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PRESS RELEASES
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PO-3518: Testimony of Jimmy Gurule before the U.S. Senate Finance Committee
Page 1 of 12
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FROM THE OFFICE OF PUBLIC AFFAIRS
October 9, 2002
PO-3518
Testimony of Jimmy Gurule
Under Secretary for Enforcement
U.S. Department of the Treasury
Before the
U.S. Senate Finance Committee
October 9, 2002
Chairman Baucus, Ranking Member Grassley and distinguished members of the
Committee, permit me to begin by thanking you for inviting me to testify today about
the measures the Treasury Department. and the U.S. government more generally,
have taken and are taking to identify, attack and disrupt terrorist financing and the
lessons we have learned to date about patterns of financing and fundraising. In
addition to my testimony, I am submitting a document for the record entitled
"Contributions by the Department of the Treasury to the Financial War on
Terrorism" that provides more detailed information in summary form of our efforts
since the brutal attacks of September 11th. That paper also is available on our
website at httpll:www.treas.gov/press/releases/reports/200291 0184556291211.pdf.
Preliminarily, I would like to re-state the Treasury Department's gratitude to this
Committee and the Congress for the additional resources, authorities, and support
given to the Executive Branch this past year to assist Treasury in identifying,
disrupting, and dismantling terrorist financial networks. Immediately after the
horrific attacks of September 11th, Congress worked closely with the Department of
the Treasury, along with the Department of Justice and other agencies and
departments, to make significant improvements in the law that enhance our ability
to tackle the issue of terrorist financing in a more unified, cohesive and aggressive
manner. Of particular importance to our counter-terrorist efforts, the USA PATRIOT
Act, enacted into law on October 26, 2001, expands the law enforcement and
intelligence community's ability to access and share critical financial information
regarding terrorist investigations.
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 of funding." The President directed the federal
government to wage the nation's war against the finanCing of global terrorism, and
we have continued to devote our extensive resources and expertise to fulfill this
mandate.
In our actions and in our words, the Treasury Department has shown quite clearly
that in this war, financial intermediaries and facilitators who infuse terrorist
organizations with money, materiel, and support must be held accountable along
with those who perpetrate terrorist acts.
Before I turn to specific developments in our fight against terrorist financing, I would
like to emphasize the importance of vigorous interagency consultation and
cooperation in attacking terrorist financing, and thank the other agencies and
departments in our federal government for their work with us over the past year.
We have seen that terrorist financing is a complicated and multi-dimensional
problem that both domestically and internationally implicates a range of legal,
regulatory, financial, intelligence and law enforcement interests. Consequently, no
successful attack on the financial underpinnings of terrorism may be advanced
without coordinated interagency strategies on the use of legal, regulatory, private
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sector, law enforcement and intelligence-gathering tools required to combat this
problem.
I would now like to briefly review our efforts in countering terrorist financing since
the events of September 11 tho This review will provide a helpful context for some
recent developments that I would then like to describe in greater detail for you.
I. A Brief Review of Our Efforts to Combat Terrorist Financing
Identifying, attacking and disrupting the financial underpinnings of terrorism are
matters of national security. This war on terrorist financing is an immense
undertaking. The openness of our modern financial system, which allows savers
and investors to fuel economic growth, also creates opportunities for terrorists to
hide. Our challenge in this front of the war against terrorism is to protect the
efficiency and flexibility of the world's financial systems while preserving the
integrity of such systems by ensuring that they are not abused by terrorists and
their financiers. We have enjoyed success. but much more remains to be done.
In the months immediately following the heinous crimes of September 11th, the
Department of the Treasury took six principal steps to identify and pursue financial
underwriters of terrorism:
1. Working with other USG agencies. we implemented Executive Order 13224.
giving us greater power to freeze terrorist-related assets;
2. We established Operation Green Quest, an inter-agency task force which has
augmented existing counter-terrorist efforts by targeting financial networks and
mechanisms. and 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;
3. The United States won the adoption of UN Security Council Resolutions 1373
and 1390. which require member nations to join us in the effort to disrupt terrorist
financing;
4. We engaged other multilateral institutions such as the Financial Action Task
Force (FATF) and the international financial institutions to focus on terrorist
financing;
5. We began implementation of the USA PATRIOT Act provisions to broaden and
deepen our access to critical financial information in the war against terrorist
financing and to expand the anti-money laundering regulatory net for our financial
system; and
6. We began sharing information across the federal government. with the private
sector, and among our allies to crack down on terrorist financiers.
As we executed these initial steps. we began to formulate a strategy for combating
terrorist financing on a global scale. For the first time. the 2002 National Money
Laundering Strategy (NMLS) contains such a strategy. with a discrete set of
objectives and priorities targeting terrorist financing. The NMLS identifies financial
mechanisms or systems by which terrorist funding is effectuated. and seeks to
attack these mechanisms on an interagency and coordinated basis. Released this
past summer by the Secretary ofthe Treasury and the Attorney General. the NMLS
states that terrorist groups tap into a wide range of sources for their financial
support, including sources that are otherwise legitimate commercial enterprises
such as construction companies, honey shops. tanneries, banks, agricultural
commodities growers and brokers, trade businesses. bakeries, restaurants.
bookstores. and through non-governmental organizations (NGOs). The Strategy
also states that, although terrorists receive material assistance and/or financial
support from rogue nations and other governments that are sympathetic to the
terrorists' cause, they also secure funding from charity or relief organizations.
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money remitters, informal value transfer systems, as well as trade-based schemes.
The NMLS addresses each of these mechanisms, and establishes priorities and
objectives to identify and attack their corruption by criminals.
Our strategy, in its broadest outlines, focuses in particular on the following seven
areas: (1) targeted intelligence gathering; (2) freezing of suspect assets; (3) law
enfor.cement actions; (4) diplomatic efforts and outreach; (5) smarter regulatory
scrutinY; (6) outreach to the financial sector; and (7) capacity building for other
governments and the financial sector. This is an integrated inter-agency strategy
because these efforts draw on the expertise and resources of the Treasury
Department and other departments and agencies of the federal government, as well
as our foreign partners and the private sector. Allow me to highlight briefly the
efforts the Treasury Department has taken to tackle terrorist financing in these
seven areas of focus identified in our terrorist financing strategy.
First, with respect to targeted intelligence gathering, we are applying technology,
intelligence, investigatory resources and regulations to locate and freeze the assets
of terrorists, wherever they may hide. New powers granted to Treasury by the
President and Congress have enabled us to scour the global financial system for
suspicious activities with greater precision than ever before.
Second, we are freezing terrorist-related assets on a global scale. To date, we
have frozen over U.S. $34 million in terrorist-related assets pursuant to designation
under Executive Order 13224, and the international community has frozen an
additional U.S. $78 million in terrorist-related assets pursuant to designation under
United Nations Security Council Resolution 1390, 1373 and related preceding
resolutions.
Third, we have coordinated effective law enforcement actions both domestically and
internationally against terrorist cells and networks. On October 25, 2001, Treasury
created Operation Green Ouest ("OGO"), a new multi-agency financial enforcement
initiative intended to augment existing counter-terrorist efforts by bringing the full
scope of the Treasury Department's financial expertise to bear against systems,
individuals, and organizations that serve as sources of terrorist funding.
Internationally, Treasury has deployed Customs attaches and representatives from
Treasury's Office of Foreign Assets Control (OFAC) in strategic embassies around
the world to facilitate cooperation with host countries and regions in combating
terrorist financing. International law enforcement cooperation has led to over 2400
arrests of suspected terrorists and their financiers in 95 countries.
Fourth, together with other agencies, we are using our diplomatic resources and
regional and multilateral engagements to ensure international cooperation,
collaboration and capability in dismantling terrorist financing networks. As stated
above, the United States has worked through the United Nations to globalize the
war on terrorist financing, and we have complemented these efforts with a range of
bilateral and multilateral initiatives.
Fifth, we are engendering smarter regulatory scrutiny by training the financial
sectors to concentrate enhanced due diligence and suspicious activity monitoring
on terrorist financing and money laundering typologies. Through the USA
PATRIOT Act authorities, we are expanding and enhancing regulatory scrutiny to all
businesses within the financial sector that may be susceptible to terrorist or criminal
abuse.
Sixth, we have undertaken our regulatory expansion under the authorities of the
USA PATRIOT Act in full consultation with the private financial sectors that we are
regulating. This outreach has assisted and informed our regulatory strategy with
respect to each financial sector so that costs of new regulation are borne only
where warranted by the offsetting enforcement benefit. For example, after
prolonged discussion with the insurance industry, we decided to regulate life and
annuity insurance products because of their investment-like characteristics, but we
decided against regulating other forms of insurance, such as health care or property
insurance, because of the low risk that such policies have for terrorist financing or
other financial criminal abuse. Most importantly, on October 1,2002, FinCEN's
secure link with financial institutions, the USA PATRIOT Act Communications
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System (PACS), became operational. Bank Secrecy Act reports are now being
filed via PACS.
Finally, we have engaged in several capacity-building initiatives with other
governments and the private sector with respect to terrorist financing. For example,
internationally, Treasury is co-chairing a FATF Working Group on Terrorist
Financing, which, among other issues, is charged with identifying technical
assistance needs of various governments around the world. This Working Group IS
collaborating with donor states, the International Monetary Fund, the World Bank,
and the UN Counter-Terrorism Committee in coordinating the delivery of technical
assistance to those governments.
Bilaterally, Treasury's Office of International Enforcement Affairs has actively
participated in conducting several inter-agency assessments of technical assistance
needs with respect to combating terrorist financing in various countries of strategic
interest to the United States.
In pursuing these areas of focus, we have adopted a systemic approach against
terrorist financing. As the initial results of the September 11 th investigation have
made clear, the financial trail left by terrorists and their facilitators represents a
vulnerability that must be pursued and exploited. Our strategy takes full advantage
of the new authorities granted to us under the USA PATRIOT Act and the
international support that we have cultivated against terrorism to find to these
financial trails and uncover terrorist financing networks and operational cells. We
have utilized these authorities and resources to attack the terrorist financial
infrastructure; that is, their formal, informal and underground methods for
transferring funds across borders and between cells, whether through banks,
businesses, hawalas, subverted charities, or innumerable other means. Through
designation, regulation and investigation, we have systemically been shutting down
terrorist access to these financing channels and mechanisms, and we have used
the money trails evident in terrorist financing cases to locate and apprehend
terrorists.
Our objective is simple-to prevent acts of terrorism in the short and long term by
identifying and disrupting terrorist operations and the financial networks that support
those operations. To pursue this objective, we have been working in close
partnership with the Department of Justice and its investigative components, the
State Department, the Department of Defense, the intelligence community, and
many other agencies of the federal government to address terrorist financing on
multiple levels. We have concentrated much of our enforcement efforts and
resources on identifying, tracing, and blocking terrorist-related assets. In this
endeavor, we have gathered the financial expertise, information and authorities that
are unique to the Treasury Department to attack terrorist financing on all fronts. We
have also engaged the world, in bilateral and multilateral fora, to ensure
international cooperation in our anti-terrorist campaign.
I would now like to describe these operational, regulatory and international aspects
of our counter-terrorist financing efforts in greater detail.
II. Actions Taken Against Terrorist Financing
Shutting Down Terrorist Access to Formal Financial Channels
The most visible and immediately-effective tactic of our comprehensive terrorist
financing strategy has been designating and blocking the accounts of terrorists and
those associated with financing terrorist activity. Public deSignation of terrorists,
terrorist supporters and facilitators, and blocking their abilities to receive and move
funds through the world's financial system, has been and IS a crucial component In
the fight against terrorism.
On September 24, 2001, President Bush issued Executive Orde~ 13244, "Blocking
Property and Prohibiting Transactions with Persons Who Commit, Threaten to
Commit, or Support Terrorism." Section 1 of the Order s~ates: "All property and
interests in property of the following persons ... that are In the United States or that
hereafter come within the United States, or that hereafter come Within the
possession or control of United States persons are blocked."
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The Department of the Treasury's Office of Enforcement, in conjunction with the
Office of International Affairs and the Office of Foreign Assets Control, has helped
lead U.S. efforts to Identify and block the assets of terrorist-related individuals and
entities within the United States and worldwide. Currently, 240 individuals and
entities are publicly-designated as terrorists or terrorist supporters by the United
States, and since September 11 th over $112 million in the assets of terrorists has
been frozen around the world. Beyond simply freezing assets, these U.S. and
international actions to publicly-designate terrorists and their supporters advance
global interests in suppressing terrorist financing and combating terrorism by:
(I) shutting down the pipeline by which designated parties moved money and
operated financially in the mainstream financial sectors;
(ii) informing third parties who may be unwittingly financing terrorist activity of their
association with supporters of terrorism;
(iii) deterring undesignated parties that might otherwise be willing to finance terrorist
activity;
(iv) exposing terrorist financing "money trails" that may generate leads to previously
unknown terrorist cells and financiers;
(v) forcing terrorists to use more costly informal means of financing their activities;
and
(vi) supporting our diplomatic effort to strengthen other countries' capacities to
combat terrorist financing.
Only the first interest identified above can be quantified by hard numbers; that is,
the value of assets frozen pursuant to blocking actions. However, we must
remember that the value of the designation process is much greater than any
amount of terrorist money frozen. The designation process is invaluable because it
accomplishes all of the other interests identified above, and in doing so, shuts off
terrorist access to the world's formal financial systems.
Currently, over 160 countries and jurisdictions have blocking orders in force; but,
not every country has joined us in blocking every identified terrorist or terrorist
supporter. We must continue to work to ensure that countries do more than just
add names to a list; we must also work towards ensuring that they have the
necessary legislation, training and political will to join with us in shutting down
terrorist access to international financial systems.
As we succeed in our domestic and international efforts to deny the world's financial
systems to terrorists and their financiers, terrorists will be forced to utilize alternative
methods such as bulk currency transfers, alternative remittance systems, charities,
and trade-based transactions to raise and move money.
In a recent speech to the Council on Foreign Relations echOing these concerns,
Deputy Secretary Ken Dam stated, "public designations are, by their very nature,
public and therefore terrorists can adapt their behavior by keeping their money out
of the United States or other financial centers with regulations in place to stop
them. Instead, they will utilize other methods to move their money, such as trade in
commodities like gold or diamonds, and avoid storing large sums of money in any
one location." We are targeting these mechanisms as well. I'd now like to turn to
these alternative financial mechanisms and briefly describe our efforts to combat
terrorist financing conducted through these mechanisms.
Protecting Charities from Terrorist Abuse
Charities across the world perform an important function, enhancing the lives of
millions of people. In 2000, for example, Americans donated U.S. $133 billion to
charity with humanitarian intent. Unfortunately, however, terrorists have preyed
upon such noble intentions by diverting charitable funds for terrorist purposes.
Our task then is twofold: (1) to identify those charities which are nothing more than
fronts for terrorist oganizations; and (2) to prevent legitimate charities from being
abused by terrorist financiers without chilling legitimate charitable donations and
charitable works. Our strategic approach, as set forth In the recently published
2002 National Money Laundering Strategy, involves domestic and international
efforts to ensure that there is proper oversight of charitable activities, as well as
transparency in the administration and functioning of cha.ritable organizations. We
also are striving to effect greater coordination with the pnvate sector to develop
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partnerships that include mechanisms for self-policing by the charitable and nongovernmental organization sectors.
Under the authority of E.O. 13224, the United States has designated ten foreign
charitable organizations as having ties to al-Qaida or other terrorist groups and has
shut down two prominent U.S.-based charities with ties to Usama bin Laden and
the Taliban. In addition, the United States has designated and blocked the assets
of the largest U.S.-based Islamic charity, which acted as a funding vehicle for the
HAMAS terrorist organization. To date, we have frozen $6.3 million in U.S.
charitable funds, and an additional $5.2 million in charitable funds have been frozen
or seized in other countries.
U.S. Treasury officials have also met with charitable sector watchdog and
accreditation organizations, including the Better Business Bureau Wise Giving
Alliance and the International Committee on Fundraising Organizations, to raise
their awareness of the threat posed by terrorist financing. We will continue these
efforts to promote effective self-regulation and oversight within the charitable
industry.
We are also increasing the transparency and oversight of charities through
multilateral efforts. FATF Special Recommendation VIII on Terrorist Financing
commits all member nations to ensure that non-profit organizations cannot be
misused by financiers of terrorism. The United States is co-chairing the FATF
Terrorist Financing Working Group that is developing international best practices on
how to protect charities from abuse or infiltration by terrorists and their supporters.
We are working bilaterally with many countries to ensure transparency in charitable
operations. According to recent press accounts, Saudi Arabia and Kuwait have
announced the establishment of oversight authorities for Saudi and Kuwaiti
charities in their respective countries. We are confident that our work bilaterally and
through FATF on this issue will prompt other countries to adopt competent
authorities to protect charities from terrorist abuse.
Regulating Hawalas / Informal Value Transfer Systems
Terrorists have also used hawalas and other informal value transfer systems as a
means of terrorist financing. The word "hawala" (meaning "trust") refers to a fast
and cost-effective method for the worldwide remittance of money or value,
particularly for persons who may be outside the reach of the traditional financial
sector. In some nations hawalas are illegal; in others they active but unregulated.
It is therefore difficult to measure accurately the total volume of financial activity
associated with the system; however, it is estimated that, at a minimum, tens of
billions of dollars flow through hawalas and other informal value transfer systems on
an annual basis. Officials in Pakistan, for example, estimate that more than $7
billion flow into the nation through hawala channels each year.
Some of the features which make hawalas attractive to legitimate customers -efficiency, reliable access to remote or under-developed regions, and low cost -also make the system attractive for the transfer of illicit or terrorist-destined funds.
Traditionally, informal value transfer systems such as hawalas have largely
escaped financial regulation. As noted in a recent money laundering report of the
Asia Pacific Group, a FATF-style. regional body, the terrorist events of September
11 th have brought into focus the ease with which informal value transfer systems
may be utilized to conceal and transfer illicit funds. Not surprisingly, concerns in
this area have led many nations to reexamine their regulatory policies and practices
in regard to hawalas and other informal value transfer systems.
The United States has already taken steps to regulate hawalas and informal value
transfer systems. The USA PATRIOT Act requires money remitters (underground
or otherwise) to register as "money services business" or "MSBs", thereby
subjecting them to existing money laundering and terrorist financing regulations,
including the requirement to file $uspicious Activity Reports (SARs). As a result,
well over 10,000 money service businesses have registered with the federal
government and are now required to report suspicious activities. The Act also
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makes it a crime for the money transfer business owner to move funds that he
knows are the proceeds.of a crime or are intended to be used in unlawful activity.
Failure to register with FlnCEN and/or failure to obtain a state license also are
federal crimes.
We have succeeded in disrupting the operations of several illegal money remitters
Implicated in terrorist finanCing. U.S. experts have worked with officials in other
nations on proposed licensing and/or registration regimes for money remitters,
including hawala operators, to ensure greater transparency and record-keeping in
their transactions. We will work closely with the Department of Justice to ensure a
balanced, but aggressive, use of criminal authorities to charge individuals who are
operating illegal money remitting businesses.
We are also working to ensure the integrity and transparency of informal value
transfer systems internationally. FATF Special Recommendation VI addresses this
issue by demanding that countries register or license informal value transfer
businesses and subject them to all of the FATF Recommendations that apply to
banks and non-bank financial institutions. In addition, at a conference on hawala in
the UAE in May 2002, a number of governments agreed to adopt FATF Special
Recommendation VI and shortly thereafter the UAE government announced it
would impose a licensing requirement on hawala operators operating within its
borders. Participants at the UAE meeting drafted and agreed upon the Abu Dhabi
Declaration on Hawala, which set forth a number of principles calling for the
regulation of hawalas.
On the international training front, FinCEN is hosting a conference on informal value
transfer systems in Oaxaca, Mexico, today. The full-day schedule will include
presentations and discussions covering the money laundering risks posed by
informal value transfer systems, such as hawala, and the law enforcement and
regulatory challenges posed by such systems. The key findings from FinCEN's
outreach efforts to the law enforcement community will be shared with international
law enforcement officials at the seminar. Speakers will include representatives
from The New York State Attorney General's Office, Italy, the United Kingdom,
Bahrain, and the World Bank
Combating Bulk Cash Smuggling
Bulk cash smuggling has proven to be yet another means of financing adopted by
terrorists and their financiers. Disruption of this tactic requires a global approach.
To identify and attack bulk cash movements, we must work with the international
community to ensure mandated inbound/outbound currency reporting at reasonable
levels (e.g., U.S. reporting threshold is $10,000). Further, intelligence-gathering
and law enforcement/customs agencies must cooperate with immigration officials to
share information about potential terrorist financing smugglers/couriers. We are
currently exploring the idea of creating multi-lateral Customs-to-Customs "Hotlines",
where appropriate, to exchange "real time" bulk currency information, as well as the
sharing of large value cross-border cash reports.
Investigating Trade-Based Terrorist Financing
With respect to trade-based financial systems, we will continue to investigate the
use of licit and illicit international trade commodities, for example, diamonds, gold,
honey, cigarettes, as well as narcotics, to fund terrori~m. Countering these tradebased terrorist financing systems demands consultation With domestic as well as
international trade communities and will require further bilateral and multilateral
efforts.
International capacity-building in this arena could include sharing and comparing
trade-based data bi-Iaterally and on a regional level to Identify and attack
unexplained anomalies.
To combat illicit international trade commodities such as narcotics, we must build
from existing domestic and international law enforcement and investigative
authorities and initiatives. As we have seen with both the Tallban and the FARC,
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narcotics trafficking presents these groups with the greatest potential for raising the
funds they need to support their terrorist regimes. Additionally, the associations
that these groups establish with narcotics traffickers give them access to the arms
traffickers and other facilitators (i.e., smuggling, communication and transportation
groups) that service the narcotics organizations.
Treasury (Office of Enforcement) and the United States Customs Service, in
consultation with the Departments of Justice and State, have developed an
international training program and are sponsoring an interagency training session in
the United Arab Emirates later this month to examine trade-based financing.
Investigating Terrorist Cyber-Fundraising Activities
Finally, we recognize that terrorist groups may exploit the internet to recruit
supporters and raise terrorist funds. Developing a strategy to counter such cyberfund raising activities is a responsibility that the Treasury Department has assumed
in its 2002 Anti-Money Laundering Strategy. We are currently working to devise
such a strategy, and we welcome input from other government agencies and
departments in this effort.
As you can see, we have developed a sophisticated understanding of the various
means of terrorist financing, and we have responded with a range of domestic and
international initiatives to counter each of these means. Most of these initiatives
that I have been referring to are designed to give us greater access to critical
financial information in the war against terrorist financing. In order to take
advantage of this information, we have created an operational, interagency
investigative group whose purpose is to targeting terrorist financing.
Operation Green Ouest
As I indicated earlier, on October 25, 2001, Treasury created Operation Green
Ouest ("OGO") to focus the Treasury Department's financial expertise in the war
against terrorist financing. OGO identifies and attacks terrorist financing through a
systemic financial approach. OGO specializes in identifying financial mechanisms,
such as illegal money remitters, and searching those systems to identify potential
terrorist financing. This systems-based approach, and the understanding that the
financing of terrorism is not merely an ancillary component of a terrorist-specific
investigation, differentiates OGO from other governmental efforts and brings the
unique financial capabilities of Treasury components to bear against terrorist
financing.
OGO is led by the United States Customs Service, and includes the Internal
Revenue Service, the Secret Service, the Bureau of Alcohol Tobacco and Firearms
(ATF), Treasury's Office of Foreign Assets Control (OFAC), FinCEN, the Postal
Inspection Service, the Federal Bureau of Investigation (FBI), and the Department
of Justice. The financial expertise of the Treasury Bureaus, along with the
exceptional experience of our partner agencies and departments, is also utilized in
this operational attack on terrorist financing.
OGO has complemented the work of OFAC and Foreign Terrorist Asset Tracking
Group (FTAT-G) in identifying terrorist networks at home and abroad, and it has
served as an investigative arm in aid of blocking actions. Since its inception,
OGO's investigations have resulted in 47 arrests, 28 indictments, 107 search
warrants issued and/or consent searches and the seizure of over $19 million in bulk
cash (over $11 million with a Middle East connection). For the year ending
September 11, 2001, seizures outbound to Middle and Far East countries totaled
$5.216 million.
OGO, along with the FBI and other government agencies, also has traveled abroad
to follow leads, exploit documents recovered and provide assistance to foreign
governments. In this effort, OGO is utilizing its 22 Customs attaches in 31 foreign
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offices overseas to gather information. These offices and attaches have proven
invaluable to our operational efforts against terrorist financing.
Operational Training: Building Upon EXisting Treasury Expertise
Treasury's primary assignment in the war on terrorism is to identify and attack
financial mechanisms, licit and illicit, supporting terrorism. In pursuing this
assignment, Treasury can build upon its efforts to identify and attack money
laundering. In many cases, due to the similarity of financial systems used by
targets, investigating terrorist fundraising is similar to conducting a money
laundering case. There are, however, significant differences between money
laundering and terrorist fundraising investigations. A key distinction is manifested in
the end game sought by investigators. Money laundering investigations are
initiated to achieve prosecution and forfeiture. Terrorist fund raising investigations,
although sharing these objectives as well, are more nuanced. The ultimate
objective is to identify, disrupt and cut off the flow of funds to terrorists. Significant
accomplishments can be had without any significant domestic prosecutions.
There are other differences as well. For example, as opposed to a typical money
laundering case, methods used for raising funds to support terrorist activities may
be legal. Moreover, in a terrorist financing investigation, the targeted financial
transactions tend to be smaller, and much less observable, for example, than the
typical narcotics money laundering transaction. Identification of the transaction as
suspicious, therefore, may require a much greater melding of private, law
enforcement and intelligence information obtained domestically, as well as
internationally. To address these issues, it is essential to develop "in-house"
expertise aware of financial methods utilized by financiers of terrorism, and
strategies to attack, disrupt and dismantle them. To accomplish this, interagency
training is essential.
Recently, on September 24 and 25, 2002, at the Department of the Treasury,
Treasury's Office of Enforcement sponsored a "Combating Terrorist Fundraising
Seminar." The purpose of the seminar was to serve as a "train the trainer"
mechanism, and to familiarize participants with ongoing terrorist financing
methodologies and anti-terrorist financing strategies. Attending the seminar were
more than 80 federal investigators, prosecutors and regulators who already
possessed a familiarity with terrorist financing issues and problems. Speakers
included experts in the field from the various components of Treasury, Justice and
State. The participants were drawn from Treasury and its Bureaus, Justice and its
components, U.S. Attorney Offices, State, the National Security Council, and Office
of the Comptroller of the Currency, the Federal Reserve Board of Governors and
FDIC. The seminar was well-received, and Treasury (Enforcement) is planning
additional regional seminars in key locations in the United States during the next
year.
III. International Efforts
I would now like to take a few moments to explain what we have been doing
internationally to combat terrorist financing. Terrorist financing networks are global,
and consequently, our efforts to identify and deny terrorists access to funds must
also be global. Our efforts in this aspect of the war on terrorism cannot be wholly
successful if pursued alone. Internationally, the United States has worked not only
through the United Nations on blocking efforts, but also through multi-lateral
organizations and on a bi-Iateral basis to promote international standards and
protocols for combating terrorist financing generally. I would hke to briefly review
some of the more significant initiatives that we have pursued In the international
arena.
United Nations
Because of its global nature and its ability to require states to take action under
Chapter VII of the UN Charter, the UN offered the quickest route for globaliZing the
war against terrorism in general and terrorist finanCing In particular. The United
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PO-3518: Testimony of Jimmy Gurule before the U.S. Senate Finance Committee
Page 10 of 12
States has worked diligently with the UN Security Council to adopt international
resolutions, which reflect the goals of our domestic executive orders by requiring
UN member states to freeze terrorist-related assets. These UN Security Council
resolutions form the legal basis for freezing terrorist assets on a global basis.
The UN 1267 Committee is responsible for UN designations of individuals and
entities associated with al-Qaida, bin Laden and the Taliban. States wishing to
propose a name for UN designation often will pre-notify affected states and close
allies to facilitate cooperation. The United States typically pre-notifies its allies and
affected states five working days in advance of formally presenting a name to the
1267 Committee for designation. After any pre-notification, a state submits a
proposed name for designation to the 1267 Committee. The submission typically
includes a statement of the basis for designation, along with identifying information
for the use of financial institutions, customs and immigration officials, and others
who must implement sanctions.
If no state objects (or requests a "hold" for more time to consider, or to obtain more
information on, the proposed designation) 48 hours after a name is circulated by the
1267 Committee Chairman for proposed designation, the designation becomes
effective. The 1267 Committee then puts out an announcement on its web site and
all UN member states are required to freeze any assets held by the designated
party(ies).
We have worked with our allies in the UN to pursue bilateral and multilateral
designations of terrorist-related parties where possible and appropriate. We have
achieved some notable successes in this area to date:
U.S.-Saudi Joint Designations - On March 11,2002, the United States participated
in its first joint designation of a terrorist supporter. The United States and Saudi
Arabia jointly designated the Somalia and Bosnia-Herzegovina offices of AI
Haramain, a Saudi-based NGO. These two organizations are linked to al-Qaida
and their names were forwarded to the Sanctions Committee for inclusion under the
UNSCR 1333/1390 list. On September 9, 2002, the United States and Saudi
Arabia jointly referred to the Sanctions Committee Wa'el Hamza Julaidan, an
associate of Usama bin Laden and a supporter of al-Qaida terror.
G7 Joint Designation - On April 19, 2002, the United States, along with the other G7
members, jointly designated nine individuals and one organization. All of these
groups were European-based al-Qaida organizers and financiers of terrorism.
Because of their al-Qaida links, all ten of these names were forwarded to the UN
Sanctions Committee for inclusion under the UNSCR 1333/1390 list.
U.S.-Italy Joint Designation - On August 29,2002, the United States and Italy jointly
designated 11 individuals and 14 entities. All of the individuals were linked to the
Salafist Group for Call and Combat designated in the original U.S. Annex to E.O.
13224. The 14 entities are part of the NadalNasreddin financial network, two
terrorist financiers designated on earlier E.O. 13224 lists.
U.S.-Central Asia Joint Designation - On September 6,2002, the United States,
Afghanistan, Kyrgyzstan, and China jointly referred to the Sanctions Committee the
Eastern Turkistan Islamic Movement, an al-Qaida-linked organization which
operates in these and other countries in Central Asia.
Beyond designating terrorist-related parties for blocking action on a global basis,
the UN has also asked for countries to identify needs for technical assistance in
order to comply with UN resolutions and conventions against terrorist finanCing.
The UN has required all member states to submit reports on the steps they have
taken to implement the various actions against terrorist financing called for in
UNSCR 1373.
To date, 175 members have completed their reports. The UN is reviewing those
reports with the intent of identifying gaps that member nations need to fill in order to
comply with UNSCR 1373.
Financial Action Task Force (FATF)
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PO-3518: Testimony of Jimmy Gurule before the U.S. Senate Finance Committee
Page 11 of12
Since 1989, the 31-member FATF has served as the preeminent anti-money
laundering multilateral organization in the world. The United States has played a
leading role in the development of this organization. Capitalizing on this financial
crime expertise, on October 31,2001, at the United States' initiative, the FATF
issued Eight Special Recommendations on terrorist financing, requiring all member
nations to:
(1) Ratify the UN International Convention for the Suppression of the Financing of
Terrorism and implement relevant UN Resolutions against terrorist financing;
(2) Criminalize the financing of terrorism, terrorist acts and terrorist organizations;
(3) Freeze and confiscate terrorist assets;
(4) Require financial institutions to report suspicious transactions linked to
terrorism;
(5) Provide the widest possible assistance to other countries' laws enforcement
and regulatory authorities for terrorist financing investigations;
(6) Impose anti-money laundering requirements on alternative remittance systems;
(7) Require financial institutions to include accurate and meaningful originator
information in money transfers; and
(8) Ensure that non-profit organizations cannot be misused to finance terrorism.
Many non-FA TF counties have committed to complying with the Eight
Recommendations and over 80 non-FATF members have already submitted selfassessment questionnaires to FATF describing their compliance with these
recommendations. Together with the Departments of State and Justice, Treasury
will continue to work with the FATF to build on its successful record in persuading
jurisdictions to adopt anti-money laundering and anti-terrorist financing regimes to
strengthen global protection against terrorist finance.
As part of this effort, FATF has established a Terrorist Financing Working Group,
which the United States is co-chairing with Spain, devoted specifically to developing
and strengthening FATF's efforts in this field. Among other initiatives on its agenda,
the Working Group has begun a process to identify nations that will need
assistance to come into compliance with the Eight Special Recommendations on
Terrorist Financing.
Egmont Group
Through FinCEN, we have directed the attention of the Egmont Group towards
terrorist finanCing. The Egmont Group is an international organization of 69
Financial Intelligence Units (FlUs) from various countries around the world.
FinCEN serves as the U.S. FlU. The FlUs in each nation receive financial
information (such as SARs) fromfinancial institutions pursuant to each
government's particular anti-money laundering laws, analyzes and processes these
disclosures, and disseminates the information domestically to appropriate
government authorities and internationally to other FlUs in support of national and
international law enforcement operations.
Since September 11th, the Egmont Group has taken steps to leverage its
information collection and sharing capabilities to support the United States in its
global war on terrorism. On October 31, 2001, FinCEN hosted a special Egmont
Group meeting that focused on the FlUs' role in the fight against terrorism. The
FlUs agreed to: work to eliminate impediments to information exchange; make
terrorist financing a form of suspicious activity to be reported by all financial sectors
to their respective FlUs; undertake joint studies of particular money laundering
vulnerabilities, especially when they may have some bearing on counterterrorism,
such as hawala; and create sanitized cases for training purposes.
In June 2002, 11 new FlUs were admitted to the Egmont Group, increasing its size
to 69 members. Approximately ten additional FlUs are being considered for
admission to the Egmont Group, and Egmont is planning training sessions to
improve on a continuing basis the analytical capabilities of FlU staffaround the
world. Training is being conducted this week in Oaxaca, MexIco. FInCEN IS
heavily involved and has sent four speakers.
Bilateral/Multilateral Law Enforcement Cooperation
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An unintended consequence for al-Qaida of its heinous actions on September 11 th
has been unprecedented international law enforcement cooperation and information
sharing on a scale inconceivable prior to the 9/11 attack. As these efforts continue
to improve, terrorist cells and networks become more vulnerable. Let me briefly
recount some of our successes with respect to international law enforcement
cooperation:
U.S.-Swiss Operative Working Arrangement: On September 4,2002, a working
arrangement signed by the Attorney Generals of Switzerland and the United States
and the Deputy Secretary of the Treasury was agreed to in Washington. Under this
agreement, Swiss and U.S. federal agents have been assigned to each country's
terrorism and terrorist financing task forces in order to accelerate and amplify work
together on cases of common concern. Bilateral cooperation and assistance is
occurring on a more informal basis in many other countries.
Successful Results: International law enforcement cooperation has resulted in over
2400 arrests of suspected terrorists and their financiers in 95 countries. Some of
these arrests have led to the prevention of terrorist attacks in Singapore, Morocco
and Germany, and have uncovered al-Qaida cells and support networks in Italy,
Germany, and Spain, the Philippines and Malaysia, among other places. In
addition, soon after September 11th, a Caribbean ally provided critical financial
information through its FlU to FinCEN that allowed the revelation of a financial
network that supported terrorist groups and stretched around the world.
IV. Conclusion
The range of initiatives that I briefly have shared with you today highlights the
complexity of the tasks at hand. We have made substantial progress since
September 11 th, and since my last testimony before Congress. This progress is
owing to the outstanding cooperation and hard work of all U.S. government
agencies and departments and the international community to close the seams that
terrorists had exploited before last fall. We are proud of our efforts, but realize that
much work remains to be done.
I
will be happy to answer any questions you may have.
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11/6/2002
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
october 09, 2002
CONTACT:
Office of Financing
202-691-3550
RESULTS OF TREASURY'S AUCTION OF 9-YR 9-MO INFLATION-INDEXED NOTES
This issue is a reopening of an inflation-indexed note originally issued
July 15, 2002.
Interest Rate:
Series:
CUSIP No:
TIIN Conversion
3%
C-2012
912828AF7
Factor per $1,000
High Yield:
Issue Date:
Dated Date:
Maturity Date:
8.342602892 1/
2.260%
October 15, 2002
July 15, 2002
July 15, 2012
Adjusted Price: 106.777
All noncompetitive and successful competitive bidders were awarded
securities at the high yield.
Tenders at the high yield were
allotted 72.92%. All tenders at lower yields were accepted in full.
Adjusted accrued interest of $ 7.52385 per $1,000 must be paid for
the period from July 15, 2002 to October 15, 2002.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Accepted
Tendered
Tender Type
Competitive
Noncompetitive
FIMA (noncompetitive)
9,393,817
99,870
$
$
o
o
7,000,047 2/
9,493,687
SUBTOTAL
o
Federal Reserve
TOTAL
6,900,177
99,870
9,493,687
$
°
$
7,00C,047
Both the unadjusted price of $106.439 and the unadjusted accrued interest
7.50000 were adjusted by an index ratio of
1.00318, for the period
from July 15, 2002, through October 15, 2002.
of $
Median yield
2.150%:
50% of the amount of accepted competitive tenders
was tendered at or below that rate.
Low yield
2.067%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-cover Ratio
=
9,493,687 / 7,000,047
=
1.36
1/ This factor is used to calculate the Adjusted values for any TIIN face
amount and will be maintained to 2-decimals on Book-entry systems.
2/ Awards to TREASURY DIRECT = $44,486,000
h Up://www.publicdebttreas.go v
ro-JS19
PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
FOR IlVIMEDIATE RELEASE
October 9,2002
Contact: Peter Hollenbach
(202) 691-3502
BUREAU OF THE PUBLIC DEBT AIDS SAVINGS BOND OWNERS
AFFECTED BY SEVERE WEATHER IN INDIANA
The Bureau of Public Debt took action to assist vIctIms of severe weather in Indiana 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 Indiana affected by the
stomlS. These procedures will remain in effect through November 2002.
Public Debt's action waives the nomlal six-month minimum holding period for Series 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.
Indiana counties involved are BaI1holomew, Blackford, Brown, Daviess, Decatur, Delaware, Fayette, Franklin,
Gibson, GraIlt, Greene, Hamilton, Hancock, Hendricks, Henry, Jay, Johnson, Knox, Lawrence, Madison,
Marion, Momoe, Morgan, Owen, Pike, Posey, Randolph, Rush, Shelby, Sullivan, Tipton and Vanderburgh.
Should additional cotmties 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-l 048, available at most financial institutions or by writing the Minneapolis Federal Reserve
Bank's Savings Bond Customer Service Department, 90 Hennepin Avenue, Minneapolis, Minnesota 55401;
phone (612) 204-5000. 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 261061328. Bond owners should write the word "DISASTER" on the front of their envelopes, to help expedite the
processing of claims.
000
PO-3520
PUBLIC DEBT NEWS
Department of the Treasury .. Bureau of the Public Debt • Washington, DC 20239
FOR IlVIMEDIATE RELEASE
October 9,2002
Contact: Peter Hollenbach
(202) 691-3502
BUREAU OF THE PUBLIC DEBT AIDS SAVINGS BONDS OWNERS
AFFECTED BY SEVERE WEATHER IN LOUISIANA
The Bureau of Public Debt took action to assist victims of severe weather in Louisiana by expediting the
replacement or payment of United States Savings Bonds for owners in the area. The emergency procedures are
effective immediately for paying agents and owners in Louisiana affected by the stonns. These procedures will
remain in effect through the end of November 2002.
Public Debt's action waives the nOlllial six-month minimum holding period for Series EE and Series I savings
bonds presented to authorized paying agents for redemption by residents of the affected area. Most financial
institutions serve as paying agents for savings bonds.
The parishes in Louisiana involved are: Acadia, Ascension, Assumption, Avoyelles, Beauregard, Calcasieu,
Cameron, Evangeline, Iberia, Iberville, Jefferson Davis, Jefferson, Lafayette, LaFourche, Livingston, Orleans,
Plaquemines, St. Bernard, St. Charles, St. James, St. John the Baptist, St. Landry, st. Martin, St. Mary, St.
Tammany, Tangipahoa and Tenebonne and Vermillion. Should additional parishes be declared disaster areas
the emergency procedures for savings bonds owners will go into effect.
The replacement of bonds lost or destroyed will also be expedited by Public Debt. Bond owners should
complete form PD-I048, available at most financial institutions or by writing the Richmond Federal Reserve
Bank's Savings Bond Customer Service Depmiment, 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
infonnation 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 Office of Investor
Services, 200 Third St., Parkersburg, West Virginia 26106-1328. Bond owners should write the word
"DISASTER" on the front oftheir envelopes, to help expedite the processing of claims.
000
www.pubHcdebttreas.gov
PO-3521
PUBI.-dIC DEBT
EW
-Department of the Treasury ~ Bureau of the Public Debt'" Washington, DC 20239
FOR DvUl:i.<DIATE RELEASE
October 9, 2002
Contact: Peter Hollenbach
(202) 691-3502
BUREAU'OF THE PUBLIC DEBT AiDS SAVINGS BONDS OWNERS
AFFECTED BY SEVERE WEATHER IN TEXA.S
The Bureau of Public Debt took action to assist victims of severe weather in Texas 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
Texas affected by the storms. These procedures will remain in effect through the end of November
2002.
Public Debt's action waives the normal six-month minimum holding period for Series EE and
Series I savings bonds presented to authorized paying agents for redemption by residents of the
aiTected area. Most financial institutions serve as paying agents for savings bonds.
Texas counties involved are: Brazoria, Frio, Galveston, LaSalle, Live Oak, Matagorda, Nueces,
San Patricio, andWhatron. Should additional counties be declared disaster areas the emergency
procedures for savings bonds owners will go into effect for those areas.
PLlblic Debt will also expedite the replacement of bonds lost or destroyed. Bond owners should
complete form PD-1048, available at most financial instihltions or by writing the Kansas City
Federal Reserve Bank's Savings Bond Customer Service Department, 925 Grand Boulevard,
Kansas City, Missouri 64198; phone (816) 881-2000. 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 intormation should include how the
bonds were inscribed, social security number, and approximate dates of issue, bond denominations
and serial numbers if available. A notary public or an officer of a financial institution must certi£Y
the completed form. 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-3S22
PO-3523: Two Members of the President's Cabinet to Discuss the Economy Thursday
~HLSS
Page 1 of 1
HOOM
FROM THE OFFICE OF PUBLIC AFFAIRS
October 9, 2002
PO-3523
TWO MEMBERS OF THE PRESIDENT'S CABINET TO DISCUSS THE
ECONOMY THURSDAY
On Thursday, Treasury Secretary Paul O'Neill and Commerce Secretary Don
Evans will deliver brief remarks and take questions from the media regarding
President Bush's efforts to strengthen the economic recovery.
Both Secretaries have been traveling the United States to meet with employers and
workers to discuss local economic conditions and creating jobs. At the briefing they
will discuss President Bush's efforts to strengthen the economy, from cutting taxes
last year and enacting a stimulus package this spring to advancing free trade now
that the President has trade promotion authority and repeating the President's call
on Congress to enact terrorism risk insurance.
This briefing on the economy will take place on Thursday, October 10th at 1:OOpm
eastern time in the Treasury Department's new Media Room (4121) at 1500
Pennsylvania Ave., N.W. Washington, DC. A White House or Treasury press
credential is needed to attend. Call 202-622-2960 for clearance information.
This press conference can be watched live on the web at www.treasury.gov.
http://w~w.treas.gov/press/rc::lc~ses/p03523.htm
11/6/2002
PO-3524: Under Secretary John Taylor Remarks on Afghanistan's Reconstruction at COll...
Page 1 of 6
.~'~~:r:r·
•
0<
_
•
... ""-'.
PfH':SS HOOM
FROM THE OFFICE OF PUBLIC AFFAIRS
October 9, 2002
PO-3524
Making Reconstruction Work in Afghanistan
John B. Taylor Under Secretary of Treasury for International Affairs
Remarks at the Council on Foreign Relations
Washington, D.C.
It was one year ago this week that the United States and other coalition forces
launched the military campaign to oust the Taliban and liberate the people of
Afghanistan. Much has been accomplished in that year. The Taliban have been
thrown out. The president of Afghanistan has been democratically elected. Nearly
2 million Afghan refugees have returned to their country. Tons of food and medicine
have been delivered. Over 3 million children-both girls and boys-have gone
back to school. Provincial governors have begun to send customs revenues to the
central government. Shops and markets are free to open and are thriving. And just
this week, the govern-ment began the introduction of a new currency-a symbol of
national unity and economic stability.
Still, the Afghan people and the international community face an enormous task:
rebuilding the basic infrastructure of Afghanistan, strengthening the central
government, and laying the foundations for strong private sector growth. In my
view there is now a unique window of opportunity to make real progress. President
Karzai and his economic team are devoted to developing pro-growth policies-they
speak of emulating free market success stories in Dubai and elsewhere. And the
international donor community has mobilized to help Afghanistan succeed. Last
January in Tokyo, donors pledged $4.5 billion over the next five years for this
purpose. Reconstruction and economic development in Afghanistan can be a real
success story. But more than a "business-as-usual" effort from the international
donor community will be needed to achieve this success.
I have been serving as CO-chair of the Afghanistan Reconstruction Steering Group
for international assistance since its inception last fall. I recently returned from a
visit to Afghanistan, where I met with President Karzai, Finance Minister Ghani, and
other senior Afghan officials. I visited schools, businesses, humanitarian projects,
and I met with representatives of the private sector and the international donor
community.
Today I would like to share with you some thoughts on making reconstruction work
in Afghanistan. My comments cover three areas: (1) creating an environment for
private sector led economic growth; (2) strengthening the central government, and
(3) rebuilding the infrastructure. I would like to take this opportunity to identify the
principles that, in my view, should guide us in these efforts.
The Foundations for Private Sector Growth
When listing their goals for foreign assistance in post-conflict situations, it is easy
for government agencies and international organizations to forget the private
sector. That would be a serious mistake in the case of Afghanistan. Afghanistan is
a very poor country with average income less than $1 a day. Of course,
Afghanistan needs reconstruction; but it also needs economic growth. Without
strong economic growth it will stay a poor country for many years. The only way
Afghanistan can generate such growth is through the creation of higher productivity
jobs by the private sector.
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Fortunately there is a long tradition of private entrepreneurship in Afghanistan,
especially in the areas of agriculture, light manufacturing, and trading. In 1832 an
Englishman's diary describes Kabul as an agricultural paradise. He wrote "there
were peaches, plums, apricots, pears, apples, quinces, cherries, walnuts,
mulberries, pomegranates, and vines" growing throughout the city. In the twentieth
century, Afghanistan was internationally renowned for its many varieties of grapes
and for its skillfully designed and woven carpets.
Today, with the Taliban ousted, that entrepreneurial spirit is again alive and well in
Afghanistan. I saw that spirit in the streets of the city of Herat; one entrepreneur I
met there made and sold glassware. The entrepreneur's hands and feet were
seriously deformed, crushed by the Taliban as he was driven out of business; but
now he is back in business and happy to tell me about his products. He had
manufactured for export 30 years ago and was anxious to get back in that export
business too.
Driving through the streets of Kabul you can see how the private sector is already
doing its part to rebuild the country. You see storefront after storefront selling uncut
logs, bricks, mortar, trowels, handsaws, shovels. You see people streaming out of
the shops carrying building materials to rebuild their houses or businesses
destroyed in the conflicts of recent years. The scene reminded me of a Home
Depot in the United States.
I could only imagine the huge improvements in productivity and the better life that
precut lumber and cheap saws could bring; perhaps foreign investment by firms like
Home Depot could some day be the agents of such change.
Recognizing this entrepreneurial spirit and its great potential, the government of
Afghanistan is working quickly to create a business-friendly atmosphere. The
government recently approved a new investment law, cut export taxes to zero, and
developed a "one-stop shopping" process for Investors. The government has
invited foreign banks from the United States, from Europe, from the United Arab
Emirates to come to Afghanistan under an innovative regulatory and supervisory
structure: that the banks operate solely under their home-country laws and
regulations. On my return to the United States from Afghanistan, I stopped, along
with Finance Minister Ghani, in Dubai, where we met with the UAE central bank
governor and finance minister. In order to spread the word about the good things
Afghanistan was dOing to encourage private sector growth, we discussed a
conference on "Investing in Afghanistan" to be hosted by UAE in Dubai later this
year.
The new national currency-the Afghani-will also be good for economic
development. It will replace the three different currencies now in circulation. The
new Afghani will help the central bank control money growth and keep inflation low.
Price stability will foster economic growth. Moreover, with its new denominations,
this currency will make buying and selling more efficient. Previously, a stack of
AfghaniS was needed to pay for a simple meal and a cartload was required for any
major business transactions.
The government is matching this good monetary policy with fiscal discipline. It is
swearing off deficit financing, looking for grants rather than loans to fill the finanCing
gap until the economy is strong enough to generate enough tax revenue to support
basic government services.
A goal of international assistance should be to build on these pro-growth economic
policies and thereby help Afghanistan realize its great entrepreneurial potential.
Helping to provide for a good infrastructure-schools, roads, air transport, and
power-is of course essential. Because so much private sector activity is in
agriculture, repairing irrigation channels and dams would have huge benefits in
private sector development. The country is also endowed with abundant minerals
and hydrocarbons, as well as great hydroelectric power potential. I believe there is
much more that can be done to encourage private sector growth if the donor
community listens carefully to the Afghan people.
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PO-3524: Under Secretary John Taylor Remarks on Afghanistan's Reconstruction at Cou...
Page 3 of 6
~ met with many traders ~nd other businessmen in Kabul and Herat; they had good
Ide~s about how International donors could encourage the private sector. They
reminded me that factories as well as homes had been damaged or destroyed in
the many conflicts. They suggested the building of industrial parks that would have
the infrastructure needed for light manufacturing; they talked about export zones;
they asked that export credit banks provide financing for the purchases of
machinery from abroad. Because capital is in such short supply, there are huge
returns to Importing machines and rebuilding factories.
To better understand these huge returns consider the following example. I visited a
UNDP construction project in Kabul: a renovation of a city park. I saw nearly 100
workers at the project, moving dirt around the park with picks and shovels. But I
saw no machinery. No backhoes. No jackhammers. No trucks. Later, on the way
back to the United States, I had to change planes in Amsterdam. Looking out the
window from the airport waiting room I saw 2 workers; they were moving 50 times
more dirt in an hour than all those 100 workers in Kabul. The difference of course
was capital. One of those workers in Amsterdam was driving a huge dump truck
and the other was operating a mammoth backhoe. I estimate (roughly of course)
that productivity-the amount of dirt moved per hour-was 2,500 times greater
because of that capital.
Direct Budget Support
If reconstruction is to work in Afghanistan it is essential that the country be unified
and this requires that the central government in Kabul be strong and have
legitimacy. Providing budget support to the central government is essential for this
legitimacy, because the central government's credibility depends upon its ability to
pay salaries and provide basic services including security and education. President
Karzai was elected with a huge majority, and he is gaining support from regional
leaders, but civil conflict is still a risk to security and, as press reports make clear,
certain areas still seem to be on the verge of conflict.
It is critical, therefore, to provide budget support for the central government. This
point is simple enough to make, but it has proved to be one of the most difficult
tasks of the reconstruction effort. Donors are frequently reluctant to give budget
support. Some have expressed reservations about providing funds directly to the
government because of concerns about financial controls. Others find their aid
agencies much more willing to fund favorite projects or programs than to give
unrestricted funds.
This is one reason why the U.S. Treasury has placed a budget expert in
Afghanistan: to help implement sound budgeting, financial accountability, and
auditing systems. The first budget put together last spring by the Afghanistan
government is responsible and transparent. At $460 million in expenditures for the
first fiscal year it was much more frugal than the $700 million estimated in the
needs assessment exercise in Tokyo last January.
The finance ministry has been successful in setting up a good system with the
assistance of reputable international consulting firms and the U.S. government.
The government will soon be able to make electronic payments, replacing an
antiquated manual system of payments. Using this system, teachers and
government workers would receive their salaries directly from the finance ministry,
which would prevent middlemen from skimming off the top. Donations to the
government can be handled with accountability and transparency. On top of all this
an Afghanistan Reconstruction Trust Fund, which can channel funds for budget
support from donors to the central government. has been established at the World
Bank.
Rebuilding the Infrastructure
The third component needed to lay the foundation for economic recovery in
Afghanistan is to accelerate the rebuilding of its infrastructure. Years of war have
http://www.treas.gov/press/releases:/po3524.htm
111612002
PO-3524: Under Secretary John Taylor Remarks on Afghanistan's Reconstruction at Cou...
Page 4 of 6
devastated Afghanistan's roads, bridges, schools, irrigation systems, and
telecommunications networks.
Accelerating the Transition from Humanitarian Relief to Visible Reconstruction
Projects
A visit to Afghanistan makes clear the sheer magnitude of this challenge.
Achievements of humanitarian relief operations have been significant, but little
visible progress has been made on reconstruction efforts. Of the $900 million in
international aid disbursed since the Tokyo conference, only $260 million has gone
to reconstruction, according to Afghan government figures. It is not surpriSing
therefore that one of the most common questions from the Afghan people is,
"Where is the reconstruction?"
It is imperative that donors accelerate the transition from humanitarian relief to
reconstruction assistance. The same sense of urgency that was brought to
humanitarian activities must now be brought to reconstruction efforts. While delays
in reconstruction may not result in visible tragedies such as starvation or exposure,
complacency will have profound consequences. Today the optimism and energy of
the Afghan people is palpable. Highly visible progress in rebuilding the country's
basic infrastructure will reinforce this optimism and give the Afghan people the tools
they need to forge a more prosperous future. Delays in reconstruction risk
disappointment, disillusionment, and prolonged dependence on the charity of
international donors.
Insisting on Donor Coordination
Speed is not the only thing required for the reconstruction effort to be successful. A
huge number of aid agencies, international organizations, and private organizations
are involved in the assistance effort. Even a single country's assistance is often
delivered by multiple agencies within that government (such as ministries of
development, agriculture, defense, trade & industry), not to mention an even larger
number of private contractors. In short, the Afghan reconstruction effort will be
implemented by a numerous different actors with numerous different goals, often
with too little awareness of what their counterparts elsewhere are dOing or of how
their efforts fit into the broader strategy.
In order for this massive effort to be successful, improved communication and
coordination are crucial. This means communication and coordination among
donors on the ground. It means communication between donors on the ground and
their home agencies. And it means coordination with the Afghan government. The
Afghan government has already taken the lead in developing a National
Development Framework for donors to use as a guide when providing assistance.
International donors need to ensure that they are providing assistance in
accordance with this framework.
I would like to note that while the scale and intensity of donor efforts in Afghanistan
are unique, the problems of donor coordination are found throughout the world.
Any African finance or development minister can describe the multiplicity of foreign
government agencies, international organizations and financial institutions, NGOs
and other private donors doing work in their countries. The uncoordinated nature of
all these efforts is often a source of frustration for these officials and undermines
the effectiveness of the assistance provided. Secretary O'Neill has called for
improved collaboration and coordination among the multilateral development banks
and other donors to ensure that donors do not duplicate efforts and work toward
common objectives. Afghanistan should serve as an example of how this can be
done, even under difficult circumstances.
I am happy to report that this week a new Special Representative for Donor
Assistance-Ambassador William Taylor-has been sent to Kabul to promote this
kind of coordination and communication. He will work with the government of
Afghanistan and the donors in the Afghanistan Reconstruction Steering Group. His
http://www.treas.gov/press/releases/po3524.htm
1116/2002
PO-3524: Under Secretary John Taylor Remarks on Afghanistan's Reconstruction at Cou...
Page 5 of 6
aim is to make sure that responsibilities for specific reconstruction tasks are clearly
allocated among donors, so that there are no overlaps and that nothing falls
through the cracks. A good place to begin this coordination is the reconstruction of
highways and roads. I will say a bit more about this effort in a moment.
Implementing Measurable Goals and Timelines
President Bush has emphasized the importance of measurable results in everything
government does-from educating children to improving government efficiency.
Secretary O'Neill has insisted that development assistance from the multilateral
development banks and other donors produce measurable results. We must
ensure that this kind of aid improves the lives of those it is intended to help. Thanks
to the Administration's efforts, the World Bank is developing a new system to
measure and evaluate the results of its activities in areas such as education, health,
and private sector development in the poorest countries. Eventually we want every
loan, every grant, every project to have clearly defined and measurable
benchmarks.
This same emphasis of measurable results is critical to ensuring progress in
reconstruction in Afghanistan. At the moment few timelines are being set for overall
progress in the reconstruction effort. Measurable targets and concrete timelines
are excellent tools for resisting complacency and making sure that donors are
accountable for producing visible results. Let me give you some examples for what
such targets and timelines could look like in a few key sectors.
The United States, Saudi Arabia, and Japan recently announced plans to rebuild
the road from Kabul, through Kandahar, to Herat. This initiative is part of a larger
plan to build roads connecting other parts of the country, including roads to crossing
pOints on the borders. Different donors-including the European Union, the World
Bank, the Asian Development Bank, and the government of Iran-have committed
to build other parts of this road system. The color map that I have provided
illustrates the division of responsibilities for these major roads.
The simple table that goes along with the map illustrates how the different donors
might set clear measurable goals for completion of a set number of kilometers by
December 2002, by June 2003, and so on. Specific dates for completion of
important road segments, such as Kandahar-Spin Boldak, should be also set.
I believe that putting this type of information down in a simple form, in writing, in
public will help provide incentives to move the project forward. A tendency to
postpone deadlines and lower the bars for success is inevitable. This must be
resisted. Pressure from the United States, the government of Afghanistan, and the
international community to see these projects through to completion in a timely
manner will be needed.
One can imagine concrete timelines and benchmarks for success in every
important sector. In the National Development Framework the government of
Afghanistan has listed goals in education including important school rebuilding
projects. Other possible indicators include the percentage of children in school or
better yet improvements in test scores. In the area of irrigation, the reconstitution
of which is critical to jump-starting the private sector in this heavily agricultural
society, there could be the goal of achieving a certain percentage increase in
irrigation facilities or rebuilding a certain number of small- and medium-sized dams
over the next year. In the area of air transportation, structural damage to airport
facilities and the lack of instrument flight systems drastically reduces the number of
flights in and out of Afghanistan. The goal here could be the completion of a set
number of instrument flight-ready airports by a certain date.
Conclusion
I have tried to focus today on the key principles that should help make
http://www.treas.gov/press/releases/po3524.htm
11/6/2002
PO.3524: Under Secretary John Taylor Remarks on Afghanistan's Reconstruction at COll...
Page 6 of 6
reconstruction work in Afghanistan-principles that promote private sector growth. a
strong central government, and an expedited rebuilding of infrastructure. These
principles can provide the foundation upon which the Afghan people-with creativity
and determination-can build a better future. The Afghan government has
demonstrated its commitment to doing its part in laying this foundation. We in the
international community must do ours. If we do so, I look forward to the day when
the phrase "lessons of Afghanistan" refers to a model for how foreign assistance
and economic development can succeed.
Afghanistan - Map of National Highway Reconstruction Plan
http://www.trC215.gov/prcss/rcle~es/po3524.htm
111612002
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Attachment for "Making Reconstruction Work in Afghanistan" - Remarks by John B. Taylor, Under Secretary of
Treasury for International Affairs - Council on Foreign Relations, Washington, DC - October 9, 2002
National Highway Reconstruction Plan - Example Timeline
This is a notional example of how timelines could be used for measuring reconstruction progress.
Road
Segments
Kabul-Herat
Responsible Group or
Country
Date
Started
Date to be
Completed
US/Japan/ Saudi Arabia
Oct-02
Oct-05
ADS
EUlSweden/Pakistan
Oct-02
Oct-03
Kabul to Kowt-e Ashrow
Kowt -e Ashrow to Ghazni
Ghazni to Mukur
Mukur to Qalat
Qalat to Kandahar
Kandahar to Delaram
Delaram to Herat
Kandahar-Spin
Soldak
Kabul-Torkham
Kabul-Shirkhan
Sandar
WS
Kabul to Kapisa
Kapisa to Doshi
Doshi to Pol-e Khomri
Pol-e Khomri to Konduz
Konduz to Shirkhan Bandar
Pol-e KhomriChahar Sagh
ADS
Pol-e Khomri to Samangan
Samangan to Mazar-e-Sharif
Mazar-e-Sharif to Sheberghan
Sheberghan to Chahar Baqh
Chahar SaghHerat
ADS
Chahar Bagh to Meymaneh
Meymaneh to Qal'eh-ye Now
Qal'eh-ye Now to Herat
Islam Qila-Herat
Iran
Attachment for "Making Reconstruction Work in Afghanistan" - Remarks by John B. Taylor, Under Secretary of
Treasury for International Affairs - Council on Foreign Relations, Washington, DC - October 9, 2002
a
PRESS ROO M
FROM THE OFFICE OF PUBLIC AFFAIRS
October 9, 2002
PO-3425
U.S. International Reserve Position
The Treasury Department today released U.S. reserve assets data for the latest week. As indicated in this table, U.S. reserve assets
totaled $75,674 million as of the end of that week, compared to $75,490 million as of the end of the prior week.
I. Official U.S. Reserve Assets (in US milliom)
September 27, 2002
October 4, 2002
75,490
75,674
TOTAL
I. Foreign Cunency Reserves
Euro
Yen
TOTAL
Euro
Yen
TOTAL
a. Securities
6,270
12,803
19,073
6,310
12,786
19,097
o
o
Of1Vhich, issuer headquartered in the US.
b. Total deposits with:
10,352
b.i. Other central banks and BIS
2,570
12,922
10,410
2,567
12,977
b.ii. Banks headquartered in the US.
0
0
b.ii. Of which, banks located abroad
0
0
°
0
0
0
20,782
20,849
11,670
11,707
11,044
11,044
0
0
b.iii. Banks headquartered outside the US.
b.iii. Of which, banks located in the U.S.
2. IMF Reserve Position
2
3. Special Drawing Rights (SDRs)
4. Gold Stock
2
3
5. Other Reserve Assets
II. Predetermined Short-Term Drains on Foreign Currency Assets
October 4, 2002
September 27,2002
Euro
Yen
TOTAL
o
Euro
1. Foreign currency loans and securities
2. Aggregate short and long positions in forwards and futures in foreign currencies vis-a-vis the U.S. dollar:
Yen
TOTAL
0
2.a. Short positions
0
0
lb. Long positions
0
0
3. Other
0
0
III. Contingent Short-Term Net Drains on Foreign Currency Assets
September 27, 2002
Euro
1. Contingent liabilities in foreign currency
Yen
TOTAL
October 4, 2002
Euro
Yen
TOTAL
0
0
o
o
o
o
o
o
La. Collateral guarantees on debt due within 1
year
Lb. Other contingent liabilities
2. Foreign cun'ency securities with embedded
options
3. Undrawn, unconditional credit lines
3.a. With other central banks
3.b. With banks and other/inanct'al institutions
Headquartered in the
u.s.
3.c. With banks and otherfinancial institlltiolls
Headquartered outside the U.S.
4. Aggregate short and long positions of
options in foreign
Currencies vis-a-vis the U.S. dollar
4.a. Short positiolls
4.a.l. Bought puts
4.a.2. Written calls
4.b. Long positions
4.b.1. Bought calls
4.b.2. Written puts
Notes:
11 Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account
(SOMA), valued at current market exchange rates. Foreign currency holdings listed as securities reflect marked-to-market values, and
depOSits reflect carrying values. Foreign Currency Reserves for the latest week may be subject to revision. Foreign Currency
Reserves for the prior week are final.
2/ The items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF and are
valued in dollar terms at the official SDR/doliar exchange rate for the reporting date. The entries for the latest week reflect any
necessary adjustments, including revaluation, by the U.S. Treasury to the prior week's IMF data. IMF data for the latest week may be
subject to revision. IMF data for the prior week are final.
31 Gold stock is valued monthly at $42.2222 per fine troy ounce.
o
EPA R T 1\1 E N T
0 F
THE
T REA SUR Y
~/7~89~. . . . . . . . . . . . . . . . . . . . . . . . . . . ..
..............................
OmCE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C .• 20220. (202) 622-2960
EMBARGOED UNTIL 11: 00 A. M.
october 10, 2002
CONTACT:
TREASURY OFFERS 13-WEEK
.~~
Office of Financing
202/691-3550
26-WEEK BILLS
The Treasury will auction 13-week and 26-week Treasury bills totaling $32,000
million to refund an estimated $26,179 million of publicly held 13-week and 26-week
Treasury bills maturing October 17, 2002, and to raise new cash of approximately
$5,821 million.
Also maturing is an estimated $18,000 million of publicly held 4-week
Treasury bills, the disposition of which will be announced October 15, 2002.
The Federal Reserve System holds $12,159 million of the Treasury bills maturing
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 October 16, 2002.
.1Unounts
awarded to SOMA will be in addition to the offering amount.
on October 17,
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 :;:-einvest their maturing holdings
of approximately $973 million into the 13-week bill and $566 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 hund:;:-edth of a whole percentage point, e.g., 17.13%.
This offering of T:;:-easury 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-3526
FiJI'press releases, speeches, public schedules and ojj1.cil1.1 biof;raphies. call our 24-hourfiLY line
lit
(202) 622-2!NO
---------------------~------~---------------------------------------------------------------------------
HIGHLIGHTS OF TREASURY OFFERINGS OF BILLS
TO BE ISSUED OCTOBER 17, 2002
October 10, 2002
Offering Amount . . . . . .
Public Offering .... .
NLP E~clusion Amount .,.
..... . ... ..
~
Description of Offering;
Term and type of security
CUSIP ntunber
Auc lion da te .
Issue date .. ,
Haturity date
Original issue date
Currently outstanding
l1inimum bid amount and mUltiples
~
~
. .. ...
$17,000 million
$17,000 million
$ 5,400 million
$15,000 million
$15,000 million
None
91-day bill
912795 LU 3
October IS, 2002
October 17, 2002
January 16, 2003
July 1B, 2002
$21,49B million
$1,000
1B2-day bill
912795 MH 1
October IS, 2002
October 17, 2002
April 17, 2003
October 17, 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 aa agenta for FIMA accounts.
Accepted in order of size from smallest to largest with no tllOre than $100
million awarded per account.
The total noncompetitive amount awarded to F'ederal 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.
l1aximum Recognized Bid at a Single Rate . . . . . . . . 35% of public offering
Maximwn Award, . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35% of public offering
Receipt of Tenders:
NQncompetitive 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~nent 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.
2002-10-10-8-31-5-16094: Financial Stabilization Programs Report
··
U
,
Page 1 of 1
~-,--...!
""-.'
fJH[SS HOOM
FROM THE OFFICE OF PUBLIC AFFAIRS
To view or pnnt the PDF content on this page. download the free Acln/Je"" Am)/,ar,} ':;;ed,i!],,"'.
October 10, 2002
2002-10-10-8-31-5-16094
FINANCIAL STABILIZATION
PROGRAMS REPORT
FINANCIAL STABILIZATION
PROGRAMS REPORT
BRIDGE LOAN TO URUGUAY FROM THE EXCHANGE STABILIZATION FUND
A Report to Congress
in accordance with
Section 1704 of the International Financial Institutions Act,
as added by
section 612 of the Foreign Operations, Export Financing, and Related
Programs Appropriations Act, 1999.
U.S. Department of the Treasury
September 2002
Report(s}:
•
FlliarlClal Stabilization Program Report
http://www.treas.llov!oressJreleec<;es/20021010831516094.htm
11/6/2002
FINANCIAL STABILIZATION
PROGRAMS REPORT
BRIDGE LOAN TO URUGUAY FROM THE EXCHANGE STABILIZATION FUND
A Report to Congress
in accordance with
Section 1704 of the International Financial Institutions Act,
as added by
section 612 of the Foreign Operations, Export Financing, and Related
Programs Appropriations Act, 1999.
u.S. Department of the Treasury
September 2002
ESF Report to Congress - Uruguay
1. Condition of the Uruguayan Economy - Uruguay has historically been a center of economic
stability and market-oriented reform in the Southern Cone region. The country experienced
robust growth during much of the last decade due to sound management and appropriate
economic policies. Substantial trade liberalization, financial sector reform, prudent fiscal
management, and strong demand from Brazil and Argentina helped Uruguay grow 4.4% per
year from 1990-94 and by 5.1 % from 1996-98. This growth, underscored by a dramatic
reduction in the overall deficit and inflation, helped Uruguay earn investment grade status on
its sovereign debt in 1997.
However, economic growth has been weak during the last four years as conditions in
Uruguay's close neighbor, Argentina, deteriorated. In the last year, Uruguay has faced acute
financial pressures, due largely to the dramatic deterioration in Argentina at the end of 200 1.
The impact of lower growth on tax revenues led to an increase in the debt stock. The
Uruguayan authorities have taken substantial measures to address the effects of these
pressures, accelerating their reform agenda, including a streamlining of the financial sector.
The financial sector in Uruguay is open to foreign participation and is underpinned by a
generally strong supervisory and regulatory framework. For several years, the government
has been undertaking financial sector reforms to address outstanding vulnerabilities by
enforcing greater disclosure of financial statements, broader compliance with the Basle Core
Principles, and greater sanctioning power for the oversight arm of the Central Bank.
Despite these reforms, the extraordinary demand to withdraw dollar deposits resulting from
the freeze on deposits in Argentina in late-200 1 put immediate and substantial pressure on
the financial system. In response, the Uruguayan authorities acted quickly to restore
confidence, closing insolvent banks, solidifying the regulatory framework, and backing bank
deposits needed for economic transactions. In June 2002, the Uruguayan Central Bank
floated the peso as part of a phased shift to greater exchange rate flexibility that began the
previous year. Authorities will take steps to close insolvent, private domestic banks and to
restructure public banks. To reinforce confidence in the banking system, the central bank
will further strengthen its supervisory capacity.
ESF financing in the form of a short term four-day bridge loan was specifically to be used to
ensure the availability of funds to back transactional deposits of Uruguayan banks. This loan
supported in a timely manner the restoration of confidence in the financial sector.
2. Degree of Implementation offinancial restructuring and corporate governance reform
measures required by IMF - Since early 2001, Uruguay has performed consistently under
IMF programs with respect to financial restructuring and corporate governance targets.
Furthermore, throughout the recent recession and financial sector deterioration, the GOU has
assiduously respected the commercial nature of bank lending, limited intervention to
prudential supervision, and maintained open financial markets.
2
The following chart illustrates progress made by Uruguay in implementing corporate
governance and financial sector reforms:
Corporate Governance and Financial Sector Reform Progress
Before end-March 200 I
Publish quarterly reports for public sector financial and non-financial enterprises
Complete independent external audit of three public banks
Complete independent external audit of six public utilities
Before end-June 200 1
Submit law to Congress to reform five special pension funds
Publish annual reports of all three public banks and six public utilities
Before end-September 2001
Submit law to Congress to reform the special pension fund for university professionals
The BCU will issue a regulation requiring all banks to obtain and publish a corporate credit rating
Before end-July 2002
Presentation to Congress of restructuring plan of one public bank
3. Description of implementation of reform measures required by the IMF to deregulate and
privatize economic activity, undertake trade liberalization, and open up restricted areas of
the economy to foreign investment and competition.
Privatization and Foreign Investment - State owned enterprises represent a relatively minor
share of Uruguayan GOP (roughly 2% of GOP). Nonetheless, authorities did commit in the
context of recent official sector support to end private sector monopolies in key sectors by
allowing for both domestic and foreign competition. In the current program, the GOU
commits to presenting legislation to Congress to foster competition in both the
telecommunications and oil sectors by end-2002.
Trade Liberalization - Uruguay continues to operate a generally open trade regime (see
below). There have been no specific requirements in IMF programs in the trade area.
4. Description of the trade policies of the countries including any unfair trade practices or
adverse effects of the trade policies on the United States - Uruguay is a member of the World
Trade Organization (WTO) and is a founding member of MERCO SUR, the Southern Cone
Common Market (also composed of Brazil, Argentina and Paraguay, with Chile and Bolivia
as Associate Members). Since 1995, no tariffs have been paid on goods traded between
MERCOSUR countries. The same year, a common external tariff went into effect on imports
from non-member countries, with most rates ranging between 0 and 20 percent. In 1997, the
maximum common effective tariff was raised to 23 percent, and in July 2002, stood at 21.5
percent. In addition to tariff rates, a (refundable) value-added tax of 28 percent is applied
over customs' valuations plus import surcharges. Import duties on non-MERCOSUR goods
range from zero to 21.5 percent. Uruguay has maintained a long-lasting tradition of imposing
no restrictions on the purchase of foreign currency or the remittance of profits abroad.
Foreign exchange can be freely obtained.
U.S. trade with Uruguay is small and consistently in surplus for the U.S. Uruguay's exports
to the U.S. represent less than 10% of Uruguay's trade with the world. U.S. exports to
Uruguay represent only 0.06% of U.S. trade with the world. The full year trade data for 2001
3
shows U.S. exports to Uruguay of$414 million. 2001 US imports from Uruguay were $228
million. The key framework for US-Uruguay trade relations going forward is likely to be the
Joint Commission of Trade and Investment (JCTI), which President Bush agreed to establish
with President Batlle in February of2002.
5. Description of the extent to which the financial stabilization programs have resulted in
appropriate burden sharing among private sector creditors, including rescheduling of
outstanding loans by lengthening maturities, agreements on debt reduction, and the
extension of new credit - Historically, the Uruguayan government has maintained good
relations with its private creditors, reinforced by sound economic management. Its strong
fiscal position and timely servicing of external obligations contributed to an investment grade
rating on the government's obligations that lasted until the recent crisis. The strengthened
reform measures undertaken under Uruguay's program with the IMF have been directed to
restore this confidence and thereby reduce capital account pressures while strengthening the
foundations for sustainable growth going forward.
6. A description of the extent to which the economic adjustment policies of the IMF and the
policies of the government of the country adequately balance the need for financial
stabilization, economic growth, environmental protection, social stability, and equity for all
elements of society. The GOU has actively sought to minimize the impact on the most
vulnerable portions of the population of the recent recession and the current crisis. In the
current period, the GOU has emphasized the importance of mitigating the adverse effects of
the crisis on the poor, including through 1) lowering the wage and pension tax for lowerincome pensioners; 2) shielding budget expenditures on key social programs, including early
child development and rural housing; and 3) maintaining the current system of
unemployment benefits. In support of the IMF stabilization package, the IDB approved a
$500 million emergency loan that will be disbursed in two equal tranches to support spending
on priority social programs. The goal of the financing is to mitigate the harmful effects of
the economic crisis on low-income groups while at the same time preventing a reversal of
ongoing modernization efforts in the social sectors. The emergency loan is conditioned on
the government protecting budgetary expenditure in the period 2002-2003 for priority social
programs in education, health, and social security. The World Bank also recently approved
$300m in programs as part of a broader $550m Country Assistance Strategy that includes
support for fiscal and social policy reforms, including measures to ensure that social
protection programs are focused on helping the country's poorest families and children.
Recent enactment by the GOU of the General Environmental Protection Act likewise
illustrates the high priority that Government authorities place on environmental issues and
reflects a growing public awareness of and support for these issues.
7. Whether International Monetary Fund involvement in labor marketjlexibility measures has
had a negative effect on core worker rights, particularly the rights offree association and
collective bargaining. Include a description of any pattern of abuses of core worker rights Uruguay is one of 80 states to have ratified all eight of the International Labor
Organization's fundamental conventions. In total, Uruguay has ratified 102 ILO
conventions.
4
The PIT-CNT (central labor collective) is very active politically and has the full backing
of the leftist political coalition party, Encuentro Progresista-Frente Amplio.
In prior years, the international financial institutions have had extensive discussions with
Uruguayan authorities on labor issues. In order to address the dampening effect high
labor costs have on employment generation, Fund staff, with the support of the United
States, have urged the government to reduce its tax on hiring new employees in order to
lower costs for employers and spur job creation.
8. The amount, rate of interest, and disbursement and repayment schedules ofany funds
disbursedfrom the stabilization fund in the form of loans, credits, guarantees, or swaps in
support of the financial stabilization programs - The ESF entered into a swap agreement
with Uruguay, effective Sunday, August 4,2002, to provide short-term bridge financing until
the disbursement of credits to Uruguay from the IMF, the World Bank, and the InterAmerican Development Bank. The rate of interest was 1.689%, based on the costs of funds
to the U.S. Treasury. On Monday, August 5, Uruguay drew $1,466,000,000 from the ESF
and on Friday, August 9, completed repayment to the ESF of the $1,466,000,000, plus
$271,350.58 in interest.
9. The amount, rate of interest, and disbursement and repayment schedules of any funds
disbursed by the I MF to the countries in support of the financial stabilization programs - On
August 8, the IMF approved a SDR 376 million ($494 million) augmentation on its current
Stand-By Arrangement (SBA) to Uruguay and accelerated disbursement of SDR 227 million
($298 million) in funds previously committed. This allowed Uruguay to immediately draw
down SDR 603 million ($793 million) and help settle its obligations to the ESF under the
swap agreement. The August augmentation and re-phasing of IMF disbursements come in
addition to a 24 month SBA of SDR 594.1 million ($781 million), approved in March 2002,
and a subsequent augmentation of SDR 1.16 billion ($1.5 billion), approved in June. The
total size of Uruguay's IMF financial package currently amounts to SDR 2.13 billion ($2.8
billion). Of this amount, SDR 128.7 million ($169.8 million) was disbursed under the Fund's
Special Reserve Facility (SRF).
Since March, Uruguay has drawn SDR 1.1 billion ($1.5 billion) from the IMF. Uruguay's
remaining drawings are scheduled for disbursement in 7 installments over the course of the
coming year and a half. Pending successful completion of performance reviews,
disbursements in the amount ofSDR 145 million (about $191 million) will be made
available, respectively, in October and December 2002, February, May, August and
November 2003, and February 2004, at which time Uruguay will have completely drawn
down all of its current IMF financial packages.
Principal repayments on existing and prospective drawings of Uruguay's SBA are scheduled
on an expectations basis! to be made as follows: SDR 51 million in 2002, SDR 264 million
I Countries are expected to make repayments prior to final obligation dates under the "Expectations Schedule." The
IMF Executive Board can extend repayment dates up to the final "Obligations schedule" upon request by the debtor
5
in 2003, SDR 94 million in 2004, SDR 321 million in 2005, SDR 894 million in 2006 and
2
SDR 859 million in 2007. Currently, 95% of Uruguay's outstanding obligations to the Fund
are provided under Stand-By Arrangements. Members are expected to repay loans from this
facility 2 114 to 4 years from the date of drawing and are obliged to do so 3Y4 to 5 years from
the date of drawing. Under the SRF, the member is expected to repay 1-1 ~ years after the
date of drawing but must do so not later than 2-2 Y2 years. Uruguay's repayment schedule
can be referenced online through the IMF website at www.imf.org.
Use of the SBA carries a surcharge of 100 basis points above the basic rate of charge for
credit exceeding 200 percent of a member's quota, and 200 basis points for credit exceeding
300 percent of quota. Since Uruguay's combined credit outstanding is in excess of300% of
quota, it pays a surcharge of300 bps on top of the basic interest rate (determined weekly
based on a weighted average of representative interest rates on short-term debt in the money
markets of major IMF creditor countries). For the 5% of Uruguay's outstanding obligations
financed through the SRF, credits are subject to surcharges of300 basis points above the
basic rate of charge during the first year from the date of drawing, with these surcharges
rising by 50 basis points at the end of that first year and every six months thereafter until they
reach 500 basis points.
country if its external payments position is not strong enough to meet the expectations without undue hardship or
risk.
6
2002-10- t O-~-45-56- I 6403: Implementation of Legislative Provisions Relating to the IMF
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FROM THE OFFICE OF PUBLIC AFFAIRS
To view or print the PDF content on this page. download the free AeioiJl?('! Ai/f)!.)d!''') PedeleI L •.
October 10, 2002
2002-10-10-8-45-56-16403
IMPLEMENTATION OF LEGISLATIVE PROVISIONS
RELATING TO THE INTERNATIONAL MONETARY FUND
IMPLEMENTATION OF
LEGISLATIVE PROVISIONS
RELATING TO THE
INTERNATIONAL MONETARY FUND
A Report to Congress
in accordance with
Sections 1503(a) and 1705(a) of the
International Financial Institutions Act
and
Section 801 (c)(1)(B) of the
Foreign Operations, Export Financing, and Related Programs
Appropriations Act, 2001
United States Department of the Treasury
October 2002
Report(s):
•
Illlp'lemelltatlo;J of Le(}ISIJilve ProvlslCJrL; Relatlllg to tile iMF
http://WWW.lfeaS.gOV/press/rele3Ses~200210108455616403.htm
111612002
IMPLEMENTATION OF
LEGISLATIVE PROVISIONS
RELATING TO THE
INTERNATIONAL MONETARY FUND
A Report to Congress
in accordance with
Sections 1503(a) and 1705(a) of the
International Financial Institutions Act
and
Section 801 (c)( 1)(B) of the
Foreign Operations, Export Financing, and Related Programs
Appropriations Act, 2001
United States Department of the Treasury
October 2002
Table of Contents
Introduction ............................................................................................................................... 1
International Financial Institutions Act, Section 1503 Provisions, by Subsection
1. Exchange Rate Stability ................................................................................................. 1
2. Independent Monetary Authority, Internal Competition, Privatization,
Deregulation, Social Safety Nets, Trade Liberalization ................................................ 2
3. Strengthened Financial Systems .................................................................................... 5
4. Bankruptcy Laws & Regulations ................................................................................... 5
5. Private Sector Involvement. ........................................................................................... 6
6. Good Governance .......................................................................................................... 8
7. Channeling Public Funds Toward Productive Purposes .............................................. l0
8. Individual Economic Prescriptions ............................................................................. 11
9. Core Labor Standards .................................................................................................. 11
10. Discouraging Ethnic and Social Strife ......................................................................... 11
11. Environmental Protection ............................................................................................ 12
12. Greater Transparency ................................................................................................... 13
13. Evaluation .................................................................................................................... 13
14. Microenterprise Lending .............................................................................................. 14
Foreign Operations, Export Financing, and Related Programs Appropriations Act, 2001, Section
801 (c)(1)(B) Provisions, by Subsection
1. Suspension of Financing for Diversion of Funds ........................................................ 14
II. IMF Financing as Catalyst for Private Sector Financing ............................................. 14
III. Conditions for Disbursement ....................................................................................... 15
IV. Trade Liberalization ..................................................................................................... 15
V. Focus on Short-Term Balance of Payments Financing ............................................... 15
VI. Progress toward Graduation from Concessionary Financing ...................................... 15
Appendix:
Selected Abbreviations
List of Specific Legislative Provisions
Introduction
This is the fourth report prepared in accordance with Sections 1503 and l705(a) of the
International Financial Institutions Act (the IFI Act - codified at 22 United Statesc. 2620-2 and 262r4).1 This report also covers policies set forth in Section 801(c)(l)(B) of the Foreign Operations,
Export Financing, and Related Programs Appropriations Act 2001, 2 as required by amended Section
1705 of the IFI Act. The report reviews actions taken by the United States during fiscal year 2002 to
promote these legislative provisions in IMF country programs. A full description of both legislative
provisions is included in the appendix. Earlier reports under these provisions are available on the
Treasury website. 3
The Treasury Department and the Office of the United States Executive Director (USED) at the
IMF consistently endeavor to build support in the IMF's Executive Board for the objectives set out in
this legislation. These efforts include meetings with IMF staff and other Board members on individual
programs and IMF policies, as well as formal statements by the USED in the IMF Board. Our
objective in doing so has been to support strengthened commitments in IMF programs, policy actions
by program countries, and policy decisions at the IMF itself.
An assessment of the overall effectiveness of the Treasury and USED's office in promoting the
legislative provisions is provided in a GAO Report published in January 2001.4 The report found that
the "Treasury has instituted a systematic process for applying legislative mandates concerning
the Fund to individual countries, based on their economic circumstances."
Report on Specific Provisions
I.
Section 1503(a)
(1) Exchange Rate Stability
Article I of the IMF's Articles of Agreement states that one of the purposes of the IMF is "to
promote exchange stability, to maintain orderly exchange arrangements among members, and to avoid
competitive exchange depreciation." The IMF advises countries that exchange rate stability can only
be achieved through the adoption of sound macroeconomic policies. While the Fund recognizes the
right of each member country to choose its own exchange rate regime, it advises countries on
I These provisions were enacted in Sections 610 and 613 of the Foreign Operations, Export Financing, and Related
Programs Appropriations Act, 1999 (Public Law 105-277, division A, § 101(d), title VI, §§ 610 & 6\3). Section 1705(a)
was amended by Section 803 of the Foreign Operations, Export Financing, and Related Programs Appropriations Act,
200 I (Public Law 106-429, title VIII, § 803)
2 Public Law \06-429, title VIII, § 801(c)(I)(8).
3 See: http://www.treas.gov/press/releases/reports.htm.
4 Efforts to Advance United States Policies at the Fund, General Accounting Office (GAO), January 200 I. As required
under section 504 ofH.R. 3425, as enacted in Appendix E to section 1000(a)(5) of Public Law \06-113 (making
consolidated appropriations for Fiscal Year 2000), the GAO conducted a review of Treasury's implementation of
legislative objectives for IMF reform. Its work focused "on the measures taken by UNITED STATES agencies to promote
IMF practices that are consistent with UNITED STATES policies set forth in federal law and the influence UNITED
STATES policy has over the IMF's operations and other members' positions, as illustrated by specific cases."
1
macroeconomic and financial policies necessary to support the sustainability of that regime and raises
caution where it views arrangements to be inconsistent with broader macroeconomic policy choices.
(2) Policies to increase the effectiveness of the IMF in promoting market-oriented reform, trade
liberalization, economic growth, democratic governance, and social stability through (A) Establishment of an independent monetary authority
With the support of the United States, the IMF has been a consistent advocate of greater
independence of monetary authorities across a range of countries. IMF conditionality frequently
includes measures to strengthen central bank autonomy and accountability. The IMF also provides
technical assistance to help countries achieve these goals. In addition, the Fund promotes these
objectives through assessments of compliance with internationally-agreed upon standards and codes,
as well as rules for safeguarding the use of IMF resources.
Examples of United States activities with regard to these issues include the following:
•
•
•
•
In a February 2002 discussion on Thailand, the United States Executive Director at the IMF
(USED) encouraged Thai authorities to enhance the legal basis for central bank independence.
The United States has highlighted the benefit of increased central bank independence in a number
of discussions on Brazil over the course of the past year.
The United States was a leading supporter of making central bank reform a prior condition of
Turkey's program. The Turkish government has made significant progress implementing the
central bank reform agenda, which has helped bring inflation expectations below 35% for end2002, compared to inflation in 2001 of 68.5%.
During a review of the Democratic Republic of Congo's (DROC) Staff Monitored Program (SMP)
implementation, the ,uSED emphasized the need to increase central bank independence.
Publication of the statutes providing for the independence of the Banque Centrale du Congo (BCC)
was a prerequisite for approval ofDROC's Poverty Reduction and Growth Facility (PRGF) in
June 2002. Completion of a financial audit of the BCC is a performance criterion for the next
scheduled review ofDROC's PRGF program in September 2002.
(B) Fair and open internal competition among domestic enterprises
With United States support, the IMF encourages member countries to pursue policies that improve
internal economic efficiency. These measures may include ending directed lending (or other
relationships between government and business based on favoritism), improving anti-trust
enforcement, and establishing a sound and transparent legal system. While the World Bank has the
lead mandate on these issues, the IMF has at times incorporated related measures related to them into
programs when it considered them critical to macroeconomic stability.
Recent actions in support of these objectives include:
•
In a Board statement in May 2002 on Hong Kong's Article IV Consultation, the United States
urged authorities to limit sector-specific government intervention and inquired about what
remaining sectors could benefit from being further opened to competition.
2
•
•
During an IMF Board discussion of Burkina Faso's PRGF program in April 2002, the United
States expressed support for authorities' efforts to include private operators in the Burkinabe
cotton sector. The United States statement highlighted the gains in productivity and poverty
reduction that resulted from these measures and encouraged the authorities to continue on the
current reform trajectory.
In several IMF Board discussions over the past year, the United States has consistently urged
Uruguayan authorities to do more to encourage private sector development. Though further
privatization of state assets is unconstitutional, authorities recently agreed to complete partnership
agreements in the energy and transportation sectors before the end of the year.
(C) Privatization
While privatization lies primarily in the domain of the World Bank, the IMF has made it a key
component of programs in countries where significant distortions and government ownership of
business enterprises have created substantial inefficiencies in the allocation of resources and the
production of goods. Working in collaboration with the World Bank, the Fund has supported the use
of competitive and transparent means of privatization so that borrowing countries might achieve gains
in economic efficiency and improve their fiscal positions.
Examples of IMF programs in FY 2002 in which the USED has advocated privatization include
the following:
•
•
•
In an IMF Board discussion of Korea's February 2002 Article IV review, the USED welcomed the
government's plans to begin privatization of state-owned financial institutions. The USED
cautioned that experience does not support delays based on optimism that higher prices will appear
in the future and urged the authorities to move more rapidly with the sale of government shares.
In August 2002, the USED expressed disappointment over the continued use of quasi-fiscal
financing for state-owned enterprises (SOEs) in Romania and urged Romanian authorities to fully
implement their commitments to privatization and enterprise restructuring.
In a recent Board discussion of Moldova's current PRGF, the USED recommended that the IMF
incorporate additional structural benchmarks on privatization into its program.
(D) Economic deregulation and strong legalframeworks
Without strong property rights, enforcement of contracts, and fair and open competition, markets
are distorted and entrepreneurship is stifled. While these issues might frequently be addressed through
the World Bank, the IMF at times includes these measures in programs when they are considered
critical to macroeconomic performance.
Examples of USED efforts to promote progress concerning these issues include the following:
•
The United States has repeatedly cautioned Indonesia about the negative impact of a weak and
unfair legal system on the country's attractiveness to investors. In June 2002, at the sixth review
ofIndonesia's IMF program, the United States noted that reforms in the legal sphere, and efforts to
combat corruption, have been lagging.
3
•
•
In a review of Bosnia's SBA in August 2002, the USED stressed the need to improve governance,
particularly in relation to the business environment, and observed that progress in this area will be
essential to the success of the overall program.
In a Board discussion of Ukraine's Article IV review, the USED expressed support for the
government's recent adoption of a new land law and urged authorities to take additional steps to
improve the investment environment.
(E) Social safety nets
Encouraged by strong USED advocacy, the IMF and the World Bank have been increasingly
focused on the establishment of effective social safety nets in borrowing countries. The United States
has been a strong proponent of increased IFI funding for productivity-building investments in public
education, health and other social services. In addition, the United States has supported steps taken by
the IMF and World Bank to revise their lending frameworks to focus more on the reduction of poverty
indicators.
Below is an example of United States support for this policy goal:
•
•
With United States and IMF support, the Government of Uruguay has emphasized its commitment
to minimizing the impact of the recent recession and current crisis on the most vulnerable
segments of its people. Authorities have signaled their intention to reduce taxes for low-income
pensioners, shield budget expenditures on social programs, and maintain the current system of
unemployment benefits.
The United States has emphasized to the Government of Turkey the importance of maintaining a
social safety net. Despite the country's ongoing crisis, authorities have kept real spending on
social services and education constant while overall primary expenditures and GNP have fallen
sharply.
(F) Opening of markets for agricultural goods through reductions in trade barriers
The IMF, with the support of the United States, has been a consistent advocate of open markets
and trade liberalization. The IMF encourages trade liberalization across all sectors of an economy including, but not limited to, the agricultural sector. The following are some examples in which the
United States has supported trade liberalization in IMF country programs:
•
•
•
In a recent Board discussion on Brazil, the USED urged authorities to pursue both multilateral
and bilateral trade liberalization.
In a statement to the IMF Board on Benin's PRGF review in July 2002, the United States
recognized the government's leadership on regional trade integration issues through its
advocacy of full implementation ofa common external tariff for the West African Economic
and Monetary Union (W AEMU) customs union.
The same month, in a review ofSeycheIles' Article IV Consultation, the USED supported IMF
staffs call for trade liberalization as part of Seychelles' economic refonn program.
4
(3) Strengthened financial systems and adoption of sound banking principles and practices
The joint IMF-World Bank Financial Stability Assessment Program (FSAP) has emerged as a
critical instrument for financial sector surveillance and advice. As of August 2002, 33 FSAP
assessments had been completed. Results from the FSAPs are used to generate assessments of
compliance with key financial sector standards such as the Basel Committee Core Principles/or
Effective Banking Supervision, the International Organization of Securities Commissions' Objectives
and Principles a/Securities Regulation, and the IMF's own Code a/Good Practices on Transparency
in Monetary and Financial Policies. The latter report is often provided to the public through the
Reports on the Observance a/Standards and Codes (ROSCs). The Executive Boards of the IMF and
World Bank recently reached conditional agreed on incorporating Anti-Money Laundering /
Countering the Financing of Terrorism (AMLlCFT) assessments into the ROSC process.
The following are some examples where the USED has promoted policies in support of
strengthened financial systems:
•
•
•
•
•
Strengthening the banking sector has been a centerpiece of Turkey's program. Authorities have
taken significant steps to recapitalize struggling private sector banks and have toughened oversight
and prudential regulation. The United States took the lead in advancing these issues through
discussions with IMF staff and Turkish authorities.
In successive statements, the USED has highlighted the importance of addressing inefficiencies in
the Uruguayan banking sector and has urged authorities to fully implement promised reforms. The
GOU has responded by moving to enforce greater disclosure of financial statements, broader
compliance with the Basle Core Principles, and greater sanctioning power for the oversight arm of
the Central Bank.
In its Board statements, the USED has repeatedly encouraged the Philippines' authorities to make
necessary regulatory changes to facilitate the restructuring/closing of troubled banks. With the
strong support of the United States, the IMF has also cautioned the Philippine government against
loosening prudential standards, particularly provisioning requirements for new loans.
In Board discussions on PRGF programs for Vietnam and Laos, the USED has emphasized the
importance of encouraging growth of private banks and limiting that of state banks. With United
States support, IMF staff have expressed doubt that a banking sector dominated by state banks will
promote growth.
In a review of the Federal Republic of Yugoslavia's SBA, the USED emphasized to the
government the importance of strengthening the financial sector by closing down four of the
largest state-owned banks, which represented over 70% of the book-value of assets in the banking
sector. FRY authorities initially sought financing to recapitalize these banks, but after strong
signals from the US and other IMF members that the money would not be forthcoming, ultimately
shut them down in January 2002.
(4) Internationally acceptable domestic bankruptcy laws and regulations
The International Financial Institutions (IFIs) have continued to build upon work launched in the
wake of the Asian financial crisis in promoting more effective insolvency and debtor-creditor regimes.
While domestic insolvency law is an issue on which the World Bank normally takes the lead, the IMF
is supporting this agenda in several important ways. The Fund published an in-depth study on
5
national insolvency regimes that currently serves as the basis for its dialogue with member countries.
Additionally, the IMF has supported adoption of the Model Law on Cross-Border Insolvency
developed by the UN (the UNCITRAL Model Law) to facilitate the resolution of increasingly
complex cases of insolvency, where companies have assets in several jurisdictions at once. Finally, the
1M: provides technical assistance to help emerging market economies develop efficient insolvency
regimes.
With the support of the United States, the IMF has worked with the World Bank to promote
improved insolvency regimes in a number of countries:
•
In a recent IMF Board discussion on Thailand, the USED encouraged the Thai government to
amend its bankruptcy law in order to provide adequate incentives for defaulting debtors to
negotiate restructuring arrangements in good faith and in a timely manner.
•
During a Board discussion of Korea's February 2002 Article IV review, the USED supported IMF
staffs recommendations for reforming Korea's insolvency regime. The USED stressed that
creditors must have the ability to force operational restructuring or liquidation and that, while the
United States supports "cram down" provisions, it is important to provide some minimum level of
protection to minority shareholders.
•
With the strong support of the United States, the adoption of additional changes to Argentina's
bankruptcy code is a prior action required for approval of a new program.
(5) Private Sector Involvement
The United States continues to work to assure that the private sector plays an appropriate role in
the resolution of financial crises. Efforts in the past year have been particularly focused on
developing more orderly methods for sovereign debt workouts and more transparent methods for
involving the private sector. These efforts are the focus of a unified G-7 Action Plan on this subject
released in April 2002 that can be found on the Treasury website at
www.ustreas.gov/press/releases/p030IS.htm. The United States is now working closely with the G-7
and the IMF to enact the provisions outlined in this plan, which include work toward implementing a
market-based approach to sovereign debt restructuring.
In particular, the United States has advocated policies that include:
(AJ Increased Crisis Prevention through Improved Surveillance and Debt and Reserve
Management
The United States continues to press for improvements in this area by putting greater emphasis on
the provision of data to the markets and improved guidelines for debt and reserves management
practices.
The IMF promotes, with strong United States support, efforts by countries to make information on
their economies available to private markets by publishing Article IV assessments and program
documents as well as regularly releasing economic and financial data consistent with the IMF's
Special Data Dissemination Standard (SDDS) (see Section 12, Part I). These data have been bolstered
6
by IMF efforts to enhance reporting on reserves. Further, the IMF also has sought to deepen its own
understanding of international capital markets through the creation of an International Capital Markets
Department in 2001.
(B) Strengthening of Emerging Markets' Financial Systems
The IMF continues to work with other IFls to promote stronger financial systems in emerging
market economies (see Section 3). It is also actively involved, with the World Bank, in monitoring the
implementation of the Core Principles for Effective Banking Supervision. The IMF, with United States
support, has increased its cooperation with the World Bank in this area, through the joint FSAP and
cooperative assessments of other standards and codes (see section 12).
(C) Use of Collective Action Clauses in Sovereign Bonds
The United States has made encouragement of use of collective action clauses in international
sovereign debt contracts a central aspect of its crisis resolution agenda. In response to strong interest
by the United States and others in the G-7, the IMF held Board discussions in June 2002 on how to
broaden the use of such clauses.
(D) Extension of Lending into Arrears
In 1998, the IMF extended, on a case-by-case basis, the scope of the IMF's policy to allow lending
into arrears. This policy enables the IMF to provide financial support for policy adjustment, despite
the presence of actual or impending arrears on a country's obligations to private creditors where: (1)
prompt IMF support is considered essential for the successful implementation of the member's
adjustment program; and (2) the member is pursuing appropriate policies and is making a good faith
effort to reach a collaborative agreement with creditors. In September 2002, the IMF held discussions
on how to clarifY ways to assess "good faith" actions in an effort to reduce market uncertainty about
when the IMF will lend into arrears.
(E) Promotion of Orderly Workouts
With strong United States encouragement, the IMF is working aggressively to develop processes
that would promote more orderly workouts of sovereign debt. Currently, as directed by the United
States and the G-7, the IMF is pursuing two complementary approaches: a contractual approach that
would encourage greater use of contractual clauses to facilitate workouts and a statutory approach to
establish a sovereign debt restructuring mechanism. In addition, the IMF, with USED support,
continues to encourage countries facing financial difficulties to engage in cooperative and transparent
consultations with creditors.
(F) Formal Linkage between Provision of Official Financing and Private Sector Involvement
Private lenders necessarily are involved in crisis resolution, though there are not always formal
linkages between the provision of official financing and steps to assure the involvement of specific
groups of private creditors. In some cases, the combination of catalytic official financing and policy
adjustment should allow the country to regain market access quickly, contributing to the country's
stabilization. In February 2002 the IMF Executive Board discussed how various methods to involve
7
the private sector in the resolution of financial crises and increase burden-sharing by the private sector
could best be achieved. In addition, a Board discussion in September 2002 on access policy on
capital access cases will provide the basis for providing greater clarity on official sector lending
decisions.
(G) Facilitation of Discussions between Debtors and Creditors
As noted above, the United States is working closely with the IMF and others in the official and
private sectors to develop and promote the use of clauses in sovereign bond contracts that could
encourage early dialogue, coordination and communication; promote collective action; and limit
disruptive legal action. In addition, improving interaction between debtor countries and private
creditors has been a key focus of the IMF's Capital Market Consultative Group (CMCG).
(B) Combining the Provision of IMF Funding with Efforts to Achieve Private Sector
Involvement
The IMF's framework for private sector involvement promotes contributions from private sector
lenders, and aims to develop a system in which countries can address debt problems in a market-based,
orderly way. It recognizes the need to preserve the fundamental principle that creditors should bear
the consequences of the risks they assume, while not undermining the equally essential principle that
debtors should honor their obligations and that the IMF should not encourage default.
(6) Good governance
The IMF has devoted increased attention to governance in its structural benchmarks, a
commitment underpinned by its 1996 Declaration on Partnership for Sustainable Global Growth and
1997 Guidelines on Good Governance. The IMF also supports good governance through emphasis on
s
transparency and promotion of market-based reforms.
