MBN: The Monte Bubbles Network

July 27

Secretary Paulson Statement on Foreign Investment and National Security Act

Washington, DC--Treasury Secretary Henry M. Paulson, Jr. issued the following statement on the enactment of the Foreign Investment and National Security Act and the need for congressional approval of four pending free trade agreements:

--Treasury Secretary Henry M. Paulson, Jr. issued the following statement on the enactment of the Foreign Investment and National Security Act and the need for congressional approval of four pending free trade agreements:

I commend Congress, especially the Senate Banking and the House Financial Services Committee, for their successful efforts to reach bipartisan agreement. These efforts resulted in a law that will accomplish our mutual goals of ensuring that the Committee on Foreign Investment in the U.S., CFIUS, can continue to address national security imperatives while also reaffirming that America welcomes foreign investment.

The CFIUS process applies only when a transaction may be related to national security, and that is a very small percentage of foreign investment. The vast majority are mergers, acquisitions and investments, and don't receive a CFIUS review. Last year, and historically, only 10 percent of foreign direct investments were reviewed by CFIUS, and the vast majority of those received a review which was resolved without controversy. Importantly, the new law maintains CFIUS' narrow focus on transactions that raise national security concerns.

President Bush, through his open economies statement on May 10, 2007, and the Congress, through their actions on this bill, have reaffirmed that the U.S. continues to welcome foreign investment.

Foreign investment in America creates jobs and revitalizes communities. Foreign owned companies directly provide jobs to over 5 million U.S. workers, or almost 5 percent of our domestic workforce, and they support almost the same number of jobs indirectly.

Today, the United States sends a clear signal to the rest of the world that we continue to have an open economy. We are committed to encouraging other countries to deepen their commitment to open investment policies.

An open economy includes vigorous promotion of open investment, free markets and trade. And so, open investment is an important, but not the entire, statement of our principles. It is equally important to enact laws that encourage trade. Four Free Trade Agreements - three in Latin America and a fourth with South Korea – are awaiting Congressional action.

Approval of the Peru, Colombia and Panama FTAs are critical. We need to support democratic countries in our neighborhood. These countries are working to develop greater opportunities for their citizens. Economic opportunity that arises out of free trade will help build a thriving middle class in these countries, reducing poverty and creating new markets for U.S. goods.

The Korean FTA will create new opportunities for U.S. exporters and investors with our seventh largest trading partner.

We have worked with Congressional leaders to address their concerns about labor and environment provisions. In May, the FTAs were revised to include these agreed-upon changes, and that was to clear the way for Congressional approval.

Instead, congressional action is being delayed because some are now insisting that Peru, Colombia and Panama change their domestic laws before Congress will consider these agreements. That requirement is unprecedented and unfair and raises doubts about the ability of the United States to deliver on our international commitments.

We need Congress to ratify these FTAs, and I hope we will see Congress act on all of them in September.

The U.S. has long been a world leader in working to expand trade and break down barriers to trade, and to promote investments that benefit our citizens and the citizens of other nations. These policies are vital to ensuring a strong domestic and global economy.

 

Paulson Closing Statement at the
U.S. Business Tax Competitiveness Conference

Washington, DC--I hope that this morning's discussions have been as informative for you as they have been for me.

I hope that this morning's discussions have been as informative for you as they have been for me.

The distinguished experts and leaders who joined us did not disappoint; we have heard a variety of perspectives and candid discussion. And there is a strong consensus that our business tax system is far from optimal, and is undermining the competitiveness of American workers.

The business tax system has a very tangible impact on workers' daily lives and living standards. The goal of a business tax regime should be to minimize economic distortions and allow capital to flow to its most efficient use. Capital is the necessary fuel that provides workers the greatest opportunity for productive jobs, higher incomes, and living standards. Higher living standards, efficient use of capital and maintaining competitiveness are our mutual goals. They are the answer to the question "What are we trying to achieve?"

This morning we examined the options for answering the logical next question, which is "How do we best achieve it?" We heard from professors and policy-makers who have studied how to address the issues of complexity, targeted preferences, depreciation regimes, and incentives for entrepreneurship for many years. CEOs educated us on the impact the tax system has on investment, innovation, and expansion decisions. We heard some ideas for improving the system without sacrificing revenue, which could bring greater prosperity through new jobs and increased opportunities for workers.

It is clear from our discussion that America needs to remain alert and responsive to changing global economic conditions. Other nations have seen the results of the bold tax reforms enacted by the U.S. in the 1980s and they have moved to follow our example. And with much of the world having reduced their corporate rates, we now have the second highest statutory corporate tax rate among OECD nations.

The American economy today is healthy and we have record-low unemployment. But we must look to our future competitiveness with the goal of making sure that our policies recognize and respond to changes in the global marketplace.

We can't turn back the clock on globalization, nor should we want to. A globally integrated economy leads to greater innovation by American companies and gives American consumers a wider variety of choices and lower prices on a wide range of products from food to clothes to cars. Our business tax system must be one that will help our companies and workers successfully compete in a dynamic global economy.

We heard many good ideas and relevant insights here today. Much of our discussion confirmed what we at Treasury have already identified as elements of our business tax system that are obstacles to U.S. competitiveness. We also heard insights and ideas that have prompted additional thinking. We will spend some time digesting today's discussion and will then develop specific follow-up steps in the coming months to build support for the need to improve our business tax system, and ideas for doing just that.

It is important to act comprehensively and prudently, rather than respond on an ad hoc basis to current headlines. Promoting an efficient business tax system is a high priority for me, and I look forward to working with you on this complicated and significant endeavor.

Thank you again for joining us this morning.

Paulson Opening Statement at the U.S. Business Tax Competitiveness Conference

Washington, DC-- Good morning; thank you for coming today. And, thank you to the distinguished group of business, policy, and academic leaders who have joined us. With me here on stage for our first session are:

Good morning; thank you for coming today. And, thank you to the distinguished group of business, policy, and academic leaders who have joined us. With me here on stage for our first session are:

Michael Boskin, professor of economics at Stanford University and former chairman of the President's Council of Economic Advisors;

Safra Catz, President and CFO of Oracle Corporation;

Martin Feldstein, professor of economics at Harvard University and former chairman of the President's Council of Economic Advisors;

Alan Greenspan, former Chairman of the U.S. Federal Reserve Bank;

Jim Owens, Chairman and CEO of Capterpillar, Inc.; and,

Fred Smith, Chairman, President and CEO of FedEx Corporation.

Welcome, and I look forward to our panel.

My goal is to promote the policies and conditions for economic growth that will maintain and enhance our competitiveness, and lead to greater American prosperity. Enhanced competitiveness means new and better-paying jobs and higher living standards for American workers.

We all know two facts: first, that taxes are a drag on economic growth, and second, that taxes are necessary to raise revenues to fund federal government priorities. The question we must ask ourselves, then is this: for a given level of revenue, what business tax regime best maximizes job creation and economic growth and in doing so promotes higher standards of living for Americans?

Our current business tax system is clearly not optimal. It includes ad-hoc policies and preferences that result in a narrow tax base and create distortions that divert capital from its most efficient use. These include: complex, targeted provisions; depreciation schedules without clear rationale; taxation of capital income that discourages saving and investment; and, double taxation of corporate profits that can lead to misallocation of capital.

We have made great strides in the last few years. The 2001 reduction of individual income tax rates has helped flow-through businesses flourish and create jobs. In 2003 we reduced -- although we did not eliminate -- double taxation of dividends. Now, though, it is time for a comprehensive look at our system for taxing business.

Systemic distortions impact not only corporate owners, the shareholders, but also the employees. When capital is available to purchase new machine tools, to modernize an assembly line, or purchase laptop computers for a traveling sales force, employees are more productive. Greater productivity means a company can expand, increase wages, and provide new opportunities for employee advancement.

When an inefficient business taxation system discourages marginal investments, our workers pay the price.

We will discuss the economic distortions caused by the current system during our first roundtable session.

The business tax system must also take into account the reality of an integrated global economy, marked by borderless capital. Although many American workers don't feel that they are the essential drivers of the world's most powerful economy, they are.

Global economic expansion is not a zero-sum proposition -- it is no more true that a job created in Dublin means one less job in Denver, than that a job created in Miami means one less job in Minneapolis.

Foreign investments made by U.S. corporations bring real benefits to the domestic economy. A U.S. production facility overseas creates new export platforms, producing goods for sale in the world market that wouldn't be possible otherwise. U.S. companies support this international expansion by creating entry-level, mid-range, and high-paying jobs here -- productive jobs that raise living standards.

If American companies miss opportunities to build and sell overseas, it's a sure bet in this global economy that some other company will step in when we do not. Then the productivity and wage gains will go abroad, not to Americans. In today's competitive marketplace, if American companies can't expand globally, they risk stagnating at home.

Our business tax system should therefore not discourage inward and outward investment flows that are critical to U.S. businesses' ability to maintain their leadership positions around the world. Our second roundtable will look at the international tax system, and how we can best maximize our position in the global economy.

Now, when our economy is in a position of strength, is an opportune time to discuss the business tax system and its impact on workers, investment, and the United States' ability to compete in the world marketplace.

I look forward to hearing the panel's views and will ask them to start our conversation with this question: What is the impact of the business tax system on the competitiveness of U.S. businesses and how important are taxes relative to other factors which determine our economic competitiveness?

 

Statement of David H. McCormick
Nominee for Under Secretary of the Treasury
for International Affairs to the
U.S. Senate Committee on Finance

Chairman Baucus, Ranking Member Grassley, and members of the Committee on Finance, thank you for the opportunity to appear before you today. I am honored that President Bush has nominated me to serve as Under Secretary of the Treasury for International Affairs and, if confirmed, to have the opportunity to work with Secretary Paulson, the Treasury staff and others in the administration. I'd also like to take a moment to thank my wife Amy and our four children - who are here today - for their unwavering support for my public service.

If confirmed, I also look forward to working closely with this committee, the United States Senate, and your colleagues in the House of Representatives to advance U.S. economic interests at home and abroad.

My experiences as a senior member of the President's economic team, as a public company CEO, and as a former military officer have prepared me well for the position to which I have been nominated.

In my first role in government as Under Secretary of Commerce for Export Administration, I led a 250-person organization responsible for balancing the promotion of U.S. technology exports with the imperative of protecting our national security by controlling the transfer of militarily-sensitive technologies. In this position, I coordinated with other government agencies consulted actively with members of Congress and their staffs, worked closely with the business community, and engaged senior foreign officials in reaching agreement on multilateral approaches for satisfying both of these objectives.

This experience has been crucial to my success as the President's principal White House advisor for international economic policy with responsibilities closely aligned with those of the Under Secretary of Treasury for International Affairs. In my current role, I have led the US-Japan sub-cabinet economic dialogue, directed White House involvement in policies affecting foreign investment in the United States, and coordinated U.S. policy regarding multilateral debt relief, the President's U.S. AIDS Initiative, and the Millennium Challenge Account. I have also served as the President's personal representative for major economic summits such as those of the US-EU, APEC, and the G8.

My experiences in the private sector too are relevant to the responsibilities of the Under Secretary of Treasury. As a consultant serving Global 2000 companies, I worked with senior executives to develop and execute strategies for improving the growth and performance of their businesses. As an entrepreneur and public company CEO, I helped build and lead a profitable 1,000+ person technology organization with 25 offices worldwide. During this time, I collaborated with business leaders around the globe, and I witnessed firsthand their challenges in maintaining competitiveness in times of accelerating change.

Prior to my business career, I was a veteran of the first Gulf War and I served for five years as an active Army officer. From this experience, I learned the importance of setting a clear direction for an organization, communicating clearly and often, and leading by example. I followed this service with formal training in economics and foreign policy, receiving a Ph.D. from Princeton in 1996. Since that time, I have written regularly on economic, national security, and business-related issues.

I'm confident that based on these experiences I have the capacity to take on the responsibilities of Under Secretary and execute them successfully. If confirmed, I will immediately focus on pressing issues such as addressing growing global imbalances, accelerating China's stable integration into the global economy, and ensuring that development assistance from the multilateral development banks is deployed effectively around the world. I will also focus on advancing the President's vision for opening foreign markets for U.S. goods and services and accelerating the transition of many developing countries to true market-based economies. I will emphasize the critical importance of economic growth, good governance, and the rule of law in ensuring that all parts of the global economy can become vibrant and prosperous, while at the same time maintaining vigilance to try to prevent future financial crises.

Mr. Chairman, Senator Grassley, I am grateful for this opportunity to appear before you today. I would be pleased to answer any questions you and other members of the Committee may have.

 

Treasury Releases Business Taxation and
Global Competitiveness Background
Paper

Washington, D.C.--The Treasury Department released today a background paper concerning some of the many issues to be discussed Thursday, July 26 at the Treasury Conference on Business Taxation and Global Competitiveness.

The Treasury Department released today a background paper concerning some of the many issues to be discussed Thursday, July 26 at the Treasury Conference on Business Taxation and Global Competitiveness.

The paper details:

the extent to which special provisions narrow the business tax base;

the importance of the non-corporate sector generally subject to the individual tax rather than the corporate tax;

the various ways the tax system distorts economic decisions; and

how the level of U.S. tax compares with our major trading partners (G7, OECD, and emerging market countries).

The paper also discusses the U.S. system for taxing international income and examines how that affects business decisions. A PDF copy of the paper is attached.

REPORTS

Tax Conference Background Paper

 

Twin Treasury Actions Take Aim at Hizballah’s Support Network

The U.S. Department of the Treasury today targeted Hizballah's support network by designating the Iran-based Martyrs Foundation, including its U.S. branch, and the finance firm Al-Qard al-Hassan (AQAH) under Executive Order 13224. Two individuals were also designated today for the role they play in Hizballah's support network.

"We will continue to target those who form the financial backbone of Hizballah, Hamas, PIJ and other terrorist groups that are attempting to destabilize Lebanon and target innocent civilians," said Stuart Levey, Under Secretary for Terrorism and Financial Intelligence. "We will not allow organizations that support terrorism to raise money in the United States or to evade our measures and continue to operate simply by changing their names."

The Martyrs Foundation

The Martyrs Foundation is an Iranian parastatal organization that channels financial support from Iran to several terrorist organizations in the Levant, including Hizballah, Hamas, and the Palestinian Islamic Jihad (PIJ). To this end, the Martyrs Foundation established branches in Lebanon staffed by leaders and members of these same terrorist groups. Martyrs Foundation branches in Lebanon has also provided financial support to the families of killed or imprisoned Hizballah and PIJ members, including suicide bombers in the Palestinian territories.

In addition to fundraising responsibilities, senior Martyrs Foundation officials were directly involved in Hizballah operations against Israel during the July-August 2006 conflict. In addition, a Lebanon-based leader of the Martyrs Foundation has directed and financed terrorist cells in the Gaza Strip that worked with Hizballah and PIJ.

Today's designation includes the Goodwill Charitable Organization (GCO), a fundraising office established by the Martyrs Foundation in Dearborn, Michigan. GCO is a Hizballah front organization that reports directly to the leadership of the Martyrs Foundation in Lebanon. Hizballah recruited GCO leaders and has maintained close contact with GCO representatives in the United States.

GCO has provided financial support to Hizballah directly and through the Martyrs Foundation in Lebanon. Hizballah's leaders in Lebanon have instructed Hizballah members in the United States to send their contributions to GCO and to contact the GCO for the purpose of contributing to the Martyrs Foundation. Since its founding, GCO has sent a significant amount of money to the Martyrs Foundation in Lebanon.

Al-Qard al-Hassan

Hizballah has used AQAH as a cover to manage its financial activity. AQAH is run by Husayn al-Shami, a senior Hizballah leader who has served as a member of Hizballah's Shura Council and as head of several Hizballah-controlled organizations.

Following the September 7, 2006 designation of al-Shami, along with Bayt al-Mal and Yousser Company for Finance and Investment, AQAH assumed a more prominent role in Hizballah's financial infrastructure. As of February 2007, bank accounts of Bayt al-Mal and Yousser Company were changed and re-registered in the name of senior employees of AQAH.

Further, after the majority of Bayt al-Mal's offices were destroyed during the summer 2006 conflict, Hizballah transferred a portion of its financial activity to AQAH, giving Hizballah access to the international banking system.

Individuals

Treasury's action today also targets Qasem Aliq, a Hizballah official who was previously the director for the Martyrs Foundation branch in Lebanon. In addition to overseeing Martyrs Foundation's operation, Aliq worked closely with senior Hizballah officials. Aliq currently serves as the director of Jihad al-Bina, a Lebanon-based construction company formed and operated by Hizballah and previously designated by the Treasury.

Also designated today was Ahmad al-Shami, who has worked for the Martyrs Foundation in Lebanon and has been in frequent contact with GCO. Money raised by GCO was sent to al-Shami in Lebanon to be distributed to the Martyrs Foundation. Hizballah leadership placed Ahmad al-Shami in his position at the Martyrs Foundation in Lebanon.

Today's action is being taken pursuant to Executive Order 13224, which is aimed at financially isolating terrorists and their support networks. Designations under E.O. 13224 freeze any assets the designees may have under U.S. jurisdiction and prohibit transactions by U.S. persons with the designees.

 

Steel Statement on Basel II Resolution

Treasury Under Secretary for Domestic Finance Robert K. Steel released the following statement today regarding the Basel II Accord agreement among the Federal Reserve, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation and the Office of Thrift Supervision:

"The federal financial regulators must be commended today for their work on Basel II. Resolution on this matter is an essential component of any effort to modernize our regulatory structure and to strengthen American capital markets' competitiveness.

"This is a challenging issue, requiring a complex balance of safety, soundness and global competitiveness concerns. The regulators demonstrated a willingness to work together with the best interests of the United States in mind and I look forward to seeing the results of their cooperation."

 

United States and Other Paris Club Creditors Provide Further Debt Relief to Afghanistan

Washington, D.C.--The United States and fellow Paris Club members Russia and Germany agreed Wednesday to provide additional debt relief to Afghanistan under the terms of the enhanced Heavily Indebted Poor Countries (HIPC) initiative. This agreement allows Afghanistan to benefit from debt reduction under the HIPC initiative of 92 percent, which is worth approximately $1 billion.

The United States and fellow Paris Club members Russia and Germany agreed Wednesday to provide additional debt relief to Afghanistan under the terms of the enhanced Heavily Indebted Poor Countries (HIPC) initiative. This agreement allows Afghanistan to benefit from debt reduction under the HIPC initiative of 92 percent, which is worth approximately $1 billion.

Under the HIPC framework, the three bilateral creditors will cancel 90 percent of the non-concessional debt payments Afghanistan would owe during its current IMF program, deepening the relief the three countries agreed to provide in the Paris Club in July 2006. The United States will go beyond the HIPC framework and forgive 100 percent of all debt payments falling due.

The debt relief follows a decision by the executive boards of the World Bank and IMF – with strong U.S. support – to declare earlier this month that Afghanistan had formally qualified for the HIPC initiative. To achieve this, the Afghan government had to adhere to the terms of its IMF program as well as meet certain other requirements. All remaining debt will be forgiven by the United States, Russia and Germany once Afghanistan reaches the completion point of its HIPC program. Total debt relief for Afghanistan will equal more than $11 billion, which represents more than 99 percent of its total debt.

It is a major achievement of the Afghan government to qualify for HIPC debt relief. This debt relief is a crucial step towards normalizing Afghanistan's relations with the international financial community and in helping Afghanistan move towards economic sustainability.

The United States urges Afghanistan's other bilateral creditors to join the Paris Club members by providing 100 percent debt reduction.

 

 

July 6

 

Treasury Awards $3.6 Million to Organizations ServingEconomically Distressed Native American Communities

Crazy Horse, South Dakota – The director of the U.S. Treasury Department's Community Development Financial Institutions (CDFI) Fund, Kimberly A. Reed, visited South Dakota's Crazy Horse Memorial today to announce awards totaling $3,632,292 to 19 organizations serving Native American or Alaskan Native communities in 12 states. The awards were made through the CDFI Fund's Native American CDFI Assistance (NACA) Program.

The director of the U.S. Treasury Department's Community Development Financial Institutions (CDFI) Fund, Kimberly A. Reed, visited South Dakota's Crazy Horse Memorial today to announce awards totaling $3,632,292 to 19 organizations serving Native American or Alaskan Native communities in 12 states. The awards were made through the CDFI Fund's Native American CDFI Assistance (NACA) Program.

"Today, we are recognizing 19 Native organizations that are on the front lines to provide important financial education, create critically needed jobs and help Native families and communities build personal wealth," said CDFI Fund Director Reed. "We are very pleased to know that the over $3.6 million being awarded today will provide these community-based lenders the resources to do more of this important work in Native American and Alaskan Native communities."

Treasury held the national award announcement at the Crazy Horse Memorial to highlight the four South Dakota-based award recipients: First Nations Oweesta Corporation (Rapid City), The Lakota Fund (Kyle), Mazaska Owecaso Otipi Financial, Inc. (Pine Ridge), and the Teton Coalition, Inc. (Rapid City) – all of which are leaders serving the community development needs of their Native communities. The awardees were selected after a competitive review of 29 applications received by the CDFI Fund from organizations across the nation that requested nearly $11 million in funding under the 2007 round of the NACA Program.

Since 2002, the CDFI Fund has made 148 awards totaling $23.1 million through its various funding programs aimed at benefiting Native communities. In five short years, the number of Native CDFIs has grown from 14 to 43 – a 307 percent increase. In addition, the CDFI Fund has awarded over $7.5 million in contracts to organizations that provide capacity-building and financial services training programs that are focused on Native Communities.

Background

The CDFI Fund invests in and builds the capacity of community-based, private, for-profit and non-profit financial institutions with a primary mission of community development in economically distressed communities. These institutions – certified by the CDFI Fund as community development financial institutions, or CDFIs – are able to respond to gaps in local markets that traditional financial institutions are not adequately serving. CDFIs provide critically needed capital, credit and other financial products in addition to technical assistance to community residents and businesses, service providers, and developers working to meet community needs.

In 2004, the CDFI Fund introduced the NACA Program, which was specifically designed to encourage the creation and strengthening of CDFIs that primarily serve Native American, Alaska Native, and Native Hawaiian communities. Organizations funded serve a wide range of Native communities, and reflect a diversity of institutions in various stages of development – from organizations in the early planning stages of creating a CDFI, to tribal entities working to certify an existing lending program, to established CDFIs in need of further capacity building assistance. Two types of funding are available: financial assistance awards, available only to certified CDFIs and primarily used for financing capital; and technical assistance grants used to acquire products or services such as computer hardware and software, staff training, etc.

The CDFI Fund's vision is an America in which all people have adequate access to affordable capital, credit and financial services.

For more information about these awards, or about the CDFI Fund and its programs, please visit the Fund's website at: http://www.cdfifund.gov.

 

HP-482

Secretary Paulson Announces New Latin American and
Caribbean Initiative to Catalyze Private Finance for Infrastructure

Washington, DC-- Secretary Paulson announced a new proposal today to increase investment in infrastructure projects in Latin America and the Caribbean. The United States will partner with the International Finance Corporation (IFC), the private sector arm of the World Bank Group, to create a program to catalyze private investment in infrastructure in Latin America. This initial $17.5 million infrastructure project development program will include a $4.6 million U.S. contribution, and a $1.9 million contribution from Brazil. The IFC is prepared to seek an increase in funding over time if warranted by demand for its services.

Secretary Paulson announced a new proposal today to increase investment in infrastructure projects in Latin America and the Caribbean. The United States will partner with the International Finance Corporation (IFC), the private sector arm of the World Bank Group, to create a program to catalyze private investment in infrastructure in Latin America. This initial $17.5 million infrastructure project development program will include a $4.6 million U.S. contribution, and a $1.9 million contribution from Brazil. The IFC is prepared to seek an increase in funding over time if warranted by demand for its services.

"The United States' interest in the Americas is strong. We are committed to helping the region reduce poverty, fight corruption, build a middle class, and generate more opportunities, including for those who currently feel excluded from the region's growing prosperity," said Treasury Secretary Henry M. Paulson, Jr.

"Last month I announced an initiative to catalyze market-based bank lending to small businesses in Latin America and the Caribbean. The initiative involves a combination of new lending models, sharing part of the lending risk, and technical, regulatory assistance so that more banks can finance options for small businesses.

"The Americas face another serious constraint to economic growth – that is a lack of critical infrastructure. Latin America, for example, currently spends less than 2 percent of GDP on infrastructure annually. Underinvestment in electricity, transport, and potable water hamstring the region's entrepreneurs and citizens.

"Today I am pleased to announce a new initiative aimed at addressing this constraint. This initiative will attack the information, technical capacity, and regulatory barriers which block the flow of private finance."

Underinvestment in infrastructure has had a direct impact on the quality of life and economic performance in Latin America. 59 million people in the region lack access to potable water and 135 million have no adequate sanitation. Meanwhile, 55 percent of entrepreneurs complain that infrastructure is a serious problem. Improving the region's infrastructure could reduce inequality by as much as 20 percent, according to the World Bank.

59 million people in the region lack access to potable water and 135 million have no adequate sanitation. Meanwhile, 55 percent of entrepreneurs complain that infrastructure is a serious problem. Improving the region's infrastructure could reduce inequality by as much as 20 percent, according to the World Bank.Major investments in infrastructure are needed to boost productivity and competitiveness, connect the poor and small entrepreneurs to markets, and provide them with adequate basic services. Investment in infrastructure is a regional priority and mobilizing private financing is essential given the magnitude of investment needs and the constraints on public finance.

The objective of this program is to target three critical constraints that block the flow of private finance for infrastructure: lack of reliable, objective information identifying good projects for potential investors; lack of know-how on structuring and tendering projects; and problems with the regulatory environment – particularly as it pertains to specific transactions.

lack of reliable, objective information identifying good projects for potential investors; lack of know-how on structuring and tendering projects; and problems with the regulatory environment – particularly as it pertains to specific transactions.

The program, to be managed by the IFC, will help identify productive infrastructure projects suitable for private participation, make information about these projects publicly available, and provide technical assistance on structuring projects, tendering concessions, and improving regulatory regimes. Project proposals can be made to the program by sovereign governments, sub-sovereign governments (including municipal governments), or private sponsors. The program will provide assistance in two phases: first, identifying and analyzing projects through feasibility assessments, and, second, advising project sponsors on how to structure, market, and tender projects successfully.

Project proposals can be made to the program by sovereign governments, sub-sovereign governments (including municipal governments), or private sponsors. The program will provide assistance in two phases: first, identifying and analyzing projects through feasibility assessments, and, second, advising project sponsors on how to structure, market, and tender projects successfully.

Once a project reaches contractual closure, the investor will reimburse the program through a cost-recovery fee. The program can also assist private investors in identifying possible sources of financing in order to move projects to financial closure and implementation. A project manager will be responsible for overseeing all aspects of this process. The program is expected to be fully operable in one year. Interested parties should contact the Advisory Services Department at the International Finance Corporation, http://www.ifc.org/Advisory.

The IFC estimates that the program's impact could be as much as $800 million to $1 billion in creating new investments and $300 to $400 million in fiscal savings to local governments.

President Bush called for this program in 2005 at the Summit of the Americas.

The $4.6 million grant from the U.S. comes from FY06 and FY07 State Department Economic Support Fund appropriations.

 

July 5

Treasury Secretary Paulson to Visit Brazil, Uruguay and Chile Next Week

Treasury Secretary Henry M. Paulson, Jr. will travel to South America next week to reinforce our strong ties with Brazil, Uruguay, and Chile and to stress our stake in the economic success of Latin America. He will meet with finance ministers and heads of state in the region, as well as local business leaders to discuss ideas on how to spread opportunity, reduce poverty, and build the middle class in the region and talk about what the United States is doing to help.

Secretary Paulson will travel to Belo Horizonte on Monday, July 9, where he plans to meet with Governor Aécio Neves and venture capitalists. On Wednesday he will be in Brasilia where he will meet with Brazilian President Luiz Inácio "Lula" da Silva, Finance Minister Guido Mantega, Chief of Staff Dilma Rousseff, Central Bank President Henrique Meirelles, and Minister of Foreign Affairs Celso Amorim. He will also attend a lunch on access to finance and local capital market development.

Paulson will spend Thursday in Montevideo where he will meet with Uruguayan President Tabare Vasquez and Minister of Finance Danilo Astori. From there he will travel to Santiago to hold meetings Friday with Chilean President Michelle Bachelet, Minister of Foreign Affairs Alejandro Foxley, Minister of Finance Andres Velasco, and Central Bank Chairman Vittorio Corbo.

These visits to Brazil, Uruguay, and Chile will be his first to those countries as Treasury Secretary. Secretary Paulson traveled to Mexico in April of 2007, Guatemala and Peru in March of 2007, and Colombia in August of 2006.

 

 

Treasury Secretary Henry M. Paulson, Jr. today issued the following statement on the importance of Trade Promotion Authority to the U.S. and global economies: "America's openness has made our economy the most vibrant and dynamic in the world. To keep our economy strong and competitive, we must continue to push forward on the trade agenda. The 110th Congress has an important opportunity to demonstrate bipartisan leadership and help to strengthen our economy by reauthorizing Trade Promotion Authority. "Trade fosters the environment of innovation and research that leads to better goods and services at lower prices, which in turn helps Americans provide for their families. "Members of Congress should move quickly to reauthorize Trade Promotion Authority. Americans benefit from open markets here at home and open markets abroad for our exports. Together with my colleagues in the Administration, we will fight to keep markets open to the benefit of American manufacturers, farmers, and service providers."

 

Treasury Secretary Henry M. Paulson, Jr. today issued the following statement on the departure announcement of International Monetary Fund Managing Director Rodrigo de Rato: "Rodrigo de Rato brought vision and dedication to his tenure as Managing Director of the International Monetary Fund. He launched the Medium Term Strategy, a plan that provides a foundation for important reforms to ensure the institution reflects today's global economy. Rodrigo helped to strengthen the Fund by creating this road map for reform, which will enable the Fund to remain a strong, relevant institution and resource for the global financial system. His leadership was also instrumental in the Fund's revision of its exchange rate surveillance framework, which is a highly critical piece of the road map. I wish him continued success in his future endeavors."

 

Treasury Secretary Henry M. Paulson, Jr. issued the following statement today on the World Bank's Executive Board approval of Robert Zoellick to be World Bank President: "I welcome the board's action approving Bob Zoellick to lead the World Bank. Bob brings a wealth of experience, a passion for development and a proven track record of working with colleagues around the world to get results. "He has the trust, respect and support of governments in all regions of the world and I have no doubt his leadership will ensure continued support of World Bank members. He will be an aggressive advocate for overcoming poverty, investing in growth, and creating opportunity and hope."

 

Treasury International Capital (TIC) data for April are released today and posted on the U.S. Treasury web site (www.treas.gov/tic). The next release, which will report on data for May, is scheduled for July 17, 2007. Net foreign purchases of long-term securities were $84.1 billion. * Net foreign purchases of long-term U.S. securities were $97.4 billion. Of this, net purchases by foreign official institutions were $25.3 billion, and net purchases by private foreign investors were $72.1 billion. * U.S. residents purchased a net $13.3 billion of long-term foreign securities. Net foreign acquisition of long-term securities, taking into account adjustments, is estimated to have been $76.5 billion. Foreign holdings of dollar-denominated short-term U.S. securities, including Treasury bills, and other custody liabilities decreased $25.9 billion. Foreign holdings of Treasury bills decreased $28.6 billion. Banks' own net dollar-denominated liabilities to foreign residents increased $61.2 billion. Monthly net TIC flows were $111.8 billion. Of this, net foreign private flows were $93.6 billion, and net foreign official flows were $18.2 billion.

 

 June 23

REMARKS BY ANNA ESCOBEDO CABRAL U.S. TREASURER U.S. DEPARTMENT OF THE TREASURY BEFORE THE NEW MEXICO MORTGAGE LENDERS ASSOCIATION Albuquerque, NM- Good afternoon. Thank you, Ryan, for that introduction. I want to thank Dan and the New Mexico Mortgage Lenders Association for your warm welcome. I applaud the important work you're doing here in New Mexico to promote and maintain sound mortgage lending practices. I'm pleased to join you here today with our federal partners and so many others dedicated to fostering the American Dream of homeownership. For many Americans, owning a home is a giant step on the ladder of economic mobility. It's a symbol of hard work, a source of pride, and a foundation for security. I know President Bush is deeply committed to helping all Americans fulfill the dream of owning a home. Today, more and more individuals and families are achieving this dream. Nearly 70 percent of Americans own homes, and the rate of minority homeownership has risen above 50 percent since the President took office. The Departments of Housing and Urban Development and Agriculture do a tremendous amount of work to ensure this success and extend the opportunity of homeownership to more and more Americans. At Treasury, we're equally committed to fostering an ownership society. One of the ways we do this is by empowering individuals to make wise and informed decisions about their finances. In today's increasingly complex mortgage market, often the greatest challenge to consumers is having enough information to navigate through the variety of products available and choose the one that best fits their needs. A 2001 study revealed that homeownership counseling can reduce 90-day mortgage delinquencies by an average of 19 percent. Of course, knowledge is also our best protection against predatory lenders and fraud. When we talk about effective homeownership counseling, we need to think beyond the specific states of pre-purchase, post-purchase, and foreclosure. After all, the goal should be to ensure individuals and families are equipped not just to buy their homes, but also to remain in their homes. Buying a home is often the biggest purchase most of us will make in our lifetime, and information is critical to ensuring that we make this purchase wisely. Homeownership counseling and training provides an ideal opportunity to educate consumers on general personal finance issues such as credit and money management that are critical to helping them manage their new mortgage and avoid foreclosure. Therefore, good homeownership counseling programs take a more holistic approach to address a range of finance topics. Without question, homeownership fuels the economy and enhances quality of life in our communities. It's in the best interest of financial institutions to help their customers continue on a successful and secure economic path once they purchase their homes. In talking with communities throughout the country, we've found the most effective way to deliver this important financial education message is by working together. Grassroots organizations can be extremely successful in reaching their local community members to deliver homeownership counseling. We also know that HUD regional offices across the country as well as programs like NeighborWorks America are advancing homeownership education through innovative outreach, aggressive public awareness campaigns, and intensive counseling. Just this week the Federal Reserve Board announced a new online Mortgage Comparison Calculator that consumers can use to compare what their monthly mortgage payments will be and how much equity they will build up in the future. This is a user-friendly and accessible financial education tool that will help consumers make informed decisions about mortgage options. These are just some of the financial education programs and resources out there. By working together, federal, state, and local governments, financial institutions and community organizations have the potential to empower all Americans with the information they need to achieve their dream of buying a home. Finally, I want to mention another important Treasury-led effort. As some of you may know, in 2003 Congress established the Financial Literacy and Education Commission under the Fair and Accurate Credit Transactions Act. The Commission brings together 20 different federal agencies – including HUD and USDA – with the single goal of improving financial education. Since that time, the Commission has released The National Strategy for Financial Literacy, and launched a financial education web site and toll-free hotline, MyMoney.gov and 1-888-MyMoney in English and Spanish. The Strategy – which can be downloaded from the website looks at a variety of important finance topics including homeownership. In fact, the section of the Strategy on homeownership has been nationally recognized as a valuable source of information. The MyMoney website also offers helpful links such as the Federal Reserve Board's mortgage calculator I mentioned earlier. I encourage those of you who haven't seen the Strategy to go on line and take a look. I think you'll find it offers some truly valuable resources. Over the last year, Treasury and HUD have co-hosted meetings with financial institutions, lenders, policy makers, community organizations, and counseling agencies to discuss the issues surrounding homeownership and build new partnerships to advance this important goal. Treasury continues to work with HUD and our Commission partners to engage in similar discussions throughout the country. We're making great progress in offering homeownership opportunities to more Americans and building a more prosperous future for our communities. But much work remains. I'm confident that working together we will continue to boost homeownership – especially among the nation's most underserved consumers – and create a more financially informed public. I thank you for your continued partnership, hard work and commitment to this important endeavor. Thank you.

REMARKS BY ACTING UNDER SECRETARY FOR INTERNATIONAL AFFAIRS CLAY LOWERY ON SOVEREIGN WEALTH FUNDS AND THE INTERNATIONAL FINANCIAL SYSTEM --The financial crisis that struck East Asia ten years ago had many causes – fixed but adjustable exchange rate regimes, balance sheet mismatches in the financial and corporate sectors, and inadequate financial sector regulation and supervision, among others. Ultimately these causes manifested themselves in large-scale capital outflows and insufficient official foreign exchange reserves. At the time, a number of working groups were established to address issues coming out of that crisis. One group recommended that the international community – largely led by the IMF – improve the coverage, frequency, and timeliness of data on foreign exchange reserves. The idea was to improve financial stability by providing clarity on what had been shown to be misleading data regarding gross reserves. Though much has been accomplished, further progress, particularly on coverage, is needed. East Asia today looks considerably different in many respects, but perhaps none more so than foreign exchange reserve holdings. In East Asia, and around the world, reserve accumulation has sharply accelerated. From 1997 to 2001, global foreign exchange reserves including gold increased at 6 percent per year on average. Since 2002, the annual average increase has been a phenomenal 20 percent. Global reserves currently stand at roughly $5.6 trillion. Many countries with large reserves surpass, by several multiples, benchmarks of reserve adequacy developed after the Asian Financial Crisis. But reserves do not tell the whole story as they generally do not include Sovereign Wealth Funds. Sovereign Wealth Funds are not new – they have existed for over three decades, even if the term as such was only coined to my knowledge in 2005. What is new is the number of Sovereign Wealth Funds and their sheer current and projected sizes. Private analysts put current Sovereign Wealth Fund assets in a range of $1.5 – 2.5 trillion, which would bring total foreign assets held by sovereigns to roughly $7.6 trillion, or 15 percent of global GDP. These trends raise broad, strategic issues for the international financial system. What are the underlying policies driving the accumulation, and should they be adjusted? What financial market and, over the medium-term, financial protectionism challenges could arise from this tremendous increase in sovereign cross-border asset holdings? How can countries in which these funds are invested best promote openness and welcome foreign capital? The common objective should be an international financial system where countries do not accumulate more foreign assets than they want or need, and where cross-border investment remains healthy and open. At Treasury we are actively considering these issues, and potential steps that could be taken multilaterally, bilaterally, and by national authorities. While we clearly do not have all the answers, I would like to walk you through some of our initial thinking. I believe that the IMF and World Bank could take a very constructive step through the drafting of best practices for Sovereign Wealth Funds. Complementing the work of the International Financial Institutions, I would expect that the issue of sovereign foreign asset accumulation will increasingly arise in informal multilateral discussions. National authorities will also have an important role to play. Moreover, the U.S. government itself has responsibilities. Definitions and Differences First let us be clear on what we are talking about. There is no universal, agreed definition of a Sovereign Wealth Fund. I will use the term to mean a government investment vehicle which is funded by foreign exchange assets, and which manages those assets separately from official reserves. Sovereign Wealth Funds generally fall into two categories based on the source of the foreign exchange assets. * Commodity funds are established through commodity exports, either owned or taxed by the government. They serve different purposes, including stabilization of fiscal revenues, inter-generational savings, and balance of payments sterilization. Given the recent extended sharp rise in commodity prices, many funds initially established for fiscal stabilization or balance of payments sterilization purposes have evolved into savings funds. * Non-commodity funds are typically established through transfers of assets from official foreign exchange reserves. Large balance of payments surpluses have enabled non-commodity exporters to transfer "excess" foreign exchange reserves to stand-alone investment funds to be managed for higher returns. There are three key differences between these two types of funds: * First is their asset-liability structure. Commodity funds often derive from foreign currency accruing directly to the government, so the foreign currency is not converted to domestic currency, does not enter the domestic economy, and does not need to be sterilized through the issuance of domestic debt to avoid unwanted inflationary pressures. In contrast, non-commodity Sovereign Wealth Fund assets often derive from exchange rate intervention, much of which is usually sterilized. These funds' net return will depend on the difference between the yield they earn on their investments and the yield they pay on their sterilization debt. So they may be thought of more as "borrowed funds" than traditional "wealth." * A second difference involves how countries have allocated their foreign assets to Sovereign Wealth Funds and reserves. Commodity exporters have typically chosen Sovereign Wealth Funds, while Asian countries have chosen reserves. There are exceptions – Singapore created its Government Investment Corporation back in 1981 and Russia established its oil stabilization fund only in 2003 – but the general trend has stood. Now, though, Asian countries are increasingly establishing non-commodity Sovereign Wealth Funds. * A third difference concerns the future pace of asset accumulation. Oil exporters in particular are essentially replacing a real asset in the ground with a financial asset in an account. If oil prices remain high, these governments are likely to accumulate foreign assets going forward even after the implementation of sensible domestic fixed investment plans. In contrast, the extent of asset accumulation in non-commodity funds will depend heavily on how successful emerging markets are in shifting to increased exchange rate flexibility. Benefits and Risks The creation and expansion of Sovereign Wealth Funds is understandable given the significant increase in official reserves. To be considered reserves, foreign currency must be invested in liquid and marketable instruments that are readily available to the monetary authorities to meet a balance of payments need. The idea of a Sovereign Wealth Fund is to diversify foreign exchange assets and earn a higher return by investing in a broad range of asset classes, including longer-term government bonds, agency and asset-backed securities, corporate bonds, equities, commodities, real estate, derivatives, alternative investments, and foreign direct investment. Some back-of-the envelope math demonstrates why this trend toward higher risk-return management of official assets is to some extent inescapable, or what has been perceptively called "forced diversification." In 2006, official foreign exchange reserves grew by 20% or $843 billion. If we assume for simplicity a similar percent increase in Sovereign Wealth Fund assets, we add $336 billion. Setting aside valuation changes, this brings total 2006 official flows to nearly $1.2 trillion. In comparison, 2006 net issuance of the most traditional reserve assets – U.S. Treasuries, U.S. Agencies, euro area government securities, and UK Treasuries – totaled $461 billion. So even if reserve and Sovereign Wealth Fund managers had purchased all 2006 net issuance of these traditional reserve assets, they would still have had some $720 billion left over. Of course this remainder can be invested in the existing stock of these securities, but part is also likely to find its way to other assets and asset classes. These trends can bring benefits to countries in which these funds are invested. From the U.S. perspective, we unequivocally support international investment in this country – both portfolio and direct investment – and are committed to ensuring that the United States continues to be the most attractive place in the world to invest. Most market estimates, though highly dependent upon underlying assumptions, expect future official flows to have a material though moderate impact in bidding up prices and lowering risk premia of riskier, less liquid assets, while at the same time resulting in continued strong demand for traditional reserve assets. This may contribute to continued benign financing conditions. There are also risks, however. The first concerns these funds' potential impact on financial market stability. To be sure, there is much that is reassuring. Sovereign Wealth Funds are, in principle, long-term investors that can be expected to stick with a strategic asset allocation despite short-term losses. They are not highly leveraged. They cannot be forced by capital requirements or investor withdrawals to liquidate positions rapidly. They have access to, and frequently make use of, well-regarded private fund managers, consultants, administrators, and custodians. Yet it is hard to dismiss entirely the possibility of unseen, imprudent risk management with broader consequences. Sovereign Wealth Funds are already large and projected to get much larger. Little is known about their investment policies, so that minor comments or rumors will increasingly cause volatility as market participants react to what they perceive Sovereign Wealth Funds to be doing. Sovereign Wealth Funds are typically not directly regulated by their domestic financial authorities, and the extent of indirect regulation may also be limited. Investor discipline will depend on what their citizens know and how active they are in monitoring fund activities, rather than the market discipline of savvy institutional investors. Further, the funds' counterparties and any creditors may simply assume a sovereign guarantee and fail to exercise market discipline. The second risk is that, over the medium term, the size, investment policies, and/or operating methods of these funds fuel financial protectionism. It is no secret that globalization, despite its benefits, is raising sensitivities around the world. This is not just a U.S., European, or even industrialized country issue. Emerging markets have also at times expressed sensitivity to certain investments by other emerging markets. There will likely be much public attention to whether Sovereign Wealth Funds exercise the voting rights of their equity shares, and if so, how. If Sovereign Wealth Funds obtain operational control of the companies in which they invest, the fact that they are government entities may invite additional scrutiny. Finally, these sensitivities and pressures to block sovereign investment would worsen if Sovereign Wealth Fund investment decisions were made for non-economic reasons. I think I can identify two other risks, which are largely domestic but could potentially be international. One is that with so much money invested across a wider range of asset classes, Sovereign Wealth Funds will need to have strong fiduciary controls and good checks and balances to prevent corruption. Another is that, while Sovereign Wealth Funds should be managed as professionally and independently as possible, my experience in government suggests that once a bureaucracy is created, shutting it down becomes difficult. Therefore, a fund created to handle what could be a temporary phenomenon should not impede thorough examination of underlying policies and avoid becoming self-perpetuating. The Work Ahead of Us We want of course to maximize the benefits of these funds while reducing the risks. A sound global financial system and the maintenance of open markets are in the common interests of all. Sovereign Wealth Funds raise issues of the appropriate institutional arrangements, governance, operational and risk management, accountability, and – critically – transparency of the funds' rules, operations, and asset management guidelines and performance. So what to do? First, I believe that the IMF and World Bank could take a very useful step by developing best practices for Sovereign Wealth Funds, perhaps through a joint task force. The IMF has the requisite expertise on wider systemic and macroeconomic subjects, such as the link to fiscal policy. The World Bank is knowledgeable about country governance and accounting and fiduciary issues, including the fiduciary duty these funds have to their citizens as investors. The IMF and World Bank also have the broad membership of 185 member countries, including countries that have these funds, countries in which they invest, and countries that simply have a stake in a healthy overall international financial system. One caveat is that I do not think that the International Financial Institutions should be in the business of competing with the private sector to manage reserves or Sovereign Wealth Fund assets on behalf of countries. This is clearly beyond their mandates. Proposals along these lines have been justified by the concern that an individual reserve manager may be reluctant to invest excess reserves more aggressively for fear of disapproval (or worse) if returns are negative in a given year. This issue is best addressed by building support domestically, including through the establishment of a stand-alone domestic institution if appropriate. A country naturally also retains the right to fire asset managers that underperform their designated benchmarks. Finally, it is critical that the International Financial Institutions avoid feeding a misperception that more reserves are necessarily better, both for the countries themselves and the broader system. Second, the subject of sovereign foreign asset accumulation will increasingly arise in informal multilateral discussions, which can complement and provide impetus to the work of the International Financial Institutions. At last April's meeting of G-7 Finance Ministers and Central Bank Governors, the Treasury Department hosted a special outreach dinner with Russia, Saudi Arabia, and the United Arab Emirates to discuss investment flows from oil exporters, including in the form of Sovereign Wealth Funds. In May, Treasury and the Federal Reserve co-hosted with the South African Treasury and Reserve Bank a meeting of G-20 Finance Ministry and Central Bank officials on Commodity Cycles and Financial Stability, where we discussed, among other topics, Sovereign Wealth Funds. Third, national authorities will have an important role to play, and certainly at Treasury we will continue to explore ways to address the challenges and opportunities provided by Sovereign Wealth Funds. Finance Ministries and Central Banks are in increasing contact with these funds to promote common understanding. National securities regulators should treat these funds as they would any large institutional investor. National governments also maintain mechanisms to review foreign direct investment in a manner that preserves national security without creating unnecessary and counterproductive barriers. Long-established and well-run Sovereign Wealth Funds may wonder why they should adjust their practices, particularly on transparency. I hope they will find that transparency is good for the funds as well as the international financial system. Lack of transparency puts heavy demands on the quality of fund administration. Even where fund administration is solid, greater transparency would enhance the likelihood that the fund serves its intended purposes and reduce the likelihood of future governance problems. The experience of large corporations in the industrialized world demonstrates that potential for error and abuse exists even in apparently highly-rated and well-managed organizations. From a systemic perspective, transparency will facilitate the maintenance of openness to investment. What may have been tenable in a world where Sovereign Wealth Funds manage only several hundred billion dollars may not be tenable in a world where Sovereign Wealth Funds manage several trillion dollars. Finally, the U.S. government also has a direct responsibility – which is making our investment regime as open and consistent as possible for welcoming Sovereign Wealth Fund investment. We are doing that by working with Congress to get a sound CFIUS bill and we are doing that by reaching out around the world to explain the U.S. investment climate. Just this week for instance Deputy Secretary Kimmitt has been traveling in Beijing and Moscow meeting with government officials and business leaders to promote open investment policies and to gain clarity on their new investment laws and to better understand the nature and investment priorities of their soon to be established sovereign wealth funds. The message delivered clearly to the Deputy Secretary from officials in both countries is that the funds would focus primarily on portfolio investments such as corporate bonds and equities. When asked about the possibility of foreign direct investment acquisitions, officials in both countries indicated that is not in their current planning but if such an opportunity arose in the future, it would be in non-sensitive sectors. Never Forget the Underlying Issues In considering Sovereign Wealth Funds, we should not lose sight of the underlying issues – the need for increased exchange rate flexibility in many emerging markets and the need for oil exporters to formulate and implement fixed investment plans even if further foreign asset accumulation can reasonably be expected. Otherwise the official sector would be doing the equivalent of treating the symptoms rather than the condition. However, Sovereign Wealth Funds are not going away, and it will be increasingly necessary to work to integrate these funds as smoothly as possible into the international financial system.

