The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
Treas.
HJ
10
.A13
P4
v.380
Department of the Treasury
1.' PRESS RELEASES
The following numbers were not used:
450, 488,499,425,507
~
D EPA R T 1\1 E N T
0 F
THE
+~
r
T REA SUR Y
'l'REASURY'tifl.:
_BJ~
J~i/ NEW S
~~/78~q~. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..
.....................................
OrnCE OF PUBUC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASlfiNGTON, D.C. - 20220. (202) 622-2960
EMBARGOED UNTIL 2 P.M.
Text as Prepared for Delivery
March 1, 2000
N. CINNAMON DORNSIFE
Nomination
To be
United States Executive Director for the Asian Development Bank
SENATE COMMITTEE ON FOREIGN RELATIONS
Mr. Chairman, Mr. Ranking Member. and Members of the Committee, I am honored
to appear before this committee as the nominee for the position of United States
Executive Director for the Asian Development Bank:.
My interest in Asia and the Pacific extends back for more than twenty years. My life's
work has been devoted to working on issues affecting Asia and the Pacific, as well as
the promotion of deeper understanding between the United States and Asia. I have
extensive experience in the region, have lived in Asia for twelve years, and speak two
Asian languages, Bahasa Indonesia and Filipino. After graduating from the Johns
Hopkins School of Advanced International Studies in 1977, I worked with the Office of
International Cooperation and Development at the U.S. Department of Agriculture as a
Technical Assistance Officer in Asia Programs. I then researched integrated rural
development issues at the World Bank before joining the Asia Foundation in 1979,
where I worked for thirteen years. including six years in the Indonesia field office in
Jakana. In 1992, I joined the U.S.- Asia Environmental Partnership Program, a Bush
Administration initiative linking U.S. and Asian businesses, governments and nongovernmental organizations to address shared envirorunental problems.
Since joining the U.S. office at the ADB in 1994 as the U.S. Alternate Executive
Director, I have been privileged to be a member of the team that has made a real
difference in the way the Bank operates. I have seen the Bank become a more
transparent and accountable institution. emphasizing performance-based assistance,
improving project quality, and increasing beneficiary participation. The Board has
approved nearly fifty new policies. including anti-corruption, good governance, and
information disclosure, and in September 1999 reaffirmed poverty reduction as the
Bank's overarching mandate.
In partnership with the IMF and the World Bank. the Asian Development Bank was a
leader in addressing the financial crisis that struck Asia in 1997, both in supporting
LS-427
Fur press releases, speeches, public schedules and official biographies, call our 24~our fax line at (202) 622-2040
policy-based reforms in the financial sectors, and in addressing the far-reaching social
costs of the crisis, through the provision of safety nets in the most severely affected
countries.
Based in large part on the findings of a Board mission led by my predecessor. former
U.S. Executive Director Linda Tsao Yang, the Bank is refocusing and revitalizing its
private sector development strategy. As the Bank's own resources are dwarfed by the
massive domestic and international investment flows to the region, this strategy
presents an opportunity to catalyze additional resources to address the development
needs of the region.
With the strong support of the U.S. Executive Director's office, U.S. businesses have
played a key role in the Bank's activities, ranking first among member countries in
procurement to the Bank for the period 1995-1999.
U.S. Treasury Secretary Summers, in a statement to the Development Committee of the
World Bank and the IMF in September 1999, outlined four basic conditions for
sustainable development and poverty reduction:
1. Sound and transparent economic management. including market-encouraging
macro-economic policies conducive to private enterprise, and financially viable banking
instirutions ;
2. A policy framework which focuses U.S. more on poverty considerations by
integrating poverty reduction and growth objectives;
3. Priority attention to human development, particularly the provision of far stronger
and more efficient basic education and health services to equip the poor to respond
more effectively as opportunities improve:
4. Good governance, including fully functioning instirutions incorporating
transparency, accountability, the rule of law. and participation of civil society.
If given the opportunity to serve as the U.S. Executive Director, I would draw on my
past experiences, especially my six years as Alternate Executive Director, and my more
than twenty years' association with the region, to work to further strengthen the
implementation of this strategic vision for sustainable development and poverty
reduction in the Asia Pacific region.
Tha~ you for your attention and consideration. I look forward to answering any
questIOns you may have.
-30-
DEPARTMENT
OF
THE
TREASURY
NEWS
For Immediate Release
March 2, 2000
"COMBATING INTERNATIONAL MONEY LAUNDERING"
REMARKS OF SECRETARY LAWRENCE H. SUMMERS ON INTERNATIONAL
MONEY LAUNDERING TO THE BAFT, ABA AND SIA
I would like to talk to you today about international money laundering. Let me first say
that much of what we are doing to combat money laundering has been greatly helped by recent
discussions between Treasury and bodies such as the BAFT. ABA. and SIA. We look forward to
continuing these mutually beneficial discussions and working together to achieve real progress in
combating money laundering.
Anyone who has followed events over the last six months knows that money laundering
is a growing problem that affects virtually every country in the world. We have recently
witnessed an executive at a bank in New York admit her guilt in a conspiracy in which she and
her husband ran an operation that helped launder millions of dollars in Russian criminal
proceeds. We have heard that the brother of a former head of state allegedly laundered millions
of dollars of drug money by exploiting legitimate private banking facilities at another American
bank. And we have read recent reports that $70 billion out of a total $74 billion that flowed from
Russia to offshore centers in 1998 moved through accounts in the tiny island of Nauru.
In a world where capital can silently traverse the globe with the push of a button.
proceeds of crime can move just as quickly and just as quietly. This makes it even harder to
detect money laundering.
Former IMF Managing Director Camdessus has estimated the amount of laundering at
two to five per cent of the world' s gross domestic product - almost $600 billion even at the
lowest end. Having said that. it is hard to be confident about any estimates owing to the
secretive nature of the process of money laundering.
LS-432
Far press releases, speeches, public schedules and official i1ographies, call our 24-hour fax line at (202) 622-2040
• U S Government Printing Office '998· 6'9·559
Combating this scourge is important for three reasons.
•
First. laundering is a crucial adjunct to the underlying crimes that generate the money.
whether drug trafficking, kidnapping or other forms of crime. However bloodless money
laundering may seem, there is often a violent reality at its core. Tackling dirty money gives
us more weapons to fight the underlying crimes. As is often noted. it took an accountant to
catch AI Capone.
•
Second. money laundering facilitates foreign corruption. undermining U.S. efforts to promote
democratic institutions and economic development around the world.
•
Third. money laundering risks undermining the integrity of our financial system. When dirty
money finds its way into American banks. the reputations of all involved sutTer.
In the past year. the Administration has intensified its already considerable efforts to combat
money laundering. Last September. Attorney General Reno and I announced the
Administration's first National Money Laundering Strategy, a broad-based international and
domestic program to combat dirty money.
Under the leadership of Deputy Secretary Stuart Eizenstat at Treasury and Deputy Attorney
General Eric Holder at the Justice Department. we have been implementing the dozens of action
items outlined in the 1999 Strategy.
Moreover. in addition to our normal budget requests this year. I have asked for $15 million
to set up a centralized account to implement key items in the 2000 strategy. The strategy will be
released next week by Deputy Secretary Eizenstat and Deputy Attorney Holder.
Today I want to focus on the growing threat of international money laundering. Let me
divide my remarks into three parts:
•
First. the problems posed by jurisdictions that are too lax in their approach to money
laundering and the measures we arc taking within our existing authority to tackle this
problem.
•
Second. new legislation we are proposing that would better equip us to combat international
laundering and penalize jurisdictions that fail to comply with international standards.
•
And third, what the financial institutions in the U.S. must do to better protect themselves
against dirty money.
I. Source Countries and Destination Countries
If we are to make progress in our efforts to combat money laundering, we must focus on
jurisdictions that provide the raw material and on those that provide the finished product. That is
to say, we should focus on countries that have become major sources or destinations for dirty
money.
2
Let me be clear: New York, London, Hong Kong and other developed financial centers are
no strangers to money laundering: there can be little doubt that much of the world's dirty money
flows through these financial centers. But the U.S. and its partners are taking aggressive action to
curb money laundering.
Today I want to highlight countries that have yet to take action against dirty money before
discussing what we are doing to encourage them to combat money laundering without our
existing authorities.
Lax jurisdictions.
Crime is universal. But some countries export more of it than others. Countries lacking an
effective rule of law pose a disproportionate threat to the wellbeing of more stable societies.
They are a major source of cross-border flows of dirty money.
And some countries appear more willing than others to import the proceeds of crime.
Jurisdictions with inadequate financial supervision are often the ultimate destination of these
flows. Money that begins life as the proceeds of a drug deal or an illegal arms trade is often
laundered in one of the more than 50 offshore centers around the world.
These havens offer strict bank secrecy laws and "economic citizenship" that allow
criminals to escape the legal reach of their countries of origin. In addition many offer zero tax
and stamp duty and facilities for establishing offshore "shell" companies that disguise the true
owners.
Let me give you some prominent examples of both "source" and "haven" countries:
•
Crime continues to flourish in Russia due to the lack of the rule of law. Russian organized
crime conducts operations in Russia and around the world, hurting law-abiding Russians
more than anyone else. Recognizing this. Minister Putin pledged last October to push for
passage of an effective money laundering law. We encouraged the Russian government to act
on this measure expeditiously. To date. however. the Russian government has still not
enacted meaningful reforms.
•
Colombia remains the leading supplier of drugs to the U.S. that in tum are a major source of
dirty money in this country. The Colombian Black Market Peso Exchange that drugs
traffickers use to disguise the origins of their money is probably the biggest laundering
market in this hemisphere, reportedly exceeding $5 billion a year. Criminal organizations in
Mexico and Nigeria also pose large risks to neighbors and the rest of the world.
•
In the absence of proper anti-money laundering laws. Nauru has proved a popular conduit for
funds flowing out of Russia. Russian organized crime has also exploited Nauru's lax
regulations by employing middlemen to establish charters or open bank accounts in nonRussian names. Due to international pressure. Nauru recently has taken steps to amend its
banking secrecy laws and we are working with its government to deepen these reforms.
3
•
Dominica has also benefited from weak regulation. It offers low-fee "economic citizenship".
confidential finance and "virtual" gambling. Recently a new government was elected that
pledged to eliminate economic citizenship. We will work with the new Dominican
government towards this objective and push for a wider review of other laws in Dominica.
•
Liechtenstein is an established offshore center that still has not adequately joined
international efforts to combat dirty money. It offers anonymous accounts. bearer shares. and
complete banking secrecy. Although laundering has been a criminal offense since 1993. its
laws are not well implemented. Four investigators oversee the entire financial sector.
•
Cyprus has recently taken comprehensive steps to combat international laundering. and is
reviewing its laws and authority to deal with attempts to circumvent international sanctions.
Nevertheless. the Milosevic regime has continued to use Cyprus's financial system. according
to international regulators. We want to encourage the Government of Cyprus in its efforts to
deal with this problem.
We are proposing new legislation next week that would enable us to better encourage lax
jurisdictions to take action against money laundering. I will tum to these new proposals in a few
moments.
But let me first mention a number of ways that we have been working, within our existing
authority, to encourage both "source" and "haven" jurisdictions to combat dirty money.
First, working at the international leveL we have achieved broad consensus on the range of
measures that governments need to adopt to combat laundering.
•
We are a leading member of the 26 nation Financial Action Task Force that was
launched by the G-7 in 1989. The FA TF has set the standard for effective countermoney laundering with its 40 recommendations and peer review. Members of
regional FA TF -style bodies in the Caribbean. Eastern Europe. and the Asia/Pacific
region have joined the effort. and new FATF-style bodies are beginning to emerge in
Africa and South America. We welcome and support these efforts to strengthen
regulatory controls and improve cooperation between law enforcement and
regulators.
•
FA TF has also recently committed to take action against jurisdictions that have failed
to join this global movement. FA TF will issue a report in June listing some of the
world's worst offending money laundering havens. Last month, the FATF announced
that Austria - one of its founding members - would be suspended as of June 15 of
this year unless the new government introduces and supports a law to abolish
anonymous passbook accounts. We welcome the Austrian government's pledge to
meet FATF's conditions and will be monitoring its progress closely.
4
Second, we have acted to publicize the worst offending jurisdictions and warn U.S. financial
institutions to apply especially close scrutiny in their transactions with these countries. For
example:
•
Last year the U.S. and the U.K. issued ajoint advisory against Antigua and Barbuda
after attempts were made to weaken its laws against laundering. Antigua has since
largely rectified this. But more needs to be done to bring Antigua up to international
standards. We also stand ready to issue financial advisories against countries that
appear on the FA TF's list of offending money laundering havens in June.
Third. at a bilateral level we are helping countries to tackle their root problems of crime and
corruption and pushing for the enactment and implementation of effective counter-money
laundering regimes. For example:
•
The U.S. government is working directly with Moscow to push for effective antimoney laundering legislation. To help Colombia, the President has proposed a $1.6
billion package, most of which targets drug production and the operation of the drugs
trafficking organizations, while Treasury is coordinating inter-agency efforts to close
the Black Market Peso Exchange. And, with the support of the U.S, and our partners,
Mexico is tightening implementation of money laundering laws, while Nigeria has
pledged to introduce new laws to clamp down on criminal finance and official
corruption.
Fourth, through programs of the international financial institutions we are pressing to reduce
corruption and encourage source countries to adopt statutes to fight money laundering. For
example:
•
The I.M.F. has incorporated the goal of taking effective action against crime and
corruption as part of its ongoing lending dialogue with Russia. The Administration
has also worked with its G7 colleagues to encourage international financial
institutions, including the World Bank and the IMF, to develop systems of financial
safeguards and transparent practices in their lending to Russia to ensure that funds
lent to Russia are used for their intended purposes.
And fifth, we are taking parallel action against offshore centers that provide a haven for tax
evasion. This is criticaL because many of the incentives that havens offer to tax evaders also
prove attractive to money launderers. These include lack of transparency and weak regulation.
•
The OEeD will issue a report in June identifying the world's worst tax havens. It will
be interesting to see which countries appear on both the FATf's list for money
laundering and on the OECD list for tax evasion. In our FY2001 budget request, we
have also proposed legislation that would allow us to target tax havens by requiring
individuals to report most payments to offshore tax havens.
5
II.
The International Counter-Money Laundering Act.
Let me say that we have been pleased by the interest shown by members of Congress in
combating money laundering. We thank Representatives Leach. LaFalce. Velazquez, Waters,
Roukema, McCollum, King and Vento, and Senators Grassley, Schumer, Coverdell and Levin in
addressing these issues.
I think it is fair to say that our approach has been built on the foundations of bills
proposed in recent months and share many of their characteristics. In addition, the money
laundering bill proposed by the administration last fall shares a key provision with a number of
these bills - namely, that foreign corruption should serve as a predicate offense for a U.S.
prosecution against money laundering. We look forward to working with the leadership in the
Senate and House Banking committees to enact effective legislation to combat international
money laundering.
The U.S. government and its partners have made genuine progress in tackling
international money laundering. But the range of weapons that we have to protect ourselves from
the worst offending havens, financial institutions. and individuals is limited. At one end of the
scale, we can issue financial advisories as we have done in Antigua. At the other, we can apply
sweeping economic sanctions against countries that the President finds pose a national security
threat to the United States.
As the President said in his State of the Union, there is a need for new legislation to
combat money laundering.
That is why early next week we will be working with Congress to introduce the
International Counter-Money Laundering Act. Our legislation would provide important new
tools, filling the wide gap between advisories and full-blown sanctions.
Under our proposaL if the Secretary. of the Treasury, in consultation with key Cabinet
members. makes a determination that a given nation, foreign institution or type of international
transaction poses a primary money laundering concern, the Secretary could then select from a
series of measures. These would range from requiring new reporting requirements on U.S.
financial institutions that are doing business with the affected entity, to barring U.S. financial
institutions from opening or maintaining correspondent accounts with countries or foreign
institutions that pose a money laundering threat.
The new measures are designed to be graduated. discretionary, and targetable.
Graduated, so we can calibrate our action to be proportionate to the threat. Discretionary, so we
can integrate these tools into our more active bilateral and multilateral diplomatic efforts to
persuade offending jurisdictions to change their laws. And targetable, so we can focus our
response on the precise threat we confront in each specific jurisdiction. Deputy Secretary
Eizenstat will describe this legislation in more detail next week when we issue the 2000 strategy.
6
III.
Protecting the U.S. Financial System.
In addition to the measures taken by this Administration to combat international money
laundering, the private sector also has grave responsibilities.
U.S. financial institutions are the first line of defense against money laundering. In
generaL they take this role very seriously. We were pleased to note, for instance. that several
U.S. banks. recently cut off correspondent relations with banks from Nauru based on their own
assessment of the risks involved.
But more can be done. Last year, in our National Money Laundering Strategy. I called for
a review of whether additional guidance was appropriate for banks in their dealings with highrisk accounts, including accounts held by wealthy foreign individuals. We have concluded that
such guidance is an appropriate and necessary concomittant of an effective strategy. But it must
be appropriately crafted to take into account the competitive concerns of banks and to ensure that
it does not interfere with their ordinary business.
Next week, when Deputy Secretary Eizenstat unveils the 2000 strategy, he will discuss
the collaborative process in which we will engage to work out the details of such guidance. This
will involve consultations with every interested party, including privacy advocates. the financial
sector, regulators and others. The Deputy Secretary will also say more about other critical steps
we will be taking to combat domestic and international money laundering.
IV.
Conclusion.
We live in a new global economy. one that is driven by economic integration.
Globalization has bought unparalleled wealth to U.S. citizens and brought emerging markets
onto the ladder of prosperity. But if integration is going to continue to work, we must deal
effectively with forces that threaten to undermine it including dirty money. That is why we
have been vigorously engaged in a wide-ranging effort to confront global money laundering.
And it is why we are proposing new legislation to bolster our counter-money laundering
capacity. We look forward to working with the financial sector. members of Congress, the
regulatory agencies and others in ensuring that effective legislation is enacted soon. Thank you
very much.
- 30 -
7
n
1;- P .\ R T \.1 E ::'\ T
0 F
THE
TREASURY
T I~ E A S lJ H Y
NEWS
OFFICE OF PUBLIC AFFAIRS -1500 PENNSl'LVANIA AVENUE, N.W .• WASHINGTON, D.C.e 20220. (lOZ) 622-2960
EMBARGOED 1lNTZL 2:30 P.M.
Harc:b 2, 2000
CONTACT:
Office of Financing
2021691-3550
TREASURY OFFERS 13-WEB AND 26-WEEK BJ:LLS
The Treasury will auction two series of Treasury bills totaling approximately $17,000mdllion to refund $17,042 ~llion of publicly held securities
maturing March 9, 2000, and 1:0 pay d.ow:D. about $42 million.
In additiOA to the publ~c holdi~gs, Federal Reserve Banks for their own
accounts hola $8,187 million of the maturing bills, whiCh may be refUDded at
the highest discount rate of accepted competitive tenders. Amounts issued to
these accoun~s will be in addition to the offering amount.
The maturing bills held ~ the public inClude $2,784 million held by
Federal Reserve Banks as agents for foreign and international monetary authorities, which may be refun4ed within the offering amount at the highest discount
rate of accepted oompetitive tenders. Additional amounts may be issued for
such aocounts if the aggregate amount of new bids exceeds the aggregate amount
of maturing bills.
Treasur.v.Direct customers requested that we reinvest their maturing
holdings of approximate~y $914 ~llion into the 13-week bill aDd $729 million
into the 26-waek bill.
~s offering of Treasury securities is governed by the terms and conditions set forth in the Dnifor.m offering Circular for the Sale and Issue of
Marketabl.e Book-Entry Treasury Bills, Notes, and Bonds (31
amen6ed) •
cn
Part 356, as
Details about each of the new securities are giveD in the attached offering higblights.
18-433
000
For P'~ss releases, speeches, public schBdules and officilll biographies, call our 24-hour fax line at (202) 622-2040
KZGHL~GBTB
OF TRZASURY
OPFBR~NGS
OP BXLLS
TO BB ZSSUED KARCH 9, 2000
March 2, 2000
Offering Amount •••.•.•••••.•••••••.••••• $9,000 million
Description of Offeringl
Ter.m and type of s.curity •••••.•••.••. t '
CUSI:P number.... • ••••••••.••••••..•••••
Auction date ••..•••••••••.••••••••
::Issue date ••••..••.•••••••••••••••.•••••
Maturity date •••••.•••.•••••••••••••••.•
Original issue date •••••••••••••••••.•••
Currently outstanding ••••••-•••••••.•••••
Minimum bid amount and maltiples •..•••••
t
•••••
91-day bill
912795 DZ 1
March 6, 2000
March 9, 2000
June 8,2000
December 9, 1999
$11,869 million
$l,OOO
$8,000 million
182-day hill
912795 EZ 0
March 6, 2000
Karch 9, 2000
Septsmber 7, 2000
March 9, .2000
$1,000
The following rules apply to all securities mentioned ahovez
Submission of BldsJ
Noncompetitive bids ••.•••••• Accepted in full up to $1,000,000 at the highest discount rate of
accepted competitive bids.
Campeti~ive bids •••••••••••• (1) MUst be expressed as a discount rate with three decimals in
increments of .005%, e.g., 7.~OO%, 7.105%.
(a) Net long position for each bidder must be reportsd when the sum
of the total bid amount, at all discount rates, and the net long
position is $1 billion or greater.
(3) Net long position must be detecmine4 as of ODS half-hour prior
to the closing time for receipt of competitive tenders.
Maximwm Recognized Bid
at a S~ngle Rate •.•••••••.•• 35% of public offering
Maximum Award .•.•.•••••••••••••• 35% of public offering
Receipt of Tenders:
Noncompetitive tenders •••.•• Prior to 12:00 noon Bastern Standard time on auction day
c~etitive tenders .•.•••.•• prior to 1:00 p.m. Eastern Standard time on auction day
Payment ~er.m.:
By charge to a funds account at a Federal Reserve Bank on issue date, or payment
of full par amount with tender.
TreaBu~irec~ customers can use the Pay Direct feature which
authorizes a charge to their account of record at their financial institution on issue date.
NEWS
~8~9~. . . . . . . . . . . . . ..
. . . . . . . . . . . . . .
OmCE OFPUBUCAFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C. - 20220 - (202) 622·2960
EMBARGOED UNTIL I :30 P.M. EST
Text as Prepared for Delivery
For Immediate Release
March 6. 2000
"Priorities for Economic Policy in a New American Economy"
Remarks by Treasury Secretal")' Lawrence H. SU.mmers
Finance Conference on the New Economy
Boston College
Boston, MA
Thank you. I am delighted to be here. Let me especially thank my friend Congressman
Markey. and Father William Leahy. the President of Boston College. for im'iting me to be \\ith
you for this event.
Today I want to reflect for a few minutes on three fundamental questions for the future.
•
First. what is new about the ""new" economy?
•
Second. why has the American economy perfom1ed so well in this new era?
•
Third, what are the right broad strategies for taking advantage of the opportunities that a nev;
economy presents'?
I.
The Foundations of a New Economy
Ten years ago in Chicago I called my wife - simply to tell her that I was in a car that had a
telephone. Seven years later. traveling abroad. ] was handed a mobile phone to talk to (then)
Secretary Rubin about the IRS. And I did not give it a second thought. Even though I was sitting
in a canoe two hours outside Abidjan at the time.
That experience brought together some of the most important forces in the world today:
technology. markets. global integration and the changing source of economic value.
LS-.:/34
Fm- press releases, speeches, public schedules and official biographies, call our 24~our fax line at (202) 622-2040
·U.S. Govemment Printing Olflce 1998· 619·559
First. revolutions in technolo,l,'Y
Advances in information teclmology. transportation and communications are taking us to a
post-industrial age. with profound implications for economies and societies. And 1 am con\'inced
that the process of diffusion is far from complete. The sign that a technology has become
pervasive is when you notice its absence rather than its presence. By that standard. connection to
the Internet has some way to go. Perhaps 3-4 percent of the letters of congratulation that 1
received on my appointment as Secretary were in the form of e-l11ails.
With the scale of business-to-business c01Ulections many times greater than individual-toindividual ones, it is likely that we understate their importance when we equate our day-to-day
experience with that of the broader economy. What we can say. based on the evidence. is that the
diffusion of new technologies is likely to be an accelerating rather than a decelerating process. I
have been struck, looking at the business literature on these issues, by how many of the chans
are in log scale.
Second. the spread of market forces
A second trend that has been creating this new economy has been the erosion of centralized
economic controls and the spread of market forces.
It cannot be an accident that Soviet-style communism, planning ministries throughout the
developing world and large corporations run by command and control all ran into a brick wall in
the same decade and had to be restructured. Increasingly, the balance of economic advantage has
tilted in favor of systems in which economic power and opportunities are more decentralized and the skills and ideas of the individual are given greater weight. At the level of individual
businesses and national economies, flexibility is wi1Uling out over rigid controls. And the
capacity to respond to change is winning out over the capacity to dictate it.
Third, global integration
A third and perhaps most spectacular recent development is the beginnings of a more truly
global economy.
\\Then history books are written 200 years from now about the last two decades of the 20th
century, I am convinced that the end of the Cold War will be the second story. The first story
will be about the appearance of emerging markets - about economies where more than three
billion people live moving toward the market and seeing rapid growth in incomes. For the first
time in human history, living standards for huge populations have quadrupled or more in a single
generation. This is an event. I would argue, whose importance in economic history can be
compared only to the Industrial Revolution and the Renaissance.
2
Fourth. a changing source oj'economic value
A fourth major trend is a change in the nature of what constitutes a good. We are moving
from an economy in which the canonical product is an ingot of iron, a barrel of oil or a bushel of
wheat- to one in which the canonical product is gene sequence, a line of computer code. or a
logo. As Chairman Greenspan has often emphasized, in such a world. goods are increasingly
valued for the knowledge that went into them rather than their physical weight. And what you
know matters more than how much you can lift.
Taken together. these trends perhaps capture what is new about the present moment.
Parameters such as normal rates of unemployment and potential GNP growth surely have
changed in the new economy. But many of the laws of economics. and all of the verities of
human psychology, have not changed. That is why the new economy has to be built on old
virtues. Which brings us to the question of explaining America's recent economic success.
II.
The Foundations of America's Recent Economic Success
The exceptional performance of the United States economy in the 1990s has been
fundamentally the result ofthe coming together of two elements: the advent of what VicePresident Gore has called the "information teclmology supply shock", and a return to old ,iirtues
in economic policies - fiscal policies particularly.
•
The oil shock of the mid-1970s dramatically raised the price of a commodity that while not
accounting for a large share of the economy, had enormous spillovers. The effect was a
negative productivity shock. and a combination of ills that we had to coin a new term for:
stagflation.
•
Conversely, the information technology sector accounts for a similar fraction of the
American economy in the 1990s that oil did in the 1970s. But developments in this sector
have reduced inflation and unemployment, and substantially raised productivity - with
positive impacts on the rest of the economy that are just beginning to be captured.
OUf ability to take advantage of this supply shock has depended on the centrality of
information technology to our economy - which, in turn, has depended in large part on the
dynamism of the American financial system.
•
This helped to ensure that US companies were forced early to undergo painful reengineering, permitting them to emerge faster and stronger in their fields.
•
And it helped to channel funds to new industries - through a venture capital sector in which
entrepreneurs may raise their first $100 million before buying their first suits.
However, our ability to exploit these new opportunities has depended also and critically on
President Clinton and Vice President Gore's determination to forge a new national consensus
around sound macro-economic policies - and, especially, a new paradigm for the management of
our nation's budget.
.,
.J
Structural deficit policies give rise to vicious circles. With underlying deficits and rising debts
and interest burdens. deficits tend to lead to rising interest rates - and so to falling investment
and slowing growth. which reduce revenues further. increase deficits and start the cycle again.
This process leads to steadily decreasing national saving and deteriorating economic
performance - what we saw in the late 1980s and early 1990s.
Deficits - and the vicious cycle that they set in train - are ever more costly in an environment
of burgeoning opportunities for new investment. That is why it was so impOltant for the United
States to reverse a generation or more of public borrowing. And that is why fiscal policy has
played such an important role in helping to sustain the current expansion.
Surpluses give rise to a kind of virtuous circle of declining debt. increasing national savings.
lower interest rates, and rising investment and growth - leading to further fiscal improvement
and a continuation of the cycle. Indeed. American savers have had to absorb more than $2 trillion
less in government debt since 1993 than they would have if the budget projections made in that
year had been realized. That is more than $2 trillion dollars available for new investment in
America's future.
This has much to do with why the expansion has been investment led. capacity creating and
long lived. with capacity utilization - even today - not far from historic norms. Real investment
as a share of GNP is today higher than it has been at any time in the postwar period.
III.
Core Implications for Future Economic Policy
If these judgments are correct - that the economy is new in the sense that it is driven by new
technologies, the benefits are more globaL it is more market-oriented. and the value of its goods
is judged more by the ideas they embody than their physical mass - this has a number of
implications for public policy today:
•
Some newer aspects of economic policy become especially essential.
•
And certain old virtues increase in value.
1.
New Prioritiesfor Economic Policy
It is a characteristic of the "weightless" goods of this new economy that there will often be
very high initial fixed costs and low, even zero marginal costs. In that sense, the cost structure of
the canonical industry will be increasingly reminiscent of that for pharmaceuticals. publishing or
the recording industry.
In these new kinds of industries, growth should have a greater potential to snowball. Success
may have greater potential to become self-perpetuating. as growth leads to rapid declines in
prices, and so to further expansion in the market and further growth. We see an aspect of this
today in the fact that orphan drugs cost much more than drugs with a larger market - and
bestsellers cost that much less than academic monographs that very few people may read.
4
There is the further point about these new industries, beyond the fact that costs fall as markets
grow, that the value of networks will be increasingly important. The first fax machine could do
very little. With one hundred fax machines, ten thousand connections are possible - with ten
million machines the possibilities are almost limitless.
This reality - that growing demand and growing markets and networks will tend to reduce
costs and raise efficiency - makes successful economic management all the more important. It
also points up the importance of making sure that we function with as large markets as possible.
•
That is why continued emphasis on deregulation will be cruciaL to ensure that goverm11ent is
not preventing or distorting the development of fast-growing markets. It is why passing the
Telecommunications Act was important. And it is why we worked so hard to pass the right
kind of Financial Modernization legislation last year.
•
Just as important. it highlights the enormous benefits that will flow from successful global
economic integration. which is why we need to do all we can to keep our markets open. and
to work to ensure that other countries open theirs. A number of upcoming decisions will
show our continued commitment to this kind of integration. Let me highlight two here:
granting China Permanent Normal Trade Relations (PNTR) status to support its entry into the
WTO; and passing the African Growth and Opportunity Act and the enhanced Caribbean
Basin Initiative.
•
It also points up the importance of growing the size of our networks here at home. by making
sure that everyone has a part. This has been an enduring national challenge going back to our
efforts, half a century ago. to ensure that essentially every American had access to electricity.
to running water. and to a telephone. It has its counterpart today in our work. through "First
Account" and other initiatives. to ensure that every American has access to a bank account.
This sounds like a small step. Until you consider that in this age of the Internet. derivatives.
and embedded options. perhaps 15 percent of US households still do not have one.
2. The New Importance of Old Virtues
At the same time, in this new economy some of the oldest lessons of economic science
acquire even greater force.
•
It makes continued fiscal discipline even more important. For. at a time when growth and
investment is critical. and financial markets respond more quickly than ever before to
changes in the future prospects. the specter of rising public debt in the future will cause more
economic damage today than was true in the past - and the prospect of continued surplus will
do that much more good. By continuing to pay down debt within a framework that helps us
meet our future commitments to Social Security and Medicare, we can help to maintain the
virtuous cycle we have worked so hard to achieve. And we can re-Ioad the fiscal cannon,
preparing the government to respond to future contingencies such as recessions or threats
from overseas.
5
•
It also makes us even more dependent as a nation on the skills and capacities of our people and makes more urgent the challenge of raising the quality and coverage of American
education. This will have important direct benefits for the economy in reducing skill
bottlenecks and expanding the productive potential of the workforce. It will also have
important indirect benefits for our society. by weighing against the potentially inequitable
consequences of new teclmologies. That is why the President has placed such an emphasis on
investing in schools. on expanding Pell Grants and on creating the HOPE scholarship. And
that is why his budget for FY2001 includes expanded deductions for college tuition thm
would essentially put four years of college within reach for every American.
•
And this new economy surely makes the case for public support for scientific innovation.
first elaborated nearly 40 years ago by Kenneth Arrow. that much more evident. That is why
we pushed for an extension of the R&D tax credit last year. That is why we have increased
America's national science and technology budget for seven successive years. And that is
why the President's budget for FY2001 commits an unprecedented $43 billion to science and
technology research as part of our 21 sl Century Research Fund - a 7 percent increase on the
previous year.
IV.
Concluding Remarks
These are good times. The economy is working for most Americans. We have a great deal to
be proud of. But let me conclude on a more somber note.
Just as the world in 1999 looks very different from the world of 1989. so too did things look
very different in 1989 than in 1979 - and so. just as surely. will 2009 look very different from
today. We cannot know what this new economy will look like a decade from now. What \,ye can
know is that we are enjoying a very special moment. a moment that confers a special
responsibility on public policy to work to broaden the base of our prosperity - and minimize
future risks.
Technology does provide Americans with remarkable opportunities. But they are not there for
those who lack the basic means to take advantage of them. And it has been estimated that in
America today. a child born of a single teenage mother who did not finish high school has an 80
percent chance of living in poverty at the age often. Male life expectancy in Washington. DC is
several years below that in Mongolia or Belarus.
If our success is to continue. if our economy is to be what it has to be. and if it is to be a
secure prosperity that we enjoy. then we as a country have to do more to ensure that all are
included. That is why expanding support for the working poor through the Earned Income Tax
Credit is so important. That is why we need to take the steps contained in our New Markets
Initiative to help to unleash the potential of our inner cities and other disadvantaged areas. And
that is why we need to expand programs such as Head Start and the Child Health Insurance
Program so that every child starts out in life with the core essentials. Many are rightly focused
today on preventing a gaping digital divide. And we should remember that nothing does more to
create that divide than the inability to read.
6
Finally, technology is transforming our economy and our society. But we need to recognize
that there are some things that many Americans would like to stay the same. As we work to build
a modem financial system we have also to ensure that every consumer's right to privacy is
properly protected. As we work to build a more global economy we have also to work to prevent
a race to a bottom in the policies and protections that matter to us. As important as new markets,
new technologies, and new global integration are, we have equally to recognize that their full
potential will not be realized without the right kind of public purpose. Thank you.
-30-
7
D EPA R T
~I
E N T
0 F
THE
T REA SUR Y
1789
OFFlCE OF PUBUCAFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C. - 20220 - (202) 622-2960
FOR IMMEDIATE RELEASE
T ext as Prepared for Delivery
March 6, 2000
Remarks by Under Secretary of the Treasury for Domestic Finance Gary Gensler
to the Institute of International Bankers Annual Washington Conference
Washington, D.C.
Good morning and thank you for inviting me to speak here today.
The reform of our nation's financial services laws is one of the major achievements of this
Administration. Passage of the Financial Modernization Act (the "Act") culminated decades of
effort by Congress and various Administrations. In the end, we believe that we achieved a bill
that benefits not only the financial services industry, but consumers, communities, and the
economy as a whole. We are proud to have been part of this historic legislation.
The Act's core financial activities provisions are about to take effect on March lIth, 120 days
after enactment of the bill. We are well into the tremendous undertaking of implementing the
many provisions of the Act. We are working closely with our colleagues at the financial
regulatory agencies to accomplish this.
This morning, I would like to give you an update on our efforts at Treasury to carry out the
provisions of this legislation. While the Act generated a significant number of rulemakings and
studies, I would like to focus today on four areas in particular - new financial activities and
merchant banking, Community Re~nvestment Act, subordinated debt study, and privacy. March
will truly be a busy time for us. Proposed rules on privacy have already been published. We
anticipate publishing rules, studies, and requests for comments in each of the other areas. We also
are moving forward to finalize proposals for the President's privacy initiative.
LS-435
1
For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
New Financial ActivitieslMerchant Banking
I would like to talk first about some of the new authority the legislation provides to financial
institutions. In addition to opening up a broad range of banking, insurance, and securities
activities that can now be offered by a single organization, the financial modernization bill allows
for additional new financial activities. Treasury and the Federal Reserve Board have a shared role
under the Act in defining these additional activities. Both Treasury and the Federal Reserve share
t he view that the intent of the legislation is to expand the range of pennissible activities while
maintaining an appropriate separation between banking and commerce. We will be working
closely with the Board to ensure that new activities permitted under these provisions are truly
financial in nature. We will each be putting out a housekeeping rule addressing the process for
applications to conduct these new activities.
Maintenance of the separation between banking and commerce is particularly important in the
area of merchant banking. Both Treasury and the Federal Reserve Board believe that the
limitations included in the legislation are very important to ensure that merchant banking
ownership interests are held as investments. A critical feature of our capital markets has been a
traditional separation of those who allocate capital from those who compete for capital. The
financial modernization legislation appropriately took a very cautious approach to lessening such
separation.
Treasury and the Board are writing joint rules to ensure compliance with the statutory limitations
on merchant banking activities and to place limits on transactions between depository institutions
and these holdings. Such limits are essential for the protection of the safety and soundness of
affiliated depository institutions. We look forward to publishing proposed rules with the Federal
Reserve on these issues later this month.
Community Reinvestment Act
We also have important follow-up work to do in the area of community reinvestment. In
modernizing our nationts financial system, the Administration insisted on the principle that no
bank or holding company should be permitted to expand into newly authorized lines of business -such as insurance and securities underwriting -- without a satisfactory track record in meeting its
fundamental community reinvestment responsibilities. We and our Congressional supporters
fought hard for this principle, and won in the final bill.
The ace and Federal Reserve have already published proposed rules on engaging in new
activities in financial subsidiaries or financial holding company affiliates that require all affiliated
2
banks to have at least a satisfactory eRA rating. We expect the rules to be finalized shortly. The
implementation of these rules represents an important step forward for eRA.
The legislation also calls on Treasury to conduct two studies on how the bill affects financial
services in low- and moderate-income communities and to persons of modest means. The first, a
baseline study of the effectiveness of eRA, is due in March. This baseline study, in effect, will be
the first installment of a broader study due in early 2001. We expect that the result of the baseline
study will be very helpful in suggesting the lines of inquiry for the broader study. The legislation
also requires the Federal Reserve to do a survey of profitability, delinquency, and default rates
related to eRA lending. We look forward to the results of that study.
The law also includes a provision that requires disclosure and annual reporting on certain
agreements between banks and non-governmental organizations. The bank regulatory agencies
are charged with proposing implementing rules for this provision. How the bank regulators
implement this rule could have an important effect on the burdens faced by financial institutions
and community-based organizations in creating jobs, building housing, and restoring
neighborhoods in communities across the country. We expect regulators to publish proposed
rules shortly.
Financial modernization holds the promise of greater customer choice and greater economic
efficiency in delivering financial services. We must remain vigilant to assure that access to capital
is available for all communities.
Subordinated Debt Study
Treasury and the Federal Reserve are jointly undertaking a study ofthe feasibility and
appropriateness of requiring large banks and bank holding companies to maintain some portion of
their capital in the form of subordinated debt. Treasury and the Board will publish a request for
comment this week that asks a number of questions that we believe are important to evaluating
this issue.
Proponents of mandatory subordinated debt believe that it has the potential to provide a source of
market discipline, both directly, through the cost of issuing such debt, and indirectly, through
monitoring of the price of previously issued debt. As the tremendous changes in the banking
industry further complicated the task of supervising large banking organizations, market discipline
could prove increasingly valuable in maintaining the soundness of our banks.
Our request invites comment on the potential of a subordinated debt requirement to serve as a
source of market discipline. It raises issues concerning the characteristics of the subordinated
3
debt markets and both the costs and benefits of mandatory subordinated debt issuance. We also
ask how such a requirement could be structured, if implemented, and how it could be
incorporated into existing capital standards and supervisory policies.
We look forward to receiving comments on these important and complex issues.
Privacy
Finally, I would like to tum to the topic of privacy.
One of the first challenges of implementing financial modernization has been the development of
proposed privacy rules. This is an issue that has great resonance with consumers and with
lawmakers. When the President outlined his "Financial Privacy and Consumer Protection in the
21 st Century" initiative last May, many viewed the proposal as ambitious. Only six months later,
we made significant progress on the President's goals in the financial modernization legislation.
We believe that the requirements included in the legislation for clearly stated privacy policies, for
consumer notices and for the right to opt out of third-party information sharing are important
advances in privacy protections for all Americans.
In developing the regulations to implement the Act's provisions, we faced the challenge of
protecting the privacy of consumers while preserving the benefits of competition and innovation
brought about by technology. Treasury has been pleased to have had a role in the interagency
development of privacy rules implementing this statute. This has been a major undertaking, with
eight agencies working together to issue consistent rules on one of the Act's most complicated
and important provisions. The timetable has been very tight. but there has been a high level of
cooperation among all of those involved in the process.
Proposed rules have now been issued by all of the agencies involved. We believe the agencies
have taken a balanced approach that minimizes burdens on financial institutions, while providing
very effective privacy protection consistent with the statute. The regulators are looking forward
to receiving comments from you and, we expect, many others. After the comment period closes
at the end of March, the agencies will continue to work together with the goal of achieving a
uniform, consistent set of final rules.
The additional consumer choice provided in the financial modernization act is an important step in
protecting financial privacy. As important as the legislation and the implementing rules are,
however, this Administration believes that more can be done to protect personal financial privacy.
Consumer choice for sharing with third parties should be a floor, not a ceiling.
4
The President has called on Treasury, working with other parts of the Administration, to develop
legislation to enhance consumer privacy beyond existing law. As the President has indicated, our
new proposals will address information sharing within financial conglomerates. We are looking
at a range of options, with the objective of finding balanced proposals that will both enhance
privacy protection and allow financial institutions to provide quality services. We are consulting
with industry, consumer groups, and Congress to fulfill the President's mandate. We hope to
finalize these proposals in the near term.
I believe that the question of consumer control over personal information will become more
pressing as technological innovation continues. I encourage those of you who work with financial
institutions to get out ahead of this issue. Indeed, some institutions already have.
Conclusion
The implementation of the financial modernization legislation and the continuing challenges of
evolving technology will have important implications for the shape of the financial services
industry in the future. I believe that the now-constant change driving financial services markets
will produce -- perhaps sooner than we think -- an industry that looks very different from the one
we now know. While there are a lot of uncharted waters ahead of us in this process, I believe that
change will ultimately be very good for the industry, consumers, and the economy.
Thank you. I will be happy to take your questions.
-30-
5
PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
FOR RELEASE AT 3:00 PM
March 6, 2000
Contact: Peter Hollenbach
(202) 691-3502
PUBLIC DEBT ANNOUNCES ACTIVITY FOR
SECURITIES IN THE STRIPS PROGRAM FOR FEBRUARY 2000
The Bureau of the Public Debt announced activity figures for the month of February 2000, of
securities within the Separate Trading of Registered Interest and Principal of Securities program
(STRIPS).
Dollar Amounts in Thousands
Principal Outstanding
(Eligible Securities)
$1,905,222,878
Held in UnstrippedForm
$1,700,260,683
$204,962,195
Held in Stripped Form
$18,093,988
Reconstituted in February
The accompanying table gives a breakdown of STRIPS activity by individual loan description. The
balances in this table are subject to audit and subsequent revision. These monthly figures are included
in Table V of the Monthly Statement of the Public Debt, entitled "Holdings of Treasury Securities in
Stripped Form."
The Strips Table along with the new Monthly Statement of the Public Debt is available on Public
Debt's Internet homepage at: www.publicdebt.treas.gov.Awide range of information about Public
Debt and Treasury Securities is also available on the homepage.
18-436
000
TABLE V • HOLDINGS OF TREASURY SECURITIES IN STRIPPEO FORM. FEBRUARY 29. 2000 - ContinueCl
Loan DescriptiOn
Treasury Noles:
Series: Inleresl Rate:
eusIP;
AB
>112
9128274A7
4C3
AC
>518
8·7/8
B
YVV6
AD
4G4
>112
5-318
4J8
AE
AF
>3/8
4Ml
8·3/4
C
ZE5
402
AG
>118
4-112
AH
4RO
4
4T6
AJ
8-1/2
0
ZNS
5-314
3M2
X
4-518
AK
4V119
4-5/8
Al
4X7
4-1/2
U
4Z2
7-3/4
A
ZX3
>3/8
3WO
S
V
5
5C2
4-7/8
W
500
5
X
5E8
8
B
A8S
T
>518
4E9
Y
>1/4
SHI
5-3/4
5J7
Z
AB
>112
5L2
C
7·7/8
B92
AC
>112
5P3
5-516
AD
501
AE
>7/8
5R9
0
7·112
025
6-3/8
R
5X6
6-112
5
6A5
7-1/2
A
F49
6-3/8
B
G55
>7/6
M
3J9
5-314
N
3L4
5-314
P
303
>518
3S9
5-112
3V2
C
6-1/4
A
J78
>1/2
0
3Z3
>1/2
E
4B5
5-314
F
401
5-1/2
G
4H2
>318
H
4K5
>314
B
L83
5-1/4
4N9
J
4·1/4
K
4U3
>7/8
A
Nal
4-314
E
5AS
7·1/4
B
P89
5-1/4
F
5F5
7·1/4
C
088
6
SMa
G
7·7/8
0
RS7
>7/8
H
557
7·112
A
5SS
6-112
8
T85
6-1/2
C
US3
5-718
0
V82
5-5/8
A
W81
6-718
B
xao
7
C
Y55
6-112
0
Z62
6-1/4
B
2JO
6-518
C
2U5
6-1/8
0
3EO
>112
B
3X8
5-5/8
C
4F6
4-314
4Vl
D
5-1/2
B
5G3
6
5N8
C
6-1/2
B
5Z1
a
Corpus
STRIP
euslP
912820 CT2
CV7
AM
eZ8
OBO
006
MS
OFI
OG9
OH7
AY3
CF2
OlB
OM6
OP9
AZO
CPO
DRS
053
0T1
BA4
CX3
OW4
OX2
OYO
BB2
EB9
EC7
E05
BCO
El7
EN3
BOB
BE6
eC9
CE5
CH8
CKI
CN5
BF3
C54
CU9
CW5
OA2
OC8
BGI
DE4
OJ3
BH9
007
BJ5
OU8
BK2
OZ7
BlO
EE3
8M8
BNS
BPI
809
6R7
B55
BT3
BUO
BW6
BX4
CA3
C08
CYI
OKO
OV6
EAl
EMS
Principal Amount Outstanding in Thousands
ReeonstiMed
This Month
Maturity Dale
Tolal
Oulstanding
03/31100
04130/00
05115/00
05131/00
06130/00
07131100
08115/00
08131100
09130/00
10131100
11115/00
11115/00
11130/00
12131/00
01131/01
02115/01
02115/01
02128/01
03131/01
04/30/01
05/15/01
05115101
05131/01
06130/01
07131101
08115/01
08131/01
09130101
10131101
11/15/01
01131102
02128/02
05115/02
08115/02
09130/02
10/31102
11/30/02
12131/02
01131/03
02115/03
02128/03
03131/03
04130103
05131103
06/30103
08/15103
08115/03
11115/03
02115/04
02115/04
05115/04
05/15/04
08115/04
08/15/04
11115/04
11115/04
02/15105
05/15/05
08/15/05
11/15/05
02115/06
05115106
07/15/06
10115106
02115/07
05/15/07
08115/07
02115/08
05/15/08
11115/08
05/15/09
08115/09
02115/10
Total Treasury Notes ............................ ·
Grand Total.. ........•.............••..••••.•....••..••... .......•...........••.••••.••...........
Portion Held in
UnstriDced Form
Portion Held in
SlripDed FOnT!
0
0
12.800
0
0
17.206.376
15.633.855
10.496,230
16.580.032
14.939.057
18.683.295
11.080.646
20.028.533
19.268.508
20.524,986
11.519.682
IS.036.088
20.157,568
19,474,772
19.777,278
11.312.802
15.367,153
19.586.630
21,605.352
21,033.523
12.398.083
12.873.752
19.885,985
19.001.309
20.541.318
12.339,185
20.118.595
16.797,828
19,196,002
24,226,102
19,381,251
IS,569,711
11,714,397
23.859.015
12,806.814
11.737,284
12,120,580
12,052,433
13,100,640
23,562,691
13,670,354
14,172,892
12,573,248
13,132,243
13,126,779
28.011,028
19,852,263
18,625,785
12,955,077
17,823,228
14,440,372
18,925,383
13,346,467
18,089,806
14.373,760
32.658,406
13.834,754
14.739,504
15.002,580
15.209.920
15.513,587
16.015,475
22,740.446
22.459,675
13.103,678
13.958.186
25.636,803
13.583,412
27.190.961
25.083.125
14.794.790
27.399.894
12.277,466
17.203.576
15.630.655
4.793.830
16.326,432
14.671.857
18.680.095
6.492.806
20.023.733
19.268.508
20.496.986
6.138.082
16.036.088
20.157,568
19.471.572
19.777.278
7.635.202
15.367,153
19.586.630
21,605,352
21.033.523
8.563.333
12.873.752
19.885.985
19,001,309
20.541.318
8.979,185
20,118.595
18,797,828
19,196.002
20,305,462
19.381,251
16.569,711
8,739,197
22,103,B15
12,771,S14
11,675,684
11,843,780
12.052,433
13,100,640
22,930,595
13,626,354
14,172.892
12,573,248
13,132,243
13,126,779
27,671,028
19,852.263
18,593,765
12,883,077
17,823,228
14,373,172
18.925,383
12,377,667
18.089.806
14,373,760
32.658,406
13.789.634
14.739,504
15.002,580
15.200.320
15.513.267
15,924,915
22.740,446
22.459,675
13,032,830
13.914,986
25,612,803
13.583,012
27.190,961
25.082,325
14,791.900
27.399.794
12.277,466
2.800
3.200
5.702.400
253.600
267.200
3.200
4.587.840
4.800
0
28.000
5.381.600
0
0
3.200
0
3.677.600
0
0
0
0
3.834.750
0
0
0
0
3.360.000
0
0
0
3,920,640
1.260.916.688
1.222.338.014
38,578.674
1,277.744
1.905.222.878
1.700.260.683
204.962.195
18.093.988
0
0
2.975.200
1,755.200
35,200
61.600
276,800
0
0
632,096
44,000
0
0
0
0
340,000
0
32,000
72,000
0
67,200
0
968,800
0
0
0
45.120
0
0
9.600
320
90.560
0
0
70,848
43,200
24,000
400
0
800
2,800
100
0
0
0
0
0
0
5.200
0
0
0
0
132.800
0
0
0
0
0
0
0
0
0
112,000
0
0
0
402,080
0
0
233.280
104,000
0
0
0
0
0
141.184
0
0
0
0
0
0
0
0
0
0
57.690
0
73,600
0
0
0
0
0
0
0
0
0
0
0
0
0
3.200
0
0
0
0
0
0
PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
CONTACT:
FOR IMMEDIATE RELEASE
March 06, 2000
Office of Financing
202-691-3550
RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
91-Day Bill
March 09, 2000
June 08, 2000
912795DZ1
Term:
Issue Date:
Maturity Date:
CUSIP Number:
5.690%
High Rate:
Investment Rate 1/:
Price:
5.852%
98.562
All noncompetitive and successful competitive bidders were awarded
securities at the high rate. Tenders at the high discount rate were
allotted 14%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Competitive
Noncompetitive
$
21,689,882
1,328,544
$
310,939
310,939
23,329,365
9,011,365
4,336,780
139,061
4,336,780
Foreign Official Refunded
SUBTOTAL
Federal Reserve
Foreign Official Add-On
$
7,371,882
1,328,544
8,700,426 2/
23,018,426
PUBLIC SUBTOTAL
TOTAL
Accepted
Tendered
Tender Type
27,805,206
139,061
$
13,487,206
Median rate
5.660%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate.
Low rate
5.590%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio = 23,018,426 / 8,700,426 = 2.65
1/ Equivalent coupon-issue yield.
2/ Awards to TREASURY DIRECT = $1,015,153,000
18-437
http://www.publicdebt.treas.gov
PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
FOR IMMEDIATE RELEASE
March 06, 2000
Office of Financing
202-691-3550
CONTACT:
RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
182-Day Bill
March 09, 2000
September 07, 2000
912795EZO
Term:
Issue Date:
Maturity Date:
CUSIP Number:
5.825%
High Rate:
Investment Rate 1/:
Price:
6.085%
97.055
All noncompetitive and successful competitive bidders were awarded
securities at the high rate. Tenders at the high discount rate were
allotted 70%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Accepted
Tendered
Tender Type
Competitive
Noncompetitive
$
$
Foreign Official Refunded
SUBTOTAL
Federal Reserve
Foreign Official Add-On
$
4,425,487
1,105,161
5,530,648 2/
19,465,648
PUBLIC SUBTOTAL
TOTAL
18,360,487
1,105,161
2,472,761
2,472,7.61
21,938,409
8,003,409
3,850,000
1,105,239
3,850,000
1,105,239
26,893,648
$
12,958,648
Median rate
5.810%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate.
Low rate
5.750%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio
=
19,465,648 / 5,530,648
=
3.52
1/ Equivalent coupon-issue yield.
2/ Awards to TREASURY DIRECT = $810,684,000
L8-438
http://www.publicdebt.treas.gov
DEPARTMENT
OF
THE
TREASURY rg)
For Immediate Release
March 7. 2000
TREASURY
NEW S
Contact: Public Affairs
(202) 622-2960
TREASURY AND JUSTICE RELEASE 2000 MONEY LAUNDERING STRATEGY
Treasury Deputy Secretary Stuart Eizenstat and Deputy Attorney General Eric Holder
will release the Second Annual National Money Laundering Strategy at 4 p.m. Wednesday,
March 8 in the Treasury Department's Diplomatic Reception Room (Room 3311), 1500
Pennsylvania Avenue, N.W.
The room will be available for pre-set at 3 p.m.
Media without Treasury. White House. State. Defense or Congressional press credentials
planning to attend should contact Treasury's Office of Public Affairs at (202) 622-2960 with the
following information: name. social security number and date of birth. This information may
also be faxed to (202) 622-1999.
- 30 LS-439
For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
TREASURY
NEWS
OFFICE OF PVBLlC ArrAnts -ISO. rENNSYU'ANlA AVENUE. N.W. - WASIUNOTON, I>.C•• 202%8. (20l) 621.~t60·
PtmLXC CO!I'l'AC'l": Off ice of J'i.na.J1c:iDg
202-691-3550
IIBDIA COII'lAC'l' I Bill Buck
202-622-1997
BIIBAltGOC tJJII'l'I[' 9: 00 A.K.
KarCh ." 2000 '
OIl Karch 9. 2000, the 1'reasuZ'y "il1 buy back up to $1,000 m:illi~ par of
its out.tan4iDg i.sues that mature between I'abruary 2015 &Ad Jlebna:y 2020.
~r••.ur.r reserves the right to accept less thaD the ~unc.4 amQUDt.
Dis debt ba,yt)aek (recSflllPtiem) operatiOD will be ccmducted :by Treasury' a
"iseal AQent, the rec!eral aeserre BaAk of .." York, 'Using its OpeD Market .
operaticms system. ODly institutions that the rec!eral " •••rYe Bank of Ifew
York baa appro....4 to coaduct 0pG llark.t tr.sa.actL0iD8 aay n.J:aLt offar. em
l>ehalf of Uamsel'ftB U14 their customers. Offer. at the lligh•• t
accepted price for a particular i.sue JIilY J)e accepted CD a l)rorate4 basis,
rounc!e4 Up to the Dezt $100,000. As. re.ult of this X'OUDctiDg, the Treasury
may buy back u. amount .lightly larger than the ODe UDO'W1ced aboTe.
'l'his de!lt buYback operatiOD Ls go~emec! by
forth in 31 CI'R "art 375 aDc! this &m1ounca.ent.
u.
tazms ad cxmdi tions set
file debt buyback operatiOD regulal:ions are ....aJ.l.al:>le em the Bureau of
the Public Debt's website at www.pUblic4ebt.treaa.gov.
Detai1s about the operation and each of the eligible illues are given in
tla• • t~.ebe4 ~ighl.i9h~B.
000
At; taCbTJUUl t
LS-440
BIGBLIGB'l'S
or
'l'REASURY DEBT Bl1YBACl; OI»ERATION
March 7, 2000
Par amount to be bought back •.•••••••• Up to $1,000 million
Operation date •••.•.....••••.•••••••.. March 9, 2000
Operation close time ...••.•••••••••••• 11:00 a.m. Kastern St~ ttme
Settlement data ••.••••••••••••••••.••• Karch 13, ~OOO
Min;mum par offer amount ••••••••••••. $100,000
Multiples of par ••••.•..•.••••••••••• $100,000
Pormat for offers ..... Expresaed in terms of price per $100 of par with
three decimals. The first two decimals represent
fractional 32D4s of a dollar. '!'he third decimal
repr ••ants eighths of a 32 ad of & dollar, and must:
be a 0, 2, 4, or 6.
Delivery instructions
••••••••••••••• ABA Ilumber 021001208 n.B NYC/COST
Treasury issues eligible for debt buyback operation (in millions):
Coupon
Ilaturitl"
COSIP
bte (%)
11.250
10.625
9.875
9.250
7.250
7.500
8.750
8.875
9.125
9.000
8.87S
Data
Humber
8.125
8.500
02/1S/~01S
08/15/2015
11/15/2015
02/15/2016
05/15/3016
11/15/2016
05/15/2017
08/15/2017
05/15/2018
11/15/2018
02/15/2019
08/15/2019
02/15/2020
DP 0
DS 4
M' 2
DV 7
J)W 5
DX 3
DY 1
91~e10 DZ 8
912810 BA 2
912810 1m 0
912810 ICC 8
912810 ED 6
912810 :u: ,
912810
912810
912810
912810
912810
912810
912810
Pa.r A1Unmt
privately
Par Amou.nt
Outstanding·
Beld·
12,668
11,012
7,150
5,983
6,900
5,958
7,267
6,230
17,726
18,82'
18,864
17,486
15,677
18,19'
14,017
12,063
7,478
8,709
9,033
8,494
19,251
17,566
20,214
18,373
10,229
8,868
Total
• Par amounts are
80S
171,3~O
15~,914
Par Amount
Bel.d as
STRIPS·
',962
1,768
3,427
843
161
1,005
7,592
3,070
'5,736
5,488
7,576
733
2,011
4',372
of March 3, 2000
The d.;if£erenee between the par CDOUIlt outstanding and the par amount
privately held is the par amount of thole issues 'held by the 7ederal
Jleserve System.
DEPARTMENT
OF
THE
TREASURY
NEWS
1_--•.----
U.S. International Reserve Position
The T reasm\' De[1arrmen t todar released US reserve
i\, mcllcared
In
asset~ da ta (or the week emung )'brch 3. ~lllill
tlm table, US resen'c assets totaled $()<),607
rrulLon
as ot i\larch ). 2UIiII, up from S(,<),2%
:1~
nuliJOI1
of February 25, 2000
(in
us ml'11'Ions
TOTAL
1. Foreign Currency Reserves
1
I
a. Securities
Of which. Issuer headquartered in the U S
b. Total deposits with:
b.i. Other central banks and SIS
b.n. Banks headquartered in the U.S.
b,ii, Of which, banks located abroad
b.iii. Banks headquartered outside the U.S.
b,jjj Of which, banks located In the US
2. IMF Reserve Position
3 1 2000
69,607
March
25: 2000
69,296
FebruarY
I. Official U.S. Reserve Assets
2
3. Special Drawing Rights (SDRs) 2
Euro
4,9:l2
Yen
5,784
Euro
TOTAL
10,716
4,861
Yen
TOTAL
5955
10,816
0
0
8.466
11,196
19,662
8,346
11 526
19572
a
a
0
0
0
0
0
0
17587
17 588
10,282
10
11048
11 C~5:
0
oi
:c]
I
4. Gold Stock
5.
3
Other Reserve Assets
!
11 Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Marke: Account
(SOMA), valued at current market exchange rates Foreign currency holdings listed as securities reflect marked·to-market V2lues, ar:
depOSits refect carrying values
21 SDR ho dings and the reserve position In the IMF are based on IMF data and revalued In dollar terms at the offl:lal SDR jollar ex:~an;:e
rate Consistent With current reporting practices, IMF data for February 25, 2000 are final Data for SDR holdings and the reserve pes'Jon I"~
the IMF shown as of March 3, 2000 (tn Italics) reflect preliminary adjustments by the Treasury to the February 2:, 2000 IMF ::ata
31 Gold stock IS valued monthly at $42 2222 per fine troy ounce
Values shown are as of January 31 2000
The Dec<2mb,,- 31. 19~~ .al~~
was S11,048 million
-441
Fm' press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
'US GovemmentP"nlingOIf,ce 1998· 619·559
u.s. International Reserve Position (cont'd)
II. Predetermined Short-Term Drains on Foreign Currency Assets
March 3, 2000
February 25, 2000
1 Foreign currency loans and securities
2. Aggregate short and long positions in forwards and
futures in foreign currencies vis-a-vis the U.S. dollar:
o
o
2.a. Short positions
2.b. Long positions
3. Other
o
o
o
o
o
o
III. Contingent Short-Term Net Drains on Foreign Currency Assets
March 3, 2000
February 25, 2000
1 Contingent liabilities in foreign currency
1.a. Collateral guarantees on debt due within 1 year
1.b. Other contingent liabilities
2. Foreign currency securities With embedded options
3. Undrawn, unconditional credit lines
3.a. With other central banks
3.b. With banks and other financial institutions
14.
headquartered in the U. S.
3.e. With banks and other financial institutions
headquartered outside the U.S.
Aggregate short and long positions of options In foreign
currencies vis-a-vis the U.S. dollar
4.8. Short positions
4.a.1. Bought puts
4.a.2. Written calls
4. b. Long positions
4.b.1. Bought calls
4.b.2. Written puts
o
o
o
o
o
o
o
o
Offical Reserve Assets Worksheet
(actual US dollar amounts)
Enter Dates Here
Last Week
25-Feb-00
Foreign Currency
Euro Securities
Yen Securities
Sec. Total
Euro Deposits
Yen Deposits
Deposit Total
Total
Euro Rate
Yen Rate
This Week
3-Mar-00
25-Feb-OO
3-Mar-00
$4,931,776,568.33
15,784,182014.78
$4,860,885,351.16
15,954,824833.02
$10,715,958,583.11
$10,815,710,184.18
~8,466
~8,345,626,087.70
226 535.12
111,196,063,897.45
~11,526,408,101.85
$19,662,290,432.57
$19,872,034,189.55
$30,378,249,015.68
$30,687,744,373.73
$0.9763
Y 110.98
$0.9618
Y 107.80
IMF
25-Feb-00
Source: NY Fed
-70,891,217.17
170,642.818.24
99,751,601.07
·120,600,447.42
330,344,204.40
209,743,756.98
309,495,358.05
3-Mar-00
Source: IMF (fax)
(prelim, with adjust.)
Reserve Tranche
GAB
NAB
Total
SDR
17,586,967,165.05
0.00
17,588,098,388.07
0.00
1,131.223.02
0.00
0.00
17,586,967,165.05
0.00
17,588,098,388.07
0.00
1.131,223.02
10,282,185,876.40
10,282,847,244.02
661,367.62
0.00
as of 1/31/00
Gold
25-Feb-00
3-Mar-00
11,048,272,032.71
11,048,272,032.71
Source: FMS (monthly statement)
0
25-Fet!-0~1
3-Mar-o~1
IOther Res.Assets
69,295,674,089,84
1TOTAL
Adjustments
to IMF and SDR data,
Source: (?)
311,287,948.69
69,606,962,038.53 1
translated at current exchange rates
1i);eHn;:iftftF=[)ata------------iN-S-OFtiS---------------------------------------------------S[)R-r.atefor---------------------1
I
:Calculation Section
Reserve Tranche
1
I
II GAB
:NAB
I
1
!SDRs
,
2S-Feb-OO
13,125,100,834
0
0
7,673,564.473
Adjustments
3-Mar-OO
13,125,100,834
0.746249
a
Q
13,125,100,834
7,673,564,473
Total =
SDRs =
------------------------------------------------------------------------------------------------------
In USC
:
$17 ,588,098,388.071I
$0.001,
$0.00:
I
$17,588,098,388.071
$10,282,847,244.02:
~
DEPARTl\1ENT
OF
THE
IREASURY'U}
TREASURY
NEW S
omCE OF PUBUCAFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C. - 20220 - (202) 622-2960
EMBARGOED UNTIL 9:30 A.M. EST
Text as Prepared for Delivery
March 8, 2000
TREASURY UNDER SECRETARY (INTERNATIONAL AFFAIRS)
TIMOTHYF.GE~
TESTIMONY BEFORE THE HOUSE COMMITTEE ON BANKING
AND FINANCIAL SERVICES
Introduction:
Thank you, Mr. Chairman and Ranking Member LaFalce, for inviting me to
testify at this important hearing about efforts to combat AIDS worldwide. We
welcome your hard work, Mr. Chairman, in bringing attention to this issue and in
putting forward a creative and ambitious proposal for U.S. leadership in this global
health crisis.
I would like to focus my remarks on the broader challenge of diverse health
problems in the developing world, and on the Millennium Initiative proposed by the
President to help combat infectious diseases, including AIDS. Health issues are not
usually considered the province of Finance Ministries, but they should be. In many
countries there are no greater threats to economic development, and any strategy that
effectively addresses health problems will need to leverage financial resources on a
large scale.
In my testimony today I would like to:
•
First, illustrate the United States' compelling economic interest in combating
infectious diseases in the developing world;
•
Second, identify the major constraints on progress in this area, and review the
lessons of recent development experience;
•
Third, outline the main elements of the Administration's initiative to promote
the development and delivery of vaccines around the world.
LS-442
Far press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
·U S Government Prlnllng Ofl,ce 1998 - 619-559
The Economic Dimension of the Crisis
The human toll of AIDS is indeed staggering. Fifty million people worldwide
have been infected with the HIV virus; more than 16 million have died; and annual
AIDS-related fatalities hit a record 2.6 million last year.
So far, the most devastating impact of AIDS has been in sub-Saharan Africa,
where 85 percent of all AIDS deaths have occurred. In at least five African countries,
over 20 percent of adults are HIV -positive. And the highest rates of new infection are
often among young women who will soon be mothers.
Even more frightening is the possibility that other parts of the world will go
down the same road as Africa. Infection rates in Asia are climbing rapidly, with
several countries on the brink of a large-scale pandemic and needing to take action
immediately to forestall the disaster that Africa has suffered. Parts of Latin America
and the Caribbean -- our own neighbors - also show high and rising rates of infection.
And the former Soviet Union countries and Eastern Europe are vulnerable as well, with
Russia experiencing the highest increase in infection rates in the world last year.
At the same time, people around the world continue to suffer from the scourge
of other deadly diseases that are centuries old. Tuberculosis accounts for 2.3 million
deaths annually, and drug-resistant strains are spreading. Thousands of people who are
HIV -positive actually die of TB; their damaged immune systems allow active TB to
develop, which then can spread to people who are not HIV -positive. Malaria strikes
hundreds of millions of people each year and results in more than one million deaths,
mostly children. The more common infectious diseases, diarrhea and respiratory
infections, are even more devastating, killing almost 6 million people each year.
Altogether, infectious diseases are the leading cause of death worldwide,
causing almost half of all deaths among people under age 45. As a result, over 11
million children worldwide are orphaned each year.
It is often hard for Americans to fathom, but fewer than half of Africa's
children are vaccinated against basic diseases like measles and diphtheria - even though
such vaccines exist and are one of the most cost-effective ways to improve health. In
South Asia, less than three-quarters of the children are vaccinated. The result is that
over 8 million children die each year of centuries-old diseases. Millions could be saved
using vaccines and medicines available today.
The social and economic impact of this public health crisis is horrific. Life
expectancy is declining sharply in many African countries, reversing decades of hardwon gains. In southern Africa, life expectancy is expected to drop from a high of 59 in
the early 1990s to 45 within the next 5-10 years - a level not seen since the 1950s.
Importantly, life expectancy is falling mainly because of rising mortality among prime
2
age adults. Because research shows that a larger share of working-age adults in a
population leads to faster economic growth, the loss of the most productive members of
society has disproportionate economic consequences.
Health care budgets and facilities are overwhelmed by the heavy burden of
caring for those infected. Families that are already impoverished are forced to liquidate
assets and defer expenses for essentials like education in order to pay for costly medical
care; this sends them into a deeper spiral of poverty. The death of both parents, which
is very common once AIDS strikes the family, has led to an alarming number of
orphans - over 11 million worldwide, with all but one-half million in Africa.
In many societies, young women are particularly vulnerable. It is often difficult
for them to stand up for themselves and minimize HIV risks, and - once infected they may face abandonment.
The costs of this humanitarian crisis are not limited to the countries that are
directly affected. We are all vulnerable - in part, because infectious diseases do not
respect the boundaries of states and geography, and in part because the national
economic distress and political instability that inevitably accompany this scale of human
loss can cause greater damage to the world economy and to regional stability.
We face a humanitarian imperative, but also an economic and a strategic
imperative, in doing what we can to address these challenges.
The Complexity of the Challenge and The Lessons of Experience
The causes of the health crisis in developing countries are complicated and
formidable. The record of past international efforts to combat infectious disease
suggests that there are no easy, simple solutions to this problem. Nevertheless, we
have learned a lot from experience, and we know the concrete steps that need to be
taken to improve the health and economic situation in poor nations.
One problem contributing to the high incidence of infectious diseases is the
remaining gaps in our scientific knowledge about those diseases. The development of
vaccines and medicines simply cannot exceed the frontiers of available basic science.
Yet, our scientific understanding is growing daily. As one pharmaceutical
executive said at last week's meeting with the President, this is a "golden age" for
research and implementation. Important recent advances are being made on malaria,
pneumococcus, and AIDS. Public policy can provide a critical boost to private
research efforts, and I will describe later some of the channels of public-private
cooperation that we intend to strengthen.
3
A second obstacle to improving health in poor nations is their lack of resources
relative to the cost of even the most basic health interventions. On average, the poorest
nations in the world spend $15 per person on health care each year - less than it costs
to fully vaccinate a child (for polio, diphtheria, pertussis, measles, tetanus, hepatitis B,
TB, yellow fever, and rubella). In the United States, we spend thousands of dollars per
person on health care each year. The poorest developing countries have only 14
doctors and 26 nurses on average for every 100,000 patients, compared to 245 doctors
and 878 nurses in the United States. Roughly 800 million people in these countries live
on less than a dollar per day. The harsh reality is that the cost of caring for patients
with AIDS the way we do in the United States far exceeds the per capita income of
most developing countries.
Once again, however, we know how we can reduce -- but obviously not
eliminate -- this problem. The HIPC debt initiative provides a powerful and effective
tool for increasing the resources available to the poorest countries -- and for ensuring
that these resources are used where they are most needed. Aiding the broader process
of development will also help these countries generate more internal funds that can be
used to improve health.
A third obstacle to good health in developing nations is the difficulty of
delivering basic health services when and where they are needed. Clearly, it does no
good to ship vaccines and medicines to the ports of poor nations if they do not end up
in the throats or arms of the people who need them. Just as clearly, it does little good
to administer vaccines and medicines to people who do not receive basic tools for
maintaining health (such as nutritional interventions like vitamin A and iron) or
preventing disease (such as bed nets for malaria, and condoms and sex education for
HIV/AIDS).
However, the tight linkages between different aspect of health care are now well
understood in the development community. The President's Millennium Initiative and
the plans being developed by the World Bank focus squarely on this problem by
shifting significant resources to improving the delivery of basic health services
including vaccines and medicines.
But this is not a problem of money alone. It is also a matter of competence and
enduring commitment. The governments of developing nations need to commit
themselves to specific targets for improving health care delivery and health outcomes.
At the same time, donor countries, international organizations, and non-government
entities in developing nations must work cooperatively with those nations'
governments. Such commitment and cooperation have achieved demonstrated success.
In Uganda and Thailand, innovative programs have begun to reverse HIV infection
rates of high-risk groups. In Senegal, an early investment in prevention programs has
helped to keep HIV infection rates low.
4
In sum,. poverty and runaway infectious disease reinforce each other to produce
economic and social problems that may seem insuperable. Yet, despite the scale of the
crisis and the complexity of the constraints, experience points to specific actions we can
take that will dramatically improve the lives of millions of people.
The President's Millennium Vaccine Initiative
In January of this year, the President outlined a new initiative to build on
existing approaches to combating HIV / AIDS and other infectious diseases. This
initiative has the following principal components.
First, we need to rapidly mobilize additional international resources to help the
poorest countries vaccinate children and deal with the heavy cost of AIDS prevention
and treatment.
•
The President has proposed in his FY 2001 budget an additional $100
million for HIV prevention and AIDS treatment in Africa and Asia. We can
make crucial headway against HIV and AIDS by providing clear information
on prevention strategies, supplying condoms, and treating sexually
transmitted diseases. We are calling on other countries to join us in
committing money for these purposes.
•
The President has also proposed a $50 million contribution to the Global
Alliance for Vaccines and Immunization (GA VI) to purchase vaccines for
children. This contribution should help catalyze significant contributions
from other countries and foundations. It will also add critical credibility to
the international community's commitment to provide a market for new
vaccines, including vaccines for AIDS, when they are developed. Further,
the Presid~nt has helped to catalyze commitments from the pharmaceutical
industry to donate hundreds of millions of dollars worth of vaccines.
Second, we must shift existing international resources toward building
infrastructure in poor countries that can deliver vaccines and medicines and provide
essential basic health services.
•
President Clinton has called on the multilateral development banks to shift
an additional $400 million to $900 million annually of concessional
resources into basic health care. Of course, an essential element of such
care is prevention and treatment of infectious diseases, including AIDS.
These banks are the right institutions for investing in health infrastructure
and health care: these activities fall clearly within the poverty reduction and
5
development mandate of the banks, and no other institutions can bring to
bear the funding and policy dialogue on the scale needed for the task.
•
The Administration is also using the enhanced HIPC debt initiative to
support our efforts on infectious diseases. A key principle of this initiative,
designed to reduce substantially the crushing debt burdens of the world s
poorest countries, is the requirement that resources freed up by debt relief
be used for poverty reduction.
I
•
Therefore, HIPC countries will be developing Poverty Reduction Strategy
Papers (PRSPs), in a participatory process with civil society and donors, to
establish comprehensive plans with monitorable targets. We have already
requested that our Embassies and USAID missions in these countries stress
the use of debt-reduction savings for bolstering basic education and health,
including the fight against infectious diseases. We expect that all PRSPs
that are prepared by HIPC candidates will discuss the adequacy of budget
resources and policy reforms devoted to basic health care.
•
The early evidence from HIPC beneficiaries is encouraging. Last year, the
Ugandan government saved $45 million in debt service under the original
HIPC program. Its expenditures on health and education increased by $55
million, including a major effort to combat the HIV / AIDS epidemic.
Immunization rates for children in Uganda are expected to increase from 5S
percent in 1996 to 60 percent in 2002. One of the key priorities for health
spending in the future, which would be facilitated by enhanced RIPC debt
relief, is to extend HIV / AIDS education outreach, particularly to rural
communities. Another instructive example is Bolivia, which saved $77
million under the original HIPC initiative last year and increased social
sector spending by more than $80 million.
•
This redirection of resources supports the Administration s overall strategy
for global development, which emphasizes poverty reduction and gives a
central role to "global public goods" -- like health or the environment -- in
which positive actions taken in one country benefit other countries is well.
Because of the interconnection between poverty and health, funds for
fighting infectious diseases should not be diverted from spending on other
basic social programs such as education and health care.
•
These measures do not require additional budget commitments. However,
our influence within the multilateral development banks and on RIPC
depends on our ability to meet our existing commitments.
I
6
Third, we need to harness the scientific and technological skills of our nation
and others to accelerate the development of new vaccines and medicines for infectious
diseases. Because poor countries often cannot afford to buy vaccines, the market
provides little incentive for pharmaceutical companies to develop vaccines for diseases
that disproportionately affect those countries.
•
The President's FY 2001 budget for the National Institutes of Health
includes a significant increase in research critical to creating vaccines for
deadly diseases that afflict primarily developing countries. Funding for
AIDS vaccine research will increase substantially in FY 2001 and will have
more than doubled since FY 1997.
•
The President is proposing a new tax credit for sales of vaccines against
malaria, tuberculosis, HIV / AIDS, or any infectious disease that causes over
one million deaths annually worldwide. Under the proposal, the seller of a
qualified vaccine could claim a credit equal to 100 percent of the amount
paid by a qualifying nonprofit organization (such as UNICEF) that received
a credit allocation from the U.S. Agency for International Development
(AID). The tax credit would match the purchaser's expenditures dollar-fordollar, thereby doubling its purchasing power. For 2002 through 2010, AID
could designate up to $1 billion of vaccine sales as eligible for the credit.
This credit would provide a specific and credible commitment to purchase
vaccines for the targeted diseases once they become available. The
President is calling on other governments to make similar purchase
commitments, so that we can ensure a future market for these critically
needed vaccines.
Conclusion
The sheer magnitude and complexity of these problems, and thei'r resistance to
the efforts of the past, have a tendency to overwhelm hope with a sense of futility.
Around the world, infectious diseases - including AIDS - are killing millions of
children and weakening and killing tens of millions of prime-age adults. The
devastating human and economic consequences are clear.
Yet there are compelling examples of impressive progress toward resolving
these problems, including the successes in Uganda, Thailand and Senegal that I
mentioned earlier. And there are other success stories from well-coordinated global
efforts: the hugely successful eradication of smallpox; ·the nearly complete campaign
against polio; and the remarkable efforts that turned the tide on river blindness.
7
We believe that this is an important moment to try to catalyze a broad
international effort to deal with the linked challenges of health crises and oppressive
poverty. We look forward to working with the Congress to try to mobilize the
necessary resources and shape the incentives and strategies that can contribute to
enduring solutions.
-30-
8
DEPARTiVIENT
OF
THE
TREASURY
1789
OmCE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W .• WASlllNGTON, D.C .• 20220. (202) 622-2960
EMBARGOED UNTIL 1000 AM EST
Text as Prepared for Delivery
March 8, 2000
TREASURY ACTING ASSISTANT SECRETARY FOR TAX POLICY JONATHAI\
TALISMAN TESTIMONY BEFORE THE SENATE COMMITTEE ON FINANCE
Mr Chairman, Senator Moynihan, and distinguished Members of the Committee.
Thank you for giving me the opportunity to appear before you today to discuss two
important issues - the interest and penalty provisions of the Internal Revenue Code and the
problem of corporate tax shelters
On October 25, 1999, the Treasury Department issued a report on the interest and penalty
regime in the Internal Revenue Code The report was mandated by Section 3801 of the Internal
Revenue Service Restructuring and Reform Act of 1998 (RRA98). The report reviewed the
administration and implementation of those provisions and made appropriate legislative and
administrative recommendations. I will focus on the main aspects of this report later in my
testimony. However, I would first like to address the problem of corporate tax shelters
In the past, the Committee on Finance has reacted quickly and appropriately with
legislation when confronted with issues that posed grave consequences to the tax system, such as
the use of tax shelters by individuals in the 1970's and 1980's and, more recently, the development
of particular abusive transactions. As indicated by Secretary Summers
this morning, we believe that the use of corporate tax shelters currently represents the most
serious compliance problem facing our tax system.
My testimony today will focus on the reasons for our concerns, the steps Treasury, the
Congress, and the IRS have undertaken to date to address this problem, why this current
approach is inadequate and legislation is necessary, and what our legislative proposals entail.
18-443
Far press releases, speeches, public schedules and official biographies, call our 24~our fax line at (202) 622-204.0
'U S Govemment Pnnt.ng Office 1998· 619-559
I.
Corporate Tax Shelters
A. General Discussion and Background
Over the last several years, the Treasury Department has become increasingly aware and
increasingly concerned about the proliferation of corporate tax. shelters. These concerns range
from the short-term revenue loss to the tax system, to the potentially more troubling long-term
effects on our voluntary income tax system. In its FY 2000 Budget, released in February 1999,
the Administration made several proposals to inhibit the growth of corporate tax shelters These
proposals generated significant commentary from the corporate and tax practitioner community
In July 1999, the Treasury Department issued its White Paper, The Problem of ('O/poratf
Tax Shelters: DisClissioll, Analysis and LegislatIve Proposals This report discussed more fully
the reasoning underlying the Budget proposals relating to corporate tax shelters, provided a
description and analysis of the comments on the Budget proposals, and provided, in light of these
comments, refinements to those proposals. These refined proposals are contained in the
Administration's FY 200 I Budget proposals
There have been several other important developments regarding corporate tax shelters
since the issuance of our FY 2000 Budget proposals approximately a year ago The staff of the
Joint Committee on Taxation has issued its report on the penalty and interest provisions of the
Internal Revenue Code In its report, the staff found that "the corporate tax shelter phenomenon
poses a serious challenge to the efficacy of the tax system." Similar sentiments have been
expressed by the American Bar Association, the American Institute of Certified Public
Accountants, the New York State Bar Association, the Tax Executives Institute, and many
respected tax executives and practitioners in testimony before the tax-writing committees and
other presentations
The Treasury and the IRS have issued administrative guidance curtailing the use of
specific abusive transactions in the past year, including "fast pay" stock, "LILO" transactions,
"BOSS" transactions, "chutzpah trusts," and debt straddles In 1999, Congress enacted
legislation addressing corporate tax shelters involving the use of certain liabilities to inflate the
adjusted basis of assets. The IRS has won significant victories in court, ) successfully arguing that
the transactions purportedly giving rise to certain tax benefits should not be respected because the
transactions did not possess economic substance Most recently, Treasury and the IRS issued
temporary and proposed regulations requiring registration of confidential corporate tax shelters,
maintenance of lists of shelter participants, and reporting of certain transactions having
characteristics common to corporate tax shelters.
See, c. g., C olllpaq ComplIler Corp. v. COIIIIII. 1 13 T C No. 17 (1999), If~S Industries \'. [',S. No C97 -206 (ND
Iowa 1999): ff'il1l1-DI.,ie SlOres, Ine. \. Call/Ill .. 1 13 T C No 2 I (1999): Saba Partners/lip v. ('0111111 .. T C Memo
1999-359 (1999)
I
2
With these developments in mind, I would like to emphasize the following points in my
testimony today.
First, despite these efforts, corporate tax shelters continue to be a substantial and ongoing
problem. While Congress, the Treasury Department and the IRS take action to stop particular
transactions as they are uncovered, many abusive transactions remain undiscovered and numerous
new transactions are created all the time. Our new disclosure regulations primarily address the
visibility of corporate tax shelter transactions. Disclosure will help the IRS identify and deal with
abusive transactions more quickly and effectively. It also is our hope that the disclosure
requirements will deter corporate taxpayers from entering into tax shelters. However, in the
absence of Congressional action, we do not believe the regulatory disclosure requirements are
sufficient to address fully the problem of corporate tax shelters, because they do not adequately
affect the cost/benefit analysis a corporation undertakes when deciding whether to participate in a
particular transaction.
Second, the ad hue and piecemeal approach that Congress, the Treasury Department, and
the IRS have employed in the past to address corporate tax shelters is inadequate. Admittedly,
recent court decisions denying the purported tax benefits of certain shelter transactions are
important. However, litigation is costly and inefficient Moreover, these decisions are af'ter-thefact actions against shelters - they do not prevent the design, marketing, and implementation of
. new and different shelters. Furthermore, even though Congress has enacted certain legislative
changes curbing certain types of shelters, these statutory prohibitions can sometimes be avoided
by making certain adjustments to a transaction to avoid the impact of the revised statutory
provisions A global legislative solution is needed to prevent abusive, tax-engineered transactions
before they occur. The Treasury Department believes this global solution should include four
parts increased disclosure, changes to the substantial understatement penalty, codification of the
economic substance doctrine, and sanctions on other parties to the transaction.
Third, there are substantial similarities between the Treasury Department's proposals and
other proposals to curb corporate tax shelters For example, the staff of the Joint Committee on
Taxation agrees that there should be increased disclosure by participants, increased penalties on
understatements attributable to undisclosed transactions and tightening of the reasonable cause
exception, and sanctions on other panies to the transaction As discussed more fully in the White
Paper, the American Bar Association and the New York State Bar Association proposals contain
several elements similar to those in the Administration's proposal. Finally, HR 2255, introduced
by Mr. Doggett, also contains an approach similar to the Administration's proposal, including the
codification of the economic substance doctrine. We commend Mr. Doggett for his leadership.
Finally, the proposed legislation would be inadequate without effective enforcement The
Internal Revenue Service is undergoing a substantial restructuring. This restructuring will
concentrate IRS resources relating to corporate tax shelters, enabling it to identify, focus on, and
coordinate its efforts against corporate tax shelters in a more efficient manner, while instituting
and maintaining appropriate taxpayer safeguards. The enactment of corporate tax shelter
legislation, combined with the efforts of the restructured IRS, will deter abusive transactions
before they occur and uncover and stop these transactions to the extent they continue to occur
The balance of my testimony with respect to corporate tax shelters will elaborate on these
points.
B. Reasons for Concern
Corporate tax shelters are designed to, and do, substantially reduce the corporate tax base.
Moreover, corporate tax shelters breed disrespect for the tax system - both by the parties who
participate in the tax shelter market and by others who perceive unfairness. A view that welladvised corporations avoid their legal tax liabilities by engaging in tax-engineered transactions
may cause a "race to the bottom" The New York State Bar Association recently noted this
"corrosive effect" of tax shelters: "The constant promotion of these frequently artificial
transactions breeds significant disrespect for the tax system, encouraging responsible corporate
taxpayers to expect this type of activity to be the norm, and to follow the lead of other taxpayers
who have engaged in tax advantaged transactions" Ifunabated, this will have long-term
consequences to our voluntary tax system far more important than the revenue losses we currently
are experiencing in the corporate tax base.
Finally, signifIcant resources - both in the private sector and the government - are
currently being wasted on this uneconomic activity 2 Private sector resources used to create,
implement and defend complex shelter transactions are better used in productive activities
Corporations distort their business decisions to take advantage of tax shelter opportunities
Similarly, the Congress (particularly the tax-writing committees and their staffs), the Treasury
Department, and the IRS must expend significant resources to address and combat these
transactions.
C. Corporate Tax Shelters and the Corporate Tax Base
Some have argued that the growth of corporate income tax receipts demonstrates that
corporate tax shelters cannot be a problem Of course, the size of the problem is not indicated by
the GmOllllf of corporate tax receipts, which vary over time for a number of reasons, but by the
difference between actual tax payments and those that would be remitted absent corporate tax
shelters. That difference is impossible to measure directly, but the increasing difference between
the income taxpayers report on their corporate tax forms (taxable income) and the income they
report to shareholders (book income) appears to be consistent with the increasing use of
corporate tax shelters
C As Peter Cobb. fOlmer Deputy Chief of Stall of the .lomt Conumttee on Ta:-;ation recently stated" You can't
underestunatc how many of Amenca's greatest Imnds nght no\\' an~ bemg den)ted to what economIsts \\'ould a\l say IS
totally useless economIc actIYlty."
4
One feature of many tax shelters is that they reduce taxable income and taxes without
reducing book income Corporate taxpayers report their book income on Schedule M-l of Form
1120. Such data show that the difference between book income and taxable income for large
corporations (average assets greater than $1 billion) increased between 1991 and 1997 ~ Current
income reported on corporate tax returns (total receipts less total deductions) represented a much
smaller share of book income (calculated as book income after tax, plus Federal taxes, less taxexempt income) in 1997 than in the early 1990's (See Figure 1.) Thus, even though corporate
income reported on tax returns has increased markedly in the 1990's, book income has increased
even faster. It is unclear how much of the divergence between tax and book income retlects tax
shelter activity, but the data are clearly consistent with other evidence that the problem is
significant.
Figure 1.
Book and Tax Corporate Income
Firms with Mean Assets Over $1 Billion
450
400 '
350 .
~
....
300'
~
:;:: 250 '
en
~
~
200-
"
0::
"
-
.
- ..
- ......
,"
-
~
iIi 150 .
Tax Income (dashed)
100 -
1991
1992
1993
1995
1994
1996
1997
Year
Book Income = After,tax book Income from Schedule M-l + Federal taxes' tax exempt Interest
Tax Income Total Receipts, Total Deductions
Corporations excluding S corporallons, RICs, REITs, and Foreign Corporations
Source. Internal Revenue Service. Stallstlcs of Income
=
Book and tax measures of income can diverge for many reasons that are unrelated to tax
shelters. For example, increases in the rate of new investment can cause book and taxable income
to diverge because tax depreciation is accelerated compared with book depreciation But
depreciation does not seem to be a significant factor. Figure 2 shows that the difference due to
3
All estlmates are based on a balanced panel of 7 ~5 corporations with mean asset size in excess of $1 billion, in 1992
dollars, over the years 1991 through 1997 COIvorate tax data are only available through 1997. We did not use data
before 1991 for this companson because depreciation data from Schedule M-I are not available before 1991 In
addition, the detailed book data from hefore 1991 seem inconsistent with the post-I 990 data, perhaps because of an
accounting method change
5
depreciation has changed little over the last several years while the difference between book and
tax income continues to climb. Hence, the depreciation discrepancy is not a significant factor
behind the divergence between the two income measures in recent years. 4
Figure 2.
The Difference Between Book and Tax Corporate Income
140
Firms with Assets Over $1 Billion
120
100
BOOk Income - Tax Income (sohd)
80
60
40
........ -
.......
~
..... -- - ..
.
..
Excess otTax fItIef
Book Depreciation
1991
1992
1993
1994
1995
1996
1997
Year
Book Income =After-tax book income from Schedule M-1 + Federal taxes - tax exempt
interest
Tax Income = Total Receipts - Total Deductions
Corporations excluding S corporations, RICs, REITs, and Foreign Corporations
Source: Internal Revenue Service, Statistics of Income
D. All Hoc Approach to Corporate Tax Shelters
To date, most attacks on corporate tax shelters have targeted specific transactions and
have occurred on an ad hoc, after-the-fact basis - through legislation, administrative guidance,
and litigation. In the past few years alone, Congress, the Treasury Department and the IRS have
taken a number of actions to address specific corporate tax shelters. These include:
1.
Two provisions enacted in 1996 and 1997 to prevent the abuse for tax purposes of
corporate-owned life insurance (COLI).5 Collectively, these two provisions were
estimated by the Joint Committee on Taxation to raise over $18 billion over 10 years. As
the then Chief of Staff of the Joint Committee on Taxation stated: "When you have a
corporation wiring out a billion dollars of premium in the morning and then borrowing it
4 Other factors contribute to the gap between book and tax measmes of income, including 1) the differential impact of
the business cycle on the two measures, 2) increases in foreign based income that are reflected in book but not ta\:
income and 3) differences in accounting treatment for stock options and their increased importance as a component of
executive and employee compensation.
5 Pub. L. No. 104-191, § 501 (1996): Pub. L. No. 105-34, § 1084 (1997)
6
back by wire in the afternoon and instantly creating with each year another $35 million of
perpetual tax savings, that's a problem ... I think we were looking at a potential for a
substantial erosion of the corporate tax base if something hadn't been done ,,6
')
Legislation enacted in 1998 to eliminate the ability of banks and other financial
7
intermediaries to avoid corporate-level tax through the use of "liquidating REITs" The
Treasury Department's Office of Tax Analysis (aT A) estimated that eliminating this one
tax shelter product alone would save the tax system approximately $34 billion over the
next ten years.
3.
The IRS ruling~ addressing so-called lease-in, lease-out transactions, or "LILa" schemes
Like COLI, these transactions, through circular property flows and cash flows, offered
participants millions of dollars in tax benefits with no real economic substance or risk.
Based on the transactions we have been able to identify to date, aT A estimates that
eliminating thi s tax shelter saved $10.5 billion over ten years.
4.
Legislation signed into law on June 25, 1999, aimed at section 357(c) basis creation
9
abuses In these transactions, taxpayers exploited the concept of" subject to" a liability
and claimed increases in the bases of assets that resulted in bases far in excess of the
assets' values.
5.
Regulations III addressing fast-pay preferred stock transactions. These financing
transactions purportedly allowed taxpayers to deduct both principal and interest. It was
reported that one investment bank created nearly $8 billion of investments in a few
months.
6
Notice 98-5 I I dealing with foreign tax credit abuses
7.
Recent administrative actions taken with respect to the "BOSS" transaction and debt
straddles,13 the latter of which has been described as a "heads, I win; tails, I win"
proposition for the taxpayer
l2
or
(, Kenneth Kies, Transcript h.;dcraI13ar ASSOCIatlon\ Fuurth InntatlOnal Blclmial Cunference
Process, reprinted 111 97 Ta:--: Notes Today 21-3~ (Jan 31, 1997).
