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v.391

Department of the Treasury

PRESS RELEASES

The following numbers were not used:

1087,2019-2021,2059
These releases are in numerical order even though
Some releases are not in order by date.

JUil 2 n 2003
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DEPARTMENT

THE

TREASURY

NEWS

TREASURY

OFFICE OF PUBLIC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. _ WASHINGTON, D.C.- 20220. (202) 622-2960

EMBARGOED UNTIL 11:30 A.M.
March 4, 2002

Contact:

Office of Financing
202/691-3550

TREASURY OFFERS 4-WEEK BILLS
The Treasury will auction 4-week Treasury bills totaling $21,000 million to
refund an estimated $14,000 million of publicly held 4-week Treasury bills maturing
March 7, 2002, and to raise new cash of approximately $7,000 million.
Tenders for 4-week Treasury bills to be held on the book-entry records of
TreasuryDirect will not be accepted.
The Federal Reserve System holds $12,539 million of the Treasury bills maturing
on March 7, 2002, in the System Open Market Account (SOMA).
This amount may be
refunded at the highest discount rate of accepted competitive tenders in this auction
up to the balance of the amount not awarded in today's 13-week and 26-week Treasury
bill auctions.
Amounts awarded to SOMA will be in addition to the offering amount.
Up to $1,000 million in noncompetitive bids from Foreign and International
Monetary Authority (FIMA) accounts bidding through the Federal Reserve Bank of New York
will be included within the offering amount of the auction.
These noncompetitive bids
will have a limit of $100 million per account and will be accepted in the order of
smallest to largest, up to the aggregate award limit of $1,000 million.
The allocation percentage applied to bids awarded at the highest discount rate
will be rounded up to the next hundredth of a whole percentage point, e.g., 17.13%.
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 BookEntry Treasury Bills, Notes, and Bonds (31 CFR Part 356, as amended) .
Details about the new security are given in the attached offering highlights.

000

Attachment

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lit

(202) 622-2040

HIGHLIGHTS OF TREASURY OFFERING
OF 4-WEEK BILLS TO BE ISSUED MARCH 7, 2002
March 4, 2002
Offering Amount . . . . . . . . . . . . . . . . . . . . . $21,000 million
Public Offering . . . . . . . . . . . . . . . . . . . . . $21,000 million
NLP Exclusion Amount ................ $ S,SOO million
Description of Offering:
Term and type of security ........... 2S-day bill
CUSIP number . . . . . . . . . . . . . . . . . . . . . . . . 912795 IN 2
Auction date . . . . . . . . . . . . . . . . . . . . . . . . March 5,2002
Issue date . . . . . . . . . . . . . . . . . . . . . . . . . . March 7, 2002
Maturity date . . . . . . . . . . . . . . . . . . . . . . . April 4,2002
Original issue date ................. October 4,2001
Currently outstanding ............... $33,667 million
Minimum bid amount and multiples .... $1,000
Submission of Bids:
Noncompetitive bids: Accepted in full up to $1 million at the highest
discount rate of accepted competitive bids.
Foreign and International Monetary Authority (FIMA) bids: Noncompetitive bids submitted through the Federal Reserve Banks as agents for
FIMA accounts. Accepted in order of size from smallest to largest
with no more than $100 million awarded per account.
The total noncompetitive amount awarded to Federal Reserve Banks as agents for
FIMA accounts will not exceed $1,000 million. A single bid that
would cause the limit to be exceeded will be partially accepted in
the amount that brings the aggregate award total to the $1,000
million limit.
However, if there are two or more bids of equal
amounts that would cause the limit to be exceeded, e~ch will be
prorated to avoid exceeding the limit.
Competitive bids:
(1) Must be expressed as a discount rate with three decimals in
increments of .005%, e.g., 4.215%.
(2) Net long position (NLP) 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.

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 04, 2002

CONTACT:

Office of Financing
202-691-3550

RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
Term:
Issue Date:
Maturity Date:
CUSIP Number:

91-Day Bill
March 07, 2002
June 06, 2002
912795JXO

High Rate:

1.760%

Investment Rate 1/:

1.793%

Price:

99.555

All noncompetitive and successful competitive bidders were awarded
securities at the high rate.
Tenders at the high discount rate were
allotted 16.95%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Accepted

Tendered

Tender Type
Competitive
Noncompetitive
FIMA (noncompetitive)

25,209,989
1,473,117
260,000

14,000,069 2/

26,943,106

SUBTOTAL
Federal Reserve

5,149,349

12,266,952
1,473,117
260,000

-----------------

TOTAL

32,092,455

19,149,418

Median rate
1.740%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate. Low rate
1.710%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio

= 26,943,106 / 14,000,069 = 1.92

1/ Equivalent coupon-issue yield.
2/ Awards to TREASURY DIRECT = $1,189,946,000

htfp://www.publicdebt.treas.gov

PO-I063

CONTACT:

Office of Financing
202-691-3550

RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
182-Day Bill
March 07, 2002
September 05, 2002
912795KZ3

Term:
Issue Date:
Maturity Date:
CUSIP Number:
High Rate:

1.890%

Investment Rate 1/:

1.934%

Price:

99.045

All noncompetitive and successful competitive bidders were awarded
securities at the high rate.
Tenders at the high discount rate were
allotted 87.69%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tender Type

Tendered

Competitive
Noncompetitive
FIMA (noncompetitive)

32,197,827
1,034,154
25,000

Accepted
$

33,256,981

SUBTOTAL

13,000,240 2/
4,640,480

4,640,480

Federal Reserve

11,941,086
1,034,154
25,000

-----~-----------

TOTAL

37,897,461

17,640,720

Median rate
1.880%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate.
Low rate
1.840%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio

33,256,981 / 13,000,240

2.56

1/ Equivalent coupon-issue yield.
2/ Awards to TREASURY DIRECT = $730,035,000

http://www.publicdebt.treas.gov

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D EPA R T 1\1 E N T

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THE

T REA SUR Y

NEWS
omCE OF PUBUC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASIDNGTON, D.C. - 20220 - (202) 622-2960

FOR IMMEDIATE RELEASE
March 4, 2002

Contact: Public Affairs
(202) 622-2960

STATEMENT OF TREASURY SECRETARY PAUL O'NEILL
AT
BAHRAIN INSTITUTE OF BANKING AND FINANCE (BIBF)

I want to thank the Bahrain Institute of Banking and Finance for welcoming me today. I
am very interested to learn about the BIBF's activities and view the BIBF's impressive facilities.
The BIBF's well-established training program has contributed to the growth of the Bahraini
banking sector by cultivating financial professionals equipped to help the Bahraini economy
grow. Most of all, I enjoyed looking in on a class in session, where banking professionals were
learning more about combating money laundering.
The BIBF is a symbol of continued U.S. -Bahraini cooperation in the effort to strengthen
financial systems. BIBF has strategic partnerships with many U.S. organizations including
DePaul University and the University of Virginia's Darden Graduate School of Business.
In furtherance of this cooperation, I am pleased to extend U.S. technical assistance to the
BIBF. Treasury experts will travel here soon to lead sessions in a new BIBF course on both
counter-terrorist financing and anti-money laundering. A well-trained professional workforce is
crucial to the success of every nation's effort to secure its financial system against misuse.

On a more personal note, I would like to express my sympathy to the BmF and Bahrain
for the recent passing of American Michael Langton, BIBF's late leader and veteran of our
Federal Reserve Bank of New York as well as Citibank and Bankers Trust. Michael Langton
was an impressive man who along with Bahrainis, worked to create a vibrant financial system by
training dedicated financial professionals. We are pleased to see that the BIBF is continuing
Michael Langton's passion by providing important financial sector training.
-30-

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EPA R T :\1 E N T

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THE

T REA SUR Y

NEWS
omCE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C.• 20220. (202) 622-2960

FOR IMMEDIATE RELEASE
March 4, 2002

Contact: Public Affairs
(202) 622-2960

JOINT STATEMENT OF
U.S. TREASURY SECRETARY PAUL O'NEILL
AND
BAHRAIN FINANCE MINISTER ABDULLA HASSAN SAIF

We met today for a valuable exchange of information on topics related to
terrorism, economics, banking and finance. We affirmed our shared commitment
to disrupting the financial flows that fund terrorism.
The U.S. thanked the Government of the Kingdom of Bahrain for its
support for Operation Enduring Freedom and the global war against terrorism,
and in particular its efforts to combat the financing of terrorism. Bahrain's
reaffirmation of its commitment to block terrorist accounts has been particularly
important, and the U.S. welcomes continued close cooperation in the future. In
this regard, the U.S. looks forward to joining Bahrain and other countries in the
region in a combined initiative to ensure that charities throughout the world are
not abused by terrorists.
The U.S. appreciates Bahrain having enacted legislation to prevent and
combat money laundering in accordance with the guidelines of the Financial
Action Task Force (F ATF), of which the Gulf Cooperation Council is an active
member. The U.S. also welcomes Bahrain's participation in the terrorist financing
self-assessment project ofFATF and the measures that it is taking to implement
the new FATF guidelines on combating terrorist financing.
The Secretary and the Minister discussed the steps the Government of the
Kingdom of Bahrain has taken to encourage the development of a strong banking
sector in Bahrain. The United States welcomed the continued development of
Bahrain's financial sector and appreciates the steps the Government of the
Kingdom of Bahrain has taken to strengthen both supervision and regulation ..

PO-I066
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The U.S. also praised the Bahrain Monetary Authority's progress in the
development of Islamic banking regulation and welcomed the efforts by the
Accounting and Auditing Organization of Islamic Financial Institutions (AAOIFI)
to promote international accounting standards for Islamic financial institutions.
Bahrain and the U.S. pledged to continue working closely together in the
future. The U.S. extended an invitation to personnel at Bahrain's new Financial
Intelligence Unit to visit the Financial Crimes Enforcement Network, the U.S.'
Financial Intelligence Unit, to share information and strategies.
The U.S. Treasury Secretary commended the strong economic and
financial performance of the Kingdom of Bahrain's open and diversified
economy, and the country's approach towards attracting foreign direct
investment.
The Bahrain Minister of Finance & National Economy thanked the U.S.
Treasury Secretary Paul O'Neill for his visit and for the constructive discussions,
which the Minister was confident would lead to enhanced economic and financial
cooperation, and hailed the outstanding leadership of the U.S. government in
promoting economic development.

D EPA R T \1 E 1\ T

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THE

T REA SUR Y

NEWS
OFFICE OF PUBUC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C.• 20220. (202) 622.2960

EMBARGOED UNTIL 1 P.M. EST
March 5, 2002

Contact: Betsy Holahan, 202-622-2960
Karen Mocker, 202-622-8401

REMARKS BY TONY T. BROWN, DIRECTOR
COMMUNITY DEVELOPMENT FINANCIAL INSTITUTIONS FUND (CDFI)
ANNUAL CONFERENCE OF THE COMMUNITY DEVELOPMENT VENTURE
CAPIT AL ALLIANCE
WYNDHAM ORLANDO RESORT, ORLANDO, FLORIDA

Thank you, Kerwin Tesdell, for that kind introduction. Please allow me to take a minute
to express my gratitude and thanks to you in front of your membership. Kerwin has been a
tireless advocate of your interest. He's everywhere - I first met Kerwin with the NMTC
Coalition. Following that, I met with the CDFI Coalition. And, he was there, too.
My first interface with the industry was the Community Development Venture Capital
Alliance. I was interviewed for your newsletter. I heard early on about your interests. I learned
quickly about the importance of the New Market Tax Credit Program to your organization.
Kerwin asked my help in coordinating the rollout of New Markets Tax Credit with SBA's
New Market Venture Capital Fund. He was concerned that the delays in releasing the IRS
guidance on New Markets would have an adverse impact on NMVCs' ability to raise equity and
meet SBA's deadline for equity capital.
I assured Kerwin he had my support. Our mutual goal is to increase the flow of capital
into low-income communities. If this is the goal of the SBA, then we should support their efforts
too. We met with SBA officials and gave them a progress briefing. We met with Tax Policy in
Treasury and shared CDVCA's concerns. I understood early on as a new political appointee that
interagency cooperation would be critical if the Fund is to succeed in its efforts. The presentation
was easy. We need every tool possible to improve the economic health of our nation's most
underserved areas.
PO-I067

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The outcome was just as easy. As a result of our collective efforts, the IRS agreed to
offer a "look-back" period through which NMVCs and other potential recipients of New Market
Tax Credit allocations could offer the tax credits to their investors. This look-back period
applies to any qualified investments received on or after April 20, 2001. IRS published
notification of this decision last November - over a month prior to releasing its NMTC
regulations - so that NMVC firms could alert potential investors of this decision right away. We
recognized how important this issue was to the community development venture capital industry,
and we were glad to help you achieve a desirable outcome. I credit Kerwin for bringing this
matter to my attention.
Now, Kerwin, we need your help again! I know CDVCA has been instrumental in
encouraging organizations to register as Community Development Entities or CDEs. I am
pleased to report that today over 170 organizations have been certified as CDEs. Three of 174
CDEs are SSBICs. We need your help in getting more groups registered. We need you to push
NMVCs and SSBICs to get registered as CDEs.

It gives me great pleasure to be here to represent the Department of the Treasury and the
CDFI Fund to address your organization; and to welcome you to my adopted home state Florida. Let me also add, on behalf of every chamber of commerce in the sunshine state, we
hope that you invest millions of venture capital dollars in this great state.
I have spent 20 years in banking. Ten of these years have been in community
development in the state of Florida. I know the importance of development venture capital. I
understand how mezzanine financing can move a deal from declination to approval. I empathize
with minority entrepreneurs who have vision and expertise in a particular field and are willing to
take risk but can't seem to overcome a financial institutions requirement for equity or collateral.
My heart aches when I see Americans living in poverty, buildings boarded up and homes
dilapidated. This is America. No one should feel despair or disenfranchised. America is still the
land of opportunity and I am honored to stand in front of you today to say thank you for raising
socially conscious capital. Keep up the good work!
We cannot overstate the importance of the NMTC Program and our hope that you will be
able to use this program to attract equity in your valuable venture capital funds. We commend
you for viewing your investments as providing twice the impact to the bottom-line - investments
that generate financial returns and investments that enrich our communities.
Treasury Secretary Paul O'Neill has made creating jobs and improving living standards
of people everywhere the standard by which to measure the impact Community Development
Entities (CDEs) and Community Development Financial Institutions (CDFls) have in the
marketplace. Secretary O'Neill believes that our job in government is to continuously improve
the framework of our economy. He has set a high standard and expectation for the CDFI Fund to
help Treasury achieve this mission in low-income communities by targeting populations that
have historically been underserved.

By offering a tax credit, the New Markets Program encourages private investment in
underserved communities in an unprecedented manner. If the program is embraced by investors,
it will be a significant source of new, patient capital that will help to stimulate new industries and
entrepreneurs, to diversify the local economy, and to generate new jobs in low-income
communities.
Let me put a face on the NMTC program for you. It is $15 billion in tax credits designed
to spur economic development in low-income communities. A remarkable 24,562 census tracts
in the United States qualify for NMTCs. That's nearly 40 percent of all census tracts,
representing 36 percent of the population, or nearly 91 million people. There can be no contest
that the New Markets Tax Credit program is seriously needed throughout the nation. The
directive at Treasury has been quite pointed - successfully implement the NMTC program this
year!
I'd like to spend the next 15 - 20 minutes talking about (1) developments at the Fund;
(2) a briefing on the NMTC program; and (3) some things you might want to consider if you are
planning to capitalize your venture capital fund or pool by utilizing NMTCs. I hope, following
this, we can engage in a dialogue of questions, answers, and ideas from you.
(1) Developments at the Fund

Vision and Change
First, let me talk vision and change. As you know, our vision at the Fund is to have an
America in which all people have adequate access to credit, capital, and affordable financial
services. My vision for the Fund is to grow our organization as the nation's leading vehicle and
best practice government agency for financing economic and community development activities
in low-income areas, distressed and underserved communities.
Secretary O'Neill has challenged all employees of the Treasury Department to take the
necessary steps needed to achieve a world-class organization. Along these lines, the Secretary
has directed the Fund to develop procedures that will provide meaningful measurement of the
impact of taxpayer dollars and credits awarded through CDFI Programs.

In response, we have strategically taken a step back in order to leap forward with an
ambitious plan of service to America. That first step has been to develop a new organizational
structure that is designed to help build your capacity to achieve such results. Some of what we
aspire to is placing a higher accountability upon ourselves here at the Fund to complete
application reviews, make awards, and close and disburse these awards in a more timely manner.
We also are putting systems in place to ensure that we are targeting awards in the areas of
highest need with organizations that can help us to achieve the greatest impact.
We will apply these basic principles to the NMTC program from the start. The programs
ofthe Fund will be under the supervision of Fred Cooper, recently named as my Deputy Director
for Policy and Programs. An important new addition to the staff is Linda Davenport, who is the
manager for the New Markets program.

Linda comes with a long work experience in the Low Income Housing Tax Credit
program, has a legal background, and brings many years' experience as a practitioner and as an
equity investor, so she will definitely add a valuable and fresh perspective to the development of
the New Markets program.
(2) Brief NMTC Overview

To recap briefly, the New Markets Tax Credit Program is designed to help spur economic
growth in urban and rural communities across the country. Briefly, here's how NMTCs will
work:
•

Tax credits are allocated for investments into a Community Development Entity (CDE),
certified by the Fund;

•

To qualify as a CDE, the entity must have a mission of community development and
demonstrate accountability to the low-income communities served (The Fund is allowing
multiple, related entities to apply for certification under a single application. CDEs will be
allowed to sub-allocate tax credits to subsidiary entities, and it is not necessary that they
identify each of these subsidiaries at the time of their initial application for the tax credits).

•

A CDE applies for an allocation ofNMTCs.

•

The CDE uses its allocation ofNMTCs to raise equity from private investors.

•

Investors can receive NMTCs worth 39% of the invested amount over the life of the credit.
(5% in the first three years; 6% in the subsequent four years).

•

Investors need to make their investments in a CDE, certified by the CDFI Fund.

•

The proceeds from these investments must be made in Qualified Low-Income Community
Investments (QLICls).
There are four types of QLICls:
1) Investments in or loans to qualifying low-income community
businesses;
2) Training or technical assistance to businesses or entrepreneurs
in low-income communities;
3) Investments in or loans to other CDEs; and
4) The purchase of qualifying business loans from other CDEs.

$15 billion in equity to which NMTCs may be claimed will be available over the next six
years. We expect to allocate up to $2.5 billion in such equity in calendar year 2002. In seminars
at the conference, Fund staffwill discuss the program in greater detail.

The NMTC staff has been working diligently to finalize the NOAA (Notice of
Availability of Allocations) and the application process. Most exciting, we will be accepting
applications electronically, another efficiency measure to get this ~rogram out on the street as
soon as possible. We anticipate release to the Public by April 30 t •
We encourage you to check out our website on a regular basis for updates regarding the
NMTC. Soon, you will see the NOAA and the application package appearing there! And if you
haven't done so, check there, too, for how to become a CDE. So far, as mentioned, we have
certified over 170 CDEs!
The New Markets staff also has been working hand-in-glove with the IRS to make sure
that the process we are creating matches what they need to create as rules to govern the
distribution of tax credits. As you know, the IRS has just closed out its comment period on its
temporary rules, and will now be considering these comments and finalizing the rules for use.
Compliance Monitoring and NMTC
Let me share with you how important I believe it is to clearly define what may cause a
recapture event. If the NMTC program is to be successful, investors must be very comfortable
and clear on what could trigger recapture. As a reminder, the tax credits may be recaptured from
the investor if:
1)

The CDE fails to invest, either initially or upon subsequent returns of capital,
substantially all (generally 85%) of the investor dollars into qualifying
activities;

The CDE fails to meet the requirements (related to primary mission and
community accountability) relating to certification as a CDE; or

The investment is redeemed by the CDE prior to the conclusion of the sevenyear credit allowance period.

We are working very closely with IRS in developing clear guidelines and outlining our
respective roles and responsibilities. As part of this process, they will aid the Fund in developing
an entirely electronic reporting and compliance system - so that all CDEs will be submitting
uniform compliance documents, customized to the types of investments in which they are
engaged. If you have not already done so, I urge you to share any specific suggestions or
concerns you may have with Linda Davenport about this.
For its part, the role of the Fund is charged with the implementation of the tax credit
program. That means developing and setting policy that will govern the certification of CDEs,
and the competitive application process for tax credit allocations awards.
It means administering the process to determine which groups will receive awards each

year.

And it means overseeing the use of tax credit investments through excellent compliance
monitoring to ensure that low-income and economically distressed communities are served.
The IRS, on the other hand, is responsible for developing the regulations that govern the
use of tax credit allocations. They published implementing regulations on December 26, 200 1
addressing, among other things: how the proceeds from the tax credit allocations must be used;
what qualifies as an eligible investment; and what events will trigger a recapture of the tax
credit.
Please familiarize yourself with these rules and share them with your investors. A copy
of these regulations is available on the Fund's website.
I would also like to point out that these rules are still in a temporary stage. The IRS
public comment period closed last week, but we've been told that they'll review comments that
come in after the deadline. So I would encourage you to contact IRS if you have significant
comments or concerns regarding the regulations.

(3) Issues in Using the NMTC Program for CDEs
I wanted to spend some time talking about how New Markets Tax Credits can open up
opportunities for you, and deal with the challenges presented by being "development venture
capitalists."
a. The Double Bottom-Line. One ofthe typical things said about DVC is that it works to
achieve the "double bottom line." Your organizations work to ensure that the deals you
invest in are profitable, and yet, still accomplish important "human" end results: more
jobs, better quality jobs, increased wealth for low-income individuals, better quality of
life, and capital access to groups who have historically not participated in traditional
venture capital funds.
Your challenge is how to straddle the social purposes that under-gird your mission, while
still having the ability to attract investors.
We will need your assistance and cooperation in helping us design a process that will
measure impact and sustainable economic growth from the funds you raise using
NMTCs.
b. Investor Fit. Who will be the right kind of investors for this program? There are two
issues to tackle under this heading. One is what traditional VC investors look for, and the
other is how DVCs will make the conversion from non-taxpaying pool investors, to tax
paying investors, who are enticed by the tax credit.
Many regular VC investors want, not surprisingly, to invest in deals where rapid growth
is possible, and they want proximity to their investments for monitori.ng capability. They
make larger investments, in general, than DVCs do, and also would hke to know clearly
that the exit strategy is in place at the time of investment.

Many of their investments rely heavily on personal relationships that have been
built, and the assessment of management oftentimes is the deciding factor to invest. It is
just these kinds of issues that have precluded investment in low-income and rural areas.
A tax credit investment through CDEs can help!
Our basic premise is that investors will get an additional return each year for
seven years in the form of a tax credit, and their money will go directly into highly
economically distressed areas. We're hearing that the tax credit, in itself, is not enough.
We know that the deal matters.
1. You will be the middleman that will make their large investments in your
CDE work in a variety of smaller deals that they would never have the time or
interest in which to participate.
2. You will be the surrogate monitor for the investor, providing skilled technical
assistance to the investee businesses and bringing a proven track record of
stable, experienced management to oversee these companies.
3. You will develop the personal relationship on both ends. You already have it
with the businesses needing patient capital, and you'll be developing it with
your investors.
You'll make it easy on them, so why wouldn't they invest? Seriously, the
important thing is that New Markets will give you the tool that allows you to have the
conversation with tax-paying investors. If Congress wanted to simply provide a credit for
investments into low-income areas then the credit would be direct.
Instead, these investments occur through CDEs, empowering you to provide the
expertise and technical assistance needed to make these deals work in low-income
communities and to have low-income residents as members of your boards. As the
program progresses, we will need to hear from you about what works as well as what
doesn't.
Conclusion
In talking with several trade groups over the course of the fall and winter, I have also
learned that CD venture groups have been lining up investors. With all this investing in
businesses going on, and the resources you are stacking up, sounds like you're ready for New
Markets! That's very good ...
We need the NMTC Program to be the impetus to increase the flow of private capital into
low-income communities. Direct subsidies from the Federal government alone will not do it.
We hear that NMTCs may take time before investors are comfortable with using it as a tool.

We, in all honesty, do not have the luxury of time. President Bush has made the nation's
economic recovery a top priority. The President requested an economic stimulus package to
reduce the tax burden onjob-creating investments. The Senate has voted to extend
unemployment benefits, but have yet to vote on the President's stimulus packet.
While the economic stimulus package debate continues in Congress, we have a head start
and a new tool in the community development finance field. Like many of you, I was anxious to
ride the stock market wave of the dot-corns and the tele-coms. Now, we have an opportunity
today to bring in a new era: that of the low-corns.
Your funds have been on the leading edge in providing assistance to businesses that
create jobs for low-income people and help revitalize low-income communities. The market
opportunity is tremendous and the commitment from Treasury to see this program succeed is
high.
In 10 years time, when we look back, we hope to say the NMTC Program put significant
amounts of private sector capital investment to work in the areas where it was needed most. We
know that you too share this vision. I look forward to working with you.

Thank you very much for your attention, and now, please share with me your thoughts
and questions.

-30-

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 05, 2002

CONTACT:

Office of Financing
202-691-3550

RESULTS OF TREASURY'S AUCTION OF 4-WEEK BILLS
Term:
Issue Date:
Maturity Date:
CUSIP Number:

28-Day Bill
March 07, 2002
April 04, 2002
912795JN2
1.750%

High Rate:

Investment Rate 1/:

1.775%

Price:

99.864

All noncompetitive and successful competitive bidders were awarded
securities at the high rate. Tenders at the high discount rate were
allotted 23.07%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)

Competitive
Noncompetitive
FIMA (noncompetitive)

Accepted

Tendered

Tender Type
$

45,248,522
24,833

20,975,227
24,833

SUBTOTAL

45,273,355

21,000,060

Federal Reserve

2,748,860

TOTAL

48,022,215

23,748,920

Median rate
1.735%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate. Low rate
1.700%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio = 45,273,355 / 21,000,060

= 2.16

1/ Equivalent coupon-issue yield.

http://www .publicdebt.treas.gov

PO-I068

D .E PAR 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

FOR IMMEDIATE RELEASE
March 5, 2002

Contact: Public Affairs
(202) 622-2960

TRANSCRIPT OF U.S. SECRETARY OF TREASURY PAUL O'NEILL
AND MINISTER OF FINANCE DR. YUSSEF AL-IBRAHIM
PRESS CONFERENCE
KUWAIT INTERNATIONAL AIRPORT
KUW AIT CITY, KUWAIT

MINISTER AL-ffiRAHIM: It is our great pleasure to have Secretary O'Neill here in
Kuwait and his distinguished delegates. As you know, this visit shows the deepness of the
relationship between the United States and Kuwait. This morning he had the chance to meet
with the Governor of the Central Bank, with representatives of the banks and the Kuwait Finance
House, and also to meet Shaykh Sabah AI-Ahmad and myself. Unfortunately, it's a very short
visit. We'd love to have you for a longer period of time to enjoy the spring weather and to show
you the desert, but I know you have a very busy schedule. But, again, welcome to Kuwait. It is
our pleasure to have you here.
SECRETARY O'NEILL: Thank you very much. We have received a very warm
welcome this morning and have had very successful meetings talking about the issues that are of
mutual interest. It's wonderful to be in Kuwait and to feel the warmth of the friendship that
exists between the United States and Kuwait. Our topic today was to talk about many things, but
specifically about financial matters, and to thank the people of Kuwait and government officials
for their very quick condemnation of terrorist activities after September the 11 th, and for their
very quick and forthcoming action of blocking the accounts or the names of the people identified
as terrorists or suspected terrorists. I want to say how much we appreciate the wonderful
cooperation that we've had on this issue, and also to talk about how we can go forward together
and ensure that money is not flowing to terrorists. The United States can learn from the work
that has been done in Kuwait, from the thinking about these issues, and to volunteer assistance
going forward if it could be useful in Kuwait to deal with some specific issues. One issue that
we in the United States have been keen to add to our perspective is to assure people around the
world who are giving money to help others for charitable purposes that all of the money given
for charitable purposes only goes for good purposes. Again, I think we had a very successful
engagement in talking about this issue. I'm convinced we all have the same idea and purpose.
Together, I'm also confident that we can reduce the possibility ofterrorists having access to
funds through our normal financial systems and our charitable systems.

PO-I069
For press releases, speeches, public schedules and official biographies, call our 24~our fax line at (202) 622-2040

For me, this was a very successful and pleasant engagement with the high officials in
Kuwait. I'd be very happy to take a few questions.
QUESTION: You, the Treasury Department, I think it was December or January, froze
the accounts ofthe Kuwait-based Islamic Heritage Revival Society. I was wondering if any
steps had been taken, perhaps to unfreeze the accounts, and if you could give any more
information on that specific society.
SECRETARY O'NEILL: We are not prepared to unfreeze those -- what we consider to
be sub-accounts -- but we're continuing to exchange information. Again, we're most anxious
that -- and think that everyone that I've spoken around the world shares this view -- that it is very
important that money given for good purposes not end up being used for bad purposes, and to
take every effort to make sure that this doesn't happen.
QUESTION: There are some reports stating that the influx and the size of investment
from the GCC countries has actually lowered after September 11 because of the measures taken
by your administration. How can you assure investors that their money is in a safe place? And
is this accurate first?
SECRETARY O'NEILL: No, I think the assertion is wrong. I think if you look at our
general funds and flow of funds they are not different from before and after September 11. In
fact, on a somewhat broader note, it seems quite clear now that our economy maybe never
suffered a recession. (We experienced) one quarter of negative growth, I guess, but the report
now from the fourth quarter of our economy is far above the no-growth level of 1.4 percent. We
are expecting a continuation of improving growth rates as we go through this year. So I would
say that -- although we will never return to normal in the sense of being able to forget about the
terrorist attacks of September 11 -- the economic fundamentals are moving back into place.
QUESTION: To Minister AI-Ibrahim. Kuwait said that it was hiring international
auditors to monitor the accounts of the charities, has it done that?
MINISTER AL-IBRAHIM: Well, we didn't say that we are going to hire international
auditors. We said we are going to stick to international accounting standards. There are Kuwaiti
auditing offices here in Kuwait that can do this job. I have to assure you that what we are doing
is part of the international effort and we are dealing with Security Council Resolution 1373 and
we are adhering, as a member of the international community, to these resolutions.
QUESTION: Are you planning to freeze other accounts for organizations, especially in
Kuwait?
SECRETARY O'NEILL: We are not making any announcements of freezing action
today. But we are continually working on the further identification of people who have declared
themselves to be terrorists or who take responsibility for a terrorist act.

Through our intelligence activities, we are working hard to identify other people who
would hann innocent people around the world and to stop their money flow. It's an ongoing
effort. I don't know that it will ever be finished.
QUESTION: I know that all the GCC countries are extremely cooperative with the
international allies to stop the terrorist activities, but how is it possible to trace the funds coming
in and out the GCC countries when these countries are not applying tax revenues systems where
you can trace all the funds?
MINISTER AL-ffiRAHIM: I don't see that that has anything to do with having a tax
system. Since you have been working with the Commercial Bank of Kuwait, you know how the
transfers are being done in Kuwait, through the Central Bank The system is very clear. This is
being done for a long time. Kuwait has a very advanced banking system. We were dealing with
these issues prior to September 11, and all people and experts who came and visited were very
happy with the system we have. So there is nothing to do with our tax system here, or (the fact)
that we don't have an income tax system.
QUESTION: I want to know your view and your opinion about the U.S. economy in
2002 and what you expect in 2002 and 2003?
SECRETARY O'NEILL: In 2002, as I said, we are expecting the first quarter of this
year to be better than the forth quarter of last year. Then we are expecting to see successive
quarters of growth, with the expectation that by the end of the year we will be growing at
something between three and three and one-half percent. There are some economic observers
who are now making estimates of even stronger growth than that because of the correction that's
taken place in the inventory levels, and what looks like more rapid return to good growth rates
than what people were expecting. It's my own expectation that 2003 will again be a year of
substantial growth for the U.S. economy.
QUESTION: There have been funds that were frozen all over the world which were
suspected to be funding terrorists. Are there any steps taken to make sure that these funds are
really and certainly funding terrorism and to release those who prove not to have a relation with
terrorists?
I mean are you following up the funds frozen already, to release them if they are not
certainly in relation with terrorists?
SECRETARY O'NEILL: Yes.
QUESTION: Some people believe that under the pretext of fighting terrorism the United
States interferes in the internal affairs of countries. How do you respond to this?
SECRETARY O'NEILL: It's simply not true. After the events of September 11,
President Bush himself, and several of the rest of the members of the American administration,
were in touch with world leaders and all the countries of the world. We said to them that we
believe the attacks of the terrorists are attacks of uncivilized people on civilization.

Ifwe are going to prevail, it will take the combined efforts of people everywhere in the
world to identify people who want to do evil things. While we know that there are military
cadres in Afghanistan, there are other people in the world who do their dirty work by providing
money to those who want to hurt others. So we asked the leaders of the world to please join us
in identifying these people and blocking their access to money. The response of every country
has been uniformly the same, agreeing that we should together fight terrorism everywhere in the
world. We've not given direction or instructions or even suggestions to individual countries
about how they should be responding, but every place in the world has responded in an
affirmative way to this call to support civilization.
QUESTION: How concerned are you that there are still Kuwaiti charities or individuals
here that could still be managing to finance terrorism. Secondly are you fully satisfied with the
controls the Kuwaiti government has already taken to tighten certain charities and financials?
SECRETARY O'NEILL: On the broader question about the charities: We have a very
strong tradition in the United States of people giving substantial amounts of their own income
and wealth to help people who have nothing, to help low income people and poor people, and
people who have serious medical problems and don't have enough access to food. So we have a
very big tradition in the United States of charities. I understand there is also a very strong
tradition in the faith here of giving to help others. So, in that sense, I think we are very much
together in believing it's a good thing for those who have much to help those who have little.
We don't want to do anything that will interfere with that regular flow of charitable giving and
support for good causes. But we do have infonnation from places around the world where there
have been instances --without the knowledge of people who gave the money -- of some of the
money they gave ending up providing support to those who want to do evil things. So we've
said we think we should work together with other governments around the world to make sure
that this doesn't happen. I think anyone who gives their own money with the intent of it being
helpful to those who don't have very much has the right to believe that their money will go for a
good purpose, not for a bad purpose. It's only in that sense that we've raised this issue. I think,
frankly, that we're all learning together. One of the earliest identifications of a charitable
institution that was providing money to a terrorist organization was located in the state of Texas
in the United States. So this is not the United States saying 'everyone else has a problem, we
don't have a problem.' We recognize this is a problem. We think it is something we should all
work on together. We are very pleased with the response and with the conversations we had this
morning, and with the resolutions to accomplish this purpose which I think we all share.
Thank you very much.

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

FOR IMMEDIATE RELEASE
March 5, 2002

Contact: Public Affairs
(202) 622-2960

STATEMENT OF SECRETARY PAUL O'NEILL
KUWAIT CITY

During my brief visit to Kuwait, I had the opportunity to meet with His
Excellency Shaykh Sabah, His Excellency Dr. Ibrahim, and the governor of the
Central Bank, Shaykb Salem. I also spoke with representatives of all of the
commercial banks operating in Kuwait, including the Kuwait Finance House. I
would like to thank my Kuwaiti hosts for their warm hospitality, and for their
cooperation in the financial war against terrorism.
I expressed our appreciation to the governrn.ent of
Kuw"ait for Kuw-ait's ongoing support for the carn.paign
against terrorisITl. Given rn.y responsibilities as Secretary of
the Treasury, I arn. particularly grateful for Kuw-ait's
participation in the international effort to disrupt the
financing of terrorisrn.. In rn.y discussions, I explained that
freezing the assets of terrorists is an issue of pararn.ount
irn.portance to the United States. We look forw-ard to
continued cooperation betw-een our nations. For exarn.ple,
the United States has offered training and technical
assistance to support Kuw-ait's goal of rapid and effective
enforcement of its new- anti-rn.oney laundering law-.
During our talks, w-e also discussed Kuw-ait's efforts to
improve regulation of the operations of charitable
organizations. Charitable organizations perform. a vital and
valued role in society. We seek to protect and enhance that
role. To do so, it is essential to ensure that donations reach
those in need. Introducing greater transparency and
accountability into the process of charitable financing w-ill
increase donor confidence, itnprove the delivery of
assistance to the needy, and deny terrorists the opportunity
to steal from w-idow-s and orphans. These are goals w-e all
share.
PO-1070
F(J1" press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622·2040

In closing, let me say how much I appreciated the
opportunity to consult W"ith my Kuwaiti friends on this
critical topic.
-30-

ornCE OFPUBUCAFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C. - 20220 - (202) 622-2960

03/06/02

U.S. International Reserve Position

The Treasury Department today released U.S. reserve assets data for the week ending March 1 ,.2002. As indicated
in this table, U.S. reserve assets tot dIed $67,793 million on that date, compared to $68,081 million at the end of the
prior week.
(in US millions)

I. Official U.S. Reserve Assets

67,814

TOTAL
1. Foreign Currency Reserves
a. Securities

March 1, 2002
67,793

February 22.2002

Euro

yen

TOTAL

Euro

Yen

5,414

10,183

15,597
0

5,380

10,310

9,122

3,928

13,050
0
0

9, ON

3,977

Of which, issuer headquartered in the U. S.

TOTAL
15,690
0

13.050
0
0

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

0
0

b.iii. Banks headquartered outside the U.S.
b.iii. Of which, banks located in the U.S.

2. IMF Reserve Position

3. Special Drawing Rights (SDRs)

4. Gold Stock

5. Other Reserve Assets

17,321

17,21-1

10,801

10,79.1

11,045

11 Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's Sysrem 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 The Items, "2. IMF Reserve Position' and'3. Special Drawing Rights (SDRs),' are based on data provided by the IM.F and are/alued in
dollar terms at the official SDR/dollar exchange rate for the reporting date. The entries in the taele above for ~a18st weeK (snown :n Irallcs)
reflect any necessary adjustments. including re'Jaluation, by the US. TreasL:lj to rhe pnor.veeK's IrvlF dara. I he IrvlF oate ,or the !C rlor week
are final.
31 Gold stoc:,:s '/aluec mollthl\, at 5-1;2.2222 ,::er rlne [r:;~:

was $11,045 mlilion.

0-1071

JUnC2

'jalL:eS

silC';.;n

are:

ci ~cnU2{ 31

0
0

PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239

FOR RELEASE AT 3;00 PM

Contact: Peter Hollenbach
(202) 691-3502

March 6, 2002

PUBLIC DEBT ANNOUNCES ACTIVITY FOR
SECURITIES IN THE STRIPS PROGRAM FOR FEBRUARY 2002

The Bureau of the Publlc Debt announced activity for the month of February 2002, of securities within the
Separate Trading of Registered Interest and Principal of Securities program (STRIPS).
Dollar Amounts in Thousands
Principal Outstanding
(EHgibll~ Securities)

$2,092,135,286

Held in Vnstripped Form

$1,928,128,796
$164,006,490

Held in Stripped Form

$11,374,760

Reconstituted in February

The accompanying table gives a breakdown of STRIPS activity by individual loan description. The balances jn
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 Fonn.
The Strips Table along with the new Monthly Statement of The Public Debt is available on Public Debt;s
Internet site at: www.publicdebt.treas.gov.Awide range of information about the pllb1ic debt and Treasury
securities is also available at the site.
000

PO-ion

www.publicdebt.treas,gov

iABLE V HOLOlfoiCiS OF 'rREASUAY SECURIIIES IN STRIPPED FCRM FEBRUARY 2.8 , 2002
Corpll9
Lean DescrIption

Ameunl Out.:;Ii!lndin5l in Thouslli'1ds
Maturity Dete

STRIP

TOlel
Oulalil"dino

CUSIP

Tre!lSury Bonds:
OUSIP:
912810 DM7
008
DR6
DUe
ONe

DW5

Inlerest Rale:
11-5/8
12
10-$/4
NIB
1 1-3/4
1',1/4
10-5/6
9·7/8
9-1/4
7,114

0)(3

7-112

A!~9

11/16116

OYl
026
EA2

6-$/4
8-7/11
5-'1B

AL'/

0&15117
oa/1Sf17

ESO

9
8,71B
8-1ta
6·112
9-3/'1
6-3/4

OPO
OS4
0'r2

DV7

EC6·

EDG
EE4
I:F1
EG9

EH'r
EJS

7·718

EKO

8-'1B
B

EU~

7-114

EVG

6-r/8
6
6-3/4

EX2
EYo

e:a

AJ~

912800AA7
912803 AA1
AO'/
AS3
AFO
AH6

AM5
AN3
APe
1\06
AR4
AS?
ATo
AU7
AV5
AW3
AXI
AY9
AZ6
SAO
BB13
BC6
[JD4
BE2
BFa

a·1Ie

EMs
EN'!
EP9
E07
ES3
E'll

EW4

912603 A89
AD5
AGe

7.S/B

7-1/6
6-1/'1
'7-112

7·5fS

6·5/6

6,SOl,806

05/15/05
08115/05
02115106

4,260,756

11115114
~J1511S

061, 5/15
"n5115
02115/16

05/15f1B

05/15/18
11115116

07./15119
Oa/'l6/111
0;»15120
05/11;/20
Oal151'20
02(151il1
OM 6121
08/15121

11/15/21
ODI15/22
11/1512<1
02/16123
06/1M!::!
11/15124

02/16/25

oe/ltitl5

BHS

0'2(15125
09/15t26

ElJl
BKa

111151?8
02/151'n

13<37

6-112

11/15/04

6-3/8

sLe:

01Jl15J27

6-'/6

l1lHil2?

5-112

BM4
BP7

5-1/4

ElV4

061151'26
11/151;zS

~W2

02/1S129

eGG

f'M5

50·1/4
G·11e
6-V'l

08/15129
05115/30

FPO

5-318

F=Al
Fil9
F=E3
FFo
Faa
FJ2

OH4
OK?

02/15131

Talal Tre;asury 8on,~a .... ,...................................
Trca.:;ury Inllalion-lnd6)(6(j Notes:
CUSIP:
~:erles:
Interest Rato:
81ail27 SAB
~S16
J
3.3/8
2M3
A
A
3T7
~-5IS
3-71B
4Y5
A
!',W8
A
4·1/4
BRa
3-112
A
3-3Ie
7J5
A
TQI~

ave

CUI
DN4
EK!l
CA9
GTe

07115102
01/15i07

01/15108
01lHi/09 .
0,/15/10
01/15111

01l1511?

In!iillion-lndeX9d Notes..............................

Treasury Inllsllon.ll"ldcxod Bonds:
OUSI;>;
tnlereal FIala;
~12al0 FD5
3-518
3-,15
FHa
FQG
3·s/6
TOI~I

912820 ElZe

Inllalion·lnde)(03d Bond!! .............................

~12803

8m
OFa
Cl.5

onl1512a
04115(29
0411 S!.32

9,269.713
4,7SS,916
5.016,284
10,783.299
4,023.916
5,564,859
5.501,754
16,82.3,551
1 B,8?4,44e
15,619,'69
11.~OB,SSfI

6.797,43;)
",174.470
13,320,496
18,940,932
9,6S6,<68
7,707,163
1{,2M.306
10,195,573
10,191,71.l8
9,926,3S2
30,632,194

10.227,790
7,42.:3,6?6
16.162.061
22.659,0'14
9,704,162
10,019.170
11,26'/,20'7
12,837,916
9,000.418
10,B70,177
9,601,971
9,.:35B,756
22.021.539
11,776,201
10.947,0570
11,360,341
11,178,560

Ponion Held in
Un~lrlooeCl Form

4,593,006
1.1120,208
5,872,213

Reconstituted
This Monlh \

Poniol'! Held rn
Slril>"ed Form

3.708,eOO
2,440,550
3.397,500

4,444,HIO

S";/35

1,804,500
a,SS5,I\30
3,080,730
3.366.269
5,317,8qe
18,6S6.916
17,478,9B6
8,754,304
7,599,965
2,975.839
3,504.::147
7,909,61 a
18,276,940
7,80S,620
3,\SG.963
6,1'15.586
9,353.773
e>,493.3GS
7,922.690
15.n8.07!l
8.966,B91
3,414,6.:31
10,455,461
19,1 B9,9S2
3,773,922
3.967,769
7,S10.llQ5
11,647.716
6,293.600

3.210.7B4
2.417,8S9
943,186
2,HI8.5'1'O

5.~S7.,e27

163,90B

154.633
1.3'15.480
6,!l64,~65

3,606,393
3,621.600
3.670,123
5,410,662
653,987
1.850,6411
4,570,200
9,'13,;20
B<l1.BOO

4,1398,42:>
2,003.692
1 '1,904,119
1,259.099
4,00B,995
6,695.600
3,459,092
5.930,240
G,051,401
3.555,782
1,190,200
2,706,8'8
5,617,;;!50
9,366.605
2,O69,!l00

184.000
5,450
148.800
10,200
71.400
38Z,320
4.3,7.00
123,200
161.BOO
9Ei.OOO
38.320
66S,840
264,600
56,000
16,000
617,000
667,360
a22,200

eo,ooo

604.S60
129,400
614,720
130,620
1.ea'.650
91.200
30,aOO
438,400
1119,200
111,760
160.000
275,120
565,1100
160,400
297,000
302.400'
37.:3,000
292.400

16.42'1.6~8

5,235.356
7,2B6,956
11 :fS1 ,239
11,150,101
10,3e;s,G5:?,
'0,891,446
10,39',5&0
16.383,290
16.290.048

503,/)39.4&5

362,"1 ElO,209

140,859.275

1 B,557,'HIO
17,577,071
16.390,155
17,1313.264
11.891.540
11,170.40<1
6,004,283

1!!.557.280

0
0
109.390
0

100.727,044

1"1.043.162

17,5n,071

lB.280,765
17.136.264
l',B91.540
11,170,452
6,004,2.83

10,~40.100

B26.100
591,400
456,895
787,000

~07.BOO

S5~.a72

3,200

1S'f,800

10.886,940

142,400
.q9.600
24.600

0
0

100.617.654

109,390

la,aS5,7!!3
21,201,4SS
!i.012,235

lB,365,78S
21,067,OSS
5.012,235

134,876
0

0
0

~4,579.47e

44,445,101

134,3'76

T.ABLE: V - HOLDINGS OF TREASURY S~CIJRITIE$II\I STRIPPEO FORM, FEBRUARY 211. 2002 - COnlil'lucd

Treasury Noles:
CUSrP:
9126272P6

Amounl OUI.s\j!JIdlng In Thousands

Corpus
STAIP
CIJSIP

Loon Description

Serles:

Inlerest Flats:

Malurily Dale

91aSOS FM4
EPa
FN2
eQS
8D6
FP7
ES2
F05

03/31/02

683

230
6C,

6-515
6-'12
6.516

s-SIB

F4~

aWl

7-112
6-112

GE7

(,.5,I!l

2'(7
BF4
3C4

H
W

6.1/4
6-5/8

FAS

6HO

EU7

G55
3<35
6K3

CI-IB

11I30I02

11130102
12131/02
12131102
01t.31103
01131103
02/1S103
02/28/03
02126/03
03131103
03/31/0:3
0<\/30J\)3
04I30I03
05131103
05131103

egs

03131,.02
04/30102
04/3002
05/15/02
05131102
05/31/02
06130102
06/SO/02
07!31tr:1Z
07131102
0811510'2

FSI

08/31/02

FU6
CC9
FV4
CE5

08/S1!02
05l/3OItl2

ETo

6l.1
3La

303

8·1/4
8-sle
6-1(4
6·118
5·7/8
5
5.314
!>-3/4

6F2

PIC

50Sia

FVa

Sl9

L
V
M

sao

5·5/ll
5-112

3V2
6S6

5-112
4-S/4

J'I6

6-1/4

5-112
oil-oJ'S
5-112
4-1/4
5.314
4
6-112

4-1/11

szo

H
R

5-3/B
3-7/8

7A'I

~·718

CK1
F25
CNS
GEl7
BFa
CS4
GOa
Cug
GEl
CVV5
GFB
DA2
GH.q
DCS
GJO
GK'7

LII3
lIN9
700
7DS

5-s/4

BGI

J
T

!J-1/4

7~6

U
v

'1U3

2.31<1
2-3/4
4-1'4
3

DE'4
13M3
GNI

3Sl:!

323
6Ul
4BS
6V9

401
1SN7
4H2
6V3
41-(5

N
F
P
G

3·5/B

7G:1
"(H9
7K2
Nal
SAG
7M6

IN
X

peS

J
Po

LJ83
Va2
6N7

I)
I'

6-112
5-7/8

WBI

GX5

II
Po

557
S86

xao

1>3/4

5-5/!!
5-7/8
4·51&
7

'1'55

Z62
7F3
2JO
;W5

6-112

3.1/?

8-1/4

lS·ole

sEo
3X8

4FG
1\(1

&as
SNB
5Z1
SJ6
6T4

c:
[)

E,
(;

!!'

c:
e1

GPS

09/S0I03
10/.'31/03

DJ3
OR:!

11130/0$

11/1 S/t)3
12131103

6.;314

08131/03

01 131 itl4
0'Zf16104
02115104
02129104
05115/04
05/15104
00115104
OM 5/04

AB"!

06130103
07/31/03
08/15103
Oe/15103

eso

GOS

5MO

06130/03

OU!i
Ell-l9
DO',
GW1
8J5

,':I.
~

10/91/02

3
tj-"l/8
4,3/4

TeS

5r5

09130102

~-1f4

7·1/4
5-1/4
7·1f4
8
7-7/6
5.7/a
7-112
6-112

6-1/8
5.1/2
5-516
4-3/4
5-1/2
8

Due

BK2

DZ7
BLO
EES

BMS
BNS
ER'I

BPI
9051
FXO
SR?
BSS
eG8
6TS
BUO
clO4
BW6
ElX4
Cp.3

caB
CY1
(>1(0
OV6
EAl

6·11'2.
5.3/4

EMS
Fig

GC5
GL5
GV3

792

7LO

'1-7/6

111'1S104
,,115/04
02fl510S
05115105
05l15/t)5
oSl1S105
11115105
, 1/15106
02/1MDS
05115105
05115106
07/15106
~0115106

,,115/06
02115/07
00/15107
08/15/07
OZ11s/09
0511510B
l' /1 GibS
05/iSl09
06l15i08
02/1 S/1 0
09/15/1 0

02115/11
08/15/1 ,

02115112

TOlar Tteagury !Vot05... _._ ..... _.- ......... -............

ASCOI\!ililUlad
Total
Outst<:lTldino

Grand TotaL ....... -." ...... _........ _.... -.. _.- ... '-'-'- ............... "".",," 't,.,." " ...

11 . . . "

...... •

14,301.310
17,2.37,943
14,474,673
17,390,900
11.714,397
13,503,890
14,B71,8?,3
13,05B,684
111,320,609
12,231,057
15,057,900
23,S59,OI5
12,731,742
15.072,214
12,806,814
15,144,335
25,S9S,BS2
1:l,120,580
15,056,528
12,052,433
1~,B22,027

13,100,540
15,4~,604

23,562,691
103,(;;70,354
14,665,095
14,172.892
14,674,853
12,573,24 8
13,338,528
H132,243
13,331,937
13,126,'179
1'1,671,070
16,003,270
26,01 1,026
19,852,253
19,55,5,036
22,675,4D2
25,147,960
lB,625,795
28,170,526
29,GG6,9BS
30,775,555
, 2,955,077
17,823,22B

$1,7'11,2gS
14,440,372
1&,925,983
13,346,467
18,OB9,B06
14.37S,7~O

3?,eSS,145
13,B34,754
14.739,S04
2e,5G2,S70
15,002,5aO
15,209,920
28,062,797
15,513,667
18,015,475
27,797,s!J2
7.7.,740,446
22,459,675
~,3S0,129

13,103,678
13,958,18S
25,83B,e 03
1$,583,1)12
27,190,g61
25,08:3,125
14.794,790

Ponlon Held in
UnslriJ)J)od Form

14,278,910
17.197,143
14,474,673
17,3B4,500

7,483.591
13,503,690
14,949,423
13,05B,S94
1'1.309,009
12,23',057
15,05S,~0

19,167,::rZ6
12.731,"'42
15.072,214
17.,733,2 1 4
15,144,335
26.503.492
11,750,780
111,990,868
11,643,793
14,822,027
13,09",4'10
15,4117 ,O04
22,197,463
13,1526,354
14,27 El,6515
14,162,492
14,G74,853

12,55B,D48
13,338,528
13,103,8'13
1:3,331,937
13,097,979
14,671.0'70
16,003,270
25,655,'ZBD
10,783,2B3
18,665,038
22,675,492
2ti,147.980
17,367,385
28,170,526
29,666,986
30,775,555

12.218.677
17,a04,!l28
31,741,296
13,645,272
18,925,383
11,477,967
18,OS9,905
111,389,180
$2,666,145
13,236,974
14,'739,104
28,562,:'170
16.002,1 SO
14.788,120
27.6'72,897
15,508,107
15,?S2,91i1i
27,79'7,652
22,700,446
<:2,399,675
3'1,970,729
12,715,142
13,775,871
25, 130,BO.~
13,563,212
27,'2$,441
25,067,9Z5

Tn!, Month 1

F'oItion Held in
Stfioocd Form

22,4100
40,600
0
6,400
4,230,BOO
0
22,400
0
11,800
0
1.600
4,SS1,7as

0
0
.73,600
0
90,400

0
0
0
0
~O

0
0
0
0
0
0
20,600
0
0
0

0
0

359,800

67,840
1106,640
0
3,200
26,600
1,365,228
'14.000
406,400
10,400
0
14,4()0
0

0
0
0
0
0
48,300

28,~00

()

2B,800
0
0
2,355,740
B9,000

°0

1,256,'100
0
0
0
736,400
la,AOO
0
795,100
0
1,86B,SOO

0
0
0
0

°
°

0
0
0
16.BOO
102,400
0
0
0
30,400
0
0
0
34,400
0
0
0

0
2,400

4,GOO

200
0
0
0
0
0
3,000
800

0
597,780
400
0
400
441,600
189,800
5,4110
752,520
0
40,000
60,000
409,400
3S8,536
1B2,31 Ii
506,000
~O,200

67,520
15,200

0
152.000
0
0
0
e;o,400
, 4,800
0
'",000
0
0
0
0
25,000
0

14.1'61,290

33,500

23,355,109
22,431,59'1
23,436,329
26.635,316
1.. ,389,255

27,304.894
'18,351,509
22,434,594
203,430,569
26,631,316
13,389,255

95,000
4,200
3,000
5,760
4.000
0

1,443,189,280

, ,420,295,632

22,903,44a

!;o(;,a20

2092135 288

1,928 125796

1G4,006 490

11 374.760

27,399.&94

°
0
0
0

TOTAL P.03

NEWS
ornCE OFPUBUCAFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C. - 20220 - (202) 622-2960

FOR IMMEDIATE RELEASE
March 6, 2002

Contact: Public Affairs
(202) 622-2960

UNITED STATES SECRETARY OF THE TREASURY
PAUL O'NEILL
MEDIA ROUNDTABLE
CONFERENCE PALACE
JEDDAH, SAUDI ARABIA

Secretary O'Neill: We've had very interesting and I think successful meetings
beginning yesterday afternoon and continuing into the evening last night. And then we
had a resumption of our meetings this morning at 9:00, finishing just a short while ago
with a visit to the Technical College.
In these meetings I found a wonderful spirit of shared interest and cooperative
spirit about the important issues of the world. We've talked about the world economy at
large; we've talked about the regional economy; we've talked about bi-lateral work
together. We resolved that in the spirit of an agreement signed in 1974 that we will
redouble our effOlis to speak with each other and work with each other on a regular basis,
to talk about all of the issues that engage Saudi Arabia and the United States. I said that
the spirit and feeling has been one of great cooperation and shared interest between our
two peoples.
I was intrigued by the visit to the technical college this morning to see how
students are being prepared to take part in the economy, to provide education on a worldcompetitive basis. And it was really quite fulfilling to see the energy of the professional
staff at the college and how they're approaching this work and the new initiatives they
have coming in the very near future. So I would say to begin with, excellent set of
meetings and conversations and I'm looking to the opportunity this afternoon to meet
with the Crown Prince and then, hopefully to return on a fairly regular basis for a
continuation of our conversation.
PO-I073

For press releases, speeches, public schedules and official biographies, call our 24-fwur fax Yine C!i (202) 622-20.10
$

The Finance Minister and I had the opportunity to engage each other in Japan a
few weeks ago and we both observed that we're having opportunities on a fairly frequent
basis. I think the next one will be in Monterey Mexico; we'll have an opportunity to see
each other again, then at the World BankJIMF meetings. So I think we can see a regular
program going forward where we can speak with each other and talk about the important
issues. And with that 1'd be happy to take your questions.

Question:
I'm sure that Saudi Arabia would share your views in establishing
the trail to terrorist organizations, financial terrorist organizations, but those terrorist
organiza-tions do not have declared address to transfer the money to, and the
organizations you listed, many of them, I'm sure the Saudis here and other countries
abroad also do not share your views that those organizations are terrorist or should be
labeled as terrorist organizations. Is that a matter of discussion? For example if you pick
just one organiza-tion, it's called Holy Land Foundation, in America. That organization is
also known here, is respected here in Saudi Arabia by different business communities and
it is not seen as a terrorist organization, when you see it as a terrorist. How could you
solve this?
Secretary O'Neill:
Okay, well let me start by putting this issue in the broadest
context. At last count there are 189 nations in the world. We think there is substantial
evidence that there are cells of terrorists in many, many nations in the world. Therefore, if
the world's people are going to be protected from terrorists, we need to work on-as you
say, they don't have an address-we need to work on where they are, not where we may
wish they were or where we may think they are, we need to work on finding out where
they are in fact. And they're not holding out a sign saying "We're a terrorist. .. please
come and get us!" What that says to me is that we in the civilized world must work
together to identify people who are terrorist or who are suspected to be terrorist, so that
we can, together, protect ourselves against the threat of the kind of event that occurred in
the United States on September the 11 tho We think that the possibility of terrorist attack is
as great everyplace in the world as it is in the United States and therefore this is not an
issue of the United States or for the United States; this is an issue of and for the world.
To your more specific question about the Holy Land Foundation: we found that
this organization that was operating in the United States was, to the best of our
knowledge, providing financial support for terrorists. I think the fact that you raised it is
important. We're not saying to the world that this is the rest of the world's problem or
that there is one country or five countries or ten countries that are the only places where
terrorists can be. I think the evidence is much to the contrary. And so when we look at
this problem we think about the idea of "we." We don't think about the idea of "us" or
"I" or "they." We think this is a subject for "We of the civilized world" to work on
together.

Question:
Your Excellency, do you have any direct evidence about any
Saudis, Saudi businessmen, that he had financed any ten-orist activities?

Secretary O'Neill: We have made it our practice, when we think that we have
sufficient evidence to register a name, that we register a name. We don't have any
comment to make until we believe the evidence is sufficient that there should be a listing.
And there's of course an opportunity for people who have been listed to say that it's not
true and to offer evidence to refute the charge. We're trying to be as careful as possib Ie
in doing this so that we don't unfairly identify people. But we also feel the weight of
responsibility of being sure that where the evidence seems to be powerful that we don't
leave the subject alone with the hope that it's not true.
I would say that there's another important thing in this, that's a growing trend,
which I think is very important. There was a list that was forthcoming from the UK at
the end of last year. And I will tell you the reason it came forward. Maybe it would have
anyway, but there was a meeting in Washington where I had an opportunity to speak with
the finance minister of the UK and I said to him it would be a very helpful if you were
showing that you were working on the subject as well and if you have through your own
analysis identified people that should be put on the worldwide list this would be a way of
making the point that this is "we"; this is the world that needs to pay attention to this
subject. So a few weeks after our meeting they produced a list which we added to our list.
And last week, when I was on another trip, the people in Spain identified a list which we
also added to our list. And so, we're beginning to see this worldwide process of
cooperation and with individual governments doing their own work to identify people
who might do evil things to the rest of the civilized world.

Question:
Mr. Secretary (inaudible) when you are talking about (inaudible)
exactly or other names?
Secretary O'Neill: No, we had a long list of names, I forgot, I think there was
six. I think six names that were forthcoming from the UK. (Some were IRA.) That's
right. We've had, you know, we're seeing now other nations are adding to the list for
everybody to know about in the world. I think this is a very favorable development.
Question:
In a comment to the listing process of suspects of terrorist
financing, does it bother you that you just adopt a list of some other country and you just
add it to your main list. I understand your list is more stringent as far as criteria of
identifying people suspected of terrorist actions. Does it bother you in any way that they
just keep (inaudible) lists on top of one another?
Secretary O'Neill: Well, I'll tell what we're doing, we're not just putting it on
the computer and sending it out. When we get a list from other governments we ask them
for evidence as other governments have asked us for evidence. And to the limit of our
ability and to the limit of their ability they've been very fOlihcoming in saying that these
are the evidence that we have for these names and we believe that these governments are
operating in good faith and that they are not frivolous designations.

Question:
Are you satisfied with the extensive money laundering measures
already being implemented in Saudi Arabia especially after the recent Hajj and this is the
large season for collection ofIslamic charities? And also this (inaudible).
Secretary O'Neill: First as a general point I would say that the government of
Saudi Arabia has been very good in its cooperation with us on these sUbjects. In a
broader sense I think the whole world is working on the issue of money laundering and
this is a subject that's been going on for a very long time. I think in all civilized nations
there's an alann and a distress about the drug trade and the money laundering that
surrounds the drug trade. I think it's very difficult to separate the flow 0 f funds that are
related to illegal activities like the drug trade and other things that are oppressive to the
better human spirit. And I don't think anyone including the US has designed a system
that captures all of the money laundering activity and all of the drug trade. We don't
really know how to do it. We're learning together how to think about this and how to
learn from each other's ideas about how to do a more refined job of stopping the assault
on not just our adult population but our child population which is subjected to drug usage
and again I think that one of the things important about this trip is to be engaged with the
governments of the nations we're visiting in the Gulf to learn from them what they are
doing and the ideas they have because I have no doubt at all that especially with the
strong traditions in the Gulf that the resentment about creating victims of drugs and
victims of terrorism is as strong here as it is any place in the world.
Question:

Will the US (inaudible) monitoring Islamic charities?

Secretary O'Neill: Well, I don't think so. Let me talk to the issue of charities
again in the broadest sense. In the United States we have a very strong tradition of
charitable giving. Our people give billions of dollars every year to help people who have
nothing or who don't have very much. For education, for healthcare, for housing, for all
the human needs that are unmet. And so we believe very much in charitable giving. We
have a registration system in the United States much like what you have here that
r3quires charitable organizations to let the government know of their existence and then
they get a special a tax fonn.
The last thing we want to do in the world is dampen the spirit of charitable giving.
We think this is a most important human dimension of helping those who don't have
anything. Now, at the same time we want to work -- we are working -- we want to work
with nations around the world with a focus on finding cases where legitimate important
aspects of our society are being used for purposes they weren't intended for. I don't
know of anyone -- I'm sure there's no one here, I guarantee you there's no one in the
United States -- who gives charitable money who wants it to be used for evil purposes.
It's a universal perspective. But we have evidence in our own territory-and you gave
me an example of the Holy Land Foundation-of funds given with the greatest intentions
and benevolence being diverted to support terrorist activity.

We want to make sure that terrorists don't get money. And so wherever we find
that telTorists are giving money through legitimate banking systems, through haw alas,
through whatever device, that all the peoples of the world who believe in the aspirations
of a positive civilization work together to make sure that our legitimate institutions are
not contaminated by terrorists.

Question:
There seems to be a US criteria, HAMAS and Jihad for example,
on what would be considered terrorist organizations and if charities funding them they
would be funding a terrorist organization. Now in the Gulf, not only in Saudi Arabia,
you'll find a lot of people think that HAMAS and Jihad are not terrorist. How do you
resolve that with the governments like if you have evidence that you have a certain
charity in Saudi Arabia in UAE, they are funding HAMAS. How do you resolve that?
Would they agree, do they agree with your criteria?
Secretary O'Neill: Well, again, I think the focus needs to be on working
backward from terrorist activity. The complication is that this is we need to make life so
financially difficult for terrorists that it's very hard for them to do evil things. And in
order to do that our focus needs to be on getting money sources that flow to them. I think
that you don't begin with a general indictment of an institution. You look at where money
is coming from. And ifin tracing money backwards you find that it's coming from a
particular institution I think you don't begin by saying the whole institution is a problem
unless you find that there's knowledge at the top of the institution. But it doesn't mean
that because you think that say, the Catholic Church is a wonderful organization if you
find some little part of it someplace that's providing terrorist financing without the
leadership knowing it, you don't contend the whole institution is bad, but it doesn't keep
you from saying this part of the organization is doing bad things. And so I think we need
to be precise in our language and in our designation and so you know when we've made
some recent designations, we make designations of sub units, not of broad scale units.
We try to put our attack directly where we have knowledge that people knew what they
were doing and provided money to terrorists. That's our objective. So that you know for
example we find in our own banks, when we find money laundering going on in one of
our major banks we don't indict the whole bank. Maybe we don't indict even the bank
even at the small unit level if they are an innocent victim of people who are doing this
illegal activity; we go after the people. But it doesn't keep us from asking the financial
institutions to help us. So we ask the financial institutions please help us. We're asking
the charitable institutions please help us. It's in your interest. It's in our interest together
that terrorists not get money. So it's not that we're wanting to assault the legitimate
institutions of society. We're wanting to work with the legitimate institutions of society
because we believe they share the same goals that we have.
Question:
But what I mean is the recipients. There's a difference in
identifying the recipients. Are they terrorists groups or are they not. And this is like one
issue that there is obviously a difference. How do you resolve that difference?

Secretary O'Neill: Well, I think you can tell a terrorist by the acts they
commit. I mean, if you want to go and look at people being killed in the street, iIU10cent
people being killed in the street, I mean if you went to look at the people who piloted the
airplane, were they terrorists? I would say they were terrorists. And then when you trace
back and find out where they got their money, (inaudible) well, we're trying to find clear
cut cases because it's our purpose, I think, a shared purpose for the world to stamp out
terrorism. That's the shared purpose. It's not to make life miserable for the legitimate
institutions of the world. It's to get at terrorists. And knowingly giving money to
terrorists we think is a terrorist act. If you fund terrorism, if you, if you know someone is
going to go and use your money to create a weapon of mass destruction, that's
complicity. And that's support. And that's unforgivable.
Question:

But do you find the problem, is that a problem that you're facing

now?

Secretary O'Neill: It's not so easy. Ifwe all knew how to do this we would
have finished it yesterday afternoon.
Question :
Your Excellency, you just talked in the beginning about the
cooperation with SAMA about transferring the money to abroad to some institutions.
First of all, we want to know what kind of cooperation can we expect in the future, new
stages that are going to happen.
And if there's any illegal offices still working now from Saudi Arabia, what's the
Saudi government promise you to stop this kind of activity?
Secretary O'Neill: Now first, to the last part of your question, I tell you what, r
have a great deal of confidence that if the governmental people in Saudi Arabia had
knowledge of people that were providing assistance to terrorists that they would stop it
immediately. I don't have any doubt that the people of Saudi Arabia are every bit of as
dedicated to the proposition of stamping out terrorism as any other people in the world. I
have no doubt at all. Going forward, I think we all, I think as I've talked to people
around the world and I have now talked to people from I think in a many different places,
maybe talked to representatives of almost every nation in the world, I find all of them are
dedicated to the proposition of using their own energy and conviction to work on this
problem. And I have to tell you that I wish I could say that I though it would be over
shortly. I don't think so. And I think that there are enough people of ill will and evil
intent out there that the world is going to have to be continuously vigilant. It's not
something that we're going to be able to declare a victory and then we can all go on to
something else. We're going to have to keep working on this problem individually and
together and learning from each other so that we can relieve our peoples everywhere in
the world from the burden of worrying about how their life's going to end tomorrow.

Question:
On the oil initiative, Your Excellency, been announced two days
ago that the postponement of the letters of agreement with the Saudi officials negotiating
in Los Angeles and the consortia, what's your reaction to that? Do you see a link
between (inaudible) and the 11 th of September, 911, or back down because of some
disagreements of other issues?
Secretary O'Neill: You know 1... I'm tempted to ... I guess I will tell you. I
attribute it to bureaucratic process. Which means that when governments work on those
kinds of things the propensity to talk is very strong. And to conclude is not so strong.
But I have a great deal of confidence that the work will go on and will be concluded in a
good time. Again, let me say what I said at the beginning: I found the engagement with
the government people very, very cooperative and strong, and the same on both sides to
commitment of working together and the continuing ongoing strong relationship between
our peoples. In fact even adding the energy to the contact we've had in the sphere of
economics and trade and a sharing of insight and information about economic
development. We've spent some time this morning talking about economic development
in the rest of the world. I think it's really noteworthy. What I said, that I saw the finance
minister in Japan, I think it's very noteworthy that the co-chairs of the conference of
Japan included the United States and Saudi Arabia. This is co-chairs for the Afghan
fundraising initiative. I think this is a really significant thing and it shows that we are
working together not only on a bi-Iateral basis but on things that are important to the
whole world in a broader setting. And I think it's symbolic and practical evidence at the
same time of our strong and ongoing friendship and dedication of working together.
Question:
Can you report to us how much progress you've made in the
fighting terrorism aspect in this visit with the Saudis, like is there something you can
report to us?
Secretary O'Neill: Well, you know I think we made, let me say for myself, I
learned a lot. You know, just listening to the work that's being done and the attitude, and
the explanation of how Islamic banks work is a degree of very helpful knowledge that we
can take back with us and help to explain to the rest of the world how some of these
things work because they are a mystery. To lots of the world you may not appreciate, but
to lots of the world these things are a mystery and I think when you take away the
mystery it's very clear that these are a legitimate ways to do business. So I think this is a
very important thing for us that we came and we leamed a lot. And I think we'll go away
with a strong degree of confidence that we are absolutely together in our detennination
that we individually and together will work on this problem of illegal activities and
particularly the terrorist aspect of flows of funds to people that want to do harm to
innocent people in the world.
I think it's the same in Bahrain and it's the same in Kuwait, and I'm sure we will
find the same tomorrow in the UAE and you know it's what I found in talking about
these same subjects in Japan. You may have a feeling that, because you only see it from
your point of view, the US being interested in this issue only here.

I've had these conversations now and engaged in ones with leaders everyplace in
the world since September the lIth, I mentioned the meeting with the UK finance
minister. It was the first subject on our agenda, with the UK. It was the first subject on
our agenda with the members of the so-called G7 group. You know, including with the
Russians, it's interesting to find we're working with the Russians on these same issues.

Question:

Are the Saudis going to come out with their own list?

Secretary O'Neill: Well I don't know, we will see. Maybe, maybe they will.
think it's less important whether they come up with their own list than it is important by
their own declaration that they will pursue these issues and that they will be a world
leader in assuring that terrorist finance doesn't happen within the boundaries of Saudi
Arabia. Just as we will do our level best to assure in the United States for the benefit of
people other places in the world. As I said earlier I think this is a very important thing.
Terrorist can and do attack anywhere. This is not something for one country. This is
something for the whole world to be concerned about to work on together.
Thank you (inaudible)

Secretary O'Neil:

Thank you

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FOR IMMEDIATE RELEASE
March 6, 2002

JEDDAH, SAUDI ARABIA
JOINT STATEMENT: U.S. -SAUDI ARABIAN ECONOMIC DIALOGUE

Today Dr. Ibrahim aI-Assaf, Minister of Finance and National Economy for the Kingdom
of Saudi Arabia, and Mr. Paul H. O'Neill, Secretary of the United States Department of the
Treasury, held an in-depth dialogue on economic issues of mutual interest, including the global
economic situation. They also discussed the economic reform program being implemented to
support more rapid, broad-based growth in Saudi Arabia. Both parties agreed that today's
dialogue aims at strengthening the long-standing U.S.-Saudi cooperation on economic issues.
This cooperation dates back to the creation of the United States-Saudi Arabian Joint Commission
on Economic Cooperation in 1974, following the visit to the United States of King Fahad,
Custodian of the Two Holy Mosques, when he was Second Deputy Premier and Minister of
Interior. Both parties agreed to continue the dialogue, expressing their intention to meet
annually or more often as circumstances require.

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For Immediate Release
March 7, 2002

TREASURY AND IRS ANNOUNCE INTENTION
TO ISSUE ANTI-DUPLICATION RULES

Today the Treasury Department and the Internal Revenue Service issued Notice 2002-18,
announcing their intention to issue regulations that will prevent a group of corporations filing a
consolidated return from obtaining more than one tax benefit from a single economic loss. The
regulations will apply to dispositions occurring on or after March 7,2002.
"Treasury and the IRS are preparing regulations addressing these loss duplication
transactions, and will issue this guidance in the near future," stated Mark Weinberger, Assistant
Secretary of the Treasury for Tax Policy.

The text a/Notice 2002-18 is attached.

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Part 111- Administrative, Procedural, and Miscellaneous
IRS Announces Regulations will be Issued to Prevent Duplication of Losses
within a Consolidated Group on Dispositions of Member Stock

Notice 2002-18
In Notice 2002-11,2002-7 I.R.S. 526, the Internal Revenue Service announced
its intention to promulgate interim regulations that, prospectively from the date of their
issuance, will require consolidated groups to determine the allowable loss on a sale or
disposition of subsidiary stock under an amended §1.337(d)-2 of the Income Tax
Regulations.
Concurrently with this Notice, the IRS and Treasury are filing with the Federal
Register temporary regulations under §§ 337(d) and 1502 of the Internal Revenue Code
that set forth rules governing a consolidated group's allowable loss, or basis reduction,
on a disposition or deconsolidation of subsidiary stock, as described in Notice 2002-11.
These rules do not disallow stock loss that reflects net operating losses or built-in asset
losses of a subsidiary member.
Nonetheless, the IRS and Treasury believe tHat a consolidated group should not
be able to benefit more than once from one economic loss. Accordingly, the IRS and
Treasury intend to issue regulations that will prevent a consolidated group from
obtaining a tax benefit from both the utilization of a loss from the disposition of stock (or
another asset that reflects the basis of stock) and the utilization of a loss or deduction
with respect to another asset that reflects the same economic loss. For example, where
a member of a group contributes built-in loss assets to another member of the group in
exchange for stock of such member in a transaction in which the basis of such stock is
determined, directly or indirectly, in whole or in part, by reference to the basis of such
assets and the transferor member sells such stock without causing the deconsolidation
of the transferee, the group may benefit from the built-in loss in the contributed assets

more than once. It is expected that the regulations will defer or otherwise limit utilization
of the loss on the stock in such transactions and other transactions that facilitate the
group's utilization of a single loss more than once. Such regulations will apply to
dispositions of stock (or another asset that reflects the basis of stock) occurring on or
after March 7, 2002.
The IRS and Treasury are devoting substantial resources to the development of
the regulations described in this Notice in order to issue the regulations in an
expeditious manner. In addition, the IRS and Treasury are studying the various
approaches that could be implemented to give full effect to § 337(d) and to reflect the
single entity principles of the consolidated return rules.
REQUEST FOR PUBLIC COMMENT
Comments are requested on the scope and substance of the regulations. Direct all written
comments to Internal Revenue Service, Attn: CC:IT A:RU (Notice 2002-18), room 5226, Internal
Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. In the
alternative, comments may be hand delivered Monday through Friday between the hours of 8:00
a.m. and 5:00 p.m. to: CC:ITA:RU (Notice 2002-18), Courier's desk, Internal Revenue Service,
1111 Constitution Avenue, NW, Washington, DC, or submitted electronically to:
Notice.Comments@irscounse1.treas.gov. Please include "Notice 2002-18" in the subject line of
your e-mail comments. All submissions will be open to public inspection.

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F or Immediate Release
March 7, 2002

TREASURY AND IRS RELEASE INTERIM REGULATIONS
IN RESPONSE TO RITE AID DECISION
Today the Treasury Department and the Internal Revenue Service released
temporary and proposed regulations replacing the loss disallowance rules, a portion of
which was invalidated by the Federal Circuit in Rite Aid Corp. v. United States, 255 F.3d
1357 (Fed. Cif. 2001). In Rite Aid, the Federal Circuit held that the duplicated loss rule
of Regulation Section 1.1502-20, which disallows certain losses on sales of stock of a
member of a consolidated group, was an invalid exercise of regulatory authority.
"The regulations addressed by the Court in Rite Aid were developed over a period
of years and reflected extensive consideration of a number of complex issues and factual
situations. The regulations published today are merely a stop-gap measure to provide
interim guidance while we develop a new set of rules," stated Mark Weinberger,
Assistant Secretary of the Treasury for Tax Policy.
Treasury and the IRS are devoting substantial resources to the development of a
comprehensive regime to replace the rules at issue in Rite Aid. In light of the complexity
of the issues, Treasury and the IRS are soliciting commehts.
The text of the regulations is available from the IRS.

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EMBARGOED UNTIL 2:30 P.M.
March 7, 2002

CONTACT:

Office of Financing
202/691-3550

TREASURY OFFERS 13-WEEK AND 26-WEEK BILLS
The Treasury will auction 13-week and 26-week Treasury bills totaling $26,000
million to refund an estimated $25,593 million of publicly held 13-week and 26-week
Treasury bills maturing March 14, 2002, and to raise new cash of approximately $407
million. Also maturing is an estimated $18,000 million of publicly held 4-week
Treasury bills, the disposition of which will be announced March 11, 2002.
The Federal Reserve System holds $11,532 mill~n of the
on March 14, 2002, in the System Open Market Account-(SOMA) .
refunded at the highest discount rate of accepted competitive
auctions or the 4-week Treasury bill auction to be held March
awarded to SOMA will be in addition to the offering amount.

Treasury bills maturing
This amount may be
tenders either in these
12, 2002. Amounts

Up to $1,000 million in noncompetitive bids from Foreign and International
Monetary Authority (FIMA) accounts bidding through the Federal Reserve Bank of New
York will be included within the offering amount of each auction. These
noncompetitive bids will have a limit of.$100 million per account and will be accepted
in the order of smallest to largest, up to the aggregate award limit of $1,000
million.
TreasuryDirect customers have requested that we reinvest their maturing holdings
of approximately $1,049 million into the 13-week bill and $927 million into the 26week bill.

The allocation percentage applied to bids awarded at the highest discount rate
will be rounded up to the next hundredth of a whole percentage point, e.g., 17.13%.
This offering of Treasury securit~~~ 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.
000

Attachment
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TO BE ISSUED MARCH 14, 2002
March 7, 2002
Offering Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $13,000 million
Public Offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $13,000 million
NLP Exclusion Amount . . . . . . . . . . . . . . . . . . . . . . . . $ 5,600 million

$13,000 million
$13,000 million
None

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 LA 7
March 11, 2002
March 14, 2002
September 12, 2002
March 14, 2002

91-day bill
912795 JY 8
March 11, 2002
March 14, 2002
June 13, 2002
December 13, 2001
$21,516 million
$1,000

$1,000

The following rules apply to all securities mentioned above:
Submission of Bids:
Noncompetitive bids:
Accepted in full up to $1 million at the highest discount rate of accepted competitive bids.
Foreign and International Monetary Authority (FIMA) bids: Noncompetitive bids submitted through the Federal Reserve
Banks as agents for FIMA accounts.
Accepted in order of size from smallest to largest with no more than $100
million awarded per accoun·t.
Tne total noncompetitive amount awarded to Federal Reserve Banks as agents for FIMA
accounts will not exceed $l,006~million.
A single bid that would cause the li~it to be exceeded will
be partially accepted in the amount that brings the aggregate award total to the $1,000 million limit.
However,
if there are two or more bids of equal amounts that would cause the limit to be exceeded, each will be prorated
to avoid exceeding the limit.
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 (NLP) 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.
TreasuryDirect customers can use the Pay Direct feature which authorizes a charge to their account of
record at their financial institution on issue date.

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For Immediate Release
March 7, 2002

TREASURY SECRETARY PAUL O'NEILL STATEMENT ON HOUSE PASSAGE OF
THE "JOB CREATION AND WORKER ASSISTANCE ACT"
I applaud the House on today's passage of the "Job Creation and Worker Assistance
Act."
The overwhelming bipartisan support garnered by this proposal is a win for American
workers, their families and the nation.
This legislation - which contains many of the provisions President Bush has been calling
for since last October - will give immediate help to workers whose unemployment benefits will
expire next Monday and it will add needed momentum so that we have a robust economic
recovery.
It offers more than just an unemployment check for those out of work and those hurting,
it offers the hope of a paycheck in the near future.

I urge the Senate to immediately pass this bill and get it to the President's desk for his
signature.

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1

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For Immediate Release
March 8, 2002

TREASURY SECRETARY PAUL O'NEILL STATEMENT ON SENATE PASSAGE OF
THE "JOB CREATION AND WORKER ASSISTANCE ACT"
I applaud the Senate for following the lead of the House and promptly passing the "Job

Creation and Worker Assistance Act," legislation which contains many of the provisions
President Bush has been calling for since last October.
As President Bush said, this bill not only takes care of unemployed workers, it also has
tax relief for employers to create and retain jobs as a major part of it. This legislation will add
momentum so that we have a more robust economic recovery and return to full prosperity.
Make no mistake; this legislation is about jobs. President Bush has insisted that it is not
enough to help people out of work unless we can also help them get back to work. This
legislation will do that - it will speed American back to work and help the unemployed until they
return to work.
This is a great victory for American workers and their families.
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NEWS
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March 8, 2002

CONTACT: BETSY HOLAHAN
202-622-2960

REMARKS BY J. PATRICK CAVE
DEPUTY ASSISTANT SECRETARY
FOR FINANCIAL INSTITUTIONS & GSE POLICY
BEFORE THE
CONSUMER BANKERS ASSOCIATION
PREDATORY LENDING: CAN BEST PRACTICES BE PART OF THE SOLUTION?

Good afternoon and thank you for this opportunity to speak before you today about our
ideas for addressing predatory lending. Assistant Secretary Bair asked me to speak on her
behalf, as she has lost her voice to a bout of laryngitis. Let this demonstrate her personal
commitment to fighting predatory lending, even when her voice will not cooperate.
We should all be proud of the positive developments in mortgage and housing markets
that have taken place during the last decade. During the last decade, the percentage of
Americans who have achieved the dream of home ownership has increased significantly. This
increase in home ownership has, in part, been fueled by the broader availability of mortgagerelated credit to all types of borrowers. This increase in credit availability has been most evident
in the subprime market, which primarily serves borrowers with past credit problems. As noted
recently by Governor Gramlich, from 1993 to 2000, the number of subprime loans to purchase
homes increased from 19,000 to 306,000. The number of subprime home equity loans increased
from 66,000 to 658,000 during that same time period.
Clearly much has been done to improve home ownership opportunities and expand access
to credit. However, as President Bush noted in the State of the Union speech, "broader home
ownership, especially among minorities," remains a priority. While the Administration has set
forth an aggressive program for further increasing home ownership opportunities, we are also
focused on preserving those opportunities by keeping people in their homes and protecting them
from unscrupulous lenders. A key component of that goal is eliminating what has come to be
known as predatory lending.

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not to damage what has generally been a positive development - the expansion ofthe availability
of credit through the sUbprime market. Responsible providers of subprime credit provide an
important source of credit to borrowers with damaged credit histories. The current services of
responsible subpriroe lenders will not be easily replaced by government programs or through the
activities of other lending institutions.
Let me now briefly describe recent and current activities underway in the Administrative
Branch that should be beneficial in combating predatory lending, and some ideas for additional
initiatives that we have been considering at Treasury.

Federal Efforts to Combat Predatory Lending
The Federal government has recently or is currently undertaking a number of efforts
related to disclosures and enforcement that should contribute to a reduction in predatory lending.
First, the Department of Housing and Urban Development (HUD) is taking a new look at
improving mortgage disclosures. In particular, HUD is considering ways to improve disclosures
of mortgage yield spread premiums. High levels of broker compensation are often associated
with predatory lending, and to the extent that improved disclosures can better infonn consumers
about broker compensation, some abusive lending practices could be stopped by consumers.
HUD is also considering ways to address predatory lending within its own mortgage
programs. Secretary Martinez has stated his intention to improve accountability within Federal
Housing Administration loan programs by considering rules that would specify lenders'
responsibilities for the actions of mortgage brokers and appraisers.
Second, the Board of Governors of the Federal Reserve System has recently finalized
revisions to its regulations under the Home Ownership and Equity Protection Act (HOEP A) and
the Home Mortgage Disclosure Act (HMDA). The new HOEPA regulations will expand the
protections available under HOEPA to a broader group of borrowers by reducing the annual
percentage rate threshold for coverage from 10 percent (above the rate on a comparable maturity
Treasury bond) to 8 percent for first·lien mortgages. The Board estimates that this change alone
could triple the amount of first-lien mortgages covered by HOEP A.

Other revisions include: adding fees paid for single premium credit insurance to the
HOEPA points and fees trigger; prohibiting the original lender from refinancing a HOEPA loan
within twelve months of origination unless it is clearly in the borrower's interest; and requiring
lenders to verify and document borrowers' repayment ability.
Third, the Justice Department and the Federal Trade Commission (FTC) have taken
aggressive steps in recent years to crack down on abusive lending. The FTC has undertaken

several high profile cases that could mean broad redress for many consumers. The FTC also
devotes resources to consumer education and the Commission goes on record with its views on
legislative and regulatory proposals in this field. Because many of the practices associated with
predatory lending are already illegal, stronger enforcement is a key component of any solution to
the problem. In addition to stronger enforcement at the Federal level, increased enforcement
activity at the state level is also needed.

Treasury's Ideas for Combating Predatory Lending
While these recent Federal actions should be useful in reducing abusive lending practices
associated with predatory lending, is there more that we can do? At least two areas have stood
out to us - improved consumer education and encouraging greater mortgage industry
responsibility.
We must do more to educate borrowers so they are in a better position to provide a first
line of defense against abusive lending practices. To better prepare consumers for this task, the
Federal government should take a leadership role in educational efforts. My office is working
with others in the Administration and with industry, education, and non-profit groups to enhance
financial literacy. In addition, the Community Development Financial Institutions Fund - also a
part of my office - is increasingly building financial literacy programs into its award-making
process.
There is a lot of great work being done by the private sector to educate consumers about
the mortgage process, the financial responsibilities of home ownership, and general principles of
consumer finance. Members of the Consumer Bankers Association have made important
contributions toward improving financial literacy. We applaud those efforts and hope to
continue working with the financial institutions and consumer groups to improve borrower
education.
The second area we have been considering is what the Federal government can do to
encourage private sector efforts to eliminate abusive lending practices. One area we have been
examining is whether it would be useful for the Federal government to playa role in developing
a national code of best practices that address predatory lending.
Many key players in the prime and subprime mortgage industry - including members of
the Consumer Bankers Association - have implemented best practices or lending guidelines to
address predatory lending. Many of these lending guidelines were developed with active
participation of consumer groups.

Some of the practices addressed in current lending guidelines include: prohibiting the
sale and financing of single premium credit life insurance; limiting or prohibiting loans with
balloon terms or negative amortization features; limiting prepayment penalties and providing
borrowers the option of a loan without a prepayment penalty; requiring full credit bureau
reporting; requiring documentation of a borrower's ability to repay; limiting refinancing to
prevent loan "flipping;" and requiring that borrowers be given fair access to prime credit. Many
such codes also address developing standards for third party relationships; implementing
procedures to mitigate foreclosures; restricting charges for points and fees; and requiring fair and
less burdensome arbitration procedures. We have been taking a detailed look at these lending
guidelines and there appears to be a fair amount of agreement in a number of areas.
Given that there is a fair amount of agreement among individual institutions' best
practices and lending guidelines, it seems that it might be possible to build off of what has
already been implemented to develop a national code of best practices to address predatory
lending. We would see such a code as being voluntary, and hopefully a significant number of
institutions would agree to adopt the code. Institutions that made representations to consumers
that they abided by the national code of best practices, and then failed to do so, could be subject
to enforcement actions by the FTC. Even though such a code of best practices would be
voluntary, the actual code and the dialogue associated with developing the code would be useful
in formulating the Administration's views on the contents of potential Federal legislation. The
process of developing the code could also prove useful in efforts to reach agreement on key
features of any potential Federa1legislation.
The development of a national code of best practices could help promote consistency and
uniformity among state and local predatory lending laws. By setting national standards for good
lending practices, a code of industry best practices might provide a helpful model for the efforts
of state and local leaders in this area.
A code of best practices could also help consumers navigate the complex mortgage
financing process by giving them some assurance that the lender with whom they are dealing
adheres to certain core standards. I am strongly committed to an aggressive program of financial
education to help consumers better protect themselves against abusive lending practices. The
reality is, however, that home financing is exceedingly complex - I would venture to guess that
many of the homeowners in this room didn't fully understand the documents they signed at their
closing - if you even bothered to read them all. Through a well-publicized national code of best
practices, we could empower consumers with the ability to ask their lender a single question "Do
you adhere to the code?" If the lender said, yes, the consumer would know that they would
receive key protections for which there existed a federal enforcement mechanism. If the lender
said no, the consumer could then consider whether they wanted to look elsewhere for credit.
I believe that a national code of best practices for lenders has the potential to reduce
abusive lending practices and to provide real value to consumers. However, in today's mortgage
market lenders are only one part of the mortgage process.

In many cases the first contact a consumer makes in the mortgage process is with a
mortgage broker. Mortgage brokers serve an important function of providing borrowers with a
wide array of loan products and generally increasing credit availability throughout the country.
While the majority of mortgage brokers follow responsible business practices, some abusive
lending practices - such as loan flipping - are often linked to brokers. Regulation and licensing
of mortgage brokers is done to varying degrees at the state level. State law enforcement and
regulatory agencies need to be vigilant in monitoring mortgage brokers and enforcing existing
laws, and consideration of new requirements may be necessary to ensure that a few irresponsible
brokers do not damage the positive role played by mortgage brokers. However, all responsibility
for monitoring mortgage brokers can not rest only with state enforcement and regulatory
agencies. Lenders should also carefully monitor the performance of mortgage brokers that they
do business with to ensure that those brokers are following prescribed lending guidelines and not
engaging in abusive lending practices.
Another piece of the mortgage process that could contribute to combating predatory
lending is the secondary mortgage market. The secondary mortgage market - either through the
housing GSEs or Wall Street investment banks - provides a link between capital market funding
and mortgage finance to consumers. While clearly these finns do not have a direct relationship
to the consumer in the same way as mortgage brokers or lenders, secondary market firms do
have a responsibility to playas good corporate citizens. As good corporate citizens, secondary
mortgage market finDs should seek to work with lenders and mortgage companies that are also
good corporate citizens. In that regard, a national code of code of best practices could provide
important infonnation to secondary market finns. We would hope to significantly expand the
number of lenders adhering to a code of best practices through the active participation of the
secondary mortgage market.
While a code of best practices is typically thought of as a private sector initiative, the
Federal government could playa leadership role in coordinating and encouraging the
development ofa national code of best practices. In my view, the key components of that
leadership role would be: evaluating best practices and lending guidelines that are already in
place; considering the views of all stakeholders - brokers, lenders, consumer groups, secondary
market participants, and government regulators; and working with stakeholders to develop a
national code of best practices that could be broadly adopted.
Some stakeholders have raised concerns over the concept of a national code of best
practices. There is concern that code will not provide consumers with strong enough protection
and that the code will take pressure off oflegislative efforts. We have started to evaluate these
issues more closely, and in the coming weeks I hope to further consider what role if any the
Federal government should take in encouraging the development of a national code of best
practices. The goal of this potential initiative would be to strengthen consumer protections by
building upon the work already done by a number of lenders in collaboration with consumer
groups. In evaluating the merits of a national code, the key issue is whether there would be value
added to consumers.

I would greatly appreciate the thoughts and input of the members of this organization on
developing a national code of best practices and other steps the Federal government can take to
combat predatory lending. There is a tremendous amount of expertise in this room, and I look
forward to the opportunity to work with you in tackling this important issue.
In closing, I would like to thank the Consumer Bankers Association for inviting me to

speak here today.
-30-

NEWS
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Friday, March 08, 2002

For Immediate Release

Statement by Rob Nichols, Deputy Assistant Secretary for Public Affairs

The Treasury Department today released the following statement to make clear wire reports:
"The Secretary was offering his personal expectations of future oil prices based on his own
view of the market. The U.S. policy is that market forces should detennine oil prices."
-30-

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NEWS
ornCE OFPUBUCAFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C. - 20220 - (202) 622-2960

EMBARGOED UNTIL 9: 15 A.M. EST
March 12, 2002

Contact: Public Affairs
(202) 622-2960

RElVIARKS ON THE PATRIOT ACT OF
TREASURY UNDER SECRETARY FOR ENFORCEMENT
JIMMY GURULE
BEFORE THE
BANKERS ASSOCIATION FOR FINANCE AND TRADE

Introduction:
I am sure that many of you here today experienced emotions similar to mine yesterday
as the nation took time to reflect on the six month anniversary of the September 11 Ih tragedy.
I felt a profound sadness and also anger. I still have a lingering disbelief that what happened
that clear day in September actually occurred here on American soil. As I have taken time to
reflect on what happened, my resolve has been strengthened to ensure that the Treasury
Department is doing everything we can to prevent another large scale attack from occurring
on our soil. At the Treasury Department this preventative mindset has translated into taking
steps to shut down the flow of funds into the coffers ofthe terrorists - to make it difficult for
them to underwrite their training camps, purchase firearms and explosives, and to send
money abroad to fund future attacks. The new PATRIOT Act regulations, when fully
implemented, will playa critical role in this anti -terrorist financing strategy.
Background and Purpose:

Let me speak for a moment about the background and purpose of the PATRIOT Act.
When President Bush delivered his memorable speech to ajoint session of Congress and the
nation last September 20 th there was no mistaking the President's words: the United States
would combat terrorism with every tool, every tactic at our disposal. Just over a month later
the United States Congress backed up the President's words with action when they
overwhelmingly passed, and the President signed, what is known today as the USA
PATRIOT Act of 200 1. Although the Act is an omnibus piece of legislation containing many
important provisions, the true purpose of the legislation is clear - to unite and strengthen
America by providing the tools needed to defeat terrorism. The PATRIOT Act is a bipartisan
manifestation of the President's promise at the conclusion of that same speech in which he
eloquently stated: " ... we will meet violence with patient justice, assured of the rightness of
our cause and confident of the victories to come.
II

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-"

Today I will address just a pOliion of the PATRIOT Act, specifically Title III of the
overall package which is also known as the International Money Laundering Abatement and
Anti-Terrorist Financing Act of2001 (MLAA for short). Many of the sections of this MLAA
will directly affect your industry and it is important that all of us - law enforcement,
regulators, as well as the providers of financial services - all understand what this law
requires of us.
The concepts in the law were derived from accepted international standards, the
deliberations of various congressional committees, and in the archives of legislative reports
and proposals that surfaced well before the events of September 11 tho The final product, as
passed by Congress in October, is one of the most significant anti-money laundering statutes
since the original Bank Secrecy Act first became law in 1970.
Let me also add at the outset of my remarks that I know there is considerable interest
from the private sector in the regulations slated to roll out from the Department in the corning
months. I appreciate your interest in understanding how the PATRIOT Act will affect your
businesses and what you and your companies can do to help. Although I will be discussing
some of these new provisions today in general terms, it would be inappropriate to comment
extensively on these regulations before the Department completes them. I can assure you,
however, that we will continue consulting closely with the private sector and other
government agencies during the drafting process.

Overview of Key Provisions:
Among the many provisions of the MLAA, I would like to highlight some of its key
elements.

•

Section 311 - Special Measures - This is a hallmark provision of the MLAA affording.
the Secretary of the Treasury a graduated set of five special measures that can be used to
combat money laundering. Under this provision, domestic financial institutions,
including the U.S. based operations of foreign financial institutions, must comply with the
specific measure or measures if the Secretary determines that a foreign jurisdiction, a
foreign financial institution, a certain international transaction or a type of account
constitutes what is called a "primary money laundering concern." Prior to enactment of
this provision, it was not clear that the Secretary had the full authority necessary to
protect the U.S. financial system from being abused by money launderers operating from
or through international financial crime havens. Previously, we had only two options
available. First, we could issue advisories to U.S. banks about specific jurisdictions or
transactions. Our second option was a more extreme measure - to issue sanctions
authorized by the International Emergency Economic Powers Act (IEEPA). Now, we
have a graduated set of interim measures that range from added reporting requirements to
requiring the termination of certain accounts. All of these measures can apply to a very
broad definition of financial institutions which provides the Secretary of the Treasury
with sweeping discretionary power which we intend to use carefully and yet forcefully for
its intended objective.

•

Section 312 - Special Due Diligence - This key section calls for special due diligence on
the part of all financial institutions for correspondent accounts and private banking
accounts involving foreign persons, entities, and banks. It requires all financial
institutions to either establish or enhance those due diligence procedures that will be able
to detect and report money laundering through these accounts for all foreign private
banking customers and international correspondent accounts. It also necessitates
enhanced due diligence by financial institutions with respect to correspondent accounts
maintained for offshore banks or for foreign banks that are located in certain designated
foreign countries, such as those on the Financial Action Task Force's list of noncooperative jurisdictions in the global fight against money laundering. Enhanced due
diligence is likewise required for private banking accounts maintained for foreign
political figures, including their families and close associates. We anticipate that we will
meet our statutory deadline of issuing a proposed rule by April 24.

•

Section 314 - Cooperative Efforts Communication and cooperation are critical to
success in the fight against money laundering and terrorist financing. Section 314 of the
Act bolsters the information exchange regime by enhancing two key channels for sharing
information: (1) information exchange between the government and financial
institutions; and (2) information exchange among financial institutions. First, in a
proposed rule, we seek to create a communication network to link federal law
enforcement with financial institutions so that vital information relating to suspected
terrorists and money launderers can be exchanged quickly and without compromising
pending investigations. Under the proposal, federal law enforcement will have the
ability to locate accounts of, and transactions conduct by, suspected terrorist or money
launderers by providing their names and identifying information to FinCEN, which will
then blast that information, both electronically and by fax, to financial institutions so that
a check of accounts and transactions can made. If matches are found, law enforcement
can then follow up with the financial instit]..ltion directly. Second, in a rule effective
immediately, financial institutions may share information amongst themselves related to
suspected terrorists or money launderers. Financial institutions wishing to share such
information must provide FinCEN with a yearly, blanket certification that they will
protect information shared. Both information sharing provisions represent bold, new
steps in our efforts to utilize existing resources to eliminate terrorism and money
laundering.

•

Section 326 - Verification and Identification - A pivotal point in any counter money
laundering strategy occurs with the initial opening of an account. This section of the
MLAA confers upon the Secretary of the Treasury, in conjunction with the bank
regulators and the SEC, the authority to issue regulations setting minimum standards for
customer identification at the time of account-opening. Once adopted, this regulation will
encompass all accounts, including both foreign persons and U.S. citizens. In addition the
statute mandates that it will apply to all financial institutions as defined by the Bank
Secrecy Act unless they are specifically exempted. It will call for reasonable procedures
to verify the identity of the customer opening the account, the maintenance of records
used to identify the customer, and consultation of a government provided list of known or
suspected terrorists.

•

I know for many of you this type of explanation raises more questions than it answers.
Understandably you are interested in knowing what exactly "reasonable procedures"
means in the real world. As I mentioned earlier in my remarks, the Department of
Treasury will continue to consult with private industry as the regulation drafting process
continues. The input and expertise of the private sector calIDot be underestimated as we
continue to assemble available information to make the regulations as effective as
possible.

•

Section 352 - Anti-Monev Laundering Programs - While many financial institutions
have already instituted their own anti-money laundering programs, section 352 of the
MLAA mandates that each financial institution establish a basic anti-money laundering
program. Such programs must include: internal policies, procedures and controls; a
designated compliance officer; training programs for employees; and, independent audits
to test the implementation of the anti-money laundering program. Furthermore, the
Secretary of the Treasury is authorized to prescribe, in consultation with the appropriate
functional supervisor, additional minimum standards for an anti-money laundering
program. The significance of section 352 lies in its broad application to all financial
institutions described in the Bank Secrecy Act, many of which have not previously been
subject to anti-money laundering regulation.

I have highlighted what I consider to be some of the more salient provisions, soon to
come into force, of the MLAA or Title III of the P ATRlOT Act. Certain other provisions of
t
the Act are already effective. As of last December 26 \ financial institutions operating in the
United States were required to sever correspondent banking relationships with foreign shell
banks - those foreign banks that have no known physical presence. As I am certain you all
are aware, we are now reviewing public comments received on the proposed rule. We hope
to issue a final rule shortly. Similarly, the record-keeping requirements for correspondent
,accounts maintained by foreign banks also took effect last December. Weare also
considering the many comments raised in connection with that proposed rule. Furthermore,
final regulations requiring broker-dealers to file suspicious activity reports, or SARS, with
Treasury's FinCEN are to be published by July 1st.

Update on Implementation of the PATRIOT Act:
Let me also take a moment to comment on the status of the implementation of the
Act. Treasury has a hardworking and loyal team committed to this process and I am pleased
to inform you that we have received the full support of the Administration in our eff0l1s. In
fact, I am joined here today by one of Treasury's key players with respect to the
implementation process -- Deputy Assistant Secretary for Money Laundering Julie Myers.
We currently have about twenty working groups for the different regulatory projects required
by the PATRIOT Act, with the Federal Reserve Board involved in about fifteen of these
groups.

As you are probably well aware, the implementation of the PATRIOT Act involves
close inter- agency and intra- agency coordination. The Department of the Treasury has
reached out both government wide and to the private sector during the drafting process. We
have been pleased with the interagency response to getting this job done and in getting it
done right.
We are also greatly encouraged by the response of the private sector and industry
groups. Regarding several key provisions of the law we not only received positive comments
about the legislation, but also helpful insights into implementation issues. I cannot
underestimate the important value added to the implementation process when others take time
to educate us on their particular industry and its practices and procedures. Any attempt to
craft regulations in a vacuum is a foolhardy endeavor and we are particularly thankful for the
creative and constructive suggestions from those of you who will be affected by the
regulations. These contributions allow us to identify issues early and discover solutions
expeditiousl y.
Before I conclude, let me briefly summarize the key principals that are guiding the
Treasury Department's implementation of the Act. First, we want to prevent regulatory
arbitrage in that people should not be able to shift from one type of financial institution to
another in order to avoid a regulatory scheme or anti-money laundering control. Second, we
will prioritize the principles of enhanced coordination and information flow. Third, we will
respect important privacy interests. Fourth, we will require only the degree of repOliing that
results in action by the government - information that is not intended to be used will not be
requested. Fifth and finally, we will protect our financial system by using this Act's authority
to systematically eliminate known risks as well as to act in response to any specific threat that
mayanse.
Thank you again for your interest in the work of the Trea~ury Department. I look
forward to continued dialogue and cooperation in the weeks and months ahead.
-30-

OFFICE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C .• 20220. (202) 622-2960

FOR IMMEDIATE RELEASE
March 8, 2002

Contact: Public Affairs
(202) 622-2960

SECRETARY OF THE TREASURY PAUL O'NEILL
DUBAI BUSINESS CHANNEL INTERVIEW
EMIRATES TOWERS HOTEL, DUBAI
MARCH 8TH 2002 - 7 A.M.
INTERVIEWER - SIMON MARS

Interviewer: Thank you for coming in and joining us.
Question: Are you satisfied by the amount of support you are being given by the
Gulf states in your campaign against money laundering?
Answer: The support is excellent. It's really gratifying to have been here for a
week now and to have had talks with so many people. I have found without
exception that we're united in our goal to defeat terrorism and I know that we've
had support of the initiative that we found here without failure, so it's been really
a wonderful week. I really enjoyed being here. I've been in the Gulf in the past in Dubai and Bahrain, but I had not been to Saudi Arabia or Kuwait before, and
so I really found that very satisfying, to meet people.
Question: Do you think any terrorist money is still being funneled through the
UAE at the moment, or the Gulf, or do you think it has dried up?
Answer: I see this on a bigger world stage. For me this is not an issue about the
Gulf. This is an issue about a hundred and eighty nine countries around the
world banding together with a determination that we're going to defeat terrorism
so that people everywhere in the world are able to live without fear in their lives
every day. So I don't see this in terms of one country, or a few countries, or a
particular destination, as you suggest the Gulf states. We're all in this together.