 

Testimony of
Treasury Assistant Secretary for Financial Institutions
David G. Nason
Before the U.S. House Committee on Financial Services
Subcommittee on Capital Markets, Insurance
and Government Sponsored Enterprises

Washington - Thank you, Chairman Kanjorski, Ranking Member Pryce, and other members of the Subcommittee for inviting me to appear before you today.

Thank you, Chairman Kanjorski, Ranking Member Pryce, and other members of the Subcommittee for inviting me to appear before you today.

The market for terrorism risk insurance in the United States was significantly changed by the terrorist attacks of September 11, 2001. Of course, prior to September 11, terrorism risk clearly existed in the United States. We experienced the 1993 bombing of the World Trade Center, the 1995 Oklahoma City bombing, the 1996 Centennial Olympic Park bombing, and the "Millennium Bomber's" December 1999 attempted bombing of the Los Angeles International Airport. Despite these events, most commercial property and casualty insurance companies continued to provide coverage for terrorism risk in the insurance policies sold to their commercial policyholders.

The terrorist attacks of September 11 resulted in insured losses of approximately $32 billion, which at the time was the largest single insured loss event in U.S. history. The recognition that terrorist attacks could cause losses of such scale spread across multiple insurance products and concentrated in a relatively small geographic area, caused the insurance industry to undertake a broad reassessment of the likelihood and potential losses associated with terrorism. Immediately following September 11, commercial property and casualty insurers sought to exclude coverage for terrorism risk in many policies. Reinsurance contracts also began excluding coverage for terrorism.

In the months after September 11, there were increasing concerns about potential economic disruptions caused by the unwillingness of many insurance companies to provide terrorism insurance. In response, Congress passed and the President signed the Terrorism Risk Insurance Act (TRIA) in late 2002. TRIA established a temporary federal program of shared public and private compensation for privately-insured commercial property and casualty losses resulting from acts of terrorism. The TRIA legislation stated that the purposes of the legislation were to address market disruptions, to ensure the continued widespread availability and affordability of commercial property and casualty insurance for terrorism risk, and to allow for a transition period for the private markets to stabilize and build capacity while preserving State insurance regulation and consumer protections. While TRIA was largely successful in achieving its original purposes, given some remaining uncertainty surrounding the development in the market for terrorism risk insurance, TRIA was temporarily extended in 2005 for an additional two years by the Terrorism Risk Insurance Extension Act of 2005 (the "Extension Act").

Today, I would like to provide an overview of the key features of TRIA and the Extension Act, the key findings of the President's Working Group on Financial Markets' (PWG) 2006 report to Congress on terrorism risk insurance, and some principles for the federal government's role in the market for terrorism risk insurance going-forward. Our view of TRIA is shaped by the belief that the most efficient, lowest cost, and most innovative methods of providing terrorism risk insurance will come from the private sector. The Administration believes that three elements are critical if TRIA is to be reauthorized for a second time: the program remains temporary and short-term; private sector retentions are increased; and there is no expansion of the program. Treasury cannot support efforts that move the program in a direction that is inconsistent with these key elements.

The Terrorism Risk Insurance Act and the Extension Act

TRIA essentially established a government reinsurance program. Much like typical provisions found in reinsurance, the TRIA program requires that insurers first retain a portion of terrorism risk exposure themselves (referred to as "deductible") with the insurer and government then sharing in the losses above the initial retention (referred to as "co-share" or "co-pay"). Unlike a typical reinsurance policy, however, there is no up-front premium charged for the reinsurance coverage provided under TRIA; but instead, any federal expenditure can be collected, or recouped, after a loss through surcharges applied to premiums paid by commercial policyholders regardless of whether their insurers had received TRIA payments. Some key features of TRIA and the Extension Act include the following:

Private Sector Retentions

An insurer's "retention" under TRIA generally refers to the amount of terrorism risk exposure that an insurer retains. An insurer's retention is comprised of its insurer deductible, its co-share of the insured losses above its deductible, or all of its losses if an attack results in industry-wide losses below an event size threshold, called the "Program Trigger." An insurer's retention under TRIA is a key provision that governs the amount of terrorism risk exposure held by the private sector. The general structure of TRIA and the Extension Act requires increases in private sector retentions over time to encourage development of private market capacity to provide terrorism risk insurance over time.

An insurer's deductible is company specific and is calculated based on the size of the insurer's prior year's premium revenue from the types of insurance covered by TRIA. Insurer deductibles have increased throughout the TRIA program – from its 2003 level of 7 percent of an insurer's prior year's direct earned premiums, to 10 percent in 2004, and 15 percent in 2005. The Extension Act further increased insurer deductibles to 17.5 percent in 2006 and 20 percent in 2007. In the event of a certified terrorist act, each insurer will cover 100 percent of the insured losses up to its deductible before being eligible for federal payments under TRIA. Tying an insurer's deductible to its revenue helps ensure that the amount of insured losses the company itself is responsible for is commensurate with its size and assets. Some of the largest insurers that participate in the program have deductibles in the billions of dollars.

Once an insurer pays insured losses up to its deductible, insured losses above its deductible amount would then be shared between the insurer and the federal government. The federal share of insured losses above the insurer's deductible had been 90 percent through the first four years of the TRIA program, and was reduced to 85 percent in 2007 – thus increasing the private sector's share from 10 percent to 15 percent. This provision of TRIA encourages proper claims adjustment as insurers will have "skin in the game" in deciding and settling insurance claims, much the same as provisions included in private sector reinsurance contracts.

In addition to the deductible and co-share, an insurer retains all of its losses if industry-wide aggregate losses are below the minimum event size eligible for payments under TRIA, or what has come to be known as the "Program Trigger." Under TRIA, in order for an event to be certified as an act of terrorism, the losses suffered by the insurance industry as a whole must exceed at least $5 million in the aggregate. As originally structured, certified acts of terrorism resulting in losses above $5 million would have been eligible for federal payments under TRIA, essentially making the certification and the event's eligibility for federal payments under TRIA equivalent. The minimum event size qualifying an event for federal payments under TRIA was raised beginning in 2006 by the Extension Act, which specifically added the concept of a Program Trigger to TRIA. Under the Program Trigger concept, the Treasury Secretary is directed not to compensate insurers under TRIA unless the aggregate industry insured losses exceed certain "trigger" amounts: $50 million in 2006 and $100 million in 2007. Once the threshold is met, program payments can then be made to an insurer once it has paid claims and met its company-specific deductible.

Lines of Coverage

Insurance coverage under TRIA is limited to commercial property and casualty insurance, which was the primary area of concern in terms of dislocations associated with the September 11 terrorist attacks. TRIA does not apply to personal insurance, such as homeowners, automobile, or life insurance. While TRIA did not specifically define commercial property and casualty insurance, it did specifically include excess insurance, workers' compensation insurance, and during the first three years of the TRIA program, surety insurance. In addition, TRIA specifically excluded certain types of insurance:

· Federal or private crop insurance;
· Private mortgage insurance, or title insurance;
· Financial guaranty insurance offered by a monoline financial guaranty insurance corporation;
· Insurance for medical malpractice;
· Health or life insurance, including group life insurance;
· Federal flood insurance; and,
· Reinsurance or retrocessional reinsurance.

In implementing the definition of commercial property and casualty insurance, Treasury relied on the lines of business ("lines") under which insurers report their premiums in annual statement filings pursuant to forms and rules adopted by the National Association of Insurance Commissioners (NAIC). The specific lines that were included in the program were established by Treasury through regulation, in consultation with the NAIC. With respect to implementing the program, policies whose premiums are reported to the NAIC on designated commercial lines qualify for TRIA coverage.

The Extension Act scaled back the scope of the program so that TRIA no longer covers:

· Commercial automobile insurance;
· Burglary and theft insurance;
· Surety insurance;
· Professional liability insurance (but not directors' and officers' liability insurance); and,
· Farmowners' multiple peril insurance.

Terrorism risk insurance for these lines of insurance, which was covered only during the first three years of the program, was successfully transitioned back to the private market without any signs of market disruption.

Certified TRIA Events

The TRIA program covers losses from certified acts of terrorism. In order to qualify as an act of terrorism, an event must be certified by the Secretary of the Treasury with the concurrence of the Secretary of State and Attorney General of the United States as being:

· a violent act, or an act dangerous to life, property or infrastructure;
· resulting in damage within the U.S., or to a U.S. air carrier or U.S. flag vessel, or on the premises of a U.S. mission; and,
· committed by an individual or individuals acting on behalf of any foreign person or foreign interest, as part of an effort to coerce the civilian population of the U.S. or to influence the policy or affect the conduct of the U.S. government by coercion.

Terrorism coverage is often described as "certified acts" coverage (based on the TRIA definition) and "non-certified acts" coverage (acts of terrorism that are not certified under TRIA because they do not meet one or several of the certification requirements). "Certified acts" are synonymous with foreign acts of terrorism due to the requirement that the act be "committed by an individual or individuals acting on behalf of any foreign person or foreign interest."

Under TRIA, an act committed by a "home-grown" terrorist could currently be certified as an act of terrorism and covered by TRIA so long as the terrorist was acting on behalf of any foreign person or foreign interest, and the other requirements are met. However, purely domestic terrorism, such as eco-terrorist attacks or an attack like Oklahoma City, would not be covered by TRIA. Such non-certified risks generally continue to be insured by the private market.

Recoupment

Unlike a private sector reinsurance company, the TRIA program does not require insurers to pay up-front premiums and does not build up surplus to pay future claims. Instead, the program is funded on a post-loss basis. TRIA provides authority for Treasury to recoup its federal payments through annual surcharges on commercial policyholders of up to three percent of a policy's premium. Certain recoupment is mandatory, while in other circumstances TRIA authorizes discretionary recoupment.

Mandatory recoupment is based on the concept of an "insurance marketplace aggregate retention" amount, which specifies the amount of losses the private sector as a whole must absorb in any given year. If the insured losses that the insurers collectively retain (individual company deductibles plus the co-pay portions paid above deductibles) are lower than the marketplace aggregate retention, Treasury must recoup the difference. In addition, Treasury has the discretion to seek recoupment of up to the full amount paid out based on consideration of specific factors described in TRIA. The "insurance marketplace aggregate retention" amounts have increased each year of the program, going from $10 billion in the first year to $27.5 billion in 2007.

Key Outcomes of the Extension Act

The TRIA program was originally designed as a three-year program set to expire on December 31, 2005. The temporary program structure allowed the federal government to re-evaluate the program in the context of current market conditions.

As the debate surrounding the extension of TRIA took place in 2005, the Administration focused on encouraging the private insurance market to develop innovative solutions and build capacity. This serves to reduce potential exposure to taxpayers. The core changes ultimately adopted as part of the Extension Act – increasing deductibles and co-share amounts, elevating program trigger levels, and eliminating coverage for certain lines of insurance – all focused on encouraging greater private market participation over time. The impact of these changes and an overall evaluation of the market for terrorism risk insurance formed the basis for much of the President's Working Group on Financial Market's (PWG) 2006 report on terrorism risk insurance.

The Findings of the President's Working Group on Financial Markets

The Extension Act required the PWG to perform an analysis regarding the long-term availability and affordability of insurance for terrorism risk, including group life coverage; and coverage for chemical, nuclear, biological, and radiological events. In conducting this analysis, the PWG was assisted by staff of the member agencies who reviewed academic and industry studies on terrorism risk insurance, sought additional information and consultation through a Request for Comment published in the Federal Register, and also met with insurance regulators, policyholder groups, insurers, reinsurers, modelers, and other government agencies. The PWG submitted its report to Congress last September. Key findings of the report are summarized below.

Long-Term Overall Availability and Affordability of Terrorism Risk Insurance

One of the key findings of the PWG report was that overall the availability and affordability of terrorism risk insurance has improved since the terrorist attacks of September 11, 2001. The general trend observed in the market has been that as insurer retentions have increased under TRIA and policyholder surpluses have risen, prices for terrorism risk have fallen, and take-up rates have increased.

Much of the improvement in the terrorism risk insurance market is due to several important factors, including better risk measurement and management, improved modeling of terrorism risk, greater reinsurance capacity, and a recovery in the financial health of property and casualty insurers.

· Since September 11, insurers have made greater use of sophisticated models that allow them to identify and manage concentrations of risk in order to avoid accumulating too much risk in any given location. This improvement in risk accumulation management has allowed insurers to better diversify and control their terrorism risk exposures, which has enhanced their ability to underwrite terrorism risk. In addition, a significant effort has been made by the insurance industry in modeling the potential frequency and severity of terrorist attacks; however, given the uncertainty of terrorism in general and, in particular, the uncertainty associated with these modeling efforts, insurers appear to have limited confidence to date in these models for evaluating their risk exposures.

· In terms of market capacity, the PWG found that the quantity of terrorism risk reinsurance capacity has increased since the period following September 11. In addition, the financial health of insurers has recovered since September 11. As a result, insurers have more available capacity to allocate to terrorism risk as demonstrated by the increased provision of terrorism risk insurance coverage over the past few years.

Despite these overall improvements, the PWG report found that a significant number of policyholders are still not purchasing terrorism coverage – approximately 40 percent of all policyholders do not purchase coverage. Even in major cities, a high proportion of policyholders are not purchasing terrorism risk insurance. For example, in 2004, 46 percent of policyholders in New York City had not purchased terrorism insurance; in Los Angeles, 61 percent had not purchased terrorism insurance; in Chicago, 42 percent; and in Washington, D.C., 40 percent. Recently reported data for 2006 suggests this has improved for some cities; for example, approximately one-quarter of policyholders in the New York metropolitan area are uninsured, as compared to 46 percent in 2004. The PWG's report, Treasury's own 2005 study, and others have found that the primary reasons for non-purchase were price, perceptions of low risk, and perhaps to some degree an expectation that federal disaster aid might be available if a significant attack were to occur.

The PWG report concluded that further improvements in insurers' ability to model and manage terrorism risk will likely contribute to the long-term development of the terrorism risk insurance market. However, the high level of uncertainty currently associated with predicting the frequency of terrorist attacks, along with what appears to be a general unwillingness of some insurance policyholders to purchase insurance coverage, makes any prediction of the potential degree of long-term development of the terrorism risk insurance market somewhat difficult.

Group Life Insurance

As passed by Congress in 2002, TRIA did not include group life insurance in the program. Treasury was required to evaluate market conditions and determine whether to include it in the program if both insurance and reinsurance were not available, or not likely to be available in the future. In 2003, Treasury found that group life insurance coverage was readily available for consumers. Thus, group life was not added to the program. In 2005, when TRIA was extended by Congress, group life was not added to the program.

The PWG report found that group life insurance is still widely available in the private market even though it is not part of the TRIA program. In particular, the group life market is highly competitive and is very price sensitive. Group life insurers concede that competitive pressures have caused them to make coverage available, even in the absence of TRIA protection. In contrast to property and casualty insurers, group life insurers have decided to forgo purchasing reinsurance and to focus less on managing risk accumulations.

Chemical, Nuclear, Biological, or Radiological (CNBR) Coverage under TRIA

CNBR is currently covered under TRIA. However, TRIA does not require insurers to make CNBR terrorism coverage available to policyholders if CNBR coverage for non-terrorism events is similarly not provided. Although not required by TRIA, if CNBR terrorism coverage is provided by the insurance policy, such as with workers' compensation insurance, TRIA covers insured losses from a certified terrorist event involving CNBR.

CNBR is currently covered under TRIA. However, TRIA does not require insurers to make CNBR terrorism coverage available to policyholders if CNBR coverage for non-terrorism events is similarly not provided. Although not required by TRIA, if CNBR terrorism coverage is provided by the insurance policy, such as with workers' compensation insurance, TRIA covers insured losses from a certified terrorist event involving CNBR.

The PWG report found that historically CNBR risks (caused by a terrorist or by any other event) were typically not covered by insurance (except when mandated by state law, such as with workers' compensation). The factors determining the availability and affordability of CNBR coverage have more to do with the nature, scale, and uncertainty of the damage and losses from CNBR events – however caused – and less to do with terrorism specifically. In addition, policyholder expectations regarding their own potential terrorism risk exposure are probably lower and their expectations about the likelihood of post-disaster federal aid are probably higher for CNBR attacks than for relatively smaller-scale conventional terrorist attacks.

The Federal Government's Role in the Market for Terrorism Risk Insurance

As a basic principle, the federal government's role in any market, including the market for terrorism risk insurance, should be limited to those areas where private markets cannot function and hence broader costs are imposed on our Nation's overall economy. In playing such a role at a time when it was needed, TRIA appears to have been successful. TRIA provided time for insurers and others to adjust to the risks made clear by the September 11 terrorist attacks. Subsequently, there have been positive market responses by insurers and reinsurers to the reductions in the federal role over the five years that TRIA has been in place, most notably by assuming additional terrorism risk exposure in each year of the program. And as insurers have increased their terrorism risk exposure as TRIA was scaled back, prices for terrorism risk coverage have declined or remained stable. In some sense, we have conducted a market experiment under TRIA that has illustrated that the private sector is capable of taking on increasing amounts of terrorism risk as the federal government's role recedes. TRIA has generally been effective in encouraging the greater provision of terrorism risk insurance, while at the same time encouraging and supporting private market development. However, by providing a terrorism risk reinsurance without any up-front premiums, it may also have displaced some private sector alternatives.

As has been clear from the outset, TRIA was designed as a temporary program. A permanent or long-term federal subsidy of free federal reinsurance was never intended. We firmly believe that temporary programs should be just that – temporary. Given the success achieved under TRIA to date, the obvious question is should the federal government maintain a limited role in the provision of terrorism risk insurance? It is clear that some challenges remain in the market for terrorism risk insurance almost five years after the passage of TRIA and nearly six years after September 11. Insurers have made great strides in modeling loss exposure and managing their concentration of risk; however, the ability of the insurance industry to model the frequency of terrorism attacks is uncertain, and market participants are skeptical of their current reliability. As a result, insurers are cautious in allocating more capacity to terrorism risk, although it appears that gradual increases have been occurring over time. If TRIA were to expire, our general view is that the market for terrorism risk insurance in much of the country would largely be unaffected, but that there could be some dislocations in certain markets and industries.

Based on where the market for terrorism risk insurance is today, our view is that TRIA should be phased out in order to increase private sector participation. The following three elements are critical if TRIA is to be reauthorized for a second time: the program remains temporary and short-term; private sector retentions are increased; and there is no expansion of the program. Unfortunately, H.R. 2761 does not meet these critical elements.

It is important that the program remain temporary and short-term. When the President signed TRIA in 2002 he said that it should be temporary, and the Administration maintains this position. Given the positive market developments during the last five years under a TRIA program where the federal role has been scaled-back further and further each year, we clearly do not believe the federal government's role in terrorism risk insurance should be made permanent. Similarly, if the program were extended for a long period of time there would be less urgency surrounding the development of private sector solutions, which would lead to market complacency. In considering the length of any extension we must maintain incentives for industry participants to continue to improve their systems (e.g., modeling) and develop private market capacity and innovative solutions. We believe the ten year extension in H.R. 2761 is not consistent with the critical element of keeping the program temporary and short-term.

It is also important to continue the trend of increasing the private sector's participation and reducing the role of the Federal Government. Private sector retentions provide financial incentives for insurers to encourage their policyholders to mitigate risk through such measures as improved physical security and evacuation and business continuation planning. Private sector retentions can be increased through deductibles, co-shares, or program triggers. Any extension of TRIA should not backtrack from current levels, but rather should reflect some real amount of increased private sector participation. As has been demonstrated by the increased willingness of insurance companies to take on terrorism risk exposure during the life of TRIA, there is ample opportunity to continue increasing private sector retentions. In addition, recent increases in the capacity of property and casualty insurers, as evidenced by growing surplus and profit levels as well as increased reinsurance availability, should allow for greater private sector retentions. Unfortunately, a number of provisions in H.R. 2761 move away from requiring increased private sector participation, such as leaving insurer deductibles and co-payment amounts flat and unchanged, lowering the program trigger level, and lowering retentions for subsequent events through a reset mechanism. Treasury would oppose these provisions as they are inconsistent with phasing out TRIA and encouraging private provision of terrorism risk insurance – which is the fundamental goal of TRIA.

The program should not be expanded to introduce new lines or types of coverage willingly provided by the private market. For example, we do not see any evidence of problems in the market for group life insurance or in coverage for domestic terrorism. These markets continue to function despite not having access to the TRIA program. Expanding the TRIA program to include additional coverage for well functioning markets – as H.R. 2761 proposes – is inconsistent with the appropriate role of the federal government in the terrorism risk insurance market. Treasury would oppose any such efforts that move the program in the wrong direction.

Finally, there have been questions raised about the lack of coverage for CNBR terrorism risks. As noted previously, outside of workers' compensation insurance, coverage for CNBR risk has generally not been provided by insurers. However, TRIA does provide coverage for CNBR risk if insurers include such coverage in their policies. If policyholders were to demand CNBR coverage and were willing to pay appropriate prices, we would expect some additional capacity to emerge for CNBR risks. At this time the lack of CNBR coverage does not appear to be leading to any disruptions or imposing any broader costs on our Nation's overall economy. We do not support H.R. 2761's expansion of TRIA's "make available" provision that would require insurers to offer coverage for CNBR risks or its provisions that would lower insurer retentions. Nevertheless, outside the debate surrounding TRIA, we should continue to consider the potential economic implications associated with the limited amount of CNBR terrorism risk insurance coverage that is currently being provided.

Conclusion

We appreciate the efforts of the Chairman and Members of the Subcommittee in evaluating issues associated with terrorism risk insurance and TRIA. Unfortunately, the risk of terrorism is likely to remain a part of our lives for some time to come, but that is precisely why the federal government needs to encourage the development of the most creative and cost effective means of covering terrorism risks. The most efficient, lowest cost, and most innovative methods of providing terrorism risk insurance will come from the private sector. TRIA should be phased out in order to increase private sector participation.

The three critical elements that we have set forth surrounding an acceptable extension of TRIA – (1) the program remain temporary and short-term; (2) private sector retentions are increased; and (3) there is no expansion of the program – reflect the positive experience under TRIA to date, and are grounded in the basic principle of limited government involvement in private markets. Without these critical elements, we would not be supportive of extending TRIA as, in our view, the program would be moving in the wrong direction. H.R. 2761 does not meet our objectives. In Treasury's view, from both a market and economic perspective, it would be better to have no TRIA than a bad TRIA. We are willing to continue to work with Congress toward finding an appropriately balanced solution and to establish the appropriate increases in private sector participation.

We look forward to continuing to work with Congress on this important issue. Thank you. I look forward to answering your questions.

 

Testimony of Treasury Secretary Henry M. Paulson, Jr.
before the House Committee on Financial Services
on the State of the International Financial System

Washington, DC -- Thank you, Chairman Frank, Ranking Member Bachus and Committee members, for the opportunity to appear today to discuss the state of the international financial system.

-- Thank you, Chairman Frank, Ranking Member Bachus and Committee members, for the opportunity to appear today to discuss the state of the international financial system.

The Bush Administration is committed to strengthening U.S. and global economies by promoting domestic and international growth. Our policies encourage openness, competition, financial stability, and development, both at home and abroad.

As countries around the world have reformed and opened their economies, global integration has provided businesses greater access to markets around the world, more choices for consumers, and reduced the prices of goods and services, which is a real benefit, especially to those with lower incomes in the United States and abroad.

Our aim is to help ensure that more people share in the benefits created by economic growth and trade opportunities, to help every nation reduce poverty and build a strong middle class.

To further expand on these points, my testimony will touch on the following:

The economic outlook for the U.S. and the global economy.

Contributions that the U.S. and other economies have made toward global re-balancing and additional steps that are required.

The vital importance of continued U.S. openness to foreign investment and trade, while ensuring national security, to keep our economy dynamic and competitive; and the imperative of addressing anxieties about globalization and successfully concluding the Doha trade round.

Why the international financial institutions are key instruments through which to pursue U.S. economic interests abroad and what needs to be done to maintain their relevance and credibility. On the IMF side, this includes an overhaul of governance structure.

The importance of multilateral debt and development initiatives, which serve U.S. interests – both moral and practical – by lifting people out of poverty, promoting private-sector led growth, helping rebuild war-torn societies.

How the Treasury is working bilaterally and multilaterally to detect and disrupt financial networks related to money laundering, terrorism, WMD proliferation.

How Treasury's international assistance program supports the achievement of many of these goals.

U.S. and Global Economic Developments

A strong U.S. economy benefits the international economy, and the U.S. economy is strong. Most recent data show that employers are hiring more than 100,000 people per month, businesses are starting to invest again and consumers are spending at a healthy pace.

The global economy continues to be very robust, with sustained strong growth from 2003 through 2006. In 2006, global GDP grew 5.4 percent, the highest rate of growth in over 30 years. The International Monetary Fund (IMF) projects continued strong growth, at about 5 percent, in 2007 and 2008. The U.S. and China are key engines of global growth, accounting for over 40 percent of world growth for the past 5 years. Emerging markets and developing countries have made a huge contribution to global growth, growing, on average, 4.8 percentage points faster than the advanced economies from 2003 through 2006. And with both Europe and Japan also experiencing faster growth, the global economy is now firing on all engines in a way that produces better balance, more sustained growth, and expanding opportunities.

At the same time there has been a substantial increase in the amounts of funds invested across borders, a near doubling in cross-border investment flows since 2000 to $6 trillion annually. Not surprisingly, given the depth, liquidity and attractiveness of our financial markets, the U.S. has attracted international investment that has enabled us to achieve higher rates of growth, higher levels of capital formation, and greater job creation than would have been possible otherwise.

The issue of global imbalances remains on the international agenda. Some historical perspective is useful in this discussion. Global imbalances have evolved and developed over a long time period and are the result of a myriad of global forces, including the massive amounts of international investment mentioned earlier and the relative attractiveness of U.S. financial markets to foreign investors. Another reason is the consistently faster pace of demand growth in the United States relative to our foreign partners.

However, progress is being made, as suggested in last week's release of first quarter 2007 data showing the U.S. current account deficit has declined to 5.7 percent of U.S. GDP, down from a peak of 6.8 percent in the fourth quarter of 2005. Our partners are growing faster, particularly in Europe, where demand has strengthened. We continue to seek further re-balancing of global demand through stronger demand growth in Japan and Europe, as well as by oil exporting economies and China.

We are doing our part. The U.S. fiscal position continues to improve. The FY 2006 federal budget deficit was $248 billion, $70 billion less than in FY2005. This is considerable progress and we are on track to further reduce the deficit in 2007. As a share of GDP, the deficit amounted to 1.9 percent in FY 2006, down from a recent peak of 3.6 percent in FY 2004 and below the 40-year average of 2.3 percent. The U.S. labor market remains healthy with a low unemployment rate, steady job gains and solid real wage growth. Core measures of inflation appear to be contained, although energy and food price increases continue to boost the headline inflation figures.

In sum, global economic growth is widespread and moving at a faster pace than in the 1980s or the 1990s. Inflation is down, fiscal positions have improved, and vulnerabilities have been reduced. We still have work to do, however, to further re-balance global demand, expand global trade and open markets.

The Strategic Economic Dialogue with China

Since becoming Secretary, I have emphasized the United States' economic relationship with China. Rapid growth in China has helped power the global economy. And, as a major global economic participant, China must address the need for structural reform.

Our relationship with China is multi-faceted, and we welcome China's growth and integration into the world economy. As our relationship with China matures, tensions will naturally emerge. Less than one year ago, President Bush and President Hu established the Strategic Economic Dialogue, which is a focused and effective framework for addressing issues of mutual concern. The first SED meeting was held in Beijing in December, and the second one was held last month here in Washington. We have tangible results to show for our work so far, such as agreements in civil aviation, energy, the environment and financial services.

Through the SED, which allows us to speak to senior Chinese officials with one voice, avoiding the stove-piping that had sometimes characterized past discussions, we can work to strengthen the U.S. – China economic relationship. It is very important to both of our countries that we get this right.

The United States supports a stable and prosperous China; a stable and prosperous China will be a growing market for U.S. goods and services, even if it will be an economic competitor at times. We are not afraid of the competition; we welcome it, because competition makes us stronger. It is in our interest to support China's continuing efforts to reform and open its economy. Our policy disagreements are not about the direction of change, but about the pace of change.

You recently received the foreign exchange report, which emphasizes the need for stronger, faster action from China. Treasury did not determine that China's exchange rate policy was carried out for the purpose of preventing effective balance of payments adjustment or gaining unfair competitive advantage in international trade. But, Treasury continues to press the Chinese to increase the flexibility of their exchange rate.

Although they have taken some steps towards greater flexibility in the short term, they need to accelerate that movement and move more quickly to a market-determined exchange rate in the medium term. While currency reform is not going to eliminate our trade deficit, a market-determined exchange rate that reflects the underlying fundamentals of the Chinese economy is an important ingredient to sustainable, balanced economic growth in China, which is critical to continued stable growth around the world. The huge inflow of liquidity under the current exchange rate policy undermines the effectiveness of China's monetary policy and fuels excessive growth in credit, which itself poses significant risks for the Chinese economy's performance. The risk that China now faces is moving too slowly on exchange rate reform, rather than moving too quickly.

Rebalancing China's growth to be less dependent on exports is key to reducing China's trade surplus, and assuring that China can continue to grow in the future without generating large imbalances. Moving more quickly to embrace competition and market principles will also spread the benefits of China's growth to all of China's people. Just as important is addressing the structural reasons why Chinese households save so much and consume so little. Precautionary savings rates would likely decrease, and consumption increase, if there were a stronger social safety net. Competitive retail financial services would allow the Chinese public to insure against risk, finance major expenditures like education, and garner a higher return on their savings. Investments driven by market signals and expected profitability, rather than by administrative guidance, combined with a reduction in precautionary savings, would shift the economy from its infrastructure and export manufacturing focus and spread prosperity more widely. This can only be beneficial, and China's consumption and import level can only increase.

We will have our third SED meeting in December. Between now and then, we will continue to actively work on the trade agenda, on opening markets, increasing transparency and innovation, rebalancing growth and promoting energy efficiency and security, as well as environmental protection measures. We will continue our focus on financial services, moving at a faster pace towards a market-driven currency and expanding U.S. access in the services sector. We have room to be more creative and accomplish a good deal more.

Promoting Open Trade and Investment

A central U.S. policy priority is promoting further opening to international trade while addressing the sources of globalization anxieties. I have been and will continue to be an outspoken advocate for maintaining and extending open trade. This is fundamental to the long term competitiveness of the U.S. economy. As the world opens its doors, we must resist the sentiment that favors economic isolationism; this is not the time to retreat from the principles which have made America so strong and competitive.

We have worked hard to open markets and liberalize trade, in order to promote economic growth and development worldwide. Free trade agreements (FTAs) also bring significant benefits to Americans and the American economy as well as to our FTA partners. Over the last six years, the Administration has put free trade agreements into effect with ten countries. Agreements with the Dominican Republic, Costa Rica and Oman have passed Congress and await implementation.

The Administration is working hard to complete the Doha round, which has the potential to lift hundreds of millions out of poverty. Last month, congressional leaders and the Administration reached bipartisan agreement on labor, environmental and other issues related to pending free trade agreements with Peru, Panama, Colombia and Korea. We are hopeful that congressional approval of these agreements will soon unlock their important benefits.

Openness to trade and competition fuels economic dynamism, innovation, and deployment of new technologies that raise standard of living and productivity across the globe. Countries which have opened up to international competition have prospered, while others have been left behind. But a dynamic economy does create dislocations and change, and we must help workers succeed amidst this change. However, we cannot turn back the clock; the global economy is here to stay.

A successful Doha round would expand trade in agriculture, manufactured goods and services. The World Bank estimates that full liberalization of global merchandise trade alone would increase annual global income by $287 billion (0.7 percent of global GDP) and lift 65 million people out of poverty by 2015. Agriculture in particular is crucial for developing countries, especially for the poorest ones. On average, agriculture represents 40 percent of GDP, 35 percent of exports, and 50–70 percent of total employment in the poorest developing countries

Financial services are particularly important for developing countries because they are linked to increased economic growth and development. A Doha Round without significant liberalization in these areas would be a missed development opportunity. Capital markets are the lifeblood of an economy. They connect those who need capital with those who invest or lend capital. They play a vital role in helping entrepreneurs implement new ideas and businesses expand operations, creating new jobs. Financial sector openness has been shown to increase growth rates by over one percentage point in developing countries and to help the poor disproportionately, making commitments in the financial sector a win-win proposition. Cross-country analysis shows that greater involvement by private and foreign banks leads to more efficient lending and higher growth.

Foreign Direct Investment

On May 10, 2007, President Bush reaffirmed our nation's commitment to "open economies that empower individuals, generate economic opportunity and prosperity for all, and provide the foundation for a free society." A free and open international investment regime is vital for a stable and growing economy, both here at home and throughout the world. Foreign investment in the United States strengthens our economy, improves productivity, creates jobs, and spurs healthy competition.

Thank you, Chairman Frank, Ranking Member Bachus and Committee members for your efforts to improve and strengthen the CFIUS process. Your bill will contribute to creating a sound process to assess national security risks in those limited investments where they may arise, while signaling to the rest of the world that the United States remains open for investment. The CFIUS process has historically applied to less than 10 percent of foreign acquisitions of U.S. firms and the vast majority of reviews take place without controversy.

Modernizing the International Financial Institutions

We have a strong stake in maintaining the credibility, relevance and legitimacy of the IFIs. The IFIs are indispensable to promoting the United States' global economic interests, which cannot be effectively pursued through bilateral means alone.

As you know, the President has nominated Ambassador Robert Zoellick to be World Bank President. Positive feedback from my extensive consultation with foreign ministers around the world reinforced our confidence in Ambassador Zoellick's ability to lead the Bank's vital mission of economic growth. I believe he will rightly keep Africa at the center of the Bank's focus and continue the vital campaign to fight corruption and reduce poverty.

At the IMF, we have reached an important moment for reform. Failure to follow through will undermine the credibility and legitimacy of the IMF. Within the past days, the IMF took action to update its operational framework for its surveillance over members' exchange rate policies. The U.S. has been a strong voice in favor of such reform.

The IMF's exchange rate surveillance framework was 30 years old and badly needed updating to reflect developments such as the tremendous rise in international capital flows and increased prevalence of freely floating exchange rates. The reform will permit firmer surveillance in areas such as insufficiently flexible exchange rate regimes or weak macroeconomic policies which do not adequately support the exchange rate regime. The U.S. will continue to emphasize that for the reform to be meaningful, it must be carried through in the day-to-day surveillance work undertaken by staff. Nothing is more important for the relevance of the IMF than rigorous execution of its most fundamental responsibility.

Firm, multilateral-based exchange rate surveillance has the potential to be a strong complement to bilateral diplomacy. A multilateral approach places exchange rate issues in a broader, less politically-charged context where the win-win aspects of reform can be more persuasively emphasized.

The United States has led the call for reforms of the IMF's governance structure so that it better reflects the world economy in which we live. The chief goal of governance reform must be to boost the voting share of dynamic emerging market economies. Major emerging market economies produce an increasing share of global output, and will increasingly drive global growth. Reform can and should be accomplished while protecting the voting share of the poorest countries. The U.S. has demonstrated its commitment to reform by offering to forego the additional quota which would otherwise be due to us. We continue to call on similarly situated countries to follow our lead.

Supporting Economic Growth in Developing Countries

This administration has pursued a proactive reform agenda on development. President Bush has made a strong case for why international development assistance is squarely in the U.S. interest. Treasury supports these international development objectives through active leadership in the multilateral development banks (MDBs) and international debt initiatives. Lifting unsustainable debt burdens from the poorest countries allows a greater focus on economic growth and frees up resources that can be spent on poverty-reduction priorities.

In 2005 the G-8 agreed to support a multilateral debt relief agreement to cancel up to $60 billion in debt obligations owed to the World Bank's International Development Association (IDA), the African Development Bank and the IMF by countries eligible for the Heavily Indebted Poor Countries (HIPC) Initiative. In response to U.S. leadership, the Inter-American Development Bank has followed suit, agreeing to provide additional debt reduction to its five most heavily-indebted borrowers: Bolivia, Guyana, Haiti, Honduras and Nicaragua, with debts totaling $3.4 billion.

The U.S. seeks to preserve the gains made under these historic debt relief initiatives, and to end the "lend and forgive" cycle that has plagued many of the poorest countries in recent decades. This will require not only prudent debt management by borrowing countries, but greater attention by lenders to responsible lending policies and practices.

A key tool is the joint World Bank/IMF Debt Sustainability Framework, the DSF, for low-income countries, a forward-looking assessment of potential risk of debt distress. DSF must be put to use not only by borrowers to promote prudent management of new debt, but also by lenders, beyond the MDBs. It should include explicit guidance on recommended level of concessionality of lending.

We are concerned that some commercial creditors and non-OECD bilateral creditors have increased non-concessional lending to Low-Income Countries following the extension of debt relief, in effect "free riding" on the debt relief for these countries paid for by others. We are working within various forums, including the OECD Export Credit Group, to explore how use of the DSF might be expanded to other creditors. We are also working to engage the G-20 on a "Charter for Responsible Lending" to promote collaboration with emerging creditors. In this context, we are also working to help HIPCs avoid costly litigation.

Largely through U.S. leadership, the MDBs have been making significant progress in support of our international policy priorities: promoting private sector-led growth, reducing poverty, fighting corruption, and assisting post-conflict countries in rebuilding their war-torn economies.

We are now engaged with our donor partners around the world in replenishment negotiations for the International Development Association, the concessional arm of the World Bank and the African Development Fund. Successful negotiations are particularly important for Africa, which receives half of the IDA's resources. U.S. leadership is essential to advance the following key objectives:

Making sure the institutions measure, report and demonstrate results concretely and consistently; and continue to allocate more resources to countries that are reforming and performing well;

Improved work in fragile states such as Afghanistan and Liberia;

Increased transparency of the Bank's country operations;

Greater attention to debt sustainability in poor, debt vulnerable countries;

Continued efforts to fight against corruption.

The U.S. and the MDBs are strengthening their commitment to the financial sector in Africa, which is critically important for supporting sustainable economic growth. President Bush recently announced the Africa Financial Sector Initiative to provide financial and technical assistance to overcome barriers to capital markets development in Africa. This will complement work of the MDBs to strengthen Africa's financial markets.

The World Bank's new "Making Finance Work for Africa" initiative aims to increase efficiency of financial intermediation, provide greater access to finance for households and small business, and deepen financial markets. The IFC provides financial and technical assistance to help African financial institutions lend profitably to small and medium-sized enterprises. World Bank/IMF financial sector assessments help African countries develop financial sector reform strategies.

The MDBs also play a key role in addressing the needs of fragile states, which complements U.S. policy of helping to rebuild war-torn economies in countries like Afghanistan, Liberia, Haiti and Lebanon. Successfully addressing the special needs of fragile states is critical for advancing global economic and political stability. We are encouraging the MDBs to focus on the core issues of capacity and governance, since shortcomings in these areas often make it difficult for fragile states to effectively absorb aid. We also emphasize the need for the MDBs to achieve measurable results.

The Administration wants to continue to work with Congress on this proactive development agenda. In order for the United States to maintain its leadership in these important efforts, we must address the past payments due to these valuable institutions, as was requested in the President's FY 2008 budget.

Helping Small Businesses in Latin America

In March, President Bush asked the Treasury and State Departments to develop an initiative to "help U.S. and local banks improve their ability to extend good loans to small businesses" in Latin America and the Caribbean. On June 12, Treasury announced a three part program specifically designed to assist the estimated 90 percent of small businesses in the region that are often frozen out of the formal financial sector. The initiative is aimed at helping more people share in the benefits of economic freedom and growth that occur when small businesses thrive.

It is a three-part plan to catalyze market-based bank lending to small, profitable businesses with growth potential in Latin America and the Caribbean, that would be carried out in conjunction with in the Multilateral Investment Fund (MIF) of the Inter-American Development Bank, the Overseas Private Investment Corporation (OPIC) and the IDB Group's Inter-American Investment Corporation (IIC).

Household financial education is also vital to the success of this initiative. Many entrepreneurs get their start using their own savings or personal loans. Treasurer Anna Cabral will host a regional conference this fall to discuss ways we can enhance access to financial services, including financial service access of entrepreneurs in the region.

Strengthening the International Framework against Illicit Finance

In 2004, Treasury became the first finance ministry in the world to develop in-house intelligence and analytic expertise to use specific, current, and reliable intelligence to evaluate potential national security threats. We use reliable financial intelligence to build conduct-based cases, working to achieve a multilateral alignment of interests. Multilateral support is critical to the success of targeted financial measures; this support is also vital to bolstering the integrity of the international financial system and to underpinning sustainable growth and development.

