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Department of the Treasury
Ubrary
AUG 2 1 2006
Treas.
HJ
10
.A13
P4
v.428
Department of the Treasury
PRESS RELEASES
The following Press Release number was not used:
JS-3056
Page 1 of 2
PRESS ROOM
November 2, 2005
js-3002
Under Secretary for Domestic Finance Randal K, Quarles November 2005
Quarterly Refunding Statement
We are offering $44.0 billion of notes to refund approximately $38.7 billion of
privately held securities maturing or called on November 15, raising approximately
$5.3 billion. The securities are:
- A new 3-year note in the amount of $18.0 billion, maturing November 15, 2008;
- A new 5-year note in the amount of $13.0 billion, maturing November 15, 2010;
- A new 1O-year note in the amount of $13.0 billion, maturing November 15, 2015.
These securities will be auctioned on a yield basis at 1:00 PM EDT on Tuesday,
November 8, Wednesday, November 9 and Thursday, November 10, respectively.
All of these auctions will settle on Tuesday, November 15. The balance of our
financing requirements will be met with weekly bills, monthly 2-year and 5-year
notes, the December 1O-year note reopening and 1O-year and 20-year TIPS in
January. Treasury also is likely to issue cash management bills in early December
and January.
Thirty-Year Nominal Issuance
In August, Treasury announced the re-introduction of regular semi-annual auctions
of the 30-year nominal security beginning with a bond that will mature on February
15, 2036. Treasury will announce the details of the 30-year bond auction on
February 1, 2006 and will hold the auction on February 9, 2006.
Calendar Adjustment
To fit the re-introduction of the 30-year bond into our financing calendar we are
revising the dates for the auction and issuance of 5-year notes. Beginning in
February 2006, all monthly 5-year notes will be auctioned and settled late in the
month with calendar end-of-month maturity and payment dates.
Other Policy Matters Under Consideration
Treasury Securities Lending Facility
Treasury is studying the desirability of a standing, nondiscretionary securities
lending facility. Treasury will continue to consult with market participants on how
best this lending facility could be structured and used.
Please send comments and suggestions on these subjects or others relating to
Treasury debt management to cif:IJi 111;Jllc1w;rnfcI1l,]Jrlo.trf'cl:;.(J(}V.
The next quarterly refunding announcement will take place on Wednesday,
February 1, 2006.
-30-
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PRESS ROOM
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November 2,2005
js-3003
Report to the Secretary of the Treasury from the Treasury Borrowing
Advisory Committee of the Bond Market Association
Dear Mr. Secretary:
Since the Committee's last meeting in August, economic growth has remained firm
in spite of the material impact of hurricanes Katrina and Rita, which had a
devastating impact along the coast of the Gulf of Mexico. While 2005 GOP growth
will be above its long-term trend of 3.2%, it seems likely that growth will soften in
the near term due to record energy costs, which have slowed personal spending
growth. Investment spending continues to grow strongly, supported by robust home
sales and investment in capital equipment. Though capital equipment spending
may have moderated at the end of 03 due to transportation disruptions from the
hurricanes and a strike at Boeing, demand remains high, as evidenced by a record
level of unfulfilled orders for durable goods.
The hurricanes significantly affected employment, as September non-farm payrolls
shrank by 35,000, whereas payroll growth averaged 221,000 in the three months
preceding the storm. Accompanying job losses from the hurricanes, the
unemployment rate rose to 5.1 % in September from a cyclical low of 4.9% in
August. In addition, the insured unemployment rate rose to 2.3% in October.
Energy prices have begun to decline from record levels following the hurricanes.
However, the moderation did not occur soon enough to prevent headline CPI
inflation from reaching 4.7% in September, the highest since 1991. Price increases
outside of food and energy have been modest. The core CPI deflator rose at a
1.5% annualized pace in 03, lower than the 2.0% annualized pace of both 02 and
the 1.7% annualized pace of a year ago. The core PCE deflator increased at a
1.3% annualized pace in 03, lowering its year-over-year (Y/y) change in 03 to
1.9%. The pass-through of higher energy prices and a pickup in unit labor costs
raise the risk that increases in core inflation may be ahead. However, with energy
prices slipping from record levels, headline inflation should soon return to less
elevated observations. Foreign demand looks to have little impact on inflation, as
the trade-weighted dollar is virtually flat from a year ago.
Yields on U.S. Treasury securities have risen in anticipation of continued Fed
tightening. Rates have backed up across the entire curve, reflecting a combination
of higher estimates of the sustainable level of overnight rates and emerging
uncertainties about the path of inflation. This process has slowed the intense pace
of curve flattening evident throughout the tightening cycle. Forward markets are
expecting that the funds rate will peak next year, leveling off in the 4.5% area.
The level of 03 reported operating earnings is forecasted to be somewhat lower
than 02, although the Y/y growth rate will increase due to a favorable comparison.
03 operating earnings look to be 0.4% lower than 02, but 14.7% higher than a year
ago. As of Friday, October 28, 2005, 69% (market capitalization) of the S&P 500
had reported earnings; 78% had met or beaten expectations, while 22% had failed
to meet expectations. Operating earnings have thus far surprised to the upside by
1.8%. Continued strength in oil prices supported Energy Sector earnings, with
lower earnings evident in the Consumer Discretionary and Materials sectors.
Insurance losses from the hurricanes led to lower Financial Sector earnings.
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Cyclical forces narrowed the recently completed fiscal year's Federal budget
shortfall to $319 billion, or 2.6% of GOP. The expansion should continue to lift tax
receipts, albeit at a more moderate pace, in the year ahead. However, public
spending may rise by a similar amount given spending blueprints and hurricanerelated appropriations.
Against this economic and financial backdrop, Treasury representatives presented
a series of charts summarizing the near-term outlook and associated financing
requirements Charts depicting daily operating cash balances, drivers of finanCing
needs, projected net borrowing with hypothetical auction sizes, and distributions of
the outstanding debt portfolio were shown. Highlights included projections for a
stabilization of average maturity of total outstandings at 55 months due to
reintroduction of the 30-year bond, and total outstandings under 3 years continuing
to decline with bill pay down. It was observed that the current coupon pattern and
issuance amounts will leave Treasury with ample flexibility to handle significant
variance to current budgetary forecasts.
In the first section of the charge, Treasury asked the Committee to discuss several
prospective changes to its issuance calendar. Specifically, Treasury asked for
comments on whether or not it should cluster supply and whether there are
advantages to moving 5-year note auctions to month-end during the quarters when
it issues 30-year bonds. Treasury also asked whether staggered announcement
dates are preferable or not, and lastly, whether the 30-year auction cycle would
impact 20-year TIPS auctions. To the first part of the charge, members observed
that the amount of duration risk sold at the clustered auction periods would not be
large relative to historical volumes and market liquidity. Members generally felt that
clustering of auctions would also be advantageous for market attention purposes.
Most members felt that regular month-end 5-year note auctions would be preferable
to other alternatives and that single announcements of month-end auctions were
preferable to staggered announcements. Finally, given the unique and different
characteristics of 20-year TIPS and 30-year bonds, members opined that there
would be no impact on 20-year TIPS auctions from the February/August 30-year
bond issuance cycle.
In the second section of the charge, Treasury asked for the Committee's views as
to when and under what circumstances the deployment of an emergency securities
lending facility should be offered to the market, a topic previously discussed in
August. Treasury asked the Committee to suggest a construct that was only
economically attractive during periods of protracted fails as well as to opine
generally about the merits of the facility being considered.
Treasury had expressed concern in prior meetings that in periods of market stress,
particularly those times when counterparty credit risk is elevated, a protracted fail
could hamper transactional liquidity in Treasury obligations, causing borrowing
costs to rise. Additionally, Treasury noted that in low-rate environments, chronic
fails can persist for very long periods of time as the cost of failing to deliver
securities is nominally low.
The Committee engaged in a wide-ranging discussion of the merits and design of
such a facility. Most members felt that a facility was clearly a good idea if it lowered
the cost of borrowing demonstrably and encouraged Treasury to develop analysis
whereby it could test those perceived benefits. Quantifying the benefits of a lending
facility through lower cost of borrowing was considered the most important
benchmark to determine the merits of the facility. Members then discussed
conditional measures to test the merits of the facility if the borrowing cost benefit
was clearly demonstrable. Most members felt that the introduction of a facility
would be a good idea if it served to limit the potential of a debilitating credit event or
other catastrophic occurrence. As such they argued, that establishing a penalty
borrowing rate well below the zero bound would allow market participants to fulfill
contracts to sell specific securities assuaging counterparty concerns. However,
many members counseled Treasury not to link the implementation of the proposed
facility to the enforcement of buy-in rules citing a lack of clarity of precedence or
understanding of how consistent procedure would be applied. Members strongly
encouraged Treasury not to inadvertently tinker with a well functioning market by
imposing additional regulatory burdens. They asserted that markets have thrived
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wlln less regulcllOIY lI"nellelellce dilU \I'r'dl . I Ted::'ury CUUIU elludllgel Il'S eIIVldu'lt:
borrowing costs through increased regulatory imposition. Some felt that a linkage
between buy-in rules and a lending facility would be detrimental to the efficient
functioning of the markets, and would promote speculative activity not intended at
the outset. Members encouraged Treasury to emphasize simplicity and to clearly
define the circumstances under which the facility would be implemented.
At the conclusion of the discussion, members generally felt that adding a lending
facility to the list of protracted fail mitigants, namely suasion, large reporting
requirements and tap auctions could serve as a valuable policy tool on an
infrequent basis. However, members urged Treasury to take great care not to
inadvertently disrupt a well functioning marketplace.
In the last section of the charge, the Committee considered the composition of
marketable financing for the October-December quarter to refund $38.7 billion of
prrvately held notes and bonds maturing on November 15, 2005, as well as the
composition of Treasury marketable financing for the remainder of the OctoberDecember quarter and the January-March 2006 quarter. To refund $38.7 billion of
privately held notes and bonds maturing November 15, 2005, the Committee
recommended a $18 billion 3-year note maturing November 15, 2008, a $13 billion
5-year note due November 15, 2010, and a $13 billion 1O-year note due November
15,2015. For the remainder of the quarter, the Committee recommended a $20
billion 2-year note issued in November, a $20 billion 2-year note issued in
December, a $13 billion 5-year note issued in December and a $8 billion reopening
of the 1O-year note in December. The Committee also recommended a $12 billion
12-day cash management bill issued November 18, 2005 and maturing November
30, 2005 and a $25 billion 9-day cash management bill issued December 6, 2005
and maturing on December 15, 2005. For the January-March quarter, the
Committee recommended financing as contained in the attached table. Relevant
features include three $20 billion 2-year notes, a $18 billion 3-year note, three $13
billion 5-year notes, a $13 billion 1O-year note in February, a $15 billion 30-year
bond, followed by a $8 billion reopening of the 1O-year note in March. The
Committee further recommended a $8 billion 1O-year TIPS in January and a $8
billion reopening of the 20-year TIPS.
Respectfully submitted,
Ian G. Banwell
Chairman
Thomas G. Maheras
Vice Chairman
REPORTS
•
•
TBAC
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3/)J/2006
US TREASURY FINANCING SCHEDULE FOR 1st QUARTER 2006
BILLIONS OF DOLLARS
ISSUE
ANNOUNCEMENT AUCTION SETTLEMENT
DATE
DATE
DATE
4-WEEKAND
3&6 MONTH BILLS
12/29
1/5
1/12
1/19
1/26
2/2
2/9
2/16
2/23
3/2
3/19
3/16
3/23
CASH MANAGEMENT BILLS
12-DAY BILL
2/27
Matures 3/15
7-DAY BILL
3/3
Matures 3/15
113
1/9
1/17
1/23
1/30
2/6
2/13
2/21
2/27
3/6
3/13
3/20
3/27
1/4
1/11
1/18
1/25
2/1
2/8
2/15
2/22
3/1
3/8
3/15
3/22
3/29
MATURING
AMOUNT
NEW
MONEY
49.00
46.00
48.00
52.00
42.00
40.00
40.00
40.00
43.00
49.00
48.00
53.00
54.00
-3.00
-3.00
-5.00
-9.00
7.00
16.00
16.00
23.00
20.00
14.00
14.00
9.00
-1.00
702.00
604.00
98.00
4-WK
OFFERED
AMOUNT
3-MO
6-MO
10.00
8.00
8.00
8.00
12.00
19.00
19.00
24.00
24.00
24.00
24.00
24.00
17.00
19.00
19.00
19.00
19.00
20.00
20.00
20.00
21.00
21.00
21.00
20.00
20.00
19.00
17.00
16.00
16.00
16.00
17.00
17.00
17.00
18.00
18.00
18.00
18.00
18.00
17.00
3/1
3/3
15.00
15.00
0.00
3/6
3/8
25.00
25.00
0.00
0.00
COUPONS
CHANGE
IN SIZE
1/9
1/12
1/17
8.00
20-Year TIPS (R)
2-Year Note
5-Year Note
1/19
1/19
1/19
1/24
1/25
1/26
1/31
1/31
1/31
8.00
20.00
13.00
3-Year Note
10-Year Note
30-Year Note
2/1
2/1
2/1
2/7
2/8
2/9
2/15
2/15
2/15
18.00
13.00
15.00
2-Year Note
5-Year Note
2/20
2/20
2/22
2/23
2/28
2/28
20.00
13.00
10-Year Note (R)
3/6
3/9
3/15
8.00
3/20
3/20
3/22
3/23
3/31
3/31
20.00
13.00
26.01
-6.01
13.00
169.00
106.69
74.11
10-Year TIPS
2-Year Note
5-year Note
"20-year bonds
R =Reopening
A =Announced
Actual Amounts in Italics
Treasury announced a Q4
borrowing need of $171
billion on October 31st
8.00
25.61
13.57
3.71"
26.00
8.00
-5.61
13.00
18.00
-0.57
11.29
-6.00
13.00
8.00
NET CASH RAISED THIS QUARTER:
172.11
US TREASURY FINANCING SCHEDULE FOR 4th QUARTER 2005
BILLIONS OF DOLLARS
ISSUE
4-WEEKAND
3&6 MONTH BILLS
ANNOUNCEMENT AUCTION SETTLEMENT
DATE
DATE
DATE
9/29
10/6
10/13
10/20
10/27
11/3
11/10
11/17
11/23
12/1
12/8
12/15
12/22
CASH MANAGEMENT BILLS
11-DAYBILL
10/3
Matures 10/17
12-DAY BILL
11/16
Matures 11/30
9-DAY BILL
12/2
Matures 12/15
10/3
10/11
10/17
10/24
10/31
11/7
11/14
11/21
11/28
12/5
12/12
12/19
12/27
10/5
10/12
10/19
10/26
11/2
11/9
11/16
11/23
11/30
12/7
12/14
12/21
12/28
MATURING
AMOUNT
NEW
MONEY
42.01
40.02
-2.01
4-WK
OFFERED
AMOUNT
3-MO
6-MO
8.00
10.00
13.00
18.00
17.00
18.00
18.00
19.00
15.00
16.00
16.00
17.00
39.95
7.05
40.74
18.00
22.00
22.00
20.00
20.00
18.00
13.00
14.00
16.00
18.00
18.00
18.00
18.00
18.00
17.00
16.00
16.00
17.00
16.00
16.00
16.00
16.00
16.00
15.00
14.00
14.00
15.00
37.00
39.00
43.00
49.00
48.00
52.00
52.00
49.00
49.00
13.26
15.00
17.00
13.00
5.00
6.00
-2.00
-9.00
-5.00
-1.00
642.00
580.72
61.29
3.98
10/5
10/6
13.00
13.00
0.00
11/17
11/18
10.00
10.00
0.00
12/5
12/6
25.00
25.00
0.00
0.00
COUPONS
CHANGE
IN SIZE
5-Year Note
10-YearTIPS (R)
10/6
10/6
10/12
10/13
10/15
10/15
13.00
8.00
5-Year TIPS (R)
2-Year Note
10/20
10/24
10/25
10/26
10/31
10/31
7.00
20.00
25.82
-5.82
3-Year Note
5-Year Note
10-Year Note
11/2
11/2
11/2
11/8
11/9
11/10
11/15
11/15
11/15
18.00
13.00
13.00
23.22
15.51 '
18.00
-10.22
-1.51
2-Year Note
11/17
11/22
11/30
20.00
25.35
-5.35
5-year Note
10-Year Note (R)
12/5
12/5
12/7
12/8
12/15
12/15
13.00
8.00
12/22
12/28
12/30
20.00
26.01
-6.01
153.00
115.91
38.09
2-Year Note
'Includes $2.8 billion of maturing 25-year bonds
Treasury announced a Q4
R = Reopening
borrowing need of $96
A =Announced
billion on October 31st
Actual Amounts in Italics
13.00
8.00
7.00
13.00
8.00
NET CASH RAISED THIS QUARTER:
99.38
Page 10f6
PRESS ROOM
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November 2, 2005
js-3004
Minutes Of The Meeting Of The Treasury Borrowing Advisory Committee Of
The Bond Market Association November 1, 2005
The Committee convened in closed session at the Hay-Adams Hotel at 3:00
pm. Three members of the Committee, Keith Anderson, Susan Estes, and James
Capra, were not present. Undersecretary for Domestic Finance Randal Quarles
welcomed the Committee and gave them the charge. Office of Debt Management
(ODM) Director Jeff Huther then proceeded to address the Committee.
Director Huther highlighted a few of the quarterly refunding charts released
on October 31, noting that Treasury's borrowing in fiscal year 2005 was less than
projected earlier in the year and that this is largely due to increased tax receipts and
higher-than-expected SLGS issuance. He also noted the potential for volatility in
Treasury's borrowing needs in the next few fiscal years, with estimated borrowing
needs rising in FY2006. In addition, recent disaster related relief may create
additional volatility in bill and coupon issuance in FY 2006. However, Director
Huther highlighted the fact that such expenditure was within the expected range of
Treasury forecast scenarios for FY 2006, and could be financed by increasing the
size of bill and coupon issuance from their low current levels over the course of the
fiscal year. He emphasized that Treasury had great flexibility in its financing needs
during fiscal year 2006 even considering the appropriations bill.
A Committee member asked if Treasury knew why SLGS issuance was so
high in the previous fiscal year. Director Huther stated that one of the primary
reasons for increased issuance was the desire to lock in low interest rates and
refinance existing levels of debt. He anticipated that such issuance would return to
more normal levels in the coming fiscal year.
The Committee then addressed the first question in the Committee charge
(attached) regarding potential adjustments to Treasury's auction calendar in order
to accommodate the introduction of 30-year bond issuance. Director Huther
presented a series of charts regarding calendar issues and changes, including the
recommendation that the 30- year bond be included in the Quarterly Refunding
semiannually and moving all 5-year note auctions to month-end. He noted that
historically Treasury has not auctioned four coupon securities during refunding
week and referred to a chart stating that such issuance could create excess risk for
primary dealers which could lead to higher borrowing costs for the Treasury.
Director Huther said that Treasury was currently planning on auctioning the 30-year
bond be auctioned on a February/August cycle in 2006 with a dated date on the
15th of the month to ensure fungibility with outstanding bonds, and with a
settlement date on the 15th of the month or the next business day if it were a
weekend or holiday. He noted the importance that primary dealers placed on the
STRIPS market and stated that Treasury would aim to broaden liquidity in this
market following the issuance of the 30-year bond.
In addition, Treasury was planning on moving all 5-year note auctions to the end of
the month, with an end of month dated date and settlement date. The 5-year note
would auction and settle in similar fashion to the monthly 2-year note. In addition,
Treasury would announce the 5-year on the same date as the 2-year note, and
auction the 5-year note one day after the 2-year auction. Given that 5-year TIPS
and 20-year TIPS are auctioned at month end on a semiannual basis, the
placement of the 5-year note at month end would, on a quarterly basis, result in 3
coupon auctions in a week. By moving the 5-year to month end, Director Huther
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stated that these month end auctions could garner greater interest from the
investment community, provide additional liquidity to the market, and potentially
lower borrowing costs while at the same time improve the management of
Treasury's cash balances.
The Committee was asked if there are other issues Treasury should
consider as a result of these planned changes in the calendar. In addition, Treasury
asked if clustering issues during refunding week and the last week of the month
were beneficial to Treasury, and if there were any tradeoffs of which Treasury
should be mindful.
A majority of Committee members believed the adjustments to the calendar
proposed by Treasury were prudent and reflected various market factors.
A Committee member noted that clustering securities allows Treasury to take
advantage of Wall Street's marketing skills and helps in the overall underwriting
process. The member also noted that the duration offered during the refundings did
not look excessive. The same member noted that Treasury may want to consider its
own exposure during refunding week and consider if issuing 1O-year notes and 30year bonds during the same week poses potential problems.
Another Committee member stated that the flexibility Treasury has shown in
accommodating various securities may pose potential problems in the marketing of
securities over the long run. Another Committee member countered this comment
and stated that marketing had little to do with placement on the calendar as shown
by the decline in when-issued trading. The member stated that the changes made
by Treasury to accommodate various securities have not had an impact on
borrowing costs. The member noted that an increase in when-issued trading would
potentially indicate issues with Treasury issuance, placement, and marketing.
A Committee member noted that the 30-year bond should be auctioned such that it
is fungible with currently outstanding STRIPS. Another member noted that having
TIPS auctions during the same week as 2-year note and 5-year note auctions was
not a problem because the securities were not necessarily substitutes and that their
investor bases were different.
One Committee member suggested that auctioning three securities during the final
week of the month may potentially be an issue given that employment numbers are
released during that period. The member also noted that such issuance may be
costly in December. Director Huther acknowledged this potential cost and stated
this factor was considered in Treasury's issuance decisions.
Next the Committee turned to the second discussion point on the Committee
charge on the proposed Treasury Securities Lending Facility and possible
approaches to setting the borrowing terms so that it is only economically attractive
during periods of protracted fails. Director Huther presented a series of slides on
the factors that led Treasury to consider such a facility and the initial thoughts on a
potential structure for a facility. The first few slides highlighted the costs to Treasury
of periods of chronic fails including impaired liquidity in the cash markets,
operational costs, and the potential erosion of benchmark status. He noted that
these factors ultimately result in higher borrowing costs for Treasury.
The next few slides addressed other alternatives including reopenings or market
based solutions such as "prompt delivery trades". Director Huther noted that
Treasury had studied these alternative methods to resolve chronic fails and
determined they were not suitable because of various factors including the lack of
incentive to use such facilities, the reactive - rather than preemptive - nature of
such methods, the uncertainty created by issuing the appropriate amount of
additional supply, and the potential to introduce additional speculative components
to securities prices.
The final set of slides presented by Director Huther showed preferred
characteristics of the proposed securities lending facility as well as the possible
incentives for using such a facility. The slides noted that such a facility would
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Page 3 of6
prevent settlement fails from occurring, ensure that additional supply was
temporary, encourage market driven solutions to supply-driven imbalances, and be
viewed as a lendel· of last resort option Desired attributes include a nondiscretionary, standing facility with unlimited supply on renewable terms. The price
would be set at a penalty rate to discourage use unless the market was severely
stressed. The facility would not be designed to address temporary needs, so the
term would likely be greater than overnight. The slides also discussed potential
incentives for using such a facility. Director Huther than asked members of the
Committee for their thoughts on how such a lending facility should be designed and
the risks of introducing such a facility in the Treasury market.
A Committee Member began the discussion by reviewing the minutes of the
previous TBAC meeting in which members offered numerous and varied opinions
as to the merits of the program, but expressed some reservations regarding the
implementation and dynamics of such facility. The Committee member then asked if
the Treasury was requesting further context on the facility.
Undersecretary Quarles responded by stating that Treasury wanted to hear what
the views of the Committee were since the previous meeting and if the idea as a
whole was a good idea.
A Committee member noted that the lending facility was potentially a departure
from market conventions. He noted that delivery failures of Treasury securities are
a market convention. He noted that the benefits that accrue to Treasury from the
specials market versus the costs associated with chronic fails was difficult to define.
Another member noted that the low rate environment was exacerbating chronic fails
and that such a situation would clear as rates increased.
A Committee member stated that the fails situation was not simply a problem
resulting from low rates, but the result of market trends in which Treasury supply
was decreasing as an overall portion of the market. Given trends in foreign
ownership, such supply related problems may become more frequent in the future.
Another member stated that if Treasury were to institute such a program,
they should make the facility as simple as possible and create minimal impact on
the market. The member suggested that the NASD and SEC should enforce the
buy-in rule, and that Treasury should set up securities facility in tandem. Such a
response would have minimal consequences.
A Committee member asked Treasury if it is Treasury's responsibility to
enforce the buy-in rule. Director Huther clarified that the buy-in rule is enforced by
the various self-regulatory organizations including the NYSE and NASD, and that
Treasury can grant extensions. However, beyond this, the penalty for not
responding to the buy-in rule was undefined.
In response, a Committee member stated that the facility appeared to be
increasing regulatory burdens, and that instituting limits in markets generally
encourages speculative behavior. The member stated that Treasury should allow
market-based mechanisms to clear chronic fails.
A Committee member then asked if the ultimate benefit of such a facility
should be to lower the cost of borrowing for tax payers. The Committee as a whole
agreed. A Committee member stated that investors and market makers should also
be taken into account when devising the appropriate penalty rate and term.
A Committee member asked the group if system limitations would prevent
the implementation of a facility with a negative rate as the penalty fee. Several
Committee members stated that their systems could not handle such rates, but that
they would make the necessary adjustments if required by regulatory authorities.
Another member stated that negative rates would not be necessary if the facility
were set up on a term basis with a minimum term of 1 week. The term would act as
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the penalty in a similar fashion as the negative rates.
A Committee member returned to the point that chronic fails, regardless of
the penalty rate utilized, were creating strains in other markets, including mortgages
and corporate bond markets, and that implementing some type of backstop facility
was prudent. Another Committee member stated that preparing for the worst case
scenario was in Treasury's interest, but that the current proposed facility was too
restrictive and burdensome.
A Committee member asked if Treasury had ever experienced such a
degree of fails when interest rates were above 4%. Director Huther stated that such
a high degree of fails was not evident when rates were higher.
Undersecretary Quarles then asked the Committee if they felt that chronic
fails were creating a cost for Treasury over time, and if a securities lending facility
would be beneficial. A Committee member stated that he did not feel that the costs
to Treasury over the long term were high. He stated that other methods to clear fails
including persuasion from Fed officials and the Treasury were already working
options and that an additional facility created greater ambiguity and potentially,
speculative, activities.
Another member stated that a solution that was between large position
reports and tapping an issue was optimal, but that the benefits of the proposed
securities lending facility to Treasury were not readily apparent.
A Committee member noted that a backstop facility was required, but
perhaps with less regulatory impositions. The member noted that some of the other
alternatives - such as asking foreign entities to lend securities during periods of
chronic fails - were not reasonable, and may reduce investor demand.
Finally, the Committee discussed its borrowing recommendations for the
November refunding and the remaining financing for this quarter as well as the
January - March quarter. Charts containing the Committee's recommendations are
attached. A Committee member suggested that, in the future, the borrowing
recommendations would be presented in a calendar format rather than in table
format. The Committee made some minor adjustments to its suggested financing
tables, moving the 5-year note from mid month to month end in February 2006 and
March 2006.
The meeting adjourned at 4:30 p.m.
The Committee reconvened at the Hay-Adams Hotel at 6:30 p.m. Three
members of the Committee, Keith Anderson, Susan Estes, and James Capra, were
not present. The Chairman presented the Committee report to Director Huther. A
brief discussion followed the Chairman's presentation but did not raise significant
questions regarding the report's content.
The meeting adjourned at 6:45 p.m.
Jeff Huther
Director
Office of Debt Management
November 1, 2005
Certified by:
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Ian Banwell, Chairman
Treasury Borrowing Advisory Committee
Of The Bond Market Association
November 1, 2005
Treasury Borrowing Advisory Committee Quarterly Meeting
Committee Charge - November 1, 2005
Calendar issues
Treasury is considering inclusion of the 30-year bond in the Quarterly Refunding
semi-annually and moving all 5-year note auctions to month end. Treasury seeks
the Committee's views on such an adjustment in Treasury's auction calendar. In
particular Treasury solicits Committee input on the following questions:
•
The clustering of auctions in refunding weeks increases market focus,
potentially leading to higher demand, but it also increases the amount of risk
market participants must hold, potentially leading to lower demand. How
should Treasury evaluate this trade-off when considering where to place
securities on the calendar?
• What is the potential impact of a February/August 30-year cycle on 20-year
TIPS auctions?
• Are there any advantages to moving the 5-year note auction to month end
only during 30-year auction months versus holding 5-year note auctions
regularly at month end?
• Are staggered announcements of month end auctions preferable - i.e.,
consistent with current Treasury policy - or a single announcement of all
three coupons?
Treasury Securities Lending Facility
Last quarter Treasury presented some preliminary thinking to the Committee on the
need for a backstop securities lending facility to mitigate the risk of recurrent
systemic fails. We will present some additional thinking on the potential negative
implications of recurrent systemic fails. We seek the Committee's views on
possible approaches to setting terms so that borrowing from the facility is only
economically attractive during periods of protracted fails.
Financing this Quarter
We would like the Committee's advice on the following:
•
The composition of Treasury notes to refund approximately $38.7 billion of
privately held notes and bonds maturing on November 15, 2005.
•
The composition of Treasury marketable financing for the remainder of the
October- December quarter, including cash management bills.
•
The composition of Treasury marketable financing for the January-March
quarter.
REPORTS
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PRESS ROOM
November 2, 2005
js-3005
Randal K. Quarles Appointed to Air Transportation Stabilization Board
Treasury Secretary John W. Snow appointed Under Secretary for Domestic
Finance Randal K. Quarles this week to serve as Treasury's designee on the Air
Transportation Stabilization Board. Quarles will replace Assistant Secretary for
Financial Markets Timothy Bitsberger who resigned from the Treasury Department
last month.
- 30 -
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PRESS ROOM
November 3, 2005
2005-11-3-8-50-57 -26142
Treasury Secretary John Snow and Deputy Secretary Robert Kimmitt meet
with Secretary Jim Baker at the Treasury Department
All media queries should be directed to
The Press Office at (202) 622-2960.
Only call this number if you are a member of the media.
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PRESS ROOM
November 1 , 2005
JS-3006
The Honorable John W. Snow Prepared Remarks Delivery of Final Report
from the President's Advisory Panel on Federal Tax Reform Washington, DC
Welcome. I'd like to thank everyone for joining us here today.
I'd like to welcome former Senators Connie Mack and John Breaux, the chair and
vice chair of the President's Advisory Panel on Federal Tax reform. I'd also like to
welcome the other Panel members - Edward Lazear, James Poterba, Liz Ann
Sonders and William Frenzel - and thank them for joining us as well.
In January, the President appointed this bipartisan panel under the leadership of
Senators Mack and Breaux to make recommendations to make the tax code fairer
for all Americans, simpler so everyone can understand it, and more pro-growth, to
help boost our economy. The President also asked that they do so in a way that
was revenue neutral and that considered the importance of home ownership and
charitable giving in our society.
This Panel has held meetings all over the country; they listened to experts,
economists, lawyers, and average taxpayers; they studied all the information that
was presented to them, and they have made bold recommendations. The
recommendations that they are presenting today will begin the dialogue that will
help shape the future of tax policy. Their advice is the starting point, and I look
forward to reading their recommendations and considering them carefully before I
make a recommendation to the President based on the excellent work carried out
by this Panel. I congratulate the panel for their excellent work and a job well done.
Thank you.
###
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PRESS ROOM
November 1, 2005
JS-3007
Statement of Treasury Secretary John W. Snow on
Retirement of House Financial Services
Chairman Michael G. Oxley
As Chairman of the House Financial Services Committee, Mike Oxley oversaw a
critical period for our nation's financial markets. The landmark corporate
responsibility legislation enacted under his leadership - and which bears his name
- shored up investors in the face of events which shook their confidence. In
addition, his hard work to establish greater transparency and increased disclosures
for mutual fund investors provided greater protections and investment security for
millions of Americans. And in the wake of September 11, he led the Committee's
efforts to swiftly strengthen anti-money-Iaundering measures and provide law
enforcement with better tools to fight the financing of terrorism.
He has well served the people of the 4th District of Ohio in his quarter-century of
public service. I commend Mike for his wise oversight for America's financial
consumers as chairman of the House Financial Services Committee.
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PRESS ROOM
November 1 , 2005
]s-3008
Treasury Secretary Snow to Visit to India
Treasury Secretary John W. Snow will visit India next week to highlight the growing
economic relationship and financial ties between the United States and India, and
the benefits to both economies. He will discuss the strong potential of the Indian
economy, focusing on efforts to further liberalize the financial sector and improve
financing infrastructure, as well as India's role in the upcoming Doha round of trade
talks.
Secretary Snow will travel to Mumbai and New Delhi to meet with economic officials
and representatives of the local business communities there. The Secretary will
meet with Indian Finance Minister Chidambaram in New Delhi to discuss economic
developments in the region.
The following events are open to credentialed media with photo identification:
Monday, November 7, 1:30 p.m.
Visit to Society for the Promotion of Area Resource Centers Microfinance
Headquarters
Mahim Station
Bandra Kurla Complex, T. Junction
Mumbai, India
Tuesday, November 8,5 p.m.
Visit to National Stock Exchange & National Commodities Exchange
Exchange Plaza
C-1, Block G, Bandra-Kurla Complex
Bandra E
Mumbai, India
Wednesday, November 9,6 p.m.
Joint Press Conference with Indian Finance Minister Chidambaram
Ta] Mahal Hotel
1 Mansingh Road
New Delhi, India
Thursday, November 10, 1 p.m.
Remarks to U.S.-Indian Business Leaders
Hyatt Regency Hotel
Bhikaiji Cama Place, Ring Road
New Delhi, India
-30-
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PRESS ROOM
November 3, 2005
JS-3009
Treasury Action Targets Southeast Asian
Narcotics Traffickers
The U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC)
today identified 11 individuals and 16 companies that are part of the financial and
commercial network of designated significant foreign narcotics trafficker Wei
Hsueh-kang and the United Wa State Army (UWSA). The names were added to
OFAC's Specially Designated Nationals and Blocked Persons (SON) list pursuant
to the Foreign Narcotics Kingpin Designation Act (Kingpin Act).
"Wei and the UWSA's opium trafficking plagues the society and economy of
Southeast Asia. We're acting to protect the U.S. financial sector from this network's
tainted drug profits, as well as ensure Wei and his cohorts can't use the American
financial system to move or launder their opium proceeds," said Robert Werner,
OFAC Director.
Wei Hsueh-kang (Wei) was designated as a significant foreign narcotics trafficker
pursuant to the Kingpin Act on June 1, 2000. Wei serves as a senior commander of
the UWSA, which was subsequently designated as a drug kingpin on May 29, 2003.
Wei is the subject of a U.S. federal indictment, unsealed in January 2005, from the
Eastern District of New York on narcotics-related charges. The U.S. Department of
State has offered a $2,000,000 reward for information leading to his capture.
The UWSA, with as many as 20,000 armed fighters located in Burma, is the largest
and most powerful drug trafficking organization in Southeast Asia and was
responsible for the production of more than 180 metric tons of opium in 2004. Many
of its senior leaders are also the subject of an indictment unsealed by the Eastern
District of New York in January 2005.
Among the key financial individuals designated by OFAC today are Warin
Chaichamrunphan, who is one of Wei's wives, and her brother Winai Phitchaiyot.
They act for or on behalf of Wei and the UWSA in various front companies, as well
as materially assist in their narcotics trafficking activities. Several relatives of Warin
and Winai are among those designated today. The 16 companies named, all of
which are located in Thailand, were designated for their role in the financial network
of Warin, Winai, Wei and the UWSA. Many of the designated companies have been
raided in the past by Thai authorities in connection with an investigation into Wei's
money laundering network.
Today's action freezes any assets found in the United States and prohibits all
financial and commercial transactions between the designated persons and entities
and any U.S. person.
The 27 new names collectively bring the total number of Tier I and Tier II designees
under the Kingpin Act to 224: 57 drug kingpins worldwide, 11 individuals and 16
companies in Thailand and 140 companies and other individuals in Mexico,
Colombia, Peru and the Caribbean.
This action is part of the ongoing interagency effort of the Treasury, Justice, State,
Defense, and Homeland Security Departments, the Central Intelligence Agency, the
Federal Bureau of Investigation, and the Drug Enforcement Administration to carry
out the Kingpin Act, which was signed into law on December 3, 1999, and which
applies economic sanctions against narcotics traffickers on a worldwide basis. The
Kingpin Act was modeled after Executive Order 12978 which applies economic
sanctions against narcotics traffickers centered in Colombia, and which is also
administered by OFAC.
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PRESS ROOM
November 3,2005
2005-11-3-13-13-26-18565
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 $70,911 million as of the end of that week, compared to $70,529 million as of the end of the prior week.
I. Official U.S. Reserve Assets (in US millions)
I
Q~tober~1.2Q05
TOTAL
70,529
70,911
EurO~f
1. Foreign Currency Reserves 1
a. Securities
11,163
I
October 28, 2005
I
0,9
Of which, issuer headquarlered in the US.
TOTAL
Euro
Yen
TOTAL
22,135
11,263
11,012
22,275
0
0
b. Total deposits with:
er central banks and BIS
b.ii. Banks headquarlered in the US.
~
0
Ib.iii. Banks headquarlered outside the US.
0
b.iii. Of which, banks located in the U.S.
0
13. Special Drawing Rights (SDRs) 2
I
II
5,3
1
0
0
b.ii. Of which, banks located abroad
12. IMF Reserve Position 2
10,731
15,926
5,315
I
I
I
I
4. Gold Stock 3
13,207
I
I
0
I
I
0
0
13,270
I
8,260
8,221
~ ~
11,041
~
0
0
5. Other Reserve Assets
"
II. Predetermined Short-Term Drains on Foreign Currency Assets
October 21,2.005
Euro=1P"
I TOTAL
I
1. Foreign currency loans and securities
0
II
II
I
October 28, 2005
Euro
I
Yen
TOTAL
I
0
l3.. Aggregate short and long positions in forwards and futures in foreign currencies vis-a-vis the U.S. dollar:
0
2.a. Shorl positions
II
I
II
0
2.b. Long positions
I
I
II
0
13. Other
II
I
II
I
I
I
0
0
III. Contingent Short-Term Net Drains on Foreign Currency Assets
October 28, 2005
October 21~ 2005
Yen
Euro
I
Euro
TOTAL
II
0
1. Contingent liabilities in foreign currency
1.a. Collateral guarantees on debt due within'1
year
II
Yen
J
TOTAL
0
1/
II
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I
I
I
II
II
I
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1.b. Other contingent liabilities
2. Foreign currency securities with embedded
options
1
II
I
II
3. Undrawn, unconditional credit lines
13.a. With other central banks
II
0
0
II
1
II
1
1
3.b. With banks and other financial institutions
I
I
II
II
1
~eadqUal1ered in the U. S.
0
I
0
I
I
II
II
.c. With banks and other financial institutions
Headqualtered outside the U. S.
4. Aggregate short and long positions of options
in foreign
I
Currencies vis-a-vis the U.S. dollar
0
0
4.a. Shalt 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:
11 Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account
(SOMA), valued at current market exchange rates. Foreign currency holdings listed as securities reflect marked-to-market values, and
deposits reflect carrying values. Foreign Currency Reserves for the latest week may be subject to revision. Foreign Currency
Reserves for the prior week are final.
21 The items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF and are
valued in dollar terms at the official SDRldoliar 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.
31 Gold stock is valued monthly at $42.2222 per fine troy ounce.
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PRESS ROOM
November 4,2005
JS-3010
Statement of Treasury Secretary John W. Snow
On October Employment Report
"Today's report that 56,000 new jobs were created in October is the latest evidence
that the fundamental strength of the American economy is helping the nation
overcome the challenges presented by the Gulf Coast hurricanes and high energy
prices.
"Last week's GOP report that the economy grew at a strong rate of 3.8 percent in
the third quarter showed the resilience of an American economy on a steady path of
growth.
"By reducing taxes and pursuing pro-growth economic policies, the President has
put the economy on the right course. The President's commitment to fiscal
discipline and making the tax cuts permanent is key to sustained economic growth."
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PRESS ROOM
November 8, 2005
JS-3011
Testimony of Daniel L. Glaser, Deputy Assistant Secretary Office of
Terrorist Financing and Financial Crimes U.S. Department of the Treasury
Before the Senate Committee on the Judiciary
Chairman Specter, Ranking Member Leahy and other distinguished members of the
Committee, thank you for inviting me to testify today before you on the Kingdom of
Saudi Arabia. This is an important topic that touches at the very heart of our efforts
as a government to combat terrorism throughout the world. We have learned over
the last four years that the war on terror requires the collective efforts of every
country, working to counter terrorism both within its own borders and in every
corner of the globe. In this collective fight, we depend on the wisdom, vigilance,
and support of both our allies and those whom we traditionally hold at arm's length.
In this mix of relationships, Saudi Arabia is by all measures one of the countries
most central to our global counterterrorism efforts. I would characterize the quality
of this relationship as one of active partnership aimed at achieving progress on
several issues. The success of global anti-money laundering and counterterrorist
financing (AMUCFT) efforts relies, in good measure, on ensuring that this
partnership is real, focused and lasting.
Like any partnership, however, ours has experienced times of frustration and
impatience. Partnerships evolve over time, and those that last, can point to a long
list of trials which have tested both sides of it. Our relationship with Saudi Arabia is
no exception.