Protecting against Abuse of the Financial System, including Money Laundering
Combating the financing of terrorism and anti-money laundering has been a priority of the
Treasury in its work with the IMF. In the immediate aftermath of the September 11 attacks, the Fund
established an internal Task Force to examine its contribution to the effort against money laundering
and explore ways in which the institution could otherwise contribute to the campaign against
terrorism. At the fall 2001 meeting of the IMF and World Bank, the United States stressed the
importance of integrating Anti-Money Laundering and Countering the Financing of Terrorism
(AMLlCFT) issues into the International Financial Institutions' (IFIs) financial sector assessments and
surveillance activities. Further, the United States has emphasized the need for the Fund and World
Bank to increase their involvement in strengthening financial regulatory frameworks and to provide
technical assistance to authorities on AMLlCFT issues.
5 IMF financing is provided to central banks to address balance of payments difficulties. The IMF does not lend to fund
specific projects in member countries aimed at procurement and financial management controls.
8
Significant progress has been made toward these objectives in recent months. The IMF has begun
to include assessments of members' AMLlCFT regimes in the course of their Financial Sector
Assessment Program (FSAP) reviews and its offshore financial sector assessments. Additionally, the
Fund and Bank have been collaborating closely with the FA TF, other international standard setters
(the Basle Committee of Banking Supervisors, the International Association ofInsurance Supervisors,
the International Organization of Securities Commissions), and the Egmont Group to develop a
comprehensive and unified methodology for measuring countries' implementation of AMLlCFT
principles, based on the FA TF Recommendations. In mid-summer 2002, the IMF and World Bank
Executive Boards agreed conditionally to incorporate assessment of anti-money laundering and
terrorist financing principles into their operations using the comprehensive FA TF methodology, and
endorsed a 12-month pilot program to assess members' compliance with the anti-money laundering
and terrorism financing standards in participation with FA TF and FA TF -style regional bodies.
Over the past year, many IMF country programs have incorporated measures on money laundering
and countering terrorist financing. Examples of such programs include the following:
•
•
•
•
In a February 2002 discussion of Korea's Article IV review, the USED commended the Korean
authorities for the establishment of their Financial Intelligence Unit and issuance of blocking
orders to freeze the assets of terrorists.
In a Board review in March 2002, the United States encouraged the Philippines to take stronger
measures against money laundering and terrorist financing by bringing their financial and legal
infrastructure more closely in line with international best practice.
During a July 2002 Board discussion of Benin's PRGF, the USED welcomed plans by the regional
central bank (the BCEAO) to set up an anti-money laundering and financial information unit in
Benin. The USED also recognized the leadership role that the BCEAO has played in the region on
anti-money laundering issues.
In a January 2002 Board statement, the USED commended the Federal Republic of Yugoslavia
(FRY) government's new requirement that transactions in excess ofDM 20,000 be reported and its
use of external consultants to advise on policies for combating money laundering. We have
encouraged the FRY authorities to follow through on recommendations of advisors concerning this
matter.
Other Good Governance and Anti-Corruption Measures
The Fund's involvement in good governance and anti-corruption measures has focused on those
aspects of governance that are generally considered part of the IMF's core expertise, such as
improving public administration, increasing the transparency of government operations, enhancing
data dissemination, and implementing effective financial sector supervision. However, members have
agreed that the IMF's role should also extend into other areas, where anti-corruption efforts would
clearly have a positive impact on the macroeconomic environment.
Examples of United States and IMF support for policies that encourage good governance include
the following:
•
The IMF and the World Bank have jointly promoted fiscal transparency in Laos, encouraging
authorities to resume publication of a detailed government budget. The Laos authorities complied
9
•
•
•
in early 2002, in line with specific conditions associated with a World Bank Financial
Management Adjustment Credit.
The United States has urged the IMF to require prior actions on good governance and anticorruption in Kenya before it resumes lending. Authorities have begun to make progress on this
front, through the recent passage of a government ethics bill and the establishment of an anticorruption unit in the police force. The United States continues to insist that additional steps on
governance and anti-corruption take place prior to resumption of Kenya's IMF program.
nd
During the combined 1sl and 2 Review of Latvia's SBA in July 2002, the United States
welcomed authorities' progress on anti-corruption efforts, particularly the government's opening
of an anti-corruption office.
In a 2002 Board statement on the second review of Georgia's PRGF, the USED noted the need for
stronger implementation of the government's commitment to step up efforts to combat corruption.
(7) Channeling public funds away from unproductive purposes, including large "show case"
projects and excessive military spending, and toward investment in human and physical capital
to protect the neediest and promote social equity.
Since its publication in 1998, the Fund has encouraged adherence to the IMF's Code o/Good
Practices on Fiscal Transparency, which aims to enhance the transparency of fiscal policy, promote
quality audit and accounting standards, and reduce or eliminate off-budget transactions, which are
often the source of unproductive government spending. As of August 2002,45 countries had
completed IMF-Ied fiscal transparency reviews, which compare local budgetary practices with
internationally-agreed upon standards and codes. The IMF also encourages countries to conduct
"public expenditure reviews" with the World Bank.
In addition, the IMF does an annual survey of global military expenditures, publishing these results
in its periodical, IMF Survey. The most recent review in June 2002 found that military spending as a
percentage of GDP has leveled off in developing countries, after declining steadily in the early 19905.
Military spending as a percentage of total expenditure, however, has continued to fall. In December
2001, the IMF released a research report on the global decline in military spending which found that in
countries with IMF programs, the ratio of military spending to GOP is on average 1% smaller than in
countries without Fund programs.
Below are several examples of efforts to focus government expenditure on investment in human
capital and other productive purposes:
•
•
In a Board statement in August 2002, the United States expressed concern about the accuracy of
China's reported military spending and encouraged the government to verify the accuracy of
military expenditure statistics provided to civilian leadership.
In an October 2001 Board discussion of Rwanda's PRGF, the USED urged the authorities to
eliminate off-budget accounts and to ensure that they do not reemerge. To enhance accountability,
the USED also called for annual audits of government budgets to be made public. Further, the
USED stressed that any increases in military spending should not threaten social expenditures and
should be offset by compensating revenue or spending measures. The government has begun the
process of taking stock of off-budget items.
10
•
•
•
With IMF support and United States encouragement, Cambodia has made progress in shifting
fiscal spending away from defense toward the social sectors. Social sector spending reached 3%
ofGDP in 2001, from less than 1Y2 % ofGDP in 1998.
In a June 2002 Board review of Albania's PRGF, the USED welcomed the program's proposed
increases in primary education and healthcare, particularly in rural areas. The United States also
supported the PRGF's call for better expenditure tracking and domestic revenue collection.
In various Board statements, the USED has expressed support for Peru's fiscal program, designed
to replace military spending with social spending. Under its IMF program, Peruvian authorities
intend to shift unfocused, less accountable social expenditures administered by the Office of the
Presidency to the social services ministry. This shift is expected to increase the quality and
coherency of Peru's social expenditures program.
(8) Economic prescriptions appropriate to the economic circumstances of each country
The United States has supported flexibility and customization in Fund programs while
emphasizing the need to focus conditionality on issues critical to growth and macroeconomic stability
with measurable results. Further, countries that borrow from the IMF on concessional terms prepare
Poverty Reduction Strategy Papers (PRSPs) through a participatory process involving domestic
stakeholders as well as external development partners. This process is designed to ensure that each
program meets the specific needs of the country that prepares it.
(9) Core Labor Standards (CLS)
To assist the USED in addressing labor issues, the Treasury works closely with the United States
Labor Department and the State Department to assess labor standards in IMF program countries. Core
labor standards provide a useful benchmark for assessing countries' treatment of workers against
internationally agreed upon standards.
As has been noted in past reports, there is some reluctance by many member countries to address
this issue in the IMF, particularly in the context of the effort to focus Fund conditionality more
narrowly. However, during the past year, the USED has made an effort to raise critical labor issues in
Board discussions. For example:
•
•
In a statement to the Board on February 8, 2002, the USED noted the efforts of the Thai
government to improve labor standards and welcomed authorities' restoration of trade union rights
to employees of state enterprises. However, the USED also expressed concern over the apparent
failure to protect workers who attempt to unionize.
In a review of the Dominican Republic's Article IV Consultation in June, the USED encouraged
authorities to fully implement laws protecting the rights of workers to freely engage in collective
bargaining and organizational activities.
(10) Discouraging practices that may promote ethnic or social strife
By helping to create the conditions for a sound economy, IMF assistance facilitates the reduction
of ethnic and social strife, to the extent such strife is driven in part by economic deprivation. For
example, with United States support, the IMF has increasingly encouraged the strengthening of social
11
safety nets. The IMF also encourages consultation with various segments of society in the
development of programs. This approach seeks to ensure that all parties have an opportunity to
participate in the implementation of national priorities and that resources are employed in the public
interest. IMF assistance has helped to free up resources for more productive public investment by
contributing to a reduction in country military expenditures. The United States has also advocated that
an analysis of the impact on the poor - carried out by the World Bank - be conducted and
countervailing measures, as appropriate, be incorporated into Fund programs.
Below are some examples of United States advocacy in the IMF Board in support of ethnic and
social stability:
•
•
In Fiji's August 2002 Article IV review, the USED expressed concern about Fijian authorities'
refusal to include opposition party seats in the Cabinet as stipulated in the Fijian Constitution. The
United States has opposed a resumption of international financial institution lending to the
government of Fiji.
At the combined first and second reviews of Sri Lanka's SBA in April 2002, the United States
raised concerns about the potential for social strife and noted that our support for further reviews is
premised on authorities' efforts to resolve the country's 13 year old civil conflict.
(11) Link between environmental and macroeconomic conditions and policies
Recognizing that the World Bank has lead responsibility for environmental issues in individual
countries, the United States has used its voice and vote in the IMF Board to encourage staff to review
the potentially negative environmental consequences of recommended policies. The United States has
urged the inclusion of measures in IMF programs to tax polluting activities, fund environmental
protection efforts, and remove subsidies on environmentally-harmful products or activities.
The following are a few examples in which the United States has commented on environmental
policies in country programs:
•
•
•
•
In a June 2002 Board statement, the USED expressed support for environmental provisions
contained in Vietnam's PRSP, including measures requiring estimates of environmental impacts in
all projects, incentives for cleaner production, and amendments to the foreign investment approval
process designed to protect the environment.
In an April Board discussion, the USED encouraged Indonesian authorities to focus on stronger
enforcement of environmental regulations, particularly in the forestry sector, where significant
fiscal losses have been incurred as a result of illegal logging.
During a July Board discussion, the United States expressed concern with the Cambodian
government's delay in implementing sustainable management plans for the forestry sector and its
lax enforcement of a logging ban.
In a February Board discussion of Peru's SBA request, the US expressed concern over the
environmental costs of mining sector policies and urged the authorities to consider implementing
pollution taxes.
12
(12) Greater transparency
Over the last several years, the IMF has significantly increased the amount of information on its
programs that it has made available to the pUblic. The United States has stressed the need to build on
this progress and expand the number of publications and IMF practices open to public scrutiny.
•
•
•
•
Publication of program and Article IV staff papers is voluntary, and 82 countries have chosen to
publish at least one staff paper. Between January 2001 and February 2002,64% of Article IV staff
reports and 95% of Letters of Intent were published.
To date, 293 Reports on Observance of Standards and Codes (ROSC) modules for 81 economies
have been completed, of which 217 have been published for 66 economies.
The United States has made available on its website self-assessments on 10 of the 12 ROSC .
modules and is currently working with the IMF on a fiscal policy ROSC.
The United States has pushed for a presumption of publication for most IMF documents, including
mandatory release of Letters ofIntent (LOIs), publication of Technical Assistance reports and
greater use of Public Information Notices (PINs) following Board discussions of Article IV
consultations.
The following are some examples of country programs with respect to which the United States has
advocated greater transparency:
•
•
•
In a review of Brazil's SBA, the United States expressed disappointment that the government had
decided not to publish the IMF staff report and urged authorities to increase transparency.
In Yemen's Article IV review in July 2002, the USED highlighted the importance of enhanced
budget transparency, particularly to help the authorities manage scarce funds for PRSP spending
priorities and to enhance the delivery of government services.
The USED welcomed the decision of Jordanian authorities to participate in an FSAP in 2003,
particularly given recent instances of bank fraud, and signs of weakness in the banking sector such
as high rates of Non-Performing Loans (NPLs), for which there has not been sufficient
provisioning.
(13) Greater IMF accountability and enhanced self-evaluation
The USED has consistently supported measures to increase the accountability of the IMF and to
allow independent evaluations of the IMF's operations. The IMF's Office of Internal Audit has long
had responsibility for reviewing Fund finances, operations, and systems. In 1998, with the
encouragement of the United States, the IMF established procedures for independent evaluations.
Under these procedures, independent evaluations were completed on a variety of topics, including the
IMF's Enhanced Structural Adjustment Facility, as well as Surveillance and Economic Research
Activities. These evaluations are available on the IMF's website.
Finally, in April 2000, with the strong urging of the USED, the Executive Board agreed to
establish an Independent Evaluation Office (lEO) to supplement existing internal and external
evaluation activities. The lEO provides objective and independent evaluation on issues related to the
IMF and operates independently of Fund management and at arm's length from the IMF's Executive
Board. Terms of reference for the lEO and its work program have been published on the IMF website
13
and the lEO's first report - on Prolonged Use of Fund Resources - was discussed by the IMF's Board
this fall.
(14) Structural reforms which facilitate the provision of credit to small businesses, including
microenterprise lending
The provision of micro-credit is an important component of structural adjustment, especially in
economies where state-directed lending is prevalent and the provision of credit to individuals and
small companies is limited. Responsibility for assistance in establishing micro-finance programs lies
with the World Bank and regional development banks. The Treasury strongly supports these efforts in
the Multilateral Development Banks.
II. Section 801(c)(l)(B)
(/) Suspension of IMF financing iffunds are being divertedfor purposes other than the purpose
for which the financing was intended
With strong United States support, the IMF has taken steps in the past several years to ensure that
IMF resources are used solely for the purposes for which they are intended. These steps constitute a
serious and far-reaching initiative to strengthen the system for safeguarding the use of Fund resources
and for deterring the misreporting of data to the IMF.
The IMF's safeguards framework, which took effect in 2000, requires countries receiving funds to
submit to external financial audits of their central bank's data. This process is designed to provide
assurances that member countries' central banks have adequate control, accounting, reporting and
auditing systems in place to protect central bank resources, including IMF disbursements. Any critical
gaps identified during the assessment process must be remedied before additional IMF resources can
be disbursed.
In April 2002, with the support of the United States, the Executive Board agreed to adopt
safeguards assessments as a permanent policy. As of May 2002, 27 countries had undergone full
assessments and an equal number had completed abbreviated safeguard reviews.
•
•
In a June 2002 Board statement, the USED expressed strong concern over Vietnam's delay in
completing its safeguards assessment and questioned the independence of the auditor assigned to
review central bank financial statements.
In Yemen's August 2002 Article IV review, the USED agreed with IMF staffs recommendation
that a full safeguard assessment will need to be completed before a new Fund program can be
brought to the Board.
(II) IMF financing as a catalyst for private sector financing
The IMF recognizes that if structured effectively, official financing can complement and attract
private sector flows. The Fund promotes policy reforms that catalyze private financing and allow
countries to regain access to international private capital markets as quickly as possible. (See Section
5, Part I above for a more in-depth discussion of private sector involvement.)
14
(IU) Financing must be disbursed (i) on the basis ofspecific prior reforms; or (ii) incrementally
upon implementation of specific reforms after initial disbursement
The United States has been a strong advocate of tight conditionality on IMF loans, including
greater use of prior actions, and has supported the Fund's stepped-up focus on results-oriented lending.
IMF disbursements are tranched based on a country's perfonnance against specified policy actions,
both prior to and during the program.
(IV) Open markets and liberalization of trade in goods and services
The IMF has been a consistent advocate of open markets and trade liberalization. For elaboration,
see Section 2 of Part I, above.
(V) IMF financing to concentrate chiefly on short-term balance ofpayments financing
In September 2000, with strong United States support, the IMF agreed to reorient IMF lending to
discourage casual or excessive use, and provide incentives to repay as quickly as possible. In
particular, the IMF shortened the expected repayment periods for both Stand-by and Extended
Arrangements and established surcharges for higher levels of access. In addition, the IMF committed
to limiting the use of Extended Arrangements to those countries with a financial need that justifies a
longer repayment period.
(VI) Graduation from receiving financing on concessionary terms
The United States supports comprehensive growth strategies to move countries from concessional
to market-based lending. The United States works closely with the IMF and World Bank to promote a
growth-oriented agenda in developing countries based on strong monetary and fiscal policies, trade
liberalization, and reduction of impediments to private sector job creation.
The IMF extends concessional credit through the PROF. Eligibility is based principally on a
country's per capita income and eligibility under the International Development Association (IDA), the
World Bank's concessional window (the current cutoff point for IDA eligibility is a 1999 per capita
ODP level of $885). Factors that would contribute to reduced reliance on concessional resources
include a country's growth perfonnance and prospects, capacity to borrow on non-concessionary
tenns, vulnerability to adverse external developments such as swings in commodity prices, and
balance of payments dynamics. To lower reliance on concessionallending and promote debt
sustainability, the 0-7 countries, acting on the initiative of the United States, have agreed to expand
the use of grants in Multilateral Development Bank lending to the world's poorest countries.
15
Appendix
Selected Abbreviations
Anti-Money Laundering (AML)
Asia-Pacific Economic Cooperation (APEC)
Compensatory Financing Facility (CFF)
Countering the Financing of Terrorism (CFT)
Contingent Credit Line (CCL)
Core Labor Standards (CLS)
Combating the Financing of Terrorism (CFT)
Democratic Republic of Congo (DROC)
Extended Fund Facility (EFF)
Enhanced Structural Adjustment Facility (ESAF)
Federal Republic of Yugoslavia (FRY)
Financial Action Task Force (F ATF)
Financial Sector Assessment Program (FSAP)
Financial Stability Forum (FSF)
Financial System Stability Assessment (FSSA)
Foreign Direct Investment (FDI)
General Data Dissemination Standard (GDDS)
Heavily Indebted Poor Countries (HIPC)
International Financial Institutions (lFls)
International Labor Organization (ILO)
International Monetary and Financial Committee (lMFC)
Letter of Intent (LOI)
Memorandum of Economic Policies (MEP)
Memorandum of Economic and Financial Policies (MEFP)
Non-Cooperative Countries and Territories (NCCT)
Non-Performing Loan (NPL)
Poverty Reduction and Growth Facility (PRGF)
Poverty Reduction Strategy Paper (PRSP)
Public Expenditure Review (PER)
Public Information Notice (PIN)
Report on Standards and Codes (ROSC)
Special Data Dissemination Standard (SDDS)
Stand-By Arrangement (SBA)
Staff Monitored Program (SMP)
State-Owned Enterprise (SOE)
Technical Memorandum of Understanding (TMU)
United States Executive Director at the IMF (USED)
Use of Fund Resources (UFR)
Legislative Provisions
As noted above, this report covers progress on implementing the policies and refonn objectives
set out in Section lS03(a) of the IFI Act and Section 801(c)(1)(B) of the Foreign Operations, Export
Financing, and Related Programs Appropriations Act, 2001.
Section lS03(a) of the IFI Act provides that:
The Secretary of the Treasury shall instruct the United States Executive Director of the
International Monetary Fund to use aggressively the voice and vote of the Executive Director to do the
following:
(1)
Vigorously promote policies to increase the effectiveness of the International Monetary Fund
in structuring programs and assistance so as to promote policies and actions that will
contribute to exchange rate stability and avoid competitive devaluations that will further
destabilize the international financial and trade systems.
(2)
Vigorously promote policies to increase the effectiveness of the International Monetary Fund
in promoting market-oriented reform, trade liberalization, economic growth, democratic
governance, and social stability through (A) Establishing an independent monetary authority, with full power to conduct monetary
policy, that provides for a non-inflationary domestic currency that is fully convertible
in foreign exchange markets;
(B) Opening domestic markets to fair and open internal competition among domestic
enterprises by eliminating inappropriate favoritism for small or large businesses,
eliminating elite monopolies, creating and effectively implementing anti-trust and antimonopoly laws to protect free competition, and establishingfair and accessible legal
procedures for dispute settlement among domestic enterprises;
(C) Privatizing industry in afair and equitable manner that provides economic
opportunities to a broad spectrum of the population, eliminating government and elite
monopolies, closing loss-making enterprises, and reducing government control over the
factors ofproduction;
(D) Economic deregulation by eliminating inefficient and overly burdensome regulations
and strengthening the legal framework supporting private contract and intellectual
property rights;
(E) Establishing or strengthening key elements of a social safety net to cushion the effects
on workers of unemployment and dislocation; and
(F) Encouraging the opening of markets for agricultural commodities and products by
requiring recipient countries to make efforts to reduce trade barriers.
(3)
Vigorously promote policies to increase the effectiveness of the International Monetary
Fund, in concert with appropriate international authorities and other international financial
institutions (as defined in Section 1701 (c)(2)), in strengtheningfinancial systems in
developing countries, and encouraging the adoption of sound banking principles and
practices, including the development of laws and regulations that will help to ensure that
domestic financial institutions meet strong standards regarding capital reserves, regulatory
oversight, and transparency.
(4)
Vigorously promote policies to increase the effectiveness of the International Monetary
Fund, in concert with appropriate international authorities and other international financial
institutions (as defined in Section 170] (c)(2)), infacilitating the development and
implementation of internationally acceptable domestic bankruptcy laws and regulations in
developing countries, including the provision of technical assistance as appropriate.
(5)
Vigorously promote policies that aim at appropriate burden-sharing by the private sector so
that investors and creditors bear more fully the consequences of their decisions, and
accordingly advocate policies which include (A) Strengthening crisis prevention and early warning signals through improved and more
effective surveillance of the national economic policies andfinancial market
development of countries (including monitoring of the structure and volume of capital
flows to identify problematic imbalances in the inflow of short and medium term
investment capital, potentially destabilizing inflows of offshore lending andforeign
investment, or problems with the maturity profiles of capital to provide warnings of
imminent economic instability), andfuller disclosure of such information to market
participants;
(B) Accelerating work on strengtheningfinancial systems in emerging market economies so
as to reduce the risk offinancial crises;
(C) Consideration ofprovisions in debt contracts that wouldfoster dialogue and
consultation between a sovereign debtor and its private creditors, and among those
creditors;
(D) Consideration of extending the scope of the International Monetary Fund's policy on
lending to members in arrears and of other policies so as to foster the dialogue and
consultation referred to in subparagraph (C);
(E) Intensified consideration of mechanisms to facilitate orderly workout mechanisms for
countries experiencing debt or liquidity crises;
(F) Consideration of establishing ad hoc or formal linkages between the provision of
official financing to countries experiencing afinancial crisis and the willingness of
market participants to meaningfully participate in any stabilization effort led by the
International Monetary Fund;
(G) Using the International Monetary Fund to facilitate discussions between debtors and
private creditors to help ensure that financial difficulties are resolved without
inappropriate resort to public resources; and
(H) The International Monetary Fund accompanying the provision offunding to countries
experiencing afinancial crisis resultingfrom imprudent borrowing with efforts to
achieve a significant contribution by the private creditors, investors, and banks which
had extended such credits.
(6)
Vigorously promote policies that would make the International Monetary Fund a more
effective mechanism, in concert with appropriate international authorities and other
international financial institutions (as defined in Section ] 70] (c)(2)), for promoting good
governance principles within recipient countries by fostering structural reforms, including
procurement reform, that reduce opportunities for corruption and bribery, and drug-related
money laundering.
(7)
Vigorously promote the design of International Monetary Fund programs and assistance so
that governments that draw on the International Monetary Fund channel public funds away
from unproductive purposes, including large "show case" projects and excessive military
spending, and toward investment in human and physical capital as well as social programs
to protect the neediest and promote social equity.
(8)
Work with the International Monetary Fund to foster economic prescriptions that are
appropriate to the individual economic circumstances of each recipient country, recognizing
that inappropriate stabilization programs may only serve to further destabilize the economy
and create unnecessary economic, social, and political dislocation.
(9)
Structure International Monetary Fund programs and assistance so that the maintenance
and improvement of core labor standards are routinely incorporated as an integral goal in
the policy dialogue with recipient countries, so that(A) Recipient governments commit to affording workers the right to exercise internationally
recognized core worker rights, including the right offree association and collective
bargaining through unions of their own choosing;
(B) Measures designed to facilitate labor market flexibility are consistent with such core
worker rights; and
(C) The staff of the International Monetary Fund surveys the labor market policies and
practices of recipient countries and recommends policy initiatives that will help to
ensure the maintenance or improvement of core labor standards.
(10) Vigorously promote International Monetary Fund programs and assistance that are
structured to the maximum extent feasible to discourage practices that may promote ethnic
or social strife in a recipient country.
(11) Vigorously promote recognition by the International Monetary Fund that macroeconomic
developments and policies can affect and be affected by environmental conditions and
policies, and urge the International Monetary Fund to encourage member countries to
pursue macroeconomic stability while promoting environmental protection.
(12) Facilitate greater International Monetary Fund transparency, including by enhancing
accessibility of the International Monetary Fund and its staff, foster a more open release
policy toward working papers, past evaluations, and other International Monetary Fund
documents, seeking to publish all Letters of Intent to the International Monetary Fund and
Policy Framework Papers, and establishing a more open release policy regarding Article IV
consultations.
(13) Facilitate greater International Monetary Fund accountability and enhance International
Monetary Fund self-evaluation by vigorously promoting review of the effectiveness of the
Office of Internal Audit and Inspection and the Executive Board's external evaluation pilot
program and, if necessary, the establishment of an operations evaluation department
modeled on the experience of the International Bankfor Reconstruction and Development,
guided by such key principles as usefulness, credibility, transparency, and independence.
(14) Vigorously promote coordination with the International Bankfor Reconstruction and
Development and other international financial institutions (as defined in Section 1701 (c)(2))
in promoting structural reforms that facilitate the provision of credit to small businesses,
including microenterprise lending, especially in the world's poorest, heavily indebted
countries.
Section 1705(a) of the IFI Act further requires that Treasury report on the progress made by the IMF
in adopting and implementing the following policies as set forth in Section 801(c)(I)(B) ofFOAA
2001(I)
Policies providingfor the suspension offinancing iffunds are being divertedfor purposes
other than the purpose for which the financing was intended;
(II)
Policies seeking to ensure that financing by the Fund normally serves as a catalyst for
private sector financing and does not displace such financing;
(III) Policies requiring that financing must be disbursed (i) on the basis of specific prior reforms;
or (it) incrementally upon implementation of specific reforms after initial disbursement;
(IV) Policies vigorously promoting open markets and liberalization of trade in goods and
services;
(V)
(VI)
Policies providing that financing by the Fund concentrates chiefly on short-term balance of
payments financing;
Policies providingfor the use, in conjunction with the Bank, of appropriate qualitative and
quantitative indicators to measure progress toward graduation from receivingfinancing on
concessionary terms, including an estimated timetable by which countries may graduate over
the next 15 years.
o
EPA R T l\ lEN T
0 J.'
THE
T REA SUR Y
omCE OF PUBUC AFFAIRS. 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C .• 20220. (202) 622-2960
EMBARGOED UNTIL 11:00 A.M.
October 10, 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 $32,000
million to refund an estimated $26,179 million of publicly held 13-week and 26-week
Treasury bills maturing October 17, 2002, and to raise new cash of approximately
$5,821 million. Also maturing is an estimated $18,000 million of publicly held 4-week
Treasury bills, the disposition of which will be announced October 15, 2002.
The Federal Reserve System holds $12,159 million of the Treasury bills maturing
on October 17, 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 October 16, 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
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 $973 million into the 13-week bill and $566 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
For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
HIGHLIGHTS OF TREASURY OFFERINGS OF BILLS
TO BE ISSUED OCTOBER 17, 2002
October 10, 2002
Offering Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . $17,000 million
Public Offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . $17,000 million
NLP Exclusion Amount . . . . . . . . . . . . . . . . . . . . . . . $ 5,400 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 ...........
91-day bill
912795 LU 3
October 15, 2002
October 17, 2002
January 16,2003
July 18, 2002
$21,498 million
$1,000
$15,000 million
$15,000 million
None
182-day bill
912795 MH 1
October 15, 2002
October 17, 2002
April 17, 2003
October 17, 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 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 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:
(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 daylight saving time on auction day
Competitive tenders ........ Prior to 1:00 p.m. eastern daylight saving 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.
PO·3528: Remarks of Fisher to the Federalist Society for Law and Public Policy Studies
Page 10f3
f->HlSS FWOM
FROM THE OFFICE OF PUBLIC AFFAIRS
October 11 , 2002
PO-3528
Remarks of Peter R. Fisher. Treasury Under Secretary for Domestic Finance
to the Federalist Society for Law and Public Policy Studies
"The Future of Regulation and Supervision of Financial Intermediaries"
Continuous improvement in the efficiency with which we convert savings into
investment is the pre-eminent objective that we, as a society, have for our financial
intermediaries. We want both to minimize the potential loss of savings, to
individuals and society, and to maximize real, risk-adjusted returns on investment.
For the last century and a half, we have sought to minimize the potential loss of
savings by accepting a role for the federal government in promoting what in the late
19th century would have been called "monetary stability" but by the late 20th
century we came to call "financial stability."
In the last twenty years we have begun to strip away the obsolete segmentation
that the federal government imposed on our financial system to shore up the
soundness of financial intermediaries. That compartmentalized regulatory scheme
imposed too great a constraint on the efficiency of intermediation. We have begun
to dismantle these rigid functional and geographic barriers but we have not yet fully
accepted the regulatory and supervisory consequences of our loss of faith in the
efficacy of those barriers.
We need now to follow through on the Congress' commitment to open up our
financial services industry by focusing our regulatory efforts on promoting
competition among all intermediaries. We are still concerned for financial stability,
but in a more competitive, more dynamic financial system, we must pursue this in a
different way. Supervisors of financial intermediaries need to be a little less
concerned with preventing every bad outcome among their charges and, instead,
should concentrate on improving the overall resilience of the financial system by
thinking of it as a system. In the language of statistics, distributions and portfolio
theory, supervisors should minimize "negative tail" outcomes by striving to
maximize "positive tail" outcomes.
Adam Smith praised the invisible hand of individual incentive. But he was even
more passionate in his animus toward the visible hand of government. His hostility
was not to the exercise of government power per se but, rather, to its likely abuse
by men of commerce - particularly the intermediaries or "dealers" - seeking to limit
their competition or to gain privilege.
"The interest of the dealers," Smith wrote, "is always in some respect different
from, and even opposite to, that of the public. To widen the market and to narrow
the competition, is always in the interest of the dealers. To widen the market may
frequently be agreeable enough to the interest of the public; but to narrow the
competition must always be against it, and can serve only to enable the dealers, by
raising their profits above what they would naturally be, to levy, for their own
benefit, an absurd tax upon the rest of their fellow-citizens. The proposal of any
new law or regulation of commerce which comes from this order ought always to be
listened to with great precaution, and ought never to be adopted till after having
been long and carefully examined, not only with the most scrupulous, but with the
most suspicious attention."·
Adam Smith's concern was mercantilism. Today, however, he would recognize the
competition-distorting consequences of all manner of subsidy, preference, and
guarantee, as well as the problems of agency capture and regulatory arbitrage.
Moreover, for most of the last two centuries in banking and finance we tended to
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PO-3528: Remarks of FIsher to the Federalist Society for Law and Public Policy Studies
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compound the general problem of competition-distorting government interventions
by the very means we used to protect the stability of financial intermediaries.
Through the sovereign's power to charter, we carved up the pathways of financial
intermediation, allocating different sets of risks and returns as franchises for
different forms of intermediation: deposit taking and loan making, investment
underwriting, insurance underwriting, broking, and so forth. Holding less than the
total set of available risks and returns from financial intermediation, anyone form is
necessarily less robust, less stable, than the full set. By itself, each one is prone to
crisis in the event that its particular form of arbitrage suffers an abrupt or prolonged
period of below average returns.
Each chartering authority reasonably sees its mission, however, as preserving the
safety and soundness of its particular set of charges. To counterbalance their
vulnerability to crisis, the chartering authority is tempted to pad the revenues of its
franchisees by limiting the competition they face or by providing special privileges
not available to competitors. These added returns, however, do not promote the
efficiency with which society converts savings into investment; they represent only a
toll- Adam Smith's "absurd tax." Nor are the returns so extracted from our savings
likely to make that particular form of intermediation any more robust in the long run.
We Americans made matters even worse with the misguided thought, reflected in
Glass-Steagall, that the set of risks and returns called "commercial banking" could
be made stronger by a rigid separation from the rest of the intermediation pathways
and especially from the set of risks and returns called "investment banking". In the
late 1980s starting with the regulatory reforms of the Federal Reserve Board, and
eventually with the passage of the Gramm-Leach-Bliley Act in 1999, we began
deconstructing the forced compartmentalization of our financial services industry.
We need to see this process through by clearing out the cobwebs of regulatory
arbitrage that restrict which firms can provide which financial services. We have and want to retain - different forms of financial intermediation. But we also want to
encourage vigorous competition at the frontiers among these forms and the firms
that provide them. Our system of financial rule writing - and particularly the
licensing and chartering of financial services providers - needs to respect this
dialectic: promoting alternative forms of intermediation and vigorous competition
among them. Limitations on who can compete, and on how they can compete,
should be viewed with "the most suspicious attention."
In a more competitive, more rough-and-tumble, financial environment, we may
have more, not less, concern for financial stability - for minimizing the potential loss
of savings for individuals and society.
The supervision of financial intermediaries - the hands-on job of looking over the
shoulders of individual financial institutions - originates with the desire to avoid
some set of bad outcomes'. bank failures, depositor losses, fraud or some other
form of consumer or social loss. The supervisory challenge is to limit these
negative tail outcomes. To do so while still promoting competition and efficiency,
however, requires that we recognize that individual failures are part of an overall
system that produces both negative and positive outcomes.
When we adopt this portfolio viewpoint, we see that society as a whole is likely to
benefit the most through the improvement of overall performance. We can do that
best when we strive to maximize positive tail outcomes across the whole financial
system. Snuffing out every bad outcome - that is, stifling competition - cannot be
the way to spur the whole system to best performance. Indeed, at both the broad
level of systemic stability and for any particular products or sales practices, the only
compelling case for financial supervision is as a means of more rapidly
disseminating best practice than would otherwise be the case, in order both to
minimize the likelihood of bad outcomes and to improve median and mode
outcomes for society.
There are two consequences of thinking of financial supervision in these terms.
First, when we think of financial supervision in the context of the range of positive
and negative outcomes that a particular form of financial intermediation produces,
we better understand the systemic role of the supervisor. Over the extended time
horizon and the total portfolio of intermediaries of concern to the supervisor,
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minimizing the loss of savings will be a consequence of, not at odds with, the
striving for the positive tail outcomes that reflect convergence on best practice and
serve to maximize real, risk-adjusted returns.
Second, in order to be an effective means of redistributing best practice, the
supervisor needs to know what best practice is. This requires real knowledge and
expertise about the risks and rewards of the particular businesses to be
supervised. In the absence of this knowledge and expertise, the supervisor is
unlikely to be able to promote best practice and is more likely only to add to the cost
of financial intermediation and, thereby, regrettably diminish the overall efficiency
with which our savings are converted into investment. At the practical level, in
order to know best practice supervisors need to be specialized by lines of business
and sets of risks.
If we can focus the role of the federal government on the twin tasks of expanding
competition among the providers of financial services and of channeling supervisory
resources to serve as a means of redistributing best practices, we will be moving in
the right direction.
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'~-'-' .
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PfilSS HOOM
FROM THE OFFICE OF PUBLIC AFFAIRS
October 11 , 2002
PO-3529
Treasury Under Secretary Taylor to travel to Tokyo for
U.S-Japan Financial Dialogue Meetings
John Taylor, Under Secretary of the Treasury for International Affairs, will travel to
Tokyo, Japan, October 20-23 for a series of meetings to discuss economic and
financial issues.
In meetings with members of Japan's economic team and other officials, Under
Secretary Taylor will discuss Japanese efforts to return to sustained economic
growth. Taylor will also meet with individuals in the private sector including
bankers, financial analysts, and business leaders.
Taylor will arrive in Tokyo on Sunday, October 20 and depart on Wednesday,
October 23, 2002.
On Tuesday, October 22, Under Secretary Taylor is scheduled to deliver a
lunchtime speech at the Japan National Press Center in Tokyo.
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PHLSS HOOM
FROM THE OFFICE OF PUBLIC AFFAIRS
October 11 , 2002
PO-3530
Treasury Department Provides Guidance
on Compliance with Section 326 of USA PATRIOT ACT
The Treasury Department today is advising all financial institutions that they will not
be required to comply with section 326 of the USA PATRIOT ACT or the proposed
rules issued by Treasury and the federal functional regulators on July 23 until final
implementing regulations are issued and become effective.
Section 326 of the USA PATRIOT Act directs the Department of the Treasury and
the federal functional regulators to jointly issue regulations requiring financial
institutions to establish minimum procedures for the identification and verification of
customers who open new accounts.
The proposed rules issued in July applied to the following financial institutions:
banks, savings associations, and credit unions; securities brokers and dealers;
mutual funds; futures commission merchants and introducing brokers; and credit
unions, private banks and trust companies that do not have a federal regulator.
Comments received on the proposed rules revealed substantial issues that
Treasury and the federal functional regulators are analyzing as a final rule is
prepared.
The final rules will provide financial institutions with a reasonable amount of time in
which to come into compliance. However, financial institutions are reminded that
they must continue to comply with any existing obligation to guard against money
laundering and the financing of terrorism through adequate customer identification
procedures. Financial institutions should already be taking basic steps to ensure
appropriate customer identification.
Treasury will issue shortly further guidance on other provisions of the Act with
October implementation deadlines.
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2002-10-14-9-33-43-22890: Secretary O'Neill Remarks before the Greater Des Moines Pa... Page 1 of 3
PHlSS HOOM
FROM THE OFFICE OF PUBLIC AFFAIRS
October 14, 2002
2002-10-14-9-33-43-22890
Secretary O'Neill Remarks before the Greater Des Moines Partnership, Des
Moines, Iowa, October 14, 2002
Good morning.
In the past year and a half, we've seen some tough times for the American
economy. We've suffered through a bursting stock market bubble, terrorist attacks
on New York and Washington, and discoveries of corporate fraud. We were
wrestling with recession when President Bush entered office, and it took the better
part of a year to shake it off, even as its consequences have lingered. People have
lost jobs, and retirement accounts are hurting. Economic security is on all our
minds.
Through all of this turmoil and hardship, the American consumer has
continued to bolster our economy and American businesses have continued to
innovate and improve productivity to prepare themselves for the next surge
forward. The extraordinary flexibility of our economic system and the spirit of those
who work within it are key reasons for the brevity of the recession, and the steady
march of our recovery.
American innovation - good ideas put to work - drives our productivity,
creates jobs, and raises our standard of living. I have seen many examples, as I
have traveled to meet workers and viSit businesses across the United States, of
new ideas being put into practice to boost productivity, modernize communities, and
create prosperity.
In Washington, we are working hard to support your efforts. From the
beginning of his Administration, President Bush has embraced economic freedom
and individual accountability as the foundation for continuing prosperity. His
economic plan creates Jobs, improves education and expands opportunities to save
and invest.
First, the President's historic tax relief program last summer reduced taxes
for the average family of four by $1,040 a year, and put cash in consumers' pockets
when we needed it most: last August and September. Then in March, he signed
the Job Creation Act to stimulate investment in our economy - a second major
accomplishment. By the end of 2002, these two tax relief programs will have
allowed the private sector to create an additional one million jobs with resources
that would otherwise have gone to
Washington.
Our third victory for the economy has been new standards for corporate
accountability. These ensure that people saving for their future can get accurate
information for sound investment decisions. We are holding corporations
accountable for telling the truth to investors and employees, so Americans can save
for college tuitions and comfortable retirements with greater confidence. I am
confident the worst is behind us for corporate scandals - call them what you will,
but I can't believe any CEO still standing would be stupid enough to falsely certify
their books. Not when jail time is the certain consequence.
And the most recent major accomplishment for our nation's prosperity is
winning Trade Promotion Authority, which the President will use to open
international markets to US exports, creating jobs here at home.
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Today, key economic fundamentals such as inflation, real wages,
productivity, interest rates, business profits, and the housing sector are all strong
because of the resilience and determination of the American people. and the
flexibility of our banks and financial institutions. I am confident that we will return to
3 to 3.5% growth rates by the end of this year, and that growth will create jobs and
renew our prosperity. But to a lot of folks out there watching, it doesn't feel like a
recovery yet. And the President won't be satisfied until everyone who wants a job
has a job. He's advancing the rest of his economic agenda to strengthen the
recovery.
For nearly a year the President has been asking Congress to enact
terrorism risk insurance. Today, over $15 billion in construction projects are not
going forward because of the lack of terrorism risk insurance. Finishing this
legislation is the single thing we could do in Washington to create jobs in the short
run. We also need President Bush's Homeland Security plan, because the physical
security of our nation is essential to prosperity. The brief economic freeze
immediately following September 11 demonstrated that reality all too well. We are
working with Congress to complete the new Department of Homeland Security,
which would better organize and deploy our resources toward preventing further
attacks.
We'll also work with Congress to restrain wasteful government spending,
because overspending in Washington burdens our economy with higher debts and
taxes. And the President has called on Congress to protect individuals' control over
their 401 (k) holdings without undue constraints from employers. Your retirement
nest egg is yours alone - you earned it, and you should have full legal rights to
control it.
The President's concern for the health of our recovery led him to ask the
courts to intervene in a labor dispute and reopen the ports on the west coast. By
some estimates, the port closures were costing the US economy as much as $2
billion a day. Plants were closing and workers were being sent home because
important supplies were held up by the port closures. We won't know for some time
the full effects on our economy of this 10-day disruption. What we do know is that
our economic recovery is crucial to the prosperity of all Americans, and the
President acted deCisively to prevent the recovery from being derailed.
As we emerge from the turbulence of last year's recession, we're gaining
new perspective on the recent past, and we're applying that perspective to the
decade still beginning. In short, we are facing our problems, dealing with them as a
nation, and moving forward.
The question for our new era is not whether we can or should continue the
economic success we enjoyed in the 1990s. The question is how leaders of
business and government should incorporate the best aspects of the 90s - growth,
productivity, and innovation - into the emerging decade, while actively working to
make this new era a time of both personal responsibility and public integrity. How
can we reaffirm the link between value and values, and restore public confidence in
American enterprise? In my view, the answer is simple: honesty and
accountability. With leadership that respects and promotes these values,
everything is possible. Without it, nothing is possible. That is as true for American
corporations as it is for American government. In my experience, the example from
the top becomes the model for everyone below.
In the economic domain, I believe the connection between creating value
and affirming values in American business has always been strong. Far away from
the headlines, most business leaders, from mom and pop shop-owners to corporate
chiefs, have always treated their shareholders and employees with honesty and
fairness. Today, however, doingyour job with competence is not enough. Leaders
must stand up and set an example not just for their employees, but for the general
public as well. Honesty in business is the new patriotism. There .is nothing better
business leaders can do for this country right now than restore faith In the system
that has made it great. The President's leadership at home and abroad is
smoothing our road to recovery, and increasing the prospectsfor peace and
prosperity around the world. We will continue to pursue our VISion, In which
Americans have the greatest possible opportunity to live the lives we dream of:
pursuing our chosen professions, owning a home, raising our children to be happy
and successful, engaging in our communities, and attaining financial
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independence.
Thank you
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PHCSS fiOOM
FROM THE OFFICE OF PUBLIC AFFAIRS
October 15, 2002
PO-3531
"Promoting Growth Throughout the Americas"
Remarks by Kenneth W. Dam
Deputy Secretary Department of the Treasury
United States of America delivered to the
Miami Herald's Sixth Annual Conference on the Americas
Miami Florida October 15, 2002
As we gather this morning, one-third of the people of Latin America lives on less
than two dollars a day. Major economies in the region face severe economic,
political, and security challenges.
We have a lot of work to do to realize President Bush's vision of an American
hemisphere where each and every human being has the opportunity to realize his
or her full potential.
I am here today to tell you about the concrete actions that President Bush and his
economic team are taking to promote growth throughout the Americas and realize
that vision.
Economic Growth in the United States. The single most important thing the United
States Government can do to promote growth throughout the hemisphere is to
ensure that the U.S. economy grows at its full potential. That's because our
economies are tied together.
You can see this especially in Florida. In 2001, Florida's international merchandise
trade reached nearly $71 billion. That's 15% of Florida's gross state product.
Florida is the nation's third largest exporter of high-tech products, many of which
are exported to Latin America. Over 1,100 foreign firms are located in Florida. In
1999 - the last year for which figures are available - Florida attracted over $36
billion in foreign investment. That foreign investment created more than 286,000
jobs.
Because our economies are tied together, economic growth in the United States is
important for the hemisphere as a whole. And it is clear that the U.S. economy is
now growing again, thanks to decisive leadership by President Bush.
We cut taxes at exactly the right time, providing important stimulus to the economy
just as it was emerging from the economic slowdown we inherited.
Our trade agenda is once again energized. Securing passage of Trade Promotion
Authority from Congress for the first time in nearly a decade enabled us to renew
the Andean Trade Preferences Act and will help us conclude a Free Trade
Agreement with Chile, a Free Trade Agreement of the Americas, and a successful
round of negotiations in the WTO.
After the exposure of a few, but startling, corporate accounting scandals, President
Bush acted decisively to restore investor confidence in our stock market.
After our citizens were attacked and our economy threatened, President Bush led
an international coalition to fight terrorism and protect our people and our
economies.
The President's strong leadership is paying off. We have now completed a fourth
consecutive quarter of growth. We believe that in the quarter just ended the U.S.
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economy probably grew at least 3%. We expect that growth to continue next
quarter. Five consecutive quarters of growth is good. 3% growth is good, but not
good enough. President Bush and his economic team will not be satisfied until
every American who wants a job has one.
Economic Growth in the Americas. Strong policy leadership is paying off elsewhere
in the Hemisphere. EI Salvador, which has implemented key structural reforms to
strengthen public banks, improve financial supervision, and further expand the role
of the private sector, is expected to grow by 3% this year. Chile, which ranks
among the most open, competitive and economically stable countries in the region,
also is likely to grow by 3%.
Many countries, however, are not growing at their full potential. I'd like to talk about
some of the economies in the region facing particular challenges.
Argentina. As we all know, Argentina has faced extreme economic hardship over
the last year. This Administration has backed four extensions this year on
payments to the IMF (totaling $4.9 billion).
There is reason to be encouraged about Argentina, as recent reports indicate that
parts of Argentina's economy have stabilized and that conditions there may have
bottomed out.
As Secretary O'Neill has said, we want Argentina to succeed. We are prepared to
support additional international financial assistance as soon as a sustainable
economic program is developed. The IMF and the Argentine Government have
been working towards an agreement, and we hope that an agreement may be
reached soon.
Brazil. We supported the August decision to provide an expanded IMF lending
package to Brazil because of confidence in the current policy mix and the firm belief
that the short term liquidity pressures faCing Brazil can be alleviated through
continuity of such policies. To ensure that the large majority of IMF resources are
provided only if sound policies are observed, the program "backloads" the funds.
That is, Brazil will get the majority of the IMF loan only if it adheres to sound policies
such as maintaining fiscal prudence and taking concrete steps to reform major
impediments to growth such as the current tax code. Commitments by the two
major Presidential candidates reaffirming support for the program have helped
reduce the uncertainty going forward.
Colombia. Colombia faces difficult economic conditions and security concerns. But
President Uribe has a strong agenda, appropriately focused on economic reforms
to stimulate growth and create stability. We support these efforts. They deserve
the support of the international community.
Uruguay. The United States also supported a $3.8 billion official sector package for
Uruguay, and drew on the U.S. Exchange Stabilization Fund to provide a short-term
bilateral bridge loan until IMF financing was put in place. The Government of
Uruguay's strategy to address its difficulties - particularly in the banking sectorand its commitment to implement that strategy convinced the official community to
support the package. The results are encouraging. We have since seen increased
stability in the financial system and continued strong performance by the
Uruguayan authorities. Uruguay still faces a difficult regional economic
environment, but its leaders have shown a commitment to necessary reforms and
long-term economic goals. Uruguay merits international support.
With economic uncertainty in the region, our assistance in helping meet sustainable
economic objectives is more important than ever.
Our top priority for the countries of the Hemisphere is to generate growth and raise
productivity through macroeconomic stability, open markets and private sector
initiatives. Sustained economic growth raises living standards and reinforces
political and social stability.
The key to sustained economic growth is increasing productivity.
We know that productivity growth is hampered if a country's most critical asset - its
people - is unable to take advantage of technological progress. The higher Income
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countries of the Western Hemisphere region have demonstrated their capacity to
compete at the most sophisticated technological level. This is especially true in
places where people have good access to education and are therefore capable of
leveraging this technology. Chile and Uruguay have been particularly successful in
this regard.
Nor can you ignore the fact that if people's basic needs for food, shelter and clean
water are not met, growth is severely curtailed. That is why Secretary O'Neill has
made access to clean water a development priority.
Governments can best foster growth by creating an attractive investment climate of
economic and financial stability. Sound monetary policies, coupled with a stable
exchange rate, disCiplined fiscal policies and sustainable debt levels, inspire
confidence in financial markets and encourage capital investment. Economic
openness and competition spur the exchange of technology and ideas. Investing in
health and education allows individuals to take advantage of new opportunities.
Transparency within the public and private sectors, and enforcement of the rule of
law are critical to business-led growth. These policies generate a sound investment
climate, which paves the way for private sector led growth.
President Bush is committed to supporting the poorest countries, and helping them
climb out of debt. In July, World Bank donor countries agreed to deliver a
significant portion of International Development Association resources -- 18-21 % -in the form of grants rather than loans. Grants avoid burdening needy countries
with unnecessary debt. And will therefore be targeted towards HIV/AIDS programs,
natural disaster reconstruction, and those countries that are debt vulnerable, facing
post-conflict situations, or extremely poor.
We also believe in helping countries that help themselves. In March, President
Bush announced a new Compact for Development. The fundamental belief behind
this compact is mutual accountability - a hard link between aid and policy
performance. A key component of the Compact is the Millennium Challenge
Account. This account increases aid to the poorest good performing countries over
the next three years to $5 billion in 2006, which is roughly a 50% add-on to our
current core assistance. This is new money that will supplement existing programs,
not displace them. We will continue in addition a core assistance budget of $10-11
billion, to provide development and humanitarian assistance to a broader group of
countries.
The role of the private sector.
Furthermore, we know that growth ultimately comes from investing in people and
encouraging entrepreneurship in the private sector. Governments do not have all
the answers.
Countries, businesses and individuals must work together to identify the areas
where progress is needed.
A good example of how we countries, businesses and individuals can work together
is the Partnership for Prosperity, launched by President Bush and President Fox in
September of 2001. The Partnership brings the public and private sectors of both
countries together to improve access to capital, share best practices and technical
expertise, build capacity for future growth, and link institutions with shared goals.
Through a series of conferences, round-table discussions, and technical missions,
the Partnership has identified over 30 specific projects to build out these themes.
Leadership for many of the projects resides completely in the hands of the private
sector. To cite just one example, private sector experts in housing finance are
working closely with Mexican authorities to help deepen the primary and secondary
mortgage markets in Mexico. This will make it easier and cheaper for Mexicans to
buy new homes, and also making .it possible for Mexicans to take full advantage of
the investment they already have In eXisting housing stock.
The Partnership for prosperity also includes several projects designed to lower the
cost of remittances. Remittances are important not just to the Mexican economy,
but to many economies in Latin American and the Caribbean. According to the
Inter-American Development Bank, in 2001, people living In the United States sent
$23 billion of hard-earned wages home to family and friends in Latin America and
the Caribbean.
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At least one study that shows that children whose families receive remittances stay
In school longer than children of families who do not receive remittances.
But you don't need academic research to see that remittances make a difference.
$23 billion is a lot of money put directly in the hands of people who need it most to
spend as they see fit.
Remittances are not free, however. It costs money to send money. A recent
McKinsey article reports that the cost can be as much as 20%. An immigrant
sending $250 home, therefore, can pay up to $50 in fees and exchange rate
conversion costs. Reducing these fees by 50% can have a real world impact for
people who depend on the remittances.
Accordingly, a key component of the Partnership for Prosperity is to reduce the cost
of sending money from the United States to Mexico. Much of this work will
immediately benefit other countries In Latin America as well. Other aspects of the
work can be replicated elsewhere if they are successful in Mexico. The United
States' Executive Director of the Inter-American Development Bank, Jose Fourquet
coordinates the United States' efforts concerning this aspect of the Partnership for
Prosperity.
We seek to reduce the cost of remittances in three ways.
First, we work to encourage competition and innovation. Increasingly, we see
banks and credit unions offering competitive remittance products and we applaud
them. Since President Bush and President Fox launched the Partnership for
Prosperity, we have seen Citibank, Bank of America, Wells Fargo, and others
launch new, low-priced ways to send money to Mexico.
Also, we try to protect competition and innovation from over-regulation. We have
taken care, for example, to implement terrorist financing regulations such as
customer identification requirements so as to allow financial services companies to
continue providing services to immigrants and to offer additional options for sending
money.
Second, we work to increase financial education. Competition brings additional
options. But options don't matter if people don't know about them. To increase
financial literacy, Secretary O'Neill established the Treasury's first Office of
Financial Education, headed by Deputy Assistant Secretary Judy Chapa. The
Treasurer of the United States, Rosario Marin, also works tirelessly to promote
financial literacy. Through our First Accounts pilot program, we provided funds to
financial institutions and community based organizations that provide education and
services to people who do not have bank accounts. To take just one example,
Treasury has provided over $1.8 million in grants from both First Accounts and our
Community Development Financial Institutions Fund to the Latino Community
Credit Union in North Carolina, which has one of the United States' fastest growing
Latino communities.
Third, we are working to improve the systems through which remittances are
made. The Federal Reserve Bank is working with Mexico to allow money to be
transferred through the Automated Clearing House system - a system we use here
in the United States. When completed next year, this project will reduce the cost of
sending money to Mexico to $1 or less per transfer. We are working with financial
institutions to ensure that those cost savings are passed on to consumers. If
successful, this project can be replicated elsewhere in Latin America.
As we reduce the costs, we increase the amount of money that gets home,
increasing the amount of money available to finance the purchase of consumer
durables, the construction and improvement of homes, and the expansion of small
businesses. With more than $23 billion dollars in remittances flOWing to Latin
America and the Caribbean each year, these projects can make result in hundreds
of millions more finding their way to those economies.
Conclusion
In promoting these policies, we must remind ourselves that there is no "quick fix" for
economic growth. Good results require a patient and sustained commitment over a
long period. I look forwarding to working with you as we promote growth throughout
the Americas and create the opportunity for every citizen of the Americas to realize
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PO-3531: Remarks by Ken Dam delivered to the Miami Herald's Sixth Annual Conferenc... Page 5 of 5
his or her full potential. Thank you.
http://WWW.lfeaS.gOV/press/rele3Ses/~03531.htm
4/2112005
o
EPA R T 1\1 E N T
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T REA SUR Y
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..................................
OmCE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C .• 20220. (202) 622.2960
For Immediate Release
Tuesday, October 15, 2002
Contact: Rob Nichols
(202) 622-5500
Senior Treasury Official Conducts Press Briefing Tuesday, Oct 15th in Florida
Deputy U.S. Treasury Secretary Ken Dam will brief the media at 9:00 am on Tuesday,
October 15th after he speaks at Miami Herald's" Americas Conference" in Miami, FL.
The press briefing will take place in the Marbella Room in the Biltmore Hotel in Coral
Gables. Dam speaks at 8:30 am. Logistical questions regarding the press conference
should be directed to Pat San Pedro at 305-588-9088. For other questions call Rob
Nichols at 202-622-5500.
-30-
PO-3532
-
For press reierues, speeches, public schedules and official biographies, call our 24~our fax line at (202) 622·2040
'U S Govemmenl Printing Office 1998 - 619-559
PO-3533: TREASURY SECRETARY PAUL O'NEILL TRAVELS TO IOWA AND MI...
Page 1 of 1
I-·HLSS HOOM
FROM THE OFFICE OF PUBLIC AFFAIRS
To view or print the PDF content on this page, download the free Ado/Je(r;' AUl)/Jal(w) R0(Jriel'.'.
October 15, 2002
PO-3533
TREASURY SECRETARY PAUL O'NEILL TRAVELS TO IOWA AND MISSOURI
TO
PROMOTE PRESIDENT BUSH'S ECONOMIC AGENDA
Treasury Secretary Paul O'Neill will travel to three cities in two states next week to
discuss the economy.
During visits Monday, October 14 and Tuesday, October 15, to cities in Iowa and
Missouri the Secretary will meet with employers and workers to hear about local
economic conditions and will discuss President Bush's efforts to strengthen the
economic recovery, from cutting taxes last year and enacting a stimulus package
this spring to advancing free trade now that the President has trade promotion
authority and repeating the President's call on Congress to enact terrorism risk
insurance and pension security.
The Secretary's objective is to meet with people on the front lines of the American economy
-small business owners, employees, individual investors, business leaders, economists and
farmers - to discuss where our economy stands, the impact of the policies we have put in
place, and the steps we are taking as we move forward. While on this tour, the Secretary
will meet with local employers and visit local businesses where he will speak to employees.
Related Documents:
•
Open Press Events of the Secretary's Trip
http://www.treas.gov/press/releases/po3533.htm
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PO-3534. Treasury Secretary O'Neill Travels to Iowa and Missouri to Promote President ...
Page 1 of 1
I-'HLSS fiOOM
FROM THE OFFICE OF PUBLIC AFFAIRS
October 15, 2002
PO-3534
Treasury Secretary Paul O'Neill Travels to Iowa and Missouri to Promote
President Bush's Economic Agenda
Treasury Secretary Paul O'Neill will travel to three cities in two
states next week to discuss the economy.
During visits Monday, October 14 and Tuesday, October 15, to
cities in Iowa and Missouri the Secretary will meet with
employers and workers to hear about local economic
conditions and will discuss President Bush's efforts to
strengthen the economic recovery, from cutting taxes last year
and enacting a stimulus package this spring to advancing free
trade now that the President has trade promotion authority and
repeating the President's call on Congress to enact terrorism
risk insurance and pension security.
The Secretary's objective is to meet with people on the front
lines of the American economy -small business owners,
employees, individual investors, business leaders, economists
and farmers - to discuss where our economy stands, the
impact of the policies we have put in place, and the steps we
are taking as we move forward. While on this tour, the
Secretary will meet with local employers and visit local
businesses where he will speak to employees.
Open Press Events of the Secretary's Trip
http://www.treas.gov/press/releases/po3534.htm
111612002
PO-3535: Remarks by Treasury Secretary O'Neill before the St. Louis Regional Chamber ... Page 1 of3
PHLSS HOOM
FROM THE OFFICE OF PUBLIC AFFAIRS
October 15, 2002
PO-3535
Remarks by Treasury Secretary Paul O"Neill before the St. Louis Regional
Chamber and Growth Association
Good morning.
In the past year and a half, we've seen some tough times for the American
economy. We've suffered through a bursting stock market bubble, terrorist attacks
on New York and Washington, and discoveries of corporate fraud. We were
wrestling with recession when President Bush entered office, and it took the better
part of a year to shake it off, even as its consequences have lingered. People have
lost jobs, and retirement accounts are hurting. Economic security is on all our
minds.
Through all of this turmoil and hardship, the American consumer has continued to
bolster our economy and American businesses have continued to innovate and
improve productivity to prepare themselves for the next surge forward. The
extraordinary flexibility of our economic system and the spirit of those who work
within it are key reasons for the brevity of the recession, and the steady march of
our recovery.
American innovation - good ideas put to work - drives our productivity, creates
jobs, and raises our standard of living. I have seen many examples, as I have
traveled to meet workers and visit businesses across the United States, of new
ideas being put into practice to boost productivity, modernize communities, and
create prosperity.
In Washington, we are working hard to support your efforts. From the beginning of
his Administration, President Bush has embraced economic freedom and individual
accountability as the foundation for continuing prosperity. His economic plan
creates jobs, improves education and expands opportunities to save and invest.
First, the President's historic tax relief program last summer reduced taxes for the
average family of four by $1,040 a year, and put cash in consumers' pockets when
we needed it most: last August and September. Then in March, he signed the Job
Creation Act to stimulate investment in our economy - a second major
accomplishment.
By the end of 2002, these two tax relief programs will have allowed the private
sector to create an additional one million jobs with resources that would otherwise
have gone to
Washington.
Our third victory for the economy has been new standards for corporate
accountability. These ensure that people saving for their future can get accurate
information for sound investment decisions. We are holding corporations
accountable for telling the truth to investors and employees, so Americans can save
for college tuitions and comfortable retirements with greater confidence. I am
confident the worst is behind us for corporate scandals - call them what you will,
but I can't believe any CEO still standing would be stupid enough to falsely certify
their books. Not when jail time is the certain consequence.
And the most recent major accomplishment for our nation's prosperity is winning
Trade Promotion Authority, which the President will use to open international
markets to US exports, creating jobs here at home.
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PO-3535: Remarks by Treasury Secretary O'Neill before the St. Louis Regional Chamber ... Page 2 of 3
Today, key economic fundamentals such as inflation, real wages, productivity,
interest rates, business profits, and the housing sector are all strong because of the
resilience and determination of the American people, and the flexibility of our banks
and financial institutions, I am confident that we will return to 3 to 3,5% growth
rates by the end of this year, and that growth will create jobs and renew our
prosperity, But to a lot of folks out there watching, it doesn't feel like a recovery yet
And the President won't be satisfied until everyone who wants a job has a job, He's
advancing the rest of his economic agenda to strengthen the recovery,
For nearly a year the President has been asking Congress to enact terrorism risk
insurance, Today, over $15 billion in construction projects are not going forward
because of the lack of terrorism risk insurance, Finishing this legislation is the
single thing we could do in Washington to create jobs in the short run, We also
need President Bush's Homeland Security plan, because the phYSical security of
our nation is essential to prosperity, The brief economic freeze immediately
following September 11 demonstrated that reality all too well, We are working with
Congress to complete the new Department of Homeland Security, which would
better organize and deploy our resources toward preventing further attacks,
We'll also work with Congress to restrain wasteful government spending, because
overspending in Washington burdens our economy with higher debts and taxes,
And the President has called on Congress to protect individuals' control over their
401 (k) holdings without undue constraints from employers, Your retirement nest
egg is yours alone - you earned it, and you should have full legal rights to control it
The President's concern for the health of our recovery led him to ask the courts to
intervene in a labor dispute and reopen the ports on the west coast. By some
estimates, the port closures were costing the US economy as much as $2 billion a
day,
Plants were closing and workers were being sent home because important
supplies were held up by the port closures, We won't know for some time the full
effects on our economy of this 1O-day disruption, What we do know is that our
economic recovery is crucial to the prosperity of all Americans, and the President
acted deciSively to prevent the recovery from being derailed,
As we emerge from the turbulence of last year's recession, we're gaining new
perspective on the recent past, and we're applying that perspective to the decade
still beginning, In short, we are facing our problems, dealing with them as a nation,
and moving forward,
The question for our new era is not whether we can or should continue the
economic success we enjoyed in the 1990s, The question is how leaders of
business and government should incorporate the best aspects of the 90s - growth,
productivity, and innovation - into the emerging decade, while actively working to
make this new era a time of both personal responsibility and public integrity, How
can we reaffirm the link between value and values, and restore public confidence in
American enterprise? In my view, the answer is simple: honesty and
accountability, With leadership that respects and promotes these values,
everything is possible, Without it, nothing is possible, That is as true for American
corporations as it is for American government. In my experience, the example from
the top becomes the model for everyone below,
In the economic domain, I believe the connection between creating value and
affirming values in American business has always been strong, Far away from the
headlines, most business leaders, from mom and pop shop-owners to corporate
chiefs, have always treated their shareholders and employees with honesty and
fairness, Today, however, doing your job with competence is not enough, Leaders
must stand up and set an example not just for their employees, but for the general
public as well. Honesty in business is the new patriotism, There is nothing better
business leaders can do for this country right now than restore faith in the system
that has made it great. The President's leadership at home and abroad is
smoothing our road to recovery, and increasing the prospects for peace and
prosperity around the world, We will continue to pursue our vision, in which
Americans have the greatest possible opportunity to live the lives we dream of:
pursuing our chosen professions, owning a home, raising our children to be happy
and successful, engaging in our communities, and attaining financial
independence,
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PO-3535: Remarks by Treasury Secretary O'Neill before the St. Louis Regional Chamber '" Page 3 of 3
Thank you.
http://www.treas.gov/press/releases/po3535.htm
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PO-3536: Treasury Secretary O'Neill Announces Wenzel to Serve
Page 1 of 1
PRlSS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
October 15, 2002
PO-3536
Treasury Secretary O'Neill Announces Wenzel to Serve
Today, Treasury Secretary Paul O'Neill announced that Bob Wenzel, Deputy
Commissioner, Internal Revenue Service, will serve as the Acting Commissioner,
upon Commissioner Rossotti's departure on November 6, 2002.
"I am pleased that Bob will serve as the Acting IRS Commissioner," stated Treasury
Secretary Paul O'Neill. "We're fortunate to have such an experienced person on
board. Bob will provide continuity of leadership for this transition period, and keep
the IRS on the course Commissioner Rossotti charted. It is important to not turn
back the clock, but rather keep forward momentum going and progress on track."
Mr. Wenzel has served as the Deputy Commissioner of Internal Revenue since
1998. He is the highest-ranking career official in the Internal Revenue Service, with
responsibility for the day-to-day operation and strategic management of the United
States tax administration system. As the top career advisor to the Commissioner of
Internal Revenue, he directs all major decisions regarding the operation of the
agency and has ultimate responsibility for management and oversight of the
nation's tax administration system. In this capacity, he is responsible for IRS
programs that annually respond to over 124 million customer service contacts,
process over 227 million tax returns, issue 182 million tax refunds, account for $1.9
trillion in revenue receipts, examine 815 thousand returns, collect $32 billion in
delinquent taxes, and investigate 4,000 tax fraud and related financial crimes. Mr.
Wenzel first joined the IRS in 1963 as a Revenue Officer in Chicago.
http://www.ueas.gov/press/releases/p03536.htm
1116/2002
PO-3537: Testimony of John Taylor on U.S. Economic Policy Toward Latin America
Page 1 of6
PHLSS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
October 16, 2002
PO-3537
U.S. Economic Policy Toward Latin America
and the Role of the International Financial Institutions
Testimony of John B. Taylor
Under Secretary of Treasury for International Affairs
Before the Subcommittee on International Trade and Finance
Senate Committee on Banking, Housing and Urban Affairs
I would like to thank Chairman Bayh and Ranking Member Hagel for holding this
hearing to discuss U.S. economic policy toward Latin America and the role of the
international financial institutions.
Strengthening U.S. ties and raising economic growth in the many countries of Latin
America are central to President Bush's agenda, not only because we want to help
our neighbors, but because their stability is in our interest. The United States
benefits directly from having strong neighbors and reaps tangible economic gains
when the region fares well. But we risk losses when Latin America undergoes
economic turmoil - not least because of the increasing integration within the
hemisphere.
When I testified before this committee last February, economic and financial
conditions throughout much of Latin America, with the exception of Argentina,
appeared to be picking up after the slow growth last year associated with the
recession in the United States and the global slowdown. However, since then,
conditions throughout the region became more difficult, and economic growth this
year is likely to be zero at best. This is in contrast to other developing and
emerging market regions where growth is positive this year - about 6% in Asia, 3%
in Eastern Europe, and 3% in Africa. Clearly raising economic growth in the region
must remain a high priority.
An Economically Diverse Region
Considering Latin America as a single entity overlooks its diversity - from extremely
poor nations confronting difficult development challenges to economies with
sophisticated financial markets. Some countries in Latin America are performing
well economically; they have implemented good economic policies. Others are just
beginning to implement good policies, and have much to look forward to. Still
others have recently experienced crises or are potentially in danger.
Mexico and Chile's strong economic policies and sound political foundations have
set them apart in the region. Chile remains ranked among the most open,
competitive, and economically stable countries in Latin America - factors that help
to explain its average annual growth rate of 6.8% throughout the 1990s, a figure
well above the regional average of 3.3%. After experiencing high inflation (70%
annual average) and near-zero growth throughout the 1980s, Mexico's economy
grew by an average of 5% per year between 1996-2000 after its leaders had begun
to implement a series of key free market reforms - including the North American
Free Trade Agreement.
A number of countries are striving to implement strong economic policies, but still
have a way to go to realize their full economic potential. EI Salvador stands out
among those that have made tremendous strides by pursuing sound policies, while
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PO-3537: Testimony of John Taylor on U.S. Economic Policy Toward Latin America
Page 2 of6
Bolivia, Colombia, and Peru are also working hard to implement a strong policy mix
that will enhance stability.
Other countries have experienced significant turbulence in recent months despite
policy fundamentals that have generally been strong. The United States is closely
watching Brazil. and strongly supported IMF assistance in August because its
economic policies have been strong. Events in neighboring Argentina contributed
to significant difficulties in Uruguay this summer, but the Uruguayan authorities
have responded strongly in cooperation with the international community.
Finally, Argentina is beginning to stabilize though it remains in crisis following
significant deterioration in 2000 that culminated in late 2001 with a freeze on bank
deposits, an end to dollar-peso convertibility, and a default on its debt. Argentina
and the IMF are working to conclude an agreement in the near future that will help
Argentina to strengthen its monetary and fiscal framework.
In the wake of Argentina's crisis, the experiences of different Latin American
economies and other emerging markets have been instructive. In the months after
Argentina's collapse, we saw little impact on other emerging market countries, even
in Latin America. This stands in contrast to the effects of Russia's crisis in 1998,
which was accompanied by immediate and sharp rises in the borrowing spreads for
other emerging markets, even those that had few real links to Russia. It seems that
in recent years investors have become more skilled at differentiating between
countries and markets based on fundamental economic assessments. We have
sought to promote a further evolution in this direction by emphasizing that policy
decisions will not be based on unfounded claims of contagion.
We have, however, supported programs where there was direct or fundamental
interdependence between countries - as in the case of the effect of Argentina on
Uruguay - in order to mitigate such effects.
Improving Prospects for Productivity Growth
Raising living standards and expanding support for democratic institutions in Latin
America depend critically on achieving higher levels of economic growth - a key
concern in a region where one-third of the people live on less than two dollars per
day. The United States is working to help create an environment where the private
sector can be the engine for productivity growth.
Productivity merits special emphasis because only by raiSing productivity - the
amount of goods and services that a worker produces per unit of time with the skills
and tools available - can countries raise per capita income. And the higher the rate
of productivity growth, the faster poverty will decline. Simply put, the ticket out of
poverty is higher productivity jobs.
Long-term trends in productivity growth have shown improvements in Latin America
in the 1990s. According to the Inter-American Development Bank (lOB), the 1990s
had higher productivity growth than the 1980s, reflecting economic reforms
especially in the macroeconomic areas. Productivity growth was 0.7 percent per
year in Latin America in the 1990s after averaging less than zero In the 1980s.
However, I am optimistic that productivity growth in Latin America could improve by
a much greater amount. While productivity growth was .0.7 percent in Latin America
in the 1990s, 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 would
make a huge difference in living standards over time.
The first step to raising productivity growth is gaining ~n understanding of why
productivity is so low. Productivity depends on two things: capital per worker and
the level of technology. If there are no impediments to the f~ow and accumulation of
capital and technology, then countries or areas that are behind In productivity
should have a higher productivity growth rate. More and more eVidence has been
accumulating that there are significant impediments to Investment and the adoption
of technology that are holding countries and people back.
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PO-3537: Testimony of John Taylor on U.S. Economic Policy Toward Latin America
Page 3 of6
The United States is seeking to reduce these impediments to higher productivity
growth by emphasizing the need for policy steps in three areas. As identified by
President Bush these three areas are: ruling justly, investing in people, and
encouraging economic freedom.
First, poor governance, the lack of rule of law or enforceable contracts, and the
prevalence of corruption create disincentives to invest, to start up new firms, and to
expand existing firms with high-productivity jobs. This has a negative impact on
capital formation and entrepreneurial activity.
Second, weak education systems impede the development of human capital.
Workers without adequate education do not have the skills to take on highproductivity jobs or to adopt new technologies to increase the productivity of the
jobs they do have. 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 during
the past decade. There are of course important educational success stories. For
example, in Brazil the Bolsa Escola program, which provides funds to families with
low incomes whose children attend school, has led to higher enrollments.
Third, too many restrictions on economic transactions prevent people from trading
goods and services or adopting new technologies. Lack of openness to trade, state
monopolies, and excessive regulation are all examples of restrictions that reduce
incentives for innovation and investment needed to boost productivity. 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.
Raising productivity rates involves steps to foster a stable macroeconomic
environment, boost the skills of individual workers, and introduce market forces to
help channel resources most effectively. In promoting these policies, however, we
must remind ourselves that there is no shortcut to sustained economic growth and
that good results require a patient commitment over a long period of time.
Achieving U.S. Policy Objectives
The United States is seeking to encourage increases in economic growth in Latin
America through an array of concrete policy steps at the bilateral, regional, and
multilateral levels.
President Bush signaled the U.S. commitment to bilateral efforts earlier this year
when he proposed a dramatic increase in foreign aid through the Millennium
Challenge Account initiative. Beginning in 2004, increased assistance will be
available to strong performing countries - those that govern justly, invest in their
own people, and create a favorable climate for private enterprise - with the total
increase reaching $5 billion per year starting in 2006. These funds provide a
powerful incentive for countries to create an environment conducive to growth.
The United States has also launched several country-specific initiatives, such as
reform of the North American Development Bank (NADBank). President Bush has
long recognized the need for serious reform of this instiution. He and President Fox,
who had also proposed reforms, decided to do something about the problem. The
United States and Mexico established NADBank in 1993 for the purpose of helping
border communities cope with the environmental pressures relating to the North
American Free Trade Agreement in the U.S.-Mexico border region. But during its
seven years of operation, the overall performance of NADBank was unsatisfactory.
NADBank had 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.
We have made much progress in the reform effort. In order to better use the
authorized funds at NADBank, the reforms called for increasing the amount of
support from grants and low interest rate loans, allowing NADBank projects to go
deeper into Mexico, merging the boards of NADBank and its project-certification
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PO-3537: Testimony of John Taylor on U.S. Economic Policy Toward Latin America
Page 4 of6
sister institution the Border Environmental Cooperation Commission, and allowing
retained earnings to fund supply-side water conservation projects on both sides of
the. border. The reforms were negotiated last spring and summer. The needed
legislation has passed the House and is pending in the Senate.
A~?t~er example of an initiative with Mexico is the Partnership for Prosperity _ an
Initiative aimed at strengthening Mexico's economy through a number of measures
to Improve access to capital, build capacity, and stimulate private investment in
areas that do not yet fully benefit from NAFTA.
One key area that could greatly facilitate the flow of capital to Latin American
countries involves reduCing the cost of remittances sent from abroad. The InterAmerican Development Bank estimates that Latin Americans living in the United
S.tates send an average of $200 to their native countries an average of seven to
eight times per year. These remittances surpassed $23 billion last year - about
one fifth of total worldwide remittances - and represent an enormous resource
tran~fer to families and businesses that can make direct use of the funds. Although
remittance charges are declining, they still range from 6-15% of the remitted
amount plus an eXChange margin that ranges from 3-5%. Increased competition as
more and more traditional financial institutions offer remittance products should help
to lower costs.
Trade has enormous significance for spurring productivity gains and growth in the
region. With approval of Trade Promotion Authority, we are strongly committed to
rapid progress in reduCing trade and investment barriers throughout the
hemisphere. The Doha agenda of global trade talks will give particular emphasis to
promoting development.
At the same time, the United States expects to sign a free trade agreement with
Chile soon, will continue to work towards completion of the Free Trade Area of the
Americas by 2005 as co-chair of the process with Brazil, and has announced the
U.S. intention to begin negotiating a free trade agreement with Central American
countries starting the first of this coming year.
The International Financial Institutions
At the World Bank and Inter-American Development Bank, the United States is
supporting development projects and programs that address the basic causes of
low productivity, including projects to raise health and education levels, increase
access to clean water and sanitation, and improve the climate for private sector
development. A key element of this strategy has been the successful U.S.-led
effort to have the International Development Association (IDA) expand the amount
of grant financing it provides to poorer countries in order to boost development
prospects without adding to country debt burdens. We will also continue our efforts
to have the multilateral development banks make operational a system to better
measure, monitor and manage for development results. Measuring development
results figures prominently in the most recent IDA round in that the agreement's
contribution structure allows donors to increase their funding levels if concrete
measurable results are achieved. We are convinced that donors and developing
countries will benefit from routinely quantifying development achievements and
understanding the reasons for success and failure.
Within the IMF, the United States is working to strengthen mechanisms to detect
potential crises early and act preemptively to address sources of vulnerability. We
are also working to ensure that the IMF is effective in situations when a financial
crisis develops. The IMF is most effective when it focuses on the areas central its
expertise: monetary, fiscal, exchange rate, financial sector, and debt management
policies. At the same time, we are working to increase discipline in terms of access
to IMF resources to reduce the size of IMF packages and thereby reduce the risk of
moral hazard - i.e., the belief that in a crisis, large-scale IMF assistance will protect
investors from the consequences of their decisions. We have also refrained from
providing longer-term bilateral loan assistance in crisis cases, as was done in the
past. Emphasizing that the IMF must be the key sourc~ of .emergency support and
avoiding recourse to bilateral assistance all?~s the availability of IMF resources to
act as a natural constraint on the size of offiCial finanCing packages.
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111612002
PO-3537: Testimony of John Taylor on U.S. Economic Policy Toward Latin America
Page 5 of6
We have taken into account a number of considerations to assess when and
whether the. internation~1 financial institutions should provide support to countries,
particularly In light of crises and other challenges in Latin America.
First, and most important, countries must be committed to implementing credible
and sustainable economic policies. Such policies should embrace a number of
principles: strong or improving fiscal accounts, incentives for private sector
investment in order to promote growth, steps to strengthen financial systems, and
sound monetary and exchange rate policies. Not all actions can be accomplished
immediately, of course, but it is important to begin the process as a means of
putting economies back onto a sustainable path, as a signal of the authorities'
intentions, and as a first step toward re-establishing confidence.
Second, experience has shown that lending programs that lack strong ownership by
a country's leaders are likely to fail; we should not support such programs.
Narrowing the range of conditionality to critical issues helps increase country
ownership over effective programs. And, in the context of crisis lending, providing
official sector support to countries with strong ownership over high quality economic
programs that promote economic growth is the best way to ensure that official
sector interventions in time of crisis are laying the basis for a return to economic
health over the long term.
Third, it is important for the IMF and other institutions to structure international
financial and development packages properly so that strong incentives for good
policy performance are maintained. Prior actions that must be completed before a
lending program begins, for instance, can sometimes be a useful means for a
country to demonstrate its commitment before international funds are disbursed.
"Backloading" financial assistance, with smaller amounts of money provided initially
and larger amounts provided later on, can help to ensure that a country's
performance does not weaken over time. Lending conditions within a program
should also be carefully targeted, focused on those issues that contributed to a
crisis and addressing steps that are most essential for future success. Not every
crisis results from a fiscal deficit, for instance, and so not every program should
automatically require fiscal retrenchment.
Argentina, Brazil, and Uruguay
Let me now provide an update on three of the key countries in the region that have
received particular attention in recent months - Argentina, Brazil, and Uruguay.
Argentina has not yet reached a new agreement on an IMF program, but has
recently made progress in developing a short-term program to restore monetary
stability. We hope that an agreement will be reached soon. Bush Administration
officials, including Secretary O'Neill, have stated on numerous occasions both
privately and publicly that we want Argentina to succeed. The U.S. has strongly
supported efforts to provide Argentina breathing room as it works with the IMF to
develop a sustainable economic plan. For example, the United States has backed
four extensions this year of repayments to the IMF (totaling about $4.9 billion) and
has also worked to accelerate lending from the World Bank and Inter-American
Development Bank.
But finalizing an agreement between the IMF and Argentine Government has not
happened quickly. The extensive economic problems Argentina has confronted - a
dramatic reduction in output, debt default, extensive deposit and foreign exchange
restrictions, provincial government deficits, and a sharp depreciation of the
exchange rate - have required a significant amount of time and attention. Given
the importance of Argentina's economy to the region and Argentina's need to get
back on an economically sustainable path, we believe it is essential that Argentina's
monetary and fiscal framework be strengthened as a basis for a new lending
program. Encouragingly, in recent weeks, there have been some signs that parts of
Argentina's economy have stabilized.
For Brazil, we strongly supported the August decision to provide an expanded IMF
http://www.treas.gov/press/releases/p03537.htm
111612002
PO-3537: Testimony of John Taylor on U.S. Economic Policy Toward Latin America
Page 6 of6
lending package given confidence in the current policy mix and the firm belief that
the short term liquidity pressures facing Brazil can be alleviated through continuing
such policies. Furthermore, the design of the program "backloaded" the large
majority of IMF resources so that much of the financing will be provided only if
sound policies are maintained. The key policy conditionality underlying the program
includes maintenance of fiscal prudence and concrete steps to reform major
impediments to growth such as the current tax code. Comments by presidential
candidates in recent weeks reaffirming support for the main pillars of the program
increase the chances of its success.
In Uruguay, the United States supported a $3.8 billion official sector package, and
drew on the Exchange Stabilization Fund to provide a short-term bridge loan until
IFI financing could be put in place. We did so because Uruguay had a strong
record of sound policies and we were convinced that the Uruguayan Government
had a strategy to address its difficulties - particularly in the banking sector - and
was committed to implementing that strategy.
While we do not yet know the final outcome, initial results in Uruguay have been
encouraging. Since the IMF program was announced, we have seen increased
stability in the financial system and continued strong performance by Uruguay.
Under the IMF program, net depOSits in the non-intervened banks have increased.
As a result of this improvement in financial sector confidence, only one-third of the
$1.5 billion in IMF resources targeted for the financial sector has been used.
Uruguay still faces a difficult regional economic environment, but its leaders have
shown their willingness to commit to necessary reforms and long-term economic
goals.
Outlook for the Region
In spite of recent turbulence, I remain confident about the region's prospects. First,
the current economic cycle of slow or negative growth will improve, especially as
the U.S. economy continues to gain strength. At roughly 38% of GOP, exports
comprise a large percentage of income for the Latin America region as a whole.
I believe that many countries within the region have made important progress over
the past decade in strengthening the economic institutions and poliCies that will
improve their growth prospects. In a number of countries, for instance, central
banks have focused more on keeping inflation low. And many countries have
abandoned soft exchange rate pegs and maintained floating exchange rate
regimes, helping them to adjust more easily when faced with economic shocks.
Others, such as EI Salvador, have been successful with full dollarization.
Across the region, the private sector now contributes a larger percentage of GOP
than it did during the 1980s, which will help Latin American economies regain their
dynamism more quickly. Many countries now have more extensive trade and
financial linkages amongst themselves and with developed economies - such as
the United States and Europe - than they did in the past. This is a factor that will
help to accelerate their recovery once conditions improve. Finally, Latin America
also has a strong human capital and resource base that provides a solid underlying
foundation for future growth.
http://www.treas.gov/press/releases/p03537.htm
1116/2002
PO-3538: Testimony of Olson before the Senate Appropriations Subcommittee on Treasu... Page 1 of3
PHLSS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
October 16, 2002
PO-3538
TESTIMONY OF PAMELA OLSON, ASSISTANT SECRETARY (TAX POLICY),
UNITED STATES DEPARTMENT OF THE TREASURY
BEFORE THE SENATE APPROPRIATIONS SUBCOMMITTEE ON TREASURY
AND
GENERAL GOVERNMENT
ON CORPORATE INVERSION TRANSACTIONS
Mr. Chairman, Senator Campbell, and distinguished Members of the
Subcommittee, I appreciate the opportunity to appear today at this hearing relating
to corporate inversion transactions.
Over the past year, several high-profile U.S. companies announced plans to
reincorporate outside the United States. The documents prepared for shareholder
approval and filed with the Securities and Exchange Commission cite substantial
reductions in overall corporate taxes as a key reason for the transactions. While
these so-called corporate inversion transactions are not new, there has been a
marked increase recently in the frequency, size, and profile of the transactions.
On February 28, 2002, the Treasury Department announced that it was studying
the issues arising in connection with these corporate inversion transactions and the
implications of these transactions for the U.S. tax system and the U.S. economy.
On May 17, 2002, the Treasury Department released its report on the tax policy
implications of corporate inversion transactions. (A copy of the Treasury report is
attached.) The Treasury report describes the mechanics of the transactions, the
current tax treatment of the transactions, the current tax treatment of the companies
post-inversion, the features of our tax laws that facilitate the transactions or that
may be exploited through such transactions, and the features of our tax laws that
drive companies to consider these transactions.
Inversion transactions implicate fundamental issues of tax policy. The U.S. tax
system can operate to provide a cost advantage to foreign-based multinational
companies over U.S.-based multinational companies. The Treasury report
identifies two distinct classes of tax reduction that are available to foreign-based
companies and that can be achieved through an inversion transaction. First, an
inversion transaction may be used by a U.S.-based company to achieve a reduction
in the U.S. corporate-level tax on income from U.S. operations. In addition, through
an inversion transaction, a U.S.-based multinational group can substantially reduce
or eliminate the U.S. corporate-level tax on income from its foreign operations.
An inversion is a transaction through which the corporate structure of a U.S.-based
multinational group is altered so that a new foreign corporation, typically located in
a low- or no-tax country, replaces the existing U.S. parent corporation as the parent
of the corporate group. In order to provide context for consideration of the policy
issues that arise, the Treasury report includes a technical description of the forms of
the inversion transaction and the potential tax treatment of the various elements of
the transaction under current law. The transactional forms through which the basic
rein corporation outside the United States can be accomplished vary as a technical
matter, but all involve little or no immediate operational change and all are
transactions in which either the shareholders of the company or the company itself
are subject to tax. This reincorporation step may be accompanied by other
restructuring steps designed to shift the ownership of the group's foreign operations
outside the United States. The restructuring steps involving movement of foreign
subsidiaries are complex and varied, but, like the reincorporation itself, are
transactions that are subject to tax. When all the transactions are complete, the
foreign operations of the company will be outside of the U.S. taxing jurisdiction and
http://www.treas.gov/press/releases/p03538.htm
111612002
PO-3538: Testimony of Olson before the Senate Appropriations Subcommittee on Treasu... Page 2 of 3
the corporate structure also may provide opportunities to reduce the U.S. tax on
U.S. operations.
Market conditions have been a factor in the recent increase in inversion activity.
Although the rein corporation step triggers potential tax at the shareholder level or
the corporate level, depending on the transactional form, that tax liability may be
less Significant because of current economic and market factors. The company's
shareholders may have little or no gain inherent in their stock and the company may
have net operating losses that reduce any gain at the company level. While these
market conditions may facilitate the transactions, they are not what motivates a
company to undertake an inversion. U.S.-based companies and their shareholders
are making the decision to reincorporate outside the United States largely because
of the tax savings available. It is that underlying motivation that we must address.
The ability to achieve a substantial reduction in taxes through a transaction that is
complicated technically but virtually transparent operationally is a cause for concern
as a policy matter. As we formulate a response, however, we must not lose sight of
the fact that an inversion is not the only route to accomplishing the same type of
reduction in taxes. A U.S.-based start-up venture that contemplates both U.S. and
foreign operations may incorporate overseas at the outset. An existing U.S. group
may be the subject of a takeover, either friendly or hostile, by a foreign-based
company. In either case, the structure that results provides tax-savings
opportunities similar to those provided by an inversion transaction. A narrow policy
response to the inversion phenomenon may inadvertently result in a tax code
favoring the acquisition of U.S. operations by foreign corporations and the
expansion of foreign controlled operations in the United States at the expense of
domestically managed corporations. In turn, other decisions affecting the location
of new investment, choice of suppliers, and employment opportunities may be
adversely affected. While the openness of the U.S. economy has always made -and will continue to make -- the United States one of the most attractive and
hospitable locations for foreign investment in the world, our policies should provide
a level playing field. There is no merit in policies biased against domestic control
and domestic management of U.S. operations.
The policy response to the recent corporate inversion activity should be broad
enough to address the underlying differences in the U.S. tax treatment of U.S.based companies and foreign-based companies, without regard to how foreignbased status is achieved. Measures designed simply to halt inversion activity only
address these transactions at the surface level and in the short run. Measures that
are targeted too narrowly would have the unintended effect of encouraging a shift to
other forms of transactions and structures to the detriment of the U.S. economy in
the long run.
An immediate response is needed to address the U.S. tax advantages that are
available to foreign-based companies through the ability to reduce the U.S.
corporate-level tax on income from U.S. operations. Inappropriate shifting of
income from the U.S. companies in the corporate group to the foreign parent or its
foreign subsidiaries represents an erosion of the U.S. corporate tax base. It
provides a competitive advantage to companies that have undergone an inversion
or otherwise operate in a foreign-based group. It creates a corresponding
disadvantage for their U.S. competitors that operate in a U.S.-based group.
Moreover, explOitation of inappropriate income-shifting opportunities erodes
confidence in the fairness of the tax system.
The Treasury Department has made specific proposals relating to legislative and
regulatory changes that are needed to address these transactions and the
opportunities available through such transactions. Both the Senate Finance
Committee and the House Ways and Means Committee have held hearings on this
subject and members of both committees have crafted legislation in response to
these transactions. We are working closely with these committees to ensure the
enactment of appropriate legislation.
We also must address the U.S. tax disadvantages for U.S.-based companies that
do business abroad relative to their counterparts in our major trading partners. The
U.S. international tax rules can operate to impose a burden on U.S.-based
companies with foreign operations that is disproportionate to the tax burden
imposed by our trading partners on the foreign operations of their companies. The
U.S. rules for the taxation of foreign-source income are unique In their breadth of
http://wwW.lfeaS.gov/press/releases/po3538.htm
111612002
PO-3538: Testimony of Olson before the Senate Appropriations Subcommittee on Treasu... Page 3 of3
reach and degree of complexity. Both the recent inversion activity and the increase
in foreign acquisitions of U.S. multinationals are evidence that the competitive
disadvantage caused by our international tax rules is a serious issue with significant
consequences for U.S. businesses and the U.S. economy. A comprehensive
reexamination of the U.S. international tax rules and the economic assumptions
underlying them is needed. As we consider appropriate reformulation of these rules
we should not underestimate the benefits to be gained from reducing the complexity
of the current rules. Our system of international tax rules should not disadvantage
U.S.-based companies competing in the global marketplace.
As we consider these important issues, we must focus on the overarching goal of
maintaining the attractiveness of the United States as the most desirable location in
the world for incorporation, headquartering, foreign investment, business
operations, and employment opportunities, to ensure an ever higher standard of
living for all Americans.
http://www.treas.gov/press/releases/p03538.htm
111612002
PO-3539: Senior Treasury Official Announces Trip to Europe
Page 1 of 1
PH[S S ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
October 16, 2002
PO-3539
SENIOR TREASURY OFFICIAL ANNOUNCES TRIP TO EUROPE
Undersecretary for Enforcement Gurule to raise terrorist financing issues
Treasury Undersecretary for Enforcement Jimmy Gurule will travel to Switzerland,
liechtenstein, Luxembourg, Denmark and Sweden October 20-25, 2002.
Gurule is traveling to engage high-level European officials - in the banking, finance
and law enforcement communities - on matters relating to the fight against terrorist
finance.
As Under Secretary for Enforcement, Mr. Gurule provides oversight, policy
guidance, and support to the Treasury law enforcement components: the Bureau of
Alcohol, Tobacco and Firearms; the U.S. Customs Service; the Federal Law
Enforcement Training Center; the Financial Crimes Enforcement Network; the U.S.
Secret Service; the Executive Office for Asset Forefeiture; and the Office of Foreign
Assets Control.
Since the terrorist attacks of September 11,2001, Gurule has made fighting the
financial war on terrorism the top priority among Treasury's law enforcement
assets.
http://www.lfeas.gov/press/releases/po3539.htm
111612002
Page 1 of 1
PO-3540: Media Advisory: Backgroung Briefing on New Tax Shelter Regulations
-U'- ";..
-I
.,.,,--:
I-'HCSS HOOM
FROM THE OFFICE OF PUBLIC AFFAIRS
October 16, 2002
PO-3540
MEDIA ADVISORY:
BACKGROUND BRIEFING ON NEW TAX SHELTER REGULATIONS
Regulations to be Released at Briefing
Treasury Assistant Secretary for Tax Policy Pam Olson and IRS Chief Counsel B.
John Williams will hold a background briefing on new tax shelter regulations on
Wednesday, October 16, 2002 at 3:00 pm in room 4121 (the new media room).
This session will provide a synopsis of amended regulations that apply to the
disclosure of potentially abusive tax avoidance transactions and will also allow for a
Question and Answer session with Tax Policy staff. No cameras will be admitted-this is a "pen and pad" only briefing.
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.
http://www.treas.gov/press/releases/po3540.htm
11/6/2002
R(SS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
October 16, 2002
PO-3541
U.S. International Reserve Position
The Treasury Department today released U.S. reserve assets data for the latest week. As indicated in this table, U.S. reserve assets
totaled $75,554 million as of the end of that week, compared to $75,687 million as of the end of the prior week.
I. Official U.S. Reserve Assets (in US millions)
October 4, 2002
October 11, 2002
75,687
75,554
TOTAL
I. Foreign CUlTency Reserves
I
a. Securities
Euro
Yen
TOTAL
Euro
Yen
TOTAL
6,310
12,786
19,097
6,327
12,681
19,008
o
o
Of which, issuer headquartered in the Us.
b. Total deposits with:
10,410
b.i. Other central banks alld BIS
2,567
12,977
10,452
2,546
12,997
b.ii. Banks headquartered in the US.
0
0
b.ii. Of which, banks located abroad
0
0
b.iii. Banks headquartered outside the US.
0
0
b.iii. Of which, banks located in the U.S.
0
0
20,864
20,822
11,707
11,684
11,042
11,042
0
0
2. IMF Reserve Position
2
3. Special Drawing Rights (SDRs)
2
4. Gold Stock -'
5. Other Reserve Assets
II. Predetermined Short-Term Drains on Foreign Currency Assets
October 4, 2002
Euro
1. Foreign currency loans and securities
Yen
October 11, 2002
TOTAL
Euro
o
2. Aggregate short and long positions in forwards and futures in foreign currencies vis-a-vis the U.S. dollar:
Yen
TOTAL
o
2.a. Short positiol/s
0
0
2.b. Long positions
0
0
3. Other
0
0
III. Contingent Short-Term Net Drains on Foreign Currency Assets
October 4, 2002
Euro
1. Contingent liabilities in foreign currency
Yen
October 11, 2002
TOTAL
Euro
Yen
TOTAL
o
o
o
o
o
o
o
La. Collateral guarantees on debt due within 1
year
l.b. Other contingent liabilities
2. Foreign Clm-ency securities with embedded
options
3. Undrawn, unconditional credit lines
o
3.(1. With other central ballks
3.b. With banks al/d otherjill({llcial institutions
Headquartered in the
Us.
3.c. With banks and otherfillancial institutions
Headquartered outside the
us.
4. Aggregate short and long positions of
options in foreign
Currencies vis-a-vis the U.S. dollar
4.a. Short positiol1s
4.a.1. Bought puts
4.a.2. Written calls
4.b. Long positions
4.b.1. Bought calls
4.b.2. Written puts
Notes:
11 Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account
(SOMA), valued at current market exchange rates. Foreign currency holdings listed as securities reflect marked-to-market values. and
deposits reflect carrying values. Foreign Currency Reserves for the latest week may be subject to revision. Foreign Currency
Reserves for the prior week are final.
21 The items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF and are
valued in dollar terms at the official SDR/dollar exchange rate for the reporting date. The entries for the latest week reflect any
necessary adjustments, including revaluation, by the U.S. Treasury to the prior week's IMF data. IMF data for the latest week may be
subject to revision. IMF data for the prior week are final.
31 Gold stock is valued monthly at $42.2222 per fine troy ounce.
PO-3542: Treasury Announces Tax Shelter Regulations
Page 1 of2
I-'HLSS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
To view or print the PDF content on this page, download the free Acio/leCk:' Ar:roIJdt(") Reade/(·".
October 16, 2002
PO-3542
TREASURY ANNOUNCES AMENDED REGULATIONS FOR THE DISCLOSURE
OF
POTENTIALLY ABUSIVE TAX AVOIDANCE TRANSACTIONS
Strengthens and Streamlines Rules for Disclosure and
List Maintenance Requirements
Today, as part of ongoing efforts to address abusive tax avoidance transactions,
the Treasury Department and the Internal Revenue Service released amended
disclosure and list-maintenance regulations. The amended regulations strengthen
the rules for the disclosure by taxpayers of their participation in potentially abusive
tax avoidance transactions and the maintenance of lists by promoters of taxpayers
who have entered into such transactions.
"We are continuing our efforts to identify and shut down abusive tax avoidance
transactions as quickly as possible," stated Treasury Assistant Secretary for Tax
Policy Pam Olson. "The regulations we released today will improve the system by
helping us get the information we need to identify questionable transactions.
Getting the information is the first step in speeding up the process of getting out
guidance to let taxpayers know that transactions may not work as advertised. The
amended regulations improve the rules requiring taxpayers to disclose potentially
questionable transactions on their returns and requiring promoters to maintain
customer lists for the same transactions. The changes will provide greater clarity
making it easier for taxpayers and promoters to understand and comply with their
obligations."
By simplifying the definition of a transaction that must be disclosed, these amended
regulations carry out one of the Treasury Department's key proposals for combating
abusive tax avoidance transactions, as outlined in the Treasury Department's
March 20, 2002, Enforcement Proposals. Under current rules, different definitions
and different exceptions apply to each of the disclosure requirements for taxpayers
and promoters. A consistent definition will significantly enhance compliance and
administration.
Under these amended regulations, taxpayers will be required to disclose, and
promoters will be require to maintain investor lists for, six categories of transactions:
(1) Listed transactions (i.e., transaction that have been specifically identified by the
IRS as tax avoidance transactions);
(2) Transaction marketed under conditions of confidentiality;
(3) Transactions with contractual protection (e.g., an indemnity in the event that the
claimed tax benefits are not sustained);
(4) Transactions generating a tax loss exceeding specified amounts;
http://www.treas.gov/press/releases/P03542.htm
1116/2002
PO-3542: Treasury Announces Tax Shelter Regulations
Page 2 of2
(5) Transactions resulting in a book-tax difference exceeding $10 million; and
(6) Transactions generating a tax credit when the underlying asset is held for a brief
period of time.
These proposed regulations will amend the existing temporary regulations under
sections 6011 (taxpayer disclosure) and 6112 (promoter list maintenance) of the
Code. Pending legislation would permit the Treasury Department to require
promoters to register the same types of transactions with the IRS. The Treasury
Department will amend the regulations under section 6111 (promoter registration)
when such legislation is enacted.
The amended regulations generally apply to transactions entered into on or after
January 1, 2003. The existing temporary regulations will continue to apply until that
time. Since the March 2002 announcement of its Enforcement Proposals, the
Treasury Department has been soliciting comments on the categories of
transactions covered by the amended regulations.
BACKGROUND
On March 20, 2002, after evaluating the effectiveness of the existing rules,
Treasury released its Enforcement Proposals for abusive tax avoidance
transactions. The Enforcement Proposals include administrative, regulatory, and
legislative actions and proposals. On June 14, 2002, Treasury and the IRS issued
temporary and proposed regulations implementing some of the regulatory
proposals, including the proposal that individuals, partnerships, S corporations and
trusts be required to disclose on their returns specifically identified tax avoidance
transactions. The prior regulations applied only to corporations.
The regulations are attached.
Related Documents:
•
Tax Sileiter ReqUirements
•
Tax Shelter Disclosure Statements
http://wwW.lfeaS.gOV/press/rele3Ses/~03542.htm
1116/2002
[4830-01-p]
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 301
[TD 9018]
RIN 1545-BB33
Requirement to Maintain a List of Investors in Potentially
Abusive Tax Shelters
AGENCY:
Internal Revenue Service (IRS), Treasury.
ACTION:
Temporary regulations.
SUMMARY: These temporary regulations relate to the
preparation, maintenance, and furnishing of lists of persons
in potentially abusive tax shelters under section 6112.
These
regulations apply to organizers and sellers of potentially
abusive tax shelters.
The text of these temporary regulations
also serves as the text of the proposed regulations set forth
in the notice of proposed rulemaking on this subject in the
Proposed Rules section of this issue of the Federal Register.
DATES: Effective Date: These temporary regulations are
effective January 1, 2003.
Applicability Date: For dates of applicability, see
§301.6112-1T(j) .
