The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
Treas.
HJ
10
.A13
P4
v.415
AUG 2 6 2005
Department of the Treasury
PRESS R E L E A S E S
The following numbers were not used:
JS-1757 and 1759
JS-1699: "Launching the Millennium Challenge Account in Africa"<BR> John B. Taylor... Page 1 of 4
PRESS R O O M
FROM THE OFFICE OF PUBLIC AFFAIRS
May 31, 2004
JS-1699
"Launching the Millennium Challenge Account in Africa"
John B. Taylor
Under Secretary for International Affairs
U.S. Department of the Treasury
Institute of Economic Affairs
Accra, Ghana
May 31, 2004
Let me start by thanking Minister Osafo Maafo for his introductory remarks,
Ambassador Yates for all her work in facilitating my visit and Dr. Mensah for giving
me the opportunity to speak to you about the Millennium Challenge Account or
MCA. It is quite fitting that I talk about the M C A here at the Institute of Economic
Affairs (IEA) which, since its inception 15 years ago, has dedicated itself to
strengthening Ghana's market economy and developing a more democratic, free
and open Ghanaian society. I will focus my remarks on the economic rationale
behind the MCA, how it reflects the Administration's overall approach to economic
development, and how Ghana fits into the picture.
Today there are more than three billion people - half the human race - who live on
less than $2 US dollars per day. Every year some 3 million people die for lack of
immunization, 1 million die from malaria, 3 million die from water-related diseases,
and 2 million die from exposure to stove smoke inside their own homes. In
addition, HIV/AIDS has ravaged the populations of developing nations, particularly
here in Africa, killing 3 million people in 2003 alone. More than one billion people
don't have safe water to drink, two billion have no electricity, and another 2 billion
lack adequate sanitation.
Under President Bush's leadership we are pursuing a new economic growth
agenda aimed at reducing poverty around the world. The M C A is a central part of
this agenda. It operates on the principle that aid is more likely to promote economic
growth and raise living standards in countries that are pursuing sound political,
economic and social policies. That is, in countries that are ruling justly, investing in
their people, and promoting economic freedom. The selection of the 16 MCAeligible countries, of which Ghana is one, was based on an objective and
transparent assessment of their policy performance on 16 indicators that are key to
increasing economic growth.
Removing Impediments to Productivity Growth
Evidence has shown that increased economic growth and sustainable poverty
reduction can only be achieved via productivity growth. To achieve productivity
growth, one must increase the labor output per unit of time with the skills and tools
available. The higher the rate of productivity growth, the faster poverty can decline.
Productivity depends on two things: capital investment per worker and the level of
technology. If there are no impediments to the flow and accumulation of capital and
technology, then countries that are behind in productivity should have a higher
productivity growth rate. Examples such as South Korea, Chile, and Botswana
demonstrate that higher productivity growth can lead to stronger economic growth
and higher per capita income. However, many of the poorest nations still have had
low and stagnant productivity and income, and they are not catching up. More and
more evidence has been accumulating that this is due to significant impediments to
investment and the adoption of technology.
These impediments can be grouped into three areas. First, poor governance — the
lack of rule of law or enforceable contracts and the prevalence of corruption —
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JS-1699: "Launching the Millennium Challenge Account in Africa"<BR> John B. Taylor... rage z ui t
creates disincentives to invest, start up new firms, and expand existing firms with
high-productivity jobs. Second, w e a k social sectors impede the development of
h u m a n capital. Third, restrictive economic environments prevent people from
trading goods and services or adopting n e w technologies and stagnant productivity
and growth.
Ghana Results
In all three areas, governing justly, investing in people, and encouraging economic
freedom, G h a n a scored quite well compared to other countries with a per capita
income of $1,415 or less. Let m e just briefly go over the indicators and the results
for Ghana.
In the ruling justly category, there are six indicators covering (1) civil liberties, (2)
political rights, (3) voice and accountability, (4) government effectiveness, (5) rule of
law, and (6) control of corruption. In all six of these indicators G h a n a scored well
above the median, and it scored particularly high on government effectiveness,
which is an aggregate index of such items as the provision of quality public services
and competent and independent civil servants. This is testimony to Ghana's efforts
to put in place a permanent system of democratic and effective governance and
adherence to the rule of law.
We are particularly encouraged by anti-corruption efforts including the enactment
last December of the Public Procurement Act which provides for transparency and
fair competition, clear decision-making and record maintenance, and mechanisms
for enforcement of the rules and adequate grievance procedures. These are the
type of microeconomic reforms that w e believe are essential for increased
competitiveness.
In the investing in people category, there are four indicators covering (1) Public
expenditure on health as a percent of G D P , (2) Immunization rate for D P T and
measles, (3) Total public expenditure on primary education as a percent of G D P ,
and (4) the primary completion rate. Here again Ghana scored very well compared
to the other M C A candidates, demonstrating the country's commitment to improving
the lives of its people. The data do show that there w a s a drop in immunization
rates in recent years so this is something to keep careful track of.
Within the encouraging economic freedom category, the six indicators are
regulatory quality, country credit rating, days to start a business, trade policy,
inflation, and fiscal policy. For Ghana, the scores on these indicators have not
been as robust as in the other two categories though the government has taken
steps to address weaknesses. For example, while the authorities have m a d e
progress in reducing the number of days to start a business (down from 129 days in
2002 to 85 days in 2003), this figure is still very high and is a true deterrent from
doing business in Ghana. The government has developed a private sector
development strategy that will serve as the basis for improvements. L o w deficits
and prudent fiscal policy are another lynchpin of the M C A criteria. While spending
and inflation levels in G h a n a have historically been quite volatile, the government
has done a good job of maintaining fiscal discipline and w e applaud the President
for pledging to maintain this stance during this election year. Inflation has c o m e
d o w n considerably from its high point of 3 0 % last year, and n o w is expected to be
in the single digits by year-end. Sensible implementation of fiscal and monetary
policies no doubt played a strong part in G h a n a receiving a B + rating from Standard
& Poors last year. W e acknowledge that it can be difficult to maintain fiscal
discipline in an election year, so if President Kufour and his team can accomplish
this goal, they will have reversed a long and destabilizing trend in Ghana.
As Ghanaians well know, subsidies have become a way of life in Ghana. Each
year, the government spends s o m e billions of cedis on subsidies, m a n y of which
are not well targeted. Harnessing these funds for more direct investments in people
could have a dramatic impact on the welfare of Ghanaians. This is an area where
w e hope there can be s o m e improvement. To help ensure continued M C A
eligibility, positive review from the credit rating agencies, and positive relations with
the international financial institutions, w e urge the authorities to continue to ensure
fiscal and monetary discipline. W e encourage the government to take additional
steps to improve the investment climate, particularly for foreign investors, by quickly
resolving outstanding investment disputes. The private sector will be concerned if
the government appears to be impeding into private sector investments - this
needs to be carefully monitored, as the government needs to let the private sector
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JS-1699: "Launching the Millennium Challenge Account in Africa"<BR> John B. Taylor... Page 3
be the driver for economic growth.
Next Steps
Since this past Monday, teams of Millennium Challenge Corporation officials and
staff have begun traveling to each of the 16 countries selected to be eligible to
submit proposals for M C A assistance. O n e of the teams will be in G h a n a in the
next few weeks. The purpose of these visits will be to discuss the M C A and begin
serious dialogues with countries, which will lead to the development of program
proposals and ultimately to the negotiation and finalization of Country Compacts.
But the M C C ' s acceptance of a country's proposal is not guaranteed. Only those
proposals that contain quality programs with a strong likelihood of success will be
accepted.
What types of programs should the Ghana proposal contain? That is what Ghana
will need to tell us. In a broad sense, w e expect it to focus on programs that will
stimulate transformational change within countries resulting in increased economic
growth. It could be include investments in agriculture, education, private sector and
financial systems development, legal and regulatory reform, and enabling
infrastructure. The sixteen countries selected will themselves be responsible for
identifying their priorities, outlining the programs to achieve them, and submitting
proposals reflecting these choices. In each case, w e would expect these choices
to reflect a process of broad consultation within the country. The M C C has posted
proposal guidance for countries on its website if you are interested (www.mcc.gov).
Measuring Results.
One of the aspects of the MCA that I personally attach tremendous importance to is
the emphasis on measuring results. I strongly believe the success of any foreign
aid program requires that w e measure results. What gets measured gets done.
This is a core component of the Administration's development strategy and is one
that w e have pushed in the Multilateral Development Banks (MDBs). For example,
the United States m a d e part of its financial commitment to the IDA-13
replenishment in the form of an incentive contribution that calls for making progress
towards a set of development indicators in health, education, and private sector
development. The agreement also called for the initiation of a performance
measurement system that will develop ultimately into a c o m m o n set of outcome
indicators that can be compared across countries.
The MCA furthers this focus on measuring results by making sure that every MCA
contract states in quantitative terms the expected outcomes. W e will require a clear
strategy for gathering baseline data and measuring progress toward stated results
and assessing the reasons for success and failure. W e will require projects to be
structured in a w a y that steps up or cuts back funding contingent on achieving
results. Evaluation of results will allow the M C A to incorporate lessons learned into
ongoing and future operations. All measurement and evaluation reports, as well as
the terms of each contract, will be m a d e public in the United States and in the host
country.
Conclusion
This is an exciting time for those of us who have been part of the establishment of
the Millennium Challenge Account. It has been a little over two years since
President Bush announced this initiative and it is n o w a reality. While it has not
been easy to get it done, w e firmly believe our efforts will prove to be worth all the
hard work that went into it. This is because the M C A has the potential to provide
profound and far-reaching benefits for recipient countries around the world. T h e
policy reforms enacted in M C A countries can provide opportunities for their citizens
to also benefit from both increased international trade and private capital inflows,
from the growth of their domestic economics, and from greater economic and
political freedom. These reforms can have a much greater impact than whatever
M C C itself achieves.
Having been designated as an MCA eligible country, Ghana can and should
continue to demonstrate that it has the right mix of political, economic and social
conditions to attract investment, increase economic growth, and improve the
livelihood of its citizens.
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JS-1699: "Launching the Millennium Challenge Account in Africa"<BR> John B. Taylor... Page 4 of 4
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F R O M T H E OFFICE O F PUBLIC A F F A I R S
June 1,2004
js-1700
MEDIA ADVISORY:
Treasury Secretary John S n o w to Visit Little Rock, Arkansas
and St. Louis, Missouri This W e e k
U.S. Treasury Secretary John W. Snow will visit Little Rock, Arkansas on Thursday,
June 3 and St. Louis, Missouri on Friday, June 4 to meet with local business
leaders and discuss the President's efforts to strengthen the economy and create
jobs.
As a result of the President's tax policy reforms, 865,000 taxpayers in Arkansas will
have lower income tax bills in 2004. More than 200,000 Arkansas business
taxpayers can use their tax savings to invest in new equipment, hire additional
workers, and increase pay.
In Missouri, the President's tax policy reforms will benefit more than 2 million
taxpayers and 440,000 business taxpayers in 2004. Last year, 14,930 new
businesses were created in the state.
The following events are open to the media:
Thursday, June 3, 2004
Tour of Copy Systems, Inc.
10:00-10:30 a m C D T
Copy Systems, Inc.
721 West 9th Street
Little Rock, A R
** Media must arrive by 9:00 a m and present their media credentials
Roundtable Discussion with Area Business Leaders
10:30 11:30 a m C D T
Copy Systems, Inc.
721 West 9th Street
Little Rock, A R
** Media must arrive by 9:00 a m and present their media credentials
** A brief press availability will occur after the roundtable
Friday, June 4, 2003
Roundtable Discussion with Area Business Leaders
8:30 a m -9:30 a m C D T
Nidus Center
893 North Warson Rd.
St. Louis, M O
** Media must arrive by 7:15 a m and present their media credentials
Tour of Nidus Center
9:30-10:00 a m C D T
893 North Warson Rd.
St. Louis, M O
** Media must arrive by 7:15 a m and present their media credentials
** A brief press availability will occur after the tour
-30-
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Page l oi 1
PRESS R O O M
F R O M T H E OFFICE O F PUBLIC AFFAIRS
June 1, 2004
JS-1701
MEDIA ADVISORY
Department of the Treasury to Discuss Joint Efforts with
Saudi Arabia in the Financial W a r on Terror
Treasury Deputy Assistant Secretary Juan Zarate, in coordination with the U.S.
Department of State and the Government of Saudi Arabia, tomorrow will be
discussing joint efforts between the United States and Saudi Arabia in the financial
war on terror. The discussion will include a briefing with Zarate and officials from
the Department of State and the Saudi Arabian government. The briefing will be on
the record, and cameras are permitted.
WHAT
Discussion and briefing
WHEN
Wednesday, June 2, 2004
11:00 A M E S T
WHERE
Royal Embassy of Saudi Arabia
601 N e w Hampshire Avenue
Washington, D.C.
Please use entrance at 25th and F Street
WHO
Juan Zarate, Deputy Assistant Secretary for Terrorist Financing and Financial Crime, U.S.
Department of the Treasury
Ambassador J. Cofer Black, Coordinator for Counterterrorism, U.S. Department of State
Adel Al-Jubeir, Foreign Policy Advisor to Saudi Crown Prince Abdullah
All reporters planning to attend must RSVP with Dan Rene at 202-448-3127 or drene@qorvis.com.
http://www.freas.20v/Dress/releases/js 1701 .htm
5/5/2005
FROM THE OFFICE OF PUBLIC AFFAIRS
To view or print the PDF content on this page, download the free Adobe® Acrobat® Reade
June 2, 2004
JS-1702
Treasury Clarifies Treatment of Timber Fertilization Costs
Today the Treasury Department and the Internal Revenue Service issued guidance
to clarify that costs incurred by a timber grower for post-establishment fertilization of
an established timber stand are deductible expenses.
"Whenever possible we should provide guidance on significant issues rather than
developing rules through litigation," said Acting Assistant Secretary for Tax Policy
Greg Jenner. "Taxpayers have been seeking clarification of this issue for a
considerable length of time. The lack of guidance has meant that the issue is often
settled on audit by negotiation between the taxpayer and the IRS, which is not an
appropriate outcome. After reviewing the applicable statutory provisions and court
decisions on similar costs, we concluded that we should issue guidance consistent
with those authorities to clarify the treatment of these fertilization costs."
Post-establishment fertilization and other post-establishment practices including
fire, disease, insect, and brush control, promote healthy development, maximize
timber volume, and are performed for the management, maintenance, and
protection of the timber stand. There are no significant differences between the
costs for post-establishment fertilization and the costs for other post-establishment
practices that have previously been held to be deductible expenses. The guidance
issued today therefore concludes that costs for post-establishment fertilization are
deductible expenses.
REPORTS
• Timber RR-2004-62
• 221 Release Student Loans
http ://wwwJj^^ov/prgss/releases/j s 1702 .htm
5/5/2005
Parti
Section 162.-Trade or Business Expenses
26 C F R 1.162-1: Business expenses.
(Also §§ 263, 263A; 1.263(a)-1)
Rev. Rul. 2004-62
ISSUE
Whether costs incurred by a timber grower for the post-establishment fertilization
of an established timber stand are ordinary and necessary business expenses
deductible under § 162 of the Internal Revenue Code or capital expenditures under
§263.
FACTS
Xowns and manages timberlands in the United States on which it grows trees for
use in its lumber and wood products business. After the target species of timber
establishes dominance in an area and becomes an established timber stand, X incurs
costs to perform various silvicultural practices for the purposes of managing,
maintaining, and protecting the stand. These post-establishment silvicultural costs
include labor and materials for fire, disease, insect, and brush control. X performs these
silvicultural practices to maintain optimal growing conditions that will promote healthy
development and maximize timber volume.
In 2004, X incurs costs to apply fertilizer to a portion of its timberlands underlying
an established stand of trees. This application, commonly referred to as "postestablishment fertilization," is performed after the target species of timber has
established dominance in the stand. Xgenerally performs post-establishment
fertilization once during the long-term growth cycle of a timber stand. X performs the
fertilization to supplement nutrients in the soil to maintain optimal growing conditions
that will promote healthy development and maximize timber volume.
LAW AND ANALYSIS
Section 162 and § 1.162-1 (a) of the Income Tax Regulations allow a deduction
for all the ordinary and necessary expenses paid or incurred during the taxable year in
carrying on any trade or business.
-2Section 263(a)(1) provides that no deduction is allowed for any amount paid out
for n e w buildings or for permanent improvements or betterments m a d e to increase the
value of any property. See also § 1.263(a)-1 (a).
Section 1.263(a)-1(b) provides that capital expenditures include amounts paid or
incurred to (1) add to the value, or substantially prolong the useful life, of property
owned by the taxpayer, or (2) adapt property to a n e w or different use. However,
amounts paid or incurred for incidental repairs and maintenance of property for
purposes of § 162 and § 1.162-4 are not capital expenditures under § 1.263(a)-1.
Section 263A generally provides that the direct and indirect costs properly
allocable to real or tangible personal property produced by the taxpayer must be
capitalized. Section 263A(c)(5)(A) provides that § 263A shall not apply to trees raised,
harvested, or grown by the taxpayer other than trees bearing fruit, nuts, or other crops,
or ornamental trees (other than evergreen trees more than 6 years old at the time
severed from their roots).
Certain costs incurred by timber growers for silvicultural practices performed in
established timber stands are ordinary and necessary business expenses deductible
under § 162. These costs include amounts incurred for labor and materials for fire,
disease, insect, and brush control. See Barham v. United States, 301 F. Supp. 43
(M.D. Ga. 1969), aff'd on other grounds, 429 F.2d 40 (5th Cir. 1970); H.R. Conf. Rep.
No. 841, 99th Cong., 2d Sess. 11-117 (1986); H.R. Rep. No. 426, 99th Cong., 1st Sess.
624 (1985). These costs are incurred for the management, maintenance, and
protection of the timber stand. These costs are not incurred to materially add value to
the timber stand, substantially prolong its useful life, or adapt the timber stand to a new
or different use. Accordingly, these costs are not required to be capitalized under
§263.
Like fire, disease, insect, and brush control, post-establishment fertilization
promotes healthy development and maximizes timber volume and is performed for the
management, maintenance, and protection of the timber stand. There are no significant
differences between post-establishment fertilization and the types of post-establishment
silvicultural practices, such as brush control, that have previously been held to be
ordinary and necessary business expenses deductible under § 162. Therefore, X s
costs for post-establishment fertilization are deductible as ordinary and necessary
business expenses under § 162. Furthermore, because X is growing trees for timber
production, X is not required to capitalize the direct and indirect costs allocable to
producing such trees under § 263A. See § 263A(c)(5).
HOLDING
Costs incurred by a timber grower for the post-establishment fertilization of an
established timber stand are ordinary and necessary business expenses deductible
under § 162.
-3C H A N G E IN M E T H O D O F A C C O U N T I N G
Any change in a taxpayer's treatment of post-establishment fertilization costs to
conform to this revenue ruling is a change in method of accounting to which the
provisions of • • 446 and 481 and the regulations thereunder apply. A taxpayer
changing its method of accounting to comply with this revenue ruling must file a Form
3115 in accordance with the automatic change in method of accounting provisions of
Rev. Proc. 2002-9, 2002-1 C.B. 327, as modified and clarified by Announcement 200217, 2002-1 C.B. 561, modified and amplified by Rev. Proc. 2002-19, 2002-1 C.B. 696,
and amplified, clarified, and modified by Rev. Proc. 2002-54, 2002-2 C.B. 432, except
that the scope limitations in section 4.02 of Rev. Proc. 2002-9 are not applicable. For
purposes of line 1 a of Form 3115, the designated number for the automatic accounting
method change authorized by this revenue ruling is "86."
EFFECT ON OTHER DOCUMENTS
Rev. Proc. 2002-9 is modified and amplified to include in the APPENDIX the
automatic change provided in this revenue ruling.
DRAFTING INFORMATION
The principal author of this revenue ruling is Amy Pfalzgraf of the Office of
Associate Chief Counsel (Income Tax and Accounting). For further information
regarding this revenue ruling, contact Ms. Pfalzgraf at (202) 622-4950 (not a toll-free
call).
The Treasury DejplJFment and the Internal Revenue Service today issued final regulations ... Page 1 ot
The Treasury Department and the Internal Revenue Service today issuedfinalregulations relating to the
deduction for interest paid on qualified education loans.
"The final regulations issued today clarify which amounts qualify for the student loan interest deduction
to ensure that students obtain the m a x i m u m deduction permitted under the law," said Acting Assistant
Secretary for Tax Policy Greg Jenner. "These regulations also provide guidance to help lenders meet
their reporting obligations."
The student loan interest deduction was enacted in 1997 and expanded in 2001, when Congress
eliminated the 60-month limit on the time during which interest payments are deductible. These final
regulations provide guidance on the treatment of amounts such as capitalized interest and loan
origination fees, the deductibility of interest payments m a d e by persons other than the taxpayer, the
definition of "qualified education loan," and other issues.
Related regulations on information reporting by institutions that receive payments of interest on
qualified education rules were finalized in 2002. Those regulations provided a transition rule for
reporting loan origination fees and capitalized interest. In response to comments, the student loan
interest regulations issued today provide additional time for institutions to begin reporting payments of
capitalized interest and loan origination fees by extending the transition rule for [eight] months.
Institutions will be required to begin reporting those amounts with respect to qualified education loans
made on or after [September 1, 2004].
http://www.treas.gov/press/releases/reports/221releasestudent%201oans.htm
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5-1703: Additional Al-Haramain Branches, Former <br>Leader Designated by <br>Trea... Page
F R O M T H E OFFICE O F PUBLIC A F F A I R S
June 2, 2004
JS-1703
Additional Al-Haramain Branches, Former
Leader Designated by
Treasury as Al Qaida Supporters
Treasury Marks Latest Action in Joint Designation with
Saudi Arabia
The United States and Saudi Arabian governments today announced yet further
steps in the war against terrorist financing by jointly designating five additional
branches of the Al-Haramain Islamic Foundation (AHF) for the financial, material
and logistical support they provided to the al-Qaida network and other terrorist
organizations. Today's action marks the latest in a series of joint efforts between
the United States and Saudi Arabia in the financial war on terror.
"Terrorists and their tainted dollars have corrupted charity by using the philanthropic
spirit and charitable institutions to further their warped motives," said Juan Zarate,
Treasury's Deputy Assistant Secretary for the Executive Office for Terrorist
Financing and Financial Crimes.
The U.S. and Saudi Arabia are jointly submitting the entities to the United Nations'
1267 Committee to be added to the consolidated list of terrorists tied to al Qaida,
U s a m a bin Laden (UBL) and the Taliban.
The United States is also designating the former leader of Al-Haramain, Aqeel
Abdulaziz Al-Aqil, and submitting his n a m e to the U N 1267 Committee for inclusion
on the consolidated international list.
"The act of charity is sacrosanct. We need to take every step possible to stop the
flow of terrorist funding through charities while preserving the integrity of charitable
giving around the world," said Zarate. "The United States is working with our
international partners and the charitable community to safeguard this sector from
terrorists w h o mock the very idea of charity by converting good will and
humanitarian aid into hate-filled agendas supported by blood money."
Based upon the following information and additional classified material, Treasury is
designating Al-Aqil and the branches of A H F located in Afghanistan, Albania,
Bangladesh, Ethiopia and the Netherlands.
Afghanistan
In Afghanistan, prior to the removal of the Taliban from power, AHF supported the
cause of Jihad and was linked to the U B L financed Makhtab al-Khidemat (MK), a
pre-cursor organization of al Qaida and a Specially Designated Global Terrorist
pursuant to the authorities of E.O. 13224.
Following the September 11, 2001 terrorist attacks, activities supporting terrorism in
Afghanistan continued. In 2002, activities included involvement with a group of
persons trained to attack foreigners in Afghanistan. A journalist suspected of
meeting with al Qaida and Taliban members in Afghanistan was reportedly
transferring funds on behalf of the al Qaida-affiliated A H F and forwarding
videotapes from al Qaida leaders to an Arabic language T V network for broadcast.
Albania
Irfan Tomini Street, #58
Tirana, Albania
p://www.treas.gov/press/releases/j s 1703 .htm
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JS-1703: Additional Al-Haramain Branches, Former <br>Leader Designated by <br>Trea... Page
The U.S. has information that indicates UBL may have financed the establishment
of A H F in Albania, which has been used as cover for terrorist activity in Albania and
in Europe. In late 2000, a close associate of a U B L operative moved to Albania and
w a s running an unnamed A H F subsidiary. In 1998, the head of Egyptian Islamic
Jihad in Albania w a s reportedly also a financial official for A H F in Albania. This
individual, A h m e d Ibrahim al-Nagar, w a s reportedly extradited from Albania to
Egypt in 1998. At his trial in Egypt, al-Nager reportedly voiced his support for U B L
and al Qaida's August 1998 terrorist attacks against the U.S. embassies in Kenya
and Tanzania.
Salih Tivari, a senior official of the moderate Albanian Muslim community, was
murdered in January 2002. Ermir Gjinishi, w h o had been supported by A H F , w a s
detained in connection with the murder, but no charges were filed; he w a s later
released by Albanian authorities. Just prior to being murdered, Tivari informed the
AHF-affiliated Gjinishi that he intended to reduce "foreign Islamic influence" in the
Albanian Muslim community.
Prior to his murder, Tivari controlled finances, personnel decisions, and donations
within the Albanian Muslim community. This provided him significant power,
enabling him to survive several attempts by extremists trained overseas to replace
him or usurp his power.
As of late 2002, AHF was reportedly withdrawing virtually all funding to the Albanian
Muslim community. A H F in Albania w a s to send all proceeds from the sale of s o m e
property to the A H F headquarters in Saudi Arabia. A s of late 2003, A H F w a s paying
for, through a H A M A S m e m b e r with close ties to A H F in Albania, security personnel
to guard the A H F building in Albania, which had been shut down earlier in 2003.
Bangladesh
House 1, Road 1, S-6
Uttara, Dhaka
Bangladesh
Information available to the U.S. shows that a senior AHF official deployed a
Bangladeshi national to conduct surveillance on U.S. consulates in India for
potential terrorist attacks. The Bangladeshi national w a s arrested in early 1999 in
India, reportedly carrying four pounds of explosives and five detonators. The
terrorist suspect told police that he intended to attack U.S. diplomatic missions in
India. The suspect reportedly confessed to training in al Qaida terrorist c a m p s in
Afghanistan, where he met personally with U s a m a bin Laden in 1994. The suspect
first heard of plans for these attacks at the A H F office in Bangladesh.
Ethiopia
Woreda District 24 Kebele Section 13
Addis Ababa, Ethiopia
Information available to the U.S. shows that AHF in Ethiopia has provided support
to Al-lttihad Al-lslamiya (AIAI). In Ethiopia, AIAI has engaged in attacks against
Ethiopian defense forces. AIAI has been designated both by the U.S. Government
and by the U N 1267 Sanctions Committee.
Ethiopia is one of the countries where AHF's website states that they have
operations, but there does not appear to be a formal branch office. A s part of our
efforts to designate this branch, w e are asking that action be taken to ensure that
individuals cannot use the n a m e of A H F or act under its auspices within, or in
connection with services provided in, Ethiopia.
The Netherlands
(a/k/a Stichting Al Haramain Humanitarian Aid)
Jan Hanzenstraat 114, 1053SV
Amsterdam, the Netherlands
Since 2001, Dutch officials have confirmed that the Al Haramain Humanitarian Aid
Foundation located in Amsterdam is part of the larger A H F network and that Al-Aqil,
also being designated today, is chairman of this foundation's board of directors. A s
noted elsewhere in this document, A H F w a s the founder and leader of A H F and
w a s responsible for all of its activities, including its support of terrorism.
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Aqeel Abdulaziz Al-Aqil's
D O B : April 29, 1949
These activities within the branches took place under the control of Aqeel Abdulaziz
Al-Aqil, the founder and long-time leader of A H F and a suspected al Qaida
supporter. Al-Aqil has been identified as AHF's Chairman, Director General and
President in a variety of sources and reports. A s AHF's founder and leader, Al-Aqil
controlled A H F and w a s responsible for all A H F activities, including its support for
terrorism. Having been under investigation in late 2003, by March 2004 Al-Aqil w a s
reportedly no longer leading A H F activities; however, s o m e reports indicate Al-Aqil
m a y still be in a position to exercise control or influence over A H F .
When viewed as a single entity, AHF is one of the principal Islamic NGOs providing
support for the al Qaida network and promoting militant Islamic doctrine worldwide.
Under Al Aqil's leadership of A H F , numerous A H F field offices and representatives
operating throughout Africa, Asia, Europe and North America appeared to be
providing financial and material support to the al Qaida network. Terrorist
organizations designated by the U.S. including J e m m a h Islammiya, Al-lttihad AlIslamiya, Egyptian Islamic Jihad, H A M A S and Lashkar E-Taibah received funding
from A H F and used A H F as a front for fundraising and operational activities.
Under Al-Aqil's leadership, AHF implemented its tasks through its offices and
representatives, which span more than 50 countries around the world. A H F
maintained nine general committees and several other "active committees" that
included the "Continuous Charity Committee, African Committee, Asian Committee,
Da'wah and Sponsorship Committee, Masjid Committee, Seasonal Projects
Committee, Doctor's Committee, European Committee, Internet and the American
Committee, the Domestic Committee, Zakaat Committee and the Worldwide
Revenue Promotion Committee."
After the AHF branch is Bosnia was designated in 2002, it immediately began
efforts to avoid these sanctions. Despite the joint efforts of the United States and
Saudi Arabia to designate the al Qaida-affiliated A H F Bosnia branch office, and the
subsequent raid of this office by Bosnian authorities on June 3, 2002, all A H F
employees were ordered to avoid cooperating with Bosnian and other authorities
under Al-Aqil's leadership. In 2003, A H F headquarters in Saudi Arabia provided
instructions to A H F in Bosnia for the disposition of A H F assets. These instructions
provided for actions contravening local and international counter terrorism laws and
regulations. Al-Aqil stated that AHF's work in Bosnia would continue. After the
Bosnian branch reconstituted itself under the n a m e "Vazir," the U.S. and Saudi
Arabia joined in designating the branch as an alias for the AHF-Bosnian branch.
These entities are subject to designation under Executive Order 13224 pursuant to
paragraphs (d)(i) and (d)(ii) based on a determination that they assist in, sponsor or
provide financial, material, or technological support for, or financial or other services
to or in support of, or are otherwise associated with, persons listed as subject to
E.O. 13224. These branches also meet the standard for inclusion in the United
Nations' 1267 Sanctions Committee's consolidated list because of the support
provided to U B L , al Qaida or the Taliban,
Inclusion on the 1267 Committee's list triggers international obligations on all
m e m b e r countries, requiring them to freeze the assets of these offices. Publicly
identifying these supporters of terrorism is a critical part of the international
campaign to counter terrorism. Additionally, other organizations and individuals are
put on notice that they are prohibited from doing business with them.
Blocking actions are critical to combating the financing of terrorism. When an action
is put into place, any assets existing in the formal financial system at the time of the
order are to be frozen. Blocking actions serve additional functions as well, acting as
a deterrent for non-designated parties w h o might otherwise be willing to finance
terrorist activity; exposing terrorist financing "money trails" that m a y generate leads
to previously unknown terrorist cells and financiers, disrupting terrorist financing
networks by encouraging designated terrorist supporters to disassociate
themselves from terrorist activity and renounce their affiliation with terrorist groups;
terminating terrorist cash flows by shutting d o w n the pipelines used to m o v e
terrorist-related assets; forcing terrorists to use alternative, more costly and higherrisk m e a n s of financing their activities; and engendering international cooperation
and compliance with obligations under U.N. Security Council Resolutions.
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On March 11, 2002, the United States and Saudi Arabia initiated joint public efforts
against terrorist support networks by designating and blocking the funds of the
Somalia and Bosnia-Herzegovina branches of A H F based on evidence these
branches were diverting charitable funds to terrorism. In 2003, the Saudi
government ordered A H F to close all of its overseas branches. A H F stated it closed
several branches, but continued monitoring by the United States and Saudi Arabia
indicated that s o m e branches, and/or former officials associated with these
branches, were either continuing to operate or maintaining other plans to avoid
these measures, such as the Bosnia-Herzegovina branch attempting to reconstitute
itself and continue operations under the n a m e "Vazir." Similarly, the Indonesian
branch of A H F also sought to operate under an alias.
To counter these and other efforts, on December 22, 2003, the United States and
Saudi Arabia announced the designation of Vazir, as an a/k/a for the A H F branch in
Bosnia-Herzegovina. O n January 22, 2004, the U.S. and Saudi Arabia announced
the designation of A H F branches in Indonesia, Kenya, Tanzania and Pakistan. The
Saudi Arabian government m a d e it clear to host countries that these branch offices
should not be considered Saudi entities and should be treated appropriately under
local law.
The United States works to preserve the sanctity of charitable giving and the value
of humanitarian aid provided by charities of all faiths. In this context, w e are working
to identify those charities that are abusing the trust of their donors. In addition to
today's designation, several other charities have been designated by the United
States because of their support of terrorism, including:
• Makhtab al-Khidamat/AI Kifah (formerly U.S.-based)
• Al Rashid Trust (Pakistan)
• W A F A Humanitarian Organization (Pakistan, Saudi Arabia, Kuwait and
UAE)
• Rabita Trust (Pakistan)
• The Holy Land Foundation for Relief and Development (U.S.)
• U m m a h Tamer E-Nau (Pakistan)
• Revival of Islamic Heritage Society (Kuwait, Afghanistan and Pakistan)
• Afghan Support Committee (Pakistan)
• Aid Organization of the Ulema (Pakistan)
• Global Relief Foundation (U.S.)
• Benevolence International Foundation (U.S.)
• Benevolence International Fund (Canada)
• Bosanska Idealna Futura (Bosnia)
• Lajnat al D a a w a al Islamiyya (Kuwait)
• Stichting Benevolence International Nederland (Netherlands)
• Al Aqsa Foundation (U.S., Europe, Pakistan, Y e m e n , South Africa)
• Commite de Bienfaisance et de Secours aux Palestiniens (France)
• Association de Secours Palestinien (Switzerland)
• Interpal (UK)
• Palestinian Association in Austria (Austria)
• Sanibil Association for Relief and Development (Lebanon)
• Al Akhtar Trust (Pakistan)
• Six other branches of A H F (Bosnia, Indonesia, Kenya, Pakistan, Somalia,
and Tanzania) (March 2002 and January 2004)
The United States is committed to rooting out terrorism by halting those who
provide financial support for nefarious acts. With this designation, 374 individuals
and entities will have been designated under President Bush's Executive Order
aimed at freezing the assets of terrorists and their supporters. Nearly $200 million in
terrorist-related assets has been frozen or seized as a result of efforts by the United
States and its allies.
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F R O M T H E OFFICE O F PUBLIC A F F A I R S
June 2, 2004
JS-1704
Testimony of
The Honorable Greg Zerzan
Deputy Assistant Secretary for Financial Institutions Policy
Department of the Treasury
Before the
Committee on Agriculture
United States House of Representatives
June 2, 2004
Thank you Chairman Goodlatte, Ranking Member Stenholm and members of the
Committee for this opportunity to testify today on the Federal Agricultural Mortgage
Corporation (commonly know as Farmer Mac). Our Nation's interest in maintaining
strong agricultural credit markets that serve the needs of farmers and ranchers
remains strong. The Federal government has established a number of programs or
entities that seek to supplement the private sector's efforts in meeting the credit
needs of Rural America. Farmer M a c is one such entity, a government sponsored
enterprise (GSE) established by Congress in 1987 to address perceived
inefficiencies in the allocation of mortgage credit to agricultural real estate. Publicly
traded G S E s such as Farmer M a c are not backed by the full faith and credit of the
United States, nor do they receive funding from the United States. However, such
G S E s do enjoy a limited set of benefits not generally available to other financial
institutions.
Farmer Mac was created in the aftermath of the farm financial crisis of the mid1980s, which many observers linked to the predominance of variable rate
mortgages. Farmer M a c was envisioned to operate along the lines of the
successful secondary markets for residential mortgages and improve the
opportunities for farmers and ranchers to obtain long-term fixed rate mortgages.
The idea was that farm real estate mortgages would be originated by participating
lenders, pooled by third party financial institutions, guaranteed by Farmer Mac, and
sold to investors in the form of securities. Originators would use the proceeds from
the sale of loans to make new loans, enhancing the competitiveness of agricultural
real estate mortgage markets, and expanding the supply of long-term credit
available for farmers and ranchers.
The initial structure of Farmer Mac, however, proved unsuccessful and by 1995
Farmer M a c had low business volume, its capital was depleted, and the anticipated
secondary market in agricultural real estate mortgages had not developed.
Congress decided to act the following year to significantly alter Farmer Mac's
structure with the Farm Credit System Reform Act of 1996 (the 1996 Act). The
1996 Act permitted Farmer M a c to directly act as pooler of agricultural real estate
mortgages and it eliminated the requirement that loan originators and poolers retain
a 10 percent subordinated participation interest in each securitized loan pool.
Since 1996, Farmer Mac's business operations have improved. Total assets have
increased from $512 million at the end of 1995 to $4.3 billion at the end of 2003.
Farmer M a c had its first profitable year in 1996, and Farmer Mac's net income
totaled $27 million in 2003.
Despite Farmer Mac's improving financial results, as the General Accounting Office
( G A O ) noted in its November 2003 report, Farmer M a c poses a number of
questions for policy makers to consider. In particular, today I would like to focus on
three such issues: Farmer Mac's mission achievement; regulatory issues
associated with Farmer Mac, including the perception of the Treasury Department's
oversight role; and the Treasury Department's perspective on Farmer Mac's line of
credit.
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Farmer Mac's Mission Achievement
To evaluate the mission of a GSE like Farmer Mac, it is important to understand the
reason w h y Congress created such an entity and what powers Congress provided
the entity to accomplish its purpose. Unlike s o m e of the other G S E s , Farmer Mac's
enabling legislation does not contain an explicit, prescriptive mission; instead, its
broad mission statement refers to Farmer M a c providing a secondary marketing
arrangement for agricultural real estate mortgages that would generally improve the
credit availability to farmers and ranchers.
One useful way to evaluate Farmer Mac's broad statutory purpose is to consider
whether Farmer M a c has contributed to the development of an active secondary
market in agricultural real estate mortgages, much like the secondary market that
exists for residential housing mortgages. The secondary market for residential
housing mortgages is characterized by a wide array of investors w h o on any given
day are buyers and sellers of mortgage-backed securities. G S E s such as Fannie
Mae, Freddie Mac, and the Federal H o m e Loan Bank System have roles in this
market, as does a wholly-owned government corporation - Ginnie Mae; but other
institutions, such as commercial banks, thrifts, credit unions, mutual funds,
insurance companies, and pension funds also have significant investments in
mortgage-backed securities.
Similarly liquid markets for agricultural mortgage backed securities (AMBS) do not
yet exist. Farmer M a c operates two main A M B S programs. Under the Farmer M a c
I program, Farmer M a c purchases agricultural mortgages that meet Farmer Mac's
underwriting, appraisal, and documentation standards.
Then Farmer Mac issues and guarantees the timely payment of principal and
interest on A M B S backed by such mortgages. Under the Farmer M a c II program,
Farmer M a c purchases the guaranteed portions of loans guaranteed by the United
States Department of Agriculture and guarantees the A M B S backed by those
USDA-guaranteed portions. Farmer M a c m a y retain its guaranteed securities in its
portfolio or sell them to third parties.
The amount of AMBS held by outside investors fell dramatically between 1998 and
2002 from about $600 million to about $367 million. A s a portion of total A M B S
outstanding, the amount of A M B S held by outside investors declined from 52
percent in 1998 to 19 percent in 2002. A s noted by G A O , because Farmer M a c
holds so much of its own guaranteed securities as investments, no active
secondary market has developed. In 2003, the amount of A M B S held by outside
investors did increase to about $1 billion, or 40 percent of all Farmer M a c A M B S
outstanding; however, this increase w a s due to a loan participation swap that
Farmer M a c entered into with a Farm Credit System institution in 2003. Under this
loan participation swap, Farmer M a c replaces loans guaranteed under its Long
Term Standby Purchase Commitment (LTSPC) program with an A M B S . Thus,
while the participation swap transaction increased A M B S held by outside investors,
It did not increase the outstanding credit guarantees of Farmer Mac. Even with this
substantial increase in A M B S outstanding, Farmer M a c continues to hold more than
twice as m a n y loans and A M B S in portfolio as it sells to investors. Absent a more
aggressive effort by Farmer M a c to sell its A M B S to outside investors, it is difficult
to perceive of an active secondary market for A M B S developing.
Another way to consider Farmer Mac's mission achievement is to determine if it is
broadly providing support for agricultural credit that is not being provided by other
credit providers. There are m a n y providers of credit to farmers and ranchers,
including commercial banks, insurance companies, the Farm Credit System, and
specialized agricultural credit providers. Farmer M a c supplements these
institutions' activities by issuing debt in capital markets and purchasing agricultural
real estate mortgages or A M B S . In that sense, Farmer M a c is providing a
secondary market outlet for lenders to dispose of loans, much the s a m e way that
other financial institutions would purchase or participate in agricultural real estate
mortgage loans from one another. If the goal of creating Farmer M a c w a s to create
another specialized agricultural lender, as opposed to developing a viable
secondary market for A M B S , then Farmer M a c has been more successful in
achieving its mission. Whether such an activity constitutes a meaningful public
mission is one that Congress should carefully consider.
Another mission evaluation issue is Farmer Mac's investments in non-missionrelated assets (i.e., non-agricultural assets). Farmer M a c continues to maintain the
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highest percentage of non-mission investments among all the GSEs. As of yearend 2003, Farmer Mac's investment portfolio accounted for 25 percent of Farmer
Mac's total assets with the majority of Farmer Mac's remaining assets being its o w n
A M B S . Farmer Mac's investment portfolio has increased from $150 million as of
year-end 1996 to $1.7 billion as of year-end 2003. In 2003, 22 percent of Farmer
Mac's interest income w a s generated from its investment portfolio.
Holding relatively high proportions of non-mission investments invites speculation
that G S E status is being used to generate what amount to arbitrage profits. Farmer
M a c initially justified its build-up of investments in the latter part of 1990s on the
grounds that the corresponding increase in debt issuance would improve capital
market recognition of Farmer M a c and the pricing of its securities. It w a s then
argued that improved pricing on Farmer M a c debt securities would be passed on to
farmers in the form of lower mortgage rates. Non-mission investments have also
been viewed by s o m e as providing a source of liquidity. All financial institutions
should maintain a prudent amount of liquidity. The question of h o w m u c h nonmission investments are necessary for Farmer Mac's liquidity purposes has been
the source of debate over several years. W e understand that the Farm Credit
Administration is about to issue a proposed rule on this issue, and w e look forward
to following the progress of that rulemaking.
Regulatory Oversight of Farmer Mac
The Farm Credit Administration (FCA) is the regulator of Farmer Mac. The
Treasury Department does not have any direct regulatory oversight responsibilities
with respect to Farmer Mac. However, on December 22, 1995, the House and
Senate Agriculture Committees asked the Treasury to jointly monitor Farmer Mac's
financial condition with F C A throughout the capital deferral period and beyond if
necessary. The capital deferral period w a s established as part of the Farm Credit
System Reform Act of 1996 and effectively prohibited F C A from implementing a
risk-based capital rule for Farmer M a c prior to February 10, 1999. The F C A Board
approved a final Farmer M a c risk-based capital rule on February 21, 2001, the final
rule b e c a m e effective on M a y 23, 2001, and Farmer M a c w a s required to be in
compliance after a 1-year trial period that ended on M a y 23, 2002.
Treasury's role under the joint monitoring request has consisted of reviewing the
semi-annual report that F C A sends to Congress, periodically discussing Farmer
Mac's progress with F C A officials, and on a few occasions submitting comments to
F C A that focused on broader policy issues associated with Farmer Mac. W e have
appreciated the close working relationship w e have had with F C A in conducting the
joint monitoring requested by Congress, but at this time, with the capital deferral
period long over, there will be no continued formal relationship with F C A on the joint
monitoring of Farmer Mac. F C A has developed a useful semi-annual report, which,
as w e understand, it will continue to provide to Congress. It would be useful for
Treasury also to receive a copy of the final report. However, having F C A provide
an advance copy of the report for Treasury to review, or having Farmer M a c or F C A
continue to reference a joint monitoring arrangement with Treasury, m a y
inadvertently provide the false impression that Treasury exercises s o m e form of
oversight of, or responsibility for, Farmer Mac. Treasury plays no such role.
While Treasury does not have any regulatory supervision responsibilities with
respect to Farmer Mac, just as Treasury does not have with the other financial
institutions (including the other G S E s ) , Treasury has an interest in monitoring the
activities of Farmer M a c and the FCA. An issue that has periodically c o m e up in
F C A rulemaking, which the G A O report raised and w e have also raised in the past,
is Farmer Mac's relationship under certain transactions with m e m b e r s of the Farm
Credit System. In particular, under the L T S P C program, Farmer M a c effectively
acts as an insurer of mortgages held by Farm Credit System institutions. L T S P C
transactions create regulatory capital arbitrage opportunities for Farm Credit
institutions. Under this arrangement, a Farm Credit institution can carry its
agricultural mortgages at a 20 percent risk weight, rather than 100 percent, which in
turn lowers its regulatory capital requirement for these loans from 7 percent to 1.4
percent. Farmer M a c must hold 0.75 percent in capital against these loans under
its minimum capital requirement (which appears to be the binding requirement at
this time). Thus, the combined regulatory capital for these loans is just over 2
percent compared to the Farm Credit institution's 7 percent capital requirement on
these loans prior to the transaction. This m a y raise s o m e particular concerns
because Farmer M a c is partially owned by Farm Credit institutions.
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Outstanding LTSPC guarantees have increased from $575 million as of year-end
1999 to $2.3 billion as year-end 2003. The G A O also noted concerns with the
L T S P C program regarding Farmer Mac's liquidity and concentration risk. Over the
last few years, F C A Board m e m b e r s have indicated an awareness of the potential
for capital arbitrage with the L T S P C program and they have taken s o m e recent
actions to address concentration risk within the Farm Credit System.
Farmer Mac's Line of Credit with Treasury
As noted by GAO, there appears to be some confusion over how and under what
terms Farmer M a c would have access to its line of credit with Treasury. This issue
w a s brought to the forefront in 1997 w h e n Treasury submitted comments to F C A on
a proposed regulation that would govern any future conservatorship or receivership
for Farmer Mac. That letter described Treasury's position regarding Farmer Mac's
line of credit as follows:
The Farm Credit Act specifies the circumstances allowing Farmer Mac to request
the Treasury Secretary to purchase Farmer M a c obligations. Farmer M a c must
certify that the proceeds from issuing obligations to the Treasury are necessary to
fulfill Farmer Mac's guarantee obligations, and it must have exhausted its reserves.
Treasury's obligation extends to Farmer M a c only in the prescribed circumstances,
and is not a blanket guarantee protecting Farmer Mac's guaranteed securities
holders from loss. Nor is the purpose of the Treasury's obligation to protect Farmer
M a c shareholders or general creditors.
Thus, we have serious questions as to whether the Treasury would be obligated to
m a k e advances to Farmer M a c to allow it to perform on its guarantee with respect
to the securities held in its own portfolio - that is, where Farmer Mac's guarantee
essentially runs to Farmer M a c itself. Indeed, Farmer Mac's guaranteed securities
must, by statute, carry a disclaimer stating that these securities are not guaranteed
by the federal government.
Treasury has not changed its position on this issue. Investors in Farmer Mac
securities should rely on the underlying credit quality of Farmer M a c w h e n making
investment decisions, not on any potential access to a line of credit with the
Treasury.
Conclusion
Our Nation's interest in maintaining strong agricultural credit markets that serve the
needs of farmers and ranchers remains strong. Farmer M a c has improved its
business prospects since it w a s granted new powers by Congress in 1996, and its
capital position has improved over the years. F C A completed its implementation of
Farmer Mac's risk-based capital standards and has been considering other issues
associated with risk concentration within the Farm Credit System and Farmer Mac's
non-mission investments. While Farmer Mac's role in agricultural mortgage
markets has increased, whether Farmer Mac's increased business activity
contributes to achieving a significant public purpose remains an issue that
Congress should continue to evaluate.
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PRESS ROOM
F R O M T H E OFFICE O F PUBLIC A F F A I R S
June 2, 2004
JS-1705
Remarks of Treasury DAS Juan Zarate on Joint
U.S. and Saudi Action in the Financial W a r on Terror
Thank you very much, Adel, for inviting us here today to make this important
announcement.
I am pleased to announce that, once again, the United States and Saudi Arabia
have joined forces to identify and choke off additional channels of terrorist
financing.
Today, the U.S. and Saudi Arabia are designating five additional branches of the
Saudi-based charity, Al-Haramain, located in Afghanistan, Albania, Bangladesh,
Ethiopia and the Netherlands. W e will jointly be submitting these names to the
United Nations 1267 Committee for listing by the United Nations. In doing so, w e
are calling on the U.N. to designate these groups as well, which will bring to bear
the full weight of the international community and require the freezing of any
accounts or transactions now or in the future. This is another important joint step
with the Saudi government - steps that began in March 2002 - to designate known
supporters of terrorism.
The United States is also announcing today the designation of Al Haramain's
former leader, Aqeel Abdulaziz Al-Aqil, and will be submitting his n a m e to the
United Nations for designation as well.
These entities and this individual have provided financial, material and logistical
support to the al-Qaida network, U s a m a bin Laden or the Taliban, fueling and
facilitating their efforts to carry out vile acts against innocent individuals and the
civilized world.
The terrorist attacks this past weekend in the Kingdom demonstrate again that we
are engaged in a global battle against terrorism - a battle that affects Saudi Arabia
directly on a daily basis. A s w e have seen over the course of Al Qaida's history, it
terrorizes and kills victims around the world of every race, creed and color.
These terrorists and their sympathizers have abused charities not only as a means
of raising funds but also to provide logistical support and cover for terrorist
operations. That is the case with the branches and activities of Al Haramain w e
have designated. It w a s under the cloak of charity that Aqeel al Aqil used the al
Haramain organization to benefit himself and al Qaida - to support al Qaida-related
groups like Al Ittihad Al Islamiya and al Qaida trained fighters. Mr. Aqil has
attempted to evade Saudi controls on his finances, and w e have worked with the
Saudi government to ensure that he can no longer wield control over Al Haramain
and its resources.
The use of charities for terrorist financing is not a new phenomenon, nor do we
think it will stop with these actions. That is why w e are pleased that the Saudi
government has taken even more aggressive structural and regulatory steps to deal
with the abuse of charities within the Kingdom. With the announcement of the Saudi
National Commission for Relief and Charity Work, the Saudi government is
signaling again its long-term commitment to reform in this sector.
We will continue to work with our international partners and the charitable
community to protect the sector from terrorists, w h o mock the very notion of charity
and use it to fuel their hate-filled agendas.
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The Bush Administration is committed to rooting out terrorism - root and branch through all possible m e a n s . Our worldwide effort to attack the financial
infrastructure of terror has m a d e it more difficult for al Qaida and other terrorist
groups to underwrite terror and has forced them to resort to less secure methods to
m o v e dollars.
With today's action, 374 individuals and entities have been designated under
President Bush's Executive Order aimed at freezing the assets of terrorists and
their supporters. Nearly $140 million in terrorist-related assets has been frozen as a
result of efforts by the United States and its allies.
Though our struggle against terrorism is not over, actions like today's can foil the
short-term goals of terrorists while thwarting their long-term ambitions - leading to
the ultimate dismantling of terrorist networks.
Continued collective efforts by Saudi Arabia and our international allies, like today's,
will lead to further successes in the financial war on terror. W e will not tire in these
efforts - w e will continue to cut off channels of financing, w e will ostracize those
w h o supporter or facilitate terrorism, w e will continue to capture or kill operatives
and facilitators and w e will bring to justice those w h o seek to do us harm. T h e
civilized world has rallied against terrorism, and w e remain resolute in our efforts.
Thank you very much.
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JS-1706: Treasury Launches N e w Islamic Finance Scholar-in-Residence Program
Page 1 of 1
PRLSS ROOM
F R O M T H E OFFICE O F PUBLIC A F F A I R S
June 2, 2004
JS-1706
Treasury Launches New Islamic Finance Scholar-in-Residence Program
The U.S. Treasury today announced the appointment of Dr. Mahmoud El-Gamal to
serve as the first Islamic Finance Scholar-in-Residence. Dr. El-Gamal will serve as
a principal advisor on Islamic Finance to senior Treasury officials and he will liaise
with international organizations that are seeking to create standards for and monitor
Islamic finance. H e will interact with various U.S. government agencies to provide
an overview of the recent developments on formulating new and harmonizing
current international regulatory standards, and have an opportunity to conduct
workshops on Islamic finance, including overview of the industry, prudent
supervision/regulation, accounting standards, governance practices, and debt
management.
John Taylor, Under Secretary for International Affairs, said, "We are delighted that
Dr. El-Gamal is joining us as the first Scholar-ln-Residence on Islamic Finance.
With the recent growth of the Islamic finance industry, deeper understanding of
Islamic finance is priority for this Administration. I have already learned much from
Dr. El-Gamal's research, and look forward to interacting with him on important
policy issues."
The purpose of the Islamic Finance Scholar-in-Residence program is to promote
broader awareness of Islamic finance practices internationally and domestically for
U.S. government policymakers, regulators, and the public at large. While mainly
practiced in the Middle East and Asia, the Islamic finance industry is growing in
Europe and in North America. Dr. El-Gamal - with his extensive background in
Islamic finance - will play a critical role in advancing the importance of promoting
good practices in risk management and transparency in this area.
Dr. El-Gamal is the Chaired Professor of Islamic Economics, Finance and
Management and Professor of Statistics and Economics at Rice University in
Houston, Texas. H e previously held teaching positions at the University of
Wisconsin, California Institute of Technology, and the University of Rochester, in
addition to working as an economist at the International Monetary Fund. Dr. ElGamal received a B.A. in Economics and Computer Science and an M.A. in
Economics from the American University of Cairo, an M.S. in Statistics from
Stanford University, and a Ph.D. in Economics from Northwestern University.
p://www.treas.gov/press/releases/jsl706.htm
5/5/2005
JS-1707: United States to Co-Organize APE<br>Remittance Symposium<br>Shaping the... Page 1 of 2
PRLSS R O O M
F R O M T H E OFFICE O F PUBLIC AFFAIRS
June 2, 2004
JS-1707
United States to Co-Organize APE
Remittance Symposium
Shaping the Remittances Market by Shifting to Formal Systems
TOKYO, JAPAN - As part of the Asia-Pacific Economic Cooperation (APEC)
Finance Ministers' process, the Working Group on Alternative Remittance Systems
(ARS) - which is co-chaired by the United States, Singapore, Thailand and Japan will be holding a symposium entitled "Shaping the Remittances Market by Shifting
to Formal Systems". The symposium is being held at the Asian Development Bank
Institute in Tokyo, Japan on June 3-4, 2004. This event is co-sponsored by the
Japanese Ministry of Finance, the Word Bank and the Asian Development Bank.
This unique symposium will bring together governments, the private sector and
other key stakeholders to discuss opportunities and innovations in the cross-border
remittance industry and share experiences from all over the world on successful
ways to strengthen remittance channels and create market incentives for customers
to shift from informal to formal financial systems. Participants include a wide array
of policymakers, academics, private banks and money transfer businesses, and
N G O s and microfinance institutions from countries such as the U.S., Mexico, the
Philippines, Japan, India, Egypt, Malaysia, and Singapore.
The sessions will focus on ways to balance regulations and market incentives in the
formal financial sector, explore the need to expand access to financial services in
sending and receiving countries and consider how innovative technology can be
used to establish new products to generate competition among formal service
providers. The symposium will also seek ways to maximize the development impact
of remittances in receiving countries and how governments, private sector and civil
society can work together in this process.
While over $90 billion in recorded remittances were sent last year globally,
unrecorded remittances through the informal financial systems can be significant as
well(1). Alternative or informal remittance systems can provide critical financial
services to migrant worker populations that are disenfranchised from mainstream
financial institutions. These systems, furthermore, operate in environments where
formal financial systems are underdeveloped or non-existent. Experience suggests
that by strengthening formal financial systems and encouraging remitters to shift
towards using formal channels through market incentives, senders and receivers of
remittances both will be better served by accessing formal financial services. These
provide additional mainstream financial services, and allow for additional safe
mechanisms to send money. By understanding the impediment to using the formal
financial systems, policymakers and the private sector can work to overcome these
impediments and seek to encourage wider access to and use of financial services.
The APEC Alternative Remittance System (ARS) Initiative was launched in
September 2002 by the APEC ARS Working Group - co-chaired by Japan,
Singapore, Thailand and the United States - to examine the economic and
regulatory factors for using informal remittance services through technical research
with the support of the World Bank.(2) This research forms the basis for this
symposium and brings together key stakeholders to seek ways to create the right
market conditions to allow remittances to be sent through formal channels.
For further information or interviews please contact:
Christopher Hawkins in Pucon, Chile, on +56 9418 9204 (Chile Cellular), +65 9179
4590 (Singapore Cellular) or email: ch@apec.org
:>://www.treas.gov/press/releases/js 1707.htm
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JS-1707: United States to Co-Organize APE<br>Remittance Symposium<br>Shaping the... Page 2 of 2
(1) World Bank, Global Development Finance 2004; "Appendix A: Enhancing the
Developmental Effect of Workers' Remittances to Developing Countries". (2) World
Bank. Informal Funds Transfer Systems in the A P E C Region: Initial Findings and a
Framework for Further Analysis. Sept. 2003
3://www.treas.gov/press/releases/js 1707.htm
5/5/2005
1708: Testimony of<BR>Brian Roseboro<BR>Under Secretary for Domestic Finance<BR>Departme... Page
FROM THE OFFICE OF PUBLIC AFFAIRS
May 18, 2004
js-1708
Testimony of
Brian Roseboro
Under Secretary for Domestic Finance
Department of the Treasury
Before the
Committee on Banking, Housing, and Urban Affairs
United States Senate
Thank you, Chairman Shelby, Ranking Member Sarbanes, and members of the
Committee on Banking, Housing, and Urban Affairs for this opportunity to testify
today on the implementation of the Terrorism Risk Insurance Act (TRIA) of 2002.
The market for property and casualty terrorism risk insurance was significantly
affected by the terrorist attacks of September 11, 2001. In the aftermath of
September 11, reinsurers by and large refrained from offering coverage for property
and casualty terrorism risk or offered reinsurance coverage at costs that were
generally considered prohibitive. This then caused property and casualty insurers in
general to respond by excluding terrorism coverage from commercial property and
casualty insurance policies, leaving m a n y American businesses exposed and
uninsured. Perhaps the most notable negative impact of this development w a s the
drag it created on businesses' ability to finance n e w job-creating economic activity
in the midst of our economic downturn caused in part by the events of September
11.
To address this condition, Congress enacted TRIA in the fall of 2002. TRIA
establishes a temporary Federal program of shared public and private
compensation for insured commercial property and casualty losses resulting from
acts of terrorism covered by the Act. TRIA in effect places the Federal government
in the property and casualty terrorism risk reinsurance business through December
31,2005.
By most indications TRIA has been successful in achieving the fundamental goal of
enhancing the availability and affordability of property and casualty terrorism risk
insurance, particularly for economic development purposes. N o longer are heard
the s a m e level of concerns from real estate developers, for example, that n e w
projects are on hold because financing has been frozen by a lack of terrorism risk
insurance. In terms of affordability, while the information is still somewhat
preliminary, accounts that w e have seen indicate that premiums for terrorism risk
insurance have decreased significantly throughout the early stages of TRIA and
continue to do so.
Despite TRIA's apparent success, there have been widespread reports that the
"take up" rates for TRIA coverage have been low, or in other words, the d e m a n d for
this coverage has been low. Whether this reflects a lack of interest in terrorism risk
coverage at current prices, a lack of awareness of the availability of coverage, an
assessment by businesses of low terrorism loss risk, or s o m e combination of the
above will require careful study and analysis of information reflecting as
comprehensive a view of markets as possible.
Treasury's Implementation of TRIA
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708: Testimony of<BR>Brian Roseboro<BR>Under Secretary for Domestic Finance<BR>Departme... Page
Treasury has the chief responsibility for implementing the Federal reinsurance
backstop that w a s established under TRIA. In broad terms, as Treasury has
undertaken the overall implementation of TRIA, w e have focused on five main
administrative goals: ensuring that the program w a s operable immediately;
implementing the program in a transparent manner; relying on the State insurance
laws and regulatory structure as much as possible; allowing insurers to participate
in program through their normal course of business where possible; and ensuring
that insurance benefits, if needed, can be provided in an expedited manner.