Today, Saudi Arabia is actively countering the threat of terrorism. This is a key
success, unfortunately catalyzed by the May 2003 terrorist attacks in Riyadh, which
alerted the Kingdom that terrorism was not only a theoretical global problem, but
very much a local one. Having now suffered multiple attacks within the Kingdom
itself, Saudi Arabia has come to understand the clear and present danger that
terrorism and its vast support structures pose to its citizens and the very fabric of
everyday life. The United States experienced the same shock on September 11,
2001 and the difficult months and years that have followed.
The Saudis have demonstrated serious determination to take aggressive action
against al Qaeda. The Saudi Government has also taken steps to address the
more fundamental issue of confronting extremist ideology by waging a campaign
within the Kingdom against those it terms "deviants" who pervert Islam to preach
violence. This campaign has included working with religious leaders to eliminate
hatred-filled sermons and repeated statements by the King addressing this issue.
But on counterterrorist financing, the Saudis need to do more. This includes taking
steps to ensure that Saudi funds are not sent overseas to promulgate the very
hatred and extremism that Saudis are confronting at home.
Saudi Arabia should build on its own domestic efforts to exert active leadership
regionally, and by enhancing its bilateral counter-terrorist financing relationships
worldwide. It should go after individual contributors to extremist organizations and
monitor how Saudi funds sent overseas, including Saudi government funds, are
being used. Saudi Arabia is aggressively tackling the scourge of extremism and
terrorism it faces within the Kingdom. What happens outside the Kingdom is also of
the utmost importance, however, since extremism in one country can easily find its
way elsewhere in the world and pose a threat to us all. As Under Secretary Levey
has said, wealthy donors in Saudi Arabia are still funding violent extremists around
the world, from Europe to North Africa, from Iraq to Southeast Asia. We hope that
Saudi Arabia will take effective action against these individuals to disrupt their
facilitation of violence and to send a clear message that such activity will not be
tolerated by the Kingdom.
Points of Progress
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Saudi Arabia has undertaken many measures to stem the tide of terrorist financing
within the Kingdom since the terrorist attacks in Riyadh, May 2003. In fact, in some
respects Saudi Arabia has gone further than many countries in the region to build
serious systems aimed at combating illicit financing. These measures include new
regulations in the charitable sector, increased vigilance and sophistication in the
financial sector, and regional integration on matters of anti-money laundering and
counter-terrorist financing.
Charitable Sector
Among the efforts that we have conducted jointly with the Saudis, the most public
and prominent were our joint designations of AI-Haramain Islamic Foundation
branches globally for that organization's support to the worldwide al-Qaida
network. These branches were listed by the United Nations as well. Public
designations of individuals and entities such as AI-Haramain not only cut these
supporters off from the global financial system, but also they send the strong public
message that the U.S. and its partners will not tolerate the efforts of charities to
disguise their activities while engaging in false marketing. The support of Saudi
Arabia in these designations reflected our united front against a common enemy.
In addition to these targeted actions, Saudi Arabia has taken concrete steps to
systemically protect its charitable sector. Since May 2003, the following regulations
have been put in place:
Enhanced customer identification requirements apply to charitable
accounts;
• Each charity must consolidate its banking activity in one principal account;
• No cash disbursements are permitted from charitable accounts; payments
are only allowed by check payable to the first beneficiary and must be
deposited in a Saudi bank;
• No ATM or credit cards may be issued against a charitable account (all
outstanding ATM and credit cards for such accounts have been canceled);
and
• No transfers from charitable accounts are permitted outside of Saudi Arabia.
•
These restrictions are far-reaching in scope and highlight the degree to which Saudi
Arabia has taken oversight of this sector seriously. We are also awaiting the
establishment of a Charities Commission to oversee all charities and NGOs based
in the Kingdom. The financial controls outlined above combined with this oversight
body will represent progress made in combating terrorist financing in the Saudi
Arabian charitable sector.
Financial Sector
Saudi Arabia has also made systemic changes to its financial sector. Saudi Arabia
boasts a sophisticated financial sector, regulated by the Saudi Arabian Monetary
Authority (SAMA). As a member of the Gulf Cooperation Council (GCC), Saudi
Arabia is subject to mutual evaluations conducted by the Financial Actions Task
Force (FATF), the premier international body dedicated to promulgating and seeing
global compliance of AMUCFT standards. These mutual evaluations are
conducted by a team of experts that evaluate a country's compliance with the
internationally-recognized forty recommendations on anti-money laundering and
nine special recommendations on counterterrorist financing. In February 2004,
FATF produced its assessment of Saudi Arabia and found the Kingdom to have met
most of its general obligations with the FATF recommendations.
Saudi Arabia also sits in a region that is comprised of cash-based economies. The
entire region is grappling with the challenge of cash couriers, how to track them,
how to penalize them, and how to prevent the abuse of cash-based economies.
Recently, Saudi Arabia decreased the reporting threshold for cash transiting its
borders to $16,000. This reporting enhancement not only reflects significant
political will but also allows law enforcement to take more frequent action against
those who they suspect of carrying cash into the country for illicit purposes.
The Saudi Government has also created some useful institutions to aid in the fight
against terrorist financing. It recently established a financial intelligence unit (FlU)
to engage in the essential process of reporting, analyzing, and disseminating critical
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financial information within Saudi Arabia and internationally. The FlU became
operational as of September 10,2005. FlUs playa crucial role in establishing the
backbone of information-sharing among countries worldwide. We expect to engage
with our counterparts in the Saudi FlU to increase our effectiveness in preparing
reports of suspicious activity for action. We are already actively engaged,
moreover, in joint analysis at the Joint Terrorist Financing Task Force in Riyadh
where agents from IRS Criminal Investigation Division (IRS-CID) and FBI sit sideby-side with their Saudi counterparts to analyze important streams of data together.
Regional Integration
With respect to Saudi Arabia's regional role on these issues, it is instructive to
reflect on the Middle East North Africa Financial Action Task Force (MENAFATF)
which held its second plenary in Beirut this past September. Saudi Arabia figures
prominently in this regional body, holding the Executive Secretary seat in the
MENAFATF's leadership structure. Attended by all 14 members, the recent plenary
demonstrated a commitment to raising awareness in the region and becoming a
force in the global dialogue on anti-money laundering and counterterrorist financing
issues. The plenary adopted three excellent papers on hawala, cash couriers, and
charities which underscore the degree to which the region is grappling with the
institutions and typologies most subject to abuse by supporters of terrorism. Saudi
Arabia co-authored the paper on charities which offers a candid assessment of the
issue and prescriptive recommendations for how countries in the region should deal
with it.
Anecdotal evidence suggests that all of the measures discussed above have made
it more difficult for sponsors of terrorism to fund their causes through the formal
financial system. We also must acknowledge the extraordinary efforts of Saudi
Arabia's internal security forces, which have been waging an ongoing battle on the
ground with al Qaida, and have themselves sustained casualties. In light of these
measures, it is clear that Saudi Arabia has taken the threat seriously, especially
with regard to the threat of attacks on its own soil.
Challenges Ahead
While we support and welcome these efforts, public and resolute leadership against
all aspects of terrorist financing is absolutely crucial and Saudi Arabia needs to take
its efforts in this area to the next level. In recent years, Saudi-U.S. cooperation
against terrorist finance has increased and achieved important successes. In order
for this relationship to mature, however, Saudi Arabia will need to move beyond
reacting to information provided by the U.S. and to lead the effort to identify and
take action against sources of terrorist financing.
The subject of charities and NGOs has been a lingering concern of ours in the
context of counterterrorist financing. As I noted above, Saudi Arabia has taken
steps to bring its charities and NGOs under control. We have, however, been
repeatedly raising the issue of so-called international NGOs, namely the
International Islamic Relief Organization (IIRO), the World Assembly of Muslim
Youth (WAMY), and the Muslim World League (MWL). The Saudis have
responded that charitable organizations and these international NGOs are de facto
prohibited from sending funds abroad. It is not clear to us that this de facto
prohibition is having true effect and we remain deeply concerned about this issue.
Furthermore, these restrictions do not apply to foreign branches of Saudi-based
NGOs and charities, which can transfer money among themselves throughout the
world with little accountability to the Kingdom. It is possible, for example, for an
IIRO official in Saudi Arabia to advise IIRO branches in country X and country Y to
transfer money to each other, outside of Saudi regulatory reach.
Saudi officials must concern themselves beyond the limits of restrictions within the
Kingdom. They must recognize that organizations so closely associated with Saudi
Arabia, anywhere in the world, are de facto Saudi responsibility. These
organizations must become an integral part of Saudi focus and policy. I am not
suggesting that Saudi Arabia go it alone. This type of a comprehensive strategy will
require the coordination of many regional and global counterparts. But Saudi
Arabia itself must be actively engaged in ensuring that these organizations are
responsive to Saudi oversight. The Saudis must care not only what happens in
IIRO Riyadh but they must also be concerned with what transpires in every other
IIRO office around the world.
:P://treas.gov(,Fress/releases/js3011.htm
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Page 4 of 4
As my testimony previously notes, the Saudis have repeatedly said that they will
form a Charities Commission to officially oversee all charities in the Kingdom. We
eagerly await the establishment of this mechanism and expect that all international
charities and NGOs will be covered by its oversight.
Even when the Charities Commission takes form, it will not address the issue of
private donors. While current regulations take account of the financial activities of
charitable concerns, they do not apply to direct donations made by private donors.
This issue, which we have raised on numerous occasions with the Saudis, has
been a problem in the past and continues to concern us. Especially as charities
and NGOs are held under closer scrutiny, it will become increasingly important to
focus on the ways in which private giving has and is being abused.
Palestinian Terrorist Groups
The fight against terrorist financing cannot be limited to al-Qaida funding alone.
Just as Saudi Arabia is working to ensure that Saudi funds do not support al-Qaida,
they must also work equally diligently to thwart the funding of Palestinian terrorist
groups that undermine peace and stability in the Middle East.
We were troubled, in this regard, by the recent clip from an August 29,2005
program aired in Saudi Arabia on Iqra TV, a Saudi-based station, which solicited
funds for the Saudi Committee for the Support of the al Quds Intifadah and asked
donors to direct funds to a Joint Account 98 at "all banks in the Kingdom of Saudi
Arabia." Account 98 had been a regular issue of concern that we have raised with
the Saudis at all levels. They have repeatedly assured us that Account 98 no
longer exists and that they are making efforts to staunch the flow of funds to these
groups. The U.S. shares Saudi Arabia's concern for meeting the humanitarian
needs of the Palestinian people, but it is vitally important for Saudi Arabia to act
resolutely against all terrorist organizations, and to cut off support for groups like
HAMAS intent on undermining progress towards peace and undermining the
Palestinian Authority.
CONCLUSION
There is no doubt that Saudi Arabia's perspective on counterterrorism has evolved
over the last few years, and with that change in perspective has come real progress
on systemic issues within the Kingdom. We encourage Saudi Arabia to make
greater efforts to counter terrorism and the financing of terrorism in third countries.
Such leadership requires a comprehensive, proactive, and zero-tolerance approach
to terrorism that includes widespread vigilance over global charities and wealthy
private donors, as well as total intolerance for support to all terrorist organizations.
We hope that Saudi Arabia accepts this challenge of leadership, and the greater
responsibilities that come along with it. As Saudi Arabia does so, we will be able to
say that we have entered into a new stage of our partnership in the war against
terrorism.
http://llLllLWu~treas.govJpress/releases/js3001.htm
12/1/2005
Page 1 of2
PRESS ROOM
November 8, 2005
2005-11-8-11-20-18-20308
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 $69,347 million as of the end of that week, compared to $70,911 million as of the end of the prior week.
I. Official U.S. Reserve Assets (in US millions)
QctobeL28,-~Q05
November 4.2QQ~
70,911
69,347
TOTAL
1. Foreign Currency Reserves 1
a. Securities
Euro
Yen
11,263
11,012
fETAL
Of which, issuer headquartered in the US.
b.i. Other central banks and BIS
5,3E1f
10,731
b.ii. Banks headquartered in the US.
I
I
b.iii. Banks headquartered outside the US.
II
II
b.iii. Of which, banks located in the U.S.
2. IMF Reserve Position 2
3
I
I
I
I
Stock
ther Reserve Assets
I
Yen
I
TOTAL
10,758
16,065
0
0
I
21,766
0
5,213
10,503
0
b.ii. Of which, banks located abroad
IiiO'd
Euro
11,008
0
b. Total deposits with:
3. Special Drawing Rights (SDRs) 2
I
,275
~
0
I
I
0
0
~
0
0
13,270
12,647
8,260
8,177
11,041
11,041
0
0
II
II. Predetermined Short-Term Drains on Foreign Currency Assets
November 4. 2005
October 28. 2005
I
1. Foreign currency loans and securities
I
I
Euro
II
II
Euro
TOTAL
Yen
II
0
I
Yen
I
I
TOTAL
0
2. Aggregate short and long positions in forwards and futures in foreign currencies vis-a-vis the U.S. dollar:
I
I
0
0
2.b. Long positions
0
0
3. Other
0
0
2.a. Short positions
II
III. Contingent Short-Term Net Drains on Foreign Currency Assets
QctobeJ'
I
Euro
I
28._20_0~
Yen
I
Jl,!ovember 4>-20_05
TOTAL
I
Euro
Yen
0
1. Contingent liabilities in foreign currency
TOTAL
0
1.a. Collateral guarantees on debt due within 1
year
I
I
tp:lltreas.govJpressireleasesI20051181120 1820308 .htm
I
1/
I
1211000"
Page 2 of2
11.b. Other contingent liabilities
II
II
2. Foreign currency securities with embedded
options
II
I
3. Undrawn, unconditional credit lines
0
I
I
3.a. With other central banks
3.b. With banks and other financial institutions
II
Headquartered outside the U.S.
~ Aggregate short and long positions of options
I"
"
I
I
II
I
I
I
Currencies vis-a-vis the U.S. dollar
II
1
I
II
I
0
0
I
14.a.1. Bought puts
I
14.a.2. Written calls
II
0
"
1
foreign
14.a. Short positions
II
I
I
0
Headquartered in the U. S.
13.e. With banks and other financial institutions
II
I
I
I
I
I
4.b. Long positions
4.b.1. Bought calls
4.b.2. Written puts
Notes:
11 Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account
(SOMA), valued at current market exchange rates. Foreign currency holdings listed as securities reflect marked-to-market values, and
deposits reflect carrying values. Foreign Currency Reserves for the latest week may be subject to revision. Foreign Currency
Reserves for the prior week are final.
21 The items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF and are
valued in dollar terms at the official SDRldoliar 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.
31 Gold stock is valued monthly at $42.2222 per fine troy ounce.
tp:lltreas.gov/jttess/releases/200S1 I ~1 }20 1820308.htm
12/1/2005
Page 1 of2
PRESS ROOM
10 view or prmt tne /-,UI- content on tn/S page. Clown/oaCi tne tree AClobe(O) Acrobat\R) HeaCfeN9.
November 9,2005
JS-3012
Treasury Designates Violent Colombian Drug Lord
Action Additionally Targets Four Companies, Ten Associates of North Valle
Cartel
The U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC)
today named Colombian Wilber Varela, a.k.a. "Jabon," as a principal Specially
Designated Narcotics Trafficker (SDNT) of the North Valle drug carte/. The
Treasury also identified four companies and ten other North Valle associates,
including rising North Valle cartel leaders Eduardo Restrepo Victoria, a.k.a. "EI
Socio" and Ramon Quintero San clemente. Today's action was taken pursuant to
Executive Order 12978, which applies economic sanctions against Colombian drug
cartels.
"An assassin turned drug lord, Varela's trafficking and lethal exploits are fueled
through the North Valle cartel's financial flows," said Robert Werner, OFAC
Director. "This designation directly targets a financial nucleus of the notorious North
Valle cartel."
In May 2004, the District Court for the District of Colombia charged the leaders of
the North Valle cartel, including Wilber Varela, with Racketeer Influenced and
Corrupt Organizations Act (RICO) violations. The District Court for the Eastern
District of New York separately indicted Varela on narcotics trafficking charges.
Considered extremely dangerous, Varela is a former assassin who rose to become
a North Valle cartel leader by killing competing rival cartel leaders. The United
States is offering up to $5 million for information leading to his arrest.
Ramon Quintero Sanciemente and Eduardo Restrepo Victoria are rising North Valle
traffickers associated with Varela. In 1999, the Southern District of Florida indicted
Ramon Quintero Sanclemente, a.k.a. Lucas, on narcotics trafficking and money
trafficking charges. Restrepo Victoria is wanted by Colombian authorities on
conspiracy and gunrunning charges.
Also named today are four companies owned and controlled by Varela associates.
They include a plastics company, an agricultural company and a professional
services firm, all based in Colombia. A Guadalajara, Mexico travel agency is also
named.
Today's announcement is a result of the ongoing efforts between OFAC and U.S.
law enforcement, particularly the Drug Enforcement Administration and the Federal
Bureau of Investigation.
Today's action freezes any assets the designees may have located in the United
States and prohibits all financial and commercial transactions between the
designees and any U.S. person.
1,230 companies and individuals in Aruba, Colombia, Costa Rica, Ecuador, Mexico,
Panama, Peru, Spain, Vanuatu, Venezuela, the Bahamas, the British Virgin Islands,
and the Cayman Islands, have been designated pursuant to E.O. 12978. The 464
SDNT businesses include agricultural, aviation, consulting, construction,
distribution, financial. investment, manufacturing, mining, offshore, pharmaceutical.
real estate, service and travel firms. The SDNT list includes 19 drug kingpins from
the Cali, North Valle, and North Coast drug cartels in Colombia, including newly
named North Valle cartel leader Wilber Varela.
tp://treas.gov/f:Jl'ess/releases~3012.htrn
12/1/2005
Page 2 0[2
For a complete list of individuals and entities designated today, please visit:
IlJtp:lIwww.treasury .gov/offi ces/enforcement/ofac/actions/200 511 09,shtml.
REPORTS
• Varela Drug Trafficking Organization North Valle Drug CartQI November
2005
p:lltreas.gov/pcess/refeases~012.htm
121112005
VARELA Drug Trafficking Organization
North Valle Drug Cartel
November 2005
Department of the Treasury
Office of Foreign Assets Control
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Narcotics Trafficking
May 2004
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RICO
May 2004
Wilber VARELA
DOB 6 November 1954
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ASSOCIATES
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CALLE SERNA
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Julio Cesar
LOPEZ PENA
DOB 25 June 1961
c.c. 16655942
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DOB 17 Dec 1958
C.c. 7527342
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QUINTERO SANCLEMENTE
DOB 30 Nov 1960
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Jaime Alberto MARIN ZAMORA/ NIT # 801000358-7
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Norma Constanza
RESTREPO VICTORIA
DOB 5 Jan 1968
c.e. 55060642
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Eduardo
RESTREPO VICTORIA
DOB 28 Sep 1958
C.c. 12187343
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AGROPECUARIA
PALMA DEL RIO S.A.
Ibague, Colombia
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RESTREPO VICTORIA
DOB 4 Dee 1949
c.e.41477630
Page 1 of 4
PRESS ROOM
November 10, 2005
js-3013
Remarks by Secretary Snow
U.S. Treasury Secretary John Snow
Delhi, India
Hosted by FICC!, AmCham, USIBC
"Opportunities for Indo-U.S. Economic Ties"
Thank you. It is a great pleasure to be with you today. I would like to
thank my hosts, Mr Kanwar from the Federation of Indian Chambers
of Commerce and Industry, Mr. Singh of the American Chamber of
Commerce, and of course, Torkel Patterson. I also want to thank my very good
friend, Minister Chidambaram, and the Prime Minister, for hosting my delegation
this week.
Before I begin my remarks I first want to offer my deepest condolences for
the losses India has faced in the tragic attacks that occurred here most
recently on October 29th. The U.S. condemns the triple terrorist attacks
perpetrated on innocent civilians and we stand with India in efforts to
fight against terrorism. The news of bombings in Jordan also serves as a
reminder that our constant vigilance against terrorism is needed.
I also want to express my condolences for the loss of your former president,
Kocheril Raman Narayanan His long and distinguished service to the people of
India is truly remarkable.
This is an important time for relations between our two nations. Our strong
Indo-U.S. relationship continues to gain significance in many aspects and at
no time in our history have our relations been stronger and deeper than they
are today. As countries with strong democratic traditions -- India is the
world's largest democracy, while the United States is the world's oldest -we share a common vision of the importance of democratic institutions and
the inherent wisdom of our citizens. We share respect for a free and open
press and respect for the rule of law. Our political and security
cooperation is growing, as reflected in the agreements reached with Prime
Minister Singh and President Bush in July that ranged from cooperation in
agriculture technology and aviation to the civil nuclear sector. Moreover,
I am proud to say that over 2 million people of Indian heritage call the
United States their home, likely more than in any other country outside of
India, and hundreds of thousands of young Indians come to study in the U.S.
Our bilateral economic engagement has also expanded significantly in the
last decade to the benefit of both India and the United States. Both
America and India rely on private enterprise to generate economic growth.
America is India's largest trading partner. I was told a remarkable fact
this week in meetings with Indian investors that about 80% of private equity
funds in India come from the United States.
Foreign direct investment has been growing in India. But it's important to
recognize that the potential here has only been glimpsed. Looking ahead
15-20 years, the U.S-Indian economic relationship should become a key pillar
of strength for both our countries and for the global economy.
I have had the opportunity to meet with India's leaders, both here this
week, and in our bilateral meetings in Washington and elsewhere, and it's
p:lltreas.gov/press/releases/js3013.htrn
12/1/2005
Page 2 of 4
clear to me that there is a firm commitment to pushing forward on economic
reforms to improve the standards of living for Indian citizens. India is
truly fortunate to have such talented economic officials to lead this
economy. I have come here to work with India's economic officials and to
encourage continued progress. I am here to listen, to learn more about
India's goals and strategies for achieving success, and how we can help each
other. And I want to highlight America's great interest in seeing India
succeed. India's success is important for India, but it is also important for
America.
I look forward to reporting back to President Bush with ideas on how to
further strengthen our relationship in advance of his visit next year.
Since 1991, India has made great strides in shaking off the legacy of a
state-dominated economic system, and this has translated into steady, strong
growth rates. India's economic leadership, from successive governments, has
moved ahead with policies to liberalize and modernize the Indian economy,
and this has shown real results. It's no secret that good policies tend to
lead to good results. India has been able to put in place a stable
macroeconomic environment, with inflation under control. Foreign exchange
reserves have grown significantly and India has pursued an enlightened
policy allowing flexibility of its currency. And while further development
and liberalization of India's financial services sector would be helpful,
the central bank has put in place good supervisory policies so that Indian
banks do not face the same systemic risks we see in other emerging market
economies.
India's privatization policies are helping to lead to efficient markets that
provide better goods and services to consumers at the best price. I was
pleased to see the announcement this week to liberalize the
telecommunications sector. Progress in the retail sector could also bring
benefits.
Real progress has also been made in India's equity markets. Earlier this
week I visited the National Stock Exchange and the National Commodities and
Derivatives Exchange. I was greatly impressed by the talent and technical
capacity of these very important markets. They will add immeasurable value
to the Indian economy and playa significant role in directing capital to
its best uses. It is this combination of dynamism and efficiency that help
to create growth and prosperity.
India's natural advantages make it poised to take a leading role in the
global economy. In fact, India has the potential to be an economic
powerhouse. India's population will continue to provide new sources of
labor, well after European, Japanese, and even Chinese labor resources begin
to wane. Indians are properly focused on future job creation for this labor
pool, and the investments that India is making now in primary education will
pay dividends in the years to come, as more people can participate in the
knowledge economy. And, India's widespread English-language skills give it
a key edge in the global marketplace. Finally, I would point to India's
democratic tradition as providing important political legitimacy and
stability.
The achievements in India are significant, but there is so much more to
accomplish. I have heard the sentiment that so much progress has been made
that now it is time to slow the pace of reforms in India. The pace of
reforms will be decided by India's economic leaders and the demands of the
global economy, but I think it's important to recognise that there are costs
to going too slow. With huge segments of the population unemployed,
underemployed and living in poverty, more rapid growth is an imperative.
Furthermore, when reforms are rapid in some sectors of the economy but
slower in others, not only are there lost opportunity costs, but risks can
develop that can threaten an economy. Reforms in all sectors must
"catch-up" to keep pace and prevent distortions.
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Page 3 of 4
I believe India could and should playa major and productive role on the
international economic stage. India should be at the forefront of large
emerging markets, demonstrating how such economies can contribute to global
growth and reap significant benefits. In this context, India now has a
unique opportunity to become a leader in the effort to open world markets by
taking a proactive negotiating position in the Doha round in favor of
liberalized agriculture, manufacturing and services sectors. The World Bank
has estimated that India would be one of the largest beneficiaries from a
successful Doha round, but these gains will not be forthcoming if the Doha
round fails due to unambitious offers.
To support additional foreign trade, India also faces challenges at home.
As the government has recognized, weak infrastructure is a major constraint
on trade and growth in India. In a recent survey of worldwide corporate
leaders by McKinsey, about 60% of Indian executives cited infrastructure as
a significant constraint on growth, compared to less than a quarter of
executives worldwide. To meet the government's goal of raising average
annual GDP growth from 6.5% to 8%, the IMF estimated that an additional 4%
of GDP in annual infrastructure investment will be required. The public
sector alone will not be able to finance such investments, so activating
private resources is essential.
I think there is a real opportunity here to help India meet its goals. The
financial sector could playa much more important role in supporting growth
in India, especially in infrastructure. The same McKinsey survey noted that
about half of Indian executives cite the lack of access to capital as a
significant hindrance on growth. And, I expect the percentage would be
higher for small and rural enterprises. Indeed, only about half of small
businesses in India have active bank credit lines, compared with 75% of
small businesses in Brazil. The relatively high price of capital in India
is part of the reason that India's services sector, which requires less
capital, has grown more quickly than manufacturing. It is striking that
India's service sector is about 55% of GDP while industry is only 23%. In
China, industry is a whopping 53% of GDP, compared with services of 33%.
While there is no preferred ratio, these figures point to distortions in
both the Indian and Chinese economies.
A focus of my visit this week has been to underscore the role that financial
sector reform can play in helping this nation achieve its goals in building
infrastructure. India's pool of domestic savings has been rising in recent
years and will likely continue to do so. The key will be to use market
mechanisms to channel such savings into financial institutions that can
on-lend them efficiently to productive uses. Currently, bank deposits
represent only about 60% of GDP, compared with levels in Japan and China
that are 2-3 times higher.
Even after deposits flow into the financial system, they are often not put
to the most productive use. Government borrowing is having the effect of
crowding out lending that could be made to the private sector. Of their
deposit base, Indian banks have put over 40% into government bonds. Further
progress in meeting the fiscal responsibility law would help to reduce
crowding out, and reining in state level deficits is necessary to further
free up resources for the private sector.
In my view, additional liberalization of the Indian financial sector would
also go a long way towards addressing India's pressing needs. In the banking
sector, for example, allowing for more engagement by foreign banks would add
capital to the banking system, spread credit availability, bring in
additional managerial expertise and technology, and result in more capital
being channeled to more productive investments. Some may argue that Indian
banks are not prepared for global competition. But India's banks have made
substantial improvements in their risk management abilities, and many of the
banks are eager to expand abroad to prove their competitiveness.
In a similar vein, liberalization of Indian markets in insurance, pensions,
and fund management would lead to the development of new sources of capital,
p://treas. gOY/press/releases/] s3013 .htm
12/1/2005
Page 4 of 4
provide new services for consumers, and deepen India's domestic capital
markets. India's insurance industry is an example of the positive effects
of competition. Liberalization has led to impressive growth in insurance
markets. In 2004, Indian insurance companies mobilized over $21 billion,
nearly three times as much as in 1999. This kind of capital mobilization
provides crucial resources for investment in infrastructure, businesses,
long-term bonds, and municipal projects. I welcomed the move yesterday to
allow more foreign investment in asset recovery companies.
Many of these policies would be self-reinforcing. A stronger financial
sector, combined with steps like the liberalization of the retail sector and
more effective use of technology in the agricultural sector, would
jump-start a surge in investments in India throughout the agriculture and
food processing sectors that would add jobs and increase productivity.
Part of strengthening the financial sector involves protecting it from abuse
from criminals and potential terrorists. India has taken a significant step
forward this year with the enactment of the Prevention of Money Laundering
Act. To meet international standards, India will need to aggressively
implement its provisions and address some deficiencies that hamper its
effectiveness. In addition, proper regulations need to be developed for
informal financial systems such as hawala as risks for illicit financial
facilitation in this sector remain high.
India also faces challenges in improving its investment climate. The World
Bank's recent study on "Doing Business" around the globe puts India at 116
out of 155 countries. This is 25 slots below China and just below
Indonesia and Philippines. One problem is international trade. It takes
three times as many official signatures to export a good from India than it
takes to export one from China. As McKinsey argued several years ago, India
could raise its growth rate by nearly 5 percent per year by removing product
and labor market distortions and reducing government ownership of
enterprises.
Conclusion
I have benefited from discussing these issues during my visit with many
Indians from the official sector, private sector and NGOs. India's leaders
are well aware of the economic challenges ahead and the policies that it
will take to increase sources of credit, finance infrastructure, and
integrate with the world economy, all of which are essential to support
growth, reduce poverty, and improve the lives of the Indian public.
I would like to end this speech by quoting one of my gracious hosts, Prime
Minister Singh. Just three months ago, he told an Indian audience that "we
must seize this moment and grab this opportunity. We need to have the
resolve to make our country prosperous. We must have the self confidence to
realize that we are second to none, that Indians are as good as the best."
With that spirit, India has a great future ahead of it, and we are ready to
be partners in your endeavors.
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121112005
Page 1 of2
November 9,2005
js-3014
JOINT STATEMENT
U.S.-INDIA FINANCIAL AND ECONOMIC FORUM
NEW DELHI
At the invitation of Indian Finance Minister P. Chidambaram, U.S. Treasury
Secretary John W. Snow led an official delegation to India to co-chair the India-U.S.
Financial and Economic Forum, which is part of the broader U.S.-Indian Economic
Dialogue. The delegations discussed a number of key issues, including fiscal and
tax policies, U.S. and Indian efforts to accelerate the INTO Doha Round
negotiations, strengthening India's infrastructure, and collective efforts to combat
money laundering and the financing of terrorism.
Besides senior officials from the Ministry of Finance, DEA, Government of India and
the Department of Treasury USA, representatives from the Board of Governors of
the Federal Reserve, Securities and Exchange Commission, U.S. Trade and
Development Agency, Reserve Bank of India, Securities and Exchange Board of
India, Insurance Regulatory and Development Authority, PFRDA, and the Ministries
of Commerce and Industry, Consumer Affairs and External Affairs participated in
the discussion.
The U.S. delegation expressed condolences for the tragic October 29 terrorist
attacks on Delhi.
In the official meeting, the discussions focused on the following:
Macroeconomic Issues
The two sides discussed a variety of issues that affect global growth. They noted
that global economic performance remains sound, despite the impact of rising oil
prices. In India, the growth outlook appears favorable. In the United States,
economic conditions remain solid, despite the aftereffects of recent hurricanes.
Nonetheless, both the sides noted several potential risks, including the impact of
energy prices, the tightening of financial market conditions, and uneven growth in
many parts of the world.
Both sides pointed to the need to maintain global growth while reducing global
current account imbalances. They noted that major economies have a shared
responsibility to implement policies to reduce these imbalances. In this connection
flexibility in exchange rate regime becomes crucial. The U.S. side affirmed its
commitment to reduce its fiscal deficit and to increase domestic savings. Though
the hurricane relief and recovery efforts are likely to raise the budget deficit in the
short term, the deficit outlook over the medium to long range is for steady declines
due to tight controls on discretionary spending and continued strong economic
growth. The Indian side affirmed its intention to pursue policies to maintain strong
overall demand.
Financial Sector and Infrastructure Issues
The delegations discussed India's efforts to strengthen its financial system, lower
the costs of financial intermediation and increase access to finance for agriculture,
small businesses and the poor. Both sides noted the importance of having a strong
insurance and pension sector in order to increase long term savings and the
availability of long-term financing. Indian officials emphasized their key priorities for
financial sector reform, including expansion of financial services to poor and
enhancing private sector capabilities. The delegations agreed to arrange further
consultations to share experience and expertise on these issues.
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121112005
Page 2 of2
Indian officials emphasized their commitment to infrastructure development as a
means of reducing poverty and expanding economic opportunities. While public
investment in infrastructure will be augmented, the delegations discussed ways of
encouraging more private financing for infrastructure projects. The Indian and U.S.
sides agreed that a stronger investment climate would encourage more U.S. private
sector firms to invest in Indian infrastructure development. Both sides underscored
the importance of an effective dispute mechanism that will give greater confidence
to investors.
International Cooperation
The two sides reiterated the importance of actions to identify and combat terrorist
financing and money laundering. They reaffirmed their intention to implement the
recommendations of the Financial Action Task Force (FATF) designed to prevent
the abuse of financial systems, and they agreed to work together to identify and
freeze terrorists' assets.
Both sides agreed to continue technical cooperation in the area of currency
security, including detection and enforcement. Preventing the counterfeiting of
national currencies is part of the fight against financial crimes and important to
maintaining the integrity of the financial system.
India and the United States stressed that a successful conclusion of the WTO Doha
Development Round negotiations is essential to promote global trade and growth.
They agreed that a satisfactory outcome on agriculture negotiations, as well as
services, would be crucial in this regard. They urged for progress at the upcoming
Hong Kong Ministerial.
DEA Secretary Ashok Jha and Ambassador D. Mulford signed a cooperation
framework agreement that will facilitate U.S. Trade and Development Agency
projects in India.
-30-
):lltreas.gov/~sslreleaseS/ls3U14.tmn
12/112005
Page 1 of2
November 14, 2005
2005-11-14-15-56-10-4586
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 $69,088 million as of the end of that week, compared to $69,347 million as of the end of the prior week.
I. Official U.S. Reserve Assets (in US millions)
~o,!,emQer A.
I
TOTAL.
I
11. Foreign Currency Reserves
1
la. Securities
IOf which, issuer headquartered in the US.
I
I
I
2005
NQyember 10. 2005
69,347
Euro
I
11,008
69,088
Yen = . TOTAL
10,758
21,766
I
Euro
Yen
TOTAL
10,922
10,774
21,696
I
0
I
0
I
15,649
b. Total deposits with:
Ib.i. Other central banks and BIS
Ib.ii. Banks headquartered in the US.
Ib.ii. Of which, banks located abroad
Ib.iii. Banks headquartered outside the US.
Ib.iii. Of which, banks located in the U.S.
12. IMF Reserve Position 2
13. Special Drawing Rights (SDRs) 2
I
I
I
I
I
10,503
15,716
I
I
I
II
II
I
0
I
5,220
!
0
I
I
0
0
0
0
0
12,573
II
II
I
II
I
8,129
11,041
I
11,041
0
I
0
8,177
I
15. Other Reserve Assets
10,429
0
12,647
I
II
II
II
I
14. Gold Stock 3
5,213
II. Predetermined Short-Term Drains on Foreign Currency Assets
November 10~_2005
November 4, 2005
Euro
Yen
11. Foreign currency loans and securities
:
TOTAL
Euro
Yen
0
tTO:AL
2. Aggregate short and long positions in forwards and futures in foreign currencies vis-a-vis the U.S. dollar:
2.a. Short positions
I
I
!2.b. Long positions
[3. Other
0
0
0
0
0
0
III. Contingent Short-Term Net Drains on Foreign Currency Assets
[
November 4, 2005
II
Euro
Yen
I
TOTAL
0
1. Contingent liabilities in foreign currency
I
I
!
November
Euro
I
I
1~005
Yen
I
I
TOTAL
0
1.a. Collateral guarantees on debt due within 1
year
I
I
p://treas.gov/O(ess/releasesf2OOjl 1 141556104586.htm
I
I
12/1/2005
Page 2 0[2
I
1.b. Other contingent liabilities
II
2. Foreign currency securities with embedd arl
~ns
Undrawn, unconditional credit lines
0
II
I
I
I
0
I
I
0
I
I
I
I
0
.a. With other central banks
13.b. With banks and other financial institutions
IHeadquartered in the U. s.
I
I
I
I
3.c. With banks and other financial institutions
Headquartered outside the U. s.
I
4. Aggregate short and long positions of options
in foreign
0
0
Currencies vis-a-vis the U.S. dollar
I
~a. Short positions
I
II
I
a.1. Bought puts
14.a.2. Written calls
14.b. Long positions
14.b.1. Bought calls
I
14.b.2. Written puts
I
Notes:
11 Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account
(SOMA), valued at current market exchange rates. Foreign currency holdings listed as securities reflect marked-to-market values, and
deposits reflect carrying values. Foreign Currency Reserves for the latest week may be subject to revision. Foreign Currency
Reserves for the prior week are final.
21 The items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF and are
valued in dollar terms at the official SDRldoliar 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.
31 Gold stock is valued monthly at $42.2222 per fine troy ounce.
http://treas.gov/press/releases/200511141556104586.htm
12/1/2005
Page 1 of 1
PRESS ROOM
1789
November 15, 2005
js-3015
lannicola Participates in Financial
Education Roundtable in London
Treasury's Deputy Assistant Secretary for Financial Education Dan lannicola, Jr.
participated in the International Comparisons of Financial Education Roundtable
Discussion today in London. lannicola gave a presentation on American financial
education followed by an open discussion on international comparisons of financial
literacy.
The event was hosted by the Organization for Economic Co-Operation and
Development (OECD) in conjunction with the Smith Institute, an independent think
tank. In addition to the roundtable, the OECD launched a report entitled, "Improving
Financial Literacy: Principles, Programs, and Good Practices." This report provides
international guidance to improve financial education. It also highlights the
importance of financial education, in terms of helping individuals budget and
manage their incomes, save and invest effiCiently and avoid becoming victims of
fraud.
"Around the world free markets allow people to set their own courses for the future.
Financial knowledge can help individuals navigate their way to better lives for
themselves and their families regardless of where they live," said lannicola. "Today,
representatives from some of the world's major economies have gathered here in
London to discuss what our nations have done and what we have learned as we
each seek to help our own country's people by enhancing their financial literacy.
The exchange of experiences and ideas will benefit all of us."
The Department of the Treasury is a leader in promoting financial education.
Treasury established the office of Financial Education in May of 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, homeownership 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.
http://treas.govJpress/releases/js3015.htm
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PRESS ROOM
November 15, 2005
JS-3016
Assistant Secretary for International Affairs
Clay Lowery
Testimony before the
Subcommittee on Domestic and International Monetary
Policy, Trade and Technology
Committee on Financial Services
U.S. House of Representatives
Chairwoman Pryce, Ranking Member Maloney, and distinguished members of the
subcommittee, thank you for inviting me to testify about trade in financial services.
This hearing is timely as we stand just a few weeks away from the WTO Ministerial
meeting in Hong Kong, which we hope will provide impetus to what we see as a key
element of the Doha Development Agenda, the negotiations on services, especially
financial services.
As Secretary Snow has explained, the three goals of the Administration's
international economic policy are to increase economic growth, increase global
financial stability, and advance U.S. interests. In many respects, nothing embodies
these goals more than our work to promote financial services liberalization in the
WTO and in other fora. This is what I would like to highlight in my testimony as well
as explain how Treasury is promoting an ambitious financial services agenda as
part of the Doha Development Round and as part of our everyday work.
Increasing Economic Growth and Promoting Financial Stability
The case for countries to liberalize trade in financial services is strong in both
theoretical and empirical literature. The financial sector is the backbone of a
modern economy with virtually every sector of the economy depending on its
services. Yet, in developing countries, the financial sector is typically small and
inefficient, possibly even controlled by a few large institutions with little incentive to
compete. This means that entrepreneurs, small business owners, farmers, and
other key drivers of employment and income creation either do not have access to
capital or if they do - it is extremely expensive and is not conducive to businesses
expansion.
While services account for over half of the world economy, and its share will grow
as countries develop, the barriers to services are still high because they were
outside the disciplines of the world trading system until the last set of global
negotiations, the Uruguay Round. As those barriers are lowered, competition
should increase and the benefits of a lower cost of capital and a better allocation of
resources to more productive uses should accrue, particularly to those developing
countries where the barriers are relatively high. For instance, World Bank studies
estimate that:
•
by 2015 the benefits of services liberalization in developing countries could
provide income gains four and a half times greater than the gains from
goods liberalization alone;
• countries with open financial services sectors grow, on average, one
percentage point faster than others, with the incremental growth rates being
somewhat higher for developing countries; and
• by 2015, the developing world would gain over $300 billion in annual
output, or an additional 2 percent of GDP, from financial sector
liberalization.
The benefits of financial services liberalization extend beyond economic growth,
however. The requests to WTO members by the United States for enhanced
foreign participation, national treatment, and greater regulatory transparency - as
http://treas.govJpress/releases/js3016.htm
12/1/2005
Page 20f4
will be explained in more detail by my colleague from USTR - also promotes
financial stability. Foreign participation in the financial sectors of developing
countries brings in strong new players that provide greater liquidity to the market,
greater loss-absorption capabilities, and enhanced risk management techniques.
The benefits of introducing global experience into the domestic market go far
beyond their direct impact. There is a transfer of skills to local workers who go off
to domestic firms where improvements in market practices are emulated. This kind
of qualitative benefit is harder to measure, but research has borne it out.
A WTO study of 27 emerging market countries found that allowing foreign financial
institutions to establish locally and engage in a broad spectrum of financial activities
contributed to greater financial sector stability. For banks in particular, a study of
financial crises in emerging markets in Latin America showed that during periods of
crisis, foreign banks established in those countries actually increased their local
lending relative to domestically-owned institutions. This is aided by such institutions
having an international capital base and not having concentrated pre-crisis lending
to the country involved, unlike domestic institutions in the affected countries.