Pub. L No. 105-277, § 3001 (a) (1998)
~ Rev. RuI99-14, 1994-I.+IRB 3.
9
Pub. L No. 106-36, § 300 I (\999)
IU
Treas. Reg. § 1.7701(1)-3
II
1998-3 I.R.B. 49
I: Notice 99-59. 1999-52 I.RB 761
7
OIl
the la:--: LcglslatIYC
The Government's victones in several important corporate tax shelter cases-A ( 'AI!
l4
l'. Con1l11issioner
and ASA 1l1vesterll1gs Partnership \'. COmnllSSIO!1e1", I' and
those cases mentioned in footnote one of this testimony In these cases, the courts
disallowed tax benefits trom transactions that lacked economic substance
8
Partnership
Addressing corporate tax shelters on a transaction-by-transaction, ad hoc basis, however,
has substantial defects. First, because it is not possible to identifY and address all (or even most)
current and future sheltering transactions, this type of transaction-by-transaction approach is
inadequate. There will always be transactions that are unidentified or not addressed by the
legislation. As Treasury Secretary Lawrence H. Summers said: "Treasury and the IRS have come
to understand new tax shelters only by capturing them on audit, picking up reports in the trade
press, receiving anonymous tips and tinding irregularities on tax returns What we see. we can act
upon. What we cannot see, by definition, we cannot act upon But what we fear is that visible
corporate tax shelters are only the tip of a very large iceberg" 16
Second, although the LRS has recently won some important cases involving corporate tax
shelters, reliance on judicial decisions, which taxpayers may attempt to distinguish, is not the most
efficient means of addressing corporate tax shelters. Litigation is expensive and time-consuming,
both for the government and taxpayers, and frequently does not provide a coherent set of rules to
be applied to subsequent transactions. Tax Court Judge Lara, speaking on his own behalf before
the Tax Executives Institute last year, 17 acknowledged that the courts have provided little
guidance on the amount of economic substance or business purpose sufficient for a transaction to
be respected He stated that such concepts "may require further development in the case law,"
but highlighted the difficulty with such an approach when he said that judges "decide cases one at
a time ... and don't make tax policy"
Third, addressing tax shelters on a piecemeal basis complicates the tax law. In the past few
years alone, Congress has passed numerous provisions to prevent specific tax shelter abuses. The
layering of provision upon provision may lead one to believe that there is a rule for every situation
and thus what is not specifically proscribed is, by negative inference, allowed. In time these
specific rules themselves are used in unintended ways to create corporate tax shelters. IX
I.'
Re\ RuL 2000~12. 2()()(1~
14
73 T C M (CCH) 2189 ( 1(97) alrd
I R.B
111
part. re\"d
111
part. 157 F.3d 2.11 Od ClI 1l)9~). cerl. demed. 119 SCI 1251
(1999)
I~ 76 TCM (CCH) 325 ( 19(8). afI'd.
F 3d
(D C Cir Feh 10 2000)
)(, Lawrence H Surruners. "Tackltng the Growth of Corporate Tax Shelters," Federal Bar AssoclatlOn. February 28.
2000.
17
BN:.J Daizl' Tax Repol'l (Oct 28. (999). G-2
18 So far thiS year. we have shut down by admimstratlw actIOn so-called "chutzpah trusts" which were Similar to a
stlUctW'e shut down lw Congress In 1997 and pel111Utations of the section 357(c) product that Congn.:ss addressed m
8
Fourth, a legislative strategy that deals with tax shelter transactions on a piecemeal basis
calls into question the viability of current rules and standards, particularly the common law tax
doctrines such as sham transaction, business purpose, economic substance and substance-overform. Finally, reliance on a transaction-by-transaction legislative approach to corporate tax
shelters may embolden some promoters and participants to rush shelter products to market on the
assumption that any Governmental reaction would be applied only on a prospective basis.
E. Temporary and P.·oposed Regulations
On February 28, 2000, the Treasury Department and the IRS issued three sets of
temporary and proposed regulations requiring promoters to register confidential corporate tax
shelters and to maintain lists of investors and requiring corporate taxpayers to disclose large
transactions that have characteristics common to corporate tax shelters In addition, the IRS
announced it has created an Office of Tax Shelter Analysis (described below) to serve as the focal
point for efforts to gather and analyze information relating to tax shelter activity and to coordinate
appropriate responses Together, these actions will enable the IRS to more quickly and
effectively address transactions used to claim tax benefits that are not properly allowable under
the Internal Revenue Code
General scope and effect of new disclosure requirements
In general, the three regulations are designed to provide the IRS with better information
about tax shelters and other tax-motivated transactions through a combination of registration and
information disclosure by promoters and tax return disclosure by corporate taxpayers The
regulations are intended to require disclosure of transactions that should be subject to careful
scrutiny by the [RS. The regulations are designed 110t to require disclosure of customary business
transactions or transactions with tax benefits that the IRS has no reasonable basis to challenge.
The regulations do not alter substantive tax rules, and thus disclosure under the regulations does
not affect the legal determination whether tax benefits claimed by taxpayers are allowable.
Registration of tax shelters by promoters
The first set of regulations is issued under section 6111 (d) of the Code as enacted by the
Taxpayer Relief Act of 1997 These regulations require tax shelter promoters to register with the
IRS transactions (1) that have been structured for a significant purpose of tax avoidance or
evasion, (2) that are offered to corporate participants under conditions of confidentiality, and (3)
for which the tax shelter promoters may receive fees in excess of $100,000
The promoter registration requirements apply to confidential corporate tax shelters offered
for sale after February 28, 2000. In general, registration of a confidential corporate tax shelter is
required not later than the day that the first offering for sale of interests in such shelter occurs.
1999 In addition, we are no\\ hearing about "son of LILO" transactions.
9
However, as a transition matter, no registration is required to be filed until 180 days after
February 28, 2000.
List maintenance requirements for promoters
The second set of regulations, issued pursuant to section 6112 of the Code, requires
promoters of corporate tax shelters to maintain lists of investors and copies of all offering
materials and to make this information available for inspection by the IRS upon request. These
requirements apply to transactions that have been structured for a significant purpose of tax
avoidance or evasion (as defined under section 61 I I (d)), whether or not offered under conditions
of confidentiality and whether or not the promoter fees may exceed $100,000.
These new list maintenance requirements apply to interests in corporate tax shelters
acquired by investors after February 28, 2000. However, as a transition matter, the IRS will not
ask to inspect the lists or offering materials until 180 days after February 28, 2000.
Reporting requirements for corporate taxpayers
The third set of regulations is issued pursuant to section 6011 of the Code and requires
corporate taxpayers to disclose their participation in "reportable transactions" by attaching a short
. information statement to their income tax returns. In general, a separate statement will be
required for each reportable transaction for each taxable year in which a corporation's federal
income tax liability is affected by its participation in such a transaction. For the first taxable year
in which a statement is attached to a taxpayer's return, a copy of the statement must be filed with
the IRS in Washington, D.C. All of the information required to complete the statement should be
readily available to taxpayers at the time their returns are filed
Disclosure is generally required only for transactions that are expected to reduce a
taxpayer's income tax liability by more than $5 million in a single taxable year or more than $10
million in multiple years and that have characteristics common to corporate tax shelters
However, these thresholds are lowered to $1 million and $2 million for certain transactions
identified through published guidance as "listed transactions" (discussed below) Reporting
generally is not required for customary business transactions or transactions with tax benefits that
the IRS has no reasonable basis to challenge.
In general, disclosure is required only for reportable transactions entered into after
February 28, 2000. However, disclosure is required for a listed transaction entered into on or
before February 28, 2000 jfthe tax benefits of the transaction are first claimed on a return filed
after February 28, 2000
Notice 2000-15: Listed transactions
Under the regulations, promoter registration and taxpayer disclosure generally are
required for certain listed transactions. The specific transactions currently designated as listed
10
transactions are identified in Notice 2000-15, which was issued concurrently with the temporary
and proposed regulations. The Treasury and the IRS have determined that each of those listed
transactions involves a significant tax avoidance purpose and that the intended tax benefits are
subject to disallowance under existing law The list set forth in Notice 2000-15 may be
supplemented from time to time, when other such tax avoidance transactions are identified
F. Administration's Legislative Proposals
In its FY 2000 and 2001 Budgets, the Administration made several proposals designed to
inhibit the growth of corporate tax shelters. These proposals build upon the common
characteristics of corporate tax shelters and focus on the following areas:
( 1) increasing disclosure of corporate tax shelter activities,
(2) increasing and modifying the penalty relating to the substantial understatement of
income tax,
(3) codifying the economic substance doctrine, and
(4) providing consequences to all the parties to the transaction (e.g., promoters, advisors,
and tax-indifferent, accommodating parties).
Increasing disclosure
Greater disclosure of corporate tax shelters would aid the IRS in identifYing corporate tax
shelters and would therefore lead to better enforcement by the IRS. Also, greater disclosure likely
would discourage corporations from entering into questionable transactions. The probability of
discovery by the IRS should enter into a corporation's costlbenefit analysis of whether to enter
into a corporate tax shelter.
In order to be effective, disclosure must be both timely and sufficient. In order to facilitate
examination of a particular taxpayer's return with respect to a questionable transaction, the
transaction should be prominently disclosed on the return. Moreover, because corporate tax
returns may not be examined for a number of years after they are filed, an "early warning" system
should be required to alert the IRS to tax shelter "products" that may be promoted to, or entered
into by, a number of taxpayers. Disclosure should be limited to the factual and legal essence of the
transaction to avoid being overly burdensome to taxpayers.
Disclosure would be required if a transaction has certain of the objective characteristics
identified above that are common in many corporate tax shelters. The Treasury Department
believes that two forms of disclosure are necessary. Disclosure would be made on a short form
separately filed with the National Office of the IRS.19 Corporations entering into transactions
I'J
The rcquiremcnts and f01111at for disclosure
111
the Adl11l11istration's PY 2001 Budget proposal is Similar to the
] ]
requiring disclosure would file the form by the due date of the tax return for the taxable year for
which the transaction is entered into and would include the form in all tax returns to which the
transaction applies. The form would require the taxpayer to provide a description of the
characteristics that apply to the transaction. The form should be signed by a corporate officer who
has, or should have, knowledge of the factual underpinnings of the transaction for which
disclosure is required. Such officer should be made personally liable for misstatements on the
form, with appropriate penalties for fraud or gross negligence and the officer would be accorded
appropriate due process rights.
Substantial understatement penalty
In order to serve as an adequate deterrent, the risk of penalty for corporations that
participate in corporate tax shelters must be real. The penalty also must be sufficient to affect the
cost/benefit analysis that a corporation considers when entering into a tax shelter transaction
The Treasury Department believes that the substantial understatement penalty imposed on
understatements of tax attributable to corporate tax shelters should be greater than the penalty
generally imposed on other understatements. This view is shared by the staff of the Joint
Committee on Taxation, the ABA, the NYSBA and others. Thus, to discourage the use of
shelters, the Treasury Department would double the current-law substantial understatement
penalty rate to 40 percent for corporate tax shelters. To encourage disclosure, the penalty rate
would be reduced to 20 percent if the taxpayer files the appropriate disclosures.
In its FY 2000 Budget proposal, the Administration provided that the rate could not be
further reduced below 20 percent or eliminated by a showing of reasonable cause (ie., the penalty
would be subject to a strict liability standard) Although one may rhetorically question whether
there ever is any reasonable cause for entering into a corporate tax shelter transaction, many
commentators have criticized the proposed elimination of the reasonable cause exception for
corporate tax shelters. These commentators cited the potentially vague definitions of corporate
tax shelter and tax avoidance transaction,20 the allowance of a reasonable cause exception for
other penalties, and basic fairness for opposing a "strict liability" penalty
In light of the comments received, the Treasury Department modified its FY 2001 Budget
proposal to provide that the substantial understatement penalty should be reduced or eliminated
where the taxpayer properly discloses the transaction and the taxpayer has a reasonable belief that
it has a strong chance of sustaining its tax position.
~equirements and f0Il11at ll1 the temporary and propos~d regulations issued under section 6011 on Fcbruill~1 28. 2000
_" These criticisms \\crc addressed lw the Treasury Department bv modit':mg. the defimtlon ofthese tem1S.
12
CodifY the economic substance doctrine
As evidenced by the comments from the ABA, AICP A, NYSBA, and others, corporate
tax shelters are proliferating under the existing legal regime. This proliferation results, in part.
because discontinuities in objective statutory or regulatory rules can lead to inappropriate results
that have been exploited through corporate tax shelters. Current statutory anti-abuse provisions
are limited to particular situations and are thus inapplicable to most current corporate tax shelters
Further, application of existing judicial doctrines has been inconsistent over time, which
encourages the most aggressive taxpayers to pick and choose among the most favorable court
oplIllons.
The current piecemeal approach to addressing corporate tax shelters has proven
untenable, as (1) policymakers do not have the knowledge, expertise and time to continually
address these transactions; (1) adding more mechanical rules to the Code adds to complexity,
unintended results, and potential fodder for new shelters; (3) the approach may reward taxpayers
and promoters who rush to complete transactions before the anticipated prospective effective date
of any reactive legislation; and (4) the approach results in further misuse and neglect of common
law tax doctrines Thus, the Treasury Department believes that a codification of the economic
substance doctrine is necessary in order to curb the growth of corporate tax shelters. While
increased disclosure and changes to the penalty regime are necessary to escalate issues and change
. the cost/benefit analysis of entering into corporate tax shelters, these remedies are not enough if
taxpayers continue to believe that they will prevail on the underlying substantive issue
The centerpiece of the substantive law proposal is the codification of the economic
substance doctrine first found in seminal case law such as Greg01}' v. He/venng 2I and most
recently utilized in ACM Partnership;';' and the cases in footnote one. The economic substance
doctrine requires a comparison of the expected pre-tax profits and expected tax benefits. This test
is incorporated in the first part of the Administration's proposed definition of "tax avoidance
transaction" Under that test, a tax avoidance transaction would be defined as any transaction in
which the reasonably expected pre-tax profit (determined on a present value basis, after taking
into account foreign taxes as expenses and transaction costs) of the transaction is insignificant
relative to the reasonably expected net tax benefits (i.e, tax benefits in excess of the tax liability
arising from the transaction, determined on a present value basis) of such transaction. In addition,
the economic substance doctrine would apply to financing transactions (that do not lend
themselves to a pre-tax profit comparison) by comparing the tax benefits claimed by the issuing
corporation to the economic profits derived by the person providing the financing
A tax benefit would be defined to include a reduction, exclusion, avoidance or deferral of
tax, or an increase in a refund. However, the definition of tax benefit subject to disallowance
:1 293lJS 465 (1915)
:: .-Ie.\! Par/mrs/1/jJ
v.
('UI//Ill ..
r, T C M (CUI) 21 ~(). <111\1111 part, rC\'\lll1 part. 157 Fyd 2y I (3d Clr 1\)')~), ccrt
denied. I J 9 S Ct 1251 ( I ()l)'))
13
would not include those benefits that are clearly contemplated by the applicable Code provision
(taking into account the Congressional purpose for such provision and the interaction of the
provision with other provisions of the Code) Thus, tax benefits that would normally meet the
definition. such as the low-income housing credit and deductions generated by standard leveraged
leases, would not be subject to disallowance
A similar approach to that discussed above can be found in H.R 2255, the "Abusive Tax
Shelter Shutdown Act of] 999," introduced by Messrs. Doggett, Stark. Hinchey and Tierney on
June 17, 1999.
The Treasury Department continues to believe that it is necessary to codifY the economic
substance doctrine, thus requiring taxpayers to perform a careful analysis of the pre-tax effects of
a potential transaction before they enter into it. The Treasury Department's proposed substantive
provision is intended to be a coherent standard derived from the economic substance doctrine as
enunciated in a body of case law to the exclusion of less developed, inconsistent decisions
Codification of the doctrine. while not creating a new doctrine, would create a consistent standard
so that taxpayers may not choose between the conflicting decisions to support their position
Codification would isolate the doctrine from the facts of the cases so that taxpayers could not
simply distinguish the cases based on the facts.
Consequences to other parties
Proposals to deter the use of corporate tax shelters should provide sanctions on other
parties that participate in. and benefit from, a corporate tax shelter. These sanctions would reduce
or eliminate the economic incentives for parties that facilitate sheltering transactions, thus
discouraging those transactions As the ABA stated in its recent testimony "All essential parties
to a tax-driven transaction should have an incentive to make certain that the transaction is within
the law" With respect to corporate tax shelters, the "other parties" generally are promoters,
advisors, and tax-indifferent parties that lend their tax-exempt status to the shelter transaction to
absorb or deflect otherwise taxable income
When Congress was concerned with the proliferation of individual tax shelters in the early
1980's, it enacted several penalty and disclosure provisions that applied to advisors and
promoters These provisions were tailored to the types of "cookie-cutter" tax shelter products
then being developed Similar provisions could be enacted that are tailored to corporate tax
shelters
Alternatively, with respect to promoters and advisors of corporate tax shelters, the
Treasury Department proposes to affect directly their economic incentives by levying a penalty
excise tax of 25 percent upon the fees derived by such persons from the corporate tax shelter
transaction. Only persons who perform services in furtherance of the corporate tax shelter would
be subject to the proposal, and appropriate due process procedures for such parties with respect
to an assessment would be provided.
14
A tax-indifferent party often has a special tax status conferred upon it by operation of
statute or treaty. To the extent such person is using this status in an inappropriate or unforeseen
manner, the system should not condone such use. Imposing a tax on the income allocated to taxindifferent parties could deter the inappropriate rental of their special tax status, limiting their
participation in corporate tax shelters, and thus reducing other taxpayers' use of shelters that
utilize this technique.
The Treasury Department proposes to require tax-indifferent parties to include in income
(either as unrelated business taxable income or effectively connected income) income earned in a
corporate tax shelter transaction. To the extent such parties are outside the U. S tax jurisdiction,
such liability would be joint and several with the US corporate participant. The proposal would
apply only to tax-indifferent parties that are trading on their special tax status and such parties
would have appropriate due process rights.
G. IRS Administrative Actions
The IRS currently is undergoing a substantial restructuring in which it will be reorganized
into divisions based on types of taxpayers The newly established Office of Tax Shelter .Analysis
is part of the Large and Mid-Size Business Division located in Washington, D.C The office is
expected to serve as a clearinghouse for all information relating to tax shelter activity that comes
. to the attention of the IRS, including information relating to tax shelters affecting taxpayers other
than those served by the Large and Mid-Size Business Division.
The Office of Tax Shelter Analysis will, among other things, review all disclosures bv
promoters and taxpayers under the new disclosure regulations for the purposes of identifying
potentially improper tax shelter transactions, identifying taxpayers that have participated in such
transactions, and better assessing the overall extent of tax shelter activity by corporate taxpayers
Where it is determined to be warranted, the Office of Tax Shelter Analysis will also coordinate the
IRS's follow-up efforts relating to such disclosed transactions
The Office of Tax Shelter Analysis, acting with the Office of Chief Counsel and Treasury's
Office of Tax Policy, will evaluate the tax treatment of new forms of tax-structured transactions at
the earliest possible time This review process is necessary not only to identify improper tax
shelters, but also to protect taxpayers that engage in legitimate business transactions. The IRS
wants to ensure that transactions are not labeled as improper tax shelters merely because they are
novel or complex
In addition to analyzing transactions that are reported to the IRS under the new disclosure
rules, the Office of Tax Shelter Analysis will provide a centralized point for the review of tax
shelter transactions that come to the attention of the IRS in other ways, including transactions
examined by field personnel and those that are disclosed to the IRS by taxpayers, practitioners,
and other members of the public. The Treasury Department will work closely with the IRS to
create appropriate systems and procedures to centralize review and analysis, to ensure fair,
consistent, and expeditious consideration of corporate tax shelter issues.
15
II.
Penalties and Interest
A. General Discussion
As stated in its report, Treasury focused its penalty and interest report on the principal
civil penalty provisions that affect large numbers of taxpayers and account for the majority of
penalty assessments and abatements. In evaluating these penalties, Treasury was mindful that
achieving a fair and effective system of compliance involves striking a balance that (1) fosters and
maintains the high degree of voluntary compliance among the vast majority of taxpayers, (2)
encourages taxpayers who are not compliant to expeditiously resolve noncompliance problems
with the IRS, and (3) imposes an adequate system of sanctions that are fair to taxpayers whose
noncompliance may be due to diverse causes that involve different degrees of culpability, but do
not impose substantial additional complexity or burden. Achieving such a balance is inherently
difficult because a system of sanctions that is calibrated to account for these differences may be
complex, but a system that does not make adequate distinctions may be unfair There is no
perfect system of sanctions and striking the appropriate balance inherently involves tradeoffs
among competing concerns
The issue of penalties is one that often strikes an emotional chord, particularly with
·respect to penalties with their attendant normative overtones At the same time, compliant
taxpayers-the vast majority of taxpayers - deserve a tax system that recognizes their compliance
Although a penalty regime should not be overly harsh to noncompliant taxpayers whose
noncompliance may not reflect deliberate flouting of the tax laws, it is equally true that the
currently high compliance level should not be discouraged. Treasury's report and
recommendations reflect an effort to strike a reasonable balance, understanding that there is no
single solution and different approaches can be formulated to achieve the same goals.
Treasury also examined the respective roles of penalties and interest in our tax system,
with a view toward maintaining an appropriate distinction between penalties as sanctions for
noncompliant conduct and interest as a charge for the use or forbearance of money Treasury
recognizes that current law does not always make a clear or consistent distinction between
interest and penalties, but believes that this distinction is important both with respect to taxpayer
perception of the amounts they are required to pay and the underlying reasons for the imposition,
the desired deterrent effects, and the corollary consequences of the characterization of the
payment.
The distinction between penalties and interest has particular consequence for the statutory
provisions that permit abatement of those impositions. Penalties generally can be abated for
reasonable cause and other statutorily-prescribed reasons that reflect their function as a sanction,
that is, as a deterrent to noncompliant conduct. By contrast, the grounds for abatement of
interest traditionally have been more narrowly drawn because interest is a charge for the use or
forbearance of money To the extent that current -law penalties are converted to interest charges
or interest becomes a more dominant mechanism for dealing with arrears in payment, important
16
corollary consequences, such as interest deductibility or interest abatement provisions, must be
considered.
In generaL Treasury's position is that interest should remain principally a charge for the
use or forbearance of money and should be set at a rate that approximates market rates Although
there are penalties in the Code that have attributes of an interest charge and whose legislative
origins support that characterization, these penalties also function as sanctions. Treasury is
particularly concerned that conversion of certain penalties to interest, even if supportable on
analytical grounds, may involve a correlative blurring of the distinctions that have been drawn in
the Code between penalty and interest abatement provisions If that distinction is blurred, it may
cause further confusion among taxpayers regarding the distinction between penalties and interest
Treasury also is mindful of the ongoing IRS reorganization and implementation aspects of
the new taxpayer right provisions of RRA98. Considerable guidance has been issued by Treasury
in the past year relating to a number of these new provisions and the IRS is engaged in a major
overhaul of its structure and systems as directed by Congress. Time is required for the impact of
these new provisions to be evaluated and certain of the new provisions affect IRS programs, such
as the offer -in-compromise program, that provide avenues other than abatement for relief from
monetary impositions
-B. Specific Recommendations
In its report, Treasury made a number of specific legislative recommendations, which are
described below
Penalties for failure to file and failure
to
llilY
Treasury recommends that the failure to file and failure to pay penalties be restructured to
eliminate the frontloading of the failure to file penalty and to impose a higher failure to pay
penalty than under current law. The frontloading of the failure to file penalty under current law in
the first five months of a filing delinquency does not provide a continuing incentive to correct
filing failures and imposes additional financial burden on taxpayers whose filing lapse may be
coupled with payment difficulties so as to impede compliance. The filing obligation is of
paramount importance to the tax system, but imposition of a severe penalty in the first five
months of a filing delinquency appears incongruent with the availability of automatic extensions of
time to file Treasury proposes, accordingly, that the failure to file penalty be restructured to
impose a lower penalty rate over a longer period of time, up to the current-law maximum amount.
The current-law higher penalty for fraudulent failures to file, however, would be maintained.
This proposal would maintain a failure to file penalty to encourage timely filing, but not impose as
significant a financial burden as under current law for a filing lapse of short duration, while
providing a continuing incentive for delinquent filers to correct a filing lapse oflonger duration
The failure to pay penalty should provide appropriate incentives to taxpayers to correct a
payment delinquency and, if necessary, arrange for payment under various payment programs that
17
the IRS makes available A taxpayer who fails to make such arrangements in a timely manner
should be subject to a higher penalty rate than that provided under current law. Treasury
proposes, accordingly, that the failure to pay penalty be restructured to accomplish these purposes
by imposing a penalty at the current rate of 0.5 percent per month for the first six months of a
payment delinquency The penalty rate would be raised to one percent per month for continuing
payment delinquencies after the sixth month to provide an additional incentive to pay an
outstanding tax liability As under current law, the maximum penalty would be 25 percent These
penalty rates would be reduced if taxpayers make, and adhere to, arrangements with the IRS for
payment. The failure to pay penalty would not be coordinated, as under current law, with the
failure to file penalty to recognize that each form of delinquency is a separate act of
noncompliance. More specifically, these recommendations would:
( 1)
Restructure the failure to file penalty to impose a penalty of 0 5 percent per month
of the net amount due for the first six months of a delinquency in filing tax returns,
which penalty rate will be increased to one percent per month thereafter, up to a
maximum 25 percent. This restructured penalty would eliminate the current-law
frontloading of the penalty into the first five months of a filing delinquency,
providing a continuing incentive for delinquent filers to correct their filing
delinquency over longer periods of time. The maximum penalty of 25 percent is
the same as under current law. As under current law, fraudulent failures to file
would be penalized at a higher penalty rate of 15 percent per month, up to a
maximum of 75 percent.
(2)
Restructure the failure to pay penalty to impose a penalty of 0.5 percent per month
of the net amount due for the tirst six months of a payment delinquency, Vvhich rate
would be increased to one percent per month thereafter, up to a maximum 25
percent. The penalty rate would be decreased from 0.5 percent to 0.25 percent per
month if the taxpayer, within six months, enters into a payment arrangement with
the IRS to which the taxpayer adheres Likewise, the one- percent penalty rate
would be reduced to 0.5 percent if the taxpayer, after the lapse of six months,
enters into a payment arrangement with the IRS to which the taxpayer adheres
Treasury also recommends that consideration be given to charging a fee, in the nature of a
service charge, for late filing of "refund due" or "zero balance" returns. Presently, the failure to
file penalty is imposed if a balance is due with the return but is not imposed ifta~ is not owed as a
result, for example, of overwithholding The importance of the filing obligation and the lRS
administrative costs associated with nonfiling may warrant imposition of a fee for late-filed returns
to encourage timely filing even if no balance is due with the return, at least after the IRS has
contacted the nonfiling taxpayer
Consideration also can be given to permitting the IRS to utilize a fixed interest rate for
installment agreements to avoid the incurrence by a taxpayer who has made the required
installment payments of a balloon payment at the end of the agreement
18
Penalties for failure to pay estimated tax
Treasury recommends that the current-law addition to tax for failure to pay estimated tax
remain treated as a penalty. Treasury recognizes that the current sanction has attributes of
interest and of a penalty The ancillary effects, however, of converting the sanction to an interest
charge do not warrant such a change. Conversion to an interest charge may mean that existing
statutory waiver provisions are inappropriate. Conversion to interest also would permit
corporations to deduct the payment of such sanction.
In recognition, however, of the potentially cumbersome nature of complying with the
estimated tax payment requirements, the following simplifYing changes are recommended for
consideration.
(1)
Individuals should not be subject to estimated tax penalties if the balance due with
their returns is less than $1,000 Thus, estimated tax payments should be included
in the calculation of the $1,000 threshold, but Treasury recommends this change
under a simplified averaging method that would preclude taxpayers from satisfying
the threshold by concentrating estimated tax payments in later installments.
(2)
A reasonable cause waiver from penalty should be permitted for individuals who
are first-time estimated taxpayers, provided the balance due on the tax return is
below a threshold amount and is paid with a timely filed return.
(3)
Penalty waiver should be provided for individual estimated tax penalties below a
de minimis amount, in the range of $1 0 to $20
Penalty for failure to deposit
Treasury recommends that few immediate changes be made to the deposit rules or
penalties at this time to provide a sufficient period of time for changes to the deposit rules enacted
by RRA98 to take efTect. However, the penalty for failure to use the correct deposit method
should be reduced. The current-law 10-percent penalty is too severe for this type of error
Treasury also recommends that, in cases where depositors miss a deposit deadline by only
one banking day, consideration be given to a reduction in the current penalty rate of two percent
to a lower amount, but above an interest charge for a one-day delay
Accuracy-related and preparer penalties
The minimum accuracy standards, tor disclosed and nondisclosed tax return positions,
should be modified to impose the same standards on taxpayers and tax return preparers. A
significant proportion of taxpayers rely on paid preparers. Such professionals have dual
responsibilities to their client/taxpayers and to the integrity of the tax system and should be
expected to be knowledgeable and diligent in applying the Federal tax laws.
19
The, minimum accuracy standards should be raised to require a "realistic possibility of
success on the merits" for a disclosed tax return position and "substantial authority" for an
undisclosed return position The standards for tax shelter items of noncorporate taxpayers should
be higher. In the case of disclosed positions, substantial authority and a reasonable and good faith
belief that the position had a "more likely than not" chance of success should be required. For
undisclosed positions, substantial authority should be accompanied by a reasonable and good faith
belief based upon a higher standard of accuracy than the "more likely than not" chance of success
standard The proposed changes in the accuracy standards would reduce the number of accuracy
standards, impose minimum standards that are higher than current law litigating standards to
discourage aggressive tax reporting, and eliminate divergence between the standards applicable to
taxpayers and tax preparers
Treasury further recommends consideration of better harmonization of the substantial
understatement and negligence penalties In many cases, the standards applicable to the
substantial understatement penalty may subsume the negligence standards It may be appropriate
to consider whether the negligence penalty should relate only to understatements that do not
satisfy the" substantiality" requirement.
In determining the amount of the preparer penalty, consideration should be given to a feebased or other approach to more closely correlate the preparer penalty to the amount of the
underlying understatement of tax, rather than the current-law flat dollar penalty amount.
Finally, Treasury also recommends enactment of the Administration's Budget proposals
that would address penalties applicable to corporate tax shelters and the determination of
"substantiality" for large corporate underpayments.
Penaltv for filing a frivolous return
The current-law penalty for filing a frivolous tax return should be raised from $500 to
$1,500, but the IRS should abate the penalty for a first-time occurrence if a nonfrivolous return is
filed within a reasonable period of time. This penalty amount was last raised in 1982 and
significant numbers of such penalties are assessed This approach will help bring taxpayers who
file frivolous returns into better compliance.
Failures to file certain information returns with respect to employee benefit plans
Several penalties currently apply to a qualified retirement plan's failure to file IRS Form
5500. These penalties should be consolidated into a single penalty not in excess of a monetary
amount per day and not to exceed a monetary cap per return. This penalty would be waived upon
a showing of reasonable cause. Welfare and fringe benefit plans should be subject to a similar
single penalty
20
Penaltv and Interest Abatement
Interest abatement
Abatement of interest in situations where taxpayers have reasonably relied on erroneous
written advice of IRS personnel should be available. Treasury does not recommend further
legislative expansion of the provisions permitting abatement of interest. A distinction exists
between the imposition of interest as a charge for the use of money and penalties as sanctions for
noncompliance. Because of this distinction, abatement of interest should be allowed in more
limited circumstances than for penalties and generally restricted to circumstances where the IRS
may be at fault or where serious circumstances outside the taxpayer's control result in payment
delays. Current law provisions permitting abatement in circumstances of unreasonable IRS error
or delay and in certain other prescribed circumstances provide sufficient scope for interest
abatement at this time In addition, taxpayers have recourse to other mechanisms for mitigation
of interest and penalties, such as the offer-in-compromise program, which are in the early stages
of implementing changes after enactment by RRA98
Consideration of any modification of the current law monetary limitation on mandatory
interest abatement in cases of erroneous refunds should be coupled with consideration of whether
the IRS has adequate means under current law to recover erroneous refunds Procedural
impediments exist with regard to the recovery of erroneous refunds by assessment in all cases and
litigation is required in some circumstances.
Penalty abatement
Other than as described above, Treasury recommends that the IRS implement
administrative improvements to ensure greater consistency in the application of penalty abatement
criteria and enhanced quality review of penalty abatement decisions
Interest Provisions
The underpayment interest rate (other than the "hot interest" rate) should be a uniform
rate determined by appropriate market rates of interest. Treasury recognizes that no single rate is
the appropriate market rate for all taxpayers but concludes that, for reasons of fairness and
administrability, a single rate generally should apply to underpayments of tax. The appropriate
rate should be in the range of the Applicable Federal Rate (AFR) plus two to five percentage
points to reflect an average market rate for unsecured loans
The existing rate differentials between the underpayment and overpayment rates for
corporate underpayments and overpayments, including the "hot interest" rate on large corporate
underpayments, should be retained. Because of the recent enactment of global interest netting
rules, it is premature to eliminate existing rate differentials
21
Treasury does not support an exclusion from income for overpayment interest paid to
individuals. The legislative policy precluding deductions of consumer interest does not warrant
such a change.
***
Mr. Chairman, the proliferation of corporate tax shelters presents an unacceptable and
growing level of tax avoidance behavior by wasting economic resources, reducing tax receipts,
and threatening the integrity of the tax system. This morning we have laid out the rationale for
our suggested approach for combating this problem, and discussed why we believe that existing
law does not provide sufficient tools to combat this behavior. We look forward to working with
you and the members of the Committee to address tlus important problem, as we have in the past
to curb specific abuses.
Treasury strongly supports a penalty and interest regime that fosters and maintains the
current high level of compliance, provides appropriate costs and sanctions for noncompliance, and
provides a reasonable and administrable degree of latitude for individual taxpayer circumstances
and errors.
The proposals made in Treasury's report strike an appropriate balance among these
objectives. Consideration of any legislative change in the current penalty and interest regime must
take into account: (1) behavioral impact of significant change cannot be predicted with precision,
and (2) the ability of the IRS to administer the new rules in a timely and equitable manner.
-30-
22
0:
From: Department Of Treasury
2026222611
.
D EPA R. 'I; 1\1 E N T
0 F
06/02/00 04: il5 PM
THE
Page ill of 92
T REA SUR Y
NEWS
OFflcr OF PUBLlCAFFAlRS • 1500 PENNSYLVANIA AVENUE, N.W. • WASHINGTON, D.C.• 20220. (202) 622-2960
FOR RELEASE AT 2:30 P.M.
July 19, 1995 .
CONTACT:
Office of Financing
202/219-3350
TREASURY .TO AUCTION 2-YEAR AND 5-YEAR NOTES
TOTALING $29,250 MILLION
Tlle Treasury will aucLion $17,750 million of 2-year notes and $11,500
million of 5-year notes to refund $16,621 million of publicly-held securities
maturing July 31, 1995, and to raise about $12,625 million new cash.
In addition Lu Lhe public holdings, Federal Reserve Banks hold $562
million of the maturing securities for their· own accounts, which may be
refunded by issuing additional amounts of the new securities.
The maturing securities held by the public include $982 million held by
Federal Reserve Banks as agents for foreign and international monetary
authorities.
Amounts bid for these accounts by Federal Reserve Banks will be
added tl"l thE=! offertng.
Both the 2-year and S-year note auctions will be conducted in the
single-price auction format. All competitive and noncompetitive awards will
be at the highest yield of accepted competitive tenders.
Tenders will be received at Federal Reserve Banks and Branches aud at
the Bureau of the Public Debt, Washington, D. C. This offering of Treasury
securities is governed by the terms and conditions set forth in the Uniform
Offering Circular (31 CFR Part 356) for the sale and issue by the Treasury to
the public of marketable Treasury bills, notes, and bonds.
Details about each of the new securities are given in the attached
offering highlights.
If the auction of 2-year Treasury notes to be held Tuesday, J~ly 25,
1995, results in a high yield in a range of 5.500 percent through and
including 5.624 percent, the 2-year notes will be considered an additional
issue of the outstanding 5-1/2 percent S-year notes of Series P-1997 (CUSIP
No. 912827G30).originally issued July 31. 1992. The additional issue of the
notes would have the same CUSIP number as the outstanding notes, which are
currently outstanding in the amount of $12, lOll million.
If the auction results in the issuance of an additional amount of the
Series P-1997 notes rather than a neW 2-year note, it will be noted at the
bottl"lm of the Tr.P.a!':ur.y·!'l Clue t{nn resul ts press release.
000
Attachment
RR-444
For press releases, speeche.r;, pubHr .~ch.edltle.s and official biographies, call our 24-hour fax line at (202) 622-2040
.
I
HIGHLIGHTS OF TREASURY OFFERINGS TO THE PUBLIC OF
2-YEAR AND 5-YEAR NOTES TO BE ISSUED JULY 31, 1995
July 19, 1995
Offering Amount ',' . . .
Description of Offering:
Term and type of security .
Series'
CUSIP number
Auc~ion date
Issue date
Dated date
Maturity date
Interest rate
Yield . . . .
Interest payment dates
Minimum bid ,amount
Mul:iples . , , , , ,
Accrued interest
payable by investor
Premium or discount .
$17,750 million
$11,500 million
2-year notes
5-year notes
AG-1997, '
912827 US 9
July 25, 1995
July 31, 1995
July 31, 1995
July 31, 1997
N"'200a
912827 U6 7
July 26, 1995
Determined based on the'
highest accepted bid
Determined at auction
January 31 and July 31
$5,000
$1,000
None
De~ermined
at auction
July 31, 1995
July 31, 1995
July 31, 2000
Determined based on the
highest accepted bid
Determined at auction
January 31 and July 31'
$1,000
$1,000
None
Determined at auction
~
Ii
f
C"I"
!....,
c
..,
-4
CD
~
~
The following rules apply to all securities mentioned above:
Submission of Bids:
Noncompetitive bids
Competitive bids
Accepted in full up to $5,000,000 at the highest accepte4 yield
(1) Must be expressed as a yield with three decima~s, e.g., 7.123%
(2) Net long position for each bidder'must be reported when the
sum of the total bid amount, at all yields, and the net long
position is $2 billion or greater.
(3) Net long position must be determined as of one hal!.~hour pri9 r
to the cloSing-time for receip1.6L 'competitive tenders .
Maximum Recognized Bid
· 35% of public offering
at a Single Yield
35% of public offering
Maximum Award . " . . .
Receiot-of Tenders:
Noncompetitive tenders · Prior to 12:00 noon Eastern Daylight Saving time on auction day
Prior to 1:00 p.m. Eastern Daylight Saving time orr auction day
Competitive tenders
Payment Terms . . . . . . · Full payment with tender or by charge to a funds account at a
Federal Reserve Bank on issue date
~
lSI
i!
..b
~
~
i
..b
N
....,
o
::s
2026222611
I:
FrOl: Department Of Treasury
RemarkS as prCp<lred Ibl'
<I~livcry
July 12, 1995
Remarks
l>y
Runalel K. Nubl.
V.der S•• r~ry ro," E.roreem~... t
D.partllloUt or tbe '[roasu.,.
be"'.. Ibe
N.daa,.1 A .. o.latloa or BI.rks la Crimm.1 JUJU ..
Dcn"rr, Cnlor.do
MF.MRF.RS OF THE NATIONAL ASSOCIATION OF 8LAC1(l'i IN CRIMINAL
JUSTICll. I AM 1I0NORI'!) AND ItAPrY TO BI'. HeIlE TONIGlIT. [AM HONORED
BECAlJSU YOUR ORGANIZATION IS ON THE CUTTING EOOB 01' LAW
El\.rORCeMENT I "'M HAPPY TO Rn HF.Rf. nt!CAI.ISI'. I nl.1 NI.ITOfTE'f ENOUGH
HAVE THE. OPI'ORTU:NlTY TO SPI;AK D1RE(.·TLY WITH RANK AND FILE
MEMBERS OF I.AW F.NF'ORCE.'dENT.
BEFORI! ·1'U1l.·,Ill\O TO SOME PllESSING LAW l!N),'ORCI!MJ:1NT ISSUES, T
'ro CONGRATUL!\TE YOt: ON YOllR CONFSRENCE. AND YOUR
ACHIF.VEMf-::-.tTS. IN TIJlS ADMINISTllATION v.'E BELlllVE IN llXI'ANlJIN(J
OPPOR11JNrn", AND Wli IlllLWVU TIIAT!1. I'RUPliR ROLE FOR COVEltNMl'Nf 1S
RMPOWBIlL"IC A.L1.I'EOPLE TO MAKF. THR VRRV BEST OF TIlE1R LIVES.
WANT
AFRICAN A.'dERJCANS J)4 LAW UJI/~O.RCEMffi''T ARE ESS6NTIAL TO
LIH!. IN OUll. COM.\4UNITY. \VE [Ml'ROVb COMMUN1CATION
ANfllJNDERSTAo\'-DlNG. WE MAKE POSSIBLE II. SE."ISE OF rusnCE. AND WE
MAKF IT MORE LlKELY HLH Jl:SI'I{;U WIl.L ~li II.CHlEVSD.
[m,~nIY.ClVIC
[ ,'M PROt.:D TO SERVE IN AN AOMINfSTRATlON TIIAT iNCLUDES
AFRICAN AMERICANS AT TlrF. HTGHF.ST LF.VFJ.S OF T.AW F.NFORCEMfiNf.
DiCLUDlNG DR. I,U': llRO\\<'N AS THE IIEAD Of TIre OFFlCE OFNATIO:"lAL DRUG
CorO'RDL POLICY. IN MY POSITION A·rTR"..~SPRV, 1 HI\VI'.STlU".NOTHENED
OUR DliM.... ND IU,DUcnON PROGRAMS AND OUR BORDER DRUCllNTFJlI)[CTlON.
OUR LAW ENJ'IJRU~MFJI," BlJREAUS rruJVIDE MBNTORS AND ru-rOKS IN OliR
SCHOOLS, TEACH Y<.II!Mi I'm~l.f.. RESIST,\I\Cf-: 1'0 (jANGS, ANI) RBCU}\B ROLE
\1(lI)~;LS JO OUR YOUlll.
I HA VB WORKr:I) TO ACHIEVE DIVIlllSITY IN TREASURY'S ENFO&CEMlDIT
DuREAUS. WE NOW HAVE h FEMALE HEAD OJ' U.S. INTERPOL; A I'EMAI,B
DJIU£<"'TOR OF TREAS!:RY'S ASSET FORI'F.ITURB FUND; I APPOINTED nIB F1RS1'
. AfRICAN AMEI<ICAN AcrtNO nffiHI ~ro.R. OF A TRP-"SURY BURl!AU; THE FIRST
AFRICAN AMliRlCAN ASSISTANT COMMISSIONER. AT ClJ!>TOMB, AND THE FIRST
Al'RlCAN AMElUCAN i\SSIIITANT DIRECTOR AT ATP.
D1Vt;RSITY ALONE 15 NOT THE AN:>WElR. TIlEKt:: HAS lUlCEN7l.y UlruN A
DlSTIJRBlNG REPORT THhT FEDr;II.AL LAW ENFORCEMENT AGENTS HAVE allEN
I'ARTIClY'AT1NCl 1111 AN ANNUAl. "COOD OLD OOYS· EVENT THAT INVOLVES
OPENLY RACIST ACTS. If TARSE ACl'IONS OCCUJUUID A~ RRPORTED THBY ARE
OllTRAGEOUS AND lNCONSII>"TBNT 'i1flTR BEHAVIOR BECOMTNO A LAw
ENFORCEMENT Ul'I'ICER. LET MJ:; hSSURF. YOU THAT Wl1J::N 1 LEARN TIm FULL
FACTS - AN LNQUIRY IS tJNOl'.rtWAY - [Vv1L1, liNSURE rnAT Al'l'ROPRTATE
.
ACTION IS TAKEN. l'\II! ONIlI'OSITIVl! TIllN<J [CAN SAY AnOUT THR REPORTS
I'VI! HEARD SO FAR JS TI!AT A WHITE AND A UL.ACK hGENT VENTURED TO
TIUS EV8-IT TOGRTIJER THlS YEAR WHEN TIlF,V HNIlHRSTOOD TIm TONB 0]1
THE ClROUP. THE TWO OF TIIIiM LEfT TOO);THER AS WELL, AND REPORTED
WHAT HAD OCCUl<lU::l>.
.
BUT M.I, OF TIm EFFOIU AND ACHIJ!VEM!!NT WI': ABE MA.JCING IN THE
AREA OF DIVERSITY AND EQ[JALITY AND lJl<...NITY lS BEINll C1lALLENGliD BY
A"'I OMINOus DEVRT.O}'M£NT: TIlE MANY AITAC1(S ON FeDERAL LAW
J!)oIPORCEMENT AC!!.OSS THIS COUNTRY.
NBXT WEEK THE HUU~U OF REI'REStlNTATIVES WILL BBGJN HOLDING A
srmms 01' HEAltINC}S UN THE EVBN1:S THAT OCClJRRED TWO YEARS AGO AT
WACO. TEXAS. THE FDtST fOlIRDAYS OF THESE ImARlNGS WILL .. oeus ON
THIl ROLE 01' THE BUREAU OF ALCOHOL To\\ACCO Alo,"D FllU!AR.MS AT WACO
AND THE REVlEW OJ' ATl"l'i INVESTIGATION OF DAVID 1<ORESH THAT
seCRETARY BENTSEN MAUl:! PI7Rl-IC IN SEI'TEMBIllll993 . nms~ HEARJNOS.
~ICH (.1JVbR ORUL'ND ALlUlADY REVlEWIJJ.) BY CONORbSli LAST YEAR, ARll
VKRY MOOi ON MY MIND.
ALSO ON MY MINI1 DURING TJU'..sE PAST MONTHS SlNCE THE BOMB11II1l
ARE 11m AITACT(~ ON
H!DERAL LAW ENFORCEMEN'r, ANn IN I'ARTICULAl<. UN THE BUlU:;Au OF
ALCOHOL, TOBACCO, AND FIR.UARMS. ATI' IS A VRRY lMPORTANT MEMBER OF
~ TRfASU!l.Y ENI'ORCI!MI!NT FAMILY. TONIGIIT I WOULll I.IKE TO SHAIUl
r rn .~OU SOMI! OF MY TFiOUGHfS ABnllT A'IF, AND AOOUT THF. VAlUOUS
INVESIIGAnoN~ 01' WACO.
.
~l THE FBOEl(AL BUILDING IN OKLAHOMA UTY
06/02/00 04:45 PM
Page 43 of 92
I:
20262226n
Frol: Department Of Treasury
06/02/00 04:45 PM
Page 44 of 92
AS POLICE IN SOME OF THE MOST DANGEROUS NEIGHBORHOODS OF
OUR NATION'S CITIES, YOU FACE VIOLENCE AND VILIFICATION BY AR.M:EU
CRIMINALS EVERY DAY. WHEN YOU DO THE WORK. OF ENFORCING OUR
NATION'S LAWS. BUT I AM CERTAIN THAT SINCE YOU HAVE BEEN WORKING
AT YOUR JOBS, YOU HAVE NOT AWAKENED TO FULL PAGE ADVERTISEl\1ENTS
IN YOlJR MORNING NEWSPAPERS CALLLNG YOU AND YOUR ORGANIZATIONS
FASCIS::£,S AND THUGS. BUT TIllS. IS PRECISELY WHAT HAS HAPPENED TO THE
ATF AND ATF AGENTS TIllS PAST YEAR. TIllS NAJ\.1E CALLING HAS HAPPENED
IN NEWSPAPERS AND IT HAS EVEN HAPPENED IN CONGRESS.
AS THE SON OF A MILITARY FAMILY, I VIVIDLY REMEMBER THE 1960'S
WHEN SOLDIERS RETURNING FROM VIET NAM WERE CALLED BABY KILLERS,
AND WHEN POLICE WERE CALLED PIGS AND OTHER EPITHETS THAT I WILL
NOT REPEAT HERE, BY CITIZENS WHO OPPOSED THE WAR IN VIET NAM~ THAT
LANGUAGE WAS WRONG AND TERRIBLY DIVISIVE. IT IS THE KIND OF VICIOUS,
UNFAIR, AND DESTRUCTIVE RHETORIC THAT ATF AND ITS AGENTS FACE
TODAY. IT IS NOT ONLY WRONG. IT IS NOT ONLY MOTIVATED BY THE LOWEST
FORM OF POLITICS. BUT IT DEEPLY IMPAIRS THE MORALE OF THE AGENTS ON
THE LINE.
I AM AWARE THAT SOME PEOPLE BELIEVE THAT THERE ARE LAW
ENFORCEMENT AGENTS WHO ARE OUT OF CONTROL AND WHO :MISUSE THEIR
AUTHORITY. FROM TIME TO TIME POLICE OFFICERS SO:METHvlES OVERSTEP
THEIR AUTHORITY. BlIT, AS I OFTEN TELL MY STAFF, "I AM AN EVIDENCE
MAN, SHOW:ME THE EVIDENCE." I HAVE NOT SEEN EVIDENCE THAT ATF OR
OTHER TREASURY AGENCIES ARE OUT OF CONTROL AND USING EXCESSIVE
FORCE AGAINST CITIZENS. IF, HOWEVER, YOU OR ANYONE IN YOUR
COMMllNITIES ARE AWARE OF ANY MISUSE OF AUTHORITY BY TREASURY
LAW ENFORCEMENT AGENTS, PLEASE BRING THEM TO MY ATTENTION, AND I
ASSURE YOU THEY WILL BE THOROUGHLY INVESTIGATED.
WHY IS ATF BEING ATTACKED NOW? WE ALL RECOGNIZE THAT THERE
IS ARE GROUPS IN OUR COUNTRY WHO no NOT SUPPORT THE FIREARMS LAWS
THAT WERE PASSED WIlli THE OVERWHELlVONG SUPPORT OF THE AMERICAN
PUBLIC. ATF IS THE PRINCIPAL AGENCY CHARGED WITH ENFORCING THOSE
LAWS. THE MOST EXTREME OPPONENTS OF THESE LAWS ARE VILIFYING THE
DEDICATED MEN AND WOMEN o.F ATF. THEIR OBJECTIVE IS TO UNDERl\.1INE
ATF'S ABILITY TO ENFORCE THE LAWS, to UNDERMINE THE PUBLIC SUPPORT
FOR THE LAWS, AND ULTlMATELY TO WEAKEN THE LAWS THEMSELVES.
LET'S NOT CONFUSE TIllS DESTRUCTIVE AGENDA WITH PROTECTED
SPEECH. WE LIVE IN A DEMOCRACY THAT CHERISHES AND PROTECTS PUBLIC
DEBATE ON IMPORTANT ISSUES. FOR THOSE WHO OPPOSE THE FIREARMS
LAWS, IT IS LEGITIMATE TO CRITICIZE THE LAW IF YOU DON'T LIKE 1T.
3
': 2026222611
Fro.: Departlent Of Treasury
06/02100 04:45 PM
Page 45 of 92
DUT IT IS WRONG TO IIARASS, INTIMIDATE, AND THREATEN TnOSE WIlO
ENFORCE THE LAW. AS AN EXPRESSION OF OPPOSITION TO LAWS LIKE BRADY
AND THE ASSAULT WEAPONS BAN. LAW ENFORCEl\IIENT AGENTS WHO ARE
DOING THE DANGEROUS WORK OF PROTECTING THE REST OF SOCIETY
SHOULD NOT BE USED AS PAWNS IN A POLITICAL FIGHT. DESPITE THE
SHAMEFUL RHETORIC DIRECTED AT THEM, THE AGENTS OF ATF WILL NOT BE
DETERRED FROM DOING THEIR SWORN DUTY.
I CANNOT PROTECT ATF AGENTS FROM THE HARM AND THE HURT AND
THE INDIGNiTY OF.
POLfllCALL
Y MOTIVATED SLURS. BUT I CAN ASK YOU,
'
MANY OF WHOM I AM SURE HAVE WORKED SIDE BY SIDE WITH ATF AGENTS,
TO REFLECT UPON SO:ME OF THE HEROIC LAW ENFORCEMENT WORK
PERFORMED BY ATF IN OUR NAUON'S CITIES. THE BEST WAY TO COUNTER
THESE INSULTS IS WITH THE JUST PRAISE THAT THESE N.lEN AND WOMEN
HAVE EARNED.
THIS IS THE TRUE ATF·RECORD:
•
ATF IS IN THE FOREFRONT OF LAW ENFORCEMENT'S STRUGGLE
AGAINST GUN VIOLENCE IN OUR CITIES AND AMONG OUR YOUTH. ATF
HAS FORMED 21 ACIDLLES TASK FORCES WITH STATE AND LOCAL LAW
ENFORCEMENT OFFICERS IN MAJOR CITIES WITH HIGH VIOLENT CRIME
RATES. BETWEEN 1988 AND 1994, THE ACHILLES PROGRAM TOOK 6,251
VIOLENT CRIMINAL OFFENDERS OFF THE STREETS.
•
ATF CONFRONTS SOc:IETY'S MOST DANGEROUS CRIMINALS. OF THE
10,000 SUSPECTS ATF REFERRED FOR PROSECUTION IN 1994~ 47 PERCENT
OF THESE WERE CONVICTED FELONS. 49 PERCENT WERE INVOLVED
IN NARCOTICS TRAFFICKING. 25 PERCENT HAD VIOLENT CRIl\flNAL
InSTORIES.
•
ATF ALSO PROVIDES SCIENTIFIC EXPERTISE AND GUN TECHNOLOGY
-SUPPORT FOR OTHER LAW ENFORCEMENT AGENCIES. IN NOVEMBER
1994, TWO FBI AGENTS. AND A D.C. POLICE DETECTIVE WERE KILLED BY
A SUSPECT IN AN UNPROVOKED SHOOTING INCIDENT INSIDE THE D.C.
POLICE HEADQUARTERS. ATF TRACED THE MURDER WEAPON TO A GUN
TRAFFICKING RTNG RESPONSIBLE FOR TRAFFICKING FIREARMS FROM
ALABAMA TO WASHINGTON, D.C. THREE MEN ASSOCIATED WITH THE
RING HAVE BEEN CONVICTED ON CHARGES OF VIOLATING FEDERAL
FIREARMS LAWS.
•
AFTER THE WORLD TRADE CENTER BOMBING, IT WAS AN ATF
EXPLOSIVES TECHNICIAN AND A MEMDER OF THE NEW YORK CITY
BOl\1B SQUAD THAT FOUND THE KEY PIECE OF EVIDENCE -- THE
4
: 1026222611
Fro.: Department Of Treasury
06/02100
04:45 PM
Page 46 of 92
VEffiCLE IDENTIFICATION NUMBER FROM A RENTED V AN -- THAT
ALLOWED ATF, THE FBI AND TIlE NEW YORK CITY POLl"CE TO IDENTIFY
AND BRING TO JUSTICE THE ISLAlvllC FUNDAlV1ENTALISTS ACCUSED IN
THE BOMBING.
ATF AGENTS ARE WORKING HAND-IN-HAND WITH OTHER FEDERAL,
STATE t AND LOCAL LAW ENFORCEMENT AGENCIES TO SOLVE TIJE
HORRlALF. ROMRTNG TN OKLAHOMA CITY. AFTER MCVEIGH WAS
STOPPED FOR A TRAFFIC VIOLATION, AN ATF AGENT WAS
INSTRUMENTAL IN IDENTIFYING TIMOTHY MCVEIGH, WHICII LED TO IDS
ARREST IN THE OKLAHOMA CITY BOMBING CASE.
'
FOR THESE, AND OTHER ACTIONS, ATF AGENTS, AND ALL LAW
ENFORCElVIENT OFFICERS, DESERVE TIlE FULL SUPPORT AND RESPECT OF THE
CONGRESS AND THE A1v1ERICAN PEOPLE, NOT THEIR DISDAIN. NEVERTHELESS,
THERE IS AN UNPRECEDENTED SWELL OF VIOLENCE, HATRED, AND
DISRESPECT FOR FEDERAL LAW ENFORCEMENT OFFICERS. IN A SOCIETY
THAT ONE ROSE UP AGAINST EXTRENDST RHETORIC AND STOOD WITH OUR
LOCAL POLICE," WE HAVE IN SOME QUARTERS BECOME THE "BAD GUYS" AND
PEOPLE WHO OPENLY PREACH DEFIANCE OF THE LAW HAVB BECOME THE
"GOOD GUYS."
GROUPS.OR INVIVlDUALS PREACHING "STATE'S RIGHTS," "COUNTY
SUPREMACY," OR ANARCHY AS DOES THE UNABOMER. OR OTHER SIMILAR
THEMES ADVOCATE THAT CITIZENS SHOULD OPPOSE, BY FORCE IF
NECESSARY, TIIE FEDERAL GOVERNMENT. BECAUSE CONGRESS HAS GIVEN
ATF PRINCIPAL RESPONSIBILITY FOR ENFORCING OUR NATION'S GUN LAWS,
THESE GROUPS SEE ATF AS THEIR "ENEMY." THE HATE MAIL RECEIVED BY
ATF AGENTS FROM CITIZENS WITH AN EXTREME FOCUS ON GUNS IS BOTH
FRIGHTENING AND SOBERING.
TIllS IS THE ENVIRONMENT IN WHICH THE WACO HEARINGS IN
CONGRESS WILL TAKE PLACE. BUT LET ME SAY TIllS: LAW ENFORCEMENT
SHOULD NOT BE ABOVE CRITICISM. WHEN WE ARE WRONG -- WHEN WE
OVERSTEP OUR LEGITIMATE AUTHORITY OR SIMPLY MAKE J\.1ISTAKES -- WE
MUST CONCJ;:DE OUR MISTAKES, LEARN FROM THEM, AND MOVE FORWARD.
TIllS IS WHAT WE DID AFTER WACO: WE TOOK A lIARD LOOK AT MISTAKES,
PRESENTED THEM TO THE PUBLIC FOR SCRUTINY, AND MOVED FORWARD
BASED ON THE LESSONS LEARNED.
ON FEBRUARY 28,1993, FOUR BRAVE ATF AGENTS WERE KILLED MnLE
ATTEMPTING TO EXECUTE A LAWFUL SEARCH AND ARREST WARRANT ON
DAVID KORESH AT THE BRANCH DAVIDIAN COMPOUND IN WACO. ON APRlL
5
19,1993, DURING THE FBI RAID AIlVfED AT BRINGING AN END TO THE STANDOFF, DAVJD KORESH AND HIS FOLLOWERS SET FIRE TO THE COIvIPOUND AND
KILLED MANY INNOCENT CIDLDREN.
PRESIDENT CLINTON AND SECRETARY BENTSEN, THE CONGRESS AND
THE PUBLIC, ALT. WANTED ANSWERS. PRESIDENT CLINTON DIRECTED BOTH
TREASURY AND THE JUSTICE DEPARTMENT TO CONDUCT VIGOROUS AND
THOROUGH INVESTIGATIONS OF WHAT HAD LED TO THE LOSS OF LAW
ENfORCEMENT AND CIVILIAN LIVES.
SECRETARY BENTSEN ASKED ME TO LEAD THE TREASURY
DEPARTMENT'S REVIEW OF ATF'S INVOLVEMENT. FROM THE BEGINNING OF
THE INVESTIGATION THROUGH THE UNSUCCESSFUL EFFORT TO EXECUTE
SEARCH AND ARREST WARRANTS. HE DEMANDED THAT THE INVESTIGATION
BE HONEST, UNCOMPROl\1ISING, AND COMPREHENSIVE.
TO ENSURE THAT THE REPORT WAS IMPARTIAL AND COMPREHENSIVE,
SECRETARY BENTSEN ENLISTED THREE INDMDUALS OF NATIONAL
PROMINENCE AND THE IDGHEST INTEGRITY -- PULITZER PRIZE WINNING
JOURNALIST EDWTN GUTHMAN, WATERGATE PROSECUTOR HENRY RUTH, AND
LOS ANGELES POLICE CHIEF WILLIE WILLIAMS. THEIR ROLE WAS TO PROVIDE
GUIDANCE TO THE INVESTIGATION, .CONSIDER ITS FINDINGS, AND ASSESS THE
FINAL REPORT. THEY RECEIVED NO PAYMENT FOR THEIR SERVICES.
TREASURY'S OFFICE OF THE INSPECTOR GENERAL WORKED CLOSELY WITH
THE REVIEW TEAM TO ENSURE THAT THE REVIEW WAS THOROUGH AND
UNBIASED.
WE ASSm.1BLHD AN INVESTIGATIVE TEAM OF SEVENTEEN SENTOR
INVESTIGATORS FROM THE SECRET SERVJCE, THE CUSTOMS SERVICE, THE IRS,
AND THE FINANCIAL CRIMES ENFORCEMENT NETWORK. NO ATF PERSONNEL
TOOK PART IN THE REVIEW.
THE REVIEW TEAM ALSO CONSULTED WITH 10 NON-TREASURY EXPERTS
IN TACTICAL OPERA TrONS, FIREARMS, AND EXPLOSIVES. LIKE THE
INDEPENDENT REVIEWERS, THE INDEPENDENT EXPERTS SERVED WITHOUT
PAY.
WE ALL KNOW HOW DIFFICULT IT IS FOR ANY ORGANIZATION TO JUDGE
ITS OWN. IT CAN BE ESPECIALLY PAINFUL IN THE LAW ENFORCEMENT
COIv1MUNITY WHERE SUCCESS, AND SOMETIMES SURVIVAL, DEPENDS ON
COlv1RADERIE AND LOYALTY. ONE OF THE SENTOR EXECUTIVES IN MY OFFICE
LIKENED TIIE WACO REVIEW TO CONDUCTING OPEN HEART SURGERY ON
YOURsELF, WiTHOUT ANAESTHESIA.
6
2026222611
Fro.: Department Of Treasury
06/02/00 04: lI5 PM
Page lI8 of 92
IN CHOOSING THE MElVIBERS OF THE REVIEW TEAM, MY FIRST PRIORITY
WAS TO ASSEMBLE THE'BEST INVESTIGATIVE TEAM COMPOSED OF
INDMDUALS WITH THE INTEGRITY AND THE COl.\flvlITMENT TO FIND OUT
WHAT EXACTLY HAPPENED. I CAN ASSURE YOU, TIm REVTEW TEAM
EXCEEDED MY HIGHEST HOPES IN THIS REGARD.
AT THE SAME TIME, WE ALSO ENSURED THAT THE INVESTIGATION
TEAM INCLUDED PEOPLE OF COLOR AND WOMEN. INDEED, THE WACO
REVIEW TEAM INCLUDED 8 AFRICAN-AMERICANS, 7 WO:MEN, 1 mSPANICAMERICAN. AND 1 ASIAN-AMERICAN.
OVER A 5-MONTH PERIOD, BETWEEN MAY AND OCTOBER 1993, MEMBERS
OF THE TEAM TRAVELLED THE COUNTRY AND CONDUCTED OYER 500
INTERVIEWS TO DETERMINE WHAT HAPPENED NEAR WACO AND WHY. WE
RECEIVED UNQUALIFIED COOPERATION FROM THE HUNDREDS OF ATF AGENTS
WHO WERE INTERVIEWED. WITHOUT THEIR SUPPORT, OUR DIFFICULT TASK
WOULD HAVE BEEN RENDERED ALL BUT IMPOSSIBLE.
SECRETARY BENTSEN ISSUED TREASURY'S 220 PAGE REPORT ON
SEPTEMBER 30, 1993. IT WAS CRITICAL OF ATF AND MAIN TREASURY. MAJOR
NEWSPAPERS PRAISED THE REPORT FOR ITS CANDOR AND THOROUGHNESS.
THE TREASURY REPORT MAKES CLEAR THAT THE EVENTS AT WACO
WERE UNUSUAL AND THERE WERE PLENTY OF LESSONS TO LEARN. IN
RESPONSE, BOTH ATF AND MAIN TREASURY HAVE MADE ORGANIZATIONAl,
REFORMS.
AFTER THE REPORT WAS ISSUED, NUMEROUS PERSONNEL CHANGES
WERE MADE, BOTH IN WASHINGTON AND IN THE FIELD. THE LEADERSHIP AT
ATF HEADQUARTERS WAS REPLACED. THE DIRECTOR OF THE ATF RETIRED. I
APPOINTED THEN SECRET SERVICE DIRECTOR JOHN MAGAW, A TIDRTY FOUR
YEAR VETERAN OF LAW ENFORCElVIENT AND A KNOWN REFORMER AS THE
NEW DIRECTOR. THE 2 RAID CO:Ml\1ANDERS WERE RELIEVED OF TIIEIR LAW
ENFORCEMENT DUTIES. THEY NO LONGER WEAR BADGES, CARRY GUNS, OR
SUPERVISE LINE AGENTS. THEY WERE DISCIPLINED FOR ERRORS 1N
JUDGMENT AND FOR FALSE AND MISLEADlNG STATEMENTS THEY MADE
FOLLOWING THE RAID.
SINCE 1HE WACO INCIDENT, FOUR SEPARATE CONGRESSIONAL COMMITTEES
HAVE HELD SEVEN DAYS OF HEARINGS ON ATF'S ROLE AT WACO. NOW TWO
MORE HOUSE SUBCOMl\1ITI'EES ARE HOLDING HEARINGS NEXT WEEK. I HAVE
SEEN THE PROPOSED SCHEDULE FOR THE HEARINGS. THE lv1EMBERS ARE
PLANNING TO ASK THE SAlvlE BASIC QUESTIONS TIIAT WERE ADDRESSED TWO
YEARS AGO IN THE TREASURY REVIEW.
7
LET ME TELL YOU WHAT THESE BASIC QUESTIONS ARE AND HOW THE
TREASURY REVIEW ANSWERED THEM.
FIRST, WAS THE INVESTIGATION OF DAVID KORESH AND IDS
FOLLOWERS TO DETERMINE WHETHER THERE WAS PROBABLE CAUSE TO
BELIEVE THAT FEDERAL FIREARMS LAWS HAD BEEN VIOLATED PROPERLY
CONDUCTED?
MY IMPRESSION IS THAT CRITICS WORRY THAT ATF SINGLED OUT
KORESH AND IllS FOLLOWERS FOR INVESTIGATION BECAUSE THEY WERE AN
UNCONVENTIONAL RELIGIOUS GROUP. THAT IS NOT WHAT HAPPENED. DAVID
KORESH WAS INVESTIGATED FOR FIREARMS VIOLATIONS, NOT HTS RELIGIOUS
BELIEF OR RELIGIOUS ,PRACTICES.
ATF'S INVESTIGATION BEGAN IN LATE MAY 1992 WHEN THE SHERIFF OF
MCLENNAN COUNTY, TEXAS, ASKED ATF TO INVESTIGATE SUSPICIOUS UPS
DELIVERIES TO CERTAIN PERSONS RESIDING AT THE BRANCH DAVIDIAN
COMPOUND. THESE DELIVERIES INCLUDED MORE THAN $10,000 WORTH OF
FIREARMS, INERT GRENADE CASINGS, AND A SUBSTANTIAL QUANTITY OF
BLACK POWDER.
ATF BEGAN A FORMAL INVESTIGATION ON JUNE 9,1992 TO PUR..C'HJE
EVIDENCE OF TWO VIOLATIONS: (1) THE ILLEGAL MANUFACTURE OF MACHlNE
GUNS FROM COMPONENT PARTS, AND (2) THE ILLEGAL MANUFACTURE AND
POSSESSION OF DESTRUCTIVE DEVICES, INCLUDING EXPLOSIVE BOMBS AND
GRENADES AND THE MATERIALS NECESSARY TO PRODUCE THEM.
BY NOVEMHER 1992, THE ASSISTANT U.S. ATTORNEY WAS SATISFIED
THAT PROBABLE CAUSE EXISTED TO SUPPORT SEARCH AND ARREST
WARRANTS. THE FEDERAL MAGISTRATE·JUDGE WHO ISSUED THE WARRANTS
AGREED.
WHEN TIm COl\t1POUND WAS SEARCHEO AFTER THE FIRE, THE
FOLLOWING ILLEGAl, WEAPONS WERE RECOVERED:
48 MACHINE GUNS
70 SILENCERS
4 FUNCTIONAL PRACTICE HAND GRENADES
DOZENS OF GRENADE CONWONENTS
TIlE TREASURY REVIEW TEAM CONSULTED TWO WEAPONS EXPERTS
AND TWO EXPLOSIVES EXPERTS. EVERYONE CONSULTED CONCLUDED THAT
THE EVIDENCE GAIHHRED BY ATF AMOUNTED TO PROBABLE CAUSE OF
VIOLATIONS.
8
FrOll: Department Of Treasury
0: 202622261
06/02100 04:45 PM
Page 50 of 92
MOREOVER, AT THE TRIAL OF THE 11 BRANCH DAVIDIANS ON WEAPONS
AND MANSLAUGHTER CHARGES LAST YEAR, NONE OF THE DEFENSE
ATTORNEYS CHALLENGED THE WARRANTS.
THE SECOND QUESTION BEING ASKED BY CONGRESS IS. ONCE THE
THRESHOLD FOR PROBABLE CAUSE FOR A SEARCH WARRANT TO SEARCH
THE BRANCH DAVIDIAN COMPOUND WAS MET, DID THE ATF DEVELOP AN
APPROPRIATE PLAN FOR EXECUTING THE WARRANT?
THE TREASURY REVIEW FOUND THAT THERE WERE SERIOUS FLAWS IN.
TIm PROCESS OF PLANNING TO EXECUTE THE WARRANTS. THERE WAS POOR
INTELLIGENCE GATHERING AND ANALYSIS. ATF TOO QUICKLY DIS:MISSED
AL TERNATIVES TO EXECUTiNG WARRANTS, SUCH AS THE POSSffiILITY OF
LURING KORESH OFF THE PREMISES AND ARRESTING HIM AWAY FROM THE
COMPOUND.
THE THIRD AREA OF CONGRESSIONAL OUESTIONING CONCERNS THE
RAID ITSELF, DID THE ATF CARRY OUT THE PLAN IN AN APPROPRIATE
MANNER?
FIRST, THE REVIEW POINTS OUT, TIlE RAID COlVIMANDERS DEPARTED
SIGNIFICANTLY FROM THE RAID PLAN. THE PLAN WAS DEPENDENT ON
SURPRISE BUT THE COMMANDERS WENT FORWARD WHEN SURPRISE WAS
LOST. THE PLAN WAS DEPENDENT UPON THE DAVIDIAN MEN BEING
SEPARATED FROM THE WEAPONS IN THE COMPOUND. THE COMMANDERS
IGNORED TIllS FUNDAJvfENTAL PRECONDTTTON, PROCEEDING BEFORE THE l\I1EN
WERE SCHEDULED TO BE OUTSIDE AND CONTINUING FORWARD WHEN THERE
WAS NO EVIDENCE OF ACTIVITY OUTSIDE THE COMPOUND.
AS THE REVIEW MAKES CLEAR, THE DECISION TO GO FORWARD WITH
THE RAID WAS A MISTAKE, NOT MERELY IN HINDSIGHT, BUT BASED ON
WHAT THE DECISIONMAKERS KNEW AT THE TIME.
TllliSE ARE JUST SOME OF THE IDGHLIGHTS OF THE TREASURY REPORT.
TWO YEARS AFTER THE REPORT WAS ISSUED, THERE MAY WELL BE DETAILS
THAT CAN BE ADDED. IT MAYBE POSSIBLE TO EXPAND ON SOME OF THE
SUBJECTS THAT COULD NOT BE INCLUDED IN THE 500 PAGES OF REPORT AND
EXPERT REPORTS TREASURY PROVIDED, BECAUSE I AM A PERFECTIONIST BY
NATURE I WILL BE DISAPPOINTED If CORRECTIONS TIIAT SHOULD HAVB BEEN
MADE ARE POINTED 01 IT TO ME. BUT I WILL NOT BE SURPRISED. SINCE WE
ISSUED ·OUR REPORT, THERE WAS A LENGTHY TRIAL PROVIDING
INFORMATION THAT DID NOT EXIST WHEN WE DID OUR INVESTIGATION.
9
0:
20262226'!
Frol: Department Of Treasury
06/02/00 04:45 PM
Page 51 of 92
WHATEVER FACTUAL ADDITIONS AND MODIFICATIONS COULD IDEALLY
BE MADE, HOWEVER, I DO NOT BELIEVE TIIAT ANY EXAMINATION WILL
ALTER OUR FUNDAMENTAL CONCLUSIONS ABOUT THIS TRAGIC EPISODE IN
LAW ENFORCEMENT HISTORY: ATF!::IA!.! A LEGITIMATE, COMPELLING, AND
LAWFUL BASIS FOR INVESTIGATING DAVID KORESH FOR VIOLATION OF
FEDERAL FIREARMS LAWS; THE PLANNING EFFORT FOR EXECUTION OF THE
WARRANTS WAS SERTOUSLY FLAWED; AND THE RAID SHOULD NOT HAVE
BEEN CARRIED OUT UNDER THE CIRCUMSTANCES THAT EXISTED.
WHATEVER MISTAKES WERE MADE BY ATF, HOWEVER, THE REAL
VILLAIN AT WACO WAS DAVID KORESH. HE WAS TIPPED OFF 45 MINUTES
BEFORE THE RAID BEGAN. WITH THE KNOWLEDGE THAT AGENTS WERE
COMING WITH A LAWFUL WARRANT. KORESH ARMED illS FOLLOWERS WITH
ILLEGAL MACHINE GUNS, GRENADES, AND OTHER ASSAULT WEAPONS, AND
PLACED A SNIPER ON THE WATER TOWER TIlEY THEN LA Y IN WAIT. WHEN
THE ATF AGENTS ARRIVED, LAW ENFORCEMENT AGENTS WERE AMBUSHED.
FOUR ATF AGENTS WERE BRUTALLY KILLED.
OTHER AGENTS WERE MAIMED AS THEY SOUGHT COVER BElllND CARS AND
OTHER BARRIERS. IN THE .FACE OF WITHERING FIRE, ATF AGENfS ACTED
WITH HONOR AND HEROISM. THROUGHOUT TIIE FIREFIGHT. THEY
DEMONSTRA TEn EXTRAORDINARY DISCIPLINE, COURAGE, AND HEROISM. LET
ME CITE JUST TWO "EXAMPLES:
SPECIAL AGENT TIM GABOURIE, A MEDTC, REPEATEDLY EXPOSED
IDMSELF TO GUNFIRE TO TREAT SEVERAL WOUNDED AGENTS.
ANOTHER SPECIAL AGENf LEFT A PROTECTED POSITION TO THROW IDS
BODY OVER A WOUNDED COLLEAGUE.
THIS ADMINISTRATION HAS SHOWN A FIERCE DEDICATION TO LAW
ENFORCEMENT AND TO REDUCING VIOLENT CRIME IN OUR COUNTRY.
SECRETARY RUBIN SPEAKS OUT EVERY DAY IN DEFENSE OF AlF'S AGENTS
AND ITS PROFOUNDLY IMPORTANT l\1ISSION. TWO DAYS AGO, SECRETARY
RUBIN AND I PARTICIPATED IN THE UNVEILING OF THE INSCRIPTIONS ON A
PLAQUE AT TREASURY OF THE NAMES OF EIGHT MEMBERS OF TREASURY
ENFORCEMENT BUREAUS WHO DIED AT.OKLAHOMA CITY IN A BOMBING.
EVERY DAY, YOU ARE ON THE FRONT LINES OF THE STRUGGLE IN OUR
SOCIETY BETWEEN RIGHT AND WRONG, DIALOGUE AND VIOLENCE, ORDER
AND CHAOS. WHEN I TESTIFY AT THE HOUSE HEARINGS ON WACO, I WILL BE
STRENGTHENED BY THE KNOWLEDGE OF YOUR STRUGGLE, YOUR
DEDICATION, AND THE SACRIFICES YOU AS LAW ENFORCEMENT AGENTS ARE
. TOO OFTEN CALLED UPON TO MAKE TO PRESERVE THE LIFE AND LIBERTY OF
THE CITIZENS OF TIllS COUNTRY.
-3010
() F P \ R
r
\I L '\ 1
() F
I' II I,.
T R E .\ S l' R Y
NEWS
omCE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W. • WASIDNGTON, D.C. • 20220 • (202) 622·2960
EMBARGOED UNTIL 10:00 A.M. EST
Text as prepared for delivery
March 9, 2000
TREASURY DEPUTY SECRETARY STUART EIZENSTAT
HOUSE COMMITTEE ON BANKING AND FINANCIAL SERVICES
I. Introduction
Mr. Chairman, Mr. LaFalce, and members of the Committee:
I am happy to be here this morning to present the International Counter Money
Laundering Act of 2000. This Committee has been at the center of a growing effort to
expose the serious problem of money laundering and to take effective steps to combat it.
This Committee wrote the House versions of the Bank Secrecy Act, the Annunzio-Wylie
Bill, and the Money Laundering Suppression Act of 1994, from which our current
enforcement powers are derived. Last fall, after reports that millions of dollars in
Russian criminal proceeds had been laundered through an American bank, you held
widely publicized hearings which did much to focus public attention on the problem.
The legislation we are proposing today would fill a crucial gap in our authorities,
and significantly enhance our ability to take calibrated, targeted action with respect to
money laundering threats posed by foreign jurisdictions, institutions, or transactions. In
shaping our proposals, we have benefited considerably from a study of legislative
proposals that you, Mr. Chairman, and other members of the Committee, have made. We
look forward to working with you and Ranking Member LaFalce with the aim of enacting
effective legislation to combat international money laundering during this Congress.
Before I get to the details of the legislation, however, I want to point out that it is
being proposed in the context of the National Money Laundering Strategy for 2000,
which has been developed as required by the Money Laundering and Financial Crimes
Strategy A~t of 1998. This comprehensive document, which was released yesterday, was
based on the continuing review we have conducted since last September of all programs
in this area. It reflects considerable progress on a wide range of initiatives since the 1999
Strategy was published. It also announces a series of new initiatives to combat money
laundering, in the areas of financial services, international policy and federal, state and
local law enforcement. It sets out the specific goals we seek this year, the actions we
shall take to achieve them, the time frame in which they will be taken and the specific
officials in the Executive Branch that are responsible for ensuring that the goals are met.
L5-445
For press~, speeches, public scheduks and official biographies, call our 24~our fax line at (202) 622·2040
While you have requested that I focus my testimony on legislation dealin~ with
offshore havens and the laundering of the proceeds of corruption, I shall be referrmg to
some other aspects of the Strategy in my presentation. as well. Because they are all part
of a whole, I would be most appreciative if the entire 2000 Strategy document could be
made a part of the Record.
II. The Need for Additional Discretionary Authorities
The IMF has estimated the amount of money laundering worldwide at between
two and five per cent of the world's gross domestic product. Because of its very
secretive nature, accurate figures on the extent of money laundering are hard to come by.
But even the most conservative estimates project the magnitude of money laundering to
be close to $600 billion. Regardless of the exact figures, money laundering is a serious
threat to our country because it facilitates drug trafficking, organized crime and
international terrorism and because it encourages corruption in foreign governments.
undermining U.S. efforts to promote democratic institutions and healthy economic
development internationally. Money laundering also poses a threat in and of itself.
because it risks undermining the integrity of our financial system. President Clinton
underscored this point in announcing Presidential Decision Directive 42 (PDD-42) when
he stated that much of the problem posed by international organized crime "stems from
the corrosive effect on markets and governments of their large illegal funds."
I want to state unequivocally that safeguarding the integrity of the American
financial system and protecting it from abuse are fundamental commitments of this
Administration. In reviewing the developments of the last six months, and deciding what
new measures may be necessary to act on those commitments, we concluded that the
specific legislative tools the government has available to protect the financial system
from international money laundering are too limited. On one end of the scale, we have
advisories, and on the other end of the scale we have formal economic sanctions under
the International Emergency Economic Powers Act ("IEEPA"). There is nothing of
practical utility in between.
Treasury Advisories can be effective, because they encourage U.S. financial
institutions to pay special attention to transactions involving certain jurisdictions, and to
file SARs - or suspicious activity reports. In two cases, that of the Seychelles in 1996
and the country of Antigua and Barbuda last year, advisories also provoked positive
action on the part of the targeted governments. But advisories do not impose specific
requirements, as an order or regulation would, and thus they are not sufficient to address
the complexity of the international money laundering threat.
At the other end of the scale, blocking orders under the IEEPA require a
Presidential finding of a national security emergency, and operate to suspend financial
and trade relations with the offending targets. Such orders can affect legitimate as well as
illegitimate commerce. We have used IEEPA orders effectively against drug trafficking
and terrorist organizations, but the tool is not particularly well suited to dealing with
under-regulated foreign financial institutions.
2
III. Proposed Legislation and Implementation
New Discretionary Authorities. Under our proposed legislation, if the United
States government believes that a certain foreign jurisdiction, a specific foreign financial
institution, or a type of international transaction, poses a primary money laundering threat
to this country, we will be able to take a far wider range of actions. The Secretary of the
Treasury, after consultation with the Secretary of State, the Attorney General, and the
Chairman of the Federal Reserve Board, could do one or more of the following:
1. Require banks or other financial institutions to keep records of transactions and
make them available to the government on request. These records could be
kept in the aggregate or by individual transaction. Such records could prove
invaluable to law enforcement and could help us better understand the specific
money laundering mechanisms at work. As a corollary benetit, because such a
requirement would cause U.S. institutions to increase the level of scrutiny they
apply to transactions involving targeted jurisdictions or institutions, it could
result in pressure on the offending foreign jurisdictions to improve their laws.
2. Require financial institutions to ascertain the foreign beneficial owners of
accounts in the U.S. where they are different from the owners of record. This
requirement would help us dig through the layers of obfuscation, and often
plain deceit, that prevent us from knowing who really holds money in U.S.
banks.
3. Require identification of those who are allowed to use a bank's correspondent
accounts, as well as its so-called "payable through" accounts, which allow
customers of a foreign bank to conduct banking operations through a U.S.
bank just as if they were its own customers. These technical financial
mechanisms, though perfectly legal and serving many legitimate purposes, are
also abused by foreign money launderers who seek to clean their dirty money
through our financial institutions. When necessary, we need to be able to tind
out who really benefits from these accounts, and by application of
transparency, discourage abusive practices.
4. Finally, where necessary in extreme cases, the Secretary would have the
authority to impose conditions upon, or prohibit outright, the opening or
maintaining of correspondent or payable-through accounts. Sometimes, when
the threat is really serious, we need to be able to say enough is enough and cut
foreign money launderers off from using U.S. financial institutions.
As you can see, our proposed legislation is designed to be graduated, targeted and
discretionary -- graduated so that the Secretary can narrowly tailor the action he takes in a
manner proportional to the threat he is seeking to counteract; targeted, so we can focus
our response on the precise threat we confront; and discretionary, so we can integrate
these tools into the bilateral and multilateral diplomatic efforts we are engaged in to
3
persuade offending jurisdictions to change their practices. In the mean time, the
information generated by these measures will enable our enforcement and regulatory
personnel more effectively to understand the way these mechanisms are used and how
money passes through the jurisdictions named. Hopefully, the information will also
enable us to conduct more effective enforcement efforts against abuses stemming from
those jurisdictions. transactions, or institutions.
The extent to which we should rely on multilateral action has been a matter of
some debate over the past few months. Some have said that all our actions should be
taken in concert with other countries, so that our institutions are not put at any possible
competitive disadvantage. Others would mandate our government to apply certain stated
measures automatically with respect to those who pose a threat. We have learned from
our experience with economic sanctions, that on the one hand multilateral action is
generally more effective than unilateral steps. And there may be times when the
desirability of specific countermeasures is trumped by overriding national interest
considerations.
On the other hand, if we believe there is a genuine threat to our own institutions,
we shall be prepared use these powers unilaterally even if other nations are unprepared to
join us. There may well be instances where multilateral or even bilateral action is not
feasible and in which the risk of corrupt penetration of our banking system is so high we
that must act ourselves. In making these choices, discretionary powers serve a very
useful purpose.
Findings and Implementation Process. I would also like to outline the process we
intend to use to designate foreign jurisdictions as money laundering threats. First,
working with the State Department, we shall improve the processes we use to gather data
about other countries' laws, regulations and practices that either combat or facilitate
money laundering. We will also look at experiences from U.S. law enforcement. With
this information, we shall assess the scope and type of money laundering problems we
face from each jurisdiction. These assessments will be made on an annual basis.
Second, we would seek to determine whether each of the problem jurisdictions is
primarily a source of criminal funds, or primarily a haven for dirty money. "Source"
countries often face continuing problems of political will and capacity in dealing with
what are, at root, domestic problems of crime and corruption. "Havens" tend to be
characterized by under-regulated offshore financial services and excessive bank secrecy.
Political will is relevant in both cases; but the distinction is crucial. in terms of the
application of specific countermeasures. Training and technical assistance might be more
appropriate than targeted regulatory action, for example, with respect to "source"
jurisdictions.
Third, for each source country and money laundering haven, we shall ask if it has
an adequate anti-money laundering regime, based on the global standards established by
the Financial Action Task Force on Money Laundering ("FATF"). If not, we shall then
ask whether it is improving its laws and practices. If not, we shall examine if this failure
4
is primarily due to a lack of resources, or instead an absence of political will. [t may in
fact reflect a clear intention of providing no-questions-asked banking to the international
underworld. In addition, our analysis will also take into account the interplay between
tax evasion-a serious crime in its own right-and money laundering, since the same
organizations in the same havens are often used for both activities, often by the same
criminals.
The answers to these questions will go a long way in determining which
countermeasure will be very influential in the determination whether a jurisdiction is
designated a primary money laundering concern so that the Secretary may then impose
one of the new authorities. They will also inform the decision of which counter-measures
to apply in each specific case.
These factors are set forth in the 2000 National Money Laundering Strategy, in
order to send a clear signal to the public, to financial institutions, and to the international
community, about our concerns and our intentions. We hope and expect that many
institutions and foreign governments will not wait for us to announce specific steps
before they take appropriate preventive steps.
Multilateral Action. As we contemplate specific countermeasures with respect to
specific jurisdictions, we shall be guided by, and actively participate in, the work of
international organizations in this field. In June, the FATF is expected to publish the
names of jurisdictions that substantially fail to meet its criteria for cooperation in
resisting money laundering. The Financial Stability Forum, created by the G7 major
industrial nations, is also reviewing the role of off-shore financial centers in the
international system and encouraging them to put sound international standards into
force. We shall help both organizations make their evaluations and take appropriate and
coordinated countermeasures toward those jurisdictions, offshore and on shore, that fail
their tests.
We shall also work with our partners in the DEeD to publish its list of tax havens
within the next few months. Although tax evasion and money laundering are separate
crimes, the same havens are used for both, often by the same people, because the features
that make a jurisdiction attractive for one, such as excessive bank secrecy and lack of
transparency, make it attractive for the other.
We also can and will promote the adoption of appropriate supervisory actions in
response to specified jurisdictions that fail to make progress in implementing effective
international standards relating to money laundering. In multilateral forums, the banking
agencies will support the development and issuance of international supervisory guidance
on the reputational risks associated with money laundering and the sound practices that
should be implemented to address these risks.
IV. Guidance to U.S. Financial Institutions
5
More broadly, Treasury and the tinancial regulatory agencies intend also to issue.
before the end of the year, guidance to U.S. tinancial institutions that will assist them in
identifying, on their own, those customers and transactions that pose an especially high
risk of involvement with money laundering and other financial crimes. We would then
expect the institutions to keep a watchful eye on these accounts.
Let me make it clear that our guidance will ditfer from the "know your customer"
proposals made last year. First, we do not intend to issue formal regulations, and the
guidance will be tailored so as to require special scrutiny only with respect to high risk
accounts. Institutions already conduct due diligence with respect to a wide range of
regulatory requirements; we intend to assist them in making determinations about what
specific steps they need to take to comply with their existing obligation to tile Suspicious
Activity Reports. This obligation explicitly requires banks to be aware of transactions
that are suspicious because of their size, their source, or because they are not the kind of
transactions in which their customers would normally be expected to engage.
Banks should be able to identify high-risk customers - including certain so-called
"private banking" customers -- without unduly interfering with normal business activities
or invading the privacy of any customer. Moreover, these efforts to identify certain highrisk customers will take place in the context of the Administration's commitment,
expressed by the President in the State of the Union, to propose new legislation this year
to safeguard citizens' financial privacy. To assure this, we will, in preparing the details
of our guidance, consult widely with all segments of the industry, with privacy advocates
and with other affected groups. I personally will be heading up this initiative.
In this connection, special attention should be paid to corrupt public officials who
try to launder money and other assets they have stolen from their own people. We will
continue to seek legislation we first called for last year to make public corruption by a
foreign a predicate offense under the anti money laundering laws. This change would
have a significant effect, both in ensuring that our own financial institutions applied
enhanced scrutiny to activity in accounts they manage on behalf of foreign officials, and
in providing our prosecutors tools necessary to bring to justice foreign officials who have
looted their countries. The change would also provide U.S. prosecutors with tools to
assist investigations of foreign governments to bring such "kleptocrats" to justice. We
will also continue to urge other countries to make public corruption a predicate offense.
in order to implement the international treaties and standards that have been negotiated
and will be in the future.
V. Other National Money Laundering Strategy Initiatives
I would like now to highlight a few of the other activities covered in our 2000
Strategy Report which may be of special interest to members of the Committee.
HIFCA Designations. We announced yesterday that the New York / Northern
New Jersey region, the city of Los Angeles and the city of San Juan have been designated
as High Risk Money Laundering and Financial Crime areas. In addition, one money
6
laundering system -- the movement (and often smuggling) of cash in bulk across the
Southwest border -- has also received this designation. These are the first designations
under the 1998 Strategy Act. In each, a money laundering action team will be created or
identified and will proceed this year to launch concentrated enforcement activities that
will coordinate the efforts of federal, state and local law enforcement. State and local
authorities operating within each HIFCA will also be eligible for grants under the new
Financial Crime Free Communities Support program ("'C-FIC").
Suspicious Activity Reporting for MSBs. Yesterday, we issued final regulations
requiring filing of suspicious activities reports by money services businesses that transfer
funds or deal in money orders or traveler's checks. They were developed after significant
consultations with representatives of the industry, state regulators and law enforcement
officials. The regulations will significantly expand the ability of law enforcement to focus
its efforts on money laundering activity oc'curring through non-bank financial institutions.
It will help level the playing field in SAR reporting for institutions providing financial
services to the public.
This summer, we hope to issue our final rules for casinos and card clubs. We
have also been working with the SEC, and we expect to publish proposed rules covering
SAR reporting by brokers and dealers in securities later this year. The securities industry
is generally not used in the "placement" stage of money laundering because of nearuniversal policies against currency transactions. It also requires special rules and systems
to ensure conformity with existing examination and enforcement programs of securities
regulators. Nevertheless, the services and products the industry provides, including the
efficient transfer of funds between accounts and to other financial institutions, the
liquidity of securities, and the ability to conduct international transactions provide
opportunities for money launderers to obscure and move illicit funds.
Gatekeepers. We are aggressively pursuing programs aimed at the la\\-yers,
accountants and auditors who function as "gatekeepers" to the financial system. While
legal rules properly insulate professional consultations from overly broad scrutiny and
create a zone of safety within which professional can advise their clients, those rules
should not create a cover for criminal conduct. We have published materials for the
accounting profession that highlight money laundering risks in various industries. We
are considering how existing accounting standards, on such subjects as illegal acts by
clients, internal controls and fraud, can incorporate money laundering safeguards. By the
end of this year, after outreach to a range of professional associations, we expect to have
developed recommendations on ways to impress upon gatekeepers their professional
responsibilities in this regard.
In order to ensure that we are able to fully implement this year's Strategy, we
have asked for a $15 million, centralized account in our 200 1 budget. These funds.
which are in addition to our normal budget request, will be used to provide grants to state
and local enforcement agencies, and to support a number of key Strategy initiatives.
7
VI.
Conclusion
There are those who believe that in the new world of electronic commerce, where
funds travel so fast and so easily, law enforcement cannot possibly keep up with
criminals and corrupt officials and those who move their money for them. I strongly
disagree. We have the same information technology they have. We are more dedicated
than they are. We will work to implement the authority we have and the new laws we
seek, and we will seek the help of other nations that realize the threat money laundering
presents to their own economic progress, and the stability of their own societies. We
shall work harder and with more resourcefulness than our adversaries to track their
activities, eliminate their havens, bring them to justice and eliminate the scourge of
money laWldering from our societies.
Thank you, Mr. Chairman, for inviting me to testify before this Committee today.
I would be happy to answer questions from you and the other members of the Committee.