Perhaps the most daunting, immediate administrative task was to prioritize and
undertake the actions needed to m a k e the program operational right away. O n e of
the key factors in this regard w a s that TRIA b e c a m e effective immediately on
November 26, 2002, w h e n the President signed the Act into law. The instant
effective date of TRIA meant that terrorism exclusions on existing insurance policies
were removed and all policyholders had the ability to secure coverage for terrorism
risk. In addition to the effective date, Treasury also had to address the wide range
of businesses, insurance companies, and types of policies that are affected by
TRIA.
To address the immediate effective date of TRIA and provide the necessary
guidance to the insurance industry and others to m a k e the program operational,
Treasury's first action w a s to issue promptly a series of three interim guidance
notices. The first interim guidance notice w a s issued on December 3, 2002, about
one w e e k after TRIA w a s signed into law. Other interim guidance notices were
issued on December 18, 2002, and January 22, 2003. Treasury relied on the
process of issuing interim guidance notices because it provided us with the ability to
respond quickly to implementation issues, and to prevent confusion prior to the
issuance of formal regulations. These interim guidance notices provided the basis
for insurance companies to proceed with offering coverage by addressing issues
such as: compliance with TRIA's required disclosure and "make available"
requirements; determining what insurers were required to participate in the program
and h o w their deductibles would be calculated; and the scope of coverage under
the program.
Even while the interim guidance process went forward we began the next step in
the implementation process of preparing formal rulemakings that would incorporate
and supercede our interim guidance. In general, the first rules were issued as
interim final rules, as authorized in the statute, because of the immediate
operational needs. The first interim final rule w a s issued on February 28, 2003. That
rule and an interim final rule that w a s issued on April 18, 2003 took m a n y of the
issues that were addressed in interim guidance notices and transformed them into
formal implementing regulations. Subsequent rulemakings have addressed issues
associated with State residual market mechanisms, claims processing, and
litigation management. Overall, Treasury has published two interim final rules and
three proposed rules, and three of these rulemakings have been finalized.
It is important to stress that while we have been moving progressively through the
rule making process, the program from the beginning has been and continues to be
fully operational. These rules have been put forward as refinements to and
improvements on practices and operations, but from the earliest days of the
program, w e have had procedures and resources ready to respond to any covered
event that might arise.
In addition to the regulatory actions outlined above, Treasury has also created and
staffed a Terrorism Risk Insurance Program (TRIP) office to administer the Act.
A m o n g its accomplishments, the TRIP office has developed systems to handle
claims processing, payment, and auditing of claims should a covered event occur.
The TRIP office has been working to provide detailed operating procedures for
claims filing, processing and payment that are separate from the claims procedures
regulation. In addition, the TRIP office has been consistently responding to requests
for interpretation of the Act and its regulations from insurers; m a n y of those
interpretations have been m a d e available to the general public on the TRIP website
(www.treas.gov/trip).
TRIA created an interesting hybrid program jurisdictional^; it provides a Federal
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6/1/2005
708: Testimony of<BR>Brian Roseboro<BR>Under Secretary for Domestic Finance<BR>Departme... Page
reinsurance backstop to commercial property and casualty insurance entities that
are regulated almost exclusively at the State level. This type of program would likely
be unmanageable without the cooperation of the State insurance regulatorscooperation a m o n g themselves and cooperation with the Federal government.
Throughout the implementation process, Treasury consulted and worked closely
with the NAIC, and the NAIC's assistance has been invaluable in implementing
TRIA. W e look forward to continuing to work closely with the NAIC regarding
Treasury's remaining responsibilities under TRIA.
Comprehensive Market Information and Analysis Requirement
An important requirement of TRIA is to implement the Act with a careful eye on
market conditions and developments, and report to Congress. In particular,
Treasury is required to report to Congress by June 30, 2005, on an itemized list of
issues associated with the Act and its purposes. Specifically, Treasury is required to
assess* The "effectiveness of the Program;"
* The "likely capacity of the property and casualty insurance industry to offer
insurance for terrorism risk after termination of the Program;" and
* The "availability and affordability of such insurance for various policyholders,
including railroads, trucking, and public transit."
Together with this analysis, Treasury is also required under TRIA to compile
information on premium rates for property and casualty terrorism risk insurance.
To assist in the evaluation of the Act's effectiveness and to meet TRIA's premium
information collection requirement-and to ensure that w e do so with as
comprehensive a view of the markets as possible-Treasury has contracted with an
outside survey research firm to conduct a comprehensive survey with a nationally
representative sample of policyholders and insurers. S o m e of the information being
collected through the surveys includes the cost of terrorism risk insurance as
compared to total insurance within eligible lines, basic financial data, insurance
deductibles and limits for terrorism as compared to non-terrorism insurance, use of
reinsurance and self insurance, and the types of risk m a n a g e m e n t programs.
Each company chosen for the survey will be contacted at least twice and possibly
three times (depending on its policy renewal dates) in order to capture effects of
changes in TRIA's insurer deductibles in successive program years. The first
survey w a v e collected data from 2002 and 2003. Surveys for the first w a v e were
mailed out late in 2003 and early 2004 to over 30,000 policyholders and almost 500
insurers. A second survey w a v e to collect 2004 data is planned for early this fall,
and the last survey w a v e is planned for January and February of 2005. This phased
structure will allow us to m o v e beyond snapshots and anecdotal evidence to obtain
a broader and more dynamic view of the conditions in the market place. W e believe
that anything less would not provide to the Secretary the full and reliable
information needed to m a k e the sort of careful, trustworthy, and responsible
evaluation called for by Congress in the statute.
The completed survey results, as well as consultations with a wide range of
interested parties, will form the basis for Treasury completing by the June 30, 2005
statutory deadline its report to Congress on the effectiveness of TRIA and the
capacity of the property and casualty insurance industry to offer insurance for
terrorism risk after termination of the program.
Determination on Extending the "Make Available" Requirement
The Secretary of the Treasury is required by TRIA to determine by September 1,
2004, whether to extend the "make available" provisions into the third year of the
program (i.e., through December 31, 2005). The "make available" provisions of
TRIA require'that, from the date of enactment (November 26, 2002) through the last
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708: Testimony of<BR>Brian Roseboro<BR>Under Secretary for Domestic Finance<BR>Departme... Page
day of the second year of the program (December 31, 2004), each insurer must
m a k e available, in all of its commercial property and casualty insurance policies,
coverage for insured losses under the Act. In this regard, TRIA also requires that
such insurance coverage must not differ materially from the terms, amounts and
other coverage limitations applicable to losses arising from events other than acts
of terrorism.
TRIA requires that Treasury's determination on whether to extend the "make
available" requirements through the third year of the program be based on the
s a m e statutory factors described above that are to be considered in Treasury's
overall study of the effectiveness of TRIA.
Treasury is now developing a base of information from which the Secretary can
m a k e this required determination, consistent with the terms of the Act. A s part of
the information gathering process, on April 29, 2004, Treasury submitted to the
Federal Register for publication a request for comments regarding the Secretary's
determination of whether to extend the "make available" requirements of the Act
into the third year of the program. C o m m e n t s will be accepted through June 4,
2004. W e encourage anyone w h o has views on this question to respond to this
request for comments with as much detail as they can provide.
In making this determination, however, while examining similar issues as those
outlined for the larger examination due by June 2005, Treasury will be looking at
those issues with the specific, narrow focus of the "make available" question, and
with the use of much less information than will be available for the larger, broader
study. Therefore, each examination will be conducted independently of the other.
Conclusion
We must all remember that the basic goal of TRIA was to develop a temporary
backstop for property and casualty terrorism risk insurance so that private markets
would have a chance to adjust. W e encourage insurance companies, state
insurance regulators, other financial services providers, and other interested parties
to think creatively in this regard, and to consider what methods can be employed to
allow for broader private sector involvement in the market for managing property
and casualty terrorism risk. Treasury looks forward to completing our review of the
effectiveness of TRIA and considering the m a n y complicated issues presented to
us in a thorough manner with the best information that can be obtained. Our
obligations to the taxpayers, and the need for the long-term health and vitality of our
financial markets, require nothing less.
In summary, while we hope that we will never be called upon to trigger coverage
under TRIA, the program stands ready today-as it has from its earliest days-to
meet its responsibilities. The extensive work done by Treasury in developing the
basic framework of TRIA through interim guidance notices and regulations, the
proposed claims regulations, the drafting of claims forms and review with industry
organizations and the NAIC, and contingency procurement plans, all have
contributed to an effective program that the Treasury will continue to refine over the
life of the program. W e look forward to moving forward with the implementation
process and evaluating the effectiveness of the program in the weeks and months
ahead.
30
/.treas.eov/nress/releases/is 1708.htm
6/1/2005
JS-1709: The Honorable John W . Snow<BR>Secretary of the Treasury<BR>Prepared Op... Page 1 of 2
PR CSS ROOM
F R O M T H E OFFICE O F PUBLIC A F F A I R S
June 3, 2004
JS-1709
The Honorable John W. Snow
Secretary of the Treasury
Prepared Opening Remarks
Roundtable with Small Business Leaders at Copy Systems, Inc
Little Rock, Arkansas
June 3, 2004
It's great to be here in Arkansas, and great to be here at Copy Systems. Mary Jane,
thank you for hosting this roundtable and thanks to all of you here today for the
work you do, as business owners, to create jobs for the people of Arkansas.
I hope that all of your businesses are doing better today than a year ago; I know our
economy overall certainly is, and that w e have your hard work to thank for that.
Each of you are one of nearly 200,000 business taxpayers here in Arkansas who
can use your tax savings from the President's tax cuts to invest in new equipment,
hire additional workers, and increase pay.
There is a reason why the President's tax cuts focused on helping your businesses
- because w e understand that its businesses like yours that create jobs, and that is
the President's top economic priority.
The President and I share a passion for small business - we know that it's what
makes our economy so dynamic, innovative and productive. W e appreciate how
important the entrepreneurial spirit is to this great country.
We're also keenly aware of the challenges you face. I imagine that today we'll talk
about the cost of health care, taxes, regulations and abusive lawsuits. These are all
a drag on your business, and a disincentive for growth and job creation.
It's clear that only with great freedom can the entrepreneurial spirit thrive. That's
why the President and I are so strongly in favor of tax cuts. W e know we've got to
lift the burden of taxes, regulations, health care costs and abusive lawsuits from
your shoulders whenever possible - because what's good for you and your
business is good for our economy.
We've seen it work with the President's tax cuts - when the burden was lightened,
our economy began to soar.
Just a few weeks ago, I had a discussion with my counterpart from the UK,
Chancellor Gordon Brown, and a group of British and American business owners
on the subject of entrepreneurship. W e asked them: what makes entrepreneurship
work and what can government do to ensure it is welcomed and encouraged?
The conclusion we came to will not be a surprise to you: the best thing government
can do for small business and entrepreneurship is to get out of the way\ W e took
s o m e taxes out of your way, and I'm delighted to say that it worked; our economy is
firing on all cylinders right now. We're experiencing very strong growth - the best in
20 years - and 1.1 million jobs have been created over the past eight months.
Here in Arkansas, jobs having been coming back for one year now, since last June.
Your unemployment rate has been trending downward, but we're not satisfied.
Arkansans need jobs; w e need to lower that rate even further.
>://www.treas.gov/press/releases/js 1709.htm
5/5/2005
JS-1709: The Honorable John W . Snow<BR>Secretary of the Treasury<BR>Prepared Op... Page 2 of 2
Manufacturing jobs are very important to this state, and those jobs were hardest hit
during our time of economic recession. We've seen modest gains in that area on a
national basis since we've been in economic recovery, with 21,000 n e w
manufacturing jobs created in April - the third straight month of job creation. While
w e still are not satisfied with the rate of recovery in the manufacturing industry, the
signs are pointing in a positive direction.
I remain optimistic for Arkansans who are looking for work today. There is no doubt
that our economy is doing very well, and job creation does follow economic growth.
It's never fast enough for any of us, but it does come.
In addition to the strong GDP growth that I mentioned earlier, we also see
indications that business spending has rebounded. Business and consumer
confidence are up, and there are signs that labor market is also beginning to create
better-paying jobs. Our housing industry is extremely strong, with homeownership
at an all-time high, and this is something to be very proud of, as a nation.
It's clear that American families and small businesses like yours have benefited
from the lowered burden of taxation brought about by President Bush's tax cuts.
The natural strength and resilience of our free-market economy has proven itself
once again. The President's tax cuts provided the relief and the stimulus that
American consumers and job-creators needed.
As a result, people are finding jobs and seeing their paychecks increase, and that
kind of security is the President's top economic priority
When we lift the weights that hold it down, our economy soars. That's why the most
important thing w e can do going forward is to keep it unencumbered by making the
President's tax cuts permanent.
We can't stop our progress now - the working people of Arkansas need this growth
to continue, because w e need the jobs it will create.
Thank you for having me here today and thank you for the work you do to make our
economy the strongest in the world. I look forward to hearing from you.
)://www.treas.gov/press/releases/jsl709.htm
5/5/2005
JS-1710: Testimony of<br>Michael Kestenbaum<br>Executive Director<br>Air Transpo... Page 1 of 2
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC A F F A I R S
June 3, 2004
JS-1710
Testimony of
Michael Kestenbaum
Executive Director
Air Transportation Stabilization Board
Before the
Subcommittee on Aviation
United States House of Representatives
Thank you, Chairman Mica and members of the subcommittee, for this opportunity
to report to you on the Air Transportation Stabilization Board (ATSB or Board).
Program Overview
As you know, the ATSB was established by Congress in September 2001 as part of
the Air Transportation Safety and System Stabilization Act (Act). The Board is
comprised of designees of the Chairman of the Federal Reserve (who is Chairman
of the Board), the Secretary of the Treasury, the Secretary of Transportation, and
the Comptroller General of the United States (who is a nonvoting member). The
designees and voting members are Federal Reserve Board Governor Edward M.
Gramlich, Department of the Treasury Under Secretary for Domestic Finance Brian
C. Roseboro, and Department of Transportation Under Secretary for Policy Jeffrey
N. Shane. The A T S B w a s authorized to issue up to $10 billion of Federal loan
guarantees to air carriers that suffered losses as a result of the September 11
terrorist attacks. The Act required the Office of Management and Budget to issue
regulations setting forth procedures and minimum requirements for loan guarantee
applications.
The ATSB received sixteen loan guarantee applications prior to the June 28, 2002
application deadline established under the Board's regulations drafted by O M B .
They included a range of large airlines, low-fare airlines, smaller airlines, charter
and cargo carriers. The A T S B has approved seven applications, denied eight
applications, and has one application pending. O n e of the approved applications
was withdrawn prior to closing.
The ATSB has issued six loan guarantees totaling $1.56 billion supporting loans
totaling $1.74 billion. The carriers w h o have received A T S B guarantees are
America West Airlines ($380 million for a $429 million loan), American Trans Air
($148.5 million for a $168 million loan), Aloha Airlines ($41 million for a $45 million
loan), Frontier Airlines ($63 million for a $70 million loan), U S Airways ($900 million
for a $1.0 billion loan), and World Airways ($27 million for a $30 million loan).
Evergreen Airlines received conditional approval for a loan guarantee but withdrew
its application after obtaining a private loan. The loans range in maturity from five to
seven years with final maturity dates between 2007 and 2009. The guarantees
generally have represented about 90 percent of the total loan amounts, with roughly
10 percent of the risk assumed by private sources.
Evaluative Criteria
In evaluating loan guarantee applications, the Board has applied the standards set
forth in its statute and regulations. To be eligible for a loan guarantee, an air carrier
must demonstrate that it suffered losses as a result of September 11, credit is not
reasonably available to the air carrier, the intended obligation by the air carrier is
prudently incurred, and the loan is a necessary part of maintaining a safe, efficient,
and viable commercial aviation system in the United States.
://www.treas.gov/press/releases/js 1710.htm
5/5/2005
JS-1710: Testimony of<br>Michael Kestenbaum<br>Executive Director<br>Air Transpo... Page 2 of 2
Among other things, the OMB regulations require the ATSB to consider whether the
application presents a reasonable assurance that the borrower will be able to repay
the loan by the date specified in the loan agreement. The A T S B conducts detailed
analyses of each air carrier's business plan and financial projections as part of its
evaluation process. The A T S B also evaluates credit ratios, liquidity, downside
forecast scenarios, and the value of proposed collateral to m a k e an overall
judgment on the risk being assumed by the taxpayer.
Compensation to the Government
The statute also indicates that, to the extent feasible and practicable, the
government should be compensated for the risk of extending loan guarantees. The
A T S B has strived to ensure that the government has been compensated for the risk
assumed in making the guarantees through fees and stock warrants. To date, the
six A T S B borrowers have paid approximately $145 million in guarantee fees to the
Government. The A T S B also obtained stock warrants in the six air carriers to allow
the government to participate in their financial success. For those air carriers, the
warrants represent between 10 percent and 33 percent of each company's equity.
Based on recent stock prices, the A T S B warrants currently have a "paper value" in
excess of $100 million. While they can be exercised and sold at the Board's
discretion - the Board is exploring different options for monetizing the warrants -the actual value realized will be a function of a number of factors such as the size of
the position offered, liquidity of the underlying stock and markets, investor interest,
and the timing and manner in which the warrants are monetized. The warrants will
have expired by 2012.
Loan Performance
Currently, all five of the outstanding ATSB guaranteed loans are performing. The
current amount of outstanding guarantees is $1.19 billion. Frontier Airlines repaid its
loan in full ahead of schedule in December of last year. However, there is always a
risk of eventual defaults given the challenges the industry continues to face. The
A T S B closely monitors the financial performance of all of its borrowers. The
borrowers submit monthly financial reports to the A T S B , and the A T S B meets
regularly with the borrowers to discuss the state of the business.
On occasion, the Board has granted amendments and waivers to loan terms for
several of its borrowers. In these cases, the A T S B strives to ensure that taxpayer
interests are protected or enhanced. For example, the A T S B negotiated a
prepayment of $250 million from U S Airways as part of an agreement to provide the
company with flexibility to meet changing conditions in the airline industry.
Conclusion
During a very challenging period for the airline industry, the ATSB has worked hard
to responsibly execute its statutory mandate to provide liquidity to air carriers whose
business plans can support repayment of the loans.
://www.treas.gov/press/releases/js 1710.htm
5/5/2005
JS-1711: Press Statement Under Secretary John Taylor, U.S. Treasury Department<br> ...
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Page 1 of 1
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PRESS ROOM
F R O M T H E OFFICE O F PUBLIC A F F A I R S
June 3, 2004
JS-1711
Press Statement Under Secretary John Taylor, U.S. Treasury Department
M a y 27, 2004
Acknowledging the critical contribution of housing finance to the development of
economic well being, President George W . Bush announced on July 12, 2003 in
Abuja, Nigeria his desire to see mortgage markets developed in Africa. H e
requested that Treasury Department Secretary John W . S n o w lead a U.S.
government initiative to assist African nations to develop their mortgage markets.
To date, the initiative has resulted in almost $50 million in commitments from the
Overseas Private Investment Corporation (OPIC) for housing finance related
projects in Africa, including $3.5 million in Nigeria. In addition, the U.S. Treasury, in
partnership with Ginnie Mae, is helping to develop plans for primary and secondary
mortgage market projects in three countries.
Today I discussed this initiative at a roundtable meeting at the Federal Mortgage
Bank of Nigeria, Abuja, with leading commercial bankers and senior officials
engaged in housing finance, to discuss the development of the market and identify
where the United States best might provide assistance.
As part of this initiative, I am pleased to announce that the United States Agency for
International Development (USAID) will develop a new micro and medium finance
program that will address housing, agriculture and small business development for
low-income households. This innovative program will use the Development Credit
Authority to leverage lending capital and engage local private sector financial
institutions as providers of micro loans.
://www.treas.gov/press/releases/js 1711 .htm
5/5/2005
1712: John B. Taylor<br>Under Secretary for International Affairs<br>United States Treasury<br>K... Page 1 of
F R O M T H E OFFICE O F PUBLIC A F F A I R S
To view or print the PDF content on this page, download the free Adobe® Acrobat® Readet®).
May 27, 2004
JS-1712
John B. Taylor
Under Secretary for International Affairs
United States Treasury
Keynote Address
M o n e y Market Association of Nigeria
Abuja, Nigeria
M a y 27, 2004
Improvements in Monetary Policy and
Implications for Nigeria
Thank you very much for inviting me to speak at this important conference on
monetary policy. And thanks to the Money Market Association of Nigeria for
sponsoring it. I a m delighted to be here in Abuja to talk about monetary policy. I
have had a very long interest in monetary policy, and, m y current international
affairs job at the U.S. Treasury often requires that I get involved in discussions
about monetary policy issues in other countries, especially those with international
implications. So being here is not only enjoyable, it is part of m y job.
I have an even greater interest in this particular conference because it is about
monetary policy in Africa, a continent to which President Bush has asked those in
his administration to pay particular attention, by increasing foreign assistance, by
urging the multilateral development banks to provide more grants rather than loans,
by insisting on measurable results in all assistance projects, and by encouraging
pro-growth economic policies. In fact, this is m y sixth trip to Africa since I joined the
Bush administration just over three years ago.
Monetary policy is a key component of any pro-growth strategy. That is why it is
one of the indicators in President Bush's new Millennium Challenge Account, which
endeavors to direct more economic development assistance toward countries that
are following good pro-growth policies. N o w is an opportune time to build on recent
improvements in monetary policy in many parts of the world and create a legacy of
growth-enhancing price stability for Nigeria and the whole continent. In this way,
monetary policy will play an important role in the continent's economic
rejuvenation. Today I would like to describe recent improvements in monetary
policy around the world and then indicate ways to build on these improvements in
Nigeria and in all of Africa.
Recent Improvements in Price Stability
One of the best good news stories about monetary policy in recent years is that
there has been a great reduction in inflation-an increase in price stability. I have
three charts to illustrate this improvement. O n e (Figure 1) shows the inflation rate
in the United States going back several decades. The second (Figure 2) shows the
inflation rate in the United Kingdom over a similarly long time period. And the third
(Figure 3) shows the inflation rate in Africa and other parts of the world.
All three charts tell the same remarkable story. Starting about 20 years ago, and
then gaining momentum, there has been a dramatic reduction in the rate of inflation
around the world. This reduction followed a nearly simultaneous increase in
/.treas.gov/press/releases/js 1712.htm
712: John B. Taylor<br>Under Secretary for International Affairs<br>United States Treasury<br>K... Page
inflation in the late 1960s and 1970s. M a n y people have discussed the great
disinflation in the United States in the late 1970s and early 1980s and the period of
relative price stability ever since then. And many-myself included-have concluded
that the improvements in overall economic performance in the United Statessmaller, less frequent business cycles, sometimes called the "great moderation"-has been closely related to the improvements in price stability.
But as the charts show, this phenomenon of greater price stability is good news
heard around the world. The chart of the United Kingdom is very similar to the
United States. O n e difference is that the inflation c a m e d o w n a bit earlier and faster
in the United States. And the data in the third chart documents the decline in Africa
and compares it with other parts of the world.
If you look more closely at the data in individual countries in Africa you can see
positive trends in inflation in m a n y countries in recent years. In 1990, 22 countries
in sub-Saharan Africa had inflation rates in double digits. In 2003, only 12 countries
had inflation in double digits. I note in particular that inflation in South Africa has
been cut in half from 14 percent to around 7 percent in the last ten years.
Accompanying Changes in Monetary Policy
Accompanying this improvement in price stability, have been some equally dramatic
changes in monetary policy in m a n y countries around the world. It is important to
first note that there has been a major reduction in the rate of m o n e y growth in m a n y
countries. This is implied by the fourth chart (Figure 4), which shows the high rates
of m o n e y growth on average in the last thirty years. Clearly m o n e y growth has
c o m e w a y d o w n off these high levels. For example, none of the three Latin
American countries in the chart have anything near triple digit m o n e y growth now.
This chart is also a useful reminder that inflation is truly a monetary phenomenon.
It would certainly be a mistake to ignore money growth in analyzing trends in
inflation around the world. But the relevant question is what why did m o n e y growth
and inflation fall so m u c h in m a n y countries in the recent years. In m y view there
are three factors to consider.
Exchange rate policy
First, let us focus on the big changes in exchange rate policy. Of course there was
the end of the Bretton W o o d s international system of fixed exchange rates in the
early 1970s, but since then w e have seen the international monetary system evolve
further with several marked trends. M a n y countries have chosen to abandon
pegged exchange rates and instead either (1) use a monetary policy based on
flexible exchange rate or (2) permanently connect monetary policy to other
countries through a monetary union or dollarization. By our count at the U.S.
Treasury, 47 countries n o w operate a monetary policy with a flexible exchange rate
and 50 countries are either dollarized, in currency unions, or using currency
boards. The number with fixed or heavily managed exchange rates is falling and is
n o w at 75. Fortunately, there are n o w only 7 countries with multiple exchange
rates. In sum, there are n o w 97 countries that have dollarized, joined a currency
union, created a currency board, or chosen a flexible exchange rate. There is a
c o m m o n feature in all 97 countries: They are either tying their monetary policy to a
central bank with good price stability goals and instrument setting procedures, or
they are trying to pursue an independent monetary themselves.
If we focus on sub-Saharan Africa, this change is quite evident. There has been a
general m o v e m e n t away from pegging toward flexible exchange rates. In 1990
there were 10 countries with a flexible exchange rate regime, while in 2003 there
were 23. At the other extreme, currency zones, including the C F A zone, have
offered a viable approach to monetary policy for m a n y countries in Africa. By tying
to the Euro, the C F A zone provides institutional discipline that keeps inflation low.
Note that a'monetary union could be a collective float such as the euro zone in
which the Euro floats against the dollar and other currencies. The C F A zone is tied
to the euro and thus offers the monetary discipline of the European Central Bank. I
note with great interest efforts to create a West Africa monetary zone, which would
/.treas.gov/press/releases/js 1712.htm
6/1/2005
1712: John B. Taylor<br>Under Secretary for International Affairs<br>United States Treasury<br>K... Page 3 of 5
include Nigeria. However, creating a credible monetary framework in Nigeria is an
essential pre-condition to any such union, since Nigeria would play an important
anchoring role.
Price Stability Goals
A second important change in monetary policy is the increased emphasis on price
stability that began in the early 1980s and has picked up m o m e n t u m . This
emphasis followed from the growing consensus that there is no long-run trade off
between inflation and unemployment or economic growth, a view that had been
c o m m o n in the 1960s and the 1970s. The modern view, to the contrary, is that
inflation is harmful to economic growth. It creates volatility and raises interest
rates. It reduces private investment. And, inflation hurts the poor, w h o are least
able to hedge.
In the United States the greater emphasis on price stability began early in the
1980s and has continued under the chairmanship of Alan Greenspan. The success
of monetary policies with a greater focus on price stability has been noted and the
ideas of spread. The inflation targeting movement has helped spread these ideas.
N e w Zealand w a s one of the first countries to adopt inflation targeting. Chile w a s
another one of the first movers in the inflation targeting movement. Inflation
targeting has been especially helpful for countries that started with very high
inflation rates. A s the example of the United States m a k e s clear, it is not necessary
to have an explicit numerical target for inflation in order to have a clear goal for
monetary policy.
Systematic, transparent, procedures for setting the policy instruments
A third important change is in the way the instruments of policy are set. There are
two main choices for the instrument of monetary policy: the interest rate and the
monetary base, and there has been an increased focus on the interest rate in
recent years. In part this reflects increased transparency; in the past m a n y central
banks had been implicitly setting interest rate. In 1994 the Fed, for example, began
issuing public statements about its interest rate decisions. Similar developments
occurred at other central banks.
Now, with the focus increasingly on the interest rate as the policy instrument, there
has been a shift in h o w monetary economists analyze central bank decisions.
Rather than evaluate each decision as an isolated one-time adjustment in the
instrument, the evaluation is about the overall dynamic strategy for setting the
instrument. In other words, policy analysis places greater emphasis on the process
for setting the interest rate. This change in thinking about monetary policy has
occurred both inside and outside of central banks. W h e n economists evaluate
monetary policy, they simulate models with policy rules inserted in them rather than
simply simulating one-time changes in the instruments. W h e n financial market
analysts try to determine what a central bank should or should not do, they usually
consider a monetary policy rule. And central banks frequently use policy rules as
an input to their actual decisions.
An unexpected benefit of this approach to policy evaluation is that it has revealed
changes in the decisions making processes at central banks. For example, during
the late 1960s and 1970s the response of the interest rate to inflation appeared to
be less than one; during the period since the mid 1980s the coefficient has been
greater than one. A n illustration of the change can be seen in the inflation figure
(Figure 5) for the United Kingdom. W h e n the inflation rate approached nine percent
in 1971, the interest rate w a s only six percent. W h e n the inflation rate approached
nine percent in 1990, the interest rate w a s fifteen percent, clearly a m u c h larger
response. T h e s a m e change has occurred in the United States and other countries.
Another indication of the greater transparency about monetary policy is the
reduction in dual exchange rate regimes in Africa over the last decade. Compared
to 1990, roughly half as m a n y countries n o w have multiple official exchange rates.
Central planning is disappearing in Africa as almost everywhere else, and along
with it the comprehensive foreign exchange controls. In addition, more transparent
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6/1/2005
1712: John B. Taylor<br>Under Secretary for International Affairs<br>United States Treasury<br>K... Page
procedures for setting the instruments of monetary policy such as open market
operations have replaced direct controls in recent years. For example, South Africa
unified exchange rates in 1995. And here in Nigeria a Dutch auction system w a s
introduced in 2002 which has narrowed the parallel exchange rate from a 20
percent premium to under five percent in 2003.
General Implications for Monetary Policy
This review of improvements in inflation and the accompanying changes in
monetary policy has clear policy implications. It is clear that the choice of an
exchange rate is by no m e a n s the only factor to consider in deciding h o w to achieve
a successful monetary policy. Perhaps most relevant for this conclusion is the
performance of the United States and United Kingdom I have reviewed here. Both
countries showed an increase in inflation and price instability in the years
immediately following the end of the Bretton W o o d s fixed exchange rate system. It
w a s not until the two other changes were instituted in the 1980s and 1990s-clear
price stability goals and a systematic procedure for setting the instruments of policy-that low inflation and price stability were achieved.
Hence, all three of the factors mentioned above appear to be essential: For
countries that do not choose a policy of a "permanently" fixed exchange rate, a
successful monetary policy must include the trinity of a flexible exchange rate, a
price stability goal, and a systematic procedure for setting the instruments of policy.
For countries that choose a "permanently" fixed exchange rate regime, monetary
conditions will be determined largely by the central bank of the anchor currency
While originally implemented by some advanced economies, research and
experience increasingly show that these s a m e three factors are essential for
emerging markets too. The experience of Chile, Indonesia, and Mexico, as
compared to Nigeria, highlights the macroeconomic benefits associated with this
approach. After instituting a flexible exchange rate regime, a goal for inflation, and a
more systematic approach to monetary policies, the average rates of inflation
decreased significantly in Chile, Indonesia, and Mexico. Moreover, real G D P
growth accelerated. I believe that the establishment of such a monetary policy in
Nigeria can be equally successful.
Implementation challenges
To be sure, actually implementing such a monetary policy can present challenges,
especially in emerging market countries. I reviewed these issues in a paper I
presented at a conference at the Bank of Mexico several years ago. It is often
difficult to estimate the potential growth rate, the output gap, or the equilibrium
interest rate. These challenges are m a d e more difficult where the informal sector is
large and statistical coverage is limited.
In using the interest rate versus the monetary base as the instrument, one must
consider the difficulty in measuring the real interest rate in a high growth, high-risk
premium environment. If financial markets are weak, the effectiveness of
transmitting policy through interest rates will be limited. In such cases, policy
makers might chose to use the m o n e y supply instrument. The monetary base,
however, can also faces challenges, such volatility in velocity. For example, an
emerging economy experiencing rapid and successful reform m a y witness a surge
in d e m a n d for m o n e y to transact as well as to serve as a store of value coincident
with greater confidence and activity.
Emerging markets also need to consider the importance of exchange rate stability.
In small open economies, sharp changes in nominal exchange rates can have
significant effects. In general, it is best to react to exchange rate changes only to
the extent that they effect inflation or inflationary expectations. However, debt
sustainability can be adversely affected by sudden depreciations, especially in the
case of mismatched denominations and terms.
Some Implications for Monetary Policy in Nigeria
/.treas.gov/press/releases/j sl712.htm
6/1/2005
1712: John B. Taylor<br>Under Secretary for International Affairs<br>United States Treasury<br>K... Page
I believe that the implications of this review for Nigeria are clear: Establishing a
monetary policy framework that follows and builds on recent historical experience
around the world would greatly improve economic stability and growth. And
implementing such a policy will be easier if there are further institutional and
operational changes.
Of course, it would help if the pressures on the central bank to finance the
government budget deficit were reduced. The Central Bank of Nigeria has had to
accommodate high fiscal deficits in the past; deficits averaged 5 percent of G D P
from 1989 to 2002. These deficits were largely financed through an increase in the
m o n e y supply. The growth rate of M 2 has been consistently higher than the Central
Bank's targets in each of the last several years. In 1999 and 2000, the actual
growth rate w a s three times the target; more recently it w a s twice the target. In
2003, monetary base growth w a s 26 percent compared with a target of 15 percent.
This high rate of m o n e y growth has fueled inflation, which averaged almost 22
percent a year between 1971 and 2002. In 2003 alone, the inflation rate increased
to 24 percent from 12 percent in 2002.
For this reason, we welcome the budget that was recently signed by President
Obasanjo, which targets a deficit of around 2 percent, compared to the recent
historical average closer to 5 percent. I have been very pleased to hear on this visit
to Nigeria that implementation of this budget is going very well. The Fiscal
Responsibility Act will play a key role in smoothing out volatile expenditure.
Establishment of primary and secondary government bond markets can also
increase the efficiency of monetary policy and reduce the government's need to rely
on the central bank for direct financing. In the presence of high volumes of credit to
the government, private sector credit is stifled. In Nigeria, outstanding private
sector credit as a share of G D P is only about 12 percent, far below comparison
countries. The efforts to establish a debt management office in the Ministry of
Finance and efforts to launch the first sovereign bond offering in Nigeria in 17 years
are signs that Nigeria is moving towards better debt management and the possible
establishment of a yield curve and s o m e alternative instruments to the 91-day Tbill.
Better and. more timely monetary and national income statistics are also needed in
order to better understand the relationship between economic variables and
inflation, develop a more robust inflation forecasting model, and give monetary
authorities more high frequency data for making quicker decisions about needed
adjustments.
Conclusion
I have tried in this speech to share my thoughts on the implications of recent
changes in monetary policy for Nigeria. Of course, monetary policy is only one part
of a good pro-growth economic policy.
There are good reasons to be optimistic about increasing economic growth in
Nigeria. In Nigeria in particular, there is a n e w economic team. It has been a
pleasure to meet with Finance Minister Ngozi Okonjo-lweala and other m e m b e r s of
the economic team during m y visit to Nigeria. I look forward to following the
continued implementation of the Nigeria Economic E m p o w e r m e n t and
Development Strategy ( N E E D S ) . It is a clear welcome departure from the past.
REPORTS
• Nigeria Monetary policy Charts
/.treas.gov/press/releases/js 1712.htm
6/1/2005
FIGURE 1
U.S. Inflation
12 -
S m o o t h e d Inflation
(four-quarter inflation)
Quarterly
Inflation
10 ,8~
i
! 6"
>
4"
2 -I |
0
-2 J
LO
CD
LO
CD
CD
CD
CD
05
CO
CD
00
CD
O
O
CN
FIGURE 2
U.K. Inflation
Quarterly
Inflation
S m o o t h e d Inflation
(four-quarter inflation)
2
FIGURE 3
Median Inflation
5-year Periods by Region
16 -|
14
— United States
12
— Africa
10
— Asia
8
— Middle East
6
— Western
Europe
Western
Hemisphere
4
2
0
19621966
1967
1971
19721976
19771981
19821986
3
19871991
19921996
19972001
FIGURE 4
Money Growth and Inflation
1971-2001
500%o/_
|
c
c
-i
400%-
(0
5 300% i
Q.
200%o/_
-
100%
H
O
C
0%
0% 100% 200% 300% 400% 500%
Money Growth (% per annum)
4
FIGURE 5
U.K. Inflation
40 -I
Quarterly
Inflation ^
35 30 ^25§20 -
Smoothed Inflation
(four-quarter inflation)
1971: Overnight
interest rate
was 6%
1990: Overnight
interest rate was
15%
Q_ 15
10 -.
5-1
-5 -
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ESS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
June 3, 2004
2004-6-3-14-30-14-19923
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 $83,066 million as of the end of that week, compared to $82,064 million as of the end of the prior week.
I. Official U.S. Reserve Assets (in US millions)
TOTAL
Mav21,2004
Mav 28, 2004
82,064
83,066
1. Foreign Currency Reserves1
Euro
Yen
TOTAL
Euro
Yen
TOTAL
i. Securities
9,535
14,033
23,568
10,079
14,276
23,355
0
0
y which, issuer headquartered in the U.S.
'. Total deposits with:
./'. Other central banks and BIS
11,813
2,820
14,633
11,647
2,869
14,516
ii. Banks headquartered in the U.S.
0
0
ii. Of which, banks located abroad
0
0
///'. Banks headquartered outside the U.S.
0
0
iii. Of which, banks located in the U.S.
0
0
IMF Reserve Position 2
20,354
20,559
Special Drawing Rights (SDRs) 2
12,464
12,590
Gold Stock 3
11,045
11,045
0
0
Other Reserve Assets
II. Predetermined Short-Term Drains on Foreign Currency Assets
Mav 21, 2004
Euro
oreign currency loans and securities
Yen
Mav 28, 2004
TOTAL
Euro
0
Yen
TOTAL
0
ggregate short and long positions in forwards and futures in foreign currencies vis-a-vis the U.S. dollar:
Short positions
°
0
Long positions
0
°
her
0
0
III. Contingent Short-Term Net Drains on Foreign Currency Assets
M a v 21, 2004
Euro
1. Contingent liabilities in foreign currency
Yen
M a v 28, 2004
TOTAL
0
Euro
Yen
TOTAL
0
1.a. Collateral guarantees on debt due within 1 year
1.b. Other contingent liabilities
2. Foreign currency securities with embedded options
0
0
3. Undrawn, unconditional credit lines
0
0
3. a. With other central banks
3.b. With banks and other financial institutions
Headquartered in the U.S.
3.c. With banks and other financial institutions
Headquartered outside the U.S.
4. Aggregate short and long positions of options in
-oreign
Currencies vis-a-vis the U.S. dollar
0
0
La. Short positions
-.a.1. Bought puts
.a.2. Written calls
.b. Long positions
.b.1. Bought calls
b.2. Written puts
Notes:
ncludes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account
)MA), valued at current market exchange rates. Foreign currency holdings listed as securities reflect marked-to-market values, and
•osits reflect carrying values. Foreign Currency Reserves for the latest week m a y be subject to revision. Foreign Currency
serves for the prior week are final.
he items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF and are
ed in dollar terms at the official SDR/dollar exchange rate for the reporting date. The entries for the latest week reflect any
Bssary adjustments, including revaluation, by the U.S. Treasury to IMF data for the prior month end.
old stock is valued monthly at $42.2222 per fine troy ounce.
Js-1713: Under Secretary Taylor's Remarks at the A D B Housing Roundtable, Uganda
Page 1 of 2
F R O M T H E OFFICE O F PUBLIC A F F A I R S
June 3, 2004
js-1713
Under Secretary Taylor's Remarks at the ADB Housing Roundtable, Uganda
The development of mortgage markets is important for the overall development of a
country. It contributes to employment, the development of commercial banking
and ultimately to the development of capital markets. Most importantly, it increases
the well-being of households by providing superior shelter and helping establish
personal wealth - wealth that can be leveraged for creation of more wealth.
Yesterday my colleagues made the point that housing is a significant component of
the economy of the United States. I think that this point should be emphasized.
Housing and its related industries contribute roughly 2 0 % to the U.S. G D P . This
number is large because housing affects not only h o m e building but it also
stimulates other varied parts of the economy such as banking, professional
services, building materials and even the production of furniture and appliances.
The mortgage finance industry alone generates $7 trillion in new mortgage
originations a year and contributes to a robust market in mortgage-backed
securities and other capital markets products.
The mortgage market in the U.S. was not always so successful. In fact, 70 years
ago it was virtually non-existent. If someone wanted to buy a home, the options
were very limited. A person could either pay cash or, if he was very lucky and had
a good relationship with a local banker, could obtain a short-term loan - usually less
than 10 years in duration.
This situation changed almost overnight when in 1934 the U.S. Congress created
the Federal Housing Administration, also called the FHA. F H A mortgage insurance
m a d e 30 year mortgage loans possible by providing comfort to commercial lenders
to lend long term. Essentially the government assumed the credit risk of mortgage
lending thus creating a new market for commercial banks.
After the creation of the FHA, the U.S. mortgage market began to grow. It was not,
however, until after the second World W a r that the mortgage market's growth
surged. Soldiers returning from the war were in need of housing. To help the
private sector meet the increased demand, Congress again enacted legislation now
commonly known as the Gl Bill. A m o n g the provisions of the legislation was a new
mortgage insurance program and down payment assistance for veterans. The
result of the Gl Bill was to make homeownership accessible to even more
Americans. The Gl Bill directly helped m e and m y family. M y father w a s one of
those veterans returning from the war w h o was able to purchase a h o m e through
the Gl Bill. Using the veteran's guarantee he bought our first h o m e in Levittown,
N e w York.
Acknowledging the critical contribution of housing finance to the development of
economic well being, President Bush announced last summer in Abuja, Nigeria, his
desire to see mortgage markets developed in Africa. He requested that the
Treasury Department lead a U.S. government effort to assist African nations
develop their respective mortgage markets. W e are using institutions such as the
Overseas Private Investment Corporation (also known as OPIC) as well as USAID
and its Development Credit Authority to create mortgage and micro finance
programs. In addition, with assistance from Ginnie Mae, m y organization is
developing technical assistance programs focused on both primary and secondary
market development in a number of African countries.
Before I go on, it is important to point out that before we can expect development of
a mortgage market, some prerequisites need to be in place. These include: (1)
defined property rights and the ability to transfer title of real estate; (2) a legal
p://www.treas.gov/press/releases/j s 1713 .htm
5/5/2005
js-1713: Under Secretary Taylor's Remarks at the A D B Housing Roundtable, Uganda
Page 2 of 2
system that supports the enforcement of contracts as well as supports the ability of
lenders to foreclose on defaulted loans and efficiently seize and resell collateral;
and (3) a stable macroeconomic environment that is favorable to long term
mortgage lending. The primary focus of our work, however, is not these
prerequisites but rather the development of lending programs as well as the
institutions that are required for lending. Such institutions include liquidity facilities
and credit risk management programs.
The success of the FHA in part guides our work in Africa. We have taken the
position that effective management of credit risk is critical for the introduction of
long-term lending and requires a threefold approach of loan underwriting, loan
servicing and mortgage insurance aimed at the unique needs of low-income and
informal sector households.
Since President Bush's announcement, the U.S. has been very active in developing
mortgage programs in a number of African countries. W e have commitments for
funding almost $50 million in mortgage market related programs though O P I C loans
and U S A I D grants. In addition, m y department is working on policy and institutional
design of credit risk management facilities and a secondary market transaction.
S o m e of our projects include:
• $8 million OPIC loan for the construction of 500 single family homes in
Uganda. The program is particularly interesting because once the
construction loan is repaid, the funds will be re-loaned to a local financial
institution which will on-lend the funds to households for 15 year mortgage
loans.
• $5 million O P I C loan for the guarantee of local bank financing for the
construction of 500 low income apartments in South Africa.
• $4 million U S A I D grant for the establishment of a micro lending facility for
housing and small business development in Nigeria. A n innovative feature
of this project is that the facility will rely primarily on local private sector
financial institutions for liquidity.
• $3.5 million O P I C loan for the construction of 175 middle income h o m e s in
Nigeria. W e are looking into the possibility of adding a mortgage
component to this program.
• $5.3 million in O P I C loans for the construction of 300 middle income
housing units in Ghana. While this is currently a construction program, w e
are looking into the possibility of extending it into a mortgage lending
program.
• $5 million O P I C loan for the construction of 750 low income homes. The
program also includes a lease-purchase program which will act similarly to a
mortgage lending program.
• M y staff is currently working with the government of Botswana, helping them
to develop a mortgage-backed securities program to provide liquidity to local
banks.
These programs and others that the United States is undertaking are a start to
developing mortgage markets in Africa. I a m encouraged that the African
Development Bank has also taken an interest in the topic and hope that it will be
able to fund similar programs. To this end, I propose that the Bank adopt firm
goals for the development of mortgage markets. Success can be measured by the
ratio of mortgage debt outstanding to G D P . For m a n y African countries the time is
right to seriously address the issue of mortgage finance. I look forward to
collaborating with the Bank on this important issue.
Thank you.
p://www.treas.gov/press/releases/js 1713 .htm
5/5/2005
js-1714: Statement of Secretary John S n o w on the M a y Employment Report
Page 1 of 1
:
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PRLSS R O O M
F R O M T H E OFFICE O F PUBLIC AFFAIRS
June 4, 2004
js-1714
Statement of Secretary John Snow on the May Employment Report
Today's employment report demonstrates, beyond a doubt, the broad-based
strength and continuing m o m e n t u m of the U.S. economy. The addition of 248,000
jobs in M a y is encouraging news for America's workers and growing businesses. In
nine consecutive months of growth we've seen the addition of nearly 1.5 million
jobs to the workforce, more than a million so far this year. Today's report is
especially encouraging for the manufacturing sector. In four months of growth,
91,000 manufacturing jobs were created - the best four-month period since 1998.
The President's timely action to lift the burden of tax relief on millions of American
families and businesses has resulted in a strong and stable recovery. The
President's ongoing economic leadership will ensure that American companies
continue to hire and the economy continues to expand.
p://www.treas.gov/press/releases/js 1714.htm
5/5/2005
Js-1715: Arizona M a k e s Federal Health Coverage Tax Credit Available
Page 1 of 1
PRESS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
June 7, 2004
js-1715
Arizona Makes Federal Health Coverage Tax Credit Available
Today, Treasury Secretary John Snow applauded Governor Janet Napolitano for
signing legislation that allows the Arizona Health Care Cost Containment System
( A H C C C S ) to qualify for the Health Coverage Tax Credit Program (HCTC). T h e
program will help cover the cost of health insurance premiums for m a n y Arizona
residents.
"I would like to thank the Republicans and Democrats in the legislature who voted
for this legislation and Governor Napolitano for signing it," stated Treasury
Secretary John Snow. "I would also like to thank Director of Insurance Christina
Urias, Industrial Commission Director Orlando Macias and other interested parties
in Arizona w h o have worked so hard to m a k e the Health Coverage Tax Credit
program available to over 1,900 workers and their families. I c o m m e n d them for
their leadership in enacting legislation that makes the Arizona Health Care Cost
Containment System available to those eligible for T A A benefits. The H C T C
program is a real innovation in tax policy, one that w e hope will lead the w a y for
other innovations that help real people obtain the health care coverage that they
need in a flexible and reliable way. W e want to ensure that those w h o qualify for the
credit get the help they need as quickly as possible."
The Trade Adjustment Assistance Act President Bush signed into law in 2002
included the n e w Health Coverage Tax Credit (HCTC). Recipients can receive the
H C T C either in advance, to help pay qualified health plan premiums as they c o m e
due, or in a lump s u m when they file their federal tax returns. The H C T C advance
payments program began nationally in August 2003. This program provides an
advanced payment of 6 5 % of the premium cost for a qualified health plan for
individuals w h o are eligible to receive Trade Adjustment Assistance (TAA) benefits
or certain individuals w h o receive pension benefit payments from the Pension
Benefit Guaranty Corporation (PBGC).
In order to receive the credit, eligible individuals must enroll in qualified health
insurance, such as a C O B R A health plan or State Qualified Health Plan (SQHP).
Thirty-seven states and the District of Columbia have S Q H P s that will enable more
than 210,000 of those potentially eligible for the H C T C to purchase health
coverage. Nationwide, there are nearly 250,000 individuals potentially eligible for
the H C T C .
For more information on a particular state and the health insurance programs that
qualify, please visit the H C T C website at www.irs.gov and enter IRS Keyword:
HCTC.
-30-
p://www.treas.gov/press/releases/js 1715 .htm
5/5/2005
JS-1716: The Honorable John W. Snow<BR>Prepared Remarks<BR>MONEY SummiK... Page 1 of 2
F R O M T H E OFFICE O F PUBLIC AFFAIRS
June 8, 2004
JS-1716
The Honorable John W. Snow
Prepared Remarks
M O N E Y Summit
N e w York City
June 8, 2004
Before I remark on the state of the economy, I'd like to take a moment in
remembrance of a great American, Ronald Reagan.
With the passing this weekend of Ronald Reagan America has lost one of the
commanding and gracious figures of our time. His smile and charm are seared in
our memories as is his deep commitment to the American values he cherished. N o
one among the world leaders can lay so great a claim as he to having ended the
Cold War, brought down the Berlin Wall and restored democratic institutions in the
former Soviet Bloc. He stands as a giant of our times who may have baffled the
historians but never the American people who always rallied to him. The great
voice has been stilled but what he said and what he stood for will live on forever.
It's hard to believe that just a year ago, discussions about the economy were filled
with pessimism - there was talk of a double-dip recession, and some even raised
the specter of deflation.
I believe that the President's tax cuts, combined with sound monetary policy,
enabled our incredibly resilient and robust economy to achieve the incredible
recovery and growth rate that w e see today.
The third quarter of 2003 was a break-through quarter, with astounding GDP growth
of over eight percent.
Over the past nine months, we've seen the best growth in almost 20 years; GDP
has been averaging an outstanding annual rate of 5.6 percent over the past three
quarters.
Business spending has rebounded. Business and consumer confidence is up.
American households sense that the job market is strengthening.
And best of all, we've had good news of strong job growth. In the ninth straight
month of growth, the economy created nearly a quarter million jobs in May, bringing
the total increase since August to more than 1.4 million. The unemployment rate,
which is down substantially from its peak last summer, remains below the average
of each of the past three decades. Employment over the past year was up in 44 of
the 50 states. The unemployment rate was down in all regions and in 47 of the 50
states.
One newspaper recently had a headline that read: "Higher-Pay Jobs Make a
Comeback." The story made the point that as the U.S. economy grows stronger,
the labor market is beginning to create better-paying jobs and that signs point to a
turnaround for professional, service and manufacturing work.
It's great to see that the manufacturing sector is coming back, because it's an
important source of jobs... nearly 100,000 manufacturing jobs have been created in
the past four months.
p://www.treas.gov/press/releases/js 1716.htm
5/5/2005
JS-1716: The Honorable John W. Snow<BR>Prepared Remarks<BR>MONEY Summits... Page 2 of 2
The housing industry is extremely strong, with homeownership at an all-time high,
and this is something to be very proud of, as a nation. N e w and existing h o m e sales
remain strong. Also worth noting, housing starts continue at high levels.
When I speak to financial leaders from other parts of the world, they are in awe of
h o w quick and h o w strong our economic recovery has been. They are taking note
of something that is truly unique: the most free market economy in the world.
When we lift the weights that hold it down - like excessive taxation - it soars.
All is not perfect, of course. Americans are now challenged by high oil prices, and
far too m a n y still seek work.
We need tax cuts to be made permanent, we need economic growth to continue,
and w e need the Congress to pass the President's energy policy.
We also need to be ever-mindful of maintaining and increasing our global
competitiveness.
America has the best economy in the world, and the best workers in the world. We
are limited only by ourselves: our own desire to succeed, and sometimes our o w n
mistakes in the realm of public policy.
It is my opinion as an economist that President Bush is an excellent steward of our
economy. I would not have joined his team otherwise.
It is a privilege to serve the country that leads the world in growth - I know how
blessed w e are to live in a truly free-market economy, and I'm dedicated to keeping
it as free, as unencumbered as possible. Because it is our freedom that gives rise
to our economic strength.
Thank you for all you do to shine a light on this great economy, and thank you so
much for having m e here today.
p://www.treas.gov/press/releases/js 1716.htm
5/5/2005
js-1717: Treasury Secretary John S n o w Applauds China and <br>Chicago Mercantile Ex... Page 1 of 2
if
PRLSS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
June 8, 2004
js-1717
Treasury Secretary John Snow Applauds China and
Chicago Mercantile Exchange on Foreign Exchange Agreement
Initiative to develop n e w products in China's foreign exchange
derivatives market
seen as step toward currency flexibility
I am delighted to be in Chicago as China embarks on this important initiative with
the Chicago Mercantile Exchange (CME). China has no better partner in this effort
than the Chicago Mercantile Exchange. The C M E is one of the preeminent futures
exchanges in the world and a leader in financial product and technology innovation
in the global financial markets.
China holds a significant and growing place in the international trading system and
so it is appropriate that China acquire the financial and economic tools available
commensurate with its size and presence in the markets. Today's announcement
of a m e m o r a n d u m of understanding between China and the C M E to further develop
a currency derivatives market is certainly is a step in the right direction.
The Bush Administration has always maintained that the international trading
system works best with free trade, with the free flow of capital and with currency
values set in open, competitive markets. It is best for the global system, for the
United States, and for China itself, for China to m o v e to a flexible exchange rate
regime as soon as possible. Importantly, China acknowledges this and is making
progress toward this goal. The Chinese are actively taking steps to modernize their
financial infrastructure with the goal of achieving a flexible currency. In addition to
today's announcement, Chinese authorities have also taken measures to liberalize
certain capital flows.
This cooperative initiative is an outstanding example of the kinds of exchange-raterelated technical cooperation efforts Treasury has consistently advocated as part of
our on-going technical cooperation program with China's financial sector and
financial regulators.
This memorandum of understanding represents a significant milestone on China's
path toward greater exchange rate flexibility. It is a demonstration of China's
commitment to m o v e forward along this path, but China must m a k e continued
progress toward achieving this goal. Risks of unexpected movements in exchange
rates are inherent in foreign exchange markets. This initiative helps China develop
the technology "backbone" and internationally standardized tools -- such as futures
and forward contracts -- allowing companies and individuals to insure against such
risks at a nominal cost.
This initiative illustrates the seriousness of China's effort to reform and strengthen
its financial system as it moves towards a more flexible exchange rate system and
greater integration in the world capital market. By drawing on the expertise of the
private exchanges China will have access to the best technical expertise
available.
China and the Treasury Department have this year initiated a technical cooperation
program to help strengthen regulatory and financial sector infrastructure as China
prepares its economy for more currency flexibility.
As China prepares to manage its economic and financial risks, technical
cooperation is even more important, so that the m o v e to exchange-rate flexibility
happens in an orderly fashion. For a large economy like China's, an orderly
:p://www.treas.gov/press/releases/js 1717.htm
5/5/2005
js-1717: Treasury Secretary John S n o w Applauds China and <br>Chicago Mercantile Ex... Page 2 of 2
transition to greater currency flexibility is important for China's own domestic
economy, for the Asia region, and for global economic growth.
Chicago Mercantile Exchange News Release: CME and China Foreign
Exchange Trade System (CFETS) Announce Memorandum of Understanding
tp://www.treas.gov/press/releases/js 1717.htm
5/5/2005
SS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
June 8, 2004
2004-6-8-17-18-23-17572
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 $82,728 million as of the end of that week, compared to $83,066 million as of the end of the prior week.
I. Official U.S. Reserve Assets (in US millions)
TOTAL
1. Foreign Currency Reserves 1
a. Securities
Mav 28, 2004
June 4, 2004
83,066
82,728
Euro
Yen
TOTAL
Euro
Yen
TOTAL
10,079
14,276
23,355
10,107
14,136
24,243
Of which, issuer headquartered in the U. S.
0
0
). Total deposits with:
)./. Other central banks and BIS
11,647
2,869
14,516
2,841
11,668
14,509
>./'/. Banks headquartered in the U.S.
0
0
.ii. Of which, banks located abroad
0
0
.//'/'. Banks headquartered outside the U.S.
0
0
iii. Of which, banks located in the U.S.
0
0
IMF Reserve Position 2
20,559
20,268
Special Drawing Rights (SDRs) 2
12,590
12,663
Gold Stock 3
11,045
11,045
0
0
Other Reserve Assets
II. Predetermined Short-Term Drains on Foreign Currency Assets
Mav 28, 2004
Euro
:
oreign currency loans and securities
Yen
June 4, 2004
TOTAL
Euro
0
Yen
TOTAL
0
aggregate short and long positions in forwards and futures in foreign currencies vis-a-vis the U.S. dollar:
Short positions
°
0
Long positions
°
0
•ther
0
0
III. Contingent Short-Term Net Drains on Foreign Currency Assets
M a v 28, 2004
Euro
1. Contingent liabilities in foreign currency
Yen
June 4, 2004
TOTAL
0
Euro
Yen
TOTAL
0
1.a. Collateral guarantees on debt due within 1 year
1.b. Other contingent liabilities
2. Foreign currency securities with embedded options
0
0
3. Undrawn, unconditional credit lines
0
0
3.a. With other central banks
3.b. With banks and other financial institutions
Headquartered in the U.S.
3.c. With banks and other financial institutions
Headquartered outside the U.S.
X. Aggregate short and long positions of options in
oreign
Currencies vis-a-vis the U.S. dollar
0
0
J.a. Short positions
.a.1. Bought puts
.a.2. Written calls
.b. Long positions
.b.1. Bought calls
b.2. Written puts
Notes:
ncludes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account
)MA), valued at current market exchange rates. Foreign currency holdings listed as securities reflect marked-to-market values, and
>osits reflect carrying values. Foreign Currency Reserves for the latest week m a y be subject to revision. Foreign Currency
serves for the prior week are final.
he items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF and are
led in dollar terms at the official SDR/dollar exchange rate for the reporting date. The entries for the latest week reflect any
assary adjustments, including revaluation, by the U.S. Treasury to IMF data for the prior month end.
old stock is valued monthly at $42.2222 per fine troy ounce.
jsl718: Treasury Issues Guidance O n Withholding Tax Treatment O f Cross Border Pensi... Page 1 ot 1
PRLSS ROOM
F R O M T H E OFFICE O F PUBLIC A F F A I R S
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June 9, 2004
js1718
Treasury Issues Guidance On Withholding Tax Treatment Of Cross Border
Pension Distributions
Today, the Treasury Department and the IRS issued guidance on the treatment of
pension distributions m a d e by a U.S. qualified plan to a nonresident alien
individual. Revenue Procedure 2004-37 provides guidance in particular for
determining the tax withholding obligations of those persons responsible for making
payments from a U.S. defined-benefit pension plan to a foreign person.
The revenue procedure provides detailed rules for determining the U.S.-source
portion of a pension distribution under a defined-benefit plan in cases where the
retiree has performed services both in the United States and abroad during his or
her employment. For pension distributions that take the form of a lump-sum
distribution or a straight life annuity, the revenue procedure sets forth an actuarial
method for apportioning the distribution between deemed employer contributions
and deemed earnings and for apportioning those deemed contributions between
services performed within the United States and services performed outside the
United States. For other forms of pension distribution, the revenue procedure
provides guidance on appropriate assumptions that may be used to apportion a
distribution between sources within the United States and sources outside the
United States.
-30-
REPORTS
• Revenue Procedure 2004-37
http://www.treas.gov/press/releases/js 1718.htm
5/5/2005
Part III
Administrative, Procedural, and Miscellaneous
26 C F R 1.861-4: Compensation for labor or personal services
(Also: Part I, Sections 861, 862, 871, 1441)
Rev. Proc. 2004-37
S E C T I O N 1. P U R P O S E
This revenue procedure provides a method for determining the source of a pension
payment to a nonresident alien individual from a defined benefit plan where the trust
forming part of the plan is a trust created or organized in the United States that
constitutes a qualified trust under § 401(a) of the Internal Revenue Code.
SECTION 2. BACKGROUND
Section 871(a) imposes a tax of 30 percent on amounts received by nonresident alien
individuals as interest (other than original issue discount as defined in § 1273),
dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations,
emoluments, and other fixed or determinable annual or periodical gains, profits, and
income to the extent the amount so received is from sources within the United States
and is not effectively connected with the conduct of a trade or business within the
United States.