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Question: If we are all in this together, why did your department or the
administration help derail the Financial Action Taskforce - the OECD's Financial
Action Taskforce last February the 17th? You announced at the G7 Summit
you're putting a multilateral agreement under review, and if it is a global
campaign, did it just start after September eleventh? I mean, why did you stop
before?
Answer: No, I don't think so at all. I think maybe you're talking about my concern
about what was being done with the so-called tax-haven legislation. This is a
different issue. But if you're interested in that, let me say a word about it.
There's a school of thought in the world that was reflected in some of the work
that was being done that all countries should have the same tax regime. I don't
think that's right. I think sovereign nations should have an ability to have their
own tax regime, and if one country wants to have no tax, and other countries
have relatively high tax, I think that's the prerogative of the people, of the
independent, individual countries themselves.
When I raised the issue about what's going on with this so-called taxharmonization, I think people wondered why. To me it's a fairly straightforward
proposition of sovereignty. In the broader context of money laundering -- which
is I think it's the face for illegal, illicit, evil kinds of activity, and it's been going on
for a long time -- we've been prosecuting a war against drug lords and doing it by
trying to find connections through financial systems, and for me, in a way, the evil
that's at the drug trade is connected to the evil of the terrorism in a broader
sense. And so what I see going forward is a renewed, determined, connected
effort around the world to interdict money that's connected to evil doers, whether
it's drugs, or assaults, or assassinations, and I see around the world a real
conviction that we can do this.
Question: Why then again, on November 27th last year, did you announce that
you've an agreement with the Cayman Islands which, despite what you say, is
not just about plain tax (inaudible), that this concerns money laundering and
terrorist funds being channeled through there. They didn't have to tighten their
banking or tax laws until 2004. That's at odds with your previous statement.
Answer: Not at all. We set out to find agreements with a/l countries around the
world that we don't have specific agreements with, and there haven't been any
done for years and years. Last year in testimony before the Congress, I
promised them in one year that we would sign agreements with at least fifty
percent of the represented accounts in the world, and we're going to easily make
that part. Cayman Islands was part of that. There are procedures for how
quickly these things can be done, and it takes a year and a half or so in their
case. But I think the agreement is already beginning to be in practical effect.
(interruption). Pardon me.

Question: You're (inaudible) at the wrong time (inaudible) present situation.
Answer: Well, you know, the world is a few thousand years old, and as much
as I would like to change it tomorrow, I find that it's not within my power to do
everything I would like to do overnight.
Question: And it's got nothing at all to do with the fact that Enron have some 874
subsidiaries like (inaudible) ...
Answer: You know we've signed an agreement with four jurisdictions now and
you will see we're going to sign some more. Within the next couple of months,
we're going to be relentless about this, and this doesn't have anything to do with
anything else except pursuing and prosecuting evil people.
Question: OK. Last time I'm turning to this. According to the FT last year, you
said that banks having to report any cash deposits over ten thousand dollars
imposed a significant cost on society. Do you still subscribe to that view?
Answer: Well, I didn't say that. I didn't say that, but you know, I've become
acquainted with mis-assertions about what I said. It's one of the reasons I
welcome doing television: what I say is what I say and as long as it doesn't get
edited, then I'm very (inaudible).
My belief is this: that we should seek out and identify and confiscate money of
terrorist organizations, and what they were saying is something that is quite
important. In the U.S. we have a provision that requires banks to report
transactions of over ten thousand dollars. And when I began having
responsibilities for these matters I asked the question how many people have we
identified as a result of the reporting rule for ten thousand dollars. At first I
discovered that with all these reports that cost seventeen million dollars a year
for the Treasury people to convert the reported information into computer data so
tl1at could be used, and when I asked the question, how many people have we
caught because of this, no one could tell me a single case. I'm one who believes
tax payers deserve to get value for their money, and I want to stop every one of
these dollars from drug traders and terror, and so I'm not comfortable at all with
having a process in place that appears to do something when it doesn't do
anything. And so I'm questioning every aspect of what we're doing, because I'm
going to make sure we accomplish our purpose, and I want taxpayers to get
value for their money.
Question: Are you going to support Senator Levin's money laundering
abatement act then, because he said he has reports of .,. your domestic banking
sector's a gateway to an entry of massive criminal sums to the US. He said that
laundering is around a five hundred billion dollar a year US industry, so are you
working with him?

Answer: Yes, I think we are working with him, and it was when I testified before
his committee last June that I made this assertion, much to his amazement I
must tell you, that I would do something that has never been done - that I would
work with my people and we would cause at least fifty percent of these
questionable accounts to be covered by treaties, and it was a great pleasure to
call them up and tell them about the Cayman Islands and about Bermuda and the
others that we have signed, because I intended to do what I said, and I said,
"Yes, I'm working very closely with them."
Question: OK. Moving on. How do you assess the current state of the U.S.
economy? Are you happy?
Answer: Yes, I must say I'm not surprised by it. Last fall when everyone seemed
to be so certain that we were going to have a negative GOP growth in the fourth
quarter, it didn't look like that to me. From the people that I talked to around the
country I was pretty convinced that there was a possibility that we could be
positive for the fourth quarter. As you know it's turned out that not only were we
positive, but that we were positive one point four percent, and I saw in the
overnight report that productivity numbers have not been revised so that we have
five point two percent productivity increase for the fourth quarter, which is a mark
of an economy that's moving quite quickly. So yes, I'm pleased with the
movement back to a significant positive growth rate that we're seeing in the U.S.
economy, and I expect it to continue.
Question: Are you at all worried about the implications of the tariff that's been
imposed on steel by the US. That the rest of the world might decide to retaliate?
It could cause a global trade war. And the implications on the global economy?
Answer: As people look at the details of what the President has decided to do,
they will have a second thought as they look at how this will work, because
(interruption). No I don't think so at all. I think that other people, when they see
what the President said is this: we've got an industry that's got thirty one
companies in bankruptcy ...
Interviewer - genius - capitalism ...
Answer: That's a troubled industry. But with that troubled industry, the President
said "all right." For example for slag product he said we're going to draw a line
on the level of imports that can come in at the level that came in the year 2000.
And if the imports go above that level, then there will be an imposition of a tariff.
So it's not really saying there has to be a cut-back. The level that's been
suggested for the next three years is above the current level. The first reaction
that I've seen on television as I've been traveling, and having an opportunity to
look at the television reports at night - it seems to me are, not unexpectedly, the
kind of quick reaction you get before people study the details. I think that they've
studied the details and maybe we'll have some calming on this issue.

It includes a doubling of the level of money that we were spending on what we've
come to call homeland security; and it delivers on the President's promise for
things like big increases in education spending. And so, as I've had the same
question you've given me from Congress, I've said to them, "What is it you would
like to stop doing?" You know, and I must say I'm getting a deafening silence
from the members of Congress. They don't want to say that we shouldn't pursue
terrorists, and they don't want to say that we shouldn't have better homeland
security, and they don't want to say that we shouldn't have better education for
our children.
We're going to pay for it by having economic growth that will return us to
surpluses at the federalleve!. The way to develop surpluses in a federal budget
is to have a fast growing economy - not to take more money away from the
people, who are already paying an historically high level of their income to the
federal government. Even with the tax reductions that were made last year, the
American people are going to be paying nineteen percent of all of their income to
the federal government, and since 1945, the average level has been eighteen
percent. So we're asking them to do more already. As we see this economic
improvement take place, we're going to return to surpluses at the federal level,
and I think this is the correct way of doing it, not by diminishing the money we
need to spend on priorities, and not by raising taxes, which will kill the economic
boom.
Interviewer: Mr. Secretary, thank you very much.
END

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Contact:

FOR IMMEDIATE RELEASE
March 11, 2002

Rob Nichols
202-622-2910

TREASURY SECRETARY PAUL O'NEILL TO DISCUSS PROGRESS ON THE WAR
AGAINST TERRORIST FINANCING
What: Treasury Secretary Paul O'Neill will update the press on the
financial war against terrorism
Where: The Treasury Department
The Diplomatic Reception Room, 3rd Floor
(Please enter at the 15th Street Entrance)
When: Monday, March 11, 2002
2:00pm
Contact: The room will be available for pre-set up at 1:00 p.m.
News media without Treasury or White House press crerlentials
planEing to attend should cOIltac~ FJblic AffdJ.r:J iJ.t (2D2) 622-29CO
by 11:00 a.m. with the following information: name, social
security number and date of birth. This information may also be
faxed to (202) 622-1999.

-30-

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FOR IMMEDIATE RELEASE
March 11,2002

Contact: Public Affairs
(202) 622-2960

AN ECONOMIC GROWTH AGENDA AT THE IDB
BY
JOHN B. TAYLOR
UNDER SECRETARY FOR INTERNATIONAL AFFAIRS
UNITED STATES TREASURY
AT THE BOARD OF GOVERNORS OF THE
INTER-AMERICAN DEVELOPMENT BANK AND THE
INTER-AMERICAN INVESTMENT CORPORATION
FORT ALEZA, BRAZIL

1. President Iglesias, fellow Governors, ladies and gentlemen: I would like to begin by thanking
Brazil and Minister Tavares for hosting this meeting in beautiful Fortaleza.
2. This is my first Board of Governors meeting. At the time of last year's meeting I was still
awaiting confirmation of my appointment by the United States Senate. I was very
disappointed that I could not attend last year. But I have been looking forward to attending
this year's meeting and I am happy to be here today.
3. This past year has been a challenging one for all of us. Our attention has been drawn to
important new tasks, such as combating the financing of terrorism and restoring economic
growth after last September's terrorist attacks. At the same time we continued to deal with
the difficult problems of economic instability, slow growth, and reduced capital flows in the
regIOn.
4. Some say that the problems of this past year have diverted attention from the region and have
eroded the commitment of the United States to increased trade, free-markets, and democracy
in the hemisphere. Nothing could be further from the truth. 'vVe are neighbors and friends.
Geography, culture, history, and the strong bonds of mutual economic and security interests
tie the Americas together. The United States remains committed to this friendship.

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5. The Inter-American Development Bank (IDB) is an essential part of this friendship-playina
a role in economic development in the region. Today I would like to discuss how we should;:'
build on the successes of the IDB to make the hemisphere a better neighborhood-one
characterized by more economic growth and less poverty.

Productivity Growth il1 the Hemisphere
6. The place to begin talking about economic development is with productivity growth. Poverty
reduction and higher standards of living cannot occur without productivity growth.
Productivity is simply the amount of goods and services a worker can produce in a particular
period of time. The higher productivity is in a country or a region, the higher income per
capita is in that country or region. You can see that by comparing the richer and the poorer
countries in our region.
7. For the countries of Latin America as a whole the 1990s were better than the 1980s in terms
of productivity growth, reflecting many economic reforms, especially in the macroeconomic
areas. Productivity growth was 0.7 percent per year in the region as a whole in the 1990s
after averaging below zero in the 1980s. That is an improvement, of course, but I believe
there is room for much more improvement.
8. During the period that productivity growth was 0.7 percent in Latin America, it was 1.7
percent in the developed countries, and 2.7 percent in the East Asian countries. That 1
percent or 2 percent productivity difference could have made a huge difference in living
standards in the region. Productivity growth in the United States is projected to be at least 2
percent in the next few years. Productivity growth in Latin America should be higher than 2
percent-or more than triple what it was in the 1990s.
9. While productivity is not a new thing, experience and research during the recent years have
taught us many new things about productivity. As a matter of accounting, productivity will
grow if capital-including human capital-per worker grows or if technology improves. The
reason why I think that the productivity potential is so much higher in the region is that there
is so much room to increase capital-including human capital-and to adopt cutting edge
technology in use around the world today.
10. So, when evaluating a loan or a grant the IDB should look at its effect on productivity. That
will lead to activities that will raise living standards and reduce poverty. I was very glad to
see the emphasis placed on productivity growth in the recent report of the IDB, The Business
of Growth. Secretary Paul O'Neill gave his strong endorsement of that report when he spoke
at the IDB last fall. Using the latest research and data, the report demonstrates that more
investment and more education in the region will increase productivity.
11. The report also shows that an improved business climate-a more consistent rule of law,
better control of corruption, fewer obstacles to starting a business-will raise productivity.
And the report shows that there is room for improvement.

12. For example, in Canada it takes 2 "procedures" to start up a business; in the United States it
takes 4 and in Latin America it takes 12. And the report points out important success stories
such as the Oportunidades, formerly known as Progresa, program in Mexico and the Balsa
Escola program here in Brazil which provide funds to families with low incomes whose
children attend school. I am pleased that the IDB is using this model to develop educational
programs in other countries.

Measurable Results
13. To achieve success in any endeavor it is necessary to have measurable results. That certainly
holds true in our endeavor to raise productivity growth. We must be sure that the activities of
the IDB actually do the things they are supposed to do. While nearly everyone welcomes the
recent increases in funding for education by the IDB, we should not be satisfied with the
funding alone. We must look at the outputs. Is enrollment increasing? Are more children
graduating? Are literacy rates rising? Close monitoring is needed to assure that tangible,
measurable results are being obtained. It is not enough to look at input. It is output that
counts.
14. It is good that the IDB has already started strengthening the independent evaluation office-a
process that has prompted candid debates about results. But it is not enough to have a
separate and independent evaluation unit. Quality has to be built into every project at the
early design stage, before it is presented to the Board of Directors, with clearly stated outputbased objectives. I understand that during this past year, the independent evaluation office
reviewed every loan proposal to see if it contained adequate indicators to measure results. I
also understand that the review shows a broad need for improvement. This is a special
challenge for the line managers in their day-to-day operations.
15. Some of you may know that the United States has proposed a large 18 percent increase in
funding for the World Bank's International Development Association (IDA) in the current
replenishment. We have also proposed that the year-to-year increments in this replenishment
be tied to measurable results. Although an FSO replenishment is not immediate, the approach
we are now proposing for IDA should eventually apply to FSO. If resources can be shown to
be delivering effective economic development, the United States will be ready to make
meaningful financial commitments.

Strengthening the Private Sector
16. Economic development will falter and fail without a strong private sector. Without a
transparent economic environment based on the rule of law, private investment simply will
not happen. This is especially important for small and medium sized enterprises, since
opaque regulatory and legal environments create insurmountable barriers to entry. These
barriers must be removed if the region is to grow rapidly.

17. The IDB and the other development banks can do more to promote private sector
development. This will include giving practical investment climate assessments and
providing more loans to small businesses. Work on improving transparency and governance
in each country remains the biggest challenge.
18. We further need to remove the continuing obstacles to hemispheric integration. The United
States is committed to the Free Trade Area of the Americas so that all the countries of the
region can benefit from the free flow of goods and services. We know that this process will
not be easy. The IDB is doing important work on trade capacity building.
19. The recent report by the IDB External Advisory Group gave particular attention to the private
sector operations. I share the view expressed in that report that the IDB needs to strengthen
risk management and evaluation functions for its private sector operations and for the IDB as
a whole.
20.

I would also like to comment on the work of the Multilateral Investment Fund in
strengthening the environment for the private sector in Latin America. Its investment and
technical assistance for Caja Los Andes in Bolivia, for example, enabled that institution to
increase its portfolio seven fold, improve the efficiency of credit officers, and transform itself
from an NGO to a full fledged formal financial institution. The MIF realized an internal rate
of return of 17.9% when it exited Caja Los Andes in 2001, demonstrating that small business
finance can be profitable.

21. We were pleased to support the extension of the MIF for 5 years so it can fully utilize its
existing resources. The MIF and the IDB are focusing on reducing the transaction costs of
remittances to Latin America and the Caribbean-a flow that is estimated to have grown to
$23 billion last year.

The Importance of Grants
22. The IDB needs to look at grants as an important development tool. President Bush proposed
increasing the share of development banle support for poor countries that is in the form of
performance-based grants. Grants are appropriate for projects that fail to generate the
revenues needed to service loans. It does not make sense, for example, to finance disease
interventions such as HIV I AIDS with loans. Education support can also be in the fonn of
grants. There is already agreement that a larger share of support from IDA and from the
African Development Fund should be in the form of grants, though there is debate about how
large that share should be.
23. How does the IDB fit into President Bush's grants proposal? Again there is currently no
FSO replenishment underway. However, the IDB could use a portion of resources r~su1ting
from emergency lending to provide grants. If grant programs can be funded from thIS source,
it will also take some pressure off the FSO, leaving added resources for the very poorest
countries.

Conclusion
24. I have noted a number of difficult obstacles to economic growth in the region today. I have
also noted that it is possible to remove these obstacles and achieve the goal of substantially
higher economic growth. I am confident that the goal can be met successfully in the years
ahead, and the IDB can play an important role in achieving this goal. Of course, we as
shareholders must continue to ask the tough questions about productivity and measurable
results. As President Iglesias has said, the goal of economic growth is the "business of the
Inter-American Development Bank," and we look forward to working with him on this goal
in the future.

NEWS
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For Immediate Release
March 11,2002

Contact:

Michele Davis
(202) 622-2920

REMARKS BY TREASURY SECRETARY PAUL O'NEILL ON NEW U.S.-SAUDI
ARABIA TERRORIST FINANCING DESIGNATIONS
Today, on the six month anniversary of the September 11 attacks, we take a new step in
the war on terrorist financing, making our first joint designation of a financial supporter of
terrorism. Today we are blocking the accounts of the Somalia and Bosnia-Herzegovina branches
of the Saudi Arabia-based Al-Haramain Islamic Foundation. While the Saudi headquarters for
this private charitable entity is dedicated to promoting Islamic teachings, we and our Saudi
Arabian allies have determined that the Somalia and Bosnia-Herzegovina branches of AlHaramain have been engaged in supporting terrorist activities and terrorist organizations such as
al-Qaida, AlAI (al-Itihaad al-Islamiya), and others.
Few deceits are more reprehensible than the act of collecting charity from wellintentioned donors, and then diverting those funds to support hatred and cruelty. As I said during
my visit to the Gulf, misusing charity funds to support telTorism harms the people who gave the
donation, harms the people who should have received it and is dangerous to us all. Organizations
that pervert the name of charity are an affront to us all, and we will find them, expose them, and
shut them down.
Today the Saudi government is joining us in this blocking action. We have had
significant co-operation in blocking accounts of those named by the United States, and our
European allies have made designations of their own. As the first joint blocking we've
undertaken, today's action is a sign of the growing strength ofthe anti-terror coalition,
appropriate to mark the six month anniversary of the September 11 attacks.
I just returned from a visit to the Persian Gulf, where I had the opportunity to meet with
King Fahd and Crown Prince Abdullah, others in the Saudi govermnent, and the leadership in
Bahrain, Kuwait and the UAE. Throughout the region I encountered a great recognition that the
September attacks weren't only an attack on the United States, but were an attack on the
civilized world. The governments there, like elsewhere in the world, are eager to cut off
terrorists' access to funds, wherever we may find them. We all agree that we have a
responsibility to safeguard charities, so that we can assure people giving to charities that their
donations will be used only for their intended good purposes.
This joint designation marks a new level of coordination in the international cooperation
that has characterized the fight against international terrorism to date.

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I thank the Saudi leadership for taking this step with us, and I hope this is only the first
of many similar joint designations we will undertake with other allied nations. On this, the sixmonth anniversary of the September 11 attacks, as we remember the victims and the horror of
that day, we recognize that we still have much to do to prevent such an outrage from ever
.
.
occumng agam.
The United States has blocked more than $34 million in terrorist assets, and other nations
around the world have blocked more than $70 million. More important than the dollars found in
the accounts is the shutting down of these pipelines for much larger amounts of money. We are
implementing new safeguards at home to identify suspicious financial transactions and we are
improving information sharing within the US government and among our allied governments.
Weare engaging the entire world to examine and improve the safeguards on their own financial
system. We will continue to perfect the tools in this financial war and to increase our
coordination so that we can stop the flow of funds that support terrorism.
-30-

NEWS
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Contact: Public Affairs
(202) 622-2960

FOR IMMEDIATE RELEASE
March 11, 2002

Media Advisory
What: Joint Financial Management Improvement Program's (JFMIP) Annual
Conference will meet with Bush Administration Senior Officials to discuss
management reform initiatives at the one day conference. "Geeting to GreenThe President's Management Agenda."
Who: Secretary O'Neill will address the Joint Financial Management
Improvement Program's (JFMIP) Annual Conference on Tuesday, March 12,
2002.

When: March 12, 2002
9:30am EST Secretary O'Neill will make remarks

Where: Hilton Washington and Towers
1919 Connecticut Avenue NW
Washington, DC
Contact: Journalist contacting Isabelle Howers at the Graduate School, USDA at
202-314-3471 or send registration form by faxing to 202-479-6801.
-30-

PO-1088

F()If' press Y''!lerues, s1Jeeches, :~ublic schedules and official biographies, call our 24-hou:~ fax line ,at (202) 622-2040

omCE OF PUBUC AFFAIRS • 1500 PENNSYLVAN1A AVENUE, N.W. • WASIDNGTON, D.C .• 20220. (202) 622-2960

For Release Upon Delivery
March 12, 2002

Contact Tony Fratto at 5585-399-1031 .

PRODUCTIVITY GROWTH IN THE AMERICAS
REMARKS BY
JOHN B. TAYLOR
UNDER SECRETARY FOR INTERNATIONAL AFFAIRS
UNITED STATES TREASURY
AT BRAZILIAN AMERICAN CHAMBER OF COMMERCE
FORTALEZA, BRAZIL

Thank you for inviting me to this meeting of the Brazilian American Chamber of
Commerce. It is a pleasure to discuss economic issues with people from the private sector.
I would like to focus my remarks today on productivity growth. Of course I do not need
to tell business people about the importance of productivity growth. Productivity is simply the
amount of goods or services a worker can produce in a particular period of time-a day, or a
week, or a year. Successful finns must monitor productivity closely. There are strong incentives
to raise productivity because with higher productivity the same amount of goods or services can
be produced at lower cost. In a competitive environment higher productivity eventually leads to
higher real wages for workers.

In fact, for an economy as a whole economic progress itself is based on productivity
growth. Higher standards of living cannot occur without productivity growth. We cannot reduce
poverty without productivity growth. The higher productivity is in a country or a region, the
higher income per capita is in that country or region. You can see that by comparing the richer
and the poorer countries in our own hemisphere.
In the United States productivity growth has been the subject of an enonnous amount
discussion and research in recent years. And I do not mean simply academic research and
discussion.

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The Federal Reserve Board, for example, under Chairman Alan Greenspan's leadership,
has devoted a great deal of resources to the study of U.S. productivity growth: Getting better
data, using more sophisticated statistical techniques, looking for changing trends, assessing the
importance of new technology. And the Fed takes this research into account when deciding
whether to raise or lower the federal funds interest rate.
Productivity growth has changed trends for the better in the United States in recent years.
Productivity had been trending around I percent per year during the period from the mid-1970s
to the mid-1990s. The trend now appears to be at least 2 percent, perhaps higher. During the
recent economic slowdown in the United States productivity growth has held up remarkably well
compared with earlier slowdowns and recessions in the United States.
I am happy to say that the United States is now coming out of the recent slowdown. The
fourth quarter of last year showed positive real GDP growth, and recent data on production and
employment indicate that the U.S. economy has turned the comer. Once the recovery is
underway, we have strong evidence to believe that productivity growth will remain closer to the
improved trend of recent years.
For the countries of Latin America as a whole productivity growth has also improved.
Data published by the Inter-American Development Bank (!DB) indicate that the 1990s were
better than the 1980s in terms of productivity growth, reflecting many economic reforms,
especially in the macroeconomic areas. Productivity growth was 0.7 percent per year in the
region as a whole in the 1990s after averaging below zero in the 1980s.
However, I believe there is room for much more improvement in productivity growth.
During the period that productivity growth was 0.7 percent in Latin America, it was 1.7 percent
in the developed countries, and 2.7 percent in the East Asian countries. That 1 percent or 2
percent productivity difference could have made a huge difference in living standards in the
region. As I indicated productivity growth in the United States is projected to be at least 2
percent in the next few years. Productivity growth in Latin America can and should be higher
than 2 percent--or more than triple what it was in the 1990s.
The average trend in productivity in Latin America hides important difference between
countries. In fact, productivity growth varied substantially across the region in the 1990s.
According to the IDB, productivity grew by 2 percent annually in Chile, about the same as the
United States. And the economic reforms in the early 1990s in Argentina led to similar high
productivity growth, but of course the events of recent economic crisis are preventing that trend
from continuing for the time being. According to the same !DB report, productivity growth was
also strong in Uruguay. However, in Brazil productivity growth was close to zero-actually
slightly negative according to the data we have-for the 1990s as a whole.
Why do I think productivity growth can improve so much in Latin America? The
observed differences between regions and countries certainly point in that direction. Experience
and research during the recent years have taught us many new things about productivity.
Productivity will grow if capital-including human capital-per worker grows or if technology
Improves.

The main reason why I think that the productivity potential is so much higher in Latin
America is that there is so much room to increase capital-including human capital-and to
adopt cutting edge technology in use around the world today.
Research has shown that a better business climate-a more consistent rule of law, better
control of corruption, fewer obstacles to starting a business-will raise productivity. Quantitative
studies show that there is room for improvement here too. For example, in Latin America on
average it takes 12 legal and government administrative steps to start up a business. In Canada it
takes 2 steps to start up a business; in the United States it takes 4 steps.
Excessive taxes and regulations are obstacles to raising productivity growth that can be
reduced or removed. According to a recent survey, 66 percent of business people in Brazil
believe excessive taxes and regulations hinder investment. In Chile, however, only 12 percent of
business people see overtaxing and regulation as a serious problem. Recall that productivity
growth was negative in Brazil in the 1990s and 2 percent per year in Chile over the last decade.
Inefficient government intervention in labor markets may also reduce productivity.
According to the Inter-American Development Bank, the costs of job restrictions are higher on
average in Latin America (nearly 3.0 months of wages per worker) than in the OECD countries
(1.7 months of wages).
There is wide agreement that better education is key to productivity growth. Although
the labor force in Latin America grew at similar rates as East Asia in the 1990s, the rate of
educational improvement was slower than in the countries of East Asia, and it even slowed
further in Latin American during the past decade. There are of course important educational
success stories. For example, here in Brazil the Bolsa Escola program, which provides funds to
families with low incomes, whose children attend school has led to higher enrollments.

In conclusion, by reviewing some key facts and recent studies on productivity growth in
the hemisphere, I hope I have convinced you that the goal of substantially raising productivity
growth is important and feasible. I mentioned some of the obstacles to raising productivity
growth. And I have also noted that the substantial gains in terms of higher living standards and
reduced poverty that would come with the reduction or removal of these obstacles.

-30-

D EPA R T :\1 E N T

0 F

THE

T REA SUR Y

NEWS
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EMBARGOED UNTIL 12:45 P.M. EST
March 12, 2002

CONTACT: BETSY HOLAHAN
202-622-2960

Remarks of Peter R. Fisher
Treasury Under Secretary for Domestic Finance
to the Financial Services Analysts Association
President Bush spoke last week about the importance of improving the accountability of
corporate leaders as part of a broader effort to improve our system of corporate disclosure for the
benefit of investors. I would like to take this opportunity to explain both the President's program
and your critical role as financial analysts.
The goal is for public companies to inform investors better so that the financial markets
can price risk better and allocate capital more efficiently. Nothing could be more important both
for the long-run health of our economy and for investor protection. While federal and state
governments can mandate minimum standards for the behavior of corporate actors and disclosure
requirements for them to follow, unless you put that information to work, it will all be for
naught. You, the financial analysts of America, must become the engine that takes the
improvements in corporate disclosure and then drives the new information into the pricing of risk
and into the efficiency of our capital markets.
The remarkable resilience that our economy has demonstrated is a consequence of our
adaptable, flexible, and open markets for labor, goods, services, and capital. Over the past few
months, however, we have learned once again not to take the performance of our capital markets
for granted. For you and your clients and employers to allocate capital to the firms with the
brightest prospects, you must have access to reliable information that allows you to make those
judgments. The demise of Enron, other recent confidence-driven financial implosions, and the
rash of recent earnings restatements have made us realize that our system of corporate disclosure
is not working as well as it should.
Last Thursday, President Bush called on all of us to raise the bar for corporate disclosure
in the United States, for all of us to hold corporate executives to the highest standards of conduct.
I say "all of us" because this is not just a job for government. We in government can raise the
legal minimums that public companies' CEOs must meet. But in our open society, committed to
democracy and freedom of choice, government should not be the only source for setting
behavioral norms for corporate actors.
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Legal minimums enforced by fines and penalties will only take us so far. Improving the
efficiency of financial markets and the ethics of our corporate leaders is principally a job for the
business community itself.
The President's program is guided by three core principles: first, providing better (not
necessarily more) information to investors; second, making corporate officers more accountable;
and, third, developing a stronger, more independent accounting and auditing system.
As the President made clear, and as the SEC has recently re-affirmed, mere compliance
with GAAP is not enough. Each investor should have access to a true and fair picture of the
company, in plain English, and should be promptly informed of unquestionably significant
events that affect the condition and prospects of the company. Much of the press coverage of the
President's announcement underestimates the importance of this. Our goal is to raise the bar for
what constitutes adequate disclosure.
President Bush directed our attention to CEOs because "reform should start at the top."
We believe that CEOs should personally vouch for the veracity, timeliness, and fairness of their
companies' public disclosures, including their financial statements. If a CEO or other corporate
officer is guilty of misconduct, he or she should have to give back any compensation gained
thereby. If corporate leaders abuse their power, they should lose the right to serve as a director
or officer of a public company. And corporate leaders should have to tell investors within two
days whenever they buy or sell the company's stock for personal gain.
Finally, the President believes that we need a stronger and more independent auditing and
accounting system. To do this we need to establish a new, independent regulatory board, under
the SEC's supervision, to develop standards of professional conduct and competence. In
addition, the SEC needs to exercise more effective and broader oversight of the Financial
Accounting Standards Board to ensure that accounting standards are issued more promptly and
are more responsive to the needs of investors.
A word on the policy choices that the President made with his economic team. Some
have suggested that Congress should enact an absolute ban on audit firms providing any nonaudit services but we don't think that rigid lines should be drawn in statutes. The President
instead would re-assert the responsibility of audit committees, working under new SEC
guidelines, to decide whether a non-auditing service would compromise an auditor's integrity,
and to report their choice of auditor directly to the shareholders. The President would also stepup enforcement of securities fraud; we all think existing legal standards and penalties are
sufficient and well-honed for the task. Last, the President does not want to induce more lawsuits.
Nor does anyone on the President's team think that more litigation would solve the problem of
corporate disclosure.
The President's proposals are the product of vigorous thinking and discussion among his
advisors; in the end, the President and his entire team agreed on these proposals as the best way
to secure fuller corporate disclosure. Many reflect the ideas of Harvey Pitt, the SEC chairman
whom President Bush appointed.

3
Harvey was working at improving corporate disclosure before it became front page
news, before the President asked Secretary O'Neill to lead the Working Group on Financial
Markets to take up the topic, before congressional committees held hours upon hours of hearings.
Harvey Pitt is doing a terrific job and the country is lucky to have his service. I think the country
has been lucky to have both Chairman Pitt and Secretary O'Neill- one of America's most
effective securities lawyers and one of America's most effective corporate leaders - working to
improve corporate disclosure and governance.
What's next? In Washington, I have learned that the Congress and President have to
spend some time disagreeing before we can agree. But there is a lot of common ground. The
President's program shares much with the thoughtful proposals of House Financial Services
Committee Chairman Michael Oxley and Congressman Richard Baker. As we move along, I
think we are going to find greater convergence of ideas between the House and Senate and
between Republicans and Democrats than some may want to admit. We all want to serve the
same goals of better corporate disclosure and improved investor protection. And we all know
that, even while we strive to improve it, our corporate disclosure regime is the best in the world.
But perhaps the most important next step for the President's proposals is not what
happens in Washington but, rather, what happens outside of Washington. In many respects, the
most important next step depends on you.
However we feel about the role that some financial analysts played in the exuberance of
the late 1990s, our financial system is dependent on your profession to interpret the flow of
financial information that drives our market economy. In the highly-articulated division of labor
in our capital markets, you serve as the information intermediaries between the providers of
capital and the users of capital, between the asset managers who pool and invest our savings and
the companies that raise equity and borrow.
For capitalism to work, the people who control capital have got to behave like capitalists.
They need to care intensely about where and how the capital they control is invested. But in the
institutional setting of asset management today, we may have lost some of the sharp incentives
present when one is putting one's own capital at risk.
Much of our investment capital is in the hands of banks, mutual funds, insurers, and
private pensions. These are our modem capitalists. Yet it's not clear that the individual asset
managers - who control the discrete investment portfolios -- have the incentives and the
accountability to act like real capitalists. Indexation has many advantages as an investment
strategy. One disadvantage, for society, is that the managers who run trillions of dollars by
overtly or covertly tracking indexes are not exerting discipline on the leaders of the firms in
which they invest. Nor are they demanding improved corporate disclosures.
Even with this large pool of inert capital, there are still probably enough marginal buyers
and sellers to price investments properly, based on the information known to the market. But do
we have enough asset managers pressing management for more information? I'm not sure.

As a consequence, we look to you. We rely upon you - the Fourth Estate of finance - to
poke behind the screen of boilerplate reports and tedious footnotes. You are the engines of
learning for modem capital markets. We depend on you to question corporate authority, to probe
for inconsistencies in corporate disclosures, and to lead the drive for better, more meaningful
information with which to price financial instruments.
It is up to you to press for the flow of financial information to keep pace with the rapid
evolution of our capital markets and corporate finance. If you let us down, risks will be
mispriced and capital misallocated. Eventually, when the markets take sudden notice of
particularly egregious misallocations, we will witness yet more financial implosions.
President Bush called last week to hold CEOs and auditors accountable to their investors
and employees, and to their society. That is why it is so important that you rise to the challenge,
to President Bush's challenge, to press corporate America to fulfill its obligations.
To do this, of course, you yourselves have to be accountable, too. I applaud the steps that
Richard Grasso at the NYSE and Robert Glauber at the NASD have taken together with the
leadership of the House Financial Services Committee and the SEC to sharpen that
accountability for the sell-side members of your profession. Keep at it. Deploy your
skepticism. American capitalism depends on you.
-30-

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 12, 2002

Office of Financing
202-691-3550

RESULTS OF TREASURY'S AUCTION OF 4-WEEK BILLS
28-Day Bill
March 14, 2002
April 11, 2002
912795JP7

Term:
Issue Date:
Maturity Date:
CUSIP Number:
1.770%

High Rate:

Investment Rate 1/:

Price:

1.801%

99.862

All noncompetitive and successful competitive bidders were awarded
securities at the high rate.
Tenders at the high discount rate were
allotted 73.05%.
All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Accepted

Tendered

Tender Type
Competitive
Noncompetitive
FIMA (noncompetitive)

22,965,905
34,286

SUBTOTAL
Federal Reserve
$

TOTAL

49,668,680
34,286

49,702,966

23,000,191

2,099,991

51,802,957

25,100,182

Median rate
1.760%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate.
Low rate
1.720%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio

49,702,966 / 23,000,191

2.16

1/ Equivalent coupon-issue yield.

http://www .public debt. treas.gov

PO-I091

OFFICE OF PUBLIC AFFAIRS .1500 PENNSYLVANIA AVENUE, N.W .• WASHINGTON, D.C.. 10220. (102) 622-2960

EMBARGOED UNTIL 11:30 A.M.
March 11, 2002

Contact:

Office of Financing
202/691-3550

TREASURY OFFERS 4-WEEK BILLS
The Treasury will auction 4-week Treasury bills totaling $23,000 million to
refund an estimated $18,000 million of publicly held 4-week Treasury bills maturing
March 14, 2002, and to raise new cash of approximately $5,000 million.
Tenders for 4-week Treasury bills to be held on the book-entry records of
TreasuryDirect will not be accepted.
The Federal Reserve System holds $11,532 million of the Treasury bills maturing
on March 14, 2002, in the System Open Market Account (SOMA). This amount may be
refunded at the highest discount rate of accepted competitive tenders in this auction
up to the balance of the amount not awarded in today's 13-week and 26-week Treasury
bill auctions.
Amounts awarded to SOMA will be in addition to the offering amount.
Up to $1,000 million in noncompetitive bids from Foreign and International
Monetary Authority (FIMA) accounts bidding through the Federal Reserve Bank of New York
will be included within the offering amount of the auction. These noncompetitive bids
will have a limit of $100 million per account and will be accepted in the order of
smallest to largest, up to the aggregate award limit of $1,000 million.
The allocation percentage applied to bids awarded at the highest discount rate
will be rounded up to the next hundredth of a whole percen.tage point, e. g., 17.13%.
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 BookEntry Treasury Bills, Notes, and Bonds (31 CFR Part 356, as amended).
Details about the new security are given in the attached offering highlights.

000

Attachment

PO-I092

For press releases, speeches, public schedules and official biographies, call ollr 24-lzourfllx lil/e at (202) 622-2040

HIGHLIGHTS OF TREASURY OFFERING
OF 4-WEEK BILLS TO BE ISSUED MARCH 14, 2002
March 11, 2002
Offering Amount . . . . . . . . . . . . . . . . . . . . . $23,000 million
Public Offering . . . . . . . . . . . . . . . . . . . . . $23,000 million
NLP Exclusion Amount . . . . . . . . . . . . . . . . $ 7,900 million
Description of Offering:
Term and type of security ........... 28-day bill
CUSIP number . . . . . . . . . . . . . . . . . . . . . . . . 912795 JP 7
Auction date . . . . . . . . . . . . . . . . . . . . . . . . March 12, 2002
Issue date . . . . . . . . . . . . . . . . . . . . . . . . . . March 14, 2002
Maturity date . . . . . . . . . . . . . . . . . . . . . . . April 11, 2002
Original issue date . . . . . . . . . . . . . . . . . October 11, 2001
Currently outstanding ............... $30,837 million
Minimum bid amount and multiples .... $1,000
Submission of Bids:
Noncompetitive bids: Accepted in full up to $1 million at the highest
discount rate of accepted competitive bids.
Foreign and International Monetary Authority (FIMA) bids: Noncompetitive bids submitted through the Federal Reserve Banks as agents for
FIMA accounts. Accepted in order of size from smallest to largest
with no more than $100 million awarded per account. The total noncompetitive amount awarded to Federal Reserve Banks as agents for
FIMA accounts will not exceed $1,000 million. A single bid that
would cause the limit to be exceeded will be partially accepted in
the amount that brings the aggregate award total to the $1,000
million limit. However, if there are two or more bids of equal
amounts that would cause the limit to be exceeded, each will be
prorated to avoid exceeding the limit.
Competitive bids:
(1) Must be expressed as a discount rate with three decimals in
increments of .005%, e.g., 4.215%.
(2) Net long position (NLP) 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.

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 ll, 2002

Office of Financing
202-691-3550

RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
182 -Day Bill
March 14, 2002
September 12, 2002
912795LA7

Term:
Issue Date:
Maturity Date:
CUSIP Number:
2.020%

High Rate:

Investment Rate 1/:

Price:

2.069%

98.979

All noncompetitive and successful competitive bidders were awarded
securities at the high rate.
Tenders at the high discount rate were
allotted 55.34%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)

Competitive
Noncompetitive
FIMA (noncompetitive)

30,509,871
1,278,948

11,721,141
1,278,948

13,000,089 2/

31,788,819

SUBTOTAL

4,660,847

Federal Reserve
TOTAL

Accepted

Tendered

Tender Type

36,449,666

17,660,936

Median rate
2.010%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate.
Low rate
1.970%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio

= 31,788,819 / 13,000,089 = 2.45

1/ Equivalent coupon-issue yield.
2/ Awards to TREASURY DIRECT = $1,007,195,000

http://www .publicdebttreas.gov

PO-1093

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 11, 2002

Office of Financing
202-691-3550

RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
91-Day Bill
March 14, 2002
June 13, 2002
912795JY8

Term:
Issue Date:
Maturity Date:
CUSIP Number:
1.825%

High Rate:

Investment Rate 1/:

Price:

1.858%

99.539

All noncompetitive and successful competitive bidders were awarded
securities at the high rate.
Tenders at the high discount rate were
allotted 70.90%.
All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)

Competitive
Noncompetitive
FIMA (noncompetitive)

30,900,519
1,425,212
150,000

4,770,773

Federal Reserve
$

37,246,504

11,424,819
1,425,212
150,000
13,000,031 2/

32,475,731

SUBTOTAL

TOTAL

Accepted

Tendered

Tender Type

17,770,804

Median rate
1.800%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate.
Low rate
1.775%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio = 32,475,731 / 13,000,031

2.50

1/ Equivalent coupon-issue yield.
2/ Awards to TREASURY DIRECT = $1,159,997,000

http://www.publicdebt.treas.gov

PO-1094

0
<.0
OJ

federal financing
WASHINGTON, DC

20220

FEDERAL FINANCING BANK

February 28, 2002

Kerry Lanham, Secretary, Federal Financing Bank (FFB),
announced the following activity for the month of January 2002.
FFB holdings of obligations issued, sold or guaranteed by
other Federal agencies totaled $38.1 billion on January 31, 2002
posting a decrease of $956.3 million from the level on December
31, 2001.
This net change was the result of decreases in
holdings of agency debt of $886.7 million, in holdings of agency
assets of $55.0 million, and in holdings of government-guaranteed
loans of $14.6 million. The FFB made 79 disbursements, and
received 15 prepayments during the month of January. The FFB
also refinanced one Rural Utilities Service ("RUS") guaranteed
loan, and priced three buydowns of RUS guaranteed loans. A
maturity extension of a General Services Administration ("GSA")
guaranteed loan also was priced during the month of January.
Attached to this release are tables presenting FFB January
loan activity and FFB holdings as of January 31, 2002.

PO-1095

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Page 3
FEDERAL FINANCING BANK
JANUARY 2002 ACTIVITY
Borrower
Chamblee Office Building
Atlanta CDC Lab

Date

Amount
of Advance

Final
Maturity

Interest
Rate

1/25
1/30

$26,971.02
$25,269,237.78

10/01/26
1/30/31

5.569% S/A
5.523% S/A

1/04
1/04
1/18

$180,059.47
$19,008.70
$173,587.84

3/01/30
3/01/30
3/01/30

5.596% S/A
5.596% S/A
5.430% S/A

DEPARTMENT OF EDUCATION
Barber-Scotia College
Barber-Scotia College
Barber-Scotia College

RURAL UTILITIES SERVICE
Grundy County Elec. #689
Comanche County Elec. #765
Maquoketa Valley #636
Medina Electric #622
Pee Dee Elec. #547
Brazos Electric #561
Jackson Energy #794
Rutherford Electric #779
S. Illinois Power #792
Surry-Yadkin Elec. #534
Darien Telephone Co. #719
~range County Elec. #771
Brazos Electric #561
East Kentucky Power #753
rri-County Elec. Coop. #646
Pirelands Elec. #621
Southside Electric #786
Jnited Power Assoc. #432
:-Iart Elec. #698
3urke-David Elec. #494
:odington-Clark Elec. #551
:oop. Power Assoc. #722
~osebud Elec. #723
:oop. Power Assoc. #450
3ho-Me Power #480
"\rrowhead Electric #773
~ookson Hills Elec. #797
:-iamilton County Elec. #686
'?leming-Mason Energy #644
~ational Power #788
~ational Power #789
30uth Texas Electric #505
Jnited Elec. #519
~sociated Electric #906
3asin Electric #232
3asin Electric #232
3asin Electric #232
fueees Electric Coop. #774
rhumb Electric #767

1/02
1/04
1/08
1/08
1/09
1/10
1/10
1/10
1/10
1/10
1/11
1/14
1/15
1/15
1/17
1/18
1/18
1/18
1/22
1/23
1/23
1/23
1/23
1/25
1/25
1/28
1/28
1/28
1/29
1/29
1/29
1/29
1/29
1/31
1/31
1/31
1/31
1/31
1/31

1/02/35
$200,000.00
$2,029,000.00 12/31/35
1/02/35
$754,000.00
3/31/04
$1,500,000.00
3/31/03
$2,475,000.00
7/01/02
$4,070,000.00
7/01/02
$3,000,000.00
$2,500,000.00 12/31/35
1/02/35
$1,785,000.00
7/01/02
$1,000,000.00
7/01/02
$253,000.00
12/31/35
$425,000.00
7/01/02
$7,629,000.00
$20,000,000.00 12/31/30
1/02/35
$3,000,000.00
1/03/34
$500,000.00
12/31/35
$2,200,000.00
1/02/18
$3,376,000.00
1/02/35
$2,000,000.00
1/03/33
$168,000.00
$800,000.00 12/31/08
1/02/18
$1,977,000.00
$1,300,000.00 12/31/29
1/02/18
$4,018,000.00
12/31/31
$2,000,000.00
12/31/35
$700,000.00
$1,500,000.00 12/31/35
1/02/35
$1,000,000.00
7/01/02
$3,000,000.00
12/31/30
$1,262,000.00
$27,435,000.00 12/31/30
12/31/24
$176,500.00
1/03/34
$1,187,000.00
12/31/19
$9,836,666.45
1/02/24
$158,952.10
1/02/24
$418,801.14
1/02/24
$246,001.42
12/31/35
$600,000.00
6/30/05
$250,000.00

5.444% Qtr.
5.516% Qtr.
5.458% Qtr.
3.184% Qtr.
2.402% Qtr.
1.750% Qtr.
1.750% Qtr.
5.474% Qtr.
5.475% Qtr.
1.750% Qtr.
1.733% Qtr.
5.249% Qtr.
1.610% Qtr.
5.322% Qtr.
5.299% Qtr.
5.366% Qtr.
5.370% Qtr.
4.978% Qtr.
5.229% Qtr.
5.467% Qtr.
4.644% Qtr.
5.125% Qtr.
5.339% Qtr.
5.039% Qtr.
5.428% Qtr.
5.442% Qtr.
5.442% Qtr.
5.440% Qtr.
1.831% Qtr.
5.364% Qtr.
5.364% Qtr.
5.524% Qtr.
5.443% Qtr.
5.092% Qtr.
5.411% Qtr.
5.411% Qtr.
5.411% Qtr.
5.302% Qtr.
3.779% Qtr.

Page 5

FEDERAL FINANCING BANK HOLDINGS
(in millions of dollars)

Program

January 31. 2002

Agency Debt:
U.S. Postal Service

December 31. 2001

Monthly
Net Change

Fiscal Year
Net Change

111102 - 1131/02

1011/01- 1131/02

Subtotal*

$6.689.1
$6.689.1

$7.575.8
$7.575.8

-$886.7
-$886.7

-$4,623.9
-$4.623.9

Agency Assets:
FmHA-RDIF
FmHA-RHIF
Rural Utilities Service-CBO
Subtotal*

$2.255.0
$4.375.0
$4,270.2
$10.900.2

$2,310.0
$4,375.0
$4,270.2
$10,955.2

-$55.0
$0.0
$0.0
-$55.0

-$180.0
$0.0
$0.0
-$180.0

Government-Guaranteed Lending:
DOD-Foreign Military Sales
DoEd-HBCU+
DHUD-Community Dev. Block Grant
DHUD-Public Housing Notes
General Services Administration+
DOr-Virgin Islands
DON-Ship Lease Financing
Rural Utilities Service
SBA-State/Local Development Cos.
DOT-Section 511
Subtotal*

$2,090.9
$43.9
$6.7
$1,207.3
$2.242.0
$11. 9
$841.2
$13,981.6
$121. 5
$3.4
$20,550.3

$2,103.1
$43.7
$7.0
$1.207.3
$2.246.8
$13.1
$941.1
$13,875.8
$123.5
$3.4
$20,564.9

-$12.2
$0.2
-$0.3
$0.0
-$4.9
-$1. 2
-$100.0
$105.8
-$2.1
$0.0
-$14.6

-$65.7
$12.5
-$1.1
-$71.4
-$26.0
-$1.2
-$100.0
$382.3
-$10.5
$0.0
$118.9

=:::======

=======

======

==========

$38.139.6

$39,095.9

-$956.3

-$4,685.0

Grand total*
* figures may not total due to rounding
+ does not include capitalized interest

ornCE OFPUBUCAFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C. - 20220 - (202) 622-2960

U.S. International Reserve Position

03/14/02

The Treasury Department today released U.S. reserve assets datJ. for the week ending lvIarch S ) 2002. A.s indiCdted in this
table, US. reserve assets totaled 568,.232 million on that date, compared to $67,793 million at the end of me prior week.

(in US millions)

I. Official U.S. Reserve Assets
TOTAL
1. Foreign Currency Reserves

a. Securities
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.

Euro
5,380

March 1. 2002

March 8, 2002

67,793

68,232

Yen
10,310

TOTAL

Euro

15.690

5,400

Yen

TOTAL

10,631

9,074

3,977

13,050

16.031
0

9.128

4,101

13,228

b.ii. Of which, banks located abroad

b.iii. Banks headquartered outside the U.S.
b.iii. Of which, banks located in the U.S.

17,21-+

17, 165 1

3. Special Drawing Rights (SORs) 2

10,794

70, ;6J

4. Gold Stock

11,045

2, IMF Reserve Position

5. Other Reserve Assets

11 Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reser/e's System Open ivlarket Account
(SONIA), valued at current market exchange rates. Foreign currency holdings listed as securities reflect marked-co·market values, and
depOSits reilect carrying values.
21 The Items, "2. INIF Reserve POSition" and "3. Specoal Drawing Rights (SDRs)," are based on data prOVided by the ifVIF and are lalusd In
dollar terms at the official SDR/dollar exchange rate for the reporting date. The entries in the table above for latest week (snown in Italics)
reflect any necessarf adjustments, including revaluation. by the U.S. Treasury to the prior 'Nee~.'s I~IF cata. ,he il\IF dala ior the prlcr wee~
are final.
JJ GGid SICC:, IS .'alued I1lcllthly at S-1-2.2222 per fine troy cunce. \/alues snown are as cr Januar! 21, 2C)J2

Nas S1 I ,C45 Illillion.

PO-I096

:he 'Jecemoer::'. 2(iC1 ia!ue

NEWS
ornCE OFPUBUCAFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C. - 20220 - (202) 622-2960

FOR IMEDIATE RELEASE
March 13,2002

Contact: Office of Public Affairs
(202) 622-2960

MEDIA ADVISORY
Treasury Under Secretary for Enforcement Jimmy Gurule will host a press
conference and signing ceremony in the Diplomatic Reception Room at the Department of
the Treasury on Thursday, March 14,2002,10:30 a.m., EST.

Senior Officials of the Black Market Peso Exchange (BMPE) System Multilateral
Working Group will sign a statement that recommends short and long term actions to combat the
biggest money laundering system in the Western Hemisphere.
The Black Market Peso Exchange System Multilateral Working Group was established in
1999 to combat this black market peso exchange system which is believed by U.S. law
enforcement to launder between $3 to $6 billion a year. Participants will be available for a few
minutes to answer questions from the press.
Mr. Gurule will be joined by: Nilo J.J. Swaen, Minister of Finance of the Ministry of
Finance of Aruba, Mr. Luis Alberto Moreno, Ambassador of Colombia to the U.S., is
representing Mr. Santiago Rojas Arroyo, Colombian Director General, National Tax and
Customs Directorate; Mr. Guillermo A. Ford, Ambassador of Panama to the United States, is
representing Mr. Jose Miguel Aleman, Minister of Foreign Relations for Panama; and Dr. Jose
Luis Perez Castillo, Director of the Anti-Money Laundering Unit of Venezuela will represent Dr.
Mildred Camero, President of the National Commission Against Illicit Use of Drugs ofVenezula
Media without Treasury or White House press credentials planning to attend should
contact Treasury's Office of Public Affairs at 202-622-2960, by close of business Wednesday,
March 13,2002 with the following information: name, social security number and date of birth.
This information may also be faxed to 202-622-1999. For additional information about the event,
please contact Tasia Scolinos of Treasury Public Affairs (202) 622-1996.
-30PO-l097

Fm- press releases. speeches) public schedules and official biographies, miZlJur 24-rwur fax line at (21)2) 622-20LiO

ornCE OFPUBUCAFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C. - 20220 - (202) 622-2960

EMBARGOED UNTIL 9:00 A.M. EST
March 14,2002

CONTACT: BETSY HOLAHAN
202-622-2960

REMARKS OF UNDER SECRETARY OF THE TREASURY PETER R. FISHER
TO THE FUTURES INDUSTRY ASSOCIATION
BOCA RATON, FLORIDA
Clarifying Treasury's Objective for Federal Debt Management

The resilience of the U.S. economy has surprised even its admirers.
One source of this resilience is the federal government's role as a shock absorber. When
economic activity slows, taxes fall and expenditures rise, both automatically and as a result of targeted
legislation. From physics we know, however, that every action has an equal and opposite reaction. So
while for a given sector of the economy, or set of incomes, the federal government can absorb a shock,
this only happens by transferring it somewhere else. The ultimate cost is passed to the broader risk pool
of federal taxpayers. The immediate cost ~ in terms of funding ~ is transmitted from the real economy
back to the financial markets as variance in the federal government's borrowing requirements.
You contribute to the economy's resilience as well. You price the risk of likely and unlikely
outcomes for the value of commodities and products and companies and help to transfer these risks to
those most willing to absorb them. You also price the risk of likely and unlikely outcomes for the
federal government's borrowing needs.
It is one of my jobs to manage the fluctuations in the government's borrowing needs. It is one of
your jobs to price that risk. So I thought I would take this opportunity to explain how I see the
objectives and the constraints of the Treasury's debt management in the hope that it might be of some
use to you.

By way of illustration, I will say a few words about our decision last fall to suspend issuance of
the long bond.

PO-109S

For press releases, speeches, public schedules and u.fficial biog'raphies, call our 24-hour fax line at (202) 622-2040

Signs of Economic Resilience
But, first, let's talk about the economy.
Both Glenn Hubbard, the chairman of the President's Council of Economic Advisors, and Alan
Greenspan, have said that an economic expansion is underway. GDP growth in the fourth quarter of
2001 was recently revised up to 1.4 percent, so that it now appears that there was only one quarter of
contraction in 2001 - the third quarter, which included September 11 tho Of course, even revisions have a
way of being revised themselves, but signs point to improvement.
Of particular significance, I think, is the fact that estimates of productivity for the fourth quarter
were revised up again to an astounding 5.2 percent annual rate. This is almost surely above that possible
in the long run but it may indicate that the long-run growth rate is higher than we previously thought.
The outlook for 2002 thus looks fairly bright. In the first half of this year, we expect the
economy to benefit from a swing in the inventory cycle and a continued growth in household and
government spending. In the second half of the year it will be crucial that business investment spending
rebound from the path of contraction that has been evident since the summer of 2000. There are reasons
to be optimistic. In recent months shipments of non-defense capital goods have been increasing. Also,
the passage of the stimulus bill that was just signed into law by President Bush will provide significant
new incentives for corporate investment.
Although most of the indicators are favorable and recovery appears to be under way, we must
not forget that more than a million Americans lost their jobs since the recession began. As Secretary
O'Neill stated recently, the stimulus bill "will add momentum so that we have a more robust recovery
and return to full prosperity. [The bill] will speed Americans back to work and help the unemployed
until they return to work."
Both the extension of unemployment insurance and the new tax incentives for corporate
investment will have to be absorbed, in the first instance, in our borrowing requirements. We know that
in times of war, national emergency or recession it makes economic sense for the federal government to
run deficits. We also know that we would like to return the federal government to a surplus position and
that this will happen as our economy gathers momentum and discipline is exerted in the budget process.
The recent swing from large surpluses to deficits and our objective of returning to surpluses,
once again, all serve to cast a spot light on the role of debt management and the impact that variance in
the federal government's borrowing needs has on our financial markets.

Debt Management: the Past Twentv-five Years
For the last quarter of a century, the Treasury's debt management has been described as serving
three objectives: first, the lowest borrowing cost over time; second, efficient management of cash
balances; and, third, the promotion of efficient capital markets.

3
For many years, these three stated objectives appeared to be complementary and market
participants have often thought of them as self-reinforcing. In practice, however, debt management has
always involved trade-offs among these three objectives and these trade-offs have become more evident
in recent years.
From the late 1970s to the mid-1990s, we faced seemingly ever-expanding deficits and
borrowing needs. During this period, Treasury developed its pattern of regular and predictable issuance
of a wide range of securities in order to promote efficient capital markets and, by doing so, also serve
our objective of borrowing at the lowest cost over time. But, given the lumpiness of federal tax receipts,
regular and predictable issuance has always posed a challenge for efficient cash management. For the
most part, variance in receipts has been absorbed by expanding and contracting cash balances. Only at
the margin have we deviated from regular and predictable issuance - through seasonal changes in bill
issuance and the use of cash management bills - to limit the swings in cash balances.

In the late 1990s, as surpluses rapidly materialized and it became necessary to reduce issuance,
the tension became obvious between promoting capital markets, on the one hand, and achieving the
lowest cost borrowing, on the other. Market participants habituated to the use of Treasury securities for
pricing and hedging and for their own cash management perceived continuation of established issuance
patterns as desirable for the promotion of efficient capital markets. But sustaining those issuance
patterns, in sizes necessary to maintain the liquidity of each maturity, would have added unnecessary
borrowing costs and without a large buyback program would have converted our cash management into
an asset management function.
I am dissatisfied with the conventional trilogy of objectives because - as expressed - they give
no guidance as to how we will make trade-offs and choices among them and, thus, I fear they will not
serve us well in communicating how debt management is conducted in the current uncertain
environment. Both as a description of past debt management actions and as a guide for understanding
our future behavior, I believe that the same elements can be restated to express the idea that the
Treasury's debt management serves a single, overriding objective and confronts multiple constraints.

Going Forward: The Claritv of a Single Objective
Simply put, the objective is to meet the financing needs of the federal government at the lowest
cost over time.
The dominant constraint that we confront in achieving this objective is that we see the future
only imperfectly. We are always making decisions in conditions of uncertainty.
As a consequence, debt management necessarily involves three judgments: first, about what will
be the likely size and duration of our borrowing needs, second, about how we should respond if actual
needs differ substantially from expectations and, third, about what will be the lowest cost means of
financing those needs in the future. We cannot escape these three issues. We face them in our weekly
financing decisions, in our quarterly refundings, and in our strategic planning.

4
Cash management is better thought of as a constraint on our actions, not an independent
objective. We need to pay the government's bills as they come due even though our cash flow from tax
receipts varies considerably from week to week. We must have enough cash on hand to meet the
expected and unexpected variance in both revenues and expenditures even when doing so imposes added
costs. But we seek to minimize the extent to which our objective of the lowest borrowing costs is
burdened by the constraint of our cash management.
The promotion of efficient capital markets is important, but should not be thought of as an
independent objective of Treasury's debt management. In the long run, we know that we need efficient
capital markets in order to sustain our ability to finance the federal government. Efficient capital
markets are a means to the end of lowest cost borrowing over time. In the short run, however, where we
all live, the need to promote and sustain efficient capital markets can act as a constraint on our objective
of the lowest cost borrowing.
For example, the unscheduled reopening of the IO-year note last October was undertaken
because of concerns about the long-term consequences of systemic failure in our credit markets - even
though the uncertainty it engendered may have added to our borrowing costs in the short run. For that
reason, unscheduled reopenings will remain the exception - the exceedingly rare exception.
Similarly, the Treasury's continuing commitment to a schedule of regular and predictable
auction dates is a means, over time, to the end of the lowest cost borrowing. In the short run, however,
this commitment serves as a constraint: with regular and predictable auction dates we accept the cost of
occasionally borrowing when it is inconvenient or expensive in return for the lower costs, over time,
from providing greater certainty to the Treasury market.
There are other constraints. For example, the availability of the full faith and credit of the United
States as a savings vehicle should not be limited only to those who can afford the minimum one
thousand-dollar denominations available in our auctions of marketable securities. Thus, we will
continue to offer savings bonds even though they are not the most efficient form of borrowing in
operational terms. But, again, we will seek to minimize the cost of this constraint as it weighs on our
objective by striving for more efficiency.
The framework I am describing, of a single overriding objective and of multiple constraints,
informs the decisions of the debt manager. There is an entirely different discussion about positive
externalities and the optimal level of government debt for the purpose of financing the federal
government, for the functioning of our financial markets and of our economy. For my part, I doubt that
zero is the right number for federal debt outstanding. But that policy debate needs to take place away
from the explanation of the debt manager's reaction function, away from the effort to explain how we
manage the vmiance in the federal government's borrowing needs as we receive them, day by day.
In explaining this process, I want to underscore the importance of the three judgments we are
always making. To achieve our objective of the lowest borrowing costs, we want to maintain a pattern
of regular and predictable issuance of as broad a portfolio of instruments as is consistent with (a) our
best projections oflikely borrowing requirements and (b) our ability to respond if those projections are
not realized, and (c) our current understanding of what will provide the lowest bOlTowing cost over time.

Understanding the Suspension of 30-Year Bond Issuance

By way of example, you know that in my judgment continued issuance of the long bond was not
consistent with our objective, nor compelled by our constraints.
Last October, given the likely path of our borrowing needs over the coming decade, we could not
sustain continued issuance of our complete portfolio of instruments. Because we want to maintain the
liquidity and depth of the instruments we issue - as a means of achieving the lowest borrowing costs
over time - we suspended issuance of the 30-year bond so we could concentrate our borrowing needs on
our other instruments. Consolidating our long-term borrowing at the 1O-year point is the most effective
way for us to maintain a reasonable yield curve and to provide the supply necessary for adequate
liquidity.
At that time, it seemed to some as if the economic downturn would be extended and the recovery
would be slow. Now it seems that these views may have been too pessimistic. In making our decision
to suspend the 30-year, we were neither optimistic nor pessimistic. We simply made a judgment about
the most likely path of our borrowing needs.
In addition, we considered the likely consequences of the unlikely outcomes - that is, the
situation we would find ourselves in if our projections were not realized and how we would respond.
On one side, we faced the risk that we return to surpluses even more quickly than we expected. In this
event, maintaining issuance of the 30-year would impair our ability to maintain a portfolio ofliquid
instruments and prove unnecessarily costly to the taxpayer.

On the other side, we faced the risk that sustained surpluses would not materialize as promptly as
we expect. As I explained last October, "if later in this decade it turns out that 30-year borrowing is
necessary to meet the government's financing needs, it is still likely that our decision to suspend 30-year
borrowing at this time will have saved the taxpayers money. In addition, the reintroduction of the 30year bond, at some in the future, if necessary, would likely be costless to the Treasury."
I don't expect that to happen - and you shouldn't either - because we also made a judgment
about the cost effectiveness of the long-bond, over time. For over a decade, market participants have
been telling the Treasury that demand for the bond was insufficient to achieve our objective of the
lowest cost financing. Investors simply wanted too high a premium for this added cost to be a sensible
means of minimizing our refinancing "risk" on ten-year securities. Think about it: is our refinancing
risk on two rollovers of a 1O-year note so great that we should bear the additional cost of the 30-year?
We think not.
Continued issuance of the 30-year is not consistent with our objective. Nor is it compelled by
our constraints. The 30-year bond is not a necessary feature of efficient capital markets. With the cut
backs in long-bond issuance carried out by my predecessors, it's role and liquidity had already been
significantly impaired. Benchmark status had already shifted, several years ago, to the 10-year note.

6
Given our objective of maximizing our ability to finance at the lowest cost over time, and our
desire to minimize the burden of our constraints on that objective, the decision to suspend the long-bond
was relatively straight forward.

Volatility: A Fact of Life in Our Financial System
In the fourth quarter of last year, fixed-income markets experienced extraordinarily high levels of
volatility, which only recently have abated somewhat. My hunch is that, several years from now that
spike in volatility will be better understood as a reflection of an extraordinary conjunction of economic
and financial events.

Essentially, financial markets were absorbing the slowdown in manufacturing and the rapid
inventory adjustment, the bursting of the technology bubble, the dramatic swing in the federal
government's short-run financing needs, and the immediate shock of 9-11 to confidence and economic
activity and they also were beginning to anticipate an end to the economic slowdown. Those
expectations of recovery help explain why the yield curve remained so steep - particularly at the short
end. In addition, that steep curve provided an opportunity for millions of Americans to improve their
personal cash flows. They did this by exercising the puts embedded in their fixed-term mortgages and
refinancing at lower interest rates.
All of this took place in an environment of heightened risk aversion on the part of both our major
financial institutions and speculative capital. This risk aversion diminished the pool of capital willing to
step in to price the risk of both the likely and the unlikely outcomes.
As a society we have made a number of choices that reflect our collective desire to limit the
variance in real economic outcomes - especially jobs and income. Particularly through federal fiscal
policy, as I mentioned at the outset, but also through the provision of the put option embedded in
conventional fixed-term mortgages and by the very structure and role of financial intermediation in
America, we have made choices that result in the transmission of economic shocks to and through our
financial system.
Having made these choices, we as a society are highly dependent upon the strength of our
financial system to attenuate the transmission of shocks. But to do that, our financial system needs
investors willing to commit capital in return for bearing risk.
But given the choices we've made perhaps, as a society, we should be somewhat less surprised to
find so much volatility "going on" in our financial system.
Then again, we in the financial community need to do a better job explaining the importance of
the transmission and attenuation of volatility throughout financial markets. Indeed, given its central
importance in our financial system, we need to do a better job promoting the transparency, depth and
resilience of the volatility market.

7
For my part, I thought it incumbent on me to do a better job of explaining how we see our role
and what motivates our decisions in order to help you do your job of pricing the volatility that our
behavior engenders. We cannot eliminate the volatility that debt management creates. We can,
however, explain our objective clearly and identify the constraints under which we operate. Having
done so, I hope we have at least taken a step towards greater understanding. Thank you.
-30-

EPA R T :\1 E N T

O.F

THE

T REA S II R Y

NEWS
omCE OF PUBliC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W. • WASHINGTON. D.C.• 20220. (202) 622-2960

EMBARGOED UNTIL 2:00 P.M. EST
March 14,2002

Contact: Michele Davis
(202) 622-2920

TREASURY SECRETARY PAUL H. O'NEILL
TESTIMONY BEFORE THE
SENATE APPROPRIATIONS COMMITTEE
SUBCOMMITTEE ON TREASURY AND GENERAL GOVERNMENT

Mr. Chairman, Senator Campbell, and members of the Committee, I appreciate this
opportunity to discuss Treasury's FY2003 budget request.
As you know, Treasury plays a crucial role in the core functions of government, and
serves as tax administrator, revenue collector, law enforcer, financial manager, as well as leading
policymaker for tax policy, banking policy and international and domestic economic policy.
For FY2003, we are proposing a performance budget that will enable Treasury to
continue to provide the American public with both the service and program reliability it expects
and deserves. I have challenged each of my bureaus to carefully examine their operations to
achieve improved effectiveness in business practices. I expect that Treasury can realize
reasonable savings from this type of review through reviewing programmatic efforts on a
continual basis and reducing or removing those producing little or no value.
Our budget request totals $16.654 billion for all operations. Taking into account the
offset from the proposed $250 million dedicated toward Customs commercial operations, our
program level totals $16.903 billion, compared to $16.5 billion appropriated in FY 2002, and
$14.8 billion in FY 2001.
Mr. Chairman, the budget request includes the impact of proposed legislation for
retirement and health costs for federal employees and I will speak to that proposal later in my
statement. However, I do want to note that the budget presents for the Committee the
comparative information on this proposal for prior fiscal years, in order to not materially affect
the real changes being proposed and reviewed by the Committee for FY 2003.
We have provided the Committee with a detailed breakdown and justification for
Treasury's FY 2003 budget request. I would like to take the opportunity today to highlight four
important areas of focus for FY 2003.

PO-I099

Far press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040

Treasury's FY 2003 budget recognizes the importance of, and provides adequate and
appropriate funding for, the following:

a.
b.
c.
d.

FIRST, in light of the recent events concerning terrorism in the U. S., I would like to discuss
Treasury's role in protecting our Nation from terrorists and terrorist activity.
The tragic events of September 11, 200 I sparked a Nation-wide effort to prevent and
combat terrorism. Treasury has been at the forefront of these efforts with all of its law
enforcement bureaus participating in counter-terrorism functions, including internal bureau and
agency security and ensuring the continuity of operations. We bear the responsibility of
protecting the Nation on three fronts:

(a)
(b)
(c)

At its borders;
In the banks; and
At home.

In FY 2002, Treasury received $683 million in additional counter-terrorism funding
through the Emergency Supplemental. In the proposed FY 2003 budget, the follow-on costs
associated with the funding provided in FY 2002 have been estimated in the amount of $518
million.

Our nation's first line of defense against terrorists and terrorist activity is the security of our
borders.
Following the attacks of September 11 th, the border threat level was raised from Alert
Level 4 (normal operations) to the highest level, Alert Levell (Code Red). The Customs
Service, our Nation's first line of defense at 301 ports of entry into the Nation, has made the fight
against terrorism its number one priority. In response to this heightened state of alert, Customs
has hired additional personnel to staff our borders and seaports, and has engaged members of the
National Guard to increase security around our Nation's borders.
Customs received almost $400 million in new FY 2002 appropriations for addressing
homeland security matters (in addition to $65 million provided through separate presidential
releases). Of this amount, $235 million is being used for a combination of personnel and new
equipment in ports of entry on the northern border and at critical seaports, along with selected
investments on the southern land border.
Customs has set out an expenditure plan for this funding for Congressional review that
responds to both short and long-term security concerns. The recurring cost of labor-intensive
efforts will be coupled with technology investments that will increase efficiencies and enhance
the level and degree of scrutiny for various ports of entry.

The FY 2003 proposal for the U.S. Customs Service includes $365 million to fund
counter-terrorism efforts in the second year, continuing to focus principally on Northern Border
and Marine Port security efforts, but also addressing other areas of vulnerability, such as:
international money laundering, security infrastructure, southwest border staffing, and funding
for the backup of commercial data facilities. Ports of Entry (POE) have been identified as main
entry points for terrorists as well as the most likely avenue for them to introduce implements of
terror into the country. The danger this presents has become a focus for the FY 2003 request.
In FY 2003, Customs will add 626 new positions, in addition to the 1,075 positions
allocated in FY 2002, to vulnerable locations on the northern and southern land borders, and in
seaports with the highest volume of containerized cargo. They will counter the terrorist threat
while facilitating legitimate trade and travel.
The FY 2003 request also includes a large complement of inspection and targeting
technology (including a modest research component), a further expansion of the Advance
Passenger Information System (APIS) to real-time processing capability, and technology to
expedite the passage of goods imported by highly trusted entities.
Finally, low volume Ports of Entry would be protected through "hardening" measures
including physical barriers, sensors and monitoring devices to prevent and detect unauthorized
crossings. Customs serves as the lead agency for Operations Green Quest and Shield America.
These multi-agency task forces are dedicated to: (1) identifying, disrupting, and dismantling
terrorist financing sources and systems, and (2) ensuring that munitions and sensitive u.S.
technologies are not unlawfully exported into the hands of terrorists. The FY 2003 budget
supports and maintains these critical task forces.
Equally important with protecting our Nation's borders is deterring the terrorists from being
able to finance their operations.
Treasury's Financial Crimes Enforcement Network (FinCEN), along with the Office of
Foreign Assets Control (OFAC), lead the Nation's war against global terrorism financing.
In his November 7th address at Treasury, President Bush proclaimed that "the first strike
in the war against terror targeted the terrorists/financial support." Following the attacks,
FinCEN and OFAC were able to identify and stymie numerous supporters of the Al Qaida and
other terrorist organizations by freezing $34 million in terrorist assets and working with allies
overseas to freeze over $45 million. Funding levels proposed for FY 2003 will better enable
FinCEN to sustain and maintain these activities.

The United States Secret Service is the only federal government entity charged with the
challenging mission of protecting the President and foreign dignitaries. In response to increasing
homeland security threats, the Secret Service has been assigned new protectees and has seen
significant workload increases in its protective functions. The FY 2003 budget provides funding
to enable the Secret Service to meet its protective requirements, including funding for travel,
overtime, and follow-on costs associated with Special Agents and Uniformed Division Officers
hired in FY 2002.
Around the world, firearms and explosives are the most frequent tools of terrorist attacks.
The Bureau of Alcohol, Tobacco and Firearms is charged with enforcing Federal laws relating
to commerce in, and the criminal misuse of, firearms and explosives, and ATF's authority and
technical expertise is an integral component in fighting the Nation's war against terrorism.
Through the awareness that terrorists need funds to operate, ATF has found that illegal
commerce in alcohol and tobacco products serve as attractive and lucrative sources for
generating funds for illegal activities.
As new law enforcement officials are being recruited and hired to fulfill the various
positions critical to the Nation's war on terrorism, training for these individuals to perform their
duties in a safe and highly proficient manner has become an immediate necessity. The Federal
Law Enforcement Training Center (FLETC) serves as the Federal government's leading
provider of law enforcement training. FLETC currently provides training for 74 Federal Partner
Organizations, and also for state, local and international law enforcement organizations on a
reimbursable basis. Training is provided in the most cost-effective manner by taking advantage
of economies of scale available only from a consolidated law enforcement training organization.
The FY 2003 request provides funding to maintain current levels prior to the September 11 th
terrorist attacks, while also providing additional funding to support the training of new agents
hired as a result of the attacks.
SECOND, the FY 2003 budget is Treasury's continuing commitment to stewarding
change through technological improvement. This effort entails modernizing two of Treasury's
mission-critical technological systems.
The budget continues critical support for the IRS computer modernization. The
Internal Revenue Service is committed to providing excellent customer service and takes pride in
the integrity of their systems. As a result, they are continually making improvements in
operations efficiency and performance by adopting best business practices and state-of-the-art
technology.

The IRS is replacing its antiquated computer system with an information technology
capacity that is appropriate for the new century. Modernizing the agency's technology will
enable it to deliver on its pledge to provide better customer service for all.
The Business Systems Modernization effort was begun not just to keep up with modem
systems, but also because it was a necessity due to the fundamentally deficient nature of the IRS
core data systems. The Master File system, on which all taxpayer accounts reside, is based on
outdated 1960s technology.

It is important, if the agency is to provide quick and reliable service to its customers, to
continue the ongoing shift to modem standards of technology by adopting a new architecture. As
this is the project's fourth year, much has been achieved, but the process is still incomplete.
This multi-year endeavor is providing IRS with the technological tools and revamped
business processes needed to deliver first class customer service to American taxpayers and to
ensure that compliance programs are administered efficiently and fairly.
FY 2002 and FY 2003 are key transition years for IRS Modernization efforts, as the
foundation of our Nation's tax system is being replaced, building a bridge to providing
interactive and improved customer service.
The Department's FY 2003 budget provides $450 million for the continuation of effort in
re-engineering business processes and developing new business systems to replace their
antiquated and obsolete system. This amount is $58 million above the FY 2002 enacted level of
$392 million, and $378 million above the FY 2001 enacted level of$72 million.
The budget also continues important investments initiated for the Customs
modernization effort. Illegitimate trade and contraband trafficking have been of the utmost
concern to the Department, the Administration, the Congress and the American public. This
concern was heightened due to the tragic events of September 11 th, and increased pressure has
been placed on the Customs Service to inspect all cargo entering and exiting the United States.
The strains on our Customs Service are growing increasingly severe every day. Since the
Customs Modernization Act was passed in 1993, the value of exports has grown by 36 percent
while the value of imports has risen by 51 percent. The agency is required to cope with this sharp
rise in input and export volumes with the same outdated technology it had when the Act was
passed.
Customs is not alone in having to work with antiquated technology. We believe we are on
the right track in our efforts to modernize IRS technology and we have learned a great deal from
this experience. 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 they are equipped with the
best tools available to fulfill these goals.

In FY 2003, the Customs Service expects to process 27 million formal trade entries.
Customs is dedicated to replacing the outdated and unreliable Automated Commercial System
(ACS), which has been subject to an increasing number of system outages, with the Automated
Commercial Environment (ACE). The replacement system will enable Customs to adopt a
paperless, account-based process for importers. FY 2003 marks the third year of funding for this
modernization effort.
Besides trade facilitation and compliance, ACE will play an integral role, in conjunction
with other targeting and inspection tools, in assisting Customs with the evaluation of high-risk
cargo for possible contraband as it passes the Nation's borders.
The Department's FY 2003 proposal provides for: (1) additional investments in the
automation modernization program to further develop and migrate to the Automated Commercial
Environment ($307.5 million), as well as continued funding for a government-wide trade data
interface through the International Trade Data System ($5.4 million); and (3) sufficient funding
to maintain the existing Automated Commercial System while modernization efforts are
underway.

THIRD, our FY 2003 budget request addresses the improvement of customer service and
compliance at the Internal Revenue Service. This has been of significant concern to the
Committee and the Department, and the Internal Revenue Service has been making great strides
for improvement in this area.
To achieve its mission of "providing America's taxpayers top quality service by helping
them understand and meet their tax responsibilities and by applying the tax law with integrity
and fairness to all," the IRS has realized that organizational improvements and increased
employee satisfaction lead to improved customer satisfaction. As a result, strategic objectives
focus not only on the taxpayer, but also on the improvement of the bureau as a whole.
Under the leadership of Commissioner Rossotti, the IRS has already made impressive
progress towards providing a more responsive and effective service to its customers. But there is
still more to accomplish. An inefficient tax system imposes costs on all. The longer it takes to
implement improvements, the greater the cost to the consumer and the economy.
The IRS is well down the road towards modernizing its organizational structure and
computer systems. Although the IRS has no intention of returning to its peak employment,
recognizing that real productivity has made the agency more effective and efficient, modest
staffing increases, along with improvements from systems modernization are needed to provide
the best service in both compliance and customer service areas.
This is the ideal moment to re-engineer the agency to serve all Americans by providing
the most effective, up-to-date service possible. We must not allow this opportunity to pass us by.
During its strategic planning and budget process, the IRS identified $260 million in
requirements to improve processing, customer service and compliance across its organization as
part of its tax administration responsibilities.

Using a combination of strategic redeployment of staff and identification of labor
savings programs, the IRS has been able to internally redirect $158 million from existing
resources to focus on customer service, compliance and workload requirements.
The FY 2003 request seeks additional funding for the remaining requirement of $102
million needed to meet this mission-critical goal. The request supports efforts that are already
underway to improve customer service and compliance operations. Re-engineering and Quality
Improvement projects and programs are focusing on redesigning internal processes, policies and
procedures. These additional resources, in addition to the redirected resources discussed earlier,
will be realized by the American taxpayer through the following improvements:
•

•
•

Providing additional assistance and forms, schedules and new return types to its e-file
website in order to meet the Congressional goal of having 80% of all returns filed
electronically;
Through effective implementation of the e-file and e-services programs, the IRS will save
more than 500 FTE to be redirected to assist in achieving other parts of this initiative.
Hiring of lower-cost employees to handle the submission processing growth anticipated
increase from new tax returns filed, reducing the number of high cost employees needed
for compliance during filing season;
Increasing the level of telephone service to taxpayers with respect to tax law inquiries;
Providing almost instant access to return at Customer service sites, assisting staff in
providing top-quality customer service to business taxpayers.

The FOURTH, and overriding area of focus for this year's request, addresses Treasury's
role in becoming a results-driven organization, consistent with the President's Management
Reform Agenda. Although it may referred to as the President's Management Agenda, the
concept of the agenda is very similar to the types of results this Committee is concerned with.
The Agenda's five areas of emphasis are:
•
•
•
•
•

Strategic Management of Human Capital;
Expanded Electronic Government;
Improved Financial Performance;
Budget and Performance Integration; and
Competitive Sourcing.

Only through the delicate balance of all five Presidential Management Initiatives can an
organization achieve true world class performance.
In working to achieve world-class status, the Department emphasizes the importance of
leadership, accountability, excellence, people, trust and integrity, and improving the work
environment. In addition, as the principal custodian of the revenue collected and debt issued on
behalf of the Federal Government, the Department strives to demonstrate fiscal stewardship of
each congressionally authorized dollar by linking investments with specific, measurable results.

Presidential Management Initiative 1: Strategic Management of Human Capital

Treasury's most valuable and strategic asset is its employees, who are responsible for
carrying out the Department's vast array of duties which affect the lives of every American
citizen. Without employees, the Department would be unable to meet the obligations placed on
it by the American pUblic. I have reemphasized the importance of my employees and have made
every effort to ensure that each employee is (1) used to their full potential, (2) working in a safe
and positive environment, and (3) providing value-added work to the organization.

I have emphasized that organizations known for excellence are built on a foundation of
dignity and respect for its employees. The Department is focused on evaluating its work and
processes so that each and every employee feels that their work is meaningful and contributes to
the mission and objectives of the organization. In addition, because job satisfaction is a number
one priority for many employees, I am dedicated to creating a work culture of performance,
challenge, meaning, and dignity, while providing employees with flexibility to balance their
work and personal lives. Examples of this flexibility include tele-work and flexiplace programs,
alternative work schedules, and offering family-sensitive benefits.
In order to implement this Presidential Management Initiative, the Department is
continually reassessing its human resource strategies and support systems to strengthen the
quality of both its workforce and its management.

In the aftermath of September 11,2001, an increasing number of Americans have
become eager to consider service opportunities in government. It is imperative that the
Department exploits this opportunity and is able to recruit the best and brightest. As a result,
innovative approaches to recruit high-caliber candidates into mission-critical positions are
underway.
A broad variety of private industries have experienced a direct correlation between
employee satisfaction and customer satisfaction. Similarly, I believe that high levels of
employee satisfaction within the portfolio of Treasury employees will lead to enhanced service
provided to its citizens, thus yielding higher customer satisfaction from both stakeholders and
servIce users.

Presidential Manaeement Initiative 2: Expanded Electronic Government

In addition to the strategic management of human capital, the use and improvement of
information technology will assist the Department in providing solutions to common challenges
facing all areas of the Department. The benefits of these improvements will not only improve
the effectiveness of Treasury operations, but they will also produce tangible benefits for the
American public.
Treasury is currently in the process of reviewing its IT portfolio for adherence to
common standards, and updating and maintaining cost-benefit analyses for new and ongoing
systems. This will yield an integrated comprehensive enterprise architecture at the Department
level that saves money and reduces the cycle time of major products.

For example, the Internal Revenue Service continues to work towards the Congressional
goal of having 80% of all tax and information returns filed electronically by 2007. As this
method of tax filing becomes more popular, the IRS has reduced processing costs significantly
per document, with less input errors and reduced handling time and storage costs as well.
Working with the Internal Revenue Service, the Bureau of Alcohol, Tobacco and
Firearms continues to operate systems that electronically capture revenue and allow forms to be
electronically submitted for tobacco taxation collection.
In efforts to streamline human resources applications, HR Connect, which is currently
operational in six Treasury bureaus, serves as a single, integrated automated environment for
human resource operations across all Treasury bureaus. When fully operational, HR Connect
will replace the 90+ legacy stand-alone human resources systems that currently exist. HR
Connect will provide standardized information and will facilitate results-driven decision-making.
As a highly visible agency, Treasury maintains websites that are among the most frequently
accessed, and are therefore tailored to the specific needs of its customer base - citizens,
businesses and other government agencies. The following are examples of Treasury bureau
websites that were created with the customer in mind, while improving the cost effectiveness of
Treasury:
The U.S. Mint offers a large portion of their services, resources and products through the
Internet. Recognized as one of the top 30 "e-tailers" in the Nation in FY 2000, the Mint's Web
sales exceeded $109 million and their return on investment has reached 20%.
Working closely with the Financial Management Service, Mellon Bank, MasterCard and
IBM, the Bureau of Public Debt now sells U.S. Savings Bonds to the public on a 2417 basis over
the Internet. Within the first ten months of its operation, the Savings Bond Connection generated
$63 million in bond sales, reSUlting in a 180% return on investment.
Presidential Management Initiative 3: Improved Financial Management

Treasury has the responsibility of principal custodian of the revenue collected and debt
issued on behalf of the Federal Government. To improve financial performance and expand
electronic government, it is imperative that the Department implement modem financial
management systems that are capable ofproviding timely, accurate and reliable information.
In recognizing that real-time information is much more valuable than information that is
five months old, I have challenged each of the bureaus to improve their reporting capabilities by
moving to a 3-day, monthly closing of their books by no later than July 3,2002.
Once all bureaus are implementing a 3-day, monthly close, they will be able to submit
better financial data for consolidated reporting to bureau and Department. This will enable
bureau and Department management to make results driven decisions, instead of spending the
majority of time aggregating the data.

This will also contribute to increased employee job satisfaction by showing employees
that the work they do contributes to the overall decision-making process.
Bureaus are also in the process of conducting internal risk assessments focusing on
payment controls, determining and investigating those areas that contain the most potential risk
for improper payments. These assessments will result in improved operational performance,
which will contribute to improved customer service.
Presidential Mana2ement Initiative 4: Budget and Performance Integration
Integrating performance information into the budget decision-making process allows
agencies to more directly focus their resource decisions on strategies and programs that produce
desired results. This effort has been evolving and ongoing for the past six years. The following
are examples of Departmental improvements in this area:
•

Bureaus have submitted performance information along with their budget requests to the
Department for several years. The Department is moving to target better use of this
information, lining up resources, performance data and metrics to become a more
effective decision-making tool for the bureau, the Department, OMB and Congress, as
senior officials are better able to make resource decisions based on the performance of
programs and initiatives.

•

Work continues on presenting bureau measures, which address key activities using
balanced, results-oriented performance measures, and on improving the quality of this
data.

Presidential Management Initiative 5: Competitive SourCing
Treasury continues its efforts in competitive sourcing, utilizing contractors whenever
necessary to meet its goals. Expanded steps are underway with each bureau, to enhance
competitive sourcing knowledge sharing, and knowledge management Department-wide so that
necessary sourcing competitions can begin as soon as possible.
The Department is committed to evaluating the merits of its internal efforts, by
understanding competitive sourcing options - migrating to those outsourced options when it
makes sense for the American people based on cost and value, while retaining those specific
mission areas that are inherently governmental.
A number of the Department's bureaus rely heavily on the private sector.
•

The Bureau of Alcohol, Tobacco and Firearms employs a broad array of contractors to
support its mission, and integrates in-house solutions with outsourced vendors. This
allows ATF's leadership team to focus on their core deliverables and mission-oriented
goals.

•

At the Financial Management Service, contractors are involved in 41 % of the total
management support functions.

•

The U.S. Mint contracted out 26% of its operating expenses in FY 2000. These
contractors performed not only administrative tasks, but were also responsible for other
functions at the Mint such as advertising, public relations, printing, numismatic order
processing, telemarketing services, and custodial and facilities management operations.
During late FY 2001 and early FY 2002, the U.S. Mint built a strategic plan that ensures
its employee focus on those critical areas of performance.
They have leveraged the actual business execution of their operations using contractors,
while their core employee base provides leadership, direction and critical business
efforts.

•

IRS and the Department will study the possibilities of outsourcing some aspects of the
collection process.

Legislative Proposal on Retirement and Health Costs
Mr. Chairman, our budget includes the impact of proposed legislation for the full funding
of certain federal employee retirement and health costs. Because Treasury has the third largest
agency financial impact with the implementation of this proposal, I'd like to provide the some
additional background for the Committee.
The President's FY 2003 Budget corrects a long-standing understatement of the true cost
of thousands of government programs.
For some time, the accruing charge of costs associated with the Federal Employee
Retirement System (FERS) and Military Retirement System (MRS), and a portion of the old
Civil Service Retirement System (CSRS), have been allocated to the affected salary and expense
accounts, and the remainder (a portion ofCSRS, other small retirement systems, and all civilian
and military retiree health benefits) has been charged to central accounts.
The President's Budget presents the amounts associated with shifting this cost from
central accounts to affected program accounts, starting in FY 2003, predicated on the enactment
of authorization legislation. By shifting this cost to the affected salary and expense accounts,
budget choices for program managers and budget decision-makers will not distorted by
inaccurate cost information. The proposal does not increase or lower total budget outlays or alter
the surplus/deficit, since the higher payments will be offset by receipts in the pension and health
funds. This change in treatment of costs is the first in a series of steps that will be taken to
ensure that the full annual cost of resources used -- including support services, capital assets and
hazardous waste -- is charged properly in the budget presentation.

Conclusion

Mr. Chainnan, let me conclude on a personal note. Since becoming Treasury Secretary
last year, I have been deeply impressed by the intelligence, professionalism and dedication of the
people with whom I have worked, and together, we are working to making this Department a
model for management and service to the American people. I hope the 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 2003 budget request to support the work of the Treasury Department in fulfilling
its wide range of responsibilities in serving the American people. I look forward to working with
you, Mr. Chainnan, as well as members of the Committee and your staff, to come up with a
budget that maximizes Treasury's resources in the best interest of the American people and our
country. Thank you again for giving me the opportunity to meet with you and personally present
the Department's budget. I am willing to answer any questions the Committee may have
concerning the Department's FY 2003 budget.

ornCE OF PUBUC AFFAIRS .1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C.· 20220 • (202) 622-2960

EMBARGOED UNTIL 2: 30 P.M.
March 14, 2002

CONTACT:

Office of Financing
202/691-3550

TREASURY OFFERS 13-WEEK AND 26-WEEK BILLS
The Treasury will auction 13-week and 26-week Treasury bills totaling $26,000
million to refund an estimated $25,723 million of publicly held 13-week and 26-week
Treasury bills maturing March 21, 2002, and to raise new cash of approximately $277
million. Also maturing is an estimated $23,001 million of publicly held 4-week
Treasury bills, the disposition of which will be announced March 18, 2002.
The Federal Reserve System holds $11,217 million of the
on March 21, 2002, in the System Open Market Account (SOMA).
refunded at the highest discount rate of accepted competitive
auctions or the 4-week Treasury bill auction to be held March
awarded to SOMA will be in addition to the offering amount.

Treasury bills maturing
This amount may be
tenders either in these
19, 2002. Amounts

TreasuryDirect customers have requested that we reinvest their maturing holdings
of approximately $1,074 million into the 13-week bill and $703 million into the 26week bill.
The allocation percentage applied to bids awarded at the highest discount rate
will be rounded up to the next hundredth of a whole percentage point, e.g., 17.13%.
This offering of Treasury securities is governed by the terms and conditions set
Eorth in the Uniform Offering Circular for the Sale and Issue of Marketable Book-Entry
rreasury Bills, Notes, and Bonds (31 CFR Part 356, as amended).
Details about each of the new securities are given in the attached offering
lighlights.
000

.ttachment

0-2000

'or 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 21, 2002
March 14, 2002
Offering Amount ..... .
Public Offering ..... .
NLP Exclusion Amount.

· $13,000 million
· $13,000 million
· $ 5,200 million

Description of Offering:
Term and type of security . . . . . . . . . . . . . . . . . . . 91-day bill
CUSIP number.
... ...
. . 912795 JZ 5
Auction date....
. . . . . . . . . . . . . . . . . . . March 18, 2002
Issue date. . . . . .
. . . . . . . . . . . . . . . . . . . . March 21, 2002
Maturity date...
. . . . . . . . . . . . . . . . . . . . June 20, 2002
Original issue date . . . . . . . . . . . . . . . . . . . . . . . . . December 20, 2001
Currently outstanding . . . . . . . . . . . . . . . . . . . . . . . $20,186 million
Minimum bid amount and multiples . . . . . . . . . . . . $1,000

$13,000 million
$13,000 million
None

182-day bill
912795 LB 5
March 18, 2002
March 21, 2002
September 19, 2002
March 21, 2002
$1,000

The following rules apply to all securities mentioned above:
Submission of Bids:
Noncompetitive bids:
Accepted in full up to $1 million at the highest discount rate of accepted competitive bids.
Foreign and International Monetary Authority (FIMA) bids:
Noncompetitive bids submitted through the Federal Reserve
Banks as agents for FIMA accounts.
Accepted in order of size from smallest to largest with no more than $100
million awarded per account.
The total noncompetitive amount awarded to Federal Reserve Banks as agents for FIMA
accounts will not exceed $1,000 million.
A single bid that would cause the limit to be exceeded will
be partially accepted in the amount that brings the aggregate award total to the $1,000 million limit.
However,
if there are two or more bids of equal amounts that would cause the limit to be exceeded, each will be prorated
to avoid exceeding the limit.
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 (NLP) 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.
TreasuryDirect customers can use the Pay Direct feature which authorizes a charge to their account of
record at their financial institution on issue date.

D EPA R T 1\1 E N T

0 F

THE

T REA SUR Y

NEWS
omCEOFPUBUCAFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASlUNGTON, D.C.- 20220 - (202)622-2960

For Immediate Release
March 14,2002

Contact: Tasia Scolinos
(202) 622~2960

TREASURY ANNOUNCES SIGNING OF MULTILATERAL
RECOMMENDATIONS FOR COMBATTING THE BLACK MARKET PESO
EXCHANGE SYSTEM
The Treasury Department today announced the signing of a Statement by the Senior
Officials of the Black Market Peso Exchange (BMPE) System Multilateral Working Group that
recommends short and long term actions to combat the biggest money laundering system in the
Western Hemisphere. The officials convened at the Department of the Treasury to formally
issue recommendations based on conclusions reached by the BMPE System Multilateral Experts
Working Group, comprised of officials from Aruba, Colombia, Panama, Venezuela, and the
United States. The Working Group, established in 2000, convened on four occasions to meet with
subject matter experts from relevant agencies of their respective governments, as well as Free
Trade Zone Administrators and merchants operating in Free Trade Zones.
The BMPE System is a trade-based money laundering system used by drug dealers to
launder their illegal proceeds. Typically, peso exchange brokers in Colombia deposit pesos into
the Colombian accounts of narcotics traffickers doing business in the United States. The pesos
are profitably exchanged for the tainted U.S. dollars. The brokers have U.S. based operatives
deposit the U.S. money into U.S. accounts that the brokers then use to purchase U.S. goods for
Colombian importers in exchange for pesos. The products are then smuggled into Colombia,
often through Panama, Aruba, and Venezuela, in avoidance of taxes.
The Black Market Peso Exchange System Multilateral Working Group was established to
combat this black market peso exchange system which is believed by U.S. law enforcement to
launder between $3 to $6 billion a year. According to Jimmy Gurule, Under Secretary for
Treasury Enforcement, "Money laundering takes place on a global scale and the Black Market
Peso Exchange System, though based in the Western Hemisphere, affects business around the
world. U.S. law enforcement have detected BMPE-related transactions occurring throughout the
United States, Europe, and Asia."
The short-term recommendations for all countries affected by the BMPE exchange
system include conducting public outreach programs for manufacturers, other persons engaged in
international commerce, as well as Free Trade Zone Operators and Merchants; more adequate
screening, registering, and regulating of merchants engaged in international trade; requiring
money changers and exchange offices to report to their supervisory agencies information on
suspicious or unusual transactions; and improving communication, coordination, and cooperation
among law enforcement, regulatory, and supervisory agencies.

PO-200l
Fur press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040

Long-tenn recommendations include improving the collection, quality, and international
exchange of trade data for the purpose of developing a regional Numerically Integrated Profiling
System (NIPS) to help promote legitimate trade by developing a more accurate picture of trade
flows; conducting economic, social, political, and/or legal studies of the problem of trade-based
money laundering; encouraging the development and implementation of an electronic customs
filing and reporting system with universally compatible data fields that can be used to track the
flow of goods being imported, exported, or transshipped from, to, or through each jurisdiction's
customs territory and free trade zones; considering bilateral or multilateral agreements or
arrangements to fill existing gaps with regard to the exchange of evidence and infonnation; and
having each jurisdiction evaluate its anti-money laundering legislative framework and
effectiveness in combating trade-based money laundering.
Signers of the Statement were: Mr. Nilo J.1. Swaen, Minister of Finance, for the Ministry
of Finance of Aruba; Mr. Santiago Rojas Arroyo, Director General, National Tax and Customs
Directorate for the National Tax and Customs Directorate of the Republic of Colombia (by Mr.
Luis Alberto Moreno, Ambassador of Colombia to the United States); Mr. Jose Miguel Aleman,
Minister of Foreign Relations for the Ministry of Foreign Relations of the Republic of Panama
(by Mr. Guillenno A. Ford, Ambassador of Panama to the United States); Dr. Mildred Camero,
President, The National Commission Against the TIlicit Use of Drugs for The National
Commission Against the TIlicit Use of Drugs of the Bolivarian Republic of Venezuela (by Dr.
Jose Luis Perez Castillo, Director, Anti-Money Laundering Unit; and Mr. Jimmy Gurule, Under
Secretary of the Treasury (Enforcement) for the Department of the Treasury of the United States.

NEWS
ornCE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C .• 20220. (202) 622-2960

For Immediate Release
March 18, 2002

Contact: Tara Bradshaw
(202) 622-2014

TREASURY ISSUES FINAL REGULATIONS ON HEDGING TRANSACTIONS
Provides Certainty for Taxpayers & Closes Down Potential Loophole
Today the Treasury Department issued final tax regulations that relate to hedging
transactions. A hedge is a transaction that allows a business to manage risks such as interest rate
changes, price changes and currency fluctuations.
"These regulations provide the certainty taxpayers need to engage in legitimate hedging
activity that is essential to the running of a business today," stated Mark Weinberger, Treasury
Assistant Secretary for Tax Policy. "The regulations also close a loophole that some interpreted
to allow taxpayers to avoid current tax on certain investments taxpayers used as hedges."
The regulations list a number of types of transactions as tax hedges, but also provide that
certain types of hedges will not be considered tax hedges. For example, the regulations provide
that an employer's investment hedging its deferred compensation obligations will not be treated
as a tax hedge. Thus, the employer needs to pay tax currently on these investment earnings.
Under the old rules, taxpayers had taken the position that the recognition of income from that
type of investment c,ould be delayed until the deferred compensation was paid to the employee,
This non-hedge treatment will apply also to investments relating to other employee benefits.
"It is improper to use the hedge rules to get full tax deferral on deferred executive
compensation," explains Mr. Weinberger. "Congress has set up a mechanism to get favored tax
treatment for deferred compensation through qualified plans. It is not appropriate to use the
hedging rules as a back door to obtain a favorable treatment for deferred compensation that
Congress never intended."

The text of the regulations is attachea.

-30PO-2002

For press releases, speeches, public schedules and ;;fficial biog-mphies,call aur 24-fwur fax Zine c;,i (2fJ2) 522-2C40

[4830-01-p]
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
[TO
]
RIN 1545-AY02
Hedging Transactions
AGENCY:
Internal Revenue Service (IRS), Treasury.
ACTION:
Final regulations.
SUMMARY:
This document contains final regulations relating to
the character of gain or loss from hedging transactions.
The
regulations reflect changes to the law made by the Ticket to
Work and Work Incentives Improvement Act of 1999. The
regulations affect businesses entering into hedging
transactions.
DATES: Effective Date:

These regulations are effective [INSERT

DATE OF PUBLICATION OF THIS DOCUMENT IN THE FEDERAL REGISTER] .

Applicability Dates:

For dates of applicability of these

regulations, see the discussion in the Dates of Applicability
paragraph in the Supplementary Information portion of the
preamble.
FOR FURTHER INFORMATION CONTACT:

Elizabeth Handler,

(202) 622-

3930 or Viva Hammer at (202) 622-0869 (not toll-free numbers) .
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act

The collections of information contained in these final
regulations have been reviewed and approved by the Office of
Management and Budget in accordance with the Paperwork Reduction
Act of 1995 (44 U.S.C. 3507(d)) under control number 1545-1480.
Some responses to these collections of information are
mandatory, and others are required to obtain the benefit of the
separate-entity election.

An agency may not conduct or sponsor, and a person is not
required to respond to, a collection of information unless it
displays a valid control number assigned by the Office of
Management and Budget.
The estimated annual burden per respondent or recordkeeper
varies from .1 to 40 hours, depending on individual
circumstances, with an estimated average of 5.9 hours.
Comments concerning the accuracy of this burden estimate
and suggestions for reducing this burden should be sent to the
Internal Revenue Service, Attn:

IRS Reports Clearance Officer,

W:CAR:MP:FP:S, Washington, DC 20224, and to the Office of
Management and Budget, Attn:

Desk Officer for the Department of

the Treasury, Office of Information and Regulatory Affairs,
Washington, DC 20503.
Books or records relating to a collection of information
must be retained as long as their contents may become material
in the administration of any Internal Revenue law.

Generally,

tax returns and tax return information are confidential, as
required by 26 U.S.C. 6103.
Background
This document contains amendments to 26 CFR Part 1 under
section 1221 of the Internal Revenue Code (Code).

Prior to

amendment in 1999, section 1221 generally defined a capital
asset as property held by the taxpayer other than:

(1) Stock in

trade or other types of assets includible in inventory;

(2)

property used in a trade or business that is real property or
property subject to depreciation;

(3) certain copyrights (or

similar property);

(4) accounts or notes receivable acquired in

the ordinary course of a trade or business; and (5) U.S.
government publications.
In 1994, the IRS published in the Federal Register

(59 FR

36360) final Treasury regulations under section 1221 providing
for ordinary character treatment for certain business hedges.
The regulations generally apply to transactions that reduce risk
with respect to ordinary property, ordinary obligations, and
borrowings of the taxpayer and that meet certain identification
requirements.

(§1.1221-2).

In 1996, the IRS published in the

Federal Register (61 FR 517) final regulations on the character

and timing of gain or loss from hedging transactions entered
into by members of a consolidated group.

In this preamble, the

final regulations published in 1994 and 1996 are referred to
collectively as the Treasury regulations.
On December 17, 1999, section 1221 was amended by section
532 of the Ticket to Work and Work Incentives Improvement Act of
1999 (113 Stat 1860) to provide ordinary gain or loss treatment
for hedging transactions and consumable supplies.

Section

1221(a) (7) provides ordinary treatment for hedging transactions
that are clearly identified as such before the close of the day
on which they were acquired, originated, or entered into.
The statute defines a hedging transaction as a transaction
entered into by the taxpayer in the normal course of business
primarily to manage risk of interest rate, price changes, or
currency fluctuations with respect to ordinary property,
ordinary obligations, or borrowings of the taxpayer.

Sections

1221(b) (2) (A) (i) and (ii).

The statutory definition of hedging

transaction also includes transactions to manage such other
risks as the Secretary may prescribe in regulations.
1221(b) (2) (A) (iii).

Section

Further, the statute grants the Secretary

the authority to provide regulations to address the treatment of
nonidentified or improperly identified hedging transactions, and
hedging transactions involving related parties (sections
1221(b) (2) (B) and (b) (3), respectively).

The statutory hedging

provisions are effective for transactions entered into on or
after December 17, 1999.

Congress intended that the hedging

rules be the exclusive means through which the gains and losses
from hedging transactions are treated as ordinary.

S. Rep. No.

201, 106 th Cong., 1st Sess. 25 (1999).
Section 1221(a) (8) provides that supplies of a type
regularly consumed by the taxpayer in the ordinary course of a
taxpayer's trade or business are not capital assets.

That

provision is effective for supplies held or acquired on or after
December 17, 1999.
A notice of proposed rulemaking (REG-107047-00, 2001-14
I.R.B. 1002) was published in the Federal Register (66 FR 4738)
on January 18, 2001.

On May 16, 2001, the IRS held a public

hearing on the proposed regulations.

Written comments

responding to the notice of proposed rulemaking were also
received.

In response to these comments, the proposed

regulations were modified and as so modified are adopted as
final regulations.

The principal changes to the proposed

regulations are discussed below.

Explanation of Provisions
Coordination with International Provisions of the Code
_____ The provisions of these regulations generally apply to
determine the character of gain or loss from transactions that
are also subject to various international provisions of the
Code.

Paragraph (a) (4) of the regulations, however, provides

that the character of gain or loss on section 988 transactions
is not determined under these regulations because gain or loss
on those transactions is ordinary under section 988(a} (l).

addition, no implication is intended as to what constitutes
"risk management" or "managing risk" for purposes of proposed or
final regulations under section 482.
Paragraph (a) (4) of the proposed regulations provided that
the definition of a hedging transaction under §1.1221-2(b} of
the proposed regulations would apply for purposes of certain
other international provisions of the Code only to the extent
provided in regulations issued under those provisions.
Technical changes have been made in the final regulations to
eliminate references to proposed regulations as well as Code
sections for which the relevant regulations have not been issued
in final form.