-30-
8
DEPARTMENT OF THE TREASURY
DEPARTMENT OF JUSTICE
For Immediate Release
March 8, 2000
Contact: Public Affairs
(202) 622-2960
TREASURY AND JUSTICE ISSUE 2000 MONEY LAUNDERING STRATEGY
The Departments of Treasury and Justice unveiled the Administration's National Money
Laundering Strategy for 2000 today, laying down a comprehensive and detailed plan for
combating money laundering.
The Strategy calls for a comprehensive approach to combat domestic and international
money laundering. It designates the first four High Intensity Financial Crime Areas for the
United States - New YorklNew Jersey, Los Angeles, San Juan and cash smuggling across the
Southwest Border. It announces a final rule requiring money services businesses to report
suspicious transactions and the intention to expand this coverage later to include casinos and
securities broker/dealers. It sets out the Administration's plan to issue guidance to financial
institutions to apply enhanced scrutiny to certain high risk accounts. And, it calls for the passage
of key Administration legislation to deal with the problem of international money laundering and
provide law enforcement better anti-money laundering tools.
"Money laundering is a growing threat to the United States," said Deputy Treasury
Secretary Stuart Eizenstat. "It undermines confidence in the integrity of our financial systems,
facilitates crime and corruption, and allows criminals to savor the rewards of their illegal
actions."
This 2000 Strategy builds upon the foundation of the original National Money
Laundering Strategy released last September. It reports on the conclusions of the various studies
and initiatives begun last year and underscores accountability by assigning lead officials and
responsible offices for each of its various action items.
"The 2000 Strategy sets out a highly ambitious and far-reaching agenda for the
government's efforts to fight money laundering," said Deputy Attorney General Eric Holder.
"Targeting the first four High Intensity Financial Crime Areas in the United States, the antimoney laundering grant program to state and local law enforcement, and the Strategy's
legislative proposals will significantly raise the stakes for those who would profit from crime and
try to erase the taint of their criminality."
'J?e Strate~y re~rese~ts the second of five annual reports called for by the 1998 Money
Laundenng and Fm~clal C~lmes Strategy Act. Implementation is being led by the Departments
of Treasury ~d Ju~tlce and mvolves the efforts of a wide cross-section of government agencies.
The Strategy IS avaIlable on the Treasury website at WWWtl·P.~"
- 30LS-446
(l(W
DEPARTMENT .OF
THE
TREA'SURY
,
TREASURY
NEWS
1I1I1I1I1I1I1I1I1I1I1I1I1I1I1I1I1I1I1I1I1I1I1I"~1785g~~"1I1I1I1I1I1I1I1I1I1I1I1I1I1I1I1I1I1I1I1I1I..
OFFICE OF PUBUCAFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASIDNGTON, D.C.· 20220 • (202) 622-2960
FOR IMMEDIATE RELEASE
March 8, 2000
LS-447
ST A TEMENT BY
TREASURY DEPUTY SECRETARY STUART EIZENSTAT
ON THE NATIONAL MONEY LAUNDERING STRATEGY FOR 2000
Thank you all for coming, and a special thanks to Rep. LaFalce, Rep, Velazquez, and Rep. Roukema for joining us here
today. I also want to thank many of their colleagues who could not be here but who share their focus on this important
issue, including Senators Grassley, Schumer, Sarbanes, Coverdell and Kerry, Chainllan Leach and Representatives
Waters, Vento, King and McCollum.
Money laundering, at home and abroad, is a growing threat to the United States, both because it facilitates crime and
because it taints our fmancial system. Deputy Attorney General Holder and I, as co-chairs of the Administration's Money
Laundering Steering Committee, have worked to bring the agencies of government together to combat this threat through
an integrated, comprehensive approach. The result of these efforts is the National Money Laundering Strategy for 2000,
which we unveil here today.
The 2000 Strategy comprises dozens of new initiatives, including the first designations of high intensity money
laundering zones that will be the target of intensive law enforcement activity; a new grant program for state and local law
enforcement; new legislative proposals aimed at foreign countries and institutions that pose serious money laundering
risks; new rules requiring suspicious activity reporting from additional sectors of the financial industry; and a process for
developing new guidance for enhanced scrutiny of high-risk accounts. The President's budget proposal this year requests
an additional $15 million in a new centralized account to implement key Treasury items in the
2000 Strategy.
Let me begin today by outlining our key international initiative. Last week Secretary Summers announced that \\'e \\ere
proposing new international counter-money laundering legislation. I am very pleased that Chail'man Leach and Ranking
Member Lafalce of the House Banking Committee have indicated their willingness to introduce this legislation. and I
look forward to testifying before their committee on this issue tomorrow moming.
This legislation is aimed at providing the United States with new powers to act against foreign countries. financial
lT1stitutions, or types of international transaction that arc deemed to pose a money laundering threat Right no\\. \\ c: are
limited to the
relatively mild step of issuing bank advisories or the full-scale treatment of Il11poslng economic SClIKtIOIl) Thi, bill \\ Ollie!
give LIS the discretion to:
• Requirc financial institutions to record and report on transactions with prl)hlem COLIlltr-ICS or Illstltutions
• Require financial institutions to ascertain the foreign beneficial owners of accuunts In the U S
• Requirc identification oftltose who lise a bank's correspondent and "payable tltrullgh" ZICCOllntc,_ \\hicil all,l\\
foreign bank custornns to conduct bankin~ oper-ations through a LJ S bank
• And finally, wherc necessary, proilihit US flnilncial institutions f!'Om opeiling or 1l1:lIlllilllllllg CIJITl'SPOlldc'::'
accounts altogether.
The new legislation is designed to be graduated, discretionary and targetable. so we can most effectl\'el\ combat l:l(")I1c\
laundering without impairing legitimate business
,
The Strategy also outlines the process we will usc to designate foreignjurisdictions as money launderin£ threats_ In dOlll'"
this, we will consider the interplay between tax evasion and money laundering, since tax havens and m~ney laund;?rin~ havens share many of the same attributes.
-
For press releases, speeches, public sdzedules arid official biographies, call
Olll-
24..JlOlir fax line at (202) 622-2040
At the same time, we will continue our work within the multilateral Financial Action Task Force to develop a list of the
world's worst money laundering havens and in the OECD to develop a list of the world's worst tax havens. Both these
lists should be issued in June.
The Strategy also commits us to develop guidance for U.S. financial institutions to apply enhanced scrutiny to certain
high-risk accounts. U.S. financial institutions are the first line of defense against money laundering, and it is important
for us to provide the guidance they need to do the job right. At the same time, we are keenly aware of the need both to
protect Americans' right to privacy and to avoid imposing unnecessary burdens on banks. Thus, we are talking about
guidance, not regulation; we are focussing only on high-risk accou.l1ts, not ordinary accounts; and we are committed to
moving forward only after intensive consultations with all interested parties, including privacy advocates.
Let me at this point tum things over to Deputy Attorney General Eric Holder, who will then be followed by Jim Sloan
and our distinguished guests from the Congress.
D EPA R T 1\1 E N T
IREASURY
0 F
THE
T REA SUR Y
NEWS
omCE OF PUBliC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASIllNGTON, D.C. - 20220 - (202) 622-2960
Text as prepared for delivery
March 9, 2000
STATEMENT OF UNDER SECRETARY FOR ENFORCEMENT JAMES E. JOHNSON
SUBCOMMITTEE ON TREASURY, POSTAL SERVICE, AND GENERAL
GOVERNMENT COMMITTEE ON APPROPRIATIONS
Mr. Chairman, Congressman Hoyer, and Members of the Subcommittee, I am pleased to be
here today on behalf of Secretary Summers to introduce the fiscal year 200 1 budget request for
the Treasury Department's law enforcement bureaus and offices.
At the outset of my testimony, I want to thank the Members of this Subcommittee for their
strong and continuing support for Treasury law enforcement. I welcome this opportunity to
discuss with you the Treasury Department's accomplislunents and plans in the important law
enforcement mission areas for which we are responsible. I would like to focus on what we
regard as the most significant challenges we are facing and how Treasury law enforcement is
responding to them, covering our activities over the last year, our plans for the remainder of the
current fiscal year, and our budget proposals for fiscal year 200 1.
While we continue to face fiscal challenges, the fiscal year 2000 appropriation provides
Treasury bureaus with strong support for carrying forward increasingly complex and challenging
missions. We appreciate the support you showed for Treasury's enforcement programs in the
appropriations for FY 2000. I am pleased to report that the President's fiscal year 200 I budget
proposes a $4.2 billion program level for Treasury enforcement. If enacted. this budget will
provide the A TF with 600 more full-time equivalent agents, inspectors, and other staff to
enhance our firearms enforcement etJorts. This budget will provide the US. Secrc1 Service \\·ith
400 additional full-time equivalent agents to enable the United States Secret Service to carry Ollt
its dual mission of protection and investigation. The President's budget also pro\'idcs the l .\.
Customs Service with 273 additional full-time equivalent positions, including 120 for agents to
conduct drug smuggling and money laundering investigations. Overall. the President's budget
proposal would add more than I AOO full-time equivalent positions to Treasury enforcement. It
represents the largest increase in Treasury law enforccmcnt staffing in over a decade.
LS-448
For press releases, speeches, public sdzedules arid official biographies, call
Olll-
24-1lOur fax line at (202) 622-2040
DEPARTMENTAL OVERSIGHT
Funding is not the only element of strong law enforcement. It is also important that law
enforcement agencies have clear policies and a means for setting priorities. We at the Treasury
Department seek to provide support, oversight, and policy guidance to enhance the performance
of our enforcement bureaus and to provide strong leadership in the enforcement community.
Over the past year, we have continued to focus on accomplishing the Department's
enforcement goals and our bureaus' individual goals. We have relied on the expertise of our
professional staff and also on the talent and experience of bureau personnel to work on
challenging issues.
Hiring: Our need to recruit the best qualified and diverse workforce will gain even greater
salience if the proposed budget is enacted. We have undertaken two key initiatives in this area.
(1) Schedule B - Late last year, in response to our appeal, the Office of Per SOlmel Management
(OPM) granted the ATF and the Customs Service Schedule B excepted hiring authority. This
authority is somewhat similar to that currently used by the Secret Service, the Federal Bureau of
Investigation, and the Drug Enforcement Administration for criminal investigator recruitment
and selection. Some of the benefits ofthis authority are greater flexibility in targeting
recruitment to meet skill requirements and diversity goals, the capability to focus on the large
number of intangible skill sets and personal characteristics required, and the ability to find and
hire quickly the best candidates for their jobs.
(2) Diversity conference - Last fall, the Office of Enforcement, joined by Management, discussed
with each of the bureaus their recruiting and hiring practices, focusing on diversity. We learned
that each of the bureaus' recruitment programs had many commendable aspects, but concluded
that all could benefit from hearing about the experiences of the other bureaus. Since that time.
we have brought together the Equal Employment Opportunity managers from across the bureaus
for a series of meetings which will culminate in a diversity conference, to be held this spring.
which will focus on best practices to recruit and hire a diverse workforce. The conference \\'ill
also have a training module focusing on best practices for ensuring that, once recruited, minority
employees have fair opportunities to advance through the organization over the course of their
careers.
Retention: Retention of employees who have years of experience and in whom we have invested
long hours of training is critical. In that regard, the Department has made progress toward
meeting the challenges of improving our capacity to develop and retain high-caliber employees.
Specifically, we have worked to address workforce retention and workload balancing issues \\ith
the Secret Service. My office established an Interagency Working Group on U.S. Secret Sen-ice
Workforce Retention and Workload Balancing, which included representatives from
Enforcement, Treasury's Office of Management, OMB, and the Secret Service. The analysis
revealed that Secret Service agents have experienced an extreme increase in the amount of travel
and working hours in the last few years due to the increase in thc number of protectees and the
enhanced level of protection necessary. In fiscal year 2001, the Secret Service will experience a
further workload increase when the change of administrations occurs. To begin to alleviate these
problems, Treasury's fiscal year 2001 budget proposal includes a significant increase in staffing
for the Secret Service.
Senior Executive Service (SES) allocations: As the Subcommittee is aware, Treasury bureaus
have had a critical need for SES positions. Last month, as a result of decisions within the OPM,
we allocated 20 additional SES positions to our enforcement bureaus. The lion's share of those
positions went to the Customs Service, which, as you know, still faces significant challenges in
this area. This is an issue that the Department will continue to work with our bureaus to address.
Demonstration pay project: In January, ATF implemented its pay demonstration pilot for
scientific and technical positions. The demonstration project -- developed by a team comprised
of personnel from the Office of Enforcement, the Office of Management and the ATF -emphasizes flexibility in approaches to recruitment, and establishes a pay-for-performance
system designed to provide incentives to compete with state and local government and the
private sector. To date, 205 out of a possible 260 ATF employees have chosen to participate in
the program, and the period for choosing to participate has not yet closed. We thank the
Subcommittee for this authority as we look forward to making this capacity permanent.
Retirement: Schedule B authority, increasing SES allocations, and the pay demonstration project
are particularly critical in light of the Department's report on retirement and the proposed
budget. At the direction of this Subcommittee, the Department, through a contract with the
Office of Personnel Management, analyzed the large numbers of criminal investigator
retirements that have occurred and will likely continue to occur in the next several fiscal years.
Submitted to Congress last fall, the report included the findings and the implications for
workforce planning, as well as related information about the recruiting market and selection
problems that will affect Treasury's ability to hire criminal investigators and maintain staffing
levels. Specifically, the report included an analysis of retirement and attrition patterns from the
last five years, and the age and years of service of Treasury's criminal investigators. Based on
this analysis, it was estimated that the Department would need approximately 2,662 new hires for
its criminal investigator workforce between fiscal years 1998 and 2003 in order to maintain
Treasury's 1998 fiscal year-end strength of 10,261 criminal investigators. This means that,
before we can take advantage of the increases contemplated in the President's budget we must
hire an average of approximately 600 additional investigators each year for fiscal years 1999
through 2003.
Training: Another aspect of our goal to recruit and retain a high quality workforce is assuring
that Treasury law enforcement officers receive the highest quality of training available. The
Federal Law Enforcement Training Center (FLETC) is key to this goal. The expansion in recent
years in the number of employees hired by the 73 law enforcement agencies that participate in
FLETC has stressed FLETC's ability to meet all the requests for training. Although FLETC
continues to be able to provide all the basic training needed, currently by using a temporary
facility in Charleston, South Carolina, increases in bureau hiring require coordinated increas~s in
funding for FLETC.
To address some of the strain from increased demand for training, we have also been
exploring ways to use the latest technology to provide alternative means of delivering training
courses. Recognizing that the FLETC facilities cannot accommodate all of the requests for
.,
.)
training that are likely to arise in the future, we are searching for ways to use the Internet and
video conferencing to provide needed training.
Likewise, the need for advanced training to keep law enforcement officers abreast of the latest
trends in fighting crime is critical. We have been working closely with FLETC to explore ways
to enhance training to address high-tech crime. One example of this approach is Computer
Investigative Specialist (CIS) 2000 training. This course, which includes agents from the Secret
Service, Customs, the Internal Revenue Service Criminal Investigations Division, and A TF. uses
state-of-the-art training and equipment to teach agents how to deal with the latest computer and
encryption technology that they may encounter in conducting an investigation. The CIS 2000
agents have achieved many notable successes in their investigations of counterfeiting, money
laundering and various types of fraud as a result of this course.
Through our Implementation Working Group, the Office of Enforcement also continues to
monitor FLETC' s progress in implementing organizational assessments of FLETC that my
predecessor had done. Great strides have been made in addressing some of the problems that
had developed at FLETC, and we hope to be able to conclude the Implementation Working
Group's work later this year. The next meeting of the Committee will be held in Artesia, New
Mexico this spring.
Our budget request for fiscal year 2001 contains important initiatives for the Federal Law
Enforcement Training Center (FLETC). We are seeking $6,969,000 for FLETC's mandatory
workload. This funding will be used to address entry level training for additional agents and
inspectors for A TF and additional agents for the Secret Service. This is the first major hiring
initiative for Treasury law enforcement bureaus in many years. FLETC is a key component of
Treasury's effort to meet this build-up. Funding also is included for new construction and
renovation of older existing structures at FLETC to continue the planned upgrade of facilities
crucial to the training of the vast majority of the federal government's law enforcement
personnel.
Office of Professional Responsibility: One of the key functions of the Office of the Under
Secretary (Enforcement), is to provide oversight to the Treasury law enforcement bureaus. Over
the past few years, our effo11s have been enhanced owing to the establishment of the Office of
Professional Responsibility (OPR), which Congress directed. OPR completed a number of
significant projects in 1999 and 2000, including the review of Customs' Office of Internal
Affairs, ICDE funding needs, operations at ATF's Tracing Center. and the aforementioned
Secret Service workforce review. A number of significant reviews are also underway, such as a
prioritization of international training conducted by the bureaus, overseeing a year-long
gathering of statistics on encounters with law enforcement to ensure ethnic and minority groups
are not being unfairly targeted. and a review of ATF' s role in the National Instant Check System
(NICS).
MONEY LAUNDERING AND FINANCIAL CRIMES
Preventing abuse of our financial institutions to conceal tax evasion and the movement of
money generated by criminal activities is a high priority. It is a problem that cuts across a broad
spectrum of criminal activities, from violent crimes such as narcotics trafficking to white-collar
crimes such as credit card fraud. This is a matter of great concern for the Treasury Department
in our role as guardian of the integrity of the U.S. financial system and its financial institutions.
Current Activities and Priorities for Fiscal Year 2001
Treasury's law enforcement bureaus and offices playa key role in our fight against financial
crime. The Customs Service, the Secret Service, IRS-CID, and ATF all investigate money
laundering stemming from the specified unlawful activities within their jurisdictions.
Additionally, the Financial Crimes Enforcement Network (FinCEN) is charged with
administering the Bank Secrecy Act, which prescribes transaction reporting and record-keeping
requirements for financial institutions designed to insulate those institutions from money
laundering, and to provide a paper trail for investigators. Just last August FinCEN issued a final
rule requiring all money services businesses to register with Treasury. In coming weeks,
FinCEN will issue the final rule requiring a subset of these businesses - money remitters and
money order and traveler's check issuers, sellers and redeemers - to file suspicious activity
reports. FinCEN serves as the central point for collection and analysis of Bank Secrecy Act data
and provides case support to law enforcement investigations.
Over the last year we have undertaken or strengthened several initiatives aimed at addressing
systemic vulnerabilities in our financial system.
National Money Laundering Strategy: In September 1999, in consultation with the Department
of Justice, the Department of State, the federal financial supervisory agencies, and state and local
law enforcement, Treasury published the first National Money Laundering Strategy. The
Strategy for the first time articulates a coherent, broad-based attack against the pernicious effects
of criminals hiding the proceeds of their crimes.
Since the 1999 Strategy was released, a tremendous amount of progress has been made
toward implementing it. Over a dozen interagency groups were formed to ensure progress on
priority action items. Less than six months after the release of the 1999 Strategy, Treasury and
Justice will in early March release the 2000 Strategy. The 2000 Strategy will announce a
number of high intensity financial crime areas (HIFCAs), and will describe the results of a
number of policy reviews. Substantial progress occurred in a number of areas. including a
review of whether formal guidance should be given to financial institutions about how to meet
their obligations to report suspicious transactions, the aforementioned issuance of suspicious
activity reporting rules for so-called money services businesses, a review of rules and practices
currently in place to protect the privacy of U.S. persons by limiting access and controlling the
use of information collected pursuant to the Bank Secrecy Act, developing a formal process to
administer a grant program to support state and local efforts to combat money laundering. and
encouraging countries around the world to join in the global tight against this problem.
Particular progress was made this year in the multi-faceted attack on the Black Market Peso
Exchange (BMPE) system of money laundering. The Treasury-led BMPE working group helped
to produce improvements in investigative techniques used by law enforcement. awareness among
the business community, and a multilateral working group of experts from affected governments
5
throughout the hemisphere. In addition, Treasury continued its prominent role in the Financial
Action Task Force (FATF), which is defining "non-cooperative jurisdictions" in order to identify
and ultimately orchestrate counter-measures against them. The Department also issued a formal
advisory encouraging the Government of Antigua and Barbuda to take constructive steps to
address serious vulnerabilities in its system of anti-money lawldering control.
In the future, we expect to be in a position to meet the statutory deadline of February 1 for the
annual strategy.
Identity Theft Summit: Each year American businesses and citizens lose more that $3 billion to
credit card fraud. One of the key means by which this fraud occurs is identity theft. On May 4,
1999, President Clinton announced that the Treasury Department would convene a national
summit on the subject of identity theft and work with the private sector to help prevent the
occurrence of this crime. This summit is part of a larger identity theft initiative that includes
case referral, a public education partnership, and sentencing enhancements, which will
implement the new legislation that provides the U.S. Secret Service with authority to investigate
identity theft violations. The summit, scheduled for March 15 and 16, 2000, will engage 250
senior executives from the public and private sectors in a substantive dialogue that we expect
will lead to better communication and cooperation on identity theft crimes.
Financial Fraud: During 1999 the U.S. Secret Service made almost 4,500 arrests for financial
crime offenses. The' Secret Service also coordinated 28 task forces involving 54 law
enforcement agencies throughout the United States. These task forces focused primarily on
fraud schemes intended to victimize individuals, banks, credit card issuers, and other financial
institutions.
In fiscal year 2001, preventing abuse of our financial system to facilitate criminal activities
remains a high priority for Treasury enforcement agencies. Our budget request for fiscal year
2001 supports Treasury's role.in implementing that strategy. We are emphasizing (i) technical
assistance to financial institutions as well as law enforcement agencies; (ii) enhanced collection
and analysis of data that can help us to identify and pinpoint financial crimes; (iii) interdiction of
outbound currency; (iv) giving our bureaus the resources to allow them to undertake lengthy
investigations of complex illegal transactions; (v) specialized training for our agents; and (vi)
partnership grants to state and local governments to leverage the resources they can bring to bear
on this problem.
FIREARMS VIOLENCE
Over the last two years few events have so caught the attention of the American public, and
indeed the worldwide audience, as the spate of senseless shootings in public places. In our
schools, in our places of work, and on our streets, criminal violence and the easy availability of
firearms to criminals have wrought havoc and caused Americans in all walks of life to feel
unsafe. Over the last year, both the President and the Congress have responded to these
cOncerns. Treasury, specifically the ATF, with the support of this Committee, has been at the
center of this comprehensive response.
6
The most important development of the past year has been our work with the Department of
Justice to provide support for burgeoning collaborative federaL state, and local intensive lircarms
crime investigation and prosecution plans throughout the country. Bdween I ()(n and 199X.
violent crime with firearms fell 37 percent and gun-rclakd homicides declined ]() pL'rcent.
Firearms prosecutions are increasing. Department of Justice information shows that in 1999
federal prosecutors brought ),500 firearms cases in the federal courts, 700 more cases than in
1992. Looking ahead, our primary focus continues to be on building firearms enforcement
capacity, and providing the tools that enable federal. state, and local law enforcement to usc their
resources in a strategic manner that will have the most impact on armed crime reduction.
Current Activities and Priorities for Fiscal Y car 2001
Integrated Violence Reduction Strategy: Last fiscal year. the Treasury Department and the
Justice Department were directed by the President to provide an integrated violence reduction
strategy to further reduce gun violence. The .ioint Treasury-Justice strategy will be released
soon. It will call for more enforcement resources to combat armed violence as requested of
Congress in the Administration's fiscal year 2001 budget request and A TF' s tiscal year 200 I
appropriations request in order to maximize the impact of current laws on the reduction of gun
violence. The strategy will also highlight legislative proposals discussed by the President to
further reduce youth violence and improve public safety. Enforcement resources requested will
be used to support and enforce current statutory authorities.
The strategy proposes funding for 300 new full time equivalent agent positions, 200 full time
equivalent inspector positions and 100 other full time equivalent personnel for ATF to support
local intensive prosecution projects like Project Ceasefire in Boston and Project Exile in
Richmond. These local strategic projects encompass investigations of armed criminals and illegal
traffickers, and inspections of firearms dealers that are the sources of firearms to criminals, as
well as those illegally attempting to acquire or illegally possessing firearms.
Consistent with our budget request, the strategy will also call for an expanded etlort to
supp0l1 state and local law enforcement agency capability to trace recovered tirearms to
determine their illegal sources and to speed up trace responses to state and local law enforcement
agencies ($9.9 million), and to establish ballistics imaging capability to identify shooters and
traffickers where the firearm itself is not recovered $23.4 million. Our vic\\ is that all stall: and
local enforcement agencies with a gun crime problem should have these capabilities. and be able
to draw on ATF's information and analysis, expertise, and investigative experience. Expanded
and shared information about the illegal gun market will enable more strategic L1SC of federal.
state, and local investigative and criminal justice resources.
Commerce in Firearms in the United States: Treasury strongly supports ATF's ellor1s to basc its
firearms inspection program 011 indicators of criminal access to tirearms. In Fcbruary. ATF
released the tirst annual report on Commerce in Firearms in the United States, prO\iding an array
of information concerning the lireanns industry and ATF's regulatory inspection program. Ihe
2000 report informs Congress, law enforcement ofJicials, and the public on the activities (lj.\ IT
inspectors, and how ATF regulatory resources are focused in order to maximize their
effectiveness in reducing firearms trafficking and abuse. Thc report shows the typL'S
acti\ ities
or
7
and inspection strategy for which \ve are requesting 300 new inspectors and other personnel for
ATF. A fair and focused inspection program will redllce the need j(H more costly criminal
investigations and benefits public safety.
Youth Crime Gun Interdiction Initiative (YCGII): There is a continuing need lo j()Cus attention
and resources specitically on reducing youth violence and preventing the illegal supply
firearms to juveniles and youth. !\ fundamental need is for investigators to find out how guns are
illegally acquired by young people. In the past year, ATF and local police committed to
establishing comprehensive crime gun tracing and youth gun violence reduction efforts with law
enforcement agencies in eleven new cities, bringing the total number of cities participating in
YCGn to 38 in its third year. In February 1999, Treasury and ATf issued the second year Youth
Crime Gun Interdiction Initiative Trace Analysis report analyzing over 76,000 crime gun traces
from 27 cities. The report provides local law enforcement agencies with information about the
number of firearms recovered in their jurisdictions, top crime guns in each city, and their
geographic sources, in order to assist local law enforcement agencies with development of
effective law enforcement strategies against youth violence. ATf also released the yeGII
Performance Report, a survey of over 640 trafficking investigations nationwide involving
juveniles and youth engaged in gun crime, demonstrating ATf' s en forcement efforts to stop
youth and juvenile access to guns through straw purchasers and other illegal channels. We
endorse A TF' s plan to expand YCGII to 75 cities, and propose to add 12 new cities in tiscal year
2001 to work toward this goal by bringing the fiscal year 2001 participating cities to 50.
or
Gun Show Report: In February 1999, Treasury in coordination with the Department of Justice.
released a report on gun shows, Gun Shows: Brady Checks and Crime Gun Traces. The report
was prepared in response to a directive from the President that the Secretary of the Treasury and
the Attorney General provide him with recommendations to address the gun show loophole. that
is, the sale or exchange of tirearms at gun shows without background checks or tracing records
for those acquiring the firearm. The report led to legislation proposing that all transactions at
gun shows include background checks and tracing records to prevent access to guns by
prohibited persons and to allow law enforcement officials to trace firearms when they are
recovered by law enforcement officials. Both licensed and unlicensed gun sellers at gun sh(ms
are sources of guns to criminals and other prohibited persons; \vhere there is evidence of criminal
activity, enforcement attention is required.
COUNTER-NARCOTICS
Reducing the supply of dangerous drugs entering the United States continues to be another of
our high priorities. It is also our most difficult challenge. We are conti·onted by \\'i.~II-rinanced
criminal organizations that adapt quickly to evny advance \\c make in the detection of illcg~d
drugs. Moreover, interdiction is only onc piece of a comprehensivc drug control strategy th~\t
includes eradication of drug production abroad, sanctions against drug kingpins. invcstigatiull
and disruption of trafficking activities within the l !nited Stales. treatment uf drug users, and. as
mentioned above, combating money launderers.
Current Activities and Priorities for Fiscal Year 20(H
8
Border Coordination Initiative - We continue to work to strengthen our coordination with other
border enforcement agencies to assure that taxpayers get the most effective lise of lederal
resources available for drug interdiction. In September 1998. Treasury and Justice initiated the
Border Coordination Initiative (BCl). an innovative system 10r controlling the Southwest Border.
BCI is a strategic plan for Customs and the INS to maintain a seamless. comprehensive,
integrated border management system that increases interdiction of illegal drugs. illegal aliens.
and other contraband while simultaneously facilitating legal migration and trade. Customs and
the INS have set new standards for innovation. interagency cooperation. and operational
effectiveness, with locally developed innovations leading to improved coordination and more
efficient border operations. As a result of BCL more than 120 tons of cocaine. marijuana. and
heroin were seized by Customs and the INS along the southwest border in 1999 - an increase of
more than 20% over the previous year.
For fiscal year 200 I, the budget proposes several important initiatives to strengthen the
enforcement and interdiction capabilities of the U.S. Customs Service, our main player in the
counter-narcotics fight. Commissioner Kelly can address these programs in greater detail. but
summarized briefly they include:
•
a $25 million request and 107 FTEs to aid Customs' investigations into the criminal
organizations that smuggle narcotics into our country and distribute them in our
communities;
•
a $10 million request to enhance Customs' to detect illegal outbound currency movements:
and
•
a request of approximately $20 million in enforcement intfastructure improvements.
including a P-3 FUR upgrade. aircraft flight safety enhancements. surveillance equipment of
helicopters. and an upgrade of the air interdiction center radar.
Together, these initiatives would help Customs improve on record-setting seizure statistics.
while allowing it to better respond to the variolls smuggling routes and methods employed by
narcotics traffickers.
Intelligence Architecture Review: Enforcement represented the Department in the inter-agency
intelligence architecture review. The review. which also involved ONDCP. the ./ustice
Department, CIA, and other agencies. led to a report. released last month. that contained a sl'rics
of important action items to improve intelligence collection. dissemination. and usc.
Narcotics Kingoin Act -- On December 3. the President signed the Intelligence Authorization
Act for fiscal year 2000. which contains the Foreign Narcotics Kingpin Designation Act (the
Act). The Act establishes a global sanctions program targeting significant foreign narcotics
traflickers and their organizations modeled along the lines or the President's Il:EP A -based
program targeting Colombian narcotics cartels. The Act requires the Office of roreign l\sscts
Control (OFAC) to identify significant foreign narcotics traffickers and closely associated
entities and individuals throughout the world and impose financial and trade prohibitions. as \yell
as asset blocking, against them.
C)
As a result of the signillcant workload increase driven by Ol;/\Cs responsibilities LInder the
Act, the Department has included a rcqucst for $2.1 million and 2() I'TE in the liscal year 2()()()
supplemental request submitted to Congress 111 February, This would provide resources 1'01'
OFAC to implement a global sanctions program targeting significant foreign narcotics traffickers
and their organizations, as mandated by the Act. In addition, the fiscal year 2()O I budget
includes a request for $2,9 million and II FTE for OF AC to improve information gathering
capabilities with respect to terrorist funding and narcotics trafficking and raise the quality oj
service to the public in the performance of OF ACs licensing function. OF AC currently has onsite stafT gathering specialized information in Bogota, Colombia, on drug traffickers, Similar
information gathering capability is needed in Dubai, United Arab Emirates to investigate terrorist
funding, and in Panama and Bangkok to investigate drug traffickers. Sanctions programs are
administered largely by licensing and the licensing function is OFAC's primary contact point
with the public.
TRADE ENFORCEMENT AND FACILITATION
The United States is the world's largest exporting and importing country. and the volume of
both exports and imports is growing rapidly, Over the Eve year period 1994 to 1999. the dollar
value of exports increased by over a third (about 36 percent), During the same period the
dollar value of imports increased by more than half (about 51 percent), These increases translate
rather directly into increased workload for the Customs Service,
Our trade with other nations is vital to our economic strength and our standard of living. and
we want to do everything we can to assure that the movement of trade across our borders is as
frictionless as possible. At the same time, however, we recognize our responsihility to assure
Congress and the American public that laws enacted to protect public health and safety, as well
as other interests. are being effectively enforced at the border.
Current Activities and Priorities for Fiscal Year 2001
Improved Performance Measurement and Targetiml of Violations: The Customs Service has
continued to improve the accuracy and specificity of its compliance measurement system. In
1999 CustOI11S submitted its fourth annual report to Congress on the results of compliance
measurement. Compliance measurement is not only a tool for targeting Customs' enforcement
activities. It also enables us to account to the Congress and the American people on how
dlectively Customs' trade enfllrcement resources are being used,
By illuminating \V'here the problems are, compliance measurement also impro\'es Customs'
ability to implement a national risk management program that allows more efficient use of
resources and more effective detection of violations.
Automation -- Customs' struggle to modernize its automated commercial system is well knO\\l1
to this Subcommittee, and is a problem of a kind that is not unique to Customs. \Vc belic\c that
we have made substantial progress in the last year in responding to problems identified by this
Subcommittee and by the (jeneral Accounting Office in the development of Customs' ne\\
Automated Commercial Environment (ACE).
10
As we work to develop a new automated commercial system, we are paying close attention to
the reliability of the current system, the Automated Commercial System (ACS). The ACS is
Customs' current mechanism for allowing importers, carriers, and others to transmit required
information electronically, and enabling Customs to process and store the information
electronically. ACS greatly accelerates transactions between the trade community and Customs,
allows quicker release of goods, reduces the number of instances in which shipments of goods
must be held by Customs owing to the absence of required paper documents, reduces filing
errors, and improves law enforcement at the border by making possible electronic analysis of
information for risk assessment purposes.
However, the ACS was created in the early 1980s, and was developed with programming
language that is now obsolete. The program is proprietary to Customs and not supported by any
software vendor. Moreover, at the time ACS was created, the urgency of moving as rapidly as
possible from a paper environment to an automated environment resulted in inadequate
docwnentation of ACS programming. Customs is effectively prevented from modernizing its
business practices - including changes authorized by "the Customs Modernization Act of 1993 because of the difficulty and cost of modifying the obsolete and poorly-documented
programming language on which ACS runs. Among the obsolescent features of ACS: (i) it is
transaction based, that is, it treats the release of each shipment as a separate, taxable transaction,
requiring the filing of an individual entry (tax return); and (ii) it is service-port oriented,
requiring that entries be filed at the port at which goods are released from Customs custody.
A little over a year ago the ACS began to experience periodic failures, or "brownouts".
Although these did not last long, they were sufficient to remind us of the absolute necessity of
maintaining a reliable automated commercial system for Customs. Consequently, we have given
very high priority to upgrading the capacity and reliability of the ACS. We expect to spend up to
$79 million in the current fiscal year, and" we are requesting $123 million in fiscal year 2001, to
assure that the American public can rely on its government for effective and efficient
enforcement of our trade laws.
But we recognize that the trade community would like us to do more than simply assure the
reliability of the current automated system. Each year the Customs Service must deal with the
challenge of assuring that millions of freight containers and carriers entering the U.S. each year
are in compliance with several hundred laws. In order for Customs to be effective at this job
without becoming a serious impediment to commerce it must become a more efficient collector
and intelligent user of information.
This is difficult to do with the ACS because, as I noted, it efIectively locks Customs into
obsolete business practices. Because it is difficult to modify ACS's software. Customs cannot
even implement procedural reforms that were authorized in the 1993 Customs Modernization
Act, let alone new procedures that have become possible since then.
The Automated Commercial Environment, or ACE, is the proposed new Customs automated
commercial system. It would operate on modern software and the programming would be fully
documented to facilitate subsequent programming changes. ACE would allmv periodic filing of
11
consolidated entries to cover multiple transactions, and it would allow filing from any location,
and not only the port at which the goods are entered. ACE also includes equipment
enhancements to increase reliability and upgrade cOlmectivity among Customs offices around the
country and between Customs and the trade community. For example, ACE would be accessible
to the trade through the Internet, while ACS is accessible only over dedicated lines.
In our budget for fiscal year 2001 we are requesting $210 million for ACE development. We
estimate the cost of ACE development over the next four years to be around $1.25 billion. This
is arelatively costly initiative. The recently completed cost-benefit analysis for conversion hom
ACS to ACE shows that modernizing Customs' trade data processing system will provide
significant benefits to both the federal government and the trade community. We continue to
believe that the proposed fee appropriately captures some of the benefits private businesses will
receive from Customs modernization, and therefore we have proposed to offset the costs of ACE
over the next several years by creating a user fee to be collected from all parties that use
Customs' automated systems. The amount collected from each user would be based on its
volume of use.
We acknowledge that a similS\r user fee proposal last year was not well received. We have
made some changes to our proposal this year that we believe go at least part of the way to
meeting the objections oflast year. For example, we are not asking, as we did last year, for the
user fee to be collected a year in advance of appropriations for ACE.
The Administration is prepared, indeed eager, to work with Congress and the trade
community to enact this proposal and begin work on ACE as soon as possible.
International Trade Data System: An interagency group working under Treasury leadership has
finished the system design of a new international trade data system (ITDS), called for by the
Vice President's National Program Re-invention project. The ITDS will offer a single electronic
window for collecting all data required in connection with importing and exporting. When
implemented, the new system will substantially improve the effectiveness and efficiency of
government administration of laws that must be applied at the border, and will greatly reduce
red tape imposed on importers, exporters, and carriers. Our budget proposal for fiscal year 2001
continues this program at the current level of $5.4 million.
07 Data Harmonization: Completing harmonization of 07 customs data requirements, as
outlined by the Lyon, Denver, and Birmingham 07 summit communiques, will continue to be a
priority in 2000. Current disparity in reporting requirements among 07 customs administrations
imposes heavy reporting and record-keeping burdens on traders, and inhibits cooperation on law
enforcement among governments.
Child Labor Enforcement: Treasury established a private sector advisory committee on child
labor to help focus Customs' efforts to enforce laws prohibiting the importation of goods
produced by forced labor. Customs' resources for enforcement efforts in the area of forced child
labor have been increased. Customs had baseline resources of $3 million and 4 full-time
equivalent positions (FTE) in fiscal year 1999, $5 million and 6 FTE in fiscal year 2000.
l~
In fiscal year 2000, we are continuing to work aggressively to assure that goods produced by
forced child labor are not allowed to enter the American market. Through the Child Labor
Advisory Committee, Treasury and Customs are developing a program of business outreach
aimed at fostering voluntary compliance with U.S. import restrictions on products of forced or
indentured child labor through adoption of industry codes, best practices, and other methods.
Customs will use additional budget resources provided by this Subcommittee to open a field
office in South Asia dedicated to child labor enforcement, and will deploy additional
investigative staff overseas as needed.
Additionally, Customs investigators have conducted a number· of fact-finding missions to
countries in Asia and Latin America where child labor is believed to be prevalent in a number of
industries. Several visits have been made to South Asia, including India, Pakistan, Nepal,
Bangladesh, and Thailand. With the fiscal year 1999 appropriation, additional agents were
assigned to Bangkok, Hong Kong, and Montevideo. Additional agents will be assigned to the
new South Asia field office that is being established in fiscal year 2000.
The fiscal year 2001 President's Budget requests an additional $5 million and 9 FTE, for a
program total of $1 0 million and 15 FTE, to combat importation of goods made by forced child
labor. The requested increase in fiscal year 2001 will enable us to attain even broader
investigative coverage of overseas regions where child labor is believed to be endemic. These
carefully placed investigative resources will enable Customs to acquire the detailed evidence that
is required under U.S. law for Customs to detain merchandise manufactured with forced or
indentured child labor.
The use of forced child labor to produce goods imported into the United States is not merely a
matter of unfair commercial competition. Use of forced child labor perpetuates poverty and
contributes to instability abroad by denying children the opportunity to pursue educational
opportunities that could enable them to improve their standards of living. In fiscal year 2001. we
shall remain committed to working with other govermnents, other U.S. government agencies,
and with knowledgeable private sector groups, to assure that the U.S. market does not
inadvertently become a means for supporting forced child labor.
EXPORT ENFORCEMENT
As events as demonstrated over the last few years, the United States continues to be targeted
by those who seek to acquire our most advanced weapons and technology_ often for purposes
that directly or indirectly threaten the security of the American people. For years, the Customs
Service has been an integral part of our response to that threat, by monitoring exports of goods
from the U.S. to identify goods that embody sensitive technology.
Current Activities and Priorities for Fiscal Year 2001
Customs' ability to enforce effectively laws enacted by Congress to prevent the export of
munitions and sensitive technology has been hampered by the difficulty of getting timely
information about shipments leaving the country. Too often information is inadequate, .
inaccurate, or late. Two years ago the Treasury Department sponsored negotiations among the
13
Customs Service, the Commerce Department, and representatives of exporters and carriers to
work out the terms for use of a modern, electronic export reporting system. As a result of the
agreement reached, use of the Automated Export System (AES) to file export declarations
electronically increased from about two percent of export declarations filed in January of last
year to around 25-30 percent in January of this year. Because the AES, unlike its predecessor
system, is accessible over the Internet, we expect use gf electronic export filing to continue to
grow. Electronic filing is, of course, convenient for exporters and carriers, but the government
also benefits. Having timely export information in an electronic format greatly increases
Customs' ability to monitor for export violations. In fiscal year 2001 we shall continue to
promote use of the AES, and to look for other ways to improve the quality and timeliness of
export data.
COUNTER-TERRORISM AND PROTECTION
Current Activities and Priorities for Fiscal Year 2001
On May 22, 1998, the President signed Presidential Decision Directive 62. This Directive
created a new and more systematic approach to fighting the terrorist threat and created criteria
for identifying events of national significance that may be vulnerable to terrorist threats. At
several events this year, including the World Energy Conference in Houston, Texas and the
highly successful NATO Summit here in Washington, D.C., Treasury bureaus, including the
Secret Service and ATF were involved in providing security, and the Customs Service provided
air support. We estimate that approximately three or four events of this nature will occur each
year.
Additionally, Treasury leads an interagency working,group in conjunction with the Customs
Service to address issues of weapons of mass destruction (WMD). The focus of the group durin
1999 and 2000 has been to find ways to enhance our security and prevent WMD from entering
the United States. Recent incidents, such as the arrest of several suspects at the end of 1999 in
Washington and Vermont relating to the attempt to smuggle explosives into the United States.
highlight the importance of heightened vigilance in this area.
ARSON
National Church Arson Task Force -- Treasury and Justice, along with others, continue to
coordinate a nationwide federal, state and local law enforcement effort to identify and prosecute
those who bum or damage our houses of worship, to help rebuild those institutions. to prevent
additional fires, and to help heal community tensions resulting from attacks on our houses of
worship. Due in part to increased vigilance, well-publicized arrests, and ongoing prevention
efforts under the President's three-pronged strategy, church arsons continued on a downward
trend during the past year.
In this statement I have been able to touch on only some of the important programs of
Treasury's enforcement bureaus.' In the individual bureau hearings that you will have. each
bureau head will address our programs in greater detail. And, of course, I shall be pleased to
respond in writing to any questions you want to direct to me about any of our programs.
14
In conclusion, Mr. Chairman, I would like to thank you, Mr. Hoyer, and the Members of this
Subcommittee for your outstanding support of Treasury's law enforcement programs over many
years. Our law enforcement bureaus have grown, they are better equipped, and they have
become more professional as a result of your oversight and support. The benefits of this for the
American public cannot be calculated. I would like also to thank the staff of this Subcommittee
for its professionalism and patience over the last several years, as we wrestled with the problems
that inevitably accompany growth and a rapidly-changing set of challenges. I do not want to
miss this opportunity to express my appreciation and gratitude.
- 30 -
DEPART1VIENT
TREASURY
OF
THE
TREASURY
NEWS
omCE OF PUBUC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C. - 20220 - (202) 622-2960
Hearing on FY 2001 Appropriations
U.S. House of Representatives
Subcommittee on VA, HUD, and Independent Agencies
General Statement
Of
Ellen W. Lazar, Director
DEPARTMENT OF THE TREASURY
Community Development Financial Institutions Fund
March 9, 2000
INTRODUCTION
Chairman Walsh, Congressman Mollohan and distinguished Members of the Subcommittee, it
is a pleasure to be before you today to represent the Community Development Financial
Institutions (CDFI) Fund. I am Ellen Lazar, the Director of the Fund. Before I begin my
testimony, I would like to introduce to you two other key members of the Fund who are with
me today: Owen Jones, Deputy Director for Management/Chief Financial Officer of the Fund,
and Maurice Jones, Deputy Director for Policy and Programs at the Fund.
My testimony today will focus on four major areas: 1) the principles underlying the
operations of the CDFI Fund; 2) the Fund's management systems; 3) the performance of the
Fund so far; and 4) Fund objectives for FY 2001.
THE CDFI FUND: PRINCIPLES OF OPERATION
The CDFI Fund, working with private sector partners across the country, operates on four
basic principles: 1) its programs and initiatives are highly targeted, focusing on areas and
individuals inadequately served by conventional financial markets; 2) its funds are recycled
within communities in need; 3) its Federal resources leverage private sector and other nonFederal resources into underserved places; and 4) its programs stress performance in the form
of both outputs and outcomes.
LS-449
For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
CDFI Fund programs strive to address gaps in the marketplace by targeting resources to
financial institutions that serve individuals and communities that cannot adequately access
capital from the traditional marketplace. For example, funds are used to support: 1) small
business loan funds that originate loans, sometimes as small as $500, that are difficult for
mainstream financial institutions to offer; 2) housing loan funds that provide downpayment and
closing cost assistance, subordinated debt, pre-development grants, bridge loans and other
sources of financing that increase the supply of affordable housing and enable poor people to
get mortgages; 3) community development banks and credit unions that offer Individual
Development Accounts, Electronic Transfer Accounts, and other products targeted to
underserved populations; and 4) community development venture capital firms whose highly
targeted investments facilitate the creation and retention of jobs in distressed areas across
America.
To ensure that CDFI funds support institutions serving those most in need, the Fund requires
all organizations designated by the Fund as CDFIs to demonstrate that at least 60% of their
activities are targeted to distressed communities, low-income individuals, or other individuals
that have been denied access to mainstream financial services. The Fund further requires that
these organizations provide technical assistance and training to their borrowers. This
requirement benefits CDFIs as well as their borrowers. CDFIs will enjoy higher rates of
repayment and larger returns on their investments, and borrowers will acquire general financial
and business skills and develop positive credit histories. As a result, both the CDFIs and the
borrowers they serve become more attractive to mainstream financial institutions.
The CDFI Fund's assistance to needy communities supporls community and economic
development activities for years after the Fund's initial investment. The Fund requires
applicants seeking designation as a CDFI to demonstrate that their predominant business
activity is the provision of loans, equity investments, deposit accounts or other sources of
capital that can be invested, repaid, and then recycled to other individuals or organizations in
need. In addition, the Fund provides investments that directly support the long-term growth
and viability of lending-based institutions. Fund awards enable institutions to build their
capacity to better administer their programs and provide them with the capital needed to grow
their loan funds and make their products more affordable to their borrowers.
The CDFI Fund leverages investments from other public and private institutions. Under
several of the Fund's programs, applicants must demonstrate that they have significant
community partnerships in place. In addition, certain awardees are required to provide a
dollar for dollar match of non-Federal assistance for each dollar of Fund assistance provided.
These matching funds come from a variety of sources, including local governments, banks,
insurance companies, foundations, individuals and non-profit institutions. The match
requirement helps to ensure that the awardee coordinates the use of Fund assistance with other
entities in the community, and that these other entities will be involved in supporting the
ongoing operations of the CDFI.
The Fund also encourages mainstream financial institutions to invest in CDFIs. Regulated
financial institutions may receive awards from the Fund for, among other things, increasing
2
their provision of grants, equity investments, loans, deposits or other investments to certified
CDFIs.
The CDFI Fund programs are designed to achieve maximum community and economic
develDpm,nt impaet. When a CDFI applies to the Fund for assistance, it must submit a
business plan that includes its projected levels of activity and the anticipated impact of these
activities upon the community. Prior to receiving a Fund award, an awardee must agree to
meet performallce standards that are based upon the activities and impacts outlined in its
business plan. For example, a housing loan fund that receives an award would have to meet
minimal thresholds not only for the number and dollar amount of loans it originates, but also
for the number of housing units created as a result of its financing. Similarly, a business loan
fund may be monitored based not only upon the number and dollar amounts of loans it
dis1?urses, but also upon the number of jobs created or retained by its borrowers. This type of
"performance-based monitoring" helps ensure that the Fund is achieving a high degree of
community development impact as a result of its investments.
MANAGING FOR RESULTS
I am pleased to report that our independent auditors (KPMG, LLP) provided an unqualified
opinion on the Fund's financial statements for the fiscal year that ended September 30, 1999.
KPMG's opinion affirms that the Fund's Statements of Financial Position, Operations, and
Changes in Net Position and Cash Flow are fairly presented. This marks the third consecu.tive
year in which the Fund has received an unqualified audit opinion. In·addition, for the second
year in a row, the Fund's independent auditors identified no material weaknesses. Also, the
Fund has no reportable conditions. These findings reflect the tireless commitment of the
Fund's staff to sustaining and improving upon its internal controls, operating policies and
procedures, and awards monitoring.
The Fund continues to comply with the Federal Managers Financial Integrity Act (FMFIA)
and the Federal Financial Management Improvement Act (FFMIA). The Fund's system of
internal management, accounting and administrative control has been strengthened and is
operating effectively. Enhanced policies and procedures ensure that Fund programs achieve
their intended results; Fund resources continue to be used in a manner that is consistent with
its mission; and Fund programs and resources are protected from waste, fraud, and
mismanagement.
I
Enhanced internal efficiencies and improved staff capacity have resulted in unprecedented
levels ·of productivity at the Fund. In FY 1999, we selected 260 institutions to receive $112
million in awards, a 32% increase in the dollar amount of awards made in 1998. Our carryover into FY 2000 was ,approximately $10 million - a nearly four fold reduction from the $36
milti:9n carried-over in FY 1999. We anticipate having no carry-over into FY 2001 .
.A,I discussed with the Subcommittee in previous years, the Fund is committed to managing
for results. Its mission is to promote access to capital and local economic growth by directly
3
investing in and supporting CDFIs and expanding banks' and thrifts' lending, investment, and
services within underserved markets. I would like to highlight some of the progress we have
made in achieving this important mission.
CDFI FUND INITIATIVES -- PUTTING CAPITAL TO WORK
The CDFI Fund pursues its mission goals through seven initiatives: 1) CDFI Certification; 2)
the CDFI Program, which includes the Core, Technical Assistance and Intermediary
Components; 3) the Bank Enterprise Award (BEA) Program; 4) the Training Program; 5)
Microenterprise Initiatives; 6) Policy and Research Efforts; and 7) the Native American
Lending Study/Action Plan.
CDFI Certification
To help recognize and support the growing CDFI industry, the Fund reviews the applications
of organizations wishing to become Federally certified CDFls. In order for the Fund to certify
an organization as a CDFI, the organization must meet each of the following six criteria:
1. The organization and its affiliates must collectively have a primary mission of
promoting community development;
2. The organization must be a financing entity (either an insured depository institution or
an institution that principally provides loans or equity investments);
3. The organization must principally serve a target market consisting of distressed
neighborhoods, low-income people, or other underserved popUlations;
4. The organization must provide training or technical assistance in conjunction with its
financing activities;
5. The organization must maintain accountability to its identified target market; and
6. The organization must be a non-governmental entity.
There are several potential benefits of CDFI certification. First, certification enables an
organization to be eligible to receive assistance from the Fund. Second, certified CDFls may
increase their capital by becoming partners with regulated financial institutions seeking awards
from the Fund for investments in CDFIs. Third, CDFI certification may increase an
organization's ability to raise funds from sources such as corporations, foundations and state
and local governments. Finally, certified CDFls may receive technical assistance from the
Fund and training support from organizations sponsored by the Fund.
To date, the Fund has certified over 380 organizations as CDFIs. These organizations are
headquartered in 47 states, the District of Columbia and Puerto Rico. CDFls include
community development banks, community development credit unions, housing loan funds,
facilities loan funds, small business loan funds, micro-enterprise loan funds, multi-bank
community development corporations, intermediaries and community development venture
capital funds. On average, the Fund certifies approximately 75 new CDFIs each year.
4
The CDFI Program
The CDFI Program has three funding components: Core, Intermediary and Technical
Assistance. These three components promote the Fund's goals, articulated in its strategic plan,
of strengthening the expertise and the financial and organizational capacity of CDFIs to
address the needs of the communities that they serve. The Fund engages in targeted outreach
to inform potential applicants to these funding components. The Fund also provides
debriefings to applicants that are not selected for awards.
The Core Component builds the financial capacity of CDFls by providing equity investments,
grants, loans or deposits to enhance the capital base -- the underlying financial strength -- of
these organizations so that they can better address the unmet community development needs of
their target markets. In addition, under the Core Component, the Fund provides technical
assistance grants in order to build the capacity of awardees and maximize the community
development impact of the Fund's awards.
The Fund selects awardees that clearly demonstrate private sector market discipline and the
capacity to positively impact underserved communities. The Core Component leverages
additional private and public sector investments into these same organizations through the
Fund's application requirements, particularly the one-to-one non-Federal matching funds
requirement.
In FY 1999, the Fund provided 78 Core Component awards totaling over $78 million. This
represents an 86% increase over the number of Core Awards provided in FY 1998 (42
awards), and a 77% increase over the total amount of dollars awarded under the Core
Component in 1998 ($44 million). Since inception, the Fund has made approximately 200
Core Awards totaling over $193 million.
On November 1, 1999, the Fund published a Notice of Funds Availability (NOF A)
announcing the availability of $50 million in Core Component awards for FY 2000. We
expect to make approximately 50-70 awards under this NOF A. The application deadline was
January 20, and, as has been the case in every year, we are over-subscribed. The Fund
received 160 applications requesting a total of $264 million, over five times the amount of
money the Fund announced as available under this program in FY 2000.
The Intennediary Component allows the Fund to invest in CDFIs indirectly, through
intermediary organizations that support CDFIs and emerging CDFIs. These intermediary
entities, which are also CDFIs, generally provide intensive financial and technical assistance to
small and growing CDFIs, thereby strengthening the industry's financial and institutional
capacity. Like Core awardees, Intermediary awardees are required to obtain matching funds in
comparable form and value to the financial assistance they receive from the Fund.
Since inception, the Fund has made Intermediary Awards totaling over $15 million to five
different institutions. On November 1, 1999, the Fund published a NOF A announcing the
5
availability of $6 million in Intermediary Component awards for FY 2000. The application
deadline for this NOFA was January 18, and the Fund received seven applications requesting
over $9 million in assistance.
The Technical Assistance (TA) Component of the CDFI Program was first introduced in
1998. This component builds the capacity of " start-up", young and small institutions. The T A
Component allows the Fund to direct relatively small amounts of funds -- generally $50,000 or
less -- to CDFIs that demonstrate significant potential for generating community development
impact, but whose institutional capacity needs to be strengthened before they can fully realize
this potential. Some typical uses of our TA grants include: achieving operating efficiencies
through computer system upgrades and software acquisition; producing internal policies and
procedures; evaluating current loan products and developing new ones; and training staff in
operations essential to the success of the organization.
In FY 1999, the Fund provided 88 Technical Assistance Component awards totaling over $4
million. This represents a 24% increase over the number of TA awards provided in FY 1998
(71 awards), and a 33% increase over the total amount of dollars awarded under the Technical
Assistance Component in 1998 (approximately $3 million). Since inception, the Fund has
made 159 Technical Assistance Awards totaling over $7 million.
On January 4, 2000, the Fund published a NOFA announcing the availability of $4.5 million
in Technical Assistance awards for FY 2000. Commencing this year, the Fund will make
award decisions regarding FY 2000 TA applications on a rolling basis with four separate
application deadlines. In this manner, we hope to expedite both the approval and disbursement
of TA awards and give T A applicants more flexibility in terms of when they apply for funds.
We expect to issue approximately 80-90 TA awards in FY 2000.
Outreach: To date, institutions in 47 states plus the District of Columbia, Puerto Rico and the
Virgin Islands have received CDFI Program awards. To inform potential applicants about the
Fund's programs, the Fund conducts informational workshops throughout the country. In
preparation for the FY 2000 round of applications, the Fund conducted 13 Core/Intermediary
Component outreach sessions, including one that was broadcast by satellite to 73 locations; and
7 Technical Assistance Component outreach sessions, including one that was broadcast by
satellite to 85 locations. The live sessions were held in regions of the country where there are
relatively fewer CDFIs, including four sessions specifically targeted to organizations serving
Native American populations.
The Fund is particularly interested in reaching out to organizations that provide capital and
technical assistance to rural communities. In FY 1999, about 22 % of our Core Component
awards and 32 % of our Technical Assistance Component awards were provided to
organizations that predominantly serve rural markets. By comparison, about 26% of our Core
Component awards and 56% of our Technical Assistance Component awards were provided to
organizations that predominantly serve urban markets. The remainder of our awards went to
organizations that serve a mix of urban and rural areas. We will continue to increase our
efforts to reach rural communities. In the past few months, we have conducted, either live or
6
by satellite, information sessions in 55 rural communities - two and a half times the number
reached in FY 1999.
Debrie/ings: To further our goal of building the institutional capacity of the CDFI field, we
provi~e debriefings to applicants that were not selected for CDFI Program awards. Applicants
are gIven valuable feedback about strengths and weaknesses of their applications as observed
by those community development professionals involved in reviewing their requests for
funding. Many of these applicants use the information gathered from the debriefing to build
the strength of their operations and to improve their performance. In FY 1999, the Fund
provided debriefings to 110 institutions that had been unsuccessful in seeking awards under the
FY 1998 funding round. Already in FY 2000, we have provided debriefings to 62
organizations that were not selected to receive an award in FY 1999.
The Bank Enterprise Award Program
The Bank Enterprise Award (BEA) Program is the principal means by which the Fund
achieves its strategic goal of expanding financial service organizations' community
development lending and investments. The BEA Program recognizes the key role played by
mainstream depository institutions in promoting the revitalization of distressed communities.
The BEA Program provides monetary incentives for banks and thrifts to expand their
investments in CDFIs and/or to increase their lending, investment and service activities in
distressed communities. BEA awards vary in size, depending upon the type and amount of
assistance provided by the bank and the activities being funded through the bank's investments.
In general, banks that provide equity investments to CDFIs are likely to receive the largest
awards relative to the size of their investments.
The leveraging involved in the BEA Program is impressive. To date, 274 awards totaling over
$89 million have been announced for banks and thrifts investing in CDFIs and distressed
communities throughout the country. This $89 million actually reflects investments in CDFIs
and underserved communities of $1.87 billion, over 20 times the amount of the Fund's
investment. To date, banks and thrifts receiving BEA awards have provided $439 million
directly to CDFIs, and $1.43 billion to distressed communities in the form of direct loans,
investments and services.
In FY 1999, as in every year since the program's inception, the Fund increased both the
number and the total amount of our BEA awards. In FY 1999, we made 103 awards totaling
$31.7 million. This represents an increase of 30% over the number of awards made in 1998
(79 awards), and 13% over the dollar amount of the awards made in 1998 ($28.1 million).
On September 1, 1999, the Fund published a NOF A announcing the availability of $25 million
in BEA Program funds for FY 2000. The application deadline for this NOFA was November
23, 1999. We received 228 applications, a 64% increase over the 138 applications that were
received in FY 1999. If the applicant institutions complete all of the activities proposed in
7
their applications, we estimate that they would be eligible for awards totaling approximately
$113 million -- four and a half times the amount of money currently available for the BEA
Program.
The Training Program
The Training Program, begun in FY 1999, enhances the Fund's ability to achieve its strategic
goal of strengthening the organizational capacity and expertise of CDFls. The Training
Program provides funds that support the development and delivery of training products to
CDFIs and other financial service organizations engaged in community development finance.
Training needs will be addressed via classroom instruction, web-based distance leaming, and
other electronic formats. In addition, the Fund will explore supporting other types of capacity
building training opportunities, including structured internships.
In FY 1999, the Fund initiated its first activity under this program. We undertook a market
analysis of the training needs and resources of CDFIs and community-focused financial service
organizations. The purpose of the market analysis was to determine: (1) the quality and
extent of training available for CDFIs and financial service organizations engaged in
community development lending; (2) the training needs of such organizations; (3) impediments
~o obtaining needed and adequate training for such organizations; and (4) strategies for
eliminating those impediments. We recently received the results of this analysis and expect it
to inform our future training initiatives.
In FY 2000, the Fund anticipates awarding, through competitive procurement processes, up to
$6 million in contracts to entities for the purpose of developing and delivering specific training
products to CDFIs and eligible financial service organizations. Funding will be made available
to entities that provide training in a number of disciplines, including market analysis, financial
projections, program development and organizational development.
Currently the Fund has received and is reviewing proposals from training providers offering
the development and delivery of training for three specific areas: preparation of financial
projections; preparing a market analysis; and the fundamentals of lending operations. We
anticipate that the proposals will result in over $1 million in contracts. Training provided
under these contracts will begin this year.
Microenterprise Initiatives
As part of its strategy to democratize access to capital, the Fund works to strengthen the field
of microenterprise development and microentrepreneurs. In addition to providing assistance to
microenterprise loan funds under the CDFI Program, the Fund administers two initiatives
specifically targeting microenterprise organizations and microentrepreneurs: I) the
Presidential Awards for Excellence in Microenterprise Development; and 2) the Interagency
Workgroup on Microenterprise Development.
8
The Presidential Awards for Excellence in Microentetprise Development is an annual nonmonetary awards program that recognizes organizations that have demonstrated excellence and
leadership in promoting microenterprise development. These awards reflect the
Administration's on-going commitment to advancing the role of microenterprise development
in enhancing economic opportunities for all Americans -- particularly low-income people and
others who lack access to traditional sources of credit and business development assistance. By
recognizing outstanding organizations, the program promotes "best practices" within the
microenterprise development field in the United States and brings wider public attention to the
important role of microenterprise development in the domestic economy.
Awards are given to practitioner organizations - entities that provide microentrepreneurs
access to credit, training, counseling and technical assistance - for demonstrating excellence in
providing access to capital; alleviating poverty; developing entrepreneurial skills; and
innovative programming. In addition, organizations that support the effort of practitioner
organizations through financial assistance, technical assistance, research, or other activities are
eligible for awards for demonstrating excellence in public or private support.
The Fund is co-chairing, with the Small Business Administration, the Interagency Workgroup
on Microenterprise Development. The workgroup was established in 1998 to coordinate the
work of Federal agencies involved in microenterprise efforts, and to develop a coherent
framework for Federal government efforts to promote microenterprise. The Workgroup
includes participants from several Federal agencies and departments. It is examining Federal
policies that affect the microenterprise field and is harmonizing discrepancies in definitions and
reporting standards among Federal programs that support microenterprise development. This
year the workgroup expects to publish a policy paper, a matrix of microenterprise programs at
the Federal level, a listing of needs of the field, and case studies highlighting examples of
microenterprise best practices.
Policy and Research Initiatives
The Fund's Policy and Research initiatives focus on three areas: 1) measuring and reporting
on the performance of awardees; 2) promoting industry-wide research and development
activities; and 3) instituting policies that maximize the effectiveness of the Fund's programs.
Reporting on Peifonnance and Outcomes:
Core Component Survey -- For the second consecutive year, the Fund conducted a survey of
its Core Component awardees to determine the impact of these awardees on the communities
that they serve. We evaluated only 1996 and 1997 awardees because they have had at least one
year to absorb the Fund's investments and put them to work. As of today, we have received
and analyzed responses from 44 of 74 organizations. Together, these awardees received over
$45 million in Fund awards. What has our $45 million helped these institutions to
accomplish?
9
Our preliminary findings demonstrate that these awardees have generated significant
community development impact. Since the time of their award, our Awardees have made over
$1.4 billion in community development loans and investments, which have helped to: create
or expand 3,961 microenterprises and 1,947 businesses; create or maintain 34,373 jobs;
develop or rehabilitate 27,112 units of affordable housing; and develop or support 689
community facilities. These facilities have the capacity to provide child care to 13,922
children, health care to 49,179 patients and education to 5,554 students.
Our credit union and community development bank awardees provided 69,179 checking and
savings accounts totaling over $115 million in 1999. Sixty-nine percent (69%) of these
accounts are held by low-income individuals. These institutions have also provided 337
Individual Development Accounts (IDAs) with deposits totaling over $362,000.
Since receiving their Fund awards, the 44 awardees have also strengthened their capacities to
deliver products and services to their target communities. Our awardees provided business
training, credit counseling, homebuyer training and other development services to 31,318
individuals and organizations. Their total assets have increased by 113 %, growing from $643
million in the aggregate before they received their awards to $1. 37 billion in the aggregate in
1999. Based on our sample, 71 % of the clients served are low-income individuals. Fifty-five
percent (55 %) are minority individuals and 51 % are women. Forty-eight percent (48 %) live
in the inner city, 42 % live in rural communities and 10% live in suburban areas.
Finally, Fund awardees have leveraged significant additional capital. They estimate that an
additional $194 million in capital over and above the $45 million raised as part of our 1: 1
matching funds requirement can be directly attributed to receipt of a Fund award. In most
cases, their community development loans and investments were part of a larger deal. In
1999, for every $1 our awardees loaned or invested in their communities, $1.30 was invested
by other entities.
The Fund is currently engaged in efforts to improve upon the information collected in this
survey and to reduce the reporting burden that is placed on awardees. We have been engaged
in discussions with industry groups and private funders to devise a CDFI industry-wide survey
that could be administered annually to the Fund's Core Component awardees as well as to
other CDFIs in the field. A single, uniform survey will help to standardize data for the entire
field of CDFIs, and help to reduce the reporting requirements of individual CDFIs - many of
whom currently complete different surveys for each of their funders.
BEA Program Survey: This past year, the Fund developed a pilot survey and administered it
to a sample of 30 banks and thrifts that received BEA awards in 1998. Thus far, we have
received responses from 23 institutions. Among other things, the survey asked: 1) how the
promise of a BEA award influenced the lending policies or products of the awardee; 2) how
the awardee spent its BEA award. We are still collecting and analyzing surveys, but the
preliminary findings indicate that the BEA Program is a valuable tool for encouraging banks to
increase their community investments.
10
The pilot survey indicates that the BEA Program has been successful in helping banks to offer
more flexible products to organizations and individuals. The vast majority of the respondents
reported that the likelihood of a BEA award allowed them to offer or develop products they
otherwise wouldn't have. These include longer term, lower interest rate loans; below market
rate deposits; and new products such as pre-development loans. Many of the respondents also
indicated that the prospect of a BEA award allowed them to offset risks of return, and thus
fund projects that they would not have otherwise supported. A majority of respondents also
reported that they increased their investments in CDFIs and/or built new relationships with
CDFIs as a consequence of participating in the BEA Program.
Twenty-one (21) of the 23 respondents reported that they used their BEA award monies to
fund additional community development initiatives. This is an impressive outcome, given that
awardees are under no obligation to reinvest BEA Program award funds in this fashion. Many
of the respondents reported using their BEA awards to increase their grants and investments in
CDFIs and in other non-profit community development organizations. Others used their award
money to subsidize below market rate loans to community development institutions and lowincome borrowers, or to increase the provision of technical assistance to borrowers.
The Fund is encouraged by the preliminary results of this survey, as well as the response rate
we achieved. These findings suggest that the BEA Program is an effective incentive for banks
to increase their community development finance activities.
Reporting on Certified CDFIs: With over 380 organizations certified as CDFls and new
applications for certification arriving regularly, the Fund has information on more CDFls than
any other entity in the country. This past year, the Fund worked with CDFI industry groups
to develop a brief questionnaire that will produce aggregate, standardized data from every
certified CDFI. This data will enable the Fund to report on the total volume of CDFI lending
and investing, portfolio quality, community development impact indicators, capital managed
by CDFIs, and basic CDFI financial indicators. As of November I, 1999, all entities seeking
certification or re-certification with the CDFI Fund are required to complete this brief
questionnaire.
Promoting Industry- Wide Research and Development: The Fund has begun working with
CDFI industry groups and other major funders to develop an industry-wide research agenda.
The Fund has solicited input from practitioners, funders and academics to identify gaps in
existing research and will work with the industry to establish a coordinated research program
that addresses the needs identified by the industry and its investors. The Fund has also
initiated, and will continue to pursue, in-house research activities that examine various aspects
of our awardees' work.
Developing Fund Policies: The Fund is constantly seeking to improve upon its programs and
pol icies to obtain higher levels of efficiency, and to be more responsive to the needs of our
applicants and awardees. In 1999, the Fund performed a comprehensive review of its
certification and funding processes. The Fund solicited input from applicants and awardees,
external reviewers, and Fund staff about ways to improve documents and processes to ensure
11
that they are well coordinated and transparent. With this feedback, the Fund implemented
significant revisions to its certification, Core, Intermediary and TA applications, application
review criteria, awards closings procedures and reporting requirements. These changes were
codified as revised interim regulations, published on November 1, 1999. As a result,
applicants for certification or for funding in FY 2000 and in future years will benefit from
more transparent and efficient policies, procedures and application materials.
Native American Lending Study/Action Plan
Our Native American Lending Studyl Action Plan is intended to stimulate private investment
on Native American reservations and other lands held in trust by the United States. The first
step in accomplishing this goal is to identify the barriers to private financing in these areas.
To this end, the Fund conducted 13 regional workshops across the country. The workshops
included participants from Native American communities, financial institutions, Federal and
state agencies, and community development organizations. Participants in these workshops
identified barriers to investments in Native American communities and developed strategies
and actions for eliminating these barriers. The Fund is also administering a national survey to
collect additional data from Native American organizations and financial institutions regarding
barriers to accessing capital in Native American communities. The products from these
workshops and the results of this survey will assist the Fund in completing the Study. It is
anticipated that the final report will be submitted to the Congress and the President by the end
of FY 2000. This report will contain recommendations regarding policy, legal, statutory and
regulatory changes needed to spur more investment within Native American communities.
THE YEAR AHEAD: FY 2001
The President's FY 2001 budget request includes $125 million in appropriations for the Fund.
This request is $30 million above FY 2000 funding levels. Of the $30 million in additional
funding requested, the Fund proposes to use $28,360,000 to fund its various programs and
$1,640,000 to cover administrative expenses. These additional appropriations will assist the
Fund in its efforts to continue to meet the great demand for its programs. In the past, we have
addressed this demand with a combination of new appropriations and funds carried over from
previous fiscal year appropriations. However, because we do not anticipate carrying over any
appropriations into FY 2001, the Fund will need all of the President's FY 2001 budget request
to address the demand for its programs.
In every year since the Fund's inception, interest in our programs has increased. This year has
been no exception to that rule. In FY 2000, the Fund received 167 Core and Intermediary
Component applications requesting a total of $273 million in awards - or 37% more than the
$200 million requested under these Components in FY 1999. The Fund also experienced a
64 % increase in the number of BEA Program applications received in FY 2000 as compared
with FY 1999. The additional appropriations requested for the Fund by the President's FY
2001 budget will enable the Fund to continue to invest in worthy organizations and proposals
at approximately the same rate as it has done up to now.
12
The Fund is requesting an additional $1.6 million in appropriations for FY 2001 to cover
administrative costs. These funds will be used to support 10 new FTE positions and to cover
the salary cost of living increase for existing staff. Consistent with our appropriations requests
outlined above, we anticipate that most of these new hires will be used to administer Fund
programs. Current Fund staff work tirelessly to ensure that the Fund makes prudent
investments and that our awards are disbursed in a timely fashion. However, the increasing
demand for our programs and a growing portfolio of investments to monitor makes it
necessary to hire additional staff. Sufficient staff ensures that we will continue to make sound
investment decisions and retain the capacity to monitor the growing number of awardees in our
portfolio.
The Fund's budget request for FY 2001 also includes a $5 million set-aside for the purpose of
establishing training and technical assistance programs to increase access to capital in Native
American, Alaskan Natives and Native Hawaiian communities. The need for this set-aside was
identified in the workshops related to the development of the Native American Lending
Studyl Action Plan. This set-aside would fund educational and other programs that: 1) enable
financial institutions currently serving these communities to enhance their capacity to provide
access to capital and credit; 2) assist financial institutions contemplating serving these
underserved communities to do so; and 3) assist these communities in establishing their own
. community development financial institutions.
We anticipate making additional innovations in our programs that will enable us to better serve
small, emerging and rural CDFIs in FY 2001. We plan to amend our Technical Assistance
Component to allow small and emerging CDFIs to compete for both technical assistance and
financial assistance in amounts up to $150,000 to $200,000 per round. This innovation
addresses the Small and Emerging CDFI Access Program idea that Congress encouraged the
Fund to consider last Fall. We are also looking forward to expanding some of our current
research initiatives. We intend to fund a research project this year that examines the feasibility
of creating a secondary market for community development loans. Pending the outcome of
this study, we hope to be able to fund a secondary market pilot project in FY 2001.
Finally, we anticipate that our nascent Training Program will facilitate the development and
delivery of several new training and technical assistance products by 2001. The Fund will
solicit bids from prospective developers and providers of training products in FY 2000, with
the intent that they will complete their products and make them available to CDFls and other
community development financial service organizations early in 2001.
CONCLUSION
Mr. Chairman and members of the Committee, thank you for giving me the opportunity to
provide this information on the Fund's current activities and FY 2001 budget. I am hopeful
that this Committee will approve the President's $125 million budget request for the Fund, so
that we may continue to work on creating jobs, affordable housing, childcare facilities, small
businesses and economic revitalization across America.
13
o
EPA R T :\1 E N T
() F
THE
T REA S II R Y
OFFICE OF PUBUC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C. _ 20220. (202) 622-2960
EMBARGOED UNTIL 4:30 PM
March 9, 2000
TREASURY RELEASES ANNUAL FOREIGN EXCHANGE RATE REPORT
The Treasury Department today released the update to the eleventh annual Report to
Congress on International Economic and Exchange Rate Policy, which reviews developments
in the major economies and exchange markets, and assesses the foreign exchange systems of a
number of our major trading panners. The report is provided under the Omnibus Trade and
Competitiveness Act of 1988.
This report covers the period from July 1, 1999 to December 31. 1999, when the U.S.
economy continued to perform strongly relative to its major trading partners. The U.S.
economy over this period continued to experience a combination of strong output growth, low
inflation and employment expansion not seen in nearly three decades.
Amid a slow recovery in emerging markets, continued Japanese economic weakness, and
the beginning of faster European growth, U.S. exports grew slowly and the U.S. current
account deficit increased significantly and is likely to continue to increase in the months ahead.
The relative strength of the U.S. economy fueled strong capital inflows into the United States
which helped sustain domestic investment despite low personal savings, but also contributed to
a continued deterioration in the U.S. net international investment position.
Reflecting the relative strength of the U.S. economy compared to key U.S. trading
partners, the nominal value of the dollar depreciated by 1.6 % on a trade weighted basis in the
second half of 1999. This depreciation followed a 2.6 % rise in the first half of 1999.
United States monetary authorities did not engage in any intervention for their own account
during the period covered by this report.
The Report presents an updated assessment of whether countries have manipulated
exchange rates between their currencies and the dollar to prevent balance of payments
adjustment or gain an unfair competitive advantage in international trade (as defined in the
Omnibus Trade and Competitiveness Act). It concludes that none of the major trading partners
of the United States is manipulating its exchange rate under the terms of the Act.
LS - 451
-30For press releases, speeches, public schedules and official biographies, call our 24~Qur fax line at (202) 622-2040
DEPARTMENT
OF
THE
TREASURY
NEWS
TREASURY
OFFICE OF PUBLIC AJ.'FAIRS _1500 PENNSYlYANIA AVENUE, tI;.W .• WASHINGTON.
EMBARGOED UNTIL 2:30 P.M.
March 9, 2000
CONTACT:
v.c.-
20220. (202) 622-29611
Office of Financing
202/691-3550
TREASURY OFFERS 13-WEEK AND 26-WEEK BILLS
The Treasury will auction two series of Treasury bills totaling
approximately $16,000 million to refund $41,537 million of publicly held
securities maturing March 16, 2000, and to pay down about $25,537 million.
The amount of maturing publicly held securities includes the 13-day cash
management bills issued March 3, 2000, in the amount of $25,014 million.
In addition to the public holdings, Federal Reserve Banks for their own
accounts hold $7,609 million of the maturing bills, which may be refunded at
the highest discount rate of accepted competitive tenders. Amounts issued
to these accounts will be in addition to the offering amount.
The maturing bills held by the public include $5,213 million held
by Federal Reserve Banks as agents for foreign and international monetary
authorities. Up to $3,000 million of these securities may be refunded
within the offering amount in each of the auctions of 13-week bills and
26-week bills at the highest discount rate of accepted competitive tenders.
Additional amounts may be issued in each auction for such accounts to the
extent that the amount of new bids exceeds $3,000 million.
Treasu~Direct
customers requested that we reinvest their maturing holdings of approximately $939 million into the 13-week bill and $748 million
into the 26-week bill.
This offering of Treasury securities is governed by the terms and conditions set forth in the Uniform Offering Circular for the Sale and Issue
of Marketable Book-Entry Treasury Bills, Notes, and Bonds (31 CFR Part 356,
as amended).
Details about each of the new securities are given in the attached
offering highlights.
18-452
000
~ttachment
For press releases, speeches, public schedules and official biographies, call our 24·hour fax line at (202) 622-2040
HIGHLIGHTS OF TREASURY OFFERINGS OF BILLS
TO BE ISSUED MARCH 16, 2000
March 9, 2000
Offering Amount ••••••••••••••••••••••••• $8,500 million
$7,500 million
Description of Offering:
Term and type of security ••••••••••••.••
CUSIP number •.•••••••••••••••••••.••••••
Auction date ••••••••••••••••••••••••••••
Issue date .•••••.••...•.••.....•••••.•.•
Maturity date .••••••.••.••..•.•••.•..•.•
Original issue date ••••.••.•••.•••••••••
Currently outstanding .•.••.•..••••••••••
Minimum bid amount and multiples ..••••••
182-day bill
912795 EF 4
March 13, 2000
March 16, 2000
September 14, 2000
September 16, 1999
$15,542 million
$1,000
91-day bill
912795 EA 5
March 13, 2000
March 16, 2000
June 15, 2000
December 16, 1999
$11,709 million
$1,000
The following rules apply to all securities mentioned above:
Submission of Bids:
Noncompetitive bids ••••••••• Accepted in full up to $1,000,000 at the highest discount rate of
accepted competitive bids.
Competitive bids •••••••••••• (1) Must be expressed as a discount rate with three decimals in
increments of .005%, e.g., 7.100%, 7.105%.
(2) Net long position for each bidder must be reported when the
sum of the total bid amount, at all discount rates, and the
net long position is $1 billion or greater.
(3) Net long position must be determined as of one half-hour prior
to the closing time for receipt of competitive tenders.
Maximum Recognized Bid
at a Single Rate •..••....••. 35% of public offering
Maximum Award ••••••••••••••••••• 35% of public offering
Receipt of Tenders:
Noncompetitive tenders .•..•. Prior to 12:00 noon Eastern Standard time on auction day
Competitive tenders •.••••••• Prior to 1:00 p.m. Eastern Standard time on auction day
Payment Terms: By charge to a funds account at a Federal Reserve Bank on issue date, or payment
of full par amount with tender.
Treasu~Direct customers can use the Pay Direct feature which
authorizes a charge to their account of record at their financial institution on issue date.
DEPARTMENT
OF
THE
TREASURY;~J;
TREASURY
NEW S
17SQ
OI'FICE 010' PUBLIC AFFAIRS _1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C.- 20220 _ (202) 622-29t.11
: IMMEDIATE RELEASE
'ch 9, 2000
PUBLIC CONTACT: Office of Financing
202-691-3550
MEDIA CONTACT: Bill Buck
202-622-1997
TREASURY DEBT BUYBACK OPERATION RESULTS
Today, Treasury completed a debt buyback (redemption) operation for $1,000 million
of its outstanding issues. A total of 13 issues maturing between February 2015 and
ruary 2020 were eligible for this operation. The settlement date for this operation will
March 13, 2000. Summary results of this operation are presented below.
(amounts in millions)
ers Received (Par Amount) :
era Accepted (Par Amount) :
$8,627
1,000
a1 Price Paid for Issues
(Less Accrued Interest) :
ber of Issues Eligible:
For Operation:
For Which Offers were Accepted:
1,345
13
9
~hted
Average Yield
of all Accepted Offers (%):
6.491
~hted
Average Maturity
for all Accepted Securities (in years) :
lils for each issue accompany this release.
L8-453
16.0
March 9, 2000
TREASURY DEBT BUYBACK OPERATION RESULTS
(amounts in millions, prices in decimals)
Table I
Coupon
Rate (%)
Maturity
Date
Par
Amount
Offered
11. 250
10.625
9.875
9.250
7.250
7.500
8.750
8.875
9.125
9.000
8.875
8.125
8.500
02/15/15
08/15/15
11/15/15
02/15/16
05/15/16
11/15/16
05/15/17
08/15/17
05/15/18
11/15/18
02/15/19
08/15/19
02/15/20
772
1,272
559
422
549
509
670
460
307
660
794
868
785
Par
Amount
Accepted
Highest
Accepted
Price
Weighted
Average
Accepted
Price
160
352
125
93
0
0
148
53
20
25
25
0
0
144.796
139.796
132.906
127.187
N/A
N/A
123.515
125.062
128.359
127.500
126.398
N/A
N/A
144.779
139.739
132.893
127.153
N/A
N/A
123.501
125.062
128.347
127.500
126.398
N/A
N/A
~
Weighted
Average
Accepted
Yield
Par Amount
Privately Held*
6.511
6.500
6.496
6.486
N/A
N/A
6.462
6.457
6.451
6.445
6.441
N/A
N/A
6.513
6.504
6.497
6.489
N/A
N/A
6.463
6.457
6.452
6.445
6.441
N/A
N/A
10,852
5,631
5,833
6,137
17,726
17,486
15,530
12,010
7,458
8,469
17,541
18,373
8,868
Table II
Coupon
Rate (%)
Maturity
Date
CUSIP
Number
11.250
10.625
9.875
9.250
7.250
7.500
8.750
8.875
9.125
9.000
8.875
8.125
8.500
02/15/15
08/15/15
11/15/15
02/15/16
05/15/16
11/15/16
05/15/17
08/15/17
05/15/18
11/15/18
02/15/19
08/15/19
02/15/20
912810DPO
912810D84
912810DT2
912810DV7
912810DW5
912810DX3
912810DY1
912810DZ8
912810EA2
912810EBO
912810EC8
912810ED6
912810EE4
:al Par Amount Offered:
:al Par Amount Accepted:
Lowest
Accepted
8,627
1,000
lount outstanding after operation. Calculated using amounts reoorted on announcement.
2026222611
l11fm: Department Of Treasury
,
D EPA R T 1\1 E N T
0 F
06/02/00 04:45 PM
T H F.
Page 39 of 92
T REA SUR Y
,
,
NEWS
omCE OF PUBUC AFFAIRS • 1500 PENNSYLVANlAAVENUE, N.W.• WASmNCTON,
D.C.• 20220. (202) 622·2960
For Immediate Release
As Prepared for Delivery
July 21. 1995
STATEMENT OF LAWRENCE H. SUMMERS
NOMINEE FOR DEPUTY SECRETARY OF TIiE TREASURY
BEFORE THE SENATE FINANCE COMMIlTEE
Mr. Chainnan, I am grateful for this opponunity to appear before you today in
connection with my nomination to be Deputy Secretary of the Treasury. I am deep1y
honored by the U'Ust that Secretary Rubin has shown in recommending me for this position,
and that the President has demonstrated in nominating me.
For the past two and a half years, I have served as Under Secretary for International
Affairs at the Treasury Department. It has been my privilege to work first with Secretary
Bentsen, then with S~retary Rubin 'on a wide range of economic and ·financia1 issues facing
our nation. I believe that the President and the Congress, working in a spirit of biparti~
cooperation. have achieved reaJprogress over these past two and a half years toward
increasing America·s export potential, opening foreign markets to our goods and services,
and reintegrating the transition economies of the former Soviet Union and Eastern Europe
into the world economy.
My experience before coming to Treasury was as an economjst working on policy
questions, first as a professor at Harvard, and then as Chief Sconomist and Vice President at
the World Bank. At Harvard I taught and conducted research on a range of economic issues,
including w policy, unemployment. and the role of financial markets. At the Bank] had
responsibilities for managing the organiiation's research, statistical, and training programs,
and participating in its lending decisions.
If confumed as Deputy Secretary. I look forward to worldng very closely with
Secretary Rubin and assisting him in the fulfillment of the Treasury Department's broad
array of responsibilities. I believe that there is nothing more important for the future of our
country than successful economic policies that allow market forces to harness the tremendous
economic energy of the American people. Appropriate public policies in support of a sound
financial system are crucial to attaining this objective.
In particular, I would highlight four areas which should be priorities for the Treasury
U-454
Far press releases, speeches, public schedules and official biographies, ('nIl our 24-hour fax line at (202) 622-204-0
2026222611
from: Department Of Treasury
06/02/00 04:45 PM
Page 40 of 92
Department in advancing the continued economic success of the American people over the
months and years ahead.
One is the need to increase our national savings and investment rates -- both of which
lay the foundation for our nation '5 future. Cutting government spending and balancing the
budget. considering tax and other measures that can increase private savings, and furthering
critical public investments can all play an essential role in achieving rising standards of living
for the American people.
A second priority must be continued support for international economic cooperation.
We must work with other countries to ensure that the process of opening markets, furthering
market-oriented refonns in developing countries, and safeguarding the functioning of
international fmancial markets goes forward.
Third, the United States must maintain a modern and effective financial system as the
basis for our prosperity. Such a system is essential to provide funds and capital for our
industries, channel investments to their most efficient use, offer high returns for the
American people, and allow our financial services firms to compete effectively overseas.
Fourth, Treasury -- like other agencies with law enforcement responsibilities -- must
work to improve its capacity to meet those responsibilities. Narcotics trafficldng, money
laundering, tax evasion, and other crimes all represent a threat to the rule of law in our
society, and the economic progress that we work for.
Many of these issues are complex. While we have made progress over the last
several years, much more must be done. Clearly, there will be some disagreement as to how
best to achieve our aims. I strongly believe that it is very important to discuss key issues
fully and openly.
In conclusion, let me say that the Treasury Department has a long and proud tradition
of professionalism, integrity, and public service. If confirmed, I will do my utmost to
maintain that tradition, by remaining fully responsive to the Congress, and seniing Secretary
Rubin and President Clinton to the best of my abilities. Let me offer you my personal
assurance that I will continue to do everything in my power to work closely and
cooperatively with the members of this Committee and all the members of Congress in the
weeks and months ahead.
Thank you once again Mr. Chairman for bringing me before this Committee. Now I
would be pleased to respond to any questions which you or the Committee may have.
2
DEPARTMENT
OF
THE
'IREASURy!l}
TREASURY'·
NEW S
178q
omCE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W .• WASHINGTOl\. D.C.. 20220. (202) 622-2960
EMBARGOED UNTIL 8:00 AM EST
Text as Prepared for Delivery
March 10, 2000
DEPUTY TREASURY SECRETARY STUART E. EIZENSTAT REMARKS TO THE
LEGG MASON WORKSHOP ON INVESTMENT PRECURSORS
WASHINGTON, DC
I am happy to be here at your Workshop Your work in the venture capital and the
secondary markets, which are essential in translating innovation in information technology and
telecommunications into actual businesses and your experience with the policy and regulatory
issues that effect these industries, provide you with a deep sense of what telecommunications and
the Internet can mean for the American economy. I share your enthusiasm for these increasingly
important components of our economy
Economists tell us that despite soaring sales figures and market valuations, the jury is still
out on whether the Internet is merely a major new technology in one sector of the economy, such
as the automobile or television were in an earlier time, or whether it indeed will change the
world, as the Industrial Revolution did in the 19th century In 1870, America's steam ~ngines
delivered 1.2 million horsepower to America's manufacturing firms. By 1939, sixty years later,
the electric motors that replaced them gave factories 45 million horsepower-an increase in
"muscle power" of forty times, or five per cent a year In the forty years since electronic
computers replaced electromechanical calculators, the number of computers has increased from
2,000 to 200 million worldwide, and there has been an increase in information processing power
of one million times This comes to 3:\ per cent a year
The products and processes based on this computer power are changing the way we buy,
the way we sell, how we communicate with one another, how we entertain ourselves and educate
our children. They are making businesses far more efficient in the way they design, manufacture
and market products. They are even changing the nature of what constitutes a product. We are
moving from an economy in which the symbolic product was an ingot of iron, a barrel of oil or a
bushel of grain to one in which the symbolic product is gene sequence, a line of computer code,
or a logo As Chairman Greenspan has often said, in such a world goods are increasingly valued
for the knowledge that went into them rather than for their physical weight.
In this economy, information technology has been the largest single factor in the
remarkable increase in productivity, which has given us a high rate of GDP growth with very
L8-455
For press releases. speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
low unemployment and low inflation. It has helped make the United States a high performance
economy, powered by technology, driven by ideas, rewarding the value of innovation, flexibility
and enterprise and attaining ever better living standards for its people.
Let me give you just one example. Between the end of World War II and the start of the
1990s, our economy went through eight recessions. In almost every case, when economists
looked back with their analytic tools, they concluded these were what they called "'inventory
recessions. Business firms had overstocked. When they discovered this, they cut back on orders.
This cut in spending rippled through the economy, reducing consumer spending, reducing
investment, and forcing layoffs. The economy declined until firms decided to stock up on
inventory again.
With information technology, companies can fine-tune their inventories through "just in
time" purchasing and other techniques. Inventory recessions should be a thing of the past. This
does not mean the business cycle has been repealed. There are other factors, including new ones.
that could cause our economy to run aground But it shows how technology has been
instrumental, not just in creating new ways of living and new economic opportunities, but in
solving some of the most persistent problems of our economy.
The movement of information technology to the center of the American economy came
about in part because of the dynamism of the American financial system. In the 1980s, toughminded economics, driven by investors who looked hard at the bottom line, forced our
companies to restructure and reengineer years before those of other countries. This allowed them
to emerge faster and stronger in their fields and, in the 1990s, to more readily adapt new
technology as an integral part of their businesses. An open, flexible and extremely
entrepreneurial venture capital sector has channeled needed funds to new industries. It was also
the result of an outpouring of traditional American ingenuity. The number of patents granted to
our inventors has increased over 140 per cent over the last decade, and now stands at over
150,000 a year. And it came about because an increasing number of workers have been willing
to invest longer hours, acquire new skills and accept pay increases more in line with the success
of their companies than ever before.
However, our ability to exploit these new opportunities depended critically on President
Clinton and Vice President Gore's determination to stop a generation of public borrowing and
forge a new national consensus around sound budget policy Structural deficits give rise to
vicious circles. They tend to lead to rising interest rates, and so to falling investment and slower
growth, which reduce revenues further, increase deficits and start the cycle again. This is what
we saw in the late 1980s and the early 1990s.
Surpluses generate a kind of virtuous circle of declining debt, increasing national savings,
lower interest rates and rising growth and investment. American savers have had to absorb about
$2 trillion less in government debt since 1993 than they would have if the budget projections
made in that year had been realized. That is more than $2 trillion dollars available for new
private investment in America's future. As a share of GNP, real investment today is higher than
it has been at any time in the postwar period. We need to continue to exercise fiscal discipline,
and retire debt, to keep the longest economic expansion in our history going strong
2
The traits of the new economy will have other implications for public policy. For
example, the "weightless" goods it produces usually have very high initial fixed costs and low,
even zero marginal costs. It can be compared to publishing a book, cutting a record or marketing
a new pharmaceutical product. In the new industries, success may have greater potential to
become self-perpetuating, as growth leads to rapid declines in prices, and so to further expansion
in the market and further growth.
Moreover, networks become increasingly important. The first fax machine could do very
little. With one hundred fax machines, ten thousand connections are possible, and with ten
million machines the possibilities are limitless.
F or these reasons, we should strive to enlarge our markets-at home and
internationally- as much as possible. Their development should not be slowed or distorted by
unnecessary regulation. That is why we worked to pass the Telecommunications Act, and the
right kind of Financial Modernization Act last year. That is why we are doing what we can to
keep our own markets open to trade, and to open up the largest market in the world, China, by
granting it Permanent Normal Trade Relations status and supporting its entry into the World
Trade Organization.
It also points to increasing the size of our markets here at home, by making sure
everyone is a part of this vibrant economy. Half a century ago, this meant ensuring that every
home had electricity and running water and a telephone. It continues today in our work, through
"First Accounts" and other initiatives, to ensure that every American has access to a bank
account. This sounds like a small step, until you realize that in this age of the Internet, an
estimated 15 per cent of U.S. households still do not have a bank account.