Treasury continues an intensive effort to track and disrupt terrorist financing that has been effective on several levels. Perhaps the best example of a multilateral program of targeted financial measures is evidenced when the target provides support to al Qaida or the Taliban. In that case, a U.N. Security Council list requires all member states to freeze the assets of designated actors.

We are applying targeted financial measures against narcotics trafficking, terrorism threats and to counter the threat of proliferation, particularly the threats posed by Iran and North Korea. We have used our authorities to financially isolate entities central to the financing of terrorism and proliferation, such as Iran's Bank Sepah and Bank Saderat. We have worked to ensure that targeted financial measures are a central part of multilateral efforts to combat WMD proliferators; these measures are included in key UNSCRs related to North Korean and Iranian proliferation activities.

One of the greatest challenges of this century will be to keep the most dangerous weapons out of the hands of dangerous people. As I travel and meet with my colleagues in finance ministries around the world, everyone acknowledges that we must find effective ways to deal with these threats, short of military measures. Other nations can move more quickly to accomplish our shared goals of protecting the financial system and combating security threats by implementing the laws necessary to give their finance ministries the authority to access and use intelligence, and by integrating financial and security functions. This will enable further cooperation and multilateral action, which is in the world's best interest. And, these authorities must be available not only for use against terrorist financing and money laundering, but also for the dangerous, emerging practice of proliferation financing.

In conjunction with these targeted financial measures, Treasury has worked to enhance transparency across the international financial system and creating a dialogue with the international banking and financial service industries. Treasury is working with FATF to reinforce anti-money laundering/counter-terrorist financing framework to safeguard against threats such as WMD proliferation. FATF is a centerpiece of multilateral efforts, but cannot function effectively in isolation, the IFIs are major partners. Countering illicit finance promotes international financial stability and is therefore complementary to the missions of the IFIs.

The U.S. has been working very closely with the IMF and MDBs on anti-money laundering issues since 1999 and on terrorist financing issues since 2001. Our efforts have been very successful in gaining their commitment and engagement to combat terrorist financing and money laundering. A major step forward occurred in March 2004, when IMF and World Bank Executive Boards agreed to make countries' compliance with the FATF 40 + 9 recommendations, the anti-money laundering and terrorist financing standard, a regular part of their financial sector surveillance and diagnostic work, including in the Financial Sector Assessment Program.

The IMF and World Bank continue to undertake country assessments and provide technical assistance to help countries strengthen their AML/CFT regimes. They have performed 80 country assessments since 2002. The IMF has provided technical assistance to 158 countries; conducted 57 training workshops/seminars at national or regional level, involving 1,873 participants. And the World Bank has undertaken 196 outreach activities and 314 technical assistance missions, training approximately 2,200 officials in 140 countries.

Treasury Technical Assistance

Treasury seeks to advance the international economic agenda, and the specific goals that I have discussed today, in many ways, primarily through bilateral policy dialogue, through Treasury's participation in international organizations, and through specialized groupings such as the G-7/G-8.

Another, less visible, way is Treasury's international technical assistance program. It is a very small program that "punches above its weight" and merits your support. Let me give you a few specific examples that illustrate how Treasury assistance is supporting our efforts to combat illicit finance, to promote economic growth in developing countries, and to promote open trade and investment:

In Afghanistan, Treasury advisors have assisted the Afghan Central Bank in a successful effort to license and regulate the vast network of informal currency changers, also known as "hawaladars." This was a major step forward in the effort to bring hawaladars into the formal financial system and thereby reduce vulnerability to money laundering and terrorist financing.

In Zambia, Treasury advisors are helping the Finance Ministry to create a new Treasury Department that unifies and makes more transparent revenue and expenditure collection, and introduces new cash management tools.

In Mauritius, Treasury advisors have provided critical assistance in advancing "aid for trade" initiatives. With Treasury's help, Mauritius has introduced more advanced budget techniques that will help the authorities plan for and mitigate the budgetary impact of steps to liberalize its trade regime.

Conclusion

Taken together, policies to embrace openness, promote trade and assist developing economies will enhance economic security and prosperity for people around the world. These goals reflect what is best in the American people, and I look forward to working with you to achieve them. Thank you and I welcome your questions.

 

TREASURY SEEKS NOMINATIONS FOR AUDITING COMMITTEE  The Treasury Department issued a notice in the Federal Register this week seeking nominations of individuals to serve on the Advisory Committee on the Auditing Profession. Secretary Henry M. Paulson, Jr. announced his intention to create the committee last month to assist Treasury in examining the sustainability of a strong and vibrant auditing profession, as part of the first stage of the Secretary's capital markets competitiveness initiative. Treasury will select 15 to 21 committee members representing the views of non-government entities or groups having an interest in the auditing profession, such as auditors, investors, public companies, and other financial market participants. The Department also requested names of professional and public interest groups that should be represented on the committee. The public committee will evaluate and make recommendations to strengthen the auditing profession, which the Department expects the committee to release within a year. All full committee meetings will be open to the public. Topics the committee is expected to consider include: the auditing profession's ability to attract and retain the human capital necessary to meet developments in the business and financial reporting environment; audit market competition and concentration; and the financial resources of the auditing profession, including the effect of existing limitations on auditing firms' structure; as well as those factors affecting audit quality. Treasury will direct the committee to conduct its work with a view to furthering Treasury's mission to promote the conditions for prosperity and stability in the United States and the rest of the world and to predict and prevent, to the extent possible, economic and financial crises. Nominations should be sent to acapmembership@do.treas.gov or to the Advisory Committee on the Auditing Profession Membership, Office of Financial Institutions Policy, Department of the Treasury, Main Treasury Building, Room 1418, 1500 Pennsylvania Ave., NW, Washington, D.C. 20220. Nominations are due by July 11.

 

FINANCIAL LITERACY COMMISSION HOSTS BOSTON MEETING ON HOMEOWNERSHIP The Financial Education and Literacy Commission, chaired by the U.S. Treasury Department, visited Boston, Mass., today for a discussion on successful financial education programs to improve homeownership. "Homeownership is a journey not a destination. Good homeownership counseling services need to be available before, during and after the purchase transaction," said Treasury Deputy Assistant Secretary for Financial Education, Dan Iannicola, Jr., who attended today's conference. "The community groups we met with today understand this and that is why they're making a difference here in Boston and the surrounding areas." Treasury and the U.S. Department of Housing and Urban Development led a discussion with financial institutions, lenders, policymakers, community organizations and counseling agencies on how public-private sector partnerships can better deliver grassroots counseling and training programs. Representatives from the Federal Deposit Insurance Corporation also attened the event, which was part of broader national and regional efforts to highlight National Homeownership Month. The discussion focused on helping home-buyers better understand the terms of their mortgages to help them stay in their homes. Homeownership counseling can reduce 90 day mortgage delinquencies by 19 percent, according to a 2001 study. Today's meeting was part of the Financial Literacy and Education Commission's national strategy for improving Americans' understanding of issues like homeownership, credit management, and retirement savings. The report, released in 2006, and other free homeownership counseling publications can be found at MyMoney.gov. -30- -- You are currently subscribed to the All US Treasury Press Releases and Documents list as: williamhhoehne@montebubbles.net Unsubscribe from this list by replying to this message.

 

 

STATEMENT BY SECRETARY PAULSON ON IMF REVISION OF EXCHANGE RATE SURVEILLANCE FRAMEWORK Treasury Secretary Henry M. Paulson, Jr. today issued the following statement on International Monetary Fund Managing Director De Rato's announcement that the Fund revised its framework for exercising surveillance over members' exchange rate policies: "The United States welcomes the revision, and I want to commend particularly Managing Director De Rato for his leadership on this important issue. The revised decision sends a strong message that the IMF will put exchange rate surveillance back at the core of its duties and rigorously implement its rules on exchange rate surveillance going forward. The revised decision also demonstrates that the IMF is serious about reforming itself and enhancing its legitimacy and relevance in today's global economic and financial system."

 

UNITED STATES TERMINATES ESTATE AND GIFT TAX TREATY WITH SWEDEN The Treasury Department today announced that on June 7, 2007 the United States delivered to the Government of Sweden a notice of termination of the tax treaty between the two countries with respect to estates, inheritances, and gifts. In accordance with the provisions of the treaty, the notice of termination provides that the treaty will cease to have effect as of January 1, 2008. At the time the treaty was signed, Sweden maintained a tax on inheritances and gifts. Sweden has since abolished this tax such that the treaty is no longer needed to prevent double taxation with respect to taxes on estates, inheritances and gifts

 

TREASURY DESIGNATES AL QAIDA, LIFG OPERATIVES

The U.S. Department of the Treasury today designated three Libyan

individuals who are members of both al Qaida and the Libyan Islamic

Fighting Group (LIFG). Today's action was taken pursuant to

Executive

Order 13224, which is aimed at prohibiting transactions with

terrorists and their supporters and freezing their assets.

"These terrorists execute roles throughout al Qaida and LIFG, from

recruitment to military training to procurement of explosive

components," said Adam J. Szubin, Director of the Office of Foreign

Assets Control (OFAC). "We are publicly holding them to account for

their dangerous actions."

Identifying Information

Nur Al-Din Al-Dibiski

* AKAs: Salem Nor Eldin Amohamed al-Dabski

* Salim Nur al-Din al-Dabski

* Salim Nur al-Din al-Dabaski

* Abdallah Rajab

* Abdullah Ragab

* Abu al-Ward

* `Abd al-Ward

* Abu al-Wurud

* Abu Naim

DOB: circa 1963

POB: Tripoli, Libya

PASSPORT: 1990/345751 (Libya)

Nur al-Din al Dibiski traveled to Afghanistan in the early 1990s,

where he joined al Qaida and received military training in al

Qaida's

camps. Dibiski is believed to be a senior member of the LIFG and a

member of that terrorist group's military committee. Dibiski also

joined the LIFG while he was in Afghanistan, and as of August 2005

was

identified as a member of the LIFG in Iran.

Sa'id Yusif Ali Abu Azizah

* AKAs: Said Youssef Ali Abu Aziza

* Sa'id Yusif Ali Abu Azizat

* Sa'id Yusif Abu Aziz

* Sa'ud Abu Aziz

* Abu Therab

* Abu Thurab

* Abu Turab

* Abdul Hamid

* Abd al-Hamid

DOB: 1958

POB: Tripoli, Libya

PASSPORT: 87/437555 (Libya)

Sa'id Yusif Ali Abu Azizah is a member of and recruiter for al

Qaida,

and was responsible for al Qaida's publications and mass media

operations. Azizah, who underwent terrorist training in an al Qaida

training camp, supervised one of bin Laden's guesthouses in

Peshawar,

Pakistan.

Azizah joined the LIFG in 1995. Azizah has long been involved in

recruiting new LIFG members and sending them to Afghanistan for

military training and combat experience. On behalf of LIFG, Azizah

has

focused on the return of recruits to Libya to conduct operations

against the government.

Azizah was identified as a member of al Qaida in Canada in 2003, and

became the leader of the LIFG in Canada in 2004.

`Ali Sulayman Mas'ud `Abd Al-Sayyid

* AKA: Aly Soliman Massoud Abdul Sayed

* AKA: Mohamed Osman

* AKA: Ibn al-Qayyim al-Jawziyyah

* AKA: Ibn al-Qayyim

* AKA: Ibn El Qaim

* AKA: Al-Zawl

DOB: 1969

POB: Tripoli, Libya

PASSPORT: 96/184442 (Libya)

`Abd al-Sayyid is one of al Qaida's early members and is reportedly

a

member of the al Qaida military committee. He was assigned by al

Qaida's leadership to deliver messages to al Qaida members in Libya

that contained instructions for terrorist plots in Libya. `Abd

al-Sayyid was also tasked by LIFG to enter Libya secretly, and was

involved in arming an al Qaida group in Libya.

`Abd al-Sayyid was at one time in charge of al Qaida activities in

Yemen, where he tasked one al Qaida operative to obtain electrical

"igniters" for explosives. In 1993, `Abd al-Sayyid coordinated with

a

LIFG member to bring an explosives expert to Yemen to make an

improvised explosive device to be catapulted on the U.S. Embassy in

Sanaa.

`Abd al-Sayyid later returned to Sudan, where he was in charge of al

Qaida operations and was a regional LIFG leader. He followed orders

of

the LIFG leadership, particularly LIFG leader and Specially

Designated

Global Terrorist (SDGT) Abd al-Rahman al-Faqih. `Abd al-Sayyid also

received funds from a Switzerland-based LIFG member.

In 2003, `Abd al-Sayyid received explosives detonators from a LIFG

security committee member in Sudan and was involved in planning an

attack on the Sudanese president and vice president.

 

TREASURY ACTION TARGETS INDIVIDUALS INVOLVED IN IRAN’S NUCLEAR PROGRAM The U.S. Department of the Treasury today designated two Iranian individuals, Mohammad Qannadi and Ali Hajinia Leilabadi, for their involvement in Iran's nuclear program. "Even individuals who are active in Iran's nuclear program are going to be held to account for their conduct and isolated by the international financial community," said Stuart Levey, Under Secretary for Terrorism and Financial Intelligence. This action was taken pursuant to Executive Order 13382, an authority aimed at freezing the assets of proliferators of weapons of mass destruction (WMD) and their supporters. Designations under E.O. 13382 are implemented by Treasury's Office of Foreign Assets Control (OFAC), and they prohibit all transactions between the designees and any U.S. person and freeze any assets the designees may have under U.S. jurisdiction. Mohammad Qannadi acts or purports to act for or on behalf of the Atomic Energy Organization of Iran (AEOI). The AEOI manages Iran's overall nuclear program and reports directly to the Iranian president. Identified by President George W. Bush in the Annex to E.O. 13382, the AEOI is the main Iranian institute for research and development activities in the field of nuclear technology, including Iran's centrifuge enrichment program and experimental laser enrichment of uranium program. Ali Hajinia Leilabadi acts or purports to act for or on behalf of the Mesbah Energy Company, an AEOI subordinate designated by OFAC in January 2006. Mesbah has been used to procure products for Iran's heavy water project. Heavy water is essential for Iran's heavy-water-moderated reactor project, which will provide Iran with a potential source of plutonium well-suited for nuclear weapons. Heavy water is believed to have no credible use in Iran's civilian nuclear power program, which is based on light-water reactor technology. The AEOI and Mesbah Energy Company are both named in the Annex to United Nations Security Council Resolution (UNSCR) 1737 for their involvement in Iran's nuclear program. Mohammad Qannadi and Ali Hajinia Leilabadi were also both included in the Annex to UNSCR 1737 for their respective roles with AEOI and Mesbah. The UN identified Qannadi as AEOI's Vice President for Research and Development, while identifying Leilabadi as the Director General of the Mesbah Energy Company. In August 2006 the Iranian President awarded government medals to Qannadi, Leilabadi, and 12 other individuals, for their contributions in the field of nuclear technology. Qannadi received the second medal for research for his role as AEOI research and technology deputy. Leilabadi was awarded the third medal of excellence in management for his role as director and deputy manager of Mesbah. Background on E.O. 13382 Today's action builds on President Bush's issuance of E.O. 13382 on June 29, 2005. Recognizing the need for additional tools to combat the proliferation of WMD, the President signed the E.O. authorizing the imposition of strong financial sanctions against not only WMD proliferators, but also entities and individuals providing support or services to them. In the Annex to E.O. 13382, the President identified eight entities operating in North Korea, Iran, and Syria for their support of WMD proliferation. E.O. 13382 authorizes the Secretary of the Treasury, in consultation with the Secretary of State, the Attorney General, and other relevant agencies, to designate additional entities and individuals providing support or services to the entities identified in the Annex to the Order. In addition to the entities identified in the annex of E.O. 13382, the Treasury Department has designated 29 entities and four individuals as proliferators of WMD, specifically: * Eight North Korean entities on October 21, 2005; * Two Iranian entities on January 4, 2006; * One Swiss individual and one Swiss entity tied to North Korean proliferation activity on March 30, 2006; * Four Chinese entities and one U.S. entity tied to Iranian proliferation activity on June 8, 2006; * Two Iranian entities on July 18, 2006; * Three Syrian entities on January 4, 2007; * One Iranian entity, one British entity, and one individual tied to Iranian missile proliferation on January 9, 2007; * Three Iranian entities on February 16, 2007; and * Three Iranian entities on June 8, 2007; and * Two Iranian individuals on June 15, 2007. The designation announced today is part of the ongoing interagency effort by the United States Government to combat WMD trafficking by blocking the property of and prohibiting transactions with entities and individuals that engage in proliferation activities and their support networks. - 30 -

 

June 14

 

REMARKS BY TREASURY SECRETARY PAULSON ON TARGETED FINANCIAL MEASURES TO PROTECT OUR NATIONAL SECURITY This Department of Good morning. Thank you, Hank, and thank you to the Council on Foreign Relations for hosting us. It is a pleasure to be with you. New York is the heart of the world's financial system and Treasury Secretaries often come here to talk about the role that system plays in our economic health. Today, I want to talk about something a little different - the financial system's importance to our national security. Throughout history, Treasury Secretaries have focused their efforts on promoting policies and actions to help ensure the safety and soundness of our financial system. Today, the Secretary must focus on the security of the financial system, as well as its safety and soundness. Global financial flows are growing rapidly and greatly exceed the trade in goods and services. This is a positive trend; open finance and free trade enhance the economic security and prosperity of people in this country and around the world. But bad actors seek to abuse this global financial system to support their illicit purposes. The world of finance and the world of terror and weapons proliferation intersect through the same system that spreads prosperity at home and abroad. National security is not only an integral part of my job; it is also a sobering one. Our enemies are determined, and there are significant threats that aren't going away anytime soon. As part of the National Security Council, I work with the President and his Cabinet to address these threats. Treasury is now a key pillar of the President's national security and foreign policy strategy. An integrated world economy presents challenges and opportunities. The challenge and importance of protecting the integrity of our global financial network have never been greater. Our financial system also presents us with enormous opportunities because technology and integration have made it more difficult for anyone using the financial system to hide. This makes financial intelligence a particularly valuable tool to detect and disrupt bad actors. Recognizing this, Congress and the President have provided an expanded set of tools that allow innovative and more focused uses of financial intelligence. These targeted financial measures are proving to be quite effective, flying in the face of a widely-held historical view that dismisses sanctions as ineffective, harmful to innocents, or both. There are certainly times when that conventional wisdom is true, particularly with broad, country-wide sanctions that are perceived as political statements. It can be difficult to persuade other governments and private businesses to join such sanctions. Even when other governments agree with us politically, they generally tend to be unwilling to force their nation's businesses to forego opportunities that remain open to others. When the private sector views such broad sanctions as unwelcome political barriers to trade, companies are unmotivated to do more than what is minimally necessary to comply. Indeed, history is replete with examples of participants in the global economy working to evade such sanctions while their government turns a blind eye. The dynamic is different when we instead impose financial measures specifically targeted against those individuals or entities engaging in illicit conduct. When we use reliable financial intelligence to build conduct-based cases, it is much easier to achieve a multilateral alignment of interests. It is difficult for another nation, even one which is not a close political ally, to disagree with targeted measures to isolate actors who are demonstrably engaged in conduct that threatens human rights or global security. And multilateral support is critical to the success of financial measures in today's world. When we use targeted financial measures aimed at explicit wrongdoing, the private sector around the world tends to support these measures thereby amplifying their effectiveness. Rather than grudgingly complying with, or even trying to evade our sanctions, we have seen the banking industry in particular voluntarily go above and beyond their legal requirements because they do not want to do business with terrorist supporters, money launderers or proliferators. This is a product of good corporate citizenship and a desire to protect their institution's reputation. Once some in the private sector decide to cut off those we have targeted, it becomes an even greater reputational risk for others not to follow, and so they often do. Such voluntary implementation by the private sector in turn makes it even more palatable for governments to impose similar measures, thus creating a mutually-reinforcing cycle of public and private action. In the end, if we do our jobs well, especially by sharing critical information with the key governmental and private sector parties around the world, there is the potential for us to create a multilateral coalition to apply significant pressure on those who threaten our security. Because we are learning to apply our tools in this way, our financial actions have produced demonstrable impacts on threats ranging from terrorist groups to narcotics cartels, and on dangerous regimes in North Korea and Iran. This new strategy uses conduct-based, intelligence-grounded, targeted financial measures to harness the power of the private sector and form the basis of multilateral coalitions, adding an innovative financial dimension to our national security effort. Treasury can effectively use these tools largely because the U.S. is the key hub of the global financial system; we are the banker to the world. We understand that maintaining this standing, which makes our strategy possible, requires focused and fact-based action, so that the private sector and other governments are most likely to amplify our measures. Financial Intelligence The starting point for Treasury's approach to targeted financial measures is information. To identify and act against threats, we need specific, current, and reliable intelligence. And the global financial system is a rich source of the information we need. Illicit actors who otherwise try to avoid detection often use the formal financial system because there is no good alternative and, in many cases, no alternative at all. Proliferation networks need import and export financing to buy materials and equipment. Rogue nations depend on the financial system for everything from holding reserves to currency transactions. Terrorist networks use the system to raise and move funds when more opaque alternatives are too cumbersome or risky. These transactions typically leave a trail of detailed information which we can follow to identify key actors and their networks. Opening an account or initiating a funds transfer requires a name, an address, a phone number; identification information that does not lie. Unlike a phone call or conversation that essentially disappears if it's not captured at the moment it occurs, the financial system produces records that tend to survive. In 2004, Treasury became the first finance ministry in the world to develop in-house intelligence and analytic expertise to use this information. We now work with the broader intelligence community, requesting the data necessary to understand the financial networks that threaten our national security. Treasury then evaluates this information with an eye towards potential action – be it a designation, an advisory to the private sector, or a conversation to alert other finance ministers to a particular threat or bad actor. It is also critical that the government handle and use the information it gathers appropriately. As Treasury implements these efforts to help protect national security, we simultaneously take rigorous steps to protect privacy and preserve civil liberties. We seek to discover those who are abusing the system, keeping in place sufficient controls and safeguards to protect those who are not. Innovative Use of Financial Authorities When considering how best to approach a threat, Treasury draws on an array of powerful authorities. Some are very old, such as the Trading with the Enemy Act, originally passed in 1917. Some are much newer, such as the authority to cut off access to the U.S. financial system for an entity that is "of primary money laundering concern" under Section 311 of the PATRIOT Act. The innovative use of these authorities against national security threats is fairly recent. We have drawn on lessons learned from earlier programs aimed at Colombian drug cartels. Over the last ten years, as these cartels, their associates and financial holdings have appeared on a Treasury list designating them as narcotic traffickers, U.S. banks have frozen their accounts and assets. Colombian and other countries' banks have then followed suit, refusing to hold or move their money. When given good information, honest bankers won't do business with these criminals. Treasury has designated over 1,400 individuals and companies, and caused the disruption or seizure of more than $1 billion in proceeds related to these cartels. The cartels refer to being placed on the Treasury list as "muerte civil" or civil death. Since September 11th, Treasury has been applying these lessons in a more focused effort against global terrorist threats, beginning with a September 23, 2001 Executive Order that authorized the identification and designation of terrorists and their facilitators worldwide. We have based our actions on clear evidence and encouraged the private sector and other nations to follow suit. Under a U.N. resolution, worldwide, targeted sanctions are now in place against members and supporters of al Qaida and the Taliban. The European Union and other nations have joined the United States in designating the terrorist group Hamas, and the United Nations has designated individuals responsible for the genocide in Darfur. The targeted financial measures used against terrorists and their supporters are likely to be as effective in combating proliferation networks. While terrorist organizations may attempt to shift their financial dealings to informal networks or cash couriers, proliferators tend to depend upon access to the formal financial system, where our controls and visibility are greatest. Those seeking to procure items for a nuclear program, for example, often seek to disguise their efforts by making the transaction appear to be for a legitimate commercial purpose. Those who participate in a proliferation transaction because of profit, rather than ideology, are susceptible to being deterred from such transactions if we can credibly threaten to publicly expose and isolate them. Recognizing this fact, in 2005, President Bush took a visionary first step---issuing a new Executive Order authorizing Treasury to target proliferators and their support networks, just as we do terrorists. The consequences of these targeted measures can be seen on a number of levels, some obvious and some less so. Most directly, when the U.S. designates a terrorist supporter or a weapons proliferator, U.S. entities and persons, wherever located, must freeze the target's assets and stop doing business with them. Given the U.S. financial system's prominence, this can have a severe impact. All major U.S. and foreign banks have offices dedicated to protecting their institutions from infiltration by illicit money. Our designations let these officials know who they need to protect against. These measures have also led to a base of international, private sector support. Reputable banks around the world don't want to hold accounts for terrorists and proliferators any more than U.S. banks do. My strong view, based on personal experience, is that the major financial institutions, and the individuals who run them, care deeply about the integrity of the financial system and the reputations of the institutions they run. They genuinely want to be good corporate citizens and want nothing to do with illegal behavior. Additionally, a lack of vigilance on their part is not worth the risk of a regulatory action. These institutions, which are, in a sense, the true gatekeepers of the financial system, have also become more effective in detecting and combating illicit money flows. As a result, they have made us all safer, and they have become sounder and stronger. We strive to make information-sharing a truly two-way street by expanding and improving the information we provide, to help them make better-informed decisions about their customers. The information the financial sector shares with the government is critically important to our efforts, and they do so under obligations that they sometimes perceive as unduly burdensome. We will continue to work to ensure that the security benefits justify the regulatory obligations, and will make adjustments as warranted. If we communicate well with the private sector, I believe that we can make our regulations more efficient and simultaneously be more effective in protecting our national security. Targeted Financial Measures in Action The impacts of these new financial measures are evident around the world. I would like to highlight a few notable examples. Terrorism Treasury continues an intensive effort to track and disrupt terrorist financing that has been effective on several levels. This effort has involved government-wide cooperation, applying law enforcement, military, intelligence, and financial tools depending on the target and the situation. While individual terrorist attacks may be inexpensive to carry out, global terrorist groups need large sums of money to pay operatives, to recruit and train members, to acquire false documents and travel. By exploiting the financial intelligence generated by that activity and combining it with other available information, we have made progress in mapping these terrorist networks. In many ways, that has been the Treasury Department's most important, but least visible, contribution to the fight against terrorist groups. Our actions have had additional disruptive effects. We have frozen assets and closed off conduits, such as terrorist-supporting charities in the United States. Some international entities have shut down simply by virtue of being publicly designated and exposed. When we restrict the flow of funds to terrorists groups or disable a link in their financing chain, they then have to shift their focus from planning attacks to concern about their financial viability. These designations may also have a deterrent effect on the financiers who want to keep one foot in the legitimate business world while supporting murder and violence on the side. When the target provides support to al Qaida or the Taliban, we have perhaps the best example of a multilateral program of targeted financial measures: a U.N. Security Council list that requires all member states to freeze the assets of designated actors. Even when we don't have that multilateral regime, such as in the case of financial supporters of Hizballah or the Palestinian Islamic Jihad, we have found that our designations make an impact beyond their formal, legal reach, as many banks around the world, who are not obliged to do so, screen their customers and transactions against our list of designated terrorist supporters. North Korea In North Korea, we have used targeted financial measures to help protect the U.S. financial system from the DPRK's illicit financial conduct. We used our authorities to designate several North Korean entities involved in its weapons programs. Because it served as a primary conduit for North Korean illicit actors to access the international financial system, we have also cut off Macau-based Banco Delta Asia's access to the U.S. financial system. The real impact, however, has come from the information made public in conjunction with these actions. Worldwide, private financial institutions decided to terminate their business relationships with the designated entities as well as others suspected of engaging in similar conduct. The result is North Korea's virtual isolation from the global financial system. The effect on North Korea has been significant, because even the most reclusive regime depends on access to the international financial system It is clear to everyone in the world today that the U.S. government takes very seriously its responsibility to preserve the security of the financial system and protect it against abuses of WMD proliferation, money laundering and other illegal activities. We have potent tools that can change behavior. In this case, our financial measures are part of a wider campaign to change North Korean behavior, including the State Department-led effort to bring about a de-nuclearized Korean Peninsula. Iran We are currently in the midst of an effort to apply these same lessons to the very real threat posed by Iran. It is well known that Iran is pursuing nuclear weapons in violation of international agreements and channeling hundreds of millions of dollars to terrorist groups. Still, when I was first briefed on the details, I was surprised to learn the extent to which Iran was exploiting global financial ties to pursue and finance its dangerous behavior, and the extent to which reputable financial institutions were being drawn into these schemes. Financial institutions that would exercise extreme caution to avoid even small-time crooks were unknowingly handling the money of Iran's proliferation front companies. I knew that the people who run these financial institutions would be shocked and disturbed, to say the least, if they were aware of the facts. So, to combat the Iranian threat, we embarked on a strategy that combines the use of intelligence-based targeted financial measures with a concentrated outreach strategy to inform financial leaders, in governments and, especially in the private sector, of what was happening. Treasury put together a briefing describing the range of Iran's deceptive financial conduct. We explained how Iran uses front companies and other mechanisms that make it difficult, if not impossible, for businesses dealing with Iran to "know their customer" or counterparty. We also explained how the Iranian regime uses its state-owned banks to pursue its missile procurement and nuclear programs, as well as fund terrorism. Repeatedly, state-owned Iranian banks, including the Central Bank of Iran, ask other financial institutions to remove their names from global transactions. This practice aims to evade risk-management controls and threatens to involve responsible financial institutions in transactions they would never knowingly handle. At around the same time, in September 2006, Treasury cut Iran's state-owned Bank Saderat off from any direct or indirect access to the U.S. financial system, and publicly disclosed some of the information underlying that decision, including that the Central Bank of Iran was sending money through Bank Saderat to Hizballah. We also disclosed evidence that Bank Saderat was providing financial services to other terrorist groups such as the Palestinian Islamic Jihad and Hamas. Almost immediately, financial institutions around the world began to adjust their business with all Iranian state-owned banks and with Bank Saderat, specifically. The private sector, when presented with our solid evidence, is able to act much more quickly than governments who often lack the necessary authority or the political will to take action on their own. As part of our outreach, we shared extensive information with some of our allies about another Iranian state-owned bank, Bank Sepah, which was providing financial services to Iranian missile firms and trying to disguise its activities. It was our hope that another nation would take the lead in pursuing an action against Bank Sepah, especially when we learned that one of our allies had independently corroborated the information we had shared. Due to a lack of legal authorities and political will, that did not happen. So, in January of this year, we unilaterally designated Bank Sepah as a facilitator of Iranian proliferation. Other nations often seem to lack the political will to take unilateral actions, and our goal has always been multilateral action. To that end, our outreach eventually proved to be successful when our allies joined us in persuading the United Nations Security Council to blacklist Bank Sepah in its most recent resolution against Iran. Now the entire world must freeze Bank Sepah's assets, and isolate it from the global financial system. As a result of our outreach and targeted measures, financial institutions around the world are more sensitive than ever about the very substantial risks posed by doing business with Iran. Most of the world's top financial institutions have now dramatically reduced their Iranian business or stopped it altogether. For the most part, they are not legally required to take these steps but have decided, as a matter of prudence and integrity that they do not want to be the bankers for such a regime. To those banks that have decided to stop dollar-based business, but continue to transact Iran's business in other currencies, I would say that the risk of transacting Iran's business is present in every currency. The engagement of Iran's state-controlled banks and its Central Bank in advancing the regime's policies should be cause for great concern to financial institutions around the world. Due to our State Department's outstanding work, the UN has passed two unanimous Security Council resolutions sanctioning Iran, and is working on a third. As we approach this next resolution, we are increasingly focused on the role of Iran's Revolutionary Guard Corps (IRGC). The IRGC, a paramilitary arm of the regime, has been directly involved in the planning and support of terrorist acts, as well as funding and training other terrorist groups to pursue the military objectives of the regime. Based on its role in proliferation activities, the UN has targeted IRGC companies and officials in recent resolutions. The IRGC is so deeply entrenched in Iran's economy and commercial enterprises, it is increasingly likely that if you are doing business with Iran, you are somehow doing business with the IRGC. In a country where the regime uses its state-owned banks, military entities, and state-run industries to fund, facilitate, and conceal its WMD and missile programs, the eyes of the world will inevitably turn to the decision maker, the regime itself, and demand that it be held accountable. By approaching the Iran issue the way we have, focusing intensely on specific illicit conduct and making the private sector a partner in the effort, we are in a better position to discuss broader measures with our allies. While the financial isolation of the entire regime may impose costs on our partners and on us, it would be far less costly than a nuclear-armed Iran. The Way Forward As these examples show, the innovative use of targeted financial measures has advanced our national security, but there are gaps in this effort that must be filled. One of the greatest challenges of this century will be to keep the most dangerous weapons out of the hands of dangerous people. As I travel and meet with my colleagues in finance ministries around the world, everyone acknowledges that we must find effective ways to deal with these threats, short of military measures. Yet other nations are not moving quickly enough to accomplish this goal. Specifically, nations must implement the laws necessary to give their finance ministries the authority to access and use intelligence, and they must move to integrate financial and security functions. This will enable further cooperation and multilateral action, which is in the world's best interest. And, these authorities must be available for use against terrorist financing, money laundering and the dangerous, emerging practice of proliferation financing. Although there has not been a terrorist attack on American soil since 9/11, terrorists have struck London, Madrid, Jakarta, Mumbai, Amman, Bali, and Istanbul. Several of our key allies who support the global effort against terrorism have yet to take such basic steps as adequately criminalizing money laundering and terrorist financing. An even greater number of countries have failed to develop the national authorities and capabilities necessary to apply targeted financial measures to any terrorist group other than Al Qaida and the Taliban. We have a shared responsibility for our mutual security, and our allies, who confront risks at least as great as those confronting the United States, must find the political will to enact the authorities they need to join in effective multilateral action. These authorities may not deal a knock-out-punch, but they can and will produce results and change behavior. My finance ministry counterparts and I have the same responsibility: to broaden our role beyond economic stewardship and become valuable contributors to help ensure our countries' and our citizens' security. In performing these dual roles we seek essentially the same end: preserving the global financial system's integrity, which will enhance economic security and prosperity for people around the world.

 

ASSISTANT SECRETARY FOR FINANCIAL MARKETS ANTHONY W. RYAN REMARKS BEFORE THE TREASURY MARKETS PRACTICE GROUP AT THE FEDERAL RESERVE BANK OF NEW YORK New York City- Good morning. Let me begin by expressing my thanks for inviting me to join you today. Collectively, everyone here shares the privilege of working in the best capital markets in the world. With such a privilege comes responsibility. To maintain our leadership status and to accrue the associated benefits, certain characteristics must define our marketplace. These include investor confidence, market integrity, and competitiveness. We must also recognize that the responsibility for maintaining and strengthening these traits is borne by both the public and private sectors. We all have a role to play in enhancing the competitiveness of our capital markets. In doing so, we leverage the important contribution that competitive and efficient capital markets make to our nation's economy. Such efforts also bring direct benefits to investors and users of capital. Competitive capital markets foster innovation and serve to attract investors, capital, and talent. In turn, these advantages reinforce and strengthen the competitive position of our economy and improve the lives of all Americans. The confidence displayed by global investors in our deep, liquid markets is a direct byproduct of the integrity and transparency of our markets. Certainly all of that is true when we focus on the U.S. Treasury marketplace. As the Assistant Secretary of the U.S. Treasury for Financial Markets, I can assure you how much we value the symbiotic relationship that we have with Treasury market participants. Because our operating principles of transparent, regular, and predictable debt management practices are well established, buyers of Treasury securities come to us in greater numbers, bid with more confidence, and in larger amounts. Our predictability, coupled with our unitary financing approach to debt issuance, increases the depth and liquidity of the Treasury marketplace and results in lower cost borrowing for the government. For investors, the U.S. Treasury market represents a safe, broad and liquid universe for investing their capital. U.S. Treasury securities are the global standard by which all other fixed income instruments are valued. In addition to its risk free status, the Treasury market is diverse. Instruments range across the entire investment spectrum: from bills to notes to bonds. Due to this range of options, buyers can select the securities that best meet their objectives. In addition, the Treasury market enables investors to diversify their exposure across nominal and real securities, and hence their exposure to the risk of inflation. Treasury inflation protected securities (TIPS) currently exceed $400 billion in market value and span the yield curve out more than 10 years. As a result of the presence of these instruments, the market pricing of inflation risk is now better quantified dynamically through the actions of market participants. Even if investors do not invest in TIPS, they benefit from the additional information provided to the marketplace by the presence of these securities. TIPS are integral to both the Treasury portfolio and market participants and our commitment to the program remains strong. Additional benefits to investors include scale and liquidity. Treasury issues over $4 trillion in marketable debt each year, with trading volume exceeding over $500 billion per day. With the existence of robust swaps, options, and futures trading based off of the cash market in Treasuries, investors have the benefit of additional liquidity and flexibility. Just as open economies are best suited to grow, the same can be said of capital markets. Open investment and the free flow of capital are essential to healthy capital markets. Let me take this opportunity to assure investors from around the world that they are welcome in our markets. Just last month, President Bush released his Open Investment Policy. He stated that, "The United States unequivocally supports international investment in this country and is equally committed to securing fair, equitable, and nondiscriminatory treatment for U.S. investors abroad." Certainly we have embraced this philosophy as it relates to the U.S. Treasury marketplace. Our market is truly global and buyers of our securities are increasingly diverse. My comments this morning have been about the importance and benefits of competitive capital markets. I'd now like to discuss one way we can approach this important goal. As policymakers, we need our regulatory environments to be optimally positioned in order to allow our markets and our economy to compete. However, regulatory approaches, like the markets themselves, must be flexible, dynamic, and globally oriented. As participants within the Treasury marketplace, we all recognize that by comparative standards, our marketplace is lightly regulated. This is a direct result of the operating integrity, transparency, and sound practices that characterize the actions of both the Treasury debt managers and the various market participants. Every stakeholder benefits from the current regulatory regime, and thus has strong incentives to act in accordance with principles that enhance the stability and integrity of the marketplace. By doing so, participants will help to ensure that the liquidity, efficiency, and quality of our market remains the finest in the world. From a regulatory perspective in the U.S., we have historically largely relied on rules. There are clear benefits to knowing and following the rules, but we should not limit ourselves by creating and relying on an ever expanding rulebook. Given the pace, scale, and complexity of the global capital markets in which we operate and compete, we will by necessity need to complement our rules by developing, applying, and consistently updating principles and best practices to meet well defined objectives. The introduction of the principles-based framework outlined by the Treasury Market Practices Group (TMPG) is encouraging. The principles and guidelines comprising the document lay a strong foundation for all stakeholders. In particular, the document provides a framework for market participants to evaluate and enhance their current activities in the secondary markets and to fulfill their responsibilities as stakeholders in the Treasury market. The guidelines are practical, and possess the flexibility to deal with the global and dynamic environment in which stakeholders operate. There are significant benefits in having guidelines and clearly defined practices complement regulations. I should add it is not just registered broker-dealers who are encouraged to subscribe to these guidelines. All Treasury market participants should adopt and implement them and should hold each other accountable. We all benefit from the high confidence in and integrity of the Treasury market and we all stand to lose significantly if that integrity is challenged. It is important to recognize that while much effort went into developing the practices comprising the document, the real test comes with how stakeholders collectively apply these practices. Success will be determined by how market participants interpret and implement these practices, and how market practices evolve from this point forward. The introduction of these practices represents another step in the continual process of enhancing our Treasury market. Surely more steps will follow as participants contribute to efforts that serve to define, update and enhance these practices. The practices put forth by the TMPG represent a positive development as the application of principles creates flexibility, as well as place pressure on all participants to follow their spirit and intent. While these practices and guidelines complement existing rules, we will of course continue to monitor the markets. Along with us, each of you can help ensure liquid and efficient Treasury markets. I want to recognize Tom Wipf for his leadership and for chairing the TMPG and guiding the group to develop these best practices. Tom, I look forward to the panel discussions, and thank you and the others on the Treasury Market Practices Group for your efforts and initiative. I also want to acknowledge SIFMA for its many constructive contributions, efforts, and its ongoing initiatives aimed at further enhancing the U.S. Treasury market. All of this strikes at the core of collective responsibility. Let me conclude my remarks by stating how grateful we are at the U.S. Treasury Department for the numerous contributions made by the Federal Reserve Bank of New York and for its efforts in enhancing the treasury marketplace. Our combined efforts serve to enhance investor confidence by improving the integrity, efficiency, orderliness, and competitiveness of the U.S. Treasury market. In doing so, we facilitate our economy's ability to compete and thrive. Thank you.

 

FACT SHEET: TARGETED FINANCIAL MEASURES TO PROTECT OUR NATIONAL SECURITY "Treasury's strategy uses conduct-based, intelligence-grounded, targeted financial measures to harness the power of the private sector and form the basis of multilateral coalitions, adding an innovative financial dimension to our national security effort." – Treasury Secretary Henry M. Paulson, Jr. June 14, 2007 Protecting National Security and Strengthening the Global Financial System "The challenge and importance of protecting the integrity of our global financial network have never been greater. Our financial system also presents us with enormous opportunities because technology and integration have made it more difficult for anyone using the financial system to hide. Illicit actors who otherwise try to avoid detection often use the formal financial system because there is no good alternative and, in many cases, no alternative at all. These transactions typically leave a trail of detailed information which we can follow to identify key actors and their networks. The starting point for Treasury's approach to targeted financial measures is information. And the global financial system is a rich source of the information we need. Recognizing this, Congress and the President have provided an expanded set of tools that allow innovative and more focused uses of financial intelligence. These targeted financial measures are proving to be quite effective… We have based our actions on clear evidence and encouraged the private sector and other nations to follow suit. These measures have also led to a base of international, private sector support. When we use reliable financial intelligence to build conduct-based cases, it is much easier to achieve a multilateral alignment of interests. It is difficult for another a nation, even one which is not a close political ally, to disagree with targeted measures to isolate actors who are demonstrably engaged in conduct that threatens human rights or global security. And multilateral support is critical to the success of financial measures in today's world. " – Treasury Secretary Henry M. Paulson, Jr. Treasury Efforts to Combat Terrorism "Treasury continues an intensive effort to track and disrupt terrorist financing that has been effective on several levels. This effort has involved government-wide cooperation, applying law enforcement, military, intelligence, and financial tools depending on the target and situation. While individual terrorist attacks may be inexpensive to carry out, global terrorist groups need large sums of money to pay operatives, to recruit and train members, to acquire false documents and travel. By exploiting the financial intelligence generated by that activity and combining it with other available information, we have made progress in mapping these terrorist networks." – Treasury Secretary Henry M. Paulson, Jr. Ø Since September 11, 2001, Treasury has engaged in a more focused effort against global terrorist threats, beginning with a September 23, 2001 Executive order that authorized the identification and designation of terrorists and their facilitators worldwide. o When the United States designates a terrorist supporter, U.S. entities and persons – wherever located – must freeze the target's assets, block all transactions, and stop conducting business with the designated entity. Ø The Treasury's Office of Foreign Assets Control has designated 470 individuals and entities as terrorists, their financiers or facilitators, since Executive Order 13224 was issued. * Over 40 of these designations have targeted charities, exposing and disrupting a conduit used by groups such as al Qaida, Hamas, Palestinian Islamic Jihad and Hizballah to funnel funds and exploit charitable giving to advance terrorism. * The U.S. designated Adel Batterjee, one of the world's leading terrorist financiers, who employed his private wealth and a host of charitable fronts to fund al Qaida. Following the U.S. action, the United Nations followed suit, leading to a worldwide freeze of his assets, including in his home country of Saudi Arabia. These designations often make an impact beyond their legal reach, as many banks around the world screen their customers and transactions against the U.S. list of designated terrorist supporters, even though they are not obligated to do so. Treasury cut off Iran's Bank Saderat from the U.S. financial system in September 2006, due to its facilitation of transactions flowing from Iran to Hizballah, Hamas, and other terror groups. The USA PATRIOT Act of 2001 amended the Bank Secrecy Act to strengthen the anti-money laundering (AML) controls of U.S. financial institutions, with new safeguards to counter terrorist financing and other illicit financial activity. * The Act gives Treasury expanded authority to regulate the financial services community and share information with partners in the financial sector. * Section 311 of the PATRIOT Act authorizes the Treasury to protect the U.S. financial system from abuse from foreign jurisdictions, banks, or classes of transactions that are found to be of "primary money laundering concern." The Treasury Department has coupled its domestic actions with coordinated multilateral efforts and engagement of the international financial community. Through bilateral cooperation and multilateral action by the United Nations, more than 170 countries have implemented blocking orders to freeze the assets of terrorists. * These authorities allow the United States to effectively implement our international obligations under United Nations Security Council Resolutions 1267 and 1373, which respectively target the networks supporting al Qaida, the Taliban, Usama bin Laden, and global terrorists. Treasury Efforts to Combat Proliferation "The targeted financial measures used against terrorists and their supporters are likely to be as effective in combating proliferation networks. Those who participate in a proliferation transaction because of profit, rather than ideology, are susceptible to being deterred from such transactions if we can credibly threaten to publicly expose and isolate them." – Treasury Secretary Henry M. Paulson, Jr. In 2005, President Bush issued a new Executive order authorizing Treasury to target proliferators and their support networks in the same way terrorists and their supporters are targeted. * A designation under Executive Order 13382 freezes any assets the designee may have under U.S. jurisdiction, denies the targeted entities access to the U.S. financial and commercial systems and puts the international community on notice about the threat posed to global security. * These prohibitions have a powerful effect, as the financiers and facilitators of proliferation networks tend to have commercial presences and accounts around the world that make them vulnerable to exactly this kind of financial action. Since E.O. 13382 was issued, the Treasury Department has designated 41 proliferators and their supporters involved in North Korean, Syrian and Iranian proliferation efforts. * Bank Sepah, the fifth largest Iranian state-owned bank was designated by the Treasury under E.O. 13382 on January 9, 2007 for providing financial services to Iran's missile program. * Including Bank Sepah, the Treasury has acted against 19 entities and individuals supporting Iran's proliferation programs. As a result of Treasury's outreach and targeted measures, financial institutions around the world are more sensitive than ever about the very substantial risks posed by doing business with Iran. Treasury has also designated several North Korean entities involved in weapons programs. And even greater impact has come from the information made public in conjunction with these actions. Worldwide, private financial institutions decided to terminate their business relationships with the designated entities as well as others suspected of engaging in similar conduct. The result is North Korea's virtual isolation from the global financial system. These multilateral efforts have yielded critical success in the fight against proliferation financing. * United Nations Security Council Resolution 1540 calls on all states to develop and implement authorities to combat proliferation, including by denying proliferators and their supporters access to the financial system. * North Korea: The Security Council has required specific financial action against North Korean proliferators. United Nations Security Council Resolutions 1695 and 1718 obligate states to prevent the flow of financial and economic resources to, and freeze the assets of, entities involved or supporting North Korean WMD and missile proliferation. * These financial measures are part of a wider campaign to change North Korean behavior, including the State Department-led effort to bring about a denuclearized Korean Peninsula. * Iran: The United States and our allies worked together to unanimously pass United Nations Security Council resolution 1747 on March 27, 2007 to blacklist Bank Sepah. Resolution 1747 reaffirms and expands UN Security Council Resolution 1737 of December 2006. These resolutions target Iran's nuclear and missile programs, and among other requirements, obligate states to freeze the assets of named entities and individuals associated with those programs. Now the entire world must freeze Bank Sepah's assets, and isolate it from the global financial system. The Way Forward "One of the greatest challenges of this century will be to keep the most dangerous weapons out of the hands of dangerous people. As I travel and meet with my colleagues in finance ministries around the world, everyone acknowledges that we must find effective ways to deal with these threats, short of military measures. Yet other nations are not moving quickly enough to accomplish this goal." – Treasury Secretary Henry M. Paulson, Jr. Since 9/11, terrorists have struck a number of cities around the world, including London, Madrid, Jakarta, Mumbai, Amman, Bali and Istanbul. Several of our allies who support the global effort against terrorism have yet to take basic steps, such as adequately criminalizing money laundering and terrorist financing. "Specifically, nations must implement the laws necessary to give their finance ministries the authority to access and use intelligence, and they must move to integrate financial and security functions. And, these authorities must be available for use against terrorist financing, money laundering and the dangerous, emerging practice of proliferation financing. My finance ministry counterparts and I have the same responsibility: to broaden our role beyond economic stewardship and become valuable contributors to help ensure our countries' and our citizens' security. In performing these dual roles we seek essentially the same end: preserving the global financial system's integrity, which will enhance economic security and prosperity for people around the world." – Treasury Secretary Henry M. Paulson, Jr.