Subsequent regulations will specify the extent

to which the rules relating to hedging transactions that are
contained in §1.1221-2 will be applicable for purposes of those
other regulations and related Code sections.
Risk Management Standard
_____ Several commentators noted that the proposed regUlations
used risk reduction as the operating standard to implement the

risk management definition of hedging introduced by section
1221(b) (2) (A).

These commentators found that risk reduction is

too narrow a standard to encompass the intent of Congress which
defined hedges to include transactions that manage risk of
interest rate, price changes or currency fluctuations.

They

urged the IRS and Treasury to adopt a broader definition of
hedging to reflect Congress' intent.

With one exception, the

commentators did not suggest a definition of risk management.
In response to these comments, the final regulations have
been restructured to implement the risk management standard.

definition of risk management is provided, but instead, the
rules characterize a variety of classes of transactions as
hedging transactions because they manage risk.

Risk reducing

transactions still qualify as one class of hedging transactions,
but there are also others.

In addition, specific provision is

made for the recognition of additional types of qualifying risk
management transactions through published guidance or private
letter rulings.

Under the final regulations, as under the

proposed regulations, transactions entered into for speculative
purposes will not qualify as hedging transactions.
No. 201, 106 th Cong., 1 st Sess. 24

See S. Rep.

(1999).

Application on the Basis of Separate Business Units
_____ The proposed regulations provided that a taxpayer has risk
of a particular type only if it is at risk when all of its
operations are considered.
"macro" basis.

That is, risk must exist on a

For this purpose, under the proposed

regulations, a taxpayer has to show that hedges of particular

assets or liabilities, or groups of assets or liabilities, are
reasonably expected to reduce the overall risk of the taxpayer's
operations.
Commentators pointed out that this entity-based approach to
hedging is no longer uniform business practice.

Instead,

businesses often conduct risk management on a business unit by
business unit basis.

In response to these comments, the final

regulations permit the determination of whether a transaction
manages risk to be made on a business unit basis provided that
the business unit is within a single entity or consolidated
return group that adopts the single-entity approach.

An example

was added to the final regulations in which for one taxpayer,
the determination of whether hedging activities reduce risk is
made at the business unit level.

In the example, the conduct of

risk management activities within separate business units is
undertaken

as part of a program to reduce the overall risk of

the taxpayer's operations.
Fixed-to-floating Interest Rate Hedges
_____ Paragraph (c) (1) of the proposed regulations recognized
that a transaction that economically converts an interest rate
or price from a fixed rate or price to a floating rate or price
may manage risk.

Commentators suggested that the rule in the

proposed regulations provides insufficient guidance in that it
states only that fixed-to-floating interest rate or price hedges
may be hedging transactions.

In response to these comments, the

regulations have been restructured to separately address
interest rate hedges and price hedges.

Commentators suggested that in the case of interest rate
conversions, a taxpayer may choose to convert from a floating to
a fixed rate to fix the amount payable on the obligation.
However, a taxpayer could also elect to convert from a fixed to
a floating rate to insure that the value of the liability
remained relatively constant.

In response to these comments,

the final regulations provide that a transaction that converts
an interest rate from a fixed rate to a floating rate or from a
floating rate to a fixed rate manages risk.

With respect to

fixed-to-floating price hedges, the final regulations adopt the
proposed rules without change.
Transactions Not Entered into Primarily to Manage Risk
_____ Paragraph (c) (3) of the proposed regulations provided that
the purchase or sale of certain assets will not qualify as a
hedging transaction if the assets are not acquired primarily to
manage risk.

This rule was illustrated by the example of a

taxpayer that has an interest rate risk from a floating rate
borrowing and that acquires debt instruments bearing a
comparable floating interest rate.

Although the taxpayer's

interest rate risk from the floating rate borrowing may be
reduced by the purchase of the floating rate debt instruments,
the proposed regulations provided that the acquisition of the
debt instruments is not made primarily to reduce risk and,
therefore,

is not a hedging transaction.

The IRS and Treasury understand that some employers may
invest in assets (such as shares of a mutual fund) that are used
as a reference investment for purposes of computing their

liability to employees under a nonqualified deferred
compensation plan.

A question may arise whether such an

investment may constitute a hedging transaction and, if so,
whether income from the investment may be deferred by the
employer until payments of deferred compensation are made to
employees.

See §1.446-4(b); but compare Albertson's, Inc. v.

Commissioner, 42 F.3d 537 (9 th Cir. 1994).
The rule in the proposed regulations is based on
§1.1221-2(c) (1) (vii).

The rule has been restated in the final

regulations to refer specifically to investments in debt
instruments, equity securities, and annuity contracts so as to
provide greater certainty in its application.

For this purpose

certain transactions in instruments that are not themselves debt
instruments may include a debt investment.
§1.446-3(g) (4).

See, e.g.,

Further, the final regulations provide that the

IRS may identify by future published guidance specified
transactions that are determined not to be entered into
primarily to manage risk.

An example has been added to the

final regulations to illustrate that an investment in mutual
fund shares in the case described in the preceding paragraph
does not qualify as a hedging transaction.

A similar example is

added with respect to an investment in an annuity contract.
Hedging Risks Other Than Interest Rate or Price Changes, or
Currency Fluctuations
_____ Paragraph (c) (8) of the proposed regulations provided that
the Commissioner may, by published guidance, provide that
hedging transactions include transactions entered into to manage

risks other than interest rate or price changes, or currency
fluctuations.
The notice of proposed rulemaking solicited comments
regarding the expansion of the definition of hedging
transactions to include transactions that manage risks other
than interest rate or price changes, or currency fluctuations
with respect to ordinary property, ordinary obligations or
borrowings of the taxpayer.
response to that request.

Some comments were received in
Because the comments described

hedging transactions that related to the general operating
results of a business (such as gross sales) rather than specific
ordinary property, ordinary obligations or borrowings of the
taxpayer, the implementation of rules respecting such hedges
would present a number of issues not easily dealt with by the
rules contained in the final regulations.

Thus, the expansion

of the scope of operation of the hedging rules is not being
proposed at this time, so as not to delay the publication of
guidance on the matters that are covered by the final
regulations.

However, the IRS is continuing to consider whether

to expand the definition of hedging transactions to cover hedges
of such other risks.

The IRS and Treasury invite comments on

the types of risks that should be covered, including specific
examples of derivative transactions that may be incorporated
into future guidance, as well as the appropriate timing of
inclusion of gains and losses with respect to such transactions.
Send submissions to:

CC:ITA:RU (REG-I07047-00), room 5226,

Internal Revenue Service, POB 7604, Ben Franklin Station,
Washington, DC 20044.
"Gap" Hedges
_____ The status of so-called gap hedges was not separately
addressed in the proposed regulations and is not covered in the
final regulations.

Insurance companies, for example, sometimes

hedge the gap between their liabilities and the assets that fund
them.

Under the final regulations, a hedge of those assets

would not qualify as a hedging transaction if the assets are
capital assets.

Whether a gap hedge qualifies as a liability

hedge is a question of fact and depends on whether it is more
closely associated with the liabilities than with the assets.
Identification Requirement
_____A rule has been added specifying additional information

that must be provided for a transaction that counteracts a
hedging transaction.
Dates of Applicability

-----The

regulations generally apply to all transactions entered

into on or after [INSERT DATE OF PUBLICATION OF THIS DOCUMENT IN
THE FEDERAL REGISTER].

However, the IRS will not challenge any

transaction entered into on or after December 17, 1999, and
before [INSERT DATE OF PUBLICATION OF THIS DOCUMENT IN THE
FEDERAL REGISTER], that satisfies the provisions of either

§1.1221-2 of REG-107047-00, published in the Federal Register
(66 FR 4738) on January 18, 2001, or the provisions of this
final regulation.
Special Analyses

It has been determined that this Treasury decision is not a
significant regulatory action as defined in Executive Order
12866.

Therefore, a regulatory assessment is not required.

is hereby certified that the collection of information in these
regulations will not have a significant economic impact on a
substantial number of small entities.

This certification is

based upon the fact that very few small businesses enter into
hedging transactions due to their cost and complexity.

Further,

those small businesses that hedge enter into very few hedging
transactions because hedging transactions are costly, complex,
and require constant monitoring and a sophisticated
understanding of the capital markets.

Therefore, a Regulatory

Flexibility Analysis under the Regulatory Flexibility Act (5
U.S.C. chapter 6) is not required.

Pursuant to section 7805(f)

of the Code, the notice of proposed rulemaking preceding these
regulations was submitted to the Chief Counsel for Advocacy of
the Small Business Administration for comment on its impact on
small business.
Drafting Infor.mation

The principal author of these regulations is Elizabeth
Handler, Office of the Associate Chief Counsel (Financial
Institutions and Products).

However, other personnel from the

IRS and Treasury Department participated in their development.
List of Subjects

26 CFR Part 1

----- Income

taxes, Reporting and recordkeeping requirements.

26 CFR Part 602

- - - Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

Accordingly, 26 CFR parts 1 and 602 are amended as follows:
PART l--INCOME TAXES
Paragraph 1.

The authority citation for part 1 is amended

by revising the entry for §1.1221-2 to read as follows:
Authority:

26 U.S.C. 7805

* * *

Section 1.1221-2 also issued under 26 U.S.C. 1221(b) (2) (A) (iii),
(b) (2) (B), and (b) (3)
Par. 2.

1502 and 6 001.

* * *

In the list below, for each location indicated in

the left column, remove the language in the middle column from
that section, and add the language in the right column.
Affected section

Remove

Add

1.446-4 (d) (2) ,
first sentence

1.1221-2(e)

1.1221-2(f)

1.446-4 (d) (2),
last sentence

1.1221-2 (e) (2)

1.1221-2 (f) (2)

1.446-4 (d) (3),
first sentence

1.1221-2(e)

1.1221-2(f)

1.446-4 (d) (3),
last sentence

1.1221-2(a) (4) (i)

1.1221-2 (a) (4)

1.446-4 (e) (7),
first sentence

1.1221-2 (c) (2)

1.1221-2 (d) (4)

1.446-4 (e) (9) (ii),
first sentence

1.1221-2 (d) (2)

1.1221-2 (e) (2)

1.446-4 (e) (9) (ii),
last sentence

1.1221-2(d) (2) (ii)

1.1221-2(e) (2) (ii)

1.475(b)-1(d) (2)

1.1221-2(e)

1.1221-2(f)

1.954-2 (a) (4) (ii) (A) ,
first sentence

1.1221-2(a)
through (c)

1.1221-2(a) through

1.954-2 (a) (4) (ii)
first sentence
1.954-2(g) (2) (ii)
last sentence

1.1221-2(e)

1.1221-2(f)

1.954-2 (g) (3) (i)
last sentence

(B) ,

( d)

(B)

(2), 1.1221-2(c) (7)

1.1221-2 (c)

(3)

(B) ,

1.1221-2 (c) (7)

1.1221-2 (c)

(3)

1.1256(e) -l(b),
1.1221-2 (e) (1)
first and last sentences

1.1221-2 (f) (1)

1.1256 (e) -1 (c) ,
first sentence

1.1221-2 (e)

1.1221-2 (f) (1)

1.1256 (e) -1 (c) ,
last sentence

paragraph
(f) (1) (ii) of
§1.1221-2

Par. 3.
§1.1221-2

(1)

paragraph
(g) (1) (ii) of
§1.1221-2

Section 1.1221-2 is revised to read as follows:

Hedging transactions.

(a) Treatment of hedging transactions--(l) In general.
This section governs the treatment of hedging transactions under
section 1221(a) (7).

Except as provided in paragraph (g) (2) of

this section, the term capital asset does not include property
that is part of a hedging transaction (as defined in paragraph
(b) of this section).
(2) Short sales and options.

This section also governs the

character of gain or loss from a short sale or option that is
part of a hedging transaction.

Except as provided in paragraph

(g) (2) of this section, gain or loss on a short sale or option

that is part of a hedging transaction (as defined in paragraph
(b) of this section)
(3) Exclusivity.

is ordinary income or loss.
If a transaction is not a hedging

transaction as defined in paragraph (b) of this section, gain or
loss from the transaction is not made ordinary on the grounds
that property involved in the transaction is a surrogate for a
noncapital asset, that the transaction serves as insurance
against a business risk, that the transaction serves a hedging
function, or that the transaction serves a similar function or
purpose.
(4) Coordination with section 988.

This section does not

apply to determine the character of gain or loss realized on a
section 988 transaction as defined in section 988(c) (1) or
realized with respect to any qualified fund as defined in
section 988 (c) (1) (E) (iii) .
(b) Hedging transaction defined.

Section 1221(b) (2) (A)

provides that a hedging transaction is any transaction that a
taxpayer enters into in the normal course of the taxpayer's
trade or business primarily-(1) To manage risk of price changes or currency
fluctuations with respect to ordinary property (as defined in
paragraph (c) (2) of this section) that is held or to be held by
the taxpayer;
(2) To manage risk of interest rate or price changes or
currency fluctuations with respect to borrowings made or to be
made, or ordinary obligations incurred or to be incurred, by the
taxpayer; or

(3) To manage such other risks as the Secretary may
prescribe in regulations (see paragraph (d) (6) of this section).
(c) General rules--(l) Normal course.

Solely for purposes

of paragraph (b) of this section, if a transaction is entered
into in furtherance of a taxpayer's trade or business, the
transaction is entered into in the normal course of the
taxpayer's trade or business.

This rule includes managing risks

relating to the expansion of an existing business or the
acquisition of a new trade or business.
(2) Ordinary property and obligations.

Property is

ordinary property to a taxpayer only if a sale or exchange of
the property by the taxpayer could not produce capital gain or
loss under any circumstances.

Thus, for example, property used

in a trade or business within the meaning of section 1231(b)
(determined without regard to the holding period specified in
that section) is not ordinary property.

An obligation is an

ordinary obligation if performance or termination of the
obligation by the taxpayer could not produce capital gain or
loss.

For purposes of this paragraph (c) (2), the term

termination has the same meaning as it does in section 1234A.
(3) Hedging an aggregate risk.

The term hedging

transaction includes a transaction that manages an aggregate
risk of interest rate changes, price changes, and/or currency
fluctuations only if all of the risk, or all but a de minimis
amount of the risk, is with respect to ordinary property,
ordinary obligations, or borrowings.

(4) Managing risk--(i) In general.

Whether a transaction

manages a taxpayer's risk is determined based on all of the
facts and circumstances surrounding the taxpayer's business and
the transaction.

Whether a transaction manages a taxpayer's

risk may be determined on a business unit by business unit basis
(for example by treating particular groups of activities,
including the assets and liabilities attributable to those
activities, as separate business units), provided that the
business unit is within a single entity or consolidated return
group that adopts the single-entity approach.

A taxpayer's

hedging strategies and policies as reflected in the taxpayer's
minutes or other records are evidence of whether particular
transactions were entered into primarily to manage the
taxpayer's risk.
(ii) Limitation of risk management transactions to those
specifically described.

Except as otherwise determined by

published guidance or by private letter ruling, a transaction
that is not treated as a hedging transaction under paragraph (d)
does not manage risk.

Moreover, a transaction undertaken for

speculative purposes will not be treated as a hedging
transaction.
(d) Transactions that manage risk--(l) Risk reduction
transactions--(i) In general.

A transaction that is entered

into to reduce a taxpayer's risk, manages a taxpayer's risk.
(ii) Micro and macro hedges--(A) In general.

A taxpayer

generally has risk of a particular type only if it is at risk
when all of its operations are considered.

Nonetheless, a hedge

of a particular asset or liability generally will be respected
as reducing risk if it reduces the risk attributable to the
asset or liability and if it is reasonably expected to reduce
the overall risk of the taxpayer's operations.

If a taxpayer

hedges particular assets or liabilities, or groups of assets or
liabilities, and the hedges are undertaken as part of a program
that, as a whole, is reasonably expected to reduce the overall
risk of the taxpayer's operations, the taxpayer generally does
not have to demonstrate that each hedge that was entered into
pursuant to the program reduces its overall risk.
(B) Example.

The following example illustrates the rules

stated in paragraph (d) (1) (ii) (A) of this section:
Example.
Corporation X manages its business operations by
treating particular groups of activities, including the assets
and liabilities attributable to those assets, as separate
business units. A separate set of books and records is
maintained with respect to the activities, assets and
liabilities of separate business unit y. As part of a risk
management program that Corporation X reasonably expects to
reduce the overall risks of its business operations, Corporation
X enters into hedges to reduce the risks of separate business
unit y.
Corporation X may demonstrate that the hedges reduce
risk by taking into account only the activities, assets and
liabilities of business unit y.
(iii) Written options.

A written option may reduce risk.

For example, in appropriate circumstances, a written call option
with respect to assets held by a taxpayer or a written put
option with respect to assets to be acquired by a taxpayer may
be a hedging transaction.
section.

See also paragraph (d) (3) of this

(iv)

Fixed-to-floating price hedges.

Under the principles

of paragraph (d) (1) (ii) (A) of this section, a transaction that
economically converts a price from a fixed price to a floating
price may reduce risk.

For example, a taxpayer with a fixed

cost for its inventory may be at risk if the price at which the
inventory can be sold varies with a particular factor.

Thus,

for such a taxpayer a transaction that converts its fixed price
to a floating price may be a hedging transaction.
(2)

Interest rate conversions.

A transaction that

economically converts an interest rate from a fixed rate to a
floating rate or that converts an interest rate from a floating
rate to a fixed rate manages risk.
(3) Transactions that counteract hedging transactions.

a transaction is entered into primarily to offset all or any
part of the risk management effected by one or more hedging
transactions, the transaction is a hedging transaction.

For

example, if a written option is used to reduce or eliminate the
risk reduction obtained from another position such as a
purchased option, then it may be a hedging transaction.
(4) Recycling.

A taxpayer may enter into a hedging

transaction by using a position that was a hedge of one asset or
liability as a hedge of another asset or liability (recycling).
(5) Transactions not entered into primarily to manage
risk--(i) Rule.

Except as otherwise determined in published

guidance or private letter ruling, the purchase or sale of a
debt instrument, an equity security, or an annuity contract is
not a hedging transaction even if the transaction limits or

reduces the taxpayer's risk with respect to ordinary property,
borrowings, or ordinary obligations.

In addition, the

Commissioner may determine in published guidance that other
transactions are not hedging transactions.
(ii) Examples.

The following examples illustrate the rule

stated in paragraph (d) (5) (i) :
Example 1.

Taxpayer borrows money and agrees to pay a

floating rate of interest. Taxpayer purchases debt instruments
that bear a comparable floating rate.

Although taxpayer's

interest rate risk from the floating rate borrowing may be
reduced by the purchase of the debt instruments, the acquisition
of the debt instruments is not a hedging transaction, because
the transaction is not entered into primarily to manage the
taxpayer's risk.
Example 2.

Taxpayer undertakes obligations to pay

compensation in the future.

The amount of the future

compensation payments is adjusted as if amounts were invested in
a specified mutual fund and were increased or decreased by the
earnings, gains and losses that would result from such an
investment.
fund.

Taxpayer invests funds in the shares of the mutual

Although the investment in shares of the mutual fund

reduces the taxpayer's risk of fluctuation in the amount of its
obligation to employees, the investment was not made primarily
to manage the taxpayer's risk.

Accordingly, the transaction is

not a hedging transaction.
Example 3.

Taxpayer provides a nonqualified retirement

plan for employees that is structured like a defined

contribution plan.

Based on a schedule that takes into account

an employee's monthly salary and years of service with the
taxpayer, the taxpayer makes monthly credits to an account for
each employee.

Each employee may designate that the account

will be treated as if it were used to pay premiums on a variable
annuity contract issued by the M insurance company with a value
that reflects a specified investment option.

M offers a number

of investment options for its variable annuity contracts.
Taxpayer invests funds in M company variable annuity contracts
that parallel the investment options selected by the employees.
The investment is not made primarily to manage the taxpayer's
risk and is not a hedging transaction.
(6) Hedges of other risks.

The Commissioner may, by

published guidance, determine that hedging transactions include
transactions entered into to manage risks other than interest
rate or price changes, or currency fluctuations.
(7) Miscellaneous provision-- (i) Extent of risk management.
A taxpayer may hedge all or any portion of its risk for all or
any part of the period during which it is exposed to the risk.
(ii) Number of transactions.

The fact that a taxpayer

frequently enters into and terminates positions (even if done on
a daily or more frequent basis) is not relevant to whether these
transactions are hedging transactions.

Thus, for example, a

taxpayer hedging the risk associated with an asset or liability
may frequently establish and terminate positions that hedge that
risk, depending on the extent the taxpayer wishes to be hedged.
Similarly, if a taxpayer maintains its level of risk exposure by

entering into and terminating a large number of transactions in
a single day, its transactions may nonetheless qualify as
hedging transactions.
(e) Hedging by members of a consolidated group--(l) General
rule: single-entity approach.

For purposes of this section, the

risk of one member of a consolidated group is treated as the
risk of the other members as if all of the members of the group
were divisions of a single corporation.

For example, if any

member of a consolidated group hedges the risk of another member
of the group by entering into a transaction with a third party,
that transaction may potentially qualify as a hedging
transaction.

Conversely, intercompany transactions are not

hedging transactions because, when considered as transactions
between divisions of a single corporation, they do not manage
the risk of that single corporation.
(2) Separate-entity election.

In lieu of the single-entity

approach specified in paragraph (e) (1) of this section, a
consolidated group may elect separate-entity treatment of its
hedging transactions.

If a group makes this separate-entity

election, the following rules apply:
(i) Risk of one member not risk of other members.
Notwithstanding paragraph (e) (1) of this section, the risk of
one member is not treated as the risk of other members.
(ii)

Intercompany transactions.

An intercompany

transaction is a hedging transaction (an intercompany hedging
transaction) with respect to a member of a consolidated group if
and only if it meets the following requirements--

(A) The position of the member in the intercompany
transaction would qualify as a hedging transaction with respect
to the member (taking into account paragraph (e) (2) (i) of this
section) if the member had entered into the transaction with an
unrelated party; and
(B) The position of the other member (the marking member)
in the transaction is marked to market under the marking
member's method of accounting.
(iii) Treatment of intercompany hedging transactions.

intercompany hedging transaction (that is, a transaction that
meets the requirements of paragraphs (e) (2) (ii) (A) and (B) of
this section)

is subject to the following rules--

(A) The character and timing rules of §1.lS02-13 do not
apply to the income, deduction, gain, or loss from the
intercompany hedging transaction; and
(B) Except as provided in paragraph (g) (3) of this section,
the character of the marking member's gain or loss from the
transaction is ordinary.
(iv) Making and revoking the election.

Unless the

Commissioner otherwise prescribes, the election described in
this paragraph (e) (2) must be made in a separate statement
saying "[Insert Name and Employer Identification Number of
Common Parent] HEREBY ELECTS THE APPLICATION OF SECTION 1.12212 (e) (2)

(THE SEPARATE-ENTITY APPROACH) . "

The statement must

also indicate the date as of which the election is to be
effective.

The election must be signed by the common parent and

filed with the group's Federal income tax return for the taxable

year that includes the first date for which the election is to
apply.

The election applies to all transactions entered into on

or after the date so indicated.

The election may be revoked

only with the consent of the Commissioner.
(3) Definitions.

For definitions of consolidated group,

divisions of a single corporation, group,

intercompany

transactions, and member, see section 1502 and the regulations
thereunder.
(4) Examples.
General Facts.
In these examples, 2 and g
are members of the same consolidated group.
O's business
operations give rise to interest rate risk "~," which 2 wishes
to hedge. 2 enters into an intercompany transaction with g that
transfers the risk to H. 2's position in the intercompany
transaction is "~," and !i's position in the transaction is "f."
H enters into position "Q" with a third party to reduce the
interest rate risk it has with respect to its position f. D
would be a hedging transaction with respect to risk ~ if 2's
risk ~ were g's risk. The following examples illustrate this
paragraph (e):

Example 1. Single-entity treatment--(i) General rule.
Under paragraph (e) (I) of this section, Q's risk ~ is treated as
!!'s risk, and therefore Q is a hedging transaction with respect
to risk A.
Thus, the character of 2 is determined under the
rules of this section, and the income, deduction, gain, or loss
from Q must be accounted for under a method of accounting that
satisfies §1.446-4. The intercompany transaction B-C is not a
hedging transaction and is taken into account under §1.1502-13.
(ii) Identification. Q must be identified as a hedging
transaction under paragraph (f) (I) of this section, and A must
be identified as the hedged item under paragraph (f) (2) of this
section. Under paragraph (f) (5) of this section, the
identification of ~ as the hedged item can be accomplished by
identifying the positions in the intercompany transaction as
hedges or hedged items, as appropriate.
Thus, substantially
contemporaneous with entering into 2, g may identify f as the
hedged item and 2 may identify ~ as a hedge and ~ as the hedged
item.

Example 2.
Separate-entity election; counterparty that
does not mark to market.
In addition to the General Facts
stated above, assume that the group makes a separate-entity
election under paragraph (e) (2) of this section.
If H does not
mark £ to market under its method of accounting, then ~ is not a
hedging transaction, and the B-C intercompany transaction is
taken into account under the rules of section 1502. D is not a
hedging transaction with respect to~, but Q may be a hedging
transaction with respect to £ if £ is ordinary property or an
ordinary obligation and if the other requirements of paragraph
(b) of this section are met.
If D is not part of a hedging
transaction, then D may be part of a straddle for purposes of
section 1092.

Example 3.
Separate-entity election; counterparty that
marks to market. The facts are the same as in Example 2 above,
except that H marks £ to market under its method of accounting.
Also assume that ~ would be a hedging transaction with respect
to risk A if
- had entered into that transaction with an
unrelated party. Thus, for 0, the B-C transaction is an
intercompany hedging transaction with respect to Q's risk ~, the
character and timing rules of §1.1502-13 do not apply to the B-C
transaction, and g's income, deduction, gain, or loss from f is
ordinary. However, other attributes of the items from the B-C
transaction are determined under §1.1502-13. Q is a hedging
transaction with respect to C if it meets the requirements of
paragraph (b) of this section.

(f)

Identification and recordkeeping--(l) Same-day

identification of hedging transactions.

Under section

1221(a) (7), a taxpayer that enters into a hedging transaction
(including recycling an existing hedging transaction) must
clearly identify it as a hedging transaction before the close of
the day on which the taxpayer acquired, originated, or entered
into the transaction (or recycled the existing hedging
transaction) .
(2) Substantially contemporaneous identification of hedged
item--(i) Content of the identification.

A taxpayer that enters

into a hedging transaction must identify the item, items, or
aggregate risk being hedged.

Identification of an item being

hedged generally involves identifying a transaction that creates
risk, and the type of risk that the transaction creates.

For

example, if a taxpayer is hedging the price risk with respect to
its June purchases of corn inventory, the transaction being
hedged is the June purchase of corn and the risk is price
movements in the market where the taxpayer buys its corn.

For

additional rules concerning the content of this identification,
see paragraph (f) (3) of this section.
(ii) Timing of the identification.

The identification

required by this paragraph (f) (2) must be made substantially
contemporaneously with entering into the hedging transaction.

An identification is not substantially contemporaneous if it is
made more than 35 days after entering into the hedging
transaction.
(3)

Identification requirements for certain hedging

transactions.

In the case of the hedging transactions described

in this paragraph (f) (3), the identification under paragraph
(f) (2) of this section must include the information specified.
(i) Anticipatory asset hedges.

If the hedging transaction

relates to the anticipated acquisition of assets by the
taxpayer, the identification must include the expected date or
dates of acquisition and the amounts expected to be acquired.
(ii)

Inventory hedges.

If the hedging transaction relates

to the purchase or sale of inventory by the taxpayer, the
identification is made by specifying the type or class of

inventory to which the transaction relates.

If the hedging

transaction relates to specific purchases or sales, the
identification must also include the expected dates of the
purchases or sales and the amounts to be purchased or sold.
(iii) Hedges of debt of the taxpayer--(A) Existing debt.
If the hedging transaction relates to accruals or payments under
an issue of existing debt of the taxpayer, the identification
must specify the issue and, if the hedge is for less than the
full issue price or the full term of the debt, the amount of the
issue price and the term covered by the hedge.
(B) Debt to be issued.

If the hedging transaction relates

to the expected issuance of debt by the taxpayer or to accruals
or payments under debt that is expected to be issued by the
taxpayer, the identification must specify the following
information:

the expected date of issuance of the debt; the

expected maturity or maturities; the total expected issue price;
and the expected interest provisions.

If the hedge is for less

than the entire expected issue price of the debt or the full
expected term of the debt, the identification must also include
the amount or the term being hedged.

The identification may

indicate a range of dates, terms, and amounts, rather than
specific dates, terms, or amounts.

For example, a taxpayer

might identify a transaction as hedging the yield on an
anticipated issuance of fixed rate debt during the second half
of its fiscal year, with the anticipated amount of the debt
between $75 million and $125 million, and an anticipated term of
approximately 20 to 30 years.

(iv) Hedges of aggregate risk--{A) Required identification.
If a transaction hedges aggregate risk as described in paragraph
(c) (3) of this section, the identification under paragraph
(f) (2) of this section must include a description of the risk
being hedged and of the hedging program under which the hedging
transaction was entered.

This requirement may be met by placing

in the taxpayer's records a description of the hedging program
and by establishing a system under which individual transactions
can be identified as being entered into pursuant to the program.
(B) Description of hedging program.

A description of a

hedging program must include an identification of the type of
risk being hedged, a description of the type of items giving
rise to the risk being aggregated, and sufficient additional
information to demonstrate that the program is designed to
reduce aggregate risk of the type identified.

If the program

contains controls on speculation (for example, position limits),
the description of the hedging program must also explain how the
controls are established, communicated, and implemented.
(v) Transactions that counteract hedging transactions.

the hedging transaction is described in paragraph (d) (3) of this
section, the description of the hedging transaction must include
an identification of the risk management transaction that is
being offset and the original underlying hedged item.
(4) Manner of identification and records to be retained-(i)

Inclusion of identification in tax records.

The

identification required by this paragraph (f) must be made on,
and retained as part of, the taxpayer's books and records.

(ii) Presence of identification must be unambiguous.

The

presence of an identification for purposes of this paragraph (f)
must be unambiguous. The identification of a hedging transaction
for financial accounting or regulatory purposes does not satisfy
this requirement unless the taxpayer's books and records
indicate that the identification is also being made for tax
purposes.

The taxpayer may indicate that individual hedging

transactions, or a class or classes of hedging transactions,
that are identified for financial accounting or regulatory
purposes are also being identified as hedging transactions for
purposes of this section.
(iii) Manner of identification.

The taxpayer may

separately and explicitly make each identification, or, so long
as paragraph (f) (4) (ii) of this section is satisfied, the
taxpayer may establish a system pursuant to which the
identification is indicated by the type of transaction or by the
manner in which the transaction is consummated or recorded.

identification under this system is made at the later of the
time that the system is established or the time that the
transaction satisfies the terms of the system by being entered,
or by being consummated or recorded, in the designated fashion.
(iv)

Principles of paragraph (f) (4) (iii) of this section

illustrated.

Paragraphs

(f) (4) (iv) (A) through (C) of this

section illustrate the principles of paragraph (f) (4) (iii) of
this section and assume that the other requirements of this
paragraph (f)

are satisfied.

(A) A taxpayer can make an identification by designating a
hedging transaction for (or placing it in) an account that has
been identified as containing only hedges of a specified item
(or of specified items or specified aggregate risk).
(B) A taxpayer can make an identification by including and
retaining in its books and records a statement that designates
all future transactions in a specified derivative product as
hedges of a specified item, items, or aggregate risk.
(C) A taxpayer can make an identification by designating a
certain mark, a certain form, or a certain legend as meaning
that a transaction is

a hedge

of a specified item (or of

specified items or a specified aggregate risk).

Identification

can be made by placing the designated mark on a record of the
transaction (for example, trading ticket, purchase order, or
trade confirmation) or by using the designated form or a record
that contains the designated legend.
(5)

Identification of hedges involving members of the same

consolidated group--(i) General rule: single-entity approach.
member of a consolidated group must satisfy the requirements of
this paragraph (f) as if all of the members of the group were
divisions of a single corporation.

Thus, the member entering

into the hedging transaction with a third party must identify
the hedging transaction under paragraph (f) (1) of this section.
Under paragraph (f) (2) of this section, that member must also
identify the item, items, or aggregate risk that is being
hedged, even if the item, items, or aggregate risk relates
primarily or entirely to other members of the group.

If the

members of a group use intercompany transactions to transfer
risk within the group, the requirements of paragraph (f) (2) of
this section may be met by identifying the intercompany
transactions, and the risks hedged by the intercompany
transactions, as hedges or hedged items, as appropriate.
Because identification of the intercompany transaction as a
hedge serves solely to identify the hedged item, the
identification is timely if made within the period required by
paragraph (f) (2) of this section.

For example, if a member

transfers risk in an intercompany transaction, it may identify
under the rules of this paragraph (f) both its position in that
transaction and the item, items, or aggregate risk being hedged.
The member that hedges the risk outside the group may identify
under the rules of this paragraph (f) both its position with the
third party and its position in the intercompany transaction.
Paragraph (e) (4) Example 1 of this section illustrates this
identification.
(ii) Rule for consolidated groups making the separateentity election.

If a consolidated group makes the separate-

entity election under paragraph (e) (2) of this section, each
member of the group must satisfy the requirements of this
paragraph (f) as though it were not a member of a consolidated
group.
(6) Consistency with section 1256(e) (2).

Any

identification for purposes of section 1256(e) (2)

is also an

identification for purposes of paragraph (f) (1) of this section.

(g) Effect of identification and non-identification--(l)
Transactions identified--(i) In general.

If a taxpayer

identifies a transaction as a hedging transaction for purposes
of paragraph (f) (1) of this section, the identification is
binding with respect to gain, whether or not all of the
requirements of paragraph (f) of this section are satisfied.
Thus, gain from that transaction is ordinary income.

If the

transaction is not in fact a hedging transaction described in
paragraph (b) of this section, however, paragraphs (a) (1) and
(2) of this section do not apply and the character of loss is
determined without reference to whether the transaction is a
surrogate for a noncapital asset, serves as insurance against a
business risk, serves a hedging function, or serves a similar
function or purpose.

Thus, the taxpayer's identification of the

transaction as a hedging transaction does not itself make loss
from the transaction ordinary.
(ii)

Inadvertent identification.

Notwithstanding paragraph

(g) (1) (i) of this section, if the taxpayer identifies a
transaction as a hedging transaction for purposes of paragraph
(f) of this section, the character of the gain is determined as
if the transaction had not been identified as a hedging
transaction if-(A) The transaction is not a hedging transaction (as
defined in paragraph (b) of this section);
(B) The identification of the transaction as a hedging
transaction was due to inadvertent error; and

(C) All of the taxpayer's transactions in all open years
are being treated on either original or, if necessary, amended
returns in a manner consistent with the principles of this
section.
(2) Transactions not identified--(i) In general.

Except as

provided in paragraphs (g) (2) (ii) and (iii) of this section, the
absence of an identification that satisfies the requirements of
paragraph (f) (1) of this section is binding and establishes that
a transaction is not a hedging transaction.

Thus, subject to

the exceptions, the rules of paragraphs (a) (1) and (2) of this
section do not apply, and the character of gain or loss is
determined without reference to whether the transaction is a
surrogate for a noncapital asset, serves as insurance against a
business risk, serves a hedging function, or serves a similar
function or purpose.
(ii)

Inadvertent error.

If a taxpayer does not make an

identification that satisfies the requirements of paragraph (f)
of this section, the taxpayer may treat gain or loss from the
transaction as ordinary income or loss under paragraph (a) (1) or
(2) of this section if-(A) The transaction is a hedging transaction (as defined in
paragraph (b) of this section) ;
(B) The failure to identify the transaction was due to
inadvertent error; and
(C) All of the taxpayer's hedging transactions in all open
years are being treated on either original or, if necessary,

amended returns as provided in paragraphs (a) (1) and (2) of this
section.
(iii) Anti-abuse rule.

If a taxpayer does not make an

identification that satisfies all the requirements of paragraph
(f) of this section but the taxpayer has no reasonable grounds
for treating the transaction as other than a hedging
transaction, then gain from the transaction is ordinary.

The

reasonableness of the taxpayer's failure to identify a
transaction is determined by taking into consideration not only
the requirements of paragraph (b) of this section but also the
taxpayer's treatment of the transaction for financial accounting
or other purposes and the taxpayer's identification of similar
transactions as hedging transactions.
(3) Transactions by members of a consolidated group--(i)
Single-entity approach.

If a consolidated group is under the

general rule of paragraph (e) (1) of this section (the singleentity approach), the rules of this paragraph (g) apply only to
transactions that are not intercompany transactions.
(ii) Separate-entity election.

If a consolidated group has

made the election under paragraph (e) (2) of this section, then,
in addition to the rules of paragraphs (g) (1) and (2) of this
section, the following rules apply:
(A)

If an intercompany transaction is identified as a

hedging transaction but does not meet the requirements of
paragraphs (e) (2) (ii) (A) and (B) of this section, then,
notwithstanding any contrary provision in §1.1502-13, each party
to the transaction is subject to the rules of paragraph (g) (1)

of this section with respect to the transaction as though it had
incorrectly identified its position in the transaction as a
hedging transaction.
(B) If a transaction meets the requirements of paragraphs
(e) (2) (ii)

(A) and (B) of this section but the transaction is

not identified as a hedging transaction, each party to the
transaction is subject to the rules of paragraph (g) (2) of this
section.

(Because the transaction is an intercompany hedging

transaction, the character and timing rules of §1.1502-13 do not
apply. See paragraph (e) (2) (iii) (A) of this.section.)
(h) Effective date.

The rules of this section apply to

transactions entered into on or after [INSERT DATE OF

PUBLICATION OF THIS DOCUMENT IN THE FEDERAL REGISTER] .
Par. 4. Section 1.1256(e)-1 is revised to read as follows:
§1.1256(e)-1
(a)

Identification of hedging transactions.

Identification and recordkeeping requirements.

Under

section 1256(e) (2), a taxpayer that enters into a hedging
transaction must identify the transaction as a hedging
transaction before the close of the day on which the taxpayer
enters into the transaction.
(b) Requirements for identification.

The identification of

a hedging transaction for purposes of section 1256(e) (2) must
satisfy the requirements of §1.1221-2 (f) (1).

Solely for

purposes of section 1256(f) (1), however, an identification that
does not satisfy all of the requirements of §1.1221-2(f) (1)
nevertheless treated as an identification under section
1256 (e) (2) .

Any identification for

is also an identification for
If a taxpayer satisfies the

requirements of §1.1221-2(f) (1) (ii), the transaction is treated
as if it were not identified as a hedging transaction for
purposes of section 1256(e) (2).
(d) Effective date.

The rules of this section apply to

transactions entered into on or after

[INSERT DATE OF

PUBLICATION OF THIS DOCUMENT IN THE FEDERAL REGISTER] .
PART 602--0MB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT
Par. 5.

The authority citation for part 602 continues to

read as follows:
Authority: 26 U.S.C. 7805.

Par. 6.

In §602.101, paragraph (b)

is amended by removing

the entries for "1.1221-2," "1.1221-2(d) (2) (iv) ,"
"1.1221-2 (e) (5) ," "1.1221-2 (g) (5) (ii) ," "1.1221-2 (g) (6) (ii) ,"
"1.1221-2(g) (6) (iii)," and "1.1221-2T(c)" and adding an entry in
numerical order to the table to read as follows:
§602.101 OMB Control numbers.

* * * * *
(b)

* * *

CFR part or section where

Current
OMB

identified and described

control No.

* * * * *
1.1221-2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1545-1480

Deputy Commissioner of Internal Revenue.

Approved:

Assistant Secretary of the Treasury.

ornCE OFPUBUCAFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C. - 20220 - (202) 622-2960

FOR IMMEDIATE RELEASE
March 15, 2002

Contact: Tasia Scolinos
(202) 622-2960

Remarks by Julie Myers
Deputy Assistant Secretary for
Money Laundering and Financial Crimes
United States Department of the Treasury Before the
International Regulators Meeting
Boca Raton, Florida

Good afternoon. I am Julie Myers, Deputy Assistant Secretary for Money Laundering
and Financial Crimes in the Office of Enforcement of the Department of the Treasury. It is
my pleasure to be able to speak with you today about cooperation on money laundering with
special regard to the securities industry and I thank those who extended this kind invitation.
There was a time, perhaps not so long ago, when some may have argued that money is
nothing more than a medium of exchange, colorless and odorless, like some component of the
atmosphere, conducive to life but morally neutral. In the last two de€ades we have begun to
disavow that notion. We have seen criminal proceeds color parts of our own society, painting
desolate landscapes of addiction and violence. And, in the early workday hours of September
11 t\ we saw an unforgettable image of terror - a terror that also required money for its
perpetration. These types of monies do, indeed, carry with them a very rank odor, repugnant
to law-abiding citizens everywhere, to their commerce, and to their institutions.
Over these same twenty years, we who work in the law enforcement community have
come to the realization that an effective response to money laundering must involve more
than simply law enforcement. As a threat to the security and integrity of our financial
institutions, money laundering deserves a system-wide response and broad cooperation. Law
enforcement, in and of itself, can only do so much - chiefly investigating crimes and assisting
prosecutions. When it comes to money laundering, the other principal stakeholders in the
financial system need to be a part of the solution, to see this not just as a compartmentalized
problem for law enforcement, but as a common and mutually assisted effort to make our
national and international financial system less vulnerable to the abuses and depredations of
criminals.

PO-2003

For press releases, stJeeches./Jublic schedules and official biographies, call our 24-Jwur fax line 'li (2D2; 522-2MO

Fortunately, this wider perspective has been taking hold. From regulators to the
financial services industry to the international community, there is a growing understanding
of, and concern with, money laundering and financial crime. In the United States, banking
regulatory agencies have agreed that their approach to anti-money laundering supervision
needs to be risk-focused, with resources concentrated upon those institutions that are most
susceptible to money laundering. These agencies have been developing procedures to
address high-risk areas such as private banking, payable through accounts, and wire transfer
activity. A second generation of bank examination procedures has been set forth and fieldtested. Anti-money laundering training modules, using information derived from recent
cases, now offer examiners new and timely information derived from the actual experiences
of regulatory as well as law enforcement agencies. Banks have been required to implement
anti-money laundering control programs for years and now the reach of that requirement is
expanding to cover other providers of financial services.
Extending the scope of anti-money laundering programs to the securities industry
involves a premise recognized by securities regulators as early as 1998 when the International
Organization of Securities Commissions issued its Objectives and Principles of Securities
Regulation. In those principles there is a specific reference to anti-money laundering controls
as an important element of sound securities and futures regulation. We agree, and, to that
end, we are now extending our anti-money laundering programs to include the securities and
futures industry. We are doing this in close consultation and coordination with U.S.
securities and futures regulators. We have also sought the counsel and advice of
representatives from the securities and futures industry. We are doing all of this to ensure
that the new requirements being imposed will provide the best possible result for law
enforcement while at the same time minimizing any unnecessary disruption to the operations
of securities and futures industry members.
To say that September 11 th re-focused our attention on the problem of money
laundering and the related threat of terrorist financing hardly seems to capture the import of
that day, but that was certainly one of its many effects. Less than two months after that
infamous attack, the Congress of the United States overwhelmingly passed and the President
signed what is known as the USA Patriot Act of200l. Title III of that law, known as the
International Money Laundering Abatement and Anti-Terrorist Financing Act of2001
(MLAA for short) has a broad array of implications for the financial services industry. It is
important that we - law enforcement, regulators as well as the providers of financial services all understand what these implications are and I would like to highlight some of the more
prominent ones this afternoon.
To begin with, the Patriot Act brings a mandatory money laundering control program
to the securities industry. One could reasonably ask why, since the securities and futures
business is not, usually, a cash business. To answer this question, we need to look at the big
picture. Each year, trillions of dollars flow through the securities industry and its firms
encompass major global financial institutions. Use of the U.S. financial system to facilitate
fraud can taint our vibrant capital markets - the same markets that fuel our economy and hold
the savings of our nation's investors. Even before enactment of the Patriot Act, firms faced
potential civil and criminal exposure when they were used to launder profits derived from
illegal activities.

The large monetary fines and forfeiture provisions that have been part and parcel of
pre-existing money laundering laws could seriously impact the financial stability of a
securities firm, affecting all those who do business with that firm.
As a matter of best practice, many firms had already concluded that they should
protect themselves from being inadvertently drawn into charges of facilitating money
laundering. From the perspective of a firm's bottom line this has meant protection against
significant monetary penalties as well as avoiding the reputational risk to a firm associated
with a criminal element. It has been, and still remains, in the long-term interest of securities
and futures firms to preserve the integrity of our securities markets.
Now, section 352 of the Patriot Act requires that all financial institutions, including
securities firms, establish anti-money laundering programs by April 24th of this year. Some
of the minimum standards for such a program involve: (1) the development of internal
policies, procedures and controls; (2) the designation of a compliance officer; (3) an ongoing
employee training program; and, (4) an independent audit function to test the program.
Implementation of Section 352 is already underway. For example, the operators of our
largest exchanges, the New York Stock Exchange and the National Association of Securities
Dealers, have already set out rules requiring brokers to have an anti-money laundering
program. The Preliminary Guidance for Deterring Money Laundering Activity, that was
issued by the Securities Industry Association's Anti-Money Laundering Committee last
month, offers sound, fundamental advice on the nature of such a program as the government
works to finalize more detailed regulations for this part of the law.
A closely related section of the Patriot Act (section 356), specifically affecting the
securities industry, mandates that the Secr~tary of the Treasury issue a rule to include brokerdealers in our suspicious activity reporting (SAR) system. We are implementing this
requirement. In late December, after consultation with the Securities and Exchange
Commission and the Federal Reserve, we published proposed regulations requiring brokerdealers to file SARs. The final fOlm of this rule should be ready by July. This same section
356 of the Act also authorizes the Secretary, after consultation with the Commodity Futures
Trading Commission (CFTC), to prescribe regulations requiring CFTC-regulated firms to file
SARs. Our Deputy Secretary of the Treasury, Ken Dam, has testified to the Congress that we
intend to promulgate similar requirements for future commission merchants and we are
working with the CFTC on that initiative.
While investment companies have not, to date, been directly covered by Bank Secrecy
Act regulations, the broker-dealers that sell the funds are covered. Later this year, we expect
a broad inter-agency working group, under section 356, to submit a report concerning
regulations that would apply the Bank Secrecy Act to registered investment companies. I
understand that the Investment Company Institute, the Managed Funds Association and
others have offered their cooperation in extending these provisions to their members and we
welcome these offers.

The very products and services of the securities industry - the efficient transfer of
funds between accounts, the ability to conduct international transactions, the liquidity of
securities - provide opportunities to hide and move criminal proceeds. Weare confident of
success in implementing anti-money laundering measures with the industry because we are
certain that the vast majority of firms desire to fulfill their duties as good corporate citizens.
We all know intuitively that it is better to prevent a crime than to punish one. It is in the
long-term self-interest of firms to obey the law and conduct business as responsible corporate
citizens. Complying with the law often entails costs but it is the right thing to do. Moreover,
we are working in a way that is intended to minimize any unnecessary regulatory burden
while remaining consistent with our objective of countering money laundering within the
securities industry. We believe that implementing these new measures will save firms
substantial hardship, suffering and expense in the long term.
Another prominent implication of the Patriot Act is the effect its requirements will
have on the international financial community. The growing understanding of and concern
with the problem of money laundering, that I referred to earlier, has also been taking hold
around the world. Over a century ago, within the United States, we learned the importance of
common rules and institutions as commerce between our states took off and America's
national economy began to come together. Greater interconnectedness between our states
called for common institutions and understandings at the national level to offset the
downward pressure on local rules and standards that competition could create. That same
historical imperative is now being recognized at a global level. In this vein, the actions taken
by the Financial Action Task Force (F ATF) to publicly identify jurisdictions with serious
deficiencies in their anti-money laundering regimes is a necessary step forward. At the same
time, international financial institutions such as the World Bank and the International
Monetary Fund are encompassing anti-money laundering concerns within the scope of their
respective mandates so that they may playa strong role in fighting abuse and preserving the
integrity of the international financial systym. The Patriot Act substantially increases the
means available to the United States to advance this worldwide effort.
The special measures contained in section 311 of the Patriot Act represent a hallmark
provision that offers added tools that can be employed to protect the U.S. financial system
from being abused by money launderers operating from or through international financial
crime havens. In the past, we had limited choices when it came to defending ourselves. We
had only, on the one hand, informational advisories that we could issue to U.S. banks about
specific jurisdictions, and, on the other hand, sanctions authorized by the International
Emergency Powers Act (IE EPA) which blocked transactions with designated entities in a
jurisdiction.
Now, under section 311, the Secretary of the Treasury has available a graduated set of
five sp'ecial measures that can be used to combat money laundering threats from abroad.
Domestic financial institutions, including the U.S. operations of foreign financial institutions,
comprising also their securities and futures operations, need to comply with the specific
measure or measures, if the Secretary determines that a foreign jurisdiction, a foreign
financial institution or even a type of international transaction or account constitutes, what is
called, a primary money laundering concern.

These measures may extend from simply added reporting to the actual abandonment
of accounts and can be required of domestic financial institutions broadly defined.
A final section of the Patriot Act that is already having international reverberations is
the provision regarding special due diligence that is contained in section 312. This key
section deserves highlighting because it calls for special due diligence on the part of all
financial institutions for correspondent accounts and private banking accounts involving
foreign persons. Essentially, it requires all financial institutions (again, a term that is broadly
defined in the Act) to either establish or enhance due diligence procedures that are able to
detect and report money laundering through these accounts for all foreign private banking
customers and international correspondent accounts. Additionally, section 312 requires
enhanced due diligence by financial institutions for correspondent accounts maintained for
offshore banks or for foreign banks that are located in certain designated foreign countries,
such as those on the Financial Action Task Force's list of non-cooperative jurisdictions in the
fight against money laundering. Some of you may recall that slightly over a year ago - in
January of2001 - the departments of Treasury and State and the federal banking regulators
jointly issued Guidance on Enhanced Scrutiny for Transactions that May Involve the
Proceeds of Foreign Official Corruption. Among other things, section 312 of the Patriot Act
basically reaffirms and codifies what was contained in that guidance.
Such an example of reaffirmation in the Patriot Act leads me to an important and
concluding point. To anyone who had even casually followed the evolution of the concept of
financial crime and ways to combat it over the last twenty years, what the Patriot Act requires
of us - regulators, law enforcement and financial services providers - will be less than
surpnsmg.
Antecedents for most of the concepts that are in this law can be found in the
development of generally accepted international standards, in the deliberations of various
Congressional committees, in the archives oflegislative reports and proposals and in many of
the initiatives undertaken by law enforcement, regulators and industry. In short, what is in
the Patriot Act, is, in many respects, the logical continuation of that spreading awareness of
money laundering as a threat that demands a response by all who have a stake in our financial
system.
Over the last twenty years, it has not been law enforcement's intent to punish or
impose greater burdens on America's financial services community but rather to gradually
elicit their participation and support in the common effort to ensure the integrity of our
financial system. Key to that effort has been our work with the regulators of the various
providers of financial services and that same key will unlock a successful implementation of
the Patriot Act's many provisions. This Administration's policy on regulation has as its focus,
quality regulation, with an emphasis on sound analysis to determine the best solution for all.
That general policy applies here as well. Regulators playa critical role in ensuring that any
new requirements are thoughtfully crafted and compatible with existing law.

I am encouraged by what we have been able to do together in the past and early and
vigorous cooperation between law enforcement and regulators leaves me very optimistic for
the future. So far, implementation of this new law is progressing well. Together, we are
using existing resources and expertise in the government to develop creative solutions to
complex issues. We have about twenty working groups for the different regulatory projects
required by the Patriot Act and all concerned regulatory agencies, both inside of Treasury and
outside as well, have been generous with their contributions to ensure that we meet the
ambitious timeline contained in the Act. We are greatly pleased with the interagency
response to getting this job done and in getting it done right.
We are also greatly encouraged by the response of the private sector, industry groups
and others. On several key provisions of the law, we have not only received positive
comments about the legislation but also helpful insights into implementation issues. I cannot
underestimate the important value added to the implementation process when others take time
to educate us on their particular industry and its practices and procedures. Any attempt to
craft regulations in a vacuum is a foolhardy endeavor and we are particularly thankful for the
creative and constructive suggestions from those of you who will be affected by the
regulations. Such contributions allow us to identify issues early and discover solutions much
more easily.
Most of the work on the various regulations needed to implement the Patriot Act
should be completed by year's end and, because all parties are cooperating in this important
task, we are confident of meeting our interim milestones.
Although criminals have always tried to work the proceeds of their illegal acts into the
legitimate economy, money laundering as a crime in and of itself, is fairly new. Just as we
are rapidly developing in our understanding of this crime and its pernicious effects - from
financing criminal enterprises, enabling acts of terror and undermining the integrity of our
financial system - so too are we developing a more comprehensive and effective response.
Before September 11 th, I believed that we - law enforcement, regulators and the
providers of financial services - were part of a much larger enterprise, namely, building a
worldwide economy that works for all- not simply integrating the wealthiest industrialized
states but successfully encompassing the poorer and less advantaged as well. As we go about
our task of ensuring the security and integrity of the financial systems that support a new
global economy, don't underestimate what we are about here. With success, we can have a
world that offers all our children better prospects for development in an increasingly
integrated world market. With failure, the alternative is much less promising - a global
economy that turns an undifferentiating eye to the sources of capital, to the products of honest
versus criminal labor.
Since September 11 t\ I am even more convinced of the importance of our work. The
Patriot Act has accelerated many of the initiatives with which we have already been engaged.
It is a concrete and bipartisan manifestation of a political will so memorably stated by
President Bush in his speech before a joint session of Congress and the nation last September
20 th : " ... we will meet violence with patient justice, assured of the rightness of our cause and
confident of the victories to come." Thank you very much.

NEWS
ornCE OFPUBUCAFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C. - 20220 - (202) 622-2960

EMBARGOED UNTIL 12:00 P.M. EST
March 18,2002

CONTACT: BETSY HOLAHAN
202-622-2960

REMARKS BY
THE HONORABLE SHEILA C. BAIR
ASSIST ANT SECRETARY OF THE TREASURY
FOR FINANCIAL INSTITUTIONS

9TH

BEFORE THE
PITTSBURGH COMMUNITY INVESTMENT GROUP
ANNUAL COMMUNITY BANKING AWARDS LUNCHEON

IMPROVING AND MAINTAINING FINANCIAL WELL-BEING
THROUGH EXPANDING ACCESS TO FINANCIAL SERVICES

Good afternoon and thank you for this opportunity to speak before you today about an
issue that is of great importance to me, the Treasury Department, and the Bush Administration expanding consumer access to financial services. Unfortunately, due to his very busy schedule,
Secretary O'Neill is unable to be with us today, but he sends his regrets and best wishes to
everyone in Pittsburgh.
We should all be proud of the positive developments that have taken place in the
consumer financial services market over the last decade. During the last decade, the percentage
of Americans who have achieved the dream of home ownership has increased significantly.
General credit availability has also increased dramatically, fueled in part by the subprime market,
which serves borrowers with past credit problems. Consumer access to financial services has
also increased as depository institutions have seriously responded to community concerns over a
lack of access to mainstream banking services.
But as everyone in this room knows, our job is not complete. There are still many
problems that need to be addressed. Too many Americans still do not have access to financial
services or a relationship with a lending institution. Without access to competing financial
services providers, many residents of low-income communities are stuck paying high fees and
not developing the type of financial relationships that can lead to an improved standard of living.
Too many Americans have also fallen victim to unscrupulous lenders in what has come to be
known as predatory lending.
PO-2004
For press releases, speeches, public schedules .and official biographies, call au, 24-hourfax Zine ad (202) 522-204()

One reason that I am especially pleased to be here is that the Pittsburgh Community
Reinvestment Group has been described by many as a model nonprofit community development
organization. As we have considered these issues, it has become clear to us that the Federal
government cannot alone provide all the solutions. The PCRG's model of forming strong
relationships between neighborhood groups, financial institutions, and local political leaders, has
been very successful and is proof of what can be accomplished if all parties work together. I
look forward to learning more about the PCRG's community development efforts here today.
Let me now describe some of the efforts underway at the Treasury Department to
improve and maintain the financial well being of all Americans through expanded access to
financial services.

Improving Financial Well-Being
First, through our First Accounts program we will be funding initiatives to connect
unbanked low- and moderate-income individuals to mainstream financial services. While most
Americans have the comfort of keeping their money at insured depository institutions, other
Americans - about one in ten families - use financial services of a different sort. They cash
checks at a neighborhood storefront and pay bills in cash or with money orders. Simple and
convenient perhaps, but often expensive, dangerous, and not economically productive.
Providing greater access to mainstream financial services should have a number of
benefits. Greater access should increase safety and security as carrying large amounts of cash is
dangerous and keeping cash at home is risky. Greater access should lower the cost of financial
transactions, as the costs of financial transactions outside the banking system are relatively high.
Recent Treasury research indicates that a minimum wage worker can pay an average of $18 per
month for cashing paychecks at a check casher. Finally, greater access should help to build a
promising future, as it is difficult to participate in the mainstream economy without a bank
account.
Treasury's First Accounts initiative was launched this past December 2ih with a
published notice of funds availability, a NO FA, in the Federal Register inviting applications for
First Accounts grants. The amount available is approximately $8 million to fund projects that
can serve as models to connect unbanked low- and moderate-income individuals to mainstream
financial services.
The paramount goal of First Accounts is to move a maximum number of unbanked lowand moderate-income individuals to a banked status with either an insured depository institution
or an insured credit union. We hope to accomplish this goal through the development of
financial products and services that can serve as replicable models in meeting the financial
services needs of un banked individuals. Under First Accounts, financial institutions are
encouraged to create low-cost accounts for unbanked families and to help bring more ATMs to
safe places in low-income communities. Additional goals include the provision of financial
education to unbanked low- and moderate-income individuals to enhance the sustainability of the
new financial relationships.

A wide variety of entities are eligible to apply for the grants - such as community
development financial institutions, employers, financial services electronic networks, Indian
tribal governments, insured credit unions, insured depository institutions, labor organizations,
local governments, nonprofit organizations, and States. Some reasons often cited for individuals
remaining unbanked include: a lack of low-cost account products; lack of convenient access;
perception of unprofitability; an individual's prior account problems; and customer financial
literacy. First Accounts attempts to involve entities that could help to overcome those problems.
For example, nonprofit organizations may provide consumer education. Employers may provide
convenient access. Banks may demonstrate the profitability of serving previously unbanked
customers. And, credit unions might do all of the above - develop a new product, open at a
convenient location, demonstrate profitability, and provide financial education.
First Accounts applicants must propose to, at a minimum, provide low-cost electronic,
checking, or other types of accounts either directly (if the applicant is an insured depository) or
indirectly through one or more insured depository institutions and/or insured credit unions. The
NOFA, application, and FAQs (frequently asked questions) are available on our web site,
www.treas.gov/firstaccounts. Applications are due March 20 t \ and I look forward with great
enthusiasm to receiving applications for this exciting new program.
Second, we are also interested in learning more about an area that is often overlooked in
discussion of the unbanked - the remittance industry. The Inter-American Development Bank
estimates that Latin American immigrants living in the United States send an average of $250 to
their native countries an average of eight to ten times per year. These remittances have reached a
level that surpassed $20 billion last year- about one fifth of total worldwide remittances. If
current growth rates are maintained, cumulative remittances could reach $300 billion by 2010.
Although remittance charges have declined in the past two years, they still appear to be
relatively high. The average transfer fee and exchange rate commission to send $200 varies from
approximately $15 to $26. The cost varies depending on the type of institution used to send the
money and the country where the money is being sent, but can often reach up to 20 percent of the
amount being sent, when transmission fees and losses on the exchange rate are both factored in.
One of the reasons that prices have remained high is a lack of competition in the money transfer
business.
But this is changing. More and more traditional financial institutions and credit unions
are recognizing that there is a concrete opportunity to attract a diverse consumer base by offering
low cost remittance products. We encourage this participation because one important product
banks and credit unions can offer that money transmitters cannot is a federally insured checking
or savings account. This can lay the foundation for new customers to save and build assets,
establish a banking relationship, and learn about important tools in personal finance. At the
same time, the increased competition should result in lower remittance costs. We support any
efforts made to make the process of sending remittances more affordable for the people that use
it - most of whom earn low wages to begin with.

Third, the Community Development Financial Institutions Fund (CDFI Fund), which is
part of my office, administers a new and exciting community development initiative - the New
Markets Tax Credit Program. Over the next seven years, the New Markets Tax Credit Program
will provide $15 billion in tax credits to spur economic development in low-income urban and
rural communities across the country. By offering a tax credit, the New Markets Program
encourages private investment in underserved communities in an unprecedented manner. If
investors embrace the program, it will be a significant source of fresh patient capital that will
help to stimulate new industries and entrepreneurs, to diversify the local economy, and to
generate new jobs in low-income communities.
New Markets Tax Credits will be widely available across the United States, in
Pennsylvania, and in the Pittsburgh MSA. A remarkable 24,562 census tracts in the United
States qualify for the program. That's nearly 40 percent of all census tracts, representing 36
percent of the population, or nearly 91 million people. Here, in the Pittsburgh MSA, our records
show that 38 percent of the census tracts qualify for New Markets Tax Credit investments. For
Pennsylvania, our records show that 34 percent of census tracts qualify for the program.
Staff has been working diligently to finalize the NOAA (Notice of Availability of
Allocations) and the application process, and we anticipate a public release this spring. We
encourage you to check the CDFI Fund website on a regular basis for updates regarding the New
Markets program (www.cdfifund.com) and for information on becoming a Community
Development Entity (CDE). Both for-profit and non-profit CDEs may apply to the Fund for an
allocation of tax credits, but only a for-profit CDE is permitted to provide tax credits to its
investors in exchange for stock or capital ownership. We are pleased to announce that already
186 organizations have been certified as CDEs, with 9 coming from Pennsylvania and 1 from
Pittsburgh.

Maintaining Financial Well Being
Expanding access to financial services through some of the efforts I just described should
contribute to improved financial well being among many low- and moderate-income individuals.
However, we must also focus on maintaining the financial well being of these individuals by
eliminating what has come to be known as predatory lending.
We all know that predatory lending is difficult to clearly define. Predatory lending is
generally characterized by abusive lending practices that include deception, fraud, and other
practices that are unfair to borrowers. In the most egregious cases, lenders have made loans with
little or no regard for a borrower's ability to repay, and have engaged in multiple refinance
transactions that result in little or no benefit to a borrower. These types of abusive lending
practices can result in the stripping of borrowers' equity and, in the worst case, borrowers losing
their homes. The result is not only devastating to the borrower, but it also can contribute to a
general decline in the conditions of the surrounding neighborhood. While the Administration has
set forth an aggressive program for increasing home ownership opportunities, we also must focus
on preserving those opportunities by keeping people in their homes and protecting them from
unscrupulous lenders.

As different methods for combating predatory lending are considered, we must be careful
not to damage what has generally been a positive development - the expansion of the availability
of credit through the sUbprime market. Responsible providers of subprime credit provide an
important source of credit to borrowers with damaged credit histories. The current services of
responsible subprime lenders will not be easily replaced by government programs or through the
activities of other lending institutions.
The Federal government has recently or is currently undertaking a number of efforts
related to disclosures and enforcement that should contribute to a reduction in predatory lending.
First, the Department of Housing and Urban Development is taking a new look at
improving mortgage disclosures and considering ways to improve accountability within Federal
Housing Administration loan programs.
Second, the Board of Governors of the Federal Reserve System has recently finalized
revisions to its regulations under the Home Ownership and Equity Protection Act (HOEP A) and
the Home Mortgage Disclosure Act (HMDA). The new HOEP A regulations will expand the
protections available under HOEP A to a broader group of borrowers and the HMDA regulations
will increase the amount of information on subprime lending activities.
Third, the Justice Department and the Federal Trade Commission (FTC) have taken
aggressive steps in recent years to crack down on abusive lending. The Justice and FTC have
undertaken several high profile cases that could mean broad redress for many consumers.
Because many of the practices associated with predatory lending are already illegal, stronger
enforcement is a key component of any solution to the problem. In addition to stronger
enforcement at the Federal level, increased enforcement activity at the state level is also needed.
While these recent Federal actions should be useful in reducing abusive lending practices
associated with predatory lending, is there more that we can do? At least two areas have stood
out to us - improved consumer education and encouraging greater mortgage industry
responsibili ty.
We must do more to educate borrowers so they are in a better position to provide a first
line of defense against abusive lending practices. To better prepare consumers for this task, the
Federal government should take a leadership role in educational efforts. My office is working
with others in the Administration and with industry, education, and non-profit groups to enhance
financial literacy. In addition, the Community Development Financial Institutions Fund is
increasingly building financial literacy programs into its award-making process.
There is a lot of great work being done by community groups and financial institutions to
educate consumers about the mortgage process, the financial responsibilities of home ownership,
and general principles of consumer finance. We applaud those efforts and hope to continue
working with the financial institutions and community groups to improve borrower education.

The second area we have been considering is what the Federal government can do to
encourage private sector efforts to eliminate abusive lending practices. One area we have been
examining is whether it would be useful for the Federal government to playa role in encouraging
continued debate and discussion about best practices as a means of combating predatory
lending. Many key players in the prime and subprime mortgage business have implemented best
practices or lending guidelines to address predatory lending. Many of these lending guidelines
were developed with active participation of community groups.
Some of the practices addressed in current lending guidelines include: prohibiting the
sale and financing of single premium credit life insurance; limiting or prohibiting loans with
balloon terms or negative amortization features; limiting prepayment penalties and providing
borrowers the option of a loan without a prepayment penalty; requiring full credit bureau
reporting; requiring documentation of a borrower's ability to repay; limiting refinancing to
prevent loan "flipping;" and requiring that borrowers be given fair access to prime credit. Many
such guidelines also address developing standards for third party relationships; implementing
procedures to mitigate foreclosures; restricting charges for points and fees; and requiring fair and
less burdensome arbitration procedures. We have been taking a detailed look at these lending
guidelines and there appears to be a fair amount of agreement in a number of areas.
Given that there is a fair amount of agreement among individual institutions' best
practices and lending guidelines, it seems that it might be possible to encourage wider adoption
of best practices throughout the mortgage industry. The dialogue and discussion associated with
encouraging broader adoption of best practices would be useful in and of itself as the
Administration formulates its views on the contents of potential Federal legislation. Such a
dialogue on best practices could also prove useful in efforts to reach agreement on key features
of any potential Federal legislation and might provide a helpful model for the efforts of state and
local leaders in this area.
Lender best practices could help consumers navigate the complex mortgage financing
process by giving them some assurance that the lender with whom they are dealing adheres to
certain core standards. I am strongly committed to an aggressive program of financial education
to help consumers better protect themselves against abusive lending practices. The reality is,
however, that home financing is exceedingly complex - I would venture to guess that many of
the homeowners in this room didn't fully understand the documents they signed at their closingif you even bothered to read them all. Community groups can play an important role by
encouraging their constituents to use lenders with a responsible code of best practices or by
warning their constituents about specific abusive lending practices.
I believe that wider adoption of best practices by lenders has the potential to reduce
abusive lending practices and to provide real value to consumers. However, in today's mortgage
market lenders are only one part of the mortgage process.
In many cases the first contact a consumer makes in tl~e mortgag~ ~rocess is with a.
mortgage broker. Mortgage brokers serve an important functIOn of provldmg borrowers WIth a
wide array of loan products and generally increasing credit availability throughout the country.

While the majority of mortgage brokers follow responsible business practices, some
abusive lending practices - such as loan flipping - are often linked to brokers. Regulation and
licensing of mortgage brokers is done to varying degrees at the state level. State law
enforcement and regulatory agencies need to be vigilant in monitoring mortgage brokers and
enforcing existing laws, and consideration of new requirements may be necessary to ensure that
a few irresponsible brokers do not damage the positive role played by mortgage brokers.
However, greater enforcement may not be enough. Mortgage brokers should also consider
adopting their own best practices that address their unique relationship with their customers.
Lenders should also carefully monitor the performance of mortgage brokers that they do business
with to ensure that those brokers are following prescribed lending guidelines and not engaging in
abusive lending practices.
Another group of participants in the mortgage process that could contribute to combating
predatory lending is the secondary mortgage market. The secondary mortgage market - either
through the housing GSEs or Wall Street investment banks - provides a link between capital
market funding and mortgage finance to consumers. While clearly these firms do not have a
direct relationship to the consumer in the same way as mortgage brokers or lenders, secondary
market firms do have a responsibility to ensure that the lenders to whom they provide funding
adhere to high standards of professionalism and corporate citizenship. I encourage Wall Street
firms, in particular, to undertake development of more formal standards of conduct for the
lenders with whom they do business. It is in the reputational as well as financial interest of Wall
Street firms to take steps to ensure that the mortgages they securitize are issued in accordance
with sound underwriting standards and that the consumers who have received such mortgages
have the ability to repay them. The number of lenders adhering to responsible best practices
could be expanded significantly if the secondary mortgage market made this issue a high
priority.
I would greatly appreciate the thoughts and input of the members of this organization on
encouraging adoption of best practices and other steps the Federal government can take to
combat predatory lending. There is a tremendous amount of expertise in this room, and I look
forward to the opportunity to work with you in tackling this important issue.
In closing, I would like to thank the Pittsburgh Community Reinvestment Group for
inviting me to speak here today.

-30-

OFFICE OF PUBLIC AFFAIRS. 1500 PENNSYLVANIA AVENUE, N.W .• WASHINGTON, D.C .• 20220. (202) 622.2960

EMBARGOED UNTIL 11: 30 A.M.
March 18, 2002

Contact:

Office of Financing
202/691-3550

TREASURY OFFERS 4-WEEK BILLS
The Treasury will auction 4-week Treasury bills totaling $19,000 million to
refund an estimated $23,001 million of publicly held 4-week Treasury bills maturing
March 21, 2002, and to pay down approximately $4,001 million.
Tenders for 4-week Treasury bills to be held on the book-entry records of
TreasuryDirect will not be accepted.
The Federal Reserve System holds $11,217 million of the Treasury bills maturing
on March 21, 2002, in the System Open Market Account (SOMA). This amount may be
refunded at the highest discount rate of accepted competitive tenders in this auction
up to the balance of the amount not awarded in today's 13-week and 26-week Treasury
bill auctions. Amounts awarded to SOMA will be in addition to the offering amount.
Up to $1,000 million in noncompetitive bids from Foreign and International
Monetary Authority (FIMA) accounts bidding through the Federal Reserve Bank of New York
will be included within the offering amount of the auction.
These noncompetitive bids
will have a limit of $100 million per account and will be accepted in the order of
smallest to largest, up to the aggregate award limit of $1,000 million.
The allocation percentage applied to bids awarded at the highest discount rate
will be rounded up to the next hundredth of a whole percentage point, e.g., 17.13%.
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 BookEntry Treasury Bills, Notes, and Bonds (31 CFR Part 356, as amended) .
Details about the new security are given in the attached offering highlights.

000

Attachment

0-2005

For press releases, speeches, public schedules and official biographies, call our 24-"our fax line at (202) 622-2040

HIGHLIGHTS OF TREASURY OFFERING
OF 4-WEEK BILLS TO BE ISSUED MARCH 21, 2002
March 18, 2002
Offering Amount . . . . . . . . . . . . . . . . . . . . . $19,000 million
Public Offering . . . . . . . . . . . . . . . . . . . . . $19,000 million
NLP Exclusion Amount ................ $ 8,400 million
Description of Offering:
Term and type of security ........... 28-day bill
CUSIP number . . . . . . . . . . . . . . . . . . . . . . . . 912795 JQ 5
Auction date . . . . . . . . . . . . . . . . . . . . . . . . March 19, 2002
Issue date . . . . . . . . . . . . . . . . . . . . . . . . . . March 21, 2002
Maturity date . . . . . . . . . . . . . . . . . . . . . . . April 18, 2002
Original issue date ................. October 18, 2001
Currently outstanding ............... $33,394 million
~nimum bid amount and multiples .... $1,000
Submission of Bids:
Noncompetitive bids: Accepted in full up to $1 million at the highest
discount rate of accepted competitive bids.
Foreign and International Monetary Authority (FIMA) bids: Noncompetitive bids submitted through the Federal Reserve Banks as agents for
FIMA accounts. Accepted in order of size from smallest to largest
with no more than $100 million awarded per account.
The total noncompetitive amount awarded to Federal Reserve Banks as agents for
FIMA accounts will not exceed $1,000 million. A single bid that
would cause the limit to be exceeded will be partially accepted in
the amount that brings the aggregate award total to the $1,000
million limit.
However, if there are two or more bids of equal
amounts that would cause the limit to be exceeded, each will be
prorated to avoid exceeding the limit.
Competitive bids:
(1) Must be expressed as a discount rate with three decimals in
increments of .005%, e.g., 4.215%.
(2) Net long position (NLP) 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.

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
Office of Financing
202-691-3550

CONTACT:

IMMEDIATE RELEASE
arch 18, 2002

'OR

RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
91-Day Bill
March 21, 2002
June 20, 2002
912795JZ5

Term:
Issue Date:
Maturity Date:
CUSIP Number:
1.840%

High Rate:

Investment Rate 1/:

1.874%

Price:

99.535

All noncompetitive and successful competitive bidders were awarded
at the high rate.
Tenders at the high discount rate were
illotted
8.41%.
All tenders at lower rates were accepted in full.

~curities

AMOUNTS TENDERED AND ACCEPTED (in thousands)

Competitive
Noncompetitive
FIMA (noncompetitive)

37,993,463
1,397,103
175,000

4,833,885

Federal Reserve
$

44,399,451

11,428,848
1,397,103
175,000
13,000,951 2/

39,565,566

SUBTOTAL

TOTAL

Accepted

Tendered

Tender Type

17,834,836

Median rate
1.820%: 50% of the amount of accepted competitive tenders
tendered at or below that rate.
Low rate
1.780%:
5% of the amount
accepted competitive tenders was tendered at or below that rate.
-to-Cover Ratio

= 39,565,566 / 13,000,951 = 3.04

Squivalent coupon-issue yield.
~wards to TREASURY DIRECT = $1,176,181,000

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
'OR IMMEDIATE RELEASE

CONTACT:

Office of Financing
202-691-3550

larch 18, 2002

RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
Term:
Issue Date:
Maturity Date:
CUSIP Number:

182-Day Bill
March 21, 2002
September 19, 2002
912795LB5
2.070%

High Rate:

Investment Rate 1/:

2.120%

Price:

98.954

All noncompetitive and successful competitive bidders were awarded
ecurities at the high rate.
Tenders at the high discount rate were
llotted 74.05%.
All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tendered

Tender Type
Competitive
Noncompetitive
FIMA (noncompetitive)

26,059,056
983,943

4,714,582

Federal Reserve
$

31,757,581

12,016,180
983,943
o
13,000,123 2/

27,042,999

SUBTOTAL

TOTAL

Accepted

17,714,705

Median rate
2.055%: 50% of the amount of accepted competitive tenders
s tendered at or below that rate.
Low rate
2.000%:
5% of the amount
accepted competitive tenders was tendered at or below that rate.
d-to-cover Ratio = 27,042,999 / 13,000,123 = 2.08
Equivalent coupon-issue yield.
Awards to TREASURY DIRECT = $765,464,000

http://www .pu blicdebt. treas.gov
)-2007

Part III - Administrative, Procedural, and Miscellaneous

Tax Avoidance Using Inflated Basis

Notice 2002-21

The Internal Revenue Service and the Treasury Department have become aware
of a type of transaction, described below, that is used by taxpayers to generate tax
losses. This Notice alerts taxpayers and their representatives that the tax benefits
purportedly generated by these transactions are not allowable for federal income tax
purposes. This Notice also alerts taxpayers, their representatives, and promoters of
these transactions of certain responsibilities that may arise from participating in these
transactions.
FACTS
In general, the transaction involves the use of a loan assumption agreement to
claim an inflated basis in assets acquired from another party. This inflated basis is
claimed as a result of a transfer of assets in which a U.S. taxpayer (Taxpayer) becomes
jointly and severally liable on indebtedness of the transferor of the assets (Transferor),
with the indebtedness having a stated principal amount substantially in excess of the
fair market value of the assets transferred. Transferor may not be subject to U.S. tax or
otherwise may be indifferent to the federal income tax consequences of the transaction.
In one variation of the transaction, Transferor borrows money from a lender
(Lender) on a long term basis such as 30 years (the "Loan"). The amount borrowed
may be in a foreign currency. Interest is payable at regular intervals, and principal is

due at maturity. The Loan may permit prepayment. The Loan is made with full
recourse to Transferor.
Transferor uses the proceeds to purchase assets (the "Assets"), such as
short-term deposits, government bonds, or high-grade corporate debt, which may be
denominated in a foreign currency. The Assets serve as collateral for the Loan
pursuant to a loan agreement. As each interest payment becomes due, the collateral is
used to satisfy such payments. Upon maturity or earlier payment, the Loan is satisfied,
by its terms, first from the collateral, and only then against Transferor (or Transferor and
any party that has assumed the liability as a jOint and several obligor) to satisfy any
shortfall.
Pursuant to a separate agreement between Transferor and Taxpayer, Transferor
transfers a portion of the Assets to Taxpayer in consideration for Taxpayer's agreement
to pay a portion of the Loan and become jointly and severally liable to Lender as a
co-obligor on the Loan. The fair market value of the Assets transferred to Taxpayer (the
"Conveyed Assets") equals the present value of the Loan's principal payment at
maturity, determined by using a market rate of interest. Thus, the fair market value of
the Conveyed Assets is substantially less than the Loan's stated principal amount.
Taxpayer provides substitute collateral for the Loan, equal in value to the Conveyed
Assets. The remainder of the Assets owned by Transferor continue to serve as
collateral for the Loan.
Also pursuant to the agreement between Transferor and Taxpayer, Transferor
agrees to make all interest payments on the Loan, and Taxpayer agrees to pay the
principal due at maturity. The co-obligors and Lender anticipate that the collateral will
be substantially (if not entirely) sufficient to repay the Loan.
Taxpayer subsequently disposes of the Conveyed Assets for their fair market
value. Taxpayer claims that, as a result of its assumption of jOint and several liability on
the Loan, the entire principal amount of the Loan is included in Taxpayer's basis in the

Conveyed Assets. As a result, Taxpayer claims a loss for federal income tax purposes
in an amount equal to the excess of the stated principal amount of the Loan over the fair
market value of the Conveyed Assets. If the Conveyed Assets are nonfunctional
currency, Taxpayer claims an ordinary loss.
ANALYSIS
Section 1012 of the Internal Revenue Code provides that the basis of property is
equal to the cost of the property. Section 1.1012-1(a) of the Income Tax Regulations
defines "cost" to mean the "amount paid" for the property in cash or other property.
Under general tax law principles, the amount paid for property generally includes the
amount of the seller's liabilities assumed by the buyer.

Commissioner v. Oxford Paper

Co., 194 F.2d 190 (2d. Cir. 1952). The inclusion of liabilities in basis by a buyer,
however, is predicated on the assumption that the liabilities will be paid in full by the
buyer. See Commissioner v. Tufts, 461 U.S. 300, 308 (1983),1983-1 C.B. 120, 123.
In appropriate cases, the courts have rejected attempts to assign an inflated
basis to property and have limited the basis of property to its fair market value. For
example, the basis of property acquired with the issuance or assumption of recourse
indebtedness has been limited to the acquired property's fair market value where "a
transaction is not conducted at arm's-length by two economically self-i nterested parties
or where a transaction is based upon 'peculiar circumstances' which influence the
purchaser to agree to a price in excess of the property's fair market value." Lemmen v.
Commissioner, 77 T.C. 1326, 1348 (1981) (citing Bixby v. Commissioner, 58 T.C. 757,
776 (1972)); Webber v. Commissioner, T.C. Memo. 1983-633, aff'd, 790 F.2d 1463 (9 th
Cir. 1986). See also Majestic Securities Corp. v. Commissioner, 42 B.T.A. 698, 701
(1940), aff'd, 120 F.2d 12 (8 th Cir. 1941) ("The general rule that the price paid is the
basis for determining gain or loss on future disposition presupposes a normal business
transaction. ")

Other cases have limited the portion of an assumed indebtedness that may be
taken into account for federal income tax purposes. For example, where two or more
persons are liable on the same indebtedness, or hold separate properties subject to the
same indebtedness, the amount taken into account for federal income tax purposes by
each person generally is based on a" the facts and circumstances, including the
economic realities of the situation and the parties' expectations as to how the liabilities
will be paid. See Maher v. United States, No. 16253-1 (W.O. Mo. 1969) (property was
not in substance "subject to" liability where lender was not actually relying on property
as co"ateral); Maher v. Commissioner, 469 F.2d 225 (8 th Cir. 1972) (corporation's
assumption of primary liability on shareholder's indebtedness becomes taxable dividend
only as corporation makes payments as promised); Snowa v. Commissioner, T.C.
Memo 1995-336, rev'd on other grounds, 123 F.3d 190 (4 th Cir. 1997) (co-obligor's cost
of a new residence included only her ratable share of the liability due to state law's right
of contribution).
Under the facts and circumstances of the transaction described in this Notice, as
a matter of economic reality, the parties wi" bear responsibility for repayment of the
Loan in accordance with their relative ownership of the Assets immediately after the
transfer from Transferor to Taxpayer. Accordingly, the Service and the Treasury believe
that Taxpayer's basis in the Conveyed Assets is equal to the fair market value of such
assets upon their acquisition by Taxpayer. The losses purportedly resulting from the
transaction described in this Notice (or substantially similar to the transaction described
in this Notice) are not allowable to the extent Taxpayer derives a tax benefit that is
attributable to a basis in excess of the fair market value of the Conveyed Assets. The
purported tax benefits from these transactions also may be subject to challenge under
other provisions of the Code and regulations, including but not limited to § 988 and, in
the case of individuals, §§ 165(c)(2) and 465.

In addition, the Service may impose penalties on participants in these
transactions or, as applicable, on persons who participate in the promotion or reporting
of these transactions, including the accuracy-related penalty under § 6662, the return
preparer penalty under § 6694, the promoter penalty under § 6700, and the aiding and
abetting penalty under § 6701.
Transactions that are the same as, or substantially similar to, the transaction
described in this Notice 2002-xx are identified as "listed transactions" for the purposes
of §§ 1.6011-4T(b)(2) of the Temporary Income Tax Regulations and
301.6111-2T(b)(2) of the Temporary Procedure and Administrative Regulations. See
also § 301.6112-1T, A-4. It should be noted that, independent of their classification as
"listed transactions" for purposes of §§ 1.6011-4T(b)(2) and 301.6111-2T(b )(2), such
transactions may already be subject to the tax shelter registration and list maintenance
requirements of §§ 6111 and 6112 under the regulations issued in February 2000 (§§
301.6111-2T and 301.6112-1T, A-4), as well as the regulations issued in 1984 and
amended in 1986 (§§ 301.6111-1T and 301.6112-1T, A-3). Persons required to
register these tax shelters who have failed to register the shelters may be subject to the
penalty under § 6707(a), and to the pena Ity under § 6708(a) if the requirements of §
6112 are not satisfied.
The Service and the Treasury recognize that some taxpayers may have filed tax
returns taking the position that they were entitled to the purported tax benefits of the
type of transaction described in this Notice. These taxpayers are advised to take
prompt action to file amended returns.

NEWS
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FOR l1v1MEDIATE RELEASE
March 19,2002

MEDIA ADVISORY:
TREASURY AND IRS UNVEIL ENFORCEMENT PROPOSALS TO CURB
ABUSIVE TAX AVOIDANCE TRANSACTIONS
Treasury Assistant Secretary for Tax Policy Mark Weinberger and Internal
Revenue Service Commissioner Charles O. Rossotti will hold a press briefing on
Treasury's Enforcement Proposals to curb abusive tax avoidance transactions at 1:30
p.m. EST on Wednesday, March 20, 2002 in the Treasury Department's Diplomatic
Reception Room (Room 3311), 1500 Pennsylvania Avenue, NW.
The Room will be available for pre-set at 12:30 p.m.
Media without Treasury or White House 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.

-30PO-2009

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D EPA R T :\1 E N T

0 F

THE

T REA SUR Y

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EMBARGOED UNTIL 2:00 P.M. EST
March 19,2002

Contact: Michele Davis
(202) 622-2920

TREASURY SECRETARY PAUL H. O'NEILL
TESTIMONY BEFORE THE SENATE APPROPRIATIONS SUBCOMMITTEE ON
FOREIGN OPERATIONS, EXPORT FINANCING AND RELATED PROGRAMS

Chairman Leahy, Ranking Member McConnell, Members of the Subcommittee, thank
you for the opportunity to testify today about the President Bush's FY2003 budget request for
Treasury's international programs.
Let me begin by underscoring the emphasis that President Bush places on economic
development as a central commitment of American foreign policy. The United States should and
must be a champion of economic growth and development, particularly in those parts of the
world where poverty is most acute. In today's world, in many nations and regions, extreme
poverty is widespread and deep and exacts an enormous human toll. Ifwe care about simple
human dignity, we must act to help raise living standards for the poorest. As President Bush
stated last week in a speech at the Inter-American Development Bank:
"This growing divide between wealth and poverty, between opportunity and misery, is
both a challenge to our compassion and a source of instability. "
The President has called for a new compact for global development, defined by new
accountability for both rich and poor nations alike with greater contributions from developed
nations linked to greater responsibility from developing nations. The President's proposal
recognizes that sound policies have universal application and that development partnerships can
only be effective if rooted in a good policy framework. For this reason, the adoption by poor
countries of the reforms and policies that make development effective and lasting is integral to
the President's proposed new Millennium Challenge Account. The concept underlying the
Account is clear, that countries that rule justly, invest in their people, and encourage economic
freedom will receive more assistance from the United States.
The Administration looks forward to working closely with the Congress as we move to
operationalize the Millennium Challenge Account.

PO-2010
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The MDBs are also important instruments in helping us pursue growth and prosperity in
the global economy. They serve vital interests of the United States, and are crucial and integral
components of our overall foreign assistance effort. U.S. foreign assistance programs, including
assistance through multilateral development banks, are important for advancing American
foreign policy. The more our assistance aids in economic development, the greater countries'
ability to engage in mutually beneficial trade with Americans, the greater the chances for
democratic values to take root, and the greater the chances for government and social institutions
to develop stability. The crucial importance of laying the foundation for hope and opportunity
has only been underscored by recent events. As the President has said, when governments fail to
meet the most basic needs of their people, these failed states can become havens for terror.
This year's request totals $1.4 billion. It includes $1.26 billion in funding for our annual
commitments to the Multilateral Development Banks (MDBs), $178 million towards clearing our
arrears to these institutions over a three-year period, and $10 million for international technical
assistance programs.
I take very seriously my responsibility to ensure that U.S. taxpayer resources provided to
the MDBs are effective in achieving significant and sustainable improvements in the daily lives
of the people living in developing countries. I am convinced that the MDBs can do a better job,
and it has been a high priority from the beginning of the Bush Administration to improve their
performance. Our message is beginning to take hold, but there is much work to be done to
accomplish our objective.
The MDB Growth Agenda

There is an untapped reservoir of human potential in all countries, including the poorest.
To fully realize this potential, countries need to create an environment with the institutional
conditions and incentives required to encourage individual enterprise. These include the rule of
law, enforceable contracts, stable and transparent government, and a serious commitment to
eliminate corruption. Countries also need to provide individuals with health, knowledge, and the
skills they need to participate in and contribute to economic activity. External assistance can
only help if the right fundamentals are in place to harness this great human potential.
Job-creating productivity growth is the driving force behind rising per capita income and
reduced poverty, and we have been pressing the MDBs to focus on projects and programs that
raise productivity. This includes operations that would improve health and education; promote
private enterprise; enhance the rule oflaw, effective public expenditure management,
accountability and anti-corruption; and open economies by strengthening trade capacities and
investment environments.
As a result of our efforts, productivity and private sector job creation are receiving
greater emphasis in the debate on MDB policies within the institutions and among other
shareholders. We will continue working actively to ensure they become a hallmark of actual
operations.

We are also pressing all the MDBs to measure results. It is not enough to say that the
MOBs are increasing funding for education, for example. We also need to know whether that
increase is leading to measurable results, such as better reading and writing skills. For the first
time, in the current IDA replenishment negotiations, the U.S. will provide supplementary
funding conditioned on measurable results in areas crucial to economic growth and poverty
reduction. My goal is to ensure that the successes and failures of the past 50 years guide and
improve development efforts in the future.
President Bush has also proposed that a higher percentage of the World Bank and other
MDB funds for the poorest countries be provided as grants rather than loans. This proposal is an
important part of our MDB growth agenda because grants are the best way to help poor countries
make productive investments without saddling them with ever-larger debt burdens. It thus also
will help avoid the need for future RIPe debt relief. The fact is that investments in crucial social
sectors, such as education and health, do not directly or sufficiently generate the revenue needed
to service new debt.
I am happy to say that the new IDA-13 and African Development Fund negotiations are
likely to have larger shares going to grants, but there is still disagreement on how much. It is
important to reach an agreement on grants that will facilitate closure on these important
replenishments.
Private sector development is essential for economic development and growth. Without a
transparent economic environment based on the rule of law, private investment simply will not
happen. Opaque regulatory and legal environments create insurmountable barriers to entry for
new firms, which are the lifeblood of a thriving market economy.
We believe the MDBs can do more to promote and develop investment climates that will
attract needed private capital. The MDBs could provide practical investment climate
assessments, for example. On the basis of such assessments, technical assistance, project finance
and small-business loans could be channeled more effectively to countries committed to policy
and regulatory changes that will create conditions that sustain robust levels of private-sector
investment, productivity growth, and income generation.

The FY 2003 Request
The Administration's FY 2003 budget request of$I,447 million for Treasury's
international programs reflects these development priorities, thus projecting U.S. leadership and
complementing our efforts to strengthen the effectiveness of the MDBs. Funding of this request
also will help enable the MDBs to address critical development issues in key regions of
importance to the United States: supporting key countries in the war on terrorism; combating
money-laundering and terrorist financing; providing assistance to countries emerging from
conflict; and responding to natural disasters.
There are three basic components to this request: annual funding for the MDBs, arrears
clearance, and Treasury's bilateral technical assistance program.

Annual Funding for the MDBs ($1,259.4 million)

Our request for the MDBs includes $1,259.4 million to fund fully our current annual U.S.
commitments. This includes the first payments of our proposed contributions to new
replenishments for the International Development Association ($850 million), the African
Development Fund ($118 million) and the Global Environment Facility ($107.5 million).
Negotiations for all three replenishments are ongoing.
For the International Development Association (IDA), the U.S. is proposing for the first
time a results-based financing framework. The U.S. would provide $850 million in FY 2003,
$950 million in FY 2004 and $1,050 million in FY 2005, with amounts over $850 million subject
to the achievement of measurable results in areas such as health, education and private-sector
development, for example. This amounts to a total of $2,850 million, or 18 percent above the
U.S. commitment to the last IDA replenishment.
Weare also proposing an 18 percent increase in funding for the African Development
Fund (AfDF), a total of$354 million over three years. For the GEF, the U.S. is proposing to
contribute a total of $430 million over four years.
2.

Arrears ($178 million)

The $177.7 million request for arrears would be applied to all MDB arrears on a pro rata
basis, and is part of a three-year plan to fully pay U.S. arrears to the institutions, which now total
$533 million, including $211 million in arrears to the GEF. Arrears have now risen for the third
consecutive year, after declining substantially from 1996 to 1999. It is critical that the U.S. meet
its international commitments, and I look forward to working with the Congress to pay down
these arrears over the next three years, thus helping to ensure U.S. leadership and credibility on
global issues of vital importance to the United States.
3.

Technical Assistance ($10 million)

Our request also includes $10 million for Treasury technical assistance programs, which
form an important part of our effort to support countries facing economic transition or security
issues, and whose governments are committed to fundamental reforms. This compares to $6.5
million in FY 2002 appropriations and $3 million in the budget supplemental for programs
specifically designed to combat terrorism. Treasury's technical assistance programs were created
in 1990 and 1991 to assist countries in the Former Soviet Union and Central and Eastern Europe.
Beginning in FY 1999, a direct Congressional appropriation allowed us to expand the program
selectively and effectively. Our FY 2003 request will allow us to continue current programs in
countries in Africa, Asia, Central and South America and to expand into other countries
committed to sound economic reform policies. We expect to spend a significant amount on antiterrorist programs. Over half of the traditional programs will be in Sub-Saharan Africa, as has
been the case for the past two years. The anti-terrorist programs will be global in scope, with an
emphasis on a group of about 20 countries that the Administration has identified as having
financial systems vulnerable to misuse by terrorist organizations.

Legislative mandates
There is one final issue that I want to highlight. I am determined to enable the Treasury
Department to fulfill its mission to develop and implement our international economic policy.
Currently, the Administration is burdened by a large number oflegislative mandates relating to
U.S. participation in the international financial institutions, including requirements for directed
voting, policy advocacy, certifications, notifications, and reports, that have built up over time.
The U.S. Government's policy development and implementation in these institutions
would be improved by consolidation of these mandates. Some mandates go back 50 years.
Some provisions overlap, or are inconsistent. There are 32 directed vote mandates and over 100
policy mandates, plus numerous reports, certifications, and modifications. I want the Congress
to be fully informed, but numerous vestigial reporting requirements have increased the amount of
time senior officials spend working on these reports to levels that warrant serious concern. I
would like to work with you to rationalize and focus our mandated reports and requirements.
Conclusion
I will continue to work hard with MDB managements and with other shareholders to
ensure vigorous and effective implementation of the U.S. reform agenda. I ask for your support
as we work together to ensure that these institutions are more effective in achieving real results
that promote economic growth and productivity, improve the living standards of people in
developing countries, and advance American interests.
Thank you very much, and I will be pleased to respond to your questions and
suggestions.

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FOR IMMEDIATE RELEASE
FEBRUARY 9, 2002

CONTACT: PUBLIC AFFAIRS
(202) 622-2960

Statement of G-7 Finance Ministers and Central Bank Governors
We met last night and today to discuss the global economy, the importance of fostering development and
our ongoing efforts to combat the financing of terrorism.
In October 2001, we released an Action Plan to Combat the Financing of Terrorism. Our commitment to
this objective remains resolute and the international community has demonstrated its strong support. While we have
made significant progress, further action is required, as set out in the attached annex.
Since we last met, prospects have generally strengthened for resumed expansion in our economies,
although risks remain. We remain vigilant and will each continue to take appropriate steps to promote a strong and
sustained recovery. We will continue to monitor exchange markets closely and cooperate as appropriate. We
welcome the successful introduction of euro notes and coins.
Emerging market economies currently face mixed economic and financial market conditions. They should
continue to implement policies conducive to investment and economic growth. We welcome as steps in the right
direction recent announcements by Argentine authorities. We encourage them to continue to work closely with the
International Monetary Fund (IMF) and the international community on a financially and socially sustainable
economic reform program that will enhance prospects for growth and future foreign investment.
Recent events have highlighted the importance of an improved, predictable and fair framework, involving
the private sector, to prevent and resolve international financial crises. We are committed to playing a leading role in
improving this framework and will review progress at our next meeting. In this regard, we welcome the IMF
management's proposal on sovereign debt restructuring as a useful contribution that addresses some of the legal and
practical obstacles to timely and orderly debt restructuring.
We recognize the difficult challenges that the world's poorest countries face in reducing poverty and raising
living standards. We explored ways to enable all countries to benefit more from greater global economic integration.
We will continue to work with other donors to resolve outstanding issues on the 13 th replenishment of the
International Development Association, in order to ensure that additional resources for development are made
available.
We underlined the need for more effective use of development assistance and a commitment to sound
policies, good governance and the rule of law by all countries. We had a productive discussion of development
policy issues, including possible innovative ways to mobilize additional domestic and external resources, trade and
external debt, and look forward to continued discussions at the UN Financing for Development conference in
Monterrey in March.
We welcomed Russia's strong growth and significant structural reforms, and encourage further progress in
strengthening the financial sector, improving corporate governance and the investment climate, and combating
terrorist financing. We agreed on the imp0l1ance of Russia's early accession to the World Trade Organization
(WTO).

PO-2011

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FOR IMMEDIATE RELEASE
February 9, 2002

Contact: Public Affairs
(202) 622-2960

Action Plan: Progress Report on Combating the Financing of Terrorism
G-7 countries have been joined by over 200 other countries and jurisdictions in expressing support for the
fight against terrorist fmancing. Our October 2001 Action Plan to Combat the Financing of Terrorism contributed to
this international effort by setting out clear priorities: vigorous application of international sanctions, including the
freezing of terrorist assets; rapid development and implementation of international standards; increased information
sharing among countries; and enhanced efforts by financial supervisors to guard against the abuse of the financial
sector by terrorists.
Significant results have already been achieved. Since September 11, almost 150 countries and jurisdictions
have issued orders to freeze terrorist assets, and over $US 100 million has been frozen worldwide. Each G7 country
is implementing UN Security Council Resolution 1373 and has signed and is committed to ratifying the UN
Convention for the Suppression of the Financing of Terrorism. The Financial Action Task Force (FATF) has agreed
to a set of Special Recommendations on Terrorist Financing and is implementing a comprehensive action plan
encouraging all countries to adopt them. All G-7 countries have established or are in the process of establishing
Financial Intelligence Units (FlUs) that will facilitate the sharing of information on money laundering and terrorist
financing. We have also all established mechanisms to share information relating to the tracking of terrorist assets.
Continued success requires even closer cooperation and an intensified commitment. We now set forth the
following steps to further advance the global fight against terrorist financing .

•

To enhance international coordination in the freezing of terrorist assets, we will develop a mutual
understanding of the information requirements and the procedures that different countries can use to undertake
freezi;}g actions. We will also develop key principles regarding the information to be shared, the procedures for
sharing it, and the protection of sensitive information. We will also work with other countries to identify jointly
terrorists whose assets would be subject to freezing. We will continue to review our institutional structures to ensure
that they facilitate the international flow of information necessary to identify, track, and stop the flow of terrorist
funds. In this regard, we support the Egmont Group's work on improved information flow among flUs.
The G- 7 are committed to fully implementing by June 2002 the FA TF standards against terrorist financing.
We Urge all countries to accept the FATF' s invitation to take part in a self-assessment and to commit to the rapid
implementation of the standards. We look to the FATF, IMF and the World Bank to quickly complete their
collaborative work on a framework for assessing compliance with international standards, including all FA IF
recommendations, against money laundering and terrorist financing. We urge all countries that have not done so by
February 1,2002, to implement the measures set out in the November 2001 Communique of the International
Monetary and Financial Committee of the lMF, and look forward to the IMP's report to the spring meeting of the
Committee on all issues raised by the Communique. We urge the Basle Committee on Banking Supervision to
review its enhanced customer due diligence standards for banks to ensure that they address terrorist financing, and
the Financial Stability Forum to review its role in combating terrorist financing, including in relation to offshore
financial cenh·es.

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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 19, 2002

Office of Financing
202-691-3550

RESULTS OF TREASURY'S AUCTION OF 4-WEEK BILLS
28-Day Bill
March 21, 2002
April 18, 2002
912795JQ5

Term:
Issue Date:
Maturity Date:
CUSIP Number:
High Rate:

1.780%

Investment Rate 1/:

1.801%

Price:

99.862

All noncompetitive and successful competitive bidders were awarded
securities at the high rate.
Tenders at the high discount rate were
allotted 75.08%.
All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)

Competitive
Noncompetitive
FIMA (noncompetitive)

33,289,278
21,071

Federal Reserve
$

18,979,058
21,071

SUBTOTAL

TOTAL

Accepted

Tendered

Tender Type

33,310,349

19,000,129

1,668,961

34,979,310

20,669,090

http://www.publicdebUreas.gov

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u.s. International Reserve Position

03/21/02

The Treasury Department today released u.s. reserve assets data for the week ending March 15 ,2002. As indicated in

this table, us. reserve assets totaled $68,266 million on that date, compared to $68,232 million at the end of the prior
week
n

us millions)

Official U.S. Reserve Assets

March 8, 2002
68,232

TOTAL
. Foreign Currency Reserves
a. Securities

Euro
5,400

Yen
10,631

March 15, 2002
68,266

TOTAL

Euro

16,031

5,445

Yen

TOTAL

9,706

Of which, issuer headquartered in the U. S.

15,150

b. Total deposits with:
b.i. Other central banks and B/S
b.ii. Banks headquartered in the U.S.
b.ii. Of which, banks located abroad
b.iii. Banks headquartered outside the U.S.
b.iii. Of which, banks located in the U.S.

IMF Reserve Position

Special Drawing Rights (SDRs)
Gold Stock

Other Reserve Assets

9,128

4,101

13,228
0
0

9,208

4,924

0
0

17,165

17.143

10,763

10,796

11,045

I 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
leposits reflect carrying values.
I The items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF and are valued in

ollar terms at the official SDR/doliar exchange rate for the reporting date. The entries in the table above for latest week (shown in italics)
;flect any necessary adjustments, including revaluation, by the U.S. Treasury to the prior week's IMF data. The IMF data for the prior week
re final.
I Gold stock is valued monthly at $42.2222 per fine troy ounce. Values shown are as of January 31,2002. The December 31 2Q01Jalue
las $11,045 million.

)-2014

14.132
0
0

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For Immediate Release
March 20, 2002

Contact: Betsy Holahan
202-622-2960

STATEMENT OF PETER R. FISHER
UNDER SECRETARY OF THE TREASURY FOR DOMESTIC FINANCE
BEFORE THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES

Thank you, Chainnan Oxley and Ranking Member LaFalce, for the opportunity to testify
this morning before your committee on refonning corporate disclosure. The President and
Secretary 0 'N eill are emphatic about the need for change.
I would like to describe first the underlying problems in corporate disclosure and second
the President's plan for resolving them.
The Administration wants to work closely with Congress and the Securities and
Exchange Commission to achieve the objectives spelled out in the President's 10-point plan.
Looking at all the proposals now circulating, while there are still some important unresolved
issues, there are also a number of areas of broad agreement. I would like to highlight some of
both in my testimony this morning. Let me say at the outset that the bill that most closely
parallels the President's plan is the Chainnan's and Representative Baker's bill, H.R. 3763, the
Corporate and Auditing Accountability, Responsibility, and Transparency Act of 2002.

The underlying problem
The United States enjoys the deepest, most liquid, and most transparent capital markets in
the world. Over the past few months, however, we have learned once again not to take the
perfonnance of our capital markets for granted. For investors to price risk properly and to
allocate capital to the most promising finns, they must have access to reliable information.
Nothing could be more impOliant for the long-run health of our economy and for investor
protection.
The quality of corporate disclosures has not kept pace with the growing complexity of
corporate finance for at least a decade. While Ollr capital markets have been racing along at 100
r.p.m., our accounting and corporate disclosure regime has been crawling along at 10 r.p.m. The
gap has just kept widening.

PO-201S

I am particularly pleased to be here today because for almost 10 years I have been
watching this gap grow and endeavoring to close it. In 1994, I joined with other G-1 0 central
bankers to try to update bank disclosures to reflect evolving corporate finance and risk
management. I did the same in 1999, that time also with banking, securities, and insurance
regulators. Both committees came up with good ideas but not much happened. It is exciting for
me to have the opportunity to work with Secretary O'Neill and the President on these issues, and
to see this Committee and Chairman Pitt focused on the same problems.
What is driving this gap? The true culprit is an ethic in boardrooms and auditing finns
that too often equates GAAP compliance with adequate disclosure. This ethic sets the bar too
low. It encourages corporate executives to prepare, and auditors to certify, financial statements
that may meet the technical requirements of GAAP but fail to provide investors with a realistic
picture ofa firm's condition. For our corporate disclosure regime to work, a company's CEO
and its auditors must be made accountable for disclosing the information that a reasonable
investor would find necessary to assess the company's value (excepting competitive secrets).