And the needs of the new economy surely make the case for public support for scientific
innovation. It was the National Science Foundation and DARPA, just as much as the Bell Labs
and Xerox PARC, that kept the infant Internet alive. We have increased our national science and
technology budget for seven successive years. The 2001 budget commits an unprecedented $43
billion to science and technology research.
We cannot know what this new economy will look like a decade from now. What we can
know is that we are enjoying a very special moment, a moment that confers a special
responsibility on public policy to work to broaden the base of our prosperity, and minimize
future risks.
Electronic Payments
I would like now to discuss two issues that are particularly within the purview of the
Treasury Department: electronic payments and internet taxation. Despite the expansion of the
Internet into so many areas, there is no legitimate option at this time for businesses to pay each
other over the Internet. Most e-commerce shoppers use credit cards which involve a 2-6%
expense to the seller. For shoppers, credit cards only work on line for certain classes of
payments. A college student who successfully bids on this weekend's basketball tickets on eBay
3
has to spend additional money to FedEx his check to the seller. According to one study, in 1999,
consumers spent $19 billion on-line. But the amount they ordered off-line after doing their
browsing on-line came to $103 billion.
In the physical world, parties can pay each other directly using cash and checks in a peer~
to-per fashion. In the electronic world, existing payment mechanisms must be processed through
central bank hubs and mainframes before payments or payment obligations can be delivered to a
payee. One of the greatest attractions of the Internet is the way it makes possible person-toperson communication and commerce even where the people have no prior relationships and the
geographic distance between them is great. Our current systems simply were not designed to
support this type of dynamic commerce.
To narrow this gap, payments need to be accompanied by the kinds of documents that
allow one to purchase, collect and store data electronically. We need an efficient, standardsbased mechanism for exchanging information across different automated processes. Buyers,
sellers and financial institutions also need to know with certainty that their orders were received
and payments logged. Even E-mail still lacks much of the certainties traditional mail offersguaranteed delivery, return receipts, guaranteed time-stamping, change of address information.
Because the Treasury Department handles 85% of the government's payments, we have
focused our efforts on improving electronic payments. We have been quietly working on some
revolutionary pilot programs to use the new technologies for this purpose. We have introduced
smart cards that function as cash. At military training sites and at US bases in Bosnia, for
example, soldiers now receive their pay on smart cards. Merchants on these sites are equipped
with the tools to accept payments from the cards. As a result, Treasury's Financial Management
Service is now the largest producer of financial smart cards in the country.
We are using electronic checks to pay some of our vendors. The Treasury creates an echeck on a PC, digitally signs it and securely emails it to a payee along with remittance
information. The payee verifies the digital signature and strips off the remittance information. It
then digitally endorses the check and e-mails it to its bank for deposit. The bank validates the
endorsement digital signature and presents the items for payment to the bank on which it is
drawn. Our partners in this test include banks, technology companies, DOD and major Defense
vendors.
We are exploring the use of electronic cash. It allows transactions to be consummated
instantly with no clearing or settlement and no involvement by a financial intermediary. The
first use will be in buying computers on-line.
Introducing changes to the payments system is a long-term proposition and raises
complex policy issues, but these pilots can teach us a great deal. The Treasury, along with FMS
and the Bureau of the Public Debt will continue to build on our pilots through an "electronic perto-peer payments" effort. We plan to share with industry the lessons we learn at a conference or
another forum that will allow stakeholders to address barriers to financial e-commerce on the
Internet. We shall also launch additional initiatives to help develop the tools and find the models
that will bridge the internet payments gap.
Internet Taxation
The other issue is internet taxation. The Supreme Court decided, several years ago in the
context of mail order sales, that it would impose an unconstitutional burden on interstate
commerce for one state to ask a seller physically located in another state to collect a sales tax on
its behalf. As a result, purchases made on the Internet, although in fact still subject to a tax
(called a "use tax") in practice they enjoy virtual tax-free status because the seller is not
obligated to collect the tax - as long as the seller does not have a physical presence such as a
store or a warehouse in the purchaser's jurisdiction.
Many state and local government officials are increasingly concerned that if electronic
commerce continues to grow exponentially, as it has been, the tax base that supports our schools,
our police and firemen, and other essential services will be seriously undermined. Sales taxes
currently account for one third of state and local tax collections. Main-street businesses are
concerned about the unequal playing field - if a book bought in one of their stores is taxed while
one bought on-line is not taxed in most cases it will grow increasingly difficult for them to
compete. However, Internet businesses return to the issue of the burden that would be imposed
if they were forced to collect sales taxes. They point out - and rightly so - that the enormous
complexity of current state and local sales and use taxes would indeed make it excessivel\'
burdensome for a remote seller to have to collect taxes in multiple jurisdictions. The current
network of sales taxes is so diverse and complicated-- there are over 6,000 separate taxing
jurisdictions, each with its own definitions and rules.
The Internet Tax Freedom Act, passed in 1998, did not create these problems nor did it
solve them It attempted to solve a different set of problems. Internet businesses were
increasingly concerned that states would see them as a new cash cow and would impose new,
discriminatory taxes on the Net or might tax access to the Internet The Internet Tax Freedom
Act imposed a time-out on these new types of taxes on the Internet for a period of three years,
which expires in October 200 I.
The Administration opposes any kind of discriminatory taxation of the Internet We
support a permanent ban on taxes on access to the Internet We also support a permanent
moratorium on customs duties on electronic transmissions We strongly SUppOI1 the growth of
Internet commerce. We want to encourage people to go on line, not discourage them. This is
important as we wish to eliminate the '"Digital Divide" President Clinton has spoken o( where
low income people are left out of the new economy, unable to gain the knowledge and acquire
the skills they will need to improve their circumstances.
On the issue of taxing sales made on the lnternet- as opposed to access to the Internet the Internet Tax Freedom Act created a congressionally-appointed Commission which holds its
last meeting in Dallas in just over a week Discussions have been held in the context of the
Commission that I hope have stal1ed to bridge the gap between the states and some members of
the business community, helping each to see the valid aspects of the others arguments. But
whatever the outcome of that Commission, it is clear that any answer -- short of repealing the
sales tax and replacing it with another revenue stream to pay for police and education -- has to
5
involve simplification of the current sales tax systems-- the same issue that the Supreme Court
identified in its decision several years ago.
Fundamentally, the issue of how e-commerce will contribute to the building and
maintenance of our 21 sl century public services and institutions is a critical one - and a delicate
one. It must be settled through painstaking conversations between affected parties. We cannot
rush to judgment on these complex issues.
Conclusion
The industries you invest in and work for will benefit from sound economic policies
which strengthen and open markets for you in this country and around the world. We value your
continued input on all these issues, and I appreciate the opportunity to speak to you today.
Thank you.
-30-
6
DEPARTMENT
OF
THE
TREASURY
ornCE OF PUBUC AFFAIRS. 1500 PENNSYLVANIA AVENUE, N.W .• WASHINGTON, D.C.. 20220. (202) 622-2960
El\1BARGOED UNTIL 200 PM EST
Text as Prepared for Delivery
March 16, 2000
TREASURY SECRETARY LAWRENCE H. SUMMERS TESTIMONY BEFORE THE
HOUSE APPROPRIATIONS SUBCOMITTEE ON TREASURY, POSTAL SERVICE
AND GENERAL GOVERNMENT
Mr Chairman, Congressman Hoyer, Members of this Committee, I appreciate this opportunity to
discuss Treasury's FY2001 budget request and to seek to continue to work in the cooperative
spirit that we and Members of the Committee have achieved I would like to take this
opportunity to thank this Committee for its impressive and productive work over the years.
As you know, Treasury plays a crucial role in the core functions of government, including tax
administration, revenue collection, law enforcement, financial management, tax policy, banking
policy and international and domestic economic policy
We propose a budget that will enable Treasury to continue to provide the American public with
the customer service and program reliabilit~, it expects and deserves
Our budget request totals S 14.245 billion for all operations After taking into account two offsets
- a $210 million fee on Customs' automated commercial svstem for the Automated Commercial
Environment (ACE) and $42.5 million from the use of the estimated potential balance from the
Treasury Forfeiture Fund - our appropriation level would be $13.992 billion
We have provided the Committee with a detailed breakdown of Treasury's FY2001 budget
request Let me today highlight five important areas offocus
•
First supporting continued IRS modernization
•
Second , stren!.!thenin!.!
our ability. to fl!.!ht dnl!.!s, violence and crime
-
•
Third, modernizing our trade systems
•
Fourth, enhancing our financial management
•
And fifth, supporting management operations
~
~
~
Ls-456
Far press releases, speeches, public schedules and official biographies. call our 24-hour fax line at (202) 622-2040
l.
Continuing to modernize the IRS
In its new mission statement, the IRS has pledged to focus on two core priorities "Provide
America's taxpayers top quality service by helping them understand and meet their tax
responsibilities, and apply the tax law with integrity and fairness to all"
As the modernization and reorganization at the IRS has proceeded, some have framed debates on
IRS priorities around a trade-off between enforcement and customer serv:ice This argument is no
different to believing that businesses face a trade-off between quality and cost.
We have heard similar false choices posed through the years To have effective tax
administration, there must be both compliance and high-quality customer service. A trade off is
neither necessary nor desirable
Under the leadership of Commissioner Rossotti, the IRS has already made impressive progress
towards meeting both these goals But there is more to accomplish.
In particular we need resources to focus on three areas
Comillued support/Of ()fgalli=atiollall11()derlli=atlOll
Until recently, IRS was organized along geographic lines At the direction of Commissioner
Rossotti, the IRS is reorganizing along customer lines. This enables the IRS to provide better
service to groups of taxpayers with si mi lar needs This reorganization also enables the agency to
become more effective and focused For example, it will improve the agency's ability to clamp
down on abuse of the tax code, including combating the growth of abusive corporate tax shelters
The reorganization also involves building a modern management structure to enable the IRS to
serve its customers better This \vill im'olye significant re-training of staff because many are
being asked to take on redefined roles FY200 I provides the second year of major funding for
the IRS reorganization We strongly belie\e this restructuring etfort is putting the agency on the
right track It is imperative that we support the employees and leadership at the IRS so they can
complete this monumental task of reorganizing the IRS for the first time in almost 50 years
Comillued support/Of computer l11oderl1l=al/OIl
The IRS is embarking on a plan to replace its antiquated computer system to bring it into the new
century The IRS core data systems are fundamentally deficient The Master File system, on
which all taxpayer accounts reside, is based on outdated I 960s technology Modernizing the
agency's technology will enable it to deli\er on its pledge to provide better customer service for
all and is absolutely necessary for the agency' to make the improvements that the public needs.
In our FY 200 I budget, we are asking for another deposit into the Information Technology
Investment account (lTlA) to keep this program on track. The Committee has shown its support
for this program in past years by making the needed deposits, and we ask you continue to support
this critical program.
StahiJi=ing lhe IRS
The IRS is on the road toward modernizing its organizational structure and computer systems
For several reasons we feel the time is now right to reverse the decline in staff that has occurred
at the agency over the last 5 years. Firs!, no one anticipated the resources required to implement
the very important provisions of the Restructuring and Reform Act. Second, recent articles have
highlighted the decline in enforcement activity over the last few years -- a trend Commissioner
Rossotti and I are particularly concerned about.
We feel the time is right to permit a modest expansion in IRS resources to ensure the integrity of
the tax system, which depends heavily on maintaining voluntary compliance, and to provide the
service the American taxpayers deserve. Our request provides 2,800 new positions, an increase
of 2.9 percent over the next two fiscal years.
II.
Strengthening our ability to fight drugs, violence, and other crimes
Our second focus today in on improving our capacity to fight drugs, violence and other crimes.
As this Committee knows, Treasury oversees six law enforcement bureaus, Customs, the Secret
Service, the Bureau of Alcohol, Tobacco and Firearms, the IRS, FinCen, and the Federal Law
Enforcement Training Center. Each of these has critical and extensive responsibilities
Our FY200 I budget request enables Treasury agencies to continue to playa full role in the
crucial anti-crime initiatives in which this Administration is engaged.
Mr. Chairman, last year you and others expressed concerns about the disparity of treatment
between Treasury law enforcement and our Justice counterparts. This year's budget provides
Treasury law enforcement with an 18 percent increase over the FY2000 budget It recognizes the
special law enforcement role that Treasury plays in the Administration's anti-crime strategy.
The proposals would result in the largest increase in Treasury law enforcement funding in more
than a decade Let me focus briefly on four key areas of this request
RedUCing li'{~(ficking. Smuggling and {\e of "!JCII 1)mgs
Our request supports the Administration's counter-narcotics strategy by providing Treasury with
resources critical to reducing the trafficking, smuggling, and use of illicit drugs across our
borders
The budget request supports Custom's responsibility to facilitate legitimate trade, while
interdicting contraband through the use of enhanced technology and equipment. Customs
remains committed to improving the efficiency and effectiveness of its drug interdiction.
3
Specifically, the budget request supports:
•
Aircraft with upgraded interdiction and surveillance equipment.
•
Non-intrusive inspection equipment for expanding interdiction efforts along the southwest
border;
•
And additional personnel and investigative equipment to support Customs Counter-drug
Initiative. This will include new positions to implement the Foreign Narcotics Kingpin
Designation Act and improve information gathering capabilities on terrorist funding and
narcotics trafficking. Our FY2001 request builds upon last year's supplemental request.
Combatingfinancial crimes and money laundering
Our budget request also supports Treasury' s central role in the implementation of the
Administration's National Money Laundering Strategy. Deputy Secretary Eizenstat and Deputy
Attorney General Holder unveiled the 2000 Strategy this week. The Strategy is aimed at
combating dirty money and, in doing so, giving us additional weapons to fight the underlying
cnmes.
Money laundering has a number of intolerable effects on the U. S. economy and on American
society. It enables the criminal to invest the proceeds in the perpetuation of the underlying crime,
many of which are violent and spread drug addiction in our communities. It taints the U. S
financial system and damages the reputation of those involved. And it undermines U.S.
government programs to support democracy and economic development around the world.
Our request will enable us to support initiatives in zones designated as high-risk financial crime
areas (HIFCA) The budget also supports Customs, IRS, and the Financial Crimes Enforcement
Network (FinCEN) by providing them with resources to strengthen the fight against money
laundering. It will also enable these agencies to respond to additional information gathered from
the expanded reporting requirements for non-bank financial institutions
Protecti/1~
Our NatlO/1 's Leaders
Few agencies are required to work under such pressure or meet such rapidly expanding demands
as the Secret Service. The dramatic rise in global terrorism and a significant increase in the
number of protectees has intensified the Secret Service' s critical responsibility of protecting our
nation's leaders
We must address the increased workload of the Secret Service and the resultant decline in
working conditions in order to retain members of this highly trained workforce and ensure their
safety and the safety of their protectees. We are requesting 250 new positions in addition to the
new positions in the FY 2000 appropriation.
The increased hiring by the Secret Service and ATF will result in a significant increase in the
workload at the Federal Law Enforcement Training Center (FLETC) This budget provides
4
funding to address this increase and continues implementation of FLETC s five-year Master
Plan
Redllcingfirearms l'io/ence
Mr. Chairman, we have all been deeply affected by a number of recent incidents that have
focused attention on the level of armed crime in this country. There is a great deal of debate
about the correct level of policy response. But, it is fair to say that there is now widespread
agreement about the need to enforce existing laws to the fullest extent possible.
Our request will help us to build on existing efforts that fall within our firearms enforcement
strategy, including the Integrated Violence Reduction Strategy (IVRS), the Youth Crime Gun
Interdiction Initiative (YCGll), nationwide crime gun tracing, and the National Integrated
Ballistics Information Network (NIB IN)
These, and other efforts, strongly supported by President Clinton, Vice-President Gore and this
committee, have contributed to the sharp reduction in firearms violence in the last few years.
With strong inter-agency support from the Department of Justice, our initiatives have also
resulted in a clear rise in the number of firearms prosecutions, an increase of more than 12
percent between 1992 and 1999. But we can address more violations of firearms law. And we
must reduce firearms violence further.
Our request strengthens our ability to achieve this national priority in four ways
•
First, providing funding for 300 new agents, 200 new inspectors and 151 new support staff at
the bureau of Alcohol Tobacco and Firearms so that the agency can continue its crucial work
of collaborating with state and local law enforcement agencies to reduce illegal acquisition,
possession, misuse, and trafficking of firearms
•
Second, increasing the number of cities under the Youth Crime Gun Interdiction Initiative
enforcement program by 12, bringing the total to 50
•
Third, strengthening the crime gun tracing system for law enforcement agencies nationwide,
including equipment and training support for 250 state and local law enforcement agencies
•
And fourth, bolstering the Treasury and Justice Department's unified effort to provide
automated ballistics imaging technology to Federal, State, and local law enforcement
agencIes.
In addition, Treasury has asked for funding to meet several other critical challenges. These
include enforcement of laws against forced child labor, support for Secret Service and Customs
efforts on counter-terrorism, and airspace security in support of special national events. The
budget provides funding for these important responsibilities
5
III.
Modernizing our trade systems
Our third focus is on modernizing our trade systems Like the IRS, Customs has experienced a
significant increase in demand on its trade system, and the system is not able keep pace. Since
the Customs Modernization Act was passed in 1993, the number of merchandise lines on
customs formal entries has more than doubled. The Customs Service is required to cope with this
sharp rise in trade with substantially the same outdated technology it had when the Act was
passed. Given the critical role of Customs in handling enormous volumes of goods and in
combating drug and other types of trafficking, it is important that be equipped with the best tools
to fulfill these goals.
As I have indicated, Customs is not alone in having to work with antiquated technology. We
have learned a great deal from the experience of the IRS and are applying these lessons to
Customs. These lessons include forging a clear and well defined partnership with the private
sector; adopting a systems life cycle discipline; and using an enterprise-wide blueprint and
architecture to guide the integration of systems as they are developed.
Our request has two main elements:
•
Additional resources to maintain the existing trade system, the Automated Commercial
System, (ACS). The system is prone to outages or "brownouts", and it is important that we
do what is necessary to minimize such disruptions.
•
Begin work on a new system, the Automated Commercial Environment (ACE), that will
eventually replace the ACS. This replacement is critical and will require a multi-million
dollar investment over several years We propose to establish a fee to fund the development
of ACE and that the fee would appropriately capture some of the benefits that will accrue to
private business from modernization These include a streamlined cargo entry process,
account-based transactions, and a paperless process. It is imperative to secure funding for this
critical program. The Administration looks forward to working with Congress on the fee to
ensure that funding is available in FY200 L and through the life of the program.
IV.
Enhancing financial management
My fourth focus is on financial management We have made important progress this year with
respect to the nation's money We have overseen the development of the new five and ten dollar
bills that will start circulating in May And we have seen what has so far been a very successful
introduction of the new dollar coin
At Treasury we believe it is essential to achieve the highest standards of financial management
The two bureaus of the Fiscal Service - the Financial Management Service (FMS) and the
Bureau of the Public Debt (BPD) - provide core services in the areas of government payments,
collections, government-wide accounting and reporting, collection of delinquent debt, and
Federal Government financing.
6
These are vital functions that enable Congress and the American public to have confidence in the
ability of the U. S. government to keep a detailed and accurate account of public finances and to
manage its finances professionally. This year, the Bureau of Public Debt carried out a new
mission of buying back debt as a complement to its more traditional mission of issuing debt.
Owing to the excellent stewardship of the fiscal bureaus - including redirection of base resources
and reinvestment of productivity savings for investment in state-of-the-art electronic commerce
technologies - the budget proposals for the FMS and BPD are comparable to last year's requests.
Let me briefl y in this context mention the budget request for the President's "First Accounts"
initiative that aims to "Bank the Unbanked". To help fulfill the goals of this initiative, we will
use Treasury's financial expertise to encourage low-income families who do not receive Federal
benefits to open bank accounts.
Between 10 and 20 percent of our population lacks access to bank accounts and can pay up to
$15,000 over a lifetime for routine transactions such as cashing a check or paying a bill. This is
something that we have started to address through the EFT and ETA programs for those who
receive Federal benefit payments. We believe it is important to work with the private sector to
extend this opportunity to those who do not benefit from Federal payments.
Let me also briefly report on the progress of the Community Adjustment and Investment
Program The is the domestic window of the North American Development Bank but receives its
own appropriation entirely independent from NAD Bank funding. The CAIP has been
particularly effective in helping to create and sustain jobs in communities experiencing
temporary job dislocation attributable to changing trade patterns related to NAFT A To date,
CAIP financing has helped to create and sustain over 7000 jobs by facilitating more than $225
million in direct loans. loan guarantees and grants to businesses, workers, and communities. 1
urge you to support this year's funding request for the CAIP.
v.
Maintaining Management Operations
Our final area of priority is maintaining support for management operations. Departmental
Offices provides the programmatic oversight and technical support essential to the Secretary's
leadership role in law enforcement. revenue collection. international and domestic economic and
tax policy, and financial management The budget supports these functions with
•
Increases for core infrastructure operations, including technology upgrades that support
Treasury's leadership role on economic issues
•
Essential resources required in Domestic Finance to oversee implementation of the recently
enacted Financial Modernization Act, the most sweeping change in the regulation and
management of financial institutions since the 1930s.
•
Continued funding for the multi-year program to repair and restore the historic Main
Treasury Building and Annex begun in December 1998
7
In addition, our request supports four major projects: the Human Resources Information System;
Integrated Treasury Network, Critical Infrastructure Protection, including the banking and
finance sector; and the Public Key Infrastructure pilots.
The budget also strengthens the audit and investigative efforts of the Office ofInspector General
and enhances the capacity of the Treasury Inspector General for Tax Administration to conduct
mandated and discretionary reviews of IRS operations
Let me also in this context raise one particular concern at Treasury. We have always sought to
recruit the brightest and the best so that Treasury can provide the highest quality service to
American taxpayers. But the salaries we are able to offer graduates are increasingly outmatched
by those offered by the U.S. Federal Reserve while the gap with the private sector is widening.
Let me give you a specific example from my own field of economics. A talented graduating PhD
economist can get a starting salary of between $51,000 and $66,000 from the Treasury
Department compared to a minimum starting salary of$80,000 from the Federal Reserve. And in
the private sector, economics PHDs are often paid more than twice the starting salary of
Treasury. ~hile it is not appropriate for the Federal government to match the best offers from
the private sector, our current constraints are troubling.
While we are working closely with the Office of Personnel Management to find solutions to this
problem, and we are improving the delivery of recruitment bonuses and looking at introducing
pay banding, there is a limit to the results we can achieve using existing flexibilities without new
legislation At some stage we will also require new resources if we are to continue to attract the
level of talent required to maintain the highest standards of excellence at Treasury.
VI.
Conclusion
Mr Chairman, let me conclude on a personal note. Since becoming Treasury Secretary last year,
and in the seven years that I have worked in this department, I have been deeply impressed by
the intelligence, professionalism and dedication of the people with whom I have worked. I am
sure this Committee shares my confidence in the uses that are being made of taxpayer's funds. In
that spirit, I ask that you approve our FY 200 I budget request to support the work of the
Treasury Department in fulfilling its wide range of responsibilities in serving the American
people. Thank you very much.
-30-
8
_
() E P \ R T \ I F '\
r
()
'IREASURY
OffiCE OF PUBUC AFFAIRS • 1500 PENNSYLVANJ·
F
T II I·:
r
I~ F
\ S (
I~ \
NEWS
VENUE, N.W.• WASHINGTON, D.C.. 20220. (202) 622.%960
EMBARGOED UNTIL 10:30 AM EDT
Text as Prepared for Delivery
March 13, 2000
TREASURY ASSISTANT SECRETARY (INTERNATIONAL AFFAIRS)
EDWIN M. TRUMAN
TESTIMONY BEFORE THE U.S. TRADE DEFICIT REVIEW COMMISSION
Introduction
Mr. Chainnan, thank you for the opportunity to testify before you on the important
issues that this Commission is considering. You asked me to discuss the ability of the U.S.
economy to absorb the recent, large increases in our trade and current account deficits, and
whether they will affect our continuing, record-setting prosperity.
With the widening of the trade and current account deficits, it is natural that there
should be increasing questions raised about their effects. The Administration is closely
monitoring and analyzing them. In my judgment, much of the recent discussion tends to
overemphasize the possible adverse consequences. As my colleague Robert Lawrence stressed
in his testimony before you, not all current account deficits are created equal. The rise in U.S.
imports has played an important role in keeping price pressures contained during the
expansion. In addition, the net capital inflows have helped finance large increases in private
investment. This investment has helped put in place new technologies that will help increase
future growth, future labor productivity, and living standards. It is important to note that the
recent widening of our external deficits has been associated with strong growth in U.S.
employment and output That widening has not been caused by a decline in U.S.
competitiveness. -On the contrary, productivity growth has accelerated. Between 1973 and
1995, it grew at an annual rate of 1.5 percent per year. From 1995 to the present, growth
increased to 2.9 percent per year, and in 1999, growth was even higher still, at 3.6 percent.
Performance in the manufacturing sector has been equally impressive; in 1999, manufacturing
productivity grew 6.9 percent, the fastest pace on record, and unit labor costs have declined
6.9 percent since the third quarter of 1993.
LS - 457
For press releases, speeches, public schedules and official biographies, caU our 24-hour fax line at (202) 622-2(}10
·U.S. Government Printing Off.ce . -~q~
-
3 SSg
The basic consensus is that our widening current account deficit has been largely caused
by two factors: the gap in growth between the United States and the rest of world, and forces
causing an acceleration in U.S. private investment that was not matched by increases in U.S.
national saving. The fiscal move from deficits to substantial surpluses has helped support U.S.
national saving, but the continuing low rate of U.S. personal saving has exacerbated this latter
shortfall.
Restoring Balanced Patterns of Growth
The gap between U.S. and foreign growth was at its widest during the fourth quarter of
1998, when the U.S. growth rate was approximately 3th percentage points higher than foreign
growth, due to recessions and slow growth in Asia, South America, Europe, and Japan. While
this gap has begun to narrow, several quarters of rapid U.S. growth and slow global growth
have resulted in stagnant export growth. By the second quarter of 1999, U.S. exports of goods
and services were still $456 million lower than two years before. Exports to emerging market
economies account for 44 percent of our total exports. The Asian financial crisis and its
spillovers severely disrupted our export markets. It is for that reason that we have supported
fmancing packages with strong reform components for the crisis-affected countries; those
efforts have been successful in helping to restore growth. With the resumption of global
growth, exports in the second half of 1999 increased at a seasonally adjusted annual rate of 3.6
percent in the third quarter and 3.0 percent in the fourth. During the period of relatively weak
U.S. export growth, imports continued to grow at traditional rates, supporting global growth.
As a result, imports in the second quarter of 1999 were 16 percent higher than in the second
quarter of 1997 -- an increase of $41 billion.
To close this gap in growth and restore a more balanced distribution of growth, we
have been urging our trading partners to stimulate their growth, inter alia, through economic
reforms to increase flexibility and openness. In particular, we have focused on Europe and
Japan. As Secretary Summers recently stressed:
"Governments, workers and businesses in Europe and Japan are increasingly
recognizing that they, too, do not have to limit themselves to the hope that growth will
retUrn to traditional estimates of potential... [Instead,] the right aspiration for policy is
much higher than that: achieving a sustained period of growth above what has recently
been considered their potential, and encouraging the kind of investments that are
necessary to raise the rate at which the economy can expand. This will also help bring
about a more balanced pattern of growth in the global economy as a whole. "
Europe haS, in recent years, taken some steps toward a more dynamic economy with
the development of the single market and introduction of the Euro. Additional structural
reform is required, especially in their labor market. Such reforms can have tangible results.
In the four European countries that have moved furthest with structural reforms (Denmark,
Ireland, Netherlands, and United Kingdom), real fixed investment in the 1990s has risen
between three and ten times faster than for the EU as a whole.
2
Similar structural challenges are presented on a larger scale in Japan. Steps have been
taken to reverse the poor economic performance of recent years. But as the Japanese
authorities recognize, enormous obstacles remain if Japan is to achieve the kind of dynamic
market-driven growth that its people deserve. Successful structural change will also depend on
the maintenance of a supportive macroeconomic policy environment; private sector estimates
from Consensus Economics suggest that the Japanese economy will grow less than one percent
this year.
Restoring the Balance in U. S. Saving and Investment
While a substantial portion of our current account deficit reflects weak foreign growth,
the deficit also reflects the strength of recent, rapid increases in private U.S. investment that
has not been matched by domestic saving. As a result, we have had to "import" foreign
savings. This shortfall reflects long-term trends in U.S. personal saving. During the 1980s
and early 199Os, net national saving fell steadily, from a high of nearly 10 percent of GOP in
1979 to a low of approximately 3 percent of GOP in 1993. More recently, net national saving
has risen substantially and has recovered to 6.5 percent of GOP, thanks to our dramatically
improved fiscal stance as a consequence of the budgetary discipline applied by the President
and Congress. However, continuing declines in personal saving rates have resulted in a
leveling off of this trend, while investment has continued to increase.
At the same time, foreign investors have found the United States a relatively attractive
place to invest, so foreign inflows have taken the place of domestic saving. Expected returns
have been high, the economy healthy, and productivity has risen remarkably. U.S.
macroeconomic policies are fundamentally sound, and the U.S. economy is one of the most
flexible and open economies in the world. As a result, returns are higher in the United States
than in many other destinations for capital. A recent McKinsey report showed that the relative
returns to financial investments in the United States are 20 to 25 percent higher than in Japan
or Germany. It is this difference in relative returns that has helped to attract strong capital
inflows to the United States in recent years.
The United States remains an attractive place to invest, but we face the task of
increasing national saving and remaining open to competition and market forces. The federal
government can set a good example by maintaining fiscal discipline and continuing to run
budget surpluses. We must also keep our markets open. Attempts to close our markets are
likely to backfire and damage the high level of confidence foreign investors have in the U.S.
economy.
Financing the Current AccoUIII Deficit
As our current account deficit expands, so too have concerns by some about our ability
to finance it smoothly. By the third quarter of 1999, the deficit reached $360 billion, or 3.9
percent of GOP, at an annua]j~ rate. Some recent forecasts, such as Consensus Economics,
3
place the 2000 deficit above $400 billion. As Chairman Greenspan indicated in his recent
Humphrey-Hawkins testimony:
"Growing net imports and a widening current account deficit require ever larger
portfolio and direct foreign investments in the United States, an outcome that cannot
continue without limit. "
It is helpful, however, to put the current account deficit and the counterpart
n': (
capital
inflows, in perspective. For the first three-quarters of 1999, the deficit represented he
difference between current account receipts of $1.2 trillion and payments of $1.5 ~r ilion, both
at annual rates. During the same period, recorded capital inflows were $760 billiel at an
annual rate and recorded outflows were $362 billion. On a gross basis, total U.S international
capital transactions are considerably higher -- totaling $12 to 13 trillion for the fi;'st threequarters of 1999 on an annual basis. These transactions reflect movements and reallocations in
investor portfolios as well as new investment. As long as we maintain sound tY.:onomic
policies and open and flexible labor, capital, and goods markets, global financ'a! markets can
reasonably be expected to cover the gap between our investment and saving S ;:loothly, and we
need not be overly concerned about the financial counterpart of our current a.;count deficit.
In addition to promoting sound economic polices in the United States and encouraging
reforms to help restore domestic demand-led growth abroad, a crucial component of our
approach to the trade deficit is the,opening up of foreign markets to U.S. goods and services.
To this end, as you heard from Richard Fisher, the Clinton Administration has completed
nearly 300 separate trade agreements - some sectoral and others, like NAFfA, more broadly
based. One of our highest priorities this year is to work closely with Congress to secure
Normal Trade Relations with China in connection with China's entry into the WTO, which we
believe is strongly in our national interest.
Some have pointed to the service sector as an untapped potential for U.S. exports. At
the Treasury Department, we have focused our efforts on liberalizing trade in financial
services, where American financial institutions are recognized as world leaders in product
innovation and management For foreign economies, financial liberalization can lower the
costs of capital to their companies and citizens while inviting in highly capitalized firms that
raise the standards of financial practices domestically, and many countries have recognized
these benefits. One hundred and seven countries have made financial services commitments
under the World Trade Organization, by far the most of any services sector. We intend to
broaden and deepen these commitments as part of the GATS (General Agreement on Trade in
Services) 2000 negotiations, which are now getting underway in Geneva.
Conclusion
Let me summarize my remarks. In order to reduce our current account deficit over
time, which is desirable, other countries must do their part to restore robust global growth, and
we must increase our national savings rate. A return to a more balanced pattern of global
4
growth should help to relieve pressure on the U.S. current account. It is far better to achieve
adjustment through faster growth abroad than low growth in the United States. In addition,
our economy's flexibility has helped us prosper over most of the past decade; this flexibility
should also help boost our saving and ease the transition to lower trade and current account
deficits in the future.
Thank you for your attention. I will be pleased to respond to your questions.
-30-
5
DEPARTMENT
OF
THE
lREASURY fit)
TREASURY
NEW S
1789
OFFICE OF PUBUC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C. - 20220 - (202) 622·2960
FOR Th1MEDIATE RELEASE
March 13,2000
Contact:
Bill Buck
(202) 622-2960
TREASURY DEPARTMENT ANNOUNCES RULE ON NEW FINANCIAL ACTIVITIES
The U.S. Treasury Department announced on Monday an interim final rule for national
banks to request the Treasury Secretary to designate activities as new financial activities.
The Financial Modernization Act authorizes financial holding companies and financial
subsidiaries of national banks to engage in activities that are financial in nature or incidental to
financial activities. The Act also authorizes the Secretary of the Treasury and the Federal
Reserve Board (for national banks and financial holding companies, respectively) to designate. in
consultation with one another, additional activities as financial in nature or incidental to a
financial activity.
The interim final rule outlines the procedures by which the Treasury Secretary designates
an activity as financial in nature. The rule explains the consultation process with the Federal
Reserve Board and indicates that the Secretary may request public comment on whether an
activity should be considered financial in nature or incidental to a financial activity.
-30-
LS-4S8
w press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202)
~
622-2040
~
PUBLIC
DEBT
NEWS
,./6\\·
---~~----::------:--:--:::--:-:-:-~-------:-~-----:-~-:----:~/~
vJ3LIC 1)~v
Department of the Treasury • Bureau of the Public Debt· Washington, DC 20239
TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
CONTACT:
JR IMMEDIATE RELEASE
:lrch 13, 2000
Office of Financing
202-691-3550
RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
91-Day Bill
March 16, 2000
June 15, 2000
912795EA5
Term:
Issue Date:
Maturity Date:
CUSIP Number:
5.730%
High Rate:
Investment Rate 1/:
5.893%
Price:
98.552
All noncompetitive and successful competitive bidders were awarded
!curities at the high rate.
Tenders at the high discount rate were
.lotted 82%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tender Type
Tendered
Competitive
Noncompetitive
$
PUBLIC SUBTOTAL
28,012,812
1,341,540
$
SUBTOTAL
6,843,419
1,341,540
8,184,959 2/
29,354,352
345,000
345,000
29,699,352
8,529,959
4,219,310
4,219,310
Foreign Official Refunded
Federal Reserve
Foreign Official Add-On
TOTAL
Accepted
o
$
33,918,662
o
$
12,749,269
Median rate
5.715%: 50% of the amount of accepted competitive tenders
s tendered at or below that rate.
Low rate
5.680%:
5% of the amount
accepted competitive tenders was tendered at or below that rate.
i-to-Cover Ratio
= 29,354,352
/ 8,184,959
= 3.59
Equivalent coupon-issue yield.
Awards to TREASURY DIRECT = $1,038,142,000
http://www.publicdebt.treas.gov
LS-459
.-
PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
FOR IMMEDIATE RELEASE
March 13, 2000
CONTACT:
Office of Financing
202-691-3550
RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
Term:
Issue Date:
Maturity Date:
CUSIP Number:
182-Day Bill
March 16, 2000
September 14, 2000
912795EF4
5.860%
High Rate:
Investment Rate 1/:
Price:
6.124%
97.037
All noncompetitive and successful competitive bidders were awarded
securities at the high rate.
Tenders at the high discount rate were
allotted 58%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tendered
Tender Type
Competitive
Noncompetitive
$
19,391,012
1,130,246
$
Foreign Official Refunded
SUBTOTAL
Federal Reserve
Foreign Official Add-On
3,758,712
1,130,246
4,888,958 2/
20,521,258
PUBLIC SUBTOTAL
TOTAL
Accepted
2,620,000
2,620,000
23,141,258
7,508,958
3,390,000
3,390,000
o
o
$
26,531,258
$
10,898,958
Median rate
5.850%: 50% of the amount of accepted competitive tenders
'as tendered at or below that rate. Low rate
5.800%:
5% of the amount
If accepted competitive tenders was tendered at or below that rate .
.id-to-Cover Ratio
=
20,521,258 / 4,888,958
=
4.20
/ Equivalent coupon-issue yield.
/ Awards to TREASURY DIRECT = $829,928,000
http://www.publicdebt.treas.gov
Ls-460
}) E P ,\ R T \" E N T
0 F
THE
T REA S tl R Y
.
TREASURY
OFFlCE OF PUDLJC AFFAIRS -1500 PENNSYLVANH. AVENUE, N.W .• WASIUNGTON. D.C.- 10110 - (101) 622·1960
BMBARGOED UHT:IL 9:00 A.M.
March 14, 2000
PUBL:IC CONTAC'l': Office of FinaDcing
202-691-3550
MEDIA CONTACT: Bill Buck
202-622-1997
TREASURY ANNOUNCES DBBT BUYBACK OPBRATIOS
On March 16, 2000, the Treasury will buy back up to $1,000 million par
of its outstanding issues that mature between May 2018 and November 2021.
Treasury reserves the right to accept less than the announced amount.
This debt buyback (redemption) operation will be conducted by Treasury's
riscal Agent, the Federal Reserve Bank of New York, using its Open Market
operations system. Only institutions that the ~edera1 Reserve Bank of New
York has approved to conduct Open Market transactions may submit offers on
behalf of themselves and their customers. Offers at the highest
accepted price for a particular issue may be accepted on a prorated basis,
rounded up to the next $100,000. As a result of this rounding, the Treasury
may buy back an amount slightly larger than the one announced above.
This debt buyback operation is governed by the terms and conditions set
forth in 31 CPR Part 375 and this announcement.
The debt buyback operation regulations are available on the Bureau of
the Public Debt's website at www.publicdebt.treas.gov.
Details about the operation and each of the eligible issues are given in
the attached highlights.
000
Attachment
s-461
'or press releases, speeches, public schedules and official biographies, caU our 24·hour fax line at (202) 622·2040
HIGHLIGHTS OF TREASURY DEBT BUYBACK OPERATION
March 14, 2000
Par amount to be bought back .•.••••••• Up to $1,000 Bd1liOD
Operation date •.•.••••.•••.•• •·••••·•• March 16, 2000
Operation close time •••••••••••••••••• 11:00 a.m. Eastern Standard tiDe
Settlement date •.•.•..•...•.•.•••.•..• March 20, 2000
~n~ par offer amount
.•.•••.•.•.•• $100,000
Multiples of par •••••.••.•.•.•.•.•••• $100,000
For.mat for offers •.••. Expressed in terms of price per $100 of par with
three decimals. The first two decimals represent
fractional 32~ of a dollar. The third decimal
represents eighths of a 32 M of a dollar, and must
be a 0, 2, 4, or 6.
Delivery instructions
..•••••••.•••.• ABA NUmber 021001208 FRB NYC/COST
TreaSUry issues eligible for debt buyback operation (in millions):
Coupon
Rate (%.)
9.125
9.000
8.875
8.125
8.500
8.750
8.750
7.875
8.125
8.125
8.000
CUSIP
Maturity
Number
Date
05/15/2018 912810 EA 2
11/15/2018 912810 BB 0
02/15/2019 912810 BC 8
08/15/2019 912810 ED 6
02/15/2020 912810 EE 4
05/15/2020 912810 BY 1
08/15/2020 912810 EG 9
02/15/2021 912810 EH 7
05/15/2021 912810 EJ 3
08/15/2021 912810 EK 0
11/1Sn021 912810 BL 8
Total
Par Amount
OUtstanding*
8,709
9,033
19,251
20,214
10,229
10,159
21,419
11,113
11,959
12,163
32,798
167,047
Par Amount Par Amount
Privately
Held as
Held*
STRIPS*
7,478
5,675
8,494
5,329
17,566
7,920
18,373
913
8,868
2,037
8,765
6,710
19,891
12,093
10,273
1,099
10,644
4,858
10,603
2,306
29,936
19,394
150,891
68,334
* Par amounts are as of March 10, 2000
The difference between the par amount outstanding and the par amount
privately held is the par amount of those issues held by the Federal
Reserve SYBt:.am.
,
DEPARTMENT
OF
THE
TREASURY
OFFICE OF PUBUC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C. - 20220 - (202) 622-2960
EMBARGOED UNTIL 12:30 EST
Text as Prepared for Delivery
March 14,2000
"THE CASE FOR NORMAL TRADE RELATIONS WITH CHINA"
TREASURY SECRETARY LAWRENCE H. SUMMERS
REMARKS TO THE ELECTRONICS INDUSTRY ASSOCIATION
WASHINGTON, DC
Thank you. I would like to focus my remarks today on the case for granting Permanent
Normal Trading Relations (PNTR) to China.
There are many ways to make the case for granting permanently to the largest country in
the world the access to our markets that it enjoys more conditionally today. But let me start by
emphasizing one crucial point: these arguments have very little to do with helping China - and
everything to do with promoting America's core interests.
Last fall, the United States signed a bilateral agreement with China to bring it into the
World Trade Organization, on terms that will open its markets to American products and
investment. After China completes its agreements with other countries, it will join the WTO. But
for us to enjoy the benefits of its entry we must first grant it the same permanent normal trading
status that we have already granted to every other country with whom we share the benefits of
the WTO.
The President submitted to Congress last week legislation that would achieve this. I will
discuss in a few moments the concrete commercial advantages for the United States of passing
this bill. I believe they are enormous. But let me be clear. Even if these advantages were very
small, it would be in our interest to take this step, because the agreement with China is quite
simply a one-way street.
•
This vote is not about whether China will enter the WTO: it will become a member either
way.
•
It is not about whether Chinese producers will have access to our market: they will continue
to be able to sell their goods in the United States whether or not Congress passes PNTR.
LS - 462
For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
·U.S Governmenl P"nlln~ 011 lee 1998·619·559
•
It is not about whether we approve or disapprove of China's human rights record: we will
continue to condemn it in the United Nations Human Rights Commission and other fora.
either way.
•
It is not about China's policies toward Taiwan or other strategic issues that concern us: we
will continue to insist on peaceful resolution of differences between the PRC and Taiwan.
and to press China to respect global norms of conduct in nuclear nonproliferation and other
areas, either way.
There is no disadvantage to the United States in passing this legislation. We will continue
to press our full agenda with China regardless of how Congress votes. And China will open its
markets to other members of the WTO when it joins the system. All that PNTR does is ensure
that America enjoys the benefits that every other country will obtain.
There are, however, three crucial advantages to the United States in passing this bill:
•
First, there are the direct and commercial benefits of the market opening agreement that we
concluded last fall.
•
Second, there are the economic and broader benefits to the United States of promoting
economic and social change in China.
•
Third, there is the ultimate enhancement of America's national security interests that comes
from integrating China more closely with the community of nations
I.
The Commercial Benefits to the United States of Granting PNTR
By passing PNTR we will be agreeing to continue to grant China the same access to our
markets that its producers currently enjoy. What we will get in return - as a result of the
agreement we concluded last fall - is unprecedented new access to what could ultimately become
the largest market in the world.
With this deal in force:
•
Chinese tariffs will fall by 50 percent or more in the space of five years, and other import
barriers either eliminated or greatly reduced, in a wide range of sectors that are important to
the United States. For example:
•
Tariffs in the automobile sector will fall from 80-100 percent to 25 percent by mid-2006,
with the largest cuts in the first years after WTO accession. Auto quotas will be phased
out. And American auto companies will be allowed to provide auto financing for the first
time.
•
China will participate in the Information Technology Agreement (IT A), eliminating all
tariffs on computers, semi-conductors and other high-tech products.
2
•
Tariffs on the broad range of agricultural goods will fall by roughly one half, with larger
cuts for US priority goods. And Chinese export subsidies on agricultural goods will be
eliminated.
•
China would phase out a wide range of restrictions in a broad range of services, including
distribution, banking, insurance, telecommunications and professional services such as
accountancy and legal consulting. Instead of having to produce in China and sell through a
state-sponsored middleman, over the course of the next three years American businesses will
win the right to distribute goods directly - goods that are made here at home.
•
We would also acquire special safeguards in the WTO against dumping and surges in imports
from China, along with other key protections with respect to forced technology transfer
requirements and the practices of state-owned-enterprises. These provisions will ensure that
American businesses and workers have strong formal protection against unfair trading
practices in China going forward. No WTO accession agreement has ever contained stronger
measures to guarantee fair trade and to address practices that distort trade and investment.
To those who are concerned that these commitments by China will not be honored, let me
assure you that we are already preparing for the most intensive enforcement effort ever mounted
for a single trade agreement. Such concerns cannot be a reason to reject an agreement that will
allow us to use global enforcement mechanisms of the WTO to keep China to its word. Some of
China's most important decisions will for the first time be subject to international review, with
rules and binding mechanisms for resolving disputes.
In these and other ways, the concessions involved in this agreement are all on China's
side. All that it requires is we pass PNTR - so that these new markets do not flow instead to
other countries.
D.
America's Stake in Promoting Successful Market Reform in China
I have spoken of the direct commercial advantages of this agreement. But there are also
crucial indirect advantages for the United States in helping to promote the path of Chinese
reform.
China has come a long way since the beginnings of market reforms a little over 20 years
ago. Its economy has grown by more than 350 percent in real terms. It has risen to being 11 th
largest trading nation in the world. And the number of Chinese with access to a television has
risen one hundred-fold, to one billion.
And yet, in part as a result of the government's partial approach to reform, China's
economy and society are also showing increasing signs of strain:
•
The financial sector is mired in debts, but is still making the majority of its loans to a lossmaking state-owned enterprise sector that accounts for only around one third of economic
output.
3
•
Each year many millions of people migrate to the cities in search of jobs. and in many places
unemployment is now well into double digits.
•
And the country still suffers from poorly developed market institutions and the lack of a
reliable rule of law. These pose a growing burden at a time of enormous economic and social
change. Smuggling and corruption, drugs and arms trafficking all pose a rising threat.
As the President has said, as they confront these problems, the Chinese authorities face a
dilemma: they realize that closer integration with the global economy risks unleashing forces that
they cannot control. Notably, opening China more fully to the revolution in communications and
technology will provide ordinary Chinese with unprecedented freedom and access to information
- access that experience suggests that China will not long be able to control. But the government
also knows that without competition and integration, China will not be able to attract the
investment and know-how that it needs to build a modem economy and deliver rising living
standards and stability to its 1.3 billion people.
It is a lesson of the history of international trade agreements since the start of the GATT
that the greatest benefits come not from the concessions that you receive from other nations but
from the concessions that you make. In choosing to sign this agreement and enter the WTO,
China is locking into place a more rapid process of market opening and reform of its economy.
And it is submitting itself to a global rules-based system, based on core standards such as
transparency and checks on arbitrary government action.
We have an enormous economic and broader stake in supporting that decision.
•
Because it will help strengthen the hand of economic reformers in China, and make it more
difficult for others to seek to tum back the clock. The growth of the private sector could then
playa vital role in absorbing workers that are being laid off from inefficient state-owned
firms.
•
Because it will help support faster growth in productivity and wages in China - and thus
higher real living standards in China and higher demand for our products in the future.
•
And we have an enormous stake in supporting that decision because it will provide a catalyst
for broader changes that will help to promote core American interests and values. As
competition and integration proceed, China will need to become more market-based; more
protective of personal and commercial freedoms, and more open to the free flow of
information and ideas.
Already, we are seeing these positive effects in renewed commitment to reform at the
highest levels of the Chinese leadership that is expressly linked to the need to prepare the
economy for tougher competition from the outside world. For example:
•
The government has stepped up efforts to promote the development of private firms, the most
dynamic sector of China's economy, by eliminating heavy deposit requirements and other
4
regulations which discriminate against them and allowing them to list themselves on the
stock market for the first time.
•
PBOC Governor Dai has pledged to intensify efforts to clean up bad loans within the banking
sector and to enhance competition among banks by permitting more flexible interest rates. A
regulatory overhaul is underway to level the playing field between foreign and domestic
firms in line with WTO commitments.
•
As the Wall Street Journal reported only yesterday, even parts of the economy that the
Chinese consider strategically important are being opened up to the private sector, with
individual irivestors already dominating the Chinese Internet industry and being allowed take
ownership stakes in domestic banks for the first time.
ill.
The Droader National Strategic Case for Supporting Greater Integration of China
Finally, a policy of welcoming China into the community of nations - rather than being a
voice that keeps China out, even when it commits to live by the rules - is a policy that supports
our deepest national security interests.
Ever since the rise of Assyria and Sparta, emerging economic strength and major changes
in the economic balance of power have raised the specter of war and conquest. In this century
alone we have seen two World Wars that followed closely on the emergence of major new
economic powers. And the pace of economic change in China - and indeed through much of Asia
- is literally unprecedented in history, with standards of living for billions of people quadrupling
or more in a single generation.
That this has so far been achieved with the minimum of conflict, despite the pervasive
rivalries between the peoples of Asian nations, is a reflection of the progress that has been made
across the region toward openness and integration. And it speaks to the success of postwar
international institutions in helping to cement that progress. But if the next quarter century in
Asia is to be as successful as the last it will be crucial that China define its greatness in a
constructive way and that it fit into the global economic system.
As President Clinton has said, if we have learned anything in the last few years, from
events in Russia and elsewhere, it is that the weaknesses of great nations can pose as a big a
challenge to the United States as their strengths. Our long-term strategy must be to encourage the
right kind of success in China: to help it grow into a strong, prosperous and open society, to
come together not fall apart, and to become part of institutions that promote our deepest values
and interests and can build mutual trust. And we have a much greater chance of having a positive
influence if we welcome it into the broader global system.
This is a policy based not on mutual affection but mutual respect. As I said at the
beginning, we can and will continue to express our differences with China both forthrightly and
consistently. What we must not do is seek to cut China off from the economic and broader
forces that are most likely to change it in the right direction.
5
st
At bottom, we believe that in a 21 century global economy China will increasingly have
to recognize that to maintain stability and growth at home, it must meet, rather than stifle, the
growing demands of its people for openness and accountability. As the President has said, simply
bringing China into the WTO does not guarantee that its government will take this course. But it
will force the authorities to confront that choice sooner, and it will make stronger and more
visible the imperative to make the right choice.
By supporting China's entry into the WTO we have already paved the way for an historic
change in China's relations with the broader global economy. All that remains is for us to grant
PNTR to China so that American businesses, workers and farmers can enjoy the benefits. I do
not believe that this should be a difficult step for the United States to take. Thank you.
-30-
6
DEPARTMENT
OF
THE
TREASURY
NEWS
TREASURY
OFFICE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C. • 20220. (202) 622-2960
BOAKlJ Uf< ljUVERNORS OF THE FE'i>ERAL RESERVE SYSTEM
DEPARTMENT OF THE TREASURY
FOR IMMEDIATE RELEASE
March 14,2000
Contact:
Dave Skidmore
Federal Reserve
(202) 452-2955
Bill Buck
Treasury
(202) 622-2960
FEDERAL RESERVE AND TREASURY DEPARTMENT ANNOUNCE INTERIM RULE
ON ALTERNATIVE TO RATED DEBT REQUIREMENT FOR FINANCIAL SUBSIDIARIES
The Federal Reserve Board and the Secretary of the Treasury today announced their
approval of an interim rule, effective March 14, 2000, establishing alternative criteria for debt
ratings that certain large banks may satisfy in order to establish a financial subsidiary under the
Financial Modernization Act.
Under the act, a national or state member bank ranked among the largest 50 insured
banks may control a financial subsidiary only if the bank meets certain criteria, including having
an issue of highly rated debt outstanding. The next 50 largest insured banks may control a
financial subsidiary if they satisfy this debt rating requirement or an alternative requirement
determined by Treasury and the Federal Reserve Under the interim rule, a bank meets the
alternative requirement if it has a current long-term issuer credit rating from a nationally
recognized statistical rating organization that is within the three highest investment-grade rating
categories used by the rating organization
Comments will be accepted on the interim rule until May 15, 2000
###
LS-463
DEPARTl\1ENT
OF
THE
TREASURY
NEWS
TREASURY
~~~_ _ _ _ _ _ _ _~/78~9~_ _ _ _ _ _ _ _ _ __ _
OmCE OF PUBUC AFFAIRS .1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C .• 20220 • (202) 622-2960
u.s. International Reserve Position
The Treasury Department today released u.s. reserve assets data for the week ending March 10, 2000.
As indicated in this table, U.S. reserve assets totaled $69,979 million as of March 10,2000, up from $69,616 million as
of March 3, 2000.
(in US millions)
TOTAL
1. Foreign Currency Reserves
a. Securities
I
1
Euro
Yen
4,861
5,955
8,346
11,526
Of which, issuer headquartered in the U. S.
b. Total deposits with:
b.i. Other central banks and BIS
b.ii. Banks headquartered in the U.S.
b.iL Of which, banks located abroad
b.iii. Banks headquartered outside the U.S.
b.iiL Of which, banks located in the U.S.
2. IMF Reserve Position
March 10 1 2000
69,979
March 31 2000
69,616
I. Official U.S. Reserve Assets
TOTAL
10,816
0
19,872
0
0
Euro
Yen
TOTAL
4,893
6,040
10,933
0
8,386
11,693
20,079
0
0
0
0
0
0
17,598
17.622
,
2
i
I
3. Special Drawing Rights (SDRs)
4. Gold Stock
2
10,282
10.296 :
Ii
11,048
11,04E\,
0
CI
II
I
3
5. Other Reserve Assets
11 Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account
(SOMA), valued at current market exchange rates. Foreign currency holdings listed as securities reflect marked-to-market values, and
deposits reflect carrying values.
21 SDR holdings and the reserve position in the IMF are based on IMF data and revalued in dollar terms at the official SDRIdoliar exchan;e
rate. Consistent with current reporting practices, IMF data for March 3, 2000 are final. Data for SDR holdings and the reserve position in t:le
IMF shown as of March 10, 2000 (in italics) reflect preliminary adjustments by the Treasury to the March 3, 2000 IMF data,
31 Gold stock is valued monthly at $42.2222 per fine troy ounce, Values shown are as of January 31,2000. The December 31. 1999
W3S
val~e
$11,048 million.
L5-464
For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
U.S. International Reserve Position (cont'd)
II. Predetermined Short-Term Drains on Foreign Currency Assets
March 3, 2000
March 10, 2000
-
o
1 Foreign currency loans and securities
2 Aggregate short and long positions In forwards and
futures In foreign currencies vis-a-vis the U.S. dollar
2 a Short pas/lions
2 b Long positions
3 Other
o
o
o
III. Contingent Short-Term Net Drains on Foreign Currency Assets
March 3, 2000
1 Contingent liabilities In foreign currency
1 a Collateral guarantees on debt due within 1 year
1.b. Other contingent liabilities
2 Foreign currency securities with embedded options
3 Undrawn, unconditional credit lines
3 a. With other central banks
3.b. With banks and other financial institutions
headquartered in the U. S
3 c With banks and other financial institutions
headquartered outs/de the U. s.
4 Aggregate short and long positions of options in foreign
currencies vis-a-VIs the U S dollar
4.a Short positions
4.a.1 Bought puts
4.a.2. Written calls
4.b. Long positions
4.b.1 Bought calls
4.b.2. Written puts
March 10, 2000
o
o
o
o
c
Ottical Reserve Assets Worksheet
(actual US dollar amounts)
Enter Dates Here
Last Week
3-Mar-00
Foreign Currency
Euro Securities
Yen Securities
3-Mar-00
10-Mar-00
$4.860.885.351.16
$4.892.923.766.39
32.038,41523
~5,954,824,833.02
~6,040,307,462.12
85,482.629.10
$10,933,231,228.51
~8,386,41 0,053.61
~11 ,692,624,875.64
$20,079.034,929.25
$31.012.266.157.76
$0.9659
Y 106.27
117.521.04433
Sec. Total
$10,815,710,184.18
Euro Deposits
Yen Deposits
Deposit Total
~8,345,626,087.70
,526,408, 101.85
$19.872,034,189.55
Total
Euro Rate
Yen Rate
$30.687,744.373.73
$0.9618
Y 107.80
IMF
This Week
10-Mar-00
~11
3-Mar-00
Source NY Fed
40,783.965.91
166.216.773.79
207.000.739.70
324.521.784.03
10-Mar-00
Source: IMF (fax)
(prelim. with adjust.)
Reserve Tranche
GAB
NAB
Total
SDR
17.597.686.292.27
0.00
17.622.172,781.31
0.00
0.00
17,597,686,292.27
0.00
17,622,172,781.31
24,486,489.04
10.282.185.876.40
10.296,493.133.94
14.307.257 54
3-Mar-00
10-Mar-00
11.048.272.032.71
11.048,272.032.71
24,486,48904
000
0.00
0.00
as of 1/31/00
Gold
Source FMS (monthly statement)
0
3-Mar-0~1
1o-Mar-o~1
lather Res.Assets
ITOTAL
Source (?)
363.315.53061
69,615,888,575.11
69,979,204,105.72 1
Adjustments to IMF and SDR data, translated at current exchange rates
fPrelfm.-j'MF-Oata"------------It.fsDR-s---------------------------------------------------SOR-ratefo~--------------------I
:Calculation Section
: Reserve Tranche
:GAB
I
:NAB
I
:
I
!~!?~~
3-Mar-00
13.133.100,487
0
0
Adjustments
13.133.100,487
0
10-Mar-00
0.74526
Q
13.133.100,487
Total
=
_________________________ ?!~?~!~~~!~?:_______________________________~..?_7_~._5_~~~4..~~ _____ ~_~~~_:__
In USD
$17.622.172.781.31
$0.00
SO.OO
$17.622.172.781.31
$10.296.493.133.94
DEPARTMENT
OF
THE
TREASURY
NEWS
OFFICE OF PUBUC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASIllNGTON, D.C. - 20220 - (202) 622-2960
F or Immediate Release
March 15, 2000
Contact: Public Affairs
(202) 622-2960
TREASURY CONVENES IDENTITY THEFT SUMMIT
Treasury Secretary Lawrence H. Summers convened a two-day National Summit on
Identity Theft today and announced four new initiatives targeted at cracking down on the
increasing threat of identity theft.
"Criminals are exploiting new technologies to make a significant profit from an old
crime," said Treasury Secretary Summers. "We will continue to work with the private sector to
strengthen our efforts to combat this threat."
Called for last year by President Clinton, the Summit will address the prevention of
identity theft, remediation and enforcement efforts with the public and private sector. The
Summit will consist of a series of panels and more than 150 participants from federal, state and
local government agencies, financial institutions, credit card companies and reporting agencies.
as well as identity theft victims, consumer advocacy groups and private sector representatives.
The four new Treasury initiatives to help combat identity theft include:
•
Skimming and counterfeit check databases currently used to identify common suspects,
defendants of identity theft, and address criminal trends prevalent in financial crimes today.
These databases were developed and are maintained by the U.S. Secret Service in partnership
with the financial industry;
•
A computer-based training module developed by the U.S. Secret Service that will focus on
financial crimes and all pertinent statutes including identity theft, and be made available
within the agency as well as local and state law enforcement officials throughout the U.S.:
•
A pilot program, developed by the U.S. Secret Service and Citicorp, to help identify
suspicious activity on electronic commerce. The program will attempt to develop a protocol
for the identification of identity theft and other schemes used to commit bank fraud, credit
fraud and money laundering within electronic commerce and the immediate notification of
law enforcement authorities; and
•
Forums and mini-conferences to maintain a dialogue between the private and public sector.
Treasury's National Summit on Identity Theft is the first national level conference
involving law enforcement, victims, industry and nonprofits interested in the issue.
LS-465
- 30For JJ1ih%feases, speeches, public schedules and official biographies, call our 24.1zour fax line at (202) 622-2040
·u.s
Government Printing Ollie" 1998·619-559
DEPARTMENT
OF
THE
fl'RRASURY (i.ef~
'JJ_
]'"'So .~.
~'
.
IS". 'tIl
,\,:1
~
TREASURY
NEW S
~/78f9~. . . . . . . . . . . . . . . . . . . . . . . . . . . .. . .
..............................
OFFICE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE. N.W.• WASHINGTON. D.C.. 20220. (202) 622-2960
EMBARGOED UNTIL 6:45 PM EST
Text as Prepared for Delivery
March 15, 2000
"'ELECTRONIC COMMERCE AND FINANCE"
TREASURY UNDER SECRETARY FOR DOMESTIC FINANCE GARY GENSLER
REMARKS TO THE BANK AND FINANCIAL ANALYSTS ASSOCIATION
NEW YORK, NY
Good evening and thank you for inviting me to speak here tonight. I'm pleased to have the
opportunity to talk about how technology is rapidly changing the world of finance.
There may be no part of our economy that is more suited to delivery in electronic form than
financial services. The Internet is rapidly changing the way Americans borrow money, the way
they get insurance, the way they save their money and the way they invest it. The Internet can
bring information on financial products to consumers in the comfort of their home or,
increasingly, any place they may be at any time Financial firms will be competing in ways they
never have before. The potential for greater access, efficiency, competition, and innovation are
tremendous.
The Changing Environment for Financial Services
Technology is creating tremendous opportunities for expanded access to financial services. The
Internet creates a 24-hour marketplace for financial services. While just under 30 percent of all
households in the U.S had Internet access in 1999, this figure will most certainly grow
significantly.
The most important financial decisions that Americans make - decisions about mortgages, life
insurance, auto and home owners insurance, auto loans, investing their savings - can all be aided
by the Internet. We have come from a world where consumers were much more reliant on their
local bankers, insurance agents, and brokers. We are moving into a world where information can
be obtained from a broad variety of sources through the Internet, presented in a way that helps
consumers find the product that best serves them. American consumers and the economy at large
stand to benefit greatly from the enhanced services and competition fostered by the Internet.
L8-466
r;'or press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
'U S Government Printing Office 1998·619·559
Consumers now are rapidly moving from using the Internet as an information-gathering tool to
conducting transactions on line. Today, more than seven million Americans have on-line accounts
to invest in the stock markets. Most other areas of Internet finance remain relatively small,
however, and still have a great deal of growth opportunity.
Tremendous savings can be achieved in moving from paper to electronic information, enabling
financial services to be provided at lower costs to consumers and business. Savings can be
achieved both by improving productivity gains and by reducing the need for investments in
physical assets. One consulting firm estimates that some transactions that cost $5.30 to do at a
teller's window would cost as little as $0.09 on line.
Efficiency gains will also come on the institutional side, in business-to-business transactions.
Institutional customers can gain greater access to dealer books electronically and equity and other
underwriting may move on-line. New electronic communications networks (ECNs) also represent
important opportunities for greater efficiency and competition in the trading markets.
While these developments represent enormous opportunities for financial service providers, they
also bring very real challenges. New business models certainly will emerge. Operating margins
may shrink just as the need to invest to stay competitive grows. Many of today' s financial
institutions may be encumbered by legacy systems, sales forces, and physical assets. In this
environment, financial institutions will have to look very carefully at where they add value. Many
institutions will adapt well. Others may struggle and no doubt some will not survive in their
current form.
Financial institution regulators will have the challenge of keeping up with the changing business
environment and of gauging how well institutions are coping. Regulators will have to recognize
institutions that are not making the adjustment or are taking on excessive risk, possibly to
compensate for shrinking profitability elsewhere.
While Internet access is greatly expanding, it is important that a gap not develop between those
who have access to computers and those who don't. This "digital divide" threatens to become a
tactor in access to financial services In the 21 sl Century, computer access is fast becoming what
access to running water and electricity was in the early 20 lh Century -- basic utilities that we need
to ensure everyone has to participate fully in the modem economy.
Treasury Success at E-Commerce
At Treasury, we have had significant success using new technologies. In some areas, we are
ahead of the private sector.
Treasury runs one of the largest payment collection systems in the world, with more than $1.3
trillion or two out of every three dollars, of U.S. government revenue now collected
electronically. Individuals can pay their taxes on line. More than three-quarters of all government
2
benefit payments are now made electronically. So are almost sixty percent of payments to
vendors.
We also are the world's largest issuer of smart cards. This year we will issue close to a quarter of
a million smart cards at U.S. military installations throughout the world. We also are developing
or testing a variety of new programs, including digital cash, secure Internet e-mail for the delivery
of digital checks to vendors, and ACH debit authorizations over the Internet.
Sales of Treasury debt, both retail and institutional, also take advantage of new technologies.
Auctions of Treasury securities are now entirely electronic, as the last paper bidders were recently
moved to an Internet-based system. Consumers holding Treasury securities through the Treasury
Direct program can make purchases or reinvest on line or through an automated phone system.
Even Savings Bonds can now be purchased over the Internet.
Challenges
I would like to turn now to four issues that are particularly relevant for the financial services
industry: privacy, electronic signatures, payments systems, and trading market structures.
Privacy
If electronic commerce is to live up to its full potential, consumers must have confidence in their
ability to maintain their privacy, as well as other critical consumer protections. The ability to
protect one's privacy is a core value that all Americans share.
The Administration has stressed the importance of industry leadership to create effective privacy
protections through self-regulation. But there are several areas of such sensitivity that the
government does have a role to play, and that is concerning medical information, children, and
financial privacy.
Americans should not have to forgo participating in our modern economy to preserve their
privacy. The challenge is to preserve the benefits of competition and innovation that information
sharing and technology have brought while protecting the ability of consumers to preserve their
pnvacy.
Last year, the President called for greater consumer privacy protections, including for the first
time protections for personal financial information. We made significant progress toward greater
financial privacy as part of the financial modernization bill. We believe that the requirements for
clearly stated privacy policies, for consumer notices and for the right to opt out of third-party
information sharing are important advances in privacy protections.
But more can be done to protect personal financial privacy Consumer choice for sharing with
third parties should be a floor, not a ceiling. The President has called on Treasury, in consultation
3
with others in the Administration, to develop legislation to enhance consumer privacy, particularly
within financial conglomerates. We are consulting with industry, consumer groups, and Congress
to fulfill the Preside~t's mandate. Our objective is a balanced proposal that will both enhance
privacy protection and allow financial institutions to provide quality services. We hope to finalize
these proposals in the near term.
In a recent address, the President put two simple questions to business leaders:
Do you have privacy policies you can be proud of?
•
Do you have privacy policies that you would be glad to have reported in the
media')
I believe that the question of consumer control over personal information will become even more
pressing as technological innovation continues.
Electronic Signatures
The Administration supports electronic commerce and has been working to promote its
development wherever possible The government has an important role to play in facilitating this
progress. We need to make sure that our laws keep up with rapidly changing technologies and
markets. The application of laws written before the Internet was even an idea can create
uncertainty that is not in the interest of either business or consumers.
That is why the Administration is working with Congress on a critical step toward facilitating ecommerce through digital signature legislation. Two electronic signature bills, S.761 and
H. R. 1714, passed their respective Houses last year, and are on their way to conference. These
bills would allow any contract that can be entered into in writing to be entered into electronically.
We support this move to validate the use of electronic signatures and documents in place of
paper.
The House version goes further, however, allowing electronic delivery of a broad range of
records, disclosures, and notices that are now provided in writing. While this could be a very
important step forward, we should not take this step unless we can continue to provide the
consumer protections that Congress and the States have previously enacted.
A good digital signature bill will ensure that consumer protections in the electronic world are
equivalent to those in the paper world. A bill that promotes both electronic commerce and
consumer protection is in everyone's interest. But a bill that fails to preserve existing consumer
protections will be counterproductive, creating legal uncertainty for businesses and driving
consumers away from transacting on-line.
4
We believe that with some common-sense changes, we can achieve a good electronic signatures
bill. We are looking forward to working with Congress, industry, and consumer groups to
produce a win-win bill that will lower a barrier to electronic commerce.
Payments
One of the greatest opportunities of the Internet could be the payments area. Technology could
ultimately provide us with the means to permit safe, secure on-line movement of money.
Transferring money over the Internet could be paperless and therefore efficient. It could be
authenticated and therefore free of fraud. It could allow for real-time transfer offunds and
therefore eliminate credit risk. The challenge is how we get there. Many have tried, but their
efforts have yet to gain acceptance.
Virtually all on-line payments today are conducted using credit cards. But credit cards have
drawbacks that limit their use for broad Internet e-commerce. In many ways, credit cards are still
creatures of the paper-intensive retail store environment for which they were created. The
transaction cost is a 2-6% discount charged to the seller, making it an expensive payment
mechanism. Credit cards can be used for consumer retail transactions and small corporate
purchases, but not for most business-to-business payments or for person-to-person payments.
Additionally, credit card fraud is much higher on the Internet than off-line. For a variety of
reasons, many consumers continue to be reluctant to use their cards on-line.
The growth of electronic bill presentment and payment has been slow, as well. Estimates indicate
that close to eight percent of all households used some form of on-line banking service last year,
but less than 1% of consumer bills currently are viewed and paid on-line. Although several high
profile efforts to develop consumer electronic bill payment systems have been launched, the
market has not yet found a viable model. As an aside, I would note that, when electronic bill
payment does grow significantly, as I believe it will, it will create many challenges for the U.S.
Postal Service. Bills and bill payments represent the bulk of first class mail, one of the Postal
Service's most important revenue streams.
The lack of a viable Internet-based payment tool for business-to-business commerce is perhaps
even a more important issue today. In the business-to-business world, the number of paper
invoices and the paper checks continues to grow at a steady pace in spite of the growth of
electronic commerce. Part of the reason for this may be that no payment mechanism has yet been
developed for the Internet that is both safe and secure and that can carry related transaction
information along with the payment.
I believe the private sector will be able to find solutions to moving payments securely and
efficiently on-line. When this occurs, it will make a significant contribution to the growth of ecommerce and the economy as a whole.
5
Trading Markets
New technologies also are rapidly changing the way market professionals and investors trade in
the markets for securities and derivatives. These developments are leading to changes in the
structure of the markets themselves.
There already have been dramatic changes in the trading of equity securities. The proliferation of
electronic communication networks (ECNs) and proprietary trading systems has expanded the
ways that investors access the markets. ECNs now account for 30 percent of Nasdaq's trades.
We supported the removal of Rule 390 by the New York Stock Exchange to promote similar
market competition for listed securities. Increased market competition, however, may over time
change the way investors participate in markets. The challenge will be to promote market
competition and innovation, while at the same time ensuring vigorous quote competition among
market participants.
New technologies also will allow for significant changes in the way derivatives can be traded.
With important changes in existing law, the development of electronic trading networks could
facilitate interdealer trading in the over-the-counter (OTC) derivatives markets. That is why, last
fall. the President's Working Group on the Financial Markets called on Congress to remove
current legal impediments to the development of electronic trading systems and clearing systems
for OTC derivatives. These systems have the potential to enhance market transparency and
efficiency and to reduce counterparty risks for participants. We are working with Congress to
include these provisions in legislative proposals to reauthorize the Commodity Futures Trading
Commission (CFTC) this year.
Conclusion
New technologies have the potential to dramatically change the world of finance though greater
access, more efficiency, and increased competition and innovation. As we make the transition to
e-commerce, however, we must find ways to promote access, privacy, and consumer protection.
Technology will lead t~ si~nificant. changes in the financial industry over the next ten years.
Today, the U.S financIal mdustry IS the strongest in the world. I am confident that it will find
ways to innovate and adapt in this new world.
-30-
DEPARTMENT
OF
THE
TREASURY
1789
OFFICE OF PUBUC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C. - 20220 - (202) 622-2960
FOR IMMEDIATE RELEASE
March 15,2000
STATEMENT BY TREASURY ASSISTANT SECRETARY
FOR INTERNATIONAL AFFAIRS
EDWIN M. TRUMAN
We are deeply concerned about the information in yesterday's IMF statement, which
describes the past mismanagement and misreporting of Ukraine's reserves. All IMF members are
obligated to provide the IMF with comprehensive and accurate information on their finances and
economic and financial policies.
The IMF and Ukraine must complete a thorough investigation and audit of Ukraine's
reserve reporting and management from end-1996 to September 1998, and publish the results. We
welcome Ukraine's commitment to a policy of maximum transparency and openness in
cooperation with international financial institutions. We also welcome its recent progress and
resolve to strengthen economic reforms.
In addressing the issue of additional IMF financing for Ukraine, we will review the results
of this investigation in order to determine what additional controls are needed to prevent future
inappropriate reserve management practices and to ensure that future IMF resources made
available to Ukraine are used for their intended purpose. Ukraine must also satisfy the economic
and financial policy conditions for a resumption of IMF lending.
IMF management has acknowledged that the handling of this matter raises issues that it
needs to address, including the handling of reports of Ukrainian reserve mismanagement
emanating from the Ukrainian parliamentary commission.
-30-
LS - 467
For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
DEPARTMENT
TREASURY
OF
THE
TREASURY
NEWS
ornCE OF PUBUCAFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASlllNGTON, D.C. - 20220. (202) 622-2960
EMBARGOED UNTIL 10:00 A.M. EST
Text as prepared for Delivery
March 16, 2000
ASSIST ANT SECRETARY LEE SACHS
SUBCOMMITTEE ON CAPITAL MARKETS, SECURITIES AND GOVERNMENT
SPONSORED ENTERPRlSES
Mr. Chairman, Ranking Member Kanjorski, members of the Subcommittee, I appreciate the
opportunity to appear before you today on behalf of the President's Working Group on Financial
Markets. I would like to thank the members of this Subcommittee for your leadership in efforts to
mitigate systemic risk by implementing recommendations that the President's Working Group on
Financial Markets (the Working Group) set forth in its April 1999 report, Hedge Funds, Leverage,
and the Lessons of Long-Term Capital Management.
Today, I would like to focus my comments on two broad areas:
•
•
First, I will briefly address the developments in systemic risk mitigation since the Working Group
issued its report, including progress in the implementation of the Working Group's specific
recommendations;
Second, I will focus on the importance of market discipline and enhanced transparency and
disclosure, and the ways in which H.R. 2924, the bill you will be addressing today, introduced by
Chairman Baker, Ranking Member Kanjorski and others, would help to promote enhanced
transparency in our financial system.
As you recall, in the immediate aftermath of the near-collapse of L TCM in September 1998.
then-Secretary Rubin called on the Working Group to prepare a study of the potential implications
of the operations of firms such as LTCM and their relationships with their creditors and
counterparties. The Working Group report concluded that the near collapse of L TCM highlighted
the possibility that problems at one financial institution - (ie. a hedge fund or other highly leveraged
institution) - could be transmitted to other institutions and potentially pose risks to the fmancial
system, and, that excessive leverage in such institutions can increase the likelihood of a general
breakdown in the functioning of financial markets. Thus, the principal public policy issue arising out
of the events surrounding the near-collapse ofL TCM was how to constrain excessive leverage more
effectively.
LS-468
Far press releases, speeches, public schedules and official biographies, call our 24-hollr fax line at (202) 622-2040
To this end, the Working Group set forth a series of recommendations designed to help
constrain excessive leverage and thereby help to reduce the likelihood that future failures of individual
institutions could pose a threat to our financial markets more broadly. Three broad themes united
these recommendations:
•
•
•
The first is that our market economy relies primarily on market discipline to constrain excesses
- particularly excessive leverage;
The second is that that market discipline must be built upon sound risk management practices by
all market participants; and
Finally, in order for markets, generally, to impose that discipline, there must be sufficient
transparency and information available to allow individual participants, including creditors,
counterparties, and investors to make more informed investment and credit decisions
Let me briefly update you on the progress that has been made to date on the implementation
of the recommendations from the report that promote these themes and, more generally, on the
mitigation of systemic risk:
•
First, our call for regulators to encourage improvements in the risk management systems of
regulated entities was answered last year when the Federal Reserve Board and the Office of the
Comptroller of the Currency issued new guidelines urging improvements in such systems. The
guidelines were designed to address weaknesses in banks' existing credit risk management tools
and the risk management of financial derivatives and to help banks adapt their basic risk
management policies, procedures, and internal controls to new products and counterparties in
increasingly global and interrelated markets.
•
Second, the provisions recommended by the Working Group to improve the netting regime for
certain financial contracts in bankruptcy and bank insolvency situations are currently a subject for
the conference committee on the bankruptcy bill. We urge Congress to adopt these financial
contract netting provisions.
•
Third, the private sector has responded to the Working Group's calls for improvements in their
risk management practices with groups such as the Counterparty Risk Management Policy Group
(CRMPG) and a group of the largest hedge funds publishing reports outlining detailed
recommendations for improved risk management standards. These reports have also helped to
advance the dialogue between the public and private sectors concerning public disclosure
•
Fourth, internationally, groups such as the Highly Leveraged Institutions (HLI) Working Group
of the Financial Stability Forum are taking a hard look at highly leveraged institutions and their
effect upon market dynamics worldwide. The HLI Working Group report will be released in a few
weeks, and we expect it to broadly support the thrust of the proposals of the President's Working
Group, including the legislation being discussed today. Additionally, the International Swaps &
Derivatives Association (ISDA), the Emerging Markets Traders' Association (EMT A), the Bond
2
Market Association and the Financial Markets Lawyers Group have joined together, with others,
to create the Global Documentation Steering Committee to help reduce systemic risk by
"improving the plumbing" through efforts to ensure that industry documentation initiatives will
be harmonized.
While this progress is encouraging, there is still more work to be done. Tomorrow, Secretary
Summers will elaborate on some of these issues in a speech that he will give at the Futures Industry
Association conference.
Transparency and H.R. 2924
Let me now tum to H.R. 2924 and the issues of transparency and disclosure. The premise
of the Working Group's recommendations is that, in our market economy, the primary mechanism
that should and does regulate risk-taking is the market discipline provided by creditors,
counterparties, and investors. This discipline can serve to constrain excessive leverage and thereby
reduce the associated risks. But its effectiveness is contingent upon counterparties and investors
having the information necessary to impose such discipline. The government cannot impose market
discipline, but can heIp to enhance the effectiveness of market discipline by creating an environment
of greater transparency and disclosure. Indeed, the long history of public disclosure and transparency
in our financial markets has been a source of great strength, and a leading factor in establishing and
maintaining the high degree of confidence the world has in the integrity of the U.S. financial markets.
This confidence, in tum, increases investment in our markets, lowering the cost of capital for
American businesses and individuals, and thereby helping to strengthen the U.S. economy.
Several of the Working Group's recommendations were designed to enhance transparency,
and important efforts are already underway to enact some of these recommendations:
•
The Commodity Futures Trading Commission (CFTC) has been drafting proposed regulations
that would require more relevant and more frequent information from large commodity pool
operators regarding the funds they operate and would make this information public. These
regulations will be similar to the provisions contained in HR. 2924 as amended and, should H.R.
2924 become law, it would be important that those reporting to the CFTC and those reporting
to the Federal Reserve Board report the same sort of information; and
•
The Securities and Exchange Commission (SEC) has been studying ways to implement the
disclosure recommendation for public companies and has indicated that they will introduce a draft
for public comment in the near future.
HR. 2924 would contribute to these efforts to enhance transparency by implementing the
Working Group's recommendations regarding public disclosure of more frequent and meaningful
information on the largest hedge funds. If the manager's amendment is adopted, the bill would
require that the largest unregulated hedge funds provide basic non-proprietary financial information
3
and meaningful and comprehensive measures of risk to the Federal Reserve Board ofGovemors. The
Federal Reserve would then share that information with other members of the President's Working
Group and disclose the information publicly, allowing market participants to make more informed
investment decisions.
One of the primary areas of concern expressed by the private sector has been the challenge
of balancing the disclosure necessary to enhance market discipline with the need for protection of
proprietary information essential to the finns' ability to engage in business transactions. The Working
Group is sensitive to this concern. We believe that HR. 2924, with the manager's amendment,
strikes the appropriate balance by providing the Federal Reserve, in consultation with the other
members of the Working Group, with the flexibility to determine what information is both relevant
and useful without compromising the firms' ability to engage in business transactions.
H.R. 2924 does not call for direct regulation of hedge funds. It is our view that investors in
highly leveraged institutions are generally high net worth individuals or institutional investors, and
the usual investor protection grounds for such regulation are not relevant. Moreover, a direct
regulatory regime could create a form of moral hazard in which investors and counterparties, knowing
that a highly leveraged institution is regulated and supervised for systemic reasons, might reduce their
normal due diligence and relax their risk management standards. Thus, rather than imposing
regulation, HR. 2924 would provide for enhanced public disclosure only by those hedge funds that
are large enough such that if anyone of them were to fail, such failure could potentially pose risk to
the financial system more broadly.
We recognize that enhancing transparency and disclosure and providing information to market
participants does not guarantee that those participants will process or use the information effectively.
However, it is equally true that if the information is not made available to market participants, it
cannot be processed or used at all. Thus, the Working Group is seeking to provide the market with
one of the key ingredients to making informed credit and investment decisions and thereby
collectively promoting greater market discipline.
In this way, HR. 2924, combined with the Working Group's other recommendations, \. .·ould
take an important step in helping to mitigate systemic risk.
Finally, I would like to thank you, Mr. Chairman, Mr. Kanjorski, and other sponsors ofH R.
2924 for the spirit of cooperation with which you have approached this bill Members of the Working
Group have been working closely with Committee staff and representatives of the private sector to
help ensure that this legislation is as effective as possible in accomplishing our collective goals wh.ile
remaining sensitive to private sector concerns. We are pleased with the results of this cooperation
and the steps this bill, as amended by the manager's amendment, takes in promoting our efforts to
create an environment conducive to enhanced market discipline.
4
The Working Group appreciates this Subcommittee's ongoing interest in and efforts regarding
the Working Group's recommendations.
I would be happy to answer any questions that you may have.
-30-
5
PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • WashiDgtoD, DC 20239
FOR IMMEDlATE RELEASE
Contact: Office of Financing
(202) 691-3550
March 17, 2000
TREASURY'S INFLATION-INDEXED SECURITIES
APRIL REFERENCE CPI NUMBERS AND DAILY INDEX RATIOS
Public Debt announced today the reference Consumer Price Index (CPI) numbers and
daily index ratios for the month of April for the following Treasury inflation-indexed securities:
(1) the 3-3/8% 10-year notes due January 15,2007, (2) the 3-5/8% 5-year notes due July 15,
2002, (3) the 3-5/8% to-year notes due January 15, 2008. (4) the 3-5/8% 30-year bonds due
April 15. 2028, (5) the 3-7/8% 10-yearnotes due January 15, 2009. (6) the 3-7/8% 30-year-bonds
due April 15. 2029, and (7) the 4-1/4% 10-year notes due January 15, 2010. This information is
based on the non-seasonally adjusted U.S. City Average All Items Consumer Price Index for All
Urban Consumers (CPI-U) published by the Bureau of Labor Statistics of the U.S. Department
of Labor.
In addition to the publication of the reference CPI's (RefCPI) and index ratios, this
release provides the non-seasonally adjusted CPI-U for the prior three-month period.
This information is available through the Treasury's Office of Public Affairs automated
fax system by calling 202-622-2040 and requesting document number 469. The information is
also available on the Internet at Public Debt's ~ebsite (http://www.publicdebt.treas.gov).
The infonnation for May is expected to be released on April 14. 2000.
000
Attachment
PA-443
18-469
http://www.publicdebLtreas.gov
TREASURY INFLA110M-INDEXED SECURITIES
Ref CPI and Ind8ll Ranoa tor
April 2000
Security:
.t..JII% lO·Year Nobla
OeecrtpUon:
CU81P Number.
O.ltd Oa'e:
O.lglnall.. U8 Dill:
Addltlonlll..". Da":
aerl .. A·2007
'UU72M)
3·118% Ii-V.., Nottl
Serlel J·2ott
ICi8U3A!
)·1i/8% 10'YHr NGta,
Sirlea A-2001
3·'14% 3a,Vla. Bond,
Bond. of April 2121
Janiliry ' .. '"7
... bNary I. 1917
Aprl""
JulV 111, 1897
July '6,
October 1&. Itt7
January tI, 1191
Janulry 11, 1111
Cclohr '" , •••
112'10FOS
Aprtl1" .. "
Apdlll, 1t11
July 11,1IM
January tI, a007
JulV 15. 2002
1ae.43~
11O.1~8"
January 15, 2008
16U64.I4
Apl1l t'.:lOU
.. U4000
.m
Maturity 0111:
Ref CPI on O... d 0 ...:
0,,,
April
April
April
April
April
Apdl
April
April
April
ApI1I
Aptil
April
Aplt'
April
Ap"l
Apltl
Aprtl
AJldl
April
April
April
April
Ap"l
April
Aprtl
April
April
ApI1I
April
Aprtl
t
2
J
..I
,
••
2000
2000
2000
2000
2000
2DOO
2000
1000
»01
2000
2000
2000
RelePi
Ind •• ft,11o
Indl. Rallo
'ndull,Uo
161.700110
UUU3J
UU6e&1
188.80001
1.08478
1.06500
1.09U'
1.0WZ
1.056U
f.O»H
1.063611
1.04413
1.0U4S
1.0"'"'
1.04411.
1.04505
t6U33~
UlU.
aooo
188.11MI1
16UOOOt
118.9)313
18ueell
169.00000
16U33U
169.061117
1111.10000
18 ... 3ll3
n'.1fie81
189.20000
I"2ll»
119.2611'
'U.31H100
let.nlU
.iIt.l6U7
'''.40000
16• .4»3)
IstAS8n
2000
11t.IIOIHIO
2OGO
169.13333
t.070~6
15t.6&687
21
2.
2000
2000
11)00
)0
2000
1.0702'
U70.7
1.07011
U10U
1
10
"
12
tJ
200m
14
2C)00
11
!tOO
.."
2GOO
ZDOI
2000
2000
2000
II
22
2J
24
21
II
:WOO
n
,.
17
70
2000
~~O
1.0e80&
1.01621
1.01841
1.066&1
1.0'6111
1.06710
1.0.nl
l.OlrU
1.0617'
1.0&1$4
l.Oe815
1.00tl&
1.oU61
1.Hln
1.0Ust
1.061120
1.1)8941
'.H8U
1.08914
'''.60000
151.833)3
nu...,
Oecemb,r 1in
CPI·U INIAl lor :
-
un
,ul2un
--
---~
181.3
'.OI3n
unu
t.G541.
1.D5440
'.06440
1.01481
t.G5502
1.06513
1.0iI<U
1.058116
I.~1t
1.D4&41
1.94H1
'.0458.
1.04t0l
'.04631
I.W~
1.04470
1.04"1
1.04112
1.047)Z
t.oS585
1.01101
1.01627
1.0554&
'.OGen
1.061i"
'.01110
1.06U1
1.06162
1.01773
1.Cl5191
1.051'.
1.0513'
1.06151
1.06B71
1.0elel
1.1)47&3
1.04714
1.047Q.
1.04111
1.04836
1.0486e
1.04111
L048W7
1.04811
1.04839
1.04861
1.04810
1.060GO
t.OiOli
un..
UIU,
January
acoo
111.7
Inde. ltallo
1.0430J
1.04314
'.04344
1.G434.
1.0438'
1.044tt
t.o44U
1.tw4'
1.0448'
1.Q4.4t.
1.0415Oi
1.046J0
1.04561
1.(104UI
I.04151U
1.0"11
1.0-4'33
1.046&4
I
'.0417.
1.044"
1.0471'
1.04n.
1.04117
1.04m
'.047i'
1.0"'"
1.04U8
,.o48e.
1.0"'10
1.0410'
FebruAry leoO
1111.7
TREASURV INFLA liON-INDEXED SECURJlIEI
R8f CPt ...d Ind •• Rltloe for
April 2000
~·71'8%
Stculftr:
10'YH' Notel
.,,111 A-20Dl
D..erlp1lon:
CjqlP Number.
'·71'8% 3o'YHr Bondi
Bondi of A,rN 20lt
IUltGfHI
Addltlonillalue Oatil
tfZIJ74VI
Janulry IS, UII
Jlnulry 1',1N'
Julytl,flH
Maturity Olle:
CPI on Dat.d Ode:
January 11. 20011
le4..00oll0
April 1 •• 20n
184.39333
Dat.dD81.:
Ort(lln.'
'"UI D••:
R.,
D••
April
April
Apltl
April
1
2000
2
:I
200t
4
Apll
I
2000
2000
2000
2000
2000
ZOOO
2000
2000
2aOO
2000
2000
ZOllO
2000
1000
April
April
AINfI
Apltl
Aprtl
Apltl
Aprtl
Apdl
Aplf'
AIN1I
•
7
•
,.
I
11
12
13
14
11
Ap'"
11
April
17
It
AIIIt'
April
April
Apr1l
Apdl
April
April
Aprtl
April
Apfll
April
Aplt'
Aptf.
11
20
ZI
ZOllO
IIMIO
2000
2CHlo
ZOOo
211C10
IOOIIlR.llo
Ind •• Rallo
Incr.IRallo
161.711000
1811.73Sn
188.71157
1.1.1000.
1.... ,333
"1.1"'7
, ....0000
t118.nU3
161.91187
'89.00000
tli.NUl
11UII&7
161.10000
11t.I33n
t81.1M17
11'.2000'
168.133.»
16UI1I57
1.0211"
f.02881
1.02907
f.02I20
1.021CO
t.oJ927
1.02111
1.01701
1.00270
UODt
1.01310
1.00UO
f.oOUO
1.02147
f.02N7
1.02911.
U.tODI
1.0302'
U1Ma
1.G301'
l.OS081
1.03110
1.03UO
1.031110
1.0)171
1.D3191
1.N2tt
1.03732
1.0320
1.03272
151.30000
1".33331
U
14
2000
II
MOO
"1.13000
21
2000
2000
20M
it9.1l333
111.1&1&7
16UGOOO
:roOO
2000
lIU3l3J
1.03431
189.6.1.7
1.0341111
27
21
21
3D
MOO
CP'-U (NU) for:
Janu.ry tI,2010
151.24&fl
RelePI
tst..3tl67
11'.40000
t8tA33U
,.9.... 117
22
April 1&, 1'"
Aprfl fl. 118.
Octob.r 1" 1191
4·1/4% fo·Vea, Not-a
l,flnA4010
8I28211'Nt
JlQuary tI. 20011
Janulry ",2000
Olcemb,r Uti
1.0172'
1.003111
1.02741
1.02762
1.02712
1.02802
1.0382'
1.00'.
1.tMNGl
1.(Ion,
1.00441
1.004'1
1.004"
1.00601
MUG
U280
1.0052.
1.00641
1.02883
1.02t04
1.02.24
1.028....
1.02164
t.02881
1.030011
uose.
1.10117
U06tf
1.00127
1.00847
1.00887
1.03021
MUn
1.030'"
UM..
1.033t3
t.onu
1.0MU
1.0070&
1,0:1011
t.NtOt
1.03127
t.00'47
1.03117
t.N'87
1.03201
1.0117'"
1.0076.
1.00711
1.00801
1.0082&
1.033"
UU74
'-'33M
1.0141&
161.3
'.mlo
J1nu1'V 2000
1.0012.
1.0084'
161.7
'lbrullY lOGO
111.7
DEPARTMENT
OF
THE
TREASURY (UJ
TREASURY
NEW S
OFFICE OF PUBLIC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C.- 20220 _ (202) 622·2960
IMMEDIATE RELEASE
1 16, 2000
PUBLIC CONTACT: Office of Financing
202-691-3550
MEDIA CONTACT:
Bill Buck
202-622-1997
TREASURY DEBT BUYBACK OPERATION RESULTS
Today, Treasury completed a debt buyback (redemption) operation for $1,000 million
If its outstanding issues. A total of 11 issues maturing between May 2018 and
~er 2021 were eligible for this operation, The settlement date for this operation will
.rch 20, 2000, Summary results of this operation are presented below.
(amounts in millions)
s Received (Par Amount) :
s Accepted (Par Amount) :
Price Paid for Issues
Less Accrued Interest} :
of Issues Eligible:
Operation:
) r Which Offers were Accepted:
$6,446
1,000
1,268
~
)r
:ed Average Yield
E all Accepted Offers (%):
:ed Average Maturity
lr all Accepted Securities (in years) :
11
11
6.358
19.6
.s for each issue accompany this release.