A more competitive financial system also puts pressure on policy makers to make
regulatory and supervisory structures more predictable and transparent as well as
to follow sound macroeconomic policies, which are beneficial to economic growth
and financial stability.
Trade in financial services holds the promise of significant economic benefit for all
countries, including the United States. As I'm sure that some of the speakers in
your next panel will highlight, the financial services sector plays an indispensable
role in America, providing individuals, businesses, and the government with credit
and liquidity, short and long-term investments, risk-transfer products, various
payment systems, and depository services. The financial services sector is not only
a vital part of our economy -- accounting for over 8% of U.S. GOP - but it is a
sector growing in importance -- roughly 70% greater than it was in 1980. In 2004,
finance, insurance, real estate, rental, and leasing contributed more than any other
industry group to real GOP growth - about 25 percent. Finance and insurance
alone (excluding real estate, rental and leasing) are also key engines of job
creation: 6 million jobs (aboJ,It 4.5 p_ercentQf all emRloym~mt) and growing.
Financial services--from banking to asset management to insurance--represent one
of the most dynamic sectors of our economy. Consumers enjoy the convenience of
ATMs, online banking, and a host of other innovations that make financial
transactions cheaper and less time-consuming. Businesses today rely on a
sophisticated range of financial products to hedge risk and make their services
more competitive. The WTO negotiations provide an opportunity to eliminate
barriers in foreign markets to U.S. financial services firms. Improving the access of
U.S. financial institutions to foreign markets helps our exporters continue to expand
and develop new markets, building upon U.S. competitive advantage in the
provision of these services. U.S. firms have led the way in our economy and can
bring those innovations to developing countries.
We have been disappointed in the progress that has been made in the WTO on
financial services. At Treasury, we have worked with our colleagues at USTR,
State, and other agencies to heighten our engagement over the last year. In just
the past few months, led by Secretary Snow and Deputy Secretary Kimmitt,
Treasury has highlighted the development benefits of open financial sectors and
encouraged WTO members to put forward high-quality offers in multilateral fora -the G-7, G-20, IMF, World Bank, and APEC - and through bilateral discussions in
some of the most important developing markets -- Brazil, China, India, and Korea.
Multilaterally, we have made good progress, winning endorsement in each of these
key organizations for an ambitious Doha Round. Bilaterally, we have made some
progress, but much works remains to be done. The Hong Kong Ministerial is an
important milestone, but not the end of the road. We will continue to press for
further liberalization in services, especially financial services, through these various
fora. We will also continue to push this issue in our bilateral meetings with
economic leaders across a broad spectrum of countries.
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Page 3 of 4
Given the importance of further liberalization in services, especially financial
services, to the global economy, we have recognized the need to complement the
WTO discussions by advancing the cause of liberalization elsewhere. We do this
through bilateral and regional Free Trade Agreements (FTAs) and through financial
dialogues.
Bilaterally and regionally, the United States is conducting ongoing negotiations of
FTAs, which include state of the art financial services provisions. These are
making an important contribution to trade liberalization. Bilateral and regional FTAs
can lead to increased confidence in the benefits of liberalization both from countries
having made some of the hard choices that go with negotiating an FT A and from
directly experiencing the benefits. We have completed high standard financial
services chapters with Bahrain, Chile, Singapore, Morocco, and Australia to name a
few. We are negotiating with Thailand, the Andeans, Panama, the Southern African
Customs Union (SACU) and UAE. These agreements have provided our industry
with substantial new opportunities in many cases and in others locked in the open
regimes of our trading partners. For instance, beginning in July of this year, U.S.
banks will be able to obtain licenses in Singapore for full services banks that were
restricted prior to the FTA. In the first year of the Singapore and Chile FTAs, U.S.
exports to those countries together increased by $4 billion. More broadly, the
Administration has achieved more than $64 billion in tariff reduction commitments in
its FTAs.
For several years, the Treasury Department and U.S. financial regulators have
been conducting dialogues with our counterparts from a number of countries with
three important objectives in mind. One is to promote a stronger global economy,
because dynamic financial markets that are soundly regulated have been proven
both in our historical experience and throughout the world to stimulate competition,
discipline economic agents, enhance opportunities afforded savers and investors,
and to drive growth. Two is to encourage movement toward more competitive,
better regulated financial regimes abroad, which enhance global financial stability.
Three is to find ways to mitigate actual or potential cross border frictions in the
financial services realm. In support of these dialogues and our ongoing work on
financial services liberalization, we routinely reach out to U.S. private sector
financial officials and trade associations for their input and expertise. Let me make
brief remarks about a few of these dialogues.
u.S.-Canada-Mexico: Treasury and U.S. regulators have been discussing financial
sector issues with our NAFTA partners for the past eleven years since the trade
agreement was signed. Much has been achieved, such as the opening up of
foreign branch banking in Canada or Mexico's receptivity to foreign investment in its
banking sector, which has been key in restoring it to good health--although more
needs to be done.
U.S.-Japan Dialogue: The United States has an active financial dialogue with
Japan, the world's second largest economy. Our efforts in this dialogue and in
financial services broadly have been aided by the presence of a Treasury attache in
Tokyo. In recent years, our discussions have focused on banking sector stability as
Japan's Financial Services Agency tightened financial supervision, focused on
resolving non-performing loans, improved the quality of bank capital, and inspected
banks more thoroughly. The financial dialogue also has taken up the reform of
Japan Post as part of the U.S. Administration's broad engagement with Japan on
this issue. It is important that these reforms promote financial system stability and
establish a level playing field so that private firms are not competitively
disadvantaged.
U.S.-China Dialogue: In October, Secretary Snow led the 17th U.S.-China Joint
Economic Committee meeting, which this year included Chairmen Greenspan, Cox,
and Jeffery from the Federal Reserve, SEC, and CFTC, respectively, and their
Chinese financial sector regulatory counterparts. In addition, Treasury convened
the first Financial Sector Working Group bringing together working level officials
from U.S. banking, securities, and insurance regulators with their Chinese
counterparts for a day of informal discussion. This builds upon ongoing U.S.
Administration outreach to China on financial services regulatory issues. We
argued for better market access for foreign firms so they can contribute to
improving the capital levels and risk management systems of Chinese financial
http://treas.govJpress/releases/js3016.htm
12/1/2005
Page 4 of4
sector. We also discussed numerous regulatory issues of concern to both the
Chinese and our financial firms, such as cleaning up the Chinese banking sector,
addressing problems in equity and bond markets, and improving insurance
regulation. These efforts will be carried forward in the new year both with continued
efforts from Washington and by our newly appointed attacM in Beijing.
U.S.-EU Dialogue: The U.S.-EU Financial Markets Regulatory Dialogue has
focused on measures designed to further integrate EU financial markets, which,
according to studies, could lift EU real economic growth by as much as one
percentage point. Through its low-key and informal approach, this dialogue has
been useful in managing issues that arise when legislation enacted in one
jurisdiction has "spillover effects," in the other's jurisdiction, potentially creating
uncertainty for enterprises. Moreover, the U.S.-EU Dialogue provides a forum for
the Administration to advance the interests of U.S. financial firms that would thrive
in the more competitive environment offered by a unified EU financial market.
Going forward, Treasury intends to place an attache in Brussels whose focus will
include the dialogue and financial market integration more broadly.
U.S.-India: Secretary Snow returned last week from a trip to India, where he met
with the Indian Finance Minister, Central Bank Governor, and other senior
government and business leaders on a dialogue on financial, investment, and trade
issues. This complements broader U.S. Administration outreach to India on trade
and investment issues. They discussed additional liberalization of the Indian
banking. insurance. pension, and fund management sectors, the need to strengthen
and protect the financial sector against abuse, and the benefits to India from
improving the investment climate. These and other challenges are the essential
pillars to support sustainable growth, reduce poverty, and increase incomes. Going
forward, we look to continuing this important and useful dialogue with India.
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12/112005
Page 1 of 1
PRESS ROOM
November 15, 2005
JS-3017
Statement by Treasury Secretary Snow on PBGC FY 2005 Financial Results
"Today's announcement of the Pension Benefit Guarantee Corporation's (PBGC)
fiscal year 2005 financial results reminds us that action to reform America's pension
system cannot wait any longer. We must act to protect the 34 million American
workers who depend on single employer defined benefit pension plans and to
protect the American taxpayers who risk bearing the consequences of underfunded
pension plans."
"America's pension plans are now underfunded by more that $450 billion dollars
and the PBGC is at least $23 billion short of what it owes to workers and retirees.
The Administration has proposed real pension reforms that will secure the pension
promises made to America's workers, will encourage continued participation in the
voluntary pension system by healthy plans and will improve the financial status of
the PBGC. I appreciate the attention given by the Congress to this important issue
and I look forward to continuing to work with lawmakers to enact meaningful
reforms that will strengthen our pension system for the future."
http://treas.govJpress/releases/js301 7.ntm
12/112005
Page 1 of 1
PRESS ROOM
November 15, 2005
js3018
Statement by Secretary John Snow on DeMint-Santorum Social Security
Legislation
"I applaud today's efforts in the Senate to bring Social Security personal account
legislation up for consideration by the full Senate."
"Passage of this legislation sponsored by Senators DeMint, Santorum and others
would be a positive first step to a strengthened Social Security system, establishing
voluntary personal accounts and protecting Social Security money from being spent
on other government programs."
"The President is committed to fixing Social Security permanently so that it remains
strong for our children and grandchildren. The longer we wait for legislative action
to comprehensively fix Social Security, the more difficult our choices will be."
http://treas.govJpress/releases/js301~.htm
12/112005
Page 1 of2
PRESS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
We recommend printing this release using the PDF file below.
To view or print the PDF content on this page. download the free AdolX:(p,J Ac[oqa/0) N9adQrl~),
November 16, 2005
JS-3019
Treasury International Capital Data for September
Treasury International Capital (TIC) data for September are released today and posted on the U.S. Treasury web site (www.treas.gov/ti
date, which will report on data for October, is scheduled for December 15, 2005.
Net foreign purchases of long-term securities were $101.9 billion .
•
Net foreign purchases of long-term domestic securities were $118.1 billion, $4.3 billion of which were net purchases by foreign (
$113.8 billion of which were net purchases by private foreign investors.
• U.S. residents purchased a net $16.2 billion in foreign issued securities.
Foreigners' Transactions in Long-Term Securities with U.S. Residents
(Billions of dollars, not seasonally adiusted)
12 Months Through
Jun-
Jul-
2003
2004
Sep-
Sep-
13526.0
12806.1
15178.9
14262.5
14514.5
13647.9
16877.4
15866.3
1530.1
1435.2
1279.0
1177.9
3 Domestic Securities Purchased, net (line 1 less line
719.9
916.4
866.6
1011.1
94.9
101.0
4
5
6
7
8
Private, net /2
Treasury Bonds & Notes, net
GOy't Agency Bonds, net
Corporate Bonds, net
Equities, net
585.0
159.7
129.9
260.3
35.0
680.8
150.9
205.6
298.0
26.2
621.8
156.0
159.4
282.4
23.9
872.5
218.1
221.0
346.4
87.0
71.9
-0.9
17.1
51.9
3.8
90.7
24.9
32.1
23.3
10.3
9
10
11
12
13
Official, net
Treasury Bonds & Notes, net
GOy't Agency Bonds, net
Corporate Bonds, net
Equities, net
134.9
103.8
25.9
5.4
-0.3
235.6
201.1
20.8
11.5
2.2
244.8
208.7
26.3
9.4
0.4
138.6
90.7
28.8
17.5
1.7
23.0
16.7
3.2
2.6
0.6
10.4
3.6
5.7
1.4
-0.3
2761.8
2818.4
3123.1
3276.0
3064.4
3200.7
3438.9
3592.4
307.9
321.0
273.3
287.1
16 Foreign Securities Purchased, net (line 14 less line
-56.5
-152.8
-136.3
-153.5
-13.1
-13.8
17
18
32.0
-88.6
-67.9
-85.0
-62.2
-74.2
-35.4
-118.1
-1.2
-11.8
-5.1
-8.7
1 Gross Purchases of Domestic Securities
2 Gross Sales of Domestic Securities
14 Gross Purchases of Foreign Securities
15 Gross Sales of Foreign Securities
Foreign Bonds Purchased, net
Foreign Equities Purchased, net
http://treas.goYJpress/releaseS/j s3019 .htm
12/1/2005
~-3019 -
Trea:8ttPY JntcmutiUIfftt CllJ1ital Data for September
19 Net Long-Term Flows (line 3 plus line 16)
11
/2
/3
Page 2 0[2
663.3
763.6
730.31
857.6
81.8
87.3
Net foreign purchases of U.S. securities (+)
Includes International and Regional Organizations
Net U. S. acquisitions of foreign securities (- )
REPORTS
http://treas.govJpress/releases/js3019.htm
12/1/2005
DEPARTMENT OF THE TREASURY
OFFICE OF PUBLIC AFFAIRS
Embargoed Until 9 a.m. EST
November 16, 2005
Contact:
Brookly McLaughlin
(202) 622-1996
TREASURY INTERNATIONAL CAPITAL DATA FOR SEPTEMBER
Treasury International Capital (TIC) data for September 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
October, is scheduled for December 15,2005.
Net foreign purchases of long-term securities were $101.9 billion.
•
Net foreign purchases of long-term domestic securities were $118.1 billion, $4.3 billion of
which were net purchases by foreign official institutions and $113.8 billion of which were
net purchases by private foreign investors.
•
U.S. residents purchased a net $16.2 billion in foreign issued securities.
Foreigners' Transactions in Long-Term Securities with U.S. Residents
(Billions of dollars, not seasonally adjusted)
1
2
3
Gross Purchases of DomestIc Securities
Gross Sales of Domestic Securities
Domestic Securities Purchased, net (hne I less line 2) II
12 Months Through
Sep-04
Sep-OS
lun-OS
lui-OS
Aug-OS
2003
2004
13S26.0
12806.1
719.9
IS178.9
14262 S
916.4
14S14.5
136479
866.6
16877.4
15866.3
1011.1
1530.1
143S.2
94.9
1279.0
1177.9
101.0
14146
1326.7
87.9
90.7
24.9
32.1
23.3
10.3
83.5
25.0
16.9
38.1
36
113.8
22.9
4.3
-1.1
2.2
2.2
1.0
SeD-OS
16S6.S
1538A
118.1
4
S
6
7
8
Private, net 12
Treasury Bonds & Notes, net
GOy't Agency Bonds, net
Corporate Bonds, net
Equities, net
585.0
IS9.7
129.9
260.3
35.0
680.8
1509
2056
2980
26.2
621.8
156.0
1594
872.5
218.1
221.0
282A
346A
23.9
870
71.9
-0.9
17.1
51.9
3.8
9
10
II
12
13
Official, net
Treasury Bonds & Notes, net
GOy't Agency Bonds, net
Corporate Bonds, net
EquitIes, net
134.9
103.8
25.9
5.4
-03
235.6
2011
20.8
11.5
2.2
244.8
208.7
26.3
94
138.6
90.7
28.8
17.5
1.7
23.0
16.7
3.2
2.6
06
10.4
3.6
5.7
-03
4.4
3.2
-1.2
2.1
03
27618
2818.4
-56.5
3123.1
3276.0
-152.8
3200.7
-136.3
3438.9
3592.4
-153.5
307.9
3210
-13.1
273.3
2871
-13.8
311.7
310.6
1.1
318.9
335 1
-16.2
32.0
-88.6
-67.9
-85.0
-622
-74.2
-3S.4
-118.1
-1.2
-11.8
-5.1
-8.7
17.1
-16.0
-9.1
-7.0
663.3
763.6
730.3
857.6
81.8
87.3
89.0
101.9
14
IS
16
17
18
Gross Purchases of Foreign Securities
Gross Sales of Foreign SecuritIes
Foreign Securities Purchased, net (line 14 less line IS) 13
Foreign Bonds Purchased, net
Foreign Equities Purchased, net
19
Net Lon2-Term Flows (line 3 plus line 16)
II
Net foreign purchases of US. securities (+)
Includes International and RegIOnal Organizations
Net US acquisitIOns offoreign securities (-)
12
13
OA
3064A
1A
18A
48.9
23.6
Page 1 of 1
PRESS ROOM
November 16, 2005
js-3020
Statement of Secretary John W. Snow
on Terrorism Insurance Legislation
"I'm pleased to see that actions today in the Senate to extend the Terrorism Risk
Insurance Act recognize the temporary nature of the program and place terrorism
insurance on the right path to full private market participation.
'Treasury set out principles this summer to ensure that the risk to taxpayers was
reduced in any extension of the Act. I support the legislation passed by the Senate
Banking Committee today as it meets many of those important goals. I commend
Chairman Shelby, Ranking Member Sarbanes and the Committee for producing a
commonsense bipartisan product based on input from all interested parties.
"As Congress proceeds on legislation to extend TRIA, we will continue to work with
both the House and Senate to ensure the program entails greater participation of
the private market and less risk for taxpayers."
-30-
http://treas.govJpressireleases/js3020.hrID
12/1/2005
Page 10f3
PRESS ROOM
November 17, 2005
JS-3021
The Honorable John W. Snow
Prepared Remarks to the Tax Foundation
Good afternoon. Thank you so much for having me here today. With a number of
critical tax issues pending on Capitol Hill, this is a great time for us to discuss just
how important it is that we keep our economy on the right path.
There has been much discussion in the halls of congress in the past few days about
the extension of Federal tax rates on capital gains and dividends. I'd like to take
some time this morning to talk with you about the important role lower tax rates
have played in strengthening our economy and creating jobs and the vital need to
keep tax rates, on capital gains and dividends in particular, low to ensure continued
economic growth in the future. Millions of Americans have benefited from these
important tax policies either directly - through lower taxes - or indirectly through
new and better jobs and greater economic security for families.
To offer some perspective on where we are today, I'd like to begin by taking a look
back to where we were three years ago. We were facing an economy that was
really underperforming. Economic growth was very weak. Job growth was
stagnant. Businesses were extremely reluctant to invest. We were coming off a
period where the economy was struggling to recover from a recession and a rapid
succession of shocks that included the bursting of the equity bubble, terrorist
attacks, and a loss of business and investor confidence in light of corporate
accounting scandals.
President Bush, to his great credit, recognized that fundamental tax relief was
necessary to generate strong growth and restore confidence -- and that it had to be
long-lasting. I remember the conversations we had both before and shortly after I
took this job where we agreed that the tax code could be employed to put the
economy on a path for economic growth and job creation.
What the President understood was that if we could keep marginal tax rates low
and reform our tax system in ways that would encourage investment, the U.S.
economy would take off. In particular, the President believed that if we could lower
the cost of capital, we would encourage higher investment, which would lead to
greater capital formation, and increased job growth.
This was really an historic, landmark moment: for the first time in many years, a
President put on the table a discussion about the role of capital in our economy and
how the tax code could be put to work to make this economy work better. First, we
brought tax rates down for all Americans, making sure that individuals had more
money in their pockets. Then, in 2003, we worked cooperatively with leaders in
Congress to pass the tax plan we needed with provisions to reduce the tax on
capital gains and on dividends paid to shareholders to 15 percent.
Since the spring of 2003, when the President signed this tax relief legislation into
law, our economy has tested the President's view that if we put more money in the
pockets of working Americans and reduce taxes on investment, the result would be
a stronger economy and millions of new jobs. The results have been clear. The
U.S. economy today is performing as strongly as anyone could have anticipated:
4.2 million new jobs have been created. Real per capita income is up and the
equity markets have rebounded. A couple of weeks ago we learned that the
American economy grew at an impressive 3.8 percent rate for the third quarter of
this year, making it the tenth straight quarter that the American economy has grown
at a healthy rate of 3.3 percent or more.
It's no coincidence that it was ten quarters ago that the President's tax reform plan
)://treas.gov/pJess/releases/]s3021.tmn
12/1/2005
Page 2 of3
took effect.
Lower taxes - especially those that lower the cost of capital and encourage
investment -- combined with sound monetary policy from the Federal Reserve, set
American entrepreneurs free to do what they do best: innovate, invest, grow the
economy, and create jobs.
The debate in Congress today is whether to keep or jettison key ingredients to
continued economic growth and job creation such as reduced tax rates on capital
gains and dividends. To me, the choice is obvious: failure to extend these tax
reforms would take us in the wrong direction, and would have negative
consequences for our economy. Americans expect and deserve that we do
everything we can to keep our economy growing, promote innovation, spur the
creation of new and better jobs and keep the promise of a more prosperous future
for all Americans.
President Bush's plan to lower the cost of investing through reduced rates on
capital gains and dividends has resulted in broad benefits to the U.S. economy
overall and for the tens of millions of Americans who own stocks either directly or
through mutual funds. The number of households owning equities through
employer-sponsored plans - which often offer stock mutual funds as investment
options - has grown from 5.2 million in 1999 to nearly 38 million today.
The American Shareholders Association estimates that S&P 500 shareholders will
receive $201 billion in regular dividend payments this year - a 36% increase over
2002, the year before the President's tax reductions on dividends took effect. If you
combine the tax savings to investors with the increased dividends, S&P
shareholders alone received an additional $98.7 billion from America's corporations
than before the tax plan.
The dividend tax reduction reversed a 25-year decline in companies paying
dividends to their shareholders. Seventy-seven percent of S&P companies now
pay a dividend, nearly a 9 percent increase.
More than just lowering the tax burden, reducing the tax rate on dividends had an
additional, fundamental benefit by reducing the disparity in the tax treatment
between debt and equity financing. Before the reform, the bias in capital markets
was tilted toward debt financing because of the tax code. While there is still a bias
toward debt financing - only elimination of the double-taxation of dividends would
completely eliminate the bias - it has been significantly reduced. This reform is
helping to reduce distortions in capital markets and is helping more companies to
make more sound financing decisions by reducing distortions caused by the bias in
the tax code.
One argument that was made against the President's tax plan was that it would be
too expensive, costing the government too much revenue. But the facts since 2003
have shown that the economic growth spurred by the President's tax policies have
significantly swelled government coffers. In January 2004, for example, the nonpartisan Congressional Budget Office projected that 2004 revenue would be $1.817
trillion. Actual revenue came in $63 billion higher - half a percent of GDP. In
January 2005, CBO projected 2005 revenue would be $2.057 billion; actual
revenue came in $96 billion higher - 0.7 percent of GDP.
We still have a federal budget deficit - one that is too large and that the President is
firmly committed to reducing. But our deficits are not the result of lower receipts tax revenue continues to be strong. Our deficits are overwhelmingly the result of
the recession we inherited and necessary increases in spending to fight the war on
terror. Deficits matter and one of our highest priorities is to achieve the President's
goal of reducing our deficit to below 2.3 percent of GDP by 2009. Even in the face
of increased costs to deal with this summer's hurricanes, I am confident that we will
achieve this goal.
What is irrefutable is that the President's economic plan has resulted in an
economy that is the envy of the rest of the world. Today we enjoy strong economic
growth, job creation, and increased tax revenues.
As Congress considers tax reconciliation legislation this week, we should not walk
http://~ u~treas.govjpress/releaSes/js30 21.htm
12/1/2005
Page 30[3
away from these successful reforms. We should not raise the cost of investing here
at home when we expect American companies to compete in the global economy. I
strongly urge Congress to extend these reforms and keep this economy the most
dynamic in the world.
I hope you don't assume that because we were able to successfully use the tax
code to spur growth in our economy that I'm pleased with America's tax code. As
many of you here today are aware, our tax code is not where it should be. After
nearly three years as Treasury Secretary I have yet to find anyone who is happy
with the tax code - unless you are in the tax preparation business, that is. Just to
navigate it, millions of Americans have to enlist professional help. It's a startling fact
that in the United States today we more tax preparers than firemen or policemen!
You've heard many of the statistics - billions of hours of paperwork for tax filers and
businesses, $140 billion dollars in lost time and money just trying to comply with our
increasingly unwieldy tax code. This is a drag on economic growth in America and
an unnecessary burden we all share.
I have recently received proposals from the President's Tax Reform Panel intended
to simplify and streamline the tax code. I commend the work they did under the
leadership of the two co-chairmen, former Senators John Breaux and Connie
Mack. My colleagues and I at Treasury are reviewing their recommendations now
and I will make a recommendation to the President.
During this process, we welcome your good insights and opinions. America
deserves a tax code that meets the President's goals for fairness and simplicity and, as I've argued today - for economic growth.
Thank you again for inviting me here today. I would be happy to take any questions
you might have.
http://~u~treas.govJpress/releases/js3021.htm
12/1/2005
Page 1 of2
PRESS ROOM
November 21,2005
2005-11-21-15-57 -4-656
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 $68,799 million as of the end of that week, compared to $69,088 million as of the end of the prior week.
I. Official U.S. Reserve Assets (in US millions)
I
I
11. Foreign
I
I
Nov~mbe[J O.2PQ!).
TOTAL
69,088
Currency Reserves 1
Euro
I
10,922
la. Securities
Yen
II
TOTAL
II
21,696
10,774
10f which, issuer headquartered in the US.
NO'l~mper
1a. 2.00~
68,799
Euro
I
10,921
TOTAL
Yen
10,674
II
21,595
0
0
b. Total deposits with:
b.i. Other central banks and BIS
10,429:
15,649
5,220
b.ii. Banks headquartered in the US.
!b.ii. Of which, banks located abroad
Ib.iii. Banks headquartered outside the US.
5,169
10,4
0
I
0
0
0
0
0
12,573
12,487
8,129
8,073
3. Special Drawing Rights (SDRs) 2
II
11,041
I
5. Other Reserve Assets
I
0
b.iii. Of which, banks located in the U.S.
4. Gold Stock 3
15,603
0
I
2. IMF Reserve Position 2
II
0
I
11,041
I
0
II. Predetermined Short-Term Drains on Foreign Currency Assets
I
November :1 0, 200~
I
I
Euro
TOTAL
Yen
November 18, 2005
Yen
i=lIrn
TOTAL
0
1. Foreign currency loans and securities
0
2. Aggregate short and long positions in forwards and futures in foreign currencies vis-a-vis the U.S. dollar:
0
0
I
12.8. Short positions
0
2.b. Long positions
I
3. Other
0
I
II
I
I
0
0
I
I
III. Contingent Short-Term Net Drains on Foreign Currency Assets
Novemb~r
Euro
Yen
TOTAL
Euro
Yen
TOTAL
0
1. Contingent liabilities in foreign currency
1.a. Collateral guarantees on debt due within 1
year
I
NQvember 18, 2005
10, 20_05
I
http://treas.gov/press/releases/2005112115574656.htm
0
I
I
I
II
II
I
12/1/2005
Page 2 of2
11.b. Other contingent liabilities
2. Foreign currency securities with embedded
options
I
II
II
I
I
I
3. Undrawn, unconditional credit lines
0
0
I
I
I
3.a. With other central banks
. With banks and other financial institutions
Headquartered in the U. S.
II
I
II
I
I
I
I
II
II
I
I
I
0
0
I
I
I
3.c. With banks and other financial institutions
IHeadquartered outside the U. S.
I
4. Aggregate short and long positions of options
in foreign
Currencies vis-a-vis the U.S. dollar
0
0
4.a. Short positions
14.a.1. Bought puts
I
4.a.2. Written calls
4.b. Long positions
I
I
I
I
4.b.1. Bought calls
4.b.2. Written puts
Notes:
11 Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account
(SOMA), valued at current market exchange rates. Foreign currency holdings listed as securities reflect marked-to-market values, and
deposits reflect carrying values. Foreign Currency Reserves for the latest week may be subject to revision. Foreign Currency
Reserves for the prior week are final.
21 The items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF and are
valued in dollar terms at the official SDRldoliar 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.
31 Gold stock is valued monthly at $42.2222 per fine troy ounce.
http://treas.gov!press/releases/2005112115574656.htm
12/1/2005
Page 1 of 1
PRESS ROOM
10 view or pont the PUr content on thiS page, download the tree
A(jO/Je~'J Acrobt~N')
Het'jdeIV'J.
November 22, 2005
js-3022
Treasury and IRS Issue Guidance on FSA Grace Period and HSA Eligibility
Today the Treasury and the IRS issued Notice 2005-86 which clarifies the
interaction of the 2-1/2 month Flexible Spending Arrangement (FSA) grace period
(established earlier this year by Notice 2005-42) and eligibility to contribute to
Health Savings Accounts (HSAs), The guidance clarifies that coverage by the FSA
grace period disqualifies an individual to contribute to an HSA during the grace
period. However, the notice also provides guidance on how an FSA can be
amended to enable a covered individual to contribute to an HSA during the grace
period. The guidance also clarifies a number of technical questions concerning the
grace period,
An individual eligible to contribute to an HSA must be covered by a high deductible
health plan (HDHP) and generally no other non-HDHP coverage, including health
FSA coverage, Consequently, an individual who has his or her health FSA
coverage extended by the grace period is ineligible to contribute to an HSA, even
where the health FSA has reached its annual benefit limit. However, the guidance
provides that, if the employer amends the FSA to be HSA-compatible during the
grace period for all participants, individuals would not be disqualified from
contributing to an HSA during the grace period. In addition to this general rule, the
notice provides a special transition rule for coverage years ending before June 5,
2006. For those years, an otherwise eligible individual may contribute to an HSA
during coverage by a health FSA grace period if the individual's health FSA has no
unused contributions or if the employer amends the cafeteria plan to provide that
the grace period is not available to individuals electing HDHP coverage during the
grace period.
Finally, the notice clarifies the following points about the grace period:
• The grace period must be made available to all participants who are
covered on the last day of the plan year, including participants whose
coverage is extended to the last day through COBRA continuation
coverage,
•
The grace period must remain in effect for the entire period even though the
participant terminates employment prior to the end of the grace period.
•
Employers may limit the application of the grace period to only certain
benefits (e.g., a plan offering a health FSA and a dependent care FSA
could limit the grace period to the health FSA),
•
The maximum grace period is until the 15th day of the third calendar month
after the end of the plan year, but a shorter period may be adopted as a
grace period.
A copy of Notice 2005-86 is attached.
REPORTS
•
Notice 2005-86
http://treas.govJpressireleases/js3022.htID
12/1/2005
Health Savings Account Eligibility During A Cafeteria Plan Grace Period
Part III - Administrative, Procedural, and Miscellaneous
Notice 2005-86
PURPOSE
This notice provides guidance on eligibility to contribute to a Health Savings
Account (HSA) during a cafeteria plan grace period as described in Notice 200542,2005-23 I.R.B. 1204. As discussed below, an individual participating in a
health flexible spending arrangement (health FSA) who is covered by the grace
period is generally not eligible to contribute to an HSA until the first day of the
first month following the end of the grace period, even if the participant's health
FSA has no unused benefits at the end of the prior cafeteria plan year. This
notice, however, provides guidance on how an employer may amend the
cafeteria plan document to enable a health FSA participant to become HSA
eligible during the grace period.
BACKGROUND
Cafeteria Plans
Section 125(a) states that, in general, no amount is included in the gross income
of a participant in a cafeteria plan solely because, under the plan, the participant
1
may choose among the benefits of the plan. Section 125(d) defines a cafeteria
plan as a written plan under which all participants are employees, and the
participants may choose among two or more benefits consisting of cash and
qualified benefits. "Qualified benefits" mean any benefit which, with the
application of § 125(a), is not includible in the gross income of the employee by
reason of an express provision of Chapter 1 of the Internal Revenue Code,
including employer-provided accident and health coverage under §§ 106 and
105(b). A high deductible health plan (HDHP) as defined in § 223(c)(2)(A) can
be employer-provided accident and health coverage. A health FSA, which pays
or reimburses certain § 213(d) medical expenses (other than health insurance or
long-term care services or insurance), is also employer-provided accident and
health coverage. The term "qualified medical expenses" as used in this Notice,
means expenses which may be paid or reimbursed under a health FSA.
Cafeteria Plan Grace Period
Notice 2005-42, 2005-23 I.R.S. 1204, modifies the application of the rule
prohibiting deferred compensation under a cafeteria plan (i.e., the "use-it-or-Ioseit" rule). The notice permits a cafeteria plan to be amended, at the employer's
option, to provide a grace period immediately following the end of each plan year,
during which an individual who incurs expenses for a qualified benefit during the
grace period, may be paid or reimbursed for those expenses from the unused
benefits or contributions relating to that benefit. A plan providing a grace period
2
is required to provide the grace period to all participants who are covered on the
last day of the plan year (including participants whose coverage is extended to
the last day of the plan year through COBRA continuation coverage). The grace
period remains in effect for the entire period even though the participant may
terminate employment on or before the last day of the grace period. But an
employer may limit the availability of the grace period to only certain cafeteria
plan benefits and not others. For example, a cafeteria plan offering both a health
FSA and a dependent care FSA may limit the grace period to the health FSA.
The grace period must not extend beyond the fifteenth day of the third calendar
month after the end of the immediately preceding plan year to which it relates,
but may be adopted for a shorter period.
Interaction Between HSAs and Health FSAs
Section 223(a) allows a deduction for contributions to an HSA for an "eligible
individual" for any month during the taxable year. An "eligible individual" is
defined in § 223(c)(1 )(A) and means, in general, with respect to any month, any
individual who is covered under an HDHP on the first day of such month and is
not, while covered under an HDHP, "covered under any health plan which is not
a high-deductible health plan, and which provides coverage for any benefit which
is covered under the high-deductible health plan."
In addition to coverage under an HDHP, § 223(c)(1 )(B) provides that an eligible
3
individual may have disregarded coverage, including "permitted insurance" and
"permitted coverage." Section 223(c)(2)(C) also provides a safe harbor for the
absence of a preventive care deductible. See Notice 2004-23, 2004-1 C.B. 725.
Therefore, under § 223, an individual who is eligible to contribute to an HSA must
be covered by a health plan that is an HDHP, and may also have permitted
insurance, permitted coverage and preventive care, but no other coverage. A
health FSA that reimburses a" qualified § 213(d) medical expenses without other
restrictions is a health plan that constitutes other coverage. Consequently, an
individual who is covered by a health FSA that pays or reimburses a" qualified
medical expenses is not an eligible individual for purposes of making
contributions to an HSA. This result is the same even if the individual is covered
by a health FSA sponsored by a spouse's employer.
However, as described in Rev. Rul. 2004-45, 2004-1 C.B. 971, an individual who
is otherwise eligible for an HSA may be covered under specific types of health
FSAs and remain eligible to contribute to an HSA. One arrangement is a limitedpurpose health FSA, which pays or reimburses expenses only for preventive care
and "permitted coverage" (e.g., dental care and vision care). Another HSAcompatible arrangement is a post-deductible health FSA, which pays or
reimburses preventive care and for other qualified medical expenses only if
incurred after the minimum annual deductible for the HDHP under § 223(c)(2)(A)
is satisfied. This means that qualified medical expenses incurred before the
HDHP deductible is satisfied may not be reimbursed by a post-deductible HDHP
4
even after the HDHP deductible had been satisfied. To summarize, an otherwise
HSA eligible individual will remain eligible if covered under a limited-purpose
health FSA or a post-deductible FSA, or a combination of both.
OPTIONS AVAILABLE TO AN EMPLOYER
An employer may adopt either of the following two options, which will affect
participants' HSA eligibility during the cafeteria plan grace period:
(1) General Purpose Health FSA During Grace Period
Employer amends the cafeteria plan document to provide a grace period but
takes no other action with respect to the general purpose health FSA. Because a
health FSA that pays or reimburses all qualified medical expenses constitutes
impermissible "other coverage" for HSA eligibility purposes, an individual who
participated in the health FSA (or a spouse whose medical expenses are eligible
for reimbursement under the health FSA) for the immediately preceding cafeteria
plan year and who is covered by the grace period, is not eligible to contribute to
an HSA until the first day of the first month following the end of the grace period.
For example, if the health FSA grace period ends March 15, 2006, an individual
who did not elect coverage by a general health FSA or other disqualifying
coverage for 2006 is HSA eligible on April 1, 2006, and may contribute 9/12ths of
the 2006 HSA contribution limit. The result is the same even if a participant's
5
health FSA has no unused contributions remaining at the end of the immediately
preceding cafeteria plan year.
(2) Mandatory Conversion from Health FSA to HSA-compatible Health FSA for
All Participants
Employer amends the cafeteria plan document to provide for both a grace period
and a mandatory conversion of the general purpose health FSA to a limitedpurpose or post-deductible FSA (or combined limited-purpose and postdeductible health FSA) during the grace period. The amendments do not permit
an individual participant to elect between an HSA-compatible FSA or an FSA that
is not HSA-compatible. The amendments apply to the entire grace period and to
all participants in the health FSA who are covered by the grace period. The
amendments must satisfy all other requirements of Notice 2005-42. Coverage of
these participants by the HSA-compatible FSA during the grace period does not
disqualify participants who are otherwise eligible individuals from contributing to
an HSA during the grace period.
TRANSITION RELIEF
For cafeteria plan years ending before June 5, 2006, an individual
participating in a general purpose health FSA that provides coverage during a
grace period will be eligible to contribute to an HSA during the grace period if the
6
following requirements are met: (1) If not for the coverage under a general
purpose health FSA described in clause (2), the individual would be an "eligible
individual" as defined in § 223(c)(1 )(A) during the grace period (in general, is
covered under an HDHP and is not, while covered under an HDHP, covered
under any impermissible other health coverage); and (2) Either (A) the
individual's (and the individual's spouse's) general purpose health FSA has no
unused contributions or benefits remaining at the end of the immediately
preceding cafeteria plan year, or (8) in the case of an individual who is not
covered during the grace period under a general purpose health FSA maintained
by the employer of the individual's spouse, the individual's employer amends its
cafeteria plan document to provide that the grace period does not provide
coverage to an individual who elects HDHP coverage.
EFFECT ON OTHER DOCUMENTS
Notice 2005-42 and Rev. Rul. 2004-45 are amplified.
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).
7
Page 1 of 1
PRESS ROOM
November 28, 2005
JS-3023
International Affairs Under Secretary Adams to hold Press
Briefing on Semiannual Foreign Exchange Report
Treasury International Affairs Under Secretary Tim Adams will host a press briefing
on the release of the Semiannual Foreign Exchange Report today, Nov. 28, at 4
p.m. (EST) in the Treasury Department's Media Room (Room 4121), 1500
Pennsylvania Avenue, NW.
Media without Treasury press credentials planning to attend should contact Frances
Anderson in Treasury's Office of Public Affairs at (202) 622-2960 or (202) 528-9086
with the following information: name, Social Security number and date of birth. This
information may also be emailed to frances.anderson@do.treas.gov.
http://treas.govJpressireleases/js3023.htm
12/1/2005
Page 1 of3
PRESS ROOM
November 28, 2005
JS-3024
Statement of Treasury Secretary John W. Snow on the Report to Congress on
International Economic and Exchange Rate Policies
November 28, 2005
Today, I have sent to Congress the latest report outlining the currency practices of
the United States' major trading partners, as required by the Omnibus Trade and
Competitiveness Act of 1988.
While attention is focused on the Report's judgments on exchange rates, exchange
rate developments cannot be viewed in isolation but need to be assessed in the
broader context of international economic policies and developments. Let me say
briefly on that front that global economic growth remains solid and the prospects
are for continued good growth next year, in particular here in the U.S. At the same
time, the world economy faces challenges from high energy prices, global
imbalances, protectionist pressures and the risk of higher inflation.
A manifestation of the divergent growth rates and saving and investment patterns
among the major economies of the world is large and widening global current
account imbalances, including the U.S. current account deficit which now exceeds
6 percent of GOP.
The adjustment of global imbalances is a shared responsibility that must be
undertaken in a way that maximizes sustained global growth. America's open trade
and capital markets - and the corresponding flexibility and adaptability of our
economy -- allow the United States to sustain sizable current account imbalances.
However, it would be imprudent to test the limits of our ability to absorb these
imbalances.
Employing contractionary policies to slow U.S. growth rates to match the slow
growth rates of our trading partners is not the answer; it would constitute a major
setback for the global economy and would also harm the efforts of many lowincome countries to alleviate poverty.
The appropriate policy response involves increasing savings in the United States including the reduction of fiscal deficits, raising the growth rates of our largest
trading partners, and greater exchange rate flexibility to allow for gradual, marketbased adjustments.
The United States is doing its part. U.S. economic growth continues to lead the
global economy, as it has for many years, while the performance of many of our
largest trading partners has lagged. In addition to sustaining good growth, the
United States reduced the federal budget deficit by 1 full percentage point of GOP
in FY2005 to 2.6% of GOP. That level is lower than the deficit ratio of 15 of the last
25 years. This does not mean we can be satisfied. Our goal is to ensure that U.S.
fiscal deficits decline further over the medium-term through restraint in non-security
spending and strong economic growth leading to higher revenue receipts.
But we cannot address global imbalances alone. These imbalances will persist if
growth in our major trading partners continues to substantially lag our growth rate.
Domestic demand growth in Europe and Japan, though somewhat improved, still
falls far short of what is needed. Substantial growth potential continues to be
foregone because of weak productivity growth or constraints on labor and capital
markets.
Another critical condition for addressing global adjustment prospects is greater
exchange rate flexibility, especially in China and other large emerging economies of
Asia, as well as the need for these economies to bolster domestic demand,
http://treas.govJpress/releases/js3024.htrn
12/1/2005
Page 2 of3
including through promoting greater financial sector reform.
The 1988 Omnibus Trade and Competitiveness Act calls for reporting on "whether
countries manipulate the rate of exchange between their currency and the United
States dollar for purposes of preventing effective balance of payments adjustment
or gaining unfair competitive advantage in international trade." In submitting today's
report, I would like to draw your attention to a special annex in today's report that
highlights the complexity of reaching judgments on this issue. The annex, which is
meant to be illustrative, shows that no one indicator or set of indicators can provide
determinative evidence. These indicators require a more comprehensive analysis.