 

June 11

 

The Honorable Nicole R. Nason

Administrator, National Highway Traffic Safety Administration

U.S. Department of Transportation

Before the

House Select Committee on Energy Independence and Global Warming

June 8, 2007

Mr. Chairman, Congressman Sensenbrenner, members of the Select Committee, thank you for the opportunity to testify regarding the President’s May 14 Executive Order and the Supreme Court's decision in Massachusetts v. EPA.

In January, the President announced in the State of the Union address his “Twenty in Ten” proposal that would reduce domestic gasoline consumption by twenty percent in 2017. A key component of the President’s “Twenty in Ten” plan is to significantly boost fuel economy standards for cars and light trucks. The President’s aggressive goal to raise fuel efficiency would save up to 8.5 billion gallons of gasoline annually in 2017 and reduce consumption by 5 percent. Towards that end, the Administration forwarded draft legislation at the request of Chairmen Dingell and Boucher to grant the Secretary of Transportation the statutory authority to restructure corporate average fuel economy (CAFE) so we could then safely and responsibly raise fuel economy standards for passenger cars.

The Bush Administration has a proven record in this area. This Administration raised the CAFE standards for light trucks for seven consecutive years, from model years 2005 to 2011. The higher standards are expected to save 14 billion gallons of fuel over the life of the affected vehicles.

The saving of 14 billon gallons of fuel means that there will also be a net reduction in carbon dioxide emissions of 107 million metric tons. This is because as fuel economy is increased, the reduction in fossil fuel consumption necessarily translates into a commensurate reduction in carbon dioxide emissions.

Since the nation first decided to establish CAFE standards, fuel economy has improved and, therefore, carbon dioxide emission rates have decreased significantly. If fuel economy had not increased above the 1975 level, cars and light trucks would have pumped an additional 11 billion metric tons of carbon dioxide into the atmosphere between 1975 and 2005. That is nearly the equivalent of emissions from all U.S. fossil fuel combustion for two years (2004 and 2005).

As important, the attribute-based structure that we have established promises that these and even greater benefits can be obtained without jeopardizing safety, without causing job loss, and without sacrificing consumer choice. Basing our reforms on the landmark 2002 study on CAFE by the National Academy of Sciences (NAS), we changed the structure of the CAFE program to make it more effective, safer and fairer.

We accomplished this by using a structure that incentivizes manufacturers to add fuel-saving technologies instead of downsizing vehicles. Under an attribute-based CAFE system, fuel economy standards were restructured by basing them on a measure of vehicle size (the “footprint”) measured as the vehicle’s wheelbase times its track width. A target level of fuel economy is established for each increment in footprint. Smaller footprint light trucks have higher targets and larger ones have lower targets. Under the new standards, some light trucks will now be subject to a fuel economy target of 28.4 milers per gallon, higher than today’s standard for passenger cars. All manufacturers will be required to comply with the reformed CAFE standard by model year 2011.

This reform has a number of benefits. First, it will result in more fuel savings than under the old CAFE because now all automakers will have to make their light trucks more fuel efficient.

This reform also has the benefit of preserving consumer choice. Under the old CAFE program, an automaker generally manufactures a certain quantity of small light trucks to balance out the larger light trucks it produces to meet the standard. Our attribute-based CAFE system not only allows automakers the freedom to produce vehicles consumers want, it also benefits new vehicle buyers by having all sizes of vehicles – small, mid-size or large -- become more fuel efficient.

We also tackled what NAS described as the CAFE “safety penalty.” The NAS study estimated that CAFE was partially responsible for between 1,300 and 2,600 lives lost in one year alone, 1993. This occurred because the flat standard encouraged manufacturers to meet much of their compliance obligations by downsizing cars, which is often the cheapest way to improve fuel economy. Since our restructuring of CAFE incentivizes automakers to add fuel-saving technologies instead of downsizing vehicles, we have been able to minimize safety impacts.

Mr. Chairman, our successful effort to reform and raise CAFE for light trucks will guide the way in meeting our next challenge. In response to Massachusetts v. EPA, on May 14 the President directed EPA and the Departments of Transportation, Energy, and Agriculture to take the first steps toward regulations that would cut gasoline consumption and thus reduce greenhouse gas emissions from motor vehicles, using as a starting point his “Twenty in Ten” plan to reduce U.S. gasoline consumption by 20 percent over the next ten years. The steps called for in the May 14 Executive Order will ensure coordinated efforts on regulatory actions aimed at protecting the environment with respect to greenhouse gas emissions from new motor vehicles that proceed in a manner consistent with sound science, analysis of benefits and costs, public safety, and economic growth.

This is a complicated legal and technical matter that will take time to fully resolve, but the President has directed us to complete the regulatory process by the end of 2008. In preparing this rulemaking, we expect to propose using an attribute-based system. We have received the manufacturers’ product plans for cars, and will receive their plans for light trucks by the end of this month.

Mr. Chairman, given the Supreme Court’s interpretation of the Clean Air Act, there are now in effect two agencies with authority to regulate motor vehicle fuel economy and carbon dioxide tailpipe emissions. While NHTSA and EPA have convened several meetings to discuss the analysis necessary to responsibly raise CAFE standards for cars and light trucks, as the President stated, our regulatory efforts are “not a substitute for effective legislation.” Accordingly, we ask Congress to enact the President’s “Twenty in Ten” proposal as the most responsible way to raise fuel economy standards, reduce our dependence on foreign oil, and cut greenhouse gas emissions while preserving autoworker jobs in the United States and protecting consumer choice and passenger safety.

Thank you.

 

ASST SEC RYAN TO DISCUSS TREASURY MARKETS AT NEW YORK FED This Department of Treasury press release may be viewed at: http://www.treas.gov/press/releases/hp454.htm Treasury Assistant Secretary for Financial Markets Anthony W. Ryan will discuss current topics related to the Treasury markets Thursday at the Federal Reserve Bank of New York in New York City, NY. Assistant Secretary Ryan will be the featured speaker at the Treasury Markets Practice Group Conference.

 

SECRETARY PAULSON RECOGNIZES INDIVIDUALS FOR DEDICATION TO VOLUNTEER SERVICE  Atlanta, GA- Secretary Henry M. Paulson, Jr. presented the President's Volunteer Service Award to Charles Bruce, Andrea Eva and Dr. Michael Petelle as part of the USA Freedom Corps Presidential Volunteer Service Recognition Program today in Atlanta, Georgia. Both Bruce and Eva have served countless hours at Volunteer Income Tax Assistance sites while Dr. Petelle has dedicated his time to improving the environment. Charles Bruce has been a volunteer with the Volunteer Income Tax Assistance Program since 1998. Under his leadership over the past nine years, thousands of low-income individuals have received free tax preparation and e-file services. Bruce is currently the Site Coordinator for one of the premiere sites in Metro-Atlanta – Clarkston Library. Andrea Eva serves as the Community Affair Committee Director of the National Association of Black Accountants, which adopted the Westend Mall Volunteer Income Tax Assistance site as a community service project. She took the lead in training all new preparers for the site, developed a refresher class for the professionals and increased the volunteer lifeline. Dr. Michael Petelle has spent his life involved in improving the environment, going back to high school when he single-handedly planted 3600 trees to forest a pasture. Petelle has sponsored the environmental club SAVE at North Cobb High School for 16 years where they recycle, plant trees, organize clean-ups and monitor water quality in local lakes and streams. Each award recipient has individually dedicated more than 4,000 hours of volunteer service over their lifetime. In his January 2002 State of the Union Address, President Bush called on all Americans to make a difference in their communities through volunteer service. He created USA Freedom Corps, an Office of the White House, to strengthen and expand volunteer service. Americans are responding to the President's Call to Service. According to the Bureau of Labor Statistics, more than 61 million Americans volunteered in 2006. Go to www.volunteer.gov or call 1-877-USA-CORPS to find an existing volunteer service opportunity in your area or to find more information about service programs, including national service programs such as the Peace Corps, AmeriCorps, Senior Corps, and Citizen Corps. USA Freedom Corps is also highlighting youth volunteer service. Visit www.volunteerkids.gov for games and ideas designed to show how America's youth are making a difference. The President's Volunteer Service Award was created at the President's direction by the President's Council on Service and Civic Participation. The Award is available to youth ages 14 and under who have completed 50 or more hours of volunteer service; to individuals 15 and older who have completed 100 or more hours; and to families or groups who have completed 200 or more hours. For more information about the Award, please visit www.presidentialserviceawards.gov .

 

FACT SHEET: TREASURY PROPOSAL TO EXPAND SMALL BUSINESS LENDING IN LATIN AMERICA I'm also directing Secretary Rice and Secretary Paulson to develop a new initiative that will help U.S. and local banks improve their ability to extend good loans to small businesses [in Latin America]. It's in our interest that businesses flourish in our own neighborhood. Flourishing business will provide jobs for people at home." –President Bush, March 5, 2007"A thriving small business community can reduce poverty and inequality, as well as create jobs. When individuals turn their ideas into productive businesses, they make a transition from workers to owners. Ownership helps create sustainable and stable economies with broader opportunities for all citizens. Economic and social mobility have always been at the core of the U.S. system. We want to help Latin American countries create the same mobility for their citizens." –Treasury Secretary Henry M. Paulson. Jr., June 12, 2007 Secretary Paulson announced today a three-part plan to provide the ways and means to encourage market-based bank lending to small businesses. The first two elements will provide support to banks willing to commit to specific and ambitious targets for small business lending. The third will address the regulatory environment. First, introduce new lending models that fit the unique characteristics of smaller firms. One key barrier to credit is that banks lack information about, and experience with, smaller companies. Banks are often more comfortable lending to larger companies that have collateral, formal financial statements and documentation. Small companies may not yet have these resources. Banks need the tools necessary to assess the value and risk of these smaller companies. We will promote the spread of new lending models that fit the unique characteristics of smaller companies. We will help banks build capacity to quickly and accurately assess the credit quality of small companies. Subject to approval from its donor committee, the Inter-American Development Bank's Multilateral Investment Fund (MIF) will engage with selected interested and eligible banks to provide tailored technical assistance to work with banks to expand small business lending. * MIF would provide financing to support consulting services related to credit officer training, material development, software and computer equipment, credit scoring systems, and other relevant assistance required to implement a successful small business lending program and minimize per-loan costs. * MIF is proposing to its donor committee that it finance up to $10 million per year over five years for this initiative, with no more than $1 million per single bank. * This technical assistance would be provided on a cost-sharing basis to ensure banks have committed capital as well as capacity. Second, assume a portion of the risks associated with this lending. Sharing the initial risk of lending to new, small business customers can help banks address the uncertainty and lack of knowledge about this new client base. The Overseas Private Investment Corporation (OPIC), the U.S. government agency responsible for promoting social and economic development by mobilizing U.S. private capital, will offer risk-sharing guarantees and loans to eligible banks to extend/catalyze their financing activity for small and medium-sized businesses in the region. OPIC will provide support through three vehicles: Credit guarantees for U.S. bank loans to local banks to support "on-lending" (when one bank borrows from another bank and uses those funds to make smaller loans) to small business. * Guarantees on bond issues to allow local financial institutions, including microfinance institutions, to raise funds to finance small and medium enterprise (SME) loans in the local capital markets. * Guarantees to local banks on portfolios of small business loans in which OPIC and the local banks would share risk of loss. OPIC currently anticipates $150 million will be available for SME lending through these vehicles. The factors that will determine whether a bank qualifies for OPIC support are the potential benefit to economic development from the bank's SME lending activity, the bank's ability and commitment to build an SME loan portfolio efficiently and profitably, and the bank's ability to utilize OPIC support in a manner consistent with OPIC statutory requirements. The Inter-American Investment Corporation (IIC) of the IDB Bank Group is focused on providing financing to SMEs in the region. The IIC will build upon its relationships in the region to offer a similar menu of options to banks under the initiative, particularly those that do not qualify for OPIC support. Third, ensure that small business lending is not unnecessarily constrained by burdensome regulations or bureaucracy. In many cases, bank regulatory authorities perceive small businesses to be very high risk borrowers and impose heavy collateral and/or provisionary requirements. We will help introduce best practice regulatory models that ensure prudentially sound lending while avoiding requirements more suited to lending to larger firms. * Treasury's Office of Technical Assistance – which has 33 advisors working in 16 countries in Latin America – will allocate one regional advisor to help identify regulatory changes needed for more credit to be made available to the SME sector. * MIF will engage the Latin American Association of Supervisors of Banks of the Americas (ASBA) and facilitate cross-border seminars and regional workshops to define and promote the adoption of best practices in SME and microlending among its members. Measurable Results. Tracking of the small business lending results is expected to be overseen by a program manager housed at the MIF. A steering committee will be created to oversee performance under the initiative and meet twice a year to ensure the program's effectiveness in catalyzing lending to small businesses. * Eighty percent of the volume of lending under this initiative will be composed of loans under $100,000. * Participating banks will also likely sign a policy statement, similar to a business plan, outlining a strategy for lending to small business. The statement would incorporate several indicators of measurable results we would target for this effort, such as the total volume of loans disbursed to small businesses, the average loan amount and the number of loan officers trained.

 

REMARKS BY TREASURY SECRETARY HENRY M. PAULSON, JR. ON SUPPORTING SMALL BUSINESS IN THE AMERICAS AT THE AMERICAS COMPETITIVENESS FORUM  Atlanta, GA-- Thank you, Carlos, for that kind introduction. This inaugural meeting of the Americas Competitiveness Forum is possible because of your leadership. This is a unique opportunity to engage in meaningful discussion about ways to enhance competitiveness and economic prosperity in our region. I would also like to acknowledge Rob Mosbacher, the President of the Overseas Private Investment Corporation. OPIC does valuable work mobilizing one of our greatest assets, U.S. private capital, to promote social and economic development in the Western Hemisphere and around the world. I welcome this opportunity to share my thoughts and to emphasize the U. S.' stake in the economic success of Latin America. This region is moving towards its enormous potential as an engine of growth, opportunity and poverty reduction for its own citizens and for the global economy. In recent years, a number of governments have strengthened their policies – shored up public finances, reduced debt vulnerability, opened markets, and laid the foundation for the growth we are now seeing. My message today is that spreading economic opportunity within and between the nations of the Americas is urgent and possible. President Bush often refers to the growing ties between Western Hemisphere nations. We share two-way trade flows of more than $1 trillion and two-way investment of more than $1 trillion. Last year workers from the region employed in the United States sent an estimated $45 billion home to their families. The U.S. acts in our own and, we believe, the region's best interest when we help neighboring nations build open economies and create opportunity for all their people. This includes those who have not yet benefited from this progress. A key to spreading prosperity is supporting entrepreneurs. More people share in the benefits of economic freedom and growth when small businesses thrive. Small businesses tend to be labor intensive and are usually responsible for over 50 percent of new job creation. They are the engine of job and wealth creation in most economies. So, in March, when the President asked the Treasury and State Departments to develop an initiative to "help U.S. and local banks improve their ability to extend good loans to small businesses," I was pleased to accept his charge. A thriving small business community can reduce poverty and inequality, as well as create jobs. When individuals turn their ideas into productive businesses, they make a transition from workers to owners. Ownership helps create sustainable and stable economies with broader opportunities for all citizens. Economic and social mobility have always been at the core of the U.S. system. We want to help Latin American countries create the same mobility for their citizens. We need to get real support to these entrepreneurs. They have good ideas, markets to serve and the skills to operate in an often tough environment. They can also form constituencies that drive governments to strengthen their business climates and improve governance. But, they often are frozen out of the formal financial sector. It is estimated that only 10 percent of small businesses in Latin America have access to financing from banks and commercial lenders. The other 90 percent depend on friends, relatives or other informal sources of capital that can charge 10 percent or more in daily interest. One key barrier to credit is that banks lack information about, and experience with, smaller companies. Banks are often more comfortable lending to larger companies that have collateral, formal financial statements and documentation. Small companies may not yet have these resources, and so traditional lending criteria don't apply. Banks need the tools necessary to assess the value and risk of these smaller companies. Lack of finance may mean the difference between success and failure, growth or stagnation. These entrepreneurs need capital to expand into bigger space, purchase additional inventory to serve growing demand and new markets, to buy capital equipment. We see evidence in economies around the world that greater availability of finance not only enhances growth, it reduces poverty and inequality, and helps to build a middle class. I'm pleased to announce our answer to President Bush's call – we have developed a three-part plan to catalyze market-based bank lending to small businesses in Latin America. By breaking down the barriers that block commercial bank financing, we can work to build this necessary function in developing economies. This initiative targets small, profitable firms with growth potential, and it has three elements. The first two will provide support to banks willing to commit to specific and ambitious targets for small business lending. The third will address the regulatory environment. First, we will promote the spread of new lending models that fit the unique characteristics of smaller companies. We will offer the tools to adopt these models so that banks can build capacity to quickly and accurately assess the credit quality of small companies. This capacity building facility would be housed in the Multilateral Investment Fund, MIF, of the Inter-American Development Bank. We have committed to replenish this fund and we are actively working with the MIF to develop a program which would provide up to $50 million over five years for this purpose. Second, the Overseas Private Investment Corporation, OPIC, and the IDB Group's Inter-American Investment Corporation, IIC, will assume a portion of the risks associated with this lending. OPIC has already identified banks with the potential to provide up to $150 million using OPIC support through various vehicles that address particular market needs. The IIC will also build upon its relationships in the region to offer a similar menu of options to banks under the initiative. These vehicles include credit guarantees to banks to support small business on-lending by banks in Latin America; local currency guarantees on small business loan portfolios held by local banks; and partial guaranties for bond issues to fund small business loans. A third and equally important step is making sure that small business lending isn't unnecessarily constrained by burdensome regulations or bureaucracy. Treasury's Office of Technical Assistance and the MIF will work with local authorities to review existing regulations. The team will identify and address obstacles to small business lending, such as excessive collateral and capital requirements and interest rate restrictions. The MIF, with support from Treasury, will also engage with regional banking regulators and supervisors to define and promote the adoption of best practices in micro, small and medium lending. Taken together, these three steps – building new lending models, sharing the initial risk for early-stage loans and helping to ensure a constructive bank regulatory environment – will open new opportunities for banks to lend and for small businesses to grow. Public efforts and funds will leverage private money to support small businesses, and create the foundation for sustainable, non-governmental market-based lending. We'll kick-start the model to help existing businesses in the region best positioned to expand, and to help entrepreneurs with good ideas get started. Once participating banks demonstrate that it is profitable to lend to small businesses, competition will bring other banks into the market and the need for on-going assistance should diminish. Application of this model in Eurasia has created over $12 billion in new small business lending to nearly two million companies and, especially for small countries, transformed financial sectors. Household financial education is also vital to the success of this initiative. Many entrepreneurs get their start using their own savings or personal loans. Treasurer Anna Cabral will host a Latin America Regional Conference this fall to discuss ways we can enhance access to financial services, including financial service access of entrepreneurs in the region. Our interest in Latin America is strong, and it will continue. The countries of the Americas are brought together by geography and history, and bound together by common interest. The United States is committed to helping Latin America reduce poverty, fight corruption, build the middle class, and generate more opportunities for people who feel excluded from the region's growing prosperity. Since becoming Treasury Secretary, I have visited Colombia, Guatemala, Peru and Mexico. This region is a high priority for me, and I will return to South America in July. I'll also continue discussing with my regional colleagues how we can work together to improve economic and social opportunities for people throughout Latin America. Thank you. I welcome the opportunity to answer a few questions.

 

TREASURY ASSISTANT SECRETARY FOR FINANCIAL MARKETS ANTHONY W. RYAN REMARKS BEFORE THE MANAGED FUNDS ASSOCIATION CONFERENCE Chicago- Good afternoon. Thank you for inviting me to join you here in Chicago. It's a pleasure to be here. There must be 300 people in the audience and collectively, you represent a significant portion of the approximately $1.4 trillion in assets under management in hedge funds. In addition, hedge funds represent anywhere from 30 to 60 percent of trading activity, depending on the asset class or instrument. No wonder there has been a lot of discussion regarding your impact on the financial markets. Private pools of capital bring many advantages to our capital markets but also pose challenges including systemic risk and investor protection. While it is important to address both of these challenges, I would like to focus on the issue of systemic risk. We will never eliminate the potential for systemic risk, but we can seek to reduce the probability of it occurring and its impact. My purpose today is to sensitize all of us as to how systemic risk operates and urge all stakeholders in our capital markets to take the necessary steps to implement policies, procedures and efforts to mitigate it. Numbers Let me begin by offering an observation. You like to quantify and measure things. You quantify returns, risk, hurdles, assets under management, leverage, spreads, premiums and discounts, drawdowns, locks ups and let's not forget fees. Why do people like to quantify things so much? I would argue that people gain comfort in being able to define and measure certain characteristics. In doing so, they seek a framework and perspective in which to make assessments, draw comparisons and make forecasts – frequently with a great deal of conviction. As a group, you've gotten to be pretty good at defining characteristics and measuring them. That being said, I know you're a competitive lot and do not like to be outdone, but another group has you beat. Like you they are passionate and committed to their pursuit. This group also keeps copious and meticulous records, and makes fervent prognostications. The group that I speak of is baseball fans. In the investment community, one of the hardest things to do is to produce returns with the least risk possible, hence the frequently mentioned goal of a high Sharpe ratio. In baseball the same is true. Players seek to get hits with the least outs possible with the ultimate goal being a high batting average. Now baseball has been played for a long time. Players get several "at bats" per game and they play a lot of games in a season. As a result, there is no shortage of observations. So how do hitters fare? Admittedly, hitting a major league pitch is a tough thing to do. It is also perhaps unfair to make comparisons across history. Think about how many more eligible players there are today and how well trained they are versus when the game began over 100 years ago. Because you like to measure things, let me share some numbers with you. The batting average for the entire major league from 1876-1890 was .259. Now, one hundred years later, despite all of the changes, the major league batting average for the decade ending in 1990 was .259.[i] All of those games, all of those at bats, and the league batting average did not change 1/1000. But, something did change during that period. During the first few decades of play, there were 34 different batters that had a season batting average over .400.[ii] Then, 11 years went by without a single player accomplishing the goal. Finally, in 1941, the Boston Red Sox' Ted Williams batted .406. During the last 65 years not a single major leaguer has batted over .400. I know that getting 4 out of 10 investment decisions correct on average is unlikely to generate stellar returns, but in baseball it's likely to get you a ticket to the Hall of Fame. Now most of you probably have never heard of Stephen Jay Gould. He was not some great hedge fund manager or professional baseball player, but he was a prominent evolutionary biologist and Red Sox fan. He postulated that like many other species through time, the .400 hitter has become extinct. Using statistical measures – many of which are the same used by so many risk measurement systems and trading desks today – he concluded that .400 averages were simply outliers in the overall distribution of averages.[iii] Gould wrote, "[V]ariation in batting averages must decrease as improving play eliminates the rough edges that great players could exploit."[iv] There has been a compression of talent towards the league average; hence, the "tails of the distribution" have shortened because of better play. This is true for the best batters, as well as for those batters with the lowest averages. All players' batting averages moved towards the mean, despite the mean not moving over time. It is something to think about. PWG Let me return to hedge funds. As I am sure you are all aware, the policymakers and regulators comprising the President's Working Group on Financial Markets (PWG) have evaluated hedge funds over the years. The PWG is chaired by the Secretary of the Treasury and also includes the chairmen of the Board of Governors of the Federal Reserve System, the Securities and Exchange Commission, and the Commodity Futures Trading Commission. Since 1988, the PWG's overarching, non-partisan mission has been to maintain investor confidence and enhance the integrity, efficiency, orderliness, and competitiveness of U.S. financial markets. Earlier this year the PWG released an agreement outlining its views on private pools of capital, which include hedge funds. The PWG stated its collective belief that the most effective mechanism to mitigate systemic risk is market discipline and that a combination of market discipline and regulatory policies is the best way to protect investors. As I mentioned at the outset, I'd like to confine my remarks this afternoon to the issue of systemic risk. Systemic Risk Systemic risk can be defined as the potential that a single event, such as a financial institution's loss or failure, may trigger broad dislocation or a series of defaults that impact the financial system so significantly that the real economy is adversely affected. Some may posit that the increasing sophistication of risk management systems coupled with other developments and efforts has placed systemic risk on the endangered species list. For supportive proof they point to the lack of extensive ripple effects upon the financial markets following some relatively recent shocks.[v] I'd like to elaborate why, given market conditions, I believe that subscribing to this thesis is both potentially misleading and imprudent. Let's begin with answering the question: how could a systemic risk event manifest itself? Meteorologists describe atmospheric conditions conducive to producing a perfect storm. What are the atmospherics for a perfect financial storm? While there would be several, let me name a few: easy credit and leverage, highly correlated strategies, connected and concentrated lenders, inadequate information, and underdeveloped financial market infrastructure. Let's look at those elements more closely. Credit and Leverage We must understand the impact of the remarkable surge in liquidity available today to borrowers, such as private pools of capital. Interest rates around the world are low and the competition to deploy this capital has evidenced itself in numerous ways including declining lending standards. Institutions and investors have exposure to balance sheet leverage, and perhaps more importantly, embedded leverage as a result of both simple and complex strategies and instruments they utilize. We must ensure that the implications of this degree of leverage are well understood. Correlations We should also consider the increase in the correlation of returns among hedge funds. Returns moving in the same direction when facing similar market conditions could suggest an increasing concentration of risk. Many will recall almost 10 years ago, the markets received a real shock when a highly levered hedge fund imploded as its diversification strategy was compromised by just such an occurrence of rising correlation. In fact, we are seeing a rise in correlation of returns among hedge funds today. The Federal Reserve Bank of New York recently commented on this and appropriately highlighted an important difference between the rising correlation of returns we witnessed a decade ago with what we see today. The recent increase in correlation results mainly from a decline in the volatility of returns, while the earlier rise was driven by high covariance.[vi] On the one hand that is comforting, but we need to appreciate that covariance can increase and correlations can change during periods of market stress. Connectivity and Concentration We must also appreciate the concentration among counterparties and creditors. A few large financial institutions serve as the principal counterparties and creditors to hedge funds. The concentrated and connected network of these core financial institutions raises the specter of a major market event having a systemic impact. This March, E. Gerald Corrigan, chairman of the Counterparty Risk Management Group, stated "the potential damage that could result from such shocks is greater due to the increased spread, complexity, and tighter linkages that characterize the global financial system."[vii] Although these sophisticated institutions have improved their capital positions and risk management practices over the past decade, there is room for additional improvement. Inadequate Information The availability of information also plays an important role. Only with accurate and timely information can counterparties, creditors, and investors understand and adequately assess their risk exposure. Much of this information can only be disclosed by the managers of the private pools of capital. If investors, counterparties and creditors are to define and create effective market discipline, they must have access to reliable and timely information. Financial Market Infrastructure It is also critical that we appreciate the importance of our financial systems' underlying structure. It facilitates liquidity. It includes the market-making capacity and the system for clearing and settlement of financial transactions. Market infrastructure must adapt quickly to product innovation and increasing trading volume. Not having effective and rapid clearing and settlement procedures could stimulate a systemic contagion effect if there were a failing counterparty or highly leveraged market participant.[viii] The state of these conditions contributes to defining the atmospheric environment for a systemic risk event. We must now ask ourselves: Should we be concerned about systemic risk? Returning to Gould Let me return to Gould's prior conclusion regarding the .400 hitter. Recall, he postulated that because of the better play, there has been a compression of talent towards the overall league batting average; hence, the tails of the distribution of individual players' batting averages have shortened. As a result, the .400 hitter is extinct. Could our capital markets practices' better play have influenced the distribution of risk events such that the tails of the distribution have shortened? It is true that the dispersion of risk is greater. The presence of so many derivatives strategies and instruments do help to hedge risk, and markets have adjusted to "tremors." At the same time, we can also observe that the capital markets, with a few periodic exceptions, are not pricing risk and future volatility anywhere near close to long-term averages.[ix] Stakeholders in our markets must not operate under the false illusion that systemic risk is not a real possibility. Whether examining batting averages or financial market risk, we must account for the possibility of outliers. Let's take it a step further. Outliers, by definition, are long tail events. They are distant from the norm. But not all outliers, or long tails, significantly impact the norm. Another .400 hitter would be a long tail event, but it would not significantly impact the overall major league batting average. When an outlier is impactful, it is considered a fat tail. Look at baseball salaries. On a prorated basis, the New York Yankees will pay Roger Clemens $28 million this year. That is almost seven times the average salary of his teammates, and as such, has a real impact on the team's average compensation. No wonder fans call Clemens the Rocket! So, the long tails of some distributions may also be a lot fatter than people frequently assume. Besides baseball salaries, there are many other data series where the distributions are anything but normally distributed. Look at "book sales per author…populations of cities…numbers of speakers per language, damage caused by earthquakes, deaths in war, deaths from terrorist incidents…or the sizes of companies."[x] Could the same be true of capital markets, commodity prices, inflation rates, and economic data? If so, what are the implications? What if such events occur with much more frequency than people recognize, and what are the consequences if we do a particularly poor job in preparing for them? One student of such distributions is Nassim Taleb. He defines an occurrence such as a systemic risk event as follows: "First, it is an outlier, as it lies outside the realm of regular expectations, because nothing in the past can convincingly point to its possibility. Second, it carries an extreme impact. Third, in spite of its outlier status, human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable."[xi] If we can not predict a systemic market event in advance, and we seek to reduce the impact of such an event, we must prepare.[xii] The PWG's Principles and Guidelines released last February are a call to action to foster preparedness. They direct all stakeholders to undertake efforts that seek to mitigate the likelihood and impact of a systemic risk event.[xiii] These Principles and Guidelines highlight how potential systemic risk is best mitigated within the current regulatory framework by market discipline that is developed and applied by creditors, counterparties and investors. Let's return to the environmental conditions that I outlined earlier: easy credit and leverage; rising correlations, connected and concentrated lenders; information flow; and financial market infrastructure. Credit and Leverage First, the Principles and Guidelines call upon financial institutions to determine appropriate credit terms. In doing so, they must assess market, credit, liquidity and operational risk. Financial institutions also need to be disciplined and independent in quantifying valuations. Importantly, they need to guard against the risks to their reputation. They should expect their prudential regulators to closely monitor their management of these risks and assess whether their performance is in line with expectations set out in supervisory guidance. To deal with these challenges, counterparties and creditors must maintain appropriate policies, procedures, and protocols. They must clearly define, implement and continually enhance best risk management practices. These practices must address how the quality of information from a client affects margin, collateral, and other credit terms and other aspects of counterparty risk management. Correlations, Connectivity and Concentration In terms of combating the network effects of increased risk concentration, the PWG guidelines encourage lenders to private pools of capital to frequently measure their exposures, taking into account collateral to mitigate both current and potential future exposures. Credit exposures, in addition to being measured frequently, should also be subject to rigorous stress testing, not just at the level of an individual counterparty, but also aggregated across counterparties and should consider scenarios of adverse liquidity conditions. The liquidity of the counterparty's positions should be a factor in exposure measurement, since concentrated or illiquid positions can lead to crowded trades and unexpected exposures in the event of a counterparty default or market volatility. Inadequate Information A debate has emerged over disclosure. While the arguments are somewhat confused, the premise is somewhat less so. Disclosure does help. The PWG expects enhanced disclosure and communication between three explicit groups: managers and investors, managers and their counterparties, and creditors and their regulators. Information should be disclosed frequently enough and with sufficient detail that investors, counterparties and creditors stay informed of strategies and the amount of risk being taken. On a regular basis, investors, counterparties and creditors should seek to obtain from the manager both quantitative data and qualitative information on the pool's net asset value, performance, market and credit risk exposure, and liquidity. The PWG articulated that regulators' clear communication of expectations regarding prudent management of counterparty credit exposures to hedge funds is also critical. Financial Market Infrastructure Regarding post-trade obligations, managers, counterparties and creditors should also continue to strengthen and enhance their processing, clearing, and settlement arrangements, particularly for OTC derivatives. This will limit the contagion effect of weak post-trade processes if there is a failing counterparty or highly leveraged institution. Conclusion We cannot get lulled into a false sense of confidence because of the increased dispersion of risk, the presence of diverse and flexible instruments and strategies to manage and hedge risk, or the abundance of capital and liquidity characterizing the recent benign market environment. I began my remarks this afternoon with an observation, so I will conclude with another. Maybe the tails are longer than Gould thought. I'd bet that somewhere in the world there is a kid dreaming about being the next .400 hitter. I have enough suspicion in models and statistics to think the potential for that kid to accomplish that dream is a real possibility. While I hope it does occur, another .400 hitter may or may not happen. If it does, it will have a big impact on sports media but virtually no impact on the overall league batting average. So the tails may be longer than people imagine, and the tails could also easily be fatter. We must therefore be humble enough to realize that a systemic event in the financial markets cannot be discounted and its impact will be significant. Preparedness is therefore key and all stakeholders in the capital markets must contribute to the effort. As Taleb illustrates, fat tail events occur. When one does, it will be rare, have a big impact, and many experts retrospectively, although not prospectively, will argue it was predictable. When the next outlier occurs, regardless of its type, let's make sure the experts are commenting on something positive like the baseball player's hitting acumen rather than some systemic event in our capital markets. Thank you very much. --------------------------------------------------------------------- [i] Thomas J. Miceli, Minimum Quality Standards in Baseball and the Paradoxical Disappearance of the .400 Hitter, Economics Working Papers, University of Connecticut (May 2005), at 1. [ii] Miceli at 7. [iii] Stephen Jay Gould, Why No One Hits .400 Any More in Triumph and Tragedy in Mudville: A Lifelong Passion for Baseball (2003) (first published as Entropic Homogeneity Isn't Why No One Hits .400 Any More in Discover (Aug. 1986)). [iv] Gould at 163 (emphasis added). [v] But cf., E. Gerald Corrigan, Chairman, Counterparty Risk Management Group, Hedge Funds and Systemic Risk in the Financial Markets, Statement before the Committee on Financial Services, U.S. House of Representatives (Mar. 13, 2007) at 9-10 (describing the reasons why a hedge fund's collapse did not pose a systemic risk). [vi] Tobias Adrian, Measuring Risk in the Hedge Fund Sector, Current Issues in Economics and Finance, Federal Reserve Bank of New York, Vol. 13, No. 3 (Mar./Apr. 2007). [vii] E. Gerald Corrigan, Chairman, Counterparty Risk Management Group, Hedge Funds and Systemic Risk in the Financial Markets, Statement before the Committee on Financial Services, U.S. House of Representatives (Mar. 13, 2007), at 8. See also Timothy Geithner, President and Chief Executive Officer, Federal Reserve Bank of New York, Liquidity Risk and the Global Economy, Remarks at the Federal Reserve Bank of Atlanta's 2007 Financial Markets Conference--Credit Derivatives (May 15, 2007) at 3 ("And yet this overall judgment, that both financial efficiency and stability have improved, requires some qualification. Writing a decade ago about the history of the financial shocks of the 1980s and early 1990s, Jerry Corrigan argued that these same changes in financial markets we see today, though less pronounced then than now, created the possibility that financial shocks would be less frequent, but in some contexts they could be more damaging. This judgment, that systemic financial crises are less probable, but in the event they occur could be harder to manage, should be the principal preoccupation of market participants and policymakers today.") [viii] Donald L. Kohn, Vice Chairman, Federal Reserve Board, Financial Stability and Policy Issues, Remarks at the Federal Reserve Bank of Atlanta's 2007 Financial Markets Conference--Credit Derivatives (May 16, 2007) at 4 ("Weaknesses in such [clearing and settlement] systems can be a source of systemic contagion. Conversely, when such arrangements are robust, the potential for contagion is significantly diminished."). [ix] See e.g., Andrew Bary, A World at Risk, Barron's (Mar. 15, 2007) (profiling historian Niall Ferguson and his views on the "`paradox of diminishing risk in an apparently dangerous world'"). [x] Nassim Nicholas Taleb, The Black Swan 35 (2007). [xi] Taleb at xvii-xviii. [xii] Taleb at 208, 213. [xiii] Cf., E. Gerald Corrigan, Chairman, Counterparty Risk Management Group, Hedge Funds and Systemic Risk in the Financial Markets, Statement before the Committee on Financial Services, U.S. House of Representatives (Mar. 13, 2007), at 8 ("[O]ur collective capacity to anticipate the specific timing and triggers of future financial [systemic] shocks is extremely low, if not nil. Indeed, if we could anticipate the timing and triggers such shocks would not occur. Thus, since we certainly cannot rule out future financial shocks we have no choice but to strengthen what I like to call the "shock absorbers" of the global financial system in order to limit and contain the damage caused by future financial shocks when – not if – they occur.")

 

 

TREASURY TAKES ADDITIONAL MEASURES TO COMBAT IRANIAN WMD PROLIFERATION IRANIAN NUCLEAR & MISSILE FIRMS TARGETEDU.S. Department of the Treasury today designated four Iranian companies, Pars Tarash (a/k/a Pars Trash Company), Farayand Technique, Fajr Industries Group, and Mizan Machine Manufacturing Group, for their role in Iran's proliferation of weapons of mass destruction. This action was taken pursuant to Executive Order 13382, an authority aimed at freezing the assets of proliferators of weapons of mass destruction (WMD) and their supporters. Designations under E.O. 13382 are implemented by Treasury's Office of Foreign Assets Control (OFAC), and they prohibit all transactions between the designees and any U.S. person and freeze any assets the designees may have under U.S. jurisdiction. "So long as Iran continues to pursue a nuclear program in defiance of the international community's calls to halt enrichment, we will continue to hold those responsible to account for their conduct," said Stuart Levey, Under Secretary for Terrorism and Financial Intelligence (TFI). Pars Tarash and Farayand Technique are owned or controlled by, or act or purport to act for or on behalf of the Atomic Energy Organization of Iran (AEOI) and/or the Kalaye Electric Company, an AEOI subsidiary designated by OFAC on February 16, 2007. The AEOI manages Iran's overall nuclear program and reports directly to the Iranian president. Identified by President George W. Bush in the Annex to E.O. 13382, the AEOI is the main Iranian institute for research and development activities in the field of nuclear technology, including Iran's centrifuge enrichment program and experimental laser enrichment of uranium program. The AEOI is named in the Annex to United Nations Security Council Resolution (UNSCR) 1737 for its involvement in Iran's nuclear program. Pars Tarash and Farayand Technique were also listed in the Annex to UNSCR 1737 for their involvement in Iran's centrifuge program and were identified in reports of the International Atomic Energy Organization (IAEA). According to IAEA reports, Iran disclosed the existence of these two entities in October of 2003, and indicated that they were involved in the domestic production of centrifuge components. It was revealed to the IAEA in January 2004 that Pars Tarash and Farayand were subsidiaries of the Kalaye Electric Company, an AEOI subsidiary. Farayand Technique has had a number of different roles in Iran's centrifuge enrichment program, and performs quality control on components used at the uranium enrichment facility at Natanz. Farayand Technique also has capabilities suitable for the testing and assembly of centrifuges. Pars Tarash has been identified by the IAEA as a site used by Natanz and the Kalaye Electric Company to store centrifuge equipment. Also designated today are Fajr Industries Group and Mizan Machine Manufacturing Group, two entities owned or controlled by, or acting or purporting to act for or on behalf of Iran's Aerospace Industries Organization (AIO). The AIO, which was also identified by President Bush in the Annex to E.O. 13382, is a subsidiary of the Iranian Ministry of Defense and Armed Forces Logistics, and is the overall manager and coordinator of Iran's missile program. Fajr Industries Group is subordinate to the AIO and involved in the production and acquisition of precision equipment for missile guidance and control systems. Fajr has consistently procured a wide range of missile guidance and control equipment on behalf of the AIO over the years. Since the late 1990s, Fajr has purchased high strength steel alloy, useful for guidance equipment in ballistic missiles and missile-related technology and items. Fajr Industries Group was also identified in the Annex to UNSCR 1737 for its involvement in Iran's ballistic missile program. Mizan Machine Manufacturing Group is one of several front companies utilized by AIO in commercial transactions. In particular, Mizan Machine Manufacturing Group has been used by AIO to acquire sensitive material for Iran's ballistic missile program. For example, in April 2005, Mizan Machine Manufacturing Group purchased a state-of-the-art crane for Iran's weapons program. An investigation of this transaction determined the crane was probably intended for use in Iran's Shahab missile program. Cranes can be used to support missiles, like the Shahab, in the field or at storage facilities. Mizan Machine Manufacturing Group has also acted on behalf of the Shahid Hemmat Industrial Group (SHIG), a subordinate entity of the AIO which is listed in UNSCR 1737 for its direct role in advancing Iran's ballistic missile program. In 2005, Mizan Machine Manufacturing Group was connected to the acquisition of equipment, on behalf of SHIG, that could be used to calibrate guidance and control instruments for more accurate targeting of Iran's ballistic missiles. Background on E.O. 13382 Today's action builds on President Bush's issuance of E.O. 13382 on June 29, 2005. Recognizing the need for additional tools to combat the proliferation of WMD, the President signed the E.O. authorizing the imposition of strong financial sanctions against not only WMD proliferators, but also entities and individuals providing support or services to them. In the Annex to E.O. 13382, the President identified eight entities operating in North Korea, Iran, and Syria for their support of WMD proliferation. E.O. 13382 authorizes the Secretary of the Treasury, in consultation with the Secretary of State, the Attorney General, and other relevant agencies, to designate additional entities and individuals providing support or services to the entities identified in the Annex to the Order. In addition to the entities identified in the annex of E.O. 13382, the Treasury Department has designated thirty entities and two individuals as proliferators of WMD, specifically: * Eight North Korean entities on October 21, 2005; * Two Iranian entities on January 4, 2006; * One Swiss entity and one Swiss individual tied to North Korean proliferation activity on March 30, 2006; * Four Chinese entities and one U.S. entity tied to Iranian proliferation activity on June 8, 2006. * Two Iranian entities on July 18, 2006; * Three Syrian entities on January 4, 2007; * One Iranian entity, one British entity, and one individual tied to Iranian missile proliferation on January 9, 2007; * Three Iranian entities on February 16, 2007; and * Four Iranian entities on June 8, 2007. The designation announced today is part of the ongoing interagency effort by the United States Government to combat WMD trafficking by blocking the property of entities and individuals that engage in proliferation activities and their support networks.