-470
For press releases, speeches, public schedules and official biographies, call our 24-"our fax line at (202) 622-2040
March 16, 2000
TREASURY DEBT BUYBACK OPERATION RESULTS
(amounts in millions, prices in decimals)
Table I
coupon
Rate (%)
Maturity
~
Par
Amount
Offered
9.125
9.000
8.875
8.125
8.500
8.750
8.750
7.875
8.125
8.125
8.000
05/15/18
11/15/18
02/15/19
08/15/19
02/15/20
05/15/20
08/15/20
02/15/21
05/15/21
08/15/21
11/15/21
495
825
1,168
724
335
396
686
443
335
321
716
Par
Amount
Accepted
Highest
Accepted
Price
Weighted
Average
Accepted
Price
28
383
90
15
24
155
221
60
5
10
10
129.343
128.484
127.375
119.578
124.062
127.093
127.312
117.718
120.687
120.906
119.609
129.317
128.457
127.316
119.567
124.059
127.074
127.264
117.703
120.668
120.906
119.609
Weighted
Average
Accepted
Yield
Par Amount
Privately Held*
6.375
6.370
6.369
6.355
6.352
6.349
6.347
6.335
6.337
6.328
6.324
7,450
8,111
17,476
18,358
8,844
8,610
19,670
10,214
10,639
10,593
29,926
Table II
Coupon
Rate (%)
Maturity
Date
CUSIP
Number
Lowest
Accepted
Yield
9.125
9.000
8.875
8.125
8.500
8.750
8.750
7.875
8.125
8.125
8.000
05/15/18
11/15/18
02/15/19
08/15/19
02/15/20
05/15/20
08/15/20
02/15/21
05/15/21
08/15/21
11/15/21
912810EA2
912810EBO
912810EC8
912810ED6
912810EE4
912810EF1
912810EG9
912810EH7
912810EJ3
912810EKO
912810EL8
6.373
6.368
6.364
6.354
6.352
6.347
6.344
6.334
6.335
6.328
6.324
!l Par Amount Offered:
!l Par Amount Accepted:
6,446
1,000
)unt outstanding after operation. Calculated using amounts reported on announcement.
OFFICE
or PUBLIC AFFAIRS. JSDO PENNSYLYANIA AVENUE, N.W.- WASHINGTON, D.C •• 20110 e(102) 62l·29'O
DmAP.GOED OJft:tL 2:30 P.K.
larch 16, 2000
~y
Office of Financing
202/691-3550
COJ!1'l'ACT:
OFFERS 13 -WEEJI: AND 26 -WEEJ; S:tLLS
The Treasury will auction. two ••ries of Treaauzy bills totaling$16,000 million to refund $16,912 million of publicly held
;ecurities maturing Karch 23, 2000, &l1d to pay dow.a. about $912 milliQ%l..
~roximate~
:tn ad.dition to the public holdings, Federal Raserv. Banks for their own
LCCQUIlt5 bola $' ,144 millio=. of the maturing bill., which may be refunded at
:he highest discount rate of accepted cCIIap8titive t.naers.
~se accounts will be in addition. to the offering ..aunt.
Amcunta issued to
'L'he maturing bills held by the public include $3,219 million held
Pederal Reserve Banks as agents for foreign and international monetary
Luthoriti... t7p to $3,000 million of thea. s.curiti •• !&y be refunded withiu
:he offering amount in eacb of the auctions of 13-week bills and. 26-WGek
'ills at the highest disC!ount rate of accepted cQlZlpetitive tenders. Ad.di'.102:1.&1 amounts may be issued in eaeh auction for .ucb accounts to the extent
:hat the amount of new bids exceeds $3, DOD million.
~
fte&S'I.LZ:y:D.iZ'ece cu8tCIID.GrS requ•• ted that we reiz~:"•• t their m&~uring holc!of approximately $9" million into the 13-...k bill and $785 million into
he 46-week bill.
~.
'l'bi. offer!Dg of Treasury securities is ~ by the tenw and ~o=.
iti0n5 &et forth in the Uniform Offering Circular for the Sale and X88ue of
a:ketable Book-Entry Treasury 8111., wote., and·BOnda (31 CFR Pa:t 356, ••
mended) •
Details about each of the new securities are given
nSf highliSlhts.
ttaC'hment
in the attached offer-
HXGHL~OHT8
o.
~aBABU.T OFrBR~NGS
or
aXLLS
TO BE XSBUED .aRCH 23, 2000
llareh 16,
~ff.ri!f
Amount ••••••••••••••••••••••••• $8,500
aooo
.7,500.illion
~llion
Description of Off.ring)
~.mI.na type of ••curlty ••••••••••••••• 91-day bill
CU8IP Dumb.r ••••••• ~ •••••••••••••••••••• 'l27'5 BB 3
Auction dat . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .rch 20, 2000
x.... d.t •••••• ~ •••••••••••••••••••••••• March 23, 2000
,,~qzlty 4.t•••••••••••••••••••••••••••• JUne 22, 2000
Original i ••u. dat •••••••••••••••••••••• JUn. 24, 199t
CU~.ntly o.~.t.n4Ing •••••••••••••••••••• 26,029 .tIlion
~u.wm b14 ..aunt ao4 .ultlpl•••••••••• $l,OOO
182 ...4q bill
912795 ..A 4
lIarch 20, 2000
. .reh 23, 2000
Septa.ber 21, 2000
Karch 23, 2000
,1,000
'Ih. following rule. apRll to all .ecuritie. mentioned abov.:
"}mis.ion of Bi4s.
mono~etitiv.
C~tltive
Acc~t.4
in full up to $1,000,000 at the highest di.count r.t. ot
acoeptea competitive bi4s.
bids •••••••••••• (1) HUst be ~r••••d .a a discount rate with ~hEee decimal. in
incrementa of .005%, e.g. 1 7.100%, 7.105%.
(2) Ret long posi~lon for each blader auat bs reported Wben the .um
of the total bid amount, at all discount rates, aDd the nat long
position i . ,1 billion or greater.
(3) .at loq position must b. determin.d as of one balf-hour prior
bia••••••••••
to
~be
cloa1Dg
t~.
for
r.c.lp~
of
c~.tltiye
tend.c•.
Bid
at • Siapl. Rate •••••••••••• 35% of public off.ring
Maxim. . Award ••••••••••••••••••• 35% of public offering
~i.um Recog~ce4
Receipt of 'render.:
I1ODCOIIIpatitive teD4era •••••• ».rlcr to 12100
auction Clay
CCllllpetitiv.t.eD4er•••••••••• Prior to 1: 00 p ••• Eastern Standard time on auction day
~!J!!nt
flOOD
sastern StanClar4 tim.
OD
By charge to • fund. account at • We4eral Reserve Bank on issue date, or p~ent
of full par UIOunt with tender. f'r•••uJ;yD.i.rect; custcaars can us. the Pay Direct teature which
_thorl ... a chazge to their account of reoord at their finau.clal. inatltut.loa on i ••ue 4at••
7acms:
DEPARTMENT
OF
THE
IREASURY i~
TREASURY
NEW S
(789
OrnCE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE. N.W .• WASHINGTON. D.C. • 20220. (202) 622-2960
FOR IMMEDIATE RELEASE
Remarks as Prepared for Delivery
March 17, 2000
REMARKS OF TREASURY SECRETARY LAWRENCE H. SUMMERS
TO THE FUTURES INDUSTRY ASSOCIATION
BOCA RATON, FLORIDA
Good morning. I am glad to have this opportunity to speak to the Futures Industry Association
Your industry makes a significant contribution to our economy
The futures industry directly employs almost 300,000 people generating enormous downstream
benefits to the rest of the economy and indirectly sustaining tens of thousands more jobs. It
makes up a significant proportion of US financial services exports. Even more importantly, the
futures industry has played a key role in the American economic success story of the past
decade: the nearly ten year-old investment-led expansion that has created a prosperity and a rate
of productivity growth that few would have anticipated even a few years ago.
There are many reasons for this prosperity: our fiscal discipline; our success in managing
information technology; and the vitality of entrepreneurship in the U. S. But I am convinced that
an important part of the credit for our unprecedented economic performance goes to the
unparalleled strength and dynamism of our financial markets.
•
No other country offers such deep and liquid capital markets or such an impressive venture
capital industry.
•
No other financial market is so open to foreign competition or so quick to innovate, whether
it be in the area of securitization, financial derivatives, high-yield bonds, or equity finance.
•
And no other financial system has combined so effectively the integrity of high-quality
regulation with the absence of excessive state interference.
By allocating capital to its highest and best uses and by ensuring its availability to the industries
of the future, our financial markets have unquestionably been major contributors to America's
economic success.
Certainly, this is a very special time. We are enjoying the longest period of economic growth in
our history~ our markets have remained a source of opportunity while weathering a series of
recent crises', and our financial sector continues to be the world leader. For these reasons, we are
LS-412
For press releases, speeches, public schedules and official bkJgraPhies, call our 24-hourfax line at (202) 622-2040
justifiably confident about the strengths of America's financial industry. But we must not allow
our confidence to spill over into a sense of complacency. Markets are at their most vulnerable
when their sense of self-belief is strongest.
That is why we must learn the lessons of previous crises so that we can minimize the likelihood
ofa recurrence - by working with leading market participants, both in the U.S. and elsewhere, to
develop a stronger international financial architecture that will reduce the frequency of crises and
lessen their impact when they do occur. The role of key members of the private sector in this
effort has been as welcome as it has been constructive.
With this as a backdrop, let me divide my remarks today into four parts:
•
First, the critical importance of financial markets, including derivatives markets, to the
broader economy.
•
Second, the lessons that we have drawn from the recent financial disruptions and crises.
•
Third, the role of the public sector and the need for effective self-regulation within our
financial markets.
•
And fourth, our policy agenda in the years ahead.
I.
The Critical Economic Importance of Effective Capital Markets and Financial
Derivatives.
As a central component of the broader capital markets, financial derivatives playa critical role in
facilitating the efficient pricing and allocation of risk in the economy. They are a powerful
symbol of the kind or"innovation and technology that has made the American financial system as
strong as it is today.
We have an enormous stake in securing the overall strength of the U.S. financial markets and in
strengthening the position of the U.S. as the world's leading financial center. When business
moves elsewhere we all pay a price: the private sector pays a price in lost market share and lower
employment~ and the public sector pays a price because the migration of business undermines its
regulatory objectives. That is why all of us, Chairman Greenspan, Chairman Rainer, Chairman
Levitt, and myself, are committed to maintaining the competitiveness of the U.S financial
system.
Well-functioning derivatives markets permit us three critical benefits.
•
The first benefit is better distribution and management of risk By allowing for the transfer of
financial risk and enabling American businesses and institutions to hedge their risks more
efficiently, financial derivatives promote the efficient allocation of capital that further
increases American productivity. For example, financial institutions routinely use Eurodollar
futures contracts to reduce their exposure to movements in short-term interest rates.
2
•
Second, there is the benefit oflower costs for American consumers and businesses. Bv
enabling a more sophisticated management of assets, including mortgages, consumer loans
and corporate debt, financial derivatives can help lower mortgage payments, insurance
premiums, and other financing costs for American consumers and businesses.
•
And third, well-functioning derivatives and futures markets help make our economy stronger
Because a well-functioning and efficient capital market broadens - and lowers the cost of capital access for businesses and financial institutions alike, financial derivatives boost
economic opportunity and growth. For example, lenders that have hedged their exposure to
interest rates are able to reduce the cost of credit to businesses and consumers.
And yet, in spite of the dynamism and efficiency of our financial system, we have seen that our
financial markets can also be prone to disruption and crisis. Indeed, it was only 18 months ago
that the crisis at Long Term Capital Management (LTCM) raised the specter of what many
believed might have been the worst financial crisis in 50 years.
II.
The Lessons of Recent Crises
LTCM was not the first accident to befall the financial markets in recent years. One need only
think of Black Monday in 1987, the collapse ofBarings Bank in 1995 or the crises of 1997 and
1998 in Asia and Russia. And certainly, we can be sure that other financial failures will strike in
the future.
History tells us that creditors. counterparties and investors sometimes become complacent in
making risk assessments in an attempt to achieve higher short-term returns. A tendency toward
complacency can be particularly prevalent in good times, as creditors and investors become less
concerned about risk.
In that sense the near-collapse of L TCM was perhaps a wake-up call for the markets about the
need for greater transparency and better risk management practices and to keep pace with an
increasingly interconnected and complex world with all the new risks that brings.
Let me highlight four primary lessons that the public and private sectors can draw from the
LTCM crisis.
•
First. markets and technology may change but human psychology endures. The tendency to
fall into complacency and over-optimism in good times; the tendency to assume that past
relationships will hold in the future; and the tendency to assume that events that have not
occurred will not occur in the future. is as old as the financial markets themselves. This is a
lesson about over-confidence.
•
Second, L TeM presented us with an unusually toxic combination of excessive leverage and
asset and funding illiquidity. Leverage without illiquidity does not pose serious problems
because positions can be unwound. Illiquidity without leverage can be solved with time. But
where a combination of illiquidity and leverage is pervasive. the risks to stability are at their
3
greatest. The traditional law of supply and demand can be distorted. for, when the price of an
asset falls. the supply can increase as those who hold it are forced to liquidate.
•
Third, there was in the LTeM crisis the combination of non-transparency and surprise.
Where there is no transparency; where lenders are not aware of the basis on which they are
lending, you have the greatest prospect for surprise and therefore the greatest threat of
instability.
•
Fourth, and crucially, many market participants learned that modern hedging strategies and
models do not necessarily work as they were intended. Hedging market risk has many
positive advantages but it can be complex and comes with its own inherent risks.
m.
The Role of the Public Sector.
These factors together - market over-confidence, the toxic combination of over-leverage and
iHjquidity, non-transparency and the risks that hedging strategies and models may not live up to
their design - are problems of which we must all be aware. Let me be clear. it is the private
sector. not the public sector, that is in the best position to provide effective supervision. Market
discipline is the first line of defense in maintaining the integrity of our financial system.
The public sector, for its part, has three fundamental roles.
•
First, it needs to create an environment in which market discipline can work effectively.
Counterparties and creditors have more knowledge of their counterparts. more skill in
evaluating risk and greater incentives than any public regulator will ever have. The best
approach to regulation is therefore to maximize the quality of counterparty discipline and to
ensure that public activities do not crowd out the supervision provided by counterparties.
creditors and investors.
•
Second the public sector must promote the maximum degree of transparency. because
transparency is the necessary corollary to counterparty discipline. The government cannot
impose counterparty discipline. but it can help to enhance the effectiveness of market
discipline by creating an environment of greater transparency and disclosure. Indeed. the
long history of transparency in our financial markets has been a source of great strength, and
a leading factor in' maintaining the integrity of U. S markets.
•
Third, the public sector has a duty to maintain the competitiveness of the system as a whole.
Just as there is a sharp distinction between support for the free enterprise system and support
for individual enterprises, so also the task of public policy must be to ensure the stability and
integrity of the market system rather than to seek to ensure the survival of individual firms or
investors. Regulation must never hold out the prospect that it can eliminate risk or that it can
prevent any individual institution from failing. Any regime that had that effect would be
perverse and counterproductive and undermine market discipline.
IV.
Our Policy Agenda Going Forward
4
We thus have a clear set of principles to guide the role of the public sector. These are: to
strengthen market discipline, to promote transparency in the markets, and to promote efficient
and competitive financial markets in the interests of the health of the broader American
economy.
In applying these principles, we have four clear areas of priority over the coming months and
years. Let me highlight the following:
First, increased transparency
We are calling on financial institutions, supported by their regulators, to improve counterparty
diiscipline in general - and to disclose their exposure to highly leveraged institutions in
particular. Specifically:
•
Regulatory agencies should continue to apply the recommendations of the President's
Working Group report on Hedge Funds that are designed to enhance the monitoring of
leverage and risk, and to improve transparency: especially the steps to increase reporting by
the largest hedge funds and disclosure by public companies of direct material exposures to
leveraged financial institutions.
•
We urge Congress to codify some of the recommendations of the Working Group on Hedge
Funds including the bill put forward by Congressman Baker.
•
We look forward to the findings of the Financial Stability Forum working group's report on
Highly Leveraged Institutions that will be published soon and will build on the findings of
the President's Working Group report on Hedge Funds.
Transparency is also an international concern. It is incumbent on all countries to promote better
prudential oversight.
Second. improved ri.'!.'k manaKement in the priwlfe seefOr
We support private sector proposals to improve risk management practices such as those
recommended by the CR1v1PG and the Hedge Fund Group. These call upon firms to institute
effective risk analysis of their portfolios, conduct realistic stress testing of their models and
ensure they have adequate liquidity in the event of a crisis
To be sure, recent experience has brought a certain humility to those involved in a construction
of risk management models. We have seen that what statisticians call "outliers" and what others
caJI "freak events" can happen too often. Not only do outlier situations occur, but traditional
patterns also breakdown in times of crisis. This makes it all the more essential that risk
management systems be improved, updated as necessary, and subjected to rigorous stress-testing.
Third, establishment oj legal certaintyfor deriwllll'es market. .'
5
We are calling on COAgress to take new steps, as part of its re-authorization of the Commodity
Exchange Act, to provide legal certainty for the OTC derivatives market and afford some
regulatory relief for the nation's futures exchanges, This will give the industry the benefits ofa
clear regulatory and legal environment and thus help to promote U,S, competitiveness at a
critical juncture, It will also reduce systemic risk by permitting the creation of clearing houses
that will provide more satisfactory netting arrangements and margin facilities, Of course, as
technology reshapes our derivatives markets it will also be essential to ensure that the interests of
retail customers are protected
Fourth. improved market infrastnlcture.
Our markets will not be fail-safe until they are safe for failure, This is an issue with respect to the
failure of individual institutions, which is why it is so important that Congress enact the
Financial Contract Netting provisions of the Bankruptcy Bill. It is also an issue that goes beyond
the area of bankruptcy to the "plumbing" of our financial system. Improving the plumbing may
not be glamorous. But it is a vital part of our objective of minimizing the effects of crises. For
example, if"plumbing" measures such as proper settlement mechanisms, harmonized
documentation, and contractual uniformity, had been in place, the financial environment in
September 1998 would have been much more secure.
v.
Conclusion.
Our market-based economy relies primarily on the discipline provided by creditors,
counterparties, and investors to constrain the leverage of both regulated and unregulated
financial entities. While recent crises have prompted market participants to make some
encouraging and necessary changes to their risk management practices, we must remain vigilant
The history of such crises tells us that even painful lessons quickly recede from memory. The
markets are especially vulnerable to complacency when they are performing well. We must take
advantage of this moment to carry out the reforms that we all agree are necessary. Ifwe delay
taking action until the next crisis is upon us, it will already be too late. Thank you very much.
6
DEPARTl\1ENT
OF
THE
TREASURY
NEWS
OFFICE OF PUBLIC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASIllNGTON, D.C. - 20220 - (202) 622-2960
F or Immediate Release
March 17, 2000
Contact: Public Affairs
(202) 622-2960
HUD, Public Affairs
(202) 708-0685
SECRETARIES SUMMERS AND CUOMO MAKE GUN ANNOUNCEMENT
Treasury Secretary Lawrence H. Summers, Deputy Secretary Stuart Eizenstat and
Housing and Urban Development Secretary Andrew Cuomo will hold a news conference
to make an historic gun announcement at noon today, at HUD, 451 Seventh Street, S.W ..
in the Cafeteria (first floor).
# # #
LS-473
For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2(}1{j
NEWS
Department of Housing and Urban Development - Andrew Cuomo, Secretar~
Department of the Treasury - Lawrence H. Summers. Secretary
Hun Public Affairs
Treasury Public Affairs
(202) 708-0685
(202) 622-2960
FOR RELEASE
Noon F ridav
March 17. 2000
HUD No. 00-56
http://www.hud.gov/news.html
CLINTON ADMINISTRATION AND STATE AND LOCAL GOVERNMENTS REACH
BREAKTHROUGH GUN SAFETY AGREEMENT WITH SMITH & WESSON
WASHINGTON - The Clinton Administration and state and local governments today reached a
breakthrough agreement with America's largest gun manufacturer Smith & Wesson - under which the
company agrees to make major changes in the design. distribution and marketing of guns to make them
safer and to help keep them out of the hands of children and criminals.
The agreement requires Smith & Wesson to: 1) Install mandatory gun locks and other childsafety devices on all guns. 2) Introduce "smart gun" technology It1 all newly designed handguns. 3) Bar
gun sales - including gun show sales - without a background check of the buyer. 4) Limit multiple
handgun sales.
The agreement was signed for the Clinton Administration by Housing and Urban Development
Secretary Andrew Cuomo and Treasury Secretary Lawrence H. Summers. Deputy Treasury Secretar~
Stuart Eizenstat and Deputy Attorney General Eric Holder participated in the announcement of the
slgnmg.
In addition. the agreement \\as signed by New York Attorney General Eliot Spitzer and
Connecticut Attorney General Richard Blumenthal on behalf of their states.
Representatives of cities and counties that have filed lawsuits against gun manufacturers also
approved the agreement. pledging to drop their lawsuits against Smith & Wesson in exchange for the
company's landmark reforms. Cities and counties initially signing the agreement \\"erc: 1\liami-Dadc
County, FL: Los Angeles. Inglewood. San Francisco and Berkeley in California: Bridgeport. CT:
Atlanta. GA: Camden. NJ. Sc Louis. MO: Detroit. MI: and Gary. IN. More could sign in the future.
Smith & Wesson President and CEO L.E. Shultz signed the agreement for the company.
The U.S. government will require any additional gun manufacturers joining in the agreement to
meet all the requirements set for Smith & Wesson. \vith the possibility of some additional concessions.
-moreLS-474
Page 2
The agreement is the product of negotiations between HUD. the Treasury Department and local
governments
with Smith & Wesson that were designed
to .
settle
alreadv
Smith 8:
.....
. .
.lawsuits
. . .
. filed against
.....
Wesson and to make new ones unnecessary.
"This is a historic agreement that will save lives." Secretary Cuomo said. "Smith & Wesson has
acted responsibly and in the best interests of the American people by agreeing to adopt common-sense
measures to reduce gun violence across the country."
"As a result of this breakthrough agreement. fewer parents will have to bury their children'"
Secretary Summers said. "The agreement is a great example of the public and private sectors coming
together to move the country forward on what is our most critical public safety issue."
The agreement is designed to reduce the toll of gun violence. which each year claims more than
30.000 lives and injures another 100.000 people in crimes. accidents and suicides around the United
States.
A commission made up of two representatives from local governments, one from states. one
from Smith & Wesson and one selected by the U.S. Bureau of Alcohol. Tobacco and Firearms will
oversee the agreement.
The Oversight Commission will have the power to notify Smith & Wesson of any gun dealer
violations. This notification will trigger penalties against gun dealers by Smith & Wesson and the
Commission that could include barring dealers from selling Smith & Wesson products. Smith &
Wesson will also take action. including suspension or termination. against dealers responsible for a
disproportionate number of crime gun traces. This provision is designed to focus industry attention on
the relatively small number of current dealers that are the source of many guns used in crimes. An
estimated 57 percent of guns used in crimes are sold by just 1.2 percent of dealers.
Under the agreement. all guns must have child safety devices. include internal locks. hidden
serial numbers and pass stringent performance tests.
Smith & Wesson will also devote:2 percent of revenues to develop "smart gun" technology and
\vill equip all newly designed guns with such technology within three years. "Smart guns" can only he
fired by an authorized person. making them useless in the hands of thieves or children who could get
hold of guns.
Other provisions of the agreement. \\hich apply to Smith &Wesson and its dealers include
requirements that:
•
No sales can be made until the buyer passes a hackground check.
-more-
Page 3
•
Guns cannot be marketed to appeal to children or criminals.
•
No sales can be made at a gun show unless background checks are performed for all sales.
•
A purchaser can take home only one gun at the time of purchase and must wait two weeks to piel-.
up additional guns. This is designed to prevent illegal traffickers from buying large quantities t)f
guns.
•
Within six months, packaging of new guns must include a warning on the risk of having a firearm in
the home and suggestions for safe storage.
•
Gun stores must have a security plan and guns and bullets must be kept locked and separated.
•
Gun dealer employees must complete annual training and pass an exam.
•
Distributors can only sell to other distributors or dealers that agree to abide by the agreement.
•
Smith & Wesson agrees to work with the Bureau of Alcohol. Tobacco and Firearms (A TF) to
establish a system for firing each gun it makes and entering digital images of the casings into the
National Integrated Ballistics Identification (NIBIN) system and accessible by A TF. This will make
it easier for law enforcement to trace bullet casings used in crimes back to the guns that fired them.
•
Establishment of a trust fund by Smith & \Vesson to implement a public service campaign to inform
people about the risk of firearms in the home, proper home storage, the importance of proper
disposal and need to reduce gun violence.
Guns manufactured and sold to the military and law enforcement agencies will be granted an
exception to the safety features mandated by the new agreement. if the military or law enforcement
agencies certify the need.
HUD and the Treasury Department entered the ncgotiations with Smith & Wesson after
President Clinton said his Administration could support a class action lawsuit by the nation's 3,2()()
public housing authorities that would he designed to reduce gun violence in public housing and nearb:
areas. About 3 million IO\\-incomc people live in public housing.
Cuomo said months ago that HUD \\uuld sed, tn help negotiate a settlement to achieve the
objectives of such a lawsuir.
Gun violence is a major problem in the nation's public housing developments, which arc ('(ten
located in neighborhoods \",ith the highest crime rate in a cOlllmunity. In the nation's 100 largest public
housin~ authorities alone there are an estimated 10,000 '
Quncrimes
each.
vear
an averaf.!e
-.
. and
..
. . of 111,-,re
than one murder per day by gunfire.
_.
Other parts of the Clinton Administration's gun safety agenda include:
-rnore-
Page 4
•
A $280 million national firearms enforcement initiative that is part of the President's proposed
budget. The initiative would hire 500 new ATF agents and inspectors to target gun criminals, hire
more than 1,000 prosecutors at all levels of government, fund expanded crime gun tracing and
ballistics imaging systems to catch more gun criminals, fund local media campaigns to discourage
gun violence, and expand the development of "smart gun" technologies.
•
A $30 million Community Gun Safety and Violence Reduction Initiative that President Clinton
proposed in his Fiscal Year 2001 Budget. The initiative, which would be administered by HUD,
would fund computerized mapping of gun violence to help law enforcement agencies better protect
the public, education and outreach programs to promote responsible safety measures by gun owners.
and innovative community activities to reduce both gun crimes and accidents. If Congress approves
funding for the initiative, local governments, law enforcement agencies, public housing authorities.
community organizations, and other groups would be eligible to compete for HUD grants to support
gun violence reduction activities in the communities the Department serves.
•
Gun buyback programs around the nation funded by HUD. So far this year nearly $2.6 million in
HUD funds have been awarded for buybacks of about 50,000 guns in 80 cities.
###
AGREEMENT BETWEEN SMITH & WESSON AND
THE DEPARTMENTS OF THE TREASURY AND HOUSING AND URBAI'"
DEVELOPMENT, LOCAL GOVERNMENTS AND STATES
SUMl\fARY OF TERMS
Preamble: The city, state, county and federal parties agree to dismiss the parties from the
pending suits and refrain from filing suits against the manufacturer parties based on an equivalent
cause of action.
SAFETY AND DESIGN
All handguns must meet the following safety and design standards:
•
•
•
•
•
•
•
Second "hidden" serial number, to prevent criminals from obliterating serial numbers .
External locking device sold with all guns within 60 days.
Internal locking device on all guns within 24 months.
Smart Guns - Authorized User Technology.
•
Manufacturers commit 2% of annual firearms revenues to the development of
authorized user technology.
•
Within 36 months, authorized user technology will be included in all new firearm
models, with the exception of curios and collectors' firearms.
•
If top eight manufacturers agree, authorized user technology will be included in all
new firearms .
Child Safety. Within 12 months, handguns will be designed so they cannot be readily
operated by a child under 6, .
Performance test. All firearms will be subject to a perfonnance test to ensure safety and
quality.
Drop test. All fireanns will be subject to a test to ensure they do not fire when dropped.
All pistols must meet the following additional requirements
•
•
Safety device. Positive manually operated safety device
Magazine disconnectors must be available on all pistols to customers who desire the
feature, within 12 months .
Chamber load indicators on all pistols, showing whether the pistol is loaded, within 12
months .
Large capacity magazines. New firearm designs will not be able to accept large-capacity
magazines that were manufactured prior to September 1994. (Manufacture of such
magazines has been prohibited since that date)
Law enforcement and military exception. Iflaw enforcement agencies or the military certify
the need, exceptions to these requirements may be made. Manufacturers will ask that these guns
not be resold to the civilian market .
Warnings about safe storage and handling included with all firearms within six months
Ulegal firearms. Manufacturers will not sell firearms that can readily be converted into fully
automatic weapons or that are resistant to fingerprints.
SALES AND DISTRmUTION
Code of Conduct. The manufacturers will sell only to authorized dealers and distributors and
allow their authorized distributors to sell only to authorized dealers. Authorized dealers and
distributors will agree to a code of conduct. If manufacturers receive notice of a violation by an
authorized dealer or distributor, they will take action against the dealer or distributor, including
termination of sales to the dealer or distributor. The Oversight Commission will review such
actions and have authority to require termination or suspension if warranted.
The code of conduct will require authorized dealers and distributors to:
•
•
•
•
•
•
•
•
•
•
•
•
•
Gun shows: make no gun show sales unless all sales at the gun show are completed only
after a background check.
Brady checks: wait as long as necessary for a completed Brady check showing that the
purchaser is not a felon or otherwise prohibited before selling a gun to the purchaser.
Safety training for purchasers: transfer firearms only to individuals who have passed
certified safety course or exam and demonstrate to purchasers how to use all safety
devices and how to load, unload, and safely store the firearm before completing the sale.
Multiple handgun sales: all purchasers of multiple handguns to take only one handgun
from the store on the day of sale, at which point a multiple sales report will be filed with
ATF. The remainder of the guns can only be collected after 14 days.
Employee training: require all employees to attend ATF-approved training and to pass a
exam on firearms laws, straw purchasers, illegal trafficking indicators, and gun safety.
Insurance: carry liability insurance where available, with a minimum coverage of $1
million for each incident.
Inventory control: maintain an electronic inventol)' tracking plan within 24 months
Security: implement a security plan for securing firearms.
Child access: require persons under 18 to be accompanied by adults in gun stores or gun
sections of stores.
Weapons attractive to criminals: not sell large capacity magazines or semiautomatic
assault weapons.
Compliance: provide law enforcement, government regulators, and the Oversight
Commission established in this Agreement with access to documents necessary to
determine compliance; cooperate fully in the Agreement's Oversight mechanism.
Crime gun traces: maintain an electronic record of all ATF trace requests and report
trace requests to manufacturers
Indicted dealers: forgo firearms sales to licensed dealers known to be under indictment.
Straw purchasers: not to make sales to straw purchasers.
Manufacturer commitments. Manufacturers will:
•
•
•
•
•
•
Provide quarterly sales data to ATF.
Not market guns in any manner designed to appeal to juveniles or criminals.
Refrain from selling any modifiedlsporterized semi-automatic pistol of type that cannot be
imported into U. S.
Reaffirm policy of not placing advertisements in vicinity of schools, high crime zones, and
public housing.
Implement a security plan for securing firearms.
Designate an officer to ensure compliance with the Agreement.
Corporate responsibility for crime gun traces. If an authorized dealer or distributor has a
disproportionate number of crime guns traced to it within three years of sale, the manufacturers
will take action, including possible termination or suspension, against the dealer or distributor.
The Oversight Commission will review such actions and have authority to require termination or
suspension if warranted
Oversight Commission will be established and empowered to oversee implementation of the
Agreement. The Commission will have five members selected as follows: one by manufacturers;
two by city and county parties; one by state parties; one by ATF. The Commission's powers will
include the authority to review compliance with the design and safety requirements, review the
safety and training program for dealer and distributor employees, review manufacturer actions
against dealers or distributors that violate the Agreement or have a disproportionate number of
crime gun traces, and require suspension or termination if warranted.
Role of A TF. To the extent consistent with law, ATF will work with manufacturers and the
Oversight Commission to assist them in meeting obligations under the Agreement. A TF will
notifY the Oversight Commission of certain violations of the Agreement by distributors and
dealers if it uncovers such violations.
Ballistics Imaging \Vithin six months, if technologically available, manufacturers will fire all
firearms before sale and will enter the digital image of the casings in a system compatible with the
National Integrated Ballistics Identification Network and accessible to ATF. This will enable law
enforcement to trace crime guns when only the bullets or casings are recovered.
Access 2000 i\1anufacturers shall participate in A TF' s Access 2000 program, which establishes
electronic links with ATF and enables high-speed tracing of crime guns.
Legislation. The parties will work together to support legislative efforts to reduce firearm
misuse and the development of authorized user technology.
Education trust fund. Upon resolution of all current city, state, and county lawsuits,
manufacturers will dedicate 1% of overall firearms revenues to an education trust fund
Most favored entity. If other manufacturers enter agreements with more expansive design and
distribution reforms, and those manufacturers, along with the manufacturer parties to this
Agreement, account for fifty percent or more of United States handgun sales, the manufacturer
parties to this Agreement will agree to abide by the same reforms.
Enforcement. The Agreement will be entered into and enforceable as a court order and as a
contract.
NEWS
OFFICE OF PUBUC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C. - 20220. (202) 622-2960
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
DEPARTMENT OF THE TREASURY
FOR IMMEDIATE RELEASE
March 17, 2000
Contact:
Dave Skidmore
Federal Reserve
(202) 452-2955
Bill Buck
Treasury
(202) 622-2960
FEDERAL RESERVE AND TREASURY DEPARTMENT ANNOUNCE RULES
ON MERCHANT BANKING ACTIVITIES
The Federal Reserve Board and the Secretary of the Treasury jointly announced on
Friday their approval of an interim rule governing the merchant banking activities of financial
holding companies.
The interim rule implements the merchant banking provisions of the Financial
Modernization Act. The interim rule includes provisions on record keeping and reporting: risk
management practices; holding periods for merchant banking investments; corporate
separateness and limits on involvement in management; and limits on exposure of financial
holding companies to merchant banking investments. The interim rule is effective today.
The Board also today announced that it is seeking public comment on a proposed rule.
developed in consultation with the Secretary of the Treasury. that would govern the regulatory
capital treatment for equity investments in nonfinancial companies held by bank holding
companies. The proposed rule would generally impose a 50 percent capital requirement on
merchant banking investments and certain similar investments.
Comments will be accepted on the interim rule and the capital proposal until May 22.
2000. The interim rule and the capital proposal will be revised as appropriate after the comments
are reviewed.
LS-475
###
For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
DEPARTlVIENT
OF
THE
TREASURY
NEWS
omCE OF PUBliC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C .• 20220 • (202) 622-2960
EMBARGOED UNTIL 8:00 AM EST
T ext as Prepared for Delivery
March 20, 2000
TREASURY DEPUTY SECRETARY STUART E. EIZENSTAT REMARKS
TO THE TAX EXECUTIVES INSTITUTE MIDYEAR CONFERENCE
WASHINGTON, DC
When I spoke to your annual conference last fall, I mentioned the creative dialog that has
long existed between Treasury and TEL Now that I have had six more months on the job, I have
had an opportunity to observe this first hand, and that is why I appreciate the opportunity to meet
with you today.
I want to touch on some issues of current interest. We were disappointed by the outcome
of our government's appeal of the World Trade Organization's decision holding that our foreign
sales corporation regime constituted an impermissible export subsidy that violates two WTO
agreements We are working with interested members of Congress, on a bipartisan basis, and
with the business community, to devise solutions to this problem. Our goal continues to be a
level playing field for United States companies, and I appreciate the assistance members of this
organization have offered us on this issue.
Corporate Tax Shelters
After a series of corporate tax shelters were closed by either legislation approved by
Congress or guidance issued by the Treasury and the IRS, the Administration included in its FY
2000 Budget proposals, released in February of 1999, a series oflegislative proposals designed
to curtail the proliferation of corporate tax shelters on a before-the-fact basis At this point we
had concluded that the ad hoc approach of past years, in which Congress or the Administration
took action to close specific shelters as they came to our attention, was simply not \vorking \Ve
were outgunned and outmanned by tax shelter merchants We were told that for each shelter we
took action against, ten more were escaping without our notice. The situation was, and is, just
like that of the mythical Hydra, except recast in the context of modern corporate finance \\"c
were losing the battle for the integrity of our system of corporate taxation, and preservation of
the corporate tax base.
Ls-476
Far press releases, speeches, public schedules and official biographies, call our 24~our fax line at (202) 622-2040
We felt we had to do something to deter all participants in the shelter industry from
designing, promoting, or entering into transactions devoid of economic substance, rather than
wait for a plain bn.m!1 envelope to be slipped over the government transom, or for a questionable
transaction to show up on audit, with the prospect of years oflitigation ahead, with the
concomitant waste of productive resources for all parties It is suggestive of the scale of the
problem that specific shelters that have been addressed over the last few years were estimated to
have cost collectively close to $80 billion over ten years.
Our goal then was to raise awareness that there was a problem and to explore the nature
of the problem. Now, it is clear that there is widespread agreement and concern among tax
professionals that the corporate tax shelter problem is large and growing, and we feel it is time to
move ahead
CUl1ailing the problem of transactions lacking economic substance requires that the tax
shelter cost/benefit analysis be changed in a manner that affects the dynamics on both the supply
and demand side of this 'market' -- making it a less attractive one for all participants -'merchants' of abusive tax shelters, their customers, and those who facilitate the transactions We
have a strategy for moving forward, consisting of three mutually reinforcing parts:
First, increasing disclosure of corporate tax shelter activities, On February 28, Secretary
Summers announced the issuance of new regulations requiring promoters to register confidential
corporate tax shelters and to maintain lists of investors, and requiring corporate taxpayers to
disclose large transactions that have characteristics common to tax shelters. By definition, what
we cannot see, \ve cannot act upon. Thus, a central element of our approach in curbing tax
shelters is bringing these transactions to light and taking remedial action where appropriate.
These regulations constitute a first step -- significant but quite incomplete.
Second, administrative reforms within the IRS and strengthened rules governing the
practice of accountants and lawyers before the IRS The administrative reforms, carried out as
part of tile IRS modernization mandated by the Restructuring and Reform Act of 1998, will
prm'ide the IRS \\ith a more centralized approach to identifying, tracking, and taking appropriate
action against abusi\e transactions
The rules go\erning the practice of accountants and lawyers before the IRS are outdated
..\::; Secretary Summers announced recently, the Treasury Department hopes to have a series of
meetings \\ ith aCCOllntants and lawyers to discuss the problem of shelters and what miuht be the
appropriate modifications to Circular,) 0 We see updating these rules as an essential~step in
impr()\ing upon the culture of compliance. We also v;lere encouraged when Chairman Roth
rl'centh said he belic\ed Congress should look at when a taxpayer may rely on a tax opinion
ThlflL
•
•
•
111.'\\
legislation
ttl strengthen and better coordinate disclosure requirements,
ll) pr,)\1 d\.' increased pena It I c) for abusi \e t ransactiOl1s,
to cndif, the ecnnomic substance doctrine, and
•
to provide consequences to all the parties to the transaction (e.g., promoters, advisors,
and tax-indifferent, accommodating parties).
As I mentioned before, there is a great deal of consensus regarding significant aspects of
the Administration's proposals on corporate tax shelters. Penalties, disclosure, and consequences
for promoters are all core elements of a solution to the ·problem. We also, however, believe that
codification of the economic substance doctrine is necessary.
Marketing of and participation in corporate tax shelters flourish today because
•
•
•
taxpayers and their advisors may be simply ignoring case law doctrines;
an evaluation of case law has convinced the taxpayer and the taxpayer's advisers that
a particular doctrine of case law does not apply because the facts of the transaction
under consideration are distinguishable from prior cases, and
taxpayers may be relying on decisions that are more favorable to the result they
desire, while ignoring decisions less favorable (the "least common denominator"
factor).
Increasing the substantial understatement penalty does little good if there is no finding of
substantial understatement Without codification of the economic substance doctrine, or a
similar step, penalties will not be imposed on participants in shelters prior to a finding by the
courts. Thus, we believe that enactment of only increased penalties and disclosure requirements,
and consequences for promoters and tax-indifferent" enablers," will not place the bar for
participation in abusive transactions high enough. As long as potential sanctions against abusive
transactions are dependent upon successful litigation, taking years and requiring the devotion of
immense private- and public-sector resources that could be deployed far more productively and
positively in other endeavors, the corporate tax shelter industry will thrive.
The consequences of not taking action are grave. As Secretary Summers said recently,
"Failure to address this issue in a meaningful way would put the fairness and efficacy of our tax
system at risk"
Taxation of Electr"onic Commer"cc
I would like finally to discuss electronic commerce tax issues. As most of you know, the
Supreme Court decided, several years ago in the context of mail order sales, that it would impose
an unconstitutional burden on interstate commerce for one state to ask a seller physically located
in another state to collect a sales tax on its behalf As a result, purchases made on the internet,
although in fact still subject to a tax (called a "use tax"), in practice enjoy virtual tax-free
treatment because the seller is not obligated to collect the tax - as long as the seller does not have
a physical presence such as a store or a warehouse in the purchaser's jurisdiction
Internet businesses point to the burden that would be imposed if they were forced to
collect sales taxes. They make the claim -- and rightly so -- that the enormolls complexity of
current state and local sales and use taxes would indeed make it excessively burdensome for a
3
remote seller to have to collect taxes in multiple jurisdictions. The current network of sales taxes
is too diverse and complicated -- there are over 6,000 separate taxing jurisdictions, each with its
own detinitions and rules. On the other hand, many state and local government otTicials are
increasingly
... . concerned that if electronic commerce continues to grow exponentially, as it has
been, the tax base that supports our schools, our police and firemen, and other essential services
\vill be seriously undermined. Sales taxes currently account for about one third of state and local
tax collections. Main-street businesses are concerned about the unequal playing field -- if a book
bought in one of their stores is taxed while one bought on-line is not taxed, in most casys it will
grow increasingly difficult for them to compete.
I would like to highlight some components of the position the Administration
representatives will be taking today in Dallas at the final meeting of the congressionallyappointed Advisory Commission on Electronic Commerce. We strongly support the growth of
internet commerce. Electronic commerce and the associated explosion of the information
technology sector are key sources of economic growth in the United States and around the world.
Since issuing his, Framework/or Glohal Electronic Commerce, in July 1997, the President and
the entire Administration have focused on creating a policy environment in which this new
medium of commerce will flourish
This Commission was charged with examining some of the most difficult issues
associated with this evolving marketplace. The three Administration representatives participated
fully in the Commission's deliberations. They assessed the issues before the Commission on the
basis of two tllJ1damentai principles.
•
•
the internet and electronic comrnerce should not be subject to discriminatory taxes;
and
tax policy in this area should be neutral, nondiscriminatory, simple, certain, fair, and
flexible.
Applying these principles, the Administration representatives reached the following
conclusions regarding the key issues before the Commission
The current statutory moratorium on internet access taxes should be made permanent
It is critically ill1pOI1ant to encourage access to the internet Because taxes on internet access
\\ould create an obstacle to Americans' access to the internet, and in turn, their ability to
participate in electronic commerce, these taxes should be prohibited permanently.
" \It!ltiple.3Dd Discriminatof\' Taxes
The current statutory moratonum on multiple and discriminatory taxes should be
t'\tended \lultiple or discriminatory taxes on electronic commerce plainly would hinder its
de\ elopmel1! Thts e\isting statutory moratorium should be extended and final protections
against such ta\cs should be crafted after the States develop simplified sales tax systems
4
3. State and Local Taxes on Telecommunications
States and local governments should work expeditiously, in conjunction with the private
sector to simplify and reform these taxes. The goal of these reforms should be neutrality in
taxation of telecommunications as compared to other sectors, as well as neutrality in taxation of
providers of similar telecommunications services. This complex web of taxes is in large part a
relic of the time when telecommunications services were a regulated monopoly -- taxes on these
services were passed on to consumers through the regulated rate structure. Today,
telecommunications on all levels have moved from regulated monopoly to competitive market,
and the line between telecommunications and other types of services becomes less clear every
day. State and local governments have recognized the pressing need for reform in this area. We
believe that these governments, working in cooperation with businesses and consumers, can
accomplish this goal.
4. State and Local Sales and Use Taxes
•
States and localities should develop a simplified sales and use tax system within two
years. During that time, the current rules governing this area -- which were
established by the Supreme Court -- shou10 remain unchanged.
•
While this simplified system is being developed, States and localities should engage
in a dialogue with businesses and consumers to address the complex and difficult
issues regarding the application of these taxes to internet sales. These issues include:
fairness to both internet businesses and "bricks and mortar" businesses:
significantly reducing or eliminating the cost to businesses of collecting these
taxes;
the effect of these taxes on the international competitiveness of U S. internet
compantes;
whether lower-income Americans are paying, or will be required to pay, an
unfair and disproportionate share of state and local sales taxes;
ensuring protection of consumers' privacy; and
the feasibility of imposing and collecting sales taxes on goods delivered
digitally over the internet (software, music, etc)
Following development by the States of a simplified system, this issue should be
addressed based on these considerations The application of sales tax laws to internet
transactions raises difficult issues. It is essential that we maintain the vitality of electronic
commerce, which is one of the primary drivers of our economy. It also is essential that States
and localities have the revenues they need to provide citizens with essential services -- such as
education, police, and fire protection. Addressing this issue is extraordinarily complex for a
number of reasons, including the fact that policymakers do not now have all of the information
they need Everyone agrees, however, that simplification is the key So the States should
proceed in developing a model act that produces real and efTective simplification, while
discussion on the other issues continues. While the model act is being developed, which is
estimated to take two years, the current sales and use tax rules, establ ished by the Supreme
5
Cotln, should remain in place; they plainly have not hindered the growth of electronic
C(Hl1mCrCC In the eyent of any change in existing rules governing the application of sales and
usc taxcs to internet sales, there should be full accountability so that citizens of each State can
determine the appropriate consequences of any projected increase in revenue.
Phase out of this tax is a worthy policy objective and should be considered, but must be
w'eighed against other worthy objectives including other proposed tax reductions, and must not
be allowed to threaten the important priorities of maintaining fiscal discipline, paying down the
national debt, extending the solvency of Medicare and Social Security, and maintaining core
government functions such as health care and education,
This tax contributes more than $4 billion in revenue per year and $52 billion over ten
years Because of this substantial budgetary impact, phasing out of the tax cannot be considered
in a vacuum, but must be weighed against other important priorities.
6
Customs Duties
The current moratorium on customs duties on electronic transmissions should be made
permanent. Maintaining the moratorium on customs duties on electronic transmissions is a goal
shared both domestically and internationally, There is a broad recognition that imposing
customs duties on electronic transmissions would only undermine the ability to attract the
investment and technology necessary to build and develop an e-commerce infrastructure.
7 International Taxation
Any taxation of electronic commerce should be neutral, nondiscriminatory, simple,
certain, t:lir and flexible. Regarding international taxation of electronic commerce, our view is
that any taxation of electronic commerce should be neutral and non-discriminatory We must
continue to v,;ork within the Organization for Economic Cooperation and Development (OECD)
tu agrl'l' l)f) til\ rules based 011 the principle of neutrality and other core principles, such as
simplicity, certainty and fairness We must also continue to work with non-OECD member
c\llilltrics Global electronic commerce should not be impeded by globally inconsistent tax
treatment and thus a global consensus must be reached regarding appropriate taxation
***
As I Just noted, the Advisory COIllmission on Electronic Commerce is holdin!! its last
I11cl'ting toda\
Representatives from industry and state and local governments have 11ad
i.lPplHtUllltlCS to share their views on issues associated with electronic commerce. I \\.ould like tc
take this oPPol1:111ity t.o l:ecogniz~ the hard work of many of the state and local representatives
senll1g on the C01111111SS1011, partIcularly the efiorts of Governor Michael Leavitt Chairman of
t hl'
'\ Ci'\
'
6
Despite the Administration's substantial efforts to form a co.mpromise position, through
many meetings, telephone conference calls and exchanges of ideas, the commissio.ners have
apparently reached an impasse and have not yet been able to bridge their differences in order to
make recommendations to. Congress. As a result, neg~tiations on a comprehensive set of
recommendatio.ns that Governor Leavitt and others had crafted has stalled This set of
recommendations was based on a proposal endorsed by the business commissioners. We hope
they can be revived, since there can certainly be no valid recommendations that do not take into
consideration the needs of the state and local governments that provide essential civic services
such as education and public safety -- just as there can be none that do not take into consideration
the interests of all businesses, internet as well as bricks and mortar. We hope a co.mpromise can
be reached in the eleventh ho.ur in Dallas.
Fundamentally, the issue o.fho.w e-co.mmerce will contribute to the building and
maintenance of our 21 st century public services and institutions is a critical one. We cannot rush
to judgment or let political rhetoric impede the resolution of these co.mplex issues. We intend
instead to continue o.ur effo.rts to. help the states and the business community arrive at a
principled consensus
Thank you.
-30-
7
•
A more global prosperity will promote peace: from Bosnia to East Timor, from Rwanda to
Palestine, successful economic development is absolutely necessary if our core objective of
a stable peace is to be achieved.
•
A more global prosperity will promote human freedom. Nations that succeed economically
are much more likely to become democratic, and avoiding debilitating disease, learning to
read and working with dignity are also crucial components of human freedom.
•
A more global prosperity will produce better trading partners for the US: time and again,
as poor countries grow richer, they become the fastest growing markets for US goods and
services. Already, developing countries account for some 42 percent of US exports. And
as we saw in 1998, adverse economic and financial developments in the developing world
today can put our own prosperity at risk.
•
A more global prosperity will help us to meet the profound challenge of protecting the
global environment. Environmental degradation spawned by dire poverty is a global
concern. A more shared prosperity creates the will and the way for these problems to be
overcome.
Successful efforts to promote economic development around the world may well be the
most cost-effective investment that we can make in forward defense of US core interests. To be
sure, the world has changed in profound ways: most importantly, with the spread of market
ideologies and a more truly global private capital market. And so the development institutions
must change and adapt as well. But their special benefit, their special efficiency; their special
ability to lever funds - because they are both financed multilaterally and able to borrow from
the private markets - all make them especially important tools today. Each dollar that we
contribute to the MDBs leverages $45 in lending programs in the economic success stories of
tomorrow.
Ten years ago, when the Berlin Wall carne tumbling down, the United States defense
budget was more than $100 bi1lion higher, in real terms, than it is today. Reasonable people
can debate how much of this dividend ought to have been invested in the ongoing protection of
our interests that support for the International Financial Institutions (IFls) and other foreign
operations provides. But it would be difficult to make the case that the right answer is to spend
a good deal less on these things than we did before. In fact, we are spending 20 percent less in
real terms today on foreign assistance overall - and 40 percent less on the MDBs.
Strong support for the MDBs has been central to a vision of closer integration between
nations and shared global prosperity upon which United States foreign and economic policy has
been based for the bulk of our postwar history. We believe that this vision has served our
country extraordinarily well, and that it wil1 serve us even better in the new century to come.
But we equally believe that the investments we make in these institutions need to be deployed
as effectively as they possibly can. How best to achieve this will be the focus of my remarks
today.
2
I. The Global Development Experience
What are the main lessons of the global development experience? This is an area that
has been pored over by economists and others for decades and will continue to be debated in
the future. There are no simple blue-prints or magic bullets. But there are certain truths that I
think now command broad consensus. These truths can usefully frame our approach to
development finance over the years ahead, and thus can frame an approach to the role of the
world's primary development institutions.
Countries shape their own destiny.
When the will to reform and grow is present, outside support can make a powerful
difference, as the experience of international assistance to Korea and Taiwan in the 1960s and successful recent reformers such as Poland and Uganda - will attest. But it cannot
substitute for that domestic commitment where it is lacking. The international community
cannot want reform and stability more than a country's own government and its people do.
Growth is both necessary and a long way toward being sufficient for reducing in poverty.
In every region of the world and at every time in history, experience has confirmed
what common sense would suggest: that the best way for a country to reduce poverty is to
make itself richer. The world's single greatest success in reducing poverty has been in the
fastest growing Asian economies. Even with the recent crises, the number of Asia's people
living on less than a dollar a day has fallen by nearly 40 percent, or 175 million, since 1990. In
Sub-Saharan Africa, average income per head is today somewhat lower than it was in 1970.
And the number of people living in such extreme poverty has risen by 20 percent, or nearly 50
million in the past decade alone. One study estimates that simply raising the average incomes
of the developing countries by one percent today would result in 53,000 fewer child deaths.
While it is surely right to emphasize that policies or pre-existing conditions can make
growth more or less effective in reducing poverty, discussions of poverty reduction that do not
lay primary emphasis on economic growth are like Hamlet without the prince. They are a
symptom of what is morally urgent to avoid in development debates: the substitution of
attractive sentiment for clear-eyed analysis. Quite simply, rapid, market-led growth is the most
potent weapon against poverty that mankind has ever known.
Market-oriented open policies work best
It cannot be an accident that Soviet-style communism, planning ministries in the
developing world and large US corporations run by command and control all ran into a brick
wall in the same decade and had to be restructured. In this new global economy, the power of
open markets and market-based incentives are larger and clearer than ever before. And the
failings of more centralized means of coordinating economic activity have become that much
more apparent. Globally the message has been repeated again and again: that successful
3
national economic development depends above all on the promotion of open markets and the
institutions and policies that are needed for markets to function well.
Public investment in people and a sustainable environment is crucial to growth
Experience in Asia and elsewhere has taught us that investments in people. especially
basic health and education for women, and in long-term environmental sustainability,
especially the efficient use of energy, are crucial to lasting economic growth and poverty
reduction. In that sense, respect for people and for the environment are central to successful
economic policies. And a framework that reflects the rights of people is one in which every
child's right to go to school rather than labor in the fields or workshops is protected - and
every worker's right to core labor standards is promoted.
Assistance must be conditioned to be effective
Economic history has provided a clear natural experiment regarding the efficacy of
finance without conditions. Again and again, natural resources windfalls have financed
presidential planes and palaces and entrenched official corruption, while producing very little
in the way of lasting economic benefits. Countries with the windfall external finance provided
by abundant natural resources, such as Nigeria, Venezuela, Burma, and Zambia have failed to
progress economically - indeed, in several cases have fallen back. Similarly, the record of
official assistance that is provided for political reasons, rather than the assessment of
appropriate conditions for development, is hardly encouraging.
Recent research has raised another important difficulty in the provision of assistance:
the problem of fungibility. International resources provided for a certain purpose, like health
or education, often substitutes for domestic spending on these priorities, meaning that the
incremental impact of project lending is something very different than the project that appears
on the MDBs' books. Developmental lending cannot have a developmental impact if it simply
supplants public resources. The basic lesson we need increasingly to bring to bear is that MDB
lending needs to be conditioned on government commitments to reform, sound analyses of
budgets and public institutions and a clear assessment of how development lending will affect
the share of national resources invested in core development priorities.
These observations point up a number of priorities for MDB lending: that support
should reward and strengthen domestic efforts to reform rather than try to force those efforts
into existence; that it must support, not supplant the development of open markets and the
growth <that open markets can bring; that it should be conditioned on an effective framework
for promoting market-led growth; and that conditions should focus on the essentials, including
critical public investments.
Let me spend the rest of my time outlining in greater detail the implications of these
principles for the primary development institutions going forward.
ll.
More Effective Policies in the Poorest Countries
4
What the MDBs do to promote development in the poorest countries is without doubt
their most morally urgent and important work. These are countries that cannot expect to
mobilize private flows on a consistent basis and can expect to be reliant on official flows for
some time to come. This is the right moment for a fundamental reassessment of how these
flows are provided.
The Highly Indebted Poor Countries initiative is a one-off attempt to clear away the
residue of the Cold War and the mistakes of the past, and offer these countries a fresh start. It
is essential that we make it work. Debt write-offs need to be planned as a one-time event, not
conceived as part of a cycle. That makes effective programs essential.
Again, this is not an area for simple solutions. While hard and fast rules are tempting,
inevitably conditions will differ and policy will need to balance conflicting considerations and
demands. However, we believe that an effective approach will require a shift in the emphasis
of the MDBs in these countries in four areas.
First, a more human-centered approach and new division of labor between the IMF and the
World Bank
Development lending exercises always rely on estimates of gaps, financing needs and
measured indicators of performance. In light of recent experiences in the HIPC countries, we
believe that these need increasingly to move from a predominant focus on macro-economic
issues to more clearly emphasizing the nature of human needs.
As a condition for receiving debt relief and new loans, HIPC countries are now
required not only to have established a solid track record of reform, but also to produce
forward-looking Poverty Reduction Strategies. We cannot lose sight of the fact that effective
growth strategies go a long way toward reducing poverty, and ineffective growth policies will
go a long way toward making poverty more entrenched. At the same time, we must work to
ensure that growth has the greatest possible impact on poverty. These strategies will clearly
define national poverty reduction goals, such as reducing infant mortality and malnutrition, and
identify the medium term costs associated with achieving these goals. They will and must form
an important part of the basis for a satisfactory financing framework for countries going
forward.
Over time we expect this to become the primary responsibility of the World Bank given
its expertise and mandate in global poverty reduction. For its part the IMF needs to have a
continuing role in macro-economic evaluation, because no plan is viable if there is not a
financing framework that is sustainable.
Second, increased selectivity
We recognize that there will inevitably be a tension between helping the countries most
in need and helping those who will use MDB resources well. But as the World Bank has
5
recognized in implementing IDA 12, increasingly we need to shift the balance in favor of
providing support to countries where donors can have confidence that assistance will be well
used - and more often denying it where they are likely to be misused, particularly in cases of
corruption.
Too often, need-based aid rewards failure and penalizes success. Where countries are
using concessional resources effectively, they should be expected and encouraged to attract
more of such flows. By some estimates, this would more than triple the effectiveness of
development assistance in reducing global poverty.
Third, better procedures for the interaction between countries and the IFIs
The greatest shortage in the poorest countries is of institutional capacity. And frankly,
too much of that scarce capacity is absorbed in dealing with the international development
institutions. Too often, the need for conciliation between the institutions and countries results
in a dialogue where the response to failure is promises more ambitious than the ones that failed
before, setting the stage for future failure - and yet greater escalation of goals.
This suggests a need for a smaller number of clear and measurable performance targets,
set more realistically, and then more vigorously adhered to. An important part of this shift will
be developing more effective mechanisms within the MDBs for evaluating when targets and
intermediate benchmarks have been met, including a stronger commitment to disbursing in
stages and more frequent formal reviews.
There also needs to be a stronger presumption of publication of all relevant loan
documents and transparency in the relevant operations at the national level, so that the
domestic population, outside investors and donors can readily track disbursements and results.
Founh, additional concessional resources
Financing debt relief in a way that reduces the existing stock of concessionary resources
will not expand the budget capacity of countries to invest in core development priorities. We
should not delude ourselves that HIPe or the reforms that it has inspired will translate into
better basic schooling or health care in these countries without a genuine increase in the pool of
concessional resources.
This makes it especially urgent and important for Congress to help the US play our
proper part in this effort, by enacting the President's supplementary appropriations request and
the funding contained in his FY200 1 budget. The earlier version of HIPe saved Uganda $45
million in debt service in 1999 alone. This relief has helped it to double enrollment in primary
education in just two years. Under the enhanced HIPe, Uganda would receive an estimated
$650 million more, in net present value terms, to invest in these basic priorities. But these
benefits for Uganda and other countries will remain in question if the United States does not do
its part.
6
m.
Development Assistance in the Emerging Market Economies
Emerging market economies, where there are private financial flows, involve different
issues than those posed in the poorest countries. It needs to be recognized that these countries
have a certain capacity to repay debt, and therefore a certain borrowing capacity. If that
capacity is absorbed by international financial institutions without their programs actually
raising borrowing capacity, the result is to crowd out private sector finance. Therefore, the
role of MDB lending in these countries should be confined to the areas where they can increase
total financing capacity.
There are a number of such areas and it is crucial to the interests of the United States
and the international community as a whole that they be a basis for lending by the MDBs:
crucial because of these economies' increasing systemic significance; and crucial because these
are still the countries in which the majority of the world's poorest people live. For all the
progress that we have seen, one third of the people in Latin America live on less than $2 a day
- and more people live on that income in China and India than the entire population of SubSaharan Africa. Private financial markets alone will not finance needed investments in basic
health and education and rural infrastructure. And appropriately targeted MDB finance can
itself catalyze additional private investment.
We therefore categorically reject the idea that these countries should not be in a position
to obtain the additional finance, expertise and insurance against instability that access to MDB
programs can provide. But we equally recognize that the work of the MDBs and their private
sector lending arms in such economies needs to be more tightly focused on adding value that
the private markets cannot.
This suggests an emphasis on three types of circumstances:
•
Where the ability that the public sector development institutions uniquely have to impose
conditions that promote key public investments - including basic health and education and
other social spending - that the existing stock of private and public resources cannot fully
provide. These public goods also include financial sector and capital market development,
and the legal and institutional infrastructure indispensable for functioning societies, such as
the rule of law, clearly stated and fairly applied. In this context we share the hope and
expectation of the World Bank that it will meet its own targets for social sector lending in
the future and will more effectively seize the opportunities that exist to promote durable
institutional reforms.
•
Where the involvement of the MDBs can attract genuinely additional private flows: for
example, where MDB co-financing arrangements and guarantees can enhance the
credibility of developing country borrowers in the eyes of investors. In this context we
believe that the MDBs should continue to explore more innovative ways of catalyzing
private capital flows to such countries, where these can be pursued within strict and clear
guidelines that safeguard the financial position of the institutions.
7
•
Where the MDBs can help to counteract temporary disruptions or limitations in a country's
access to private capital due to contagion or other external shocks. To this end, they should
be taking advantage of the substantial recent improvement in global financial conditions to
develop a large, more flexible, contingent financial capacity to respond to deteriorations in
investor confidence in emerging markets down the road.
This last is an important point. Financial emergencies are times when there is more
social and human distress, and as we have seen, they are times when more structural changes
can take place in 18 months than would otherwise been achieved in a matter of years. They are
not times for the usual rhythms of development lending. It is thus noteworthy that despite the
professed urgency of the situation, the World Bank was only able to deliver $260 million to the
Asian crisis economies in FY 1998, the most acute year of the crisis. While this in part reflects
legitimate concerns about domestic absorptive capacity and the potential diversion of funds in
some countries, it will be important for the World Bank to find ways to upgrade substantially
its capacity to respond rapidly and effectively to such emergencies in the future.
At the same time, recent experience suggests that it will be increasingly important for
the World Bank and others to ensure that their lending is genuinely productive, and that it
enhances rather than reduces a country's capacity to grow out of a need for official funds. The
IFe, especially, will need to guard against the risk of supplanting, rather than supporting,
private sector finance.
Accordingly:
•
We believe there should now be a strong presumption that the MDBs have no business
lending in countries for sectors in which private financing is available on appropriate terms,
and where there is a risk that such lending will simply supplant private financing. These
include credit programs serving mainly large-scale industry, support for large-scale
infrastructure in cases where these would have no significant environmental benefit, and
lending in oil, telecoms and other sectors where the private sector is already active.
•
In a world in which the MDBs are promoting policies that succeed in increasing the
capacity for emerging market economies to borrow in private markets, it is natural that the
share of MDB lending that is devoted to these economies should decline in volume over
time and become more closely linked to the end-goal of graduation. The MDBs cannot
expect to live in a world where they can count on successive capital increases for their nonconcessionalloan windows. They should incorporate this reality in their identification and
management of lending in middle income countries going forward.
For all MDB lending in emerging market economies, I believe that a review of pricing
policies is appropriate. Pricing needs to avoid excessive encouragement of public rather than
private sector reliance. It also needs to assure that given the enormous needs for concessional
finance, the MDBs are in as strong a position as possible to contribute resources to
8
concessional programs and to the creation of global public goods. A review based on these
principles will, I suspect, lead to higher prices in many cases.
IV.
An Enhanced Focus on the Provision of Global Public Goods
Increasingly, as integration proceeds, the world is confronting a broad class of
problems that cross borders and defy solution by individual governments and markets. Whether
it is money laundering and financial crime, global warming, new killer diseases, or reductions
in global bio-diversity - the solutions to these problems will be global public goods, requiring
concerted global cooperation.
We believe that the World Bank and other development institutions potentially have an
enormous contribution to make in helping to push the frontier of international efforts to
promote these kinds of goods, many of which will especially benefit developing countries. And
examples such as the Consultative Group on International Agricultural Research (CGIAR), the
Green Revolution and the campaign to defeat river blindness in Africa have all shown that
determined and innovative forms of collaboration among the World Bank and other official
bodies can deliver results.
Let me highlight two areas where we believe that the MDBs should be looking
especially hard for new kinds of responses:
Collective effons to promote the creation and dissemination of medical knowledge
Infectious diseases such as HIV I AIDS, tuberculosis, malaria and respiratory and
diarrheal disease, are responsible for almost half of all deaths of people under 45 worldwide.
Life expectancy is now actually declining in a host of African countries struck by HIV I AIDS,
with adult mortality rates in the worst affected countries now twice what they were even a few
years ago. Providing vaccines to prevent these deaths is one of the most cost-effective ways
there is of raising the well being and productivity of people in the poorest countries. Yet the
WHO estimates that only perhaps 10 percent of the $50-60 billion spent worldwide each year
on health research is directed toward diseases that afflict 90 percent of the world's population.
President Wolfensohn has led a major effort to put this high on the Bank's agenda in
recent years. And President Clinton has proposed a number of important bilateral efforts that
he hopes will catalyze further efforts by other bilateral and private donors. But we agree with
President Wolfensohn that the MDBs - the World Bank, especially - has an important
contribution to make. One crucial part of the problem is that there is not a visible market for
new treatments and vaccines in many of the countries worst affected. And the World Bank can
do much to create a market, through its lending programs and the policies they support. That is
why the President is proposing that the MDBs dedicate a further $400 million to $900 million
each year of their concessional lending for basic health care to immunize, prevent and treat
infectious diseases in the poorest countries. We expect to be intensifying global efforts in this
area at the upcoming G8 Summit in Japan.
9
Collective effons
to
promote global environmental security
The Global Environmental Facility is a promising development. But going forward we
believe the MDBs need to exercise far greater leadership in finding ways for the international
community to better protect the global resource base we all share.
For example:
•
In helping countries to combat deforestation. The World Bank potentially has a key role in
helping those who live in or near the forests to move beyond slash and burn agriculture, to
manage the harvest of the forest, and above all to develop new ways to earn a better living
and ensure their own well being. A major World Resources Institute forest policy reform
study, to be released on Wednesday, shows that under the right conditions, World Bank
structural adj ustment lending has been effective in supporting domestic constituencies for
reform against entrenched vested interests in unsustainable logging. These experiences need
to inform the MDBS as they work to develop even more effective ways of engaging in
these issues in the future.
•
In supporting global efforts to find ways to combat global warming that are responsive to
the economic needs of the poorest. We cannot develop the global economy unless we
protect the global resource base. Nor can we expect the developing countries to meet the
short-term costs of this kind of protection on their own. To this end we believe that the
MDBs need to expand their efforts to lead in the development of markets for cleaner and
more energy efficient technologies; small-to-medium scale renewable energy sources; and
testing methods to internalize the true costs of energy in assessments of project viability.
V.
A Better Division of Labor Across the System
Husbanding well the world's scarce flow of concessional resources for development
must mean improved coordination and division of labor more broadly - across the panoply of
international institutions, bilateral donors and NGOs that have come to be called the
"development community".
Devising the right framework will be a strenuous, ongoing effort - and certainly, will
not be the prerogative of a single country or institution. But ensuring clarity of mission and
purpose must be a core reform priority at a time when there are, for example, 18 international
donors and 65 individual programs operating in Bolivia in the health sector alone.
I have already mentioned the new division of labor that we envisage between the IMF
and the World Bank in the poorest countries going forward, with the World Bank more clearly
taking the lead. Clearly, this is not an area where precise distinctions and road-maps can be
drawn. But three further imperatives seem to us to be important:
10
•
First, as President Wolfensohn has recognized in the Comprehensive Development
Framework, the World Bank - through the new approach embodied in the PRSPs - has
potentially a unique role to play in helping to bring the threads of global development
activities and expertise together. This can also help to ensure that every institution or donor
or NGO is playing to its strengths. Among other things, it must also mean bringing donor
coordination to the center of official assistance activities.
•
Second, this improved framework must be based on a recognition that no MDB or other
part of the system can or should aspire to be and do everything for all countries. It makes
no sense for the regional development banks or, indeed, the World Bank to build and
maintain a capacity to undertake every kind of activity relevant to development in every
country in which they could playa role. In that context we believe that it should
increasingly be recognized that the World Bank should take prime responsibility for core
program-lending - with responsibility for certain kinds of project lending possibly more
often devolved to the regional development banks where they have proven expertise.
•
Third, the World Bank will need to deliver on its commitment to accept a more
coordinating or supporting role to other agencies where the circumstances require it. This
will be especially true in post-conflict situations and other areas where UN agencies and
bilateral donors, often working with NGOs with more grant-based assistance, have a clear
comparative advantage. President Wolfensohn has rightly called for a renewed emphasis on
serving the client - and of course, high quality client service includes telling them when
they would be better off going to somebody else.
VI.
Concluding Remarks: The US Stake in Truly Global Development
It has been a touchstone of the Clinton Administration since its earliest days that
globalization is happening, and that it offers limitless potential for raising the living standards
and quality of life of every American and the global population as a whole. At the same time,
we have also stressed that making economic integration work means making it work for
people.
•
That is why we have worked to keep our economy strong, to invest in people, and to
ensure every American in this new economy is equipped to seize the opportunities that this
new global economy presents - and manage the risks.
•
That is why we have worked internationally to build the right kind of open global
marketplace, the right kind of international financial architecture, and the right kind of
framework for the promotion of core labor standards, environmental protections and other
values that are important to Americans.
When the President talks about "'putting a human face on the global economy" he
means all of these things. But if there is one further message of my remarks today it is that it
also means working to ensure that all countries and peoples have a chance to be included.
11
The greatest source of squalor and inequality in the global economy today is not
integration but exclusion: a failure to grow and integrate that keeps large populations trapped
on the bottom rung. If we are serious about preventing a global race to the bottom, we must
be serious about helping those at the bottom to rise up. And US support for strong and
effective international development institutions can and must playa crucial role in our efforts
to achieve this. Thank you.
-30-
12
DEPARTMENT
OF
THE
lREASURY
(W)
................
~
TREASURY
NEW S
omCE OF PUBUCAFFAIRS -1500 PENNSYLVANIA AVENUE. N.W. - WASHINGTON, D.C.. 20220. (202) 622-2960
EMBARGOED UNTIL 2:00 PM EST
Text as Prepared for Delivery
March 21, 2000
TREASURY ACTING ASSISTANT SECRETARY FOR TAX POLICY JOl\ATHAN
TALISMAN TESTIMONY BEFORE HOUSE COMMITTEE ON WAYS AND l\1EANS
SUBC01\lMITTEE ON OVERSIGHT
I am pleased to have the opportunity this afternoon to discuss with you the Administration's
program of tax incentives designed to foster the revitalization of economically disadvantaged
American communities. I would like to begin by acknowledging the efforts of the Chair. the
Speaker, other Members of Congress from both parties, and the panelists this afternoon, all of
whom have sought to provide assistance to America's economically distressed communities.
Despite the unprecedented prosperity that is evident in so many places in the United States, not
all communities have fully shared in this affluence In some communities, good jobs are still
scarce, new construction is a rarity, and infrastructure, including schools, shows its age The
Administration believes that, in this period of great prosperity, no American communities should
be left behind Accordingly, we are dedicated to insuring that the residents of inner cities and
less affluent rural communities, just like those Americans living in the Silicon Valley or along
the Dulles Corridor. have full access to the opportunities which symbolize the promise of the
neweconom\
The Administration's budget proposals include almost $17 billion in new tax incentives over ten
years to ensure that we satisfy this commltment \Ve view tax policy as one, but by no means the
only, tool at our disposal in achieving this important goal To be most effective, tax measures
must be integrated into a broader program designed to foster community development. Thus, in
conjunction with targeted tax incentives, the Administration has proposed major initiatives on
the appropriations side to insure that all communities have access to the tools that will be critical
to success in the new economy For example, the Administration has proposed to expand the
Community Development Financial Institutions Fund to bolster the capacity of specialized,
locally-based financial institutions serving economicallv disadvantaged areas, and has launched
BusinessLlNC to provide smaller firms in these communities the know-how and business
opponunities enjoyed by their larger counterparts Other initiatives in the President's FY200J
budget would fund community technology centers train teachers in the use of computer and
internet technology, and encourage private-public pannerships to provide basic banking services
to individuals and businesses in economically-disadvantaged areas.
18-478
:;'or press releases, speeches, public schedules and official biographies. call our 24-hour fax line at (202) 622-2040
Current Law
Investment, by both the private and public sectors, is the key to economic development Only
with investment by the public sector in infrastructure and the private sector in businesses can real
economic opportunity be created. Since 1993, the Administration, together with Congress, has
sought to direct both types of investment to disadvantaged communities through the designation
of Empowerment Zones and Enterprise Communities. Since 1993, 125 communities have been
selected on the basis of their comprehensive strategic revitalization plans to receive special tax
incentives and other resources.
Empowerment Zones
The Omnibus Budget Reconciliation Act of 1993 authorized a demonstration project under
which nine Empowerment Zones, six in urban areas and the remainder in rural areas, were
designated through a competitive application process. State and local governments nominated
distressed geographic areas, which were selected based on the strength of their strategic plans for
economic and social revitalization. The incentives available in the Empowerment Zones
designated under the 1993 Act remain available through the end of2004
By virtue of this designation, businesses located in these zones became eligible for a nurnber of
tax incentives specifically designed to encourage new businesses and business growth in these
areas of acute need. These include a wage credit, preferential tax treatment for certain
depreciable property, and special tax-exempt bond financing
The wage credit provides a 20 percent subsidy on the first $15,000 of annual wages paid to
residents of Empowerment Zones by businesses located in these communities. By lowering the
cost of labor. the waue credit encouraues nev.. businesses to locate in zones, and encourages
those businesses already there to expand, providing good jobs and opportunities for selfsufficiency for zone residents
-
Further incentives are intended to encourage im·estment machines, computers and other tangible
business property Empowerment Zone businesses are allovv'ed to expense the cost of property
up to an additional $20,000 above the amounts generally available under Section 179 of the
Internal Revenue Code, rather than depreciate such property over time. This additional
expensing lowers the cost of the capital investment necessary to support the creation of highpaying jobs in the new economy
Finally, the original legislation permitted the issuance of a neV'i class of tax-exempt private
activity bonds to provide subsidized financing to projects in Empowerment Zones By lowering
the cost of capitaL tax-exempt financing makes projects that would not otherwise be undertaken
by the private sector economically viable, leading to the creation of new jobs in disadvantaged
areas.
The landmark 1993 legislation also made these zones eligible for a variety of programs
administered by other agencies, including the Department of Housing and Urban Development
2
and the Small Business Administration. These programs complement the tax incentives, and
contribute further to the revitalization of these economically disadvantaged communities
The Empowerment Zone legislation has been expanded during recent years. The Taxpayer Relief
Act of 1997 provided for the designation of two additional Empowerment Zones. The Act also
authorized the designation of twenty "Round II" Empowerment Zones using slightly expanded
eligibility criteria. Although businesses in the "Round II" Empowerment Zones may not claim a
wage credit, the available tax incentives are otherwise very similar to those provided in the
original nine zones and remain, under current law, in place through the end of 2008.
Since environmental hazards often pose a major obstacle to the privately-financed revitalization
of both urban and rural areas, the 1997 legislation provided an additional incentive to help
private firms clean up such contamination Under this provision, businesses in Empowerment
Zones may expense, and therefore recover immediately for tax purposes, the costs of remediating
certain environmental hazards in the soil and ground water. This favorable tax treatment, which
is also available in some other economically depressed areas, reduces the expected return
necessary to justify investments that often benefit the entire community.
Enterprise Communities
In addition to the Empowerment Zones, the Omnibus Budget Reconciliation Act of 1993 also
provided for the designation of95 Enterprise Communities, at least thirty-five of which would be
located in rural areas. Businesses in these communities are entitled to the same favorable tax
treatment of environmental remediation expenses and tax-exempt financing benefits as those in
the Empowerment Zones.
District of Columbia Incentives
A special set of incentives, bearing a broad resemblance to those provided to the Empowerment
Zones, were enacted in 1997 to foster the redevelopment of the District of Columbia. The
Taxpayer Relief Act of 1997 included tax incentives for both residents and business to locate in
the District of Columbia A $5,000 income tax credit for first-time home purchasers was
intended to attract new homeowners to the District A second set of incentives, similar to those
provided to the original nine Empowerment Zones, was intended to encourage the establishment
of new businesses in the District as well as new investment in existing enterprises.
Subject to certain income restrictions, the $5,000 credit is available to first-time purchasers of a
principal residence in the District of Columbia who have not owned houses in the District during
the year preceding the purchase Although the credit was initially available only for property
purchased through the end of 2000, subsequent legislation in 1999 extended the incentive
through the end of 200 1.
Other tax incentives otTer a range of economic inducements to businesses operating
economically disadvantaged parts of the District. With the exception of a provision
sale of capital assets, these incentives are available only to businesses located either
boundaries of the D.C Enterprise Community, or located in census tracts elsewhere
in the more
related to the
within the
in the
District where the poverty rate exceeds 20 percent These areas are collectively known as the
D C Zone With certain minor adjustments, businesses in the Zone mav. claim the same wage
credit, expensing of certain capital investment, expensing of environmental remediation costs,
and tax exempt bond financing, as businesses in the original nine Empowerment Zones In
addition, capital gains realized from the sale of certain assets are excludable from the income of
the seller, whether a business or individual. For the purposes of this provision alone, the DC
Zone is expanded to include all census tracts in the District in which the poverty rate exceeds 10
percent.
~
Native American Wage Credit
Unfortunately, many residents of Native American communities continue to struggle
economically, even during these times of prosperity The Indian Wage Credit provides a
powerful incentive for job grovvth in these communities. Employers may claim an Indian
employment credit equal to 20 percent of the qualified wages and employee health insurance
costs paid to an enrolled member of an Indian tribe in compensation for ~ervices performed on or
near a reservation. The aggregate amount of qualified wages and health insurance costs may not
exceed $20,000 per person per yeaL This incentive is now available through 2003.
New Proposals
The President's FY2001 budget proposals, the Administration seeks to leverage the progress that
has already been made in revitalizing America's economically disadvantaged communities
through the provision of another $17 billion in targeted tax incentives over the next decade.
These measures will allow more communities to benefit from the investment that is so important
in a technology-driven economy, while offering an innovative approach to the task of attracting
patient equity capital to businesses in economically disadvantaged areas.
New Markets Tax Credit
An important priority is the New Markets Tax Credit, a part of the President's broader New
Markets Initiative This tax incentive would help attract $15 billion in equity capital to
community-based financial institutions which. in turn, would invest these funds in their
communities. spurring the creation of high-quality jobs and, equally important, building lasting
links to the new economy.
High technology and service firms at the heart of the nev. economy have generally sought to
locate near other similar enterprises, in places like the Silicon Valley and the Dulles Corridor, so
that they may tap a common pool of customers, employees and other resources Thus these
enterprises tend to be highly concentrated geographically, and often not in lower-income areas.
The New Market Tax Credit would attract capital, and therefore high-growth industries, to
lower-income areas by providing a subsidy to investors This temporary subsidy wilL at least in
part, compensate investors for the additional costs involved in establishing operations in locales
which have yet to benefit from the strength of the U S economy over the past decade and where
the presence of other fast-growing firms may therefore be limited
4
The New Markets Tax Credit is specifically designed to further the efforts of community-based
financial institutions in promoting economic revitalization while encouraging these entities to
make the "on the ground" decisions concerning where the need for capital is greatest Such
institutions - including a wide variety of existing or newly-formed community development
banks and venture funds - would apply to the Treasury Department for authorization to issue
stock (or other equity interests) with respect to which the investors could claim a tax credit equal
to approximately 25 percent of the investment, in present value terms. The credit would be
claimed in five equal installments, each equal to 6 percent of the original investment, during each
of the first five years of investment.
Community development entities selected for a credit allocation would be required to invest the
leverage funds by taking equity stakes in, or providing loans to, businesses located in lowincome communities. The required investments could be made in a wide range of commercial
ventures, the basic requirement being that the business conduct an active trade or business in one
or more low-income communities. The selected community development entities themselves
would decide which local commercial ventures are likely to produce the greatest social and
financial return
We greatly appreciate the active leadership ofMr. Rangel, Mr. Lafalce and Ms. Velazquez, as
well as Senators Rockefeller, Robb, Sarbanes, Kerry, Kennedy and Daschle, in working over the
last twelve months to move New Markets Tax Credit legislation forward. Our current budget
proposal would, relative to the original design, more than double the amount of capital with
respect to which credits could be allocated, raising this amount from $6 billion to $15 billion by
providing $3 billion per year from 2001 through 2005.
Empowerment Zones
In addition to the New Markets Tax Credit, the Administration would like to see a further
expansion of the Empowerment Zone program, as well as movement towards standardization of
incentives across the already-designated zones
The President's F'{200 1 budget proposal would extend empowerment zone status for the
existing thIrty-one designated zones through 200C) At present, these designations expire as early
as 2004. Furthermore, the wage credit rate would remain at 20 percent in all zones until 2009
The current set of incentives available in some zones does not include the wage credit, while in
other zones this credit phases out over the final three years of designation.
Businesses in all thirty-one zones would be eligible to expense, rather than to depreciate over
time, an additional S35,OOO in qualified investment property Under current law, this additional
expensing authority in Empowerment Zones is limited to $20,000.
Finally, ten new Empowerment Zones would be authorized, eight in urban communities and two
in rural areas During the period 2002 through 2009, businesses located in these zones would be
eligible for the same tax incentives that are available to businesses in the other 31 Empowerment
Zones, including the expensing of qualitied environment remediation costs and certain taxexempt financing benefits.
5
Low-Income Housing Credit
The low-income housing credit has played a vital role in helping working poor people to find
affordable, decent housing and in helping to revitalize low-income communities. But affordable
rental housing remains in extremely short supply in many communities. Paradoxically, general
prosperity can actually exacerbate the shortage of high-quality, affordable housing for lowincome workers. Here in the greater Washington area, as in Silicon Valley and the areas
surrounding New York City, the problem has become acute as the creation of new jobs has led to
a substantial increase in the cost of housing. fl.,1any low-income workers must either contend
with the inadequate housing stock often found in central cities or reside so far from their jobs
that the cost of commuting, measured in both time and money, is staggering To help address
this need, the Administration is proposing an expansion of the low-income housing credit. We
also appreciate the leadership on this issue of Mrs. Johnson, Mr. Rangel, and the co-sponsors of
HR 2400, including Mr. Watkins, Mr. Frost, Mr. Ballenger, Mr. Barcia, and Mr. Isakson.
~
~
This tax credit is allowed in annual installments over 10 years for qualifying low-income rental
housing, which may be newly constructed or substantially rehabilitated residential units In order
to qualify for the credit, the building owner must receive an allocation from a state or local
housing authority, which is counted towards an annual limit for each state.
The per capita credit allocation of $1.25, used to determine the annual state limit, was set in
1986. Since that time. inflation has eroded the value of the cap on low-income housing credit
allocations by 45 percent. Most state housing agencies receive qualified proposals for far more
low-income rental housing than they can support with available credits. The Administration is
proposing an increase in the cap, to $1. 75 per capita, and subsequent indexing of this amount for
inflation. These measures will subsidize the construction and rehabilitation of additional lowincome housing units while allowing the state agencies to choose projects that best meet local
needs.
Digital Divide
Access to computers and the Internet -- and the ability to use this technology effectively -- are
becoming increasingly important for full participation in America's economic, political and
social life Unfortunately, unequal access to technology by income, educational level, race, and
geography could deepen and reinforce the di\'isions that exist within American society The
Administration believes that we must make access to computers and the Internet as universal as
the telephone is today -- in our schools, libraries, communities, and homes
In recognition of the importance of technology III the ne\v economy, the President's FY 200 I
Budget includes a series of tax incentives to insure that residents of disadvantaged communities
are able to develop the skills that will be essential for labor market success in the coming years.
This initiative, to help "bridge the digital divide", consists of three components. The first is an
enhanced deduction for corporate donations of computer equipment to schools and other
institutions in disadvantaged communities Such donations will help to provide these institutions
the tools necessary to train residents in new technology. The second is a tax credit for certain
6
corporate payments to schools, libraries and technology centers in Empowerment Zones and
Enterprise Communities This credit will help insure that innovative educational programs, many
with a focus on technology, flourish in communities undergoing economic and social
revitalization. The final incentive is a tax credit for certain employer-provided education
programs in workplace literacy and basic computer skills. This credit is vital in ensuring that our
least-educated workers obtain the basic skills necessary for success in the new economy.
The first measure, designed to encourage corporate donations of computer equipment, builds
upon and extends a similar provision of the Taxpayer Relief Act of 1997. Under the 1997
legislation, a taxpayer is allowed an enhanced deduction, equal to the taxpayer's basis in the
donated property plus one-half of the amount of ordinary income that would have been realized
if the property had been sold This enhanced deduction, limited to twice the taxpayer's basis,
was made available to donors for a limited three-year period. Without this provision, the
deduction for charitable contributions of such property is generally limited to the lesser of the
taxpayer's cost basis or the fair market value. To qualify for the enhanced deduction, the
contribution must be made to an elementary or secondary school. The Administration proposal
would extend this special treatment through 2004, as well as expand the provision to apply to
contributions of computer equipment to a public library or community technology center located
in a disadvantaged community.
The second measure is a 50 percent tax credit for corporate sponsorship payments made to a
qualified zone academy, public library, or community technology center located in an
Empowerment Zone or Enterprise Community The proposed tax credit would provide a
substantial incentive that would encourage corporations to sponsor such institutions. Up to $16
million in corporate sponsorship payments could be designated as eligible for the 50 percent
credit in each of the existing 31 Empowerment Zones (and each of the 10 additional
Empowerment Zones proposed in the Administration's FY2001 budget). In addition, up to $4
million of sponsorship payments would be credit-eligible in each Enterprise Community. All
told, this credit could induce over $1 billion in sponsorship payments to schools, libraries and
technology centers, providing innovative educational programs to disadvantaged communities
The third component of the Digital Divide proposal is a credit to employers who provide training
in basic technology skills, English literacy, and other basic education to educationally
disadvantaged workers The credit would be equal to 20 percent of qualified training
expenditures. up to a maximum of $1,050 per participating worker Eleven percent of the labor
force has less than a high school education Their employers may hesitate to provide general
education because the benefits of basic technological and other skills and literacy education are
more difficult for employers to capture through increased productivity than the benefits of jobspecific education The proposed credit will help Vvorkers with low levels of education to
improve their job skills and enhance their employment opportunities
Specialized Small Business Investment Companies
Specialized Small Business Investment Companies playa special role in insuring that businesses
in disadvantaged communities have access to capital Licensed by the Small Business
Administration, these partnerships or corporations make long-term loans to, or equity
7
investments in, small business owned by socially or economically disadvantaged entrepreneurs
The Administration has proposed in the FY 200 I budget that these entities be allowed greater
flexibility with regard to their organizational form, and specifically in transitioning from one
organizational form to another without triggering adverse tax consequences For example, the
proposal would also allow C corporations to roll over, without payment of tax on realized capital
gains, the proceeds from the sale of publicly-traded securities if these are used to purchase a
common stock or partnership interest in a Specialized Small Business Investment Company.
Puerto Rico Economic Activity Tax Credit
The Administration supports extension of the wage-based credit as a more efficient means of
promoting beneficial economic activity in Puerto Rico, which is still seeking to recover
economically from the repeal of section 936 and, in addition, from the devastating effects of
Hurricane Mitch. The Administration views the proposed extension of the credit as providing a
means to helping Puerto Rico and its people through this difficult recovery and transition period.
To provide a more efficient tax incentive for the economic development of Puerto Rico and to
continue the shift from an income-based credit to an economic-activity-based credit that \vas
begun in the 1993 Act, the President's FY 200 I budget would extend and modify the phase-out
of the economic-activity-based credit for Puerto Rico by opening it to newly established business
operations during the phase-out period and extending the phase-out period through taxable years
beginning before January 1, 2009.
Renewal Communities
In the "American Community Renewal Act", Mr. Watts, Mr. Talent, and Mr. Davis, joined by
numerous cosponsors from both parties, proposed further expansion and refinement of the use of
tax incentives to encourage private sector investment in the revitalization of disadvantaged
communities. The full Committee has since adopted a version of this proposal. We are eager to
work with members of the Committee, as well as Mr. \Vatts, Mr. Talent, and Me Davis, in
ensuring, through the use of targeted tax incentives and other complementary measures, that all
American communities share in the Nation' s general prosperity.
H. R 3832, which incorporates provisions originally introduced in the "American Community
Renewal Act", would permit the designation of up to 15 Renewal Communities, at least three of
which would be located in rural areas. Renewal communities would be composed of contiguous
low-income census tracts, with respect to which the State and local government had promised to
reduce taxes, improve local services, or reduce government regulation A number of tax
incentives would be available to businesses and individuals located in the Renewal
Communities.
Clearly, there is broad agreement between the Administration and Congress on the problems
facing low-income areas, and the power of ta:\ incentives to help address these needs. In
particular, both the Administration and Congress view increased investment as critical to
community redevelopment, and tax incentives as a valuable tool to attract capital to lowerIncome areas
8
H.R. 3832 would provide for additional expensing of certain capital investment in excess of that
permitted under section 179 of the Internal Revenue Code, and for the expensing of qualified
environmental remediation expenses. In addition, H.R. 3832 provides an extension of the Work
Opportunity Tax Credit, with certain adjustments, for businesses located in Renewal
Communities. H.R. 3832 would permit a credit against tax equal to 15 percent of the first
$10,000 in wages paid, per eligible employee, for the first year of employment. The credit rate
rises to 30 percent for the second year of employment. Like the authors of the" American
Community Renewal Act", the Administration favors increased expensing authority as a means
to encourage capital formation in disadvantaged areas, expensing authority to encourage the
remediation of environmental hazards, a wage credit to spur the hiring of residents of distressed
communities, and measures to encourage saving by low-income workers.
However, the Administration has concerns with the specifics of certain proposals in H.R.3832
Most notably, exempting from taxation the capital gains on the sale of appreciated assets is not
an efficient means to encourage capital formation, and may lead to unintended and undesirable
consequences. Potential investors in distressed communities are unlikely to respond to an
incentive that provides benefits not at the time funds are committed but only upon the sale of the
assets Furthermore, a reduction in capital gains rates will not provide a meaningful incentive to
invest in depreciable property - such as machinery and equipment that is so often thought to spur
job growth - since such property is unlikely to increase in value above its original cost. And the
ability of taxpayers to deduct interest on borrowing while entirely excluding the gains from the
sale of certain property, could create negative tax rates like those associated with the individual
tax shelters of the early 1980s. This would result in an expansion of non-productive investments
that benefit neither the targeted area nor the country as a whole. Finally, exempting capital gains
from taxation could have the perverse effect of encouraging disinvestment, as owners of
appreciated assets accelerate their liquidation of investments to receive the tax benefit while this
is available.
The Administration has supported - and continues to support in the President's FY2001 budget - the basic concept of development accounts But we have concerns with the particular
provisions related to Family Development Accounts included in HR 3832 First allowing an
up-front deduction for contributions to a savings account and an exclusion for earnings and
withdrawals from that account sets a bad precedent by effectively assessing a negative rate of
tax on such savings Second, allowing eligible low-income individuals who make contributions
to their own Family Development Accounts, and non-eligible individuals who make
contributions to one or more other individuals' Family Development Accounts, to claim an
above-the-line deduction for their contributions would create complexity and significant
administrative problems.
The Administration supports the structure contained in the Assets for Independence Act, under
which Individual Development Accounts established on behalf of low-income individuals
receive matching grants from the Federal government and non-profit entities. The Department of
the Treasury, in conjunction with the Internal Revenue Service, recently issued guidance
clarifying the favorable tax treatment under current-law rules of matching grants received by a
low-income individual who establishes such an Individual Development Account.
9
In addition, the Administration's Retirement Savings Account proposal, a substantial initiative in
the FY 2001 budget, provides another model for powerful incentives that should encourage
savings by low-income workers while avoiding unintended, and potentially serious, negative
interactions with certain facets of the pension and tax systems. We are now actively discussing
the structure of this program with representatives from the private sector. including emplovers
and financial service providers. We have been pleased at their generally favorable response thus
far, and hope that these conversations will help us further refine and improve the Retirement
Savings Account concept.
Notwithstanding these concerns, the Administration looks forward to working with Members of
Congress to craft a set of measures that will help reach our common goal of promoting the
revitalization of America's most economically disadvantaged communities as efficiently and
quickly as possible.