Section 1441(a) provides for the withholding of tax, generally at a 30 percent rate, on
certain income from sources within the United States paid to a nonresident alien
individual. Section 1441(b) lists salaries, wages, annuities, compensations,
remunerations, or other fixed or determinable annual or periodical gains, a m o n g other
things, as items of income subject to the withholding of tax under § 1441(a).
Section 1.1441-4(b)(1)(H) of the Income Tax Regulations provides generally that U.S.source payments to a nonresident alien individual from a trust described in § 401(a) are
subject to withholding under § 1441. But see § 871(f) (excluding from income certain
amounts received from certain qualified plans); § 1.1441-4(d) (excluding such amounts
from withholding).
Section 861(a)(3) provides generally that compensation for labor or personal services
performed in the United States is treated as income from sources within the United
States. Section 862(a)(3) provides that compensation for labor or personal services
performed outside the United States is treated as income from sources without the
United States.
Employer contributions to an annuity or pension plan constitute compensation for labor
or personal services. See, e.g., Rev. Rul. 56-82, 1956-1 C.B. 59. For purposes of
determining the source of pension payments from a qualified trust under § 401(a), the
portion of each payment that is attributable to employer contributions with respect to
services rendered within the United States is treated as income from sources within the
United States, the portion that is attributable to employer contributions with respect to
services rendered outside the United States is treated as income from sources without
the United States, and the portion that represents earnings and accretions to
contributions of either the employer or the employee is treated as income from sources
within the United States. Rev. Rul. 79-388, 1979-2 C.B. 270. See also. Clayton v.
United States, 33 Fed. CI. 628 (1995), affd without published opinion. 91 F.3d 170
(Fed. Cir. 1996), cert, denied. 519 U.S. 1040 (1996).
Employer contributions to a defined benefit plan qualified under § 401(a) covering more
than one individual participant are not m a d e for the benefit of specific participants, but
are m a d e based on aggregate liabilities to all participants. All funds held under the plan
are available to provide benefits to any participant. Accordingly, it is not possible in
such a case to allocate actual contributions to specific participants.
SECTION 3. SCOPE
.01 General application. If a trust under a qualified defined benefit plan makes a
payment with respect to a participant w h o is a nonresident alien individual and the
actual amounts of employer contributions m a d e to the plan for the benefit of such
participant are not known, the method set forth in section 4 of this revenue procedure
m a y be used to allocate the payment to sources within and without the United States.
The method set forth in section 4 is based on methods similar to those used for
purposes of §§ 1.403(b)-1 (d)(4), 1.402(b)-1 (a)(2), and 1.402(b)-1 (b)(2)(H) of the Income
2
Tax Regulations w h e n contributions for the benefit of a particular participant are not
known.
.02 Application to a possession of the United States. The method set forth in section 4
of this revenue procedure also m a y be used for purposes of allocating a payment from a
trust under a qualified defined benefit plan to sources within and without a possession of
the United States. S e e § 1.863-6 (providing that the principles applied for determining
income from sources within and without the United States are generally applied for
purposes of determining income from sources within and without a possession). Thus,
for example, in the case of a payment from a trust under a qualified defined benefit plan
to a bona fide resident of Puerto Rico, the method set forth in section 4 m a y be used for
purposes of determining what portion of the payment is derived from sources within
Puerto Rico and therefore excludible from the recipient's gross income under § 933(1).
SECTION 4. METHOD
.01 Determination of total contributions. The amount of total contributions to a defined
benefit plan for the benefit of a particular individual is d e e m e d to be the product of the
following three quantities multiplied by one another, each such quantity determined as
of the annuity starting d a t e —
(i) the present value of the individual's pension payable at the annuity starting
date, determined under section 4.02;
(ii) the amount from Table I below based on the number of years from the first
date the individual b e c a m e a participant in the plan to the annuity starting date
(representing the amount that, w h e n contributed on an annual level basis, will
accumulate to $1.00 at the annuity starting date); and
(iii) the number of years from the first date the individual became a participant in
the plan to the annuity starting date.
.02 Present value of pension, (a) If payment is made in the form of a straight life
annuity commencing at the annuity starting date, then the present value of the
individual's pension is the product of (i) the amount payable annually, multiplied by (ii)
the value from Table II below, based on the individual's age at the annuity starting date,
of an annuity of $1.00 per a n n u m payable in equal monthly installments during the life of
the individual.
(b) If payment is made in the form of a single-sum payment of the total benefit due to
the individual under the plan at the annuity starting date, then the present value of the
individual's pension is equal to the amount of the single-sum payment.
3
(c) If payment is m a d e in a form not identified in either of the two preceding paragraphs,
then the present value of the individual's pension is the actuarial present value of the
individual's pension, determined on the annuity starting date based on a 7 % rate of
interest and the mortality table in Rev. Rul. 2001-62, 2001-2 C.B. 632.
.03 Tables.
Table I.—Amount that, when contributed on an annual level basis, will
accumulate to $1.00 at the annuity starting date, based on the total
number of years from the first date the individual b e c a m e a participant
in the plan to the annuity starting date
Number of
Years
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
Amount
$1.0000
0.4831
0.3111
0.2252
0.1739
0.1398
0.1156
0.0975
0.0835
0.0724
0.0634
0.0559
0.0497
0.0443
0.0398
0.0359
0.0324
0.0294
0.0268
0.0244
0.0223
0.0204
0.0187
0.0172
0.0158
0.0146
0.0134
0.0124
4
0.0115
0.0106
0.0098
0.0091
0.0084
0.0078
0.0072
0.0067
0.0062
0.0058
0.0054
0.0050
0.0047
0.0043
0.0040
0.0038
0.0035
0.0033
0.0030
0.0028
0.0026
0.0025
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
Table II.— The value of an annuity of $1.00 per a n n u m payable in equal monthly
installments during the life of the individual, based on the individual's age at the annuity
starting date.
Age at
Annuity
Starting
Date
40
41
42
43
44
45
46
47
48
49
50
Value
13.61
13.54
13.46
13.38
13.29
13.20
13.11
13.00
12.89
12.78
12.66
5
12.53
12.40
12.25
12.11
11.95
11.79
11.62
11.45
11.26
11.08
10.88
10.68
10.48
10.27
10.06
9.84
9.62
9.40
9.17
8.93
8.69
8.44
8.18
7.92
7.65
7.38
7.10
6.83
6.55
6.28
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
70
71
72
73
74
75
76
77
78
79
80
.04 Allocation of payments to sources within and without the United States, (a) General
rule. The portion of each payment that is d e e m e d to be attributable to contributions for
services rendered outside the United States, and thus treated as income from sources
without the United States, is equal to the quotient of (i) the product of (A) the total
deemed contributions (as determined under section 4.01 of this revenue procedure),
multiplied by (B) a fraction, the numerator of which is the months of service credited
under the plan that were rendered outside the United States and the denominator of
which is the total months of service credited under the plan as of the annuity starting
date (i.e., prorated based on months of service rendered within and without the United
States), divided by (ii) the present value of the pension at the annuity starting date (as
determined under section 4.02 of this revenue procedure). The remainder of the
6
payment, which represents the s u m of deemed contributions for services rendered
within the United States plus earnings on all contributions, is treated as income from
sources within the United States.
(b) Special rule for employee after-tax contributions. If the participant has made any
employee after-tax contributions to the plan, then each payment is first reduced by the
employee after-tax contributions allocable to such payment under § 72. The portion of
the remainder of each payment that is treated as income from sources without the
United States is equal to the quotient of (i) the product of (A) the excess of the total
contributions (as determined under section 4.01 of this revenue procedure) over the
total employee after-tax contributions to the plan, multiplied by (B) a fraction, the
numerator of which is the number of months of service credited under the plan that were
rendered outside the United States and the denominator of which is the total months of
service credited under the plan at the annuity starting date, divided by (ii) the excess of
the present value of the pension at the annuity starting date (as determined under
section 4.02 of this revenue procedure) over the total employee after-tax contributions
to the plan. The portion of each payment that is allocable neither to employee after-tax
contributions nor to income from sources without the United States is treated as income
from sources within the United States.
SECTION 5. EXAMPLES
.01 Retirement at age 65. (a) Facts. P, a nonresident alien individual, is a citizen and
resident of Country B. P will be age 65 on December 31, 2004. There is no income tax
treaty in force between the United States and Country B.
P has been an employee of Company X, a domestic corporation, since 1975 and is
retiring on December 31, 2004. P worked in C o m p a n y X's branch office in Country B
from January 1, 1975 through December 31, 1984. O n January 1, 1985, P w a s
transferred to the United States to work at C o m p a n y X's headquarters. While P worked
in the United States, P w a s classified as a resident alien under § 7701(b)(1)(A)(ii). O n
January 1, 1995, P w a s transferred back to C o m p a n y X's branch office in Country B,
where P will have worked until retiring on December 31, 2004. In total, P will have
worked 360 months for C o m p a n y X, including 240 months worked in Country B and 120
months worked in the United States.
Throughout P's employment by Company X, P has been a participant in a defined
benefit plan ("Plan A") maintained by C o m p a n y X. The trust forming part of Plan A is a
trust created or organized in the United States that constitutes a qualified trust under
§ 401(a). The normal form of retirement benefit under Plan A is a straight life annuity.
The amount payable under the straight life annuity form is an annual benefit of 1
percent of highest-five years' pay multiplied by years of service credited under the plan,
payable monthly for life commencing at normal retirement age (age 65) or at actual
7
retirement age, if later. Plan A provides for an actuarially reduced amount to be payable
if the participant has a severance from employment before normal retirement age, but
the reduction is smaller if the participant retires after age 55 with at least 20 years of
service (for example, only a 16.67% reduction applies at age 55). Contributions under
Plan A are not m a d e on behalf of specific individual participants.
P is entitled to a monthly pension from Plan A beginning at age 65, the annual amount
of which will be $30,000 payable as a straight life annuity. P elects to receive payment
of that pension in the form of a straight life annuity commencing immediately. P has
never m a d e any after-tax contributions to Plan A, and § 871(f), relating to an exclusion
from gross income for certain amounts received from certain qualified pension plans,
does not apply to any amounts received by P from Plan A.
(b) Application. The total deemed contributions for the benefit of P under the method
set forth in section 4.01 of this revenue procedure equal $95,972, which is the product
of $301,800 (the present value of P's pension benefit from Plan A under section 4.02(a),
computed as the product of $30,000 multiplied by 10.06, which is the applicable
adjustment factor under Table II of section 4.03), multiplied by 0.0106 (the number from
Table I that corresponds to the total number of years of accumulation for P before the
annuity starting date), multiplied by 30 (P's total years of service credited under the
plan). Under section 4.04 of this revenue procedure, the portion of each payment that is
treated as income from sources without the United States is equal to the quotient of (i)
the product of 240/360 multiplied by $95,972, divided by (ii) $301,800, or 21 percent.
The remaining 79 percent is treated as income from sources within the United States
that is subject to withholding under § 1441(a).
.02 Early Retirement, (a) Facts. The facts with respect to Plan A and Company X are
the s a m e as in Example 5.01. Q, a nonresident alien individual, is a citizen and resident
of Country B. Q will be age 55 on December 31, 2004. There is no income tax treaty in
force between the United States and Country B.
Q has been an employee of Company X since 1985 and is retiring on December 31,
2004. Q worked in C o m p a n y X's branch office in Country B from January 1, 1985
through December 31, 1994. O n January 1, 1995, Q w a s transferred to the United
States to work at C o m p a n y X's headquarters. While Q worked in the United States, Q
was classified as a resident alien under § 7701(b)(1)(A)(ii). O n September 1, 2001, Q
was transferred back to C o m p a n y X's branch office in Country B, where Q will have
worked until retiring on December 31, 2004. In total, Q will have worked 240 months for
Company X, including 160 months worked in Country B and 80 months worked in the
United States.
Throughout Q's employment by Company X, Q has been a participant in Plan A. Q is
entitled to a monthly pension from Plan A beginning at age 55, the annual amount of
8
which will be $25,000 payable as a straight life annuity. Q elects to receive an
actuarially equivalent joint and contingent annuity option of $23,000 annually with a 50
percent continuation percentage (and Q's designated contingent annuitant is age 55)
and the actuarial present value of that benefit under section 4.02(c) is $288,019. Q has
never m a d e any after-tax contributions to Plan A, and § 871(f), relating to an exclusion
from gross income for amounts received from certain qualified pension plans, does not
apply to any amounts received by Q from Plan A.
(b) Application. The total deemed contributions for the benefit of Q under the method
set forth in section 4.01 of this revenue procedure equal $140,553, which is the product
of $288,019 (the present value of Q's $23,000 annual pension benefit from Plan A with
a 50-percent continuation percentage, as determined under the assumptions in section
4.02(c)), multiplied by 0.0244 (the number from Table I that corresponds to the total
number of years of accumulation for Q before the annuity starting date), multiplied by 20
(Q's total years of service credited under the plan). Under section 4.04 of this revenue
procedure, the portion of each payment that is treated as income from sources without
the United States is equal to the quotient of (i) 160/240 multiplied by $140,553, divided
by (ii) $288,019, or 33 percent. The remaining 67 percent is treated as income from
sources within the United States that is subject to withholding under § 1441(a).
SECTION 6. LIMITATION ON ISSUANCE OF PRIVATE LETTER RULINGS
.01 The Service will not issue a private letter ruling regarding a method for determining
the source of a pension payment to a nonresident alien individual from a trust under a
defined benefit plan that is qualified under § 401(a) if the proposed method (including
the related assumptions) is inconsistent with sections 4.01, 4.02, and 4.03 of this
revenue procedure.
.02 Revenue Procedure 2004-7, 2004-1 I.R.B. 237, is amplified by adding the following
to section 3.01:
Section 861. Income from Sources Within the United States. A method
for determining the source of a pension payment to a nonresident alien
individual from a trust under a defined benefit plan that is qualified under
§ 401(a) if the proposed method is inconsistent with sections 4.01, 4.02,
and 4.03 of Revenue Procedure 2004-37, 2004-26 I.R.B. .
9
Section 862. Income from Sources Without the United States. A method
for determining the source of a pension payment to a nonresident alien
individual from a trust under a defined benefit plan that is qualified under
§ 401(a) if the proposed method is inconsistent with sections 4.01, 4.02,
and 4.03 of Revenue Procedure 2004-37, 2004-26 I.R.B. .
S E C T I O N 7. D R A F T I N G I N F O R M A T I O N
The principal author of this revenue procedure is Michelle S. Lyon of the Office of
Associate Chief Counsel (International). However, other personnel from the IRS and
Treasury Department participated in its development. For further information regarding
this revenue procedure generally, contact Ms. Lyon on (202) 622-3880 (not a toll-free
call). For information regarding computations under the method set forth in section 4 of
this revenue procedure, contact Diane S. Bloom at (202) 283-9888 (not a toll-free call).
10
jsl719: John B. Taylor Under Secretary of Treasury for International Affairs Keynote Ad... Page 1 of 4
PHESS ROOM
F R O M T H E OFFICE O F PUBLIC A F F A I R S
June 10,2004
js1719
John B. Taylor Under Secretary of Treasury for International Affairs Keynote
Address at the Conference Global Economic Challenges for the IMF's N e w
Chief American Enterprise Institute
New Directions for the International Financial Institutions
I thank the American Enterprise Institute for sponsoring this timely conference and
Desmond Lachman for inviting m e to speak. It is a pleasure to be on the program
with so many distinguished economists-John Lipsky, Glenn Hubbard, Ken Rogoff,
Ted Truman, Alan Meltzer--who have contributed so many good ideas to improve
the international financial institutions over the years. I have benefited from many
discussions with each of them. Indeed, many of their ideas are reflected in our
current reform agenda for the international financial institutions.
This seminar is timely, of course, because it comes just two days after Rodrigo
Rato took the helm at the IMF The United States is extremely pleased to welcome
Minister Rato. I a m confident that his strong and skillful leadership will benefit the
IMF and improve the lives of people around the world.
While our main focus today is on the IMF, my opening comments pertain to both
Bretton W o o d s institutions. From their founding sixty years ago, the institutions
have been closely linked. It is difficult to discuss change in one without discussing
change in the other. Indeed, one of the most important areas of reform is to achieve
a better division of labor and to be on the lookout for mission creep that causes
overlap and blurred responsibilities.
When the institutions were founded, their original goals were specifically oriented to
the period of post World W a r II reconstruction. At a more general level, however,
these goals were timeless, and can be stated quite simply: first, to increase
economic stability, and, second, to raise economic growth, and thereby reduce
poverty. I see no reason to change these goals. But much has changed in sixty
years, and to achieve these goals the institution must reform.
Let me list the many changes in the world economy that have implications for the
international financial institutions:
• Private cross-border capital flows have increased sharply and are now much
larger than flows from the international financial institutions.
• A higher fraction of these private capital flows is in the form of securities rather
than loans.
• Remittances from people in developed countries back home have increased
dramatically.
• Markets are more interconnected, which has raised concerns about volatility and
contagion.
• The end of the fixed exchange system reduced the need for balance of payments
financing.
• Better domestic monetary policies have reduced inflation and increased
economic stability.
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• Poverty has been reduced significantly, but many countries have been left far
behind.
• New management ideas-results management, timelines, incentives, and
accountability-have improved the delivery of services at firms and governments.
Because of these changes, the need for reform has long been recognized, and
m a n y good reforms have been proposed and debated for m a n y years. In the last
few years, however, I believe that something more significant has happened: w e
are having success actually implementing reforms. S o m e of the important changes
in the last few years include:
The introduction of collective action clauses in sovereign debt.
• The creation of clearer limits and criteria for exceptional access from the IMF.
• A more streamlined conditionality at the IMF.
• The introduction of a new system for measuring results at the World Bank.
• Creation of a grant window at the World Bank for very poor countries.
• A focus on core expertise at the IMF and World Bank with an appropriate division
of labor.
Taken as a whole, these reforms represent an important policy shift for both the
IMF and the World Bank that is enabling them to achieve their goals more
effectively. Let m e explain w h y by referencing the first two reforms on m y list.
It is now well known that both the number and severity of financial market crises
increased in the 1990s compared with the 1980s. These crises provided clearer
and clearer evidence that the systemic changes in the world's financial markets that
I just listed required systematic changes in the policy framework underlying the
international financial system.
Throughout the 1990s the responses of the international community to crises,
though understandable under the circumstances, continued in roughly the s a m e
fashion as the response to the first major crisis in Mexico . They tended to
concentrate on short-term tactics rather than strategy. They were designed around
discretionary changes in policy instruments, rather than systematic changes in the
policy regime. They tended to be government-focused rather than market-focused,
emphasizing large loans by the official sector, and later government-induced bailins by the private sector. M a n y observers became concerned that the use of very
large financial packages w a s having adverse effects on expectations or incentives.
Missing from the international financial policy framework, however, was more
predictability, more accountability, and more systematic behavior on the part of the
official sector. More focus needed to be placed on what public sector actions were
likely to be in a given circumstance, on what accountability there would be for those
actions, and on what the strategy and the principles behind the actions were.
To address these problems a path-breaking G-7 Action Plan was announced in
April 2002. The plan called for the use of collective action clauses and the
clarification of limits on exceptional access to loans from the IMF.
Following the G-7 action plan, the Bush Administration actively promoted inclusion
of collective action clauses in external sovereign bonds because w e were
convinced that they were the most promising and feasible w a y to introduce more
predictability into the system. These clauses provide a n e w option for sovereigns to
restructure their debt without having to obtain the unanimous consent of
bondholders - not to m a k e restructurings more desirable but to m a k e them more
predictable and less vulnerable to holdouts' in cases w h e n a country has no real
alternative.
We are very pleased with the dramatic progress that has been made in
implementing these proposals in a very short period. The n e w clauses are n o w the
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market standard in New York and are well on their way to becoming standard in
internationally issued sovereign bonds, with no adverse impact on pricing.
Some argue that these clauses do not solve all the problems about the uncertainty
surrounding debt restructurings, and they are right. Future crises m a y not be as
closely associated with debt problems as past crises have been. But the clauses
and the debate surrounding them last year have helped to change perceptions
about emerging market debt. The debt is n o w being held by a more diverse class
of investors as an important part of their portfolios.
Regarding limits and greater clarity on official sector finance, there are several
components of the reform effort. First, the Bush administration set out to establish
the presumption that the IMF - rather than official creditor governments - is
responsible for providing large scale loan financing. This provides an overall budget
constraint and thereby an overall limit on loan assistance, recognizing that IMF
resources are limited.
Second, we want the IMF to provide clear signals in advance of a decision not to
provide additional IMF loans w h e n it appears that the limits of sustainability m a y be
reached in the near future. Signaling policy changes in advance, even in broad
outline, can lead to smoother adjustments and provide investors with time to obtain
information about fundamentals - thus minimizing surprises and reducing
contagion. At the s a m e time, it is also important to be clear about supporting
countries that are following good policies and thereby reduce the risk of investors
fleeing one country just because a neighbor m a y face financial crisis.
Third, to provide specificity and accountability for the changes I have described, the
IMF has n o w established specific criteria for large scale lending above certain limits
and adopted the policy that, in cases of exceptional access, m a n a g e m e n t put
forward a n e w exceptional access report. The aim of this report is to provide
accountability in the s a m e w a y that monetary policy reports or inflation reports
provide s o m e accountability at central banks.
The purpose of all three changes is to reduce the uncertainty and the perverse
disincentives in the markets due to lack of clarity about h o w m u c h funding will be
provided from the IMF and under what circumstances. The clearer limits help define
the policy regime under which market participants and borrowing countries can
operate. A s part of the policy framework defined by the clearer access limits, the
general presumption is that the official sector will avoid arm-twisting the private
sector to do bail-ins, because this can lead to uncertainty about future applications
and encourage early runs for the exits.
I hope that this brief explanation helps show why these two inter-related reforms are
important. However, I believe that still more can be done. At the least the recent
reforms need to be locked-in and internalized, but, more fundamentally, the reforms
also need to be expanded. N o w seems to be an opportune time to m o v e ahead.
First, the recent progress has generated a m o m e n t u m for reform and has
demonstrated that by working together, the international community can m a k e
progress on reforms. Second, w e are currently in a period where there is no major
financial crisis, which gives the relevant participants time to consider longer-term
reforms. Third, there is the occasion of the 60th anniversary of the institutions.
Indeed, at the urging of Secretary Snow, the G7 finance ministers and central bank
governors have already begun a strategic review of the institutions. There has
already been a positive response to this review from m a n y developed countries,
emerging market countries, and developing countries. More consultations are under
way, but, in m y view, several ideas have already been well received and merit
further discussion. For example,
• An enhanced surveillance system at the IMF, including greater independence
between debt sustainability analyses and lending decisions; publication of all
country reports; explicit allowance and encouragement of country-led presentations;
more focus on contagion by looking at connections between countries.
• A new non-borrowing program at the IMF with emphasis on strong country
ownership of program design.
These, of course, are just examples, suggestive of the types of additional reforms
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that are possible. I very much look forward to working with Managing Director Rato
and the entire international community on these and other types of reforms in the
years ahead.
)://www.treas.gov/press/releases/js 1719.htm
5/5/2005
F R O M T H E OFFICE O F PUBLIC A F F A I R S
June 10,2004
js1720
Treasury Designates Islamic Extremist, Two Companies Supporting Hizballah
in Tri-Border Area
One of the most prominent and influential members of the Hizballah terrorist
organization, along with two of his companies, was designated by the Treasury
Department today under Executive Order 13224. Assad A h m a d Barakat has close
ties with Hizballah leadership and has worked closely with numerous Islamic
extremists and suspected Hizballah associates in South America's tri-border area
(TBA), m a d e up of Brazil, Paraguay and Argentina.
"Today, we are designating a key terrorist financier in South America who has used
every financial crime in the book, including his businesses, to generate funding for
Hizballah," said Juan Zarate, the Treasury Department's Deputy Assistant
Secretary for the Executive Office for Terrorist Financing and Financial Crimes.
"From counterfeiting to extortion, this Hizballah sympathizer committed financial
crimes and utilized front companies to underwrite terror."
Barakat is currently serving six and a half years in a Paraguay prison for tax
evasion, and was detained in June 2002 by Brazil - at the request of Paraguay - on
suspicion of tax evasion and criminal association.
On January 25, 1995, the Annex to Executive Order 12947 listed Hizballah as a
Specially Designated Terrorist. The Department of State, in consultation with other
agencies, designated Hizballah as a Foreign Terrorist Organization in 1997.
Additionally, on October 31, 2001, Hizballah was designated as a Specially
Designated Global Terrorist under Executive Order 13224.
Barakat has long served as a treasurer for Hizballah and has carried contributions
to Lebanon for the group. Barakat is reportedly the deputy to a Hizballah financial
director, Ali Kazan, and the primary liaison in the T B A for Hizballah's Secretary
General Shaykh Hasan Nasrallah. As of late 2001, Barakat reportedly was traveling
to Lebanon and Iran annually, meeting with both Nasrallah and Hizballah's Spiritual
Leader Hussein Fadlallah. Nasrallah and Fadlallah were also named as Specially
Designated Terrorists under E.O. 12947.
In addition, Treasury is designating two of Barakat's businesses, Casa Apollo and
Barakat Import Export Ltda. Information available to the U.S. indicates Barakat has
used wholesale import-export businesses as front companies for Hizballah activities
and cells. Barakat used his electronics wholesale store Casa Apollo as a cover for
Hizballah fund-raising activities and as a way to transfer information to and from
Hizballah operatives. Barakat used his company, Barakat Import Export Ltd., to
raise money for Hizballah in Lebanon by mortgaging the company in order to
borrow money from a bank in a fraud scheme.
Barakat has used strong-arm tactics and coercive measures to raise large sums of
money annually, which were sent to Hizballah in Lebanon and Iran. Barakat
threatened T B A shopkeepers w h o are sympathetic to Hizballah's cause with having
family members in Lebanon placed on a "Hizballah blacklist" if the shopkeepers did
not pay their quota to Hizballah via Barakat.
Barakat has also been involved in a counterfeiting ring that distributes fake U.S.
dollars and generates cash to fund Hizballah operations. As of early 2001, Barakat
w a s one of two individuals reportedly in charge of distribution and sale of the
counterfeit currency in the TBA.
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Information obtained by the U.S. indicates that Barakat's personal secretary
operated as Hizballah's military leader in the T B A and w a s reportedly arrested on
October 3, 2001 at Barakat's business, Casa Apollo. Sobhi M a h m o u d Fayad a
close associate of Barakat and possibly his executive secretary - is a known
Hizballah m e m b e r and weapons expert. A high-ranking Hizballah official in Lebanon
in the 1980s, Fayad supports the terrorist organization in the T B A today. Fayad w a s
arrested in 1999 for surveillance of the U.S. Embassy in Asuncion, and w a s
arrested again in November of 2002 and sentenced to six and a half years for tax
evasion.
Barakat has also served as the deputy financial director of the Husaniyya "Iman AlKhomeini" mosque in Brazil. Barakat's arrest in June 2002 prompted a prominent
m e m b e r of the Mosque to prohibit anyone w h o is not a m e m b e r of Hizballah from
attending services.
Paraguayan authorities have recovered video of Hizballah military operations from
a personal computer in one of Barakat's stores. The footage depicted the
detonation of explosives, s o m e of which show people dying from these explosions.
Another file included Hizballah military orders for each town and village in southern
Lebanon.
Barakat relayed information to and from Hizballah leaders in Lebanon and, at their
request, sought sensitive information about the activities of Arabs in the TBA. In
particular, Barakat procured information about Arab community m e m b e r s that
traveled to the United States or Israel and transmitted that information to Hizballah's
Foreign Relations Department in Lebanon.
Barakat has also regularly hosted and attended meetings of senior Hizballah TBA
leaders. According to information available to the U.S. Government, Barakat
attended a meeting of T B A Hizballah members in the fall of 2000 in Brazil where
Hizballah m e m b e r s discussed their intentions to identify, locate and assassinate
former m e m b e r s of the Army of South Lebanon and Israelis. The group also
discussed a possible effort to oust Yasir Arafat due to his agreement to a ceasefire.
Assad Ahmad Barakat
Brazilian Residences as of January 2002
RueTaroba 1005
Beatriz M e n e z Building
Foz do Iguacu, Brazil
Rua Rio Branco
Lote 682
Quadra 13
Foz do Iguacu, Brazil
Rua Xavier Da Silva 535
Edificio Martin Terro
Apartment 301
Foz do Iguacu, Brazil
Brazilian Residences as of January 2001
290, Rua Silva Jardim
Foz do Iguacu, Brazil
Chilean Residences
Arrecife Apartment Building
Iquique, Chile
Apartment 111
Panorama Building
Iquique, Chile
Paraguayan Residences
Piribebuy Y A. Jara
Ciudad del Este, Paraguay
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jsl720: Treasury Designates Islamic Extremist, T w o Companies Supporting Hizballah in ... Page 3 of 3
Phone:061-514-932
Casa Apollo
Galeria Page
Ciudad del Este, Paraguay
Barakat Import Export Ltd
Iquique, Chile
Tax Identification Number: A A B A 670850 Y
-30-
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JS-1721: Treasury and the IRS Finalize Defined Benefit Plan<BR>and Annuity Distribute.. Page 1 of 1
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June 14, 2004
JS-1721
Treasury and the IRS Finalize Defined Benefit Plan
and Annuity Distribution Rules
Today, Treasury and the IRS finalized regulations regarding minimum distribution
rules for defined benefit plans and annuity products purchased with account
balances in other types of qualified retirement plans and IRAs. This completes the
comprehensive update and simplification of the minimum distribution rules that
began in 2000. The regulations finalized today were originally issued as proposed
and temporary regulations in 2002.
"This is great news for participants, employers and annuity providers because they
now have final rules regarding required distributions from their retirement
programs," stated Gregory Jenner, Acting Assistant Secretary for Tax Policy
There is adequate flexibility in the rules to permit annuities that meet the different
needs of retirees. The final rules reflect many of the comments w e received from
the public during the finalization process."
While the final regulations retain many rules from the temporary regulations there
are numerous modifications. For example, changes are included to address
concerns of defined benefit plan sponsors and annuity issuers to provide more
flexibility in annuity payment terms. The regulations also generally grandfather
governmental plan provisions that were in effect when the temporary regulations
were published. These regulations also include a modification to the defined
contribution plan rules that will provide more flexibility in the establishment of
separate accounts for beneficiaries following the death of a plan participant or IRA
holder.
The final regulations are effective January 1, 2003, the same date used for the
regulations applicable to defined contribution plans. However, until 2006, plans are
only required to show that they exercised good faith in complying with a reasonable
interpretation of section 401(a)(9).
Most employers and annuity contract issuers will not need to adjust their plan or
contract distribution options to comply with the regulations. For those plans or
contracts that do need to be changed, the good faith compliance period will allow
sufficient time to do so.
REPORTS
• The text of the final regulations
vw.treas.gov/press/releases/js 1721 .htm
5/5/2005
[4830-01-P]
DEPARTMENT OF TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9130]
RIN 1545-BA60
Required Distributions from Retirement Plans
AGENCY: Internal Revenue Service (IRS), Treasury
ACTION: Final regulations
SUMMARY: This document contains final regulations concerning required minimum
distributions under section 401(a)(9) for defined benefit plans and annuity contracts
providing benefits under qualified plans, individual retirement plans, and section 403(b)
contracts. This document also contains a change to the separate account rules in the
final regulations concerning required minimum distributions for defined contribution
plans. These final regulations provide the public with guidance necessary to comply with
the law and will affect administrators of, participants in, and beneficiaries of qualified
plans; institutions that sponsor and administer individual retirement plans, individuals
who use individual retirement plans for retirement income, and beneficiaries of
individual retirement plans; and employees for whom amounts are contributed to section
403(b) annuity contracts, custodial accounts, or retirement income accounts and
beneficiaries of such contracts and accounts.
DATES: Effective Date: These regulations are effective June 15, 2004.
Applicability Date: These regulations apply for purposes of determining required
minimum distributions for calendar years beginning on or after January 1, 2003.
INFORMATION C O N T A C T : Cathy Vohs at (202)622-6090.
S U P P L E M E N T A R Y INFORMATION:
Background
These final regulations amend 26 C F R part 1 relating to section 401(a)(9). The
regulations provide guidance on the minimum distribution requirements under section
401(a)(9) for plans qualified under section 401(a) and for other arrangements that
incorporate the section 401(a)(9) rules by reference. The section 401(a)(9) rules are
incorporated by reference in section 408(a)(6) and (b)(3) for individual retirement
accounts and annuities (IRAs) (including Roth IRAs, except as provided in section
408A(c)(5)), section 403(b)(10) for section 403(b) annuity contracts, and section 457(d)
for eligible deferred compensation plans.
Section 401(a)(9) provides rules for distributions during the life of the employee
in section 401 (a)(9)(A) and rules for distributions after the death of the employee in
section 401 (a)(9)(B). Section 401 (a)(9)(A)(ii) provides that the entire interest of an
employee in a qualified plan must be distributed, beginning not later than the
employee's required beginning date, in accordance with regulations, over the life of the
employee or over the lives of the employee and a designated beneficiary (or over a
period not extending beyond the life expectancy of the employee and a designated
beneficiary).
Section 401(a)(9)(C) defines required beginning date for employees (other than
2
5-percent owners and IRA owners) as April 1 of the calendar year following the later of
the calendar year in which the employee attains age 702 or the calendar year in which
the employee retires. For 5-percent owners and IRA owners, the required beginning
date is April 1 of the calendar year following the calendar year in which the employee
attains age 702, even if the employee has not retired.
Section 401(a)(9)(D) provides that (except in the case of a life annuity) the life
expectancy of an employee and the employee=s spouse that is used to determine the
period over which payments must be m a d e m a y be redetermined, but not more
frequently than annually.
Section 401(a)(9)(E) provides that the term designated beneficiary m e a n s any
individual designated as a beneficiary by the employee.
Section 401(a)(9)(F) provides that, under regulations prescribed by the
Secretary, any amount paid to a child shall be treated as if it had been paid to the
surviving spouse if such amount will be become payable to the surviving spouse upon
such child reaching the age of majority (or other designated event permitted under
regulations).
Section 401(a)(9)(G) provides that any distribution required to satisfy the
incidental death benefit requirement of section 401(a) is a required minimum
distribution.
Section 401(a)(9) also provides that, if the employee dies after distributions have
begun, the employee=s interest must be distributed at least as rapidly as under the
method used by the employee.
3
Section 401(a)(9) further provides that, if the employee dies before required
minimum distributions have begun, the employee=s interest must be either distributed
(in accordance with regulations) over the life or life expectancy of the designated
beneficiary with the distributions beginning no later than 1 year after the date of the
employee=s death, or distributed within 5 years after the death of the employee.
However, under section 401(a)(9)(B)(iv), a surviving spouse may wait until the date the
employee would have attained age 702 to begin taking required minimum distributions.
Comprehensive proposed regulations under section 401(a)(9) were first
published in the Federal Register on July 27, 1987 (52 FR 28070) (EE-113-82). Those
proposed regulations were amended in 1997 (62 FR 67780) (REG-209463-82) to
address the limited issue of the rules that apply when a trust is designated as an
employee's beneficiary. Comprehensive proposed regulations were reproposed in the
Federal Register on January 17, 2001 ((66 FR 3928) (REG-130477-00/REG-13048100)). The 2001 proposed regulations substantially revised and simplified the rules for
defined contribution plans but maintained the basic structure for defined benefit plans
and requested additional comments on the rules that should apply to those plans. With
respect to annuity payments, the 2001 proposed regulations retained the basic structure
of the 1987 proposed regulations and the preamble indicated that the IRS and Treasury
were continuing to study these rules and specifically requested updated comments on
current practices and issues relating to required minimum distributions from annuity
contracts. Commentators on the 2001 proposed regulations provided information on
the variety of annuity contracts being developed and available as insurance company
4
products for purchase with separate accounts.
Final and temporary regulations relating to required minimum distributions from
qualified plans, individual retirement plans, and section 403(b) annuity contracts,
custodial accounts, and retirement income accounts were published in the Federal
Register on April 17, 2002 (67 FR 18987). Proposed regulations that cross reference
those temporary regulations were published in the Proposed Rules section of the
Federal Register on April 17, 2002 ((67 FR 18834) (REG-108697-02)). The final and
temporary regulations were effective with the 2003 calendar year.
The 2002 regulations finalized the rules for defined contribution plans and the
basic rules regarding the determination of the required beginning date, determination of
designated beneficiary and other general rules that apply to both defined benefit and
defined contribution plans. The 2002 regulations also provided temporary regulations
under ' 1.401 (a)(9)-6T relating to minimum distribution requirements for defined benefit
plans and annuity contracts purchased with an employee=s account balance under a
defined contribution plan. In response to the comments to the 2001 proposed
regulations, the temporary regulations significantly expanded the situations in which
annuity payments under annuity contracts purchased with an employee's benefit may
provide for increasing payments, but this guidance was provided in proposed and
temporary form rather than final form in order to give taxpayers an opportunity to
comment on these changes.
A public hearing was held on the temporary and proposed regulations on
October 9, 2002. At the public hearing, and in comments on the temporary regulations,
5
concerns were raised that requiring compliance with certain of the rules in the
temporary regulations in 2003 would not be appropriate. Many of the comments relate
to restrictions on variable annuity payments, and certain other increasing annuity
payments, set forth in A-1 of • 1.401 (a)(9)-6T. Commentators also requested additional
guidance in applying the rule in A-12 of • 1.401 (a)(9)-6T that requires the entire interest
under an annuity contract to include the actuarial value of other benefits (such as
minimum survivor benefits) provided under the contract and that the rule requiring the
inclusion of these values be delayed until the guidance is provided. Finally,
commentators requested that special consideration be provided to governmental plans.
In response to these comments and in order to provide adequate time to
consider the issues raised, the IRS issued Notice 2003-2 (2003-1 C.B. 257) which
provided that, pending the issuance of further regulations, plans are permitted to satisfy
certain requirements in the 1987 or 2001 proposed regulations with respect to variable
annuity payments in lieu of complying with the corresponding requirements in the 2002
temporary regulations, and that the entire interest under an annuity contract (including
an annuity described in section 408(b) or section 403(b)) is permitted to be determined
as the dollar amount credited to the employee or beneficiary without regard to the
actuarial value of any other benefits (such as minimum survivor benefits) that will be
provided under the contract. Notice 2003-2 also provided that, pending the issuance of
further regulations under section 401(a)(9), governmental plans are only required to
satisfy a reasonable and good faith interpretation of section 401(a)(9). Finally, Notice
2003-2 provided that the transitional relief would continue at least through the year in
6
which additional regulations are published, with a later effective date for certain
governmental plans.
In response to the comments received, these final regulations make a number of
significant modifications to the proposed and temporary regulations and adopt the
regulations as modified. They also make a minor modification to the rules in A-2 of
• 1.401 (a)(9)-8 for separate accounts. These final regulations contain rules relating to
minimum distribution requirements for defined benefit plans and annuity contracts
purchased with an employee=s account balance under a defined contribution plan. For
purposes of this discussion of the background of the regulations in this preamble, as
well as the explanation of provisions below, whenever the term employee is used, it is
intended to include not only an employee but also an IRA owner.
Explanation of Provisions
Overview
These final regulations retain the basic rules of the temporary regulations. For
example, distributions of an employee's entire interest must be paid in the form of
periodic annuity payments for the employee's or beneficiary's life (or the joint lives of t
employee and beneficiary) or over a comparable period certain. The payments must be
nonincreasing or only increase as provided in the regulations. As provided in the
temporary regulations, the permitted increases under these final regulations include:
adjustments to reflect increases in the cost of living; any increase in benefits pursuant to
a plan amendment; a pop up in payments in the event of the death of the beneficiary or
the divorce of the employee and spouse; or return of employee contributions upon an
7
employee's death. In addition, for both annuity contracts purchased from insurance
companies and annuities paid from section 401(a) qualified trusts, the regulations allow
variable annuities and other regular increases, if certain conditions are satisfied. The
regulations also allow changes in distribution form in certain circumstances.
These regulations retain many rules from the temporary regulations without
modification. These include, for example, rules regarding: the distribution of benefits
that accrue after an employee's first distribution calendar year; the treatment of
nonvested benefits; the actuarial increase to an employee's benefit that must be
provided if the employee retires after the calendar year in which the employee attains
age 70!4; and benefits that commence in the form of an annuity prior to an employee's
required beginning date.
Incidental benefit requirement
The basic purpose of the incidental benefit rule is to ensure that the payments
under the annuity are primarily to provide retirement benefits to the employee.
These final regulations retain the basic rule in the temporary regulations that, if
distributions commence under a distribution option that is in the form of a joint and
survivor annuity where the beneficiary is not the employee's spouse, the incidental
benefit requirement will not be satisfied unless the payments to the beneficiary as a
percentage of the payments to the employee do not exceed the percentage provided in
the table in the regulations. The percentage is based on the number of years that the
employee's age exceeds the beneficiary's age, and the percentage decreases as the
difference between the ages increases. This reflects the fact that the greater the
8
number of years younger a beneficiary is than the employee, the greater the number of
years of expected payments that will be made to the beneficiary after the death of the
employee. Under the table in the temporary regulations, a plan may not provide a 100
percent survivor benefit to an employee's nonspouse beneficiary under a joint and
survivor annuity if the beneficiary is more than 10 years younger than the employee.
Some commentators suggested that an adjustment to the table is appropriate if the
employee commences distributions before 701A This is because, in such a case, more
payments are expected to be made while the employee is alive.
In response to these comments, the final regulations provide that, if an
employee's annuity starting date is at an age younger than age 70, an adjustment is
made to the employee/beneficiary age difference. This adjusted employee/beneficiary
age difference is determined by decreasing the age difference by the number of years
the employee is younger than age 70 at the annuity starting date. The effect of this
change is to permit a higher percentage after an employee's death for employees who
commence benefits at earlier ages. Thus, for an employee age 55 at the time of the
employee's annuity starting date, a joint and 100 percent survivor annuity can be
provided if the survivor is not more than 25 years younger than the employee.
Increasing annuities (including acceleration and cost-of-living increases)
These final regulations clarify that a plan may provide an annual increase that
does not exceed the increase in an eligible cost-of-living index for a 12-month period
ending in the year during which the increase occurs or the prior year. An eligible costof-living index is a consumer price index (CPI) issued by the Bureau of Labor Statistics
9
and based on prices of all items (or all items excluding food and energy), including an
index for a population of consumers (such as urban consumers or urban wage earners
and clerical workers) or geographic area or areas (such as a given metropolitan area or
state).
Under these regulations, a plan may provide for annual cost-of-living increases,
or may provide for less frequent cost-of-living increases that are cumulative since the
most recent increase (or the employee's annuity starting date, if later), as long as there
is no actuarial increase to reflect having not provided increases in the interim years.
For a plan that provides annual increases, but provides a ceiling on the annual
increase, and thus does not allow a full cost-of-living increase in some years, the plan
may allow an unused portion of the cost-of-living increase to be provided in a
subsequent year when the ceiling exceeds the increase in the CPI for that year and still
treat the increase in that subsequent year as an increase that does not exceed an
eligible cost-of-living index.
Finally, a plan can provide for annuity payments with a percentage adjustment
based on the increase in compensation for the position held by the employee at the time
of retirement. However, in the case of a nongovernmental plan, this form of adjustment
is only permitted if it is provided under the terms of the plan as in effect on April 17,
2002.
In addition to these permitted increases in the amount of annuity payments, the
final regulations retain the rules in the temporary regulations allowing an annuity
purchased from an insurance company with an employee's account balance under a
10
defined contribution plan to provide for variable and increasing payments and clarify that
these rules apply to an annuity contract purchased from an insurance company by a
qualified trust for a defined benefit plan. For an annuity contract purchased from an
insurance company, these final regulations retain the rule that the total expected future
payments (disregarding any payment increases) as of the annuity starting date must
exceed the premium being annuitized. This rule insures that annuity payments start at a
high enough amount to prevent inappropriate deferral.
In response to comments asking for more flexibility in the rules relating to
changes in distribution amounts from an annuity contract purchased from an insurance
company, the final regulations replace the rule permitting partial and complete
withdrawals with a broader rule permitting all types of acceleration. The final
regulations allow any method that retains the same rate of increase in future payments
but results in the total future expected payments under the annuity (disregarding any
future payment increases and including the amount of any payment made as a result of
the acceleration) being decreased, thereby allowing acceleration in the form of a shorter
period as well as through withdrawals. In addition, the requirement that a total
withdrawal option be available has been eliminated.
These final regulations also permit defined benefit plans under a qualified trust to
provide variable or fixed-rate increasing annuities paid directly from the trust, but the
control in the regulations on the rate of increase for these annuities is different. For
these annuities, increases in payments solely to reflect better-than-assumed investment
performance are permitted but only if the assumed interest rate for calculating the initial
11
level of payments is at least 3 percent. Alternatively, fixed rate increases m a y be
provided but only if the rate of increase is less than 5 percent. Paralleling the payment
of the undistributed premium at death, the regulations allow a payment at death to the
extent that the payments after annuitization are less than the present value of the
employee's accrued benefit as of the annuity starting date calculated using the
applicable interest and morality under section 417(e).
The rule allowing an acceleration of payments under an annuity has not been
extended to annuity payments from a qualified trust. However, as noted below, such
plans are permitted to allow changes in form of distribution in certain specific
circumstances as described below. In addition, if distribution is in the form of a joint and
survivor annuity, the final regulations allow the survivor to convert the survivor annuity
into a lump sum upon the death of the employee.
Permitted changes in form of distribution
Some commentators requested that employees and beneficiaries be permitted to
change the form of future distributions in response to changed circumstances, such as
upon retirement or death. In response to these comments, the regulations allow an
employee or beneficiary to change the form of future distributions in a number of
circumstances provided certain conditions are satisfied. First, if distribution is in the
form of a period certain only annuity (i.e., an annuity with no life contingency), the
individual may change the form of distribution prospectively at any time. The employee
or beneficiary also is permitted to change the form of distribution prospectively upon an
employee's actual retirement or upon plan termination, regardless of the form of annuity
12
payments before retirement or plan termination. In addition, an employee m a y change
to a qualified joint and survivor annuity in connection with marriage.
In order to make these changes, the future payments must satisfy section
401(a)(9) (as though payments first commenced on the new annuity starting date,
treating the actuarial value of the remaining payments as the employee's or
beneficiary's entire interest). As a condition to changes in the form of distribution,
whether under a period certain only annuity or a life contingent annuity, the stream of
payments from the employee's original annuity starting date (both the payments before
and after the change in form) must satisfy section 415 using the interest rate
assumption and applicable mortality table in effect as of the annuity starting date. In
addition, the end point of the new period certain, if any, may not be later the end point
available at the original annuity starting date. Furthermore, the plan must treat an
individual electing a new form of distribution under these rules as having a new annuity
starting date for purposes of sections 415 and 417. Thus, the payments under the new
form must satisfy section 415 as of its new annuity starting date based on the applicable
interest rate and applicable mortality table for that date, taking into account prior
payments. Although not stated, for plans subject to section 411, any form of distribution
or change in the form of distribution must not result in an impermissible forfeiture of
benefits.
A number of commentators requested that the final regulations provide the rule in
prior proposed regulations that allowed minimum distributions from a defined benefit
plan to be calculated using the rule for defined contribution plans in ' 1.401 (a)(9)-5. The
13
primary argument for allowing this level of flexibility in calculating distribution amounts
from year to year is to allow employees to adjust to changed circumstances. The rules
in these final regulations allowing a change in distribution form upon retirement or plan
termination, and at any time when distribution is in the form of a term certain only,
address this need.
Value of guarantees in determining account value prior to annuitization
The final regulations retain the basic rule in the temporary regulations that,
before annuitization, the defined contribution plan rules apply. For this purpose, an
employee's entire interest under an annuity contract is the dollar amount credited to the
employee or beneficiary under the contract plus the actuarial value of any additional
benefits (such as survivor benefits in excess of the account balance) that will be
provided under the contract. A number of commentators requested guidance on how
this actuarial value is calculated and indicated that, in certain circumstances it would be
appropriate to disregard this additional value.
The IRS and Treasury believe that it is generally appropriate to reflect the value
of additional benefits under an annuity contract, just as the fair market value of all
assets generally must be reflected in valuing an account balance under a defined
contribution plan. However, in response to these comments, the final regulations allow
the additional benefits to be disregarded when there is a pro-rata reduction in the
additional benefits for any withdrawal, provided the actuarial present value of the
additional benefits is not more than 20 percent of the account balance. An example is
provided that illustrates an acceptable method of determining the value of an additional
14
benefit that is a guaranteed death benefit. In addition, an exception is provided for an
additional benefit in the form of a guaranteed return of premiums upon death.
Certain payments to children
The final regulations provide rules governing when, pursuant to section
401(a)(9)(F), payment of an employee's accrued benefit to a child may be treated as if
such payments were made to a surviving spouse. Under the final regulations,
payments under a defined benefit plan or annuity contract that are made to an
employee's child until such child reaches the age of majority (or dies, if earlier) may be
treated, for purposes of section 401(a)(9), as if such payments were made to the
surviving spouse, provided they become payable to the surviving spouse upon
cessation of the payments to the child. In addition, for this purpose, a child may be
treated as having not reached the age of majority if the child has not completed a
specified course of education and is under the age of 26, or so long as the child is
disabled.
Governmental plans
A number of commentators raised concerns that governmental plans offer
annuity distribution options that are not permitted under the temporary regulations.
Most of the suggestions made by commentators on behalf of governmental plans were
incorporated into the final regulations, such as expanding the list of acceptable COLAs;
permitting lump sum distributions to beneficiaries; and providing for pop-up payments to
a surviving spouse after the cessation of payments to a child.
Nevertheless, some substantive changes recommended by or on behalf of
15
governmental plans were not m a d e in the final regulations. In light of the difficulties a
governmental plan faces in changing its plan terms (e.g., in some states, the state
constitution does not allow elimination of existing distribution options) and the public
oversight of such plans, these final regulations provide a grandfather rule under which,
in the case of an annuity distribution option provided under the terms of a governmental
plan as in effect on April 17, 2002, the plan will not fail to satisfy section 401(a)(9)
merely because the annuity payments do not satisfy the requirements set forth in these
regulations. However, a grandfathered distribution option must satisfy the statutory
requirements of section 401(a)(9), based on a reasonable and good faith interpretation
of that section.
This grandfather rule only applies to existing plan provisions. Otherwise, the
regulations provide that annuity payments under governmental plans within the meaning
of section 414(d) must satisfy the rules for nongovernmental plans. Thus, any new
distribution option in a governmental plan or change in a distribution option must comply
with the rules applicable to nongovernmental plans under these final regulations.
Separate accounts under defined contribution plans
Several comments have been received raising administrative concerns with the
rule in the final regulations applicable to defined contribution plans that recognizes
separate accounts for purposes of section 401(a)(9) only after the separate account is
actually established. In particular, concerns have been raised that, for employees who
die late in a calendar year, it is nearly impossible to set up separate accounts by the
end of the year so that they can be used to determine required minimum distributions
16
for the year after death. In response to these comments the regulations have been
modified to provide that if separate accounts, determined as of an employee's date of
death, are actually established by the end of the calendar year following the year of an
employee's death, the separate accounts can be used to determine required minimum
distributions for the year following the year of the employee's death. Under the
separate account rules, post-death investment experience must be shared on a pro-rata
basis until the date on which the separate accounts are actually established.
Effective Date
As provided in the temporary and proposed regulations, these final regulations
apply for purposes of determining required minimum distributions for calendar years
beginning on or after January 1, 2003. However, in order to fulfill the commitment in
Notice 2003-2 to allow plans to continue to use certain provisions from the pre-existing
proposed regulations and to provide plan sponsors sufficient time to make any
adjustments in their plans needed to comply with these regulations, a distribution from a
defined benefit plan or annuity contract for calendar years 2003, 2004, and 2005 will not
fail to satisfy section 401(a)(9) merely because the payments do not satisfy the rules in
these final regulations, provided the payments satisfy section 401(a)(9) based on a
reasonable and good faith interpretation of the provisions of section 401 (a)(9). For a
plan that satisfies the parallel provisions of the 1987 proposed regulations, the 2001
proposed regulations, the 2002 temporary and proposed regulations, or these final
regulations, a distribution will be deemed to satisfy a reasonable good faith
interpretation of section 401(a)(9).
17
For governmental plans, this reasonable good faith standard extends to the end
of the calendar year that contains the 90th day after the opening of the first legislative
session of the legislative body with the authority to amend the plan that begins on or
after TENTER DATE OF PUBLICATION OF THIS DOCUMENT IN THE FEDERAL
REGISTER], if such 90th day is later than December 31, 2005.
Special Analyses
It has been determined that these final regulations are 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
' 1.401(a)(9)-6 imposes no new collection of information on small entities, a Regulatory
Flexibility Analysis under the Regulatory Flexibility Act (5 U.S.C. chapter 6) is not
required. Pursuant to section 7805(f) of the Code, the proposed regulations preceding
these regulations were submitted to the Chief Counsel for Advocacy of the Small
Business Administration for comment on its impact on small business.
Drafting Information
The principal authors of these regulations are Marjorie Hoffman and Cathy A.
Vohs of the Office of the Division Counsel/Associate Chief Counsel (Tax Exempt and
Government Entities). However, other personnel from the IRS and Treasury
participated in the development of these regulations.
List of Subjects 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
18
A m e n d m e n t s to the Regulations
Accordingly, 26 CFR part 1 is amended as follows:
PART 1-INCOME TAXES
Paragraph 1. The authority citation for part 1 is amended by removing the entry
for "§1.401 (a)(9)-6T" and adding an entry in numerical order to read, in part, as foll
Authority: 26 U.S.C. 7805 * * *
1
1.401(a)(9)-6 is also issued under 26 U.S.C. 401(a)(9). * * *
Par. 2. Remove"' 1.401 (a)(9)-6T" and replace it with ' 1.401 (a)(9)-6 each time it
is used in the sections listed below:
§1.401(9)-0
§1.401(a)(9)-1 A-2(b)
§1.401(a)(9)-2A-1(c)
§1.401(a)(9)-2A-5
§1.401(a)(9)-2A-6(a)
§1.401(a)(9)-3A-1(a)
§1.401(a)(9)-3A-1(b)
§1.401(a)(9)-3A-6
§1.401(a)(9)-4A-4(a)
§1.401(a)(9)-5A-1(e)
§1.401(a)(9)-8A-2(a)(3)
§1.401(a)(9)-8A-6(b)(2)
§1.401(a)(9)-8A-7
§1.401(a)(9)-8A-8
§1.403(b)-3 A-1 (c)(3)
§1.408-8 A-1 (a)
§1.408-8 A-1 (b)
§54.4974-2 A-3(a)
§54.4974-2 A-4(b)(2)(i)
Par. 3. Section 1.401(a)(9)-6 is added to read as follows as follows:
§1.401(a)(9)-6 Required minimum distributions for defined benefit plans and annuity
contracts.
19
Q-1. H o w must distributions under a defined benefit plan be paid in order to
satisfy section 401(a)(9)?
A-1. (a) General rules. In order to satisfy section 401 (a)(9), except as otherwise
provided in this section, distributions of the employee's entire interest under a defined
benefit plan must be paid in the form of periodic annuity payments for the employee's
life (or the joint lives of the employee and beneficiary) or over a period certain that does
not exceed the maximum length of the period certain determined in accordance with A-3
of this section. The interval between payments for the annuity must be uniform over the
entire distribution period and must not exceed one year. Once payments have
commenced over a period, the period may only be changed in accordance with A-13 of
this section. Life (or joint and survivor) annuity payments must satisfy the minimum
distribution incidental benefit requirements of A-2 of this section. Except as otherwise
provided in this section (such as permitted increases described in A-14 of this section),
all payments (whether paid over an employee's life, joint lives, or a period certain) also
must be nonincreasing.
(b) Life annuity with period certain. The annuity may be a life annuity (or joint
and survivor annuity) with a period certain if the life (or lives, if applicable) and period
certain each meet the requirements of paragraph (a) of this A-1. For purposes of this
section, if distributions are permitted to be made over the lives of the employee and the
designated beneficiary, references to a life annuity include a joint and survivor annuity.
(c) Annuity commencement. (1) Annuity payments must commence on or before
the employee's required beginning date (within the meaning of A-2 of §1.401 (a)(9)-2).
20
The first payment, which must be m a d e on or before the employee's required beginning
date, must be the payment which is required for one payment interval. The second
payment need not be made until the end of the next payment interval even if that
payment interval ends in the next calendar year. Similarly, in the case of distributions
commencing after death in accordance with section 401(a)(9)(B)(iii) and (iv), the first
payment, which must be made on or before the date determined under A-3(a) or (b)
(whichever is applicable) of §1.401(a)(9)-3, must be the payment which is required for
one payment interval. Payment intervals are the periods for which payments are
received, e.g., bimonthly, monthly, semi-annually, or annually. All benefit accruals as of
the last day of the first distribution calendar year must be included in the calculation of
the amount of annuity payments for payment intervals ending on or after the employee's
required beginning date.
(2) This paragraph (c) is illustrated by the following example:
Example. A defined benefit plan (Plan X) provides monthly annuity payments of
$500 for the life of unmarried participants with a 10-year period certain. A n unmarried,
retired participant (A) in Plan X attains age 701/4 in 2005. In order to meet the
requirements of this paragraph, the first monthly payment of $500 must be m a d e on
behalf of A on or before April 1, 2006, and the payments must continue to be m a d e in
monthly payments of $500 thereafter for the life and 10-year period certain.
(d) Single sum distributions. In the case of a single sum distribution of an
employee's entire accrued benefit during a distribution calendar year, the amount that is
the required minimum distribution for the distribution calendar year (and thus not eligible
for rollover under section 402(c)) is determined using either the rule in paragraph (d)(1)
or the rule in paragraph (d)(2) of this A-1.
(1) The portion of the single sum distribution that is a required minimum
21
distribution is determined by treating the single s u m distribution as a distribution from an
individual account plan and treating the amount of the single sum distribution as the
employee's account balance as of the end of the relevant valuation calendar year. If the
single sum distribution is being made in the calendar year containing the required
beginning date and the required minimum distribution for the employee's first
distribution calendar year has not been distributed, the portion of the single sum
distribution that represents the required minimum distribution for the employee's first
and second distribution calendar years is not eligible for rollover.
(2) The portion of the single sum distribution that is a required minimum
distribution is permitted to be determined by expressing the employee's benefit as an
annuity that would satisfy this section with an annuity starting date as of the first day of
the distribution calendar year for which the required minimum distribution is being
determined, and treating one year of annuity payments as the required minimum
distribution for that year, and not eligible for rollover. If the single sum distribution is
being made in the calendar year containing the required beginning date and the
required minimum distribution for the employee's first distribution calendar year has not
been made, the benefit must be expressed as an annuity with an annuity starting date
as of the first day of the first distribution calendar year and the payments for the first two
distribution calendar years would be treated as required minimum distributions, and not
eligible for rollover.
(e) Death benefits. The rule in paragraph (a) of this A-1, prohibiting increasing
payments under an annuity applies to payments made upon the death of an employee.
22
However, for purposes of this section, an ancillary death benefit described in this
paragraph (e) may be disregarded in applying that rule. Such an ancillary death benefit
is excluded in determining an employee's entire interest and the rules prohibiting
increasing payments do not apply to such an ancillary death benefit. A death benefit
with respect to an employee's benefit is an ancillary death benefit for purposes of this A1 if(1) It is not paid as part of the employee's accrued benefit or under any optional
form of the employee's benefit; and
(2) The death benefit, together with any other potential payments with respect to
the employee's benefit that may be provided to a survivor, satisfy the incidental benefit
requirement of §1.401 -1 (b)(1 )(i).
(f) Additional guidance. Additional guidance regarding how distributions under a
defined benefit plan must be paid in order to satisfy section 401(a)(9) may be issued by
the Commissioner in revenue rulings, notices, or other guidance published in the
Internal Revenue Bulletin. See §601.601(d)(2)(ii)(b) of this chapter.
Q-2. How must distributions in the form of a life (or joint and survivor) annuity be
made in order to satisfy the minimum distribution incidental benefit (MDIB) requirement
of section 401(a)(9)(G) and the distribution component of the incidental benefit
requirement of §1.401-1 (b)(1 )(i)?
A-2. (a) Life annuity for employee. If the employee's benefit is paid in the form
of a life annuity for the life of the employee satisfying section 401 (a)(9) without regard to
the MDIB requirement, the MDIB requirement of section 401(a)(9)(G) will be satisfied.