FOR FURTHER INFORMATION CONTACT: Charlotte Chyr, Tara P.
Volungis, or Danielle M. Grimm, 202-622-3070 (not a toll-free
number) .
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
These regulations are being issued without prior notice
and public procedure pursuant to the Administrative Procedure
Act
(5 U. S . C. 553).
For this reason, the collections of
information contained in these regulations have been reviewed
and, pending receipt and evaluation of public comments,
approved by the Office of Management and Budget under control
number 1545-1686.
Responses to these collections of
information are mandatory.
An agency may not conduct or sponsor, and a person is not
required to respond to, a collection of information unless the
collection of information displays a valid OMB control number.
For further information concerning these collections of
information, and where to submit comments on the collections
of information and the accuracy of the estimated burden, and
suggestions for reducing this burden, please refer to the
preamble to the cross-referencing notice of proposed
rulemaking published in the Proposed Rules section of this
issue of the Federal Register.
Books and 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 amends 26 CFR part 301 regarding the
requirement to maintain lists of persons for potentially
abusive tax shelters under section 6112.
Section 6708
provides penalties for failing to maintain a list under
section 6112.
On February 28, 2000, the IRS issued temporary and
proposed regulations regarding section 6112
103736-00) .
(TD 8875, REG-
The February regulations were published in the
Federal Register (65 FR 11211; 65 FR 11271) on March 2, 2000.
On August 11, 2000, the IRS issued temporary and proposed
regulations regarding section 6112
(TD 8896, REG-103736-00).
The August 2000 regulations were published in the Federal
Register (65 FR 49909; 65 FR 49955) on August 16, 2000,
modifying the previous regulations.
The list maintenance rules under section 6112, along with
the rules relating to disclosure of reportable transactions
under section 6011 and the rules for registration of tax
shelters under section 6111, are intended to provide the IRS
and Treasury with information needed to evaluate potentially
abusive transactions.
The IRS and Treasury have considered
-3-
and evaluated compliance with these rules and have determined
that certain additional changes to the current temporary and
proposed regulations are necessary to improve compliance and
to carry out the purposes of sections 6011,
On March 20,
6111, and 6112.
2002, Treasury released its Plan to Combat
Abusive Tax Avoidance Transactions
(PO-2018), which describes
changes to the rules under sections 6011,
6111, and 6112 that
will establish a more effective disclosure regime and improve
compliance.
See
http://www.treas.gov/press/releases/po2018.htm.
These amendments to the temporary regulations under
section 6112 generally require organizers and sellers
(material advisors)
to maintain lists of persons for
transactions required to be registered under section 6111 and
for reportable transactions defined in §1.6011-4T(b) of the
Income Tax Regulations.
Concurrent with these amended temporary regulations under
section 6112,
the IRS and Treasury are publishing elsewhre in
this issue of the Federal Register amended temporary
regulations under section 6011.
The amended temporary
regulations under section 6011 revise the categories of
transactions that must be disclosed on returns.
Pending legislation would modify section 6111 to require
-4-
registration of transactions that are required to be disclosed
under section 6011.
The IRS and Treasury intend to revise the
regulations under section 6111 when such legislation is
enacted.
Explanation of Provisions
A.
Potentially Abusive Tax Shelter
Section 6112 provides that any person who organizes or
sells any interest in a potentially abusive tax shelter must
maintain a list identifying each person who was sold an
interest in such shelter and containing any other information
required by regulations.
A potentially abusive tax shelter
under section 6112 includes any tax shelter that is required
to be registered with the IRS as a tax shelter under section
6111, and any transaction that has a potential for tax
avoidance or evasion.
Under these regulations, a transaction has the potential
for tax avoidance or evasion if it is a listed transaction or
if a potential material advisor, at the time the transaction
is entered into, knows or has reason to know that the
transaction is otherwise a reportable transaction as defined
in §1.6011-4T.
For purposes of section 6112, listed
transactions that involve Federal estate, gift, employment,
and pension and exempt organizations excise taxes are also
-5-
potentially abusive tax shelters that require list
maintenance.
If a transaction that involves Federal income
taxes becomes a listed transaction on or after January 1,
2003,
it is a potentially abusive tax shelter for purposes of
section 6112 and, whether or not the material advisor is
already required to maintain a list, the material advisor must
begin, at the time of listing, to include on the list those
persons who acquired an interest in the transaction after
February 28, 2000.
B.
Organizer and Seller (Material Advisor)
The regulations provide that a person is an organizer of,
or a seller of any interest in, a transaction that is a
potentially abusive tax shelter if that person is a material
advisor with respect to that transaction.
material advisor is any person who
(i)
In general, a
receives, or expects to
receive, at least a minimum fee in connection with a
transaction that is a potentially abusive tax shelter, and
(ii) who makes or provides any statement, oral or written, to
any person as to the potential tax consequences of that
transaction.
The Internal Revenue Service and Treasury are
considering whether the minimum fee requirement should be
eliminated with respect to listed transactions.
The minimum fee is $250,000 for a transaction that is a
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potentially abusive tax shelter if all persons who acquire an
interest, directly or indirectly,
corporations
in the transaction are
(other than S corporations).
The minimum fee for
any other transaction that is a potentially abusive tax
shelter is $50,000.
In calculating the minimum fee, each
transaction that is a potentially abusive tax shelter is
evaluated separately to determine whether the minimum fee
threshold is satisfied with respect to that particular
transaction.
If the minimum fee threshold is satisfied with
respect to one transaction that is a potentially abusive tax
shelter, but not with respect to another separate transaction
(whether or not it is substantially similar), a person is a
material advisor with respect to only the transaction for
which the minimum fee threshold is satisfied.
Accordingly,
the list required to be maintained includes only those persons
who are participants in the transaction for which the minimum
fee threshold is satisfied.
c.
Preparing, Maintaining and Furnishing Lists
In general, a material advisor must prepare and maintain
a separate list of persons for each transaction that is a
potentially abusive tax shelter.
However, to ensure that the
IRS is able to identify all of the persons who are
participants in potentially abusive tax shelters that are
-7-
substantially similar, the regulations further provide that
the material advisor must keep one list for all transactions
that are substantially similar and are potentially abusive tax
shelters.
Any person to whom a material advisor makes or provides a
statement, oral or written, as to the potential tax
consequences of a transaction that is a potentially abusive
tax shelter must be included on a list if the material advisor
knows or has reason to know that the person, or any related
party, participated or will participate in the transaction.
person
(including any related party) is treated as having
participated in a transaction that is a potentially abusive
tax shelter if the material advisor knows or has reason to
know that the person sold or transferred, or will sell or
transfer to another person (subsequent participant) an
interest in that type of transaction that,
would be a potentially abusive tax shelter.
if entered into,
The material
advisor also must list any subsequent participant if the
material advisor knows or has reason to know the identity of
that subsequent participant and the material advisor knows or
reasonably expects that the subsequent participant will
participate in, or sell or transfer to another subsequent
participant an interest in that type of transaction that, if
-8-
A
entered into, would be a potentially abusive tax shelter.
The required list must be maintained for ten years
following the date on which the material advisor last made a
statement, oral or written, as to the potential tax
consequences that may result from the transaction that is a
potentially abusive tax shelter.
If a material advisor that
is an entity dissolves or liquidates before the expiration of
the ten-year period, the person responsible under state law
for winding up the affairs of the material advisor is
(or if
state law does not specify any person, then each of the
directors of the corporation, the general partners of the
partnership, or the trustees, owners, or members of the entity
are)
responsible for preparing, maintaining, and furnishing
the list, unless the dissolved or liquidated entity submits
the list to the Office of Tax Shelter Analysis
(OTSA) within
60 days after the dissolution or liquidation.
The responsible
person must also provide notice to OTSA of such dissolution or
liquidation within 60 days after the dissolution or
liquidation.
Each material advisor must, upon written request by the
IRS,
furnish the list of persons to the IRS within 20 business
days after the date of the request.
The list may be furnished
to the IRS in any form that enables the IRS to determine
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without undue delay or difficulty the information required to
be contained in the list.
As a general rule,
the name of a participant in a
transaction that is a potentially abusive tax shelter is not
protected by either the attorney-client privilege or by the
tax practitioner privilege under section 7525.
No participant
in a transaction that is a potentially abusive tax shelter
should have a reasonable expectation of confidentiality with
respect to that person's identity.
Moreover, a claim of
privilege that is not based on a reasonable belief that the
privilege applies may subject the material advisor to
penalties under section 6708.
D.
Substantially Similar Transactions
For purposes of section 6112, a substantially similar
transaction includes any transaction that is expected to
obtain the same or similar types of tax consequences and that
is either factually similar or based on the same or similar
tax strategy.
Receipt of an opinion regarding the tax
consequences of a transaction is not relevant to the
determination of whether that transaction is the same as or
substantially similar to another transaction.
Further, the
term substantially similar must be broadly construed in favor
of list maintenance;
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E.
Effective Date
These amended temporary regulations apply to transactions
that are potentially abusive tax shelters entered into, or
interests acquired therein, on or after January 1, 2003.
However, these regulations shall apply to any transaction that
was entered into, or in which an interest was acquired, after
February 28, 2000, if the transaction becomes a listed
transaction as defined in §1.6011-4T on or after January 1,
2003, and is subject to disclosure under §1.6011-4T.
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.
It also has been determined that section 553(b) of the
Administrative Procedure Act (5 U.S.C. chapter 5) does not
apply to these regulations.
Because no notice of proposed
rulemaking is required, the provisions of the Regulatory
Flexibility Act (5 U.S.C. chapter 6) do not apply.
Pursuant
to section 7805(f) of the Internal Revenue Code, these
regulations will be submitted to the Chief Counsel for
Advocacy of the Small Business Administration for comment on
their impact on small business.
Drafting Information
-11-
The principal authors of these regulations are
Charlotte Chyr, Tara P. Volungis, and Danielle M. Grimm,
Office of the Associate Chief Counsel (Passthroughs and
Special Industries).
However, other personnel from the IRS
and Treasury Department participated in their development.
List of Subjects in 26 CFR Part 301
Administrative practice and procedure, Employment taxes,
Estate taxes, Excise taxes, Gift taxes,
Income taxes,
Penalties, Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR part 301 is amended as follows:
PART 301--PROCEDURE AND ADMINISTRATION
Paragraph 1.
The authority citation for part 301
continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2.
Section 301.6112-1T is revised to read as
follows:
§301.6112-1T Requirement to prepare, maintain, and furnish
lists with respect to potentially abusive tax shelters
(temporary) .
(a)
In general.
Each organizer and seller, as described
in paragraph (c) of this section, of a transaction that is a
potentially abusive tax shelter, as described in paragraph (b)
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of this section, shall prepare and maintain a list of persons
in accordance with paragraph (e) of this section and upon
request shall furnish such list to the Internal Revenue
Service in accordance with paragraph (g) of this section.
(b)
Potentially abusive tax shelters. For purposes of
this section, a potentially abusive tax shelter is any
transaction that is a section 6111 tax shelter, as described
in paragraph (b) (1) of this section, or that has a potential
for tax avoidance or evasion, as described in paragraph (b) (2)
of this section.
The term "transaction" includes all of the
factual elements relevant to support the expected tax
treatment of any investment, entity, plan, or arrangement, and
includes any series of steps carried out as part of a plan.
(1) Transaction that is a section 6111 tax shelter. A
section 6111 tax shelter is any transaction that is required
to be registered with the Internal Revenue Service under
section 6111, regardless of whether that tax shelter is
properly registered pursuant to section 6111.
(2)
Transaction that has a potential for tax avoidance or
evasion. A transaction that has a potential for tax avoidance
or evasion is any transaction that is a listed transaction as
defined in §1.6011-4T of this chapter and is subject to
disclosure under §1.6011-4T, 20.6011-4T, 25.6011-4T, 31.6011-
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4T,
53.6011-4T,
54.6011-4T, or 56.6011-4T of this chapter, or
any transaction that a potential material advisor knows or has
reason to know, at the time the transaction is entered into or
an interest is acquired, meets one of the categories of a
reportable transaction under §1.6011-4T(b) (3) through (7) of
this chapter.
(i) The determination of whether a transaction has the
potential for tax avoidance or evasion does not depend upon
whether the transaction is properly disclosed pursuant to
§1.6011-4T, 20.6011-4T, 25.6011-4T, 31.6011-4T, 53.6011-4T,
54.6011-4T, or 56.6011-4T of this chapter.
(ii)
If a transaction becomes a listed transaction as
defined in §1.6011-4T of this chapter and is subject to
disclosure under §1.6011-4T of this chapter, after the
transaction is entered into or an interest in the transaction
is acquired,
this section shall apply with respect to any
interests acquired after February 28, 2000.
If a transaction
becomes a listed transaction as defined in §1.6011-4T of this
chapter and is subject to disclosure under §20.6011-4T,
25.6011-4T,
31.6011-4T, 53.6011-4T, 54.6011-4T, or 56.6011-4T
of this chapter, after the transaction is entered into or an
interest in the transaction is acquired, this section shall
apply with respect to any interests acquired on or after
-14-
January 1, 2003.
(c) Organizer and seller--(l)
In general. A person is an
organizer of, or a seller of an interest in, a transaction
that is a potentially abusive tax shelter if that person is a
material advisor, as described in paragraph (c) (2) of this
section, with respect to that transaction.
(2) Material advisor. A material advisor is any person
who
(or through its employees, shareholders, partners, or
agents)
fee,
receives, or expects to receive, at least a minimum
as defined in paragraph (c) (3)
of this section, in
connection with a transaction that is a potentially abusive
tax shelter and who makes or provides any statement, oral or
written, to any person as to the potential tax consequences of
that transaction.
A person shall be treated as a material
advisor if that person forms or avails of an entity with the
purpose of avoiding the rules of section 6111 or 6112 or the
penalties under section 6707 or 6708.
(3) Minimum fee--(i)
paragraph (c),
In general. For purposes of this
the minimum fee is $250,000 for a transaction
that is a potentially abusive tax shelter if all persons who
acquire an interest, directly or indirectly, are corporations
(other than S corporations), and $50,000 for any other
transaction that is a potentially abusive tax shelter.
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(ii)
Determination of fees.
In determining whether the
minimum fee threshold is satisfied, all fees for advice
(whether or not tax advice)
regarding, or for implementation
of, a transaction that is a potentially abusive tax shelter
are taken into account.
For purposes of this section,
fees
include consideration in whatever form paid, whether in cash
or in kind,
and whether paid or denominated as fees for tax
advice or for some other function such as the preparation of
documentation or tax return preparation.
The Internal Revenue
Service will scrutinize carefully all of the facts and
circumstances in determining whether consideration received in
connection with a transaction that is a potentially abusive
tax shelter constitutes fees for purposes of this section.
(d)
Definitions. For purposes of this section, the
following terms are defined as follows:
(1)
Interest.
The term interest includes, but is not
limited to, any right to participate in a transaction by
reason of a partnership interest, a shareholder interest, or a
beneficial interest in a trust; any interest in property
(including a leasehold interest); the entry into a leasing
arrangement or a consulting, management or other agreement for
the performance of services; or any interest in any other
investment, entity, plan, or arrangement.
-16-
The term interest
includes any interest that purportedly entitles the direct or
indirect holder of the interest to any tax consequence
(including, but not limited to, a deduction,
loss, or
adjustment to tax basis in an asset) arising from the
transaction.
An interest also includes the receipt of
information or services regarding the organization or
structure of the transaction if the information or services
are relevant to the potential tax consequences of the
transaction.
(2)
Substantially similar. The term substantially similar
includes any transaction that is expected to obtain the same
or similar types of tax consequences and that is either
factually similar or based on the same or similar tax
strategy.
Receipt of an opinion regarding the tax
consequences of the transaction is not relevant to the
determination of whether the transaction is the same as or
substantially similar to another transaction.
Further, the
term substantially similar must be broadly construed in favor
of list maintenance.
(3)
Person. The term person means any person described in
section 7701(a) (1),
including an affiliated group of
corporations that join in the filing of a consolidated return
under section 1501.
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(4)
Related party. A person is a related party with
respect to another person if such person bears a relationship
to such other person described in section 267 or 707.
Preparation and maintenance of lists--(l)
(e)
In general. A
separate list of persons must be prepared and maintained for
each transaction that is a potentially abusive tax shelter.
However, one list must be maintained for substantially similar
transactions that are potentially abusive tax shelters.
(2)
Persons required to be included on lists.
(i) A
material advisor is required to list each person to whom the
material advisor makes or provides a statement, oral or
written, as to the potential tax consequences of a transaction
that is a potentially abusive tax shelter, if the material
advisor knows or has reason to know that the person or any
related party participated in or will participate in the
transaction (or a substantially similar transaction that is a
potentially abusive tax shelter).
(ii) A material advisor shall treat a person (including
any related party) as having participated in a transaction
that is a potentially abusive tax shelter if the material
advisor knows or has reason to know that the person sold or
transferred, or will sell or transfer, to another person
(subsequent participant) an interest in that type of
-18-
transaction that,
if entered into,
abusive tax shelter.
would be a potentially
The material advisor also must list any
subsequent participant if the material advisor knows or has
reason to know the identity of that subsequent participant,
and the material advisor knows or reasonably expects that the
subsequent participant will participate in,
or sell or
transfer to another subsequent participant an interest in that
type of transaction that,
if entered into, would be a
potentially abusive tax shelter.
(iii)
The following examples illustrate the provisions of
this section:
Example 1. An investment firm provides a statement
describing the potential tax consequences of a type of
transaction to three taxpayers: Corporation X, Corporation Y,
and Corporation Z.
Each taxpayer agrees to pay the investment
firm $300,000 in connection with the transaction, and each
taxpayer engages in a separate transaction (transaction X,
transaction Y, and transaction Z, respectively).
At the time
the transactions are entered into, the investment firm knows,
or has reason to know, that the transactions will result in a
single taxable year loss of $9 million for Corporation X, $15
million for Corporation Y, and $12 million for Corporation Z.
The transactions do not satisfy the definitions of a
reportable transaction under §1. 6011-4T (b) (2), (3), (4), (6)
or (7) of this chapter.
All the persons who acquired an
interest directly or indirectly in the transactions are C
corporations.
(i) Transaction X.
At the time transaction X is entered
into, the investment firm does not know, or have reason to
know, that the transaction is a reportable transaction,
because the $9 million loss does not satisfy the $10 million
threshold under §1.6011-4T(b) (5) of this chapter (relating to
loss transactions).
Accordingly, transaction X is not a
potentially abusive tax shelter.
The investment firm is not
-19-
required to maintain a list with respect to transaction X.
(ii) Transactions Y and Z.
The investment firm satisfies
the three requirements for being a material advisor with
respect to transaction Y and with respect to transaction Z.
First, both of the transactions are potentially abusive tax
shelters with respect to the investment firm because the
investment firm knows, or has reason to know, at the time the
transactions are entered into, that the losses for each of
Corporation Y and Z are expected to exceed the $10 million
threshold and, thus, the transactions are reportable
transactions under §1.6011-4T(b) (5) of this chapter (relating
to loss transactions).
Second, the investment firm provides a
statement as to the potential tax consequences of the
transactions.
Third, the investment firm receives $300,000 in
connection with each transaction, which exceeds the minimum
fee with respect to each transaction ($250,000).
Accordingly,
the investment firm must maintain a list with respect to
transactions Y and Z.
Because transactions Y and Z are based
on the same or similar tax strategy, transactions Y and Z are
substantially similar transactions, and the investment firm
must keep one list with respect to both transactions.
The
list must contain information about Corporation Y and
Corporation Z (see paragraph (e) (2) (i) of this section).
Example 2.
(i) Corporation M provides a statement to
Corporation N describing the potential tax consequences of a
type of transaction.
Corporation N pays Corporation M $90,000
for the information about that type of transaction.
Corporation M knows that Corporation N will sell the
information to Taxpayer 0 (a corporation) and Taxpayer P (an
individual), and reasonably expects Taxpayer 0 and Taxpayer P
to participate in transactions of the type that Corporation M
described to Corporation N.
Corporation N, in turn, provides
a statement as to the potential tax consequences of that type
of transaction to Taxpayer 0 and Taxpayer P.
Each taxpayer
agrees to pay Corporation N $80,000 in connection with their
respective transactions, and each taxpayer engages in a
separate transaction (transaction 0 and transaction P,
respectively).
At the time the transactions are entered into,
both Corporation M and Corporation N know, or have reason to
know, that the transactions are reportable transactions under
§1.6011-4T(b) of this chapter.
All the persons who acquire an
interest directly or indirectly in transaction 0 are C
corporations.
-20-
(ii) Corporation N is not a material advisor with respect
to transaction 0 because Corporation N receives only $80,000
in connection with transaction 0, which is less than the
minimum fee for that transaction ($250,000).
Corporation N is
a material advisor with respect to transaction P.
First, at
the time transaction P is entered into, Corporation N knows,
or has reason to know, that transaction P is a reportable
transaction and, thus, is a potentially abusive tax shelter.
Second, Corporation N provides a statement as to the potential
tax consequences of transaction P.
Third, Corporation N
receives $80,000 in connection with transaction P, which
exceeds the minimum fee for that transaction ($50,000).
Accordingly, Corporation N must keep a list with respect to
transaction P.
The list must contain information about
Taxpayer P (see paragraph (e) (2) (ii) of thi s section).
(iii) Corporation M is not a material advisor with
respect to transaction 0 because Corporation M receives only
$90,000 in connection with transaction 0, which is less than
the minimum fee for that transaction ($250,000).
Corporation
M is a material advisor with respect to transaction P.
First,
at the time transaction P is entered into, Corporation M
knows, or has reason to know, that transaction P is a
reportable transaction and, thus, is a potentially abusive tax
shelter.
Second, Corporation M provides a statement as to the
potential tax consequences of transaction P, and Corporation M
receives $90,000 in connection with transaction P, which
exceeds the minimum fee for that transaction ($50,000).
Accordingly, Corporation M must keep a list with respect to
transaction P.
The list must contain information about
Corporation N (see paragraph (e) (2) (ii) of this section) and
Taxpayer P (see paragraph (e) (2) (i i) of this section).
(3) Contents--(i) In general. Each list must contain the following information-(A) The name of each transaction that is a potentially abusive tax shelter and the
registration number, if any, obtained under section 6111;
(B) The TIN (as defined in section 7701 (a)(41)), if any, of each transaction;
(C) The name, address, and TIN of each person required to be on the list;
(0) If applicable, the number of units (i.e., percentage of profits, number of shares,
-21-
etc.) acquired by each person required to be included on the list;
(E) The date on which each interest was acquired;
(F) The amount invested in each transaction by each person required to be included
on the list;
(G) A detailed description of each transaction that describes both the structure and
its expected tax consequences;
(H) A summary or schedule of the tax consequences that each person is intended or
expected to derive from participation in each transaction, if known by the material advisor;
(I) Copies of any additional written materials, including tax analyses or opinions,
relating to each transaction that have been shown or provided to any person who acquired
or may acquire an interest in the transactions, or to their representatives, tax advisors, or
agents, by the material advisor or any related party or agent of the material advisor; and
(J) For each person, if the interest in the transaction was not acquired from the
material advisor maintaining the list, the name of the person from whom the interest was
acquired.
(ii) Claims of privilege. In any case in which an attorney or federally authorized tax
practitioner within the meaning of section 7525 is required to maintain a list with respect to
a transaction that is a potentially abusive tax shelter, and that person has a reasonable
belief that information required to be disclosed under this paragraph (e)(3)is protected by
the attorney-client privilege or by the confidentiality privilege of section 7525(a), the
attorney or federally authorized tax practitioner must still maintain the list of persons
pursuant to the requirements of this section. When the list is requested by the Internal
-22-
Revenue Service, as provided in paragraph (g) of this section, the material advisor may
assert a privilege claim subject to the requirements of this paragraph (e)(3)(ii).
(A) The claimed privilege must be supported by a statement that is signed by the
attorney or federally authorized tax practitioner under penalties of perjury, must identify and
describe (as set forth in paragraph (e)(3)(ii)(8) of this section) the nature of each document
or category of information that is not produced which will allow the Service to determine the
applicability of the privilege or protection claimed, without revealing the privileged
information itself, and must include the following representations with respect to each
document or category of information for which the privilege is claimed--
(1) Specifically represent that the information was a confidential practitioner-client
communication and, in the case of information which a federally authorized tax practitioner
claims is privileged under section 7525, that the omitted information was not part of tax
advice that constituted the promotion of the direct or indirect participation of a corporation
in any tax shelter (as defined in section 6662(d)(2)(C)(iii)); and
(~) Specifically represent that to the best of such person's knowledge and belief, all
others in possession of the omitted information did not disclose the omitted information to
any person whose receipt of such information would result in a waiver of the privilege.
(8) Identification and description of a document or category of information includes,
but is not limited to--
(1) The date appearing on such document or, if it has no date, the date or
approximate date that such document was created;
(~) The general nature, description and purpose of such document and the identity
-23-
of the person who signed such document, and, if it was not signed, the identity of each
person who prepared it; and
(~) The identity of each person to whom such document was addressed and the
identity of each person, other than such addressee, to whom such document, or a copy
thereof, was given or sent.
(f) Retention of lists. Each material advisor must maintain the list described in
paragraph (e) of this section for ten years following the date on which the material advisor
last made a statement, oral or written, as to the potential tax consequences of the
transaction. If the material advisor required to prepare, maintain, and furnish the list is a
corporation, partnership, or other entity (entity) that has dissolved or liquidated before
completion of the ten-year period, the person responsible under state law for winding up
the affairs of the entity must prepare, maintain and furnish the list on behalf of the entity,
unless the entity submits the list to the Office of Tax Shelter Analysis (OTSA) within 60 days
after the dissolution or liquidation. If state law does not specify any person as responsible
for winding up the affairs, then each of the directors of the corporation, the general partners
of the partnership, or the trustees, owners, or members of the entity are responsible for
preparing, maintaining and furnishing the list on behalf of the entity, unless the entity
submits the list to the Office of Tax Shelter Analysis (OTSA) within 60 days after the
dissolution or liquidation. The responsible person must also provide notice to OTSA of
such dissolution or liquidation within 60 days after the dissolution or liquidation. The list
and the notice provided to OTSA may be sent to: Internal Revenue Service
LM:PFTG:OTSA, Large & Mid-Size Business Division, 1111 Constitution Ave., NW.,
-24-
Washington, DC 20224, or to such other address as provided by the Commissioner.
(g) Furnishing of lists. Each material advisor and person responsible for maintaining
a list of persons must, upon written request by the Internal Revenue Service, furnish the list
to the Internal Revenue Service within 20 business days after the date of the request. The
request is not required to be in the form of an administrative summons. The list may be
furnished to the Internal Revenue Service on paper, card file, magnetic media, or in any
other form, provided the method of furnishing the list enables the Internal Revenue Service
to determine without undue delay or difficulty the information required in paragraph (e)(3) of
this section.
(h) Designation agreements. If more than one material advisor is required to
maintain a list of persons, in accordance with paragraph (e) of this section, for a potentially
abusive tax shelter, the material advisors may designate by written agreement a single
material advisor to maintain the list or a portion of the list. The designation of one material
advisor to maintain the list does not relieve the other material advisors from their obligation
to furnish the list to the Internal Revenue Service in accordance with paragraph (g) of this
section. The fact that a material advisor is unable to obtain the list from any designated
material advisor, the fact that any designated material advisor did not maintain a list, or the
fact that the list maintained by any designated material advisor is not complete, will not
relieve any material advisor from the requirements of this section.
(i) Procedure for obtaining rulings. A person may submit a request to the Internal
Revenue Service for a ruling as to whether a transaction is a potentially abusive tax shelter
for purposes of this section and whether that person is a material advisor with respect to
-25-
that transaction. If the request fully discloses all relevant facts relating to the transaction
(including all facts relevant to the person's relationship to such transaction), then the
requirement to maintain a list shall be suspended for that person during the period that
such ruling request is pending and for 60 days thereafter; however, if it is ultimately
determined that the transaction is a potentially abusive tax shelter, the pendency of such a
ruling request shall not affect the requirement to maintain the list, nor shall it affect the
persons required to be included on the list (including persons who acquired interests in the
potentially abusive tax shelter prior to and during the pendency of the ruling request), or the
other information required to be included as part of the list.
0) Effective date. This section applies to any transaction that is a potentially abusive
tax shelter entered into, or any interest acquired therein, on or after January 1, 2003.
However, this section shall apply to any transaction that was entered into, or in which an
interest was acquired, after February 28, 2000, if the transaction becomes a listed
transaction as defined in § 1.6011-4T of this chapter on or after January 1,2003, and is
subject to disclosure under § 1.6011-4T of this chapter. Otherwise, the rules that apply with
respect to any other transaction that is a potentially abusive tax shelter entered into, or any
interest acquired therein, on or before December 31,2002, are contained in §301.61121T in
-26-
effect prior to December 31,2002 (see 26 CFR part 301 revised as of April 1,2002).
Fobert E. Wenzel,
Deputy Commissioner of Internal Revenue.
Approved: October 15, 2002
Pamela F. Olson,
Assistant Secretary of the Treasury.
[4830-0l-p]
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1, 20, 25,
31, 53, 54, 56, and 301
[TO 9017]
RIN l545-BB32
Tax Shelter Disclosure Statements
AGENCY:
Internal Revenue Service (IRS), Treasury.
ACTION:
Temporary regulations.
SUMMARY:
These temporary regulations modify the rules
relating to the filing by certain taxpayers of a disclosure
statement with their Federal tax returns under section 60ll(a)
and include conforming changes to the rules relating to the
registration of confidential corporate tax shelters under
section 6111 (d) .
These regulations affect taxpayers
participating in reportable transactions and persons
responsible for registering confidential corporate tax
shelters.
The text of these temporary regulations also serves
as the text of the proposed regulations set forth in the
notice of proposed rulemaking on this subject in the Proposed
Rules section of this issue of the Federal Register.
DATES: Effective Date: These temporary regulations are
effective January 1, 2003.
Applicability Date: For dates of applicability, see
§1. 6011-4T (h), §20. 6011-4T (b), §25. 6011-4T (b), §31. 6011-4T (b),
§53. 6011-4T (b), §54. 6011-4T (b), §56. 6011-4T (b), and §301.61112T (h) .
FOR FURTHER INFORMATION CONTACT: Tara P. Volungis,
Grimm,
or Charlotte Chyr, 202-622-3070
Danielle M.
(not a toll-free
number) .
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
These regulations are being issued without prior notice
and public procedure pursuant to the Administrative Procedure
Act
(5 U.S.C. 553).
For this reason, the collections of
information contained in these regulations have been reviewed
and, pending receipt and evaluation of public comments,
approved by the Office of Management and Budget under control
numbers 1545-1685 and 1545-1687.
Responses to these
collections of information are mandatory.
An agency may not conduct or sponsor, and a person is not
required to respond to, a collection of information unless the
collection of information displays a valid OMB control number.
For further information concerning these collections of
information, and where to submit comments on the collections
of information and the accuracy of the estimated burden, and
suggestions for reducing this burden, please refer to the
preamble to the cross-referencing notice of proposed
rulemaking published in the Proposed Rules section of this
issue of the Federal Register.
Books and 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 amends 26 CFR parts 1 and 301 to provide
modified rules relating to the disclosure of reportable
transactions by certain taxpayers on their Federal income tax
returns under section 6011 and includes conforming changes to
the rules regarding the registration of confidential corporate
tax shelters under section 6111.
This document also amends 26
CFR parts 20, 25, 31, 53, 54, and 56 to provide rules for
purposes of estate, gift, employment, and pension and exempt
organizations excise taxes requiring the disclosure of listed
transactions by certain taxpayers on their Federal tax returns
under section 6011.
On February 28, 2000, the IRS issued temporary and
proposed regulations regarding sections 6011 and 6111 (TO
8877, REG-103735-00; TO 8876, REG-110311-98))
-3-
(the February
2000 regulations).
The February 2000 regulations were
published in the Federal Register (65 FR 11205, 65 FR 11269;
65 FR 11215,
65 FR 11272) on March 2, 2000.
On August 11,
2000, the IRS issued temporary and proposed regulations
modifying the rules under sections 6011 and 6111
REG-I03735-00, REG-II0311-98)
(TO 8896,
(the August 2000 regulations).
The August 2000 regulations were published in the Federal
Register (65 FR 49909,
65 FR 49955) on August 16, 2000.
On
August 2, 2001, the IRS issued temporary and proposed
regulations modifying the rules under sections 6011 and 6111
(TO 8961, REG-103735-00, REG-110311-98)
regulations).
The August 2001 regulations were published in
the Federal Register (66 FR 41133,
2001.
(the August 2001
66 FR 41169) on August 7,
On June 14, 2002, the IRS issued temporary and proposed
regulations modifying the rules under sections 6011 and 6111
(TO 9000, REG-103735-00, REG-110311-98)
regulations).
(the June 2002
The June 2002 regulations were published in the
Federal Register (67 FR 41324,
67 FR 41362) on June 18, 2002.
The rules under sections 6011, 6111, and 6112 for
disclosure,
registration, and list maintenance are intended to
provide the IRS and Treasury with information needed to
evaluate potentially abusive transactions.
-4-
The IRS and
Treasury have considered and evaluated compliance with those
rules, and have determined that certain additional changes to
the current temporary and proposed regulations are necessary
to improve compliance and to carry out the purposes of
sections 6011,
6111, and 6112.
On March 20, 2002, Treasury
released its Plan to Combat Abusive Tax Avoidance Transactions
(PO-2018), which describes changes to the rules under sections
6011,
6111, and 6112 that will establish a more effective
disclosure regime and improve compliance.
See
http://www.treas.gov/press/releases/po2018.htm.
The amended temporary regulations under section 6011
revise the categories of transactions that must be disclosed
on returns.
Certain conforming changes are being made to the
temporary regulations under section 6111.
Concurrent with
these amended temporary regulations under sections 6011 and
6111, the IRS and Treasury are publishing elsewhere in this
issue of the Federal Register temporary regulations under
section 6112.
The amendments to the temporary regulations
under section 6112 generally require organizers and sellers
(material advisors)
to maintain lists of persons for
transactions required to be registered under section 6111 and
for reportable transactions subject to disclosure under
§1.6011-4T, 20.6011-4T, 25.6011-4T, 31.6011-4T, 53.6011-4T,
-5-
54.6011-4T, or 56.6011-4T.
Pending legislation would modify section 6111 to require
registration of transactions that are required to be disclosed
under section 6011.
The IRS and Treasury intend to revise the
regulations under section 6111 when such legislation is
enacted.
Explanation of Provisions
I.
In General
Section 1.60 11-4T generally provides that certain taxpayers must disclose their direct or
indirect participation in reportable transactions when they file their Federal income tax returns. Under
the current temporary regulations, in the case of a partnership or an S corporation that participates in a
listed transaction, that partnership or S corporation must disclose its participation and the partners and
shareholders also must disclose their participation in the listed transaction. A reportable transaction is
either: (1) a listed transaction, or (2) a transaction that meets two of five characteristics, satisfies a
projected tax effect test, and does not satisfY any of the exceptions provided in the regulations. The
IRS and Treasury have found that taxpayers are interpreting the five characteristics in an overly narrow
manner and are interpreting the exceptions in an overly broad manner.
These new temporary regulations provide more objective rules. The regulations redefine a
reportable transaction as a transaction that satisfies anyone of six categories of transactions. The
regulations also eliminate the projected tax effect test and the general exceptions. The six categories of
reportable transactions are: listed transactions, confidential transactions, transactions with contractual
-6-
protection, loss transactions, transactions with a significant book-tax difference, and transactions
involving a brief asset holding period. Further, the new temporary regulations require disclosure of
participation in reportable transactions by all direct and indirect participants. Disclosure must be made
on Form 8886, "Reportable Transaction Disclosure Statement", which will be available when these
regulations become effective.
A provision has been added to §1.6011-4T allowing
taxpayers to request a ruling as to whether a transaction must
be disclosed under §1.6011-4T.
A transaction will not be
considered a reportable transaction, or will be excluded from
any individual category of reportable transaction, if the
Commissioner makes a determination, by published guidance,
individual ruling under §1.6011-4T, or otherwise, that the
transaction is not subject to the disclosure requirements of
§1. 6011-4T.
While some exceptions to the disclosure
requirements are included in these regulations, the IRS and
Treasury specifically request comments on particular types of
transactions that should be either treated as not subject to
the disclosure requirements of §1.6011-4T or excluded from an
individual category of reportable transaction.
The major changes to the categories of reportable
transactions are discussed below.
2.
Confidential Transactions
-7-
A confidential transaction is a transaction that is offered under conditions of confidentiality,
unless the presumption in the regulations regarding written authorization to disclose the structure and tax
aspects of the transaction is satisfied. These regulations clarify, however, that the presumption is
available only in cases in which the written authorization to disclose is effective without limitation of any
kind from the commencement of discussions.
3.
Loss Transactions
A loss transaction is any transaction resulting in, or that is reasonably expected to result in, a
loss under section 165 of at least: $10 million in any single taxable year or $20 million in any
combination of taxable years for corporations; $5 million in any single taxable year or $10 million in any
combination of taxable years for partnerships or S corporations, whether or not any losses flow through
to one or more partners or shareholders; $2 million in any single taxable
year or $4 million in any combination of taxable years for
individuals or trusts, whether or not any losses flow through
to one or more beneficiaries; and $50,000 in any single
taxable year for individuals or trusts, whether or not the
loss flows through from an S corporation or partnership, if
the loss arises with respect to a section 988 transaction (as
defined in section 988 (c) (1)
transactions) .
relating to foreign currency
In determining the monetary thresholds, the
amount of a section 165 loss is adjusted for any salvage value
and for any insurance or other compensation received.
However, a section 165 loss does not take into account
-8-
offsetting gains or other income or limitations.
A section 165 loss includes an amount deductible by
virtue of a provision that treats a transaction as a sale or
other disposition, or otherwise results in a deduction under
section 165.
A section 165 loss includes, for example, a loss
resulting from a sale or exchange of a partnership interest
under section 741 and a loss resulting from a section 988
transaction.
Under these regulations, casualty losses and
losses resulting from involuntary conversions are not subject
to the disclosure requirements under §1.6011-4T.
The IRS and Treasury also are considering adding two
other exceptions.
One exception would be for losses resulting
from a sale of securities on an established securities market
within the meaning of §1.7701-1(b), but only if the amount of
basis used in computing the amount of the loss is equal to the
amount of cash paid by the taxpayer for the securities.
The
other potential exception would be for losses claimed under
section 475(a) or section 1296(a).
The IRS and Treasury
specifically request comments on whether these or other
exceptions should be added to the regulations.
4.
Transactions with a Significant Book-Tax Difference
A transaction with a significant book-tax difference is a
transaction where the treatment for Federal income tax
-9-
purposes of any item or items from the transaction differs, or
is reasonably expected to differ, by more than $10 million on
a gross basis from the treatment of the item or items for book
purposes in any taxable year.
When making this determination,
offsetting items are not netted for either tax or book
purposes.
Book income is determined by applying
generally accepted accounting principles (GAAP)
u.s.
for worldwide
income.
This category of transaction generally applies to
taxpayers that are reporting companies under the Securities
Exchange Act of 1934
(15
uses
78a)
(and related business
entities) and to business entities that have $100 million or
more in gross assets.
Specific rules are provided for
taxpayers that file consolidated returns,
foreign persons,
disregarded entities, partnerships, and shareholders of
certain foreign corporations.
For example, where a taxpayer
is considered to participate in a transaction indirectly
through a partnership or foreign corporation, items from the
transaction that otherwise may be considered items of the
partnership or foreign corporation (for tax or book purposes)
are treated as items of the taxpayer (to the extent of the
taxpayer's allocable share).
The mere fact that an item may
be reported by different persons for tax and book purposes
-10-
(e.g., on the taxpayer's U.S. tax return and on the entity's
books and records), without more,
is not considered a
significant book-tax difference in such cases.
Instead, the
taxpayer must test such items for a book-tax difference in the
same manner as items from a transaction in which the taxpayer
participated directly.
The regulations provide various exceptions for this
category of transaction.
The IRS and Treasury specifically
request comments on the exceptions and whether other
exceptions should be provided.
5.
Transactions Involving a Brief Asset Holding Period
A transaction involving a brief asset holding period is a
transaction resulting in, or that is reasonably expected to
result in, a tax credit exceeding $250,000 (including a
foreign tax credit) if the underlying asset giving rise to the
credit is held by the taxpayer for less than 45 days.
For
purposes of determining the holding period, the principles in
section 246 (c) (3) and (c) (4) apply.
6.
Application of Section 6011 to Estate, Gift, Employment,
and Pension and Exempt Organizations Excise Taxes
A listed transaction that involves Federal estate, gift,
employment, or pension or exempt organizations excise taxes
must be disclosed in accordance with published guidance
identifying such transaction as a listed transaction.
-11-
Effective Date
These regulations apply to transactions entered into on
or after January 1, 2003.
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.
It also has been determined that section 553(b) of the
Administrative Procedure Act (5 U.S.C. chapter 5) does not
apply to these regulations.
Because no notice of proposed
rulemaking is required, the provisions of the Regulatory
Flexibility Act (5 U.S.C. chapter 6) do not apply.
Pursuant
to section 7805(f) of the Internal Revenue Code, these
regulations will be submitted to the Chief Counsel for
Advocacy of the Small Business Administration for comment on
their impact on small business.
Drafting Information
The principal authors of these regulations are Tara P.
Volungis, Danielle M. Grimm, and Charlotte Chyr, Office of the
Associate Chief Counsel
(Passthroughs and Special Industries).
However, other personnel from the IRS and Treasury Department
participated in their development.
List of Subjects
-12-
26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
26 CFR Part 20
Estate tax, Reporting and recordkeeping requirements.
26 CFR Part 25
Gift taxes, Reporting and recordkeeping requirements.
26 CFR Part 31
Employment taxes, Income taxes,
Penalties, Pensions,
Railroad retirement, Reporting and recordkeeping requirements,
Social security, Unemployment compensation.
26 CFR Part 53
Excise taxes, Foundations,
Investments, Lobbying,
Reporting and recordkeeping requirements.
26 CFR Part 54
Excise taxes,
Pensions, Reporting and recordkeeping
requirements.
26 CFR Part 56
Excise taxes, Lobbying, Nonprofit organizations,
Reporting and recordkeeping requirements.
26 CFR Part 301
Administrative practice and procedure, Employment taxes,
Estate taxes, Excise taxes, Gift taxes, Income taxes,
Penalties, Reporting and recordkeeping requirements.
-13-
Adoption of Amendments to the Regulations
Accordingly, 26 CFR parts 1, 20, 25, 31, 53, 54, 56, and
301 are amended as follows:
PART l--INCOME TAXES
Paragraph 1.
The authority citation for part 1 continues
to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2.
Section 1.6011-4T is revised to read as follows:
§1.6011-4T Requirement of statement disclosing participation
in certain transactions by taxpayers
(a)
(temporary).
In general. Every taxpayer that has participated,
directly or indirectly, in a reportable transaction within the
meaning of paragraph (b) of this section must attach to its
return for the taxable year described in paragraph (e) of this
section a disclosure statement in the form prescribed by
paragraph (d) of this section.
The fact that a transaction is
a reportable transaction shall not affect the legal
determination of whether the taxpayer's treatment of the
transaction is proper.
(b) Reportable transactions--(I)
In general. A reportable
transaction is a transaction described in any of the
paragraphs
(b) (2)
through (7) of this section.
The term
transaction includes all of the factual elements relevant to
-14-
the expected tax treatment of any investment, entity, plan, or
arrangement, and includes any series of steps carried out as
part of a plan, and any series of substantially similar
transactions entered into in the same taxable year.
There are
six categories of reportable transactions: listed
transactions, confidential transactions, transactions with
contractual protection, loss transactions, transactions with a
significant book-tax difference, and transactions involving a
brief asset holding period.
(2)
Listed transactions. A listed transaction is a
transaction that is the same as or substantially similar to
one of the types of transactions that the Internal Revenue
Service has determined to be a tax avoidance transaction and
identified by notice, regulation, or other form of published
guidance as a listed transaction.
(3) Confidential transactions--(i)
In general. A
confidential transaction is a transaction that is offered
under conditions of confidentiality.
All the facts and
circumstances relating to the transaction will be considered
when determining whether a transaction is offered under
conditions of confidentiality, including the prior conduct of
the parties.
If a taxpayer's disclosure of the structure or
tax aspects of the transaction is limited in any way by an
-15-
express or implied understanding or agreement with or for the
benefit of any person who makes or provides a statement, oral
or written,
(or for whose benefit a statement is made or
provided) as to the potential tax consequences that may result
from the transaction, a transaction is considered offered
under conditions of confidentiality, whether or not such
understanding or agreement is legally binding.
A transaction
also will be considered offered under conditions of
confidentiality if the taxpayer knows or has reason to know
that the taxpayer's use or disclosure of information relating
to the structure or tax aspects of the transaction is limited
in any other manner (such as where the transaction is claimed
to be proprietary or exclusive)
for the benefit of any person,
other than the taxpayer, who makes or provides a statement,
oral or written,
(or for whose benefit a statement is made or
provided) as to the potential tax consequences that may result
from the transaction.
(ii)
Privilege. A taxpayer's privilege to maintain the
confidentiality of a communication relating to a reportable
transaction in which the taxpayer might participate or has
agreed to participate, including a taxpayer's confidential
communication with the taxpayer's attorney, is not itself a
condition of confidentiality.
-16-
(iii) Securities law exception. A transaction is not
considered offered under conditions of confidentiality if
disclosure of the structure or tax aspects of the transaction
is subject to restrictions reasonably necessary to comply with
federal or state securities laws and such disclosure is not
otherwise limited.
(iv)
Presumption. Unless the facts and circumstances
indicate otherwise, a transaction is not considered offered
under conditions of confidentiality if every person who makes
or provides a statement, oral or written,
(or for whose
benefit a statement is made or provided) as to the potential
tax consequences that may result from the transaction,
provides express written authorization to the taxpayer
permitting the taxpayer (and each employee, representative, or
other agent of such taxpayer) to disclose to any and all
persons, without limitation of any kind, the structure and tax
aspects of the transaction, and all materials of any kind
(including opinions or other tax analyses) that are provided
to the taxpayer related to such structure and tax aspects.
This presumption is available only in cases in which the
written authorization to disclose is effective without
limitation of any kind from the commencement of discussions.
(4)
Transactions with contractual protection. A
-17-
transaction with contractual protection is a transaction for
which the taxpayer has obtained or been provided with
contractual protection against the possibility that part or
all of the intended tax consequences from the transaction will
not be sustained, including, but not limited to, recission
rights, the right to a full or partial refund of fees paid to
any person, fees that are contingent on the taxpayer's
realization of tax benefits from the transaction, insurance
protection with respect to the tax treatment of the
transaction, or a tax indemnity or similar agreement (other
than a customary indemnity provided by a principal to the
transaction that did not participate in the promotion or
offering of the transaction to the taxpayer).
the foregoing,
Notwithstanding
a transaction will not be considered to have
contractual protection solely because the issuer of a debt
instrument agrees to pay additional interest to compensate the
holder of such debt instrument for withholding tax imposed on
interest paid on the debt instrument, or because the
requirement to pay such additional interest entitles the
issuer to redeem the debt instrument.
(5) Loss transactions--(i)
In general. A loss transaction
is any transaction resulting in, or that is reasonably
expected to result in, a taxpayer claiming a loss under
-18-
section 165 of at least-(A)
$10 million in any single taxable year or $20 million
in any combination of taxable years for corporations;
(B)
$5 million in any single taxable year or $10 million
in any combination of taxable years for partnerships or S
corporations, whether or not any losses flow through to one or
more partners or shareholders;
(C)
$2 million in any single taxable year or $4 million
in any combination of taxable years for individuals or trusts,
whether or not any losses flow through to one or more
beneficiaries; or
(0)
$50,000 in any single taxable year for individuals or
trusts, whether or not the loss flows through from an S
corporation or partnership, if the loss arises with respect to
a section 988 transaction (as defined in section 988(c) (1)
relating to foreign currency transactions).
(ii) Section 165 loss.
(A) For purposes of this section,
in determining the thresholds in paragraph (b) (5) (i) of this
section, the amount of a section 165 loss is adjusted for any
salvage value and for any insurance or other compensation
received.
See §1.165-1 (c) (4) .
However, a section 165 loss
does not take into account offsetting gains or other income or
limitations.
For example, a section 165 loss does not take
-19-
into account the limi tat ion in section 165 (d) (relating to
wagering losses) or the limitations in sections 165(f), 1211,
and 1212
(B)
( relating to capi tal losses).
For purposes of this section, a section 165 loss
includes an amount deductible by virtue of a provision that
treats a transaction as a sale or other disposition, or
otherwise results in a deduction under section 165.
165 loss includes,
A section
for example, a loss resulting from a sale
or exchange of a partnership interest under section 741 and a
loss resulting from a section 988 transaction.
(iii) Exceptions. Transactions that result in the
following losses under section 165 are not loss transactions
under this paragraph (b) (5)-(A) A loss from fire,
storm, shipwreck, or other
casualty, or from theft, as defined in section 165(c) (3); or
(B) A loss from a compulsory or involuntary conversion as
described in section 1231 (a) (3) (A) (ii) and section
1231 (a) (4) (B) .
(6) Transactions with a significant book-tax difference-(i)
In general. A transaction with a significant book-tax
difference is a transaction where the treatment for Federal
income tax purposes of any item or items from the transaction
differs, or is reasonably expected to differ, by more than $10
-20-
million on a gross basis from the treatment of the item or
items for book purposes in any taxable year.
For purposes of
this determination, offsetting items shall not be netted for
either tax or book purposes.
For purposes of this paragraph
(b) (6), book income is determined by applying
accepted accounting principles (GAAP)
u.s.
generally
for worldwide income.
Adjustments to any reserve for taxes are disregarded for
purposes of determining the book-tax difference.
(ii) Applicability--(A) In general. This paragraph (b) (6)
applies only to-(1)
Taxpayers that are reporting companies under the
Securities Exchange Act of 1934
business entities
(15 USCS 78a) and related
(as described in section 267(b) or 707(b));
or
(~)
Business entities that have $100 million or more in
gross assets
(the assets of all related business entities (as
defined in section 267(b) or 707(b)) must be aggregated).
(B) Consolidated returns. For purposes of this paragraph
(b) (6),
in the case of taxpayers that are members of a group
of affiliated corporations filing a consolidated return,
transactions solely between or among members of the group will
be disregarded.
Moreover, where two or more members of the
group participate in a transaction that is not solely between
-21-
or among members of the group,
items shall be aggregated (as
if such members were a single taxpayer), but any offsetting
items
shall not be netted.
(C)
Foreign persons. In the case of a taxpayer that is a
foreign person (other than a foreign corporation that is
treated as a domestic corporation for Federal tax purposes
under section 269B,
953(d), 1504(d) or any other provision of
the Internal Revenue Code), only assets that are
under §1.884-1(d)
u.s.
assets
shall be taken into account for purposes of
paragraph (b) (6) (i i) (A)
(~)
of this section, and only
transactions that give rise to income that is effectively
connected with the conduct of a trade or business within the
United States
(or to losses, expenses, or deductions allocated
or apportioned to such income) shall be taken into account for
purposes of this paragraph (b) (6) .
(0)
Owners of disregarded entities. In the case of an
eligible entity that is disregarded as an entity separate from
its owner for Federal tax purposes, items of income, loss,
expense, or deduction that otherwise are considered items of
the entity for book purposes shall be treated as items of its
owner, and items arising from transactions between the entity
and its owner shall be disregarded, for purposes of this
paragraph (b) (6) .
-22-
(E)
Partners of partnerships. In the case of a taxpayer
that is a member or a partner of an entity that is treated as
a partnership for Federal tax purposes, items of income, loss,
expense, or deduction that are allocable to the taxpayer for
Federal tax purposes but otherwise are considered items of the
entity for book purposes shall be treated as items of the
taxpayer,
(F)
for purposes of this paragraph (b) (6) .
Shareholders of certain foreign corporations. To the
extent that a taxpayer is considered under paragraph
(c) (3) (ii) of this section to have indirectly participated in
a transaction to which a foreign corporation is a direct
party, all items from the transaction that otherwise are
considered items of the foreign corporation for Federal tax
purposes or book purposes shall be considered items of the
taxpayer for purposes of this paragraph (b) (6) .
(iii) Exceptions. Items listed in paragraphs
(b) (6) (iii) (A)
through (M) of this section are not items for
which reporting is required under this paragraph (b) (6)
(A)
Items to the extent a book loss or expense is
reported before or without a loss or deduction for Federal
income tax purposes.
(B)
Items to the extent income or gain for Federal income
tax purposes is reported before or without book income or
-23-
gain.
(C)
Depreciation, depletion, and amortization relating
solely to differences in methods,
lives,
lives
(for example, useful
recovery periods), or conventions.
(D)
Bad debts or cancellation of indebtedness income.
(E)
Federal, state, local, and foreign taxes.
(F)
Compensation of employees and independent
contractors, including stock options and pensions.
(G)
Items that for Federal tax purposes cannot be
deducted or capitalized, such as certain payments for meals
and entertainment, and certain fines and penalties.
(H) Charitable contributions of cash or tangible
property.
(I) Tax exempt interest, including municipal bond
interest.
(J)
Dividends,
including amounts treated as dividends
under section 78, distributions of previously taxed income
under sections 959 and 1293, and income inclusions under
sections 551,
(K)
951, and 1293.
Items resulting from transactions under section 1033.
(L) Gains and losses arising under section 475 or section
1296.
(M)
section 481 adjustments.
-24-
(7)
A
Transactions involving a brief asset holding period.
transaction involving a brief asset holding period is a
transaction resulting in, or that is reasonably expected to
result in, a tax credit exceeding $250,000 (including a
foreign tax credit) if the underlying asset giving rise to the
credit is held by the taxpayer for less than 45 days.
For
purposes of determining the holding period, the principles in
section 246(c)
(3)
and (c)
(8) Exceptions--(i)
(4)
apply.
In general. A transaction will not be
considered a reportable transaction, or will be excluded from
any individual category of reportable transaction under
paragraphs
(b) (2)
through (7) of this section, if the
Commissioner makes a determination, by published guidance,
individual ruling under paragraph (f) of this section, or
otherwise, that the transaction is not subject to the
reporting requirements of this section.
(ii) Special rules for RICs. For purposes of this
section, a regulated investment company as defined in section
851 is not required to disclose transactions described in
paragraph (b)
(c)
(5)
or (6) of this section.
Definitions. For purposes of this section, the
following terms are defined as follows:
(1)
Taxpayer. The term taxpayer means any person
-25-
described in section 7701(a) (1),
including S corporations.
The term taxpayer also includes, unless specifically provided
elsewhere in this section, an affiliated group of corporations
that joins in the filing of a consolidated return under
section 1501.
(2) Corporation. When used specifically in this section,
the term corporation means an entity that is required to file
a return for a taxable year on any 1120 series form,
successor form,
(3)
or
excluding S corporations.
Indirect participation--(i)
In general. A taxpayer
will have indirectly participated in a reportable transaction
if the taxpayer's Federal tax liability is affected (or in the
case of a partnership or an S corporation, if a partner's or
shareholder's Federal tax liability is reasonably expected to
be affected) by the transaction even if the taxpayer is not a
direct party to the transaction (e.g., the taxpayer
participates as a partner in a partnership, as a shareholder
in an S corporation, or through a trust or a controlled
entity) .
Moreover, a taxpayer will have indirectly
participated in a reportable transaction if the taxpayer knows
or has reason to know that the tax benefits claimed from the
taxpayer's transaction are derived from a reportable
transaction.
-26-
(ii)
Shareholders of foreign corporations--(A)
general.
In
A taxpayer that is a shareholder in a foreign
corporation will not be considered to have participated
indirectly in a transaction to which the foreign corporation
is a direct party merely because the taxpayer is a shareholder
in the foreign corporation unless the taxpayer is a reporting
shareholder
(as de fined in paragraph (c) (3) (i i) (B) of thi s
section) and the transaction either is described in any of the
paragraphs
(b) (2)
through (5) or in paragraph (b) (7) of this
section, or reduces or eliminates an income inclusion that
otherwise would be required under section 551,
(B)
951, or 1293.
Reporting shareholder. For purposes of paragraph
(c) (3) (ii) (A) of thi s section, the term reporting shareholder
means a United States shareholder (as defined in section
551(a))
in a foreign personal holding company (as defined in
section 552), a United States shareholder (as defined in
section 951(b))
in a controlled foreign corporation (as
defined in section 957), or a 10 percent shareholder (by vote
or value) of a qualified electing fund (as defined in section
1295) .
(iii) Example. The following example illustrates the
provi sions of paragraph (c) (3) (i) of thi s section:
Example. Notice 95-53
(1995-2 C.B. 334)
-27-
(see
§601.601(d) (2) of this chapter), describes a lease stripping
transaction in which one party (the transferor)
assigns the
right to receive future payments under a lease of tangible
property and receives consideration which the transferor
treats as current income.
The transferor later transfers the
property subject to the lease in a transaction intended to
qualify as a substituted basis transaction, for example, a
transaction described in section 351.
In return, the
transferor receives stock (with low value and high basis)
the transferee corporation.
from
The transferee corporation claims
the deductions associated with the high basis property subject
to the lease.
The transferor and transferee corporation have
directly participated in the listed transaction.
If the
transferor subsequently transfers the high basis/low value
stock to a taxpayer in another transaction intended to qualify
as a substituted basis transaction and the taxpayer uses the
stock to generate a loss, and if the taxpayer knows or has
reason to know that the tax loss claimed was derived from the
lease stripping transaction, then the taxpayer is indirectly
participating in a reportable transaction.
Accordingly, the
taxpayer must disclose the reportable transaction and the
manner of the taxpayer's indirect participation in the
reportable transaction under the rules of this section.
-28-
(4)
Substantially similar. The term substantially similar
includes any transaction that is expected to obtain the same
or similar types of tax consequences and that is either
factually similar or based on the same or similar tax
strategy.
Receipt of an opinion regarding the tax
consequences of the transaction is not relevant to the
determination of whether the transaction is the same as or
substantially similar to another transaction.
Further, the
term substantially similar must be broadly construed in favor
of disclosure.
The following examples illustrate situations
where a transaction is the same as or substantially similar to
a listed transaction under paragraph (b) (2) of this section.
(Such transactions may also be reportable transactions under
paragraphs
(b) (3)
through (7) of this section.)
The following
examples illustrate the provisions of this paragraph (c) (4) :
Example 1. Notice 2000-44
(2000-2 C.B. 255)
(see
§601.601(d) (2) of this chapter), sets forth a listed
transaction involving offsetting options transferred to a
partnership where the taxpayer claims basis in the partnership
for the cost of the purchased options but does not adjust
basis under section 752 as a result of the partnership's
assumption of the taxpayer's obligation with respect to the
options.
Transactions using short sales,
-29-
futures,
derivatives
or any other type of offsetting obligations to inflate basis
in a partnership interest would be the same as or
substantially similar to the transaction described in Notice
2000-44.
Moreover, use of the inflated basis in the
partnership interest to diminish gain that would otherwise be
recognized on the transfer of a partnership asset would also
be the same as or substantially similar to the transaction
described in Notice 2000-44.
Example 2. Notice 2001-16 (2001-1 C.B. 730)
§601.601(d) (2)
(see
of this chapter), sets forth a listed
transaction involving a seller (X) who desires to sell stock
of a corporation (T), an intermediary corporation (M), and a
buyer (Y) who desires to purchase the assets
stock) of T.
(and not the
M agrees to facilitate the sale to prevent the
recognition of the gain that T would otherwise report.
Notice
2001-16 describes M as a member of a consolidated group that
has a loss within the group or as a party not subject to tax.
Transactions utilizing different intermediaries to prevent
the recognition of gain would be the same as or substantially
similar to the transaction described in Notice 2001-16.
An
example is a transaction in which M is a corporation that does
not file a consolidated return but which buys T stock,
liquidates T,
sells assets of T to Y, and offsets the gain
-30-
recognized on the sale of those assets with currently
generated losses.
(d) Form and content of disclosure statement. The IRS
will release Form 8886, "Reportable Transaction Disclosure
Statement" (or a successor form), for use by taxpayers in
accordance with this paragraph (d).
A taxpayer required to
file a disclosure statement under this section must file a
completed Form 8886 in accordance with the instructions to the
form.
The form must be attached to the appropriate tax
returns as provided in paragraph (e) of this section.
If a
copy of a disclosure statement is required to be sent to the
Office of Tax Shelter Analysis (OTSA) under paragraph (e) of
this section, it must be sent to: Internal Revenue Service
LM:PFTG:OTSA, Large & Mid-Size Business Division, 1111
Constitution Ave., NW., Washington, DC 20224, or to such other
address as provided by the Commissioner.
(e)
Time of providing disclosure--(l)
In general. The
disclosure statement for a reportable transaction must be
attached to the taxpayer's Federal income tax return for each
taxable year for which the taxpayer's Federal income tax
liability is affected by the taxpayer's participation in the
transaction.
In addition, a copy of the disclosure statement
must be sent to OTSA at the same time that any disclosure
statement is first filed with the taxpayer's Federal income
tax return.
If a reportable transaction results in a loss
which is carried back to a prior year, the disclosure
statement for the reportable transaction must be attached to
the taxpayer's application for tentative refund or amended
Federal income tax return for that prior year.
-31-
In the case of
a taxpayer that is a partnership or S corporation, the
disclosure statement for a reportable transaction must be
attached to the partnership's or S corporation's Federal
income tax return for each taxable year ending with or within
the taxable year of any partner or shareholder whose income
tax liability is affected or is reasonably expected to be
affected by the partnership's or S corporation's participation
in the transaction.
If a transaction becomes a reportable
transaction (e.g., the transaction subsequently becomes one
identified in published guidance as a listed transaction
described in paragraph (b) (2) of this section, or there is a
change in facts affecting the expected Federal income tax
effect of the transaction such that the transaction is
reportable under any of the paragraphs
(b) (5) through (7)) on
or after the date the taxpayer has filed the return for the
first taxable year for which the transaction affected the
taxpayer's or a partner's or a shareholder's Federal income
tax liability, the disclosure statement must be filed as an
attachment to the taxpayer's Federal income tax return next
filed after the date the transaction becomes a reportable
transaction (whether or not the transaction affects the
taxpayer's or any partner's or shareholder's Federal income
tax liability for that year).
The taxpayer must disclose the
-32-
transaction in the time and manner provided for under the
provisions of this section regardless of whether the taxpayer
also plans to disclose the transaction under other published
guidance,
for example, Rev. Proc. 94-69 (1994-2 C.B. 804)
(see
§601. 601 (d) (2) of this chapter).
(2) Example. The following example illustrates the
application of this paragraph (e)
Example. In January of 2003, F, a domestic calendar year
corporation, enters into a transaction that F reasonably
expects will result in an $8 million section 165 loss in a
single year and a $15 million section 165 loss over a
combination of years.
Assume that the transaction is not a
transaction described in any of the paragraphs (b) (2) through
(7) of this section, and, therefore, is not a reportable
transaction under paragraph (b) of this section.
On March 1,
2005, the IRS publishes a notice identifying the transaction
as a listed transaction described in paragraph (b) (2) of this
section.
Thus, upon issuance of the notice, the transaction
becomes a reportable transaction described in paragraph (b) of
this section.
F is required to file Form 8886 for the
transaction as an attachment to F's next filed Federal income
tax return.
If F's 2004 Federal income tax return has not
been filed on or before the date the Service identifies the
transaction as a listed transaction, the disclosure statement
must be attached to F's 2004 return and at that time a copy of
the form must be sent to OTSA.
(f) Rulings and protective disclosures--(l) Requests for
ruling. If a taxpayer is uncertain whether a transaction must
be disclosed under this section, that taxpayer may, on or
before the date that disclosure would otherwise be required
under this section, submit a request to the IRS for a ruling
as to whether the transaction is subject to the disclosure
-33-
requirements of this section.
If the request fully discloses
all relevant facts relating to the transaction, the potential
obligation of that taxpayer to disclose the transaction will
be suspended during the period that the ruling request is
pending and,
if the IRS subsequently concludes that the
transaction is a reportable transaction subject to disclosure
under this section, until the 60th day after the issuance of
the ruling (or,
if the request is withdrawn,
60 days after the
date that the request is withdrawn).
(2)
Protective disclosures. If a taxpayer is uncertain
whether a transaction must be disclosed under this section,
the taxpayer may disclose the transaction in accordance with
the requirements of this section, and indicate on the
disclosure statement that the taxpayer is uncertain whether
the transaction is required to be disclosed under this section
and that the disclosure statement is being filed on a
protective basis.
(g) Retention of documents. The taxpayer must retain a
copy of all documents and other records related to a
transaction subject to disclosure under this section that are
material to an understanding of the facts of the transaction,
the expected tax treatment of the transaction, or the
taxpayer's decision to participate in the transaction.
-34-
Such
documents must be retained until the expiration of the statute
of limitations applicable to the final taxable year for which
disclosure of the transaction was made in accordance with the
requirements of this section.
(This document retention
requirement is in addition to any document retention
requirements that section 6001 generally imposes on the
taxpayer.)
Such documents generally include, but are not
limited to,
the following:
marketing materials related to the
transaction; written analyses used in decision-making related
to the transaction; correspondence and agreements between the
taxpayer and any advisor, lender, or other party to the
reportable transaction that relate to the transaction;
documents discussing, referring to, or demonstrating the tax
benefits arising from the reportable transaction; and
documents,
if any, referring to the business purposes for the
reportable transaction.
(h) Effective dates. This section applies to Federal
income tax returns filed after February 28, 2000.
paragraphs
However,
(a) through (g) of this section apply to
transactions entered into on or after January 1, 2003.
The
rules that apply with respect to transactions entered into on
or before December 31, 2002, are contained in §1.6011-4T in
effect prior to January 1, 2003 (see 26 CFR part 1 revised as
-35-
of April 1, 2002 and 2002-28 I.R.B.
90
(see §601.601(d) (2)
of
this chapter)).
PART 20--ESTATE TAX; ESTATES OF DECEDENTS DYING AFTER
AUGUST 16, 1954
Par. 3.
The authority citation for part 20 continues to
read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par.
4.
Section 20.6011-4T is added to read as follows:
§20.6011-4T Requirement of statement disclosing participation
in certain transactions by taxpayers
(a)
(temporary).
In general. If a transaction is identified as a
"listed transaction
H
as defined in §1.6011-4T of this chapter
by the Commissioner in published guidance
(see §601.601(d) (2)
of this chapter), and the listed transaction involves an
estate tax under chapter 11 of subtitle B of the Internal
Revenue Code, the transaction must be disclosed in the manner
stated in such published guidance.
(b) Effective date. This section applies to transactions
entered into on or after January 1, 2003.
PART 25--GIFT TAX; GIFTS MADE AFTER DECEMBER 31, 1954
Par. 5.
The authority citation for part 25 continues to
read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par.
6.
Section 25.6011-4T is added to read as follows:
-36-
§25.6011-4T Requirement of statement disclosing participation
in certain transactions by taxpayers
(a)
(temporary).
In general. If a transaction is identified as a
"listed transaction" as defined in §1.6011-4T of this chapter
by the Commissioner in published guidance
(see §601.601(d) (2)
of this chapter), and the listed transaction involves a gift
tax under chapter 12 of subtitle B of the Internal Revenue
Code, the transaction must be disclosed in the manner stated
in such published guidance.
(b) Effective date. This section applies to transactions
entered into on or after January 1, 2003.
PART 31--EMPLOYMENT TAXES AND COLLECTION OF INCOME TAX AT THE
SOURCE
Par. 7.
The authority citation for part 31 continues to
read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 8.
Section 31.6011-4T is added to read as follows:
§31.6011-4T Requirement of statement disclosing participation
in certain transactions by taxpayers
(a)
(temporary).
In general. If a transaction is identified as a
"listed transaction" as defined in §1.6011-4T of this chapter
by the Commissioner in published guidance
(see §601.601(d) (2)
of this chapter), and the listed transaction involves an
employment tax under chapters 21 through 25 of subtitle C of
-37-
the Internal Revenue Code, the transaction must be disclosed
in the manner stated in such published guidance.
(b) Effective date. This section applies to transactions
entered into on or after January 1, 2003.
PART 53--FOUNDATION AND SIMILAR EXCISE TAXES
Par.
9.
The authority citation for part 53 continues to
read as follows:
Authority: 26 U.S.C. 7805
Par. 10.
Section 53.6011-4T is added to read as follows:
§53.6011-4T Requirement of statement disclosing participation
in certain transactions by taxpayers
(a)
(temporary).
In general. If a transaction is identified as a
"listed transaction
H
as defined in §1.6011-4T of this chapter
by the Commissioner in published guidance
(see §601.601(d) (2)
of this chapter), and the listed transaction involves an
excise tax under chapter 42 of subtitle D of the Internal
Revenue Code
(relating to private foundations and certain
other tax-exempt organizations), the transaction must be
disclosed in the manner stated in such published guidance.
(b) Effective date. This section applies to transactions
entered into on or after January 1, 2003.
PART 54--PENSION EXCISE TAXES
Par. 11.
The authority citation for part 54 continues to
-38-
read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 12.
Section 54.60ll-4T is added to read as follows:
§54.60ll-4T Requirement of statement disclosing participation
in certain transactions by taxpayers
(a)
(temporary).
In general. If a transaction is identified as a
"listed transaction" as defined in §1.60ll-4T of this chapter
by the Commissioner in published guidance
(see §60l.60l(d) (2)
of this chapter), and the listed transaction involves an
excise tax under chapter 43 of subtitle 0 of the Internal
Revenue Code
(relating to qualified pension, etc., plans), the
transaction must be disclosed in the manner stated in such
published guidance.
(b)
Effective date. This section applies to transactions
entered into on or after January I, 2003.
PART 56--PUBLIC CHARITY EXCISE TAXES
Par. 13.
The authority citation for part 56 continues to
read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 14.
Section 56.60ll-4T is added to read as follows:
§56.60ll-4T Requirement of statement disclosing participation
in certain transactions by taxpayers
(a)
In general.
(temporary).
If a transaction is identified as a
-39-
"listed transaction" as defined in §l.6011-4T of this chapter
by the Commissioner in published guidance (see §601. 601 (d) (2)
of this chapter), and the listed transaction involves an
excise tax under chapter 41 of subtitle D of the Internal
Revenue Code (relating to public charities), the transaction
must be disclosed in the manner stated in such published
guidance.
(b) Effective date. This section applies to transactions
entered into on or after January 1, 2003.
PART 301--PROCEDURE AND ADMINISTRATION
Par. 15.
The authority citation for part 301 continues
to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 16.
Section 301.6111-2T is amended as follows:
1.
Paragraphs
(a) (3) and (b) (3) (i) are revised.
2.
Paragraph (c) (3)
is amended by adding a sentence at
the end of the paragraph.
3.
Paragraph (h)
is amended by revising the paragraph
heading and removing the third sentence through the last
sentence and adding two new sentences in their place.
The revisions and additions read as follows:
§301.6111-2T
(a)
Confidential corporate tax shelters
* * *
-40-
(temporary).
(3)
For purposes of this section, references to the term
"transaction" include all of the factual elements relevant to
the expected tax treatment of any investment, entity, plan, or
arrangement, and include any series of steps carried out as
part of a plan.
For purposes of this section, the term
"substantially similar" includes any transaction that is
expected to obtain the same or similar types of tax
consequences and that is either factually similar or based on
Receipt of an opinion
the same or similar tax strategy.
regarding the tax consequences of the transaction is not
relevant to the determination of whether the transaction is
the same as or substantially similar to another transaction.
Further, the term
"substantially similar" must be broadly construed in favor of
registration.
For examples, see
§1.
6011-4T (c) (4) of this
chapter.
* * * * *
(b)
* * *
( 3)
* * *
(i)
The potential participant is expected to participate
in the transaction in the ordinary course of its business in a
form consistent with customary commercial practice (a
transaction involving the acquisition, disposition, or
-41-
restructuring of a business, including the acquisition,
disposition, or other change in the ownership or control of an
entity that is engaged in a business, or a transaction
involving a recapitalization or an acquisition of capital for
use in the taxpayer's business, shall be considered a
transaction carried out in the ordinary course of a taxpayer's
business); and
* * * * *
(c)
(3)
* * * This presumption is available only in cases in
which the written authorization to disclose is effective
without limitation of any kind from the commencement of
discussions.
* * * * *
(h) Effective dates. * * * However, paragraphs
(a) (3),
(b) (3) (i), and (c) (3) of this section apply to confidential
corporate tax shelters in which any interests are offered for
sale on or after January 1, 2003.
The rules that apply to
confidential corporate tax shelters in which any interests are
offered for sale after February 28, 2000, and on or before
December 31, 2002, are contained in §301.6111-2T in effect
-42-
prior to January 1, 2003
(see 26 CFR part 301 revised as of
April 1, 2002, and 2002-28 I.R.B.
91
(see §601. 601 (d) (2) of
this chapter))
Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
Approved:
October 15, 2002
Pamela F. Olson,
Assistant Secretary of the Treasury.
PO-3543: Remarks of Brian Roseboro to the Business Management Roundtable Global Fi ... Page 1 of 1
PRess HOOM
FROM THE OFFICE OF PUBLIC AFFAIRS
October 17, 2002
PO-3543
Remarks of Treasury Assistant Secretary for Financial Markets Brian
Roseboro to the Business Management Roundtable Global Fixed Income
Institute
Text Wlti, ChClItS
http://www.treas.gov/press/releases/p03543.htm
111612002
DEPARTMENT OF THE TREASURY
OFFICE OF PUBLIC AFFAIRS
For Immediate Release
October 17,2002
Contact: Betsy Holahan
202-622-2960
Remarks of
Treasury Assistant Secretary for Financial Markets Brian Roseboro
to the Business Management Roundtable
Global Fixed Income Institute
"Managing Debt Is Managing Variance"
Thank you for the opportunity to address such a distinguished gathering.
As Assistant Secretary for Financial Markets at the u.S. Treasury, I am
responsible for advising Secretary O'Neill on the federal government's debt management
policies. Today I'd like to share with you a principle the Secretary has ingrained at the
Treasury, a principle that echoes what I'd earlier learned as a central banker, sales person,
trader, and more recently a risk manager.
And that is, variance matters - it matters a lot. Variance is a greatly underappreciated measure. Thinking about it always reminds me of the man who puts his feet
in the oven and his head in the freezer and says, "On average, I feel just fine." The most
common conceptual error I see from watchers of the U.S. Treasury, whether on Capitol
Hill or Wall Street, is to over-rely on point forecasts, and to under-invest in
understanding the likely scope of deviation. Eager to get the inside story on our future
borrowing needs, a trader or a reporter may sidle up to me to ask, "Which are you using or worse yet, which do you believe - the Administration or 'Street' projections?" Wrong
question. It presumes we Treasury gnomes paste a single number above our computers
and walk around with it pasted to our foreheads.
When we plan for future debt management decisions, we can no more zero in on
- nor solely plan around - one estimate than, for example, a currency trader can presume
that the forward rate is a sure predictor of the future spot price. We have to look at a
range of futures and test how our decisions would tum out in each.
In the time you've graciously afforded me, I'll start by reviewing the Treasury's
debt management mission, and then speak to the role of variance in shaping how we
achieve that mission. I'll then close with a look at what variance analysis says about our
future borrowing needs. Here's a sneak preview for those who like to jump to the end of
the book: there's far more capacity in the u.s. Treasury market than our bleakest fiscal
projections suggest we will need.
An apparent contradiction
The key to education is repetition. So let me start by re-stating the Treasury's
single objective in managing the marketable debt. Just like that of a private sector chief
financial officer, our objective is to achieve the lowest cost, over time, for the federal
government'sjinancing needs. However, unlike a private sector CFO, a Treasury debt
manager does not, and must not, "time the market." We never have. Recent ten-year
yields are low by historical standards - 40 year lows - but we aren't holding snap
auctions. We don't even take the yield curve into account when we allocate how much to
raise by different maturities. Nor do we cancel auctions due to spikes in our cash
balances. Instead, to achieve our objective of lowest cost over time, the Treasury
commits to regular and predictable issuance across a wide range of securities. This
regularity and predictability gives investors certainty that they can get our securities if
they need them. We're always there.
Market participants thus have grown habituated to using Treasuries for pricing,
hedging, and cash management, and to relying on our stable issuance patterns. In 2001,
even with reduced issuance over the prior years, the daily average volume of transactions
in the Treasury market averaged almost $300 billion. That's over three times the daily
average volumes for each of corporate debt, agency debt, mortgage-related securities, and
even the New York Stock Exchange. In 2002, we're averaging close to $350 billion.
Only the volume of interest rate swaps transactions are comparable with Treasury
securities. Over time, we believe this regularity and predictability cuts our financing
costs more than market-timing moves ever could.
So ideally, one could conclude we should lock down our issuance calendar
through eternity and post it on our website. We can't. We just don't have crystal-clear
foresight of how much money we'll need to borrow.
In fact, fiscal forecasts are notoriously unreliable - not because of the ability or
efforts of those charged with making the forecasts, but because of the quality and
variability of the multiple inputs. Going back to the early 1990s, the average forecast
uncertainty, with only an 8-month horizon, is $75 billion. Or take the "post-equity
bubble" surprise we faced last year. The gap between the February 2001 forecast for FY
2002 and the current projected results, for FY 2002, is no less than $396 billion. And as
the forecasting horizon extends, the forecast uncertainties magnify. Take a look at the
Congressional Budget Office's self-estimated variance over the next five years:
2
Trillions of Dollars
1.0
0.8
0.6
0.4
0.2
o
-0.2
I
-0.4
-0.6
_ I
1989 1991 1993 1995 1997 1999 2001 2003 2005 2007
Source: CBO Outlook (1/02)
Is it just a case of bad "government" forecasting? No, the private sector banks
and economists get it just as wrong. A small part of the problem may be that the U.S.
Treasury has less control over fiscal policy than do our sister finance ministries in
parliamentary systems. But the underlying problem is that our financing needs, and thus
auction sizes, are constantly shifting in response to at least four dynamic factors:
(1) Seasonal changes in our cash flows (up to $200 billion), daily standard
deviation of $18 billion!
(2) Structural changes in tax and expenditure policies
(3) U.S. economic activity
(4) The relationship between the economy, tax code, and taxes actually raised
Yet just a moment ago I said that our mantra was "regular and predictable." Do I
contradict myself?
Managing variance
I don't think so. "Regular and predictable" does not mean static, inflexible and
never changing. It means factoring variance into our debt management policies. It
means reducing the uncertainty where we can and planning for where we cannot. It
means offering a flexible product range, improving our auction and distribution systems,
and preparing the market as much as possible when we do have to make policy changes.
The Office of Management and Budget, the Council of Economic Advisors, the
Treasury, and other government offices strive to improve our economic forecasting and
thus our borrowing projections. But think for a moment on the difficulty faced if you
were running your business off metrics, in our case economic indicators, that are in many
instances as much as 6 months old. This alone creates a significant impediment to
3
improvements in forecasting. Another major impediment - politics- well, that
forecasting we will leave to the tarot~card readers.
But better forecasting is only part of the answer. "In preparing for battle," General
(later President) Eisenhower advised, "I have always found that plans are useless, but
planning is indispensable." So we constantly ask those fundamental risk management
questions: "What is? What was? What if? And how?" What is our current, up-to-date,
borrowing requirement? What happened after we adapted to changes in previous
borrowing requirements? What if we vary the assumptions driving future borrowing
needs? How can we better prepare the market for alterations of our borrowing pattern
when - not if-the future does not fit our forecast?
So back to our friendly reporter's question: do we use OMB or Street projections?
OMB projections are the point of reference, the central tendency - but no single
point forecast dominates our thinking. We plan for a broad distribution. Given the
uncertainties in all forecasts, it's the only prudent thing to do.
Further, our flexibility is increased by offering as broad a product range as we
can, consistent with minimizing cost to the taxpayer over time. Our current calendar has
roughly 180 auctions per year: weekly for 4-week, 13-week, and 26-week bills, monthly
for 2-year notes, quarterly for longer-dated nominal notes, and three times a year for
inflation-indexed securities.
The broader customer demand is for our products, the more diversified we can be
and the more easily we can respond to future events. That's partly why we are now
promoting the 10-year inflation-indexed note. These notes are particularly interesting for
investors, because their market value varies inversely with real U.S. interest rates, not
nominal rates. For us as issuers, indexed notes diversify our portfolio of liabilities. They
are a unique asset class - dollar-denominated, inflation-protected, and backed by the U.S.
full faith and credit. Adding these securities to a portfolio increases diversification but
does not increase credit risk, thus potentially improving the risk/reward tradeoff. Further,
these securities can mitigate exchange rate risk, since they are linked to a measure of
purchasing power. We think they should be attractive to every diversified investor.
Still, occasionally the changes in our borrowing needs exceed the flexibility built
into even this diverse auction schedule. That's when we have to consider policy changes.
Over the last three decades, Treasury has introduced and withdrawn numerous securities
including the 52 week bill, 3 year note, 4 year note, 5 year inflation index note, seven
year note, twenty year bond, thirty year bond, thirty year callable bond, thirty year
inflation indexed bond, and foreign-denominated securities. We always signal our
deliberations well ahead of time, both in our discussions with the Treasury Borrowing
Advisory Committee (with minutes publicized immediately) and in our quarterly
refunding statements. When we make a decision, we announce it at a quarterly refunding
as early as we can. Market participants gain substantial lead-time for any specific
changes to our offerings, and an awareness of the problems or choices we face.
4
We also believe that it is especially important to plan for the variance risk that
exists for the distribution of our securities and continue to grow our base of direct
competitive bidders in order to sell our securities at the lowest possible price. In the U.S.,
approximately 1,200 small to medium-sized submitters directly participate in Treasury's
auctions using our IP browser-based bidding mechanism implemented in 1998.
Market capacity and crowding-out
So let me now turn to my final point, which is to address a question apparently on
many of your minds. How much will the U.S. borrow in the next couple years, will we
"crowd out" the market, and ifso, what do we plan to do about it? OMB's estimate of
additional marketable borrowing for FY 2002 was $209 billion. Its forecast for FY 2003
was $126 billion. But first, let's put our current debt in perspective.
Due to economic growth and the surpluses of the late 1990s, publicly held debt
today is about 35 percent ofGDP, versus 50 percent a decade ago. And while Treasury
debt has slowly shrunk, the overall dollar bond markets have doubled from $8 trillion in
1990 to almost $20 trillion today.
So even after running a roughly $165 billion deficit in fiscal 2002, our bill
issuance as a percentage of all "open market paper" - short-term commercial paper plus
Treasury bills - stands at nearly an all-time low of29 percent. The story is the same for
our notes and bonds. They're at a 28-year low as a portion oflong-term equity and debt.
Treasury Debt as Portion of U.S. Open Market Paper
i 70
g.
~
60
~ 50
:;; 40
:::E
30
r:::
8.
20
-;;e.
10 ,
0 ~-----,-----,----~.--
o
'0
1----,-----1
.-. r---
r----,
~~~~~~~~~~~~#~~~~~~~~
Year
5
Treasury Notes & Bonds as Portion of U.S. long-Term
Nonfinancial Credit and Equity Market Assets
16%
14% -
/
\.
~'
12%
10% 8%
6%
4%
2%
0%
---I----'--r
- - - - , - - r - -------,-- - ------,-- -------,----------.----r----i-------,--------------,-----------,-- -
- --r------,-
Source: Federal Reserve Flow of Funds
Now let's put on our risk management hats, and take the darkest, ugliest, most
pessimistic projections we can outlandishly imagine, and then make them even worse, to
say $400 billion per year. The budget deficit would still be below four percent ofGDP,
versus five percent or more several times in the past two decades - and now in a much
deeper fixed income market. On every measure, we would still remain far below any
theoretical market limit for Treasury debt, and far away from crowding out other issuers.
Obviously we're not eager for this kind of borrowing, nor do we expect anything
coming close to it. The President has called repeatedly on Congress to curb spending,
and we all look forward to a robust economic recovery. But my point is that, even taking
inevitable variance into account, we are confident that the financial markets can digest
any increases in Treasury issuance that prove necessary, whether through current or if
necessary new securities.
I again thank you for the opportunity to speak at this conference. I would be more
than happy to answer any questions you may have.
6
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
October 16, 2002
·RESULTS OF TREASURY'S AUCTION OF 4-WEEK BILLS
28-Day Bill
October 17, 2002
November 14, 2002
912795LK5
Term:
Issue Date:
Maturity Date:
CUSIP Number:
1.630%
High Rate:
Investment Rate 1/:
Price:
1.658%
99.873
All noncompetitive and successful competitive bidders were awarded
securities at the high rate.
Tenders at the high discount rate were
allotted 69.53%.
All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Competitive
Noncompetitive
FIMA (noncompetitive)
$
SUBTOTAL
Federal Reserve
TOTAL
Accepted
Tendered
Tender Type
$
44,687,309
36,827
$
13,963,574
36,827
o
o
44,724,136
14,000,401
1,405,520
1,405,520
46,129,656
$
15,405,921
Median rate
1.625%: 50% of the amount of accepted competitive tenders
Nas tendered at or below that rate.
Low rate
1.600%:
5% of the amount
)f accepted competitive tenders was tendered at or below that rate.
3id-to-Cover Ratio = 44,724,136 / 14,000,401 = 3.19
L/ Equivalent coupon-issue yield.
http://www.publicdebt.treas.gov
~O-3544
PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
FOR IMMEDIATE RELEASE
October 15, 2002
Contact: Stephen Meyerhardt
(202) 691-3792
ELECTRONIC
SERIES I SAVINGS BOND NOW AVAILABLE
.'
The Bureau ofthe Public Debt today launched an electronic version of the inflation-indexed Series I Savings
Bond as part of a new system, TreasuryDirect, designed to offer investors a one-stop web location for buying
and managing holdings of Treasury securities. The electronic I Bond marks the first time a savings bond has
been offered to the public in paperless form, online, at www.treasurydirect.gov.
The electronic I Bond supplements the traditional ways the public buys and redeems savings bonds.
TreasuryDirect, for the first time, will allow I Bond purchasers to buy in increments of as little as a penny
above the minimum purchase price of$25, up to the annual purchase limit of$30,000. The Series I Savings
Bond earns a real rate ofretum above inflation for as long as 30 years.
"This new way of buying, managing, and redeeming I Bonds is the first step in a larger initiative,
TreasuryDirect, which creates a direct relationship between the U.S. Treasury and its customers," said Van
Zeck, Commissioner of the Public Debt. "We are making it easier than ever for individuals to purchase and
manage their I Bonds in an online account with the Treasury. We also plan to make the full range of
Treasury securities available online through TreasuryDirect, resulting in cost savings to taxpayers through
improved efficiencies and lower transaction costs."
The new TreasuryDirect.gov website is a customer-focused and intuitive interactive tool. It provides
investors with a safe and convenient way to learn about, buy, and manage their Treasury securities in a single
account. Payments for purchases and redemptions are made by electronic funds transfers through customerdesignated accounts at their financial institutions.
TreasuryDirect.gov will be expanded early next year to include additional information and options.
Customers will continue to have easy access to the existing services used to purchase other Treasury
securities including Treasury bills and notes.
Savings bonds remain available over-the-counter through financial institutions, through payroll savings
programs offered by employers, and online through Savings Bonds Direct. Redemptions of paper savings
bonds are handled by most commercial banks and thrift institutions.
The Bureau of the Public Debt will launch a comprehensive education campaign next year to inform the
public about TreasuryDirect as a safe and secure way to buy and manage Treasury securities in a paper-free
environment.
000
www.treasurydirect.gov
PO-3545
Questions & Answers on Electronic I Bonds and TreasuryDirect
Q. What are electronic I Bonds?
A. Electronic I Bonds, like their paper cousins, are accrual savings securities issued
to holders of TreasuryDirect accounts in book-entry fonn. I Bonds earn interest
according to a formula indexed to inflation. In most respects, their tenus and
conditions are the same as for the paper Series I Bonds issued since 1998. Payments
for purchases and redemptions of electronic I Bonds are made by electronic funds
transfer to and from a customer-designated account at a financial institution able to
accept ACH debits and credits.
Q. How do you open a TreasuryDirect account?
A. All you need to do to open a TreasuryDirect account online is go to
www.treasurydirect.gov and provide the specified infonnation. You must be 18 years
of age or older, provide your social security number, drivers license or state ID
number and expiration date, birth date, bank routing and account number, e-mail
address, postal address, and telephone number. A U.S. mailing address is required.
You can open an account now and purchase securities anytime.
Q. What is different about electronic I Bonds?
A. While interest earnings and financial tenns are the same as for paper I Bonds, the
paperless I Bond offers investors greater flexibility and convenience. One significant
difference is in the registration options available. While single owner and beneficiary
fonns remain the same, electronic I Bonds can be issued in primary, not co-owner,
fonn with a secondary owner (A with B). Another difference is that ownership of an
electronic I Bond can be transferred as a gift to any individual with a TreasuryDirect
account, although such a transfer is a reportable event for tax purposes for the original
owner.
Q. What are some benefits ofbuying electronic I Bonds in a TreasuryDirect account?
A. TreasuryDirect account holders can buy and manage their securities 24-hours a
day, seven days a week from any computer with internet access. Account holders
may purchase securities in increments of as little as a penny above a minimum $25
initial purchase. Partial transfers or redemptions of holdings are also possible in
minimum amounts of $25. An account may be held open with no securities;
however, if a security is held it must have a minimum redemption value of $25. As a
result, owners of electronic I Bonds have far more flexibility in dealing with their
holdings than owners of paper bonds.
Q. What's the difference between TreasuryDirect and TreasuryDirect?
A.. TreasuryDirect is a new account-based way to buy, hold and manage Treasury
securities and is currently limited to electronic I Bonds. The TreasuryDirect you
have heard about since the 1980's is the existing method for buying and holding
marketable Treasury securities. TreasuryDirect account holders can continue to
access their accounts by going to the TreasuryDirect.gov website and clicking on
"Investor Services for Treasury Bills, Notes and Bonds."
Q. Where can I get more information?
A. More information about electronic I Bonds and TreasuryDirect can be found by
going to the website www.treasurvdirect.gov.
000
PO-3546: Under Secretary Taylor Increasing Economic Growth and Stability in Emergin...
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PHlSS HOOM
FROM THE OFFICE OF PUBLIC AFFAIRS
October 17, 2002
PO-3546
John B. Taylor
Under Secretary of Treasury for International Affairs
Remarks at the Cato Institute 20th Annual Monetary Conference
"International Financial Crises: What Is the Role For Government?"
Increasing Economic Growth and Stability in Emerging Markets
Waldorf Astoria Hotel, New York
Thank you for the invitation to speak today about the Bush Administration's strategy
to deal with financial crises in emerging markets. It is a real pleasure to step back
from the fray and to review some of the principles that have guided our day-to-day
decisions in this area.
OwnerShip, Growth, and Stability
Let me emphasize at the start that the Administration's emerging market strategy is
an interrelated part of our overall international economic agenda. The agenda
focuses on two goals: increaSing economic growth and increasing economic
stability throughout the world, not only in emerging markets countries, but also in
the developing countries and in the industrial countries, including the United
States. President Bush's idea is that each country, by following proven economic
policy principles and considering its own circumstances, can contribute significantly
to the achievement of greater growth and stability. His stress is on country
ownership of policies, with the United States willing to provide strong support for
good policy reforms.
These economic goals have not changed since the start of the Administration.
Indeed, the challenges of the war on terrorism-especially the need for increased
resources for security and for the removal of hotbeds of terrorism-make economic
growth and stability more important than ever.
Consistent with these goals was the Administration's perseverance in winning back
preSidential trade negotiation authority: free trade is a key driver of both economic
growth and stability.
The goals also underlie our economic policy program for the United States where
fiscal and monetary policies to combat the recession were implemented in a
remarkably timely fashion.
A theme of our pro-growth policy has been productivity growth through job creation
in the private sector. Higher productivity is essential for rising living standards and
reduction in poverty. The keys to raising productivity growth are the rule of law,
sound fiscal policy, low-inflation monetary policy, and the reduction in barriers to
trade-both external and internal.
Let me now focus on the part of our international economic agenda that relates to
the subject of this conference, dealing with financial crises and other instabilities in
emerging markets. I'll begin by discussing the problems we are trying to solve with
this strategy.
Three Related Problems
First, in recent years there has been a marked increase in the frequency and
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severity of financial crises in emerging markets. A recent McKinsey study,
Dangerous Markets: Managing in Financial Crises, puts the 1990s increase at 60
percent compared with the 1980s, and showed that more countries have
experienced crises in recent years. But even if there were no increase in the
number of crises in recent years, the number would still be too high. The damage
caused by economic and financial crises-deep recessions, rising unemployment,
volatile exchange rates, sky-high interest rates-create real hardships for people.
And the uncertainty caused by economic instability reduces foreign and domestic
investment and has negative implications for long-term growth.
Second, there has been a sharp decline in net private capital flows to emerging
markets in recent years. Averaging more than $150 billion per year from 19921997, net private capital flows fell off to less than $50 billion per year in 1998-2000.
Guillermo Calvo of the Inter-American Development Bank calls this sharp drop off a
"sudden stop." There are many explanations for this sudden stop, but the
increased frequency of financial crises, which has increased volatility and damaged
expected profitability, is one reason. Restoring private investment flows into
emerging market countries would help create higher productivity jobs and raise
living standards.
Third, real interest rates are still very high in many emerging market countries.
These high interest rates-caused in part by the risks of financial crisis and the
policies that raise such risks-discourage investment in productivity-raising capital.
As Secretary O'Neill has emphasized, the high interest rates are a burden on the
people in the emerging market countries; they are the ones who have to pay the
taxes that go to make the high interest payments. If there were fewer crises and
more countries followed the policies that merited investment grade ratings, then
these interest rates would be lower.
More than anything else our emerging market strategy is designed to address
these three problems. The aim is to reduce the frequency and severity of crises,
restore the flow of investment to emerging markets, and increase the number of
countries that have investment grade ratings.
Elements of an Emerging Market Strategy
For the strategy to work for the long haul, it must incorporate country ownership as
stressed by President Bush. We should be clear that countries themselves-not the
U.S., not the G-7, not the IMF-have ownership over their own policies. But what
are the core elements that define the strategy? How do they address the three
problems? How to they support country ownership?
An Emphasis on Crisis Prevention
It almost goes without saying that the best way to deal with crises is to prevent
them from happening in the first place. This requires close monitoring of country
vulnerabilities, and taking appropriate action to reduce those vulnerabilities. At the
U.S. Treasury, for example, we have developed a "Blue Chip" index based on
numerical crisis indicators from a variety of public and private sources. Of course,
all numerical indicators have their own problems. Some indicator models were
estimated during periods of fixed exchange rates where overvalued or undervalued
exchange rates have more predictive value for crises. Such models have to be
interpreted carefully if a country now has a flexible exchange rate. While the Blue
Chip averaging deals with some of the idiosyncrasies, we must back up the
indicators with judgmental analysis.
We are also asking that the IMF pay closer attention to vulnerabilities in emerging
markets. This requires that the IMF staff concentrate more on the areas most
central to its expertise: monetary, fiscal, exchange rate, financial, and debt
management policies. The IMF should also limit the number of countries with
programs, so that it does not spread itself too thin, and should narrow the range of
conditionality in programs. Narrowing conditionality has the added benefit of
increasing country ownership.
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The emerging market countries themselves, of course, have the primary
responsibility to help prevent crises. Adopting prudential standards, providing
greater transparency, keeping debt levels and inflation low, developing domestic
bond markets, reducing currency or duration mismatches, avoiding soft pegs, and
choosing either a flexible exchange rate or full dollarization are all good parts of a
crisis prevention strategy. It is our policy to encourage such reforms in emerging
market countries.
Reducing Contagion
A second element of our emerging market strategy is aimed at reducing contagion
from one crisis country to other countries. Reducing contagion is another form of
crisis prevention.
Last year in the early days of the Administration we felt that there was an excessive
emphasis on contagion. After many discussions with investors and traders, we
found much more differentiation between countries and between policies than had
previously been assumed. We spoke out that contagion was not "automatic." We
stated that our support for large scale financing at the IMF would not be based on
unfounded claims of contagion without evidence that there were fundamentals at
work linking countries. Then, using econometric analysis to bolster our views, we
distinguished between direct links from one country to another-which clearly exists
in neighboring countries like the United States and Mexico-and the automatic
spread of bad market events from one country to another without such links.
Our policy to reduce contagion had two other dimensions, which can be illustrated
in the case of Latin America. First, we welcomed a new IMF program for Brazil in
August of last year at the time that the crisis in Argentina started heating up. The
program was for $15 billion, much smaller than the previous Brazilian program, but
something that could provide a cushion. Our support for Uruguay early this year
was aimed at limiting the impact of the Argentina crisis on Uruguay, though in this
case there was much more direct or fundamental interdependence between the two
countries. Second, we have moved gradually in implementing our new strategy
regarding limits-accepting a waiver in Argentina in the spring 2001, and then
agreeing to an augmentation-so as to give markets time to adjust. Observe also
that this policy of supporting countries that are following good policies, but are
negatively impacted by a crisis in a nearby country, preserves incentives for country
ownership. In contrast, the alternative of supporting bad policies in the crisis
country due to fear of contagion effects undermines incentives to follow good
policies.
As with any change in policy, assessing its impact takes time, but one of the most
profound and beneficial changes in emerging markets visible in the last year is that
contagion among different emerging market countries has been reduced
dramatically. Figure 1 illustrates this important development. The three graphs in
the upper part of Figure 1 show the big impact of the Russian default on sovereign
debt spreads over U.S. Treasuries (called EMBI+ spreads) in all other parts of the
emerging market world: Asia, Africa, and Latin America. In contrast, the three
graphs in the lower part of Figure 1 show that after the Argentine default there was
no such interest rate reaction in other parts of the emerging market world: Asia,
Africa, and emerging market Europe.
Moreover, economic growth in emerging market countries outside of Latin America
has been very strong despite the deterioration in Argentina. Even within Latin
America, good policy in countries such as Chile and Mexico is being rewarded by
good economic performance. Investors are differentiating much more carefully
among emerging markets.
We have continued to emphasize the points made early in the Administration that
contagion is not inevitable and that uncritical acceptance of claims of contagion
should not constitute the basis for large-scale official sector financing.
Limiting Access and Clarifying Official Sector Responses
The third part of the strategy is to place limits on official sector finance and to be as
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clear as possible about those limits. The policy challenge is to move gradually in the
direction of less reliance on large official packages, so that investor expectations
can adjust smoothly to new official sector policies. In our view, there should be no
lending into unsustainable debt situations, but full implementation of a new access
limit policy will require a new process to deal with sovereign debt as described
below.
Clarifying the size of official financing packages is essential to increasing
predictability in the market, to curbing excessive risk-taking, and to providing the
right incentives for country ownership of good policies. In a further effort to clarify
official sector responses, we believe that the official sector should seek to avoid ad
hoc interventions using coercive official sector tactics.
As a first step to creating limits, we have established a policy of avoiding the use of
large-scale bilateral loan assistance; in other words, the IMF must be the main
source of emergency support. This allows the availability of IMF resources to act
as a natural budget constraint on official financing packages. In this vein, the United
States has made clear that it is not now in favor of an IMF quota increase. As
Secretary O'Neill has said, "Limiting official resources is a key tool for increasing
discipline over lending decisions." Limiting official resources in this way also places
more accountability at the IMF where technical development of loan programs takes
place.
So far the Administration has adhered to these pOlicies on access. Consider some
examples. Turkey and Argentina are two countries that were in crisis or near crisis
since the start of this Administration. Each was already on a large IMF program.
The new programs for Turkey in May of last year and in February of this year did
not involve large-scale bilateral support from the United States or the other G-7
countries. The program for Turkey entailed strong prior actions; the policies have
been implemented and the program has been on track with favorable economic
results.
Similarly, an augmented program for Argentina in August of last year did not entail
bilateral loan support. In the case of Argentina, however, it became clear by the
end of the year that the debt was. unsustainable and policy was off track. For this
reason, the Administration decided to stop supporting IMF lending to Argentina in
December. The recent programs for Uruguay and Brazil also did not have longterm, large-scale bilateral support. Because there was no such bilateral support,
the overall size of this year's program for Brazil was smaller than the overall
package in 1998, though the IMF support was larger.
Note that there was a four-day bridge loan from the U.S. Exchange Stabilization
Fund to get the Uruguayan banks to open as soon as possible; as noted above this
was designed to deal with the impact of Argentina on the banking sector in
Uruguay.
With respect to IMF lending, we believe the higher the level of exceptional access
for individual countries the greater should be the analytical justification for this
access. The IMF has introduced a new analytical framework for debt sustainability
analysis, which should help strengthen early identification of unsustainable
situations. We also would like the IMF to put in place a process to ensure that any
decision to provide exceptional levels of financing be supported by a formal
exceptional access report.