I would like to thank Mr. Houghton, Mr. Coyne and the members of the Subcommittee for
providing the chance today to discuss these important issues. I hope that, working together, we
can insure that all Americans share in the current prosperity and have even greater opportunity in
the future This concludes my prepared remarks. I would be pleased to respond to your
questions.
-30-
10
DEPARTlVIENT
1\
OF
THE
TREASURY
NEWS
OFFICE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C .• 20220. (202) 622-2960
EMBARGOED UNTIL 10:00 A.M. EST
Text as prepared for Delivery
March 22, 2000
TREASURY UNDER SECRETARY GARY GENSLER
HOUSE BANKING SUBCOMMITTEE ON CAPITAL MARKETS, SECURITIES
AND GOVERNMENT SPONSORED ENTERPRISES
Mr. Chairman, Representative Kanjorski, Members of the Subcommittee, I appreciate the
opportunity to testify on the supervision and regulation of government sponsored enterprises. Your
bill, H.R. 3703, the HOllsing Finance Regulatory Improvement Act, focuses on the supervision and
regulation of three government sponsored enterprises (GSEs) whose original purpose was devoted
to housing. I will divide my remarks into four parts: first, a general discussion on the background
of GSEs; second, a description of the GSEs' role in the capital markets; third, a discussion of
Treasury's general approach to mitigating systemic risk in capital markets; and fourth, the
Administration's view on how aspects of the Baker bill meet this general approach.
The nation's interest in a vital housing market is strong. Congress originally created the
housing GSEs -- the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan
Mortgage Corporation (Freddie Mac), and the Federal Home Loan Bank System -- to improve
consumers' access to mortgage credit. These three GSEs have done much for home ownership in
this country. Fannie Mae and Freddie Mac, along with government-owned Ginnie Mae, helped
create a market for mortgage securitization. Credit from Federal Home Loan Banks, along with the
creation of the Federal Housing Administration, helped banks and thrifts to establish the long-term,
fixed-rate mortgage in the 1930s and 1940s.
Currently, we are enjoying the longest period of economic growth in our history. Our
financial markets have unquestionably been major contributors to America's economic success, and
our financial sector continues to be the world leader. Our capital markets are the most competitive
and efficient in the world. They generally operate without the government providing differential
treatment among financial institutions.
Government sponsored enterprises are an exception to this general approach because the
government provides them benefits in order to affect market outcomes. The potential benefits that
GSEs bring to a particular market must be balanced, therefore, against potential risks to the
financial system and potential effects on market competition.
LS-479
For p~-A7£Ses, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
Reconsideration of this balance is appropriate from time to time and as financial conditions
change. The GSEs have significantly increased both their size and their market share. They have
now become the dominant institutions in the secondary mortgage market, and constitute an
increasing percentage of the overall credit markets. At the same time, our government's fiscal
discipline is leading to less Treasury debt. Together, these factors have caused the GSEs to occupy
a more central role in capital markets than ever before.
At the same time, technology and innovation have revolutionized capital markets. Markets
are broader and more efficient than they have ever been. Our capital markets have developed
increasingly sophisticated techniques for securitizing mortgages and other assets, broadening the
holders of mortgages and lessening the need for government intervention.
The housing markets and the overall economy are currently strong. With no particular
problems on the horizon, this is an ideal time to review the supervision and regulation of the GSEs.
What are GSEs?
GSEs are privately owned but federally chartered companies, created by Congress to help
overcome barriers to the flow of credit into certain segments of the economy. I Fannie Mae and
Freddie Mac are publicly traded companies. The Federal Home Loan Banks are cooperatives
owned by their member banks and thrifts.
The federal government created the Federal Home Loan Bank System in 1932 to provide
credit to illiquid thrifts and to encourage the development of long-term, fixed-rate mortgages.
Freddie Mac was created, and Fannie Mae was transformed from a government corporation to a
GSE, during the turbulent financial period of the late 1960s and early 1970s. One of the primary
goals of creating Fannie Mae and Freddie Mac was" ... to provide supplementary assistance to the
secondary market for home mortgages by providing a degree of liquidity for mortgage investments,
thereby improving the distribution of investment capital available for horne mortgage financing,,2
During the 1970s, Fannie Mae provided this assistance primarily by buying mortgages
while Freddie Mac concentrated on securitizing mortgages. As there was not a significant
secondary market for conventional mortgages at the time, the two GSEs provided assistance to the
traditional originators and holders of mortgages, such as thrifts and mortgage banks. By the 1980s,
however, securitization had broadened the potential holders of mortgages. Pooling mortgages into
securities brought many more potential purchasers into the secondary markets for home mortgages.
Freddie Mac and Fannie Mae helped lead the development of this important market.
With rising interest rates in the early 1980s, Fannie Mae's cost of funds rose above the
interest rate it was earning on its long-term, fixed-rate mortgages. This interest rate mismatch was
similar to that faced by the savings and loan industry. Fannie Mae became insolvent on a mark-toI Today there are five GSEs: Famllc Mac: Freddie Mac: the Federal Home Loan Bank Systcm: the Fann Crcdit
System; and Fanner Mac. A sixth GSE, Sallie Mae, is in the process of being fully privatized
~ See Federal National Mortgage Association Chartcr Act, sec. 30 I(a) (amended 1989); See also S. Rep. 91-761. 91;"
Cong., 2d Sess. 7 (April 7, 1970) (explaining Freddie Mac's mission: "The Corporation (Freddie Mac) would be a
supplement to, and would llave p,uallel authority to. the Federal National Mortgage Association under its expanded
authority proposed by title II of the bill ")
2
market basis. A combination of legislative tax relief, regulatory forbearance, and a decline in
interest rates allowed Fannie Mae to grow out of its problem. Also, the Farm Credit System was in
serious financial trouble in the late 1980s, and the federal government ultimately provided financial
assistance to the System.
In 1989, Congress restated Fannie Mae's and Freddie Mac's charters, directing the GSEs to
"provide stability" and "ongoing assistance to the secondary mortgage market. ,,3
Since the early 1990s, each of the three housing GSEs has significantly expanded the size
and scope of its activities. The FHL Banks now provide both banks and thrifts with advances. In
addition, the FHL Banks now directly hold approximately $170 billion in investments. Similarly,
Fannie Mae and Freddie Mac now derive significant earnings from purchasing their own mortgagebacked securities in th.e market. Fannie Mae and Freddie Mac now hold about $850 billion of
mortgages and mortgage-backed securities in portfolio, plus another $80 billion in non-mortgage
securities.
Today, the GSEs are large, sophisticated financial i.nstitutions that retain and manage credit,
interest rate, and liquidity risks. They are owned by the private sector. In these ways, the GSEs are
very similar to other large financial institutions. As financial institutions, the GSEs earn money in
four basic ways:
Credit Guarantees. Fannie Mae and Freddie Mac purchase mortgages and issue mortgage-backed
securities on which they guarantee the timely payment of principal and interest. This credit
enhancement is similar to what Ginnie Mae and FHA do for securities backed by FHA mort.?ages.
As of year-end 1999, guarantees by Fannie Mae and Freddie Mac totaled $1.2 trillion.
On
average, they charged roughly 19 basis points (nineteen one-hundredths of a percentage point) per
dollar of security guaranteed. The GSEs bear the credit risk of individual borrowers defaulting on
their mortgages after losses covered by private mortgage insurance. While in the mid-1990s losses
averaged 5 to 6 basis points, last year they subtracted only about 1 basis point from the 19 basis
points charged.
Mortgage Investments. All three housing GSEs purchase whole mortgages, mortgage-backed
securities, and other mortgage-related securities in the capital market. By the end of 1999, the three
GSEs held about $920 billion of such assets. The GSEs take on three forms of risk with these
investments -- credit risk, interest rate risk and liquidity risk. An important component of interest
rate risk relates to forecasting the behavior of borrowers in prepaying their mortgages. In addition,
the history of financial markets shows that the significance of liquidity risk increases with size and
leverage.
Similar to other financial institutions, the GSEs choose to hold and manage risk rather than
attempting to completely hedge it. They thereby seek to increase returns to their shareholders.
Thus, the GSEs earn a spread between the interest rate on their mortgage investments and their own
J Financial Institutions Reform, Recovery, and Enforcement Act Pub. L. No. 101-73. sec. 731(111)(1).103 Stat. 183.
435 (August 9,1989) (codified at 12 U.s.c. sec. 1716).
4 TItis figure excludes securities held in portfolio by Fannie Mae and FreddIe Mac, as the GSEs are the beneficiary of
their own guarantee.
3
below-market cost of funds. This spread has recently been approximately 80 basis points per dollar
of assets for Fannie Mae and Freddie Mac, and about 50 basis points for the Federal Home Loan
Banks.
Advances.
The Federal Home Loan Banks make secured loans, called advances, to the
approximately 7,000 banks and thrifts that are System members. These subsidized funds are
frequently used by the member to make further mortgage loans, but are also used for non-housing
purposes. The Federal Home Loan Bank System Modernization Act liberalized the uses to which
small institutions can put those advances. As of year-end 1999, outstanding advances totaled $396
billion, on which the FHL Banks earned about 20 basis points per dollar of advance.
Non-Housing Investments . All three housing GSEs invest in non-housing assets such as assetbacked securities, commercial paper, and other money market instruments. As of year-end 1999,
the GSEs held aQout $180 billion in non-housing assets. Generally, the spreads earned on these
investments are smaller than the GSEs' other business lines, ranging between roughly 10 and 30
basis points per dollar of asset.
Benefits of GSE Status
The GSEs' growing role in. the capital markets is aided by the numerous benefits derived
from their federal charters. The GSEs receive no funds from the federal government, and the
government does not guarantee their securities. GSE status, however, does provide a set of benefits
that are not available to other financial institutions. These statutory benefits are listed in an
appendix to my testimony.
Taken together, these statutory benefits provide the GSEs with three advantages in financial
markets: lower funding costs; the ability to operate with less capital; and lower direct costs. These
advantages have been identified by past government studies of the GSEs, notably studies by the
Congressional Budget Office, the General Accounting Office, and the Treasury Department in
1996, and studies by these same agencies in 1990 and 1991.
Funding. First, the GSEs are able to borrow money at lower interest rates than other financial
institutions. Over the last six months, the GSEs borrowed at approximately 40 basis points less
than AA-rated banking and financial firms on one- and five-year debt . The spread to AA-rated
financial firms is particularly relevant since Standard and Poor's gave Fannie Mae and Freddie Mac
a "risk-to-the-government" rating of AA- in 1996, the last time such a rating has been done . Even
if one compares to AAA-rated banking and financial fIrms, the advantage still averaged almost 30
basis points. They also borrow at approximately 18 basis points below three-month LIBOR, which
represents the rates at which banks generally obtain inter-bank funding . These spreads may widen
or shrink over time. What remains true, however, is that the GSEs operate with a significant
funding advantage over other private companies in equal or better financial condition .
Leverage. Second, GSEs operate with less equity capital per dollar of debt than other financial
institutions. Fannie Mae and Freddie Mac have roughly $32 of debt for each dollar of capital. The
FHLBanks have roughly $19 in debt per dollar of capital. In contrast, per dollar of capital , large
4
banks have about $11.50 of debt, thrifts have $l2.50 in debt, and the five largest securities firms
have approximately $25 in debt.
Lower direct costs. Third, GSEs receive direct cost savings from their charters. In 1999, the GSEs
saved approximately $280 million by being exempt from SEC registration. In addition, Fannie
Maels and Freddie Mac's exemption from state and local taxes was worth approximately $690
million for 1999, based on the GAOls 1996 estimate that this exemption saved those GSEs about 8
percent of net income.
These funding, leverage and cost advantages are particularly significant to the GSEs
because of the markets in which they operate. The U.S. capital markets are the most competitive
and efficient in the world. Relatively small advantages, even those measured in single basis points,
over time can allow firms to dominate their markets.
While a portion of these benefits is passed on in lower mortgage rates, the rest of the cost
reductions provide higher returns to GSEs' shareholders. Studies conducted by Treasury, CBO,
and GAO over the past ten years concluded that the GSEs retain a significant amount of their
federal subsidy. Although those estimates have not been updated recently, the high return on
equity of the publicly traded GSEs in part suggests that this pattern continues. Between 1995 and
1999, Fannie Mae and Freddie Mac's average return on equity was about 24 percent. In
comparison, over that same time period, large banks' average return on equity was 15 percent, large
thrifts' average return was 12 percent, securities firms averaged 17 percent, and the largest
insurance firms averaged 12 percent.
GSEs in the Capital Markets
The advantages of GSE status have also enabled the GSEs to grow rapidly and gain an
increasing share of the capital markets. The GSEs now control a central position in the mortgage
market and an increasing share of the U.S. debt markets.
The $1.4 trillion ofGSE debt is large on any relative scale. It is now roughly the size of the
entire municipal bond market - the outstanding debt of the fifty states and localities that issue
publicly traded debt. The GSEs' debt of $1.4 trillion is now more than one-half of the $2 7 trillion
of outstanding privately held marketable Treasury debt. s Adding the $1.2 trillion in GSEguaranteed mortgage-backed securities to the mix, GSE involvement in the credit market is
approaching the size of the Treasury market.
Expected growth
Based upon recent trends and growth forecasts, GSE debt may double to $3 trillion by
2005. With the government's continued fiscal discipline, GSE debt is forecast to surpass privately
held marketable Treasury debt in the next three years.
111is is the most relevant measure of Treasury debt for comparisons of market size, as it excludes amounts held by
the Federal Reserve and non-marketable securities such as Savings Bonds and those held by municipalities
5
5
As the Treasury market declines in size, financial markets will be able to make a smooth
adjustment. Investors and hedgers will be able to switch to other securities and derivatives,
including those of GSEs. In this environment, the GSEs have been promoting their debt securities
as an alternative market benchmark. Like other large firms, the GSEs see benefits in having fewer,
more liquid issues of their debt. Such efforts could lower the GSEs' funding costs and increase
their returns to shareholders. In addition, futures contracts on Freddie Mac and Fannie Mae debt
securities began trading last week. These are the first contracts on individual private sector debt
securities to trade on the futures exchanges.
The Federal Reserve has principally used Treasury securities and repurchase transactions on
Treasury securities to c;arry out monetary policy. Although the Federal Reserve does not currently
purchase GSE debt securities, it has done so in the past and in recent years increasingly has used
their debt as collateral for repurchase agreements. Furthermore, in response to liquidity needs
spurred by Y2K concerns, the Federal Reserve began to take GSE-guaranteed mortgage-backed
securities as collateral in repurchase agreements.
Share of Mortgage Market
The GSEs have become the dominant institutions in the secondary mortgage market. Over
the last decade they have grown over four-fold, from just over $300 billion in size to $1.4 trillion.
As of year-end 1999, Fannie Mae and Freddie Mac either owned or guaranteed roughly 63 percent
of all outstanding conforming, conventional mortgages. Their retained portfolio of mortgages
currently represents 26 percent of outstanding conforming, conventional mortgages.
To the extent that the GSEs now finance a significant portion of their sector of the mortgage
market, the willingness of a GSE to purchase a mortgage has become a far more significant factor
in deciding whether to originate that mortgage. The GSEs' automated underwriting systems are
increasingly becoming the means by which originators decide to lend This technology will make
the process more efficient. In the long run, however, this trend may result in less diversity in credit
decisions and less price competition.
Ownership of GSE Debt by Depository Institutions
GSE debt also has become a significant portion of the assets of the banking system. Banks
held over $210 billion in GSE debt at mid-year in 1999. This constituted just under 4 percent of
total bank assets and over one-third of total bank capital. Banks held 75 percent more GSE debt
than their holdings of Treasury securities. In addition, banks held over $355 billion in mortgagebacked securities guaranteed by the GSEs.
To protect the exposure of banking institutions, current law places limits on an individual
bank's credit exposure to anyone entity. National banks may hold no more than 10 percent of their
capital in the corporate bonds of anyone issuer or lend unsecured more than 15 percent of their
capital to anyone borrower. Most state banks are subject to similar limits. Among all debt
securities issued by private companies, however, only GSE debt securities are exempt from this
investment limit.
6
Principles for Mitigating Systemic Risk
As the GSEs continue to grow and to play an increasingly central role in the capital
markets, issues of potential systemic risk and market competition become more relevant. In 1997,
Treasury established an Office ofGSE Policy in order to monitor these issues.
Treasury's general approach to mitigating systemic risk in capital markets emphasizes the
role of the private sector. The public sector has three roles: creating an environment in which
market discipline can work effectively; promoting the maximum degree of transparency; and
maintaining the competitiveness of the system as a whole. For institutions where the public has a
special interest - for example, depository institutions carrying federal deposit insurance - further
government involvement such as on-site examinations and capital standards is appropriate.
Promoting market discipline means crafting government policy so that creditors do not rely
on governmental intervention to safeguard them against loss.
Transparency is the necessary corollary to market discipline. The government cannot
impose market discipline, but it can enhance its effectiveness by promoting transparency.
Transparency lessens uncertainty and thereby promotes market stability.
Promoting competition in financial markets lessens systemic risk. The task of public policy
must be to ensure the stability and integrity of the market system. In any sector of the financial
market, the dominance of one or two firms can lessen competition and the efficiency of the market
pricing mechanism. In addition, the entry of a subsidized financial institution into a market may
motivate other firms to take on greater risks and weaken their operating results.
We also recognize the important role this Committee has played in addressing risk in the
capital markets. Most recently, the Committee reported out a hedge fund bill supported by the
President's Working Group on Financial Markets
H.R.3703
Mr. Chairman, I appreciate your efforts to highlight these issues and would now like to tum
to your legislative proposal, which takes various steps to accomplish these goals.
Promoting Private Market Discipline
H.R. 3703 contains several provisions designed to promote private market discipline.
H.R. 3703 repeals the housing GSEs' conditional line of credit with the Treasury. Congress
first authorized the Secretary of the Treasury to lend to the housing GSEs decades ago. The dollar
amounts of these lines of credit are now a mere fraction of the GSEs' actual borrowings For
example, since its line of credit was established at its current level in 1957, Fannie Mae's mortgage
holdings have increased 320 times in size. Each of the GSEs has gone from being a small,
relatively unknown borrower in the capital markets to being among the largest debt issuers in the
7
world. Any function the lines perform at this point is purely symbolic. Repeal of the line of credit
would be consistent with the congressional requirement that all GSE securities carry a disclaimer
that they are not obligations of the U. S. government. Thus, as part of a package of reforms, we
would support repeal of the line of credit.
The bill also repeals the Federal Home Loan Banks' so-called "superlien". A law adopted in
the midst of the thrift crisis treats a Federal Home Loan Bank's secured, but not perfected, interest
in any collateral as having a priority over any other secured, but not perfected, interest in that same
collateral. Because the Banks need not take the legal steps necessary to perfect, they typically
place a general, or "blanket," lien on most or all of a member's mortgage assets. If the member
fails, the combination of the superlien and blanket lien places a Federal Home Loan Bank in a
position superior to other secured creditors who have not perfected their interests. Repealing the
superlien would restore market discipline by increasing the Banks' incentives to distinguish among
their members with regard to credit risk. This in turn would reduce risk to the deposit insurance
fund and taxpayers.
For the same reasons, we believe that the Committee should consider repealing a provision
of current law that requires the federal banking agencies to provide confidential bank examination
ratings to the Federal Home Loan Banks. No other lender possesses this information. We believe
that GSEs, just like any other private sector financial institution, should not have access to
confidential governmental examination data.
H.R. 3703 provides new authority to appoint a receiver to resolve a troubled GSE. This
provision grants the GSE regulator powers comparable to other regulators of government chartered
companies. For example, the Co.mptroller of the Currency can appoint a receiver for national
banks. The availability of this authority would contribute to market discipline and enhance
stability in the event there were ever a market strain
Increasing Transparency
H.R. 3703 contains several provisions that increase transparency.
The bill allows the regulator to make public information that it determines would increase
the efficiency of the secondary mortgage market or the housing finance system. This provision
could enhance transparency. In crafting such language, however, it would be appropriate to
recognize that some data is proprietary and may not be appropriate for public disclosure
The bill also requires the GSEs to obtain an annual credit rating from nationally recognized
statistical rating organizations. Such ratings could improve transparency and market discipline by
giving investors an independent view of the GSEs' financial condition. It would also be a useful
outside tool for the regulator. In determining such ratings, the bill specifically requires the ratings
agencies to consider that the United States government does not guarantee the GSEs' obligations.
Current law authorizes OFHEO to obtain ratings. We believe this proposal is an improvement over
current law, as it requires annual ratings and specifically sets a standard for such ratings.
Promoting Market Competition
H.R. 3703 also contains provIsIons that are designed to preserve market competItIon,
reducing the potential for subsidized competitors to distort financial markets. Limiting the new
activities of the GSEs also has the potential to limit their scale.
The bill sets up a mechanism whereby the regulator would have authority to approve new
activities. We have some concern that the notice and comment procedures for such approvals
could interfere with the ability of the enterprises to innovate, while leaving the regulator to interpret
a rather vague standarq. We believe that it is appropriate for Congress, the chartering authority, to
provide clear guidance about what activities the enterprises' charters allow and how broadly they
should be interpreted. For example, to what extent does Congress wish the GSEs to expand from
their current housing finance business into general consumer finance or mortgage origination?
Limiting the non-mission investments of the housing GSEs could also increase their focus
on mission-related activities. Such an action could enhance accountability for the GSEs' benefits,
and improve market competition.
Other Restrictions
Exposure Limits
The bill highlights an important issue - the potential for problems at one financial
institution to cause instability in the financial markets or at other institutions. As I noted earlier,
GSE debt obligations are exempt from banks' investment securities limits. We believe that
Congress should seriously consider the best way to repeal such exceptions, including a sufficient
transition period to prevent any market disruption.
Further Regulatory Authority
H.R. 3703 also addresses the regulatory structure for the GSEs. We believe that there is an
appropriate regulatory oversight role with respect to the GSEs. First, oversight is appropriate to
determine whether government sponsored enterprises carry out their public mission, as Assistant
Secretary Apgar will later explain Second, there is also a role for oversight of their financial
condition. Such regulatory role should reflect, however, the fact that GSEs are private sector firms
with uninsured liabilities.
We believe that any regulator charged with oversight of the financial condition of the GSEs
must have a clearly defined and limited mandate. The bill grants the GSE regulator greater
flexibility in setting capital standards than current law permits. We support such flexibility, though
Congress may wish to provide the regulator greater guidance on the goals of capital regulation in
the GSE context.
We believe that the standard for regulation and the tools available to the regulator are issues
of primary importance. But the identity of the regulator is important as well. We agree with you,
9
Mr. Chairman, that it may be appropriate to have common regulators for the three housing GSEs.
We also believe that supervision ofGSEs should be a duty of the Executive Branch of government,
which is charged with economic policy, including banking and housing policy. Responsibility for
regulating financial condition could be placed with an agency responsive to those in the Executive
Branch who oversee the soundness of the financial system. Experts in housing could supervise
mission.
That said, we would not wish for regulatory reform to interfere with current efforts by
existing regulators. For example, we support the efforts of the Office of Federal Housing
Enterprise Oversight to finalize its risk-based capital rule and the Department of Housing and
Urban Development to finalize its affordable housing goals. Any regulatory consolidation should
allow this effort to be completed without interruption.
In any regulatory scheme, there may be important interactions between regulating mission
and regulating financial condition. Congress can best balance these interests by giving the
regulators clear guidance as to the mission of the GSEs and the standard for regulatory oversight.
Furthermore, although the three housing GSEs share a common overall goal - increasing the
availability of credit for housing. - the charter of the Federal Home Loan Banks mandates a
different business from the charter of Fannie Mae and Freddie Mac. Each GSE should be focused
on those market failures they were intended to solve. By clearly specifying the mission of each
GSE and the regulatory standards for their financial health, Congress can best promote housing
finance while providing for financial regulation for these GSEs.
Conclusion
Mr. Chairman, the economy and the financial markets are strong. With no particular
problems on the horizon, this is an ideal time to review the supervision and regulation of the GSEs.
The GSEs play a central role in the nation's housing finance and debt markets. Thus, your
Committee is providing a valuable service by thinking through the best framework for supervision
and regulation of these enterprises. These are important matters of public policy that require
balanced, thoughtful review by all interested parties.
-30-
10
APPENDIX A
The following benefits of GSE status are contained in the GSEs' charter acts and other laws:
•
Their debt and mortgage-backed securities are exempt from registration with the Securities and
Exchange Commission.
•
The GSEs are exempt from state and local corporate income taxes.
•
The GSEs have a line of credit from the Treasury that authorizes Treasury to purchase up to
$2.25 billion of Fannie Mae's and Freddie Mac's obligations and up to $4 billion of the Federal
Home Loan Bank System's obligations.
•
Banks are permitted to make unlimited investments in GSEs' debt securities, whereas there are
limits placed on their investments in any other company's debt securities.
•
GSE securities are eligible as collateral for public deposits and for loans from Federal Reserve
Banks and Federal Home Loan Banks.
•
GSE securities are lawful investments for federal fiduciary and public funds.
•
GSEs are authorized to use Federal Reserve Banks as their fiscal agents, including issuing and
transferring their securities through the book-entry system maintained by the Federal Reserve.
11
DEPARTMENT
OF
THE
TREASURY
~~/78~9~. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1II
................................
OmCE OF PUBUC AFFAIRS -1500 PENNSYLVANIA AVENUE, N:W. - WASHINGTON, D.C. - 20220 - (202) 622·2960
EMBARGOED UNTIL 10 AM EST
Text as Prepared for Delivery
March 23, 2000
TREASURY SECRETARY LAWRENCEH. SUMMERS
TESTIMONY BEFORE THE HOUSE BANKING COMMITTEE
Chairman Leach, Ranking Member LaFalce, Members of the Committee, I am
pleased to have this opportunity to discuss the ongoing reform of the international
financial institutions, which I know is of considerable interest to the members of this
committee and other members of Congress.
I would like to address five issues today:
•
First, the case for strong United States support of the international financial
institutions (IFls).
•
Second, the important steps that the Administration has taken in recent years to
strengthen the international financial architecture and the IFls.
•
Third, our agenda for reform at the IMF.
•
Fourth, our agenda for reform of the international development institutions,
particularly the World Bank.
•
Fifth, some initial reflections on the Report produced recently by the IFI
commission, both the majority and the dissents thereto.
I.
The Need for Strong International Financial Institutions in the New Global
Economy
Since the Mexico crisis in 1994 President Clinton has been committed to the
project that has come to be called the reform of the international financial architecture and he has been committed to change at the IFls as a crucial part of that effort. As we
LS-480
For press releases~eeches~ublic schedules and official biographies, call our 24-hour fax line at (202) 622·2040
institutions were founded more than fifty years ago at Bretton Woods, and it is both
right and urgent that the IMF and the other IFIs change along with it.
What has not changed, in this new environment, is the US stake in these
institutions. Indeed, it is greater than ever in a more integrated, market-based world.
The core case for the U. S. support for the IFIs rests on the core case for the U. S.
supporting increased prosperity in the developing world and increased global
integration.
That case has three pillars.
•
First, it advances our core values and humanitarian goals: countries that are helped
to succeed economically are much more likely to become democratic, and their
people more likely to avoid debilitating disease, to learn to read and to work with
human dignity.
•
Second, it promotes US economic and commercial interests. Already the developing
world accounts for more than 40 percent of U.S. exports and that will increase.
Growth in the developing world raises the demand for our exports. And the IFIs
support policy changes, such as reduced tariffs in Mexico and opening up the Indian
economy that enormously benefits U.S. producers.
•
Third, it promotes our national security. From the experience of Germany in the
1930s to Bosnia and Africa in more recent times, history teaches us that conflicts
are most likely in situations of economic distress - when populations tum their
frustration to nationalist leaders because of a lack of a sense of economic of
economic opportunity. Our ability to create a successful economic development
strategy around the world reduces the likelihood of conflicts that we would
otherwise be drawn into.
In their lending the MDBs support all three of these core American interests - at
a cost to American taxpayers that is less than one half of one percent of our budget, and
much lower than it was in the early 1990s.
Ten years ago, when the Berlin Wall came down, the United States defense
budget was more than $100 billion higher, in real terms, than it is today. Reasonable
people can debate how much of this dividend ought to have been invested in the
ongoing protection of our interests that support for the IFIs and other foreign operations
provide. But it would be difficult to make the case that the right answer is to spend a
good deal less on these things than we did before. In fact, we are spending 20 percent
less in real terms today on foreign assistance overall - and 40 percent less on the
MDBs.
2
To be sure, the world has changed in profound ways: most importantly, with the
spread of market ideologies and a more truly global private capital market. And so the
IFIs must change and adapt as well. But their special benefit, their special efficiency;
their special ability to lever funds - both multilateral and private - all make them
especially important tools today. Quite simply, they are one of the most effective, and
cost-effective, investments we can make in the forward defense of America's core
interests.
•
Each dollar that we contribute to the MDBs leverages $45 in lending programs in
tomorrow's economies.
•
With respect to the IMF, appropriations for the US quota do not result in any net
budgetary outlay, yet they can catalyze significant international financial resources
when financial crises threaten the financial stability and prosperity of the US and
global economy.
Strong support for the IFIs has been central to a vision of closer integration
between nations and shared global prosperity upon which United States foreign and
economic policy has been based for the bulk of our postwar history. We believe that
this vision has served our country extraordinarily well, and that it will serve us even
better in the new century to come. But we equally believe that the investments we make
in these institutions need to be deployed as effectively as they possibly can. The IFIs
are indispensable. But as we have said many times, that does not mean we have to be
satisfied with them as they now are.
II.
The Refonn of the International Financial Architecture and the
International Financial Institutions
The ongoing reform of the global financial architecture has produced some
important achievements, including, more recently, the creation of the G20. This
grouping, which met for the first time last December, will be a permanent informal
mechanism for dialogue on key economic and financial issues among industrial and
emerging market economies that collectively account for more than 80 percent of
global GOP.
In addition:
•
With the creation of the IMF's Supplementary Reserve Facility (SRF), we have
changed the terms of the exceptional financial support that the international
community provides, working to reduce moral hazard with the application of
premium interest rates.
•
We have catalyzed a major global effort to reduce national vulnerabilities to crises,
with concrete steps to help countries develop stronger national financial systems and
3
improved international surveillance, with increased incentives to pursue sound
policies before crisis strikes. These include the incentives embodied in the terms of
the new Contingent Credit Line, which has several of the features of the SRF, but
was designed to enable the IMF to safeguard countries with sound policies from the
effects of market contagion.
•
And we have found new ways to involve the private sector in the resolution of
crises - most notably in the cases of Korea and Brazil.
More generally, changing the broad orientation of the IFIs has been an
important focus of this Administration and many in Congress in recent years. In this
context we have seen new developments on a number of fronts, including:
A sea change in transparency and accountability.
This is perhaps most visible in the IMF's new policies on the public release of
documents. For example, since last June, in large part as a result of Administration and
Congressional urging, there is now a presumption that key program documents
considered by the IMF Board - including Letters of Intent - which detail the policy
commitments that countries have undertaken as a condition for IMF support will be
released. Since June 3rd, 58 arrangements have been discussed by the Board, and
program documents were released in 50 of these cases.
Similarly, all of the multilateral development banks have in place mechanisms
for public information disclosure and increased public participation. Increasingly the
institutions use their Internet websites to post a large volume of project information and
appraisal documents and other information.
At the World Bank, disclosure of the Country Assistance Strategies (CASs), the
Bank's key planning document for future lending, is now routine - as are consultations
with the people that will be affected by Bank projects. For many of the world's poorest.
this can be the first real voice in their own future that they have ever had.
New emphases in program content.
We have advocated substantial changes in the scope and nature of the
conditionality for IF! support: to place greater emphasis on the importance of market
opening and liberalization of trade; to focus more on the development of the institutions
and policies that will allow markets to operate; to take better account of the impact on
the poor of economic adjustments; to increase national ownership and participation in
reforms; and incorporate environment, social and labor issues into program design, as
appropriate.
For example:
4
•
As part of its recent IMF program, Indonesia abolished import monopolies for
soybeans and wheat; agreed to phase out all non-tariff barriers affecting imports;
dissolved all cartels for plywood, cement and paper; removed restrictions on foreign
investment in the wholesale and resale trades; and allowed foreign banks to buy
domestic ones.
•
At the World Bank, in large part as a result of United States urging - pursued with
broad bipartisan support - there is now systematic evaluation of the environmental
and social impacts of Bank-financed projects, and independent inspection panels to
provide recourse to people affected by these and other Bank projects.
Making good governance and fighting corruption a systematic pan of IFI operations
We have consistently worked to make governance, combating corruption and the
effective use of funds a core part of IFI procedures. Most recently, in light of our
experience in Russia, we have led the call from the G7 for authoritative and systematic
reviews by the IMF and the World Bank to find ways to strengthen safeguards on the
use of their funds in all of their lending activities.
I am glad to report that largely as a result of United States urging, IMF staff are
now working with outside experts to develop new tools for strengthening ·their
safeguards against misuse of IMF funds and to support higher quality auditing and
information practices in member countries. The need for such safeguards has surely
been further underscored by recent reports of events in Ukraine.
Let me say a little more about this situation, which I know has been of
considerable interest to this committee and others in Congress. The IMF indicated last
week that the Ukrainian authorities undertook a number of transactions with their
reserves in 1997 and 1998 that may have led, at the least, to the disbursement of Fund
loans based on an overstated level of reserves. We are deeply concerned about this
in formation.
The IMF became aware of these transactions over a period of time. The
Ukrainians first acknowledged in August 1998 that some of their reserves were tied up
and not readily available. At that time, the IMF required Ukraine to make
compensating changes in reserves, tighten reserve definitions, and institute quarterly
audits by a reputable accounting firm. We supported these actions.
IMF staff received subsequent information during 1999 about additional
questionable transactions that it did not disclose to the IMF Board until recently. We
consider this to be a matter of especially serious concern, and the Fund has
acknowledged that the handling of this matter raises important issues that it needs to
address.
5
Ukraine is cooperating closely with the IMF in undertaking detailed independent
audits of the National Bank's activities for 1997-98. The first of these will be completed
and published soon. Ukraine will institute more detailed quarterly audits, and has
agreed to place the proceeds of any new IMF disbursements in an account at the Fund
that can be used only to repay its debts to the IMF.
In addressing the issue of whether to support further IMF financing for Ukraine,
we will review the results of the audits in order to determine what additional controls
are needed to prevent future inappropriate reserve management practices and help
ensure that future IMF resources are used for their intended purpose. We are also
urging the IMF to strengthen its internal procedures, in order to do everything possible
to ensure against any recurrence of such abuses - whether in Ukraine or any other
borrowing country.
Progress in areas highlighted by the IMF legislation
With reference to the IMF in particular, on October 1, 1999, Treasury
submitted to Congress a major report on IMF reform detailing progress in efforts to
increase the IMF's effectiveness in numerous areas such as increased transparency,
strengthening of social safety nets, implementation of core labor standards, trade
liberalization, promoting good governance, and the environment. This report is
available on the Treasury website at:
http://www . treas. gov/press/releases/docs/imfrefor .pdf.
In addition, with the active support of Treasury and the United States IMF
Executive Director's Office (USED/IMF), the IMF cooperated fully in the GAO's
preparation of its report on the financial operations of the IMF, which was one of the
requirements of the IMF legislation. This report was completed and transmitted to
Congress in September 1999 ("International Monetary Fund: Observations on the
IMF's Financial Operations"),
Since the submission of the October report on IMF reforms, we have seen
further progress in a number of areas. For example:
•
Trade. In its most recent Letter of Intent, published on January 20, Indonesia
pledged to "maintain a liberal trade regime, avoid introducing any new trade
barriers, and remove remaining distortionary elements in the trade structure" and to
eliminate during the program period "all exemptions to import tariffs (except those
which are part of international agreements), and remove all existing non-tariff
barriers (except those maintained for health and safety reasons)." Indonesia's
government has further pledged to eliminate its import monopoly on rice.
•
Labor and Social Safety Nets. In Bolivia, the authorities, in consultation with social
partners and the International Labor Organization (lLO), have plans for a new labor
6
law this year that will both enhance labor flexibility and bring Bolivian labor
regulations into line with ILO standards, particularly those regarding equality of
treatment between genders and labor safety. The USED/IMF has emphasized, both
in the context of Bolivia's program and more broadly, the importance of ensuring
that efforts to enhance labor market flexibility should include measures to support
workplace representation and strengthen social safety nets
•
Environment. In recent Article IV discussions with authorities in Laos, the IMF
raised the issue of sustainable natural resource management for forestry, water, and
agricultural land to prevent over-exploitation. The IMF recommended
strengthening the forestry regulatory framework and enforcement as well as a
review of logging and export privileges reserved to military-owned enterprises.
In addition, we have fully implemented the fiscal year 1997 Military Audit
Legislation. As part of these efforts, following consultations with the U.S. Government
and the IMF, the Government of Nigeria reactivated the role of its Auditor General,
subjected defense spending to the same accountability standards as other ministries, and
committed to consolidate all extra-budgetary military expenditures into the budget. In
cases where a country's military audit system does not meet the standards of the
legislation, the United States Executive Director has opposed IMF assistance.
As the recoveries in both Mexico and in the crisis-affected economies in Asia
indicate, IMF and World Bank programs have played a key role in responding to
financial crises and containing their broader effects - stabilizing financial systems, and
returning economies to growth. But we recognize that both institutions need to change
further in a number of respects if they are to meet the challenges of this new world.
III.
Building a 21" Century IMF: Our Agenda for Refonn
Our plans for reforming the IMF start from a single framing new reality of the
global financial system today, that- the private sector is the overwhelming source of
capital for growth. We believe that the IMF must increasingly reflect that change, with
a greater focus on promoting financial stability within countries, a stable flow of capital
among them, and rapid recoveries following financial disruptions.
Reforming the IMF to meet the conditions of a new time will partly be a matter
of policies and procedures. It will also and perhaps most crucially be a matter of culture
and orientation. In London last December I laid out five core reforms of the IMF's
approach in the emerging economies that we believe are necessary.
These are:
I. A greater focus on promoting the flow of injonnation from governments to markets
and investors.
7
In a more integrated global capital market, IMF surveillance needs to shift from
a focus on collecting and sharing information within the club of nations - to promoting
the collection and dissemination of information for investors, markets and the public as
a whole. And the IMF needs to pay more attention, not just to the quantity of
information disclosed to markets, but also to its quality.
In the context of countries receiving IMF finance, we believe it is appropriate
that independent external audits of central banks and other relevant government entities
be required and regularly published. We are working to forge a broad international
consensus on this point. More generally, we believe that substantial deficiencies in the
accuracy and quantity of data that a country discloses should be noted and highlighted
by the IMF in the way that more conventional macro-economic deficiencies are
highlighted.
2. Greater attention
fundamentals.
to financial
vulnerability as well as macro-economic
In the wake of recent events, we believe that the IMF needs to focus much more
attention on financial vulnerabilities such as those that played such an important role in
causing the crises in Asia.
This will mean, in particular, a greater focus on the strength of national balance
sheets. In this context we believe the IMF should promote a more fully integrated
assessment of a country's liquidity and balance sheet. To this end, it should work to
incorporate more systematically, in its surveillance, indicators that provide a more
meaningful guide to the adequacy of a country's reserves than simply their size relative
to imports. Work is already under way at the IMF to explore how this can best be
achieved.
By the same token, we believe that the IMF should highlight more clearly the
risks of unsustainable exchange rate regimes. The presumption needs to be that
countries that are involved with the world capital market should increasingly avoid the
"middle ground" of pegged exchange rates with discretionary monetary policies, in
favor of either more firmly institutionalized fixed rate regimes or floating.
3. A more strategic financing role that is focused on emergency situations.
International financial institutions, no less than private companies, need to focus
on core competencies. Going forward the IMF needs to be more tightly focused in its
financial involvement with countries, lending selectively and on short maturities. It can
and must be on the front line of the international response to financial crises. It should
not be a source of low-cost financing for countries with ready access to private capital,
or long-term support for countries that cannot break the habit of bad policies.
8
This suggests a number of core imperatives. Let me just highlight one here: the
need for streamlined facilities.
We have supported a thorough review by the IMF's members and its
management of the myriad lending facilities that have been established over time. We
are already seeing progress on this front, with the IMF Executive Board agreeing
earlier this year to eliminate the BSFF and the contingency element of the CCFF and
just last week supporting elimination of the Currency Stabilization Fund and support for
debt and debt service reduction. But we believe that more change is necessary.
We believe that a necessary result of this kind of streamlining would be that the
IMF would come to rely on a very small number of core instruments for the bulk of its
lending. These instruments will also need to be priced appropriately, both relative to
each other and relative to alternative, private sources of finance. For example, in this
context we believe that it would be appropriate to introduce higher charges for
borrowing under standby arrangements, to encourage recourse to alternative sources of
funding. The IMF Executive Board took up this issue last week, when it engaged in an
initial discussion of the broad issues, and will continue work on streamlining the IMF S
lending tools in the coming months.
I
4.
Greater emphasis on catalyzing market-based solutions to crises.
In its response to financial crises, several basic presumptions should now be guiding the
IMF's approach with respect to the private sector.
•
IMF lending should be a bridge to and from private sector lending not a long-term
substitute.
•
Official lending along with policy changes can be constructive in helping to restore
confidence in situations where a country does have the capacity to repay.
•
Where possible, the official sector through its conditionality should support
approaches - as in Korea and, more recently, Brazil - that enable creditors to
recognize their collective interest in maintaining positions, despite their individual
interest in withdrawing funds.
•
As we have seen, for example in Ukraine and Pakistan, it will be necessary in some
cases for countries to seek to change the profile and structure of their debts to the
private sector. Such agreements should have the maximum feasible degree of
voluntarism, but they should not fill short-term financing gaps in a way that
promises renewed problems down the road.
•
In exceptional cases, the IMF should be prepared to provide finance to countries
that are in arrears to their private creditors: but only where the country has agreed
9
to a credible adjustment program, is making a good faith effort to reach a
collaborative agreement with its creditors, and is focused on a realistic plan for
addressing its external financing problems that will be viable over the medium and
longer term.
The IMF Board discussed early this week the ways in which the broad principles
of the G-7' s approach toward involving the private sector in crisis response have been
implemented -- with a view towards better operationalizing this approach going
forward. Further discussion of these issues is expected by International Monetary and
Financial Committee (formerly Interim Committee) in mid-April.
More broadly, we believe strongly that the IMF should establish a Market
Conditions Advisory Group to help it have a deeper knowledge of the private sector and
more systematic access to market trends and views.
5. Modernization o/the IMF as an institution.
We further believe that if the work of the IMF is to change, the IMF itself may
also need to change. Specifically, we believe it should move over time toward both a
governing structure that is more representative and a relative allocation of member
quotas that reflects the changes under way in the world economy - so that each
country's standing and voice are more consistent with its relative economic and
financial strength.
We also believe that the IMF should deepen the commitment to transparency
that is built into its operations, especially by making the Fund's own financial workings
clearer and more comprehensible to the public. In that context I am pleased to note that
just last month we won IMF Board agreement on quarterly publication of the
operational budget - to be renamed the Financial Transactions Plan - with a one quarter
lag.
This would also be consistent with the legislative mandate that was enacted in
last year's authorization of IMF off-market gold sales. The first such "FTP", covering
the period March-May 2000, will be published in August.
IV.
Our Refonn Agenda for the World Bank and Regional Development Banks
Turning to the multilateral development banks, this week in a speech at the
Council on Foreign Relations in New York I outlined the United States' agenda for
making them as effective as possible in promoting market-led development around the
world.
Our approach starts from a number of crucial lessons from the global
development experience of the past 50-plus years: that support should reward and
strengthen domestic efforts to reform rather than try to force those efforts into
10
existence; that it must support, not supplant the development of open markets and the
growth that open markets can bring; that it should be conditioned on an effective
framework for promoting market-led growth; and that conditions should focus on the
essentials, including critical public investments
We believe that the MDBs need to bring these lessons to bear in improving their
capacity to fulfil three core missions:
•
Above all, supporting effective growth and poverty reduction in the poorest
countries at a time when there are now 1.3 billion people living on less than $1 a
day.
•
Targeting lending to countries with access to private markets, focused on areas of
clear market failure, catalyzing additional private flows, and supporting government
efforts to respond to financial disruptions.
•
Promoting the provision of global public goods such as vaccines for killer diseases
such as AIDS and more effective tools for international environmental protection
efforts.
Let me highlight the key changes that we are promoting in each of these areas.
More Effective Policies in the Poorest Countries
What the MDBs do to promote development in the poorest countries is without a
doubt their most morally urgent and important work. These are countries that cannot
expect to mobilize private flows on a consistent basis and can expect to be reliant on
official flows for some time to come. This is the right moment for a fundamental
reassessment of how these flows are provided.
The Heavily Indebted Poor Countries (HIPe) initiative is a one-off attempt to
wipe the slate clean. It is essential that we make it work so that countries do not find
themselves in this situation again.
We believe that an effective approach will require a shift in the emphasis of the
MDBs in these countries in the following respects.
•
A more human-centered approach and new division of labor between the IF/s.
Official estimations of the need for external support need increasingly to move from
a predominant focus on macro-economic issues to more clearly emphasizing the
nature of human needs. As a condition for receiving debt relief and new loans,
HIPe countries are now required not only to have established a solid track record of
reform, but also to produce forward-looking Poverty Reduction Strategies. These
strategies will and must form an important part of the basis for a satisfactory
11
financing framework for countries. Over time we expect this to become the primary
responsibility of the World Bank given its expertise and mandate in global poverty
reduction. But the IMF needs to have a continuing role in macro-economic
evaluation, because no plan is viable if there is not a sustainable financing
framework.
•
Increased selectivity. As the World Bank has recognized in implementing IDA 12,
we need increasingly to shift the balance in favor of providing support to countries
where donors can have confidence that assistance will be well used - and denying it
more often where this is likely to be misused, particularly in cases of corruption. By
some estimates, this would more than triple the effectiveness of development
assistance in reducing global poverty.
•
Better procedures for the interaction between countries and the IFls. We believe
that the MDBs should rely on a smaller number of clear and measurable
performance targets, set more realistically, and then more vigorously adhered to.
An important part of this shift will be developing more effective mechanisms within
the MDBs for evaluating when targets and intermediate benchmarks have been met,
including a stronger commitment to disbursing in stages and more frequent formal
reviews. There also needs to be a stronger presumption of publication for key loan
documents and transparency in the relevant operations at the national level, so that
the domestic population, outside investors and donors can track disbursements and
results.
•
Additional concessional resources. We should not delude ourselves that HIPC or the
reforms that it has inspired will translate into better basic schooling or health care in
these countries without a genuine increase in the pool of concessional resources.
This makes it especially urgent and important for Congress to help the US play our
proper part in this effort, by enacting the President's supplementary appropriations
request and the funding contained in his FY2001 budget.
This last point is a crucial one: the earlier version of HIPC saved Uganda $45
million in debt service in 1999 alone. This relief has helped it to double enrollment in
primary education in just two years. Under the enhanced HIPC, Uganda would receive
an estimated $650 million more, in net present value terms, to invest in these basic
priorities. But these benefits for Uganda and other countries will remain in question if
the United States does not do its part.
More focused MDB lending in emerging market economies
Emerging market economies, where there are private financial flows, involve
different iss~es than those posed in the poorest countries. Specifically: MDB lending in
these countnes should be confined to those areas where they can increase the country's
12
overall capacity to access external resources, and add value that the private markets
cannot.
This suggests an emphasis on three types of circumstances:
•
Where they can effectively deploy the MDBs' unique capacity to apply conditions
and to promote key public investments - including basic health and education and
other social spending and the development of an effective institutional infrastructure
for markets - that add to the total stock of public resources available for these
purposes.
•
Where the involvement of the MDBs can attract genuinely additional private flows:
for example, where MDB co-financing arrangements and guarantees can enhance
the credibility of developing country borrowers in the eyes of investors. In this
context we believe that the MDBs should continue to explore more innovative ways
of catalyzing private capital flows to such countries, where these can be pursued
within strict and clear guidelines that safeguard the financial position of the
institutions.
•
Where the MDBs can help to counteract temporary disruptions or limitations in a
country's access to private capital due to contagion or other external shocks. To this
end, they should be taking advantage of the substantial recent improvement in
global fmancial conditions to develop a large, more flexible, contingent financial
capacity to respond to deterioration in investor confidence in emerging markets
down the road. This is an important point, because financial emergencies are times
when there is more social and human distress, and as we have seen, they are times
when more structural changes can be achieved in 18 months than would otherwise
been achieved in a matter of years. On the basis of recent experience, we strongly
believe that the World Bank should find ways to upgrade substantially its capacity to
respond rapidly and effectively to such emergencies in the future.
As part of this approach, the World Bank and others need to work harder to
ensure that their lending is genuinely productive, and that is supports, rather than
supplants, private sector finance.
Accordingly:
•
We believe there should now be a strong presumption that the MDBs have no
business lending in countries for sectors in which private financing is available on
appropriate terms, and where there is a risk that such lending will simply supplant
private financing. These include credit programs serving mainly large-scale
industry, support for large-scale infrastructure in cases where these would have no
significant environmental benefit, and lending in oil, telecoms and other sectors
where the private sector is already active.
13
•
We further believe that in a world in which the MOBs are promoting policies that
succeed in increasing the Capacity for emerging market economies to access private
finance, the share of MOB lending that is devoted to these economies should be
expected to decline in volume over time and become more closely linked to the endgoal of graduation. The MOBs cannot expect to live in a world where they can
count on successive capital increases for their non-concessionalloan windows.
Going forward, they should incorporate this reality in their identification and
management of lending in middle income countries.
For all MOB lending in emerging market economies, we also believe that a
review of pricing policies is appropriate. Pricing needs to avoid excessive
encouragement of public rather than private sector reliance. And it needs to assure that,
given the enormous needs for concessional finance, the MOBs are in as strong a
position as possible to contribute resources to concessional programs and to the creation
of global public goods. A review based on these principles will, I suspect, lead to
higher prices in many cases.
An Enhanced Focus on the Provision of Global Public Goods
Increasingly, as integration proceeds, the world is confronting a broad class of
problems that cross borders and defy solution by individual governments and markets.
Whether it is money laundering and financial crime, global warming, new killer
diseases, or reductions in global bio-diversity - the solutions to these problems will be
global public goods, requiring concerted global cooperation. We believe that the World
Bank and other development institutions potentially have an enormous contribution to
make in helping to push the frontier of international efforts to promote these kinds of
goods, many of which will especially benefit developing countries.
Let me highlight one area in particular where we believe that the MOBs should
be looking especially hard for new kinds of responses: promoting the creation and
dissemination of medical knowledge.
Infectious diseases such as HIV I AIDS, tuberculosis, malaria and respiratory and
diarrheal disease, are responsible for almost half of all deaths of people under 45
worldwide. Life expectancy is now actually declining in a host of African countries
struck by HIV I AIDS, with adult mortality rates in the worst affected countries now
twice what they were even a few years ago. Yet the WHO estimates that only perhaps
10 percent of the $50-60 billion spent worldwide each year on health research is
directed toward diseases that afflict 90 percent of the world's population.
President Clinton has proposed a number of important bilateral efforts that he
h~pes wil~ catalyze further efforts by other bilateral and private donors. But we agree
WIth PreSIdent Wolfensohn that the World Bank has an important contribution to make,
14
by helping to create a market for new treatments and vaccines in many of the countries
worst affected. That is why the President is proposing that the MDBs dedicate a further
$400 million to $900 million each year of their concessional lending for basic heal th
care to immunize, prevent and treat infectious diseases in the poorest countries.
V.
Initial Reflections on Recent Alternative Refonn Proposals for the IFIs
These steps for reorienting the institutions build on and, in many cases,
significantly expand upon the progress we have already made in recent efforts to
strengthen the international financial architecture. Fully implemented, our proposed
reforms would greatly enhance the IFIs' capacity to support global financial stability
and growth - while remaining true to the basic ideals upon which they were founded.
As will be clear from my preceding remarks, our approach shares with the
reports of the IFI Commission and the dissents thereto a number of important goals and
aspirations. Notably:
•
The need for a clearer delineation of the respective roles of the World Bank and the
IMF - and clearer priorities.
•
The need for more effective program design to make best use of the lending
provided to respond to crisis situations - including, with regard to the IMF, the
potential for ex ante conditions to help strengthen incentives for sound policies
outside of crises.
•
The need for greater accountability and transparency at all of the IFIs - an objective
that we have vigorously pressed in the past and will continue to push for in the
future.
•
The need for strong and well-targeted support for successful development in the
poorest countries and America's enormous stake in the global development effort as
a whole.
•
The need for substantial, conditioned debt relief for highly indebted countries with a
track record of economic reforms.
•
And the fundamental recognition that no amount of official finance in the world can
make up for a lack of domestic commitment in the country itself. Countries
implement and sustain reforms to which they are themselves committed.
At the same time, it is fair to say that we part company with the IFI
Commission's Report on how these principles can best be applied.
15
Mr. Chainnan, we have not completed our full review of this Report, but
frankly, we find a number of the more drastic recommendations highly troubling.
However, while we have not completed our full review of the Report's
recommendations, we believe that taken literally, they would strai~acket these
institutions to the point where would no longer be able to advance America's core
values and interests around the world. The combination of restrictions that the Report
proposes would essentially eliminate these institutions' capacity to provide support for
countries as diverse as Mexico, Bulgaria and Thailand. This would put at risk American
wages, American savings and American security.
Let me highlight for the Committee some of our leading concerns with respect
to both the Commission's recommendations for the IMF and for the World Bank.
The Repon's proposals for the IMF:
First, the Report could limit lending to a narrow set of relatively prosperous
economies, thereby preventing the international community from responding to
financial crises such as the Asian financial crisis. Taking at facing value the
recommendations in the Report, few, if any of the countries that have suffered financial
crises in recent years - notably Mexico, Brazil and Korea - would have qualified for
emergency IMF support.
The Report's brief acknowledgment that these rules might have to be
overthrown in times of systemic risk is welcome, but it equally calls into question how
the rest of the Report's proposals in this area are to be interpreted and applied. The
authors offer no guidelines or rules for how to implement this exception, which by its
nature surely merits more serious discussion than the Report acknowledges. Until and
unless the implications are fully understood, it must be assumed on the basis of the rest
of the Report that a very large number of countries that are potentially vulnerable to
crises would not, under the proposed system, have access to IMF official finance.
Second, the Report would allow the set of pre-qualified borrowers unconditional
access to IMF resources. We believe this would be an irresponsible use of taxpayers'
money, would be likely to fail in stemming crises, and would be a standing invitation to
irresponsible behavior by investors and governments as a result of moral hazard. For
the Committee's information I am submitting with this testimony a brief survey of the
IMF's experience with the use of conditions l • As this survey shows clearly, countries
that fully implement IMF reform conditions, for example, Thailand and Korea, have
consistently had the greatest success in stabilizing their economies and restoring
growth.
1 Compliance a/Countries with Agreements Afade as a Condition a/Receiving IMF Financial Assistance,
attached.
16
Third, the Report would presume, through its qualification criteria, that crises
emerge almost exclusively from flaws in the financial sector. This neglects a major
lesson of recent crises, that problems that surface in the financial sector will often have
their roots in much deeper economic and structural problems. These are problems that
the Commission's suggested criteria would be likely to overlook.
A global economy with the kind of IMF that the Report envisions would be one
in which the vast majority of IMF members would be without the IMF's financial
support in finding constructive means of dealing with balance of payments problems including the newer kinds of crises that we have seen in Mexico, Korea and elsewhere.
The net result would be that US businesses, farmers and workers would be more
vulnerable to contagion from crises that countries were unable to contain on their own and more vulnerable to the re-emergence of restrictions on trade and payments and
other beggar-thy-neighbor policies that governments in crisis without international
support have all too often resorted to in the past. We do not believe this an outcome
that the United States should support.
The Repon's proposals for the World Bank and other MDBs:
With regard to the World Bank and other MDBs, the Report would exclude the
vast majority of the current recipients of MDB lending from the additional finance and
insurance against instability that access to these programs can provide. As I noted
earlier, we believe that the MDBs' lending to countries with access to private sector
finance needs to be more tightly focused on adding value that the private markets
cannot. But we categorically reject the idea that there are few such opportunities for the
MDBs to exploit in these countries - or that they are not crucially important to US
interests.
•
As we saw, most vividly, in the Asian crises, the emerging market economies
have increasing systemic significance for the global economy as a whole.
Emergency lending by the MDBs at times of crisis can enhance a country's
capacity to make necessary policy adjustments, not least by making it possible
for governments to protect the most vulnerable from the short-term effects of the
crisis.
•
Second, and no less important, the Report would rule out MOB support for the
majority of the world's poorest people. One third of the people in Latin America
live on less than $2 a day, and most are in countries that would be made
ineligible for support. Despite the fact that more people live on that income in
China and India than the entire population of Sub-Saharan Africa, neither of
these countries would have access. Private financial markets alone will not
finance needed investments in basic health and education and rural
infrastructure. And appropriately targeted MDB finance can itself catalyze
additional private investment.
17
With regard to the poorest countries, the Report would substitute grants for
loan-based funding in the vast majority of World Bank programs.
•
The Report's proposals in this area would raise serious workability problems with
respect to both the timing of the delivery of assistance and the reliance on NGOs as
the main conduits of aid. For example, the recommendations for promoting the
provision of public goods would essentially require countries to build the school and
enroll the children, before the official assistance to pay for it would be provided.
•
Perhaps most fundamentally the shift to grant-based funding would drastically
reduce the total amount of official resources that can be brought to bear in these
economies, and bringing to an end any capacity for concessional flows to be fe-lent.
H bears emphasis that roughly half of the $20 billion in IDA 12 is made up of
"reflows" of funds due to past recipients' repayment of loans. In a world in which
official assistance is in such scarce supply, this re-Iending of very highly subsidized
concessional support, is a benefit that the international community should be very
wary of giving up.
In essence, the Report's recommendations would drastically undercut the global
role of the World Bank by limiting it to the "knowledge" business. This ignores the
fact that knowledge without funding can be sterile; the fact that useful knowledge is a
product of real operations, which require real finance; and not least, the fact that the
World Bank is the broadest, most effective source of development expertise that the
world possesses.
Mr. Chairman, the founders of the Bretton Woods institutions more than half a
century ago recognized that there could be no successful global integration without truly
global institutions for promoting prosperity within countries and a stable flow of capital
between them. This was the painful lesson of the 1930s, when the absence of an
effective global response to financial panics helped pave the way for deflation and
depression - and ultimately, World War II. The same lesson has been taught again and
again in the postwar period: indeed, can only apply more forceful1y at a time when the
world is more interconnected than ever before. Seen in this light, adopting the view that
the IMF should serve only an elite club of nations, and the World Bank's global role
should be drastically curtailed, would be a large step backward indeed.
The Commission's call for expanded debt relief
Finally, we welcome the support that both the Commission's Report and the
dissents thereto have offered for reducing on a conditioned basis the official debts of the
poorest countries. As I mentioned earlier, this has been a primary goal of the
Administration since we led the development of the first HIPC initiative in 1996.
18
These efforts have already worked to help countries such as Uganda direct their
scarce resources on poverty reduction rather than debt service. When the enhanced
RIPC initiative is fully funded and implemented we believe it will make an even greater
difference to the prospects for growth and poverty reduction in countries that are
committed to reform.
However, we do not believe that the Report's recommendation to "write-off'" all
RIPC debt would be either desirable or feasible. Specifically:
•
First, because the United States and the international community's commitment to
this effort will be judged less by the scale of our aspirations than by the resources
we are prepared to invest in making these aspirations bear fruit. Comprehensive
debt forgiveness for the HIPCs would raise the costs of the Initiative for the IFIs
from around $14 billion to roughly $43 billion. A clear-eyed assessment of the
record must conclude that this would require a substantially larger donor
commitment to RIPC than the international community or the US Congress has
shown itself willing to make.
•
Second, and as a consequence, without a commensurate increase in the global pool
of concessional resources, the additional costs of such a proposal would have a
commensurate negative impact on new concessionallending. This would negate the
very financial benefits to these countries that HIPC is intended to provide. And to
the extent that it had the effect of depleting resources for non-HIPC countries, it
would amount to the "poor funding the poor". This is at odds with the
Commission's own recommendations for increasing financial support for poor
countries with a track record of reform.
IV.
Concluding Remarks
Mr. Chairman, my colleagues and I anticipate a complete and thoughtful
examination of the IFI Commission's Report and the dissents thereto to better help us
identify and address the global issues and realties confronting us. Our hope is that the
work of the Commission might help accelerate and strengthen the ambitious reform
agenda, which is already on the table.
However, let me end by highlighting once again that we welcome the unanimous
support for debt relief within the Commission. At this point, our ability to advance
U.S. interests in the IFIs will depend crucially on meeting our current reduced
obligations for these institutions and playing our full part in the enhanced HIPC
initiative agreed in Cologne. There has also been broad national and international
support for President's efforts to promote the provision of vaccines and cost-effective
treatments for HIV / AIDS and other diseases that hurt the poorest countries worst of all.
19
Mr. Chairman, these two initiatives need urgently to move forward. It would be
tragic indeed if these common priorities were delayed by less morally compelling
debates of IFI reforms. I look forward to working with this Committee and with others
in Congress on finding the most constructive means by which this can be achieved.
Thank you. I would now welcome any questions you may have.
-30-
20
ATfACHMENT
Compliance of Countries with Agreements
Made as a Condition .of Receiving IMF Fmancial Assistance
The IMF provides financial resources to member countries on conditions that
are designed to encourage economic adjustment and to ensure that a member has the
capacity to repay the IMF on time. This, in tum, helps ensure that the IMF's pool of
financial resources is available to other members facing balance of payments problems.
Such conditions aim to reduce a member's balance of payments deficit to a manageable
size while fostering economic growth, employment, financial stability, and the
elimination of restrictions on international trade and payments.
The IMF has developed a process and a range of techniques for monitoring and
assessing a country's compliance with conditions for receiving financial assistance. The
IMF requires that the national authorities provide a "letter of intent" outlining: the
government's policy intentions; the policy changes that must be taken before financing
can be approved; performance criteria (macroeconomic indicators that must be satisfied
on a quarterly, semiannual, or in some cases monthly basis for drawings to be made);
and periodic reviews that allow the IMF's Executive Board to assess the consistency of
policies with the objectives of the program.
Increased transparency at the IMF is giving the public greater capacity to make
its own assessment about the degree to which countries comply with conditions for IMF
financial assistance. The more systematic release of letters of intent as well as
information about periodic program reviews means that, in most cases, the public can
monitor the evolution of a country's program from the initial elaboration of policy
intentions through decisions regarding release of financial resources.
The IMF's guidelines on conditionality, which are reviewed periodically:
•
•
•
encourage members to adopt corrective measures at an early stage;
stress that the IMF should pay due regard to members' domestic social and political
objectives, as well as their economic priorities and circumstances; and
permit flexibility in determining the number and content of performance criteria.
While these guidelines apply to all cases where members seek IMF financing,
the Fund recognizes that no single reform model suits every circumstance. Each
member country, in close collaboration with IMF staff, designs its IMF-supported
program. The process involves a comprehensive review of the member's economy,
including the causes and nature of the balance of payments problem, and an analysis of
the policies needed to achieve a sustainable balance between the demand for, and the
availability of, resources. In sum, the IMF's approach to conditionality seeks to strike
a balance between the need for equal application of rules regarding access to finance,
and the need for reasonable flexibility in the design and monitoring of adjustment
programs.
A recent report by the General Accounting Office looked in detail at the process
by which the IMF establishes financial arrangements with borrower countries and the
types of conditions set under such arrangements. The study also assessed, for six
countries (Argentina, Brazil, Indonesia, Korea, Russia and Uganda), the degree to
which conditions were met and not met, and the actions the IMF took in response.
The report found that "in some cases, the IMF determined the countries had made
sufficient progress in meeting program conditions so that additional funds could be
made available. In other cases, however, the IMF determined that country progress in
meeting the conditions had not been sufficient, and its response varied depending on the
specifics of the condition and the judgment of the IMF staff and Executive Board on the
country's overall progress." The report cites specific examples of how the IMF deals
with situations where a determination is made that progress in meeting conditions has
been insufficient.
•
•
•
•
In some cases (e.g., Argentina March 1999, Uganda April 1998) the IMF
Executive Board granted waivers for nonobservance of specific conditions at
various points during their programs. "These waivers were based on the IMF's
judgment that there was sufficient overall progress in implementing the program
and that deviations from meeting required conditions were minor."
In other cases (e.g., Brazil February-March 1999; Indonesia March and June 1998)
the Executive Board delayed disbursements until the country had made sufficient
overall progress in meeting the program requirements.
Sometimes, as in the case of Russia (March 1999), a program may be terminated.
Finally, the GAO report points out-that in some cases "the IMF and borrower
countries may also negotiate changes in conditions to respond to unanticipated
developments." In the case of Korea, this reflected a determination by the IMF
during the course of 1998 that the initial program was overly optimistic. In other
cases, this may be due to changes in the international environment or other factors
over which the country has little or no control.
The IMF's website (www.imf.org) contains additional information about this
subject (see "conditionality" on the website's index of subjects). There is also
extensive literature, both country-specific and cross-country studies, on the related
question of the effectiveness of IMF programs. See, for example, "Do IMF-Supported
Programs Work? A Survey of the Cross-Country Empirical Evidence" (IMF Working
Paper WP/981169 by Nadeem UI Haque and Moshin S. Khan). This study is available
on the IMF's website and includes a lengthy list of additional works on this subject by
authors both inside and outside the IMF.
I International Monetary Fund: Approach Used to Establish and Monitor Conditions Jor Finan . I
Assistance. .. General Accounting Office, June 1999.
cIa
DEPARTMENT
OF
THE
TREASURY
NEWS
OffiCE OF PUBliC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C .• 20220. (202) 622-2960
FOR IMMEDIATE RELEASE
March 20,2000
Contact:
BilI Buck
(202) 622-2960
TREASURY STATEMENT ON DEBT BUYBACKS
The U. S. Treasury Department anticipates conducting the next stage of its debt buyback
program during the second half of April, in accordance with Treasury Secretary Lawrence H.
Summers announcement in January
Treasury wilI provide additional information concerning the debt buyback program at the
Quarterly Refunding announcement in May.
LS-481
For press reieases1 speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
.
PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
CONTACT:
FOR IMMEDIATE RELEASE
March 20, 2000
Office of Financing
202-691-3550
RESULTS OF TREASURY'S AUCT:ON OF 13-WEEK BILLS
91-Day Bill
March 23, 2000
June 22, 2000
912795EB3
Term:
Issue Date:
Maturity Date:
CUSIP Number:
5.780%
High Rate:
5.947%
Investment Rate 1/:
Price:
98.539
All noncompetitive and successful competitive bidders were awarded
securities at the high rate.
Tenders at the high discount rate were
allotted 22%.
All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Accepted
Tendered
Tender Type
Competitive
Noncompetitive
$
25,082,885
1,309,632
67,000
67,000
26,459,517
8,536,802
3,889,235
3,889,235
Foreign Official Refunded
SUBTOTAL
Federal Reserve
Foreign Official Add-On
o
°
$
7,160,170
1,309,632
8,469,802 2/
26,392,517
PUBLIC SUBTOTAL
TOTAL
$
30,348,752
$
12,426,037
Median rate
5.770%: 50% of the amount of accepted competitive tenders
was tendered at or below that ratE.
Low rate
5.720%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio
=
26,392,517 /
8,469,802
=
3.12
1/ Eq~ivalent coupon-issue yield.
2/ Awards to TREASURY DIRECT = $1,037,710,000
L5 -482
http://www.publicdebt.treas.gov
: 2826222611
£r~m:
Department Of Treasury
06/02/00 04:45
PM
Page 23 of 92
PUBLIC DEBT NEWS
DepSJ:tment of tbe Treasury • Bureau of tbe Public Debt· Washington, DC 20239
TREASURY SECURITY AUCTION RESULTS
OF THE PUBLIC DEBT - WASHINGTON DC
BURE~U
CONTACT~
FOR IMMEDIATE RELEASE
March 20, 2000
Office of Financing
202-6:H-35S0
RESULTS OF TREASURY'S AUCTION OF 26-WEEK EILLS
182-Day Bill
March 23, 2000
Term:
Issue Dat.e:
Mat.urity Date:
CUSIl? Number:
High Rate:
Septe~9r
21,
2000
912795FA4
5.895%
Investment Rate 1/;
Price:
6.160%
97.020
All nonccmpe~itive
sscuri~ies at the high
allot.ted
13t.
and successful competit.ive bidders ware awarded
rate.
Tender5 at t.he high discount rat.e were
All tenders at lower rates ~ere accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousand5)
Tender Type
Tende;r;ed
Competitive
Noncompetitive
$
Refund~d
Federal Re!::erve
Foreign Official Add-On
$
3,350,635
l,l52,726
4,503,361 2/
19,976,361
SUBTOTAL
TOTAL
$
1,152,726
PUBLIC SUBTOTAL
Foreign Official
18,823,635
Accepted
3,000,000
3.000,000
22,976,361
7,503,361
3,255,000
3,255,000
346,000
346,000
26,577,361
$
11,104,]61
Medi~n rate
5.880%: 50% of the amount of accepted competitive tenders
was tendered ~t or below that rate.
Low raee
5.800%:
5% of the amount
of accepted competitive tenders waG tendered at or below that rate,
Bid-to-Cover Ratio ~ 19,976,361 / 4,503,361 ~ 4.44
11 Equivalent coupon- issue yield.
21 Awards to TREASURY DIRECT = $858,434,000
L8-483
http://www.public:debt.treas.gov
TOTAL P.Ol
DEPARTMENT
OF
THE
1REASURY (g)
TREASURY
NEW S
omCE OF PUBUC AFFAIRS • 1500 PENNSYLVA."IIA AVENUE, N.W. • WASHINGTON. D.C .• 20220 • (202) 622-2960
EMBARGOED UNTIL 1:00 PM EST
Text as Prepared for Delivery
March 21, 2000
"THE CASE FOR NORMAL TRADE RELATIONS WITH CHINA"
TREASURY SECRETARY LAWRENCE H. SUMMERS
REMARKS TO THE DALLAS COMMITTEE ON FOREIGN RELATIONS
DALLAS, TX
Thank you. Let me start by thanking you, Ray Hunt, for the effort you have invested
in making this event happen, and, I gather, the special efforts you made to be here in person.
Let me also thank Ambassador Richard Fisher for his contribution. If he did not have to be in
Japan I know he would have been here today.
I am here to discuss the case for granting Permanent Normal Trading Relations (PNTR)
to China. The President and all of this Administration believe that the United States has an
enormous stake in this decision. And I know that Congresswoman Eddie Bernice Johnson, and
all the other friends of open trade here in Dallas, recognize that in this area, what is good for
America will be even better for Texas. Texas is second only to California in the exports it sells
overseas. And have no doubt: Texas's most successful export sectors would gain some
dramatic new opportunities if Congress makes the right decision.
There are many ways to make the case for granting permanently to the largest country
in the world the access to our markets that it enjoys more conditionally today. But let me start
by emphasizing one crucial point: these arguments have very little to do with helping China and everything to do with promoting America -s core interests.
Last fall, the United States signed a bilateral agreement with China to bring it into the
World Trade Organization, on terms~that will open its~ markets to American produ~cts and
investment. After China completes its agreements with other countries, it will join the WTO.
But for us to enjoy the benefits of its entry we must first grant it the same permanent normal
trading status that we have already granted to every other country with whom we share the
benefits of the WTO.
LS - 484
-
_ For press releases, speeches, public schedules and official biograph ies, call our 24-hour fax line at (202) 622-2040
The President submitted to Congress last week legislation that would achieve this. I will
discuss in a few moments the concrete commercial advantages for the United States of passing
this bill. I believe they are enormous. But let me be clear. Even if these advantages were very
small, it would be in our interest to take this step, because the agreement with China is quite
simply a one-way street.
•
This vote is not about whether China will enter the WTO: it will become a memher either
way.
•
It is not about whether Chinese producers will have access to our market: they will
continue to be able to sell their goods in the United States whether or not Congress passes
PNTR.
•
It is not about whether we approve or disapprove of China's human rights record: we will
continue to condemn it in the United Nations Human Rights Commission and other fora.
either way.
•
It is not about China's policies toward Taiwan or other strategic issues that concern us: we
will continue to insist on peaceful resolution of differences between the PRC and Taiwan,
and to press China to respect global norms of conduct in nuclear nonproliferation and other
areas, either way.
There is no disadvantage to the United States in passing this legislation. We will
continue to press our full agenda with China regardless of how Congress votes. And China will
open its markets to other members of the WTO when it joins the system. All that PNTR does
is ensure that America enjoys the benefits that every other country will obtain.
There are, however, three crucial advantages to the United States in passing this bill:
•
First, there are the direct and commercial benefits of the market opening agreement that we
concluded last fall, some of them particularly valuable to the businesses, workers and
farmers of Texas.
•
Second, there are the economic and broader benefits to the United States of promoting
economic and social change in China.
•
Third. there is the ultimate enhancement of America's national security interests that comes
from integrating China more closely with the community of nations
I.
The Commercial Benefits to the United States of Granting PNTR
By passing PNTR we will be agreeing to continue to grant China the same access to our
markets that its producers currently enjoy. What we will get in return - as a result of the
agreement we concluded last fall - is unprecedented new access to what could ultimately
2
become the largest market in the world. Texas alone has export sales to China of more than
$580 million in 1998 - nearly 50 percent above its sales in 1993.
With this deal in force:
•
Chinese tariffs will fall by 50 percent or more in the space of five years, and other import
barriers either eliminated or greatly reduced, in a wide range of sectors that are important
to us. For example:
•
Tariffs on the broad range of agricultural goods, including many that are crucial to
Texas, will fall by roughly one half, with larger cuts for US priority goods. And
Chinese export subsidies on cotton and other agricultural goods - and the price
advantage that these provide - will be eliminated. These changes can only hold out
important potential benefits for the state that produces more cotton and beef than any
other.
•
China will participate in the Information Technology Agreement (ITA). eliminating all
tariffs on computers, semi-conductors and other high-tech products Texas is this
country's second largest exporter of electronic goods, and managed to sell $140 million
worth in China in 1998. Consider what could happen when those tariffs fall to zero - in
a country where one fifth of the world's people live.
•
Tariffs in the automobile sector. another key area for Texas. will fall from 80-100
percent to 25 percent by mid-2006, with the largest cuts in the first years after WTO
accession. Auto quotas will be phased out. And American auto companies will be
allowed to provide auto financing for the first time.
•
China would phase out a wide range of restrictions in a broad range of services, including
distribution, banking. insurance, telecommunications and professional services such as
accountancy and legal consulting. Instead of having to produce in China and sell through a
state-sponsored middleman, over the course of the next three years American businesses
will win the right to distribute goods directly - goods that are made here at home.
•
We would also acquire special safeguards in the WTO against dumping and surges in
imports from China, along with other key protections with respect to forced technology
transfer requirements and the practices of state-owned-enterprises. These provisions will
ensure that American businesses and workers have strong formal protection against unfair
trading practices in China going forward. No WTO accession agreement has ever
contained stronger measure"s to guarantee fair trade and to address practices that distort
trade and investment.
To those who are concerned that these commitments by China will not be honored, let
me assure you that we are already preparing for the most intensive enforcement effort ever
mounted for a single trade agreement. Such concerns cannot be a reason to reject an agreement
3
that will allow us to use global enforcement mechanisms of the WTO to keep China to its
word. Some of China's most important decisions will for the first time be subject to
international review, with rules and binding mechanisms for resolving disputes.
In these and other ways, the concessions involved in this agreement are all on China's
side. All that it requires is we pass PNTR - so that these new markets do not flow instead to
other countries.
II.
America's Stake in Promoting Successful Market Reform in China
I have spoken of the direct commercial advantages of this agreement. But there are also
crucial indirect advantages for the United States in helping to promote the path of Chinese
reform.
China has come a long way since the beginnings of market reforms a little over 20
years ago. Its economy has grown by more than 350 percent in real terms. It has risen to being
11th largest trading nation in the world. And the number of Chinese with access to a television
has risen one hundred-fold, to one billion.
And yet, in part as a result of the government's partial approach to reform, China' s
economy and society are also showing increasing signs of strain:
•
The financial sector is mired in debts. but is still making the majority of its loans to a lossmaking state-owned enterprise sector that accounts for only around one third of economic
output.
•
Each year many millions of people migrate to the cities in search of jobs. and in many
places unemployment is now well into double digits.
•
And the country still suffers from poorly developed market institutions and the lack of a
reliable rule of law. These pose a growing burden at a time of enormous economic and
social change. Smuggling and corruption. drugs and arms trafficking all pose a rising
threat.
As the President has said, as they confront these problems, the Chinese authorities face
a dilemma: they realize that closer integration with the global economy risks unleashing forces
that they cannot control. Notably, opening China more fully to the revolution in
communications and technology will provide ordinary Chinese with unprecedented freedom
and access to information - access that experience suggests that China will not long be able to
control. But the government also knows that without competition and integration, China will
not be able to attract the investment and know-how that it needs to build a modern economy
and deliver rising living standards and stability to its 1. 3 billion people.
4
It is a lesson of the history of international trade agreements since the start of the
GATT that the greatest benefits come not from the concessions that you receive from other
nations but from the concessions that you make. In choosing to sign this agreement and enter
the WTO, China is locking into place a more rapid process of market opening and reform of
its economy. And it is submitting itself to a global rules-based system, based on core standards
such as transparency and checks on arbitrary government action.
~
~
~
We have an enormous economic and broader stake in supporting that decision.
•
Because it will help strengthen the hand of economic reformers in China, and make it more
difficult for others to seek to turn back the clock. The growth of the private sector could
then playa vital role in absorbing workers that are being laid off from inefficient stateowned firms.
•
Because it will help support faster growth in productivity and wages in China - and thus
higher real living standards in China and higher demand for our products in the future.
•
And we have an enormous stake in supporting that decision because it will provide a
catalyst for broader changes that will help to promote core American interests and values.
As competition and integration proceed, China will need to become more market-based:
more protective of personal and commercial freedoms, and more open to the free flow of
information and ideas.
Already, we are seeing these positive effects in renewed commitment to reform at the
highest levels of the Chinese leadership that is expressly linked to the need to prepare the
economy for tougher competition from the outside world. For example:
•
The government has stepped up efforts to promote the development of private firms, the
most dynamic sector of China's economy, by eliminating heavy deposit requirements and
other regulations which discriminate against them and allowing them to list themselves on
the stock market for the first time.
•
PBOC Governor Dai has pledged to intensify efforts to clean up bad loans within the
banking sector and to enhance competition among banks by permitting more flexible
interest rates. A regulatory overhaul is underway to level the playing field between foreign
and domestic firms in line with WTO commitments.
•
As the Wall Street Journal recently reported, even parts of the economy that the Chinese
consider strategically important are being opened up to the private sector, with individual
investors already dominating the Chinese Internet industry and being allowed take
ownership stakes in domestic banks for the first time.
III.
The Broader National Strategic Case for Supporting Greater Integration of China
5
Finally, a policy of welcoming China into the community of nations - rather than being
a voice that keeps China out, even when it commits to live by the rules - is a policy that
supports our deepest national security interests.
Ever since the rise of Assyria and Sparta. emerging economic strength and major
changes in the economic balance of power have raised the specter of war and conquest. In this
century alone we have seen two World Wars that followed closely on the emergence of major
new economic powers. And the pace of economic change in China - and indeed through much
of Asia - is literally unprecedented in history. with standards of living for billions of people
quadrupling or more in a single generation.
That this has so far been achieved with the minimum of conflict. despite the pervasive
rivalries between the peoples of Asian nations. is a reflection of the progress that has been
made across the region toward openness and integration. And it speaks to the success of
postwar international institutions in helping to cement that progress. But if the next quarter
century in Asia is to be as successful as the last it will be crucial that China define its greatness
in a constructive way and that it fit into the global economic system.
As President Clinton has said, if we have learned anything in the last few years. from
events in Russia and elsewhere, it is that the weaknesses of great nations can pose as a big a
challenge to the United States as their strengths. Our long-term strategy must be to encourage
the right kind of success in China: to help it grow into a strong. prosperous and open society.
to come together not fall apart, and to become part of institutions that promote our deepest
values and interests and can build mutual trust. And we have a much greater chance of having
a positive influence if we welcome it into the broader global system.
This is a policy based not on mutual affection but mutual respect. As I said at the
beginning, we can and will continue to express our differences with China both forthrightly
and consistently. What we must not do is seek to cut China off from the economic and broader
forces that are most likely to change it in the right direction.
At bottom, we believe that in a 21 ,( century global economy China will increasingly
have to recognize that to maintain stability and growth at home, it must meet, rather than stifle.
the growing demands of its people for openness and accountability. As the President has said,
simply bringing China into the WTO does not guarantee that its government will take this
Course. But it will force the authorities to confront that choice sooner. and it will make
stronger and more visible the imperative to make the right choice.
By supporting China's entry into the WTO we have already paved the way for an
historic change in China's relations with the broader global economy. All that remains is for us
to grant PNTR to China so that American businesses, workers and farmers can enjoy the
benefits. I do not believe that this should be a difficult step for the United States to take. Thank
you.
-30-
6
DEPARTMENT
1REASURY
OF
THE
TREASURY
ri"]! NEW S
omCE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C .• 20220. (202) 622-2960
FOR IMMEDIATE RELEASE
Text as Prepared for Delivery
March 21, 2000
TREASURY ACTING ASSISTANT SECRETARY FOR TAX POLICY
JONATHAN TALISMAN REMARKS TO THE TAX EXECUTIVES INSTITUTE
MIDYEAR CONFERENCE
WASHINGTON, DC
I want to thank Charles, Mike and Tim for inviting me here this morning. As has become
traditional, I am following behind our Deputy Secretary, this year Stu Eizenstat, to discuss issues
that are part of the tax policy agenda this year. I will focus first on the Administration's
legislative initiatives and then shift to administrative guidance
As you know, the President's budget calls for about $350 billion in gross tax cuts over ten
years -- $250 billion in net tax cuts and about $100 billion in revenue offsets.
The budget includes targeted tax cuts to address several particularly pressing problems -education, health care, child care, poverty relief and retirement saving For example, the Budget
includes two new initiatives designed to provide a progressive saving incentive. First, the
President's Retirement Saving Accounts provide a progressive matching credit for contributions
to pension accounts maintained by employers or financial institutions Second, a nev. credit
would be provided to small businesses that provide automatic contributions to their employees.
We are presently meeting with outside groups to discuss comments and concerns regarding these
proposals We have been pleased at the generally favorable response and hope that our
conversations will help us refine and improve our proposals, leading to their enactment
In its FY2001 budget proposals, the Administration also seeks to leverage the progress
that has already been made in revitalizing America's economically disadvantaged communities
through the provision of another $17 billion in targeted ta:\ incentives over the ne:\t decade
These measures will allow more communities to benefit from the investment that is so important
in a technology-driven economy. while ofTering an innovative approach to the task of attracting
patient equity capital to businesses in economically disadvantaged areas.
LS-485
-~or
press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
For example, an important priority is the New Markets Tax Credit, a part of the
President's broader New Markets Initiative This tax incentive would help attract $15 billion in
equity capital to community-based financial institutions which, in turn, would invest these funds in
their communities, spurring the creation of high-quality jobs and, equally important, building
lasting links to the new economy .. High technology and service firms at the heart of the new
economy have generally sought to locate near other similar enterprises, in places like the Silicon
Valley and the Dulles Corridor, so that they may tap a common pool of customers, employees and
other resources. Thus these enterprises tend to be highly concentrated geographically, and often
not in lower-income areas. The New Market Tax Credit would attract capital, and therefore highgrowth industries, to lower-income areas by providing a subsidy to investors This temporary
subsidy will, at least in part, compensate investors for the additional costs involved in establishing
operations in locales which have yet to benefit from the strength of the U.S. economy over the
past decade and where the presence of other fast-growing firms may therefore be limited.
The New Markets Tax Credit is specifically designed to further the efforts of communitybased financial institutions in promoting economic revitalization while encouraging these entities
to make the "on the ground" decisions concerning where the need for capital is greatest. Such
institutions -- including a wide variety of existing or newly-formed community development banks
and venture funds -- would apply to the Treasury Department for authorization to issue stock (or
other equity interests) with respect to which the investors could claim a tax credit equal to
approximately 25 percent of the investment, in present value terms. The credit would be claimed
in five equal installments, each equal to 6 percent of the original investment, during each of the
first five years of investment.
The budget also contains an important new tax initiative to encourage the development of
vaccines to combat diseases that afflict the third world. These diseases cause over 5 million
deaths annually, most in developing countries. The credit would match the efforts of non profits,
such as UNICEF, to provide a market to purchase these vaccines
The final budget initiative I would like to focus on addresses a serious concern with the
current tax code The Budget contains a $33 billion proposal to correct serious design flaws in
the individual Alternative Minimum Tax (AMT) that are causing the AMT to apply increasingly to
middle-income families, thereby complicating their tax preparation and raising their tax bills. The
number of taxpayers subject to the AMT is expected to grow, if no change is made, from 1 3
milIion today to 17 million by 2010. This is due in part because, under current law, the AMT
treats personal exemptions and the standard deduction as preference items, in the same category
as special tax breaks such as intangible drilling costs and tax shelter losses Taxpayers subject to
the AMT are denied these deductions As a result, under current law, a couple with five children
and $70,000 of income that claims the standard deduction would be subject to the AMT in 2000.
The AMT was never intended to affect such families
The Administration's proposal would address these design flaws in two ways First, when
fully phased in, the proposal would allow taxpayers to deduct all of their dependent exemptions
against the AMT, thereby ensuring that no taxpayers would become subject to the AMT simply
because they claim personal exemption deductions for their children This would cut the number
of taxpayers on the AMT in 2010 by more than half to 7.6 million. Absent this reform, by 2010,
45 percent of two-child families would be subject to the AMT. The percentage is higher for
larger families. Second, the proposal would allow taxpayers to claim the standard deduction for
AMT purposes in 2000 and 2001.
Let me move from the initiatives and briefly discuss a few other issues of imponance to us
at Treasury: corporate tax shelters, and our 2000 priority business guidance plan.
As you all are well aware (and as discussed by Deputy Secretary Eizenstat yesterday), we
have been seeking to address the recent proliferation of corporate tax shelters In fact, I tlrst
spoke to you about this problem in St Louis in the fall of 1998. This is a problem, we believe,
that affects the integrity of the tax system and therefore warrants great concern and merits
concerted action, both legislative and administrative. When we started working on our "White
Paper" on corporate tax shelters at the end of 1998, our first goal was to raise awareness that
there was a problem and to explore the nature of the problem. Now, it is clear that there is
widespread agreement and concern among tax professionals that the corporate tax shelter
problem is large and growing
Earlier this year, the American Bar Association testified about its "growing alarm [at] the
aggressive use by large corporate taxpayers of tax 'products' that have little or no purpose other
than the reduction of Federal income taxes," and its concern at the "blatant, yet secretive
marketing" of such products. The staff of the Joint Committee on Taxation, the New York State
Bar Association, the Tax Executives Institute, and others have echoed these comments. The
dialogue we have received to date on this topic has been invaluable.
Our budget proposals include a number of targeted provisions aimed at specific shelters of
which we were aware. What we have found over time, however, is that addressing tax shelters
transaction-by-transaction is a losing proposition As one participant has remarked, "it is like the
arcade game of , whack-a-mole'" You kill ofT one over here and two or three more appear over
there. Already, last year, we shut down so-called "chutzpah trusts" which were similar to a
structure shut down by Congress in 1997 The "BOSS" transaction that we curbed recently by
notice is a derivation on the section 357(c) product Promoters will continue to search for defects
in the code to exploit, and taxpayers with an appetite for tax shelters will simply move from those
transactions that are specifically prohibited by the new legislation to other transactions the
treatment of which has 110t been definitively proscribed.
To curtail the development marketing, and purchase of corporate tax shelters, we must
change the tax shelter cost/benefit analysis in a manner sutlicient to deter these artificial
transactions.
Last month, we announced new tax disclosure regulations designed to increase disclosure
and access to information regarding corporate tax shelters. Greater disclosure will help the IRS
...
'
.
to identify these shelters and assist enforcement in curbing these shelters Also, requiring
disclosure will inhibit corporate taxpayers from engaging in questionable transactions
•
Corporate taxpayers would be required to attach a disclosure statement to their return
regarding transactions that have certain identified characteristics common to corporate tax
shelters. Also, any transaction that is substantially similar to a transaction previously identified
by Treasury and the IRS as a tax shelter would need to be disclosed.
These characteristics include: book\tax differences above $5 million, certain fees paid to a
promoter in excess of $1 00,000, use of a tax-indifferent party to provide tax benefits,
conditions of confidentiality, contractual protection against the fact that the tax benefits
would not be realized, and inconsistent treatment for U.S. and foreign tax purposes
To aim at larger transactions, the reporting obligation would be limited to transactions
above certain dollar thresholds.
Also, to avoid impact on legitimate transactions, several exceptions are provided in the
regulations. For example, transactions in the ordinary course of a taxpayer's business
would not be disclosed if they were consistent with customary commercial practice and
the taxpayer can demonstrate it would have participated in the transaction on substantially
the same terms absent the tax benefits
•
Promoters would be required to register certain confidential corporate tax shelters under
section 6111 (d) Disclosure is required for any transaction that ( 1) has a significant purpose
of tax avoidance or evasion, (2) is oftered under conditions of confidentiality, and (3) has
promoter fees in excess of $100,000
This hopefully will enhance IRS notification of tax shelters either through actual
registration of shelters or removal of conditions of confidentiality
•
Promoters would be required to maintain lists of investors and other pertinent inf'Onnation
regarding potentially abusive tax shelters
This will allow cross-checking. Once a shelter is Identified as having been promoted, we
will be able to locate all of the taxpayers to \vhom it was marketed
This information must be available for inspection by the IRS generally for a period of
seven years.
These regulations are an essential part of our comprehensive strategy fer curbing
corporate tax shelters. Other aspects of this multi-faceted approach to tackling the problem of
corporate tax shelters include legislative proposals to halt the sale and marketing of shelters,
tightening practitioner standards, regulatory action to clamp down on specific shelters as they
come to light, and IRS steps to better identify and address abusive transactions
Administration's Legislative Proposals
Legislative action is necessary in order to curb the further growth of corporate tax
shelters The main elements of the proposed legislation include
•
•
•
creating incentives for disclosure by providing penalties for nondisclosure and modifYing the
substantial understatement penalty,
codifYing the judicially-created economic substance doctrine, and
providing consequences to all parties to the transaction (including promoters, advisors, and
tax-indifferent. accommodating parties).
The centerpiece of the substantive law proposal is not a new standard, but rather is
intended as a coherent articulation of the economic substance doctrine first found in seminal case
law such as Gref?OlY \'. Helwril1f? and most recently utilized in ACM, Compaq, IES and \Vinn
Dixie. The economic substance doctrine requires a comparison orthe expected pre-tax profits
and expected tax benefits. Codification of the doctrine would create a consistent standard so that
taxpayers may not pick and choose between conflicting decisions to support their position
Codification also would isolate the doctrine from the facts of the cases so that taxpayers could not
simply distinguish the cases based on the facts.
Additional Regulatory Action
Of course, we will continue to combat corporate tax shelters with the tools we have
available under current law The Administration has worked with Congress in enacting legislation
that shut down specific abusive schemes that have come to light In the last year, the Treasury
and the IRS issued various notices, revenue rulings and regulations stopping several tax shelters
including so-called "BOSS" transactions, "lease-in/lease-out" or "ULO" transactions, fast-pay
stock issuances, and "chutzpah" trusts Also, the IRS has won several significant court victories,
successfully arguing that various shelter transactions lacked economic substance.
Modernization and Reorganization of the IRS
The restructuring of the IRS into business units will enhance the ability of the IRS to
address the corporate tax shelter problem by facilitating the centralization and coordination of its
efforts This will help provide additional taxpayer safeguards, while at the same time allowing the
IRS to identify and address transactions more quickly' and etliciently
We will be releasing our year :-WOO busmess plan imminently. It is very ambitious,
including several more items than last year's plan -- a year in which we released a record amount
offormal guidance This year's guidance plan reflects greater formal input from taxpayers, tax
practitioners and industry groups Suggestions were carefully considered by the newly formed
Published Guidance Advisory Committee This, we believe, will result in a comprehensive plan
that is extremely responsive to taxpayer needs.
One area that taxpayers are clamoring for guidance relates to the issue of whether certain
costs must be capitalized or can be expensed - the so-called "INDOPCO issue." This issue has
been present since the beginning of the income tax The Treasury and the IRS take this issue very
seriously. In 1996, we issued Notice 96-7, asking for comments on how this issue can be best
addressed in the guidance process. Not unexpectedly, many of the comments can be summarized
as "Fix my problem, and by the way, the answer is current deductibility."