The President's plan to restore corporate accountability
The President's lO-point plan is guided by three core principles: first, providing better
infonnation to investors; second, making corporate officers more accountable; and, third,
developing a stronger, more independent accounting and auditing system.
As the President made clear, and as the Securities and Exchange Commission has
recently re-affirmed, mere compliance with GAAP is not enough. Each investor should have
access to a true and fair picture of the company, in plain English, and should be promptly
infonned of critical events that affect the condition of the company. By forcing companies to
stop hiding behind technical GAAP compliance and demanding additional disclosure - by reclarifying what satisfies the law -' the President's proposals would raise the bar for what
constitutes adequate disclosure.
President Bush directed our attention to CEOs because "refonn should start at the top."
We believe that CEOs should personally vouch for the veracity, timeliness, and fairness of their
companies' public disclosures, including their financial statements. If a CEO or other corporate
officer is guilty of misconduct that caused financial restatements, the SEC should force him or
her to give back any compensation gained thereby. If corporate leaders abuse their power, the
SEC should deny them the right to serve as a director or officer of a public company. And
corporate leaders should have to tell investors within two days whenever they buy or sell the
company's stock for personal gain.
What about catching those guilty of fraud? The President has urged the SEC to step up
its enforcement against securities fraud. We think existing legal standards are sufficient for this
task. Neither the President nor anyone else on his economic team thinks more private litigation
would improve corporate disclosure.

Finally, the President believes that we need a stronger and more independent auditing and
accounting system. To do this, we need a new, independent private-sector regulatory board,
under the SEC's supervision, to develop standards of professional conduct and competence. In
addition, the SEC needs to exercise more effective and broader oversight ofFASB to ensure that
accounting standards are issued more promptly and are more responsive to the needs of
investors.
The efficiency of our capital markets rests in part on investors' relying on the
independent judgment of outside auditors. The President is committed to bolstering that
independence. He is also committed to doing so in measured ways that avoid perverse or
unintended consequences.
A strong defense for investors is an active, informed audit committee, and so the
President would urge making audit committees more accountable. The President has proposed
that the SEC issue new guidelines for audit committees to use in deciding whether a non-auditing
service would compromise an auditor's integrity. Audit committees would also report their
choice of auditor directly to the shareholders. And the President encourages the SEC to prohibit
outside auditors from providing internal audit services to the same client. This would eliminate
the largest obstacle to auditor independence.
The President does not support a statutory mandate to rotate outside auditors. A rigid
rule like this would impose unwarranted costs on companies and investors. For an outside
auditor, just understanding the intricacies of a client's business -like mortgage-backed securities
- can take a long time. So does learning about a company's people, processes, and problems.
This deep knowledge is in fact the key to effectively reviewing a company's books. It is also
why companies often hire auditors to deliver other services such as tax consulting. A rigid
rotation rule would erase that intellectual capital every X years, no matter the circumstances. It
might also undermine auditor effectiveness by periodically re-establishing auditor ignorance.
Imagine that to stamp out Medicare fraud, the Federal government required all patients to
rotate doctors every few years. While this might reduce the risk of financial abuses in some
cases, I think most Americans would think this an excessive intrusion into their own judgment
about whom they want for a doctor, and an unjustified impairment of their physicians' ability to
care for them. The analogy may be imperfect, but the logic is really the same for mandatory
rotation of auditors.
Individual companies are of course free to choose to rotate. We hope that companies and
their auditors will always aspire to best practices, not just avoid breaking the law. If an audit
committee judges that in its company's specific circumstances, rotation makes sense, we would
applaud. For the same reasons, we would discourage rigid bans on audit finns providing any
non-audit services to the same client. As I noted above, the President does favor the SEC's
banning combined internal/outside auditing.
The reform agenda I'vejust outlined focuses on government's role. We can raise the
legal minimums that public companies' senior executives must meet.

But in a society committed to democracy and freedom of choice, government should not
be the only source for setting behavioral norms for CEOs. Legal minimums enforced by fines
and penalties will only take us so far. Going beyond that - to ever-improving best practices,
more efficient financial markets, stricter ethics for our corporate leaders - is a job for the
business community itself.

Required legislation
As I canvass the major bills offered here in the House and in the Senate, I am heartened
that we will find a number of spots of convergence. We all want to serve the same goals of
better corporate disclosure and improved investor protection. And we all know our corporate
disclosure regime is the best in the world, even while we strive to improve it.
The thoughtful bill that you, Mr. Chairman, and Representative Baker have offered is the
clearest example of the common ground I see. You have called for a public regulatory
organization to police the audit profession that closely resembles the President's proposal, as
does your call for real-time disclosure of critical events and insider sales. You would press for
fuller disclosure beyond GAAP's limits, such as off-balance sheet items and related-party
transactions.
I think we will find common ground on where we will need legislation and where new
SEC regulations will suffice. The 1933 and 1934 Acts provide the SEC with tremendous power
and flexibility to implement the President's reforms, especially given the substantial consensus
between his proposals and the major bills in Congress. If the SEC requires additional resources,
the President has said he is open to working with Congress to address that need. And we may
find there are specific areas - perhaps the need for a self-regulating organization to police the
auditing profession - where legislation may be a useful complement to regulatory action.
One area where the SEC will need new legislative authority is to enable it to
administratively bar wrongdoers from positions of corporate trust. Under current law, the SEC
must first go to court to bar a director or officer guilty of serious misconduct from serving in
such a position again in a public company. The President would urge you to empower the SEC
to do so through administrative proceedings (preserving a right of appeal to the courts) - a power
much like bank regulators have for bank executives.
We look forward to working with this Committee to find common ground and strengthen
our capital markets. I am happy to try and answer any questions you may have.
Thank you.
-30-

NEWS
ornCE OFPUBUCAFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C. - 20220 - (202) 622-2960

REMARKS BY
THE HONORABLE SHEILA C. BAIR
ASSISTANT SECRETARY OF THE TREASURY
FOR FINANCIAL INSTITUTIONS
BEFORE THE
AMERICAN CONFERENCE INSTITUTE
REINSURANCE: GLOBAL SOLUTIONS AND OPPORTUNITIES CONFERENCE
TERRORISM RISK INSURANCE

Good afternoon and thank you for inviting me to speak today on an economic issue of
great importance to our country - the continued provision of insurance for terrorism risk.
As you know, the Administration has been a strong proponent of a Federal backstop for
terrorism insurance. Secretary O'Neill provided an outline of the Administration's proposal in
testimony before the House and the Senate last fall. The House passed legislation that would
have provided a Federal backstop for terrorism insurance in late November. We worked closely
with a number of Senators on terrorism insurance legislation, but unfortunately the Senate did
not act before adjourning in December.
Part of the motivation for enacting terrorism insurance legislation last fall was that the
majority of reinsurance contracts were coming up for renewal on January 1. Reinsurers had
made clear that they were no longer going to cover terrorism risk or that the cost of limited
terrorism coverage would be very expensive. Without access to reinsurance coverage, primary
insurance companies would be subject to the full exposure of terrorism risk. In response, state
insurance commissioners in 47 states (with the exception of New York, California, and Georgia)
have permitted terrorism coverage exclusions in commercial lines. While the state-level
terrorism coverage exclusion is fairly broad, most states do not allow an exclusion from fire
damage following a terrorist attack and all states require terrorism coverage be included in
workers' compensation insurance. Mandatory terrorism coverage requirements along with other
factors have resulted in some insurers exiting the workers' compensation market.
PO-2016

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As January 1 passed without any dramatic disruption in economic activity, it appears that
some members of Congress have concluded that the lack of insurance coverage for terrorism is
no longer a pressing issue. The Administration disagrees with this assessment and continues to
support enactment of a Federal backstop for terrorism insurance.
Documenting the extent of the problem is difficult. Many businesses and property
owners are hesitant about highlighting the fact that they have inadequate insurance coverage.
But as Treasury Deputy Assistant Secretary Warshawsky and the GAO recently testified,
problems in insurance markets are having a negative impact on economic activity. It is clear to
us that many commercial property owners and business owners are unable to find coverage for
terrorism risk or are paying very high rates for limited coverage. In some instances, the cost of a
policy with limited terrorism coverage is reported to be roughly double the cost of a policy
without terrorism coverage. We also have heard of cases where separate limited coverage for
terrorism risk costs more than twice the premium for insurance coverage for all other risks.
Such widespread dislocations in insurance markets are starting to have an impact on
businesses' ability to finance economic activity. Reports to us indicate that financing is limited
for new construction and/or acquisition of high-profile properties that are inadequately insured
and thought to be at higher risk of terrorist attack. Lenders are carefully screening the location
and size of buildings. Some are simply refusing to lend on trophy properties that are not fully
insured. Others will lend on underinsured properties, but only if the owner will provide recourse.
The impact on existing financial arrangements and structures for financing commercial
mortgages is equally troubling. While, technically, properties without adequate insurance are in
default of financing covenants, lenders may well not foreclose but, rather, raise their fees to
cover their own risk. Rating agencies have indicated that they will substantially increase
subordination levels on new issues of commercial mortgage backed securities that are
collateralized by properties having inadequate insurance coverage. They are also in the process
of establishing risk criteria that would lead to the downgrading of securities collateralized by
properties that are inadequately insured and thought to be at an elevated risk of attack.
The combination of higher insurance costs and higher financing costs associated with
inadequate insurance coverage has the real potential to reduce economic activity. These effects
will not likely dissipate in near future. More reinsurance treaties will come up for renewal.
More primary insurance contracts will come up for renewal. And investors will more seriously
evaluate their risk exposure to terrorism if it becomes clear that Congress will not take action.
Lack of Federal action on terrorism insurance, in addition to placing a drag upon our
economic recovery, paralyzes private sector initiatives to address terrorism risk. The lack of finn
government action, one way or another, is itself costly as insurers, financiers, and businesses
wait to see what if any new institutions the government might set up before going forward with
new plans to address terrorism risk.

Finally, there is a real concern about the potential costs to the Federal government and the
economy in the event of another attack if no backstop is place. Private insurance covered a
significant percentage oflosses arising from the September 11 attacks in an efficient and timely
manner. Trying to devise such a scheme on short notice and in the aftermath of another terror
attack would be considerably less effective and would slow the recovery.
We must continue to clearly make the case to Congress that Federal inaction on terrorism
insurance is causing economic disruptions that need to be addressed now. Perhaps even more
importantly, Congress needs to consider the adverse economic consequences that could ensue in
the event of a future terrorist event, given the unavailability of terrorism coverage, particularly
for properties viewed as potential targets. A federal terrorism insurance program is an essential
part of our nation's defenses against this insidious new threat. We stand ready to engage in
negotiations with the House and Senate to develop consensus legislation that can be signed into
law.
-30-

D· E p'i;. "J.\. T MEN
,

. -

0 F

THE
-

T REA SUR Y
-

NEWS
omCE OF PUBLIC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C. - 20220" (202) 622-2960

EMBARGOED UNTIL 2:00 P.M. EST
March 20, 2002

CONTACT: BETSY HOLHAN
202-622-2960

Statement of
Treasury Assistant Secretary For Financial Markets Brian C. Roseboro
Before the
House Committee on Appropriations
Subcommittee on Treasury, Postal and General Government

Good afternoon Chairman Istook, Mr. Hoyer, and distinguished members of the
Subcommittee. I am pleased to be here today to discuss Treasury's Debt Management
approach and direction.

Debt Management
Simply put, the objective of Treasury debt management is to meet the financing
needs of the federal government at the ~owest cost over time.
However, achieving this straightforward objective is subject to multiple
constraints. The dominant constraint that we confront in achieving this objective is that
we see the future only imperfectly. We are always making decisions in conditions of
uncertainty. As a consequence, debt management necessarily involves three judgments:
first, what will be the likely size and duration of our borrowing needs, second, how
should we respond if actual needs differ substantially from expectations and, third, what
will be the lowest cost means of financing those needs in the future. We cannot escape
these three issues. We face them in our weekly financing decisions, in our quarterly
refundings, and in our strategic planning.
Further, the Treasury's continuing commitment to a schedule of regular and
predictable auctions of marketable bill and note dates is a means, over time, to the end or
objective of the lowest cost borrowing. In the short run, however, this commitment serves
as a constraint: with regular and predictable auction dates we accept the cost of
occasionally borrowing when it is inconvenient or expensive in return for the lower costs,
over time, from providing greater certainty to the Treasury market.
PO-ZOl7

Far press relea.tes, spee8llJ, putJtit ~es and official biographies, call our 24-hour fax line at (202) 622-2040

Conceptually, there is another constraint. We believe the availability of the full
faith and credit of the United States, as a savings vehicle should not be limited only to
those who can afford the minimum one-thousand dollar denominations available in our
auctions of marketable securities. Thus, we will continue to offer savings bonds even
though they are not the most efficient fonn of borrowing in operational terms. But, again,
we will seek to minimize the cost of this constraint on our objective by supporting the
Bureau Public Debt's ongoing efforts to improve efficiency.

Balanced Marketing of all Treasury Securities
Successfully achieving our debt management objective requires us to strive to
create the broadest possible primary market for all Treasury securities that technology
and our imaginations will allow. One critical dimension of creating this broad primary
market is a balanced marketing effort for all our securities. The other is the technology
that is making the distinctions between wholesale and retail borrowing increasingly
arbitrary. We will use technology to move as many investors large and small to directly
access our securities over the Internet.
Let me illustrate how we are using balanced marketing by describing a challenge
Under Secretary Fisher gave to the Bureau of the Public Debt. He recently challenged
Commissioner Zeck to increase direct competitive bidding in our auctions. Currently,
most of the dollars bid in our auctions come through a small number of the largest
dealers. The dealers bid for their own account and for customers. We are actively
seeking new institutional bidders in our auctions by marketing Public Debt's new
TAAPSLink Internet site.
Public Debt is well positioned to take up the twin challenges of using technology
to move as many investors in all our securities to direct Internet access and market the
full range of securities to the public.
The Bureau has a solid track record of innovation in creating direct access for
investors. For example, individuals and other holders in our TreasuryDirect system have
had an Internet or other electronic channel available to them for several years to purchase
or reinvest in marketable issues. Individual investors can now buy Series EE and Series I
bonds at Public Debt's Savings Bonds Direct website at their pleasure.
At the same time, Public Debt is already shifting its marketing emphasis from a
heavy focus on the savings bond component, of our financing mix, to effectively market
all the securities we offer to the pUblic.

Savings Bonds
I know the Committee is interested in the level of operational resources it takes to
operate the savings bond program. I think it worthwhile to make an observation or two
about the program.

First, as Treasury's debt manager I have to look at the total cost of borrowing and
the total cost of borrowing from any type of security includes administrative costs and
more importantly interest costs. When you take both into account, the savings bonds
program, though less efficient as a borrowing tool in today's capital markets, actually is a
slightly more cost-effective way to borrow, over time, than market borrowing. Savings
bonds are part of our borrowing mix, and currently finance $190 billion of our debt.
Commissioner Zeck will discuss in greater detail the way we evaluate the costs of the
savings bond pro gram.
I would very much like to transform our savings bond program and move it
immediately into the future. However, we have the legacy of more than 60 years of
issuing savings bonds, which requires a commitment of customer service. "A promise
made is a promise kept" and we must honor our obligation to the more than 50 million
existing savings bond holders. This commitment requires a significant administrative
infrastructure.
While we may be constrained somewhat by the legacy costs associated with
servicing small denomination securities issued in physical fonn, we are moving new
savings bonds into the future. The economies of the Internet are making it not only
possible but also desirable to begin offering savings securities in accounts directly with
the Treasury rather than issuing millions of paper certificates. Work is now underway to
make this a reality, later this year, by offering the Series I bond in a new Internet based
system.
Conclusion
To achieve our primary objective of the lowest borrowing costs within the constraints
we have, we want to maintain a pattern of regular and predictable issuance of as broad a
portfolio of instruments as is consistent with (a) our best projections of likely borrowing
requirements and (b) our ability to respond if those proj ections are not realized, and (c) our
current understanding of what will provide the lowest borrowing cost over time.
We will support our primary objective with efforts to move as many investors as
we can toward direct electronic access to all Treasury securities and we will continue our
ongoing efforts to improve efficiency and reduce costs. Effective, balanced marketing of
all our securities is critical to educating the public about the variety and benefits of
Treasury securities. Finally, we will keep our promise to millions of investors who rely
on the safety and security of Treasuries by continuing to offer the high-quality customer
service they expect and deserve.
-30-

DEP ARTMENT OF THE TREASURY
OFFICE OF PUBLIC AFFAIRS
For Immediate Release
March 20, 2002

Contact: Tara Bradshaw
(202) 622-6014

TREASURY'S PLAN TO COMBAT ABUSIVE
TAX AVOIDANCE TRANSACTIONS

ST ATEMENT BY
TREASURY SECRETARY PAUL O'NEILL
STATEMENT BY
INTERNAL REVENUE SERVICE COMMISSIONER CHARLES O. ROSSOTTI
STATEMENT BY
TREASURY ASSISTANT SECRETARY FOR TAX POLICY MARK WEINBERGER
HIGHLIGHTS OF
TREASURY'S PLAN TO COMBAT ABUSIVE TAX AVOIDANCE TRANSACTIONS
COMPLETE PROPOSAL
TREASURY'S PLAN TO COMBAT ABUSIVE TAX AVOIDANCE TRANSACTIONS
(Includes Executive Summary and Penalties Chart)

...

DEP ARTMENT OF THE TREASURY
OFFICE OF PUBLIC AFFAIRS
Contact: Tara Bradshaw
(202) 622-2014

For Immediate Release
March 20, 2002

TREASURY SECRETARY PAUL O'NEILL STATEMENT ON TREASURY'S PLAN TO
COMBAT ABUSIVE T AX AVOIDANCE TRANSACTIONS
Today, the Treasury Department is introducing new proposals to combat abusive tax avoidance.
These proposals will increase transparency and disclosure of transactions that take advantage of
complexities in the tax code. They will better allow the Internal Revenue Service to enforce our
tax laws and the Treasury to identify anomalies in the tax law requiring correction.
The complexity of our tax code has created opportunities for abuse. These proposals will help us
find and stop unscrupulous promoters who are marketing questionable transactions to taxpayers.
Our tax code is so complex it sometimes seems to be a secret code-a cipher. Even the wellintentioned may run afoul of its baffling provisions. This complexity creates two dangers. The
first is that people will simply throw up their hands in frustration instead of paying. But the
second and worse danger is that it leads some innovative thinkers to find and exploit loopholes.
These tax avoidance strategies deliberately violate the spirit of our laws and are unfair to the vast
majority of taxpayers, who do their best to comply with the code.
The search for loopholes diverts creativity and resources away from productive investments in
our economy and reduces our economic potential. Taxpayers spend as much as $125 billion
each year complying with the tax code. The cost of those lawyers and accountants adds to the
price of every product, but they do nothing to make our factories more efficient, our computers
faster or our cars more durable.
The 9,500 page tax code, with its endless convolutions, is an abomination unworthy of our
society. Is it any surprise that some people run from it? It undermines notions of law of, for, and
by the people, because even those who spend a lifetime studying can barely understand it.
Certainly ordinary citizens cannot hope to figure it out.
The right way to eliminate abusive tax practices is to simplify the tax code. We are working on
long-term and short-term plans to address complexity in the code, eliminating redundant
provisions and unintended consequences. In an ideal world, we would throwaway the current
code and start from scratch. Until that day, we will take steps such as this proposal to do away
with transactions that abuse the intent of the code.
-30-

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON. D.C. 20224
COMMISSIONER

MARCH 20, 2002
STATEMENT OF THE
COMMISSIONER OF INTERNAL REVENUE
CHARLES O. ROSSOTTI
ON CORPORATE TAX SHELTERS
Let me thank and congratulate Secretary O'Neill and Assistant Secretary
Weinberger for their leadership in putting together and pushing forward this excellent
package.
Boiled down to their essence, these initiatives are about one thing. And that's
fairness for the overwhelming majority of America's taxpayers who pay what they owe
every year. Nothing undermines the idea of fairness in the tax system more than when
it seems that the average taxpayer who has taxes withheld from his or her wages is
being forced to pay - while big corporations or very wealthy individuals can use highpriced tax advisors to escape taxes.
We need these new initiatives to identify and keep pace with ever changing
exotic tax devices that manipulate highly technical provisions of the tax law in
inappropriate ways.
To deal effectively with this problem, we need better disclosure so we can
evaluate these devices openly. Disclosure is what helps us distinguish between a
legitimate business transaction and one that inappropriately manipulates the code.
I don't think that increased disclosure requirements should be objectionable to
most taxpayers. If you have a transaction or device that's acceptable under the law,
why isn't it acceptable to disclose it to the IRS for us to examine. If we agree that it is
legitimate, that eliminates any further concern. If we don't agree, there are ample
mechanisms to resolve disputes over technical issues.
With the help of these initiatives, we believe we will increase the effectiveness in
combating the use of abusive tax shelters without unduly burdening taxpayers.

xxx

DEP ARTMENT OF THE TREASURY
OFFICE OF PUBLIC AFFAIRS
For Immediate Release
March 20, 2002

Contact: Tara Bradshaw
(202) 622-2014

TREASURY ASSISTANT SECRETARY FOR TAX POLICY MARK WEINBERGER
STATEMENT ON TREASURY'S PLAN
TO COMBAT ABUSIVE TAX AVOIDANCE TRANSACTIONS

Thank you all for being here this afternoon. Secretary O'Neill is currently in Mexico, but he
joins us in spirit--and in a statement. I would like to thank Commissioner Rossotti for being here
today as we announce Treasury's enforcement proposals to curb abusive tax avoidance
transactions.
Abusive tax avoidance transactions are not structured for business reasons but instead are
structured to take advantage of a complex tax code to obtain tax benefits that Congress did not
intend. These transactions must be curbed because they violate Congress' intent, hann the public
fisc and erode the public's sense of fairness.
As I said at my confinnation hearing and in several public speeches since, this Administration
will continue to seriously examine the issue of abusive tax avoidance transactions and how best
to step up enforcement against them. I asked for time to review the results of the first filing
season of the new rules put in place in 2000. The results are in. We now have received and
reviewed the first year of filings of disclosures. We are disappointed in the number and types of
transactions disclosed. Today, we are proposing significant regulatory and legislative changes to
enhance enforcement of the law.
The current rules for disclosing, registering, and maintaining customer lists for tax shelter
transactions differ dramatically, which creates complexity for some, and opportunity for others.
The vast majority of taxpayers and practitioners do their best to comply with the letter and spirit
of the laws. Some, however, are actively promoting or engaging in transactions structured to
generate tax benefits never intended by Congress. All taxpayers have a stake in the government's
success in establishing rules that assist in identifying and addressing these transactions.
Transparency - that is, ensuring that questionable transactions are disclosed and SUbjected to IRS
review - is critical to the Government's ability to identify and immediately address abusive tax
avoidance practices.

Our Legislative and Administrative Proposals will change the risk/reward analysis for taxpayers
who would enter into questionable transactions and play the audit lottery to avoid paying their
fair share of taxes. We are simplifying disclosure rules to eliminate gray areas that have been
used to avoid disclosure, and imposing new penalties on promoters and taxpayers for failure to
disclose.
Simply put, if a taxpayer is comfortable entering into a transaction, a promoter is comfortable
selling it, and an advisor is comfortable blessing it, they all should be comfortable disclosing it to
the IRS.
Together, these steps to simplify compliance and raise the cost of noncompliance will provide us
\vith more information about the misuses of our tax code, so that we can work with Congress to
correct them. We are deliberately casting a broader net with our legislative and administrative
proposals than exists under the current rules.
The Treasury Department's initiative will build upon ongoing Treasury Department and IRS
efforts to combat abusive tax practices. Recent actions have focused on both individual and
corporate tax avoidance transactions, and on both taxpayers and promoters.
•

The IRS announced in December 2001 a limited-time program to encourage disclosure of
questionable transactions. A taxpayer who discloses a transaction, and who identifies all
promoters of the transaction, will avoid accuracy-related penalties. The taxpayer,
however, will still be liab Ie for interest on any underpayment of tax. To date, almost 150
transactions have been disclosed, including many that the IRS already has identified as
tax avoidance transactions. Along with this disclosure initiative, the IRS issued penalty
guidelines for all tax avoidance transactions that require the full, fair, and consistent
consideration of penalties.

•

The Treasury Department and the IRS are working closely together to streamline the
evaluation of transactions, including the determination of whether a transaction should be
identified as a listed (i.e., tax avoidance) transaction for taxpayer disclosure purposes.

•

The Treasury Department and the IRS are working to re-deploy additional resources to
deal with tax avoidance transactions and have increased their coordination with the
Department of Justice.

•

The IRS is working actively to obtain transaction and investor information from some 30
promoters 0 f tax avoidance transactions. These efforts have and will continue to include
the use of judicial summonses for those promoters who prove reluctant in providing this
information.

•

The IRS, in coordination with the Department of Justice, is working to shut down the
promoters of abusive tax schemes directed primarily at individuals and small businesses.
Courts already have issued six injunctions, and a number of additional cases are pending.

•

The IRS is investigating a major abusive tax avoidance scheme used by individuals to
evade U.S. tax by placing assets in banks located in foreign tax havens. Thousands, and
potentially tens of thousands, of individuals are participating in these schemes. Through

judicial summonses, the IRS is working to identify these individuals and is in the process
of initiating enforcement action, including audits and criminal actions.
•

Treasury and the IRS recently published a notice warning taxpayers that the IRS will
challenge transactions using a loan assumption agreement to claim an inflated basis in
assets acquired from another party.

•

Treasury and the IRS recently published a notice warning taxpayers that the IRS will
challenge transactions improperly shifting basis from one party to another.

•

Treasury and the IRS recently published a notice announcing Treasury's intention to
promulgate regulations that prevent the duplication of losses by a consolidated group.

•

Treasury and the IRS recently published final regulations on hedging transactions that
prevent employers from deferring tax on income from investments used to fund deferred
executive compensation.

•

Treasury is actively pursuing, and has had remarkable success in obtaining, tax
information exchange agreements with offshore financial centers. These agreements
allow us to pursue information on civil and criminal tax evaders even when countries
have bank secrecy laws.

Ultimately, to address these abusive tax avoidance transactions, we have to get at the heart of the
problem-the complexity of the tax Code. Our complex tax system must be re-evaluated and
simplified, so that the opportunities for abusive tax practices that currently exist are eliminated.
Until abusive tax avoidance transactions can be addressed by simplifying the tax Code, the
Treasury Department and the IRS will continue to use these simplified and strengthened rules for
disclosure, registration and list maintenance to eliminate abusive tax avoidance transactions.

-30-

TREASURY PROPOSALS TO CURB
ABUSIVE TAX AVOIDANCE TRANSACTIONS
"The complexity of our tax code has created opportunities for abuse. These proposals will help us find and stop
unscrupulous promoters who are marketing questionable transactions to taxpayers."
Treasury Secretary Paul O'Neill
THE ABUSIVE TAX AVOIDANCE TRANSACTION PROBLEM: SYMPTOM OF A LARGER PROBLEM

• The vast majority of taxpayers and practitioners do their best to comply with the letter and spirit of the law. Some,
however. are actively promoting or engaging in abusive tax avoidance transactions.
• Abusive tax avoidance transactions are not structured for business reasons but instead are structured to take
advantage of a complex tax code to obtain tax benefits that Congress did not intend.
• The ability of taxpayers to engage in these kinds of transactions is one more reason why our complex tax system must
be re-evaluated and simplified, so that the opportunities for abusive tax practices that currently exist are eliminated.
• These transactions must be curbed because they violate Congress' intent, harm the public fisc and erode the public's
sense of fairness.
• To address this problem, the system must include clearer rules, more transparency and stiffer penalties. Together, the
initiatives will change the risk/reward ratio for taxpayers who wish to play the audit lottery and fail to follow the law.

THE IMPORTANCE OF TRANSPARENCY AND VIGOROUS ENFORCEMENT

• The current rules for disclosing, registering, and maintaining customer lists for tax shelter transactions differ, which
creates complexity. In addition, the disclosure regulations set forth a series of filters and exceptions that taxpayers are
parsing to avoid disclosure. As a result, registrations and disclosures to date have been disappointing.
• Transparency - that is, ensuring that questionable transactions are disclosed and subjected to IRS review - is critical to
the Government's ability to address abusive tax avoidance practices.
• Clear rules mandating transparency and vigorous enforcement are essential to curbing abusive tax avoidance
transactions. Treasury believes that the existing enforcement regime must be expanded and enhanced to ensure
transparency.
• This means more than just new rules; it means more action. Treasury and the IRS have intensified enforcement efforts
against promoters of abusive tax practices.

NEW BROADER DISCLOSURE REQUIREMENTS AND ENHANCED PENALTIES NEEDED
• Treasury will seek legislation that will impose new penalties and enhance existing penalties for a taxpayer's or
promoter's failure to comply with enhanced rules.
• Treasury is undertaking a series of administrative actions that strengthen and improve the rules for disclosing and
registering transactions and the maintenance of customer lists for tax avoidance transactions.
• Under these new proposals, Treasury will create a Single set of rules, that leaves no room for interpretation, to apply to
disclosure, registration, and maintenance of customer lists. A single set of rules should create a better enforcement
system that increases the certainty of IRS detection of failure to disclose, failure to register, and failure to maintain
customer lists, and thus will deter tax shelter activities.

TREASURY'S LEGISLATIVE PROPOSALS
.; Impose a Penalty on the Failure to Disclose Reportable Transactions
Without a penalty, taxpayers have less incentive to disclose. Significant new penalties will apply to the failure to disclose
reportable transactions. No penalty currently exists .
.; Increase the Penalty on Promoters for Failure to Register a Reportable Transaction
Asignificant penalty should be imposed on a promoter for the failure to register a reportable transaction .
.; Require Corporate Taxpayers to Disclose to Shareholders any Penalties for Failing to Disclose "Listed"
Transactions or Participating in Undisclosed "Listed" Tax Avoidance Transactions
Corporate taxpayers should disclose to their shareholders that they have been penalized for failing to disclose or for
participating in undisclosed tax avoidance transactions that have been listed by the IRS .
.; Increase the Penalty for the Failure to Turn Over Investor Lists in a Timely Fashion
Legislation is necessary to encourage promoters to respond more quickly to IRS requests for investor lists .
.; Permit Injunction Actions against Promoters who Repeatedly Disregard the Registration and List·Maintenance
Requirements
An injunction would place a promoter under court order to abide by the registration and list-maintenance requirements. The
promoter then would be in contempt of court if it violated these rules in the future. The threat of an injunction will enable
Treasury and the IRS to curb the most egregious behavior by promoters .
.; Impose a Penalty for the Failure to Report an Interest in a Foreign Financial Account
Acivil penalty is necessary because many taxpayers are failing to comply with the rules and regulations requiring the
reporting of information on the "Report of Foreign Bank and Financial Accounts" (Form TO F 90-22.1) .
.; Increase the Penalty for Frivolous Return Positions
Treasury, in its 2003 fiscal year budget, has proposed to increase the penalty for frivolous tax returns from $500 to $5,000.
This amendment would further deter individual taxpayers from taking positions that have no basis in law or fact.
.; Amend the Promoter Registration Rules
This will expand the types of transactions promoters will be required to register with the IRS .
.; Confirm Treasury and the IRS' Ability to Expand the Number of Promoters and Advisors Required to Register
Reportable Transactions and Maintain Investor Lists
Broadening the list of promoters and advisors required to register transactions and keep lists will help the IRS more easily
identify the taxpayers participating in abusive tax avoidance transactions .
.; Curb Improper Use of Foreign Tax Credits
To prevent taxpayers from improperly obtaining foreign tax credits, Treasury will seek legislation that will amend Section
901{k) of the Code to cover income streams other than dividends (which already are covered by the statute) that are subject
to foreign withholding taxes .
.; Curb Abusive Income.Separation Transactions
To prevent "income-separation" transactions that are structured to create immediate tax losses or to convert current
ordinary income into deferred capital gain, Treasury will seek legislation to prevent the separation for tax purposes of an
asset from its income stream.

TREASURY'S ADMINISTRATIVE ACTIONS
.; Require Partnerships, S Corporations, Trusts and High-Income Individuals to Disclose Reportable Transactions
Disclosure should not be limited to corporations-everyone should be required to disclose potentially abusive transactions .
.; Centralize the Receipt and Review of Disclosures by Partnerships, S Corporations, Trusts and High.lncome
Individuals
This will give the IRS an early warning mechanism to identify potentially abusive transactions. It also facilitates the process
of identifying potentially abusive transactions if all the documents are in one location .
.; Establish a Consistent Definition of a "Reportable Transaction" for Return Disclosure, Registration and List.
Maintenance Purposes
Asingle set of rules reduces complexity and should apply on a clear bright line basis that leaves no room for interpretation
and is not based on subjective inquiries .
.; Clarify the Definition of a Listed Transaction
Clarifying the definition of a listed transaction will improve disclosure .
.; Impose Strict Liability for Failure to Disclose a Reportable Transaction
To encourage taxpayers to disclose reportable transactions, a strict liability penalty should be imposed on a
taxpayer who fails to disclose a reportable transaction and is found liable for an understatement of tax .
.; Impose Strict Liability for Failure to Disclose a Position
Astrict liability penalty should be imposed on a taxpayer who fails to disclose that it has disregarded a
regulation and is found liable for an understatement of tax .
.; Broaden the Range of Persons who Are Required to Register Reportable Transactions and Maintain Lists of
Investors
Broadening the list of promoters and advisors required to register transactions and keep lists will help the IRS more easily
identify the taxpayers participating in abusive tax avoidance transactions .
.; Establish Standards for Opinions in Circular 230
Because taxpayers often rely on opinions in deciding whether to partiCipate in a tax avoidance transaction, and because
some practitioners are rendering legal opinions that fall short of appropriate minimum standards, it is necessary to clarify the
standards for opinions and impose strict standards on promoters who provide opinions to facilitate abusive tax avoidance
transactions .
.; Provide a Consistent Form for Return Disclosures
Astandard form will ensure that all relevant information is provided to the IRS .
.; Establish Procedures for Early Examinations of Potential Tax Avoidance Transactions
This process will allow the IRS to quickly identify, evaluate, and shut down abusive tax avoidance transactions .
.; Target Abusive Tax Avoidance Schemes
The IRS will re-deploy resources to identify and shut down abusive tax avoidance transactions. Resolution of issues such as
capitalization and the R & E credit, which the IRS has indicated consumes nearly 40% of the audit resources in the IRS
Large &Mid-Size Business Division, will free up resources for better use-such as targeting abusive tax avoidance
schemes.

THE TREASURY DEPARTMENT'S ENFORCEMENT PROPOSALS FOR
ABUSIVE TAX AVOIDANCE TRANSACTIONS

EXECUTIVE SUMMARY
The Treasury Department is announcing an initiative that will give the Treasury
Department and the IRS the tools needed to combat abusive tax avoidance transactions.
The mind-numbing complexity of the Internal Revenue Code underlies these
transactions. While the vast majority of taxpayers and their advisors do their best to
comply with the law, the Code's multitude of rules creates opportunities for those who
\vould seek to reduce improperly their tax liabilities. Fundamental fairness requires that
questionable transactions be disclosed and evaluated so that all taxpayers bear their fair
share of taxes.
Transparency - insuring that questionable transactions are disclosed and subject
to IRS scrutiny - is at the core of the Treasury Department's initiative. The current
enforcement regime, which includes the temporary regulations that were issued in
February 2000, provides for the disclosure by taxpayers of potential abusive tax
avoidance transactions, and the registration of these transactions and the maintenance of
investor lists by promoters. The Treasury Department and the IRS' experience with this
current enforcement regime - and especially with the return disclosures filed in fall 2001
- has been disappointing and points to the apparent willingness by taxpayers and
promoters to interpret and manipulate the rules to avoid disclosure.
Clearer rules and stiffer penalties are needed to ensure transparency. The
Treasury Department's initiative will create a series of clear, mutually-reinforcing rules
for disclosure, registration, and list maintenance. These rules will be easier for taxpayers
and their advisors to apply, and harder for those who seek to avoid disclosure to
manipulate. The Treasury Department also is proposing new and substantial penalties,
and significant increases to existing penalties, for those taxpayers and promoters who fail
to obey these rules.
The Treasury Department's initiative will build upon ongoing Treasury
Department and IRS efforts to combat abusive tax practices. Recent actions have focused
on both individual and corporate tax avoidance transactions, and on both taxpayers and
promoters.
•

The IRS announced in December 2001 a limited-time program to encourage
disclosure of questionable transactions. A taxpayer who discloses a transaction,
and who identifies all promoters of the transaction, will avoid accuracy-related
penalties. The taxpayer, however, will still be liable for interest on any
underpayment of tax. To date, almost 150 transactions have been disclosed,
including many that the IRS already has identified as tax avoidance transactions.
Alona with this disclosure initiative, the IRS issued penalty guidelines for all tax
avoidance transactions that require the full, fair, and consistent consideration of
penalties.

•

The Treasury Department and the IRS are working closely together to streamline
the evaluation of transactions, including the detennination of whether a
transaction should be identified as a listed (i.e., tax avoidance) transaction for
taxpayer disclosure purposes.

•

The Treasury Department and the IRS are working to re-deploy additional
resources to deal with tax avoidance transactions and have increased their
coordination with the Department of Justice.

•

The IRS is working actively to obtain transaction and investor infonnation from
some 30 promoters of tax avoidance transactions. These efforts have and will
continue to include the use of judicial summonses for those promoters who prove
reluctant in providing this infonnation.

•

The IRS, in coordination with the Department of Justice, is working to shut down
the promoters of abusive tax schemes directed primarily at individuals and small
businesses. Courts already have issued six injunctions, and a number of
additional cases are pending.

•

The IRS is investigating a major abusive tax avoidance scheme used by
individuals to evade u.S. tax by placing assets in banks located in foreign tax
havens. Thousands, and potentially tens of thousands, of individuals are
participating in these schemes. Through judicial summonses, the IRS is working
to identify these individuals and is in the process of initiating enforcement action,
including audits and criminal actions.

•

Treasury and the IRS recently published a notice warning taxpayers that the IRS
will challenge transactions using a loan assumption agreement to claim an inflated
basis in assets acquired from another party.

•

Treasury and the IRS recently published a notice warning taxpayers that the IRS
will challenge transactions improperly shifting basis from one party to another.

•

Treasury and the IRS recently published a notice announcing Treasury's intention
to promulgate regulations that prevent the duplication of losses by a consolidated
group.

•

Treasury and the IRS recently published final regulations on hedging transactions
that prevent employers from deferring tax on income from investments used to
fund deferred executive compensation.

•

Treasury is actively pursuing, and has had remarkable success in obtaining, tax
infonnation exchange agreements with offshore financial centers. These
agreements allow us to pursue infonnation on civil and criminal tax evaders even
when countries have bank secrecy laws.

The Treasury Department recognizes that more must be done to curb abusive tax
practices, and this initiative, by establishing clear rules for transparency and stiff

penalties who attempt to avoid scrutiny, will allow the Treasury Department and the IRS
to devote more resources to evaluating and addressing questionable transactions.

Administrative Actions - Highlights
•

Expand Disclosure - Individuals, partnerships, S corporations, and trusts, in
addition to corporations, will be required to disclose questionable transactions.
Current rules cover only corporations.

•

Expand and Unify the Definition of a Reportable Transaction - Current rules
contain different definitions of a transaction for disclosure, registration, and list
maintenance. A single, clear definition will be established that will curtail the
apparent manipulation of the current rules by come taxpayers and promoters.

•

Impose Accuracy-Related Penalties for Reportable Transactions that are not
Disclosed - Current rules permit taxpayers to assert as a defense to the accuracyrelated penalty that they have received a tax opinion regarding that transaction.
Amended regulations will prohibit this defense with respect to undisclosed
reportable transactions and will increase the penalty in certain cases. These
amended regulations also will address undisclosed transactions that are based on
the invalidity of a regulation.
•

If a listed transaction is not disclosed, a strict liability accuracy-related penalty
of 25% will be imposed on any underpayment resulting from the transaction
regardless of the amount of the understatement. This would be in addition to
a new $200,000 penalty for the failure to disclose a listed transaction.
Legislative changes would be required for these new and increased penalties.
See attached penalty chart.

•

If a non-listed reportable transaction is not disclosed, the existing defenses to
any accuracy-related penalty (~, reasonable cause, substantial authority)
will not be available for any underpayment resulting from the transaction.

•

If a transaction based on the invalidity of a regulation is not disclosed, a strict
liability accuracy-related penalty will be imposed on any underpayment
resulting from the transaction regardless of the amount of the understatement.

•

Broaden the Registration and List-Maintenance Requirements - The persons
responsible for registering transactions and maintaining investor lists will be
broadened to insure that this information is available to the IRS. The listmaintenance requirements will be mandatory for all material participants in the
promotion of a reportable transaction.

•

Establish Standards for Legal Opinions- The Treasury Department and the IRS
are revising the proposed rules in Circular 230 governing the legal opinions used
to market and support tax avoidance transactions.

Legislative Proposals - Highlights
•

Impose a Penaltv on the Failure to Disclose Reportable Transactions - Significant
new penalties will apply to the failure to disclose reportable transactions. No
penalty currently exists.

•

Increase the Penalty for the Failure to Timely Tum Over Investor Lists - The
existing penalty will be significantly enhanced, particularly to address promoters
who delay in providing the IRS with required information.

•

Require Corporations to Publicly Disclose to Shareholders Penalties for the
Failure to Disclose Listed Transactions and Accuracy-Related Penalties Resulting
from Listed Transactions that are not Disclosed - Corporations would be required
to disclose publicly the payment of a penalty for failure to disclose a listed
transaction or an accuracy-related penalty imposed as a result of an undisclosed
listed transaction.

•

Permit Injunction Actions against Promoters who Repeatedly Disregard the
Registration and List-Maintenance Requirements - The Government will be
permitted to enjoin the most egregious promoters of abusive tax avoidance
transactions, as it is doing currently with promoters of tax scams directed
primarily at individuals and small businesses.

•

Impose a Penaltv for the Failure to Report an Interest in a Foreign Financial
Account - A new civil penalty will be imposed on the failure to disclose foreign
financial accounts, which often are used in tax avoidance transactions.

•

Expand Section 901(k) - Additional restrictions will eliminate any additional
efforts to traffic in foreign tax credits.

•

Curb Abusive Income-Separation Transactions - New rules will curtail tax
avoidance transactions that separate the periodic income stream from an
underlying income-producing asset in order to generate an immediate tax loss for
one taxpayer and the conversion of current taxable income into deferred capital
gain for another.

The Treasury Department's Enforcement Proposals
Penaltv Structure for Listed and Unlisted Reportable Transactions
Listed Transactions
Unlisted Reportable
(strict liability)
Transactions
Failure to disclose:
Corporations
Failure to disclose:
$200,000
$50,000
SEC reporting

Partnerships, S
Corporations, and
Trusts
Individuals

Promoters

Accurac~-related 12enal~:

Accurac~-related 12enalt~:

Additional 5% of underpayment
Deemed negligence/disregard of
rules
No reasonable cause
SEC reporting
Failure to disclose:
$200,000

No reasonable cause (strict
liability if lose and have
substantial understatement)

Failure to disclose:
S100,000

Failure to disclose:
$10,000

Accuracv-related 12enalt~:
Additional 5% of underpayment
Deemed negligence/disregard of
rules
No reasonable cause
Failure to register:
Greater of 50% of fees or
$200,000 (increased to 75% if
intentional)
Failure to 12roduce investor list:
$10,000 per day past 20 business
days

Failure to disclose:
$50,000

Accurac~-related 12enalt~:

No reasonable cause (strict
liability if lose and have
substantial understatement)
Failure to register:
$50,000

Failure to 12roduce investor list:
$10,000 per day past 20 business
days

THE TREASURY DEPARTMENT'S ENFORCEMENT PROPOSALS
FOR ABUSIVE TAX AVOIDANCE TRANSACTIONS
The Treasury Department is announcing an initiative that will ensure that the
Treasury Department and the IRS have the tools to combat abusive tax avoidance
transactions. Fairness requires that the Treasury Department and the IRS identify these
transactions (along with the taxpayers who invest in them and the persons who promote
them), evaluate the tax positions taken, and take appropriate enforcement actions.
What underlies these transactions is the mind-numbing complexity of the Internal
Revenue Code. Its multitude of rules provide the opportunities for those who would seek
improperly to reduce their tax liabilities. Rules that provide for nonrecognition of gains
and losses, a two-tier tax system, mechanical basis adjustments, rules for allocation of
income and losses among partners, crediting of foreign taxes paid - all rules that serve
important purposes - are just some of the rules that may be used in these transactions to
create unintended tax benefits. These abusive transactions harm the public fisc, erode the
public's respect for the tax laws, and consume valuable public and private resources.
Transparency - insuring that questionable transactions are disclosed and subject
to IRS review - is critical to the Government's ability to identify and address abusive tax
avoidance practices. The Treasury Department believes that clear rules mandating
transparency and vigorous enforcement are essential to curbing abusive tax avoidance
transactions. If a promoter is comfortable with selling a transaction, a taxpayer is
comfortable with entering into that transaction, and a tax practitioner is comfortable with
advising that the transaction is proper, then they all should be comfortable with the IRS
knowing about and understanding the transaction.
The existing enforcement provisions in the Internal Revenue Code (Code) for tax
avoidance transactions, along with the temporary regulations issued in February 2000, are
designed to give the Treasury Department and the IRS the opportunity to evaluate
questionable transactions at the earliest opportunity. Section 6111 of the Code requires
promoters who market transactions to register with the IRS transactions that either will
generate a certain level of tax benefit or are corporate tax avoidance transactions that are
marketed on a confidential basis. Section 6112 requires that promoters maintain lists of
investors in registered transactions as well as other potential tax avoidance transactions.
The regulations under Section 6011 require corporate taxpayers to disclose on their tax
returns transactions that the IRS has identified as tax avoidance transactions or that have
certain characteristics common to tax avoidance transactions.
Since the beginning of this Administration, the Treasury Department has made
clear its commitment to curtailing abusive tax practices. The Treasury Department in
particular wanted to evaluate the return disclosures from the 2000 corporate filing season,
which ended in the fall of 200 1, to determine whether the existing enforcement regime is
working and, if not, what additional measures are required. This review is complete.
The apparent willingness of certain taxpayers and their advisors to parse words in a
manner that narrows requirements and expands exceptions has been disappointing.

The Treasury Department's enforcement initiative, which includes both
administrative actions and legislative proposals, will significantly enhance the current
enforcement regime and curtail the use of abusive tax avoidance transactions. These
proposals focus on increased transparency and enhanced penalties. Transparency is
central to the Treasury Department and the IRS' ability to evaluate promptly new tax
avoidance transactions and to address them quickly. Enhanced penalties are necessary to
alter the "risk/reward" analysis taxpayers undertake when entering into these
transactions.
The Treasury Department has concluded that a more effective enforcement
regime would be created by a web of rules - rules that reinforce each other by requiring
the same information about a questionable transaction to be provided to the IRS both by
the taxpayers participating in these transactions and by the promoters and their advisors,
who also will be required to maintain lists of investors. These rules will allow the IRS to
identify taxpayers who fail to disclose based on the promoter's registration of the
transaction with the IRS, promoters who fail to register based on a taxpayer's disclosure
or based on a taxpayer's audit, and other taxpayers who fail to disclose based on a
promoter's investor list.
One of the primary goals of these proposals is certainty. Clearer disclosure rules,
without exceptions and perceived loopholes, will be easier for taxpayers and their
advisors to apply, harder for taxpayers and their advisors to manipulate, and easier for the
IRS to administer and enforce. The Treasury Department's proposals, for example, will
broaden and align the rules and regulations for disclosure, registration, and list keeping
under Sections 6011, 6111, and 6112 of the Code. The IRS will have multiple sources of
infom1ation about questionable transactions, including the identity of the participants.
Taxpayers and promoters will find avoiding IRS scrutiny of questionable transactions to
be difficult.
Taxpayers and promoters also will find avoiding IRS scrutiny to be hazardous.
The Treasury Department is proposing enhanced penalties for the failure to disclose and
maintain the information required by the IRS to enforce the tax laws. The Treasury
Department, for instance, will seek legislation creating a new strict liability penalty for a
taxpayer's failure to disclose a listed transaction. This penalty for the first time would
sanction taxpayers for failure to obey the disclosure rules. More generally, taxpayers and
promoters who disregard the rules for disclosure, registration and list-keeping will face
an increased risk of penalties.

2001 Taxpayer Return Disclosures

The corporate returns that were filed during the fall 200 I filing season were the
first to be fully covered by the revised disclosure regulations under Section 6011 of the
Code. To date, 99 corporate taxpayers have disclosed 272 transactions.
•

Only 64 listed transactions were disclosed. Listed transactions are
transactions that previously have been identified by the IRS in published
guidance as tax avoidance transactions. Based on other information , the
Treasury Department and the IRS have reason to believe that a far greater
number of listed transactions were undertaken.

•

The remaining 208 disclosures were for transactions that satisfy a multi-factor
test designed to identify transactions that have at least two of five
characteristics common to tax avoidance transactions (the 2-of-5 filter test).
Two types of transactions, however, account for 159 of these disclosures. The
Treasury Department and the IRS believe that taxpayers and promoters are
manipulating the requirements and exceptions to the 2-of-5 filter test to avoid
disclosure.

The small amount of disclosure was disappointing. From the information the
Treasury Department and the IRS have seen, this disclosure is a small segment of the
universe of transactions that should have been disclosed. A number of factors have led to
insufficient disclosure, registration, and list-keeping.
First, the rules in Sections 6011, 6111, and 6112 of the Code do not contain a
consistent definition of a transaction that must be disclosed and registered, and for which
investor lists must be maintained. While this situation is due, in part, to differing
statutory requirements, it also reflects the desire, when these rules were drafted, to
exclude legitimate business transactions and minimize taxpayer administrative burden.
The result, unfortunately, is a set of elegantly constructed, but complicated, rules. The
Treasury Department's enforcement initiative will create a single, clear definition of a
transaction that must be disclosed and registered, and for which lists must be maintained.
Second, the rules and regulations under Section 6011, 6111, and 6112 contain a
number of exceptions intended to ensure that the rules are narrowly tailored. For
instance, the disclosure requirements contain an exception for transactions for which
there is a generally accepted understanding that the taxpayer's intended tax treatment is
properly allowable. Another disclosure exception is for transactions that the IRS has "no
reasonable basis" to challenge.
The Treasury Department believes that many taxpayers and promoters have read
the exceptions broadly to cover virtually everything and interpreted the filters in the 2-of5 filter test narrowly to cover virtually nothing. While some interpretations are good
faith interpretations of the rules, others are attempts to assure taxpayers that they can
engage in tax avoidance transactions without appropriate disclosure. The Treasury

Department's enforcement initiative will eliminate any confusion about the obligation to
disclose questionable transactions to the IRS.
Third, the penalties for the failure to comply with the existing enforcement regime
may be insufficient to deter efforts to avoid IRS scrutiny. For example, there currently is
no penalty on a taxpayer for failure to disclose a transaction subject to the disclosure
requirements (although nondisclosure may be a factor in determining if an accuracyrelated penalty applies to any underpayment). The Treasury Department's enforcement
initiative will create a new and significant penalty on taxpayers who fail to disclose
transactions, and will increase significantly the penalty imposed on promoters who delay
in providing investor lists to the IRS. Corporations also will be required to disclose
publicly to their shareholder penalties that they incur for undisclosed listed transactions.
Finally, the Government will be authorized to seek injunctions against promoters who
repeatedly disregard the registration and list-keeping rules.
Finallv, many taxpayers and promoters believe that they can disregard the rules
and avoid detection. As described below, the IRS already is taking steps to increase its
detection of tax avoidance transactions, and these proposals will significantly enhance the
IRS' ongoing efforts.

Ongoing Efforts to Combat Abusive Tax Avoidance Transactions and Their
Promoters
The Treasury Department and the IRS recently have taken a number of important,
additional steps to combat abusive tax practices. The Treasury Department and the IRS
are committed to making sure that the necessary time, effort, and resources are
committed to this important issue.
Taxpaver Initiatives
•

Encouraged Voluntary Disclosure - IRS Announcement 2002-2, which was
issued last December, gives taxpayers an incentive to disclose questionable
transactions and other items that may have resulted in an underpayment. Under
the Announcement, if a taxpayer discloses a questionable transaction before April
23, 2002, the IRS will waive the accuracy-related penalty if additional tax
ultimately is due. In order to obtain this relief, a taxpayer must disclose all
relevant information about the transaction, including the identity of any promoter.
The IRS already has received almost 150 disclosures and expects many additional
disclosures in the coming weeks. The IRS will use the information it receives to
pursue promoters, identify taxpayers that have not disclosed reportable
transactions, and evaluate the new types of transactions that are identified.

•

Issued Penalty Guidelines - Along with the disclosure initiative, the IRS issued
penalty guidelines for tax avoidance transactions, including guidelines for the
coordination of penalty consideration with the IRS' Office of Tax Shelter
Analysis. These guidelines will ensure that penalties are impartially, fairly, and
consistently considered in all tax avoidance transaction cases.

•

Evaluated Additional Transactions - The Treasury Department and the IRS
recently issued Notice 2002-21, which warns that the IRS will challenge
transactions using a loan assumption agreement to claim an inflated basis in
assets, Notice 2002-18, which announces the Government's intention to
promulgate regulations preventing the duplication of losses by a consolidated
group, and Notice 2001-45, which warns that the IRS will challenge transactions
improperly shifting basis from one party to another. In addition, the Treasury
Department and the IRS recently promulgated final regulations on hedging
transactions that prevent employers from deferring tax on income from
investments used to fund deferred executive compensation. Other transactions
currently are under review. The Treasury Department and the IRS recognize the
critical need to expedite the process for reviewing questionable transactions and
are working to meet this objective.

•

Made Additional Resources Available to Address Abusive Tax Avoidance
Transactions - Recent published guidance in areas that have consumed significant
IRS audit resources, such as accounting method and timing issues, will allow the
IRS to devote more of its audit resources to tax avoidance transactions.

•

Developed a Mandatory IDR for LMSB Cases - The IRS' Large and Midsize
Business Division (LMSB) has developed an information document request (IDR)
that will be used for all LMSB audits beginning in April 2002. This mandatory
IDR will request information regarding all listed transactions.

•

Increased Coordination with the Department of Justice - In order to coordinate
the Government's efforts against abusive tax avoidance practices and conserve
resources, the Treasury Department and the IRS have increased their coordination
with the Department of Justice on tax avoidance transaction cases.

•

Entered into Tax Information Exchange Agreements (TIEAs) - The Treasury
Department has mounted a concerted effort to enter into agreements covering the
exchange of tax information with significant foreign financial centers where the
possibility of hiding income or assets poses a serious problem. Agreements
recently have been reached with three key offshore financial centers - the
Cayman Islands, Antigua and Barbuda, and The Bahamas.

Promoter Initiatives
The IRS is vigorously pursuing actions against the promoters of corporate and
individual tax avoidance transactions. The IRS' objectives are to curb the most egregious
promoters, penalize non-compliance, and obtain investor lists that will allow the IRS to
target and examine those taxpayers who have engaged in potential tax avoidance
transactions.
The IRS has contacted some 30 promoters of tax avoidance transactions in
connection with their marketing activities.
•

"Soft Letters" - The IRS has requested, through so-called "soft letters,"
information from these promoters. These letters request investor lists as well as

infonnation regarding compliance with the registration requirements under
Section 6111. A number of promoters already have provided the IRS with a
significant amount of infonnation, including investor lists.
•

Summonses - The IRS, in cooperation with the Department of Justice, is using
summonses to force reluctant promoters to provide investor lists and other
materials related to their promotion of tax avoidance transactions. These
summonses already are proving to be a valuable tool, and additional summonses
are being prepared. The IRS and the Department of Justice will seek to enforce
all summonses in court, if necessary.

•

Penaltv Audits - The IRS has begun more than a dozen promoter penalty audits
and expects to begin additional audits in the coming weeks.

The IRS also has intensified its enforcement efforts against promoters of abusive
tax avoidance transactions and scams directed primarily at individuals and small
businesses. These schemes include claims that the federal income tax is unconstitutional,
claims that individuals are citizens of the States and therefore not subject to federal
income ·tax, claims that U.S. citizens are not subject to U.S. income tax because of
Section 861 of the Code (so-called "Zero Tax" schemes), and credit claims for slavery
reparations. The Treasury Department believes that these schemes are especially
pernicious because the individuals targeted by promoters often have a limited
understanding of their legal duties and obligations. Recent and ongoing actions include:
•

Injunctions Granted - The Department of Justice has obtained injunctions against
six promoters of abusive tax avoidance schemes, including a preliminary
injunction that was issued on February 20,2002.

•

Pending Cases - The Department of Justice has filed an additional eight actions
against promoters of abusive tax avoidance schemes.

•

Future Cases - The IRS has referred a number of additional promoter cases to the
Department of Justice in order to initiate legal action against these promoters.

In addition, the IRS is pursuing a major initiative against promoters of abusive
offshore trust schemes. These schemes use banks located in offshore financial centers to
help U.S. individuals hide income while at the same time allowing these individuals to
access their offshore money in the U.S. by using credit cards issued by the offshore
banks. The IRS believes that thousands of individuals are using these schemes to evade
tax. In addition to an extensive publicity campaign to educate the public about the
dangers of these schemes, the IRS is working to shut them down.
•

Summonses to Financial Networks - Summonses have been issued to two
financial networks to obtain transaction infonnation that will allow the IRS to
identify individuals who are using credit cards issued by foreign banks to evade
tax.

•

Summonses to Vendors - Although information obtained from the financial
net\vorks may identify accounts, these schemes are set up so that the financial

networks often do not have infonnation identifying specific persons. Summonses
will be issued to vendors expected to have identification infonnation for credit
card transactions. The IRS expects to identify individuals through these vendor
summonses.
•

IRS Audits - The IRS will initiate audits of individuals who are identified as
participants in these schemes. If an identified individual is already under audit,
this infonnation will be provided to the auditor.

•

Criminal Prosecution - The IRS and the Department of Justice will initiate, where
appropriate, criminal proceedings against individuals who have violated the
criminal laws by participating in these schemes.

Aggressive enforcement and continuous taxpayer education will continue to be
keys to the Government's efforts to close down the tax schemes being marketed to
individuals and small businesses. For the more sophisticated tax avoidance transactions,
increased transparency, supported by stiffer penalties, is needed.

The Treasury Department's enforcement proposals are divided into administrative
actions and legislative proposals. These proposals, collectively, will enhance and expand
the efforts to combat abusive tax avoidance transactions.

THE TREASURY DEPARTMENT'S ADMINISTRATIVE ACTIONS
1.

Expand the Disclosure Rules to Cover Partnerships, S Corporations. Trusts,
and Some Individuals - The Treasury Department and the IRS will amend the
regulations under Section 6011 of the Code to require partnerships, S corporations,
trusts and individual taxpayers to disclose "reportable transactions," as described in
Administrative Action No.3, below. This requirement, however, will not affect
individuals unless they engage in specifically identified tax avoidance transactions
or in other transactions resulting in a significant reduction of tax liability.

Reason (or Proposal: Under current law. only corporate
taxpayers are required to disclose reportable transactions on a tax
return. The Treasury Department believes that potentially abusive
ta..r avoidance transactions are increasingly being used by high
net-worth individuals. Individuals. for example. have used
transactions modeled after those described in Notice 2000-44 (the
so-called "Son of Boss" transaction) and Notice 2001-45 (basisshifting transaction) to avoid paying income tax. In addition.
potentially abusive transactions by both corporations and
individuals often employ partnerships and trusts to achieve
unintended tax results. The Treasury Department believes that
individuals. partnerships. S corporations. and trusts should be
required to disclose questionable transactions. While this will

result in some duplicative reporting. the duplicative reporting will
ensure disclosure and also may deter improper transactions.
2.

Centralize the Receipt and Review of Disclosures bv Partnerships, S
Corporations, Trusts, and Individuals - Disclosures of transactions must be
submitted as part of a taxpayer's return. The IRS currently requires that copies of
corporate taxpayer disclosures be sent to a single location so that the IRS' Office of
Tax Shelter Analysis can coordinate their review. This centralized filing
requirement for disclosures will be expanded to disclosures required for
partnerships, S corporations, trusts, and individuals and will pennit the expeditious
review of all disclosures.

Reason for Proposal: The Treasury Department believes that the
review of all disclosures. whether by corporations. individuals,
partnerships. S corporations, or trusts must be centralized alld
coordinated. The coordinated review of these disclosures will
allow the Treasury Department and the IRS to identify trends and
new types of transactions and will ensure the consistent evaluation
of disclosed transactions. Moreover. the certainty of review that
will result from centralized disclosure should serve to deter
improper transactions.
3.

Expand and Unifv the Definition of a "Reportable Transaction" for Return
Disclosure, Reeistration and List-Maintenance Purposes - The Treasury
Department and the IRS will amend the regulations under Sections 6011, 6111, and
6112 of the Code to establish a single definition of the types of transactions
(reportable transactions) that must be disclosed by taxpayers and registered by
promoters, and for which lists of investors must be maintained by promoters. \
The current regulations under Section 6011 require taxpayers to disclose (i) listed
transactions (lk, tax avoidance transactions identified by the IRS in published
guidance), subject to a minimum tax effect requirement; and (ii) transactions that
satisfy the 2-of-5 filter test, subject to a number of exceptions. The current
regulations under Section 6111 requiring registration of confidential corporate tax
shelters and the current regulations under Section 6112 requiring list maintenance
use different standards than those in the Section 6011 regulations, but each set of
regulations has exceptions similar to those in the Section 6011 regulations.
The IRS' identification of listed transactions under current regulations has played
an important role in compelling disclosure of transactions, discouraging future
participation in these transactions, and guiding IRS audits in the field. Listed

Certain legislative changes will be required to allow for the full confonnity of the definition
of a reportable transaction for purposes of Sections 6011, 6111, and 6112 of the Code. See
LegIslative Proposal No.8, below

transactions will remain an important part of the definition of a reportable
transaction.
Under new regulations, the 2-of-5 filter test will be replaced by clearer rules that
will be easier for taxpayers and their advisors to apply and the IRS to administer. In
addition, the minimum tax effect requirement for listed transactions and the
exceptions to the 2-of-5 filter test (including exceptions for transactions for which
there is a generally accepted understanding that the taxpayer's intended tax
treatment is properly allowable, and the exception for transactions that the IRS has
"no reasonable basis" to challenge) will be eliminated.
These rules will have the effect of broadening the scope of transactions required to
be registered with and reported to the IRS. The IRS will have the ability to issue
published guidance to narrow the requirements as appropriate. In addition, the IRS
will establish expedited procedures permitting taxpayers (and particularly those
taxpayers who enter into multiple transactions of the same type) to seek a
determination from the IRS that their transactions are not reportable transactions.
Under this proposal, a reportable transaction will be defined as a transaction
(including a series of related transactions) falling into any of the following
categories:
•

Listed Transactions - Any transaction specifically identified by the IRS in
published guidance as a tax avoidance transaction without regard to the size of
the tax savings.

•

Loss Transactions - Any transaction resulting in, or that is expected to result
in, a loss under Section 165 of the Code of at least:

•

For corporate taxpayers - $10 million in any single
year, or $20 million in any combination of years.

•

For partnerships and S corporations - $10 million in
any combination of years.

•

For trusts - $2 million in any single year or $4 million
in any combination of years, whether or not any losses
flow through to one or more beneficiaries.

•

For individual taxpayers - $2 million in any single year,
or $4 million in any combination of years.

Transactions with Brief Asset Holding Periods - Any transaction resulting in
a tax credit (including a foreign tax credit) if the underlying asset giving rise
to the credit was held by the taxpayer for less than 45 days. This definition
will be limited to transactions resulting in tax credits exceeding $250,000.

•

Significant Book-Tax Differences - Any book-tax difference of at least S 10
million, subject to specific exceptions for book-tax differences that are not
indicative of potentially abusive tax avoidance practices, such as depreciation,
depletion, amortization, bad-debt reserves, state and local taxes, and employee
compensation.

•

Transactions that are Marketed under Conditions of Confidentialitv and that
Provide Minimum Tax Benefits - Any transaction promoted under conditions
of confidentiality, if the transaction results in, or is expected to result in (i) a
reduction in taxable income of an individual, partnership, S corporation, or
trust of at least $250,000, or (ii) a reduction in taxable income of any
corporate taxpayer of at least $500,000. Conditions of confidentiality do not
include the fact that a taxpayer's financial information is subject to restrictions
on disclosure.

Under this proposal, this same definition of a reportable transaction will be used to
identify those transactions that must be registered by promoters under Section 6111
and for which lists must be maintained pursuant to Section 6112 of the Code. The
exceptions to disclosure also will be eliminated for purposes of promoter
registration and list maintenance.
The Treasury Department recognizes that this definition of a reportable transaction
potentially will cover many transactions that may not be abusive tax avoidance
transactions. This definition, however, will enable the Treasury Department and the
IRS to accomplish two important objectives. First, this definition will give the
Treasury Department and the IRS the information needed to evaluate promptly
potentially questionable transactions. Equally important, this definition will allow
the Treasury Department and the IRS to identify problems and anomalies with
existing rules and regulations for which statutory or regulatory changes should be
considered.

Reason for Proposal: Ta.'(payers and promoters are interpreting
the requirements in the current rules narrowly and reading the
e.l.:ceptions liberal~v. The Treasury Department believes that a
clear and consistent rule for disclosure, registration, and listmaintenance will ensure that the IRS has more than one source of
information about a reportable transaction. The IRS must have the
ability to move quickly from a promoter registration to the
promoter's investor list in order to identify non-disclosing
taxpayers. Similarly, the IRS must be able to move quickly from a
ta.'(payer disclosure of a reportable transaction to a promoter who
might have failed to register the transaction, andfrom the
promoter's investor list to non-disclosing taxpayers. This web of
disclosure will increase the likelihood that taxpayers who fail to
disclose and promoters who fail to register will be identified.

Clarifv the Definition of a Listed Transaction - Under current law, a "listed
transaction" includes any transaction that is the same or "substantially similar" to a
transaction identified by the IRS in published guidance as a tax avoidance
transaction. The Treasury Department and the IRS will amend the regulations
under Section 6011 of the Code to clarify that a listed transaction includes any
transaction designed to produce the same or similar type of tax result using the
same, or similar, tax strategy. For example, a transaction that relies on Sections 318
and 302 to shift basis from one person to another in a factual situation similar to the
one in IRS Notice 2001-45 would be a listed transaction.

Reason (or Proposal: Some taxpayers and promoters have applied
the "substantially similar" standard in an overly narrow manner
to avoid disclosure. Some taxpayers and promoters, for example,
have made subtle alld insignificant changes to a listed transaction
in order to claim that their transaction is not subject to disclosure.
Others have taken the positioll that their transactiOIl is not
sllbstantial/.v similar to a listed transaction because they have an
opinioll concluding that the transaction is proper. The Treasury
Department believes that these interpretations are improper. The
change to the definition of a listed transaction is intended to halt
these practices.
5.

Impose Strict Liabilitv for Accuracv-Related Penalties for Reportable
Transactions that are not Disclosed - Under current law, taxpayers may claim a
defense to the accuracy-related penalty, even for an undisclosed reportable
transaction resulting in an underpayment, based on an opinion regarding the tax
consequences of the transaction. The Treasury Department and the IRS will amend
the regulations under Sections 6662 and 6664 of the Code to provide two similar,
but distinct, rules for reportable transactions that are not disclosed. These amended
regulations generally will provide that the defenses to the penalty under Sections
6662(d)(2)(B) and (C) and 6664(c) are not available in these cases.
For listed transactions that are not disclosed, the amended regulations will provide
that (i) a taxpayer cannot rely on, among other things, an opinion as a defense to the
in1position of the accuracy-related penalty under Section 6662 if the transaction
results in an underpayment and (ii) that any underpayment resulting from the
transaction will be treated as an underpayment attributable to negligence or the
disregard of rules or regulations for purposes of Section 6662. In other words, the
increased accuracy-related penalty of 25%, in addition to the $200,000 failure to
disclose penalty,2 will apply regardless of the amount of the underpayment.
For other reportable transactions (i&, non-listed transactions) that are not disclosed,
the amended regulations win provide that a taxpayer cannot rely on, among other
things, an opinion as a defense to the imposition of the accuracy-related penalty
See Legislative Proposal No. 1, below.

under Section 6662 if the transaction results in an underpayment. Whether any
resulting underpayment is attributable to negligence or the disregard of rules or
regulations will depend on the facts.

Reason for Proposal: The Treasury Department believes that
mall)' reportable transactions are not being disclosed. Promoters
are (ldvisil1g taxpayers to disregard the disclosure requirements 011
groullds that an opinion will be sufficient to avoid accuracyrelated penalties even if a listed transaction is identified during
audit and results in an underpayment. The Treasury Department
believes there should not be defenses to the accuracy-related
penalties in cases where a reportable transaction is not disclosed.
III the case of a listed transaction, there should be strict liability
regardless of the amount of the understatement.
6.

Impose Strict Liabilitv for Accuracv-Related Penalties for Transactions Based
on the Invaliditv of a Re2ulation that are not Disclosed - Some promoters are
advising taxpayers to participate in certain tax avoidance transactions based on
opinions that conclude that a contrary regulation is invalid. The Treasury
Department and the IRS will amend the regulations under Sections 6662 and 6664
of the Code to provide that a taxpayer cannot rely on an opinion as a defense to the
imposition of the accuracy-related penalty under Section 6662 for any
underpayment attributable to the disregard of rules or regulations if the underlying
transaction or item (whether or not a "tax shelter" as defined by Section 6662) was
not adequately disclosed. The defenses to the penalty under Sections 6662(d)(2)(B)
and 6664( c) would not be available in these cases.

Reason (or Proposal: Taxpayers and promoters should lIor be
permitted to rely on opinions - rendered for penalty protection [hat conclude that one or more regulations are invalid unless the
taxpayer discloses that its position is based on the invalidity of a
regulation. Although the Treasury Department believes that such
opillions currently are insufficient to establish a defense to the
penal~v. some promocers nevertheless are encouraging
participation in (and nondisclosure oj) transactions based 011 such
opinions. The Treasury Department believes that this practice is
improper for all transactions regardless of whether they are
reportable transactions.

Broaden the Ranee of Persons who are Required to Reeister Reportable
Transactions and Maintain Lists of Investors - The Treasury Department and the
IRS will amend the regulations under Sections 6111 and 6112 of the Code to clarify
that all parties materially involved with a reportable transaction must register a
transaction and maintain lists of investors. Material participation will be measured
by the fees received, or expected to be received, as a result of the transaction or a
series of related transactions (u., fees in excess of 5250,000 for corporate
transactions, or in excess of Sl 00,000 for individual transactions). In addition, a
material participant may include a return preparer if the return preparer or an
affiliate was materially involved with the transaction.

In order to avoid unnecessary burden, the Treasury Department and the IRS \vill
allow otherwise obligated persons to agree to have a single person register a
transaction on behalf of a group of promoters and advisors so long as the
registration identifies all of the promoters and advisors subject to the agreement.
The IRS would not be precluded from imposing a penalty on any obligated party
otherwise req uired to register a transaction if the transaction is not registered. A
promoter or advisor always will have the option of registering a transaction on its
own. Each promoter or advisor, however, will be required to maintain its own list
of investors. Clarifying legislation to coordinate the language in Section 6111 and
6112 may be requested. See Legislative Proposal No.9, below.

Reason {or Proposal: The IRS is dealing with many situations
where promoters have not registered transactions or maintained
lists of investors. Some promoters, for example, have argued that
they are mere(v "advisors" or "return preparers" (and not an
organizer or seller) for a transaction and therefore are not subject
to the registration and list-maintenance requirements. In other
instances, the promoting parties use or create a separate entity
that they claim promotes the transactions. Afterwards, this
separate entity ceases doing business, and there is no registration
or investor list. The Treasury Department believes that these
practices are improper.
8.

Establish Standards for Opinions in Circular 230 - Circular 230 provides
standards and ethical rules for practice before the IRS. In January 2001, the
Treasury Department and the IRS issued proposed amendments to Circular 230 that
would establish new rules and standards for opinions that are used to support tax
avoidance transactions. These amendments reflect Treasury's concern that many of
these opinions were being written to promote a transaction without reaching a firm
conclusion about the validity of the transaction, were inadequately discussing
important legal issues, were reaching inconsistent conclusions on issues, or were
based on questionable factual assumptions. The Treasury Department believes that
practitioners have a duty to the integrity of the tax system as well to their clients,
and in the case of opinions used to promote or support tax avoidance transactions, a
high degree of diligence and analysis is appropriate.

The Treasury Department and the IRS are evaluating these proposed amendments in
light of the extensive comments received from the major tax professional
organizations and will issue revised proposed regulations shortly. In addition, the
Treasury Department and the IRS will finalize other proposed amendments to
Circular 230 that were issued in January 2001.

Reason for Proposal: Taxpayers participating in tax avoidance
transactions often rely on opinions by tax professionals that the
transactions are legitimate and proper. Many taxpayers will not
participate in these transactions without opinions. either as a basis
for participating in a transaction or as protection from penalties.
Some tax professionals are rendering opinions that fall short of the
minimum standards that the Treasury Department believes are
appropriate. This proposal will address this problem by
establishing minimum standards for these t}pes of opinions.
9.

Provide a Consistent Form for Return Disclosures - The IRS will issue a
disclosure form, to be submitted by taxpayers as part of their returns and to the IRS'
Office of Tax Shelter Analysis, that will clearly identify the information required to
be disclosed for reportable transactions. These forms will require taxpayers to
disclose information relevant to the IRS' evaluation of a transaction - ~, a
description of the transaction, its participants (including tax-indifferent parties), its
principal tax benefits, and the promoter.

Reason for Proposal: Although existing rules require that certain
information be included as part of a disclosure. the Treasury
Department believes that a standard form will ensure that the
disclosures are made and that all relevant information is provided
to the IRS
10.

Establish Procedures for Earlv Examinations of Potential Tax Avoidance
Transactions - The IRS will establish procedures for the early examination of
potential tax avoidance transactions while allowing, ifnecessary, for the
examination of other issues at a later time. This process will allow the IRS to
quickly identify, evaluate, and shut down abusive tax avoidance transactions.

Reason (or Proposal: Although existing rules under Section 7605
of the Code permit the ear(v examination of a particular issue. the
Treasury Department and the IRS believe that these procedures
should be clarified to emphasize the availability of an early
examination ofpotential tax avoidance transactions. This action
will ensure that the IRS will be able to act quickly on disclosures
and registrations of reportable transactions. while allowingfor the
examination of other issues as part of the regular audit process.

11.

Tareet Abusive Tax Avoidance Schemes - The IRS will re-deploy resources to
identify and shut down abusive tax avoidance schemes. For example, the IRS'
Small Business/Self Employed Division (SBSE) is finalizing the establishment of a
centralized organization charged with developing leads on these schemes. As part
of this effort, SBSE will establish a dedicated network of at least one examination
group/collection group team in each of the 16 SBSE areas to work on abusive tax
scheme cases; establish a new executive position to focus solely on abusive tax
schemes, money laundering and fraud; implement additional monitoring of the
Internet and other media outlets where abusive tax schemes often are advertised;
increase efforts to educate the public about why these schemes are illegal; and
increase efforts to shut down promoters.

Reason (or Proposal: Many abusive tax avoidance schemes that
are targeted at individuals and small businesses are marketed
through a number of different mass media outlets. The Treasury
Department believes that increased monitoring of these media
outlets. as well as increased publicity about the dangers of these
schemes. will help curb these tax avoidance schemes.
THE TREASURY DEPARTMENT'S LEGISLATIVE PROPOSALS
I.

Impose a Penaltv for the Failure to Disclose Reportable Transactions - The
Treasury Department will seek legislation that would:
•

Impose a penalty on corporate taxpayers for each failure to disclose a listed
transaction equal to the sum of (i) $200,000 and (ii) 5% of any underpayment
resulting from the listed transaction.

•

Impose a penalty of $50,000 on corporate taxpayers for each failure to
disclose a reportable transaction (other than a listed transaction).

•

Impose a penalty of 5200,000 on partnerships, S corporations, and trusts for
each failure to disclose a listed transaction, and 550,000 for each failure to
disclose other reportable transactions.

•

Impose a penalty on individual taxpayers for each failure to disclose a listed
transaction equal to the sum of (i) S I 00,000 and (ii) 5% of any underpayment
resulting from the listed transaction.

•

Impose a penalty of $1 0,000 on individual taxpayers for each failure to
disclose a reportable transaction (other than a listed transaction).

The portion of this proposed penalty that is dependent on the amount of any
underpayment will be incorporated as an increase to the existing accuracy-related
penalty under Section 6662. The disclosure penalty for listed transactions will not
be waivable.

Reason for Proposal: Although the failure to disclose a
transaction is a factor in determining whether an accuracy-related
penalty should be imposed. current law does not impose a penal(\!
15

for the mere failure lO disclose a reportable transaction on a
return. The Treasury Department believes that nondisclosure
should be subject lO a separate sal/ction because it undermines the
IRS' ability to evaluate questiollable transactions.
')

Require Public Disclosure bv Corporate Taxpayers of Penalties for the Failure
to Disclose Listed Transactions and Accuracy-Related Penalties Resultin2
from an Undisclosed Listed Transaction - The Treasury Department will seek
legislation requiring corporate taxpayers to disclose, in their filings with the
Securities and Exchange Commission, any penalty for the failure to disclose a listed
transaction and any accuracy-related penalty resulting from an undisclosed listed
transaction.

Reason (or Proposal: The Treasury Department believes that a
corporation should be required to disclose to its shareholders the
corporation's participation in a listed transaction if the
corporatioll incurs any penalties as a result of not disclosing the
transaction to the IRS.
3.

Expand and Increase the Penalty for a Promoter's Failure to Re2ister a
Reportable Transaction - The Treasury Department will seek legislation that
would amend Section 6707 of the Code, which provides for the penalty on
promoters for the failure to register a transaction under Section 6111. The
amendment would:
•

Impose, for listed transactions, a penalty equal to the greater of 50% of the
fees paid to the promoter or $200,000. This penalty would be increased to
75% for the intentional failure to register a transaction or the intentional
failure to provide complete or true infonnation as part of a registration.

•

Impose, for the failure to register all other reportable transactions, a penalty of
S50,OOO.

Reason (or Proposal: The Treasury Department believes that a
significant penalty should be imposed on the failure to register a
reportable transaction.
4.

Increase the Penaltv for a Promoter's Failure to Timelv Turn Over Investor
Lists - The Treasury Department will seek legislation that would replace the
existing penalty in Section 6708 of the Code for a promoter's failure to maintain
lists of investors in a reportable transaction. Under the Treasury Department's
proposal, the penalty would be changed so that if a promoter fails to provide the
IRS with a list of investors within 20 business days after receipt of the IRS' written
request, the promoter would be subject to a penalty of $1 0,000 for each additional
business day that the requested infonnation is not provided. This penalty would be
imposed for each investor list that a promoter fails to maintain or delays in
providing to the IRS. The IRS would have the discretion to extend the deadline or
waive all or a portion of the penalty for good cause shown.

Reason (or Proposal: Too many promoters are using delaying
tactics to avoid turning over investor lists. The Treasury
Department believes that the penalty statute must be stmctured to
sanction this type of behavior.
5.

Permit Injunction Actions a~ainst Promoters who Repeatedlv Disre~ard the
Reeistration and List-Maintenance Requirements - The Treasury Department
will seek legislation to amend Section 7408 of the Code to allow the Government to
enjoin promoters after the repeated disregard of the rules requiring the registration
of reportable transactions under Section 6111 of the Code and the maintenance of
investor lists under Section 6112 of the Code. An injunction would place a
promoter under court order to abide by the registration and list-maintenance
requirements. The promoter then would be in contempt of court if it violates these
rules in the future.

Reason for Proposal: One of the persistent problems faced by the
Treasury Department and the IRS is the fact that some promoters
are ignoring the rules even in the face ofpenalties. The Treasury
Department believes that the threat of an injunction will enable the
Treasury Department and the IRS to curb the most egregious
behavior by promoters.
6.

Impose a Penaltv for the Failure to Report an Interest in a Forei~n Financial
Account - The Treasury Department will seek legislation that will impose, in
addition to existing criminal penalties, a civil penalty of $5,000 for the failure to
comply with the rules and regulations requiring the reporting of information
requested on the "Report of Foreign Bank and Financial Accounts" (Form TD F 9022.1). The IRS would have the ability to waive the penalty, in whole or in part, if
the taxpayer paid all U.S. tax due with respect to the taxpayer's foreign accounts
and the taxpayer demonstrates that the failure to file this form was due to
reasonable cause.

Reason (or Proposal: The Treasury Department believes that
many ta.r:payers are notfiling Forms TD F 90-22.1 even though
they have an obligation to do so. Because many ta.r: avoidance
transactions involve foreign financial accounts, information about
a taxpayer's interest in a foreign financial account will enhance
the IRS' ability to identify participants in ta.r: avoidance
transactions.
7.

Increase the Penaltv for Frivolous Return Positions - The Treasury Department,
in its 2003 fiscal year budget, has proposed to increase the penalty for frivolous tax
returns from $500 to $5,000. This amendment would further deter individual
taxpayers from taking positions that have no basis in law or fact, such as claims that
the Federal income tax is unconstitutional and claims for slavery reparations. The

IRS would publish, at least annually, a listing of positions, arguments. requests. and
proposals deemed frivolous for purposes of the statute.

Reason for Proposal: The IRS has been faced with a significant
number of individuals who are filing returns based on frivolous
arguments or who are seeking to hinder ta.x: administration by
filing returns that are patently incorrect. The IRS must address
such frivolous arguments through statutorily mandated
procedures. which result in delay and additional administrative
burden and expense. The Treasury Department believes that
enhanced penalties will deter egregious taxpayer behavior and
enable the IRS to utilize its resources more efficiently.
8.

Permit a

Sin~le

Definition of a Reportable Transaction for Disclosure,
Re~istration, and List-Maintenance Requirements - The Treasury Department
will seek legislation amending the statutory definition of a transaction that must be
registered under Section 6111 of the Code (currently, a "tax shelter" as defined in
Section 6111 (c) and (d)) using the existing definition under section 6112(b )(2) i.e., "any entity, investment plan or arrangement or other plan or arrangement which
of a type which the Secretary determines by regulations as having a potential for tax
avoidance or evasion." Among other things, this would eliminate the "conditions of
confidentiality" requirement in Section 6111 (d). In addition, the registration
requirements under Section 6111 would be expanded to cover transactions entered
into by individuals, partnerships, S corporations, and trusts.

Reason for Proposal: This proposal will allow for regulations that
will establish a single definition of a "reportable transaction "for
purposes of disclosure. registration and list maintenance. See
Administrative Action No.3. above.
9.

Confirm the Treasurv Department and the IRS' Ability to Expand the
Number of Persons Required to Re~ister Reportable Transactions and
Maintain Investor Lists - The Treasury Department will seek legislation
confirming that the registration requirements under Section 6111 of the Code and
the list-maintenance requirements of Section 6112 apply to all organizers and
sellers of a reportable transaction, including persons who assist such persons, and
confirming the Treasury Department and the IRS' authority to impose conditions on
agreements among promoting parties to have only one person (on behalf of a group
of promoters) register a reportable transaction and maintain lists of investors. See
Administrative Action No.7, above.

SUBSTANTIVE LAW CHANGES TO CURB ABUSES
1.

Expand Section 901 (k) - The Treasury Department will seek legislation that will
amend Section 90 I (k) of the Code to cover income streams other than dividends
(which already are covered by the statute) that are subject to foreign withholding

taxes. Other income streams that may be subject to foreign withholding taxes
include interest and royalties. The amendment would require a minimum holding
period for the underlying property generating the income and deny foreign tax
credits with respect to any withheld foreign taxes if the minimum holding period is
not satisfied.

Reason for Proposal: The Treasury Department is concerned that
the recent appel/ate decisions in Compaq and IES may cause
taxpayers to renew their efforts to trade in foreign tax credits to
reduce their u.s. tax liability. While Section 90 J(k) of the Code
already addresses the specific type of transaction at issue in these
cases, this section should be expanded to cover other similar
transactions.
2.

Address Income-Separation Transactions - The Treasury Department will seek
legislation to curb "income-separation" transactions that are structured to create
immediate tax losses or to convert current ordinary income into deferred capital
gain. These transactions are similar to the bond-stripping transactions that were
prohibited by Section 1286 of the Code and preferred stock-stripping transactions
that were prohibited by Section 305(e).
Reason (or Proposal: Subsequent to the enactment of Section
J286, which applies only to bonds, and Section 305(e), which
applies only to preferred stock, taxpayers have been engaging in
essentially identical transactions using similar assets - i.e., assets
providing for relatively stable, periodic income and with
substantial future value. Although the IRS is pursuing these
transactions under existing tax principles, legislation is needed to
create a more comprehensive, consistent tax regime.
In a common fonn of these types of transactions, a taxpayer acquires shares in a
money-market mutual fund, which provide for a periodic income stream and which
have a constant redemption value (~, $1 per share). The taxpayer separates the
right to receive the income stream over a specific period (u., 15 years) from the
right to the underlying shares at the end of that period. When the future right to the
shares is sold, the parties claim that under the technical rules (i) the taxpayer has a
large tax loss on the sale of the future right to the shares (this is accomplished
through the allocation of the entire tax basis solely to the future right to the shares),
and (ii) the buyer, rather than recognizing ordinary income periodically as the future
right to the shares increases in value over time, claims that it is entit1ed to defer
income until a future sale, at which time the buyer will claim that its income is
capital gain. Other types of assets used in these income-stripping transactions
include leases and service contracts.
The Treasury Department will propose legislation that will treat an incomeseparation transaction as a secured borrowing, not a separation of ownership. Debt

characterization will ensure that the parties' ongoing tax treatment from the
transaction clearly reflects income.

DEPARTMENT

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OFFICE OF PUBUC AFFAIRS. 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C .• 20220. (202) 622-2960

FOR IMMEDIATE RELEASE
March 20, 2002

Contact: Tara Bradshaw

Statement of
Andrew Lyon, Deputy Assistant Secretary for Tax Analysis
United States Department of the Treasury
Before the Committee on Transportation and Infrastructure
Subcommittee on Highways and Transit
United States House of Representatives
Hearing on the Highway Trust Fund
March 20, 2002

Mr. Chainnan and Members of the Subcommittee, I appreciate the opportunity to
describe recent trends in actual highway-related excise taxes and discuss the Administration's
FY 2003 Budget forecast of excise taxes dedicated to the Highway Account of the Highway
Trust Fund.
The Office of Tax Analysis in the Department of the Treasury forecasts most future tax
receipts for the President's Budget. These forecasts are made using economic models that are
constantly updated to incorporate the most current inforn1ation on tax collections and reported
tax liabilities. The forecast for Fiscal Years 2002 through 2012 incorporates the
Administration's economic assumptions fonnulated for the Budget by the Troika, which consists
of the Council of Economic Advisors, the Office of Management and Budget, and the
Department of the Treasury. J Each of the six dedicated Highway Account excise tax sources are
separately forecast: (i) Gasoline, (ii) Gasohol fuels, (iii) Diesel and other fuels, (iv) Retail tax on
trucks, (v) Highway-type tires, and (vi) Heavy vehicle use tax. In Table 1, fiscal year receipts
for 2000 through 2012 are reported for these six excise tax sources. The 2000 and 2001 figures
are actual receipts drawn from the Highway Account Income Statement, while the 2002 through
2012 figures are projections from the President's FY 2003 Budget.~"
Recent Excise Tax Receipts
There has been a rapid downturn in highway-related excise taxes as the economy weakened over
the past year and a half.

The economic assumptIOns are described in Chapter :2 of the AnalytIcal PerspectI\eS volume of the F ISCJI Year
2003 Budget.
2 The Income Statement for 2001 includes three quarters of JctuJI tax receipts certified by the IRS. ReceIpts for the
last quarter of the year are based on an estimated allocatIOn of total excise tax receipts. A.ny differences between
estimated and actual receipts for the last quarter is adjusted in March and reflected in the Income Statement of the
subsequent year.
I

PO-2022
_For press releases, speeches, ptlfJltc !JC!wm.:ies and official biographies, call our 24-,101lr fax line at (202) 622-2040

Actual tax receipts dedicated to the Highway Account fell $3.4 billion from Fiscal Year
2000 to Fiscal Year 2001, dropping from $30.3 billion to $26.9 billion, an 11.3 percent decline.
As shown in Table 1, five of the six receipt sources were lower in 2001 than in 2000. Only taxes
on gasohol fuels show an increase.
Although the growth in the tax on gasohol fuels might initially appear to be a bright spot
in an otherwise disappointing year, the growth is actually a significant factor in the overall
reduction in dedicated Highway Account tax receipts. The increase in taxes on gasohol fuels is
evidence of an ongoing substitution of gasohol fuels for gasoline, which may be used
interchangeably in cars and light trucks. We anticipate that there will be an increasing use of
gasohol fuels, and corresponding reductions in gasoline consumption as States ban the use of
MTBE (methyl tertiary-butyl ether) as a fuel additive. Since the Highway Account receives
15.44 cents per gallon of gasoline but only about 8 cents per gallon of gasohol, increases in
gasohol use at the expense of gasoline consumption will result in a net reduction in Highway
Account receipts. On net, for every billion gallons of gasohol sold in place of gasoline, Highway
Account receipts are approximately $78 million lower. Approximately two-thirds ofthis
negative effect on Highway Account receipts from the substitution of gasohol for gasoline is due
to the ethanol tax incentive (currently 53 cents per gallon of ethanol, which at a 10 percent blend
is 5.3 cents per gallon of gasohol). The remainder is attributable to the fact that the law dedicates
a portion of gasohol tax receipts (typically 2.5 cents per gallon) to the General Fund.
The most dramatic declines between FY 2000 and FY 2001, both in percentage terms and
in dollars, occurred in excise taxes related to the sales and operations of trucks. The retail tax on
trucks, a 12 percent tax on the first retail sale of heavy trucks, buses, truck tractors, and trailers,
was down 55.2 percent, a decline of more than $1.8 billion. Tax receipts from the tax on truck
tires fell 22.5 percent, and truck use tax receipts fell 33.8 percent. The reductions in retail truck
taxes were particularly large because this tax is levied as an ad valorem tax on the first retail sale.
During the investment boom of 1998 and 1999, a large volume of new trucks were purchased at
premium prices. As the economy weakened, large numbers of these slightly used trucks were
placed on the market. This greatly depressed prices and sales in the new heavy truck market, and
tax revenues from retail truck taxes declined accordingly.
The first quarterly report to show weakness in total collections was for July through
September of 2000. This Highway Trust Fund certification of excise tax receipts was issued in
March of 2001. 3 This certification shows a 4.8 percent drop compared with the same quarter in
the prior year. The subsequent quarterly certification for October through December 2000,
issued in late June, showed a 5.6 percent reduction in receipts compared to the prior year. Based
on this weakness, the Mid-Session Review of the FY 2002 Budget reported that Highway Trust
Fund revenues would be lower than previously forecast.

3 The Hiuhway Account Certification is issued bv the IRS as the final statement of excise tax collections dedicated
""
- IS issued approximately five and half months after the end of
to the account.
The Certification for a given quarter
the quarter due to the time required to process the excise tax returns. This report based on filed excise tax returns.
provides the first detail of tax receipts by specific tax item.

New data for the first two quarters of calendar year 2001 have shown further weakness in
tax receipts. The certification for January through March of2001 showed receipts declining 3.5
percent compared with the prior year, and the certification for April through June of 200 1 was
5.5 percent lower than the prior year. These two quarterly certifications also reflected
accelerating increases in gasohol use as gasohol taxes grew by 25.8 percent and 23.7 percent
compared with the same quarters in 2000. This series of weak Highway Account receipt
certifications explains why FY 2001 total tax revenues fell to $26.9 billion.-+
Forecast of Future Excise Tax Receipts
Looking forward, the Administration projects steady growth in highway-related excise
tax receipts. Net receipts in FY 2003 are projected to be 6.2 percent higher than FY 2001 and
2.9 percent higher than FY 2002. Average annual growth is forecast to be more than 3 percent
per year over the remainder of the budget period. The FY 2003 Budget forecasts a faster longrun growth in receipts than last year's Budget; however, this faster rate of growth is relative to a
smaller base, so the forecasted levels are lower than previously projected. In the current budget,
the Administration forecasts net Highway Account excise tax receipts to be $28.57 billion in FY
2003.
During the first five years of the forecast period, gallons of gasoline and gasohol fuels are
projected to grow at an average of 2.3 percent per year. The consumption of gasohol fuels grows
faster than gasoline consumption due to the increasing reliance on ethanol as an oxygenate to
meet clean air requirements. Because of the difference in the amount per gallon dedicated to the
Highway Account, total gasoline and gasohol receipts grow at about 2 percent per year during
the first five years of the forecast, which is slower than the rate of growth of fuel consumption.
The truck related excise tax receipts are projected to grow quickly as the economy
recovers. For FY 2003 compared to FY 2001, receipts from the retail tax on trucks are proj ected
to grow 22.1 percent and tire tax receipts are projected to grow by 10.6 percent. Between FY
2003 and FY 2002 receipts from the retail tax on trucks are projected to grow 15.6 percent and
tire tax receipts are projected to grow 6.5 percent. This growth reflects the recovery of the heavy
truck market and more generally increased investment in equipment. Due to continued weakness
in the manufacturing sector of the economy, diesel fuel receipts are forecast to decline slightly
between FY 2001 and FY 2002 before resuming growth averaging more than 3.5 percent per
year.
In summary, the Administration's forecast of highway-related excise taxes reflects the
most recent tax collection and liability data available, and the Administration's economic
forecast. The data reflect the weakness in the economy during 2000 and 2001. The forecast for
future years is based on the assumption that the economic downturn would end in early 2002 and
a strong recovery would be underway later in the year. Recent economic data are consistent with
these assumptions and suggest the recovery may already be under\vay.
Conclusion
I appreciate this opportunity to describe recent trends and present our CUlTent forecast to
you.
4 Total

Highway Account receipts including fines and penalties were S26.917 billIon

111

FY 2001.

DEPARTMENT

THE

fIR1:~ASURY ~~}rt:.~\
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TREASURY

NEW S

......................................~i,781q~~....................................
OFFICE OF PUBUC AFFAIRS. 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C .• 20220. (202) 622-2960

FOR IMMEDIATE RELEASE
March 20, 2002

Contact: Office of Public Affairs
(202) 622-2960

Secretary of the Treasury Paul H. 0' Neill
Statement to the Press
Monterrey, Mexico
March 20, 2002

President George W. Bush has called for a new era in intemational development assistance-an
era of accountability and efficacy, as well as generosity. The President has committed our nation
to improving living standards worldwide, to giving people the tools and materials they need to
build prosperity for their children. Like the President and our fellow Americans, I believe that
too many are bom into poverty today, without hope for escape. Too many have been left behind,
without enough food, or medicine, or education, without even the prospect of progress. And for
too long, the developed world has been content to make promises without expecting results. We
have bragged about our efforts, without measuring our accomplislm1ents. Now, at last, we will
hold accountable rich and poor govemments alike, to make a difference, not just a donation.
The President's new compact for global development recognizes that building lasting prosperity
requires laying a solid foundation first. Without good govemment and sound economic policies,
our work will sink into the mud of corruption and mismanagement. That is why the President's
proposed Millennium Challenge Account encourages recipient govemments to rule justly, invest
in their people, and advance economic freedom. Countries that demonstrate a commitment to
these principles will see the greatest benefit from the Challenge Account.
We know these fundamentals are crucial to achieving sustained economic growth. We know
that increases in productivity-- the amount of value that each worker produces -- drive economic
growth and per capita income. Economic growth creates better jobs, increased wages, and a
higher standard of living for all. Thus, smart development dollars invest in activities that
enhance productivity.
PO-2023

For prESS c-.<:fe!Jses, siJezches, i1ublic schedules and official qiographies, call DUe 24-hoi"l'r fax !zne at (2D2) .622-204 0

More specifically, we know that successful developing countries have several characteristics in
common:
•
•
•
•
•

They encourage private enterprise through market-oriented mechanisms.
They fight corruption and ensure competent public administration and rule of law.
They open their economies to trade and investment.
They invest in human capital such as education and health care.
And they observe and adopt best practices in business and govemment from around the
world

•

Here in Mexico, the PROGRESA program provides a good example of an investment in
human capital -- that is, children's education -- that could pay great future dividends in
productivity and growth.

The Role of External Assistance
Wealthy nations such as the United States have a responsibility to see that their contributions
produce real improvements in the daily lives of people in the poorest countries. Over the last 50
years, bilateral and multilateral aid have delivered relief and disappointment. Relief as we
provide food or vaccinations where there are none. But also(that's a little too harsh)
disappointment because so many poor countries stay that way, and we too rarely ask why. In
fact, the truth is that we don't know how successful aid has been, because we have not
consistently measured its results. What we do know is that half the world's people still live on
less than $2 a day.
These people are no different in their desire for dignity than those of us bom in the
developed world. We must do better, and we can do better, to help them achieve their dreams.
That means raising expectations, setting standards, and measuring results. We have an
obligation to plant our resources where they will yield growth, rather than squandering precious
seeds in un fertile soil.
The good news is that we believe we can make a difference, if we work in partnership with the
developing world and both sides take responsibility for results. We can make even barren soil
fertile. Research has shown that when a country's policies are sound, extemal assistance can have
a significant and positive impact
Let me suggest four priority areas for donor and recipient attention:
First, donors should expand grants, instead of loans, and recipients should invest the grants in
human capital. People need health, knowledge, and skills if they are to become more productive.
But it is unrealistic to imagine that investments in crucial social services such as education,
health, clean water and sanitation will directly generate enough revenue to service new debt For
investments of this kind, President Bush has proposed that the World BanI.,;: and the regional
development banks follow the example of bilateral donors and dramatically increase the share of
their funding provided as grants to the poorest and least creditwo11hy countries. Grants

encourage these basic investments without burying developing nations in new debt they may not
be able to service.
Second, donor investments should boost productivity in borrowers' economies and remove
economic constraints to progress. Examples include improving infrastructure and the services
needed to create vibrant rural economies, strengthening the regulatory systems necessary to
support competitive manufacturing and small and medium enterprises, providing access to seed
capital to start new businesses, and helping establish the institutions and expertise needed to
benefit from trade and investment flows.
Third, donors should playa larger role in promoting investment climate reform, especially
private investment. They should help channel technical assistance and project finance to viable
private sector projects in developing nations.
Fourth, donors should step up efforts to promote good governance and to assist borrowers in
managing and monitoring their public expenditures, improving service delivery, and ensUling
accountability for public and donor resources.

In an era of profound global change, developing countries still face enormous challenges. The
United States is committed to continuing to playa necessary and important role in helping the
people in the poorest nations in the world to build self-sustaining economies that will generate
ever increasing living standards and ever widening opportunities.

PUBLIC DEBT NEWS
)epartment of the Treasury • Bureau of the Public Debt • Washington, DC 20239

FOR 1M MEDIA TE RELEASE
March 21, 2002

Contact: Office of Financing
202-691-3550

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:
(I) 3-3/8% 10-year notes due January 15, 2007
(2) 3-5/8% 5-year notes due July 15,2002
(3) 3-5/8% IO-year notes due January 15,2008
(4) 3-5/8% 30-year bonds due April 15, 2028
(5) 3-7/8% IO-year notes due January 15,2009
(6) 3-7/8% 30-year bonds due April 15, 2029
(7) 4-1/4% IO-year notes due January 15,2010
(8) 3- I /2% 10-year notes due January 15, 20 I I
(9) 3-3/8% 30-112-year bonds due April 15,2032
(10) 3-3/8% IO-year notes due January 15, 20 I 2
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 (Ref CPI) 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 2024. The information is also
available on the Internet at Public Debt's website (http://www.publicdebureas.gov).
The information for May is expected to be released on April 16,2002.
000

Attachment

http://www.publicdebt.treas.gov

PO-2024

TREASURY INFLATION-INDEXED SECURITIES
Ref CPI and Index Ratios for
April 2002

Security:
Description:
CUSIP Number:
Dated Dale:
Original Issue Dale:
Additional Issue Dale(s):

3-3/8% 10-Year Notes
Series A-2007
9128272M3
January 15, 1997
February 6, 1997
April 15. 1997

3-5/8% 5-Year Notes
Series J-2002
9128273A8
July 15, 1997
July 15, 1997
October 15, 1997

3-5/8% 10-Year Notes
Series A-2008
9128273T7
January 15, 1998
January 15, 1998
October 15. 1998

3-5/8% 30-Year Bonds

Maturity Dale:
Ref CPI on Dated Date:

January 15. 2007
158.43548

July 15, 2002
160.15484

January 15, 2008
161.55484

April 15, 2028
161.74000

Date
April
April
April
April
April
April
April
April
April
April
April
April
April
April
April
April
April
April
April
April
April
April
April
April
April
April
April
April
April
April

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30

2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002

CPI-U (NSA) for:

Bonds of April 2028
912810FD5
April 15, 1998
April 15. 1998
July 15, 1998

RefCPI

Index Ratio

Index Rallo

177.10000
177.12333
177.14667
177.17000
177.19333
177.21667
177.24000
177.26333
177.28667
177.31000
177.33333
177.35667
177.38000
177.40333
177.42667
177.45000
177.47333
177.49667
177.52000
177.54333
177.56667
177.59000
177.61333
177.63667
177.66000
177.68333
177.70667
177.73000
177.75333
177.77667

1.11781
1.11795
1.11810
1.11825
1.11839
1.11854
1.11869
1.11884
1.11898
1.11913
1.11928
1.11943
1.11957
1.11972
1.11987
1.12001
1.12016
1.12031
1.12046
1.12060
1.12075
1.12090
1.12105
1.12119
1.12134
1.12149
1.12163
1.12178
1.12193
1.12208

1.10580
1.10595
1.10610
1.10624
1.10639
1.10653
1.10668
1.10682
1.10697
1.10712
1.10726
1.10741
1.10755
1.10770
1.10784
1.10799
1.10814
1.10828
1.10843
1.10857
1.10872
1.10886
1.10901
1.10916
1.10930
1.10945
1.10959
1.10974
1.10988
1.11003

1.09622
1.09637
1.09651
1.09666
1.09680
1.09694
1.09709
1.09723
1.09738
1.09752
1.09767
1.09781
1.09796
1.09810
1.09824
1.09839
1.09853
1.09868
1.09882
1.09897
1.09911
1.09926
1.09940
1.09954
1.09969
1.09983
1.09998
1.10012
1.10027
1.10041

1.09497
1.09511
1.09526
1.09540
1.09554
1.09569
1.09583
1.09598
1.09612
1.09627
1.09641
1.09655
1.09670
1.09684
1.09699
1.09713
1.09728
1.09742
1.09756
1.09771
1.09785
1.09800
1.09814
1.09829
1.09843
1.09857
1.09872
1.09886
1.09901
1.09915

December 2001

176.7

January 2002
--

177.1

February 2002

177.8

TREASURY INFLATION-INDEXED SECURITIES

Ref CPI and Index Ratios for
April 2002
Security:
Description:
CUSIP Number:
Dated Date:
Original Issue Date:
Additional Issue Dale(s):

3-7/8% 10-Year Notes
Series A-2009
9128274Y5
January 15. 1999
January 15. 1999
July 15. 1999

Maturity Date:
Ref CPI on Dated Date:

January 15. 2009
164.00000

Date
April
April
April
April
April
April
April
April
April
April
April
April
April
April
April
April
April
April
April
April
April
April
April
April
April
April
April
April
April
April

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30

2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002

CPI-U (NSA) for:

3-7/8% 30-Year Bonds
Bonds of April 2029
912810FH6
April 15. 1999
April 15. 1999
October 15. 1999
October 15. 2000
April 15. 2029
164.39333

4-1/4% 1O-Year Notes
Series A-2010
9128275W8
January 15. 2000
January 18. 2000
July 15. 2000

3-1/2% 10-Year Notes
Series A-2011
9128276R8
January 15. 2001
January 16. 2001
July 16, 2001

January 15. 2010
168.24516

January 15. 2011
174.04516

RefCPI

Index Ratio

1.07988
1.08002
1.08016
1.08030
1.08045
1.08059
1.08073
1.08087
1.08102
1.08116
1.08130
1.08144
1.08159
1.08173
1.08187
1.08201
1.08215
1.08230
1.08244
1.08258
1.08272
1.08287
1.08301
1.08315
1.08329
1.08343
1.08358
1.08372
1.08386
1.08400

1.07729
1.07744
1.07758
1.07772
1.07786
1.07800
1.07815
1.07829
1.07843
1.07857
1.07871
1.07886
1.07900
1.07914
1.07928
1.07942
1.07957
1.07971
1.07985
1.07999
1.08013
1.08027
1.08042
1.08056
1.08070
1.08084
1.08098
1.08113
1.08127
1.08141

1.05263
1.05277
1.05291
1.05305
1.05319
1.05332
1.05346
1.05360
1.05374
1.05388
1.05402
1.05416
1.05429
1.05443
1.05457
1.05471
1.05485
1.05499
1.05513
1.05527
1.05540
1.05554
1.05568
1.05582
1.05596
1.05610
1.05624
1.05638
1.05651
1.05665

1.01755
1.01769
1.01782
1.01795
1.01809
1.01822
1.01836
1.01849
1.01862
1.01876
1.01889
1.01903
1.01916
1.01929
1.01943
1.01956
1.01970
1.01983
1.01997
1.02010
1.02023
1.02037
1.02050
1.02064
1.02077
1.02090
1.02104
1.02117
1.02131
1.02144

December 2001

176.7

January 2002

177.1

February 2002
-

I
I

177.8

TREASURY INFLATION-INDEXED SECURITIES

Ref CPI and Index Ratios for
April 2002

Security:
Description:
CUSIP Number:
Dated Date:
Original Issue Date:
Additional Issue Date(s):

3-3/8% 30-1/2-Year Bonds
Bonds of April 2032
912810FQ6
October 15, 2001
October 15, 2001

3-318% 10-Year Notes
Series A-2012
91282nJ5
January 15, 2002
January 15, 2002

Maturity Date:
Ref CPI on Dated Date:

April 15, 2032
177.50000

January 15, 2012
1n.56452

Dale
April
April
April
April
April
April
April
April
April
April
April
April
April
April
April
April
April
April
April
April
April
April
April
April
April
April
April
April
April
April

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30

2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002

CPI-U (NSA) for:
---

RefCPI

Index Ratio

Index Rallo

0.99n5
0.99788
0.99801
0.99814
0.99827
0.99840
0.99854
0.99867
0.99880
0.99893
0.99906
0.99919
0.99932
0.99946
0.99959
0.99972
0.99985
0.99998
1.00011
1.00024
1.00038
1.00051
1.00064
1.00077
1.00090
1.00103
1.00116
1.00130
1.00143
1.00156

0.99738
0.99752
0.99765
0.99n8
0.99791
0.99804
0.99817
0.99830
0.99844
0.99857
0.99870
0.99883
0.99896
0.99909
0.99922
0.99936
0.99949
0.99962
0.99975
0.99988
1.00001
1.00014
1.00027
1.00041
1.00054
1.00067
1.00080
1.00093
1.00106
1.00119

December 2001

176.7

January 2002
-

177.1

February 2002

177.8

DEPARTMENT

THE

fIR:E~ASURY ~(f1!f:.E\
$~~)
,<,~," ..