 

 

May 22

 

FINANCIAL SECTOR REFORM FACT SHEET - SECOND MEETING OF THE U.S.-CHINA STRATEGIC ECONOMIC DIALOGUE As leaders in the global economy and in the international financial and trading systems, the United States and China share a responsibility to promote balanced and sustained growth in their economies. A competitive and efficient financial sector will be an engine for growth in China's fast-growing economy, providing opportunities for American manufacturers, farmers, and other service providers. As China becomes progressively more integrated into the global economy and financial system, stability in China's financial sector becomes increasingly important for the U.S. economy. Introduction of U.S. securities firms, asset managers and insurance companies will help to develop expertise and depth in China's markets and improve the stability of the market. During the second meeting of the Strategic Economic Dialogue, China announced it will take steps to encourage growth and competition in its financial sector. * Expansion of U.S. Financial Services Industry: China agreed to remove a block on the entry of new foreign securities firms and resume licensing securities companies, including joint-ventures, in the second half of 2007. In addition, China will announce before SED-III that it will allow foreign securities firms to expand their operations in China to include brokerage, proprietary trading and fund management. This will create opportunities for U.S. firms and provide new competition and expertise in the Chinese securities industry. * Increased Qualified Foreign Institutional Investors (QFIIs) Quotas: To develop broader and deeper integration into the global financial market, China will raise the quota for Qualified Foreign Institutional Investors from $10 billion to $30 billion. The United States also welcomes China's May 10, 2007 announcement to expand QDII investment to include equity investment. This change can help diversify financial sector assets in China, which in turn can help enhance financial sector stability. * Pending Foreign Property Insurance Company Conversion Applications: The China Insurance Regulatory Commission will make decisions by August 1, 2007 on applications for conversion from branch to subsidiary that have been pending for more than a year. China also commits to abide by regulations that require 60 day processing for future applications. This will allow for more efficient and cost effective operations. * RMB Transactions by Foreign Banks: China agreed to immediately allow foreign-invested banks to offer their own brand of RMB-denominated credit and debit cards. This will allow U.S. banks to offer a full range of RMB services to compete with Chinese banks that currently offer these services. * Market Access for Insurance Firms -- Enterprise Annuities: The Chinese Government agreed to streamline by SED-III the application and licensing process for the provision of enterprise annuities by financial institutions, which will allow U.S. insurance firms already operating in China to widen the range of services they provide and increase the amount of capital under their management for investment.

DEVELOPMENTS SINCE THE FIRST MEETING OF THE STRATEGIC ECONOMIC DIALOGUE IN DECEMBER 2006 The SED is a management tool for the U.S.-China economic relationship, not merely a biannual event. Under the SED, interaction between the U.S. and China is frequent and ongoing. Progress will occur and be announced throughout the year, such as the following actions by the Chinese Government which occurred between the first and second meetings of the SED: * Transparency and accountability: In April, China's State Council issued new regulations to promote government transparency. This is an important priority for the U.S. business community. * Protecting private property: In March, China's National People's Congress approved landmark legislation to protect property rights. This legislation is an unprecedented, significant step towards China becoming a market economy and the development of legal rights. * Market access: The conversion of bank branches to subsidiaries under foreign bank regulations has been a smooth and quick process. In March, four banks had their applications approved, including one U.S. bank, Citibank. In April, these banks began accepting RMB deposits, a first in decades. In December 2006, Citibank purchased a 20 percent stake in Guangdong Development Bank. * Construction and engineering services: In March, China issued implementing regulations that relaxed residency requirements, allowing regulators to recognize the foreign qualifications of license applications of technical experts. * Reducing export subsidies: In March, China agreed to terminate the subsidy that allowed major Chinese exporters to receive discounted loans not available to other companies. * Reduction of Value-Added Tax Rebates: In April, China announced the reduction of export tax rebates on textile and apparel products, the elimination of the VAT on some chemical and steel exports, and a reduction of the VAT rebate to 5 percent on higher-value steel. * Tax rebates for imports: In April, China announced tax rebates on imported components for advanced equipment. These rebates apply to imports by 16 industries, including large power-generating plants and transmission equipment. * Energy Security: In April, officials from China's National Reform and Development Council (NDRC) visited the national renewal energy lab in Colorado and the Strategic Petroleum Reserve in Texas as they continue to develop their strategic petroleum reserves and engage in international cooperation. * Reducing Tariffs: China announced on May 21, effective June 1, that it will raise export taxes on 142 goods and cut import tariffs on 209 goods to rein in its trade surplus, improve energy efficiency, and promote domestic consumption, effective June 1.

FACT SHEET: SECOND MEETING OF THE U.S.-CHINA STRATEGIC ECONOMIC DIALOGUE Body of Press Release: The United States and China today concluded the second meeting of the Strategic Economic Dialogue (SED). President Bush and President Hu established the Strategic Economic Dialogue in September 2006 as a focused and effective framework to address shared priorities and mutual concerns. For the meeting held May 22 and 23 in Washington, 17 U.S. Cabinet officials and agency heads joined Secretary Paulson for discussions with China's Vice Premier Wu Yi and a delegation of 15 ministers and representatives from a total of 21 Chinese government ministries and agencies. The Strategic Economic Dialogue is a management tool for our bilateral economic relationship and is an on-going process involving continuous discussions between officials from both nations. The SED addresses long-term structural issues and seeks near-term results which build confidence on both sides and demonstrate progress toward long-range objectives. At the meeting this week, leaders from both countries agreed to increase market access, open the financial sector, foster energy security, protect the environment, and strengthen the rule of law. Increasing Market Access Trade fosters an environment of competition, innovation, research and investment, which leads to higher incomes and a wider range of goods and services at lower prices. Increased access to markets in China creates opportunities for American companies. During this second meeting of the Strategic Economic Dialogue, the United States reached new agreements to further open China's markets to U.S. products and services. * Air Services Liberalization: The United States and China committed to expand the existing bilateral aviation agreement through liberalization of air services rights. This new accord provides for a doubling of daily passenger flights from the United States to China by 2012, starting with the addition of a new daily flight this year. The agreement also will provide U.S. cargo carriers with virtually unfettered access to Chinese markets by lifting all government-set limits on the number of cargo flights and cargo carriers serving the two countries by 2011. U.S. and Chinese officials have committed to resume negotiations in 2010 to establish a timetable to achieve the mutual objective of full liberalization. * Promoting Growth in the Tourism Industry: The United States and China signed a declaration of intent to launch negotiations to facilitate Chinese group leisure travel to the United States. The Chinese travel market is expected to grow to 100 million travelers within the next 15 years according to the United Nations World Travel Organization. Allowing tourism companies to arrange trips for Chinese travelers to the United States is a significant step, given that one in seven jobs in the United States is related to the tourism industry. * Expanding U.S. Exports: The Export-Import Bank of the United States and the Export-Import Bank of China signed a memorandum of understanding that will provide loan guarantees for the export of large scale capital goods from the United States to China, supporting U.S. export jobs and promoting China's sustainable development. Opening the Financial Sector Financial markets connect money with ideas and ambition, the lifeblood of innovation and dynamism. U.S. financial institutions are helping to expand a vast new market in China for American financial services products. During the second meeting of the Strategic Economic Dialogue, the United States and China committed to further financial sector reform, including: * Expansion of U.S. Financial Services Industry: China agreed to remove a block on the entry of new foreign securities firms and resume licensing securities companies, including joint-ventures, in the second half of 2007. In addition, China will announce before SED-III that it will allow foreign securities firms to expand their operations in China to include brokerage, proprietary trading and fund management. This will create opportunities for U.S. firms and provide new competition and expertise in the Chinese securities industry. * Increased Qualified Foreign Institutional Investors (QFIIs) Quotas: To develop broader and deeper integration into the global financial market, China will raise the quota for Qualified Foreign Institutional Investors from $10 billion to $30 billion. * The United States also welcomes China's May 10, 2007 announcement to expand Qualified Domestic Institutional Investors (QDII) investment to include equity investment. This change can help diversify financial sector assets in China, which in turn can help enhance financial sector stability. * Pending Foreign Property Insurance Company Conversion Applications: The China Insurance Regulatory Commission will now make decisions by August 1, 2007 on applications for conversion from branch to subsidiary that have been pending for more than a year. China also commits to abide by regulations that require 60 day processing for future applications. This will allow for more efficient and cost effective operations. * RMB Transactions by Foreign Banks: China agreed to immediately allow foreign-invested banks to offer their own brand of RMB-denominated credit and debit cards. This will allow U.S. banks to offer a full range of RMB services to compete with Chinese banks that currently offer these services. * Market Access for Insurance Firms: Enterprise Annuities: The Chinese Government agreed to streamline by SED-III the application and licensing process for the provision of enterprise annuities by financial institutions, which will allow U.S. insurance firms already operating in China to widen the range of services they provide and increase the amount of capital under their management for investment. Promoting Energy Security and Protecting the Environment Energy security and environmental protection are shared priorities for both the United States and China. This creates demand and incentives for the rapid development and deployment of clean and efficient energy technology. At the second meeting of the Strategic Economic Dialogue, both countries agreed to: * Coal-Mine Methane (CMM) Capture: Over the next five years, the United States and China will develop up to 15 large-scale CMM capture and utilization projects in China. * Develop Clean Coal Technologies: The United States and China will provide policy incentives to promote the full commercialization of advanced coal technologies and will advance commercial use of carbon capture and storage technologies. China uses twice as much coal as the United States to power its growth and economy, and that number is expected to double by 2020. * Reduce and Eliminate Trade Barriers: The United States and China agreed to work together as part of the WTO Doha negotiations to discuss reducing or eliminating tariff and non-tariff barriers to environmental goods and services. Working together, the United States and China can increase access and reduce the costs of these important environmental technologies and services. Strengthening the Rule of Law * Fighting Counterfeit Goods and Protecting Our Borders: Protecting intellectual property rights, welcoming competition, promoting transparency and observing the rule of law are all critical to creating the framework within which creative ideas can flourish. During the second meeting of the SED, the United States and China signed an agreement to strengthen the enforcement of intellectual property rights laws. The agreement provides for an exchange of information on counterfeit good seizures, experiences with counterfeit goods and dialogue among respective Customs staff to improve intellectual property rights enforcement in our nations.

 

CLOSING STATEMENT BY SECRETARY HENRY M. PAULSON, JR. AT THE MAY 2007 MEETING OF THE U.S.-CHINA STRATEGIC ECONOMIC DIALOGUE Thank you, Vice Premier Wu Yi and your distinguished colleagues for a very productive two days. My colleagues and I have been impressed by, and grateful for, the openness and positive spirit you brought to this meeting of the Strategic Economic Dialogue. Over the last five months, China and the United States have come together to discuss our shared economic interests with mutual respect. We agree on many issues. We agree that it is vital to the prosperity of both our nations, that China rebalance its economic growth, encourage consumption and spread development more broadly among its people. We agree that by combining the power of our economies, we can spur further development of clean energy technology. We agree that strengthening and deepening our two-way trading relationship will create jobs and give our citizens a wider variety of choices and lower prices on goods. While we have much more work to do, we have tangible results for our efforts thus far. These results are like signposts on the long- term strategic road, building confidence and encouraging us to continue moving forward together. The United States and China understand that getting our economic relationship right is vital not only to our people, but to the world economy. Vice Premier Wu and I see an important part of our job is to communicate frequently, iron out differences, and keep the economic relationship on an even keel, even during times of tension. Our relationship works best when it produces mutual benefits, which lead to growth, balance and a stronger global economy. We agreed today on a wide variety of next steps, including significant items in financial services, energy and the environment, and civil aviation. The dialogue will continue; our cooperative spirit will continue as well. At our next meeting, we will focus on capturing the benefits and managing the challenges of global economic integration. We have built strong relationships since our inaugural meeting in Beijing. Those relationships will continue to grow stronger and produce on-going returns. On behalf of the American delegation, thank you for coming and we look forward to returning to China later this year.

 

UNDER SECRETARY STEEL STATEMENT ON PASSAGE OF HOUSE GSE BILL , DC - Treasury Under Secretary for Domestic Finance Robert K. Steel issued the following statement today regarding the passage of H.R. 1427 to reform the housing government sponsored enterprises: "The House made progress to reform the oversight of the housing GSEs today. Treasury commends Chairman Frank for working in a bipartisan manner to pass legislation addressing this goal. "Regretfully the House significantly weakened the regulator's abilities to examine systemic risk issues. Additionally, we remain troubled by the provisions relating to conforming loan limits, the Federal government's appointment of directors and aspects of the affordable housing fund. "Treasury appreciates the efforts of the Financial Services Committee to advance the process of creating a strong GSE regulator but as a result of amendments adopted on the floor, the Department does not believe this bill adequately guards our financial system with the necessary oversight. We look forward to working with the Senate to address reforms critical to the safety and soundness of the U.S. financial system."

OPENING STATEMENT BY SECRETARY HENRY M. PAULSON, JR. AT THE MAY 2007 MEETING OF THE U.S.-CHINA STRATEGIC ECONOMIC DIALOGUE Washington, DC – Good morning. It is with great pleasure that I welcome Vice Premier Wu and your colleagues to Washington, and the second meeting of the Strategic Economic Dialogue. Your visit is historically unprecedented. Never before have so many Ministers from China gathered in one place in the United States. The number of senior officials who are focusing their time and attention on this effort is a demonstration of our shared and on-going commitment to the vision and purpose of this dialogue. We both recognize how critical it is for our countries that we get our long-term economic relationship right. When President Bush and President Hu created the SED last August, their leadership set us on a course that led to our inaugural December meeting in Beijing, has continued through a series of meetings among Chinese and U.S. officials since then, to this Washington gathering, and will continue after we leave here. An open, honest economic relationship between our two countries is pivotal to the future of the global economy. The SED is a forum to manage that relationship on a long-term strategic basis, for our mutual benefit, and to work towards near-term agreements that build confidence on both sides. Our task is not an easy one. We must address the immediate concerns that are impacting our industries and citizens and simultaneously identify tomorrow's issues. We must maintain a partnership, and engage in this process to solve what may seem unsolvable. We conduct our talks under the wary eyes of politicians, business leaders and workers in both of our countries. We both face challenges of domestic protectionism and questions about the merits of trade and globalization. There is a growing skepticism in each country about the others' intentions. Unfortunately, in America this is manifesting itself as anti-China sentiment as China becomes a symbol of the real and imagined downside of global competition. That argument is fueled by the evidence of persistent trade and financial imbalances. China has its own opposition, with its own set of arguments. The purpose of this on-going dialogue is to have candid discussions and find ways to ease, rather than increase, these tensions. A look back demonstrates, of course, that increasing our ties has benefited both our people. China's presence in the global economy has raised living standards in China and fueled growth around the world. Ten years ago, China was an outsider in the global marketplace; other countries set the rules and China was expected to abide by them. Now, China is a member of the WTO, a dynamic economic force and a model for other developing countries. China is able to help lead and define the rules. Neither America nor China can shrink from the role we have carved for ourselves in the world. We both must exercise leadership, in positive and productive ways. I have no doubt that our proud, strong countries can fulfill this responsibility. The United States is supportive of a stable and prosperous China. We are not afraid of the competition. We welcome it, because competition makes us stronger. It is therefore in our interest to support China's continuing efforts to open its economy. As I have said before, our policy disagreements are not about the direction of change, but about the pace of change. Americans have many virtues ---we are a hard-working, innovative people---but we are also impatient. Even the notion of a "dialogue" may seem too passive for America's action-oriented ethic. It is up to us, over these two days and in the work that follows, to show that words are precursors to action. The SED allows us to look forward, together, and define our future bilateral economic relationship. We are creating a roadmap for the future. So, welcome again, Madame Wu, distinguished Ministers and colleagues. Let's get to work.

UPDATE: U.S. AND CHINA TO HOLD SECOND MEETING OF THE STRATEGIC ECONOMIC DIALOGUE IN WASHINGTON NEXT WEEK This Department of Treasury Secretary Henry M. Paulson, Jr. will host the second meeting of the U.S.-China Strategic Economic Dialogue next week. Secretary Paulson will be joined by Agriculture Secretary Mike Johanns, Commerce Secretary Carlos Gutierrez, Labor Secretary Elaine Chao, Health and Human Services Secretary Michael Leavitt, Transportation Secretary Mary Peters, Energy Secretary Sam Bodman, U.S. Trade Representative Susan Schwab, EPA Administrator Stephen Johnson, Deputy Secretary of State John Negroponte, and other Administration officials. In addition, Federal Reserve Chairman Ben S. Bernanke will participate in the Strategic Economic Dialogue discussions. The opening session will include a presentation by the Honorable Henry Kissinger. The second meeting of the U.S.-China Strategic Economic Dialogue will review progress on work plans agreed to at the December meeting and continue discussions in areas including policies to address economic imbalances to ensure continued global growth, China's economic development and further integration into the world trading system, greater openness of markets, cooperation on energy security and the environment, and innovation. The dialogue was launched by Presidents Bush and Hu in September 2006. The talks will take place May 22-23 at the Andrew W. Mellon Auditorium. The following events are open to media with SED credentials only: What: Opening Statements and Introductions When: Tuesday, May 22, 2007, 9:15 a.m. EDT Where: Andrew W. Mellon Auditorium 1301 Constitution Ave., NW Washington, DC Note: SED Credentialed press may begin setting up at 5:00 a.m., equipment must be in place for security sweep no later than 6:00 a.m. What: Presentation by the Honorable Henry Kissinger When: Tuesday, May 22, 2007, 9:45 a.m. EDT Where: Andrew W. Mellon Auditorium 1301 Constitution Ave., NW Washington, DC What: Family Photo When: Wednesday, May 23, 2007, 8:00 a.m. EDT Where: Andrew W. Mellon Auditorium 1301 Constitution Ave., NW Washington, DC Note: SED Credentialed photographers may begin setting up at 5:00 a.m., equipment must be in place for security sweep no later than 6:00 a.m. What: Closing Statements When: Wednesday, May 23, 2007, 10:45 a.m. EDT Where: Environmental Protection Agency East Building 1201 Pennsylvania Ave., NW Washington, DC Note: SED Credentialed press must be pre-set by 10:00 a.m. What: U.S. Delegation Press Conference When: Wednesday, May 23, 2007, 11:30 a.m. EDT Where: Environmental Protection Agency East Building 1201 Pennsylvania Ave., NW Washington, DC Links to press materials: DECEMBER: 11/28/2006: U.S. and China to Hold First Meeting of the Strategic Economic Dialogue in Beijing Next Month 12/13/2006: Introductory Remarks by Secretary Henry M. Paulson, Jr. at the U.S.-China Strategic Economic Dialogue 12/13/2006: Opening Statement by Secretary Henry M. Paulson, Jr. before the Opening Session of the U.S.-China Strategic Economic Dialogue 12/15/2006: Fact Sheet 12/15/2006: Statement from Treasury Secretary Henry M. Paulson, Jr. at the Closing of the U.S.-China Strategic Economic Dialogue 12/15/2006: Statement by Treasury Secretary Henry M. Paulson, Jr. at the Closing Press Conference SEPTEMBER 09/20/2006: U.S.-China Statement on Strategic Economic Dialogue 09/20/2006: Fact Sheet on Creation of the U.S.-China Strategic Economic Dialogue 09/21/2006: Strategic Economic Dialogue Press Briefing Transcript

TREASURY IDENTIFIES FINANCIAL NETWORK OF ISMAEL ZAMBADA GARCIA The U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC) today designated six companies and twelve individuals in Mexico that act as fronts for Ismael Zambada Garcia, the leader of a Sinaloa, Mexico-based drug trafficking organization. Ismael Zambada Garcia was named as a Tier I drug kingpin by President George W. Bush on May 31, 2002, pursuant to the Foreign Narcotics Kingpin Designation Act (Kingpin Act). "Zambada Garcia is one of Mexico's most powerful drug kingpins and a fugitive from justice," said Adam Szubin, Director of the Office of Foreign Assets Control. "Today's action further exposes the network of front companies and financial associates that Zambada Garcia uses to hide and launder his drug monies and cuts them off from the U.S. financial system." The OFAC designation targets Nueva Industria de Ganaderos de Culiacan S.A. de C.V., a large, Sinaloa, Mexico-based cattle and dairy company. Zambada Garcia's former spouse, Rosario Niebla Cardoza, and their four adult daughters, Maria Teresa, Midiam Patricia, Monica del Rosario, and Modesta Zambada Niebla, are also designated today on the basis of their role in the ownership or control of Zambada Garcia front companies and assets in Mexico. Other companies designated today are Establo Puerto Rico S.A. de C.V., Jamaro Constructores S.A. de C.V., Multiservicios Jeviz S.A. de C.V., Estancia Infantil Niño Feliz S.C., and Rosario Niebla Cardoza A. en P. Ismael Zambada Garcia is a U.S. fugitive and the State Department has offered a $5 million dollar reward for information leading to his arrest. In January 2003, the U.S. District Court for the District of Columbia returned an indictment against Ismael Zambada Garcia and two key lieutenants, Javier Torres Felix and his son Vicente Zambada Niebla. Javier Torres Felix was extradited to the United States in December 2006. "The Zambada Garcia organization cannot hide behind front companies like the Sinaloa cattle and dairy business," said DEA Administrator Karen P. Tandy. "We're working with OFAC to expose these traffickers' front companies for what they really are – not legitimate businesses, but illegal cash cows that fuel the drug trade, its violence and corruption. We're relentlessly following the financial trail to deprive these traffickers of their assets, draining the lifeblood from their criminal drug enterprises." This action is part of an ongoing U.S. Government effort under the Kingpin Act to apply financial measures against significant foreign drug kingpins worldwide. More than 300 businesses and individuals associated with the 62 drug kingpins have been designated since June 2000. Today's designation would not have been possible without key support from the Drug Enforcement Administration. Today's designation action freezes any assets the 18 designees may have under U.S. jurisdiction and prohibits U.S. persons from conducting financial or commercial transactions with these individuals and entities. Penalties for violations of the Kingpin Act range from civil penalties of up to $1,075,000 per violation to more severe criminal penalties. Criminal penalties for corporate officers may include up to 30 years in prison and fines of up to $5,000,000. Criminal fines for corporations may reach $10,000,000. Other individuals face up to 10 years in prison for criminal violations of the Kingpin Act.

UNDER SECRETARY FOR DOMESTIC FINANCE ROBERT K. STEEL REMARKS BEFORE THE COUNCIL ON COMPETITIVENESS "STRENGTHENING OUR CAPITAL MARKETS COMPETITIVENESS" Thank you very much. Deborah, thank you for that introduction and to everyone gathered here this morning, thank you for welcoming me. It is a privilege to be here at the Council on Competitiveness. You are fortunate to have Deborah's strong leadership. She has served here at the Council since 1993 and has helped your organization develop a great reputation of excellence. For nearly two decades, the Council on Competitiveness has brought together our nation's business, academic and labor leaders to help us chart a course for global competitiveness. Your mission reflects a commitment to the future prosperity of all Americans and enhanced U.S. competitiveness in a global economy. These important objectives echo one of Secretary Paulson's key goals for the Treasury Department – to encourage the competitiveness of U.S. capital markets. Strengthening our Bridge Today, Secretary Paulson announced the first stage of his plan to enhance U.S. capital markets competitiveness. These steps focus on strengthening financial reporting to enhance investor protection and encourage a vibrant, sustainable auditing profession. I will discuss today's announcement in more detail, but first would like to offer some general perspectives on how we think about issues of competitiveness. For some, optimism about the future of our capital markets comes less easily today. We at Treasury do not share that view. Instead, we start with the fact that our markets are the strongest in the world. Earlier in this decade, our markets passed safely through several perils, including the burst of the technology bubble, a terrorist attack and a series of corporate accounting scandals. Today, our economy is healthy – the labor market is strong, core inflation is contained and we are transitioning from an unsustainable to a sustainable rate of growth. Our markets are deep, vibrant and efficient, and our financial system remains the envy of the world. We plan to keep things that way. Maintaining this leadership requires having the confidence to continually self-assess our position and when appropriate, make changes or adjustments. For that reason, Secretary Paulson has asked the Treasury Department to engage in a broad, ongoing initiative to strengthen the competitiveness of our capital markets. Our efforts kicked off last November with a major speech by Secretary Paulson in New York, which served to frame the issues. Since his address, an enriching period of public discourse has followed, highlighted by the release of three separate and independent reports. In March, Secretary Paulson hosted a conference on capital markets competitiveness. We heard from key policymakers, consumer advocates, business representatives and academics, each with different perspectives on ways to keep U.S. capital markets the strongest and most innovative in the world. The many voices involved both in our conference and the three reports have illuminated the vital role capital markets play in our economy. Markets serve as a bridge, connecting suppliers of capital with users of capital. They connect those who have resources to invest with those who could use this capital to turn new ideas into businesses, generating jobs and contributing to the economy. The most effective bridges allow participants and their capital to cross from one side to the other with as little friction as possible. Effective bridges facilitate an open, transparent flow of information, and are built on strong pillars of investor protection, market integrity and risk mitigation. The structure, management and regulation of a bridge are each crucial. We seek to ensure that the policies in place for managing our bridge are effective in protecting investors and consumers, while at the same time enhancing the entrepreneurial spirit and innovation that has made America great. As keepers of our bridge, we must carefully consider what measurements we will use to gauge the strength of our markets, not just for today but also for the future. The indicators we examine include more than just public offerings. IPOs have become an often-referenced benchmark of capital markets competitiveness, but focusing solely on that measurement is too simple and not forward-looking enough. We should start with a global vision and look broadly at measures that gauge our ability to foster human capital, encourage innovation and reward efficiency. As these conditions are met, we will continue to excel in areas such as: * skills for asset management; * alternative asset management, such as venture capital, private equity and hedge funds; * trading and execution models characterized by leading-edge technology; * innovation in all types of investor products, including listed and unlisted derivatives; * and the accessible advice of a trusted advisor for governments, companies and investors. By most measurements we remain the uncontested world leader. We are well ahead of the rest of the world in mutual fund and hedge fund assets, venture capital and private equity, securitization, syndicated loans, and yield in equities and exchange-traded derivatives. * 45% of global mutual fund assets are housed in the U.S., compared to 35% in Europe and 11% in Asia. * Of the $2.1 trillion in global hedge fund assets, $1.5 trillion resides here in the U.S. * Worldwide, there are 351 hedge funds with at least a $1 billion in assets, and almost 70% (241) of them are located in the U.S. * Last year, more than 80% of outstanding OTC foreign exchange derivatives worldwide were in the U.S. Dollar. * The number of futures contracts traded on organized exchanges in the U.S. in 2006 was 1.3 times higher than what was traded in Europe and more than 5 times higher than trading volume in Asia. Let's be straightforward here: Financial markets in the U.S. are second to none. Our exchanges in New York and Chicago, asset management industry based all across the U.S., and commercial and investment banks with a global reach are unrivaled on an international scale. Additionally, our accounting and auditing professions, legal advice and management and consulting industries are the strongest in the world. Globalization is an Opportunity to Advance our Leadership Certainly, our markets are not immune to challenges. But we view challenges as an opportunity to improve – to make the best capital markets even better. Often when you are doing well proves to be the best time to focus on improvement. We are a nation and an economy that overcomes challenges and creates solutions. Americans are a creative, innovative people; we are entrepreneurs, risk-takers, and most of all competitors and winners. Secretary Paulson's capital markets competitiveness initiative is about using recent trends like globalization as an opportunity to leverage our competitiveness and bring even greater benefits to our economy and citizens. Today, emerging markets throughout the world are rapidly expanding and progressing. More and more countries are borrowing our expertise, emulating our success and moving to market-based systems. As a result their economies are growing and becoming stronger. Leaders around the world now realize that a market-driven economy has the best chance of producing economic growth and productivity, a higher standard of living and lower rates of unemployment. Without a doubt, financial capital is more mobile now than ever before, and with more choices, investors are able to access capital all over the world that was once available only in the U.S. This development is not something to fear. In fact, during my career in the financial services industry, I worked with many companies to take advantage of globalization, helping firms develop new markets overseas and working with small companies to become big corporations. Just as athletes perform better under the pressure of healthy competition, so too can we use this opportunity to raise our game and further enhance our competitive edge. A New Approach to Regulation The world has continued to evolve. Competition has become more flexible, but there are many things we can do to compete more effectively, including addressing internal challenges that our system itself has created over time. The current U.S. regulatory structure has been evolved together over 150 years – with act on top of act, initiative on top of initiative – so that today we have a series of individual regulations, each designed in response to specific circumstances and lacking an overarching set of guiding principles. This creates a difficult environment for both regulators and those being regulated. Certainly, regulators must find ways to appropriately balance issues of investor protection, market integrity and systemic risk, as well as the historic tension between state and federal boundaries. In addition, our structure was born institutionally focused and now is adapting into one that regulates activities rather than entities. As we heard from participants at our conference, these ambiguities generate inconsistent applications and reduce predictability of outcomes. If we were starting fresh and had a blank page, no one would choose to draw a regulatory structure that resembles our current picture. Too often, however, discussions about ideal regulatory philosophy and structure have been reduced to a black and white debate of rules vs. principles. This oversimplification undermines the complexity of these issues, and is not constructive. As Chairman Bernanke said earlier this week, it is a mischaracterization to draw a "sharp distinction" between the approach to financial regulation in the U.K. and the U.S. In fact, the U.K.'s so-called "principles-based" system supplements their eleven principles with over 8,000 pages of rules, and our system in the U.S. utilizes some principles. At Treasury, our goal is to elevate public thinking, so that we are not engaging in an either/or debate. The optimal construct should balance both rules and principles. We need a new, modernized approach to regulation – one that is risk-based, globally oriented and flexible in scope. A prudent approach recognizes that we should be guided by principles at an overarching level. But regulation at the retail level will require some focus on rules, particularly to protect less sophisticated market participants, where investor protection must be a paramount focus. Other key elements of this risk-based approach are: * Benefit-Burden Analysis – We reject calling for regulation just for regulation's sake. Instead, we should engage in rigorous cost-benefit analysis of proposed and current regulation. * Materiality – Regulators need to focus on issues that are material to investors and consumers. It is not simply a matter of collecting more material to review; rather, we should have measures in place to ensure that we are collecting appropriate, useful material. * Engagement between regulators and the regulated – We need to facilitate a move for constructive dialogue between regulators and the entities they regulate. There should be a clear process for businesses to engage with their regulators when they have questions or need clarification. In short, the modernized regulatory regime we seek should be, in the words of Chairman Bernanke, "principles-based, risk-focused, and consistently applied." Other Components of Treasury's Competitiveness Initiative We have already made some progress toward these goals. For instance, earlier this year the President's Working Group on Financial Markets (PWG) – chaired by the Secretary of the Treasury – released principles and guidelines for private pools of capital. Private pools of capital, which include hedge funds, private equity and venture capital, exemplify the creativity and innovation that have helped make our financial markets the strongest in the world. These principles and guidelines show that issues of systemic risk and investor protection are best addressed by a combination of market discipline and government oversight. They put forth a forward-looking, principles-based framework specifically designed to possess the flexibility to deal with global and dynamic nature of modern capital markets. These principles are not an endorsement of the status quo. They represent a uniform view from a broad group of key independent regulators that heightened vigilance is necessary and desired to address market developments. Treasury is currently actively engaged to ensure the adoption of these principles among each respective group of stakeholders – investors, pool managers, and creditors and counterparties. Other important steps toward modernized regulation are being taken by the regulators, and Treasury strongly supports these steps. The Sarbanes-Oxley Act of 2002 brought much needed reform and restored investor confidence. This successful piece of legislation is now being replicated around the world. Public companies have faced significant costs and challenges in the application of Sarbanes-Oxley's Section 404 internal control requirements, but we do not believe new legislation is required to amend it. A reinterpretation is currently in progress, which will reduce unintended and unnecessary costs of Section 404 to small businesses. Treasury supports the work of the SEC and the PCAOB, who are actively engaged in replacing Auditing Standard 2 (AS2) with Auditing Standard 5 (AS5). These efforts will make the implementation process of Sarbanes-Oxley section 404 more risk-based. As a result, we are optimistic that this change will achieve the appropriate balance. Another encouraging development that is underway at the SEC is the move to allow foreign companies to file their financial statements according to International Financial Reporting Standards (IFRS) without reconciling to US GAAP. As contemplated, the U.S. would recognize both major accounting languages – US GAAP and IFRS. However, the auditing industry faces other challenges, which if remedied will enhance our competitiveness. These solutions will take time to develop, but we will begin to lay the groundwork now for longer-term improvements. As he announced in an op-ed this morning, Secretary Paulson has asked us to establish a non-partisan, public federal advisory committee that will develop proposals for creating a stronger, sustainable auditing profession. We have asked former SEC Chairman Arthur Levitt and former SEC Chief Accountant Donald Nicolaisen to co-chair this effort. This soon-to-be-chartered committee will develop recommendations to address challenges facing this profession, such as industry concentration, competition, financial soundness, and employee recruitment and retention. The group will focus on three areas: (1) audit market competition and concentration, (2) human capital and (3) financial resources. We will solicit a broad range of individuals representing views from the auditing profession, public companies, investor community, and other financial market participants. We intend to solidify membership this summer and anticipate a first meeting in the fall. Auditing plays a unique role in our economy. A resilient and quality auditing profession is vital to the strength of our capital markets. Of course, management is ultimately responsible for a company's financial statements but requiring these companies to have their financial statements audited by an independent accounting firm enhances investor confidence. Strong, trustworthy auditing helps to encourage entrepreneurs and capital providers to take appropriate risks. At the same time, Treasury will seek solutions that will serve to enhance financial reporting, make the presentation of financial information more meaningful and accessible to investors, and gain a better understanding of why financial restatements have increased over the past decade. We will also encourage managers, directors and investors to focus on long-term value creation while maintaining frequent and accurate financial reporting. Conclusion The steps I have outlined today represent the first in a series of initiatives that we will undertake to strengthen our bridge that connects suppliers and users of capital. The maintenance of this bridge will require that some tolls be paid. These tolls will pay for sound and effective regulation. They enable the free movement of capital, support appropriate protections for consumers and investors, while also encouraging innovation and entrepreneurship. Our markets remain the most liquid, efficient and transparent in the world. And we are committed to maintaining that competitive edge. The world is indeed changing, but we will use this as an opportunity to reassess our position and improve our leadership. As we undergo a period of construction, the work on our bridge will take time and require patience. These issues do not lend themselves to easy fixes. But I am confident that we will succeed, and the legacy we leave behind will be one of enhanced capital markets competitiveness. Thank you.

PAULSON: FINANCIAL REPORTING VITAL TO US MARKET INTEGRITY, STRONG ECONOMY The Financial Times published the following opinion editorial today from U.S. Treasury Secretary Henry M. Paulson, Jr., discussing the first stage of his plan to enhance U.S. capital markets competitiveness: The Key Test of Accurate Financial Reporting is Trust By Henry Paulson Accurate and transparent financial reporting is vital to the integrity of our capital markets and the strength of the US economy. In an address last November, I spoke about the importance of strong capital markets, pointing out that capital markets rely on trust. That trust is based on financial information presumed to be accurate and to reflect economic reality. Our capital markets are the best in the world and so is our financial reporting system. We must work to keep them that way. On Thursday, the Treasury department is announcing several important steps to ensure we preserve an efficient financial reporting system that provides reliable information, is supported by a sustainable auditing industry, and has enhanced compatibility with foreign reporting standards. In March, Christopher Cox, the Securities and Exchange Commission chairman, and I co-chaired a conference on capital markets competitiveness. Financial reporting was one of the main topics of discussion. A strong auditing profession is essential for a well-functioning reporting system. The auditor's role is key: to examine financial statements and express an opinion that conveys reasonable, but not absolute, assurance as to the truth and fairness of those statements. The Sarbanes-Oxley Act of 2002 enhanced financial reporting integrity, including mandating major changes affecting the auditing profession. The act created the Public Company Accounting Oversight Board to replace self-regulation, and mandated auditor independence requirements. As these changes took effect, new challenges arose. We now have fewer major accounting firms, and legitimate questions about the sustainability of the auditing profession's business model. These new challenges require understanding and solutions. To achieve this, the Treasury has asked Arthur Levitt, former SEC chairman, and Donald Nicolaisen, former SEC chief accountant, to serve as co-chairs of a non-partisan committee to address auditing industry concentration, and to consider options available to strengthen the industry's financial soundness and its ability to attract and retain qualified personnel. Through this public forum, investors, advocates, and companies can present a wide range of views, engage in informed debate and provide recommendations. In addition to changes in the auditing profession, Section 404 of Sarbox appropriately emphasised the importance of internal controls over financial reporting. However, implementation has proven more costly and burdensome than originally anticipated. Mr Cox, Mark Olson, PCAOB chairman, and their commissioners and board members have sought to improve the application of Section 404. A more risk-based implementation will be a positive step. Another emerging challenge is the soaring number of financial restatements over the past decade. In 1997, there were 116 restatements; in 2006, there were 1,876, or more than 10 per cent of public companies. Restatements pose significant costs on our capital markets. They have the potential to confuse investors and erode public confidence in financial reporting. Some of these restatements might not be material to investors, and others may simply reflect new accounting standards interpretations. This volume of restatements reflects, in part, the complexity of our financial reporting system. Mr Cox and Robert Herz, Financial Accounting Standard Board chairman, are to be commended for their efforts to reduce that complexity. To complement this move, the Treasury intends to commission a rigorous analysis of factors driving financial restatements, and their impact on investors and the capital markets. The increasing globalisation of our markets also means that we must enhance the comparability of foreign company financial statements. Mr Cox's leadership has been instrumental. He has taken positive steps towards the convergence of US GAAP and International Financial Reporting Standards, and eliminating the US GAAP reconciliation requirements for IFRS-reporting foreign companies by 2009. As the SEC has said, its actions are key steps "toward a future regulatory framework in which IFRS may be used on a stand-alone basis by foreign private issuers and possibly also by US issuers." When fully implemented, this will enhance financial statement consistency and facilitate cross-border transactions and cash flows. We will pursue each of these initiatives, and other steps that will be part of the broader competitiveness discussion, to ensure that US capital markets remain efficient, innovative and continue to drive capital to its most productive uses. Our markets must retain the integrity and efficiency that has contributed greatly to prosperity in America and around The writer is US Treasury secretary

 

May 10

STATEMENT OF DAVID G. NASON NOMINEE FOR ASSISTANT SECRETARY FOR FINANCIAL INSTITUTIONS AND TO BE A MEMBER OF THE BOARD OF DIRECTORS FOR THE NATIONAL CONSUMER COOPERATIVE BANK U.S. TREASURY DEPARTMENT BEFORE THE SENATE COMMITTEE ON BANKING, HOUSING AND URBAN AFFAIRS

Washington, D.C.- Chairman Reed, Ranking Member Shelby and members of the Committee, thank you for inviting me to appear before you today. I am grateful to President Bush and Secretary Paulson for their trust and confidence in me. I am honored to be here today as the President's nominee to be Assistant Secretary for Financial Institutions at the Treasury Department and to be a member of the Board of Directors for the National Consumer Cooperative Bank, an organization established to assist underserved communities across the nation. I would like to thank my family for their unyielding support of my decision to continue in public service. I'd like to introduce my wife, Nicole, my best friend and closest adviser, who is also a dedicated public servant, and our daughters, Alexandra, 6, and Abigail, 2. My parents George and Ann Nason are also here today. Aside from being very supportive parents, they are two of the greatest grandparents in the world. If confirmed, I look forward to working with Secretary Paulson, Under Secretary Steel and the rest of the Treasury team, along with others in the Administration and Congress, on a variety of important issues impacting our financial institutions. In my current role as Deputy Assistant Secretary, I have had the opportunity to engage on numerous important issues that affect our capital markets and financial institutions, including Treasury's positions on banking and insurance regulation. I also serve as an advisor to Secretary Paulson in his capacity as chair of the President's Working Group on Financial Markets. If confirmed, I will work constructively in my role as Assistant Secretary for Financial Institutions to ensure that the Department faithfully carries out its responsibilities related to financial institutions policy, critical infrastructure protection, and financial education. These topics are diverse, complex, and have a direct impact on the lives of Americans. The legal and regulatory structure imposed on our financial institutions must guard against systemic risk, protect consumers, and enhance their confidence. If confirmed, I will help Secretary Paulson shape and implement his agenda on capital markets competitiveness. I share the Secretary's view that robust and vibrant capital markets are directly tied to future economic prosperity for all Americans. I believe that my prior professional experience has prepared me for this important responsibility. Before coming to Treasury, I served at the Securities and Exchange Commission as counsel to a commissioner. I was there at a critical moment in the SEC's history – when the agency implemented the Sarbanes-Oxley Act of 2002, the most comprehensive piece of securities legislation in decades. My experience there has contributed significantly in preparing me for this next challenge at the Treasury Department. Prior to the SEC, I spent time in the private sector as an attorney at Covington & Burling where I focused on securities offerings, mergers and acquisitions, and federal tax planning. If confirmed, I would seek to ensure a constructive dialogue with members of Congress and their staffs. I appreciate the time that members of this Committee have taken to consider my nomination, and I would be happy to answer any questions.

Washington, D.C.- Chairman Reed, Ranking Member Shelby and members of the Committee, thank you for inviting me to appear before you today. I am grateful to President Bush and Secretary Paulson for their trust and confidence in me. I am honored to be here today as the President's nominee to be Assistant Secretary for Financial Institutions at the Treasury Department and to be a member of the Board of Directors for the National Consumer Cooperative Bank, an organization established to assist underserved communities across the nation. I would like to thank my family for their unyielding support of my decision to continue in public service. I'd like to introduce my wife, Nicole, my best friend and closest adviser, who is also a dedicated public servant, and our daughters, Alexandra, 6, and Abigail, 2. My parents George and Ann Nason are also here today. Aside from being very supportive parents, they are two of the greatest grandparents in the world. If confirmed, I look forward to working with Secretary Paulson, Under Secretary Steel and the rest of the Treasury team, along with others in the Administration and Congress, on a variety of important issues impacting our financial institutions. In my current role as Deputy Assistant Secretary, I have had the opportunity to engage on numerous important issues that affect our capital markets and financial institutions, including Treasury's positions on banking and insurance regulation. I also serve as an advisor to Secretary Paulson in his capacity as chair of the President's Working Group on Financial Markets. If confirmed, I will work constructively in my role as Assistant Secretary for Financial Institutions to ensure that the Department faithfully carries out its responsibilities related to financial institutions policy, critical infrastructure protection, and financial education. These topics are diverse, complex, and have a direct impact on the lives of Americans. The legal and regulatory structure imposed on our financial institutions must guard against systemic risk, protect consumers, and enhance their confidence. If confirmed, I will help Secretary Paulson shape and implement his agenda on capital markets competitiveness. I share the Secretary's view that robust and vibrant capital markets are directly tied to future economic prosperity for all Americans. I believe that my prior professional experience has prepared me for this important responsibility. Before coming to Treasury, I served at the Securities and Exchange Commission as counsel to a commissioner. I was there at a critical moment in the SEC's history – when the agency implemented the Sarbanes-Oxley Act of 2002, the most comprehensive piece of securities legislation in decades. My experience there has contributed significantly in preparing me for this next challenge at the Treasury Department. Prior to the SEC, I spent time in the private sector as an attorney at Covington & Burling where I focused on securities offerings, mergers and acquisitions, and federal tax planning. If confirmed, I would seek to ensure a constructive dialogue with members of Congress and their staffs. I appreciate the time that members of this Committee have taken to consider my nomination, and I would be happy to answer any questions.

 

Fact Sheet
An Open Economy is Vital to United States
Prosperity

Today, President Bush reaffirmed America's continuing commitment to advancing open economies at home and abroad, including open investment and trade.