Thus, for the last several years, Treasury and the IRS have embarked on a guidance
process that attempted to analyze and provide guidance in the framework of specific fact patterns,
generally in the form of revenue rulings. Although a revenue ruling appears to be short and
simple, let me assure you that its development is not. Providing such guidance is extremely
resource intensive, both from the government's and taxpayer's standpoint, as there needs to be (1)
a complete understanding, analysis, and agreements as to the facts, (2) an application of the law to
such facts, and (3) consideration of the implications of the holding of one ruling to the fact
patterns of other cases
Although Treasury and IRS have consistently made capitalization guidance a high priority
in the last several years and have issued a significant amount of fact-specific guidance, demand
continues to outpace supply For this reason, we believe we must go broader and deeper
Unfortunately, no single "magic bullet" has enabled us to resolve all capitalization issues for once
and for all. However, we can and will consider broader topics as (1) whether workable rules can
be provided for self-created assets, (2) whether the "plan of rehabilitation" doctrine" can be
defined, (3) whether workable rules can be developed for repairs generally, and (4) in what cases
de minimis rules are appropriate. We will continue to consider traditional case-specific guidance.
However, we should also consider whether new forms of guidance, such as industry settlements
and the pre-filing agreements launched by the IRS's Large and Mid-Sized Business division, can
be brought to bear
We welcome your comments and suggestions on how to best proceed We at Treasury
and the IRS realize the importance of the issue and pledge to continue to provide prompt and
useful guidance in this area.
I want to thank you again for the opportunity to appear this mornIng. It
pleasure to speak before TEl.
-30-
6
IS
always a
NEWS
~/78~9. . . . . . . . . . . . . ._ _
. . . . . . . . . . . . . .
OmCE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W .• WASHINGTON, D.C.. 20220 • (202) 622·2960
u.s. International Reserve Position
The Treasury Department today released U.S. reserve assets data for the week ending M,lrch 17, 2000.
As indicated in this table, U.S. reserve assets totaled $70,131 million as of March 17,2000, up from S69,974
million as of March 10, 2000.
(in US millions)
TOTAL
1. Foreign Currency Reserves
I
1
Euro
4.893
a. Securities
Yen
6.040
b. Total deposits with:
b.i. Other central banks and SIS
b.n. Banks headquartered in the U.S.
bJi. Of which, banks located abroad
b.iii. Sanks headquartered outside the U.S.
b.iii. Of WhiCh, banks located in the U.S.
2
3. Special Drawing Rights (SDRs)
4. Gold Stock
2
3
5. Other Reserve Assets
TOTAL
Euro
10.933
4.923
TOTAL
Yen
1C 973
6050
0
0
Of which, issuer headquartered in the US.
2. IMF Reserve Position
March 17,2000
70,131
March 10 1 2000
69,974
I. Official U.S. Reserve Assets
8,386
11.693
20.079
8.422
2C
11 711
0
0
0
0
0
0
0
17.617
1-'- 557
10.297
1C 319
l ' )48
11.048
C
0
deposits reflect carrying values
21 SDR holdings and the reserve position In the IMF are based on IMF data and revalued In dollar terms at the offiCial SDR/dollar exchange
rate. Consistent with current reporting practices. IMF data for March 10.2000 are final Data for SDR holdings and the reserve pOSition In the
IMF shown as of March 17. 2000 (In ItaliCS) reflect preliminary adlustments by the Treasury \0 the March 10.2000 IMF data
31 Gold stock IS valued monthly at $42.2222 per fine troy ounce
LS-486
34
0
11 Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account
(SOMA). valued at current market exchange rates Foreign currency holdings listed as securities reflect marked-to-market values and
was S11 ,048 million
~
Values shown are as of January 31 2000
The December 31
1999 value
u.s. International Reserve Position (cont'd)
II. Predetermined Short-Term Drains on Foreign Currency Assets
March 10. 2000
1. Foreign currency loans and securities
2. Aggregate short and long positions in forwards and
futures in foreign currencies vis-a-vis the U.S. dollar:
2.a. Short positions
2.b. Long positions
3. Other
March 17. 2000
o
o
o
o
o
o
o
o
III. Contingent Short-Term Net Drains on Foreign Currency Assets
March 17, 2000
March 10. 2000
1. Contingent liabilities in foreign currency
1.a. Collateral guarantees on debt due within 1 year
o
o
o
o
o
o
o
o
1.b. Other contingent liabilities
12. Foreign currency securities with
embedded options
3. Undrawn, unconditional credit lines
3.a. With other central banks
3.b. With banks and other financial institutions
headquartered in the U. S.
3.e. With banks and other financial institutions
headquartered outside the U. S.
4. Aggregate short and long positions of options In foreign
currencies vis-a-vis the U.S. dollar
4.a. Short positions
4.a.1. Bought puts
4.a.2. Written calls
4.b. Long positions
4.b.1. Bought calls
4.b.2. Written puts
DEPARTMENT
OF
THE
TREASURY
OFFICE OF PUBliC AFFAIRS • 1500 PENNSYLVANIA AVENUE. N.W. • WASHINGTON. D.C .• 20220. (202) 622-2960
FOR IMMEDIATE RELEASE
March 21, 2000
STATEMENT BY TREASURY SECRETARY LAWRENCE H. SUMMERS AND
COUNCIL OF ECONOMIC ADVISERS CHAIRMAN MARTIN N. BAILY
The Administration respects the independence of the Federal Reserve in making
decisions about our nation's monetary policy. We share the Federal Reserve's goals of
maintaining healthy economic growth while preserving low inflation.
Supported by sound economic policies, including budget discipline, the economy
continues to grow, with strong investments and higher productivity, creating good jobs and
improved living standards for all Americans. We are committed to sustaining this economic
success into the future.
-30-
LS-487
_For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622·2040
0
federal financing
WASHINGTON, DC
20220
bankNE
CD
0
":J
N
<:t
N
N
N
en
S
U?
N
0
N
cr.
<.r:
a;
Jt
FEDERAL FINANCING BANK
Kerry Lanham, Secretary, Federal Financing Bank (FFB),
announced the following activity for the month of December ~999.
FFB holdings of obligations issued, sold or guaranteed by
other Federal agencies totaled $42.2 billion on December 31,
1999, posting a decrease of $690.3 million from the level on
November 30, 1999.
This net change was the result of a decrease
in holdings of agency debt of $601.5 million and in holdings of
agency assets of $110.0 million, and an increase in holdings of
agency guaranteed loans of $21.2 million.
FFB made 90
disbursements during the month of December.
FFB also received 15
prepayments in December.
Attached to this release are tables presenting FFB December
loan activity and FFB holdings as of December 31, 1999.
U')
('\;
<.C
N
0
N
ro
lJ...
lJ...
Page 2
FEDERAL FINANCING BANK
DECEMBER 1999 ACTIVITY
Borrower
Date
Amount
of Advance
Final
Maturity
Interest
Rate
AGENCY DEBT
NATIONAL CREDIT UNION ADMIN.
National
National
National
National
National
National
National
National
National
National
National
National
National
National
National
National
National
National
National
National
National
National
Credit
Credit
Credit
Credit
Credit
Credit
Credit
Credit
Credit
Credit
Credit
Credit
Credit
Credit
Credit
Credit
Credit
Credit
Credit
Credit
Credit
Credit
Union
Union
Union
Union
Union
Union
Union
Union
Union
Union
Union
Union
Union
Union
Union
Union
Union
Union
Union
Union
Union
Union
- CLF
12/01
12/02
12/03
12/06
12/07
12/08
12/09
12/10
12/13
12/14
12/15
12/16
12/17
12/20
12/21
12/22
12/23
12/27
12/28
12/29
12/30
12/30
$200,000,000.00
$200,000,000.00
$200,000 / 000.00
$200,000,000.00
$200,000,000.00
$200,000,000.00
$200,000,000.00
$200,000,000.00
$200,000,000.00
$200 / 000,000.00
$200,000,000.00
$200,000,000.00
$200,000,000.00
$200,000,000.00
$200,000 / 000.00
$200,000,000.00
$400,000,000.00
$200,000,000.00
$200,000,000.00
$200,000,000.00
$200,000,000.00
$200,000,000.00
12/08/99
12/09/99
12/10/99
12/13/99
12/14/99
12/15/99
12/16/99
12/17/99
12/20/99
12/21/99
12/22/99
12/23/99
12/23/99
12/27/99
12/28/99
12/29/99
12/30/99
1/03/00
1/04/00
1/05/00
1/06/00
1/07/00
5.430%
5.399%
5.377%
5.375%
5.346%
5.346%
5.346%
5.377%
5.416%
5.513%
5.513%
5.472%
5.513%
5.562%
5.754%
5.712%
5.681%
5.594%
5.597%
5.534%
5.357%
5.357%
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
12/01
12/01
12/02
12/02
12/03
12/03
12/06
12/06
12/07
12/07
12/.08
12/08
12/09
12/09
12/10
12/10
12/13
12/13
12/14
12/14
$1,400,000,000.00
$326,000,000.00
$1,325,000,000.00
$196,300,000.00
$1,395,000,000.00
$185,300,000.00
$950,000,000.00
$192,100,000.00
5550,000,000.00
$221,700,000.00
$400,000,000.00
$124,000,000.00
$140,000,000.00
$206,400,000.00
$900,000,000.00
$335,700,000.00
$1,330,000,000.00
$237,300,000.00
$1,075,000,000.00
$208,300,000.00
12/02/99
12/02/99
12/03/99
12/03/99
12/06/99
12/06/99
12/07/99
12/07/99
12/08/99
12/08/99
12/09/99
12/09/99
12/10/99
12/10/99
12/13/99
12/13/99
12/14/99
12/14/99
12/15/99
12/15/99
5.482%
5.399%
5.430%
5.377%
5.399%
5.375%
5.377%
5.346%
5.375%
5.346%
5.346%
5.346%
5.346%
5.377%
5.346%
5.416%
5.377%
5.513%
5.416%
5.513%
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
U.S. POSTAL SERVICE
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
8/A
S/A
Page 3
FEDERAL FINANCING BANK
DECEMBER 1999 ACTIVITY
Final
Maturity
Interest
Rate
$825,000,000.00
$304,200,000.00
$600,000,000.00
$317,900,000.00
$450,000,000.00
$282,300,000.00
$360,000,000.00
$237,700,000.00
$150,000(000.00
$92,500,000.00
$40,800(000.00
$850,000,000.00
$222,600,000.00
$1,050,000,000.00
$379,500,000.00
$1,300,000,000.00
$27,400,000.00
$1,025,000,000.00
$177,600,000.00
$1,000,000,000.00
$171,000,000.00
12/16/99
12/16/99
12/17/99
12/17/99
12/20/99
12/20/99
12/21/99
12/21/99
12/22/99
12/22/99
12/23/99
12/27/99
12/27/99
12/28/99
12/28/99
12/29/99
12/29/99
12/30/99
12/30/99
1/03/00
1/03/00
5.513%
5.472%
5.513%
5.513%
5.472%
5.562%
5.513%
5.754%
5.562%
5.712%
5.681%
5.712%
5.594%
5.681%
5.597%
5.594%
5.534%
5.597%
5.357%
5.534%
5.346%
12/02
12/10
12/14
12/14
12/23
$46,726.00
$7,363.24
$40,809.24
$41,502.81
$10,959.70
7/31/25
1/02/25
7/31/25
7/31/25
1/30/02
6.618%
6.528%
6.497%
6.497%
6.380%
S/A
12/01
12/02
12/02
12/03
12/06
12/07
12/08
12/13
12/13
12/14
12/16
12/17
12/20
12/21
12/27
12/28
$4,684,000.00
$20,000,000.00
$15,804,752.00
$1, 275,000.00
$800,000.00
$2,000,000.00
$5,604,000.00
$1,000,000.00
$2,050,000.00
$222,000.00
$50,000.00
$273,000.00
$1,000,000.00
$1,183,000.00
$786,000.00
$366,000.00
12/31/14
1/03/05
1/03/05
1/03/34
3/31/00
1/03/33
3/31/00
1/03/34
12/31/29
12/31/24
1/02/18
1/03/34
3/31/00
12/31/14
12/31/14
1/03/33
6.308%
6.100%
6.100%
6.374%
5.455%
6.423%
5.295%
6.206%
6.243%
6.449%
6.749%
6.439%
5.477%
6.499%
6.526%
6.640%
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Date
Borrower
u.s. Postal Service
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
Postal
postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Service
Service
Service
Service
Service
Service
Service
:::ervice
:rvice
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
12/15
12/15
12/16
12/16
12/17
12/17
12/20
12/20
12/21
12/21
12/22
12/23
12/23
12/27
12/27
12/28
12/28
12/29
12/29
12/30
12/30
Amount
of Advance
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
;OVERNMENT - GUARANTEED LOANS
GENERAL SERVICES ADMINISTRATION
Foley Square Office Bldg.
Memphis IRS Service Cent.
Foley Services Contract
Foley Services Contract
Atlanta CDC Lab
S/A
S/A
S/A
S/A
RURAL UTILITIES SERVICE
Cornbelt Power #376
Georgia Trans. Corp. #559
Georgia Trans. Corp. #559
Cimarron Electric #567
Big Sand Elec. #540
Blue Ridge Elec. #512
Brazos Electric #561
Craig-Botetourt #570
Pee Dee Elec. #547
South Texas Electric #505
Marshalls Energy Co. #458
Garland Light & Power #558
Surry-Yadkin Elec. #534
Molalla Tele. Co. #420
Cornbelt Power #376
Hawkeye Tri-County Elec. #509
Page 4
FEDERAL FINANCING BANK
DECEMBER 1999 ACTIVITY
Borrower
Johnson County Elec. #500
Altamaha Elec. #467
Tri -State #439
Tri-State #440
Tr i - S tat e # 4 7 5
Upsala Coop. Tele. #429
S/A is a Semiannual rate.
Qtr. is a Quarterly rate.
Date
12/28
12/30
12/30
12/30
12/30
12/30
Amount
of Advance
$1,200,000.00
$3,500,000.00
$3,813,000.00
$2,806,000.00
$4,794,000.00
$600,000.00
Final
Maturity
Interest
Rate
12/31/29
12/31/31
12/31/25
1/02/24
12/31/25
6/30/00
6.675%
6.514%
6.709%
6.714%
6.709%
5.745%
Qtr.
Qt~.
Qtr.
Qtr.
Qtr.
Qtr.
Page 5
FEDERAL FINANCING BANK HOLDINGS
(in millions of dollars)
Program
December 31. 1999
November 30, 1999
Monthly
Net Change
12/1/99-12/31/99
Fiscal Year
Net Change
10/1/99-12/31/99
Agency Debt:
U.S. Postal Service
National Credit Union Adm.-ClF
Subtotal*
$4,671.0
$1,041.0
$5,712.0
$5,472.5
$841. 0
$6,3l3.5
-$801. 5
$200.0
-$601. 5
-$1. 608.1
$1 041. 0
-$567.1
Agency Assets:
FmHA-RDIF
FmHA-RHIF
DHHS-HMO
DHHS-Medical Facilities
Rural Utilities Service-CBO
Subtotal*
$3.410.0
$6,665.0
$1. 7
$3.2
$4 598.9
$14.678.8
$3,410.0
$6,775.0
$1. 7
$3.2
$4 598.9
$14,788.8
$0.0
-$110.0
$0.0
$0.0
$0.0
-$110.0
$0.0
-$460.0
$0.0
$0.0
$0.0
-$460.0
Government-Guaranteed lending:
DOD-Foreign Military Sales
DoEd-HBCU+
DHUD-Community Dev. Block Grant
DHUD-Public Housing Notes
General Services Administration+
DOl-Virgin Islands
DON-Ship lease Financing
Rural Utilities Service
SBA-State/local Development Cos.
DOT-Section 511
Subtotal*
$2,582.5
$20.8
$12.8
$1. 348. 5
$2.370.0
$16.1
$1. 138. 7
$14.084.8
$183.7
$3.7
$21, 761. 6
$2,595.3
$20.8
$12.9
$1. 348.5
$2,392.3
$16.1
$1, l38. 7
$14,025.3
$186.7
$3.7
$21, 740.4
-$12.8
$0.0
-$0.1
$0.0
-$22.3
$0.0
$0.0
$59.5
-$3.0
$0.0
$21.2
-$28.4
$9.8
-$0.8
-$71.4
-$34.9
$0.0
$0.0
$199.8
-$10.2
$0.0
$63.8
Grand total*
$42,152.4
$42,842.7
-$690.3
-$963.3
* figures may not total due to rounding
+ does not include capitalized interest
1
-------
1
1
OFFICE OF PUBLIC AFFAIRS. 1500 PEN:"ISYLVr\:"L-\ .\\"ENl'E. "i.W .• \\'ASHIN<;TO ..... D.C.- 20220e !21121 622·2%11
EMBARGOED UNTIL 2:30 P.M.
March 22, 2000
CONTACT:
Office of Financing
202/691-3550
TREASURY TO AUCTION $12,000 MILLION OF 2-YEAR NOTES
The Treasury wi~l auction $12,000 mil~ion of 2-year notes to refund
$26,879 million of pub~ic~y he~d securities maturing March 31, 2000,
and to pay down about $14,879 mi~~ion.
In addition to the public holdings, Federal Reserve Banks hold $3,515
million of the maturing securities for their own accounts, which may be
refunded by issuing an additional amount of the new security.
The maturing securities held by the pub~ic include $3,264 million held
by Federal Reserve Banks as agents for foreign and international monetary
authorities. Amounts bid for these accounts by Federal Reserve Banks will
be added to the offering.
Treasu~Direct customers requested that we reinvest their maturing
holdings of approximately $779 mi~lion into the 2-year note.
The auction wi~l be conducted in the single-price auction format.
All competitive and noncompetitive awards will be at the highest yield of
accepted care~etitive tenders.
The notes being offered today are eligible for the STRIPS program.
This offering of Treasury securities is governed by the terms and conditions set forth in the Uniform Offering Circular for the Sale and Issue
of Marketable Book-Entry Treasury Bills, Notes, and Bonds (31 CFR Part 356,
as amended) •
Details about the new security are given in the attached offering
highlights.
If the auction of 2-year notes to be held Wednesday, March 29, 2000,
results in a yield in a range of 6.625 percent through and including 6.749
percent, the 2-year notes will be considered an additional issue of the
outstanding 6-5/8% 5-year notes of Series E-2002 (CUSIP No. 9128272P6)
origina~ly issued March 31, 1997.
The additiona~ issue of the notes would
have the same CUSIP number as the outstanding notes, which are currently
outstanding in the amount of $14,301 million.
If the auction resu~ts in the issuance of an additiona~ amount of the
Series E-2002 notes rather than a new 2-year note, it will be noted in the
Treasury auction results press release.
In the event of a reopening, all
amounts outstanding for CUSIP No. 9128272P6, inc~uding the 5-year notes
issued March 31, 1997, would be eligible for the STRIPS program.
~ttachment
000
Ls-490
_For press releases, speeches, public schedules and official biographies. call our 24-hour fax line at (202) 622·2040
HIGHLIGHTS OF TREASURY OFFERING TO THE PUBLIC OF
2-YEAR NOTES TO BE ISSUED MARCH 31, 2000
March 22, 2000
Offering Amount . . . . . . . . . . . . . . . . . • . . . . . . . . . $12,000 million
Description of Offering:
Term and type of security . . . . . . . . . . . . . . . . . 2-year notes
Series . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . T-2002
CUSIP number . . . . . . . . . . . . . . . . . . . . . . . . · ..... 912827 6B 3
Auction date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . March 29, 2000
Issue date . . . . . . . . . . . . . . . . . . . . . . . . . . . · .... March 31, 2000
Dated date ......•.....•................... March 31, 2000
Maturity date ...........•..............•.. March 31, 2002
Interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deter.mined based on the highest
accepted competitive bid
Yield . . . . . . . . . . . • . . . . . . . . . . . . . . . . . . . . . . . . • Deter.mined at auction
Interest payment dates . . . . . . . . . . . . . . . . . . . . Septamber 30 and March 31
Minimum bid amount and multiples .......... $1,000
Accrued interest payable by investor ...... None
Premium or discount . . . • . . . . . . . . . . . . . . . . . . . Deter.mined at auction
STRIPS Information:
Minimum am~unt required . . . . . . . . . . . . . . . . . . . Deter.mined at auction
Corpus CUSIP number . . . . . . . . . . . . . . . . . . . . . . 912820 EP 8
Due date(s) and CUSIP number(s)
for additional TINT(s) . . . . . . . . . . . . . . . . . . Not applicable
Submission of Bids:
Noncompetitive bids:
Accepted in full up to $5,000,000 at the highest
accepted yield.
Competitive bids:
(1) Must be expressed as a yield with three decimals, e.g., 7.123%.
(2) Net long position for each bidder must be reported when the sum
of the total bid amount, at all yields, and the net long position
is $2 billion or greater.
(3) Net long position must be determined as of one half-hour prior to
the closing time for receipt of competitive tenders.
Maximum Recognized Bid at a Single yield ...... 35% of public offering
Maximum Award . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35% of public offering
Receipt of Tenders:
Noncompetitive tenders: Prior to 12:00 noon Eastern Standard time
on auction day.
Competitive tenders: Prior to 1:00 p.m. Eastern Standard time
on auction day.
Payment Terms: By charge to a funds account at a Federal Reserve Bank
on issue date, or payment of full par amount with tender.
TreasuryDirect
customers can use the Pay Direct feature which authorizes a charge to
their account of record at their financial institution on issue date.
DEPARTt\1ENT
OF
THE
TREASURY
NEWS
OFFICE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W.· WASHINGTON, D.C.. 20220. (202) 622-2960
For Immediate Release
March 22,2000
Contact: Public Affairs
(202) 622-2960
PHOTO ADVISORY
Treasury Secretary Lawrence H. Summers will launch the production of the redesigned
$10 dollar notes on Thursday, March 23 at 9 a.m. at the Bureau of Engraving and Printing.
Media interested in attending should call (202) 874-3545 by 7:00 a.m. Thursday, March
23 with name and news organization for clearance into the building. All media should enter the
14th Street south alley entrance (past the BEP building), at which point all pre-registered media
will be escorted into the building. Pre-set begins at 8 a.m.
-30-
LS-491
For pre?3 n!!rease3, YPceeh66, fHUUic schedules and official biographies, call our 24.1zour fax line at (202) 622-2040
<
DEPARTMENT
OF
THE
TREASURY
NEWS
'IREASURY
OFFICE OF PUBliC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W. • WASHINGTON, D.C.· 20220 • (202) 622-2960
FOR IMMEDIATE RELEASE
March 20, 2000
ADMINISTRATION POLICY STATEMENT
Advisory Commission on Electronic Commerce Meeting
Dallas, Texas
Electronic Commerce and the associated explosion of the information technology sector are key
sources of economic growth in the United States and around the world, Since issuing his
Framework for Global Electronic Commerce in July 1997, the President and the entire
Administration have focused on creating a policy environment in which this new medium of
commerce will flourish,
This Commission was charged with examining some of the most difficult issues associated with
this evolving marketplace, The three Administration representatives participated fully in the
Commission's deliberations, They assessed the issues before the Commission on the basis of two
fundamental principles:
the Internet and electronic commerce should not be subject to discriminatory taxes,
tax policy in this area should be neutral, nondiscriminatory, simple, certain, fair,
and flexible
Applying these principles, the Administration representatives reached the following conclusions
regardll1g the key issues before the Commission,
LS-492
1-
For press--rekasR~) qleeches. public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
,
1. Inter'net Access Taxes
The current statutory moratol'ium on Internet access taxes should be made
permanent.
It is critically important to encourage access to the Internet. Because taxes on
Internet access would create an obstacle to the access of all Americans to the
Internet, and in turn, their ability to participate in electronic commerce, these taxes
should be prohibited permanently.
2. Multiple and Discl'iminatory Taxes
The current statutory moratorium on multiple and disc.-iminatory taxes should be
extended.
Multiple or discriminatory taxes on electronic commerce plainly would hinder its
development This existing statutory moratorium should be extended, and final
protections against such taxes should be crafted after the States develop simplified
sales tax systems.
3 State and Local Taxes on Telecommunications
States and local governments should work expeditiously, in conjunction with the
private sectOl' to simplify and J'eform these taxes. The goal of these reforms should
be neutl'ality in taxation of telecommunications as compared to other sectors as well
as neutrality in taxation of providers of similar telecommunications services.
This complex web of taxes is in large part a relic of the time when
telecommunications services were a regulated monopoly and when taxes on these
services were passed on to consumers through the regulated rate structure
Today, telecommunications on a!llevels have moved from regulated monopoly to
competitive market, and the line between telecommunications and other types of
services becomes less clear every day. State and local governments have
recognized the pressing need for reform in this area We believe that these
uovernments
workin bo in cooperation with businesses and consumers, can
b
'
accomplish this goal
4.
St~te
and Local Sales and Use Taxes
States and localities should develop a simplified sales and use tax system within two
years. During that time, the current rules governing this area, which were
established by the Supreme Court, should remain unchanged.
While this simplified system is being developed, States and localities should engage
in a dialogue with businesses and consumer"s to address the complex and difficult
issues regarding the application of these taxes to Internet sales. These issues
include:
fairness to both Internet businesses and 'bricks and mortar' businesses;
significantly reducing or eliminating the cost to businesses of collecting these
taxes;
the eITect of these taxes on the international competitiveness of U.S. Internet
companies;
whether lower-income Americans are paying, or will be required to pay, an
unfair and disproportionate share of state and local sales taxes;
ensuring protection of consumer privacy; and
the feasibility of imposing and collecting sales taxes on goods delivered
digitally over the Internet (software, music, etc.).
The application of sales tax laws to Internet transactions raises difficult issues. It is
essential that we maintain the vitality of electronic commerce, which is one of the primary
drivers of our economy It also is essential that States and localities have the revenues
they need to provide citizens with essential services such as education, police, tIre
protection. Addressing this issue is extraordinarily complex for a number of reasons,
including the fact that policymakers do not now have all of the information they need.
Everyone agrees, however, that simplification is the key So the States should proceed in
developing a model act that produces real and efTective simplification, while discussion on
the other issues continues. \Vhile the model act is being developed, which is estimated to
take two years, the current sales and use tax rules, established by the Supreme Court,
should remain in place~ they plainly have not hindered the growth of electronic commerce
In the event of any change in existing rules governing the application of sales and use
taxes to Internet sales, there should be full accountability so that citizens of each State can
determine the appropriate consequences of any projected increase in revenue.
5
Federal Excise Tax on Communications
Phase out of this tax is a worthy policy objective and should be considered, but must
be weighed against other worthy objectives including other proposed tax reductions,
and must not be allowed to threaten the important priorities of maintaining fiscal
discipline, paying down the national debt, extending the solvency of Medicare and
Social Secul'ity. and maintaining core government functions such as health care and
education.
This tax contributes more than $4 billion in revenue per year and $5:;: billion over
ten years. Because of this substantial budgetary impact, phasing out of the tax
cannot be considered in a vacuum, but must be weighed against other important
priorities
6. Customs Duties
The current moratorium on customs duties on electronic transmissions should be
made permanent.
Maintaining the moratorium on customs duties on electronic transmissions is a
goal shared both domestically and internationally. There is a broad recognition
that imposing customs duties on electronic transmissions would only undermine
the ability to attract the investment and technology necessary to build and develop
an e-commerce infrastructure.
7. International Taxation
Any taxation of electl'onie commerce should be neutral, nondiscr-iminatory, simple,
certain, fair and flexible.
Regarding international taxation of electronic commerce, our view is that any taxation
of electronic commerce should be neutral and non-discriminatory We must continue
to work within the Organization for Economic Cooperation and Development
(OECD) to agree on tax rules based on the principle of neutrality and other core
principles, such as simplicity, cer1ainty and fairness We must also continue to work
with nOll-OECD member countries Global electronic commerce should not be
impeded by globally inconsistent tax treatment and thus a global consensus must be
reached regarding appropriate taxation
-30-
4-
TREASURY
NE\¥S
OFFICE OF PUBLIC AFFAIllS -1500 PENNSYLVANIA AVENUE. N.W•• WASHINGTON. D.C.8 lO~lO. (ZOl) 612.2960
EMBARGOED UNTIL 2:30 P.M.
March 23, 2000
CONTACT:
Office of Financing
202/691-3550
TREASURY TO AUCTION CASH MANAGEMENT BJ:LLS
The Treasury will auction approxi.Jna.te1y $35,000 mi11i.on of 21-day
cash management b1l1s and $30,000 million of 19-day cash management
bills, both to be issued on March 30, 2000.
be accepted for bills to be maiDtain~d on the
))ook-entry records of the Department of the Treasury (TreasuzyDirece).
Tenders wi1l not be received at the Bureau of the Public Debt,
Washington, D.C.
Tenders will
~
Additional amounts of the bills may be issued to Federal Reserve
Banks as agents for foreign and international monetary authorities at
the highest discount rate of accepted competitive tenders.
The auctions being announced today will be conducted in the sing1eprice auction for.mat. A1l competitive and noncompetitive awards will
be at the highese discount rate of accepted competitive tenders.
NOTE: Competitive bids in cash management bill auctions must be
expressed as a discount rate with two dec~ls, e.g., 7.10%.
This offering of Treasury securities is governed by the terms and
eonditions set forth in the Unifor.m Offering Circular for the Sale and
:IaBue of Marketahl.e Book-Entry Treasury sills, Notes, and Bonds (31 CFR
Part 356, as amended).
Details about the new securities are given in the attached offering
highlights.
000
LS-493
Attachment
For pnss nl~Dsesp JP~eches. pllblic ,ch,d,lles and offICial biographies, call our 24·hour fax li"t at (202) 622.2040
HIGHLZGHTS OF TREASURY OFFBR~NGS OF CASH MANAGEMENT BZLLS
TO BE ISSUED MARCH 30, 2000
March 23, 2000
Offering Amount ••••••••••••• $35,000 mdllioD
Description of Offerings
Te~ and type of security ••• 21-day bill
CUSIP number •••••••••••••••• 912795 DB 7
Auotion date •••••••••••.•••• March 28, 2000
Receipt of Tenders (Eastern Standard time) 1
Nonoompetitive tenders •••• Prior to 12,00 noon on auction day
competitive tenders ••••••• Prior to 1,00 p.m. on auction day
Issue date ......
March 30, 2000
Maturity date ••.•••••••••••• April 20, 2000
Original issue date ••••••••• Ootober 21, 1999
Currently outstanding ••••••• $23,989 mdllion
Miniaum bid amount
and multiples ••••••••••••• $1,000
0
•••••••••••
$30,000 million
19-day bil.l
912795 GX 3
March 29, 2000
Prior to 11&00 a.m. on auction day
Prior to 11,30 a.m. on auction d~
Karcb 30, 2000
April. 18, 2000
Maroh 30, 2000
$1,000
The following rules apply to all securities mentioned above:
submission of Bidsl
Noncompetitive bids ••• Accepted in full up to $1,000.000 at the highest discount rate of accepted
competitive bids
competitive bids •••••• (1) Must be expressed a8 a discount rate with two aecima1s, e.g., 1.10%.
(2) Ret long position for each bidder must be reported wben the sum of
the total hid amount, at all discount rates, and the net long
position is $1 billion or greater.
(3) Net long position must be determined as of one half-hour prior to the
closing time for receiPt of conpetitive tenders.
Maximum Recognized Bid
at a Single Rate ••.••• 35% of public offering
Maximum Award ••••••••••• 35% of public offering
payment Te~ •.••••••••• By charge to a funds account at a Federal Reserve Bank on issue date, or
payment of full par amount with tender.
I>EPARTME);,T
TREASURY
OF
THE
TREASURY
NEWS
OFFICE OF PUBLTC AFFAIRS. UOO PENNSYLVANIA AVENUE. N.W•• WASHINGTON, D.C •• lOnG. (ZOZ) 622-2960
EHBARGOED OHTXL 2:30 P.M.
2000
CORTACT:
March 23,
of r~DaDCing
202/691-3550
Off~ee
TUAStnty Ol"!'BRS 13-WEElt AND 26-W'EE:X BXLLS
The
T~.asury w~11
auc~~on two .er~e. of T~eaBury ~~11B ~o~aling
$16,000 mil1~0D to refund $27,332 ~~lion of publicly held
maturing Mareh 30, 2000, and to pay down about $11,332 Ddllion.
appro~tBly
sacurit~es
~
addition to the public holdings, Federal Reserve Baaks for their own
~1lion of the maturin§ bills, whieh ~ be refunded at
t.he l:U.g'best aJ,scount rate of accepted competitive tenders. Amounts issued. to
tbase aceouncs will be in addition to the offering amount.
aeeOUDts bold $12,532
Th.e maturing' bills held by the pUblic il1Clude $7,696 mil.lioD :bela
Federal Reserve Banks as &§eZl.ta fo: fo:re~gu Wld ~Dterna.t~onal monetary
auehorities. Up to $3,OOO'~ll~oD o~ these 5ecur~t~es may be refunded within
the offering amguut in each of ~he auct~ons of 13-week b~lls &Dd 26-week
bills at the highest d1seount rate of accepted.competitive tenders. Additional BmOUDts may be ~ssuad in each auction for such accounts to the ex~ent
that the amount of new bids excaeds $3,000 m11ion.
by
!'reasu.zo:v,Dir.C't: custame;r;s z-equ.est.ec:1 that; we reinvese their maturi.ng holdiDgs of approx~tely $941 million into the 13-week bill and $1,226 mil1ion
1nto the 26-week bill.
'!his offar.ing of Treasury securities i . governed by the terms and CODaitionssat forth in the aDifor.m OfferiDg Circular for tbe sale and ~ssue of
Marketable Book-Entr,y Treasur,y Bills, Kotes, and BOnds (31 CFR Part 356, as
ameDded) •
Details about eaCh of the new securities are given
offering bdg~igbts.
~
the attaChed
As lUlD.ou.nced on Pabruary 2, 2000, the Traasuzy Department Ass reduced
the frequeDCY of issuanee of 52-week billa from every fourth we~ to four
ttmes a year. The last 52-weak b~ll issue4 on the four-weak baS1S was
lfarcb 2, 2000.. 'l'he next. :isSNe will be JUne 1, 2000 ..
LS-494
For preS$ ,~l~as.s, sp~flchllS, p"blie .ehedlllies lind o/ficilJl biographies, callouT 24·hour flU line ar (202) 622 ..2040
HXGHL%GHTS or TREASURY OrrZR%RGS or BXLLS
TO BB %SSUED MARCH 30, 2000
March 23, 2000
Offering Amount ...••.•••••••••••••••••• $8,500
~llion
Deacription of Offering:
Te~ and type of security .•••••••.••••• 91-day bill
CUSX» number ••••••••••••••••••••••••••• 912795 Be 1
Auction dat •••••••••••••••••.••••••••.• March 27, 2000
ISBue date •••••.••••••.••••••••••.••••• Marcb 3D, 2000
Matuxity date •••••••.•••••••••••••••••• June 29. 2000
Orlginal i ••ue 4at •••..•••••••••••••••• December 30, 1999
Currently outstanding •••••••••••••••••• $11,676 ~llioD
HiAtmw. bid amount and multipl.s ••••••• $1,000
$1,500 million
182-day bill
912795 FB 2
Karch 21, 2000
March 30, 2000
September 28, 2000
Maroh 30, 2000
$1,000
The following rules apply to all securities mentioned above:
Submission of Blds:
.ono~etitive
bids ••••••••• Accepted in full up to $1,000,000 at the higheat discount rat. of
accepted competitive bids.
Competieive bids •••••••••••• (1) MUst be expressed .a a discount rate with three 4ecimals in
incrementa of .005%, e.g., 7.100%, 7.105%.
(2) Net long position for eaoh bidder must b. reported when the sum
of the total bid amount, at all discount rate., and the net
long position is $1 billlon or greater.
(3) Net long poaition DUst be dete~ne4 as of one balf-hour prior
to the closing time for receipt of co~etitiv. tendera.
Maximum Recognized Bid
at a Single Rate •••••••••••• 35% of publio offering
Maximum Award •••.•••.•••••••••• 35% of publio offering
Recelpt of Tenders:
Moacampetitive tender ••••••• Prior to 12:00 noon Eastern Standard time on auctiOD day
Competitive t.nder •••••••••• Prior to 1:00 p.m. Eastern Standard ti~ on auction day
pax-ent Teras: By oharge to a funds aooount at a 7ederal Reserve Bank on issue date , or payment
of full par amoune with tender. ~rea8uryPlr.ct customers can use the Pay Direot feature which
Authoria.s a charg. to th.ir account of recor4 at their financial institution on iSBue date.
DEPARTMENT
OF
THE
IREASURY (r.~}
TREASURY
NEW S
\~ ~~;
Y~'"'
................................
~~/!8~q~. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .
OFFICE OF PUBUC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C.• 20220 - (202) 622-2960
FOR Jl\.1MEDIA TE RELEASE
Text as Prepared for Delivery
March 23, 2000
STATEMENT BY TREASURY DEPUTY SECRETARY STUART E. EIZENSTAT
This is a great day. We have taken a huge step forward today. We achieved a
consensus agreement on the allocation of the 10 billion 0- Marks in the German Foundation to
which all parties have agreed -- German business led ably by Dr. Manfred Gentz, the
countries of Poland, Ukraine, Russia, Belarus, and the Czech Republic, the State of Israel, the
Jewish Claims Conference, and the attorneys who represent victims in U.S. courts. I would
like to express special appreciation to the German Parliamentarians for their tireless support
and assistance. This is a remarkable achievement, in particular for the German government
and the Chancellor's gifted Special Representative, Otto Count Lambsdorff. This brings this
process a substantial step closer to completion.
To achieve this consensus, all of the participants in these negotiations have had to make
compromises, because there is only a limited amount of money in the foundation. All had to
show flexibility from their initial demands.
Count Lambsdorff and I met with each group of participants. All vigorously defended
their positions, but all recognized the larger imperative of reaching agreement now, so that
funds could promptly go to survivors. Count Lambsdorff and I introduced a joint proposal that
sought to meet the basic needs of each participant.
I am pleased to report that all participants have given their assent to our joint proposal.
This could not have been done without all parties demonstrating flexibility and a spirit of
compromise. For that, I express gratitude and appreciation to each participant.
At the same time, what we have achieved today is a fair agreement that takes account of the
interests of all parties.
Let me outline the allocation agreement that we have achieved:
There will be 8.1 billion DM allocated to make payments to surviving slave and forced
laborers and to others for other personal injuries.
LS - 495
For press releases. speechesJJublic schedules and official biographies, call our 24-hour fax line at (202) 622-2040
,"
'(
The German Foundation will allocate the 8.1 billion from within the 10 billion to labor.
The 8.1 billion will be increased by anticipated interest earnings of 50 million, for a total of
8.150 DM. We also hope there will be a contribution from the Swiss settlement to the
Foundation.
The labor payments would be allocated among seven partner organizations: the
Conference on Jewish Material Claims, the five Reconciliation Foundations in Poland,
Ukraine, Russia, Belarus, and the Czech Republic, and a yet to be designated organization for
the rest of the world. In addition, the Foundation will hold an amount in reserve for other
personal injury cases.
Here are the agreed allocations, including an amount of estimated earned interest:
Claims Conference:
1.812 billion
Poland:
1.812 billion
Ukraine:
1.724 billion
Russia:
835 million
Belarus:
694 million
Czech Republic:
423 million
Rest of the World:
800 million
Other Personal Injury:
50 million
The allocations to the Conference on Jewish Material Claims will reach surviving slave
laborers residing outside of the five Central and East European Countries. The Reconciliation
Foundations in the five CEEs will handle payments to all their citizens, including Jewish slave
laborers.
Aside from labor, our agreement on allocation also covered the other categories in the
Foundation: property, the Future Fund and administration.
We agree that the allocation to property will be one billion D-Marks. The one billion
will be divided as follows: 350 million for claims and a 650 million for humanitarian cases.
The 350 million DM claims portion will be allocated as follows:
1.
150 million for racially-motivated property claims against German companies.
2.
50 million for all other property claims against German companies.
2
3.
150 million for insurance claims, which will be supplemented by an additional
50 million to be generated from interest earned.
There will also be a reserve of 100 million in the Future Fund to cover any additional
insurance claims if necessary - creating the potential for 300 million in insurance claims, if
required.
The 650 million DM humanitarian portion will between insurance and property.
The insurance portion of the settlement involving both claims and non-claims will be
consistent with the procedures established by the International Commission on Holocaust Era
Insurance Claims.
Finally, we have agreed that 200 million DM will be reserved for administration of the
Foundation.
With this allocation agreement, we have now concluded a key element of our
December, 1999 agreement for the funding of the German Foundation.
Today's agreement puts in place two of the three important elements of this settlement - the overall figure of DM 10 billion and allocation of the funds. A key third element -- legal
peace for German firms -- requires agreement on provisions affecting actions before V.S.
courts. The Federal Cabinet approved a draft law yesterday, which will help move the
legislation through the Bundestag. But, as I have stated often, the final law will be the linchpin
of the legal settlement. I cannot overemphasize this point. The German legal basis for the
Foundation will be examined carefully by our courts. If it does not incorporate the substance
of the agreements reached here, it will not be deemed to be sufficient basis for dismissal of the
lawsuits or for the V.S. to act in support of that goal.
In conclusion, I want to re-emphasize the significance of today' s achievement, and I
look forward to continuing to work on the remaining issues in the coming weeks.
-30-
3
______j";.j!j:::!:::]:l:.:;jj:;.~.::;jjj·:·::;::::::':~::::;:::ltji::.:::'::::::::.:g~Ni::IHAUIMgti§i::::RiIBg§~:::'::::::l:I::':':'l:';::ili:::::f~.:::j;::::::::;1.l':::.:::'1::.j'j::l:ijl.:.].;].:.:.j·j.].i:i:j,::::.ii[:l:,:;i::.;::;::::::.;1;1~:::.ili':li
Suballocation
Percentage of
Amount (Billion Amount (Billion Amount for
OM)
OM)
Labor
I 3.630 OM
I 4.420 OM
Overan
Percentage
I
LABOR
Slave Labor
Forced Labor
Capital for Slave and Forced Labor
--~- -"---~~~------P0iii1d
I
1.812 OM
ues D"M-
80.50%
.--~-
-----
0.050 OM
22.31 %
1.709bM---~------
Ukrairwt
----~
ResiofEiis7""'-m---::E=--u-ro-pe-'RestoiWOrld
--- -
--
______ __fi...n0~i~_a_n<j Ro.rn"l __ 9..:~9.Q O_M _
Other PeraonallnjuryCasea
TOTAL CAPITAL FOR---
LABOR
__
22.37%
1.B120M
22.51%
21.22%
Russia 0.828 BM------10.28%
Belarus
O.salDM -- - . - - - - -----8.54%
Cz«hRePublic
-04190M
--5.21%
--------
Amount for
Labor with
Supp/ementa' Supp/ementa' Funds
Funds
Comments
Swi$.S Fund
I
8.050 OM
Suballocations (Slave and Forced
Labor Combined)
Partrwtr OlllMNJIlJions:
Claims Confef8flCe
Supplemental
Funds
(BIllion OM)
0.100 OM
Percentage of
Suballocation
Amount with
Supplemental
Funds
(Billion OM)
1.812 OM
1.724 OM
22.37%
- 0.B35 OM
10.31%
B.56%
O_BOO OM
9.94%
0_050 OM
21.29%
0.694 OM
f_Jl423 OM
------
- - - - - - , . . - - - - - - --
5_22%
I
t- ___ I 8.100 OM I
BankJ.f7fl ciaim.s
Other Property ClaimsiCatch-all
Banking Humanitarian
0.150DM
O.OSODM
0.300DM
Insurance Claims
Insurance Humanitariarv7CHEIC
0.150 OM
0.350 OM
FUTURE FUNO
1.000 OM
I
81.00%
TOTAL CAPITAL FOR NON·
LABOR, FUTURE FUND AND
ADMINISTRATION
TOTAL FOUNDATION
CAPITAL
I
I 8.250 DM I
10.00%
0.050 OM
0.700 OM
7.00%
0.200 OM
2.00%
Intef8st Earned
Programs for Heirs
Reserve for Insurance Claims
9.88%
0.50%
------~--~-
TOTAL CAPITAL FOR NON::+~
LABOR
ADMINISTRATION
Intef8st Earned 10
CEEs
0.100 OM
1.950 OM
1.900 OM
10.000 OM
100.00%
I
D EPA R T 1\1 E N T
0 F
THE
T REA SUR Y
NEWS
OFFlCE OF PUBUCAFFAlRS -1500 PENNSYLVANIA AVENUE, N.W. - WASmNGTON, D.C.• 20220 - (202) 622-2960
FOR IMMEDIATE RELEASE
March 24. 2000
Contact: Public Affairs
(202) 622-2960
SUMMERS AN]\'OlJNCES PARTNERSHIP AT GEORGE
WASHINGTON HIGH SCHOOL
Treasury Secretary Lawrence H. Summers on Friday will announce a partnership
between Treasury and the School of International Business and Finance (SIB&F) at George
Washington High Schoo) in New York. NY, the first academy to benefit from the new
partnership in the New York area.
Under the partnership agreement Treasury will support SIB&F academies by providing
internships to academy students. Treasury will coordinate the internships through its Partnership
in Education (PIE) Program, which began in 1995. Treasury will work with SIB&F through its
bureaus nationwide to prepare students for college and careers in both the private and public
sector.
"This partnership between the Treasury and the School of Internatio!1<.!l Business and
Finance is an important step for George Washington High School and we look forward to sil~1ilar
partnerships in the future." Secretary Summers said. "At George Washington and other 'public
schools across the nation, Treasury has provided and will continue to provide students with the
opportunity to learn skills that will prepare them for the workplace."
George Washington FIigh School has a number of prominent alumni including; Federal
Reserve Chairman Alan Greenspan, fonner Senator Jacob .Iavitz, former Secretary of State
Henry Kissinger. singer I Iemy Belefonte and former baseball legend Rod Karen.
Summers will be joined by former Treasury Secretary Rubin. IRS Commissioner ('harles
O. Rossotti, Representative Charles 8. Rangel and other school administration ofticials for the
signing of the Memorandum of {JnderstandlJ1g.
LS- 497
For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
DEPARTMENT
OF
THE
TREASURY
NEWS
OFFICE OF PUBLIC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W.• WASmNGTON, D.C .• 20220. (202) 622-2960
FOR IMMEDIATE RELEASE
March 24, 2000
STATEMENT BY TREASURY SECRETARY LAWRENCE H. SUM1\1ERS
We welcome the approval by the Senate Foreign Relations Committee of the
Administration's proposals for debt relief for the world's poorest countries. Under the
bipartisan leadership of Chairman Jesse Helms and Ranking Member Joseph Biden, the
Committee has taken a very important step forward toward fulfilling last year's promise for the
global RIPC initiative. We look forward to continuing our work with the Congress to provide
the critical funding needed to move ahead without delay, beginning with the pending
supplemental budget request.
-30-
LS - 498
Far pre~ r-eIe"6(1~ ~eecbes. /Jll.biic schedules and official biographies, call our 24-1lOur fax line at (202) 622-2040
--------'
,
U
t.: P A K T
~I
E N T
0 f'
THE
'IREASURY '~}I
~/78q
T REA SUR Y
NEW S
........................................
I
OmCE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C.. 20220. (202) 622·2960
EI\'lBARGOED UNTIL 2 00 Pl\.1 EST
Text as Prepared for Delivery
\larch '27, 2000
TREASURY ASSISTANT SECRETARY FOR ECONOMIC POLICY
DA VID \\'. \VILCOX TESTIl\IONY BEFORE THE
SENATE SPECIAL COMMITTEE ON AGING
\ir Chairman, Senator Breaux, and Members of the Committee, I appreciate the
opponunity to present the Admi nistration' s views on the topic of general revenue transfers to
Social Security and l'vledicare These transfers play an important role in the Administration's
thinking about 110\.v to address the long-term tinancing challenges confronting these programs, as
well as an important role in our budget framework. and I am pleased to discuss them with you
todav
The Social Security and Medicare programs are the cornerstones of American social
policy Social Security benefits are the largest source of income for nearly two-thirds of
Americans age 65 and older. and the only source of income for nearly one-fifth of them. And
Social Security is more than just a retirement plan, it is, in addition, a family protection plan,
paying survivors' benetits and disability benefits to millions of Americans under age 65
Medicare pla~'s an equally important role in the lives of older Americans In 1963. nearly
half of Americans over the age of 65 had 110 health insurance. Today. virtually all older
Americans have health insurance through Medicare. and thereby have access to the kind of highquality. dependable medical care that can help extend their lives and improve the quality of their
lives
Today, nearly everyone agrees on the importance of Social Security and Medicare, and
the crucial role they will continue to play' for senior citizens in the 21 ,I Century. Unfortunately,
\.vhi Ie both programs are on solid financial ground in the near term. they both face financing
challenges over the longer term The key factors behind the funding shortfall are the aging of the
L' S population and. for Medicare. the projected increase in spending per beneficiary due to
rapid advances in health care technology As a result. significant steps wil I need to be taken to
put these programs on a secure foundation tor the long term
LS-499
For press releases. speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
The Administration believes thaL while they are by no means the whole solution, general
revenue transfers are an appropriate and important pari of the solution to the financing problems
faced by Social Security and Medicare A comprehensive solution should include structural
reforms to these programs. The President has expressed his desire to work with Congress in a
bipartisan fashion on broader Social Security reform And he has put forward a specific proposal
tor Medicare reform that would make the program more competitive and efficient, modernize its
benefits, including the addition of a long overdue prescription drug benetit. and extend the life of
the trust fund
In my testimony today, I \vill address three topics
•
first, the opportunity for pre-funding provided by our favorable budget outlook;
•
second, the proposal that the President has put forward for limited and prudent general
re\·enue transfers into Social Security and !\1edicare: and
•
third, the way that the transfers \\.ould help to prepare the economy and the budget for the
coming demographic changes
The Budget Outlook and the Ol)portunit)- for Pre-Funding
The American economy is no\\. enjoying its best performance in decades. The
unemployment rate has been below:' percent since July of 1997, and inflation has averaged just
over 2 percent during the same period Productivity growth in nonfarm businesses has averaged
nearly 3 percent over the past four years - the strongest performance for any such period since
the late 19605 Real \vages have increased, even tor low-wage workers who had not previously
experienced proportionate increases in their earnings Altogether, the economic expansion has
no\\. become the longest in U S history and remains quite robust.
The Federal budget picture is equally bright The skills and etTorts of American workers
and businesses have combined with a policy of fiscal discipline to produce budget surpluses that
even optimists would not have predicted 7 :-,'ears ago In the budget agreements of 1993 and
J 997, the President worked with Congress to balance the budget, and he is now working with
Congress to save the surpluses Strong economic performance has boosted revenues and reduced
outlays, and our continued focus 011 tiscal discipline is helping to sustain the expansion
Last vear, the budget was balanced even leaving aside the operations of the Social
Security system, the first time in nearly 40 years that this occurred. In 1998 and 1999, we paid
down $140 billion of public debt, during this tiscal year alone, we expect to pay down $157
billion more Perhaps most encouraging oralL we have forged a bipartisan consensus in favor of
using the Social Security surpluses exclusively for the purpose of paying down the debt held by
the public Indeed, under the projections of the President's policies that were presented in the
budget, we are on a path toward eliminating this debt, on a net basis, by 2013.
The ('/wllellge
Nevertheless, the aging of the U S population and the resulting demands on the Social
Securit\'. and Medicare trust funds are hard upon us The oldest members of the babv. boom
generation will reach the age for earliest eligibility for Social Security benefits within this
decade They will become eligible for Medicare benefits a few years later All told, the number
of Americans over age 65 is projected to double by 2033, and seniors will represent about 20
percent of the population compared with roughly 12 percent today
This remarkable demographic shift will push up both Social Security and Medicare
outlays Medicare costs will be boosted further by continued improvement in the types and
quality of medical care that will be available To be sure, some of these advances in
pharmaceutical treatments, bioscience, and medical technology will reduce costs, but many
others are likely to raise the cost of providing state-of-the-art care.
In this context, the question arises Could general revenue transfers be one part of the
solution to the long-term funding challenges confronting Social Security and Medicare') The
Administration firml~' believes that they cOIl/d, and they shollid
The President's Proposal for General Revenue Transfers
Socw/ ,\'<':c"I"I'Y
The President proposes in this vear's budget, as he did in last year's budget, to transfer
resources from the government's General Fund into the Social Security Trust Funds. The
amount of these transfers is motivated by the interest savings that would be achieved by using
the Social Security: surpluses to pay down debt These transfers \vould begin in 2011, after a
decade of debt reduction, and continue through 2050 The transfers would extend the projected
solvency of Social Security to 2050, or if combined with the modest amount of equity
investment proposed by the President - to 205-+
The transfers would shift resources from the on-budget account to the off-budget account,
and thereby reduce the on-budget tunds a\'ailable for spending or ta:-: cuts. At the same time,
they would augment the Social Securit!, tunds protected by the President's proposed lockbox by
an equal amount Thus, the transfers would be matched dollar-for-dollar by an increase in
government saving and - accordinglv an inlprovement in the government's balance sheet
The President also proposes to transfer additional resources over and above current law
from the General Fund into the Trust Fund for Medicare Part A These transfers would begin in
200 I and continue through 2015 Together with the President's comprehensive proposal for
Medicare reform, the transfers \vould extend the projected solvency of the Medicare trust fund to
at least 2025 The President's program would also combine general revenue with beneficiary
premiums to pay for the new prescription drug benefit, analogous to the current financing
arrangement for Medicare Part B.
The Medicare transfers take place within the on-budget account, so they would not
represent an on-budget outlay in the traditional sense However, the President's Medicare
legislation would require the reported on-budget surplus to be reduced by the amount of the
transfers In parallel \vith the approach Vie are recommending for the transfers into Social
Security. our proposed accounti ng treatment of the transfers into Medicare would ensure that
these funds are. in fact. used to improve the government's balance sheet and not for other
purposes.
He/arion /() p,.c:-FlInding Ullder ('lI/Telll
LOll'
To summarize. the transfers proposed by the President would bring new resources into
the Social Security and Medicare Trust Funds, allowing them to better meet their existing
commitments The transfers would also cause the government to run a bigger surplus than
other\vise. because the amounts transferred could not be used for new spending or tax cuts An
essential aspect of the President"s policy is that the transfers to the respective trust funds over
and above current law would be backed dollar-far-dollar by increments to the unified budget
surplus. and hence by equal-sized improvements in the government's balance sheet.
I al so want to emphasize the close conceptual relationship of these actions to the prefunding alreadv provided for in current law It is enormously important that a bipartisan
consensus has now coalesced around the idea that Social Security surpluses should be used to
pay down the debt held by the public The core economic principle behind both this approach to
pre-funding and the framework for general revenue transfers that we have proposed is exactly the
same that Trust Fund accumulations should be matched dollar-for-dollar by an improvement in
the government's balance sheet
( '()l11prehC:I1.\II 'C: Hel()rm
Transfers of general revenue to Social Security and Medicare would make an important
contribution to the long-term financial soundness of these programs. But I want to emphasize
that \ve vie\\ these transfers as only pari of the solution to the projected funding shortfalls. As
the President has consistently stated, structural reforms are another essential part of preparing
these programs for the 21 ,I Century.
The President has made clear his interest in working with the Congress to enact
reasonable changes that would extend Social Security solvency still further while reducing
poverty among elderly women. As the President said last week, we should build on the
bipartisan spirit evidenced in the elimination of the retirement earnings test for people over the
age of 65 by enacting our proposed transfers as a down-payment on comprehensive Social
Securitv'reform
The President has also put forward a detailed and comprehensive proposal for Medicare
reform This proposal would modernize Medicare by adding a prescription drug benefit, and it
would give the program more flexibility to use private-sector purchasing mechanisms. The
proposal would also require traditional fee-for-service Medicare and managed-care plans to
compete head-to-head on price and quality By improving efficiency in Medicare, we believe
that it is possible to both raise quality and reduce costs. Yet, even with comprehensive reform,
extending solvency to at least 2025 without the proposed transfers would require severe cuts in
benefits, sharp increases in payroll tax revenues, or drastic cuts in provider payments
Clearly. general revenue transfers are a complement to structural reforms of Social
Security and Medicare, not a substitute Just as clearly, the scale of the future demands on both
programs implies that structural reforms will not be enough. These programs will need the
additional resources that general revenue transfers would provide.
It is also worth emphasizing that our proposal preserves fiscal discipline at its core,
because under the approach we are proposing. each dollar of transfer effectively must be funded
out of available on-budget surpluses. To illustrate, consider the situation in 201 L when we
project that the combined Social Security and Medicare transfers would be $122 billion With
these transfers. there would be $ J 22 billion less in on-budget resources available for policies that
reduce receipts or increase outlays This is simply not a situation, contrary to what is sometimes
charged. where arbitrary amounts of bonds can be added to the trust funds
Indeed. when all is said and done, the lion's share of funding for Social Security and
Medicare would still come through the traditional channels. For Social Security, the present
value of our proposed general revenue transfers would represent less than 7 percent of the
present value of all projected Social Security revenues over the next 75 years. And for Medicare,
the proposed general revenue transfers would represent a similarly small portion of the total
resources projected to flow into the Part A trust fund over the next 25 years
Preparing the Economy and the Budget to Meet Future Commitments
The transfers that the President has proposed would improve the budget outlook and
better prepare the Federal government to meet our existing commitments to Social Security and
Medicare And because additional government saving would boost national saving, the transfers
would better prepare the economy as a whole to meet the challenge posed by an aging
population. Let me elaborate briefly on these points
Paying .down the debt improves the budget outlook in several ways First. it will reduce
interest payments, creating future --fiscal space" that can be devoted to Social Security,
Medicare, or other government functions. We now spend more than $200 billion each year
making net interest payments on the debt held by the public. If we pay ofT the debt, that amount
will be freed up for other uses - such as paying Social Security and Medicare benefits as the
baby boom generation retires.
Second. paying down the debt now puts us in a stronger position for any future
contingency The extra government saving can be thought of as an important insurance policy
against the possibility that the future turns out to be less bright than we currently project
Strengthening the Economy
Paying down the debt also strengthens the economy For the nation as a whole, the
central challenge of population aging is to provide a high standard of living for both workers and
retirees. even though a smaller share of the population will be in the workforce. A natural
solution is to make workers more productive in the future by increasing saving and investment
now
Reducing government debt raises national saving, because private saving is supplemented
by public saving rather than being drained by public borrowing. More resources are made
available for private investment. and capital accumulation proceeds more rapidly. Over the long
run. national wealth and the productive capacity of our economy will be that much greater.
leading to higher standards of living At the same time. a larger economy will generate more tax
revenue at the same ta:\ rate, making it easier to meet our existing fiscal obligations.
Less government borrowing also helps to hold down interest rates. Of course. interest
rates are affected by many factors, including inflation. international developments, and private
saving and borrowing decisions. However. a broad consensus of economists believes that
reducing the government's public debt will allow for lower interest rates over time than if the
debt increased or were held steady.
Conclusion
In conclusion, the President has proposed a disciplined program of general revenue
transfers to Social Security and Medicare, in which each dollar of transfer would be matched
dollar-for-dollar by a reduction in debt held by the public. This policy would result in
incremental government saving, over and above what would happen if we merely agreed to
balance the on-budget account The additional government saving this policy would generate
would make both the economy and the government better able to meet the demands of the
growll1g number of retirees.
The Administration believes that dedicating the benefits of debt reduction to Social
Security and Medicare is the best use of those funds. Simply put, we should be sure that we can
finance our existing commitments before launching new programs or tax cuts And we should
work together to enact the structural reforms to these programs that are also needed. This is why
the President has consistently grounded his budgets in a framework of debt reduction, fiscal
responsibil ity, and prudent stewardship of our long-term economic prospects.
Thank you.
-30-
OFFICE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W.• WASIDNGTON, D.C.• 20220. (202) 622.2960
FOR IMMEDIATE RELEASE
March 27, 2000
"AN AMERICAS FOR THE 21 sT CENTURY AND THE ROLE OF THE IDB"
REMARKS BY TREASURY SECRETARY LAWRENCE H. SUMMERS
INTER-AMERICAN DEVELOPMENT BANK ANNUAL MEETINGS
NEW ORLEANS, LA
It is a pleasure to be greeting you on home ground. Thank you, Enrique, for another
successful year at the IDB. And thank you, Governors, for your support for our Chairmanship of
the Board of Governors for the next year, which we hope will build on the successes of the past
year: resolving the financing and structure of the Inter-American Investment Corporation, and
moving on to the discussion of the strategic direction of the Bank and ensuring full participation
in the expanded Highly Indebted Poor Countries (RIPC) initiative.
It seems a long time ago now, when I attended my first IDB meeting in Guadalajara in
1994. The Clinton Administration was a little more than one year-old. NAFT A was younger still.
And the Mexican peso crisis was only lurking in the wings. At that time, we knew that the 1990s
were a decade of change and reform. What we did not know was how it would end.
Six years - and one and half Administrations -later, we know the answer. It was a
decade of many things - of sudden financial crises and natural disasters, and some hard-fought
elections. But most of all, we can now say that for Latin America the 1990s were the decade that
reforms were sustained.
That "quiet revolution" that President Clinton has spoken of, "bringing our hemisphere
together around common values of democracy, free markets, mutual respect and cooperation" that revolution has continued. And its core ingredients are very largely in place. We are, with but
one exception, a community of democracies Governments supportive of markets are in office
across the region. And the United Staks today exports more to Chile than to India, and more to
Brazil than to China.
Today I want to reflect on 3 issues:
•
First, what the past decade has meant to Latin America.
•
Second, this hemisphere's agenda for the next decade: the creation of a more inclusive and
enduring prosperity.
LS-500
Far press releases, speeches, public schedules and official qiographies, call our 24-hour fax line at (202) 622-2040
>
<.
•
I.
Third, how the IDB can best contribute to this agenda in the years to come.
The New Latin America
Moments of difficulty always raise a fundamental question: whether to change course, or to
redouble one's efforts to pursue the course that had been chosen. As a region, Latin America has
largely and emphatically stayed the course.
.•
In response to financial instabi lity - first in Mexico, and most recently in the wake of the
Asian and Russian financial crises of 1997 and 1998;
•
In response to devastating natural disasters, from EI Nino, to Hurricanes Mitch and George;
•
In response to roller-coaster swings of prices in commodity markets;
•
In response to the inevitable pressures and stresses of the electoral cycle;
In response to each of these challenges, the governments and peoples of this Hemisphere
have pressed forward even more vigorously with the cause of reform. And what has been true of
the past decade has been even more true of the past year, as key countries have persevered with
reforms have been rewarded for their perseverance by the markets.
•
Brazil's crisis, in many respects, turns out to have been stillborn. The impact oflast year's
devaluation and the turbulence surrounding it will be felt for some time to come. But growth
in 1999 was actually positive, inflation ended the year below 10%, capital outflows and the
exchange rate stabilized and foreign direct investment rose to new record levels.
•
Mexico's recent promotion to investment grade has put the seal on an impressive year and
truly an impressive decade. We applauded when strong policies restored growth and stability
after the crisis of 1995. And we applaud again, today, Mexico's growth rate of3 6% last year
and the expectation of faster growth, and lower inflation, in the year to come.
•
With effective policies, recessions in Chile, Argentina and elsewhere have given way to
renewed growth. Private sector analysts expect the region to grow more than 3 percent this
year, and inflation to move a little below last year's 8 percent. Perhaps most encouraging,
electorates have once again opted to continue with the path of reform. In the past 6 months
alone, the electorates of Argentina, Chile and Uruguay have returned governments
committed to market reforms and market-led growth.
•
In Central America and the Caribbean, the picture is perhaps more than usually diverse. El
Salvador's impressive economic achievements have continued to impress investors and seen
it retain its investment grade. While Honduras, Nicaragua and Guyana are working with the
IFIs in designing strong programs that will realize the benefits ofHIPC. And Haiti remains
preoccupied with the creation of the most basic institutions of a functioning democracy.
2
•
The countries of the Andean region continue to underscore President Clinton's caution that
weak states, in today's world, may present as grave a threat as strong states have done in the
past. The resolution of political uncertainties will be especially important in Venezuela in the
months ahead. And issues of governance issues will certainly continue to loom large in
Colombia, even as the government's strong adjustment program helps to build confidence
that Colombia's enviable postwar economic record will remain intact. Ecuador's challenges
remain immense. But the government has taken bold steps to restore stability and growth,
and is well on its way to earning the support of the International Financial Institutions.
ll.
The Agenda for a New Decade
The dominant challenge of our region today must be the promotion of a prosperity that can
be inclusive and can be sustained. A decade of reforms has not yet made this vision a reality. But
in Latin America and around the world, the reform experience has taught a number of lessons
about what the core ingredients for such a prosperity must be.
First, growth is both necessary and a long way toward being sufficient for more inclusive
prosperiry.
We have seen here in Latin America what we have seen in every region of the world at every
time in history: that growth is the most potent weapon for combating poverty ever invented.
•
The absence of high and hyper-inflation has helped the poor more than any other group in the
past decade, with poverty levels falling in most of Latin America and the share of households
in poverty falling from more than 40 percent.
•
Growth and improved budgetary choices have also permitted social spending to rise, indeed
nearly to double in countries such as Bolivia, Colombia, and Peru. And they have helped to
boost key social indicators. Infant mortality in Latin America fell by roughly 25 percent in
the 1990s, and life expectancy rose by more than 2 years.
Never forget that the preeminent reason to combat financial crises and instability is to
safeguard improvements such as these. For if growth is the greatest force for human
development, then instability and reversals in growth are its greatest foes. It has been estimated
that a single year of recession in this region in the 1990s has been enough to wipe out anything
from 50 to 100 percent of the reduction in poverty achieved in 4 or 5 years of growth.
Second, market-oriented poliCies and economic openness work best
Globally the message has been repeated again and again in recent years: that successful
national economic development depends above all on the promotion of open markets and the
institutions and policies that are needed for markets to function well.
•
That means support for openness and integration. We must work to deepen and accelerate the
regional integration that we have achieved. And the United States is committed to doing its
part. That is why we are committed to passing legislation for an enhanced Caribbean Basin
3
Initiative this year. And that is why we remain committed to building a Free Trade Area of
the Americas. It has perhaps gone with too little notice that the negotiations for the FT AA are
continuing. The machine is not yet up and running. But gradually the nuts and bolts are
falling into place.
•
And it means developing the intangible infrastructure for markets: strong and consistent
norms of transparency and integrity in both the public and private sector~ respect for
contracts and effective means of enforcing them; continued efforts to root out corruption; and
a strong and enduring rule of law that is not merely even-handed but seen to be so.
Third, there is much for public policy to do to promote a more inclusive economic success
President Clinton has spoken often about the need to broaden the circle of economic
opportunity to include all of our citizens. If there was ever any doubt that inequality of
opportunity and resources would hold the Latin American economy back - that doubt has surely
vanished today. Policy-makers across the region are realizing that issues that were once
considered social questions are of increasingly direct macro-economic importance.
•
At a time when the market will value more of our contributions by the knowledge we able to
apply than by the muscle we are able to bring to bear, it cannot be a recipe for regional
success that only slightly more than half of the children of secondary school age in Latin
America and the Caribbean were enrolled in school in 1997 A recent IDB study concluded
that Latin American education had "gone backward" in the 19905, with the workforce
averaging two years less schooling than other countries of similar national incomes.
•
At a time when investors sometimes seem to have eyes only for the Internet and the market
opportunities that it presents, it cannot escape their attention that barely 4 percent of Latin
America's population has access to a Pc. Or that there are only II phones for every 100
people in Latin America - compared to nearly 70 in the United States.
•
And above all, at a time when we are emphasizing the creation of economic opportunities,
we must remember that opportunities mean very little to people who lack the basic tools to
make use of them. We must never forget that one third of the people in Latin America live on
less than $2 a day. And we in the US must never forget that male life expectancy in
Washington, DC is today lower than it is in Mongolia and Belarus - and that ri.ght here in
Louisiana, fully one third of children under 18 live below the official poverty hne
That is why President Clinton has always placed such emphasis on investments in peo.ple and
on policies to promote economic inclusion. And that is why. so many of the leaders ofLatl~
America - notably Presidents Zedillo and Cardoso - have nghtly .ch~sen, ~s we all of ~s did at
the Santiago Summit of the Americas, to make education and SOCial InclUSIOn such an Important
part of their mission in government.
ID.
The Agenda for the IDB
4
Here and around the world the question is being posed: what are the distinct and
distinctive roles of the various IFls in a world economy that is dominated by private sector
capital flows? In recent statements in London last December and last week at the Council on
Foreign Relations in New York I have laid out our response to this question in a broad agenda of
reforms for the IMF and the multilateral development banks. And as I said in New York, there is
a crucial role in this evolving framework for strong and effective regional development banks
(ROBs).
Right from the beginning, the Clinton Administration's approach to the IDB has been
framed by the recognition that RDBs are as important to the new world order as the regional
security organizations were to the old one. Just as the regional security organizations were
directed to the challenge of combating communism, so the RDBs are directed to the central
challenge of shared prosperity and enlarging the circle of prospering democracies.
The IDB has amply justified our commitment to this institution in the past seven years in
its dogged support for market-led growth and prosperity across the region. At the same time, as
President Iglesias and others recognize - and as I have said many times of the other IFIs - to say
that the IDB is indispensable is not to say we can be satisfied with the IDB as it now is.
The Eighth Capital Replenishment that we celebrated in Guadalajara has served the IDB
well. But the fact that we will not be reviewing the quantity of the IDB's resources in the near
future should not deter us from a consideration of how those resources are being deployed.
Specifically, over the next year, we believe there should be a full review oftheIDB's
lending policies and financial instruments - leading to concrete agreements on new procedures in
the following five areas:
First, lending jar core social priorities
IDB lending in 1999 was broadly in line with IDB 8 priorities to allocate 40 percent of
the total volume and 50 percent of the number oflDB operations to poverty reduction and social
equity. We can and should debate whether this share might be increased in the future. But let us
all agree now on the need for new procedures to ensure that this lending is as effective as
possible. The IDB' s Institutional Strategy is a welcome start on this kind of approach. Today we
call for this to find clear expression, in the development of a performance matrix to guide IDB
decision making that links lending to a small number of measurable performance benchmarks
that wiIJ be rigorously adhered to.
As part of increasing the IDB' s effecti veness in this area we must also consider concrete
ways for the IDB to enhance popular participation. This is perhaps nowhere more important than
in Latin America when so much of the population is left on the margins of economic life. I
welcome the IDB's efforts to enhance its dialogue with the labor organizations of the hemisphere
represented in the Inter-American Regional Labor Organization (ORIT). We believe that the IDB
should work to expand opportunities for these and other new forms of dialogue, particularly with
respect to rural and other groups that too often are without a voice.
5
Second, lending that supports the private sector
Given the rapid growth in financial techniques and instruments, we ought to be able to
find better ways to insure countries against the shocks that so often affiict this region: be they
dramatic swings in commodity prices, natural disasters, or sudden shifts in global market
conditions. The advent of more sophisticated ways of parceling out and hedging risk has
transformed the basic menu of offerings of the private financial institutions. The IDB and other
RDBs should be able to use their unique franchise to innovate in this area as well - with new
lending products that are tailored to the needs and situation of the IDB's diverse clientele.
Third, improved capacity for emergency response.
We must recogruze the real danger that official development lending turns out to be prorather than counter-cyclical - with too much lending when it is not needed, and too little lending
when it is needed most. This points up a need for greater emphasis on building reserves and the
reversal of funding when times are good. And it underscores the importance of maintaining a
strong capacity to respond quickly and substantially to crises when they occur.
We categorically reject the view, embraced by some, that crisis response is not
development lending. Given the degree of social distress that these moments bring, and given the
opporturuties that they present for achieving, in a matter of months, structural reforms that might
otherwise have taken many years - we believe that these are moments when the development
banks can truly show their worth. The IDB has borne this out in the past year in its emergency
lending programs for Brazil, Argentina, Colombia and others. It must have the capacity to
respond even more rapidly and effectively to such emergencies in the future. To that end, and
assuming we husband our resources in the good times, we believe that we should be prepared at
times of crisis to waive traditional limits on the share of lending that can be fast-disbursing.
Fourth, pricing.
In line with the reforms that we have supported in other official financial institutions, we
also believe that this review ofIDB lending and procedures should consider new pricing policies
that will more accurately reflect the access that beneficiaries have to a range of financing
options, including from private providers competing for the business. While respecting the
December 1998 FSO agreement, we believe that marginally higher IDB spreads in cases where
countries have substantial access to private markets would be appropriate. And a strong case can
surely be made for the shared regionai benefits of making available additional IDB resources for
regional public goods and technical assistance.
Fifth, agreement onfundingfull IDB participation in the enhanced HIPe
This is the most urgent and morally important issue on the IDB's agenda today. Let me
express my full support for the Committee of the Board of Governors' actions yesterday,
committing the Bank and its shareholders to ensuring full financing for the Bank's participation
in the enhanced RIPC initiative - and creating a working group to establish an agreement on how
to achieve this, that will be reported by the end of June. I also want to express my appreciation
6
for the work done by the IDB Executive Board in proposing elements that can contribute to such
an agreement.
What is most crucial now is that the working group moves forward quickly, so that
Bolivia and others who have made such strides to reform in recent years can obtain the additional
support that they so desperately need. The United States is working with Congress to make a
significant contribution to this effort. But we all need to work together for RIPC to move
forward. We must each acknowledge that a successful package from the working group will
require a balanced mix of internal Bank resources, new regional contributions and new nonborrower contributions.
IV.
Concluding Remarks
Let me conclude where I began. The 1990s were a decade that reforms continued - often
against the odds. Here in New Orleans, we must celebrate that fact. And the United States,
especially, must reaffirm our commitment to the more integrated and economically successful
continent of the Americas in which we have such an enormous stake.
As we look to this new century it is perhaps more crucial than ever that we look outward
as a nation and work to promote the more global prosperity upon which our own prosperity will
increasingly depend. As President Clinton has said: "a strong economy in a foreign land is not a
threat to our jobs, it's a new market for America's products; an engine of human dignity and
environmental preservation; and a partner for peace and freedom and security." And nowhere are
these real and potential benefits more visible than in Latin America.
From that perspective, the greatest threats to our economic security may lie within our
country - in the form of economic insecurity that leads some to reject global integration. As we
were reminded last year in Seattle and most recently in debates in this country over granting
Normal Trade Relations to China, globalization is and must increasingly be much more than a
narrow economic challenge. Global integration simply will not work if it means local
disintegration, and if our people do not believe that integration works for them.
For all of these reasons, international institutions that can help to promote more rapid and
inclusive growth within countries - and a more stable flow of capital between them - may be the
most effective , and cost-effective investment that we can make in forward defense of America's
core interests. And among the IFIs the IDB continues to make a crucial contribution to these
goals. That is why the Clinton Admin;stration has been so committed to the unique work of the
IDB - and why we hope and trust that future Administrations will maintain our support for this
great institution in the years to come. Thank you.
-30-
7
FrOlD~
2026222611
Department Of Treasury
DEPART1VIENT
OF
07/12/00 03:47 PM
THE
Page 3 of 6
TREASURY
NEWS
OFFICE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W. • WASHINCTON, D.C .• 20220 • (202) 622-2960
FOR IMMEDIATE RELEASE
August 1,
1995
Waco Update
Attached is an update based on testimony in today's Waco
hearings.
-30RR-501
5:35pm EST
Fur press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
: 2026222611
Fr~,
nepartment Of Treasury
07/12/00 03:47 PM
Page 4 of 6
safety
Assertion: ~r the aarety of the parsona in tbe compound an4 tbe
aqantu mattered to AT., they vou14 not bave con4ucte4 a raid.
ATF's raid plan was designed to separate the men in the
compouna ~roID the weapons in order to prevent violence. One
principal aim of the raid was to provide for the safety of
agents and innocents by uSing, surprise, speed, and superior
force (by virtue of separating them from the arms) to take
quick control of the premises.
•
ATF planners chose not to conduct a siege, in part, because
of the possibility of mass suicide.
•
The planners chose not to conduct a pre-dawn raid, in part,
because of concerns about sarety. Planners feared that
eKccuting a search warrant under the cover of darkness would
make i t difficult to ~istinguish between innoeen~ persons
and residents who were prepared to resist with lethal foree.
•
The Treasury review reports that when presented with the
raid plan ATF management raised concerns about measures
beinq taken to protect ATF agents and the women and chilaren
in the ccmpc~nd.
Director Hiqqins directed that partiCUlar
care be taken with the flashbanqs.
•
ATF Agents wore vests to protect vital organs against
bullets and helmets to protect aqainst head wounds.
•
Nevertheless, the Treasury review concluded that ATF
selected a raid before fully considering other options.
(Tre~6ury report, p. 134-142) Moreover, the raid commanders
failed to realize the unacceptable risk of proceeding
without surprise.
(Treasury report, p. 170-L73).
August L, 1995
: 2026222611
Fr~
Department Of Treasury
07/12/00 03:47 PM
Page 5 of 6
PACT SHEET:
A'lF, the uJ)ruq Nexus," and Military Assiet&12ce
Fact; Weither ~b. lav nor the regulations of tbe military
establish. formal atandard for a drug nBXUS. Once ATP
investigators gathered infor.matlon about a possi~le drug nasus at
the compoUD4, they pre.ented tbis infor.matioD to tbo u.s.
military aDd tbe Texas National Guard.
aepresentative. ~rom
tbe.e qroupa evaluated tbe information and found tbat i t w••
suffioient to .arraDt assiatanoe OD .. Donra1mburB&ble basis.
Fact:
ATP di4 Dot l i . to or mislead the mtli~.ry about tbe
existence o~ .. methamphetamine lab on tbe compound.
possi~l.
One of the mi~itary officials who testified at these
hearings stated that ATF did not lie.
•
Wade Ishimoto, a former Delta Force intelliqence officer ~nd
one of the tactical experts consu~ted by the Treasury review
team testified that ATF did not 119 about its evidence of a
possib1e meth lab on the compound.
The documentary evidence provided to the committees provos
that ATF accurately presented the information it 9athered~
Fact: Military ~ocumsnt.tion proves ATF 414
mislead the mi1itary.
DO~ l~e
to or
•
ATF's written request for military assistance dated ~/22/$3
referred only to a "possible math lab" with wQapons.
•
The Department of Defense's (DOD) own internal review sent
to the commander, Forces command, Joint Task Force Six,
dated Auqust 18, 1993, shows that DOD knew from ATF that
~989 was the last year for which hard evidence o~ meth
production at the compound existed.
•
"Hot spot.s" discovered by military overflights in January
and February 1993 confirmed the possibility of a meth lab.
Fact: Tbe DBA 4ocumantatioB proves that
mislea4 tbe m11t~ary.
•
~TP
4i4 not lie to or
D~'s coordinator for Operation Alliance attended the
February 2, 1993 meeting of operation Alliance which
evaluated the information provided by ATF on a drug nexus,
and which approved a request for military assistance based
on that information.
AUqus't J., 1995
; 2026222611
fr~
Department Of Treasury
07/12/00 03:47 PM
The DEA coordinator told the Treasury review that he aoes
not beli&ve that ATF lied to or mislead the military.
•
ATF notified DEA in advance of the February 28 action •
Three DEA agents, who were prepared to assist ATF, were
present at the ATF Command Center on Febru~ry 28, 1993~
•
DEA states that OEA and ATF have done joint raids on many
labs and that ATF personnel know the precautions that need
to be taken.
x~ addition, ATP
noxus.
possessed tba ~ollowin9 dooumentatioD
or
a drug
Information rrom Marc Breault, an ex-cult memcer. concerning
the ~xistence of a meth l~b and conversations with Koresh
about sellinq drugs to raise money.
-- A meth lab existed on the compound when Koresh took over
the property:
-- The math lab was never turned over to the Sheriff's
office;
-- Xoresh talked
raising money.
a~out
drug selling
~s
a possible means of
•
Information from the Bunds ramily, ex-cult members, who
thou9ht that Koresh's erratic behavior might indicate that
he was utilizing the math lab for himself.
•
Cr~inal history records obtained in December 1992 by ATF,
which disclosed a record of druq use; arrests, and
convictions for members of the compound.
-- Sev.E!!ral arrests for drug offenses;
-- Two convictions for possession of a controlled substance,
including a conviction in January 1992 for methamphetamine
by Marshal Keith Butler, a machin~st who frequented the
compound, and who was paroled to McLennan county, Texas in
1992.
•
conversation between ATF undercover agent and Koresh at the
compound on J~nuary 28, ~993, in which Koresh stated the
compound would be a great place for the methamphetamine lab
because it vas in the open and the wind blew all the time so
no one could smell a lab.
•
Delivery of precursor chemicals to the compound •
Auqust 1, 1995
DEPARTI\1ENT
OF
THE
IREASURY f'~J
TREASURY
NEW S
OFFICE OF PUBliC AFFAIRS. 1500 PENNSYLVANIA AVENUE. N.W.· WASHINGTON. D.C.. 20220. (202) 622·2960
TEXT AS PREPARED FOR DELIVERY
March 30, 2000
Under Secretary (Enforcement) James E. Johnson,
Subcommittee on Treasury and General Government
Committee on Appropriations
Mr. Chairman, Senator Dorgan, and Members of the Subcommittee, I am pleased to be
here today on behalf of Secretary Summers to introduce the fiscal year 2001 budget request for
the Treasury Department's law enforcement bureaus and offices. Testifying with me today are
the heads of each Treasury law enforcement bureau: Raymond W. Kelly, Commissioner of the
United States Customs Service (USCS); Brian L. Stafford, Director of the United States Secret
Service (USSS); Bradley A. Buckles. Director of the Bureau of Alcohol, Tobacco and Firearms
(ATF); W. Ralph Basham, Director of the Federal Law Enforcement Training Center (FLETC):
and William F. Baity, Deputy Director of the Financial Crimes Enforcement Network (FinCEN).
FinCEN Director James Sloan suffered a loss in his family and will not be able to join us today.
At the outset of my testimony, I want to thank the Members of this Subcommittee for
their strong and continuing support for Treasury law enforcement. I welcome this opportunity to
discuss with you the Treasury Department's accomplishments and plans in the important law
enforcement mission areas for which we are responsible. I would like to focus on what we
regard as the most significant challenges we are facing and how Treasury law enforcement is
responding to them, covering our activities over the last year, our plans for the remainder of the
current fiscal year, and our budget proposals for fiscal year 2001.
While we continue to face fiscal challenges, the fiscal year 2000 appropriation provides
our Treasury bureaus with strong support for carrying forward increasingly complex and
challenging missions. We appreciate the support you showed for Treasury's enforcement
programs in the appropriations for FY 2000. I am pleased to report that the President's fiscal
year 2001 budget proposes a $4.2 billion program level for Treasury enforcement. If enacted,
this budget will provide the A TF with an overall increase of more than 500 full-time equivalent
agents, inspectors and other staff, and will substantially enhance our firearms enforcement
efforts. This budget will provide the U.S. Secret Service with 193 additional full-time equivalent
agents over the fiscal year 2000 appropriated level to enable the United States Secret Service to
carry out its dual mission of ptotection and investigation. The President's budget also provides
the U.S. Customs Service with 273 additional full-time equivalent positions, including 120 for
agents to conduct drug smuggling and money laundering investigations. Overall, the President's
budget proposal would add roughly 1,200 full-time equivalent positions to Treasury enforcement
LS-502
.
Far press releases. speeches. public $chedules and official biographies, call our 24-hour fax line at (202) 622-2fMO
(
above the fiscal year 2000 total enacted level. It represents the largest increase in Treasury law
enforcement staffing in over a decade.
DEPARTMENTAL OVERSIGHT
Funding is not the only element of strong law enforcement. It is also important that law
enforcement agencies have clear policies and a means for setting priorities. We at the Treasury
Department seek to provide support. oversight and policy guidance to enhance the performance
of our enforcement bureaus and to provide strong leadership in the enforcement community.
Over the past year. we have continued to focus on accomplishing the Department' s
enforcement goals and our bureaus' individual goals. We have relied on the expertise of our
professional staff and also on the talent and experience of bureau personnel to work on
challenging issues.
Hiring: Our need to recruit the best qualified and diverse workforce will gain even greater
salience if the proposed budget is enacted. We have undertaken two key initiatives in this area.
(1 ) Schedule B - Late last year, in response to our appeal, the Office of Personnel Management
(OPM) granted the ATF and the Customs Service Schedule B excepted hiring authority. This
authority is somewhat similar to that currently used by the Secret Service, the Federal Bureau of
Investigation, and the Drug Enforcement Administration for criminal investigator recruitment
and selection. Some of the benefits of this authority are greater flexibility in targeting
recruitment to meet skill requirements and diversity goals, the capability to focus on the large
number of intangible skill sets and personal characteristics required, and the ability to find and
hire quickly the best candidates for their jobs.
(2) Diversity conference - Last fall, the Office of Enforcement, joined by Management, discussed
with each of the bureaus their recruiting and hiring practices. focusing on diversity. We learned
that each of the bureaus' recruitment programs had many commendable aspects. but concluded
that all could benefit from hearing about the experiences of the other bureaus. Since that time,
we have brought together the Equal Employment Opportunity managers from across the bureaus
for a series of meetings which will culminate in a diversity conference, to be held next month,
which will focus on best practices to recruit and hire a diverse workforce. The conference will
also have a training module focusing on best practices for ensuring that, once recruited, minority
employees have fair opportunities to advance through the organization over the course of their
careers.
Retention: Retention of employees who have years of experience and in whom we have invested
long hours of training is critical. In that regard, the Department has made progress toward
meeting the challenges of improving our capacity to develop and retain high-caliber employees.
Specifically, we have worked to address workforce retention and workload balancing issues
within the Secret Service. My office established an Interagency Working Group on U.S. Secret
Service Workforce Retention and Workload Balancing, which included representatives from
Enforcement, Treasury's Office of Management, OMB, and the Secret Service. The analysis
revealed that Secret Service agents have experienced an extreme increase in the amount of travel
2
and working hours in the last few years due to the increase in the number of protectees and the
enhanced level of protection necessary. In fiscal year 2001, the Secret Service will experience a
further workload increase when the change of administrations occurs. To begin to alleviate these
problems, Treasury's fiscal year 200 I budget proposal includes a significant increase in staffing
for the Secret Service.
Senior Executive Service (SES) allocations: As the Subcommittee is aware, Treasury bureaus
have had a critical need for SES positions. Last month, as a result of decisions within the OPM,
we allocated 20 additional SES positions to our enforcement bureaus. The lion's share of those
positions went to the Customs Service, which, as you know, still faces significant challenges in
this area. This is an issue that the Department will continue to work with our bureaus to address.
Demonstration pay project: In January, ATF implemented its pay demonstration pilot for
scientific and technical positions. The demonstration project -- developed by a team comprised
of personnel from the Office of Enforcement, the Office of Management and the A TF -emphasizes flexibility in approaches to recruitment, and establishes a pay-for-performance
system designed to provide incentives to compete with state and local government and the
private sector. To date, 223 out of a possible 260 ATF employees have chosen to participate in
the program, and the period for choosing to participate has not yet closed. We thank the
Subconunittee for this authority as we look forward to making this capacity permanent.
Retirement: Schedule B authority, increasing SES allocations, and the pay demonstration project
are particularly critical in light of the Department's report on retirement and the proposed
budget. In response to Congressional direction, the Department, through a contract with the
Office of Personnel Management, analyzed the large numbers of criminal investigator
retirements that have occurred and will likely continue to occur in the next several fiscal years.
Submitted to Congress last fall, the report included the findings and the implications for
workforce planning, as well as related information about the recruiting market and selection
problems that will affect Treasury's ability to hire criminal investigators and maintain staffing
levels. Specifically, the report included an analysis of retirement and attrition patterns from the
last five years, and the age and years of service of Treasury's criminal investigators. Based on
this analysis, it was estimated that the Department would need approximately 2,662 new hires for
its criminal investigator workforce between fiscal years 1998 and 2003 in order to maintain
Treasury's 1998 fiscal year-end strength of 10,261 criminal investigators. This means that,
before we can take advantage of the increases contemplated in the President's budget, we must
hire an average of approximately 600 additional investigators each year for fiscal years 1999
through 2003.
Training: Another aspect of our goal to recruit and retain a high quality workforce is assuring
that Treasury law enforcement officers receive the highest quality of training available. The
Federal Law Enforcement Training Center (FLETC) is key to this goal. The expansion in recent
years in the number of employees hired by the 73 law enforcement agencies that participate in
FLETC has stressed FLETC's ability to meet all the requests for training. Although FLETC
continues to be able to provide all the basic training needed, currently by using a temporary
facility in Charleston, South Carolina, increases in bureau hiring require coordinated increases in
funding for FLETC.
3
To address some of the strain from increased demand for training. we have also been
exploring ways to use the latest technology to provide alternative means of delivering training
courses. Recognizing that the FLETC facilities cannot accommodate all of the requests for
training that are likely to arise in the future, we are searching for ways to use the Internet and
video conferencing to provide needed training.
Likewise, the need for advanced training to keep law enforcement officers abreast of the latest
trends in fighting crime is critical. We have been working closely with FLETC to explore ways
to enhance training to address high-tech crime. One example of this approach is Computer
Investigative Specialist (CIS) 2000 training. This course, which includes agents from the Secret
Service, Customs, the Internal Revenue Service Criminal Investigations Division, and ATF. uses
state-of-the-art training and equipment to teach agents how to deal with the latest computer and
encryption technology that they may encounter in conducting an investigation. The CIS 2000
agents have achieved many notable successes in their investigations of counterfeiting, money
laundering and various types of fraud as a result of this course.
Through our Implementation Working Group, the Office of Enforcement also continues
to monitor FLETC's progress in implementing organizational assessments ofFLETC that my
predecessor had done. Great strides have been made in addressing some of the problems that
had developed at FLETC, and we hope to be able to conclude the Implementation Working
Group's work later this year. The next meeting of the Committee will be held in Artesia, New
Mexico this spring.
Our budget request for fiscal year 2001 contains important initiatives for the Federal Law
Enforcement Training Center (FLETC). We are seeking $6,969,000 for FLETC's mandatory
workload. This funding will be used to address entry level training for additional agents and
inspectors for ATF and additional agents for the Secret Service. This is the first major hiring
initiative for Treasury law enforcement bureaus in many years. FLETC is a key component of
Treasury's effort to meet this build-up. Funding also is included for new construction and
renovation of older existing structures at FLETC to continue the planned upgrade of facilities
crucial to the training of the vast majority of the federal government's law enforcement
personnel.
Office of Professional Responsibility: One of the key functions of the Office of the Under
Secretary (Enforcement), is to provide oversight to the Treasury law enforcement bureaus. Over
the past few years, our efforts have been enhanced owing to the establishment of the Office of
Professional Responsibility (OPR), which Congress directed. OPR completed a number of
significant projects in 1999 and 2000, including the reviews of Customs' Office of Internal
Affairs, ICDE funding needs, operations at ATF's Tracing Center, and the aforementioned
Secret Service workforce review. A number of significant reviews are also underway, such as a
prioritization of international training conducted by the bureaus, overseeing a year-long
gathering of statistics on encounters with law enforcement to ensure ethnic and minority groups
are not being unfairly targeted, and a review of ATF's role in the National Instant Check System
(NICS).
4
MONEY LAUNDERING AND FINANCIAL CRIMES
Preventing abuse of our financial institutions to conceal tax evasion and the movement of
money generated by criminal activities is a high priority. It is a problem that cuts across a broad
spectrum of criminal activities. from violent crimes such as narcotics trafficking to white-collar
crimes such as credit card fraud. This is a matter of great concern for the Treasury Department
in our role as guardian of the integrity of the U.S. financial system and its financial institutions.
Current Activities and Priorities for Fiscal Year 2001
Treasury's law enforcement bureaus and offices playa key role in our fight against
financial crime. The Customs Service, the Secret Service, IRS-CID, and ATF all investigate
money laundering stemming from the specified unlawful activities within their jurisdictions.
Additionally, the Financial Crimes Enforcement Network (FinCEN) is charged with
administering the Bank Secrecy Act, which prescribes transaction reporting and record-keeping
requirements for financial institutions designed to insulate those institutions from money
laundering, and to provide a paper trail for investigators. Just last August, FinCEN issued a final
rule requiring all money services businesses to register with Treasury. FinCEN recently issued
the final rule requiring a subset of these businesses -- money remitters and money order and
traveler's check issuers, sellers and redeemers -- to file suspicious activity reports. FinCEN
serves as the central point for collection and analysis of Bank Secrecy Act data and provides case
support to law enforcement investigations.
Over the last year we have undertaken or strengthened several initiatives aimed at
addressing systemic vulnerabilities in our financial system.