23
(b) Joint and survivor annuity, spouse beneficiary. If the employee's sole
beneficiary, as of the annuity starting date for annuity payments, is the employee's
spouse and the distributions satisfy section 401(a)(9) without regard to the MDIB
requirement, the distributions to the employee will be deemed to satisfy the MDIB
requirement of section 401 (a)(9)(G). For example, if an employee's benefit is being
distributed in the form of a joint and survivor annuity for the lives of the employee and
the employee's spouse and the spouse is the sole beneficiary of the employee, the
amount of the periodic payment payable to the spouse would not violate the MDIB
requirement if it was 100 percent of the annuity payment payable to the employee,
regardless of the difference in the ages between the employee and the employee's
spouse.
(c) Joint and survivor annuity, nonspouse beneficiarv-d) Explanation of rule. If
distributions commence under a distribution option that is in the form of a joint and
survivor annuity for the joint lives of the employee and a beneficiary other than the
employee's spouse, the minimum distribution incidental benefit requirement will not be
satisfied as of the date distributions commence unless under the distribution option, the
annuity payments to be made on and after the employee's required beginning date will
satisfy the conditions of this paragraph (c). The periodic annuity payment payable to
the survivor must not at any time on and after the employee's required beginning date
exceed the applicable percentage of the annuity payment payable to the employee
using the table in paragraph (c)(2) of this A-2. The applicable percentage is based on
the adjusted employee/beneficiary age difference. The adjusted employee/beneficiary
24
age difference is determined by first calculating the excess of the age of the employee
over the age of the beneficiary based on their ages on their birthdays in a calendar year.
Then, if the employee is younger than age 70, the age difference determined in the
previous sentence is reduced by the number of years that the employee is younger than
age 70 on the employee's birthday in the calendar year that contains the annuity
starting date. In the case of an annuity that provides for increasing payments, the
requirement of this paragraph (c) will not be violated merely because benefit payments
to the beneficiary increase, provided the increase is determined in the same manner for
the employee and the beneficiary.
(2) Table.
Adjusted employee/beneficiary age difference
10 years or less
11
12
13
14
Applicable percentage
100%
96%
93%
90%
87%
15
16
17
18
19
84%
82%
79%
77%
75%
20
21
22
23
24
73%
72%
70%
68%
67%
25
26
27
28
29
66%
64%
63%
62%
61%
25
30
31
32
33
34
60%
59%
59%
58%
57%
35
36
37
38
39
56%
56%
55%
55%
54%
40
41
42
43
44 and greater
54%
53%
53%
53%
52%
(3) Example. This paragraph (c) is illustrated by the following example:
Example. Distributions commence on January 1, 2003 to an employee (Z), born
March 1, 1937, after retirement at age 65. Z's daughter (Y), born February 5, 1967, is
Z's beneficiary. The distributions are in the form of a joint and survivor annuity for the
lives of Z and Y with payments of $500 a month to Z and upon Z's death of $500 a
month to Y, i.e., the projected monthly payment to Y is 100 percent of the monthly
amount payable to Z. Accordingly, under A-10 of this section, compliance with the rules
of this section is determined as of the annuity starting date. The adjusted
employee/beneficiary age difference is calculated by taking the excess of the
employee's age over the beneficiary's age and subtracting the number of years the
employee is younger than age 70 . In this case, Z is 30 years older than Y and is
commencing benefit 5 years before attaining age 70 so the adjusted
employee/beneficiary age difference is 25 years. Under the table in paragraph (c)(2) of
this A-2, the applicable percentage for a 25-year adjusted employee/beneficiary age
difference is 66 percent. A s of January 1, 2003 (the annuity starting date) the plan does
not satisfy the M D I B requirement because, as of such date, the distribution option
provides that, as of Z's required beginning date, the monthly payment to Y upon Z's
death will exceed 66 percent of Z's monthly payment.
(d) Period certain and annuity features. If a distribution form includes a period
certain, the amount of the annuity payments payable to the beneficiary need not be
reduced during the period certain, but in the case of a joint and survivor annuity with a
26
period certain, the amount of the annuity payments payable to the beneficiary must
satisfy paragraph (c) of this A-2 after the expiration of the period certain.
(e) Deemed satisfaction of incidental benefit rule. Except in the case of
distributions with respect to an employee's benefit that include an ancillary death benefit
described in paragraph A-1(e) of this section, to the extent the incidental benefit
requirement of §1.401-1(b)(1)(i) requires a distribution, that requirement is deemed to
be satisfied if distributions satisfy the minimum distribution incidental benefit
requirement of this A-2. If the employee's benefits include an ancillary death benefit
described in paragraph A-1(e) of this section, the benefits (including the ancillary death
benefit) must be distributed in accordance with the incidental benefit requirement
described in §1.401-1 (b)(1 )(i) and the benefits (excluding the ancillary death benefit)
must also satisfy the minimum distribution incidental benefit requirement of this A-2.
Q-3. How long is a period certain under a defined benefit plan permitted to
extend?
A-3. (a) Distributions commencing during the employee's life. The period
certain for any annuity distributions commencing during the life of the employee with an
annuity starting date on or after the employee's required beginning date generally is not
permitted to exceed the applicable distribution period for the employee (determined in
accordance with the Uniform Lifetime Table in A-2 of §1.401 (a)(9)-9) for the calendar
year that contains the annuity starting date. See A-10 of this section for the rule for
annuity payments with an annuity starting date before the required beginning date.
However, if the employee's sole beneficiary is the employee's spouse, the period
27
certain is permitted to be as long as the joint life and last survivor expectancy of the
employee and the employee's spouse, if longer than the applicable distribution period
for the employee, provided the period certain is not provided in conjunction with a life
annuity under A-1 (b) of this section.
(b) Distributions commencing after the employee's death. (1) If annuity
distributions commence after the death of the employee under the life expectancy rule
(under section 401(a)(9)(B)(iii) or (iv)), the period certain for any distributions
commencing after death cannot exceed the applicable distribution period determined
under A-5(b) of §1.401 (a)(9)-5 for the distribution calendar year that contains the
annuity starting date.
(2) If the annuity starting date is in a calendar year before the first distribution
calendar year, the period certain may not exceed the life expectancy of the designated
beneficiary using the beneficiary's age in the year that contains the annuity starting
date.
Q-4. Will a plan fail to satisfy section 401(a)(9) merely because distributions are
made from an annuity contract which is purchased from an insurance company?
A-4. A plan will not fail to satisfy section 401(a)(9) merely because distributions
are made from an annuity contract which is purchased with the employee's benefit by
the plan from an insurance company, as long as the payments satisfy the requirements
of this section. If the annuity contract is purchased after the required beginning date,
the first payment interval must begin on or before the purchase date and the payment
required for one payment interval must be made no later than the end of such payment
28
interval. If the payments actually m a d e under the annuity contract do not meet the
requirements of section 401 (a)(9), the plan fails to satisfy section 401 (a)(9). See also
A-14 of this section permitting certain increases under annuity contracts.
Q-5. In the case of annuity distributions under a defined benefit plan, how must
additional benefits that accrue after the employee's first distribution calendar year be
distributed in order to satisfy section 401(a)(9)?
A-5. (a) In the case of annuity distributions under a defined benefit plan, if any
additional benefits accrue in a calendar year after the employee's first distribution
calendar year, distribution of the amount that accrues in the calendar year must
commence in accordance with A-1 of this section beginning with the first payment
interval ending in the calendar year immediately following the calendar year in which
such amount accrues.
(b) A plan will not fail to satisfy section 401(a)(9) merely because there is an
administrative delay in the commencement of the distribution of the additional benefits
accrued in a calendar year, provided that the actual payment of such amount
commences as soon as practicable. However, payment must commence no later than
the end of the first calendar year following the calendar year in which the additional
benefit accrues, and the total amount paid during such first calendar year must be no
less than the total amount that was required to be paid during that year under A-5(a) of
this section.
Q-6. If a portion of an employee's benefit is not vested as of December 31 of a
distribution calendar year, how is the determination of the required minimum distribution
29
affected?
A-6. In the case of annuity distributions from a defined benefit plan, if any portion
of the employee's benefit is not vested as of December 31 of a distribution calendar
year, the portion that is not vested as of such date will be treated as not having accrued
for purposes of determining the required minimum distribution for that distribution
calendar year. When an additional portion of the employee's benefit becomes vested,
such portion will be treated as an additional accrual. See A-5 of this section for the
rules for distributing benefits which accrue under a defined benefit plan after the
employee's first distribution calendar year.
Q-7. If an employee (other than a 5-percent owner) retires after the calendar
year in which the employee attains age 70/4, for what period must the employee's
accrued benefit under a defined benefit plan be actuarially increased?
A-7. (a) Actuarial increase starting date. If an employee (other than a 5-percent
owner) retires after the calendar year in which the employee attains age 701/2, in order
to satisfy section 401(a)(9)(C)(iii), the employee's accrued benefit under a defined
benefit plan must be actuarially increased to take into account any period after age 701/4
in which the employee was not receiving any benefits under the plan. The actuarial
increase required to satisfy section 401(a)(9)(C)(iii) must be provided for the period
starting on the April 1 following the calendar year in which the employee attains age
701/2, or January 1, 1997, if later.
(b) Actuarial increase ending date. The period for which the actuarial increase
must be provided ends on the date on which benefits commence after retirement in an
30
amount sufficient to satisfy section 401(a)(9).
(c) Nonapplication to plan providing s a m e reguired beginning date for all
employees. If, as permitted under A-2(e) of §1.401 (a)(9)-2, a plan provides that the
required beginning date for purposes of section 401(a)(9) for all employees is April 1 of
the calendar year following the calendar year in which the employee attains age 701/4
(regardless of whether the employee is a 5-percent owner) and the plan m a k e s
distributions in an amount sufficient to satisfy section 401(a)(9) using that required
beginning date, no actuarial increase is required under section 401(a)(9)(C)(iii).
(d) Nonapplication to governmental and church plans. The actuarial increase
required under this A-7 does not apply to a governmental plan (within the meaning of
section 414(d)) or a church plan. For purposes of this paragraph, the term church plan
m e a n s a plan maintained by a church for church employees, and the term church
m e a n s any church (as defined in section 3121(w)(3)(A)) or qualified church-controlled
organization (as defined in section 3121(w)(3)(B)).
Q-8. W h a t amount of actuarial increase is required under section
401(a)(9)(C)(iii)?
A-8. In order to satisfy section 401(a)(9)(C)(iii), the retirement benefits payable
with respect to an employee as of the end of the period for actuarial increases
(described in A-7 of this section) must be no less than: the actuarial equivalent of the
employee's retirement benefits that would have been payable as of the date the
actuarial increase must c o m m e n c e under paragraph (a) of A-7 of this section if benefits
had c o m m e n c e d on that date; plus the actuarial equivalent of any additional benefits
31
accrued after that date; reduced by the actuarial equivalent of any distributions m a d e
with respect to the employee's retirement benefits after that date. Actuarial equivalence
is determined using the plan's assumptions for determining actuarial equivalence for
purposes of satisfying section 411.
Q-9. How does the actuarial increase required under section 401(a)(9)(C)(iii)
relate to the actuarial increase required under section 411?
A-9. In order for any of an employee's accrued benefit to be nonforfeitable as
required under section 411, a defined benefit plan must make an actuarial adjustment to
an accrued benefit, the payment of which is deferred past normal retirement age. The
only exception to this rule is that generally no actuarial adjustment is required to reflect
the period during which a benefit is suspended as permitted under section 203(a)(3)(B)
of the Employee Retirement Income Security Act of 1974 (ERISA) (88 Stat. 829). The
actuarial increase required under section 401(a)(9)(C)(iii) for the period described in A-7
of this section is generally the same as, and not in addition to, the actuarial increase
required for the same period under section 411 to reflect any delay in the payment of
retirement benefits after normal retirement age. However, unlike the actuarial increase
required under section 411, the actuarial increase required under section
401(a)(9)(C)(iii) must be provided even during any period during which an employee's
benefit has been suspended in accordance with ERISA section 203(a)(3)(B).
Q-10. What rule applies if distributions commence to an employee on a date
before the employee's required beginning date over a period permitted under section
401(a)(9)(A)(ii) and the distribution form is an annuity under which distributions are
32
m a d e in accordance with the provisions of A-1 of this section?
A-10. (a) General rule. If distributions commence to an employee on a date
before the employee's required beginning date over a period permitted under section
401(a)(9)(A)(ii) and the distribution form is an annuity under which distributions are
made in accordance with the provisions of A-1 of this section, the annuity starting date
will be treated as the required beginning date for purposes of applying the rules of this
section and §1.401(a)(9)-2. Thus, for example, the designated beneficiary distributions
will be determined as of the annuity starting date. Similarly, if the employee dies after
the annuity starting date but before the required beginning date determined under A-2 of
§1.401(a)(9)-2, after the employee's death, the remaining portion of the employee's
interest must continue to be distributed in accordance with this section over the
remaining period over which distributions commenced. The rules in §1.401(a)(9)-3 and
section 401(a)(9)(B)(ii) or (iii) and (iv) do not apply.
(b) Period certain. If, as of the employee's birthday in the year that contains the
annuity starting date, the age of the employee is under 70, the following rule applies in
applying the rule in paragraph (a) of A-3 of this section. The applicable distribution
period for the employee is the distribution period for age 70, determined in accordance
with the Uniform Lifetime Table in A-2 of §1.401 (a)(9)-9, plus the excess of 70 over the
age of the employee as of the employee's birthday in the year that contains the annuity
starting date.
(c) Adjustment to emplovee/beneficiarv age difference. See A-2(c)(1) of this
section for the determination of the adjusted employee/beneficiary age difference in the
33
case of an employee whose age on the annuity starting date is less than 70.
Q-11. What rule applies if distributions commence to the surviving spouse of an
employee over a period permitted under section 401(a)(9)(B)(iii)(ll) before the date on
which distributions are required to commence and the distribution form is an annuity
under which distributions are made as of the date distributions commence in
accordance with the provisions of A-1 of this section.
A-11. If distributions commence to the surviving spouse of an employee over a
period permitted under section 401(a)(9)(B)(iii)(ll) before the date on which distributions
are required to commence and the distribution form is an annuity under which
distributions are made as of the date distributions commence in accordance with the
provisions of A-1 of this section, distributions will be considered to have begun on the
actual commencement date for purposes of section 401 (a)(9)(B)(iv)(ll). Consequently,
in such case, A-5 of §1.401 (a)(9)-3 and section 401(a)(9)(B)(ii) and (iii) will not apply
upon the death of the surviving spouse as though the surviving spouse were the
employee. Instead, the annuity distributions must continue to be made, in accordance
with the provisions of A-1 of this section, over the remaining period over which
distributions commenced.
Q-12. In the case of an annuity contract under an individual account plan that has
not yet been annuitized, how is section 401(a)(9) satisfied with respect to the
employee's or beneficiary's entire interest under the annuity contract for the period prior
o the date annuity payments so commence?
A-12. (a) General rule. Prior to the date that an annuity contract under an
34
individual account plan is annuitized, the interest of an employee or beneficiary under
that contract is treated as an individual account for purposes of section 401(a)(9). Thus,
the required minimum distribution for any year with respect to that interest is determined
under §1.401 (a)(9)-5 rather than this section. See A-1 of §1.401 (a)(9)-5 for rules
relating to the satisfaction of section 401(a)(9) in the year that annuity payments
commence and A-2(a)(3) of §1.401 (a)(9)-8.
(b) Entire interest. For purposes of applying the rules in §1.401(a)(9)-5, the
entire interest under the annuity contract as of December 31 of the relevant valuation
calendar year is treated as the account balance for the valuation calendar year
described in A-3 of §1.401(a)(9)-5. The entire interest under an annuity contract is the
dollar amount credited to the employee or beneficiary under the contract plus the
actuarial present value of any additional benefits (such as survivor benefits in excess of
the dollar amount credited to the employee or beneficiary) that will be provided under
the contract. However, paragraph (c) of this A-12 describes certain additional benefits
that may be disregarded in determining the employee's entire interest under the annuity
contract. The actuarial present value of any additional benefits described under this A12 is to be determined using reasonable actuarial assumptions, including reasonable
assumptions as to future distributions, and without regard to an individual's health.
(c) Exclusions. (1) The actuarial present value of any additional benefits
)rovided under an annuity contract described in paragraph (b) of this A-12 may be
iisregarded if the sum of the dollar amount credited to the employee or beneficiary
inder the contract and the actuarial present value of the additional benefits is no more
35
than 120 percent of the dollar amount credited to the employee or beneficiary under the
contract and the contract provides only for the following additional benefits:
(i) Additional benefits that, in the case of a distribution, are reduced by an amount
sufficient to ensure that the ratio of such sum to the dollar amount credited does not
increase as a result of the distribution, and
(ii) An additional benefit that is the right to receive a final payment upon death
that does not exceed the excess of the premiums paid less the amount of prior
distributions.
(2) If the only additional benefit provided under the contract is the additional
benefit described in paragraph (c)(1)(ii) of this A-14, the additional benefit may be
disregarded regardless of its value in relation to the dollar amount credited to the
employee or beneficiary under the contract.
(3) The Commissioner in revenue rulings, notices, or other guidance published
in the Internal Revenue Bulletin (see §601.601 (d)(2) of this chapter) may provide
additional guidance on additional benefits that may be disregarded.
(d) Examples. The following examples, which use a 5 percent interest rate and
the Mortality Table provided in Rev. Rul. 2001-62 (2001-2 C.B. 632), illustrate the
application of the rules in this A-12:
Example 1. (i) G is the owner of a variable annuity contract (Contract S) under
an individual account plan which has not been annuitized. Contract S provides a death
Denefit until the end of the calendar year in which the owner attains the age of 84 equal
o the greater of the current Contract S notional account value (dollar amount credited to
3 under the contract) and the largest notional account value at any previous policy
inniversary reduced proportionally for subsequent partial distributions (High Water
lark). Contract S provides a death benefit in calendar years after the calendar year in
tiich the owner attains age 84 equal to the current notional account value. Contract S
36
provides that assets within the contract m a y be invested in a Fixed Account at a
guaranteed rate of 2 percent. Contract S provides no other additional benefits.
(ii) At the end of 2008, when G has an attained age of 78 and 9 months the
notional account value of Contract S (after the distribution for 2008 of 4.93% of the
notional account value as of December 31, 2007) is $550,000, and the High Water
Mark, before adjustment for any withdrawals from Contract S in 2008 is $1,000,000.
Thus, Contract S will provide additional benefits (i.e. the death benefits in excess of the
notional account value) through 2014, the year S turns 84. The actuarial present value
of these additional benefits at the end of 2008 is determined to be $84,300 (15 percent
of the notional account value). In making this determination, the following assumptions
are made: on the average, deaths occur mid-year; the investment return on his notional
account value is 2 percent per annum; and minimum required distributions (determined
without regard to additional benefits under the Contract S) are m a d e at the end of each
year. The following table summarizes the actuarial methodology used in determining
the actuarial present value of the additional benefit.
37
Year
Death
Benefit
During
Year
2008
2009
2010
2011
2012
2013
2014
$1,000,000
950.7391
$
901,983
$
853,749
$
806,053
$
758,916
$
712,356
$
Year
2008
2009
2010
2011
2012
2013
2014
End-of-Year
Notional
Account
Before
Withdrawal
Average
Notional
Account
Withdrawal
at
End of Year
$555,5003
$538,123
$520,109
$501,454
$482,159
$462,222
$28,2054
$28,492
$28,769
$29,034
$29,287
$29,525
Survivorship Interest
to Start
Discount
of Year
to End
of 2008
Mortality
Rate
During
Year
Discounted
Additional
Benefits
Within Year
.97590
.929436
.88517
.84302
.80288
.76464
.044265
.04946
.05519
.06146
.06788
.07477
1.00000
.95574
.908478
.85833
.80558
.75090
$561,0002
$543,451
$525,258
$506,419
$486,933
$466,798
End-of-Year
Notional
Account
After
Withdrawal
$550,000
$532,795
$514,959
$496,490
$477,385
$457,645
$437,273
$17,070
$15,9877
$14,807
$13,546
$12,150
$10,739
$84,300
1 $1,000,000 death benefit reduced 4.93 percent for withdrawal during 2008.
2. Notional account value at end of prior year (after distribution) increased by 2 percent return for year.
3 Average of $550,000 notional account value at end of prior year (after distribution) and $561,000 notional account
value at end of current year (before distribution).
4. December 31, 2008 notional account (before distribution) divided by uniform lifetime table age 79 factor of 19.5.
5 One-quarter age 78 rate plus three-quarters age 79 rate.
6 Five percent discounted 18 months (1.05A(-1.5)).
7 Blended age 79/age 80 mortality rate (.04946) multiplied by the $363,860 excess of death benefit over the average
notional account value (901,983 less 538,123) multiplied by .95574 probability of survivorship to the start of 2010
multiplied by 18 month interest discount of .92943.
8 Survivorship to start of preceding year (.95574) multiplied by probability of survivorship during prior year (1 .04946).
(iii) Because Contract S provides that, in the case of a distribution, the value of
the additional death benefit (which is the only additional benefit available under the
contract) is reduced by an amount that is at least proportional to the reduction in the
notional account value and, at age 78 and 9 months, the sum of the notional account
38
value (dollar amount credited to the employee under the contract) and the actuarial
present value of the additional death benefit is no more than 120 percent of the notional
account value, the exclusion under paragraph (c)(2) of this A-12 is applicable for 2009.
Therefore, for purposes of applying the rules in §1,401(a)(9)-5, the entire interest under
Contract S m a y be determined as the notional account value (i.e. without regard to the
additional death benefit).
Example 2. (i) The facts are the same as in Example 1 except that the notional
account value is $450,000 at the end of 2008. In this instance, the actuarial present
value of the death benefit in excess of the notional account value in 2008 is determined
to be $108,669 (24 percent of the notional account value). The following table
summarizes the actuarial methodology used in determining the actuarial present value
of the additional benefit.
Year
Death
Benefit
During
Year
2008 $1,000,000
2009 $ 950,739
2010 $ 901,983
2011 $ 853,749
2012 $ 806,053
2013 $ 758,916
2014 $ 712,356
Year
2008
2009
2010
2011
2012
2013
2014
Survivorship
to Start
of year
1.00000
.95574
.90847
.85833
.80558
.75090
End-of-Year
Notional
Account
Before
Withdrawal
Average
Notional
Account
$459,000
$454,500
$440,282
$444,642
$429,757
$425,543
$410,281
$414,343
$394,494
$398,399
$378,181
$381,926
Interest
Discount
to end
of 2008
.97590
.92943
.88517
.84302
.80288
.76464
Mortality
Rate
During
Year
.04426
.04946
.05519
.06146
.06788
.07477
Withdrawal
at
End of Year
$23,077
$23,311
$23,538
$23,755
$23,962
$24,157
Discounted
Additional
Benefits
Within Year
$21,432
$20,286
$19,004
$17,601
$15,999
$14,347
$108,669
39
End-of-Year
Notional
Account
After
Withdrawal
$450,000
$435,923
$421,330
$406,219
$390,588
$374,437
$357,768
(ii) Because the s u m of the notional account balance and the actuarial present
value of the additional death benefit is more than 120 percent of the notional account
value, the exclusion under paragraph (b)(1) of this A-12 does not apply for 2009.
Therefore, for purposes of applying the rules in §1.401(a)(9)-5, the entire interest under
Contract S must include the actuarial present value of the additional death benefit.
Q-13: When can an annuity payment period be changed?
A-13. (a) In general. An annuity payment period may be changed in
accordance with the provisions set forth in paragraph (b) of this A-13 or in association
with an annuity payment increase described in A-14 of this section.
(b) Reannuitization. If, in a stream of annuity payments that otherwise satisfies
section 401(a)(9), the annuity payment period is changed and the annuity payments are
modified in association with that change, this modification will not cause the distributions
to fail to satisfy section 401(a)(9) provided the conditions set forth in paragraph (c) of
this A-13 are satisfied, and either -(1) The modification occurs at the time that the employee retires or in connection
with a plan termination;
(2) The annuity payments prior to modification are annuity payments paid over a
period certain without life contingencies; or
(3) The annuity payments after modification are paid under a qualified joint and
survivor annuity over the joint lives of the employee and a designated beneficiary, the
employee's spouse is the sole designated beneficiary, and the modification occurs in
connection with the employee becoming married to such spouse.
(c) Conditions. In order to modify a stream of annuity payments in accordance
with paragraph (b) of this A-13, the following conditions must be satisfied 40
(1) The future payments under the modified stream satisfy section 401(a)(9) and
this section (determined by treating the date of the change as a new annuity starting
date and the actuarial present value of the remaining payments prior to modification as
the entire interest of the participant);
(2) For purposes of sections 415 and 417, the modification is treated as a new
annuity starting date;
(3) After taking into account the modification, the annuity stream satisfies section
415 (determined at the original annuity starting date, using the interest rates and
mortality tables applicable to such date); and
(4) The end point of the period certain, if any, for any modified payment period is
not later than the end point available under section 401(a)(9) to the employee at the
original annuity starting date.
(d) Examples. For the following examples in this A-13, assume that the
Applicable Interest Rate throughout the period from 2005 through 2008 is 5 percent and
throughout 2009 is 4 percent, the Applicable Mortality Table throughout the period from
2005 to 2009 is the table provided in Rev. Rul. 2001-62 (2001-C.B. 632) and the section
415 limit in 2005 at age 70 for a straight life annuity is $255,344:
Example 1. (i) A participant (D), who has 10 years of participation in a frozen
defined benefit plan (Plan W ) , attains age 70>2 in 2005. D is not retired and elects to
receive distributions from Plan W in the form of a straight life (i.e. level payment) annuity
with annual payments of $240,000 per year beginning in 2005 at a date w h e n D has an
attained age of 70. Plan W offers non-retired employees in pay status the opportunity to
modify their annuity payments due to an associated change in the payment period at
retirement. Plan W treats the date of the change in payment period as a n e w annuity
starting date for the purposes of sections 415 and 417. Thus, for example, the plan
provides a n e w qualified and joint survivor annuity election and obtains spousal
consent.
41
(ii) Plan W determines modifications of annuity payment amounts at retirement
such that the present value of future n e w annuity payment amounts (taking into account
the n e w associated payment period) is actuarially equivalent to the present value of
future pre-modification annuity payments (taking into account the pre-modification
annuity payment period). Actuarial equivalency for this purpose is determined using the
Applicable Interest Rate and the Applicable Mortality Table as of the date of
modification.
(iii) D retires in 2009 at the age of 74 and, after receiving four annual payments of
$240,000, elects to receive his remaining distributions from Plan W in the form of an
immediate final lump s u m payment (calculated at 4 percent interest) of $2,399,809.
(iv) Because payment of retirement benefits in the form of an immediate final
lump s u m payment satisfies (in terms of form) section 401(a)(9), the condition under
paragraph (c)(1) of this A-13 is met.
(v) Because Plan W treats a modification of an annuity payment stream at
retirement as a n e w annuity starting date for purposes of sections 415 and 417, the
condition under paragraph (c)(2) of this A-13 is met.
(vi) After taking into account the modification, the annuity stream determined as
of the original annuity starting date consists of annual payments beginning at age 70 of
$240,000, $240,000, $240,000, $240,000, and $2,399,809. This benefit stream is
actuarially equivalent to a straight life annuity at age 70 of $250,182, an amount less
than the section 415 limit determined at the original annuity starting date, using the
interest and mortality rates applicable to such date. Thus, the condition under
paragraph (c)(3) of this A-13 is met.
(vii) Thus, because a stream of annuity payments in the form of a straight life
annuity satisfies section 401(a)(9), and because each of the conditions under paragraph
(c) of this A-13 are satisfied, the modification of annuity payments to D described in this
example meets the requirements under of this A-13.
Example 2. The facts are the same as in Example 1 except that the straight life
annuity payments are paid at a rate of $250,000 per year and after D retires the lump
sum payment at age 75 is $2,499,801. Thus, after taking into account the modification,
the annuity stream determined as of the original annuity starting date consists of annual
payments beginning at age 70 of $250,000, $250,000, $250,000, $250,000, and
$2,499,801. This benefit stream is actuarially equivalent to a straight life annuity at age
70 of $260,606, an amount greater than the section 415 limit determined at the original
annuity starting date, using the interest and mortality rates applicable to such date.
Thus, the lump s u m payment to D fails to satisfy the condition under paragraph (c)(3) of
this A-13. Therefore, the lump s u m payment to D fails to meet the requirements of this
42
A-13 and thus fails to satisfy the requirements of section 401(a)(9).
Example 3. (i) A participant (E), who has 10 years of participation in a frozen
defined benefit plan (Plan X), attains age 701/2 and retires in 2005 at a date w h e n his
attained age is 70. E elects to receive annual distributions from Plan X in the form of a
27 year period certain annuity (i.e., a 27 year annuity payment period without a life
contingency) paid at a rate of $37,000 per year beginning in 2005 with future payments
increasing at a rate of 4 percent per year (i.e., the 2006 payment will be $38,480, the
2007 payment will be $40,019 and so on). Plan X offers participants in pay status
whose annuity payments are in the form of a term-certain annuity the opportunity to
modify their payment period at any time and treats such modifications as a n e w annuity
starting date for the purposes of sections 415 and 417. Thus, for example, the plan
provides a n e w qualified and joint survivor annuity election and obtains spousal consent
(ii) Plan X determines modifications of annuity payment amounts such that the
present value of future n e w annuity payment amounts (taking into account the n e w
associated payment period) is actuarially equivalent to the present value of future premodification annuity payments (taking into account the pre-modification annuity
payment period). Actuarial equivalency for this purpose is determined using 5 percent
and the Applicable Mortality Table as of the date of modification.
(iii) In 2008, E, after receiving annual payments of $37,000, $38,480, and
$40,019, elects to receive his remaining distributions from Plan W in the form of a
straight life annuity paid with annual payments of $92,133 per year.
(iv) Because payment of retirement benefits in the form of a straight life annuity
satisfies (in terms of form) section 401(a)(9), the condition under paragraph (c)(1) of this
A-13ismet.
(v) Because Plan X treats a modification of an annuity payment stream at
retirement as a n e w annuity starting date for purposes of sections 415 and 417, the
condition under paragraph (c)(2) of this A-13 is met.
(vi) After taking into account the modification, the annuity stream determined as
of the original annuity starting date consists of annual payments beginning at age 70 of
$37,000, $38,480, $40,019, and a straight life annuity beginning at age 73 of $92,133.
This benefit stream is equivalent to a straight life annuity at age 70 of $82,539, an
amount less than the section 415 limit determined at the original annuity starting date,
using the interest and mortality rates applicable to such date. Thus, the condition under
paragraph (c)(3) of this A-13 is met.
(vii) Thus, because a stream of annuity payments in the form of a straight life
annuity satisfies section 401(a)(9), and because each of the conditions under paragraph
(c) of this A-13 are satisfied, the modification of annuity payments to E described in this
43
example meets the requirements of this A-13.
Q-14. Are annuity payments permitted to increase?
A-14. (a) General rules. Except as otherwise provided in this section, all annuity
payments (whether paid over an employee's life, joint lives, or a period certain) must be
nonincreasing or increase only in accordance with one of more of the following -(1) With an annual percentage increase that does not exceed the percentage
increase in an eligible cost-of-living index as defined in paragraph (b) of this A-14 for a
12-month period ending in the year during which the increase occurs or the prior year;
(2) With a percentage increase that occurs at specified times (e.g., at specified
ages) and does not exceed the cumulative total of annual percentage increases in an
eligible cost-of-living index as defined in paragraph (b) of this A-14 since the annuity
starting date, or if later, the date of the most recent percentage increase. However, in
cases providing such a cumulative increase, an actuarial increase may not be provided
to reflect the fact that increases were not provided in the interim years;
(3) To the extent of the reduction in the amount of the employee's payments to
provide for a survivor benefit, but only if there is no longer a survivor benefit because
the beneficiary whose life was being used to determine the period described in section
401(a)(9)(A)(ii) over which payments were being made dies or is no longer the
employee's beneficiary pursuant to a qualified domestic relations order within the
meaning of section 414(p);
(4) To pay increased benefits that result from a plan amendment;
(5) To allow a beneficiary to convert the survivor portion of a joint and survivor
44
annuity into a single s u m distribution upon the employee's death; or
(6) To the extent increases are permitted in accordance with paragraph (c) or (d)
of this A-14.
(b) (1) For purposes of this A-14, an eligible cost-of-living index m e a n s an index
described in paragraphs (b)(2), (b)(3), or (b)(4) of this A-14.
(2) A consumer price index that is based on prices of all items (or all items
excluding food and energy) and issued by the Bureau of Labor Statistics, including an
index for a specific population (such as urban consumers or urban w a g e earners and
clerical workers) and an index for a geographic area or areas (such as a given
metropolitan area or state).
(3) A percentage adjustment based on a cost-of-living index described in
paragraph (b)(2) of this A-14, or a fixed percentage if less. In any year w h e n the costof-living index is lower than the fixed percentage, the fixed percentage m a y be treated
as an increase in an eligible cost-of-living index, provided it does not exceed the s u m of:
(i) The cost-of-living index for that year, and
(ii) The accumulated excess of the annual cost-of-living index from each prior
year over the fixed annual percentage used in that year (reduced by any amount
previously utilized under this paragraph (b)(3)(H)).
(4) A percentage adjustment based on the increase in compensation for the
position held by the employee at the time of retirement, and provided under either the
terms of a governmental plan within the meaning of section 414(d) or under the terms of
a nongovernmental plan as in effect on April 17, 2002.
45
(c) Additional permitted increases for annuity payments under annuity contracts
purchased from insurance companies. In the case of annuity payments paid from an
annuity contract purchased from an insurance company, if the total future expected
payments (determined in accordance with paragraph (e)(3) of this A-14) exceed the
total value being annuitized (within the meaning of paragraph (e)(1) of this A-14), the
payments under the annuity will not fail to satisfy the nonincreasing payment
requirement in A-1 (a) of this section merely because the payments are increased in
accordance with one or more of the following(1) By a constant percentage, applied not less frequently than annually;
(2) To provide a final payment upon the death of the employee that does not
exceed the excess of the total value being annuitized (within the meaning of paragraph
(e)(1) of this A-14) over the total of payments before the death of the employee;
(3) As a result of dividend payments or other payments that result from actuarial
gains (within the meaning of paragraph (e)(2) of this A-14), but only if actuarial gain is
measured no less frequently than annually and the resulting dividend payments or other
payments are either paid no later than the year following the year for which the actuarial
experience is measured or paid in the same form as the payment of the annuity over the
remaining period of the annuity (beginning no later than the year following the year for
which the actuarial experience is measured); and
(4) An acceleration of payments under the annuity (within the meaning of
paragraph (e)(4) of this A-14).
(d) Additional permitted increases for annuity payments from a qualified trust. In
46
the case of annuity payments paid under a defined benefit plan qualified under section
401(a) (other than annuity payments under an annuity contract purchased from an
insurance company that satisfy paragraph (c) of this section), the payments under the
annuity will not fail to satisfy the nonincreasing payment requirement in A-1 (a) of this
section merely because the payments are increased in accordance with one of the
following (1) By a constant percentage, applied not less frequently than annually, at a rate
that is less than 5 percent per year;
(2) To provide a final payment upon the death of the employee that does not
exceed the excess of the actuarial present value of the employee's accrued benefit
(within the meaning of section 411(a)(7)) calculated as the annuity starting date using
the applicable interest rate and the applicable mortality table under section 417(e) (or, if
greater, the total amount of employee contributions) over the total of payments before
the death of the employee; or
(3) A s a result of dividend payments or other payments that result from actuarial
gains (within the meaning of paragraph (e)(2) of this A-14), but only if (i) Actuarial gain is measured no less frequently than annually;
(ii) The resulting dividend payments or other payments are either paid no later
than the year following the year for which the actuarial experience is measured or paid
in the s a m e form as the payment of the annuity over the remaining period of the annuity
(beginning no later than the year following the year for which the actuarial experience is
measured);
47
(iii) The actuarial gain taken into account is limited to actuarial gain from
investment experience;
(iv) The assumed interest used to calculate such actuarial gains is not less than
3 percent; and
(v) The payments are not increasing by a constant percentage as described in
paragraph (d)(1) of this A-14.
(e) Definitions. For purposes of this A-14, the following definitions apply -(1) Total value being annuitized m e a n s (i) In the case of annuity payments under a section 403(a) annuity plan or under
a deferred annuity purchased by a section 401(a) trust, the value of the employee's
entire interest (within the meaning of A-12 of this section) being annuitized (valued as of
the date annuity payments commence);
(ii) In the case of annuity payments under an immediate annuity contract
purchased by a trust for a defined benefit plan qualified under section 401(a), the
amount of the premium used to purchase the contract; and
(iii) In the case of a defined contribution plan, the value of the employee's
account balance used to purchase an immediate annuity under the contract.
(2) Actuarial gain m e a n s the difference between an amount determined using
the actuarial assumptions (i.e., investment return, mortality, expense, and other similar
assumptions) used to calculate the initial payments before adjustment for any increases
and the amount determined under the actual experience with respect to those factors.
Actuarial gain also includes differences between the amount determined using actuarial
48
assumptions when an annuity w a s purchased or c o m m e n c e d and such amount
determined using actuarial assumptions used in calculating payments at the time the
actuarial gain is determined.
(3) Total future expected payments means the total future payments expected
to be made under the annuity contract as of the date of the determination, calculated
using the Single Life Table in A-1 of §1.401 (a)(9)-9 (or, if applicable, the Joint and Last
Survivor Table in A-3 of in §1.401 (a)(9)-9) for annuitants who are still alive, without
regard to any increases in annuity payments after the date of determination, and taking
into account any remaining period certain.
(4) Acceleration of payments means a shortening of the payment period with
respect to an annuity or a full or partial commutation of the future annuity payments. An
increase in the payment amount will be treated as an acceleration of payments in the
annuity only if the total future expected payments under the annuity (including the
amount of any payment made as a result of the acceleration) is decreased as a result of
the change in payment period.
(f) Examples. Paragraph (c) of this A-14 is illustrated by the following examples:
Example 1. Variable annuity. A retired participant (Z1) in defined contribution
plan X attains age 70 on March 5, 2005, and thus, attains age 701/2 in 2005. Z1 elects
to purchase annuity Contract Y1 from Insurance C o m p a n y W in 2005. Contract Y1 is a
single life annuity contract with a 10-year period certain. Contract Y1 provides for an
initial annual payment calculated with an assumed interest rate (AIR) of 3 percent.
Subsequent payments are determined by multiplying the prior year's payment by a
fraction the numerator of which is 1 plus the actual return on the separate account
assets underlying Contract Y1 since the preceding payment and the denominator of
which is 1 plus the AIR during that period. The value of Z1's account balance in Plan X
at the time of purchase is $105,000, and the purchase price of Contract Y1 is $105,000.
Contract Y1 provides Z1 with an initial payment of $7,200 at the time of purchase in
2005. The total future expected payments to Z1 under Contract Y1 are $122,400,
49
calculated as the initial payment of $7,200 multiplied by the age 70 life expectancy of 17
provided in the Single Life Table in A-1 of ' 1.401 (a)(9)-9. Because the total future
expected payments on the purchase date exceed the total value used to purchase
Contract Y1 and payments m a y only increase as a result of actuarial gain, with such
increases, beginning no later than the next year, paid in the s a m e form as the payment
of the annuity over the remaining period of the annuity, distributions received by Z1 from
Contract Y1 meet the requirements under paragraph (c)(3) of this A-14.
Example 2. Participating annuity. A retired participant (Z2) in defined
contribution plan X attains age 70 on M a y 1, 2005, and thus, attains age 701/2 in 2005.
Z2 elects to purchase annuity Contract Y 2 from Insurance C o m p a n y W in 2005.
Contract Y 2 is a participating single life annuity contract with a 10-year period certain.
Contract Y 2 provides for level annual payments with dividends paid in a lump s u m in the
year after the year for which the actuarial experience is measured or paid out levelly
beginning in the year after the year for which the actuarial gain is measured over the
remaining lifetime and period certain, i.e., the period certain ends at the s a m e time as
the original period certain. Dividends are determined annually by the Board of Directors
of C o m p a n y W based upon a comparison of actual actuarial experience to expected
actuarial experience in the past year. The value of Z2's account balance in Plan X at the
time of purchase is $265,000, and the purchase price of Contract Y 2 is $265,000.
Contract Y 2 provides Z 2 with an initial payment of $16,000 in 2005. The total future
expected payments to Z 2 under Contract Y 2 are calculated as the annual initial
payment of $16,000 multiplied by the age 70 life expectancy of 17 provided in the Single
Life Table in A-1 of -1.401 (a)(9)-9 for a total of $272,000. Because the total future
expected payments on the purchase date exceeds the total value used to purchase
Contract Y 2 and payments m a y only increase as a result of actuarial gain, with such
increases, beginning no later than the next year, paid in the s a m e form as the payment
of the annuity over the remaining period of the annuity, distributions received by Z 2 from
Contract Y 2 meet the requirements under paragraph (c)(3) of this A-14.
Example 3. Participating annuity with dividend accumulation. The facts are the
same as in Example 2 except that the annuity provides a dividend accumulation option
under which Z 2 m a y defer receipt of the dividends to a time selected by Z2. Because
the dividend accumulation option permits dividends to be paid later than the end of the
year following the year for which the actuarial experience is measured or as a stream of
payments that only increase as a result of actuarial gain, with such increases beginning
no later than the next year, paid in the s a m e form as the payment of the annuity over
the remaining period of the annuity in Example 2, the dividend accumulation option
does not meet the requirements of paragraph (c)(3) of this A-14. Neither does the
dividend accumulation option fit within any of the other increases described in
paragraph (c) of this A-14. Accordingly, the dividend accumulation option causes the
contract, and consequently any distributions from the contract, to fail to meet the
requirements of this A-14 and thus fail to satisfy the requirements of section 401(a)(9).
50
Example 4. Participating annuity with dividends used to purchase additional
death benefits. The facts are the s a m e as in Example 2 except that the annuity provides
an option under which actuarial gain under the contract is used to provide additional
death benefit protection for Z2. Because this option permits payments as a result of
actuarial gain to be paid later than the end of the year following the year for which the
actuarial experience is measured or as a stream of payments that only increase as a
result of actuarial gain, with such increases beginning no later than the next year, paid
in the s a m e form as the payment of the annuity over the remaining period of the annuity
in Example 2, the option does not meet the requirements of paragraph (c)(3) of this A14. Neither does the option fit within any of the other increases described in paragraph
(c) of this A-14. Accordingly, the addition of the option causes the contract, and
consequently any distributions from the contract, to fail to meet the requirements of this
A-14 and thus fail to satisfy the requirements of section 401(a)(9).
Example 5. Annuity with a fixed percentage increase. A retired participant (Z3) in
defined contribution plan X attains age 701/2 in 2005. Z3 elects to purchase annuity
contract Y 3 from Insurance C o m p a n y W . Contract Y 3 is a single life annuity contract
with a 20-year period certain (which does not exceed the m a x i m u m period certain
permitted under A-3(a) of this section) with fixed annual payments increasing 3 percent
each year. The value of Z3's account balance in Plan X at the time of purchase is
$110,000, and the purchase price of Contract Y 3 is $110,000. Contract Y 3 provides Z3
with an initial payment of $6,000 at the time of purchase in 2005. The total future
expected payments to Z 3 under Contract Y 3 are $120,000, calculated as the initial
annual payment of $6,000 multiplied by the period certain of 20 years. Because the total
future expected payments on the purchase date exceed the total value used to
purchase Contract Y 3 and payments only increase as a constant percentage applied
not less frequently than annually, distributions received by Z3 from Contract Y 3 meet
the requirements under paragraph (c)(1) of this A-14.
Example 6. Annuity with excessive increases. The facts are the same as in
Example 5 except that the initial payment is $5,400 and the annual rate of increase is 4
percent. In this example, the total future expected payments are $108,000, calculated
as the initial payment of $5,400 multiplied by the period certain of 20 years. Because
the total future expected payments are less than the total value of $110,000 used to
purchase Contract Y3, distributions received by Z3 do not meet the requirements under
paragraph (c) of this A-14 and thus fail to meet the requirements of section 401(a)(9).
Example 7. Annuity with full commutation feature, (i) A retired participant (Z4) in
defined contribution Plan X attains age 78 in 2005. Z 4 elects to purchase Contract Y 4
from Insurance C o m p a n y W . Contract Y 4 provides for a single life annuity with a 10
year period certain (which does not exceed the m a x i m u m period certain permitted under
A-3(a) of this section) with annual payments. Contract Y 4 provides that Z 4 m a y cancel
Contract Y 4 at any time before Z 4 attains age 84, and receive, on his next payment due
date, a final payment in an amount determined by multiplying the initial payment amount
51
by a factor obtained from Table M of Contract Y 4 using the Y4's age as of Y4's birthday
in the calendar year of the final payment. The value of Z4's account balance in Plan X
at the time of purchase is $450,000, and the purchase price of Contract Y 4 is $450,000.
Contract Y 4 provides Z 4 with an initial payment in 2005 of $40,000. The factors in
Table M are as follows:
Age at Final Payment Factor
79 10.5
80
81
82
83
84
10.0
9.5
9.0
8.5
8.0
(ii) The total future expected payments to Z4 under Contract Y4 are $456,000,
calculated as the initial payment of 40,000 multiplied by the age 78 life expectancy of
11.4 provided in the Single Life Table in A-1 of »1.401 (a)(9)-9. Because the total future
expected payments on the purchase date exceed the total value being annuitized (i.e.,
the $450,000 used to purchase Contract Y4), the permitted increases set forth in
paragraph (c) of this A-14 are available. Furthermore, because the factors in Table M
are less than the life expectancy of each of the ages in the Single Life Table provided in
A-1 of • 1.401 (a)(9)-9, the final payment is always less than the total future expected
payments. Thus, the final payment is an acceleration of payments within the meaning
of paragraph (c)(4) of this A-14.
(iii) As an illustration of the above, if Participant Z4 were to elect to cancel
Contract Y 4 on the day before he w a s to attain age 84, his contractual final payment
would be $320,000. This amount is determined as $40,000 (the annual payment
amount due under Contract Y4) multiplied by 8.0 (the factor in Table M for the next
payment due date, age 84). The total future expected payments under Contract Y 4 at
age 84 before the final payment is $324,000, calculated as the initial payment amount
multiplied by 8.1, the age 84 life expectancy provided in the Single Life Table in A-1 of
' 1.401 (a)(9)-9. Because $320,000 (the total future expected payments under the
annuity contract, including the amount of the final payment) is less than $324,000 (the
total future expected payments under the annuity contract, determined before the
election), the final payment is an acceleration of payments within the meaning of
paragraph (c)(4) of this A-14.
Example 8. Annuity with partial commutation feature, (i) The facts are the same
as in Example 7 except that the annuity provides Z4 m a y request, at any time before Z4
attains age 84, an ad hoc payment on his next payment due date with future payments
reduced by an amount equal to the ad hoc payment divided by the factor obtained from
Table M (from Example 7) corresponding to Z4's age at the time of the ad hoc payment.
52
Because, at each age, the factors in Table M are less than the corresponding life
expectancies in the Single Life Table in A-1 of • 1.401 (a)(9)-9, total future expected
payments under Contract Y 4 will decrease after an ad hoc payment. Thus, ad hoc
distributions received by Z 4 from Contract Y 4 will satisfy the requirements under
paragraph (c)(4) of this A-4.
(ii) As an illustration of paragraph (i) of this Example 8. if Z4 were to request, on
the day before he w a s to attain age 84, an ad hoc payment of $100,000 on his next
payment due date, his recalculated annual payment amount would be reduced to
$27,500. This amount is determined as $40,000 (the amount of Z4's next annual
payment) reduced by $12,500 (his $100,000 ad hoc payment divided by the Table M
factor at age 84 of 8.0). Thus, Z4's total future expected payments after the ad hoc
payment (and including the ad hoc payment) are equal to $322,750 ($100,000 plus
$27,500 multiplied by the Single Life Table value of 8.1). Note that this $322,750
amount is less than the amount of Z4's total future expected payments before the ad
hoc payment ($324,000, determined as $40,000 multiplied by 8.1), and the
requirements under paragraph (c)(4) of this A-4 are be satisfied.
Example 9. Annuity with excessive increases, (i) A retired participant (Z5) in
defined contribution plan X attains age 701/2 in 2005. Z5 elects to purchase annuity
Contract Y 5 from Insurance C o m p a n y W in 2005 with a premium of $1,000,000.
Contract Y 5 is a single life annuity contract with a 20-year period certain. Contract Y 5
provides for an initial payment of $200,000, a second payment one year from the time of
purchase of $40,000, and 18 succeeding annual payments each increasing at a
constant percentage rate of 4.5 percent from the preceding payment.
(ii) Contract Y5 fails to meet the requirements of section 401(a)(9) because the
total future expected payments without regard to any increases in the annuity payment,
calculated as $200,000 in year one and $40,000 in each of years two through twenty, is
only $960,000 (i.e., an amount that does not exceed the total value used to purchase
the annuity).
Q-15: Are there special rules applicable to payments made under a defined
benefit plan or annuity contract to a surviving child?
A-15: Yes, Pursuant to section 401(a)(9)(F), payments under a defined benefit
plan or annuity contract that are made to an employee's child until such child reaches
the age of majority (or dies, if earlier) may be treated, for purposes of section 401(a)(9),
as if such payments were made to the surviving spouse to the extent they become
53
payable to the surviving spouse upon cessation of the payments to the child. For
purposes of the preceding sentence, a child m a y be treated as having not reached the
age of majority if the child has not completed a specified course of education and is
under the age of 26. In addition, a child w h o is disabled within the meaning of section
72(m)(7) w h e n the child reaches the age of majority m a y be treated as having not
reached the age of majority so long as the child continues to be disabled. Thus, when
payments described in this paragraph A-15 b e c o m e payable to the surviving spouse
because the child attains the age of majority, recovers from a disabling illness, dies, or
completes a specified course of education, there is not an increase in benefits under A1 of this section. Likewise, the age of child receiving such payments is not taken into
consideration for purposes of the minimum incidental benefit requirement of A-2 of this
section.
Q-16: Will a governmental plan within the meaning of section 414(d) fail to
satisfy section 401(a)(9) if annuity payments under the plan do not satisfy this section?
A-16: (a) Except as provided in paragraph (b) of this A-16, annuity payments
under a governmental plan within the meaning of section 414(d) must satisfy this
section.
(b) In the case of an annuity distribution option provided under the terms of a
governmental plan as in effect on April 17, 2002, the plan will not fail to satisfy section
401(a)(9) merely because the annuity payments do not satisfy the requirements A-1
through A-15 of this section, provided the distribution option satisfies section 401(a)(9)
based on a reasonable and good faith interpretation of the provisions of section
54
401(a)(9).
Q-17: W h a t are the rules for determining required minimum distributions for
defined benefit plans and annuity contracts for calendar years 2003, 2004, and 2005?
A-17: A distribution from a defined benefit plan or annuity contract for calendar
years 2003, 2004, and 2005 will not fail to satisfy section 401(a)(9) merely because the
payments do not satisfy A-1 through A-16 of this section, provided the payments satisfy
section 401(a)(9) based on a reasonable and good faith interpretation of the provisions
of section 401(a)(9). For governmental plans, this reasonable good faith standard
extends to the end of the calendar year that contains the 90 th day after the opening of
the first legislative session of the legislative body with the authority to a m e n d the plan
that begins on or after June 15, 2004, if such 90 th day is later than December 31, 2005.
§1.401(a)(9)-6T [ R e m o v e d ]
Par. 4. Section 1.401(a)(9)-6T is removed.
Par. 5. In ' 1.401 (a)(9)-8 A-2, the first sentence in paragraph (a)(2) is revised to
read as follows:
'1.401(a)(9)-8 Special rules.
*****
A_ O * * *
(a) * * *
(2) If the employee's benefit in a defined contribution plan is divided into separate
accounts and the beneficiaries with respect to one separate account differ from the
beneficiaries with respect to the other separate accounts of the employee under the
55
plan, for years subsequent to the calendar year containing the date as of which the
separate accounts were established, or date of death if later, such separate account
under the plan is not aggregated with the other separate accounts under the plan in
56
order to determine whether the distributions from such separate account under the plan
satisfy section 401(a)(9). * * *
* * * * *
Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.
Approved: June 1, 2004
Gregory F. Jenner,
Acting Assistant Secretary of the Treasury.
FEDERAL FINANCING BANK
Brian D. Jackson, Chief Financial Officer, Federal Financing
c (FFB) announced the following activity for the month of
LI 2004.
FFB holdings of obligations issued, sold or guaranteed by
Br Federal agencies totaled $29.4 billion on April 30, 2004,
ung a decrease of $695.3 million from the level on March 31,
4. This net change was the result of decreases in holdings of
ncy debt (U.S. Postal Service) of $873.6 million and in
dings of agency assets of $75.0 million, and an increase in
holdings of government-guaranteed loans of $253.3 million.
FFB made 68 disbursements and received 4 prepayments during
month of April.
Attached to this release are tables presenting FFB April
n activity and FFB holdings as of April 30, 2004.
o
CO
O)
CM
CM
CM
CD
CM
O
CM
iederal tinancing bank
CO
CO
CD
WASHINGTON, D.C. 20220
FEDERAL FINANCING BANK
a.
May 2004
Brian D- Jackson, Chief Financial Officer, Federal Financing
Bank (FFB) announced the following activity for the month of
April 2004.
FFB holdings of obligations issued, sold or guaranteed byother Federal agencies totaled $29.4 billion on April 30, 2004,
posting a decrease of $695.3 million from the level on March 31,
2004. This net change was the result of decreases in holdings of
agency debt (U.S. Postal Service) of $873.6 million and in
holdings of agency assets of $75.0 million, and an increase in
net holdings of government-guaranteed loans of $253.3 million.
The FFB made 68 disbursements and received 4 prepayments during
the month of April.
Attached to this release are tables presenting FFB April
loan activity and FFB holdings as of April 30, 2004.
JS-1722
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Page 2
FEDERAL FINANCING BANK
APRIL 2 004 ACTIVITY
Borrower
Date
Amount
of Advance
Final
Maturity-
Interest
Rate
AGENCY DEBT
U S
POSTAL SERVICE
u s
u s
u s
u s
u s
u s
u s
u.,s
u s
u s
u s
u s
u s
u s
u s
u s
u s
u s
u s
u s
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
4/01
4/01
4/02
4/05
4/09
4/12
4/12
4/13
4/13
4/14
4/15
4/23
4/26
4/26
4/27
4/27
4/28
4/29
4/30
4/30
GOVERNMENT-GUARANTEED LOANS
$400,000,000
$144,300,000
$331,100,000
$73,500,000
$333,700,000
$500,000,000
$138,800,000
$300,000,000
$124,300,000
$265,500,000
$43,000,000
$272,200,000
$500,000,000
$95,000,000
$350,000,000
$30,500,000
$244,400,000
$154,500,000
$550,000,000
$70,200,000
00
00
00
00
00
00
00
00
00
00
00
00
00
00
00
00
00
00
00
00
4/02/04
4/02/04
4/05/04
4/06/04
4/12/04
4/13/04
4/13/04
4/14/04
4/14/04
4/15/04
4/16/04
4/26/04
4/27/04
4/27/04
4/28/04
4/28/04
4/29/04
4/30/04
5/03/04
5/03/04
1 099%
1 079%
1 058%
1 068%
1 058%
1 058%
1 048%
:
1.058
038%
1
1 048%
1 048%
0 987%
0 926%
0 997%
0 987%
1 038%
0 998%
0 967%
0 998%
0 947%
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
8/01/05
8/01/05
8/01/05
8/01/05
7/31/25
7/31/25
1
1
1
1
4
4
493%
711%
711%
711%
948%
948%
S/A
S/A
S/A
S/A
S/A
S/A
GENERAL SERVICES ADMINISTRATION
San Francisco Bldg Lease
San Francisco Bldg Lease
San Francisco Bldg Lease
San Francisco OB
Foley Services Contract
Foley Services Contract
4/02
4/14
4/14
4/14
4/27
4/27
$4,537 10
$2,828,634 02
$3,795,714.37
$148,474.70
$54,125 21
$21,287 28
DEPARTMENT OF EDUCATION
Tuskegee Univ
Livingstone College
Livingstone College
Virginia Union Univ
4/01
4/27
4/27
4/27
$325,661
$127,399
$6,099
$42,075
87
20
52
86
1/02/32
7/01/31
7/01/31
1/02/32
4
5
5
5
540%
031%
031:
043:
S/A
S/A
S/A
S/A
4/01
4/01
4/02
4/05
$2,025,000
$952,000
$17,861,000
$712,000
00
00
00
00
1/02/35
6/30/14
1/03/33
9/30/04
4
3
4
1
586%
761%
561%
028%
Qtr
Qtr
Qtr
Qtr
RURAL UTILITIES SERVICE
BARC Electric #663
The Carroll E.M,C
#859
Tri-State #2022
Greenbelt Elec #743
Page 3
FEDERAL FINANCING BANK
APRIL 2004 ACTIVITY
Borrower
Habersham Electric Mem. #2001
Tri-County EMC #814
Citizens Tel (VA) #680
Sequachee Valley Elec. #2048
Thumb Electric #767
Lake Region Elec. #737
Lighthouse Elec. #2090
Mountrail-Williams #665
Niobrara Electric Assoc. #860
Hart Elec. #885
Wheatland Rural Elec. #800
Maquoketa Valley #2012
Canoochee Elec. #2112
South Miss. Elec. #2109
Farmers Elec Coop Corp #877
Hemingford Co-operative #2105
Lea County Elec. Coop. #2 0 96
Orange County Elec. #771
Tri-County Electric #876
Fox Islands Elec. Coop. #2106
Peoples Cooperative Svcs #2 024
PRTCommunications #7 98
Prince George Elec. #2111
Woodruff Electric Coop. #893
Carroll Elec. #618
Central Georgia Elec. #2010
Darien Telephone Co. #719
South Miss. Elec. #2109
Eastern Maine Coop. #795
Blue Grass Energy #674
Cookson Hills Elec. #2125
Endless Mtns. Wireless #2103
S/A is a
Semiannual
Farmers'
Elec.
#2122 rate.
Qtr. is
a Quarterly
Kenergy
Corp.
#2 0 68 rate.
Date
Amount
of Advanc<o
Final
Maturity
4/06
4/07
4/08
4/08
4/08
4/09
4/09
4/09
4/09
4/12
4/12
4/13
4/14
4/16
4/19
4/19
4/19
4/19
4/19
4/20
4/20
4/21
4/23
4/23
4/26
4/27
4/27
4/27
4/28
4/29
4/29
4/29
4/29
4/29
$4,000 ,000 .00
$2,200 ,000 .00
$1,494 ,000 .00
$1,153 ,000 .00
$475 ,000 .00
$263 ,000 .00
$2,000 ,000 .00
$1,046 ,000 .00
$281 ,000 .00
$4,000 , 000.00
$1,167 r 000 .00
$1,625,r 000 .00
$800,,000 .00
$100,000,,000 .00
$500, 000 .00
$1,441, 755 .00
$5,970, 000..00
$1,000, 000. 00
$1,000, 000. 00
$22, 000. 00
$1,900, 000. 00
$1,000, 000. 00
$1,700, 000. 00
$5,000, 000. 00
$347, 000. 00
$1,844, 000. 00
$700, 000. 00
$68,429, 000. 00
$500, 000. 00
$2,888, 000. 00
$6,187, 000. 00
$1,385, 000. 00
$5,000, 000. 00
$5,000, 000. 00
12/31/36
12/31/36
9/30/04
1/03/33
12/31/35
12/31/30
12/31/37
1/02/35
12/31/36
9/30/04
12/31/35
12/31/36
12/31/37
1/03/34
1/02/35
12/31/35
6/30/05
10/01/07
9/30/11
12/31/37
9/30/04
9/30/04
12/31/37
12/31/36
1/03/34
9/30/16
9/30/04
1/03/34
12/31/35
9/30/04
12/31/37
6/30/09
6/30/11
9/30/04
Interest
Rate
4.908%
4.876%
1.028%
4.805%
4.866%
4.767%
4.914%
4.860%
4.742%
1.028%
4.879%
4.929%
5.028%
5.029%
.5.015%
5.037%
1.535%
2.705%
3.913%
5.087%
1.075%
1.094%
5.081%
5.062%
5.075%
4.600%
1.131%
5.060%
5.069%
1.103%
5.155%
3 .612%
4.051%
1.103%
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.!