"The United States has a longstanding commitment to open economies that empower individuals, generate economic opportunity and prosperity for all, and provide the foundation for a free society. . . . A free and open international investment regime is vital for a stable and growing economy, both here at home and throughout the world."
- President George W. Bush

Focusing on the benefits of open investment, Secretary of the Treasury Henry M. Paulson Jr. will moderate a panel discussion on the gains to the United States economy from foreign investment here.

"Foreign investment in the United States strengthens our economy, improves productivity, creates good jobs, and spurs healthy competition. Americans have prospered as foreign companies have put their money to work here."
- Secretary Henry M. Paulson Jr.

Foreign Direct Investment (FDI) in the United States Creates High-Paying Jobs

Foreign companies in the U.S. employed more than 5 million U.S. workers in 2005, providing 4.5% of all private sector employment in the United States.

Manufacturing jobs accounted for 33% of the jobs created by foreign companies in the U.S. (2004 data). The manufacturing sector accounts for just 12% of overall U.S. private sector employment. Thus, FDI is disproportionately bolstering this important sector.

An additional 4.6 million U.S. jobs indirectly depend on foreign investment in the U.S. (2005 data). Foreign companies in the U.S. buy 80% of their inputs from U.S. companies. This additional business indirectly supports almost as many U.S. jobs as FDI creates directly.

Compensation at foreign companies in the U.S. is on average 30% higher than the U.S. national average. Foreign-owned firms paid U.S. workers an average of $63,428 in 2004.

Foreign Direct Investment in the United States Strengthens Our Economy

Foreign firms in the U.S. account for 5.7% of U.S. economic output, as well as 10% of all investment in plant and equipment in the United States.

Foreign firms in the U.S. re-invested $48.6 billion (45% of their income) back into the U.S. economy in 2004. This investment furthers innovation and promotes economic growth.

Foreign firms generate 19% of U.S. exports ($153.9 billion in 2006). This contribution is greater than their overall percentage of U.S. economic output, which means they are doing more than their share to help improve the U.S. trade balance.

Foreign firms in the U.S. generate a disproportionate share of national R&D spending (13%, totaling $29.9 billion). This spending strengthens U.S. global competitiveness in pharmaceuticals, high-tech, and other key sectors and produces innovative products that help to improve our standard of living.

The economic benefits generated by inflows of foreign capital help strengthen economic leadership. In the late 1980s and early 1990s, some pointed with alarm to Japanese purchases of U.S. assets, fearing they foreshadowed the Japanese overtaking our economic leadership. Twenty years later, the resulting jobs and economic growth show those fears were misplaced.

Maintaining U.S. Competitiveness in Attracting FDI Requires Renewed Commitment

At $1.9 trillion, the total stock of FDI in the United States in 2005 was equivalent to 15% of U.S. GDP. Foreign investment in the U.S. is the ultimate vote of confidence in our economy. It signals a long-term belief in the strength of our markets and the skill of our workforce.

In the last few years, the United States has not received as high a share of total worldwide FDI as it did before 2000. This trend could be due to the growth of opportunities in emerging markets, burdensome U.S. legal, regulatory and corporate tax regimes, or the misperception that the United States is no longer open to foreign direct investments.

However, this trend is cause for some concern. In 2000, foreign firms directly employed 5.7 million people in the U.S. (5.1% of the private sector workforce) and indirectly supported 6.5 million more jobs. In 2005, those figures had fallen to 5.1 million (4.7% of the private sector workforce) and 4.6 million, respectively. Foreign firms' R&D spending as a share of total R&D spending in the U.S. has also slightly declined since 2000.

This trend reinforces the need for the United States to renew its commitment to open investment, and to policies that make the U.S. attractive for FDI.

Our National Security Review Process Has Not Restricted the United States' Openness to Foreign Direct Investment

Since 1988, the interagency Committee on Foreign Investment in the United States (CFIUS) has carefully reviewed the potential national security impact of proposed foreign investments in the United States.

CFIUS's recently more public profile has created the misconception in some quarters that the United States is becoming less open to foreign investment. However, CFIUS is continuing its long history of fairly, efficiently, and narrowly reviewing individual transactions for national security concerns alone, without any protectionist influence on its decisions.

Less than 10% of foreign investments in U.S. companies were reviewed by CFIUS in 2006, and the average since 2000 is about 5%. The vast majority of foreign investment does not raise national security implications – and is untouched by the CFIUS process.

May 7

REPORT HIGHLIGHTS OFAC’S SUCCESS IN COMBATING NARCOTICS TRAFFICKERS

The U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC) today released the Impact Report on Economic Sanctions Against Colombian Drug Cartels, which reviews OFAC's highly effective efforts to expose and isolate significant Colombian narcotics traffickers and their associates and to disrupt and dismantle their business empires. "Since it's inception in 1995, the Specially Designated Narcotics Traffickers (SDNT) program has been extremely successful in disrupting the financial operations of Colombian drug lords and stripping the cartels of their ill-gotten gains," said OFAC Director Adam J. Szubin. The Impact Report details the illicit activities of each of the 22 Colombian drug cartel principals and organizations that have been targeted by OFAC. The report also focuses on specific highlights of the SDNT program, including the historic September 2006 plea agreement between the United States Government and the leaders of Colombia's infamous Cali drug cartel, Miguel and Gilberto Rodriguez Orejuela. This sanctions program was established by Executive Order 12978. "We believe the report will be valuable to the Congress and law enforcement agencies, both domestic and abroad. The report will also inform foreign governments, fostering closer coordination in fighting the scourge of narcotics trafficking," Szubin continued. The Impact Report on Economic Sanctions Against Colombian Drug Cartels, as well as additional information about the SDNT program, can be accessed through the following link:

 

2007 NATIONAL MONEY LAUNDERING STRATEGY RELEASED

The U.S. Departments of Treasury, Justice, and Homeland Security today joined together in issuing the 2007 National Money Laundering Strategy, a report detailing continued efforts to dismantle money laundering and terrorist financing networks and bring these criminals to justice. "The 2007 National Money Laundering Strategy is a direct result of close cooperation by the Departments of Justice, Treasury and Homeland Security, along with our foreign counterparts, and signifies our collective commitment to fight money laundering," said Assistant Attorney General Alice S. Fisher of the Justice Department's Criminal Division. "Implementation of this strategy will greatly assist in efforts to seize and forfeit millions in illegal proceeds that flow through the international financial system." The 2007 Strategy addresses the priority threats and vulnerabilities identified by the Money Laundering Threat Assessment released in 2006, the product of an extremely valuable investigation into the current and emerging trends and techniques used by criminals to raise, move, and launder proceeds. The Assessment – the first government-wide analysis of its kind – brought together the expertise of regulatory, law enforcement, and investigative officials from across the government, culminating in a comprehensive analysis of specific money laundering methods, patterns of abuse, geographical concentrations, and the associated legal and regulatory regimes. "The 2007 National Money Laundering Strategy builds upon the groundbreaking work of the Money Laundering Threat Assessment," said Pat O'Brien, Treasury's Assistant Secretary for Terrorist Financing. "Focusing on well-established money laundering methods and emerging trends identified in the Assessment, we have created a robust strategy for combating money laundering, deterring criminals, and addressing areas vulnerable to exploitation." The 2007 Strategy builds on initiatives and programs pioneered in preceding National Money Laundering Strategies. The constant searching by criminals for new ways to launder and hide dirty money is evidence of our successful regulatory and law enforcement efforts to safeguard the banking system. With an aim at continuing these robust efforts, the 2007 Strategy places an emphasis on bolstering the efficiency of the anti-money laundering processes currently in place. "In every type of case, from human smuggling and drug trafficking to intellectual property rights violations and illegal alien employment schemes, the need to hide and move ill-gotten gains is a constant. ICE's anti-money laundering initiatives are at the forefront of attacking existing and emerging money laundering threats" said Julie L. Myers, Assistant Secretary for Immigration and Customs Enforcement at the Department of Homeland Security. "ICE's trade transparency unit, bulk cash smuggling initiative and programs targeting illegal money service businesses and stored value card schemes are making it less profitable to commit these crimes." Additionally, the 2007 Strategy focuses on leveling the playing field internationally, helping to ensure U.S. financial institutions are not disadvantaged through the implementation of controls and standards to combat money laundering and terrorist financing. Indeed, money laundering is a global threat the United States is working to address through international bodies, including the Financial Action Task Force (FATF), and through direct private sector outreach in regions around the world.

 

Testimony of Treasury
Acting International Tax Counsel
John Harrington
Before the Senate Finance Committee on
Offshore Tax Evasion

Washington, D.C.--Mr. Chairman, Ranking Member Grassley, and distinguished Members of the Committee, thank you for the opportunity to participate this morning and discuss the serious problem of offshore tax evasion.

Mr. Chairman, Ranking Member Grassley, and distinguished Members of the Committee, thank you for the opportunity to participate this morning and discuss the serious problem of offshore tax evasion.

Introduction

From the standpoint of tax administration, offshore tax evasion historically has been a very difficult area to address. Questionable use of low- or no-tax jurisdictions has been an issue for decades. Globalization, however, has made foreign investment and foreign activities common, with overseas markets becoming an increasingly important source of income for U.S. individuals and businesses.

Individuals invest in foreign entities for a variety of reasons. In most instances, these investments represent legitimate business transactions, using foreign entities in ways that are typical for international commerce. At times, however, foreign entities can be used for tax evasion. For example, some individuals invest through a jurisdiction with a reputation for secrecy and opaqueness, hoping to stymie the Internal Revenue Service (IRS) in its administration of the Internal Revenue Code. Others try to hide income from the IRS by setting up elaborate business structures and financial arrangements, some components of which are located offshore.

These varied scenarios make it clear that a one-size-fits-all approach will not work to stop offshore tax abuse while continuing to permit legitimate cross-border transactions, which are vital to the United States' participation in the global economy. This is why the Treasury Department has undertaken a multi-faceted approach to deal with the problem of offshore tax evasion. I would like to describe the actions we have taken and continue to take, especially regarding information exchange, to deal with this difficult but important issue. It is critical to bear in mind that this has been a long-term problem, and we must continue to take a long-term view in combating offshore tax evasion, while managing expectations about the speed with which progress can be made in addressing it.

The Treasury Department is very concerned about the use of offshore jurisdictions to evade U.S. tax. There plainly have been abuses in this area. We have been aggressively pursuing such abuses, and we intend to continue doing so.

We have sought to target our efforts on the sources of abuse and avoid actions that are so blunt that they hinder the legitimate cross-border trade and investment activities, which are so critical to U.S. business and U.S. jobs. Cross-border transactions are now standard business operations, as globalization has led to increased cross-border investment opportunities. We have to make sure that our tax rules reflect the current economic environment, without hurting the competitiveness of U.S. workers and businesses.

Regulatory and Administrative Actions

As part of our overall effort to improve compliance, the Treasury Department and the IRS have taken a number of important steps on the administrative front and are continuing to work on other avenues to address offshore tax abuses. Although determined tax evaders may flaunt the tax rules, some taxpayers opportunistically seek to take advantage of ambiguous or outdated tax rules. Accordingly, we modify or update U.S. tax rules when we determine that they are being used to perpetrate such abuse. Recent published guidance projects that will improve compliance and that target potential areas of abuse include:

Foreign Tax Credit: We have taken strong steps to halt misuse of the foreign tax credit. In November 2006, we issued final regulations regarding the proper allocation of partnership expenditures for foreign taxes. In March 2007, we issued proposed regulations that would disallow foreign tax credits tied to participation in certain artificially engineered, highly structured transactions. In August 2006, we issued proposed regulations that would address the inappropriate separation of creditable foreign taxes from foreign source income. We intend to make appropriate modifications and finalize both sets of proposed regulations as soon as possible.

: We have taken strong steps to halt misuse of the foreign tax credit. In November 2006, we issued final regulations regarding the proper allocation of partnership expenditures for foreign taxes. In March 2007, we issued proposed regulations that would disallow foreign tax credits tied to participation in certain artificially engineered, highly structured transactions. In August 2006, we issued proposed regulations that would address the inappropriate separation of creditable foreign taxes from foreign source income. We intend to make appropriate modifications and finalize both sets of proposed regulations as soon as possible.

Transfer Pricing: We have produced, and continue to produce, significant guidance in the area of transfer pricing. In an increasingly globalized economy, cross-border transactions between controlled entities present significant compliance challenges, making guidance in the transfer pricing area an important part of our administrative efforts to address noncompliance. In August 2006, we issued temporary and final regulations addressing the treatment of cross-border services, and followed them up with additional guidance in December 2006. We issued proposed transfer-pricing regulations addressing cost-sharing in August 2005. We intend to finalize both sets of regulations, with appropriate modifications.

: We have produced, and continue to produce, significant guidance in the area of transfer pricing. In an increasingly globalized economy, cross-border transactions between controlled entities present significant compliance challenges, making guidance in the transfer pricing area an important part of our administrative efforts to address noncompliance. In August 2006, we issued temporary and final regulations addressing the treatment of cross-border services, and followed them up with additional guidance in December 2006. We issued proposed transfer-pricing regulations addressing cost-sharing in August 2005. We intend to finalize both sets of regulations, with appropriate modifications.

Other Abusive Transactions: We have also shut down arrangements that utilized foreign jurisdictions to perpetuate abuse of the Internal Revenue Code. For example, in October 2006, we published proposed regulations regarding the Federal tax treatment of annuity contracts. These proposed regulations address a type of widely marketed transaction in which taxpayers claimed to be able to defer or avoid gain on the exchange of highly appreciated property for the issuance of annuity contracts. Recent Congressional hearings have highlighted how taxpayers were applying prior law treatment of these contracts to facilitate abusive private annuity arrangements, often involving offshore issuers. The proposed regulations, when adopted as final, will shut down those arrangements.

: We have also shut down arrangements that utilized foreign jurisdictions to perpetuate abuse of the Internal Revenue Code. For example, in October 2006, we published proposed regulations regarding the Federal tax treatment of annuity contracts. These proposed regulations address a type of widely marketed transaction in which taxpayers claimed to be able to defer or avoid gain on the exchange of highly appreciated property for the issuance of annuity contracts. Recent Congressional hearings have highlighted how taxpayers were applying prior law treatment of these contracts to facilitate abusive private annuity arrangements, often involving offshore issuers. The proposed regulations, when adopted as final, will shut down those arrangements.

The IRS has also undertaken several compliance initiatives, including the Offshore Voluntary Compliance Initiative, aimed at taxpayers who used offshore payment cards or other offshore financial arrangements to hide their income, and the Offshore Credit Card Program, designed to identify taxpayers who use offshore bank accounts to hide income and offshore credit cards issued by secrecy jurisdiction banks to repatriate the unreported income. The IRS is continually monitoring this area for opportunities to implement new programs that will stop abusive transactions and improve compliance.

Obtaining Information from Other Jurisdictions

In most cases, however, the problem of offshore tax abuse lies not with our tax rules but with attempts to hide from them. Accordingly, to enforce our tax laws, we have to exchange information with other countries. Information exchange is an area in which the Treasury Department has been working assiduously for several years, and our steady and persistent efforts are bearing fruit.

In today's global economy, countries must be able to obtain and exchange the information needed to enforce their domestic tax laws. A key element of U.S. tax treaties, therefore, is the provision for exchange of information between the tax authorities. Under tax treaties, the competent authority (i.e., the tax authorities designated under the tax treaty) of one country may request from the other competent authority such information as may be relevant for the proper enforcement of the first country's tax laws. The information provided by the other country is subject to the strict domestic confidentiality protections that generally apply to taxpayer information. Because access to information from other countries is critically important to the full and fair enforcement of the U.S. tax laws, information exchange is a priority for the United States in its tax treaty program.

A tax treaty is not feasible or appropriate in all cases, however. In some cases, there simply may not be the type of cross-border tax issues between the United States and the foreign country that are best resolved by treaty. For example, in the case of a country that does not impose significant income taxes, there may be little possibility of the double taxation of income that tax treaties are designed to address. In cases where a full tax treaty is not appropriate or feasible, the Treasury Department seeks to provide for the bilateral exchange of tax information by entering into a tax information exchange agreement ("TIEA") with the other country.

Information Exchange Generally

There are three primary forms of information exchange.

Exchange of information on request: Exchange of information on request occurs when the competent authority of one country asks for particular information regarding specific taxpayers from the competent authority of another country.

Exchange of information on request occurs when the competent authority of one country asks for particular information regarding specific taxpayers from the competent authority of another country.

Automatic exchange of information: Information that is exchanged automatically is typically information comprised of many individual cases of the same type. Usually, this type of information exchange consists of details of income arising in the source country (e.g., interest, dividends, royalties, or pensions). This information is obtained on a routine basis (generally through reporting of the payments by the payer) by the sending country and is thus available for transmission to its treaty partners.

: Information that is exchanged automatically is typically information comprised of many individual cases of the same type. Usually, this type of information exchange consists of details of income arising in the source country ( interest, dividends, royalties, or pensions). This information is obtained on a routine basis (generally through reporting of the payments by the payer) by the sending country and is thus available for transmission to its treaty partners.

Spontaneous exchange of information: Information is exchanged spontaneously when a country, having obtained information in the course of administering its own tax laws, which it believes will be of interest to one of its treaty partners for tax purposes, passes on the information without the latter having asked for it.

: Information is exchanged spontaneously when a country, having obtained information in the course of administering its own tax laws, which it believes will be of interest to one of its treaty partners for tax purposes, passes on the information without the latter having asked for it.

Tax Treaties

Tax treaties typically permit all three types of information exchange. Both the United States Model Income Tax Convention (U.S. Model Tax Convention) and the Organization for Economic Cooperation and Development Model Tax Convention on Income and on Capital (the OECD Model Tax Convention) provide for broad information exchange and do not limit the form or manner in which information exchange can take place. For example, Article 26 of the U.S. Model Tax Convention generally provides that "the competent authorities of the Contracting States [the treaty partners] shall exchange such information as may be relevant for carrying out the provisions of this Convention or of the domestic laws of the Contracting States concerning taxes of every kind imposed by a Contracting State to the extent that the taxation thereunder is not contrary to the Convention, including information relating to the assessment or collection of, the enforcement or prosecution in respect of, or the determination of appeals in relation to, such taxes." The Article confirms that each Contracting State must maintain and protect the confidentiality of the tax information it receives from the other State, with disclosure permitted only to persons or authorities (including courts and administrative bodies) involved in the assessment, collection, or administration of, the enforcement or prosecution in respect of, or the determination of appeals in relation to, such taxes, or the oversight of such functions.

The Article further provides that each Contracting State "shall use its information gathering measures to obtain the requested information, even though that other State may not need such information for its own purpose." Thus, a treaty partner may not decline to supply information to the other treaty partner merely because the first treaty partner has no domestic interest in the information. For example, a country may not refuse to provide information on request about the holder of a bank account simply because the country does not tax interest and, therefore, does not collect such information.

Article 26 permits a Contracting State to refuse to share information in certain specified cases, however. A Contracting State may refuse (a) to carry out administrative measures at variance with the laws and administrative practice of that or of the other Contracting State; (b) to supply information that is not obtainable under the laws or in the normal course of the administration of that or of the other Contracting State; or (c) to supply information that would disclose any trade, business, industrial, commercial, or professional secret or trade process, or information the disclosure of which would be contrary to public policy. The Article specifically prohibits, however, a treaty partner from refusing to obtain or exchange information because of bank secrecy rules.

The information exchange article in the OECD Model Tax Convention has substantially similar provisions to those described above.

TIEAs

Compared to tax treaties, TIEAs are a more recent phenomenon. In 1983, as part of the Caribbean Basin Initiative, Congress granted the Treasury Department the authority to enter into bilateral or multilateral TIEAs with designated countries in the Caribbean and Central America. This authority was extended in 1986 to allow the Treasury Department to enter into bilateral TIEAs with other countries.

There are several items that are essential to the United States when negotiating a TIEA. First, the TIEA must provide for the exchange of information on request for both criminal and civil tax matters. Many jurisdictions are more willing to exchange information with respect to criminal tax matters, but such a restriction would greatly limit the utility of a TIEA from a U.S. standpoint. Second, the TIEA must provide for the exchange of information even if such information relates to a person who is not a resident or national of the United States or the TIEA partner. We may be more interested in the beneficial owner of an entity formed under the jurisdiction of the TIEA partner than we are in the entity itself. Finally, the TIEA must provide for the disclosure of information regardless of local "confidentiality" laws that may prohibit such disclosure, including laws relating to bank secrecy or bearer shares. Indeed, such laws may be one of the principal attractions for offshore tax evaders.

Many of our TIEA partners have small tax administrations, and the TIEAs acknowledge this reality. Accordingly, a TIEA often will specify the details that a request for information under the TIEA should contain and also require the IRS to explain why it is making the request. Although each TIEA partner is usually expected to bear the routine costs of fulfilling its obligations under the agreement, TIEAs often require the requesting party to bear "extraordinary costs." This type of feature is often necessary to induce a small jurisdiction to agree to a TIEA.

Information Exchange Is Not Just a Bilateral Issue

The United States is not the only country that has encountered the problem of offshore tax evasion, but it has been a leader in increasing worldwide standards of information exchange to combat such evasion. We have worked with other countries, particularly through the OECD, to raise international standards of information exchange. Although exchange of taxpayer information is effected on a bilateral basis, pursuant to a tax treaty or TIEA, the information exchange practices of third countries matter significantly. Some of the more complicated cases may involve transactions in several jurisdictions, requiring exchange of information with multiple jurisdictions. Thus, the adoption of high standards of international information exchange facilitates our ability to obtain the information we need through our agreements, thereby promoting the sound and effective administration of U.S. tax laws.

We have made great strides in raising international standards. It is now rare for a country to insist that it can only exchange information in which it has a domestic tax interest. In addition, the countries that assert that they cannot provide information because of bank secrecy are becoming fewer and fewer.

Improving the quality of the information available for exchange (e.g., removing bank secrecy and eliminating the requirement of a domestic tax interest) is one of the most important developments in the last few years. In other words, access to relevant information is more important than the method of exchange (e.g., whether automatic or not). In particular, automatic exchange does no good if the underlying information is too limited to be of help.

We also have to make sure that tax information is properly protected. Under U.S. law, we cannot exchange taxpayer information unless we know the other country will protect the confidentiality of that information.

Exchange of non-taxpayer-specific information is also important. Countries often share experiences and schemes that they have encountered. For example, the Treasury Department recently issued proposed foreign tax credit regulations to shut down abusive foreign tax credit "generator" transactions. We learned about these transactions from foreign tax authorities. This kind of communications can be as important as the more traditional exchange of information.

The IRS has been actively involved in the development of several multilateral information exchange programs. The Joint International Tax Shelter Information Centre (JITSIC) was formed by tax authorities in the United States, the United Kingdom, Canada, and Australia. The objectives of JITSIC are to deter promotion of and investment in abusive tax schemes, particularly through information exchange and knowledge sharing. IRS Commissioner Everson has described JITSIC as having sharply improved IRS knowledge and understanding in a number of important international tax areas.

In addition to JITSIC, in January 2006 the IRS and the tax administrations of nine other countries agreed to the establishment of the so-called "Leeds Castle" Group. Under this arrangement, the commissioners of the revenue agencies of China, India, and South Korea agreed to meet regularly with their counterparts from the United States, the United Kingdom, Japan, Australia, Canada, France and Germany to consider and discuss issues of global and national tax administration in their respective countries. By providing additional opportunities to share information and experience, these organizations are a significant tool in combating offshore evasion.

Taking Stock of Information Exchange

Successes in information exchange do not come overnight. We have the access to information that we have today due to years of patient negotiations and cultivation of information exchange relationships. Moreover, new efforts today may not bear fruit until years from now. For that reason, we are committed to a multi-year approach to expanding our information exchange network. It is important to take a long-term perspective. At times, there have been criticism that we are devoting too much time and resources to expanding our information exchange network; other times we hear that we are not devoting enough. Because this is an area where steady pressure is essential and missteps (or overreaching) can undo years of work, we have to be careful not to disrupt the steady progress we have made.

It is also important to remember that information exchange is inherently voluntary. We cannot force any country to agree to exchange tax information. Sometimes negotiations on this issue are very difficult. The treaty or TIEA partner may be required to repeal or modify domestic law. In addition, signing a tax treaty or a TIEA is only the first step in the process. A healthy information exchange relationship requires us to maintain good relations with our treaty and TIEA partners. Even an ideally drafted agreement is of limited value if the tax authorities do not have a cooperative relationship. For example, if a treaty or TIEA partner believes that the information exchange relationship is not respected or appreciated by the United States, this may have a chilling effect on exchange of information on request or, particularly, on spontaneous exchange of information.

We have more to do in this area. Nonetheless, we have made great strides in recent years. Several new TIEAs have entered into force with jurisdictions that have figured prominently in previously documented accounts of offshore tax evasion. Within the last two years alone, TIEAs have fully entered into force with the Cayman Islands, the British Virgin Islands, the Bahamas, the Netherlands Antilles, Jersey, Guernsey, and the Isle of Man. We also recently signed a TIEA with Brazil, and the newly signed tax treaty with Belgium provides greater information exchange than we have previously been able to achieve with that country.

Moreover, it must be kept in mind that TIEAs and the information exchange article in tax treaties are enforcement tools. Accordingly, there are limits in what we can say publicly about the manner in which we use them and the frequency with which we make requests, without undermining their deterrent effects. The goal is to enforce our laws, and we do not want to convey inadvertently to tax evaders any specific information about how and with whom we exchange information.

However, it is worth noting a few of the public successes that have resulted in part from our information exchange agreements.

Recently, the U.S District Court in Washington sentenced an individual to nine years in prison for failing to report $365 million in income. This individual, Walter Anderson, had attempted to evade his tax responsibilities by hiding earnings in offshore entities in the British Virgin Islands, Bermuda, the Channel Islands, and Panama. Information that the IRS and Department of Justice gathered through our TIEA with Bermuda helped in the prosecution of this case.

In 2004, Almon Glenn Braswell was sentenced to 18 months in prison and ordered to pay over $10 million in back taxes, interest and penalties. Mr. Braswell's use of a Bermuda corporation and bank account as part of his tax evasion scheme was uncovered through requests made under our TIEA with Bermuda.

Conclusion

As both Secretary Paulson and Assistant Secretary Solomon stated in recent testimony before this Committee, the Treasury Department is committed to improving tax compliance without unduly burdening honest taxpayers who currently meet their tax obligations. Tax compliance with respect to offshore transactions is an important aspect of that endeavor. By focusing on information exchange, we seek to reduce offshore tax evasion while achieving these goals.

Thank you again, Mr. Chairman, Ranking Member Grassley, and other Members of the Committee for the opportunity to appear before the Committee today. I would be pleased to answer any questions you may have.

 

MINUTES OF THE MEETING OF THE TREASURY BORROWING ADVISORY COMMITTEE OF THE SECURITIES INDUSTRY AND FINANCIAL MARKETS ASSOCIATION MAY 1, 2007

The Committee convened in closed session at the Hay-Adams Hotel at 11:35 a.m. All Committee members except Richard A. Axilrod were present. Under Secretary Robert Steel, Assistant Secretary Anthony Ryan, Deputy Assistant Secretary Matthew Abbott and Office of Debt Management Director Karthik Ramanathan welcomed the Committee and gave them the charge. The Committee addressed the first question in the Committee charge (attached) regarding debt issuance in light of intermediate and longer-term fiscal trends as well as recent economic and market conditions. Director Ramanathan presented a series of charts discussing the continued strong growth in individual, corporate, and non-withheld receipts as well as the slower growth of outlays in fiscal year 2007. In addition, the charts showed the Administration's projections of a rapidly improving fiscal outlook with a balanced budget by 2012. Director Ramanathan noted that increased issuance of State and Local Government Series (SLGS) securities has led to a decline of nearly $50 billion in marketable borrowing needs. In order to promote large, liquid sizes in its benchmark securities and in light of potential reduced borrowing needs in the near future, Director Ramanathan noted that one possible option would be to discontinue the 3-year note following the May 2007 auction. Director Ramanathan noted that current issuance sizes across bills and coupons may be approaching their lower limits. Discontinuing the 3-year note would promote liquidity in bills and other benchmark securities and eliminate the need for Treasury to resort to larger cuts across the curve which could impede market efficiency. Moreover, given the fiscal outlook and portfolio considerations, adjusting the auction calendar at this time was feasible. Director Ramanathan stated that Treasury had the capacity to raise more than $200 billion through increased bill and coupon issuance if needed through its current menu of offerings. Another chart noted that TIPS and longer term securities – based on current issuance patterns and sizes – would be primary tools in raising funds in the future. If positive fiscal trends continue in the future, additional reductions may be necessary through coupon reductions or calendar adjustments across the portfolio. The TBAC in the February 2007 meeting had suggested the 5-year TIPS as well as a consolidation of the 10-year note as other possible options. These options and others may need to be explored if current positive trends persist. Director Ramanathan then noted that the TBAC may want to consider several factors when contemplating adjustments to the auction calendar including portfolio considerations, the intermediate to long-term trends, non-marketable borrowing, and potential legislative changes. From a portfolio perspective, the ability to offer the market large, liquid offerings on its benchmark securities and grow the bill sector was important. The economic outlook remains stable but Treasury's current auction calendar has the ability to raise a large amount of funds fairly rapidly. Non-marketable borrowing trends, particularly those related to SLGS, could moderate, but a low interest rate environment may precipitate additional refinancings and issuance over the next few years. Finally, legislative changes related to tax policy or entitlement reform could occur and impose additional funding requirements, but the Treasury generally remained capable of funding such needs. The Committee turned to the decision facing the Treasury regarding the discontinuance of the 3-year note. One member noted that there is no futures contract and that any 3-year assets that investors want could be obtained through the Eurodollar market and swaps. Given both the decline in fiscal needs and concern about maintaining large liquid benchmarks, the Committee member noted that discontinuing the 3-year note at this point was sensible. Another member noted that market participants hoping to invest in the three-year space could purchase off the run 5-year notes as they roll down the curve. One member raised caveats including uncertainty about the Alternative Minimum Tax provisions, war expenditures, and cash outflows starting in 2008 and 2009. This member noted that if the fiscal situation becomes more pessimistic, the discontinuance of the 3-year note may put significant pressures on other instruments. This same member noted, however, that outlays remain below trend, and this might continue into the 2008 elections as Congress potentially remains in gridlock. Some members expressed the view that there was significant capacity to increase issuance in benchmark issues and bills. Several members noted that the market would welcome larger sizes in the core benchmark securities should the situation warrant such action. Other members noted that if at some future date, it was determined that more intermediate financing was needed, Treasury could reintroduce the 3-year note without significant disruption to the market. This member acknowledged that generally Treasury has considered the 3-year note to be a fairly flexible security, and that the market would not view reintroduction of the security negatively if such a move was properly telegraphed. Several members agreed with this perspective. At this point, Committee members reached consensus that discontinuing the 3-year note at this time was advisable. The Committee then considered the question of what might be done if the fiscal situation improves further. Committee members noted that Treasury may need to consider additional adjustments to the calendar if the fiscal outlook improved more rapidly than expected. Several members suggested that Treasury continue to evaluate other options in the event they need to be acted upon, including eliminating the 5-year TIPS, the consolidation of the 10-year note auction cycle, and any other prudent measures. One member pointed out that 5-year TIPS cash flows were not that unique and that real money investors where more interested in the cash flows generated by longer-dated TIPS. Another member noted that Treasury has shown commitment to the TIPS program, and given that inflation-indexed securities are a core element of the overall portfolio, TIPS need to be reviewed just as any other security. Another member suggested that Treasury should be flexible in considering all options. Most members felt that Treasury should keep its options open regarding the future fiscal situation and the potential need to cut financing. Members suggested that Treasury wait and evaluate technical and market factors as well as consider modifications of issue sizes and or elimination of reopenings in certain nominal or real issues. The Committee then addressed the second question in the charge regarding debt management within a framework of improving fiscal trends. Specifically, the Committee was asked to address what practices Treasury and market participants should consider in a significantly improving fiscal or surplus environment, given volatility in budget forecasts and the Administration's long-term plan to balance the budget. In addition, the Committee was asked to discuss what lessons can be learned from the 1998-2002 experience. A presenting member led the discussion with a high level overview of the current debt management framework-- where the framework is working-- and where Treasury might consider improvements. The member cited three key areas in the overall framework 1) debt management 2) cash management, and 3) risk management. In the area of debt management, the member felt Treasury had adequate tools to manage the debt in all environments. The set of tools, which have been clearly elucidated to market participants, includes changing issue sizes, frequencies, and finally, the menu of offerings. Debt management has been proceeding very well on all fronts, according to the member, particularly with respect to transparency and issuance decisions. Transparency worked greatly to Treasury's advantage in reducing borrowing costs. The member noted that Treasury has used buybacks in the past and should be prepared to use this tool in the future should the fiscal outlook rapidly improve. Regarding buybacks, the presenting member pointed out that Treasury had used one form of buybacks quite effectively in the past, and it may want to study another form of the buyback called "the switch" which is used by other countries. A switch involves issuing debt in one part of the yield curve to repurchase debt in another part of the curve. The member pointed out that previous buyback program had created significant cost savings for Treasury according to one study. The member also suggested the idea of continuous buybacks in small sizes to better balance the overall portfolio and maturity structure. In the area of cash management, the member noted that the timing of receipts often presented problems for Treasury, and that the Treasury Tax and Loan program was suboptimal from both a capacity and return standpoint. The member suggested that Treasury consider using excess cash to buy short-term bills and coupons and also consider engaging in repurchase agreements. Both options may offer greater returns to the Treasury. The presenting member then discussed Treasury's risk management, noting at the outset that other countries were further ahead in this area than the US. Specifically, the member suggested that Treasury consider using derivative transactions and swaps to change rollover risk. The member noted that such transactions would introduce credit risk into Treasury's portfolio, and that Treasury would need to decide if it wanted to accept such risk. The member noted that other counties such as Australia and Canada used these tools to continuing issuance despite having surpluses. The presenting member than solicited comments and reaction from other Committee members. One member stated that the way the past buyback program operated, in which Treasury asked the market for offers on a basket of securities and selected only the best offers, was not good for real-money accounts because there was uncertainty about which issues would be repurchased. Other members pointed out that the former buyback program, which focused generally on the long end of the market, was predicated on the idea that the US would be in surplus indefinitely and as such, long-term funding was no longer needed. Those members pointed out that fiscal outlooks change rapidly, and that such a motivation may have led to less than optimal repurchases. A discussion arose whether Treasury should engage in continuous buybacks - continuous purchases of small lots in the market in the range of $50 to $100 million to retire debt - as opposed to the buybacks in the past, which were reverse auctions as large a $3 billion. Several members thought continuous buybacks were not advisable because it may not fall into Treasury's regular and predictable behavior framework. Another member suggested that using excess cash to opportunistically retire maturing debt – particularly when large maturities were coming due – was prudent. With regard to using swaps, several members member thought that using such a tool ran counter Treasury's objectives. The Committee generally agreed that Treasury should continue to review its debt, cash, and risk management tools in light of the rapidly improving fiscal outlook in the event such instruments are necessary sooner rather than later. Finally, the Committee was asked about trends related to international flows and capital investments, and if the Committee had any thoughts or suggestions with regard to these trends and the impact of the trends on Treasury's mission. A Committee member presented a series of slides describing and characterizing international capital flows both into and out of the U.S. The member shared his thoughts on capital flows into various US capital markets including fixed income (Treasuries, agencies, corporate bonds), equities, direct investments (merger and acquisition related transactions), and private equity. The member noted the diverse set of inflows and the importance such inflows play in the U.S. economy. The Committee member noted that foreign capital inflows provide a rising share of U.S. debt financing and allow stable U.S. investment, despite low savings, at lower interest rates. Estimates regarding how much lower rates are from these foreign capital inflows varied between 20 and 150 basis points, though such estimates are extremely difficult to verify. The member also stated that the U.S. net foreign investment position is still modest relative to GDP, but is forecasted to grow significantly in coming years. The member noted that sources of foreign inflows are vulnerable to disruptions due to potential protectionist legislation, and that Congress should be wary of passing legislation related to international investment given their potential far reaching consequences. Several members agreed that international investment was critical to ensuring strong, competitive capital markets in the United States. One member noted that opportunities abound globally, but that international investors still seek U.S. investments in one form or another given the depth of its markets. Another member noted that the recent trend in establishing sovereign investment vehicles in Norway, China, Korea and other nations was a natural trend and that large flows of capital would still seek the most liquid, developed capital markets in the long run. One member suggested that Treasury offer products tailored to central banks given the amount of liquidity which they are seeking. Director Ramanathan noted that Treasury seeks to have the broadest base of investors through its security offerings, and that tailoring specific products for specific audiences was currently not being contemplated. Several members noted that the market needed to be aware that international investments came from many avenues and through many vehicles, and that forming a conclusion based on reviewing just one sector of the market, be it equities or Treasuries, was not wise. The meeting adjourned at 12:55 p.m. The Committee reconvened at the Hay-Adams Hotel at 6:10 p.m. All Committee members were present except for Richard A. Axilrod and Gary Cohn. The Chairman presented the Committee report to Assistant Secretary Ryan. A brief discussion followed the Chairman's presentation but did not raise significant questions regarding the report's content. The meeting adjourned at 6:20 p.m.

 

TREASURY ASSISTANT SECRETARY FOR FINANCIAL MARKETS ANTHONY RYAN MAY 2007 QUARTERLY REFUNDING STATEMENT WASHINGTON, DC

 - We are offering $32.0 billion of Treasury securities to refund approximately $54.6 billion of privately held securities maturing on May 15 and to pay down approximately $22.6 billion. The securities are: - A new 3-year note in the amount of $14.0 billion, maturing May 15, 2010; - A new 10-year note in the amount of $13.0 billion, maturing May 15, 2017; - A reopening of the 30-year bond in the amount of $5.0 billion, maturing February 15, 2037 These securities will be auctioned on a yield basis at 1:00 PM EDT on Monday, May 7, Tuesday May 8, and Thursday, May 10, respectively. All of these auctions will settle on Tuesday, May 15. The balance of our financing requirements will be met with weekly bills, monthly 2-year and 5-year notes, the June 10-year note reopening, and the July 10-year TIPS and 20-year TIPS reopening. Treasury also is likely to issue cash management bills in late May and early June. Debt Issuance Considerations Since our February 2007 statement, Treasury's ongoing monitoring of the fiscal and economic outlook has resulted in our decision to discontinue issuance of the 3-year note. Discontinuing the 3-year note will allow Treasury to ensure large liquid benchmark issuances, better balance its portfolio, and manage the improving fiscal outlook. The final scheduled auction of the 3-year note will be held on May 7, 2007. Treasury will continue to assess the fiscal and economic outlook and to review the size, frequency and issuance of securities. Thirty-Year Bond Issuance As noted in our August 2006 statement, Treasury will auction a new 29 ¾ - year bond with three months' accrued interest in August 2007, followed by a reopening of that bond in November 2007. This new 29 ¾ - year bond will mature in May 2037. Treasury Markets and Investor Participation Treasury places great importance on maintaining a highly liquid and efficient government bond market. As part of ongoing efforts to enhance the efficiency of debt management operations, including reducing risks and lowering borrowing costs, we are examining ways to enhance our cash and debt management practices. In addition, as we stated in February, we are in the process of updating our auction system. With respect to overall market efficiency and participation, Treasury acknowledges and supports private sector efforts to enhance the operating integrity of the Treasury marketplace, including the creation of principles-based guidance for all stakeholders in the US Treasury markets. Please send comments and suggestions on these subjects or others relating to Treasury debt management to debt.management@do.treas.gov. The next quarterly refunding announcement will take place on Wednesday, August 1, 2007.

 

April 30

 

Testimony of Dan Iannicola, Jr.
Deputy Assistant Secretary for Financial Education
Before the U.S. Senate Subcommittee on Oversight of
Government Management, the Federal
Workforce, and the District of Columbia

Washington, DC- Good afternoon Chairman Akaka, Ranking Member Voinovich and distinguished members of the Subcommittee. Thank you for this opportunity to appear before you today to talk about the important issue of financial literacy in America. As Financial Literacy Month comes to a close, I would like to recognize the strong bi-partisan emphasis on this important topic. Thank you for sponsoring the Senate resolution supporting April as Financial Literacy Month. I would like to commend the House for their recognition of Financial Literacy Month as well. Additionally, President Bush issued a statement observing April as Financial Literacy Month.

Good afternoon Chairman Akaka, Ranking Member Voinovich and distinguished members of the Subcommittee. Thank you for this opportunity to appear before you today to talk about the important issue of financial literacy in America. As Financial Literacy Month comes to a close, I would like to recognize the strong bi-partisan emphasis on this important topic. Thank you for sponsoring the Senate resolution supporting April as Financial Literacy Month. I would like to commend the House for their recognition of Financial Literacy Month as well. Additionally, President Bush issued a statement observing April as Financial Literacy Month.

Secretary Paulson, along with the rest of the Administration, believes in the importance of increasing financial literacy levels across our nation. In fact, just last week President Bush recommitted his Administration to the cause of financial literacy and charged Secretary Paulson with building on the Financial Literacy and Education Commission's efforts to bring financial education to all Americans. Mr. Chairman, I commend you for your continued leadership on the issue of financial education and for focusing a national spotlight on this critical topic.

I would like to briefly discuss the financial literacy issue we are faced with, then discuss the responses to that issue to date and conclude with a discussion of next steps.

The Issue

Today Americans are faced with a robust marketplace of financial products and services which give them many more options than ever before in structuring their finances. However this has not always been the case. For example, there used to be only a few ways to finance a home, now there are numerous mortgage options. Credit cards used to be hard to come by, now consumer credit is widely available. At one time your employer managed your retirement, now with the steady migration from defined benefit plans to defined contribution plans, the individual has much more to think about.

Times have changed on us. This generation doesn't know any less about money than our parents or grandparents. It is simply that we need to know more now than they did then. It is as if every American has awoken to find himself or herself promoted to the position of CFO of his or her own household. Are we ready for the job? And if not, how do we address the new reality that our economic choices have simply outpaced our financial knowledge?

The answer, of course, is financial education. Only when we learn more about our money will we be able to move forward confidently in the modern financial marketplace. As a nation we need to learn more about saving and investing, using credit wisely, avoiding fraud and a number of other financial topics.

The Response

Three players are responding to the financial literacy issue: non-profits, businesses and the government.

Non-profits

Non-profit organizations of many varieties are involved in financial education. Some are large national organizations, while others are community-based groups that operate on the grass roots level. They address a variety of financial education issues for adults like banking the unbanked, providing credit counseling or free tax preparation, or helping people build assets to prepare for financial emergencies or to achieve financial goals. Other non-profits, including schools, center their efforts on young people. Some of these groups focus on school based programs that train students and teachers on money matters while other groups focus on reaching youth outside of the classroom.

Businesses

Many companies have also wisely recognized financial education as a cause worthy of their attention. Some companies develop curricula or donate funds for use in support of youth and adult financial education programs. Other companies encourage their associates to volunteer their time on financial literacy programs of non-profit organizations. Still other private sector firms devote resources to financially educate their own employees on money matters.

Federal Government

While the efforts of state and local governments to spread financial education have been commendable, this testimony will focus on the efforts at the federal level.

The Department of the Treasury supports the expansion of financial education both through its own work and through its leadership of a multi-agency commission. I will describe both roles.

Department of the Treasury

Several bureaus and offices within the Treasury Department work in the field of financial education. These include the Bureau of Public Debt (BPD), Internal Revenue Service (IRS), Mint, Office of the Comptroller of the Currency (OCC), Office of Thrift Supervision (OTS), and the Office of the Treasurer. While all of these offices perform important tasks in financial education, Treasury's main effort in the field is conducted by its Office of Financial Education.

In 2002 Treasury established the Office of Financial Education. Since that time, the office has developed rapidly and now stands as a policy leader in the field of financial education in the U.S. and around the world. The office has five key functions.

1) Outreach

First, the office promotes and delivers financial education across the country through its ambitious outreach efforts. The Office has traveled to 42 states and held 304 financial education sessions reaching over 24,000 people and generating 470 media stories. Many of the people reached are educators, counselors, journalists, community leaders, or service providers who themselves engage in financial literacy outreach to many more Americans. This creates a multiplier effect which only increases the office's total impact.

The office has performed its work wherever needed, ranging from classrooms to corporate boardrooms to military bases, and even to the Gulf Coast region to counsel Katrina victims. The office has reached out to students of all ages, teachers, lenders, credit counselors, accountants, attorneys, community activists, the media and the public at large. The message to each group varied according to its specific needs but the theme has been the same, that financial knowledge is an empowering force that helps people improve their lives and realize their dreams.

2) Setting Standards for Quality Programs

The office's second function is to set standards for quality financial education. It does this through the development and dissemination of the "Eight Elements for Successful Financial Education" programs. Financial educators across the country have been using these qualitative standards to evaluate and enhance financial education programs.

3) Technical Assistance

Third, the office operates a Technical Assistance Center in English and Spanish for those seeking advice on establishing or improving financial education programs in their communities.