TREASURY

NEW S

~/78iq~. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .

................................

OFFICE OF PUBUC AFFAIRS. 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C .• 20220. (202) 622-2960

EMBARGOED UNTIL 2: 30 P. M.
March 20, 2002

CONTACT:

Office of Financing
202/691-3550

TREASURY OFFERS 2-YEAR NOTES
The Treasury will auction $25,000 million of 2-year notes to refund $23,666
million of publicly held notes maturing March 31, 2002, and to raise new cash of
approximately $1,334 million.
In addition to the public holdings, Federal Reserve Banks hold $7,873 million
of the maturing notes for their own accounts, which may be refunded by issuing
an additional amount of the new security.
Up to $1,000 million in noncompetitive bids from Foreign and International
Monetary Authority (FIMA) accounts bidding through the Federal Reserve Bank of New
York will be included within the offering amount of the auction. These
noncompetitive bids will have a limit of $100 million per account and will be
accepted in the order of smallest to largest, up to the aggregate award limit of
$1,000 million.
TreasuryDirect customers requested that we reinvest their maturing holdings
of approximately $789 million into the 2-year note.
The auction will be conducted
tive and noncompetitive awards will
tenders. The allocation percentage
be rounded up to the next hundredth

in the single-price auction format. All competibe at the highest yield of accepted competitive
applied to bids awarded at the highest yield will
of a whole percentage point, e.g., 17.13%.

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 BookEntry Treasury Bills, Notes, and Bonds (31 CFR Part 356, as amended).
Details about the new security are given in the attached offering highlights.

000

Attachment

0-2025

POI' press releases snpeclte5_
nubUc schedules
alld ojJicial biographies. call ollr ]-I-hollr{ax Iille at 00]) ()]]-]()-IO
I ·
---",

HIGHLIGHTS OF ~REASURY .OFFERING TO THE PUBLIC OF
2 -YEAR No'iltm:TO BE ISSUED APRIL 1 2002
.

/;;.1''10' •. /0-'

March 20, 2002
offering Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $25,000 million
Public Offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $25,000 million
Description of Offering:
Term and type of security . . . . . . . . . . . . . . . . . . . . .
Series . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CUSIP number . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Auction date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issue date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dated date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maturity date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2 -year notes
L-2004
912828 AA 8
March 27, 2002
April 1, 2002
March 31, 2002
March 31, 2004
Determined based on the highest
accepted competitive bid
Yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Determined at auction
Interest payment dates . • . . . . . . . . . . . . . . . . . . . . . . September 30 and March 31
Minimum bid amount and multiples . . . . . . . . . . . . . . $1,000
Accrued interest payable by investor . . . . . . . . . . Determined at auction
Premium or discount . . . . . . . . . . . . . . . . . . . . . . . . . . . Determined at auction

STRIPS Information:
Minimum amount required . . . . . . . . . . . . . . . . . . . . . . . $1,000
Corpus CUSIP number . . . . . . . . . . . . . . . . . . . . . . . . . . 912820 GX 9
Due date(s) and CUSIP number(s)
for additional TINT(s) . . . . . . . . . . . . . . . . . . . . . . March 31, 2004 - - 912833 YS 3
Submission of Bids:
Noncompetitive bids:
Accepted in full up to $5 million at the highest accepted yield.
Foreign and International Monetary Authority (FlMA) bids: Noncompetitive bids
submitted through the Federal Reserve Banks as agents for FlMA accounts.
Accepted in order of size from smallest to largest with no more than $100
million awarded per account.
The total noncompetitive amount awarded to Federal
Reserve Banks as agents for FIMA accounts will not exceed $1,000 million. A
single bid that would cause the limit to be exceeded will be partially accepted
in the amount that brings the aggregate award total to the $1,000 million limit.
However, if there are two or more bids of equal amounts that would cause the
limit to be exceeded, each will be prorated to avoid exceeding the limit.
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.

DEPARTMENT

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OFFICE OF PUBUC AFFAIRS. 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C .• 20220. (202) 622-2960

Contact: Tara Bradshaw

EMBARGOED UNTIL DELIVERY
March 21, 2002

(202) 622-2014

STATEMENT OF
MARK A WEINBERGER
ASSISTANT SECRETARY OF THE TREASURY FOR TAX POLICY
COMlVIITTEE ON FINANCE
UNITED STATES SENATE
Mr. Chairman, Mr. Grassley and other members of the Committee, thank you for
inviting the Treasury Department to testify today on the important issue of abusive tax
avoidance transactions. We appreciate the role that your Commi ttee has taken in
considering these matters. Through your statements and the release of your staffs draft
legislative proposals, you have taken the lead in the public discussion about how best to
address abusive tax avoidance transactions.
Abusive tax avoidance transactions are designed to take advantage ofthe
incredible complexity of the tax law to obtain benefits that Congress never intended.
Abusive tax avoidance transactions pose a threat to the integrity of our self-assessment
tax system by eroding the public's respect for the tax law. They also waste public and
private resources and harm the public fisc. As long as the tax law retains its current
complexity, promoters will continue to develop these transactions and market them to
corporate and individual taxpayers. As Secretary O'Neill has stated, we must simplify
the Internal Revenue Code. Its complexity effectively aids and abets those who seek to
improperly reduce their taxes. Nevertheless, until we simplify the Code, the Treasury
Department and the IRS will continue to vigilantly pursue enforcement of our laws,
within the contours of the current system, to address abusive tax avoidance transactions.
As you know, the Treasury Department has been evaluating the effect of the
current disclosure regime, particularly the effect of the disclosure regulations issued in
February 2000, before initiating a new course of action. We appreciate very much, Mr.
Chairman, that the Committee has given us the time to complete our evaluation because
what we have learned will result in more effective rules. Constant change is not helpful
to tax administration; it makes it harder for taxpayers to comply with the la\v and harder
for the IRS to administer the law. Accordingly, we should act deliberately to change the
rules only after appropriate evaluation and analysis.

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Treasury's testimony today will highlight the measures that we believe are
necessary to address abusive tax avoidance transactions. Our proposals include
administrative actions we already are beginning to undeliake, as well as legislative
proposals. Our administrative and legislative initiatives are similar in many respects to
the proposals considered by your staff in the draft legislation they previously prepared.
The goal we an share is to ensure that each taxpayer pays its fair share of tax. We
do not wish to interfere with legitimate business tax planning, but we must curb abusive
tax practices that take advantage of complex tax laws to obtain unintended tax benefits.
This goal can best be achieved through transparency and certainty. Transparency means
that questionable transactions are disclosed for the IRS to review. Certainty means that
taxpayers and promoters are subject to rules that clearly identify which transactions must
be disclosed and registered and which transactions require list maintenance. Certainty
also means that taxpayers and promoters cannot avoid detection. Finally, certainty means
that rules will be enforced and penalties will be imposed in appropriate circumstances.
The measures we propose will provide transparency and certainty. These
measures will create a web ofrules that reinforce each other by requiring infonnation
reporting to the IRS about a questionable transaction both by the taxpayers participating
in the transaction and by the promoters. These disclosure rules will allow the IRS to
identify promoters from taxpayer disclosures, and other taxpayers from promoter
disclosures. Taxpayers and promoters who fail to provide the required disclosure will be
subject to significant penalties.
Treasury believes that if a taxpayer feels comfortable entering into a transaction,
if a promoter feels comfortable selling a transaction, and an advisor feels comfortable
recommending a transaction, they all should feel comfortable detailing the transaction for
the IRS.
Before providing details about our new course of administrative actions and our
l~gislative proposals, I think it would be helpful first to provide a context for our
measures by describing the actions that Treasury and the IRS are currently taking to
combat abusive tax avoidance transactions, and why we have concluded that more needs
to be done. In the final analysis, however, we all must recognize that the complexity of
the tax Code is the fundamental reason why taxpayers have the opportunity to engage in
abusive transactions, and only by simplifying the entire system will such opportunities be
eradicated.

Current Enforcement Status
Treasurv and the IRS are working together closely to combat abusive tux
practices. Som~ recent and important steps include a new voluntary disclosure initiativc,
new penalty guidelines, guidance that shuts down several abusive transactions, improved
resource allocation and inter-agency coordination, enhanced tax infol111ation exchange
agreements with offshore financial centers. and intensified enforcement efforts against
the promoters of abusive tax avoidance transactions.

Treasury and the IRS will continue pursuing steps that will enhance the
Government's ability to curb abusive tax avoidance transactions.

Disclosure Initiative alld New Penalty Guidelines
The IRS recently issued Announcement 2002-2, which provides an incentive for
taxpayers to disclose questionable transactions. Under this program, which runs through
April 23, 2002, the IRS will waive the accuracy-related penalty if a disclosed transaction
results in an underpayment. The taxpayer, however, remains liable for the additional tax
and interest. In order to obtain the benefits of the program, the taxpayer must disclose to
the IRS all relevant infonnation about the transaction, including the identity of any
promoter. Almost 150 transactions already have been disclosed, and the IRS expects
many additional disclosures in the coming weeks. The IRS will use the information
received to identify promoters and taxpayers who have not disclosed transactions. For
example, one recent IRS inquiry of a promoter resulted in a list of 17 investors. All 17 of
the investors should have disclosed their participation to the IRS, but only 5 of the
investors actually disclosed.
Along with this disclosure initiative, the IRS announced new penalty guidelines
that will be used by the IRS' Large and Mid-Size Business Division. These guidelines
make clear that penalties are an important tool to encourage voluntary compliance. The
new guidelines require IRS agents to consider the appropriateness of penalties for certain
transactions and require an agent's decision to assert or not assert penalties to be
reviewed by a Director of Field Operations. The guidelines will ensure that penaHies are
impartially, fairly, and consistently considered in all tax avoidance cases.

Guidance Shutting Down Variolls Transactions
Treasury and the IRS are continually evaluating transactions that come to the
Government's attention. When an abusive tax avoidance transaction is identified,
Treasury and the IRS will issue guidance shutting down that transaction. For example,
Treasury and the IRS recently published (i) a notice warning taxpayers that the IRS will
challenge transactions using a loan assumption agreement to claim an inflated basis in
assets acquired from another party (Notice 2002-21), (ii) a notice waming taxpayers that
the IRS will challenge transactions improperly shifting basis from one paIiy to another
(Notice 2001-45), (iii) a notice announcing Treasury's intention to promulgate regulations
that prevent the duplication oflosses by a consolidated group (Notice 2002-18), and (iv)
final regulations on hedging transactions that prevent employers from deferring tax on
income from investments used to flmd non-qualified deferred executive compensation
(Treasury Regulation Section 1.1221-2). Treasury and the IRS are working to expedite
the issuance of additional notices and guidance.

Improved Resource Allocation {Ind Inter-Agency Coordinatioll

Government resources must be used as efficiently and effectively as possible.
Treasury has worked with the IRS to issue published guidance in controversial areas
(such as research credit, accounting method and timing issues), that have consumed
significant IRS examination resources. According to the IRS' Large and Mid-Size
Business Division, these areas previously used as much as 40% of large case audit
resources across industry groups. That placed an unacceptable burden on both taxpayer
and IRS recourses. Treasury and the IRS believe that IRS resources are better used to
address other important issues, including abusive tax avoidance transactions. Moreover,
taxpayer resources are better allocated to growing their businesses.
The 1RS also is working with the Department of Justice to ensure that the
Government has a single, coordinated approach to cases in litigation.
Enhanced Ta..,y Information Exchange with Offshore Financial Ce1lters
It is more important than ever not to allow the financial institutions of any country
to be used for an illicit purpose, including cheating on taxes. Treasury is working to
ensure that the necessary tax infonnation exchange relationships are in place so that no
country serves as a safe haven for those who wish to hide income from the IRS.
Secretary O'Neill made a commitment last summer to significantly expand our network
of tax infonnation exchange agreements, with a particular focus on achieving such
agreements for the first time with significant offshore financial centers that have not been
interested in cooperating with us on tax matters in the past. Importantly, these civil and
criminal tax infonnation exchange agreements will override bank secrecy laws.

Over the past few months the United States has signed important new tax
information exchange agreements with the Cayman Islands, Antigua and Barbuda, and
The Bahamas. These agreements, with jurisdictions that are major international financial
centers located in our own neighborhood, will be an invaluable source of information to
the IRS. These were the first agreements signed in nearly a decade.
However, Treasury is not stopping there. We are in ongoing discussions with
many other jurisdictions, and we expect to be able to announce additional new
agreements very soon. We remain committed to establishing a complete network of tax
infonnation exchange relationships as quickly as possible.
Treasury also is continuing to work within the OECD to keep international
attention focused on the need for cooperation on infonnation exchange on tax matters.
We have been successful in refocusing the OECD project on its core element: the need
for countries to be able to obtain specific infonnation from other countries upon request
in order to prevent noncompliance with tax laws. Treasury is very pleased that nineteen
jurisdictions have committed to improving their transparency and infon11ation exchange
practices since the refocusing of the OECD project last year. We look forward to
continuing to work together with other countries to achieve real advances in this critically
important area.

Intensified Enforcemellt Efforts Against Promoters of Abusive Tax Avoidance
Transactions
Some promoters proliferate abusive tax avoidance transactions by developing
them and marketing them to a large number of taxpayers. Because these promoters play
a role in the existence of abusive tax avoidance transactions, the IRS is taking vigorous
actions to curb their activities with respect to both corporations and individuals.
The IRS has contacted 30 promoters of corporate tax avoidance transactions and
is working with the Department of Justice to ensure that these promoters provide us with
information on questionable transactions, including the identity of the taxpayers who
participated in them. The IRS and the Depmiment of Justice are ready to go to court to
ensure that promoters comply with the IRS' requests for information. Once the IRS
obtains from promoters the identity of participating taxpayers, the IRS will initiate
appropriate enforcement action against those taxpayers, including examinations and
penalty consideration. The IRS also has opened 14 penalty audits with respect to
promoters of corporate tax avoidance transactions.
In addition, the IRS is focusing on promoters of tax schemes that are directed
primarily at individuals and small businesses. Although often less sophisticated than
corporate tax avoidance transactions, these schemes are equally damaging to the fairness
of our tax system. The IRS, working with the Department of Justice, already has
obtained 6 injunctions against promoters of these schemes, and 12 other cases have been
or soon will be filed. The IRS also is working to stop the use of offshore accounts that
allows U.S. residents to hide assets in a tax haven country while using a credit card to
spend that money in the United States. The IRS, again in coordination with the
Department of Justice, has issued summonses to some ofthe major credit card networks
and plans to issue summonses to certain vendors to identify the thousands of taxpayers
who are participating in these schemes.

Treasury's Assessment of the Current Disclosure Regime
The current disclosure regime is a key component in combating abusive tax
avoidance transactions. Under the current disclosure regulations, corporate taxpayers arc
required to disclose certain reportable transactions on their tax returns, and promoters are
required to register confidential corporate tax shelters with the IRS and maintain lists of
investors. Disclosure allows the IRS to identify potentially abusive transactions early in
the process, to evaluate those transactions, to provide guidance on whether those
transactions are proper, and, if necessary, to change the regu1ations or recommend
legislative changes to shut down those transactions. Disclosure also helps the IRS
identify taxpayers who participate in abusive transactions and promoters who market
such transactions. Effective disclosure rules also are important to deter taxpayers from
engaging in abusive tax avoidance transactions. A disclosure regime that increases the
probability ofIRS detection will change the taxpayer's risk/reward analysis and
discourage taxpayers from playing the audit lottery.

For the year 2000 corporate returns, which were filed primarily in the fall 2001
filing season, only 272 transactions were disclosed by 99 corporate taxpayers. Treasury
and the IRS are disappointed with the small number of disclosures. Treasury and the IRS
also are disappointed with promoter compliance with the list maintenance rules. Some
promoters are claiming they are not required to maintain investor lists or are refusing to
provide the lists to the IRS in a timely manner.
After reviewing the operation of the current rules, Treasury and the IRS have
concluded that significant changes to the rules are necessary. Treasury and the IRS have
identified which rules are effective and which are ineffective. Based on this analysis, we
are proposing changes that build on what has proven effective and alter what has proven
ineffective.
The primary feature of an effective regime is certainty - certainty that transactions
will be identified, certainty that the rules will be enforced, and certainty that applicable
penalties will be imposed. Regardless of how artful or conceptually perfect the rules in
the Code and the regulations are drafted, if they are not enforced - and especially if the
tax community perceives that they are not being enforced - they will prove ineffective.
The current rules do not provide the necessary certainty.
The current rules do not provide certainty in part because of their complexity.
This complexity arises because the disclosure, registration, and list maintenance rules are
different from one another and because they are each difficult to apply. For example,
under the current rules, a transaction must be disclosed if it satisfies two of five filters,
but does not qualify for anyone of three exceptions. Some ofthe exceptions are highly
subjective, including the exception if there is a "generally accepted understanding" that
the tax benefits are allowable and the exception if there is "no reasonable basis" for the
IRS to deny the tax benefits. Taxpayers and promoters are parsing these rules to avord
disclosure. They are interpreting the filters narrowly and reading the exceptions broadly.
In addition, the system must alter the risk/reward analysis for participating in
questionable transactions by increasing the cost of not complying with the rules. The
current rules do not provide incentives to disclose transactions because they do not
impose meaningful penalties on taxpayers and promoters who fail to comply. For
example, under the current rules, there are no clear penalties if a taxpayer fails to disclose
a reportable transaction.
The existing rules were intended to create a web that would allow the IRS to
identify and halt abusive tax avoidance transactions by tracing transactions through the
system from promoters to taxpayers and vice versa. The possibility of the IRS finding
out about a transaction from altemative sources would increase the "risk" of detection.
However, the complexity and subjectivity of the current rules and the lack of meaningful
penalties -- essentially, holes in the web -- do not afford cer1ainty of disclosure,
identification, or enforcement. Without this certainty, the current disclosure rules do not
have the necessary deterrent effect.

Yesterday, Treasury announced an initiative to improve the disclosure and penalty
regime through a combination of administrative actions already underway and new
legislative proposals. These actions will increase certainty and make the disclosure
regime more effective. A detailed description of the proposals is attached to this
testimony. We have met with your staffs to provide an overview as well.

Administrative Changes
Many of the administrative actions will simplify and broaden the rules governing
taxpayer disclosure and promoter registration and list keeping. For example, Treasury
and the IRS intend to provide a single definition of a reportable transaction for purposes
of the disclosure, registration, and list maintenance rules. The definition will provide
clear, bright line tests that leave no room for interpretation or SUbjective inquiries. This
single definition will allow the IRS to move quickly from a taxpayer's disclosure to a
promoter's list of investors to other taxpayers who engaged in the reportable transaction.
This will create a more perfect web that deters abusive tax avoidance transactions by
increasing the certainty of IRS detection.
The IRS also is developing a new disclosure form that will be centrally filed with
the Office of Tax Shelter Analysis. The form will request specific information needed to
evaluate whether a transaction is an abusive tax avoidance transaction. The form will
greatly help the IRS identify and evaluate transactions for which further action may be
needed.
The new rules will deliberately cast a broader net than exists under the current
disclosure and registration rules. For example, the initiative will extend the disclosure
requirements to partnerships, S corporations, trusts, and certain individuals. In addition,
the initiative will apply the disclosure, registration and list maintenance requirements to
more transactions. Under the current rules, transactions that the IRS has identified as tax
avoidance, or listed, transactions, must be disclosed, and we will keep that rule. Weare
replacing, however, the 2-of-5 filter test and eliminating the related exceptions in the
current rules. In their place, we are creating clear categories designed to require
disclosure of the types of transactions we are most concerned about. These include
transactions that generate large tax losses, transactions that result in tax credits where the
underlying assets are held a brief period of time, transactions that generate significant
book-tax differences , and transactions marketed on a confidential basis. We recognize
that these rules will require disclosure of many legitimate transactions, and we are eager
to work with taxpayers to ensure that these rules are appropriately tailored. Simplicity
and clarity, however, will remain our paramount goals.
Treasury and the IRS also will undertake administrative actions to increase
penalties on taxpayers who fail to disclose reportable transactions. For example,
Treasury and the IRS will amend the regulations to impose a strict liability accuracyrelated penalty on taxpayers who do not disclose a listed transaction and who have an
underpayment resulting from the transaction.

In addition, the amended regulations will provide that taxpayers cannot rely on a
favorable tax opinion as a defense to the imposition of the accuracy-related penalties if
the taxpayer did not disclose a reportable transaction or a retum position based on the
invalidity of a regulation.

Because taxpayers rely on opinions for assurance that transactions are proper and
will not be subject to penalties, Treasury and the IRS believe that tax opinions regarding
tax avoidance transactions need to be regulated. Weare currentl y taking steps
administratively to mandate and enforce standards for opinions used to support tax
avoidance transactions.

Legislative Proposals
Treasury's legislative proposals focus on enhanced penalties for taxpayers and
promoters who fail to follow the disclosure, registration, and list maintenance rules. For
example, Treasury is seeking a new and substantial penalty for taxpayers who fail to
disclose reportable transactions. A corporate taxpayer, for instance, would be subject to a
penalty of$200,000 for failure to disclose a listed transaction, regardless of whether the
tax benefits of the transaction are ultimately sustained on the merits. Further, if the
corporate taxpayer fails to disclose and loses on the merits, the taxpayer would be liable
for a new strict liability penalty of 25% of its claimed tax savings. Treasury is also
seeking legislation requiring public disclosure by corporate taxpayers of penalties for the
failure to disclose listed transactions and accuracy-related penalties reSUlting from an
undisclosed listed transaction.
For promoters, Treasury is recommending legislation that would enhance the
existing penalties for failure to register a transaction. For example, a promoter who fails
to register a listed transaction generally would be subject to a fine of $200,000 or 50% of
its fees, whichever is greater.
Because Treasury wants to make sure that promoters identify taxpayers who have
invested in reportable transactions, we are seeking an escalating penalty that would
increase by $10,000 for each day that a promoter fails to tum over a list of investors
requested by the IRS in writing. The IRS is facing too many delay tactics, and this needs
to stop.
In addition to the preceding penalty proposals, Treasury believes that other
legislative measures should be taken to curb abusive tax avoidance transactions. For
example , leaislative
revisions to Code Section 6111 may be necessary for Treasury and
t:>
the IRS to create a consistent definition of a reportable transaction for purposes of the
disclosure , reaistration
and list maintenance rules.
t:>
Treasury also proposes two substantive law changes. The first substantive
proposal would amend Section 901 (k) of the Code to deal with trading in foreign tax
credits.

Under the proposed rule, a minimum holding period for ownership of property
would be required before taxpayers could claim tax credits associated with income from
the property. The second substantive proposal would add a new provision to deal with a
broad range of income stripping transactions. The new provision would address stripping
transactions in a manner that would match the tax treatment with the economics of the
transactions.
Conclusion

In conclusion, Treasury and the IRS are committed to combating abusive tax
avoidance transactions. While the vast majority of taxpayers and their advisors attempt
to comply with the letter and spirit of the law, the complexity of the current tax system
provides too many opportunities for some taxpayers to participate in transactions that
generate tax benefits never intended by Congress. The best way to eliminate these
practices is to simplify the tax law and improve transparency so that questionable
transactions are disclosed and subject to IRS review. Treasury has set forth a number of
administrative and legislative proposals that provide clear and simple rules for disclosure,
registration and list maintenance. We also propose new and increased penalties for
failure to comply with these rules. Treasury and the IRS are moving forward to
implement the administrative actions that can be undertaken without further action by
Congress. In addition, we urge Congress to move forward with Treasury's legislative
proposals. If enacted, these proposals would improve the effectiveness of the disclosure,
registration and list maintenance rules, thereby changing the risk/reward analysis for
taxpayers who otherwise might play the audit lottery to avoid paying their fair share of
taxes.
Thank you again, Mr. Chairman, for the opportunity to speak today. The
Treasury Department looks forward to working with the {iinance Committee on the
important task before us. I will gladly answer any questions the Committee may have.

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OFFICE OF PUBUC AFFAIRS. 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C .• 20220. (202) 622-2960

Contact: Tony Fratto

or Immediate Release
larch 21,2002

(202) 622-2960

STATEMENT OF RANDAL K_ QUARLES
NOMINEE FOR ASSISTANT SECRETARY OF THE TREASURY
FOR INTERNATIONAL AFFAIRS
BEFORE THE COMMITTEE ON FINANCE
UNITED STATES SENATE
Thank you, Mr. Chairman and Members of the Committee, for the opportunity to appear before you today. I

n honored that President Bush has nominated me to serve as the Assistant Secretary for Intemational AfTairs at the
epartment of the Treasury, and I am grateful to have the privilege of your consideration, particularly during such a
lSY

time of year. With the Committee's indulgence, I would like to introduce the members of my family that are

~re.

The role of the Assistant Secretary for Intemational .:'dlairs is to advise the Under Secretary for Intemational
ffairs and the Secretary of the Treasury on U.S. participation in the intemational financial system, including
tbjects such as financial regulation, macroeconomic policy, exchange rate policy, trade and investment and our
Irticipation in the International Monetary Fund and the World Bank, among other institutions. The Assistant
~cretary also shares oversight of operations of the Office of International Atlairs and represents the Department of
e Treasury in various international fora.
If confirmed, I would bring to this role a variety of experiences in both govemment and the private sector.
ost recently, I have been the U.S. Executive Director of the International Monetary Fund, representing the United
ates on the Fund's board during a time of stress for the international financial system. Before that, I was ~although
ised in Utah and a passionate westerner - a practicing Wall Street lawyer for nearly seventeen years, focusing on
temational banking and financial matters. I was privileged, particularly during the last decade, to help some of the
:lrJd's premier financial institutions think through their approach to an increasingly integrated financial system and
take practical steps to prepare for that integration. I was also privileged to serve at the Treasury Department trom
191 to 1993, working with the team that helped propose a modem statutory framework for this ongoing financial
tegration - - work that we like to think contributed to the financial modemization legislation enacted into law
'arly two years ago.
If confinned, I would hope to approach my role as Assistant Secretary \\'ith the benetit of all these
periences: the practical wisdom of a good counselor, the policy experience of an enthusiastic public servant and.
It least, the common sense r have always found native in those bom west of the 100lh meridian and raised in the
adow of the Wasatch Mountains.
Thank you again Mr. Chaim1an for the privilege of appealing before this Committee. I \vould be pleased to
swer any questions you and the other members of the Committee may have.
)-2027

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UNTIL 2:30 P.M.
21, 2002

~GOED

~rch

CONTACT:

Office of Financing
202/691-3550

MARCH HOLIDAY SCHEDULE FOR
TREASURY'S WEEKLY BILL ANNOUNCEMENT
Due to an early market closing on Thursday, March 28, 2002,
rreasury will release its announcement of weekly bills at 12:00 noon

that day.

000

PO-2028

'or press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040

DEPARTMENT

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OFFICE OF PUBUC AFFAIRS. 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C .• 20220. (202) 622·2960

UNTIL 2:30 P.M.
:-1arch 21, 2002

E~GOED

CONTACT:

Office of Financing
202/691-3550

TREASURY OFFERS 13-WEEK AND 26-WEEK BILLS
The Treasury will auction 13-week and 26-week Treasury bills totaling $24,000
lillion to refund an estimated $25,796 million of publicly held 13-week and 26-week
~reasury bills maturing March 28, 2002, and to pay down approximately $1,796 million.
Jso maturing is an estimated $23,001 million of publicly held 4-week Treasury bills,
he disposition of which will be announced March 25, 2002.
The Federal Reserve System holds $13,196 million of the
n March 28, 2002, in the System Open Market Account (SOMA).
efunded at the highest discount rate of accepted competitive
:lctions or the 4 -week Treasury bill auction to be held March
Harded to SOMA will be in addition to the offering amount.

Treasury bills maturing
This amount may be
tenders either in these
26, 2002. Amounts

Up to $1,000 million in noncompetitive bids from Foreign and International
lnetary Authority (FIMA) accounts bidding through the Federal Reserve Bank of New
Irk will be included wi thin the offering amount of each auction.
These
,ncompetitive bids will have a limit of $100 million per account and will be accepted
the order of smallest to largest, up to the aggregate award limit of $1,000
Ilion.
TreasuryDirect customers have requested that we reinvest their maturing holdings
approximately $987 million into the 13-week bill and $917 million into the 26-week
11.
The allocation percentage applied to bids awarded at the highest discount rate
.1 be rounded up to the next hundredth of a whole percentage point, e.g., 17.13%.
This offering of Treasury securities is governed by the terms and conditions set
'th in the Uniform Offering Circular for the Sale and Issue of Marketable Book-Entry
·asury Bills, Notes, and Bonds (31 CFR Part 356, as amended) .
Details about each of the new securities are given in the attached offering
hlights.
000

achment

~029

~ss releases, speeches, public schedules alld official biographies, call our 24-hour fax line at (202) 622-2040

HIGHLIGHTS OF TREASURY OFFERINGS OF BILLS
TO BE ISSUED MARCH 28, 2002
March 21, 2002
Offerlng Amount ..... .
Public Offerlng ..... .
NLP Excluslon Amount.
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.

· $12,000 million
· $12,000 million
· $ 5,200 mllllon

· 91-day bill
.912795 KA 8
· March 25, 2002
· March 28, 2002
· June 27, 2002
. December 27, 2001
$20,341 million
.. $1,000

$12,000 million
$12,000 million
None

182-day bill
912795 LC 3
March 25, 2002
March 28, 2002
September 26, 2002
March 28, 2002
$1,000

The following rules apply to all securities mentioned above:
Submission of Bids:
Noncompetitlve bids:
Accepted in full up to $1 million at the highest discount rate of accepted competitive bids.
Foreign and International Monetary Authority (FIMA) bids:
Noncompetitive bids submitted through the Federal Reserve
Banks as agents for FIMA accounts.
Accepted in order of size from smallest to largest with no more than $100
million awarded per account.
The total noncompetitive amount awarded to Federal Reserve Banks as agents for FIMA
accounts will not exceed $1,000 million.
A single bid that would cause the limit to be exceeded will
be partially accepted in the amount that brings the aggregate award total to the $1,000 million limit.
However,
if there are two or more bids of equal amounts that would cause the limit to be exceeded, each will be prorated
to avoid exceeding the limit.
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 (NLP) for each bidder must be reported when the sum of the total bid amount, at all
discount rates, and the net long posi~ion 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.
35% of public offering
Maximum Recognized Bid at a Single Rate.
35% of public offering
Maximum Award.............
. .....
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
w~th tender.
TreasuryDirect customers can use the Pay Direct feature which authorizes a charge to their account of
~~cord at their financial institution on issue date.

DEPARTMENT

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OFFICE OF PUBUC AFFAIRS. 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C .• 20220. (202) 622-2960

Contact: Public Affairs
(202) 622-2960

FOR IMMEDIATE RELEASE
March 25, 2002

MEDIA ADVISORY:
SOCIAL SECURITY AND MEDICARE TRUSTEES REPORT
Secretary of the Treasury and Managing Trustee PaulO 'Neill, Secretary of Health
and Human Services Tommy Thompson, Secretary of Labor Elaine Chao, Commissioner
of the Social Security Administration Jo Anne Barnhart, and the public trustees John
Palmer and Thomas Saving will hold a press briefing on the Social Security and
Medicare Trustees Reports at 4: 15 p.m. EST on Tuesday, March 26, 2002 in the Treasury
Department's Diplomatic Reception Room (Room 3311), 1500 Pennsylvania Avenue,
NW.
The Room will be available for pre-set at 3: 15 p.m.
Media without Treasury or White House 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.

-30PO-2030

DEPARTMENT

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TREASURY

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........................................

OFFICE OF PUBUC AFFAIRS. 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C .• 20220. (202) 622-2960

EMBARGOED UNTIL 1:15 P.M. EST

CONTACT: BETSY HOLAHAN

March 25, 2002

202-622-2960

RElVIARKS OF
UNDER SECRETARY OF THE TREASURY PETER R. FISHER
TO
THE COUNCIL OF INSTITUTIONAL INVESTORS
WASHINGTON, DC
I am here today as a salesman. I want you to buy Treasury securities to help
finance the federal government.
Our product has unique credit characteristics and we could just rely on those as
the basis of our marketing effort. But there is a problem I had better admit to you. While
I want you to buy my product, as the debt manager I cannot control the quantity that is
available for sale - in fact, I can't even make a very good forecast of how much I will
have to sell in any given year. Our financing needs are actually just the by-product of
decisions Congress and the President make about spending and taxes and the growth rate
of the economy.
Because of the variance in our financing needs from year-to-year, and even
month-to-month, we work hard to be regular and predictable in our issuance pattern to
make it easier for you to keep a little space in your portfolios for Treasury securities. But
we want our product to be more than just another good credit that is available on a
regular schedule.
We spend a fair amount of time trying to gauge how to sustain the liquidity of
secondary market trading, principally by ensuring an adequate supply at each maturity.
Going forward, we will be spending more of our time trying to gauge how to improve our
auctions in order to encourage you to participate directly. We want the primary market
for Treasury securities to be as broad and as deep as possible. We want more asset
managers bidding directly in our auctions because we are confident that, over the long
term, broader participation will help lower our costs.
We need your advice on how we can make direct auction participation more
attractive to institutional investors. We also need your help to see if we can make our
newest product - inflation-indexed securities - more successfuL both for investors and for
Treasury.
PO-2031
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Debt Management: the Claritv of a Single Objective
First, let me clarify the objective of federal debt management and the constraints
within which we operate.
Our objective is to meet the financing needs of the federal government at the
lowest cost over time.
Our most significant constraint is that we see the future only imperfectly. As a
consequence, we constantly work to forecast our likely borrowing needs, to anticipate
how we should alter our borrowing pattern when the future does not fit our forecast, and
to anticipate what will prove to be the lowest cost means of financing in the future.
For the debt manager, promoting efficient capital markets is not an independent
objective but, rather, a means to the end of lowest cost financing over time. In the short
run, the need to sustain efficient capital markets can appear to act as a constraint on our
objective of lowest cost financing. But we pennit this short-run tradeoff only if we think
it is in the service of achieving the lowest cost in the long run - "over time".
For this reason, the Treasury's continuing commitment to a schedule ofregular
and predictable auction dates is a means, over time, to the end of the lowest cost
borrowing. In the short run, however, this commitment serves as a constraint: with
regular and predictable auction dates we accept the cost of occasionally borrowing when
it is inconvenient or expensive in return for the lower costs, over time, from providing
greater certainty to the Treasury market.
Similarly, we limit awards in our auction to 35 percent of the publicly-available
total, even though at times this means we issue debt at slightly higher yield than would be
the case without the limit. The long tenn benefit to the Treasury of maintaining a broad
distribution of our securities through the auction process outweighs the short tenn costs.
There is a separate discussion we could have about the optimal level of
goverrunent debt for the efficient functioning of our capital markets and our economy.
But in our system of government, this is a political debate about the proper amount of
borrowing needed to operate the federal government and to sustain our economy. This
policy debate needs to take place away from the explanation of the debt manager's
activities, away fl:om the effort to explain how we manage the variance in the federal
government's borrowing needs as we receive them, day by day.
Expanding Participation in Treasurv Auctions

Given our commitment to auctions as the means of selling Treasury securities,
one of the most direct ways we can try to lower our costs, in the long run, is to increase
the number of bidders, to try to make OLlr primary market as broad and as deep as
possible.

Single-price Auctions
Since 1992, the Treasury has worked to open up the primary market for Treasury
securities in order to serve the needs of end-users such as yourselves. The move to
single-price auctions, which began in 1992 and was completed in 1998, was intended to
make direct bidding more attractive to a wider number of potential bidders. By reducing
the risk of awards at sub-market yields (the "wilmers curse"), single-price auctions have
allowed a broader range of investors to participate in our auctions with confidence.
Consistently Brief Auction Processing
Earlier this year, we announced our objective to reduce auction turnaround times
in order to reduce the risks for auction participants and to reduce our borrowing costs.
We are now on a mission to complete auction processing and release results consistently
within two minutes. Achieving this will take some time and some changes for all of us,
but our objective is clear.
Processing bids and disseminating results more quickly will be a win-win
situation for both investors and the Treasury. Shorter release times will reduce the period
of time bidders are exposed to uncertainty as to whether and at what price they purchased
Treasury securities. Reducing uncertainty will reduce risk for both investors and dealers.
By reducing this risk, the Treasury will no longer need to compensate bidders for the
implicit option premium associated with the extended period of uncertainty. This will
lower the government's borrowing costs.
We have made considerable progress. In 1995 the average release time was 45
minutes. By 2000 average release times had been reduced to 27 minu~es. Over recent
months we released several auction results in less than 5 minutes. But we can do better.
To achieve the lowest borrowing costs and make direct participation in our
auctions attractive to you, we must make the period of time between the auction close and
the public release of results consistently brief So our ultimate objective is a two-minute
release with a variance of no more than 30 seconds on either side. At present, we are
aiming to release auction results in six minutes, plus or minus 60 seconds.
Facilitating Participation with Better Technology
Over the coming months, we will be introducing an updated version of our
automated auction system, which will streamline the process of submitting bids and lead
to faster processing and dissemination of auction results. Looking somewhat farther
ahead, we are planning additional improvements that will make it easier for institutions to
bid directly in our auctions. Our intention is to achieve what I call "point and click"
eligibility.

We see a time when a bidder can come to our web site, give us identifying infol111ation.
get the concurrence of the financial institution which will guarantee payment, and receive
access to our auction system all within a day or so. No paper, no embossed seals, no fuss,
just a few simple steps all handled securely and electronically.

Inflation Indexed Securities
We also need your help on how we can improve upon our efforts to sell our 10year inflation-indexed note. Both we at the Treasury and you in the investment
community may need to work a little harder to make these instruments live up to their
potential.
So far, against our objective of lowest cost financing over time, inflation-indexed
securities appear to be "challenged". Over the five years we have been issuing inflation
indexed securities, some estimates suggest that it has been a more expensive form of
borrowing than the comparable nominal security and the prospective inflation-rate at
which we would "break-even" is below most forecasts.
But we need to be careful not to judge these instruments in the short-run. Recent
demand for both short-dated inflation-indexed notes and for new issues has been
stronger. This supports my view that we should only pass judgment on the costeffectiveness of these instruments after they have at least worked their way through an
entire interest rate cycle. Ten years of data, perhaps more, may provide the right vantage
point from which to assess their performance.
We also may need to take a broader view of how we should judge their
perfol111ance. Nothing can be as important to risk management as diversification.
Indexed-notes represent a completely different asset class which helps diversify our
portfolio of liabilities. Perhaps portfolio strategists and asset managers could give a little
more thought to the benefits of the inflation and the deflation protection afforded by our
10-year indexed note. Unlike our nominal rate offerings, these instruments provide a
symmetric protection that may be worth paying a little something for.
Both dealers and the Treasury's Borrowing Advisory Committee have suggested
that there may be ways for us to enhance the attractiveness of our indexed notes,
including more frequent auctions, a shorter when-issued trading period, and different
issue sizes. We also want to hear from you. Your portfolio managers will determine
whether the inflation-indexed securities succeed as a separate asset class.
We also want to hear trom you about any ideas that you may have about how we
should structure or market our debt. Assistant Secretary for Financial Markets Brian
Roseboro, Deputy Assistant Secretary Tim Bitsberger, and staff from the Bureau of the
Public Debt have been spending time meeting with many of you in the investment
community, in particular to promote direct auction participation. but also to get your
feedback.

I hope that you will reach out to them. We have also established an email address at
Treasury for your suggestions and comments. The address is
debt.management@do.treas.gov.
Secretary O'Neill likes to remind us that our real goal is to make excellence a
habit. To do this, we need to strive for continuous improvement in how we manage the
government's debt. You can help us. Over the next five years our focus will be on
encouraging direct investor participation in our auctions and on developing the market for
inflation indexed notes. Every gain that we make will serve both investors and taxpayers.
Thank you - in advance - for your help.

DEPARTMENT

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OFFICE OF PUBUC AFFAIRS. 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C .• 20220. (202) 622-2960

Contact: Tara Bradshaw

FOR IMMEDIATE RELEASE
March 25, 2002

(202) 622-2014

TREASURY STATEMENT ON OFFSHORE CREDIT CARD SCHEMES

Today the Intemal Revenue Service armounced a number of actions that have been taken
to combat tax-evasion schemes involving credit cards issued by offshore banks--including
issuing John Doe summonses to major credit card companies.
"The Treasury Department and the lntemal Revenue Service are committed to combating
tax evasion. I applaud the steps taken by the IRS in cracking down on the illegal use of offshore
bank accounts to hide U.S. taxable income," stated Treasury Assistant Secretary for Tax Policy
Mark Weinberger.
"This stepped up enforcement coupled with the Legislative and Administrative proposals
the Treasury and IRS released last week demonstrates the Administration's commitment to
pursue individuals and businesses who attempt to evade paying their tax," Weinberger stated.
One of the proposals would add a civil penalty, to the criminal penalties that may apply,
for the failure to file the "Report of Foreign Bank and Financial Accounts" (Foml TD 90-22.1),
which provides infomlation about a taxpayer's interest in a foreign financial account.

-30PO-2032

For press J"2leaS'iS speeches, m.ttJUc SLlledui-::S and dndal bicf!Yu~ohi?5"
...

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OFFICE OF PUBUC AFFAIRS. 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C .• 20220· (202) 622-2960

~ARGOED UNTIL 11:30 A_M.
March 25, 2002

Contact:

Office of Financing
202/691-3550

TREASURY OFFERS 4-WEEK BILLS
The Treasury will auction 4-week Treasury bills totaling $19,000 million to
refund an estimated $23,001 million of publicly held 4-week Treasury bills maturing
March 28, 2002, and to pay down approximately $4,001 million.
Tenders for 4-week Treasury bills to be held on the book-entry records of
TreasuryDirect will not be accepted.
The Federal Reserve System holds $13,196 million of the Treasury bills maturing
on March 28, 2002, in the System Open Market Account (SOMA). This amount may be
refunded at the highest discount rate of accepted competitive tenders in this auction
up to the balance of the amount not awarded in today's 13 -week and 26-week Treasury
bill auctions. Amounts awarded to SOMA will be in addition to the offering amount.
Up to $1,000 million in noncompetitive bids from Foreign and International
Monetary Authority (FIMA) accounts bidding through the Federal Reserve Bank of New York
will be included within the offering amount of the auction. These noncompetitive bids
will have a limit of $100 million per account and will be accepted in the order of
smallest to largest, up to the aggregate award limit of $1~000 million.
The allocation percentage applied to bids awarded at the highest discount rate
will be rounded up to the next hundredth of a whole percentage point, e.g., 17.13%.
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 BookEntry Treasury Bills, Notes, and Bonds (31 CFR Part 356, as amended).
Details about the new security are given in the attached offering highlights.

000

Attachment

0-2033

For press releases. speeches. public schedules alit! official biographies. call ollr l.J-/lOlirfax line at (01) 611-1().J()

HIGHLIGHTS OF TREASURY OFFERING
OF 4-WEEK BILLS TO BE ISSUED MARCH 28, 2002
March 25, 2002
Offering Amount . . . . . . . . . . . . . . . . . . . . . $19,000 million
Public Offering . . . . . . . . . . . . . . . . . . . . . $19,000 million
NLP Exclusion Amount . . . . . . . . . . . . . . . . $ 9,400 million
Description of Offering:
Term and type of security . . . . . . . . . . . 28-day bill
CUSIP number . . . . . . . . . . . . . . . . . . . . . . . . 912795 JR 3
Auction date . . . . . . . . . . . . . . . . . . . . . . . . March 26, 2002
Issue date . . . . . . . . . . . . . . . . . . . . . . . . . . March 28, 2002
Maturity date . . . . . . . . . . . . . . . . . . . . . . . April 25, 2002
Original issue date . . . . . . . . . . . . . . . . . October 25, 2001
Currently outstanding . . . . . . . . . . . . . . . $36,577 million
Minimum bid amount and multiples .... $1,000
Submission of Bids:
Noncompetitive bids: Accepted in full up to $1 million at the highest
discount rate of accepted competitive bids.
Foreign and International Monetary Authority (FIMA) bids:
Noncompetitive bids submitted through the Federal Reserve Banks as agents for
FIMA accounts. Accepted in order of size from smallest to largest
with no more than $100 million awarded per account.
The total noncompetitive amount awarded to Federal Reserve Banks as agents for
FIMA accounts will not exceed $1,000 million.
A single bid that
would cause the limit to be exceeded will be partially accepted in
the amount that brings the aggregate award total to the $1,000
million limit. However, if there are two or more bids of equal
amounts that would cause lhe limit to be exceeded, each will be
prorated to avoid exceeding the limit.
Competitive bids:
(1) Must be expressed as a discount rate with three decimals in
increments of .005%, e.g., 4.215%.
(2) Net long position (NLP) 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.

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 25, 2002

CONTACT:

Office of Financing
202-691-3550

RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
91-Day Bill
March 2B, 2002
June 27, 2002
912795KAB

Term:
Issue Date:
Maturity Date:
CUSIP Number:
1.820%

High Rate:

Investment Rate 1/:

1.854%

Price:

99.540

All noncompetitive and successful competitive bidders were awarded
securities at the high rate.
Tenders at the high discount rate were
allotted 26.71%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)

Competitive
Noncompetitive
FIMA (noncompetitive)

30,636,710
1,414,416
214,000

5,150,733

Federal Reserve
$

37,415,859

10,37l,625
1,414,416
214,000
l2,000,0412/

32,265,126

SUBTOTAL

TOTAL

Accepted

Tendered

Tender Type

17,150,774

Median rate
I.BOO%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate.
Low rate
1.780%:
5% of the amount
Jf accepted competitive tenders was tendered at or below that rate.
3id-to-cover Ratio = 32,265,126 /

12,000,041 = 2.69

1/ Equivalent coupon-issue yield.
2/ Awards to TREASURY DIRECT = $1,134,997,000

http://www . publicdebUreas.gov
2034

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 25, 2002

Office of Financing
202-691-3550

RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
182 -Day Bill
March 28, 2002
September 26, 2002
912795LC3

Term:
Issue Date:
Maturity Date:
CUSIP Number:
2.110%

High Rate:

Investment Rate 1/:

2.163%

Price:

98.933

All noncompetitive and successful competitive bidders were awarded
securities at the high rate.
Tenders at the high discount rate were
allotted 12.60%.
All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)

Competitive
Noncompetitive
FIMA (noncompetitive)

32,314,288
1,212,479
520,000

4,737,077

Federal Reserve
$

38,783,844

10,267,538
1,212,479
520,000
12,000,017 2/

34,046,767

SUBTOTAL

TOTAL

Accepted

Tendered

Tender Type

16,737,094

Median rate
2.080%: 50% of the amount of accepted competitive tenders
tendered at or below that rate.
Low rate
1.810%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
~s

Bid-to-Cover Ratio = 34,046,767 / 12,000,017 = 2.84
1/ Equivalent coupon-issue yield.
2/ Awards to TREASURY DIRECT = $986,603,000

http://www,publicdebt.treas.gov

PO-2035

DEPARTMENT

THE

fIR:E~ASURY ~(}rt:.~\
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TREASURY

NEW S

~/78~q~. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .

................................

OFFICE OF PUBUC AFFAIRS. 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C .• 20220. (202) 622-2960

FOR IMMEDIATE RELEASE
March 26, 2002

Contact: Tara Bradshaw
(202) 622-2014

0' NEILL ANNOUNCES WEINBERGER PLANS TO LEAVE TREASURY
Treasury Secretary Paul O'Neill today announced that Mark Weinberger, Assistant
Secretary of the Treasury for Tax Policy, plans to leave government service in mid-April.

Treasury Secretary PaulO 'Neill made the following comments:
I am extremely appreciative of the sacrifices Mark has made to head our tax policy
efforts in one of the most prolific times in the tax area in memory. With four young children at
home, he now deserves to spend some much-needed quality time with them and his wife Nancy.
Mark's policy sense and technical expertise have been invaluable to Treasury. His
management style and drive for results is refreshing.
Mark joined Treasury's Office of Tax Policy with three goals in mind-to pass the
Presidents tax bill, build a world-class team in the Office of Tax Policy and improve the
guidance process. He met those goals and had several other impressive accomplishments as well.
Mark played a critical role in the enactment of the President's tax plan last year, the
largest tax cut in decades. His close collaboration with the IRS ensured that our unprecedented
decision to send out nearly 100 million advance refund checks last summer went off without a
hitch.
Mark has brought a sense of real world management experiences to the department that
has had a significant impact on the updating and improvement of the IRS guidance process.
Mark's shop, working with the IRS, has delivered a number of meaningful guidance projects
aimed at reducing controversies, simplifying taxpayer compliance and freeing up IRS resources.
Mark also worked tirelessly in the international area, updating and expanding our treaty
networks and negotiating our first tax information exchange agreements in over a decade.
After September 11 th, Mark worked closely with the IRS to ensure that those affected by
the terrorist attacks didn't have to worry about meeting their tax deadlines when more pressing
matters deserved attention. More than a dozen guidance items were issued at record speed to help
those taxpayers in need. He also worked with Congress to pass the Victims Tax Relief Bill.

PO-2036

lor press releases, speeches. public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
,

'U S Government P"nt.nq Ott.ce 199B· 619·559

Mark worked with Capitol Hill lawmakers as they considered the Administration's
)osals on retirement security, national energy policy, charitable giving and economic
lulus.
Mark has made an exceptional contribution to the Office of Tax Policy and the Treasury
,artment as a whole.
The President and I are grateful for his public service, as should be all American
,ayers.

-30-

PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239

FOR IMMEDIATE RELEASE
March 26, 2002

Contact: Peter Hollenbach
(202) 619-3502

BUREAU OF THE PUBLIC DEBT AIDS SAVINGS BONDS OWNERS
AFFECTED BY FLOODING IN TENNESSEE AND VIRGINIA
The Bureau of Public Debt took action to assist victims of flooding in Tennessee and Virginia by
expediting the replacement or payment of United States Savings Bonds for owners in the affected
areas. The emergency procedures are effective immediately for paying agents and owners in those
areas of Tennessee and Virginia affected by the floods. These procedures will remain in effect
through the end of May 2002.
Public Debt's action waives the normal six-month minimum holding period for SeJies EE and
Selies I savings bonds presented to authOIized paying agents for redemption by residents of the
affected area. Most financial institutions serve as paying agents for savings bonds.
The Tennessee counties involved are: Blount, Hancock, Loudon, Marshall, Robel1son and Sevier.
The Virginia counties involved are Smyth and Wise. Should additional counties be declared
disaster areas the emergency procedures for savings bonds owners will go into effect for those
areas.
The replacement of bonds lost or destroyed will also be expedited by Public Debt. Bond owners
should complete form PD-1048, available at most financial institutions or by writing the Richmond
Federal Reserve Bank's Savings Bond Customer Service Department, 701 East Byrd Street,
Richmond, Virginia 23219; phone (804) 697-8370. This form can also be downloaded from
Public Debt's website at: www.publicdebureas.gov. Bond owners should include as much
infonnation as possible about the lost bonds on the fonn. This information should include how the
bonds were inscribed, social secUlity number, approximate dates of issue, bond denominations and
serial numbers if available. The completed form must be celtified by a notary public or an officer
of a financial institution. Completed forms should be forwarded to Public Debt's Savings Bond
Operations Office located at 200 Third St., Parkersburg. West Virginia 26106-1328. Bond owners
should write the word "DISASTER" on the front of their envelopes, to help expedite the processing
of claims.

000

www.publicdebt.treas.gov

PO-2037

PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239

FOR IMMEDIATE RELEASE
March 26, 2002

Contact: Peter Hollenbach
(202) 691-3502

BUREAU OF THE PUBLIC DEBT AIDS SAVINGS BONDS OWNERS
AFFECTED BY FLOODING IN KENTUCKY
The Bureau of Public Debt took action to assist victims of flooding in Kentucky by expediting
the replacement or payment of United States Savings Bonds for owners in the affected areas.
The emergency procedures are effective immediately for paying agents and owners in those
areas of Kentucky affected by the floods. These procedures will remain in effect through the end
of May 2002.
Public Debt's action waives the normal six-month minimum holding period for Selies EE and
Series I savings bonds presented to authOlized paying agents for redemption by residents of the
affected area. Most financial institutions serve as paying agents for savings bonds.
The Kentucky counties involved are: Bell, Boyd, Carter, Clay, Fayette, Harlan, Knox, Leslie,
McCreary, Rowan, and Whitley. Should additional counties be declared disaster areas the
emergency procedures for savings bonds owners will go into effect for those areas.
The replacement of bonds lost or destroyed will also be expedited by Public Debt. Bond owners
should complete form PD-1048, available at most financial institutions or by \-vriting the
Pittsburgh Federal Reserve Bank's Savings Bond Customer Service Department, 717 Grant St.,
Pittsburgh, Pennsylvania 15219; phone (412) 261-7800. This form can also be downloaded
from Public Debt's website at: www.publicdebUreas.gov. Bond owners should include as
much information as possible about the lost bonds on the form. This information should include
how the bonds were inscribed, social security number, approximate dates of issue, bond
denominations and serial numbers if available. The completed form must be certified by a
notary public or an officer of a financial institution. Completed forms should be forwarded to
Public Debt's Savings Bond Operations Office located at 200 Third St., Parkersburg, West
Virginia 26106-1328. Bond owners should write the word "DISASTER" on the front of their
envelopes, to help expedite the processing of claims.

000

PO-2D38

www.publicdebUreas.go v

DEPARTMENT

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OFFICE OF PUBUC AFFAIRS. 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C .• 20220. (202) 622-2960

EMBARGOED UNTIL 1:00 P.M.
March 26, 2002

Contact: Michele Davis
(202) 622-2960

REMARKS TO THE NATIONAL ASSOCIATION FOR BUSINESS
ECONOMISTS
TREASURY SECRETARY PAUL O'NEILL
MARCH 26, 2002
Thank you for inviting me here today to speak on the state of the American economy and
the Administration's economic priorities.
I have always been an optimist about the U.S. economy. Sometimes, like last fall,
optimism seems like an act of faith. Other times, like today, optimism seems to be the obvious
choice.
Our economy slowed sharply in 2000, with GDP growth rate and job growth rate declines
beginning mid-year, business capital spending plummeting in late 2000, and accelerating
declines in most indicators through mid-200l. By August 2001, however, I believed that we
were already on track for a fourth quarter rebound.
Then September 11 th happened. Financial markets were shut down for almost a week.
Air transportation carne to a standstilL Consumer activities froze as families stayed home in
front of their televisions, uncertain about the future. As a result, GDP fell an annualized 1.3
percent in the third quarter of 200 1.
Even then, I remained optimistic, and that hope now appears justified. In spite of the
terrorist attacks, our economy still grew in the fourth quarter, confounding doomsayers. The
latest indicators show that our slow period last year was one of the shortest, shallowest
downturns on record. There's no denying that the slowdown brought harder times for many
Americans, and the President is dedicated to improving economic conditions for everyone. But
those who relished the "R" word even this winter, some comparing 2001 to 1929, are going to be
happily disappointed.
Based on my personal reading of the numbers and conversations with business people
spread around the economy, I believe we are going to see continued improvement throughout
2002. Productivity growth will stay strong, ifnot always at the 2001 fourth quarter's recordsetting rate.

PO-2039
_Fqr press releases. speerhRS, puhlic. Wudules and official biographies, call our 24-hour fax line at (202) 622-2(f10
'U S Government P"ntlnq Office 1998· 619-559

Business spending will revive, as companies gradually restock the inventory pipeline.
Consumers will grow more positive, as job-growth accelerates and the war on terrorism
progresses. By year-end, I expect we will approach the 3 to 3.5% annual growth rate that the
U.S. economy can sustain. And we will begin to see improvements in employment rates.
Why was optimism the right outlook, even in the summer of2001? Why was the
slowdown so short? Several reasons. The most important is that the United States has the most
advanced economy in the world. Our economic structure, though not perfect, recognizes that the
private sector drives growth. It offers the right incentives for entrepreneurs and business leaders
to build prosperity, one job at a time, without undue government interference in the form of
excessive taxation or intervention. Our government provides essential rule oflaw, enforceable
contracts, and physical security with minimal corruption, while allowing relative openness to
world competition and reasonably flexible labor markets. Our financial markets are the deepest
and most liquid in the world, and they provide resilience and shock-absorption for all business
sectors. They offer credit for expansions and flexibility in slowdowns, with less of the boom and
bust that characterized our early history.
Our laws and our markets treat capital well, so capital from around the world likes to live
here, not just visit. As a result, our cost of capital is the lowest in the world on a risk-adjusted
basis. That means more entrepreneurs can pursue new ventures, companies can invest in
productivity enhancing technology and research and development, and more families can afford
homes and cars.
Another key reason for the quick recovery was the extraordinary timing of the President's
tax cut last year. Passage of the tax relief plan in May 2001 put $36 billion directly into
consumers' hands in the late summer and early fall, when they needed it most. In fact, that was
only the beginning of the tax relief benefits. On March 6, USA Today reported on the front page
that the tax cuts have already put $74 billion back into the economy since last summer, and
average tax refunds were up 12% from the year before. In just the last few weeks the President
signed bipartisan legislation enacting tax relief to boost job creation and unemployment benefits
to help those displaced by the slowdown get back on their feet and back into productive work.
But tax relief doesn't just put cash back in consumers pockets. At the macro level, tax
relief is a structural advantage for our economy. It increases incentives for growth by allowing
individuals to keep more of the efforts of their labor. It also allows businesses to allocate more
of their resources toward the most rewarding investment opportunities, thereby increasing
productivity and growth potential. It's not that government spending does nothing for the
economy-for some types of activities, such as the war on terrorism, it is the only option. But
the private sector is the true engine of growth in our economy.
And, of course, we have to give credit to my friend Chairman Greenspan and the Federal
Reserve. He cut interest rates faster and lower than any time in the past forty years, and that
action appears to have succeeded in maintaining credit expansion and liquidity in the economy.

On the fiscal policy side, I know some of you have been grumbling about our expenses
this year. It is true that we expect a small deficit for the next few years. The February
Congressional Budget Office projections now put the ten-year government budget surplus at $1.6
trillion, down from a projection of $3.4 trillion last August. The August projection included the
President's tax cut. The loss of $1.8 trillion in surplus since August is entirely attributable to
reduced economic activity, increased spending for the war on terrorism, and "technical changes."
In fact, technical changes account for $660 billion of the difference, exposing the fallacy of
relying on 10-year point projections in a $10 trillion economy.
Ultimately, our policies cannot revolve around the roulette wheel of this month's
projections. No one knows the distant future. What we do know is how to continue to improve
the policy environment in our country.
The President put forward a budget this year that does exactly that. He laid out a serious
plan to prosecute the war on terrorism and protect our homeland, maintaining fiscal discipline
without sacrificing his commitment to education and other national priorities. The war on
terrorism and homeland defense are top priorities, because physical security is the foundation on
which all prosperity is built. This concept hardly requires elaboration.
We are in the right position. Weare returning to economic growth in a safer and more
vigilant atmosphere, and that growth will put us back into surplus in Washington. Some in
Washington have that formulation backwards. They think surpluses create growth. The budget
put forward by the majority in the Senate would increase spending and then raise taxes in the
quixotic drive to return to surpluses at all costs. The tax increase is disguised with code words
like "trigger" or "circuit breaker" - but it is a tax increase. And that's the last thing our economy
needs as it reestablishes forward motion.
The House has passed a budget resolution reflecting the President's priorities. I hope we
can move forward on that framework when Congress returns.
Restoring our growth is crucial not just to the lives of all Americans, but also to people in
every part of the world. When the US economy grows, we create opportunities for people
everywhere. And the President strongly believes we have a responsibility to spread freedom,
opportunity and prosperity around the world. That's why he will continue to push for Trade
Promotion Authority this summer, to open foreign markets to U.S. products and services and
create jobs here at home. The House has passed TP A, and it is awaiting action in the Senate.
One of the policy initiatives closest to my heart is the President's plan to increase
development assistance to poor countries while increasing accountability and effectiveness of all
aid dollars. At the U.N. conference on world poverty in Monterrey Mexico last week, which I
attended, President Bush committed our nation to improving living standards worldwide, to
giving people the tools and materials they need to build prosperity for their children. Like the
President, I believe that too many are born into poverty today, without hope for escape. Too
many have been left behind, without enough food, or medicine, or education, without even the
prospect of progress.

DEPARTMENT

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OFFICE OF PUBUC AFFAIRS. 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C .• 20220· (202) 622-2960

u.s. International Reserve Position

03/26/02

The Treasury Department today released U.S. reserve assets data for the week ending March 2.2, 2002. As indicated
in this table, U.S. reserve assets totaled $67,808 million on that date, compared to $68,296 million en the end of the
prior week.
;n

us millions)
March 15,2002

,Official U.S. Reserve Assets

Foreign Currency Reserves

March 22,2002
67,808

68,296

TOTAL

a. Securities
Of which, issuer headquartered in the U.S.

Euro
5,445

Yen

9,706

TOTAL

Euro

15,150

5,333

Yen

TOTAL

10,032

15,365

b, Total deposits with:
9,208

b.i. Other central banks and B/S

14,132

9,180

4,182

13,362
0

b.ii. Of which, banks located abroad

b.W. Banks headquartered outside the U.S.

b.iii. Of which, banks located in the US.

IMF Reserve Position

Special Drawing Rights (SDRs)
Gold Stock

Other Reserve Assets
I

4,924

b.ii. Banks headquartered in the U.S.

10,796

10,842

11,045

11,044

Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account

lOMA), valued at current market exchange rates. Foreign currency holdings listed as secunties reflect marked-to-market values. and
,posits reflect carrying values.

The Items, "2. IMF Reserve Position' and '3. Special Drawing Rights (SDRs), are based on data provided by the IMF and are valued In
lilar terms at the official SDR/doliar exchange rate for the reporting date The entries in the table above for latest week (shown In ItaliCS)
fleet any necessary adjustments. including revaluation. by the U.S Treasury to the prior week's IfIJ1F data The Il\ilF data for the pflor week
e final
Gold stock IS valued monthly at S42.2222 per fine troy ounce.

)-2040

195

17,173

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
;'OR IMMEDIATE RELEASE
~arch 26, 2002

CONTACT:

Office of Financing
202-691-3550

RESULTS OF TREASURY'S AUCTION OF 4-WEEK BILLS
Term:
Issue Date:
Maturity Date:
CUSIP Number:

28 -Day Bill
March 28, 2002
April 25, 2002
912795JR3
1.770%

High Rate:

Investment Rate 1/:

1.801%

Price:

99.862

All noncompetitive and successful competitive bidders were awarded
;ecurities at the high rate.
Tenders at the high discount rate were
Illotted 92.09%.
All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tender Type
Competitive
Noncompetitive
FlMA (noncompetitive)

Tendered
$

SUBTOTAL
Federal Reserve
TOTAL

Accepted

43,507,650
21,874

18,978,802
21,874

43,529,524

.19,000,676

3,307,895

46,837,419

22,308,571

Median rate
1.760%: 50% of the amount of accepted competitive tenders
tendered at or below that rate.
Low rate
1.720%:
5% of the amount
: accepted competitive tenders was tendered at or below that rate.
is

ld-to-cover Ratio = 43,529,524 / 19,000,676 = 2.29
I

Equivalent coupon-issue yield.

http://www.publicdebt.treas.go\"

PO-2041

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OFFICE OF PUBUC AFFAIRS. 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C .• 20220. (202) 622-2960

NOT FOR PUBLICATION
PLANNING PURPOSES ONLY
TO:

Members of the Media

FR:

Tony Fratto, Director of Public Affairs
U.S. Department of the Treasury

DA:

26 March 2002

RE:

Treasury Secretary Paul H. O'Neill's trip to Africa

Many of you have inquired about Secretary O'Neill's visit to Africa scheduled for the last
week of May. While we are not prepared at this time to formally announce the trip, I
thought it would be useful to meet to describe the unique nature of the trip and discuss
certain logistical concerns.
If you are giving consideration to cover this visit, please join us or send a representative
from your organization for a planning briefing on Thursday, March 28, at 10:00AM at
the Treasury Department's Diplomatic Reception Room. We will provide a brief run
down on the trip schedule, transportation concerns, immunizations and visa
requirements. I especially welcome any advice and suggestions from those who have
previously traveled to Africa.
Please RSVP to Sean Miles in the Office of Public Affairs if you can attend this planning
meeting. Sean can be reached at 202-622-2960; or via email at
sean.miles@do.treas.gov.
NOTE: If you are not a Treasury or White House pass holder you must be cleared into
the Treasury Building to attend this meeting. Please email Frances Anderson at
frances.anderson@do.treas.gov with your full name, date of birth and social security or
passport number no later than Wednesday, March 27 in order the receive security
clearance.
Thank you.

PO-2042

-.!()t' press releases. speeches public schedules and official biographies, call our 24~our fax line at (202) 622-2040
'U S Government Prlntlnq Othce 1998· 619·559

DEPARTMENT

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........................................

OFFICE OF PUBUC AFFAIRS. 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C .• 20220. (202) 622-2960

Contact: Tara Bradshaw
(202) 622-2960

For Immediate Release
March 26, 2002

TREASURY SECRETARY PAUL O'NEILL REMARKS AT THE lVIEDICARE 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 forward the reports to
Congress.
Beyond the statistics and actuarial tables, the clear message from the Trustees is that
Social Security and Medicare need to be reformed and strengthened at the earliest opportunity.
The long-term financing gap for Social Security and Medicare is slightly larger this year than it
was projected to be last year. Absent reform, over 15% of GOP-nearly lout of every 6 dollars
in the economy--will be devoted to these two programs by 2076. The earlier action is taken to
address this prospect, the easier it will be to strengthen these essential programs for generations
to come.
The projected near-term financial conditions ofthe Trust Funds have improved slightly
since last year's reports, due mainly to assumed additional growth in underlying economic
productivity. This reprieve provides little comfort, as the programs continue to face substantial
financial challenges in the not-too-distant future that need to be addressed at the earliest
opportunity. The longer we wait, the more difficult our choices will be in the future.
Let me talk a bit more about Medicare. I am pleased that the Trustees' have, for the first
time, prepared a single report for the Medicare program. The best way to understand the full
implications of the financial situation of the Medicare program is to consider its two components
(HI and SMI) together.
Medicare's share of GOP is expected to more than triple by 2076. By comparison,
projected Medicare income will barely double during that time. Medicare will eventually be
larger than Social Security. The financing gap for the Hospital Insurance program is larger than
the gap for Social Security, and the HI Trust Fund will become insolvent 11 years sooner than
the Social Security Tmst Funds. HI tax income will fall short of outlays beginning in 2016, as
we projected last year. Adopting new benefits without addressing the underlying cost dlivers
will only add to Medicare's unsustainable financial problems.

PO-2043

_For press release.~; 3peer:hru, public Jchcduks and official biog:-afJnies, call our 2.d-:?Ciir );;;: line
t

(

2::

{2D2} 622-2{)Ll.O

are facing the potential for cxtensivc program cuts or large infusions of general
J\.'\",'l1UC and substantial incrcases in beneficiary premiums if we don't act soon to refom1 the
program. I continue to believe that there is tremendous potential for improvements in the health
care sector. especially for those \vho depend on Medicare. The problem of medical errors is just
the tip of the iceberg of systemic problems, which, ifresolved, could significantly improve the
quality of health care and help to reduce costs. Addressing these cost drivers will allow us to
111odell1izc the program to include the President's prescription drug plan and better meet seniors'
needs.
\\' l?

TUll1ing to Social Security, the primary problem remains - the program is substantially
out of long-term balance because of the impending retirement of the baby boomers and increases
in longcvity. To support Social Security's outlays in 2076 will require more than a 50 percent
increase in payroll taxcs over today's rates.
We must take action to ensure Social Security is safe and secure for this generation and
for future generations, This past fall, the President's Social Security Commission released its
final report that showed how personal accounts can be an important part of the solution to
strengthening Social Security. We must work now to preserve and protect Social Security, so we
kccp our commitment to current seniors, and meet the needs of our children and grandchildren.
It is my hope that with the constructive leadership provided by this Administration and

Members of Congress we will create the necessary climate to restore long-tem1 health to these
programs, and do it very soon.

-30-

PUBLIC DEBT NE'WS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239

FOR IM.MEDIATE RELEASE
March 27, 2002

Contact: Peter Hollenbach
(202) 691-3502

TREASURY AUTHORIZES HUD CALL OF
FHA INSURANCE DEBENTURES

The Departments of Treasury and Housing and Urban Development announced the call of all
Federal Housing Administration (FHA) insurance fund debentures with an interest rate of7.125
or higher outstanding as of March 29, 2002. Debentures issued with a debenture lock agreement
are not subject to the call. Debentures that have been registered on the books of Bureau of the
Public Debt, Department of the Treasury as of March 29, 2002 are considered "outstanding."
The date of call for the redemption of approximately $59 million in debentures is July 1,2002,
with the semi-annual interest due on that date paid along with the debenture principal. Notice of
the call was published in the Federal Register (67 FR 13790) on March 26, 2002.
Debenture owners of record as of March 29, 2002, will be notified by mail of the call. No
transfers in debentures covered by the call will be made on the books of the U.S. Treasury on
or after May 15.2002. Should investors have questions they can contact the Bureau of the
Public Debt's Division of Special Investments at (304) 480-5299.

000

www.publicdebt.treas.gov

PO-2044

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, 2002

CONTACT:

Office of Financing
202-691-3550

RESULTS OF TREASURY'S AUCTION OF 2-YEAR NOTES
Interest Rate:
Series:
CUSIP No:

3 5/8%
L-2004
912828AA8

High Yield:

Issue Date:
Dated Date:
Maturity Date:

3.705%

Price:

April 01,
March 31,
March 31,

2002
2002
2004

99.847

All noncompetitive and successful competitive bidders were awarded
securi ties at the high yield.
Tenders at the high yield were
allotted 95.37%.
All tenders at lower yields were accepted in full.
Accrued interest of $ 0.09904 per $1,000 must be paid for the period
from March 31, 2002 to April 01, 2002.
AlvlOUNTS TENDERED AND ACCEPTED (in thousands)
Accepted

Tendered

Tender Type
Competitive
Noncompetitive
FIMA (noncompetitive)

47,584,006
1,458,100

25,000,0661/

49,042,106

SUBTOTAL

7,873,430

Federal Reserve
TOTAL

56,915,536

23,541,966
1,458,100

32,873,496

Median yield
3.670%:
50% of the amount of accepted competitive tenders
was tendered at or below that rate.
Low yield
3.610%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio

49,042,106 /25,000,066

1/ Awards to TREASURY DIRECT

1.96

$1,092,154,000

http://www . pu blicd ebt. treas. gOY

PO-2045

(j)

federal financing
WASHINGTON, 0 C

20220

bankNEWS

FEDERAL FINANCING BANK

March 30, 2002

Kerry Lanham, Secretary, Federal Financing Bank (FFB),
announced the following activity for the month of February 2002.
FFB holdings of obligations issued, sold or guaranteed by
other Federal agencies totaled $39.1 billion on February 28,
2002, posting an increase of $1,004.2 million from the level on
January 31, 2002.
This net change was the result of an increase
in holdings of agency debt of $1,060.9 million, and decreases in
holdings of agency assets of $55.0 million and in holdings of
government-guaranteed loans of $1.7 million. The FFB made 56
disbursements, received 21 prepayments, and refinanced one Rural
Utilities Service (\\RUS") guaranteed loan during the month of
February.
Attached to this release are tables presenting FFB February
loan activity and FFB holdings as of February 28, 2002.

PO-2046

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FEDERAL FINANCING BANK
FEBRUARY 2002 ACTIVITY
Date

Borrower

Amount
of Advance

Final
Maturity

Interest
Rate

2/04/02
2/04/02
2/05/02
2/05/02
2/06/02
2/06/02
2/07/02
2/07/02
2/08/02
2/08/02
2/11/02
2/11/02
2/12/02
2/12/02
2/13/02
2/19/02
2/19/02
2/20/02
2/20/02
2/21/02
2/21/02
11/17/08
2/15/05
11/15/06
2/15/12
2/18/31
2/25/02

1.877% 5,
1.886% 5,
1.887% 51
l. 897% 5
1.886% 5,
1.887%5,
1.897% 5,
1.866% 51
1.887% 51
1.856% 51
1.866% 5;
1.856% 51
1.856% 5,
1.877% 5,
1.877% 51
1.887% 51
1.866% 51
l.876% 51
l.887% 51
1.866% SI
1.887% 51
4.806% 51
3.636%51
4.325% 51
5.012% 51
5.522% 51
1.886% SI

AGENCY DEBT

u.s. POSTAL SERVICE
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.
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
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
Service
Service
Service
Service
Service
Service

$825,000,000.00
2/01
$282,500,000.00
2/01
2/04 $1,210,000,000.00
$199,600,000.00
2/04
$800,000,000.00
2/05
$273,700,000.00
2/05
$590,000,000.00
2/06
$257,700,000.00
2/06
$475,000,000.00
2/07
$175,000,000.00
2/07
$315,000,000.00
2/08
$213,300,000.00
2/08
$85,000,000.00
2/11
$267,000,000.00
2/11
2/12
$88,600,000.00
2/15
$480,000,000.00
2/15
$319,100,000.00
$860,000,000.00
2/19
$216,300,000.00
2/19
2/20
$575,000,000.00
2/20
$244,300,000.00
2/21
$300,000,000.00
2/21
$300,000,000.00
2/21
$200,000,000.00
2/21
$200,000,000.00
2/21
$200,000,000.00
2/22
$175,800,000.00

GOVERNMENT-GUARANTEED LOANS
GENERAL SERVICES ADMINISTRATION
Atlanta CDC Lab
San Francisco OB
San Francisco OB

2/21
2/21
2/27

$51,573.98
$254,305.90
$99,740.84

1/30/31
8/01/05
8/01/05

5.537% sl
3.894%SI
3.963% sl

2/11

$244,603.82

3/01/30

5.377%

2/01
2/01
2/04

$145,000.00
$2,000,000.00
$200,000.00

1/03/34
12/31/02
1/02/35

2.201%

DEPARTMENT OF EDUCATION
Barber-Scotia College

RURAL UTILITIES SERVICE
Oneida-Madison Elec. #582
Owen Electric #525
Burt County Public #669

5.323% Qt
Qt

5.363% Qt

Page 3
FEDERAL FINANCING BANK
FEBRUARY 2002 ACTIVITY

Borrower
omanche County Elec. #765
olmew-Wayne Elec. #707
cLennan County Elec. #675
@ Energy Cooperative #772
nited Power Assoc. #432
ictory Electric #782
lark Energy Coop. #611
ast Otter Tele. #435
psala Coop. Tele. #429
ri-State #915
imarron Electric #567
arien Telephone Co. #719
ew Horizon Elec. #791
ental Virginia Elec. #593
ames Elec. #568
Central Arkansas #605
urry- Yadkin Elec. #534
utler Rural Elec. #578
awkeye Tri-County Elec. #643
mkakee Valley Elec. #761
ynches River Elec. #634
kefenoke Rural Elec. #685
rundy Electric Coop. #744
S/A is a Semiannual rate.
Qtr. is a Quarterly rate.
306C refinancing

Date
2/05
2/06
2/07
2/08
2/08
2/08
2/12
2/12
2/12
2/13
2/14
2/14
2/14
2/19
2/19
2/19
2/21
2/22
2/22
2/22
2/22
2/22
2/25

Amount
of Advance
$1,152,000.00
$1,000,000.00
$507,000.00
$1,500,000.00
$2,927,000.00
$1,543,000.00
$4,400,000.00
$976,844.00
$99,570.00
$7,804,714.79
$1,879,000.00
$184,000.00
$3,165,000.00
$1,800,000.00
$1,324,000.00
$572,000.00
$2,310,000.00
$1,252,587.00
$565,800.00
$600,000.00
$550,000.00
$1,976,000.00
$1,250,000.00

Final
Maturity

Interest
Rate

12/31/35
7/02/12
1/02/35
12/31/35
12/31/20
12/31/35
7/01/02
12/31/15
7/01/02
1/02/24
1/03/34
7/01/02
4/02/07
1/03/34
3/31/03
1/03/34
7/01/02
1/03/34
1/02/35
12/31/35
1/03/06
3/31/09
7/01/02

5.307%
4.880%
5.241%
5.363%
4.991%
5.362%
1. 794%
4.897%
1.919%
5.226%
5.422%
1.797%
4.388%
5.302%
2.294%
5.302%
1.788%
5.402%
5.292%
5.420%
3.855%
4.661%
1.790%

Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.

Page 4
FEDERAL FINANCING BANK HOLDINGS
(in millions of dollars)

Program

February 28. 2002

Agency Debt:
U_S_ Postal Service

January 31. 2002

Monthly
Net Change
2/1/02 - 2128/02

Fiscal Year
Net Change
10/1/01- 2128/02

Subtotal*

$7.750.0
$7.750.0

$6.689_1
$6.689.1

$1, 060 _9
$1, 060.9

-$3,563.0
-$3.563.0

Agency Assets:
FmHA-RDIF
FmHA-RHIF
Rural Utilities Service-CBO
Subtotal*

$2.200.0
$4.375.0
$4.270.2
$10.845.2

$2.255.0
$4.375.0
$4,270.2
$10.900.2

-$55_0
$0.0
$0.0
-$55.0

-$235.0
$0.0
$0.0
-$235.0

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 *

$2,057.3
$44.1
$6.7
$1,207.3
$2,242.4
$11.9
$841. 2
$14,015.5
$118.9
$3.4
$20.548.5

$2,090.9
$43.9
$6.7
$1,207.3
$2,242.0
$11.9
$841.2
$13,981. 6
$121. 5
$3.4
$20,550.3

-$33.7
$0.2
$0.0
$0.0
$0.4
$0.0
$0.0
$33.9
-$2.6
$0.0
-$1. 7

-$99.4
$12.8
-$1.1
-$71.4
-$25.6
-$1. 2
-$100.0
$416.2
-$13.1
$0.0
$117.2

Grand total*

$39.143.8

$38.139.6

$1,004.2

-$3.680.8

* figures may not total due to rounding
+ does not include capitalized interest

DEPARTMENT

THE

fIR:E~ASURY ~~}rt:.~\
$~~V
,<,~," ..

TREASURY

NEW S

~/78~q~. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .

................................

OFFICE OF PUBUC AFFAIRS. 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C .• 20220. (202) 622-2960

FOR IMlVIEDIATE RELEASE
March 7, 2002

Contact: Public Affairs
(202) 622-2960

SECRETARY O'NEILL'S STATEMENT IN ABU DHABI

Today I thanked the Government of the U.AE. for its support in Operation Enduring
Freedom and the global war against terrorism. U.AE. action in blocking terrorist accounts and
closing down a targeted financial network has been particularly important, and I look forward to
continued close cooperation in the future.
The roundtable hosted by Central Bank Governor H.E. Sultan bin Nasser AI Suweidi was
extremely useful in understanding the alternative remittance systems, including hawalas, and
their vulnerabilities to abuse by those who seek to move money without a trace. Hawalas
provide efficient low-cost services to many individuals around the world and is a legitimate
means of transferring funds. At the same time, those who fund terror can take advantage of the
anonymity and lack of a paper trail in hawala transactions. In that regard, we welcome the broad
international efforts to reexamine regulatory policies and practices for hawalas and other
alternative remittance systems, and we very much appreciate that willingness to explore new
efforts to improve transparency and recorrl-keepinc
Of special note is the leadership displayed by the U.AE. in inviting to host an
international conference on hawalas in early May 2002. This conference presents an important
opportunity to stimulate world discussion in regard to the hawala system and the associated
vulnerabilities for money laundering and the financing of terrorism. It will also allow countries
to learn from each other and to share how different countries have attempted to regulate these
alternative systems. i.;Ve commend the U.A.E. Government for taking on a leadership role in this
area and will lend our full support to the initiative.
Additionally, I was please to hear that the Gulf nations are developing a joint initiative to
ensure that charities throughout the world are not abused by terrorists. We are all committed to
safeguarding the sanctity of charitable giving, and we look forward to joining in that effort. The
U.S. also welcomes the U.AE. 's commitment to participate in the terrorist financing selfassessment project of the Financial Action Task Force (FATF), ofwhicb the Gulf Cooperation
Council is an active member.

-30PO-2047

DEPARTMENT

THE

fIR:E~ASURY ~(}rt:.~\
$~~V
,<,~," ..

TREASURY

NEW S

~/78~q~. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .

................................

OFFICE OF PUBUC AFFAIRS. 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C .• 20220. (202) 622-2960

EMBARGOED UNTIL 12:00 NOON
March 28, 2002

CONTACT:

Office of Financing
202/691-3550

TREASURY OFFERS 13-WEEK AND 26-WEEK BILLS
The Treasury will auction 13-week and 26-week Treasury bills totaling $22,000
million to refund an estimated $25,258 million of publicly held 13-week and 26-week
Treasury bills maturing April 4, 2002, and to pay down approximately $3,258 million.
Also maturing is an estimated $21,000 million of publicly held 4-week Treasury bills,
the disposition of which will be announced April I, 2002.
The Federal Reserve System holds $11,158 million of the TreasuDJ bills maturing
on April 4, 2002, in the System Open Market Account (SOMA).
This amount may be
refunded at the highest discount rate of accepted competitive ·tenders either in these
auctions or the 4-week Treasury bill auction to be held April 2, 2002.
Amounts
awarded to SOMA will be in addition to the offering amount.
Up to $1,000 million in noncompetitive bids from Foreign and International
MonetaDJ Authority (FlMA) accounts bidding through the Federal Reserve Bank of New
These
York will be included within the offering amount of each auction.
noncompeti tive bids will have a limit of $100 million per accoun·t and will be accepted
in the order of smallest to largest, up to the aggregate a,.,ard limit of $1 (000
million.
TreasuryDirect customers have requested that we reinvest their maturing holdings
of approximately $1,059 mil~ion into the 13-week bill and $675 million into the 26week bill.
The allocation percentage applied to bids awarded at the highest discount rate
will be rounded up to the next hundredth of a whole percentage point, e.g., 17.13%.
This offering of Treasury securities is governed by the terms and conditions se·t
forth in the Uniform Offering Circular for the Sale and Issue of Lviarketable 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
highligh'cs.
000

Attachment

PO-2048

,,'(ii! :;;,

HIGHLIGHTS OF TREASURY OFFERINGS OF BILLS
TO BE ISSUED APRIL 4, 2002
March 28, 2002
l)~i- c, 1.. 1.. llC.L~~ u l 1 t~

_!::JU b~ !- c

-.2i f_,=E 1.. 1~

j\fLf' Exc;lus~on
Amount.
-----_._._--_._-----

· $11,000 mlilion
· $11,000 mlilion
· $ 6,100 mlilion

$11,000 million
$11,000 mililon
None

· 92-day bill
· 912795 KQ 3
· April 1, 2002
· April 4, 2002
· ,July 5, 2002
January 3, 2002
,$22,737 million
$1,000

182-day bill
912795 LD 1
April 1, 2002
April 4, 2002
October 3, 2002
April 4, 2002

!}eSCJ::l f:~t~l~at ut~-e:c :!:E~9":
'I'erlll

dnd

l:lIS T L'

!\lICLI.Ull

1:..:-Stl0
Ivja LILt.1

i:ype of

sec uri ty .

IltlHlt)eL

dot""

clCtL~

ty cia t e

Chig I.ned i.SSIH~ da L:e
1,:U.cL(2fl t 1 y ou ts tandintj
MlflJlliUHI

bid amount and multiples.

$1,000

:~~letollo,!_in9_L'u~.~~,~!:':ely_ t~o all securities mentioned above:
Submission of Bids:
Noncompetitive bi.ds:
Accep-ted in fuLL up to $1 million at the highest discount rate of accepted competitive bids.
E'OLdi<jll and Tnt("'l:national Monetary Authority (FIMA) bids:
Noncompetitive bids submitted through the Federal Reserve
Ba{)ks as agents for FH1A accounts.
Accepted in order of size from smallest to largest with no more than $100
lfllll1_on awa:cded per: account.
The total noncompetitive amount awarded to Federal Reserve Banks as agents for FIMA
accounts will not exceed $1,000 million.
A single bid that would cause the limit to be exceeded will
be partially accepted in the amount that brings the aggregate award total to the $1,000 million limit.
However,
if l:here aL'e tHO or more bids of equal amounts that Hould cause the limit to be exceeded, each will be prorated
to avoid exceeding the limit.
Competitive bids:
(1) Must be expressed as a discount rate Hith three decimals in increments of .005%, e.g., 7.100%, 7.105%.
(2) Net long position (NLP) 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.
Recognized Bid at a Single Rate.
35% of public offering
imum Award. . . . . . . . . . . . .
. .....
35% of public offering
Ra ei~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
Pavment_ l ' erms:
By charge to a funds account at a Federal Reserve Bank on issue date, or payment of full par amount
Hith tender.
Treasury-Direct customers can use the Pay Direct feature Hhich authorizes a charge to their account of
r~ord at their financial institution on issue date.

DEP ARTMENT OF THE TREASURY
OFFICE OF PUBLIC AFFAIRS
FOR IMMEDIATE RELEASE
March 29,2002

CONTACT:

Betsy Holahan (Treasury)
202-622-2960
Trent Duffy (OMB)
202-395-7254

U.S. Government Releases FY 2001 Financial Report
Importance of Financial Reporting Highlighted
The Department of the Treasury and the Office of Management and Budget (OMB) today
released the FY 2001 Financial Report of the U.S. Government, containing the government's
consolidated financial statements.
The Financial Report discloses the full extent of the assets, liabilities, costs and commitments
that result from the government's operations. These include the disposition of more than $2
trillion in revenue and $1.9 trillion in outlays, as well as the government's extensive stewardship
responsibilities and commitments (e.g, the Social Security program).
The report presents financial information that the annual budget, which is presented largely on a
cash basis, does not include, providing a more complete depiction of the government's finances.
The financial statements of the Federal Government are presented on an accrual basis in
accordance with Generally Accepted Accounting Principles.
"This year's report, in particular the disclosure of actuarial changes, is an important step in our
efforts to provide a more transparent picture of the government's financial operations and
position." said Treasury Under Secretary for Domestic Finance Peter R. Fisher.
For example, a new law requiring expanded military retiree health benefits was enacted last year,
increasing the government's liability for post-retirement health benefits by almost $300 billion.
This caused the Jiability for federal employee (civilian and military) pension and other post
retirement benefits to exceed the federal debt held by the public as the government's largest
liability. The effect of this law and other actuarial changes are also the principal reasons the
Financial Report shows the government with an FY 2001 deficit of $514.8 billion, compared
with the budget's FY 200 I $127 billion operating surplus.

PO-I049

.e General Accounting Office was unable to express an opinion on the reliability of thIS year's
.tements primarily as a result of financial management weaknesses at the Department of
~fense and the inability to track transactions among government entities. To address these and
1er weaknesses, the President's Management Agenda includes a major initiative to improve
lancial management. The Administration has taken a number of steps, including accelerating
~ delivery of audited statements, implementing quarterly and comparative reporting, and
egrating performance and financial information, that are designed to achieve the goals of
~urate and timely financial information.
Ve are not satisfied with publication of this report six months after the end of the fiscal year,"
id OMB Controller Mark Everson. "To better align our practices with those in the private
:;tor, we are accelerating the deadline for financial reporting so that by FY 2004 we wil1
Jduce a consolidated government report on December 15, in time for the Administration and
mgress to use the information to make budgetary decisions."
addition to its efforts to improve financial management in the Executive Branch, the President
s provided Congress with draft legislation, the Managerial Flexibility Act, to strengthen
dgeting for full program costs by funding the employer's share of the annual cost of all federal
nsions and retiree health benefits from the salary and expense accounts of the agencies where
1ployees work.

###

DEPARTMENT

THE

fIR]~ASURY ~~}rt:.~\
$~~V
,<,~," ..

TREASURY

NEW S

~/78~q~. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .

................................

OFFICE OF PUBUC AFFAIRS. 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C .• 20220. (202) 622-2960

~ARGOED UNTIL 11:30 A.M.
April 1, 2002

Contact:

Office of Financing
202/691-3550

TREASURY OFFERS 4-WEEK BILLS
The Treasury will auction 4-week Treasury bills totaling $19,000 million to
refund an estimated $21,000 million of publicly held 4-week Treasury bills maturing
April 4, 2002, and to pay down approximately $2,000 million.
Tenders for 4-week Treasury bills to be held on the book-entry records of
TreasuryDirect will not be accepted.
The Federal Reserve System holds $11,158 million of the Treasury bills maturing
on April 4, 2002, in the System Open Market Account (SOMA). This amount may be
refunded at the highest discount rate of accepted competitive tenders in this auction
up to the balance of the amount not awarded in today's 13-week and 26-week Treasury
bill auctions. Amounts awarded to SOMA will be in addition to the offering amount.
Up to $1,000 million in noncompetitive bids from Foreign and International
Monetary Authority (FIMA) accounts bidding through the Federal Reserve Bank of New York
will be included within the offering amount of the auction. These noncompetitive bids
will have a limit of $100 million per account and will be accepted in the order of
smallest to largest, up to the aggregate award limit of $1,000 million.
The allocation percentage applied to bids awarded at the highest c'lisc(1unt rate
will be rounded up to the next hundredth of a whole percentage point, e.g., 17.13%.
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 BookEntry Tr~asury Bills, Notes, and Bonds (31 CFR Part 356, as amended).
Details about the new security are given in the attached offering highlights.

000

Attachment

PO-2050

-2rpress releases. speeches. public schedules alld o/ficial hiographies. calf our 2.J-llOllrfax lille at (202) 622-20.JO

HIGHLIGHTS OF TREASURY OFFERING
OF 4-WEEK BILLS TO BE ISSUED APRIL 4, 2002
April 1, 2002
Offering Amount . . . . . . . . . . . . . . . . . . . . $19,000 million
Public Offering . . . . . . . . . . . . . . . . . . . . $19,000 million
NLP Exclusion Amount . . . . . . . . . . . . . . . $ 9,900 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 ...

28-day bill
912795 JS 1
April 2, 2002
April 4, 2002
May 2, 2002
November 1, 2001
$38,910 million
$1,000

Submission of Bids:
Noncompetitive bids: Accepted in full up to $1 million at the highest
discount rate of accepted competitive bids.
Foreign and International Monetary Authority (FIMA) bids:
Noncompetitive bids submitted through the Federal Reserve Banks as agents for
FIMA accounts. Accepted in order of size from smallest to largest
with no more than $100 million awarded per account.
The total noncompetitive amount awarded to Federal Reserve Banks as agents for
FIMA accounts will not exceed $1,000 million. A single bid that
would cause the limit to be exceeded will be partially accepted in
the amount that brings the aggregate award total to the $1,000
million limit. However, if there are two or more bids of equal
amounts that would cause the limit to be exceeded, each will be
prorated to avoid exceeding the limit.
Competitive bids:
(1) Must be expressed as a discount rate with three decimals in
increments of .005%, e.g., 4.215%.
(2) Net long position (NLP) 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.

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

Office of Financing
202-691-3550

April 01, 2002

RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
92 -Day Bill
April 04, 2002
July 05, 2002
912795KQ3

Term:
Issue Date:
Maturity Date:
CUSIP Number:
1.790%

High Rate:

Investment Rate 1/:

Price:

1.821%

99.543

All noncompetitive and successful competitive bidders were awarded
securities at the high rate.
Tenders at the high discount rate were
allotted 43.32%.
All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Accepted

Tendered

Tender Type
Competitive
Noncompetitive
FIMA (noncompetitive)

26,148,075
1,423,812
225,000

11,000,151 2/

27,796,887

SUBTOTAL

TOTAL

5,086,085

Federal Reserve

32,882,972

9,351,339
1,423,812
225,000

16,086,236

Median rate
1.770%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate.
Low rate
1.760%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio

27,796,887/11,000,151

2.53

1/ Equivalent coupon-issue yield.
2/ Awards to TREASURY DIRECT = $1,165,855,000

http://'tvww.publicdebt.treas.gov
0-2051

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
April 01, 2002

CONTACT:

Office of Financing
202-691-3550

RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
182 -Day Bill
April 04, 2002
October 03, 2002
912795LD1

Term:
Issue Date:
Maturity Date:
CUSIP Number:
High Rate:

2.110%

Investment Rate 1/:

2.163%

Price:

98.933

All noncompetitive and successful competitive bidders were awarded
securities at the high rate.
Tenders at the high discount rate were
allotted 10.77%.
All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tendered

Tender Type
Competitive
Noncompetitive
FIMA (noncompetitive)

26,486,350
949,906
75,000

Accepted
$

11,000,111 2/

27,511,256

SUBTOTAL

TOTAL

4,020,350

Federal Reserve
$

31,531,606

9,975,205
949,906
75,000

15,020,461

Median rate
2.090%: 50% of the amount of accepted competitive tenders
"as tendered at or below that rate.
Low rate
2.030%:
5% of the amount
)f accepted competitive tenders was tendered at or below that rate.
lid-to-Cover Ratio

27,511,256 / 11,000,111

2.50

./ Equivalent coupon-issue yield.
~/ Awards to TREASURY DIRECT = $746,479,000

http://www.publicdebt.treas.gov
-2052

DEPARTMENT

THE

fIR]~ASURY ~~}rt:.~\
$~~}
,<,~,"/

TREASURY

NEW S

......................................~i,781q~......................................
OFFICE OF PUBUC AFFAIRS. 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C .• 20220. (202) 622-2960

EMBARGOED UNTIL 9:30 A.M. EST
April 2, 2002

CONTACT: Betsy Holahan
202-622-2960

STATEMENT OF TREASURY ASSISTANT SECRETARY FOR FINANCIAL
MARKETS BRIAN ROSEBORO
ON THE DEBT LIMIT

In order to finance a number of regularly scheduled federal payment obligations, this
morning we announced two auctions for cash management bills: today for $23 billion, and
tomorrow for $23 billion.
Absent other actions, this borrowing would put the Treasury above the current statutory
debt ceiling of$5.950 trillion. Therefore, this morning Secretary O'Neill announced that
beginning on April 4, 2002 and ending on or about April 18, 2002, actions are needed to prevent
the government from hitting the debt limit.
As you know, we have forecast for months that, barring Congressional action, we would
reach the debt ceiling this spring. During the first half of April, the government must make
several monthly benefit payments, such as Social Security ($30 billion), Medicare/Medicaid ($18
billion), and civilian and military payroll ($6.4 billion). We also expect to pay $20 billion in
individual tax refunds. We are using the two cash management bills to bridge us until the tax
receipts due April 15.
Treasury has taken all prudent steps to avoid reaching the statutory debt limit, including
reducing the size of our regular bill auctions and drawing down available cash. Because
Congress has not raised the statutory debt limit, the Secretary must now exercise the Treasury's
legal authority to suspend investments in the Govenunent Securities Investment Fund (G-Fund)
for a brief period. Secretary Rubin took a similar step in 1995.
This action will not affect G-Fund beneficiaries. The G-Fund will be restored with
interest as soon as there is room under the debt ceiling to do so (i.e., after April IS). Congress
could restore the G-Fund more quickly by raising the debt ceiling.

PO-2053

The April 15 tax inflows will only postpone our breaching the debt ceiling for a few
months. At some point this summer, our projected borrowing needs will exceed the limited
flexibility that G-Fund suspension and similar strategies provide. We will be ab Ie to make a
more precise estimate after we have analyzed the tax receipts, at the end of April.
We continue to work with the Congress to enact a permanent increase in the debt limit
the Administration has requested.
-30-

Note: This letter went to Senate and House Leadership, as well as the Chair and Ranking
Member of the following committees: Sen. Banking, Sen. Govt. Affairs, Sen. Budget, Sen.
Finance, House Financial Services, House Govt. Reform, House Budget and House Ways and
Means.

April 2, 2002

The Honorable Dennis Hastert
Speaker of the House
United States House of Representatives
Washington, D.C. 20515
Dear Mr. Speaker:
Since December, I have wlitten Congress three times requesting an increase in the
statutory debt limit. Unfortunately, the debt limit has not yet been raised.
I regret that I must inform Congress that, pursuant to 5 U.S.c. § 8438(h)(2), it is
my determination that by reason of the public debt limit I will be unable to fully comply
with the requirements of 5 U.S.c. § 8438(e), beginning on April 4, 2002 and ending on or
about April 18, 2002. This statute provides for the investment of the Government
Securities Investment Fund ("G-Fund") of the Federal Employees Retirement System in
special interest-bearing Treasury securities; it also grants the Secretary of the Treasury
explicit authority to suspend this G-Fund investment to avoid breaching the statutory debt
limit. Such a suspension action was taken in 1995 by then-Treasury Secretary Rubin.
G-Fund beneficiaries are fully protected and will suffer no adverse consequences
from this action. The statute ensures that once the Secretary ofthe Treasury can make
the G-Fund whole without exceeding the public debt limit, he is to do so. Under the
governing law in this case, the G-Fund will receive complete restoration of all funds
temporarily affected by this necessary action, including full and automatic restoration of
any interest that would have been credited to the Fund. In short, the result on the G-Fund
and its beneficiaries will be the same as if this temporary action had never taken place.
I know that you share the President's and my commitment to maintaining the full
faith and credit of the U.S. government, especially at this critical time. Together we must
continue working to enact an increase in the statutory debt limit as quickly as possible to
avoid any negative repercussions at home or abroad.
Sincerely,

Paul H. O'Neill

DEPARTMENT

THE

fIR:E~ASURY ~(~t!f:.E\
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......................................

TREASURY

NEW S

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .

OFFICE OF PUBUC AFFAIRS. 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C .• 20220. (202) 622-2960

Embargoed Until 9:30 AM EST
April 2, 2002

Contact: Betsy Holahan
202-622-2960

Fact Sheet on Today's Action on the Debt Limit
Current situation:
•

The current statutory debt limit is $5,950 billion. The debt outstanding subject to
limit on April 1 was $5,928 billion. The debt subject to limit includes "Debt Held by
the Public" (57%) and "Intra-governmental Holdings of Debt" (43%). Civil service,
military retirement and Social Security account for 75% of Intra-governmental
Holdings.

•

Beginning on April 4, 2002 and ending on or about April 18, 2002, actions are needed
to prevent the government from hitting the debt limit.

•

During the first week of April, recUlTing monthly federal benefit payments and other
disbursements will exceed collections by $45 - 50 billion. Monthly recurring benefit
payments totaling more than $45 billion will be made for programs such as Social
Security ($27 billion), Medicare, and civilian and military payroll and retirement.
Tax refunds ($10 billion) and other disbursements are expected to total more than $35
billion. Tax receipts from individuals and corporations are only expected to total
about $35 billion.

Necessary Action:
•

Each year, Treasury faces seasonal cash shortages in early April in advance of tax
receipts in mid-April. Treasury needs to issue sh0l1-tenn cash management bills
(CMBs) to bridge this period. There is insufficient room under the current debt limit
to issue the needed CMBs.

•

To ensure payment of the tax refunds and recurring benefits this week, the Secretary
must draw on his statutory authority to avoid hitting the debt limit.

PO-2055
_ For press reiruses, speeches, puNft gffl,<o-viuies and official bi0!5;rJ;iJhies, cdl
,

OW"

2d -,',our}",;:; ;i:,e

,;)~' (2:)2) 622-2(NO

•

The Secretary has today notified in writing the Congress and the Executivc Director
of the Federal Retirement Thrit1 Im'estment Board of his intention to suspend
investments of securities in the Government SecUlities Investment Fund (G-Fund)
beginning on April -1. and ending on or about April 18,2002. The G-Fund is part of
the Federal Employee Retirement System (FERS).

•

As of .-\pril I. the G-Fund has investments of $-1.0 billion in ove111ight non-marketable
Treasury securities. Other FERS funds are invested in corporate bonds, S&P 500
equities. small cap equities, and foreign equities.

•

Beginning on April -1., 2002 and ending on or about April 18,2002, Treasury will
exchange between $5 - 35 billion of the S-1.0 billion in non-marketable Treasury
securities in the G-Fund for the same amount of credit balances. Consequently, debt
subject to limit will be reduced by the same amount.

•

Congress has provided the specific authority to use in this situation; it was similarly
used by the previous Administration.

•

G-Fund beneficiaries are fully protected and will experience no adverse consequences
from this action. The Secretary will recredit the G-Fund once the Treasury can do so
without exceeding the public debt limit (on or about April 18 th ). Any interest that was
not credited during that period will be immediately credited to the Fund.
Congressional action to raise the debt ceiling \vould allow the Secretary to do this
sooner.

•

The result on the G-Fund and its beneficiaries will be the same as if this temporary
action had never taken place.