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Page 4
FEDERAL FINANCING BANK HOLDINGS
(in millions of dollars)
April 30, 2004
Program
Agency Debt:
U.S. Postal Service
March 31, 2004
Monthly
Net Change
4/1/04- 4/30/04
Fiscal Year
Net Change
10/1/03- 4/30/04
Subtotal*
$620.2
$620.2
$1,493.8
$1,493.8
-$873.6
-$873.6
-$6,653.2
-$6,653.2
Agency Assets:
FmHA-RDIF
FmHA-RHIF
Rural Utilities Service-CBO
Subtotal*
$515.0
$1,830.0
$4,270.2
$6,615.2
$590.0
$1,830.0
$4,270.2
$6,690.2
-$75.0
$0.0
$0.0
-$75.0
-$290.0
$0.0
$0.0
-$290.0
Government-Guaranteed Lending:
DOD-Foreign Military Sales
DoEd-HBCU+
DHUD-Community Dev. Block Grant
DHUD-Public Housing Notes
General Services Administration+
DOI-Virgin Islands
DON-Ship Lease Financing
Rural Utilities Service
SBA-State/Local Development Cos.
DOT-Section 511
Subtotal*
$1,572.5
$126.6
$1.0
$1,054.8
$2,142.3
$8.2
$597.3
$16,626.5
$65.2
$3.0
$22,197.4
$1,575.2
$126.1
$1.0
$1,054.8
$2,139.2
$8.2
$597.3
$16,372.7
$66.6
$3.0
$21,944.0
-$2.7
$0.5
$0.0
$0.0
$3.1
$0.0
$0.0
$253.9
-$1.4
$0.0
$253.3
-$115.9
$47.3
-$1.2
-$78.5
-$4.9
-$1.4
-$10.2
$1,008.3
-$12.1
-$0.1
$831.4
Grand total*
$29,432.8
$30,128.0
-$695.3
-$6,111.8
* figures may not total due to rounding
+ does not include capitalized interest
Js-1723: Treasury International Capital (TIC) data for April
Page 1 of3
PRLSS ROOM
F R O M T H E OFFICE O F PUBLIC A F F A I R S
To view or print the PDF content on this page, download the free Adobe® Acrobat® Reader®.
June 15, 2004
js-1723
Treasury International Capital (TIC) data for April
Treasury International Capital (TIC) data for April are released today and posted on
the U.S. Treasury web site (www.treas.gov/tic). The next release date which will
report on data for May, is scheduled for July 16, 2004.
Domestic Securities
Gross purchases of domestic securities by foreigners were $1,739.5 billion in April
exceeding gross sales of domestic securities by foreigners of $1,658.4 billion durinq
the s a m e month.
Foreign purchases of domestic securities reached $81.2 billion on a net basis in
April, relative to $82.4 billion during the previous month. Private net flows reached
$55.1 billion in April. Net private purchases of Treasury Bonds and Notes
decreased to $13.2 billion from $27.6 billion the preceding month. Net private
purchases of Government Agency Bonds were $28.2 billion, up from $1.1 billion the
previous month. Net private purchases of Corporate Bonds declined to $16.1 billion
from $29.2 billion the previous month. Net private purchases of Equities increased
to minus $2.4 billion from minus $13.5 billion.
Official net purchases of U.S. securities were $26.1 billion in April, relative to $38.1
billion in March. Official net purchases of Treasury Bonds and Notes of $22.1 billion
accounted for the bulk of official inflows in April, down from $33.9 billion the
previous month.
Foreign Securities
Gross purchases of foreign securities owned by U.S. residents were $399.4 billion
in April, relative to gross sales of foreign securities to U.S. residents of $404.4
billion during the s a m e month.
Gross sales of foreign securities to U.S. residents exceeded purchases by $5.0
billion, highlighting a net U.S. acquisition of $11.3 billion in Foreign Equities and net
U.S. sales of $6.3 billion in Foreign Bonds.
Net Long-Term Securities Flows
Net foreign purchases of both domestic and foreign long-term securities from U.S.
residents were $76.2 billion in April compared with $80.7 billion in March. Net
foreign purchases of long-term securities were $843.2 billion in the 12-months
through April 2004 as compared to $600.7 billion during the twelve months through
April 2003.
The full April data set, including adjustments for repayments of principal on assetbacked securities, as well as historical series, can be found on the TIC web site,
www.treas.gov/tic.
Foreigners' Transactions in Long-Term Securities with U.S. Residents
(Billions of dollars, not seasonally adjusted)
12 Months
http://www.treas.gov/press/releases/js 1723 .htm
5/5/2005
j s-1723: Treasury International Capital (TIC) data for April
Page 2 of 3
Through
2002
2003
Apr-03
Apr-04
Jan-04 Feb-04 Mar-04 Apr-04
Gross
1 Purchases 13,022.9 15,726.4 13,395.1 17,664.1 1,385.6 1,439.4 1,774.0 1,739.5
of Domestic
Securities
Gross
2 Sales of
12,475.4 14,981.4 12,807.0 16,765.6 1,285.3 1,354.4 1,691.6 1,658.4
Domestic
Securities
Domestic
Securities
3 Purchased, 547.6
net (line 1
less line
2)/1
4 Private,
508.3
net/2
Treasury
5 Bonds &
112.8
Notes, net
Gov't
6 Agency
166.6
Bonds, net
745.0
588.1
898.6
100.3
85.0
82.4
81.2
605.6
529.1
664.6
69.4
62.7
44.3
55.1
163.7
131.8
217.1
20.0
20.9
27.6
13.2
137.9
171.6
152.9
23.4
18.4
1.1
28.2
266.1
198.2
259.3
12.5
21.1
29.2
16.1
37.9
27.4
35.4
13.4
2.3
-13.5
-2.4
39.3
139.4
59.1
233.9
31.0
22.3
38.1
26.1
71
109.3
21.3
199.5
26.9
16.1
33.9
22.1
28.6
24.9
34.5
27.8
4.2
5.9
2.9
2.8
5.6
5.5
3.6
7.0
0.5
0.2
1.2
0.6
-2.0
-0.4
-0.3
-0.3
-0.6
0.1
0.0
0.5
7 Corporate
176.7
Bonds, net
Equities,
8 net
52.2
9 Official,
net
Treasury
10 Bonds &
Notes, net
Gov't
11 Agency
Bonds, net
Corporate
12
Bonds, net
Equities,
13 net
Gross
Purchases
14 of Foreign
Securities
2,640.0 3,532.9 2,740.2 4,287.1
390.7
401.9
488.1
399.4
Gross
Sales of
15 Foreign
Securities
2,613.0 3,577.4 2,727.6 4,342.5
399.3
403.6
489.9
404.4
Foreign
Securities
Purchased,
27.0
16
net (line 14
less line
15)/3
Foreign
Bonds
28.5
17
Purchased,
net
-44.6
12.6
-55.4
-8.5
-1.7
-1.8
-5.0
26.6
32.1
32.5
4.7
0.7
2.2
6.3
Foreign
Equities
18 Purchased, -1.5
net
-71.1
-19.4
-87.9
-13.2
-2.4
-4.0
-11.3
Net LongTerm
19 Flows (line 574.6
3 plus line
I I 16)
700.4
600.7
843.2
91.8
83.3
80.7
76.2
http://www.treas.gov/press/releases/jsl723.htm
5/5/2005
js-1723: Treasury International Capital (TIC) data for April
1/1 Net foreign purchases of U.S. securities (+) |
|/2 Includes International and Regional Organizations
|/3Net U.S. acquisitions of foreign securities (-)
\Source: U.S. Department of the Treasury
Page 3 of 3
\
REPORTS
• PDF version: Foreigners' Transactions in Long-Term Securities with U.S.
Residents (Billions of dollars, not seasonally adjusted)
http://www.treas.gov/press/releases/jsl723.htm
5/5/2005
2003
12 Months Through
Apr-04
Apr-03
Jan-04
Feb-04
Mar-04
Apr-04
13,022.9 15,726.4
12,475.4 14,981.4
547.6
745.0
13,395.1 17,664.1
12,807.0 16,765.6
588.1
898.6
1,385.6
1,285.3
100.3
1,439.4
1,354.4
85.0
1,774.0
1,691.6
82.4
1,739.5
1,658.4
81.2
44.3
27.6
55.1
13.2
28.2
16.1
-2.4
2002
1 Gross Purchases of Domestic Securities
2 Gross Sales of Domestic Securities
3 Domestic Securities Purchased, net (line 1 less line 2) /l
4
5
6
7
8
Private, net 12
9
10
11
12
13
Official, net
Treasury Bonds & Notes, net
Gov't Agency Bonds, net
Corporate Bonds, net
Equities, net
Treasury Bonds & Notes, net
Gov't Agency Bonds, net
Corporate Bonds, net
Equities, net
14 Gross Purchases of Foreign Securities
15 Gross Sales of Foreign Securities
16 Foreign Securities Purchased, net (line 14 less line 15) /3
17
18
Foreign Bonds Purchased, net
Foreign Equities Purchased, net
19 Net Long-Term Flows (line 3 plus line 16)
/l
12
/3
Net foreign purchases of U.S. securities (+)
Includes International and Regional Organizations
Net U.S. acquisitions of foreign securities (-)
Source: U.S. Department of the Treasury
508.3
112.8
166.6
176.7
52.2
605.6
163.7
137.9
266.1
37.9
529.1
131.8
171.6
198.2
27.4
664.6
217.1
152.9
259.3
35.4
69.4
20.0
23.4
12.5
13.4
62.7
20.9
18.4
21.1
2.3
29.2
-13.5
39.3
59.1
21.3
34.5
233.9
199.5
27.8
31.0
26.9
22.3
16.1
38.1
33.9
26.1
22.1
28.6
139.4
109.3
24.9
5.6
5.5
3.6
7.0
4.2
0.5
-2.0
-0.4
-0.3
-0.3
-0.6
5.9
0.2
0.1
2.9
1.2
0.0
2.8
0.6
0.5
2,640.0
2,613.0
27.0
3,532.9
3,577.4
-44.6
2,740.2
2,727.6
12.6
4,287.1
4,342.5
-55.4
390.7
399.3
-8.5
401.9
403.6
-1.7
488.1
489.9
-1.8
399.4
404.4
-5.0
28.5
-1.5
26.6
-71.1
32.1
-19.4
32.5
-87.9
4.7
0.7
2.2
6.3
-13.2
-2.4
-4.0
-11.3
574.6
700.4
600.7
843.2
91.8
83.3
80.7
76.2
7.1
1.1
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
June 15, 2004
2004-6-15-12-40-16-20409
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 $82,581 million as of the end of that week, compared to $82,728 million as of the end of the prior week.
I. Official U.S. Reserve Assets (in US millions)
TOTAL
1. Foreign Currency Reserves1
a. Securities
June 4, 2004
June 11, 2004
82,728
82,581
Euro
Yen
TOTAL
Euro
Yen
TOTAL
10,107
14,136
24,243
10,165
14,387
24,552
0
0
Of which, issuer headquartered in the U.S.
b. Total deposits with:
b.i. Other central banks and BIS
11,668
2,841
14,509
2,891
11,366
14,257
b.ii. Banks headquartered in the U.S.
0
0
b.ii. Of which, banks located abroad
0
0
b.iii. Banks headquartered outside the U.S.
0
0
b.iii. Of which, banks located in the U.S.
0
0
2. IMF Reserve Position2
20,268
20,142
3. Special Drawing Rights ( S D R s ) 2
12,663
12,585
4. Gold Stock 3
11,045
11,045
0
0
5. Other Reserve Assets
II. Predetermined Short-Term Drains on Foreign Currency Assets
June 4. 2004
Euro
1. Foreign currency loans and securities
Yen
June 11, 2004
TOTAL
Euro
0
Yen
TOTAL
0
2. Aggregate short and long positions in forwards and futures in foreign currencies vis-a-vis the U.S. dollar:
2.a. Short positions
0
0
2.b. Long positions
0
0
3. Other
0
0
III. Contingent Short-Term Net Drains on Foreign Currency Assets
June 4, 2004
Euro
1. Contingent liabilities in foreign currency
Yen
June 11. 2004
TOTAL
Euro
0
Yen
TOTAL
0
1.a. Collateral guarantees on debt due within 1 year
1.b. Other contingent liabilities
2. Foreign currency securities with embedded options
0
0
3. Undrawn, unconditional credit lines
0
0
0
0
3. a. With other central banks
3.b. With banks and other financial institutions
Headquartered in the U.S.
3.c. With banks and other financial institutions
Headquartered outside the U.S.
4. Aggregate short and long positions of options in
foreign
Currencies vis-a-vis the U.S. dollar
4.a. Short positions
4.a.1. Bought puts
4.a.2. Written calls
4.b. Long positions
4.b.1. Bought calls
•i
4.b.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 m a y 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
/alued 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 IMF data for the prior month end.
V Gold stock is valued monthly at $42.2222 per fine troy ounce.
JS-1724: Treasury and IRS Withdraw<BR>Proposed Cash Balance Regulations
PRESS ROOM
-"-==?"--
'-"
Page 1 of 1
^E&
FROM THE OFFICE OF PUBLIC AFFAIRS
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June 15,2004
JS-1724
Treasury and IRS Withdraw
Proposed Cash Balance Regulations
Today, the Treasury Department and the IRS announced the withdrawal of
proposed regulations on cash balance pension plans and cash balance
conversions.
The regulations are being withdrawn to provide Congress an opportunity to review
and consider a legislative proposal on cash balance plans that was included in the
Administration's Budget for Fiscal Year 2005. The legislative proposal would
require a five-year "hold harmless" period for current employees following a cash
balance conversion, would ban benefit "wear-away" after a cash balance
conversion, and would clarify the legal status of cash balance plans and other
hybrid plans.
"We have proposed legislation that requires companies to deal fairly with their older
workers when they convert to cash balance plans," said Greg Jenner, Acting
Assistant Secretary for Tax Policy. "We want to work with Congress to enact these
employee protections and remove legal uncertainty about cash balance plans."
The regulations, which were proposed in December of 2002, would have applied
the statutory age-discrimination rules to cash balance plans and cash balance
conversions. Treasury and the IRS will not publish new age-discrimination
guidance for cash balance plans or other hybrid plans while these issues are under
consideration by Congress.
REPORTS
• The Text of Announcement 2004-57
http://www.treas.gov/press/releases/jsl724.htm
5/5/2005
Part IV.—Items of General Interest
Age-Discrimination Regulations
Announcement 2004-57
O n December 11, 2002, Treasury and the IRS published proposed
regulations under §§411 (b)(1)(H) and 411 (b)(2) of the Internal Revenue Code
(the "Code"). 67 Fed. Reg. 76123. The proposed regulations would provide
guidance under the statutory age-discrimination rules for all qualified plans,
including cash balance pension plans. The proposed regulations set forth
specific conditions under which cash balance plans and cash balance
conversions would not be considered to violate these age-discrimination rules.1
Thousands of comment letters were submitted on the proposed
regulations, including comments from older and longer-service employees w h o
stated that they had been adversely affected by cash balance conversions.
Other comments set forth employer concerns that the regulations would create
issues for certain traditional defined benefit plans that had not previously been
considered age-discriminatory.
Section 205 of the Consolidated Appropriations Act, 2004, Pub. L. 108199, (the "Act") provides that none of the funds m a d e available in the Act m a y be
used to issue any rule or regulation that implements the proposed agediscrimination regulations or any regulations reaching similar results.
Additionally, the Act requires the Secretary of the Treasury to propose legislation
providing transition relief for older and longer-service participants affected by
cash balance conversions.
The Administration's Budget for Fiscal Year 2005 includes a legislative
proposal addressing cash balance plans and conversions to cash balance plans.
The legislative proposal would require companies converting to cash balance
plans to protect current employees through a five-year "hold harmless" period
and would prohibit any benefit wear-away. The proposal also would provide
rules under which cash balance formulas would not be considered age-
1
At the s a m e time, Treasury and the IRS published proposed nondiscrimination
regulations for cash balance plans under § 401 (a)(4) of the Code. In
Announcement 2003-22, 2003-1 C.B. 847, Treasury and the IRS announced that
the proposed regulations under § 401(a)(4) would be withdrawn because they
raised unintended obstacles for employers that wanted to provide transition relief
in cash balance conversions.
discriminatory and rules regarding interest crediting rates. The proposal would
provide similar rules for other types of hybrid plans and hybrid plan conversions.
Treasury and the IRS are withdrawing the proposed age-discrimination
regulations issued in December 2002. This will provide Congress an opportunity
to review and consider the Administration's legislative proposal and to address
cash balance and other hybrid plan issues through legislation. Treasury and the
IRS do not intend to issue guidance on compliance with the age-discrimination
rules of §§ 411 (b)(1)(H) and 411 (b)(2) of the C o d e for cash balance plans, cash
balance conversions, or other hybrid plans or hybrid plan conversions while
these issues are under consideration by Congress.
Beginning September 15, 1999, cases in which an application for a
determination letter or a plan under examination involved a cash balance
conversion were required to be submitted to the Washington, D.C. office of the
IRS for technical advice on the conversion's effect on the plan's qualified status.
Many such cases were submitted and are still pending. Treasury and the IRS do
not intend to process these technical advice cases while cash balance plan and
cash balance conversion issues are under consideration by Congress.
JS-1725: M E D I A A D V I S O R Y : <br> Secretary Snow in California and Nevada This Wee... Page 1 of 2
PRLSS HOOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
June 15,2004
JS-1725
MEDIA ADVISORY:
Secretary S n o w in California and Nevada This W e e k to Discuss E c o n o m y
Secretary John W. Snow will visit San Francisco and San Jose, California and Las
Vegas, Nevada this week to meet with local business leaders and discuss the
President's efforts to strengthen the economy and create jobs.
As a result of President Bush's tax policy reforms, 12.4 million taxpayers in
California will have lower income tax bills in 2004 and nearly 3.1 million business
taxpayers in California can use their tax savings to invest in new equipment, hire
additional workers, and increase pay. In Nevada, 845,000 taxpayers will have
lower income tax bills and more than 160,000 businesses will benefit in 2004.
The following events are open to the media:
Thursday, June 17
10:15 am PDT
Tour of the San Francisco Federal Reserve
101 Market Street (between Spear and Main Streets)
San Francisco, C A
** Media must arrive by 9:30 a m and wear media credentials; please R S V P to
Lily Ruiz at 415-974-3240 or lily.ruiz@sf.frb.org
** A brief press availability will be held immediately following the event
** UPDATED LOCATION **
12:00 pm PDT
Remarks to Women's High-Tech Coalition Luncheon
E-Bay
2161 North First Street
San Jose, C A
** Media must arrive by 11:00 a m and wear media credentials
** A brief press availability will be held immediately following the event
Friday, June 18
8:30 am PDT
Roundtable with Members of the Nevada Hotel and Lodging Association
Las Vegas Convention Center, R o o m N263
3150 Paradise Road
Las Vegas, N V
** Media must arrive by 7:30 a m and wear media credentials
9:45 am PDT
Tour of The Verandas at the Peaks Housing Development
West W a r m Springs Road and South Rainbow Blvd.
Las Vegas, N V
** Media must wear media credentials
11:00 am PDT
Tour of East Las Vegas Senior Center
250 Northeastern Ave.
Las Vegas, N V
Vwww.treas.gov/press/releases/js 1725.htm 5/5/2005
JS-1725•"MEDIA A D V I S O R Y : <br> Secretary Snow in California and Nevada This Wee... Page 2 of 2
** Media must wear media credentials
)://www.treas.gov/press/releases/js!725.htm
5/5/2005
JS-1726: "Bitsberger Presentation on TIPS to Barclay's Investment Conference"
Page 1 of 1
PRESS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
June 16, 2004
JS-1726
"Bitsberger Presentation on TIPS to Barclay's Investment Conference"
REPORTS
• Treasury Debt Management
http://www.treas.gov/press/releases/js 1726.htm
5/5/2005
Treasury Debt Management
Timothy Bitsberger
Deputy Assistant Secretary
U.S. Treasury Department
Treasury Inflation-Protection Securities
Treasury's Perspective
• Widen investor base
• Reduce/eliminate term premium
Investor's Perspective
• Improve portfolio diversification
• Protect against inflation better than real estate,
commodities, or other real assets
TIPS Structure
•
The principal value is adjusted for inflation by multiplying the value at
issuance by an index ratio that changes daily. The inflation accrual on
principal is paid at maturity.
• The coupon payments are a fixed percentage, determined at auction, of the
inflation-adjusted value of the principal.
• The principal repayment at maturity is protected against deflation, but the
semi-annual coupon payments are not protected against deflation.
• The inflation accrual is based on the CPI-U NSA with a 3-month lag
(e.g., index number for July 1st is based on the April CPI report which was
released in mid-May).
• Daily indexed numbers are calculated using straight-line interpolation between
first-of-month numbers.
• The index ratio for a particular valuation date is the index number for that date
divided by the index number for the dated date.
•
Index RatioValueDate = Index number for value date
Index number for dated date
TIPS Auction Schedule
July 2004
- 10-yr TIPS, auction 7/8/04, settle 7/15/04, mature 7/15/14
- 201/2-yr TIPS, auction 7/27/04, settle 7/30/04, mature 1/15/25
October 2004
- 93/4-yr TIPS, auction 10/7/04, settle 10/15/04, mature 7/15/14
- 5x/2-yr TIPS, auction 10/26/04, settle 10/29/04, mature 4/15/10
January 2005
- 10-yr TIPS, auction 1st half of month, settle on 15th, mature 1/15/15
- 20-yr TIPS, auction 2 n d half of month, settle last business day of month, mature 1/15/25
April 2005
- 93/4-yr TIPS, auction 1st half of month, settle on 15th, mature 1/15/15
- 5-yr TIPS, auction 2 n d half of month, settle last business day of month, mature 4/15/10
* Tentative Schedule
TIPS Supply
Inflation-Adjusted Par Amount Outstanding
1997
Source: U S Treasury
1998
1999
2000
2001
calendar year
2002
2003
June'04
TIPS Annual Issuance
$ billions
60
•
•
•
•
5-yrTIPS
10-yr TIPS
20-yrTIPS
30-yrTIPS
50
40
30
20 -
10
0
1997
1998
1999
2000
2001
2002
2003
calendar year
*
2004 issuance amounts are tentative and not necessarily indicative of future auction sizes
TIPS Trading Volume Increasing
Average Daily TIPS Transactions by Primary Dealers
$ billions
$ billions
12
10
8
0
Jan-98
0
Jul-98
Jan-99
Source: New York Fed
Jul-99
Jan-00
Jul-00
Jan-01
Jul-01
Jan-02
Jul-02
Jan-03
Jul-03
Jan-04
Net Dealer Positions in Treasuries
TIPS
($ billions)
Nominal Treasuries
($ billions)
- 20
0
-20
-40
-60
-80
TIPS zero line
0 1
-100
-1
Dealers net
short TIPS for
the first time
(5/14/03)
TIPS (LHS)
Nominal Treasuries (RHS)
-2
Feb-01
Jun-01
Oct-01
* Source: New York Fed
Feb-02
Jun-02
Oct-02
Feb-03
-120
Jun-03
Oct-03
Feb-04
-140
Jun-04
SIZE OF GLOBAL INFLATION-INDEXED
BOND MARKET VS. OTHER ASSET CLASSES
1,000
900
800
700
600
=
O
cc
500
400 300
200
100
0
i
Gobal Inflation Indexed
Global High Yield
Emerging Market Debt
Asset Class
Source: Bridgewater Associates
Emerging Market
Equities
European Corp orates
Distribution of Competitive Auction Awards of 10-Year Treasury Notes
10-Year TIPS
10-Year Nominal Notes
July '03, Oct f03, Jan '04, & Apr f04
Nov f03, Dec f03, Feb f04, & M a r f04
Other, 8 %
Financial Insts.,
1%
Financial Insts., ~,u
~ 0/
' Other, 3 %
1%
I/I BOND CORRELATION TO OTHER ASSETS AND INFLATION
Correlation of U P S (10-Year Duration) to...
Jan. 1970 - Feb. 2004
1 Month
3 Month
1 Year
3 Year
5 Year
Source: Bridgewater Associates
USCPI
0.18
0.28
0.49
0.65
0.75
U S Equities
S & P 500
0.09
0.02
-0.21
-0.54
-0.56
U S Nominal Bonds
10-Year Duration
0.60
0.67
0.30
-0.27
-0.28
10-Year TIPS and Nominal Yields
TIPS Yield
Nominal Yield
6.5
TIPS 10yr
(RHS)
6.0
5.5
5.0
4.5
4.0
3.5
3.0
Jul-98
Jan-99
Jul-99
Jan-00
Jul-00
Jan-01
Jul-01
Jan-02
Jul-02
Jan-03
Jul-03
Jan-04
Jul-04
10-Year TIPS Breakeven Rates
Percent
Percent
2.5
2.5
2.0
2.0
1.5
1.5
1.0
1.0
0.5
0.5
0.0
Jan-98 Jul-98 Jan-99 Jul-99 Jan-00 Jul-00 Jan-01
Jul-01
0.0
Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04
5yr - 10yr Yield Spread
basis points
basis points
110
~ 110
Nominal Treasuries
90
90
70
70
50
- 50
30
30
10
10
-10
-10
-30 H
-30
-50
Jan-99
-50
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Monthly Inflation Accrual on TIPS
1.0%
-r 1.0%
0.8%
0.8%
Average Monthly
Inflation Accrual
0.6%
0.6%
0.4%
0.4%
0.2%
0.2%
0.0%
0.0%
-0.2%
-0.2%
-0.4%
-0.4%
1997
D1998
D1999
B2000
D2001
D2002
D2003
B2004
-1 -0.6%
-0.6%
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
JS-1727: Statement of Policy on Accepting Accounts <br>From Foreign Governments, F... Page 1 of 1
PRESS HOOM
F R O M T H E OFFICE O F PUBLIC A F F A I R S
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June 16,2004
JS-1727
Statement of Policy on Accepting Accounts
From Foreign Governments, Foreign Embassies
and Foreign Political Figures
It is the longstanding policy of the United States Department of the Treasury that
persons residing or working in the United States should have access to U.S.
banking services. This policy certainly encompasses the embassies and interests
sections of foreign governments and their staffs.
It is also the policy of the United States Treasury Department that financial
institutions comply with the Bank Secrecy Act, as amended by the USA PATRIOT
Act, and its implementing regulations. Compliance with those provisions helps to
safeguard our financial system from the abuses of money laundering and illicit
finance, including terrorist activity financing.
These two policies are not in conflict. Financial institutions can provide appropriate
banking services to the embassies and interests sections of foreign governments
and their staffs in a manner that fulfills the needs of those foreign governments
while satisfying the provisions of the Bank Secrecy Act.
For a copy of Guidance on Accepting Accounts From Foreign Governments,
Foreign Embassies and Foreign Political Figures, please visit:
http://www.fincen.gov/advis36.pdf.
tp://www.treas.gov/press/releases/js 1727.htm
5/5/2005
JS-1728: Written Testimony of <br>Samuel W . Bodman, Deputy Secretary<br>U.S. Dep... Page 1 of 8
PRLSS ROOM
F R O M T H E OFFICE O F PUBLIC A F F A I R S
June 16,2004
JS-1728
Written Testimony of
Samuel W . Bodman, Deputy Secretary
U.S. Department of the Treasury
Before the House Financial Services Subcommittee on Oversight
and Investigations
I. Introduction
Madam Chairman Kelly, Congressman Gutierrez and Members of the Committee,
thank you for inviting m e to testify before you today. As you have requested, I plan
to address a number of specific Treasury issues in m y statement, and would be
pleased to address any other issues during m y testimony.
The Treasury Department is currently undertaking significant steps to advance our
campaign against terrorist financing and financial crime, largely through the creation
of the Office of Terrorism and Financial Intelligence. W e are also addressing a
number of significant regulatory and oversight issues associated with compliance
and enforcement of the Bank Secrecy Act. Secretary S n o w has asked m e to focus
a considerable amount of m y time on these important matters, and I welcome this
opportunity to explain our progress and vision for moving forward in meeting these
challenges.
Treasury has broad authorities, relationships and expertise in the financial arena.
As importantly, w e have a cadre of dedicated and diligent individuals w h o work hard
every day - along with countless others in the U.S. government - to fight the
financial war on terror and to protect the integrity of the financial system.
We have had very real and concrete successes in fighting this war, but as the
recent attacks around the world demonstrate, our work must continue at an even
higher pace. Our enemies are numerous, resourceful, and dedicated, and they
continually adapt to the changing environment. W e must do the same, using every
tool that w e have. W e also recognize that, unfortunately, w e are in this fight for the
long term. And so the Department must be organized to reflect that reality.
II. The Office of Terrorism and Financial Intelligence
The dynamic and long-term challenges that we face in the war on terror will require
unwavering political will, active and continuous leadership by senior policymakers,
and sustained commitment from all of us. This is precisely why the Administration
has collaborated with Congress to develop a new Treasury structure: a high profile
office led by an Under Secretary - one of only three in the Department - and two
Assistant Secretaries. This office, called the Office of Terrorism and Financial
Intelligence (TFI), will bring together Treasury's intelligence, regulatory, law
enforcement, sanctions, and policy components.
The creation of TFI will augment Treasury's efforts in several ways. First, it will
allow us to better develop and target our intelligence analysis and financial data to
detect how terrorists are exploiting financial systems and to design methods to stop
them and their financial infrastructure. Second, it will allow us to better coordinate
aggressive law, sanctions and regulatory enforcement programs, working with other
components of our government and the private sector, and using important new
tools provided by Congress to Treasury under the U S A P A T R I O T Act (Patriot Act).
Third, it will help us continue to develop the strong international coalition required to
combat terrorist financing, in part by facilitating the development and exchange of
financial information that supports our requests for collaborative action. Fourth, it
ttp.V/www.treas. gov/press/releases/js 1728.htm
5/5/2005
JS-1728: Written Testimony of <br>Samuel W . Bodman, Deputy Secretary<br>U.S. Dep... Page 2 of 8
will ensure accountability and help achieve results for this essential mission
TFI will have two major components. One Assistant Secretary will lead the Office of
Terrorist Financing. This office will build on the functions that have been underway
at Treasury over the past year by developing, organizing, and implementing U.S.
government strategies to combat terrorist financing and financial crime, both
internationally and domestically. In essence, this will be the policy and outreach
apparatus for the Treasury Department on the issues of terrorist financing, m o n e y
laundering, financial crime, and sanctions. This will m e a n increased coordination
with other elements of the U S government, including law enforcement and
regulatory agencies.
This office will continue to represent the United States at international bodies
dedicated to fighting terrorist financing and financial crime such as the Financial
Action Task Force and will increase our multilateral and bilateral efforts in this field.
W e will use this office to create global solutions to these evolving international
problems, attacking financial crime and safeguarding the financial system by
advancing international standards, conducting assessments, administering
technical assistance and applying protective measures against high risk
jurisdictions. In this regard, w e will also have a more vigorous role in the
implementation of measures that can affect the behavior of rogue actors abroad.
Domestically, the office will be charged with continuing to develop and implement
our government's national m o n e y laundering strategy as well as other policies and
programs to fight financial crimes.
It will continue to develop and help implement our policies and regulations in
support of the Bank Secrecy Act and the Patriot Act. W e will further increase our
interaction with federal law enforcement and continue to work closely with the
criminal investigators at the IRS to deal with emerging domestic and international
financial crimes of concern. Finally, this office will serve as a primary outreach
body - to the private sector and other stakeholders - to ensure that w e are
maximizing the effectiveness of our efforts.
A second Assistant Secretary will lead the Office of Intelligence and Analysis (OIA).
The overall purpose of this office is to ensure that the Treasury Department
properly analyzes relevant intelligence - adding our o w n unique expertise and
capabilities - to create actionable financial intelligence that Treasury and rest of the
U.S. Government can use effectively. W e recognize that OIA must focus its efforts
on filling any gaps in intelligence targets and on adding value and expertise - not
on duplicating the efforts of other Federal agencies. Our priorities will include
identifying and attacking the financial infrastructure of terrorist groups; assisting in
efforts to identify and address vulnerabilities that m a y be exploited by terrorists and
criminals in domestic and international financial systems; and promoting stronger
relationships with our partners in the U.S. and around the world.
In determining the structure of OIA, we first focused on meeting our urgent shortterm needs. Accordingly, w e have already assembled a small team of analysts to
closely monitor and review current intelligence threat reporting. These analysts,
w h o are sitting together in secure space in the Main Treasury building, are ensuring
that Treasury can track, analyze any financial angles, and then refer these threats
to relevant Treasury and U.S. government interests for appropriate action.
In the near term, the Department plans to further develop our analytical capability
through OIA in untapped areas, such as strategic targeting of terrorist financial
networks. W e also plan to analyze trends and patterns and non-traditional targets
such as hawalas and couriers. In order to accomplish these goals, w e are in the
process of hiring several n e w analysts as well as considering drawing on additional
resources from O F A C and FinCEN. In addition, enhancing our working
relationships with other agencies will be a key job for the n e w Assistant Secretary.
Overall, the twin components of TFI will complement the important work being done
by the Department of Justice, the Department of Homeland Security, the State
Department, and the various intelligence and law enforcement agencies, and will be
fully integrated into established task forces and processes.
I would like to underscore this point. It is impossible to overstate the importance of
coordinating the assets, resources and expertise of the Treasury and other
ttp://www.treas.gov/press/releases/js 1728.htm
5/5/2005
JS-1728: Written Testimony of <br>Samuel W . Bodman, Deputy Secretary<br>U.S. Dep... Page 3 of 8
government agencies in our mission to identify, disrupt and dismantle terrorist and
other criminal networks. Since 9/11, the Treasury Department, together with
departments and agencies across the federal government, has m a d e unparalleled
strides in coordinating its efforts towards creating a seamless front in the war on
terror.
However, we are continuing to look for ways that can improve our management of
Treasury authorities and resources to facilitate information-sharing and coordination
across the Department and the government as a whole to safeguard the financial
system from terrorist and criminal abuse. The creation of TFI will help us advance
these interests.
We are in the process of working out the budget for TFI and its impact on the rest of
the Department. For both fiscal years 2004 and 2005, w e believe that w e will be
able to re-prioritize existing resources in order to fund the personnel and other
related start-up costs for the operation. W e expect to hire up to 15 n e w personnel
for the remainder of 2004, as well as additional staff during 2005. At the s a m e time,
w e have realized that w e will likely incur information technology and infrastructure
costs to m a k e TFI, and especially OIA, into a world class organization. W e are
currently looking at other possible funding sources, including the Asset Forfeiture
Fund and reprogramming authorities, and will work with O M B and the Congress to
resolve this issue.
III. Treasury's Regulatory Authorities under the BSA and Associated
Compliance Issues
Another area that I would like to discuss is Treasury's responsibility to protect the
integrity of the financial system by administering the Bank Secrecy Act (BSA), as
enhanced by Title III of the Patriot Act. W h e n Congress enacted the B S A in 1970, it
charged the Secretary of the Treasury with the responsibility for enforcing
compliance with the law. For the last three decades, Treasury has satisfied this
responsibility by relying on a diverse group of existing regulators - by delegating to
them the authority to actually examine the institutions subject to B S A requirements.
In light of recent events, Secretary Snow and I are taking a fresh look at this
arrangement. There have been s o m e clear benefits. W e have been able to
maximize our government's existing resources and have been able to capitalize on
the unique expertise and examination capabilities of the regulatory agencies most
familiar with the specific financial industries. But there are also s o m e clear risks.
Without sufficient attention and control, this decentralized approach m a y devolve
into a situation where there is a lack of transparency, accountability, and
timeliness. This is a potentially serious problem, and it is one that the Secretary
and I are committed to addressing.
I am going to take a few minutes to discuss the current structure, and then describe
for you s o m e of the things that w e are doing to evaluate its effectiveness.
The overall purpose of the original BSA - and its subsequent modifications -- is to
promote transparency and accountability in the U.S. financial system in order to
preserve its integrity and to protect it from criminal abuse. W h e n originally passed
in 1970, the B S A simply mandated that covered institutions identify the source,
volume and m o v e m e n t of large amounts of currency and other monetary
instruments into or out of the United States or being deposited in U.S. financial
institutions.
Since that time, the Congress has amended the BSA on numerous occasions in
light of the ongoing development of our financial system and evolving criminal
abuses of that system. For example, in 1992, Congress a m e n d e d the Act to
authorize the Treasury to require institutions to report suspicious activities - so
called suspicious activity reports or S A R s -- regardless of whether they met a
certain monetary threshold. In 2001, the Patriot Act strengthened and expanded
B S A regulation to include enhanced due diligence and customer identification
requirements, expanded information sharing authorities, and n e w industries subject
to B S A regulatory obligations.
It is worth noting that the BSA places the actual responsibility for compliance - for
filing appropriate reports, for checking the identity of its customers, for having a
sufficient system in place - on the private sector institutions that fall under its
ttp://www.treas.gov/press/releases/jsl728.htm
5/5/2005
JS-1728: Written Testimony of <br>Samuel W . B o d m a n , Deputy Secretary<br>U.S. Dep... Page 4 of 8
framework. Treasury's job is to make sure that those private sector institutions fulfill
their legal responsibilities - in other words, to enforce compliance.
According to Treasury regulations and orders, the Secretary has delegated the
overall authority for enforcement and compliance of this system to one of
Treasury's bureaus, the Financial Crimes Enforcement Network (FinCEN). The
Director of FinCEN retains the authority from the Secretary to pursue civil
enforcement actions against financial institutions for non-compliance with the B S A
and the implementing regulations. FinCEN has been empowered to assess civil
monetary penalties against, or require corrective action by, a financial institution
committing negligent or willful violations.
The Secretary has also delegated the authority to examine institutions to determine
B S A compliance to eight separate federal regulators:
The Board of Governors of the Federal Reserve System
The Office of the Comptroller of the Currency ( O C C )
The Federal Deposit Insurance Corporation (FDIC)
The Office of Thrift Supervision (OTS)
The National Credit Union Administration ( N C U A )
The Securities and Exchange Commission (SEC)
The Commodity Futures Trading Commission (CFTC)
The Internal Revenue Service (IRS)
Each one of these regulators has a distinct group of institutions for which they are
responsible:
• the Federal Reserve Board covers state chartered banks that are members
of the Federal Reserve System;
• the O C C covers nationally chartered banks;
• the FDIC covers non-Federal Reserve System m e m b e r banks;
• the O T S covers federally chartered thrifts;
• the N C U A covers federally insured credit unions;
• the S E C covers securities broker-dealers and mutual funds;
• the C F T C covers futures commission merchants and futures introducing
brokers; and
• the IRS covers primarily money service businesses and casinos outside of
Nevada.
We have made significant strides lately - for example, registering thousands of
M S B s in the last few years, but the magnitude of the task of ensuring compliance in
this area is enormous.
In trying to coordinate this overall structure, it is important to keep in mind the
varying levels of independence of each of the participating regulators. I mention
this not because the Department has any desire to exercise full control over all of
these other agencies - which w e certainly do not - but simply to m a k e clear the
operational realities of the current arrangement. FinCEN and the IRS are bureaus
of the Treasury, and like most of the other Treasury bureaus, the Secretary has a
significant degree of direct authority over them. O C C and O T S are also Treasury
bureaus, and are subject to the general oversight of the Secretary. However,
Congress has provided them a level of independence from Departmental
involvement for various functions of those agencies, such as specific matters or
proceedings, including agency enforcement actions. Finally, the Federal Reserve,
FDIC, N C U A , S E C , and C F T C are agencies over which the Secretary has no direct
authority at all.
As I already mentioned, Secretary Snow and I are in the process of reviewing the
system in its entirety. W e are considering whether any systemic changes that
should be m a d e in order to ensure that w e are in a position to successfully carry out
Treasury's duties. To this end, w e have hosted a series of meetings on this topic.
T w o weeks ago, I brought together s o m e of the relevant Treasury components FinCEN, the Office of Thrift Supervision, and the Office of the Comptroller of the
Currency, and O F A C to discuss that question. W e talked about ways of improving
the transparency of compliance and enforcement efforts by developing and
enhancing regular reporting and information sharing on: examination policies and
procedures; aggregate results of examinations across each of the regulated
financial industries; deficiency trends in B S A compliance; and enforcement actions
contemplated in response to these deficiencies. S o m e of this reporting already
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occurs, but it is sporadic and not comprehensive. Such enhanced transparency
should assist us in harmonizing the administration of the B S A across the financial
system and in responding to compliance and risk trends with appropriate guidance
to the regulatory community.
At that meeting, I was encouraged to hear that OTS Director Jim Gilleran, who is
the current chair of the Federal Financial Institutions Examination Council (FFIEC),
plans to use that body to re-emphasize the importance of B S A compliance. I also
understand that William Fox, the Director of FinCEN, will be invited to participate
with that regulatory group. This is important, as the Secretary has delegated to
FinCEN his responsibility for ensuring B S A compliance across the banking system.
Earlier this week, Secretary Snow hosted a principals-level gathering of all of the
banking regulators. Secretary S n o w and I expressed serious concerns about our
ability to vouch for the effectiveness of the current system. W e discussed the need
for regular reporting and information sharing. W e also began exploring possible
ways that to build a sustainable process and capacity to validate the effectiveness
of the regulators' compliance programs. To the extent that there are administrative
or legal barriers that w e encounter, w e will identify them and then see h o w w e can
resolve them.
In focusing on these issues, we are also relying on the useful work done over the
past few years by the Treasury Inspector General and by the Treasury Inspector
General for Tax Administration. Their reports have identified s o m e deficiencies,
and have outlined s o m e steps to improve the system. W e are currently analyzing
the reports, seeing what additional measures they recommended still need to be
taken, and working with them to address our concerns.
Ensuring that the banks and other financial institutions comply with provisions of the
Bank Secrecy Act is only one part of the equation. It is equally important that w e
m a k e the best possible use of this reporting in order to protect the financial system
and to attack those w h o use the system for unlawful or improper purposes. Shortly
after arriving at Treasury, I learned that there were s o m e historical problems with
the administration of B S A data - as FinCEN has the responsibility for making sure
the system works, but the IRS actually handles the data collection and
dissemination. I immediately brought in IRS Commissioner Everson and Director
Fox to resolve any issues. In the short term, IRS has committed to fulfilling
FinCEN's requirements for the data, and in the longer term, the Department will
remain committed to constructing B S A Direct, an updated electronic system for
efficiently analyzing and retrieving relevant data.
We are also exploring the idea of more electronic filing. There are currently only a
small percentage of suspicious activity reports and currency transaction reports that
are filed electronically, and there are numerous benefits of increasing the share of
electronically filed reports. Just like in the tax system, electronic filing m e a n s faster
and less expensive processing, as well less chance of error. I recognize that
increased electronic filing could impose a burden on m a n y of the less sophisticated
filers, and so w e will evaluate both costs and benefits as w e m o v e forward.
In administering the BSA, Treasury uses various mechanisms to maintain
relationships between the private sector, law enforcement, and other regulatory
agencies. These include rule making processes, interagency working groups, joint
task forces, detailed liaisons, cross-training seminars, conferences and outreach
events. These mechanisms coordinate the development, implementation, and
administration of B S A policies across the field of effected federal agencies, the
industries they supervise, and the criminal justice system.
A good example of this can be seen in the workings of the Bank Secrecy Act
Advisory Group ( B S A A G ) , a congressionally chartered group that is chaired by the
Treasury Department.
This group, which is comprised of regulatory, law enforcement and private sector
representatives, meets on a regular basis to discuss issues of concern in the
administration of the BSA. At the group's most recent meeting - about 4 weeks
ago - I asked them to assist m e in evaluating the effectiveness of B S A compliance
generally. I understand that a subset of the group has been looking at this
question, and I a m looking forward to hearing and discussing their initial findings.
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While there is always more work to be done, I do think that as a general matter, the
government and the private sector have done a good job of developing and
implementing the regulatory changes to the B S A following the passage of the
Patriot Act. O n e good example, for instance, is the implementation and
effectiveness of Section 314(a) of the Patriot Act.
Broadly speaking, Section 314(a) authorizes law enforcement to request
information about suspected terrorists and money launderers from U.S. financial
institutions, and financial institutions to communicate a m o n g themselves about such
targets. Given the size of the U.S. financial system, this authority posed an
enormous implementation challenge. Yet, pursuant to the relationship mechanisms
described above, Treasury has worked with the private sector, law enforcement and
the regulatory community to develop, implement and administer a comprehensive
and effective Section 314(a) process. Under revised procedures, law enforcement
sends 314(a) requests through FinCEN, customarily on a batched basis issued
every two weeks, and financial institutions have two weeks to respond back to
FinCEN with any matches and an identified point of contact for appropriate law
enforcement follow up. In administering this process, FinCEN maintains an
electronic database of 314(a) contacts for over 26,000 financial institutions,
demonstrating overwhelming initial compliance with 314(a) contact requirements by
the financial sector.
Most importantly, the 314(a) process has achieved significant results for law
enforcement. For example, between April 1, 2003 and April 26, 2004, IRS-CI
submitted 16 requests to FinCEN pertaining to 66 individuals and 17 businesses.
These requests generated 646 positive matches with over 1274 financial
institutions. Since Section 314(a)'s creation, the system has been used to send the
n a m e s of 1,547 persons suspected of terrorism financing or money laundering to
over 26,000 financial institutions, and has produced in 10,560 matches that were
passed on to law enforcement. These results suggest substantial compliance with
314(a) across the financial sector, generating substantial leads for law
enforcement.
Before concluding, I would like to briefly address issues of concern regarding the
Terrorism Risk Insurance Act, Government Sponsored Enterprises and financial
education.
IV. Terrorism Risk Insurance Act of 2002 (TRIA)
Congress enacted TRIA in the fall of 2002 to address disruptions in the market for
commercial property and casualty terrorism risk insurance caused by the terrorist
attacks of September 11, 2001. TRIA establishes a temporary Federal program of
shared public and private compensation for insured commercial property and
casualty losses resulting from acts of terrorism covered by the Act. Treasury has
the chief responsibility for implementing TRIA and has issued regulations, created
and staffed the Terrorism Risk Insurance Program office, and begun mandated
studies and data collection efforts. It is important to note that as Treasury has
moved through the rule making process, the program from the beginning has been,
and continues to be, fully operational. Treasury still has s o m e important tasks to
complete, including the required determination by September 1, 2004, as to
whether TRIA's "make available" provisions should be extended into 2005 - the
third year of the program. Treasury is now in the process of developing a base of
information from which the Secretary can m a k e this required determination.
Another remaining task is to report to Congress by June 30, 2005, on specific
issues associated with the Act, including the effectiveness of the program and the
likely capacity of the property and casualty insurance industry to offer insurance for
terrorism risk after expiration of the Program.
On May 5th, Treasury published a request for comment in the Federal Register to
solicit views from all interested parties as to whether the m a k e available provision of
the Terrorism Risk Insurance Act should be extended through the life of the
program. The c o m m e n t period ended on June 4 th , and w e are n o w analyzing the
approximately 180 comments that w e received.
V. Government Sponsored Enterprises
Our nation has a world-class system of housing finance. Unfortunately, we do not
have a world-class system of supervision of the housing government sponsored
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enterprises (GSEs), even though the importance of the housing financial system
that the G S E s serve d e m a n d s the best in supervision to ensure the long-term
vitality of that system. Therefore, the Administration has called for a new, first
class, regulatory supervisor for the three housing G S E s : Fannie M a e , Freddie Mac,
and the Federal H o m e Loan Banking System. This n e w supervisor should have all
the powers and tools necessary to oversee the activities of housing G S E s with the
goal of promoting the continued strength and vitality of the housing finance
markets. The Administration has set forth several elements that must be included
in any G S E regulatory, reform bill in order for the supervisory system to be credible.
These elements - which were set forth in testimony presented to this Committee
last fall by Secretary S n o w and former Secretary Martinez - include: (1) broader
authority for H U D to set and enforce meaningful housing goals; (2) independent
funding and litigation authority; (3) control over both minimum and risk based
capital; (4) receivership authority; and (5) authority to review and approve or reject
n e w and existing activities.
At the same time, the Administration will continue to review what existing authorities
can be exercised to improve supervision. However, exercise of existing authorities
cannot replace need for legislation to correct deficiencies in those existing statutory
authorities.
VI. Treasury's Office of Financial Education
The Committee has also asked that I address what the Department is doing in the
area of financial education. The Department of the Treasury has established an
Office of Financial Education to promote access to financial education programs
that help Americans obtain practical knowledge and skills to m a k e informed
financial choices throughout their lives. The Office carries out this mission in several
ways: coordinating the federal effort on financial education, performing public
outreach to increase awareness, setting standards to help raise the effectiveness of
financial education programs, and brokering relationships between those w h o need
and those w h o provide financial education.
The Department leads the Financial Literacy and Education Commission, a group
of twenty federal government agencies charged with improving the level of financial
education in the country. Congress created the Commission last year, as part of
the Fair and Accurate Credit Transactions Act. The Commission has held two
meetings this year, the most recent one on M a y 20, which w a s attended by m a n y of
your staff. Significant progress has been m a d e toward the establishment of a toll
free hotline for financial education as well as towards a financial education website
to help the public find information about financial education resources and
programs. The website and hotline will provide more convenient access to public
information on financial education. The Commission has also heard from a number
of public and private sector organizations, something which will help it to formulate
a national strategy for financial education.
In addition, the Treasury Department maintains a highly visible public profile
through testimony before lawmakers on Capitol Hill, public speaking engagements
and newsletters.
The OFE has also developed standards by which to evaluate and highlight
successful financial education programs throughout the country and communicates
those standards by awarding certificates of recognition to exemplary programs
which meet those standards. The standards are available in the O F E newsletter
and on the O F E website. This effort also enables the honored programs to achieve
greater esteem and participation within their respective communities.
VII. Conclusion
I thank you for the opportunity to be here today. The Treasury Department is
charged with enormous responsibilities in attacking terrorist financing and financial
crime, and in protecting the integrity of our financial systems. TFI and the other
developments that I have discussed will improve Treasury's ability to meet these
challenges.
I look forward to your comments and questions. And I hope this will be the start of
an ongoing dialogue with this Committee as w e m o v e forward with this important
effort, and with the rest of Treasury's activities.
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Thank you. I will be happy to answer any questions.
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PRLSS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
June 16,2004
JS-1729
Testimony of R. Richard Newcomb, Director
Office of Foreign Assets Control
U.S. Department of the Treasury
Before the H o u s e Financial Services Subcommittee o n Oversight
and Investigations
Introduction
Madame Chairman, members of the Committee, thank you for the opportunity to
testify on the Office of Foreign Assets Control's efforts to combat terrorist support
networks which forms an important part of the Treasury Department and our
government's national security mission. It's a pleasure to be here, as w e discuss
Treasury's n e w office and its role in these areas. Please allow m e to begin with an
overview of our overall mission and conclude with our strategies for addressing the
threat of international terrorism.
II. OFAC's Core Mission
The primary mission of the Office of Foreign Assets Control ("OFAC") of the U.S.
Department of the Treasury is to administer and enforce economic sanctions
against targeted foreign countries, and groups and individuals, including terrorists
and terrorist organizations and narcotic traffickers, which pose a threat to the
national security, foreign policy or economy of the United States. O F A C acts under
general Presidential wartime and national emergency powers, as well as specific
legislation, to prohibit transactions and freeze (or "block") assets subject to U.S.
jurisdiction. Economic sanctions are intended to deprive the target of the use of its
assets and deny the target access to the U.S. financial system and the benefits of
trade, transactions and services involving U.S. markets. These s a m e authorities
have also been used to protect assets within U.S. jurisdiction of countries subject to
foreign occupation and to further important U.S. nonproliferation goals.
OFAC currently administers and enforces 27 economic sanctions programs
pursuant to Presidential and Congressional mandates. These programs are a
crucial element in preserving and advancing the foreign policy and national security
objectives of the United States, and are usually taken in conjunction with diplomatic,
law enforcement and occasionally military action.
OFAC's historical mission has been the administration of sanctions against target
governments that engage in policies inimical to U.S. foreign policy and security
interests, including regional destabilization, severe h u m a n rights abuses, and
repression of democracy. Recent programs in the Western Balkans, Zimbabwe,
Sudan, and other regions reflect that focus. Since 1995, the Executive Branch has
increasingly used its statutory blocking powers to target international terrorist
groups and narcotics traffickers.
Many "country-based" sanctions programs are part of the U.S. government's
response to the threat posed by international terrorism. The Secretary of State has
designated seven countries - Cuba, North Korea, Iran, Libya, Iraq, Sudan and Syria
as supporting international terrorism. Three of these countries are subject to
comprehensive economic sanctions: Cuba, Iran, and Sudan (1997).
Comprehensive sanctions have been imposed in the past against Libya, Iraq, and
North Korea. In addition, effective M a y 12, 2004, the President issued a n e w E.O.
prohibiting specific types of transactions and exportations and importations to and
from Syria due to its continued support for terrorism, its occupation of Lebanon, its
pursuit of weapons of m a s s destruction and missile programs and its undermining
of the United States and international efforts to stabilize and reconstruct Iraq.
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OFAC also administers a growing number of "list-based" programs, targeting
m e m b e r s of government regimes and other individuals and groups w h o s e activities
are inimical to U.S. national security and foreign policy interests. In addition to
OFAC's terrorism and narcotics trafficking programs, these include sanctions
against persons destabilizing the Western Balkans and against the regimes in
Burma and Zimbabwe. O F A C also administers programs pertaining to nonproliferation, including the protection of assets relating to the disposition of Russian
uranium, and to trade in rough diamonds.
III. Administration and Transparency
Organization
OFAC has grown over the past eighteen years from an office with ten employees
administering a handful of programs to a major operation of 144 employees
administering 27 programs. A large percentage of OFAC's professional staff have
had prior professional experience in various areas of the law, finance, banking, law
enforcement, and intelligence. To accomplish its objectives, O F A C relies on good
cooperative working relationships with other Treasury components, federal
agencies, particularly State and C o m m e r c e , law enforcement agencies, the
intelligence community, domestic and international financial institutions, the
business community and foreign governments.
OFAC is an organization which blends regulatory, national security, law
enforcement, and intelligence into a single entity with m a n y mandates but a single
focus: effectively implementing economic sanctions programs against foreign
adversaries w h e n imposed by the President or the Congress. In order to carry out
OFAC's mission, the organization is divided into ten divisions, with offices in Miami,
Mexico City and Bogota and soon to open this s u m m e r an office in Bahrain.
OFAC's operations are also supported by attorneys in the Office of Chief Counsel
(Foreign Assets Control). T w o divisions are primarily devoted to the narcotics and
terrorism programs, while others, primarily the Licensing, Compliance and Civil
Penalties Divisions, are geared toward interaction with the public. It is these latter
Divisions that primarily serve as OFAC's liaison with the public and figure
prominently in promoting the transparency of OFAC's operations. Finally, O F A C ' s
Enforcement Division provides crucial liaison with the law enforcement community.
Licensing Division
OFAC's licensing authority serves to "fine tune" or carve out exceptions to the
broad prohibitions imposed under sanctions programs, ensuring that those
transactions consistent with U.S. policy are permitted, either by general or specific
license. For example, working closely with the Department of State, the Licensing
Division played a critical role in issuing specific licenses to facilitate humanitarian
relief activity by U.S. non-governmental organizations in the w a k e of the B a m
earthquake in Iran. The primary focus of O F A C Licensing involves the countrybased programs, primarily C u b a and Iran. Major areas of activity include issuing
advisory opinions interpreting the regulations; processing license applications for
exports of agricultural products, medicine and medical devices to Iran and Sudan
pursuant to the Trade Sanctions Reform and Export Enhancement Act of 2000;
license applications pertaining to travel and activities involving Cuba; applications to
unblock funds transfers blocked by U.S. financial institutions; and the preparation of
numerous legal Notices continuing statutory authority for OFAC's programs and
semiannual reports to the Congress on their administration. Licensing activity
involving the list-based programs centers primarily on the authorization of payment
for legal services provided to blocked persons. OFAC's Miami Office, which
coordinates C u b a travel licensing, compliance and enforcement matters, also
reports primarily to the Licensing Division.
The Licensing Division reviews, analyzes and responds to more than 25,000
requests per year for specific licenses covering a broad range of trade, financial
and travel-related transactions, including those related to the exportation and
importation of goods and services and the provision of humanitarian and banking
and financial services. It also provides written and oral guidance to the public and
private sectors on the application of OFAC's regulatory programs to specific facts
and circumstances. Redacted versions of interpretive rulings prepared by the
Licensing Division are published on OFAC's website. During F Y 2003, the
Licensing Division m a d e substantial progress in reducing the overall response time
to incoming correspondence, primarily through a net increase of staff of 11 F T E s
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and conversion to an Oracle database and the use of that database for effective
case management. The Licensing Division is also currently implementing a n e w
integrated voice response system to more efficiently handle the large volume of
calls it receives from the public.
Compliance Division
OFAC Compliance adds a unique dimension to the war against terrorists and
against other sanctions targets. Working with the regulatory community and with
industry groups, it expeditiously formats and makes information public through
appropriate channels in appropriate formats to assure that assets are blocked and
the ability to carry out transactions through U.S. parties is terminated. It is always
aware that "time is of the essence" and, if a n e w e n e m y were to appear tomorrow,
O F A C is confident that it would be able to implement a n e w sanctions program
within 24 hours even in a crisis environment. Our Compliance team is "in the
trenches," so to speak, and provides a unique service through its toll-free telephone
"hotline" giving real-time guidance on in-process transactions. A s a result of its
efforts every major bank, every major broker-dealer, and more and more industry
professionals use software to scan and interdict transactions involving sanctions
targets. OFAC's hotline averages 1,000 calls per week with at least $1 million and
sometimes as m u c h as $35 million in appropriately interdicted items each week.
Recently, for example, O F A C worked with a U S bank to block a wire transfer for
close to $100,000 originating from a suspect and going to an organization
associated with a Specially Designated Global Terrorist organization which w e had
named.
OFAC uses multiple formats and multiple platforms to get information out on its
targets and its programs - including on our website which n o w has over 1,000
documents, over a million hits per month, and over 15,000 email subscribers--so
that banks, broker-dealers, and others can stop transactions in mid-stream.
OFAC's Compliance Division also runs more than 100 training sessions per year
around the country and follows up with cases based on regulatory audits and
blocked and rejected items which have resulted in 4,250 administrative subpoenas,
3,500 warning letters, and hundreds and hundreds of referrals for Enforcement or
Civil Penalties action over the past five years.
Its positioning within the Treasury Department provides OFAC's Compliance with
an invaluable capability to dialogue with and oversee industry groups as diverse as
banking and securities, exporters and importers, travel service providers, insurers,
and even credit bureaus and retailers.
Civil Penalties Division
OFAC's Civil Penalties Division acts as the civil enforcement arm of OFAC by
imposing civil penalties for violations of O F A C programs. Penalties range from
$11,000 to $1,075 million. Since 1993, the Division has collected nearly $30 million
in civil penalties for sanctions violations and has processed more than 8,000
matters.
The Division reviews evidence and determines the appropriate final OFAC penalty
action -- either a settlement, a penalty imposition, or the decision not to impose a
penalty. It also grants requests for an agency hearing before an administrative law
judge (ALJ) in cases under the Trading With the E n e m y Act ( T W E A ) . Four ALJs
have contracted with O F A C to hear such cases. In addition to ALJ hearings and the
administrative civil penalty process, OFAC's Civil Penalties Division resolves civil
enforcement cases in conjunction with criminal prosecutions by the Justice
Department. O F A C also enters into global settlements of violations in forfeiture
actions brought by the U.S. Customs and Border Protection (CBP) and works
closely with CBP's Office of Regulations and Rulings and the Fines, Penalties and
Forfeitures Offices nation wide.
The Civil Penalties Division publishes information on completed settlements and
penalty impositions on OFAC's Penalties Disclosure Website. Providing additional
transparency, as recommended by the Judicial Review Commission, O F A C has
published in the Federal Register its Enforcement Guidelines with Penalty
Mitigation Guidelines.
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Enforcement Division
OFAC Enforcement concentrates on providing advice and assistance concerning
criminal investigations and investigates civil violations of OFAC's regulations and
statutes.
• Criminal investigations. O F A C Enforcement officers provide expert advice
and assistance to Assistant United States Attorneys and criminal
investigators from the FBI, Bureau of Immigration and Customs
Enforcement (ICE) and the Department of Commerce's Office of Export
Enforcement (OEE) in the investigation of suspected criminal violations of
O F A C programs. The FBI has primary investigative authority for terrorism
cases, while ICE conducts most investigations dealing with trade-related
transactions. OFAC's long-standing and close relationship with ICE, and its
predecessor office the U S Customs Office of Investigation, has continued
after the transfer of Customs to the Department of Homeland Security
("DHS"). This relationship works very well. ICE has field offices nationwide,
covering all ports of entry, and agents assigned as attaches for overseas
investigative coverage. ICE agents, along with inspectors from the C B P at
D H S , have seizure authority at U.S. ports and they are the front line of
OFAC's efforts to interdict unlicensed goods being exported to, or imported
from, sanctioned countries or persons. Since 1995, there have been
approximately 68 cases that resulted in criminal enforcement action for
T W E A and the International Emergency Economic Powers Act ("IEEPA")
violations.