To encourage greater dialogue on these issues and improve analysis, the
Department is soliciting comments on the Annex.
Today's report to Congress finds that no major trading partner of the United States
met the technical requirements for designation under the Act. The initial steps by
China to increase exchange rate flexibility played an important part in this decision.
But it is also contingent on further progress to incorporate flexibility reflecting
underlying market forces in China's RMB exchange rate by the time of the next
Foreign Exchange Report.
The last Report, issued on May 17, 2005, noted the importance of exchange rate
flexibility in the adjustment of international imbalances. It also noted that China's
fixed exchange rate created distortions and posed increasing risks to both China
and the broader global economy, especially in constraining the flexibility of other
Asian currencies. On July 21, 2005 China took an initial step towards greater
exchange rate flexibility when it moved away from an eight-year peg, adopted a
new exchange rate mechanism, and committed to a market-determined exchange
rate with enhanced flexibility.
China's adoption of a new exchange rate mechanism was an important step
towards exchange rate flexibility. And while China has taken additional steps to
develop a market-based exchange rate and further open capital markets, its
progress to date is limited and far to slow to be sufficient. The actual operation of
the new system is highly constricted. As a result, the distortions and risks created
by China's rigid exchange rate still persist. Furthermore, exchange rate rigidity in
China continues to dampen flexibility in the entire region. It is imperative that China
move towards greater flexibility as quickly as possible. In preparing the next Report
the Treasury will focus on China's progress in implementing the exchange rate
flexibility its leaders have committed repeatedly to introduce.
Despite adjusting its peg on July 21, Malaysia continues to maintain a rigid
exchange rate. Macroeconomic conditions in Malaysia are very strongly influenced
by world prices, and a stable exchange rate may be an important tool for price
stability. However, a rigid exchange rate has also contributed to significant
macroeconomic imbalances in the Malay economy, including large and protracted
current account surpluses.
The global economy works best with free trade, open capital markets, and flexible
exchange rates for large economies. Flexible exchange rates are also a key part of
the adjustment of global imbalances. The United States, through bilateral and
multilateral discussions, actively encourages exchange rate flexibility in large
economies. The International Monetary Fund, an institution established to underpin
exchange rate policy and international adjustment, must also playa central role.
In this light, the Report also calls on the International Monetary Fund to intensify its
efforts to promote greater flexibility in exchange rates for China and other large
emerging Asian economies and to recommend other policies, including financial
sector reforms, to bolster domestic demand and reduce global imbalances. To this
end, the United States also calls on the Managing Director to provide a
comprehensive report on these issues, including associated policy assessments, to
the Executive Board and the International Monetary and Financial Committee on an
expedited basis. Treasury will also explore possible proposals for reforms in IMF
exchange rate surveillance procedures.
Thank you.
LINKS
http://treas.govJpressireleases/js3024.htm
12/1/2005
Report to Congress on
International Economic and Exchange Rate Policies
November 2005
Summary
This report reviews developments in international economic policy, including exchange rate
1
policy, focusing on the first half of 2005. The report is required under the Omnibus Trade and
Competitiveness Act of 1988 (the "Act,,). 2
Global imbalances are being manifested in large and disparate growth rates, which in turn are
mirrored in divergent current account positions, particularly among larger countries. Addressing
global imbalances is a shared responsibility and should occur in an orderly manner that
maximizes sustained global growth. This requires: 1) further reducing budget deficits and
boosting national saving in the United States; 2) appreciably strengthening domestic demand-led
growth in Europe and Japan and additional structural reforms to raise economic potential; 3)
greater flexibility in the exchange rates of large Asian economies that lack such flexibility,
particularly China; and 4) an ambitious Doha trade round and a concerted effort to resist
protectionism.
This report finds that no major trading partner of the United States met the technical
requirements for designation under the Act. This is consistent with the findings of this report for
the past eleven years. Reaching judgments about countries' currency practices and their
relationships to the terms of the Act for the purpose of designation is inherently complex, and
there is no formulaic procedure that accomplishes this objective. Moreover, the Articles of
Agreement of the International Monetary Fund allow countries enormous latitude in selecting
and managing exchange rate systems. In this light, a special Appendix to this Report has been
added that seeks to offer greater insights into the foreign exchange practices of countries and the
implications of their policies. Treasury will continue to build on this work in future reports so
that we can better illuminate behavior that, while falling short of a technical designation, is
distortionary and potentially problematic.
The last report, issued on May 17,2005, noted the importance of exchange rate flexibility in the
adjustment of international imbalances. It also noted that China's fixed exchange rate created
distortions and posed increasing risks to both China and the broader global economy, especially
in constraining the flexibility of other Asian currencies. Since that report, the Treasury has
engaged in an intensive dialogue with China and other key economies in the region to bring
about needed adjustments.
I Treasury has consulted with the IMF in preparing this report. This report focuses on the period January 1, 2005,
through June 30, 2005.
2 The Act states, among other things, that: "The Secretary of the Treasury shall analyze on an annual basis the
exchange rate policies of foreign countries, in consultation with the International Monetary Fund, and consider
whether countries manipulate the rate of exchange between their currency and the United States dollar for purposes
of preventing effective balance of payments adjustments or gaining unfair competitive advantage in international
trade."
Accordingly, the United States applauded China's July 21 st announcement that it had abandoned
its eight-year peg to the dollar and committed to enhance the flexibility and strengthen the role of
market forces in the exchange rate. Because of this action and China's stated - and repeatedly
reaffirmed - commitment to enhanced, market-determined currency flexibility, Treasury has
refrained from designating China at this time. China's commitment to put greater emphasis on
sustainable domestic sources of growth, including by modernizing the financial sector, which
will support and complement greater currency flexibility, also factored into this decision.
However, China's actual operation of its new system is highly constricted. Distortions and risks
previously identified still persist, as do the constraints thus imposed on exchange rate flexibility
in the region. This is troubling, and future reports will intensely scrutinize whether and to what
degree China is practicing what officials have repeatedly committed to undertake. It is
imperative that China fully utilize its new system to move towards greater flexibility as quickly
as possible.
Malaysia also altered a long-held peg on July 21 by revaluing slightly. Still, its large, protracted
and rising external surpluses suggest that current exchange rate policy may be contributing to
macroeconomic imbalances and distortions in the economy. Treasury will begin discussions
with the Malaysian government on its exchange rate policy.
Given the risks and distortions noted above and in previous reports, the United States calls on the
International Monetary Fund to intensify its efforts to promote greater flexibility in exchange
rates for China and other large emerging Asian economies and to recommend other policies,
including financial sector reforms, to bolster domestic demand and reduce global imbalances.
To this end, the United States also calls for a comprehensive report on these issues, including
associated policy assessments, to the Executive Board and the International Monetary and
Financial Committee on an expedited basis. Treasury will also explore possible proposals for
reforms in IMF exchange rate surveillance procedures.
2
Domestic Macroeconomic Conditions
Growth in the U.S. economy continued at a solid pace in the first halfof2005, with real GOP
rising at an annual rate of 3.6 percent on average in the first two quarters. Business investment
continued to grow in the first half and a large increase in exports and a small decline in imports
led to a sizable 1.1 percentage point net contribution to growth from foreign demand in the
second quarter. Personal consumption expenditures maintained steady increases through the first
half of the year. Even though household debt as a share of disposable personal income (OPI) is
at a record high, household finances appear in good shape overall as net worth in relation to OPI
is the highest in more than three years. Employment is growing, with the average monthly
payroll job gain at 190,000 through the first half of 2005, and the number of jobs created since
the May 2003 employment trough reaching 3.8 million through June of this year. Over the first
half of the year, the unemployment rate declined from 5.4 percent to 5.0 percent - 1.3 percentage
points below its June 2003 peak and the lowest since a similar reading in September 2001.
Consumer prices were generally contained over the 12 months ending in June 2005. The
consumer price index rose 2.5 percent over that time span. Energy prices rose 7.3 percent over
the year ending in June while the core consumer price index (CPI), excluding food and energy,
rose 2.0 percent. Gasoline prices jumped sharply in the second quarter of 2005, and energy
prices overall continued to rise in the third quarter, culminating in a 12.0 percent surge in
September. Over the 12 months ending in September, energy prices at the consumer level were
nearly 35 percent higher than a year ago, but excluding food and energy, the core rate of
consumer price inflation remained low, rising a moderate 2.0 percent over the 12 months ending
in September. The Federal Reserve continued to raise the target for the federal funds rate,
raising it one full percentage point over the first half of the year to 3.25 percent and by an
additional 25 basis points at each of its next three meetings on August 9, September 20, and
November 1, to 4.0 percent. The Federal Reserve kept the balanced bias for both growth and
inflation at each of those meetings. The November action marked the twelfth straight target
increase of 25 basis points since the Federal Reserve began to remove accommodation in the
middle of 2004.
Prior to Hurricane Katrina, estimates of the Federal budget deficit for fiscal year 2005, which in
February had been projected at $427 billion, were revised substantially lower as growth in
revenues was stronger than forecast. The Administration's Mid-Session Review lowered the
deficit projection to $333 billion while the Congressional Budget Office projected a $331 billion
deficit. In the actual budget results for the entire fiscal year, the deficit was even lower than
expected, declining by $94 billion to $318 billion. In relation to the more than $12 trillion U.S.
economy, the fiscal year 2005 deficit represented a 2.6 percent share of GOP. That is lower than
the deficit shares in 16 of the last 25 years and only slightly above the 2.3 percent average over
the past 40 years. The deficit is nevertheless too high, and the Administration is determined to
do more to reduce it. While Federal outlays for hurricane relief are expected to raise the deficit
in the short term, and will affect budget results in fiscal year 2006, in the medium to long
term, the Administration is working to prevent the additional burden on the deficit from storm
repair from undermining efforts at deficit reduction. Continued strong growth will lead to higher
receipts, and the Administration is committed to restraint in non-security spending, which will
lead to lower deficits in the future.
3
The United States International Accounts3
• u.s. Balance of Payments Data
U.S. Balance of Payments and Trade
($ billions, SA, unless otherwise indicated)
2004
2UU4
01
02
2005
03
-Q4
Ul
ICurrent Account:
Balance on goods
-665.4 -151.5 ·164.0 -167.8 -182.2 -186.3
Balance on services
47.8
12.6
11.9
10.3
13.0
13.3
Balance on income 1/
30.4
5.9
6.3
3.2
.6
15.0
Net unilateral current transfers
·80.9 ·22.3 -20.5 -15.8 -22.4 -26.3
Balance on current account
-668.1 -146.1 -166.6 -167.0 -188.4 -198.7
Current Account as % of GDP
-oJ -5.1
-5.7
-6.3
-C.O
-5.7
[Major (;apnal t"IOW lJomponents \TlnanClallnllow +)
12.5
26.2 -34.j
Net Bank ~Iows
3c./l
-4.1
2.2
-145.2 -43.9 -27.4
8.1
Net Direct Investment Flows
-5.6 -68.4
Net Securities Sales
698.3 187.3 177.6 115.1 218.3 159.0
-1.5
19.0
Net Liabilities to Unaffiliated Foreigners by Non Banking
-24.6 -10.8
1.3 -13.6
Memoranda:
-4.0
50.7
19.9
41.2
Statistical discrepancy
85.1
18.6
394.7 147.4
75.8
94.5
25.3
Change in Foreign official assets in the United States
77.0
Trade In Goods
-665.4 -151.5 -164.0 -167.8 -182.2 -186.3
Balance
Total Exports
!lU'.O l~j./l Luu.l 204.8 ~ 2'f3.8
of which:
15.6
15.6
16.0
15.4
62.9
15.9
Agricultural Products
84.3
85.4
80.7
82.3
84.2
331.5
Capital Goods Ex Autos
23.4
23.7
89.3
21.0
21.8
23.1
Automotive Products
26.0
27.1
28.3
103.1
24.5
25.5
Consumer Goods Ex Autos and Food
54.0
55.9
204.0
47.9
50.1
51.9
Industrial Supplies and Materials 2/
345.2 364.1 372.6 391.1 400.£
[Total Imports
1 14 72.9
of which
52.9
41.5
45.1
53.8
180.5
40.0
Petroleum and Products
90.7
85.5
87.8
89.4
343.5
80.8
Capital Goods ex Autos
58.1
58.2
228.2
57.2
57.5
55.4
Automotive Products
96.9 102.1
94.0
92.6
373.1
89.6
Consumer Goods Ex Autos and Food
11 Including com pensatlon 01 em plloYees
2/ Including Petroleum and Petroleum Products
Source: BEA, Bureau of Census
U2
-186.9
13.6
-.5
-21.9
-195.7
-C.j
jl.c
-16.0
132.7
-10.2
53.6
82.3
-186.9
223.5
17.1
90.2
23.5
28.5
59.0
41U.0
57.4
95.9
58.1
102.1
The U.S. current account was $789 billion (at a seasonally adjusted annual rate, or "saar") in
deficit, or 6.4 percent of GDP, in the first half of 2005. Viewed over a longer period, the U.S.
current account balance declined, as a percent of GDP, from a one percent surplus in the first
quarter of 1991 to a four percent deficit in the fourth quarter of 2000, to a six percent plus deficit
in the first half of2005.
In the first half of 2005, the United States exported $875 billion in goods (saar) and imported
4
$1,621 billion, with a resulting $747 billion deficit on trade in goods. Exports of goods
increased 5.7 percent in the first half of 2005 compared to the second half of 2004, while imports
increased 6.2 percent. Non-automotive capital goods constituted 40.1 percent of merchandise
) The IMF annually reviews U.S. economic performance and policies through the so-called IMF Article IV
surveillance process. The last Article IV surveillance review took place in July 200S. The IMF Working Paper and
the results of the IMF Executive Board's discussion of the U.S. Article IV review can be found at
http://www.imf.org/extemallpubs/ftlscr/200SlcrOS2S7.pdf. In addition, the IMF discusses U.S. economic policies
and performance in the context of its twice yearly World Economic Outlook reports. These can be found at
http://www.imf.org!extemal/pubs/ftlweo/200SlcrOS2S8.pdf
4 Sums may not be exact due to rounding.
4
exports in the first half of 2005. Consumer goods imports constituted 25.2 percent, nonautomotive capital goods imports 23.0 percent, and petroleum and petroleum product imports
13.6 percent of merchandise imports.
Canada, Mexico, China, Japan and Germany remain the largest trading partners of the United
States. Canada accounted for 13.7 percent of U.S. exports, Mexico 13.0 percent, Japan 6.0
percent, the u.K. 4.5 percent and China 4.3 percent in the first half of 2005. Canada accounted
for 17.4 percent of U.S. imports, China 13.8 percent, Mexico 10.4 percent, Japan 8.6 percent,
and Germany 5.2 percent in the first halfof2005.
Country
Exports
Jan-Jun
Country
2005 11
Total, All Countries
Il.;anada
IMeXICO
IJapan
IUnited Kingdom
Il.;nlna
ederaJ KepUOIiC 01 l::iermany
I~outn Korea
NetneriandS
I~ rance
Iialwan
11 census NSA
200511
444.6 Total, All Countries
Percent of
Total
LJ. (V/o
U.U'1o
o.UV/o
'1.::>'10
q.JV/o
J.tlV/o
J.1 V/o
J.U"/o
L.O'1o
L.::J'10
Imports
Jan-Jun
Ivanada
Il.;nlna
IMeXICO
IJapan
ederal KepUOIiC 01 l::iermany
unltea Kingdom
~outn Korea
lalwan
rance
,venezuela
793.2
Percent of
Total
'f.4%
';$./;!%
lU.4%
/;!.O'Yo
::>.L%
J.1%
L.tl'1o
L.1%
7.T'l70
--z:u'70
Prices of imported goods (nsa) increased 8.3 percent in the twelve months through June 2005.
Non-petroleum import prices rose 2.1 percent. Export prices rose 2.9 percent over the year. The
most recent trough in import and export prices occurred roughly at the beginning of 2002. Since
then non-petroleum import prices have risen 5.9 percent and export prices 9.4 percent.
Foreign demand for U.S. financial assets remains strong. A major item financing the current
account deficit has been net private foreign purchases of U.S. securities, which reached an
annualized $552 billion in the first half of 2005. (Included in these were net private foreign
purchases of U.S. Treasury securities amounting to $162 billion.) In addition, foreign official
institutions increased their U.S. assets by $215 billion.
Foreigners owned $2.0 trillion in Treasury securities at the end of June 2005, or 53 percent of the
public debt not held in Federal Reserve and U.S. Government accounts. This compares with
$1.9 trillion, at the end of December 2004. Foreign official institutions held $1.2 trillion in
Treasury securities at the end of June 2005, only marginally greater than at the end of December
2004.
•
Net International Investment Position
The net international investment position of the United States (with direct investment valued at
the current stock market value of owners' equity) was a negative $2.5 trillion as of December 31,
2004, the latest date for which data are available. This was only $170 billion less than the
negative $2.4 trillion position at the end of 2003, as a $272 billion valuation adjustment due to
5
exchange rate changes and a $147 billion valuation adjustment due to other price changes offset
much of the financial outflow associated with the 2004 current account deficit of$665 billion. 5
Despite the large negative net investment position, U.S. residents earned $52 billion on their
investment position in 2003, $36 billion in 2004, and $6.1 billion at an annual rate in the first
half of 2005 as net receipts from the U.S. direct investment position offset net income payments
on the portfolio investment position.
•
Perspectives on the Current Account
The U.S. current account deficit can be examined from different analytic perspectives. Each
perspective focuses on different characteristics of normal current account balances and different
adjustment patterns. The perspective can affect interpretations of which domestic and global
factors give rise to a given current account deficit and the implications of deficits.
A current account deficit is conceptually equal to the gap between domestic investment and
domestic saving, as a matter of ex post accounting. When investment in the United States is
higher than domestic saving, foreigners make up the difference, and the United States has a
current account deficit. In contrast, if saving exceeds investment in a country, then that country
has a current account surplus as its people invest abroad. The economic analysis of this
relationship is more complex, so that when ex ante saving, investment and net export plans are
not satisfied ex post, economic adjustment processes come into play seeking to reconcile plans
with outcomes. The simple ex post accounting saving and investment perspective has led some
analysts to focus heavily on the components and determinants of saving and investment in the
concerned country. National saving reflects the sum of net private and net public saving. Some
analysts, giving little weight to the dynamics of private saving and investment, focus on net
public saving, and hence on fiscal policy as the best way to affect national saving.
Although an increasing federal budget deficit, from this perspective, would tend to widen the
current account deficit, the evidence for a simple correlation between the budget and the current
account deficit (the so called "twin deficits" view) is very weak. More generally, in a recent
Federal Reserve staff paper, it was argued that a $1 decline in the fiscal deficit would only result
in a 20 cent reduction in the current account deficit because fiscal reduction, inter alia, could be
associated with crowding-in of investment. 6,7
The current account deficit can also be seen as the excess of what a country purchases over what
it produces, or the excess of what it buys from abroad over what it sells abroad. This perspective
leads to a focus on broad macroeconomic factors and their implications for the current account
balance - such as relative growth rates among the major economies, broad cost and productivity
5 In principle the net financial flows should equal the current account balance, but in practice there was a statistical
discrepancy of$85 billion in 2004.
6 Erceg, Christopher, Luca Guerrieri, and Christopher Gust (2005). "Expansionary Fiscal Shocks and the Trade
Deficit." International Finance Discussion Paper 2005-825. Washington: Board of Governors of the Federal
Reserve System (January). The paper can be found at
http://www.federalreserve.gov/pubs/ifdp/2005/825/ifdp825.pdf.
7 IMF staff report a higher estimate, using an alternative methodology, in Section V of the IMF Selected Issues
Paper of the July 200S Article IV Consultation, IMF Report No. OS/2S8. The paper can be found at
http://www.imf.org/external/pubs/ft/scr/sOOS/cr05258.
6
differences in domestic traded and non-traded goods sectors, inflation and interest rate
differentials among economies, and exchange rate movements. Some analysts have used this
approach to estimate, employing complex models, the amount that an economy's real tradeweighted exchange rate needs to adjust in order to bring its current account balance to what they
perceive to be a "normal" level. 8
At the microeconomic level, this perspective places a focus on specific features of productive
processes and the comparative advantage of given countries - the United States has an edge in
producing, among other goods and services, certain financial services and leading high tech
products; other economies may have an advantage in producing certain low-value consumer
goods. The mix of specific purchases and sales of goods and services, in tum, depends on many
millions of microeconomic decisions made by consumers and producers. Specific trading
aggregates are also subject to both very specific long-term effects, such as industry productivity
growth, and short-term effects, such as supply disruptions.
Other perspectives on the current account deficit focus on net foreign financial flows into the
United States. A surplus on the capital and financial accounts is, by balance of payments
accounting definition, the counterpart to a current account deficit. These flows finance the net
capital formation that is equal to the excess over domestic saving. This perspective also leads to
a focus on broad macroeconomic factors - such as relative growth of output and productivity and
relative attractiveness of investment environments among the major economies, inflation and
differentials, exchange rate movements, etc. According to this perspective, the growth of the
U.S. current account deficit over more than a decade has been linked to high levels of domestic
U.S. capital formation compared to domestic U.S. saving. Perceived high rates of return on U.S.
assets, based on sustained strong productivity growth especially relative to the rest of the world,
sound U.S. economic performance, a welcoming U.S. investment climate, and the deepest and
most liquid capital markets in the world have all combined to attract foreign investment. In tum,
sustained external demand for United States assets has allowed the United States to achieve
levels of capital formation that would have otherwise not been possible, and robust growth in
investment has been critical to non-inflationary growth of production and employment.
All of these analytic perspectives offer insights into an understanding of the U.S. external
position. More broadly, the distribution of global current accounts must be seen as the product
of economic and financial policies of all economies spanning the world. For example:
•
Saving rates in many emerging market economies, especially those in Asia, are very
high compared to investment rates, resulting in correspondingly large current account
surpluses. These high saving rates, in tum, may be partly associated with the
demographic consequences of aging and the need to save for retirement in the
8 Indexes of the foreign exchange value of a currency seek to summarize the often divergent movements in
bilateral exchange rates into a single measure. A nominal effective exchange rate (NEER) index is a weighted
average of bilateral exchange rates. A real effective exchange rate (REER) index multiplies each bilateral
exchange rate by relative costs or prices in each economy. Movements in the REER reflect movement in prices
or costs of production of domestically produced goods and/or services relative to the prices or costs of goods
and/or services produced by foreign competitors. The weights of these indexes are typically based on trade
flows, both bilateral trade flows and, in some cases, competitors' trade with third markets.
7
absence of well developed public pension systems, and also with the lack of well
developed financial systems allowing consumers to diversify and hedge against risks
(including through insurance products) or to borrow (for example, mortgages).
•
Investment rates across the globe have been dampened by a range of factors,
including low growth in many economies, the emergence of large service sectors
which are less capital intensive than many industries, and excess capacity after the
Asia crisis and the bursting of the IT bubble, more efficient financial intermediation,
and strong corporate profitability coupled with a low propensity to reinvest earnings.
•
A mark of the increasing globalization of the world economy - reflecting in part the
effects of greater internationalization of financial markets and diminishing "home
bias" in patterns of investment - is a decline, in recent years, of the correlation
between national saving and investment rates.
•
With rising oil prices, large current account surpluses of oil exporting countries have
reemerged with rising oil prices. Ten major oil exporters 9 had a combined $213
billion current account surplus in 2004.
The adjustment of global imbalances is a shared responsibility that must be undertaken in a way
that maximizes sustained global growth. Toward this end, domestic demand-led growth from
other parts of the world simply must increase. Slowing U.S. growth to match low growth
elsewhere would constitute a major setback for the global economy, would be harmful to the
efforts of many low-income countries throughout the world to alleviate poverty, and would hurt
U.S. workers. Against this background, all major economies must play their part. In the United
States, policies aimed at increasing saving by the public sector and the private sector should
contribute to global adjustment and reinforce the continuing stability of the international
financial system. In Europe and Japan, policies for further structural reforms are needed to boost
sustainable growth. Greater flexibility of exchange rates is needed, particularly in emerging
Asian economies that lack such flexibility. Finally, an ambitious outcome from the Doha Round
is essential to enhancing global growth.
The U.S. Dollar
Movements in the foreign exchange value of the dollar reflect a wide range of factors in
extremely large and deep international financial markets. The latest Bank of International
Settlements-coordinated central bank survey of the global foreign exchange market estimated
that average daily turnover in the market was nearly $2 trillion dollars per day. A large majority
of these trades involve the dollar, either as one of the two currencies in the underlying
transaction or as the vehicle currency in a trade between two foreign currencies.
The real trade-weighted value of the dollar has fluctuated considerably over past decades, as
have the trade-weighted exchange values of other major currencies. In particular, the dollar's
real effective exchange rate peaked in early 1985 and then declined. It rose again in the second
9
Iran, Kuwait, Libya, Nigeria, Norway, Qatar, Russia, Saudi Arabia, United Arab Emirates, and Venezuela.
8
half of. the .19:0s thro~gh ~arly 2002, after which it has fallen back. The euro, after depreciating
following Its introductIon In 1999, has appreciated in recent years, while the yen has fallen
relative to its mid-1990 peaks.
Real Trade Weighted Exchange Rates
(Indexed 10 1999= fOO)
165.0
I
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Between its peak in early 2002 and the beginning of 2004, the dollar fell 25 percent against
major currencies measured by the Federal Reserve Board's nominal trade-weighted index. 10
Since then, the dollar has risen less than three percent against the major currencies.
Another Federal Reserve Board index also provides a measure of the dollar's performance
against the currencies of the other important trading partners (OITP) of the United States; these
economies account for 45 percent of the broad dollar's trade-weighted basket, and about twothirds of the OITP index is accounted for by Asian emerging market economies. The OITP
index did not follow the dollar's decline against major currencies. The OITP index of the
dollar's value rose four percent from early 2002 to the beginning of2004 and has since declined
by a similar amount.
After its depreciation between early 2002 and early 2004, the dollar has moved in a broad range
against the major currencies through the first half of the year, roughly speaking between $1.20
and $1.35 against the euro and between 102 and 111 yen per dollar. Fluctuations within the
range have been influenced by a host of factors, including market perceptions about so-called
"cyclical" factors such as relatively strong U.S. growth, which have tended to boost the dollar,
and "structural" factors such as concerns about the ability of the U.S. to attract capital inflow to
finance its current account deficit which have tended to weaken the dollar. On balance, the euro
and yen have moved in a broadly similar manner against the dollar since early 2002.
During the first half of 2005, the euro and the yen, the most important of the other major
currencies, depreciated against the dollar by 10.6 percent and 7.4 percent, respectively, in
10 Descriptions of the Federal Reserve Board's summary indexes for the foreign exchange value of the dollar can be
found at http://www.federalreserve.gov/releases/hIO/Summary/.
9
nominal terms. The trade-weighted value of the dollar appreciated by 7.5 percent vs. major
currencies and depreciated by 1.0 percent vs. currencies of other important trading partners.
The dollar's appreciation in 2005 reflected a shift in the market's focus away from concerns about
the financing of the U.S. current account deficit toward recognition of the brighter relative U.S.
growth outlook. In addition, interest rate differentials widened in favor of dollar assets, given the rise
in the Fed Funds interest rate and market expectation of further increases.
Nominal Trade Weighted Dollar
Feb 27. 2002
1100
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8/112005
The Japanese yen has been affected by cross-cutting considerations. Market perceptions this year
that Japan's economic turnaround is taking hold have strengthened foreign demand for Japanese
equities, and the Nikkei has firmed substantially. Also, market expectations about the prospects for a
revaluation of the Chinese renminbi stimulated demand for yen at times. In contrast, rising oil prices
weighed on the yen during the period as did the substantial widening in the differential between
short-term dollar and yen interest rates. Further, Japanese investors have stepped up purchases of
foreign assets in view of the increased confidence in the economic turnaround and higher foreign
interest rates.
The euro was held down by the outlook for continued low growth in key parts of the Euro-zone and
shifts in interest differentials. In addition, the French and Dutch votes on the EU constitution also
contributed to negative euro sentiment. Demand for sterling eased over the course of the year as the
U.K. economy slowed and the Bank of England reduced its official policy interest rate. Firm dollar
demand against the euro and yen has been reflected in Chicago Mercantile Exchange futures and
options reports showing a net-increase in non-commercial long dollar positions against both
currenCIes.
10
EU[Q/dQllar (inyerted) and DQllar/yen siOce End-20o!
J2f)VXOI
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In.
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Jan Milr
May
lui
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2002
Nov
Jan
Mar
May
Jul
S~p
Nov
Jan
2003
Mar
May
lui
2004
Sep
Nov
The United States has not intervened in foreign exchange markets since September 2000.
Analysis of Exchange Rates Pursuant to the Act
For the specific purpose of assessing "whether countries manipulate the rate of exchange
between their currency and the United States dollar" according to the terms of the Act, the
Treasury has traditionally undertaken a careful review of the trading partner's exchange rates,
external balances, foreign exchange reserve accumulation, macroeconomic trends, monetary and
financial developments, institutional development, and financial and exchange restrictions
among other things. II
The Appendix of this Report provides a detailed analysis of such considerations relating to the
Act, amplifying on Treasury's report to Congress of March 11,2005. The Appendix reviews the
importance of a wide range of economic indicators in rendering judgments pursuant to the Act.
and assesses a large number of economies throughout the world against that background. This
review shows that the use of numerical indicators of economic performance provides valuable
information and insights, including insights into the operation of economies and their
interactions with the world economy and financial system.
The Appendix also highlights that many economies - including several oil exporting countries,
China, and Malaysia - have significant current account surpluses, increasing reserves, and
relatively rigid exchange rate regimes. But other countries - Germany, Japan, and Switzerland with floating currencies also have significant current account surpluses. Given that the United
States is the world's largest economy and has a large current account deficit, it is to be expected
that some other economies around the world would have large current account surpluses, which
II These issues are discussed more completely in Treasury's March 11,2005, Report To The Committees on
Appropriations on Clarification Of Statutory Provisions Addressing Currency Manipulation
(http://www.treas.gov/press/releaseslreports/js2308.pdD.
11
are the counterpart to the U.S. deficit. In addition, these surpluses reflect a range of factors including cyclical considerations and saving and investment trends.
The Appendix reaffirms the basic conclusions that rendering judgments pursuant to the Act is
inherently complex, that there is no mechanistic or formulaic approach to doing so, and that any
judgment must be undertaken in the context of the specific economic circumstances and
characteristics of a given economy. A more complete assessment requires additional analysis of
the interactions of indicators among themselves and other economic variables, specific factors
affecting economies, and current policy formation and implementation.
Country Analyses
Mexico
Mexico has a flexible exchange rate regime. Its central bank targets an inflation rate of 3 percent
with a plus or minus one percent band. The Bank of Mexico also follows a transparent rule for
selling foreign reserves accumulated by state enterprises. During the first half of 2005 the
Mexican peso appreciated by 3.6 percent, from 11.14 pesos/dollar to 10.75 pesos/dollar. The
J.P. Morgan trade-weighted index for the broad real exchange rate for the peso appreciated by
5.0 percent in the first six months of the year. Mexico's current account deficit during the first
half of 2005 was $3.8 billion, versus $4.6 billion in the second half of 2004. The U.S. bilateral
trade deficit with Mexico in the first half of 2005 was $24.5 billion, versus $22.7 billion in
second half of 2004. Foreign direct investment in Mexico increased to $7.5 billion in the first
half of the year compared with $5.7 billion in the second half of 2004. International reserves
grew by $278 million during the first half of the year, reaching $61.8 billion by end-June. Yearon-year (yr/yr) headline inflation was 4.3 percent in June, versus 5.2 percent in December 2004.
Real GOP grew 0.7 percent in the first quarter of2005 and fell 1.7 percent in the second quarter,
on a seasonally adjusted annualized basis.
Brazil
Brazil has a flexible exchange rate regime. Its central bank targets a 2005 inflation rate of 5.1
percent with a band of 4 to 7 percent. The real appreciated 12.6 percent during the first half of
2005 from BRL2.66/dollar to BRL2.36/dollar. The Central Bank increased net international
reserves to $40.5 billion by June compared to $27.5 billion in end-December, in part due to
Central Bank purchases of foreign exchange for reserve accumulation in January-March. Brazil
had a $6.5 billion current account surplus in the first half of 2005, compared to $6.3 billion in the
second half of 2004. The United States had a trade deficit with Brazil of $4.7 billion in the first
half of 2005, compared to a $4.9 billion deficit in the second half of 2004. Foreign direct
investment in Brazil decreased to $8.6 billion in the first half of the year compared with $14.1
billion in the second half of 2004. Year-on-year inflation stood at 7.3 percent in June, versus 7.6
percent in December 2004. Real GOP grew 1.5 percent in the first quarter and 5.8 percent in the
second quarter, on a seasonally adjusted annualized basis.
12
The European Monetary Union
The euro depreciated 10.6 percent against the dollar in the first half of 2005. The real effective
exchange rate depreciated 6.2 percent over the period. The ECB did not intervene in foreign
exchange markets during the first half of2005. The harmonized consumer price index rose 2.1
percent year-on-year as of June 2005 while the index excluding energy, food, alcohol, and
tobacco rose 1.3 percent. Broad money, M3, grew 8.2 percent annualized in the first half of
2005.
The countries in the Euro-zone taken together had a marginal current account surplus during the
first half of2005 equal to $10.0 billion (sa) or 0.2 percent of GOP, down from $38.0 billion and
$15.9 billion in the first and second halves of2004, respectively. Goods exports increased 3.6
percent while goods imports increased 4.9 percent in the first half of 2005. The trade surplus of
the Euro-zone vis-a-vis the U.S. was $42.8 billion in the first half of2005, which is about $4.1
billion higher than in the same period last year.
Euro-zone growth was an estimated 1.4 percent (annualized) in the first half of 2005. Final
consumption expenditure rose 0.8 percent (annualized) in the first halfof2005 while investment
increased 0.7 percent. Euro Area countries taken together ran a fiscal deficit of 2.7 percent of
GOP in 2004.
Germany
Germany had a current account surplus during the first half of 2005 equal to $61.6 billion (sa) or
4.3 percent of GOP. Goods exports increased 4.1 percent while goods imports increased 3.2
percent in the first half of 2005. The trade surplus of Germany vis-a-vis the U.S. was $24.4
billion, which is $2.8 billion higher than the same period last year.
German growth was an estimated 1.5 percent (annualized) in the first half of 2005, driven
entirely by exports. Consumption and investment contracted 0.6 percent and 2.0 percent
(annualized), respectively in the first half. Germany's fiscal deficit was 3.7 percent of GOP in
2004, and it was recently revised up from 2.9 percent to 3.7 percent for 2005. German inflation
was 1.8 percent yr/yr in June 2005 while core inflation was 0.5 percent.
Belgium
Belgium had a current account surplus of $2.3 billion, or 1.2 percent of GDP, during the first half
of2005 compared to $14 billion (sa) or 3.4 percent of GOP for 2004 as a whole. Goods exports
increased 9.2 percent while goods imports increased 12.5 percent in the first halfof2005 over
the same period in 2004. The surplus in trade in goods declined to $8.0 billion in the first half of
2005 compared to $11.1 billion in the comparable period of 2004. The trade deficit of Belgium
vis-a-vis the U.S. was $3.2 billion, which is $1.1 billion higher than the same period last year.
Belgian growth was an estimated 0.7 percent (annualized) in the first half of 2005, driven by
domestic demand. Belgium's fiscal deficit was 0.3 percent of GDP in 2004, and the European
13
Commission forecasts a deficit of 0.2 percent of GOP in 2005. Belgian CPI inflation was 2.7
percent yrlyr in June 2005 while core inflation was 1.3 percent.
Spain
Spain had a current account deficit of$43.0 billion, or 7.6 percent of GOP, during the first half
of2005 compared to a $55.4 billion (sa), or 5.3 percent of GOP, deficit for 2004 as a whole.
Goods exports increased 3.8 percent while goods imports increased 12.4 percent in the first half
of 2005 over the same period in 2004. The trade surplus of Spain vis-a-vis the U.S. in the first
half of 2005 was $743 million, which is $355 million lower than the same period last year.
Spanish growth was an estimated 3.5 percent (annualized) in the first half of 2005, driven
entirely by strong domestic demand. Consumption and investment increased 4. I percent and 5.2
percent (annualized) respectively in the first half. Spain's fiscal deficit was 0.3 percent of GOP
in 2004, and the European Commission projects Spain to have a balanced budget for 2005.
Switzerland
Switzerland had a current account surplus of$26.5 billion (sa), or 14.1 percent ofGDP, during
the first half of 2005 compared with $52.3 billion (sa) or 14.6 percent of GDP for 2004 as a
whole. The trade in goods surplus was $3.9 billion in the first half of 2005 compared with $7.5
billion for 2004. The substantial current account surplus arises from surpluses in trade in
services, particularly financial services, and in investment income. The trade in goods surplus of
Switzerland vis-a-vis the U.S. was $1.2 billion in the first half of 2005, which is $74 million
lower than in the same period last year.
After 2.1 percent growth in 2004, Swiss growth fell to 1.0 percent (annualized) in the first half of
2005 due to weak investment in the first quarter and a lower trade surplus. Switzerland's fiscal
deficit was 0.4 percent of GDP in 2004. The Swiss franc appreciated 12.4 percent against the
dollar in the first half of 2005, but declined 2.7 percent overall against major trading partners.
Inflation remains low at 0.7 percent yr/yr as of June 2005, while core inflation was 0.4 percent.
The Swiss National Bank maintained an operational 0.25 to 1.25 percent target range for the
three-month Libor rate throughout the first half of 2005 compared to a 0.00 to 0.75 percent range
though most of the first half of 2004.
Russia
High oil prices continued to dominate the dynamics of Russian external accounts. The price for
Russian "Urals" blend crude increased 42 percent in the first half of 2005. Russia's current
account surplus in the first half of 2005 was an estimated $44.7 billion (nsa), or 13.4 percent of
GDP, compared to $26.3 billion, or 10.2 percent of GDP, in the first half of 2004. The bilateral
trade surplus with the U.S. reached $5.9 billion in the first half of2005 compared to $3.5 billion
in the first half of2004. After hitting a 5-year high against the dollar in April, the ruble eased
somewhat, with a net 3.2 percent nominal depreciation against the U.S. dollar for the entire first
half.
14
However, inflation continued to accelerate with consumer prices rising 13.6 percent yr/yr at endJune 2005 compared to 10.2 percent at end-June 2004. As a result, JP Morgan's trade-weighted
index of the real exchange rate rose 10.6 percent yr/yr at the end of June 2005 compared to 8.4
percent at the end of June 2004. The Russian monetary authorities intervened in the foreign
exchange market during the period, and official reserve assets increased 21.7 percent from
$124.5 billion at end-December 2004 to $151.6 billion at end-June 2005 compared with a 14.7
percent increase in the first half of 2004. The broad monetary aggregate M2 grew 39.7 percent
over the twelve months through June 2005 compared to 35.4 percent in the comparable period
through June 2004.
Gulf Cooperation Council Countries
GOP growth and current account surpluses remain high in the oil-exporting countries of the Gulf
Cooperation Council (GCC) countries (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the
UAE) due to high oil prices (e.g., Saudi Light Crude finished above $50 a barrel at the end of
June). All of the GCC countries maintain exchange rates pegged to the dollar because the price
of their major export, oil, is denominated in dollars.
Saudi Arabia
With oil export revenues increasing by 35 percent in 2004, Saudi Arabian real GOP grew by 5.2
percent in 2004, and it is expected to grow by a further 6 percent in 2005. The overall current
account balance posted a surplus of 20.5 percent of GOP in 2004 compared to 13.1 percent in
2003 and 0 percent in 1999, while the bilateral trade surplus with the United States reached $18.6
billion in the year to June 2005. CPI inflation remains contained at 0.6 percent growth yr/yr to
June 2005 because of relatively subdued import price inflation, and price subsidies on utilities
and petroleum products. Nevertheless, the government's financial position improved with the
government posting a budget surplus of approximately $26 billion (or 10 percent of GOP) in
2004, and using some of that surplus to reduce outstanding debt. The riyal has been unofficially
pegged to the dollar since 1986 (officially since 2003), so short-term interest rates largely
followed recent increases in US interest rates. Net foreign assets of the Saudi Arabian Monetary
Agency rose 36 percent to $117 billion from $86 billion during the first 6 months of 2005, due to
Saudi Arabia's large current account surplus. Saudi Arabia had $13.3 billion of short-term
external debt at the end of 2004.
Singapore
Singapore is a small and open economy. Its inflation and inflationary expectations are largely
determined by movements in the Singapore dollar. As a result, Singapore uses a heavilymanaged float against an undisclosed basket of currencies within a target band as its primary
monetary policy tool. The Monetary Authority of Singapore (MAS) currently maintains "a
policy of modest and gradual appreciation" of the Singapore dollar against the basket. The
Singapore dollar depreciated 2.9 percent against the U.S. dollar in the first half of 2005, while
J.P. Morgan's nominal trade-weighted index of the exchange rate appreciated 0.9 percent. The
CPI fell 0.2 percent yrlyr in June despite rising oil prices, although domestic wholesale prices
rose 8.5 percent yr/yr. According to the MAS, it intervened in the first quarter "to moderate
15
excessive upward pressure" on the currency, which would have been deflationary. Total
reserves increased about 2 percent to $115 billion in the first half of the year.