History:

•

During the debt-ceiling impasse in 1985. Treasury was unable to follow its n01111al
trust fund investment and redemption policies and procedures. Treasury suspended
il1\'estment of certain trust fund receipts and redeemed some Treasury securities
issued to one trust fund earlier than n01111al to pay fund benefits.

•

In 1986. the Congress prO\'ided the Secretary of the Treasury with statutory authority
to cxchange securities in the G-Fund to prevent exceeding the debt ceiling. The
statutory reference is 5 l".S.c. 8-1.38(h)(2).

•

On :\L~\. 15. 1995. then Treasury Secretary Rubin exchanged about S 18 billion of the
:lpproximJtely S21.6 billion of Treasury securities held in the G-Fund for the same
amount of credit balances to pre\'ent exceeding the debt limit.

DEPARTMENT

THE

fIR:E~ASURY ~(f1!f:.E\
$~~)
,<,~,"/

TREASURY

NEW S

......................................~i,781q~......................................
OFFICE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C .• 20220. (202) 622-2960

EMBARGOED UNTIL DELIVERY
April 2, 2002

Contact: Tony Fratto
(202) 622-2960

SOVEREIGN DEBT RESTRUCTURING: A U.S. PERSPECTIVE
REMARKS BY JOHN B. TAYLOR
UNDER SECRETARY OF TREASURY FOR INTERNATIONAL AFFAIRS
AT THE CONFERENCE
"SOVEREIGN DEBT WORKOUTS: HOPES AND HAZARDS?"
INSTITUTE FOR INTERNATIONAL ECONOMICS
WASHINGTON, D.C.

Thank you for giving me the opportunity to speak here today. I would like to use the
opportunity to discuss U.S. policy regarding the process of sovereign debt restructuring in
emerging markets.
It is clear that refonn of this process is long overdue. There has been much useful study
and discussion since the mid-1990s when problems with the process became apparent, including
the 1996 Rey Report of the G-1 0, numerous G-7 statements since then, and most recently the
stimulating discussion of several refonn options by the International Monetary Fund. But the
time for study and discussion of options should be ending. The time for action is here.
The truth is that many emerging markets have not perfonned well in recent years.
Investment flows going through these markets have declined sharply; net private capital flows
dropped from an average of $154 billion per year from 1992 through 1997 to $50 billion per year
from 1998 through 2000. Even if you ignore the high years of 1995 and 1996, there has been a
sharp reduction. There have been too many crises, which have discouraged capital flows and
damaged the affected economies. Clearly we would like to see fewer crises. We would like to
see a sustained recovery of investment in the emerging markets along with lower interest rates.
Ultimately we would like to see the poor developing economies become truly emerging market
economies.
Currently there is a great deal of uncertainty surrounding the sovereign debt restructuring
process. When it becomes apparent that a country's sovereign debt situation is unsustainable and
a restructuring is in order, many difficult questions arise about what will happen next. What will
the debtor government do and when?
PO-2056
_ For press rele~ ~RpchRS) public u:bRdules and official biographies, call our 24-hour fax line at (202) 622·2040

. U S Government Pftntlng Ottlce 1998· 619·55<3

How will the discussion with the creditors be structured? How will the private sector
espond? Will holdout creditors upset the whole process? If a restructuring is chosen, how lon~
vill it take? Will the restructuring lead to a sustainable situation? Will creditors be treated
:quitablyand fairly? This uncertainty complicates decision-making for everyone-the private
ector, the official sector, and the sovereign government itself.
A more predictable sovereign debt restructuring process for countries that reach
msustainable debt positions would help reduce this uncertainty. It would thereby lead to better,
nore timely decisions, reducing the likelihood of crises occurring and mitigating crises that do
.ccur. Ideally sovereign debt restructurings would never have to take place, because ideally
ountries would never get into unsustainable debt situations. But we have a long way to go
.efore we get to that ideal. The aim of reforming the sovereign debt restructuring process is not
o reduce the incentives that sovereign governments have to pay their debts in full and on time.
~hose incentives-primarily the benefit of continued access to capital at reasonable interest
ates-will remain. Rather the aim is to reduce the uncertainty that now surrounds
estructurings.
Actually implementing a reform of the debt restructuring process will require a great dea
.f financial diplomacy. There are many participants in emerging markets with many different
:conomic and political interests and points of views. Practicality is essential. People have to
lnderstand clearly how the reformed process will work and why it will work better than the
urrent process.

,uidelilles for a Decentralized, Market-Oriented Approach
In our view, the most practical and broadly acceptable reform would be to have sovereigJ
,orrowers and their creditors put a package of new clauses into their debt contracts. The clauses
,ould describe as precisely as possible what happens when a country decides it has to restructur
:s debt. In this way the contracts would create a more orderly and predictable workout process.
;uch clauses represent a decentralized, market-oriented approach to reform because both the
ontracts and the workout process described by the contracts are determined by the borrowers
nd lenders on their own terms.
What should these new clauses look like? In decentralized fashion, many of the details
/Quid be determined by the borrowers and lenders as new bonds are issued, but the legal
!mplates should conform to several essential guidelines.
First, there should be a majority action clause. Currently, the clauses in many bonds
!quire the consent of 100 percent of bondholders to change the financial terms. Thus, a small
linority can prevent a restructuring that the majority of bondholders feel is in their best interest~
1 contrast, majority action clauses allow a super majority-bondholders holding, for example,
5 percent rather than 100 percent of the principal-to agree to a restructuring. The decision of
lis super majority is binding on the minority.

Thus, a majority action clause would prevent a small minority from delaying or otherwi
iisrupting an agreement and would thereby add predictability to the restructuring process.
Majority action clauses are now in sovereign bonds issued under u.K. law. However,
;overeign bonds issued under New York law generally and by tradition have no such clauses.
[here is no legal reason why such clauses could not be included.
Second, there should be a clause describing the process through which debtors and
:reditors come together in the event of a restructuring. This clause would specify how the
:reditors would be represented and what data the debtor must provide to the creditors'
-epresentative and within what period of time. The representative would be able to negotiate
Nith the debtor, and thus have more than simply administrative responsibilities such as
lccounting for and distributing payments. The representative, rather than individual
)ondholders, would have the power to initiate litigation, but would have to act with the
instructions of a certain fraction of bondholders.
Third, there should be a clause describing how the sovereign would initiate the
restructuring. It may take a period of time-perhaps several weeks-for creditors to come
together to get the relevant infonnation, choose a representative, and decide how to proceed wit
the debtor. Thus, there is a need for a "cooling off' period-between the date when the
sovereign notifies its creditors that it wants to restructure and the date that the representative is
:hosen-setting a fixed limit of, say, 60 days. During this period a temporary suspension or
jeferral of payments might be necessary, and the possibility of such a suspension or deferral
should be incorporated in the clause along with appropriate penalties. During this limited
:ooling off period, bondholders would be prevented from initiating litigation.

'mplemelltation
What is required to make this refonn happen? First, we need to work together with
emerging market countries, the official sector, and market participants to get agreement that thi~
approach is the most practical way to proceed at the current time. I hope that we can move
expeditiously towards such an agreement. Second, there may be a need to develop some
incentives to encourage borrowers and lenders to incorporate such tenns in their debt contracts.
Recent empirical work comparing bonds issued under New York, U.K., and other
lurisdictions suggests that existing differences in clauses may have only a small impact on the
lttractiveness of such bonds to individual borrowers. Nevertheless, it may be necessary to
)vercome a perception on the part of borrowers that omitting such clauses would cut a few basi!
Joints from the interest rate on sovereign debt. There are two possibilities. First, the official
:;ector could require that these clauses be used by any country that has, or is seeking, an IMF
Jrogram. Second, the official sector could provide some financial enhancement, such as slight1:
lower charges on IMF borrowing for countries that include these clauses in their debt. Such an
~nhancement would be especially useful to encourage borrowers to swap existing debt for debt
"'ith the new clauses.

Of course, this decentralized contract-based approach is not the only option that has bet
proposed for refonning the sovereign debt restructuring process. Indeed, among the options
recently presented by the IMF is a more centralized approach in which the IMF articles would 1
amended and the IMF or some newly created entity could step in and impose its decisions on tt
process. These alternative options call for a larger role for the IMF or the newly created agenc:
than the more decentralized and market-oriented approach.
A number of questions can be raised about the decentralized approach, especially when
considering alternatives. What is the scope of the debt treated by the new clauses? There is no
reason to restrict the scope of such clauses to bonded debt. It would be appropriate, for exampl
to include such clauses in bank debt along with bonded debt; indeed such clauses are already
incorporated in many syndicated bank loans. Another question concerns aggregation of all the
different bond issues and the different types of debt. In our view, it is most practical to
incorporate the majority action and other clauses into debt on an issue-by-issue or loan-by-Ioan
basis, letting any inconsistencies caused by different types of issues or jurisdictions be handled
an arbitration process for which the contracts could provide.

Part Of An Overall Strategy
This proposal for refonn of the sovereign debt restructuring process should viewed as ar
integral part of our broader strategy toward emerging markets.
That strategy starts with crisis prevention. Individual countries and the IMF must
carefully monitor and transparently report on economic conditions; when economic trends
appear unsustainable the tough decisions must be made before the crisis occurs. The refonned
restructuring process should help policy makers make those tough decisions in a timely manner
Limiting official sector support when countries reach unsustainable debt situations is als
a key element of our emerging markets strategy. Large official sector support packages for
::ountries with unsustainable debts effectively bailout private investors holding high-yield debt
Instruments. It is becoming clearer that official sector support in such cases is being limited to (
significant degree. Some have argued that additional numerical access limits should be placed
::m individual countries, but the most effective and credible way to limit official sector support il
mch situations is to reduce the incentives to provide such support. In this respect, sovereign del
restructuring refonn will go a long way to help limit official sector support in such cases. The
Jncertainty that currently exists leads to pressures for large support packages. Reducing this
Jncertainty will reduce such pressures.
Trying to keep contagion low and emphasizing that our decisions are not based on
mfounded claims of contagion is another essential part of our strategy. Early last year, we
~xamined the contagion issue carefully. We commented on the fact that market participants
.\fere paying more attention to economic fundamentals, differentiating between countries and
~vents.

We noted that these changes should reduce contagion, and, in fact, contagion has com(
down significantly during the past year even in the face of the terrible economic situation in
Argentina. To the extent that the decentralized approach to sovereign debt reform enables
market participants to more accurately predict official actions, it will focus even more attentio
on fundamentals. This too will help with the contagion problem.

Conclusion

I began this talk by stressing the need to move expeditiously to reform the process of
sovereign debt restructuring in emerging markets. I have now outlined the key elements of a
workable, decentralized, market-oriented approach to reform, which includes:
•
•
•

A package of new collective action clauses.
Guidelines for borrowers and lenders as they set the detailed terms of these clauses.
Incentives-including financial incentives-to encourage countries to adopt such claus

I hope that we can now concentrate on the implementation of this kind of reform in the
weeks and months ahead. I look forward to working with all of you on this important initiativt

DEPARTMENT

THE

TREASURY

NEW S

fIRl:~ASURY ~t.q~:,E\
$~~}
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......................................~i,781q~......................................
OFFICE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C .• 20220. (202) 622-2960

FOR IMMED IA TE RELEASE
April 2, 2002

Contact: Public Affairs
(202) 622-2960

MEDIA ADVISORY:
UNITED STATES AND BRITISH VIRGIN ISLANDS WILL SIGN TAX
INFORMATION EXCHANGE AGREEMENT ON WEDNESDAY

Treasury Secretary Paul H. O'Neill will hold the United States-British Virgin
Islands tax information exchange agreement signing ceremony at 3:30 p.m. EST on
Wednesday, April 3, 2002 in the Treasury Department's Diplomatic Reception Room
(Room 3311), 1500 Pennsylvania Avenue, NW. Treasury Secretary O'Neill, United
Kingdom Ambassador Sir Christopher Meyer and British Virgin Island Governor Frank
Savage will be signing the tax inforn1ation exchange agreement.
The Room will be available for pre-set at 2:30 p.m.
Media vvithout Treasury or \Vhite HOLlse press credentials planning to attend
should contact Treasury's Office of Public Affairs at (202) 622-2960 with the following
infom1ation: name, social security number and date of birth. This inronnation may also
be faxed to (202) 622-1999.

-30-

PO-2057

For press ':"eleases, VIr
meecheso public scft.qauies and mprini bioGYJ1:iJhies
;:::1:7 ?ur :~k:-'"mi;- ,'c:: :i.?2 ;:.;; ,'202) 52:-2C~,:D
b.>.....

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--------,-------------------------------------------------------------------------..>

DEPARTMENT

THE

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TREASURY

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~/78fq~. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .

................................

OFFICE OF PUBUC AFFAIRS. 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C .• 20220. (202) 622-2960

FOR IMMEDIATE RELEASE
April 2, 2002

CONTACT:

BETSY HOLAHAN
202-622-2960

Treasury Extends Public Comment Period on Information-Sharing Study

The Treasury Department today announced the extension of the public comment period
from April l, 2002 to May l, 2002, for the Study of Infonnation Sharing Practices
Among Financial Institutions and Their Affiliates. This study was required by Section
508 of the Gramm-Leach-Bliley Act of 1999.
The extension notice has been sent to the Federal Register for publication and is expected
to be published in the next several days.
-30-

PO-2058

For press r-??eases, s'beeckes.
-oublzc scfteduies and o/ficiai biD!5'-r:;::yhles, ::dZ 0,::- 2c;:-;'::I;;- ~~;:,
.i
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DEPARTMENT

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........................................

OFFICE OF PUBUC AFFAIRS. 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C .• 20220. (202) 622-2960

EMBARGOED UNTIL 9:00 A.M.
April 2, 2002

Contact:

Office of Financing
202/691-3550

TREASURY OFFERS CASH MANAGEMENT BILLS
The Treasury will auction approximately $23,000 million of 19-day and
$23,000 million of 12-day Treasury cash management bills.
Tenders for Treasury cash management bills to be held on the book-entry
records of TreasuryDirect will ~ be accepted.
Up to $1,000 million in noncompetitive bids from Foreign and
International Monetary Authority (FIMA) accounts bidding through the Federal
Reserve Bank of New York will be included within the offering amount of each
auction. These noncompetitive bids will have a limit of $100 million per
account and will be accepted in the order of smallest to largest, up to the
aggregate award limit of $1,000 million.
The allocation percentage applied to bids awarded at the highest
discount rate will be rounded up to the next hundredth of a whole percentage
point, e.g., 17.13%.
NOTE: Beginning with these offerings, competitive bids in all cash
management bill auctions must be expressed as a discount rate with three
decimals in increments of .005%, e.g., 7.100%, 7.105%.
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.
000

Attachment

PO-2060

For press releases,

~peeches,

public schedllles and official biographies, call ollr 2-1-llOlIr jiv.: line at (202) 622-20-10

HIGHLIGHTS OF TREASURY OFFERINGS OF CASH MANAGEMENT BILLS
April 2, 2002

Offering Amount
Public Offering
Description of Offering:
Term and type of security . . . . . . . . . . . . .
CUSIP number . . . . . . . . . . . . . . . . . . . . . . . . . .
Auction date . . . . . . . . . . . . . . . . . . . . . . . . . .
Issue date . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maturity date . . . . . . . . . . . . . . . . . . . . . . . . .
Original issue date . . . . . . . . . . . . . . . . . . .
Minimum bid amount and multiples ......

.
.
.
.
.
.
.

$23,000 million
$23,000 million

19-day bill
912795 KK 6
April 2, 2002
April 3, 2002
April 22, 2002
April 3, 2002
$1,000

12-day bill
912795 KL 4
April 3, 2002
April 4, 2002
April 16, 2002
April 4, 2002
$1,000

The following rules apply to all securities mentioned above:
Submission of Bids:
Noncompetitive bids:
Accepted in full up to $1 million at the highest discount rate of accepted
competitive bids.
Foreign and International Monetary Authority (FIMA) bids: Noncompetitive bids submitted through the
Federal Reserve Banks as agents for FIMA accounts.
Accepted in order of size from smallest to largest
with no more than $100 million awarded per account.
The total noncompetitive amount awarded to Federal
Reserve Banks as agents for FIMA accounts will not exceed $1,000 million.
A single bid that would
cause the limit to be exceeded will be partially accepted in the amount that brings the aggregate award
total to the $1,000 million limit.
However, if there are two or more bids of equal amounts that would
cause the limit to be exceeded, each will be prorated to avoid exceeding the limit.
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 (NLP) 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.
Naximum Recognized Bid at a Single Rate ... 35% of public offering
~aximum 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
By charge to a funds account at a Federal Reserve Bank on issue date.
Payment Terms:

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
April 02, 2002

Office of Financing
202-691-3550

RESULTS OF TREASURY'S AUCTION OF 19-DAY BILLS
19-Day Bill
April 03, 2002
April 22, 2002
912795KK6

Term:
Issue Date:
Maturity Date:
CUSIP Number:
High Rate:

1.780%

Investment Rate 1/:

1.807%

Price:

99.906

All noncompetitive and successful competitive bidders were awarded
,ecurities at the high rate.
Tenders at the high discount rate were
lllotted 73.32%.
All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)

Competitive
Noncompetitive
FIMA (noncompetitive)

59,320,000

23,000,410

°
°

°o

23,000,410

59,320,000

SUBTOTAL
Federal Reserve
TOTAL

Accepted

Tendered

Tender Type

°
$

59,320,000

23,000,410

Median rate
1.770%: 50% of the amount of accepted competitive tenders
,s tendered at or below that rate.
Low rate
1.740%:
5% of the amount
: accepted competitive tenders was tendered at or below that rate.
d-to-Cover Ratio = 59,320,000 / 23,000,410 = 2.58
Equivalent coupon-issue yield.

http://www . pu blicdebt. treas.gov

·2061

PUBLIC DEBT NEWS
Department of the Treasury· Bureau of the Public Debt· Washingtun, DC 20239
TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
CONTACT:

FOR IMMEDIATE RELEASE
April 02, 2002

Office of Financing
202-691-3550

RESULTS OF TREASURY'S AUCTION OF 4-WEEK BILLS
28-Day Bill
April 04, 2002
May 02, 2002
912795JS1

Term:
Issue Date:
Maturity Date:
CUSIP Number:
High Rate:

1.750%

Investment Rate 1/:

1.775%

Price:

99.864

All noncompetitive and successful competitive bidders were awarded
securities at the high rate.
Tenders at the high discount rate were
~llotted
89.51%.
All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tendered

Tender Type
Competitive
Noncompetitive
FIMA (noncompetitive)

40,113,000
32,294

18,967,852
32,294

SUBTOTAL
Federal Reserve
TOTAL

Accepted

40,145,294

19,000,146

2,051,341

42,196,635

21,051,487

Median rate
1.735%: 50% of the amount of accepted competitive tenders
tendered at or below that rate.
Low rate
1.700%:
5% of the amount
f accepted competitive tenders was tendered at or below that rate.

id-to-Cover Ratio = 40,145,294 / 19,000,146

2.11

I Equivalent coupon-issue yield.

http://www.publicdebt.treas.gov

0-2062

DEPARTMENT

THE

fIR:E~ASURY ~(f1!f:.E\
$~~)
,<,~," ..

TREASURY

NEW S

......................................~i,78~q~..................................... .
OFFICE OF PUBUC AFFAIRS. 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C .• 20220. (202) 622-2960

For Immediate Release
April 3, 2002

Contact: Tara Bradshaw
(202) 622-2014

TREASURY SECRETARY O'NEILL SIGNING CEREMONY STATEMENT
UNITED STATES AND UNITED KINGDOM SIGN AGREEMENT
TO EXCHANGE TAX INFORMATION WITH RESPECT TO THE BRITISH
VIRGIN ISLANDS
Today Treasury Secretary Paul O'Neill signed a new agreement with the United
Kingdom, including the British Virgin Islands, that will allow for exchange of
information on tax matters between the United States and the British Virgin Islands. The
agreement was signed by Treasury Secretary Paul O'Neill, United Kingdom Ambassador
Sir Christopher Meyer and British Virgin Island Governor Frank Savage.
At the signing ceremony, Treasury Secretary Paul O'Neill delivered the following
remarks:
I would like to thank you all for being here today and welcome our friends from
the United Kingdom and the British Virgin Islands, especially the Governor of the British
Virgin Islands, Mr. Frank Savage, and the British Ambassador to the United States, Sir
Christopher Meyer. I also want to extend a very warm welcome to Mr. Robert
Mathavious and Mr. Michael Riegels of the Financial Services Commission of the British
Virgin Islands.
The British Virgin Islands is one of the largest financial centers in the Caribbean
and is widely recognized as a leader in its region. The United States and the British
Virgin Islands already have a close and cooperative relationship on law enforcement
matters under our mutual legal assistance treaty. In these troubled times, cooperation
between countries is more important than ever before. As we all know, the funds
associated with illicit activities, including tenorism, money laundering, and tax evasion,
now move almost effortlessly across national boundaries. As a result, nations that are
committed to thwarting these activities must be prepared to work together.
With today's signing of a tax inforn1ation exchange agreement, the British Virgin
Islands is once again demonstrating its commitment to cooperating with the United States
on law enforcement matters.
PO-2063

_Far press relp~ JjJt-etitru, public $c~dules and official biographies, call our 24-hour fax line at (202) 622-2040
- -_ _ _ _ _ _ 4

'~------------_ _ _ _ _ _- -_ _- - - - - -_ _- -_ _- - - - - - - - - - - - - - - - -

As I ha\(: said on numerous occasions, we have an obligation to enforce our tax
la\\'s because failing to do so undennines the confidence of honest taxpayers in the
faimess of our tax system. One of the keys to enforcement of our tax laws is access to
needed inforn1ation.
Several months ago I made a public commitment, in Congressional testimony, to
expanding our network of tax information exchange relationships. We have already
made significant progress in that regard, and today's signing is another major step
fOr\vard.
I would like to take this opportunity to thank the Government of the British Virgin
Islands for coming here today and demonstrating its leadership, its commitment to
upholding international standards, and its insistence that its financial institutions are not
to be used to further illicit activities of any kind.
I hope that the British Virgin Islands' cooperation with the United States in
developing this tax infonnation exchange agreement will serve as an example to other
financial centers in the region and around the world. I look forward to convening here
again in the coming weeks to announce additional agreements with other countries.
We have already signed tax infonnation exchange agreements with the Cayman
Islands, The Bahamas, and Antigua and Barbuda. The agreements signed in the past year
are the first tax information exchange agreements that have been signed since 1992. We
are gratified with the progress that has been made with the OECD project-more than 20
countries have committed to entering into agreements providing for transparency and tax
inforn1ation exchange.

-30-

DEPARTMENT

THE

TREASURY

fIR]:~ASURY ~}rt:.~\

NEW
S
1••~~~•••••••••••••••~.t~c2't'I~~ ~v

178~q~"• • • • • • • • • • • • • • • • • • •11

OFFICE OF PUBUC AFFAIRS. 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C .• 20220. (202) 622-2960

For Immediate Release
April 4, 2002

Contact: Rob Nichols
(202) 622-2020

Deputy Treasury Secretary Kenneth W. Dam
Remarks to the Office of the General Counsel Annual Meeting
Thursday, April 4, 2002

I would like to begin my remarks today with a quote from Alexander Hamilton, our first
Treasury Secretary, and a lawyer. In a 1778 letter to New York Governor George Clinton,
Hamilton wrote:
"However important it is to give form and efficiency to your interior constitutions and
police; it is infinitely more important to have a wise general council."
He continued, "You should not beggar the councils ofthe United States ... " No wonder
Treasury now employs around 1,800 counselors!
Of course, I have taken Hamilton's words out of context. He was referring to the
Continental Congress as the "general council," spelled "C -I-L." lIe did not mean the term in the
sense of a lawyer, as much as I would like to represent that he was speaking of an early
predecessor to our colleague David Aufhauser.
Secretary O'Neill has called on all of the 160,000 men and women of the Treasury to
make this a world-class organization. Central to that goal is working toward enhancing our
productivity - giving taxpayers more and better services with less money spent. Our lawyers
have special responsibilities for helping - and risks of hindering - that progress.
Our customers, the taxpayers of the United States, deserve world-class service for their
dollars. Question: Are we providing it to them? Or to ask a question from Secretary O'Neill's
results-oriented philosophy, how we do we know if we are providing world class service?
Are we close to that goal and getting closer. or are \ve moving in the wrong direction?
We need criteria to measure our progress.

PO-2064

Allow me to propose a standard we might consider as we contemplate the meaning
'world-class" for Treasury: How do we compare to governments in other nations of the \vo
Let me offer some context. One of President Bush's most important foreign policy
initiatives this year \s his "New Compact for DevelopmenL" a plan to improve economic
conditions in less developed nations.
The neW compact increases accountability for rich and poor nations alike, linking g:
contributions from developed nations to greater responsibility by developing nations.
In March, the President announced the compact at the Inter-American Development
Bank, and the President and Secretary O'Neill expanded on the policy at the UN. ConfereI
Financing for Development in Monterrey, Mexico.
At the IDB, the President stated that "good government is an essential condition of
development.. .. Countries that live by these thIee broad standards -- rulingjust\y, investin~
their people, and encouraging economic freedom - will receive more aid from America."
He also directed Secretary O'Neill "to reach out to the world community, to develo\
of clear and concrete and objective criteria for measuring progress. And ... [to] apply these
criteria rigorously and fairly."
Ifwe are to apply rigorously and fairly the criteria that we at Treasury are responsic
developing, we must apply them to ourselves as well. Is our government, is our departmen
are the legal functions witbin our department ruling justly, investing in our people, and
encouraging economic freedom? Are we doing what we can to improve productivity?
We are, atter all, the U.S. Treasury, one of the principal economic policy and law
enforcement organizations of the United States government. We have considerable influen
these matters.
Put another way, if we applied to our own Millennium Challenge Account, would v
qualify for a grant? An interesting question, I think.
(And, by tbe way, if Congress does not act to raise the federal debt ceiling, perhaps
pertinent one.)
We are still in the early stages of defining the criteria for the new development assi:
policy, so in truth, we cannot yet apply them rigorously. But I find the speculation worthw
In order to pursue the line of inquiry, I looked at several of the many indices that measure
governance, con'uption, human rights, and rule of la\v in the developed and deve\oplIlg \\'0
So, how do we stack up?

One useful volume is the 2001-2002 Global Colllpelitivelless Report from Harvard's
Center for International Development. It uses the 2001 World Economic Forum Executive
Opinion Survey results to compare 75 nations on the basis of 140 economic and governmental
measures.
At first glance, the results are satisfying. The United States is ranked second in the
world, after Finland, for both of the aggregate indices, "growth competitiveness" and "current
competitiveness." But although we do well overall, there are a few disappointments in the
detailed listings. There are a large number of measures in which we are not in the top quintile of
rankings, and in a few cases, we are not even in the top half of all countries.
Within the categories for public sector perforn1ance and rule of law, we do relatively
well. For example, we appear in the top decile with regard to protections for real and intellectual
property rights, minimal administrative burdens for new finns, effectiveness of financial
regulation and supervision, and perceived presence of tax evasion.
On the other hand, we are not in the top 20-percent of nations ranked for some rather
important governance categories, including the business costs of corruption in government (state
and local, I hope), perceived favoritism in the decisions of public officials, presence of organized
crime, and the extent of distortive government subsidies.
But the most surprising result lies in one of the very few measures in which we fall below
even the median for the countries surveyed. We are below the halfway mark for the perception
of competence of public officials versus our private sector counterparts. Singapore ranks first.
Finland is 15 th . Nicaragua is 3ih. The United States is 41 5t out of 75 nations.
The survey is highly SUbjective, of course, and it relies on a poll of 4,600 business
leaders, not a general sample of the citizenry. Furthennore, inter-country comparisons of the
subjective data are arguably meaningless in many cases. There are countless caveats.
Nonetheless, we should heed the results.
Why does the perception of our relative competence seem to differ so much from the
perception of the relative results of our perfonnance? Our perforn1ance is far from perfect, of
course - we should be aiming for number one in every category, not merely top quartile or
quintile.
But I suspect we would qualify for our Millennium Challenge Grant, or a World Bank
loan, if we needed it - that is, we would qualify so long as we didn't send a public official to fill
out the loan application! Or so it would seem.
Part of the perceived competence gap is, without a doubt, the extraordinarily high regard
that exists for the American private sector, especially within the business community of the
world. Of the eighteen categories in which \ve score first among all countries, most describe the
tlexibility and competitiveness of American businesses and business infrastructure, such as
financial market and technological sophistication, venture capital availability, tl1l11-level
innovation, and customer service orientation.

Compared to the lightning speed and service of American businesses it is not surprisin.§
that our government can only suffer in a zero-sum comparison.
But that is of limited comfort to those of us who have spent large parts of our careers
working to understand and improve government processes. And it cuts to the core of Secretary
O'Neill's vision for this Department.
Just as we focus on enhancing infrastructure and productivity in the developing world
with our Millennium Challenge grants, we must also bring these principles to bear on our own
public sector performance. We must deliver value to the American people, not just effort.
Many economic observers, O'Neill and Greenspan among them, have said that private
productivity growth is at the root of the nearly relentless U.S. economic expansion of the past
decade.
How can we import that spirit of innovation into the public sector: How can we give
taxpayers more value for less money? Businesses do it every day, year after year - surely it
not out of our reach.

How can we, in particular, as Treasury lawyers, enable our bureaus to work faster, man
efficiently, and more effectively?
Unfortunately, lawyers are often viewed as the naysayers, indiscriminately applying the
brakes on change, regardless of its merits.
As one California Attorney General said, "An incompetent attorney can delay a tri~l
months or years. A competent attorney can delay one even longer."
But we can also use our detailed knowledge of the rules to enable innovation. For
exarr,ple, when Alexander Hamilton sought to create the first Bank of the United States, he use
his legal training to argue its constitutionality, and he succeeded.
At Treasury we have seen both success and failure in advocating a legal agenda for
progress. The Patriot Act passed expeditiously, and we have been quick to take advantage of i
in the service of the American people. On the other hand, tax simplification proposals and
indeed some tax regulations have been tied up - within the legal system -- for years.
These are questions for al1 of us to consider, especially, in Alexander Hamilton's phras
the "wise general councils" among us.
Thank you.

DEPARTMENT

THE

fIRI:~ASURY ~t).rf:.E\
$~~}
,<,~," ..

TREASURY

NEW S

.........................................:z1781q~........................................
OFFICE OF PUBUC AFFAIRS. 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C .• 20220. (202) 622·2960

EMBARGOED UNTIL 2:30 P.M.
April 4, 2002

CONTACT:

Office of Financing
202/691-3550

TREASURY OFFERS 13-WEEK AND 26-WEEK BILLS
The Treasury will auction 13-week and 26-week Treasury bills totaling $20,000
million to refund an estimated $22,634 million of publicly held 13-week and 26-week
Treasury bills maturing April 11, 2002, and to pay down approximately $2,634 million.
Also maturing is an estimated $23,000 million of publicly held 4-week Treasury bills,
the disposition of which will be announced April 8, 2002.
The Federal Reserve System holds $10,303 million of the
on April 11, 2002, in the System Open Market Account (SOMA).
refunded at the highest discount rate of accepted competitive
auctions or the 4-week Treasury bill auction to be held April
awarded to SOMA will be in addition to the offering amount.

Treasury bills maturing
This amount may be
tenders either in these
9, 2002.
Amounts

TreasuryDirect customers have requested that we reinvest their maturing holdings
of approximately $1,132 million into the 13-week bill and $930 million into the 26week bill.
The allocation percentage applied to bids awarded at the highest discount rate
will be rounded up to the next hundredth of a whole percentage point, e.g. I 17.13%.
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.
000

Attachment

PO-2065

For press teiellses, speeches, pl1blic sciledules and official iJiograpilies, caii our 24-Jirmr fax line at (202) 622-2,)4'1

HIGHLIGHTS OF TREASURY OFFERINGS OF BILLS
TO BE ISSUED APRIL 11, 2002
April 4, 2002
~~ EeE in9._Aillo!::~!:

P 11 b 1i.~_.Q f!"~~:E i wi . .
N1.P Ellclllsion Awount

---~-----------

· $10,000 million
· $10,000 million
· $ 4,700 million

$10,000 million
$10,000 million
None

· 91-day bill
· 912795 KR 1
· April 8, 2002
· April 11, 2002
· July 11, 2002
. January 10, 2002
$18,891 million
· $1,000

182-day bill
912795 LE 9
April 8, 2002
April 11, 2002
October 10, 2002
April 11, 2002

~Le::,;.~r!:.p~2..~E"~ ,?~ __()i:te£~~:
'1'~.Llll

CUSIP

anci

i~'ypEo

of security.

nUlItb",.L

Allction da t.'"
:I."sue dace.
tvIa turi t.y elate.
O~iginal lssue dat,=.
Currently outstanding
lvIinimulll bid amount and multiples.

$1,000

'rhe foll.owing rules apply to all securities mentioned above:
Submission of Bids:
Noncompetitive bids:
Accepted in full up to $1 million at the highest discount rate of accepted competitive bids.
Foreign and International Monetary Authority (FIMA) bids:
Noncompetitive bids submitted through the Federal Reserve
Banks as agents for FIMA accounts.
Accepted in order of size from smallest to largest with no more than $100
rr!lllion aHarded per account.
The total noncompetitive amount awarded to Federal Reserve Banks as agents for FIMA
accounts Hill not exceed $1,000 million.
A single bid that would cause the limit to be exceeded will
be partially accepted in the amount that brings the aggregate award total to the $1,000 million limit.
However,
if there are two or more bids of equal amounts that would cause the limit to be exceeded, each will be prorated
to avoid exceeding the limit.
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 (NLP) 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
cOlllpeti ti ve tenders.
35% of public offering
Max.p-mull1 Recognized Bid at a Single Rate.
Maxtmum Award . . . . . . . . . . . . . . . . . . . . . . . .
35% of public offering
Receipt of Tenders:
Noncompetitive tenders ..... Prior to 12:00 noon eastern daylight saving time on auction day
Competitive tenders . . . . . . . . Prior to 1:00 p.m. eastern daylight saving time on auction day
pa~ent Terms:
By charge to a funds account at a Federal Reserve Bank on issue date, or payment of full par amount
wit tender.
1'reasuryDlrect customers can use the Pay Dlrect feature WhlCh authorlzes a charge to thelr account of
recprd at their financial institution on issue date.

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
April 03, 2002

Office of Financing
202-691-3550

RESULTS OF TREASURY'S AUCTION OF 12-DAY BILLS
12 -Day Bill
April 04, 2002
April 16, 2002
912795KL4

Term:
Issue Date:
Maturity Date:
CUSIP Number:
High Rate:

1.780%

Investment Rate 1/:

1.796%

Price:

99.941

All noncompetitive and successful competitive bidders were awarded
securities at the high rate.
Tenders at the high discount rate were
allotted 15.96%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tendered

Tender Type
Competitive
Noncompetitive
FIMA (noncompetitive)

76,750,000

23,000,440

°
°

23,000,440

76,750,000

SUBTOTAL
Federal Reserve
TOTAL

Accepted

°
$

76,750,000

23,000,440

Median rate
1.765%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate.
Low rate
1.740%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio ~ 76,750,000 / 23,000,440 ~ 3.34
1/ Equivalent coupon-issue yield.

http;//www.pubJicdebt.treas.gov

PO-2066

34/04/2002 16: 01 FAX 2[2 219 4lti3

CUMMlSSlU~hNS

UfflCh

~ UU~,

uu.:

PUBLIC DEBT NEWS
)epartment of the Treasury • Bureau of the Public Debt • Washington, DC 20239

Contact: Peter Hollenbach
(202) 691-3502

FOR RELEASE AT 3:00 PM
April 4, 2002

PUBLIC DEBT ANNOUNCES ACTIVITY FOR
SECURITIES IN THE STRIPS PROGRAM FOR MARCH 2002

The Bureau of the Public Debt announced activity for the month of March 2002, of securities within the
Separate Trading of Registered Interest and Principal of Securities program (STRIPS).
Dollar Amounts in Thousands
Principal Outstanding
(Eligible Securities)

$2,060,876,051

Held in Un stripped Fonn

$1,892,490,528

Held in Stripped FOIm

$168,385,523

Reconstituted in March

$10,272,351

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 site at: www.publicdebt.treas.gov.Awide range of infonnation about the public debt and Treasury
securities is also available at the site.
000

www.publicdebt.treas.gov
PO-2067

DEPARTMENT

THE

fIR]:~ASURY ~~}rt:.~\
$~~}
,<,~,"/

TREASURY

NEW S

......................................~i,781q~......................................
OFFICE OF PUBUC AFFAIRS. 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C .• 20220. (202) 622-2960

FOR IMMEDIATE RELEASE
Sunday, April 7, 2002

Contact: Rob Nichols
(202) 622-2010

DEPUTY TREASURY SECRETARY KENNETH W. DAM
REMARKS TO THE TRILATERAL COMMISSION
"GLOBALISM AND REGIONALISM IN THE POST-DOHA
MULTILATERAL TRADING SYSTEM"
SUNDAY, APRIL 7, 2002

[Introduction. Chair: Peter Sutherland]
1 appreciate this opportunity to speak to the members of the Trilateral
Commission today, and to share the stage with such a distinguished panel.
The relationship between multilateral, regional, and bilateral trade agreements has
long been a professional interest of mine. It is also an important subject for my
colleagues in the Bush Administration.
Let me say, first off, that if anyone here feared that this Administration would turn
its back on multilateralism and the World Trade Organization, those skeptics were
clearly mistaken.
On Thursday of this past week. President Bush made a major statement calling on
the United States Senate to bring Trade Promotion Authority to the Senate floor
by April 22. This statement may not have gotten all the attention it deserved, with
the media spotlight on his decision earlier in the same day to send Secretary
Powell to the Middle East. But it was unequivocal.
The President said, "I believe strongly in trade. I believe not only is trade in my
nation's interests, 1 think trade is in the interest of those nations who struggle with
poverty, and that desire a route out of poverty." He hailed our recent work to
advance the Doha round, and the success of WTO countries represented here in
bringing both China and Taiwan into the WTO last year.
PO-2068

Far Jm!ss rel~. sf'P'd'llS puhlic ~ft/.~ and official biographies, call our 24-hour fax line at (202) 622-2040
j

'U S G"""",m"", P",,'ma

0Ii.,,,,

199B· 619-SSg

He also noted that some 250 preferential trade agreements exists in the world
today. The United States is a party to only three of these 150, considerably short
of the European Union's 31 or even Mexico's 10. And he expressed our desire to
reassert America's leadership on trade.
We view Trade Promotion Authority - the ability for the executive branch to
negotiate the details of trade agreements and then submit them to Congress for
approval in a simple up-or-down vote as an essential legislative component of our
free trade strategy. TPA would allow us to elevate our trade negotiations above
the din of interest groups that might otherwise render the process ineffectual.
All of us here agree, I am sure, on the importance of advancing global free trade.
The debate is on the best means to achieve our goal. This administration
advocates a pragmatic, multidimensional approach.
Simply put, this approach suggests that we move forward however we can,
whenever we can.
I personally would concede to Director Mike Moore that the universal,
multilateral approach would be best in an ideal world. The proliferation of
bilateral and regional deals today sometimes makes import-export administration
so complex that few entities, public or private, can manage it effectively. The
complexity is a tax in itself.
I am inclined to agree with my friend, Professor Jagdish Bhagwati, that the
present system has come to resemble a "spaghetti bowl." Also, because of the
relationship between domestic interest groups and the trade negotiation process,
trade diversion all too often prevails over trade creation in regional and bilateral
arrangements. We hope that Trade Promotion Authority in the United States will
diminish that effect because it will make it much more difficult for domestic
interest groups to carve out exceptions in their own protectionist interest.
Nonetheless, I believe regional and bilateral agreements, despite their
shortcomings, are more of a building block than a stumbling block toward global
agreements.
There are two main reasons for this conclusion.
First, regional agreements can create a competition toward trade liberalization that
extends far beyond the individual agreements themselves. Many developing
nations that are leery of diving head first into the global pool are quite eager to get
their feet wet with a free trade agreement with the United States. They don't want
to be left behind.

As nations open to the idea of freer trade, regionally and bilaterally, they become
more amenable to the global approach as well. They wann to the idea of freer
trade as they see the benefits from more limited arrangements.

Second, and perhaps most tangibly, free trade agreements induce growth
stimulating changes in developing economies that may in themselves outweigh
the costs of trade diversion, or even the benefits of trade creation. In particular,
regional agreements encourage private investment into economies that are a party
to the agreement.
This is not only because investors benefit from increased trade, but it is also
because free trade agreements generally go hand-in-hand with improved
macroeconomic policies. Moreover, they lock-in the policy improvements.
The Mexican economy since NAFT A is a wonderful example of this effect.
Mexico is now an investment-grade country, with the growing employment and
incomes that entails. NAFT A helped to make Mexico a capital-friendly place,
and capital responded.
Mexico also demonstrates that global and regional trade agreements often build
on each other, rather than excluding each other as some fear. Mexico did not
even join GAIT until 1986. It joined NAFT A and the OECD in 1994, and is now
party to about ten preferential agreements. There is every reason to believe that
Mexico will be more friendly toward the Doha round than it would have been if
there had never been a NAFT A.
The policy environment benefits of free trade agreements parallel and amplify the
Bush Administration's international aid policy, which we call the New Compact
for Development. We want aid dollars to support policy improvements in
developing countries that stimulate domestic private enterprise investment. We
believe free trade agreements advance the same cause. Indeed, trade talks can
open the doors to talks on more extensive economic reforms, as they did in
NAFTA.
In particular, I personally believe that freer trade in financial services and related
financial services sector reforms offer macroeconomic benefits for stability and
growth in developing nations. As a Treasury Department official, I plan to place
special emphasis on pursuing liberalization on this front this year.

Regardless of whether we obtain Trade Promotion Authority from the Congress
later this month, this administration intends to advance free trade worldwide,
through every means available. In the coming year, this may include several new
bilateral agreements as well as the ongoing discussions for expanding free trade
in our own hemisphere.

Certainly it will include strong support for the Doha round and close engagement
with the WTO. But we will keep every option on the table.
Some will argue that it is optimistic to suggest that regional trade agreements and
bilateral agreements are building blocks toward global trade advancement. But it
is also realistic to suggest that they are sometimes the only means available for
progress on the free trade agenda.
I look forward to discussing and perhaps debating these ideas with all of you.
Thank you.

DEPARTMENT

THE

fIR]=~ASURY ~t).t!t:.E\
$~~}
,<,~," ..

TREASURY

NEW S

~/78iq~. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .

................................

OFFICE OF PUBUC AFFAIRS. 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C .• 20220. (202) 622-2960

Contact: Tasia Scolinos
(202) 622-2960

FOR IMMEDIATE RELEASE
April 8, 2002

Treasury Signs License Unblocking Frozen Afghan Assets
Today the Treasury Department signed licenses unblocking the assets of three
Afghan entities that had been frozen under Executive Order 13129 to prevent their use by
the Taliban. The licenses, signed by Richard Newcomb, Director of Treasury's Office of
Foreign Assets Control, released $16.8 million in assets belonging to Pashtany Tejaraty
Bank, Afghan National Credit and Finance and Halmund-Arghandab Construction
Company. The licenses were issued after consultations with the new Afghan Interim
Authority (AIA) to determine that the entities were free from Taliban control.
The assets had been blocked under the 1999 Executive Order that froze all assets
associated with the Taliban regime. The Taliban, who seized control of Kabul in 1996,
were not recognized as the legitimate government of Afghanistan by the United States or
the United Nations.
"This is how the blocking system was designed to work," said Treasury Secretary
Paul O'Neill. "The blocked assets are held until a recognized regime is in place and the
funds can be directed back to the legitimate holders."

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PO-2069

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DEPARTMENT

THE

fIR1:~ASURY ~(}rt:.~\
$~~V
,<,~," ..

TREASURY

NEW S

.........................................:z1781q~........................................
OFFICE OF PUBUC AFFAIRS. 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C .• 20220. (202) 622-2960

EMBARGOED UNTIL 11: 30 A.M.
April 8, 2002

Contact:

Office of Financing
202/691-3550

TREASURY OFFERS 4 -WEEK BILLS
The Treasury will auction 4-week Treasury bills totaling $14,000 million to
refund an estimated $23,000 million of publicly held 4-week Treasury bills maturing
April 11, 2002, and to pay down approximately $9,000 million.
Tenders for 4-week Treasury bills to be held on the book-entry records of
TreasuryDirect will not be accepted.
The Federal Reserve System holds $10,303 million of the Treasury bills maturing
on April 11, 2002, in the System Open Market Account (SOMA).
This amount may be
refunded at the highest discount rate of accepted competitive tenders in this auction
up to the balance of the amount not awarded in today's 13-week and 26-week Treasury
bill auctions. Amounts awarded to SOMA will be in addition to the offering amount.
Up to $1,000 million in noncompetitive bids from Foreign and International
Monetary Authority (FIMA) accounts bidding through the Federal Reserve Bank of New York
will be included within the offer~ng amount of the auction.
These noncompetitive bids
will have a limit of $100 million per account and will be accepted in the order of
smallest to largest, up to the aggregate award limit of $1,000 million.
The allocation percentage applied to bids awarded at the highest discount rate
will be rounded up to the next hundredth of a whole percentage point, e.g., 17.13%.
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 BookEntry Treasury Bills, Notes, and Bonds (31 CFR Part 356, as amended).
Details about the new security are given in the attached offering highlights.

000

Attachment

PO-2070

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HIGHLIGHTS OF TREASURY OFFERING
OF 4-WEEK BILLS TO BE ISSUED APRIL 11, 2002
April 8, 2002
Offering Amount ..................... $14,000 million
Public Offering ..................... $14,000 million
NLP Exclusion Amount ................ $10,600 million
Description of Offering:
Term and type of security ........... 28-day bill
CUSIP number . . . . . . . . . . . . . . . . . . . . . . . . 912795 JT 9
Auction date . . . . . . . . . . . . . . . . . . . . . . . . April 9,2002
Issue date . . . . . . . . . . . . . . . . . . . . . . . . . . April 11,2002
Maturity date . . . . . . . . . . . . . . . . . . . . . . . May 9,2002
Original issue date ................. November 8,2001
Currently outstanding ............... $41,256 million
Minimum bid amount and multiples .... $1,000
Submission of Bids:
Noncompetitive bids: Accepted in full up to $1 million at the highest
discount rate of accepted competitive bids.
Foreign and International Monetary Authority (F~) bids: Noncompetitive bids submitted through the Federal Reserve Banks as agents for
FIMA accounts. Accepted in order of size from smallest to largest
with no more than $100 million awarded per account. The total noncompetitive amount awarded to Federal Reserve Banks as agents for
FIMA accounts will not exceed $1,000 million. A single bid that
would cause the limit to be exceeded will be partially accepted in
the amount that brings the aggregate award total to the $1,000
million limit. However, if there are two or more bids of equal
amounts that would cause the limit to be exceeded, each will be
prorated to avoid exceeding the limit.
Competitive bids:
(1) Must be expressed as a discount rate with three decimals in
increments of .005%, e.g., 4.215%.
(2) Net long position (NLP) 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 daylight saving t~e on auction day
Competitive tenders:
Prior to 1:00 p.m. eastern daylight saving t~e on auction day
Payment Terms: By charge to a funds account at a Federal Reserve Bank
on issue date.

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
April 08, 2002

Office of Financing
202-691-3550

RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
91-Day Bill
April 11, 2002
July 11, 2002
912795KR1

Term:
Issue Date:
Maturity Date:
CUSIP Number:
1.710%

High Rate:

Investment Rate 1/:

1.740%

Price:

99.568

All noncompetitive and successful competitive bidders were awarded
securities at the high rate.
Tenders at the high discount rate were
allotted 98.34%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tender Type

Tendered

Competitive
Noncompetitive
FIMA (noncompetitive)

SUBTOTAL

28,488,161
1,505,322
339,000

Accepted
$

30,332,483

Federal Reserve

10,000,033 2/

3,642,382

TOTAL

33,974,865

8,155,711
1,505,322
339,000

3,642,382
$

13,642,415

Median rate
1.695%: 50% of the amount of accepted competitive tenders
tendered at or below that rate.
Low rate
1.690%:
5% of the amount
)f accepted competitive tenders was tendered at or below that rate.

~as

3id-to-Cover Ratio

30,332,483 / 10,000,033

3.03

II Equivalent coupon- issue yield.

!I Awards to TREASURY DIRECT = $1,231,352,000

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
April 08, 2002

Office of Financing
202-691-3550

RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
182-Day Bill
April 11, 2002
October 10, 2002
912795LE9

Term:
Issue Date:
Maturity Date:
CUSIP Number:
High Rate:

1.975%

Investment Rate 1/:

2.022%

Price:

99.002

All noncompetitive and successful competitive bidders were awarded
securities at the high rate.
Tenders at the high discount rate were
allotted 30.00%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tender Type

Accepted

Tendered

Competitive
Noncompetitive
FIMA (noncompetitive)

25,435,300
1,239,996

SUBTOTAL

10,000,296 2/

26,675,296

Federal Reserve

3,821,260

TOTAL

8,760,300
1,239,996

30,496,556

13,821,556

Median rate
1.960%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate.
Low rate
1.940%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
3id-to-cover Ratio

26,675,296 / 10,000,296

2.67

l/ Equivalent coupon-issue yield.
2/ Awards to TREASURY DIRECT = $1,005,354,000

http://www .pu blicdebt. treas.gov
'0-2072

D EPA R T 1\1 E N T

0 F

THE

T REA SUR Y

~~/78~9~. . . . . . . . . . . . . . . . . . . . . . . . . . . .. .

............................

OmCE OF PUBUC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C. - 20220 - (202) 622-2960

Contact: I aSia Scounos
(202) 622-2960

For Immediate Release
April 8, 2002

Media Advisory
Photo Opportunity and Brief Remarks
WHA T:

Treasury Under Secretary for Enforcement Jimmy
Gurule will accept a torch from the Salt Lake City
Olympic Committee on behalf of the Treasury Law
Enforcement bureaus. Representatives from A TF,
Customs, IRS Criminal Investigations and the Secret
Service will also be present for the presentation of the
torch given in recognition of the countless hours the
bureaus invested in securing the Salt Lake City 2002
Winter Olympic Games.

WHEN:

Tuesday, April 9, 2002
2:00 p.m.

WHERE:

The Treasury Department
1500 Pennsylvania Avenue
rd
The Diplomatic Room, 3 Floor

CLEARANCE: If you are not a Treasury or White House pass holder,
You must be cleared into the Treasury Building to
attend. Please email Frances Anderson at
frances.anderson@do.treas.gov or call 202-622-2960
with you full name, date of birth and social security
PO-2073
number to receive security clearance.

For press releares. ri,beeches, public ~chedules and official biographies, call our 24-hour fax line at (202) 622-2040

_ _ _ L

•

'U S Governmenl Prtnlrng Oflrce 1998 - 619-559

DEPARTMENT

THE

TREASURY

NEWS
OffiCE OF PUBUC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASIllNGTON, D.C. - 20220 - (202) 622·2960

CONTACT: BETSY HOLAHAN
202-622-2960

FOR IMMEDIATE RELEASE
April 8, 2002

Statement of Treasury Secretary Paul O'Neill
on Need for Terrorism Risk Insurance

"There is a real and immediate need for Congress to act on terrorism insurance
legislation. The terrorist attacks on September 11 have caused many insurance companies to
limit or drop terrorist risk coverage from their property and casualty coverage - a move that
leaves the majority of American businesses extremely vulnerable. This dynamic in tum threatens
American jobs and will wreak havoc on the entire economy in the case of future attacks.

"I join the President in continuing to urge Congress to take the necessary steps to address
this issue. We cannot stand by as the lack of terrorism risk insurance becomes a significant drain
on the American economy. A fundamental necessity for a strong economy is confidence. The
lack of confidence lingers in some parts of our economy because of a lack of terrorism risk
insurance. "
Attached is a list of examples of companies and organizations facing terrorism insurance
diffiCUlties.
-30-

PO-2074

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o

)(

·U S Government Pnnllna Office 199R _ n 1Q-C,c,Q

Examples of Terrorism Insurance Difficulties

Prior to January 1st 2002, Gwinnett County, GA, in Atlanta's metropolitan area paid
approximately $349,000 for $1.8 billion of property-casualty insurance, including $300 million
of terrorism coverage. At renewal, Gwinnett secured only $500 million in property-casualty
insurance for the county's jail, police headquarters, sewage treatment plants, government center,
and other municipal buildings from its primary carrier, and only $1 million of terrorism
insurance coverage. Additionally, the county's premiums climbed to $502,000 per year.
Gwinnett County then went out and purchased a $50 million terrorism insurance policy from
Lloyds of London for $390,000.
After discussions with over 40 different insurance companies for general liability coverage, the
U.S. Olympic Committee (USOC) received quotes from only two companies just days before
the Salt Lake City Games were to begin. Both quotes excluded terrorism coverage. The day
before the Olympic Winter Games began, the USOC secured a minimal amount of terrorism risk
coverage - 5 percent of its expiring general liability limit, for the full price of the broader
coverage - a 20-fold increase in cost per dollar of coverage. The USOC is currently negotiating
a policy for 3 U.S. Olympic training sites, for an April 16 renewal. So far, it has received 5
quotes for insurance coverage, but none of them includes terrorism coverage.
The Metropolitan Transportation Authority for New York City was able to obtain only $150
million in terrorism coverage for its tunnels, bridges, and subways worth over $1.5 billion.
Terrorism insurance coverage for the Mall of America was finally re-obtained in late March.
For the real estate company, which owns the Mall and many other trophy properties, certain
coverage limits are now 1Il00th of what they were prior to January 1st. At times terrorism
coverage costs more than 10 times what all risk coverage had cost prior to January 1st. The
company is prohibited from revealing the exact price terms.
The LeFrak Organization, owner of a new large office building in Jersey City, New Jersey,
experienced difficulty obtaining mortgage financing because of the high cost of terror coverage.
Self-insurance was not an option since all of LeFrak' s lenders, including the securitization
market, required terrorism insurance. After an extensive search, LeFrak was able to obtain
terrorism coverage. But this came at a substantially higher cost - $400,000 for standard
property-casualty coverage and another $400,000 for terrorism insurance. Prior to 9/11, the
entire cost of the coverage for this building, including terrorism coverage, was $60,000.
The Golden Gate Bridge in San Francisco has lost its terrorism risk coverage. For its nonterrorism coverage, premiums recently rose from $500,000 to $1.1 million and coverage was
reduced from $125 million to $25 million. The Golden Gate Bridge District's CFO is
contemplating toll increases to pay for the premium hikes.
The United Jewish Appeal-Federation of Jewish Philanthropies of New York sponsors hospitals,
major medical teaching centers, nursing homes, and many other facilities throughout New
York State. None of these institutions has been able to obtain terrorism risk insurance.

The Newark Museum's fine arts insurance premium recently doubled, increasing from $21,000
to $42,500. According to the Museum's insurance agent, this increase was primarily due to
concerns about potential terrorism, exacerbated by the institution's proximity to New York City.
The Hyatt Corporation has purchased a site for a new office building in downtown Chicago at a
cost of roughly $400 million. The company is now trying to obtain financing for this project but
is being told that nobody will make loans without insurance for terrorism, yet adequate terrorism
insurance is unavailable. As a result, construction on the project has not been able to begin. The
project will lead to the creation of2500 jobs -- if the Hyatt Corporation can get insurance and
proceed with the project.
Amtrak was unable to obtain terrorism coverage when its $500 million property insurance
policy came up for renewal on December 1st. Terrorism coverage of that magnitude was not
available, and the amount of terrorism coverage that was available was priced so high that it was
beyond consideration. Amtrak believes that only limited amounts of terrorism coverage are
available today, and that limited coverage is at extremely high rates.
Major hotel companies, including such well-known brands as Embassy Suites, Hilton, Holiday

Inn, Hyatt, Marriott, Sheraton, Westin and others, have lost or will soon lose within the next 60
days terrorism coverage under their property insurance programs. These companies are finding
that whatever replacement terrorism insurance coverage is available is inadequate to meet their
insurance needs. These companies employ millions of Americans, including people working in
the hotels, building the hotels and all the other indirect jobs that are required to support hotel
properties.
The Cleveland Municipal School District has been notified that there will be an exclusion for
terrorist risk when its policy comes up for renewal in July. The School District is concerned that
not only will it be losing coverage for terrorism risk, but that the language of the exclusion is
written very broadly.
The Wisconsin Energy Corporation has been informed by its insurer that coverage will no
longer be available for acts of terrorism when its policy comes up for renewal in July. In seeking
to fill this void, the company has found only very limited, and extremely expensive, coverage
available from other insurance companies. With this limited coverage, the company's nonnuclear power plants would be grossly underinsured for the potential risk.
In a recent insurance renewal, Baylor University was able to get only half the coverage for
twice the price, and its terrorism risk coverage was even more limited. Last year, Baylor's
coverage was $1 billion, including terrorism coverage, for a $500,000 premium. This year, they
have several separate policies totaling $600 million in coverage, and the premium has risen to $1
million. The terrorism coverage is only $60 million.
The State of Florida is requiring all insurance policies for homeowners and small businesses to
include terror coverage. But the availability of such insurance is in jeopardy because the
insurance companies cannot obtain reinsurance on coastal commercial properties in Florida.

A prominent Las Vegas developer has been unable to obtain financing for a $2 billion project
due to lack of insurance; once financing is obtained, the project will provide 16,000 jobs.
The National Football League and individual teams and stadiums have experienced difficulty
acquiring terrorism coverage. The Miami Dolphins and New York Giants have joined the ranks
of other teams around the country that have lost terrorism coverage in the wake of the 9/11
attacks. Many teams and stadiums are faced with the choice of going "bare" or paying the
exorbitant prices being charged by insurers for minimal coverage.

DEPARTMENT

'IREASURY

THE

TREASURY

NEWS

omCE OF PUBUC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C. - 20220 - (202) 622-2960

EMBARGOED UNTIL 10 A.M. EST
April 9, 2002

CONTACT: BETSY HOLAHAN
202-622-2960

STATEMENT OF DONALD V. HAMMOND
FISCAL ASSISTANT SECRETARY
DEPARTMENT OF THE TREASURY
BEFORE THE HOUSE GOVERNMENT REFORM SUBCOMMITTEE
ON GOVERNMENT EFFICIENCY, FINANCIAL MANAGEMENT AND
INTERGOVERNMENTAL RELATIONS

FY 2001 FINANCIAL REPORT OF THE UNITED STATES GOVERNMENT

Mr. Chairman and members of the Subcommittee, I am pleased to have the opportunity
to appear before you today to discuss the Financial Report of the United States Government.
This is my fourth appearance before your subcommittee on reporting the government's financial
results and while we continue to make progress, the government still has a considerable distance
to go before the quality of its financial reporting will be equal to what the taxpayers deserve. At
times this process has been frustrating but I am optimistic that we will achieve our objective.
Your tireless pursuit of sound government financial management has been an important element
of our continued improvement.

Treasury shares your commitment to improving the state of federal financial management
and in particular reporting fmancial information that is timely, reliable and most importantly
useful. As explained more fully in the testimony ofOMB Controller Mark Everson, one of the five
government-wide initiatives in the President's Management Agenda addresses improved financial
performance. One component of this agenda item is the acceleration of the timing of agency and
government-wide financial reporting. OMB has established a deadline of November 15, 2004 for
agencies to submit their fiscal 2004 audited financial statements and December 15,2004 for the
government-wide financial statements. In support of this endeavor, the Chief Financial Officers
Council has created a Financial Statement Acceleration Committee, which I chair. The committee
has set out to identify existing agency best practices for expedited preparation and issuance of
audited financial statements as well as barriers to timely preparation.

PO-2075

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--.

·u.s

Government Printing OH,ce· 1998 - 619-559

This infonnation will be essential to making changes across government in the way that
we process financial infonnation. Accelerated reporting will finally allow adequate time to have
the fmancial statements considered in the budget process, and in time for decision-makers to fully
consider financial perfonnance in the management of their programs.
Financial Results
The Fiscal Year 2001 Financial Report was issued on March 29 th - on time for the 5th
consecutive year. The report showed a financial loss of$514.8 billion, compared with the
budget's FY 200 1 $127 billion surplus. The primary components of the difference between the
budget and accrual numbers are increases in the liability for military health liabilities of $388.6
billion, and an increase in the liability for veterans disability of $115.2 billion, both of which are
recognized as costs in FYOl. As a result, for the first time, the liability for Federal employee
(civilian and military) pension and other post retirement benefits ($3.36 trillion) exceeds the
Federal debt held by the public ($3.32 trillion). Further, the report includes an update on the
latest financial projections from the Social Security Trustees' Report, released on March 26,
about the Social Security and Medicare programs.
I highlight these items because they provide outstanding examples of the type of unique
infonnation contained ill! the Financial Report and point out the importance of disclosing these
results. Similar to the private sector, the financial statements of the Federal government are
presented on an accrual basis in accordance with generally accepted accounting principles
(GAAP). In the case of the Federal government, GAAP is developed by the Federal Accounting
Standards Advisory Board. The Financial Report presents a complete and integrated picture of
the government's assets, liabilities, cash flows and costs. The report also discloses the
Government's extensive stewardship responsibilities and commitments. As mentioned above, a
new law requiring expanded military retiree health benefits was enacted that resulted in an
increase in the government's liability for post retirement health benefits by almost $300 billion.
These benefits are payable in the future but the obligation to pay them has already been made.
Only the accrual-based Financial Report presents this government-wide consolidated infonnation
in context to the public, providing a more transparent picture of the Government's financial
operations and position.
Progress Made
Treasury is committed to producing accurate and useful governmentwide financial
statements. Reflecting this commitment, the following changes were made to improve its
usefulness and better disclose the government's activities to the Congress and the public. This
year, for the first time, the report presented comparative financial statements displaying the current
and prior years. This fonnat facilitates financial analyses and highlights trends that may be of
importance to analysts of the government's activity. In addition, we have added two new financial
statements. The Reconciliation of Net Operating Revenue/(Cost) to the Budget Surplus explains
the differences between the accrual-based loss and the budget surplUS. These differences are
generally due to liabilities or future payments being recorded in the current year's financial
statements, while the budget does not record these amounts until the payment is made.

The Disposition ofthe Budget Surplus explains how the excess cash collected over cash
payments made was used (for example, the amount ofthe budget surplus that was used to reduce
the debt held by the public). In addition, we have begun reporting costs by agency rather than
function. This is consistent with the new Presidential budget presentation and will provide a better
basis for program perfonnance analysis. It also is more understandable by the public. These
changes were made possible through the dedicated efforts of the staff of the Financial Management
Service and Treasury's accounting policy office.

GAO Opinion and Material Weaknesses
The General Accounting Office (GAO) has again given a disclaimer of opinion, but also
acknowledges that progress is being made in addressing the impediments to an opinion on the
Financial Report. Across the agencies, specific progress was noted. For example, the Department
of Agriculture and certain other key agencies made significant improvements in estimating the cost
ofthe government's lending programs and the net loan amounts expected to be collected.
Additionally, two agencies that did not receive unqualified opinions from their auditors last year
were able to do so this year. However, the serious financial management and systems problems at
the Department of Defense remain a huge obstacle in overcoming the impediments to reaching an
opinion on the government-wide report. Defense has evidenced a serious commitment to
improving the fmancial situation with Secretary Rumsfeld publicly stating that effective financial
management refonn is one of his top priorities.
With respect to those material weaknesses that are unique to the Financial Report, Treasury
is actively working with OMB and the agencies to remove them as impediments to achieving an
opinion on the Financial Report. One such weakness relates to the preparation ofthe consolidated
financial statements, and the need to establish consistency between the agency financial statements
and the compiled infonnation used for the consolidated financial statements. Treasury, in
consultation with OMB and GAO, is developing and implementing a new system and procedures
to prepare the consolidated financial statements that will directly link infonnation from the
agencies' financial statements to amounts reported in the consolidated financial statements and to
facilitate the reconciliation of net position. This new process will involve compiling information
from agency submissions taken directly from their financial statements and associated "closing
packages," with these closing packages containing the data necessary to prepare the report. In
some cases, the data will be audited as part of the audit of the agencies' financial statements. In
other cases, auditors at the agency level will provide audit assurance through the application of
agreed-upon procedures. In addition, a thorough review ofthe standard general ledger (SGL) is in
process that will verify that the SGL contains all of the accounts necessary to facilitate the
reconciliation of net position, especially between intragovernmental and public activities.
This year for the first time, FMS staff did a complete analysis of the balance sheet numbers
reported by the agencies and those reported in the statements. This work involved a detailed
comparison and crosswalk of the infonnation agencies reported on their financial statements to the
data they provided independently to FMS for the preparation of the Financial Report.

In a very encouraging sign, the analysis indicates that no line item differs by more than
$270 million and total assets of$926 billion and total liabilities of$7.4 trillion differ by $143
million and $369 million respectively. These differences are a significant improvement from
earlier years, indicate consistency of the balance sheet information and reflect the marked
improvement in the quality of the information.

Another area of recurring material weakness relates to intragovernmental activity and
balances. The government currently lacks clearly articulated business rules to ensure that agencies
record transactions with each other consistently and correctly. This makes it difficult for agencies
to reconcile balances with each other, resulting in inconsistent information being reported to
Treasury. These inconsistencies can result in total government assets, liabilities, revenues, and
expenses being misstated and raise concerns about their reliability. The problem is a data
problem as pointed out by GAO in its audit report. Beginning with Fiscal Year 2001, OMB and
Treasury required agency chief financial officers to report on the extent and results of
intragovernmental activity and balances reconciliation efforts. The inspectors general reviewed
these reports and communicated the results of their reviews to OMB, Treasury, and GAO. A
substantial number of the CFO Act agencies did not fully perform the required reconciliations for
Fiscal Year 2001 citing reasons such as (1) trading partners not providing needed data, (2)
limitations and incompatibility of agency and trading partner systems, and (3) human resources
Issues.
OMB has initiatives underway to address this data quality problem. Additionally,
business rules are currently being developed that will standardize the recording of agency
transactions with each other. Meanwhile, as part of the development of the preparation process,
Treasury is implementing a methodology that will effectively eliminate intragovernmental
activity. However, until the underlying data is accurate, there will continue to be potential
problems with the presentation of the government's activity.
Future Directions

The Treasury Department continues to develop a governmentwide accounting system that
will greatly improve the agencies' access to data, reduce redundant data reporting, and eliminate
reconciliations between the cash amounts shown on agency and Treasury books. The redesigned
system will be Internet-based and will be implemented in a modular, phased approach over the
next several years. The necessary accounting information will be captured at the initiation of the
business transaction instead of after the funds have left the Government, as is presently the case.
In addition, Treasury will provide an account statement so that agencies will know their fund
balances on a daily basis.
Treasury's Financial Management Service continues to improve our SOL based reporting
systems. Using the Federal Financial Management Improvement Act of 1996 as a base, these
systems strive to collect data needed by OMB and GAO directly from agency accounting
systems. Just as manufacturers reject components that do not meet specifications, our new
reporting systems reject reports that do not meet specifications of the U.S. Standard General
Ledger.

As agencies move toward SGL compliant accounting systems, the reports continue to improve.
The SGL and the full implementation of the SGL is a critical part of Treasury's goal to make
financial data more accessible, more available, more accurate, and more useful for management
decision-making.

Conclusion
Improving financial management and accountability is a top priority for Treasury and we
are taking a lead role. We will work closely with OMB and program agencies to raise the bar in
financial management improvements. As I mentioned earlier in my testimony, Treasury, OMB,
and GAO have reevaluated the process we use to prepare the government-wide financial
statements. Our goals include accelerating the time frames for issuing year-end audited financial
statements and moving toward the preparation of quarterly statements by program agencies. We
will also consider new ideas such as audit committees and the use of pro forma financial
statements with budget submissions. These changes will require the commitment and support of
management throughout the Federal Government. It is reasonable to expect such support since
improved financial performance is part of the President's Management Agenda.
Success will be achieved when we reliably and accurately report on the distinctly
different financial activities of many agencies of Government as if they were one entity and do
so in a time frame and a manner that is truly useful. We look forward to working together with
all affected parties to reach that end.
Thank you, Mr. Chairman. This concludes my formal remarks and I would be happy to
respond to questions.

-30-

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For Release Upon Delivery
April 17, 2002

Contact: Public Affairs
(202) 622-2960

TREASURY SECRETARY PAUL H. O'NEILL
TESTIMONY BEFORE THE
HOUSE APPROPRIATIONS COMMITTEE
SUBCOMMITTEE ON TREASURY, POSTAL SERVICE AND GENERAL
GOVERNMENT

Mr. Chainnan, Congressman Hoyer, and members of the Committee, I appreciate this
opportunity to discuss Treasury's FY 2003 budget request
As you know, Treasury plays a crucial role in the core functions of government, and
serves as tax administrator, revenue collector, law enforcer, financial manager, as well as leading
policymaker for tax policy, banking policy and international and domestic economic policy,
For FY 2003, we are proposing a performance budget that will enable Treasury to
continue to provide the American public with both the service and program reliability it expects
and deserves. I have challenged each of my bureaus to carefully examine their operations to
achieve improved effectiveness in business practices. I expect that Treasury can realize
reasonable savings from this type of review through reviewing pro grammatic efforts on a
continual basis and reducing or removing those producing little or no value.
Our budget request totals $16.654 billion for all operations. Taking into account the
offset from the proposed $250 million dedicated toward Customs commercial operations, our
program level totals $16.903 billion, compared to $16.5 billion appropriated in FY 2002, and
$14.8 billion in FY 2001.
Mr. Chainnan, the budget request includes the impact of proposed legislation for
retirement and health costs for federal employees and I will speak to that proposal later in my
statement However, I do want to note that the budget presents for the Committee the
comparative infonnation on this proposal for prior fiscal years, in order to not materially affect
the real changes being proposed and reviewed by the Committee for FY 2003,
We have provided the Committee with a detailed breakdown and justification for
Treasury's FY 2003 budget request. I would like to take the opportunity today to highlight four
important areas of focus for FY 2003.
PO-2076
_ For press relefiSes, speeches, pUhlic schedules and official biographies, call Dur 24-nour fax line at (202) 622·2040
,

'----------------------------------------------------

Treasury's FY 2003 budget recognizes the importance of, and provides adequate and
appropriate funding for, the following:

a.
b.
c.
d.
FIRST, in
Treasury's

Protecting our Nation from Terrorists and Terrorist Activity
Stewarding Change through Technological Improvement
Improving Customer Service & Compliance at the Internal Revenue Service
Achieving the President's Management Agenda
light of the recent events concerning terrorism in the U. S., I would like to discuss
role in protecting our Nation from terrorists and terrorist activity.

The tragic events of September 11, 2001 sparked a nationwide effort to prevent and
combat terrorism. Treasury has been at the forefront of these efforts with all of its law
enforcement bureaus participating in counter-terrorism functions, including internal bureau and
agency security and ensuring the continuity of operations. We bear the responsibility of
protecting the Nation on three fronts:

(a)
(b)
(c)

At its borders;
In the banks; and
At home.

Our nation's first line of defense against terrorists and terrorist activity is the security of our
borders.
Following the attacks of September 11 th, the border threat level was raised from Alert
Level 4 (normal operations) to the highest level, Alert Levell (Code Red). The United States
Customs Service, our Nation's first line of defense at 301 ports of entry into the Nation, has
made the fight against terrorism its number one priority. In response to this heightened state of
alert, Customs has hired additional personnel to staff our borders and seaports, and has engaged
members of the National Guard to increase security around our Nation's borders.
Customs received almost $400 million in new FY 2002 appropriations for addressing
homeland security matters (in addition to $65 million provided through separate presidential
releases). Of this amount, $235 million is being used for a combination of personnel and new
equipment in ports of entry on the northern border and at critical seaports, along with selected
investments on the southern land border.
Customs has set out an expenditure plan for this funding for Congressional review that
responds to both short and long-term security concerns. The recurring cost of labor-intensive
efforts will be coupled with technology investments that will increase efficiencies and enhance
the level and degree of scrutiny for various ports of entry.

The FY 2003 proposal for the U.S. Customs Service includes $365 million to fund
counter-terrorism efforts in the second year, continuing to focus principally on Northern Border
and Marine Port security efforts, but also addressing other areas of vulnerability, such as:
international money laundering, security infrastructure, southwest border staffing, and funding
for backup commercial recovery facilities. Ports of Entry (POE) have been identified as
potential entry points for terrorists as well as the most likely avenue for them to introduce
implements of terror into the country. The danger this presents has become a focus for the FY
2003 request.
In FY 2003, Customs will add 626 new positions, in addition to the 1,075 positions
allocated in FY 2002, to vulnerable locations on the northern and southern land borders, and in
seaports with the highest volume of containerized cargo. They will counter the terrorist threat
while facilitating legitimate trade and travel.
The FY 2003 request also includes a large complement of inspection and targeting
technology (including a modest research component), a further expansion of the Advance
Passenger Information System (APIS) to real-time processing capability, and technology to
expedite the passage of goods imported by highly trusted entities.
Finally, low volume Ports of Entry would be protected through "hardening" measures
including physical barriers, sensors and monitoring devices to prevent and detect unauthorized
crossings. Customs serves as the lead agency for Operations Green Quest and Shield America.
These multi-agency task forces are dedicated to: (1) identifying, disrupting, and dismantling
terrorist financing sources and systems, and (2) ensuring that munitions and sensitive U.S.
technologies are not unlawfully exported into the hands of terrorists. The FY 2003 budget
supports and maintains these critical task forces.

Equally important with protecting our Nation's borders is deterring the terrorists from being
able to finance their operations.
Treasury's Financial Crimes Enforcement Network (FinCEN), along with the Office
of Foreign Assets Control (OFAC), lead the Nation's war against global terrorism financing.
In his November 7th address at Treasury, President Bush proclaimed that "the first strike
in the war against terror targeted the terrorists/financial support. "Following the attacks,
FinCEN and OF AC were able to identify and stymie numerous supporters of the Al Qaida and
other terrorist organizations by freezing $34 million in terrorist assets and working with allies
overseas to freeze over $70 million. Funding levels proposed for FY 2003 will better enable
FinCEN to sustain and maintain these activities.
The Foreign Terrorist Asset Tracking Center (FTAT) was in the process of being
organized and staffed when the terrorist attacks of September 11 lh occurred.

In fact, the Financial Crimes Enforcement Network (FinCEN) had already been staffed
for the purpose of providing analytical support to the interagency FT AT and was supplying the
product of that staffing to the Office of Foreign Assets Control (OFAC). Immediately following
the attacks, the Treasury Department helped to accelerate the development of the interagency
FTAT by establishing a temporary operational presence within the secure environment of
FinCEN. The unit quickly began to serve as an analytical center for combating the problem of
terrorist financing.
Section 906 of the USA Patriot Act requires that the Director of the CIA, the Attorney
General and the Secretary of the Treasury jointly file a report on the "feasibility and desirability"
ofreconfiguring FTAT. I reviewed this matter along with other senior government officials,
including the Principals Committee of the National Security Council. Based on that review, a
decision was made to move and reconfigure FT AT to ensure it was fully integrated into the
ongoing terrorist financing activities of other agencies. Let me assure this Subcommittee that
Treasury will continue its leadership role in FTAT and in the broader efforts to disrupt and
dismantle terrorist financing.

While leading protection efforts on the borders and in the banks, Treasury has also
placed an increased emphasis on security within the Nation in the protection of our Nation's
leaders, foreign dignitaries and, ultimately, our Nation's freedom. The United States Secret
Service, Bureau of Alcohol, Tobacco and Firearms, and Federal Law Enforcement Training
Center are at the forefront of these efforts.
The United States Secret Service is the only federal government entity charged with the
challenging mission of protecting the President and foreign dignitaries. In response to increasing
homeland security threats, the Secret Service has been assigned new protectees and has seen
significant workload increases in its protective functions. The FY 2003 budget provides funding
to enable the Secret Service to meet its protective requirements, including funding for travel,
overtime, and follow-on costs associated with Special Agents and Uniformed Division Officers
hired in FY 2002.
Around the world, firearms and explosives are the most frequent tools of terrorist attacks.
The Bureau of Alcohol, Tobacco and Firearms is charged with enforcing Federal laws relating
to commerce in, and the criminal misuse of, firearms and explosives, and ATF's authority and
technical expertise is an integral component in fighting the Nation's war against terrorism.
Through the awareness that terrorists need funds to operate, ATF has found that illegal
commerce in alcohol and tobacco products serve as attractive and lucrative sources for
generating funds for illegal activities.
As new law enforcement officials are being recruited and hired to fulfill the various
positions critical to the Nation's war on terrorism, training for these individuals to perfonn their
duties in a safe and highly proficient manner has become an immediate necessity. The Federal
Law Enforcement Training Center (FLETC) serves as the Federal government's leading
provider of law enforcement training. FLETC currently provides training for 74 Federal Partner
Organizations, and also for state, local and international law enforcement organizations on a
reimbursable basis.

Training is provided in the most cost-effective manner by taking advantage of economies
of scale available only from a consolidated law enforcement training organization. The FY 2003
request provides funding to maintain current levels prior to the September 11 th terrorist attacks,
while also providing additional funding to support the training of new agents hired as a result of
the attacks.
SECOND, the FY 2003 budget is Treasury's continuing commitment to stewarding
change through technological improvement. This effort entails modernizing two of
Treasury's mission-critical technological systems.
The budget continues critical support for the Internal Revenue Service's computer
modernization efforts. The IRS is committed to providing excellent customer service and takes
pride in the integrity of their systems. As a result, they are continually making improvements in
operations efficiency and performance by adopting best business practices and state-of-the-art
technology.
The IRS is replacing its antiquated computer system with an information technology
capacity that is appropriate for the new century. Modernizing the agency's technology will
enable it to deliver on its pledge to provide better customer service for all.
The Business Systems Modernization effort was begun not just to keep up with modem
systems, but also because it was a necessity due to the fundamentally deficient nature of the IRS'
core data systems. The Master File system, on which all taxpayer accounts reside, is based on
outdated 1960s technology.
It is important, if the agency is to provide quick and reliable service to its customers, to
continue the ongoing shift to modem standards of technology by adopting a new architecture.
This multi-year endeavor is providing IRS with the technological tools and revamped business
processes needed to deliver first class customer service to American taxpayers and to ensure that
compliance programs are administered efficiently and fairly.

As this is the project's fourth year, much has been achieved, but the process is still
incomplete. FY 2002 and FY 2003 are key transition years for IRS Modernization efforts, as the
foundation of our Nation's tax system is being replaced, building a bridge to providing
interactive and improved customer service.
The Department's FY 2003 budget provides $450 million for the continuation of effort in
re-engineering business processes and developing new business systems to replace their
antiquated and obsolete system. This amount is $58 million above the FY 2002 enacted level of
$392 million, and $378 million above the FY 2001 enacted level of $72 million.
The budget also continues important investments initiated for the United States Customs
Service modernization effort. Illegitimate trade and contraband trafficking have been of the
utmost concern to the Department, the Administration, the Congress and the American public.

This concern was heightened due to the tragic events of September 11 th, and increased
pressure has been placed on the Customs Service to inspect all cargo entering and exiting the
United States.
The strains on the Customs Service are growing increasingly severe every day. Since the
Customs Modernization Act was passed, the value of exports has grown by 36 percent while the
value of imports has risen by 51 percent. The agency is required to cope with this sharp rise in
input and export volumes with the same outdated trade system it had when the Act was passed in
1993.
Customs is not alone in having to work with antiquated technology. We believe we are on
the right track in our efforts to modernize IRS technology and we have learned a great deal from
this experience. 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 they are equipped with the
best tools available to fulfill these goals.
In FY 2003, the Customs Service expects to process 27 million formal trade entries.
Customs is dedicated to replacing the outdated and unreliable Automated Commercial System
(ACS) with the Automated Commercial Environment (ACE). The replacement system will
enable Customs to adopt a paperless, account-based process for importers. FY 2003 marks the
third year of funding for this modernization effort.
Besides trade facilitation and compliance, ACE will play an integral role, in conjunction
with other targeting and inspection tools, in assisting Customs with the evaluation of high-risk
cargo for possible contraband as it passes the Nation's borders.
The Department's FY 2003 proposal provides for: (1) additional investments in the
automation modernization program to further develop and migrate to the Automated Commercial
Environment ($307.5 million), as well as continued funding for a government-wide trade data
interface through the International Trade Data System ($5.4 million); and (2) sufficient funding
to maintain the existing Automated Commercial System while modernization efforts are
underway.

Under the leadership of Commissioner Rossotti, the IRS has already made impressive
progress towards providing a more responsive and effective service to its customers. But there is
still more to accomplish. An inefficient tax system imposes costs on all. The longer it takes to
implement improvements, the greater the cost to the consumer and the economy.
The IRS is well down the road towards modernizing its organizational structure and
computer systems. The IRS has no intention of returning to its peak employment, recognizing
that real productivity has made the agency more effective and efficient. However, modest
staffing increases, along with improvements from systems modernization, are needed to provide
the best service in both compliance and customer service areas.
This is the ideal moment to re-engineer the agency to serve all Americans by providing
the most effective, up-to-date service possible. We must not allow this opportunity to pass us by.
During its strategic planning and budget process, the IRS identified $260 million in
requirements to improve processing, customer service and compliance across its organization as
part of its tax administration responsibilities. Using a combination of strategic redeployment of
staff and identification of labor savings programs, the IRS has been able to internally redirect
$158 million from existing resources to focus on customer service, compliance and workload
requirements.
The FY 2003 request seeks additional funding for the remaining requirement of $1 02
million needed to meet this mission-critical goal. The request supports efforts that are already
underway to improve customer service and compliance operations. Re-engineering and Quality
Improvement projects and programs are focusing on redesigning internal processes, policies and
procedures. These additional resources, in addition to the redirected resources discussed earlier,
will be realized by the American taxpayer through the following improvements:
•

•
•

Providing additional assistance and fOnTIs, schedules and new return types to its e-file
website in order to meet the Congressional goal of having 80% of all returns filed
electronic all y;
Through effective implementation of the e-file and e-services programs, the IRS will save
more than 500 FTE to be redirected to assist in achieving other parts ofthis initiative;
Hiring of lower-cost employees to handle the submission processing growth anticipated
increase from new tax returns filed, reducing the number of high cost employees needed
for compliance during filing season;
Increasing the level of telephone service to taxpayers with respect to tax law inquiries;
and
Providing almost instant access to return at Customer service sites, assisting staff in
providing top-quality customer service to business taxpayers.