• Civil Investigations. The Enforcement Division conducts civil investigations
as a result of voluntary disclosures, informant information, internal research
by O F A C staff, and referrals from ICE and other agencies. The Division
currently has more than 2600 civil cases opened. These cases range from
complex export, reexport and other trade transactions, to violations of O F A C
Cuba travel restrictions. Most such cases result in an internal referral to the
Civil Penalties Division for the possible imposition of civil penalties.
Domestic Blocking Actions. O F A C officers serve blocking notices and work
to ensure the blocking of assets of entities in the United States that are
designated under the Foreign Terrorist, Narcotics and country programs.
These actions are accomplished with the assistance of special agents from
the FBI and ICE as needed.
•
L a w Enforcement Outreach Training. O F A C provides sanctions
enforcement training to ICE agents and C B P inspectors on a monthly basis
through in-service training courses at the Federal Law Enforcement Training
Center and at field offices and ports nation-wide. W e have also provided
training presentations to agents and analysts at FBI Headquarters and at
the FBI A c a d e m y at Quantico, VA.
Transparency and Outreach
In January 2001, the Judicial Review Commission on Foreign Asset Control
submitted its final report to the Congress, making several recommendations with
respect to O F A C . While s o m e were specific to the Foreign Narcotics Kingpin
Designation Act and OFAC's designation authority generally, others pertained to
the '"transparency" of OFAC's operations and decision making standards in order
to facilitate greater understanding of, and compliance with, the sanctions laws
[OFAC] administers." In response to the Commission's report, O F A C and the three
Divisions described above have taken several measures to enhance the
transparency of OFAC's operations. Central to this initiative is the use of OFAC's
website, administered by the Compliance Division, which currently contains more
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than 1,000 documents, including 96 program brochures, guidelines and general
licenses, 12 industry brochures, and over 200 legal documents. Website usage
statistics indicate in excess of 1.3 million hits per month. O F A C also publishes
reports, speeches, and Congressional testimony on its website. Included a m o n g the
reports are quarterly reports to the Congress on the administration of the licensing
regime pertaining to the exportation of agricultural products, medicine and medical
devices to Iran, Sudan, and, until recently, Libya. OFAC's Terrorist Assets Reports
for 2001 through 2003 are also available.
Interpretive rulings in redacted format prepared by the Licensing Division are
published on the website, extending the benefit of what had previously been private
guidance. O F A C has also published 95 questions of general applicability frequently
asked by the public about O F A C and its programs.
Publication of various OFAC guidelines is also an important component of the
transparency initiative. Along with the Enforcement Guidelines, O F A C has issued
comprehensive application guidelines pertaining to the authorization of travel
transactions involving Cuba. These guidelines were instrumental in reducing a
backlog of license applications in this category from more than four hundred cases
to fewer than one hundred, with a current average processing time per application
of fewer than nine days. O F A C also issues a circular setting forth the regulatory
program governing travel, carrier and funds forwarding services provided in the
context of the Cuba embargo.
Responding to one of the Judicial Review Commission's recommendations, OFAC,
wherever possible, has issued its regulations in the Federal Register as interim final
rules allowing for public comments.
Finally, there are listings on the website for more than 100 sanctions workshops in
the near future. These workshops provide a significant outreach to the financial and
other communities O F A C regulates, further promoting transparency of agency
operations.
IV. OFAC's Designation Programs
Designations constitute the identification of foreign adversaries and the networks of
companies, other entities, and individuals that are associated with them; as a result
of a person's designation pursuant to an Executive orders ("EO") or statute, U.S.
persons are prohibited from conducting transactions, providing services, and having
other dealings with them. Generically, those w h o are placed on OFAC's public list
are referred to as "Specially Designated Nationals" or "SDNs." Typically, S D N s are
the instrumentalities and representatives that help sustain a sanctioned foreign
government or adversary and commonly include the financial and commercial
enterprises, front companies, leaders, agents, and middlemen of the sanctions
target. In the terrorism programs, they are known as S D G T s , S D T s and FTOs; in
the narcotics programs they are S D N T s for the Colombian cartels and Tier I and
Tier II S D N T K s under the Kingpin Act. In the country programs, they are S D N s .
OFAC's International Programs Division and Foreign Terrorist Programs Division
are the offices which research and identify these targets for designation.
Legal Authorities
International Emergency Economic Powers Act
In January 1995, the President first used his IEEPA authority to deal explicitly with
the threat to U.S. foreign policy and national security posed by terrorism, declaring
a national emergency with respect to terrorists w h o threaten to disrupt the Middle
East Peace Process. This action, implemented through Executive Order 12947,
expanded the use of economic sanctions as a tool of U.S. foreign policy to target
groups and individuals, as well as foreign governments. During the late 1990s,
IEEPA authorities were used to issue additional Executive Orders imposing
sanctions on al Qaida and U s a m a bin Ladin and entities or individuals that are
owned or controlled by, act for or on behalf of, or that provide material or financial
support to al Qaida or U s a m a bin Ladin.
Following this model, in October 1995, the President announced the concept of
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using EO 12947 as a model for targeting significant foreign narcotics traffickers
centered in Colombia, i.e., the Colombian drug trafficking cartels. That IEEPA
program, implemented in E O 12978 with the identification by the President of four
Cali Cartel drug kingpins, has expanded into a key tool in the fight against the
Colombian cartels. A s of today, 14 Colombian drug kingpins, 381 entities, and 561
other individuals associated with the Cali, North Valle, and North Coast drug cartels
have been designated as Specially Designated Narcotics Traffickers ("SDNTs")
under E O 12978.
Authorities in Response to September 11th.
The President harnessed the IEEPA powers and authorities - as well as his
authority under the United Nations Participation Act - in response to the terrorist
attacks of September 11. O n September 23, 2001, President Bush issued
Executive Order 13224, "Blocking Property and Prohibiting Transactions with
Persons W h o Commit, Threaten to Commit, or Support Terrorism" declaring that
the grave acts of terrorism and the threats of terrorism committed by foreign
terrorists posed an unusual and extraordinary threat to the national security, foreign
policy, and economy of the United States. E O 13224, as amended, authorizes the
Secretaries of the Treasury and State, in consultation with the Department of
Justice and the Department of Homeland Security, to implement the President's
authority to combat terrorists, terrorist organizations and terrorist support networks
systemically and strategically.
This order prohibits U.S. persons from transacting or dealing with individuals and
entities owned or controlled by, acting for or on behalf of, assisting or supporting, or
otherwise associated with, persons listed in the Executive Order. Those designated
and listed under the Executive Order are known as "Specially Designated Global
Terrorists" (SDGTs). Violations of the E O with respect to S D G T s are subject to civil
penalties; and if the violation is willful, persons m a y be criminally charged. The
Executive Order also blocks "all property and interests in property of [designated
persons] that are in the United States or that hereafter c o m e within the United
States, or that hereafter c o m e within the possession or control of United States
persons[.]"
To date, the U.S. has designated 375 individuals and entities as SDGTs pursuant to
E O 13224. More than 270 of these entities are associated with either al Qaida or
the Taliban which provides the basis to propose these n a m e s to the U N 1267
Sanctions Committee for inclusion on its consolidated list of individuals and entities
the assets of which U N m e m b e r states are obligated to freeze in accordance with
relevant United Nations Security Resolutions ( U N S C R s ) including resolutions1267
and, most recently, 1526. The United States has worked diligently with the U N
Security Council to adopt resolutions reflecting the goals of our domestic executive
orders and obligating U N m e m b e r states to freeze terrorism related assets.
Rolling FTOs into SDGTs Makes War on Terrorist Infrastructure Global
On November 2, 2001, the U.S. took an additional significant step when the
Secretary of State, in consultation with the Secretary of the Treasury and the
Attorney General, utilized the n e w authorities in E O 13224 to designate 22 Foreign
Terrorist Organizations (FTOs) as Specially Designated Global Terrorists (SDGTs).
This action expanded the W a r on Terrorism beyond al Qaida and the Taliban and
associated individuals and entities to include H a m a s , Hizballah, the F A R C , the Real
IRA and others. This action created a truly global war on terrorism and terrorist
financing and demonstrated the USG's commitment to continue and expand its
efforts against all terrorist groups posing a threat to the United States, its citizens,
its interests, and its allies. Currently, there are 37 F T O s which are also designated
as S D G T s .
Foreign Narcotics Kingpin Designation Act
Building on the successes of the Colombian narcotics traffickers program, in
D e c e m b e r 1999 Congress enacted the Foreign Narcotics Kingpin Designation Act
(Kingpin Act), originally introduced by Senators Coverdell and Feinstein and
modeled on IEEPA and OFAC's Columbia S D N T program. It provides a statutory
framework for the imposition of sanctions against foreign drug kingpins and their
organizations on a worldwide scale. Like its terrorism and narcotics Executive
Order-based predecessors, the Kingpin Act is directed against individuals or entities
and their support infrastructure, not against the countries in which they are
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imbedded. Since the first list of kingpins was issued, 48 foreign drug kingpins, 14
derivative companies, and 52 derivative individuals have been designated. These
totals are in addition to the 14 Colombian Principal Individuals that have been
designated as Colombian Specially Designated Narcotics Traffickers [SDNTs]
pursuant to E.O. 12978.
Antiterrorism and Effective Death Penalty Act
In 1996, Congress passed the Antiterrorism and Effective Death Penalty Act
("AEDPA"). A E D P A makes it a criminal offense to: (1) engage in a financial
transaction with the government of a country designated as supporting international
terrorism; or (2) provide material support or resources to a designated Foreign
Terrorist Organization (FTO).
Thirty-seven FTOs are currently subject to OFAC-administered sanctions. These
F T O s have been designated by the Secretary of State in consultation with the
Secretary of the Treasury and the Attorney General. Under the A E D P A and OFAC's
implementing regulations, U.S. financial institutions must maintain control over all
funds in which an F T O has an interest and report the existence of such funds to
O F A C . O F A C works with State and Justice on F T O designations, and with the
financial community, the FBI, State, and other Federal agencies in implementing
the prohibitions of the A E D P A .
Uniting and Strengthening America by Providing Appropriate Tools Required to
Intercept and Obstruct Terrorism Act of 2001
The Uniting and Strengthening America by Providing Appropriate Tools Required to
Intercept and Obstruct Terrorism Act of 2001 (the U S A " P A T R I O T Act"), passed in
October 2001, a m e n d s IEEPA to provide critical m e a n s and authority to O F A C to
counter terrorist financing and their support structures. The Act has enhanced
OFAC's ability to implement sanctions and to coordinate with other agencies by
clarifying OFAC's authorities to block assets of suspect entities prior to a formal
designation in "aid of an investigation." This critical authority helps prevent the
flight of assets and prevents the target from engaging in potential damaging
behavior or transactions. In addition, the P A T R I O T Act explicitly authorizes
submission of classified information to a court, in camera and ex parte, upon a legal
challenge to a designation. This n e w P A T R I O T Act authority has greatly enhanced
our ability to m a k e and defend designations by making it absolutely clear that
O F A C m a y use classified information in making designations without turning the
material over to an entity or individual that challenges its designation.
OFAC'S Counter Narcotics Program
OFAC's Mission Against Foreign Drug Cartels
One of the primary missions of OFAC/IPD officers is to investigate, through both
"all-source" research and extensive field work with U.S. law enforcement agents
and Assistant U.S. Attorneys, and compile the administrative record that serves as
the O F A C case to designate significant foreign narcotics traffickers and their
networks of front companies and individuals pursuant to the Specially Designated
Narcotics Traffickers ( S D N T ) program pursuant to E O 12978 and the Foreign
Narcotics Kingpin Designation Act ("Kingpin Act").
Interagency Coordination
In its capacity to administer and enforce economic sanctions against foreign
narcotics traffickers, both traditional drug cartel and narco-terrorist targets, OFAC's
International Programs Division (OFAC/IPD) works extensively with other U.S.
agencies in the law enforcement and intelligence communities, as well as the
President's Office of National Drug Control Policy. O F A C / I P D officers regularly are
requested to train DEA's financial investigators on OFAC's authorities to designate
and block foreign drug cartels' financial networks under E O 12978 and the Kingpin
Act. In addition, O F A C / I P D officers have also provided presentations for various
ICE, FBI, U.S. Attorney's offices, the Department of Justice, and the Department of
Defense on O F A C narcotics and other sanctions programs and h o w they can work
jointly with a U.S. criminal investigation. O F A C continues to expand its relationships
with U.S. law enforcement, including ICE, D E A , FBI, IRS Criminal Investigation and
U.S. Attorney's Offices, and with other agencies including the Department of State,
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Department of Defense, and Central Intelligence Agency. While some formal
interagency coordination is established by executive order or legislation (the
Kingpin Act), in the day-to-day execution of these programs, interagency
cooperation is the result of experienced OFAC/IPD officers working closely with
other U.S. criminal investigators. These working relationships have led to several
successful sanctions designation actions over the past few years.
OFAC's Enforcement Division and its International Programs Division have distinct
but complementary relationships with the federal law enforcement community.
OFAC/IPD is focused on investigations and research leading to designations,
whether worked independently or jointly with federal law enforcement agencies and
task forces, U.S. Attorneys offices, or other U S G agencies. In the programs that
O F A C enforces against foreign narcotics trafficking cartels and drug kingpins,
OFAC/IPD has been working with the Department of Justice and D E A since 1995,
with a significant contingent of OFAC/IPD personnel cleared to work at D E A
headquarters. Over the years those working relationships have substantially
broadened, bringing O F A C to the point where OFAC/IPD officers, both in the field
and at headquarters, including OFAC's Attache Offices in Bogota and Mexico City,
regularly work with O C D E T F task forces, multiple U.S. Attorneys' offices, D E A , ICE,
IRS-CI and the FBI, on cases and broader operations of mutual interest. This
integrated operating method not only provides OFAC/IPD with better background
information and evidence for its targets, but also makes OFAC's expertise in the
business and financial structuring by the cartels available as a resource to law
enforcement and intelligence agencies. This appropriate close working relationship
with law enforcement provides a successful conduit for the sharing of information
between law enforcement agencies and OFAC/IPD.
Since September 11, 2001, OFAC has played an integral role in the terrorismrelated investigations being conducted throughout the law enforcement community.
To coordinate efforts and actions, O F A C has detailed a full time liaison to the FBI's
Terrorist Financing Operations Section (TFOS) and a weekly liaison to the Terrorist
Screening Center (TSC) and participates on their interagency enforcement teams.
Information obtained through close interagency coordination has been crucial in
"making the case" to designate particular targets domestically and internationally.
Information developed by O F A C has also proven useful for investigations being
conducted by T F O S , T S C and other U.S. law enforcement agencies.
The Kingpin Act
Pursuant to section 804(a) of the Kingpin Act, the Secretaries of Treasury, State,
and Defense, the Attorney General, and the Director of Central Intelligence must
consult and provide the appropriate and necessary information to enable the
President to submit a report to Congress no later than June 1 each year
designating additional Kingpin Tier I targets. OFAC/IPD is responsible for
coordinating the interagency process for the Kingpin Act.
On May 29, 2003, President Bush announced the names of 7 foreign persons that
he determined were significant foreign narcotics traffickers, or kingpins, under the
Kingpin Act. These n e w drug kingpins included 3 foreign groups - a Colombian
narco-terrorist guerrilla army (the Revolutionary Armed Forces of Colombia or
"FARC"), a Colombian narco-terrorist paramilitary force (the United Self-Defense
Forces or "AUC"), and a Burmese drug trafficking ethnic guerrilla army (United W a
State Army or " U W S A " ) . These were the first designations of narco-terrorist groups
under the Kingpin Act. The F A R C and the A U C had previously been n a m e d as
Foreign Terrorist Organizations by the State Department and designated as
Specially Designated Global Terrorists by O F A C pursuant to E O 13224.
On June 1, 2004, President Bush announced the names of 10 foreign persons that
he determined were significant foreign narcotics traffickers, or kingpins, under the
Kingpin Act. These n e w drug kingpins included 8 individuals involved in the
Mexican, Jamaican, Peruvian, Indian, and Afghanistan drug trade and 2 Mexican
groups - the Arellano Felix Organization and the Carrillo Fuentes Organization.
This action underscored the President's determination to do everything possible to
pursue drug traffickers, undermine their operations, and end the suffering that trade
in illicit drugs inflicts on Americans and other people around the world, as well as
preventing drug traffickers from supporting terrorists. Concurrent with the
President's Kingpin designations, O F A C blocked, in furtherance of investigation, the
Peruvian airline company, Aero Continente, six other companies, and six other
individuals connected to the newly n a m e d Kingpin, Fernando Zevallos.
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OFAC prepares and designates "Tier II" narco-terrorist leaders under the Kingpin
Act. O n February 19, 2004, OFAC/IPD took action against leaders and key figures
of two narco-terrorist organizations in Colombia, the F A R C and the A U C . Nineteen
leaders of the F A R C and eighteen key figures of the A U C plus three A U C front
companies were added to OFAC's list of "Tier II" individuals and entities designated
under the Kingpin Act. These Kingpin Tier II designations reinforce the reality that
the F A R C and the A U C are not simply terrorist/guerrilla organizations fighting to
achieve political agendas within Colombia. They are part and parcel of the narcotics
production and export threat to the United States, as well as Europe and other
countries of Latin America.
Specially Designated Narcotics Traffickers
Since the inception of the Colombia program in 1995 under Executive Order 12978,
O F A C / I P D officers have identified 956 businesses and individuals as Specially
Designated Narcotics Traffickers ("SDNTs") consisting of fourteen leaders of
Colombia's Cali, North Valle, and North Coast drug cartels.
• North Valle Cartel links to the A U C . In October 2002, O F A C coordinated the
designation of a Colombian cartel kingpin with the FBI. A joint investigation
by O F A C / I P D and the FBI Miami field office led to the S D N T action against
Colombia's North Valle cartel leader, Diego Leon Montoya Sanchez and a
network of front companies and individuals in Colombia in conjunction with
an FBI criminal asset forfeiture action in South Florida. Diego Leon Montoya
Sanchez is closely associated with the A U C , a Colombian narco-terrorist
organization.
• Continued Actions against the Cali Cartel. Since 2002, O F A C / I P D has
worked jointly with the U.S. Attorney's Office for Middle District of Florida
and Operation P A N A M A E X P R E S S , a multi-agency drug task force based
in Tampa, Florida. A two-year investigation by O F A C / I P D officers in
conjunction with the P A N A M A E X P R E S S task force led to the March 2003
S D N T action against two new Cali Cartel leaders, Joaquin Mario Valencia
Trujillo and Guillermo Valencia Trujillo, and their financial network of 56 front
companies and individuals. Joaquin Mario Valencia Trujillo is indicted in the
Middle District of Florida and w a s recently extradited to the U.S. from
Colombia.
In 2003, OFAC/IPD investigations focused on Cali cartel leaders, Miguel and
Gilberto Rodriguez Orejuela. In February 2003, OFAC/IPD designated 137
companies and individuals comprising a complex financial network in Colombia and
Spain controlled by Miguel and Gilberto Rodriguez Orejuela. This action exposed
and isolated a parallel network of Cali cartel front companies established to evade
O F A C sanctions. In March 2003, OFAC/IPD officers targeted a Colombian m o n e y
exchange business and a prominent Colombian stock brokerage firm, which
facilitated the Cali cartel network's financial transactions. In October 2003,
O F A C / I P D designated 134 new front companies and individuals including a network
of pharmaceutical companies extending from Colombia to Costa Rica, Ecuador,
P a n a m a , Peru, and Venezuela, with ties to financial companies in the Bahamas,
the British Virgin Islands and Spain. These S D N T actions were the result of a threeyear investigation by O F A C / I P D officers and the O F A C Attache - Bogota.
These actions under the SDNT and Kingpin Act programs reflect the increasing
cooperation, coordination and integration a m o n g the U.S. counter-narcotics
agencies in the battle against international narcotics trafficking and narco-terrorism.
O n March 3, 2004, the U.S. Attorney for the Southern District of N e w York issued a
joint statement with the D E A N e w York field office and the O F A C Director
announcing the indictment of two of Colombia's most important drug kingpins,
Gilberto Rodriguez Orejuela and Miguel Angel Rodriguez Orejuela, leaders of the
notorious Cali Cartel, under Operation D Y N A S T Y , a joint investigation involving the
U.S. Attorney's Office for the Southern District of N e w York, DEA, O F A C , and
Colombian authorities. Both Cali cartel leaders were designated under E O 12978
as Colombian cartel leaders in October 1995. The indictment charges the
Rodriguez Orejuela brothers with m o n e y laundering conspiracy based largely upon
the predicate offense of violating the IEEPA as a result of the drug kingpins' efforts
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to defeat OFAC's designations of many of their companies as SDNTs.
OFAC's Counter-Terrorism Program
Foundations of Terrorist Financing and Support
The threat of terrorist support networks and financing is real, and it has been
O F A C ' s mission to help identify and disrupt those networks.
There is much we know about how radical terrorist networks were established and
still thrive. OFAC's research has disclosed the overall framework of the support
structures that underpin the most prominent Islamic extremist movements
throughout the world. "Deep pocket" donors in the Middle East provide m o n e y
either to terrorist groups directly, or indirectly through trusted intermediaries and
non-governmental organizations (NGOs), including charities. These N G O s can, in
turn, use the m o n e y to provide funding and logistical services directly to terrorist
groups, including transportation, cover employment, and travel documentation.
They also provide support indirectly by using the funds for public works projects -wells, social centers, and clinics - to reach disaffected populations susceptible to
radicalizing influences. These projects also often include extremist religious
schools, which serve as fertile recruiting grounds for n e w m e m b e r s of terrorist
groups.
The terrorist networks are well-entrenched and self-sustaining, though vulnerable to
U.S., allied and international efforts. Looking forward, please allow m e to explain
h o w w e have arrived at this view and present the strategy, being implemented in
coordination with other components of the Treasury Department and other Federal
agencies including the Departments of Defense, State, Justice, Homeland Security,
the FBI, IRS Criminal Investigation, the intelligence community and other agencies,
to choke off the key nodes in the transnational terrorist support infrastructure.
Research and Evidentiary Preparation
The primary mission of officers within OFAC's Foreign Terrorist Programs Division
is to compile the administrative record or "evidentiary" material that serves as the
factual basis underlying a decision by O F A C to designate a specific person
pursuant to E O 13224 or other counter-terrorism sanctions authorities that triggers
a blocking of assets and a prohibition on U S persons from dealing with the
designated party. O F A C officers conduct "all-source" research that exploits a
variety of classified and unclassified information sources in order to determine h o w
the activities or relationships of a specific target meet the criteria of the E O . A s the
implementing and administrating agency for E O 13224 and other related programs,
O F A C coordinates and works with other U S agencies to identify, investigate and
develop potential targets for designation or other appropriate U S G actions. Officers
use their considerable expertise to evaluate available information in the critical
process of constructing a legally sufficient evidentiary record.
More broadly, OFAC officers compile research on multiple targets to build a
comprehensive schematic of the structure of particular terrorist network. They then
employ a "key nodes" methodology to identify these high value targets within them
that serve critical functions. O F A C believes that by eliminating these key nodes or
high value targets the network would be disabled because without them the network
would not receive sustaining services such as recruitment; training; logistical,
material, financial, or technological support; and leadership. O F A C selects specific
targets to recommend for designation based on the potential to cripple or otherwise
dramatically impair the operations of the overall network by economically isolating
these nodes. Economic sanctions are most effective against key nodes such as
donors; financiers (fundraisers, financial institutions, and other commercial
enterprises); leaders; charities; and facilitators such as logisticians. O F A C already
has targeted key nodes in terrorist networks in several areas of the world including
groups in Southeast Asia and various parts of Africa. O F A C is currently engaged in
n e w research on groups in the Middle East, including Iraq, and the Caucasus.
A completed OFAC evidentiary record on a particular target is submitted first for
legal review, then to the Executive Office of Terrorist Finance and Financial Crimes,
where O F A C officers work with that office to prepare the package for the Policy
Coordinating Committee (PCC). The P C C determines whether the U S G should
designate a particular entity or should pursue alternative legal or diplomatic
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strategies in order to achieve U.S. interests. As part of the PCC process, OFAC's
designation proposal will usually be vetted by the consultative parties specified by
the E O .
In addition to the evidentiary package, OFAC and other Treasury officers work with
the interagency community to draft an unclassified Statement of the C a s e ( S O C )
which serves as the factual basis for the public announcement of a designation.
The State Department uses it to pre-consult with countries which are directly
impacted by a proposed U S action and to urge them to designate at the s a m e time
as the U S G . Upon a U S G determination to designate, the S O C is used to notify
host countries and the U N of an impending U S action. It is also used to propose the
inclusion of the target on the consolidated list of the U N 1267 Sanctions Committee
of those individuals or entities associated with al Qaida or the Taliban.
UN and Bilaterally Proposed Designations
Whenever an individual or entity is proposed for inclusion on the UN 1267
consolidated list by another country through the U N or is proposed to the U S G
bilaterally, O F A C , and w h e n appropriate the Department of State, is responsible for
preparing the administrative record. In order to designate a target proposed to the
U N by a M e m b e r State or by another government bilaterally to the U S G , O F A C (or
w h e n appropriate State) must develop an administrative record that would support
a domestic designation under E.O. 13224 as described above. Quite often, due to a
difference in legal authorities and the type of or lack of information provided by a
proposing country, this process m a y require several discussions with the initiating
party and often requires further coordination through the U N and with other
countries in order to obtain sufficient information to meet domestic legal criteria.
Other Counter-terrorism Activities
OFAC's role in the counter-terrorism arena is not limited to preparing designations,
although this often serves as a key component of its other activities. The
transnational nature of terrorism support networks requires engagement with allies
and routine information sharing. OFAC's direct engagement with allies on terrorism
support infrastructure began with officials from Saudi Arabia, Kuwait and the U A E in
June 1999. Information and understandings developed from this and other O F A C
trips to the region significantly contributed to formulating s o m e of the strategies
employed today.
Direct Treasury and OFAC engagement with foreign allies' counterparts provides
an opportunity for O F A C to gather information, apply pressure, request support, or
offer assistance. In s o m e cases, Treasury m a y seek joint action with an ally in an
effort to disrupt or dismantle an organization. In other instances, O F A C m a y use the
threat of designation to gain cooperation, forcing key nodes of financial support to
choose between public exposure of their support for terrorist activity or their good
reputation.
Of course, OFAC also collaborates extensively with other elements within the
Treasury Department. In particular, I want to mention our excellent relationship with
IRS Criminal Investigation. This relationship has been especially important and
productive in carrying out the Treasury Department's authority under Executive
Order 13315, which blocks the assets of S a d d a m Hussein and other senior officials
of the former Iraqi regime. For m a n y months now, O F A C has been coordinating
almost daily with Washington-based IRS-CI agents to guide the efforts of IRS-CI
agents on the ground in Iraq to identify the ill-gotten assets of S a d d a m and his
cronies. O F A C ' s partnership with IRS-CI on this issue has developed important
investigational leads that would have been impossible if our organizations had not
been so closely synchronized.
Significant OFAC Designations Pursuant to EO 13224
The result of OFAC's research and coordination efforts over the past three years
has been several significant designations of charities, terrorist financiers, and
financial support networks.
OFAC Actions against Terrorist-Supporting Charities:
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•
Holy Land Foundation (HLF). OFAC/IPD worked closely with the FBI prior to
9/11 to designate this charity located in Richardson, Texas. H L F w a s a
financial supporter of H A M A S , a terrorist group originally designated in
January 1995 pursuant to Executive Order 12947 The FBI Dallas field
office specifically sought OFAC's involvement in its investigation and an
OFAC/IPD officer became part of the North Dallas Terrorism Task Force. A s
a result of this close coordination, on December 4, 2001, O F A C designated
the Holy Land Foundation pursuant to E O 13224 and E O 12947. This
designation w a s upheld in U.S. Federal district court, affirmed on appeal,
and on March 1, 2004, the Supreme Court denied HLF's petition for
certiorari in HLF's challenge to its designation. Additionally, Section 501 (p)
of the Internal Revenue C o d e w a s enacted as part of the Military Family Tax
Relief Act of 2003 (P.L. 108-121), effective November 11, 2003. Section 501
(p)(1) suspends the exemption from tax under section 501 (a) of certain
organizations, including those designated as a terrorist organization or
foreign terrorist organization. Section 501 (p), as a result, suspended HLF's
tax exempt status (effective on the date of enactment of this section or the
designation, which ever is later in time). This suspension continues until all
designations and identifications of the organization are rescinded under the
law or Executive Order under which such designation or identification w a s
made.
•
Benevolence International Foundation (BIF) & Global Relief Foundation
(GRF) Blocking in Aid of Investigation. O n December 14, 2001, the Treasury
blocked pending investigation (BPI) the property of both BIF and G R F , two
Islamic charities in Chicago, Illinois and the first such action under E O
13224. After the December 2001 BPI action, O F A C continued to work with
other components of the Treasury and the FBI, S F O R in the Balkans, the
Department of Justice, and the intelligence community to obtain additional
information which led to the designation of G R F on October 17, 2002 and
BIF on November 18, 2002 pursuant to E O 13224. O n February 25, 2003
the civil lawsuit filed by BIF against the U.S. w a s voluntarily dismissed with
prejudice and without costs. O n November 12, 2003, the Supreme Court
denied certiorari in GRF's appeal of the denial of its motion for preliminary
injunction. A s a result of the O F A C designation, IRS suspended the taxexempt status of both BIF and G R F
• Al Haramain Foundation. Treasury has worked closely with other U.S.
Government agencies and Government of Saudi Arabia in order to
coordinate the bilateral designation of six branches of this prominent Saudi
charitable organization. The Bosnian and Somali branches were designated
on March 11, 2002, the Pakistani, Indonesian, Kenyan, and Tanzanian
branches were designated on January 22, 2004 and, most recently, the
Albanian, Afghani, Bangladeshi, Ethiopian and Netherlands branches, as
well as Al Haramain's former leader Aqeel Abdulazia Al-Aqil, were
designated on June 2, 2004.
OFAC Actions against Terrorist Financial Networks:
• Al-Barakaat network. O F A C identified the Al-Barakaat Network as a major
financial network providing material, financial, and logistical support to
U s a m a Bin Laden, al Qaida, and other terrorist groups. O n November 7,
2001, the President announced the designation of the Al-Barakaat Network
pursuant to E O 13224. This action w a s taken in coordination with the
predecessor to the Department of Homeland Security's ICE, the then
Treasury Department's U S Custom's Office of Investigation, which executed
simultaneous search warrants at the time of designation. As a result of that
action, Barakaat's cash flow w a s severely disrupted and the Emiratis closed
d o w n Barakaat's offices in their territory, froze its accounts, and placed
several individuals under an informal house arrest. Since the designation,
six Barakat-related individuals and entities were removed from the list upon
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demonstrating and ensursing that they were no longer engaging in the
activities for which they were originally designated.
•
Nada-Nasreddin / al Taqwa network. O F A C coordinated with U.S. law
enforcement and intelligence community, and worked closely with its foreign
partners in the Caribbean and Europe to target al Qaida supporters, Yousef
Nada and A h m e d Idris Nasreddin. O F A C designated them and related
companies in November 2001 and August 2002 pursuant to E O 13224,
significantly disrupting another network.
•
Wa'el H a m z a Julaidan. O F A C identified Julaidan as a senior figure in the
Saudi charitable community, w h o provided financial and other support, to
several terrorist groups affiliated with al Qaida operating primarily in the
Balkans. O F A C worked with other U.S. Government agencies and the
Government of Saudi Arabia to coordinate a bilateral designation of
Julaidan on September 6, 2002.
OFAC's Key Node Strategy
Over the past year and a half, OFAC has sought to take a more systematic
approach to evaluating the activities of major terrorist organizations in various
regions. This approach has focused on identifying "key nodes" discussed above,
which when targeted and economically isolated can cripple a terrorist network's
ability to function.
To implement this approach, OFAC staff has established collaborative relationships
with several Department of Defense agencies and combatant c o m m a n d s in order to
gain wider access to information critical to developing evidentiary records in support
of designations. Working with D O D C o m m a n d s and other D O D agencies provides
O F A C and its D O D partners a force multiplier that brings together a variety of
counterterrorism tools and resources. This will be an important model of interagency coordination as well as strategic vision for the Treasury Department as a
whole, as w e m o v e toward greater integration and amplification of our intelligence
and analysis functions in the Office of Intelligence and Analysis.
J e m m a h Islamiyah (Jl) / Southeast Asia. In October 2002, O F A C began a
joint project with the U.S. Pacific C o m m a n d ( U S P A C O M ) and other D O D
elements that identified terrorist support networks in Southeast Asia and
selected key nodes, or priority targets, in these networks. The project's
geographic scope included Indonesia, the Philippines, Malaysia and
Singapore, and eight terrorist or Islamic extremist groups. The project
focused special attention on the al Qaida-affiliated Jl, the Abu Sayyaf Group
(ASG), and the Moro Islamic Liberation Front (MILF), because of their
relative importance in the region and threat to U.S. interests. The project
identified the key leaders, fundraisers, businessmen, recruiters, companies,
charities, mosques, and schools that were part of the Jl support network.
O F A C has sought to expand on this model through collaboration with other
D O D agencies including the combatant c o m m a n d s . These efforts have
included:
The Horn of Africa. O F A C analysts have worked with D O D agencies,
including analysts from the Office of Naval Intelligence (ONI), to fully identify
the terrorism support infrastructure in the Horn of Africa. In this region,
shipping and related drug smuggling activities appear to be strengthening
the terrorism infrastructure. In coordination with our interagency partners,
w e were able to identify s o m e of the key leaders, charities, and businesses
that appear to be critical to the overall functioning of the network. In January
2003, the U.S. took joint action with the Government of Saudi Arabia against
two of these key targets-the Kenya and Tanzania offices of the Saudi-
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based Al-Haramain Islamic Foundation.
•
North Africa. In August 2003, I visited the U.S. European C o m m a n d
headquarters ( U S E U C O M ) and met with the Chief of Staff, to begin a joint
project including U S E U C O M , O F A C officers, and other D O D elements to
identify terrorist support networks in the North Africa region and key nodes
within this network. The geographic scope of this project includes Morocco,
Algeria, Tunisia, Libya, Mauritania, and Mali, and nine terrorist or Islamic
extremist groups and their support networks. At the inception of this project,
the Director of U S E U C O M ' s Intelligence Directorate indicated that this
region posed the most serious threat in U S E U C O M ' s area of responsibility
and asked O F A C to devote available resources to the project. The recent
Madrid bombings and the suspicion that North African terrorists m a y have
been involved illustrates the reality of the threat these groups pose not only
to the stability of the region but the interests of the U.S. and our allies.
•
Caucasus. In January 2004, the U S E U C O M Chief of Staff visited O F A C
and w a s briefed on an O F A C initiative to identify terrorist groups and their
support networks in another region of U S E U C O M ' s area of responsibility.
The Chief of Staff invited an O F A C analyst to U S E U C O M ' s Joint Analysis
Center in Molesworth, England, to work with a regional analyst there to
further develop information on terrorist activity in the region. The outcome of
the week-long visit w a s that it confirmed our preliminary analytical
conclusions of terrorist activity and support. W e are now in discussion with a
D O D element, U S E U C O M , and a U.S. Government agency to pursue a
collaborative effort to refine our understanding and determine if the initiative
justifies the commitment of limited resources for the ultimate exercise of
O F A C sanctions or other appropriate U.S. Government authorities against
priority targets w e m a y identify.
•
Additional Initiatives. In March of this year, O F A C w a s invited to brief the
Headquarters North American Aerospace Defense C o m m a n d ( N O R A D ) and
U.S. North C o m m a n d ( U S N O R T H C O M ) Interagency Coordination Group
(JIACG) on the subject of OFAC>authorities under Executive Order 13224
and O F A C efforts against terrorism. In addition, the U.S. Southern
C o m m a n d ( U S S O U T H C O M ) has also contacted m y office and expressed
an interest in an O F A C analyst detailed to the U S S O U T H C O M JIACG.
O F A C continues to explore collaborative opportunities with both of these
commands.
These efforts have been so successful that, in December 2003, the Office of the
Secretary of Defense requested the detail of six O F A C employees to the
headquarters of six D O D combatant commands. A s a result, w e hope to detail
O F A C analysts with the U.S. Central C o m m a n d ( U S C E N T C O M ) and U.S. Special
Operations C o m m a n d ( S O C O M ) in the near future.
OFAC Attache Offices and Foreign Counterparts
OFAC's ability to successfully pursue counter-narcotics and counter-terrorism
missions has been greatly enhanced by assigning O F A C officers to attache and
liaison positions abroad with several U S embassies and military c o m m a n d s
•
O F A C Bogota office coordinates O F A C sanctions programs in Colombia
and conducts research on Colombian drug cartels and narco-terrorists. The
O F A C Attache and Assistant Attache in Bogota serve as the liaison with
U.S. Embassy elements and Colombian government agencies and have
established solid relationships with the Colombian banking and private
sectors. OFAC/IPD officers travel regularly to Colombia and have extensive
knowledge of Colombian drug cartel finances.
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•
O F A C Mexico City office coordinates O F A C sanctions programs in
Mexico. The O F A C Attache in Mexico serves as the liaison with U.S.
Embassy elements and Mexican government agencies.
In addition, OFAC's Attaches have established good working relationships with
foreign counterparts in Colombia and Mexico which has supported U.S. interests in
choking off drug cartel and narco-terrorist finances through both joint investigations
and actions. For example, Colombian companies designated by OFAC/IPD to the
S D N T list are m a n y times the targets of subsequent Colombian criminal asset
forfeiture investigations.
•
O F A C ' s Liaison Officer at the U S European C o m m a n d ( U S E U C O M )
serves as OFAC's representative to the U S E U C O M Joint Interagency
Coordination Group, as well as to targeting groups established by
U S E U C O M . The liaison also coordinates joint projects underway between
U S E U C O M and O F A C elements and travels regionally to provide support to
other O F A C programs, including the effort to block the assets of Persons
Indicted for W a r Crimes in the former Yugoslavia.
•
O F A C ' s M a n a m a office is nearing completion of its physical construction
and is slated to have an attache assigned to it this summer. The attache
Bahrain will be responsible for establishing relations with local government
bodies engaged in counter-terrorism efforts and of investigating a variety of
terrorist support issues throughout the Arabian Gulf.
V. OFAC's Vision for the Future
In order to meet the increasing demands placed on OFAC as it fulfills its multiple
missions against governmental and organizational targets, particularly its recent
critical role in countering international terrorism and narcotics trafficking, O F A C is
addressing specific challenges facing its component divisions described above.
Civil Penalties
•
The Civil Penalties Division is expanding the transparency of OFAC's civil
penalty enforcement by developing an automated system to report
enforcement actions. The Division also seeks to meet the fiscal controls
required by the Department and is designing computerized interfacing with
the financial offices of the Department. O n the enforcement front, the
Division is concentrating its resources on major cases across OFAC's
sanctions programs in order to have the greatest enforcement impact.
Compliance Division
O F A C Compliance is in the process of building new customer interaction
capabilities, with a state-of-the-art automated telephone system, enhanced
hotline capabilities, and improved w e b forms to allow the public to transmit
detailed live transaction data for our real time analysis and response. W e
expect that the n e w automated reporting systems w e are developing will
allow financial institutions and others to provide O F A C more quickly with
comprehensive information on interdicted transactions.
•
Compliance is building a n e w Specially Designated Nationals database that
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will allow enterprise-wide access to declassified target information and
permit analysts to directly link from a n a m e on the S D N list to the underlying
declassified evidentiary material for easy access.
•
Compliance intends, in the near future, to m a k e a n e w DataMart feature
available on the O F A C website that will allow users of O F A C ' s Specially
Designated Nationals list to more easily "shop" for information that is
tailored to their specific compliance needs.
Licensing Division
•
OFAC's Licensing Division plans to further increase the efficiency with
which license applications and requests for interpretive rulings are
processed, with a goal of no longer than a two-week turnaround for
submissions, which do not require review and clearance outside the
Division.
•
Licensing intends to develop enhanced capabilities for scanning and e-mail
connectivity to facilitate review and clearance of licensing submissions
requiring interagency consultation, with the ultimate goal of developing a
web-based system with interagency access to avoid the need to transmit
material altogether.
•
The Division also plans to develop and publish on O F A C ' s website
"treatises" on the various categories of commercial and financial
transactions subject to OFAC's jurisdiction. These treatises will discuss
O F A C ' s licensing practices with regard to the application of O F A C ' s
regulations to those transactions. Redacted versions of the Division's
interpretive rulings will be appended to the relevant treatise, providing
comprehensive guidance and promoting consistency and transparency with
respect to subjects ranging from trade issues and financial instruments and
services to ownership and control and acquisition and divestiture.
•
Licensing will continue supporting OFAC's regulatory implementation
function by participating in the preparation of draft regulations and
promoting their timely clearance and publication.
Enforcement Division
•
Enforcement will build on and improve upon O F A C ' s existing relationships
with federal law enforcement agencies, principally the FBI, ICE, Customs
and Border Protection, C o m m e r c e Office of Export Enforcement and Offices
of the United States Attorney, to enhance the criminal enforcement of O F A C
sanctions programs.
International Programs (Counter-Narcotics) Division
•
• O F A C ' s continuing counter-narcotics designation program objectives are
to identify, expose, isolate, and incapacitate the business and financial
infrastructures and penetrations into the legitimate e c o n o m y of foreign
narcotics kingpins and drug cartels, as well as their agents and
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functionaries. OFAC will continue to develop its working relationships with
federal law enforcement agencies, U.S. Attorneys' offices, intelligence
community elements, military c o m m a n d s , and select foreign enforcement
and counter-narcotics units on a global basis.
OFAC will continue to develop operational relationships in the field and at
headquarters with Federal law enforcement agencies, U.S. Attorneys' offices,
Intelligence Community elements, and military c o m m a n d s . This includes more
personnel to work with O C D E T F s and other operational task forces and more
training of the other government components in O F A C narcotics designation
programs.
OFAC also plans to increase its participation in narcotics fusion and targeting
centers and related interagency programs.
Foreign Terrorism Programs Division
OFAC plans to continue to expand its efforts to impede the activities of terrorist
organizations utilizing the key nodes methodology. This will be done in concert with
the n e w Office of Intelligence Analysis (OIA), as the Treasury Department works to
integrate its analytical work product with all components of Treasury and the
intelligence community. The n e w OIA will work with O F A C to monitor all relevant
intelligence which can be used to further OFAC's mission. O F A C , using this
information as well as other sources and its o w n research, will continue to develop
the structure of terrorist groups and their support networks and to identify and
isolate key nodes within them that serve critical functions, building upon and
continuing the work with the military c o m m a n d s .
•
O F A C will seek to detail O F A C officers to six D O D combatant c o m m a n d s
for periods of two years to exploit the unique D O D resources and abilities to
identify terrorists, terrorist groups, and their support networks, including
D O D analytic resources, data collection, and most importantly local
knowledge.
IT Challenges
Improving OFAC's Information Technology capabilities remains one of the greatest
challenges to enhancing OFAC's ability to pursue its mission. O F A C could enhance
current analytical capabilities by utilizing more advanced and available information
technologies and advanced communications capabilities. Communication and
cooperation with participating unified military combatant commanders and civil
agencies has shown great promise in sharing information resources to identify
terrorist targets, non-state enemies that function within worldwide terrorist networks
d e m a n d s closer coordination by U.S.. government agencies and military in the
diplomatic, economic, intelligence, and law enforcement domains. To enhance its
capabilities, O F A C is pursuing the following communication systems and
technologies that would enable the coordination and integration that is critical for
agencies, military forces, and coalition nations to effectively fight in this n e w war:
•
Database Application. O F A C could improve its ability to share and store
information with the development of an internal database application. This
application would reside on the "classified" networks and allow O F A C
analysts to store and analyze information. This information could be shared,
as appropriate, through classified communication networks and provide
participating partners (Intelligence Community, Military C o m m a n d s , and
L a w Enforcement Agencies) with substantive targeting information.
•
E n h a n c e d electronic communication. This includes the establishment of
a multi-media infrastructure using the Defense Messaging System cable
communications servers, w e b servers, secure email, and data servers using
Public Key Infrastructure (PKI) and F O R T E Z Z A national security information
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assurance for both the Joint Worldwide Intelligence Communication System
(JWICS) and the Secret IP Router Network (SIPRNET) enclaves.
Establishing connectivity to the D O D interoperability of secure voice and
data during periods of heightened protection requiring rapid analytical
reporting between military and civil agencies.
Establishment of a robust e-mail system and database infrastructure.
O F A C will establish a robust e-mail system and database infrastructure for
the exchange of Sensitive But Unclassified (SBU) information with the U.S.
and international partner law enforcement community. This infrastructure
would take advantage of emerging technologies with respect to repudiation
with digital signature, authentication, and PKI information assurance
protections. The access of law enforcement databases (NLETS, T E C S , etc)
for the cross-analytical work required between intelligence and law
enforcement sensitive data. This enhanced communications capability will
allow O F A C to exploit "open to government" information sources.
•
Developing Secure Video Teleconferencing (SVTC) capabilities. O F A C
is in the process of developing and enhancing its S V T C capbilities on both
the J W I C S for intelligence and SIPRNet for sanitized information of a law
enforcement nature. Completion of construction on OFAC's Secure Video
Teleconferencing facility will allow officers in Washington to communicate
and work more effectively on joint projects involving civil agencies and U.S.
military and coalition forces. Ensuring the collaborative strategic planning of
a host of entities in the conduct of counter-terrorism and counter-narcotic
missions.
•
Better Communication Utilizing S I P R N E T and A D N E T Enclaves. Both
the International Programs Division (counter-narcotics) and the Foreign
Terrorist Programs Division (counter-terrorism) will seek to improve their
electronic communication with the law enforcement community by utilizing
systems as S I P R N E T and the Anti Drug Network (ADNET).
Increased OFAC Cooperation with Foreign Counterparts
•
OFAC's trips to target areas and its discussions with its counterparts in
other countries have afforded O F A C the opportunity to work with these
partners and provide guidance on the sanction strategies it currently
employs. In all these, and future efforts, Treasury, working in coordination
with other U.S. government agencies including the State Department, will
take advantage of O F A C contacts and work abroad to increase cooperative
efforts and expand its interaction with other government counterparts in
order to deal with c o m m o n threats against the United States and our allies.
Madame Chairman, I would like to thank you and the Committee for the opportunity
to speak on these issues. This concludes m y remarks today. I will be happy to
answer your questions.
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js-1730: The Honorable John W . Snow<br> Prepared Remarks<br> W o m e n ' s High Tech ... Page 1 of 3
PRLSS R O O M
FROM THE OFFICE OF PUBLIC AFFAIRS
June 17,2004
js-1730
The Honorable John W. Snow
Prepared Remarks
Women's High Tech Coalition
San Jose, CA
Thank you very much; I'm delighted to be here with you.
I'd like to talk about something today that I know you appreciate deeply. In fact, I
think it's a basic truth that you will recognize as central to your industry:
The ability of the American economy to be dynamic and strong is very much
dependent on the ability of America's entrepreneurs to be fast-moving and creative.
Your industry is a good example of this. It moves at the speed of light. The fact that
new developments in technology are so rapidly out-pacing the government's ability
to accommodate them in terms of regulatory structure... well, that was one of the
main reasons why your group was created!
So it's clear you know the value of agility and speed in business. And you also
know that "speed" and "agility" are terms not often associated with government.
I think that government ought to always be aware of the value of speed and
innovation. W e ought to always be aware that slowing down innovation means
slowing down our economy... and slowing down the creation of new jobs.
That's why government needs to keep a constant watch on the things that create
drag on private industry - things like excessive taxation and regulation, high health
care costs and a legal environment where abusive lawsuits run rampant over
entrepreneurs.
When government relieves free enterprise from any of those burdens, our economy
responds. The current economic growth that we are seeing - and it is extremely
impressive - is a direct response to President Bush's tax cuts and the sound
monetary policy set by the Federal Reserve.
We can't underestimate how important fiscal policy has been in recent years. The
Bush Administration inherited an economy that was in decline... one that was then
battered by terrorist attacks and revelations of corporate corruption dating back to
the 1990s.
People were losing jobs; the situation was serious.
The steps that were taken to lighten the tax burden on small-business owners,
families and investors were a critical stimulus for growth.
It's the beauty of a free-market economy... if government gets out of the way, the
natural strength of the economy shines through.
Today, and for several months now, we have seen the results.
Now our economy is not just recovering - it's growing at a rapid rate.
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We've had the strongest three quarter growth rate in almost 20 years, averaging at
an annual rate of 5.6 percent.
The strength of the housing market continues to benefit families across America ,
with homeownership at an all time high of 68.6 percent.
The best indicator of all has been the creation of good jobs. Nearly a quarter of a
million jobs were created in May, more than a million this year so far, and nearly a
million and a half over the past nine months. Employment over the past year w a s
up in 44 of the 50 states, and the unemployment rate w a s down in all regions and in
47 of the 50 states.
Here in California, you added 23,600 jobs to the payrolls in May. That was the third
straight month of job growth. This is huge news for a state economy that has
struggled. I'm so pleased to know that jobs are being created for Califomians.
Virtually all national economic indicators are trending upward as well. And it's an
incredible thing to witness, because the numbers aren't just numbers. They
represent such good news for so m a n y American families.
The challenge now is how to keep growth and job creation going strong. Keeping
the burden of tax cuts lower is the first key element for success.
But can government do better in other areas? Yes, we can always do better. And I
think w e need to.
While we certainly have the strongest economy in the world, we are increasingly
aware of the fact that our economic challenges are changing. Which m e a n s that
government needs to change as well.
That said, I want to emphasize that we should not change the basic principles on
which our country w a s founded, and our government designed. In fact, it is
important to bring those basics back into focus and see whether current
government even matches up with them!
We also have to be honest about our current challenges. For example, countries
like India and China have large populations of skilled, educated workers - and
thanks to technology, those workers are competing directly with our own. W h e n you
consider that these highly skilled workers can be employed for a lower cost, the
question is clear: h o w can w e compete? H o w can America continue to create good,
well-paying jobs in this country?
From my travels across America I know that this question is being discussed at
dinner tables and coffee shops all across this country.
We face a challenge. But we've never shrunk from a challenge before, we've
overcome m a n y in hour history, and this time will be no different.
It's clear that education and worker training must be the first item on the agenda if
w e are to meet the challenges of the present, and of the future.
But of course, the best job skills are irrelevant without the best new jobs. And those
jobs have got to be created by American entrepreneurs.
We must make America a magnet for innovation and entrepreneurship. We must
always encourage, not discourage, the spirit of enterprise. W e must continue to
remove barriers to the resourcefulness and creativity of the American people.
I'm interested in taking a very hard look at the parts of government that have dulled
the competitive edge of private industry - and cutting them back or doing away with
them altogether, if appropriate.
To a large extent, I'm talking about our regulatory structure. Well-intentioned
regulations have often had the unintended consequence of burdening free
enterprise and stifling creativity and growth.
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Taxes do the same thing. The more you tax something, the less you get of it. We
were reminded of that principle last week, when memorializing our great 40 th
president: Ronald Reagan.
Reagan saw that taxes were out of control, that government had grown far too
much, like a weed that seems harmless but can choke a tree - not intentionally, but
due to its own growth.
So Reagan took brave steps to cut taxes dramatically, and continue the regulatory
reforms of the 1970s... and these actions led to s o m e of the greatest economic
times our country has ever known.
If we truly dedicate ourselves to major changes like that, to making government an
institution that creates an environment for enterprise, w e will not only unleash the
enormous potential of our own workers and businesses, w e will attract the
investment capital of the world.
We will be the land of choice not only for the entrepreneurs lucky enough to be born
here, but also for those in other countries that seek a place where they can employ
highly skilled workers and be welcomed as an economic asset by the government
that regulates and taxes them.
The future of our economy is dependent on the ideas and innovations that will come
from w o m e n like you.
The government can't create a strong economy; the American people, women in
business, small-business owners... that's w h o grows the economy.
It is instead government's responsibility to stay out of your way as much as we can
while creating a climate in which you can make the most of your creative abilities.
I commend all that you do to make our economy the most dynamic, prosperous
economy in the world. I will certainly do m y best to stay out of your way, because I
know your ideas are creating the jobs of the future.
Thank you for having me here today, thank you for your hard work, and for your
dedication to pursuing that most basic ideal for yourselves: the American Dream.
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js-1731: Treasury Secretary S n o w Statement O n House Passage O f FSC/ETI Legislation
F R O M T H E OFFICE O F PUBLIC A F F A I R S
June 17,2004
js-1731
Treasury Secretary Snow Statement On House Passage Of FSC/ETI
Legislation
I would like to thank the House for taking action to move the FSC/ETI process
forward to eliminate sanctions. W e want to increase the ability of American
companies to succeed in a worldwide economy and lay the foundation for increased
growth and job creation for American workers. Passing the FSC/ETI legislation is
an important step toward ending the burden of the tariffs currently being imposed
on U.S. exports under the W T O sanctions. W e will continue our efforts to work with
the Conferees to ensure that legislation is signed into law that will help us comply
with our W T O obligations, is as close to budget neutral as possible, and will
strengthen our economy and help manufacturers and other job creators.
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js-1732: Statement of the Treasury on the Decision of the Air Transportation Stabilization... Page 1 of 1
F R O M T H E OFFICE O F PUBLIC A F F A I R S
June 17,2004
js-1732
Statement of the Treasury on the Decision of the Air Transportation
Stabilization Board
Today, the Air Transportation Stabilization Board met to consider the application of
United Airlines for a federal loan guarantee. Treasury could not support the
application as presented. Should United submit an improved application in the
coming days, Treasury is open to reconsidering it.
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http://www.treas.gov/press/releases/js 1732.htm
5/5/2005
FROM THE OFFICE OF PUBLIC AFFAIRS
To view or print the PDF content on this page, download the free Adobe® Acrobat® Reader®
June 17,2004
JS-1733
ATSB Decision on United Air Lines
The
the
of a
Act
Air Transportation Stabilization Board (Board) announced today that it denied
application submitted by United Airlines, Inc. for a $1.6 billion federal guarantee
$2.0 billion loan under the Air Transportation Safety and System Stabilization
(Act).
A majority of the Board determined that a guaranteed loan to United is not a
necessary part of maintaining a safe, efficient, and viable commercial aviation
system in the United States, a requirement of the Act. The Board notes the positive
steps the company has taken since entering bankruptcy in 2002 to lower its costs,
strengthen its competitive position, and improve its governance structure.
Moreover, the Board believes that airline credit markets have been improving since
late 2001 and 2002, the period during which the Board granted most of its
approvals for loan guarantees, increasing the likelihood of United succeeding
without a loan guarantee. Given these circumstances, a majority of the Board
believes that the likelihood of United succeeding without a loan guarantee is
sufficiently high so as to make a loan guarantee unnecessary. Finally, the Board
considered proposals made by United in a series of meetings this week. A majority
of the Board believes that these revisions do not change their view of the necessity
of a federal loan guarantee.
Considering all of the foregoing factors, Chairman Edward Gramlich and Under
Secretary of Treasury for Domestic Finance Brian Roseboro voted to deny the
application. Under Secretary of Transportation for Policy Jeffrey Shane voted to
defer the decision for one week pending further Board discussions with United
regarding its most recent proposals.
The Board conducted its review pursuant to the standards set out by the Act and by
the implementing regulations promulgated by the Office of Management and
Budget. The Board considered all relevant information, including information
obtained during numerous meetings between United, Board staff, and agency
representatives during 2003 and 2004.
The Board's letter to United is attached.
Additional information about the ATSB is available on its web site,
http://www.ustreas.gov/offices/domestic-finance/atsb/.
REPORTS
• ATSB letter to United Air Lines
http://www.treas.gov/press/releases/js 1733.htm
5/5/2005
AIR
T R A N S P O R T A T I O N STABILIZATION
BOARD
1 1 20 V E R M O N T AVENUE, SUITE 9 7 0
WASHINGTON, D C 20005
Michael Kestenbaum
Executive Director
June 17,2004
Mr. Frederic F. Brace
Executive Vice President
and Chief Financial Officer
United Air Lines, Inc.
1200 East Algonquin Road
Elk Grove Township, IL 60007
Dear Mr. Brace:
In accordance with the Air Transportation Safety and System Stabilization Act,
Pub. L. No. 107-42, 115 Stat. 230 (the "Act") and the regulations promulgated
thereunder, 14 C F R Part 1300 (the "Regulations"), the Air Transportation Stabilization
Board (the "Board") has considered United's application, as supplemented, for a $1.6
billion federal loan guarantee in support of a $2 billion loan.
The Act was passed nearly three years ago in response to the terrorist attacks of
September 11, 2001, and the Board was established to respond to the ensuing constraints
on credit availability in the airline sector. Since that time the Board has approved seven
loan guarantees, with the last approval over a year ago in April of 2003 for World
Airways.
United's application for a loan guarantee was received on June 21,2002. On
December 4,2002, the Board indicated to United by letter that it could not approve its
then-current proposal, and the company subsequentlyfiledfor Chapter 11 bankruptcy
protection. Over the following eighteen months, the company revised its proposal while
working through the bankruptcy process.
During this period, the Board staff and the broader working group, consisting of
representatives of the Board's voting members, have reviewed and considered all the
materials submitted by United, as well as explanatory information presented by United at
m a n y meetings during 2003 and thefirsthalf of 2004. The Board'sfinancial,industry,
and legal consultants have submitted their reports and analyses, which have been taken
into consideration. The Board staff prepared for the members a comprehensive analysis
of all of these materials. The voting members discussed the application at length at
meetings on April 20, M a y 24, and June 17,2004.
1
The Board carefully considered the application under the standards set out under
the Act and the Regulations. Based on its review, the Board determined that the
application does not meet the applicable standards, and, accordingly, the Board voted to
deny the application. Specifically, a majority of the Board determined that a guaranteed
loan to United is not a necessary part of maintaining a safe, efficient, and viable
commercial aviation system in the United States, a requirement of the Act. The Board
notes the positive steps the company has taken since entering bankruptcy in 2002 to
lower its costs, strengthen its competitive position, and improve its governance structure.
Moreover, the Board believes that airline credit markets have been improving since late
2001 and 2002, the period during which the Board granted most of its approvals for loan
guarantees, increasing the likelihood of United succeeding without a loan guarantee.
Given these circumstances, a majority of the Board believes that the likelihood of United
succeeding without a loan guarantee is sufficiently high so as to m a k e a loan guarantee
unnecessary. Finally, the Board considered proposals m a d e by United in a series of
meetings this week. A majority of the Board believes that these revisions do not change
their view of the necessity of a federal loan guarantee.
Considering all of the foregoing factors, and all the other facts of record,
Chairman Edward Gramlich and Under Secretary of Treasury for Domestic Finance
Brian Roseboro voted to deny the application. Under Secretary of Transportation for
Policy Jeffrey Shane voted to defer a decision for one week pending further Board
discussions with United regarding its most recent proposals.
Sincerely,
Michael Kestenbaum
cc: Edward M . Gramlich
Brian C. Roseboro
Jeffrey N . Shane
2
js-1734: Treasury Announces Decision to Extend the "Make Available" <BR>Provisions ... Page 1 of 2
FROM THE OFFICE OF PUBLIC AFFAIRS
June 18,2004
js-1734
Treasury Announces Decision to Extend the "Make Available"
Provisions of the Terrorism Risk Insurance Act into 2005
The Treasury Department today announced its decision to extend the "make
available" provisions of the Terrorism Risk Insurance Act (TRIA) through 2005, the
third year of the federal Terrorism Risk Insurance Program.
The "make available" provisions of TRIA require that, from the date of enactment
(November 26, 2002) through the last day of the second year of the Program
(December 31, 2004), each insurer must m a k e available, in all of its commercial
property and casualty insurance policies, coverage for losses due to covered acts
of terrorism that does not differ materially from the terms, amounts and other
coverage limitations applicable to losses arising from events other than acts of
terrorism. TRIA requires that the Secretary of the Treasury determine whether the
"make available" provision should be extended through the third and final year of
the Program by September 1, 2004. Additionally, TRIA mandates that Treasury
complete a study of the effectiveness and success of the overall Act by June of
2005. The comprehensive study is independent from the "make available"
determination being announced today.