Gross national saving is high - 46 percent of gross national income - and investment has been
reduced domestically and increased abroad in recent years in response to adverse external shocks
to the Singapore economy including the Asian Financial Crisis, the tech slowdown, and the 2003
outbreak of Severe Acute Respiratory Syndrome (SARS). Singapore's small open economy
experiences relatively volatile income growth, which results in high precautionary saving. With
one of the fastest aging populations in the world, Singapore has also put an emphasis on saving
for the future. The government and government-linked corporations are significant contributors
to domestic saving, but the bulk of saving is done by the private sector, through mandatory
saving programs and other means. The current account surplus increased to 29.6 percent ofGDP
in the first half of the year from 26.1 percent in 2004 on the back of an improvement in the goods
balance due to a rebound in the manufacturing sector and the rising value of refined petroleum
exports. As the 19 th largest trading partner of the United States, Singapore is a net importer of
U.S. goods, resulting in a U.S. bilateral trade surplus of about $3 billion in the first half of 2005.
The current account surplus is projected to decrease in future years as the population continues to
age. GDP growth moderated sharply in the first quarter to 2.7 percent yr/yr (down from 8.4
percent in 2004) on a slowdown in the pharmaceuticals sector but rebounded 5.2 percent yr/yr in
the second quarter.
India
The Indian rupee fluctuated within a narrow band in the first half of 2005, ending largely
unchanged against the US dollar. Although the rupee depreciated 0.4 percent against the U.S.
dollar, the JP Morgan index of the real value of the rupee against the currencies ofIndia's major
trading partners appreciated about 5.5 percent. According to the central bank, India's exchange
rate policy in recent years has been guided by " ... broad principles of careful monitoring and
management of exchange rates with flexibility, without a fixed target or a pre-announced target
or a band, coupled with the ability to intervene if and when necessary." Despite strong exports
of services and remittances from overseas Indians, increases in international crude oil prices and
robust domestic demand resulted in a current account deficit of 2.2 percent of GDP in the first
half of 2005, following a balanced current account in all of 2004. The economy maintained its
strong momentum in 2005, with GDP growing at 7.0 percent in the first quarter, and consumer
prices rising 3 percent yr/yr in June. The U.S. bilateral merchandise trade deficit with India was
steady at $4.9 billion in the first half of 2005. Strong capital inflows supported the rupee.
Foreign investors, for example, poured $4.5 billion into Indian equity markets in the first half of
2005, compared to $3.5 billion in the first half of 2004. India continues to use reserves to prepay external debt by about $3 billion per year. Nonetheless, the Reserve Bank of India built
reserves to $132 billion by the end of June, up from $125 billion in December 2004.
Japan
After stagnating in the second half of 2004, Japan's economy picked up speed in the first half of
2005. GDP growth in the first half of 4.5 percent was well above forecasts and market
expectations. Business investment and private consumption were primary contributors to
16
growth. Core consumer prices (the Japanese CPI less fresh foods) fell by 0.2 percent year-onyear during the first half of 2005, the same as during the last half of 2004.
After more than a decade of sluggish growth subsequent to the bursting of Japan's huge stock
and land price bubble and after eight years of battling to overcome deflation, Japan finally
appears to be in position to achieve sustained, normal growth. The financial health of Japan's
major banks has greatly improved, companies no longer feel they have large excesses of capacity
or workers, and employment of regular full time workers has begun rising. Prices are still falling
modestly, but many, including the Bank of Japan, expect deflation to come to an end in 2006.
Should Japan finally exit deflation, this would be a major turnaround in the world's second
largest economy, and would allow Japan to concentrate on policies to encourage greater
domestic growth to deal with the fiscal challenges it faces with an aging population. This would
also allow Japan to make a greater contribution to global growth and the adjustment of global
imbalances.
Japan's current account surplus fell to $82.8 billion (3.4 percent of GOP) in the first halfof2005,
from $85.9 billion (3.7 percent of GOP) in the second halfof2004. Japan's overall trade surplus
showed a more dramatic decline of $6.4 billion to $45.3 billion as imports grew by 4.2 percent,
while exports grew by only one percent, although much of the growth of imports was the result
of higher prices for oil and other commodities. Japan's bilateral merchandise trade surplus with
the United States totaled $41.6 billion in the first half of 2005, up from $39 billion in the second
half of 2004. For the first eight months of 2005, Japan's trade surplus with the United States was
$54.8 billion, up 12 percent from the same period in 2004. In 2004, Japanese residents bought
large amounts of foreign bonds, drawn by higher interest rates overseas. These outflows were
partially, but not fully, offset by large foreign purchases of Japanese equities in the first half of
2005 on the prospect of an improving Japanese economy. As a result, Japan's financial account
recorded net outflows of $18.1 billion in the first half of 2005, down from $51.5 billion in the
second half of 2004.
The yen's real effective exchange rate against a broad range of currencies depreciated by 3.3
percent during the first half of 2005. The yen depreciated against the U.S. dollar by seven
percent during that period, possibly reflecting expectations of rising U.S. interest rates. Japanese
authorities did not intervene in the foreign exchange market during the first half of 2005, and in
·
. d
fact have not intervened since March 16, 2004. 12 Japanese c
10relgn
currency reserves remame
virtually flat, rising by less than $1 billion, or about 0.1 percent, to $825 billion in the first half of
2005.
China
China retained its fixed exchange rate of 8.28 yuan to the U.S. dollar throughout the first half of
2005. The report issued on May 17,2005, concluded that China had completed preparations and
was ready to move to a more flexible exchange rate and should act without delay. On July 21,
2005, China altered the fixed dollar peg that it had maintained for eight years, revaluing the
12 The Japanese Ministry of Finance announces its total foreign exchange intervention at the end of each month, and
publishes the dates and amounts of intervention at the end of each quarter. See
http://www.mof.go.jp/english/elc021.htm.
17
l3
renminbi by 2.1 percent against the dollaL The People's Bank of China explained that the
action was intended to "enable the market to fully play its role in resource allocation as well as to
put in place and further strengthen the managed floating exchange rate regime based on market
supply and demand."
The new exchange rate mechanism the Chinese authorities have adopted allows for considerable
flexibility and reflection of market forces. In the Joint Statement issued after the U.S.-China
Joint Economic Committee meeting in Beijing on October 17,2005, the Chinese authorities
committed "to enhance the flexibility and strengthen the role of market forces in their managed
floating exchange rate regime."l4
This has not occurred yet. Since July 21, the renminbi exchange rate has fluctuated in a very
narrow trading range against the dollar. The July 21 action was an important first step, but the
initial adjustment and the subsequent movement of the renminbi are not sufficient and do not
represent fulfillment of the Chinese authorities' commitment. Chinese monetary authorities have
not fully utilized the flexibility allowable by the regime, with intra-day movements of the RMB
against the U.S. dollar much less that the allowable +/- 0.3%.
China's economy showed many signs of overheating in 2004, as a credit-fueled investment boom
- in large part due to the capital inflows and low real interest rates that resulted from the fixed
exchange rate China maintained - spurred growth but also threatened an outburst of inflation. In
response, Chinese policymakers implemented a variety of administrative and some market-based
tightening measures to curb lending activity and investment, particularly in overheated sectors of
the economy, including the property sector. These policies had some success, as investment
growth slowed and inflation moderated from its 2004 peak. Although investment growth
slowed, the slowdown in overall GDP growth has been less pronounced. China's real GDP grew
by a stronger than expected 9.5% in the first half of 2005 (down only 0.2 percentage points from
same period last year) and by 9.4% in the third quarter. While the contribution of investment to
growth has fallen, the contribution of net exports has increased significantly this year. l5 Even
though consumer inflation has declined as food prices have eased (CPI rose by 0.9% yr/yr in
September off the 5.3% peak in August, 2004), inflation remains constrained by price controls,
notably on oil, which has led to sporadic shortages. l6 Producer prices are still growing at a more
rapid rate (4.5% yr/yr in September, compared to a peak of 8.4% yr/yr in October, 2004).
In the first half of 2005, China's global trade surplus grew to a (seasonally unadjusted) total of
17
$39.6 billion (5.0 percent of GDP), already exceeding the $32.1 billion surplus for all of 2004.
In the third quarter China's trade surplus widened further, and for the first nine months of2005
The name of the Chinese currency is the renminbi, and the unit of account is the yuan.
See http://www.treas.gov/press/releases/js2987.htm.
15 China publishes data on GDP by expenditure components, which is needed to compute the contributions of
various demand sources to growth, only on an annual basis with a lag of one year. The observation that the
contribution of net exports has increased significantly is based on first half current account data released by the
Chinese authorities and on private sector estimates.
16 In early November, 2005, the Chinese authorities announced they would ease price controls on utilities.
17 These trade figures are on an FOB-CIF basis. If China's imports were measured on the same basis as its exports
(fob), China's adjusted global merchandise trade balance would be $54.1 billion. [Note: this calculation assumes a
4.8% c-i-f(cost, insurance, and freight) adjustment factor.]
13
14
18
totaled $68.3 billion. Chinese goods exports rose 31 % in the first nine months of 2005, about the
same as the 35% rate of growth last year. The sharp rise in net exports is largely due to a
deceleration in the growth of China's imports. China's total imports grew by only 14 percent
yr/yr in the first half of 2005 over the same period last year, a much slower pace than the 36
percent increase in imports during all of2004. Administrative measures imposed last year
helped to slow investment growth, which in turn reduced demand for imports of capital
equipment. In addition, in certain sectors that experienced rapid expansion of capacity (such as
steel, aluminum, cement, and automobiles) domestic production to some extent substituted for
imported goods. The increase in the trade surplus was reflected in China's current account
surplus, which was an estimated $67.3 billion (8.3 percent of GOP) in the first half of2005,
nearly matching the $68.7 billion current account surplus for all of2004. 18
After deducting the $15 billion in foreign exchange transferred to recapitalize one of China's
major banks, China's official foreign exchange reserves grew by $101 billion during the first half
of 2005 to reach $711 billion at the end of June. In addition to the current account surplus, net
financial and capital inflows were an estimated $38.3 billion, compared to a net inflow of $111
billion for all of 2004. For the first time in several years China's current account surplus
accounted for the majority of its reserve accumulation instead of net capital inflows. Reserve
accumulation continued in the third quarter, with reserves growing an additional $58 billion to
reach $769 billion at end September. The central bank continued to "sterilize" the foreign
exchange inflows by issuing central bank bills, and net issuance picked up in the first half of
2005. 19
On July 21, 2005, China changed its exchange rate to a new value of 8.11 yuan per dollar. This
was a 2.1 percent revaluation, a small initial movement in response to the market pressures
China has faced over the past several years. China also abandoned the U.S. dollar peg, adopting
"a managed float exchange rate regime, based on market supply and demand with reference to a
basket of currencies." Thus far, however, the currency basket does not appear to have played a
significant role in determining the daily closing level of the renminbi, and trading behavior since
July 21 strongly suggests that the new mechanism remains, in practice, a tightly managed
currency peg against the U.S. dollar.
The Chinese authorities also took steps during the year to prepare market participants for greater
exchange rate flexibility and provide some financial products to hedge foreign exchange risk.
China expanded the list of participants in the inter-bank spot market, allowed market makers in
renminbi, expanded the number of banks that can handle foreign exchange forward transactions,
expanded the types of transactions that can be hedged using forwards, and offered currency
swaps. However, there is still substantial scope to expand the depth and liquidity of the foreign
exchange market in China. In addition, the tight management of the exchange rate itself
diminishes the need for development of the market, since participants have much less incentive
to hedge. By allowing the exchange rate to fluctuate more widely according to the market, the
18 Preliminary current account statistics for the first half of2005 in China were published by the State
Administration of Foreign Exchange (SAFE) on October 31, 2005.
19 The People's Bank of China (PBOC) issued $97 billion on a net basis in the first half of 2005, compared to $33
billion in the last six months of 2004.
19
authorities would create demand for products that could help firms manage the risks associated
with currency exposure more effectively.
China has taken steps to liberalize its controls on capital movements in order to increase the
depth and liquidity of foreign exchange markets. But its capital controls still maintain greater
restrictions on capital outflows than on inflows. Chinese authorities recently allowed foreign
investors to acquire a greater number of shares in locally listed Chinese companies. This move
coincides with government efforts to introduce trading for previously non-traded shares owned
by the state.
But while the new exchange rate mechanism allows for greater flexibility, China's exchange rate
since July 21 has been very tightly controlled. The renminbi-dollar exchange rate has fluctuated
up and down on a daily basis within very narrow ranges and has gradually strengthened from
8.11 yuan per dollar to 8.0815 per dollar as of November 25, a cumulative appreciation of 0.35
percent against the dollar. Even though China had pegged its exchange rate to the dollar prior to
July 21, and has allowed for modest fluctuation since, this has not prevented China's currency
from fluctuating against currencies of other trading partners. On a trade-weighted basis, the
RMB appreciated during the reporting period: the nominal and real effective exchange rates, as
measured by the J.P. Morgan Narrow Nominal and Broad Real Effective Exchange Rate Indices,
appreciated by 2.9 percent and 3.5 percent, respectively, reflecting in large measure the dollar's
appreciation.
China's exchange rate is not yet sufficiently flexible to meet the needs of the Chinese economy
or those of the global economy. A significant increase in flexibility is necessary to give China a
sufficiently autonomous and effective monetary policy to sustain growth and avoid inflation.
The inability to set domestic interest rates limits monetary control and also hinders efforts to
encourage more efficient bank lending. In addition, speCUlative capital continues to flow into
China on the expectation that the renminbi will appreciate further. Furthermore, a rigid
exchange rate hinders China's ability to move away from its current dependence on exports and
continued rapid increases in investment to a more balanced and sustainable pattern of growth in
which households have a greater share. Nor has the Chinese government introduced flexibility
sufficient to contribute to the orderly reduction of global imbalances that is needed to assure
continued strong global growth.
Treasury has continued to engage China in active bilateral and multilateral discussions on
macroeconomic, financial sector and exchange rate reform issues. This year, Treasury facilitated
the invitation of Chinese economic leaders to several G7 meetings where these topics featured
prominently. In addition, the APEC economies, including China, acknowledged their joint
responsibility in bringing about an orderly adjustment of global imbalances, including, where
appropriate, greater exchange rate flexibility.20 Secretary Snow traveled to China in midOctober 2005 for intensive talks with Chinese leaders, including through the U.S.-China Joint
Economic Committee (lEC) with broad and active participation from key economic and financial
ministries and financial regulators in China and the United States. A separate meeting of a U.S.China financial regulatory working group was also held in October. Finally, Secretary Snow just
20 See http://www.apec.org/apec/ministeria!statements/sectoralministeriallfinance/2005finance.htm!for the
statement from the September 2005 Finance Ministers meeting.
20
appointed a full-time, permanent resident Treasury Financial Attache who will move to Beijing
in the first half of 2006.
The Chinese authorities have said clearly that the July 21 action is the first step in a process of
introducing greater exchange rate flexibility. In the Joint Statement following the U.S.-China
Joint Economic Committee meetings in Beijing on October 16-17, they said that they would
enhance the flexibility and strengthen the role of market forces in their managed floating
exchange rate regime, and President Hu told President Bush that China would unswervingly
press ahead with reform of its exchange rate mechanism. The Chinese authorities should do so
by the time this report is next issued. Treasury will monitor movements of the renminbi and the
authorities' progress in allowing significant exchange rate flexibility before the next report.
Taiwan
Taiwan's economy slowed considerably during the first half of200S, growing at a seasonally
adjusted annual rate of only 1.7 percent, after growing at a seasonally adjusted annual rate of 4.1
percent in the second half of last year. A lull in electronics exports contributed to weak export
performance. Consumer price inflation remained low, with consumer prices up 1.9 percent yearon-year in the first half of 200S. Nevertheless, the central bank has raised interest rates during
each of its last four policy meetings, in an effort to head off inflationary pressures, in part related
to rising oil prices.
Taiwan's trade surplus was $1. 7 billion in the first half of 200S, down substantially from the $S
billion recorded in the first half of 2004, as imports climbed 11.1 percent, due in large part to
higher oil prices, and exports rose by 6.6 percent. Taiwan's bilateral trade surplus with the
United States dropped slightly to $S.7 billion in the first halfof200S from $S.8 billion in the
year earlier period. Reflecting the fall in the overall trade surplus, Taiwan's current account
surplus dropped to $S.8 billion (3.S percent ofGDP) in the first halfof200S, down from $11.3
billion (7.4 percent of GDP) in the first half of 2004 and 4.8 percent of GDP in the second half of
last year.
Net financial inflows to Taiwan were $9.6 bi11ion in the first halfof200S, reversing an outflow
of$7.8 billion in the second halfof2004. The main component was a $I3.S bi11ion inflow of
other investments, as the New Taiwan (NT) dollar appreciation during the first quarter of200S
led enterprises to remit home their export proceeds retained overseas and banks to reduce their
lending or deposits abroad as well as bring in capital from abroad.
After rapid growth in reserves between 2000 and 2004, Taiwanese intervention and reserve
accumulation have slowed markedly so far in 200S. Reserves at the end of June were $2S4
billion, S% higher than at the end of 2004, and remained at that level at end-September. After
appreciating by 6.0% in the last half of 2004, the NT dollar was roughly stable over the reporting
period, closing June at 31.64 per U.S. dollar, an appreciation of 0.3 percent since December 31,
2004. Since June 30, the NT dollar depreciated by 4.6 percent to end-September and an
additional 1.1 percent in October.
21
South Korea
The South Korean economy grew briskly in late 2003 and early 2004 on strong growth of net
exports, but slowed in the last half of 2004. Growth in the second half of 2004 slowed to 4.0
percent (year-over-year), and slowed further to 3.0 percent in the first half of2005. There are
signs of a pickup in the third quarter, and growth for 2005 as a whole is expected to be about
four percent, as a cautious rebound in private consumption and business investment is offsetting
slowing net exports. In fact, domestic demand is expected to overtake external demand as the
main contributor to growth for the first time since 2002. However, the recovery in consumption
is still limited by slow progress in reducing the high level of unemployment and remaining high
levels of household debt in the aftermath of South Korea's credit card bubble of2002. The Bank
of Korea has taken advantage of South Korea's exchange rate flexibility by pursuing an
accommodative monetary policy to support growth, at a time when U.S. interest rates have been
rising. The Bank of Korea left interest rates unchanged during the first half of the year, as both
the CPI and core inflation remained well within the 2.5 - 3.5 percent target range, despite rising
oil prices.
Export growth decelerated in the first half of 2005, rising 11 percent year on year, compared with
a 25 percent increase year-on-year in the second half of 2004. Exports to China remained an
especially significant contributor. Import growth outpaced export growth, rising 14.8 percent
over a year ago, reflecting the impact of rising oil prices on the cost of imports. As a result,
South Korea's overall trade surplus shrank 6.0 percent from a year earlier. The U.S. bilateral
trade deficit with Korea fell to $8.5 billion for the first half of 2005, down $0.4 billion and 4.8
percent from the same period in 2004. Korean exports to the U.S. grew by less than one percent,
and Korean imports from the U.S. grew by 4.1 percent compared to the same period last year.
South Korea's current account surplus moved in line with its shrinking trade surplus, dropping
from $14.4 billion (3.8 percent of GOP) in the second half of 2004 to $8.7 billion (2.4 percent of
GOP) in the first half of 2005 on a seasonally adjusted basis.
The net inflow in the capital and financial account of $4.7 billion in the first half of 2005 was a
marked decrease from the $7.5 billion inflow in the second half of 2004. Both foreign direct
investment of Koreans abroad and foreign direct investment into South Korea fell sharply in the
first half of2005, as did net inward portfolio investment. Foreign exchange reserves increased
by $6 billion (3 percent) to $205 billion during the reporting period.
After appreciating over 10 percent in the second half of 2004, the South Korean won fluctuated
against the dollar within a relatively narrow band during the first half of 2005, ending the first
halfat 1,034.5 won per dollar, virtually unchanged from the end of 2004. South Korea's real
effective exchange rate appreciated by about 5 percent, reflecting appreciation of the dollar
against other currencies during the first half of 2005.
Malaysia
Malaysia'S economy grew at a 4.9 percent annual rate during the first half of 2005, slowing from
the 8.1 percent rate for the same period last year. Although the economy grew 7.1 percent in
2004, it significantly slowed down in the second half of the year due in part to a moderation in
22
global growth. Economic activity picked up a bit in the first half of this year with increases in
private consumption and private investment. Growth in 2005 is expected to be around 5 percent.
Fiscal consolidation continued, as public works spending declined and total public sector
spending fell moderately as part of the government's overall goal to bring the fiscal deficit down
to 3.8 percent of GOP. The government also has gradually cut oil subsidies as global oil prices
continue to rise, creating a slight drag on consumption.
The current account surplus was $10.2 billion, or 16.5 percent of GOP, in the first half of 2005,
up from 12.7 percent in the second half of2004. Malaysia's bilateral trade surplus with the
United States totaled $10.4 billion in the first halfof2005, compared with $7.5 billion in the first
half of2004. Large current account surpluses have been a striking feature of the Malaysian
economy in the last few years, even before higher oil prices (Malaysia is a net oil exporter)
expanded the surplus. After running substantial external deficits prior to the Asian Financial
Crisis, Malaysia has had significant and growing trade and current account surpluses. The
current account surplus in 2004 was $14.9 billion (12.6 percent of GOP). Malaysia's current
account surplus is in large part the counterpart to a sharp fall in domestic investment that took
place in the aftermath of the Asian Financial Crisis. After rising to over 40 percent of GOP in
1995-97, total investment dropped sharply in 1998, and has declined gradually to 20.5 percent of
GOP in 2004. The decline in private investment has been even more striking, falling from over
30 percent ofGDP in 1997 to just below 8 percent in 2003. Part of this decline was expected
after the investment boom just prior to the 1997 Asian Financial Crisis, but Malaysia's
investment rate is almost 15 percentage points below its level in the early 1990s, and there have
been sharp declines in both domestic private and foreign direct investment. The reasons for the
sharp fall in investment are not clear; reasons that have been suggested include declining
competitiveness of Malaysia vis-a-vis other Asian economies, shortages of complementary
inputs (particularly skilled labor), policy efforts to shift towards a more service-oriented
economy, and the effect of government regulation.
Through the first half of 2005, Malaysia maintained a fixed peg to the dollar (3.80 ringgit to a
dollar), as it had since September 1998. However, immediately following China's revaluation on
July 21, Malaysia announced that it was abandoning the ringgit's peg to the dollar and moving to
a managed float against a trade-weighted basket. The Central Bank plans to monitor the
exchange rate to ensure that it "remains close to its fair value." In the first two weeks after the
revaluation, the ringgit appreciated by only 1.4 percent, before falling to a level of about 3.77 (a
cumulative appreciation of 0.8 percent from the original pegged rate), with small fluctuations in
the daily rate.
Preceding this move, Malaysia relaxed most of its controls on capital flows which were imposed
when the ringgit was pegged in 1998. As of April 1, 2005, Malaysia further relaxed the controls
to allow: increased investment abroad; maintenance of currency export proceeds with licensed
banks onshore; and hedging on any committed or anticipatory current account transaction or on
any committed capital account payments. However, offshore trading of the ringgit remains
prohibited, and foreign portfolio investment by residents continues to be limited.
Malaysia's financial account surplus contracted to $1 billion in the first half of 2005 from $1.7
billion in the last half of 2004, due in part to a decline in net portfolio investment inflows. At the
23
end of June 2005, foreign exchange reserves stood at $70.4 billion, up from $61.7 billion at the
end 0[2004.
Although Malaysia has taken important step to remove the capital controls it imposed during the
Asian Financial Crisis in 1997, and has made a small alteration in the ringgit exchange rate, its
currency remains essentially fixed, despite the substantial rise in the current account and trade
balances. Malaysia is a relatively small and highly open economy, where domestic prices
rapidly reflect changes in international prices. In these circumstances, Malaysia's exchange rate
policy may be appropriate. At the same time, the large and rising current account surplus
suggests that there are both external and domestic imbalances in which the exchange rate plays a
role. Treasury will begin bilateral discussions with the Malaysian government on its exchange
rate policy and the role that it plays in the Malaysian economy.
24
Page 1 of2
PRESS ROOM
November 29,2005
2005-11-29-12-24-15-16460
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 $68,790 million as of the end of that week, compared to $68,799 million as of the end of the prior week.
I. Official U.S. Reserve Assets (in US millions)
1'Iovernber 18, 2005
TOTAL
11. Foreign Currency Reserves 1
N()vember ~5, 2005
I
68,799
I
a. Securities
I
68,790
Euro
Yen
TOTAL
10,921
10,674
21,595
Of which, issuer headquarlered in the US.
I
Euro
II
10,932
Yen
I
10,638
TOTAL
21,570
0
0
b. Total deposits with:
b.i. Other central banks and BIS
I
5,169
10,434
15,603
I
10,423
5,150
15,573
Ib.ii. Banks headquartered in the US.
0
Ib.ii. Of which, banks located abroad
0
Ib.iii. Banks headquarlered outside the US.
0
II
II
Ib.iii. Of which, banks located in the U.S.
0
II
II
II
II
I
12. IMF Reserve Position 2
12,487
3. Special Drawing Rights (SDRs) 2
II
II
I
II
II
0
II
0
0
0
12,515
8,073
4. Gold Stock 3
II
••
/I
I I,
5. Other Reserve Assets
8,091
II
11,041
0
°
II. Predetermined Short-Term Drains on Foreign Currency Assets
Novemb~r
Euro
I
N...Qyember 2S.,_2005
18,2005
Yen
I
Euro
TOTAL
Yen
TOTAL
0
1. Foreign currency loans and securities
0
2. Aggregate short and long positions in forwards and futures in foreign currencies vis-a-vis the U.S. dollar:
12.8. Short positions
2.b. Long positions
3. Other
II
II
I
I
I
I
0
II
I
0
°
0
0
I
0
III. Contingent Short-Term Net Drains on Foreign Currency Assets
I
1. Contingent liabilities in foreign currency
1.a. Collateral guarantees on debt due within 1
year
I
~
lII.overn..l;)e[25,.20~5
Noveml;)er18. 2005
Euro
Yen
I
0
I
I
II
http://treas.gov/press/reieases/2005112912241516460.htm
II
Euro
TOTAL
I
I
II
II
II
II
II
Yen
II
TOTAL
I
0
I
II
12/1/2005
Page 2 of2
li.b. Other contingent liabilities
I
I
2. Foreign currency securities with embedded
options
I
"
II
I
"
"I
I
"
I
I
3. Undrawn, unconditional credit lines
3.a. With other central banks
.b. With banks and other financial institutions
i-feadquartered in the U. S.
I
II J.C. with banks and other financial institutions
Headquartered outside the U.S.
4. Aggregate short and long positions of options
in foreign
0
0
I
I
I
I
Currencies vis-a-vis the U.S. dollar
I
0
II
I
0
0
I
"
I
I
0
4.a. Short positions
4.a.1. Bought puts
I
I
4.a.2. Written calls
4.b. Long positions
4.b.1. Bought calls
I
I
I
I
I
I
I
4.b.2. Written puts
Notes:
11 Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account
(SOMA), valued at current market exchange rates. Foreign currency holdings listed as securities reflect marked-to-market values, and
deposits reflect carrying values. Foreign Currency Reserves for the latest week may be subject to revision. Foreign Currency
Reserves for the prior week are final.
21 The items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF and are
valued in dollar terms at the official SDR/doliar exchange rate for the reporting date. The entries for the latest week reflect any
necessary adjustments, including revaluation, by the U.S. Treasury to IMF data for the prior month end.
31 Gold stock is valued monthly at $42.2222 per fine troy ounce.
http://treas.gov!press/releases/2005112912241516460.htm
12/1/2005
Page 1 of 1
PRESS ROOM
November 30,2005
JS-3025
Statement of Treasury Secretary John W. Snow
On Third Quarter GOP
"Economic growth was outstanding in the third quarter of this year. The
government's estimate of the rate of growth increased to 4.3 percent, which is very
good news for American workers and those seeking jobs. Additionally, it is good
news for federal and state government budgets with economic growth inevitably
leading to higher tax receipts.
"Continued strong GOP growth, along with news of a rebound in consumer
confidence in November and a robust start to the holiday shopping season are all
compelling indications that the American economy is solidly on a track of healthy
growth.
"For each of the last ten quarters, and in spite of severe weather disruptions in the
most recent quarter, the American economy has grown at a robust rate of 3.3
percent or more. There can be no doubt that the combination of the President's
leadership and good fiscal policies with American innovation and hard work
continues to make the American economy the most adaptive and resilient in the
world.
"The President's economic course of lower tax rates and the Federal Reserve
Board's sound monetary policy are the foundation upon which the American people
build a strong economy. We need to continue these pro-growth policies, and
prevent harmful tax increases."
http://treas.govJpress/releases/js302SJUm
12/1/2005
Page 1 of 1
PRESS ROOM
10 vIew or pnnt the put- content on thIS page. download the tree AdQbel") Acroba((f'.J HeaOere")
November 30, 2005
JS-3026
Treasury and IRS Issue Guidance Clarifying New Legislation
Providing Hurricane Katrina Victims Access to Their
Retirement Savings
Treasury and the IRS issued Notice 2005-92 today, which provides guidance
relating to the application of two provisions of the Katrina Emergency Tax Relief Act
of 2005 (KETRA) for Hurricane Katrina victims and employer-sponsored retirement
plans and IRAs.
Under one provision of KETRA, individuals who live in one of the four states
affected by Hurricane Katrina and who suffered an economic loss as a result of that
hurricane receive favorable tax treatment with respect to distributions from eligible
retirement plans that are qualified Hurricane Katrina distributions, called "Katrina
distributions." A Katrina distribution is not subject to the 10% additional tax
applicable to early distributions from a retirement plan (25% in the case of a Simple
IRA), is generally includible in income over a 3-year period, and -- to the extent the
distribution is eligible for tax-free rollover treatment and is contributed to an eligible
retirement plan (recontributed) within a 3-year period -- will not be includible in
income at all.
Another provision of KETRA increases the allowable plan loan amount from an
employer-sponsored retirement plan and provides for a suspension of payments for
plan loans outstanding on or after August 25, 2005 that are made to Katrina victims.
This notice provides guidance for plan sponsors, service providers, and
participants, as well as IRA owners, who choose to use the valuable benefits
provided under these two KETRA provisions.
REPORTS
http://treas.govJpressireleases/js3026.htm
12/112005
Part III. Procedural, Administrative, and Miscellaneous
Hurricane Katrina Relief under sections 101 and 103 of the Katrina
Emergency Tax Relief Act of 2005
Notice 2005-92
PURPOSE
This notice provides guidance relating to the application of sections 101
and 103 of the Katrina Emergency Tax Relief Act of 2005, P.L. 109-73 (KETRA)
for qualified individuals and eligible retirement plans. KETRA was enacted on
September 23, 2005. Under section 101 of KETRA, qualified individuals receive
favorable tax treatment with respect to distributions from eligible retirement plans
that are qualified Hurricane Katrina distributions (Katrina distributions). A Katrina
distribution is not subject to the 10% additional tax under § 72(t) of the Code
(including the 25% additional tax under § 72(t)(6) for certain distributions from
SIMPLE IRAs), is generally includible in income over a 3-year period, and, to the
extent the distribution is eligible for tax-free rollover treatment and is contributed
to an eligible retirement plan (recontributed) within a 3-year period, will not be
includible in income. Section 103 of KETRA increases the allowable plan loan
amount under § 72(p) of the Code and permits a suspension of payments for
plan loans outstanding on or after August 25, 2005 that are made to qualified
individuals.
BACKGROUND
Under § 402(c)(8) of the Code, an eligible retirement plan includes an
individual retirement arrangement (IRA) under § 408(a) or (b), a qualified plan
under § 401 (a), an annuity plan under § 403(a), a section 403(b) plan, and a
governmental deferred compensation plan under § 457(b). Distributions from
these plans are generally includible in the distributee's gross income in the year
of the distribution. For example, for qualified plans, § 402(a) provides that any
amount actually distributed to a distributee is taxable to the distributee in the
taxable year of the distribution under § 72. Similar rules exist for section 403(b)
plans under § 403(b)(1), for governmental section 457(b) plans under § 457(a),
and for IRAs under § 408(d)(1).
Section 402(f) provides that a plan is required to provide a distributee,
within a reasonable period of time before an eligible rollover distribution is made,
with a written explanation of the distributee's rollover rights and the tax and other
potential consequences of the distribution or rollover.
Section 402( c)(4) provides that any distribution of all or a portion of the
balance to the credit of an employee under a qualified plan is an eligible rollover
distribution with certain exceptions. These exceptions include substantially equal
periodic payments over a specified period of at least 10 years, or for the life or
the life expectancy of the employee (or the employee and the employee's
deSignated beneficiary); minimum distributions required under § 401 (a)(9); and
any distribution that is made upon the hardship of an employee. This same
definition of eligible rollover distributions applies to distributions from section
403(b) plans under § 403(b)(8) and governmental section 457(b) plans under §
457(e)(16). Generally, any distribution from an IRA is eligible for rollover except
a required minimum distribution or certain distributions from inherited IRAs.
Under § 401 (a)(31), if a distributee elects to have an eligible rollover
distribution paid directly to an eligible retirement plan and specifies the eligible
retirement plan to receive the distribution, a qualified plan must pay the
distribution to that eligible retirement plan in a direct rollover. Similar rules apply
to section 403(b) plans under § 403(b)( 10) and governmental section 457 (b)
plans under § 457(d)(1).
Q&A-14 of §1.401 (a)(31 )-1 of the Income Tax Regulations provides that if
a plan accepts an invalid rollover contribution, the contribution will be treated, for
purposes of applying the qualification requirements to the receiving plan, as if it
were a valid rollover contribution, if two conditions are satisfied. First, when
accepting the amount from the employee as a rollover contribution, the plan
administrator of the receiving plan reasonably concludes that the contribution is a
valid rollover contribution. Second, if the plan administrator later determines that
the rollover contribution was an invalid rollover contribution, any amount
attributable to the invalid rollover contribution (including earnings) must be
distributed to the employee within a reasonable amount of time after the
determination.
Under § 402, if an eligible rollover distribution is contributed to an eligible
retirement plan in a direct rollover or within 60 days from the date of distribution
as a rollover contribution, the amount rolled over is not includible in the
distributee's gross income.
Section 72(t)(1) imposes an additional tax on early distributions from
eligible retirement plans. In general, this additional tax is equal to 10% of the
portion of the distribution that is includible in income. For any amount distributed
from a SIMPLE IRA during the 2-year period described in § 72(t)(6), the rate of
the additional tax is increased from 10% to 25%. Section 72(t)(2) provides a
number of exceptions to this additional tax, including, for example, exceptions for
distributions made on or after the employee attains age 59~, distributions made
to a beneficiary on or after the employee's death, distributions made because of
the employee's disability, and distributions that are a part of substantially equal
periodic payments made over the employee's life or life expectancy.
2
Section 401 (k)(2)(8)(i) generally provides that amounts attributable to
elective contributions under a qualified cash or deferred arrangement may not be
distributable to participants or beneficiaries earlier than severance from
employment, death or disability, plan termination, or attainment of age 59~. This
same restriction applies to any amount attributable to qualified nonelective
contributions and qualified matching contributions under qualified cash or
deferred arrangements. An amount equal to the dollar amount of elective
contributions can generally be distributed upon hardship of the employee.
Parallel rules apply to custodial accounts under § 403(b)(7)(A)(ii), to annuity
contracts under § 403(b)(11), and to governmental section 457(b) plans under
§ 457(d)(1 )(A).
Section 72(p) imposes certain requirements relating to plan loans. Unless
these requirements are satisfied, an amount received by a participant as a loan is
treated as having been received as a distribution from the plan (deemed
distribution). Deemed distributions are includible in income and are subject to
the 10% additional tax under § 72(t), unless an exception applies.
Under § 72(p )(2)(A), a plan loan (when added to the outstanding balance
of all other loans outstanding) must not exceed the lesser of (1) $50,000 reduced
by the excess of the highest outstanding balance of loans from the plan during
the 1-year period ending on the day before the date on which the loan is made
over the outstanding balance of loans from the plan on the date that the loan is
made or (2) the greater of $10,000 or one-half of the present value of the
participant's nonforfeitable accrued benefit under the plan. Section 72(p)(2)(8)
provides that a loan must be repaid within 5 years. However, an exception to the
5-year repayment rule applies for loans used to acquire any dwelling unit that will
be used (determined at the time the loan is made) as the participant's principal
residence. Section 72(p)(2)(C) requires substantially level amortization of a plan
loan (with payments not less frequently than quarterly) over the term of the loan.
Q&A-1 O(a) of § 1.72(p)-1 of the regulations provides that the failure to
make any installment payment when due, in accordance with the terms of a loan,
violates § 72(p)(2)(C) and, accordingly, results in a deemed distribution at the
time of such failure. However, the plan administrator may allow a cure period
and § 72(p)(2)(C) will not be considered to have been violated if the installment
payment is made not later than the end of the cure period, which period cannot
continue beyond the last day of the calendar quarter following the calendar
quarter in which the required installment payment was due. If there is a failure to
pay the installment payments required under the terms of the loan (taking into
account any cure period allowed under Q&A-10(a)), then the amount of the
deemed distribution equals the entire outstanding balance of the loan (including
accrued interest) at the time of such failure.
3
SECTION 1: QUALIFIED HURRICANE KATRINA DISTRIBUTIONS
A. Special tax treatment for Qualified Hurricane Katrina distributions.
Section 101 of KETRA provides for special tax treatment for a Katrina
distribution. Section 101 of KETRA provides an exception to the 10% additional
tax under § 72(t) of the Code (including the 25% additional tax under § 72(t)(6)
for certain distributions from SIMPLE IRAs), allows the distribution to be included
in income ratably over 3 years, and provides that the distribution will be treated
as though it were paid in a direct rollover to an eligible retirement plan if the
distribution is eligible for tax-free rollover treatment and is recontributed to an
eligible retirement plan within 3 years of the date of the distribution. Section 101
of KETRA also permits special treatment for Katrina distributions under employer
retirement plans, as described in section 2 of this notice.
B. Definition of qualified individual.
For purposes of this notice, a qualified individual is an individual whose
principal place of abode on August 28, 2005, is located in the Hurricane Katrina
disaster area as defined in section 2(1) of KETRA and who has sustained an
economic loss by reason of Hurricane Katrina. For purposes of the relief
provided under KETRA, the term "Hurricane Katrina disaster area" as set forth in
section 2(1) means the entire states of Louisiana, Mississippi, Alabama, and
Florida. 1
C. Definition of Katrina distribution.
Section 101 (d)(1) of KETRA defines a Katrina distribution as any
distribution from an eligible retirement plan made on or after August 25, 2005,
and before January 1, 2007, to a qualified individual. Section 101 (b) of KETRA
limits the amount of distributions that can be treated as Katrina distributions to no
more than $100,000.
A qualified individual is permitted to designate a distribution described
above as a Katrina distribution. This designation is permitted to be made with
respect to any distribution that would meet the requirements of a Katrina
distribution without regard to whether the distribution was on account of
Hurricane Katrina. Thus, periodic payments and required minimum distributions
received by a qualified individual from an eligible retirement plan on or after
August 25, 2005 and before January 1, 2007, are permitted to be treated as
Katrina distributions. Similarly, any distribution received by a qualified individual
I This definition applies solely for purposes of relief provided under KETRA and does not apply for
purposes of relief under other provisions. For example, see Notice 2005-73, 2005-42 I.R.B. 723, which
defines taxpayers affected by Hurricane Katrina and designates disaster areas for purposes of the relief
provided under § 7508A.
4
as a beneficiary can be treated as a Katrina distribution. In addition, a reduction
or offset of a participant's account balance in order to repay a plan loan, as
described in Q&A-9(b) of § 1.402(c)-2 of the regulations, is permitted to be
treated as a Katrina distribution. However, any amount described in Q&A-4 of
§1.402(c)-2 of the regulations is not permitted to be treated as a Katrina
distribution. Thus, the following amounts are not Katrina distributions: corrective
distributions of excess contributions under § 415, excess elective deferrals under
§ 402(g), excess contributions under § 401 (k), and excess aggregate
contributions under § 401 (m); loans that are treated as deemed distributions
pursuant to § 72(p); dividends paid on applicable employer securities under
§ 404(k); and the costs of current life insurance protection. See section 1.0 of
this notice for rules relating to which Katrina distributions are permitted to be
recontributed to an eligible retirement plan.
The definition of Katrina distribution under section 101 (d)(1) of KETRA
does not limit the designation of a Katrina distribution to amounts withdrawn
solely to meet a need arising from Hurricane Katrina. Thus, even though a
qualified individual is required to have sustained an economic loss, Katrina
distributions are permitted without regard to the qualified individual's need and
the amount of the distribution is not required to correspond to the amount of the
economic loss suffered by the qualified individual.
As explained in section 2.C of this notice, an employer retirement plan is
also permitted to treat a plan distribution described above as a Katrina
distribution. It is possible that a qualified individual's designation of a Katrina
distribution may be different from the employer retirement plan's treatment of the
distribution. This different treatment could occur, for example, if a qualified
individual has more than one plan distribution that meets the requirements of a
Katrina distribution. This different treatment could also occur if a qualified
individual has distributions from more than one eligible retirement plan.
D. Certain Katrina distributions are permitted to be recontributed.
Subject to certain exceptions, distributions from an eligible retirement plan
that satisfy the requirements of a Katrina distribution under section 1.C of this
notice are permitted to be treated as Katrina distributions. Such distributions
may be included in income ratably over 3 years and are not subject to the 10%
additional tax under § 72(t) of the Code. However, only a Katrina distribution that
is eligible for tax-free rollover treatment under § 402(c) (and 402(e)(6)),
403(a)(4), 403(b)(8), 408(d)(3), or 457(e)(16) is permitted to be recontributed to
an eligible retirement plan, and such recontribution will be treated as having been
made in a direct rollover to that eligible retirement plan.