4) Brokering Partnerships

Fourth, the office uses its unique position within the financial education community to broker partnerships between the supply side and demand side of financial education. Some organizations have financial education resources to offer, while other organizations are in need of such resources. The office works with groups nationwide to help the right people get connected with the right resources to advance financial education.

5) Federal Government Coordination

The fifth and final role of the office is to coordinate financial education efforts across the federal government. Treasury's office of Financial Education performs this task by coordinating the activities of the Financial Literacy and Education Commission. The details of this function are described below

The Financial Literacy and Education Commission

The Fair and Accurate Credit Transactions (FACT) Act of 2003 established a twenty agency group called the Financial Literacy and Education Commission. The FACT Act named the Secretary of the Treasury as chair of the Commission and gave the Commission and Treasury four mandates: a Web site, a hotline, a multimedia campaign and a national strategy.

I will describe progress on each of these projects.

1) Web Site

In October 2004, the Commission launched MyMoney.gov, a Web site designed to be a one-stop shop for federal financial education information which is available in English and Spanish. Operated by the General Services Administration (GSA), the Web site is organized intuitively, the way Americans live their lives instead of the way their government is structured--organized by topic rather than agency. Topics include Paying for Education, Saving and Investing, Home Ownership and Privacy, and Frauds and Scams. MyMoney.gov also provides links to financial education grants offered by different Commission agencies. The site has 399 links and has had 1,717,247 visitors, 1,053,004 in 2006 alone. On the site, visitors can also access an interactive, instructional quiz on financial literacy, view a public service announcement promoting MyMoney.gov and get information on the activities of the Commission.

2) Toll Free Hotline

In October 2004, the Commission also launched a toll free hotline called 1-888-MyMoney. Operated by the GSA, the hotline is available in English and Spanish and permits callers to order a free MyMoney toolkit. The English language toolkit contains eight federal publications covering topics from savings to investing to understanding the Social Security system. The Spanish language toolkit has six publications. To date, the MyMoney Hotline has received 18,781 calls, 15,508 calls in 2006 alone.

3) Multimedia Campaign

The Treasury is working with the Ad Council on the production of a campaign that will address the topic of credit literacy, emphasizing the impact of one's credit score. The project has progressed through the research and focus group stages and is now in the creative stage where advertising professionals are working to develop creative concepts to communicate the campaign message. The campaign is scheduled to launch in the fall of 2007.

4) National Strategy

The FACT Act also required the Commission to develop a national strategy for financial literacy. In April of 2006, the Commission released Taking Ownership of the Future - the National Strategy for Financial Literacy. The Strategy is a comprehensive blueprint for improving financial literacy in America, covering 13 areas of financial education in 13 chapters. At the end of each chapter are specific, numbered calls to action. Most of the actions are assigned to the federal government, but some of the activities are recommendations to the private sector or to individuals.

Since the launch of the Strategy just over a year ago, the Commission has been busy executing these "calls to action." These calls to action are milestones for the Commission which allows us to measure its performance and could not have been accomplished without the cooperation of all 20 member agencies. Below is a summary of progress on the Strategy's calls to action.

Chapter 1: General Saving

1-1 In April of 2007, Treasury and the American Savings Education Council launched a public service announcement on the importance of saving. The PSA promotes the website, MyMoney.gov and toll-free hotline, 1-888-MyMoney.

In April of 2007, Treasury and the American Savings Education Council launched a public service announcement on the importance of saving. The PSA promotes the website, MyMoney.gov and toll-free hotline, 1-888-MyMoney.

Chapter 2: Homeownership

2-1 In July of 2006, the Department of Housing and Urban Development (HUD) and Treasury co-hosted a roundtable which highlighted successful partnerships that have advanced homeownership. During the meeting, the complexity of identifying partners to advance homeownership was discussed at length. Participants cited best practices which have helped with foreclosure prevention, non-traditional mortgage products, and the identification of a variety of hidden costs.

In July of 2006, the Department of Housing and Urban Development (HUD) and Treasury co-hosted a roundtable which highlighted successful partnerships that have advanced homeownership. During the meeting, the complexity of identifying partners to advance homeownership was discussed at length. Participants cited best practices which have helped with foreclosure prevention, non-traditional mortgage products, and the identification of a variety of hidden costs.

Chapter 3: Retirement Saving

3-2 In April of 2006, the Small Business Administration (SBA) linked its online retirement training tools for small businesses to MyMoney.gov. In addition, the Department of Labor (DOL) and IRS developed and released a new publication, Payroll Deduction IRAs, to complement a series on retirement plan options for small employers. DOL conducted six fiduciary education seminars in coordination with IRS, the American Institute of Certified Public Accountants and the Society of Human Resources Management.

In April of 2006, the Small Business Administration (SBA) linked its online retirement training tools for small businesses to MyMoney.gov. In addition, the Department of Labor (DOL) and IRS developed and released a new publication, , to complement a series on retirement plan options for small employers. DOL conducted six fiduciary education seminars in coordination with IRS, the American Institute of Certified Public Accountants and the Society of Human Resources Management.

Chapter 4: Credit

4-1 In 2005, Treasury entered into an agreement with the Ad Council to develop and execute a multimedia public service announcement campaign on credit literacy for young adults. The campaign is scheduled to launch in the fall of 2007. It will also be available in Spanish.

In 2005, Treasury entered into an agreement with the Ad Council to develop and execute a multimedia public service announcement campaign on credit literacy for young adults. The campaign is scheduled to launch in the fall of 2007. It will also be available in Spanish.

Chapter 5: Consumer Protection

5-2 In April of 2006, Treasury released the DVD "Identity Theft: Outsmarting the Crooks," and made it available to the public through MyMoney.gov and 1-888-My Money. To date, 60,750 copies have been distributed.

In April of 2006, Treasury released the DVD "Identity Theft: Outsmarting the Crooks," and made it available to the public through MyMoney.gov and 1-888-My Money. To date, 60,750 copies have been distributed.

Chapter 6: Taxpayer Rights

6-2 In the first full year of the "Go Direct" campaign, which ended in June of 2006, Treasury and the Federal Reserve Banks converted 600,000 paper check recipients to direct deposit enrollees. An additional 160,000 people were enrolled as of December of 2006. The success of the program would not be possible without the cooperation and support of financial institutions across the country. The program will continue through 2007.

In the first full year of the "Go Direct" campaign, which ended in June of 2006, Treasury and the Federal Reserve Banks converted 600,000 paper check recipients to direct deposit enrollees. An additional 160,000 people were enrolled as of December of 2006. The success of the program would not be possible without the cooperation and support of financial institutions across the country. The program will continue through 2007.

6-3 As a result of the Department of Health and Human Services' (HHS) public awareness campaign on the new Medicare drug benefit that encourages seniors and people with disabilities to take a look at their prescription drug coverage options, over 90 percent of those with Medicare have some form of drug coverage. Of those, almost 24 million have prescription drug coverage through the new Medicare Part D benefit. HHS worked with 40,000 partners and conducted more than 12,000 events to educate taxpayers and beneficiaries on enrolling in the Part D program. As of late January 2007, more than 1.4 million beneficiaries have enrolled in Medicare's Part D program since June of 2006, bringing the total number of people with Medicare receiving comprehensive prescription drug coverage to more than 39 million.

As a result of the Department of Health and Human Services' (HHS) public awareness campaign on the new Medicare drug benefit that encourages seniors and people with disabilities to take a look at their prescription drug coverage options, over 90 percent of those with Medicare have some form of drug coverage. Of those, almost 24 million have prescription drug coverage through the new Medicare Part D benefit. HHS worked with 40,000 partners and conducted more than 12,000 events to educate taxpayers and beneficiaries on enrolling in the Part D program. As of late January 2007, more than 1.4 million beneficiaries have enrolled in Medicare's Part D program since June of 2006, bringing the total number of people with Medicare receiving comprehensive prescription drug coverage to more than 39 million.

Chapter 8: The Unbanked

8-1 To date, three regional conferences have been held on how to reach the unbanked. The conferences were held in Chicago, IL in May 2006; Edinburg, TX in December 2006; and Seattle, WA in March 2007. The conferences have touched on topics such as building partnerships and identifying solutions, serving immigrant communities, reaching young customers, and providing financial education to help new and potential bank customers. The conferences were accomplished by the Federal Deposit Insurance Corporation (FDIC), National Credit Union Administration (NCUA), OCC, OTS, Treasury, the Federal Reserve Banks of Chicago, Dallas, and San Francisco, along with assistance from HUD, partnering to bring a wide range of attendees together on the topic of the unbanked population. After the final regional conference is completed in the fall of 2007, a white paper will be released which will summarize the conferences findings and make recommendations based on them.

To date, three regional conferences have been held on how to reach the unbanked. The conferences were held in Chicago, IL in May 2006; Edinburg, TX in December 2006; and Seattle, WA in March 2007. The conferences have touched on topics such as building partnerships and identifying solutions, serving immigrant communities, reaching young customers, and providing financial education to help new and potential bank customers. The conferences were accomplished by the Federal Deposit Insurance Corporation (FDIC), National Credit Union Administration (NCUA), OCC, OTS, Treasury, the Federal Reserve Banks of Chicago, Dallas, and San Francisco, along with assistance from HUD, partnering to bring a wide range of attendees together on the topic of the unbanked population. After the final regional conference is completed in the fall of 2007, a white paper will be released which will summarize the conferences findings and make recommendations based on them.

Chapter 9: Multilingual / Multicultural Populations

9-1 In March of 2007, the first roundtable took place at Treasury and was focused on the Native populations. The roundtable touched on the needs and wants of Native populations and how financial education can help. Other topics included public and private partnerships, access to financial institutions and services, and public awareness events on reservations.

In March of 2007, the first roundtable took place at Treasury and was focused on the Native populations. The roundtable touched on the needs and wants of Native populations and how financial education can help. Other topics included public and private partnerships, access to financial institutions and services, and public awareness events on reservations.

Chapter 10: Kindergarten – Postsecondary Financial Education

10-1 In February of 2007, the Department of Education (ED) and Treasury co-hosted a two-day summit on kindergarten through postsecondary financial education. The summit brought together teachers, students, program providers and researchers from across the country to discuss the role of financial education at school, non-school venues and college level programs to assist others who are starting or enhancing programs. The summit findings will be made available to the public in the summer of 2007.

In February of 2007, the Department of Education (ED) and Treasury co-hosted a two-day summit on kindergarten through postsecondary financial education. The summit brought together teachers, students, program providers and researchers from across the country to discuss the role of financial education at school, non-school venues and college level programs to assist others who are starting or enhancing programs. The summit findings will be made available to the public in the summer of 2007.

Chapter 12: Coordination

12-1 The Commission continues to enhance MyMoney.gov. In 2006, the "Money 20" interactive quiz was added to the Web site, where visitors can test their knowledge with a 20-question online quiz which covers a variety of personal finance issues. Currently, all Commission members have links to MyMoney.gov from their agencies' Web sites.

The Commission continues to enhance MyMoney.gov. In 2006, the "Money 20" interactive quiz was added to the Web site, where visitors can test their knowledge with a 20-question online quiz which covers a variety of personal finance issues. Currently, all Commission members have links to MyMoney.gov from their agencies' Web sites.

12-2 In August of 2006, GSA and Treasury completed the first survey of Federal financial education programs and resources. Findings have shown very little overlap or duplication among Federal financial education efforts. The overlap noted was found to be minor and necessary to the completeness of a particular resource or topic.

In August of 2006, GSA and Treasury completed the first survey of Federal financial education programs and resources. Findings have shown very little overlap or duplication among Federal financial education efforts. The overlap noted was found to be minor and necessary to the completeness of a particular resource or topic.

12-5 In April of 2007, Treasury and Office of Personnel Management (OPM) hosted the inaugural meeting of the "National Financial Education Network" of federal, state and local governments. The network will meet regularly by phone to discuss topics related to financial education.

In April of 2007, Treasury and Office of Personnel Management (OPM) hosted the inaugural meeting of the "National Financial Education Network" of federal, state and local governments. The network will meet regularly by phone to discuss topics related to financial education.

Efficiency

Since part of the focus of this Subcommittee is government management, I wanted to comment briefly on the manner in which this Commission has been managed. During its work, the Commission has sought to carry out the purpose of the FACT Act by coordinating the federal effort and helping the 20 agencies to work together more efficiently on the issue of financial education. Many of the mandates of the FACT Act can be met through such cooperation. The consequence of this is that, in many cases, the Commission has been able to add value without needing to add resources. As good stewards of federal funds, the Commission is obligated to seek the least costly way to meet its obligations under the law. With a number of accomplishments and few expenditures, the Commission has been successful thus far in achieving good value for Congress, the Administration and the American taxpayer.

Government Accountability Office Review of the Commission

In December of 2006, the Government Accountability Office (GAO) issued a report on the Commission. We on the Commission welcomed the insights of GAO on how we could better accomplish our important mission on behalf of the American people. The Commission chose to consider the GAO recommendations as part of the Commission's annual review of the Strategy which is required by the FACT Act. During that review the Commission incorporated many of the GAO recommendations into its 2007 revisions to the Strategy. For instance, GAO recommended that definitions to "financial education" and "financial literacy" be added to the Strategy; in response the Commission defined and incorporated both terms. Also consistent with GAO's recommendations, the Commission plans to conduct usability testing of and measure customer satisfaction with MyMoney.gov by 2009.

Additionally, GAO suggested an independent review of the federal financial education programs and resources. Although the FACT Act does not require an independent review of such programs and resources, the Commission decided to pursue such a review, with the first series of assessments to be completed in 2009. Lastly, GAO recommended that the Commission work closely with private entities and state and local governments to improve financial literacy. In response, on April 17, 2007 Treasury and OPM co-hosted the Commission's inaugural meeting of the "National Financial Education Network" of federal, state and local governments at Treasury. This network will facilitate precisely the type of cooperation called for in the GAO report.

Next Steps

The Strategy outlines clear steps for the Commission to implement in the next few years.

In the remainder of 2007, the Commission will continue working on issues pertaining to credit literacy, general savings, retirement planning, homeownership preservation and youth financial education while performing special outreach to minority communities. To succeed, we will convene those leading efforts in the private and public sectors through regional conferences, national roundtables and an international summit. The Commission will issue policy papers and meeting findings to further national efforts on financial education. In addition, Treasury plans to launch a multimedia campaign. Lastly, the Commission will continue performing regular enhancements to MyMoney.gov and 1-888-MyMoney.

In 2008, the Commission will host a roundtable discussion on insurance issues as well as an academic research symposium on financial education.

Later in 2009, the Commission intends to conduct a usability testing and customer satisfaction survey of MyMoney.gov as well as complete the first series of independent assessments of federal financial education programs and resources.

Conclusion

I hope this discussion has given an insightful overview of Treasury's and the Commission's work on financial literacy.

While it is valuable to look at this issue from a high level as a policy matter, it is also helpful to view it in terms of the individual and the difference it can make to his or her future. Put simply, there are two paths before each person we are all trying to help. The first is a rocky path that leads to a place where the complexity of the marketplace appears overwhelming, where people are easy prey for fraud and where bad choices lead to bad outcomes that can last a lifetime.

The other path travels through financial literacy and it takes people to a place where understanding replaces apprehension, where people make the most of their abundant options and where they have a tangible, enduring stake in their futures – it is a place some of us refer to as the Ownership Society. It comes from the idea that a true community is based more on shared aspirations than shared geography. Each of us wants to provide for our families, have a comfortable retirement and achieve financial security. These goals become more obtainable when we are financially literate, and that is why financial education is a priority for Secretary Paulson and for this Administration. We hope that through our emphasis on increased financial literacy people gain the skills to make better decisions and live better lives.

Now, I will be happy to answer any questions from the Subcommittee concerning financial literacy.

 

 

CROSS-BORDER DERIVATIVES REPORTING SYSTEM BECOMES OPERATIONAL Washington, DC – The Treasury Department today announced that it will begin publication on May 15, 2007, of a quarterly data series on U.S. cross-border derivatives contracts on the Treasury International Capital (TIC) reporting system website. These series are the result of a new TIC data collection and will expand information on U.S. international portfolio capital movements and the U.S. international investment position. Templates for the website derivatives data files and a brief description of the data are available in the news section on the U.S. Treasury TIC web site (www.treas.gov/tic). The new data will provide information on gross positive and gross negative fair-value positions, and on net cash settlements, by type of contract and by country. The data are collected on the basis of the residence of the counterparties, and conform to international guidelines for reporting derivatives data to be used in the computation of the balance of payments accounts and the international investment position. A more complete description of the data will be published by the Federal Reserve Board on its website, also on May 15. The data on U.S. derivatives released on May 15 will cover the period beginning as of December 31, 2005, through December 31, 2006. Thereafter, the data will be updated in January, April, July and October on the day that monthly TIC data are published

 

Treasury Statement on Release of President
Bush’s
ID Theft Task Force Strategy

Washington, DC- President Bush's Identity Theft Task Force today released its strategic plan for combating identity theft, the top consumer fraud reported to the Federal Trade Commission.

- President Bush's Identity Theft Task Force today released its strategic plan for combating identity theft, the top consumer fraud reported to the Federal Trade Commission.

Treasury Deputy Assistant Secretary for Critical Infrastructure Protection and Compliance Policy D. Scott Parsons, who led the Department's efforts with the taskforce, released the following statement today:

"President Bush recognized that identity theft is a crime with global reach and potentially serious consequences for our security and economic well-being. The criminals are sophisticated and the crimes can have a lasting impact on victims' lives.

"Many agencies, like the Treasury, have existing plans to combat identity theft, but this strategy promotes enhanced coordination among federal, state, and local authorities and recognizes the need for private sector participation. The report will serve as a blueprint for preventing and tracking down identity thieves and giving them due justice. More importantly, it charts a course to improve public awareness and data security, to prevent the opportunities for these crimes and to assist victims."

The Treasury Department is a member of the 17-agency task force, co-chaired by Attorney General Alberto Gonzales and FTC Chairman Deborah Majoras. The group, created by executive order in May 2006, developed 31 major recommendations for the plan. More information can be found at www.idtheft.gov.

 

 

Treasury Secretary Henry M. Paulson, Jr. Statement on the 2007 Social Security and Medicare Trust Fund Reports

WASHINGTON--The Social Security and Medicare Board of Trustees met this afternoon to complete their annual financial review of the programs and to transmit the Trustees Reports to Congress. I welcome my Cabinet colleagues and the Public Trustees, Tom Saving and John Palmer, two well-respected experts in their field. The nation is indeed fortunate to have your service.

For decades, Social Security and Medicare have provided vital support for Americans. As the baby boom generation moves into retirement, these programs face progressively larger financial challenges. If we do not take action soon to reform Social Security and Medicare, the coming demographic bulge will jeopardize the programs' ability to support people who depend on them. Without change, rising costs will drive government spending to unprecedented levels, consume nearly all projected federal revenues, and threaten America's future prosperity. I urge my friends in Congress to join me in a bipartisan effort to strengthen both programs for future retirees.

This year's Social Security report again demonstrates that the Social Security program is financially unsustainable and requires reform. In just 10 years, cash flows are projected to turn negative, and the Trust Funds are projected to be exhausted in 2041. Reform is needed and time is of the essence. The longer we delay, the larger the required adjustments will be – and the burden of making those adjustments will fall more heavily on future generations.

Social Security's unfunded obligation - the difference between the present values of Social Security inflows and outflows less the existing trust fund - equals $4.7 trillion over the next 75 years and $13.6 trillion on a permanent basis. The actuarial imbalance expressed as a percent of taxable payroll is 1.95 percent over 75 years and 3.5 percent over the indefinite future. This means that, to make the system whole on a permanent basis, the combined payroll tax rate would have to be raised immediately by about one-third from 12.4 percent to about 15.9 percent, or benefits reduced immediately by 22 percent.

This report confirms the need for action; the sooner we take action to strengthen Social Security's financial footing, the less drastic the needed reforms will be. President Bush has called for solutions that generate a permanently sustainable Social Security system through bipartisan efforts. The President has put forward a number of well-considered ideas. And he has asked me to reach out to lawmakers in both parties and listen to all ideas. We need serious and thoughtful engagement from all sides to make sure Social Security is strengthened and sustained for future generations.

The 2007 Medicare Trustees Report shows even greater financial challenges. Medicare faces the same demographic trends as Social Security, and, in addition, the system must cope with large increases in health care costs.

Cash flow for the Hospital Insurance (HI) Trust Fund is projected to be negative this year and for all subsequent years. The HI Trust Fund is projected to become insolvent in 2019, one year later than projected in last year's report, and the 75-year estimated actuarial imbalance as a percent of payroll is 3.55, a slight deterioration from last year's report. On a permanent basis, the imbalance is unchanged at 5.8 percent of payroll.

The Supplementary Medical Insurance (SMI) Trust Fund, which includes Part B for outpatient services and the new Part D prescription drug benefit, is financed in large part by general revenues as well as beneficiary premiums. SMI expenditures are projected to increase rapidly, resulting in growing pressures on future federal budgets and, in turn, the U.S. economy. General revenue financing for SMI is expected to increase from about 1 percent of GDP in 2006 to nearly 5 percent in 2081.

Today, seniors all over America have guaranteed access to affordable prescription drug coverage. The market-based structure of the new prescription drug benefit appears to be working. Average premiums for Part D have come down this year.

The facts are clear: reforms to both Medicare and Social Security are urgently needed. The serious concerns raised by the Trustees Reports demand the attention of America's policymakers and the public. Americans who depend on Social Security and Medicare are relying on those of us in public to address the long-term funding issues. Successful long-term reform of these programs is a shared responsibility and we all have to rise to the challenge.

 

April 20

STATEMENT ON NORTH KOREAN-RELATED FUNDS FROZEN AT BANCO DELTA ASIA The United States understands that the Macau authorities are prepared to unblock all North Korean-related accounts currently frozen in Banco Delta Asia. Based on previous discussions with Chinese, Macanese, and DPRK officials, as well as understandings reached with the DPRK on the use of these funds, the United States would support a decision by the Macau authorities to unblock the accounts in question. Throughout this process we have appreciated the consistent help, goodwill, and professionalism shown by the Macanese authorities and look forward to continued cooperation between the United States and Macau.

TREASURY, IRS ISSUE FINAL REGULATIONS ON NONQUALIFIED DEFERRED COMPENSATION WASHINGTON, DC--The Treasury Department and the IRS today issued final regulations on the treatment of nonqualified deferred compensation plans and arrangements under section 409A of the Internal Revenue Code. "Since the enactment of section 409A in 2004, Treasury and the IRS have worked hard to develop these regulations on the treatment of nonqualified deferred compensation plans," said Treasury Assistant Secretary for Tax Policy Eric Solomon. "These regulations comprehensively address how employers can identify nonqualified deferred compensation plans and arrangements subject to section 409A and provide rules to help employers and employees comply." The regulations provide guidance regarding the requirements for deferral elections and payment timing under section 409A. Affected plans and arrangements are required to comply with documentation requirements established in the final regulations by December 31, 2007. The final regulations generally implement the rules provided in the proposed regulations published on September 30, 2005, but include revisions reflecting numerous comments received from the public. The regulations are in response to legislation enacted by Congress in 2004 to address concerns involving reported abuses of nonqualified deferred compensation plans. Published along with the regulations was Notice 2007-34, which includes additional guidance regarding the application of section 409A to split-dollar life insurance arrangements and provides that certain amendments of such arrangements to comply with section 409A will not be treated as a material modification. A copy of the final section 409A regulations and a copy of Notice 2007-34 are attached. Related Documents: Final Regulations on Nonqualified Deferred Compensation (TD 9321.pdf) http://www.treas.gov/press/releases/reports/td9321.pdf Notice 2007-34 http://www.treas.gov/press/releases/reports/notice200734.pdf

STATEMENT BY TREASURY SECRETARY HENRY M. PAULSON, JR. FOLLOWING MEETING OF G-7 FINANCE MINISTERS AND CENTRAL BANK GOVERNORS Washington, DC--I was pleased to host the G-7 Finance Ministers and Central Bank Governors today here in Washington. We addressed many important issues on a very full agenda. The current global expansion provides a positive backdrop to our discussions. The U.S. economy is healthy and is making a transition to a sustainable expansion. GDP growth in the 4th quarter was 2.5 percent and U.S. output is up by 3.1 percent over the past 4 quarters. Inflation remains moderate and the U.S. labor market is healthy, with low unemployment, steady job gains, and strong real wage growth. The overall strength of the U.S. economy has led to an improved federal budget situation over the past two years. The deficit, which was 1.9 percent of GDP in FY2006, has been cut in half three years ahead of schedule and the Administration's budget projects a return to a surplus by 2012. We continue to watch developments in the subprime mortgage market. While challenges in this market do not appear to pose a serious risk to the overall economy, many families have been affected. As I testified before Congress earlier this month, we are working closely with housing sector regulators on this issue. Nevertheless, we remain aware of risks to the world economy. Fuel prices remain high and volatile. Protectionist pressures are rising. Global financial markets are vulnerable to reversals, as we saw earlier this year, though the system has proved to be resilient and adjustments orderly. My colleagues and I discussed the initial progress made towards implementing policies to help reduce global imbalances, including some rebalancing of global demand. However, more needs to be done. We need global demand to be underpinned by strong domestic demand in major economies such as Japan and Europe, and the cyclical upswings need to be translated into lasting improvements in potential growth. Greater exchange rate flexibility and stronger domestic demand in China are critical parts of rebalancing, and it is crucial that China move now with greater urgency. Oil exporters also need to undertake measures to increase investment and consumption. Tonight I will have a working dinner with my G-7 and Chinese colleagues. We will be joined by our counterparts from Russia, Saudi Arabia, and the United Arab Emirates to discuss investment flows from oil exporters to gain a sharper understanding of this increasingly important issue. I have emphasized that our capital markets in the United States and abroad are vital to global economic growth. At our meetings today, I talked with my colleagues about the United States' approach to private pools of capital, including hedge funds, provided by the U.S. President's Working Group on Financial Markets (PWG). The PWG recognized the rapid growth of this industry and the increasing complexity of the financial instruments that hedge funds use. The U.S. federal regulators and policymakers unanimously moved in February to give unified, forward-leaning guidance for market participants for enhanced vigilance and market discipline. The PWG will continue to encourage market participants to take up this guidance. In our meetings today, we also discussed how robust domestic bond markets are necessary for the growth and stability of all economies, including the emerging markets. We continued our discussion about securities and mutual recognition among comparable regulatory regimes. In today's global marketplace, I believe this is an idea well worth considering and I will be supportive of our regulators' efforts to make progress in this area. We are at a critical juncture for progress on the Doha Development Round of trade negotiation, and we had a serious discussion on the way forward. I urged my fellow Finance Ministers to encourage their trade ministers to achieve an ambitious deal because of the Round's potential to stimulate growth and economic development. Substantial progress on services, including financial services, must be integral part of a development round, so Finance Ministries need to work together to reinvigorate the financial services negotiations. Progress must be based on a substantive break-through. As major shareholders of the IMF, the G-7 have a strong interest in safeguarding the legitimacy and effectiveness of that institution. To do so, we must make the IMF look more like the world economy in which it operates. The rise of emerging markets needs to be reflected in the IMF's governance structure. That is why it is essential, first and foremost, that we be bold and follow through with fundamental reform of IMF quotas. I think there is a path forward that could achieve this objective, but doing so will require a rededication by many countries to the understanding that a strong IMF benefits us all. A more representative IMF, however, will mean little without significant improvements in the institution's surveillance over exchange rate policies. For this reason, the G-7 reaffirmed our strong support for quick action to update the IMF's 30-year-old principles and procedures for exchange rate surveillance. We had a good discussion on policies to promote development in low-income countries, especially ways to address debt sustainability concerns. Responsible lending policies and practices are fundamental to our efforts to enhance support to low-income countries. The key to preserving debt sustainability is to build upon and support the work reflected in the IMF/World Bank Joint Debt Sustainability Framework, and for all creditors to incorporate the framework into their lending practices. We reaffirmed our commitment to vigorously counter money laundering, terrorist financing, and other illicit finance to promote the stability and integrity of the international financial system. We called on the Financial Action Task Force (FATF) to address emerging threats, including the threat of WMD proliferation finance, and to enhance implementation of FATF standards around the world. Energy efficiency and security were also on the agenda. The United States is committed to improving energy security and tackling the important issue of climate change, as evidenced by the Administration's January announcement of the "Twenty in Ten" initiative. I urged my colleagues to explore creative policies to address these issues that will engage developing countries. We also need to explore options for accelerating market penetration of low-carbon energy technologies. Solving climate change is fundamentally a technology challenge, so we must consider how best to achieve this goal. Thank you.

 

STATEMENT BY U.S. TREASURY SECRETARY HENRY M. PAULSON, JR. AT THE INTERNATIONAL MONETARY AND FINANCIAL COMMITTEE MEETING WASHINGTON, DC--Today's meeting is taking place against the backdrop of a continued strong and resilient global economy, which provides a favorable setting for overcoming the challenges we face. Both advanced and emerging economies have put in place improved policy frameworks that are underpinning sustained growth. With global growth expected to be near 5% this year, the past five years mark the strongest period of world growth since the early 1970s. Recent bouts of moderate financial turbulence, in mid-2006 and again in early 2007, have tested the system, but it has performed well. While ongoing vigilance is required, inflation risks appear contained and international trade continues to expand. Prospects for the U.S. economy are good. While economic activity slowed below potential in late 2006, we expect GDP growth to rebound to 3% by the end of this year. Inflation risks appear to be contained, while the labor market is healthy – with 7.8 million new jobs created since mid-2003, low unemployment and strong real wage growth. I am happy to report that the U.S. continues to make excellent progress in steadily shrinking our federal fiscal deficit, which fell from 3.6% in FY2004 to 1.9% in FY2006, a pace faster than most thought likely. We are committed to keeping the U.S. economy open to trade and investment, which underpins our economic strength, and to opposing protectionism whenever and wherever it arises. Trade liberalization remains essential to economic growth for all countries and a key catalyst for poverty reduction in the less developed countries. Now that Doha Round negotiations have resumed, we must seize the opportunity to reach agreement. All countries will benefit from an agreement, and all countries – both developed and developing – must contribute through real market access commitments in agriculture, manufacturing, and services, including financial services. The financial sector in particular is the backbone of a modern economy with virtually every other sector of the economy depending on its services. Over the last several months, the United States has been a participant in the IMF-sponsored Multilateral Consultations on global imbalances. While these consultations were never intended to produce joint policy commitments, they have still contributed importantly to improved understanding about the participants' shared responsibilities for promoting adjustment of imbalances. Indeed, there has been some re-balancing of global demand over the last year, but it is important to ensure that the cyclical upturn now underway in many countries is translated into lasting improvements in underlying potential growth. Looking forward, we hope for faster sustained demand growth from Europe and Japan, more demand growth from major surplus countries, and greater exchange rate flexibility in Asian emerging economies, especially China. The counterpart to a falling U.S. trade deficit, by definition, is falling trade surpluses in other economies. Progress on IMF Reform The IMF is an essential organization for international monetary cooperation. It has proven this since its inception – fostering growth and integration in the wake of World War II; strengthening international surveillance after the breakdown of the Bretton Woods System; helping the global financial system overcome the debt crises of the 1980s and 1990s; and facilitating the transition of command economies. In serving the global economy, the Fund has adapted to changing times while adhering to its basic principles. The world is fast changing again. For the IMF to remain modern and relevant, it must re-invent itself. That is what our discussions on the Medium Term Strategy are all about. First and foremost, the IMF must fundamentally reform its approach to surveillance over exchange rates. Let us be clear: exercising firm surveillance over members' exchange rate policies is the core function of the institution. The 1977 Decision on Surveillance over Exchange Rate Policies must be updated to reflect the dramatic rise of capital flows and the wider use of market-determined floating exchange rates, and to sharpen the focus on fundamental exchange rate misalignment. This should enable firmer surveillance in areas where market forces are not the prevailing paradigm, such as insufficiently flexible exchange rate regimes, or areas where macroeconomic policies and performance are poor even if the exchange rate freely floats. The updating should be accomplished in a manner that creates no new obligations under the IMF Articles. It should also incorporate the realities of how surveillance is actually undertaken in this day and age, and ensure that the conduct of surveillance is even-handed and candid. If exchange rate issues are not debated critically and openly at the Fund, alternative venues and approaches will necessarily emerge. For us, reform of the IMF's foreign exchange surveillance is the lynchpin on which other reforms depend, and we look forward to action in this important area very soon after these meetings. Moreover, it is not simply enough to revise the 1977 Decision. The IMF staff must do a better job in addressing foreign exchange surveillance on a day-to-day basis, particularly in Article IV reports. Second, as part of the modernization and re-invention process, the IMF's governance structure needs to be overhauled. The Fund no longer looks like the world economy in which we live. Marginal reforms that do not fundamentally alter relative quota shares are insufficient – bold action is needed to boost the share of dynamic emerging market countries. Major emerging markets are producing an increasing share of global output, assuming greater responsibility for the functioning of the system, and will increasingly drive global growth. We continue to support protecting the shares of the poorest countries through an increase in basic votes. We reiterate the commitment of the United States to forgo the additional quota due us in the second stage ad hoc increase beyond what we need to maintain our pre-Singapore voting share and we reiterate our as of yet largely unheard call on other similarly situated countries to join us in doing this. As part of this broader reform package, we have listened to our colleagues in emerging markets and we will support a new liquidity instrument to promote further reduction of vulnerabilities to capital account crises, provided the instrument is well-designed. We expect the instrument to include a high standard for qualification and provide that a country, which fully draws its funding under the instrument and subsequently requires additional resources, do so under a new IMF program. Policy actions to deepen domestic local currency capital markets should be an important part of efforts to mitigate the risks to national balance sheets. Two important external reports have been issued since we last met, both of which have provided useful insights on key issues facing the Fund. The Malan Report on Bank/Fund Collaboration provides recommendations on sharpening the focus of the IMF's work in low-income countries. We very much agree with these recommendations. The Fund has a very important role to play in poor countries, through surveillance, technical assistance, and financing when appropriate. But the IMF is not a development agency, and we strongly concur with the report's recommendation that the IMF's financing role in low-income countries should focus on actual balance of payments needs, as it does in emerging market members. The Crockett Report will help catalyze the Executive Board's thinking on the important issue of how the IMF finances itself in the longer-term. The IMF has ample reserves to cover shortfalls in the immediate term, permitting time to fully consider the merits of the Report's recommendations. In parallel, options for further budget restraint must also be fully explored. If low levels of credit persist, the Board will need to give serious consideration to the appropriate role and size of the IMF going forward. The Report puts forward a number of financing options, and we are prepared to consider each on their merits in time. Since we last met, there has been important progress on strengthening the joint World Bank/IMF Debt Sustainability Framework and Debt Sustainability Analyses (DSAs) for low-income countries. Vigilance will be required to deter the rapid re-accumulation of debt for post-MDRI countries, and we urge emerging bilateral creditors to exercise good judgment and lend responsibly. To this end, we hope that lenders and borrowers will use the DSAs as a tool for analysis and decision making. Vigorous global efforts to combat terrorist financing, WMD proliferation financing, and other forms of illicit financing are necessary to promote international financial stability and global security. We must continue to assist countries in implementing the Financial Action Task Force's (FATF's) international standards on money laundering and terrorist financing. The IMF and World Bank have been major partners in this vital global effort, and we look for their continued close collaboration with FATF going forward. We also call on all countries to fulfill their UN obligations by implementing UN Security Council Resolutions 1540, 1718, 1737, and 1747 against WMD proliferation, particularly the economic and financial provisions of those resolutions. We commend FATF's effort to examine the risks of WMD proliferation financing and to enhance surveillance of emerging threats to the financial system. Thank you.

 

G-7 DEPUTIES EXCHANGED VIEWS WITH THE PRIVATE SECTOR ON HEDGE FUNDS Washington, DC- In the follow up of G-7 Finance Ministers' discussion in Essen on the role of hedge funds, G-7 Deputies had an exchange of views with hedge fund managers, prime brokers and counterparties at the margins of the spring meeting of the Bretton Woods institutions in Washington DC. The meeting was co-chaired by the G-7 presidency, State Secretary Thomas Mirow and Under Secretary of the Treasury, Tim Adams. After hearing a presentation by Under Secretary of the Treasury, Robert Steel, on the "Principles and Guidelines Regarding Private Pools of Capital" of the President's Working Group on Financial Markets, a progress report was given by the chairman of the Financial Stability Forum, Mario Draghi, on the update of the institution's 2000 report on Highly Leveraged Institutions. In addition, the chairman of the "Counterparty Risk Management Policy Group II", E. Gerald Corrigan, briefed participants on the implementation of the group's 2005 report's findings. The discussion with private sector participants focused on best practices on risk management, current hedge fund and private equity regulations and disclosure issues, including a discussion of best practices. G-7 Deputies agreed to keep the matter under further consideration

 

Testimony of Treasury Assistant Secretary For Tax Policy
Eric Solomon
Before the Senate Finance Committee on
Ways to Reduce the Tax Gap

Mr. Chairman, Ranking Member Grassley, and distinguished Members of the Committee, thank you for the opportunity to discuss our strategy to reduce the tax gap, including the legislative proposals included in the President's Fiscal Year (FY) 2008 Budget request to Congress.

The vast majority of Americans pay their taxes voluntarily and on time. The voluntary compliance rate is approximately 85 percent. Nonetheless, there remains a substantial difference between what taxpayers should pay and what they actually pay. The IRS estimates that the tax gap was $290 billion in 2001, after accounting for late payments and enforcement activities. Each year, compliant taxpayers are required to make up for this shortfall.

The Administration is committed to reducing the tax gap without unduly burdening honest taxpayers who currently meet their tax obligations. In September 2006, the Office of Tax Policy released a comprehensive strategy (the Treasury Strategy) to reduce the tax gap. This strategy forms the basis for our legislative and IRS appropriation proposals in the FY 2008 Budget, while also emphasizing that any strategy must take into account additional components such as a commitment to research, improvements to information technology, and strengthening taxpayer service.

Magnitude and Source of Tax Gap

In recent months, there has been a significant level of discussion about the tax gap. Much of this discussion has focused on the IRS's release last February of estimates of the tax gap in 2001. These estimates included the results from the 2001 National Research Program (NRP), which examined compliance with the individual income and self-employment (SECA) taxes. The estimates of compliance with other types of taxes were projections derived from older studies.

Before focusing on our proposals, it is important to differentiate between the gross tax gap and the net tax gap. The "gross tax gap" is the difference between the amount of tax that taxpayers should pay under the tax law and the amount they actually pay on time. The IRS estimates that the gross tax gap was $345 billion in tax year 2001, resulting in a voluntary compliance rate of 83.7 percent. This estimate, however, does not take into account taxes that were paid voluntarily but late, or recoveries from IRS enforcement activities. Taking these factors into account, the "net tax gap" was an estimated $290 billion in tax year 2001, which represents a net compliance rate of 86.3 percent. Thus, $55 billion of the gross tax gap for 2001 is in the government coffers.

These compliance rates are consistent with historical patterns. IRS estimates of voluntary compliance rates have ranged between 80 and 85 percent for over two decades, although research limitations generally prevent us from measuring fluctuations during this time period. The tax gap is not a new problem, and it will not be eliminated overnight.

The tax gap results from a variety of errors, including non-filing, underreporting of taxes, or underpayment of taxes. It is estimated that over 80 percent of the gross tax gap is attributable to underreporting of tax (including underreported income or overstated deductions and credits). Over 40 percent of the gross tax gap is attributable to underreporting of net business income by individuals (affecting both individual income and self-employment taxes).

Noncompliance is highest among taxpayers whose income is not subject to third-party information reporting or withholding requirements. For 2001, it was estimated that 54 percent of net income from proprietors (including businesses, farms, and ranches), rents and royalties was misreported. In contrast, only one percent of tax due on wage income, which is reported by employers and subject to withholding, was not reported to the IRS by return filers in 2001.

IRS data do not reveal the extent to which the tax gap results from intentional evasion rather than unintentional errors by well-meaning taxpayers who are confused by the increasing complexity of the tax law. Determining taxpayer intent during a regular examination is very difficult. For obvious reasons, taxpayers do not concede that their erroneous reporting is intentional, and any analysis of the nature of the error by IRS examiners is inherently subjective. Moreover, complexity provides those taxpayers who are predisposed to taking aggressive positions the opportunity to argue that their errors were unintentional.

It is safe to assume that both intentional and unintentional errors contribute to the tax gap and that any strategy to reduce the gap must address both intentional evasion as well as taxpayer confusion due to the complexity of the tax code.

Treasury's Tax Gap Strategy

These findings suggest the need for a targeted response designed to address the most significant sources of noncompliance. Four key principles have guided the development of our tax gap strategy:

Unintentional taxpayer errors and intentional taxpayer evasion should both be addressed.

Sources of noncompliance should be targeted with specificity.

Enforcement should be combined with a commitment to taxpayer service

Tax policy and compliance proposals should be sensitive to taxpayer rights and maintain an appropriate balance between enforcement activity and imposition of taxpayer burden.

These principles point to the need for a comprehensive, integrated, multi-year strategy to improve tax compliance. Components of this strategy must include: (1) legislative proposals to reduce opportunities for evasion; (2) a multi-year commitment to compliance research; (3) continued improvements in information technology; (4) improvements in IRS compliance activities; (5) enhancements of taxpayer service; (6) simplification of the tax law; and (7) coordination between the government and its partners and stakeholders.

Since release of the Treasury Strategy last September, the Administration has taken a number of steps to implement each of its seven components. The FY 2008 Budget requests $409.5 million in new funding for initiatives aimed at reducing the tax gap. These initiatives include additional compliance research, investments in information technology, enhancements of front-line enforcement activities, and improvements in taxpayer service aimed at increasing voluntary compliance. The Budget also includes 16 legislative proposals designed to reduce opportunities for evasion. In addition, the FY 2008 Budget contains legislative proposals to simplify the tax treatment of families and savings incentives which, if enacted, would help to eliminate some of the complexity that gives rise to unintentional noncompliance.

We have also been working with our partners and stakeholders to develop and refine our tax gap strategy. Commissioner Everson and I held a public roundtable at the IRS last month to discuss ways to address the tax gap. Panelists at the roundtable included a former IRS Commissioner and a former Assistant Secretary for Tax Policy, researchers, and members of organizations representing businesses and preparers. In addition, we have been meeting regularly with Finance Committee staff to discuss and refine our legislative proposals to reduce the tax gap.

Legislative Proposals

As outlined above, development of legislative proposals to reduce opportunities for evasion is one element of our broader strategy to increase taxpayer compliance, improve tax collection, and reduce the tax gap. As presented in the FY 2008 Budget, our compliance legislative proposals fall into four categories: (1) expand information reporting; (2) improve compliance by businesses; (3) strengthen tax administration; and (4) expand penalties. On the front end, the legislative proposals would help to apprise the IRS of the payment of income through third-party information reporting, one of the most effective tools in improving compliance. On the back end, the legislative proposals would increase incentives to comply with existing law through strengthened penalties. The package of legislative proposals includes targeted provisions that, if enacted, would assist the IRS in enforcing the tax law more efficiently and effectively in targeted areas that present risks of noncompliance.

The legislative proposals are designed to reduce the tax gap, not to raise revenue through a change in the baseline against which compliance is measured. In addition, the legislative proposals attempt to reduce the tax gap by making compliance more efficient while balancing the burden placed on compliant taxpayers. If, on the other hand, draconian measures were to be enacted, they could become so burdensome as to detract from voluntary compliance, compounding rather than reducing the tax gap.

Although the legislative proposals set forth an approach toward improved tax compliance, we recognize that they do not come close to eliminating the tax gap. Making collection of the entire tax gap a reality, however, would require universal audits followed by draconian collection practices, imposing prohibitive costs and burdens on taxpayers as well as the IRS, and fundamentally changing the relationship between taxpayers and the government. Through the multi-pronged approach set forth in the Treasury Strategy, however, we can make significant progress in improving compliance.

In addition to the sixteen legislative proposals, the FY 2008 Budget indicates that the Treasury is continuing to develop proposals to improve compliance and reduce the tax gap. In particular, the Budget mentioned that IRS coordination with State governments could be improved. Under current law, State tax agencies may adjust taxpayer returns in response to an IRS audit. A proposal under development would permit reciprocal adjustments by the IRS in response to a State audit determination. This proposal raises technical issues relating to the assessment limitations period that we are currently working to resolve. Another aspect of Federal-State tax coordination could involve expanded information sharing. In particular, State governments maintain databases in connection with numerous licenses issued pursuant to State law, such as driver's and professional licenses. In some cases, States may suspend certain licensing privileges in connection with State tax noncompliance. Access to such State data could assist the IRS in improving Federal tax compliance. The Treasury Department continues to consider the advantages and disadvantages of these additional proposals to improve tax compliance.