Improved predictability in sovereign debt restructuring processes
A fourth element of our emerging market strategy is to create a more orderly and
predictable process for debt restructuring. The aim is not to reduce the incentives
for sovereign governments to pay their debts in full and on time. Rather the aim is
to reduce the uncertainty about restructurings. There is currently a great deal of
uncertainty about the restructuring process. This uncertainty complicates decisionmaking. A more predictable sovereign debt restructuring process for countries that
reach unsustainable debt positions would help reduce thiS uncertainty. It would
thereby lead to better, more timely decisions, reducing the frequency and severity
of crises.
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Currently two approaches to an improved restructuring process have been
suggested.
One approach uses collective action clauses. It is often called the contractual
approach. It would have sovereign borrowers and their creditors put new clauses
into their external bond contracts. The clauses would provide a roadmap describing
as precisely as possible what happens when a country decides it has to restructure
its debt. In this way the contracts would create a more orderly and predictable
workout process. The official sector-in particular the U.S. Treasury and the G10-have outlined some broad parameters for this approach. Within these
parameters, sovereign borrowers and their creditors would work out the details as
the new bonds are issued. The parameters are that there should be a majority
action clause allowing a certain percentage of bondholders to change the financial
terms of the bond, an engagement/representation clause to facilitate information
flow between sovereign borrowers and their creditors and provide for the election of
a bondholders' representative, and a clause limiting disruptive legal action.
The other approach is statutory. It is frequently called the sovereign debt
restructuring mechanism (SDRM). It would endeavor to achieve these restructuring
goals by statute. This approach, which is being developed by the IMF staff and
management, is more centralized. It would require that the IMF articles be
amended or another international treaty be created. A newly created forum would
coordinate creditors and debtors and be empowered to handle certain disputes,
particularly as they relate to verification of claims. This approach would also deal
with aggregation across different debt issues and provide for uniform treatment for
instruments from different jurisdictions. To handle disputes relating to aggregation
and to provide uniform treatment under the contractual approach, an arbitration
process could be included in the clauses if borrowers and their creditors agreed.
I believe that we have made substantial progress in this area. In April of this year
the Finance Ministries and Central Bank Governors of the G-7 countries agreed on
an historic G-7 Action Plan for emerging markets. The plan called for the
immediate introduction of collective action clauses into sovereign debt contracts
and further development of a sovereign debt restructuring mechanism. At the
recent September meeting, the G-7 reiterated support for this approach. Moreover,
the G-7 stated that any sovereign-including any member of the G-7-that issues
bonds governed by the jurisdiction of another sovereign should include collective
action clauses. That is the strongest statement of support for collective action
clauses ever issued by the G-7.
Since last April, representatives from the private sector have stated their general
support for the introduction of collective action clauses. They have worked over the
summer months to further refine the specific form that these clauses would take. In
late September, representatives of the private sector, senior officials from the G-7
and senior officials from some key emerging markets met at the U.S. Treasury-the
first meeting of this kind ever. The purpose of the meeting was to discuss key
aspects of collective action clauses.
The views expressed by these three groups are important for determining how to
proceed in the future. All the G-7 officials reiterated their governments' support for
incorporating collective action clauses now and continuing to work on a more
specific proposal for the SDRM. The private sector supported the collective action
clauses, but strongly rejected the SDRM. Many of the emerging market countries
expressed support for the collective action clauses; many also expressed
disapproval of the SDRM.
With support for collective action clauses from the private sector, from the official
sector, and from some key emerging market countries, the time appears ripe for
moving ahead and actually putting such clauses in new issues. This would be a
tremendous step forward. Any delay would be most unfortunate. It is only when
the new clauses are in some actual bonds and trading in these bonds takes place
that people will be able to judge their effectiveness.
Good public policy entails considering all options and choosing the one that works
better than the alternatives. Today I have highlighted several obJectlves-
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encouraging country ownership, reducing the frequency of crises, increasing private
capital flows to emerging markets, and raising investment ratings of countries. For
those who are convinced that the clauses are superior to the SDRM, the best
strategy is to move ahead and introduce such clauses. If there is convincing
evidence that clauses do a better job of achieving these objectives than the SDRM
or a combination of clauses and the SDRM, then the clauses will be the instrument
of choice in this Administration's strategy for emerging markets. Similarly, if the
SDRM or a combination can be shown to work better for achieving these objectives,
then we will support such an alternative.
Concluding Remarks
In summary I have tried to give you an overview of the elements that are guiding
our emerging market strategy. I began with our immediate objectives of improving
country ownership, reducing the frequency of crises, increasing private sector
capital flows, and having more countries achieve "investment grade" status-all
means to the ends of higher economic growth and improved standards of living for
the people in emerging market countries.
I indicated how we have made good progress in crisis prevention, in reducing
contagion, in limiting access to large scale financing, and in creating more orderly
sovereign debt restructurings. And to further progress in this last area of debt
restructuring I suggested a framework through which the private sector and the
emerging market countries can move ahead.
Figure 1 Soverign Risk Spreads after the Russian and Argentine Defaults
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Figure 1. Sovereign Risk Spreads Mter the Russian and Argentine Defaults (Regional EMBI+ Indices)
Russia's default in 1998 hit emerging market countries around the world.
EMBI+ Asia After the Russian Default
EMBI+ Africa After the Russian Default
EMBI+ Latin America After the Russian Default
1800
1500
900
1500
1200
1200
600
900
900
600
600
300
300
300
Jan-98
Apr-98
1ul-98
Oc.-98
Jan-99
Apr-9 4
Jan-98
Apr-98
1ul-98
Oct-98
Jan-99
Apr-'
Jan-98
Apr-98
1ul-98
Oct-98
Jan-99
Apr-99
By contrast, Argentina's default did not trigger a rise in risk spreads elsewhere.
EMBI+ Asia After tlze Argentine Default
EMBI+ Africa After tlze Argentine Default
EMBI+ Europe After tlze Argentine Default
800
1500
900
500
1200
200
600
900
900
600
300
300
May"()l
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PO-3547: Treasury Issues Proposed Regulations Regarding Basis-Shifting Transaction
Page 1 of 1
fJH[SS HOOM
FROM THE OFFICE OF PUBLIC AFFAIRS
October 17, 2002
PO-3547
Treasury Issues Proposed Regulations Regarding Basis-Shifting Transaction
Today the Treasury Department issued proposed regulations confirming that
taxpayers cannot create tax losses in stock through certain basis-shifting
transactions. In these transactions, basis is purportedly shifted from a block of
stock owned by a non-U.S. person to a block of stock owned by a U.S. taxpayer,
enabling the U.S. taxpayer to claim an artificial loss on the disposition of his or her
shares. This technique purports to rely on current regulation section 1.302-2(c),
which permits a "proper adjustment" to the basis of other shares of stock in cases
where stock is redeemed and the proceeds of the stock redemption are treated as a
dividend for federal income tax purposes.
The proposed regulations will prevent such assertions by altering the rules that
would shift basis in stock redemptions. According to Pamela Olson, Assistant
Treasury Secretary for Tax Policy, "These new regulations set forth clear rules that
will prevent the claims for the shifting of basis attributable to stock that is
redeemed. The IRS currently is challenging losses claimed in a number of basisshifting transactions. In the meantime, the IRS and Treasury have proposed rules
that prevent such assertions in the future."
The text of the proposed regulations is attached.
http://www.treas.gov/press/releases/Po3547.htm
111612002
[4830-01-p]
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-150313-0 1]
RIN 1545-BA80
Redemptions Taxable as Dividends
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking and notice of public hearing.
SUMMARY: This document contains proposed regulations that provide guidance regarding the
treatment of the basis of redeemed stock when a distribution in redemption of such stock is treated as a
dividend, as well as guidance regarding certain acquisitions of stock by related corporations that are
treated as distributions in redemption of stock. The proposed regulations affect shareholders whose
stock in a corporation is redeemed or is acquired by a corporation related to the issuer of the stock,
and ate necessary to provide such shareholders with guidance regarding the treatment of the basis of
such stock. This document also provides notice of a public hearing on these proposed regulations.
DATES: Written or electronic comments must be received by January 16, 2003. Requests to speak
and outlines of topics to be discussed at the public hearing scheduled for February 20, 2003, at 10 a.m.
must be received by January 30, 2003.
ADDRESSES: Send submissions to CC:ITA:RU (REG-150313-0 1), room 5226, Internal Revenue
Service, POB 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand
delivered Monday through Friday between the hours of8 a.m. and 5 p.m. to: CC:ITA:RU
(REG-150313-01), Courier's desk, Internal Revenue Service, 1111 Constitution Avenue, NW.,
Washington, DC 20224. Alternatively, taxpayers may submit electronic comments directly to the IRS
Internet site at www.irs.gov/regs. The public hearing will be held in Room 4718, Internal Revenue
Building, 1111 Constitution Avenue, NW., Washington, DC.
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations generally, Lisa
K. Leong, (202) 622-7530; concerning issues under sections 367,861 and 864 of the Internal
Revenue Code, Aaron A. Farmer, (202) 622-3860; concerning submissions of comments, the hearing,
and/or to be placed on the building access list to attend the hearing, Treena V. Garrett, (202) 622-7180
(not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained in this notice of proposed rulernaking has been
submitted to the Office of Management and Budget for review in accordance with the Paperwork
Reduction Act of 1995 (44 U.S.C. 3507(d)). Comments on the collection of information should be
sent to the Office of Management and Budget, Attn: Desk Officer for the Department ofthe
Treasury, Office of Information and Regulatory Affairs, Washington, DC 20503, with copies to the
Internal Revenue Service, Attn: IRS Reports Clearance Officer, W:CAR:MP:FP:S, Washington,
DC 20224. Comments on the collection of information should be received by December 17,2002.
Comments are specifically requested concerning:
Whether the proposed collection of information is necessary for the proper performance of the
functions of the IRS, including whether the information will have practical utility;
2
The accuracy of the estimated burden associated with the proposed collection of infonnation
(see below);
How the quality, utility, and clarity of the infonnation to be collected may be enhanced;
How the burden of complying with the proposed collection of infonnation may be minimized,
including through the application of automated collection techniques or other forms of infonnation
technology; and
Estimates of capital or start-up costs and costs of operation, maintenance, and purchase of
services to provide infonnation.
The collection of infonnation in these proposed regulations is in §1.302-S(e) and
§ 1.IS02-19(b)(S)(v). This collection of infonnation is required by the IRS to verify compliance with
section 302. This infonnation will be used to determine whether the amount of tax has been calculated
correctly. The collection ofinfonnation is required to properly determine the amount permitted to be
taken into account as a loss. The respondents are shareholders (including individuals, corporations and
pass-through entities) whose stock in a corporation is redeemed or is treated as redeemed.
Estimated total annual reporting burden: 1,SOO hours.
Estimated average annual burden per respondent: 30 minutes.
Estimated number of respondents: 3,000.
Estimated annual frequency of responses: On occasion.
An agency may not conduct or sponsor, and a person is not required to respond to, a collection
ofinfonnation unless it displays a valid control number assigned by the Office of Management and
Budget.
3
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. 6lO3.
Background
This document contains proposed revisions and amendments to the Income Tax Regulations (26
CFR part 1) under sections 302,304, 704, 861, 1371, 1374, and 1502 of the Internal Revenue Code
(Code). The proposed regulations would amend the temporary and final regulations under sections
302,304, 704, 861, 1371, 1374, and 1502 to provide guidance concerning the treatment of the basis
of stock redeemed or treated as redeemed where the redemption proceeds are treated as a dividend
distribution. These proposed regulations would also amend the fmal regulations under section 304 to
conform them to certain of the amendments made to section 304 by legislation, including section 226 of
the Tax Equity and Fiscal Responsibility Act of 1982, Public Law 97-248 (96 Stat. 325,490)
(September 3, 1982), section 712(1) of the Deficit Reduction Act of 1984, Public Law 98-369 (98
Stat. 494, 953-55) (July 18, 1984), section 1875(b) of the Tax Reform Act of 1986, Public Law
99-514 (100 Stat. 2085, 2894) (October 22, 1986), and section 1013 of the Taxpayer Relief Act of
1997, Public Law lO5-34 (111 Stat. 788,918) (August 5, 1997).
A. The Character of Property Received in Redemption of Stock
Section 302 of the Code governs the tax treatment of distributions in redemption of stock. The
rules of section 302 attempt to distinguish between distributions that "may have capital-gain
characteristics because they are not made pro rata among the various shareholders" and distributions
"characterized by what happens solely at the corporate level by reason ofthe assets distributed." S.
4
Rep. No. 1622, 83d Cong., 2d Sess. 49 (1954). Section 302(a) provides that a corporation's
redemption of its stock is treated as a distribution in part or full payment in exchange for the stock if the
redemption satisfies anyone of the following criteria: (1) the redemption is not essentially equivalent to a
dividend (section 302(b)(1)); (2) the redemption is substantially disproportionate (section 302(b)(2));
(3) the redemption completely terminates the redeemed shareholder's interest (section 302(b)(3)); or
(4) the redemption is in connection with a qualitying partial liquidation (section 302(b)(4)). Ifa
redemption satisfies none of these criteria, pursuant to section 302(d), the redemption is treated as a
distribution of property to which section 301 applies.
Under sections 301 (c)( 1) and 3 I6(a), a distribution is treated as a dividend to the extent of the
redeeming corporation's earnings and profits. Any portion ofthe distribution that is not treated as a
dividend is first applied against the adjusted basis of the redeemed stock to the extent of such basis
under section 301(c)(2), and then treated as gain from the sale or exchange of property under section
301(c)(3).
B. The Character of Property Received in Certain Stock ACquisitions
The redemption rules of section 302 are implicated not only when an issuing corporation
acquires its own stock, but also in the case of certain stock acquisitions by corporations related to the
issuer of the acquired stock. Pursuant to section 304(a)(1), an acquisition of stock by a corporation
from one or more persons that are in control of both the acquiring and issuing corporations is treated as
ifthe property received in respect of the acquired stock were a distribution in redemption of the stock
of the acquiring corporation. Prior to the amendments made by the Taxpayer Relief Act of 1997,
section 304 provided that, to the extent that the deemed distribution was treated as a distribution to
5
which section 30 I applies, the stock acquired was treated as having been transferred by the person
from whom acquired and as having been received by the corporation acquiring it, as a contribution to
the capital of such corporation. The Taxpayer Relief Act of 1997 amended section 304(a)(J) to
provide that, to the extent that this deemed distribution is treated as a distribution to which section 30 I
applies, the shareholder and the acquiring corporation are treated as if the shareholder had transferred
the stock of the issuing corporation to the acquiring corporation in exchange for stock of the acquiring
corporation in a transaction to which section 351(a) applies, and then the acquiring corporation had
redeemed the stock it was treated as issuing in that transaction. Pursuant to section 304(a)(2), an
acquisition of stock by a corporation controlled by the issuer of the acquired stock is treated as if the
property received in respect of the acquired stock was a distribution in redemption of the stock of the
issuing corporation.
For purposes of section 304, control means the ownership of stock possessing at least 50
percent of either the total combined voting power of all classes of stock entitled to vote or the total
value of shares of all classes of stock. The determination of the amount and source of the distribution
that is treated as a dividend is made as if the property received in respect of the redeemed stock were
distributed by the acquiring corporation to the extent of its earnings and profits and then by the issuing
corporation to the extent of its earnings and profits. Because section 304 recharacterizes certain stock
acquisition transactions as redemptions of stock, transactions to which section 304 applies implicate the
redemption rules of section 302.
C. The Unutilized Basis of Stock Redeemed in Certain Transactions
While sections 30 I and 302 clearly set forth the character of property received in a redemption
6
(whether actual or deemed) of stock, they do not prescribe the tax treatment of the unutilized basis of
the redeemed stock or the stock treated as redeemed. In 1955, the IRS and Treasury promulgated
regulations under section 302 that provide guidance in this regard in the case of an actual redemption of
stock. Section 1.302-2(c) of the Income Tax Regulations states that "[i]n any case in which an amount
received in redemption of stock is treated as a distribution ofa dividend, proper adjustment of the basis
of the remaining stock will be made with respect to the stock redeemed." The regulation contains
examples illustrating what constitutes a proper adjustment. In Example I and Example 3, the redeemed
shareholder actually owns stock of the redeeming corporation immediately after a redemption that is
treated as a distribution of a dividend. In those cases, the basis of the shares ofthe redeeming
corporation that the shareholder owns after the redemption is increased by the basis ofthe redeemed
shares. See also United States v. Davis, 397 U.S. 301 (1970) (interpreting § 1.302-2(c) to shift the
basis of redeemed stock to other shares held by the redeemed shareholder, even where those other
shares are of a different class of stock than those redeemed); Rev. Rul. 66-37, 1966-1
c.B. 209
(same). In Example 2, although the redeemed shareholder actually owns no stock of the redeeming
corporation immediately after a redemption that is treated as a distribution of a dividend, he does
constructively own stock of the redeeming corporation immediately after the redemption by reason of
his wife's continuing ownership of stock of the redeeming corporation. The example concludes that the
redeemed shareholder's basis in the redeemed shares shifts to his wife's basis in her shares of stock of
the redeeming corporation.
In addition, on December 2, 1955, the IRS and Treasury promulgated §§ 1.304-2(a) and
1.304-3(a). With respect to an acquisition of stock by a related corporation (other than a subsidiary),
7
§ 1.304-2(a) provides that the transferor's basis for his stock in the acquiring corporation is increased
by the basis of the stock of the issuing corporation surrendered by him. Similarly, with respect to an
acquisition of stock by a subsidiary, § 1J04-3(a) provides that the transferor's basis in his remaining
stock in the parent corporation is increased by the basis of the stock deemed redeemed by the parent
corporation. The treatment of the transferor's unutilized basis in stock of the issuing corporation as a
result of transactions subject to section 304(a) is the subject of Revenue Ruling 70-496 (1970-2
c.B.
74), and Revenue Ruling 71-563 (1971-2 C.B. 175).
In Revenue Ruling 70-496, a first-tier subsidiary (Y) of a parent corporation (X) sold all of its
stock in a second-tier subsidiary of X (S) to another first-tier subsidiary of X (Z). The ruling concludes
that the transaction is governed by sections 304(a)(l) and 302(d). Accordingly, the ruling holds that the
sales proceeds constitute dividends to the extent of Z's earnings and profits and, to the extent in excess
of such amount, constitute gain under section 301(c)(3). With respect to Y's basis in the sold S stock,
the ruling holds that because Y had no direct stock ownership in Z before or after the sale, Y's basis in
the S stock surrendered disappears and cannot be used to increase the basis of any asset of Y.
In Revenue Ruling 71-563, A, an individual, owned all the stock ofX. C, A's son, owned all of
the outstanding stock of Y. A sold 25 percent of its stock in X to Y for cash. The ruling states that,
under section 304(a)(l), the sale is treated as a contribution by A of the stock of X to the capital ofY
and a distribution to A by Y in redemption of its stock. Because the deemed redemption is governed
by section 302(d), the cash received is taxable as a dividend to A under section 301 (c)(l).
Furthermore, the ruling reasons that, because A owns no stock in Y directly after the transaction, the
basis of the X stock should be added to the basis ofthe remaining stock of X that A continues to own
8
after the transaction.
The current regulatory regime preserves, and prevents the elimination of, basis in transactions
subject to section 302 where a proper adjustment may be made to the basis ofthe remaining stock of
the redeeming corporation and in transactions subject to section 304 where, immediately after the
transaction, the seller owns stock of the acquiring corporation. In certain transactions, however,
taxpayers have taken the position that certain adjustments are proper, even if they shift basis from a
person that is not subject to US. tax to a person that is subject to US. tax or to stock other than stock
of the redeeming corporation. Notice 2001-45 (2001-2 C.B. 129), describes a type of transaction
with respect to which taxpayers have taken the position that, under § 1.302-2(c), all or a portion of the
basis of stock redeemed from a person that is not subject to US. tax or is otherwise indifferent to the
Federal income tax consequences ofthe redemption ofthe stock is added to the basis of other stock in
the redeeming corporation owned by a taxpayer that is subject to US. tax to create a loss on the
disposition of the other stock. Although the IRS intends to challenge the adjustments claimed in such
transactions, the IRS and Treasury believe it is desirable to revise the rules that govern accounting for
unutilized basis attributable to redeemed stock to better reflect the purposes of the relevant Code
proVISIOns.
Explanation of Provisions
A. Rules Under Section 302
This notice of proposed rulemaking proposes a replacement for the "proper adjustment" regime
of current § 1.302-2(c) for taking into account the unutilized basis attributable to redeemed stock in any
case in which a redemption of stock is treated as a distribution of property to which section 301 applies.
9
The rules are proposed to apply both where the redeemed shareholder actually owns no stock ofthe
redeeming corporation immediately after the redemption (a complete redemption) and where the
redeemed shareholder actually owns stock of the redeeming corporation immediately after the
redemption (a partial redemption). While consideration was given to retaining the "proper adjustment"
rule of current § 1.302-2(c) where only a portion of the shareholder's interest in the redeeming
corporation is redeemed, the IRS and Treasury believe the two situations are similar enough to warrant
the same rules, and that the rules proposed herein best carry out the purposes of section 302 even
where the redeemed shareholder continues directly to own stock in the redeeming corporation because,
even in that case, dividend treatment under section 302 may have resulted from shares owned by
attribution rather than directly. The following paragraphs describe the proposed rules.
1. General description of the proposed rules
Certain transactions that, in form, involve the redemption of shares are economically identical or
similar to distributions to shareholders that do not involve any redemption of shares. For example, if a
single shareho lder owns all of the stock of the redeeming corporation, the redemption of some shares
from that shareholder for cash is economically indistinguishable from the mere distribution of corporate
cash to the shareholder. In recognition of this, section 302 taxes these transactions as corporate
distributions notwithstanding their form as redemptions. The underlying premise of section 302 is that
distribution treatment is called for in these cases because, in effect, the redeemed shareholder still owns
(or is treated as owning) its stock in the corporation, even if it may have turned in some physical shares.
Although section 302 does not provide any explicit guidance regarding the shareholder's basis
of the shares redeemed, in deriving a regulatory regime to address the treatment of the unutilized basis of
10
redeemed stock, it is appropriate to consider what happens when a shareholder receives a distribution
and keeps its shares, because that analogy underlies distribution treatment under section 302. Because
the Code does not permit basis to offset any portion of the redemption distribution that is treated as a
dividend, and because such an offset is not available when a corporation distributes a dividend and the
shareholder retains its shares, the redemption date is not the appropriate time to recover the unutilized
basis of the redeemed stock. However, if the shareholder receives a distribution and retains its shares,
it also retains its basis, which it can recover later in situations other than dividends, such as the sale of
the shares. Accordingly, the unutilized basis of the redeemed stock should not disappear and should be
taken into account for Federal income tax purposes at some time. In addition, any tax benefit
associated with the unutilized basis of redeemed stock should remain with the taxpayer that made, or
succeeded to, the investment that gave rise to the unutilized basis. Accordingly, these regulations
propose that, in any case where a redemption of stock is treated as a distribution of a dividend, an
amount equal to the adjusted basis of the redeemed stock is treated as a loss recognized on the
disposition of the redeemed stock on the date of the redemption. That loss is taken into account as
described below.
Once the facts and circumstances that caused the redemption distribution to be treated as a
distribution subject to section 301 no longer exist (i.e., the redeemed shareholder has sufficiently
reduced its actual and constructive ownership interest in the redeeming corporation), these regulations
permit the loss attributable to the unutilized basis of redeemed stock that has not previously been taken
into account to be taken into account. The first date on which the redeemed shareholder would satisfy
the criteria of section 302(b)(1), (2) or (3) if the facts and circumstances that exist on such date had
11
existed immediately after the redemption is referred to as the "final inclusion date." In addition, a date is
the final inclusion date if there is no later date on which the redeemed shareholder could take the loss
into account. For example, if the redeemed shareholder is an individual, the [mal inclusion date includes
the date of death of such individual. If the redeemed shareholder is a corporation, the final inclusion
date includes the date such corporation transfers its assets in a liquidation described in section 331. If
the redeemed shareholder is a foreign corporation, the final inclusion date includes the date such
corporation transfers its assets to a domestic corporation in either a liquidation described in section 332
or a reorganization described in section 368(a)(l) to which section 381 applies. If the redeemed
shareholder is a foreign corporation that is not a controlled foreign corporation, within the meaning of
section 957(a), on the date of the redemption, the term [mal inclusion date includes the date such
corporation transfers its assets to a controlled foreign corporation in a liquidation described in section
332 or a reorganization described in section 368(a)(l) to which section 381 applies.
These proposed regulations also provide that the redeemed shareholder is permitted to take into
account the loss attributable to the unutilized basis of redeemed stock when the redeemed shareholder
recognizes a gain on stock of the redeeming corporation to the extent of the gain recognized. Any date
on which the redeemed shareholder must take into account gain recognized pursuant to section
301(c)(3) or gain recognized on a disposition of stock of the redeeming corporation is referred to as an
"accelerated loss inclusion date." Although there can be only one [mal inclusion date, there can be
several accelerated loss inclusion dates.
Because the loss attributable to the basis of the redeemed stock is treated as recognized on a
disposition of the redeemed stock on the redemption date, the attributes (e.g., character and source) of
12
that loss are fixed on the redemption date, even if such loss is not taken into account until after the
redemption date. For example, if a corporation redeems its stock from a shareholder within one year
after the shareholder's acquisition of such stock and the proceeds of the redemption are treated as a
dividend distribution, the character of any amount of the loss that is taken into account is treated as
short-term capital loss (assuming the redeemed shareholder held the redeemed stock as a capital asset),
even if such loss is taken into account more than one year after the redeemed shareholder's acquisition
of the redeemed stock. Nonetheless, for purposes of the carryforward and carryback provisions of
sections 172 and 1212, such loss is treated as a loss for the taxable year in which it is taken into
account rather than for the taxable year of the stock redemption that gave rise to such loss.
Because a redemption of stock may give rise to, or increase, an excess loss account in
redeemed stock where the redeemed shareholder and the redeeming corporation are members of the
same consolidated group, these regulations propose rules similar to those described above where the
redeemed shareholder has an excess loss account in the redeemed stock.
These proposed regulations do not apply on the redemption of stock described in section
306(c). Pursuant to section 306(a)(2), a redemption of stock described in section 306(c) is treated as
a distribution of property to which section 301 applies. Example 2 of § 1.306-1 suggests that the
unutilized basis of redeemed section 306 stock is added back to the basis of the stock with respect to
which the section 306 stock was distributed. The IRS and Treasury request comments on whether such
treatment of the unutilized basis of redeemed section 306 stock is appropriate or whether an alternative
regime should apply when such a redemption is treated as a distribution to which section 301 applies.
2. Special issues related to certain pass-through entities
13
Where stock is redeemed from a partnership and all or a portion of the distribution in
redemption of such stock is treated as a dividend, any loss attributable to the basis of redeemed stock is
treated as a current loss to the partnership on the date of the redemption. To the extent of the lesser of
the amount of such distribution that is treated as a dividend and such loss that is not allocated pursuant
to section 704(c) and the regulations thereunder, the dividend and the loss must be allocated in equal
amounts. Such amounts must be allocated in accordance with the partners' interests in the partnership.
An allocation will be deemed to be in accordance with a partner's interest in the partnership if the
allocation is in the same proportion as the allocation of (i) the excess of the dividend income over the
loss attributable to the basis of the redeemed stock, if any, (ii) the excess of the loss attributable to the
basis of the redeemed stock over the dividend income, if any, or, (iii) if neither, in the same proportion
as the partnership's net taxable income or loss for the year is allocated. This rule ensures that the
benefit of the loss may be realized by the person to whom the dividend income was allocated. The
excess dividend or loss attributable to the basis of redeemed stock must be allocated in a manner that
takes into account the requirements of section 704.
The loss attributable to the basis of redeemed stock allocated to a partner under the rules of this
section is not taken into account at the partner level until the final inclusion date or an accelerated loss
inclusion date, as applicable. For purposes of determining whether a particular date is the final inclusion
date with respect to such a loss, if the partner is a partner of the partnership on such date, the
partnership is treated as the redeemed shareholder. Otherwise, the former partner is treated as the
redeemed shareholder and the determination of whether a particular date is the final inclusion date is
made by comparing such former partner's actual and constructive ownership of the redeeming
14
corporation immediately prior to the redemption to such former partner's actual and constructive
ownership of the redeeming corporation at the end of such particular date. For purposes of determining
whether a particular date is an accelerated loss inclusion date with respect to a loss attributable to the
basis of redeemed stock that is allocated to a partner from a partnership, the partner is treated as the
redeemed shareholder. Similar rules are proposed to apply where stock is redeemed from an S
corporation.
The proposed regulations provide that where stock is redeemed from a C corporation, and the
C corporation subsequently elects to be taxed as an S corporation, any loss attributable to the basis of
redeemed stock that has not been taken into account at the time of the election is treated as a
carryforward arising in a taxable year for which the corporation was a C corporation. Such loss is
allowed as a deduction against net recognized built-in gain under section 1374 in the year of the final
inclusion date or an accelerated loss inclusion date.
To the extent that a trust from which stock is redeemed is wholly or partially a grantor trust, the
proposed rules treat the redeemed stock as having been owned directly by the grantor. When stock is
redeemed from an estate or from a trust that is not a wholly grantor trust, and all or a portion of a
distribution in redemption of such stock is treated as a dividend, any loss attributable to the basis of
redeemed stock that is not attributable to the basis of redeemed stock treated as owned by the grantor
is not taken into account by such estate or trust until the final inclusion date or an accelerated loss
inclusion date. In that case, whether a particular date is the [mal inclusion date or an accelerated loss
inclusion date is determined by treating such estate or trust, not its beneficiaries, as the redeemed
shareholder. In the event that the trust or estate terminates before it has been permitted to take into
15
account all of the loss attributable to the basis of redeemed stock, any remaining loss is treated as a loss
under section 172 or section 1212 for purposes of section 642(h) (regarding the availability to
beneficiaries of unused loss carryovers and excess deductions of an estate or trust upon tennination).
Each beneficiary's interest in the loss distributed under section 642(h), however, shall be limited to the
proportion of that loss that is equal to the proportion of the total amount of the distribution treated as a
dividend that is represented by that beneficiary's beneficial interest in that dividend. Once all or a
portion of such a loss is distributed to a beneficiary, whether a particular date is the fmal inclusion date
or an accelerated loss inclusion date with respect to such a loss is determined by treating such
beneficiary as the redeemed shareholder.
3. Special rules related to apportionment of interest and other expenses
Under section 864(e), taxpayers apportion interest expense between U.S. and foreign source
income on the basis of the relative values oftheir U.S. and foreign assets. For this purpose, taxpayers
may choose to value their assets using either fair market value or tax book value (adjusted basis). If the
taxpayer apportions interest expense using tax book value, the adjusted basis of stock in any
nonaffiliated 10 percent owned corporation (as defmed in section 864(e)(4)(B» is increased by the
amount of earnings and profits (and reduced by any deficits in earnings and profits) attributable to such
stock that accumulated during the period the taxpayer held such stock. The proposed regulations
provide that for purposes of apportioning expenses on the basis of the tax book value of assets, the
adjusted basis in any remaining shares of the redeeming corporation that are owned by the redeemed
shareholder or certain affiliated corporations will be increased by the amount of the unutilized basis of
redeemed stock. This adjustment is intended to provide consistent interest allocation consequences in
16
the case of dividends and redemptions treated as dividends by nonaffiliated 10 percent owned
corporations.
B. Revisions to Regulations Under Section 304
The ClUTent regulations under section 304 do not reflect all of the legislative amendments that
have been made to section 304. This notice of proposed rulemaking proposes certain revisions to the
ClUTent regulations under section 304 to incorporate these legislative amendments to the extent that
those legislative amendments are relevant to the issues that are subject to the proposed regulations
under section 302. In particular, these revisions reflect the amendments to section 304 made by section
1Ol3 of the Taxpayer Relief Act of 1997, Public Law 105-34 (Ill Stat. 788,918) (August 5, 1997),
that provide that, to the extent that a stock acquisition to which section 304(a)(l) applies is treated as a
distribution to which section 301 applies, the transferor and the acquiring corporation are treated as if
(1) the transferor transferred the stock of the target corporation to the acquiring corporation in exchange
for stock of the acquiring corporation in a transaction to which section 351(a) applies, and (2) the
acquiring corporation then redeemed the stock it is treated as having issued. The same rules that govern
an actual redemption govern a deemed redemption.
In transactions under section 304 that involve one or more foreign corporations, further
consequences may apply under the international provisions of the Code. For example, where target
corporation stock is transferred to a foreign corporation in the deemed section 351 transaction, section
367 and the regulations promulgated thereunder apply to the transfer. See Rev. Rul. 91-5 (1991-1
c.B. 114) (holding that section 367 applied to the deemed contribution to capital of the target
corporation stock under prior law because section 367(c)(2) resulted in the stock transfer constituting a
17
section 351 transaction). The IRS intends to issue guidance on the application of the international
provisions to section 304 transactions and requests comments on such transactions, including what
changes, if any, to existing published guidance may be appropriate in light ofthe 1997 amendments to
section 304.
Proposed Effective Date
These regulations are proposed to apply to transactions occurring after the date these
regulations are published as final regulations in the Federal Register.
Special Analyses
It has been determined that this notice of proposed rulemaking is not a significant regulatory
action as defined in Executive Order 12866. It is hereby certified that the collection of information in
this Notice of Proposed Rule Making will not have a significant economic impact on a substantial
number of small entities. This certification is based upon the fact that the IRS and Treasury estimate that
at most 3,000 taxpayers will be subject to these requirements and most of those taxpayers will be
individuals or large businesses. Therefore, a Regulatory Flexibility Analysis under the Regulatory
Flexibility Act (5 U.S.c. chapter 6) is not required. Pursuant to section 7805(f), this notice of
proposed rulemaking will be submitted to the Chief Counsel for Advocacy of the Small Business
Administration for comment on its impact on small business.
Comments and Public Hearing
Before these proposed regulations are adopted as fmal regulations, consideration will be given
to any written (a signed original and eight (8) copies) or electronic comments that are submitted timely
to the IRS. The IRS and Treasury Department request comments on the clarity of the proposed rules
18
and how they can be made easier to understand. All comments will be available for public inspection
and copying.
A public hearing has been scheduled for February 20, 2003, beginning at 10 a.m. in Room
4718 of the Internal Revenue Building, 1111 Constitution Avenue, NW., Washington, DC. Due to
building security procedures, visitors must enter at the Constitution Avenue entrance. In addition, all
visitors must present photo identification to enter the building. Because of access restrictions, visitors
will not be admitted beyond the immediate entrance area more than 30 minutes before the hearing starts.
For information about having your name placed on the building access list to attend the hearing, see the
FOR FURTHER INFORMATION CONTACT portion of this preamble.
The rules of26 CFR 601.601 (a)(3) apply to the hearing. Persons who wish to present oral
comments must submit written or electronic comments and an outline of the topics to be discussed and
the time to be devoted to each topic (a signed original and eight (8) copies) by January 30, 2003. A
period of 10 minutes will be allotted to each person for making comments. An agenda showing the
scheduling of the speakers will be prepared after the deadline for receiving outlines has passed. Copies
of the agenda will be available free of charge at the hearing.
Drafting Information
The principal author of these proposed regulations is Lisa K. Leong of the Office of the
Associate Chief Counsel (Corporate), IRS. However, other personnel from the IRS and Treasury
participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
19
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is proposed to be amended as follows:
PART 1-- INCOME TAXES
Paragraph I. The authority citation for part 1 continues to read in part as follows:
Authority: 26 US.c. 7805
***
§1.302-2 [Amended]
Par. 2. In § 1.302-2, paragraph (c) is removed.
Par. 3. Section 1.302-5 is added to read as follows:
§ 1.302-5 Redemptions taxable as dividends.
(a) In general In any case in which an amount received in redemption of stock is treated as a
distribution ofa dividend, an amount equal to the basis of the redeemed stock, after adjusting such basis
to reflect the application of section 301 (c )(2), 961(b), 1059, § 1.1502-32, or any other applicable
provision of the Internal Revenue Code or the regulations thereunder, is treated as a loss recognized on
a disposition of the redeemed stock on the date of the redemption. The redeemed shareholder (as
defined in paragraph (b)(1) of this section) shall be permitted to take such loss into account pursuant to
the provisions of this section. Although such loss may be taken into account on a date later than the
date ofthe redemption, the attributes (e.g., character and source) of such loss are determined on the
date of the redemption of the stock that gave rise to such loss. See § 1.1502-19(b)(5) for rules that
apply where an amount received in redemption of stock is treated as a dividend and such amount either
increases or creates an excess loss account in the redeemed stock.
(b) Definitions--(1) Redeemed shareholder. Except as provided in paragraphs (d)(6), (7), and
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(8) of this section, the redeemed shareholder is the person whose stock is redeemed in a transaction in
which a portion or all of the redemption proceeds are treated as a dividend. If the assets of the
redeemed shareholder are acquired in a transaction described in section 381(a), the acquiring
corporation (within the meaning of section 381) thereafter is treated as the redeemed shareholder. For
rules concerning the person that is treated as the redeemed shareholder where the redeemed stock is
held by a partnership or an S corporation at the time of the redemption, see paragraphs (d)(6) and (7)
of this section. For rules concerning the person that is treated as the redeemed shareholder where the
redeemed stock is held by an estate or a trust not treated as wholly owned by the grantor or another
person at the time of the redemption and a loss attributable to the basis of such redeemed stock is
distributed to a benefic iary of such estate or trust, see paragraph (d)(8) of this section.
(2) Redeeming corporation Except as provided in paragraph (d)(5) of this section, the
redeeming corporation is the corporation that issued the stock that is redeemed. For rules concerning
the entity that is treated as the redeeming corporation where the redeeming corporation ceases to exist
in a transaction described in section 381(a) or where the redeeming corporation distributes to its
shareholders stock of one or more controlled corporations in a distribution described in section 355(a),
see paragraph (d)( 5) of this section.
(3) Final inclusion date. Except as otherwise provided in paragraphs (d)(5), (6), (7), and (8) of
this section, the [mal inclusion date is the first date on which the redeemed shareholder would satisfy the
criteria of section 302(b)( 1), (2), or (3) if the facts and circumstances that exist at the end of such day
had existed immediately after the redemption. In addition, a date is the final inclusion date if there is no
later date on which the redeemed shareholder could take the loss into account. For purposes of the
21
preceding sentence, the existence or creation of a limitation under section 382 is not treated as
preventing the loss from being taken into account. For example, if the redeemed shareholder is an
individual, the final inclusion date includes the date of death of such individual. If the redeemed
shareholder is a corporation, the final inclusion date includes the date such corporation transfers its
assets in a liquidation described in section 331. If the redeemed shareholder is a foreign corporation,
the final inclusion date includes the date such corporation transfers its assets to a domestic corporation
in either a liquidation described in section 332 or a reorganization described in section 368(a)(1) to
which section 381 applies. If the redeemed shareholder is a foreign corporation that is not a controlled
foreign corporation, within the meaning of section 957(a), on the date ofthe redemption, the term final
inclusion date includes the date such corporation transfers its assets to a controlled foreign corporation
in a liquidation described in section 332 or a reorganization described in section 368(a)(1) to which
section 381 applies.
(4) Accelerated loss inclusion date. An accelerated loss inclusion date is a date other than the
final inclusion date on which the redeemed shareholder must take into account gain from an actual or
deemed sale or exchange of stock of the redeeming corporation. For example, the redeemed
shareholder must take into account gain from an actual or deemed sale or exchange of stock of the
redeeming corporation when such shareholder receives a distribution with respect to stock of the
redeeming corporation to which section 301(c)(3) applies, recognizes gain on stock of the redeeming
corporation as a result of the application of section 475, recognizes gain on a sale or exchange of stock
of the redeeming corporation (even if such gain is characterized as a dividend under section 1248),
recognizes gain in connection with a constructive sale of stock of the redeeming corporation within the
22
meaning of section 1259, or is a partner of a partnership or a shareholder of an S corporation that is
allocated, and must take into account, gain recognized on the partnership's or S corporation's sale or
exchange of stock of the redeeming corporation.
(c) Inclusion of loss attributable to basis of redeemed stock--( 1) Amount taken into account on
final inclusion date. On the final inclusion date, the redeemed shareholder is permitted to take into
account the loss attributable to the basis of redeemed stock, reduced by the amount of such loss that
was previously taken into account pursuant to paragraph (c )(2) of this section.
(2) Amount taken into account on accelerated loss inclusion date. On an accelerated loss
inclusion date, the redeemed shareholder is permitted to take into account the loss attributable to the
basis of redeemed stock in the amount of the lesser of-.(i) The amount of such loss reduced by the amount of such loss previously taken into account
pursuant to this paragraph (c)(2); and
(ii) The amount of gain recognized with respect to stock of the redeeming corporation that must
be taken into account by the redeemed shareholder on such accelerated loss inclusion date.
(d) Special rules--(1) Treatment ofloss attributable to basis of redeemed stock. Except as
otherwise provided in this section, for purposes of applying the provisions of the Internal Revenue Code
and the regulations thereunder, any loss attributable to the basis of redeemed stock that has not been
permitted to be taken into account shall be treated as a net operating loss carryforward or a capital loss
carryforward, as applicable. For example, for purposes of determining under sections 382 and 383
whether the redeemed shareholder is a loss corporation that has an ownership change and whether the
loss attributable to the basis of redeemed stock is a pre-change loss, any loss attributable to the basis of
23
redeemed stock that the redeemed shareholder is not permitted to take into account before a testing
date shall be treated as a net operating loss carryforward or a capital loss carryforward, as applicable,
that arose in the taxable year in which the redemption that gave rise to such loss occurred and that can
be carried forward to the taxable year that includes the testing date. If such loss is treated as a prechange loss because of an ownership change on the testing date, it is subject to the section 382
limitation (and the other rules of section 382 or 383) for any post-change year in which it is taken into
account under paragraph (c) ofthis section and any other post-change year to which it is carried
pursuant to section 172 or 1212, as applicable, and paragraph (d)(2) ofthis section. The order in
which the loss is absorbed (and in which it absorbs the section 382 limitation (see § 1.383-1(d)(2)),
however, is determined in a manner consistent with the principles of section 172 or 1212, as applicable,
and paragraph (d)(2) of this section.
(2) Net operating loss deduction and capital loss canybacks and canyovers. For purposes of
sections 172 and 1212, any portion of a loss attributable to the basis of redeemed stock shall be treated
as occurring in the taxable year in which the redeemed shareholder is permitted to take such loss into
account, not the taxable year of the redemption that gave rise to such loss. If an estate or trust
terminates before it is permitted to take into account all of the loss attributable to the basis of redeemed
stock, such loss that it has not been permitted to take into account is treated as a loss under section 172
or 1212 for purposes of section 642(h), provided, however, that the identification of carryover years of
the beneficiaries will be determined in accordance with the preceding sentence. Notwithstanding the
preceding sentence, each beneficiary's interest in the loss distributed under section 642(h) shall be
limited to the proportion of that loss that is equal to the proportion of the total amount of the distribution
24
treated as a dividend that is represented by that beneficiary's beneficial interest in that dividend. If a
deduction for any portion of such loss is disallowed by section 382 or 383 for the taxable year in which
the redeemed shareholder is permitted to take such loss into account, such portion shall be carried
forward to subsequent taxable years under rules similar to the rules for the carrying forward of net
operating losses or capital losses, as applicable, but shall be subject to the section 382 limitation (and
the other rules of sections 382 and 383) for any post-change year to which it is carried.
(3) Expenses apportioned on the basis of assets. For special rules regarding adjustments in the
case of taxpayers apportioning expenses on the basis of the tax book value of assets, see §1.86112(c)(2)(vi).
(4) Effect of loss attributable to basis of redeemed stock on earnings and profits. If the
redeemed shareholder is a corporation, any loss attributable to the basis of redeemed stock is not
reflected in such corporation's earnings and profits before it is taken into account pursuant to the rules
of paragraph (c) ofthis section. See, for example, §§ 1.312-6(a), 1.312-7, and 1.1502-33(c)(2).
(5) Successors to the redeeming corporation--(i) Acquisitive transactions. If the assets ofthe
redeeming corporation are acquired by another corporation in a transaction described in section 381(a),
the determination of whether a particular date is the [mal inclusion date or an accelerated loss inclusion
date is made by treating the facts and circumstances that exist at the end of such day (including the
acquisition ofthe assets ofthe redeeming corporation) as existing immediately after the redemption and
treating the acquiring corporation (within the meaning of section 381) as the redeeming corporation.
(ii) Divisive transactions. In general, if the redeeming corporation distributes to its shareholders
the stock of one or more controlled corporations in a distribution to which section 355 (or so much of
25
section 356 as relates to section 355) applies, the loss attributable to the basis of redeemed stock is
allocated among the stock of the distributing and any controlled corporations that the redeemed
shareholder owns, actually and constructively pursuant to the rules of section 318, immediately after the
distribution in proportion to the fair market value of the stock of the distributing corporation that the
redeemed shareholder is treated as so owning and the distributed stock of the controlled corporation
that the redeemed shareholder is treated as so owning. To the extent that such loss is allocated to the
stock of the distributing corporation, the distributing corporation will be treated as the redeeming
corporation for purposes of determining whether a particular date is the [mal inclusion date or an
accelerated loss inclusion date with respect to such loss. To the extent that such loss is allocated to the
stock of a controlled corporation, such controlled corporation will be treated as the redeeming
corporation for purposes of determining whether a particular date is the [mal inclusion date or an
accelerated loss inclusion date with respect to such loss. Where the controlled corporation was wholly
owned by the distributing corporation and all of the stock of the controlled corporation was distributed
to the shareholders of the distributing corporation in a distribution to which section 355 (or so much of
section 356 as relates to section 355) applies, the determination of whether a particular date is the final
inclusion date with respect to a loss that is allocated to a controlled corporation is made by treating the
redeemed shareholder as owning a percentage of stock of the controlled corporation immediately prior
to the redemption equal to the percentage of stock of the distributing corporation the redeemed
shareholder actually and constructively owned immediately prior to the redemption. In all other cases,
appropriate calculations shall apply to determine whether a particular date is the final inclusion date.
(6) Redeemed shareholder is a partnership--(i) Treatment and allocation ofloss attributable to
26
basis of redeemed stock. Where stock is redeemed from a partnership and all or a portion of the
distribution in redemption of such stock is treated as a dividend, any loss attributable to the basis of
redeemed stock is treated as a current loss to the partnership on the date ofthe redemption. To the
extent of the lesser of the amount of such distribution that is treated as a dividend and such loss that is
not allocated pursuant to section 704(c) and the regulations thereunder, the dividend and the loss must
be allocated in equal amounts. Such amounts must be allocated in accordance with the partners'
interests in the partnership. An allocation will be deemed to be in accordance with a partner's interest in
the partnership if the allocation is in the same proportion as the allocation of the excess of the dividend
income over the loss attributable to the basis of the redeemed stock, if any, the excess of the loss
attributable to the basis of the redeemed stock over the dividend income, if any, or, if neither, in the
same proportion as the partnership's net taxable income or loss for the year is allocated. The excess
dividend or loss attributable to the basis of redeemed stock must be allocated to the partners in a
manner that takes into account the requirements of section 704. The loss attributable to the basis of
redeemed stock allocated to a partner under the rules of this section is not taken into account until the
final inclusion date or an accelerated loss inclusion date, as provided in this section.
(ii) Identification of redeemed shareholder. For purposes of determining whether a particular
date is the final inclusion date with respect to a loss that is allocated to a partner, if the partner is a
partner of the partnership at the end of such day, the partnership is treated as the redeemed
shareholder. If the partner is not a partner of the partnership at the end of such day, the former partner
is treated as the redeemed shareholder and the determination of whether such date is the fmal inclusion
date is made by comparing such former partner's actual and constructive ownership of the redeeming
27
corporation immediately prior to the redemption to such former partner's actual and constructive
ownership of the redeeming corporation at the end of such particular day. For purposes of determining
whether a particular date is an accelerated loss inclusion date with respect to a loss attributable to the
basis of redeemed stock that is allocated to a partner from a partnership, the partner is treated as the
redeemed shareholder.
(7) Redeemed shareholder is an S corporation--(i) Treatment and allocation ofloss attributable
to basis of redeemed stock. Where stock is redeemed from an S corporation and all or a portion of the
distribution in redemption of such stock is treated as a dividend, any loss attributable to the basis of
redeemed stock is treated as a current loss to the S corporation on the date of the redemption and is
allocated to the S corporation's shareholders under section 1366(a). The portion of such loss that is
allocated to an S corporation shareholder from the S corporation is not permitted to be taken into
account by such shareholder until the fmal inclusion date or an accelerated loss inclusion date, as
provided in this section.
(ii) Identification of redeemed shareholder. For purposes of determining whether a particular
date is the final inclusion date with respect to a loss attributable to the basis of redeemed stock that is
allocated to a shareholder of an S corporation from an S corporation, if the S corporation shareholder is
a shareholder of the S corporation at the end of such day, the S corporation is treated as the redeemed
shareholder. If the S corporation shareholder is not a shareholder of the S corporation at the end of
such day, the former S corporation shareholder is treated as the redeemed shareholder and the
determination of whether such date is the fmal inclusion date is made by comparing such former S
corporation shareholder's actual and constructive ownership of the redeeming corporation immediately
28
prior to the redemption to such former S corporation shareholder's actual and constructive ownership
of the redeeming corporation at the end of such particular day; provided, however, that for purposes of
computing such former S corporation shareholder's ownership of the redeeming corporation
immediately prior to the redemption, section 318(a)(2)(C) shall be applied without regard to the 50
percent limitation contained therein. For purposes of determining whether a particular date is an
accelerated loss inclusion date with respect to a loss attributable to the basis of redeemed stock that is
allocated to an S corporation shareholder from an S corporation, the S corporation shareholder is
treated as the redeemed shareholder.
(8) Redeemed shareholder is an estate or trust. To the extent that a trust from which stock is
redeemed is treated as owned (in part or in whole) by the grantor or another person under subpart E of
part I of subchapter J of the Internal Revenue Code, the rules of this section are applied as though the
redeemed stock were owned directly by such grantor or other person. Where stock is redeemed from
an estate or from a trust not treated as wholly owned by the grantor or another person under subpart E
of part I of subchapter J of the Internal Revenue Code, and all or a portion of the distribution in
redemption of such stock is treated as a dividend, any loss attributable to the basis of redeemed stock,
except any loss attributable to the basis of redeemed stock treated as owned by the grantor or another
person, is not taken into account by such estate or trust until the final inclusion date or an accelerated
loss inclusion date, and whether a particular date is the final inclusion date or an accelerated loss
inclusion date is determined by treating such estate or trust, not its beneficiaries, as the redeemed
shareho lder. However, if all or a portion of such loss is distributed to a beneficiary of such estate or
trust pursuant to section 642(h) and paragraph (d)(2) of this section, the determination of whether a
29
particular date is the final inclusion date or an accelerated inclusion date shall be made by treating each
such beneficiary as the redeemed shareholder with respect to the loss distributed to such beneficiary.
(9) Redeemed shareholder is a C corporation that converts to an S corporation For rules
regarding the treatment of a loss attributable to the basis of redeemed stock when the redeemed
shareholder is a C corporation on the date ofthe redemption and elects to be taxed as an S corporation
prior to the final inclusion date or an accelerated loss inclusion date, see §§ 1.1371-1 (a)( 1) and
1. 1374-5(b)(2).
(e) Statement to be filed with returns. With or as part of the income tax return for the year in
which a redeemed shareholder takes into account any loss pursuant to this section, the redeemed
shareholder shall provide a statement entitled "Claim of Loss Attributable to Basis of Redeemed
Stock." The statement shall specify the amount of the loss that is taken into account on such return
pursuant to this section and shall identify the shares to which such amounts relate.
(f) Examples. For purposes of the examples in this section, each of corporation X, corporation
Y, corporation Z, corporation D, and corporation C is a domestic corporation that files U.S. tax returns
on a calendar-year basis. The principles of this section are illustrated by the following examples:
Example 1. (i) Facts. A and B, husband and wife, each own 100 shares (50 percent) of the
stock of corporation X and hold the corporation X stock as a capital asset. A purchased his
corporation X shares on February 1, Year 1, for $200. On December 31, Year 1, corporation X
redeems all of A's 100 shares of its stock for $300. At the end of Year 1, corporation X has current
and accumulated earnings and profits of $200. In connection with the redemption transaction, A does
not file an agreement described in section 302(c)(2) waiving the application of the family attribution
rules. The redemption proceeds, therefore, are treated under section 301(c)(1) as a dividend to the
extent of corporation X's earnings and profits of$200, and under section 301 (c)(2) as a recovery of
basis in the amount of $1 00. On July 1, Year 2, B sells all of her shares of corporation X stock to G,
her mother.
30
(ii) Analysis. Under this section, an amount equal to A's basis in the corporation X stock ($100
after application of section 301 (c )(2» is treated as a loss recognized on a disposition of the redeemed
stock on December 31, Year 1, the date of the redemption. When B sells her shares to G, A no longer
owns, actually or constructively, any shares of corporation X stock. Thus, if the facts that existed at the
end of July 1, Year 2, had existed immediately after the redemption, A would have been treated as
having received a distribution in part or full payment in exchange for the redeemed stock pursuant to
section 302(a). Under this section, therefore, July 1, Year 2, is the final inclusion date and, on that date,
A is permitted to take into account the loss of $1 00 attributable to his basis in the redeemed stock.
Because that loss is treated as having been recognized on a disposition of the redeemed stock on the
date of the redemption, December 31 of Year 1, such loss is treated as a short-term capital loss.
Example 2. (i) Facts. The facts are the same as in Example 1, except that, instead of selling all
of her 100 shares of corporation X stock to G on July 1, Year 2, B sells only 75 shares of corporation
X stock to G on that date.
(ii) Analysis. As in Example 1, an amount equal to A's basis in the redeemed stock ($100 after
application of section 301 (c)(2)) is treated as a loss recognized on a disposition ofthe redeemed stock
on December 31, Year 1, the date of the redemption. Immediately after B's sale of75 shares of
corporation X stock to G, A constructively owns 25 percent of the shares of corporation X stock.
Thus, if the facts that existed at the end of July 1, Year 2, had existed immediately after the redemption,
A would have been treated as receiving a distribution in part or full payment in exchange for the
redeemed stock pursuant to section 302(a). Under this section, therefore, July 1, Year 2, is the final
inclusion date and, on that date, A is permitted to take into account the loss of $100 attributable to his
basis in the redeemed stock. Because that loss is treated as having been recognized on a disposition of
the redeemed stock on the redemption date, December 31 of Year 1, such loss is treated as a shortterm capital loss.
Example 3. (i) Facts. Corporation Y has 200 shares of common stock outstanding. L, an
individual, owns 150 shares of common stock in corporation Y and has owned these shares for several
years. The remaining 50 shares are owned by K, L's father. In Year 1, corporation Y redeems 50
shares ofL's corporation Y stock, which have a basis of$75, for $200. At the end of Year 1,
corporation V's current and accumulated earnings and profits exceed $200. The redemption ofL's
stock is treated as a distribution to which section 301 applies. L recognizes dividend income in the
amount of $200. In Year 4, L sells 25 of his remaining shares of corporation Y stock, which have a
basis of$50, to K for $100 and recognizes $50 oflong-term capital gain.
(ii) Analysis. Under this section, an amount equal to L's basis in the corporation Y stock that is
redeemed, $75, is treated as a loss recognized on a disposition ofthe redeemed stock on the date of
the redemption. The date on which L sells 25 shares of corporation Y stock to K is not the final
inclusion date under paragraph (b)(3) of this section because L does not satisfy the criteria of section
302(b)(1), (2), or (3) at the end of such day. Under paragraph (b)( 4) of this section, however, that
31
date is an accelerated loss inclusion date because, on that date, L recognizes gain of $50 on a
disposition of stock of corporation Y, the redeeming corporation. Thus, on that date, L is permitted to
take into account $50 of the loss attributable to his basis in the redeemed stock. The remaining $25 of
such loss is taken into account on the earlier of the final inclusion date or the next accelerated loss
inclusion date (to the extent of gain recognized).
Example 4. (i) Facts. The facts are the same as in Example 3, except that L does not sell any
shares of corporation Y to K in Year 4. Instead, in Year 4, corporation Y distributes $75 to L with
respect to his remaining 100 shares of corporation Y stock. L's basis in these shares is only $30, and
at the end of Year 4, corporation V's current and accumulated earnings and profits are $20, instead of
$200. Under section 301 (c)(1), $20 of the distribution is treated as a dividend, under section
301(c)(2), $30 ofthe distribution is treated as a recovery of basis, and, under section 301 (c)(3), $25 of
the distribution is treated as gain from the sale or exchange of stock.
(ii) Analysis. As in Example 3, an amount equal to L's basis in the corporation Y stock
redeemed in Year 1, $75, is treated as a loss recognized on a disposition of the redeemed stock on the
date of the redemption. Because L recognizes gain under section 301(c)(3) upon the receipt ofthe
Year 4 distribution, the date of that distribution is an accelerated loss inclusion date. Accordingly, on
that date, L is permitted to take into account $25 of the loss attributable to the basis of the redeemed
stock. The remaining $50 of such loss is taken into account on the earlier of the final inclusion date or
the next accelerated loss inclusion date (to the extent of gain recognized).
Example 5. (i) Facts. Corporation Z has 100 shares of stock outstanding, 50 shares of which
are owned by each of A and his son, B. A's basis in each of his shares of corporation Z stock is $1.
During Year 1, corporation Z redeems from A 25 shares of corporation Z stock for $200. At the end
of Year 1, corporation Z has current and accumulated earnings and profits in excess of $200. The
redemption is treated as a distribution to which section 301 applies. Accordingly, A recognizes
dividend income of $200. In Year 2, corporation Y acquires all of corporation Z's assets in exchange
solely for voting stock in a reorganization described in section 368(a)(1)(C). In the reorganization, A
and B surrender their shares of corporation Z stock. A receives 2,500 shares of common stock of
corporation Y and B receives 5,000 shares of common stock of corporation Y. Immediately after the
reorganization, corporation Y has outstanding one million shares of common stock.
(ii) Analysis. Under this section, an amount equal to A's basis in the redeemed stock after the
Year 1 redemption, $25, is treated as a loss recognized on a disposition of the redeemed stock on the
date of the redemption. Under paragraph (d)(5) of this section, for purposes of determining whether a
particular date on or after the date of the reorganization is the final inclusion date or an accelerated loss
inclusion date, corporation Y, the acquiring corporation, is treated as the redeeming corporation. If the
facts and circumstances that exist at the end ofthe day of the reorganization had existed on the date of
the redemption, the redemption would have been treated as a distribution in part or full payment in
exchange for the redeemed stock pursuant to section 302(a). Therefore, the date of the reorganization
32
is the final inclusion date and A is permitted to take into account the loss of $25 attributable to his basis
in the redeemed stock.
Example 6. (i) Facts. Corporation D has 300 shares of stock outstanding. J and her two
daughters, M and N, each own 100 shares of corporation D stock. J's basis in her corporation D
shares is $400. In Year 1, corporation D redeems all of J's shares for $1,000. At the end of Year 1,
corporation D has current earnings and profits exceeding $1,000. The redemption is treated as a
distribution to which section 301 applies. Accordingly, J recognizes dividend income in the amount of
$1,000. Subsequently, M and N decide to separate corporation D's business. Accordingly, they
cause corporation D to contribute one-half of its assets to corporation C, a newly formed corporation,
in exchange for all of corporation C's stock and to distribute all of the corporation C stock to N in
exchange for all of her corporation D stock. Immediately after the distribution, the value of corporation
D is equal to the value of corporation C. In Year 6, M sells her shares in corporation D to an unrelated
person.
(ii) Analysis. Under this section, an amount equal to 1's basis in the corporation D stock
redeemed, $400, is treated as a loss recognized on a disposition of the redeemed stock on the date of
the redemption. Upon corporation D's distribution of the stock of corporation C in Year 2, 1's loss
attributable to the basis of the redeemed corporation D stock is allocated among the stock of
corporation D and corporation C that J owns, actually and constructively, immediately after the
distribution in proportion to the fair market value ofthe stock of each such corporation. Although J
does not actually own any stock of corporation D or corporation C, because J constructively owns all
of the stock of both corporation D and corporation C and each of the stock of corporation D and the
stock of corporation C have the same value immediately after the distribution, $200 of the loss is
allocated to each of the stock of corporation D and the stock of corporation C that J is treated as so
owning. Accordingly, each of corporation D and corporation C is treated as the redeeming corporation
for purposes of determining whether a particular date after the date of the distribution is an accelerated
loss inclusion date or the [mal inclusion date with respect to $200 ofthe loss. In this case, the date in
Year 6 on which M sells her corporation D stock to an unrelated person is the [mal inclusion date with
respect to 1's loss allocated to J's constructively owned corporation D stock, because had corporation
D's distribution of corporation C stock occurred immediately after the redemption of 1's stock and M's
Year 6 sale of corporation D stock occurred immediately thereafter in Year 1, the redemption of 1's
corporation D stock would have been treated as a distribution in part or full payment in exchange for the
redeemed stock pursuant to section 302(a). Accordingly, on that date in Year 6, J is permitted to take
into account the $200 loss allocated to the corporation D stock. The $200 loss allocated to the
corporation C stock is taken into account on the earlier of the final inclusion date or the next accelerated
loss inclusion date (to the extent of gain recognized) with respect to the corporation C stock.
Example 7. (i) Facts. In Year 1, A and B, two unrelated individuals, each contribute $100 to
form a 50-50 general partnership, PS. A and B share in the income ofPS equally. PS buys 100 shares
of corporation Z stock for $200. A owns the remaining 400 outstanding shares of corporation Z stock
directly. In Year 2, corporation Z redeems all ofPS's shares for $300. At that time, the basis of A's
33
interest in PS is $100 and the basis ofB's interest in PS is $100. At the end of Year 2, corporationZ
has current and accwnulated earnings and profits of$150. Because A's ownership of the Z stock is
attributed to PS under section 318(a)(3)(A), the redemption is treated as a distribution to which section
30 I applies. The redemption proceeds, therefore, are treated as a dividend to the extent of corporation
Z's earnings and profits, $150, and as a recovery of basis in the amount of$150. Assume that PS's
only items of income, gain, loss, deduction, and credit for Year 2 arise from the redemption of the
corporation Z stock. On January I of Year 4, A sells his entire interest in PS to C, an unrelated
individual.
(ii) Analysis. Under this section, an amount equal to PS's basis in the corporation Z stock, ($50
after application of section 301(c)(2)), is treated as a current loss recognized by the partnership on a
disposition of the redeemed stock on the date of the redemption. Under this section, $50 of the
dividend and $50 of the loss must be allocated in equal amounts in accordance with A's and B's
interests in PS. Accordingly, if the remaining $100 of the dividend is allocated $50 to A and $50 to B
under section 704 and the regulations thereunder, $25 of each ofthe dividend and the loss is allocated
to each of A and B. A's and B's basis in their PS interests are increased by their shares of the dividend
and decreased by their shares of the loss attributable to the basis of the redeemed stock. A and B will
not be able to take that loss into account until the fmal inclusion date or an accelerated loss inclusion
date. When A sells his PS interest to C, an unrelated individual, PS and A are no longer related.
Therefore, PS no longer owns, actually or constructively, any shares of corporation Z stock. Because
B remains a partner in PS after January I, Year 4, PS is treated as the redeemed shareholder for
purposes of detennining if January I, Year 4, is the fmal inclusion date for B. If the facts that exist at the
end of the day of A's sale of his PS interest to C had existed immediately after the redemption, PS
would have been treated as receiving a distribution in part or full payment in exchange for the redeemed
stock pursuant to section 302(a). Therefore, B is permitted to take into account the $25 loss
attributable to the basis of the redeemed stock that was allocated to him. Because A is no longer a
partner in PS after January I, Year 4, A is treated as the redeemed shareholder for purposes of
determining if January I , Year 4, is the final inclusion date for A. Immediately prior to the redemption,
A actually and constructively owns 90 percent of the corporation Z stock. After the sale of the PS
interest, A actually owns 100 percent of the corporation Z stock. If these facts had existed immediately
after the redemption, A would not have been treated as receiving a distribution in part or full payment in
exchange for the redeemed stock pursuant to section 302(a). Therefore, January I, Year 4, is not the
final inclusion date for A.
Example 8. (i) Facts. H, I, and J are shareholders in corporation S, a corporation that has
made a valid election to be taxed as an S corporation. H, I, and J respectively hold 60 percent, 20
percent, and 20 percent of the stock in corporation S. H, I, and J have no relation to each other apart
from their ownership interests in corporation S. Corporation S owns 20 percent of the outstanding
shares of corporation X with a $100 adjusted basis. H owns the remaining outstanding shares of
corporation X. In Year I, all of corporation S's shares of corporation X stock are redeemed for their
fair market value, $200. Corporation X has current and accumulated earnings and profits of $300 at
34
the end of Year 1. Because H's ownership of X stock is attributed to corporation S under section
318(a)(2)(C), the redemption is treated as a distribution to which section 30 I applies and is treated as a
dividend. H, I, and J will be allocated $120, $40, and $40 of dividend income, respectively. In Year
2, J sells his stock of corporation S to K, an unrelated person. In Year 3, H sells his stock of
corporation X to L, an unrelated person.
(ii) Analysis. Under this section, an amount equal to corporation S's basis in the redeemed
stock ($100) is treated as a loss recognized on a disposition ofthe redeemed stock on the date of the
disposition. H, I, and J will be allocated $60, $20, and $20 of the loss, respectively, in the year of the
redemption. Both the allocation of dividend income and the allocation of the loss give rise to
adjustments to each shareholder's basis in corporation S. H, I, and J, however, will not be able to take
into account this loss until the fmal inclusion date or an accelerated loss inclusion date. In Year 2, when
J sells his stock of corporation S to K, J is no longer a shareholder in corporation S and will be treated
as the redeemed shareholder for purposes of determining whether a particular date is the final inclusion
date or an accelerated loss inclusion date. In addition, the determination of whether the date of the
Year 2 sale is the final inclusion date for J is made by comparing 1's actual and constructive ownership
of corporation S stock immediately prior to the redemption to 1's actual and constructive ownership of
corporation S stock at the end of the date of the Year 2 sale. However, for purposes of computing 1's
ownership of the redeeming corporation immediately prior to the redemption, section 318(a)(2)(C) is
applied without regard to the 50 percent limitation contained therein. Immediately prior to the
redemption, therefore, J is treated as owning actually and constructively 4 percent of the stock of
corporation X and, at the end of the day of 1's sale of corporation S stock, J owns, actually and
constructively, no corporation X stock. Therefore, if the facts that existed on the date of the Year 2
sale had existed immediately after the redemption, J would have been treated as having received a
distribution in part or full payment in exchange for the redeemed stock pursuant to section 302(a).
Therefore, the date of 1's sale of corporation S stock to K is the final inclusion date. J is permitted to
take into account 1's share of the loss attributable to the basis of the redeemed stock as of that date.
While H and I remain shareholders of corporation S, whether a particular date is the final inclusion date
will be determined by treating corporation S as the redeemed shareholder. Thus, in Year 3 when H
disposes of his shares of corporation X, corporation S actually and constructively owns no stock of
corporation X. As of that date, therefore, H and I will be permitted to take into account their respective
shares of the loss attributable to the basis of the redeemed stock.
(g) Effective date. This section applies to transactions occurring after the date these regulations
are published as final regulations in the Federal Register.
Par. 4. Section 1.304-1 is revised to read as follows:
§ 1. 3 04- 1 In general
35
(a) In general Section 304 is applicable where a shareholder sells stock of one corporation to
a related corporation as defined in section 304. Sales to which section 304 is applicable shall be
treated as redemptions subject to sections 302 and 303.
(b) Effective date. This section applies to transactions occurring after the date these regulations
are published as final regulations in the Federal Register.
Par. 5. Section 1.304-2 is amended as follows:
1. Paragraphs (a) and (c) are revised.
2. Paragraph (d) is added.
The revisions and addition read as follows:
§ 1.304-2 Acquisition by related corporation (other than subsidiary).
(a) In general (1) If a corporation (the acquiring corporation), in return for property, acquires
stock of another corporation (the issuing corporation) from one or more persons, and the person or
persons from whom the stock was acquired were in control of both such corporations, then such
property shall be treated as received in redemption of stock of the acquiring corporation. As to each
person transferring stock, the amount received shall be treated as a distribution to which section 301
applies if section 302(a) or 303 does not apply. For rules regarding the amount constituting a dividend
in such cases, see § 1.304-6.
(2) In applying section 302(b), reference shall be had to the shareholder's ownership of stock in
the issuing corporation and not to its ownership of stock in the acquiring corporation (except for
purposes of applying section 318(a», section 318(a) (relating to the constructive ownership of stock)
shall be applied without regard to the 50 percent limitation contained in section 318(a)(2)(C) and
36
(3)(C), and a series of redemptions referred to in section 302(b)(2)(O) shaH include acquisitions by
either of the corporations of stock of the other and stock redemptions by both corporations.
(3) If, pursuant to section 302(d), section 301 applies to the property treated as received in
redemption of stock of the acquiring corporation pursuant to paragraph (a)( 1) of this section, the
transferor and the acquiring corporation shaH be treated, for all Federal income tax purposes, in the
same manner as ifthe transferor had transferred the stock of the issuing corporation to the acquiring
corporation in exchange for stock of the acquiring corporation in a transaction to which section 351(a)
applies, and then the acquiring corporation had redeemed the stock it was treated as issuing in the
transaction in exchange for the property. Accordingly, under section 362, the acquiring corporation's
basis in the stock of the issuing corporation is equal to the basis the transferor had in that stock and,
under section 358, the transferor's basis in the stock ofthe acquiring corporation deemed issued to the
transferor in the deemed transaction to which section 351(a) applies is equal to the transferor's basis in
the stock of the issuing corporation it surrendered. Section 1.302-5 applies to the transferor's unutilized
basis, ifany, in the stock of the acquiring corporation treated as redeemed in connection with an
acquisition described in paragraph (a)(1) of this section by treating the acquiring corporation as the
redeeming corporation and the transferor as the redeemed shareholder.
(4) If section 301 does not apply to the property treated as received in redemption of stock of
the acquiring corporation pursuant to paragraph (a)( 1) of this section, the property received by the
transferor shall be treated as received in a distribution in full payment in exchange for stock of the
acquiring corporation under section 302(a). The basis and holding period of the stock of the acquiring
corporation that is treated as having been redeemed shall be the same as the basis and holding period of
37
the stock of the issuing corporation actually surrendered. The acquiring corporation shall take a cost
basis in the stock of the issuing corporation that it acquires. See section 1012.
*****
(c) Examples. For purposes ofthe examples in this section, each of corporation X and
corporation Y is a domestic corporation that files
u.s. tax returns on a calendar-year basis.
The
principles of this section are illustrated by the following examples:
Example 1. (i) Facts. Corporation X and corporation Y each have outstanding 100 shares of
common stock. A, an individual, owns one-half of the stock of each corporation, B owns one-half of
the stock of corporation X, and C owns one-half of the stock of corporation Y. A, B, and Care
unrelated. A sells 30 shares of the stock of corporation X, which have an adjusted basis of $1 0,000, to
corporation Y for $50,000.
(ii) Analysis. Because before the sale A owns 50 percent of the stock of corporation X and
after the sale A owns only 35 percent of such stock (20 shares directly and 15 constructively because
one-half of the 30 shares owned by corporation Yare attributed to A), the redemption is substantially
disproportionate as to A pursuant to the provisions of section 302(b)(2). A, therefore, realizes a gain of
$40,000 ($50,000 minus $10,000). If the stock surrendered is a capital asset, such gain is long-term or
short-term capital gain depending on the period of time that such stock was held. The basis to A for the
stock of corporation Y is not changed as a result of the sale. Under section 1012, the basis that
corporation Y takes in the acquired stock of corporation X is its cost of $50,000.
Example 2. (i) Facts. Corporation X and corporation Y each have outstanding 200 shares of
common stock, all of which are owned by H, an individual. H has a basis in his corporation X stock of
$60 and in his corporation Y stock of $30. Corporation X has $80 of current and accumulated
earnings and profits and corporation Y has $80 of current and accumulated earnings and profits. H sells
his 200 shares of corporation X stock to corporation Y for $150.
(ii) Analysis. Because H is in control of both corporation X and corporation Y and receives
property from corporation Y in exchange for the corporation X stock, H's sale of200 shares of
corporation X stock to corporation Y is subject to section 304(a)(1). Accordingly, H is treated as
receiving $150 as a distribution in redemption of corporation Y stock. Because H actually owns 100
percent of corporation X before the sale and is treated as owning 100 percent of corporation X after
the sale, pursuant to section 302(d), section 302(a) does not apply to the deemed redemption
distribution and the proceeds of the deemed redemption are treated as a distribution to which section
301 applies. Therefore, H is treated as transferring the corporation X stock to corporation Y in
exchange for corporation Y stock in a transaction to which section 351(a) applies. Corporation V's
38
basis in the corporation X stock acquired is $60, the same basis that H had in the corporation X stock
surrendered. H takes a basis of $60 in the corporation Y stock he is treated as receiving in the deemed
section 351 exchange. That corporation Y stock is then treated as redeemed by corporation Y for
$150. Under section 302, that redemption is treated as a distribution to which section 301 applies
because H owns directly 100 percent of corporation Y both before and after the redemption of the
corporation Y stock that was deemed issued. Thus, the deemed redemption proceeds are treated as a
distribution to which section 301 applies. Pursuant to § 1.304-6(a), H is treated as receiving a dividend
of $150 ($80 from the current and accumulated earnings and profits of corporation Y and then $70
from the current and accumulated earnings and profits of corporation X). An amount equal to the basis
in the corporation Y stock that H is deemed to receive and that is deemed redeemed, $60 is treated as
a loss recognized on a disposition of the stock deemed redeemed on the date of the deemed
redemption and is taken into account under rules set forth in § 1.302-5. H's basis in the 200 shares of
corporation Y stock that H owned before the sale and continues to own immediately after the sale
remains $30.
Example 3. (i) Facts. The facts are the same as in Example 2, except that corporation X has
$5 of current and accumulated earnings and profits and corporation Y has $25 of current and
accumulated earnings and profits.
(ii) Analysis. As in Example 2, H takes a basis of $60 in the corporation Y stock he is treated
as receiving and $150 is treated as a distribution to which section 301 applies. Pursuant to § 1.3046(a), H is treated as receiving a dividend of$30 ($25 from the current and accumulated earnings and
profits of corporation Y and $5 from the current and accumulated earnings and profits of corporation
X). In addition, $60 of the distribution is treated as a return of basis and $60 of the distribution is
treated as gain from the sale or exchange of corporation Y stock. H's basis in the 200 shares of
corporation Y stock that he owned before and continues to own immediately after the sale remains $30.
Corporation Y's basis in the corporation X stock acquired is $60, the same basis that H had in the
corporation X stock surrendered.
Example 4. (i) Facts. A, an individual, owns 100 shares of corporation X stock, which is all of
the outstanding stock of corporation X. A has a basis of $1 in each share of his corporation X stock.
B, the son of A, owns all the outstanding stock of corporation Y. A sells 25 shares ofthe stock of
corporation X to corporation Y for $50. For that year, the current and accumulated earnings and
profits of corporation Y exceed $50.
(ii) Analysis. Because A is in control of both corporation X and corporation Y (corporation X
directly and corporation Y through attribution from B) and receives property in exchange for the
corporation X stock, A's sale of corporation X stock to corporation Y is subject to section 304(a)(I).
Consequently, A is treated as transferring the corporation X stock to corporation Y in exchange for
corporation Y stock in a transaction to which section 351(a) applies. That corporation Y stock is then
treated as redeemed by corporation Y for $50. Before the deemed redemption of the corporation Y
stock, A owned 100 percent of corporation Y directly and constructively. After the deemed
39
redemption, A owns 100 percent of corporation Y constructively by attribution from B. Accordingly,
the redemption distribution is treated as a distribution to which section 301 applies. Because the
earnings and profits of corporation Y exceed the amount of cash paid by corporation Y to A for the
corporation X stock, pursuant to § 1.304-6(a), the entire amount is a dividend. An amount equal to the
basis in the corporation Y stock that A was deemed to receive and that was then deemed redeemed,
$25, is treated as a loss recognized on a disposition ofthe stock deemed redeemed on the date of the
deemed redemption and is taken into account under rules set forth in § l.302-5. A's basis in the 75
shares that he continues to hold remains $1 per share for an aggregate basis of$75.
(d) Effective date. This section, except for paragraph (b) of this section, applies to transactions
occurring after the date these regulations are published as [mal regulations in the Federal Register.
Paragraph (b) of this section applies on and after December 2, 1955.
Par. 6. Section l.304-3 is amended as follows:
l. Paragraph (a) is revised.
2. Paragraph (c) is added.
The revision and addition read as follows:
§ 1.304-3 ACquisition by a subsidiary.
(a) In general If a subsidiary, in return for property, acquires stock of its parent corporation
from a shareholder of the parent corporation, the acquisition of such stock shall be treated as if the
parent corporation had redeemed its own stock in exchange for the property. For purposes of this
section, a corporation is a parent corporation if it meets the 50 percent ownership requirements of
section 304(c). The determination of whether the amount received shall be treated as an amount
received in payment in exchange for the stock shall be made by applying section 303, or by applying
section 302(b) with reference to the stock of the issuing parent corporation. For rules regarding the
amount that constitutes a dividend in a redemption treated as a distribution subject to section 301, see
40
§ 1.304-6. For the treatment of the redeemed shareholder's basis in the redeemed stock in such cases,
see § 1.302-5. Section 1.302-5 applies to the shareholder's unutilized basis, if any, in the stock of the
parent corporation treated as redeemed in connection with an acquisition described in this paragraph (a)
by treating the parent corporation as the redeeming corporation and the shareholder as the redeemed
shareholder.
*****
(c) Effective date. This section applies on and after December 2, 1955, except for paragraph
(a) of this section, which applies to transactions occurring after the date these regulations are published
as final regulations in the Federal Register.
Par. 7. Section 1.304-5 is amended as follows:
1. Paragraph (a) is amended by adding a sentence at the end of the paragraph.
2. Paragraph (c) is revised.
The revision and addition read as follows:
§ 1.304-5 Control
(a)
* * * Specifically, section 318(a) shall be applied by using the language "5 percent" instead
of "50 percent" in section 318(a)(2)(C) and by using the language "5 percent" instead of "50 percent" in
section 318(a)(3)(C), except that if section 318(a)(3)(C) would not have applied but for this
substitution, by considering a corporation as owning the stock (other than stock in such corporation)
owned by or for any shareholder of such corporation in that proportion which the value of the stock
which such shareholder owned in such corporation bears to the value of all stock in such corporation.
*****
41
(c) Effective date. This section applies on and after January 20, 1994, except the last sentence
of paragraph (a) of this section applies to transactions occurring after the date these regulations are
published as final regulations in the Federal Register.
Par. 8. Section 1.304-6 is added to read as follows:
§ 1.304-6 Amount constituting a dividend.
(a) In general The determination of the arnount of the property that is a dividend is made as if
the property were distributed by the acquiring corporation to the extent of its earnings and profits and
then by the issuing corporation to the extent of its earnings and profits. Where, however, the acquiring
corporation is a foreign corporation, for purposes of the preceding sentence, the earnings and profits of
the acquiring corporation are taken into account only to the extent that they-(1) Are attributable to stock of the acquiring corporation owned (within the meaning of section
958(a)) by a corporation or individual that is-(i) A United States shareholder (within the meaning of section 951(b)) of the acquiring
corporation; and
(ii) The transferor or a person who bears a relationship to the transferor described in section
267(b) or 707(b); and
(2) Were accumulated during the period or periods such stock was owned by such person
while the acquiring corporation was a controlled foreign corporation.
(b) Effective date. This section applies to transactions occurring after the date these regulations
are published as final regulations in the Federal Register.
Par. 9. Section 1.704-1 is amended by adding paragraph (b)(4)(viii) to read as follows:
42
§ 1.704-1 Partner's distributive share.
*****
(b)
***
(4)
***
(viii) Loss attributable to basis of redeemed stock under § 1.302-5. For rules regarding
allocations on a redemption of stock all or a portion of which is treated as a dividend, see § 1.3025(d)( 6)(i).
**** *
Par. 10. Section 1.861-12 is added to read as follows:
§ 1.861-12 Characterization rules and adjustments for certain assets.
(a) through (c)(2)(v) [Reserved]. For further guidance, see §1.861-12T(a) through (c)(2)(v).
(c)(2)(vi) Adjustments in respect of redeemed stock for taxpayers using the tax book value
method. Solely for purposes of apportioning expenses on the basis of the tax book value of assets, the
adjusted basis of any stock in a 10 percent owned corporation owned directly by a taxpayer that is a
redeemed shareholder (as defined in § 1.302-5(b)(l)) with respect to such corporation shall be
increased by the amount of any loss that has not been taken into account under § 1.302-5(c) as of the
close of the redeemed shareholder's taxable year (unrecovered loss). If the redeemed shareholder
does not own directly any shares in the 10 percent owned corporation as ofthe end of the taxable year,
but is treated for purposes of section 302(b) as owning shares actually owned by another member of
the redeemed shareholder's affiliated group, as defined in section 1504(a), or by a corporation that is
either an affiliate described in § 1.904(i)-I(b)( 1) or an affiliated corporation described in § 1.86143
1IT(d)(6) with respect to the redeemed shareholder, then the adjusted basis ofthe shares in the 10
percent owned corporation, if any, that are owned by such other corporation or corporations shall be
increased by the amount ofthe redeemed shareholder's unrecovered loss (and allocated among such
corporations, if applicable, in proportion to their relative adjusted bases (as adjusted pursuant to this
paragraph and §1.861-12T(c)(2» in the stock of the redeeming corporation). These adjustments are to
be made annually and are noncumulative.
(vii) Examples. [Reserved]. Certain of the rules of this paragraph (c)(2) may be illustrated by
the following examples:
Examples 1 and J. [Reserved]. For further guidance, see § 1.861-12T(c)(2)(vii), Examples 1
andJ.
Example 3. The facts are the same as in § 1.861-12T(c)(2)(vii) Example 2, except that the
taxable year is 2003, and during the taxable year Y redeems some of the shares of its stock held by X
for $100,000. X's adjusted basis in the redeemed shares is $50,000. Because X still owns all of the
outstanding stock ofY, the redemption is treated as a distribution with respect to the stock ofY under
section 301. Under §1.302-5, X's $50,000 adjusted basis in the redeemed shares is treated as a loss
recognized on the date of the redemption, none of which is taken into account in 2003. X invests the
$100,000 of redemption proceeds in assets that generate foreign source general limitation income.
Under paragraph (c)(2)(vi) of this section, X's adjusted basis in its remaining Y stock is considered to
be $2,000,000 ($1,950,000 adjusted basis in the Y stock plus $50,000 unrecovered loss in the
redeemed shares). X's adjusted basis of assets that generate foreign source general limitation income is
considered to be $2,500,000 ($2,000,000 adjusted basis in the Y stock plus $500,000 other assets),
and the resulting apportionment of interest expense is the same as in § 1.861-12T(c)(2)(vii) Example 2.
(c)(3) through (j) [Reserved]. For further guidance, see § 1.861-12T(c)(3) through (j).
Par. 11. Section 1.861-12T is amended as follows:
1. Paragraph (c)(2)(vi) is redesignated as paragraph (c)(2)(vii).
2. New paragraph (c)(2)(vi) is added.
44
The addition reads as follows:
§ 1.861-12T Characterization rules and adjustments for certain assets (temporary regulations.)
*****
(c)
***
(2) * * *
(vi) [Reserved]. For further guidance, see § 1.861-12(c )(2)(vi).
*****
Par. 12. Section 1.1371-1 is added to read as follows:
§ 1.1371- I Coordination with subchapter C.
(a) No carryover between C and S years--(l) Loss attributable to basis of redeemed stock. A
loss described in § 1.302-5(a) is treated as a carryforward arising in a taxable year for which a
corporation is a C corporation. Therefore, it may not be carried to a taxable year for which such
corporation is an S corporation.
(2) [Reserved].
(b) Effective date. This section applies to transactions occurring after the date these regulations
are published as final regulations in the Federal Register.
Par. 13. In § 1.1374-5, paragraph (a) is amended by adding a sentence at the end of the
paragraph.
§ 1.1374-5 Loss carryforwards.
(a) In general
* * * However, for redemptions of stock occurring after the date these
regulations are published as final regulations in the Federal Register, a loss attributable to the basis of
45
redeemed stock that is taken into account pursuant to the rules of § 1.302-5 is allowed for purposes of
section 1374(b)(2) as a deduction against net recognized built-in gain of the S corporation for the
taxable year, provided that the loss arose in a year in which the corporation was a C corporation.
*****
Par. 14. In § 1.1374-10, paragraph (a) is revised to read as follows:
§ 1.1374- 10 Effective date and additional rules.
(a) In genera1. Except as provided in §1.1374-5(a), §§1.1374-1 through 1.1374-9 apply for
taxable years ending on or after December 27, 1994, but only in cases where the S corporation's return
for the taxable year is filed pursuant to an S election or a section 1374(d)(8) transaction occurring on or
after December 27,1994.
*****
Par. 15. In § 1.1502-13, paragraph (f)(7) Example 3(b) is revised to read as follows:
§ 1.1502-13 Intercompany transactions.
*****
(f) * * *
(7)
***
Example 3.
***
(b) Treatment as a section 301 distribution The merger of S into B is a transaction to which
paragraph (f)(3) of this section applies. P is treated as receiving additional B stock with a fair market
value of$500 and, under section 358, a basis of$250. Immediately after the merger, $150 of the
stock received is treated as redeemed, and the redemption is treated under section 302(d) as a
distribution to which section 301 applies. Because the $150 distribution is treated as not received as
part of the merger, section 356 does not apply and no basis adjustments are required under section
358(a)(1)(A) and (B). Because B is treated under section 381(c)(2) as receiving S's earnings and
46
profits and the redemption is treated as occurring after the merger, $100 of the distribution is treated as
a dividend under section 301 and P'S basis in the B stock is reduced correspondingly under
§ 1.1502-32. Under paragraph (f)(2)(ii) of this section, P'S $100 of dividend income is not included in
gross income. Accordingly, P has a $75 excess loss account in the redeemed stock. That excess loss
account is treated as income recognized on a disposition of the redeemed stock on the date of the
redemption and is taken into account under the rules of § 1.1502-19(b)( 5).
*****
Par. 16. Section 1.1502-19 is amended as follows:
1. Paragraph (b)(2)(i) is amended by adding a sentence at the end of the paragraph.
2. Paragraph (b)(5) is added.
3. Paragraph (g) Example 7 is added.
4. The heading for paragraph (h) is revised.
5. The first sentence of paragraph (h)(1) is removed and two new sentences are added in its
place.
The revisions and additions read as follows:
§ 1.1502-19 Excess loss accounts.
*****
(b)
***
(2)
* * * (i) * * * As another example, ifS redeems (or is treated as redeeming) P's S stock
and, as a result, an excess loss account is either increased or created in such redeemed stock, P takes
into account such excess loss account under the rules of paragraph (b)(5) ofthis section.
*****
(5) Redemptions of member stock; treatment of excess loss account in redeemed stock--(i) In
47
general In any case in which an amount received in redemption of S stock is treated as a distribution to
P to which section 301 applies and such amount either increases or creates an excess loss account in
the redeemed S stock, after adjusting such basis or excess loss account to reflect the application of
section 30 I (c)(2), section 1059, § 1.1502-32, or any other applicable provision of the Internal Revenue
Code or the regulations thereunder, such excess loss account is treated as income (ordinary income or
gain) recognized on a disposition of the redeemed stock on the date of the redemption. Such income
shall be taken into account by P under the provisions of this paragraph (b)( 5).
(ii) Inclusion of gain attributable to excess loss account in redeemed stock--(A) Amount taken
into account on final inclusion date. On the final inclusion date (as defmed in § 1.302-5(b)(3)), P must
include in income as ordinary income or gain the excess loss account in the redeemed stock, reduced by
any amounts of such excess loss account that are taken into account pursuant to the provisions of
paragraph (b)(5)(ii)(B) of this section.
(B) Amount taken into account on accelerated income inclusion date. Q) On an accelerated
income inclusion date (as defined in paragraph (b)(5)(ii)(B)(f) of this section), P must include in income
as ordinary income or gain the excess loss account of the redeemed stock to the extent of the lesser of--
G) The amount of such excess loss account reduced by the amount of such excess loss account
previously taken into account pursuant to this paragraph (b)(5)(ii); and
GD The amount of loss recognized on the disposition of stock of S that the group of which P is a
member is pennitted to take into account on such accelerated income inclusion date without regard to
the application of § 1.337(d)-2T.
Q) An accelerated income inclusion date is a date on which P is pennitted to take into account
48
a loss recognized on a disposition ofS stock without regard to the application of § 1.337(d)-2T.
(iii) Application of other rules. In addition to the rules set forth in this paragraph (b)( 5), the rules
of § 1J02-5(d) apply for purposes of determining the appropriate time to take into account any portion
of an excess loss account in redeemed stock by treating P as the redeemed shareholder and S as the
redeeming corporation. However, the rules of § 1.302-5(d) shall be applied by using the language
"accelerated income inclusion date" instead of "accelerated loss inclusion date" each time that term
appears.
(iv) Statement to be filed with returns. With or as part of the income tax return for the year in
which P takes into account any income attributable to an excess loss account in redeemed stock, P shall
provide a statement entitled "Inclusion of Income Attributable to Excess Loss Account in Redeemed
Stock." The statement shall specify the amount of the income that is taken into account on such return
pursuant to this paragraph (b)(5) and shall identify the shares to which such amounts relate.
*****
(g)
***
Example 7. Redemption of member stock. (a) Facts. P directly owns all of the outstanding
stock of S 1 and S2. S 1 and S2 each own 50 shares of S3's outstanding 100 shares of stock. P is the
common parent of the consolidated group. S 1's adjusted basis in the S3 stock is $50. In Year 1, S3
redeems all of its stock from S 1 for $100. In Year 2, P sells all of its shares of S 1 stock to an unrelated
party.
(b) Analysis. In Year I, because S 1 actually and constructively owns 100 percent of stock of
S3 immediately before and immediately after the redemption, the redemption is treated as a distribution
to which section 301 applies. S3 's distribution is an intercompany distribution under § 1.150213(f)(2)(ii) and excluded from SI's gross income. Under § 1.1502-32, SI 's basis in S3's stock is
reduced by the amount of the distribution, creating an excess loss account of$50. Pursuant to
paragraph (b)(5)(i) of this section, that excess loss account is treated as income recognized on a
disposition of the redeemed stock on the date of the redemption. That income, however, is not taken
into account on such date. Instead, it is taken into account on the date on which S 1 departs from the
49
consolidated group as that date is the final inclusion date because, ifthe facts that exist at the end of that
day had existed immediately after the redemption, the redemption would have been treated as a
distribution in part or full payment in exchange for the redeemed stock pursuant to section 302(b)(3).
Accordingly, S 1 must include in its income as gain an amount equal to the excess loss account in the
redeemed S3 stock.
(h) Effective dates--( 1) Application This section, except for the last sentence of paragraph
(b)(2)(i), and paragraphs (b)(5) and (g) Example 7 of this section, applies with respect to
determinations of the basis of (including an excess loss account in) the stock of a member in
consolidated return years beginning on or after January 1, 1995. The last sentence of paragraph
(b)(2)(i), and paragraphs (b)(5) and (g) Example 7 of this section apply to transactions occurring
50
after the date these regulations are published as final regulations in the Federal Register.
***
*****
Acting Deputy Commissioner of Internal Revenue.
PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
Contact: Office of Financing
202-691-3550
FOR IMMEDlA TE RELEASE
October 18, 2002
TREASURY'S INFLATION-INDEXED SECURITIES
NOVEMBER 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 November for the following Treasury inflation-indexed securities:
(1) 3-3/8% 10-year notes due January 15,2007
(2) 3-5/8% lO-year notes due January 15,2008
(3) 3-5/8% 30-year bonds due April 15,2028
(4) 3-7/8% 10-year notes due January 15,2009
(5) 3-7/8% 3D-year bonds due April 15,2029
(6) 4-1/4% 10-year notes due January 15,2010
(7) 3-1/2% 1O~year notes due January 15, 2011
(8) 3-3/8% 30-1I2-year bonds due April 15, 2032
(9) 3-3/8% 1O-year notes due January 15,2012
(10) 3% lO-year notes due July 15,2012
This information is based on the non-seasonally adjusted U.S. City Average Allltems 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 publ ication of the reference CPI's (Ref CPl) 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 3548. The information is also
available on the Internet at Public Debt's website (http://www.publicdebttreas.gov).
The information for December is expected to be released on November 19,2002.
000
Attachment
http://www.publicdebt.treas.gov
PO-3548
TREASURY INFLATION-INDEXED SECURITIES
Ref CPI and Index Ratios for
November 2002
Security:
Description:
CUSIP Number:
Dated Date:
Original Issue Date:
Additional Issue Date(s):
3-3/8% i0-Year Notes
Series A-2007
9128272M3
January 15, 1997
February 6,1997
April 15, 1997
3-516% 10-Year Notes
Series A-2006
9128273T7
January 15, 1998
January 15, 1998
October 15,1998
3-516% 30-Year Bonds
Bonds of April 2028
912810FD5
April 15, 1998
April 15, 1998
July 15, 1998
3-7/6% 10-Ye"r Notes
Series A-2009
9128274Y5
January 15,1999
January 15, 1999
July 15, 1999
Maturity Date:
Ref CPI on Dated Dale:
January 15, 2007
158.43548
January 15, 2008
161.55484
April 15, 2028
161.74000
January 15, 2009
164.00000
RefCPI
Index Ratio
Index Ratio
Index Ratio
Index Ratio
180.70000
180.71000
160.72000
180.73000
180.74000
180.75000
180.76000
1BO.77000
180.78000
180.79000
180.80000
180.81000
180.82000
180.83000
180.84000
180.85000
180.86000
180.87000
180.88000
160.89000
180.90000
180.91000
180.92000
180.93000
180.94000
180.95000
180.96000
180.97000
180.98000
180.99000
1.14053
1.14059
1.14065
1.14072
1.14078
1.14084
1.14091
1.14097
1.14103
1.14110
1.14116
1.14122
1.14128
1.14135
1.14141
1.14147
1.14154
1.14160
1.14166
1.14173
1.14179
1.14185
1.14192
1.14198
1.14204
1.14211
1.14217
1.14223
1.14229
1.14236
1.11851
1.11857
1.11863
1.11869
1.11875
1.11882
1.11888
1.11894
1.11900
1.11906
1.11912
1.11919
1.11925
1.11931
1.11937
1.11943
1.11950
1.11956
1.11962
1.11966
1.11974
1.11981
1.11987
1.11993
1.11999
1.12005
1.12012
1.12018
1.12024
1.12030
1.11723
1.11729
1.11735
1.11741
1.11747
1.11753
1.11760
1.11766
1.11772
1.11778
1.11784
1.11791
1.11797
1.11803
1.11809
1.11815
1.11821
1.11828
1.11834
1.11840
1.11846
1.11852
1.11859
1.11865
1.11871
1.11877
1.11883
1.11889
1.11896
1.11902
1.10183
1.10189
1.10195
1.10201
1.10207
1.10213
1.10220
1.10226
1.10232
1.10238
1.10244
1.10250
1.10256
1.10262
1.10268
1.10274
1.10280
1.10287
1.10293
1.10299
1.10305
1.10311
1.10317
1.10323
1.10329
1.10335
1.10341
1.10348
1.10354
1.10360
Date
Nov.
Nov.
Nov.
Nov.
Nov.
Nov.
Nov.
Nov.
Nov.
Nov.
Nov.
Nov.
Nov.
Nov.
Nov.
Nov.
Nov.
Nov.
Nov.
Nov.
Nov.
Nov.
Nov.
Nov.
Nov.
Nov.
Nov.
Nov.
Nov.
Nov.
1
2
3
4
5
6
7
B
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:
-
July 2002
180.1
August 2002
180.7
September 2002
181.0
TREASURY INFLATION-INDEXED SECURITIES
Ref CPI and Index Ratios for
November 2002
Security:
Description:
CUSIP Number:
Dated Dale:
Original Issue Date:
Additional Issue Date(s):
Maturity Date:
Ref CPI on Dated Date:
Date
Nov.
Nov.
Nov.
Nov.
Nov.
Nov.
Nov.
Nov.
Nov.
Nov.
Nov.
Nov.
Nov.
Nov.
Nov.
Nov.
Nov.
Nov.
Nov.
Nov.
Nov.
Nov.
Nov.
Nov.
Nov.
Nov.
Nov.
Nov.
Nov.
Nov.
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:
3-3/8% 30-1/2-Year Bonds
3-7/8% 30-Year Bonds
4-1/4% 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
Bonds of April 2032
912810FQ6
October 15, 2001
October 15, 2001
January 15, 2010
168.24516
January 15, 2011
174.04516
April 15, 2032
177.50000
RefCPI
Index RatiO
Index Ratio
Index Ratio
Index Ratio
180.70000
180.71000
180.72000
180.73000
180.74000
180.75000
180.76000
180.77000
180.78000
180.79000
180.80000
180.81000
180.82000
180.83000
180.84000
180.85000
180.86000
1BO.87000
180.88000
180.89000
180.90000
180.91000
180.92000
180.93000
180.94000
180.95000
180.96000
lBO.97000
180.98000
180.99000
1.09919
1.09925
1.09931
1.09938
1.09944
1.09950
1.09956
1.09962
1.09968
1.09974
1.09980
1.09986
1.09992
1.09998
1.10004
1.10011
1.10017
1.10023
1.10029
1.10035
1.10041
1.10047
1.10053
1.10059
1.10065
1.10071
1.10077
1.10084
1.10090
1.10096
1.07403
1.07409
1.07415
1.07421
1.07427
1.07433
1.07438
1.07444
1.07450
1.07456
1.07462
1.07468
1.07474
1.07480
1.07486
1.07492
1.07498
1.07504
1.07510
1.07516
1.07522
1.07528
1.07534
1.07539
1.07545
1.07551
1.07557
1.07563
1.07569
1.07575
1.03824
1.03829
1.03835
1.03841
1.03847
1.03852
1.03858
1.03864
1.03870
1.03875
1.03881
1.03887
1.03893
1.03898
1.03904
1.03910
1.03916
1.03921
1.03927
1.03933
1.03939
1.03944
1.03950
1.03956
1.03962
1.03967
1.03973
1.03979
1.03985
1.03990
1.01803
1.01808
1.01814
1.01820
1.01825
1.01831
1.01837
1.01842
1.01848
1.01854
1.01859
1.01865
1.01870
1.01876
1.01882
1.01887
1.01893
1.01899
1.01904
1.01910
1.01915
1.01921
1.01927
1.01932
1.01938
1.01944
1.01949
1.01955
1.01961
1.01966
July 2002
180.1
August 2002
180.7
September 2002
181.0
TREASURY INFLATION·INDEXED SECURITIES
Ref CPI and Index Ratios for
November 2002
Security:
Description:
CUSIP Number:
Dated Date:
Original Issue Date:
Additional Issue Date(s):
3·3/8% 10·Year Notes
Series A·2012
9128277J5
January 15, 2002
January 15, 2002
3% 10·Year Notes
Sedes C·2012
912828AF7
July 15, 2002
July 15, 2002
October 15, 2002
Maturity Date:
Ref CPI on Dated Date:
January 15, 2012
177.56452
July 15, 2012
179.80000
Date
Nov.
Nov.
Nov.
Nov.
Nov.
Nov.
Nov.
Nov.
Nov.
Nov.
Nov.
Nov.
Nov.
Nov.
Nov.
Nov.
Nov.
Nov.
Nov.
Nov.
Nov.
Nov.
Nov.
Nov.
Nov.
Nov.
Nov.
Nov.
Nov.
Nov.
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:
Ref CPI
Index Ratio
Index Ratio
180.70000
1aD. 71000
180.72000
180.73000
180.74000
180.75000
180.76000
180.77000
1BO.78000
180.79000
180.80000
1BO.B1000
180.82000
180.83000
180.84000
180.85000
180.86000
180.87000
1BO.88000
180.89000
180.90000
180.91000
130.92000
180.93000
180.94000
180.95000
180.96000
180.97000
180.98000
180.99000
1.01766
1.01771
1.01777
1.01783
1.01788
1.01794
1.01800
1.01805
1.01B11
1.01817
1.01B22
1.01 B28
1.01833
1.01839
1.01845
1.01850
1.01856
1.01862
1.01867
1.01873
1.01878
1.01884
1.01890
1.01895
1.01901
1.01907
1.01912
1.01918
1.01924
1.01929
1.00501
1.00506
1.00512
1.00517
1.00523
1.00528
1.00534
1.00539
1.00545
1.00551
1.00556
1.00562
1.00567
1.00573
1.00578
1.00584
1.00590
1.00595
1.00601
1.00606
1.00612
1.00617
1.00623
1.00628
1.00634
1.00640
1.00645
1.00651
1.00656
1.00662
July 2002
180.1
August 2002
I
180.7
September 2002
-
181.0
PO-3549: United States Treasury Secretary Paul H. O'Neill Remarks to the Harvard Busi...