"The terrorism risk insurance Program has been an important confidence builder as
this country recovered from the attacks of September 11 and the recession. By
extending the m a k e available provision, w e ensure that our overall evaluation of the
Program's success is based on information and assumptions that are consistent
and that there's no changing of the rules in the middle of the game," said Secretary
Snow.
In making this determination, Treasury was interested in the perspective of both
users and providers of terrorism risk insurance. To solicit input, Treasury published
a request for c o m m e n t in the Federal Register on M a y 5, 2004, on the statutory
factors (e.g., effectiveness of TRIA, capacity, availability, and affordability) with
regard to the "make available" determination. The comment period closed on June
4, 2004, and almost 200 comments were received.
Based on the comments received and other information, Treasury has found that
there is a widespread belief that the "make available" provisions have contributed to
the effectiveness of TRIA by providing customers with offers of terrorism risk
insurance that would otherwise have been unavailable. Treasury also found that it
is widely believed that the "make available" requirement has contributed to the
affordability and availability of terrorism risk insurance under the Program, and m a y
have increased the attention devoted by insurers to questions of capacity to offer
coverage. While little evidence w a s provided in direct support of these views, there
also w a s little or no evidence presented that the "make available" provisions had
harmed affordability, availability, or capacity. Therefore, Treasury determined to
extend this requirement into the third year.
Although Treasury had until September 1, 2004 to determine whether or not to
extend the "make available" provisions of TRIA, the determination w a s m a d e well in
advance of the deadline in order to avoid any potential disruption in the terrorism
risk insurance market.
Treasury is currently in the information gathering stage of the congressionally
mandated study of the Act's overall effectiveness. To assist in this evaluation,
Treasury is conducting a comprehensive multi-wave survey with a nationally
representative sample of policyholders, insurers, and reinsurers, which will allow us
to obtain a broad view of the market conditions and dynamics. W h e n the
http://www.treas.gov/press/releases/js 1734.htm 5/5/2005
js-1734: Treasury Announces Decision to Extend the " M a k e Available" <BR>Provisions ... Page 2 of 2
information gathering stage is completed, Treasury will then study and analyze the
information in preparation of the final report to Congress.
Because our analysis of the Program's effectiveness and success is ongoing, it is
premature to draw conclusions about the need to extend TRIA, either temporarily or
permanently. Similarly, recommendations at this time regarding the reauthorization
of TRIA prior to the conclusion of our o w n study would be premature.
http://www.treas.gov/press/releases/js 1734.htm
5/5/2005
JS-1735: The Honorable John W . Snow<br>Prepared Remarks: Nevada Hotel and Lodgi... Page 1 of 1
F R O M T H E OFFICE O F PUBLIC A F F A I R S
June 18, 2004
JS-1735
The Honorable John W . S n o w
Prepared Remarks: Nevada Hotel and Lodging Association
Las Vegas, N V
June 18, 2004
Thank you so much for having me here today. It's great to be in Las Vegas, and
great to hear that the Nevada economy is doing so well. If fact, we've just learned
that 3,800 jobs were created in this state last month.
Like most of the country, you are creating jobs and reducing unemployment here in
Nevada. What a difference a year makes... and what a difference tax cuts can
make when it comes to stimulating an economy that was in recession.
Although your unemployment rate is considerably lower than the national average,
Nevada, too, has recovered from hard times.
The horror of September 11th was particularly hard on this state, and on your
industry.
I hope that the Terrorism Risk Insurance Act of 2002 helped Nevada re-gain its
economic strength, and I'm pleased to announce today that the Treasury
Department is going to extend the "make available" provision of the act through the
third year of the program. This means that insurance companies must continue to
make terrorism risk insurance available in all of their property and casualty policies
through December 31st, 2005.
We made the decision to extend the "make available" provision because we want to
assure the continuation of the key elements of the re-insurance program. The key
to success of this program is that people at high levels of risk - like hotel owners can obtain terrorism insurance at an affordable cost.
I believe that the terrorism re-insurance program was an important confidencebuilder as w e recovered from recession. The Treasury Department is currently
evaluating the success of the program, and w e want to make sure it continues to
contain the s a m e elements - such as the requirement to offer insurance throughout the life of the program. That way, our final analysis of its efficacy will be
based on consistent policy throughout the three-year period of the program.
When we put the continuation of "make available" out for public comment, the
response was overwhelming. And it was clear from the information that w e received
that yes, "make available" should be extended.
I hope this is good news for you and your industry; I'm delighted to deliver it. Thank
you so much for having m e here today... I'd be happy to take your questions now.
http://www.treas.gov/press/releases/jsl735.htm
5/5/2005
JS-1736: The Honorable John W . Snow<br>Prepared Remarks: Astoria Homes Commum... Fage i
F R O M T H E OFFICE O F PUBLIC A F F A I R S
June 18, 2004
JS-1736
The Honorable John W. Snow
Prepared Remarks: Astoria H o m e s Communities
Las Vegas, N V
June 18,2004
Thank you so much for having me here today. I'm delighted to see that
homebuilding in Las Vegas is going so well and is so strong, as is the housing
industry all over the country.
The strength of the housing market continues to benefit families across America,
with homeownership at an all time high of 68.6 percent. That really is outstanding an accomplishment that w e can all be very proud of.
A robust housing industry is one of many indications that our economy has pulled
out of recession and is doing extremely well; we're truly firing on all cylinders right
now.
The best indicator of all has been the creation of good jobs. Nearly a quarter of a
million jobs were created in May, more than a million this year so far, and nearly a
million and a half over the past nine months. Employment over the past year w a s
up in 44 of the 50 states. The unemployment rate was down in all regions and in 46
of the 50 states.
Here in Nevada, unemployment has been falling and was a very-low 4.1 percent in
May - significantly below the national average. Payroll employment in Nevada has
been steadily rising, up by 3,800 jobs last month.
It's incredible to think about how far our economy has come in such a short time.
W e were struggling for a while there... w e had a number of blows to our economy. I
know that September 11th hit this area particularly hard because of the dampening
effect that terrible day had on tourism - a major industry in this state.
But today our economy is not just recovering - it's performing at an extremely high
level.
We've had the strongest three quarter growth rate in almost 20 years, averaging at
an annual rate of 5.6 percent.
President Bush's tax cuts, combined with sound monetary policy, made all of this
possible. The reduced tax burden on families and small businesses meant that the
load was lightened, and the natural resilience of our free-market economy was able
to shine through.
I am confident that the growth will continue as long as the burden stays lighter.
Here in Nevada, 845,000 taxpayers will have lower income tax bills in 2004 and
more than 160,000 business taxpayers can use their tax savings to invest in n e w
equipment, hire additional workers, and increase pay to those workers. That's good
news for Nevada's families for months to come.
Thank you so much for the work you do to keep our economy running - your
contributions are invaluable for both the economy and for our national spirit.
Thank you for having me here with you today.
http://www.treas.gov/press/releases/jsl736.htm
5/5/2005
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
June 22, 2004
2004-6-22-17-40-34-3682
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 $82,825 million as of the end of that week, compared to $82,581 million as of the end of the prior week.
I. Official U.S. Reserve Assets (in US millions)
TOTAL
1. Foreign Currency Reserves1
a. Securities
June 11, 2004
June 18, 2004
82,581
82,825
Euro
Yen
TOTAL
Euro
Yen
TOTAL
10,165
14,387
24,552
10,385
14,477
24,862
0
0
Of which, issuer headquartered in the U.S.
b. Total deposits with:
b.i. Other central banks and BIS
11,366
2,891
14,257
11,178
2,909
14,087
b.ii. Banks headquartered in the U.S.
0
0
b.ii. Of which, banks located abroad
0
0
b.iii. Banks headquartered outside the U.S.
0
0
b.iii. Of which, banks located in the U.S.
0
0
2. IMF Reserve Position2
20,142
20,206
3. Special Drawing Rights (SDRs) 2
12,585
12,625
4. Gold Stock 3
11,045
11,045
0
0
5. Other Reserve Assets
II. Predetermined Short-Term Drains on Foreign Currency Assets
June 11, 2004
Euro
1. Foreign currency loans and securities
Yen
June 18, 2004
TOTAL
Euro
0
Yen
TOTAL
0
2. Aggregate short and long positions in forwards and futures in foreign currencies vis-a-vis the U.S. dollar:
2. a. Short positions
2.b. Long positions
3. Other
0
0
0
0
0
0
III. Contingent Short-Term Net Drains on Foreign Currency Assets
June 11, 2004
Euro
Yen
June 18, 2004
TOTAL
1. Contingent liabilities in foreign currency
0
Euro
Yen
TOTAL
0
1.a. Collateral guarantees on debt due within 1 year
1 .b. Other contingent liabilities
2. Foreign currency securities with embedded options
0
0
3. Undrawn, unconditional credit lines
0
0
3.a. With other central banks
'
3.b. With banks and other financial institutions
Headquartered in the U.S.
T
r
3.c. With banks and other financial institutions
Headquartered outside the U.S.
4. Aggregate short and long positions of options in
foreign
Currencies vis-a-vis the U.S. dollar
0
0
4. a. Short positions
4.a.1. Bought puts
4.a.2. Written calls
4. b. Long positions
4.b.1. Bought calls
4.b.2. Written puts
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 m a y 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/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 IMF data for the prior month end.
3/ Gold stock is valued monthly at $42.2222 per fine troy ounce.
JS-1737: Guidance Relating to July 1st Application of N e w U.S.-Japan Income Tax Treaty
Page 1 of 1
PRESS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
To view or print the PDF content on this page, download the free Adobe® Acrobat® Reader
June 23, 2004
JS-1737
Guidance Relating to July 1st Application of New U.S.-Japan Income Tax
Treaty
Today, the Internal Revenue Service and the Japanese National Tax Agency
respectively have issued guidance regarding the commencement of application of
the new income tax treaty between the United States and Japan in each country.
The United States -Japan tax treaty, which was signed on November 6, 2003,
entered into force on March 30, 2004. Pursuant to Article 30, the treaty generally is
applicable with respect to withholding taxes on July 1, 2004. In the case of U.S.
withholding taxes, the treaty is applicable for amounts paid or credited on or after
July 1st. In the case of Japanese withholding taxes, the treaty is applicable for
amounts taxable on or after July 1st.
The guidance issued today by the IRS provides illustrative examples regarding the
application of the new treaty in the case of U.S. withholding taxes on dividends,
interest, and royalties. Incorporated in the guidance is an attachment prepared by
the Japanese National Tax Agency providing similar illustrative examples regarding
the application of the new treaty in the case of Japanese withholding taxes on
dividends, interest, and royalties. The Japanese National Tax Agency also has
issued guidance providing these illustrative examples and incorporating the U.S.
illustrative examples as an attachment.
REPORTS
• Guidance regarding the Commencement of Application of the New Tax
Convention between the United States and Japan
http://www.treas.gov/press/releases/js 1737.htm
5/5/2005
Guidance regarding the C o m m e n c e m e n t of Application
of the N e w Tax Convention between the United States and Japan
June 23,2004
Internal Revenue Service
In the United States, the provision with respect to taxes withheld at source in paragraph 2 of Article
30 of the Convention between the Government of the United States of America and the Government
of Japan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to
Taxes on Income ("the Convention"), entered into force on March 30, 2004, for amounts (such as
dividends, interest, and royalties) to be paid before, on or after July 1, 2004, provides for the
commencement of application of the Convention as indicated in Attachment 1.
In Japan, the commencement of application is as indicated in Attachment 2, which was prepared by
the Japanese National Tax Agency.
Note
Paragraph 2 of Article 30 of the Convention states:
2. This Convention shall be applicable:
(a)
in Japan:
(i)
with respect to taxes withheld at source:
(aa)
for amounts taxable on or after July 1 of the calendar year in which
the Convention enters into force, if the Convention enters into force before
April 1 of a calendar year; or
(bb)
(ii)
(b)
. ..
. . . ; and
in the United States:
(i)
with respect to taxes withheld at source:
(aa)
for amounts paid or credited on or after July 1 of the calendar year in
which the Convention enters into force, if the Convention enters into force
before April 1 of a calendar year; or
(bb) . . .
(ii)
Attachment 1
C o m m e n c e m e n t of Application of the N e w U.S.-Japan Income T a x Convention in
the United States
(With respect to Taxes Withheld at Source regarding Investment Income )
Internal Revenue Service
The Convention shall be applicable with respect to taxes withheld at source for amounts paid or
credited on or after July 1, 2004. Therefore, the Convention is applicable to the amount of
investment income (dividends, interest, and royalties) paid or, where amounts are credited, credited
on or after that date.
Specifically, the date on which an amount is paid or credited for the purposes of the Convention is
as follows:
Dividends
In the case of all dividends (including interim dividends), amounts are paid or credited on
the date on which they are paid or, where amounts are credited, on the date on which they
are credited.
Interest and Royalties
In the case of interest or royalties, amounts are paid or credited on the date on which they
are paid or, where amounts are credited, on the date on which they are credited. W h e n an
amount is paid (for example in the case where an amount required to be paid by contract on
a specified date actually is paid on a later date) shall be determined on the basis of United
States tax law.
Examples:
Dividends
1. U.S. Company A has a fiscal year that ends on March 31, 2004. At a shareholders' meeting
on June 25, 2004, C o m p a n y A declares dividends. Company A pays the dividends on July 5, 2004.
These dividends are paid or credited on July 5, 2004.
Interest
2. U.S. Company B has an obligation to pay to a financial institution interest on a debtclaim.
The interest is payable in quarterly installments due at the end of each quarter. In accordance with
the terms of the debt-claim, the interest is paid on June 30, 2004.
This interest is paid or credited on June 30, 2004.
2
3.
U.S. C o m p a n y C has an obligation to pay to a financial institution interest on a debt-claim.
The interest is payable in installments three times a year, due at the end of April, August, and
December. In accordance with the terms of the cfebt-claim, the interest is paid on August 31, 2004.
This interest is paid or credited on August 31, 2004.
Royalties
4. U.S. Company D has an obligation to pay royalties to Japanese Company E. Pursuant to a
license agreement, the royalties are determined based on sales over six-month periods ending June
30 and December 31, and are payable within 15 days of the end of each six-month period. In
accordance with the terms of the license, royalties are paid on July 5, 2004.
These royalties are paid or credited on July 5, 2004.
5. U.S. Company F has an obligation to pay royalties to Japanese Company G. Pursuant to a
license agreement, the royalties are determined based on sales over six-month periods ending March
31 and September 30 and are payable within 15 days of the end of each six-month period. In
accordance with the terms of the license, royalties are paid on October 5, 2004.
These royalties are paid or credited on October 5, 2004.
3
(Unofficial Translation)
Attachment 2
Commencement of Application of the New Japan-U.S. Income Tax Convention in Japan
(With respect to Taxes Withheld at Source regarding Investment Income )
National Tax Agency
The Convention shall be applicable with respect to taxes withheld at source for amounts taxable on
or after July 1, 2004. Therefore, the Convention is applicable to the amount of investment income
(dividends, interest, and royalties) "due to be received" on or after that date.
Specifically, the date on which an amount is due to be received for purposes of the Convention is as
follows:
Dividends
The date of the shareholders' meeting where dividends are declared. (In Japan a
company's ordinary shareholders' meeting is held within three months after the end of the
fiscal year in accordance with the Commercial Code.)
As for interim dividends, the date of the resolution by the board of directors. If an
effective date is specified regarding the resolution, that effective date (which must be a date
within three months after the date determined in the company's articles of incorporation).
Interest and Royalties
If the date of payment is stipulated in a contract, that date; if not, the date on which the
interest or royalties are actually paid.
Examples:
Dividends
1. Japanese Company A has a fiscal year that ends on March 31, 2004. At a shareholders'
meeting on June 25, 2004, C o m p a n y A declares dividends. C o m p a n y A pays the dividends on July
5, 2004.
These dividends are taxable on June 25, 2004.
Interest
2. Japanese Company B has an obligation to pay to a fina ncial institution interest on a
debt-claim. The interest is payable in quarterly installments due at the end of each quarter. In
accordance with the terms of the debt-claim, the interest is paid on June 30, 2004.
This interest is taxable on June 30, 2004.
4
3.
Japanese C o m p a n y C has an obligation to pay to a financial institution interest on a
debt-claim. The interest is payable in installments three times a year, due at the end of April,
August, and December. In accordance with the terms of the debtc laim, the interest is paid on
August 31, 2004.
This interest is taxable on August 31, 2004.
Royalties
4. Japanese Company D has an obligation to pay royalties to U.S. Company E. Pursuant to a
license agreement, the royalties are determined based on sales over six-month periods ending June
30 and December 31, and are payable within 15 days of the end of each six-month period. In
accordance with the terms of the license, royalties are paid on July 5, 2004.
These royalties are taxable on July 5, 2004.
5. Japanese Company F has an obligation to pay royalties to U.S. Company G. Pursuant to a
license agreement, the royalties are determined based on sales over six-month periods ending March
31 and September 30 and are payable within 15 days of the end of each six-month period. In
accordance with the terms of the license, royalties are paid on October 5, 2004.
These royalties are taxable on October 5, 2004.
5
F R O M T H E OFFICE O F PUBLIC A F F A I R S
June 23, 2004
JS-1738
Statement by U.S. Treasury Secretary John Snow following meeting
with
Brazil President Luiz Inacio Lula da Silva and Finance Minister
Antonio Palocci
U.S. Treasury Secretary John Snow met today with Brazil's President Luiz Inacio
Lula da Silva and Finance Minister Antonio Palocci in N e w York to discuss
economic developments and relations between the two countries. Secretary S n o w
congratulated President Lula and Minister Palocci on the acceleration of Brazil's
economic growth, strong export performance, and job creation. President Lula and
Minister Palocci outlined their strategy for next steps in reforms to sustain high
growth, job creation, and poverty reduction.
"We are seeing the results of the leadership of President Lula and his economic
team," Secretary S n o w said. "Real interest rates have fallen nearly 10 percentage
points since last summer and the Brazilian economy is responding. Brazil is well
positioned to benefit from higher global growth. The stage is set for increasing
gains for the Brazilian people."
"We are strongly committed to work closely with Brazil as a critical driver of growth
and rising living standards in the Hemisphere," Secretary S n o w said.
Secretary Snow and Minister Palocci also discussed the useful role that the U.S.
Brazil Group for Growth is playing as a forum for advancing strategies for
increasing economic growth in both countries.
http://www.treas.gov/press/releases/jsl738.htm
5/5/2005
JS-1739: U.S. Designates Additional M e m b e r s of Italian <br>al Qaida Cell
Page 1 of 2
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC A F F A I R S
June 24, 2004
JS-1739
U.S. Designates Additional M e m b e r s of Italian
al Qaida Cell
The United States announced further collaboration with Italy in the financial war on
terror as the U.S. Department of the Treasury designated six al Qaida loyalists
operating in Italy, primarily in the Lombardi region. This action was taken pursuant
to obligations of member states to designate individuals added to the consolidated
list of the United Nations' 1267 Sanctions Committee because of ties to al Qaida,
U s a m a bin Laden (UBL) and the Taliban.
"With Italy's leadership today, the international community continues its drive to
identify and financially isolate al Qaida supporting cells and members in Europe and
around the world," said Juan Zarate, the Treasury Department's Deputy Assistant
Secretary for the Executive Office for Terrorist Financing and Financial Crimes. "In
the face of international terrorism, w e are undeterred, resolute and methodical in
our mission to cut down terrorist support networks."
Ten other individuals associated with this terrorist cell were previously designated
by Italy, and the designation w a s supported by the United States in March 2004.
The cell is associated with the Salafist Group for Preaching and Combat ( G S P C )
and other Islamic terrorists groups operating around the globe. The United States
designated the G S P C on September 24, 2001, and the United Nations placed the
organization on the list of terrorist entities linked to al Qaida on October 8, 2001.
Information shows that the six individuals being designated today under the
authority of E.O. 13224 were part of the same al Qaida terror cell in Italy, actively
participating as members and engaging in criminal activities in support of their
terrorist agendas.
The U.S. has information that this terrorist cell was engaged in the trafficking of
arms and chemical materials. In addition, militant members of the organization were
able to immigrate to Italy because the cell w a s supplying them with false
documentation and other logistical support.
The following individuals were designated:
Mohamed Ben Mohamed Abdelhedi - Engaged in criminal acts with the intent to
profit from clandestine immigration and false documentation.
Kamel Darraji - Supplied false documentation to illegal aliens.
Mohamed El Mahfoudi- Supplied false documentation to illegal aliens.
Imed Ben BechirJammali- Supplied false documentation to illegal aliens.
Habib Ben Ahmed Loubiri - President of the executive board of Work Services
s.c.a.r.l., a cooperative society used to raise funds for extremist activity, most
notably for the G S P C .
Chabaane Ben Mohamed Trabelsi - Supplied false documentation to illegal
aliens.
These entities are subject to designation under Executive Order 13224 pursuant to
http://www.treas.gov/press/releases/js 1739.htm
5/5/2005
JS-1739: U.S. Designates Additional Members of Italian <br>al Qaida Cell
Page 2 of 2
paragraphs (d)(i) and (d)(ii) based on a determination that they assist in, sponsor or
provide financial, material, or technological support for, or financial or other services
to or in support of, or are otherwise associated with, persons listed as subject to
E.O. 13224. These branches also meet the standard for inclusion in the United
Nations' 1267 Sanctions Committee's consolidated list because of the support
provided to U B L , al Qaida or the Taliban.
Inclusion on the 1267 Committee's list triggers international obligations on all
m e m b e r countries, requiring them to freeze the assets of these offices. Publicly
identifying these supporters of terrorism is a critical part of the international
campaign to counter terrorism. Additionally, other organizations and individuals are
put on notice that they are prohibited from doing business with them.
Blocking actions are critical to combating the financing of terrorism. When an action
is put into place, any assets existing in the formal financial system at the time of the
order are to be frozen. Blocking actions serve additional functions as well, acting as
a deterrent for non-designated parties w h o might otherwise be willing to finance
terrorist activity; exposing terrorist financing "money trails" that m a y generate leads
to previously u n k n o w n terrorist cells and financiers, disrupting terrorist financing
networks by encouraging designated terrorist supporters to disassociate
themselves from terrorist activity and renounce their affiliation with terrorist groups;
terminating terrorist cash flows by shutting d o w n the pipelines used to m o v e
terrorist-related assets; forcing terrorists to use alternative, more costly and higherrisk m e a n s of financing their activities; and engendering international cooperation
and compliance with obligations under U.N. Security Council Resolutions.
The United States is working with our partners around the globe to take swift action
against terrorists and their financiers. With this designation, 383 individuals and
entities will have been designated under President Bush's Executive Order aimed
at freezing the assets of terrorists and their supporters. Approximately $200 million
in terrorist-related assets has been frozen or seized as a result of efforts by the
United States and its allies.
For more information on the March 2004 designation in support of Italy, please visit:
http://www. treasury.gov/press/releases/js1243. htm.
httD://www.treas.gov/press/releases/jsl739.htm
5/5/2005
JS-1740: M E D I A ADVISORY<br>Secretary S n o w Visits Florida on Friday<br>to Meet... Page 1 of 1
PRLSS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
June 24, 2004
JS-1740
MEDIA ADVISORY
Secretary Snow Visits Florida on Friday
to Meet with Business Leaders on the Economy
U.S. Treasury Secretary John W. Snow will visit Tampa and Miami, Florida on
Friday, June 25 to meet with local business leaders and discuss the President's
efforts to strengthen the economy and create jobs. Last month, 6,800 new jobs
were created in Florida.
"As a result of the President's tax reform and economic policies, 1.4 million new
jobs have been created since August 2003, including 1.2 million that were created
this year," said Secretary Snow. "The President's tax reform policies have ensured
that more than 6.1 million taxpayers in Florida will have lower income tax bills in
2004."
The following events are open to the media:
Friday, June 25
Tour and Roundtable Discussion with Local Business Leaders
MartinLitho
505 Rome Avenue
Tampa, FL
8:30 am EDT
** Media must arrive by 7:45 am and must wear media credentials
Town Hall Meeting on Health Savings Accounts with Florida Governor Jeb Bush
Hyatt Regency Miami
Ballroom - Tuttle South
400 SE Second Avenue
Miami, FL
3:00 pm EDT
** Media must arrive at 2:15 pm and must wear media credentials
http://www.treas.gov/press/releases/js 1740.htm
5/5/2005
JS-1741: Treasury's Roseboro Praises Efforts to Enhance the Resiliency of <BR>the U.S.... Page 1 of 2
PRLSS ROOM
F R O M T H E OFFICE O F PUBLIC A F F A I R S
June 24, 2004
JS-1741
Treasury's Roseboro Praises Efforts to Enhance the Resiliency of
the U.S. Financial Sector
at the N e w York Stock Exchange
Under Secretary of the Treasury for Domestic Finance, Brian Roseboro, today
joined the N e w York Stock Exchange (NYSE), the American Stock Exchange
(AMEX), the Securities Industry Automation Corporation (SIAC) and Con Edison
Communications to announce that SIAC's Secure Financial Transaction
Infrastructure (SFTI), has officially been joined by 600 financial services firms
representing a majority of the investment community.
"The SFTI network is one of the many important steps that the U.S. government
and the private sector have taken to enhance the resiliency of the critical financial
infrastructure and meet the challenges of the post - September 11th world. By
working together, w e have m a d e significant progress, but in this race, there is no
finish line. Our efforts to promote the safety and stability of the critical financial
infrastructure will continue in order to prevent any future disorder from becoming a
disruption," said Under Secretary of the Treasury Brian Roseboro.
Today's announcement at the NYSE of the 600th member of the SFTI network is an
important milestone, signifying that a majority of the investment community has
taken an important step to prepare in the event of a major m a n m a d e or natural
disaster.
The Secure Financial Transaction Infrastructure program is a private
communication network offered by SIAC, a subsidiary of its parent companies the
N Y S E and the American Stock Exchange. SFTI combines recovery, redundancy,
and diversity to provide continuous telecommunications resiliency and a secure
means of connecting to trading, clearing and settlement, market data distribution,
and other SIAC services to member financial firms.
All of SFTI's equipment, connections, power supplies and network links are
redundant and its architecture features independent, self-healing fiber-optic rings,
making it completely independent of all other telecommunications circuits and
conduits.
SFTI's two ring infrastructure of physically diverse fiber-optic lines can withstand a
single point of failure at any point on the fiber pathway. By replacing point-to-point
circuits with a redundant ring infrastructure of fiber lines the SFTI network has no
single points of failure. Therefore, even if a SFTI fiber pathway is compromised,
financial data traffic will continue to move uninterrupted along another pathway,
improving the industry's protection against possible threats. Additionally, instead of
relying on point-to-point circuits to SIAC, users will connect to two or more access
centers in the N e w York, Boston or Chicago area via their telecommunications
carrier(s) of choice. The fiber lines provided by Con Edison Communications are
secure and managed by a highly sophisticated Network Operations Center.
SFTI is a product of SIAC, a technology subsidiary of the New York Stock
Exchange and the American Stock Exchange. SIAC is responsible for the design,
development, implementation and operation of the exchanges' computer systems
and communications networks. SIAC operates clearance and settlement systems
on behalf of the clearing corporations and disseminates U.S. market data
worldwide. SIAC is also the company behind the Secure Financial Transaction
Infrastructure (SFTI), which is designed to meet the financial industry's need for a
data communications infrastructure that is more resistant to man-made and natural
disasters, while speeding recovery after a crisis.
http://www.treas.gov/press/releases/js 1741 .htm
5/5/2005
JS-1741: Treasury's Roseboro Praises Efforts to Enhance the Resiliency of <BR>the U.S.... Page 2 of 2
As the lead federal agency responsible for coordinating critical financial
infrastructure protection, the Treasury Department works closely with other federal
and state financial regulators, as well as the private sector. Treasury chairs the
Financial and Banking Information Infrastructure Protection Committee, chartered
under the President's Working Group on Financial Markets and charged with
improving coordination and communication a m o n g financial regulators and the
private sector to enhance the resiliency of the financial sector.
http://www.treas.gov/press/releases/js 1741 .htm
5/5/2005
JS-1742: Treasury Issues Guidance on Determination of < B R > U . S . Income of Foreign In... Page 1 of 1
PRLSS ROOM
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FROM THE OFFICE OF PUBLIC AFFAIRS
To view or print the PDF content on this page, download the free Adobe® Acrobat® Reader®.
June 24, 2004
JS-1742
Treasury Issues Guidance on Determination of
U.S. Income of Foreign Insurance Companies
Today the Treasury Department and the Internal Revenue Service issued proposed
regulations relating to the tax treatment of foreign insurance companies with U.S.
insurance operations.
A foreign company with U.S. operations is subject to U.S. tax on the portion of its
income attributable to such operations. U.S.-source income or gains are
considered attributable to a U.S. business if the income or gains are derived from
assets used by the company in such business or if the activities of the company's
business are a material factor in the realization of such income or gains. Stock
investments generally are not considered assets used in a-business.
Insurance companies make investments, including stock investments, as part of
their business in order to fund their obligations to policy holders and satisfy
regulatory capital requirements. In light of these circumstances, the proposed
regulations, when finalized, would provide that portfolio stock investments of a
foreign insurance company are excluded from the general rule that stock is not an
asset held for use in a company's business. Under these regulations, a foreign
insurance company's portfolio stock investments may be considered assets used in
the company's U.S. business and therefore such stock investments may produce
income that is subject to U.S. tax.
REPORTS
• The text of the proposed regulations
http://www.treas.gov/press/releases/jsl742.htm
5/5/2005
[4830-01-p]
DEPARTMENT OF THE TREASURY
Internal Revenue Service
2 6 CFR Part 1
[REG-117307-04]
RIN 1545-BD27
Stock Held by Foreign Insurance Companies
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking.
SUMMARY: This document contains a proposed regulation relating
to the determination of income of foreign insurance companies
that is effectively connected with the conduct of a trade or
business within the United States. The regulation provides that
the exception to the asset-use test for stock shall not apply in
determining whether the income, gain, or loss from portfolio
stock held by foreign insurance companies constitutes
effectively connected income.
DATES: Written or electronic comments and requests for a public
hearing must be received by September 23, 2004.
ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-117307-04),
room 5203, Internal Revenue Service, PO Box 7604, Ben Franklin
Station, Washington, DC 20044. Submissions may be handdelivered Monday through Friday between the hours of 8 a.m. and
4 p.m. to CC:PA:LPD:PR (REG-117307-04), Courier's Desk, Internal
Revenue Service, 1111 Constitution Avenue, NW., Washington, DC,
or sent electronically, via the IRS Internet site at
www.irs.gov/regs or via the Federal eRulemaking Portal at
www.regulations.gov (IRS and REG-117307-04).
FOR FURTHER INFORMATION CONTACT: Concerning the regulations,
Sheila Ramaswamy, at (202) 622-3 870; concerning submissions and
delivery of comments, Robin Jones, 202-622-7180 (not toll-free
numbers).
SUPPLEMENTARY INFORMATION:
Background
In 1992, the Treasury Department and the IRS published
proposed regulations under section 864 providing that stock is
not treated as an asset used in, or held for use in, the conduct
of a trade or business in the United States. Proposed §1.8644(c) (2) (ii) (C) . The notice of proposed rulemaking solicited
comments regarding the appropriate treatment of income from
portfolio stock investments of insurance companies. The
Treasury Department and the IRS published final regulations in
1996 which adopted the general rule in the proposed regulations
that stock is not treated as an asset used in, or held for use
in, the conduct of a U.S. trade or business. TD 8657(1996-1 C.B.
153). The final regulations reserved on the treatment of stock
held by a foreign insurance company. §1.864-4 (c) (2) (iii) (b) .
This proposed regulation sets forth circumstances in which stock
held by a foreign insurance company is not subject to the
general rule in §1.864-4 (c) (2) (iii) (a), which provides that
stock is not an asset used in a U.S. trade or business.
Explanation of Provisions
2
In the case of a foreign corporation engaged in a trade or
business within the United States during the taxable year,
section 864(c)(2) generally provides rules for determining
whether certain fixed or determinable, annual or periodical
income from sources within the United States or gain or loss
from sources within the United States from sale or exchange of
capital assets is income effectively connected with the conduct
of a trade or business in the United States. Section 864(c)(2).
In making this determination, the factors taken into account
include whether (a) the income, gain or loss is derived from
assets used in or held for use in the conduct of such trade or
business (the asset-use test), or (b) the activities of such
trade or business were a material factor in the realization of
such income, gain or loss. Section 864(c)(2). Section 1.8644(c) (2) (iii) (a) generally provides that stock of a corporation
(whether domestic or foreign) is not an asset used in or held
for use in the conduct of a trade or business in the United
States except as provided in (c)(2)(iii)(b). Section 1.8644(c)(2)(iii)(b) entitled "Stock Held by Foreign Insurance
Companies" is reserved.
Insurance companies hold investment assets, such as stocks
and bonds, to fund their obligations to policyholders and to
meet their surplus (capital) requirements. Thus, stock held in
an investment portfolio may be an asset held for use in the
trade or business of a foreign insurance company. By contrast,
stock of a subsidiary generally is not held for the purpose of
3
meeting an insurance company's business needs.
This proposed regulation provides that the general rule
excluding stock from the asset-use test does not apply to stock
held by a foreign insurance company unless such company owns
directly, indirectly, or constructively 10 percent or more of
the vote or value of the company's stock. The 10-percent
threshold is intended to distinguish portfolio stock held to
fund policyholder obligations and surplus requirements from
investments in a subsidiary. Comments are requested as to
whether this 10-percent threshold provides an appropriate
standard for determining whether stock is a portfolio investment
for these purposes.
Proposed Effective Date
This regulation is proposed to apply to taxable periods
beginning on or after the date of publication of a Treasury
decision adopting this rule as a final regulation 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 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 of information on small entities, the
provisions of the Regulatory Flexibility Act (5 U.S.C. chapter
4
6) do not apply.
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 its impact on small
business.
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 rules
and how they can be made easier to understand. All comments
will be available for public inspection and copying. A public
hearing may be scheduled if requested in writing by any person
that timely submits written comments. If a public hearing is
scheduled, notice of the date, time, and place for a public
hearing will be published in the Federal Register.
Drafting Information
The principal author of these proposed regulations is
Sheila Ramaswamy, Office of Associate Chief Counsel
(International). 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 recordkeeping requirements.
Proposed Amendment to the Regulations
Accordingly, 26 CFR part 1 is proposed to be amended as
5
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. In §1.864-4, paragraph (c)(2)(iii)(b) is revised
to read as follows:
§1.864-4 U.S. source income effectively connected with U.S.
business.
k k k k k
(C) * * *
(2) * * *
(iii) * * *
(b) Paragraph (c) (2) (iii) of this section shall not apply to
stock of a corporation (whether domestic or foreign) held by a
foreign insurance company unless the foreign insurance company
owns 10 percent or more of the total voting power or value of
all classes of stock of such corporation. For purposes of this
section, section 318(a) shall be applied in determining
ownership, except that in applying section 318(a)(2)(C), the
phrase "10 percent" is used instead of the phrase "50 percent."
k k k k k
Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.
6
JS-1743: Treasury Warns Against Abusive Tax Reduction Scheme
Page 1 of 1
FROM THE OFFICE OF PUBLIC AFFAIRS
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June 24, 2004
JS-1743
Treasury Warns Against Abusive Tax Reduction Scheme
Today, the Treasury Department and the Internal Revenue Service issued a notice
cautioning taxpayers against promoters who market arrangements that purportedly
provide reductions in U.S. federal taxation pursuant to the special rules applicable
to the U.S. Virgin Islands. These arrangements involve taking positions that are
highly questionable with respect to claims that the taxpayer resides in the U.S.
Virgin Islands and that the taxpayer's income is from sources in the U.S. Virgin
Islands or is connected with a U.S. Virgin Islands business. The notice describes
certain meritless arguments that promoters typically put forward to support these
claims, and warns taxpayers that the Internal Revenue Service will challenge claims
made by taxpayers based on such arguments. The notice also outlines civil and
criminal penalties that could apply to taxpayers who take these positions and to
persons who promote them.
Acting Assistant Secretary for Tax Policy Greg Jenner stated, "This notice is
another example of our ongoing efforts to prevent promoters and taxpayers from
making highly questionable arguments, and setting up dubious arrangements, in an
attempt to avoid paying their fair share of taxes."
The notice describes a form of arrangement that has been promoted and that
involves running a taxpayer's salary or business income through a U.S. Virgin
Islands entity such as a limited partnership. The notice warns, however, that these
questionable positions may also be promoted through other forms of arrangements
and with respect to U.S. possessions other than the U.S. Virgin Islands.
The IRS is working on ongoing cases involving arrangements of this type. "This
scheme is an effort to disguise or distort where taxpayers live or do business," said
IRS Commissioner Mark W. Everson. "We appreciate the assistance given us by
the U.S. Virgin Islands Bureau of Internal Revenue on this matter."
REPORTS
• A copy of Notice 2004-45
http://www.treas.gov/press/releases/jsl743.htm
5/5/2005
Part I - Income Taxes
Meritless Filing Position Based on Sections 932(c) and 934(b)
Notice 2004-45
The Internal Revenue Service is aware that certain promoters are advising
taxpayers to take highly questionable, and in most cases meritless, positions described
below in order to avoid U.S. taxation and claim a tax benefit under the laws of the United
States Virgin Islands (USVI). Promoters may also be advising taxpayers to take similar
positions with respect to other U.S. possessions. This notice alerts taxpayers that the
Service intends to challenge these positions in appropriate cases. The Service may
impose civil penalties on taxpayers or persons who participated in the promotion or
reporting of these positions. In addition to being subject to other penalties, any person who
willfully attempts to evade or defeat tax by means of an arrangement such as the one
described in this notice, or who willfully counsels or advises such evasion or defeat, may be
guilty of a criminal offense under federal law.
Background
Section 934, which was enacted in 1960, provides that the USVI may reduce its
territorial income tax only in certain limited cases. The USVI may not, however, reduce the
tax liability of U.S. citizens or residents w h o are not bona fide residents of the USVI. In the
case of U.S. citizens or residents who are bona fide residents of the USVI, it may reduce
their tax liability only with respect to income from sources in the USVI or income effectively
connected with the conduct of a trade or business within the USVI.
The legislative history of § 934 indicates that the statute was enacted in part
because of concerns that certain local income tax programs, which were intended to
provide incentives to corporations and USVI residents that made new investments in the
USVI, were having the effect of reducing the tax liability attributable not only to income from
sources within the USVI but also to income from sources within the United States. While
recognizing the goal of encouraging economic development in the USVI through
appropriate income tax reductions, the legislative history to § 934 indicates that
in no case should this [goal] be attained by granting windfall gains to taxpayers with
respect to income derived from investments in corporations in the continental United
States, or with respect to income in any other manner derived from sources outside
of the Virgin Islands.
S. Rep. No. 1767, 86th Cong., 2nd Sess. 4 (1960).
Typical Promotion
The highly questionable positions described in this notice may be promoted to
taxpayers in a variety of forms. The Service is aware, however, that they have frequently
been promoted in the following manner:
Promoters typically approach a taxpayer (Taxpayer) living and working in the United
2
States and advise Taxpayer to (i) purport to become a USVI resident by establishing
certain contacts with the USVI, (ii) purport to terminate his or her existing employment
relationship with his or her employer (Employer) and (iii) purport to become a partner of a
Virgin Islands limited liability partnership ("V.I.LLP") that is treated as a partnership for U.
tax purposes. V.I.LLP then purports to enter into a contract with Employer to provide
Employer with substantially the same services that were provided by Taxpayer prior to the
creation of this arrangement. Typically, after entering into the arrangement, Taxpayer
continues to provide substantially the same services for Employer that he or she provided
before entering into the arrangement, but Taxpayer is nominally a partner of V.I.LLP
instead of an employee of Employer.
Under this arrangement, Employer makes payments to V.I.LLP for Taxpayer's
services and no longer treats the payments as wages paid to Taxpayer subject to the
withholding and payment of employment taxes and reporting on Taxpayer's Form W-2.
V.I.LLP, in turn, makes payments to Taxpayer for his or her services to Employer. V.I.LLP
typically treats these payments for tax accounting purposes either as guaranteed payments
for services or as distributions of Taxpayer's allocable share of partnership income. Under
this arrangement, the promoter may be a general partner in V.I.LLP and may retain a
percentage of the fees received from Employer.
V.I.LLP either has or secures a reduction, up to 90 percent, in USVI income tax
liability under the Economic Development Program (EDP) of the USVI. Taxpayer takes the
3
position that the E D P benefits granted to V.I.LLP provide a corresponding reduction in the
income tax liability that Taxpayer reports on his or her USVI income tax return with respect
to guaranteed payments from the partnership or distributive shares of the partnership's net
income, or both. Taxpayer pays tax to the USVI in an amount approximately equal to 10%
of the U.S. income tax liability that otherwise would be imposed on Taxpayer's income from
performing the services. Taxpayer claims that, for purposes of computing his or her U.S.
income tax liability, gross income does not include guaranteed payments received from
V.I.LLP or Taxpayer's distributive share, if any, of the partnership's net income, or both.
Positions Promoted
In situations such as those described above, as well as in other situations, the
following highly questionable positions are being promoted:
--"You can continue to live and work in the United States and, nevertheless,
be a bona fide resident of the USVI." The concept of a "bona fide resident of
the Virgin Islands" was an integral part of the predecessor to § 934(b), and as such,
its meaning has been well established. See § 934(c) as enacted by P.L. 86-779,
§4(a) (1960). When Congress enacted the current versions of §§ 932 and 934(b), it
retained this concept, but noted that Treasury has the authority to modify its meaning
when necessary to prevent abuse. See H.R. Rep. No. 99-426 (1985) and General
Explanation of the Tax Reform Act of 1986, JCS-10-87 (1987) ("Similarly, where
appropriate, the Secretary may treat an individual as not a bona fide resident of the
4
Virgin Islands.") The determination of whether an individual is a bona fide resident
of the USVI turns on the facts and circumstances and, specifically, on an individual's
intentions with respect to the length and nature of his or her stay in the USVI. See §
1.934-1 (c)(2) (generally applying the principles of §§ 1.871-2 through -5).
Promoters typically represent that a taxpayer need not make major lifestyle changes
in order to become a bona fide resident of the USVI, and may represent that the
taxpayer need only spend a few weeks or less out of the year in the USVI to become
a resident for income tax purposes. These representations, however, have no basis
in the well-established meaning of the term "bona fide resident of the Virgin Islands."
Accordingly, a claim of USVI residency for income tax purposes may be
considered without merit or fraudulent when the taxpayer continues to live and work
in the United States.
--"USVI source income includes income from services performed in the
United States." The principles that generally apply for determining gross and
taxable income from sources within and without the United States (in particular, the
rules of §§ 1.861-1 through 1.863-5) also generally apply in determining gross and
taxable income from sources within and without a possession of the United States.
See § 1.863-6 and Francisco v. Commissioner, 119 T.C. 317 (2002) affd, No. 031210 (D.C. Cir. June 18, 2004). With certain limited exceptions, compensation for
labor or personal services performed in the United States is gross income from
5
sources within the United States. S e e § 861(a)(3) and § 1.861-4(a)(1). The result
does not change if the compensation is received in the form of a guaranteed
payment from a partnership rather than in the form of a fee for services under an
employment contract. See Miller v. Commissioner, 52 T.C. 752 (1969), acg. 19722 C.B. 2. Promoters typically claim that taxpayers are free to argue, under a variety
of theories, that income from services performed in the United States constitutes
income from USVI sources because "no rules exist under section 934" for
determining whether income is from USVI sources. Based on the foregoing
discussion, however, such arguments are without merit.
--"For purposes of determining the source of income, USVI includes the
United States." Section 932 provides coordination rules for filing of returns for
U.S. and USVI income taxes by bona fide residents of the USVI and U.S. citizens
and residents who have income derived from sources within the USVI or income
effectively connected with the conduct of a trade or business within the USVI. To
facilitate this coordination, § 932(c)(3) states that the USVI includes the United
States for certain tax purposes. Section 932(c)(3) was modeled after § 935(c),
which was enacted fourteen years earlier and which provides an equivalent rule with
respect to Guam. For an illustration of the types of purposes for which these
provisions apply, see § 1.935-1 (c)(1)(ii). Notably, these provisions do not apply for
purposes of determining the source of income. See H.R. Rep. No. 92-1479, 92d
6
Cong., 2d Sess. 5 (Oct. 2,1972) ("In determining the source of income for purposes
of the special tax system provided in the bill (new code sec. 935), the principles
contained in sees. 861-863 are to be applied without reference to sec. 935(c).")
Based on an incorrect reading of § 932(c)(3), promoters may claim that
compensation for services performed in the United States is considered for tax
purposes to be compensation for services performed in the USVI. This claim is
without merit. Section 932 does not apply to determine the source of income on
which the USVI tax liability of bona fide residents may be reduced under §
934(b)(1). Thus, § 932(c)(3) does not operate to transform compensation from the
performance of personal services in the United States into income from sources in
the USVI.
--"Non-USVI source income can be treated as effectively connected with the
conduct of a trade or business within the USVI even if, under equivalent
circumstances, such income would not be considered effectively
connected with the conduct of a trade or business within the United
States." As noted above, § 934(b)(1) grants limited authority to the USVI to reduce
the USVI tax liability with respect to income from USVI sources or income effectively
connected with a trade or business within the USVI. The use of the term "effectively
connected with the conduct of a trade or business" in § 934 indicates that Congress
generally intended for the rules under § 934 to follow the well-established rules that
7
apply for purposes of determining the taxation of nonresidents, such as the
definition of effectively connected income under § 864(c). Section 934(b)(4),
however, provides Treasury with the authority to issue regulations providing an
alternative definition of the term. The legislative history of § 934 makes clear that
this grant of regulatory authority was for the purpose of preventing abuse, and that
Congress anticipated that it would be used to provide further limitations on the type
of income that would be treated as from USVI sources or as effectively connected
with the conduct of a trade or business within the USVI. S. Rep. No. 99-313, at 484,
1986-3 C.B. (vol. 3) 484. Taxpayers have no legal basis for claiming that the scope
of the term "income effectively connected with the conduct of a trade or business" is
broader under § 934 than it is under § 864. In particular, taxpayers have no legal
basis for disregarding the rules of § 864(c)(4), which generally limit the amount of
foreign source income that is treated as effectively connected with a U.S. trade or
business to certain, very narrow categories of income. Accordingly, with the
exception of those narrow categories, and in the absence of regulations to the
contrary, income, gain, or loss from sources without the USVI cannot be treated as
effectively connected with the conduct of a trade or business within the USVI for
purposes of § 934. For example, income from the performance of personal
services without the USVI cannot under any circumstances be treated as effectively
connected with the conduct of a trade or business within the USVI. Promoters
8
typically interpret the phrase "effectively connected to the conduct of a trade or
business within the USVI" broadly, and inconsistently with § 864(c)(4), in order to
claim a tax reduction with respect to income from non-USVI sources. As indicated
above, however, these interpretations have no merit.
The IRS intends to challenge these positions and other similar claims that disregard the
statutory and regulatory provisions concerning the limitations on the reduction of USVI
income tax. Where taxpayers in order to make these claims enter into arrangements such
as the one described in this notice, the Internal Revenue Service may disregard such
arrangements on the grounds that they lack economic substance or that they have no
purpose other than tax avoidance or evasion. The Service also may assert that the
arrangement does not serve to terminate the employment relationship between a taxpayer
and Employer for federal employment tax purposes, with the result that Employer remains
liable for employment taxes and applicable penalties and interest.
In addition to liability for tax due plus statutory interest, taxpayers that claim to have
no requirement to file a federal income tax return or pay federal income tax liability based
on the positions described herein may be subject to penalties including, but not limited to,
the accuracy-related penalty under § 6662, failure to file or pay penalties under § 6651 and
civil fraud penalties under § 6663. Further, persons who participate in the promoting or
reporting of these positions may be subject to aiding and abetting penalties under § 6701.
In addition to other penalties, any person who willfully attempts to evade or defeat tax by
9
taking the positions described in this notice, or w h o willfully counsels or advises such
evasion or defeat, may be guilty of a criminal offense under §§ 7201, 7203, 7206, or
7212(a) or other provisions of federal law. Promoters and others who assist taxpayers in
taking these positions also may be enjoined from doing so under § 7408.
The principal author of this notice is W. Edward Williams of the Office of Associate
Chief Counsel (International). For further information regarding this notice contact W.
Edward Williams at (202) 622-3295 (not a toll-free call).
10
js-1744: Treasury Department Announces a Final Regulation Implementing Claims <br> ... Page 1 of 1
PRLSS R O O M
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F R O M T H E OFFICE O F PUBLIC AFFAIRS
June 24, 2004
js-1744
Treasury Department Announces a Final Regulation Implementing Claims
Procedures Under the Terrorism Risk Insurance Act
The Treasury Department today announced a final claims rule pursuant to the
Terrorism Risk Insurance Act (TRIA) of 2002. This rule finalizes the proposed rule
published December 1, 2003, and is one in a series of Treasury regulations
implementing TRIA.
Today's final rule contains procedures for insurers to follow in filing claims and
receiving payment of the federal share of compensation for insured losses under
the Terrorism Risk Insurance Program. In this regard the final rule provides for
advance payments under certain conditions. The final rule also clarifies elements of
insured losses that are to be recognized under the Program and establishes
fundamental documentation and recordkeeping necessary for insurers to receive
the federal share of compensation for terrorism losses.
"This final regulation reflects our careful consideration of the thoughtful comments
w e received on the proposed rule," said Treasury Assistant Secretary for Financial
Institutions Wayne Abemathy, who oversees the Terrorism Risk Insurance
Program. "We hope that w e will never be called upon to trigger coverage under
TRIA, but the program stands ready today, as it has from its earliest days, to meet
its responsibilities. While emergency measures were previously available to us,
these claims procedures will enable Treasury to respond quickly and properly to
insurer claims for payment."
In commenting on the proposed rule, several insurers noted potentially significant
cash flow concerns if insurers were in all cases required to first make claim
payments to insureds prior to seeking reimbursement of the 9 0 % Federal share of
insured losses. "I a m pleased to announce," said Jeffrey S. Bragg, Executive
Director of the Terrorism Risk Insurance Program, "that Treasury has been able to
devise a means by which advance federal payments may be made under certain
circumstances, thus enabling a prompt response with-appropriate financial controls
in place." Insurers who want to make use of advance payments will establish a
segregated account into which Treasury payments will be made based on insurers'
reporting of losses that are to be paid within five days of receipt of the federal
share. Companies will make their payments from the account and remit any
interest earned to the Treasury Department.
The Terrorism Risk Insurance Program is a temporary federal reinsurance program
designed to encourage the development of private sector resources and
arrangements for managing risk of loss due to acts of international terrorism. The
authority for the Program expires on December 31, 2005.
The final regulation and other information related to the Terrorism Risk Insurance
Program can be found at http://www.treas.gov/trip.
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js-1745: Remarks of W a y n e A. Abernathy Assistant Secretary of the Treasury for Financi... Page 1 of 4
PRLSS ROOM
F R O M T H E OFFICE O F PUBLIC A F F A I R S
June 24, 2004
js-1745
Remarks of Wayne A. Abernathy Assistant Secretary of the Treasury for
Financial Institutions Before MasterCard Global Risk Management
Symposium San Diego, California
The War on Freedom
In his personal memoirs, finished just days before his death, Ulysses S. Grant
wrote, "Monarchical Europe generally believed that our republic was a rope of sand
that would part the moment the slightest strain was brought upon it. N o w it has
shown itself capable of dealing with one of the greatest wars that was ever made,
and our people have proven themselves to be the most formidable in war of any '
nationality."(Ulysses S. Grant, Personal Memoirs of U.S. Grant, p.585)
Today we are engaged in a new war, testing our Republic once again. And we will
need to be as formidable as ever to gain the victory. The enemy is hidden. H e
strikes from behind, from disguise, from ambush. H e knows no mercy,
acknowledges no shame. His target is neither our land nor our wealth. His target is
nothing less than our very way of life. It is who w e are and how w e live that the
terrorist seeks to destroy.
This enemy makes the same mistake as the monarchs seen by President Grant.
H e looks at America and our freedoms and thinks to see weakness where there is
strength. H e sees free people and free markets deciding economic questions and
thinks that he sees disorder. H e hears free speech and imagines that he hears
confusion. H e witnesses a government led by freely-elected leaders rather than
self-appointed despots and imagines to himself directionless crowds. In all, he
misses the power of free people exercising their God given talents to choose and
build their lives, their futures, their homes, pursuing their happiness.
Remember, and make no mistake: it is not precisely America--or the United States
of America-that the terrorists are fighting. They target what America represents,
what m a d e America what it is. They target freedom. Were w e to surrender our
freedoms that might be one way to stop the terrorism. They say that terrorists do
not thrive in police states that they prey upon free and open societies. But if w e
close our society and surrender our freedoms, then the terrorist wins, because it is
our freedom--and what freedom does to people-what people do with freedom, free
hearts, free minds-that the terrorist hates.
The challenge set for us in this Administration by President Bush-and by the
people of this nation-is to vanquish terrorism without surrendering our freedom, to
draw upon the power of our freedom to fight and defeat terrorism. The oft quoted
and seldom read Alexis de Tocqueville saw a great genius in Americans to
associate, to c o m e together freely to achieve important goals. That is the task
before us today.
The Symbols and Sinews
Pitiless people have their sights set on the symbols and sinews of liberty and
freedom. Those symbols and sinews include the systems, the relationships, the
arrangements, and the institutions that facilitate the ability of people to associate
freely here in this nation and from here throughout the world. The haters of
freedom despise free markets, and they are .targeting the financial institutions that
support those free markets.
So I salute and congratulate you for your presence here today, for your interest in
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js-1745: Remarks of W a y n e A. Abernathy Assistant Secretary of the Treasury for Financi... Page 2 of 4
preserving, protecting, and promoting those symbols and sinews of liberty and
freedom, to c o m e together, to work together to promote our prosperity and protect
our way of life. Thank you for taking important time from your important daily
business. W e are assembled here today, as others have in other financial centers
around the country, and as others will yet assemble elsewhere, to say that w e will
not let the terrorists, w e will not let the enemies of freedom, w e will not let them
destroy or disrupt our financial commerce, w e will not let them interfere with our
ability to save, to invest, to borrow, to insure against life's dangers.
With planning, preparation, and prudence, we can deny the terrorists the prize they
seek. They want to m a k e you stop. They want to m a k e you close up shop. They
want to m a k e you fear to innovate, to invest, to create n e w opportunities, n e w
products, n e w jobs. I firmly believe that if w e are prepared, w e need not fear.
The Importance of the Obvious
This morning I would like to share with you four principles that should guide our
preparations. They should also guide us in our response to calamity, whether
m a n m a d e calamities or the calamities of nature. I presented these principles to
Congress last year, w h e n I explained h o w well they had worked at the time of the
Detroit to N e w York power black out of last summer.
I recently shared these with members of my family. I could tell that they were not
impressed. W h e n asked why, they told m e in effect that these points were rather
obvious. They had m e there, but I offer in defense the words of Calvin Coolidge,
w h o once said,
They criticize me for harping on the obvious. Perhaps some day I'll write On the
Importance of the Obvious. If all the folks in the United States would do the few
simple things they know they ought to do, most of our big problems would take care
of themselves. (Calvin Coolidge, quoted by Cal T h o m a s in, "Silent Cal Speaks:
W h y Calvin Coolidge Is the Model for Conservative Leadership Today," The
Heritage Lecture Series, No.576, p.3)
These are the four principles. They are presented in order of importance, and I
confess that they are obvious. I would add, though, that in times of stress and
challenge, the obvious does not always seem so obvious. These points are even
more important than they are obvious:
First, and most important, we must remember in all that we do to protect our
financial infrastructure, that it is always about people. It is the people that m a k e our
financial institutions work, people that designed the systems, people that m a k e
them successful, people that innovate to keep them fresh and dynamic, and it is
people w h o m they are designed to serve, people w h o rely upon financial services
for so m a n y aspects of their daily lives. Our first consideration in planning and
action must be, h o w does it affect people.
Second, because it is about people, it is about confidence. Our financial institutions
operate on confidence, but they also promote confidence. In fact, confidence is
what our financial institutions must provide, confidence that financial transactions
will be carried out, that checks will clear, that bills will be paid, that investments will
be m a d e , that insurance promises will be kept. The confidence provided by
financial institutions and their services play a big part in helping to cope with the
trauma of disaster. With good reason, earned by experience, the world places
great confidence in American financial institutions. In our planning and in our
action, what are w e doing to promote confidence?
Third, essential to that confidence is open markets, financial institutions open for
business, doing their business, allowing Americans everywhere to engage in their
business, even during-especially during-times of stress. It is important for
financial institutions and markets to continue to operate as close to business-asusual as possible. During times of stress, investors need to price the effects of that
stress on assets. The longer they are prevented from pricing the impact, the more
anxiety builds and the worse the consequences will be when markets eventually reopen. W h a t do w e need to do, in planning and action, to keep our markets open?
The fourth guiding principle is responsibility. Each bank, every insurance company,
every single financial institution has a responsibility to its customers. Every
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js-1745: Remarks of W a y n e A. Abernathy Assistant Secretary of the Treasury for Financi... Page 3 of 4
regulator has a responsibility to the financial institutions that it supervises. That
responsibility applies both as w e prepare for disruptions and as w e weather them.
In the event of a disorder in the payments system, for example, w e want the
payments systems experts to fix it. W e do not want them to wait for guidance from
Washington. Just fix it. The experts w h o are on the ground and in the field are the
best to determine what steps should be taken to protect employees and customers.
W e will help where w e can and where w e need to, but w e leave the responsibility
with the financial institutions and the regulators that are closest to the problems to
find the solutions. Initiative and ingenuity are the most powerful tools to deal with
any disruption, and w e must give full room for their exercise. All of us must
shoulder our responsibility.
People, confidence, open markets, and responsibility are the four keys, the
fundamental principles that guide us. They guide our preparations, and they guide
our response. They were tested by that unexpected drill last s u m m e r w h e n the
lights went out from Detroit to N e w York, and they worked well. People did not lose
m o n e y from their accounts, there w a s no panic, financial markets opened and
operated, and there were no calls to Washington from financial leaders asking what
to do.
Let me take a few moments to use that unplanned test of our preparedness to
illustrate these four key points.
What Happened When the Lights Went Out
Last summers power outage was a sober reminder that we must be vigilant and
prepared at all times to wrestle with a crisis, whether intentional or accidental. It
reminded us that challenges will be unexpected and unpredictable. And they are
unpredictable. It s e e m s that the voices w h o predict disasters are loudest after the
disaster has happened.
The experience of the blackout was a real life test of the preparedness of our
financial infrastructure, not its preparedness to face a blackout, but its
preparedness to face the unexpected. And the financial infrastructure worked wellnot perfectly, but very well-and there are lessons in what worked, and there are
lessons on h o w to do even better. At the core, the financial system worked well
because the four key, obvious principles I outlined had guided our preparations,
they guided our evaluation of the problem when it occurred, and they guided our
response.
Our first concern was for people. We spoke to the regulators, the financial
institutions in N e w York City, other federal agencies, and law enforcement and
intelligence units. And most importantly, w e spoke with the financial services
providers. W e quickly learned the status of the people, the employees, and
whether needed financial services were being provided to customers.
Next, we turned to confidence. We sought to ensure that critical financial
institutions had backup generators that functioned and that staff had sufficient,
reliable power to perform their jobs both effectively and safely. W e wanted to know
h o w calmly things were going, where were the problems, the bottlenecks. W e
communicated. Using the various coordination organizations that have been
developed in recent months, w e quickly talked with one another, to reassure one
another that the various pieces of our interconnected financial markets were in
place and working, that w e each could depend upon one another. W h a t w e learned
w a s reassuring.
The press coverage quickly turned to asking whether the financial markets would
open the next day. The financial services providers were confident. W h a t about
the confidence of the customers, of the public? The press interest reminded us that
the functionality of the financial markets serves as a proxy for the severity of a
crisis. Journalists asked whether the markets would open or whether they would
close. The unspoken assumption w a s that an open market indicates stability, calm,
reassurance, while closed markets suggest the opposite, namely, that the country
would not be "doing business as usual."
The tendency to view the financial markets as a bellwether points to the importance
of the third basic principle, open markets, the need that markets operate as
normally as possible both during and after a crisis. I take great comfort in h o w well
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js-1745: Remarks of W a y n e A. Abernathy Assistant Secretary of the Treasury for Financi... Page 4 of 4
this lesson has been understood. I heard no talk from any financial market
participants on Thursday evening that they would not open for business on Friday.