In the case of a distribution from an eligible retirement plan other than an
IRA, only a Katrina distribution that is an eligible rollover distribution within the
meaning of § 402(c)(4) is permitted to be recontributed to an eligible retirement
5
plan. Thus, periodic payments (for a period of at least 10 years, or the life or the
life expectancy of the employee (or the lives or joint life expectancies of the
employee and the employee's designated beneficiary)) and required minimum
distributions are not permitted to be recontributed to an eligible retirement plan
even though those distributions are permitted to be treated as Katrina
distributions if they satisfy the requirements under section 1.C of this notice. In
the case of a distribution from an IRA, only a Katrina distribution that is eligible
for rollover treatment under § 408(d)(3) is permitted to be recontributed to an
eligible retirement plan. Thus, required minimum distributions are not permitted
to be recontributed to an eligible retirement plan. Any Katrina distribution
(whether from an employer retirement plan or an IRA) paid to a qualified
individual as a beneficiary of an employee or IRA owner (other than the surviving
spouse of the employee or IRA owner) cannot be recontributed. See section 4.C
of this notice for rules relating to recontributions of Katrina distributions.
In general, a distribution from an employer retirement plan made on
account of hardship is not an eligible rollover distribution. However, if such a
distribution satisfies the requirements under section 1.C of this notice, then the
distribution is not treated as made on account of hardship for purposes of this
notice and, thus, any portion of the distribution is permitted to be recontributed to
an eligible retirement plan. See section 4.C of this notice for rules relating to
recontributions.
E. Definition of principal place of abode.
An individual's principal place of abode is where the individual lives unless
temporarily absent due to special circumstances. A temporary absence from the
household due to special circumstances, such as illness, education, business,
vacation, or military service, will not change an individual's principal place of
abode. See §§ 1.2-2, 1.152-1 (b), and 1.152-2(a)(2)(ii) of the regulations for
information relating to a temporary absence from a principal place of abode. If
an individual's principal place of abode was in the Hurricane Katrina disaster area
immediately before August 28, 2005, and the individual evacuated because of
Hurricane Katrina, the individual's principal place of abode will be considered to
be in the Hurricane Katrina disaster area on August 28, 2005.
SECTION 2. GUIDANCE FOR EMPLOYER RETIREMENT PLANS MAKING
KATRINA DISTRIBUTIONS
A. Katrina distributions are generally treated as satisfying certain plan
distribution restrictions.
Under section 101 of KETRA, a Katrina distribution designated by an
employer retirement plan is treated as meeting the distribution restrictions for
qualified cash or deferred arrangements under § 401 (k)(2)(8)(i) of the Code, for
6
custodial accounts under § 403(b )(7)(A)(ii), for annuity contracts under
§ 403(b)(11), and for governmental deferred compensation plans under
§ 457(d)(1 )(A). Thus, for example, an employer is permitted to expand the
distribution options under its plan to allow an amount attributable to an elective,
qualified nonelective, or qualified matching contribution under a qualified cash or
deferred arrangement to be distributed as a Katrina distribution even though the
distribution is before an otherwise permitted distributable event, such as
severance from employment, disability, or attainment of age 59Y2.
Except as described above, section 101 of KETRA does not change the
requirements for when plan distributions are permitted to be made from employer
retirement plans. Thus, for example, a qualified plan that is a penSion plan (e.g.
a money purchase plan) is not permitted to make in-service distributions merely
because the distribution, if made, would qualify as a Katrina distribution. Further,
a pension plan is not permitted to make a distribution under a distribution form
that is not a qualified joint and survivor annuity without spousal consent merely
because the distribution, if made, could be treated as a Katrina distribution.
B. Direct rollover and 20% withholdinq requirements are not applicable to
Katrina distributions.
If a distribution is treated as a Katrina distribution by an employer
retirement plan, the rules for eligible rollover distributions under §§ 401 (a)(31),
402(f), and 3405 of the Code are not applicable with respect to the distribution.
Thus, the plan is not required to offer the qualified individual a direct rollover with
respect to the distribution. In addition, the plan administrator does not have to
provide a § 402(f) notice. Finally, the plan administrator or payor of the Katrina
distributions is not required to withhold an amount equal to 20% of the
distribution, as is usually required under § 3405(c)(1). However, a Katrina
distribution is subject to the voluntary withholding requirements of § 3405(b) and
§ 35.3405-1T of the Temporary Employment Tax Regulations.
C. Treatment of distributions as Katrina distributions.
An employer is permitted to choose whether to treat distributions under its
plans as Katrina distributions. Further, the employer (or plan administrator) is
permitted to develop any reasonable procedures for identifying which
distributions are treated as Katrina distributions under its retirement plans.
However, if an employer retirement plan treats any distribution of an amount
subject to § 401 (k)(2)(B)(i), 403(b)(7)(A)(ii), 403(b)(11) or 457(d)(1 )(A) as a
Katrina distribution, the plan must be consistent in its treatment. Thus, the
amount of the distribution must be taken into account in determining the
$100,000 limit on Katrina distribution payments made under the retirement plans
maintained by the employer.
D. Distribution limits on Katrina distributions.
7
The total amount of distributions treated by an employer as Katrina
distributions under its retirement plans with respect to a qualified individual is not
permitted to exceed $100,000. For purposes of this rule, the term "employer"
means the employer maintaining the plan and those employers required to be
aggregated with the employer under § 414(b), (c), (m), or (0). However, a plan
will not fail to satisfy any requirement under the Code merely because a qualified
individual's total Katrina distributions exceed $100,000, taking into account
distributions from IRAs or other eligible retirement plans maintained by unrelated
employers.
E. Reliance on reasonable representations.
In making a determination that a distribution is a Katrina distribution, a
plan sponsor or plan administrator of an employer retirement plan is permitted to
rely on reasonable representations from a distributee with respect to the
distributee's principal place of abode on August 28, 2005, and whether the
distributee suffered an economic loss by reason of Hurricane Katrina, unless the
plan sponsor or plan administrator has actual knowledge to the contrary.
F. An employer retirement plan will be treated as operating in accordance with
its terms if certain reguirements are satisfied.
The Internal Revenue Service will be issuing guidance in the future
relating to plan amendments for KETRA. An employer retirement plan will not be
treated as failing to operate in accordance with its terms merely because the plan
implements the provisions of sections 101 and 103 of KETRA if the plan sponsor
amends its plan by the applicable dates described below. For employer
retirement plans other than a governmental plan, the date by which any plan
amendment to reflect KETRA is required to be made will not be earlier than the
last day of the first plan year beginning on or after January 1, 2007. For
governmental plans under § 414(d) of the Code, the date by which any plan
amendment to reflect KETRA is required to be made will not be earlier than the
last day of the first plan year beginning on or after January 1, 2009.
SECTION 3. GUIDANCE FOR ELIGIBLE RETIREMENT PLANS MAKING, OR
ACCEPTING RECONTRIBUTION OF , KATRINA DISTRIBUTIONS
This section provides guidance for eligible retirement plans (i.e., employer
retirement plans and IRAs) making, or accepting recontribution of, Katrina
distributions.
A. Tax Reporting on Katrina distributions.
8
An eligible retirement plan must report the payment of a Katrina
distribution to a qualified individual on Form 1099-R, Distributions from Pensions,
Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.
This reporting is required even if the qualified individual recontributes the Katrina
distribution to the same eligible retirement plan in the same year. If a payor is
treating the payment as a Katrina distribution and no other appropriate code
applies, the payor is permitted to use distribution code 2 (early distribution,
exception applies) in box 7 of Form 1099-R. However, a payor is also permitted
to use distribution code 1 (early distribution, no known exception) in box 7 of
Form 1099-R.
B. Reliance on representations relating to the recontribution of a Katrina
distribution.
In general, a qualified individual who receives a Katrina distribution that is
eligible for tax-free rollover treatment is permitted to recontribute, at any time in a
3-year period, any portion of the distribution to an eligible retirement plan that is
permitted to accept eligible rollover contributions. The relief in Q&A-14 of
§ 1.401 (a)(31 )-1 of the regulations applies to an employer retirement plan
accepting recontributions of Katrina distributions. In order to obtain the relief
described in Q&A-14 of § 1.401 (a)(31 )-1, a plan administrator accepting the
recontribution of a Katrina distribution must reasonably conclude that the
recontribution is eligible for direct rollover treatment under section 101 (c) of
KETRA and that the recontribution is made in accordance with the rules under
section 4.C of this notice. In making this determination, the rule in section 2.E of
this notice applies. Thus, a plan administrator may rely on the reasonable
representations of a qualified individual with respect to the individual's principal
place of abode on August 28,2005 and whether the individual suffered an
economic loss by reason of Hurricane Katrina, unless the plan administrator has
actual knowledge to the contrary.
SECTION 4. GUIDANCE FOR INDIVIDUALS RECEIVING KATRINA
DISTRIBUTIONS UNDER SECTION 101 OF KETRA
This section provides guidance for qualified individuals requesting and
receiving Katrina distributions. A qualified individual receiving a Katrina
distribution is entitled to favorable tax treatment with respect to the distribution.
First, the 10% additional tax under § 72(t) of the Code (including the 25%
additional tax under § 72(t)(6) for certain distributions from SIMPLE IRAs) does
not apply to any Katrina distribution. Second, a Katrina distribution is permitted
to be included in income ratably over 3 years. Third, a qualified individual is
permitted to recontribute any portion of a Katrina distribution that is eligible for
tax-free rollover treatment to an eligible retirement plan within 3 years from the
day after the date of the distribution, and the recontribution will be treated as if it
were paid in a direct rollover to an eligible retirement plan. See section 1.D of
9
this notice for rules relating to which Katrina distributions are permitted to be
recontributed. Qualified individuals will use Form 8915 2 , Qualified Hurricane
Katrina Retirement Plan Distributions and Repayments, to report any
recontribution made during the taxable year and to determine the amount of the
Katrina distribution includible in income for the taxable year.
A. Election to designate a distribution as a Katrina distribution.
A qualified individual is permitted to designate any distribution described in
section 1.C of this notice as a Katrina distribution provided the total amount
treated by the individual as Katrina distributions does not exceed $100,000. For
example, if a qualified individual received a distribution of $50,000 in 2005 and a
distribution of $75,000 in 2006 and both distributions satisfy the definition of a
Katrina distribution, only $100,000 of the $125,000 received by the qualified
individual can be treated as a Katrina distribution. Thus, if such individual treated
the 2005 distribution of $50,000 as a Katrina distribution on his or her 2005 tax
return, the individual can only treat $50,000 of the 2006 distribution as a Katrina
distribution on his or her 2006 tax return. Assuming no § 72(t)(2) exception
applies, the remaining $25,000 of the 2006 distribution is an early distribution.
This amount will be subject to the 10% additional tax, must be included on the
individual's 2006 tax return, and will not be eligible for 3 year recontribution to an
eligible retirement plan.
Example. A section 401 (k) plan distributes $35,000 to a qualified
individual on December 1, 2005. The qualified individual also receives a
distribution from his or her IRA on December 1, 2005 of $15,000. The individual
is permitted to treat both the $35,000 from the plan and the $15,000 from the IRA
as Katrina distributions on the individual's 2005 tax return.
B. Income inclusion for Katrina distributions
There are two methods for a qualified individual to include in income the
taxable portion of a Katrina distribution. First, a qualified individual who receives
a Katrina distribution is permitted to include the taxable portion of the amount of
the distribution in income ratably over a 3-year period that begins in the year of
the distribution. Second, a qualified individual is permitted to elect out of the 3year ratable income inclusion and include the entire amount of the taxable
portion of the Katrina distribution in income in the year of the distribution. All
Katrina distributions received in a taxable year must be treated consistently
(either all distributions are included in income over a 3-year period or all
distributions are included in income in the current year). If a qualified individual
uses the 3-year ratable income inclusion method, such method cannot be
changed after the timely filing of the individual's tax return (including extensions)
for the year of the distribution.
2
Fonn 8915 is expected to be available soon.
10
Example. Taxpayer A receives a $30,000 distribution from his or her IRA
on October 1, 2005. Taxpayer A is a qualified individual and elects to treat the
distribution as a Katrina distribution. Taxpayer A uses the 3-year ratable income
inclusion for the $30,000 distribution. Taxpayer A should include $10,000 in
income with respect to the Katrina distribution on each of his or her 2005 2006
and 2007 tax returns.
'
,
C. Tax treatment of recontributions of Katrina distributions.
If a Katrina distribution is eligible for tax-free rollover treatment (taking into
account section 1.0 of this notice), a qualified individual is permitted, at any time
in the 3-year period beginning the day after the date of a Katrina distribution, to
recontribute any portion of the distribution, but not in excess of the amount of the
distribution, to an eligible retirement plan. A recontribution of a Katrina
distribution will not be treated as a rollover contribution for purposes of the onerollover-per-year limitation under § 408(d)(3)(B).
D. Tax treatment of recontributions of a Katrina distribution using the 1-year
income inclusion method.
If a qualified individual elects to include all Katrina distributions received in
a year in gross income for that year and recontributes any portion of the Katrina
distributions to an eligible retirement plan at any time during the 3-year
recontribution period, then the amount of the recontribution will reduce the
amount of the Katrina distribution included in gross income for the year of the
distribution. The qualified individual will report the amount of the recontribution
on Form 8915, which will be filed with the individual's income tax return.
If a qualified individual includes a Katrina distribution in gross income in
the year of the distribution and recontributes the distribution to an eligible
retirement plan after the timely filing of the individual's tax return for the year of
the distribution (i.e., after the due date, including extensions), the individual will
need to file an amended tax return. The qualified individual will need to file a
revised Form 8915 with his or her amended return to report the amount of the
recontribution and should reduce his or her gross income by the amount of the
recontribution, but not to exceed the amount of the Katrina distribution.
Example 1. Taxpayer B receives a $45,000 distribution from a
section 403(b) plan on November 1, 2005. Taxpayer B is a qualified individual
and treats the distribution as a Katrina distribution. Taxpayer B receives no other
Katrina distribution from any eligible retirement plan in 2005. After receiving
reimbursement from his or her insurance company for a casualty loss, Taxpayer
B recontributes $45,000 to an IRA on March 31, 2006. Taxpayer B reports the
recontribution on Form 8915 and files the 2005 tax return on April 10, 2006. For
Taxpayer B, no portion of the Katrina distribution is includible as income for the
2005 tax year.
11
Example 2. The facts are the same as Example 1 of this section 4.0,
except that Taxpayer B timely requests an extension of time to file the 2005 tax
return and makes a recontribution on August 2, 2006, before he or she files the
2005 tax return. Taxpayer B files the 2005 tax return on August 10, 2006. As in
Example 1, no portion of the Katrina distribution is includible in income for the
2005 year because Taxpayer B made the recontribution before the timely filing of
the 2005 return.
Example 3. Taxpayer C receives a $15,000 distribution from a section
457(b) plan on January 10, 2006. Taxpayer C is a qualified individual and treats
the distribution as a Katrina distribution. Taxpayer C elects out of the 3-year
ratable income inclusion on Form 8915 and includes the entire $15,000 in gross
income for the 2006 taxable year. On December 31,2008, Taxpayer C
recontributes $15,000 to the section 457(b) plan. Taxpayer C will need to file an
amended return for the 2006 tax year to report the amount of the recontribution
and reduce Taxpayer C's gross income by $15,000 with respect to the Katrina
distribution on the 2006 original tax return.
E. Tax treatment of recontributions of a Katrina distribution using the 3-year
ratable income inclusion method.
As explained above, a qualified individual is permitted to include a Katrina
distribution in income ratably over a 3-year period. If a qualified individual
includes a Katrina distribution ratably over a 3-year period and the individual
recontributes any portion of the Katrina distribution to an eligible retirement plan
at any date before the timely filing of the individual's tax return (i.e., by the due
date, including extensions), the amount of the recontribution will reduce the
ratable portion of the Katrina distribution that is includible in gross income for the
tax year of the filed return.
Example 1. Taxpayer D receives $75,000 from a section 401 (k) plan on
December 1, 2005. Taxpayer D is a qualified individual and treats the $75,000
distribution as a Katrina distribution. Taxpayer D uses the 3-year ratable income
inclusion method for the distribution. Taxpayer D makes one recontribution of
$25,000 to the section 401 (k) plan on April 10, 2007. Taxpayer D files the 2006
tax return on April 15, 2007. Without the recontribution, Taxpayer D should
include $25,000 in income with respect to the Katrina distribution on each of D's
2005, 2006, and 2007 tax returns. However, as a result of the recontribution to
the section 401 (k) plan, Taxpayer D should include $25,000 in income with
respect to the Katrina distribution on the 2005 tax return, $0 in income with
respect to the Katrina distribution on the 2006 tax return, and $25,000 in income
with respect to the Katrina distribution on the 2007 tax return.
Example 2. The facts are the same as Example 1 of this section 4.E,
except that Taxpayer D recontributes $25,000 to the section 401 (k) plan on
August 10, 2007. Taxpayer D files the 2006 tax return on April 15, 2007, and
12
does not request an
recontribution to the
income with respect
income with respect
income with respect
extension of time to file the return. As a result of the
section 401 (k) plan, Taxpayer 0 should include $25,000 in
to the Katrina distribution on the 2005 tax return, $25,000 in
to the Katrina distribution on the 2006 tax return, and $0 in
to the Katrina distribution on the 2007 tax return.
F. Recontributions of a Katrina distribution may be carried back or forward when
using the 3-year ratable income inclusion.
If a qualified individual using the 3-year ratable income inclusion method
recontributes an amount of a Katrina distribution for a taxable year that exceeds
the amount which is otherwise includible in gross income for the tax year of the
filed return, as described in section 4.E of this notice, the excess amount of the
recontribution is permitted to be carried forward to reduce the amount of the
Katrina distribution that is includible in gross income in the next taxable year.
Alternatively, the qualified individual is permitted to carry back the excess amount
of the recontribution to a prior taxable year or years in which the individual
included income attributable to a Katrina distribution. The individual will need to
file an amended return for the prior taxable year or years to report the amount of
the recontribution on Form 8915 and reduce his or her gross income by the
excess amount of the recontribution.
Example. Taxpayer E receives a distribution of $90,000 from his or her
IRA on November 15, 2005. Taxpayer E is a qualified individual and treats the
distribution as a Katrina distribution. Taxpayer E ratably includes the $90,000
distribution over a 3-year period. Without any recontribution, Taxpayer E will
include $30,000 in income with respect to the Katrina distribution on each of the
2005,2006, and 2007 tax returns. Taxpayer E includes $30,000 in income with
respect to the Katrina distribution on the 2005 tax return. Taxpayer E then
recontributes $45,000 to an IRA on November 10, 2006 (and made no other
recontribution in the 3-year period). Taxpayer E is permitted to do either of the
following:
OptionJ.. Taxpayer E includes $0 in income with respect to the Katrina
distribution on the 2006 tax return. Taxpayer E carries forward the excess
recontribution of $15,000 to 2007 and includes $15,000 in income with respect to
the Katrina distribution on E's 2007 tax return.
Option~. Taxpayer E includes $0 in income with respect to the Katrina
distribution on the 2006 tax return and $30,000 in income on the 2007 tax return.
Taxpayer E then files an amended return for 2005 to reduce the amount included
in income as a result of the Katrina distribution to $15,000.
G. Special rules for 3-year ratable income inclusion method for Katrina
distributions.
13
If a qualified individual dies before the full taxable amount of the Katrina
distribution has been included in gross income, then the remainder must be
included in gross income for the taxable year that includes the individual's death.
H. Katrina distributions will not be treated as a change in substantially equal
periodic payments.
In the case of an individual receiving substantially equal periodic
payments from an eligible retirement plan, the receipt of a Katrina distribution
from that plan will not be treated as a change in substantially equal payments as
described in § 72(t)(4) merely because of the Katrina distribution.
SECTION 5. APPLICATION OF SECTION 103 OF KETRA TO PLAN LOANS
This section provides guidance regarding the application of section 103 of
KETRA to plan loans, including a safe harbor that is treated as satisfying section
103(b) of KETRA.
A. Increase in the allowable loan amount.
Special rules apply to a loan made from a qualified employer plan (as
defined in § 1.72(p)-1, Q&A-2) to a qualified individual on or after September 24,
2005 (the day after the date of enactment of KETRA) and before January 1,
2007. For these loans, section 103(a) of KETRA changes the limits under §
72(p)(2)(A) of the Code. In applying § 72(p) to a plan loan, the $50,000
aggregate limit in § 72(p)(2)(A)(i) is increased to $100,000 and the rule in §
72(p)(2)(A)(ii) limiting the aggregate amount of loans to one half of the
employee's vested accrued benefit is increased to 100 percent of the employee's
vested accrued benefit. 3
B. Suspension of payments and extension of term of loan.
A special rule applies if a qualified individual has an outstanding loan from
a qualified employer plan on or after August 25, 2005. Section 103(b) of KETRA
provides that, for purposes of § 72(p), in the case of a qualified individual with a
loan from a qualified employer plan outstanding on or after August 25, 2005, if
the due date for any repayment with respect to the loan occurs during the period
beginning on August 25,2005, and ending on December 31,2006, such due
date shall be delayed for one year. In addition, any subsequent repayments for
3 The Department of Labor has advised the Department of the Treasury and the Service
that it will not treat any person as having violated the provisions of Title I of the
Employee Retirement Income Security Act (ERISA), including the adequate security and
reasonably equivalent basi s requirements in ERISA section 408(b)(1) and 29 CFR
2550A08b-1, solely becaus e the person made a plan loan to a qual ified individual in
compliance with KETRA section 103, Code § 72(p), and the provisions of this notice.
14
the loan shall be appropriately adjusted to reflect the delay and any interest
accruing for such delay, and the period of delay shall be disregarded in
determining the 5-year period and the term of the loan under § 72(p)(2)(B) and
(C). Thus, an employer is permitted to choose to allow this delay in loan
repayments under its plan with respect to a qualified individual, and, as a result,
there will not be a deemed distribution to the individual under § 72(p).
This notice provides the following safe harbor for satisfying section 103(b)
of KETRA. Under this safe harbor, a qualified employer plan will be treated as
satisfying the requirements of § 72(p) pursuant to section 103(b) of KETRA if a
qualified individual's obligation to repay a plan loan is suspended under the plan
for any period beginning not earlier than August 25, 2005, and ending not later
than December 31,2006 (suspension period). The loan repayments must
resume upon the end of the suspension period, and the term of the loan may be
extended by the duration of such suspension period. If a qualified employer plan
suspends loan repayments during the suspension period, the suspension will not
cause the loan to be deemed distributed even if, due solely to the suspension,
the term of the loan is extended beyond five years. Interest accruing during the
suspension period must be added to the remaining principal of the loan. A plan
satisfies these rules if the loan is repaid thereafter by amortization in substantially
level installments over the remaining period of the loan (i.e., five years from the
date of the loan, assuming that the loan is not a principal residence loan, plus the
suspension period). If an employer, under its plan, chooses to permit a
suspension period that is less than the suspension period described above, the
employer is permitted to extend subsequently the suspension period, but not
beyond December 31,2006.
Example. On March 31, 2005, a participant with a nonforfeitable account
balance of $40,000 borrowed $20,000 to be repaid in level monthly installments
of $394 each over 5 years, with the repayments to be made by payroll
withholding. The participant makes 8 monthly payments until December 1, 2005.
The participant's home is in the Hurricane Katrina disaster area and the
participant sustained an economic loss. The participant's employer takes action
to suspend payroll withholding repayments, for the period from December 1,
2005, through the end of 2006, for loans to qualified individuals that are
outstanding on or after August 25, 2005, but only for its employees who have a
principal place of abode in the Hurricane Katrina disaster area and sustained an
economic loss. Because the participant is an employee of the employer who has
a principal place of abode in the Hurricane Katrina disaster area and notifies the
employer that he or she has sustained an economic loss, no further repayments
are made on the participant's loan until January 1, 2007 (when the balance is
$19,045). At that time, repayments on the loan resume, with the amount of each
monthly installment increased to $423 in order to repay the loan by April 30, 2011
(which is the date the loan originally would have been fully repaid, plus the 13month loan suspension period that resulted from Hurricane Katrina).
15
C. Qualified employer plan may rely on reasonable representations.
A qualified employer plan is permitted to rely on a participant's reasonable
representations that such participant is a qualified individual and therefore
qualifies for the special treatment for loans under section 103 of KETRA, unless
the plan administrator (or other responsible person) with respect to the qualified
employer plan has actual knowledge to the contrary.
Drafting Information
The principal authors of this notice are Pamela R. Kinard and Vernon
Carter of the Office of the Division Counsel/Associate Chief Counsel (Tax
Exempt and Government Entities). For further information regarding this notice,
please contact the Employee Plans taxpayer assistance telephone service at
(877) 829-5500 (a toll free number) between the hours of 8:00 a.m. and 6:30
p.m. Eastern Time, Monday through Friday.
16
Page 1 of 4
PRESS ROOM
10 view or pnnt tne fJUI- content on tn/S page, download tne tree A(jObe('~) Agro/)al'8J HeaC1?J1!.<),
November 30,2005
JS-3027
Abu Sayyaf Senior Leaders Designated
The U,S. Department of the Treasury today designated three individuals for their
senior leadership roles in the Abu Sayyaf Group (ASG), a notoriously violent
separatist group operating in the Southern Philippines. The individuals have
supported and/or committed terrorist attacks on behalf of the ASG.
"The Abu Sayyaf Group instills terror throughout Southeast Asia through
kidnappings, bombings and brutal killings. This action financially isolates senior
members of the ASG, who have planned and carried out vicious attacks on
Americans, Filipinos and innocent citizens from around the world," said Patrick
O'Brien, the Treasury's Assistant Secretary for Terrorist Financing and Financial
Crime.
The individuals named today, Jainal Antel Sali, Jr., Radulan Sahiron, and Isnilon
Totoni Hapilon, were deSignated pursuant to Executive Order 13224. This action
freezes any assets the designees may have located under U.S. jurisdiction and
prohibits transactions between U.S, persons and the designees. The U.S. and
Australia are submitting these three individuals to the United Nations 1267
Committee, which will consider adding them to its Consolidated list based on
ASG's association with al Qaida and Usama bin Laden.
The U.S, Government, through the Department of States Rewards for Justice
Campaign, has offered to pay up to 5,000,000 Philippine Pesos (about US $90,910)
for the capture of individuals belonging to the ASG, including Sali, Additionally, the
Department of Defense's U.S. Pacific Command (USPACOM) has added Sali,
Sahiron and Hapilon to the USPACOM Rewards Program Wanted list as ASG
members. The Rewards Program offers up to $200,000 for information leading to
the capture of each person.
The Philippine Government also has an outstanding reward of 5,000,000 Philippine
Pesos for the capture of individuals belonging to the ASG, including Sahiron and
Hapilon.
Identifier Informqtion
Jainal Antel Sali, Jr.
AKAs: Abu Solaiman
Abu Solayman
Apong Solaiman
Apung
DaB: 1 June 1965
POB: Barangay Lanote, Bliss, Isabele, Basilan, the Philippines
Jainal Antel Sali, Jr. has planned and perpetrated several brutal acts of terrorism
involving kidnapping U.S. and foreign nationals and bombing civilian targets. In
April 2004, Sali helped supervise members of the ASG's Urban Terror Group,
concentrated in the Zamboanga Peninsula of the Philippines, for planned bombing
activities. Additionally, as of May 2003, Sali reportedly commanded and deployed
approximately 20 ASG suicide bombers to Zamboanga City, the Philippines, in
preparation for unspecified operations.
Philippine authorities filed charges against Sali and two other ASG leaders for their
http://treas.govJpressireleases/js3027.htm
12/1/2005
Page 2 of 4
involvement in a seriesyf bombings in October 2002 in Zamboanga City, the
Philippines. The bombings occurred at shopping centers and near a restaurant,
killing 11 Filipino civilians, an American soldier and wounding more than 200 others.
Sali also headed the unit responsible for the October 17, 2002, bombings of two
department stores in Zamboanga City. He had instructed five ASG members to
bomb targets in the city and helped assemble the bombs detonated by the ASG.
In addition, Sali planned the May 2001 Dos Palmas resort kidnapping operation in
the Philippines. Sali and eight other ASG members took 20 hostages, including
U.S. nationals Martin Burnham, Gracia Burnham, and Guillermo Sobero. During
the movement of the hostages in June 2001 by the ASG, two hostages, who were
foreign national employees of the resort, were beheaded on Basilan Island. The
ASG along with 17 of the hostages then proceeded to a hospital in Lamitan, Basilan
Island, the Philippines, where they seized and detained additional hostages. Later
in June 2001, the ASG beheaded American national Guillermo Sobero. Sali was
the primary negotiator in the ransom demands for the Dos Palmas kidnapping
victims, which resulted in the ASG receiving a ransom payment.
In January 2002, Sali made statements during a radio interview denouncing the
arrival of U.S. military advisors in the Philippines to participate in joint military
exercises with the Armed Forces of the Philippines designed to locate and combat
the ASG and rescue the hostages.
Sali has held several senior positions of influence within the ASG. In February
2005, Sali accompanied ASG leader Khadafi Janjalani and ASG second-incommand Isnilon Hapilon to a meeting with in the Philippines with senior leaders of
Jemaah Islamiyah (JI), an al Qaida-linked terrorist organization operating in
Southeast Asia. The JI leaders included a top bombmaker, a JI intelligence officer
and a JI member suspected of playing a role in the 2002 Bali bombings.
Sali has served as a spokesperson for the ASG, taken part in decision-making
meetings among leaders of the group, and was an advisor to ASG leader Khadafi
Janjalani. In late 2002, for example, Sali and other ASG leaders met 10 discuss the
possibility of conducting terrorist activities in Davao City, the Philippines. The
operations were placed on hold, however, pending receipt of funding for the
operations.
Radulan Sahiron
AKAs: SAHIRON, Radullan
SAHIRUN, Radulan
SAJIRUN, Radulan
Commander Putol
DOB: 1955
ALT. DOB: Circa 1952
POB: Kaunayan, Palikul, Jolo Island, the Philippines
Radulan Sahiron has perpetrated several brutal acts of terrorism involving
bombings of civilians and kidnappings of U.S. and foreign nationals. He ordered the
bombings conducted by the ASG on Jolo Island in 2004, as mentioned above,
resulting in the death of 11 Filipino civilians and an American serviceman and
wounding more than 200 others. The improvised explosive devices used in the
bombings were initially assembled at Sahiron's headquarters, Camp Tubig TuhTuh, on Jolo Island.
Sahiron was considered to be the key leader of the April 2000 Jolo/Sipadan
kidnappings of 21 foreign tourists, including Westerners, Malaysians, and Filipinos,
conducted by Sahiron and four other ASG members. Following the June 2002 ASG
kidnapping of four hostages from a ship, the MT Singtec Marine 88 vessel, three of
the four hostages were turned over to ASG leader Sahiron and held captive. In
June 2002, Sahiron promised to end kidnappings on Jolo Island if the ransom was
paid. In August 2002, Sahiron received and held four kidnapped women Filipina
nationals on Jolo Island. In November 2002, Sahiron demanded 16 million
Philippine Pesos (about US $312,195) for the freedom of seven hostages, ~ncluding
the four Filipina women. As of December 2003, Radulan Sahlron had received a
total of 35 million Philippine Pesos (about US $636,000) in ransom payments from
his participation in kidnappings.
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12/1/2005
Page 3 of 4
Like Sali, Sahiron has held several senior positions of influence within the ASG. As
early as 1999, he was one of fourteen members of the ASG's Majlis Shura
(consultative council). In mid-2002, he acted as an advisor to ASG leader Khadafi
Janjalani. Additionally, Sahiron has held several leadership positions over ASG
fighters in the Sulu Archipelago area of the Southern Philippines.
From 2000 through 2003, Sahiron was described in various roles, including the
leader of the ASG's Putol group, composed of an estimated 100 members
operating on Jolo Island in the Sulu area of the Southern Philippines; as the head of
the Sulu-based ASG consisting of 18 armed groups; as the ASG Chief of Staff in
Sulu; and as the overall ASG commander on Jolo Island with an estimated 1 000
'
fUlly-armed followers.
Isnilon Totoni Hapilon
AKAs: HAPILUN, Isnilon
HAPILUN,lsnilun
Salahudin
Abu Musab
Tuan Isnilon
DOB: March 18, 1966
ALT DOB: March 10, 1967
POB: Bulanza, Lantawan, Basilan, the Philippines
Isnilon Totoni Hapilon has perpetrated several brutal acts of terrorism including
kidnappings of U.S. and foreign nationals. In May 2001, Hapilon and other ASG
members seized, detained, and transported 20 hostages, including three U.S.
nationals, from the Dos Palmas Resort in Palawan Province, the Philippines, on
behalf of the ASG. In June 2001, one of the U.S. nationals, Guillermo Sobero, was
beheaded. Hapilon and the other ASG members moved, hid and marched the
hostages through the dense jungles and mountains of Basilan Island, the
Philippines. During that time, the ASG took over a church and hospital on Basilan
Island and held 200 people hostage, including three Americans from the ASG
kidnapping at the Dos Palmas Resort.
In August 2000, Jeffrey Schilling, a U.S. citizen, was kidnapped by members of the
ASG and held hostage for more than seven months on Jolo Island, the Philippines,
by the ASG. In December 2000, Hapilon and 20-armed ASG members guarded a
U.S. citizen-hostage who was believed to be Jeffrey Schilling. Schilling was
rescued in April 2001.
Hapilon has held senior advisory positions of influence within the ASG, including
adviser to ASG leader Khadafi Janjalani. Hapilon also served as a deputy or
second-in-command to Khadafi Janjalani and commanded certain other members
of the ASG. At various times, Hapilon took part in decision-making meetings
between and among the leaders of the ASG. Prior to the death of ASG founder
Abdurajak Abubakar Janjalani in December 1998, Hapilon was a member of the
ASG central committee.
Additionally, since 1997, Hapilon has held several positions of operational
leadership in the ASG. As of August 2004, Hapilon commanded approximately 70armed followers. In August 2003, Hapilon and approximately 100 ASG members
were present in "Camp Usama," an ASG training camp established in 2002 by
Hapilon in the Southern Philippines. In late 1999, Hapilon served as an instructor at
an ASG camp where classes included military tactics. As of November 1997,
Hapilon was an ASG commander.
REPORTS
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12/1/2005
Page 4 of 4
•
fictlJre of ASG designees
http://treas.govJpress/releases/js3027.htm
12/1/2005
The U.S. Department of the Treasury designated Jainal Antel Sali, Jr., Radulan Sahiron, and
Isnilon Totoni Hapilon on November 30, 2005 pursuant to Executive Order 13224. These
three individuals hold senior leadership roles in the Abu Sayyaf Group (ASG), a notoriously
violent separatist group operating in the Southern Philippines. The individuals have
supported and/or committed terrorist attacks on behalf of the ASG.
Jainal Antel Sali, Jr.
AKA Abu Solaiman
Radulan Sahiron
Isnilon Totoni Hapilon
Page 1 of 1
PRESS ROOM
10 View or pnnt me I-'UI- content on m/S page. Clown/oaCi me tree AaOlJe(e<J AcrolJati!0 Keactfl«[<).
November 30, 2005
JS-3028
Treasury Names Front Companies, Sham
Operatives Helping To Bankroll NarcoTrafficking in Colombia
The U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC)
today added two individuals and three companies tied to the North Valle drug cartel
to its list of SpeCially Designated Narcotics Traffickers (SDNTs). The two
individuals, both Colombian, act as front persons for North Valle leaders Raul
Grajales Lemos and Carlos Alberto Renteria Mantilla (a.k.a. Beto Renteria). Both
Raul Grajales Lemos and Beto Renteria have been indicted in the United States on
charges relating to narcotics trafficking.
''The North Valle cartel has used these straw men and front companies in attempts
to operate under a cloak of legitimacy," said Robert Werner, Director of OFAC.
"Designating the North Valle's financial network severely restricts the cartel's efforts
to launder drug proceeds."
The two individuals, Armando Jacobo Jaar Jacir and Maria Sair Pelissier Ospina,
represent the interests of Raul Grajales Lemos and Beto Renteria in the operation
of Casa Estrella, a department store chain located in Colombia that was previously
named a SDNT. This activity is carried out in attempts to hide the North Valle's
control of the chain. Armando Jacobo Jaar Jacir has been a business associate of
Raul Grajales Lemos and Beto Renteria for over a decade and participates in
multiple companies controlled by them, in addition to Casa Estrella. Maria Sair
Pelissier Ospina has also been a business associate of Raul Grajales Lemos for
over a decade and participates in multiple companies controlled by Raul Grajales
Lemos and Beto Renteria, including Casa Estrella.
Also named as SDNTs today were two companies controlled by Armando Jacobo
Jaar Jacir, Armando Jaar y Cia. S. C. S. in Colombia and Jacaria Florida, Inc. in the
United States. In addition, Comercializadora Pelissier Ospina Ltda. in Colombia, a
company controlled by Maria Sair Pelissier Ospina, was also named.
SDNTs are subject to the economic sanctions imposed against Colombian drug
cartels in Executive Order 12978. Today's action freezes any assets the designees
may have located under U.S. jurisdiction and prohibits all financial and commercial
transactions between the designees and any U.S. person.
The assets of a total of 1,235 business and individuals in Aruba, Colombia, Costa
Rica, Ecuador, Panama, Peru, Spain, Vanuatu, Venezuela, the Bahamas, the
British Virgin Islands, the Cayman Islands and the United States have been
designated pursuant E.O. 12978. The 467 SDNT businesses include agricultural,
aviation, consulting, construction, distribution, financial, investment, manufacturing,
mining, offshore, pharmaceutical, real estate and service firms. The SDNT list
includes 19 kingpins from the Cali, North Valle and North Coast drug cartels in
Colombia.
REPORTS
http://treas.govJpressireleases/js3028.htm
12/1/2005
u.s. Department of the Treasury
North Valle Cartel
Financial Network
Office of Foreign Assets Control
SDNT Principal Individuals
Specially Designated
Narcotics Traffickers
::\
November 2005
** New SDNTs
Raul Alberto GRAJALES LEMOS
CC 6356044 (Colombia)
-Captured May 2005-
Carlos Alberto RENTERIA MANTILLA
("Beta RENTERIA")
CC 6494208 (Colombia)
-Fugitive-
ownersl' Control
Casa Estrella Holding Companies
. "J
")
La Union, Valle, Colombia
NIT'" 800112221-4
AGUSTIN GRA]ALES
VClA. LTDA.
BLAO<MORE
INVESTMENTS A.V.V.
/)
ARMANDOJAAR
La Union, Vall~ Colombja
NIT'" 800166941-0
('1
C)
GAD SA.
La Union, VaUe. Colombia
NIT'" 821002971-4
JOSAFAT SA.
:"'l
ARMAGEDON SA.
Y CIA. S.C.S,· *
Ban-anquilla, Colombia
NIT'" 890114337-6
()
Oranjestad, Aruba
C.R. No. 1212B.0
CRETA SA.
/)
HEBRON SA.
Tutu .. , Valle, Colombia
NIT'" 800107304-7
La Union, Valle, Colombia
NIT'" 800019962-6
~
Tulu., Valle. Colombia
NIT'" 800112217-4
()
SAUM SA.
La Union, Val~ Colombia
NIT'" 821001412-4
MACEDONIA LTDA.
la Unton, Valle, Colombia
NIT'" 800121860-9
I
Shareholders
Casa Estrella Operating
~
Panamanian
Suppliers
~I
~
I Real Estate Companies
Q
/)
ALMACAES S.A.
G.L.G.SA.
RAMAL S.A.
Bogota, Colomb5a
NIT'" 8J0086S1S-1
Bogota, Colombia
NIT'" 800023807-8
Bogota, Colombia
NIT'" 800142109-S
Q
~'l
.J
ILOViN SA.
Bogota. Colombia
NIT'" 800141304-0
C.A.D. S.A.
Bogota, Colombia
NIT'" 800173127-0
Mana1ement
GRAJALES
.&", ..t ..... ";:.(:~- I
Cali, Barranquilla, & Bogota
Department Store
Locations
I RENTERIA Associates
Associated Company
Associated Company
()
(j
COMERCIALIZADORA PELISSIER OSPINA LTDA.**
Bogota, Colombia
NIT# 830009052-5
JACARIA FLORIDA, INC.'*
Miami, Florida, United States
US FEIN 592804133
Armando Jacobo JAAR JACIR**
CC 7432263 (Colombia)
Page 1 of2
PRESS ROOM
December 1, 2005
js-3029
Remarks by Treasury Debt Management Director Jeff Huther before the Bond
Market Association New York
I would like to talk a little about our proposed securities lending facility, the issues
that make it a complicated proposal and, where possible, clear up mis-conceptions
about the impact of such a facility. I should start by emphasizing that this is very
early in the proposal process. We are still evaluating how a facility would work and
what the consequences of a facility would be. It is possible that we will conclude, in
the end, that we cannot proceed with implementation because the risk is too great
that the facility would adversely affect Treasury markets.
In broad terms, we have set for ourselves the goal of obtaining least cost financing
for taxpayers. For almost 30 years, Treasury has tried to meet this goal by, among
other things, providing market participants with certainty of supply of Treasury
securities in primary market offerings. It has been our assumption that greater
certainty of supply reduces the market risk of bidding for Treasury securities and
thereby lowers borrowing costs.
In general, certainty of supply in the primary market has translated directly into a
high degree of certainty of supply across the secondary markets: cash, financing,
and futures. In recent years, however, there have been occasional, isolated
periods where the availability of specific issues in the financing markets has been
so acutely impaired relative to demand as to call into question the ability of
Treasuries to provide the liquidity and risk management functions that also
contribute to lower borrowing costs.