Page 1 of 3
f-' f-; L S S H 00 M
FROM THE OFFICE OF PUBLIC AFFAIRS
October 17. 2002
PO-3549
United States Treasury Secretary Paul H. O'Neill
Remarks to the Harvard Business School
Cambridge, Massachusetts
Good afternoon It is always a pleasure to join the students and faculty of the
Harvard Business School.
The past year has been full of shocks and surprises for those who study and
participate In American business. EspeCially for those who came of age in the
1990s. Companies that received every accolade for innovative accounting and
CEOs who graced countless magazine covers have fallen further and faster than
they once rose. Nothing is what it seemed - earnings statements, revenue
projections, or the boundless, bump-less, New Economy.
As the pendulum of public opinion has swung from worship, to doubt, to outrage
over corporate behaVior, some have called into question the system of private
enterprise and economic freedom that has allowed our nation to achieve
prosperity. Are they right? Do we suffer from too much freedom? Did Y2K arrive a
year late, and the end of the world is now upon us?
I don't think so. I've been around long enough to have seen this cycle play out a
few times: the glorifications of a boom, and the recriminations of the subsequent
return to realily. We'll recover from this one as we have every other, and we'll
move on to new heights - and occasional dips. We'll be better for it too, as
legitimate technological advances, productivity gains, and improved regulatory
structures raise our overall standard of living, and set the stage for further growth.
That's not really why I'm here. Any of you WllO have studied economic history know
there is nothing truly unprecedented in today's trials and hearings, or the images of
shamed ex-executives led off in chains. Those infatuated with greed eventually get
their due, in every generation. Our economic system has the flexibility to absorb
these shocks, adjust, and recover.
The question I prefer to address is a deeper question of leadership. I presume that
most of you here today have ambitions of becoming tomorrow's captains of
industry, luminaries and visionaries. Maybe you want to become great leaders,
who unleash the potential in others, and set an example for your peers. Or maybe
you just want to make a lot of money. If it's the latter alone, I don't have much to
tell you. Best of luck. But if you believe your life and your special talents have
more of a purpose than dying with the most toys, I have a few ideas to share.
Specifically, I want to consider the importance of values, by which I mean honesty,
accountability, and respect for human dignity.
For those of you who have not yet read the HBS Alcoa case study, let me
summarize my background. From 1977 to 2001, I worked in the private sector after
working 15 years in the federal government. During those private sector years, I
worked in two large multinational companies. From 1987 to 2001, I was the
Chairman and CEO of Alcoa.
When I jOined Alcoa in 1987, we employed 55,000 people in 13 counties. When I
left at the end of the year 2000, 140,000 people worked for Alcoa at 350 locatiolls In
http://www.trcas.gov/prcj3/release~;/po3549.htm
1116/2002
PO-3S49: United States Treasury Secretary Paul H. O'Neill Remarks to the Harvard Busi...
Page 2 of 3
36 countries. Our shareholders' value Increased eight-fold during that time.
But even more than the growth and profit figures, one statistics stands out as a
measure of our values. During the time I served Alcoa, we reduced our workplace
injury rate by 90 percent. Let me explain the Importance of this fact.
Over the course of my career in business and with the government, I have come to
believe that in an organization with the potential for greatness, the people In it can
say yes to three questions every day. These are the three questions. Are you
treated with dignity and respect by everyone? Do you have the training, tools and
support you need in order to make a contribution to the organization - a
contribution that gives meaning to your life? And are you recognized for the
contribution you make?
All organizations say that employees are their most important asset. You can look
it up in the annual report. At Alcoa, I set out to create tangible evidence that people
were the most important asset. I reasoned that if people were hurt that nothing else
mattered much and that therefore we should set a goal to eliminate workplace
accidents Not to reduce them but to eliminate them. It was the best kind of goal no one could challenge its desirability.
A company with real leadership, honest and accountable, is one that helps all its
employees to work together toward a common goal, and to realize their potential to
a far greater extent than Hley could otherwise. Effective organizations unlock
human potential for all who strive within it. And that only happens when those
people at the top, the leaders, set the example.
Once you get used to taking the high road, putting values over expedience, and
treating people like people, the end and not the means, it gets easier and easier.
You will go beyond what seemed possible before. Workplace safety is just one
example - when you become effective at organizational problem solving, many of
the targets that seemed out of reach, whether that means profits, growth,
innovation, or new markets, become easy to grasp.
So what really happened with these corporate leaders now fallen, some of whom
sat in this very hall not long ago? I think they strayed from their values In the
anything-goes 90s, and by the time they realized how far they had strayed - after
all, in their minds, everyone else was doing it, or would if they could - it was too
late. Like frogs in boiling water, they didn't feel the heat until they were cooked.
There was nothing special about these people, except their hubris. They
abandoned any pretense of moral direction to follow each dollar down its path, and
figured they'd return to the main road before anyone noticed they were gone But
after the bubble popped, there was nowhere to hide. That's what I think.
If all you want is money. it's not that difficult. But if you want to achieve something
greater, to become a true leader, you need to think about the people in your
organization, and put them first. The money will follow, if that's part of your mission.
The question for our new, post- Y2K era is not whether we can or should continue
the economic success we enjoyed in the 1990s. The question is how leaders of
business and government should incorporate the best aspects of the 90s - growth,
productivity, and innovation - into the emerging decade, while actively working to
make this new era a time of both personal responsibility and public integrity. How
can we reaffirm the link between value and values, and restore public confidence in
American enterprise?
In my view, the answer is simple. honest, accountable leadership. With leadership,
everything is possible; without it, nothing is possible.
In the economic domain, I believe the connection between creating value and
affirming values in American business has always been strong. Far away from the
headlines, most business leaders, from mom and pop shop-owners to corporate
chiefs, have always treated their shareholders and employees with honesty and
http://www.trcfi3.gov!press!releases!po3S49.htm
11/612002
PO-3549: United States Treasury Secretary Paul H. O'Neill Remarks to the Harvard Busi...
Page 3 of 3
fairness. Today. however, doing your job with competence is not enough. Leaders
must stand up and set an example not just for their employees, but for the general
public as well. Honesty in business is the new patriotism. There is nothing better
business leaders can do for this country right now than restore faith in the system
that has made it great.
What we achieved at Alcoa, we did not achieve by managing quarterly earnings,
abusing tax rules or playing accounting tricks, We did It by focusing on our people,
making sure they had the tools and incentives to get their jobs done right. and done
safely. And when people have those tools and incentives, they can do anything,
We focused on the fundamentals: creating value and producing results, The rest
followed That's the truth in every company, and In every endeavor,
Those of you with the privilege of attending Harvard Business School have great
talent and potential, I have no doubt. Thanks to our shared system of free
enterprise within the rule of law, you Will have the opportunity to realize your talent
in the form of wealth, should you choose it. But I hope you will choose to do much
more than that. That's not much of a dare. The real dare is to achieve your
ambitions while refusing to bend your values to the demands of the day Set an
example for your organization, no matter your place in It.
Thank you,
http://www.trcas.gov/press/rel~as.es/p03549.htm
1116/2002
PO-3550: Assistant Secretary Ken Lawson's Corporate Fraud Speech
Page 1 of 3
FROM THE OFFICE OF PUBLIC AFFAIRS
October 17, 2002
PO-3550
Assistant Secretary Ken Lawson's Corporate Fraud Speech
It is a pleasure to be here with you today. In the wake of international
terrorism, the United States faces the consequences of yet another crisis,
that of deception and fraud on the part of American business leaders and
advisors. As has become more obvious, white collar/corporate fraud is not
a victimless crime. Employees of corporations and their families, investors
and those who believe in the American dream are devastated by this
conduct. Often silent but destructive, corporate fraud can go undetected
for years, and ordinarily will not come to light until immense and irreversible
damage has been done.
The topic at hand concerns us all and has brought to light the role of those
boards of directors responsible for the oversight of our American
corporations, the responsibility of individual shareholders, and overall
government regulation of business activity. I'd like to think that Enron,
Worldeom and the like are the exceptions rather than the proverbial "rule."
The actions of these criminals, of course, impact more than just our
domestic markets; the impact on our global economy cannot be forgotten,
We are an interdependent economy --- investors, jOint ventures play an
integral part of our economy's well-being. When U.S. citizens lose
confidence in those we allow to manage our businesses and trust is
eroded, when credibility ceases, how can we expect our foreign trading
partners to risk involvement.
President Bush stated on July 9, 2002 to an audience of Wall Street
businessmen and women in New York City: "The American economy -our economy -- is built on confidence, The conviction that our free
enterprise system will continue to be the most powerful and most promising
in the world. That confidence is well-placed. After all, American technology
is the most advanced in the world. Our universities attract the talent of the
world. Our workers and ranchers and farmers can compete with anyone in
the world. Our society rewards hard work and honest ambition, bringing
people to our shores from all around the world who share those values."
When our businesses fall prey to the same greed that some might argue is
human nature and therefore endemic of society as a whole, we must look
at causes and remedies. Is the infrastructure too lenient, are regulations in
need of revisitation? What can we do to ensure that similar corporate
maladies do not reoccur?
At the Department of Treasury. we are analyzing the affects this grandiose
scale of fraud has had on our market, on our society, on our world
economy.
The Department of the Treasury is working to restore faith in the America
http://wwv. .. trcas.goy/pre6s/release s/po3550.htm
11/6/2002
PO-3550: Assistant Secretary Ken Lawson's Corporate Fraud Speech
Page 2 of 3
economy and its prosperity. On July 9, 2002, President Bush, by Executive
Order, established the Corporate Fraud Task Force, led by the Department
of Justice. The task force, chaired by the Deputy Attorney General, is
comprised of various United States Attorneys and representatives from a
number of federal agencies including the Department of the Treasury. The
task force was established in order to strengthen the efforts of federal,
state and local governments in their quest to investigate and prosecute
corporate crime. In September, members of the task force met in
Washington, D.C. at a Corporate Fraud/Responsibility Conference. The
task force convenes regularly.
Prosecuting those individuals and corporations who engage in criminal
behavior is a priority of the Administration. Under the leadership of
President Bush and Secretary Paul O'Neill, the Treasury Department is
committed to exposing criminal behavior in the corporate culture and
ensuring that people can get accurate information so that they can make
sound investment decisions. The Treasury Department, specifically
through the Internal Revenue Service Criminal Investigation Division
assists the Department of Justice in investigation and prosecution of
significant financial crime.
The restoration of faith in American business, however, does not solely lie
on the shoulders of law enforcement. Integrity of all those involved is the
key.
President Bush has asked the American people to "usher in a new era of
integrity." Business leaders, accountants and lawyers must set the
standard for those who choose to take on the momentous responsibility of
guarding the financial freedom and security of individuals and families who
fOllow the American dream. The Administration has espoused that
economic freedom and individual accountability promote continuing
prosperity. Integrity and honor are the benchmarks of these objectives.
When abuses of this nature begin to surface in the corporate world, it is
time to reaffirm the basic principles and rules that make capitalism work:
truthful books and honest people, and well-enforced laws against fraud and
corruption. All investment is an act of faith, and faith is earned by integrity.
As the President so eloquently proffered, "In the long run, there's no
capitalism without conscience; there is no wealth without character."
The President has put forth a 10 point Accountability Plan for American
Business, deSigned to provide better information to shareholders, set clear
responsibility for corporate officers, and develop a stronger, more
independent auditing system. This plan is ensuring that the SEC takes
aggressive and affirmative action.
I will just speak a few of the components of his overall strategy to combat
this type of corruption within our corporate arena.
His plan puts forth the following: Corporate officers who benefit from false
accounting statements should forfeit ali money gained by their fraud. A
corporate office that benefits when his company does well should not be
able to benefit from a company with an income statement that is fraudulent
in design.
The plan seeks to impose a permanent ban on those who violate public
trust. No longer will such so called businessmen and women be permitted
to simply terminate one corporate structure and begin another. Corporate
leaders who violate the public trust should never be given that trust again.
The President's approach would enable the SEC to punish corporate
leaders who are convicted of abusing their powers by banning them from
http://WWW.trCllS.gov/pre661r~leases/po3550.htm
111612002
PO-3550: Assistant Secretary Ken Lawson's Corporate Fraud Speech
Page 3 of 3
ever serving again as officers or directors of a publicly-held corporation. "If
an executive is guilty of outright fraud, resignation is not enough. Only a
ban on serving at the top of another company will protect other
shareholders and employees."
The Accountability Plan also places the CEO in a position that mandates
greater personal responsibility It requires CEOs to personally vouch for
their firms' annual financial statements. In the future, the signature of the
CEO should also be his or her personal certification of the veracity and
fairness of the financial disclosures. "In order to regain the confidence of
our shareholders, the SEC has ordered the leaders of nearly a thousand
large public companies to certify that the financial information they
submitted in the last year was fair and accurate."
The Administration will also guard the interests of small investors and
pension holders. The stock holders should not suffer because of the
actions of those who falsely held themselves out to be savvy business
leaders. The Administration has given assurances that pensions will not be
abused and wasted to support malfeasance and criminal behavior.
The Plan is one designed to instill American values in the corporate arena.
Rest assured, efforts are underway to take issue with those who take
advantage of this country's entrepreneurial spirit.
Other remedial actions are being taken by our legislature. The House of
Representatives has recently passed needed legislation to encourage
transparency and accountability in American businesses. This
transparency will arguably provide needed ease in the review and oversight
process and thus make it more difficult for devious business leaders to
prevail.
Unscrupulous corporate moguls cannot continue to taint our capitalistic
philosophy nor can they shield themselves under a "corporate veil" in their
attempts to hide from justice. The few should not be permitted to affect the
many honest business men and women that make this economy great.
We are taking issue with violators and we will continue to do so until trust in
"Corporate America" is regained!
http://www.treas.gov!pre<;.../re1cases/po3550.htm
1116/2002
DEPARTMENT
OF
TREASURY-
THE
TREASURY
NEWS
OFFICE OF PlJBLlC ,\FFAIRS. ISOO PENNSYLVANIA AVENllE, N.W .• WASHINGTON, D.C.. 20220. (202) 622·2960
EMBARGOED UNTIL 11:00 A.M.
october 17, 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 $34,000
million to refund an estimated $26,710 million of publicly held 13-week and 26-week
Treasury bills maturing October 24, 2002, and to raise new cash of approximately
$7,290 million. Also maturing is an estimated $18,000 million of publicly held 4-week
Treasury bills, the disposition of which will be announced October 21, 2002.
The Federal Reserve System holds $12,627 million of the Treasury bills maturing
on October 24, 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 October 22, 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
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.
Treasu~Direct customers have requested that we reinvest their maturing holdings
of approximately $1,082 million into the 13-week bill and $879 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
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-3551
For press releases,
speeche,~,
pllblic schedules and official biographies, call our 24·ilOllf" fax lille at (202) 622·20-10
HIGHLIGHTS OF TREASURY OFFERINGS OF BILLS
TO BE ISSUED OCTOBER 24, 2002
October 17, 2002
Offering Amount . . . . . . . . . . . . . . . . . . . . . . . • . . . • $18,000 million
Public Offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . $18,000 million
NLP Exclusion Amount .........•........•.... $ 5,600 million
Description of Offering:
Term and type of security . . . . . . . . . . . . . . . . . .
CUSIP nwnber ...................•...••••••.•
Auction date ...................•..•..••....
Issue date ......••.......•..•.••.•..•••.•.•
Maturi ty date .............•........•..•.•..
Original issue date .........•.•••.....•.•••
Currently outstanding .............•..•••...
Minimum bid amount and multiples ...•.••..••
91-day bill
912795 LV 1
October 21, 2002
October 24, 2002
January 23, 2003
July 25, 2002
$21,618 million
$1,000
$16,000 million
$16,000 million
None
182-day bill
912795 MJ 7
October 21, 2002
October 24, 2002
April 24, 2003
October 24, 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 (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 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:
(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 daylight saving time on auction day
Competitive tenders ........ Prior to 1:00 p.m. eastern daylight saving 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.
PO-3552: Media Advisory: Under Secretary Jimmy Gurule to Discuss Trip to Europe & ...
Page 1 of 1
&.
PHlSS HOOM
FROM THE OFFICE OF PUBLIC AFFAIRS
October 17, 2002
PO-3552
MEDIA ADVISORY:
UNDER SECRETARY JIMMY GURULE TO DISCUSS TRIP TO EUROPE AND
TERRORIST FINANCING
Treasury Undersecretary for Enforcement Jimmy Gurule will travel to Switzerland,
Liechtenstein, Luxembourg, Denmark and Sweden October 20-25, 2002. Gurule is
traveling to engage high-level European officials - in the banking, finance and law
enforcement communities - on matters relating to the fight against terrorist finance.
Gurule will hold a press briefing to discuss this trip on Friday, October 18, 2002 at
11: 30 a.m. in room 4121. Media without Treasury or White House press credentials
planning to attend should contact Treasury's Office of Public Affairs at (202) 6222960 with the following information: name, social security number and date of birth.
This information may also be faxed to (202) 622-1999.
http://ww\.1.trea5.gov/pn~s;~!releas~s/po3552.htm
1116/2002
PO-3553: Treasury Department Statement Regarding the Designation of the Global Relief... Page 1 of3
FROM THE OFFICE OF PUBLIC AFFAIRS
October 18. 2002
PO-3553
Treasury Department Statement Regarding the Designation of the Global
Relief Foundation
We continue to wage our relentless war on terror - both here in the U.S. and
overseas. We are harvesting information. coordinating with our allies, and taking
action against terrorist networks. We are seeing progress. We have frozen
dollars and the assets of organizations, deterred donors and supporters, and forced
terrorist backers to use riskier, more vulnerable methods of raising and moving
money.
Our efforts are having real-world effects. AI-Qaida and other terrorist organizations
are suffering financially as a result of our actions. Potential donors are being more
cautious about giving money to organizations where they fear that the money might
wind up in the hands of terrorists. In addition, greater regulatory scrutiny in financial
systems around the world is further marginalizing those who would support terrorist
groups and activities.
The war on terrorism is only beginning, and it is certain to demand constant
vigilance. In the year since that terrible day, we have hit them hard. Our goal is to
bankrupt their institutions and beggar their bombers. This war - the financial war
against terrorism - is complicated and much more remains to be done. We are off
to a good start, but this is a long-term war of attrition that we are waging. We will
not relent.
As part of this campaign, today the Treasury Department designated the Global
Relief Foundation under the authority of Executive Order 13224.
The Global Relief Foundation (GRF), has connections to, has provided support for,
and has provided assistance to Usama Bin Ladin, the al Qaida Network, and other
known terrorist groups.
One of the founders of GRF was previously a member of the Makhtab AI-Khidamat,
the precursor organization to al Qaida. The GRF has received funding from
individuals associated with al Qaida. GRF officials have had extensive contacts
with a close associate of Usama Bin Ladin, who has been convicted in a U.S. court
for his role in the 1998 bombings of the U.S. embassies in Kenya and Tanzania.
GRF members have dealt with officials of the Taliban, while the Taliban was subject
to
international sanctions.
PO-3553
The GRF has connections with known terrorist organizations and with known
supporters of terrorist organizations, including the shipment of materiel to a terrorist
organization operating in the Kashmir region and through financial transactions with
a Texas-based charitable organization.
The United States today submitted this group's name to the UN sanctions
committee for inclusion in its' consolidated list of entities and individuals whose
assets UN member states are obligated to freeze pursuant to UN security council
resolutions 1267 and 1390.
TREASURY DEPARTMENT FACT SHEET ON THE GLOBAL RELIEF
http://www.trclls.gOY/press/r~IIi.~\Oes/p03553.htm
1116/2002
PO-3553: Treasury Department Statement Regarding the Designation of the Global Relief... Page 2 of 3
FOUNDATION
The Global Relief Foundation (GRF), also known as Fondation Secours Mondial
(FSM), and its officers and directors have connections to, and have provided
support for and assistance to, Usama bin Ladin (UBL), al Oaida, and other known
terrorist groups These include groups previously designated by the United States
under President Bush's September 2001 Executive Order 13224 regarding
terrorism and included on the United Nations 1267 Sanctions Committee's
consolidated list of individuals and entities whose assets are required to be frozen
pursuant to UN Security Council Resolutions (UNSCRs) 1267 and 1390
Links to UBL and al Oaida:
Rabih Haddad, a senior GRF offiCial who co-founded GRF and served as its
president throughout the 1990s and in the year 2000, worked for Makhtab alKhidamat (MAK) in Pakistan in the early 1990s. MAK was co-founded by Sheikh
Abdullah Azzam and UBL in the 1980s and served as the precul'sor organization to
alOaida. MAK was desigfli:lted by President Bustl in E.O. 13224 and was
subsequently included on the UN 1267 Sanctions Committee's consolidated list.
The organization has helped funnel fighters and money to the Afghan resistance in
Peshawar, Pakistan, and established recruitment centers worldwide to fight the
Soviets. Azzam. who served as a mentor to UBL, was killed in 1989. He is also
regarded as a historical leader of HAMAS. which was designated under E.O.
13224. At a recent immigration hearing. Haddad conceded that he met Azzam in
Pakistan and characterized him as a "hero."
In addition, GRF has provided financial and other assistance to. and received
funding from, individuals associated with al Oaida. Mohammed Galeb Kalaje
Zouaydi, a suspected financier of al Oaida's worldwide terrorist efforts, was
arrested in Europe in April 2002. GRF has admitted receiving funds from Zouaydi.
GRF and FSM personnel had multiple contacts with Wadih EI-Hage. UBL's
personal secretary when UBL was in Sudan. EI-Hage was convicted in a U.S
district court in May 2001, for his role in the UBL-directed 1998 bombings of the
U.S. embassies in Kenya and Tanzania. At the time that EI-Hage was playing an
active role in an al Oaida terrorist cell in Kenya, he was in contact with GRF. For
example. documents recovered from a search in Kenya indicated that EI-Hage was
in contact with GRF after he returned from viSiting al Oalda leadership in
Afghanistan in February 1997. GRF has acknowledged that EI-Hage and Nabll
Sayadl. FSM's Director in Belgium, were in contact during thiS period.
Links to Taliban and Other Entities and Background:
A GRF employee also dealt with officials of the Taliban, which at the time was an
entity subject to U.S sanctions pursuant to United States E.O. 13129 (prohibiting
trade and most transactions with the Taliban because it provided a safe haven and
base of operations for UBL and al Oaida) and subject to international sanctions
pursuant to UNSCRs 1267 and 1333. In November 2001, during the airstrikes in
Afghanistan, a GRF medical relief coordinator traveled to Kabul, against the advice
of the U.S. Department of State. and engaged in dealings and negotiations with
Tallban officials until the collapse of tl'le Taliban regime.
A set of photographs and negatives discovered in 1997 in a trash dumpster outside
of GRF's office in Illinois depict large shipping boxes displayed under a GRF
banner. The boxes were full of sophisticated communications equipment, including
approximately 200 handheld radio transceivers, long-range radio antennas, and
portable power packs. with an estimated total value of $120.000. Other
photographs depict fighters armed with automatic rifles, a sand bagged bunker with
a radio antenna mounted outside, and mutilated corpses with the name
"KPI" (Kashmir Press International) printed alongside. Yet another photograph
displays two dead men with the caption "Hizbul MUJahldeen," a known terrorist
organization operating in the Kashmir region. On the reverse side of the
photograph was handwritten in Arabic, "two martyrs killed by the Indian
government. "
http://www.trcas.g()v/press/r~~/po3553.htm
1116/2002
PO-3553: Treasury Department Statement Regarding the Designation of the Global Relief... Page 3 of3
GRF has stocked and promoted audio tapes and books authored by Sheikh
Abdullah Azzam, discLissed above, which glorify armed Jihad, Including "The
international conspiracy against Jihad" and "The Jihad In its present stage."
Despite Azzam's terrorist background, GRF has enthusiastically promoted Azzams
matenals to the public: ''HIs [Azzam's] theology is a sea, his words are Jewels, and
his thoughts are a light for those who are holding the smoldering embers. He lived
the Jihad experiences of the 20th century in Afghanistan ... and Palestine, and
produced a new theory for saving the [Islamic] Nation from disgl'ace, shame,
weakness, and submiSSion to others."
GRF has published several Arabic newsletters and pamphlets that advocate armed
action through Jinad against groups perceived to be un-Islamic. For example, one
1995 GRF pamphlet reads "God equated martyrdom through JIHAD with supplying
funds for the JIHAD effort. All contributions should be mailed to: GRF." Another
GRF newsletter requested donations "for God's cause - they [the Zakat funds] are
disbursed for equipping the raiders, for the purchase of ammunition and food, and
for their [the Mujahideen's] transportation so that they can raise God the Almighty's
word.
it is likely that the most important of disbursement of Zakat in our times is
on the jihad for God's cause .... "
GRF received $18,521 from the Holy Land Foundation for Relief and Development
(HLF) in 2000. HLF, a Dallas, Texas based Islamic charitable organization, was
designated under E.O. 13224 on December 4, 2001, and under the European
Union's Regulation (Ee) No. 2580/2001 on June 17,2002, for its ties to terrorism.
HLF's designation was upheld in a recent decision by a U.S. district court.
http://www.treUD.gov/presos/releases/p03553.htm
1116/2002
October 18, 2002
PREPARED STATEMENT BY UNDERSECRETARY FOR ENFORCEMENT JIMMY GURULE
We continue to wage our relentless war on terror - both here in the U.S. and overseas. We are harvesting
information, coordinating with our allies, and taking action against terrorist networks. We are seeing
progress. We have frozen dollars and the assets of organizations, deterred donors and supporters, and
forced terrorist backers to use riskier, more vulnerable methods of raising and moving money.
Our efforts are having real-world effects. AI-Qaida and other terrorist organizations arc suffering
financially as a result of our actions. Potential donors are being more cautious about giving money to
organizations where they rear that the money might wind up in the hands of terrorists. In addition, greater
regulatory scrutiny in financial systems around the world is further marginalizing those who would support
terrorist groups and activities.
The war on terrorism is only beginning, and it is certain to demand constant vigilance. In the year since
that terrible day, we have hit them hard. Our goal is to bankrupt their institutions and beggar their bombers.
This war - the financial war against terrorism - is complicated and much more remains to he done.
We are off to a good start, but this is a long-term war of attrition that we are waging. We will not relent.
As part of this campaIgn, today the Treasury Department designated the Global Relief Foundation under
the authority of Executive Order 13224.
The Global ReIiefFoundation (GRF), has connections to, has provided support for, and has provided
assistance to Usama Bin Ladin, the al Qaida Network, and other known terrorist groups.
One of the founders of GRF was previously a member of the Makhtab AI-Khidamat, the precursor
organization to al Qaida. The GRF has received funding from individuals associated with al Qaida. GRF
officials have had extensive contacts with a close associate of Usama Bin Ladin, who has been convicted in
a U.S. court for his role in the 1998 bombings of the U.S. embassies in Kenya and Tanzania.
GRF members have dealt with officials of the Taliban, while the
Taliban was subject to international sanctions.
The GRF has connections with known terrorist organizations and with known supporters of terrorist
organizations, including the shipment of materiel to a terrorist organization operating in the Kashmir region
and through financial transactions with a Texas-based charitable organization.
The United States today submitted this group's name to the UN sanctions committee for inclusion in its'
consolidated list of entities and individuals whose assets UN member states are obligated to freeze pursuant
to UN security councli resolutions 1267 and 1390.
For those of you with additional questions about GRF, a fact sheet will be handed out at the end of this
briefing.
Another key part of this campaign is also international coalition building - encouraging our allies to combat
terrorist financing and ensuring that their work in this area remains complementary and supportive of US
strategy.
To advance that goal, I depart this Sunday, to travel to Switzerland, Liechtenstein, Luxembourg, Denmark
and Sweden.
I am traveling to engage high-level European officials - in the banking, finance and law enforcement
communities - on matters relating to the fight against terrorist finance.
My three principal objectives are I. Maintaining Momentum: The key to this trip will be a renewal of momentum in combating the financing
ofterror by:
•
underscoring importance of preserving international momentum in war against terrorist
financing;
•
pursuing improvements in operational effectiveness of blocking actions;
•
obtaining commitments to strengthened law enforcement and regulatory efforts; and
•
revitalizing the European targeting and designation process.
2. Creating Greater Public/Private Interaction: For years, the problem of money laundering was considered
by many to be a strictly law enforcement concern. Recent anti-money laundering success has come as
more and more financial sector participants see this as a system wide problem and accept their
responsibility to do something about it.
Similarly with counter terrorist financing, the long term, effective solution lies in developing a pro-active
private sector that can work with law enforcement to foster awareness and induce vigilance throughout the
community of financial service providers.
And 3. Calling upon Europe to Take a Leadership Role: The USA Patriot Act is helping the US to catch up
to many of Europe's anti-money laundering practices. Just as Europe and the European Union have been
leaders in anti-money laundering efforts so they need to take a similar role with regard to the financing of
terror. While we appreciate Europe's help with US initiatives in this area, we fully expect our European
allies to be leaders in their own rite as we collectively search for the most effective ways to disrupt and
destroy the financial underpinnings of terror. European leadership should be in internal as well as external.
Internally, our European allies must lead by example in adopting and implemcnting effective counterterrorist financing regimes. Externally, we will rely on European leadership to:
•
work with the FATF, the IFls and the UN CTC in helping to provide technical assistance
to those jurisdictions in need of such assistance;
•
facilitate or support designation of new terrorist-related parties;
•
continue to cooperate with US investigative and law enforcement efforts against terrorist
financing.
Lastly, a story in the newspaper today suggests I am going to Europe with a "Saudi list." That is incorrect.
I am going to Europe to encourage our allies to combat terrorist financing and ensure that their work in this
area remains complementary and supportive of US strategy. While I will discuss high impact, high value
AI Qaeda targets - as we always do - I am not traveling with a "Saudi list."
As President Bush has said, the U.S. is pleased with and appreciates the actions taken by the Saudis to date
and is confident that they will continue to take the appropriate actions in the future. Saudi government
cooperation in the war against terrorism has been substantial. Examples of such cooperation include:
(a) joint designation with the U.S. of Bosnia-Herzegovina and Somalia branch of the Saudi-based
charity AI-Haramain;
(b) joint work with the Saudi government on regulating charities to prevent their abuse; and
(c) worked with the Saudi government directly on identifying targets - the recent joint designation
of lulaidan in a prime example of that.
To repeat, we're pleased with and appreciate the action that has been taken by the Saudis in our global war
on terrorism.
I will now take a couple of questions.
DEPARTMENT
OF
THE
NEWS
TREASURY
OFFICE
or
Pl:8UC ,HFAIRS,
151H~
PRr-lNSYLV,\NIA
TREASURY
,\vfi.NlJI~.
N.W.'W.\SHJ:'IiGTON. n.C.- 2!H20.C!fl2! 612·19()f)
Contact:
EMBARGOED UNTIL 11:00 A.M.
october 15, 2002
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 $18,000 million of publicly held 4-week Treasury bills maturing
october 17, 2002, and pay down approximately $4,000 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 $12,159 million of the Treasury bills maturing
on October 17, 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
Attaclunent
PJ-3554
For press releases, speeches, public schedules allt! official biographies, call Ollr 24-llOurfax line at (202) 622-204tJ
HIGHLIGHTS OF TREASURY OFFERING
OF 4-WEEK BILLS TO BE ISSUED OCTOBER 17, 2002
October 15, 2002
Offering Amount . . . . . . . . . . . . . . . . . . . . $14,000 million
Public Offering . . . . . . . . . . . . . . . . . . . . $14,000 million
NLP Exclusion Amount . . . . . . . . . . . . . . . $10,800 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 LK 5
October 16, 2002
October 17, 2002
November 14, 2002
May 16, 2002
$42,473 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 daylight saving time on auction day
Competitive tenders:
Prior to 1:00 p.m. eastern daylight saving 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
October 15, 2002
Office of Financlng
202-691-3550
CONTACT:
RESULTS OF TREASURY'S AUCTION OF I3-WEEK BILLS
91-Day Bill
October 17, 2002
January 16, 2003
912795LU3
Term:
Issue Date:
Maturity Date:
CUSIP Number:
1.630%
High Rate:
Investment Rate 1/:
Price:
1.659%
99.588
All noncompetitive and successful competitive bidders were awarded
securities at the high rate.
Tenders at t~e high discount rate were
allotted 56.99%.
All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Accepted
Tendered
Tender Type
Competitive
Noncompetitive
FIMA (noncompetitive)
$
37,753,285
1,436,538
265,000
$
17,000,158 2/
39,454,823
SUBTOT.l),L
5,453,608
5,453,608
Federal Reserve
$
TOTAL
44,908,431
15,298,620
1,436,538
265,000
$
22,453,766
Median rate
1.615%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate.
Low rate
1.585%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio
=
39,454,823 /
17,000,158 = 2.32
1/ Equivalent coupon-issue yield.
2/ Awards to TREASURY DIRECT = $1,091,947,000
http;llwww.publicdebt.treas.goY
PO-3555
PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt· \Vashington, DC 20239
TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
CONTACT:
FOR IMMEDIAT~ RELEASE
October 15, 2002
Office of Financing
202-691-3550
RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
182-Day Bill
October 17, 2002
April 17, 2003
912795MH1
Term:
:::ssue Date:
Maturity Date:
CUSIP Number:
High Rate:
1.630%
Investment Rate 1/:
Price:
1.666%
99.176
All noncompetitive and successful competitive bidders were awarded
securities at the high rate.
Tenders at the high discount rate were
allotted 54.79%.
All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Competitive
Noncompetitive
FI~~ (noncompetitive)
$
31,891,335
859,395
$
14,140,708
859,395
o
o
15,000,103 2/
32,750,730
SUBTOTAL
5,299,819
5,299,819
Federal Reserve
TOTAL
Accepted
Tendered
Tender Type
$
38,050,549
$
20,299,922
Median rate
1.610%: 50% of the amount of accepted competitive tenders
was tendered a::: or below that rate.
Low rate
1.570%-:
5 s of the amount
of accepted competitive tenders was te~dered at or below that rate.
0
Bid-to-Cover Ratio = 32,750,730 / 15,000,103 = 2.18
1/ Equivalent coupon-issue yield.
2/ Awards to TREASURY DIRECT = $625,179,000
http://www.publicdebt.treas.gov
PO-3556
PO-3557: Treasury Issues Proposed Regulations to Prevent Loss Duplication
Page 1 of 1
f-' H L S S H lXl r...l
FROM THE OFFICE OF PUBLIC AFFAIRS
October 18, 2002
PO-3557
Treasury Issues Proposed Regulations to Prevent Loss Duplication
Treasury today issued proposed regulations under section 1502 of the Internal
Revenue Code to prevent groups of corporations from inappropriately duplicating
for tax purposes a single economic loss. Under the regulations, which apply to
corporations filing a consolidated tax return, corporations are entitled to one and
only one tax loss with respect to a single economic loss
On March 7, 2002, the IRS Issued Notice 2002-18 announcing that regulations
would be promulgated to defer or limit the use of losses in transactions structured
by corporations to artificially accelerate losses or to claim more than one tax loss
with respect to a single economic loss. The Notice stated that the regulations would
apply to dispositions occurring on or after March 7, 2002.
According to Pamela Olson, Assistant Treasury Secretary for Tax Policy, "we have
issued these new regulations in proposed form in order to allow time to solicit and
receive taxpayers comments before final regulations are issued. We recognize this
is an extremely complex topic and we look forward to receiving input from affected
taxpayers in order to ensure that the rules work as they are intended."
http://www.tfeas.gov/press!releases/p03557.htm
111612002
[4830-0 1-p]
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-131478-02]
RIN 1545-BB25
Guidance Under Section 1502; Suspension of Losses on Certain Stock Dispositions.
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking and notice of public hearing.
SUMMARY: This document contains proposed regulations that redetermine the basis of
stock of a subsidiary member of a consolidated group immediately prior to certain
dispositions and deconsolidations of such stock. In addition, this document contains
proposed regulations that suspend certain losses recognized on the disposition of such
stock. The regulations apply to corporations filing consolidated returns. This document
also provides notice of a public hearing on these proposed regulations.
DATES: Written or electronic comments must be received by January 21, 2003. Outlines
of topics to be discussed at the public hearing scheduled for January 15, 2003, at 10 a.m.
must be received by December 27,2002.
ADDRESSES: Send submissions to CC: ITA RU (REG-131478-02), room 5226, Internal
Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044. Submissions
may be hand delivered Monday through Friday between the hours of 8 a.m. and 5 p.m. to
CC:ITARU (REG-131478-02), Courier's Desk, Internal Revenue Service, 1111
Constitution Avenue, NW., Washington, DC. Alternatively, taxpayers may submit electronic
2
comments directly to the IRS Internet site at www.irs.gov/regs. The public hearing will be
held in room 6718, Internal Revenue Building, 1111 Constitution Avenue, NW.,
Washington, DC.
FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Aimee K.
Meacham, (202) 622-7530; concerning submissions, the hearing, and/or to be placed on
the building access list to attend the hearing, Sonya M. Cruse, (202) 622-7180 (not toll-free
numbers).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained in this notice of proposed rulemaking has
been submitted to the Office of Management and Budget for review in accordance with the
Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)). Comments on the collection of
information should be sent 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, with copies to the Internal Revenue Service, Attn: IRS Reports
Clearance Officer, W:CAR:MP:FP:S, Washington, DC 20224. Comments on the
collection of information should be received by December 22, 2002. Comments are
specifically requested concerning:
Whether the proposed collection of information is necessary for the proper
performance of the functions of the IRS, including whether the information will have practical
utility;
The accuracy of the estimated burden associated with the proposed collection of
3
information (see below);
How the quality, utility, and clarity of the information to be collected may be
enhanced;
How the burden of complying with the proposed collection of information may be
minimized, including through the application of automated collection techniques or other
forms of information technology; and
Estimates of capital or start-up costs and costs of operation, maintenance, and
purchase of services to provide information.
The collection of information in these proposed regulations is in §1.1502-35(c) and
§1.1502-35(f). This information is required by the IRS to verify compliance with section
1502. This information will be used to determine whether the amount of tax has been
calculated correctly. The collection of information is required to properly determine the
amount permitted to be taken into account as a loss. The respondents are corporations
filing consolidated returns. The collection of information is required to obtain a benefit.
Estimated total annual reporting and/or recordkeeping burden: 10,500 hours.
Estimated average annual burden per respondent: 2 hours.
Estimated number of respondents: 5,250.
Estimated annual frequency of responses: on occasion.
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.
Books or records relating to a collection of information must be retained as long as
4
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
Section 1502 of the Internal Revenue Code (Code) states that
[t]he Secretary shall prescribe such regulations as he may deem necessary
in order that the tax liability of any affiliated group of corporations making a
consolidated return and of each corporation in the group, both during and
after the period of affiliation, may be returned, determined, computed,
assessed, collected, and adjusted, in such manner as clearly to reflect the
income-tax liability and the various factors necessary for the determination of
such liability, and in order to prevent avoidance of such tax liability.
The legislative history regarding that grant of authority states that "[a]mong the regulations
which it is expected that the commissioner will prescribe are [regulations addressing the]
extent to which gain or loss shall be recognized upon the sale by a member of the affiliated
group of stock issued by any other member of the affiliated group [and] the basis of
property ... acquired, during the period of affiliation, by a member of the affiliated group,
including the basis of such property after such period of affiliation." S. Rep. No. 960, 70
th
Cong., 1st Sess. 15 (1928).
In 1991, the IRS and Treasury Department promulgated § 1.1502-20, which set forth
rules regarding the extent to which a loss recognized by a member of a consolidated group
on the disposition of stock of a subsidiary member of the same group was allowed.
Section 1.1502-20 provided that a loss recognized by a group member on the disposition
of subsidiary member stock was allowable only to the extent it exceeded the sum of
"extraordinary gain dispositions," "positive investment adjustments," and "duplicated loss."
5
The rule not only implemented section 337(d), which directed the Secretary to promulgate
regulations to prevent the circumvention of corporate tax on appreciated property through
the filing of a consolidated return, but also was intended to further single entity principles by
preventing the deduction of stock losses that reflected a subsidiary member's loss
carryforwards, deferred deductions, and unrecognized losses inherent in its assets.
In Rite Aid Corp. v. United States, 255 F.3d 1357 (Fed. Cir. 2001), the United
States Court of Appeals for the Federal Circuit considered the validity of the duplicated
loss component of § 1.1502-20. The court held that the duplicated loss component of
§1.1502-20 was an invalid exercise of regulatory authority.
In response to the Rite Aid decision, the IRS and Treasury Department issued
Notice 2002-11 (2002-7 I.R.B. 526), stating that the interests of sound tax administration
would not be served by the continued litigation of the validity of the duplicated loss
component of § 1.1502-20. Notice 2002-11 announced that, because of the
interrelationship in the operation of all of the loss disallowance factors of § 1.1502-20, the
IRS and Treasury Department had decided that new rules governing loss disallowance on
sales of subsidiary stock by members of consolidated groups should be implemented.
On March 7, 2002, the IRS and Treasury Department filed with the Federal
Register temporary regulations under sections 337( d) and 1502 governing the
determination of a consolidated group's allowable stock loss on a disposition of subsidiary
member stock. Those regulations included §1.337(d)-2T, which generally allows a loss on
the disposition of subsidiary member stock only to the extent that a taxpayer can establish
that the stock loss is not attributable to the recognition of built-in gain. Section 1.337(d)-2T
6
does not disallow stock loss that reflects loss carryforwards, deferred deductions, or built-in
asset losses of the subsidiary member.
Concurrently with the filing of §1.337(d)-2T with the Federal Register, the IRS and
Treasury Department issued Notice 2002-18 (2002-121.R.B. 644), which stated that
regulations would be promulgated that would defer or otherwise limit the utilization of a loss
on stock (or another asset that reflects the basis of stock) in transactions that facilitate the
group's utilization of a single economic loss more than once. Notice 2002-18 is based on
the principle that a consolidated group should not be able to obtain more than one tax
benefit from a single economic loss. See Charles Ilfeld Co. v. Hernandez, 292 U.S. 62
(1934) (disallowing a worthless stock deduction recognized on a liquidation of a subsidiary
member because the group had already obtained the tax benefit from the operating losses
that gave rise to the deduction). The Notice stated that the regulations would apply to
dispositions occurring on or after March 7, 2002.
Explanation of Provisions
These proposed regulations reflect the principle set forth in Notice 2002-18 that a
consolidated group should not be able to obtain more than one tax benefit from a single
economic loss. The proposed regulations consist primarily of two rules: a basis
redetermination rule and a loss suspension rule. The proposed regulations also include a
basis reduction rule to address certain cases not within the scope of the loss suspension
rule. Finally, the proposed regulations include certain anti-avoidance rules to address
certain transactions designed to avoid the application of the basis redetermination and
loss suspension rules.
7
The rules in these proposed regulations are intended to address at least two types
of transactions that may allow a group to obtain more than one tax benefit from a single
economic loss. In the first type of transaction, a group absorbs an inside loss (e.g., a loss
carryforward, a deferred deduction, or a loss inherent in an asset) of a subsidiary member
and then a member of the group recognizes a loss on a disposition of stock of that
subsidiary member that is duplicative of the inside loss. For example, assume that in Year
1, P, a member of a group, forms S with a contribution of $80 in exchange for 80 shares of
common stock of S (representing all of the outstanding stock of S). In Year 2, P contributes
Asset A with a basis of $70 and a value of $20 to S in exchange for an additional 20
shares of S common stock. In Year 3, S sells Asset A and recognizes a $50 loss, which
offsets income of P on the group's return. Under the investment adjustment rules of
§ 1.1502-32, P's basis in each share of S common stock it holds is reduced by a pro rata
share of the $50 loss, with the result that the shares acquired in Year 1 have a basis of $40
and the shares acquired in Year 2 have a basis of $60. In Year 4, P sells the shares
acquired in Year 2 for $20 and recognizes a $40 loss, which offsets income of P on the
group's return. In this transaction, the group has obtained a total of $90 tax benefit from the
single $50 loss.
Alternatively, assume that, in Year 1, P forms S with a contribution of $1 00 in
exchange for all of the common stock of S. In Year 2, P contributes Asset A with a basis of
$50 and a value of $20 to S in exchange for all of the preferred stock of S. In Year 3, S
sells Asset A and recognizes a $30 loss, which offsets income of P on the group's return.
Under the investment adjustment rules of § 1.1502-32, P's basis in each share of S
8
common stock it holds is reduced by a pro rata share of the $30 loss. p's basis in its
preferred shares, however, is not reduced. In Year 4, P sells the preferred stock of S for
$20 and recognizes a $30 loss, which offsets income of P on the group's return. In this
transaction, the group has obtained a $60 tax benefit from the single $30 economic loss in
Asset A.
Although, in both cases, a taxable disposition of the S common stock acquired in
Year 1 would offset the excess tax benefit, the group has various non-taxable alternatives
by which to ensure that the excess tax benefit is not reduced, including retention of the
remaining shares of S or the liquidation of S in a transaction described in section 332.
In the second type of transaction, a member of the group recognizes a loss on a
disposition of subsidiary member stock that is duplicative of an inside loss of the
subsidiary member, the subsidiary remains a member of the group, and the group
subsequently recognizes the inside loss of that subsidiary member. For example, assume
that in Year 1, P forms S with a contribution of $80 in exchange for 80 shares of the
common stock of S. In Year 2, P contributes Asset A with a basis of $50 and a value of
$20 to S in exchange for an additional 20 shares of S common stock. In Year 3, P sells the
20 shares of S common stock that it acquired in Year 2 for $20 and recognizes a $30 loss,
which offsets income of P on the group's return. The sale of the 20 shares of S common
stock does not result in the deconsolidanon of S. In Year 4, S sells Asset A and recognizes
a $30 loss, which also offsets income of P on the group's return. In this transaction, the
group has obtained the use of two losses from the single economic loss in Asset A. Again,
although a taxable disposition by P of its remaining S common stock would offset the tax
9
benefit of one of the losses, the group has various non-taxable alternatives by which to
ensure that the excess tax benefit is not reduced, including retention of the remaining
shares of S or the liquidation of S in a transaction described in section 332.
A. Basis Redetermination Rule
The investment adjustment rules of § 1.1502-32 are premised on certain
assumptions regarding the shareholders' interests in the subsidiary. One assumption is
that the subsidiary's losses are borne by the holders of the common stock before the
holders of the preferred stock. Another assumption is that each share within a class is
entitled to an equal portion of the subsidiary's items of income and gain, and, in the case of
common stock, of deduction and loss. The investment adjustment rules, therefore,
generally allocate basis adjustments without regard to differences in members' bases in
their shares of the stock of the subsidiary member and without regard to whether a basis
adjustment reflects an item of income, gain, deduction, or loss that was built-in with respect
to contributed property. These assumptions can give rise to the results illustrated in the
transactions described above.
The basis redetermination rule attempts to mitigate the effect of the assumptions
underlying the investment adjustment rules by reversing certain investment adjustments to
take into account the source of certain items of deduction and loss. In addition, where the
subsidiary member remains a member of the group, the basis redetermination rule
equalizes members' bases in subsidiary stock such that the loss suspension rule,
described below, need not include inordinately complex rules to address the method by
which inside losses reduce stock basis under §1.1502-32.
10
The proposed regulations require the redetermination of the basis of subsidiary
member stock held by members of the group immediately before a disposition or
deconsolidation of a share of subsidiary member stock when the basis of such stock
exceeds its value. The rule applies differently when the subsidiary remains a member of
the group after its stock is disposed of or deconsolidated from when the subsidiary does
not remain a member of the group.
If a subsidiary remains a member of the group, the basis redetermination rule
requires that all members of the group aggregate their bases in all shares of the subsidiary
member. That basis is then allocated first to the shares of the subsidiary member's
preferred stock that are owned by the members of the group in proportion to, but not in
excess of, their value on the date of the disposition or deconsolidation. After the allocation
of the aggregated basis to all shares of the preferred stock of the subsidiary member held
by members of the group, any remaining basis is allocated among all common shares of
subsidiary member stock held by members of the group in proportion to their value on the
date of the disposition or deconsolidation. This rule reallocates past adjustments to refiect
an economic allocation of the built-in items of deduction and loss with respect to
contributed property. The rule also reallocates stock basis that arose from capital
contributions of property and stock basis that arose as a result of positive investment
adjustments. The reallocation of basis obviates the need for complex rules addreSSing
basis adjustments resulting from an inside loss that was reflected in a stock loss that is
suspended pursuant to the loss suspension rule described below.
11
If the subsidiary is no longer a member of the group immediately after the
disposition or deconsolidation of its stock, the basis redetermination rule requires a
reallocation of a certain amount of the basis of the stock of the subsidiary member owned
by group members. In particular, the amount of basis subject to reallocation is equal to the
lesser of (1) the loss inherent in the stock disposed of or deconsolidated, and (2) the
subsidiary member's items of deduction and loss that were taken into account in
computing the adjustment to the basis of any share of stock of the subsidiary member,
other than the shares disposed of or deconsolidated, during the time such subsidiary
member was a member of the group. However, only those items of deduction and loss that
are attributable to formerly unrecognized or unabsorbed items reflected in the basis of the
subsidiary member stock disposed of or deconsolidated are included in the computation
of the amount of basis subject to reallocation. For example, if a share of stock has a basis
in excess of value because the stock was acquired in exchange for a built-in loss asset, the
stock's basis reflects that unrecognized loss. If that loss is later recognized, the basis
adjustment resulting from that recognition is an item of loss attributable to a formerly
unrecognized item reflected in the basis of such stock. The proposed regulations contain a
presumption that all items of deduction and loss included in the computation of prior
investment adjustments to the basis of members' shares of the subsidiary member are
attributable to the recognition and absorption of a deduction or loss reflected in the basis of
the shares that are disposed of or deconsolidated. The regulations do, however, permit
groups to establish that particular items of deduction and loss are not reflected in the basis
of the shares disposed of or deconsolidated, and, therefore, are not reallocated to other
12
shares.
If the subsidiary is no longer a member of the group immediately after the
disposition or deconsolidation of its stock, the basis in the shares of subsidiary member
stock disposed of or deconsolidated is reduced by the amount of basis subject to
reallocation. Then, to the extent of the amount of basis subject to reallocation, the basis of
all preferred shares of stock of the subsidiary member that are held by members of the
group immediately after the disposition or deconsolidation is increased such that the basis
of each such share equals, but does not exceed, its value immediately before the
disposition or deconsolidation. Finally, to the extent that the amount of basis subject to
reallocation does not increase the basis of such preferred shares of the subsidiary
member, such amount increases the basis of all common shares of stock of the subsidiary
member held by members of the group immediately after the disposition or
deconsolidation in a manner that, to the greatest extent possible, causes the ratio of the
basis to the value of each such share to be the same.
The basis redetermination rule does not apply if the group disposes of all its stock
of the subsidiary member within a single taxable year, in one or more fully taxable
transactions, or is allowed a worthless stock deduction with respect to all of the subsidiary
member stock owned by the members. Under those circumstances, if a second tax benefit
has been derived from an economic loss, the second tax benefit will be recaptured in the
taxable year in which it was obtained.
The proposed regulations also include a look-through rule that applies the basis
redetermination rule to stock of lower-tier subsidiary members when there is a disposition
13
or deconsolidation of stock of a higher-tier member. In addition, the proposed regulations
provide that basis adjustments made pursuant to the basis redetermination rule result in
basis adjustments to higher-tier member stock.
While the basis redetermination rule may prevent the recognition of a current loss on
a particular share of subsidiary member stock, it does not prevent a group from obtaining a
benefit from its investment in the subsidiary member. The basis redetermination rule
affects only the timing of the group's loss and, in so doing, prevents the group from
inappropriately duplicating a single economic loss.
B. Loss Suspension Rule
The loss suspension rule prevents duplication of an economic loss by effectively
disallowing a stock loss if the economic loss giving rise to that stock loss is later reflected
on the group's return as in the second type of transaction described above.
1. Suspension of Stock Loss
Under the loss suspension rule, if, after application of the basis redetermination rule,
a member of a consolidated group recognizes a loss on the disposition of stock of a
subsidiary member of the same group, and the subsidiary member is a member of the
same group immediately after the disposition, then the selling member's stock loss is
suspended to the extent of the duplicated loss with respect to such stock. The proposed
regulations also include a special rule that applies the loss suspension rule in cases of a
disposition of stock of a subsidiary member that leaves the group where the subsidiary
owns stock of another subsidiary that remains a member of the group. In addition, the
proposed regulations include a substitute asset rule that suspends a member's loss
14
recognized on a disposition of an asset other than stock of a subsidiary member where
such member's basis in the asset disposed of was determined, directly or indirectly, in
whole or in part, by reference to the basis of stock of a subsidiary member with respect to
which there was a duplicated loss, and immediately after the disposition, the subsidiary
member is a member of such group.
The amount of duplicated loss is the excess of (1) the sum of the aggregate basis of
the subsidiary member's assets (excluding stock in other subsidiary members of the
group), the subsidiary member's losses that are carried to its first taxable year after the
disposition, and the subsidiary member's deductions that have been recognized but
deferred under another provision, over (2) the sum of the value of stock of the subsidiary
member and the subsidiary member's liabilities that have been taken into account for tax
purposes. Each of these items in the computation (except stock value) includes the
subsidiary member's allocable share of the same items of any lower-tier subsidiary. This
definition of duplicated loss is substantially identical to the one in former §1.1502-20,
except that securities of other members of the group are not excluded from the
computation of the subsidiary's aggregate asset basis.
The application of the loss suspension rule can be illustrated as follows. Assume P,
the common parent of a consolidated group, forms S in Year 1 by contributing $100 to S in
exchange for all 10 shares of S's outstanding stock. Immediately after the contribution, S
purchases a building for $100. In Year 2, the value of the building declines to $10. At the
end of Year 2, P sells one share of S stock for $1 and recognizes a $9 loss. (Because the
basis of P's shares of S stock is uniform at the time of the disposition, the basis
15
redetermination rule does not alter P's basis in the share sold.) Immediately after the sale,
S is still a member of the P group because P continues to own 90% of the S stock. On the
date of the stock sale, S's duplicated loss is $90, the excess of its asset basis ($100) over
the value of the assets (deemed to be equal to the aggregate stock value, $10). Of the
total duplicated loss, 10%, or $9, is allocable to the share sold. Thus, under the loss
suspension rule the $9 stock loss is suspended.
2. Reduction of Suspended Stock Loss
Because a suspended stock loss reflects the subsidiary member's unrecognized or
unabsorbed deductions and losses, the suspended loss is reduced, with the result that it
will not later be allowed, as the subsidiary member's deductions and losses are taken into
account (i.e., absorbed) in determining the group's consolidated taxable income (or loss).
The reduction of suspended loss is appropriate because, once the group takes the inside
loss into account in determining consolidated taxable income (or loss), the group should
not be able to take such loss (in the form of the stock loss or otherwise) into account again
in determining consolidated taxable income or loss. Using the facts of the above example,
assume that, in Year 3, S sells its building for $10 and recognizes a $90 loss. The P group
uses the entire $90 loss to offset income of another member of the group. Under these
proposed regulations, the absorbed loss ($90) reduces the suspended loss amount ($9),
but not below zero. Thus, P will benefit from the economic loss once on its return, no
suspended stock loss will remain, and P'S basis in its remaining S stock will be reduced by
its allocable share of the loss ($81).
The proposed regulations generally presume that all deductions and losses are
16
attributable first to the duplicated loss that gave rise to a suspended stock loss. The
presumption, however, is rebuttable. If a taxpayer can establish that an item of deduction
or loss was not part of the duplicated loss that gave rise to a suspended stock loss, the
taxpayer will not be required to reduce its suspended stock loss. To illustrate, assume that,
instead of selling the building, S retained the building and, in Year 3, earned $50 which it
then used to purchase a truck. In Year 4, S sells the truck, recognizing a $25 loss. That
loss offsets income of another member of the P group. Assuming that P and S have kept
adequate records, P should be able to establish that the loss on the truck was not reflected
in the stock loss (because it was attributable to an asset that was acquired after the
disposition of stock that gave rise to the suspended stock loss). In that case, P would not
be required to reduce its suspended stock loss. The IRS and Treasury Department are
concerned about, and specifically request comments regarding, the administrability
aspects of this exception.
3. Allowance of Suspended Stock Loss
The proposed regulations provide that any suspended stock loss remaining at the
time the subsidiary member leaves the group is allowed, to the extent otherwise allowable
under applicable provisions of the Code and regulations thereunder. The loss is allowed
on a return filed for the taxable year that includes the last day that the subsidiary member is
a member of the group. Once the subsidiary member is no longer a member of the group,
the group will not typically be able to use the subsidiary member's deductions or losses on
the group's return. Accordingly, it is appropriate to allow any suspended stock loss
remaining at the time the subsidiary member leaves the group.
17
The proposed regulations also provide that any suspended stock loss remaining is
allowed at the time the group is allowed a worthless stock deduction with respect to all of
the subsidiary member stock owned by members. In such cases, the basis reduction rule,
described below, may reduce a worthless stock deduction effectively to prevent any
second tax benefit that could be derived from the economic loss that gave rise to the
suspended stock loss.
The proposed regulations require that in order for a group to be allowed a loss that
was recognized on the disposition of a subsidiary member and that was suspended, the
group must file a statement of allowable loss with the consolidated return for the year in
which the loss is allowable.
C. Application of the Basis Redetermination and Loss Suspension Rules Generally
The IRS and Treasury Department do not expect that the basis redetermination and
the loss suspension rules will apply frequently. This expectation is based on the
assumption that, when a group seeks to raise capital, the common parent will typically
issue stock directly or sell all of the stock of a subsidiary member. Alternatively, groups
sometimes seek to raise capital by creating minority interests in a subsidiary member. In
such cases, however, the group will typically cause the subsidiary member to issue shares
directly to the nonmember. Thus, the IRS and Treasury Department believe that a
member's sale of less than all of the stock of a subsidiary member to a nonmember, which
may trigger application of the basis redetermination and loss suspension rules, is not a
common transaction in the absence of tax incentives.
D. Basis Reduction Rule
18
The loss suspension rule apples only if there has been a disposition of subsidiary
member stock and the subsidiary member is a member of the group immediately after the
disposition. The IRS and Treasury Department, however, are concerned that a group may
obtain more than one tax benefit from a single economic loss in certain cases in which a
group member recognizes a loss with respect to subsidiary member stock and, in
connection with such recognition event, the subsidiary member ceases to exist. For
example, suppose P owns all of the stock of S. p's basis in its S stock is $100 and the
value of the S stock is $0 because S is insolvent. S liquidates into P. In that case, P will
recognize a loss of $1 00 on the disposition of the S stock. Because S is not a member of
the P group immediately after the disposition of S stock, the loss suspension rule will not
apply. The portion of the group's consolidated net operating and net capital loss
carryforwards attributable to S, however, may remain with the P group. Therefore, to that
extent, any loss on the stock of the subsidiary duplicates those losses. To address this
case, these proposed regulations provide that if a member disposes of subsidiary
member stock and on the following day the subsidiary is not a member of the group and
does not have a separate return year, then the basis of the subsidiary member stock is
reduced to the extent of the consolidated net operating loss and net capital loss
carryforwards attributable to such subsidiary member, as though they were absorbed
immediately prior to the disposition.
Similarly, where the subsidiary becomes worthless under the standards of § 1.150280(c), the group may be allowed a worthless stock loss while consolidated net operating
and net capital loss carryforwards attributable to the worthless subsidiary member remain
19
unabsorbed. Although the subsidiary may be viewed as remaining in the group, rather than
rely on existing rules, including the excess loss account recapture rules, to prevent the
possible duplication of the unabsorbed losses, these proposed regulations provide for a
negative stock basis adjustment similar to that described above in such cases.
E. Anti-avoidance Rules
The IRS and Treasury Department are concerned that, in certain cases, taxpayers
may structure transactions to avoid the application of the basis redetermination and loss
suspension rules in a manner that is not consistent with the purpose of the proposed
regulations to prevent a consolidated group from obtaining more than one tax benefit from
a single economic loss. In particular, suppose P acquires 80 shares of S common stock in
exchange for $80. In a later year, P contributes an asset with a basis of $50 and a value of
$20 to S in exchange for 20 shares of S preferred stock. The following year, S sells the
contributed asset, recognizing a loss of $30. As a result of the sale of the asset, p's basis
in the S common stock is reduced by $30 from $80 to $50. In contemplation of the sale of
the S preferred stock, P contributes the 80 shares of S common stock to PS, a
partnership, in a transaction described in section 721. Because P's basis in the S
common stock does not exceed the value of such stock, the deconsolidation of the S
common stock does not trigger the application of the basis redetermination rule. In the
same year, but after the contribution of the S common stock to PS, P sells the S preferred
stock, recognizing $30 of loss. Absent the application of an anti-avoidance rule, the P
group will have obtained more than one tax benefit from the single economic loss inherent
in the contributed asset. Accordingly, the proposed regulations provide that if a share of
20
subsidiary member stock is deconsolidated and such deconsolidation is with a view to
avoiding application of the basis redetermination rule prior to the disposition of loss stock
of the subsidiary member, then the basis redetermination rule will apply immediately prior
to the deconsolidation.
In addition, suppose in Year 1, P forms S with a contribution of $100 in exchange for
100 shares of common stock of S which at that time represents all of the outstanding stock
of S. In Year 2, P contributes 20 shares of common stock of S to PS, a partnership, in a
transaction described in section 721. In Year 3, P contributes an asset with a basis of $50
and a value of $20 to PS in a transaction described in section 721. Also in Year 3, PS
contributes the built-in loss asset to Sand P contributes an additional $80 to S in transfers
to which section 351 applies. In Year 4, S sells the built-in loss asset for $20, recognizing a
loss of $30. The P group uses that loss to offset income of P. Also in Year 4, P sells its
entire interest in PS for $40, recognizing a loss of $30, or PS sells its S stock for $20,
recognizing a loss of $30. In either case, the P group would obtain more than one tax
benefit from the single economic loss in the contributed asset. Accordingly, the proposed
regulations provide that where a member of a consolidated group contributes a built-in loss
asset to a partnership or a deconsolidated corporation, that partnership or deconsolidated
corporation subsequently contributes the built-in loss asset to a subsidiary member of the
group, and those contributions are with a view to avoiding the application of the basis
redetermination rule or the loss suspension rule, adjustments must be made to prevent the
consolidated group from obtaining more than one tax benefit from a single economic loss
in the case.
21
The IRS and Treasury Department are also concerned that it may be possible to
avoid the loss suspension rule by disposing of a sufficient amount of subsidiary member
stock to cause a deconsolidation of the subsidiary member, but then engage in a
transaction that has the effect of re-importing to the group losses of that subsidiary
member. To address this concern, the proposed regulations include an anti-avoidance
rule that prevents the group from obtaining the tax benefit of the re-imported loss. The rule
applies whenever (1) a group recognizes and is allowed a loss on the disposition of
subsidiary member stock with respect to which there is a duplicated loss, (2) as a result of
that disposition or another disposition, the subsidiary member leaves the group, and (3)
within ten (10) years after the date the subsidiary member leaves the group, a loss of the
subsidiary member is re-imported into the group. A loss of a subsidiary may be reimported into the group when the subsidiary member rejoins the g roup at a time when it
has losses or deferred deductions that it had on the date of the disposition or has losses or
deferred deductions that are attributable to built-in loss assets held by the subsidiary
member on the date of the disposition, or has built-in loss assets that were built-in loss
assets of the subsidiary member on the date of the disposition. A loss of a subsidiary
member may also be re-imported into the group when a member of the group succeeds to
losses or deferred deductions of the subsidiary member that were losses or deferred
deductions of the subsidiary member on the date of the disposition, or losses or deferred
deductions that are attributable to assets that were built-in loss assets of the subsidiary
member on the date of the disposition, or acquires built-in loss assets that were built-in
loss assets of the subsidiary member on the date of the disposition. If the anti-avoidance
22
rule applies, then these proposed regulations generally prohibit the use of the re-imported
item of deduction or loss to offset income of the group.
F. Application of Anti-abuse Rules
Finally, the proposed regulations make clear that the proposed rules do not
preclude the application of anti-abuse rules of the Code and regulations thereunder,
including to a transaction entered into to invoke the basis redetermination rule to avoid the
effect of any other provision of the Code or regulations.
G. Request for Comments
The IRS and Treasury Department are considering alternative approaches to the
basis redetermination rule that would mitigate basis disparities in stock of a subsidiary
member. In this regard, the IRS and Treasury Department are considering an approach
that would adjust the bases of all shares of subsidiary member stock held by group
members upon any acquisition of subsidiary member stock. Comments are requested
regarding the appropriateness and desirability of such an approach as well as suggestions
for alternative approaches.
In addition, under the proposed regulations, the basis redetermination and loss
suspension rules apply only to certain events involving stock that has a basis in excess of
value. The IRS and Treasury Department, however, are considering the appropriateness
and feasibility of a rule that applies the principles of the basis redetermination and loss
suspension rules to certain events involving stock that has a value in excess of basis. With
respect to the application of the principles of the loss suspension rule to dispositions of
stock that has a value in excess of basis and that reflects duplicated gain, a rule might
23
require taking into account the stock gain upon the disposition of the stock but would
eliminate gain recognized on the disposition of assets that had a built-in gain at the time of
the stock transaction. The IRS and Treasury Department request comments on
appropriate and administrable applications of the principles of the basis redetermination
and loss suspension rules to dispositions and deconsolidations of stock that has a built-in
gain.
Finally, as an alternative or supplement to the rule providing for basis reduction for
unabsorbed losses in certain cases where the subsidiary member ceases to exist or the
group is allowed a worthless stock deduction with respect to the stock of such subsidiary
member, the IRS and Treasury Department are considering whether it would be more
appropriate to restrict the losses pursuant to the approach set forth in section 382(g)(4)(0).
Comments are requested regarding whether such an approach would be appropriate,
desirable and administrable, as well as the application of such an approach in the context
of consolidated attributes.
Proposed Effective Date
These regulations, other than the anti-avoidance rule that relates to the re-importing
of losses, are proposed to apply to transactions that occur on or after March 7, 2002. but
only if such transactions occur during a taxable year the original return for which is due
(without regard to extensions) after the date these regulations are published as temporary
or final regulations in the Federal Register. The anti-avoidance rule that relates to the reimporting of loss is proposed to apply to losses re-imported as a result of an event that
occurs on or after [INSERT DATE THESE RULES ARE FILED WITH THE FEDERAL
24
REGISTER] that triggers the application of such rule, but only if such event occurs during a
taxable year the original return for which is due (without regard to extensions) after the date
these regulations are published as temporary or final regulations in the Federal Register.
Special Analyses
It has been determined that this notice of proposed rulemaking is not a significant
regulatory action as defined in Executive Order 12866. Therefore, a regulatory
assessment is not required. It is hereby certified that these regulations do not have a
significant impact on a substantial number of small entities. This certification is based on
the fact that these regulations will primarily affect affiliated groups of corporations, which
tend to be larger businesses. Moreover, the number of taxpayers affected and the average
burden are minimal. It has also been determined that section 553(b) of the Administrative
Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations, and because
these regulations do not impose a collection requirement on small entities, the Regulatory
Flexibility Act (5 U.S.C. chapter 6) does not apply. Therefore, a Regulatory Flexibility
Analysis is not required. Pursuant to section 7805(f) of the Internal Revenue Code, this
notice of proposed rulemaking will be submitted to the Chief Counsel for Advocacy of the
Small Business Administration for comment on their impact on small businesses.
Comments and Public Hearing
Before these proposed regulations are adopted as final regulations, consideration
will be given to any written (a signed original and eight (8) copies) or electronic comments
that are submitted timely to the IRS. The IRS and Treasury Department request comments
on the clarity of the proposed regulations and how they may be made easier to understand.
25
All comments will be available for public inspection and copying.
A public hearing has been scheduled for January 15, 2003, beginning at 10 a.m. in
room 6718, Internal Revenue Building, 1111 Constitution Avenue, NW., Washington, DC.
Due to building security procedures, visitors must enter at the Constitution Avenue
entrance. In addition, all visitors must present photo identification to enter the building.
Because of access restrictions, visitors will not be admitted beyond the immediate
entrance area more than 30 minutes before the hearing starts. For information about
having your name placed on the building access list to attend the hearing, see the "FOR
FURTHER INFORMATION CONTACT' portion of this preamble.
The rules of 26 CFR 601.601 (a)(3) apply to the hearing. Persons who wish to
present oral comments must submit written or electronic comments and an outline of the
topics to be discussed and the time to be devoted to each topic (a signed original and
eight (8) copies) by December 27,2002. A period of 10 minutes will be allotted to each
person for making comments. An agenda showing the scheduling of the speakers will be
prepared after the deadline for receiving outlines has passed. Copies of the agenda will
be available free of charge at the hearing.
Drafting Information
The principal author of these regu lations is Aimee K. Meacham of the Office of the
Associate Chief Counsel (Corporate), IRS. However, other personnel from the IRS and
Treasury Department participated in their development.
List of subjects in 26 CFR Part 1
Income taxes, Reporting and record keeping requirements.
26
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is proposed to be amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.1502-32 is amended by:
1. Revising paragraph (a)(2).
2. Adding paragraphs (b)(3)(iii)(C), (b)(3)(iii)(O), and (b)(3)(vi).
The revision and additions read as follows:
§1.1502-32 Investment adjustments.
(a) * * *
(1) * * *
(2) Application of other rules of law. The rules of this section are in addition to other
rules of law. See, e.g., section 358 (basis determinations for distributees), section 1016
(adjustments to basis), §1.1502-11(b) (limitations on the use of losses), §1.1502-19
(treatment of excess loss accounts), § 1.1502-31 (basis after a group structure change),
and §1.1502-35 (additional rules relating to stock loss). P'S basis in S's stock must not be
adjusted under this section and other rules of law in a manner that has the effect of
duplicating an adjustment. For example, if pursuant to §1.1502-35(c)(3} and paragraph
(b)(3)(iii)(C) of this section the basis in stock is reduced to take into account a loss
suspended under §1.1502-35(c}(1), such basis shall not be further reduced to take into
account such loss, or a portion of such loss, if any, that is later allowed pursuant to
27
§1.1502-35(c)(S). See also paragraph (h)(S) of this section for basis reductions applicable
to certain former subsidiaries.
*****
(b) * * *
(3) * * *
(iii)***
(C) Loss suspended under § 1.1502-35(c). Any loss suspended pursuant to
§ 1.1502-3S(c) is treated as a noncapital, nondeductible expense incurred during the tax
year that includes the date of the disposition to which such section applies. See § 1.15023S(c)(3). Consequently, the basis of a higher-tier member's stock of P is reduced by the
suspended loss in the year it is suspended.
(0) Loss disallowed under §1.1502-35(g)(3)(iii). Any loss the use of which is
disallowed pursuant to §1.1502-3S(g)(3)(iii)(A) or (8) is treated as a noncapital.
nondeductible expense incurred during the taxable year that includes the date on which
such loss is recognized. Any loss the use of which is disallowed pursuant to §1.1S0235(g}(3)(iii)(C) and with respect to which no waiver described in paragraph (b)(4) of this
section is filed is treated as a noncapital, nondeductible expense incurred during the
taxable year that includes the day after the event described in § 1.1502-3S(g)(3)(iii)(C) that
gives rise to the application of § 1.1502-35(g)(3), See § 1.1S02-3S(g)(3)(iv).
28
(vi) Special rules in the case of certain transactions subject to § 1.1502-35. If a
member of a group disposes of a share of subsidiary member stock or a share of
subsidiary member stock is deconsolidated, and, at the time of such disposition or
deconsolidation, the basis of such share exceeds its value, all members of the group are
subject to the provisions of §1.1502-35, which generally require a redetermination of
members' basis in all shares of subsidiary stock.
Par. 3. Section 1.1502-35 is added to read as follows:
§1.1502-35 Disposition or deconsolidation of subsidiary member stock.
(a) Purpose. The purpose of this section is to prevent a group from obtaining more
than one tax benefit from a single economic loss. The provisions of this section shall be
construed in a manner consistent with that purpose and in a manner that reasonably carries
out that purpose.
(b) Redetermination of basis on disposition or deconsolidation of subsidiary
member stock--(1) Application. Except as provided in paragraph (b)(4) of this section, this
paragraph (b) applies if a member of a consolidated group disposes of stock of a
subsidiary member or a share of subsidiary member stock is deconsolidated, and such
disposed of or deconsolidated stock has a basis that exceeds it value immediately prior to
such disposition or deconsolidation. If, immediately after such disposition or
deconsolidation, the subsidiary member remains a member of the group, then,
immediately before such disposition or deconsolidation, the basis in each share of
subsidiary member stock owned by each member of the group shall be redetermined in
accordance with the provisions of paragraph (b )(2) of this section. If, immediately after
29
such disposition or deconsolidation, the subsidiary is not a member of the group, then
immediately before such disposition or deconsolidation, the basis in each share of
subsidiary member stock owned by each member of the group shall be redetermined in
accordance with the provisions of paragraph (b )(3) of this section.
(2) Redetermination of subsidiary member stock basis if subsidiary member
remains a member of the same group. If the subsidiary member the stock of which is
disposed of or deconsolidated remains a member of the group, all of the members' basis
in the shares of subsidiary member stock shall be aggregated. Such aggregated basis
shall be allocated first to the shares of the subsidiary member's preferred stock that are
owned by the members of the group, in proportion to, but not in excess of, the value of
those shares on the date of the disposition or deconsolidation that gave rise to the
application of this paragraph (b). After allocation of the aggregated basis to all shares of
the preferred stock of the subsidiary member held by members of the group, any remaining
basis shall be allocated among all common shares of subsidiary member stock held by
members of the group in proportion to the value of such shares on the date of the
disposition or deconsolidation that gave rise to the application of this paragraph (b).
(3) Redetermination of subsidiary member stock basis if subsidiary member does
not remain a member of the group--(i) Calculation of Reallocable Basis Amount. The
reallocable basis amount shall equal the lesser of-(A) The amount by which the basis of the disposed of or deconsolidated stock
exceeds the value of such stock immediately prior to the disposition or deconsolidation
that gave rise to the application of this paragraph (b); and
30
(8) The total of the subsidiary member's (and any predecessor's) items of
deduction and loss, and the subsidiary member's (and any predecessor's) allocable share
of items of deduction and loss of all lower-tier subsidiary members, that were taken into
account in computing the adjustment to the basis of any share of stock of the subsidiary
member (and any predecessor) under § 1.1502-32 other than the stock of the subsidiary
member the disposition or deconsolidation of which gave rise to the application of this
paragraph (b), during the time such subsidiary member (or any predecessor) was a
member of the group, except to the extent the group can establish that all or a portion of
such items would not have been reflected in a computation of the duplicated loss with
respect to the disposed of or deconsolidated stock of the subsidiary member (or any
predecessor) at any time prior to such disposition or deconsolidation.
(ii) Allocation of reallocable basis amount. If the subsidiary member the stock of
which is disposed of or deconsolidated does not remain a member of the group, the basis
in the shares of subsidiary member stock that were disposed of or deconsolidated shall be
reduced by the reallocable basis amount. Then, to the extent of the reallocable basis
amount, the basis of all the preferred shares of stock of the subsidiary member that are
held by members of the group immediately after the disposition or deconsolidation shall be
increased such that the basis of each such share shall equal, but not exceed, its value
immediately before the disposition or deconsolidation. If the reallocable basis amount is
not sufficient to increase the basis of each such share of preferred stock to its value
immediately before the disposition or deconsolidation, the basis of each such share shall
be increased in a manner that, to the greatest extent possible, causes the ratio of the basis
31
to the value of each such share to be the same. Then, to the extent the reallocable basis
amount does not increase the basis of shares of subsidiary member preferred stock
pursuant to the second sentence of this paragraph (b)(3)(ii), such amount shall increase the
basis of all common shares of subsidiary member stock held by members of the group
immediately after the disposition or deconsolidation in a manner that, to the greatest extent
possible, causes the ratio of the basis to the value of each such other share to be the
same.
(4) Exception to application of redetermination rules. This paragraph (b) shall not
apply to a disposition of subsidiary member stock if, within the taxable year of such
disposition, in one or more fully taxable transactions, the group disposes of its entire equity
interest in the subsidiary member or is allowed a worthless stock loss under section 165(g)
(taking into account the provisions of § 1.1502-80( c)) with respect to all of the subsidiary
member stock owned by members.
(5) Special rule for lower-tier subsidiaries. If(i) A member of a consolidated group disposes of stock of a subsidiary member of
the same group or a share of subsidiary member stock is deconsolidated, and,
immediately before the disposition or deconsolidation, the member's basis in the
disposed of or deconsolidated share of subsidiary member stock exceeds its value;
(ii) The subsidiary member owns stock of another subsidiary member of the same
group and, immediately before the disposition or deconsolidation, the basis of some or all
of such stock exceeds its value; and
(iii) Immediately after the disposition or deconsolidation, another member of the
32
same group owns stock of such other subsidiary member, then the basis in each share of
such other subsidiary member shall be redetermined pursuant to this paragraph (b) as if
the stock of such other subsidiary member owned by the subsidiary member had been
disposed of or deconsolidated. This paragraph (b)(5) shall not apply in the case of a
disposition of subsidiary member stock if, within the taxable year of the disposition of
subsidiary member stock, in one or more fully taxable transactions, the group disposes of
its remaining equity interests in the other subsidiary member or is allowed a worthless
stock loss under section 165(g) (taking into account the provisions of §1.1502-BO(c)) with
respect to such other subsidiary member. These same principles shall apply to stock of
subsidiary members of the same group that are owned by such other subsidiary member.
(6) Stock basis adjustments for higher-tier stock. The basis adjustments required
under this paragraph (b) result in basis adjustments to higher-tier member stock. The
adjustments are applied in the order of the tiers, from the lowest to highest. For example, if
a common parent owns stock of a subsidiary member that owns stock of a lower-tier
subsidiary member and the subsidiary member recognizes a loss on the disposition of a
portion of its shares of the lower-tier subsidiary member stock, the common parent must
adjust its basis in its subsidiary member stock under the principles of § 1.1502-32 to reflect
the adjustments that the subsidiary member must make to its basis in its stock of the lowertier subsidiary member.
(7) Ordering rule. The rules of this paragraph (b) apply after the rules of § 1.1502-32
are applied. Paragraph (b)(5) of this section (and any resulting basis adjustments to
higher-tier member stock made pursuant to paragraph (b)(6) of this section) applies prior
33
to paragraph (b)(2) or (b)(3) of this section (and any resulting basis adjustments to highertier member stock made pursuant to paragraph (b)(6) of this section).
(c) Loss suspension--(1) General rule. Any loss recognized by a member of a
consolidated group with respect to the disposition of a share of subsidiary member stock
shall be suspended to the extent of the duplicated loss with respect to such share of stock
if, immediately after the disposition, the subsidiary is a member of the consolidated group
of which it was a member immediately prior to the disposition (or any successor group).
(2) Special rule for lower-tier subsidiaries. This paragraph (c)(2) applies if neither
paragraph (c)(1) nor (f) of this section applies to a member's disposition of a share of
stock of a subsidiary member (the departing member), a loss is recognized on the
disposition of such share, and the departing member owns stock of one or more other
subsidiary members (a remaining member) that is a member of such group immediately
after the disposition. In that case, such loss shall be suspended to the extent the duplicated
loss with respect to the departing member stock disposed of is attributable to the
remaining member or members.
(3) Treatment of suspended loss. For purposes of the rules of §1.1502-32(b)(3)(iii),
any loss suspended pursuant to paragraph (c)( 1) or (c }(2) of this section is treated as a
noncapital, nondeductible expense of the member that disposes of subsidiary member
stock incurred during the taxable year that includes the date of the disposition of stock to
which paragraph (c)(1) or (c)(2) of this section applies. See §1.1502-32(b)(3)(iii)(C).
Consequently, the basis of a higher-tier member's stock of the member that disposes of
subsidiary member stock is reduced by the suspended loss in the year it is suspended.
34
(4) Reduction of suspended 105S--(i) General rule. The amount of any loss
suspended pursuant to paragraphs (c)(1) and (c)(2) of this section shall be reduced, but not
below zero, by the subsidiary member's (and any successor's) items of deduction and
loss, and the subsidiary member's (and any successor's) allocable share of items of
deduction and loss of all lower-tier subsidiary members, that are allocable to the period
beginning on the date of the disposition that gave rise to the suspended loss and ending
on the day before the first date on which the subsidiary member (or any successor) is not a
member of the group of which it was a member immediately prior to the disposition (or any
successor group), and that are taken into account in determining consolidated taxable
income (or loss) of such group for any taxable year that includes any date on or after the
date of the disposition and before the first date on which the subsidiary member (or any
successor) is not a member of such group. The preceding sentence shall not apply to
items of deduction and loss to the extent that the group can establish that all or a portion of
such items was not reflected in the computation of the duplicated loss with respect to the
subsidiary member stock on the date of the disposition of such stock.
(ii) Operating rules--(A) Year in which deduction or loss is taken into account. For
purposes of paragraph (c}(4)(i) of this section, a subsidiary member's (or any successor's)
deductions and losses are treated as taken into account when and to the extent they are
absorbed by the subsidiary member (or any successor) or any other member. To the
extent that the subsidiary member's (or any successor's) deduction or loss is absorbed in
the year it arises or is carried forward and absorbed in a subsequent year (e.g., under
section 172,465, or 1212), the deduction is treated as taken into account in the year in
35
which it is absorbed. To the extent that a subsidiary member's (or any successor's)
deduction or loss is carried back and absorbed in a prior year (whether consolidated or
separate), the deduction or loss is treated as taken into account in the year in which it
arises and not in the year in which it is absorbed.
(8) Determination of items that are allocable to the post-disposition, predeconsolidation period. For purposes of paragraph (c)(4)(i) of this section, the
determination of whether a subsidiary member's (or any successor's) items of deduction
and loss and allocable share of items of deduction and loss of all lower-tier subsidiary
members are allocable to the period beginning on the date of the disposition of subsidiary
stock that gave rise to the suspended loss and ending on the day before the first date on
which the subsidiary member (or any successor) is not a member of the consolidated
group of which it was a member immediately prior to the disposition (or any successor
group) is determined pursuant to the rules of § 1.1502-76(b)(2), without regard to § 1.150276(b)(2)(ii)(D), as if the subsidiary member ceased to be a member of the group at the end
of the day before the disposition and filed separate returns for the period beginning on the
date of the disposition and ending on the day before the first date on which it is not a
member of such group.
(5) Allowable loss--(i) General rule. To the extent not reduced under paragraph
(c)(4) of this section, any loss suspended pursuant to paragraph (c)(1) or (c)(2) of this
section shall be allowed, to the extent otherwise allowable under applicable provisions of
the Intemal Revenue Code and regulations thereunder, on a return filed by the group of
which the subsidiary was a member on the date of the disposition of subsidiary stock that
36
gave rise to the suspended loss (or any successor group) for the taxable year that includes
the day before the first date on which the subsidiary (or any successor) is not a member of
such group or the date the group is allowed a worthless stock loss under section 165(g)
(taking into account the provisions of § 1 .1502-BO( c)) with respect to all of the subsidiary
member stock owned by members.
(ii) No tiering up of certain adjustments. No adjustments shall be made to a
member's basis of stock of a subsidiary member (or any successor) for a suspended loss
that is taken into account under paragraph (c)(5)(i) of this section. See §1.1502-32(a)(2).
(iii) Statement of allowed loss. Paragraph (c)(5)(i) of this section applies only if the
separate statement required under this paragraph (c)(5)(iii) is filed with, or as part of, the
taxpayer's return for the year in which the loss is allowable. The statement must be entitled
"ALLOWED LOSS UNDER §1.1502-35(c)(5)" and must contain the name and employer
identification number of the subsidiary the stock of which gave rise to the loss.
(6) Special rule for dispositions of certain carryover basis assets. If-(i) A member of a group recognizes a loss on the disposition of an asset other than
stock of a subsidiary member;
(ii) Such member's basis in the asset disposed of was determined, directly or
indirectly, in whole or in part, by reference to the basis of stock of a subsidiary member
and, at the time of the determination of the member's basis in the assets disposed of,
there was a duplicated loss with respect such stock of the subsidiary member; and
(iii) Immediately after the disposition, the subsidiary member is a member of such
group, then such loss shall be suspended pursuant to the principles of paragraphs (c)(1)
37
and (c)(2) of this section to the extent of the duplicated loss with respect to such stock at
the time of the determination of basis of the asset disposed of. Principles similar to those
set forth in paragraphs (c)(3), (4), and (5) of this section shall apply to a loss suspended
pursuant to this paragraph (c)(6).
(7) Coordination with loss deferral, loss disallowance, and other rules--(i) In general.
Loss recognized on the disposition of subsidiary member stock or another asset is
subject to redetermination, deferral, or disallowance under other applicable provisions of
the Internal Revenue Code and regulations thereunder, including sections 267(f) and 482.
Paragraphs (c)(1), (c)(2), and (c)(6) of this section do not apply to a loss that is disallowed
under any other provision. If loss is deferred under any other provision, paragraphs (c)(1),
(c)(2), and (c)(6) of this section apply when the loss would otherwise be taken into account
under such other provision. However, if an overriding event described in paragraph
(c)(7)(ii) of this section occurs before the deferred loss is taken into account, paragraphs
(c)(1), (c)(2), and (c)(6) of this section apply to the loss immediately before the event
occurs, even though the loss may not be taken into account until a later time.
(ii) Overriding events. For purposes of paragraph (c)(7)(i) of this section, the
following are overriding events-(A) The stock ceases to be owned by a member of the consolidated group;
(8) The stock is canceled or redeemed (regardless of whether it is retired or held as
treasury stock); or
(C) The stock is treated as disposed of under §1.1502-19(c)(1 )(ii)(8) or (c)(1 )(iii).
(d) Definitions--(1) Disposition. Disposition means any event in which gain or loss
38
is recognized, in whole or in part.
(2) Deconsolidation. Deconsolidation means any event that causes a share of
stock of a subsidiary member that remains outstanding to be no longer owned by a
member of any consolidated group of which the subsidiary is also a member.
(3) Value. Value means fair market value.
(4) Duplicated loss--(i) In general. Duplicated loss is determined immediately after
a disposition and equals the excess, if any, of-(A) The sum of-(1) The aggregate adjusted basis of the subsidiary member's assets other than any
stock that subsidiary member owns in another subsidiary member; and
(f) Any losses attributable to the subsidiary member and carried to the subsidiary
member's first taxable year following the disposition; and
(~)
Any deductions of the subsidiary member that have been recognized but are
deferred under a provision of the Internal Revenue Code (such as deductions deferred
under section 469); over
(8) The sum of-(1) The value of the subsidiary member's stock; and
(f) Any liabilities of the subsidiary member that have been taken account for tax
purposes.
(ii) Special rules. (A) The amounts determined under paragraph (d)(4)(i) of this
section with respect to a subsidiary member include its allocable share of corresponding
amounts with respect to all lower-tier subsidiary members. If 80 percent or more in value of
39
the stock of a subsidiary member is acquired by purchase in a single transaction (or in a
series of related transactions during any 12-month period), the value of the subsidiary
member's stock may not exceed the purchase price of the stock divided by the percentage
of the stock (by value) so purchased. For this purpose, stock is acquired by purchase if the
transferee is not related to the transferor within the meaning of sections 267(b) and
707(b)(1), using the language "10 percent" instead of "50 percent" each place that it
appears, and the transferee's basis in the stock is determined wholly by reference to the
consideration paid for such stock.
(8) The amounts determined under paragraph (d)( 4 )(i) of this section are not
applied more than once to suspend a loss under this section.
(5) Predecessor and Successor. A predecessor is a transferor of assets to a
transferee (the successor) in a transaction-(i) To which section 381 (a) applies;
(ii) In which substantially all of the assets of the transferor are transferred to
members in a complete liquidation;
(iii) In which the successor's basis in assets is determined (directly or indirectly, in
whole or in part) by reference to the transferor's basis in such assets, but the transferee is
a successor only with respect to the assets the basis of which is so determined; or
(iv) Which is an intercompany transaction, but only with respect to assets that are
being accounted for by the transferor in a prior intercompany transaction.
(6) Successor group. A surviving group is treated as a successor group of a
consolidated group (the terminating group) that ceases to exist as a result of--
40
(i) The acquisition by a member of another consolidated group of either the assets
of the common parent of the terminating group in a reorganization described in section
381 (a )(2), or the stock of the common parent of the terminating group; or
(ii) The application of the principles of § 1.1502-75(d)(2) or (3).
(7) Preferred stock, common stock. Preferred stock and common stock shall have
the meanings set forth in §1.1502-32(d)(2) and (3), respectively.
(8) Lower-tier. A subsidiary member is lower-tier with respect to a member if or to
the extent investment basis adjustments under § 1 .1502-32 with respect to the stock of the
former member would affect investment basis adjustments with respect to the stock of the
latter.
(e) Examples. For purposes of the examples in this section, unless otherwise
stated, all groups file consolidated returns on a calendar-year basis, the facts set forth the
only corporate activity, all transactions are between unrelated persons, and tax liabilities
are disregarded. The principles of paragraphs (a) through (d) of this section are illustrated
by the following examples:
Example 1. (i) Pawns 100 percent of the common stock of each of S 1 and S2. S 1
and S2 each have only one class of stock outstanding. p's basis in the stock of S1 is $100
and in the stock of S2 is $120. P, S1, and S2 are all members of the P group. S1 and S2
form S3. In Year 1, in transfers to which section 351 applies, S1 contributes $100 to S3 in
exchange for all of the common stock of S3 and S2 contributes an asset with a basis of
$50 and a value of $20 to S3 in exchange for all of the preferred stock of S3. S3 becomes
a member of the P group. In Year 3, in a transaction that is not part of the plan that includes
the formation of S3, S2 sells the preferred stock of S3 for $20. Immediately after the sale,
S3 is a member of the P group.
(ii) Under paragraph (b)(1) of this section, because S2's basis in the preferred stock
of S exceeds the value of such shares immediately prior to the sale and S is a member of
the P group immediately after the sale, all of the P group members' bases in the stock of
41
83 is redetermined pursuant to paragraph (b)(2) of this section. Of the group members'
total basis of $150 in the 83 stock, $20 is allocated to the preferred stock, the fair market
value of the preferred stock on the date of the sale, and $130 is allocated to the common
stock. S2's sale of the preferred stock results in the recognition of $0 of gain/loss.
Pursuant to paragraph (b)(6) of this section, the redetermination of 81's and S2's bases in
the stock of S3 results in adjustments to P's basis in the stock of S1 and S2. In particular,
P's basis in the stock of 81 is increased by $30 to $130 and its basis in the stock of 82 is
decreased by $30 to $90.
Example 2. (i) Pawns 75 shares of common stock of S each with a basis and value
equal to $1. S is a member of the P group. On January 1st of Year 1, in a transfer to which
section 351 applies, P contributes Asset A, which has a basis of $1 00 and value of $25, to
S in exchange for 25 shares of common stock of S. In Year 1, S incurs $40 of ordinary
operating expenses and takes a depreciation deduction in the amount of $10 with respect
to Asset A. Those deductions offset income of P in Year 1. Pursuant to § 1.1502-32, the
negative investment adjustment of $50 with respect to the stock of 8 reduces the basis of
each share of S common stock by $0.50. Therefore, P's original 75 shares of Scammon
stock each has a basis of $0.50 and each of the 25 shares of S common stock that P
acquired in Year 1 has a basis of $3.50. In Year 3 in a transaction that is not part of a plan
that includes the Year 1 contribution, P sells the 25 shares of common stock it acquired in
Year 1 for $12.50. As a result of that sale, S ceases to be a member of the P group.
(ii) Under paragraph (b)(1) of this section, because P's basis in the 25 shares of
common stock it acquired in Year 1 exceeds its value immediately prior to the sale and 8
is not a member of the P group immediately after the disposition, P's basis in its shares of
S common stock is redetermined pursuant to paragraph (b)(3) of this section. Pursuant to
paragraph (b )(3 )(i) of this section, the reallocable basis amount is $37.50 (the lesser of the
amount by which P's basis in the S common stock sold exceeds the value of such stock
immediately prior to the sale ($87.50 minus $12.50, or $75) and the aggregate amount of
S's items of deduction and loss that were previously taken into account in the computation
of the adjustment to the basis of the S common stock other than the stock disposed of,
under §1.1502-32, during the time that S was a member of the P group ($37.50)). P,
however, may be able to establish that $30 of the $37.50 of items of deduction and loss
taken into account in computing the adjustment to the basis of the S common stock (other
than the S common stock disposed of) in Year 1 was not attributable to a loss that was
already reflected in P's basis in its shares of S common stock disposed of. Assuming that
P can establish this fact, pursuant to paragraph (b )(3)(i) of this section, the reallocable
basis amount would be $7.50. In that case, P's basis in the 25 shares of S common stock
sold would be reduced from $87.50 to $80 pursuant to paragraph (b)(3)(ii) of this section.
Accordingly, P would recognize a loss of $67.50 on the sale of the 25 shares of S common
stock for $12.50. In addition, the basis of each remaining share of S common stock would
be increased in an aggregate amount of $7.50 in a manner that, to the greatest extent
possible, causes the ratio of the basis to the value of each such other share to be equal. In
42
this case, the basis of each of the 75 shares of S common stock retained would be
increased by $0.10 to $0.60.
Example 3. (i) In Year 1, P forms S by contributing Asset A with a basis of $90 and
a value of $1 0 in exchange for one share of S common stock (CS1) in a transfer to which
section 351 applies. In Years 2 and 3, in successive but unrelated transfers to which
section 351 applies, P transfers $10 to S in exchange for one share of S common stock
(CS2), Asset B with a basis of $2 and a value of $10 in exchange for one share of S
common stock (CS3), and Asset C with a basis of $100 and a value of $10 in exchange for
one share of S common stock (CS4). In Year 4, S sells Asset A, recognizing $80 of loss
that is used to offset income of P recognized during Year 4. As a result of the sale of Asset
C, the basis of each of P's four shares of S common stock is reduced by $20. Therefore,
the basis of CS1 is $70. CS2 has an excess loss account of $10. CS3 has an excess
loss account of $18. CS4 has a basis of $80. In Year 5 in a transaction that is not part of a
plan that includes the Year 1 contribution, P sells CS1 for $10. Immediately after the sale
of CS1, S is not a member of the P group.
(ii) Under paragraph (b)(1) of this section, because P's basis in CS1 exceeds its
value immediately prior to the sale and S is not a member of the P group immediately after
the disposition, P's basis in its shares of S common stock is redetermined pursuant to
paragraph (b )(3) of this section. Pursuant to paragraph (b )(3)(i) of this section, the
reallocable basis amount is $60 (the lesser of the amount by which P's basis in the S
common stock sold exceeds the value of such stock immediately prior to the sale ($60)
and the aggregate amount of S's items of deduction and loss that were previously taken
into account in the computation of the adjustment to the basis of the S common stock other
than the stock disposed of, under § 1.1502-32, during the time that S was a member of the
P group ($60)). Pursuant to paragraph (b)(3)(ii) of this section, p's basis in CS1 is
reduced from $70 to $10. On the sale of CS1, therefore, P recognizes $0 gain/loss. Then,
P's basis in the remaining S common stock is increased in an aggregate amount of $60 in
a manner that, to the greatest extent possible, causes the ratio of the basis to the value of
each such share to be same. In this case, $20 of the reallocable basis amount is allocated
to CS2 and $28 of the reallocable basis amount is allocated to CS3 so as to increase the
basis of such shares to $10, the basis of CS1. The remaining $12 of the reallocable basis
amount is allocated equally to CS2 and CS3 so as to increase the basis of each such
share from $10 to $16.
Example 4. (i) In Year 1, P forms S with a contribution of $80 in exchange for 80
shares of the common stock of S, which at that time represents all of the outstanding stock
of S. S becomes a member of the P group. In Year 2, P contributes Asset A with a basis
of $50 and a value of $20 in exchange for 20 shares of the common stock of S in a transfer
to which section 351 applies. In Year 3, in a transaction that is not part of the plan that
includes the Year 2 contribution, P sells the 20 shares of the common stock of S that it
acquired in Year 2 for $20. At that time, S has $80 and Asset A, the basis and value of
43
which have not changed. In Year 4, S sells Asset A for $20, recognizing a $30 loss. That
$30 loss is used on the P group return to offset income of P. In Year 5, P sells its
remaining S common stock for $80.
(ii) Under paragraph (b)(1) of this section, because P's basis in the common stock
sold exceeds its value immediately prior to the sale and S is a member of the P group
immediately after the sale, P's basis in all of the stock of S is redetermined pursuant to
paragraph (b)(2) of this section. Of P's total basis of $130 in the S common stock, a
proportionate amount is allocated to each of the 100 shares of S common stock.
Accordingly, $26 is allocated to the common stock of 8 that is sold and $104 is allocated
to the common stock of 8 that is retained. On P's sale of the 20 shares of the common
stock of S for $20, P recognizes a loss of $6. Because the sale of the 20 shares of
common stock of 8 does not result in the deconsolidation of S, under paragraph (c)(1) of
this section, that loss is suspended to the extent of the duplicated loss with respect to the
shares sold. The duplicated loss with respect to the shares sold is $6. Therefore, the
entire $6 loss is suspended. Pursuant to paragraph (c)(4) of this section, the amount of the
suspended loss is reduced, but not below zero, by 8's items of deduction and loss that are
allocable to the period beginning on the date of the Year 2 disposition of the 8 stock and
ending on the day before the first date on which S is not a member of the P group and that
are taken into account in determining consolidated taxable income (or loss) of the P group
for any taxable year that includes any date on or after the date of the Year 2 disposition and
before the first date on which S is not a member of the P group, except to the extent the P
group can establish that all or a portion of such items was not included in the calculation of
the duplicated loss with respect to the shares of S sold on the date of the Year 2
disposition. Because the loss recognized on the sale of Asset A was included in the
calculation of the duplicated loss with respect to the 8 common stock sold on the date of
the sale and is absorbed by the P group, the suspended loss is reduced to zero pursuant
to paragraph (c)(4) of this section. Accordingly, no amount of suspended loss is allowed
under paragraph (c)(5) of this section. Under §1.1502-32, p's basis in its 8 stock is
reduced by $24. Accordingly, such basis is reduced from $104 to $80. P recognizes $0
gainlloss on the Year 5 sale of its remaining S common stock.
Example 5. (i) The facts are the same as in Example 4, except that instead of
selling Asset A for $20, S sells Asset A for $45, recognizing a $5 loss. In addition in Year
5, P sells its remaining S common stock for $100.
(ii) As in Example 4, P recognizes a loss of $6 on the sale of the 20 shares of the
common stock of S and that loss is suspended under paragraph (c)(1) of this section.
Pursuant to paragraph (c)(4) of this section, assuming the P group cannot establish that
only a portion of the loss recognized on the sale Asset A was reflected in the computation
of the duplicated loss with respect to the 20 shares of S common stock sold, the amount of
the suspended loss is reduced by the $5 loss recognized on the sale of Asset A to $1.
Under §1.1502-32, P's basis in its S stock is reduced by $4 from $104 to $100. In Year 5,
44
when P sells its remaining 8 common stock for $100, it recognizes $0 gain/loss. Pursuant
to paragraph (c)(5) of this section, the remaining $1 of the suspended loss is allowed on
the P group's return for Year 5.
Example 6. (i) The facts are the same as in Example 4, except that 8 does not sell
Asset A prior to the sale of its remaining 8 common stock.
(ii) As in Example 4, P recognizes a loss of $6 on the sale of the 20 shares of the
common stock of 8 and that loss is suspended under paragraph (c)(1) of this section. In
Year 5 when P sells its remaining 8 common stock for $80, it recognizes a loss of $24.
Pursuant to paragraph (c)(5) of this section, for the year that includes the date of the
deconsoHdation of 8, the suspended loss attributable to its Year 2 sale of 8 common stock
is allowed to the extent it has not been reduced pursuant to paragraph (c)(4) of this section.
Because 8 had no items of loss and deduction that are allocable to the period beginning
on the date of the Year 2 disposition of the 8 stock and ending on the day before the first
date on which 8 is not a member of the of the P group, the suspended loss is not reduced
pursuant to paragraph (c)(4) of this section. Accordingly, pursuant to paragraph (c)(5) of
this section, the entire $6 suspended loss is allowed on the P group's return for Year 5.