National Money Laundering Strategy: In September 1999, in consultation with the Department
of Justice, the Department of State. the federal financial supervisory agencies. and state and local
law enforcement, Treasury published the first National Money Laundering Strategy. The
Strategy for the first time articulates a coherent, broad-based attack against the pernicious effects
of criminals hiding the proceeds of their crimes.
Since the 1999 Strategy was released, a tremendous amount of progress has been made
toward implementing it. Over a dozen interagency groups were formed to ensure progress on
priority action items. Less than six months after the release of the 1999 Strategy, Treasury and
Justice in early March released the 2000 Strategy. The 2000 Strategy announced a number of
high intensity financial crime areas (HIFCAs), and described the results of a number of policy
reviews. Substantial progress occurred in a number of areas, including a review of whether
formal guidance should be given to financial institutions about how to meet their obligations to
report suspicious transactions, the aforementioned issuance of suspicious activity reporting rules
for so-called money services businesses, a review of rules and practices currently in place to
protect the privacy of U.S. persons by limiting access and controlling the use of information
collected pursuant to the Bank Secrecy Act, developing a formal process to administer a grant
program to support state and local efforts to combat money laundering, and encouraging
countries around the world to join in the global fight against this problem.
5
Particular progress was made this year in the multi-faceted attack on the Black Market
Peso Exchange (BMPE) system of money laundering. The Treasury-led BMPE working group
helped to produce improvements in investigative techniques used by law enforcement. awareness
among the business community. and a multilateral working group of experts from affected
governments throughout the hemisphere. In addition, Treasury continued its prominent role in
the Financial Action Task Force (FATF). which is defining "non-cooperative jurisdictions" in
order to identify and ultimately orchestrate counter-measures against them. The Department also
issued a formal advisory encouraging the Government of Antigua and Barbuda to take
constructive steps to address serious vulnerabilities in its system of anti-money laundering
control. In the future. we expect to be in a position to meet the statutory deadline of February
1 for the annual strategy.
Identity Theft Summit: Each year American businesses and citizens lose more that $3 billion to
credit card fraud. One of the key means by which this fraud occurs is identity theft. On May 4.
1999, President Clinton announced that the Treasury Department would convene a national
summit on the subject of identity theft and work with the private sector to help prevent the
occurrence of this crime. This summit is part of a larger identity theft initiative that includes
case referral, a public education partnership, and sentencing enhancements, which will
implement the new legislation that provides the U.S. Secret Service with authority to investigate
identity theft violations. The summit, which took place on March 15 and 16, 2000, engaged 250
senior executives from the public and private sectors in a substantive dialogue that we expect
will lead to better communication and cooperation on identity theft crimes.
Financial Fraud: During 1999 the U.S. Secret Service made almost 4.500 arrests for financial
crime offenses. The Secret Service also coordinated 28 task forces involving 54 law
enforcement agencies throughout the United States. These task forces focused primarily on
fraud schemes intended to victimize individuals, banks. credit card issuers, and other financial
institutions.
In fiscal year 2001, preventing abuse of our financial system to facilitate criminal
activities remains a high priority for Treasury enforcement agencies. Our budget request for
fiscal year 2001 supports Treasury's role in implementing that strategy. We are emphasizing (i)
technical assistance to financial institutions as well as law enforcement agencies; (ii) enhanced
collection and analysis of data that can help us to identify and pinpoint financial crimes; (iii)
interdiction of outbound currency; (iv) giving our bureaus the resources to allow them to
undertake lengthy investigations of complex illegal transactions; (v) specialized training for our
agents; and
(vi) partnership grants to state and local governments to leverage the
resources they can bring to bear on this problem.
FIREARMS VIOLENCE
Over the last two years, few events have so caught the attention of the American public,
and indeed the worldwide audience, as the spate of senseless shootings in public places. In our
schools, in our places of work, and on our streets, criminal violence and the easy availability of
firearms to criminals have wrought havoc and caused Americans in all walks of life to feel
6
unsafe. Over the last year, both the President and the Congress have responded to these
concerns. Treasury, specifically the A TF, with the support of this Committee. has been at the
center of this comprehensive response.
The most important development of the past year has been our work with the Department
of Justice to provide support for burgeoning collaborative federal, state. and local intensive
firearms crime investigation and prosecution plans throughout the country. Between 1993 and
1998. violent crime with firearms fell 37 percent and gun-related homicides declined 36 percent.
Firearms prosecutions are increasing. Department of Justice information shows that in 1999
federal prosecutors brought 5.500 firearms cases in the federal courts, 700 more cases than in
1992. Looking ahead, our primary focus continues to be on building firearms enforcement
capacity, and providing the tools that enable federal. state. and local law enforcement to use their
resources in a strategic manner that will have the most impact on armed crime reduction.
Current Activities and Priorities for Fiscal Year 2001
Integrated Violence Reduction Strategy: Last fiscal year. the Treasury Department and the
Justice Department were directed by the President to provide an integrated violence reduction
strategy to further reduce gun violence. The joint Treasury-Justice strategy will be released
soon. It will call for more enforcement resources to combat armed violence as requested of
Congress in the Administration's fiscal year 2001 budget request and A TF' s fiscal year 2001
appropriations request, in order to maximize the impact of current laws on the reduction of gun
violence. The strategy will also highlight legislative proposals discussed by the President to
further reduce youth violence and improve public safety. Enforcement resources requested will
be used to support and enforce current statutory authorities.
The strategy proposes funding for 300 new agent positions, 200 inspector positions and
100 other personnel for ATF to support local intensive prosecution projects like Project
Ceasefire in Boston and Project Exile in Richmond. as well as for the Youth Crime Gun
Interdiction Initiative, regulatory, and gun show enforcement activities (discussed below). These
local strategic projects encompass investigations of armed criminals and illegal traffickers, and
inspections of firearms dealers that are the sources of firearms to criminals, as well as those
illegally attempting to acquire or illegally possessing firearms.
Consistent with our budget request, the strategy will also call for an expanded effort to
support state and local law enforcement agency capability to trace recovered firearms to
determine their illegal sources and to speed up trace responses to state and local law enforcement
agencies ($9.9 million), and to establish ballistics imaging capability to identify shooters and
traffickers where the firearm itself is not recovered ($23.4 million). Our view is that all state and
local enforcement agencies with a gun crime problem should have these capabilities, and be able
to draw on ATF's information and analysis, expertise, and investigative experience. Expanded
and shared information about the illegal gun market will enable more strategic use of federal.
state, and local investigative and criminal justice resources.
Commerce in Firearms in the United States: Treasury strongly supports ATF's efforts to base its
firearms inspection program on indicators of criminal access to firearms. In February, ATF
7
released the first annual report on Commerce in Firearms in the United States, providing an array
of information concerning the firearms industry and A TF' s regulatory inspection program. The
2000 report informs Congress, law enforcement officials. and the public on the activities of A TF
inspectors, and how A TF regulatory resources are focused in order to maximize their
effectiveness in reducing firearms trafficking and abuse. The report shows the types of activities
and inspection strategy for which we are requesting new inspectors and other personnel for A TF.
A fair and focused inspection program will reduce the need for more costly criminal
investigations and benefits public safety.
Youth Crime Gun Interdiction Initiative (YCGII): There is a continuing need to focus attention
and resources specifically on reducing youth violence and preventing the illegal supply of
firearms to juveniles and youth. A fundamental need is for investigators to find out how guns are
illegally acquired by young people. In the past year, ATF and local police committed to
establishing comprehensive crime gun tracing and youth gun violence reduction efforts with law
enforcement agencies in eleven new cities, bringing the total number of cities participating in
YCGn to 38 in its third year. In February 1999, Treasury and ATF issued the second year Youth
Crime Gun Interdiction Initiative Trace Analysis report, analyzing over 76,000 crime gun traces
from 27 cities. The report provides local law enforcement agencies with information about the
number of firearms recovered in their jurisdictions, top crime guns in each city. and their
geographic sources, in order to assist local law enforcement agencies with development of
effective law enforcement strategies against youth violence. ATF also released the yeGn
Performance Report, a survey of over 640 trafficking investigations nationwide involving
juveniles and youth engaged in gun crime, demonstrating A TF' s enforcement efforts to stop
youth and juvenile access to guns through straw purchasers and other illegal channels. We
endorse ATF's plan to expand yeGn to 75 cities, and propose to add 12 new cities in fiscal year
2001 to work toward this goal by bringing the fiscal year 2001 participating cities to 50.
Gun Show Report: In February 1999, Treasury in coordination with the Department of Justice,
released a report on gun shows, Gun Shows: Brady Checks and Crime Gun Traces. The report
was prepared in response to a directive from the President that the Secretary of the Treasury and
the Attorney General provide him with recommendations to address the gun show loophole, that
is, the sale or exchange of firearms at gun shows without background checks or tracing records
for those acquiring the firearm. The report led to legislation proposing that all transactions at
gun shows include background checks and tracing records to prevent access to guns by
prohibited persons and to allow law enforcement officials to trace firearms when they are
recovered by law enforcement officials. Both licensed and unlicensed gun sellers at gun shows
are sources of guns to criminals and other prohibited persons; where there is evidence of criminal
activity, enforcement attention is required.
COUNTER-NARCOTICS
Reducing the supply of dangerous drugs entering the United States continues to be
another of our high priorities. It is also our most difficult challenge. We are confronted by wellfinanced criminal organizations that adapt quickly to every advance we make in the detection of
illegal drugs. Moreover, interdiction is only one piece of a comprehensive drug control strategy
that includes eradication of drug production abroad, sanctions against drug kingpins,
8
investigation and disruption of trafficking activities within the United States. treatment of drug
users. and. as mentioned above, combating money launderers.
Current Activities and Priorities for Fiscal Year 2001
Border Coordination Initiative - We continue to work to strengthen our coordination with other
border enforcement agencies to assure that taxpayers get the most effective use of federal
resources available for drug interdiction. In September 1998, Treasury and Justice initiated the
Border Coordination Initiative (BCI), an innovative system for controlling the Southwest Border.
BCI is a strategic plan for Customs and the INS to maintain a seamless, comprehensive,
integrated border management system that increases interdiction of illegal drugs, illegal aliens,
and other contraband while simultaneously facilitating legal migration and trade. Customs and
the INS have set new standards for innovation, interagency cooperation, and operational
effectiveness, with locally developed innovations leading to improved coordination and more
efficient border operations. As a result of BCI, more than 120 tons of cocaine. marijuana. and
heroin were seized by Customs and the INS along the southwest border in 1999 - an increase of
more than 20% over the previous year.
For fiscal year 2001, the budget proposes several important initiatives to strengthen the
enforcement and interdiction capabilities of the U.S. Customs Service, our main player in the
counter-narcotics fight. Commissioner Kelly can address these programs in greater detail. but
summarized briefly they include:
•
a $25 million request and 107 FTEs to aid Customs' investigations into the criminal
organizations that smuggle narcotics into our country and distribute them in our
communities;
•
a $10 million request to enhance Customs' ability to detect illegal outbound currency
movements; and
•
a request of approximately $20 million in enforcement infrastructure improvements,
including a P-3 FLIR upgrade, aircraft flight safety enhancements, surveillance equipment of
helicopters, and an upgrade of the air interdiction center radar.
Together, these initiatives would help Customs improve on record-setting seizure statistics, while
allowing it to better respond to the various smuggling routes and methods employed by narcotics
traffickers.
Intelligence Architecture Review: Enforcement represented the Department in the inter-agency
intelligence architecture review. The review, which also involved ONDCP, the Justice
Department, CIA, and other agencies, led to a report, released last month, that contained a series
of important action items to improve intelligence collection, dissemination, and use.
Narcotics Kingpin Act -- On December 3, the President signed the Intelligence Authorization
Act for fiscal year 2000, which contains the Foreign Narcotics Kingpin Designation Act (the
Act). The Act establishes a global sanctions program targeting significant foreign narcotics
9
traffickers and their organizations modeled along the lines of the President's IE EPA-based
program targeting Colombian narcotics cartels. The Act requires the Office of Foreign Assets
Control (OF AC) to identify significant foreign narcotics traffickers and closely associated
entities and individuals throughout the world and impose financial and trade prohibitions. as well
as asset blocking. against them.
As a result of the significant workload increase driven by OFAC's responsibilities under
the Act. the Department has included a request for $2.1 million and 20 FTE in the fiscal year
2000 supplemental request submitted to Congress in February. This would provide resources for
OF AC to implement a global sanctions program targeting significant foreign narcotics traffickers
and their organizations. as mandated by the Act. In addition. the fiscal year 2001 budget
includes a request for $2.9 million and 11 FTE for OFAC to improve information gathering
capabilities with respect to terrorist funding and narcotics trafficking and raise the quality of
service to the public in the performance of OF AC's licensing function. OFAC currently has onsite staff gathering specialized information in Bogota, Colombia. on drug traffickers. Similar
information gathering capability is needed in Dubai, United Arab Emirates to investigate terrorist
funding, and in Panama and Bangkok to investigate drug traffickers. Sanctions programs are
administered largely by licensing and the licensing function is OF AC' s primary contact point
with the public.
TRADE ENFORCEMENT AND FACILITATION
The United States is the world's largest exporting and importing country. and the volume
of both exports and imports is growing rapidly. Over the five year period 1994 to 1999, the
dollar value of exports increased by over a third (about 36 percent). During the same period the
dollar value of imports increased by more than half (about 51 percent). These increases translate
rather directly into increased workload for the Customs Service.
Our trade with other nations is vital to our economic strength and our standard of living,
and we want to do everything we can to assure that the movement of trade across our borders is
as frictionless as possible. At the same time, however, we recognize our responsibility to assure
Congress and the American public that laws enacted to protect public health and safety, as well
as other interests, are being effectively enforced at the border.
Current Activities and Priorities for Fiscal Year 2001
Improved Performance Measurement and Targeting of Violations: The Customs Service has
continued to improve the accuracy and specificity of its compliance measurement system.
In 1999 Customs submitted its fourth annual report to Congress on the results of compliance
measurement. Compliance measurement is not only a tool for targeting Customs' enforcement
activities. It also enables us to account to the Congress and the American people on how
effectively Customs' trade enforcement resources are being used.
By illuminating where the problems are, compliance measurement also improves .
Customs' ability to implement a national risk management program that allows more effiCIent
use of resources and more effective detection of violations.
10
Automation -- Customs' struggle to modernize its automated commercial svstem is well known
to this Subcommittee. and is a problem of a kind that is not unique to Cust~ms. We believe that
we have made substantial progress in the last year in responding to problems identified bv the
General Accounting Office in the development of Customs' new Automated Commerciai
Environment (ACE).
As we work to develop a new automated commercial system. we are paying close
attention to the reliability of the current system, the Automated Commercial System (ACS). The
ACS is Customs' current mechanism for allowing importers, carriers, and others to transmit
required information electronically, and enabling Customs to process and store the information
electronically. ACS greatly accelerates transactions between the trade community and Customs.
allows quicker release of goods, reduces the number of instances in which shipments of goods
must be held by Customs owing to the absence of required paper documents, reduces filing
errors, and improves law enforcement at the border by making possible electronic analysis of
information for risk assessment purposes.
However, the ACS was created in the early 1980s, and was developed with programming
language that is now obsolete. The program is proprietary to Customs and not supported by any
software vendor. Moreover, at the time ACS was created, the urgency of moving as rapidly as
possible from a paper environment to an automated environment resulted in inadequate
documentation of ACS programming. Customs is effectively prevented from modernizing its
business practices - including changes authorized by the Customs Modernization Act of 1993 because of the difficulty and cost of modifying the obsolete and poorly-documented
programming language on which ACS runs. Among the obsolescent features of ACS: (i) it is
transaction based, that is, it treats the release of each shipment as a separate, taxable transaction.
requiring the filing of an individual entry (tax return); and (ii) it is service-port oriented.
requiring that entries be filed at the port at which goods are released from Customs custody.
A little over a year ago, the ACS began to experience periodic failures, or "brownouts".
Although these did not last long, they were sufficient to remind us of the absolute necessity of
maintaining a reliable automated commercial system for Customs. Consequently, we have given
very high priority to upgrading the capacity and reliability of the ACS. We expect to spend up to
$79 million in the current fiscal year, and we are requesting $123 million in fiscal year 2001, to
assure that the American public can rely on its government for effective and efficient
enforcement of our trade laws.
But we recognize that the trade community would like us to do more than simply assure
the reliability of the current automated system. Each year the Customs Service must deal with
the challenge of assuring that millions of freight containers and carriers entering the U. S. are in
compliance with several hundred laws. In order for Customs to be effective at this job without
becoming a serious impediment to commerce, it must become a more efficient collector and
intelligent user of information.
This is difficult to do with the ACS because, as I noted, it effectively locks Customs into
obsolete business practices. Because it is difficult to modify ACS' s software, Customs cannot
11
even implement procedural reforms that were authorized in the 1993 Customs Modernization
Act. let alone new procedures that have become possible since then.
The Automated Commercial Environment. or ACE, is the proposed new Customs
automated commercial system. It would operate on modem software and the programming
would be fully documented to facilitate subsequent programming changes. ACE would allow
periodic filing of consolidated entries to cover multiple transactions, and it would allow filing
from any location, and not only the port at which the goods are entered. ACE also includes
equipment enhancements to increase reliability and upgrade connectivity among Customs offices
around the country and between Customs and the trade community. For example, ACE would
be accessible to the trade through the Internet. while ACS is accessible only over dedicated lines.
In our budget for fiscal year 2001, we are requesting $210 million for ACE development.
We estimate the cost of ACE development over the next four years to be around $1.25 billion.
This is a relatively costly initiative. The recently completed cost-benefit analysis for conversion
from ACS to ACE shows that modernizing Customs' trade data processing system will provide
significant benefits to both the federal government and the trade community. We continue to
believe that the proposed fee appropriately captures some of the benefits private businesses will
receive from Customs modernization, and therefore, we have proposed to offset the costs of ACE
over the next several years by creating a user fee to be collected from all parties that use
Customs' automated systems. The amount collected from each user would be based on its
volume of use.
We acknowledge that a similar user fee proposal last year was not well received. We
have made some changes to our proposal this year that we believe go at least part of the way to
meeting the objections of last year. For example, we are not asking, as we did last year, for the
user fee to be collected a year in advance of appropriations for ACE.
The Administration is prepared, indeed eager, to work with Congress and the trade
community to enact this proposal and begin work on ACE as soon as possible.
International Trade Data System: An interagency group working under Treasury leadership has
finished the system design of a new international trade data system (ITDS), called for by the
Vice President's National Program Re-invention project. The ITDS will offer a single electronic
window for collecting all data required in connection with importing and exporting. When
implemented, the new system will substantially improve the effectiveness and efficiency of
government administration of laws that must be applied at the border, and will greatly reduce
red tape imposed on importers, exporters, and carriers. Our budget proposal for fiscal year 2001
continues this program at the current level of $5.4 million.
G7 Data Harmonization: Completing harmonization of G7 customs data requirements, as
outlined by the Lyon, Denver, and Birmingham G7 summit communiques, will continue to be a
priority in 2000. Current disparity in reporting requirements among G7 customs administrations
imposes heavy reporting and record-keeping burdens on traders, and inhibits cooperation on law
enforcement among governments.
12
Child Labor Enforcement: Treasury established a private sector advisory committee on child
labor to help focus Customs' efforts to enforce laws prohibiting the importation of goods
produced by forced labor. Customs' resources for enforcement efforts in the area of forced child
labor have been increased. Customs had baseline resources of $3 million and 4 full-time
equivalent positions (FTE) in fiscal year 1999, $5 million and 6 FTE in fiscal year 2000.
In fiscal year 2000, we are continuing to work aggressively to assure that goods produced
by forced child labor are not allowed to enter the American market. Through the Child Labor
Advisory Committee, Treasury and Customs are developing a program of business outreach
aimed at fostering voluntary compliance with u.s. import restrictions on products of forced or
indentured child labor through adoption of industry codes, best practices, and other methods.
Customs will use additional budget resources provided by this Subcommittee to open a field
office in South Asia dedicated to child labor enforcement. and will deploy additional
investigative staff overseas as needed.
Additionally, Customs investigators have conducted a number of fact-finding missions to
countries in Asia and Latin America where child labor is believed to be prevalent in a number of
industries. Several visits have been made to South Asia, including India, Pakistan, NepaL
Bangladesh, and Thailand. With the fiscal year 1999 appropriation, additional agents were
assigned to Bangkok, Hong Kong, and Montevideo. Additional agents will be assigned to the
new South Asia field office that is being established in fiscal year 2000.
The fiscal year 2001 President's Budget requests an additional $5 million and 9 FTE, for
a program total of $10 million and 15 FTE, to combat importation of goods made by forced child
labor. The requested increase in fiscal year 200 1 will enable us to attain even broader
investigative coverage of overseas regions where child labor is believed to be endemic. These
carefully placed investigative resources will enable Customs to acquire the detailed evidence that
is required under u.S. law for Customs to detain merchandise manufactured with forced or
indentured child labor.
The use of forced child labor to produce goods imported into the United States is not
merely a matter of unfair commercial competition. Use of forced child labor perpetuates poverty
and contributes to instability abroad by denying children the opportunity to pursue educational
opportunities that could enable them to improve their standards of living. In fiscal year 200 1,
we shall remain committed to working with other governments, other U.S. government agencies,
and with knowledgeable private sector groups, to assure that the U.S. market does not
inadvertently become a means for supporting forced child labor.
EXPORT ENFORCEMENT
As events have demonstrated over the last few years, the United States continues to be
targeted by those who seek to acquire our most advanced weapons and technology, often for
purposes that directly or indirectly threaten the security of the American people. For years, the
Customs Service has been an integral part of our response to that threat, by monitoring exports of
goods from the U.S. to identify goods that embody sensitive technology.
13
Current Activities and Priorities for Fiscal Year 2001
.. Customs' a~i.lity to enforce effectively laws enacted by Congress to prevent the export of
mumtIons and sensItIve technology has been hampered by the difficulty of getting timely
information about shipments leaving the country. Too often information is inadequate, .
inaccurate, or .late. Two years ago the Treasury Department sponsored negotiations amon ~a the
Customs ServIce, the Commerce Department, and representatives of exporters and carriers to
work out the terms for use of a modem, electronic export reporting system. As a result of the
agreement reached, use of the Automated Export System (AES) to file export declarations
electronically increased from about two percent of export declarations filed in January of last
year to around 25-30 percent in January of this year. Because the AES, unlike its predecessor
system, is accessible over the Internet, we expect use of electronic export filing to continue to
grow. Electronic filing is, of course, convenient for exporters and carriers, but the government
also benefits. Having timely export information in an electronic format greatly increases
Customs' ability to monitor for export violations. In fiscal year 2001 we shall continue to
promote use of the AES, and to look for other ways to improve the quality and timeliness of
export data.
COUNTER-TERRORISM AND PROTECTION
Current Activities and Priorities for Fiscal Year 2001
On May 22, 1998, the President signed Presidential Decision Directive 62. This
Directive created a new and more systematic approach to fighting the terrorist threat and created
criteria for identifying events of national significance that may be vulnerable to terrorist threats.
At several events this year, including the World Energy Conference in Houston, Texas and the
highly successful NATO Summit here in Washington, D.C., Treasury bureaus, including the
Secret Service and ATF were involved in providing security, and the Customs Service provided
air support. We estimate that approximately three or four events of this nature will occur each
year.
Additionally, Treasury leads an interagency working group in conjunction with the
Customs Service to address issues of weapons of mass destruction (WMD). The focus of the
group during 1999 and 2000 has been to find ways to enhance our security and prevent WMD
from entering the United States. Recent incidents, such as the arrest of several suspects at the
end of 1999 in Washington and Vermont relating to the attempt to smuggle explosives into the
United States, highlight the importance of heightened vigilance in this area.
ARSON
National Church Arson Task Force -- Treasury and Justice, along with others, continue to
coordinate a nationwide federal, state and local law enforcement effort to identify and prosecute
those who bum or damage our houses of worship, to help rebuild those institutions, to prevent
14
additional fires, and to help heal community tensions resulting from attacks on our houses of
worship. Due in part to increased vigilance, well-publicized arrests, and ongoing prevention
efforts under the President's three-pronged strategy, church arsons continued on a downward
trend during the past year.
In this statement I have been able to touch on only some of the important programs of
Treasury's enforcement bureaus. Each bureau head will address our programs in greater detail.
And, of course, I shall be pleased to respond in writing to any questions you want to direct to me
about any of our programs.
In conclusion, Mr. Chairman, I would like to thank you, Senator Dorgan, and the
Members of this Subcommittee for your outstanding support of Treasury's law enforcement
programs over many years. Our law enforcement bureaus have grown, they are better equipped,
and they have become more professional as a result of your oversight and support. The benefits
of this for the American public cannot be calculated. I would like also to thank the staff of this
Subcommittee for its professionalism and patience over the last several years, as we wrestled
with the problems that inevitably accompany growth and a rapidly-changing set of challenges.
do not want to miss this opportunity to express my appreciation and gratitude.
-30-
15
PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
FOR IMMEDIATE RELEASE
March 27, 2000
Office of Financing
202-691-3550
CONTACT:
RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
91-Day Bill
March 30, 2000
June 29, 2000
912795EC1
Term:
Issue Date:
Maturity Date:
CUSIP Number:
5.720%
High Rate:
Investment Rate 1/:
Price:
5.885%
98.554
All noncompetitive and successful competitive bidders were awarded
securities at the high rate.
Tenders at the high discount rate were
allotted 15%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Competitive
Noncompetitive
$
25,270,349
1,343,697
$
216,600
216,600
26,830,646
8,500,491
7,334,000
7,334,000
Foreign Official Refunded
SUBTOTAL
6,940,194
1,343,697
8,283,891 2/
26,614,046
PUBLIC SUBTOTAL
Federal Reserve
Foreign Official Add-On
TOTAL
Accepted
Tendered
Tender Type
°
°
$
34,164,646
$
15,834,491
Median rate
5.700%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate.
Low rate
5.680%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio = 26,614,046 / 8,283,891 = 3.21
1/ Equivalent coupon-issue yield.
2/ Awards to TREASURY DIRECT = $1,039,691,000
LS-503
http://www.publicdebt.treas.gov
PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
CONTACT:
FOR IMMEDIATE RELEASE
March 27, 2000
Office of Financing
202-691-3550
RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
182 -Day Bill
March 30, 2000
September 28, 2000
912795FB2
Term:
Issue Date:
Maturity Date:
CUSIP Number:
5.905%
High Rate:
Investment Rate 1/:
Price:
6.171%
97.015
All noncompetitive and successful competitive bidders were awarded
securities at the high rate.
Tenders at the high discount rate were
allotted 14%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Competitive
Noncompetitive
$
18,804,925
1,651,860
$
2,848,160
1,651,860
20,456,785
PUBLIC SUBTOTAL
3,000,000
3,000,000
23,456,785
7,500,020
5,000,000
2,352,000
5,000,000
2,352,000
Foreign Official Refunded
SUBTOTAL
Federal Reserve
Foreign Official Add-On
TOTAL
Accepted
Tendered
Tender Type
$
30,808,785
$
14,852,020
Median rate
5.890%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate.
Low rate
5.850%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio = 20,456,785 / 4,500,020 = 4.55
1/ Equivalent coupon-issue yield.
2/ Awards to TREASURY DIRECT = $1,312,516,000
18-504
http://www.publicdebt.treas.gov
DEPARTMENT
OF
THE
TREASURY
NEWS
TREASURY
omCE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C. • 20220. (202) 622-2960
u.s. International Reserve Position
The Treasury Department today released
As indicated in this table,
March 28, 2000
u.s. reserve assets data for the week ending March 14, 1000.
u.s. reserve assets totaled $69,944 million as of March 14, 1000, down from S70,094
million as of March 17,2000.
(in US millions)
TOTAL
1. Foreign Currency Reserves
l
1
a. Securities
March 24, 2000
69,944
March 17, 2000
70,094
I. Official U.S. Reserve Assets
Euro
4,923
Yen
6,050
TOTAL
Euro
10,973
4,942
Yen
TOTAL
5,677
Of which, issuer headquartered in the U. S.
10,619
0
0
b. Total deposits with:
b.i. Other central banks and SIS
b.ii. Sanks headquartered in the U.S.
b.ii. Of which, banks located abroad
b.iii. Sanks headquartered outside the U.S.
b.iii. Of which, banks located in the U.S.
2. IMF Reserve Position
2
3. Special Drawing Rights (SDRs)
4. Gold Stock
3
5. Other Reserve Assets
2
8,422
11,711
20,134
8,454
11,894
a
0
0
0
a
0
0
0
17.620
17.613
10,319
10.316
11,048
11.048
0
0
11 Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account
(SOMA), valued at current market exchange rates. Foreign currency holdings listed as securities reflect marked-to-market values, and
deposits reflect carrying values.
21 SDR holdings and the reserve position in the IMF are based on IMF data and revalued in dollar terms at the offiCial SDR/doliar exchange
rate. Consistent with current reporting practices, IMF data for March 17,2000 are final. Data for SDR holdings and the reserve position In the
IMF shown as of March 24, 2000 (in italics) reflect preliminary adjustments by the Treasury to the March 17, 2000 IMF data.
31 Gold stock is valued monthly at $42.2222 per fine troy ounce. Values shown are as of February 29, 2000. The Januaryr 31, 2000 value
was $11,048 million.
L8-505
20,347
u.s. International Reserve Position (cont'd)
II. Predetermined Short-Term Drains on Foreign Currency Assets
March 17. 2000
1. Foreign currency loans and securities
March 24. 2000
o
o
o
o
o
o
o
o
~. Aggregate short and long positions in forwards and
futures in foreign currencies vis-a-vis the U.S. dollar:
2.a. Shoft positions
2.b. Long positions
3. Other
III. Contingent Short-Term Net Drains on Foreign Currency Assets
March 24, 2000
March 17. 2000
1. Contingent liabilities in foreign currency
o
o
o
o
o
o
o
1.a. Collateral guarantees on debt due within 1 year
1.b. Other contingent liabilities
~. Foreign currency securities with embedded options
3. Undrawn, unconditional credit lines
o
3.a. WIth other central banks
3.b. WIth banks and other financial institutions
headquaftered in the U.S.
3.e. With banks and other financial institutions
headquaftered outside the U. S.
~. Aggregate short and long positions of options in foreign
currencies vis-a-vis the U.S. dollar
4.8. Shoft positions
4.a.1. Bought puts
4.a.2. Written calls
4.b. Long pOSitions
4.b.1. Bought calls
4.b.2. Written puts
PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
CONTACT:
FOR IMMEDIATE RELEASE
March 28, 2000
Office of Financing
202-691-3550
RESULTS OF TREASURY'S AUCTION OF 21-DAY BILLS
21-Day Bill
March 30, 2000
April 20, 2000
912795DS7
Term:
Issue Date:
Maturity Date:
CUSIP Number:
5.99 %
High Rate:
Investment Rate 1/:
Price:
6.09 %
99.651
All noncompetitive and successful competitive bidders were awarded
securities at the high rate.
Tenders at the high discount rate were
allotted 73%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Accepted
Tendered
Tender Type
Competitive
Noncompetitive
$
54,000,400
245
$
35,002,400
245
TOTAL
$
54,000,645
$
35,002,645
Median rate
5.96 %: 50% of the amount of accepted competitive tenders
was tendered at or below that rate.
Low rate
5.93 %:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio
=
54,000,645 / 35,002,645
=
1.54
1/ Equivalent coupon-issue yield.
http://www. publicdebt.treas.gov
L8-506
DEPARTMENT
OF
'IREASURY:
THE
NEW S
__----------..
t
TREASURY
~/7~~~---------
OFFICE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W. • WASIDNGTON, D.C .• 20220. (202) 622-2960
Contact Steven Posner
(202) 622-2960
FOR IMMEDIATE RELEASE
March 29,2000
MEDIA ADVISORY
The Government Trustees of the Social Security and Medicare Trust Funds will hold a
press conference to release their annual report to Congress at 2:15 p.m. EST on Thursday,
lVlarch 30 in the Treasury Department's Diplomatic Reception Room (Room 3311), 1500
Pennsylvania Avenue, N.W.
At the press conference, Treasury Secretary Lawrence H Summers will be joined by the
other Government Trustees: Labor Secretary Alexis M Herman, Health and Human Services
Secretary Donna E. Shalala, and Social Security Administration Commissioner Kenneth S
Apfel.
The room will be available for pre-set at 1: 15 p.m.
Media without Treasury or White House press credentials planning to attend should
contact Treasury's OffIce of Public AtTairs at (202) 622-2960 with the following information
name, social security number and date of birth. This information may also be faxed to (202)
622-1999
-30-
LS-508
For press ~~~J "peechR3i, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
-
DEPARTMENT
OF
THE
TREASURY
NEWS
ornCE OF PUBLIC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASIDNGTON, D.C. - 20220 - (202) 622·2960
TEXT AS PREPARED FOR DELIVERY
March 29,2000
Deputy Assistant Secretary (Public Affairs) Michelle A. Smith,
Testimony Before the Senate Finance Committee
Thank you Chairman Roth, Senator Moynihan and members of the Committee for the
opportunity to appear before you today. At the outset, I would like to recognize two people in
the audience who play very important roles in my life: my husband Blake and our daughter
Madeleine. Their love and support -- as well as the love and support of other members of my
family in Texas -- make it all worthwhile.
Mr. Chairman, I consider it a great honor and a privilege to have been recommended by
Secretary Summers and nominated by President Clinton to be Assistant Secretary for public
Affairs for the Treasury Department.
I began my career working in the mailroom for the former chairman of this distinguished
committee, Senator Lloyd Bentsen. In 1992 I became deputy press secretary on his personal
staff, working closely with his long-time adviser and press secretary, Jack De Yore. Their
example continues to inspire me to the highest ideals of public service.
For the past seven years it has been my privilege to serve in Treasury's Office of Public
Affairs under three exceptional leaders: Secretaries Bentsen, Rubin and Summers. Each has
taught me a great deal. Above aU, they have demonstrated the importance of an unfailing
commitment to earning the public trust through truthfulness and honest dealings. By their
actions, they have shown me that this is not only a vital ingredient of our dealings here at home
but our relations abroad, as well. If confirmed, I will continue to dedicate myself -- and the
Office of Public Affairs -- to maintaining the high standards of excellence tlley have set for
responsiveness and openness with the American people, their representatives in Congress and
with members of the press
In closing, Mr. Chairman, I'd like to express my deep gratitude to Secretary SUll1ll1cr~
For seven years, I have depended on his sound professional and personal guidance and I ha\c
been inspired by his courage to do what is right.
Thank you again, Mr. Chairman, for the opportunity to appear before the Committee
today. I would be pleased to answer any questions you or the Committee might han:.
LS-509
For PJ'f!SS releases, speerhes, prrbl-ic schedules and official biographies, call our 24-hour fax line at (202) 622-2rHO
---
.
PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
CONTACT:
FOR IMMEDIATE RELEASE
March 29, 2000
Office of Financing
202-691-3550
RESULTS OF TREASURY'S AUCTION OF 2-YEAR NOTES
Interest Rate:
Series:
CUSIP No:
STRIPS Minimum:
Issue Date:
Dated Date:
Maturity Date:
6 1/2%
T-2002
9128276B3
$400,000
High Yield:
Price:
6.580%
March 31, 2000
March 31, 2000
March 31, 2002
99.852
All noncompetitive and successful competitive bidders were awarded
securities at the high yield.
Tenders at the high yield were
allotted 33%. All tenders at lower yields were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Accepted
Tendered
Tender Type
$
Competitive
Noncompetitive
28,917,173
1,917,340
$
12,004,881 1/
30,834,513
PUBLIC SUBTOTAL
3,514,730
1,700,000
3,514,730
1,700,000
Federal Reserve
Foreign Official Inst.
$
TOTAL
36,049,243
10,087,541
1,917,340
$
17,219,611
Median yield
6.550%:
50% of the amount of accepted competitive tenders
was tendered at or below that rate.
Low yield
6.480%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio
=
30,834,513 / 12,004,881
1/ Awards to TREASURY DIRECT
LS-510
=
2.57
$1,229,390,000
http://www . pu blicdebU reas.go \'
PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
CONTACT:
FOR IMMEDIATE RELEASE
March 29, 2000
Office of Financing
202-691-3550
RESULTS OF TREASURY'S AUCTION OF 19-DAY BILLS
19-Day Bill
March 30, 2000
April 18, 2000
912795GX3
Term:
Issue Date:
Maturity Date:
CUSIP Number:
6.00 %
High Rate:
Investment Rate 1/:
Price:
6.11 %
99.683
All noncompetitive and successful competitive bidders were awarded
securities at the high rate.
Tenders at the high discount rate were
allotted 23%.
All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Accepted
Tendered
Tender Type
Competitive
Noncompetitive
$
57,225,000
$
30,070,700
TOTAL
$
57,225,000
$
30,070,700
o
o
Median rate
5.98 %: 50% of the amount of accepted competitive tenders
was tendered at or below that rate.
Low rate
5.92 %:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio
=
57,225,000 / 30,070,700
=
1.90
1/ Equivalent coupon-issue yield.
http://www . publicdebttreas.gov
LS-511
D EPA R T 1\1 E N T
0 F
THE
T REA SUR Y
NEWS
omCE OF PUBUC AFFAIRS. 1500 PENNSYLVANIA AVENUE, N~W. • WASIDNGTON, D.C .• 20220 • (202) 622-2960
EMBARGOED UNTIL 10:00 A.M. EST
T ext as Prepared for Delivery
March 3 1, 2000
TREASURY FISCAL ASSISTANT SECRETARY DONALD V. HAMMOND
TESTIMONY BEFORE THE HOUSE GOVERNMENT REFORM SUBCOMMITTEE
ON GOVERNMENT MANAGEMENT, INFORMATION AND TECHNOLOGY
Mr. Chairman and members of the Subcommittee, I am pleased to appear today to discuss matters
involving the Financial Report of the U.S. Government. First, I would like to thank the Chairman,
the Ranking Member, and other members of the Subcommittee for your continued focus on the
priority need to improve financial accountability and reporting in the Federal Government. While
we have made steady })rogress and improvements over the last few years, significant challenges
must be met before we can produce entirely reliable financial statements of the highest quality for
the U. S. Government.
BACKGROUND
The Department of the Treasury has been, and continues to be, a strong proponent of the
development of financial statements for Government agencies and for consolidated financial
statements for the Government as a whole. The Government Management Reform Act of 1994
(GMRA) requires the Secretary of the Treasury, in coordination with the Director of the Office of
Management and Budget, to submit to the President and the Congress not later than March 3 J of
each year audited financial statements for the preceding fiscal year covering all accounts and
associated activities of the executive branch of the United States Government. This is the third
year audited financial statements have been prepared on a government-wide basis and submitted in
accordance with the statutory due date of March 31. Timeliness is an important first step in the
process and one we always intend to meet. The Financial Report of the U.S. Government for FY
1999, which includes the financial statements, provides the President, the Congress, and the
American people with information about the Government's financial position, the cost of its
operations, and its sources of financing.
LS-512
For press relcmtltJ, tJjteeM~, public EChedules and official biographies, call our 24-hour fax line at (202) 622-2040
The Financial Report of the U.S. Government is prepared based on the accrual basis of
accounting as prescribed by generally accepted accounting principles (GAAP) promulgated by the
Federal Accounting Standards Advisory Board (F ASAB). GAAP recognition was achieved this
year by F ASAB through a comprehensive process developed by the American Institute of
Certified Public Accountants (AlCPA). We are extremely pleased and proud of this milestone
because it clearly demonstrates that the government's standards have been developed through a
fair and open process and that our accounting aspirations are of the highest magnitude. In
addition, GAAP recognition will improve the professionalism and public perception of our
reports. We also believe that this reflects favorably on the level of financial professionalism in the
Federal government and, thereby, allow us to more effectively compete for essential accounting
expertise.
PROGRESS MADE
We continue to be committed to producing financial statements that meet the highest standards.
Given the daunting challenges that faced us when we began this process just over three years ago,
we have made substantial incremental progress this year towards this goal. Since issuing the first
consolidated financial statements in March 1998, we have been working in close cooperation with
OMB, GAO, and the program agencies to improve the quality of the Financial Report. Within the
Treasury Department, the Financial Management Service (FMS) undertakes the tremendous
operational task of producing these statements under very tight deadlines. This past year we
continued to focus much of our attention in three critically important areas. First, ensuring that
the financial information reported to us by the program agencies is consistent with the information
in the agencies' own financial statements. Second, identifying, reconciling and eliminating
intragovernmental transactions. And third, assisting agencies in reconciling their fund balances
with Treasury records. I am pleased to report that we have made substantial progress in each of
these areas.
Consistency of Financial Information
It is essential that the information provided by agencies to Treasury for inclusion in the Financial
Report be consistent with the information in the individual agency-level financial statements. The
agency-level financial statements are audited separately and the audit of the government-wide
financial statements relies in large part on the audits conducted of the agency-level financial
statements. Consistency problems arise when agencies provide information to Treasury that is
classified differently or fail to provide information that was included in their agency-level financial
statements. This is a problem that needs to be addressed at the agency level and uniformly across
government with guidance from OMB, Treasury, and GAO. During the past year, OMB,
Treasury, and GAO have worked diligently to dramatically improve the consistency of the
financial information. We have taken significant steps towards accomplishing this objective.
Treasury has taken many actions to improve consistency. We convened an interagency working
group to identify barriers to consistency and recommend solutions. As a result of the efforts of
this working group, a new verification procedure was implemented. This procedure requires that
agency CFOs and IGs work together to submit a comprehensive worksheet to Treasury, OMB,
2
and GAO, which crosswalks the agency audited financial statement data to the data submitted to
Treasury. This worksheet enables OMB, GAO and Treasury to determine if the financial data is
consistent. It also provides the central agencies with a more detailed understanding of the data
presented in the agencies' statements though it shifts much of the burden of the analysis from the
agencies to FMS and GAO. This worksheet is based on the U.S. Government Standard General
Ledger (SGL), which is required to be used in all agency financial systems by the Federal
Financial Management Improvement Act (FFMIA) of 1996.
In addition, during this past summer, Treasury worked with each agency to reconcile their FY
1998 ending net position. This reconciliation effort has improved significantly the FY 1999
opening net position balances, with the ultimate goal of having Treasury's opening balance agree
with the agencies' opening balance. Treasury also met with all 32 reporting entities that are
required to verify consistency to discuss processes, to review performance, and to understand
issues that affect agency financial statements.
Agencies report both adjusted trial balance (ATB) data and more detailed footnote data to
Treasury. In the past, the amounts reported in the two sets of data often did not agree. To help
rectify this problem, this past year Treasury introduced an enhancement that informed agencies of
the ATB totals at the time they report their footnote data. This procedure was designed so that
agencies can make certain that their totals agree before the footnote data is transmitted to
Treasury.
Treasury also held a Senior Executive Forum, which was well attended by agency CFOs and IGs.
The forum allowed CFOs and IGs, OMB, Treasury, and GAO to exchange ideas and information
in search of solutions to these common problems.
We have made substantial progress over the past year in improving data consistency. The new
process we're using to ensure consistency is a considerably more rigorous process than was used
last year. With the agency worksheets, we are now in a position to review the data and do
analyses to improve the consistency of the data. However, this process is limited by the tight
timeframes dictated by the report's due date. This process will show continued improvement as
the agencies become more comfortable with the reporting requirements. We feel comfortable that
verifiable progress is being made although the consistency problem has not yet been resolved.
Elimination of Intragovernmental Transactions
The audits of the agencies' financial statements have disclosed that the agencies continue to be
ineffective in identifying transactions with each other so the transactions can be reconciled or
"eliminated" for government-wide reporting. If these transactions are not properly eliminated,
total Government assets, liabilities, revenues, and expenses will be misstated by the net amount of
these transactions.
Treasury continues to make significant progress to achieve the goal of reconciling certain
intragovernmental transactions so that they can be properly eliminated. Starting two years ago,
Treasury provided two-digit identification codes for agencies to use in identifying their
3
governmental transaction partners. The consistent use of these codes is critical to our ability to
eliminate these intragovernmental transactions. During FY 1999, trading partner data was
distributed to agencies so that they could review and analyze the information.
This past year, Treasury continued to focus on resolving the intragovernmental elimination issues
for the category of transactions with the largest dollar amounts. These involve transactions
between program agencies and either the Bureau of the Public Debt or the Federal Financing
Bank (FFB). Last year, we reported that we were unable to explain $1.426 billion in
intergovernmental investment and borrowing transactions. I can report that for this year's activity
the unexplained difference issue for these transactions has been resolved. A major reason for this
is that Treasury instituted a new policy requiring program agencies to confirm and reconcile their
end offiscal year investment and borrowing balances with Public Debt and the FFB. We don't
have specific explanations for about $6.4 million in differences, however, we are confident these
transactions have no impact on the financial statements. Our progress in this area is evident when
one recognizes that gross intergovernmental investments and borrowings, not including annual
activity, amount to more than $2 trillion.
During FY 1999, Treasury also put in place new procedures for reconciling transactions with the
Department of Labor relating to the Federal Employees' Compensation Act (FECA) and
transactions with the Office of Personnel Management (OPM) relating to employee benefit
programs. We made progress in this area in disclosing out of balance conditions but more work
will be necessary befote a complete reconciliation can be effectively performed.
Regarding buying and selling transactions between Federal agencies (which have high transaction
volumes but smaller dollar amounts), Treasury issued elimination guidance to all agencies
covering accounting and reconciling procedures for FY 1999 reporting. The requirements for
reconciliation with agency trading partners on a regular basis are more detailed and formalized
than in previous years and designed to create a disciplined, routine approach to these
reconciliations.
In addition, Treasury, OMB, and GAO have been actively working together in governmentwide
task forces to solve the elimination problems and improve the financial reporting of the
government. Recently, the CFO Council Intragovernmental Eliminations Task Force was created
to sponsor an initiative to develop a web-based application that will support the FY 2000
confirmation and reconciliation process. The CFO Council also formed another group to more
clearly define the issues preventing us from completely eliminating intragovemmental buying and
selling transactions and suggest long-term solutions to the issues identified.
Treasury is committed to continue working with agencies to assure that intragovernmental
transactions are properly accounted for and reported in agency financial statements and also
properly identified and eliminated at the consolidated financial report level.
Reconciliation of Fund Balances
Treasury has made significant efforts to assist agencies in reconciling their fund balance amount
4
with the amount reported to them by Treasury. The fund balance amount is an agency level asset
account that reflects the available budget spending authority of that agency. Treasury regularly
notifies agencies of potential discrepancies in their fund balances, as compared to Treasury
records, and agencies are responsible for resolving the differences in a timely fashion. Today, the
discrepancies most often are a result of timing differences and are normally quickly resolved.
During this past year, Treasury issued policy and detailed procedural guidelines for reconciling the
fund balances; we held agency forums in San Francisco, Dallas, Kansas City, Philadelphia and
Washington; and, we continued to offer formal training courses. Since being established last year,
the FMS web-site on this subject has been accessed over 1,000 times. FMS, through its Center
for Applied Financial Management, continues to offer a number of core competency courses in
financial reporting and reconciliation. One such course is "Reconciling Fund Balance with
Treasury". As an example of the level of interest, more than 200 individuals from 12 cabinet
departments have taken this training.
Recently, Treasury and DOD personnel concerned with problems and issues associated with these
reconciliations established a program of monthly meetings to facilitate communication and to
further improve the reconciliation process at DOD.
On a government-wide basis, as of September 30, 1999 there were about $883.1 million, $104.0
million, and $7,312.7 million net differences between our records and those of the program
agencies in three key areas - Deposits, Disbursements, and Checks Issued. These differences
represent cumulative net differences since the early 1960's when the current central accounting
system was originally built. These differences are, for the most part, timing differences (much like
your checkbook and your bank statement) and most are quickly resolved by the agencies. For
example, when you review only those differences greater than five months old, the differences are
$91.6 million, $58.8 million, and $250.9 million respectively.
We do, however, agree that further improvements in this area need to be made. As discussed in
our long-term challenges, this is an area where change is needed. Reconciliation of fund balances
needs to be a routine, on-going accounting function that is done on a timely basis. Agencies have
made significant strides to institutionalize the process and we expect to see additional
improvements in FY 2000.
CHALLENGES
While we believe we have made substantial progress in the past year, the current state of federal
financial reporting requires significant improvements in a number of areas. I am confident that
with a coordinated, committed effort by Treasury, OMB, the CFO Council and the GAO these
improvements will be achieved. Much remains to be done both in the short and long-term
horizons. In the short term, we will continue to make those changes necessary to improve the
preparation of the Financial Report of the U. S Government. In the long term, as I announced
last year, we are embarking on a project to make fundamental changes in the way we do federal
accounting.
Short-term
Our most significant short-term challenges continue to be in the three specific areas that we have
been working on over the last two years as well as eliminating fund balance differences as an area
of ongoing concern. First, we need to further refine and improve the process to ensure
consistency between agency financial statements and data used to produce the Financial Report of
the U.S. Government. Second, we need to continue to make substantial progress in eliminating
intragovernmental transactions. Finally, we need to fully develop the process for a complete
reconciliation of the budget results with the financial statements' results of operations.
Regarding consistency, in April, we will meet with GAO and OMB to jointly evaluate the new
process implemented this year and formulate improvements in procedures, guidance, and analysis.
By building on the agency crosswalk process and learning from its implementation in FY 99, we
expect to make additional progress in this area. This process also highlighted the need to be able
to thoroughly analyze the data submitted by the agencies.
Regarding the elimination of intragovernmental transactions, most of our efforts will be spent
working with OMB and the program agencies to identify and put in place additional processes to
improve reconciliations with Labor and OPM as well as to reconcile buying and selling
transactions between Federal agencies. We will be successful in this area when agencies routinely
conduct these reconciliations and resolve any differences on a regular basis.
Regarding reconciliation of the budget results with the Financial Report's results of operations,
we have developed a data model to systematically reconcile the majority of the necessary
transactions. We have retained a private contractor to help us test the model and assist in
identifying any additional information necessary to perform a thorough reconciliation. Two pilot
agencies have been identified to participate in this process. This summer, after testing the model
and identifying additional data needs, we will make the necessary modifications to reporting
systems for data collection for the FY 2000 Financial Report. With the continued assistance of
GAO, we are working to improve the process.
A difficult challenge in improving the reliability and accuracy of financial information is the need
to increase the use of the SGL in agency accounting systems. Our ability to prepare the
consolidated financial report using SGL data so that it is consistent with data in agency statements
is hampered by the fact that a large number of agencies do not properly use the SOL In many
instances, agencies cannot adequately produce and send the SOL data to Treasury because their
systems do not record accounting events using the SGL at the transaction level as mandated by
the FFMIA This results in additional workload and processes to ensure that amounts are
recorded in the proper accounts. Additionally, this frustrates attempts to maximize efficiency
through the creation of automated analytical tools. As agencies move closer to full compliance
with FFMIA, and more importantly, use SGL-based data as the basis for their agency financial
statements, financial reporting at every level will be considerably improved.
6
Long-term
The preparation of a consolidated financial statement for the U. S. Government has highlighted
that our current systems for reporting budget execution information also need to be improved. In
conjunction with the changes being made to improve the processes associated with the Financial
Report, Treasury, through its Governmentwide Accounting Modernization Initiative, will improve
the processes associated with the reporting of receipts and outlays in the "Monthly Treasury
Statement" and the "Annual Report" as well as those associated with maintaining each fund
account's balance with Treasury.
This project will fundamentally change the processes that program agencies use to report financial
data to the central agencies, provide program agencies with more useful and timely presentations
of their data and improve the reliability of governmentwide totals published by OMB and
Treasury. Our approach is to work with program agencies, OMB and GAO in implementing both
short-term and long-term improvements in central accounting and reporting processes. On a
short term-basis we intend to make improvements which should assist agencies in reconciling their
fund balances by making information available from our legacy system using web-based
technology. Accounting information will be available "next day" whereas it is not now available
until 5-6 weeks after the transaction occurs.
In the long-term, we intend to make fundamental changes to the overall processes in our central
accounting system to streamline reporting, eliminate reconciliation burdens, and further improve
access to accounting data. The major objectives are to provide program agencies with one stop
shopping using internet technology to retrieve information provided to Treasury and to greatly
reduce the reporting and reconciliation burden on program agencies.
CONCLUSION
Improving financial management and accountability has been and remains an important Treasury
priority. We have taken and will continue to take actions to correct weaknesses and address
problems in the preparation of the governmentwide financial statements. Treasury will also
continue its leadership role in providing guidance, assistance and support to agencies in their ongoing efforts to improve their accounting practices and financial management systems. Our
ultimate success will be achieved when we can reliably report on the disparate financial activities
of the many components of government seamlessly as if they were a single entity.
Thank you, Mr. Chairman. This concludes my formal remarks and I would be happy to respond
to any questions.
-30-
DEPARTMf~NT
OF
THE
IREASURY ~'J
TREASURY
NEW S
OFFICE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C. • 20220. (202) 622·2960
EMBARGOED UNTIL 2:15 PM EST
T ext as Prepared for Delivery
March 30, 2000
TREASURY SECRETARY LAWRENCE H. SUMMERS REMARKS AT THE
MEDICARE AND SOCIAL SECURITY TRUSTEES PRESS CONFERENCE
Today the Boards of Trustees of the Medicare and Social Security Trust Funds met to
complete our annual review of the financial status of the Trust Funds and to send a report to
Congress on each of them.
The financial status of both programs has improved since last year's report. With respect
to Medicare, the long-term actuarial gap has been reduced again, and the projected Trust Fund
exhaustion date has been pushed back eight years to 2023. The long-term actuarial gap for Social
Security also narrowed, and the exhaustion date of the Trust Fund has been pushed back three
years to 2037.
The improved financial positions of Social Security and Medicare reflect the ongoing
robust expansion of the economy and the continued brightening ofthe long-term outlook. For
Social Security, the improvement also reflects improved methods in producing the estimates. On
the Medicare side, efforts to hold down spending growth and strong management of the program
have also contributed to the favorable outcome.
Although the financial outlook for both programs has improved, hard work remains to be
done to assure their strength for decades to come. Almost all experts agree that the single most
important step we can take to prepare for the coming demographic shift is to use the current
budget surpluses to increase national saving. In this regard, it is extremely encouraging that a
bipartisan consensus has emerged that the Social Security surpluses should be used to pay down
the debt held by the public, so that these surpluses correspond to an increase in government and
national saving. In addition, the President has called for transferring a portion of the projected
on-budget surpluses to Social Security and Medicare, in such a way that debt reduction will
make a contribution to extending the solvency of these critical programs. This plan of transfers
and debt reduction would enhance the ability of both Trust Funds to pay currently promised
benefits and would put us on a trajectory toward eliminating the debt held by the public, on a net
basis, by 2013.
18-513
Far press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
The President continues to believe that we ought to work toward putting Social Security
on a sound financial footing for the long term, and he would welcome the opportunity to work
with the Congress toward achieving that objective. The bipartisan consensus that formed around
the elimination of the retirement earnings test shows what can be accomplished when we work
together The estimates in the Report do not reflect this action, but the Trustees do not expect it
to have a material impact on the actuarial balance or the exhaustion date For Medicare, the
President has put forward a detailed and comprehensive proposal to modernize the program and
add a much needed prescription drug benefit, and he hopes that bipartisan action on Medicare
reform will occur soon. It continues to be of critical importance that we strengthen Social
Security and Medicare and assure their viability for future generations.
In an era of growing surpluses, the President has made the difficult decision to call for
using these surpluses to improve our Nation's fiscal position. Fiscal discipline has contributed
enormously to the current economic expansion. We must continue with fiscal discipline and use
the benefits to strengthen Social Security and Medicare.
-30-
D EPA R T M I~: N T
0 F
THE
TREASURY
T REA SUR Y
NEWS
OFFlCE 0.' PUBLIC AFFAJRS e1500 PENNSYLVANIA AVENUE. N.W~ e WASHINGTON. D.C.e 20220. (202) 622.2960
EMBARGOED ONTIL 2: 30 P. H.
March 30, 2000
~y
COM'l'ACT:
Office of Financing
202/691-3550
OFFERS I3-WEEK AND 2Z-W"...3K BILLS
'!'he ~easury will auction two series of 'l!reasury bills ·to.taling
approximately $16,000 million to refund $16,440 million of publicly held
securities maturiDg April 6, ~OOO, and to pay. clown about $ ... 40 million.
In addition to the public holdings, Federal Reserve BaDks for their own
accounts hold $8,084 million of the maturing bills, which may be refunded at
the highest discount rate of accepted competitive tenders. Amounts issued to
these accounts will be in addition to the offering amount.
~e
maturing' bills held by the public include $3,497 million held
by Federal Reserve Banks as agents for foreigu and international monetary
authorities. up to $3,000 million of these securities maybe refunded within
the offering amount in each of the auctions of I3-week bills and 26-week
bills at the highest discount rate of accepted competitive tenders. Additional amounts mAY be issued in each auction for such accounts to ~he extent
that the amount of new bids exceeds $3,000 million.
!rreasuryDirect customers requested that we reinvest their maturing holdings of approx~tely $883 million into the 13-week bill and $801 million into
the 26.-week bill.
This offering of Treasury securities is governed by the terms and conditions set forth in the Uniform Offering Circular for the Sale and Xssue of
Marketable Book-Entry '1'rea.sury Bills, Notes, o.nd Bonds (31 CFR Part 356, as
amended) •
Details about each of the new securities are given in the attaehed
offering highlights.
LS-514
000
For press releases, ~pe,ches, puhlic schedule. and officitzl hiQgraphitl, call our 24-hour fax line at (202) 622.2040
OF TREASURY OFFERINGS OW BILLS
TO BB ~8SUED APRIL 6, 2000·
HrGHL~GHTS
March 30, 2000
Offering Amount ••••••••••••••••••••••••• $8,500 million
Description of Offering:
Ter.m and type of aecurity ••••••••••••••• 91-d~ bill
CUSIP number •••.••••••• ~ •••••••••••••••• 911795 Eft 8
Auction date •••••••••••••••••••••••••••• April 3, 2000
Issue date •••••••••••••••••••••••••••••• April. 6, 2000
Maturity date ••••••••••••••••••••••••••• JUly 6, 2000
Original issu. date ••••••••••••••••••••• January 6, 2000
CUrrently outstanding ••••••••••••••••••• $10,461 million
Minimum bid amount and multipl.s •••••••• $l,OOO
$7,500 million
182-day bill
912795 FC 0
April 3, 2000
April 6, 2000
October S, 2000
April 6, 2000
-'-$1,000
The following rules apply to all securiti.s m.ntioned above.
Submission of Bidsa
Moncompetitive bids •••••••.•• Accepted in full up to $1,000,000 at the highest discount rat. of
accepted competitive bids.
Competitive bids •••••••••••• (1) Must be expressed a. a discount rata with three decimals in
increments of .005%, e.g., 7.~OO%, 7.105%.
(2) Net long position for each bidder must be reported when the sum
of the total bid amount, &t all discount rates, and the net long
position i . $~ billion or greater.
(3) Net long position must be determined &s of one half-hour prior
to the closing time for receipt of competitive tenders.
MAximum Recognized Bid
at a Single Rate •••••••••••• 35% of public offering
Maximum Award ••••••••••••••••••• 35% of public offering
Receipt of Tenders:
Noncompetitive tender •••••••
Competitive tendera •••••••••
Prio~
Prlo~
to ~2:00 noon Eastern Daylight Saving time on auction day
to laOO p.m. Eastern D~light Saving time on auction day
Payment Terms: By charge to a funds account at a ~ed.ral Reserve Bank on issue date, or payment
of full par &mOunt with tender.
~rea.u~jreat customers can use the Pay Direct feature which
authorize. a charge to their account of record at their financial institution on issue date.
,"-
DEPARTMENT
OF
THE
IREASURy,g)
•
TREASURY
NEW S
1789
OrnCE OF PUBUCAFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C. - 20220 - (202) 622-2960
EMBARGOED UNTIL 2:30 PM EST
Text as Prepared for Delivery
April 4. 2000
TREASURY SECRET ARY LAWRENCE H. SUMMERS TESTIMONY
BEFORE THE SENATE APPROPRIATIONS SUBCOMMITTEE
ON TREASURY AND GENERAL GOVERNMENT
Mr. Chainnan, Mr. Dorgan, Members of this Committee, I appreciate this opportunity to
discuss Treasury's FY2001 budget request and to seek to continue to work in the cooperative
spirit that we and Members of the Committee have achieved. I would like to take this
opportunity to thank this Committee for its impressive and productive work over the years.
As you know, Treasury plays a crucial role in the core functions of government.
including tax administration, revenue collection, law enforcement, financial management. tax
policy, banking policy and international and domestic economic policy.
We propose a budget that will enable Treasury to continue to provide the American
public with the customer service and program reliability it expects and deserves.
Our budget request totals $14.245 billion for all operations, After taking into account
two offsets - a $210 million fee on Customs' automated commercial system for the Automated
Commercial Environment (ACE) and $42.5 million from the use of the estimated potential
balance from the Treasury Forfeiture Fund - our appropriation level would be $l3.992 billion.
We have provided the Committee with a detailed breakdown of Treasury's FY2001
budget request. Let me today highlight five important areas of focus.
•
First, supporting continued IRS modernization.
•
Second, strengthening our ability to fight drugs, violence and crime.
•
Third, modernizing our trade systems.
•
Fourth, enhancing our financial management.
•
And fifth, supporting management operations.
LS-515
For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
I.
Continuing to modernize the IRS.
In its new mission statement. the IRS has pledged to focus on two core priorities:
"Provide America's taxpayers top quality service by helping them understand and meet their tax
responsibilities, and apply the tax law with integrity and fairness to all."
As the modernization and reorganization at the IRS has proceeded, some have framed
debates on IRS priorities around a trade-off between enforcement and customer service. This
argument is no different from believing that businesses face a trade-off between quality and cost.
We have heard similar false choices posed through the years. To have effective tax
administration, there must be both compliance and high-quality customer service. A trade off is
neither necessary nor desirable.
Under the leadership of Commissioner Rossotti, the IRS has already made impressive
progress towards meeting both these goals. But there is more to accomplish.
In particular, we need resources to focus on three areas:
Continued support for organizational modernization.
Until recently, IRS was organized along geographic lines. At the direction of
Commissioner Rossotti, the IRS is reorganizing along customer lines. This enables the IRS to
provide better service to groups of taxpayers with similar needs. This reorganization also
enables the agency to become more effective and focused. For example, it will improve the
agency's ability to clamp down on abuse of the tax code, including combating the growth of
abusive corporate tax shelters.
The reorganization also involves building a modem management structure to enable the
IRS to serve its customers better. This will involve significant re-training of staff because many
are being asked to take on redefined roles. FY2001 provides the second year of major funding
for the IRS reorganization. We strongly believe this restructuring effort is putting the agency on
the right track. It is imperative that we support the employees and leadership at the IRS so they
can complete this monumental task of reorganizing the IRS for the first time in almost 50 years.
Continued support for computer modernization.
The IRS is embarking on a plan to replace its antiquated computer system to bring it into
the new century. The IRS core data systems are fundamentally deficient. The Master File system,
on which all taxpayer accounts reside, is based on outdated 1960s technology. Modernizing the
agency's technology will enable it to deliver on its pledge to provide better customer service for
all and is absolutely necessary for the agency to make the improvements that the public needs.
In our FY 2001 budget, we are asking for another deposit into the Information
Technology Investment account (lTIA) to keep this program on track. The Committee has
2
shown its support for this program in past years by making the needed deposits. and we ask that
you continue to support this critical program.
Stabili=inR the IRS
The IRS is on the road toward modernizing its organizational structure and computer
systems. For several reasons, we feel the time is now right to reverse the decline in staff that has
occurred at the agency over the last 5 years. First. no one anticipated the resources required to
implement the very important provisions of the Restructuring and Reform Act. Second, recent
articles have highlighted the decline in enforcement activity over the last few years -- a trend
Commissioner Rossotti and I are particularly concerned about.
We feel the time is right to permit a modest expansion in IRS resources to ensure the
integrity of the tax system, which depends heavily on maintaining voluntary compliance, and to
provide the service the American taxpayers deserve. Our request provides 2,800 new positions.
an increase of 2.9 percent over the next two fiscal years.
II.
Strengthening our ability to fight drugs, violence, and other crimes.
Our second focus today is on improving our capacity to fight drugs, violence and other
cnmes.
As this Committee knows, Treasury oversees six law enforcement bureaus: Customs. the
Secret Service, the Bureau of AlcohoL Tobacco and Firearms, the IRS, FinCEN. and the Federal
Law Enforcement Training Center. Each of these has critical and extensive responsibilities.
Our FY2001 budget request enables Treasury agencies to continue to playa full role in
the crucial anti-crime initiatives in which this Administration is engaged.
Mr. Chairman, last year you and others expressed concerns about the disparity of
treatment between Treasury law enforcement and our Justice counterparts. This year's budget
provides Treasury law enforcement with an 18 percent increase over the FY2000 budget. It
recognizes the special law enforcement role that Treasury plays in the Administration's anticrime strategy.
The proposals would result in the largest increase in Treasury law enforcement funding in
more than a decade. Let me focus briefly on four key areas of this request.
Reducing Trafficking, Smuggling and Use of Illicit Drugs
Our request supports the Administration's counter-narcotics strategy by providing
Treasury with resources critical to reducing the trafficking, smuggling, and use of illicit drugs
across our borders.
3
The budget request supports Custom's responsibility to facilitate legitimate trade. while
interdicting contraband through the use of enhanced technology and equipment. Customs
remains committed to improving the efficiency and effectiveness of its drug interdiction.
Specifically. the budget request supports:
•
Aircraft with upgraded interdiction and surveillance equipment.
•
Non-intrusive inspection equipment for expanding interdiction efforts along the southwest
border:
•
And additional personnel and investigative equipment to support Customs Counter-drug
Initiative. This will include new positions to implement the Foreign Narcotics Kingpin
Designation Act and improve information-gathering capabilities on terrorist funding and
narcotics trafficking. Our FY2001 request builds upon last year's supplemental request.
Combating financial crimes and money laundering.
Our budget request also supports Treasury's central role in the implementation of the
Administration's National Money Laundering Strategy. Deputy Secretary Eizenstat and Deputy
Attorney General Holder unveiled the 2000 Strategy this week. The Strategy is aimed at
combating dirty money and, in doing so, giving us additional weapons to fight the underlying
cnmes.
Money laundering has a number of intolerable effects on the U.S. economy and on
American society. It enables the criminal to invest the proceeds in the perpetuation of the
underlying crime, many of which are violent and spread drug addiction in our communities. It
taints the U.S. financial system and damages the reputation of those involved. And it undermines
U.S. government programs to support democracy and economic development around the world.
Our request will enable us to support initiatives in zones designated as high-risk financial
crime areas (HIFCA). The budget also supports Customs, IRS, and the Financial Crimes
Enforcement Network (FinCEN) by providing them with resources to strengthen the fight against
money laundering. It will also enable these agencies to respond to additional information
gathered from the expanded reporting requirements for non-bank financial institutions.
Protecting Our Nation's Leaders.
Few agencies are required to work under such pressure or meet such rapidly expanding
demands as the Secret Service. The dramatic rise in global terrorism and a significant increase in
the number of protectees have intensified the Secret Service's critical responsibility of protecting
our nation's leaders.
We must address the increased workload of the Secret Service and the resultant decline in
working conditions in order to retain members of this highly trained workforce and ensure their
4
safety and the safety of their protectees. We are requesting 250 new positions in addition to the
new positions in the FY 2000 appropriation.
The increased hiring by the Secret Service and ATF will result in a significant increase in
the workload at the Federal Law Enforcement Training Center (FLETC). This budget provides
funding to address this increase and continues implementation of FLETC s five-year Master
Plan.
Reducing firearms violence.
Mr. Chairman, we have all been deeply affected by a number of recent incidents that
have focused attention on the level of armed crime in this country. There is a great deal of debate
about the correct level of policy response. But, it is fair to say that there is now widespread
agreement about the need to enforce existing laws to the fullest extent possible.
Our request will help us to build on existing efforts that fall within our firearms
enforcement strategy, including the Integrated Violence Reduction Strategy (lVRS). the Youth
Crime Gun Interdiction Initiative (YCGIl), nationwide crime gun tracing. and the National
Integrated Ballistics Information Network (NIBIN).
These and other efforts, strongly supported by President Clinton, Vice-President Gore
and this Committee, have contributed to the sharp reduction in firearms violence in the last fe\\"
years. With strong inter-agency support from the Department of Justice, our initiatives have also
resulted in a clear rise in the number of firearm prosecutions, an increase of more than 12 percent
between 1992 and 1999. But we can address more violations of firearms law. And we must
reduce firearms violence further.
Our request strengthens our ability to achieve this national priority in four ways:
•
First, providing funding for 300 new agents. 200 new inspectors and 151 new support staff at
the Bureau of Alcohol, Tobacco and Firearms so that the agency can continue its crucial
work of collaborating with state and local law enforcement agencies to reduce illegal
acquisition, possession, misuse, and trafficking of firearms.
•
Second, increasing the number of cities under the Youth Crime Gun Interdiction Initiative
enforcement program by 12, bringing the total to 50.
•
Third, strengthening the crime gun tracing system for law enforcement agencies nationwide,
including equipment and training support for 250 state and local law enforcement agencies.
•
And fourth, bolstering the Treasury and Justice Department's unified effort to provide
automated ballistics imaging technology to Federal, State, and local law enforcement
agenCIes.
In addition, Treasury has asked for funding to meet several other critical challenges.
These include enforcement of laws against forced child labor, support for Secret Service and
5
Customs efforts on counter-terrorism, and airspace security in support of special national events.
The budget provides funding for these important responsibilities.
III.
Modernizing our trade systems.
Our third focus is on modernizing our trade systems. Like the IRS, Customs has
experienced a significant increase in demand on its trade system, and the system is not able keep
pace. Since the Customs Modernization Act was passed in 1993, the number of merchandise
lines on customs formal entries has more than doubled. The Customs Service is required to cope
with this sharp rise in trade with substantially the same outdated technology it had when the Act
was passed. Given the critical role of Customs in handling enormous volumes of goods and in
combating drug and other types of trafficking, it is important that be equipped with the best tools
to fulfill these goals.
As I have indicated, Customs is not alone in having to work with antiquated technology.
We have learned a great deal from the experience of the IRS and are applying these lessons to
Customs. These lessons include forging a clear and well-defined partnership with the private
sector; adopting a systems life cycle discipline; and using an enterprise-wide blueprint and
architecture to guide the integration of systems as they are developed.
Our request has two main elements:
•
Additional resources to maintain the existing trade system, the Automated Commercial
System, (ACS). The system is prone to outages or "brownouts," and it is important that we
do what is necessary to minimize such disruptions.
•
Begin work on a new system, the Automated Commercial Environment (ACE), which will
eventually replace the ACS. This replacement is critical and will require a multi-million
dollar investment over several years. We propose to establish a fee to fund the development
of ACE, and that the fee would appropriately capture some of the benefits that will accrue to
private business from modernization. These include a streamlined cargo entry process,
account-based transactions, and a paperless process. It is imperative to secure funding for this
critical program. The Administration looks forward to working with Congress on the fee to
ensure that funding is available in FY2001, and through the life of the program.
IV.
Enhancing financial management.
My fourth focus is on financial management. We have made important progress this year
with respect to the nation's money. We have overseen the development of the new five and ten
dollar bills that will start circulating in May. And we have seen what has so far been a very
successful introduction of the new dollar coin.
At Treasury we believe it is essential to achieve the highest standards of financial
management. The two bureaus of the Fiscal Service - the Financial Management Service (FMS)
and the Bureau of the Public Debt (BPD) - provide core services in the areas of government
6
payments. collections. government-wide accounting and reporting. collection of delinquent debt.
and Federal Government financing.
These are vital functions that enable Congress and the American public to have
confidence in the ability of the U.S. government to keep a detailed and accurate account of
public finances and to manage its finances professionally. This year. the Bureau of Public Debt
carried out a new mission of buying back debt as a complement to its more traditional mission of
issuing debt.
Owing to the excellent stewardship of the fiscal bureaus - including redirection of base
resources and reinvestment of productivity savings for investment in state-of-the-art electronic
commerce technologies - the budget proposals for the FMS and BPD are comparable to last
year's requests.
Let me briefly in this context mention the budget request for the President's "First
Accounts" initiative that aims to "Bank the Unbanked.'· To help fulfill the goals of this
initiative. we will use Treasury's financial expertise to encourage low-income families who do
not receive Federal benefits to open bank accounts.
Between 10 and 20 percent of our population lacks access to bank accounts and can pay
up to $15.000 over a lifetime for routine transactions such as cashing a check or paying a bill.
This is something that we have started to address through the EFT and ETA programs for those
who receive Federal benefit payments. We believe it is important to work with the private sector
to extend this opportunity to those who do not benefit from Federal payments.
v.
Maintaining Management Operations.
Our final area of priority is maintaining support for management operations.
Departmental Offices provides the programmatic oversight and technical support essential to the
Secretary's leadership role in law enforcement. revenue collection. international and domestic
economic and tax policy, and financial management. The budget supports these functions with:
•
Increases for core infrastructure operations, including technology upgrades that support
Treasury's leadership role on economic issues.
•
Essential resources required in Domestic Finance to oversee implementation of the recently
enacted Financial Modernization Act. the most sweeping change in the regulation and
management of financial institutions since the 1930s.
•
Continued funding for the multi-year program to repair and restore the historic Main
Treasury Building and Annex begun in December 1998.
In addition, our request supports four major projects: the Human Resources Information
System; Integrated Treasury Network. Critical Infrastructure Protection, including the banking
and finance sector; and the Public Key Infrastructure pilots.
7
The budget also strengthens the audit and investigative efforts of the Office of Inspector
General and enhances the capacity of the Treasury Inspector General for Tax Administration to
conduct mandated and discretionary reviews of IRS operations.
VI.
Community Adjustment and Investment Program.
I would also like to report on the progress of the Community Adjustment and Investment
Program or the CAIP, which is the domestic window of the North American Development Banle
but receives its own appropriation entirely independent from NAD Bank funding. The CAIP has
been particularly effective in helping to create and sustain jobs in communities experiencing
temporary job dislocation attributable to changing trade patterns related to NAFTA. To date.
CAIP financing has helped to create and sustain over 7,000 jobs by facilitating more than $225
million in loans, loan guarantees and grants to businesses. workers, and communities. I urge you
to support this year's funding request for the CAIP.
VII.
Conclusion.
Mr. Chairman, let me conclude on a personal note. Since becoming Treasury Secretary
last year, and in the seven years that I have worked in this department, I have been deeply
impressed by the intelligence, professionalism and dedication of the people with whom I have
worked. I am sure this Committee shares my confidence in the uses that are being made of
taxpayer funds. In that spirit, I ask that you approve our FY 2001 budget request to support the
work of the Treasury Department in fulfilling its wide range of responsibilities in serving the
American people. Thank you very much.
-30-
8
DEPARTMENT
OF
THE
TREASURY
NEWS
'IREASURY
OFFICE OF PUBUC AFFAIRS .1500 PENNSYLVANIA AVENUE, N:W.• WASHINGTON, D.C.· 20220. (202) 622-2960
Contact: Steven Posner (202) 622-2960
Amy Stilwell (202) 395-3230
Chuck Melley (202) 219-4287
FOR IMMEDIATE RELEASE
March 30, 2000
ADMINISTRA TION SUPPORTS BALANCED APPROACH TO
INTERNET POLICY MAKING
Urges All Stakeholders to Continue Working With Those
Who Seek to Find Solutions in Good Faith
The three Federal government representatives on the Advisory Commission on Electronic
Commerce (ACEC) today urged all stakeholders to continue to work in good faith to achieve a
balanced consensus on the difficult issues associated with the taxation of electronic commerce.
They released a statement to be attached to the Commission's final report setting forth in detail
the Administration's position.
The Administration supports a permanent ban on taxes on Internet access; a permanent
ban on customs duties on electronic transmissions; a continuation of the moratorium on multiple
and discriminatory taxes; international tax rules that are neutral, nondiscriminatory, simple and
certain; and simplification of state and local sales taxes and telecommunications taxes.
Congress passed the Internet Tax Freedom Act, which created the ACEC, specifically
requiring a two-thirds supermajority vote to include any findings or recommendations in the final
report. When it became clear that a two-thirds supermajority would not be obtained, the
Commission became subject to procedural maneuvering to ensure that the only comprehensive
proposal included in the final report was the one supported by offered by Chairman Gilmore and
his coalition. As a result the Federal Representatives had no choice, but to vote against the final
report, because it did not comply with the rules established by Congress.
"This flawed process led to a report that includes a proposal that is strongly opposed by
the vast majority of Republican and Democratic Governors, virtually all other state and local
government officials, and large segments of the business community" said the three Federal
Representatives on the Commission. "The report is unfair in its presentation of the results"
The Administration officials worked throughout the process, striving to achieve a balance
between the interests of technology, the needs of state and local governments, and the continued
viability of traditional retailers, large and small. The Administration pledged to continue to
participate in constructive discussion of these issues in the future with state and local officials.
representatives from all sectors of the business community, members of Congress, and anyone
who in good faith seeks to find solutions to these important and complex issues
LS-516
For pressreTel1Ses, spee.dlCJ, jJtMJlH;~chedules and official biographies, call our 24-hour fax line at (202) 622-2040
____-----h
.
f1\
The three Federal Representatives serving on the Commission were Joe Guttentag, Senior
Advisor, U.S. Department of the Treasury, Andrew Pincus, General Counsel, U.S. Department of
Commerce, and Robert Novick, General Counsel, Office of the United States Trade
Representative.
To read the full text of the statement, please visit www.treas.gov.
-30-
·
DEPARTMENT
'IREASURY
OF
THE
TREASURY
fU) NEW S
178~q:'''''''''''''''''''''''''''''''''''''''
III AVENUE, N.W. - WASIDNGTON, D.C. - 20220 - (202) 622·2960
OmCE OF PUBUC AFFAIRS -1500 PENNSYLVANIA
FOR IMMEDIATE RELEASE
March 30, 2000
STATEMENT SUBMITTED TO THE ADVISORY COMMISSION
ON ELECTRONIC COMMERCE BY COMMISSIONERS JOSEPH GUTTENTAG,
ANDREW PINCUS AND ROBERT NOVICK
The Commission was charged by Congress with the important challenge of trying to provide
recommendations to Congress on the significant issues surrounding state taxation of electronic
commerce. Electronic commerce and the associated explosion of the information technology sector
are key sources of economic growth in the United States and around the world. As the President
has stated on several occasions, it is important to establish the right rules in this area in order to
promote a policy environment that is pro-growth, nondiscriminatory, and provides appropriate
revenues that communities need to meet vital public purposes.
Unfortunately, the Commission was not able to rise to this challenge and did not serve as a
forum to forge a principled consensus on how to address the issues. Rather than foster consensus,
the Commission's process instead fostered divisiveness -- allowing posturing to take precedence
over policy. This flawed process prevented the Commission from fulfilling its Congressional charge
and led to a final Report that includes only the "majority" view, which is strongly opposed by the
vast majority of Republican and Democratic Governors, virtually all other state and local
government officials, and large segments of the business community.
The challenge of reaching a principled consensus was made more difficult by the fact that the
Commission never represented the full range of stakeholders with interests in these important issues,
such as "Main Street" retailers. Inclusion of these voices on the Commission - rather than as
witnesses - would have provided more balance. Nevertheless, reasonable compromise proposals
were put forward to reach a principled consensus. Unfortunately, these were rebuffed.
Moreover, procedural machinations were employed to favor some views and suppress others.
By statute, Congress set a high bar for the final Report, requiring a two-thirds supermajority of
Commissioners for the inclusion of valid findings and recommendations. This requirement was
designed to ensure that the Commission's recommendations reflected a real consensus between
stakeholders. However, once it became clear that the two-thirds supermajority required by
Congress would not be obtained, the Chairman and other Commissioners supporting the "majority"
LS-517
For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
·U S Government PrintIng Offtce t998· 6t9·559
proposal simply changed the rules - rules that had been in force since the Commission's first
meeting The Chairman's coalition voted to reduce the number of votes required to forward a
report to Congress and to ensure that the "majority" proposal would be included in the report as the
"result" of the Commission's work.
Furthermore, the Report drafting process was not transparent, and did not foster serious
discussion of the important Commission issues. The Report does not include or summarize any of
the testimony provided to the Commission. Nor does the Report include substantive proposals
presented to and considered by the Commission, such as those supported by the majority of state
and local officials. As a result, the Report does not serve its purpose of providing Congress with all
of the information and views obtained by the Commission that will assist in this important national
and international debate. In view of this fundamentally flawed process and the stark inconsistency
with Congress's mandate to the Commission, we voted against approval of the content of the report.
We are disappointed that the Commission was unable to reach a principled consensus able to
attract the two-thirds majority required by the Internet Tax Freedom Act for a valid
recommendation to Congress. There was a significant effort to do so, and the Administration
worked hard to be an honest broker and a catalyst throughout this process to try to achieve a
balance between the interests of technology, the needs of state and local governments, and the
continued viability of traditional retailers, both large and small.
In these discussions, the primary challenge that could not be overcome was determining what
should happen while the States simplifY their sales and use tax systems, specifically, whether Internet
sales should be granted additional tax exemptions. This would have involved changing the "nexus"
rules the Supreme Court put in place - rules that have worked very well for electronic commerce
since its inception - in such a way as to further restrict state's ability to collect sales taxes that are
owed. The States were willing to make concessions regarding those rules as part of an overall
compromise, but unfortunately agreement with the Chairman's coalition could not be reached. The
Administration's view is that in the absence of an overall compromise regarding sales and use taxes,
the current nexus rules should not be changed legislatively.
We will continue to participate in constructive discussion of these issues in the future with state
and local officials, representatives from all sectors of the business community, members of Congress,
and anyone who in good faith seeks to find solutions to these important and complex issues. We
continue to support and believe that there is substantial consensus on the following substantive
positions:
1. No Internet Access Taxes
The current statutory moratorium on Internet access taxes should be made
permanent.
It is critically important to encourage access to the Internet. Because taxes on
Internet access would create an obstacle to the access of all Americans to the
-2-
Internet, and in turn, their ability to participate in electronic commerce, these taxes
should be prohibited permanently.
2. No Multiple and Discriminatory Taxes
The current statutory moratorium on multiple and discriminatory taxes should be
extended.
Multiple or discriminatory taxes on electronic commerce plainly would hinder its
development. This existing statutory moratorium should be extended, and final
protections against such taxes should be crafted after the States develop simplified
sales tax systems.
3. Simplification and Reformatioll of State and Local Taxes on TelecommunicatiollS
States and local governments should work expeditiously, in conjunction with the
private sector to simplify and reform these taxes. The goal of these reforms should be
neutrality in taxation of telecommunications as compared to other sectors as well as
neutrality in taxation of providers of similar telecommunications services.
This complex web of taxes is in large part a relic of the time when
telecommunications services were a regulated monopoly and when taxes on these
services were passed on to consumers through the regulated rate structure. Today,
telecommunications on all levels have moved from regulated monopoly to
competitive markets, and the line between telecommunications and other types of
services becomes less clear every day. State and local governments have recognized
the pressing need for reform in this area. We believe that these governments,
working in cooperation with businesses and consumers, can accomplish this goal.
4. Simplification of State and Local Sales and Use Taxes
States and localities should develop a simplified sales and use tax system within two
years. During that time, the current rules governing this area, which were established
by the Supreme Court, should remain unchanged.
While this simplified system is being developed, States and localities should engage in a
dialogue with businesses and consumers to address the complex and difficult issues
regarding the application of these taxes to Internet sales. These issues include:
fairness to both Internet businesses and "bricks and mortar" businesses;
significantly reducing or eliminating the cost to businesses of collecting these
-3-
taxes~
the effect of these taxes on the international competitiveness of U.S. Internet
compames~
whether lower-income Americans are paying, or will be required to pay, an
unfair and disproportionate share of state and local sales taxes;
ensuring protection of consumer privacy; and
the feasibility of imposing and collecting sales taxes on goods delivered digitally
over the Internet (software, music, etc.).
The application of sales tax laws to Internet transactions raises difficult issues. It is essential
that we maintain the vitality of electronic commerce, which is one of the primary drivers of
our economy. It also is essential that States and localities have the revenues they need to
provide citizens with essential services - such as education, police, fire protection.
Addressing this issue is extraordinarily complex for a number of reasons, including the fact
that policymakers do not now have all of the information they need. Everyone agrees,
however, that simplification is the key. So the States should proceed in developing a model
act that produces real and effective simplification, while discussion on the other issues
continues. While the model act is being developed, which is estimated to take two years, the
current sales and use tax rules, established by the Supreme Court, should remain in place;
they plainly have not hindered the growth of electronic commerce. In the event of any
change in existing rules governing the application of sales and use taxes to Internet sales,
there should be full accountability so that citizens of each State can determine the
appropriate consequences of any projected increase in revenue.
5. Review of the Continued Viability of the Federal Excise Tax on Communications
Phase out of this tax is a worthy policy objective and should be considered, but must
be weighed against other worthy objectives including other proposed tax reductions,
and must not be allowed to threaten the important priorities of maintaining fiscal
discipline, paying down the national debt, extending the solvency of Medicare and
Social Security, and maintaining core government functions such as health care and
education.
This tax contributes more than $4 billion in revenue per year and $52 billion over ten
years. Because of this substantial budgetary impact, phasing out of the tax cannot be
considered in a vacuum, but must be weighed against other important priorities.
-4-
6. No Customs Duties on Electronic Transmissions
The current moratorium on customs duties on electronic transmissions should be made
permanent.
Maintaining the moratorium on customs duties on electronic transmissions is a goal
~hare~ both domestically and internationally. There is a broad recognition that
Imposmg customs duties on electronic transmissions would only undermine the ability
to attract the investment and technology necessary to build and develop an ecommerce infrastructure.
7. Fair International Taxation
Any taxation of electronic commerce should be neutral, nondiscriminatory, simple,
certain, fair and flexible.
Regarding international taxation of electronic commerce, our view is that any taxation of
electronic commerce should be neutral and non-discriminatory. We must continue to
work within the Organization for Economic Cooperation and Development (OECD) to
agree on tax rules based on the principle of neutrality and other core principles, such as
simplicity, certainty and fairness. We must also continue to work with non-OECD
member countries. Global electronic commerce should not be impeded by globally
inconsistent tax treatment and thus a global consensus must be reached regarding
appropriate taxation.
Again, we should note that there was agreement within the Commission on some important
issues. Most, if not all, Commissioners agreed that there should be no taxes on Internet access and
that the current temporary moratorium on multiple and discriminatory taxes should be extended.
There was also consensus around the handling of international tax and tariff issues, and around the
principle that States should simplify their complicated sales tax and telecommunications tax systems.
It is unfortunate that the Commission was not able to reach a principled consensus on other
fundamental issues. It is also unfortunate that the final Report does not accurately represent the
deliberations and results of the Commission, and therefore does not further the important national
and international dialogue necessary for resolution of complex electronic commerce issues.
As the Commission process ends, the Administration looks forward to participating in
constructive discussions with representatives from all sectors of the business community, members
of Congress, state and local officials, and anyone who in good faith seeks to find solutions to these
important and complex issues.
-30-
-5-
D EPA R T :\1 E N T
0 F
THE
T REA SUR Y
~~/78~q~. . . . . . . . . . . . . . . .. .
..................
OmCE OF PUBUC AFFAIRS .1500 PENNSYLVANIA AVENUE, N.W. • WASHINGTON, D.C .• 20220. (202) 622-2960
Text as prepared for Delivery
March 31. 2000
UNDER SECRETARY FOR ENFORCEMENT JAMES E. JOHNSON BEFORE
THE ANNUAL LEGISLATIVEIREGULATORY CONFERENCE OF THE
NATIONAL BANKERS ASSOCIATION AND THE AMERICAN LEAGUE OF
FINANCIAL INSTITUTIONS
MARCH 30, 2000
Thank you. Chainnan [Ignacio j Urabazo [National Bankers Associalionj for that
generous introduction. Thanks as well to President [Normaj Hart for the invitation to
speak with you about the redesigned ten and five dollar notes.
To the distinguished officers. and to each of you -- trailblazers in a highly competitive
industry.-- good afternoon.
It is a special privilege to participate in the Annual Legislative/Regulatory Conference
of the National Bankers Association and the American League of Financial Institutions.
our organizations in many respects reflect a new breed of pioneers.
Two thirds of U.S. notes circulate abroad. As the most widely used cunency in the
world. our notes are naturally the most likely to be counterfeited. The upcoming
issuance of the new ten and five dollar notes: as well as the issuance of the $20 bill in
September 1998: the $50 bill in October 1997: and the $100 bill in March 1996 are key
components of our ongoing efforts to maintain the security of the Nation's currency.
The Federal Reserve System and the Treasury Department have spent a significant
portion of time the past four years highlighting these new dollar notes as part of our
worldwide public education campaign.
LS-518
For press releases, speeches, public schedules and official biographies, call our 24~our fax line at (202) 622-2040
·U.S Government Pont,ng Office 1998· 619-559
Wc ha\"t~ worked hard to ensure that the people \\ho use our currency. depcnd on our
currency. and trust our currency. kno\\ about the ne\\ series of notes and ho\\ to \erit~
their authenticity. We do not want anyone caught otT guard \\·hen issued ne\\ CUlTenc~ h\
a bank teller or grocery clerk for the first time.
And because the $10 and $5 notes are \\"idely used in many types of vending and other
machines that disperse currency. \\·e are working closely with manufacturers and
distributors of these devices to ensure a smooth transition.
As the old ten and five dollar notes pass through the Federal Resen·e Banks. we \\·ill
replace them with the new notes. The United States has never recalled its currency. We
\vill not do so now. The old tens and fives will simply circulate alongside the new ones.
And both will continue to be legal tender. O\·er time. the newer notes will become
the predominant ones in circulation.
The redesigned ten dollar and five dollar bills. like the hundred. fifty. and t\\·enty
dollars before them -- are the collective works of artisans and economists.
Over 120 features were submitted for evaluation and testing by the New Currency and
Design Task Force. This task force consisted of representatives from the Treasury
Department. the Federal Reserve System. the U.S. Secret Service. and the Bureau of
Engraving and Printing.
In addition. the Task Force reviewed features in modern world currencies as well as
features recommended in earlier studies by the National Academy of Science.
Criteria included impact on security. proven reliability. ability to be manufactured in
large qualities. and durability over time.
Our goal is to make our money more secure against the opportunities that emerging
technologies. such as high tech scanners and copiers. provide for would be counterfeiters.
While the Secretary of the Treasury has the authority to change the design and security
features. Congress was kept informed throughout the redesign process.
The public is the first line of defense against counterfeiting. It is essential that people
recognize and understand the new and modified security features in the new notes to
deter counterfeiting.
Like the other redesitmed notes. the new $10 and $5 notes include a larue dark
numeral on a light background on the back of the note that makes it easier for people with
low vision to identify the denomination.
~
~
Other features include: a larger slightly off-center portrait: a watermark depicting the
same historical figure as the engraved portrait: fine-lining printing patterns in the
background of the portrait and the picture on the back: and on the $10 note a color
-'
shifting ink that alternates between green and black \\hen viewed at different ;mu\es. Ihe
$5 note does not contain the color shifting ink.
~
Both notes contain a polymer thread embedded in the paper uniquely positioned iiJr
easy authentication. With the $10 note. the thread is to the right of the pOI1rait and \\ill
glow orange under ultraviolet light. In the $5 bill. the thread is left of the portrait and
will glow blue when held under an ultraviolet light.
In addition. the thread on the $10 note reads USA TEN and a t1ag can be seen on both
sides when held up to a light source. The number" 10" appears in the star field of the
t1ag.
The $5 note contains the words USA FIVE and a flag can also be seen from both sides
of the note when held up to a bright light. The number" 5" appears in the star field.
The new security features are working. Counterfeiting is being detected more and
more at the retail level because the security features are easy to identify.
As you know better than most, public confidence in the currency is very basic to a
healthv.. economy. The Federal Reserve SYstem
and the U.S. Secret Service diliuentlv.
..
work together to protect the integrity of the currency in circulation from the intrusion of
counterfeiting technology.
'"
"-
Thus far. we have been very successful. Only nine notes in a million turn out to be
counterfeit. This means that most people will never see a counterfeit note. But we can
not be complacent. We are committed to preserving the integrity of United States
currency. As technology changes. we are determined to keep up.
It is essential that we stay ahead of the teclmology and make every effort to ensure
that people here and around the world continue to have the utmost confidence in our
currency.
Thank you for your attention and for the very important role that you play on a daily
basis in ensuring the integrity of that currency.
-30-
@FedFRASER