Our proposal to create a securities lender-of-Iast-resort facility stems from our
recognition that availability of supply in the financing market is as important as
certainty of supply in the primary market for meeting our goal of least cost financing
over time. The proposal is based on the idea that the taxpayer is the ultimate loser
if market participants lose confidence that Treasury market transactions will not
always be settled in a timely manner due to an acute shortage of specific issues.
The foregoing idea is, however, insufficient to create securities lending facility - and
poor design could damage markets that work extraordinarily well almost all of the
time. Some characteristics of a facility that avoid damage are easy to identify:
borrowing Treasuries securities from the Treasury should be less attractive than
borrowing from the private sector (as long as the securities are actually available
from the private sector) and use of the facility should be at the discretion of the
borrower rather than Treasury officials. In addition the facility should not impose
substantially greater costs on users relative to other contemporaneous private
market borrowers. Other characteristics are likely to be determined by practical
considerations: who can access the facility, whether the facility should be bondsfor-bonds or bonds-for-cash, and the time of day that the facility can be accessed.
Whether a securities lending facility will avoid damage, however, depends most
importantly on the pricing characteristics of the facility. There are two factors that
complicate the pricing. First is the nature of the Treasury market - we auction a
fixed quantity of securities and at any given time those securities provide the basis
for a larger quantity of long positions with the excess offset by corresponding
quantity of short positions. The quantity of short positions that can be supported at
anyone time is growing but still finite. Under some conditions, such as those
prevailing in the summer of 2003, the demand for short positions by private market
participants can outstrip the capacity of the market. Fixing an upper limit on the
quantity of additional securities available from Treasury may only give some market
participants an incentive to use the facility strategically. The implication is that
pricing within a securities lending facility cannot be tied to either current market
conditions or a fixed quantity of securities.
http://treas.govJpressireleases/js3029.htm
113/2006
Page 2 of2
The second complication is the nature of the fails penalty within a repo contract.
Treasury markets have grown faster than the underlying supply of Treasuries for
years a~d market participants have generally found ways to increase the velocity of
Treasuries to ensure adequate supply for settlement purposes. The chronic fails of
the past few years have been a result of the market's inability to establish a marketclearing yield on special collateral repurchase agreements in low interest rate
environments. In trying to set up a workable pricing mechanism the complication is
that, in the absence of a well-functioning market, we do not know where the marketclearing yield would have settled. Clearly there is a need, assuming Treasury
establishes a securities lending facility, for market participants to review the fails
penalty in outright sales and both legs in repo contracts with a goal of developing a
market-clearing pricing mechanism that works in low interest rate environments.
The implication for us is that, when proposing a pricing mechanism in the absence
of good information about what a market-clearing yield would have been, we should
think in terms of a structure that can evolve with changes in market conditions or
contract design.
As we work through these issues, we will continue to seek your views on how to
establish pricing characteristics that do not reduce the existing certainty of supply of
Treasuries. The discussions that we have had with market participants so far have
been very helpful in working through the characteristics of a facility.
Internally we are working on the characteristics of the facility that pose fewer
complications, but still require careful consideration. We are considering a bondfor-bond transaction structure - like that used in the Federal Reserve's security
lending facility - because it allows for better cash management by Treasury. Initial
feedback suggests that market participants do not see a problem with a bond-forbond structure.
Our goal of providing additional supply to the market to alleviate severe shortages
points toward broad access to the facility. In the best case scenario, Treasury
would like the facility to be available to as many market participants as possible.
However, operational considerations come into play given the complexities of RP
transactions. A logical group of counterparties would be the 22 primary dealers,
given their role in the Treasury market as market-makers and liquidity providers.
However, Treasury must be sure that any additional supply it provides reaches the
broader market.
Treasury would be acting as a lender of last resort. This means we want market
participants to access all the available private supply and to use the New York
Fed's securities lending program before coming to Treasury to borrow additional
securities. We do not seek to be a part of the normal market for lending and
borrowing, but to have market participants access the facility only when all other
sources of supply have been tapped out. Because of this, we are considering use
of the facility later in the day, after the Fed's securities lending auction at noon.
This would give the market a chance to know what they still needed to borrow.
However, there are operational considerations and concerns with getting
transactions completed before the close of Fedwire that will not allow us to move
the access too late in the day. And, depending on the settlement structure, the time
of day the facility is available may be of less importance.
Let me conclude by describing what a proposed facility would not do. We view this
facility as truly a lender-of-Iast-resort facility. If we cannot make the facility
uneconomic under normal market conditions, we will not proceed. If we would
reduce the incentives for financial intermediaries to make markets in Treasuries,
discourage the use of Treasuries for hedging, or lead market participants to express
their views on interest rates in other markets, we will not proceed. And, if we do
find a pricing mechanism that works, it is easy to imagine a facility that lays dormant
for many years at a time under a wide range of interest rate environments - an
outcome that we would view favorably.
-30-
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1/3/2006
Page 1 of 1
PRESS ROOM
December 1, 2005
js-3030
Under Secretary Adams in Stockholm to meet with Local Financial Officials
and Business Leaders
Following this weekend's meetings of the G7 in London, Treasury's International
Affairs Under Secretary Tim Adams will travel to Stockholm, Sweden to meet with
local economic officials and business leaders.
Under Secretary Adams will meet on Dec. 5 with foreign and domestic business
leaders, Swedish finance officials including, Finance Minister Par Nuder, Central
Bank Governor Lars Heikensten and State Secretary Jens Henriksson, as well as
participate in a roundtable discussion on the European economy at the Stockholm
School of Economics.
-30-
http://treas.govJpress/releases/js3030.htm
1/3/2006
Page 1 of 1
PRESS ROOM
December 2, 2005
JS-3031
Statement of Treasury Secretary John W. Snow
On November Employment Report
"Today's strong employment report brings the total of jobs created since May of
2003 to 4.4 million -- with 1.8 million new jobs created this year alone, offering
additional good news for American workers and their families as we head into the
holiday season. The American economy is growing. The announcement that
215,000 new jobs were created in November marks the 30 th straight month of
payroll growth.
"Today's report ends a week of very good news for the American economy.
Wednesday's revised estimate of third quarter GDP growth for 2005 came in at a
robust 4.3 percent. Consumer confidence is rebounding, industrial production is
up, early reports are that holiday sales are strong, and new home sales just hit a
record high. These are the unmistakable hallmarks of a strong economy and are
encouraging news for America's families. A steady stream of positive indicators
has given us increased confidence that the underlying fundamentals of our
economy are solid. and that our path of growth is steady.
'The President's sound economic policies, combined with good monetary policy
from the Federal Reserve have given American workers and entrepreneurs the
opportunity to grow an economy that is competitive and remains the envy of the
world. The American model of free enterprise. open markets and low taxation
continues to be the economic inspiration for other countries seeking to grow and
create jobs."
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113/2006
Page 1 of2
PRESS ROOM
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December 2,2005
js-3032
Report to Congress on Financial Implications of U.S. Participation in the
International Monetary Fund
Q4 2004 and Q1 - Q3 2005
This report has been prepared in compliance with Section 504(b) of Appendix E,
Title V of the Consolidated Appropriations Act for FY 2000. 1 The report focuses
exclusively on the financial implications of U.S. participation in the International
Monetary Fund (IMF) and does not attempt to quantify the broad and substantial
economic benefits to the United States and the global economy resulting from U.S.
participation in the IMF.
As required, the report provides financial information on the net interest income and
valuation changes associated with U.S. participation in the IMF. The broader
context for the financial implications of U.S. participation in the IMF and the
methodology used in deriving these figures have been laid out in previous reports.
The methodology is also summarized briefly in the footnotes attached to the tables.
Reports under Section 504(b) are repared quarterly and made available to the
public on the Treasury website: http://www.t~eas.gov/press/r:eQQl1§~html.
This report provides quarterly data for the fourth quarter of fiscal year 2004 and the
first to third quarters of fiscal year 2005. It provides information on U.S. participation
in the IMF's General Department as well as information related to U.S. holdings of
Special Drawing Rights (SDRs) as part of its international reserves and the financial
implications of U.S. participation in the SDR Department of the IMF.2
Data on the net interest income and valuation changes related to U.S. participation
in the IMF's General Department during the fourth quarter of fiscal year 2004 and
the first to third quarters of fiscal year 2005 are provided in Table 1. For comparison
purposes, previously-reported data for the last three fiscal years are also provided.
Similarly, data for net interest income and valuation changes related to U.S.
participation in the SDR Department of the IMF during the fourth quarter of fiscal
year 2004 and the first to third quarters of fiscal year 2005 are provided in Table 2.
The SDR Department methodology has been revised from previous reports to
reflect actual interest paid and interest received on the net SDR position rather than
estimates. For comparison purposes, the previous ten years of fiscal year data
using this revised approach are also provided.
The table footnotes explain the columns shown and provide pertinent information
and assumptions used in the calculations.
As shown in Table 1, for the fourth quarter of fiscal year 2004 and the first to third
quarters of fiscal year 2005, the financial implications of U.S. participation in the
General Department reflected a net interest income effect of $59 million. The
valuation change in the U.S. Reserve Position for the fourth quarter of fiscal year
3
2004 and the first to third quarters of fiscal year 2005 was $64 million
As shown in Table 2, for the fourth quarter of fiscal year 2004 and the first to third
quarters of fiscal year 2005, the net interest income effect of U.S. participation in
the SDR Department was negative $8 million. The valuation change for the second
quarter on U.S. SDR holdings was $43 million.4
http://treas.govJpressireleases/js3032.htm
1/3/2006
Page 2 of2
Attachments
1 Section 504(b) of Appendix E, Title V of the Consolidated Appropriations Act for
FY 2000, Public Law 106-113, 113 Stat. 1501A-317, requires that the Secretary of
the Treasury prepare and transmit to the appropriate committees of the Congress a
quarterly report on United States participation in the International Monetary Fund
(IMF), detailing the costs or benefits to the United States as well as valuation gains
or losses on the United States' reserve position in the IMF.
2 The SDR is an international reserve asset created by the IMF. The SDR is used
as a unit of account by the IMF and other international organizations. Its value is
determined as a weighted average of a basket of currencies -- the dollar, euro,
pound sterling and yen. The SDR carries a market-based interest rate determined
on the basis of a weighted average of interest rates on short-term instruments in the
markets of the currencies included in the SDR valuation basket.
3 For an explanation of the methodology used in deriving these figures, see the
section on "Calculating the Financial Implications of U.S. Participation in the
General Department" in the report prepared for the fourth quarter of fiscal year
2000, submitted in December 2000 and available at
btiR :llwww .tI~<3_SAov!pr~s/ rf3leQ§e~!repJ)rt30 7~)ltm
4 For an explanation of the methodology used in deriving these figures, see the
section on "Calculating the Financial Implications of U.S. Participation in the SDR
Department" in the report prepared for the fourth quarter of fiscal year 2000,
submitted in December 2000 and available at
httR:llwww.treas.gQvlQ[ess/releases/r~ort3073.htrn.
REPORTS
http://treas.govJpress/releases/js3032.htm
113/2006
REPORT TO CONGRESS ON FINANCIAL IMPLICATIONS OF
U.S. PARTICIPATION IN
THE INTERNATIONAL MONETARY FUND
Q4 2004 and Ql - Q3 2005
This report has been prepared in compliance with Section 504(b) of Appendix E, Title V of the
Consolidated Appropriations Act for FY 2000. I The report focuses exclusively on the financial
implications of U.S. participation in the International Monetary Fund (IMF) and does not attempt
to quantify the broad and substantial economic benefits to the United States and the global
economy resulting from U.S. participation in the IMF.
As required, the report provides financial information on the net interest income and valuation
changes associated with U.S. participation in the IMF. The broader context for the financial
implications of U.S. participation in the IMF and the methodology used in deriving these figures
have been laid out in previous reports. The methodology is also summarized briefly in the
footnotes attached to the tables. Reports under Section 504(b) are prepared quarterly and made
available to the public on the Treasury website: http://www.treas.gov/press/reports.html.
This report provides quarterly data for the fourth quarter of fiscal year 2004 and the first to third
quarters of fiscal year 2005. It provides information on U.S. participation in the IMF's General
Department as well as information related to U.S. holdings of Special Drawing Rights (SDRs) as
part of its international reserves and the financial implications ofD.S. participation in the SDR
Department of the IMF. 2
Data on the net interest income and valuation changes related to U.S. participation in the IMF's
General Department during the fourth quarter of fiscal year 2004 and the first to third quarters of
fiscal year 2005 are provided in Table 1. For comparison purposes, previously-reported data for
the last three fiscal years are also provided.
Similarly, data for net interest income and valuation changes related to U.S. participation in the
SDR Department of the IMF during the fourth quarter of fiscal year 2004 and the first to third
quarters of fiscal year 2005 are provided in Table 2. The SDR Department methodology has
been revised from previous reports to reflect actual interest paid and interest received on the net
SDR position rather than estimates. For comparison purposes, the previous ten years of fiscal
year data using this revised approach are also provided.
Section 504(b) of Appendix E, Title V of the Consolidated Appropriations Act for FY 2000, Public Law 106-113,
113 Stat. 1501 A-317, requires that the Secretary of the Treasury prepare and transmit to the appropriate committees
of the Congress a quarterly report on United States participation in the International Monetary Fund (IMF), detailing
the costs or benefits to the United States as well as valuation gains or losses on the United States' reserve position in
the IMF.
2 The SDR is an international reserve asset created by the IMF. The SDR is used as a unit of account by the IMF
and other international organizations. Its value is determined as a weighted average of a basket of currencies -- the
dollar, euro, pound sterling and yen. The SDR carries a market-based interest rate determined on the basis of a
weighted average of interest rates on short-term instruments in the markets of the currencies included in the SDR
valuation basket.
J
The table footnotes explain the columns shown and provide pertinent information and
assumptions used in the calculations.
As shown in Table 1, for the fourth quarter of fiscal year 2004 and the first to third quarters of
fiscal year 2005, the financial implications of U.S. participation in the General Department
reflected a net interest income effect of $59 million. The valuation change in the U.S. Reserve
Position for the fourth quarter of fiscal year 2004 and the first to third quarters of fiscal year
2005 was $64 million. 3
As shown in Table 2, for the fourth quarter of fiscal year 2004 and the first to third quarters of
fiscal year 2005, the net interest income effect of U.S. participation in the SDR Department was
negative $8 million. The valuation change for the second quarter on U.S. SDR holdings was $43
4
million.
Attachments
3 For an explanation of the methodology used in deriving these figures, see the section on "Calculating the Financial
Implications of U.S. Participation in the General Department" in the report prepared for the fourth quarter of fiscal
year 2000, submitted in December 2000 and available at http://www.treas.gov/press/releases/report3073.htm
4 For an explanation of the methodology used in deriving these figures, see the section on "Calculating the Financial
Implications of U.S. Participation in the SDR Department" in the report prepared for the fourth quarter of fiscal year
2000, submitted in December 2000 and available at http://www.treas.gov/press/releases/report3073.htm.
2
Net Interest Income and Valuation Changes Related to U.S. Participation in the IMF
Table I
-- General Department -U.S. Fiscal Year, Quarterly
(millions of U.S. Dollars)
Transactions with the I]\IF
Transactions Under U.S.
Quota (LeUer of Credit
&Transfers of Resen'e
Fiscal Year Ended 9/30
Assets) Cumulative
U.S. Loans to IMF
(Under SFF, GAB,
NAB)
Cumulative
Interest Calculations
Total U.S.
Transactions with
thelMF
Interest Expense
Associated with
Financing U.S.
Transactions with
the IMF
Remuneration
Received by U.S.
from IMF&
Refund of Burden
Sharing
BJDrmt
Interest Received
from IMF Under
SFF,GAB, and
NAB
Col. 2
Col. 3
2001
QI
Q2
Q3
Q4
Total
Oct - Dec 00
Jan· Mar 01
Apr· June 01
July - Sept 01
·$11.949
·11.378
-12,389
-15.632
$0
0
2002
QI
Q2
Q3
Q4
Total
Oct - Dec 01
Jan - Mar 02
Apr - June 02
July - Sept 02
-$15,547
-14,875
-16,500
-17,635
$0
2003
QI
Q2
Q3
Q4
Total
Oct - Dec 02
Jan - Mar 03
Apr - June 03
July - Sept 03
2004
QI
Q2
Q3
Q4
Total
Oct - Dec 03
Jan - Mar 04
Apr -June 04
July -Sept 04
-$ 16,702
-15,886
-14,530
- 13,867
$0
0
2005
QI Oct - Dec 04
Q2 Jan - Mar 05
Q3 :"pr -June OS
-$ I 2,882
-9,429
-9,677
$0
-SI8, I 52
- I 8,826
-18,737
-19,136
No/t!: De/ail may not add 10 tolal due to roundmg
0
0
$0
0
0
0
- -
Valuation Changes
on U.S. Reserve
Position
Net Interest
Income
Col. 4
Col.S
Col. 7
Col.6
Total
(Col 7+8)
(Col 4+5+6)
(Col 1+2)
Col. 1
iUuW
Col. 9
Col. 8
0
SO
-$5
II
5
-4
$7
$56
-474
-172
543
-$47
$5 I
-463
-167
539
-S40
$105
83
81
103
SO
$18
$372
$0
15
$34
-$467
-125
1,157
-119
$446
-$449
-124
1,158
-104
$480
-$79
-72
-67
-65
-$283
$97
91
82
78
$348
$0
0
$580
234
439
469
$1,722
$598
:!53
454
SO
$18
19
15
13
S65
$1,787
-$ I 6,702
-15,886
-14,530
-13,867
-$65
-58
-60
-67
-$249
$78
79
69
74
$300
$0
0
0
0
$0
$13
21
9
7
$50
$903
-78
-220
43
$648
$916
-57
-2 I I
50
$698
-$12,882
-9,429
-9,677
-$73
-$56
-$60
$82
$88
$71
$0
$0
SO
$9
S32
$10
$1,026
-440
-565
$1,035
-408
-555
-$11.949
-11,378
-12,389
-15,632
-$138
-128
-109
-109
-$484
$133
139
I 15
105
$492
-$ I 5,547
-14,875
-16,500
-17,635
-$87
-82
-80
-88
-$337
-$18,152
-18,826
-18,737
-19,136
$0
0
0
48~
Net Interest and Valuation Changes Related to U.S. Participation in the IMF
Table 2
-- SDR Department -U.S. Fiscal Year, Quarterly
(millions of U.S. Dollars)
Fiscal Year Ended
9/30
Net SDR Holdings
Interest Calculations
Dollar Value of
SDR Holdings
Dollar Value of
Cumulative SDR
Allocation
Interest Income
on Net SDR
Holdings
Interest Expense
Associated with
Financing
Cumulative U.S.
SDR
Transactions
CoLI
Col. 2
Col. 4
Col. 5
NetSDR
Holdings
(Col 1-2)
Col. 3
2002
QI
Q2:
Q3.
Q4
Total
Oct - Dec 01
Jan - Mar 02
Apr - June 02
July - Sept 02
$10,783
10,809
11,645
11,710
$6,157
6,109
6,519
6,481
$4,626
4,700
5,127
5,229
$34
26
28
30
$118
-$25
-24
-26
-24
-$100
2003
QI
Q2
Q3
Q4
Total
Oct - Dec 02
Jan - Mar 03
Apr - June 03
July - Sept 03
$12,166
11,392
11,720
12,062
$6,661
6,731
6,864
7,005
$5,505
4,662
4,857
5,057
$30
27
21
20
$97
2004
QI
Q2
Q3
Q4
Total
Oct - Dec 03
Jan - Mar 04
Apr - June 04
July - Sept 04
$12,638
12,645
12,659
12,782
$7,281
7,228
7,184
7,197
$5,357
5,417
5,475
5,585
2005
QI Oct - Dec 04
Q2: Jan - Mar 05
Q3 Apr - June 05
$13,628
11,565
11,317
$7,609
7,402
7,184
$6,019
4,162
4,134
Nolf:: Detail ma), not add 10 tolal dut!
10
rmmdmg. Table has been revIsed from
preVIOUJ
reports
10
Net Interest
Income
(CoI.4+5)
Valuation
Changes
Col. 6
Col. 7
Total
(Col 6 + 7)
Col. 8
5
$18
-$115
-36
315
-30
$134
-$106
-33
316
-25
$152
-$21
-16
-15
-16
-$68
$9
11
6
4
$29
$146
58
92
100
$396
$154
69
97
104
$425
$20
21
21
24
$87
-$17
-17
-20
-25
-$79
$3
5
-1
$8
$199
-39
-33
10
$137
$202
-34
-32
10
$145
$29
33
26
-$34
-29
-32
-$5
3
-6
$319
-163
-123
$315
-160
-129
$9
3
fi!j1ect actual lIl/eresl paid and mleYt!sl rt:(.'t!lved un nd SDR pOSl/lOti
raliJf!f
than es/lma/es
Net Interest and Valuation Changes Related to U.S. Participation in the IMF
Table 2
-- SDR Department -U.S. Fiscal Year, Annual
(millions of U.S. Dollars)
Fiscal Year Ended
9/30
Net SDR Holdings
Interest Calculations
Dollar Value of
SDR Holdings
Dollar Value of
Cumulative SDR
Allocation
Interest Income
on Net SDR
Holdings
Interest Expense
Associated with
Financing
Cumulative U.S.
SDR
Transactions
Col.I
Col. 2
Col. 4
Col. 5
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Total Cost 1995-2004
Average Cost 1995-2004
11,035
10,177
9,997
10,106
10,284
10,316
10,919
11,710
12,062
12,782
NetSDR
Holdings
(Col. 1 - 2)
Col. 3
7,380
7,052
6,689
6,719
6,799
6,359
6,316
6,481
7,005
7,197
3,655
3,125
3,308
3,387
3,485
3,957
4,604
5,229
5,057
5,585
163
155
123
147
120
144
176
118
97
87
$1,331
133
-225
-202
-179
-184
-160
-227
-201
-100
-68
-79
-$1,626
-163
Valuation
Net Interest
Income
(Col. 4 + 5)
Valuation
Changes
Col. 6
Col. 7
-62
-47
-56
-37
-40
-83
-25
18
29
8
-$295
-29
Total
Total
(Col. 6+7)
Col. 8
39
-170
-170
20
33
-247
-20
134
396
137
$152
15
Note: Detail may not add to total due to rounding. Table has been revised/rom previous reports to reflect actual interest paid and interest received on net SDR position rather than estimates.
-22
-217
-226
-17
-8
-330
-44
152
425
145
-$143
-14
TABLE 1
Footnotes to Columns
Column I: Total cumulative transactions under the U.S. Quota, including drawings by the IMF under the Letter of Credit (75% portion of the U.S.
quota) and the transfers of reserve assets to the IMF (generally 25% of the U.S. quota).
Column 2: Total cumulative dollar funding through loans to the IMF made by the U.S. under the Supplementary Financing Facility (SFF, in
1980), the General Arrangements to Borrow (GAB, in FY1998) and the New Arrangements to Borrow (NAB, in FYI999). All U.S. loans under
the three facilities/arrangements have been repaid.
Column 3: Total cumulative U.S. transactions with the IMF (horizontal summation of columns I and 2).
Column 4: Total interest associated with total cumulative transactions shown in column 3. This includes interest paid on additional public
borrowing to fund day-to-day transactions under the Letter of Credit and occasional transfers under loan arrangements (SFF, GAB, NAB), as well
as interest income forgone due to the transfer of reserve assets to the IMF at the time of a quota increase. In order to provide resources under the
Letter of Credit or under loan arrangements, the Treasury borrows from the public via additional issuance in the Treasury market; average cost of
funds is used as a proxy for calculating the associated interest cost. This portion of the total interest paid enters the U.S. budget as interest on the
public debt. For purposes of calculating forgone interest on the transfer of reserve assets to the IMF, the SDR interest rate is used.
Column 5: The U.S. earns interest on the non-gold portion of its reserve position in the IMF. This interest is called remuneration and, in
combination with an adjustment by the IMF related to burden-sharing, is paid by the IMF every quarter. Ifremuneration is paid in SDRs, it is paid
to the Exchange Stabilization Fund (ESF) and the ESF transfers the dollar equivalent to the Treasury General Fund. It is recorded in the budget as
an offsetting receipt from the public. If the United States took payment in dollars (which it does not now do), the payment would be in the form of
a decrease in the U.S. Letter of Credit and a counterpart increase in the U.S. reserve position.
Column 6: These amounts constitute the interest payments the United States has received on its loans to the IMF under the SFF, GAB, and NAB.
Column 7: Total net interest paid, forgone or received as a result of U.S. participation in the General Department of the IMF.
Column 8: The U.S. reserve position in the IMF is denominated in SDRs. The valuation gain (if positive) or loss (if negative) refers to the
exchange rate gain or loss on the reserve position due to changes in the dollar value of the SDR. For example, if the SDR appreciates/dollar
depreciates, then the dollar value of the reserve position rises and a valuation gain is recorded. This column would also include valuation gains or
losses experienced as a result of U.S. loans under the SFF, GAB and NAB.
Column 9: The total of net interest and valuation changes, obtained by summing column 7 and column 8.
TABLE 2
Footnotes to Columns
Column I: Total stock of U.S. holdings ofSDRs measured at the end of period, converted into dollars at the end of period exchange rate. Source:
IMF.
Column 2: Total stock of U.S. SDR allocations measured at the end of period, converted into dollars at the end of period exchange rate. Since
U.S. SDR allocations have been constant since 1981, changes in dollar value of SDR allocations reflect only exchange rate changes. Source: IMF.
Column 3: Total stock of U.S. SDR holdings minus allocations measured from end of period (Column 2 minus Column 3), converted into dollars
at the end of period exchange rate.
Column 4: Net interest earned on SDR holdings. Derived by subtracting actual charges on SDR allocations from actual interest earned on SDR
holdings.
Column 5: Net effect on U.S. borrowing costs of cumulative net SDR holdings, derived by multiplying the dollar equivalent of cumulative net
SDR holdings by the average cost of funds rate. Interest is calculated on the basis of end-quarter holdings and compounded quarterly.
Column 6: Net interest income (Column 5 plus Column 6).
Column 7: The valuation change refers to the gain or loss over the period on the reserve position due to changes in the dollar value of the SDR.
For example, if the SDR appreciates/dollar depreciates, then the impact on the dollar value of U.S. holdings ofSDRs is positive, and a valuation
gain is recorded. The change is calculated by subtracting the beginning of period dollar value of SDR reserves from the same SDR reserve figure
converted to dollars using the end of period exchange rate. This isolates changes due to exchange rate movements from changes due to actual SDR
transactions over the period.
Column 8: The total net interest and valuation changes (sum of Columns 7 and 8).
Page 1 of 1
PRESS ROOM
December 2,2005
js-3033
CHART: Jobs Rebound and Unemployment Falls as Bush Economic Policies
Come into Effect
Jobs Rebound and Unemployment Falls as Bush
Economic Policies Come into Effect
135000
,"".-,
134000
f I)
c~ 133000
"0
fI)
::I
0
.c
.., 132000
c
;"
fI)
.Q
..,
0
131000
130000
The attached chart illustrates the strong job growth and falling unemployment rate
since the President's economic policies have come into effect. The American
economy has created 4.4 million new jobs and the unemployment rate has fallen to
5.0% -- well below the historical average -- since the President signed the Jobs and
Growth bill into law in May of 2003. It is vital that we keep taxes low on individuals
and on capital gains and dividends and resist tax hikes that could undermine the
path of economic growth.
All media queries should be directed to
The Press Office at (202) 622-2960.
Only call this number if you are a member of the press.
High Resolution Image
http://treas.goYJpress/releaseS/j s303 3.htm
113/2006
Page 1 of3
PRESS ROOM
December 3, 2005
js-3034
Statement by U.S. Treasury Secretary John W. Snow following the Meeting of
the G7 Finance Ministers and Central Bank Governors
Statement by U.S. Treasury Secretary John W. Snow following the Meeting of the
G7 Finance Ministers and Central Bank Governors
London, United Kingdom
3 December 2005
I was pleased to join the G-7 Finance Ministers and Central Bank Governors here in
London this weekend. This meeting was notable as our last with Chairman
Greenspan, who has played an integral and immensely valuable role in guiding G-7
meetings for most of the past two decades.
This meeting comes at a good time for the global economy. Growth is strong, even
though tempered by high and volatile energy prices. Many countries are making
significant progress in implementing economic reforms, and there are no emerging
market economies in financial crisis. This is an opportune time to make further
progress on trade liberalization, and this was an important topic of our discussions
this weekend. In my view, the potential rise of protectionism is the most significant
risk to the global economy.
On the subject of growth, I was pleased that the G-7 Finance Ministers met
with our counterparts from Brazil, China, India, and Russia. These emerging
countries represent an increasing share of the global economy. Their views
enriched our discussions. I look forward to continued consultations going
forward as they are an increasing and necessary part of any discussion of
the global economy.
I was able to report that the U.S. economy continues to be a major driver of
global economic growth. The U.S. economy is performing very well, which
economic reports in recent weeks have confirmed. Even in the face of severe
weather disruptions, the U.S. economic growth estimate for the third quarter
was revised up to 4.3% -- the tenth consecutive quarter of above-trend
growth. We also received news that job growth in the United States was very
strong, with a 215,000 increase in November, and nearly 4.5 million new
payroll jobs created since the employment trough of May 2003. This has given
us an unemployment rate of 5.0 percent - lower than the average rate of the
1970s, '80s, and '90s. Clearly, good economic policies that reward
flexibility and openness are paying off in the U.S. economy.
The U.S. commitment to reducing the budget deficit also remains strong. We
recognize its importance for the economic health of the country and for the
international financial system. Our efforts reduced the budget deficit by
$94 billion this past fiscal year to $318 billion. This equals 2.6 percent
of GOP - lower than almost two-thirds of the past 25 annual budget deficits.
We recognize, however, that we need to do more. While Federal outlays for
hurricane relief will affect the budget in FY2006, the Administration is
working to prevent the additional budget costs of storm-related repair from
undermining efforts at medium- to long-term deficit reduction.
While the U.S. is working to address its fiscal imbalance, the shared burden
of addressing global imbalances requires a broader international effort.
Moreover, the effort must maximize sustained global growth.
Unfortunately, the rates of growth of domestic demand in Japan and Europe
http://treas.govJpressireleases/js3034.htm
1/3/2006
Page 2 of3
remain below what is needed, underlining the need for them to put in place
reforms to allow productivity growth and labor participation to reach their
full potential. Global imbalances also very much involve China and emerging
Asian economies. I welcome China's commitment - reaffirmed many times by
Chinese officials - that market forces will play an increasing role in the
setting of China's exchange rate and past statements of placing greater
emphasis on domestic sources of growth. However, even with the change of
July 21, China's new exchange rate system has operated with too much
rigidity. This rigidity constrains exchange rate flexibility in the region
and thus poses risks to China's economy and the global economy. The G7
noted that further flexible implementation of China's currency system would
improve the functioning and stability of the global economy and the
international monetary system.
High oil prices were another risk to the global economy on the meeting
agenda. The rather quick retreat of oil prices since the shock of the U.S.
hurricanes is notable, but repairs to various facilities are far from
completed and winter is approaching. In the long-term, encouraging
investment in energy is essential for assuring adequate supplies in the
future.
The single most important item we discussed is achieving an ambitious
outcome from the Doha Round by the end of 2006. Trade liberalization is
essential to enhancing global growth and poverty reduction, and we cannot
allow it to fail. The Hong Kong Ministerial next week will be a critical
next step toward that goal. I urged the EU and Japan to make significant
moves forward on agriculture market access proposals. Just as important is
that developing countries reduce their trade barriers and provide real
market access in goods and services to both developed and developing
countries. In fact, a developing country can experience higher levels growth
and development by opening its financial services sector to foreign direct
investment.
In this context I particularly welcomed the sentiments expressed by Brazil
and India this weekend in support for progress toward successful completion
of the Doha Round. This type of leadership will help to ensure that the
benefits of trade are more broadly shared among all countries.
As part of our efforts to encourage a successful Doha Round, we have agreed
on a unified approach to help low-income countries reap the development
benefits from trade liberalization. This approach is guided by the
principles that trade assistance is offered as a core component of
multilateral and bilateral development programs; reinforces developing
country responsibility to prioritize trade-related projects; and supports
the private sector's role in capacity building. Through this approach, we
have agreed to increase bilateral and multilateral trade-related assistance
toward a goal of up to $4 billion by 2010.
On the IMF, we encouraged Managing Director Rata to substantially elevate
the attention given to exchange rate issues in the Fund's surveillance
activities. This is the IMF's most fundamental responsibility, yet IMF
exchange rate policy advice has often been too sparing or too muted.
Exchange rate flexibility is clearly in the interests of large emerging
markets increasingly integrated with international capital markets. But
from a broader perspective, the international financial system would benefit
from a multilateral approach to greater exchange rate flexibility.
We also stressed the need to enhance the Fund's governance and
representation structures, which need to evolve rapidly to reflect the
current realities of the global economy such as the growing weight of
emerging markets - particularly emerging Asia - and monetary union in
Europe. The G-7 have a collective interest in an IMF that is strong and
relevant to all its members, and the IMF's legitimacy and effectiveness risk
being undermined if current disparities on quota shares and Board seats
continue. The U.S. is seeking a better balance - we are not seeking to
increase our quota share; nor would we be prepared to see it decline.
We had good discussions on a range of developing country issues. We were all
http://treas.govJpressireleases/js3034.htm _
113/2006
Page 3 of3
pleased with the progress on the G-8 debt agreement, particularly at the IMF
- some work remains to move ahead with implementation at the World Bank and
we encourage quick action. We also welcomed Minister Tremonti's report on
Advance Market Commitments (AMCs) for vaccines as an interesting idea that
may contribute to the development, manufacture, and distribution of vaccines
for neglected diseases.
Ministers and governors also discussed efforts underway to prevent the
further spread of Avian influenza. The spread of this virus has potentially
severe human and economic impacts, and we agreed that all nations must take
all necessary steps to prevent a pandemic from occurring.
Continued terrorist attacks remind us of the urgency and importance of
implementing our commitments to fight terrorist financing and illicit
finance. We have reaffirmed our commitment to halt the flow of financing
with specific measures outlined in the Annex to our Statement. I further
urge our G7 partners and other allies to work with us to take decisive
multilateral action against individuals and entities engaged in illicit
financing including WMD proliferation networks and supporters.
Finally, in addition to our normal meeting, I am pleased the G-7 had the
opportunity to meet together with Ministers Fayyad and Olmert and the
Quartet's Special Envoy, James Wolfensohn. Our support of economic
development of the West Bank and Gaza will be a crucial element of lasting
peace in the region.
Thank you.
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Page 1 of2
PRESS ROOM
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December 5,2005
JS-3035
Treasury Seeks Comment on Updated Guidelines to Help
Protect Charitable Giving from Illicit Abuse
The U.S. Department of the Treasury today issued revised Anti-Terrorist Financing
Guidelines, Voluntary Best Practices for U.S.-based Charities (Guidelines) to help
the chartable sector protect itself from abuse by terrorist organizations. Treasury is
releasing for public comment this revised version of the Guidelines to ensure the
greatest benefit to the sector, as well as effective application.
"Charitable giving is an act ingrained in the culture of America, and the people of
this country give selflessly to vast vital causes. Sadly, terrorist networks and their
sympathizers have preyed upon this goodwill to raise and move money in support
of their deadly agendas," said Patrick O'Brien, the Treasury's Assistant Secretary
for Terrorist Financing and Financial Crime.
In November 2002, the Treasury issued the original Guidelines, and since then, the
Treasury has worked hand-in-hand with the U.S. charitable and donor community,
notably the Arab-American and Islamic-American community, to raise awareness of
terrorist abuse and the steps charities can take to protect themselves.
Strengthening and revising the Guidelines is an important part of this effort and will
further benefit the sector.
While the Guidelines are voluntary and do not supersede or modify legal
requirements, they promote the development of a risk-based, transparent approach
to guard against the threat of diversion of charitable funds for use by terrorists and
their supporters.
"Indeed, in the wake of natural disasters like the earthquake in Pakistan, the
tsunami in southeast Asia, and the hurricanes in the Gulf Coast of the United
States, we must ensure that charitable donations go to the legitimate causes they
were intended for," said O'Brien.
The Guidelines issued today immediately replace the original Guidelines, although
the Treasury will consider all comments received on or before February 1, 2006 in
finalizing the revised version. Please submit comments through one of the
following methods:
Mail:
Office of Terrorist Financing and Financial Crime
U.S. Department of the Treasury
1500 Pennsylvania Avenue, NW
Washington, D.C. 20220
Facsimile:
(202) 622-9747
Electronic Submission:
hJtp:llwww,.treas.gQv/offices/enforj:er:DenUkey-issues/protec1ing/charities- in tro.shtml
A copy of the draft Guidelines may be accessed through this link:
http://www .treasury .go vIoffices!enfo rcemenUkeyissues/protecting/docs/guidelines ch"arities-,pdf
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1/3/2006
Page 1 of2
PRESS ROOM
December 5, 2005
2005-12-5-16-11-52-1698
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 $68,130 million as of the end of that week, compared to $68,790 million as of the end of the prior week.
I. Official U.S. Reserve Assets (in US millions)
I
I
November 25, 2005
TOTAL
December 2, 2005
68,790
I
1. Foreign Currency Reserves 1
a. Securities
Euro
1
10,932
68,130
Yen
10,638
TOTAL
I
21,570
Of which, issuer headquartered in the U. S.
I
Euro
Yen
TOTAL
10,918
10,539
21,457
0
0
b. Total deposits with:
b.i. Other central banks and BIS
10,423
5,150
b.ii. Banks headquartered in the U. S.
15,573
15,507
5,102
0
0
0
I
0
0
I
0
0
12,515
12,054
8,072
b.iL Of which, banks located abroad
Ib.iiL Of which, banks located in the U.S.
I
12. IMF Reserve Position 2
1
13. Special Drawing Rights (SDRs) 2
1
8,091
1
11,041
14. Gold Stock 3
10,405
0
I
b.iii. Banks headquartered outside the U. S.
I
I
ffi
0
5. Other Reserve Assets
II. Predetermined Short-Term Drains on Foreign Currency Assets
P
Nov~mber 25, 2005
December 2, 2005
~ro~~~===Y=e=n==~F=T=O=T=A=L==~F===Eu=r=0==9il~=Y=e=n====W==T=O=TO=A=L~I
IF===============================
1. Foreign currency loans and securities
~r
0
2. Aggregate short and long positions in forwards and futures in foreign currencies vis-a-vis the U.S. dollar:
0
o
2.b. Long positions
0
3. Other
0
o
o
2.8. Short positions
III. Contingent Short-Term Net Drains on Foreign Currency Assets
I
November 25, 2005
=
1. Contingent liabilities in foreign currency
1.a. Collateral guarantees on debt due within 1
year
I
I
I
II
http://treas,gov/press/reieases/20051251611521698.htm
TOTAL
Yen
Euro
I
I
II
I
Euro
I
Yen
I
TOTAL
I
0
0
II
I
December 2, 2005
II
II
I
I
113/2006
Page 20[2
l1.b. Other contingent liabilities
2. Foreign currency securities with embedded
options
3. Undrawn, unconditional credit lines
13.a. With other central banks
I
I
I
I
I
I
II
II
II
II
I
I
3.b. With banks and other financial institutions
II
0
II
II
I
0
II
I
I
I
I
I
I
3.c. With banks and other financial institutions
1
I
Headquartered outside the U. S.
~ Aggregate short and long positions of options
in foreign
"II
I
Currencies vis-a-vis the U.S. dollar
1
4.a. Short positions
1
14.a.1. Bought puts
[4.b. Long positions
II
1
Headquartered in the U. S.
4.a.2. Written calls
II
II
I
I
"
1
4.b.1. Bought calls
0
0
II
/I
I
/I
/I
I
I
0
I
0
I
I
/I
I
1
I
4.b.2. Written puts
I
I
I
Notes:
11 Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account
(SOMA), valued at current market exchange rates. Foreign currency holdings listed as securities reflect marked-to-market values, and
deposits reflect carrying values. Foreign Currency Reserves for the latest week may be subject to revision. Foreign Currency
Reserves for the prior week are final.
21 The items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF and are
valued in dollar terms at the official SDR/dollar exchange rate for the reporting date. The entries for the latest week reflect any
necessary adjustments, including revaluation, by the U.S. Treasury to IMF data for the prior month end.
31 Gold stock is valued monthly at $42.2222 per fine troy ounce.
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Page 1 of3
PRESS ROOM
December 5,2005
JS-3036
Remarks by U.S. Treasurer Anna Escobedo Cabral
before ASPIRA Conference
San Juan, Puerto Rico
Good morning, first I would like to express my sincere thanks to ASPIRA and its
members for their gracious invitation. Thanks especially to Ron Blackburn-Moreno
and your staff for organizing this fantastic event. I bring you all greetings on behalf
of my boss, Secretary John Snow, and congratulate each and every one of you for
your amazing work and commitment to education.
It's a special honor to be here with people who care so much about our youth.
Since its inception almost 45 years ago, ASPIRA's mission has been to "empower
the Puerto Rican and Latino Community through advocacy and the education and
leadership development of its youth." This is a truly noble and very important cause.
In the United States, efforts like yours to promote education, including financial
education, are of great consequence as the country continues to experience
outstanding economic growth, particularly in the recent months.
Most of you are aware of how important it is for our Hispanic youth to be wellprepared and trained to fill the jobs of the 21st century. Hispanics are now the
largest minority in the United States, with an estimated population of 40 million. And
they are estimated to grow exponentially in the coming years.