Example 7. (i) In Year 1, P forms 81 with a contribution of $200 in exchange for all
of the common stock of 81, which represents all of the outstanding stock of 81. In the
same year, 81 forms 82 with a contribution of $80 in exchange for 80 shares of the
common stock of 82, which at that time represents all of the outstanding stock of 82. 81
and S2 become members of the P group. In the same year, 82 purchases Asset A for
$80. In Year 2, S1 contributes Asset B with a basis of $50 and a value of $20 in exchange
for 20 shares of the common stock of 82 in a transfer to which section 351 applies. In Year
3,81 sells the 20 shares of the common stock of 82 that it acquired in Year 2 for $20. At
that time, the bases and values of Asset A and Asset B are unchanged. In Year 4,82 sells
Asset A for $50, recognizing a $30 loss. That $30 loss is used on the P group return to
offset income of P. In Year 5,81 sells its remaining 82 common stock for $56.
(ii) Under paragraph (b)( 1) of this section, because 81's basis in the 82 common
stock sold exceeds its value immediately prior to the sale and 82 is a member of the P
group immediately after the sale, 81 's basis in all of the stock of 82 ;s redetermined
pursuant to paragraph (b)(2) of this section. Of 81 's total basis of $130 in the 82 common
stock, a proportionate amount is allocated to each of the 100 shares of 82 common stock.
Accordingly, a total of $26 is allocated to the common stock of 82 that is sold and $104 is
allocated to the common stock of 82 that is retained. On 81 's sale of the 20 shares of the
common stock of 82 for $20,81 recognizes a loss of $6. Because the sale of the 20
shares of common stock of S2 does not result in the deconsolidation of 82, under
paragraph (c)( 1) of this section, that loss is suspended to the extent of the duplicated loss
with respect to the shares sold. The duplicated loss with respect to the shares sold is $6.
Therefore, the entire $6 loss is suspended. Pursuant to paragraph (c)(3) of this section
45
and §1.1502-32(b)(3)(iii)(C), the suspended loss is treated as a noncapital, nondeductible
expense incurred by S1 during the tax year that includes the date of the disposition of stock
to which paragraph (c)(1) of this section applies. Accordingly, P's basis in its S1 stock is
reduced from $200 to $194. Pursuantto paragraph (c)(4) of this section, the amount of the
suspended loss is reduced, but not below zero, by S2's items of deduction and loss that
are allocable to the period beginning on the date of the Year 3 disposition of the S2 stock
and ending on the day before the first d ate on which S2 is not a member of the P group,
and that are taken into account in determining consolidated taxable income (or loss) of the
P group for any taxable year that includes any date on or after the date of the Year 3
disposition and before the first date on which S2 is not a member of the P group, except to
the extent the P group can establish that all or a portion of such items was not included in
the calculation of the duplicated loss with respect to the S2 stock sold on the date of the
disposition. Assuming the P group can establish that the $30 loss generated by S2 on the
sale of Asset A was not included in the calculation of the duplicated loss with respect to the
S2 stock sold on the date of the disposition, such loss does not reduce the suspended
loss. In that case, for the taxable year that includes the day before the first date in Year 5
on which S is not a member of the P group, the P group is allowed to take into account the
$6 suspended loss. On the other hand, if the P group cannot establish that the $30 loss
generated by S2 on the sale of Asset A was not included in the calculation of the
duplicated loss with respect to the S2 stock sold on the date of the disposition, pursuant to
paragraph (c)(4) of this section, such loss reduces the suspended loss to zero, and no
amount of suspended loss is allowed under paragraph (c)(5) of this section. In either case,
under §1.1502-32, S1's basis in its remaining S2 stock is reduced by $24 from $80 to
$56. S1 recognizes $0 gain/loss on the sale of its remaining S2 stock.
Example 8. (i) In Year 1, P forms S1 with a contribution of Asset A with a basis of
$50 and a value of $20 in exchange for 100 shares of common stock of S 1 in a transfer to
which section 351 applies. Also in Year 1, P and S1 form S2. P contributes $80 to S2 in
exchange for 80 shares of common stock of S2. S 1 contributes Asset A to S2 in exchange
for 20 shares of common stock of S2 in a transfer to which section 351 applies. In Year 3,
in a transaction that is not part of a plan that includes the Year 1 contributions, P sells its
100 shares of S1 common stock for $20. At that time, S1 owns 20 shares of common
stock of S2 and S2 has $80 and Asset A, the basis and value of which have not changed.
In Year 4, S2 sells Asset A for $20, recognizing a $30 loss. That $30 loss is used on the P
group return to offset income of P. In Year 5, P sells its S2 common stock for $80.
(ii) Because the P group disposes of its entire equity interest in S1 within a single
taxable year, pursuant to paragraph (b)(4) of this section, paragraph (b) of this section
does not apply immediately prior to the disposition to cause a redetermination of P's basis
in its S1 common stock. Pursuant to paragraph (b)(5) of this section, however, because,
immediately prior to the disposition of the S 1 stock, P's basis in such stock exceeds its
value, S1 owns stock of S2 (another subsidiary member of the same group) and,
immediately prior to the disposition of the S1 stock, such S2 stock has a basis that
46
exceeds its value, and, immediately after the disposition of the S 1 stock, P owns stock of
82, the basis in each share of 82 that is owned by members of the P group must be
redetermined as provided in paragraph (b) of this section as if S1's S2 stock had been
disposed of or deconsolidated. Because S2 is a member of the group immediately after
the disposition of the 81 stock, the group member's basis in the 82 stock is redetermined
pursuant to paragraph (b )(2) of this section immediately prior to the sale of the S 1 stock.
Of the group members' total basis of $130 in the 82 stock, $26 is allocated to S 1's 20
shares of S2 common stock and $104 is allocated to p's 80 shares of S2 common stock.
Pursuant to paragraph (b)(6) of this section, the redetermination of 81's basis in the stock
of S2 results in an adjustment to p's basis in the stock of 81. In particular, p's basis in the
stock of 81 is decreased by $24 to $26. On P's sale of its 100 shares of S1 common
stock for $20, S1 recognizes a loss of $6. Because 81 is not a member of the P group
immediately after S 1's disposition of the 82 stock, paragraph (c)( 1) of this section does
not apply to suspend such loss. Pursuant to paragraph (c)(2) of this section, however,
because P recognizes a loss with respect to the disposition of the S1 stock and 81 owns
stock of 82 (which is a member of the P group immediately after the disposition), such loss
is suspended up to $6, an amount equal to the amount by which the duplicated loss with
respect to the stock of 81 sold is attributable to 82's adjusted basis in its assets, loss
carryforwards and deferred deductions. Pursuant to paragraph (c)(4) of this section, the
amount of the suspended loss is reduced, but not below zero, by S2's items of deduction
and loss that are allocable to the period beginning on the date of the Year 3 disposition of
the 81 stock and ending on the day before the first date on which 82 is not a member of
the P group and that are taken into account in determining the consolidated taxable income
(or loss) of the P group for any taxable year that includes any date on or after the date of the
Year 3 disposition and before the first date on which 82 is not a member of the P group,
except to the extent the P group can establish all or a portion of such items were not
included in the calculation of the duplicated loss with respect to the 81 stock sold or were
not attributable to 82's adjusted basis in its assets, loss carryforwards, or deferred
deductions. Because the loss recognized on the sale of Asset A was included in the
calculation of the duplicated loss with respect to the 81 stock on the date of the sale of the
S 1 stock and is absorbed by the P group, the suspended loss is reduced to zero pursuant
to paragraph (c)(4) of this section. Accordingly, no amount of suspended loss is allowed
under paragraph (c)(5) of this section. Under §1.1502-32, P's basis in its 82 stock is
reduced by $24 from $104 to $80. P recognizes $0 gain/loss on the sale of its 82
common stock.
Example 9. (i) In Year 1, P forms 8 with a contribution of $80 in exchange for 80
shares of common stock of S which at that time represents all of the outstanding stock of 8.
8 becomes a member of the P group. In Year 2, P contributes Asset A with a basis of $50
and a value of $20 in exchange for 20 shares of common stock of S in a transfer to which
section 351 applies. In Year 3, in a transaction that is not part of a plan that includes the
Year 1 and Year 2 contributions, P contributes the 20 shares of S common stock it
acquired in Year 2 to PS, a partnership, in exchange for a 20 percent capital and profits
47
interest in a transaction described in section 721. In Year 4, P sells its interest in PS for
$20, recognizing a $30 loss.
(ii) Under paragraph (b)(1) of this section, because P's basis in the S common
stock contributed to PS exceeds its value immediately prior to its deconsolidation and S is
a member of the P group immediately after the deconsolidation, P'S basis in all of the S
stock is redetermined pursuant to paragraph (b)(2) of this section. Of P's total basis of
$130 in the common stock of S, a proportionate amount is allocated to each share of S
common stock. Accordingly, $26 is allocated to the S common stock that is contributed to
PS and, under section 722, P'S basis in its interest in PS is $26. P recognizes a $6 loss
on its disposition of its interest in PS. Because P'S basis in its interest in PS was
determined by reference to the basis of S stock and at the time of the determination of P'S
basis in its interest in PS such S stock had a duplicated loss of $6, and, immediately after
the disposition, S is a member of the P group, such loss is suspended to the extent of such
duplicated loss. Principles similar to those of paragraphs (c)(3), (4), and (5) of this section
shall apply to such suspended loss.
(f) Basis reduction on worthlessness and certain dispositions not followed by
separate return years. If a member of a group disposes of subsidiary member stock and
on the following day the subsidiary is not a member of the group and does not have a
separate return year, then, immediately prior to the recognition of any gain or loss with
respect thereto, and immediately after all other adjustments under § 1.1502-32 with respect
thereto, the basis of upper-tier members in the stock of the subsidiary member shall be
reduced to the extent of the consolidated net operating losses and net capital losses that
would be treated as attributable to such subsidiary member (and lower-tier members)
under the principles of §1.1502-21 (b)(2)(iv), as though such losses were absorbed by the
group. In addition, if, taking into account the provisions of §1.1502-BO(c), stock of a
subsidiary member is treated as worthless under section 165, then, immediately prior to
the allowance of any loss or inclusion of an excess loss account with respect thereto, and
immediately after all other adjustments under § 1 .1502-32 with respect thereto, the basis of
48
upper-tier members in the stock of the worthless member shall be reduced to the extent of
the consolidated net operating losses and net capital losses that would be treated as
attributable to such subsidiary member (and lower-tier members) under the principles of
§ 1.1502-21 (b )(2)(iv), as though such losses were absorbed by the group.
(g) Anti-avoidance rules. (1) Disposition or deconsolidation of gain share in
avoidance. If a share of subsidiary member stock has a basis that does not exceed its
value and the share is deconsolidated with a view to avoiding application of the rules of
paragraph (b) of this section prior to the disposition of a share of subsidiary member stock
that has a basis that does exceed its value, the rules of paragraph (b) of this section shall
apply immediately prior to the deconsolidation.
(2) Transfers of loss property in avoidance. If a member of a consolidated group
contributes an asset with a basis that exceeds its value to a partnership in a transaction
described in section 721 or a corporation that is not a member of such group in a transfer
described in section 351, such partnership or corporation contributes such asset to a
subsidiary member in a transfer described in section 351, and such contributions are
undertaken with a view to avoiding the rules of paragraph (b) or (c) of this section,
adjustments must be made to carry out the purposes of this section.
(3) Anti-loss reimportation--(i) Application. This paragraph (g)(3) applies if-(A) A member of a group recognizes and is allowed a loss on the disposition of a
share of stock of a subsidiary member with respect to which there is a duplicated loss;
(8) As a result of that disposition or another disposition, the subsidiary member
ceases to be a member of such group; and
49
(C) Within the 1O-year period beginning on the date the subsidiary member ceases
to be a member of such group--
(1) The subsidiary member (or any successor) again becomes a member of such
group (or any successor group) when the subsidiary member (or any successor) owns any
asset that has a basis in excess of value at such time and that was owned by the
subsidiary member on the date of the disposition and that had a basis in excess of value
on such date;
(~) The subsidiary member (or any successor) again becomes a member of such
group (or any successor group) when the subsidiary member (or any successor) owns any
asset that has a basis in excess of value at such time and that has a basis that reflects,
directly or indirectly, in whole or in part, the basis of any asset that was owned by the
subsidiary member on the date of the disposition and that had a basis in excess of value
on such date;
(~)
In a transaction described in section 381 or section 351, any member of such
group (or any successor group) acquires any asset of the subsidiary member (or any
successor) that was owned by the subsidiary member on the date of the disposition and
that had a basis in excess of its value on such date, or any asset that has a basis that
reflects, directly or indirectly, in whole or in part, the basis of any asset that was owned by
the subsidiary member on the date of the disposition and that had a basis in excess of its
value on such date, and, immediately after the acquisition of such asset, such asset has a
basis in excess of its value;
(1:,) The subsidiary member (or any successor) again becomes a member of such
50
group (or any successor group) when the subsidiary member (or any successor) has any
losses or deferred deductions that were losses or deferred deductions of the subsidiary
member on the date of the disposition;
(§.) The subsidiary member (or any successor) again becomes a member of such
group (or any successor group) when the subsidiary member (or any successor) has any
losses or deferred deductions that are attributable to any asset that was owned by the
subsidiary member on the date of the disposition and that had a basis in excess of value
on such date;
(§) The subsidiary member (or any successor) again becomes a member of such
group (or any successor group) when the subsidiary member (or any successor) has any
losses or deferred deductions that are attributable to any asset that had a basis that
reflected, directly or indirectly, in whole or in part, the basis of any asset that was owned by
the subsidiary member on the date of the disposition and that had a basis in excess of
value on such date; or
(l) Any member of such group (or any successor group) succeeds to any losses or
deferred deductions of the subsidiary member (or any successor) that were losses or
deferred deductions of the subsidiary member on the date of the disposition, that are
attributable to any asset that was owned by the subsidiary member on the date of the
disposition and that had a basis in excess of value on such date, or that are attributable to
any asset that had a basis that reflected, directly or indirectly, in whole or in part, the basis
of any asset that was owned by the subsidiary member on the date of the disposition and
that had a basis in excess of value on such date.
51
(ii) Operating rules--(A) For purposes of paragraph (g)(3)(i)(C) of this section,
assets shall include stock and securities and the subsidiary member (or any successor)
shall be treated as having its allocable share of losses and deferred deductions of all
lower-tier subsidiary members and as owning its allocable share of each asset of all lowertier subsidiary members.
(8) For purposes of paragraphs (g)(3)(i)(C)(1), (~), and (§) of this section, unless the
group can establish otherwise, if the subsidiary member (or any successor) again
becomes a member of such group (or any successor group) at a time when the subsidiary
member (or any successor) has any losses or deferred deductions, such losses and
deferred deductions shall be treated as losses or deferred deductions that were losses or
deferred deductions of the subsidiary member on the date of the disposition, losses or
deferred deductions that are attributable to assets that were owned by the subsidiary
member on the date of the disposition and that had bases in excess of value on such date,
or losses or deferred deductions that are attributable to assets that had bases that
reflected, directly or indirectly, in whole or in part, the bases of assets that were owned by
the subsidiary member on the date of the disposition and that had bases in excess of value
on such date.
(C) For purposes of paragraph (g)(3)(i)(C)(Z) of this section, unless the group can
establish otherwise, if a member of such group (or any successor group) succeeds to any
losses or deferred deductions of the subsidiary member (or any successor), such losses
and deferred deductions shall be treated as losses or deferred deductions that were
losses or deferred deductions of the subsidiary member on the date of the disposition,
52
losses or deferred deductions that are attributable to assets that were owned by the
subsidiary member on the date of the disposition and that had bases in excess of value on
such date, or losses or deferred deductions that are attributable to assets that had bases
that reflected, directly or indirectly, in whole or in part, the bases of assets that were owned
by the subsidiary member on the date of the disposition and that had bases in excess of
value on such date.
(iii) Loss disallowance. If paragraph (g)(3) of this section applies, then, to the extent
that the aggregate amount of loss recognized by members of the group (and any
successor group) on dispositions of the subsidiary member stock was attributable to a
duplicated loss of such subsidiary member, and such loss was allowed, such group (or any
successor group) will be denied the use of-(A) Any loss recognized that is attributable to, directly or indirectly, an asset that was
owned by the subsidiary member on the date of the disposition and that had a basis in
excess of value on such date, to the extent of the lesser of the loss inherent in such asset
on the date of the disposition of the subsidiary member stock and the loss inherent in such
asset on the date of the event described in paragraph (g)(3)(i)(C) of this section that gives
rise to the application of this paragraph (g)(3); and
(B) Any loss recognized that is attributable to, directly or indirectly, an asset that has
a basis that reflects, directly or indirectly, in whole or in part, the basis of any asset that was
owned by the subsidiary on the date of the disposition and that had a basis in excess of its
value on such date, to the extent of the lesser of the loss inherent in the asset that was
owned by the subsidiary on the date of the disposition the basis of which is reflected,
53
directly or indirectly, in whole or in part, in the basis of such asset on the date of the
disposition and the loss inherent in such asset on the date of the event described in
paragraph (g)(3)(i)(C) of this section that gives rise to the application of this paragraph
(g)(3); and
(C) Any loss or deferred deduction described in paragraph (g)(3)(i)(C)(~J, (9.), (§),
or (Z) of this section.
(iv) Treatment of disallowed loss. For purposes of §1.1502-32(b)(3)(iii), any loss
the use of which is disallowed pursuant to paragraph (g)(3)(iii)(A) or (8) of this section is
treated as a noncapital, nondeductible expense incurred during the taxable year that
includes the date on which such loss is recognized. See §1.1502-32(b)(3)(iii)(O). In
addition, any loss or deferred deduction the use of which is disallowed pursuant to
paragraph (g)(3)(iii)(C) of this section and with respect to which no waiver described in
§1.1502-32(b)(4) is filed is treated as a noncapital, nondeductible expense incurred during
the taxable year that includes the day after the event described in paragraph (g)(3)(iii) of
this section that gives rise to the application of this paragraph (g}(3).
(4) Examples. The principles of this paragraph (g) are illustrated by the following
examples.
Example 1. (i) In Year 1, P forms S with a contribution of $80 in exchange for 80
shares of common stock of S which at that time represents all of the outstanding stock of S.
S becomes a member of the P group. In Year 2, P contributes Asset A with a basis of $50
and a value of $20 in exchange for 20 shares of preferred stock of S in a transfer to which
section 351 applies. In Year 3, S sells Asset A for $20, recognizing a loss of $30. Under
§1.1502-32, p's basis in its common stock of S is reduced from $80 to $50. With a view
to avoiding the application of the basis redetermination rule prior to a sale of the S
preferred stock, in Year 4, P contributes the 80 shares of S common stock it acquired in
Year 1 to PS, a partnership, in exchange for a 20 percent capital and profits interest in a
transaction described in section 721. Also in Year 4, P sells its preferred stock of S for
54
$20, recognizing a $30 loss.
(ii) Under paragraph (g)(1) of this section, the rules of paragraph (b) of this section
shall apply immediately prior to the deconsolidation of the S common stock.
Example 2. (i) In Year 1, P forms S with a contribution of $100 in exchange for 100
shares of common stock of S which at that time represents all of the outstanding stock of S.
S becomes a member of the P group. In Year 2, P contributes 20 shares of common
stock of S to PS, a partnership, in exchange for a 20 percent capital and profits interest in
a transaction described in section 721. In Year 3, P contributes Asset A with a basis of
$50 and a value of $20 to PS in exchange for an additional capital and profits interest in
PS in a transaction described in section 721. Also in Year 3, PS contributes Asset A to S
and P contributes an additional $80 to S in transfers to which section 351 applies. In Year
4, S sells Asset A for $20, recognizing a loss of $30. The P group uses that loss to offset
income of P. Also in Year 4, P sells its entire interest in PS for $40, recognizing a loss of
$30.
(ii) Pursuant to paragraph (g)(2) of this section, if P's contributions of S stock and
Asset A to PS were undertaken with a view to avoiding the basis redetermination or the
loss suspension rule, adjustments must be made such that the group does not obtain more
than one tax benefit from the $30 loss inherent in Asset A.
Example 3. (i) In Year 1, P forms S with a contribution of Asset A with a value of
$100 and a basis of $120, Asset B with a value of $50 and a basis of $70, Asset C with a
value of $90 and a basis of $100 in exchange for all of the common stock of Sand S
becomes a member of the P group. In Year 2, in a transaction that is not part of a plan that
includes the contribution, P sells the stock of S for $240, recognizing a loss of $50. At such
time, the bases and values of Assets A, S, and C have not changed since their contribution
to S. In Year 3, S sells Asset A, recognizing a $20 loss. In Year 3, S merges into M in a
reorganization described in section 368(a)(1 )(A). In Year 4, P purchases all of the stock of
M for $300. At that time, M has a $10 net operating loss. In addition, M owns Asset 0,
which was acquired in an exchange described in section 1031 in connection with the
surrender of Asset B. Asset C has a value of $80 and a basis of $100. Asset D has a
value of $60 and a basis of $70. In Year 5, P has operating income of $100 and M
recognizes $20 of loss on the sale of Asset C. In Year 6, P has operating income of $50
and M recognizes $50 of loss on the sale of Asset D.
(ii) p's $50 loss on the sale of S stock is entirely attributable to duplicated loss.
Therefore, pursuant to this paragraph (g)(3), assuming the P group cannot establish
otherwise, M's $10 net operating loss is treated as attributable to assets that were owned
by S on the date of the disposition and that had bases in excess of value on such date.
Without regard to any other limitations on the group's use of M's net operating loss, the P
group cannot use M's $10 net operating loss pursuant to paragraph (g)(3)(iii)(C) of this
55
section. Pursuant to paragraph (g)(3)(iv) of this section and § 1.1502-32(b )(3 )(iii)(D), such
loss is treated as a noncapital, nondeductible expense of M incurred during the taxable
year that includes the day after the reorganization. In addition, the P group is denied the
use of $10 of the loss recognized on the sale of Asset C. Finally, the P group is denied the
use of $10 of the loss recognized on the sale of Asset D. Pursuant to paragraph (g)(3)(iv)
of this section and § 1.1502-32(b)(3)(iii)(O), each such disallowed loss is treated as a
noncapital, nondeductible expense of M incurred during the taxable year that includes the
date of the disposition of the asset with respect to which such loss was recognized.
(h) Application of anti-abuse rules. The rules of this section do not preclude the
application of anti-abuse rules under other provisions of the Internal Revenue Code and
regulations thereunder, including to a transaction that is entered into to invoke the basis
redetermination rule to avoid the effect of any provision of the Internal Revenue Code or
regulations thereunder.
(i) [Reserved].
U) Effective date. This section, except for paragraph (g)(3) of this section, applies
with respect to dispositions and deconsolidations occurring on or after March 7, 2002, but
only if such transactions occur during a taxable year the original return for which is due
(without regard to extensions) after the date these regulations are published as temporary
or final regulations in the Federal Register. Paragraph (g)(3) of this section applies to
events described in paragraph (g)(3)(iii) of this section occurring on or after October 18,
2002, but only if such events occur during a taxable year the original return for which is due
(without regard to extensions) after the date these regulations are published as temporary
or final regulations in the Federal Register.
Is/ Robert E. Wenzel
Deputy Commissioner of Internal Revenue
PO-3558: Treasury Secretary O'Neill Remarks to the Berg Center for Ethics and Leaders...
Page 1 of 3
f-"'HLSS HOOM
FROM THE OFFICE OF PUBLIC AFFAIRS
October 21, 2002
PO-3558
United States Treasury Secretary Paul H. O'Neill
Remarks to the Berg Center for Ethics and Leadership at the
Katz Graduate School of Business, University of Pittsburgh
Pittsburgh, Pennsylvania
October 21,2002
Good morning. It's a pleasure to be here with Pittsburgh's business leaders and
future business leaders,
The past year has been full of shocks and surprises for those who study and
participate in American business, We've suffered through a bursting stock market
bubble, terrorist attacks on New York and Washington, and discoveries of corporate
fraud. People have lost Jobs, and a lot of retirement accounts are hurting.
Economic security is on all our minds
The economy was in recession when President Bush took office last year, and
we've been focused on recovery since inauguration day. First, the President's
historic tax relief program last summer reduced taxes for the average family of four
by $1,040 a year, and put cash in consumers pockets when we needed it most: last
August and September.
Then in March, he signed the Job Creation Act to stimulate investment in our
economy - a second major accomplishment. Combined, these two tax relief
measures saved one million jobs in the US economy this year - one million more
Americans got paychecks because President Bush cut taxes so that money that
would have gone to Washington stayed in the hands of employers and working
Americans. Without that tax relief, the recession would have been deeper and the
recovery slower.
Today, key economic fundamentals such as inflation, real wages, productivity,
interest rates, business profits, and the housing sector are all strong because of the
resilience and determination of the American people. I am confident that we will
return to 3 to 3.5% growth rates by the end of this year, and that growth will create
jobs and renew our prosperity.
The latest indicators look good. The auto and housing markets are strong.
Consumers are taking advantage of low interest rates to buy cars and homes. We
need to see business investment and job creation pick up, and I believe we will as
we soak up the excess capacity in the system today.
We've also taken strong steps to advance corporate accountability. It's been a wild
ride for some corporations of late. Companies that received every accolade for
innovative accounting and CEOs who graced countless magazine covers have
fallen further and faster than they once rose. Nothing is what it seemed - earnings
statements, revenue proJections, or the boundless, bump-less, New Economy.
As the pendulum of public opinion has swung from worShip, to doubt, to outrage
over corporate behavior, some have called into question the system of private
enterprise and economic freedom that has allowed our nation to achieve
prosperity. Are they right? Do we suffer from too much freedom? Did Y2K arrive a
year late, and the end of the world is now upon us?
I don't think so. I've been around long enough to have seen this cycle play out a
few times: the glorifications of a boom, and the recriminations of the subsequent
return to reality. We've improved the system, putting new standards in place to
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111612002
PO-3558: Treasury Secretary O'Neill Remarks to the Berg Center for Ethics and Leaders...
Page 2 of 3
holding corporations accountable for telling the truth to investors and employees, so
Americans can save for college tuitions and comfortable retirements with greater
confidence. And now that the August 14 deadline for certifying financial statements
is past, I am confident that the worst of the corporate scandals is behind us - call
them what you will, but I can't believe any CEO still standing would be stupid
enough to falsely certify their books. Not when jail time is tt1e certain
consequence. We'll recover from this wave of scandals as we have every other,
and we'll move on to new heights - and occasional dips.
We'll be better for it too, as legitimate technological advances, productivity gains,
and improved regulatory structures raise our overall standard of living, and set the
stage for further growth.
Any of you who have studied economic history know there is nothing truly
unprecedented in today's trials and hearings, or the images of shamed exexecutives led off in chains. Tl10se infatuated with greed eventually get their due, in
every generation. Our economic system has the flexibility to absorb these shocks,
adjust. and recover.
The question I prefer to address is a deeper question of leadership. For you
students here. I presume that most of you here today have ambitions of becoming
tomorrow's captains of industry, luminaries and visionaries. Maybe you want to
become great leaders, who unleash the potential in others, and set an example for
your peers. Or maybe you just want to make a lot of money. If it's the latter alone,
I don't have much to tell you. Best of luck. But if you believe your life and your
speCial talents have more of a purpose than dying with the most toys, I have a few
ideas to share
Specifically. I want to consider the importance of values, by which I mean honesty,
accountability, and respect for human dignity.
From 1977 to 2001, I worked in the private sector after working 15 years in the
federal government. During those private sector years, I worked in two large
multinational companies. From 1987 to 2001, I was the Chairman and CEO of
Alcoa.
When I joined Alcoa in 1987, we employed 55,000 people in 13 counties. When I
left at the end of the year 2000, 140,000 people worked for Alcoa at 350 locations in
36 countries. Our shareholders' value increased eight-fold during that time.
But even more than the growth and profit figures, one statistics stands out as a
measure of our values. During the time I served Alcoa, we reduced our workplace
injury rate by 90 percent. Let me explain the importance of this fact.
Over the course of my career in business and with the government, I have come to
believe that in an organization with the potential for greatness. the people in it can
say yes to three questions every day. These are the three questions. Are you
treated with dignity and respect by everyone? Do you have the training, tools and
support you need in order to make a contribution to the organization - a
contribution that gives meaning to your life? And are you recognized for the
contribution you make?
All organizations say that employees are their most important asset. You can look
it up in the annual report. At Alcoa, I set out to create tangible evidence that people
were the most important asset. I reasoned that if people were hurt that nothing else
mattered much and that therefore we should set a goal to eliminate workplace
accidents. Not to reduce them but to eliminate them. It was the best kind of goal no one could challenge its desirability.
A company with real leadership, honest and accountable, is one that helps all its
employees to work together toward a common goal, and to realize their potential to
a far greater extent than they could otherwise. Effective organizations unlock
human potential for all who strive within it. And that only happens when those
people at the top, the leaders, set the example.
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1116/2002
PO-3558: Treasury Secretary O'Neill Remarks to the Berg Center for Ethics and Leaders...
Page 3 of 3
Once you get used to taking the high road, putting values over expedience, and
treating people like people, the end and not the means, it gets easier and easier.
You will go beyond what seemed possible before. Workplace safety IS Just one
example - when you become effective at organizational problem solving, many of
the targets that seemed out of reach, whether that means profits, growth,
innovation, or new markets. become easy to grasp.
So what really happened with these corporate leaders now fallen? I think they
strayed from their values in the anything-goes 90s, and by the time they realized
how far they had strayed - after all, in their minds, everyone else was doing it, or
would if they could - it was too late. Like frogs in boiling water, they didn't feel the
heat until they were cooked. There was nothing special about these people, except
their hubris. They abandoned any pretense of moral direction to follow each dollar
down its path, and figured they'd return to the main road before anyone noticed
they were gone But after the bubble popped, there was nowhere to hide. That's
what I think.
If all you want IS money, it's not that difficult. But if you want to achieve something
greater, to become a true leader, you need to think about the people in your
organization. and put them first. The money will follow, if that's part of your mission.
The question for our new, post- Y2K era is not whether we can or should continue
the economic success we enjoyed in the 1990s. The question is how leaders of
business and government should incorporate the best aspects of the 90s - growth,
productivity, and innovation - into the emerging decade, while actively working to
make this new era a time of both personal responsibility and public integrity. How
can we reaffirm the link between value and values, and restore public confidence in
American enterprise?
In my view, the answer is simple: honest, accountable leadership. With leaderShip,
everything is possible: without it, nothing is possible.
In the economic domain, I believe the connection between creating value and
affirming values in American business has always been strong. Far away from the
headlines, most business leaders, from mom and pop shop-owners to corporate
chiefs, have always treated their shareholders and employees with honesty and
fairness. Today, however, doing your job with competence is not enough. Leaders
must stand up and set an example not just for their employees, but for the general
public as well. Honesty In business is the new patriotism. There is nothing better
business leaders can do for this country right now than restore faith in the system
that has made it great.
What we achieved at Alcoa, we did not achieve by managing quarterly earnings,
abusing tax rules or playing accounting tricks. We did it by focusing on our people,
making sure they had the tools and incentives to get their jobs done right, and done
safely. And wrlen people have those tools and incentives, they can do anything.
We focused on the fundamentals: creating value and producing results. The rest
followed. That's the truth in every company, and in every endeavor.
The real challenge is to achieve your ambitions while refusing to bend your values
to the demands of the day. Set an example for your organization, no matter your
place in it.
Thank you.
http://www.treas.gov/pr~s.slreleases/po3558.htm
1116/2002
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
RESULTS OF TREASURY'S AUCTION OF
13~WEEK
BILLS
91-Day Bill
October 24, 2002
January 23, 2003
912795LV1
Term:
Issue Date:
Maturity Date:
CUSIP Number:
1.665%
High Rate:
Office of Financing
202-691-3550
CONTACT:
FOR IMMEDIATE RE~EASE
October 21, 2002
Investment Rate 1/:
Pr ice:
1.696%
99 . 579
All noncompetitive and successful competitive bidders were awarded
securities at the high rate.
Tenders at the high discount rate were
allotted 98.57%.
All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Competitlve
Noncompetitive
FIMA (noncompetitive)
Accepted
Tendered
Tender Type
$
34,340,255
$
1,492,629
1,492,629
300,000
300,000
18,000,144 2/
SUBTOTA~
6,195,687
6,195,687
Federal Reserve
TOTAL
16,207,515
$
42,328,571
$
24,195,831
Median rate
1.650%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate.
Low rate
1.610%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratlo = 36,132,884 / 18,000,144
=
2.01
1/ Equivalent coupon-issue yield.
2/ Awards to TREASURY DIRECT = $1,178,232,000
http:/rwww.publicdebt.treas.gov
PO-3559
PUBLIC DEBT NEWS
Department of the Treasury· Bureau of the Public Debt • Washington, DC 20239
TREASURY SECURI?Y AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
Office of Financir.g
202-691-3550
CONTACT:
FOR IMMEDIATE RELEASE
October 21, 2002
RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
182 -Day Bill
October 24, 2002
April 24, 2003
912795MJ7
Term:
Issue Date:
Maturity Date:
CUSIP Number:
1.665%
High Rate:
Investment Rate 1/:
Price:
1.703%
99.158
All noncompetitive and successful competitive bidders were awarded
securities at the high rate.
Tenders at the high discount rate were
allotted 88.00%.
All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Accepted
Tendered
Tender Type
Competitive
Noncompetitive
FIMA (noncompetitive)
$
31,438,160
$
1,106,848
325,000
16,000,008 2/
32,870,008
SUBTOTAL
$
TOTAL
5,596,488
5,596,488
Federal Reserve
38,466,496
14,568,160
1,106,848
325,000
$
21,596,496
Median rate
1.655%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate.
Low rate
1.600%:
5% of the amount
of accepted competitive tenders was tendered at or beiow that rate.
Bid-to-Cover Ratio
~
32,870,008 / 16,000,008
=
2.05
L/ Equivalent coupon-issue yield.
2/ Awards to TREASURY DIRECT ~ $931,281,000
http:lhNWW.publicdebt.treas.gov
PO-3560
DEPARTMENT
OF
THE
TREASURY
NEWS
TREASURY
OFFICE OF PUBLIC AFFAIRS .1500 PENNSYLVANIA AVENUE, N.W .• WASHINCTON, D.C .• 20220. (2()2) 622-2960
EMBARGOED UNTIL 11:00 A.M.
october 21, 2002
Contact:
Office of Financing
202/691-3550
TREASURY OFFERS 4-WEEK BILLS
The Treasury will auction 4-week Treasury bills totaling $18,000 million to
refund an estimated $18,000 million of publicly held 4-week Treasury bills maturing
October 24, 2002.
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 $12,627 million of the Treasury bills maturing
on october 24, 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
PO-3561
For press releases, speeches, public schedules lind official biograplIies, call our 14-llOur fax line III (10]) 61:]-2040
HIGHLIGHTS OF TREASURY OFFERING
OF 4-WEEK BILLS TO BE ISSUED OCTOBER 24, 2002
October 21, 2002
Offering Amount . . . . . . . . . . . . . . . . . . . . . $lS,OOO million
Public Offering . . . . . . . . . . . . . . . . . . . . . $lS,OOO million
NLP Exclusion Amount . . . . . . . . . . . . . . . . $10,300 million
Description of Offering:
Term and type of security . . . . . . . . . . . 2S-day bill
CUSIP number . . . . . . . . . . . . . . . . . . . . . . . . 912795 LL 3
Auction date . . . . . . . . . . . . . . . . . . . . . . . . October 22, 2002
Issue date . . . . . . . . . . . . . . . . . . . . . . . . . . October 24, 20b2
Maturity date . . . . . . . . . . . . . . . . . . . . . . . November 21, 2002
Original issue date . . . . . . . . . . . . . . . . . May 23, 2002
Currently outstanding . . . . . . . . 000 .. 0.$40,947 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
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
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:
(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 time on auction day
Competitive tenders:
P~ior to 1:00 p.m. eastern daylight saving time on auction day
Pa\TTnent Terms:
By charge to a funds account at a Federal Reserve Bank
on issue date.
DEPARTMENT
OF
TilE
TRr~:ASURY
NEWS
TREASURY
EMBARGOED UNTIL 11:00 A.M.
october 21, 2002
CONTACT:
Office of Financing
202/691-3550
TREASURY OFFERS 2-YEAR NOTES
The Treasury will auction $27,000 million of 2-year notes to refund $21,159
million of publicly held notes maturing October 31, 2002, and to raise new cash of
approximately $5,841 million.
In addition to the public holdings, Federal Reserve Banks hold $5,435 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 $560 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 CPR Part 356, as amended).
Details about the new security are given in the attached offering highlights.
000
Attachment
n- ---~
f'v-j.,)Oi.
For press releases, speeches, public !JI.:/tetillies lIlId ojficial biographies. cull Ollr 2-1-flOlir fax !ill': at (2U2) 622-2U-I{)
HIGHLIGHTS OF TREASURY OFFERING TO THE PUBLIC OF
2-YEAR NOTES TO BE ISSUED OCTOBER 31, 2002
October 21, 2002
Offering Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $27,000 million
Public Offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $27,000 million
Description of Offering:
Term and type of securi ty . . . . . . . . . . . . . . . . . . . . .
Series . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CUSIP number . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Auction date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issue date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dated date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maturity date . . . . . . . . . . . . . . . . . . . . ". . . . . . . . . . . . .
Interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2 -year notes
T-2004
912828 AM 2
October 23, 2002
October 31, 2002
October 31, 2002
October 31, 2004
Determined based on the highest
accepted competitive bid
Yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Determined at auction
Interest payment dates . . . . . . . . . . . . . . . . . . . . . . . . April 30 and October 31
Minimum bid amount and multiples . . . . . . . . . . . . . . $1,000
Accrued interest payable by investor . . . . . . . . . . None
Premium or discount . . . . . . . . . . . . . . . . . . . . . . . . . . . Determined at auction
STRIPS Information:
Minimum amount required . . . . . . . . . . . . . . . . . . . . . . . $1,000
Corpus CUSIP number . . . . . . . . . . . . . . . . . . . . . . . . . . 912820 HJ 9
Due date(s) and CUSIP number(s)
for additional TINT (s) . . . . . . . . . . . . . . . . . . . . . . October 31, 2004 - - 912833 ZA 1
Submission of Bids:
Noncompetitive bids:
Accepted 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 award~d 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 daylight saving time on auction day.
Competitive tenders:
Prior to 1:00 p.m. eastern daylight saving 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.
PO-3563: Greg Jenner Appointed Deputy Assistant Secretary for Tax Policy
Page 1 of 1
f-'HLSS HOOM
FROM THE OFFICE OF PUBLIC AFFAIRS
October 21 , 2002
PO-3563
GREG JENNER APPOINTED
DEPUTY ASSISTANT SECRETARY FOR TAX POLICY
Treasury Assistant Secretary for Tax Policy Pam Olson today announced that Greg
Jenner has been appointed Deputy Assistant Secretary for Tax Policy. He has been
serving as Senior Advisor and Acting Deputy Assistant Secretary for Tax Policy
since July 8, 2002.
"Greg brings an extensive background in tax policy to the Treasury Department,"
stated Pam Olson. Assistant Secretary for Tax Policy. "His previous Treasury and
Senate Finance Committee experience combined with his tenure in private practice
make him an invaluable asset to the Office of Tax Policy."
Most recently. Jenner served as Partner in the Tax and Legislative Groups at
Venable. Baetjer, Howard & Civiletti LLP, where he focused on a wide variety of tax
issues. Prior to joining Venable, he was a partner with PricewaterhouseCoopers
LLP Washington National Tax Services office. He served from 1989 to 1992 as the
Special Assistant to the Assistant Secretary for Tax Policy Jenner served as Tax
Counsel for the U.S. Senate Committee on Finance from 1985 to 1989, playing a
key role in the Finance Committee's development of legislation that became the
Tax Reform Act of 1986.
Jenner was recently named a Fellow of the American College of Tax counsel. He is
a member of the District of Columbia Bar and the American Bar Association. He is a
member of the Council of the ABA's Section of Taxation, and chaired the
http://www.treas.g.ov!pressLreleases/po3563.htm
11/612002
DEPARTMENT
OF
THE
TRr~:ASURY
NEWS
OFFICE
or
Pt:(H,IC ,HFAIRS .151.0 Pl':r'>INSYLV,\NL\ ,\vfi.NlJE. N.W.-W,\SlUNGTON.
f),c.-
W!2i~.C!02!
612·1%1)
Contact: Public Affairs
(202) 622-2960
For Immediate Release
September 30, 2002
Strengthening the Global Economy: A RepOli on the Bush Administration Agenda
John B. Taylor
Under Secretary of Treasury for International Affairs
at the
AnnuallVleeting of the National Association for Business Economics
Capital Hilton Hotel, Washington, DC
September 30, 2002
It is a pleasure to be here tonight and to spend some time discussing economic policy
issues with fellow economists. I would like to use the opportunity to discuss the
international economic policy agenda of the Bush Administration-to give a brief
overview of key goals and to highlight some of the important accomplishments,
The Administration's international economic agenda was big when we came into office
last year, and it has grown, especially since the September 11 ten'orist attacks, But 1
believe that we have stuck to our overall strategy and have made good progress on
implementing the strategy, even as we have added such items as terrorist financing and
Afghanistan reconstruction to our agenda as I will tell you more about in a few minutes,
Two goals have guided our international economic agenda: (1) increasing economic
growth, as measured by improvements in productivity and higher per capita income, and
(2) improving economic stability, as measured by a reduction in the severity, length, and
frequency of economic downturns and crises,
PO-3564
These goals apply to the United Sta~es, to other industrialized nations, to emerging
market countries, and to the developing world as I will now try to make clear.
Economic Growth and Stability in the United States and Other Industrialized Countries
My economic research on models of the world economy taught me long ago that getting
one's own economic policy right is 90 percent of getting international economic policy
right. So I should start with a discussion with the U.S. economy.
It should be clear to any economist that fiscal and monetary policy in the United States
responded remarkably quickly and decisively to last year's recession. The President's tax
cut was well timed, and along with the automatic stabilizers, helped mitigate the
recession. The Federal Reserve moved early and aggressively to lower the federal funds
rate; low interest rates are still a factor supporting the economic recovery.
Tonight we are already completing one full year of economic recovery-a recovery that
is close to what we forecast last year and about what one should expect following a
shallow recession. It is very good news that productivity growth has held up so well
during the recession and that inflation remains low as the recovery proceeds. We expect
economic growth to return soon to the long run potential of between 3 and 3.5 percent.
With the right policies there is no reason why the current U.S. economic expansion
cannot be as long-lasting, or even longer-lasting, than the expansions of the 1990s and of
the 1980s, which were the first and second longest peacetime expansions in American
history. As the economy recovers, it is essential that we make the tax cuts permanent,
control the growth of government spending, reduce the deficit, continue to remove
barriers to job creation, and insist on corporate responsibility.
Economic growth for the other G-3 countries still leaves much to be desired, however.
Japan has not yet recovered from its long period of slow growth, deflation, and
instability. The higher rate of growth of the monetary base by the Bank of Japan since
last year should be maintained and accompanied by changes in the banking sector that
will allow the growth rate of bank credit and M2 + CD to increase as well. Germany is
also growing very slowly. I believe that supply side factors, which are holding down the
growth rate of productivity and of potential GDP, must be addressed if real GDP in
Germany is to grow more rapidly. Productivity growth should be higher, not lower, in
Germany and Japan than in the United States. Fortunately economic growth is better in
other industrialized countries, especially our close friends to the north in Canada. But as I
refer to the need for pro-growth policies in many countries let me stress the importance
we place on country ownership. It does little good for us to lecture or to try to force other
countries into the right economic policy.
Rather we feel it is important to use the many opportunities for bilateral and multilateral
discussions to show the benefits of pro-growth policies and to give and take constructive
advice.
Economic Growth and Stability in the Developing World
A major thrust of our overall intemational economic agenda has been the adoption of
policies designed to promote economic growth and stability in the developing countries.
Over one billion people live on less than a dollar a day. Why? I do not need to tell an
audience of business economists that the answer is productivity. Wealthy countries are
those where productivity is high. Poor countries are those where productivity is low. If
we want to reduce poverty in the world, we need to pursue policies that promote
productivity growth in the poorest countries.
Economic theory tells us that - holding other things constant - the poorest countries
where the productivity level is lowest should have the highest rates of productivity
growth. It is in these parts of the world where there should be the greatest return for
adding capital and applying ideas to raise productivity. You see this kind of "catch-up"
in productivity growth if you look at the United States since the 19th century or at the
original members of the OEeD since 1960. But if you look around the whole world, you
don't see this. The reasons for this lack of catch-up are related to bad policies that have
inhibited, distorted, and restricted the flow of capital and ideas. The Administration's
development strategy endeavors to deal with these impediments to catch-up.
The strategy has two parts: (1) it provides for substantial increases in development
assistance and (2) it aims this assistance at countries that have good policies and where
results can be measured.
How are we implementing this strategy? President Bush has already made several
significant proposals for increasing development assistance. In July of last year, the
President called upon the World Bank and the other multilateral development banks to
increase the portion of their assistance provided as outright grants rather than loans for
education, health, nutrition, water and sanitation in the poorest countries. One year later,
we succeeded in finalizing agreement on a substantial increase in grants within the
International Development Association (IDA) - the an11 of the World Bank that provides
assistance to the poorest countries. As a result of this agreement, nearly 100% of IDA
assistance will be provided on grant terms for education, health, nutrition, potable water
and sanitation in countries whose people live on less than a dollar a day. On top of this,
the Administration proposed increasing the U.S. contribution to IDA - as well as to the
African Development Fund - by 18 percent, reversing the downward trend of U.S.
contributions during the 1990s.
On top of all this, the President has proposed that the United States increase its core
assistance to developing countries by 50 percent over the next three years - resulting in a
$5 billion increase over current levels in FY 2006. The increased assistance will be put
into a new account called the Millelmium Challenge Account (MeA).
Now, where are the examples of perfOlmance and measurable results? One is that the
funds from the Me A will be provided only to countries that are - to use the President's
terms - ruling justly, investing in people, and encouraging economic freedom. In other
words, countries that have demonstrated the right leadership in pursuing sound policies
for economic growth will be eligible for the increased U.S. development assistance.
Another example is that the recent replenishment agreement for IDA provides for the
development of a system to measure and evaluate results in the areas of education, health,
and private sector development. For the first time, this enables donors to linl;;:: their
contributions to the World Bank to the achievement of measurable results of the ground.
The U.S. contribution is linked in this way. This helps direct scarce donor dollars toward
the activities and projects that are actually improving people's lives.
Economic Growth and Stability in the Emerging Markets
An important part of our growth strategy is to create the conditions for private capital
flows to emerging markets to increase from the low levels observed in recent years.
Averaging nearly $1 SO billion per year from 1992-1997, private capital flows fell off to
less than $50 billion per year in 1998-2000, as the frequency of financial crises has
discouraged investment and damaged expected profitability in affected economies. The
United States has a critical interest in seeing a restoration of strong private investment
flows at lower interest rates into emerging market countries, so that these countries can
invest in the productive base of their economies and raise the living standards of their
people.
The core principles of our emerging markets strategy are these. First, emphasis on crisis
prevention, which refers both to early detection of potential crises and to action to
address sources of vulnerability. Improved crisis prevention requires that the IMF focus
on issues that are central to its expertise - monetary, fiscal, exchange rate, financial
sector, and debt management policies. Second, efforts to reduce contagion. In recent
years, investors have become much more skilled at differentiating between countries and
markets based on fundamental economic assessments, with the result that contagion has
fallen dramatically. We have sought to promote a further evolution in this direction by
emphasizing that pohcy decisions will not be based on unfounded claims of contagion.
Third, limits on official finance, which is needed to increase predictability in the market.
The policy challenge is to move gradually in the direction of less reliance on large
official packages, so that investor expectations can adjust smoothly to new official sector
policies. Fourth, improved predictability in the process by which sovereign debt is
restructured. This does not mean lowering the cost of debt restructuring or increasing the
likelihood of default.
The introduction of new collective action clauses into debt contracts will facilitate a more
predictable and transparent resolution of sovereign defaults when they occur, while
further development of a statutory approach could provide an additional tool to address
this issue. rifth, avoidance of coercion of the private sector, since ad hoc interventions
that affect private contracts increase uncertainty in the markets and can accelerate crises.
The Administration has made significant progress in implementing and applying the key
elements of its emerging markets strategy. Months of discussion among the G-7 Finance
Ministers and Deputies culminated in agreement on an historic G- 7 Action Plan for
emerging h1arkets last April. It calls for improved IMF crisis prevention and
surveillance, limits on IMF lending, introduction of collective action clauses into
sovereign debt contracts, and further development of a sovereign debt restructuring
mechanism.
Progress has been made on all these fronts since April. The IMF has introduced a new
analytical framework for debt sustainability analysis, which should help strengthen early
identification of unsustainable situations and aid crisis prevention. With respect to limits
on official finance, the United States has indicated that it does not support an lMF quota
increase. As Secretary O'Neill has said, "Limiting official resources is a key tool for
increasing discipline over lending decisions."
In June, key representatives from the private sector stated their support for the
introduction of collective action clauses, and work over the summer months helped
further refine the specific form that these clauses would take. A meeting last week
between the representatives of the private sector and senior officials from the G-7 and
some key emerging markets reinforced the consensus on key aspects of this approach.
Finally, the International Monetary and Financial Committee welcomed the progress
made on collective action clauses and called for further work on how a statutory
sovereign debt restructuring mechanism might function before its next meeting in the
spnng.
Free Trade
President Bush is a strong advocate of free trade as an essential part of his
Administration's pro-growth international economic agenda. It is no secret that both the
Administration and the Congress have received criticism for celiain decisions in the
international trade area during the last year, but passage this summcr of trade promotion
authority deserves strong praise. For the first time since 1994 the President now has the
authority to negotiate substantial trade agreements, including the new round of
multilateral negotiations begun at Doha. Weare now planning to move quickly on free
trade agreements with Chile and Singapore.
The Central American countries and Morocco are next. Australia and South Africa are
interested in exploring free trade agreements. By 2005 we hope to have a free trade
agreement for the whole hemisphere-the Free Trade Area of the Americas will create
the largest free trade zone in history.
Since the agreement in Doha last November to launch multilateral trade negotiations, the
United States has proposed the elimination of all agricultural export subsidies, the
reduction 0 f average agricultural tari ffs from 62 to 15 percent, and a cap on domestic
subsidies at 5 percent of domestic agricultural production. We have similarly advanced a
proposal for the global liberalization of trade in services.
In addition recently passed legislation renews for five years the Generalized System of
Preferences that lowers tariffs on 3,500 products and expands the Andean Trade
Preference Act to benefit Colombia, Pem, Bolivia, and Ecuador. Finally, domestic
safeguards on steel imports have helped to solidify domestic support for further trade
liberalization, while the Administration has eased the impact on U.S. steel consuming
industries through exclusions covering 25% of steel imports.
Terrorist Financing
When I was sworn in as Under Secretary in June oflast year, I never dreamed I would be
spending a large amount 0 f time chasing down terrorist assets around the world. Yet,
since President Bush placed combating terrorist assets high on his list of actions to fight
terrorism, this is exactly what I have been doing. About one year ago we set up a "War
Room" in Treasury to coordinate the international aspects of this fight. To be effective
all countries have to participate in freezing the assets of terrorists. And we have seen an
extraordinary amount of cooperation.
Since September 11, over 160 nations and jurisdictions have joined the U.S. in issuing
orders freezing the funds 0 f terrorists and terrorist organizations. This effort has frozen
over $112 million in existing accounts and more than 2,400 people have been arrested on
terrorist charges. OUf information is that these actions have disrupted the pipe1ines of
terrorist finance and forced terrorists to use riskier and more unwieldy means for raising
and transferring funds. We are now continuing our work to stop flows of terrorist money
through alternative remittance systems known as "hawalas" and to protect charitable
organizations from abuse by terrorists.
Afghanistan
Our international economic agenda involves close interactions with many individual
countries, and it is, of course, impossible to summarize all these operations. But, but by
way of example, I would like to spend a few minutes on Afghanistan.
It is hard to believe that one year ago Afghanistan remained under the control of the
repressive regime of the Taliban. The U.S. military campaign and the establishment of a
new Afghan government have provided the hope of a better future for the Afghan people.
I saw this during a visit to Afghanistan last week. While the economic challenges to
building that better future are' enormous, the United States and other international donors
are committed to helping the Afghan people succeed. These efforts, combined with the
creativity and dctennination of the Afghan people, give me reason to be optimistic.
At the donor pledging conference held in Tokyo in January, donors from 60 countries and
15 international organizations pledged a total of over $4.5 billion in reconstruction
assistance. Of this amount, $900 million has been disbursed.
The challenge now is to make the transition from humanitarian rehefto reconstruction
assistance, and to ensure that this reconstruction assistance is delivering measurable,
visible results on the ground. The $180 million in road assistance recently announced by
the United States, Japan and Saudi Arabia is an example of the kinds of projects that are
needed to lay the foundation for economic recovery.
The Afghan government has made accountability and transparency among its top
priorities. We have an advisor to the Afghan Finance Ministry working in Kabul to help
put in place the financial systems needed to monitor aid donations and expenditures by
the Afghan Finance Ministry. The Afghan government is firmly committed to the private
sector. The cabinet ratified a new investment law that allows for full repatIiation of
profits. The Central Bank and the Finance Ministry have laid out plans for a new
currency that will be introduced on October 7. The new Afghani will unify three
different currencies now in circulation and increase confidence and monetary stability.
As the Afghan government does its part, the international community must follow
through on its role by providing the government with aid for infrastructure as well as
essential health and education services to facilitate economic recovery. Providing
tangible results is crucial in demonstrating to the Afghan people the international
community's commitment to Afghan reconstruction.
PO-3565: Treasury Secretary O'Neill Remarks to the University of Chicago Graduate Sc...
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I-'f-; l S S H C'O ,·..1
FROM THE OFFICE OF PUBLIC AFFAIRS
October 22, 2002
PO-3565
United States Treasury Secretary Paul H. O'Neill
Remarks to the University of Chicago Graduate School of Business
Chicago, Illinois October 22, 2002
Good morning. Its a pleasure to be here with Chicago's business leaders and
future business leaders
The P3st year has been full of shocks and surprises for those who study and
participate in American business. We've suffered through a bursting stock market
bubble, terrorist attacks on New York and Washington, and discoveries of corporate
fraud. People have lost jobs, and a lot of retirement accounts are hurting.
Economic security is on all our minds.
The economy was in recession when PreSident Bush took office last year, and
we've been focused on recovery since Inauguration day. First, the President's
historic tax relief program last summer reduced taxes for the average family of four
by $1,040 a year, and put cash in consumers pockets when we needed it most: last
August and September
Then in March, he signed the Job Creation Act to stimulate investment in our
economy - a second major accomplishment. Combined, these two tax relief
measures saved one million jobs in the US economy this year - one million more
Americans got paychecks because President Bush cut taxes so that money that
would have gone to Washington stayed in the hands of employers and working
Americans. Wltiiout that tax relief, the recession would have been deeper and the
recovery slower.
Today, key economic fundamentals such as inflation, real wages, productivity,
interest rates, business profits, and the housing sector are all strong because of the
resliience and determination of the American people. I am confident that we will
return to 3 to 3.5% growth rates by the end of this year, and that growth will create
jobs and renew our prosperity.
The latest indicators look good. The auto and housing markets are strong.
Consumers are taking advantage of low interest rates to buy cars and homes. We
need to see DUSlness investment and job creation pick up, and I believe we will as
we soak up the excess capacity in the system today.
We've also taken strong steps to advance corporate accountabillty. It's been a wild
ride for some corporations of late. Companies that received every accolade for
innovative accounting and CEOs who graced countless magazine covers have
fallen further and faster than they once rose. Nothing is what it seemed - earnings
statements, revenue projections, or the boundless, bump-less, New Economy.
As the pendulum of public opinion has swung from worship, to doubt, to outrage
over corporate behavior, some have called into question the system of private
enterprise and economic freedom that has allowed our nation to achieve
prosperity. Are they right? Do we suffer from too much freedom? Did Y2K arrive a
year late, and the end of the world is now upon us?
I don't think so. I've been around long enough to have seen this cycle play out a
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few times: the glorifications of a boom, and the recriminations of the subsequent
return to reality. We've improved the system, putting new standards in place to
holding corporations accountable for telling the truth to investors and employees, so
Americans can save for college tuitions and comfortable retirements with greater
confidence. And now that the August 14 deadline for certifying financial statements
is past, I am confident that the worst of the corporate scandals is behind us - call
them what you will, but I can't believe any CEO still standing would be stupid
enough to falsely certify their books. Not when jail time is the certain
consequence. We'll recover from this wave of scandals as we have every other,
and we'I' move on to new heights - and occasional dips.
We'll be better for it too, as legitimate technological advances, productivity gains,
and improved regulatory structures raise our overall standard of living, and set the
stage for further growth,
Any of you who have studied economic history know there is nothing truly
unprecedented in today's trials and hearings, or the images of shamed exexecutives led off in chains, Those infatuated with greed eventually get their due, III
every generation. Our economic system has the flexibility to absorb these shocks,
adjust. and recover.
The question I prefer to address is a deeper question of leadership. For you
students here, I presume that most of you here today have ambitions of becomlllg
tomorrow's captains of industry, luminaries and visionaries. Maybe you want to
become great leaders, who unleash the potential in others, and set an example for
your peers. Or maybe you just want to make a lot of money. If it's the latter alone,
I don't have much to tell you. Best of luck. But if you believe your life and your
special talents have more of a purpose than dylllg with the most toys, I have a few
ideas to share. Specifically, I want to consider the importance of values, by which I
mean honesty, accountability, and respect for human dignity.
From 1977 to 2001, I worked In the private sector after working 15 years in the
federal government. During those private sector years, I worked in two large
multinational companies. From 1987 to 2001, I was the Chairman and CEO of
Alcoa.
When I joined Alcoa in 1987, we employed 55,000 people in 13 counties When I
left at the end of the year 2000, 140,000 people worked for Alcoa at 350 locations in
36 countries. Our shareholders' value increased eight-fold during that time.
But even more than the growth and profit figures, one statistics stands out as a
measure of our values. During the time I served Alcoa, we reduced our workplace
injury rate by 90 percent. Let me explain the importance of this fact.
Over the course of my career in business and with the government, I have come to
believe that in an organization with the potential for greatness, the people in it can
say yes to three questions every day. These are the three questions. Are you
treated with dignity and respect by everyone? Do you have the training, tools and
support you need in order to make a contribution to the organization - a
contribution that gives meaning to your life? And are you recognized for the
contribution you make?
All organizations say that employees are their most important asset. You can look
it up in the annual report. At Alcoa, I set out to create tangible evidence that people
were the most important asset. I reasoned that if people were hurt that nothing else
mattered much and that therefore we should set a goal to eliminate workplace
accidents. Not to reduce them but to eliminate them. It was the best kind of goal no one could challenge its desirability.
A company with real leadership, honest and accountable, is one that helps all its
employees to work together toward a common goal, and to realize their potential to
a far greater extent than they could otherwise Effective organizations unlock
human potential for all who strive within it. And ttlat only happens when those
people at the top, the leaders, set the example.
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Once you get used to taking the high road, putting values over expedience, and
treating people like people, the end and not the means, it gets easier and easier
You Will go beyond what seemed possible before. Workplace safety is just one
example - when you become effective at organizational problem solving, many of
the targets that seemed out of reach, whether that means profits, growth,
innovation, or new markets, become easy to grasp.
So what really happened with these corporate leaders now fallen? I think they
strayed from their values in the anything-goes 90s, and by the time they realized
how far they had strayed - after all, in their minds, everyone else was doing it, or
would if t'C"Jey could - it was too late. Like frogs in boiling water, they didn't feel the
heat until they were cooked. There was nothing special about these people, except
their Ilubris They abandoned any pretense of moral direction to follow each dollar
down its path, and figured they'd return to the main road before anyone noticed
they were gone But after the bubble popped, there was nowhere to hide. That's
what I think.
If all you want is money, it's not that difficult. But if you want to achieve something
greater, to become a true leader, you need to think about the people in your
organization, and put them first. The money will follow, if that's part of your mission.
The question for our new, post-Y2K era is not whether we can or should continue
the economic success we enjoyed in the 1990s. The question is how leaders of
business and government should incorporate the best aspects of the 90s - growth,
productivity, and innovation - into the emerging decade, while actively working to
make thiS new era a time of both personal responsibility and public integrity. How
can we reaffirm the link between value and values, and restore public confidence in
American enterprise?
In my view, the answer is simple: honest, accountable leadership. With leadership,
everything is possible: without It, nothing is possible.
In the economic domain, I believe the connection between creating value and
affirming values in American business has always been strong. Far away from the
headlines, most business leaders, from mom and pop shop-owners to corporate
chiefs, have always treated their shareholders and employees with honesty and
fairness Today, however, doing your job with competence is not enough. Leaders
must stand up and set an example not just for their employees, but for the general
public as well. Honesty in business is the new patriotism. There IS nothing better
business leaders can do for this country right now than restore faith in the system
that has made it great.
What we achieved at Alcoa, we did not achieve by managing quarterly earnings,
abusing tax rules or playing accounting tricks. We did it by focusing on our people,
making sure they had the tools and incentives to get their jobs done right, and done
safely. And when people have those tools and incentives, they can do anything.
We focused on the fundamentals: creating value and producing results. The rest
followed. That's the truth in every company, and in every endeavor.
The real challenge is to achieve your ambitions while refusing to bend your values
to the demands of the day. Set an example for your organization, no matter your
place in it.
Thank you.
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PO-3566: Under Secretary John Taylor Speech at the Japan National Press Club, Tokyo, 1... Page I of 5
f-' f~ L S S H (; 0 M
FROM THE OFFICE OF PUBLIC AFFAIRS
October 22. 2002
PO-3566
Raising Economic Growth in Japan: The Dual Roles of Monetary and Banking
Policy. Under Secretary of the Treasury John B. Taylor at the Japan National
Press Club Tokyo, Japan October 22, 2002
It is a great pleasure for me to be here in Tokyo. I have many friends herecolleagues in the Japanese government, in academia, and in the private sector. I
am fortunate to have had a long association with the Bank of Japan, as a visiting
scholar in the 1980s and as an honorary foreign adviser in the 1990s-a job that I
regret I had to resign from when I joined President Bush's Administration last year.
I lived III Tokyo for a short time in 1987-in the Aoyama neighborhood. My wife
and I chose to send our two children to the local Japanese school-Sei Nan Sho
Gako. My family will never forget the friendly welcome we received. I learned a lot
about the warm hospitality of the Japanese people during that viSIt.
I also learned a lot about monetary policy and banking policy in Japan during that
visit in 1987. Economic growth was still going strong; it averaged about 4 percent
per year from 1974 to 1990, much stronger than the 1 percent since then. Inflation
was low, but positive. Recessions were few and far between. From the vantage
point of 1987, looking back over the 1970s and early 1980s, I attributed much of the
responsibility for that smooth economic performance to Japanese monetary policy,
and in particular to the steady growth of money, deposits, and credit at banks. This
steadiness kept economic growth strong, it kept inflation in check, it avoided the
boom bust cycle.
On my return to the United States I talked a lot about the success of Japanese
monetary poliCY with my colleagues and students, and with policy makers In
Washington. The good story, charts and ali, was added to my textbook. As you
know, learning from Japanese experiences is not confined to macroeconomics.
Secretary of the Treasury Paul O'Neill-another admirer of the Japanese peopletalks a lot about how American manufacturing firms learned from the tough
competition from Japan.
Today I would again like to talk about monetary policy and banking policy in Japan.
I came to Japan for the Financial Dialogue, part of the Economic Partnership for
Growth established last year by President Bush and Prime Minister Koizumi. The
Partnership IS a forum to candidly exchange views about economic policy in our two
countries. I feel particularly fortunate to be able to corne to Japan at this time, just
after the naming of a new cabinet and the opening of the Diet session
Last month when President Bush and Prime Minister Koizumi met in New York they
discussed the economy. The Prime Minister told the President that he was making
renewed efforts to restore economic growth in Japan by addressing problems In the
banking sector. We in the United States are greatly appreciative of these efforts.
We are encouraged by them. Higher economic growth in Japan would greatly
benefit the Japanese people. It would reduce unemployment It would provide
greater resources needed to deal with pressing problems such as maintaining
security and Improving the environment. A healthy vibrant Japanese economy is
critically important for the world at this time.
I see no reason why-with the right policies-Japan could not return to the "3
percent plus' economic growth of the 1970s and 1980s. Getting monetary policy
and banking policy right is essential to restoring economic growth in Japan, and that
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is why I want to concentrate on them today A theme of my talk is that neither
monetary policy nor banking policy can fully succeed without the other in achieving
the goals of strong economic growth
Monetary Policy
First, let me consider monetary policy. To restore strong economic growth in
Japan. deflation must be stopped. Deflation wreaks havoc with business balance
sheets; it discourages investment; it leads people to postpone spending. With the
consumer price index falling at about 1 percent per year, and the broader GOP
deflator falling at about 2 percent per year. deflation has become persistent in
Japan. Aside from an increase in 1997 when the consumption tax was raised.
prices have been falling in Japan for the past 7 years.
Deflation is damaging to the operation of the banking system. and this is one of the
key links between monetary policy and banking policy that I want to emphasize
today. With deflation, IIlterest rates become very low -- very close to zero. Nearzero interest rates reduce the need for banks to deal with problem loans. With very
low interest rates, borrowers can easily meet their interest payments to the banks,
and loans remain performing year after year even if the firm is struggling and needs
to adjust its business operations. Firms and banks would face these decisions at a
much earlier stage if interest rates were greater than zero. As a result of the delays,
failure. liquidation, and loss of jobs can be much greater than if the adjustment were
made earlier.
In March of last year, the Bank of Japan made an important change in monetary
policy. It announced that it would provide ample liquidity until the Inflation rate was
equal to or greater than zero; that is, until deflation is ended. In fact, in the year and
a half since that announcement, the Bank of Japan has significantly increased
money as measured by the monetary base-bank reserves plus currency. The
monetary base IS up 34 percent since the Bank of Japan began its new policy.
However, broader measures of liquidity that are more closely associated with
general price increases have not grown nearly so rapidly. The growth rate of broad
money. which includes individual and business deposits at banks. has hardly
increased at all. Moreover. bank lending has not increased. Even after adjusting
for loan write-offs, bank lending is down 2.6 percent over the past year and
consumer pnces are still falling.
Why has the increase in the growth rate of the monetary base not resulted in higher
growth of loans and deposits at banks or a rise in prices? One reason may be that
the increase in the monetary base has not been sustained for long enough. So, it is
important not to reverse the policy of the last year and a half, not let the growth of
the monetary base decline. This will eventually require increases in reserve
balances banks hold at the Bank of Japan -- a key component of the monetary
base. Can we say how much of an increase will be needed? It has been some
time since a major country has had to overcome persistent deflation. But
experience in other countries-for example, Sweden during the 1930's-suggests
that Imger increases in the monetary base, sustained over time, are necessary to
break deflation's grip.
There is another important reason why the increase in the monetary base has not
yet worked, and that is non-performing loans III the banklllg sector. To put it simply,
funds loaned by commercial banks and spent by the borrower create deposits at
other banks that can then be lent out to other borrowers. This is the way that an
Increase in the monetary base leads to an increase in the amount of broad money
and higher prices. But banks that are burdened by non-performing loans do not
seek out new, profitable loan opportunities, even when they have excess reserves.
Hence, a change in banking policy that effectively deals with the non-performing
10Gn problem will lead to more banks and more businesses seeking out new
opportunities and creating new loans. It would significantly Increase the ability of
the Bank of Japan to increase broad money, increase lending, and raise the price
level. And this brings me to banking policy.
Banking PoliCY
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The recent report by the Bank of Japan highlights the nature of the non-performing
loan problem. The report effectively argues that non-performing loans are not
simply the legacy of the old bubble days, but reflect continuing problems in the
banking sector. There is growing recognition that the problem must be quickly
addressed.
Problem loans exert a heavy toll on banks. Heavily burdened banks lose the ability
to focus on new lending and new business opportunities. A banking system that is
weighed down by bad loans can't fulfill its role of gauging risk and return and
channeling savings to the most profitable investments.
Banking problems also exert a heavy toll on the economy. Borrowers who are not
servicing non~performing loans are frequently the owners of assets-property,
buildings, capital equipment-that are not being used productively or profitably.
Unresolved loans freeze these assets In place and prevent them from moving to
more profitable activities. In industries where there is excess capacity, failure to
deal with non-performing loans locks in the excess capacity, worsening deflationary
pressures.
If this were simply a matter of reducing debt, the problem would be easy to solve.
Over-Iildebted borrowers are almost always over-extended businesses-having
expanded into activities with little economic return. Addressing the problems of the
borrowers usually requires substantial restructuring in order to identify a profitable
business core, and in some cases liquidation of the borrower is the only alternative.
For the ¥44 trillion in loans classified by banks as bankrupt or in danger of
bankruptcy, these harsh choices are clear. But a more corrosive problem arises
with loans that are performing, but owed by companies that are barely able to keep
afloat, have little prospect for long-term survival, and no possibility of ever paying
back the loan. As I discussed earlier, these firms may be able, in Japan's low
Interest rate environment. to scrape together their required interest payments.
How many of the roughly ¥1 00 tnllion in "need attention" loans fall into thiS category
and are likely to become non-performing loans is at the heart of the dispute about
the size of Japan's bad loan problem Dealing with these firms-before they spiral
into bankruptcy, and while there is still value and employment that can be
salvaged-is a critical issue.
One should not underestimate the costs of addressing the bad loan problem, and
recent discussions of providing a safety net for workers who are unemployed are
welcome. But the longer Japan takes to resolve the problem the greater these
costs will be. It is also important to emphasize the gains from removing the heavy
weight that the wounded banking system represents. Other countries that
addressed severe banking crises - Sweden, Finland, and others - saw initial rises
in unemployment but then the resumption of more rapid growth that restored
employment At the same time, failure to address the non-performing loan problem
has not spared Japan the pain of unemployment If Japan could restore the
average unemployment rate of the 1980's it would mean millions of additional,
permanent jobs.
There are already some visible successes. The turnaround at Nissan is a striking
example. The activity in the Ble camera store, formerly a branch of the Sogo
Department Store, is visible to anyone who walks through Yurakucho. Another
example is Victoria Sportswear. Jafco-Nomura's private equity group-organized
a leveraged buyout to rescue a profitable ski and sportswear operation from a
company that had failed under a load of over $1 billion in property-related deb!.
And a debtor rehabilitation plan for the apparel manufacturer, Liberal, was able to
create a profitable reborn company.
For economic growth to increase in any country it is necessary for productivity
growth to increase. Productivity is the amount of goods and services that workers
can produce in a fixed period of time such as a day or year. Productivity growth is
driven by the ability to move productive resources - labor and capital equipment from low productivity activities to high productivity activities. Here the Japanese
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economy is striking. It combines industries where productivity is the highest in the
world, With Industries that lag behind their counterparts in other countries. In no
other major country are the differences between leading and lagging sectors as
large, or the potential productivity gains so great from closing the gaps.
Consider food processing, an industry that employs 11 % of Japan's manufacturing
workforce. If one could raise productivity in Japanese food processing to the level
of France-a country with equal attention to quality, freshness, and presentationthen productivity in the Japanese economy as a whole would rise by 1.64%.
The Japanese govemment is developing measures to deal With the non-performing
loan problem. Financial Services Minister Takenaka has already described
principles that will guide their approach to banking poliCy. The first is assuring that
banks accurately classify their loans and that they hold sufficient provisions against
losses. The second IS assuring that banks are adequately capitalized. And the
third is improving the corporate govemance of banks, to assure t,",at they operate
both effectively and profitably
These goals make great sense to me. Accurate loan classification and prOVISioning
means that banks recognize likely losses immediately, eliminating the incentive to
postpone losses by postponing action. Adequately capitalized banks risk their
shareholders' money, and have strong incentives to operate prudently.
Much of the Current debate In Japan has centered on the use of public funds to
strengthen the banking system. Major banking crises almost always result in a cost
to the taxpayer. Japan has already used public funds to try to strengthen its
banking system, and more may be required. But I agree strongly with statements
made by the Japanese government that public funds are not a solution in
themselves. Effective banking reform can be aided by the use of public funds. But
using public funds without condition is a recipe for moral hazard and delay.
The Broader Context of Economic and Foreign Policy
I have concentrated on monetary policy and banking poliCY today because I feel
tlley are so essential right now. To be sure, there are other economic reform issues.
As In any other country, a sound fiscal POliCY, an efficient tax system with low
marginal tax rates, and free and open trade are also Important parts of an economic
plan. It is good to t18ar that tax reform, structural reform, and regulatory reform are
part of the long term agenda in Japan. The deregulation of Japan's cellular
telephone industry provides a vivid example of a good reform.
There is also an important foreign policy context for my remarks. One of the great
pleasures I have had on my job at the U.S. Treasury is interacting with my
Japanese colleagues in areas of foreign policy and, in particular, the area of
reducing poverty in the poor countries. In this regard, the enormous help from
Japan in the reconstruction of Afghanistan is important to recognize. Japan has
been a co-chair of the Afghanistan Reconstruction Steering Group along with the
United States, the European Union, and Saudi Arabia. The government of Japan
hosted a major donors' conference in Tokyo in January of this year, where
President Koizumi gave truly inspiring remarks. And Japan pledged $500 million to
that effort Japan is now working with the United States on a major road building
effort and has helped bring the Asian Development Bank into the reconstruction
effort. And I have recently been working closely with Ambassador Nishimura, the
coordinator for Afghan reconstruction in Japan, to find ways to better fund the
operating budget of the new government of Afghanistan. I have appreCiated how
fleXible Japan has been in finding the badly needed resources
But what is the relevance of reconstruction in Afghanistan for my talk today? It is
simply that large financial resources like thiS, which are so important for peace and
security around the world, require strong economies in donor countries. Funding to
provide these resources comes from tax revenues paid the Japanese people as
they produce and earn wages and profits. If economic growth continues to falter
then these tax revenues will not grow; in fact. tax revenues have fallen off as the
economy has grown slowly in recent years.
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So a strong Japanese economy is not simply a matter of economics. A healthy,
vibrant Japan is a Japan that can take its proper place on the world stage - a
critical factor in the security of this region and the world.
Concluding Remarks
In conclusion, let me briefly summarize. Monetary policy actions and banking policy
actions~together, not separately-are essential to end deflation and restore
sustained economic growth in Japan.
Regarding monetary policy, the Bank of Japan has taken steps since March of last
year to increase the monetary base; it is important to sustain this higher growth
rate, especially if past experiences with ending deflation are a guide.
Regarding banking policy, non-performing loans problems at the banks are still a
serious problem and must be quickly addressed. We welcome the emphasis that
the government of Japan has placed on this problem. These non-performing loans
limit the ability of monetary policy to end deflation. And, perhaps most important.
the non-performing loans are now preventing higher growth rates directly by
discouraging productivity enhancing changes In the Japanese economy.
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PO-3567: Treasury Department Issues USA PATRIOT Act Report to Congress
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PRESS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
To view or print the PDF content on this page, download the free Adobe® Acrobat® Reader®.
October 22, 2002
PO-3567
Treasury Department Issues USA PATRIOT Act Report to Congress
The Department of the Treasury has sent a report to Congress addressing issues
related to domestic financial institutions' ability to vertfy the idenlity of foreign
nationals who open an account.
Under section 326(b) of the USA PATRIOT Act, Congress directed that Treasury, in
consultation with the federal functional regulators and other relevant agencies.
study and provide recommendations for enhancing the ability of domestic financial
institutions to verify the identity of foreign nationals. After examining the
impediments to identifying foreign nationals and consulting with the federal
functional regulators. the Department of Justice, the Immigration and Naturalization
Service, and other agencies, Treasury recommends that, in the absence of reliable
and standardized identification for all foreign nationals, domestic financial
institutions should make reasonable efforts to verify identity using existing and
available identifying Information and documents, as directed by Treasury's pending
regulations to be issued under the PATRIOT Act (section 326(a)).
The report also considers the question of whether Treasury should require foreign
nationals to obtain a unique identification number, assigned only after their Identity
has been verified, prior to opening an account with a financial institution. First, the
report recognizes that currently there IS no system for assigning all foreign nationals
a unique identification number after their identity has been verified. Existing
identification numbers, such as the individual taxpayer identification number issued
by the Internal Revenue Service, are insufficient as a means for verifying the
identity of a foreign national. Second, the report states that the issue of creating a
governmental system to verify the identity of foreign nationals exceeds the scope of
this report, which is limited to identity verification for purposes of opening financial
accounts. Such a system must be addressed as part of an overall assessment of
our national immigration controls and national security interests. Accordingly. the
report recommends that the appropriate parties, including the Department of
Homeland Security. when established, study this issue further within that framework
to determine whether such a system is feasible and appropriate.
Finally, the report recommends that financial institutions not be
required to consult government databases to verify identity until such
databases are complete and made available to them, preferably in one
location. Presently, the government maintains no such
comprehensive database.
Related Documents:
•
USA Patriot Act Report
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A REPORT TO CONGRESS
IN ACCORDANCE WITH § 326(b)
OFTHE
UNITING AND STRENGTHENING AMERICA BY PROVIDING
APPROPRIATE TOOLS REQUIRED TO INTERCEPT AND OBSTRUCT
TERRORISM ACT OF 2001
(USA PATRIOT ACT)
SUBMITTED BY THE
DEPARTMENT OF THE TREASURY
October 21, 2002
A REPORT TO CONGRESS
IN ACCORDANCE WITH § 326(b) OF THE USA PATRIOT ACT
TABLE OF CONTENTS
Executive Sumo1ary ........................................................................................................................ I
I.
Background ......................................................................................................................... 4
II.
Issues Affecting Identity Verification of Foreign Nationals ............................................... 7
A. The practical difficulty of determining which customers are foreign nationals ................. 7
B. The inherent need to rely on foreign documents to verify identity ..................................... 8
C. The ready avai labil ity of counterfeit identi fication documents ........................................ 10
D. Limitations in the tracking systems of the Immigration and Naturalization Service ....... 11
E. Balancing of anti-money laundering concerns and efforts to move the unbanked
population, including foreign nationals, into the banking system .................................... 14
III.
The Proposed Customer Identification and Verification Rules ........................................ 15
IV.
Recommendations ............................................................................................................. 18
A. Identity requirements for foreign nationals ....................................................................... 18
B. Identification numbers for foreign nationals ..................................................................... 20
C. System for review of government information ................................................................. 24
V.
Conclusion ........................................................................................................................ 25
Executive Summary
Section 326 of the Uniting and Strengthening America by Providing Appropriate Tools
Required to Intercept and Obstruct Terrorism Act of 200 I ("USA PATRIOT Act") requires the
Secretary of the Treasury ("Treasury") to prescribe regulations establishing minimum standards
for the identification and verification of financial institution customers in connection with the
opening of an account. The regulations must include reasonable procedures for: (i) verifying the
identity of any person who opens an account; (ii) maintaining records ofthe information used to
verify a person's identity; and (iii) consulting government lists of known or suspected terrorists
or terrorist organizations.
In addition, section 326 of the Act requires Treasury, in consultation with the Federal
functional regulators and other appropriate Government agencies, to conduct a study and to issue
a report providing recommendations with respect to the application of customer identification
requirements when a customer is a foreign national. In formulating its recommendations,
Treasury has consulted with other appropriate agencies and reviewed current financial institution
practices regarding the verification of customer identities.
Treasury finds that there are significant impediments to domestic financial institutions'
ability to identify, much less verify the identity of, foreign nationals. The wide disparity in
identification documents, the pervasive problem of fraudulent identification documents, and the
fact that many foreign nationals who establish accounts in the United States are not physically
present here mean that it might not be practicable for Treasury to prescribe rigid rules of
acceptable or unacceptable forms of identification.
Moreover, there currently is no single, reliable system within the Federal government that
domestic financial institutions could access to verify the identity of foreign nationals for any of a
variety of purposes, including opening accounts. Were one to be created, the most effective
system could be patterned after the Social Security number ("SSN") system, assigning each
foreign national a unique identification number. Such a system could ensure that all foreign
nationals are included and that the responsible agency verify the identity of the foreign nationals
before providing them with a number. The system described would involve a substantial
resource commitment and would require extensive interagency coordination for a mission that is
generally outside of Treasury's purview.
In lieu of the creation of a new system, certain identification numbers and documents are
presently available to assist in the identification of foreign nationals. In some cases, foreign
nationals may receive an SSN or an individual taxpayer identification number ("ITIN") issued by
the Intemal Revenue Service. In addition, some states issue driver's licenses and identity cards
with identification numbers only after a relatively thorough review of authenticating documents. I
While Treasury believes that financial institutions should be encouraged to collect these numbers
in connection with account opening by these individuals, for a number of reasons, Treasury does
not recommend requiring that such numbers be provided in all cases. For example, with respect
to ITINs, those numbers should not be relied on for the purpose of verifying the identity of a
foreign national. The ITIN is designed to facilitate the collection oftax revenue, not to serve as
evidence that the Internal Revenue Service has verified the identity of the foreign national.
Additionally, while some states markedly improved their procedures for verifying identity when
issuing driver's licenses after September 200 I, other states do not have rigorous identification
procedures and the ability to counterfeit these documents still1imits their utility as an
identification instrument.
I
See. e.g., Http://www.dmv.state.va.us!webdoc!citizen/driverslidproof.asp (Virginia).
2
In light of these findings, and in response to the speci fic charge in section 326, Treasury
makes the following recommendations:
(i)
The most effective way in the current environment for financial institutions to verify
the identity of foreign nationals is to comply with the requirements of the regulations
promulgated pursuant to section 326 of the USA PATRIOT Act, which take into
account the unique issues associated with verifying the identity of a non-U.S. person.
(ii)
Currently, there is no system available for assigning all foreign nationals a unique
identification number that could be used by financial institutions to assist in identifying
and verifying the identity of customers. For such a system to be beneficial to financial
institutions, the government entity responsible for assigning such a number must itself
take adequate steps to verify the identity of foreign nationals. Moreover, the creation of
such a system must necessarily be addressed within the framework of an overall plan to
address immigration and national security issues. Accordingly, Treasury recommends
that appropriate parties study further whether a unique identification numbering or
other system for all foreign nationals is feasible and appropriate as part of an overall
plan to improve our system for tracking foreign nationals.
(iii) Until a new system can be created, to the extent a foreign national has an SSN, ITIN, or
other identification number, Treasury encourages financial institutions to obtain that
number as part of their account opening procedures as it may provide an audit trail for
law enforcement. However, Treasury does not recommend imposing a requirement that
all foreign nationals obtain such a number prior to opening an account at a U.S.
financial institution. The currently available systems for providing an SSN-like number
to foreign nationals do not provide significant benefits to financial institutions seeking
to verify the identity of foreign nationals. Moreover, not all foreign nationals obtain or
should obtain such numbers.
(iv) Other than current requirements to check lists or information disseminated by the
Federal government, in connection with the opening of an account, financial institutions
should not be required to consult with government agencies to verify the identity of
foreign nationals until the United States develops a database that is accessible by
financial institutions that contains the relevant information needed for verification.
Treasury further recommends that financial institutions file Suspicious Activities
Reports were there to be circumstances at account opening justifying such a filing.
3
I.
Background
On October 26, 200 I, President Bush signed into law the USA PATRIOT Act. 2 Title III
of the USA PATRIOT Act, the International Money Laundering Abatement and Anti-Terrorist
Financing Act of 200 I ("Money Laundering Abatement Act" or "Act"), both amends existing
anti-money laundering law and imposes new requirements, particularly in connection with
relations between U.S. financial institutions and foreign persons. A primary purpose of the USA
PATRIOT Act is to strengthen the provisions put into place by the Money Laundering Control
Act of 1986, especially with respect to transactions by non-United States nationals and foreign
.
.
.
1
mstItutIOns:
Section 326 of the Act addresses the identi fication and verification of all customers
seeking to open accounts at financial mstitutions. It requires Treasury to prescribe regulations
that will establish minimum standards for the identification and verification of financial
institution customers in connection with the opening of an account. The regulations must
include reasonable procedures for: (i) verifying the identity of any person who opens an account;
(ii) maintaining records of the information used to verify a person's identity; and (iii) consulting
government lists of known or suspected terrorists or terrorist organizations. On July 23, 2002,
Treasury, jointly with the banking regulators,4 issued a Notice of Proposed Rulemaking to
implement the requirements of section 326 of the Act with respect to banks, thrifts, and credit
2 Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct
Terrorism Act, Pub. L. No. 107-56 (2001).
3
Jd. at § 302(b )(3).
4 The Proposed Rule was issued jointly with the Office of the Comptrollcr of the Currency, the Board of
Governors of the Federal Reserve System, the Fcdcral Deposit Insurance Corporation, the Office of Thrift
Supervision, and the National Credit Union Administration.
4
s
unions.
That same day, Treasury also issued proposed rules to implement the requirements of
section 326 of the Act jointly with the Securities and Exchange Commission for broker-dealers
and mutual funds and with the Commodity Futures Trading Commission for futures commission
merchants and introducing brokers. 6 Treasury also separately issued a proposed rule applicable
state chartered, non-depository trust companies; privately insured credit unions; and private
banks.
7
The proposed rules are discussed in detail below in section Ill.
For purposes of verifying the identity of financial institution customers, the Act generally
does not distinguish between individuals who are U.S. citizens and those who are foreign
nationals.
8
With respect to foreign nationals, however, section 326(b) ofthe Act requires
Treasury, in consultation with the Federal functional regulators and other appropriate
Government agencies, to conduct a study and to issue a report containing recommendations for:
I) Determining the most timely and effective way to require foreign nationals to provide
domestic financial institutions and agencies with appropriate and accurate information,
comparable to that which is required of United States nationals, concerning the identity,
address, and other related information about such foreign nationals necessary to enable
such institutions and agencies to comply with the requirements of section 326;
2) Requiring foreign nationals to apply for and obtain, before opening an account with a
domestic financial institution, an identification number which would function similarly to
an SSN or tax identification number ("TIN"); and
3) Establishing a system for domestic financial institutions and agencies to review
information maintained by relevant Government agencies for purposes of verifying the
identities of foreign nationals seeking to open accounts at those institutions and agencies.
5
See 67 Fed. Reg. 48,290 (July 23, 2002).
6
See 67 Fed. Reg. 48,306 (July 23, 2002).
7
See 67 Fed. Reg. 48,299 (July 23,2002).
8 Through the process of drafting proposed regulations pursuant to section 326 of the Act, Treasury and the
Federal functional regulators considered how a customer's status as a U.S. citizen or foreign national would affect a
financial institution's ability to comply with identity verification requirements. The proposed regulations will
require financial institutions to have adequate procedures to verify the identity of both U.S. citizens and foreign
nationals.
5
This Report responds to the Act's requirement that Treasury submit to Congress its
recommendations for achieving the customer identification and veri fication objectives of section
326 of the Act with respect to foreign nationals. Treasury, in consultation with staff at the Office
of the Comptroller of the Currency, the Office of Thrift Supervision, the Board of Governors of
the Federal Reserve System, the Federal Deposit Insurance Corporation, the Securities and
Exchange Commission, the Commodity Futures Trading Commission, the National Credit Union
Administration, the Department of Justice, the Internal Revenue Service ("IRS"), and the
Immigration and Naturalization Service ("INS"), developed these regulations to help identify
issues and impediments inherent in creating a system for financial institutions to identify foreign
nationals.
9
Treasury asked these agencies to offer suggestions for developing an effective and
practical system and, where possible, has drawn upon their expertise in making the
recommendations contained in this report.
The Congressional mandate to Treasury is broad and cuts across numerous agency
boundaries. As a result, although Treasury has enlisted the assistance of other agencies, there are
inherent limitations on Treasury's ability to propose comprehensive solutions. In this report,
Treasury has sought to identify the significant impediments to the identification and verification
of the identity of foreign nationals by domestic financial institutions. However, Treasury is not
well positioned to articulate the view of other agencies, such as the INS, on issues concerning
immigration and accompanying recordkeeping provisions. Treasury considers this report to be
the first step in the process of both analyzing the issues surrounding identification and
verification of the identity of foreign nationals as well as proposing possible solutions.
<) This report, however, does not necessarily reflect the views of other agencies, which understandably may
have di fferent interests and policy goals than Treasury.
6
II.
Issues Affecting Identity Verification of Foreign Nationals
Treasury has identi fied a number of factors that complicate the development and
implementation of a single methodology or system for financial institutions to accurately verify
the identity of foreign nationals prior to permitting them to open accounts in the United States.
These factors are discussed below.
A.
The practical difficulty Of determining which customers are foreign nationals.
A significant issue in developing any system to verify the identity of foreign nationals is
the practical question of how a financial institution will be able to determine whether a customer
is a foreign national who will be subject to the enhanced identity verification system. This basic
question may not be easily answered in many situations.
The multi-cultural society of the United States and its widely available opportunities for
citizenship make it difficult for any financial institution to judge reliably the citizenship status of
a customer based on the customer's language, appearance, residence, or physical characteristics.
There is no consistent or effective means of distinguishing long-time residents, citizens, or new
arrivals. Even relying on direct questioning or a review of documentation presented will not
always resolve this issue. For example, a financial institution may be reluctant to ask a new
customer directly whether he or she is a foreign national because of the possibility that such
questions might be interpreted as potentially discriminatory on the basis of national origin in
violation of the Equal Credit Opportunity ActiO or the Fair Housing ACt.
11
As explained below,
however, the proposed rules implementing section 326 of the Act specifically authorize financial
10
15 U.s.c. § 1691 et seq.
II
42 U.S.c. §§ 3601 - 3619.
7
institutions to distinguish between U.S. citizens and non-U .S. citizens for the purpose of
detennining acceptable forms of identifying information. Thus, financial institutions may ask
whether a new customer is a U.S. citizen.
Even if a financial institution did inquire directly as to whether a new customer is a U.S.
citizen, there is no guarantee that the financial institution would receive a truthful answer. To the
contrary, to avoid enhanced scrutiny and further questions, a foreign national would have a
strong incentive to hide the fact that he or she is not a U.S. citizen. Finally, a foreign national
may well possess the same types of identity documents typically possessed by a U.S. citizen.
For example, foreign nationals may have valid driver's licenses and some may have Social
Security numbers. Alternatively, a foreign national might provide the financial institution with
one of the easily obtained fraudulent U.S. identification documents, as discussed more fully
below. Thus, a financial institution that asks a new customer for identity documents to
determine whether he or she is a foreign national may not be in a better position to make that
determination after examining such documents.
B.
The inherent need to rely Oil foreigll documents to verify identity.
A fundamental problem with the current system for verifying the identity of foreign
nationals is that no single, uniform identification document exists for all foreign nationals. First,
for those foreign nationals to whom status or identification documents are issued when they enter
the United States, there is no universal type of identification document. Generally, foreign
nationals enter the United States pursuant to a visa. There are two basic types of visas: nonimmigrant visas (temporary) and immigrant visas (permanent). Within the nonimmigrant
category of visas there are many types that can be granted for many different reasons. Second,
some classes of visitors, such as Canadians, Western Europeans, and people of certain other
8
nationalities, are exempt from a nonimmigrant visa requirement, and, therefore, no status or
identification document is required to be issued. Third, there are foreign nationals who do not
have any documentation from the INS because they have entered the United States illegally.
Accordingly, even setting aside the issue of illegal entry, there is not anyone system for
identifying foreign nationals that relies exclusively on INS documentation. As a result, absent
significant changes in the INS system, any identity verification system for foreign nationals will
have to rely, at least to some extent, on foreign documents.
Reliance on foreign documents to verify the identity of the foreign national itself presents
significant challenges. Identity documents vary widely from country to country, and they change
from time to time. Such documents are not standardized and even so-called "standard"
documents such as a passport or driver's license differ widely among countries. For example,
some passports do not contain a picture of the passport holder, thereby making it an inherently
less reliable form of identification. As a result of the many possible types of identification
documents, an identity verification system for foreign nationals would not be able to list
"acceptable" forms of identification that would cover all possible documents that exist in all
other countries.
Moreover, it is not reasonable for the government to expect financial institution
employees to be familiar with all of the different types of foreign documents that might be
presented to prove identity, especially when those documents are in a foreign language or even in
a foreign alphabet. The system, therefore, will be less reliable because it is unlikely that
financial institution employees will be able to detect non-official forms of identification. In
addition, like many U.S. documents, many of these foreign documents may be easy to
counterfeit. Financial institution staff that is already unfamiliar with these foreign documents
9
will have a difficult time detecting forged or false foreign documents. Consequently, there will
be certain intrinsic weaknesses in the identity verification system because of its inevitable
reliance on foreign documents.
C.
The ready availability of counterfeit identification documents.
The availability of fraudulent identification documents will affect the reliability of any
identification verification system for foreign nationals. Although false identification documents
have long been available, the Intemet has made obtaining such documents easy and inexpensive.
In connection with the problem of identity theft, officials have testified before Congressional
committees about the ease with which all types of identification documents, from Social Security
cards to driver's licenses to graduation certificates to birth certificates, may be falsified.
l2
Websites offer counterfeit identification documents based on legitimate documents for each of
the fifty states. 13
Likewise, counterfeit foreign identification documents are as easy to obtain as counterfeit
U.S. documents. As a result, foreign nationals who otherwise are not eligible to receive a
genuine document could easily obtain a counterfeit version, thereby allowing the foreign national
to disguise his or her status or to purport to be another person altogether. The ready availability
of these counterfeit documents will have an impact on the effectiveness of any identity
verification system for foreign nationals.
12 Statement of Michael Robinson, Special Agellt, Office of the Inspector General, Social Security
Administration, Protecting Privacy and Preventing the Misuse of Social Security Numbers, Hearing Before the
Subcommittee on Social Security of the House Committee on Ways and Means (May 22, 2001).
13
!d.
10
D.
Limitations ill the trackillg systems of the Immigration alld Naturalization
Service.
Currently, financial institutions cannot rely on infomlation maintained by anyone U.S.
government entity to verify the identity of foreign nationals. For example, the INS does not have
a single records system or database for all non-U.S. citizens who are in the United States at any
given time. Instead, records maintained are placed in a variety of databases that reflect the status
of the non-U.S. citizen. The following is a summary of the various records systems maintained
by the INS:
•
Central Index System ("CIS"): The CIS contains records on Lawful Pem1anent
Residents, refugees, asylees, and those persons granted a status associated with an
Alien Number, 14 as well as Naturalized Citizens.
•
Computer Linked Applications Information Management System ("CLAIMS"):
CLAIMS is an umbrella system that contains records on applications and petitions
filed for immigrant and nonimmigrant benefits at all INS Service Centers and those
field offices at which filings can be uploaded to CLAIMS. Applications made at field
offices where infom1ation cannot be uploaded are not entered into the CLAIMS
system.
•
Employment Authorization Document System ("EADS"): The EADS contains
records on all EADs issued to non-immigrants, asylees, refugees, parolees, and
persons in Temporary Protected Status ("TPS"). 15 This infom1ation is uploaded to
both CLAIMS3 (a later generation of CLAIMS) and CIS through which queries may
be made.
•
Non-Immigrant Information System ("NIlS"): The NIlS contains records on all
nonimmigrants who have been lawfully admitted into the U.S. and issued an
Arrival/Departure (,,1-94") record and number. However, many foreign nationals
admitted into the U.S. are immigrants rather than non-immigrants, and not all nonimmigrants have either (i) been lawfully admitted into the U.S., or (ii) been issued an
1-94 record and number.
14 An Alien Number is a number assigned by the INS to individuals who are placed in removal or
deportation status or have requested permanent benefits.
15 Persons may be placed in Temporary Protected Status, meaning that they may remain legally in the
United States, if the Attorney General finds that as a result of certain conditions occurring in their home countries,
including civil war or natural disasters, it is unsafe for them to return home.
II
•
Student/School System ("STSC"): The STSC contains records on foreign students
(including Canadians) in the United States and the schools authorized to enroll them.
•
Detained Alien Control System ('''DACS''): The DACS contains records on illegal
aliens under removal proceedings, including detention status. Information is
maintained on the alien's entry and departure status until the alien is either granted a
stay, deported, or granted relief.
•
Refugee, Asvlum & Parole System ("RAPS"): The RAPS contains records and
information associated with all individuals who have filed for and been
denied/approved asylum, refugee status, or humanitarian parole status with the INS,
and it interfaces with CIS, DACS, and the lookout systems of INS and the FBI. The
lookout systems are electronic databases containing information about individuals
who are on terrorist watchlists or have committed crimes that would affect their
immigration status.
•
Enforcement Case Tracking System (,,'ENFORCE"): The ENFORCE contains
records of arrest bookings and is a database from which criminal activities can be
analyzed to identify local and international criminal and fraudulent immigration
schemes.
Because the INS has jurisdiction over all non-citizens who enter and stay in the U.S.,
there are multiple INS systems that contain information about immigrants and nonimmigrants,
and financial institutions potentially would face a significant burden if required to review all INS
databases as part of a system to verify the identity of foreign nationals.
In addition to the issue of multiple INS databases, another complicating factor is access
to such systems. Outside access by either government or non-government entities for purposes
of verifying alien status and employment authorization is currently restricted to a limited number
of Federal and State entitlement agencies seeking to verify a foreign national's eligibility for
benefits and a select group of employers who are voluntarily participating in one of the
Employer Verification Pilot programs administered by the INS' SAVE program. The SAVE
program is the INS program that extracts data from the principal INS databases containing
12
records on immigrants and nonimmigrants, through which only entities participating in the
SAVE program pilot may confirm an individual's INS status.
The database accessed for all outside inquiries under the SA VE program is the Alien
Status Verification Index System ("ASVI"). ASVI is a database that extracts data from the CIS
and NIlS databases. Some information from the INS' CLAIMS database is passed through to the
ASVI via the information that is extracted from CIS. ASVI presently contains over 60 million
records. SAVE provides immigration status verification through the ASVI system both through
automated queries and manual searches by INS Immigration Status Verifiers ("ISV s"). If an
automated search indicates that there is no information about an individual or provides
information that does not appear to make sense, a manual search is required. Authorized outside
users and participants in SAVE can make a direct electronic query on an alien's immigration or
employment status for any alien whose record is within the ASVI database. For individuals not
contained within ASVI, the ISV must conduct individual searches of all INS systems that might
contain a record on the individual being queried about. If financial institutions were required to
review fNS databases in connection with the opening of an account by a foreign national,
significant technological upgrades, systems enhancements, and increased staffing resource
allocations would be required.
Finally, the most basic problem with reliance solely on INS databases to verify the
identity of foreign nationals is that many foreign nationals in the United States are not reflected
in INS records systems. The millions of undocumented aliens and aliens who entered the United
States without inspection ("EWI") are not in any records system of the INS, as well as tens of
thousands of Canadian and Mexican visitors who enter for brief visits. Only those
illegal/undocumented aliens and EWIs who have been arrested, detained, or put in removal
13
proceedings by INS are in the current databases. The vast majority of illegal/undocumented
aliens and EWIs, however, are in no INS database. Likewise, most temporary Canadian and
Mexican visitors who enter the United States by land border also may not be in a database. As a
result, it would not be uncommon to find that a foreign national opening an account at a financial
institution is not in any INS database or records system, even jfthe requirement to consult the
INS databases was instituted only in connection with account opening by foreign nationals who
are physically present in the United States.
E.
Balancing of anti-money laundering concerns alld efforts to move the
ullbanked population, including foreign nationals, into the banking system.
In its efforts to deter money laundering and disrupt terrorist financing, Treasury is
cognizant that additional regulatory burdens on financial institutions might have a negative
impact on other Treasury programs, such as the initiative to encourage "unbanked" families and
individuals, including non-U.S. persons living and working in the United States, to use
mainstream financial services. In addition to discouraging the unbanked from using mainstream
financial services, imposing burdensome requirements with respect to non-U.S. customers could
discourage financial institutions from serving these populations as such institutions already face
special challenges in complying with identification requirements because many of their
customers may not have standard forms of U.S. identification.
The issue of how to manage identification of non-U.S. persons is being considered
carefully by Treasury as part of an intra-governmental effort to develop identification standards
for the various types of financial services providers. Accordingly, the recommendations in this
report reflect Treasury's recognition of the importance of providing non-U .S. persons with
access to the financial system and its effort to find a balance between the need for strong
14
regulation that provides a real benefit to those working to achieve national security and law
enforcement objectives and the ability of financial institutions to serve non-U.S. persons living
and working in the United States.
While the impediments to identifying foreign nationals must be acknowledged as part of
analyzing the issue of customer identification, they reaffirm the importance of the need for
financial institutions to be vigilant in their account opening procedures. A purpose of the
regulations issued pursuant to section 326 of the Act is to create minimum standards for
customer identification applicable to all financial institutions opening accounts. Once final, the
regulations must be foIJowed, meaning that financial institutions must take steps, consistent with
their identification program, to form a reasonable belief as to the identity of their customers.
When a financial institution is unable to form a reasonable belief as to the identity of a customer,
appropriate action must be taken in accordance with the financial institution's procedures,
including refusing to open the account.