In fact, they were eager to declare and reassure all w h o would hear that they would
be open for business. And to m e , the great sign w a s not just that the markets ran
smoothly on Friday. It w a s h o w smoothly they ran on Monday. There w a s no pent
up demand that had built up over the weekend that sought a frantic relief on
Monday morning. Everyone w h o wanted to buy had been able to buy. All w h o
wanted to sell had been able to sell. All transactions cleared.
The most effective way of achieving that goal was to rely on the individual players in
the markets themselves to determine how they would operate and how they would
interact with customers and with other institutions. W h e n the lights went out, the
calls w e received in Washington were from people telling us what they were doing,
not from people asking for instructions.
Thus, our fourth principle-responsibility-means that Washington does not
orchestrate the financial market response and recovery. I know that frustrates
people w h o think that all wisdom emanates from the banks of the Potomac, that if
government does not do it, then it doesn't happen. W e relied upon individual
initiative, and w e were not disappointed. Rather, our confidence has been
confirmed. Our job involved assessing and informing, not directing.
This is not to say that there were no problems. There were, but they were
resolved. And n o w w e are evaluating what w e learned. In addition to the
reinforcement of the wisdom of our four basic principles, w e learned the importance
of practice and drill. In the months since September 11, 2001, w e have practiced
m a n y different disaster scenarios, and w e have drilled for m a n y eventualities. I do
not recall a drill that envisioned a blackout affecting 70 million people. But because
w e had gone through the various exercises, w e had learned to work together to
face the unexpected. The development and drilling of those skills have served us
well. W e cannot let up in exercising them.
Time for Work
Preparation requires a lot of work. A lot of work has already been done, here and
elsewhere. I a m pleased by the great work that has been done by our stock
markets and other financial markets to be ready to face disorders, large or small,
and keep on operating. W e are better prepared today than w e were a year ago,
than w e were six months ago. There is more work for all of us to do. Your
presence and participation here today demonstrate your willingness to roll up your
sleeves and do the work.
I was taught that the most important part of prayer is what you do after you get up
off of your knees. If today's meetings are to have lasting effect, it will c o m e from
what you do w h e n you leave these meetings. Work with your colleagues, consult,
share best ideas. W e are ready to lend a hand, to assist you in your efforts, all in
keeping with the four obvious and absolutely essential principles I have outlined
today.
A few weeks ago, I addressed a meeting of financial services leaders in Richmond,
Virginia. I brought m y youngest son with m e that day. H e is the fifth of the latest
generation of Virginians born to our family. H e reminds m e , he and his generation
remind us all, that it is the future, a future of freedom, free markets, free enterprise,
free minds and free h o m e s that w e are preserving, that w e are building. There are
people in the world w h o hate all of that, w h o would destroy it if they could, but w e
won't let them. A s Americans have done in the past, w e today will stop them.
Thank you for letting m e join with you in that effort.
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JS-1746: M E D I A ADVISORY<br>Secretary Snow Visits Anchorage, Alaska on Monday... Page 1 of 1
F R O M T H E OFFICE O F PUBLIC AFFAIRS
June 25, 2004
JS-1746
MEDIA ADVISORY
Secretary S n o w Visits Anchorage, Alaska on Monday
to Meet with Business Leaders on the Economy
U.S. Treasury Secretary John W. Snow will visit Anchorage, Alaska on Monday,
June 28 to meet with local business leaders and discuss the President's efforts to
strengthen the economy and create jobs.
"The President's tax reform policies have ensured that nearly 265,000 Alaska
taxpayers will have lower income tax bills in 2004," said Secretary Snow.
The following events are open to the media:
Monday, June 28
9:00 am
Remarks to Alaska Federation of Natives' Economic Planning Forum
Captain Cook Hotel
5th at K Street
Anchorage, A K
** Media must arrive at 8:30 a m and must wear media credentials
10:30 am
Tour of Artie Paws with Senator Lisa Murkowski
1210 East 70th Ave.
Anchorage, A K
** Media must arrive by 10:00 a m and must wear media credentials
12:00 pm
Remarks to Anchorage Chamber of Commerce
William A. Egan Civic & Convention Center
555 West 5th Ave.
Anchorage, A K
** Media must arrive by 11:30 a m and must wear media credentials
** A brief press availability will take place immediately following the event.
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5/5/2005
JS-1747: The Honorable John W . Snow<br>Prepared Remarks: Roundtable with Busines... Page 1 of 1
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC A F F A I R S
June 25, 2004
JS-1747
The Honorable John W . S n o w
Prepared Remarks: Roundtable with Business Leaders
Tampa, FL
June 25, 2004
Thank you so much for having me here today; I'm really looking forward to our
discussion.
I want to start by saying how much I appreciate what you do, as business leaders
and employers, to make our economy run.
And our economy is running - there's no doubt about that. We have experienced
the strongest three quarters of G D P growth in 20 years. Homeownership is at an
all-time high and household wealth is also at a record level.
The best news of all, however, has been job creation. Nationally, we've seen more
than 1.4 million jobs created over the past nine months. Here in Florida, businesses
like yours created 6,800 jobs in May alone. That brought your unemployment down
to 4.5 percent, which is a good deal lower than the national average... and the
national average is lower than it was in the 70s, 80s or 90s.
This is such good news for American families. And while we can always do better and w e will do better - it's incredible to think how far we've come, economically, in
just the past year. What a difference a year makes, and what a difference tax cuts
make. Letting Americans keep more of their own money really worked; it always
does.
We were struggling for a while there... we had a number of blows to our economy. I
know that September 11 th hit Florida hard because of the dampening effect that
terrible day had on tourism - a major industry in this state. It is also an industry that,
thankfully, is continuing to rebound today.
President Bush's tax cuts, combined with sound monetary policy, made our swift
economic recovery and strong current growth possible. The reduced tax burden on
families and small businesses like yours meant that the load was lightened, and the
natural resilience of our free-market economy was able to shine through.
I am confident that the growth will continue as long as the burden stays lighter.
Here in Florida, more than 6.1 million taxpayers will have lower income tax bills in
2004 and nearly 1.4 business taxpayers like you can use their tax savings to invest
in new equipment, hire additional workers, and increase pay to those workers.
That's good news for Florida's families for months to come.
Thank you for having me here with you today, and thank you so much for the work
you do to keep our economy running - your contributions are invaluable for both the
economy and for our national spirit.
http://www.treas.gov/press/releases/jsl747.htm
5/5/2005
JS-1748^Treasury and IRS M a k e it Easier to Design <BR>Health Savings Accounts
F R O M T H E OFFICE O F PUBLIC A F F A I R S
To view or print the PDF content on this page, download the free Adobe® Acrobat® Reader®.
June 25, 2004
JS-1748
Treasury and IRS Make it Easier to Design
Health Savings Accounts
Today Treasury and the IRS issued for public comment model documents that can
be used as trust or custodial agreements for Health Savings Accounts (HSAs).
These documents, which can be reviewed at www.irs.gov (see links below), are
being released in proposed form in order to give the public the opportunity to
comment on the content before being issued in final form. Comments m a y be filed
online at the above website or verbally by calling (202) 622-4HSA.
"We have received numerous requests from the public for a safe-harbor document
like this one. Many banks and other prospective H S A trustees and custodians
would like to offer a product off the shelf and be certain that the form of the trust or
custodial agreement meets the requirements under the Internal Revenue Code,"
said Acting Assistant Secretary for Tax Policy Greg Jenner. " W e look forward to
hearing any comments that interested parties may have and finalizing these
documents for use as soon as possible."
As is the case for most IRS forms, the public comment period will be open for 30
days following today. While H S A trustees and custodians are free to now use some
or all of the language from the draft forms in their own trust or custodial
agreements, the forms are not intended to be used as stand-alone trust or custodial
agreements until they are finalized after the end of the comment period. Once
finalized, these safe-harbor forms will not be required; they are offered for those
trustees and custodians w h o wish to use them.
On Monday, June 21, Treasury and the IRS also issued guidance providing
transition relief to health plans that are unable to qualify as high deductible health
plans (HDHPs) due to state mandates. Under the guidance, a health plan that fails
to qualify as an H D H P because it provides benefits required under a state law in
effect on January 1, 2004, will nevertheless be treated as an H D H P until January 1
2006.
This guidance will enable individuals in states that require health plans to provide
certain benefits the ability to participate in HSAs. This notice allows those
individuals to benefit from H S A s while allowing their states time to modify state laws
to allow HSA-compatible H D H P s .
Generally, HDHPs must have a high deductible and can provide no benefits other
than preventive benefits below that deductible. S o m e state insurance laws,
however, require health plans to provide certain benefits without a deductible, often
as an extension of mandates related to preventive benefits. Because the H S A law
became effective less than a month after it was enacted, some states with such
requirements have not had a chance to amend their laws to allow H D H P s , for
example, by replacing first-dollar benefit requirements with a requirement that
benefits be provided no less favorably than other benefits.
The link to the model Health Savings Custodial Account is:
http://www.irs.gov/pub/irs-dft/d5305c.pdf
The link to the model Health Savings Trust Account is:
http://www.irs.gov/pub/irs-dft/d5305b.pdf
REPORTS
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Page 1 of 2
JS-1748: Treasury and IRS M a k e it Easier to Design <BR>Health Savings Accounts
Page 2 of 2
• The text of Notice 2004-43, providing transition relief for individuals in states
where H D H P s are not available available due to state laws
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5/5/2005
Part III - Administrative, Procedural, and Miscellaneous
Notice 2004-43
PURPOSE
This notice provides transition relief for individuals in states where high
deductible health plans (HDHPs) as described in section 223(c)(2) are not
available because state laws require health plans to provide certain benefits
without regard to a deductible or below the minimum annual deductible of section
223(c)(2)(A)(i). The transition relief covers months before January 1, 2006, for
state requirements in effect on January 1, 2004.
BACKGROUND
Section 1201 of the Medicare Prescription Drug, Improvement, and
Modernization Act of 2003, Pub. L. 108-173, added section 223 to the Internal
Revenue Code to permit eligible individuals to establish health savings accounts
(HSAs) for taxable years beginning after December 31, 2003. An "eligible
individual" under section 223(c)(1) must be covered by a "high deductible health
plan" (HDHP). A n H D H P under section 223(c)(2) must satisfy certain
requirements with respect to minimum annual deductibles and maximum out-ofpocket expenses. However, section 223(c)(2)(C) permits a safe harbor for the
absence of a preventive care deductible. An eligible individual m a y also have
certain permitted insurance and permitted coverage under section 223(c)(1)(B).
Notice 2004-23, 2004-15 I.R.B. 725, describes a safe harbor for
preventive care benefits that m a y be provided by an H D H P without a deductible
or with a deductible below the minimum annual deductible for an H D H P . In
addition, the notice indicates that whether health care required by state law
without regard to a deductible is "preventive" will be based on the standards set
forth in Notice 2004-23 and other guidance issued by the IRS, rather than on how
the benefits are characterized by state law.
Several states currently require that health plans provide certain benefits
without regard to a deductible or with a deductible below the minimum annual
deductible requirements of section 223(c)(2) (e.g., first-dollar coverage or
coverage with a low deductible). These health plans are not H D H P s under
section 223(c)(2) and individuals covered under these health plans are not
eligible to contribute to H S A s . Because of the short period between the
enactment of H S A s and the effective date of section 223, these states have had
insufficient time to modify their laws to conform to the standards of section 223.
Thus, it is appropriate to provide transition relief that treats H D H P s as qualifying
under section 223(c)(2) when the sole reason the plans are not H D H P s is
because of state-mandated benefits. During the transition period, otherwise
eligible individuals covered under these plans will be treated as eligible
individuals for purposes of section 223(c)(1) and m a y contribute to an H S A .
APPLICATION
For months before January 1, 2006, a health plan which would otherwise
qualify as an H D H P under section 223(c)(2), except that it complies with state
law requirements that certain benefits be provided without a deductible or below
the minimum annual deductible of section 223(c)(2)(A)(i), will be treated as an
H D H P for purposes of section 223(c)(2), if the disqualifying benefits are required
by state law in effect on January 1, 2004.
DRAFTING INFORMATION
The principal author of this notice is Shoshanna Tanner of the Office of
Division Counsel/Associate Chief Counsel (Tax Exempt and Government
Entities). For further information regarding this notice, contact Ms. Tanner on
(202) 622-6080 (not a toll-free call).
2
JS-1749: The Honorable John W . Snow<BR>Town Hall Meeting on Health Savings Ace... Page 1 of 2
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC A F F A I R S
June 25, 2004
JS-1749
The Honorable John W . S n o w
T o w n Hall Meeting on Health Savings Accounts (HSAs)
Miami, Fl
June 25, 2004
Thank you, Governor Bush, and thank you all so much for having me here today.
It's great to be here in Miami to talk about what is truly one of the top issues facing
Americans today: access to affordable health care.
Many of the people here today are from the small-business community, and there's
a good reason for that: Because it's small business that is left standing by the door,
hoping to get in, in today's health insurance market.
In America's smallest firms, you tend to have too few employees to create a good
risk pool, and you're also subject to a long list of state mandates on coverage that
were intended to protect consumers but can have the effect of pricing you right out
of the market. You've been left with a terrible choice: expensive top of the line
coverage for your employees, or no coverage at all.
Because rising health care costs are a burden on you, they are a burden on the
economy. After all, you are the ones creating the jobs and growing the economy.
Health care costs can provide a disincentive when it comes to hiring additional
employees. That's not good for our economy. And if you've m a d e hard choice to not
offer health care, it reduces your ability to hire the best employees and effectively
compete - at h o m e and internationally. And that's not good for our economy, either.
Then we look at the big picture, of what rising health-care costs are doing to our
Federal budget and deficits... and w e realized that the very future fiscal condition of
this country will be driven almost entirely by rising health care costs, for example,
those associated with Medicare.
The problems we face in this area are sobering, to say the least. And I expect we
will talk about them in detail today. But I'm delighted that w e have a solution to talk
about as well.
HSAs are a break-through new idea to help address the underlying problem of the
affordability of health-care coverage.
Think of them as super-charged IRAs for health care. Created by the Medicare bill
signed by President Bush on December 8th, H S A s are a product that is designed to
help individuals take more control over how their health care dollars are spent and
save for future medical and retiree health expenses on a tax-free basis.
I'm pleased to say that HSAs can help small-business owners, their families and
their employees. The ability for both individuals and employers to contribute to the
accounts provides a lot of options, and a lot of flexibility for a small group struggling
to keep costs reasonable for both parties. Employer contributions to employee
H S A s are not subject to FICA taxes, and individual contributions can be deducted
on their taxes.
If you or someone you know is not currently working, HSAs offer a benefit as well.
You do not have to be employed or have income from working to have an HSA. If
you are age 55 or older you can put an additional $500 in "catch-up contributions"
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JS-1749: The Honorable John W . Snow<BR>Town Hall Meeting on Health Savings Ace... Page 2 of 2
into your HSA this year. And next year this rises to $600.
Among its many benefits, an HSA puts you in charge of their health care
purchasing decisions, and that's one of the reasons w h y I think they are historic.
M a n y of us find traditional health insurance plans frustrating because there are so
m a n y rules about what is covered and what is not. For those w h o are covered
under an employer's plan and are therefore one step removed from the plan
purchase, the rationale behind coverage options can be a real mystery. To the
consumer at the bottom of this structure, it feels like decisions about their health are
being m a d e by several other parties... not by you.
If an individual is using an HSA, health purchasing decisions are made by you, the
patient, in conjunction with the counsel of your physician. And that's something a lot
of people have been asking for.
In other words, HSAs have the potential to engage us, as consumers, to be wise
shoppers. Americans are wise shoppers for everything else, and w e need to add
health care to the list of products that every American understands and can m a k e
their o w n smart choices about.
HSAs also give consumers the opportunity to budget for their health expenses over
m a n y years. M o n e y that is not spent in one year can roll over to the next,
indefinitely. It's something that makes a lot of sense and will prove to be
empowering for consumers.
Treasury is working hard to get the word out - that can be the hardest thing to do
with a n e w product like this. S o I encourage all of you to try H S A s and to
recommend them to your families, colleagues, and trade associations... so they can
tell their members.
At the Treasury Department we're also making sure that the right tools are in place
to help m a k e H S A s easy to establish for consumers, trustees and custodians.
Today, for example, Treasury and the IRS issued a model application document
that can be used to establish H S A s . The forms are being released in proposed form
in order to give the public the opportunity to comment on the content before being
issued in final form.
However, banks and other prospective HSA trustees and custodians can
incorporate language from this into their current paperwork and begin using those
documents immediately. W e look forward to hearing any comments that interested
parties m a y have and finalizing these documents.
We still need other reforms to address the issue of health-care costs, like
Association Health Plans and medical malpractice reform. And w e won't stop
fighting for any of those; it's too important not to. But in the m e a n time, H S A s are a
terrific n e w option; one that I encourage all Americans to try.
Thank you so much for having me here today.
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JS-1750: M E D I A ADVISORY<br>Secretary S n o w Visits Portland, Oregon <br>to Meet... Page 1 of 1
PRLSS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
June 25, 2004
JS-1750
MEDIA ADVISORY
Secretary S n o w Visits Portland, Oregon
to Meet with Business Leaders on the Economy
U.S. Treasury Secretary John W. Snow will visit Portland, Oregon on Tuesday,
June 29 to meet with local business leaders and discuss the President's efforts to
strengthen the economy and create jobs.
"As a result of the President's tax reform and economic policies, 1.4 million new
U.S. jobs have been created since August 2003, including 1.2 million that were
created this year," said Secretary Snow. "Oregon has gained nearly 30,000 new
jobs over the past four months."
The President's tax reform policies have ensured that 1.3 million Oregon taxpayers
will have lower income tax bills in 2004.
The following events are open to the media:
Tuesday, June 29
Tour of Oregon Iron Works
9700 S E Lawnfield Rd.
Clackamas, O R
9:30 a m P D T
** Media must R S V P to Chandra Brown, 503-653-6300
** Media must arrive by 9:00 a m and present identification
** Groundrules concerning b-roll footage will be explained prior to the tour
Roundtable with Local Business Leaders
Oregon Iron Works
9700 S E Lawnfield Rd.
Clackamas, O R
10:00 a m P D T
** Media must R S V P to Chandra Brown, 503-653-6300
** Media must arrive by 9:00 a m and present identification
** A brief press availability will occur immediately following the event
http://www.treas.gov/nress/re1eases/is 1750.htm
5/5/2005
F R O M T H E OFFICE O F PUBLIC A F F A I R S
June 25, 2004
js-1751
Snow Statement on the Introduction of the President's
Retirement Savings Account Proposal
Today's introduction of the President's Retirement Savings Accounts (RSAs)
proposal in both the U:S. House and Senate holds great promise for Americans
eager for more options and more control over their own retirement.
Retirement Savings Accounts will be a terrific tool to help Americans plan and save
for their retirement, with no limitations based on age or income status. They will
also simplify saving, which will help Americans reach the goal that w e all share: a
secure retirement.
I c o m m e n d Representative S a m Johnson and Senator Craig Thomas for
introducing this legislation; they understand what Americans need and want when it
comes to saving for the future. Along with the legislative proposal that they
previously introduced on Lifetime Savings Accounts, R S A s will make saving simple
for everyone and for every purpose. I commend Representative Johnson and
Senator Thomas for introducing this important legislative proposal that will help all
Americans plan for a financially secure future.
-30-
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5/5/2005
JS-1752: Joint Report to Leaders of the U S - E U Summit (June 25-26) by Participants in th... Page 1 of 1
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC A F F A I R S
June 28, 2004
JS-1752
Joint Report to Leaders of the US-EU Summit (June 25-26) by Participants in
the Financial Markets Regulatory Dialogue
The European Union and the United States are both keenly interested in promoting
a vibrant, open and competitive transatlantic capital market in order to strengthen
global growth, offer consumers and investors greater choice at lower costs, and
bolster the competitive dynamism of the global financial industry while ensuring
sound regulation. This area offers a win-win opportunity for transatlantic
cooperation.
Against this background, the US-EU Financial Markets Regulatory Dialogue is
entering its third year with a demonstrated record of contributing to improved
understanding and resolution of complex financial and regulatory issues on both
sides of the Atlantic.
• The European Union has moved rapidly forward with its Financial Services
Action Plan (FSAP), aimed at achieving a uniform legal framework for an
integrated EU-wide capital market. It has also proposed legislation
introducing important corporate governance, company law, accounting and
audit reforms. The United States strongly welcomes the F S A P and recent
reforms intended to create an integrated European capital market.
• The United States is moving forward with essential measures to strengthen
investor confidence, pursuant to the President's 10-point plan and the
Sarbanes-Oxley legislation. The E U agrees with the underlying objectives of
these U S efforts, many of which are reflected in current E U legislation.
The United States and the European Union have different legal, cultural and
historical traditions in the financial sphere. Thus, actions by each can have
unintended spillover effects for the other. The Dialogue is an important component
in the effective management of these spillover effects.
• European concerns over the Sarbanes-Oxley legislation have been taken
into account through strong engagement, while the letter and spirit of the
law have been fully met.
• US concerns that European legislation might not allow for full US
participation in European capital markets are being substantially addressed.
The United States and the EU will intensify their cooperation through the Dialogue
and have agreed procedural steps to be taken over the coming year to take this
forward. Together, both sides will encourage work to: maintain the highest
standards of investor protection; promote international convergence of accounting
standards, including their consistent application, implementation, and enforcement;
strengthen corporate governance on each side of the Atlantic ; and lower
transaction costs of cross-border business. In doing so, participants in the Dialogue
intend to consult with and encourage more input from the private and academic
sectors
The European Commission and the U.S. Treasury, Securities Exchange
Commission and Federal Reserve Board.
http://www.treas.gov/press/releases/jsl752.htm
5/5/2005
Js-1753: A T S B Decision on United Air Lines' Request for Reconsideration
Page 1 of 2
FROM THE OFFICE OF PUBLIC AFFAIRS
To view or print the PDF content on this page, download the free Adobe® Acrobat® Reader
June 28, 2004
js-1753
ATSB Decision on United Air Lines' Request for Reconsideration
Michael Kestenbaum
Executive Director
June 28, 2004
Mr. Frederic F. Brace
Executive Vice President
and Chief Financial Officer
United Air Lines, Inc.
1200 East Algonquin Road
Elk Grove Township, IL 60007
Re: Request for Reconsideration
Dear Mr. Brace:
We have received the materials submitted to the Air Transportation Stabilization
Board (the "Board") on June 22, 2004, by United Air Lines, Inc. ("United"). In the
materials, United requests reconsideration by the Board of its June 17, 2004, denial
of United's application (the "Application") for a federal loan guarantee under the Air
Transportation Safety and System Stabilization Act, Pub. L. No. 107-42, 115 Stat.
230 (the "Act") and the regulations promulgated thereunder, 14 CFR Part 1300.
All members of the Board and Board staff have carefully considered the additional
financial information recently provided by United. As noted in the June 17th
decision, the Board concluded that granting the loan guarantee is not a necessary
part of maintaining a safe, efficient, and viable commercial aviation system in the
United States, as required by the Act. The Board noted the positive steps the
company has taken "since entering bankruptcy in 2002 to lower its costs,
strengthen its competitive position, and improve its governance structure.
Moreover, the Board believes that airline credit markets have been improving since
late 2001 and 2002, ... increasing the likelihood of United succeeding without a
loan guarantee."
After carefully considering the additional financial information submitted as part of
United's request for reconsideration, the Board determined that this information
does not alter in a material manner the rationales underlying the Board's June 17th
decision. Given these circumstances, all members of the Board join in the decision
to deny United's request for reconsideration, and the Board's June 17th decision
stands. The Board will not accept any further submissions from United with respect
to the Application.
Sincerely,
Michael Kestenbaum
REPORTS
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5/5/2005
js-1753: A T S B Decision on United Air Lines' Request for Reconsideration
Page 2 of 2
• Copy of Letter to Frederic F Brace
http://www.treas.gov/press/releases/js 1753.htm
5/5/2005
AIR TRANSPORTATION STABILIZATION B O A R D
1 1 20 VERMONT AVENUE, SUITE 970
W A S H I N G T O N , D C 20005
Michael Kestenbaum
Executive Director
June 28, 2004
Mr. Frederic F. Brace
Executive Vice President
and Chief Financial Officer
United Air Lines, Inc.
1200 East Algonquin Road
Elk Grove Township, IL 60007
Re: Request for Reconsideration
Dear Mr. Brace:
We have received the materials submitted to the Air Transportation Stabilization Board
(the "Board") on June 22, 2004, by United Air Lines, Inc. ("United"). In the materials, United
requests reconsideration by the Board of its June 17, 2004, denial of United's application (the
"Application") for a federal loan guarantee under the Air Transportation Safety and System
Stabilization Act, Pub. L. N o . 107-42, 115 Stat. 230 (the "Act") and the regulations promulgated
thereunder, 14 C F R Part 1300.
All members of the Board and Board staff have carefully considered the additional
financial information recently provided by United. A s noted in the June 17th decision, the Board
concluded that granting the loan guarantee is not a necessary part of maintaining a safe, efficient,
and viable commercial aviation system in the United States, as required by the Act. The Board
noted the positive steps the company has taken "since entering bankruptcy in 2002 to lower its
costs, strengthen its competitive position, and improve its governance structure. Moreover, the
Board believes that airline credit markets have been improving since late 2001 and 2002,...
increasing the likelihood of United succeeding without a loan guarantee."
After carefully considering the additional financial information submitted as part of
United's request for reconsideration, the Board determined that this information does not alter in
a material manner the rationales underlying the Board's June 17th decision. Given these
circumstances, all members of the Board join in the decision to deny United's request for
reconsideration, and the Board's June 17 decision stands. The Board will not accept any further
submissions from United with respect to the Application.
Sincerely.
Michael Kestenbaum
J S-1754: Keynote Address of Deputy Assistant Secretary Juan C. Zarate<br> Ninth Annu... Page 1 of 4
F R O M T H E OFFICE O F PUBLIC A F F A I R S
June 23, 2004
JS-1754
Keynote Address of Deputy Assistant Secretary Juan C. Zarate
Ninth Annual American Express Anti-Money Laundering Conference
Thank you. I am honored to be joining you for the Ninth Annual American Express
Anti-Money Laundering Conference, and I'm pleased you invited m e to be part of
this important event.
The team at American Express should be proud: you are on the front lines protecting the global financial system from terrorist dollars and tainted capital. For
your work, Treasury Secretary S n o w and I thank you.
For those of us who don't live in New York, it is difficult not to reminisce about
September 11 th when w e are sitting so close to the World Trade Center site.
Indeed, it is far too easy to grow a bit jaded about the effect of that day on the world
- not just as the memory of that day fades but as w e witness the continuing heinous
acts of terror around the world.
This organization felt the effects of September 11th directly and braved that
turbulent time well, along with other organizations located near the World Trade
Center site, by relocating employees and operations.
That horrific day launched a new era of responsibilities as well as burdens that we
collectively share. In many respects, it has been difficult for s o m e to come to grips
with the changed landscape.
The recasting of our responsibilities has been felt vividly in the financial community,
and I would like to talk to you a bit about that. This is an important opportunity to do
so with an organization like American Express, whose lines of business run the
gamut from banks and broker-dealers to accountants and travel services providers.
As mentioned, companies like American Express are on the front of the battle to
protect the integrity of our financial system. The true guardians of the financial
sector don't roam the halls of the Treasury building; they stand at every teller
window and money service business provider around the world. That's why this
conference, and others like it, are so important as w e talk about evolving trends in
money laundering and terrorist financing and expanded requirements under the
law.
The recasting of responsibilities and actions has taken shape in the context of our
overarching war against terrorist financing. This is a war where w e have been
successfully disrupting and, in some cases, dismantling the financial infrastructure
of terrorist operations. W e have frozen approximately $140 million in terroristrelated assets, designated 377 individuals and entities as terrorist supporters,
captured or killed key terrorist facilitators and deterred donors from supporting al
Qaida and other like-minded terrorist groups.
We have made it harder and costlier for al Qaida and other terrorist groups to raise
and m o v e money around the world. O n e of the most important elements of this
campaign has been our work with organizations like American Express and with
regulators to increase levels of due diligence, expand anti-money laundering
controls to new sectors and enhance international standards to deal with the
increased threat from terrorist financing.
These notable achievements include expanded regulatory efforts. After passage of
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JS-1754: Keynote Address of Deputy Assistant Secretary Juan C. Zarate<br> Ninth Annu... Page 2 of 4
the USA PATRIOT Act, we have broadened and deepened the regulatory scope of
our anti-money laundering efforts. It is working. W e are seeing important filings from
m o n e y service businesses which w e have never seen before. W e are seeing
important suspicious activity and leads being reported through FinCEN's hotline.
W e are seeing greater vigilance on O F A C compliance and reporting from credit
card companies and other financial service providers. Greater information sharing
through the Section 314 process has allowed for the efficient sharing of criminal
leads with the banking community.
These efforts are critical as the financial community takes greater control over the
safeguards of the financial system. It is also important that w e expand the breadth
of transparency and regulation to potentially vulnerable sectors. Our outreach, for
example, to the m o n e y service business continues as w e build awareness and a
compliance culture. There has been a tremendous resolve in the financial
community to deal with these issues, but there is always more that can be done.
With the recent fine of UBS for $100 million by the Federal Reserve of New York,
w e see that diligence in O F A C compliance matters has to be overseen
aggressively.
With the recent fine of $25 million by the OCC and FinCEN against Riggs Bank,
there is no doubt that w e need greater diligence by the regulatory community to
ensure compliance with anti-money laundering controls.
That's why the Treasury has undertaken a review of the U.S. government's
administration of the Bank Secrecy Act. W e are engaged n o w directly with the
regulatory community to see h o w w e can do a better job collectively - working
toward harmonized and consistent compliance and expectations in this field.
We have also enlisted the team here at American Express and other members of
the Bank Secrecy Act Advisory Group to determine what further steps w e need to
take to enhance our efforts.
With such expectations come responsibilities for us in the Treasury and in the U.S.
Government - responsibilities not just to the financial community but to the public at
large:
• We must increase information to the financial community regarding trends
and threats in the m o n e y laundering and terrorist financing context.
• W e should increase the level and detail of feedback from law enforcement
to ensure that the regulated industries understand the value of their
diligence.
• W e are obligated to consistently weight the costs and benefits, as well as
efficiencies, of our regulations and the burdens w e impose upon the various
industries w e regulate.
• W e must continue to enhance our international partnerships, to enhance the
information available to us about the changing nature of the threat w e
face,as well as to understand h o w rogue capital m a y be afflicting the
international financial system.
With respect to this, we must use Treasury authorities and relationships judiciously
but effectively to deal with emerging threats:
• We will continue to identify and designate charities that are being used by al
Qaida and other groups to raise and m o v e money, while at the s a m e time
working with the charitable community in the United States and worldwide to
raise standards of practice and expectations in the charitable sector.
• W e will build n e w partnerships with the private sector, like our Buddy Bank
initiative, to address the needs for technical assistance and capacity
building in the financial communities of developing countries.
• W e will continue to use Section 311 aggressively against rogue financial
institutions, so as to alert and protect the U.S. financial system from the taint
of their activities.
A critical area of the PATRIOT Act calls for the Treasury to use the force of Section
311 against foreign jurisdictions or banks that are "primary m o n e y laundering
concerns." W e are using this power in a project w e affectionately refer to this as the
"Bad Banks Initiative" to identify rogue jurisdictions, institutions and classes of
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JS-1754: Keynote Address of Deputy Assistant Secretary Juan C. Zarate<br> Ninth Annu... Page 3 of 4
transactions that pose a threat to our financial system because of lax anti-money
laundering controls, criminal facilitation or blind negligence that allows rampant
financial criminal activity.
Most recently, the Treasury Department used this authority to designate the
Commercial Bank of Syria (CBS) and its subsidiary Syrian Lebanese Commercial
Bank and issued a notice of proposed rule-making that would prohibit any U.S.
bank, broker-dealer, futures commission merchant, introducing broker or mutual
fund from opening or maintaining a correspondent account for or on behalf of C B S .
Correspondent accounts involving C B S would have to be terminated without
exception.
Last November Treasury also authorized Section 311 against two Burmese banks,
M y a n m a r Mayflower Bank and Asia Wealth Bank, two banks that within that
jurisdiction that are heavily implicated in facilitating the notorious drug trafficking
organizations in Southeast Asia. Since the P A T R I O T Act w a s signed into law in
October 2001, the Bush Administration has also taken action, pursuant to Section
311, against the foreign jurisdictions of Burma, Nauru and the Ukraine.
In addition, the Treasury has used the power of the threat of a 311 designation to
our advantage, spurring several countries, including Nigeria, the Philippines and
Indonesia to implement stricter anti-money laundering regimes.
The USA PATRIOT Act and the power of Section 311 represent some of the key
resources in Treasury's arsenal to protect the U.S. financial system and combat
terrorist financing and financial crimes.
However, as we strengthen our defenses against financial crimes, terrorists and
criminals will resort to other financial institutions and underground networks to m o v e
their money. While w e know that driving terrorists to m o v e their m o n e y in unfamiliar
ways heightens the chance for mistakes and detection, w e also know w e must be
flexible in order to adapt to the changing face of terrorist financing.
We have a responsibility to organize ourselves for the long term. To that effort, the
Bush Administration recently announced the creation of a n e w office in the Treasury
to bolster our efforts in cutting the financial ties of terror and better safeguarding the
U.S. financial system against criminal activity.
The Office of Terrorism and Financial Intelligence, or TFI, brings under one
umbrella the intelligence, enforcement, diplomatic, policy, in-depth analysis and
regulatory resources of the Treasury. It will allow us to consolidate our information
and analysis to best utilize Treasury authorities to advance our national security
interests and protect our financial systems both n o w and in the long term. TFI will
be led by an Under Secretary, one of only three at Treasury, and two Assistant
Secretaries - one devoted to terrorist financing and one to intelligence.
TFI's efforts will be aided by targeted intelligence analysis. The combined use of
intelligence and financial data is the best w a y to detect h o w terrorists are exploiting
the financial system and to design methods to stop them. By coordinating
Treasury's intelligence functions and capabilities, TFI will benefit from enhanced
analytical capabilities, as well as additional expertise and technology.
All of this is intended to establish mechanisms and the institutional framework to
deal effectively with the protection of our financial system for the long term.
As I said before, however, the true guardians of our financial citadel sit in this room
today. Whether it's putting in place rigorous anti-money laundering programs in
your banks and travel service providers or increasing due diligence by your broker
dealers and m o n e y service businesses, American Express is on the front lines.
What you do matters not only for American Express, but also for the industries
which you affect. Your practices and expectations help set the benchmarks
worldwide in all the respective industries.
This is important as we collectively strive to protect the international financial
system from tainted capital. More significantly, it's important because your work can
help save lives.
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This is a shared responsibility and burden, but it is one that we must embrace
together as the nature of terrorism, terrorist financing and m o n e y laundering
evolves.
Thank you, again, for inviting me to be with you here today, and thank you for your
continued commitment to these important efforts. W e look forward to strengthening
the relationship we've cultivated with American Express and the broader financial
sector.
-30-
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js-1755: The Honorable John W . Snow<br> Prepared Remarks<br> The Anchorage Cha...
Page 1 of 3
PRLSS ROOM
F R O M T H E OFFICE O F PUBLIC A F F A I R S
June 28, 2004
js-1755
The Honorable John W. Snow
Prepared Remarks
The Anchorage Chamber of C o m m e r c e
Anchorage, A K
June 28, 2004
Thank you so much for having me here today. It's so exciting to visit Alaska ; you
live in a beautiful and fascinating land.
Coming to Alaska reminds me how vast the United States of America is, and how
diverse and rich it is in everything from its geography, to its citizens, to their ideas
and industry.
There is one thing, however, that is the same in every state that I visit in this great
nation of ours. And that's the character and strength of America 's small-business
owners - people like you.
Whether I'm in Anchorage or Tampa , Los Angeles or Pittsburgh , small employers
are getting the job done, putting people to work, and making our economy run.
The President and I share a passion for small business - we know that it's what
makes our economy so dynamic, innovative and productive. W e also understand
how important the entrepreneurial spirit is to this country... and that the
fundamental building block of entrepreneurship is freedom.
We're also keenly aware of the challenges you face. I meet with business owners in
nearly every town and city I visit as Treasury Secretary, and I always hear the same
issues raised: health care, taxes, regulations and abusive lawsuits. These are all a
drag on your business, and a disincentive for growth and job creation.
It's clear that only with great freedom can the entrepreneurial spirit thrive. That's
why the President and I are so strongly in favor of tax cuts. W e know we've got to
lift the burden of taxes, regulations, health care costs and abusive lawsuits from
your shoulders whenever possible - because what's good for you and your
business is good for our economy.
We've seen it work with the President's tax cuts - when the burden was lightened,
our economy began to soar.
And our economy is soaring - there's no doubt about that. GDP growth has been
the strongest in 20 years. Homeownership is at an all-time high and household
wealth is also at a record level.
The best news of all, however, has been job creation. Nationally, we've seen more
than 1.4 million jobs created over the past nine months. Here in Alaska , your
unemployment rate is still higher than any of us would like it to be, and I know that's
hard on the people of this state. However, I also know that the people in this room
are working harder than anyone to change that unemployment rate... to bring it way
down.
Nationwide, there is much good news for American families. And while we can
always do better - and w e will do better - it's incredible to think how far we've
come, economically, in just the past year. What a difference a year makes, and
what a difference tax cuts make. Letting Americans keep more of their own money
http://www.treas.gov/press/releases/jsl755.htm
5/5/2005
js-1755: The Honorable John W . Snow<br> Prepared Remarks<br> The Anchorage Cha...
Page 2 of 3
really works; it always does.
We were struggling for a while there... we had a number of blows to our economy.
President Bush's tax cuts, combined with sound monetary policy, made our swift
economic recovery and strong current growth possible. The reduced tax burden on
families and small businesses like yours meant that the load w a s lightened, and the
natural resilience of our free-market economy w a s able to shine through.
I am confident that the growth will continue as long as the burden stays lighter.
Here in Alaska , nearly 265,000 taxpayers will have lower income tax bills in 2004
and about 70,000 business taxpayers like you can use their tax savings to invest in
new equipment, hire additional workers, and increase pay to those workers. That's
good news for Alaska 's families for months to come.
We have your hard work to thank for the economic growth we are experiencing
today. Please know how much you are appreciated by this Administration.
Last month, I had a discussion with my counterpart from the UK , Chancellor
Gordon Brown, and a group of British and American business owners on the
subject of entrepreneurship. W e asked the entrepreneurs w h o had gathered: what
makes entrepreneurship work, and what can government do to ensure it is
welcomed and encouraged?
The conclusion we came to will not be a surprise to you: the best thing government
can do for small business and entrepreneurship is to get out of the wayl
We also agreed that the United States of America does a better job at staying out of
the way than any other country... but we're not satisfied. The fight to keep small
business free goes on every day, in Juneau , in every state capital, and in
Washington , D C
And we'll always need to hear from you, reminding us what works for small
business and what doesn't. That's why I'm here today.
I know that the spirit of freedom and entrepreneurship is strong here in Anchorage .
Government's job is to unleash that spirit.
Tax cuts can do that. And they have. The cuts allowed you to make the choice
about what to do with the extra money you kept - whether it was purchasing new
equipment, hiring new employees, giving them health insurance or raises. It w a s up
to you, and you m a d e the right choices... and our economy has grown as a result.
We also have to make sure that people have the opportunity to learn the skills that
are required for 21 st century jobs. You understand that, and I know you work
closely with local educators to m a k e sure that relevant training is available.You
know that everyone benefits from your relationship with with education community you get the skilled employees you need, and workers find jobs. That's how it should
work in every community, and I applaud your efforts.
Open markets are another key to job creation. You know that trade is a lifeblood,
and that our shores are doorways to 95 percent of the world's markets... and that's
good for your business. W e don't want to shut those doors down.
A sound energy policy is another key to making sure you can do business. It also
impacts our national security. Through greater access to reliable and dependable
U.S. energy supplies like A N W R w e will lessen our dependence on supplies from
other, less secure, parts of the world.
America runs on energy and we need greater access to our own domestic supplies
to assure adequate supplies of reliable low cost energy. That is good for our
economy and it is important to our security. I know that you oppose efforts to
declare A N W R a national monument, and that you support opening it to responsible
exploration, development and production of its oil and gas resources.You know that
opening up A N W R m e a n s good jobs for the people of this state, more reliable
energy supplies and a more secure country.
http://www.treas.gov/press/releases/js 1755.htm
5/5/2005
js-1755: The Honorable John W . Snow<br> Prepared Remarks<br> The Anchorage Cha...
Page 3 of 3
All of these issues come back to a common principle: independence. When you
have the freedom to be innovative and productive, the sky really is the limit.
Freedom from excessive taxation and regulation. Freedom from high health
insurance costs. Freedom from the threat of abusive and frivolous lawsuits.
Freedom from dependence on foreign energy supplies. Freedom to do business
with other countries.
The President understands that the more freedom you have, as small-business
owners and entrepreneurs, the better you will be. And he knows that what's good
for you is good for America.
Thank you so much for having me here today, and thank you for all you do for
Anchorage, for Alaska, and for this great country.
-30-
http://www.treas.gov/press/releases/js 1755.htm
5/5/2005
JS-1756: The Honorable John W . Snow<BR>Prepared Remarks<BR>Visit to Oregon Iro... Page 1 of 2
F R O M T H E OFFICE O F PUBLIC A F F A I R S
June 29, 2004
JS-1756
The Honorable John W. Snow
Prepared Remarks
Visit to Oregon Iron Works
Clackamas, Oregon
June 29, 2004
Thank you so much for having me here today. It's great to see this thriving business
and meet s o m e of your outstanding employees. There's no greater friend to a
community than a business that is creating jobs, and Oregon Ironworks is a great
friend to the state of Oregon.
Seeing the level of production and innovation here today is a good example of the
strength of our workforce, our entrepreneurial spirit and our growing economy.
The momentum of our free-market economy is really outstanding right now. Our
economic growth rate is the fastest it has been in 20 years, and there can be no
doubt that well-timed tax cuts and sound monetary policy spurred this growth.
We have fought our way out of recession and are now on a path to being more
prosperous, more economically secure, than ever before. W e have the best
entrepreneurs and workers in the world; America's best economic days are ahead
of us.
Here in Oregon, more than 15,000 new jobs have been created in the past two
months and your unemployment rate has fallen from 7.2 to 6.8 percent. The state is
coming back from tough times; your large manufacturing and high-tech
communities suffered greatly in recent years. But your economic trends look very
good right now.
Oregon voters rejected tax increases twice at the polls during those more difficult
days. The state government has had to cut its budget. I know that's hard for a
government to do, but it's not a coincidence that your economy has improved
during a time when the people of Oregon have kept more money in their own
pockets... a time when you - not government officials - are deciding how to spend
your money.
The future of both the national and the Oregon economies is full of promise. In
2004, 1.3 million taxpayers in Oregon will have lower income tax bills, thanks to the
President's tax cuts. S o m e 322,000 business taxpayers in Oregon will be able to
use their tax savings to invest in new equipment, hire additional workers, and
increase pay. This is terrific news for Oregon families for months to come.
Thank you again for inviting me to see your business in action today. It was a vivid
illustration of an economy in motion.
http://www.treas.gov/press/releases/js 1756.htm
5/5/2005
JRESS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
June 29, 2004
2004-6-29-14-28-50-835
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 $83,146 million as of the end of that week, compared to $82,825 million as of the end of the prior week.
I. Official U.S. Reserve Assets (in US millions)
TOTAL
1. Foreign Currency Reserves
Euro
a. Securities
10,385
June 18, 2004
June 25, 2004
82,825
83,146
Yen
TOTAL
Euro
Yen
TOTAL
14,477
24,862
10,422
14,588
25,010
Of which, issuer headquartered in the U.S.
0
0
b. Total deposits with:
b.i. Other central banks and BIS
11,178
2,909
14,087
11,207
2,932 '
14,139
b.ii. Banks headquartered in the U.S.
0
0
b.ii. Of which, banks located abroad
0
0
b.iii. Banks headquartered outside the U.S.
0
0
b.iii. Of which, banks located in the U.S.
0
0
20,206
20,280
12,625
12,671
11,045
11,045
0
0
2. IMF Reserve Position 2
3. Special Drawing Rights (SDRs)
2
4. Gold Stock 3
5. Other Reserve Assets
II. Predetermined Short-Term Drains on Foreign Currency Assets
June 18, 2004
Euro
1. Foreign currency loans and securities
Yen
June 25, 2004
TOTAL
Euro
0
Yen
TOTAL
0
2. Aggregate short and long positions in forwards and futures in foreign currencies vis-a-vis the U.S. dollar:
2.a. Short positions
°
°
2.b. Long positions
°
°
3. Other
0
0
III. Contingent Short-Term Net Drains on Foreign Currency Assets
June 18, 2004
Euro
1. Contingent liabilities in foreign currency
Yen
June 25, 2004
TOTAL
0
Euro
Yen
TOTAL
0
1.a. Collateral guarantees on debt due within 1 year
1.b. Other contingent liabilities
2. Foreign currency securities with embedded options
3. Undrawn, unconditional credit lines
3.a. With other central banks
3.b. With banks and other financial institutions
]
Headquartered in the U.S.
3.c. With banks and other financial institutions
Headquartered outside the U.S.
4. Aggregate short and long positions of options in
foreign
Currencies vis-a-vis the U.S. dollar
4.a. Short positions
4.a.1. Bought puts
4.a.2. Written calls
4.b. Long positions
4.b.1. Bought calls
4.b.2. Written puts
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 m a y 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/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 IMF data for the prior month end.
3/ Gold stock is valued monthly at $42.2222 per fine troy ounce.
js-1758: Media Advisory:<br>Deputy Assistant Secretary for Financial Education, D a n Iannicola, Jr.<br... Page 1 of
F R O M T H E OFFICE O F PUBLIC A F F A I R S
June 29, 2004
js-1758
Media Advisory:
Deputy Assistant Secretary for Financial Education, Dan Iannicola, Jr.
To Congratulate West Virginia Teachers on Completing Financial
Education Training A c a d e m y in Morgantown, West Virginia
Deputy Assistant Secretary for Financial Education, Dan Iannicola, Jr. will deliver
the keynote address and congratulate West Virginia teachers on completing "The
Finance and Economic Education for Teachers" program during a luncheon hosted
by the West Virginia Securities Commission, at the West Virginia University.
The "Finance and Economic Education for Teachers" program, organized by the
West Virginia Securities Commission and the West Virginia Jump$tart Coalition, is
a teacher training academy focusing instruction on credit management, saving and
investing and retirement decisions.
WHO:
Deputy Assistant Secretary for Financial Education Dan Iannicola, Jr.
WHAT:
Deputy Assistant Secretary Iannicola to deliver keynote address and congratulate
West Virginia teachers on completing financial education training academy.
WHEN:
Thursday, July 1, 2004
1:30 p.m. (ET) Media Availability
WHERE:
West Virginia University
Rhododendron Room, Mountainlair
1550 University Avenue
Morgantown, W V 26506
**Media interested in covering this event should call Treasury's Office of
Public Affairs at 202/622-2960
bttp;//www.tre^/jov/r)nr/>/f dc;r>c>/js 1758.htm
6/1/2005
:
Deputy Assistant Secretary for Financial Education, D a n Iannicola, Jr. Visits Pittsburgh, Penns... Page 1 of
F R O M T H E OFFICE O F PUBLIC A F F A I R S
June 30, 2004
JS-1760
Deputy Assistant Secretary for Financial Education, Dan Iannicola, Jr. Visits
Pittsburgh, Pennsylvania To Lead Financial Education Roundtable at Federal
Reserve Branch
Deputy Assistant Secretary for Financial Education, Dan Iannicola, Jr. today led a
roundtable discussion on financial literacy and education at the Federal Reserve
Branch in Pittsburgh, Pennsylvania. Representatives from The Financial Education
Consortium, a coalition of financial institutions, nonprofit organizations and
government agencies, gathered to exchange expertise about best practices and
coalition-building efforts to promote financial literacy in Pittsburgh and throughout
Western Pennsylvania.
The Financial Education Consortium focuses Western Pennsylvania's financial
literacy efforts through the information-sharing of best practices, development of a
c o m m o n financial education agenda and coordination of efforts among financial
education providers. Since June 2003, The Federal Reserve Branch in Pittsburgh
has been coordinating the Consortium with Hosanna House, Neighborhood
Housing Services of Pittsburgh, Pittsburgh Community Reinvestment Group and
the Urban League of Pittsburgh.
"Because of the President's tax cuts, Pennsylvanians now have more money to
manage. Groups like the Financial Education Consortium help people manage that
money better," said Iannicola.
While in Pittsburgh, Deputy Assistant Secretary Iannicola also toured the Action
Housing, Inc.'s facility and met with staff. Action Housing's mission centers on
assisting individuals secure affordable housing, asset building programs and
educational and employment opportunities. The "Building Blocks to Financial
Success" program includes lessons on savings and budgeting, debt and credit
management, banking loan and grants, taxes, insurance and basic financial
planning. The program allows eligible savers to receive matching funds if they
complete required financial management training.
The Department of the Treasury is a leader in promoting financial education.
Treasury established the Office of Financial Education ("Office") in May 2002. The
Office works to promote access to the financial education tools that can help all
Americans make wiser choices in all areas of personal financial management, with
a special emphasis on saving, credit management, h o m e ownership and retirement
planning. The Office also coordinates the efforts of the Financial Literacy and
Education Commission, a group chaired by the Secretary of Treasury and
composed of representatives from 20 federal departments, agencies and
commissions, which works to improve financial literacy and education for people
throughout the United States. For more information about the Office of Financial
Education visit: www.treas.gov/financialeducation.
j%//www.treas.gov/press/releases/is 1760.htm
_ _
_
6/1/2005
lis-1761: M E D I A A D V I S O R Y <br>Secretary S n o w Visits Maine and N e w Hampshire Next W e e k to Me... Page 1 of 2
F R O M T H E OFFICE O F PUBLIC AFFAIRS
June 30, 2004
js-1761
MEDIA ADVISORY
Secretary S n o w Visits Maine and N e w Hampshire Next W e e k to Meet with
Business Leaders on the Economy
U.S. Treasury Secretary John W . Snow will visit Portland, Maine on Thursday, July
8 and Manchester, N e w Hampshire on Friday, July 9 to meet with local business
leaders and discuss the President's efforts to strengthen the economy and create
jobs.
"As a result of the President's tax reform and economic policies, 1.4 million new
U.S. jobs have been created since August 2003, including 1.2 million that were
created this year," said Secretary Snow. "Last month, Maine gained 2,100 new
jobs and N e w Hampshire gained 4,600."
The President's tax reform policies have ensured that 490,000 Maine taxpayers and
more than 525,000 N e w Hampshire taxpayers will have lower income tax bills in
2004.
The following events are open to the media, which must wear media credentials or
ID:
Thursday, July 8
10:15 am EDT
Photo O p at Portland Fish Exchange
6 Portland Fish Pier
Portland, M E
* Photo op will take place on the walk to Gulf of Maine Research Institute
10:30 am EDT
Tour of Gulf of Maine Research Institute Construction Site
350 Commercial Street
Portland, M E
11:00 am EDT
Presentation of N e w Market Tax Credit Award to Coastal Enterprises, Inc.
Gulf of Maine Research Institute
350 Commercial Street
Portland, M E
** A brief press availability will occur immediately following the presentation.
12:00 pm EDT
Remarks to Portland Regional Chamber of Commerce
Holiday Inn By the Bay
88 Spring Street
Portland, M E
** Media must arrive by 11:45 a m
Friday, July 8
top://www.treas.sov/nress/releases/is 1761 .htm
6/1/2005
1-1761: M E D I A A D V I S O R Y <br>Secretary Snow Visits Maine and N e w Hampshire Next W e e k to Me... Page 2 of 2
9:00 a m E D T
Tour of Van Otis Chocolate Factory and Roundtable with Local Business Leaders
341 Elm Street
Manchester, N H
** Media must arrive by 8:30 a m and must wear media credentials
** A brief press availability will take place immediately following the event.
^www.treas.gov/nress/releases/i s 1761 .htm
6/1/2005
JS-1762: Treasury Delays Effective Date of Disclosure Rules <BR>for Certain Pension P... Page 1 of 1
PRLSS R O O M
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FROM THE OFFICE OF PUBLIC AFFAIRS
To view or print the PDF content on this page, download the free Adobe® Acrobat® Reader®.
June 30, 2004
JS-1762
Treasury Delays Effective Date of Disclosure Rules
for Certain Pension Plans
The Treasury Department and the IRS issued Announcement 2004-58 today stating
that there will be a delay in the effective date for recently issued regulations that set
forth information required to be explained to pension plan participants regarding the
optional forms of benefit offered by the plan.
The announcement states that the delay does not apply to the extent a plan offers a
lump sum payment that is less valuable than the qualified joint and survivor annuity
offered by the plan.
"Participants who are eligible for a subsidized early retirement annuity and a lump
sum payment that does not include that subsidy shouldn't have to pay for
professional advice to find out the value of the subsidy that is lost if the lump sum is
elected," said Greg Jenner, Treasury's Acting Assistant Secretary for Tax Policy.
"However, for plans offering lump sums that include this subsidy, we have delayed
the effective date so that they may evaluate all of their optional forms. This should
be done in coordination with rules we hope to finalize next year regarding
burdensome and complex forms of payment that are of de minimis value to
participants."
The announcement also clarifies certain issues that have been raised about the
new required disclosure, including that a plan will not fail to satisfy the spousal
protection rules merely because the plan's lump sum payment is calculated using
the statutory required interest and mortality assumptions.
REPORTS
• A copy of Announcement 2004-58
http://www.treas.gov/press/releases/jsl762.htm
5/5/2005
Part IV. - Items of General Interest
Extension of Effective Date of Relative Value Regulations
Announcement 2004-58
The Department of the Treasury and the Internal Revenue Service announce a
delay in the effective date of § l.417(a)(3)-1 of the Income Tax Regulations with respect
to qualified joint and survivor (QJSA) explanations relating to certain optional forms of
benefit. However, the current effective date of the regulations is retained with respect to
Q J S A explanations relating to single sum or other optional forms of benefit subject to
§ 417(e)(3) of the Internal Revenue C o d e that are less valuable than the Q J S A .
Section 1.417(a)(3)-1 requires the disclosure, as part of a QJSA explanation, of
the relative value and financial effect of optional forms of benefit available to participants
in retirement plans qualified under § 401(a) of the Internal Revenue Code. This
announcement also addresses certain questions that have arisen under these
regulations.
Extension of Effective Date
Final regulations under § 417(a)(3) of the Code regarding disclosure of the
relative value and financial effect of optional forms of benefit as part of Q J S A
explanations provided to participants receiving qualified retirement plan distributions
were published in the Federal Register on December 17, 2003. S e e § 1.417(a)(3)-1 of
the regulations, 68 F R 70141. The final regulations are generally effective for Q J S A
explanations provided with respect to annuity starting dates beginning on or after
October 1,2004.
The regulations were issued in response to concerns that, in certain cases, the
information provided to participants under § 417(a)(3) regarding available distribution
forms does not adequately enable them to compare those distribution forms without
professional advice. In particular, participants w h o are eligible for both subsidized
annuity distributions and unsubsidized single-sum distributions m a y be receiving
explanations that do not adequately explain the value of the subsidy that is foregone if
the single-sum distribution is elected. In such a case, merely disclosing the amount of
the single-sum distribution and the amount of the annuity payments would not
adequately enable a participant to m a k e an informed comparison of the relative values
of those distribution forms. The regulations address this problem, as well as the
problem of disclosure in other cases where there are significant differences in value
a m o n g optional forms, and also clarify the rules regarding the disclosure of the financial
effect of benefit payments.
l
A number of commentators have requested that the effective date of the
regulations be postponed. A m o n g the reasons cited is the need in s o m e plans for
sponsors to complete an extensive review and analysis of optional forms of benefit in
order to prepare proper comparisons of the relative values of those optional forms to the
QJSA., They have noted that recently proposed regulations under § 411(d)(6) would
permit elimination of certain optional forms of benefit and that m a n y plan sponsors can
be expected to engage in a thorough review of all of the optional forms of benefit under
their plans following publication of the those regulations in final form. S e e § 1.411(d)-3
of the regulations, 69 F R 13769 (March 24, 2004). These commentators have argued
that it would be inefficient for plans to be required to incur the costs of two such
extensive analyses in succession, rather than a single analysis of optional forms that
might serve to s o m e extent for purposes of both the relative value regulations and the
§411(d)(6) regulations.
After careful consideration of these comments, Treasury and the IRS are
postponing the effective date of thefinal regulations under § 1.417(a)(3)-1 for certain
Q J S A explanations. The regulations will generally be effective for Q J S A explanations
provided with respect to annuity starting dates beginning on or after February 1, 2006.
In the interim, plans that do not comply with § 1.417(a)(3)-1 will be required to comply
with prior guidance regarding disclosure of relative value and financial effect. See
§§ 1.401 (a)-11 (c)(3) and 1.401 (a)-20, Q&A-36 as they appeared in the April 1, 2003,
edition of the C o d e of Federal Regulations.
Notwithstanding this extension, the existing effective date under § 1.417(a)(3)-1
of the regulations is retained for explanations with respect to any optional form of benefit
that is subject to the requirements of § 417(e)(3) of the C o d e (e.g., single sums,
distributions in the form of partial single s u m s in combination with annuities, or
installment payment options) if the actuarial present value of that optional form is less
than the actuarial present value (as determined under § 417(e)(3)) of the Q J S A . Thus,
for example, a Q J S A explanation provided with respect to an annuity starting date
beginning on or after October 1, 2004, must comply with § 1.417(a)(3)-1 to the extent
that the plan provides for payment to that participant in the form of a single s u m that is
less valuable than the Q J S A .
Reasonable Estimates for Generalized Notice
The final regulations provide two methods for disclosing the relative value and
financial effect of the optional forms of benefit presently available to a participant: the
"participant-specific" method of § 1.417(a)(3)-1(c) and the "generalized notice" method
of § 1.417(a)(3)-1(d). Under the participant-specific method, a plan must provide
information on the relative value and financial effect of each optional form of benefit and
is permitted to use reasonable estimates for this purpose (e.g., estimates based on data
as of an earlier date, a reasonable assumption of the spouse's age, or reasonable
estimates of the applicable interest rate under § 417(e)(3)).
2
Under the generalized notice method, a plan discloses the amount of the
participant's benefit payable in the normal form of benefit and provides additional
information that is not participant-specific (although participant-specific information must
be provided upon request). The additional information m a y be disclosed in the form of a
chart based on computations for hypothetical participants that shows the financial effect
of generally available optional forms of benefit in units such as dollars per thousand,
and the relative value of those optional forms. The disclosure of the amount of the
individual participant's benefit in combination with the chart allows the individual to
estimate the financial effect and relative value of the optional forms of benefit available
to that individual.
In response to questions raised, this announcement clarifies that reasonable
estimates m a y be used in determining the amount of the normal form of benefit
available to a participant under the generalized notice method of disclosure. In addition,
a plan m a y choose to base the chart or additional information described above in part
on participant-specific data so long as the requirements of the generalized notice
method are otherwise satisfied.
QJSA as Most Valuable Optional Form of Benefit
Section 1.401(a)-20, Q&A-16, provides that, in the case of a married participant,
the Q J S A must be at least as valuable as any other optional form of benefit payable
under the plan at the s a m e time. Section 417(e)(3) provides that specified mortality and
interest rate assumptions apply in determining the minimum present value of certain
optional forms of benefit, such as a single sum. S o m e commentators have expressed
concern that, solely as a result of the use of the actuarial assumptions specified in
§ 417(e)(3), the value of a single-sum distribution m a y exceed the actuarial present
value of a Q J S A , especially at younger ages.
The Treasury and the Service intend to issue regulations, effective retroactively,
clarifying the interaction between the Q J S A requirements and the requirements of
§ 417(e)(3) to use specified actuarial assumptions. The regulations are expected to
provide that a plan will not fail to satisfy the requirements of § 417 merely because the
application of § 417(e)(3) causes an optional form of benefit to be more valuable than
the Q J S A .
Contact Information
For further information regarding this announcement, please contact Diane Bloom at
(202) 283-9888, or Linda Marshall at (202) 622-6090. These numbers are not toll-free.
3
14828809 1
OR/fiD/CTC
MflR
@FedFRASER