The FOURTH and overridinab area of focus for this year's request, addresses Treasury's
role in becoming a results-driven organization, consistent with the President's Management
Reform Agenda.
~~~~~~,

Although it may referred to as the President's Management Agenda, the concept of the
agenda is very similar to the types of results this Committee is concerned with.
The Agenda's five areas of emphasis are:
•
•
•
•
•

Strategic Management of Human Capital;
Expanded Electronic Government;
Improved Financial Performance;
Budget and Performance Integration; and
Competitive Sourcing.

Presidential Management Initiative 1: Strategic Management of Human Capital
Treasury's most valuable and strategic asset is its employees, who are responsible for
carrying out the Department's vast array of duties which affect the lives of every American
citizen. Without the dedication and diligence of its employees, the Department would be unable
to meet the obligations placed on it by the American public. I have reemphasized the importance
of my employees and have made every effort to ensure that each employee is (1) used to their
full potential, (2) working in a safe and positive environment, and (3) providing value-added
work to the organization.
I have emphasized that organizations known for excellence are built on a foundation of
dignity and respect for its employees. The Department is focused on evaluating its work and
processes so that each and every employee feels that their work is meaningful and contributes to
the mission and objectives of the organization. In addition, because job satisfaction is a number
one priority for many employees, I am dedicated to creating a work culture of performance,
challenge, meaning, and dignity, while providing employees with flexibility to balance their
work and personal lives. Examples ofthis flexibility include tele-work and flexiplace programs,
alternative work schedules, and offering family-sensitive benefits.
In order to implement this Presidential Management Initiative, the Department is
continually reassessing its human resource strategies and support systems to strengthen the
quality of both its workforce and its management.
In the aftermath of September 11, 2001, an increasing number of Americans have
become eager to consider service opportunities in government. It is imperative that the
Department exploits this opportunity and is able to recruit the best and brightest.

As a result, innovative approaches to recruit high-caliber candidates into mission-critical
positions are underway.
A broad variety of private industries have experienced a direct correlation between
employee satisfaction and customer satisfaction. Similarly, I believe that high levels of
employee satisfaction within the portfolio of Treasury employees will lead to enhanced service
provided to its citizens, thus yielding higher customer satisfaction from both stakeholders and
servIce users.

Presidential Management Initiative 2: Expanded Electronic Government
In addition to the strategic management of human capital, the use and improvement of
information technology will assist the Department in providing solutions to common challenges
facing all areas of the Department. The benefits of these improvements will not only improve
the effectiveness of Treasury operations, but they will also produce tangible benefits for the
American public.
Treasury is currently in the process of reviewing its IT portfolio for adherence to
common standards, and updating and maintaining cost-benefit analyses for new and ongoing
systems. This will yield an integrated comprehensive enterprise architecture at the Department
level that saves money and reduces the cycle time of major products.
For example, the Internal Revenue Service continues to work towards the Congressional
goal of having 80% of all tax and information returns filed electronically by 2007. As this
method of tax filing has become more popular, the IRS has reduced processing costs
significantly per document, with less input errors and reduced handling time and storage costs as
well.
Working with the Internal Revenue Service, the Bureau of Alcohol, Tobacco and
Firearms continues to operate systems that electronically capture revenue and allow forms to be
electronically submitted for tobacco taxation collection.
In efforts to streamline human resources applications, HR Connect, which is currently
operational in six Treasury bureaus, serves as a single, integrated automated environment for
human resource operations across all Treasury bureaus. When fully operational, HR Connect
will replace the 90+ legacy stand-alone human resources systems that currently exist. HR
Connect will ultimately provide standardized information that will facilitate results-driven
decision-making.
As a highly visible agency, Treasury maintains websites that are among the most frequently
accessed, and are therefore tailored to the specific needs of its customer base - citizens,
businesses and other government agencies. The following are examples of Treasury bureau
web sites that were created with the customer in mind, while improving the cost effectiveness of
Treasury:

The U.S. Mint offers a large portion of their services, resources and products through the
Internet. Recognized as one of the top 30 "e-tailers" in the Nation in FY 2000, the Mint's Web
sales exceeded $109 million and their return on investment has reached 20%.
The Bureau of the Public Debt offers a variety of services to investors on its website.
Customers holding Treasury bills and notes in the Bureau's TreasuryDirect system can purchase
securities and reinvest their holdings at the site, or by using a touch-tone telephone. Also, Public
Debt teamed up with our Financial Management Service to offer savings bonds to the public on a
2417 basis. The Savings Bonds Direct website has generated more than $700 million in sales
since it went live in November 1999.

Presidential Management Initiative 3: Improved Financial Management
Treasury has the responsibility of principal custodian of the revenue collected and debt
issued on behalf of the Federal Government. To improve financial performance and expand
electronic government, it is imperative that the Department implement modem financial
management systems that are capable of providing timely, accurate and reliable information.
In recognizing that real-time information is much more valuable than information that is
five months old, I have challenged each of the bureaus to improve their reporting capabilities by
moving to a 3-day, monthly closing of their books by no later than July 3,2002.

Once all bureaus are implementing a 3-day, monthly close, they will be able to submit
better financial data for consolidated reporting. This will enable bureau and Department
management to make results-driven decisions, instead of spending a majority of their time
aggregating the data. This will also contribute to increased employee job satisfaction by
showing employees that the work they do contributes to the overall decision-making process.
Bureaus are also in the process of conducting internal risk assessments focusing on
payment controls, determining and investigating those areas that contain the most potential risk
for improper payments. These assessments will result in improved operational performance,
which will contribute to improved customer service.

Presidential Management Initiative 4: Budget and Performance Integration
Integrating performance information into the budget decision-making process allows
agencies to more directly focus their resource decisions on strategies and programs that produce
desired results. This effort has been evolving and ongoing for the past six years. The following
are examples of Departmental improvements in this area:
•

•

Work continues on presenting bureau measures, which address key activities using
balanced, results-oriented performance measures, and on improving the quality ofthis
data.

Presidential Management Initiative 5: Competitive Sourcing
Treasury continues its efforts in competitive sourcing, utilizing contractors whenever
necessary to meet its goals. Expanded steps are underway with each bureau, to enhance
competitive sourcing knowledge sharing and knowledge management Department-wide so that
necessary sourcing competitions can begin as soon as possible.
The Department is committed to evaluating the merits of its internal efforts, by
understanding competitive sourcing options - migrating to those outsourced options when it
makes sense for the American people based on cost and value, while retaining those specific
mission areas that are inherently governmental.
A number of the Department's bureaus rely heavily on the private sector.
•

•

At the Financial Management Service, contractors are involved in 41 % of the total
management support functions.

•

During late FY 2001 and early FY 2002, the U.S. Mint built a strategic plan that ensures
its employees focus on those critical areas of performance. They have leveraged the
actual business execution of their operations using contractors, while their core employee
base provides leadership, direction and critical business efforts.

•

IRS and the Department will study the possibilities of outsourcing some aspects of the
collection process.

Legislative Proposal on Retirement and Health Costs

Mr. Chairman, our budget includes the impact of proposed legislation for the full funding
of certain federal employee retirement and health costs. Because Treasury has the third largest
agency financial impact with the implementation of this proposal, 1'd like to provide additional
background for the Committee.
The President's FY 2003 Budget corrects a long-standing understatement of the true cost
of thousands of government programs.
For some time, the accruing charge of costs associated with the Federal Employee
Retirement System (FERS) and Military Retirement System (MRS), and a portion of the old
Civil Service Retirement System (CSRS), have been allocated to the affected salary and expense
accounts, and the remainder (a portion of CSRS, other small retirement systems, and all civilian
and military retiree health benefits) has been charged to central accounts.
The President's Budget presents the amounts associated with shifting this cost from
central accounts to affected program accounts, starting in FY 2003, predicated on the enactment
of authorization legislation. By shifting this cost to the affected salary and expense accounts,
budget choices for program managers and budget decision-makers will not distorted by
inaccurate cost information. The proposal does not increase or lower total budget outlays or alter
the surplus/deficit, since the higher payments will be offset by receipts in the pension and health
funds. This change in treatment of costs is the first in a series of steps that will be taken to
ensure that the full annual cost of resources used -- including support services, capital assets and
hazardous waste -- is charged properly in the budget presentation.
Conclusion

Mr. Chairman, let me conclude on a personal note. Since becoming Treasury Secretary
last year, I have been deeply impressed by the intelligence, professionalism and dedication of the
people with whom I have worked, and together, we are working to make this Department a
model for management and service to the American people. I hope the 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 2003 budget request to support the work of the Treasury Department in fulfilling
its wide range of responsibilities in serving the American people. I look forward to working with
you, Mr. Chairman, as well as members of the Committee and your staff, to come up with a
budget that maximizes Treasury's resources in the best interest ofthe American people and our
country.

Thank you again for giving me the opportunity to meet with you and personally present the
Department's budget. I am willing to answer any questions the Committee may have concerning
the Department's FY 2003 budget.

DEPARTMENT

TREASURY

THE

TREASURY

NEWS

~~/78~9~. . . . . . . . . . . . . . . . . . . .. .

......................

OmCE OF PUBUC AFFAIRS .1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C. • 20220 • (202) 622-2960

U.s. International Reserve Position

04/01/02

u.s.

The Treasury DepJnmem today released
reserve J.ssets data for the latest week. As indicJ.ted in this rabIe, U.S.
reserve assets totaled $67,695 million at the end of the latest week, compJ.red to 567,740 million J.t the end of the prior
week.
~

us millions)

Official U.S. Reserve Assets

March 22, 2002
67,740

TOTAL
Foreign Currency Reserves
a. Securities

Euro
5,333

Yen
10,032

Of which. issuer headquartered in the U. S.

March 29, 2002
67,695

TOTAL

Euro

15,365

5,296

Yen

TOTAL

10,045

15.341

b. Total deposits with:
b.i. Other central banks and BIS

9,180

b.ii. Banks headquartered in the U.S.

4,182

13,362

9,107

4,188

13,295
0

b.li. Of WhiCh, banks located abroad

bJii. Banks headquartered outside the U.S.

17.173

17.1?'!

10,796

10,842

11,045

11,044

b.iii. Of which, banks located in the U.S.

MF Reserve Position

3pecial Drawing Rights (SDRs)
,old Stock

lther Reserve Assets

Includes holGings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account

)~IA), valued at current market exchange rates. Foreign currency holdings listed as securities reflect marked-to-market values, and
)OSltS reflect carrying values.

The items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IIVIF and are valued in
ar terms at the official SDRJdoliar exchange rate for the reporting date. The entries in itle table above for latest week (shown in italics)
,ct any necessary adjustments, including revaluation, by the U.S. Treasury to the prior week's IrvlF data. The IIV1F data for the prior week
Rna\.

~cld stock is valued monthly at $42.:.'22:.' per fine troy ounce.

-2077

DEPARTMENT

THE

TREASURY

NEWS

TREASURY

omCE OF PUBUC AFFAIRS .1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C .• 20220 • (202) 622-2960

u.~.

International Reserve Position

04/08/02

u.s. reserve assets data for the btest week. As indicated in this table, u.s.
reserve assets totaled $67,834 million at the end of the btest week, compared to 567,696 million at the end of the prior

The Treasmy Department today rele;lsed
week.
n us millions)

Official U.S. Reserve Assets

March 29. 2002

TOTAL
Foreign Currency Reserves
a. Securities
01 which. Issuer headquartered

Euro
5,296

April 5, 2002

67,696
Yen
10,045

67,834

TOTAL

Euro

15,341

5,359

Yen

TOTAL

10,119

the US.

15,478

b. Total deposits with:
b.i. Other central banks and BIS
b.ii. Banks headquartered in the U.S.

9,107

4,188

13,295

9,206

4,219

13,425
0

b.ii. Of which, banks located abroad

0
0

b.iii. Banks headquartered outside the U.S.

0
0

17.174

17.078

10,842

10.809

11,044

11.044

b.iii. Of which. banks located in the U.S.

IMF Reserve Position

Special Drawing Rights (SDRs)
30ld Stock

)ther Reserve Assets

Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account

OMA), valued at current market exchange rates. Foreign currency holdings listed as securities reflect marked-to-market values, and
POSits reflect carrying values.

The items, "2. IMF Reserve POSition" and "3. Special Drawing Rights (SDRs)," are based on data provided by the tMF and are valued in
liar terms at the offiCial SDRJdoliar exchange rate for the reporting date. The entries in the table above for latest week (shown In Italics)
lee: any necessary adjustments, Including revaluation, by the U.S. Treasury to the pllor week's II\IF data. The II\IF data for the p"or week
! final.
Gold stock is valued 111011thly at S42.2222 per fine troy ounce.

)-2078

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

Office of Financing
202-691-3550

April 09, 2002

RESULTS OF TREASURY'S AUCTION OF 4-WEEK BILLS
28 -Day Bill
April 11, 2002
May 09, 2002
912795JT9

Term:
Issue Date:
Maturity Date:
CUSIP Number:
High Rate:

1.680%

Investment Rate 1/:

1.710%

Price:

99.869

All noncompetitive and successful competitive bidders were awarded
securities at the high rate.
Tenders at the high discount rate were
3110tted 60.18%.
All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tendered

Tender Type
Competitive
Noncompet i t i ve
FIMA (noncompetitive)

SUBTOTAL
Federal Reserve
TOTAL

Accepted

33,405,680
28,901

13,971,210
28,901

33,434,581

14,000,111

2,839,075

36,273,656

16,839,186

Median rate
1.660%: 50% of the amount of accepted competitive tenders
tendered at or below that rate.
Low rate
1.620%:
5% of the amount
: accepted competitive tenders was tendered at or below that rate .

loS

.d-to-Cover Ratio

33,434,581 / 14,000,111

2.39

, Equivalent coupon-issue yield.

http://www.publicdebt.treas.gov

1-2079

DEi-'ARTMENT

THE

TREASURY

NEWS

TREASURY

OFFICE OF PUBLIC AFFAIRS -1500 PENNSYLVANIA AVENlIE, N.W. - WASHINGTON, D.C.- 20220 _ (202) 622-2960

EMBARGOED UNTIL 9: 00 A.M.
April 9, 2002

Contact:

Office of Financing
202/691-3550

TREASURY OFFERS CASH MANAGEMENT BILLS
The Treasury will auction approximately $16,000 million of 4-day
Treasury cash management bills to be issued April 11, 2002.
Tenders for Treasury cash management bills to be held on the book-entry
records of TreasuryDirect will not be accepted.
Up to $1,000 million in noncompetitive bids from Foreign and International
Monetary Authority (FIMA) accounts bidding through the Federal Reserve Bank of
New York will be included within the offering amount of the auction.
These
noncompetitive bids will have a limit of $100 million per account and will be
accepted in the order of smallest to largest, up to the aggregate award limit
of $1,000 million.
The allocation percentage applied to bids at the highest discount rate
will be rounded up to the next hundredth of a whole percentage point, e.g.,
17.13%.

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.
000

Attachment

?O-2080

~or press releases, speeches, public schedules alld official hiographies, call our 2-1-110 II r fax line at (202) 622-20-10

HIGHLIGHTS OF TREASURY OFFERING
OF 4-DAY CASH MANAGEMENT BILLS
April 9, 2002
l£fering Amount . . . . . . . . . . . . . . . . . . . . . $16,000 million
'ublic Offering . . . . . . . . . . . . . . . . . . . . . $16,000 million
escription of Offering:
e~ and type of security . . . . . . . . . . . 4-day Cash Management Bill
USIP number . . . . . . . . . . . . . . . . . . . . . . . . 912795 KM 2
uction date . . . . . . . . . . . . . . . . . . . . . . . . April 10, 2002
ssue date . . . . . . . . . . . . . . . . . . . . . . . . . . April 11, 2002
aturity date . . . . . . . . . . . . . . . . . . . . . . . April 15, 2002
riginal issue date . . . . . . . . . . . . . . . . . April 11, 2002
urrently outstanding . . . . . . . . . . . . . . .
inimurn bid amount and multiples .... $1,000
ilimission of Bids:
)ncompetitive bids: Accepted in full up to $1 million at the highest discount
rate of accepted competitive bids.
)reign and International Monetary Authority (FIMA) bids:
Noncompetitive bids
submitted through the Federal Reserve Banks as agents for FIMA accounts.
Accepted in order of size from smallest to largest with no more than $100
million awarded per account.
The total noncompetitive amount awarded to
Federal Reserve Banks as agents for FIMA accounts will not exceed $1,000
million. A single bid that would cause the limit to be exceeded will be
partially accepted in the amount that brings the aggregate award total to the
$1,000 million limit.
However, if there are two or more bids of equal amounts
that would cause the limit to be exceeded, each will be prorated to avoid
exceeding the limit.
mpetitive 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.
timum Recognized Bid at a Single Rate ... 35% of public offering
,imum Award . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35% of public offering
:eipt of Tenders:
Icompeti ti ve tenders:
Prior to 12:00 noon eastern daylight saving time on auction day
Ipetitive tenders:
Prior to 1:00 p.m. eastern daylight saving time on auction day
~nt

Terms:
date.

By charge to a funds account at a Federal Reserve Bank on issue

DEPARTMENT

THE

TREASURY

NEWS

TREASURY

omCE OF PUBUC AFFAIRS .1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C .• 20220 • (202) 622-2960

For Immediate Release
10 April 2002

Contact Tony Fratto
202-622-2960

STATEMENT OF UNDER SECRETARY JOHN B. TAYLOR ON THE
UNITED STATES - RUSSIA BANKING DIALOGUE
MOSCOW, RUSSIA
I have come to Russia to help advance the economic side of our strategic relations as part
of the preparation for the Summit in Moscow next month. A central aim of our work on
economic issues is strengthening the environment for private investment in Russia and building
investment and trade ties between our two countries.
I have met with government officials, the new central bank governor, Duma members,
investors, small businesses, students, teachers, and bankers. My particular focus on this trip has
been the objective of expanding access to capital to a much broader range of Russian people and
businesses, especially small businesses. In particular, Russia needs a vigorous, sound banking
sector that turns its savings into investment and jobs. That is a goal both President Bush and
President Putin set for us at the Summit in Crawford, Texas. And it is a critical goal for raising
living standards all over this country.
From my discussions, including with Chainnan Ignatiev, I sense that this goal has
become a real focus ofrefonn. The people I met with want a banking system that people can
trust and that lends according to sound business principles. They also want a banking sector that
is largely private and competitive, the key to providing good service to depositors, borrowers and
the economy as a whole. In the context of these discussions we also consulted in our shared
interest in drying up the sources of terrorist finance. Both Chainnan Ignatiev and First Deputy
Finance Minister Zubcov are committed to this effOli.
I had instructive discussions with representatives of the EBRD Russia Small Business
Fund, the most successful lenders to small businesses in the country. To date, the RSBF has
made 79,000 loans in 27 regions across this country. The United States strongly supports this
fund and has just pledged additional financing to it so that it can maintain its rapid expansion.
Among my most important meetings were those with the private sector leaders of the
U.S.-Russia Banking Dialogue. This dialogue was launched at the urging of the two Presidents
at Crawford. Its work is driven and shaped by the private sector participants. They have
produced a draft report of specific, concrete refornl recommendations that build on and extend
the government's banking reforn1 strategy.

PO-20Bl

-------------------------------------------------------------------------------------_ For press rel~a~lMJ 3jJcech~, Inihlie 66h~~~es and official biographies, call our 24-hour fax line at (202) 622-2040
®

The report includes particular recommendations on t~lcilitating lending to small business.
:\s bankers and as business people that need banks, their advice is authoritative. The report is a
\'aluable and timely document. I expect it will be made public and highlighted at the time of the
Summit next month.
The Banking Dialogue represents exactly the kind of cooperative, results-oriented, and
private sector-focused effort that both President Bush and President Putin want to [ol1n the basis
of the new unique and gro\\'ing relationship between our t\VO countries.

PUBLIC DEBT NEWS
Department of the Treasury· Bureau of the Public Debt· Washington, DC 20239

TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC 0EBT - WASHINGTON DC
FOR IMMEDIATE RELEASE
April 10, 2002

CONTACT:

Office of Financing
202-691-3550

RESULTS OF TREASURY'S AUCTION OF 4-DAY BILLS
4 -Day Bill
April 11, 2002
April 15, 2002
912795KM2

Term:
Issue Date:
Maturity Date:
CUSIP Number:
High Rate:

1.710%

Investment Rate 1/:

1.734%

Price:

99.981

All noncompetitive and successful competitive bidders were awarded
securities at the high rate.
Tenders at the high discount rate were
allotted
1.12%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tender Type
Competitive
Noncompetitive
FIMA (noncompetitive)

SUBTOTAL

50,470,000

16,000,200

o
o

50,470,000

16,000,200

Federal Reserve
TOTAL

Accepted

Tendered

50,470,000

°
$

16,000,200

Median rate
1.670%: 50% of the a~ount of accepted competitive tenders
was tendered at or below that rate.
L~)w rate
1.650%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-cover Ratio = 50,470,000 / 16,000,200 = 3.15

11 Equivalent coupon-issue yield.

http://www.publicdebt.treas.gov

PO-2082

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For Immediate Release
April 11,2002

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Rob Nichols
202-622-2910

STATEMENT OF DEPUTY TREASURY SECRETARY KENNETH W. DAM
ON THE NEED FOR TRADE PROMOTION AUTHORITY
"One week ago, President Bus'n made a major statement calling on the United States
Senate to bring Trade Promotion Al~n:ority (TPA) to the Senate floor by April 22. This statement
may not have gotten all the attentior it deserved, with the media spotlight on his decision earlier
in the same day to send Secretary Powell to the Middle East. But it was unequivocal.
"The President said, 'I believe strongly in trade. I believe not only is trade in my nation's
interests, I think trade is in the interest of those nations who struggle with poverty, and that
desire a route out of poverty.' He hailed our recent work to advance the Doha round, and the
success ofWTO cOllntries represented here in bringing both China and Taiwan into the WTO
last year.
"He also noted that some 150 preferential trade agreements exist in the world today. The
United States is a party to only three of these 150, considerably short of the European Union's 31
or even Mexico's 10. And he expres:,ed Ollr desire to reassert America's leadership on trade.
"We view Trade Promotion A~lthority - the ability for the executive branch to negotiate
the details of trade agreements and then submit them to Congress for approval in a simple up-ordown vote as an essential legislative ( )mponent of our free trade strategy.
"This administration intends to advance free trade worldwide, through every means
available."
-30-

PO-2083

--------~~----- ..

---.

Forpress relef'IJru, 3peecho, publicsM6'4zties and official biographies, call our 24-hOlwfax line at (202) 622-2040
~~---,

.u S

- -

G0vernment Pnntlng Office 1998 - 619-559

DEPARTMENT

THE

TREASURY

NEWS

TREASURY

omCE OF PUBUC AFFAIRS .1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C .• 20220 • (202) 622-2960

EMBARGOED UNTIL 2: 30 P. M.
April 11, 2002

CONTACT:

Office of Financing
202/691-3550

TREASURY OFFERS 13-WEEK AND 26-WEEK BILLS
The Treasury will auction 13-week and 26-week Treasury bills totaling $20,000
million to refund an estimated $24,134 million of publicly held 13-week and 26-week
Treasury bills maturing April 18, 2002, and to pay down approximately $4,134 million.
Also maturing is an estimated $19,000 million of publicly held 4-week Treasury bills,
the disposition of which will be announced April"15, 2002.
The Federal Reserve System holds $10,929 million of the
on April 18, 2002, in the System Open Market Account (SOMA).
refunded at the highest discount rate of accepted competitive
auctions or the 4-week Treasury bill auction to be held April
awarded to SOMA will be in addition to the offering amount.

Treasury bills maturing
This amount may be
tenders either in these
16, 2002. Amounts

Up to $1,000 million in noncompetitive bids from Foreign and International
Monetary Authority (FIMA) accounts bidding through the Federal Reserve Bank of New
York will be included within the offering amount of each auction.
These
noncompetitive bids will have a limit of $100 million per account and will be accepted
in the order of smallest to largest, up to the aggregate award limit of $1,000
million.
TreasuryDirect customers have requested that we reinvest their maturing holdings
of approximately $~84 million ~nto the 13-week bill and $576 million into the 26-week
bill.

The allocation percentage applied to bids awarded at the highest discount rate
will be rounded up to the next hundredth of a whole percentage point, e.g., 17.13%.
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.
000

Attachment

PO-2084

_For press releases, speeches, public schedules and ojjicial biographies. tail our ].f-hour fa.\: line at (202) 622-204{)

HIGHLIGHTS OF TREASURY OFFERINGS OF BILLS
TO BE ISSUED APRIL 18, 2002
April 11, 2002
Offering Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10,000 million
Public Offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10,O~0 million
NLP Exclusion Amount . . . . . . . . . . . . . . . . . . . . . . . . $ 4,500 million
Description of Offering:
Term and type of security . . . . . . . . . . . . . . . . . . . 91-day bill
CUSIP nwnber . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 912795 KS 9
Auction date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . April IS, 2002
Issue date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . April 18, 2002
Maturi ty date . . . . . . . . . . . . . . . . . . . . . . . . . . . . " . July 18, 2002
Original issue date . . . . . . . . . . . . . . . . . . . . . . . . . January 17, 2002
Currently outstanding . . . . . . . . . . . . . . . . . . . . . . . $17,643 million
Minimum bid amount and multiples . . . . . . . . . . . . $1,000

$10,000 million
$10,000 million
None

182-day bill
912795 LF 6
April IS, 2002
April 18, 2002
october 17, 2002
April 18, 2002
$1,000

The following rules apply to all securities mentioned above:
Submission of Bids:
Noncompetitive bids:
Accepted in full up to $1 million at the highest discount rate of accepted competitive bids.
Foreign and International Monetary Authority (FIMA) bids: Noncompetitive bids submitted through the Federal Reserve
Banks as agents for FIMA accounts. Accepted in order of size from smallest to largest with no more than $100
million awarded per account.
The total noncompetitive amount awarded to Federal Reserve Banks as agents for FlMA
accounts will not exceed $1,000 million. A single bid that would cause the limit to be exceeded will
be partially accepted in the amount that brings the aggregate award total to the $1,000 million limit.
However,
if there are two or more bids of equal amounts that would cause the limit to be exceeded, each will be prorated
to avoid exceeding the limit.
Competitive bids:
(I) Must be expressed as a discount rate with three decimals in increments of .005%, e.g., 7.100%, 7.105%.
(2) Net long position (NLP) 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.
M~imum Recognized Bid at a Single Rate ........ 35% of public offering
M~imum Award . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35% of public offering
R~eipt of Tenders:
Noncompetitive tenders ..... Prior to 12:00 noon eastern daylight saving time on auction day
Competitive tenders . . . . . . . . Prior to 1:00 p.m. eastern daylight saving time on auction day
P~ent 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
r~cord at their financial institution on issue date.

DEPARTMENT

THE

TREASURY

NEWS

TREASURY

omCE OF PUBUC AFFAIRS .1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C .• 20220 • (202) 622-2960

Contact: Tara Bradshaw
(202) 622-2014

April 12,2002
For Immediate Release

TREASURY HELPS SlYIALL BUSINESSES USE
THE CASH lYIETHOD OF ACCOUNTING

Today the Treasury Department announced that more small businesses will be able to use the
cash method of accounting. Revenue Procedure 2002-28 finalizes the previously mmounced
guidelines to allow certain taxpayers with average annual gross receipts of $10 million or less to
use the cash method if they meet certain requirements.
On March 19, 2002, President Bush called on Treasury to finalize these rules in short order
when he unveiled his Plan for Small Businesses.
"This is great news for small business taxpayers," stated Mark Weinberger, Treasury
Assistant Secretary for Tax Policy. "We are simplifying the bookkeeping requirements for small
businesses. These rules will save small businesses time and money and will reduce controversy
with the IRS."
Generally, under the cash method, a business reports income and deducts expenses when the
related payments occur. Under an accrual method, a business generally reports income when it
has a right to receive payment and deducts expenses when it has a fixed and determinable
liability for them.
These rules will be most beneficial to service providers that also sell related products or
provide goods incident to the performance of services.
The text of Revenue Procedure 2002-28 is attached.

-30-

PO-2085

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Part III
Administrative, Procedural, and Miscellaneous

26 CFR 601.204: Changes in accounting periods and methods of accounting.
(Also Part 1 §§, 162, 263A, 446, 447,448,460,471,481,1001; l.162-3, 1263A-1, 1.446-1,
1.448-1T, 1.460-1, 1.471-1, 1.481-1, 1.481-4, l.1001-1.)

Rev. Proc. 2002-28
SECTION 1. PURPOSE
In order to reduce the administrative and tax compliance burdens on certain small
business taxpayers and to minimize disputes between the Internal Revenue Service and small
business taxpayers regarding the requirement to use an accrual method of accounting (accrual
method) under § 446 of the Internal Revenue Code because of the requirement to account for
inventories under § 471, this revenue procedure provides that the Commissioner ofInternal
Revenue will exercise his discretion to except a qualifying small business taxpayer (as defined in
section 5.01 of this revenue procedure) from the requirements to use an accrual method of
accounting under § 446 and to account for inventories under § 471. This revenue procedure also
provides the procedures by which a qualifying small business taxpayer may obtain automatic
consent to change to the cash receipts and disbursements method of accounting (cash method)
and/or to a method of accounting for inventOliable items as materials and supplies that are not
incidental under § 1.162-3 of the Income Tax Regulations.
SECTION 2. BACKGROUND
.01 Section 446(a) provides that taxable income must be determined under the method of
accounting on the basis of which the taxpayer regularly computes its income in keeping its
books.

.02 Section 446( c) generally allows a taxpayer to select the method of accountinab it will use to
compute its taxable income. A taxpayer is entitled to adopt anyone of the pennissible methods
for each separate trade or business, including the cash method or an accrual method, subject to
certain restrictions. For example, § 446(b) provides that the selected method must clearly reflect
income. In addition, § 1.446-1 (c )(2)( i) requires that a taxpayer use an accrual method with
regard to purchases and sales of merchandise whenever § 471 requires the taxpayer to account
for inventories, unless otherwise authorized by the Commissioner under § 1.446-1 (c)(2)(ii).
Under § 1.446-1 (c)(2)(ii), the Commissioner has the authority to pennit a taxpayer to use a
method of accounting that clearly reflects income even though the method is not specifically
authorized by the regulations .
.03 Section 447 generally requires the taxable income from fanning of a C corporation engaged
in the trade or business of fam1ing, or a partnership engaged in the trade or business of farming
with a C corporation partner, to be determined using an accrual method, unless the C corporation
meets the $1,000,000 ($25,000,000 for family corporations) gross receipts test.
.04 Section 448 generally prohibits the use of the cash method by a C corporation (other than a
faIming business and a qualified personal service corporation) and a partnership with a C
corporation partner (other than a farming business and a qualified personal service corporation),
unless the C corporation or partnership with a C corporation partner meets a $5,000,000 gross
receipts test. Section 448 also prohibits tax shelters from using the cash method .
.05 The cash method generally requires an item of income to be included in income when
actually or constructively received and permits a deduction for an expense when paid. Section
1.446-1 (c)(1)( i). Other provisions of the Code or regulations applicable to cash method
taxpayers may change these general rules, including, for example, § 263 (requiring the
capitalization of expenses paid out for a new building or for pennanent improvements or
bettennents made to increase the value of any property or estate, or for restoring property or
making good the exhaustion of property for which an allowance is or has been made): § 263A
(requiring capitalization of direct and :1ilocable indirect costs of re:11 or tangible personal
property produced by a taxpayer or re::ll or personal propeny th:1t is :1cquired by a taxpayer for

.. _ 3

resale); § 460 (requiring the use of the percentage-of-completion method for certain Ion ba-term
contracts); and § 475 (requiring dealers in securities to mark securities to market) .
.06 Section 471 provides that whenever, in the opinion of the Secretary, the use of inventories
is necessary to clearly determine the income of the taxpayer, inventories must be taken by the
taxpayer. Section 1.471-1 generally requires a taxpayer to account for inventories when the
production, purchase, or sale of merchandise is an income-producing factor in the taxpayer's
business .
.07 Section 1.162-3 requires taxpayers carrying materials and supplies (other than incidental
materials and supplies) on hand to deduct the cost of materials and supplies only in the amount
that they are actually consumed and used in operations during the taxable year. In the case of
incidental materials and supplies on hand for which no record of consumption is kept or of which
physical inventories at the beginning and end of the year are not taken, taxpayers may include in
their expenses and deduct from gross income the total cost of such incidental supplies and
materials as were purchased during the taxable year for which the return is made, provided the
taxable income is clearly reflected by this method .
.08 Section 263A generally requires direct costs and an allocable portion of indirect costs of
certain property produced or acquired for resale by a taxpayer to be included in inventory costs,
in the case of propeliy that is inventory, or to be capitalized, in the case of other property.
However, resellers with gross receipts of $10,000,000 or less are not required to capitalize costs
under § 263A, and certain producers with $200,000 or less of indirect costs are not required to
capitalize certain costs under § 263A. See §§ 263A(b)(2)(B) and 1.263A-2(b)(3)(iv) .
.09 Sections 446( e) and 1.446-1 (e) state that, except as otherwise provided, a taxpayer must
secure the consent of the Commissioner before changing a method of accounting for federal
income tax purposes. Section 1.446-1 (e )(3 )(ii) authorizes the Commissioner to prescribe
administrative procedures setting forth the limitations, tem1S, and conditions deemed necessary
to permit a taxpayer to obtain consent to change a method of accounting in accordance with §
446( e) .
. 10 Section 481 (a) requires those adjustments necessary to prevent amounts from being
duplicated or omitted to be taken into account when the taxpayer's taxable income is determined

under a method of accounting different from the method used to determine taxable income tor
the preceding taxable year.
SECTION 3. SCOPE

.01 Applicability. This revenue procedure applies to a qualifYing small business taxpayer as
defined in section 5.0 l.

.02 Taxpayers Not within the Scope of this Revenue Procedure.
Notwithstanding section 3.01 of this revenue procedure, this revenue procedure does not
apply to a farming business (within the meaning of § 263A( e)( 4» of a qualifYing small business
taxpayer. If a qualifYing small business taxpayer is engaged in the trade or business of farming,
this revenue procedure may apply to the taxpayer's non-farming trades or businesses, if any. A
taxpayer engaged in the trade or business of farming generally is allowed to use the cash method
for any farming business, unless the taxpayer is required to use an accrual method under § 447 or
is prohibited from using the cash method under § 448.
SECTION 4. QUALIFYING SMALL BUSINESS TAXPAYER EXCEPTION
.01 Pursuant to his discretion under §§ 446 and 471, and to simplifY the record keeping
requirements of a qualifYing small business taxpayer, the Commissioner, as a matter of
administrative convenience, will allow a qualifYing small business taxpayer to use the cash
method as described in this revenue procedure for a trade or business described in this section
4.01 (eligible trade or business).

(1) A qualifying small business taxpayer may use the cash method as described in this
revenue procedure for all of its trades or businesses if the taxpayer satisfies anyone of the
following three tests and did not previously change (and was not previously required to have
changed) from the cash method to an accrual method for any trade or business as a result of
becoming ineligible to use the cash method under this revenue procedure.
(a) The taxpayer reasonably determines that its principal business activity (as defined in
section 5.04, below) is described in a North American Industry Classification System (""NAICS")
code other than one of the ineligible codes listed below. The ineligible NAICS codes are as
follows:
(i) minim~ activities within the me:ming ofN,-'JCS codes 211 and 212:

(ii) manufacturing within the meaning ofNAlCS codes 31 - 33;
(iii) wholesale trade within the meaning of NAICS code 42;
(iv) retail trade within the meaning ofNAICS codes 44 and 45; and,
(v) information industries within the meaning ofNAICS codes 5111 and S122.
lnfornlation regarding the NAICS codes can be found at www.census.gov.
Visitors to the site should select "Subjects A to Z," followed by "N," and then should select
"North American Industry Classification System." Taxpayers also may find a partial list of
NAICS codes, described as "Principal Business Activity Codes," in the instructions to their tax
return forms.
(b) Notwithstanding that a taxpayer's principal business activity is described in one of the
ineligible NAICS codes listed above in section 4.01(1)(a), the taxpayer reasonably determines
that its principal business activity is the provision of services, including the provision of property
incident to those services.
(c) Notwithstanding that a taxpayer's principal business activity is described in one of the
ineligible NAICS codes listed above in section 4.01 ( 1)( a), the taxpayer reasonably determines
that its principal business activity is the fabrication or modification of tangible personal property
upon demand in accordance with customer design or specifications. For purposes of this rule,
tangible personal property is not fabricated or modified in accordance with customer design or
specifications if the customer merely chooses among pre-selected options (such as size, color, or
materials) offered by the taxpayer or if the taxpayer must make only minor modifications to its
basic design to meet the customer's specifications. Moreover, a taxpayer that manufacturers an
item in quantities for a customer is not treated as fabricating or modifying tangible personal
property in accordance with customer design or specifications.
(2) Under current law, a taxpayer with two or more trades or businesses that has a trade or
business that is pern1itted to use the cash method may use such method for such trade or
business. Therefore, notwithstanding that a taxpayer's principal husiness activity is not
described above in section ..J..O 1( I) and thus the taxpayer can

110t

use the cash method for all of it::;

trades or businesses, a taxpayer may use the cash method with respect to any separate and
distinct trade or business if the principal business acti'iity of the trJde or business is not described

in an ineligible NAICS code in section 4.01(l)(a)(i) through (v) or is described in either section
4.01(l)(b) or section 4.01(1)(c). No trade or business will be considered separate and distinct
unless a complete and separable set of books and records is kept for such trade or business. See

§ 1.446-1 (d)(2) .
.02 A taxpayer who satisfies the qualifying small business taxpayer exception described in
section 4.01 and chooses not to use an overall accrual method with inventories beina
accounted
b
for under § 471 has the following three options for an eligible trade or business under this
revenue procedure:
(1) The taxpayer can use the overall cash method and account for inventories under § 471;
(2) The taxpayer can use an overall accrual method and account for inventoriable items, as
defined in section 5.09 below, in the same manner as materials and supplies that are not
incidental under § 1.162-3 (see sections 4.04 and 4.05 below); or
(3) The taxpayer can use the overall cash method and account for inventoriable items in the
same manner as materials and supplies that are not incidental under § l.162-3 (see sections 4.04
and 4.05 below) .
.03 Notwithstanding § 1001 and the regulations thereunder, qualifying small business
taxpayers that use the cash method for an eligible trade or business under section 4.01 of this
revenue procedure shall include amounts attributable to "open accounts receivable" (as defined
in section 5.10) in income as such amounts are actually or constructively received. However, §
1001 may be applicable to other transactions .
.04 Qualifying small business taxpayers that are permitted to use the cash method for an
eligible trade or business under section 4.01 of this revenue procedure and that do not want to
account for inventories under § 471 must treat all inventoriable items in such trade or business in
the same manner as materials and supplies that are not incidental under § l.162-3. For purposes
of this revenue procedure, taxpayers are not required to apply § 263A to inventoriable items that
are treated as materials and supplies that are not incidental. Items that would be accounted for as
incidental materials and supplies for purposes of § 1.162-3 may still be accounted for in chat
manner Whether an item is Durchased for resale or use (and thus accounted for as a non•

incidental material and supply) or is purchased to provide to customers incident to services (and

thus may be accounted for as either an incidental or a non-incidental material and supply
depending on the facts and circumstances) must be determined under general tax principles .
.05 Under § 1.162-3, materials and supplies that are not incidental are deductible only in the
year in which they are actually consumed and used in the taxpayer's business. For purposes of
this revenue procedure, inventoriable items that are treated as materials and supplies that are not
incidental are consumed and used in the year the qualifying small business taxpayer provides the
items to a customer. Thus, the cost of such inventoriable items are deductible only in that year,
or in the year in which the taxpayer actually pays for the goods, whichever is later. A qualifying
small business taxpayer may determine the amount of the allowable deduction for non-incidental
materials and supplies by using either a specific identification method, a first in, tirst out (FIFO)
method, or an average cost method, provided that method is used consistently. See § 1.4712(d). A taxpayer may not use the last in, first out (UFO) method described in § 472 and the
regulations thereunder to determine the amount of the allowable deduction for non-incidental
materials and supplies .
.06 The method of accounting used by a qualifying small business taxpayer for financial
accounting ("book") purposes will not atTect the taxpayer's eligibility under this revenue
procedure to use the cash method or the method of accounting for invcntoriable items as nonincidental materials and supplies under § 1.162-3. However, taxpayers must still comply with
the requirements under § 446( a) and the regulations thereunder to maintain adequate books and
records, which may include a reconciliation of any differences between such books and records
and their return. See § 1.446-1 (a)(4).

SECTION 5. DEFINITIONS

.0 1 Quaiifj1ing Small Business Taxpayer. A qualifying small business taxpayer is any taxpayer
with "average armual gross receipts" of $10,000,000 or less that is not prohibited from using the
cash method under § 448 .
.02 Average Annual Gross Receipts. A taxpayer has average annual gross receipts of

:510,000,000 or less if: for each prior taxable year ending on or after December 31, 2000, the
taxpayer's average alillual gross receipts for the three taxable-year period ending with the
applicable prior taxable year do not exceed $1 O,OOO,{)OO. If a tJxpayer has not been in existence

for three prior taxable years, the taxpayer must determine its average annual gross receipts for
the number of years (including short taxable years) that the taxpayer has been in existence. See §
448(c)(3)(A) .

.03 Business Activity. A taxpayer may use any reasonable method of applying the relevant
facts and circumstances to determine what is a business activity. For example, for some
taxpayers, the provision of services, the sale of goods, and the production of goods each will be
treated as a different business activity. However, if a taxpayer sells or produces goods incident
to the performance of services, the different activities may be treated as one business activity the provision of services .

.04 Principal Business Activity. A principal business activity is determined by the sources of
gross receipts. Under sections 4.01(l)(a), (b), and (c), a taxpayer must apply the tests in this
section to all the taxpayer's trades or businesses in the aggregate. Under section 4.01(2), a
taxpayer must apply the tests in such section separately to each trade or business for which the
taxpayer keeps a complete and separable set of books and records. A taxpayer may use either of
the following tests to detem1ine the principal business activity of the taxpayer or of the
taxpayer's trades or businesses.
(1) Principal business activit)' prior year test. Under the principal business activity prior

year test, the principal business activIty is the activity from which the largest percentage of gross
receipts was derived during the prior taxable year (even if this amount is less than 50 percent of
the aggregate gross receipts of the taxpayer or the trade or business). If a taxpayer or a trade or
business is in its first taxable year, the principal business activity is the activity from which the
largest percentage of gross receipts is derived for that taxable year.

(2) Principal business activity three-year average test. Under the plincipal business activity
three-year average test, the principal business activity is the activity from which the largest
of averaae
annual ::::aross receipts was derived over the three taxable-year period
Percentaae
::,
::,
ending with the prior taxable year. If a taxpayer or a trade or business has not been in existence
for three prior taxable years, the taxpayer must deten11ine average annual gross receipts for thl:
number of years (including short taxable years) that the taxpayer or the trad,,: or business has
been in existence. See § 448(c)(3)(A).

.05 Gross Receipts. Gross receipts is defined consistent with § 1.448-1 T( f)( 2)( iv) of the
Temporary Income Tax Regulations. Thus, gross receipts for a taxable year equal all receipts
that must be recognized under the method of accounting actually used by the taxpayer for that
taxable year for federal income tax purposes. For example, gross receipts include total sales (net
of returns and allowances), all amounts received from services, interest, dividends, and rents.
However, gross receipts do not include amounts received by the taxpayer with respect to sales
tax or other similar state and local taxes if, under the applicable state or local law, the tax is
legally imposed on the purchaser of the good or service, and the taxpayer merely collects and
remits the tax to the taxing authority. See also § 448(c)(3)(C) .

.06 Aggregation of Gross Receipts. For purposes of computing gross receipts under section
5.02, all taxpayers treated as a single employer under subsection (a) or (b) of § 52 or subsection
(m) or (0) of § 414 (or that would be treated as a single employer under these sections if the
taxpayers had employees) will be treated as a single taxpayer. However, when transactions
occur between taxpayers that are treated as a single taxpayer by the previous sentence, gross
receipts arising from these transactions will not be treated as gross receipts for purposes of the
average annual gross receipts limitation. See §§ 448(c)(2) and 1.448-1T(f)(2)(ii) .

.07 Treatment of Short Taxable Years. In the case of a short taxable year, a taxpayer's gross
receipts must be annualized by'multiplying the gross receipts for the short taxable year by 12 and
then dividing the result by the number of months in the short taxable year. See §§ 448(c)(3)(B)
and 1.448-1 T(t)(2)(iii) .

.08 Treatment of Predecessors. Any reference to a taxpayer in this section 5 includes a
reference to any predecessor of that taxpayer. See § 448(c)(3)(D) .

.09 Inventoriable Item Defined. An inventoriable item is any item either purchased for resale
to customers or used as a ww material in producing finished goods .

. 10 Open Accounts Receil'able Defined. For purposes of this revenue procedure, open accounts
receivable is defined as any receivable due in full in 120 days or less.
SECTION 6. EXAMPLES
For purposes of the following examples, assume that:
( 1 ) the taxpayers use the calendar year:

(2) the taxpayers are not prohibited from using the cash method under § 448 (except

Example 4); and
(3) the taxpayers satisfy the average annual gross receipts test of section 5.02 of this
revenue procedure (except Examples 2 and 3).

Example 1 -- Principal Business Activity Not an Ineligible NAICS Code. Taxpayer is a
graphic design finn. Taxpayer plans, designs, and manages the production of visual
communications that convey specific messages or concepts. Taxpayer's activities include the
design of printed materials, packaging, advertising, signage systems, and corporate identification
(logos). Taxpayer reasonably detennines that its principal business activity is described in
NAICS code 541430 (graphic design services), which is not one of the ineligible NAICS codes
listed in section 4.01(1)(a)(i) - (v) of this revenue procedure. Taxpayer may use the cash method
for its graphic design business.

Example 2 -- Satisfaction of the Average Annual Gross Receipts Test. Taxpayer is a
plumbing contractor that installs plumbing fixtures in customers' homes and businesses.
Taxpayer reasonably detennines that its principal business activity is construction, which is
described in NAICS code 23. Taxpayer's gross receipts at the end of the three preceding taxable
years are:
Gross receipts
1998:

$ 6,000,000

1999:

9,000,000

2000:

12,000,000

Taxpayer's average annual gross receipts for the three taxable-year period ending in the 2000
taxable year are $9,000,000 (($6,000,000 + $9,000,000 + $12,000,000) / 3

$9,000,000).

Taxpayer may use the cash method for all its trades or businesses pursuant to this revenue
procedure for its 2001 taxable year because its average annual gross receipts for each prior
taxable year ending on or after December 31,2000. is $10,000.000 or less and its principal
business activity is not described in the ineligible NAICS codes listed in section ..+'0 l( I )( a)( i) -

(v).

Example 3 -- Failure of the Average Annual Gross Receipts Test. Same as Example 2,
except that Taxpayer's gross receipts in 2001 equal $15,000,000. Taxpayer's average annual
gross receipts for the three taxable-year period ending in the 2001 taxable year are $12,000,000
(($9,000,000 + $12,000,000 + $15,000,000 /3) = $12,000,000). Taxpayer is not a qualifying
small business taxpayer for purposes of this revenue procedure for its 2002 taxable year or any
subsequent year because its average annual gross receipts for each prior taxable year ending on
or after December 31, 2000, is not $10,000,000 or less.

Example 4 --Inability to Use this Revenue Procedure When § 448 Applies. Same as
Example 2, except that Taxpayer is a C corporation. Because Taxpayer's average mmual gross
receipts for the previous three years ($9,000,000) exceed $5,000,000, Taxpayer is prohibited
from using the cash method under § 448. Consequently, Taxpayer is not eligible to use the cash
method under this revenue procedure. The same result would apply under § 448 if, instead of
being a C corporation, Taxpayer were a tax shelter (regardless of Taxpayer's average annual
gross receipts) or Taxpayer were a partnership with a C corporation as a partner.

Example 5 -- Principal Business Activity Prior Year Test. Taxpayer is a plumbing
contractor that installs plumbing fixtures in customers' homes and businesses. Taxpayer also has
a store that sells plumbing equipment to homeowners and other plumbers who visit the store.
During its prior taxable year, Taxpayer derived 60 percent of its total receipts from plumbing
installation (including amounts charged for parts and fixtures used in installation) and 40 percent
of its total receipts from the sale of plumbing equipment through its store. Under the principal
business activity prior year test, Taxpayer reasonably detemlines that its principal business
activity is plumbing installation, which is a construction activity described in NAICS code 23.
Because Taxpayer's principal business activity - plumbing installation - is not described in the
ineligible NAlCS codes listed in section 4.0 I (I )(a)( i)-(v), Taxpayer may use the cash method for
both business activities (plumbing installation and retail sales).

£:\"Cllllp/e 6 -- Principol Blisiness .-lctz"I'iZI' Three-Yeur An:rage Test. Same as Example 5,
except that for the prior taxable yeJr, Taxpayer derived -1-0 percent of its totJl receipts from
plumbing installation (including Jl110lll1ts charged for parts :.ll1d fixtures used in installation) ami

60 percent of its total receipts from the sale of plumbing equipment through its store. L"nder the

principal business activity prior year test, Taxpayer's principal business activity is retail, which
is described in an ineligible NArCS code. Thus, Taxpayer is not eligible to use the cash method
for all of its trades or businesses under the principal business activity prior year test. However.
Taxpayer may still be eligible to use the cash method for all of its trades or businesses under
section 4.0 1(1) of this revenue procedure if Taxpayer reasonably determines that its principal
business activity is plumbing installation under the principal business activity three-year average
test. Taxpayer's gross receipts for the prior three taxable years are as follows:
2000

1999

1998

3 Year A vera£e

$2,000,000

$6,000,000

$4,000,000

Retail sale of equipment $3.000.000

S2.000.000

$4.000.000

$3.000,000

Total

58,000,000

$8,000,000

57,000,000

Plumbing installation

$5,000,000

The approximate percentage of Taxpayer's average annual gross receipts for the prior three
taxable years is 57 percent ($4,000,000/$7,000,000 total average gross receipts) for plumbing
installation and 43 percent ($3,000,000/$7,000,000) for the retail sale of plumbing equipment
through its store. Thus, Taxpayer reasonably determines that its principal business activity is
plumbing installation under the principal business activity three-year average test. Because
Taxpayer's principal

bu~iness

activity - plumbing instaliation - is not described in the ineligible

NAICS codes listed in section 4.01(l)(a)(i)-(v), Taxpayer may use the cash method for both
business activities (plumbing and retail sales).

Example 7 -- Application of Section 4.0](2) Where Taxpayer Is Ineligible to Use the
Cash lvIethod Under Section ..UJl (1). Same as Examples 5 and 6, except that Taxpayer's
principal business activity is retail sales under both the principal business activity prior year test
and the principal business activity three-year average test. Taxpayer is not eligible to use the
cash method for all of its trades or businesses under section 4.0l( I) because Taxpayer's principal
NArCS code under section
business activitv (retail sales) is described in an ineli~nble
~

4.0 I ( 1 )( a)( iv) and is neither the provision of sen'ices under section 4.0 I ( 1 )( b) nor the tJbrication
or modification of tangible personal property under secrion 4.0l( 1 )(C). Taxpayer. ho\;e\er.
maintains its retail sales and plumbing installation JctiyiIies as separate ,md distinct businesses
with a complete and separable set of books Jnd records for cJch business. Lnder section ..+'(J 1(:::)

of the revenue procedure, Taxpayer may use the cash method for its separate plumbing
installation business notwithstanding that its principal business activity (retail sales) is ineligible
under section 4.01(l)(a) - (c).
Example 8 -- A Principal Business Activity Can Accountfor Less Than 50 Percent of
Gross Receipts. Taxpayer has four activities, Activities A through D. During the prior taxable

year, Taxpayer derived 35 percent of its gross receipts from Activity A, 25 percent from Activity
B, 20 percent from Activity C, and 20 percent from Activity D. Under the principal business
activity prior year test, Activity A would be Taxpayer's principal business activity because it
represents the largest percentage of gross receipts. Similarly, if the percentages of Taxpayer's
average annual gross receipts for the prior three taxable years were 35 percent from Activity A,
25 percent from Activity B, 20 percent from Activity C, and 20 percent from Activity D, under
the principal business activity three-year average test, Activity A would be Taxpayer's principal
business activity because it represents the largest percentage of average annual gross receipts.
Example 9 -- Taxpayer Does Not Satisfy the NAICS Code Exception in Section
4.01 (l)(a) , the Service Exception in Section 4.01 (l)(b) , or the Custom Manufacturing Exception
in Section 4.01 (J)(c). Taxpayer sells refrigerators. As part of the sale price, Taxpayer delivers

the refrigerator to the customer and confirms that the refrigerator is functioning properly at the
customer's site. Taxpayer's principal business activity is described in the ineligible NAICS code
44. Moreover, Taxpayer's principal business activity is not the provision of services under
section 4.01 (1 )(b). Taxpayer does not provide refrigerators incident to the performance of
services. Rather, Taxpayer performs certain services (delivery and confirmation of functionality)
incident to the sale of refrigerators. In addition, Taxpayer does not fabricate or modify tangible
personal property under section 4.01(1)(c). Taxpayer may not use the cash method under this
revenue procedure.
Example J 0 -- Taxpayer Does Not Satisf./ the N~ICS Code Exception ill Section
4. () J (1) (a), the Sen'ice Exceptioll in Sectioll c./.. 01 (1) (b).

01'

the Custom J,Jallll/acturing Exceptioll

in Section -1.01 (J)(c). Taxpayer is a sofa manufacturer that only produces sofas upon receipt of a

customer order. Customers are allowed to pick among 150 different fablics otIered by the
Taxpayer or to provide their own fabric, which the Taxpayer will use to finish the customer's

sofa. Taxpayer's principal business activity is described in the ineligible NAICS code 33.
Taxpayer does not provide sofas incident to the perfonnance of services for purposes of section
4.01(l)(b). Rather, Taxpayer perfonns certain services (upholstering) incident to the sale of
sofas. Taxpayer also does not fablicate or modify tangible personal property for purposes of
section 4.01 (1)( c) because customers merely choose among pre-selected options offered by
Taxpayer and Taxpayer only makes minor modifications to the basic design of its sofa.
Taxpayer may not use the cash method under tllls revenue procedure.
Example 11 -- Taxpayer Does Not Satisfy the NAlCS Code Exception in Section
4.01 (1)(a) , the Service Exception in Section 4.01 (1)(b) or the Custom A;fanu/acturing Exception
in Section 4.01 (1)(c). Taxpayer is a publisher who produces and sells high school and college

yearbooks. Taxpayer's principal business activity is described in the ineligible NArCS code
5111 (newspaper, periodical, book, and database publishers). Taxpayer is not providing a
service for purposes of section 4.01 (1 )(b) because Taxpayer's principal business activity is the
production of yearbooks for customers. In addition, Taxpayer is not a custom manufacturer for
purposes of section 4.01(1)(c) because Taxpayer, although it produces yearbooks to the detailed
specifications of schools, is producing yearbooks in quantities. As such, Taxpayer may not use
the cash method under this revenue procedure.
Example 12 -- Taxpayer Creating Prototype Does Not SatiSfY the NAlCS Code Exception'
in Section ..J.. 01 (1)(a) but Does SatisfY the Custom lvJallu/acturing Exception ill Section
4. U1(1)(c). Taxpayer makes tools based entirely on specific designs and specifications provided

to it by customers. Taxpayer produces the customer's prototype and gives the prototype to the
customer for production. Taxpayer's principal business activity is described in the ineligible
NAICS code 33. However, Taxpayer's principal business activity is the fabrication of tangible
personal property upon demand in accordance with customer design or specifications for
purposes of section -LO 1( 1)( c). Taxpayer may use the cash method under this revenue procedure
(subject to the potential application of § 460).
Example 13 -- Taxpuyer Producing QIILlIllilies OJ'Pi'O[{)lype Does

.\O(

SL/ri::o/i'

!iii:' CUS[()1J1

MalllqclctllrilZg Exceptioll ill Section -1.01 (1 )(c). S,1111e as Example 1:. except that inskaJ of

producing the customer's prototype and giving the prototype to the customer for further

production, Taxpayer is also the producer of the customer's goods using the prototype.
Taxpayer's principal business activity would not fall under the custom manufacturer exception of
section 4.01(l)(c).

Example 14 -- Application of Accounts Receivable 120-Day Rule in Section 4.03.
Taxpayer is eligible to use the cash method under this revenue procedure. Taxpayer chooses to
use the cash method and to account for inventoriable items as non-incidental materials and
supplies under § 1.162-3. In December 2001, Taxpayer transfers property to a customer in
exchange for an open accounts receivable (due in full in 120 days or less). In February 2002, the
customer satisfies the accounts receivable when it pays cash to Taxpayer. As provided by
section 4.03 of this revenue procedure, Taxpayer would not include any amount attributable to
the accounts receivable in income in 2001. Rather, Taxpayer would include the full amount of
the accounts receivable in income in 2002 when it actually receives the cash payment from the
customer.

Example 15 -- Timing of Deduction for Inventoriable Items Treated as Non-Incidental
Materials and Supplies Under § 1.162-3 - Construction. Taxpayer is a roofing contractor that is
eligible to use the cash method under this revenue procedure. Taxpayer chooses to use the cash
method and to account for inventoriable items as non-incidental matenals and supplies under §
1.162-J. Taxpayer enters into a contract with a homeowner in December 2001 to replace the
homeowner's roof. Taxpayer purchases roofing shingles from a local supplier and has them
delivered to the homeowner's residence. Taxpayer pays the supplier $5,000 for the shingles
upon their delivery later that month. Taxpayer replaces the homeowner's roof in December
2001, and gives the homeowner a bill for $15,000 at that time. Taxpayer receives a check from
the homeowner in January 2002. The shingles are non-incidental materials and supplies. The
cost of the shingles is deductible in the year Taxpayer uses and consumes the shingles or actually
pays for the shingles, whichever is later. In this case, Taxpayer both pays for the shingles and
uses the shingles (by providing the shingles to the customer in connection with the perfomlance
ofroofing services) in 200 l. Thus, Taxpayer deducts the $3,000 cost of the shingles on its 2001
federal income tax retum. Taxpayer includes the $15,000 in income in 2002 when it receives the
check fro111 the homeowner.

Example 16 -- Timing of Deduction for Illventoriable Items Treated as Non-Incidental
Materials and Supplies Under § 1.162-3 - Construction. Same as in Example 15. except that
Taxpayer does not replace the roof until January 2002 and is not paid until March 2002. Because
the shingles are not used until 2002, their cost can only be deducted on Taxpayer's 2002 federal
income tax return notwithstanding that Taxpayer paid for the shingles in 2001. Thus, on its 2002
return, Taxpayer must report $15,000 of income and $5,000 of deductions.

Example 17 -- Timing of Deduction for Non-Inventoriable Items - Speculative Home
Sales. Taxpayer is eligible to use the cash method as described in this revenue procedure.
Taxpayer is a speculative builder of houses that are built on land it owns. In 2001, Taxpayer
builds a house using various items such as lumber, piping, and metal fixtures that it had paid for
in 2000. In 2002, Taxpayer sells the house to a buyer. Because the house is real property held
for sale by Taxpayer, the house and the material used to build the house are not inventoriable
items under this revenue procedure. Thus, Taxpayer may not account for the items used to build
the house as non-incidental materials and supplies under § l.162-3. Rather, Taxpayer must
capitalize the costs of the lumber, piping, metal fixtures and other goods used by Taxpayer to
build the house under § 263. Upon the sale of the house in 2002, the costs capitalized by
Taxpayer will be offset against the house sales price to determine Taxpayer's gain or loss from
the sale.

Example 18 -- Timing of Deduction for [nventoriable Items Treated as NOll-Incidental
Materials and Supplies Under § 1.162-3 - Construction. Same as in Example 17, except that ( 1)
Taxpayer builds houses on land its customers own, and (2) the houses are built in three months
with payment due at completion. Because Taxpayer does not own the house, the lumber, piping,
metal fixtures and other goods used by Taxpayer in the provision of constmction services are
inventoriable items, not real property held for sale. Taxpayer elects to treat the goods used to
build the house as non-incidental materials and supplies under ~ 1.162-3. Taxpayer mLlst deduct
the cost of the lumber, piping, met.d fixtures and other non-incidcnro.l materials and supplies that
:lre used by it to build the house in 200 I (the year those items \verc used by Taxpayer to build the
house) notwithstanding that Taxpayer had paid for the items in 2000. Tax.payer will repOI1
income it receives from its customer as the income is actually or constructively receiveLi.

Example 19 -- Timing of Deduction for Inventoriable Items Treated as Non-Incidental
Materials and Supplies Under § 1.162-3 - Reseller. Taxpayer is a veterinarian that also sells pet
supplies from its clinic. Taxpayer reasonably determines that its principal business activity is
veterinary services, which is not described in one of the ineligible NArCS codes in section
4.01(1)(a)(i)-(v). Consequently, Taxpayer is eligible to use the cash method for all its business
activities (veterinary services and retail sales). For both business activities, Taxpayer chooses to
use the cash method and to account for inventoriable items (such as pet food) as non-incidental
materials and supplies under § 1.162-3. In December of2001, Taxpayer purchases and pays for
pet food to be resold from its clinic. Taxpayer sells the pet food from its clinic (and receives
cash payment from the customer) in 2002. Because the pet food is not provided to customers
until 2002, its cost can not be deducted until 2002.

Example 20 -- Timing of Deduction for Inventoriable Items Treated as Non-Incidental
A;faterials and Supplies Under § 1.162-3 - A1anufacturer. Taxpayer is a landscape designer that
also manufacturers lawn ornaments. Taxpayer does not manufacture lawn ornaments pursuant to
customer contracts. Taxpayer reasonably determines that its principal business activity is
landscape design, which is not described in an ineligible NAICS code under section
4.01 (1)( a)(i)-(v). Consequently, Taxpayer is eligible to use the cash lllethod for all its business
activities (landscape design and lawn ornament manufacturing). For both business activities,
Taxpayer chooses to use the cash method and to account for inventoriable items (such as raw
materials) as non-incidental materials and supplies under § 1.162-3. In 2001, Taxpayer
purchases and pays for raw materials to be used in its manufacturing business and uses the raw
materials to produce lawn ornaments. During 2002, Taxpayer sells the lawn ornaments to
customers. Because the lawn ornaments are not provided to customers until 2002, the cost of the
raw materials used to produce the lawn ornaments can not be deducted until 2002.

Erample II -- Application of Long Term Contract Rules - § -160 .-lpplicable. Taxpayer is
a specialty too] and die manufacturer. Taxpayer receives a reqllest from a large automobile
manufacturer to design and ,DToduce a custom-made die that the customer will use in its
~

manufacturing operation. The contrJct to manufacture the die is entered into in December 2001
but is not completed until May 2002. Because it satisfies the requirements of section -+.01 ( 1)( c)

of this revenue procedure, Taxpayer is eligible to use the overall cash method of accounting.
Notwithstanding the Taxpayer's eligibility to use the overall cash method, however, because the
contract to manufacture the custom-made die requires the production of a "unique item" and will
not be completed in the year it is entered into, it is a "long term contract" for purposes of § 460,
and the income and expense relating to that contract must be accounted for under the percentageof-completion method of accounting described in § 460 and the underlying regulations.

Example 22 -- Application ofLong Term Contract Rules - § 460 Not Applicable.
Taxpayer is a residential home builder that specializes in modest single family homes whose
construction period averages six months. Taxpayer uses an overall accrual method of
accounting, and although it is not required to do so, Taxpayer has elected to use the percentageof-completion method of accounting, as described in § 1.460-4(b), in accounting for its home
construction activities. Because its principal business activity is not described in an ineligible
NAICS code described in section 4.01(1)(a), Taxpayer may elect the overall cash method
described in this revenue procedure. Further, because its home construction activity is not
required to be accounted for using the percentage-of-completion method described in § 460,
Taxpayer is eligible (but not required) to change its method of accounting for that activity to the
cash method.

Example 23 -- Taxpayer Satisfies the NAlCS Code Provision in Section 4.01 (l)(a).
Taxpayer is a licensed medical clinic that provides specialized chemotherapy treatment to cancer
patients. The medication provided to patients accounts for 26 percent of Taxpayer's average
annual gross receipts. Taxpayer does not sell the medications separately from its provision of
services, selects the medications to be used in a particular session based on its own professional
skill and judgment, and does not maintain medications for more than two weeks. Because the
provision of medical services (NAICS code 62) represents Taxpayer's principal business
activity, Taxpayer qualifies to use the cash method under section 4.01 ( 1)( a) for all of its trades or
businesses. Even if the cost of the chemotherapy medications represented Taxpayer's principal
source of gross receipts, Taxpayer nonetheless would qualify to use the cash method under
section 4.01 ( 1)( a) of tIllS revenue procedure, because its principal business activity would still be
providing medical services, with goods being provided only incident to the provision of those

servlces. See Osteopathic lvfedical Oncology and Hematology. P. C. v. Commissioner, 113

T.e.

376 (1999), acq. AOO 2000-05, 2000-23 I.R.B. 1149.

Example 24 -- Change in Principal Business Activity. Taxpayer owns a hardware store
and a small appliance repair business. Following the issuance of this revenue procedure,
Taxpayer reasonably determined that its principal business activity was its appliance repair
business, which is not described in an ineligible NAICS code under section 4.01 (l)(a)(i)-(v).
Consequently, Taxpayer was eligible to use the cash method under this revenue procedure for
both its business activities (appliance repair and retail sales). Over time, Taxpayer's hardware
store began to generate a larger portion of Taxpayer's gross receipts than its repair business. In
2005, Taxpayer's retail business became its principal business activity. Because retail trade is
described in ineligible NAICS code 44, starting in 2006, Taxpayer is no longer eligible to use the
cash method for all its trades or businesses under section 4.01 (l). Accordingly, Taxpayer must
change to an accrual method for its retail business. If Taxpayer maintains a complete and
separable set of books and records in 2006 for its repair business, Taxpayer may continue to use
the cash method for its repair business under section 4.01(2). If Taxpayer does not maintain a
complete and separable set of books and records in 2006 for its repair business, Taxpayer also
must change to an accrual method for its repair business -- however, in any subsequent taxable
year that Taxpayer maintains complete and separable books and records for its repair business,
Taxpayer will be eligible under section 4.01(2) to change to the cash method for its repair
business.

Example 25 -- Change in Principal Business Activity. Same as Example 24, except that
Taxpayer's repair business again becomes its principal business activity in 2009. Taxpayer is no
longer eligible to use the cash method for its retail business under section 4.01 (1). For section
4.01(1) to apply, Taxpayer must not have previously changed (or have been previously required
to change) from the cash method to an accrual method for any trade or business as a result of
becoming ineligible to use the cash method under this revenue procedure. Because Taxpayer
was required to change to an accrual method for its retail business in 2006 as a result of
becoming ineligible to use the cash method under this revenue procedure. Taxpayer is not
eligible to rely on section 4.01 ( 1 ) for 2006 or any subsequent taxable year.

Example 26 -- Change in Principal Business Activity. Same as Example 24, except that
following the issuance of this revenue procedure, Taxpayer's principal business activity was
retail sales and Taxpayer used an accrual method for both businesses (retail and repair). Over
time, Taxpayer's repair business began to generate a larger portion of Taxpayer's gross receipts
than its retail business. In 2007, Taxpayer's repair business became its principal business
activity. Starting in taxable year 2008, Taxpayer is eligible under section 4.01 (l) to use the cash
method for all its trades and businesses because Taxpayer did not change (and was not required
to have changed) from the cash method to an accrual method for any trade or business as a result
of becoming ineligible to use the cash method for that trade or business under this revenue
procedure, and Taxpayer's principal business activity is no longer described in an ineligible
NAICS code under section 4.0 1(l)(a)(i)-(v).
SECTION 7. CHANGE IN ACCOUNTING METHOD

.01 In General. Any change in a taxpayer's method of accounting pursuant to this revenue
procedure is a change in method of accounting to which the provisions of § § 446 and 481 and the
regulations thereunder apply .

.02 Automatic Change/or Taxpayers within the Scope a/this Revenue Procedure.
(l) Automatic change to the cash method. A qualifYing small business taxpayer that wants to
use the cash method as described in this revenue procedure for an eligible trade or business must
follow the automatic change in accounting method provisions of Rev. Proc. 2002-9, 2002-3
LR.B. 327 (or its successor), as modified by Rev. Proc. 2002-19,2002-13 I.R.B. 696 and
Am10uncement 2002-17,2002-8 I.R.B. 561, with the following modifications:
(a) The scope limitations in section 4.02 of Rev. Proc. 2002-9 do not apply. However, if the
taxpayer is under examination, before an appeals office, or before a federal court with respect to
any income tax issue, see section 6.02(9) of Rev. Proc. 2002-9 for additional filing requirements.
( b) Taxpayers filing Fom1 3115, Application for Change in ".:i"ccounting Method, for a
change in method of accounting under this revenue procedure must complete all applic;.lble pans
of the fom1 but need not complete Part II of Schedule :-\ of F 01111 3115. Specifically. Part II of
Fonn 3115, line 17 (regarding infonnation on gross receipts in previous YCJrs) and PJrt III of

Form 3115 (regarding the § 481(a) adjustment) must be completed. Taxpayers should write
"Filed under Rev. Proc. 2002-28" at the top of their Form 3115.
(c) A taxpayer making a change under section 7.02 of this revenue procedure for its first
taxable year ending on or after December 31, 2001, that, on or before May 6, 2002, files or filed
its original federal income tax return for such year, is not required to comply with the filing
requirement in section 6.02(3)(a) of Rev. Proc. 2002-9, provided the taxpayer complies with the
following filing requirement. The taxpayer must complete and file a Form 3115 in duplicate.
The original must be attached to the taxpayer's amended federal income tax return for the
taxpayer's first taxable year ending on or after December 31, 2001. This amended return must be
filed no later than September 16,2002. A copy of the Form 3115 must be filed with the national
office (see section 6.02(6) of Rev. Proc. 2002-9 for the address) no later than when the taxpayer's
amended return is filed.

(2) Automatic change to § 1.162-3. A qualifying small business taxpayer that does not want
to account for inventories under § 471 must make any necessary change from the taxpayer's
inventory method (and, if applicable, from the method of capitaliZing costs under § 263A) to
treat inventoriab1e items in the same manner as materials and supplies that are not incidental
under § 1.162-3. For purposes of such a change, the rules of section 7.02(1) of this revenue
procedure apply.

(3) Other automatic changes. An automatic change in method under this revenue procedure
would also include any other change in method of accounting that is eligible to be made under
this revenue procedure in conjunction with either or both of the above changes in this section
7.02 (such as a change from a 10ng-tern1 contract method that is not required to be used by §
460). For purposes of such a change, the rules of section 7.02(1) of this revenue procedure
apply.

(4) Single Farm 3115. Any combination of changes under this revenue procedure may be
included in the same Forn1 3115 to be tiled by the taxpayer.

.03 Section .:/.81 (u) Adjustment.
(l) Determining the net allZolillt. The net amoLmt of the § -\.81 (a) adjustment computed under
this revenue procedure must take into account both increases and decreases in the Jpplicable

account balances such as accounts receivable, accounts payable, and inventory. For example, the
§ 481(a) adjustment may include the difference resulting from changing from taking inventory

accounts under § 471 to treating the inventoriable items as materials and supplies that are not
incidental under § l.162-3.

(2) Multiple adjustments. In the event that a taxpayer is taking into account a § 481 (a)
adjustment from another accounting method change in addition to the § 481 (a) adjustment
required by this revenue procedure, the § 481 (a) adjustments would be taken into account
separately. For example, a taxpayer that changed from the cash method to an accrual method in
1999 and was required to take its § 481 (a) adjustment into account over four years would
continue to take into account that adjustment over the appropriate four years even though the
taxpayer changes back to the cash method in 2001 and has an additional § 481 (a) adjustment
required by this revenue procedure.

(3) Section 481 (aJ adjustment period. As provided in section 2 of Rev. Proc. 2002-19, the
period for negative § 481(a) adjustments is one year, and the period for positive § 481(a)
adjustments is four years .

.04 Taxpayers Not within the Scope of this Revenue Procedure.
(1) A taxpayer that ceases to qualify for the qualifying small business taxpayer exception
described in section 4 of this revenue procedure for a trade or business and that otherwise is
required to use an accrual method for that trade or business must change to an accrual method
(and, if applicable an inventory method that complies with §§ 263A and 471) for that trade or
business using either the automatic change in accounting method provisions of section 5.01 of
the APPENDIX to Rev. Proc. 2002-9, if applicable, as modified by Rev. Proc. 2002-19 or the
advance consent provisions of Rev. Proc. 97-27,1997-1 C.B. 679 (or its successor), as modified
by Rev. Proc. 2002-19.
(2) No inference is intended regarding whether a taxpayer that does not satisfy the qualifying
small business taxpayer exception in section -1- is otherwise pem1itted to use the cash method.
Taxpayers who do not qualify to change to the cash method under this revenue procedure may
still request permission to change to the cash method under Rev. Proc. 97-27. as modified. See
also Rev. Proc. 2001-10,2001-2 LR.B. 272.

SECTION 8. EFFECT ON OTHER DOCUMENTS
Rev. Proc. 2002-9 is modified and amplified to include this automatic change in sections
5 and 9 of the APPENDIX. Notice 2002-14, 2002-8 LR.B. 548, is modified and superseded.
SECTION 9. EFFECTIVE DATE
Tllis revenue procedure is effective for taxable years ending on or after December 31,
2001. However, the Service will not challenge a taxpayer's use of the cash method under § 446
or a taxpayer's failure to account for inventories under § 471 for a trade or business in an earlier
year if the taxpayer, for that year, would have been a qualifying small business taxpayer as
described in section 5.01 of this revenue procedure and would have been eligible to use the cash
method in such year under section 4 of this revenue procedure if this revenue procedure had been
applicable to that taxable year.
DRAFTING INFORMATION
The principal author of this revenue procedure is W. Thomas McElroy, Jr., of the Office
of Associate Cillef Counsel (Income Tax and Accounting). For further information regarding
this revenue procedure, contact Mr. McElroy at (202) 622-4970 (not a toll-free call).

APPENDIX
APPLICA TIGN OF REV. PROC. 2002-28

Are your "average annual gross receipts" $1 million or
less?

Yes

No
'\!Ir

Are you either (i) prohibited from using the cash
method by section 448, or (ii) a "farming business" ?

You may use the cash
method, unless you are
prohibited from doing so
by section 448(a)(3) (tax
shelters). Rev. Proc.
2001-10.

Yes
"i"

You may not use Rev.
Proc. 2002-28.

-,.
~

Are your "average annual gross receipts" $10 million
or less? Rev. Proc. 2002-28, sec. 5.02.
Yes

Is the NAICS code of your principal business activity
described in section 4.01 (1)( a) of Rev. Proc. 2002-28,
such as retail, wholesale, manufacturing, mining, or
certain information industries?

Yes

Regardless of its NAICS code, is your principal business
activity the provision of services, including the provision of
property incident to those services? Rev. Proc. 2002-28, sec.
4.01(l)(b).

Yes

..
~

You may use Rev.
Proc. 2002-28 for all of
your business activities
(unless you previously
did so and later became
ineligible ).

Regardless of its NAICS code, is your principal business
activity the fabrication or modification of tangible personal
property upon demand in accordance with customer design
or specifications? Rev. Proc. 2002-28, sec. 4.01(l)(c).

ito.

Yes

,
Do you have a trade or business that is separate and distinct
from your principal business activity and for which you keep
a complete and separable set of books and records')
Rev. Proc. 2002-28, sec. 4.01 (2).

You may not use Rev.
Proc. 2002-28 for
.@Y of your business
activities.

Yes
~

Is the principal business activity of that separate and
distinct trade or business described in a NArCS code in
Box A of this chart'? Rev. Proc. 2002-28, sec. -1.0 l( 2).
No

Yes

.Iv

You may use Rev. Proc. 2002-28
only for that separate trade or
business.

Yes
~,

Is the principal business acti\'ity of that separate and
distinct trade or business described in either Box B or
Box C of this ch:m'? Rev. Proc. 2002-28. sec. -1-01(2)

DEPARTMENT

TREASURY
17

THE

TREASURY

NEWS

OmCE OF PUBUC AFFAIRS .1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C .• 20220 • (202) 622-2960

EMBARGOED UNTIL 9:00 A.M. EDT
April 15, 2002

CONTACT: BETSY HOLAHAN
202-622-2960

REMARKS BY
THE HONORABLE SHEILA C. BAIR
ASSISTANT SECRETARY OF THE TREASURY FOR FINANCIAL INSTITUTIONS
BEFORE THE
NATIONAL ASSOCIATION OF MORTGAGE BROKERS
LEGISLATIVE CONFERENCE
PREDATORY LENDING: ENCOURAGING RESPONSIBLE
BEHAVIOR IN THE MORTGAGE INDUSTRY

Good morning and thank you for this opportunity to speak before you today about
predatory lending.
We should all be proud ofthe positive developments in mortgage and housing markets
that have taken place during the last decade. During the last decade, the percentage of.
Americans who have achieved the dream of home ownership has increased significantly. This
increase in home ownership has, in part, been fueled by the broader availability of mortgagerelat~d credit to all types of borrowers. This increase in credit availability has been most evident
in the subprime market, which primarily serves borrowers with past credit problems.
Mortgage brokers have played an important role in expanding credit availability and they
will continue to do so in the future. Mortgage brokers provide borrowers with an important
service by making a wide array of loan products available. Mortgage brokers also have the
ability - through a lower cost structure - to make their services available to residents of
communities that have been overlooked by traditional financial institutions.
While clearly much has been done to improve home ownership opportunities and expand
access to credit, we must also focus on preserving those opportunities by keeping people in their
homes and protecting them from unscrupulous mortgage market participants. A key component
of that goal is eliminating what has come to be known as predatory lending.

PO-2086

_ Far press rehases, speeches, public schedules and official biographies, call aur 24-hour fax line at (202) 622-2040
h

We all know that predatory lending is difficult to clearly define. Predatory lending is
generally characterized by abusive lending practices that include deception, fraud, and other
practices that are unfair to borrowers. In the most egregious cases, loans have been made with
little or no regard for a borrower's ability to repay, and borrowers have engaged in multiple
refinance transactions that provide little or no benefit to a borrower. These types of abusive
lending practices can result in the stripping of borrowers' equity and, in the worst case,
borrowers losing their homes. The result is not only devastating to the borrower, but it also can
contribute to a general decline in the conditions of the surrounding neighborhood.
As different methods for combating predatory lending are considered, we must be careful
not to damage what has generally been a positive development - the expansion ofthe availability
of credit through the subprime market. Responsible providers of subprime credit provide an
important source of credit to borrowers with damaged credit histories. The current services of
responsible subprime credit providers will not be easily replaced by government programs or
through the activities of other lending institutions.
The Federal government has recently or is currently undertaking a number of efforts
related to disclosures and enforcement that should contribute to a reduction in predatory lending.
First, the Department of Housing and Urban Development is taking a new look at
improving mortgage disclosures and considering ways to improve accountability within Federal
Housing Administration loan programs. Improved mortgage disclosures could help to combat
predatory lending by providing better information to borrowers on the cost of a loan. I
understand that this is an important issue to mortgage brokers, and I trust that you have made
your views known to HUD.
Second, the Board of Governors of the Federal Reserve System has recently finalized
revisions to its regulations under the Home Ownership and Equity Protection Act (HOEPA) and
the Home Mortgage Disclosure Act (HMDA). The new HOEP A regulations will expand the
protections available under HOEPA to a broader group of borrowers and the HMDA regulations
will increase the amount of information on subprime lending activities.
Third, the Justice Department and the Federal Trade Commission have taken aggressive
steps in recent years to crack down on abusive lending through several high profile cases that
could mean broad redress for many consumers. Because many of the practices associated with
predatory lending are already illegal, stronger enforcement is a key component of any solution to
the problem. In addition to stronger enforcement at the Federal level, increased enforcement
activity at the state level is also needed.

We must do more to educate borrowers so they are in a better position to provide a first
line of defense against abusive lending practices. To better prepare consumers for this task, the
Federal government should take a leadership role in educational efforts. My office is working
with others in the Administration and with industry, education, and non-profit groups to enhance
financial literacy. In addition, the Community Development Financial Institutions Fund - also a
part of my office - is increasingly building financial literacy programs into its award-making
process.
There is a lot of great work being done by the private sector to educate consumers about
the mortgage process, the financial responsibilities of home ownership, and general principles of
consumer finance. Educational resources provided through the private sector - such as Mortgage
101 on the National Association of Mortgage Brokers website - provide consumers the ability to
better understand the mortgage process and choices that they have regarding their mortgage. We
applaud those efforts and hope to continue working with financial institutions, mortgage market
participants, and consumer groups to improve borrower education.
The second area we have been considering is what the Federal government can do to
encourage private sector efforts to eliminate abusive lending practices. One area we have been
examining is whether it would be useful for the Federal government to playa role in encouraging
continued debate, discussion, and implementation of best practices as a means of combating
predatory lending.
Best practices could help consumers navigate the complex mortgage financing process by
giving them some assurance that the mortgage market participant with whom they are dealing
adheres to certain core standards. I am strongly committed to an aggressive program of financial
education to help consumers better protect themselves against abusive lending practices. The
reality is, however, that home financing is exceedingly complex and many homeowners do not
fully understand the documents they sign at closing if they bother to read them at all.
Community groups can also play an important role by encouraging their constituents to deal with
mortgage market participants that adhere to a responsible code of best practices.
All components of the mortgage market - brokers, lenders, and secondary market
institutions - have a role to play in combating predatory lending.
Many prime and subprime mortgage lenders have implemented best practices or lending
guidelines to address predatory lending. Many of these lending guidelines were developed with
active participation of community groups.
Some of the practices addressed in current lending guidelines include: prohibiting the
sale and financing of single premium credit life insurance; limiting or prohibiting loans with
balloon terms or negative amortization features; limiting prepayment penalties and providing
borrowers the option of a loan without a prepayment penalty; requiring full credit bureau
reporting; requiring documentation of a borrower's ability to repay; limiting refinancing to
prevent loan "flipping;" and requiring that borrowers be given fair access to prime credit.

Many such guidelines also address developing standards for third party relationships;
implementing procedures to mitigate foreclosures; restricting charges for points and fees; and
requiring fair and less burdensome arbitration procedures.
We have been taking a detailed look at these lending guidelines and there appears to be a
fair amount of agreement in a number of areas. Given that there is a fair amount of agreement
among individual institutions' best practices and lending guidelines, it seems that it might be
possible to encourage wider adoption of best practices throughout the mortgage industry.
I believe that wider adoption of best practices by lenders has the potential to reduce
abusive lending practices and to provide real value to consumers. However, in today's mortgage
market lenders are only one part of the mortgage process.
In many cases the first contact a consumer makes in the mortgage process is with a
mortgage broker. As I noted at the outset, mortgage brokers have played and will continue to
play an important role in expanding access to credit. While the majority of mortgage brokers
follow responsible business practices, some abusive lending practices - such as loan flipping are often linked to brokers. It is in your best interest and in our interest, and most importantly in
consumers' best interest, that mortgage brokers take steps to eliminate bad actors from your
industry.

As you all know, lenders are not alone in adopting best practices to combat predatory
lending. The National Association of Mortgage Brokers has also developed a code of ethics and
best business practices guidelines. We appreciate the willingness of the National Association of
Mortgage Brokers to participate with us in seeking to expand and strengthen best practices for
the mortgage industry.
Is there more that mortgage brokers can do to combat predatory lending? One weakness
appears to be that regulation and licensing of mortgage brokers is done very inconsistently at the
state level. Some states have no or minimal licensing requirements and state law enforcement
agencies often lack resources to enforce existing laws. It is clearly in the interest of this
organization to work toward eliminating the irresponsible brokers that detract from the positive
role played by mortgage brokers. I would urge your organization to playa pro-active role in
improving the licensing requirements at the state level as a way toward eliminating irresponsible
brokers.
Another group of participants in the mortgage process that could contribute to combating
predatory lending is the secondary mortgage market. The secondary mortgage market - either
through the housing GSEs or Wall Street investment banks - provides a link between capital
market funding and mortgage finance to consumers. While clearly these firms do not have a
direct relationship to the consumer in the same way as mortgage brokers or lenders, secondary
market firms do have a responsibility to ensure that the lenders to whom they provide funding
adhere to high standards of professionalism and corporate citizenship.

I encourage Wall Street firms, in particular, to undertake development of more formal
standards of conduct for the lenders with whom they do business. It is in the reputational as well
as financial interest of Wall Street firms to take steps to ensure that the mortgages they securitize
are issued in accordance with sound underwriting standards and that the consumers who have
received such mortgages have the ability to repay them. The number of lenders adhering to
responsible best practices could be expanded significantly if the secondary mortgage market
made this issue a high priority.
I would greatly appreciate the thoughts and input ofthe members of this organization on
encouraging adoption of best practices and other steps the Federal government can take to
combat predatory lending. There is a tremendous amount of expertise in this room, and I look
forward to the opportunity to work with you in tackling this important issue.
In closing, I would like to thank the National Association of Mortgage Brokers for
inviting me to speak here today.
-30-

OFFICE OF PUBLIC AFFAIRS -1500 PENNSYLVANIA AVENuE, N. W. - WASHINGTON, D.C.e 20220. (202) 622.2960

EMBARGOED UNTIL 11: 30 A.M.
April 15, 2002

Contact:

Office of Financing
202/691-3550

TREASURY OFFERS 4-WEEK BILLS
The Treasury will auction 4-week Treasury bills totaling $14,000 million to
refund an estimated $19,000 million of publicly held 4-week Treasury bills maturing
April 18, 2002, and to pay down approximately $5,000 million.
Tenders for 4-week Treasury bills to be held on the book-entry records of
TreasuryDirect will not be accepted.

The Federal Reserve System holds $10,929 million of the Treasury bills maturing
on April 18, 2002, in the System Open Market Account (SOMA).
This amount may be
refunded at the highest discount rate of accepted competitive tenders in this auction
up to the balance of the amount not awarded in today's 13-week and 26-week Treasury
bill auctions. Amounts awarded to SOMA will be in addition to the offering amount.
Up to $1,000 million in noncompetitive bids from Foreign and International
Monetary Authority (FIMA) accounts bidding through the Federal Reserve Bank of New York
will be ir.:cluded wi thin the offering amount of the auction.
These noncompetitive bids
will have a limit of $100 million per account and will be accepted in the order of
smallest to largest, up to the aggregate award limit of $1,000 million.
The allocation percentage applied to bids awarded at the highest discount rate
will be rounded up to the next hundredth of a whole percentage point, e.g., 17.13%.
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 BookEntry Treasury Bills, Notes, and Bonds (31 CFR Part 356, as amended) .
Details about the new security are given in the attached offering highlights.

000

Attachment

PO-2087

_ For press releases, speeciles, public 3chedules and official biogr(lpilies, cali our 24-hour fax line at (2fJ2) 622-2040
,

HIGHLIGHTS OF TREASURY OFFERING
OF 4-WEEK BILLS TO BE ISSUED APRIL 18, 2002
April 15, 2002
Offering Amount . . . . . . . . . . . . . . . . . . . . . $14,000 million
Public Offering . . . . . . . . . . . . . . . . . . . . . $14,000 million
NLP Exclusion Amount . . . . . . . . . . . . . . . . $10,900 million
Description of Offering:
Term and type of security . . . . . . . . . . . 28-day bill
CUSIP number . . . . . . . . . . . . . . . . . . . . . . . . 912795 JU 6
Auction date . . . . . . . . . . . . . . . . . . . . . . . . April 16,2002
Issue date . . . . . . . . . . . . . . . . . . . . . . . . . . April 18, 2002
Maturity date . . . . . . . . . . . . . . . . . . . . . . . May 16,2002
Original issue date . . . . . . . . . . . . . . . . . November 15, 2001
Currently outstanding . . . . . . . . . . . . . . . $42,884 million
Minimum bid amount and multiples .... $1,000
Submission of Bids:
Noncompetitive bids: Accepted in full up to $1 million at the highest
discount rate of accepted competitive bids.
Foreign and International Monetary Authority (FIMA) bids:
Noncompetitive bids submitted through the Federal Reserve Banks as agents for
FIMA accounts.
Accepted in order of size from smallest to largest
with no more than $100 million awarded per accoun~.
The total noncompetitive amount awarded to Federal Reserve Banks as agents for
FIMA accounts will not exceed $1,000 million. A single bid that
would cause the limit to be exceeded will be partially accepted in
the amount that brings the aggregate award total to the $1,000
million limit.
However, if there are two or more bids of equal
amounts that would cause the limit to be exceeded, each will be
prorated to avoid exceeding the limit.
Competitive bids:
(1) Must be expressed as a discount rate with three decimals in
increments of .005%, e.g., 4.215%.
(2) Net long position (NLP) 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
Maximlli~ Award . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35% of public offering
Receint of Tenders:
*
Noncompe-ci
ti ve tenders:
Pri:)r te 12: 00 noen ea.:starn dayligh-t 3aving time on auct.ion day
~::':ID..Fet=- t.i "rJe

?~ior

tenders:

to 1:00 p.m. sastern daylight sa'li::1g time on auction day

?a.::-:ner::' ~er:ns:
Ey ch?r:;etc a f:.:lnds ac:=eunt at a Federal Reserve Bank
.::In issue date_

DEPARTMENT

TREASURY~

THE

TREASURY

NEWS

~/7~. . . . . . . . . . . . . ..

................

OmCE OF PUBUC AFFAIRS .1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C .• 20220 • (202) 622-2960

For Immediate Release
April 15,2002

Contact: Tara Bradshaw
(202) 622-2014

TREASURY RELEASES FIRST IN SERIES OF
TAX SIMPLIFICATION PROPOSALS
First Release Proposes Single Definition of Child
Secretary Paul O'Neill today announced a Treasury proposal for a single definition of
child in the tax code, as the first of several proposals to simplify the U.S. income tax code.
Secretary O'Neill said, "The tax code is an abomination. It runs unnecessarily to thousands of
pages. Many Americans hire tax preparers because they cannot understand the forms and
instructions and they are afraid of being punished if they make a mistake. We can take
immediate steps to restore some common sense to the tax code and make it simpler and more
fair. "
The Internal Revenue Code is extraordinarily complex. This complexity imposes a high
cost and burden on taxpayers as they try to comply with the myriad tax provisions. Many
taxpayers and businesses face significant challenges in understanding the tax laws, keeping
required records, and filling out numerous complicated and detailed tax forms which often
require working through lengthy, difficult to understand instructions and cumbersome
calculations.
"Our tax code is so complicated, we've made it nearly impossible for even the Internal
Revenue Service to understand," O'Neill stated.
"This burden is too great," O'Neill continued. "Estimates of how much taxpayers spend
complying with the tax code range from $70 billion to $125 billion a year, and include literally
millions of hours. Consider the example of senior citizens who have some modest retirement
savings. Right now, they are prohibited from using the simplest tax forms and are forced instead
to use much more complicated forms and wade through much more complicated instructions.
They shouldn't have to bear that extra burden at this point in their life. Rather, we should make
the process as simple as possible for them.
"This tax code also hurts the economy and strains our society's moral fabric. It imposes
costs on taxpayers in terms of time and money spent complying with the code that they could
better spend in other ways. Certainly, small business owners would rather invest in their
businesses than pay tax preparers, and parents would rather spend a sUlmy Saturday playing with
their children than filling out tax forms.
PO-2088
__

Fm- press re;-eases,'t'
sJ.eeches'A:bubllC sctmlules and official biographies, call au, 24-hour fax Hne at (202) 622-2040
L

"One of the unseen consequences of our tax code's complexity is the sense it leaves with
taxpayers that the system is unfair and that others pay less tax because of special advantages.
When most taxpayers believe that others aren't paying their fair share, compliance with our
voluntary tax system begins to fall off ~ a dangerous proposition for a democracy.
"Simplifying the tax code will reduce taxpayer burden by making it easier for taxpayers
to understand and comply with the law, and will increase the sense of fairness -- that everyone is
being treated the same."

Why Simplify?

We support tax simplification proposals that meet these essential principles:
Fairness. Americans want to know that the person down the street or across town is
paying his or her fair share. Most agree that the poor shouldn't pay much at all, but those who
are able should not get a free ride on the backs of honest taxpayers. Fairness does not mean
punishing success, but it does mean that everyone must pay their fair share.
Simplicity. Taxpayers would rather not need tax specialists to prepare their taxes. But
today even non-affluent taxpayers need help because the system is so complicated. Many
Americans are also concerned they are missing deductions to which they are entitled because the
system is so complex.
Clarity. People want to understand their tax obligations and know exactly what they owe.
The tax code and the tax burden should be clear to the taxpayer, without the need for extra help.
Ease. The tax code costs too much to comply with and too much to administer. This
burden is a drag on the economy and costs jobs. We need a tax code that is simpler, easier to
unde:istand, and less costly.

Simplifying the tax code pursues these principles by:
Reducing taxpayer compliance costs and paperwork.
Reducing IRS administrative costs.
Reducing tax distortions that impair economic growth.
Improving the readability, predictability, objectivity, and transparency of the law.
Reducing the need for interactions between taxpayers and the IRS to resolve disputes.
Improving taxpayers' compliance with and confidence in the tax system.
Eliminating outdated provisions or rules.

Monumental Task

We have before us a monumental task. There are many examples of unnecessary
complexity in the tax code. One of the most egregious complexities is that the current Internal
Revenue Code provides five major tax benefits relating to children and each has a different
definition of a qualifying child. We address this problem with our proposal described below for
a uniform definition of a qualifying child.
Inconsistent definitions are just one source of complexity, however. Another is the sheer
complexity of some of the calculations taxpayers are required to make. Often taxpayers must
refer to secondary schedules that, in tum, refer to various worksheets or publications to perform
basic calculations such as to determine whether they qualify for a particular tax benefit or are
subject to a phase-out or limitation. Sometimes, taxpayers must choose among a confusing array
of options such as when saving for retirement or higher education.

High Costs on Taxpayers
Tax complexity imposes high compliance costs on taxpayers. Some compliance costs
arise out of the very nature of an income tax and its need to measure people's income. Other
compliance costs are due to the use of the income tax to achieve various social and economic
policies. The process of recording and calculating on tax forms is only one dimension of
complexity and taxpayer burden. Another is the record-keeping that must occur throughout the
year in many cases. Collecting receipts and maintaining files are certainly not beyond the
abilities of the vast majority of taxpayers. But the amount of such activity, along with the other
dimensions of tax complexity, reach onerous levels few taxpayers find acceptable. Thus, tax
complexity may also diminish taxpayer compliance. As National Taxpayer Advocate Nina
Olson recently remarked: "We are creating an environment in which even the most compliant
taxpayer may wonder: Why bother?"

Who Pays? We do. In both visible and hidden ways
Tax complexity also raises the cost of administering the tax system, and taxpayers pick
up the tab. lRS must devote additional resources to provide help for taxpayers, develop
regulations, and audit and otherwise correct mistakes in taxpayers' returns. These additional
costs are paid for by taxpayers. Many taxpayers must resort to assistance from lawyers,
accountants, and other services just to wade through the morass of the tax code. Complexity also
erodes the ability of the Internal Revenue Service to enforce the tax laws by focusing on real
problem areas, and leaving honest taxpayers alone.
Americans pay in other ways, as well. Every business and employer, large or small, must
bear the cost of tax code compliance - the paperwork, the accounting bills, and the lawyer's fees.
And the products we all buy might be cheaper, better, or more plentiful if the compliance costs
could be reduced.

Drag on the Economy
In addition to the direct costs associated with tax complexity, namely the compliance and
administrative costs, tax complexity imposes a substantial drag on the economy in other ways.
For example, as tax complexity increases, taxpayers are less likely to predict accurately the tax
consequences of their decisions. An inability to predict tax consequences confidently leads to a
greater sense of uncertainty about those decisions. This uncertainty can affect important
business and family decisions, such as buying a home or car, hiring a new worker, or saving for
retirement or for education.

Next Steps
The federal income tax is a machine that generates revenue to pay for the activities of the
federal government. Like any machine, the income tax requires regular maintenance, upgrading,
and an occasional overhaul. Simplification is part of this ongoing process. The result of tax
simplification will be a tax system that is fairer, easier to comply with and administer, easier to
understand and predict, and less burdensome on taxpayers, the IRS, and the economy in general.
Starting today, we will begin releasing a series of proposals to simplify the tax code.
These proposals will first focus on individuals and subsequent proposals will focus on
businesses.

Proposals on the Tax Treatment of Families and Children
The first group of proposals will address the tax treatment of families and children. Topics
will include:
•
•
•
•

Uniform definition of a qualifying child,
Determining taxpayers' filing status (e.g., head of household),
Earned Income Tax Credit, and
Taxation of dependents.

Uniform Definition of a Qualifying Child
Today we are releasing the first proposal in this group, concerning a unified definition of
a child. This proposal is included as an attachment to this document. There are in the tax code
today five major provisions that provide tax relief to families with children, and there are five
different definitions of a qualifying child.
The five provisions are:
•
•

the dependent exemption,
the definition associated with Head of Household filing status,

•
•
•

the Child Tax Credit,
the Dependent Care Tax Credit, and
the Earned Income Tax Credit.

To see how this can confuse a taxpayer, consider the example of a shared household. Now it
is possible for three different family members, who live together for a full year, to claim the
same child for at least four different tax benefits:
•
•
•

The grandmother who provides more than half the costs of maintaining the home in which the
child resides could claim head of household filing status;
The child's aunt who provides over half the child's support and cares for the child as her own
may claim the dependency exemption and the child tax credit; and
The child's mother may claim the EITC.

Yet, none of these women may claim the child and dependent care tax credit, even if they
work and pay for the care of the child. To claim that credit, one taxpayer must both support the
child and maintain the household in which she and the child reside. Under the proposal, the
child's mother (or if the family prefers, the grandmother or aunt) could claim all four tax
benefits.

Conclusion

Secretary O'Neill concluded, "The tax code should not scare law-abiding and hardworking citizens when they sign their tax return. Our tax code is still an abomination. It is not
worthy of our free society. By beginning to undo unnecessary complexities, we can take the first
steps to a better, simpler tax code. We need to start now."

Attached is the Treasury Department's proposal for a uniform definition of a qualifYing child.

Proposal for Uniform Definition
of a Qualifying Child

Department of the Treasury
April 2002

UNIFORM DEFINITION OF A QUALIFYING CHILD
Current Law
The tax code provides assistance to families with children through the dependent exemption,
head-of-household filing status, child tax credit, child and dependent care tax credit, and earned
income tax credit (EITC). However, each of these provisions has a unique definition of eligible
child. These are described below.
Dependent Exemption: To qualify as a dependent, an individual must satisfy five tests. First, he
or she must either be a qualifying relative or meet certain residency requirements. Qualifying
relatives include the taxpayer's (l) son or daughter or a descendant of either (e.g., grandchildren,
great-grandchildren); (2) stepson or stepdaughter; (3) sibling or step sibling; (4) parent or
ancestor of parent (e.g., grandparent, great-grandparent); (5) stepparent; (6) son or daughter of a
sibling; (7) a parent's sibling; or (8) father-in-law, mother-in-law, son-in-law, daughter-in-law,
brother-in-law, or sister-in-law. If the individual is not a qualifying relative, the taxpayer's home
must be his or her principal place of abode for the full tax year, and the individual must be a
member of the taxpayer's household. I
Second, the individual must also receive more than half of his or her support from the taxpayer. 2
Third, he or she must be a citizen or resident of the United States or a resident of a contiguous
country (Canada or Mexico). Fourth, if the individual is married, he or she cannot file a joint tax
return with his or her spouse, except to receive a refund of withheld taxes. Fifth, a taxpayer
cannot claim a dependent if the dependent's gross income exceeds the exemption amount
($3,000 in 2002). This test does not apply if the dependent is the taxpayer's child (son, daughter,
stepson, stepdaughter, or foster child) and is under the age of 19 at the close of the calendar year
(under 24 if a full-time student). A foster child is defined to mean an individual for whom the
taxpayer "cares for as the taxpayer's own child." A foster child must reside with the taxpayer for
the entire year.
Special rules apply to more complicated family situations. For example, in the event of divorce
or separation, the custodial parent is generally entitled to the dependent exemption if the parents,
in combination, provide over half the support of the child. To qualify as the custodial parent, the
taxpayer must reside with his or her child for over half the year. The noncustodial parent may
claim the exemption only if the custodial parent provides him or her with a written waiver to be
attached to the tax return.
There are other circumstances, in addition to divorce or separation, when more than one taxpayer
helps support an individual. If each taxpayer provides less than half of the person's support, but
in combination, they provide over half of the person's support, then one of the taxpayers can
claim the dependent exemption if three additional tests are met. First, the taxpayer meets all the
requirements, other than support, for claiming the person as a dependent. Second, the taxpayer
contributes over ten percent of the person's support. Third, each of the other taxpayers who
I A taxpayer or another individual may still be considered to be a member of the household despite a temporary
absence due to special circumstances. such as illness. education. work. military service, or vacation.
2 Public assistance payments are taken into account as support payments made by a government entity.

provide at least ten percent of the person's support signs a waiver, which the taxpayer claiming
the exemption then attaches to his or her tax return.
An exemption is not allowed for any dependent unless a taxpayer identification number for the
dependent is included on the taxpayer's tax return.
Head of Household Filing Status: Unmarried taxpayers may be considered heads of households
if they maintain as their home a household that constitutes for more than half of the tax year the
principal place of abode for (1) unmarried sons, daughters, stepchildren, or descendants of the
taxpayers' sons or daughters; (2) married sons, daughters, stepchildren, or descendants of the
taxpayers' sons or daughters, who the taxpayers can claim as dependents; or (3) relatives whom
they can claim as dependents (as defined above). Unmarried taxpayers may also claim head of
household filing status if they maintain a separate household for dependent parents for the tax
year.
Child Tax Credit: Taxpayers can claim the child tax credit for qualifying individuals who meet
three tests, in addition to the five tests that qualify them as dependents. The qualifying
individual must be under the age of 17. Further, the child must be the taxpayer's son, daughter,
grandchild, sibling, niece, nephew, or foster child. Stepchildren, stepsiblings, and their
descendants are also qualifying children. If the child is the taxpayer's sibling, niece or nephew,
the taxpayer must care for the child as if the child were his or her own child. Finally, the child
must be a citizen or resident of the United States (that is, the contiguous country rule, which
applies to the dependent exemption, does not pertain to the child tax credit).
The definition of foster child for the child tax credit differs from that used for dependents. As
under the definition of a dependent, a foster child is an individual for whom the taxpayer "cares
for as the taxpayer's own child" and who resides with the taxpayer for the entire year. However,
the foster child must also be a child placed with the taxpayer by an authorized placement agency.
Tax Benefits Related to Child Care: Taxpayers may be eligible for the child and dependent care
tax credit and the exclusion for employer-provided child care if they provide over half the costs
of maintaining a home in which they and a qualifying individual reside. Qualifying individuals
include dependents (as defined above) under the age of 13. Custodial parents may also claim
children under the age of 13 whom they would be entitled to claim as dependents if they had not
waived the exemption to the noncustodial parents. Qualifying individuals can also include
dependents (of any age) or spouses who are physically or mentally incapable of caring for
themselves.
To qualify for the CDCTC, a taxpayer must maintain the household in which the taxpayer and
the qualifying individual reside. The household maintenance test applies to both married and
unmarried filers. A taxpayer must provide over half the cost of maintaining the household for
the period during the year in which he or she resides in the home with the qualifying individual.
Earned Income Tax Credit (ElTC): A child is a qualifying child if the following three
requirements are met: (l) the child must be the taxpayer's son, daughter, grandchild, sibling,
niece, nephew, or foster child; (2) the child must generally reside with the taxpayer in the same

principle place of abode in the United States for over half the year; and (3) the child must be
under the age of 19 (or under 24 if a full-time student). Stepchildren, stepsiblings, and their
descendants are also qualifying children. If the child is the taxpayer's sibling, niece or nephew,
the taxpayer must care for the child as if the child were his or her own child. The definition of
foster child is the same as under the child tax credit, except that the residency test is over six
months rather than twelve months.
If more than one taxpayer claims the same child for purposes of the EITC, the following rules
apply. If each claimant satisfies the age, relationship, and residence tests with respect to the
same child, only the taxpayer with the highest adjusted gross income (AGI) can claim the child.
However, the parent's claim supercedes the claims of other taxpayers, regardless of the outcome
of the AGI tiebreaker test. If both parents file separate returns claiming the child, then the parent
who resides with the child the longest is deemed entitled to the EITC. In the event that both
parents reside with the child for the same amount of time, then the parent with the highest AGI is
entitled to the credit.
Both the taxpayer (including his or her spouse, if married) and qualifying child must have a
social security number that is valid for employment in the United States (that is, they are U.S.
citizens, permanent residents, or have certain types of temporary visas that allow them to work in
the United States).
Reasons for Change
Taxpayers with children may receive a number of tax benefits to help offset the costs of raising a
family. In tax year 2003, there will be over 52 million taxpayers with children. Of these, 49
million taxpayers will claim child dependents, while millions will claim one or more other childrelated tax benefits.

Tax Year 2003
Child-Related Tax Benefit
Dependent Exemption
With Child
Head of Household Filing Status
With Child
Child Tax Credit
Child and Dependent Care Tax Credit
Earned Income Tax Credit
With Child

Number of Returns (millions)
52.5
49.4
24.4
22.4
30.8
6.1
19.8
16.5

In many cases, taxpayers will claim more than one of these benefits. For example, 30.8 million
taxpayers will claim both child dependent exemptions and the child tax credit, 16.3 million
taxpayers will claim both child dependent exemptions and the EITC, and 10.6 million taxpayers
will claim all three. Over a million taxpayers will claim all five of the child-related tax benefits.

But to obtain these benefits, taxpayers must wade through pages of bewildering rules and
instructions because each provision defines an eligible "child" differently. For example, to claim
the dependent exemption and the child tax credit, a taxpayer must demonstrate that he or she
provides most of the support of the child. To claim the EITe, the taxpayer must demonstrate that he
or she resides with the child for a specified period of time. Having different defmitions for as
simple a concept as one's child may confuse taxpayers and lead to erroneous claims of one or more
child-related tax benefits. As a recent EITe compliance study found, nearly one in five children
claimed as dependents and EITe qualifying children in 1999 were disallowed for one, but not both,
tax benefits.
Taxpayer confusion and errors may also be linked to some of the criteria used to determine
eligibility for the child-related tax benefits. A 1993 General Accounting Office study found that
in 1988, taxpayers erroneously claimed exemptions for an estimated nine million dependents. 3
Nearly three-quarters of erroneous claims were attributable to taxpayers' failure to meet the
dependent support test. Among those who did not meet the support test, taxpayers did not
provide financial support for 57 percent of the claimed dependents. In the remaining cases,
taxpayers lacked adequate records to demonstrate that they had met the support test. Replacing
the support test, which is difficult to understand and to administer in the absence of an intrusive
audit, with a uniform residency test would reduce both compliance and administrative costs.
Proposal

Uniform definition of qualifying child
A uniform definition of qualifying child would be adopted for purposes of determining eligibility
for the dependency exemption, the child tax credit, the child and dependent care tax credit, head
of household filing status, and the EITe. A qualifying child would have to meet the following
three tests:
•

Relationship - The child must be the taxpayer's son, daughter, stepchild, sibling, stepsibling,
or a descendant of such individuals. Foster children placed with the taxpayer by authorized
placement agencies would satisfy the relationship test. If the child is the taxpayer's sibling or
stepsibling or a descendant of any such individual, the taxpayer must care for the child as if
the child were his or her own child.

•

Residence - The child must live with the taxpayer in the same principal place of abode in the
United States for over half the year. Military personnel on extended active duty outside the
United States would be considered to be residing in the United States. As under current law,
the taxpayer and child are considered to live together even if one or both are temporarily
absent due to special circumstances such as illness, education, business, vacation, or military
servIce.

•

Age - The child must be under the age of 19, a full-time student if over age 18. an.d und~r age
24, or totally and permanently disabled. However, as under current law, quahfymg chIldren

3 United

State General Accounting Office. Tax Administration: Erroneous Dependent and Filing Status Claims.
Report GAO/GGD-93-60, March 1993.

(who are not disabled) must be under age 13 for purposes of the child and dependent care tax
credit and under 17 (whether or not disabled) to qualify for the child tax credit.
Neither the support nor gross income tests would apply to qualifying children who meet the
relationship, residence, and age tests. In addition, taxpayers would no longer be required to meet
a household maintenance test when claiming the child and dependent care tax credit.
If more than one taxpayer claims the same qualifying child, then the following tiebreaker rules
would apply:
•

If only one of the claimants is the child's parent, then he or she would receive the tax benefit.

•

If the child's parents do not file a joint return and both claim the child on separate returns,
then the tax benefit would accrue to the parent with whom the child resides the longest. If
both parents reside with the child for the same length of time, then the benefit would accrue
to the parent with the highest adjusted gross income.

•

If the child's parents do not claim the child, then the tax benefit would accrue to the claimant
with the highest adjusted gross income.

Custodial parents generally could not release the claim to a dependent exemption to a
noncustodial parent. However, if there is a child support instrument between the parents that
applies to the dependent and that is in effect as of the date of the announcement of a legislative
proposal, then current law will pertain. That is, in such cases, a custodial parent could release
the claim to a dependent exemption (and, by extension, the child tax credit) to the noncustodial
parent. 4
Taxpayers could continue to claim individuals who do not meet the proposed relationship,
residency, or age tests as dependents if they meet the requirements under current law (with the
exception of the rules governing divorced parents). Thus, taxpayers would still be able to claim
parents as dependents if they meet the support and gross income tests. As under current law,
taxpayers would also be able to claim a distantly related or unrelated child as a dependent if the
child resides in the taxpayer's home for the full year and meets the current law dependency tests.
Further, such children would still not qualify the taxpayer for the child tax credit or the EITC
unless placed in the home by a state agency. However, if more than one taxpayer claims a child
as a dependent, then the proposed residency-based tests would supercede current law.
Taxpayers would be required to provide a valid taxpayer identification number for each
qualifying child. An EITe qualifying child, however, would be required to have a social security

• Current law specifies that noncustodial parents cannot claim the dependent exemption for a child without receiving
a waiver from the child's custodial parent. However. according to the National Taxpaver Advocate's FY 2001
Annual Report to Congress (Publication 2104, December 3 L 200 I) the courts in 35 states have held that they have
the authority to allocate the dependency exemption between spouses who are before them m a dIvorce or custody
case. Current law may need to be clarified in order to ensure that family courts are correctly mterpretmg
Congressional intent regarding the release of the dependency exemption by the custodial parent.

number that is valid for employment in the United States (that
permanent residents, or have certain types of temporary visas).

1S,

they are U.S. citizens,

Discussion:
By harmonizing the definition of qualifying child across five related tax benefits, the proposal
would reduce both compliance and administrative burdens. By eliminating sources of taxpayer
confusion and replacing the complicated support test with a simpler residency requirement, the
proposal may also reduce erroneous claims of child-related tax benefits. Eliminating the support
test would permit some parents who are making the transition from welfare to work to claim
exemptions for their qualifying children as well as the child tax credit. Under current law, they
may not be eligible to claim their child as a dependent, even though they work, if they received
substantial government assistance before they entered the workforce.
The proposal would more closely conform the rules for dependent children to those used for
EITe qualifying children. Under current law, taxpayers may be confused by the different
Further, the taxpayer would no longer be required to
definitions of eligible children. 5
demonstrate, and retain the records to prove, that he or she provides over half the support of the
child. A uniform definition of qualifying child would reduce IRS administrative costs as well.
Currently, the IRS must ask taxpayers undergoing an audit to supply one set of documents to
confirm that they support the child they claim as a dependent and another set of documents to
prove that they reside with the same child in order to qualify for the EITe. Under the proposal,
the IRS would request only documentation of residency.
The proposal would also clarify who may claim the child for tax benefits in extended families
and other complicated living arrangements. Under current law, it is possible for three different
family members, who live together for a full year, to claim the same child for at least four
different tax benefits:
•
•
•

Yet, none of these women may claim the child and dependent care tax credit, even if they work
and pay for the care of the child. To claim that credit, one taxpayer must both support the child
and maintain the household in which she and the child reside. Under the proposal, the child's
mother (or if the family prefers, the grandmother or aunt) could claim all four tax benefits.

For example, the custodial parent who waives the dependent exemption to the chIld's noncustodial parent may not
understand that he or she still qualifies for the EITe. Or a parent who claims the EITC may erroneously belIeve he
or she can also claim the dependent exemption for the child even though most of the child's support comes from
government assistance programs. Under the proposal. the taxpayer would be able to claIm the same ch!ld for all
child-related tax benefits.
5

Another source of complexity arises from the household maintenance test that is applicable to the
child and dependent care tax credit. Under current law, single taxpayers are required to meet two
separate household maintenance tests for head of household filing status and for the CDCTC.
Married couples are generally not required to meet a household maintenance test, except to claim
the CDCTC. Eliminating the household maintenance test for the child and dependent care tax
credit would reduce record-keeping for both single and married workers with children. It would
also expand eligibility for the credit to taxpayers who do not maintain the home in which they