III.
The Proposed Customer Identification and Veritication Rules
On July 23, Treasury, jointly with the seven Federal functional regulators, issued
proposed rules that would require certain financial institutions to establish minimum procedures
for identifying and verifying the identity of customers who open financial accounts. While
separate rules were issued to reflect the di fferences in the operations of these financial
institutions, they are intended to have the same effect on alI the various industries. The
regulations were developed jointly, and are designed to ensure that minimum customcr
identification requirements be standardized across the various financial industries. The financial
15
institutions covered by the proposed rules include: banks, thrifts, credit unions, securities
brokers and dealers, mutual funds, futures commission merchants and introducing brokers, state
chartered, non-depository trust companies, privately insured credit unions, and private banks. 16
The proposed rules set forth the requirement that financial institutions would have to
establish a customer identification and verification program applicable to all new accounts that
are opened, regardless of whether the customer is a U.S. citizen or a foreign national. While the
proposed rules prescribe minimum standards for such programs, they leave sufficient flexibility
to pernlit financial institutions to tailor their program to fit their business operations. The
customer identification program would have to contain reasonable procedures for identifying any
person, including a business, that opens an account, setting forth the type of identifying
information that the financial institution will require. At a minimum, for U.S. persons the
proposed rules would require financial institutions to obtain the following information: name,
address, taxpayer identification number, and, for individuals, date of birth. While a taxpayer
identification number is not required for non-U .S. persons, a financial institution must describe
what type of information it will require of a non-U.S. person in place of a taxpayer identification
number. The regulations state that financial institutions may accept one or more of the
following: a U.S. taxpayer identification number; a passport number and country of issuance; an
alien identification card number; or the number and country of issuance of any other
government-issued document evidencing nationality or residence and bearing a photograph or
similar safeguard. 17 ror businesses opening accounts, the proposed rules would require financial
institutions to identify any individual with signatory authority over the account, or, in the case of
1(,
See supra notes 4, 5 & 6.
17 Thus, the proposed regulations do not discourage bank acceptance orthe "matricula consular" identity
card that is being issued by the Mexican govel11ment to immigrants.
16
futures commission merchants, anyone granted authority to effect transactions with respect to the
account.
Financial institutions would also have to establish procedures for verifying the identity of
customers who open an account. The proposed rules would require financial institutions to set
forth procedures describing how identification will be verified, when it will use documents for
this purpose, and when it will use other methods in lieu of or in addition to documents. While
the proposed rules are flexible concerning how verification will be accomplished, they set a
minimum standard and state that the financial institution is ultimately responsible for exercising
reasonable efforts to identify customers, and that the financial institution's procedures must
enable it to form a reasonable belief that it knows each customer's true identity.
Beyond that, the proposed rules would require financial institutions to maintain records
of information used to verify a customer's name, address, and other identifying information.
Customer names must be checked against lists of known or suspected terrorists and terrorist
organizations issued by the Federal government. Finally, financial institutions would have to
develop procedures for determining when an account should not be opened (or when an existing
account should be closed) as a result of an inability to verify the identity of a customer. Such
procedures must include determining when an account may be opened while a customer's
identity is being verified, and whether a suspicious activity report should be filed.
Treasury and the Federal functional regulators are now evaluating extensive comments
received on the proposed rules in order to draft final regulations. Commenters have raised many
significant issues that will be taken into account. Additionally, Treasury is drafting similar
proposed rules implementing section 326 for the remaining categories of financial institutions, as
defined by the Bank Secrecy Act, that maintain accounts.
17
IV.
Recommendations
The impediments to domestic financial institutions' ability to consistently and accurately
identify and verify the identity of foreign nationals are complex and varied. These difficulties
simply cannot be resolved by crafting a single set of procedures that financial institutions can
follow in all circumstances. A comprehensive solution will require additional research and study
that will give rise to an action plan involving both administrative and legislative measures. This
report, combined with the work of Treasury and the Federal functional regulators in drafting
regulations implementing section 326, is the first step in this process.
A.
Identity requirements for foreign nationals.
Congress has requested that Treasury make recommendations for determining the most
timely and effective way to require foreign nationals to provide domestic financial institutions
and agencies with appropriate and accurate identity, address, and other related information to
enable such institutions and agencies to comply with the requirements of section 326 of the Act.
The development of recommendations on this issue has been tied directly to the development of
regulations implementing section 326. Through the process of drafting the regulations, Treasury,
along with the Federal functional regulators, specifically considered the issues related to
verifying the identity of foreign nationals discussed above. In addition, Treasury consulted with
other appropriate government agencies, including the Department of State and INS, to delennine
what types of standard identity documents foreign nationals possess. Based upon the work
conducted thus far, Treasury offers the following recommendation:
Recommendation: Given the current absence of reliable or standardized identification
for foreign nationals, domestic financial institutions should make reasonable efforts to
identify foreign nationals using existing and available information and documents
18
pursuant to the domestic financial institution's customer identification procedures that
will comply with the regulations implementing section 326 of the Act and any other
existing identity verification requirements.
As discussed above, one of the problems with trying to identify foreign nationals is a lack
of standardization of identification documents. Different countries obviously use different fOnTIS
of identification, and the INS does not employ any single form of identification that could be
used across the board. The proposed regulations specifically address identification requirements
for foreign nationals within the framework of a domestic financial institution's overall customer
identification and verification procedures. These rules necessarily provide an appropriate
amount of flexibility for financial institutions in verifying the identity of foreign nationals. Prior
to opening an account with a financial institution, all customers, including foreign nationals,
must provide the financial institution with a name, address, and date of birth. In addition, where
a U.S. person would be required to provide a U.S. TIN, a non-U.S. person will need to provide a
TIN, passport number, or number from another government-issued document evidencing
nationality or residence and bearing a photograph or similar safeguard. But the collection of
such information alone is not sufficient to verify the identity of the customer under the proposed
rules. A financial institution must then verify that customer's identity using documentary or
non-documentary methods sufficient to enable the financial institution to form a reasonable
belief that it knows the customer's true identity.
Accordingly, until there is a reliable and standard form of identification that is issued to
all foreign nationals who enter the United States, Treasury recommends that, for purposes of
verifying the identity of foreign nationals, the approach in these proposed rules is not only the
most reasonable approach, but is also the most timely and effective method to verify the identity
of foreign nationals.
19
B.
Identijicatiollllumbersfor foreign Ilationals.
The search for effective ways to enable domestic financial institutions to identify foreign
nationals inevitably leads to consideration of whether a single identification number, similar to
an SSN, should be required before a foreign national may open an account. Congress has
requested recommendations for requiring foreign nationals to apply for and obtain, before
opening an account with a domestic financial institution, an identification number.
A predicate issue is whether an identification number would be helpful in establishing the
true identity of the customer, and thus whdher it would be helpful in deterring and investigating
money laundering and terrorist financing. The answer depends upon the role of the government
agency issuing the number. To the extent the identification number is not issued until the
government agency itself verifies the identity of the foreign national, such an identification
number would be quite beneficial. Furthermore, if it is linked to such things as the foreign
national's immigration status or restrictions on the length of time the foreign national may stay in
the United States, its value increases further. On the other hand, an identification number that is
available to foreign nationals with minimal identification and no link to the applicant's
immigration status would seem to hold less value from the perspective of law enforcement or of
the domestic financial institution. Finally, the creation of any such system, to be truly useful,
must allow domestic financial institutions to confirm the validity of such identification numbers
when a customer presents it prior to opening an account.
Thus, the creation of a new system for assigning and providing verification of unique
identification numbers for foreign nationals would enhance domestic financial institutions'
ability to identify and verify the identity of foreign nationals. But the creation and
implementation of such a system would require both the commitment of substantial resources for
20
the technological infrastructure and staffing as well as an overall restructuring of the system for
maintaining information on foreign nationals. Moreover, a system for identifying and tracking
foreign nationals should be constructed to further national security interests and the enforcement
of immigration laws, not just the needs of financial institutions to identify customers. Treasury
is not well positioned to itself devise such a system, and restructuring the INS system for
tracking foreign nationals and creating such an identification program, in addition to being
beyond the scope of this report, would require significantly more consideration and study.
Based on a request by the President, Congress is now considering legislation that would
create a new Department of Homeland Security, which will likely subsume some or all
components of the INS. These developments will impact directly the possible creation of a
comprehensive identification and tracking system, reinforcing the need to address this issue as
part of an overall assessment of our national immigration controls and national security interests.
To that end, Treasury recommends that the appropriate parties further study these issues within
the framework of the overall revision to the current system.
Recommendation: Treasury recommends that appropriate parties study further
whether a unique identification numbering system for all foreign nationals is
feasible and appropriate as part of an overall plan to improve our system for
tracking foreign nationals.
In the absence of a new system for identifying and tracking foreign nationals, Treasury
also considered whether it might be useful and appropriate to employ the currently available SSN
and ITIN systems and require foreign nationals to obtain such numbers prior to opening an
account at a U.S. financial institution. Based on a review of existing statutes, rules, and
practices and in light of their inherent limitations, Treasury makes the following
recommendati on:
21
Recommendation: To the extent a foreign national has an ITIN or an SSN, Treasury
encourages financial institutions to obtain that number as part of their account opening
procedures as it may provide an audit trail for law enforcement. However, Treasury does
not recommend imposing a requirement that all foreign nationals obtain such a number
prior to opening an account at a U.S. financial institution.
The Social Security Administration originally intended SSNs as a means to identify
workers' earnings and eligibility for Social Security benefits. Eventually, use of the SSN spread
to other government agencies (e.g., the Civil Service Commission adopted the SSN as an official
federal employee identifier, and the IRS decided to use the SSN as its TIN). Certain statutes also
require the use ofSSNs (e.g., Medicare), as does the private sector. SSNs generally are available
only to U.S. citizens and aliens authorized by the INS to work in the United States. SSNs also
can be issued to aliens, who are not otherwise eligible to receive an SSN, for nonwork purposes
if: (i) a federal statute or regulation requires the alien to provide his or her SSN to get the
particular benefit or service; or (ii) a state or local law requires the alien to provide his or her
SSN to get general assistance benefits to which the alien has established entitlement. Thus, the
SSN is available to foreign nationals, but only in limited circumstances.
In 1996, the IRS introduced the IT IN , a tax processing number for certain nonresident
and resident aliens, their spouses, and dependents who cannot obtain an SSN. While the ITIN is
a nine-digit number fonnatted like an SSN, its purpose is fundamentally different. ITINs are
used only for federal income tax purposes and do not entitle the recipient to Social Security
benefits or the earned income tax credit. They do not create an inference regarding the
individual's immigration status and they do not give the individual the right to work in the
United States. Indeed, ITINs wcre created solely for the purpose of facilitating voluntary
compliance with the internal revenue laws. As a result, the IRS does not employ rigorous
identification verification procedures. For example, a foreign national can apply for an [TIN by
22
mail or through an authorized ITIN Acceptance Agent, which is a person or entity authorized by
the IRS to take applications. Thus, the ITIN does not have significant value as a tool for
verifying the identity of an account holder. The IRS has issued over 5 million ITINs and it now
receives over 1 million applications for ITINs each year. Yet despite the number of ITINs
issued, in the 2000 tax year, only 1.5 million ITINs were reflected in filed returns.
Treasury recognizes the utility of financial institutions obtaining such identification
numbers at the time of account opening if the foreign national has one. Even ifsuch numbers
were fraudulently obtained or stolen, they may provide law enforcement with important clues in
the event of an investigation. For example, they could be used to link various transactions
together. With respect to ITINs in particular, however, because they are issued without rigorous
identification verification, financial institutions must avoid relying on the ITIN to verify the
identity of the foreign national.
Finally, at present, requiring foreign nationals to obtain an SSN-Iike number prior to
opening an account at a financial institution could likely be achieved only by using the existing
SSN and ITIN systems. Given that most foreign nationals would not be eligible for an SSN, the
majority of foreign nationals would have to obtain an ITIN. But because the ITIN serves an
entirely different purpose, requiring a foreign national to provide an ITIN prior to opening an
account at a U.S. financial institution would not prove a useful means for actually verifying the
foreign national's identity.
In addition, given its limited utility with respect to identity verification, requiring all
foreign nationals to obtain a tax collection number might unnecessarily discourage foreign
nationals from using the U.S. financial system. Many foreign nationals who establish accounts
in the United States never physically visit this country, but rather place funds here or use U.S.
23
financial services because of the reliability, integrity, and quality of the U.S. financial system.
Requiring these individuals to obtain an ITIN, the primary purpose of which is to facilitate the
payment of U.S. taxes, would not serve the goal of providing financial institutions with a better
means for verifying the identity of these customers. Using this tax number as a required proxy
for a foreign national identification number may discourage legitimate business without
providing a corresponding benefit to financial institutions.
C.
System for review of government illformation.
The absence of available governmental databases containing complete information about
foreign nationals in the United States means that domestic financial institutions cannot
reasonably be expected to accurately verify the identity of foreign nationals in this manner.
Therefore, until such databases are created and are made available, the obligation of a financial
institution in this regard should be limited to the following:
•
Checking the name against information provided to the financial institution via
information sharing provisions of section 3l4(a) of the USA P ATR lOT Act in
18
accordance with the terms and conditions of the final rule.
•
Checking the name against any other list or control list provided to the financial
institution by its regulator or Federal law enforcement.
•
If a customer is matched against a list, taking all appropriate measures in response,
such as alerting law enforcement immediately or, where appropriate, filing a SAR.
In addition, financial institutions are reminded that they are prohibited from engaging in
transactions with, or providing financial services to, individuals or entities identified on
Treasury's Office of Foreign Assets Control's (OFAC) Specially Designated Nationals List
(available on the OFAC website).
18
67 Fed. Reg. 60579 (Sept. 26,2002).
24
In practice, a financial institution will be required by section 326 to develop a customer
identification and verification program. The program must involve the financial institution
checking whether the customer is on the OF AC list of individuals and entities with whom a
financial institution may be restricted from doing business or on any other government list of
known or suspected terrorists. Based on these facts, Treasury offers the following
recommendation:
Recommendation: Other than their obligation to review the lists and information
described above, at present, domestic financial institutions should not be required to
review information maintained by relevant government agencies to verify the identity of
foreign nationals.
Any system requiring further verification of the identity of foreign nationals by
consulting with appropriate government agencies would be inappropriate given the current
situation. The INS is not currently in a position to provide financial institutions access to a
single database containing the relevant information needed to verify the identity of foreign
nationals in the United States. Accordingly, Treasury, at present, would not recommend
requiring financial institutions to consult with INS to verify the identity of foreign nationals
seeking to open accounts until there is a single database that is accessible by financial institutions
and contains the relevant information needed to verify the identity of foreign nationals.
V.
Conclusion
Domestic financial institutions face complex challenges in identifying and verifying the
identity of foreign nationals to guard against money laundering and terrorist financing. Through
additional study and research. options for improving existing capabilities within the Federal
government can be formulated and, where appropriate, implemented. In the meantime, financial
25
institutions should use existing resources and develop customer identification and verification
procedures consistent with Treasury regulations when they are published in final form.
26
BLSS HOOM
FROM THE OFFICE OF PUBLIC AFFAIRS
October 23, 2002
PO-3568
U.S. International Reserve Position
The Treasury Department today released U.S. reserve assets data for the latest week. As indicated in this table. U.S. reserve assets
totaled $74.840 million as of the end of that week. compared to $75.481 million as of the end of the prior week.
I. Official U.S. Reserve Assets (in US millio/ls)
October 1J, 2002
October 18, 2002
75,481
74,840
TOT4L
I. Foreign Currency Reser\'cs
I
a. Securities
Euro
Yen
TOTAL
Euro
Yen
TOTAL
6,327
12,61\ 1
19,OOg
6.22)
12,532
18,755
o
()
O/\tizicir. isslicr headqllartered ill the US.
b. Total deposits with:
10,452
h.i. Other cel1mi/ /Jallks alld BIS
2,546
12,997
)CU03
2.516
12,819
b.ii. BUllks hcadquartered in t/ie US.
()
0
b.ii. Of which, banks located abroad
0
0
0
0
0
0
20}50
20,615
11.684
11,608
11,042
11.042
0
0
b.iii. Banks /w{[dqu(/J'{c/'ed outside
/hl..'
U.S
b.iii. Of which, banks located in the U.S.
2. IMF Reserve Position
2
3. Special Drawing Rights (SDRs)
4. Gold Stock
1
3
5. Other Reserve Assets
II. Predetermined Short-Term Drains on Foreign Currency Assets
October 11, 2002
Euro
1. Foreign currency loans and securities
Yen
October 18, 2002
TOTAL
Euro
o
2. Aggregate short and long positions in forvvards and futures in foreign currencies vis-a-vis the U.S dollar
Yen
TOTAL
o
o
o
o
2.a. Short positions
2.b. Long positions
3. Other
o
o
o
III. Contingent Short-Term Net Drains on Foreign Currency Assets
October 11, 2002
Euro
1. Contingent liabilities in foreign currency
Yen
October 18, 2002
TOTAL
Euro
Yen
TOTAL
0
0
o
o
o
o
o
o
l.a. Collateral guarantees on debt due within 1
year
l.b. Other contingent liabilities
2. Foreign cun-ency securities with embedded
options
3. Undrawn, unconditional credit lines
3.a. With other central banks
3.b. With banks and otherjinancia/ institutions
Headquartered in the
u.s.
3.c. With banks and otherfinancial institutions
Headquartered outside the
u.s.
4. Aggregate short and long positions of
options in foreign
Cun-encies vis-a-vis the U.S. dollar
4.a. Short positions
4.a.l. Bought puts
4.a.2. Written calls
4.b. Long positions
4.h.1. Bought calls
4.h.2. Written puts
Notes:
1/ Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account
(SOMA), valued at current market exchange rates. Foreign currency holdings listed as securities reflect marked-to-market values, and
deposits reflect carrying values. Foreign Currency Reserves for the latest week may be subject to revision. Foreign Currency
Reserves for the pnor week are final
21 The items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF and are
valued in dollar terms at the official SOR/dollar exchange rate for the reporting date. The entries for the latest week reflect any
necessary adjustments, including revaluation, by the U.S Treasury to the prior week's IMF cata. IMF data for the latest week may be
subject to revision. IMF data for the prior week are final.
31 Gold stock
IS
valued monthly at $42.2222 per fine troy ounce.
PO-3569: Statement by Secretary Paul O'Neill on Designation of Jemaah Islamiya (JI)
Page 1 of 1
f--'HLSS HL:'OM
FROM THE OFFICE OF PUBLIC AFFAIRS
October 23, 2002
PO-3569
Statement by Secretary Paul O'Neill on Designation of Jemaah Islamiya (JI)
The Joint action taken today by the United States, Australia, IndoneSia, the
Philippines, Singapore and other Southeast ASian and European allies
demonstrates an international commitment to combating terrorism and to disrupting
terrorist financing in Southeast Asia. We are joining these countries today In
notifying the United Nations that JI should be added to the consolidated list of
terrorist-related entities and individuals pursuant to UN Security Council
Resolutions 1267 and 1390. Tile UN listing requires all Member States to block the
assets of this organization and sends a signal to JI and other like-millded terrorists
and supporters that the international community will not tolerate the support of
terrorist groups in Southeast ASia and other regions of the world There will be no
safe haven anywhere in the world for money that kills.
Because the majority of the funds that fuel terror are not found in the
United States, we have focused our attention on building a worldwide wall that cuts
off access to funds for terror organizations, In this case, the U.s, government has
worked closely with our allies to address the terrorist threat in the region. We met
recently with APEC Finance Ministers In Los Cabos, Mexico to diSCUSS steps that
should be taken to address terrorist financing in the region. This action is a critical
first step in a long-term process to fulfill the APEC Finance Ministers' Action Plan on
Terrorist Financing, which resulted from that meeting.
Today's Joint action is a clear indication of the regional and worldwide
commitment to disrupt terrorism by attacking the financial underpinnings of groups
like JI. As we and our partners around the world isolate JI from its funding sources,
we Intend to deprive them of the resources they need to carry out their acts of
terror. We Will be relentless In tile pursuit to bankrupt terrorist groups that threaten
our safety and the well being of our allies abroad
http://www.trett3.gov!presslrele3ses/p03569.htm
1116/2002
PO-3570: Under Secretary John B. Taylor - Institute for Global Economics, Seoul, Korea
Page 1 of 4
f-'HLSS HOOM
FROM THE OFFICE OF PUBLIC AFFAIRS
October 23. 2002
PO-3570
The United States and the World Economy: Current Situation and Prospects
It is a pleasure to be here this morning to discuss tlie United States and
the world economy. I am particularly pleased to have the opportunity to speak
about these issues in Korea - a country that exemplifies how good economic
policies and participation in the global economy can unleash human potential and
generate prosperity for all. Other countries have much to learn from Korea's
example. past and present.
For any discussion of the global economy I think it is useful to begin with a
statement of goals. Goals help us assess where we are and where we want to go.
The Bush Administration's mternational economic policy has been guided by two
goals: first, increasing economic growth, as measured by improvements in
productivity and higher per capita income; and second, improving economic
stability, as measured by a reduction in the severity, length, and frequency of
economic downturns and crises These goals apply to all countries - the United
States, other industrialized countries, emerging markets, and the developing world.
The challenge for economic policymakers is to find and implement the policies
needed to achieve these goals.
Economic Growth and Stability in the United States
My academiC research and experience in the government has taught me
that getting international economic policy right starts with getting economic policy
fight at home. So let me start with the United States.
The policy responses to last year's recession were quick and decisive.
President Bush's tax cut came at exactly the right time. Along with the operation of
automatic stabilizers, the tax cui helped mitigate the recession. On the monetary
side. the Federal Reserve moved early and aggressively to lower the federal funds
rate. Low interest rates continue to support the economic recovery. These fiscal
and monetary responses helped keep the recent recession mild by historical
standards: real GOP fell only 0.6 percent over the first three quarters of 2001, well
below the 2.3 percent average of all other recessions since the mid-1950s.
While the quarterly pattern of GOP growth has shown some fluctuation, it
confirms our view of a well-founded underlying recovery The healthy rebound in
the fourth quarter of last year was followed by particularly strong growth in the first
quarter of this year, which in turn was followed by a modest rise in the second
quarter. All indications are that the just completed third quarter experienced healthy
growth and the economy will continue to grow at 3 to 3 Y2 percent.
Growth is no longer concentrated in consumption. Investment in
equipment grew in the second quarter for the first time in seven quarters, assisted
by the expensing provisions of legislation enacted in March, while orders and
shipments data are signaling further gains in the third quarter. Interest rates have
been the lowest since the 1960s, sparking a record pace of new home sales and
allowing automakers to boost sales by offering generous financing and discounts.
The unemployment rate reached a 7-month low in September.
With the right policies the current U.S. economic expansion can be as
long-lasting, or even longer, than the expansions of the 1990s and of the 1980s,
which were the first and second longest peacetime expansions in American history.
http://www.trefi3.gov/pre.i-.£releases/po3570.htm
11/612002
PO-3S70: Under Secretary John B. Taylor - Institute for Global Economics, Seoul, Korea
Page 2 of 4
American economic fundamentals are sound. Productivity has surged
over the last year and by the second quarter was 4.8 percent above its level a year
ago. That was the strongest four-quarter performance since 1983. Productivity
growth has averaged 2.6 percent annually since 1995, well ahead of the 1.4
percent averaged from 1973 to 1995. Low inflation, flexible labor, capital and
goods markets and the remarkable growth in productivity form a strong platform for
the expansion ahead.
Economic Growth and Stability in Other Countries
Economic growth In the other G-3 countries, however. has been
disappointing. Japan has not yet recovered from its long period of slow growth,
deflation, and instability. Private sector forecasters project Japanese growth to
decline by around :y. to 1 percent this year and to increase by around only 1 percent
next year. The higher rate of growth of the monetary base by the Bank of Japan
since last year, if accompanied by changes in the banking sector, will allow the
growth rate of bank credit and M2 + CO to increase as well. Germany is also
growing very slowly. Private sector forecasters project German growth to be
around % percent this year and to fall short of 2 percent next year. For real GOP In
Germany to grow more rapidly, it is very important that the supply-side factors
holding down the growth rate of productivity and of potential GOP be addressed.
The recovery is fortunately picking up a better pace in America. Private
market forecasters expect growth in Canada to be greater than 3 percent this year
and around 3)12 to 3 3/., percent next year Conditions in Latin America have.
however, become more generally difficult this year, and economic growth for the
region is likely to be around zero. Clearly, raising economic growth in this region
must remain a high priority. In this context. it is important to note that the poor
growth figure for the region as a whole masks considerable diversity among the
countries within the region. Strong economic poliCies in Mexico and Chile have set
them apart in the region. Growth In Mexico is expected to be just short of 2 percent
this year, rising to 4 percent next. Chile IS expected to grow by over 2 percent this
year and by over 4 percent next year.
Economic growth in other emerging market areas has been higher than in
South America.
Growth in the dynamic Asian economies is particularly strong. Here in
Korea real GOP growth picked up to around 6 percent in the first part of the year
after the slowdown to 3 percent growth last year. In Hong Kong. Taiwan, Singapore
and Malaysia growth has picked up, and it remains strong in China.
Policies to Promote Economic Growth and
Economic Stability
Keeping economic growth strong when it is strong and increaSing growth
when it is weak, rests on adopting the right economic poliCies. A fundamental
principle of the Bush Administration's approach is that every country must have
ownership over its own economic policies. Every country has responSibility for
addressing its own economic challenges and forging its own economic destiny
History and experience provide ample evidence of the kinds of policies
that deliver higher productivity growth and higher living standards. Sound fiscal
policies and lOW-inflation monetary policies are, of course, essential. But they are
not enough. Pro-growth legal and regulatory policies encourage business
investment, innovation, and entrepreneurship. Investments in health and education
provide for physical well-being and build the skills of the labor force and population
as a whole Sound tax policies - particularly lower marginal tax rates - improve
Incentives for work and investment, while strong rule of law and intolerance of
corruption gives people confidence that they will be able to enjoy the fruits of their
work and Investments. Strong financial systems allow capital to be put to its most
efficient use. Free trade provides new avenues for growth and fosters the diffusion
of technologies and ideas that increase productivity.
The Bush Administration is committed to pursuing pro-growth policies such as
http://wwwtretls.goy/p-ress/releaseS/po3570.htm
11/6/2002
PO-3570: Under Secretary John B. Taylor - Institute for Global Economics, Seoul, Korea
Page 3 of 4
making the tax cuts permanent, controlling the growth of government spending and
reducing the deficit. The corporate responsibility act, which provides for new
standards for corporate accountability, will enhance the strength of our capital
markets by ensuring that people saving for their future can get accurate information
for sound investment decisions With the passage this summer of trade promotion
authority for the President, the Bush Administration is committed to pushing ahead
to lower trade barriers throughout the world, including through the new round of
multilateral negotiations begun at Doha.
History also tells us a great deal about the kinds of poliCies needed to
improve economic stability. My own research has examined the role that more
effective monetary poliCY has played in reducing volatility In output. Monetary policy
geared toward low inflation, combined with sound fiscal policies that allow
automatic stabilizers to operate over the business cycle, are key to promotmg
sustained and stable economic growth.
While economic stability is important for all economies, it is particularly important to
emergmg markets. The frequency of financial crises in the 1990s has served to
discourage investment and damage expected profitability in many emerging
markets. As a result, after averaging nearly $150 billion per year from 1992-1997,
private capital flows to emerging market countries fell off to less than $50 billion per
year In 1998-2000 Restoration of strong private investment flows at lower interest
rates IS crUCial to enable these countries to Invest In the productive base of their
economies and raise the living standards of their people.
Policies that reduce a country's vulnerability to finanCial crisis are therefore
important both for Improved economic stability and higher economic growth. These
Include prudent debt management policies, strong prudential standards, avoidance
of currency and duration mismatches, and greater transparency. Exchange rate
arrangements are also important, in particular avoiding soft pegs and chOOSing
either a flexible exchange rate or full dollarization.
The Korean Example
Korea stands out as a country that has adopted strong policies to promote
economic growth and to reduce external vulnerability in the wake of its financial
crisis. Korea's policies are instructive for others, and I would like to highlight some
aspects that I feel are particularly Important.
First, Korea has pursued sound macroeconomic policies. The Bank of
Korea has credibly adopted an inflation-targeting monetary framework, and allowed
the value of the won to be determined largely by market forces. Core inflation in
2002 looks likely to be within the Bank of Korea's target range of 2-4 percent. The
Korean government has maintained public debt levels well within prudent limits.
And since the crisis, Korea has built its International reserves to the point where
today they are about double short-term external debt and roughly 90 percent of total
external debt.
Second, and equally important. the Korean government has brought about
significant structural changes ifl the economy. Korea has sought to improve its
regulatory and supervisory framework for the financial sector. Korean banks have
been encouraged to improve credit analysis, lend on the basis of commercial
considerations, and recognize, rather than paper over, non-performing loans. As a
result. the health of the Korean banking system has improved dramalically NPLs
have been reduced to average OECD levels. Bank capital positions now exceed
the Basle capital requirement. Last year, the banking sector collectively recorded a
profit for the first time since 1996.
The financial markets have recognized these strong policies. Credit rating
aoencies have restored Korea's sovereign credi(rating to the A range of investment
g;ade and Korea's sovereign spread has declined.
Korea is an example of what other countries can achieve with the right
poliCies It also exemplifies what it means to exerCise strong ownership over those
policies. The Korean government's initiative in adopting good policies is as strong
as ever. As Central Bank Governor Park Seung noted recently in a speech in
Washington, DC, Korea has adopted a new economic paradigm: an open economy
http://www.tr-eas.gov/pre<;;.sJrcleases/po3570.htm
1116/2002
PO-3570: Under Secretary John B. Taylor - Institute for Global Economics, Seoul, Korea
Page 4 of 4
-- driven by knowledge and technology-driven companies, and supported
by a sound financial system. This is seen in the government's reduced role in the
financial sector, increasing unwillingness to intervene on behalf of inefficient
corporations, efforts to improve the insolvency regime, and increasing openness to
foreign investment.
Concluding Remarks
As the recent slowdown has demonstrated, we share a common interest in
increasing economic growth and improving economic stability in the global
economy Each country has a role to play in adopting the right economic policies to
advance these goals. Experience has demonstrated what policies lead to rising
standards of living and growing prosperity. In the final analysis. the prospects for
the global economy rest upon our continued dedication to applying those lessons.
http://www.treas.gov/pr-esslr cleases/po3570.htm
111612002
PO-3 571: Treasury Announces Market Financing Estimates
Page 1 of l
f-'HLSS HOOM
FROM THE OFFICE OF PUBLIC AFFAIRS
October 28. 2002
PO-3S71
Treasury Announces Market Financing Estimates
he Treasury Department announced today that it expects to borrow $76 billion in
marketable debt during the October - December 2002 quarter and to target a cash
balance of $45 billion on December 31. In the quarterly announcement on July 29.
Treasury announced that it expected to borrow $71 billion In marketable debt and to
target an end-of-quarter cash balance of $35 billion. The increase in borrowing is
due to lower receipts partially offset by higher net issues of State and Local
Government Series (SLGS) securities and changes in actual and targeted cash
balances.
Treasury also announced that II expects to borrow $84 billion in marketable debt
during the January - March 2003 quarter and to target a cash balance of $30 billion
on March 31.
During the July - September 2002 quarter. Treasury borrowed $84 billion in
marketable debt and ended with a cash balance of $61 billion on September 30.
On July 29. Treasury announced that it expected to borrow $76 billion in marketable
debt and to target an end-of-quarter cash balance of $45 billion. The increase in
borrowing was the result of lower receipts and an increase in the actual end-ofquarter cash balance partially offset by lower outlays and higher SLGS issuances.
Additional financing details relating to Treasury's Quarterly Refunding will be
released at 9.00 A.M. on Wednesday. October 30.
http://www.treas.go v/pre.•;;s/releases/p o3571.htm
11/612002
PO-3572: Assistant Secretary Brian C. Roseboro November 2002 Quarterly Refunding St... Page 1 of 2
f-'14[SS HOOM
FROM THE OFFICE OF PUBLIC AFFAIRS
October 30, 2002
PO-3572
Assistant Secretary for Financial Markets
Brian C. Roseboro
November 2002 Quarterly Refunding Statement
In the August Quarterly Statement, we described Treasury's debt management
mission and the actions we take to ensure that we meet our objective of lowest cost
borrowing over time. To achieve this objective, we seek to make our interactions
with market participants transparent. Below, we describe changes that will provide
market participants with more information regarding auction outcomes and the
issues actively under discussion by Treasury. This additional transparency is
consistent with our responsibilities as the financing arm of the U.S. government.
Additional transparency also promotes low cost financing by reducing the
uncertainty in auctions and by ensuring that our decisions are made with the widest
range of advice available.
The current maturity structure and issuance pattern of the Treasury's offerings based on large, liquid issuance of benchmark securities - is well placed to meet the
likely path of borrowing needs over the coming years. Given that the objective of
debt management is to meet the financing needs of the federal government at the
lowest cost over time, and considering the likely path of borrowing needs, there is
nothing today that suggests that it would be necessary or appropriate to add
maturity points beyond the range of our current offerings over the coming decade.
The Department of the Treasury announced its quarterly refunding needs and
related financing changes today, We are offering $40 billion of notes to refund
approximately $2,8 billion of privately held bonds called or maturing on November
15, raising approximately $37,2 billion, The securities are:
1, A new 5-year note in the amount of $22 billion, maturing November 15, 2007,
2, A new 10-year note in the amount of $18 billion, maturing November 15, 2012.
These securities will be auctioned on a yield basis at 1:00 p,m, Eastern time on
Tuesday, November 5, and Wednesday, November 6, respectively. The balance of
our financing requirements will be met through 1O-year inflation-indexed note, 2year note and bill offerings,
Treasury may issue off-cycle cash management bills due to seasonal cash swings
in early December and early January.
Auction Performance Reporting
Included in the chart package released on Monday, October 27, 2002, is
information on the average number of competitive bidders per month, broken down
by bidders that submit bids directly and those that submit their bids through some
other institution, This information will be provided as part of future chart packages
as well as information on progress towards our goal of consistently shorter results
release times.
Market Consultation
http://www.tr~jjli.govipress/releases/po3572.htm
1116/2002
PO-3572: Assistant Secretary Brian C. Roseboro November 2002 Quarterly Refunding St... Page 2 of 2
Prior to each quarterly refunding, Treasury seeks the individual advice of some of
the Federal Reserve Bank of New York's primary dealers. We place a high value
on this advice; advice elicited through questions composed by Treasury and
submitted to dealers in the week prior to the quarterly refunding. As part of our
efforts to promote greater transparency, we will begin to post these questions on
our website htlp//vvww treas.gov!offlccslrlornestlc-fmClllu:/debl1l1<lllagomc~llt!il1c1e x. hi III I
nine days prior to the release of our quarterly refunding statement. Markel
participants and observers are welcome to respond to these questions via email at
the address below.
Buyback Operations
Treasury will not be conducting buybacks this quarter.
Policy Issues Under Discussion
Previously announced policy issues that remain under discussion include
Treasury's efforts to:
• promote investor interest in inflation-indexed securities.
• reduce the costs associated with short-term fluctuations in cash balances.
• study the effects of heightened volatility on debt issuance.
Please send comments and suggestions on these subjects or others relating to
debt management to clebt management@do.treas.gov.
http://www.treast.pv/presslre!eases/po3572.htm
111612002
PO-3573: Report to The Secretary of the Treasury From the Treasury Borrowing Advisor...
Page 1 of 4
.~~
-'
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I-' f, L S S H 0 () M
'-
___
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~_
•
FROM THE OFFICE OF PUBLIC AFFAIRS
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October 30, 2002
PO-3573
Report to The Secretary of the Treasury From the Treasury Borrowing
Advisory Committee of the Bond Market Association
Dear Mr Secretary:
Since the Committee's last meetmg on July 30th, the economic recovery appears to
have slowed despite the recent rally In the eqUity markets. Outside of the robust
housing sector, economic indicators are showing signs of weakness. Payroll
growth remains far below w~at IS generally considered necessary to absorb new
entrants into the labor market. Consumer spending shows signs of slowing and
confidence indicators have all moved sharply lower. Additionally, the Impact of 0%
financing seems to be waning as it brings fewer buyers into automobile dealer show
rooms. Inventory and equipment investment have picked up modestly, but are
being more than offset by a continuing drop in nonresidential construction. Most
oconomists agree that the risks to continued growth are increasing although there
remains considerable differences as to what, if anything, should be done to further
stimulate the economy. Meanwhile. productivity growth remains healthy and
inflation indicators restrained with annualized core inflation growing at a 2.0% pace
and the breakeven inflation rate for 10-year TIIS falling to 1.84.
After our last meeting, interest rates continued to fall, reaching historical lows.
However, rates have since rebounded and now stand only fractionally lower than
they were at our last meeting. Weakness in the equity market and market
expectations of additional rate cuts from the Federal Reserve pushed the 2-year
yield below the Fed funds target rate for several days, 2-year currently yields
1.77%. Meanwhile, 1O-year yields reached a low of 3.57% on October 9th. Since
then, rates have moved higher and the 10-year note yield now stands at 3,94%.
The overall high grade credit market basis widened 21 basis points since July 31
although spreads have tightened about 10 basis points since the October 9 spread
peak. Despite the recent improvement, relative corporate bond valuations are still
at their widest levels in recent memory. New issuance levels through October are
down roughly 32% from last year as many borrowers either do not have market
access or can only borrow at unattractive levels. Lingering corporate management
credibility concerns, along With negative rating agency actions, uncertain equity
markets, pension under-funcing, and portfolio concentration issues are all weighing
on market sentiment, causing unprecedented spread volatility.
While most major indices are down just fractionally since our last meeting, equity
markets continue to exhibit signs of fragility, including high levels of volatility. The
S&P 500 index is now off just 1.4% but was, at its inter-meeting lows, off nearly
14.0%. Meanwhile, the VIX Index, a measure of volatility, has remained elevated
and, at its inter-meeting peak, reached levels just below those seen late last July.
The U.S recorded a slightly better-than-expected $159 billion budget deficit for
FY2002, Meanwhile, budget deficit estimates for FY2003 refleel the continued
uncertainty regarding the true cost of both the war on terror and the lingering effects
of the equity market downturn, At present. most budget deficit estimates for
FY2003 now run between $175 billion and $250 billion, $25 billion to $50 billion
higher than at the time of our last meeting, with few forecasters expecting a quick
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11/6/2002
PO-3573: Report to The Secretary of the Treasury From the Treasury Borrowing Advisor...
Page 2 of 4
return to surpluses.
Against this economic backdrop. the Committee began consideration of various
debt management questions from Treasury including the composition of 5- and 10year notes to refund $2.8 billion of privately held bonds maturing on November 15
and the composition of Treasury marketable financing for the October-December
and January-March quarters
The first question posed by Treasury references the Administrations Mid Session
Review of the Budget that showed a deficit for FY 2002 of $165 billion, and
forecasts deficits for FY2003 and FY2004, compared to originally projected
significant surpluses In the FY2002 Budget. As the change in fiscal position
progressed, the Treasury suspended its scheduled reopening policy and increased
auction sizes. Given that projected outlook, Treasury asked for the Committee's
recommendations regarding potential additional adjustments to its financing plans
for FY2003 and FY2004.
The Committee recommended at its January 2002 meeting, and reiterated today, a
sensible order for instituting changes to Treasury issuance policy. That order of
priority would be as follows:
•
•
•
•
Issuance size
Reopening policy
Frequency of issuance
Types of securities and maturities
The Committee also noted that Treasury had already addressed recent borrowing
needs by increasing issuance size and ending automatic reopening policies for both
the 5-year and 10-year notes.
To specifically address the FY2003 and FY2004 plans, the Committee stressed that
the first significant maturity of large two-year notes occurs in August 2003. Prior
work by this Committee indicates an increase in issuance would not be needed until
at least November 2003. In summation, there was consensus that few changes
were needed until 04 2003. and those could be handled with an increase in size
and/or frequency of issuance in the 5-year or 10-year note sectors. Further
information was needed to plan for FY2004.
The Committee also discussed average maturity of the debt which has contracted
sharply over the past 18 months from 6 years 4 months to 5 years 6 months,
leading to concentratiofl risk in securities of less than two years. Given current
robust market conditions for fixed-income securities, the Committee felt the
environment was appropriate for lengthening maturities and redistributing issuance
to alleviate this concern.
One final suggestion made by a member of the Committee, and broadly endorsed
by others, was to communicate future issuance changes early to the markets. A
minimum of a 3-month warning to Investors regarding changes was suggested.
The Treasury's second question asked the Committee to define measures of debt
management that might provide useful indicators of the quality of debt management
decisions. While most members felt Treasury could use any number of indicators
to accomplish their goals, they also noted that market and economic conditions
might dictate which should be used at any particular point in time. For instance, in
normal market conditions, the spread of Treasuries to Libor might be a valuable
barometer of Treasury's effectiveness while during other market conditions, where
the market was substantially more volatile, It might not. Additionally, some
members felt that given Treasury's role as a non-opportunistic borrower, broad
criteria used to judge its performance might be of little use.
Ultimately, the Committee agreed that the following measures, in no specific order.
might prove useful to Treasury in judging the Quality of its debt management
decisions:
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PO-3573: Report to The Secretary of the Treasury From the Treasury Borrowing Advisor...
Page 3 of 4
1. Accuracy around budget forecasting
2. Market volatility at the time of Treasury borrowing announcements
3. Auction statistics (bid to cover ratios. auction tails, time between bid submission
cutoff and auction result announcements)
4. Relative pricing of Treasury securities against either Libor or a fitted curve
5. Treasury volumes and turnover
6. Treasury market structure vs. other G10 government markets
7. Financing issues such as the size and duration of fails to deliver and receive
In closing, most Committee members agreed that it would be beneficial to revisit the
question at a later date, after having prepared for a more specific discussion of the
potential alternatives available to Treasury.
The third question asked for recommendations regarding the size and frequency of
Treasury Inflation-Indexed Securities (TIIS) issuance in order to promote growth of
the overall program In response the Committee noted that investor interest had
continued to grow in recent months at least partly due to repeated statements of
support by Treasury for the program. Most members felt that a similar statement
should accompany any plans to grow issuance or otherwise expand the program
further.
In terms of frequency of issuance several members suggested that one new issue
per annum with three subsequent reopenings would be effective in growing the
product, as market liquidity would build throughout the year in the same current
issue. The majority, however, thought that two new issues and two reopenings per
year would prove most effective as it would accomplish Treasury's objectives
without the maturity bunching caused by a single annual issue
In considering the potential size of annual issuance for TIIS, the Committee noted
that TIIS, while still relatively cheap, had been gradually richening to nominal
securities and that a cautious approach to increasing overall issuance size was
warranted to grow the product consistent with underlying demand. As a result, a
target issuance range for 2003 of $23-$30 billion was appropriate.
The Committee then turned to the question involving the composition of five- and
ten-year notes to refund $2.8 billion of privately held notes maturing November
15th, composition of Treasury marketable financing for the remainder of the
October-December quarter including cash management bills if necessary, and
composition of the marketable financing for the January-March quarter.
The Committee recommends $22 billion 5-year notes due November 15, 2007 and
$18 billion ten-year notes due November 15, 2012. For the remainder of the
quarter, the Committee recommends two $27 billion 2-year notes to be auctioned
November 27 and December 23 as shown on the attached table. The Committee
does not recommend any cash management bills through the end of the quarter.
For the January-March quarter, the Committee recommended financing as
contained in the attached table Relevant features include three $27 billion 2-year
notes, one $22 billion 5-year note, and one $18 billion 10-year note--all similar in
size to the previous quarter. The Committee further recommended a $7 billion
reopening of Treasury Inflation-Indexed Securities due July 10, 2012, which follows
Treasury's previous guidance regarding TIIS issuance. In this quarter no cash
management bills are recommended.
Respectfully submitted,
Timothy Jay
Chairman
Mark Werner
Vice Chairman
Related Documents:
http://wwwtrcZl~.goy/pre-ss/releases/po3573.htm
11/6/2002
PO-3573: Report to The Secretary of the Treasury From the Treasury Borrowing Advisor...
•
•
Page 4 of 4
Flnanclllg Table 04 2002
FII lallcllild T "ble () 1 2003
http://www.tr~ait.gov/pressJreleases/po3573.htm
1116/2002
u.s. TREASURY FINANCING SCHEDULE FOR 4TH QUARTER 2002
BILLIONS OF DOLLARS
ANNOUNCEMENT AUCTION SETTLEMENT
ISSUE
4·WEEK AND
3&6 MONTH BILLS
DATE
9/26
10/3
10/10
10/17
10/24
10/31
11/7
11/14
11/21
11/27
12/5
12/12
12/19
DATE
9/30
10/7
10/15
10/21
10/28
11/4
11/12
11/18
11/25
12/2
12/9
12/16
12/23
OFFERED
DATE
10/3
10/10
10/17
10/24
10/31
11/7
11/14
11/21
11/29
12/5
12/12
12/19
12/26
AMOUNT
4-WK
16.00 A
14.00 A
14.00 A
18.00 A
18.00 A
18.00
18.00
22.00
22.00
18.00
16.00
12.00
12.00
3-MO
16.00 A
16.00 A
17.00 A
18.00 A
18.00 A
18.00
18.00
17.00
17.00
16.00
16.00
15.00
15.00
6-MO
14.00 A
14.00 A
15.00 A
16.00 A
17.00 A
17.00
17.00
15.00
15.00
14.00
14.00
14.00
14.00
631.00
MATURING
NEW
AMOUNT
MONEY
49.08
44.89
44.18
44.71
44.58
45.00
45.00
48.00
48.00
48.00
49.00
53.00
53.00
-3.08
-0.89
1.82
7.29
8.42
8.00
8.00
6.00
6.00
0.00
-3.00
-12.00
-12.00
616.44
14.56
0.00
7.00
COUPONS
CHANGE
IN SIZE
10/7
10/9
10/15
7.00 A
2-Year Note
10/21
10/23
10/31
27.00 A
21.16
5.84
5-Year Note
10-Year Note
10/30
10/30
11/5
11/6
11/15
11/15
22.00
18.00
2.96
37.04
2-Year Note
11/25
11/27
12/2
27.00
21.32
5.68
2-Year Note
12/19
12/23
12/31
27.00
20.68
6.32
121.00
66.12
61.88
10-Year TIPS (R)
R = Reopening
A =Announced
Treasury announced a
04 borrowing need of
$76 billion on 10128/02
-2.00
NET CASH RAISED THIS QUARTER:
76.44
U.S. TREASURY FINANCING SCHEDULE FOR 1ST QUARTER 2003
BILLIONS OF DOLLARS
ANNOUNCEMENT AUCTION SETTLEMENT
ISSUE
DATE
DATE
4·WEEK AND
3&6 MONTH BILLS
12/26
1/2
1/9
1/16
1/23
1/30
2/6
2/13
2/20
2/27
3/6
3/13
3/20
12/30
1/6
1/13
1/20
1/27
2/3
2/10
2/17
2/24
3/3
3/10
3/17
3/24
DATE
1/2
1/9
1/16
1/23
1/30
2/6
2/13
2/20
2/27
3/6
3/13
3/20
3/27
4-WK
12.00
12.00
12.00
12.00
14.00
18.00
20.00
23.00
23.00
23.00
23.00
26.00
26.00
OFFERED
MATURING
NEW
AMOUNT
AMOUNT
MONEY
49.00
47.00
45.00
46.00
46.00
46.00
45.00
43.00
45.00
48.00
49.00
51.00
51.00
611.00
-8.00
-6.00
-4.00
-5.00
-3.00
2.00
7.00
14.00
12.00
9.00
8.00
7.00
7.00
40.00
3-MO
15.00
15.00
15.00
15.00
15.00
16.00
17.00
18.00
18.00
18.00
18.00
17.00
17.00
651.00
6-MO
14.00
14.00
14.00
14.00
14.00
14.00
15.00
16.00
16.00
16.00
16.00
15.00
15.00
COUPONS
CHANGE
IN SIZE
10-Year TIPS (R)
1/6
1/8
1/15
7.00
0.00
7.00
2-Year Note
1/27
1/29
1/31
27.00
21.72
5.28
5-Year Note
10-Year Note
2/5
2/5
2/11
2/12
2/18
2/18
22.00
18.00
21.59
18.41
2-Year Note
2/24
2/26
2/28
27.00
20.02
6.98
2-Year Note
3/24
3/26
3/31
27.00
20.64
6.36
128.00
83.97
44.03
=
R Reopening
A ;:: Announced
NET CASH RAISED THIS QUARTER:
84.03
PO-3574: Minutes of The Meeting Of The Treasury Borrowing Advisory Committee
Page 1 of 4
PHlSS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
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October 30, 2002
PO-3574
Minutes of The Meeting Of The Treasury Borrowing Advisory Committee of
The Bond Market Association
The Committee convened at 900 a,m. at the Treasury Department for the portion of
the meeting that was open to the public. All members were present except Mr.
Marsico and Mr. Axilrod. The Federal Register announcement of the meeting and a
list of Committee members are attached.
Paul Malvey, Director of the Office of Market Finance, welcomed the Committee
Mark Warshawsky, Deputy Assistant Secretary for Economic Policy, summarized
the current state of the U.S. economy (statement attached). Paul Malvey presented
the chart show. updating Treasury borrowing estimates and debt statistics.
The public meeting ended at 920 am
The Committee reconvened in closed session at the Madison Hotel at 12:05 p.m
All members were present except Mr. Marsico and Mr. Axilrod, The Chairman read
the charge, which is also attached.
The tentative calendars of security auctions for the November-March period were
distributed to the Committee members. The Committee briefly discussed the 2-year
note auctions scheduled in November and December. The regular auction dates
conflict with the holidays and the Committee acknowledged that recommended
alternative dates are desirable.
The Committee then considered Treasury's financing needs for FY2003 and
FY2004. The Committee sees no need for changes to the auction schedule for
FY2003 so the discussion focused more generally on the factors that Treasury
should consider in deciding how to finance future surpluses or deficits. The
Committee noted, as it has in the past, that Treasury has four ways in which it can
modify its auction schedule to increase or decrease financing. The Committee
recommended that the Treasury respond to changes in financing needs by the
following hierarchy: change issue size, re-opening policy, frequency of issuance
and, finally, range of maturities offered.
In terms of auction sizes, some Committee members noted that the market could
absorb additional amounts of existing 2-year and 5-year notes although one
member noted that recent bid-to-cover ratios in both the nominal and inflationindexed 10-year notes may be a cause for concern. Members said that the market
could absorb additional supply of 2-year notes as long as market speculation
continued that the Federal Reserve may lower the Fed funds rate. One member
also noted that the relatively low price risk of 2-year notes, compared to the longer
maturities, gave Treasury flexibility in issuing at the 2-year point
If financing needs required additional issuance, the Committee positively viewed
increasing frequencies of existing securities. Additional auctions of the 5-year note,
in particular, would be well received by both dealers and investors.
If additional 5-year auctions were needed, Committee members generally favored
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PO-3574: Minutes of The Meeting Of The Treasury Borrowing Advisory Committee
Page 2 of 4
maintaining the current mid-month coupon date. Additional issuance of 5-year and
1a-year notes was generally viewed as relieving pressures on front end of the
curve.
The Committee also discussed what additional securities should Treasury issue,
should the need arise. One suggestion was to reverse the actions Treasury took
during recent surpluses - reintroduce the 52-week bill, 3-year note, or the bond.
Some Committee members noted that the current interest rate enVIronment, from a
historical perspective, was especially attractive to long-term issues
The Committee concluded the discussion of the financing question with a broader
discussion of the factors that should guide Treasury when it weighs the trade-off
between larger issue sizes or greater auction frequencies (a trade-off that ultimately
depends on the relative cost of larger issuance versus the loss of liquidity premium
from Issuing more securities). The Committee noted the importance of making thiS
decision based on Treasury's objective of low cost finanCing over time. As part of
this discussion, the Committee reviewed the recent history of the average maturity
of debt: generally concluding that, while it may be an indicator of rollover risk, it is
less important than the structure of outstanding debt. The Committee also
reaffirmed Its support for regular and predictable issuance with substantial lead-time
before changing the auction schedule.
The question on performance measures generated some debate among Committee
members about both the feasibility and desirability of quantifying debt management
performance. Some members felt that this issue required more preparation than
the current meeting format permitted. Treasury's efforts to reduce auction release
times was cited as one area where quantification is beneficial, but some Committee
members were skeptical that Treasury would be able to identify other quantifiable
performance measures. Part of this skepticism stems from Treasury's issuance
approach as a non-opportunistic issuer.
The Committee identified some measures relating to debt management that may
form part of a larger package of performance indicators: bid volumes, auction tails,
bid-to-cover ratios, persistence of fails in the financing market, pricing relative to a
curve (splme. LlBOR or RP-adjusted swaps. or G3 funding). and turnover or volume
in secondary market. Any performance measures will need to be adjusted for
economic and market conditions. Some Committee members argued that debt
management is inherently subjective given the enormous range of uncertainty
associated with fiscal forecasts and the dependence on current conditions. The
Committee also noted the unique difficulties faced by the U.S. Treasury which
cannot use another issuer as a benchmark.
Some Committee members cautioned that performance measures may get caught
up in the political process. Others argued that the danger of politicization could be
reduced by relying on a wide range of performance indicators and that simply
proposing indicators may have the beneficial effect of clarifying objectives.
Members also suggested that Treasury would have to develop better forecasting
methods before developing concrete performance measures. Volatility around
fiscal needs is viewed as intolerably high.
In responding to the question on inflation-indexed securities, Committee members
said that market participants are generally comfortable with reopenings. Some
members said that Treasury should issue a single security annually and re-open it
in each of the following three quarters while others suggested that Treasury issue
and reopen two new securities annually. The Committee's general advice on
inflation-indexed securities is to increase issuance gradually and continue the focus
on increasing demand by continuing to signal Treasury's commitment to increase
issuance.
The Committee recommended that auction sizes for the 5-year and 1O-year notes
be unchanged at $22 billion and $18 billion respectively
The meeting adjourned at 1:00 p.m.
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1116/2002
PO-3574: Minutes of The Meeting Of The Treasury Borrowing Advisory Committee
Page 3 of 4
The Committee reconvened at the Madison Hotel at 5:30 p.m. All members were
present except Mr. Marsico and Mr. Axilrod. The Chairman presented the
Committee report to the Assistant Secretary for Financial Markets, Brian Roseboro
and De~uty Assistant Secretary for Federal Finance, Tim Bitsberger A brief
discussion followed the Chairman's presentation, but did not raise significant
questions regarding the report's content
The meeting adjourned at 5:45 p.m
Paul F. Malvey
Director
Office of Market Finance
October 29, 2002
Certified by
Timothy W. Jay, Chairman
Treasury BorrOWing Advisory Committee
of The Bond Market Association
October 29, 2002
October 29, 2002
Committee Charge
The Treasury Department would like the Committee's advice on the following:
• The Adminlstration's Mid-session Review of the Budget showed a deficit for FY 02
of $165 billion and forecasts for deficits in FY 03 and FY 04, compared to originally
projected significant surpluses in the FY 02 Budget. As the change in the fiscal
position progressed, the Treasury suspended its scheduled reopening policy and
increased auctIOn sizes. Given the projected outlook, Treasury may need to make
additional adjustments to its financing plans in FY 03 and FY 04. Would you
recommend any adjustments to Treasury's financing?
Throughout Treasury, we have undertaken to quantify performance through
measures of the quality or quantity of services we provide. Are there measures of
debt management that would provide useful indicators of the quality of debt
management decisions? Are there indicators of the auction process, issuance
policy, or the resulting composition of debt outstanding that you believe we should
be measuring ourselves against? Should the sensitivity of the outstanding debt to
interest rate changes be a measure of performance? Is there a measure of interest
rate cost that could be used as a performance measure?
Since we announced our intention to enhance the attractiveness of the Treasury
inflation-indexed security (TIIS) market, we have increased the number of 10-year
TIIS auctions from two to three per year and spoken widely to promote interest In
the inflation-indexed market. Upon completion of this TIIS cycle, we plan to further
increase Til S issuance. If Treasury were to further expand the TIIS market by
going to four auctions per year, would you recolllmend that it issue two new 10-year
notes, with each followed by a reopening, or that it issue four new notes? What
factors should be conSidered In determining TIIS auction sizes?
The composition of 5- and 1O-year notes to refund $18.8 billion of privately held
notes maturing on November15.
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The composition of Treasury marketable financing for the remainder of the October
- December quarter. including cash management bills if necessary.
The composition of Treasury marketable financing for the January - March quarter.
Related Documents:
•
FIIldilCII1U
•
FlllClIlClllU
T ,IDle 04 2002
TclDlc 01 20CU
http://www.trea~.8()v/pressireleases/po3574.htm
1116/2002
DEPARTMENT
OF
THE
TRr~:ASURY
NEWS
TREASURY
EMBARGOED UNTIL 11:00 A.M.
October 24, 2002
CONTACT:
Office of Financing
202/691-3550
TREASURY OFFERS l3-WEEK AND 26-WEEK BILLS
The Treasury will auction l3-week and 26-week Treasury bills totaling $35,000
million to refund an estimated $28,579 million of publicly held l3-week and 26-week
Treasury bills maturing October 31, 2002, and to raise new cash of approximately
$6,421 million.
Also maturing is an estimated $16,000 million of publicly held 4-week
Treasury bills, the disposition of which will be announced October 28, 2002.
The Federal Reserve System holds $12,845 million of the Treasury bills maturing
on October 31, 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 Tr~asury bill auction to be held October 29, 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
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 $1,188 million into the l3-week bill and $707 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
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-3S7S
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at
(202) 622-20.J0
HIGHLIGHTS OF TREASURY OFFERINGS OF BILLS
TO BE ISSUED OCTOBER 31, 2002
October 24, 2002
otteriflCj
Amount
..... .
- - . ----Pub_Uc ~O!!-"'E~E!9. .....
NLP Exclusion Amount
$18,000 million
$18,000 million
$ 5,600 million
$17,000 million
$17,000 million
None
De~c~!p~ion of Offering:
Term afld type of securi ty
.......... .
CUSIP number . . . . . . . . . . . . . . . . . . . . . . . . . .
Auc tion da te ...
Issue date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maturity date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Original issue date . . . . . . . . . . . . . . . . . . . . . . . .
Currently outstanding . . . . . . . . . . . . . . . . . . . . . .
Minimum bid amount and multiples . . . . . . . . . . .
9l-day bill
912795 LW 9
October 28, 2002
October 31, 2002
January 30, 2003
August 1, 2002
$21,971 million
$1,000
182 -day bill
912795 MK 4
October 28, 2002
October 31, 2002
May 1, 2003
October 31, 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
However,
be partially accepted in the amount that brings the aggregate award total to the $1,000 million limit.
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:
(l) 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.
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
rOR IMMEDIATE RELEASE
)ctober 23, 2002
Office of Financing
202-691-3550
CONTACT:
RESULTS OF TREASURY'S AUCTION OF 2-YEAR NOTES
Interest Rate:
Series:
CUSIP No:
Issue Date:
Dated Date:
Maturity Date:
2 1/8%
T-2004
912828AM2
High Yield:
2.14 0%
Price:
October 31, 2002
October 31, 2002
October 31, 2004
99.971
All noncompetitive and successful competitive bidders were awarded
securities at the high yield.
Tenders at the high yield were
allotted 42.29%.
All tenders at lower yields were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Accepted
Tendered
Tender Type
Competitive
Noncompetitive
FIMA (noncompetitive)
$
44,893,600
838,809
$
o
o
27,000,250 1/
45,732,409
SUBTOTAL
$
TOTAL
5,434,633
5,434,633
Federal Reserve
51,167,042
26,161,441
838,809
$
32,434,883
Median yield
2.095%:
50% of the amount of accepted competitive tenders
as tendered at or below that rate.
Low yield
2.050%:
5% of the amount
f accepted competitive tenders was tendered at or below that rate.
id-to-Cover Ratio
=
45,732,409 / 27,000,250
=
1.69
/ Awards to 7REASURY DIRECT = $683,281,000
http://www.publicdebt.treas.gov
po -3576
PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Publie 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
October 22, 2002
RESULTS OF TREASURY'S AUCTION OF 4-WEEK BILLS
28-Day Bill
October 24, 2002
November 21, 2002
912795LL3
Term:
Issue Date:
Maturity Date:
CUSIP Number:
1.670%
High Rate:
Investment Rate 1/:
Price:
1.697%
99.870
All noncompetitive and successful competitive bidders were awarded
securities a~ the high rate.
Tenders at the high discount rate were
allotted 28.54%.
All te~ders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Competitive
Noncompetitive
FIMA (noncompetitive)
$
44,761,400
50,301
$
17,950,870
50,301
o
°
SUBTOTAL
Federal Reserve
TOTAL
Accepted
Tendered
Tender Type
$
44,811,701
18,001,171
835,227
835,227
45,646,928
$
18,836,398
Median rate
1.655%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate.
Low rate
1.630%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio = 44,811,701 / 18,001,171 = 2.49
./ Equivalent coupon-issue yield.
http://www.publicdebt.treas.gov
PO-3S77
PO-3578: Joint Statement of Paul H. O'Neill & Mitchell E. Daniels, lr. Budget Results
~'HLSS
Page 1 of 1
H00M
FROM THE OFFICE OF PUBLIC AFFAIRS
October 25, 2002
PO-3578
JOINT STATEMENT OF PAUL H. O'NEILL
SECRETARY OF THE TREASURY,AND
MITCHELL E, DANIELS, JR.,
DIRECTOR OF THE OFFICE OF MANAGEMENT AND BUDGET
BUDGET RESULTS FOR FISCAL YEAR 2002
http://www.trea5.gov/press/reieases/po3578.htm
11/612002
FOR IMMEDIATE RELEASE
October 25, 2002
Treaswy Contact: Michele Davis
(202) 622-2920
OMB Contact:
Trent DuffY
(202) 395-7254
JOINT STATEMENT OF
PAUL H. O'NEILL,
SECRETARY OF THE TREASURY,
AND
MITCHELL E. DANIELS, JR.,
DIRECTOR OF THE OFFICE OF MANAGEMENT AND BUDGET,
ON
BUDGET RESULTS FOR FISCAL YEAR 2002
SUMMARY
The Administration is today releasing the September 2002 Monthly Treaswy Statement of Receipts
and Outlays of the United States Government'. The statement shows the actual budget totals for
the fiscal year that ended September 30, 2002, as follows:
•
A deficit of $159 billion;
•
total receipts of $1,853 billion; and
•
total outlays of$2,012 billion.
"Consistent with our July projections, these results reflect the recession, the declines in the
stock market and the consequences of the September 11 attacks, which slowed the
economy and led to new defense and homeland security expenditures. Together these
events created a deficit. But going forward, I am confident that we are on the road to
recovery and fiscal stability."
'The September 2002 Monthly Treasury Statement of Receipts and Outlays of the United States Government
containing these results can be found on the Financial Management Service website at: www.fms.treas.gov.
- Secretary Paul H. O'Neill
"It's now clear that the unexpected surge in revenues toward the end of the last decade was
temporal)', and that revenues are returning to historic levels for reasons unrelated to
legislated changes. At the same time, wlexpected new defense and homeland security
spending is needed to protect America from new threats. Given these two developments, it
is absolutely essential that we set aside business as usual and keep tight control over all
other spending."
- Director Mitchell E. Daniels, Jr.
Table I. TOTAL RECEIPTS, OUTLAYS AND SURPLUSIDEFICIT (-)
(in billions of dollars)
200 1 ActuaL .................................. .
Receipts
1,991
Outlays
1,864
SUl)?luslDeficit (-)
127
FY 2002 Estimates:
FY 2003 Budget.. ....................... ..
FY 2003 Mid-Session Review ..... .
Actual. ......................................... .
1,946
1,867
1,853
2,052
2,032
2,012
-lO6
-165
-159
NOTE: Details may not add to totals due to rounding.
The FY 2002 unified deficit was $159 billion, or 1.5 percent of the Gross Domestic Product
(GOP). The deficit for FY 2002 is $7 billion lower than projected in the Mid-Session Review
(MSR) with receipts lower by $14 billion and outlays lower by $21 billion. Outlays increased by
8.0 percent this year, the largest percentage increase since FY 1990.
RECEIPTS
Total receipts for FY 2002 were $1,853 billion, $14 billion lower than the MSR estimate. The
shortfall was largely due to lower-than-expected collections of individual income taxes and
2
social insurdl1ce and retirement receipts. Excise and estate and gift taxes for FY 2002 were
also slightly below forecast. The shortfalls in these receipt sources were partially offset by
higher-than-expected collections of corporate income taxes, customs duties, and miscellaneous
receipts. Table 2 displays actual receipts and estimates from the MSR by source.
The recent decline in receipts is predominately due to the 200 1 recession and the decline in the
stock market. Preliminary information suggests that much of the decline in receipts is
attributable to reductions in relatively highly taxed forms of income, especially wages and
salaries, and that much of the decline in these forms of income is attributable to the recession.
At the same time, the decline in the stock market reduced capital gains receipts and further
reduced taxes on wage and salary income. Specific factors attributing to the FY 2002 receipts
shortfall will not be available for some time.
lndividual income taxes were $858 billion in FY 2002, $15 billion lower than the MSR
estimate. Most of the shortfall in individual income taxes was due to lower-than-estimated
payments of withheld taxes. In addition, payments of non- withheld taxes were slightly below
forecast and refunds were slightly above forecast.
Corporation income taxes were $148 billion, $3 billion above the MSR estimate. Higher-thanestimated corporate tax payments were partially offset by higher-than-estimated refunds.
Social insurance and retirement receipts were $701 billion, $2 billion lower than the MSR
estimate. Lower-than-expected collections of Social Security and Medicare health insurance
payroll taxes and unemployment insurance taxes largely account for the shortfall in this source of
receipts.
For explanations of shortfalls in receipts relative to the FY 2003 Budget, see the FY 2003 MidSession Review, pp. 3-6 and pp. 17-18.
OUTLAYS
3
Total outlays were $2,012 billion, $21 billion or 1.0 percent below the MSR estimate. Most
agency outlays were down though notably Medicare outlays were up. Table 3 displays actual
outlays by agency and major program as well as estimates from the MSR. The largest changes in
outlays were in the following areas:
•
Department of Health and Human Services - up $5 billion mainly due to higher Medicare
outlays.
•
Department of Agriculture - down $4 billion mainly due to lower outlays by the
Commodity Credit Corporation.
•
Department of Defense - Military - down $4 billion due primarily to the late enactment of
the second supplemental.
•
Department of Transportation - down $3 billion mainly due to lower outlays by the
Transportation Security Agency.
•
All Other Agencies - down $15 billion from a shortfall in outlays i1 a broad range of
agenCIes.
-30-
4
Table 2.--2002 BUDGET RECEIPTS BY SOURCE
(fiscal years; in billions of dollars)
2001
Actual
2002
July, 2002
MSR 11
IChange, 2002 Actual from: I
July, 2002
Actual
2001
MSR
Receipts by Source
Individual income taxes ........................................
Corporation income taxes ....................................
Social insurance and retirement receipts ...........
Excise taxes .........................................................
Estate and gift taxes .............................................
Customs duties .....................................................
Miscellaneous receipts .........................................
Total, Receipts ...........................................
On-budget. ..............................................
Off-budget. ..............................................
994
151
694
66
28
19
38
1,991
1,484
508
873
145
703
67
27
18
34
1,867
1,353
515
858
148
701
67
27
19
34
1,853
1,338
515
-136
-3
7
1
-2
-1
-4
-138
-146
8
-15
3
-2
-0
-1
0
0
-14
-15
0
Table 3.--2002 BUDGET OUTLAYS BY AGENCY
(fiscal years; in billions of dollars)
2001
Actual
Outlays by Major Agency
Agriculture:
Commodity Credit Corporation ......................... .
Other ................................................................. .
Subtotal, Agriculture .................................... .
Commerce ........................................................... .
Defense-Military:
Military Personnel. ..................................... .
Operation and Maintenance ......................... .
Procurement. ............................................ .
Other ................................................................. ..
Subtotal, Defense-Military ................................ .
Education .................................................. .
Energy ...................................................... .
Health and Human Services:
Medicare (gross outlays) .................................. .
Medicaid ........................................................... .
Other ................................................................. .
Subtotal, Health and Human Services ........ ..
Housing and Urban Development. .................. .
Interior ................................................................. ..
Justice ...................................................... .
Labor:
Unemployment trust fund .................................. .
Other. .................................................................
Subtotal, Labor. ........................................... .
State ......................................................... .
Transportation:
Transportation Security Agency ................... .
Other ................................................................. .
Subtotal, Transportation .............................. .
22
46
68
2002
July, 2002
MSR 11
IChange, 2002 Actual from:
July, 2002
Actual
2001
MSR
19
54
73
5
16
53
69
5
-6
7
1
0
81
139
59
56
336
48
19
87
130
63
53
332
47
18
13
18
8
~
41
11
1
252
147
63
461
31
10
23
257
148
62
466
32
10
24
14
18
7
40
-2
2
3
32
53
2
1Q
7
63
11
~
25
2
-0
39
54
10
64
10
23
.§
1
-2
-0
61
61
-0
-4
54
54
4
60
64
5
74
112
55
50
291
36
16
242
129
55
426
34
8
21
-3
:1
-4
-0
5
-9
3
-3
-4
-1
-1
5
-1
5
1
-0
I
1
7
-3
I
Table 3.--2002 BUDGET OUTLAYS BY AGENCY
(fiscal years; in billions of dollars)
I
2001
Actual
Outlays by Major Agency
Treasury:
Interest on the public debt... ............................ ..
Earned income and child tax credits .............. .
Other ..................................................................
Subtotal, Treasury ....................................... .
Department of Veterans Affairs ........................... .
Federal Emergency Management Agency .......... .
Office of Personnel Management... ..................... .
Social Security Administration:
Old age and survivors insurance ...................... .
Disability insurance ........................................... .
Other ...................................................... .
Subtotal, Social Security Administration ...... .
Other agencies:
Postal Service ......................................... .
Other (net) ........................................................ .
Subtotal, other agencies .............................. .
Allowances ................................................. .
Undistributed offsetting receipts:
Employer share, employee retirement... ........... .
Interest received by trust funds ......................... .
Rents and royalties on the Outer
Continental Shelf lands ................................... .
Spectrum auction receipts and other ................ .
Subtotal, undistributed offsetting receipts .... .
Total, Outlays ...................................................... ..
On-budget. ....................................................... .
Off-budget. ....................................................... .
2002
July, 2002
MSR 1/
IChange, 2002 Actual from:
July, 2002
Actual
2001
MSR
360
27
3
390
45
4
51
332
34
333
33
§
~
§
374
52
6
54
375
51
4
53
-15
6
-0
2
1
-1
1
1
-1
-1
-2
373
61
28
462
390
66
33
489
390
66
33
489
17
6
§
27
-0
0
-0
-0
2
94
96
2
109
111
0
104
104
-2
10
8
-2
-5
-7
-39
-144
-42
-152
-43
-153
-4
-9
-1
-2
-7
-5
-0
-201
2
-1
1
Q
-191
-4
-0
-198
-10
-3
1,864
1,517
347
2,032
1.675
358
2,012
1,656
356
148
139
9
-21
-19
-2
:1
-27
6
I
Table 3.--2002 BUDGET OUTLAYS BY AGENCY
(fiscal years; in billions of dollars)
C
2001
Actual
Outlays by Major Agency
Deficit (-) / Surplus (+) ........................................ .
On-budget .......................................... ..
Off-budget ......................................................... .
127
-33
161
2002
July, 2002
MSR 1/
-165
-322
157
IChange, 2002 Actual from: I
Actual
2001
-159
-318
160
-286
-285
-1
July, 2002
MSR
7
4
2
1/ Estimates exclude the impact of the President's proposal related to the accrual of retiree health and retirement costs.
NOTE: Detail may not add to totals or changes due to rounding.
PO-3579: Treasury Designates North Valle Drug Cartel Leaders
Page 1 of 1
PHLSS HOOM
FROM THE OFFICE OF PUBLIC AFFAIRS
October 25, 2002
PO-3579
Treasury Designates North Valle Drug Cartel Leaders
The Treasury Department's Office of Foreign Assets Control (OFAC) today added
the names of Diego Leon Montoya Sanchez and Luis Hernando Gomez
Bustamante, two leaders of the violent North Valle drug cartel in Colombia, to its list
of Specially Designated Narcotics Traffickers (SDNTs) SDNTs are subject to the
economic sanctions imposed against Colombian drug cartels in Executive Order
12978.
The OFAC aellon blocks the assets of SDNTs found in U.S. jurisdiction and
prohibits Americans from doing business with them, thereby further exposing,
isolating, and incapacitating Colombian drug cartels and their agents. The
Colombian drug kingpins named to the SDNT list today by OFAC smuggle multi-ton
quantities of cocaine into the United States. In addition to the two North Valle cartel
leaders, OFAC has added 13 businesses and 21 associated individuals in
Colombia that it has determined are acting as fronts for Diego Leon Montoya
Sanchez, LUIS Hernando Gomez Bustamante and another North Valle cartel leader,
Arcangel de Jesus Henao Montoya, previously named an SDNT principal individual
by OFAC In August 2000. OFAC has cooperated over the past year with the
Federal Bureau of Investigation's Miami office in the designation of Diego Leon
Montoya Sanchez.
This action is part of the ongoing interagency effort of the Treasury, Justice and
State Departments to carry out Executive Order 12978, signed on October 21,
1995, which applies economic sanctions against the Colombian drug cartels. With
the addition of the names released today, the assets of a total of 613 businesses
and individuals are blocked under the 1995 Executive Order; and those businesses
and individuals are prohibited from American financial and business dealings. The
list of SDNTs now includes 12 kingpins from Colombia's drug cartels, namely Cali
cartel leaders Gilberta Rodriguez Orejuela, Miguel Rodriguez OreJuela, Jose
Santacruz Londono, Helmer Herrera Buitrago, and Juan Carlos Ramirez Abadia;
North Coast cartel leader Julio Cesar Nasser David; and North Valle cartel leaders
Ivan Urdinola Grajales, Julio Fabio Urdinola GraJales, Arcangel de Jesus Henao
Montoya, Victor Julio Patino Fomeque, Luis Hernando Gomez Bustamante and
Diego Leon Montoya Sanchez
The list of businesses and individuals named by OFAC today as SDNTs is attached
and available at WW\fltre.l~ (jUV:CI:1C, as is the entire list of SDNTs. The list will Je
published in the Federal Register at a later date.
http://wwwtreas.gov/press/relea ses/po3579.htm
11/6/2002
PO-3580: Treasury Department Issues USA PATRIOT Act Guidance on Section 352
Page 1 of I
Pf';LS S HOOM
FROM THE OFFICE OF PUBLIC AFFAIRS
October 25, 2002
PO-3580
Treasury Department Issues USA PATRIOT Act Guidance on Section 352
The Department of the Treasury today released rln interim final rule that provides
time for further study of certain industnes for the purpose of establishing anti-money
laundering programs, as required under section 352 of the USA PATRIOT Act. The
interim rule is effective until Treasury completes its study of these industries and
issues final rules applicable to them.
The industries subject to further study and regulation include certain insurance
companies; investment companies other than mutual funds; loan and finance
companies: dealers in precious metals, stones, or jewels; commodity pool operators
and commodity trading advisors; businesses engaged In vehicle sales; persons
involved in real estate closlllgs and settlements; pawnbrokers; travel agencies;
telegraph companies; private bankers; state-chartered, non-depository trust
companies: non-federally insured credit unions; and private banks.
Section 352 of the PATRIOT Act required all financial institutions, as defined by the
Bank Secrecy Act, to establish an anti-money laundering program within six months
of the passage of the PATRIOT Act. The Department determined that individual
regulations appJicClble to each category of financial institution were necessary to
provide adequate guidance to the diverse collection of industries affected, many of
which have no! previously been subject to anti-money laundering regulation. In
April, the Department issued regulations requiring a significant portion of the
financial services sector to establish anti-money laundering programs and deferring
application of the statute to the remaining categories for six months. The regulation
issued today extends the deferral to allow the Department to complete its work and
issue appropriate regulations. For the idenllfied financial institutions, compliance
with section 352 is not reqUired until the Department issues final and effective
regu lations.
The Department will publish regulations called for by the PATRIOT Act within the
next SIX months. This includes not only regulations called for by section 352 of the
Act, but also other provisions, such as section 326, which requires financial
institutions to develop procedures for identifying and verifying the identity of
accountholders.
http://www.treas.go v/ press!releases/po3580.htm
1116/2002
(BILLING CODE: 48 I 0-02-P)
DEPARTMENT OF THE TREASURY
31 CFR Part 103
RIN 1506-AA28
Financial Crimes Enforcement Network; Anti-Money Laundering Programs for
Financial Institutions.
AGENCY: Financial Crimes Enforcement Network (FinCEN), Treasury.
ACTION: Amendment of interim final rule.
SUMMARY: FinCEN is extending the provision in its regulations that temporarily defers, for
certain financial institutions, the application of the anti-money laundering program requirements
in section 352 of the Uniting and Strengthening America by Providing Appropriate Tools
Required to Intercept and Obstruct Terrorism (USA PATRIOT) Act of 200 1.
DATES: This interim final rule is effective [INSERT DATE OF PUBLICATION IN THE
FEDERAL REGISTER].
FOR FURTHER INFORMATION CONTACT: Office of the Chief Counsel (FinCEN),
(703) 905-3590; Office of the Assistant General Counsel for Enforcement (Treasury), (202)
622-1927; or the Office ofthe Assistant General Counsel for Banking & Finance (Treasury),
(202) 622-0480 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
I. Background
A. USA PATRIOT Act Section 352
On October 26, 2001, the President signed into law the USA PATRIOT Act (Public
Law 107-56) (the Act). Title III ofthe Act makes a number of amendments to the anti-money
laundering provisions of the Bank Secrecy Act (BSA), which is codified in subchapter H of
chapter 53 of title 31, United States Code. These amendments are intended to make it easier
to prevent, detect, and prosecute international money laundering and the financing of terrorism.
Section 352(a) of the Act, which became effective on April 24, 2002, amended section
5318(h) of the BSA. As amended, section 5318(h)(1) requires every financial institution to
establish an anti-money laundering program that includes, at a minimum: (i) the development of
internal policies, procedures, and controls; (ii) the designation of a compliance officer; (iii) an
ongoing employee training program; and (iv) an independent audit function to test programs.
The definition of "financial institution" in sections 5312(a)(2) and (c)(l) is extremely
broad. It includes institutions that are already subject to federal regulation such as banks,
savings associations, credit unions, money services businesses (such as money transmitters and
currency exchanges), and registered securities broker-dealers and futures commission
merchants. The definition also includes dealers in precious metals, stones, or jewels;
pawnbrokers; loan or finance companies; trust companies; private bankers; insurance
companies; travel agencies; telegraph companies; sellers of vehicles, including automobiles,
airplanes, and boats; persons engaged in real estate closings and settlements; investment
bankers; investment companies; and commodity pool operators and commodity trading
advisors that are registered or required to register w1der the Commodity Exchange Act (7
2
U.S.C. I et seq.). Section 352 of the Act requires all of these businesses to establish antimoney laW1dering progmms.
B. Prior Interim Rules Implementing Section 352
On April 29, 2002, FinCEN issued a series of interim final rules implementing section
352 of the Act. These rules prescribed requirements for anti-money laW1dering programs for
banks, savings associations, credit unions, registered securities broker-dealers, futures
conunission merchants, and introducing brokers that are regulated by a federal functional
regulator or a self-regulatory organization, and casinos!; money services businesses 2; mutual
funds 3 ; and operators of credit card systems. 4 FinCEN also temporarily deferred, until October
24, 2002, the application of section 352 to all other financial institutions. 5 The temporary
deferral applied to dealers in precious metals, stones, or jewels; pawnbrokers; loan or finance
companies; private bankers; insurance companies; travel agencies; telegraph companies; sellers
of vehicles, including automobiles, airplanes, and boats; persons engaged in real estate closings
and settlements; certain investment companies; commodity pool operators; and commodity
trading advisors. 6
!
67 FR 21110.
267 FR 21114.
367 FR 21117.
467 FR 21121.
5
See 3 I CFR 103.170 (67 FR 21 I 13, April 29, 2002).
6
The deferral did not extend to investment bankers because all such entities are either
3
The purpose of the temporary deferral was to permit FinCEN and Treasury to continue
studying the money laundering tisks posed by these institutions in order to develop appropriate
anti-money laundering program requirements. The extension of the anti-money laundering
program requirement to these financial institutions, most of which have never been subject to
federal financial regulation, raises many significant practical and policy issues. An inadequate
understanding of the affected industries could result in poorly conceived regulations that impose
unreasonable regulatory burdens with little or no corresponding anti-money laundering benefits.
FinCEN and Treasury are also aware that many ofthese financial institutions are sole
proprietors or small businesses, and that any regulations affecting them must recognize this fact.
As a result of our review of these industries, FinCEN and Treasury have published proposed
rules that would apply the anti-money laundering program requirements of section 352 to
insurance companies 7 and certain investment companies. 8 FinCEN and Treasury are continuing
to study the remainder of the deferred financial institutions and expect to issue proposed rules
for all these fmancial institutions within the next six months. FinCEN and Treasury are today
extending the temporary deferral concerning section 352 pending the issuance of final rules for
these financial institutions.
II. Analysis of the Current Interim Final Rule
depository institutions or securities broker-dealers that were subject to anti-money laundering
program requirements in the interim fmal rules.
767 FR 60625 (September 26, 2002).
867 FR 60617 (September 26, 2002).
4
A. Extension of Temporary Deferral of Section 352 Requirements for Certain BSA
Financial Institutions
As promulgated on April 29,2002,31 CFR 103.170 temporarily deferred, until
October 24,2002, the application of section 352 of the Act to dealers in precious metals,
stones, or jewels; pawnbrokers; loan or finance companies; private bankers; insurance
companies; travel agencies; telegraph companies; sellers of vehicles, including automobiles,
airplanes, and boats; persons engaged in real estate closings and settlements; certain investment
companies; commodity pool operators; and commodity trading advisors. This interim rule
amends section 103.170 by removing the October 24, 2002, termination of the exemption for
these financial institutions. As noted above, FinCEN and Treasury have issued proposed rules
for some of these financial institutions, and expect to issue additional proposed rules in the
corning months. FinCEN and Treasury believe it would be inappropriate to require these
financial institutions to implement anti-money laundering programs during the pendency of the
rulemaking process.
B. Clarification of Financial Institutions Subject to the Temporary Deferral
The temporary deferral in section 103.170 was intended to apply to all financial
institutions other than those for which anti-money laundering program requirements were
previously in effect or specifically prescribed pursuant to the April 29, 2002, interim final rules.
Although the prior interim final rules did not prescribe anti-money laundering programs for
certain financial institutions that are "banks" as defined in 31 CFR I 03.II(c) but which lack a
federal fimctional regulator, those financial institutions were not specifically included in the list of
5
financial institutions subject to the temporary deferral. Section 103.170 is being amended to
include these financial institutions (trust companies and certain state-chartered credit unions that
are not federally insmed, and private banks) within the temporary deferral. 9 For the same
reason, section 103.170 is also being amended to include any person defined as a "financial
institution" in 31 CFR 103.11(n)(7).10
C. Other Compliance Obligations Unaffected
Treasury and FinCEN emphasize that the temporary deferrals do not in any way relieve
any business from their obligations w1der law or regulation, including the requirements in 31
U.S.c. 5331 and 26 U.S.c. 60501 that they report transactions in cash or currency, or certain
monetary instruments, that exceed $10,000. The regulations under these sections are codified
at 31 CFR 103.30 and 26 CFR 1.60501, respectively. Every business must ensure that it has
appropriate procedures to report such transactions to FinCEN and the IRS using the single
Form 8300 jointly prescribed by those agencies. All financial institutions are further reminded of
the importance of reporting suspected terrorist activities or otherwise suspicious transactions to
the appropriate law enforcement authorities. In addition, Form 8300 contains a box that may
be checked to indicate that a particular transaction appears suspicious.
III. Administrative Procedure Act
The financial institutions defined as "banks" in 31 CFR 103.11 (c) correspond substantially to
the types of banks included in the list of "financial institutions" in 31 U.S.c. 53I2(a)(2)(A)-(F).
9
10 31 CFR 103.11 (n)(7) defines generally as a financial institution "a person subject to
supervision by any state or federal bank supervisory authority."
6
The provisions of section 352 of the Act, which requires all financial institutions to
establish anti-money laundering programs, became effective April 24, 2002. This interim final
rule imposes no requirements on any financial institution, and continues the exemption for certain
financial institutions from these requirements. Accordingly, good cause is found to dispense with
notice and public procedure as unnecessary pursuant to 5 U.S.c. 553(b)(B), and to make the
provisions of the interim rule effective in less than 30 days pursuant to 5 U.S.c. 553(d)(1) and
(3).
IV. Regulatory Flexibility Act
Because no notice of proposed rulemaking is required for this interim final rule, the
provisions of the Regulatory Flexibility Act (5 U.S.c. 601 et seq.) do not apply.
V. Executive Order 12866
This interim final rule is not a "significant regulatory action" as defmed in Executive Order
12866. Accordingly, a regulatory assessment is not required.
List of Subjects in 31 CFR Part 103
Banks and banking, Brokers, Counter money laundering, Counter-terrorism, Currency,
Foreign banking, Reporting and recordkeeping requirements.
Authority and Issuance
For the reasons set forth above, FinCEN is amending 31 CFR Part 103 as follows:
PART 103- FINANCIAL RECORD KEEPING AND REPORTING OF CURRENCY
AND FOREIGN TRANSACTIONS
1. The authority citation for part 103 is revised to read as follows:
7
Authority: 12 U.S.c. 1829b and 1951-1959; 31 U.S.c. 5311-5314 and 5316-5332;
title III, sees. 312, 313, 314, 319, 352, Pub. L. 107-56, 115 Stat. 307.
2. Section 103.170 is revised to read as follows:
Subpart I· Anti-Money Laundering Programs
***
§ 103.170 Exempted anti-money laundering programs for certain financial institutions.
***
(b) Temporary exemption for certain financial institutions. (1) Subject to the provisions
of paragraphs (e) and (d) of this section, the following financial institutions (as defined in 31
U.S.c. 5312(a)(2) or (c)(l)) are exempt from the requirement in 31 V.S.c. 5318(h)(l)
concerning the establishment of anti-money laundering programs:
(i) Dealer in precious metals, stones, or jewels;
(ii) Pawnbroker;
(iii) Loan or finance company;
(iv) Travel agency;
(v) Telegraph company;
(vi) Seller ofvehiclcs, including automobiles, airplanes, and boats;
(vii) Person involved in real estate closings and settlements;
(viii) Private banker;
(ix) Insurance company;
(x) Commodity pool operator;
8
(xi) Commodity trading advisor; or
(xii) Investment company.
(2) Subject to the provisions of paragraphs (c) and (d) of this section, a bank (as
defined in § 103.II(c» that is not subject to regulation by a Federal functional regulator (as
defined in § 103.120(a)(2» is exempt from the requirement in 31 U.s.c. 5318(h)(1)
concerning the establishment of anti-money laundering programs.
(3) Subject to the provisions of paragraphs (c) and (d) of this section, a person
described in § 103.11(n)(7) is exempt from the requirement in 31 U.S.c. 5318(h)(1)
concerning the establishment of anti-money laundering programs.
(c) Limitation on exemption The exemptions described in paragraphs (a)(2) and (b) of
this section shall not apply to any fmancial institution that is otheIWise required to establish an
anti-money laW1dering program by this subpart I.
(d) Compliance obligations of deferred fmancial institutions. Nothing in this section shall
be deemed to relieve an exempt financial institution from its responsibility to comply with any
other applicable requirement of law or regulation, including title 31 of the United States Code
and this part.
DATED: ______________
James F. Sloan
9
Director, Financial Crimes Enforcement
Network
10
PO-3581: Treasury Secretary O'Neill Remarks to Greenville & Spartansburg Chambers
0 ...
Page 1 of2
fJHLSS HOOM
FROM THE OFFICE OF PUBLIC AFFAIRS
October 28, 2002
PO-3581
United States Treasury Secretary Paul H. O'Neill
Remarks to Greenville & Spartansburg, SC Chambers of Commerce
Greenville, South Carolina
October 28, 2002
Good morning. It's a pleasure to be here with South Carolina's business leaders
The past year has been full of shocks and surprises for those who study and
participate in American business. We've suffered through a bursting stock market
bubble, terrorist attacks on New York and Washington, and discoveries of corporate
fraud. People have lost jobs, and a lot of retirement accounts are hurting.
Economic security IS on all our minds.
The economy was in recession when President Bush took office last year, and
we've been focused on recovery since inauguration day. The President's historic
tax relief program last summer reduced taxes for the average family of four by
$1,040 a year, and put cash In consumers' pockets when we needed it most: last
August and September.
Then in March, he signed the Job Creation Act to stimulate investment in our
economy. Combined, these two tax relief measures saved one million jobs in the
US economy this year. Without that tax relief, the recession would have been
deeper and the recovery slower.
Today, key economic fundamentals such as inflation. real wages, productivity,
interest rates, and business profits are all strong. We are on the bumpy road to
recovery. The auto and housing markets are strong. Consumers are taking
advantage of low interest rates to buy cars and homes. We need to see business
investment and Job creation pick up, and we will as we soak up the excess capaCity
in the system today.
We've also taken strong steps to advance corporate accountability. We've
Improved the system, putting new standards In place to hold corporations
accountable for telling the truth to investors and employees, so Americans can save
for college tuitions and comfortable retirements with greater confidence.
And now that the August 14 deadline for certifying financial statements is past, I am
confident that the worst of the corporate scandals is behind us - call them what you
will, but I can't believe any CEO still standing would be stupid enough to falsely
certify their books. Not when jail time is the certain consequence. We'll recover
from this wave of scandals as we have every other, and we'll move on to new
heights.
We'll be better for it too, as legitimate technological advances, productivity gains,
and improved regulatory structures raise our overall standard of living, and set the
stage for further growth.
Any of you who have studied economic history know there is nothing truly
unprecedented in today's trials and Ilea rings, or the images of shamed exexecutives led off in chains. Those infatuated with greed eventually get their due, in
every generation. Our economic system has the flexibility to absorb these shocks,
http://www.treas.gQv/prf..ssireiease s/p03581.htm
1116/2002
PO-3581: Treasury Secretary O'Neill Remarks to Greenville & Spartansburg Chambers 0... Page 2 of 2
adjust, and recover.
A company with real leadership, honest and accountable, is one that helps all its
employees to work together toward a common goal, and to realize their potential to
a far greater extent than they could otherwise. Effective organizations unlock
human potential for all who strive within it. And that only happens when those
people at the top, the leaders, set the example.
So what really happened with these corporate leaders now fallen? I think they
strayed from their values in the anything-goes 90s, and by the time they realized
how far they had strayed - after all, in their mlllds, everyone else was dOlllg it, or
would if they could - it was too late.
The questlorl for our new, post -Y2K era IS not whettler we can or should continue
the economic success we enjoyed in the 1990s. The question is how leaders of
busilless and government should incorporate the best aspects of the 90s - growth,
productivity, ane innovation - Into the emerging decade, while actively working to
make thiS new era a time of both personal responsibility and public integrity How
can we reaffirm the link between value and values, and restore public confidence in
American enterprise?
In my view, the answer is simple: honest, accountable leadership. With leadership,
everything is possible; without it, nothing is pOSSible.
In the economic domain, I believe the connection between creating value and
affirming values in American business has always been strong. Far away from the
headlines, most business leaders, from small shopowners to corporate Chiefs, have
always treated their shareholders and employees with honesty and fairness.
Today, however. doing your job with competence is not enough Leaders must
stand up and set an example not just for their employees, but for the general public
as well. Honesty:n business is the new patriotism. There is nothing better
business leaders can do for this country right now than restore faith in the system
that has made it great.
Thank you.
http://www.treas.gov/press/releases/p03581.htm
11/6/2002
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
October 28, 2002
Office of Financing
202-691-3550
CONTACT:
RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
91-Day Bill
October 31, 2002
January 30, 2003
912795LW9
Term:
Issue Date:
Maturity Date:
CUSIP Number:
1.550%
High Rate:
Investment Rate 1/:
Price:
1.578%
99.608
All noncompetitive and successful competitive bidders were awarded
securities at the high rate.
Tenders at the high discount rate were
allotted 97.24%.
All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Competitive
Noncompetitive
FIMA (noncompetitive)
$
33,570,908
1,630,929
617,000
$
5,908,511
5,908,511
Federal Reserve
$
41,727,348
15,752,372
1,630,929
617,000
18,000,301 2/
35,818,837
SUBTOTAL
TOTAL
Accepted
Tendered
Tender Type
$
23,908,812
Median rate
1.540%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate.
Low rate
1.510%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio = 35,818,837 / 18,000,301 = 1.99
L/ Equivalent coupon-issue yield.
2/ Awards to TREASURY DIRECT ~ $1,312,373,000
http://www.pubiicdebt.treas.gov
PO-3582
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
October 28, 2002
RESULTS OF TREASURY'S AUCTION OF 26 -WEEK BILLS
182-Day Bill
October 31, 2002
May 01, 2003
912795MK4
Term:
Issue Date:
Maturity Date:
CUSIP Number:
1.515%
High Rate:
Investment Rate 1/:
Price:
1.548%
99.234
All noncompetitive and successful competitive bidders were awarded
securities at the high rate. Tenders at the high discount rate were
allotted
4.33%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Competitive
Noncompetitive
FIMA (noncompetitive)
$
37,943,810
987,385
580,000
$
5,998,374
5,998,374
Federal Reserve
$
45,509,569
15,432,768
987,385
580,000
17,000,153 2/
39,511,195
SUBTOTAL
TOTAL
Accepted
Tendered
Tender Type
$
22,998,527
Median rate
1.490%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate.
Low rate
1.470%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio = 39,511,195 / 17,000,153
= 2.32
/ Equivalent coupon-issue yield.
/ Awards to TREASURY DIRECT = $763,404,000
0-3583
http://www.publicdebt.treas.gov
DEPARTMENT
OF
THE
TREASURY
,
NEWS
TREASURY
OFFICE OF PtJllLlC .~FF.~ IRS. 1500 PENNSYLVANIA AVENUE, N.W .• W\SHIN(;,(,ON. D.C .• 20220. (202) 622·21)60
EMBARGOED UNTIL 11:00 A.M.
October 28, 2002
Contact:
Office of Financing
202/691-3550
TREASURY OFFERS 4-WEEK BILLS
The Treasury will auction 4-week Treasury bills totaling $18,000 million to
refund an estimated $16,000 million of publicly held 4-week Treasury bills maturing
october 31, 2002, and to raise new cash of 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 $12,845 million of the Treasury bills maturing
on October 31, 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
0-3584
Fur press release8, speeches, puhlic schedules alld official biographies, call our 2-1-hollrfax
iiI/I!
at (202) 622-2fl.10
HIGHLIGHTS OF TREASURY OFFERING
OF 4-WEEK BILLS TO BE ISSUED OCTOBER 31,
2002
October 28,
2002
Offering Amount . . . . . . . . . . . . . . . . . . . . $18,000 million
Public Offering . . . . . . . . . . . . . . . . . . . . $18,000 million
NLP Exclusion Amount . . . . . . . . . . . . . . . $10,500 million
Description of Offering:
Term and type of security . . . . . . . . . .
CUSIP number . . . . . . , . . . . . . . . . . . . . . . .
Auction date . . . . . . . . . . . . . . . . . . . . . . .
Issue date . . . . . . . . . . . . . . . . . . . . . . . . '
Maturity date ...... , . . . . . . . . . . . . . . .
Original issue date . . . . . . . . . . . . . . . .
Currently outstanding . . . . . . . . . . . . . .
Minimum bid amount and multiples ...
29-day bill
912795 LM 1
October 29, 2002
October 31, 2002
November 29, 2002
May 3D, 2002
$41,784 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:
11) 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.
PO-3585: Deputy Assistant Secretary Mark Warshawsky Remarks to the Treasury Borro ...
Page 1 of2
f-'HLSS HOOM
FROM THE OFFICE OF PUBLIC AFFAIRS
October 29, 2002
PO-3585
Treasury Deputy Assistant Secretary Mark Warshawsky
Remarks to the Treasury Borrowing Advisory Committee of the Bond Market
Association
When you were here three months ago, economic growth was accelerating in the
third quarter following a modest pace of activity in the second quarter. Consumers
were responding once again to new auto-sales incentives. As a result, motor
vehicle sales reached an 18.6 million unit annual rate in August, the fifth highest on
record. Indicators of equipment investment were rising, including in the high-tech
sector. We Will not have official GDP results for the third quarter until later this
week, but private forecasters expect real growth in the 3-112 percent annual rate
range, com;iueratJly faster than the 1.3 percent recorded in the second quarter.
Toward the end of the third quarter, economic indicators began to turn a bit softer.
This was primarily evident in consumer spending and implies a lower platform
heading into the fourth quarter. Even so, we see a number of signs that provide a
basis for optimism The four-week average of initial claims for unemployment
insurance, while still elevated, has been moving lower through the first three weeks
of October. The housing sector continues to escalate beyond expectations, with
starts of new single-family homes jumping to their highest level since 1978.
Inventories appear to be very lean in relation to sales, and are poised to make
positive contributions to growth as production picks up to rebuild stocks.
In addition, productivity growth remains stellar and inflation is well behaved. In the
second quarter, productivity growth compared to a year earlier hit 4.8 percent in the
nonfarm business sector, the largest four-quarter increase in almost 20 years
Productivity growth in the corporate sector alone is even more striking. Output per
hour in nonfinancial corporations was up 6.0 percent over the past year, a
performance not seen since 1976. The importance of these gains cannot be
underestimated Productivity advances have combined with modest nominal wage
increases to result in year-to-year declines in unit labor costs of about 2 112 percent
in the nonfarm sector - a development not seen since the early 1960s. This has
led to Improved profits and some widening in profit margins.
The endurance of the "productivity miracle" in a period of moderate growth provides
a substantial case for stronger real growth in the future, as costs are contained and
profits rebuilt.
It seems likely that important sectors of our economy have yet to benefit fully from
improved productivity growth and that there are further gains to come in such areas
as health care, education, and government. These are areas in which the
Administration has, and will continue, to devote considerable effort in both
management and policy design
The inflation and productivity picture are, of course, closely linked, and inflation
results this year have been particularly good. The CPI has risen by just 1 1/2
percent over the past twelve months. As a result, real wages have been rising one of the factors that has supported consumption. Part of the favorable inflation
environment reflects lower energy prices relative to a year earlier - a development
that is now reverSing. Still, prices for non-energy goods have also been falling and
non-energy service prices have been decelerating. Overall, growth in the
nonenergy CPI has been slowing and has risen at Just a 2.1 percent annual rate
over the latest 12 months.
http://www.trcus.gov/pre~slrdea.<;es/~03585.htm
1116/2002
PO-3585: Deputy Assistant Secretary Mark Warshawsky Remarks to the Treasury Borro...
Page 2 of2
Low inventories, rapid productivity growth, rising real wages, and benign Inflalion
support the view lIlat solid growth will be maintained going forward, notwithstanding
what may be a continued pattern of quarterly fluctuations. Average growth over the
first half of the year was quite favorable at a 3.1 percent annual rate, and even with
what might be a slower performance in the fourth quarter, the economy is wellpOSitioned to grow at about a 3 percent pace in the second half.
Part of the reason for the economy's speedy and durable, though at times uneven,
recovery following the 2001 recession and the terrible shocks of the terrorist
attacks, lies with the resiliency and flexibility of our economic system, including our
capital markets Both last fall and this summer, a portfolio shift to government and
agency bonds in the face of heightened volatility and uncertainty in the equity
markets lowered long-term Interest rates to 40-year lows. Mortgage rates followed
suit, triggering a surge in refinancings that put billions of dollars into the hands of
households. That. and the 0% financing that auto makers were able to offer,
helped support consumer spending and the overall economy.
Fiscal and monetary poliCies also helped return the economy to an upward path.
But the recession in 2001, declines in the stock market, and the necessary
spending to combat terrorism have had an effect on Federal finances in fiscal year
2002. In response to these events, the Federal budget was in deficit by $159 billion
in FY2002, although this was less than the $165 billion projected in last summer's
Mid-Session Review. With renewed economic growth and restraint in discretionary
spending, we expect the budget to return to surplus within a few years.
In sum, current economic developments are generally positive, and strong
underlymg fundamentals will assist a return to stronger growth in 2003. As
Secretary ONeill has often said, the road to recovery may be bumpy, but we are
confident that a sustained economic upturn is underway and growth will accelerate.
http://www.treas.go v1 press/releas es /po3585.htm
11/612002
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
October 29, 2002
Office of Financing
202-691-3550
CONTACT:
RESULTS OF TREASURY'S AUCTION OF 4-WEEK BILLS
29 -Day Bill
31, 2002
November 29, 2002
912795LMI
Term:
Issue Date:
Maturity Date:
CUSIP Number:
Octobe~
1.550%
High Rate:
Investment Rate 1/:
Price:
1.575%
99.875
All noncompetitive and successful competitive bidders were awarded
securities at the high rate.