Technical Issues

The President's FY 2008 Budget recommends sixteen changes to the tax code that, if enacted, would improve compliance and reduce the tax gap. Since the Budget was released in early February, members of my staff and I have been meeting regularly with Finance Committee staff to discuss and refine the Administration's proposals and to address a number of technical issues that they present. Those discussions have been useful both in improving the proposals and in helping to highlight the challenges that we face in reducing the tax gap through targeted changes to the tax law. A brief description of some of the technical issues arising under several of the legislative proposals will help to frame the issue and illustrate the limitations of legislative solutions to this problem.

Basis Reporting. One of the Budget proposals would require that brokerage firms report to their customers basis information in connection with the sale of certain publicly traded securities. This proposal builds on section 6045 of the Code, which requires reporting of gross sale proceeds, which must be combined with basis information to determine the tax treatment of the sale. The proposal also builds on a growing trend in the securities industry to provide basis information voluntarily to customers.

. One of the Budget proposals would require that brokerage firms report to their customers basis information in connection with the sale of certain publicly traded securities. This proposal builds on section 6045 of the Code, which requires reporting of gross sale proceeds, which must be combined with basis information to determine the tax treatment of the sale. The proposal also builds on a growing trend in the securities industry to provide basis information voluntarily to customers.

The basis-reporting proposal raises a number of technical issues that are derived from the complex treatment of securities sales under our tax laws. Those issues include, for example: (1) defining the universe of "securities" subject to basis reporting; (2) putting mechanisms in place to ensure that brokers subject to the proposal have relevant basis information from both their customers and from issuers of securities; (3) determining basis for so-called "transferred-in" securities that were not purchased through the broker, including securities purchased separately and transferred into a brokerage account, gifts and inheritances; (4) addressing the interaction of the proposal with taxpayer-specific basis adjustment provisions that operate independently of the broker, such as the wash-sale rules in section 1091, the straddle rules in section 1092, and rules requiring capitalization of certain interest and carrying costs under section 263(g); and (5) determining an appropriate effective date to ensures a smooth transition to the new basis reporting regime.

Payment Card Reporting. Technical issues presented by the Budget proposal regarding information reporting on merchant payment card reimbursements also highlight the challenges of our work in this area. Proprietors, merchants, and other business taxpayers frequently receive income through their customers' use of credit or debit cards. While the use of such payment cards creates a paper trail, that trail does not lead to the IRS, unless a revenue agent were to seek it on a case-by-case basis. At the same time, that existing paper trail would make it relatively easy to generate information reports to the IRS, systematically addressing the possibility of unreported income. Because the existing payment-card system routinely delivers exact dollar and cents amounts to the correct payees, often at the speed of electronic dispatch, it is certain that the information that the IRS needs is accessible. Information reports regarding payment-card reimbursements would result in better compliance by merchants who accept these cards.

. Technical issues presented by the Budget proposal regarding information reporting on merchant payment card reimbursements also highlight the challenges of our work in this area. Proprietors, merchants, and other business taxpayers frequently receive income through their customers' use of credit or debit cards. While the use of such payment cards creates a paper trail, that trail does not lead to the IRS, unless a revenue agent were to seek it on a case-by-case basis. At the same time, that existing paper trail would make it relatively easy to generate information reports to the IRS, systematically addressing the possibility of unreported income. Because the existing payment-card system routinely delivers exact dollar and cents amounts to the correct payees, often at the speed of electronic dispatch, it is certain that the information that the IRS needs is accessible. Information reports regarding payment-card reimbursements would result in better compliance by merchants who accept these cards.

Nevertheless, there are numerous technical issues to be addressed. The payment-card system is complex, involving payment-card organizations, merchant acquiring banks, various service providers, and other entities. In the case of a payment card branded with the name of a particular retail chain, the bank may reimburse the retail chain, which in turn may reimburse a franchise proprietor. In this situation, who should obtain the merchant's Taxpayer Identification Number and generate an information report? We have met with representatives of the payment card industry to understand their concerns with the proposal. Many in this industry are concerned with the incremental burden of reporting, including potential duplication of reporting responsibilities, and have requested greater clarity regarding the party responsible for the reporting when there are other agents involved as intermediaries between the banks and the merchants. Others are concerned about how the IRS will use the data. We recognize these concerns and, while the gross reimbursements reported would not be an equivalent to gross income, the proposed information reporting would assist the IRS by providing the merchant's overall volume of payment card sales in relation to expenses claimed and cash transactions reported. The reporting would also assist the IRS in analyzing the accuracy of reporting for payment card sales.

There are also other technical issues presented by the proposal, such as treatment of "charge backs," in which a merchant is debited for the amount that a credit-card company refunded to a consumer attributable to a defective item, as well as payment-card transactions in which a merchant may sell some goods but also provide "cash back" to consumers. The Budget proposal would grant explicit authority to promulgate administrative rules that address such technical complications, by eliminating duplication of reporting requirements and creating exceptions to reporting of amounts that are not useful for compliance purposes.

Erroneous Refund Penalty. Another legislative proposal raising some technical questions is the erroneous refund penalty. Under current law, the accuracy-related penalty that a taxpayer might pay generally would depend on the amount of underpayment of tax. If a taxpayer wrongfully claims a refund, however, there may be no penalty as long as no additional tax liability is attributable to the wrongful claim, as often happens when there has been overwithholding. Consequently, the IRS has observed aggressive behavior that is undeterred by the tax code's current accuracy-related penalty framework, which is geared toward deterrence of reported tax deficiencies. As a practical matter, some taxpayers and their advisors may be taking advantage of the existing penalty structure by aggressively claiming credits that generate refunds, in an effectively risk-free gamble. To address this problem, our proposal would impose a penalty on an unreasonable claim for refund or credit.

. Another legislative proposal raising some technical questions is the erroneous refund penalty. Under current law, the accuracy-related penalty that a taxpayer might pay generally would depend on the amount of underpayment of tax. If a taxpayer wrongfully claims a refund, however, there may be no penalty as long as no additional tax liability is attributable to the wrongful claim, as often happens when there has been overwithholding. Consequently, the IRS has observed aggressive behavior that is undeterred by the tax code's current accuracy-related penalty framework, which is geared toward deterrence of reported tax deficiencies. As a practical matter, some taxpayers and their advisors may be taking advantage of the existing penalty structure by aggressively claiming credits that generate refunds, in an effectively risk-free gamble. To address this problem, our proposal would impose a penalty on an unreasonable claim for refund or credit.

The proposal seeks to create a parallel system of deterrence applicable even if the taxpayer is in a refund, rather than a deficiency, procedural posture, thus stemming the tide of aggressive claims that are made without reasonable basis or reasonable cause, regardless of the procedural context. There remain open questions about the scope of this proposal. In addition to refunds, should the proposal cover erroneous claims that purport to reduce tax liability? Should there be a threshold amount below which the proposed penalty would not apply? If a taxpayer were subject to penalties in addition to the proposed penalty, in which stacking order should the multiple penalties apply? Should the proposed penalty apply to excise or other types of taxes in addition to income taxes? The goal of the Treasury proposal would be to assert the highest applicable penalty, without duplication of penalties. In this regard, the Treasury proposal's creation of the new penalty would carve out Earned Income Tax Credit (EITC) refund claims from the scope of the penalty because these claims are already governed by their own compliance regime.

Prison Scam Disclosure Authorization. The Treasury Department's proposal for disclosure of certain tax violations by Federal and State prisoners would allow the IRS to disclose limited information about such violations so that prison officials could deter such conduct through administrative sanctions. Under existing law, when the IRS discovers that prison inmates are making fraudulent refund claims, taxpayer privacy laws do not permit the IRS to share this information with prison officials, who may be most proximately positioned to address this misconduct. While cooperation among law enforcement officials would appear to be reasonable, numerous technical questions have arisen. What information should be disclosed? When would be the proper time for disclosure, during or after an investigation? To whom should a disclosure be made, Federal officials, State employees, or local wardens? What limitations should be imposed on further use of the IRS information? Does the proposal properly preserve prisoner rights?

. The Treasury Department's proposal for disclosure of certain tax violations by Federal and State prisoners would allow the IRS to disclose limited information about such violations so that prison officials could deter such conduct through administrative sanctions. Under existing law, when the IRS discovers that prison inmates are making fraudulent refund claims, taxpayer privacy laws do not permit the IRS to share this information with prison officials, who may be most proximately positioned to address this misconduct. While cooperation among law enforcement officials would appear to be reasonable, numerous technical questions have arisen. What information should be disclosed? When would be the proper time for disclosure, during or after an investigation? To whom should a disclosure be made, Federal officials, State employees, or local wardens? What limitations should be imposed on further use of the IRS information? Does the proposal properly preserve prisoner rights?

Collection Due Process. Similar questions may arise regarding the Treasury Department's proposal to amend the Collection Due Process (CDP) procedures as they apply to employment taxes. Employment taxes include employer and employee shares of Federal Insurance Contribution Act (FICA) tax as well as Federal Unemployment Tax Act amounts and income tax withheld from employee wages. Employee FICA shares and withheld income tax constitute the largest portion of employment taxes. These taxes are often referred to as "trust fund" taxes, because employers are supposed to hold them in trust for the government after they are withheld from employee wages. These amounts include Social Security Trust Fund taxes credited to employees, whether or not actually paid to the Treasury.

. Similar questions may arise regarding the Treasury Department's proposal to amend the Collection Due Process (CDP) procedures as they apply to employment taxes. Employment taxes include employer and employee shares of Federal Insurance Contribution Act (FICA) tax as well as Federal Unemployment Tax Act amounts and income tax withheld from employee wages. Employee FICA shares and withheld income tax constitute the largest portion of employment taxes. These taxes are often referred to as "trust fund" taxes, because employers are supposed to hold them in trust for the government after they are withheld from employee wages. These amounts include Social Security Trust Fund taxes credited to employees, whether or not actually paid to the Treasury.

Unpaid employment tax liabilities are some of the most difficult taxes for the IRS to collect. In some cases, an employer may be able to retain employees and stay in business by paying only net wages, even if he or she cannot pay employment tax. Employment taxes are due quarterly and, when there are successive failures to pay quarterly employment tax installments, they continue to accrual over successive periods resulting in a "pyramid" of liability. In a case like this, employment taxes often pile up while the IRS attempts to collect, ultimately by imposing a levy. Under the CDP provisions in the Code, the IRS generally must provide the taxpayer with notice and an opportunity for an administrative hearing, with judicial review, before levy. In the employment tax context, an opportunity for a CDP hearing must be provided for every quarter that there are unpaid taxes the IRS seeks to collect. By the time this CDP procedure is completed, the employment taxes may have become uncollectible, even if determined to be due by the end of the review.

The Treasury Department's proposal would add employment taxes to the exception that allows a CDP hearing to be held within a reasonable time after, rather than before levy. While collection of employment taxes would be in the best interest of employees and the Federal Trust Fund, there nevertheless may be concerns that amendment to the CDP provision might abridge taxpayer rights. On the other hand, the opportunities available to the taxpayer who in good faith seeks to address an unpaid employment tax balance prior to levy and the urgency of the pyramiding problem are factors that support the adoption of the proposal. To be clear, under the proposal, employment tax returns showing a balance due would not be subject to levy until after the IRS has made several attempts to correspond with the taxpayer regarding the balance due a process whereby taxpayers have several opportunities to contact the IRS and enter into a voluntary payment arrangement prior to enforced collection. Those taxpayers who fail to address payment would be subject to a levy, and would have the opportunity for a post-levy CDP hearing.

We are pleased that a number of the Budget proposals have been introduced and considered in different legislative vehicles this year. We look forward to working with the Committee to address the technical issues so these proposals can achieve their intended purposes.

Regulatory Projects and Other Initiatives

The Treasury Strategy identified our published guidance program as an important component of the multi-pronged strategy to improve compliance. Published guidance clarifies ambiguous areas of the law, increasing voluntary compliance. With the increasing complexity of the tax law, it is more important than ever for us to publish timely guidance to give direction to those taxpayers who make a good faith effort to comply with the law, but have difficulty doing so because of uncertainty in its application. Published guidance is also an important tool to target specific areas of noncompliance and prevent abusive behavior.

Each year, the Treasury Department and the IRS publish a Priority Guidance Plan. The 2006-2007 plan includes 264 guidance projects scheduled for completion between July 2006 and June 2007. Numerous projects are added during the year as new tax laws are enacted or new compliance issues are identified.

Recent published guidance projects that will improve compliance and that target potential areas of abuse include:

Transfer Pricing: We have produced, and continue to produce, significant guidance in the area of transfer pricing. In an increasingly globalized economy, cross-border transactions between controlled entities present significant compliance challenges, making guidance in the transfer pricing area an important part of our administrative efforts to address the tax gap. In August 2006, we issued temporary and final regulations addressing the treatment of cross-border services, and followed them up with additional guidance in December 2006. We issued proposed transfer pricing regulations addressing cost-sharing in August 2005. We intend to finalize both sets of regulations, with appropriate modifications.

: We have produced, and continue to produce, significant guidance in the area of transfer pricing. In an increasingly globalized economy, cross-border transactions between controlled entities present significant compliance challenges, making guidance in the transfer pricing area an important part of our administrative efforts to address the tax gap. In August 2006, we issued temporary and final regulations addressing the treatment of cross-border services, and followed them up with additional guidance in December 2006. We issued proposed transfer pricing regulations addressing cost-sharing in August 2005. We intend to finalize both sets of regulations, with appropriate modifications.

Foreign Tax Credit: We have taken strong steps to halt misuse of the foreign tax credit. Last month we issued proposed regulations that would disallow foreign tax credits tied to participation in certain artificially engineered, highly structured transactions. In August 2006, we issued proposed regulations that would address the inappropriate separation of creditable foreign taxes from foreign source income. We intend to make appropriate modifications and finalize both sets of regulations as soon as possible.

: We have taken strong steps to halt misuse of the foreign tax credit. Last month we issued proposed regulations that would disallow foreign tax credits tied to participation in certain artificially engineered, highly structured transactions. In August 2006, we issued proposed regulations that would address the inappropriate separation of creditable foreign taxes from foreign source income. We intend to make appropriate modifications and finalize both sets of regulations as soon as possible.

Information Sharing: We continue to update and expand our network of tax treaties and tax information exchange agreements ("TIEAs"). We are also renegotiating tax treaties that do not have sufficient limitation on benefits or exchange of information provisions. We are entering into new TIEAs, such as the one signed with Brazil in March 2007, and bringing signed TIEAs into force, with jurisdictions such as the Netherlands Antilles, the British Virgin Islands, and the Cayman Islands. These information-sharing agreements are critical tools for the IRS to combat cross-boarder aspects of compliance.

: We continue to update and expand our network of tax treaties and tax information exchange agreements ("TIEAs"). We are also renegotiating tax treaties that do not have sufficient limitation on benefits or exchange of information provisions. We are entering into new TIEAs, such as the one signed with Brazil in March 2007, and bringing signed TIEAs into force, with jurisdictions such as the Netherlands Antilles, the British Virgin Islands, and the Cayman Islands. These information-sharing agreements are critical tools for the IRS to combat cross-boarder aspects of compliance.

Private Annuities: In October 2006, we published proposed regulations regarding the Federal tax treatment of private annuity contracts. Recent Congressional hearings have highlighted how taxpayers were applying prior law treatment of these contracts to facilitate abusive private annuity arrangements, often involving off shore issuers. The proposed regulations, when adopted as final, will shut down those arrangements.

: In October 2006, we published proposed regulations regarding the Federal tax treatment of private annuity contracts. Recent Congressional hearings have highlighted how taxpayers were applying prior law treatment of these contracts to facilitate abusive private annuity arrangements, often involving off shore issuers. The proposed regulations, when adopted as final, will shut down those arrangements.

Trust Information Reporting: In 2006, we published a series of regulations that provide a comprehensive set of information reporting rules for grantor trusts where ownership interests in those trusts are held indirectly. Historically, taxpayers who held such interests were often unable to comply fully with their tax obligations because they lacked necessary information about the activities of the trust. This project highlights work that can be done administratively to ensure that taxpayers who make every effort to meet their obligations have the information they need to determine and report their liability accurately.

: In 2006, we published a series of regulations that provide a comprehensive set of information reporting rules for grantor trusts where ownership interests in those trusts are held indirectly. Historically, taxpayers who held such interests were often unable to comply fully with their tax obligations because they lacked necessary information about the activities of the trust. This project highlights work that can be done administratively to ensure that taxpayers who make every effort to meet their obligations have the information they need to determine and report their liability accurately.

Reportable Transaction Rules: In the American Jobs Creation Act, Congress enacted a number of changes to the statutory rules requiring disclosure to the IRS of potentially abusive transactions, strengthening the IRS' hand in this area. In October 2006, we published proposed regulations that follow prior interim guidance and, when adopted as final, will build on the expanded statutory provisions to ensure that the IRS knows about and is able to react quickly to, emerging problematic transactions.

: In the American Jobs Creation Act, Congress enacted a number of changes to the statutory rules requiring disclosure to the IRS of potentially abusive transactions, strengthening the IRS' hand in this area. In October 2006, we published proposed regulations that follow prior interim guidance and, when adopted as final, will build on the expanded statutory provisions to ensure that the IRS knows about and is able to react quickly to, emerging problematic transactions.

Conclusion

An effective approach to dealing with the tax gap requires multiple, interrelated strategies. I have discussed the work that the Treasury Department is doing with regard to the legislative and regulatory components of the Treasury Strategy. Each of the multiple components of the strategy is necessary, but none is sufficient in isolation. We look forward to continuing our work with this Committee and others in Congress to implement our strategy and looking for new ways to reduce the tax gap.

Thank you again, Mr. Chairman, Ranking Member Grassley, and other Members of the Committee for the opportunity to appear before you today. I would be pleased to answer any questions you may have.

 

 

April 17

GLASER LEADS TREASURY DELEGATION TO CHINA WASHINGTON, DC – Daniel Glaser, Deputy Assistant Secretary for Terrorist Financing and Financial Crimes, leads a Treasury delegation to Beijing, China Saturday to offer assistance to the Macanese and Chinese in addressing the issue of North Korean-related funds frozen at Banco Delta Asia (BDA). "The policy and diplomatic issues have been solved – this is now down to implementation. The Macanese and Chinese have made clear that they want to ensure implementation of the agreement is consistent with their own laws and with their international obligations. We are bringing Treasury expertise to help the Macanese and Chinese wade through some of these implementation issues," said Glaser.

 

 

STATEMENT BY TREASURY DEPUTY SECRETARY KIMMITT ON UNSCR 1747

 This Department of Treasury press release may be viewed at: WASHINGTON, DC – Treasury Deputy Secretary Robert M. Kimmitt issued the following statement today on the adoption of UNSCR 1747: "The Treasury Department welcomes the unanimous adoption of UNSCR 1747, which reaffirms and expands UNSCR 1737 of December 2006. These resolutions target Iran's nuclear and missile programs, and among other requirements, obligate states to freeze the assets of named entities and individuals associated with those programs. "Of particular note is Resolution 1747's designation of Iranian state-owned Bank Sepah and Bank Sepah International, which finance and support Iran's development of ballistic missiles. The Treasury Department urges governments and financial institutions around the world to swiftly implement their obligation to freeze the assets and economic resources of all listed entities and individuals, but in particular Bank Sepah and Bank Sepah International. In the coming days, we also urge states and financial institutions to be particularly vigilant and prevent efforts by Sepah to move assets, including to other Iranian state-owned institutions, or otherwise evade sanctions."

 

 

Testimony of Treasury Secretary
Henry M. Paulson, Jr.
Before the U.S. House Appropriations
Subcommittee on Financial Services and
General Government

Washington, DC- Chairman Serrano, Ranking Member Regula, and Members of the Subcommittee. Thank you for the opportunity to appear before you today to discuss the President's Fiscal Year (FY) 2008 Budget for the Department of the Treasury.

- Chairman Serrano, Ranking Member Regula, and Members of the Subcommittee. Thank you for the opportunity to appear before you today to discuss the President's Fiscal Year (FY) 2008 Budget for the Department of the Treasury.

I am pleased to be here today to provide an overview of the President's Budget for Treasury in FY 2008. The President's FY 2008 Budget reflects the Department's budget priorities and dedication to promoting economic growth and opportunity, strengthening national security, and exercising fiscal discipline.

The $12.1 billion request focuses resources on key programs necessary to promote economic growth, fund the activities of the federal government and effectively fight the war on terror. The request is $523 million above the amount provided by the FY 2007 funding level, a 4.5 percent increase. By collecting the revenue due to the federal government and working to reduce illicit threats to the financial system, the Department of the Treasury contributes to the financial integrity of the United States.

Treasury has a primary role as steward of the U.S. economic and financial systems, including the role of the U.S. as an influential participant in the international economy. Treasury promotes financial and economic growth at home and abroad. Treasury also performs a critical and far-reaching role in national security. The Department battles national security threats by coordinating financial intelligence, targeting and imposing sanctions on supporters of terrorism, narcotics traffickers, and proliferators of weapons of mass destruction, improving the safeguards of our financial systems, and promoting international relationships to combat the financial underpinnings of terrorist and other criminal networks.

Managing these complex tasks requires expanded capabilities. Fully funding the President's FY 2008 Budget request will allow the Treasury Department to continue and improve its ability to study, recommend, and support initiatives that strengthen the U.S. economy, create more jobs for Americans, and enhance citizens' economic security. The Department will actively work to protect the security of pensions, reform Social Security, and improve the federal income tax system by providing timely, usable, and comprehensive analyses that advance the policy process.

Promoting Economic Growth, Security and Opportunity

The Treasury Department works diligently to fulfill its role as the Administration's chief economic advisor. We strive to provide the President with the best information available on a broad range of domestic and international economic issues. Treasury's Offices of International Affairs, Tax Policy, Economic Policy, and Domestic Finance support this role through the provision of technical analysis, economic forecasting, and policy guidance on issues ranging from federal financing to responding to international financial crises. The Treasury Department supports policies that stimulate U.S. economic growth, strengthen and modernize entitlement programs, and minimize regulatory burdens while ensuring the safety and soundness of financial institutions.

The FY 2008 Budget request funds Treasury's efforts to promote domestic and international economic growth through financial diplomacy. Treasury stimulates economic growth and job creation by working to open trade and investment, encouraging growth in developing countries, and promoting responsible policies regarding international debt, finance, and economics. Treasury supports trade liberalization and budget discipline through its role in negotiating and implementing international agreements pertaining to export subsidies. These agreements open markets, level the playing field for U.S. exporters, and provide effective subsidy reductions that save the U.S. taxpayer millions of dollars annually. Since 1991, cumulative budget savings from these arrangements are estimated at over $10 billion. The growth of these activities makes it necessary to enhance policy coordination and resources through the addition of regional experts. Treasury's FY 2008 Budget request provides additional staff to support key policy dialogues around the globe. These experts will enhance policy coordination on international matters and will support key policy dialogues with priority countries like China.

Treasury also remains committed to protecting the homeland from international investments that may threaten our national security. The Committee on Foreign Investment in the United States (CFIUS) is an interagency group responsible for investigating the national security implications of the merger or acquisition of U.S. companies by foreign persons. One of my key responsibilities as Secretary is to chair this committee, and to make sure that the interagency CFIUS process performs as efficiently as possible. As foreign investment in the United States has increased, so has the number of cases reviewed by CFIUS. As a result, the FY 2008 Budget request provides additional resources to support Treasury's investigations of foreign investments.

The President's FY 2008 request for Treasury also includes $28.6 million for the Community Development Financial Institutions (CDFI) Fund. CDFI Fund's mission is to expand the capacity of financial institutions to provide credit, capital, and financial services to underserved populations and communities in the United States. In order to ensure that the CDFI program continues to operate in the most efficient and effective manner, Treasury is proposing to phase out the CDFI Bank Enterprise Awards (BEA) program in 2008. There is no evidence that the BEA program improves economic development, and we believe that the program's goals are better served through other CDFI Fund activities.

Strengthening National Security

The sponsorship of terrorism and potential acquisition of weapons of mass destruction (WMD) by rogue regimes and non-state entities represent grave threats to U.S. national security and the security of all free and open societies. Terrorists, WMD proliferators and other non-state threats require support networks through which money and material flow. The Treasury Department draws on financial and other all-source intelligence, and also works to utilize its unique regulatory and law enforcement authorities, to combat national security threats and safeguard the financial system.

The Department's Office of Terrorism and Financial Intelligence (TFI) provides financial intelligence analysis, develops and implements systems to combat money laundering and terrorist financing, administers the Bank Secrecy Act, and administers and enforces the U.S. Government's economic sanctions programs.

Treasury exercises a full range of intelligence, regulatory, policy, and enforcement tools in tracking and disrupting terrorists' support networks, proliferators of weapons of mass destruction, rogue regimes, and international narco-traffickers, both as a vital source of intelligence and as a means of degrading their ability to function. Treasury's actions include:

Freezing the assets of terrorists, proliferators, drug kingpins, and other criminals and shutting down the channels through which they raise and move money;

Cutting off corrupt foreign jurisdictions and financial institutions from the U.S. financial system;

Developing and enforcing regulations to reduce terrorist financing and money laundering;

Tracing and repatriating assets looted by corrupt foreign officials; and

Promoting a meaningful exchange of information with the private financial sector to help detect and address threats to the financial system.

The FY 2008 President's Budget will enable Treasury to enhance these capabilities. Treasury requests funding for investments to further the Department's national security mission in three critical areas. First, this budget, if enacted, will enable Treasury to expand its capacity to identify potential national security threats and to enforce U.S. policies to counter those threats. Next, Treasury will enhance the information technology and physical infrastructure of TFI and its component bureaus and offices to improve data security, access, and quality. Finally, the Budget would provide funds to help integrate TFI's Office of Intelligence Analysis into the broader Intelligence Community.

Specifically, this request includes an additional $5.3 million to respond to emerging national security threats, provide strategic policy coordination in regions key to the fight against terrorist financing, and to enhance implementation of sanctions against state sponsors of terrorism and WMD proliferation. The request also includes $8.1 million for infrastructure and information technology projects to enhance data access, security, and quality, including construction of a Sensitive, Compartmented Information Facility (SCIF), stabilization and maintenance of the Treasury Foreign Intelligence Network, and the Critical Infrastructure Protection program. Finally, $1 million is requested for initiatives to further Treasury's integration into the broader intelligence community.

The Financial Crimes Enforcement Network (FinCEN) is responsible for administering the Bank Secrecy Act (BSA). The FY 2008 Budget request provides funding to strengthen recovery capability for mission-critical information technology systems and emergency operation capabilities; and improve information technology planning and oversight.

Managing U.S. Government Finances

The Treasury Department manages the nation's finances by collecting money due the United States, making its payments, managing its borrowing, investing when appropriate, and performing central accounting functions. Key priorities in managing the government's finances include maximizing voluntary compliance with tax laws and regulations, continually improving financial management processes, and financing the government at the lowest possible cost over time. The FY 2008 Budget request provides the funding necessary to properly administer these functions.

Collecting Taxes
Collecting taxes in a fair and consistent manner is a core mission of the Treasury Department. Treasury's priorities in tax administration are enforcing the nation's tax laws fairly and efficiently while balancing taxpayer service and education to promote voluntary compliance and reduce taxpayer burden. In an effort to maximize tax compliance, the FY 2008 Budget includes $11.1 billion for the IRS, which is an increase of $498 million above the amount provided in the FY 2007 funding levels.

The FY 2008 Budget request provides funding to enhance coverage of high-risk compliance areas, as well as to address the tax gap, which represents the annual difference between taxes owed and taxes collected, including a multi-year research effort that will provide continuous feedback on noncompliance. Enforcement will focus on critical reporting, filing, and payment compliance programs, and highlight abusive tax avoidance transactions and high income individual examinations involving pass-through entities (e.g., partnerships and trusts). The IRS will also continue to reengineer its examination and collection procedures to reduce audit time, increase yield, and expand coverage. As in FY 2006 and FY 2007, the Administration proposes to include IRS enforcement increases as a Budget Enforcement Act program integrity cap adjustment.

The IRS will continue efforts to improve services offered to taxpayers, primarily focusing on those outside of traditional telephone access. For example, the FY 2008 request provides funding to expand the Volunteer Income Tax Assistance program. The IRS will also implement the Taxpayer Assistance Blueprint, a five year strategic plan to deliver taxpayer service; a collaborative effort of the IRS, the IRS Oversight Board, and the National Taxpayer Advocate.

Finally, the FY 2008 request will allow the IRS to make critical IT infrastructure upgrades. IRS will continue to invest in technology, process improvements, and training to achieve consistent quality service with reduced costs. The Budget also includes funding for the IRS's Business Systems Modernization program, which is designed to provide IRS employees the tools they need to continue to administer and improve both service and enforcement programs.

The President's Budget also includes a number of legislative proposals intended to improve tax compliance with minimum taxpayer burden. Once implemented, it is estimated that proposals will generate $29 billion over ten years. These proposals are presented in detail in the FY 2008 Department of the Treasury Blue Book. The legislative proposals fall into four categories: expand information reporting, improve compliance by businesses, strengthen tax administration, and expand penalties.

Treasury's Alcohol and Tobacco Tax and Trade Bureau also collects excise taxes on alcohol, tobacco, firearms, and ammunition. In FY 2006, the Bureau collected $14.8 billion in excise taxes, interest, and other revenues on these products and also regulates the manufacture of alcohol and tobacco products.

Ensuring Efficient Fiscal Service Operations
The FY 2008 Budget request provides the funds necessary for Treasury to meet its responsibilities as the federal government's financial manager.

Treasury's management of the federal government's finances includes making payments, collecting revenue, preparing public financial statements and collecting delinquent debt owed to the federal government through the Financial Management Service (FMS). Treasury oversees a daily cash flow in excess of $58 billion and disburses 85 percent of all federal payments. The Department is working to improve its payments and collections processes by moving toward an all-electronic Treasury. In FY 2006, Treasury issued 742 million electronic payments including income tax refunds, Social Security benefits, and veterans' benefits. Treasury is also encouraging Social Security and Supplemental Security Income recipients to switch to Direct Deposit through the Go Direct campaign. Direct Deposit represents a cost savings to the federal government, and consequently to the American taxpayer, of 80 cents per transaction compared to a check payment.

Treasury's Bureau of the Public Debt manages all of the public debt, which includes marketable securities, savings bonds, and other instruments held by state and local governments, federal agencies, foreign governments, corporations, and individuals. To improve debt management and offer better customer service, Treasury offers TreasuryDirect, an electronic, web-based system that electronically issues securities to retail customers and enables investors to manage their accounts on-line.

The Budget also includes three legislative proposals for FMS that are estimated to save the federal government over $3 billion over ten years. These proposals will allow the government to trace and recover federal payments sent electronically to the wrong account, eliminate the ten-year limitation on the collection of delinquent non-tax federal debts, and remove the disincentive for the IRS to refer tax debts to FMS for collection.

Strengthening Financial Institutions

One of the principal objectives of the Treasury Department is to enable commerce. The Department is responsible for the safety and soundness of national banks and federally-chartered savings associations. The Treasury Department also produces the coins and currency needed for commerce, and guards against counterfeiting and other misuse of our money. While the Office of the Comptroller of the Currency (OCC), the Office of Thrift Supervision (OTS), the U.S. Mint (Mint), and the Bureau of Engraving and Printing (BEP) are funded through direct annual appropriations, their contribution to Treasury's mission cannot be understated.

Treasury, through OCC and OTS, maintains the integrity of the financial system of the United States by chartering, regulating, and supervising national banks and savings associations. In FY 2006, OCC and OTS oversaw financial assets held by these financial institutions totaling $8.1 trillion.

The Mint and BEP are responsible for producing the nation's coins and currency, respectively. In FY 2006, the Mint and BEP produced 16.2 billion coins and 8.2 billion paper currency notes, respectively. The Mint issued five new quarters for the 50 State Quarters program and BEP introduced the new $10 currency note into circulation. Also, despite significant increases in the price of metals, the Mint was able to return $750 million to the Treasury General Fund in FY 2006.

Managing Treasury Effectively

Treasury is committed to using the resources provided by taxpayers in the most efficient manner possible. The Department will drive improved results through decision-making that considers performance and cost. The Treasury Department strives to serve its stakeholders in the most effective way while working to leverage resources across the Department and across government.

Funding requested in Treasury's Departmental Offices and Department-wide Systems and Capital Investments Program (DSCIP) is sought for building a strong information technology infrastructure, ensuring that Treasury remains a world-class organization that meets the President's standard of a citizen-centered, results-oriented government.

The DSCIP account funds technology investments to modernize business processes throughout Treasury, helping the Department improve efficiency. In FY 2008, Treasury requests $18.71 million for ongoing modernization and critical information technology infrastructure projects, and for investment in other new technologies that will improve efficiency and service to the American people. The budget request includes:

$6 million to begin work on a Treasury-wide Enterprise Content Management System. The initial system will meet the business requirements of the Office of Foreign Assets Control and the Financial Crimes Enforcement Network;

$2 million for the continued stabilization of the Treasury Secure Data Network; and

$4 million to improve Treasury's FISMA performance, strengthen the Department's overall security posture, leveraging the President's Management Agenda, including the E-Government initiatives, across the Department.

This budget request also includes funding for the Office of the Inspector General and the Treasury Inspector General for Tax Administration. These offices play important oversight roles in the overall management of the Department and the fair administration of the nation's tax laws.

Conclusion

Mr. Chairman, thank you again for the opportunity to come here today to discuss with you and the Committee the President's FY 2008 Budget request for Treasury. I look forward to working with you and the members of the Committee in ensuring that Treasury maximizes its resources and funding so that the American people can be assured that their tax dollars are being used in the most effective way possible. I would be more than happy to answer any questions.

 

TREASURY TAKES ACTION AGAINST MAJOR MEDELLIN-BASED TRAFFICKER AND HIS FINANCIAL EMPIRE

 Washington, DC-- The U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC) today named Fabio Enrique Ochoa Vasco (a.k.a."Carlos Mario"), a major Medellin-based drug trafficker, as a principal individual on its list of Specially Designated Narcotics Traffickers (SDNTs). At the same time, OFAC designated 45 companies and 64 individuals in Ochoa Vasco's extensive criminal and financial network, across Colombia, Belize, Ecuador, Guatemala, Honduras, Jamaica, Mexico, and Panama. "Fabio Enrique Ochoa Vasco is the head of one of the most powerful Medellin-based drug trafficking organizations today," said OFAC Director Adam J. Szubin. "Our action today strikes at his massive financial empire with the aim of depriving him of the benefit of his criminal activities." This action is part of an ongoing interagency effort to implement Executive Order 12978 (October 21, 1995), which applies economic sanctions against Colombia's drug cartels. This effort includes the Departments of the Treasury, Justice, State and Homeland Security. Today's designation action freezes any assets the designees may have subject to U.S. jurisdiction, and prohibits all financial and commercial transactions by any U.S. person with the designated companies and individuals. This is OFAC's first designation of a significant narcotics trafficker operating out of Medellin, Colombia since the issuance of E.O. 12978 in October 1995. Fabio Enrique Ochoa Vasco and twelve other individuals were charged with cocaine trafficking in a September 2004 U.S. federal indictment in the Middle District of Florida, Tampa Division. OFAC has worked closely over the past three years with Operation Panama Express on the investigation of Fabio Enrique Ochoa Vasco and his organization. Operation Panama Express is an Organized Crime Drug Enforcement Task Force (OCDETF) Strike Force investigation conducted by ICE, DEA, FBI, IRS, Florida Department of Law Enforcement and the Pinellas County Sheriff's Office with the U.S. Attorney's Office in Tampa, Middle District of Florida. The investigation was also supported by the ICE Attaché - Bogotá, DEA Cartagena, Colombia Resident Office and DEA Belize Country Office. The U.S. government is offering up to $5 million for information leading to the arrest of Fabio Enrique Ochoa Vasco. "ICE is proud of our investigative partnership with other Panama Express member agencies and our contribution to this OFAC case." said Julie L. Myers, DHS Assistant Secretary for U.S. Immigration and Customs Enforcement. "By freezing their assets, we will continue to shut down the ability of drug kingpins like Fabio Enrique Ochoa Vasco to conduct their illegal businesses." Fabio Enrique Ochoa Vasco has been involved in narcotics trafficking activities from Colombia to the United States since at least 1981. Ochoa Vasco participated in narcotics trafficking with key figures in Colombia's Medellin Cartel such as Luis Fernando Galeano Berrio, Gerardo "Kike" Moncada, Diego Fernando Murillo Bejarano (a.k.a. "Don Berna"), and kingpin Pablo Escobar Gaviria. The network of 45 Ochoa Vasco businesses designated today includes Duratex S.A., a Colombian carpet/textile company located in Bogota, Colombia; Inversiones y Representaciones S.A. (IRSA), a real estate firm in Medellin, Colombia; Florida Soccer Club S.A. in Itagui, Antioquia, Colombia; Hotel La Cascada S.A., a hotel in Girardot, Colombia; Yamaha Veranillo Distribuidores, a marina in Barranquilla, Colombia; and a network of real estate firms - Inversiones MPS S.A., Proyectos y Soluciones S.A., Proyectos y Soluciones Inmobiliaria Ltda., and Gerencia de Proyectos y Soluciones Ltda. - located in Bogota, Colombia. OFAC also designated Duratex S.A. front companies located in Ecuador (Comercializadora Mor Gaviria S.A. and Comercializadora Mordur S.A.), Guatemala (Overseas Trading Company), and Mexico (MC Overseas Trading Company S.A. de C.V). A clothing store, Lizzy Mundo Interior, in Guadalajara, Mexico was also named. The OFAC action targeted seven key financial managers for Fabio Enrique Ochoa Vasco, including Jaime Dib Mor Saab, Jorge Ernesto Caicedo Rojas, Gustavo Alberto Pabon Alvarado, Silvio Yepes Velez, Jhon Jairo Castrillon Vasco, Fernando Maldonado Escobar, and Gabriel Andres Calvo Lombana, as well as three Mexican financial associates, Porfirio Miguel Cadenas Viramontes, Luis Pacheco Mejia, and Gloria Elisa Briseno Mar. In addition, important criminal associates of Fabio Enrique Ochoa Vasco were named, including John Jairo Gallego Valencia, Miyer Alberto Garcia Buitrago, Victor Hugo Castro Garzon, Carlos Heneris Varela Serna and Ricardo Castro Garzon. The assets of a total of 1,477 business and individuals in Aruba, Barbados, Colombia, Costa Rica, Ecuador, Guatemala, Honduras, Jamaica, Mexico, Panama, Peru, Spain, Vanuatu, Venezuela, the Bahamas, the British Virgin Islands, the Cayman Islands, and the United States have been designated pursuant to E.O. 12978. The 570 SDNT businesses include agricultural, aviation, consulting, construction, distribution, financial, hotel, investment, manufacturing, maritime, mining, offshore, pharmaceutical, real estate, retail, service, sporting, telecommunication, and textile firms. The SDNT list now includes 22 kingpins from the Cali, Medellin, North Valle, and North Coast drug trafficking organizations in Colombia. For a complete list of the individuals and entities designated today, please visit:

 

 

PREPARED STATEMENT BY SECRETARY HENRY M. PAULSON, JR. AT THE DEVELOPMENT COMMITTEE MEETING

Washington, DC--Over the past five years the world economy has grown at a pace not seen in over three decades. This robust growth has been particularly strong in low income countries and has helped reduce poverty. The world is well on its way to halving the share of people living in extreme poverty. While this is a remarkable accomplishment, progress is neither great enough nor balanced enough for us to congratulate ourselves. The Global Monitoring Report appropriately highlights the difficulties with progress in fragile states, many of which are located in sub-Saharan Africa, and draws attention to the need to ensure that the benefits of growth are equally open to all members of society, both male and female. While the community of donors recognizes the need for continuing substantial aid flows, one of the most critical of the many lessons we have learned in the 60-year history of the World Bank is that higher aid flows by themselves do not guarantee less poverty. Assuring that our assistance is directed to effective, efficient, well-coordinated projects that can make lasting changes in people's lives remains a key and daunting challenge. It requires intellectual vigor, the willingness to constantly reassess and question the effectiveness of our approaches, and a true hard-nosed dedication to the pursuit of measurable results at all levels of our programs. It also means that resources need to be applied to their most efficient use, and that institutions focus on their core competencies. Sub-Saharan Africa We are heartened by the early indications of success with the Bank's Africa Action Plan (AAP). It is too early to determine the long-term effectiveness of the AAP, but there is sufficient evidence that results are moving in the right direction. We are particularly pleased with positive country policy performance, a key ingredient for development results. One area highlighted in the AAP where more work should be done is statistical capacity building. Without data, African countries will always be at a disadvantage in policy creation and adaptation, and private sector firms will be less confident in investing. As we think about a post-2015 Africa, many areas of activity, such as infrastructure, the private sector, and governance deserve significant attention. While we support the IDA-IFC micro, small and medium-size enterprise facility, the AAP needs a greater focus on private sector support and improving financial sector access. It is the financial sector that provides a loan to start an enterprise, grow a business, or buy a house. Access to capital helps people acquire assets that give them a foothold in the economy – personal financial wherewithal they can leverage into greater prosperity and economic security. Trade Reducing trade barriers is also essential for providing people opportunities. The best way to alleviate poverty and raise living standards is through greater openness, so more people can benefit from the expanding global economy. The most important driver for poverty reduction has been the rapid growth of developing countries that opened to trade, notably in several Asian economies. For instance, Mexico's poverty rate fell by more than 20% and its rate of extreme poverty fell by more than 30% between 1994 and 2005 – the years following the passage of NAFTA. We need to continue pushing forward on the trade agenda, including a successful Doha Round of negotiations, to keep all our economies growing. The case for trade liberalization is clear and compelling. And if we want more people to support it, we need to ease anxieties and help more people realize the benefits of trade. The Aid for Trade agenda launched at the Hong Kong Ministerial can help allay these fears. Fragile States Fragile states pose a special development challenge because they are frequently unable to sustain any forward momentum on reforms and growth. As such, fragile states do not typically respond to standard development interventions and require a rethinking of donor engagement to ensure positive results. Paramount among these is careful consideration of resource investment. Due to weak governance and weak institutional capacity, the ability of fragile states to absorb and effectively utilize resources is limited. This is particularly relevant given the potentially negative macroeconomic implications of scaling up in low-capacity countries. Given the challenges posed by fragile states and the limited applicability of standard development tools to their situations, a new framework needs to be developed to assist donor institutions to engage effectively. Key elements of such a framework include: (1) developing a cohesive definition of fragility that focuses on the sources of fragility and not its outcomes; (2) developing and adopting an approach of selective intervention; and (3) developing a high quality and integrated monitoring and evaluation system. Governance Finally, we welcome and support the updated version of the World Bank Group's Governance and Anticorruption (GAC) strategy. We applaud the Bank for an extensive public consultation process, which has helped to sharpen the GAC's approach and has opened the door to new partnerships. We are confident that the strategy will strengthen the Bank's role in helping borrowing countries promote good governance and fight corruption and in playing a leadership role with global partners. We believe the GAC rightly focuses on the most important issues: building effective and accountable institutions; country ownership; and government commitment to governance and anti-corruption. Further, we support the call to help countries address the problem of asset seizure and repatriation and greater disclosure of assets by public officials. The core proposal to revamp the country assistance strategy (CAS) process to systematically address governance issues in country strategies assumes a continuing framework for fighting corruption in a way that applies central principles to country-specific circumstances. Going forward, we would like to see more use of the Public Expenditures and Financial Accountability indicators within the Bank fiduciary diagnostics and their link to the preparation of country assistance strategies. Conclusion The challenge of global poverty can be overcome only when the appropriate resources are married to the right policies. The MDGs intentionally set a very high bar, and achieving them will require that we remain focused in our purpose and efficient in our methods. We look forward to working closely with all our partners to achieve our common goal: to create the conditions and opportunities for the world's poor to improve their livelihoods and overcome poverty.

 

TREASURY INTERNATIONAL CAPITAL (TIC) DATA FOR FEBRUARY

This Treasury International Capital (TIC) data for February are released today and posted on the U.S. Treasury web site (www.treas.gov/tic). The next release, which will report on data for March, is scheduled for May 15, 2007. Net foreign purchases of long-term securities were $58.1 billion. * Net foreign purchases of long-term U.S. securities were $77.9 billion. Of this, net purchases by foreign official institutions were $12.6 billion, and net purchases by private foreign investors were $65.3 billion. * U.S. residents purchased a net $19.8 billion in long-term foreign securities. Net foreign acquisition of long-term securities, taking into account adjustments, is estimated to have been $43.2 billion. Foreign holdings of dollar-denominated short-term U.S. securities, including Treasury bills, and other custody liabilities increased $20.8 billion. Foreign holdings of Treasury bills increased $5.3 billion. Banks' own net dollar-denominated liabilities to foreign residents increased $30.4 billion. Monthly net TIC flows were $94.5 billion. Of this, net foreign private flows were $61.6 billion and net foreign official flows were $32.9 billion.

 

 TREASURY DEPARTMENT NEWS