and their child live but who also incur child care expenses in order to work. For example, a
young working mother who lives with her parents could qualify for the credit under the proposal
if she pays for child care, regardless of whether she maintains the home in which she, her
parents, and her child reside.
Summary of Simplification Gains: Over 52 million taxpayers would benefit from simplifying
the definition of qualifying child for the five related child tax benefits. The proposal would
reduce taxpayer confusion over differing definitions of qualifying children. It would also reduce
record-keeping burdens, as taxpayers would no longer have to demonstrate that they support
their children. Further, the proposal could result in the elimination of the six-line Schedule EIC
and the page of instructions that accompanies it. Many taxpayers would no longer have to
bother reading the four pages of instructions in Publication 501 that explain the support tests or
complete the 22-line worksheet to calculate their share of a child's support.
Under the proposal, the IRS would also receive additional information on the tax return to verify
head of household filing status. Under current law, taxpayers are not required to provide the
taxpayer identification number (TIN) of children who qualify them for head of household filing
status but not for a dependent exemption. Under the proposal, all qualifying children - for
purposes of the five child-related tax benefits - would be required to have a TIN.

Comparison of Key Provisions Relating to Qualifying Children under Current Law and the Proposal
Dependency Exemption
,~.

Relationship test
Sons,
Yes
daughters,
grandchildren
Brothers,
Yes
sisters, nieces,
nephews

----------- Current Law ----------Head of Household
Child Tax Credit
Child and Dependent
Filing Statu~
Care Tax Credit
Yes

Yes

Yes, if qualifies as a
dependent

Any child may be treated Yes, if qualifies as a
as own child if lives with dependent
taxpayer for entire year
and the taxpayer cares for
thc child as his or her own
Under 19 or under 24 if
full-time student

No age limit for
unmarried sons,
daughters, grandchildren,
and stepchildren,
Otherwise, same as
dependency exemption,

3. Gross income
limit

Individual cannot be
claimed as a dependent if
earns more than the
exemption amount, except
if son, daughter, stepson,
stepdaughter, or foster
child under age limit
Certain related children
do not have to live with
the taxpayer, otherwise
entire year
Taxpayer must provide
over one half of the
chile!' s support,

No limit for unmarried
sons, daughters,
grandchildren, and
stepchildren regardless of
age; otherwise, same as
dependency exemption

S. Support test

6. Household
maintenance test

None

Yes

Yes
I

Foster children
(which may
include
relatives and
unrelated
children)
2. Age limit

4. nesidency
requirements

Proposal

Earned Income Tax
Credit

Yes, if qualifies as a
dependent and taxpayer
cares for child as his or
her own
Yes, if lives with taxpayer
for entire year, is placed
by an authorized
placement agency, and
taxpayer cares for the
child as his or her own
Under 17

Same as dependency
exemption

Child must live with the
Same as dependency
taxpayer for over one half exemption
of the year
No support test for
unmarried sons,
daughters, grandchildren,
and stepchildren;
otherwise, same as
dependency exemption
Taxpayer must provide
over one half of the costs
of maintaining the
household
-

Same as dependency
ex'emption

None

Yes, if taxpayer cares for
child as his or her own

Same as dependency
exemption

Yes, if taxpayer cares for
child as his or her own

Yes, if lives with taxpayer Yes, if lives with taxpayer
for over half the year and
for over half the year, is
placed by an authorized
is placed by an authorized
placement agency
placement agency, and
taxpayer cares for the
child as his or her own
Under 19, under 24 if fullUnder 13 (no age limit for Same as dependency
time student, and no age
exemption, but no age
disabled dependent)
limit for disabled children limit for disabled children
(however, under 17 for
child tax credit and under
13 for child and
dependent care tax credit)
Same as dependency
No limit
No limit
exemption

Same as dependency
exemption

Child must live with the
taxpayer for the period
during which the
expenses were incurred
Same as dependency
exemption

Child must live with
taxpayer for over one half
of the year

Child must live with the
taxpayer for over one half
of the year

None

Taxpayer must provide
over one half of the costs
of maintaining the
household for the period
during which child lived
with taxpayer

None

DEPARTMENT

THE

TREASURY

NEWS

lREASURY

omCE OF PUBUC AFFAIRS .1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C .• 20220 • (202) 622-2960

For Immediate Release
April 15, 2002 10 AM

Contact: Tara Bradshaw
(202) 622-2014

STATEMENT OF SECRETARY PAUL O'NEILL IN GRAND RAPIDS, MICHIGAN,
ANNOUNCING TREASURY PROPOSAL FOR A SINGLE DEFINITION OF CHILD IN
THE TAX CODE:
Today is tax day - how many of you spent the weekend closeted up with your tax fOnTIS
and a calculator? Or did you just give up and pay someone else to do it, out of sheer confusion?
Our tax code is an abomination. It's 9,500 pages of confusion and complexity. That
complexity is costly - to taxpayers, to our economy, and to public confidence in the fairness of
the system. We've got to fix the tax code so that it's simple, clear, and fair. Americans deserve
to have a code that's understandable and treats everyone the same.
Today we are taking one small step to begin to address the headaches our tax code creates
for working Americans. Did you know the tax code has five different definitions of child? Next
year, there will be over 52 million taxpayers with children. They shouldn't have to sort out
whether their child meets the appropriate definition to be counted as a dependent, and then have
to examine an entirely separate definition to see if they can claim the child tax credit. And yet
that's what our current law requires. Today we are proposing to fix this headache, and create
one tax code definition of a child, so you can spend less time pulling your hair out over your tax
fOnTIs, and more time enjoying your kids.
-30-

PO-2089

Far press re1.iases, speeches, pufJl1c stft8(iules and official biog'l':lphies, call Dl;T 2,J.-1.m:r /[2;: Zinc ~t (2D2) 622-2C40
- -_ _ _ _ _ _ 4

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".:.

omCE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W. " WASHINGTON, D.C." 20220" (202) 622-2960

For Immediate Release
April 15, 2002

Contact: Tara Bradshaw
(202) 622-2014

ADDRESS BY TREASURY SECRETARY PAUL O'NEILL
TO THE ECONOMIC CLUB OF GRAND RAPIDS

It's April 15, do you know where your tax return is?
Hopefully, for your sake, it's in the mail, and the headaches are behind you. But if you
haven't filed yet, no need to rush from lunch -- the main post office here on Michigan Street is
open until midnight tonight.
I do have some good news today. Because of the President's tax relief plan enacted last
summer, working Americans are keeping more of what they earned last year, and will keep even
more of it this year. And small business owners will find it less difficult to invest and create new
jobs.
But clearly, we have more work to do. Even after the President's tax relief, total tax
receipts in 2002 are expected to be over 19 percent of GDP, compared to an average of 18
percent over the last fifty years. Not only is the government's tax take at a record high, but
taxpayers pay the additional burden of complying with a tax code so complex that it is an
abomination.
As Treasury Secretary, I have to oversee the administration of this tax code and the IRS
employees who face the impossible task of sorting through the paperwork and the complexities
of9,500 pages of tax law. We have got to simplify the system, for the sake of every taxpayer
and for the sanity of these IRS employees who are just trying to do their jobs.
I'd like to talk about what this Administration has done to bring the tax system under
control, including the President's historic tax relief program, and our goals for further reforn1s.
1'd also like to talk about Treasury's plans for tax code simplification, and improved
enforcement measures, to ensure that all taxpayers get fair treatment. Finally, I will make some
remarks on the state of our economy - the source of all our tax revenue.

TAX RELIEF
Last year's tax relief plan was a great achievement for the President and, I believe, for
our economy.

PO-2090
_ For press re~ases, speeches, public $~dules and official biogmphies, cail our 24-hour fa::: line at (202) 622-2(J40
b

•

_.;

Consider what we achieved. The refund checks last summer and fall distributed $36
billion to American consumers when we needed it the most, at the nadir of the slowdown. We
immediately cut the 15 percent income tax bracket to 10 percent, benefiting every worker who
pays income taxes. As the full package phases in over the next few years, all the tax rates will
fall. Over the next 10 years, the child credit will double, up to $1,000 per child and the marriage
penalty will be dramatically reduced. The death tax will be completely abolished.
All told, 104 million individuals and families will get an average tax cut of about $1,040.
We didn't stop there. Last month the President signed into law new tax incentives for
companies to invest in new plants and equipment, to speed the economy's return to strong
growth. I think business investment will be a key reinforcement for continuing economic
recovery. The Job Creation Act was designed specifically to encourage investments, especially
from smaller businesses.
I know all this sounds good on tax day. It is good. But there's a catch -- a money-back
guarantee for the government. Last year's tax relief provisions expire in 20 11. We need your
support in urging Congress to eliminate the "sunset" provision on tax relief. Uncertainty
stemming from the sunset clause will undermine investment, so the earlier we act on this, the
better. We would like to see Congress make the tax relief permanent this year.

TAX SIMPLIFICATION
High tax rates aren't the only burden on investment and job creation in our economy.
The compliance burden also is a drain on our economy and undermines public faith in
government. Taxpayers spend as much as $125 billion each year, or about 1% of GDP, just
trying to comply with the tax code. That doesn't include the $9.4 billion they spend to pay for
the IRS to administer the code. The complexities in the tax code divert resources into
unproductive compliance costs - employing lawyers and accountants instead of productive
engineers and innovators. My apologies to lawyers and accountants in the audience - I'm sure
you're all very nice people. But our economy would be better offifwe could simplify the tax
code and retrain you all as engineers!
Simplification is easier said than done. Somebody had a reason for each word that's been
inserted into the 9,500 pages of the tax code. The tax code wasn't born from immaculate
conception.
At Treasury, we are conducting a comprehensive review of the tax laws and their
c0mplexities, trying to find fixes for some of the biggest headaches.
We are releasing the first of these reports today - focusing on the confusing definitions of
child in the tax code. Did you know there are five different definitions of child in the tax code?
You'd think it would be easy to know if you have a child living in your household or not. But
don't be so sure.

That youngster at your dinner table has to fit into one definition to be counted as a
dependent, and has to meet a whole different definition for you to take the child tax credit. Try
to claim the child and dependent care tax credit, and you have to first make sure that youngster
fits yet another definition of child in the tax code.
In tax year 2003, there will be over 52 million taxpayers with children. The child credit,
the child care credit, the Earned Income Tax Credit and other provisions are there to help these
taxpayers by reducing their tax burden. Why should we make it so difficult for taxpayers with
children to receive these benefits that clearly the Congress intended?
Today we are proposing to harmonize the definition of child - to save parents the
headaches of wading through technical definitions and to reduce the number of mistakes that
taxpayers and the IRS then have to sort through and correct.
In the coming weeks, we'll be releasing additional proposals to simplify the tax code,
both for individuals and for businesses. Businesses spend countless hours battling the IRS over
timing of deductions -- not whether or not a cost is deductible, just whether the deduction should
be taken this year or next. As with most regulations, the burden falls disproportionately on
smaller business owners, who can't afford a whole tax department to muddle through these
questions.
The American people deserve a better system. I hope that by publishing detailed
descriptions of these complexities, we can begin a cooperative effort with the Congress to undo
some of these knots.
TAX ENFORCEMENT
I should also add that as we reduce the tax burden on our economy, and simplify the
code, we are taking new steps to make sure that all taxpayers are paying their fair share. There is
no excuse for cheating your fellow citizens. Unfortunately, there are unscrupulous promoters out
there who take advantage of tax complexities and loopholes, marketing questionable transactions
to taxpayers.
We have already started introducing proposals to combat this kind of abusive tax
avoidance, strategies that deliberately violate the spirit of our laws. These transactions are unfair
to the vast majority of taxpayers, who do their best to comply with the code, even with its
difficulties.
THE ECONOMY
I want to switch gears now and talk about how our economy is doing.
I have always been an optimist about the U.S. economy. Sometimes, like last fall,
optimism seems like an act of faith. Other times, like today, optimism seems to be the obvious
choice.

I hardly have to tell this crowd that our economy slowed sharply in 2000, with GDP
growth rate and job growth rate declines beginning mid-year, business capital spending
plummeting in late 2000, and accelerating declines in most indicators through mid-2001. By
August 2001, however, I believed that we were already on track for a fourth quarter rebound.
Then September 11 th happened. Financial markets were shut down for almost a week.
Air transportation came to a standstill. Consumer activities froze as families stayed home in
front of their televisions, uncertain about the future. As a result, GDP fell an annualized 1.3
percent in the third quarter of2001.
Even then, I remained optimistic, and that hope now appears justified. In spite of the
terrorist attacks, our economy still grew in the fourth quarter, confounding doomsayers. The
latest indicators show that our slow period last year was one of the shortest, shallowest
downturns on record.
Based on my own reading of the numbers and conversations with business people spread
around the economy, I believe we are going to see continued improvement throughout 2002.
Productivity growth will stay strong, ifnot always at the 2001 fourth quarter's record-setting
rate. Business spending will revive, as companies gradually restock the inventory pipeline and
invest in those high return projects that have been on hold. Consumers will continue to play their
key role and by year-end, I expect we will approach the 3 to 3.5% annual growth rate that the
U.S. economy can sustain.
Why was the slowdown so short? Several reasons. The most important is that the United
States has the most advanced and flexible economy in the world. Employers took immediate
steps to tum things around, and the result was an eye-popping 5.2% productivity growth in the
fourth quarter oflast year. Add in the effects of the President's well-timed tax cut, and my friend
Alan Greenspan's actions at the Federal Reserve, and you see why our economy is poised to
return to robust growth.
Thank you.
-30-

PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239

FOR IMMEDlA TE RELEASE
April 16, 2002

Contact: Office of Financing
202-691-3550

TREASURY'S INFLATION-INDEXED SECURITIES
MAY 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 May for the following Treasury inflation-indexed securities:
(I) 3-3/8% IO-year notes due January 15, 2007
(2) 3-5/8% 5-year notes due July 15,2002
(3) 3-5/8% IO-year notes due January 15,2008
(4) 3-5/8% 30-year bonds due April IS, 2028
(5) 3-7/8% lO-year notes due January 15,2009
(6) 3-7/8% 30-year bonds due April 15, 2029
(7) 4-114% 10-year notes due January 15,2010
(8) 3-1/2% I O-year notes due January IS, 20 II
(9) 3-3/8% 30-II2-year bonds due April 15,2032
(10) 3-3/8% IO-year notes due January 15,2012
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 2091. The information is also
available on the Internet at Public Debt's website (http://www.publicdebttreas.gov).
The information for June is expected to be released on May 15,2002.
000

Attachment

http://www.publicdebt.treas.gov
PO-2091

TREASURY INFLATION-INDEXED SECURITIES
Ref CPI and Index Ratios for
May 2002
Security:
Description:
CUSIP Number:
Dated Date:
Original Issue Date:
Additional Issue Date(s):

3-3/8% 10-Vear Notes
Series A-2007
9128272M3
January 15, 1997
February 6, 1997
April 15, 1997

3-5/8% 5-Vear Notes
Series J·2002
9128273A8
July 15, 1997
July 15, 1997
October 15, 1997

3-5/8"1. 10-Vear Notes
Series 11.-2008
9128273T7
January 15, 1998
January 15, 1998
October 15, 1998

3-5/8% 30-Vear Bonds
Bonds of April 2028
912810FD5
April 15, 1998
April 15, 1998
July 15, 1998

Maturity Date:
Ref CPI on Dated Date:

January 15, 2007
158.43548

July 15, 2002
160.15484

January 15, 2008
161.55484

April 15, 2028
161.74000
I

Date
May
May
May
May
May
May
May
May
May
May
May
May
May
May
May
May
May
May
May
May
May
May
May
May
May
May
May
May
May
May
May

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31

2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002

CPI·U (NSA) for:

RefCPI

Index Ratio

177.80000
177.83226
177.86452
177.89677
177.92903
177.96129
177.99355
178.02581
178.05806
178.09032
178.12258
178.15484
178.18710
178.21935
178.25161
178.28387
178.31613
178.34839
178.38065
178.41290
178.44516
178.47742
178.50968
178.54194
178.57419
178.60645
178.63871
178.67097
178.70323
178.73548
178.76774

1.12222
1.12243
1.12263
1.12283
1.12304
1.12324
1.12345
1.12365
1.12385
1.12406
1.12426
1.12446
1.12467
1.12487
1.12507
1.12528
1.12548
1.12568
1.12589
1.12609
1.12630
1.12650
1.12670
1.12691
1.12711
1.12731
1.12752
1.12772
1.12792
1.12813
1.12833

1.11018
1.11038
1.11058
1.11078
1.11098
1.11118
1.11138
1.11159
1.11179
1.11199
1.11219
1.11239
1.11259
1.11279
1.11300
1.11320
1.11340
1.11360
1.11380
1.11400
1.11420
1.11441
1.11481
1.11481
1.11501
1.11521
1.11541
1.11561
1.11582
1.11602
1.11622

1.10056
1.10075
1.10095
1.10115
1.10135
1.10155
1.10175
1.10195
1.10215
1.10235
1.10255
1.10275
1.10295
1.10315
1.10335
1.10355
1.10375
1.10395
1.10415
1.10435
1.10455
1.10475
1.10495
1.10515
1.10535
1.10555
1.10575
1.10595
1.10615
1.10635
1.10655

1.09930
1.09949
1.09969
1.09989
1.10009
1.10029
1.10049
1.10069
1.10089
1.10109
1.10129
1.10149
1.10169
1.10189
1.10209
1.10229
1.10249
1.10269
1.10289
1.10308
1.10328
1.10348
1.10368
1.10388
1.10408
1.10428
1.10448
1.10468
1.10488
1.10508
1.10528

January 2002

177.1

February 2002

177.8

March 2002

178.8

TREASURY INFLATION-INDEXED SECURITIES
Ref CPI and Index Ratios for
May 2002
Security:
Description:
CUSIP Number:
Dated Date:
Original Issue Date:
Additional Issue Date(s):

3-7/8 % 10-Year Notes
Series A-2009
9128274Y5
January 15. 1999
January 15. 1999
July 15. 1999

Maturity Date:
Ref CPI on Dated Date:

January 15. 2009
164.00000

Date
May
May
May
May
May
May
May
May
May
May
May
May
May
May
May
May
May
May
May
May
May
May
May
May
May
May
May
May
May
May
May

1
2
3
4
5
8
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31

2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002

CPI-U (NSA) for:

3-7/8% 30-Year Bonds

4-1/4"1. 10-Year Notes

Bonds of April 2029
912810FH6
April 15. 1999
April 15. 1999
October 15. 1999
October 15. 2000
April 15. 2029
164.39333

Series A-2010
9128275W8
January 15. 2000
January 18. 2000
July 15. 2000

3-1/2% 10-Year Notes
Series A-2011
9128276R8
January 15. 2001
January 16. 2001
July 16. 2001

January 15. 2010
168.24516

January 15. 2011
174.04516

Ref CPI

Index Ratio

1.08415
1.08434
1.08454
1.08474
1.08493
1.08513
1.08533
1.08552
1.08572
1.08592
1.08611
1.08631
1.08651
1.08670
1.08690
1.08710
1.08729
1.08749
1.08769
1.08788
1.08808
1.08828
1.08847
1.08867
1.08887
1.08906
1.08926
1.08946
1.08965
1.08985
1.09005

1.08155
1.08175
1.08194
1.08214
1.08234
1.08253
1.08273
1.08293
1.08312
1.08332
1.08351
1.08371
1.08391
1.08410
1.08430
1.08450
1.08469
1.08489
1.08508
1.08528
1.08548
1.08567
1.08587
1.08607
1.08626
1.08648
1.08665
1.08685
1.08705
1.08724
1.08744

1.05679
1.05698
1.05717
1.05737
1.05756
1.05775
1.05794
1.05813
1.05833
1.05852
1.05871
1.05890
1.05909
1.05928
1.05948
1.05967
1.05988
1.06005
1.06024
1.06043
1.06063
1.06082
1.06101
1.06120
1.06139
1.06158
1.06178
1.06197
1.06216
1.06235
1.06254

1.02157
1.02176
1.02194
1.02213
1.02232
1.02250
1.02269
1.02287
1.02306
1.02324
1.02343
1.02361
1.02380
1.02398
1.02417
1.02435
1.02454
1.02472
1.02491
1.02510
1.02528
1.02547
1.02565
1.02584
1.02602
1.02621
1.02639
1.02658
1.02676
1.02695
1.02713

January 2002

177.1

February 2002

177.8

March 2002
-

178.8

TREASURY INFLATION-INDEXED SECURITIES
Ref CPI and Index Ratios for
May 2002
Security:
Description:
CUSIP Number:
Dated Date:
Original Issue Date:
Addltlonallnue Date(s):

3-3/8"1. 30-1I2-Year Bonds
Bonds April 2032
912810FQ6
October 15, 2001
October 15, 2001

3-3/8% 10-Year Notes
Serfes A-2012
91282nJ5
January 15, 2002
January 15, 2002

Maturity Date:
Re' CPI on Dated Date:

Aprfl15,2032
1n.50000

January 15, 2012
177.56452

Date
May
May
May
May
May
May
May
May
May
May
May
May
May
May
May
May
May
May
May
May
May
May
May
May
May
May
May
May
May
May
May

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31

2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002
2002

CPI-U (NSA) 'or:

Re,ePI

Index Ratio

177.80000
177.83226
177.86452
177.896n
177.92903
177.96129
177.99355
178.02581
178.05806
178.09032
178.12258
178.15484
178.18710
178.21935
178.25161
178.28387
178.31613
178.34839
178.38065
178.41290
178.44516
178.4n42
178.50968
178.54194
178.57419
178.60645
178.63871
178.67097
178.70323
178.73548
178.76n4

1.00169
1.00187
1.00205
1.00224
1.00242
1.00260
1.00278
1.00296
1.00314
1.00333
1.00351
1.00369
1.00387
1.00405
1.00423
1.00442
1.00460
1.00478
1.00496
1.00514
1.00532
1.00551
1.00569
1.00587
1.00605
1.00623
1.00642
1.00660
1.00678
1.00696
1.00714

1.00133
1.00151
1.00169
1.00187
1.00205
1.00223
1.00242
1.00260
1.00278
1.00296
1.00314
1.00332
1.00351
1.00369
1.00387
1.00405
1.00423
1.00441
1.00460
1.00478
1.00496
1.00514
1.00532
1.00550
1.00569
1.00587
1.00605
1.00623
1.00641
1.00659
1.00678

January 2002

177.1

February 2002

I
I

177.8

March 2002
-

178.8

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
April 15, 2002

Office of Financing
202-691-3550

RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
91-Day Bill
April 18, 2002
July 18, 2002
912795KS9

Term:
Issue Date:
Maturity Date:
CUSIP Number:
1.680%

High Rate:

Investment Rate 1/:

1.712%

Price:

99.575

All noncompetitive and successful competitive bidders were awarded
securities at the high rate.
Tenders at the high discount rate were
allotted 99.26%.
All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)

Competitive
Noncompetitive
FIMA (noncompetitive)

25,852,004
1,339,413
265,000

4,219,599

Federal Reserve
$

31,676,016

8,395,729
1,339,413
265,000
10,000,142 2/

27,456,417

SUBTOTAL

TOTAL

Accepted

Tendered

Tender Type

14,219,741

Median rate
1.675%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate.
Low rate
1.650%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio = 27,456,417 / 10,000,142 = 2.75
1/ Equivalent coupon-issue yield.
2/ Awards to TREASURY DIRECT = $1,083,476,000

http://www.publicdebt.treas.gov

PO-2092

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
April 15, 2002

Office of Financing
202-691-3550

RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
182 -Day Bill
April 18, 2002
October 17, 2002
912795LF6

Term:
Issue Date:
Maturity Date:
CUSIP Number:
High Rate:

1.905%

Investment Rate 1/:

1.950%

Price:

99.037

All noncompetitive and successful competitive bidders were awarded
securities at the high rate.
Tenders at the high discount rate were
allotted 54.94%.
All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Accepted

Tendered

Tender Type
Competitive
Noncompetitive
FIMA (noncompetitive)

23,643,750
887,092
50,000

10,000,048 2/

24,580,842

SUBTOTAL

TOTAL

3,898,839

Federal Reserve
$

28,479,681

9,062,956
887,092
50,000

13,898,887

Median rate
1.880%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate.
Low rate
1.830%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-cover Ratio

24,580,842 / 10,000,048

2.46

1/ Equivalent coupon-issue yield.
2/ Awards to TREASURY DIRECT = $643,421,000

http://www.publicdebt.treas.gov

PO-2093

DEPARTMENT

THE

TREASURY

NEWS
omCE OF PUBUC AFFAIRS .1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C .• 20220 • (202) 622-2960

EMBARGOED UNTIL 10:30 A.M. EST
Tuesday, April 16, 2002

Contact: Tasia Scolinos
(202) 622-2960

Statement of Treasury Secretary Paul O'Neill
Customs-Trade Partnership Against Terrorism (C-TPAT)
Detroit, Michigan
Good afternoon. Thank you Commissioner Bonner, Governor Engler, and
Governor Ridge. And Jack, it's great to be here with you today.
Since the attacks of September 11 th we've insisted on a new level of security at
our nation's borders to protect our homeland. And we created a new challenge for our
economy - to adopt new security measures without reducing the productivity of American
companies. I'm glad to be here today to commend the Customs Service and its private
sector partners for rising to that challenge.
Over the past few decades, a key source of productivity growth in our economy
has been our increasingly more efficient global supply chain management. American
companies have pioneered rapid movement of goods and components around the globe,
cutting their costs, increasing their responsiveness to shifts in demand, and making their
inventories more flexible. Corporate confidence in the international supply chain is an
obscure reality that most American consumers take for granted - but it underpins the low
prices and high quality we have come to expect.
The Customs Trade Partnership Against Terrorism, C-TPAT, took the lead in
developing new methods and procedures to improve both secUlity and efficiency at our
borders. This partnership is yet another example of the resilience and innovation that
make the US economy the world leader and make me an optimist about our economic
future.
You have already heard how the system works. C-TPAT businesses commit to
pursuing the very best practices in supply chain security. They work with the Customs
Service, and with their own suppliers, to design and implement secure procedures. In
exchange, Customs assures them of faster, less costly import processing.
PO-2094

Rather than just accept the conventional wisdom that there is an unavoidable trade
offbetween efficiency and security, this new endeavor is an improvement in both. When
we are at our best - both in government and in the private sector - we can accomplish
anything we set our mind to. Let me congratulate the seven charter members here today
for matching their sense of responsibility with their spirit of innovation to create CTPAT. They have blazed a trail that we can expect many more American businesses and
their suppliers to follow.
Thank you.

D EPA R T 1\1 E N T

0 F

THE

T REA SUR Y

NEWS
omCEOFPUBUCAFFAIRS e1500PENNSYLVANIAAVENUE, N.W. eWASIDNGTON, D.C .• 20220. (202) 622.2960

EMBARGOED UNTIL DELIVERY
April 16, 2002

Contact: Tony Fratto
(202) 622-2960

Statement by John B. Taylor
Under Secretary of Treasury for International Affairs
before the
Subcommittee on Western Hemisphere, Peace Corps, Narcotics and Terrorism
of the Committee on Foreign Relations
United States Senate

Chairman Dodd, Ranking Member Chafee, members of the subcommittee, thank you for
the opportunity to testify on relations between the United States and Mexico. As you requested I
will focus on the Bush Administration's efforts to improve the performance and effectiveness of
the North American Development Bank (NADBank) and its sister institution, the Border
Environment Cooperation Commission (BECC).
In Monterrey, Mexico, last month, Presidents Bush and Fox announced a set of reforms
to strengthen these institutions' ability to serve the people of the United States-Mexico border
region. Today, I would like to discuss these reforms in some detail and elaborate on why they
will make these institutions more effective.

I would note at the outset that these reforms should be viewed in the context of the
Administration's broader initiative to improve the effectiveness the international financial
institutions and to increase the value they deliver for the U.S. taxpayer. I look forward to
working with the Congress on our broader international financial institution reform agenda, as
well as on the reform proposals I will discuss with you today.

NADBank and BECC: Origins and Experience
The United States and Mexico established NADBank and BECC in 1993 for the purpose
of helping border communities cope with the existing shortfall of environmental infrastructure
and potential environmental pressures relating to the North American Free Trade Agreement in
the US-Mexico border region. The two institutions perform separate, but related functions in
furtherance of their common mission.
PO-2095
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-------____ ,:

J __------------------------------------_______________

·U 5 Government Pnnllnq Ofkp 1998· 619-559

NADBank's role is to arrange financing for environmental infrastructure projects
certified by BECe. BECC works with states and local communities to develop such projects for
certification.
During its seven years of operation, BECC has certified 57 projects, with a total
construction cost of$1.2 billion. During this same period, NADBank has committed $353
million in Environmental Protection Agency (EPA) grant funds for 37 of these projects.
Notwithstanding this activity, the institutions' overall performance has been inadequate
and unsatisfactory. NADBank to date has approved only $23.5 million and disbursed only $11
million in loans to projects, despite having $405 million in authorized paid-in capital and a total
lending capacity of $2.7 billion.
Experience has demonstrated that the NADBank-BECC structure does not work
efficiently. Closely related work is conducted by two separate organizations under the
governance of two separate executive boards. The results of this arrangement have included
duplication of effort, increased transaction costs, and frequent misunderstandings. Many project
sponsors and other stakeholders claim that the BECC-NADBank project approval process is
overly complex, too time-consuming and duplicative, partiCUlarly (but not only) for small
projects and those with private-sector sponsors. Especially frustrating for border state
governments has been the overlap among federal, state, local and NADBanklBECC regulatory
and environmental review requirements.

The Reform Initiative
President Bush has recognized the need for serious reform. He and President Fox of
Mexico, who had also proposed reforms, discussed the subject on several occasions and, in
September 2001, they agreed that "immediate measures were needed to strengthen the
performance of the North American Development Bank (NADBank), and its sister Border
Environment Cooperation Commission (BECC), to identify and fund environmental
infrastructure projects on the border." They called for a binational working group to consult
with key stakeholders and to develop joint recommendations on strengthening the institutions.
Members of the binational working group undertook broad consultations with state
governments, local governments, national legislatures, non-governmental organizations and the
public in the region. In the United States, the Treasury Department, the Environmental
Protection Agency, and the State Department led the outreach efforts. An issues paper was
distributed, including via internet, to Congressional staff, state and local governments, and the
general public. Public hearings and meetings were held with state and local officials and
Congressional staff. Comments received were seriously considered in developing the
recommendations that were eventually endorsed by Presidents Bush and Fox in Monterrey last
month.
The key recommendations are as follows:

Financial Instruments: To provide a greater level of financial flexibility so that its capital
can be used more effectively, the governments have agreed to increase NADBank's ability to
extend affordable financing. This will include doubling the size ofNADBank's Low Interest
Rate Lending Facility, from the $50 million level set in November 2000 to $100 million, and
making $50 million of the Bank's paid-in capital available for grant financing.
Geographic Scope and Financial Differentiation: To expand the capacity of both
institutions to address important binational environmental needs, the geographic scope for
BECCINADBank operations in Mexico will be expanded from 100 km to 300 km from the
border. The geographic limit in the United States will remain unchanged at 100 km from the
border.
To ensure that both institutions continue to focus on the priority environmental needs of
the immediate border region, this geographic expansion will be coupled with a system of
financial differentiation. Specifically, grant financing will be provided to the poorest
communities located within the current border region of 100 km in both countries, and up to 25%
of low interest rate lending may be made available for projects located between 100 km and 200
Ian in Mexico. Projects located between 200 km and 300 km in Mexico would be allowed to
borrow at standard NADBank interest rates and receive normal technical assistance.
Private Sector: To expand the tools available for financing projects that, among other
things, prevent and mitigate industrial pollution, conserve water, improve air quality, and recycle
and reuse wastes, a more concerted effort will be made to certify and finance private sector
environmental projects.
Organizational Structure and Process: To improve functional coordination and
operational efficiency between BECC and NADBank, the two boards of directors will be
replaced by a single board. The new board will have representation from the federal
governments, the border states, and the public. In addition, a comprehensive "business process
review" will be initiated to identify ways to improve the overall project design, certification and
implementation process.
Support for Sectoral Reforms: Sectoral reforms aimed at enhancing the bankability of
environmental infrastructure projects will be leveraged and supported both through technical
assistance and policy reform conditionalities attached to project financing.
It is also important to note that the Presidents agreed that BECC and NADBank will
remain focused on addressing environmental needs in the border region. The institutions will
also continue to implement the agreement reached in November 2000 to expand the institutions'
environmental mandate into areas including water conservation, air quality, and renewable
energy, in addition to the original focus on clean water, the treatment of wastewater, and the
handling of solid waste.

Improved Performance with the Reform Initiative

We believe that these refonns will improve the perfonnance of both institutions in
several ways:
First, the financial refonns will make NADBank financing more affordable and thus
promote an increase in the Bank's project financing activities. The NADBank experience has
demonstrated that its original financial framework is unsuited to the financing of environmental
infrastructure in a region characterized by high rates of poverty and fundamental structural
problems in the utility sector.
Second, the geographic expansion will give NADBank more opportunities to use its
capital resources and thus address a greater scope of important environmental issues that affect
communities on both sides of the border. For instance, NADBank will now be in a better
position to undertake projects in Mexico that improve water use efficiency over a broader
geographic area, thereby increasing water supply in shared rivers.
Third, NADBank and BECC should be able to work more effectively with the private
sector on projects that will make economic development in the region more environmentally
sustainable, which is a win-win proposition for both the environment and economic growth.
Fourth, a single Board of Directors should improve coordination and accountability in
NADBank and BECC and will provide unified, consistent policy guidance to the management of
both institutions. The Board will have the capacity to enforce the imperative that the
management and staff of the two organizations must work together as a team if their common
mission is to be achieved. Membership on the Board will reflect a broad range of interests and,
for the first time, non-Federal board members will have a role in the decision-making processes
of both institutions

Implementation of the Reforms
Implementing the agreed refonns will require great commitment by both governments. I am
pleased that implementation efforts are already underway. EPA, State and Treasury have begun
planning a time line for implementation, and have initiated discussions with their Mexican
counterparts to this end. Important steps include the launching of the business process review,
drafting amendments to the BECC-NADBank Charter, and submitting the necessary legislation
to the two countries' respective legislatures.
As we proceed, we will continue to consult widely with stakeholders and interested parties.
As these implementation efforts get underway, we will emphasize that management at both
institutions continue to work hard to process new and existing project proposals to serve the
urgent environmental needs of border communities. We will urge them, in the spirit of the
refonns, to intensify their efforts to work together in a cooperative and collaborative manner.
Before I conclude, let me note one extremely important point. It is imperative that the
Senate act on President Bush's call to begin consideration of Trade Promotion Authority (TPA)
by April 22.

TPA will help complete both the Free Trade Area of the Americas and our broader
multilateral trade agenda. Of particular importance to this Subcommittee is the renewal and
expansion of the Andean Trade Preference Act (ATPA) that will likely be joined with TPA. A
critical fact that is not well understood is that after ATP A expired, duties on products that would
have qualified ifnot for the expiration of the program were deferred for ninety days. That
deferral expires on May 16, at which time all of the duties deferred over those 90 days will be
due. The Treasury Department estimates that duties were deferred on 50 percent of the trade
that would have been duty-free under the program. It will bring serious duress to U.S.
businesses and our Andean partners if all of those duties have to be paid on May 16. And
without question, TPA will be a great confidence-builder for the U.S. and the global economy.
For all of these reasons I urge the Senate to expeditiously consider TPA.
To sum up, I appreciate the opportunity to discuss NADBank reform and the U.S. Mexico
relationship with you today. We intend to submit a legislative proposal to Congress soon and
look forward to working closely with you as we proceed to make these reforms a reality. I
welcome your views, suggestions, and your questions. Thank you very much.

D EPA R T [\;1 E N T

0 F

THE

T REA SUR Y

OffiCE OF PUBUC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C. - 20220 - (202) 622.2960

For Immediate Release
April 16,2002

Contact: Tara Bradshaw
(202) 622-2014

TREASURY FINALIZES AND FURTHER SIMPLIFIES
RETIREMENT PLAN DISTRIBUTION RULES
Today, the Treasury Department continued the job of simplifying the minimum
distribution rules for IRA holders and retirement plan participants over age 7012. Treasury and
the IRS have finalized the required minimum distribution rules proposed in January of 2001.
The 2001 proposed regulations were extremely well received by employers, retirees, and plan
administrators alike. In addition to finalizing those rules, today's regulations make numerous
improvements in response to public comments.
"This is truly good news for the retirement system," stated William Sweetnam, Treasury
Department Benefits Tax Counsel. "These rules make it simple for older Americans and their
families to determine their annual required minimum distributions and greatly reduce the
compliance burden for qualified plan administrators. The final rules also satisfy our obligation
under the Economic Growth and Tax Relief Reconciliation Act of2001 to modify the life
expectancy tables to reflect current life expectancy."
In addition to finalizing the minimum distribution rules, temporary and proposed
regulations are being issued to provide guidelines for distributions that will be made from
annuities. By issuing these guidelines as temporary and proposed regulations, taxpayers will
have the same chance to comment as they had on the simplification of the rules for individual
accounts.

In order to assist older Americans in meeting their minimum distribution obligations, the
rules include a reporting requirement for IRA trustees. As described in a notice being issued in
conjunction with the new guidance, beginning in 2003, IRA trustees will be required to report
the amount of the required distribution to IRA owners or offer to calculate the amount for the
owner.
Treasury and the IRS have made the rules as flexible as possible for 2002. For this year,
taxpayers may use the new rules, the 2001 proposed rules, or the 1987 proposed rules to
determine their required minimum distributions.

-30PO-2096

_ For press rele~es. speeches. public schegules and official biographies, call our 24-hour fax line at (202) 622-2040
,

DEPARTMENT

THE

TREASURY

NEWS
omCE OF PUBUC AFFAIRS .1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C .• 20220 • (202) 622-2960

FOR IMMEDIATE RELEASE
April 16,2002

Contact: Public Affairs
(202) 622-2960

MEDIA ADVISORY:
UNITED STATES AND KINGDOM OF THE NETHERLANDS WILL SIGN TAX
INFORMATION EXCHANGE AGREEMENT WITH RESPECT TO THE
NETHERLANDS ANTILLES ON WEDNESDAY

Treasury Secretary Paul H. O'Neill will hold the United States-Netherlands Antilles tax
information exchange agreement signing ceremony at 3:30 p.m. EST on Wednesday, April 17,
2002 in the Treasury Department's Diplomatic Reception Room (Room 3311), 1500
Pennsylvania Avenue, NW. Treasury Secretary O'Neill and Prime Minister of the Netherlands
Antilles Miguel Pourier will be signing the tax information exchange agreement.
The Room will be available for pre-set at 2:30 p.m.
Media without Treasury or White House 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) 6221999.

-30PO-2097

For press reiAfses, speeches, public scne~le§ and Dfficial biog'!"aphi::s, [;(£l'l su/' 2':{~.~DU/·

________

Zi,'!<E'

::IX

:2 {)2,;

622-2D4C

~----------------~I~------------------------------------------------

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
Office of Financing
202 -691-3550

CONTACT:

FOR IMMEDIATE RELEASE
April 16, 2002

RESULTS OF TREASURY'S AUCTION OF 4-WEEK BILLS
28-Day Bill
April 18, 2002
May 16, 2002
912795JU6

Term:
Issue Date:
Maturity Date:
CUSIP Number:
1.690%

High Rate:

Investment Rate 1/:

Price:

1.710%

99.869

All noncompetitive and successful competitive bidders were awarded
securities at the high rate.
Tenders at the high discount rate were
allotted 29.68%.
All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Accepted

Tendered

Tender Type
Competitive
Noncompetitive
FIMA (noncompetitive)

SUBTOTAL
Federal Reserve
$

TOTAL

32,083,954
22,568

13,977,714
22,568

32,106,522

14,000,282

2,810,177

34,916,699

16,810,459

Median rate
1.670%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate.
Low rate
1.640%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio

32,106,522 / 14,000,282

2.29

1/ Equivalent coupon- issue yield.

http://www.publicdebt.treas.gov

PO-2098

D EPA R T 1\1 E N T

0 F

THE

T REA SUR Y

omCEOFPUBUCAFFAIRS -1500 PENNSYLVANIA AVENUE, N.W .• WASlllNGTON, D.C. - 20220 - (202) 622-2960

Embargoed Until 1:00 p.m. EDT
April 17, 2002

Contact: Tasia ScoIinos
(202) 622-2960

UNDER SECRETARY FOR ENFORCEMENT JIMMY GURULE
TESTIMONY BEFORE THE
SENATE APPROPRIATIONS COMMITTEE
SUBCOMMITTEE ON TREASURY AND GENERAL GOVERNMENT

Chainnan Dorgan, Ranking Member Campbell, and Members of the Subcommittee, I am
privileged to be here today to introduce the President's FY 2003 budget request for the
Department of the Treasury's law enforcement bureaus and offices. It is indeed an honor to
appear before you this week to represent the more than 31,000 dedicated men and women who
quietly and selflessly serve their country every day -- often at great personal peril and sacrifice.
Testifying with me this afternoon are Bradley A. Buckles, Director of the Bureau of
Alcohol, Tobacco and Fireanns (ATF), James F. Sloan, Director of the Financial Crimes
Enforcement Network (FinCEN), Brian L. Stafford, Director of the United States Secret Service
(USSS), and Paul Hackenberry, Acting Director of the Federal Law Enforcement Training
Center (FLETC). Tomorrow, I will be joined by Robert C. Bonner, Commissioner of the United
States Customs Service (Customs).
I am pleased to note that this week's hearings are the first time this Subcommittee will
hear from five, rather than four, Treasury Enforcement bureaus, since FinCEN recently was
authorized as a bureau within Treasury Enforcement with enactment ofthe USA PATRIOT Act.
I take this opportunity to thank the members of this Subcommittee for your support of this
provision and the many new tools which the USA PATRIOT Act provided to the Treasury
Department to fight terrorism and dismantle and disrupt terrorist financing.
The President's FY 2003 budget seeks a program level of $5.497 billion and 31,847 FTEs
for Treasury Enforcement. This level is significantly higher than the President's initial FY 2002
request largely due to additional resource needs associated with the horrific events of September
1 I th and the overall support of this Subcommittee. The request is 20 percent ($879 million)
above the President's initial FY 2002 budget request for Treasury Enforcement, and it provides
for an increase of 2,403 FTEs for Treasury Enforcement.

PO-2099

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'U S Govemmen' Prln"ng ON,ee 1998

~ 6'9~559

The 2,403 FTE increase includes 1,779 FTE for Customs; 381 FTE for the Secret
Service; 124 FTE for ATF; 94 FTE for FLETC; and 25 FTE for FinCEN. Furthermore, the FY
2003 budget request indicates a staffing level of 48 FTE for the Office of Enforcement, with the
provision of staffing up to 58 FTE within the Office's appropriated level-- the same level for the
third consecutive year.
In response to the terrorist attacks of September 11 th, Congress provided essential FY
2002 emergency appropriations of$674.1 million to the Treasury Enforcement bureaus:
approximately $428.6 million to Customs; $141.5 million to the Secret Service; $31.4 million to
ATF; $31.5 million to FLETC; and $1.7 million to FinCEN. Much of this emergency funding
was for one-time, non-recurring costs. I am pleased to inform the Subcommittee that the
recurring costs from the Terrorism Supplemental have been annualized and incorporated in the
President's budget request.

When the President submitted his budget request on February 4,2002, he indicated it
"recognize[ d] the new realities confronting our nation, and funds the war against terrorism and
the defense of our homeland." To implement this objective, the President's FY 2003 request
contains $159 million in new funding for Homeland Security program initiatives for Customs
($158 million) and FinCEN ($1 million). The FY 2003 budget request includes $29.2 million for
other program initiatives -- $21.7 million for ATF and an additional $7.5 million for the Customs
Automation Modernization programs. The budget request also includes $8 million in additional
resources for Secret Service protection services to begin preparation for the 2004 Presidential
campaign.
The FY 2003 Budget includes inflation type increases and Homeland Security
annualizations of$259.2 million. Although the immediate Office of Enforcement ($8.5 million)
FY 2003 budget request is $231,000 more than the FY 2002 Financial Plan, it is $139,000 less
than the ($8.6 million) FY 2002 Enacted. As I mentioned, the staffing level remains the same.
Over the next two days, the Subcommittee will hear from the Treasury Enforcement
Bureau Directors regarding their respective bureaus' new initiatives and programs. Therefore, I
would like to take this opportunity to provide the Subcommittee with an overview of the newest
challenges facing the men and women in Treasury law enforcement and the exemplary manner in
which they have responded. That they have been able to do so effectively is due, in large part, to
the support that this Subcommittee and the Congress have provided us both before and in the
aftermath of September 11 tho
We have all been deeply affected by the horrific acts of that day. We at Treasury lost a
respected member of our law enforcement family, Secret Service Master Special Officer Craig
Miller, who perished in the World Trade Center. And of course, the New York offices of
Customs, Secret Service, and ATF were destroyed
Combating terrorism has become the Nation's primary agenda. As you are aware, on
September 24,2001, President Bush stated, "We will direct every resource at our command to
win the war against terrorists. every means of diplomacy. every tool of intelligence. every
instrument of law enforcement. every financial influence.

We will starve the terrorists offunding. " Under Secretary Paul O'Neill's leadership, we
in Treasury Enforcement have devoted extensive resources and expertise to fulfill this mandate.
We have worked, and continue to work, in close coordination with the Justice
Department, the Federal Bureau of Investigation (FBI), State Department, the intelligence
community and the Defense Department. Specific examples of our close cooperation include
joint activities in the September 11 th investigations and on the Financial Review Group (FRG).
In these investigations, Treasury has added its investigative expertise and access to unique
databases to support the U.S. Government's efforts.
Our war against terrorist financing extends to financial intermediaries and facilitators
who infuse terrorist organizations with money, materiel, and support. We have come to clearly
appreciate and understand that terrorism has been nourished by ample funding channeled from a
plethora of sources, including banks, charities, hawalas I, narcotics traffickers, and money
launderers.
Disrupting and Dismantling Terrorist Financing
Since September 11 th, Treasury Enforcement, including its component bureaus, has
launched a number of new initiatives to identify, disrupt, and dismantle terrorist financial
networks both domestically and abroad. I am pleased to report to the Subcommittee this
morning that Treasury has named 192 individuals and entities as financiers of terrorism, and has
blocked over $34 million in assets. Our Coalition partners have blocked another $70 million. A
portion of that amount has since been unblocked for the new Afghan Interim Authority to assist
in its critical period of rebuilding. This is truly a global effort -- 196 nations have expressed
support to disrupt terrorist financing and 149 nations can block terrorist assets.
We are grateful that you and your colleagues made significant improvements in the laws
that allow us to tackle the issue of terrorist financing in a more unified, aggressive manner. Of
particular importance to our counter-terrorism efforts is the USA PATRIOT Act that clarifies the
law enforcement and intelligence communities' authority to share financial information regarding
terrorist investigations. These provisions are already being utilized and are bearing fruit in
disrupting financing networks.

Office of Foreign Assets Control
The Office of Foreign Assets Control (OF AC), an office within Treasury Enforcement,
plays a key role on the inter-agency working group, chaired by Treasury, that has been targeting
and listing individuals and entities pursuant to Executive Order 13224 which President Bush
signed on September 23,2001. In this process, we have identified, among other entities, front
companies, charities, banks, and a hawala conglomerate that served as the financial support
networks for al-Qaeda and other global terrorist groups. We have shut down the operations of
these entities in the United States and abroad. Foreign countries have been remarkably
cooperative in this process.
Hawala is a type of alternative remittance system that is common in many parts of the world, including the Middle
East and Far East.
I

OFAC has widely disseminated the names of new designated terrorists to the business
and financial communities through websites, Fedwire Alerts, CHlPS system notices,
communications to Federal and State regulators, and electronic broadcasts to 175 key industry
groups. Information on terrorist designations is also distributed to the public by way of Customs,
the Government Printing Office, and other agency networks.
As you will recall, the Foreign Terrorist Asset Tracking Center (FTAT) was in the
process of being organized and staffed when the terrorist attacks of September 11 th occurred. In
fact, the Financial Crimes Enforcement Network (FinCEN) had already been staffed for the
purpose of providing analytical support to the interagency FTAT and was supplying the product
of that staffing to the Office of Foreign Assets Control (OFAC). Immediately following the
attacks, the Treasury Department helped to accelerate the development of the interagency FTAT
by establishing a temporary operational presence within the secure environment ofFinCEN. The
unit quickly began to serve as an analytical center for combating the problem of terrorist
financing.
Section 906 of the USA PATRIOT Act requires that the Director of the CIA, the
Attorney General and the Secretary of the Treasury jointly file a report on the "feasibility and
desirability" of reconfiguring FT AT. This matter was reviewed by senior government officials,
including the Principals Committee of the National Security Council. Based on that review, a
decision was made to move and reconfigure FTA T to ensure it was fully integrated into the
ongoing terrorist financing activities of other agencies. Treasury will continue its support of
FT AT and its broader efforts to disrupt and dismantle terrorist financing.
Blocking Assets
One of the higher profile results of OFAC analysis was the identification of Al-Barakaat
as a major financial operation that supported terrorist organizations. The AI-Barakaat case is a
good example of model coordination between the Treasury Department, the FBI, and other
enforcement agencies both domestically and abroad.
Al-Barakaat is a Somali-based hawaladar2 operation, with locations in the United States
3
and in 40 countries, that was used to finance and support terrorists around the world. The
investigative work of the FBI, Customs, and IRS-Criminal Investigation, along with analysis by
OFAC, FinCEN, and the intelligence community, identified AI-Barakaat as a major financial
operation that was providing material, financial, and logistical support to Usama bin Laden and
other terrorist groups.
Treasury, along with the Department of Justice, coordinated efforts to block assets and to
take law enforcement actions against AI-Barakaat.

hawaladar is an entity that engages in hawala transactions.
individuals may have used Al-Barakaat as a legitimate means to transfer value between individuals in
different countries without passing through the formal international banking system.
3 Some

On November 7,2001, Federal agents executed search warrants in three cities across the
country -- Boston, Columbus, and Alexandria -- and shut down eight AI-Barakaat offices across
the U.S., including locations in the following cities: Boston, Massachusetts; Columbus, Ohio;
Alexandria, Virginia; Seattle, Washington; and
Minneapolis, Minnesota.
As part of that action, OFAC was able to freeze approximately $1,100,000 domestically
in AI-Barakaat-related funds. Treasury also worked closely with the United Arab Emirates
(UAE) to enable the UAE to block AI-Barakaat's assets at its financial center of operations in
Dubai. Disruptions to AI-Barakaat's cash flows, resulting from OFAC's designation actions and
international cooperation, are estimated to be in excess of $65 million from the United States
alone. In addition, the combined work of OFAC, Operation Green Quest, and law enforcement
had led to additional leads in the AI-Barakaat investigation.
This is an example of what our combined efforts can accomplish when we join our
resources and our expertise to fight the common scourge of terrorist financing.

Joint Designations
On March 11 th, on the six month anniversary of the September 11 th attacks, the Treasury
Department, joined by the Saudi government, took a new step in the war on terrorist financing by
making its first joint designation of a financial supporter of terrorism. Prior to that date,
Treasury received significant cooperation from other countries in blocking accounts of those
named by the United States, and our European allies have made designations oftheir own. The
joint blocking action on March 11 th is especially significant for it is a sign of the growing
strength of the anti-terror coalition and marks a new level of international coordination and
cooperation.
Treasury and the Saudi government blocked the accounts of the Somalia and BosniaHerzegovina branches of the Saudi Arabia-based AI-Haramain Islamic Foundation. While the
Saudi headquarters for this private charitable entity is dedicated to promoting Islamic teachings,
Treasury and our Saudi Arabian allies determined that those specific branches of AI-Haramain
have been engaged in supporting terrorist activities and terrorist organizations such as al-Qaeda,
AlAI (al-Itihaad al-Islamiya), and others.
Last month, Treasury Secretary O'Neill visited the Persian Gulfregion, where he had the
opportunity to meet with King Fahd and Crown Prince Abdullah, others in the Saudi
government, and the leadership in Bahrain, Kuwait and the UAE. Throughout the region, the
Secretary encountered a clear understanding that the September 11 th attacks were not only an
attack on the United States, but were an attack on the civilized world. These governments'
leaders assured Secretary O'Neill that they, like others in the world, are doing what they can to
cut off terrorists' access to funds, wherever those funds are found.
This action also highlights the special need to safeguard charities, so that well-intentioned
donors can be assured that their donations will be used only for their intended good purposes,
and not for acts of terrorism.

During his trip to the Gulf, Secretary O'Neill underscored that misusing charity funds to
support terrorism harms the people who gave the donation, harms the people who should have
received it and is dangerous to us all. The Treasury Department is committed to finding those
organizations that use charities to fund terrorists or terrorist acts, exposing them, and shutting
them down.

Operation Green Quest
On October 25,2001, Treasury created Operation Green Quest ("Green Quest"), a new
multi-agency financial enforcement initiative designed "to augment existing counter-terrorist
efforts by bringing the full scope of the government's financial expertise to bear against systems,
individuals, and organizations that serve as sources of terrorist funding." This task force is led
by the Customs Service and includes the Internal Revenue Service, the Secret Service, ATF,
OFAC, FinCEN, the Postal Inspection Service, the FBI, the Department of Justice, and the Naval
Criminal Investigative Service. Operation Green Quest also receives support from Interpol's
National Central Bureau, based in Washington, D.C. Green Quest brings together the extensive
financial expertise of the Treasury Enforcement bureaus along with the exceptional experience of
our partner agencies and departments to focus on terrorist financing.
Green Quest has complemented the work of OFAC in identifying terrorist networks at
home and abroad, and it has served as an investigative arm to aid in blocking actions. Green
Quest's work has led to 12 arrests, 4 indictments, the seizure of nearly $4 million, and bulk cash
seizures -- cash smuggling -- of over $11 million. Green Quest agents, along with those from the
FBI and other government agencies, have traveled abroad to follow leads, exploit documents
recovered, and to provide assistance to foreign governments. In this effort, Green Quest has
made full use of its overseas Customs Attaches to investigate suspect networks and to gather
information for its own use and the use of OFAC. The work of these financial experts is just
starting as they have opened well over 200 terrorist financing investigations and are following
leads on a daily basis. Green Quest's work, in combination with the work ofOFAC, serves as a
seminal part of our enforcement efforts.

International Cooperation
Our efforts will not have the greatest success if prosecuted unilaterally, and may
ultimately fail if we cannot obtain the cooperation of other nations. To date, all but a handful of
countries have expressed their support for the international fight against terrorist financing.
Currently, 149 countries and jurisdictions around the world can block terrorist assets. The Office
of Enforcement, in concert with other Federal agencies, is providing technical assistance to a
number of countries to strengthen their capacity to freeze terrorist funds. Daily, we are in
contact with foreign financial officials and are engaged in bilateral and multilateral discussions
regarding international cooperation and action against terrorist activities and financing.
The Office of Enforcement has also helped coordinate the deployment of financial "jump
teams" consisting of experienced accountants, bank examiners, and other financial experts from
OFAC, the Customs Service, IRS, FinCEN, the FBI, and other agencies. These experts review
business records and possible links to money associated with bin Laden's al-Qaeda network.

Treasury has engaged in numerous international fora, including the G-7, G-8, G-20, the
Financial Action Task Force (FATF), the Egmont Group -- the global network of Financial
Intelligence Units (FIUs) of which FinCEN is a key member -- and the international financial
institutions to combat terrorist financing in a global, systematic way.
The Treasury Department, in conjunction with the Departments of Justice and State,
hosted an Extraordinary Plenary session of the Financial Action Task Force in Washington,
D.C., at the end of October 2001 to address terrorist financing. This meeting was immediately
followed by a meeting of the Egmont Group to discuss information sharing and terrorism. At the
plenary session, F ATF established eight Special Recommendations regarding terrorist financing
which represent an important step to establishing a global regime to cut terrorists off from the
international financial system.
These new Recommendations were endorsed by countries throughout the world at a
special FATF Forum on Terrorist Financing held in February and attended by over 55
jurisdictions. Moving forward, FATF, with the strong support of the U.S., is now leading a
global effort to bring all countries in compliance with these new standards. The U.S. has
recently completed a self-assessment questionnaire against these standards, which is posted on
the Treasury web site. In June, FATF will begin to consider a process with respect to countries
that are not cooperating in the international effort against terrorist financing.
While countering terrorist financing is a Treasury Enforcement priority, we are also
committed to preventing terrorist acts on U.S. soil and against U.S. interests abroad, and to
reducing violent crime here at home.

Preventing Terrorism and Reducing Violent Crime
Not only is the mission of Treasury law enforcement uniquely suited to combating
terrorist financing, but we playa leading role in homeland security efforts -- from protecting the
Nation's borders to protecting its leaders, to ensuring the integrity of our financial institutions
and critical infrastructures. The President's budget request will ensure that Treasury bureaus can
continue to effectively fulfill missions that are integral to protecting the homeland.

u.s. Secret Service
The U.S. Secret Service protects the Nation's top leaders, combats financial fraud,
protects the integrity of the financial systems against cyberattacks, and leads the effort to ensure
the safety of thousands of citizens participating in designated National Special Security Events
(NSSEs). We have seen the stellar work of the Secret Service in providing security for two
recent NSSEs - the Super Bowl and the Winter Olympic Games in Salt Lake City. The
complexity of these security events highlighted the special expertise and professionalism of the
Secret Service. The dedicated men and women of the Secret Service are to be commended for
their outstanding work at protecting thousands of spectators, employees, and athletes at these
events. The President's budget request will allow the Secret Service to strengthen its efforts in an
increasingly complex and threatening environment.

u.s. Customs Service
The U.S. Customs Service also played a key role in security for the Salt Lake City
Olympic Games. The Customs Service role included providing air surveillance in restricted air
space, ground support to the United States Secret Service, increased presence at the Northern
Border, and screening general aviation aircraft and their passengers and pilots. A total of 500
Customs officers were committed to day-to-day oversight of the Games.
The Customs Service is the vanguard agency in protecting the country against weapons
of mass destruction as it monitors travelers and cargo crossing the northern and southern borders
and through the Nation's seaports and airports. Last November, Secretary O'Neill,
Commissioner Bonner, and I met with our Canadian counterparts in Ottawa, Canada, to discuss
cooperative efforts between the U.S. and Canada along our shared border. We have since been
engaged in a number of new collaborative initiatives to strengthen security along our shared
border, while working on ways to expedite the flow of trade. Commissioner Bonner and I also
are working with the Office of Homeland Security to help implement the 30-point Action Plan
announced in December by Governor Ridge and Deputy Prime Minister John Manley. The
"Action Plan for Creating a Secure and Smart Border" has four pillars: 1) The secure flow of
people; 2) The secure flow of goods; 3) Secure infrastructure; and 4) Coordination and
information sharing. I can assure this Subcommittee today that the coordination and cooperation
among Federal border agencies and their Canadian counterparts has never been stronger.
A similar Smart Border Accord is now in place for the U.S.-Mexico border. On March
22, 2002, President Bush and President Fox announced in Monterrey, Mexico, a 22-point
agreement to build a smart border for the 21 51 century between our two countries. In their joint
announcement, President Bush stated, "President Fox and I are determined to make our shared
border modem, efficient, and secure. The Smart Border Declaration our countries have just
signed will move us toward this important goal. Our common border must be closed to drugs and
terrorists, and open to trade and legitimate travel." The U.S. Customs Service and the Treasury
Department will playa key role in implementing this important Smart Border Accord.

Bureau ofAlcohol, Tobacco and Firearms
The President's budget request will ensure that the Bureau of Alcohol Tobacco and
Firearms will be able to expand its training capacity at the Canine Training Facility in Front
Royal, VA, increase ATF Canine Handler teams, and expand ATF's participation in critical Joint
Terrorism Task Force activities. ATF has developed the most respected program in the world for
detection of explosives and accelerants. This expertise is vital in our war on terrorism, in which
explosives is the terrorists' weapon of choice.
ATF also played a significant role in the security of the Winter Olympics. For several
years, ATF worked with its law enforcement and public safety partners on a comprehensive and
integrated Olympic security plan.

ATF committed over 330 special agents and support personnel to support security for the
Olympic Games. ATF Special Agent Certified Explosive Specialists, Explosive Enforcement
Officers, Explosive Detection CaninesiHandlers, and National Response Team members were
assigned to the Olympic Bomb Management Center. These experts were available to respond to
any critical incident, explosive or suspected device at any of the venues. At these Olympic
Games, unlike at the Atlanta Olympics, ATF had a new mobile crime laboratory with state of the
art detection and analysis equipment on-site. The crime lab could identify explosives and other
evidence within minutes, which would provide immediate leads to investigators on the ground.

Federal Law Enforcement Training Center
The Federal Law Enforcement Training Center, known as FLETC, conducts the training
for the vast majority of the Federal Government's law enforcement personnel. FLETC is
projecting the greatest increase in training requirements in its history as it responds in full
measure to the September 11 th attacks.
In the days following September 11 th, representatives of the U.S. Department of
Transportation's Federal Air Marshal Division reached out to FLETC regarding increased
training needs for the Federal Air Marshal Program (F AMs). These requests have resulted in an
increase of over 20,000 student weeks of training. In October, the FLETC and the FAA
developed a 5-week integrated basic training program and a 3-week agency specific basic
follow-on training program.
In January, Transportation Security Administration (TSA) representatives met with
FLETC staff to identify resources needed to develop a training curriculum for the TSA Security
Screeners. FLETC subject matter experts then met with TSA and FAA representatives to
develop that training curriculum. The result was a pilot TSA Basic Screeners training program
conducted at FLETC in February. The TSA Management Team continues to meet with FLETC
personnel to determine the extent to which the FLETC will be asked to further assist the TSA in
training Federal Law Enforcement Officers/Agents within a very short time frame. The quality
of training developed and delivered by FLETC will set the standard for our level of protection in
the air for years to come.

FinCEN
The increased funding in the President'S request for the Financial Crimes Enforcement
Network will strengthen FinCEN's law enforcement investigative support efforts to enforce the
Bank Secrecy Act, combat money laundering and other financial crimes, and implement its new
responsibilities under the USA PATRIOT Act of 200 1.
Immediately after the tragedy of September 11 th, FinCEN redirected approximately 30
percent of its resources to the initial investigation of the terrorist attacks.

Those efforts included: establishing a 24-hour operation center to enhance liaison with
the FBI Counter-terrorism Center; establishing a telephone hotline for financial institutions to
report suspicious activity; facilitating a multi-agency effort using their specialized tools and
secure facility; and developing valuable investigation referrals and financial lead infonnation by
redirecting 100 percent of its intelligence liaison office to that effort.
On November 7,2001, President Bush, Treasury Secretary O'Neill, Secretary of State
Powell and Attorney General Ashcroft visited the FinCEN offices where the President thanked
all of the FinCEN employees for their work on the front lines in the war against terrorist
financing. At that time, the President stated: "We put the world's financial institutions on
notice: if you do business with terrorists, if you support them or sponsor them, you will not do
business with the United States of America." FinCEN plays a critical role in this effort and will
continue to provide this invaluable service to our Nation.

IRS Criminal Investigation
While the Office of the Under Secretary for Enforcement does not have direct oversight
authority over IRS-Criminal Investigation, we do provide policy guidance for IRS-CI criminal
investigators. These investigators offer a unique blend of accounting and enforcement expertise
that is invaluable in perfecting complex financial investigations, including cases involving
leaders and members of extremist groups who have committed tax, money laundering, or
currency violations and individuals engaged in fundraising activities to support terrorism,
especially if tax exempt organizations are being used. In the aftennath of September 11 th, IRS
criminal investigators have played critical roles in the Strategic Infonnation Operations Center;
the Joint Terrorism Task Force; Operation Green Quest; the Office of Foreign Assets Control;
the Anti-Terrorism Task Forces throughout the country; the High Intensity Money Laundering
and Related Financial Crime Area Task Forces, and the Air Marshal Program.
Combating Money Launderin2

The Office of Enforcement is currently developing the 2002 National Money Laundering
Strategy, as well as overseeing the implementation of the 2001 Strategy. The main focus of the
Strategy is on enforcement and investigation of money laundering enterprises and sophisticated
networks. This work has been significantly impacted by the passage of the USA PATRIOT Act.
We have been working with the Treasury General Counsel to draft timely implementing
regulations for the various provisions of the USA PATRIOT Act, such as the provision that
terminated the relationship between U.S. financial institutions and shell banks.
The Office of Enforcement is overseeing the progress and development of the six High
Intensity Money Laundering and Related Financial Crime Area (HIFCA) Task Forces. The six
HIFCAs are now focused on operational activities, in addition to gathering intelligence which is
useful in money laundering investigations. I am confident the HIFCAs will playa significant
role in our anti-money laundering efforts.

At this point, I take the opportunity to highlight for the Subcommittee the recent success of
Operation Wire Cutter, a 2 Y2-year joint DEAlCustoms undercover operation targeting the largest
Colombian Black Market Peso Exchange (BMPE) money brokers. These brokers are
professional money launderers who sell their services to the Colombian drug cartels.
On January 15,2002, U.S. and Colombian officials arrested 37 people in the U.S. and
Colombia and seized over $8 million in cash, over 800 pounds of cocaine, and a total of over
1,000 pounds of narcotics. One suspect tried to evade arrest in New York City by throwing a
suitcase with $400,000 in cash out of his apartment window. The EI Dorado Task Force,
operating out of the office of the U.S. Customs Service Special-Agent-in-Charge in New York,
played an important role in this law enforcement operation.
The Multinational Black Market Peso Exchange (BMPE) Experts Working Group
(Colombia, Aruba, Panama, Venezuela, and the United States), led by the Office of
Enforcement, has produced a report that recommends BMPE initiatives to participating
governments to improve international cooperation in efforts to combat and dismantle the BMPE.
Last month ajoint statement was issued embodying the conclusions and recommendations of this
Working Group. We are also working closely with senior executives of major trade associations
and corporations operating in the United States whose products are vulnerable to being involved
in BMPE transactions.
Treasury Enforcement also works closely with the Department of Justice's Bureau of
Justice Assistance to oversee the Financial Crime-Free Communities Support Program (C-FIC)
which awards anti-money laundering grants to state and local law enforcement agencies and
prosecutors' offices through a competitive grant award program. Treasury has awarded
approximately $4.2 million in grants to 17 recipients in the first 2 years of this program.
Reducin2 Firearms Violence
One of the top priorities of the Bush Administration is to make a lasting reduction in the
gun crime rate in America. Last May the President announced Project Safe Neighborhoods, a
comprehensive approach that targets violent offenders and crime guns.
Project Safe Neighborhoods has been implemented by U.S. Attorneys across the country,
working in partnership with communities and state and local law enforcement. The strategy has
five components: 1) Partnership/Coordination; 2) Strategic Planning; 3) Training; 4)
Community Outreach and Public Awareness; and 5) Accountability. Stronger relationships
among Federal prosecutors and agents with their state and local counterparts has strengthened
their ability to identify, investigate and prosecute gun violence.
The Treasury Department, through its Bureau of Alcohol, Tobacco and Firearms, plays
an integral role in implementing Project Safe Neighborhoods through its Integrated Violence
Reduction Strategy (IVRS). The strategy provided additional resources to ATF to add new
agents, inspectors and support staff to enhance its enforcement and investigation of firearms
violations and efforts to reduce violent crime.

Under IVRSlProject Safe Neighborhoods, ATF has a broader impact in target cities by educating
police departments about the effectiveness of crime gun tracing and firearms trafficking. ATF
supports Project Safe Neighborhoods through the excellent work of its National Tracing Center,
which performs traces of crime guns, and its Youth Crime Gun Interdiction Initiative.
Countering Narcotics
One of Treasury Enforcement's highest priorities is reducing the supply of dangerous
drugs entering the United States. It is also one of our most difficult challenges. We are
confronted by well-financed 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, investigation and disruption of trafficking activities within the United States, treatment
of drug users, and, as mentioned above, combating money launderers.
The Office of Enforcement and its bureaus are decisively engaged as part of the Federal
Government's effort in support of Plan Colombia, which is a comprehensive and balanced
response to that nation's multiple challenges. In addition to targeting the critical drug trafficking
problem, the integrated strategy addresses human rights, democratization, judicial reform, social
development, the economy, and the peace process. Colombia's lawlessness, corruption, and long
internal conflict are exacerbated by the immense profits generated by the drug trade. Ninety
percent of the cocaine supplied to the United States originates in or passes through Colombia, as
does two-thirds of the heroin seized in this country. As a result, Colombia is the central focus of
the United States' Western Hemisphere efforts to reduce the supply of illicit drugs.
Treasury's support of Plan Colombia is an integral part of the U.S. Government's
programs aimed at strengthening the justice sector and financial infrastructure throughout
Colombia. The Emergency Supplemental provided funding to the State Department under the
provisions of the Foreign Assistance Act, by which State transfers authority to Treasury and its
components for programs via specifically negotiated letters of agreement ("632 agreements").
However, sustainment of most Treasury Plan Colombia programs beyond amounts appropriated
by the Terrorism Supplemental will rely on assistance provided by the State Department in 2002
and 2003.
We appreciate the Subcommittee's support for Treasury's role in Plan Colombia. The
Plan Colombia package passed by Congress included programs with $71.5 million in specific
line item allocations for Treasury. These are:
•
•
•
•

$68 million for Customs detection and monitoring aircraft radar upgrades
$2 million for the Office of Foreign Assets Control
$1 million for banking supervision assistance (Office of the Assistant Secretary for
International Affairs/Office of Technical Assistance)
$500,000 for tax revenue enhancement (OASWOT A).

In addition to these specific allocations for Treasury components, we have received $14.67
million for law enforcement programs from Justice accounts in the legislation, for a total of
$86.17 million. We anticipate all Treasury programs should be completed by June 2003,
approximately 24 months from the transfer of Plan Colombia spending authority from State to
Treasury and its components in June of2001.

Enforcing Tariff and Trade Laws
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 from 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
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 ensure that the movement of trade across our borders is
as expeditious 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.
Treasury Enforcement's Office of Regulatory, Tariff, and Trade Enforcement performs a
variety of important functions, including review of all regulations relating to enforcement of
trade laws, participation in negotiations of international trade agreements, and management of
the private sector Advisory Committee on the Commercial Operations of the Customs Service
(COAC).
The COAC is a legislatively constituted advisory committee of 20 private sector
members, which meets with Enforcement and Customs officials quarterly. Until September
11 th, their advice focused on trade facilitation. After September 11 th, I requested COAC's input
on border security and the role the private sector can play in increasing cargo security.
Utilization of the group's expertise provides a unique opportunity to examine synergies between
enhanced cargo security and the private sector concern that the smooth flow of trade not be
impeded unnecessarily due to increased security concerns.
The COAC produced an excellent report in January with 60 recommendations. Many of
these have already been implemented, and others are under close examination by Customs and
Treasury officials. Three COAC members also have entered into agreements with Customs
under the new Customs-Trade Partnership Against Terrorism program.

President's Management Agenda
The Treasury Department's FY 2003 budget recognizes the importance of achieving the
President's Management Agenda. The Office of Enforcement is working with the law
enforcement bureaus to support Secretary O'Neill's goal of Treasury becoming a results-driven
world class organization, consistent with the President's five Presidential Management
Initiati ves:

1.
2.
3.
4.
5.

Strategic Management of Human Capital;
Expanded Electronic Government;
Improved Financial Performance;
Budget and Performance Integration; and
Competitive Sourcing.

Only through a balance of implementing all five Presidential Management Initiatives will
the Treasury Department and its enforcement offices and bureaus be able to achieve world class
status and become an organization that is performance-driven with specific, measurable results
linked to investment of resources. In working towards this goal, the Department emphasizes the
importance of leadership, accountability, integrity, improving the work environment, and giving
employees the tools they need to do their jobs with excellence.
Enforcement Organization

The Office of the Under Secretary for Enforcement has oversight responsibility for more
than a third of all Federal criminal investigators, including roughly 32,000 personnel and a $5
billion operating budget. Moreover, Treasury Enforcement collects about $35 billion in
revenues. When I assumed the duties of the Under Secretary, one of my first imperatives was to
ensure that the Office had an efficient organization to be informed adequately about the day-today functions and operations of the bureaus and offices it supervises. This became even more
critical in the post September 11 th environment. In coordination with the Treasury Department's
leadership, we have implemented a reorganization of the Office of Enforcement, within existing
FTE ceilings, that I am convinced will enable the Office to achieve its mission more effectively
and efficiently.
The reorganization strengthens Enforcement's ability to address critical budgetary,
resource, and training needs for the immediate Office of the Under Secretary as well as the
Enforcement Bureaus. Additionally, the new organization also provides needed emphasis in the
major areas of Terrorism and Violent Crime and Money Laundering and Financial Crimes.
Strategic Goals and Performance Measures

Each year, the world becomes a more complex place. The events of September 11 th only
emphasize this point. As a result, Treasury's law enforcement mission grows in complexity,
scope, and impact. The Enforcement Bureaus must continue to meet these challenges as they
perform their critical roles in advancing America's law enforcement priorities. To provide a long
range focus, the Office of Enforcement identified six strategic goals for FY 2000 - FY 2005:
•
•
•
•
•
•

Combat money laundering and other financial crimes;
Protect our nation's borders and major international transportation terminals from traffickers
and smugglers of illicit drugs and weapons of mass destruction;
Reduce violent crime and the threat of terrorism;
Protect our nation's leaders and visiting dignitaries;
Provide high quality training for law enforcement personnel; and
Collect revenue due to the Federal government.

In the aftermath of September 11 th, we plan to add an additional strategic goal and supporting
objectives in the next revision of the Treasury Strategic Plan. This new goal will focus on
"Targeting, disrupting and dismantling terrorist financing and terrorist financing organizations."
In addition, Treasury's law enforcement bureaus support two other Treasury strategic
goals through the following strategic objectives:
•
•

Protect the public and prevent consumer deception in specific regulated commodities; and
Facilitate legitimate trade, enhance access to foreign markets, and enforce trade agreements.

To ensure excellence in achieving these goals, and in keeping with the spirit of the
Government Performance and Results Act, Treasury continues to engage in a strategic
management process to enhance and improve the results we deliver to the American people. To
that end, the Office of Enforcement is committed to setting long-term strategic and annual
performance goals, managing our resources and investments to achieve those goals, instituting
measures, and reporting annually on the results of our performance.
Overall, Treasury law enforcement bureaus' achievement against established performance
targets continues to improve. For example, in FY 1999, the law enforcement bureaus achieved
64 percent of the established performance targets. In FY 2000, 77 percent of the established
targets were achieved, and in FY 2001, 79 percent of all performance targets were achieved.
While not every goal was met, the results were significant.
For FY 2003, the Office of Enforcement and the Treasury law enforcement bureaus will
continue to work hard to accomplish our defined strategic goals and objectives. We will also
strive to achieve an even higher percentage of our established performance targets. Doing so
will help to ensure excellence in protecting our borders and our nation's leaders, disrupting and
dismantling terrorist financing, fighting terrorism and violent crime, combating money
laundering and financial crimes, and training our law enforcement personnel for the challenges
they will face in the future.
Thank you for the opportunity to provide an overview of the President's FY 2003 budget
request and to highlight the efforts of the Office of Enforcement in support of the mission of
Treasury's enforcement bureaus. I look forward to answering any questions you may have.

D EPA R T l\I E N T

0 F

THE

T REA SUR Y

omCEOFPUBUCAFFAIRS eI500PENNSYLVANIAAVENUE, N.W. e WASffiNGTON, D.C. e 20220 e (202) 622·2960

u.s. International Reserve Position

4/17/02

The Treasury Department today released U.S. reserve assets data for the latest week. As indicated in this table,
U.S. reserve assets totaled $67,907 million at the end of the latest week, compared to $68,035 million at the end nf
the prior week.
In US millions)

April 5, 2002
68,035

. Official U.S. Reserve Assets

TOTAL
. Foreign Currency Reserves

I. Securities
Of which, issuer heBdqulllteTrld in the U. S.

Euro
5,359

Yen
10,119

April 12, 2002
67,907

TOTAL

Euro

15,478

5,263

Ven

TOTAL

10,092

15,354

b. Total deposits with:
bJ. Other centTal banles and BlS
bJI.
h8lldquartered In the U.S.
b.ii. Of which, banks located abroad
b.lII.

9,206

4,219

13,425

a.,,/cs

0
0

a.n/cs

0
0

headquartered outside the U.S.
b.ui. Of which, banks located in the U.S.

IMF Reserve Position

SpeCial Drawing Rights (SDRs)

Gold Stock :s
Other Reserve Assets

9,197

4.207

17,249

10,849

10,856

11,044

I Indudes holdings of the Treasury's Exchange Stabilizabon Fund (ESF) and the Federal Reserve's System Open MarXet Account

IMF Reserve Position' and '3. Special Drawing Rights (SDRs): are based on data provided by the IMF and are valued in
ollar terms at the official SDRIdOllar exchange rate for the reporting date. The entries in the table above for latest week (shown in italics)
,fleet any necessary adjustments, includIng revaluabon, by the U.S. Treasury to the prior week's IMF data. The IMF data for the prior week
Ie final.
, Gold stock is valued monthly at 542.2222 per fine troy ounce.

)-3000

C
0
0
C

17.239

SOMA), valued at current marXet exchange rates. ForeIgn currency holdings listed as securities reflect marXed-to-marXet values, and
eposits reflect carrying values.

, The items, '2.

13,404

D E P :\ R T :\1 E N T

() F

THE

T REA SUR Y

ornCE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W. • WASHINGTON, D.C.• %0%%0. (%0%) 6%2-%960

For Immediate Release
Wednesday, April 17, 2002

Contact:

Rob Nicbols
202-622-2910

Deputy Treasury Secretary Kennetb W. Dam
Remarks for tbe Tax Foundation
Annual Federal Tax, Budget and Legislative Policy Seminar
Wasbington, DC
Good afternoon.
I am quite pleased to speak to you this afternoon. The Tax Foundation is an important
forum, especially for the Treasury, which has a profound interest in the quality of our income tax
rules and procedures.

•
•

•

I want to talk to you about the three main components of President Bush's tax policy:
tax relief, or reduction;
tax code simplification; and
tax law enforcement.
I will discuss each of these, with my emphasis on our new simplification proposals.

First, tax relief.
I don't have to remind this audience how important the President's historic tax program
is. The June 2001 Economic Growth and Tax Relief Act put $36 billion of tax refunds into the
hands of consumers last summer and fall - just when we needed it the most, at the nadir of the
slowdown. It cut the 15 percent income tax bracket to 10 percent, benefiting every worker who
pays income taxes. As the full package phases in over the next few years, all marginal tax rates
will fall- this is the first, across-the-board tax cut since the World War 11. Further, over the next
10 years, the child credit will double, up to $1,000 per chi ld, and the marriage penalty will be
dramatically reduced. The death tax will be completely abolished.
All told, 104 miIlion individuals and families will get an average tax cut of about $1,040.
This year, we reduced taxes further. Last month, the President signed into law new tax
incentives for companies to invest in new plants and equipment, to speed the economy's return to
strong growth.

PO-30Ot

.lor frress releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040

This historic reduction in taxes is important because of what it means for our economy. It
increases incentives for growth by allowing individuals to keep more of the fruits of their labor.
It also allows businesses to allocate more of their resources toward the most rewarding
investment opportunities, thereby increasing productivity and growth potential.
As you know, this tax reduction is only temporary. After ten years, the high rates, the
estate tax, and the marriage penalty will spring to life, Lazarus-like. As the President said on
Monday, in Cedar Rapids, that doesn't make sense. 80% of businesses in this country pay taxes
at the individual rates. How can a family business plan for the future, how can it make
investments in productivity-increasing technology, when it doesn't know what its tax rates will
be 10 years from now? We should make the tax relief permanent.
Tax complexity imposes high compliance costs on taxpayers. Some compliance costs
arise out of the very nature of an income tax and its need to measure people's income. Other
compliance costs are due to the use of the income tax to achieve various social and economic
policies. The process of recording and calculating on tax forms is only one dimension of
complexity and taxpayer burden. Another is the record-keeping that must occur throughout the
year in many cases. Collecting receipts and maintaining files are certainly not beyond the
abilities of the vast majority of taxpayers. But the amount of such activity, along with the other
dimensions of tax complexity, reach onerous levels few taxpayers find acceptable. Thus, tax
complexity threatens to diminish taxpayer compliance.
Tax complexity also raises the cost of administering the tax system, and taxpayers pick
up the tab. The IRS must devote additional resources to provide help for taxpayers, develop
regulations, and audit and otherwise correct mistakes in taxpayers' returns. These additional
costs are paid for by taxpayers. Many taxpayers must resort to assistance from lawyers,
accountants, and other services just to wade through the morass of the tax code. Assuming that it
is OK for the well-to-do, how is it justified for the poor, such as those who cannot wade through
the 52 page instruction booklet for the byzantine earned income tax credit. Complexity also
erodes the ability of the IRS to enforce the tax laws by focusing on real problem areas, and
leaving honest taxpayers alone.
Americans pay in other ways, as well. Every business and employer, large or small, must
bear the cost of tax code compliance - the paperwork, the accounting bills, and the lawyer's fees.
And the products we all buy might well be cheaper, better, or more plentiful if the compliance
costs could be reduced.

In addition to the direct costs associated with tax complexity, namely the compliance and
administrative costs, tax complexity imposes a substantial drag on the economy in other ways.
For example, as tax complexity increases, taxpayers are less likely to predict accurately the tax
consequences of their decisions. An inability to predict tax consequences confidently leads to a
greater sense of uncertainty about those decisions. This uncertainty can affect important
business and family decisions, such as buying a home or car, hiring a new worker, or saving for
retirement or for education.

For these reasons, we support tax simplification proposals that meet four essential
principles:
Fairness. Americans want to know that the person down the street or across town is
paying his or her fair share.
Simplicity. Average taxpayers should not find it necessary to hire a tax preparer. Nor
should they miss deductions and credits because they don't know about them or because they are
too complicated, with all the phase-out rules, to evaluate.
Clarity. People want to understand their tax obligations and know exactly what they owe.
The tax code and the tax burden should be clear to the taxpayer, without the need for extra help.
Ease. The tax code costs too much to comply with and too much to administer. This
burden is a drag on the economy and costs jobs. We need a tax code that is simpler, easier to
understand, and less costly.
To simplify the tax code means to:
• Reduce taxpayer compliance costs and paperwork.
• Reduce IRS administrative costs.
• Reduce tax distortions that impair economic growth.
• Improve the readability, predictability, objectivity, and transparency of the law.
• Reduce the need for interactions between taxpayers and the IRS to resolve disputes.
Improve taxpayers' compliance with and confidence in the tax system.
• Eliminate outdated provisions or rules.
This week, we began releasing a series of proposals to simplify the tax code. These
proposals will first focus on individuals. Subsequent proposals will focus on businesses.
The first group of proposals will address the tax treatment of families and children. Topics
will include:
• Uniform definition of a qualifying child,
• Determining taxpayers' filing status (e.g., head of household),
• Earned Income Tax Credit, and
• Taxation of dependents.
The first proposal, which we released earlier this week, concerns a unified definition of
"child." In the current Code, there are five major provisions that provide tax relief to families
with children, and there are five different definitions of a qualifying child.
The five provisions are:
• the dependent exemption,
• the definition associated with Head of Household filing status,
• the Child Tax Credit,
• the Dependent Care Tax Credit, and
• the Earned Income Tax Credit.

To see how complexity and conceptual redundancy can confuse a taxpayer, consider the
example of a shared household. Now it is possible for three different family members, who live
together for a full year, to claim the same child for at least four different tax benefits:
•
•
•

Yet, none of these women may claim the child and dependent care tax credit, even if they
work and pay for the care of the child. To claim that credit, one taxpayer must both support the
child and maintain the household in which she and the child reside. Under our proposal, the
child's mother (or if the family prefers, the grandmother or aunt) could claim all four tax
benefits.

In the coming weeks. we'll be releasing additional proposals to simplify the tax code, both
for individuals and for businesses. Businesses spend countless hours battling the IRS over
timing of deductions - not whether or not a cost is deductible, just whether the deduction can be
taken this year or next. As with most regulations, the burden falls disproportionately on smaller
business owners, who can't afford a whole tax department to muddle through these questions.
As we reduce the tax burden on our economy, and simplify the code, we are taking new steps
to make sure that all taxpayers are paying their fair share.

We have already started introducing proposals to combat abusive tax avoidance, strategies
that deliberately violate the spirit of our laws. These transactions are unfair to the vast majority
of taxpayers, who do their best to comply with the code, even with its difficulties.
Tax policy is a high priority for this Administration, and for the United States Treasury in
particular. We hope to bring to the United States taxpayers the kind of tax rate, tax code, and
enforcement fairness that they deserve.

Thank you.
-30-

DEPARTMENT

THE

TREASURY

NEWS
omCE OFPUBUCAFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASlllNGTON, D.C. - 20220 - (202) 622-2960

FOR IMMEDIATE RELEASE
April 17, 2002

CONTACT: BETSY HOLAHAN
202-622-2960

Statement of
Treasury Assistant Secretary for Financial Markets Brian Roseboro
on the Debt Limit
G-Fund beneficiaries made whole
On April 4, in order to protect the full faith and credit of the United States,
Treasury was required to use measures that Congress provided specifically to keep
outstanding Treasury debt within the statutory debt limit. These actions were necessary
because Congress has not yet enacted legislation to raise the debt ceiling above the
current $5,950 billion.
As Secretary O'Neill informed Congress on April 2, the Treasury would use its
statutory authority on April 4 to suspend investments in the Government Securities
Investment Fund (the "G-Fund"), just as Secretary Rubin did in 1995. This period was
estimated to extend from April 4 to about April 18. The Secretary emphasized that this
action would not affect G-Fund beneficiaries.
Yesterday, April 16, with new revenues, the Treasury was able to fully restore the
G-Fund, including full credit for all foregone interest. From the perspective of G-Fund
beneficiaries, it is as if nothing happened.

Permanent $750 billion increase needed soon
The Federal Government will confront the debt ceiling again this summer, unless
Congress raises the debt ceiling beforehand. On June 28, for instance, the Treasury must
pay about $65 billion in interest to the Social Security trust fund. Current projections
estimate reaching it again in the second half of June. A revised estimate will be made in
early May, after analyzing the April tax receipts.
This summer, similar stop-gap measures will not be sufficient to avoid reaching
the debt limit. We hope that Congress will enact the $750 billion permanent increase as
soon as possible, and we will continue to work with Congress to achieve that goal. We
will also work to maintain our regular and predictable auction calendar.
PO-3002
-30For press rele~w=es=,,---=,=,==~u=b=l=ic--,,s=ch.o.:::edules and official biographies, call our 24~our fax line at (202) 622-2040

LETTER FROM SECRETARY O'NEILL TO CONGRESS ON THE DEBT LIMIT

The Honorable Max Baucus
Chairman
Committee of Finance
United States Senate
Washington, D.C. 20510
Dear Mr. Chairman:
I wrote on April 2 to inform Congress that, in order to protect the full faith and
credit of the United States government, by reason of the public debt limit I would be
unable to fully comply with the requirements of 5 U.S.c. § 8438(e), beginning on
April 4, 2002 and ending on or about April 18. The statute grants the Secretary ofthe
Treasury explicit authority to suspend investment in the Government Securities
Investment Fund ("G-Fund") to avoid breaching the statutory debt limit.
As the April 2 letter noted, "G-Fund beneficiaries are fully protected and will
suffer no adverse consequences from this action. The statute ensures that once the
Secretary of the Treasury can make the G-Fund whole without exceeding the public debt
limit, he is to do so. Under the governing law in this case, the G-Fund will receive
complete restoration of all funds temporarily affected by this necessary action, including
full and automatic restoration of any interest that would have been credited to the Fund."
Today, I am writing to notify you that recent revenues have enabled the Treasury
to fully restore the G- Fund as required by law. The G-Fund and its beneficiaries are now
in the same financial position as if investments had never been suspended, including a
full credit for interest owed. Please find enclosed a report of G-Fund status and
operations in accordance with statutory requirements.
The need to raise the debt ceiling has only been postponed. Current projections
estimate reaching it again in the second half of June. A revised estimate will be made in
early May, after analyzing the April tax receipts.
This summer, similar stopgap measures will not be sufficient to avoid reaching
the debt limit. Therefore, I urge you to enact the President's request for a $750 billion
permanent increase in the debt ceiling as soon as possible.
Sincerely,

Paul H. O'Neill
Enclosure
PO-3003

Report on the Operation and Status of the
Government Securities Investment Fund
April 4 to April 16, 2002
Pursuant to 5 U.S.C. § 8438(h)
April 17, 2002
On April 4, 2002, Treasury's outstanding debt reached the statutory limit of$5,950
billion. In order to protect the full faith and credit ofthe United States, the Secretary of
the Treasury from April 4 employed statutory authority to suspend investment in the
Government Securities Investment Fund (G-Fund) of the Federal Employees' Retirement
System. On April 16, 2002, additional revenues enabled the Treasury to reduce the debt
subject to limit to below $5,950 billion, and rendered further suspensions unnecessary.
Legal authority. Section 8438(g)(1) of Title 5, United States Code, empowers the
Secretary of the Treasury to "suspend the issuance of additional amounts of obligations
of the United States [in this fund], if such issuances could not be made without causing
the public debt of the United States to exceed the public debt limit." The statute defines
the period of this suspension as a "debt issuance suspension period." § 8438(g)(6)(B).
Reporting requirement. Section 8438(h) requires submission of a report to Congress on
the operation and status of the G-Fund during this period. The report is to be made "as
soon as possible after the expiration of such period, but not later than 30 days after the
first business day after the expiration of such period." § 8438(h)(2). This document
fulfills the requirement ofD.S.C. § 8438(h). A copy is being concurrently transmitted to
the Executive Director of the Federal Retirement Thrift Investment Board.
Restoration requirement. Section 8438(g) requires the Secretary, immediately upon
expiration of such a period, to make the G-Fund whole. Treasury must issue obligations
sufficient to ensure that the G-Fund's portfolio replicates what it would have been upon
the expiration of the period, as if the suspension had not occurred. § 8438(g)(3).
Treasury must also pay the G-Fund for the interest that the G-Fund would have earned.
§ 8438(g)(4).
Status and operations. Throughout this period, a fraction of the G-Fund's holdings
could not be re-invested without exceeding the debt limit. Treasury has now replicated
the portfolio the G-Fund would have held but for the suspension; and has paid the GFund $27,696,703.42 for interest it would have earned, accounting for receipts and
withdrawals.
The following table details the daily and cumulative amounts of G-Fund principal and
interest that were suspended and restored:

Principal

Interest

Daily
(Suspension)
or
Restoration

Cumulative
(Suspension)

April 4, 2002

($13,694,786,000)

($2,139,810)

April 5, 2002

($25,066,000)

($13,719,852,000)

($6,432,184 )

($8,571,994 )

April 8, 2002

($958,733,000)

($14,678,585,000)

($2,294,868)

($10,866,862)

April 9,2002

$233,252,000

($14,445,333,000)

($2,258,781 )

($13,125,644)

April 10, 2002

$1,741,598,000

($12,703,735,000)

($1,987,010)

($15,112,653)

April 11, 2002

($5,983,197,000)

($18,686,932,000)

($2,922,195)

($18,034,848)

April 12, 2002

$188,474,000

($18,498,458,000)

($8,679,606)

($26,714,454)

April 15, 2002

$12,238,775,000

($6,259,683,000)

($982,250)

($27,696,703)

April 16, 2002

$6,259,683,000

$27,696,703

Cumulative
(Suspension)

With restoration on April 16 of $6,259,683,000 in principal and $27,696,703 in interest,
the G-Fund was fully restored to the condition it would have been in had there not been a
suspension.
Sincerely,

Brian C. Roseboro
Assistant Secretary of the Treasury for Financial Markets

Interest calculated on principal and on prior due mterest.

PO-300j. Lettel FlOw Secretaty O'Neill to Congress on the Debt Limit

Page 1 0[2

PRESS ROOM

FROM THE OFFICE OF PUBLIC AFFAIRS
April 17, 2002
PO-3003
LETTER FROM SECRETARY O'NEILL TO CONGRESS ON THE DEBT LIMIT
The Honorable Max Baucus
Chairman
Committee of Finance
United States Senate
Washington, D.C. 20510
Dear Mr. Chairman:
I wrote on April 2 to inform Congress that, in order to protect the full faith and credit
of the United States government, by reason of the public debt limit I would be
unable to fully comply with the requirements of 5 U.S.C. § 8438(e), beginning on
April 4, 2002 and ending on or about April 18. The statute grants the Secretary of
the Treasury explicit authority to suspend investment in the Government Securities
Investment Fund ("G-Fund") to avoid breaching the statutory debt limit.
As the April 2 letter noted, "G-Fund beneficiaries are fully protected and will suffer
no adverse consequences from this action. The statute ensures that once the
Secretary of the Treasury can make the G-Fund whole without exceeding the public
debt limit, he is to do so. Under the governing law in this case, the G-Fund will
receive complete restoration of all funds temporarily affected by this necessary
action, including full and automatic restoration of any interest that would have been
credited to the Fund."
Today, I am writing to notify you that recent revenues have enabled the Treasury to
fully restore the G- Fund as required by law. The G-Fund and its beneficiaries are
now in the same financial position as if investments had never been suspended,
including a full credit for interest owed. Please find enclosed a rE)Ilort of G-Fund
status and operations in accordance with statutory requirements.
The need to raise the debt ceiling has only been postponed. Current projections
estimate reaching it again in the second half of June. A revised estimate will be
made in early May, after analyzing the April tax receipts.
This summer, similar stopgap measures will not be sufficient to avoid reaching the
debt limit. Therefore, I urge you to enact the President's request for a $750 billion
permanent increase in the debt ceiling as soon as possible.
Sincerely,
Paul H. O'Neill

Enclosure

lmo:llw"r"W.treas.gov/oress/releases/nci1001.htm

312612003

DEPARTMENT

THE

TREASURY

NEWS

TREASURY

~~/78~9~. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .

......................................

OmCE OF PUBUC AFFAIRS .1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C .• 20220 • (202) 622-2960

EMBARGOED UNTIL 2:30 P.M.
April 17, 2002

CONTACT:

Office of Financing
202/691-3550

TREASURY OFFERS 2-YEAR NOTES
The Treasury will auction $25,000 million of 2-year notes to refund $24,218
million of publicly held notes maturing April 30, 2002, and to raise new cash of
approximately $782 million.
In addition to the public holdings, Federal Reserve Banks hold $7,648 million
of the maturing notes for their own accounts, which may be refunded by issuing
an additional amount of the new security.
Up to $1,000 million in noncompetitive bids from Foreign and International
Monetary Authority (FIMA) accounts bidding through the Federal Reserve Bank of New
~ork will be included within the offering amount of the auction.
These
noncompetitive bids will have a limit of $100 million per account and will be
accepted in the order of smallest to larqest, up to the aggregate award limit of
$1,000 million.
TreasuryDirect customers requested that we reinvest their maturing holdings
of approximately $743 million into the 2-year note.
The auction will be conducted
tive and noncompetitive awards. will
tenders.
The allocation percentage
be rounded up to the next hundredth

in thG single-price auction format.
All competibe at the highest yield of accepted competitive
applied to bids awarded at the highest yield will
of a whole percentage point, e.g., 17.13%.

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 BookEntry Treasury Bills, Notes, and Bonds (31 CFR Part 356, as amended) .
Details about the new security are given in the attached offering highlights.

000

Attachment

PO-3004

For press releases, speeches, publicsc!l~dules and official biographies, call our 24-hour fax fine at (202) 622-204{}

LIGHTS OF TREASURY OFFERING TO THE PUBLIC OF
L:-YEAR NOTES TO BE ISSUED APRIL 30, 2002
April 17, 2002
$25,OQO million
$25,000 million

Offering Amount
Public Offering
Description of Offering:
Term and type of security
Series ..... .
CUSIP number
Auction date
Issue date ........ .
Dated date ........ .
Ma turi ty date
Interest rate

.....
.....
. .....
..
....
.
.
........

Yield . . . . . . . . . . . . . . . . . .
Interest payment dates . . . . . . . . . . . . . . . .
Minimum bid amount and multiples .... .
Accrued interest payable by investor.
Premium or discount

2-year notes
M-2004
912828 AB 6
April 24, 2002
April 30, 2002
April 30, 2002
April 30, 2004
Determined based on the highest
accepted competitive bid
. Determined at auction
.October 31 and April 30
$1,000
.. None
. . Determined at auction

STRIPS Information:
$1,000
Minimum amount required . . . . . . . . . . . . . . .
912820 GY 7
Corpus CUSIP number
............. .
Due date(s) and CUSIP number(s)
for additional TINT(s) . . . . . . . . . . . . . . . . . . . . . . April 30, 2004 - - 912833 YT 1
Submission of Bids:
Noncompetitive bids:
Accr:pted in full up to $5 million at the highest accepted yield.
Foreign and International Monetary Authority (FIMA) bids:
Noncompetitive bids
submitted through the Federal Reserve Banks as agents for FIMA accounts.
Accepted in order of size from smallest to largest with no more than $100
million awarded per account.
The total noncompetitive amount awarded to Federal
Reserve Banks as agents for FIMA accounts will not exceed $1,000 million. A
single bid that would cause the limit to be exceeded will be partially accepted
in the amount that brings the aggregate award total to the $1,000 million limit.
However, if there are two or more bids of equal amounts that would cause the
limit to be exceeded, each will be prorated to avoid exceeding the limit.
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 ..
Maximum Award . . . . ..

. 35% of public offering
. 35% of public offering

Receipt of Tenders:
Noncompeti -ti vetenders :
Prior to 12: 00 noon eastern daylight saving time on auc-tion day.
Compet~t~ve tenders:
Prior to 1:00 p.m. eastern daylight saving time on auction day .
.?a',-ment Terms:
By charge to a funds account at a Federal Reserve Bank on issue date,
or payment of full par amcun-t with tender.
Treasu~/Direct customers can use the Pay
Direc~ feature whlch authorizes a charge to their account of record at their
r:'r:anc:..al ir:s ti -C-..1tlorr

:II":

issue da-te.

DEPARTMENT

THE

TREASURY

NEWS

TREASURY

~~/78~9~. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .

......................................

OmCE OF PUBUC AFFAIRS .1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C .• 20220 • (202) 622-2960

EMBARGOED UNTIL 9:00 A.M.
April 17, 2002

PUBLIC CONTACT: Office of Financing
202-691-3550
MEDIA CONTACT: Office of Public Affairs
202-622-2960

TREASURY ANNOUNCES DEBT BUYBACK OPERATION
On April 18, 2002, the Treasury will buy back up to $750 million par
of its outstanding fixed-principal issues that mature between February 2015
and November 2018 and $250 million par of its outstanding inflation-indexed
issues that mature between April 2028 and April 2032. Treasury reserves the
right to accept less than the announced amount.
This debt buyback (redemption) operation will be conducted by Treasury's
Fiscal Agent, the Federal Reserve Bank of New York, using its Open Market
operations system. Only institutions that the Federal 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
pri~e fOl:" a particular issue may be accepced on cl prl..rated basis, roul1u.::d 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.
Note: On the settlement date, securities should be delivered to the
Federal Reserve Bank of New York using the following delivery address: ABA
Number 021089482 US TREAS BUYBACK/6000.
This debt buyback operation is governed by the terms and conditions set
forth in 31 CFR 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

0-3005
For press releases, speeches, public schedules and official biographies, call our 2.J-hollr fax line at (202) 622-2040

PLIGHTS OF TREASURY DEBT BUYBACK OPERATION
April 17, 2002
Par amount of fixed-principal
issues to be bought back ......... Up to $750 million
Par amount of inflation-indexed
issues to be bought back ......... Up to $250 million
Operation date . . . . . . . . . . . . . . . . . . . April 18, 2002
Operation close time . . . . . . . . . . . . . 11:00 a.m. eastern daylight saving time
Settlement date . . . . . . . . . . . . . . . . . . April 22, 2002
Minimum par offer amount ........ $100,000
Multiples of par . . . . . . . . . . . . . . . . $100,000
Format for offers ..... Expressed in terms of price per $100 of par with
three decimals. The first two decimals represent
fractional 32 n & of a dollar. The third decimal
represents eighths of a 32 nd of a dollar, and must
be a 0, 2, 4, or 6.
Delivery instructions ........ ABA Number 021089482 US TREAS BUYBACK/6000
Treasury issues eligible for debt buyback operation (in millions) :

Coupon
Rate (%)
11. 250
10.625
9.875
9.250
7.250
7.500
8.750
- - - - - - - - --8.875
9.125
9.000
I
3.625
3.875
3.375

Maturity
Date
02/15/2015
08/15/2015
11/15/2015
02/15/2016
05/15/2016
11/15/2016
05/1~/2017

.-----

--~--.--

08/15/2017
05/15/2018
11/15/2018
04/15/2028
04/15/2029
04/15/2032

Par Amount Par Amount
Privately
Par Amount
Held as
CUSIP
Outstanding**
Held**
STRIPS***
Number
10,783
8,937
2,180
912810 DP 0
4,024
2,857
926
912810 DS 4
5,585
4,578
912810 DT 2
2,243
5,502
4,465
912810 DV 7
116
5
18,824
17,724
912810 DW
131
18,824
912810 DX 3
17,073
1,427
l5,619
912810 DY 1
12,864
1,482
-- - - - - - - - - - - - - - - - -----912810 DZ 8
11,208
9,150
3,807
912810 EA2
6,797
5,557
3,677
912810 EB 0
7,174
6,121
3,816
912810 FD 5*
16,808
14,370
5
912810 FH 6*
19,722
17,364
125
912810 FQ 6*
5,012
4,856
0
Total
145,882
125,916
25,935
---------~---

~.----

~----.-

Inflation-indexed issue
*
** Par amounts are as of April 16, 2002.
*** Par amounts are as of April 15, 2002.
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 System.

D E P :\ R T \1 E :\ T

0 F

THE

lREASURY ((I)

T REA SUR \'

NEW S

178q

ornCE OF PUBUC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON. D.C. - 20220 - (202) 622·2960

TREASURY SECRETARY PAUL O'NEILL
SPRING MEETINGS SCHEDULE

FOR PLANNING PURPOSES ONLY
Contact Tony Fratto at 202-622-2960.
• PLEASE SEE NOTES FOLLOWING SCHEDULE.

Friday, April 19, 2002
7:00 PM
Working Dinner with G7 Finance Ministers and Central Bank Governors
Treasury Department
Diplomatic Reception Room
·PHOTO SPRA Y AT TOP

Saturda\', April 20, 2002
8:00 - 11 :45 AM
G7 Finance Ministers and Central Bank Governors Meeting
Treasury Department
The Cash Room
·PHOTO SPRA Y AT TOP
9:30 - 9:45AM

G7 Finance Ministers and Central Bank Governors
Group Photos
Treasury Department
The Bell Entrance steps
East Executive Drive
·Rain Site: Diplom~tic Reception Room
·006

11 :45 AM - 12: 15 PM

-.!fJr press releases. speeches. public rrhwlules and official biographies, call our 24-hour fax line at (202) 622·2040
(it)

Secretary Paul O'Neill
Post-G7 Press Conference
Office of Thrift Supervision
17th & G Streets, NW
Washington, DC
12:30 - 5:00 PM
Secretary Paul O'Neill
IMFC Meetings
International Monetary Fund

Sunday, April 21, 2002
9:00 AM - 12:30 PM
Secretary Paul O'Neill
Development Committee Meeting
World Bank
NOTES:
Many bilateral meetings will take place on Friday. Upon request, the bilaterals will be open for
photo pool only at the top. Please contact Sean Miles at 202-622-2960 or email at
publicafTairs@do.treas.gov to arrange for access.
Access to the Bell Entrances on East Executive Drive for the group photos on Saturday requires
a Treasury or White House pass. If you are not a current pass holder, please call 202-622-2960
or email with full name, date of birth, and social security number for access to East Executive
Drive on Saturday. Please arrive early to allow time for security check; photo equipment wiI1 be
swept. NO ACCESS WilL BE GRANTED WITHOUT A PASS OR PRIOR CLEARANCE.
You must register for the Post-G7 Press Conference. If you are not a current Treasury or White
House pass holder, please call or email Treasury Public Affairs to register for the Post-G7 Press
Conference.
The Post-G7 Press conference wiJl be a LIVE event. Please call Frances Anderson to arrange for
parking.

NEWS

lREASURY

omCE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W. • WASIDNGTON. D.C .• 20220. (202) 622-2960

For Immediate Release
April 17, 2002

Contact: Tara Bradshaw
(202) 622-2014

TREASURY SECRETARY O'NEILL'S SIGNING CEREMONY STATEMENT
UNITED STATES AND KINGDOM OF THE NETHERLANDS SIGN AGREEMENT
TO EXCHANGE TAX INFORMATION WITH RESPECT TO THE
NETHERLANDS ANTILLES
Today Treasury Secretary Paul O'Neill signed a new agreement with the Kingdom of the
Netherlands that will allow for exchange of information on tax matters between the United States
and the Netherlands Antilles. The agreement was signed by Treasury Secretary Paul O'Neill and
the Prime Minister of the Netherlands Antilles, Miguel Pourier.
At the signing ceremony, Treasury Secretary Paul O'Neill delivered the following
remarks:
I would like to thank you all for being here today and welcome our friends from the
Kingdom of the Netherlands, particularly Prime Minister Pourier of the Netherlands Antilles.
The United States and the Netherlands Antilles have for many years had a close and
cooperative relationship on law enforcement matters. We greatly value this cooperation,
particularly now as we work to ensure that no safe haven exists anywhere in the world for the
funds associated with illicit activities, including terrorism, money laundering, and tax evasion.
I have spoken on numerous occasions about our obligation to enforce our tax laws,
because failing to do so undermines the confidence of honest taxpayers in the fairness of our tax
system. Access to needed information is vital to our efforts to ensure enforcement of our laws.
The tax information exchange agreement we are signing today exemplifies our close and
long-standing relationship with the Netherlands Antilles. When we last modified our tax treaty
relationship in 1996, we made a formal commitment to continue discussing issues of double
taxation arising between our two countries and, if necessary to avoid double taxation, to enter
into tax treaty negotiations. We will proceed within 12 months with that treaty dialogue to
consider the recent changes to the Netherlands Antilles tax law.
PO-3007

For press releases. $JJeeches. public schedules and official biographies, call our 24-hour fax line at (202) 622-2040

--------__ ,

This new tax infonnation exchange agreement is an important development. I want to
thank Prime Minister Pourier for his participation in this signing ceremony and for
demonstrating that the Netherlands Antilles and the United States share a common goal of
upholding international standards and ensuring that our financial institutions are not used to
further illicit activities of any kind.
As many of you know, several months ago I made a public commitment, in
Congressional testimony, to expanding our network of tax infonnation exchange relationships.
The agreement we are signing today, together with our recent agreements with the Cayman
Islands, Antigua and Barbuda, The Bahamas, and the British Virgin Islands, demonstrates the
depth of our commitment. We will continue to work vigorously to improve our tax infonnation
exchange relationships, and I look forward to gathering here again in the coming weeks to
announce additional agreements with other countries.
-30The text of the Agreement

ARTICLE I
OBJECT AND SCOPE OF THE AGREEMENT
1.

The Contracting States shall assist each other to assure the accurate assessment

and collection of taxes, to prevent fiscal fraud and evasion, and to develop improved information
sources for tax matters. The Contracting States shall provide assistance through exchange of
information authorized pursuant to Article 4 and such related measures as may be agreed upon
by the competent authorities pursuant to Article 5.
2.

Information shall be exchanged to fulfill the purpose of this Agreement without

regard to whether the person to whom the infonnation relates is, or whether the infonnation is
held by, a resident or national of a Contracting State, provided that the infonnation is present
within the territory, or in the possession or control of a person subject to the jurisdiction, of the
requested State.
3.

As regards the Kingdom of the Netherlands, this Agreement shall apply only to

the Netherlands Antilles.

ARTICLE 2
TAXES COVERED BY THE AGREEMENT
1.

This Agreement shall apply to the following taxes imposed by or on behalf of a

Contracting State:
a)

in the case of the United States of America, all federal taxes;

in the case of the Netherlands Antilles, the following taxes: the income tax
(inkomstenbelasting), the wages tax (loonbelasting), the profit tax

(winstbelasting) and the surtaxes on the income and profit taxes (hereinafter
referred to as ''Netherlands Antilles taxes'').
2.

This Agreement shall apply also to any identical or substantially similar taxes

imposed after the date of signature of the Agreement in addition to or in place of the existing
taxes. The competent authority of each Contracting State shall notify the other of changes in
laws which may affect the obligations of that State pursuant to this Agreement.
3.

This Agreement shall not apply to the extent that an action or proceeding

concerning taxes covered by this Agreement is barred by the applicant State's statute of
limitations.
4.

This Agreement shall not apply to taxes imposed by states, municipalities or other

political subdivisions, or possessions of a Contracting State.

ARTICLE 3
DEFINITIONS
1.

In this Agreement, unless otherwise defined:

The term "competent authority" means:
(i)

in the case of the United States of America, the Secretary of
the Treasury or his delegate; and

(ii)

in the case of the Netherlands Antilles, the Minister of Finance or
his authorized representative;

The term "Contracting State" means the United States or the Kingdom of

the Netherlands in respect of the Netherlands Antilles as the context requires;
c)

The term "national" means:

in the case of the United States, any United States citizen

(i)

and any legal person, partnership, corporation, trust, estate,
association, or other entity deriving its status as such from the laws
in force in the United States; and
(ii)

in the case of the Netherlands Antilles, an individual who
has Dutch nationality and who would be eligible to vote in the
Netherlands Antilles ifhe were of age and present in the
Netherlands Antilles, provided however, if an individual is not
present in the Netherlands Antilles, he must have either been born
in the Netherlands Antilles or have been resident thereof for at
least five years;

The term "person" includes an individual and a partnership, corporation, trust,
estate, association or other legal entity;

The term "tax" means any tax to which the Agreement applies;

The term "information" means any fact or statement, in any form whatever, that
may be relevant or material to tax administration and enforcement, including (but
not limited to):

(i)

testimony of an individual; and

(ii)

documents, records or tangible property of a person or Contracting State;

The terms "applicant State" and "requested State" mean, respectively, the
Contracting State applying for or receiving information and the Contracting State
providing or requested to provide such information;

For pwposes of determining the geographical area within which jurisdiction to
compel production of information may be exercised, the term "United States"
means the United States of America, including Puerto Rico, the Virgin Islands,
Guam, and any other United States possession or territory;
i)

For purposes of determining the geographical area within which

jurisdiction to compel production of information may be exercised, the term
"Netherlands Antilles" means that part of the Kingdom of the Netherlands that is
situated in the Caribbean area and consisting of the Island Territories of Bonaire,
Curacao, Saba, St. Eustatius and St. Maarten (Dutch part).
2.

Any term not defined in this Agreement, unless the context otherwise requires or

the competent authorities agree to a common meaning pursuant to the provisions of Article 5,
shall have the meaning which it has under the laws of the Contracting State relating to the taxes
which are the subject of this Agreement.

ARTICLE 4
EXCHANGE OF INFORMATION
1.

The competent authorities of the Contracting States shall exchange information to

administer and enforce the domestic laws of the Contracting States concerning taxes covered by
this Agreement, including information to effect the determination, assessment, and collection of
tax, the recovery and enforcement of tax claims, or the investigation or prosecution of tax crimes
or crimes involving the contravention of tax administration.
2.

The competent authority of the requested State shall provide information upon

request by the competent authority of the applicant State for the pwposes referred to in

paragraph 1. If the infonnation available in the tax files of the requested State is not sufficient to
enable compliance with the request, that State shall take all relevant measures, including
compulsory measures, to provide the applicant State with the infonnation requested.
a)

The requested State shall have the authority to:
examine any books, papers, records, or other tangible

(i)

property which may be relevant or material to such inquiry;
question any person having knowledge or in possession,

(ii)

custody or control of infonnation which may be relevant or
material to such inquiry;
compel any person having knowledge or in possession,

(iii)

custody or control of infonnation which may be relevant or
material to such inquiry to appear at a stated time and place and
testify under oath and produce books, papers, records, or other
tangible property;
(iv)
b)

take such testimony of any individual under oath.

Privileges under the laws or practices of the applicant State shall not apply in the
execution of a request but shall be preserved for resolution by the applicant State.

The requested State shall provide infonnation requested pursuant to the provisions

of this Article regardless of whether the requested State needs such infonnation for purposes of
its own taxes. Moreover, if specifically requested by the competent authority of the applicant
State, the requested State shall:
a)

specify the time and place for the taking of testimony or the production of books,
papers, records, and other tangible property;

place the individual giving testimony or producing books, papers, records and
other tangible property under oath;

pennit the presence of individuals designated by the competent authority of the
applicant State as being involved in or affected by execution of the request,
including an accused, counsel for the accused, individuals charged with the
administration and enforcement of domestic laws of the applicant State covered
by this Agreement, and a commissioner or magistrate present for the purpose of
rendering evidentiary rulings or detennining issues of privilege under the laws of
the applicant State;

provide individuals pennitted to be present with an opportunity to question,
directly or through the executing authority, the individual giving testimony or
producing books, papers, records and other tangible property;

secure original and unedited books, papers, and records, and other tangible
property;

secure or produce true and correct copies of original and unedited books, papers
and records;

detennine the authenticity of books, papers, records and other tangible property
produced;

examine the individual producing books, papers, records and other tangible
property regarding the purpose for which and the manner in which the item
produced is or was maintained;

permit the competent authority of the applicant State to provide written questions
to which the individual producing books, papers, records and other tangible
property is to respond regarding the item produced;

perform any other act not in violation of the laws or at variance with the
administrative practice of the requested State;

certify either that procedures requested by the competent authority of the
applicant State were followed or that the procedures requested could not be
followed, with an explanation of the deviation and the reason therefor.

The provisions of the preceding paragraphs shall not be construed so as to impose

on a Contracting State the obligation:
a)

to carry out administrative measures at variance with the laws and administrative
practice of that State or of the other Contracting State;

to supply particular items of information which are not obtainable under the laws
or in the normal course of the administration of that State or of the other
Contracting State;

to supply information which would disclose any trade, business, industrial,
commercial or professional secret or trade process;

to supply information, the disclosure of which would be contrary to public policy;

to supply information requested by the applicant State to administer or enforce a
provision of the tax law of the applicant State, or any requirement connected
therewith, which discriminates against a national of the requested State. A
provision of tax law, or connected requirement, will be considered to be
discriminatory against a national of the requested State ifit is more burdensome

with respect to a national of the requested State than with respect to a national of
the applicant State in the same circumstances. For purposes of the preceding
sentence, a national of the applicant State who is subject to tax on worldwide
income is not in the same circumstances as a national of the requested State who
is not subject to tax on worldwide income. The provisions of this subparagraph
shall not be construed so as to prevent the exchange of information with respect to
the taxes imposed by the United States on branch profits or on the premium
income of nonresident insurers or foreign insurance companies or any similar
such taxes imposed by the Netherlands Antilles in the future;
f)

notwithstanding subparagraphs (a) though (e) of this paragraph, the requested
State shall have the authority to obtain and provide, through its competent
authority, information held by financial institutions, nominees, or persons acting
in agency or fiduciary capacity (not including information that would reveal
confidential communications between a client and an attorney, solicitor or other
legal representative where the client seeks legal advice), or information respecting
ownership interests in a person.

Except as provided in paragraph 4, the provisions of the preceding paragraphs

shall be construed so as to impose on a Contracting State the obligation to use all legal means
and its best efforts to execute a request. A Contracting State may, in its discretion, take measures
to obtain and transmit to the other State information which, pursuant to paragraph 4, it has no
obligation to transmit.

The competent authority of the requested State shall allow representatives of the

applicant State to enter the requested State to interview individuals and examine books and
records with the consent of the individuals contacted.
7.

Any information received by a Contracting State shall be treated as secret in the

same manner as information obtained under the domestic laws of that State and shall be
disclosed only to individuals or authorities (including judicial and administrative bodies)
involved in the determination, assessment, collection, and administration of, the recovery and
collection of claims derived from, the enforcement or prosecution in respect of, or the
determination of appeals in respect of, the taxes which are the subjec

Full text of Press Releases of the United States Department of the Treasury : Volume 391

FRASER