Tenders at the high discount rate were
allotted 73.39%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Accepted
Tendered
Tender Type
Competitive
$
Noncompe~itive
45,086,472
37,402
FIMA (noncompetitive)
17,962,753
37,402
o
°
SUBTOTAL
Federal Reserve
TOTAL
$
$
45,123,874
18,000,155
938,271
938,271
46,062,145
$
18,938,426
Median rate
1.540%: 50% of the amount of accepted competitive tenders
Was tendered at or below that rate.
Low rate
1.510%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio
=
45,123,874 / 18,000,155 = 2.51
I Equivalent coupon-issue yield.
http://www.publicdebt.treas.gov
0-3586
PO-3587: E-Filing Agreement Signed Free electronic tax return filing for 78 Million taxp...
PHCSS
Pag
F~OOM
FROM THE OFFICE OF PUBLIC AFFAIRS
October 30,2002
PO-3587
E-Filing Agreement Signed Free Electronic tax return for 78 Million taxpayers
begins in January
Today Treasury announced that an agreement has been signed that will allow up to
78 million taxpayers to file their tax returns electronically without charge. The
agreement between the IRS and Free File Alliance, LLC was signed today by IRS
Commissioner Charles Rossotti and Free File Alliance manager Mike Cavanagh.
Under the agreement. tax software companies will offer at no charge on-line tax
return preparation and filing services to a significant portion of American taxpayers.
The IRS will provide taxpayers links to these free services through irs.gov and
firstgov.gov. The final agreement along with IRS' response to the public comments
on the draft agreement was posted in the Federal Register.
"We are one step closer to allowing millions of taxpayers free electronic filing of
their tax returns," stated Treasury Secretary Paul O'Neill. "1 look forward to the
public launch of the website in January."
"This represents an important step forward for taxpayers and our e-filing efforts.
This will give millions of taxpayers free access to preparation and e-filing," stated
IRS Commissioner Charles O. Rossotti. "As the filing season approaches, the IRS
will continue working with the Alliance to implement this important initiative. This
jOint effort will t,elp even more taxpayers benefit from e-filing."
Free federal electronic filing of tax returns is pro-consumer and pro-taxpayer. Up to
78 million Americans stand to benefit from this free service. This initiative was
launched as part of the President's budget last year. The PreSident has also
proposed a 15 day filing extension for all taxpayers who file electronically, including
those eligible for free filing under this initiative. That proposal has not yet been
approved by Congress.
Specific details about the e-file programs in the initiative will be available later.
Ttle lext of the final agreement
IS
dllCJcilPd
http://www.treasgov/press/releases/po3587.htm
1116/2002
Free On-Line Electronic Tax Filing Agreement
This Agreement is entered into, as of October 30, 2002, between the Internal
Revenue Service (the "IRS") and the Free File Alliance, LLC, a consortium of companies
in the electronic tax preparation and filing industry (the "Consortium"), a non-profit
corporation (under the provisions of26 U.S.c. §501(c)(3)) formed under the auspices of,
and affiliated with, the Council for Electronic Revenue Communication Advancement.
The Consoltium has been formed to facil itate participation in this Agreement by
commercial entities, which are members of the Consortium engaged in the business of
electronic tax preparation and filing ("Consortium Participants").
I.
Purpose
This Agreement provides for free on-line tax return preparation and filing to
individual taxpayers, thereby meeting the following five objectives:
I.
2.
3.
4.
5.
II.
Assuring access to a free and secure electronic preparation and filing option for
additional taxpayers, building upon free electronic tax preparation and filing provided
in the commercial market today;
Making tax return preparation and filing easier and reducing the burden on individual
taxpayers;
Supporting the IRS's statutory goals of increased e- filing, pursuant to the IRS
Restructuring and Reform Act of 1998, which encouraged the IRS to set a goal of
having 80% of Federal tax and information returns filed electronically by the year
2007;
Providing greater service and access to taxpayers; and
Implementing one of the proposals in the President's FY'03 budget, speci fically to
encourage further growth in electronic filing by providing taxpayers the option to file
their tax return on-on-line without charge, using cooperation with, and encouraging
competition within, the private sector to increase e- filing.
Summary
To accomplish the above objectives, the IRS and the Consortium (together, "the
Parties") will work together to offer free, on-line tax return preparation and filing services
to taxpayers ("Free Services"). The Consortium will offer Free Services to taxpayers.
The IRS will provide taxpayers with links to the Free Services offered by the Consortium
Participants through a web page (described more fully in V. below; hereafter, the "Web
Page"), which will be hosted at irs.gov accessible through firstgov.gov. During the tcon
of this Agreement, the IRS will not compete with the Consortium in providing free, online tax return preparation and filing services to taxpayers.
This Agreement is the best method for meeting the above stated objectives
because it will promote higher quality Free Services by utilizing the existing expertise of
the private sector, maximize consumer choice, promote competition for such Free
Services, and tocreby meet the objectives in the least costly manner.
III.
Scope of Offerings
A.
B.
The Consortium will offer Free Services for eligible taxpayers (taxpayers
meeting the qualifications for free offerings) from individual commercial
sites. Such offerings, when taken in the aggregate, are intended to provide
for Free Services to be available to 60% or more of taxpayers. If at any
point the Consortium's aggregate offerings of Free Services are available
to fewer than 60 % of taxpayers, the IRS may notify the Consortium of
that fact. After receipt of such notice, the Consortium wilI have six
months within which to raise the availability of such offerings to at least
60% of taxpayers. If the Consortium fails to achieve 60% within such sixmonth period, the IRS may terminate this Agreement. In making this
decision, the IRS agrees to take into account the extent to which actual
usage of Free Services has increased. Consortium offerings, taken
together, will provide eligible taxpayers with a reasonable assurance that:
(1) Free Services will be available on demand, and (2) these services will
provide the ability to file the same federal tax forms which are fileable and
available in the comparable paid on-line services offered by a selected
Consortium Participant.
The Consortium shall accept offerings only from entities that:
I.
Provide electronic, on-line tax preparation and filing of individual
income tax returns:
2.
\Vill offer and can provide Free Services to a number of individual
taxpayers, which equals or exceeds 10 percent (10%) of the
number of individual income tax returns filed in the base year (CY
2001).
3.
Offer on-line software approved by the IRS that generates returns
that can be sent to the IRS via an IRS-approved channel.
4.
Are Authorized IRS E-File Providers in accord with IRS Rev. Proc.
2000-3\.
5.
Are in compliance with applicable law, including but not limited to,
Department of Treasury/IRS rules, including but not limited to 31
C.F.R. Part 10, IRS Rev. Proc. 2000-31, current versions of IRS
Publications 1345 and 1345-A, and 26 U.S.c. §7216.
C.
IV.
6.
Demonstrate the competence and capability to deliver their free
offerings. This competence and capability may be demonstrated
either by providing evidence of prior experience in providing online or electronic filing services or by self-certification. Such self-.
certification shall be reasonably and objectively determined by the
Consortium, taking into account the above referenced need for
competence and capability and the intent of the Agreement to
avoid unnecessary barriers to entry. Consortium Participants must
have adequate capacity to meet the expected demand for their Free
Services. In addition to initial Participants, the Consortium will
accept later qualified applicants as Consortium Participants.
7.
Have a security seal certification program, from a third party
agreed to by the Consortium and IRS. Certification will be based
upon an assessment of the system's ability to protect taxpayer data.
8.
Comply with the privacy provisions of26 U.S.c. §7216. Have a
privacy seal certification program from a third party agreed to by
the Consortium and IRS. Consortium participants are encouraged
to use software that will enable their websites to state their privacy
practices in a standard machine-readable format that can be
retrieved automatically and interpreted easily by users.
Consortium Participants shall also agree that provisions of Free
Services shall not be conditioned on obtaining an eligible
taxpayer's consent to solicitations of additional business.
9.
Will not contain or provide links to inappropriate content.
10.
Clearly disclose to users their customer service support options and
privacy policy.
1l.
Agree to have at least one link to the IRS web site (irs.gov).
The Consortium will take reasonable steps to publicize the criteria for
Consortium participation. The Consortium will provide to the IRS, on
request, the names of unsuccessful applicants for Consortium
participation and the reason for their rejection.
Performance Standards
A.
The IRS will have the Consortium web page ready by December 31,
2002. Consortium participants will have submitted their test returns
produced by their software to the IRS sufficiently in advance of that date
for testing. The IRS will not list on the Consortium web page a
Consortium participant whose test returns have not been certified prior to
the beginning of the filing season until that participant's test returns have
been tested and certified.
B.
The Consortium will use its best efforts to assure that Free Services by
individual Consortium Participants are perfornled in accordance with the
terms of the Agreement and in accordance with the offer made by the
Consortium Participant. If the IRS determines a particular offering of Free
Services is defic~nt or that Free Services are not being properly
performed, it will notify the Consortium in writing of that fact, and
provide information regarding corrective actions it believes are needed.
c.
The undertaking by the Consortium under IV. A to offer Free Services at
or above the 60% level shall apply only to January through April of each
year (the primary tax filing season). Outside of the primary tax filing
season, the Consortium shall encourage Consortium members to offer Free
Services to the same extent that such services are offered by Consortium
members for compensation.
D.
The Consortium will be responsible for establishing its governance
standards. These standards shall be in accord with applicable law and
regulations. The standards shall be consistent with the Consortium
performing its obligations under this Agreement and be designed to
maximize participation of industry members while meeting the
requirements of the Agreement.
E.
IRS, in consultation with the Consortium, will develop an assessment
process including usability performance measures to measure the extent to
which the Agreement is accomplishing the objectives described in L,
above. They will include at least:
1.
2.
V.
Uptime and reliability through the tax season.
Delivery of the taxpayer to the Free Services in the minimum
number of clicks consistent with usability design principles and the
need to fully inform taxpayers about the free online services. .
From the site the taxpayer arrives at by clicking on the Consortium
page's link to the Consortium Participant, until the taxpayer arrives
at the Free Services, there will be no more clicks than required of
such Consortium Participant's paying customers, if applicable,
consistent with usability design principles.
Consortium Web Page Operation
A.
The IRS will host and maintain the Web Page. The Consortium will
submit to the IRS proposed content for the Web Page, and the IRS shall
detennine the final content to appear on the Web Page. The IRS will
ensure that there are links from appropriate Government sites to the Web
Page.
B.
The design of the Web Page will confoml to the following guidelines:
1.
2.
3.
4.
5.
VI.
The Consortium will determine rank order placement of links to
individual offerings in accordance with reasonable, objective
criteria. Each listing of an offering will provide a description of
the scope of, and eligibility for, Free Services it offers.
The Web Page will provide a link to each Consortium Participant's
Free Services entry using a minimum number of clicks.
No advertising will appear on the Web Page.
The Consortium will create and supply to IRS proposed content for
the Web Page using existing IRS content management procedures.
The Web Page will be developed using usability design principles
and will be updated based upon usability testing and other user
feedback.
C.
Taxpayers will be able to use Consortium Participants' software to prepare
and electronically file their own personal income tax returns using
proprietary processes and systems which such Participants host and
maintain.
D.
The Consortium will promptly notify the IRS of any punned or unplanned
unavailability (i.e., downtime) of an offering that is anticipated to exceed
five hours in duration. The IRS will annotate that offering's listing on the
Web Page with a notice advising the public of the unavailability. The IRS
may delist an offeror if its service remains unavailable for more than 24
hours, but shall re-Iist after restoration of availability; provided, however,
if a Consortium Participant repeatedly has periods of such unavailability,
the IRS shall be entitled to delist that Consortium Participant.
Marketing
A.
The Parties will coordinate with each other their respective marketing of
these Free Services to provide uniformity and maximize public awareness.
Final decisions on the marketing campaign will remain with the IRS for
IRS marketing expenditures and with the Consortium and the Consortium
Participants for their marketing expenditures.
B.
The IRS will not endorse specific offerings or products, but will promote
the availability of the Consortium's Free Services.
C.
The Parties will work with the States to explore how this Agreement can
support the states. On-line tax preparation and e-filing of both federal and
state returns can maximize benefits of this Agreement to taxpayers.
D.
VII.
The Consortium understands that the IRS may continue to provide
Consortium Participants or non- Participants Partners links from
Government sites to electronic prcparers and filers.
Term of Agreement; Termination
A.
This Agreement has an initial term of three years from its effective date
with automatic options to renew for successive two-year periods.
Representatives from the Parties will meet semiannually to review
operation of this Agreement. The Parties will review the terms of this
Agreement on an annual basis, and, upon mutual consent, can agree in
writing to modify any provision of this Agreement.
B.
Either Party may tern1inate this Agreement for cause if the other Party
fails to comply with this Agreement, and such failure is not cured within
thirty days of written notice of such failure from the other Party.
C.
The IRS may terminate this Agreement without cause, such termination to
be effective 12 months after the date of notice of such termination.
D.
Should the IRS decide to offer Free Services to taxpayers the IRS shall
notify the Consortium immediately. If the IRS gives such notice during the
tax season (between January 1st and April 15 t h, or the last day of the filing
deadline if that date is changed from April 15) of any year, the Consortium
may, by written notice to the IRS, terminate this Agreement, effective on
April 16th (or, if the filing deadline is changed from April 15, on the day
following such new deadline) of that year. If the IRS gives such notice
between April 16 th (or, if the filing deadline is changed from April 15, on
the day following such new deadline) and October 15 th of any year, then
the Consortium may, by written notice to the IRS other than during a tax
season, terminate this Agreement, such termination to be effective no
fewer than 30 days after the date of the Consortium's notice of such
tem1ination. If the IRS gives such notice between October 15 and
December 31, the Consortium may by written notice immediately
terminate this Agreement at any time on or before December 31.
VIII.
Miscellaneous
This Agreement represents the entire agreement between the Parties. This
Agreement is governed by Federal law.
Charles O. Rossotti, Commissioner
Internal Revenue Service
Michael F. Cavanagh, Manager
Free File Alliance, LLC
2002-10-29-13-0-14-10974: Report on Implementation of Recommendations
Page I of I
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FROM THE OFFICE OF PUBLIC AFFAIRS
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October 29. 2002
2002-10-29-13-0-14-10974
Report on Implementation of Recommendations Made by the International
Financial Institutions Advisory Commission
The international financial institutions (IFls) playa pivotal role in the international
communilYs effort to strengthen the foundations for global growth, to reduce the
incidence of crises and promote more orderly resolution when they do occur, and to
support increased productivity growth essential to poverty reduction. These
challenges are formidable and require continued efforts to find better approaches.
Report(s):
•
The Meltzer Report
•
nri'JIr1;:11 Trp;ls,II'Y Resllollsf:
http://www.trease.ov/press/releascs/200210291301410974.htm
1116/2002
Report on Implementation of Recommendations Made by the
International Financial Institutions Advisory Commission
October 2002
The international financial institutions (lFIs) playa pivotal role in the international community's
effort to strengthen the foundations for global growth, to reduce the incidence of crises and
promote more orderly resolution when they do occur, and to support increased productivity
growth essential to poverty reduction. These challenges are formidable and require continued
efforts to find better approaches.
The report prepared in March 2000 by the International Financial Institution Advisory
Commission (the Commission), chaired by Dr. Alan Meltzer, provided important insights into
how the IFIs might better achieve their objectives. This is the second annual report on progress
"to implement such recommendations [made by the Commission] as are deemed feasible and
desirable" in the June 2000 U.S. Department of the Treasury (Treasury) response to the
Commission's report. I This report provides an update on progress since the submission of the
first annual report to Congress in October 2001. 2
INTERNATIONAL MONETARY FUND
The Treasury supports many of the objectives listed in the Meltzer Commission's report on the
International Monetary Fund (IMF). To implement these objectives Treasury has focused on
five key areas:
•
•
•
•
•
strengthening the IMF's focus on preventing crises and reducing country vulnerability to
cnSlS;
increasing transparency, both for borrowing countries and the IMF itself, including to
support greater accountability for governments and to allow markets to make better risks
assessments;
streamlining IMF conditionality;
adjusting the terms of IMF lending, including better recognition of illiquid and insolvent
borrowers, and
implementing crisis resolution strategies that reduce the heavy reliance on official
financing.
In the last year, further progress has been made toward meeting these objectives.
I This report is prepared pursuant to section 603(i)(2) of the Foreign Operations, Export Financing, and Related
Programs Appropriations Act, 1999 (section 101 (d) of Public Law 105-277).
2 Available on the U.S. Treasury Department's web site: 11111'
II II 1\111'.1'.c~"\J'll" II'k,I"'" II'l'"1 I, 11I,'_IJIl'I I,dl.
U.S. Department of the Treasury - IFI Advisory Commission Recommendations
2002 Report on Implementation - Page 2
Preventing Crises and Reducing Vulnerability
Preventing interrntional financial crises is the heart of the IMF's mission. Treasury has strongly
supported the substantial efforts the IMF has made in the last year to improve its capacity in this
area. These efforts include reinforcing IMF surveillance and focusing IMP programs on the
macroeconomic and financial steps necessary to reduce vulnerabilities and bolster sustainable
growth.
Addressing Vulnerabilities
Last October, the IMF Board endorsed a new framework that will provide for more systematic
analysis of country vulnerabilities to financial crises. The framework provides for more analysis
of key "vulnerability indicators," such as reserves and the maturity structure of debt, and will
support early attention to key vulnerabilities in the IMF's and countries' crisis prevention
efforts. In June the IMF Board also endorsed a new framework for assessing external
sustainability in member countries that will reinforce IMF and country understanding of member
countries' underlying debt dynamics; such analyses are critical to better anticipating how changes
in macroeconomic parameters can affect a country's vulnerability to capital account crises.
Ongoing IMF efforts to address vulnerabilities include work on financial sector indicators and on
national balance sheet approaches to crisis prevention and resolution. It is especially important
in this regard to improve understanding of corporate balance sheets and their implications under
stress for a country's financial sector and macroeconomic performance.
At the same time, the IMF is continuing to improve the incorporation of analyses from the
Financial Sector Assessment Program (FSAP) into its surveillance and more broadly to
incorporate more systematic analyses of the critical issues around financial sector vulnerabilities
into surveillance and program work. Likewise, the IMF's Capital Markets Department continues
its efforts to strengthen links and facilitate the flow of information between the IMF and the
private sector. The above improvements are incorporated into He Fund's new guidelines for
conducting surveillance.
Increasing Availability of Country Information
The IMF has continued to assist countries in their efforts to provide economic information for
policy making and for analysts and creditors. More readily available national financial data
allow vulnerabilities to be identified earlier and policymakers to take corrective actions. The
IMF's Special Data Dissemination Standard (SDDS) is the framework which an increasing
number of nations follow in publishing this important information. Recently, Costa Rica became
the 50 th subscriber to the SDDS. In addition to the SDDS, the General Data Dissemination
System (GDDS) provides a framework through which countries may improve their statistical
systems. Finally, the IMF supplements national efforts to meet the SDDS or the GDDS with
technical assistance programs.
U.S. Department of the Treasury - IFI Advisory Commission Recommendations
2002 Report on Implementation - Page 3
Standards and Codes
The IMF also is playing a central role in the broader international efforts to promote the
development and application of internationally-accepted standards and codes. Standards and
codes contribute to market efficiency and crisis prevention by allowing market participants and
country policymakers to compare infom1ation on country practices against global benchmarks.
293 Reports on the Observance of Standards and Codes (ROSCs) have been completed by the
staffs of the IMF and the World Bank, working in conjunction with domestic authorities.
Treasury has consistently supported the IMP's role in these efforts and continues to advocate that
more ROSCs to be completed and published. The United States has published self assessments
in all areas covered by ROSCs and has participated in the SODS since its inception.
Countering the Financing of Terrorism
One of the IMF's major contributio n to the stability of the international financial system in the
past year has been its strong response to the threat caused by flows of funds to support terrorist
financing and money laundering. This response recognizes the threat these flows represent to the
international financial system and the unique capacity of the IMF to support a concerted
international effort i.n this area. Money laundering and terrorist financing issues are now
included in each FSAP and assessments of off-shore financial centers. At the same time, the
IMF has approved a one-year pilot program that will to incorporating into the ROSe framework
the Financial Action Task Force's (FATF's) 40+8 standards and codes that are designed to
reduce money laundering and the flow of terrorist financing. The FATF Plenary will review and
endorse the assessment methodology soon, and in the upcoming year the Fund and the World
Bank will begin conducting comprehensive assessments under the pilot program. The IMF has
also increased its technical assistance for anti- money laundering activities and expanded its
research into financial issues that could facilitate terrorist financing.
Transparency and Accountability
The IMF continues to make progress increasing the transparency of its own operations am its
dialogue with member countries. Treasury has championed the need for continued advancement
of this process; further progress is vitally needed and is critical for the credibility of the IMF and
its crisis prevention efforts. In total, 106 member countries have published IMF staff reports on
their economies prepared as part of surveillance (Article IV) consultations. Further, summaries
of Board discussions of these reports were published for 90% of IMF members in 2000, up from
56% in 1998. 55% of IMF staff reports on use of Fund resources programs were published from
January 200 1-April 2002, and 93% of letters of intent setting out the borrowing country's
economic reform intentions and memoranda of economic and financial policies have been
released by borrowing countries between January 200 I-August 2002.
It is equally important that the IMF make more information available about its internal activities.
Staff papers discussing key policy issues and summaries of Executive Board discussions of these
papers are now being released. Importantly, the new Independent Evaluation Office released its
first paper, which addressed the problem of prolonged use ofIMF resources by certain nations.
The United States was a key advocate for establishment of this office, which will provide a
u.s. Department of the Treasury -
IFI Advisory Commission Recommendations
2002 Report on Implementation - Page 4
source of infonned, anns-Iength analyses that should accelerate reform efforts. The publication
of the first report, along with responses from the IMF's management, staff and executive board,
represents a welcome step forward.
Finally, the U.S. Treasury strongly supports the IMF's expanded transparency with respect to its
financial operations. In recent years, the IMF has significantly increased the volume, quality,
and timeliness of information available to the public on its finances. The IMF has published
new, more detailed infonnation on its financial structure in its annual financial update. The IMF
also provides background and updated data on its financial activities on the internet, 3 including:
its current financial position, financial statements, liquidity and sources of financing, SDR
(Standard Drawing Rights) valuation and interest rates, rates of charge on IMF loans and the
interest rates paid to creditors, and detailed infonnation on its financial relationships with
individual countries.
Conditionality
On September 25, the IMF Board approved a new set of guidelines for conditionality. 4 Treasury
supported these new guidelines, which codify efforts to streamline conditionality, both in terms
of focusing conditions on items that are critical to a program's success and in focusing IMF
conditions on its areas of central expertise, including monetary, fiscal, exchange rate, financial
sector and debt management policies. 5
Future IMF conditions will be restricted to those items that are judged to be "critical" to the
macroeconomic outcomes of a program. This development addresses concerns that IMF
conditionality was too wide ranging and excessively detailed in the past, reducing the
effectiveness of IMF programs.
Consistent with its efforts to reduce the conditions the IMF imposes in policy areas outside of its
central expertise, the Executive Board of the IMF joined with the Board of the World Bank in
endorsing the concept of a designated "lead agency" to facilitate IMF and World Bank
cooperation in a country.
The guidelines also call for IMF staff to be more attentive to the need for borrowers to have
"ownership" of their reform programs. Treasury strongly agrees on the importance of supporting
programs that are backed by reliable domestic ownership. Treasury has simultaneously
emphasized the need for the Fund to be more selective in approving programs in countries where
ownership and commitment to implementation are weak. Maintaining a strong link between
disbursements and measurable results is the best way to ensure the most effective use of
resources and to deliver on the promise of aid intended to increase living standards.
Available at hup://www.imf.org/extemaUfin.htm
Available at http://www.imf.org/ExternaUnp/pdr/cond/2002/eng/guid/092302.pdf
5 The guidelines provide that conditions will normally consist of macroeconomic variables and structural measures
that are within the Funds core areas of responsibility. Variables and measures outside the Funds core area of
responsibility may also be established as conditions but may require more detailed explanation of their critical
importance.
3
4
u.s. Department of the Treasury - IFI Advisory Commission Recommendations
2002 Report on Implementation - Page 5
Finally, the guidelines identify modalities for conditionality that will reinforce the strong link
that should exist between performance and program disbursement. The guidelines reflect the
potential value of requiring specific policy actions prior to Fund endorsement and financing of a
country's economic program Treasury has long argued that prior actions can playa critical role
in building market confidence and preventing approval of programs that are likely to fail.
Reform of IMF Lending Facilities
In recent years, the IMF has taken a number of steps to shorten the maturities of its lending
programs. As the Meltzer Commission explained, shorter loan terms are more consistent with
the IMF's original mandate to make resources available for members that are experiencing a
temporary loss of liquidity and they encourage countries to address insolvency problems in an
orderly manner. These steps include movement to a repayment structure based upon an
expectation of early repayment and a fee structure based upon higher charges for increased
access. The IMF's Supplemental Reserve Facility (SRF), which carries premium pricing and
short-term repayment terms, is a central vehicle for exceptional access, although the lMF
continues to assess the needs for each program on a case- by-case basis.
In shifting to a structure based upon an early repayment expectations, the IMF included
provisions for the repayment period to be extended by another year with the formal approval of
the Executive Board in cases where the external position of the borrower is not strong enough to
make those repayments without "undue hardship or risk." Argentina has requested and received
four such extensions in the past year, with Treasury agreeing that Argentina qualified for the
extension in each instance.
Involving the Private Sector and Limiting Official Lending
A central criticism made by the Meltzer Commission was that excessive bailouts of investors
allows defaulting nations to sustain poor policies. To a great degree, the policies that engendered
these criticisms in the past were the result of the absence of a framework for the orderly
restructuring of sovereign debts. Without such a mechanism, debt restructuring-Dn the rare
occasions when it is necessary-is unduly delayed and disorderly. This lack of a framework
results in unnecessary depletion of the asset value of creditors and the imposition of severe
hardships on the citizens of debtor countries.
Creating a more orderly sovereign restructuring process will make it more likely that the private
sector plays its role in crisis resolution, while not increasing the probability of sovereign
restructuring. The IMF and the U.S. Treasury have worked intensely in the last year to create
proposals that will provide for the more orderly workouts of sovereign debt and to clarify official
sector policy in this area. Months of discussion among the G~ 7 Finance Ministers and Deputies
culminated in agreement on a G- 7 Action Plan for emerging markets in April 2002. The Action
Plan supports work on these proposals and has led to significant accomplishments.
In particular, the 6-7 has worked with emerging market countries and their creditors to develop a
market-oriented approach to the sovereign debt restructuring process. This approach would
encourage the use of collective-action clauses that, among other things, would allow a majority
U.S. Department of the Treasury - IFI Advisory Commission Recommendations
2002 Report on Implementation - Page 6
of creditors to bind a minority to key financial terms in the event of a restructuring and facilitate
on-going engagement between a sovereign and its creditors. At the same time, the Action Plan
supported further work by the IMF on a proposed statutory approach to sovereign debt
restructuring.
With the creation of a more orderly process for sovereign debt restructuring, the official sector
also will be better able to limit official finance. The policy challenge is to move gradually in the
direction of less reliance on large official packages, so that investor expectations can adjust
smoothly to new official sector policies. In the April Action plan, the G- 7 committed to provide
exceptional access only when an exception was justified. Progress has been made since April in
defining clearer procedures to determine when exceptional access is appropriate and improving
the transparency of how these decisions are made. These procedures, which include more
rigorous debt sustainability analyses, should help diminish market uncertainty regarding official
actions in times of crises and clarify the appropriate role of the private sector.
MULTILATERAL DEVELOPMENT BANKS
The Meltzer Commission emphasized the importance of raising living standards and the quality
of life, particularly for people in the poorest countries, and its majority report recommended
number of operational and policy refonns to improve the policy perfonnance of the multilateral
development banks in this crucial area.
President Bush believes that 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.
The multilateral development banks (MDBs) are important instruments in helping to raise
economic growth and prosperity around the world. But while the MDBs have the strong support
of the United States, the effectiveness of these institutions in making a difference in the lives of
the poor can be substantially improved. Consequently, reform of the MDBs has been one of the
highest priorities of the Bush Administration's international economic agenda.
Clearly, there is no simple universal blueprint for overcoming all the country-specific economic
and social obstacles that impede sustainable development progress. Yet, the MDBs can do a
better job in spurring the economic growth needed to combat poverty if they place greater
attention on two aspects of the development agenda that underlie most success stories: (I) the
factors that enable people and countries to become more productive; and (2) better measuring,
monitoring and managing for development results. From the start of the Administration, we
have pursued hallmark reforms in the MDBs in both of these complementary areas. We have
also worked to achieve an increase in the proportion of assistance to the poorest countries
delivered in the form of grants rather than loans.
Productivity Growth
The MDBs could be more effective in helping countries achieve improved living standards if
they prioritized their efforts to address causes of low productivity-such as poor policies, low
business investment, and inadequate education and health care-that are now holding countries
and people back.
U.S. Department of the Treasury - IFI Advisory Commission Recommendations
2002 Report on Implementation - Page 7
The need for sound policies is fundamental. Sound policies establish the basis for sustainable
domestic economic growth. Sound policies encompass outward-oriented engagement with
global markets and investment. In every country there is no substitute for honest leadership
committed to good and publicly accountable economic management. Progress in meeting the
goals of the Millennium Declaration is heavily contingent on improving the quality and
productivity of resource use. We therefore have successfully encouraged stepped up efforts by
the World Bank (ani the IMF) to strengthen public expenditure tracking and fiduciary
management and are urging that these efforts be intensified.
It is also crucial to create an environment that promotes vibrant private enterprise and
investment. If developing countries are to realize their economic potential, it is essential that
they, the MDBs, and their other donor partners move more forcefully to reduce the impediments
that are constraining the creation of high productivity jobs by the private sector. In this context,
Treasury secured agreement in the IDA replenishment (IDA-l3) concluded in July that IDA will
pursue a closer partnership with the International Finance Corporation to encourage innovation
in support of private sector development and devote significant resources during IDA-13 to such
innovative programs.
Treasury also wants to accord priority to human resource development, including investments
needed to improve delivery systems for health, education, water, and sanitation. These social
sector investments increase individual productivity and have major spillover benefits economywide. Conversely, the absence of basic services, such as clean water and sanitation, makes the
prospects for economic progress more remote.
The United States is supporting efforts underway by the World Bank and its donor partners to
identify best practice approaches that can be replicated elsewhere to help close the gaps-in data,
policies, institutional capacity, and financing-that now constrain the expansion of quality
education. Although delivery of health services and access to clean water pose different
challenges, the importance of coordinated approaches by the MDBs that focus on program
quality and the delivery of results cut across these three issues. We also believe it will be
difficult to envision substantial progress in any of these areas without major improvements in onthe-ground coordination by the MDBs and other official and private donors.
Better Measuring, Monitoring and Managing for Development Results.
Delivering and measuring development results at all levels should be an MDB development
priority. The IDA-13 agreement launches a fundamental shift of focus within the MDBs to
measurable results.
The unique outcome of IDA-13 is a contribution structure that allows donors to increase their
funding levels if concrete measurable results are achieved. Donors and developing countries will
benefit from routinely quantifying development achievements and understanding the reasons for
success and failure. This will increase accountability for and learning from development results.
In IDA-I3, there was agreement to measure progress toward two objectives:
U.S. Department of the Treasury - IFI Advisory Commission Recommendations
2002 Report on Implementation - Page 8
•
The first set involves getting the new measurable results system started. This system must be
established and otrer analytical underpinnings oflOA's work expanded. Timely and high
quality diagnostic analyses ~ such as public expenditure reviews, financial accountability
assessments, and investment climate assessments - are important tools for identifying the
strengths and weaknesses in a country's ability to make the most effective use of IDA
resources.
•
The second set of results is in the areas of education, health, and private sector development.
After careful consideration of both measurability (i.e., whether tre data exist in most IDA
countries) and relevance (i.e., whether they reflect IDA's productivity growth and poverty
reduction mandate), progress will be tracked toward the following goals:
Education: Increase in aggregate primary school completion rates across IDA countries as
well as an increase in the number of countries that have increased their completion rates.
Health: Increase in measles immunization coverage across IDA countries as well as an
increase in the number of countries with 80 percent coverage.
Private Sector Development: Reductions in both the number of days and the official costs
required to start business in IDA countries.
Pursuant to a recently concluded African Development Fund replenishment agreement (AfDF -9),
the AfDF will impro\e its development of quantifiable and monitorable performance indicators
for all sectors and rigorously incorporate these in individual operations. The AfDF also will
develop a results-based management system for measuring improvements in people's lives.
It is important to keep in mind that the progress secured in IDA-I3 and AfDF -9 are just the start
of what we want to be a fundamental shift of focus in the MDBs to measurable results. A new
measurement system must be created to implement the results approach; it will begin with a
small but important set of indicators. And it will evolve over time as the quality of data and
evaluation systems in recipient countries is strengthened and as the MDBs, other shareholders,
and developing countries realize that tre priority given to measuring results can ensure that the
lessons - both successes and failures - of development experience result in more effective
assistance and less poverty around the world.
More broadly, pursuing a results-based approach in IDA ani the other MOBs will require real
changes in operating style.
•
It means stating in quantitative terms the expected results of individual projects and overall
country assistance before providing funding, and
•
It means measuring progress towards stated results and assessing the reasons for success and
failure. It means structuring projects in a way that steps up or cuts back funding whether
results are achieved.
U.S. Department of the Treasury - IFI Advisory Commission Recommendations
2002 Report on Implementation - Page 9
Treasury is urging a sustained and prioritized effort by all of the MDBs to create and integrate
results-based operational plan that focuses on key measurable outcomes in every grant and loan,
and every country strategy.
Grants
The Meltzer Commission recommended that grants should replace loans in MDB operations in
poor countries without capital market access.
As a result of strong U.S. leadership, the IDA-13 agreement provides for a significant expansion
in grant funding for the world's poorest countries. Over the next three years, IDA grants will
account for between 18 and 21 percent of overall IDA resources. The availability of
approximately $4.5 billion in IDA grants should enable:
•
almost all ofIDA's assistance for education, health, nutrition, potable water and sanitation to
countries whose people live on less than a dollar a day to be provided in the form of grants.
•
all ofIDA's assistance for HIV/AIDS for all IDA-only countries, and up to 25 percent of
such assistance to blend countries (those eligible for both IBRD and IDA), to be provided in
the form of grants;
•
almost all ofIDA's assistance for natural disaster reconstruction to be provided in the form
of grants; and
•
up to 40% of IDA's assistance to post-conflict countries to be provided in the fonn of grants.
U.S. leadership on grants was also crucial in the recently concluded AfDF-9 replenishment,
which will increase the share of AfDF grants from 7.5 percent to between 18 and 21 percent. In
extending grants, the AfDF will give priority to investments in education, health, including
HIV/AIDS, the provision ofwatcr and sanitation, natural disaster prevention and recovery, and
post-conflict countries. The AfDF will also continue to provide grants for technical assistance
and capacity building.
Treasury views the IDA-13 and AfDF -9 replenishment agreements as significant achievements
in terms of meeting the Administration's policy objective of helping poor countries make
productive investments without saddling them with ever-larger debt burdens.
G-7 Reform Efforts
Complementing the U.S.-initiated reform agenda, the G-7 Heads of Government at the 2001
Genoa Summit approved six areas for MDB reform. G- 7 representatives on the Executive
Boards of the MDBs are coordinating practical ways of implementing the G- 7 recommemlalions
in each of the institutions.
The six G- 7 reform areas may be summarized as follows:
u.s. Department of the Treasury -
IFI Advisory Commission Recommendations
2002 Report on Implementation - Page 10
•
•
•
•
•
•
strengthening coordination among the MDBs at the country and institutional levels.
enhancing internal MDB governance, accountability and transparency at the highest
standards;
promoting good governance in borrowers-including effective public expenditure
management, accountability and anti-corruption efforts-as a core MOB activity;
reviewing the MOBs' lending instruments and pricing structures with consideration given to
streamlining instruments and differentiating pricing;
in the field of global public goods, giving priority to fighting infectious diseases, promoting
environmental improvement, facilitating trade and supporting financial stability;
being more proactive in supportingfinanciai sector reform in borrowing countries and in
building country capacity to meet international codes and standards.
The Presidents of all the MDBs submitted reports to the G- 7 countries at the Kananaskis Summit
in July on the status of their efforts to implement the Genoa reform agenda. There is broad G- 7
agreement that there has been good progress by the MOBs, that more still needs to be done and
that progress has not been uniform across the institutions. Implementation of this reform agenda
will remain an ongoing priority.
In conclus ion, MDB reform has been a priority of the Administration from the outset. Steady
progress is being made in achieving the key U.S. objectives within each of the institutions.
Treasury is also committed to continue to set high standards for the MDBs in order to make them
more effective in raising living standards around the world.
DEBT REDUCTION FOR THE HEA VIL Y INDEBTED POOR COUNTRIES (HIPCS)
The Meltzer Commission recommended 100 percent debt reduction by the IFIs and by bilateral
creditors for the HIPC countries.
The United States and the international community remain committed to implementing the
enhanced HI PC Initiative. Twenty-six HIPC countries have now reached their decision pointsthe point at which creditors commit to providing debt relie~allowing these 26 countries to
begin benefiting from HIPC debt relief that will amount to about $41 billion over time. Total
debt service savings for these countries will average about $1.3 billion each year over the next
five years. Six of the countries (Bolivia, Burkina Faso, Mauritania, Mozambique, Tanzania, and
Uganda) have reached their completion points, when debt relief is delivered irrevocably.
Under the enhanced HIPC initiative, creditor countries forgive at least 90 percent of eligible
bilateral commercial-term debt. The United States (and some other G- 7 countries) forgive 100
percent of all outstanding bilateral debt contracted before the June 1999 Cologne Summit for
qualifying HIPCs.
Countries benefiting from HIPC relief are required to establish and implement reforms, including
more targeted and effective development strategies. The most important long-term measure of
the success of the enhanced HIPC initiative will be the impact of these reforms on productivity
and growth.
U.S. Department of the Treasury - IFI Advisory Commission Recommendations
2002 Report on Implementation - Page 11
One hundred percent debt reduction by the World Bank and IMF for either all or a subset of
HIPC countries, as some have suggested, would involve substantial additional costs at a time
when the current HIPC initiative is not fully financed. Contrary to a number of claims, there are
not excess resources readily available at the World Bank (IBRD) and IMF to cover these
increased costs; a number of suggested funding mechanisms would deplete World Bank and IMF
resources available for developing countries. Apart from the Bank and Fund, resources to pay
for additional debt reduction would need to be identified, for example from bilateral donors such
as the United States. Finally, providing 100 percent debt reduction for HIPC countries raises
equity concerns because other poor and indebted countries, which may have done better jobs of
managing their economies and debt obligations, would receive no debt reduction.
BANK FOR INTERNA TIONAL SETTLEMENTS
The Meltzer Commission recommended that the BIS continue in its role as a financial standard
setter and suggested that the Basel Committee on Bank Supervision align its risk measures more
closely with credit and market risk. It also recommended that the BIS become more transparent
and efficient by making more information available on its activities and streamlining its
organizational structure. Lastly, the Commission recommended that any membership expansion
in the BIS be done gradually and deliberately so as to avoid disrupting infonnation exchange
between central bankers.
Recent improvements at the BIS continue to broadly coincide with the recommendations of the
Meltzer Commission. The Bank for International Settlements CBIS) continues to serve as a
primary vehicle for consultation and cooperation among the central banking an:l regulatory
community to address international financial and monetary stability. It also continues to function
as a prime counterparty and provider of financial instruments for central banks.
With the active support of the United States, the Basel Committee on Banking Supervision,
which operates with a secretariat located at the BIS, reached agreement in July 2002 on the
issues to be covered in a new Capital Accord. This new Accord is designed to align bank capital
requirements more closely with underlying risks. Rather than relying on a single measure of
risk, the new Capital Accord takes a broader, "three-pillared" approach, focusing on a regulatory
capital charge, enhanced supervisory review, and greater market discipline on banks. The new
Accord is expected to be finalized by December 2003, with implementation to begin by year-end
2006.
The BIS also has continued its efforts to achieve greater inclusiveness by expanding the activities
of the Financial Stability Institute, which conducts training seminars for financial supervisors
around the world. The BIS also makes use of its Representative Office for Asia and the Pacific
in Hong Kong SAR to conduct outreach, and it will soon have a Representative Office for the
Americas in Mexico City.
In order to make information about its activities widely available, the BIS maintains a website
(www.bis.org).TheBISwebsitecontainsinformationabouttheorganization·shistory. structure,
and activities, including developments on the new Capital Accord. The website also provides
access to regular BIS publications and international financial statistics.
Response to the Report of the
International Financial Institution Advisory
Commission
This response to the Report of the International Financial Institution Advisory Commission (the
Commission) has been prepared pursuant to section 603(i)(1) of the Foreign Operations, Export
Financing, and Related Programs Appropriations Act, 1999, found in Public Law 105-277.
Section 603(i)(l) provides that the Secretary of the Treasury shall, within three months of receipt
of the Commission report, "report to the appropriate committees on the desirability and
feasibility of implementing the recommendations contained in the report [of the Commission]".
The Commission was established under the legislation authorizing U.S. participation in the most
recent quota increase of the International Monetary Fund (1M F) and the establishment of the
New Arrangements to Borrow. Congress mandated the Commission to report on the future role
and responsibilities of international institutions including the IMF, World Bank, the African,
Asian and Inter-American Development Banks, the European Bank for Reconstruction and
Development, the Bank for International Settlements and the World Trade Organization. In
March 2000, the Commission released its report, including a set of recommendations supported
by the majority, and three dissenting statements.
The work of the Commission took place in the context of intense public discussion on the role of
the international financial institutions (IFls). A number ofreports with alternative programs for
reform have been published recently by the Council on Foreign Relations, the CATO Institute,
the Carnegie Endowment for International Peace, and the Overseas Development Council,
among others. The Commission's recommendations are appropriately considered against the
background of these reform proposals, the range of Congressional mandates for IF] reform, and
recent U.S. and multilateral efforts to reform the international financial architecture.
Table· of Contents
June 8, 2000
Introduction
Principal Conclusions
U.S. Reform Agenda in the IMF and the MDBs
Response to the Recommendations on Reform of the IMF
Response to the Recommendations on Reform of the MDBs
Debt Reduction for the Heavily Indebted Poor Countries
Response to the Recommendations on Reform of the SIS
Response to the Recommendations on Reform of the WTO
Response to the Statement by Commissioner Levinson
Appendix
2-8
9-16
17-26
27-38
39-41
42
43
44-45
A.I-A.3
u.s. Department of the Treasury Response to the IFI Advisory Commission
Principal Conclusions - Page 1
Principal Conclusions
The IFls are among the most effective and cost-efficient means available to advance U.S. policy
priorities worldwide. Since their inception, they have been central to addressing the major
economic and development challenges of our time. They have promoted growth, stability, open
markets and democratic institutions, resulting in more exports and jobs in the United States,
while advancing our fundamental values throughout the world.
The Commission affirms the importance of the IFls in today's more integrated world. We share
this conviction and many of the underlying objectives of the Commission's report. We also
share with the Commission the belief that the IFls need to reform in important ways to confront
the new challenges oftoday's global economy. The Administration, working closely with the
Congress, has pressed for and achieved significant changes in the institutions. And more needs
to be done. The second part of our response details reform achievements to date, and our agenda
for further change.
At the same time, and despite our shared objectives, it is fair to say that we disagree in
fundamental respects with the bulk of the Commission's reform prescriptions. After careful
consideration of each of the recommendations in the report, we believe that, taken together, the
recommendations of the majority, if implemented, would profoundly undermine the capacity of
the IMF and the multilateral development banks (MDBs) to perform their core functions of
responding effectively to financial crises and promoting durable growth and market-oriented
reforms in developing countries - and would thus weaken the IFls' capacity to promote central
U.S. interests.
Shared Objectives
The Commission recognizes a continuing and essential role for the IFls.
The majority report concludes appropriately that the IMF should continue to have an important
role in crisis prevention, and that a strong capacity to respond to financial crises will be crucial to
the global economy going forward.
The majority report also concludes that the MDBs have a critically important mission in
promoting long-term development and reform in the developing countries, and that more
resources need to be made available to support these efforts in the poorest countries.
These are welcome conclusions, which the Administration shares.
u.s. Department of the Treasury Response to the IFI Advisory Commission
Principal Conclusions - Page 3
The Commission also outlines a number of refonn objectives that have commanded broad
bipartisan support in recent years - objectives that have fonned the basis for achieving
substantial change in the nature and focus of these institutions. These objectives include:
•
A sea change in the transparency ofthese institutions' operations and that of member
countries.
As a result of consistent u.s. pressure, the IMF and the MDBs now systematically
disclose to the public a broad range of key documents on their lending operations
- including Letters of Intent and Press Information Notices. For example,
program documentsfor nearly 90 percent of the IMF arrangements discussed by
the IMF Executive Board since June 1999 have been publicly released. And the
creation and expansion of the Special Data Dissemination Standard (SDDS) have
set a new benchmark for IMF members to meet in providing accurate and timely
financial and economic information to markets and the public at large.
•
The development of new mechanisms for strengthening incentives for countries to reduce
their vulnerability to crises.
The u.s. has strongly promoted a more comprehensive international effort to
reduce the risk offinancial crises, especially in the wake of recent crises in Asia
and elsewhere: this has borne fruit in the development of a common set of best
practices andfinancial standards; a systematically greater focus within the IFIs
on national financial vulnerabilities, including excessive leverage or
unsustainable exchange rate regimes; and the development of the IMF's new
Contingent Credit Line (CCL), conditioned on strong. ex-ante reforms in these
and other key areas.
•
A new focus within the IFTs on the importance of strong, open financial systems, better debt
management policies, and appropriate exchange rate regimes.
Because national policy failures in these areas have played a significant role in
recent crises. the IMF and the World Bank have now adopted, or are in the
process of adopting, a number of new initiatives to help improve the quality of the
policy advice that they provide to governments, to help them design stronger
financial systems, debt structures that are less vulnerable to various risks, and
more resilient exchange rate regimes.
•
Fundamental reform of the framework for the provision of IMF and World Bank lending to
the poorest countries, centered on greater selectivity and with a greater focus on poverty
reduction and growth.
Consistent pressure from the Administration andfrom Congress has helped to
achieve much greater selectivity in the allocation of MDB assistance - with
greater support for stronger performance and reduced support for repeated nonperformance. We have also helped to refocus the IFIs' attention on key priorities
such as investment in basic education and health care and combating corruption.
The IMF's new Poverty Reduction and Growth Facility (PRGF) puts core social
investments and poverty reduction at the heart of the country's economic
program. And the World Bank has developed a range of tools to address
U.S. Department of the Treasury Response to the IFI Advisory Commission
Principal Conclusions - Page 4
corruption more effectively: for example, in the technical assistance it has
provided for civil service reform.
We have been working to build consensus in Congress and among other IFI shareholders on the
importance of other broad objectives that are also highlighted in the Commission Report. Most
notably:
•
A substantial increase in debt relief and concessional financial assistance targeted to the
poorest developing countries.
The new international debt initiative launched in 1999 will grant substantial debt
reduction to a number of highly indebted poor developing countries that commit
to a credible program of economic reform. Five countries have already qual~fied
for this enhanced relief, worth a total of$13-14 billion, but the United States must
play its part to ensure that the initiative is adequately funded. In addition to its
financing requestfor this initiative, the Administration has proposed targeted
increases in development assistance to combat infectious diseases, including
HIVIAIDS, and (0 promote primary education, poverty reduction and other
objectives, to complement existing bilateral and multilateral assistance programs.
•
A stronger role for the MOBs in international efforts to provide global public goods.
The World Bank, with our encouragement, is intensifYing its support for
international efforts to promote environmental sustainability, reduce threats to
biodiversity, combat infectious diseases, and encourage the adoption of
development best practices. As part of this effort the President has called for the
MDBs to dedicate afurther $400 million to $900 million of their lending to the
poorest countries each year for basic health care to immunize, prevent and treat
infectious diseases.
•
And the need for a clearer delineation of the respective roles of the multilateral development
banks and the IMF.
We are working to develop a more focussed role for the IMF, centered on crisis
prevention and response in the emerging economies and macroeconomic stability
in the poorest economies, andfor the MDBs, which should address the longerterm challenges to development and reform in the developing and emerging
economies.
The reforms that have been implemented in the international financial institutions and the
important further steps that are underway will make a significant contribution to the IFIs'
capacity to address the diverse and complex array of risks and challenges that the global
economy now presents. Many of these reforms have been initiated by the United States, and
they largely reflect the directions that the Congress outlined in the legislation establishing the
Commission. But America's ability to promote further change in the future will depend centrally
on our capacity to build broader support for our proposals among the shareholders of the
institutions.
u.s. Department of the Treasury Response to the IFI Advisory Commission
Principal Conclusions - Page 5
Commission Recommendations
Despite the broad objectives that we have in common, we find ourselves in fundamental
disagreement with the Report's core recommendations for further reform.
The critical test in evaluating the desirability of alternative reform proposals should be an
assessment of whether they would strengthen or weaken the capacity of the institutions to
address economic challenges that are critical to U.S. interests. In our view, the core
recommendations of the majority, taken together, would substantially harm the economic and
broader national strategic interests of the United States, by reducing dramatically the capacity of
the IMF and the MDBs to respond to financial crises, and by depriving them of effective
instruments to promote international financial stability and market-oriented economic reform and
development.
The reforms proposed by the majority do not offer a realistic prospect of preventing future
financial crises and, by effectively terminating the lending programs of the IMF and the MOBs
in a broad range of emerging market economies, could significantly undermine our capacity to
promote changes that would reduce the vulnerability of these economies, and as a consequence
the vulnerability of the U.S. economy, to future financial crises.
Specifically, if the Commission's majority reform proposals had been in place in 1997 and 1998,
neither the IMF nor the World Bank would have been able to respond to the acute financial crisis
that spread across emerging markets during that period. As a result, the crisis would have been
deeper and more protracted, with more devastating impact on the affected economies and
potentially much more severe consequences for U.S. farmers, workers, and businesses.
By essentially taking the World Bank out of the development finance business, the
Commission's reforms would eliminate the most cost-efficient and effective of the international
development institutions, and the one with the greatest concentration of development experience
and expertise. The result would be to impose a much greater burden on bilateral resources to
meet development objectives that are so important to the U.S. interest. This would also reduce
the effectiveness of development assistance provided by the United States and other nations.
The reform proposals of the majority, had they been in place at the start of the 1990s, also would
have precluded the MDBs from supporting economic restructuring and private sector
development in Eastern Europe and the former Soviet Union, and across Asia and Latin America
in a period of historic opportunities for positive reform. The MDBs would have been unable to
promote financial sector reform and capital market development in the emerging market
economies that now have the bulk of the world's population and a substantial share of world
output. And there would have been significantly reduced support for trade liberalization,
privatization, agricultural reform, and other steps that have provided significant economic
benefits for many of the largest, most important emerging economies that have also been rapidly
growing trading partners of the United States.
In a world where the fortunes of U.S. workers and farmers, business and financial institutions are
increasingly tied to the overall strength of the world economy, we have a compelling interest in
working to build stronger, more effective global institutions that are able to address new
u.s. Department of the Treasury Response to the IFf Advisory Commission
Principal Conclusions - Page 6
challenges to growth and financial stability. In short, by weakening the institutions, we believe
that the recommendations of the Commission would leave the United States and many of om
closest allies and economic partners more vulnerable to the risks that a more integrated world
presents.
Commission Recommendations for the International Monetary Fund
The majority report outlines a set a/recommendations/or reform of the IMF that
would fundamentally change the nature of the institution. The main objective of
the Commission's proposals is to limit IMF lending to very short-term, essentially
unconditional liquidity support for a limited number of relatively strong emerging
market economies that would pre-qualify for IMF assistance.
We do not believe this approach is either desirable or feasible.
•
By restricting the IMF's capacity to lend only to emerging market countries that pre-qualify
for assistance, the Commission's recommendations would preclude the IMF from being able
to respond to financial emergencies in a potentially large number of its member countries.
Even with a long phase-in period, many countries of potentially systemic importance to
global financial stability could be deemed ineligible for assistance, depriving us of the
capacity to help contain and resolve crises through the IMF. The majority acknowledges
in the executive summary of the report a possible need for an exception to the
prequalification requirements "where the crisis poses a threat to the global economy", but
this proposal is inconsistent with the overall thrust of the report and is not discussed or
developed in the report itself.
-
The Commission's limited criteria for prequalification, by focusing on the financial
sector, might not significantly reduce countries' vulnerability to financial crisis, even
where they have met all the relevant conditions. Experience suggests that these
conditions would not prevent governments from making a wide range of policy mistakes
that could contribute to a financial crisis, nor would they significantly insulate countries
from crises that arise outside the financial sector.
•
By precluding the lMF from applying policy conditions to its loans, outside of a very limited
set of prior conditions related to financial sector soundness, disclosure, and a general
requirement for fiscal soundness, the majority proposals would deprive the IMF of the
capacity to promote the policy reforms that are likely to be fundamental to restoring
confidence and economic recovery in such cases. The result would be to increase
substantially the risk that the financial assistance provided would be ineffective.
•
By limiting IMF assistance to very short-tenn loans (four to eight-month maturity) at very
high interest rates, the majority proposals would render IMF assistance ineffective in
promoting recovery even in those countries that prequalified. Experience suggests that these
terms would force repayment prematurely. Even in the most successful cases of recovery, it
has taken longer than eight months to restore substantial access to private finance. Premature
repayment and high interest rates that undermine the financial position of the government
would in turn undennine confidence among domestic and foreign investors, and could
thereby prolong and exacerbate the crisis itself.
u.s. Department of the Treasury Response to the IFI Advisory Commission
Principal Conclusions - Page 7
•
For all of these reasons we believe that implementing these proposals would substantially
reduce the IMF's capacity to restore lasting financial stability in crisis economies. However,
to the extent that such a system would commit the IMF to providing very large-scale
assistance, with very limited conditions, it would also risk a substantial increase in moral
hazard in the international financial system. Investors would be encouraged before a crisis to
lend excessively to prequalificd countries in the expectation ofbcing repaid from IMF
assistance. And governments would have an incentive to take risks in policy areas not
constrained by the eligibility criteria, in the expectation they would be insulated by the IMF
from the costs of failure. The result, in many ways, would be the worst of all worlds: overconfidence in a system that would prove ineffective for preventing and responding to crises.
•
By eliminating the IMF's concessionallending capacity in the poorest developing countries,
the majority proposals would undermine the capacity of the IFIs to promote in these
countries the types of macroeconomic policy reforms that are critical to economic growth
and long-term development, and would thereby undercut the effectiveness of substantial
amounts of bilateral and multilateral development assistance.
While we have serious reservations about the wholesale adoption of prequalification for [MF
programs that the Commission proposes, we would note, once again, that we share the
Commission's desire to find new ways to encourage countries to reduce their vulnerability
before crisis strikes. In this context, we agree with the report that it is critical for countries to
strengthen the financial sector, improve the quality of disclosure, and reinforce the resilience of
the exchange rate regime. With the objective of trying to design more powerful incentives for
policy changes before crisis strikes, and with our active encouragement, the IMF has established
a new facility, the CeL, that would be available to countries that met a range of conditions. We
are now in the process of identifying modifications to this facility to try to make it more
effective. We believe this is a promising direction for reform going forward as a complement to
the IMF's core lending instruments.
Commission Recommendations for the Multilateral Development Banks
The Commission proposes a comprehensive set of changes for the multilateral
development banks that would substantially modify the way they provide financial
assistance in support of development. The majority proposals would essentially
foreclose MDB lending to a broad range of emerging market economies, focus the
efforts of the MDBs on grants and "institutional reform loans" for the poorest
developing countries, transfer the World Bank's lending role to the regional
development banks, and close down the private sector financial operations of the
institutions.
We do not believe this approach is either desirable or feasible.
•
By eliminating MDB assistance for countries with a per capita income above $4,000 or an
investment grade credit rating, the majority proposals would eliminate the capacity of these
institutions to promote economic reform and development in countries that account for a
substantial share of the world's population and continue to face formidable development
challenges. Because access to private capital for many of these countries is fragile and
extremely limited, denying these countries access to multilateral lending would directly
U.S. Department of the Treasury Response to the IFI Advisory Commission
Principal Conclusions - Page 8
reduce their potential resources for meeting crucial development needs. Graduation policies
designed with a fixed and excessively low threshold risk worsening economic outcomes in
these countries, and increase the likelihood of future crises. This could undercut or prolong
the path to sustainable market access, and ultimately delay the time when these governments
will grow out of the need for official support.
•
By eliminating the private sector financial operations of the MDBs (including closing the
IFC and MIGA), the majority proposals would eliminate an important part of the MDBs'
capacity to promote private enterprise, privatization of state-owned firms, and the
development of domestic capital markets, all of which are critical to successful development
strategies.
•
By eliminating the World Bank's financial role in providing development assistance and by
transferring financial capacity to the Inter-American, Asian and, over time, the African
Development Banks, we believe the majority proposals would undermine the effectiveness of
the overall development effort. It would be counterproductive to limit to an advisory
capacity the institution that is the strongest, most experienced, and most competent in the
MDB system, and has the most advanced agenda for implementing reforms supported by the
U.S. Congress over the decades. Although the regional development banks have many
strengths and in many cases playa useful complementary role to the World Bank, they do not
have the capacity to match the strengths of the World Bank in most areas of development
policy. Nor do we believe that they should seek to do so, at a time when there is broad
agreement on focusing the missions of such institutions where they have comparative
advantage.
•
By eliminating the capacity of the MDBs to provide emergency lending at times offinancial
crisis, the majority proposals would make crisis response by the IMF less effective. In those
exceptional circumstances where crisis lending is appropriate, the emergency lending
capacity of the MDBs can be essential to support an appropriate level of fiscal expenditures
in such a crisis, to design and finance financial sector restructuring programs, and to further
targeted assistance for critical social programs, such as education and healthcare.
•
By transforming the adjustment and project finance capacity of the institutions into a system
of grants largely channeled directly to service providers, bypassing governments, and with a
new financial instrument for institutional reforms, the majority recommendations embrace a
number of desirable objectives without identifying proposals that have a realistic prospect of
improving the overall effectiveness of development assistance. If implemented as proposed,
these measures would limit the overall availability of financial assistance to the poorest by
eliminating the financial leverage provided by the MDBs' hard-loan operations and the
resources generated from reflows on concessional loans. Instead, the recommendations
emphasize a financing instrument that is unlikely to be effective or attractive to borrowers
compared to existing instruments for promoting critical improvements in the policy
framework and overall institutions of government.
As noted above, we share the Commission's view on the importance of focusing assistance on
the countries that need it most, and agree that substantial further reforms are necessary to
operationalize fully in the MDBs the lessons of recent experience with regard to the design and
financing of more effective development strategies. We will continue to explore a broad range
of proposals for how to best achieve these objectives. Our reform agenda is discussed in more
detail in the next section. A detailed response to the Commission's recommendations follows.
U.S. Department of the Treasury Response to the IFI Advisory Commission
u.s.
Reform Agenda in the IMF and the MDBs - Page 9
u.s. Reform Agenda in the IMF and the Multilateral Development Banks
The Administration has worked to bring about substantial reforms in the international financial
institutions over the past several years. These efforts have been framed to a significant degree by
the objectives set out in U.S. legislation, including the 1998 legislation authorizing U.S.
participation in increasing the IMF's financial resources. The most recent Congressional efforts
to advance reform in the IMF and the MOBs focused on improving transparency and
accountability across the institutions; changing the terms of IMF assistance to reduce the risk of
moral hazard; refocusing the policy conditionality to promote market oriented reform,
environmental sustainability, and mitigating the social impact of economic change; and
encouraging greater selectivity in providing development finance. Some examples of recent
progress in these areas and others are detailed in the boxes that follow at the end of this part.
Although these changes are highly significant, we do not believe they sufficiently address our
concerns about the capacity of the institutions to confront effectively the new and complex
challenges of the world economy. Further reform is needed - on many fronts over a period of
several years.
To this end, the Administration has outlined a broad framework for additional reforms that we
believe should guide the evolution of the institutions in the years ahead. Many of these changes
are founded on objectives similar to those that motivated the Commission's recommendations.
In general, however, we believe that we have identified a more promising set of reforms, that
match more closely our interests as a nation, have more practical value in addressing the
complexity of these problems, and are more likely to gain the broad international support
necessary to any successful program of change in international institutions.
The policy issues involved in designing more effective ways to promote financial stability and
successful economic development are many and complicated. The Congress and the
Administration share an interest in preserving the ability to adapt our approach to reflect past
experience and the evolution of informed opinion. And because of the high stakes involved in
making the right decisions about the appropriate direction of the institutions, we need to have a
substantial degree of confidence that the reforms we pursue will demonstrably improve and not
impair the effectiveness of the institutions. These considerations have shaped the approach for
reform outlined by the Administration.
Over the past several months we have begun to build consensus for these changes. We have
found considerable support for the broad direction of our proposals, and have already seen some
concrete changes in the institutions. This part of the report outlines the Administration's
proposals for reform, identifies specific measures that we believe would be most effective in
operationalizing these changes, and briefly reviews recent changes in the institutions resulting
from our initiatives.
U.S. Department of the Treasury Response to the IFI Advisory Commission
u.s. Reform Agenda in the IMF and the MDBs -
Page 10
Agenda for Further Reform of the International Monetary Fund
The central objective of reform in the IMF in this world of more integrated global capital
markets should be to reduce the incidence and severity of financial crises, particularly in
emerging market economies, and, more broadly, to foster growth in the context of a more stable
international financial system, including strong macroeconomic policies to spur growth in the
poorest countries. We believe the most promising proposals for advancing these objectives lie in
the following areas:
Greater focus on promoting the flow of information from governments to markets and investors
IMF surveillance should shift from a focus on collecting and sharing information within the club
of nations to promoting the collection and dissemination of information for investors and the
public, and assigning high priority not only to the quantity but also to the quality of information
disseminated.
•
To reinforce the Special Data Dissemination Standard as the international standard for
disclosure of national economic data, we support a new quarterly publication highlighting
country adherence and compliance with the SDDS, and encouraging more countries to
subscribe and comply.
•
The SDDS should be further strengthened with better data on countries' external debt and, in
due course, financial sector indicators.
•
Publication of IMF Reports on the Observance of Standards and Codes (ROSCs) on country
observance of the range of codes and standards to help strengthen financial systems should
be routine, with countries allowed to .disclose their IMF Financial Sector Assessments if they
choose.
Greater attention to financial vulnerabilities and steps to reduce countries' vulnerability to crisis
This would entail, in particular, greater focus on the strength of national balance sheet and
liquidity indicators, with a more fully integrated assessment incorporated into regular IMF
surveillance. In this context, the IMF should highlight more clearly the risks of unsustainable
exchange rate regimes.
•
Indicators of financial vulnerability, liquidity and balance sheet risks should be developed
and systematically incorporated into the Fund surveillance process, both bilateral and
multilateral, and published regularly.
•
Debt management guidelines, based on the recent work by the IMF, the W orId Bank and the
Financial Stability Forum, should be developed by the IMF to guide countries to limit their
risks, make best use oftoday's markets, and disclose their debt and reserve management
policies.
U.S. Department of the Treasury Response to the IFI Advisory Commission
u.s. Reform Agenda in the IMF and the MDBs - Page 11
A more strategic financing role focused on crisis prevention and emergency situations in
emerging economies, and on supporting macroeconomic stability and growth in the poorest
countries
The IMF has already begun to streamline its financing instruments and a major review of its
facilities is underway, as called for by the United States and the G-7 countries earlier this year.
Going forward, we believe the IMF should focus primarily on forestalling contagion and
providing appropriately priced and conditioned financing for balance of payments emergencies
in emerging market economies, and on providing the macroeconomic framework for growth and
financial stability in the poorest, in the context of World Bank-led poverty reduction programs.
•
The IMF's CCL should be recast to make it a more effective crisis prevention tool, with
greater clarity about the conditions for its use and a more attractive pricing structure relative
to the IMF's other crisis financing instruments.
•
Terms of non-concessional IMF loans should be changed, with graduated charges to promote
early repayments, to limit excessive use of large-scale IMF financing and to reduce unduly
prolonged reliance on IMF financing. Use of the Fund's Extended Financing Facility (EFF)
to address longer-term structural balance of payments problems should be limited.
•
The new Poverty Reduction and Growth Facility should provide IMF advice and financing
for the poorest in support of strong macroeconomic policies to combat capital flight and
promote the financial stability and growth needed for effective poverty reduction.
Greater emphasis on catalyzing market-based solutions to crises
The IMF should continue to develop ways of catalyzing market-based approaches to resolving
crises, particularly where the private sector is involved, with carefully designed approaches to
achieve the right balance between maximizing prospects for an early recovery from the crises
and the need to lessen the risk of moral hazard.
•
IMF lending should catalyze private market financing on appropriate terms and promote a
return to normal market access.
•
In cases where debt restructuring is needed, the Fund should provide a medium-term
framework for the debt negotiation.
•
The Fund should be prepared to lend into arrears if a country is seeking to work
cooperatively and in good faith with its private creditors and is meeting other program
requirements.
U.S. Department of the Treasury Response to the IFI Advisory Commission
u.s. Reform Agenda in the I MF and the MDBs - Page 12
Modernizing the IMF
As the IMF adapts to changes in the international financial system, it is important that it also
modernize as an institution, improving its evaluation system, enhancing dialogue with the private
sector, and updating its existing governance structure.
•
The IMF should quickly establish the recently agreed upon permanent independent
evaluation office, ensuring that the office's structure, terms of reference and operating
procedures allow it to be fully independent, transparent and open to external consultations.
•
The Fund should formally establish a liaison group consisting of private financial market
participants to deepen the Fund's understanding of global market trends.
•
Changes in the international monetary system, including countries' relative economic and
financial strength, should be more fully reflected in the IMF's governance structure.
Agenda for Further Reform of the Multilateral Development Banks
The overriding objective of reform of the multilateral development banks in a world where the
humanitarian and economic challenges facing developing and emerging economies are still
formidable should be to put into place more effective ways of promoting poverty reduction,
market-oriented economic reform, increased resources in support of programs with high
development returns, such as health care and basic education, the successful graduation of
emerging and transition economies to the point where they can rely on private finance, and
global public goods, such as environmental sustainability and programs to combat infectious
diseases. We believe the most promising proposals for advancing these objectives lie in the
following areas:
Improved performance and impact
The MDBs should rely on a smaller number of clear and measurable performance targets that are
set more realistically and are more vigorously adhered to.
•
Performance-based lending guidelines should apply to all soft loan windows and assistance
should be more focused on countries that are performing well, with less assistance to poor
performers -- and essentially withheld where governance is especially weak.
•
More effective mechanisms are needed within a number of the MDBs to evaluate when
targets and intermediate benchmarks have been met, along with a stronger commitment to
disburse in stages and to review more frequently.
u.s. Department of the Treasury Response to the IFI Advisory Commission
us. Reform Agenda in the IMF and the MDBs -
Page 13
Emphasis on economic growth and poverty reduction
The MDBs need to focus an even higher level of assistance in areas that have the highest
development returns, and particularly on investments in access to health care, clean water, and
basic education.
•
Ex-ante social and poverty assessments done by the World Bank should be prerequisites to
all Country Assistance Strategies (CASs) and adjustment operations, and such assessments
should be more explicitly linked to the sequencing and pace of reforms in IMF PRGF
programs.
•
Public Expenditure Reviews should be precursors to CASs to identify and remedy poor
composition and efficiency of spending.
•
Lending to social sectors and other poverty reduction priorities should be further increased.
Focused lending to emerging economies
We believe that the MDBs need to explore more innovative ways to catalyze private capital
flows to countries, within strict and clear guidelines that safeguard the financial position of the
institutions.
•
MDBs should establish a more selective lending framework that facilitates graduation.
•
MDB lending should decline in volume over time in countries that arc expanding their
capacity to attract private finance.
•
Capital increases for the MDB hard windows are not anticipated and future donor
contributions should be directed exclusively to the soft windows. Along these lines, the
MDBs should re-examine their current hard window pricing policies with a view toward
stronger sustainability of the institutions' balance sheets and building a greater financial
capacity to contribute to overall development efforts.
Transparency
There needs to be a higher degree of transparency, with a stronger presumption for publication of
key loan documents, and transparency in the relevant operations at the national level, so that the
domestic population, outside investors and donors can more easily track results.
•
All CASs and Poverty Reduction Strategy Papers (PRSPs) should be released to the public.
•
All reports of MOB evaluation units should be public.
•
The quality and comprehensiveness of public participation in review of Bank policies,
projects, CASs and PRSPs should be strengthened.
U.S. Department of the Treasury Response to the IFI Advisory Commission
u.s. Reform Agenda in the IMF and the MDBs - Page 14
Global public goods
As integration proceeds, the world is confronting a broad range of problems that cross
international borders and defy solution by individual governments and markets. The World
Bank and other development institutions have an enonnous contribution to make in helping
advance international efforts to provide global solutions in the form of public goods, especially
those which benefit developing countries.
•
There should be even greater focus on solutions to the problems of infectious diseases and
degradation of the global environment.
•
Information technology can be used better to create and disseminate medical knowledge and
global environmental expertise.
Improved collaboration and selectivity
Institutional collaboration and definition of tasks need to be further improved, not only between
the IMF and the W orId Bank, but also between the W orId Bank and the regional development
banks.
•
MDBs should reduce MDB overlap and inconsistencies, speak more clearly on priorities, and
share lessons of experience.
•
Regional development banks should follow the example of the World Bank!African
Development Bank Memorandum of Understanding (MOU) to develop agreements between
each of the remaining regional banks and the World Bank.
•
MDBs should work to reduce the administrative burden on developing countries that stems
from negotiating multiple development and economic priorities with multiple donors and
international institutions.
U.S. Department of the Treasury Response to the IFI Advisory Commission
u.s. Reform Agenda in the IMF and the MDBs - Page 15
International Monetary Fund: Selected Reforms Achieved to Date
Transparency
and Accountability
• Since June 1999, there has been a presumption of public release of program documents
detailing policy commitments countries have agreed to as a condition for IMF support;
documents have been released in 50 of 58 cases since then.
• Release of "Public Information Notices" (PINs) following Executive Board discussions of
Article IV consultations is becoming routine: 113 of 139 (8\ %) were released in 1999. PINs
are also published on a broad range of policy issues, e.g., private sector involvement,
safeguarding IMF resources, IMF work program.
• There is agreement to publish the IMF's Financial Transactions Plan quarterly with a onequarter lag beginning in August 2000. Information about the IMF's financial position is
available on the IMF's internet web site.
Crisis
Prevention
and
Resolution
• The SDDS is now fully operational, providing potential investors with better information about
financial conditions in member countries; 24 countries now comply with SDDS.
• The IMF is moving to address vulnerabilities, including national balance sheet and liquidity
risks, as part of surveillance. A growing number of Article IV staff reports make use of key
vulnerability indicators.
• The CCL offers incentives for countries to take early steps to reduce vulnerability to crisis.
The Supplementary Reserve Facility (SRF) charges premium interest rates to encourage an
early return to private markets, while providing exceptional financing to countries of systemic
importance.
• The IMF has begun to make use of guidelines developed by the G-7 to catalyze private sector
involvement.
Strengthened
Financial
Systems
• The IMF helps to disseminate and encourage implementation of the Basle Core Principles.
• Under the Financial Sector Assessment Program (FSAP) launched in 1999, the IMF and World
Bank jointly conduct in-depth assessments of countries' financial systems; five countries have
undergone assessments with seven more to be completed by July 2000.
• As of September 30, 1999, the IMF had completed assessments (ROSCs) of countries'
adherence to internationally-accepted standards for 13 countries, 10 of which agreed to
publication. Twenty-four countries are participating in a third phase to be completed in
September 2000. Information on ROSCs is available on the IMF web site.
Exchange
Rate Regimes
• The United States and other G-7 nations have agreed that the IMF, in its surveillance, should
increase attention to exchange rate sustainability.
• The G-7 have agreed that the IMF should not provide significant official financing to a country
whose government is intervening heavily to support a particular exchange rate level, except
where that level is judged sustainable and certain conditions have been met, including
supporting institutional arrangements and maintaining consistent domestic policies.
Labor Issues
• Labor standards issues have been raised in recent important IMF programs (e.g., Korea,
Indonesia, Brazil and Mexico), as well as in Article IV consultations and program reviews
(e.g., Indonesia, Thailand and Korea).
• The ILO has been granted ongoing observer status in the IMF's International Monetary and
Financial Committee.
• The IMF, with the World Bank and the AFL-CIO, sponsored a seminar on Labor Standards and
the New International Economy during the 1999 Annual Meetings of the IMF and World Bank.
Trade
Liberalization
• In 1998, 24 IMF members moved to a more open trade regime, 17 in the context of Fundsupported programs.
• In 1999-2000, trade liberalization was an element in IMF programs in Indonesia, Nigeria,
Zambia, Guyana, South Korea, Jordan, Colombia and Uganda.
Good
Governance
and
Combating
Corruption
• A new safeguards framework to guard against misuse of IMF resources requires the publication
of annual audited central bank financial statements and new assessments of internal controls.
• The IMF now routinely encourages countries to maintain strong internal financial controls and
tighten supervision and regulation of domestic financial institutions, including measures to
deter money laundering.
• Governance/corruption measures were an integral part of Fund programs in the Ivory Coast,
Indonesia, Ukraine, Russia, Uganda and Kenya.
U.S. Department of the Treasury Response to the IFI Advisory Commission
u.s. Reform Agenda in the JMF and the MDBs -_ Page 16
Multilateral Development Banks - Selected Reforms Achieved to Date
Transparency
and Accountability
• The MDBs now have formal disclosure policies based on a presumption of disclosure.
• MDB CASs increasingly address fiscal transparency and sound budget choices, including
military spending, and public expenditure reviews are conducted prior to many adjustment
loans and CASso
• Most MDBs have installed independent inspection panels to investigate public allegations of
non-compliance with MDB policies. Compliance advisers have been established in the IFC
and MIGA to address public complaints.
• Public participation in the design of MDB policies, projects and country strategies has
increased significantly. Public participation in the design ofPRSPs is mandatory.
Poverty
Reduction
• Heavily Indebted Poor Country debt reduction is a major new component of the international
response to poverty reduction, under which PRSPs are being used to direct resources freed
from debt relief to social investments.
• Comprehensive poverty assessments done by the World Bank have started to feed into the
design of macroeconomic and structural reforms in lending programs for the poorest countries.
• Worid Bank lending is shifting from traditional infrastructure projects toward institutional and
policy reforms designed to-build an enabling environment for human development and private
sector develoPIllent
Effective,
Selective and
PerformanceBased
Lending
• Lending effectiveness and project quality are enhanced through: annual assessments by
evaluation units in each MDB; the introduction of mandatory project performance and
monitoring indicators; and the addition of outcome indicators in CASso
• Selectivity and comparative advantage have been encouraged through the adoption of an MOU
between the World Bank and AIDB, and the creation of the Evaluation Cooperation Groupcomposed of the heads of evaluation units of each of the MDBs - to establish a common
project rating methodology to facilitate identification ofMDB comparative advantage.
• The World Bank and the AIDB have policies to link concessionallending levels to country
performance by evaluating public sector performance/governance, macro and structural
policies, and poverty reduction strategies. Good IDA performers now receive five times the
allocation of poor performers.
Governance
and Anticorruption
• Comprehensive governance strategies covering accountability, transparency, corruption,
participation and legal/judicial frameworks are in place or under preparation in every MDB.
• The World Bank now prepares governance assessments for all countries; in cases where
indicators suggest severe governance problems, lending is reduced or suspended.
•
Labor and
Environment
MDBs have upgraded attention to fiduciary policies, including anti-corruption measures and
improved procurement guidelines to safeguard the use of Bank resources.
• An increasing number ofMDB lending facilities include safeguards for core labor standards.
Additionally, MDB planning instruments and guidelines increasingly include references and/or
provisions for key labor issues and core labor practices.
• Publicly available Environmental Impact Assessments are required for all investment projects
and sector adjustment loans with potentially significant environmental consequences.
• There is now a much greater focus on environmental sustainability in MDB projects.
Structural
Change for
More
Resilient
Financial
Systems
Trade
• In response to the onset of crisis in East Asia, the World Bank established a unit of financial
experts to provide comprehensive, rapid-response, financial-sector advice to affected countries.
• Under the FSAP, the World Bank and IMF jointly carry out assessments of selected countries'
vulnerabilities
• The World Bank and IMF have been developing jointly debt management guidelines to inform
countries on how to limit risks associated with sovereign debt and make best use oftoday's
markets.
• MDBs have committed to better integrate trade into CASs in order to improve trade-related
infrastructure and institutions, and to foster trade liberalization and participation in the
international trading system.
U.S. Department of the Treasury Response to the IFI Advisory Commission
Response to the Recommendations on Reform of the IMF - Page 17
Response to the Recommendations on Reform of the
International Monetary Fund
Restrict IMF lending to countries that meet prequalification criteria
The Commission recommends that the IMF be restructured as a smaller
institution (a "quasi-lender of last resort") that focuses on providing short-term
liquidity assistance to solvent emerging economies meeting a set of
prequalification eligibility criteria.
We share a number of the objectives that apparently underlie this recommendation - notably the
importance of creating strong, open financial systems; the role that greater transparency and
market forces can play in strengthening financial systems and reducing their vulnerability to
crisis; and the importance of sharpening incentives for countries to rely on private capital
markets and avoid undue recourse to IMF financing. However, we believe that this
recommendation would be neither desirable nor feasible.
To be eligible for IMF financing, a member country would have to meet three conditions
primarily: (1) pennit freedom of entry and operation for foreign financial institutions; (2)
establish market-based disciplines in the domestic financial sector and ensure that commercial
banks are adequately capitalized (e.g., by a significant equity capital base or by the issuance of
uninsured subordinated debt to non-governmental and unaffiliated entities); and (3) publish
regularly the maturity structure of its outstanding sovereign and guaranteed debt and off-balancesheet liabilities in a timely manner. The Commission notes that this system would be phased in
over a period of several years and refers to the possibility of lending to countries that do not
prequalify in circumstances where a crisis poses a threat to the global economy. This exception
is not discussed in the report.
Our concern with the proposal centers on three points. First, implementing this recommendation
would preclude the IMF from being able to respond to financial emergencies and support
recovery in the vast majority of its members, possibly including all of the emerging market
countries affected by the financial crisis of 1997 and 1998. The exclusive focus on relatively
strong emerging economies would leave out most of the Fund's membership, notably all lower
income countries and many transition economies.
Second, the proposed eligibility criteria are too narrow. Even where they were met, they would
be unlikely to protect economies from the broad range of potential causes of crisis. The criteria
focus on the financial sector, and yet even problems that surface in the financial sector often
have their roots in deeper economic and structural weaknesses. One simply cannot predict with
confidence what the next generation of crisis will be and therefore we need to preserve the IMF's
ability to respond flexibly to changing circumstances.
u.s. Department of the Treasury Response to the IFI Advisory Commission
Response to the Recommendations on Reform ofthe IMF - Page 18
Third, the eligibility criteria as designed could increase moral hazard risks in the system. The
Commission's approach would provide assurance of substantial financing, available
immediately and automatically without conditions, to countries that have met the eligibility
criteria but may still have fundamental macroeconomic weaknesses or structural problems in
areas other than the financial sector. In our view, this approach risks creating incentives for
countries to maintain inappropriate policies (other than those directly covered by the eligibility
criteria) in the expectation that unconditional funds would protect them from the adverse
consequences of their actions or inaction - as well as incentives for investors to lend to countries
with substantial underlying vulnerabilities in the expectation that the IMF will bail them out.
an
Despite our concerns with this proposal, we think it is important to strengthen incentives for
countries to take early steps to reduce their vulnerability to crisis. This should include steps to
strengthen macroeconomic frameworks; address macro-related structural weaknesses (including
though not limited to the financial sector), adhere to relevant international standards and codes,
and increase transparency. It was in large part with these objectives in mind that the IMF created
the Contingent Credit Line (CeL) in April 1999. The CCL offers the possibility of substantial
financing to countries fulfilling a number of eligibility criteria (implementing strong macro
policies; adhering to internationally accepted standards; maintaining constructive relations with
private creditors; ready to adjust their economic and fmancial programs as needed). The CCL,
therefore, incorporates a number of elements from the Commission's prequalification proposal.
However, the prequalification approach of the CCL, important as it is in setting a precautionary
line of defense against financial crisis and contagion, should be seen as a complement to (not a
replacement for) the IMF's other financing facilities.
Unconditional Lending
The Commission recommends that the IMF be precludedfrom conditioning its
financial support to member countries on the achievement ofeconomic reforms.
other than reforms required to meet prequalification conditions.
We do not believe that this recommendation is desirable or feasible.
In making this recommendation, the Commission argues that IMF conditionality is generally
ineffective, that it allows the IMF to wield too much power over the economic policies of
borrowing countries, that it strengthens the executive branch of borrowing nations at the expense
of their legislatures, and that the IMF often fails to enforce its conditions. The only apparent
exception to the general prohibition on conditionality is that the IMF should establish "a proper
fiscal requirement to assure that IMF resources would not be used to sustain irresponsible budget
policies."
U.S. Department of the Treasury Response to the IFI Advisory Commission
Response to the Recommendations on Reform ofthe IMF - Page 19
In our view, the practice of providing phased financial support conditioned on progress in
implementing economic reforms is central to the effectiveness of financial assistance.
Conditionality is no guarantee of success - ultimately, sovereign governments are responsible for
the decisions that shape the performance of their economies - but it is central to several
fundamental objectives:
•
Encouraging countries to address the macroeconomic imbalances and structural
weaknesses, which gave rise to the need for external financing. This is critical to
stemming financial crisis, promoting recovery and growth, and reducing the risk of future
crisis. The Commission acknowledges the importance of a sound fiscal policy but makes no
accommodation for conditions on the monetary policy framework, the exchange rate regime,
the scope for exchange rate intervention, central bank support to financial institutions or
other actions that are likely to be critical to restoring confidence and promoting recovery.
Indeed, this has long been a core objective of Fund activity. And there is substantial
evidence that linking IMF financing to steps to, for example, improve a country's tax
collection system, strengthen the financial sector, reduce government subsidies, in fact
strengthens the hand of national authorities committed to reform.
•
Helping to ensure, along with other measures, that IMF financing is used for the
purposes for which it is intended. Policy conditionality, in combination with safeguards in
the form of transparency, financial controls and auditing requirements, are important to
reduce the risk of misuse of IMF resources.
•
Helping to ensure that the borrowing country has the capacity to repay the IMF on
time. Without the capacity to apply conditions to its loans, the IMF would have virtually no
means to promote the economic changes necessary to improve the countries' ability to repay.
Of course the conditions on which the IMF provides financing need to be carefully designed to
fit the particular economic circumstances of the country involved.
U.S. Department of the Treasury Response to the IFI Advisory Commission
Response to the Recommendations on Reform of the IMF - Page 20
Maturity and Pricing of Loans
The Commission recommends that IMF loans should have a short maturity (e.g.,
a maximum 0/120 days, with only one allowable rollover), and should be
provided at a penalty interest rate (Le., a premium over the sovereign yield paid
by the member country one week prior to applying/or an IMP loan).
In our view, these recommendations are not desirable. The proposed 120-day lending window
(even with one rollover) is an unrealistically short repayment period. Even in the successful
recent cases, countries needed substantially more than four months (120 days) to be in a position
to repay the loans extended by the official sector. Providing IMF assistance with such short
maturities could undermine, rather than support, prospects for repayment and recovery.
The Commission's recommendation of a penalty rate calculated on the basis of sovereign yields
one week before the member country applies for an IMF loan would also be counterproductive.
This would entail in most cases
Graph 1: Timeline ofthe Recent Financial Crises, 1997-2000
interest rates so high (see Graph 1)
Timeline 0/ country crises vx. JP Morgan Emerging Bond Market Index
that these loans would worsen the
(EBMI Brady Bond and EMBI Global spreads over U.S. Treasuries, in bp)
underlying financial position of the
i800.------------------------------------,
borrowing country.
Brazil
1600
While we find the Commission's
Russia
specific recommendations on
--Mio- I
1400
maturity and pricing to be
Korea
undesirable, we do believe that it is
1200
important for the IMF to carefully
Indonesia
structure the terms of its financing in
iooo
such a way that reduces moral
Thailand
hazard risks, discourages
800
excessively frequent or prolonged
recourse to IMF resources, and
600
encourages an early return to the
private markets, especially in cases
- - EMBI Brady Bonds
400
- - ...... EMBI Global
where exceptional amounts of IMF
120 day repayment
.
120
day
rollover
assistance are provided. With these
'200+-~--~~~--~~~--~~--~~~--~
objectives in mind, the United States
led an important innovation in this
area with the creation in December
Source: JPMorgan (Bloomberg). The EMBI Sovereign series is
1997 of a new IMF facility: the
available from 1991 onward: however. it covers the spreads o/Brady
Supplemental Reserve Facility
Bonds over U.S. Treasuries. The EMBI Global series was created in
(SRF). This marked a fundamental
I998 as a broader measure.
change in the terms and conditions of IMF lending, emphasizing financing on shorter terms at
premium rates of interest. Since the creation of this new facility, a substantial portion of IMF
lending in large programs has been provided on so-called SRF terms - interest rates that are at
least three percentage points above short-term market rates, and maturities of two years or less.
Experience with this facility has been very positive, both in supporting economic recovery and
encouraging realistically early repayment.
I
U.S. Department of the Treasury Response to the IFI Advisory Commission
Response to the Recommendations on Reform ofthe I MF - Page 2 J
More recently, we have sought in the IMF to win support for our view that all non-concessional
Fund lending should in future be based on the principle that charges should escalate the longer
countries have Fund money outstanding and, above certain thresholds, the larger the scale of
financing. We are also seeking changes that would encourage more limited and effective use of
the Fund's vehicle for medium/longer term lending, the Extended Financing Facility (EFF). In
our view, the utility of this facility is in supporting those few, carefully targeted cases where bold
structural reforms are needed to secure stabilization and where the balance-of-payments benefits
of structural reforms may require a long time to appear and where countries have limited capital
market access.
Credit Limits
The Commission recommends that the IMF have the capacity to lend on a
substantial scale to countries that have met its prequalification criteria, with
restrictions on the amounts avail(lble in order to reflect the borrowing
government's capacity to repay.
We share the view that the IMF should have the capacity to respond to crises in member
countries on a scale consistent with the scale of the crisis. However, we do not think that the
Commission offers a feasible approach to establishing appropriate credit limits.
The IMF currently has in place access limits that govern the amount of financing available to
member countries under its programs. These existing IMF limits allow countries to borrow
100% of their IMF quota per year, with a cumulative limit of 300% of quota under normal IMF
Stand-By or Extended arrangements. (The level of a country's quota is broadly determined by
its economic position relative to other members. Economic factors considered include members'
GDP, current account transactions, and official reserves.) In exceptional cases, the IMF may
approve arrangements exceeding these limits, but most programs are financed at a level well
below the access limits. There are also provisions in the IMF for exceptional access to resources
in cases of systemic crisis - through the Contingent Credit Line and the Supplemental Reserve
Facility. Under the eCL, access is expected to be within a range of 300-500 percent of quota.
Under the Supplemental Reserve Facility, access is determined based on considerations
including a member's financing need, its capacity to repay, the strength of its reform program,
and its record of cooperation with the Fund in the past.
We think that the Fund's current access limits provide the appropriate basis for guiding IMF
lending to member countries. Strict controls are needed on IMF lending to mitigate moral
hazard, preserve the Fund's catalytic role, and provide the incentives for countries to undertake
strong reform efforts, which are essential for ensuring that drawings from the IMF are repaid.
It is unrealistic and undesirable to hold out the prospect of IMF lending at a level equivalent, for
example, to one year of a member government's tax revenues. Such a credit limit would
dramatically increase the level of Fund financing to qualifying countries, resulting in very large
bailout packages that would surpass the financial capacity of the IMF and increase moral hazard.
For instance, Brazil's annual tax revenue is approximately $139 billion, many times the amount
of its quota in the IMF ($4.5 billi'on) as well as its most recent Fund program ($14.5 billion).
u.s. Department of the Treasury Response to the IFI Advisory Commission
Response to
t~e Recommendations
on Reform of the IMF - Page 22
Elimination of IMF Concessional Lending
The Commission recommends that the IMF's concessionallending instrument, the
Poverty Reduction and Growth Facility (PRGF), be closed. Further, the
Commission suggests that long-term assistance to Joster development and
encourage sound economic policies should be the responsibility of the
reconstructed World Bank or the regional development banks.
In our view, this recommendation is neither desirable nor feasible. The recommendation rests on
the premise that the IMF is not well-suited to carry out a concessionallending role, has not done
so effectively, and that the multilateral development banks (MDBs), in particular the regional
development banks, would do a better job. This premise and the Commission's recommendation
are not well-grounded, on several counts.
First, one of the clearest lessons of development experience is that economic growth is critical to
poverty reduction, and that sound macroeconomic policies are critical to growth. Growth is the
necessary basis for generating resources for investment in primary education, health care, rural
infrastructure, and other areas critical to poverty reduction. A strong macroeconomic policy
environment - one that, for example, supports currency stability and keeps inflation in check - is
essential if a country is to avoid capital flight, make effective use of development assistance, and
lay a durable foundation for broad-based growth and poverty reduction. Helping countries set up
appropriate macroeconomic frameworks is the IMF's particular expertise and is not an area of
competence or experience for the MDBs. While the IMF is by no means infallible, there is
simply no other institution with the technical expertise to design the essential and highly
specialized policy conditions that the Fund provides in this area.
Second, the Commission's suggestion that the Fund could be effective in providing
macroeconomic advice through its Article IV consultations, but no financing to accompany such
advice is, in our view, wholly unrealistic. Development experience suggests that, while
financing is no guarantee of success, countries needing to take challenging, sometimes politically
difficult measures are unlikely to show the same degree of attention and receptivity if IMF policy
advice comes without any financial underpinnings.
Third, it is important to recognize that the IMF's concessionallending activities are financed by
bilateral contributions of member countries in addition to and separate from contributions in the
form of IMF quotas. Those activities are largely financed by other member countries, and they
will have a proportionately greater voice· in deciding how these resources are used. Currently,
there is a strong consensus among the Fund's membership that concessional lending should
continue, partly for the reasons noted above, but also based on the view that IMF financing
should be available to all its members, and that the Fund's poorest members cannot afford
financing on non-concessional terms.
All of this said, we do believe that the IMF's role in this area needs to change significantly. The
recently created PRGF, the successor to the IMF's Enhanced Structural Adjustment Facility
(ESAF), represents an important shift in Fund operations in poor countries. Under this approach,
there is to be a clearer division of labor between the World Bank and the IMF, with the Bank
taking the lead in providing advice on the design of growth-enhancing national poverty reduction
U.S. Department of the Treasury Response to the IFI Advisory Commission
Response to the Recommendations on Reform ofthe IMF - Page 23
strategies and structural refonns, while the Fund will focus on promoting sound macroeconomic
policy and structural reforms in related areas, such as tax policy and fiscal management. This
division of labor should be accompanied by a streamlining of conditionality to avoid overlap and
promote coherence. It is expected that both institutions will focus on a smaller number of clear
performance targets that are aimed at maximum poverty impact, are set realistically, and are then
more rigorously adhered to.
No Future Quota Increases; Private Market Borrowing in a Crisis
The Commission recommends against further quota increases for the foreseeable
future. and that. in the event of a crisis, the Fund should borrow as needed either
from the private sector or from credit lines of member countries.
While it is difficult to predict the future with confidence, we agree that the IMF's liquidity
position is comfortable currently, and we do not see a need for a quota increase in the near
future. As of March 2000, the IMF had $289 billion in total resources, of which $138 billion
was usable. (The remaining $161 billion is currently in the form of existing loans and currency
holdings of countries with weak currencies.) In light of the Fund's comfortable liquidity
position, we consider the first part of this recommendation, counseling against a quota increase
for the foreseeable future, to be both desirable and feasible.
We agree that the Fund should be able to borrow from credit lines of member countries in
appropriate circumstances. This possibility is already provided for by the General Arrangements
to Borrow (GAB) and the New Arrangements to Borrow (NAB). The GAB and the NAB are
arrangements between the IMF and a number of member countries and institutions under which
supplementary resources can be provided to the IMF. Eleven industrial countries participate in
the GAB, which was created in 1962. Twenty-five countries and institutions participate in the
NAB, created in 1998. The total amount of resources available to the IMF under the NAB and
GAB combined is SDR 34 billion, about $46 billion.
While the Fund under its Articles of Agreement has the authority to borrow from private
markets, the IMF's membership has not taken advantage ofthis authority for two principal
reasons. First, it is not clear that the IMF could raise substantial amounts of money from the
markets without compromising its members' financial claims on the institution. For the IMF to
borrow at AAA rates, its members may have to back such borrowings with their currency
subscriptions, similar to the way that callable capital of World Bank members backs up
borrowings by the Bank. This would involve a fundamental change in the IMF's financial
relationship with its members. (To the extent that borrowings need to be backed by currency
subscriptions, those subscriptions would be impaired.)
Second, we think that it is necessary and appropriate for members to exercise close oversight
over the financial resources and operations of the Fund. The quota increase mechanism provides
an effective means for such oversight.
U.S. Department of the Treasury Response to the IFI Advisory Commission
Response to the Recommendations on Reform of the IMF - Page 24
Article IV Consultations
The Commission recommends that OECD members be allowed to opt out of
Article IV consultations, though all other IMF members would be required to
participate. The Commission further recommends that all Article IV reports be
published promptly.
We agree that Article IV reports should be published promptly and have actively advocated this
position in the Fund as part of our broader efforts to increase transparency. Towards this end,
the United States led the effort to set up a pilot program for the publication of countries' Article
IV staff reports. Under this program, 29 countries, including the United States, have now made
public the staff reports prepared as part of the Article IV surveillance process. Nearly 20
additional countries have agreed to release their staff reports in the future.
We do not think it is desirable, however, to allow DEeD countries to opt out of the Article IV
process. Their participation underscores the reality that all IMF members playa part in the
international monetary system, and reinforces the universal nature of the Fund. The health of
industrialized country economies in particular is critical to the system. The United States sees
the Article IV process as an important vehicle for encouraging needed adjustment and reform in
industrialized countries no less than in emerging market economies or developing countries. A
number ofOEeD countries (e.g., Mexico, Korea and Turkey) are emerging market economies
whose health is important to regional/international stability, and are, in some cases, users of IMF
resources. Allowing them to opt out of the Article IV process would undermine the important
ongoing efforts to make the process a more effective vehicle for avoiding financial crises, and
would put the Fund in the imprudent position of providing financing to countries that are not part
of its surveillance activities.
Transparency in IMF Accounting
The Commission recommends a variety ofsteps to improve transparency in IMF
accounting - broadly that the IMF's accounting system be simplified and
reformed to mimic standard accounting procedures for representing assets and
liabilities and income and expenses. The Commission also suggests that the
IMF's SDR accounts be incorporated into the IMF's overall accounts so as to
obtain "an accurate view of net providers and users ofsubsidized funding. "
We believe that the recommendation to improve transparency in IMF accounting is desirable and
feasible. We agree that the IMF accounts should be as transparent and understandable as
possible and that there is scope for progress in this area, while bearing in mind that the accounts
reflect complexities in the nature of the Fund's financing and operations.
U.S. Department of the Treasury Response to the IFI Advisory Commission
Response to the Recommendations on Reform of the IMF - Page 25
Although there is more to be done in this area, a number of steps have been taken with the strong
backing of the United States to enhance information available about the IMF's financial position.
•
Most recently, a decision was taken to publish quarterly details on the financing of the
Fund's operations by members - the "Financial Transactions Plan" (formerly known as the
operational budget). The Financial Transactions Plan will provide information about the
IMF's holdings of individual countries' currencies considered useful as a funding resource
(i.e., those members considered financially strong enough to support the extension of Fund
credits).
•
The Fund already posts a wide range of financial information on its web site. This includes:
a weekly update of its financial activities, monthly information on its liquidity position and
the resources available for lending, up-to-date information about Fund credit outstanding,
and extensive country-specific data on transactions with its members, including loans, loan
disbursements and repayments. The aggregate amount of Fund lending is already clearly
labeled as financial assistance in the "IMF Financial Activities" report, which is updated
weekly. The list of individual loans outstanding indicates the date the arrangement was
approved and the date it expires. 1
•
Annual audited financial statements which have traditionally been included in IMF Annual
Reports are now also published on the Fund's website along with quarterly financial
statements. Financial statements are prepared in accordance with generally accepted
accounting principles and are accompanied by detailed explanatory footnotes. For the first
time this year, the Fund's financial statements for the latest financial year (May 1, 1999 to
April 30, 2000) will be prepared in accordance with internationally accepted accounting
standards; they will also be published (per established practice) in the IMF's annual report
and on the public web site.
Regarding the recommendation to incorporate the SDR accounts into the Fund's general
accounts, given the very different nature and purposes ofthe Fund's general resources (i.e.,
quota-based) and SDR resources, we think there is merit in having distinct accounts for the two,
and note that a change to this practice would require an amendment to the IMF Articles of
Agreement. We are prepared, though, to explore whether there is some presentational advantage
in showing a country's net use of SDRs. 2 Indeed, it is our understanding that the new financial
statements noted above are expected to specifically identify net use and holdings of SDRs, as
well as credit outstanding, usable and non-usable currency assets, liquid claims on the Fund, and
a cash flow statement.
I All Stand-by Arrangements must be repaid within 5 years of the date of expiration; Extended Arrangements must
be repaid within 10 years; and ESAF/PRGF arrangements must be repaid within 10 years.
2 The IMF publication International Financial Statistics includes a table providing data on each member country's
position (and the membership as a whole) with respect to use ofIMF credit and SDRs. What is not provided is a
separate column showing a country's net use of SDRs, though this can easily be derived from the data provided by
subtracting a country's net cumulative allocation of SDRs from current holdings of SDRs.
u.s. Department of the Treasury Response to the IFI Advisory Commission
Response 10 the Recommendations on Reform o/the IMF - Page 26
Repayment Obligations: IMF Priority; Negative Pledge;
Ineligibility in the Event of Default
The Commission recommends that the IMF be given priority over all other
creditors, that members exempt the IMP from application ofnegative pledge
clauses, and that member countries that default on IMF debts not be eligible for
financing from other multilateral agencies or member countries.
These recommendations are already largely reflected in the way that IMF financing is provided.
At present, the IMF, as a de facto preferred creditor, already enjoys priority status with regard to
other creditors. As for exempting the IMF from negative pledge clauses, the Commission itself
notes that the IMF is frequently exempted from the operation of such clauses and that other
approaches are available, even absent an explicit exemption, to permit the IMF to enforce its
repayment rights.
Regarding the proposal to suspend eligibility for other IFI financing if a country is in arrears to
the IMF, generally this is already the case. However, we recognize that there may be cases
requiring special consideration, such as during workouts, humanitarian crises, or certain postconflict situations where lending would clearly advance our national interests.
U.S. Department of the Treasury Response to the IFI Advisory Commission
Response to the Recommendations on Reform of the MDBs - Page 27
Response to the Recommendations on Reform of the
Multilateral Development Banks
Limits on MDB assistance
The Commission recommends phasing out MDB lending to countries with annual
per capita incomes above $4,000 or an investment grade international bond
rating and sharply limiting assistance to countries with annual per capita
incomes above $2,500.
We do not support a rigid eligibility cutoff based solely on these criteria, as it is neither desirable
nor feasible.
The Commission's recommendation rests on the assumption that a country's potential access to
private markets at some level automatically translates into an availability of private finance at the
rates, maturities and volumes appropriate for the full range of purposes necessary to lay the basis
for sustained growth and poverty reduction. This is clearly not the case. Even relatively
productive emerging markets face severe limitations in the volume of private capital that is
reliably available for long-term development investments with the medium to longer-term
maturities that are necessary. Moreover, the private capital that is available comes with interest
rates that are prohibitive for development programs. These market limitations are of particular
importance with respect to the availability of support for development programs such as policybased sector reforms.
If the Commission's recommendations were applied as written, countries as diverse as Brazil,
Indonesia, Turkey, and South Africa - where important, long-term U.S. strategic and economic
interests are clearly at stake -- would be denied access to MDB assistance. If these
recommendations were applied today, the World Bank and regional development banks would
be effectively precluded from lending of any kind, in any circumstances. These countries
currently absorb fully one-third of U.S. exports, a
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