Yet, over 30 percent of all Hispanics do not complete high school. The number of
Hispanics who do not graduate from four year colleges and universities increase
dramatically to 90 percent. Among Hispanics who do complete high school, about
53 percent pursue a post-secondary education immediately after graduation as
compared to almost 66 percent of non-Hispanic whites. This shows how essential
ASPIRA's efforts really are.
Why? Well, let's first consider the big picture and also consider the difference that a
group like ASPIRA can make. Compare the figures I just shared with you to those
that reflect the reality of the "Aspirantes" students: ASPIRA has a 95 percent high
school graduation rate - and 90 percent college going rate.
Also, since its founding, ASPIRA has provided a quarter of a million youth with the
personal resources they need to remain in school and contribute to their
community. And it is also my understanding that most mainland Puerto Rican
leaders today were encouraged by ASPIRA during their adolescence.
Clearly, the program is making a big difference for the better. This translates not
only into benefits for each individual student, but also for the economy of Puerto
Rico and the United States.
In the United States, we continue to see a significant growth in our economy thanks
to the President's commitment to a pro-growth agenda. Just last week, the
government released new jobs figures for the U.S.:
•
•
•
Payroll employment rose by 215,000 in November.
The economy has created nearly 2 million jobs over the past 12 months.
Over 4.4 million jobs have been created since May 2003.
These new opportunities suggest that it is important that we continue to encourage
and prepare our youth so that they will be equipped with the skills to compete and
be successful in today's and tomorrow's job market.
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Now, I want to share with you a little bit about my background, only because I think
it will help me convey to you how just one teacher, one educator, can make a
difference in the life of.another f?r the better. And also because I hope it will
encourage you to continue moving forward with your good work.
Neither of my parents graduated from high school - they faced various unique
challenges. They did what they had to do to put food on the table and worked with
their hands to make a good life for their children. Their dream was for their children
to graduate from high school.
Unfortunately, I did not know of the existence of groups like ASPIRA once it came
time for me to make the crucial decision about whether to go to college or get a job
right out of high school to help out my family. However, I did know a teacher who
cared, and who I believe played an important role in dramatically changing the
course of my life for the better.
Like many Latino parents today, my parents back then knew that school was
important but didn't consider college a realistic option. I was fortunate that a high
school algebra teacher took an interest in me. He helped me fill out college and
financial aid applications and visited my home, convincing my father to let me
attend the University of California at Santa Cruz. I became the first in my very large
extended family to go to college and was later able to enroll at the Kennedy School
of Government at Harvard.
One step led to another, and I soon found myself working in of Congress
addressing policy issues of importance to the Latino community and all Americans.
Today, I have the honor of serving as Treasurer of the United States. An important
part of my responsibilities as Treasurer is to promote financial literacy and
education, which I take great pride and interest in.
You know, there is a Spanish saying that says: "EI que guarda siempre encuentra."
This "dicho" or saying has been passed down through generations of my family. I
know I am constantly telling my kids to "save your money and "stop spending
money on things you don't need" because you never know when there will be a
rainy day. Now, the interesting thing is, this "dicho" doesn't just apply to my
children, or even your children, but to every single child.
At Treasury, we are working hard to provide our citizens with the right tools that can
teach them how to make sound financial decisions and how to build a nest-egg for
the future. For instance, Treasury currently leads the efforts of a federal
commission comprised of 20 federal agencies - the Financial Literacy and
Education Commission - to improve financial literacy of all people across the
country.
President Bush understands that acquiring knowledge, and in particular personal
financial savvy, is crucial to helping improve individual lives as well as driving the
continued steady growth of our nation's strong economy.
And so, noting the importance of enhancing access to tools that can help people
make wiser financial decisions, in December of 2003 the President signed
legislation establishing this federal commission. As part of its work, the Commission
in 2004 launched a national financial education web site and national toll-free
hotline - www.mymoney.gov and 1-888-mymoney.
I encourage you to visit mymoney.gov. The site has resources on a whole host of
personal finance topics from the federal government including: budgeting, taxes,
credit, financial planning, paying for education, retirement planning and more. The
web site is an effective tool and great resource you can tap. You can also order a
sample of some of the publications that are available on the web - what we call the
MyMoney Tool Kit. It has information to help you choose and use credit cards, get
out of debt, protect your credit record, understand your Social Security benefits,
insure your bank deposits, and start a savings and investing plan. We've made
some available for the ASPIRA conference today - please check them out.
Again, these are free tools you can use to integrate financial education lessons in
established courses of study - in any classroom at no extra cost. I also encourage
their use as a complement to ASPIRA's financial literacy program, which I am glad
http://treas.govJpress/releases/js3036.htm
1/3/2006
Page 3 of3
to hear focuses on serving the Latino community, especially youths from lowincome families. Thank you for championing this effort as well. I look forward to
working with you in the future on this front.
In closing, I'd like to leave you with this thought in mind: Of all the decisions an
individual must make in his or her lifetime, the decision to stay in school and earn a
degree is without a doubt of the utmost importance. One does not just learn
arithmetic and history, but it is the experience in its entirety that allows a student to
mature. Learn how to learn. Accept others who are different, learn from them.
These aspects are vital to a young man or woman in becoming a positive impact in
society.
And I want to thank you and commend you once more for teaching these important
things to the students you serve through your example and unwavering
commitment.
http://treas.govJpress/releases/js3036.htm
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Page 1 of 1
PRESS ROOM
December 6,2005
JS-3037
Statement of Secretary John Snow on Third Quarter Productivity Data
"The productivity of American workers increased at a 4.7 percent annual rate in the
third quarter. Since productivity ultimately leads to higher wages and higher
standards of living, this economic indicator is very good news for American families,
both for today and for the future.
"Combined with the recent news of GOP growth - 4.3 percent in the third quarterand a solid rate of job creation, today's productivity number is one more clear
indication of the success of the President's economic policies. Talk on Capital Hill of
undoing some of this policy - by raising taxes - is of great concern to me. Having
lower tax rates on capital is good policy, and the results for workers and families
proves it; 4.5 million new jobs can't be wrong. Furthermore, the thriving economy
has created increased federal tax revenues that have helped to bring the deficit
down. Congress needs to continue the policies that have worked so well. Raising
taxes on capital at this time takes us in the wrong direction and would jeopardize
the strong recovery we're seeing."
http://treas.govJpress/releases/js3037.htm
1/3/200n
Page 1 of 1
PRESS ROOM
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December 7, 2005
ja-3038
Treasury And IRS Issue Proposed Regulations On Corporate Estimated Tax
Payments
Today, the Treasury Department and IRS issued proposed regulations that provide
guidance for corporations to compute their estimated tax liabilities.
Corporations are generally required to remit their annual tax liability during the
taxable year in quarterly installments. The quarterly installments generally can be
based on a pro rata portion of the corporation's estimated annual tax liability.
Alternatively, the quarterly installments can be based on the corporation's
annualized taxable income (the taxable income for a specific period of months that
is extrapolated into an annual amount) or the corporation's adjusted seasonal
taxable income.
The proposed regulations replace existing proposed regulations that were issued in
1984. Those regulations do not provide adequate guidance on how a corporation
must determine the amount due with each required installment. In addition, those
regulations do not reflect significant changes to the tax law since 1984, most
notably the enactment of the economic performance rules. As a result, the IRS and
Treasury Department have become aware of techniques employed by some firms,
particularly those computing their estimated tax payments using an annualization
method, that reduce, if not eliminate, estimated tax payments for one or more
installments for a taxable year. The current reproposed regulations provide
extensive guidance on how to determine the amount due with each quarterly
installment, whether based on the corporation's estimated annual tax liability or the
corporation's annualized or adjusted seasonal taxable income, as well as rules for
computing estimated tax during a short taxable year.
The proposed regulations are proposed to apply to taxable years beginning after
the date that is 30 days after the date the final regulations are published in the
Federal Register. The Treasury Department and IRS request comments on the
rules contained in the proposed regulations and any additional guidance that should
be provided in the final regulations.
ATIACHMENT:
Proposed regulations under section 6655
REPORTS
http://treas.govJpressireleases/js3038.htm
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Page 1 of 4
PRESS ROOM
December 8,2005
JS-3039
The Honorable John W. Snow
Prepared Remarks to PricewaterhouseCoopers' 2005
Global Tax Symposium
Good afternoon; thanks so much for having me here. Your symposium comes at a
critical time, as major decisions impacting tax policy are pending on Capitol Hill.
Talk of raising taxes is coinciding with clear, outstanding evidence of how effective
lower taxes have been. Furthermore, the economic future looks bright - why would
we change course? Raising taxes on investment would harm the economic
recovery America has been enjoying.
In just the last week, we've learned that GOP growth was a robust 4.3 percent in
the third quarter. That's strong growth for any time, and it happened when the
country faced devastating natural disasters.
We also learned on Friday that 215,000 jobs were added to the payrolls in
November. Job creation is the reward of strong economic growth, and November's
employment report brings the total of jobs created since May of 2003 to four and a
half million -- with 1.8 million new jobs created this year alone.
Wages, by the way, will be the next number to rise. Historically, when an economy
enters a recession, business income tends to fall more rapidly than the incomes of
workers. In the early stages of the economic expansion that follows, income tends
to rise faster for business than for workers. Ultimately, however, there is always a
tipping point, when incomes rise for workers and business combined, but workers
once again increase their incomes faster than businesses. We're approaching that
tipping point now. Once businesses have been doing well for a while, they
ultimately compete those increases in income away by competing harder for labor.
The result is higher wages and higher standards of living for workers.
The fact that payrolls have been growing for thirty straight months and we were
able to achieve jobs gains even through a massive natural disaster like Hurricane
Katrina suggests we are getting closer to the point when workers receive a greater
share of economic gains. Workers can look forward to good days ahead.
Beyond numbers, the evidence of economic health is also clear to me, and to the
President, when we travel the country. For example our trip to North Carolina on
Monday to visit the John Deere-Hitachi plant in Kernersville where the President
spoke about the vibrancy of our economy and the importance of maintaining the
opportunities which make it so strong. The faces of the workers at John DeereHitachi are the faces of healthy economic expansion, and that means more to me
and to the President than any number.
Lately it has seemed that good economic news comes almost every day. The Labor
Department announced on Tuesday that the productivity of American workers
increased at a 4.7 percent annual rate in the third quarter. Since productivity
ultimately leads to higher wages and higher standards of living, this economic
indicator is very good news for American families, both for today and for the future.
We also know that consumer confidence is rebounding, industrial production is up,
early reports are that holiday sales are strong, and more Americans own their
homes than ever before.
All of these are the unmistakable hallmarks of a strong economy, and each one is
encouraging news for America's families.
From a government perspective, a steady stream of positive indicators has giv~n us
increased confidence that the underlying fundamentals of our economy are SOlid,
and that our path of growth is steady. As the President has said, our best economic
p:lltreas.govJpressireleases/js3039.htm
113/2006
Page 2 of 4
days are ahead of us.
When economic growth and job creation are mapped on graphs, the visual image
makes clear what is happening in the economy, so I want to share it with all of you
today.
The numbers, and these charts, tell a story of the impact of good tax policy.
They.also re~ind us that changing the direction of successful economic policy - by
allOWing tax Increases to occur -- would be a mistake.
~ower taxes - espe.cially t.hose that lower the
Inves~ment -- combined with sound monetary
cost of capital and encourage
policy from the Federal Reserve, set
American entrepreneurs free to do what they do best: innovate, invest, grow the
economy, and create jobs. Millions of Americans have benefited from these policies
either directly - through lower taxes - or indirectly through new and better jobs and
greater economic security for families.
Congress this week and next week is debating tax legislation that could have an
enormous impact on our economy - in particular the tax rates on dividends and
capital gains.
In May 2003 when President Bush worked with Congress to enact the tax policy
that lowered the rates on dividends and capital gains, there were many skeptics.
Critics of the proposal disputed our view that this reform would create jobs and spur
economic growth. One critic called the plan "tragic"; another leader said it was
"reckless" and wouldn't create jobs.
But the past 30 months have demonstrated just how powerful those reforms were ...
and how mistaken our critics were. The evidence that that was the right policy
prescription for America stream in every day:
• 4.5 million new jobs created;
• unemployment running lower than the 1970s, 1980s and 1990s;
• GOP growth averaging over 4.0% annually;
• household wealth at an all-time high;
• federal revenues increasing;
• U.S. equity markets rising steadily;
• Dividends paid to shareholders - millions of whom are senior citizens and middle
class - are up.
There are a lot of things you can say about these statistics, but neither "tragic" nor
"reckless" come to mind.
There is no question what we need to do: we must extend these good policies and
not undermine economic growth. Raising taxes on investment would attack the
roots of the economic recovery. I rejected the arguments of the pessimists before,
and I reject them today. Gloom and doom rhetoric is absurd on a day when more
Americans are working than ever before, more Americans own stock than ever
before, and federal tax revenues are at an all-time high. We are experiencing
record prosperity; we shouldn't punish the success of American entrepreneurs and
workers with tax increases.
Reforming these tax rates have benefited our entire economy generally, and have
quite directly benefited the nearly 57 million American households - that's half of all
households - that own stocks either directly or through mutual funds. In fact,
according to the Securities Industry Association, the median income of today's
stock investor is just $65,000.
The American Shareholders Association estimates that S&P 500 shareholders will
receive $201 billion in regular dividend payments this year - a 36% increase over
2002, the year before the President's tax reductions on dividends took effect. The
dividend tax reduction reversed a 25-year decline in companies paying dividends to
their shareholders. In fact, today seventy-seven percent of S&P companies now
pay a dividend.
More than just lowering the tax burden, reducing the tax rate on dividends had an
additional, fundamental benefit by reducing the disparity in the tax treatment
between debt and equity financing. Before the reform, the bias in capital markets
:lltreas. gOYJpress/releaseS/j s303 9.htm
1/3/2006
Page 3 of 4
was tilted toward debt financing because of the tax code. While there is still a bias
toward debt financing it has been significantly reduced. This reform is helping to
reduce distortions in capital markets and is helping more companies to make more
sound financing decisions by reducing distortions caused by the bias in the tax
code.
One argument that was made against the President's tax plan was that it would
cost the government too much revenue. But, again, the facts since 2003 have
shown that the economic growth spurred by the President's tax policies have
significantly swelled government coffers. In January 2004, for example, the nonpartisan Congressional Budget Office projected that 2004 revenue would be $1.817
trillion. Actual revenue came in $63 billion higher - half a percent of GDP. In
January 2005, CBO projected 2005 revenue would be $2.057 billion; actual
revenue came in $96 billion higher - 0.7 percent of GDP.
We still have a federal budget deficit - one that is too large and that the President is
firmly committed to reducing. But our deficits are not the result of lower receipts tax revenue continues to be strong. Our deficits are overwhelmingly the result of the
recession we inherited and necessary increases in spending to fight the war on
terror. Deficits matter and one of our highest priorities is to achieve the President's
goal of reducing our deficit to below 2.3 percent of GDP by 2009. Even in the face
of increased costs to deal with this summer's hurricanes, I am confident that we will
achieve this goal.
One more benefit of tax reform that I want to mention was actually a health benefit,
the creation of Health Savings Accounts, which happened two years ago today. It's
hard to put an exact number on this, but there are estimates that over a million
Americans are now enjoying the tax and saving advantages of HSAs, and that
number appears to be growing rapidly, with many large employers offering HSAs to
their employees this coming year, including Wal-Mart, for example. HSAs are
proving to be a break-through product that helps address the underlying problem of
the affordability of health-care coverage. I think of them as super-charged IRAs for
health care, 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. Among its many benefits, an HSA puts doctors and patients back in
charge of their health care purchasing decisions.
I hope you don't assume that because we were able to successfully use the tax
code to create HSAs and spur growth in our economy that I'm pleased with
America's tax code. As all of you well know, our tax code is not where it should be.
In almost three years as Treasury Secretary, I've certainly never had anyone
approach me to say the code is in good shape, don't change a thing!
You know the statistics - billions of hours of paperwork for tax filers and
businesses, $140 billion dollars in lost time and money just trying to comply with our
increasingly unwieldy tax code. It's easy to see that the code is a drag on economic
growth in America, an unnecessary burden we all share.
At Treasury, we are reviewing the proposals from the President's Tax Reform Panel
intended to simplify and streamline the tax code. I commend the work the Panel did
under the leadership of the two co-chairmen, former Senators John Breaux and
Connie Mack, and I look forward to making a thoughtful recommendation on reform
to the President.
One thing remains true today, and will for all the days of this Presidency: we do not
support tax increases. On the contrary, we support smart fiscal policy that provides
oxygen and room to grow to the economic marvel that is the American economy.
Our policies have been successful so far, and we want to stay on this path until
every American who seeks a job can find one, and until every family that struggles
to pay their bills can breathe easier.
Thank you again for inviting me here today. I would be happy to take any questions
you might have.
-END-
REPORTS
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Page 4 of4
• CHART: GOP on a Path of Sustained Growth
• CH~Rj~J()bs Rebound and Unemployment Falls as Bush Economic
PQJic~~CQmejnto Effect
.
• CHART: Federal Revenues Rising
http://treas.govJpressireleases/js3039.htm
113/2006
Page 1 of 1
GOP On a Path of Sustained Growth
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1/3/2006
Page 1 of 1
Jobs Rebound and Unemployrnent Falls as Bush
Economic Policies Come into Effect
135000
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113/2006
Page 1 of 1
Federal Revenues Rising
-
2,300,000 i-----------===~==~~
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http://treas.govJpress/releases/reports/revent.e%20growth.jpg
2003
2004
2005
113/2006
Page 1 of 1
PRESS ROOM
December 8,2005
JS-3040
Statement of Secretary John W. Snow
On the Anniversary of the
Creation of Health Savings Accounts
"Two years ago today, with the stroke of President Bush's pen, an historic healthcare product was born. Today, over a million Americans - a large portion of whom
were previously uninsured -are enjoying access to more affordable health care
because of the tax advantages and savings benefits of Health Savings Accounts
(HSAs).
"Choosing an HSA puts patients in charge of their health-care purchasing
decisions, and that's why their creation was so important. Similar to retirementsaving tools like IRAs, HSAs were 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 that more employers are choosing
to offer HSAs to their employees every day, and I encourage all employers and
individuals to consider them as an attractive alternative to traditional health
insurance."
http://treas.govJpress/releases/js3040.htm
111 /') 00"
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PRESS ROOM
December 8,2005
JS-3041
Statement of Secretary John W. Snow
On the Passage of H.R. 4297 - Tax Relief
Extension Reconciliation Act of 2005
"I commend the House of Representatives on passage of this bill, which is critical to
sustaining our economic recovery and creating jobs. It would encourage
investment and innovation--the lifeblood of the American economy. Lower tax
rates on savings and investment have benefited millions of Americans of all income
levels either directly - through lower taxes on investment returns - or indirectly
through new and better jobs and greater economic security for families.
"With half of all U.S. households owning stock and the President's fiscal policies
showing robust economic results, it is critically important that we not raise tax rates
on capital gains and dividends. I encourage the Senate to follow suit and extend
these good policies. To do otherwise would be to undermine strong economic
growth that has created 4.5 million new jobs since tax relief was enacted in 2003.
"Additionally, I am pleased that the bill includes the expansion of Section 179
expensing for small business and an extension of many of the expiring provisions
included in the President's Budget such as the R&D credit."
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PRESS ROOM
December 9, 2005
JS-3042
Treasury Secretary Snow to Visit Mexico
Treasury Secretary John W. Snow will travel to Mexico City next week to meet with
President Vicente Fox, Finance Minister Gil Diaz, and others. The trip is part of the
ongoing dialogue with a vital economic partner on priority issues for both countries,
including economic integration and cooperation and poverty reduction.
The Secretary will hold a joint press conference with Minister Diaz at 5:45 p.m.
(CST) on Thursday, December 15 in the Los Pinos Conference Room at the
Presidential Palace.
The Secretary will also hear the views of local business leaders, students and
political commentators while in Mexico City. U.S. Treasurer Anna Escobedo Cabral
will be joining the Secretary for the trip. Cabral has been active in Treasury's
engagement with Mexico on a number of economic and financial education issues.
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PRESS ROOM
December 9,2005
JS-3043
Deputy Assistant Secretary lannicola
Teaches 2nd Graders a Lesson on Saving
Treasury's Deputy Assistant Secretary for Financial Education Dan lannicola, Jr.
will teach a lesson on savings to second graders at Greenbriar East Elementary
School in Farifax, Virginia next week. The students at Greenbriar East Elementary
School have been participating in an economics class since September. where they
have learned about money. spending and saving.
This event is open to the press:
WHEN: December 14, 2005
WHERE: Greenbriar East Elementary School
13006 Point Pleasant Drive
Fairfax. VA 22033
TIME:
10 a.m. (EST)
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PRESS ROOM
December 13, 2005
2005-12-13-11-32-23-5965
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 $68,488 million as of the end of that week, compared to $68,130 million as of the end of the prior week.
I. Official U.S. Reserve Assets (in US millions)
December b 200~
TOTAL
Decembe~
I
68,130
1. Foreign Currency Reserves 1
a. Securities
Euro
Yen
10,918
10,539
I
2005
68,488
1 TOTAL
21,457
Of which, issuer headquartered in the US.
1
Euro
10,026
I
Yen
TOTAL
10,559
21,585
u
0
b. Total deposits with:
b.i. Other central banks and BIS
10,405
5,102
15,507
Ilb.ii. Banks headquartered in the US.
I
b.iii. Banks headquartered outside the US.
12. IMF Reserve Position 2
13. Special Drawing Rights (SDRs) 2
14. Gold Stock 3
I
I
I
I
I
0
II
I
I
I
0
0
0
0
12,054
12,116
11,041
0
.
0
0
8,072
1
15. Other Reserve Assets
15,632
0
b.ii. Of which, banks located abroad
Ib.iii. Of which, banks located in the U.S.
5,112
10,520
1
1
I
II
8,114
II
I
I
11,041
I
0
II. Predetermined Short-Term Drains on Foreign Currency Assets
DecemberJt-.2005
December 2, 200..5
I
Euro
TOTAL
Yen
Euro
Yen
:
TO~AL
0
1. Foreign currency loans and securities
2. Aggregate short and long positions in forwards and futures in foreign currencies vis-a-vis the U.S. dollar:
2.8. Short positions
0
2.b. Long positions
0
°
3. Other
0
0
0
III. Contingent Short-Term Net Drains on Foreign Currency Assets
l
1. Contingent liabilities in foreign currency
1.a. Collateral guarantees on debt due within 1
year
r
DecembEtr:~,2005
II
I
Euro
I
I
II
http://treas.gov/press/releases/200512131132235965.htm
December .9.,_2Q05
TOTAL
Yen
"
0
"
"I
II
Euro
Yen
II
TOTAL
I
0
II
I
I
I
113/2006
Page 20f2
1.b. Other contingent liabilities
2. Foreign currency securities with
options
~~I
I
I
I
3. Undrawn, unconditional credit lines
I
0
II
I
I
I
0
0
0
3.a. With other central banks
3.b. With banks and other financial institutions
Headquartered in the U.S.
I
I
I
I
3.e. With banks and other financial institutions
II Headquartered outside the U. S.
4. Aggregate short and long positions of options
in foreign
'Currencies vis-a-vis the U.S. dollar
,
,
I,
,
0
4.a. Short positions
4.a.1. Bought puts
14.a.2. Written calls
4.b. Long positions
,
4.b.1. Bought calls
4.b.2. Written puts
II
II
I
I
I
I
0
Notes:
11 Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account
(SOMA), valued at current market exchange rates. Foreign currency holdings listed as securities reflect marked-to-market values, and
deposits reflect carrying values. Foreign Currency Reserves for the latest week may be subject to revision. Foreign Currency
Reserves for the prior week are final.
21 The items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF and are
valued in dollar terms at the official SDRldoliar 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.
31 Gold stock is valued monthly at $42.2222 per fine troy ounce.
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PRESS ROOM
December 13, 2005
JS-3044
U.S. Treasury Secretary John W. Snow,
U.S. Commerce Secretary Carlos M. Gutierrez
and U.S. Labor Secretary Elaine l. Chao
will provide a year-end economic briefing
Washington, D.C. - U.S. Treasury Secretary John W. Snow, U.S. Commerce
Secretary Carlos M. Gutierrez and U.S. Labor Secretary Elaine L. Chao will provide
a year-end economic briefing on Wednesday, December 14, 2005 at 2:30 p.m.
WHO:
U.S. Treasury Secretary John W. Snow
U.S. Commerce Secretary Carlos M. Gutierrez
U.S. Labor Secretary Elaine L. Chao
WHAT:
Bush economic team to provide year-end briefing on the economy.
WHEN:
Tuesday, December 14, 2005
2:30 p.m.
Note: Media must R.S.V.P. by Wednesday, December 14, 2005 10:00 a.m. to
Frances Anderson at 202·622·2439 or frances.anderson@dQJreas.g9-"l with
full name, DOB, Social Security Number, organization and country of birth if
not U.S.
WHERE:
Department of the Treasury
Media Room 4121
1500 Pennsylvania Avenue, NW
Washington, D.C. 20220
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Page 1 of 1
PRESS ROOM
December 14, 2005
JS-3045
Statement by Deputy Assistant Secretary Dan lannicola
Before the Greenbriar East Elementary School
Fairfax, Virginia
"Parents and teachers have a tremendous opportunity to help young people by
starting financial education early. Even second grade is not too early to teach
children basic financial topics such as saving and deferring gratification, like we are
doing here today. By making an early impression, we can help kids build helpful
money management habits that will benefit them their entire lives."
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PRESS ROOM
December 14, 2005
JS-3046
Statement of Tony Fratto
Nominee for Assistant Secretary for Public Affairs
U.S. Department of the Treasury
Chairman Grassley, Ranking Member Baucus, and members of the Senate Finance
Committee, thank you for the opportunity to appear before you today. It is a great
privilege to be considered for the position of Assistant Secretary of the Treasury for
Public Affairs. I appreciate your taking the time to consider my nomination during
this very busy time.
As all of you know, none of us are able to consider taking on positions in this line of
work without the support and sacrifices of our families. Certainly I am no
exception. My wife, Judy, and my children, Antonio and Juliette, have seen less of
me than is fair in recent years. I am grateful every day that they still stand by me,
and I'm very happy that they're all here today.
I am truly honored that President Bush has nominated me to serve in this position.
I believe in the President's leadership and have been proud to champion his
economic policies while working in this Administration.
Growing up in Pittsburgh, as a first-generation American, I learned that hard work
breeds success. If I have had any success in my career it has come because of
that work ethic, so much a part of the fabric of my hometown, and because of the
opportunities others gave me.
Fifteen years ago I came to Washington with a degree in economics and a chance
to work for a then very young first-term congressman, now Senator, Rick Santorum
- a member of this Committee. Senator Santorum was the first public official to
give me the job of working as a spokesman, and set me on a career path which I
hadn't intended to take, but have found to be a rewarding role where I can make a
contribution in the public debate of important issues. Since then, I have had the
opportunity to work with other distinguished officials, Governor Tom Ridge,
Secretary Paul O'Neill and now Secretary John Snow and I value the time I spent
with each of them.
I am also honored to have spent the past five years working at the U.S. Treasury
Department. The Treasury Department has been the locus of American economic
policymaking since Alexander Hamilton first served as Treasury Secretary, and it
continues in that tradition today. I have the distinct privilege of representing the
work of some of the world's finest economists and policymakers. Both the
appointed staff and career staff are exceptionally talented and dedicated. In
serving as their spokesman, they have helped me to sound smarter than I really am
every day.
Treasury's Office of Public Affairs plays a crucial role in communicating our
economic policies, both here at home and to international audiences. The public
debate of these policies is enhanced when we present with clarity our views, and
the data that support them, to the public, the news media, financial markets, and to
the Congress. I take this responsibility seriously, and promise to do my best to live
up to this Committee's expectations if I am confirmed for this position.
Thank you very much, Mr. Chairman. I look forward to responding to questions
from you and the Committee.
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PRESS ROOM
December 14, 2005
JS-3047
Remarks by Randal K. Quarles
Under Secretary of the Treasury for Domestic Finance
to the Exchequer Club
Thank you for inviting me to speak before the Exchequer Club today. I am pleased
to continue the long standing tradition of Treasury officials discussing key financial
and economic policy issues before this distinguished group.
As we at the Treasury consider some of the specific economic and financial
challenges the country needs to address, we are certainly heartened that we do so
against the backdrop of one of the strongest economies in many years. Third
quarter growth in the Gross Domestic Product was 4.3 percent, good for any
quarter, but quite remarkable in a period that followed a devastating natural
disaster. It marks the 10th straight quarter that GOP growth has exceeded 3
percent. Job growth continues with 215,000 new jobs added in November and a
total of 1.8 million new jobs this year--almost 4.5 million since May 2003. And this
strong job creation has not come at the expense of productivity growth. Productivity
grew 4.7 percent in the third quarter and current unemployment is only 5 percent.
We have built a strong foundation for future growth based upon low taxes,
restrained government spending, legal reform, and incentives for saving and
investment. All this is particularly good news for American workers.
In spite of all the encouraging economic reports, there are some issues of great
importance to America's workforce that need to be addressed. I would like to talk
about one of those issues today, the current state of the country's defined benefit
pension system. I think that the complex issues surrounding the funding and
administration of our pension and pension guarantee will be among the most
challenging and consequential that our society will face over the next several years.
The Administration has made pension reform one of its key legislative priorities.
The federal government has an interest in defined benefit pension plans for four key
reasons.
First, the government has an interest in ensuring simple fairness. The
administration wants to make sure that pension plan sponsors deal fairly with their
employees by meeting their pension obligations. It's an elementary principle, really:
a promise made ought to be a promise kept.
Second, pension benefits are guaranteed by a federal government corporation,
known as the Pension Benefit Guaranty Corporation or the PBGC. When a
company with an underfunded pension plan reorganizes, liquidates, or
demonstrates according to strictly defined statutory standards that it cannot
continue operations with its pension plans, the PBGC takes over those pension
plans' assets and liabilities and becomes the plan trustee. Once it takes over a
plan, PBGC assumes the responsibility of making benefit payments to all
employees and retirees who have earned pensions under the plan. Because the
PBGC guarantee is limited to a fixed dollar amount, workers and retirees can often
lose retirement benefits when such pension terminations occur; benefits that they
have earned through long years of service to the sponsoring company.
Third, when the PBGC takes over a pension plan it is often one of the largest
unsecured creditors. As a sponsoring company works its way through the
bankruptcy reorganization, PBGC can end up with a significant equity interest in the
new company. The federal government being a large equity holder in any private
company - however that stake may have arisen - is inconsistent with the
fundamental principles of a market economy. The continued operation of private
sector companies in our economy should not depend on whether the U.S.
government holds or maintains an equity stake in the company, but rather it should
be based on financial market participants' willingness to invest in the on-going
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Page 2 of5
business operations of such companies.
Finally, the rules for funding pension plans are defined in federal law and are jointly
enforced by the Department of Labor and the Internal Revenue Service. Pension
plan contributions and investment returns are tax-advantaged, which means that
government has an interest in ensuring that such advantages are not abused.
Status of the Defined Benefit Pension System
I am sure that many you have read in the newspapers that pension plans and the
pension insurance system are in difficult financial straits. Although most companies
do make benefit payments when due and fund their plans responsibly, an
increasing number in recent years have not. Underfunding in pension plans
increased from $164 billion to $450 billion between 2001 and 2005. During that
same five-year period, PBGC has seen its net financial position decline from a $7.7
billion surplus to a $22.8 billion deficit. The increase in PBGC's deficit has come
about primarily because of the failure of a number of very large pension plans
including those of United Airlines, US Airways, LTV Steel, and Bethlehem Steel.
Claims against the single employer guarantee fund from these and other pension
plans that failed over the past five years totaled $34.1 billion.
Some recent high profile penSion plan terminations illustrate the magnitude of
problems in the defined benefit pension system.
•
United Airlines: At the time PBGC moved to terminate United's four pension
plans it estimated that there were sufficient assets to cover only 42 percent
of total obligations. Assets were $7.0 billion while liabilities were $16.8
billion. PBGC guarantees will cover $6.6 billion of the $9.8 billion shortfall.
The remaining $3.2 billion represents lost benefits to plan participants. At
this time PBGC is still litigating the size of its claim for unfunded liabilities in
the bankruptcy court.
• U.S. Airways: U.S. Airways' plans that terminated in 2003 and 2005 had
sufficient assets to cover only 37 percent of liabilities. At the time of
termination assets were $2.9 billion while liabilities were $7.9 billion PBGC's
guarantee covered $2.9 billion of the $5.0 billion shortfall. The remaining
$2.1 billion represents benefit losses.
• Bethlehem Steel: Plans terminated in 2002 had assets sufficient to cover
only 45 percent of liabilities. Assets at the time of termination were $3.5
billion and liabilities $7.8 billon. PBGC's guarantee will cover $3.7 billion of
the $4.3 billion funding shortfall. The difference of $600 million will be lost to
partiCipants.
How is it that the pension system finds itself in this situation? While there are a
number of factors, one of the key reasons is that the current funding rules have not
adequately ensured that companies fund their pension plans and keep the
promises they have made to employees.
One of the key deficiencies in the current funding rules is that it is difficult to get an
accurate measure of the degree of pension plan underfunding. A significant reason
is that current pension funding rules are designed to make contributions even and
as predictable as possible while the plan sponsor funds to a target that represents
its long run benefit payment obligations. Today's funding rules allow pension plan
assets and liabilities to be measured on a smoothed rather than a current basis.
Liabilities are averaged over a four-year period while assets may be averaged for
up to five years. Smoothed measures that delay recognition of asset and liability
value changes make plans appear to be much better funded than they are on a
current basis when asset values are declining and liability values rise. This has
occurred most recently when stock prices and interest rates both fell at the
beginning of the 2001 bear market.
While the idea of making contributions even and predictable may sound appealing,
one consequence of smoothing rules is that pension plans are permitted to remain
seriously underfunded for years at a time. A convenient way to think of pension
underfunding is to consider it a loan from employees to employers. Accrued
pension benefits are part of an employee's compensation for work already
performed. To the extent that employers are permitted to make less than the
contribution required to fully fund their pension promises the plan is essentially
extending credit to the employer - and employers that take such loans from their
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1/3/2006
Page 3 of5
pension plans are shifting some of the risk of meeting pension obligations from
themselves to their employees. In the United States, with its pension guaranty
system, a significant portion of that risk is then transferred to the guarantor, the
PBGC. If a pension sponsor encounters financial trouble while underfunded it is
likely to default on its pension loans resulting in lost benefits to participants and
losses to PBGC's guaranty fund.
Another serious measurement problem is that pension liabilities are measured
using a single, long-term interest rate to discount future benefit payments. Under
normal conditions - that is when the yield curve slopes upward - the use of a single
long-term discount rate systematically understates the liabilities of plans with a
large ratio of retirees to active workers. This is especially problematic in the many
plans of older industrial companies that have more retirees than active workers.
In addition to measurement problems, the current funding rules also provide a
mechanism - called credit balances - that while allowing for the greater
predictability of contributions also can lead to chronic underfunding. Credit
balances, an accounting construct that may be unfamiliar to those outside of the
pension community, may be used by pension plans in lieu of required cash
contributions. Credit balances are created when pension sponsors make
contributions that are higher than the minimum required in a given year. Under the
current rules the value of such a balance, once created, increases each year with
an interest credit that is chosen by the plan and represents the expected long-run
return on penSion plan assets. The interest credit is applied each year even if the
value of plan assets declines. These balances may be used instead of cash
contributions even in plans that are very seriously underfunded. It should be noted
that credit balances allowed Bethlehem to avoid making any cash contributions to
its plans for three years before its termination. At the time that PBGC took over the
plan, assets equaled only 45 percent of termination liabilities. Likewise US Airways
was not required to make any cash contributions to its pilots' plans for the four
years preceding its termination even though the plan's assets covered only 33
percent of accrued benefits at the time of termination.
Some other problems in the current pension funding rules are that the funding
targets are set at 90 percent of current liability, which is a smoothed measure that is
well below the level of outstanding obligations. Also payments for new benefits can
be amortized for up to 30 years, which provides incentives to increase benefits
today since most of the funding expense only comes due years in the future.
The current funding rules are not the only problem with today's defined benefit
pension system. Some other problems with the current system include:
•
Pension plan financial disclosures to participants are inadequate. The data
supplied to participants is out of date and consists only of smoothed asset
and liability measures. Participants are unable to monitor how well their
plans are funded with this information. For example, the participants of
Bethlehem steel were told the year before the plan terminated that it was 84
percent funded based on smoothed asset and liability measures and the
current law funding target. When the plan terminated the next year,
however, participants were surprised to learn that plan funding would only
cover about 45 percent of earned benefits.
• The pension insurance system creates moral hazard. The existence of
insurance provides the incentive for employees to accept future promises of
pension benefit as a SUbstitute for current wage increases even if it appears
unlikely the sponsoring firm will be able to fund such promises.
• Premium rates are set below the level needed for PBGC to regain solvency.
PBGC's premium structure includes two parts. The first is a flat rate
premium of $19 per plan participant that has not been increased since 1991
even though maximum insurance coverage automatically increases every
year. Between 1991 and 2005, PBGC's maximum guarantee for an
individual who retires at age 65 increased from $27,000 to $45.613. PBGC
also charges a variable premium of $9 per $1,000 of underfunding. This
premium rate has not been updated since 1996.
• All plan sponsors pay the same flat premium rate and the same variable
premiums for underfunding regardless of the risk that they will terminate
underfunded plans. This creates a set of cross subsidies from stronger to
weaker plan sponsors that results in adverse selection in the pension .
system. Strong sponsors have an incentive to leave the system to aVOid
paying subsidies; weak sponsors have an incentive to remain to receive
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Page 4 0[5
those subsidies.
It has become apparent to nearly all interested parties that the defined benefit
pension system is not sustainable in its present form and that action is needed to
protect both pension plan participants and the pension guaranty system.
The Administration's Pension Reform Proposal
In order to encourage the continuation of financially sound pension plans, the
Ad.ministration .unveiled a comprehensive reform proposal in January of this year.
This proposal, If adopted would change the focus of pension funding rules from
smoothing contributions to ensuring that plans have adequate assets to meet their
accrued obligations. By promoting sound funding the Administration's proposal will
protect employee's benefits and place the pension guaranty system on a firm
financial footing.
The Administration has proposed the following changes to pension rules.
•
•
•
•
•
•
•
•
Assets and liabilities would be measured at current, market values.
Accurate and current measurement is necessary both as a basis for
implementing sound funding rules and for making the disclosure of pension
plan's financial status transparent to employees, retirees, and financial
market participants.
Liabilities would be valued using a yield curve of high quality (AA) corporate
bonds rather than with a single interest rate in order to capture the time
structure of the underlying benefit payments.
Pension funding targets for most plans will be set at 100 percent of accrued
benefits. Sponsors that are financially weak and pose the highest risk of
terminating underfunded plans would fund to a higher target.
Plans would be required to eliminate increases in underfunding within seven
years. This amortization period will apply to new benefits, as well as to other
causes of underfunding such as investment losses. A short amortization
period will help ensure that plans do not remain underfunded for extended
periods of time.
The use of credit balances would be eliminated. Plans would be required to
make cash contributions to satisfy their funding obligations in the future.
Plans that are underfunded would be restricted in their ability to increase
benefits. This will prevent plans that are already underfunded from making
their situations worse.
Plans will be required to provide new and meaningful financial disclosures to
plan participants.
PBGC's per capita premiums will be increased and rise in the future at the
same rate as PBGC's maximum coverage levels. Risk based premiums that
will reduce the cross subsidies in the current premium system will be
introduced.
Congress has responded to the Administration's call for reform by undertaking
important pension legislative initiatives. The Senate, under the leadership of
Chairman Grassley of the Finance Committee and Chairman Enzi of the Health,
Education, Labor and Pensions Committee passed the Pension Security and
Transparency Act of 2005 on November 16. The House may bring legislation to the
floor as early as this week. Similar versions of The Pension Protection Act of 2005
have been reported out of the Education and Workforce Committee under
Chairman Boehner and the Ways and Means Committee under Chairman Thomas.
And yet, although the House and Senate bills are both modeled after the
Administration proposal, both in their current form might actually result in a
weakening of pension plan funding and the pension guaranty system. The
fundamental goal of any pension reform proposal should be to reduce claims on the
pension insurance system, reduce benefit losses to plan participants, and increase
plan funding, all with the goal of ensuring that pension promises are kept. The
Administration does not consider any bill that fails to improve upon current law as
an acceptable legislative outcome. Likewise, the Administration opposes temporary
fixes -such as extending the corporate bond rate as the discount factor - that do
not comprehensively address the problems in the current system. However, we
believe that we can work with the Congress to strengthen current legislation in
conference. Together the Congress and the Administration can produce a bill that
will improve protection for the pension benefits of employees and retirees.
http://treas.govJpress/releases/js3047.htm
113/2006
Page 1 of2
PRESS ROOM
10 VIew or pnnt the /-,UI- content on this page, C1owntoaC1 the free /4JlQQ~(B)Ac;roba[(f)j-<eaC1erVj).
December 14, 2005
js-3048
The Honorable John W, Snow
Remarks at Year-End Economic Briefing
Good afternoon; thank you all for coming. I welcome my Cabinet colleagues here at
the Treasury Department today. Secretary Chao, Secretary Gutierrez, thank you for
being here and for your dedication to the economic strength of this great nation.
As we look back at our economy's strong performance over the last year,
Americans have a great deal to be proud of and every reason to be optimistic about
the future, More Americans are working than ever before - with nearly 4.5 million
jobs created since May of 2003 - the economy has been expanding steadily by
more than 3% for 10 consecutive quarters; and household wealth--the value of
people's savings and homes--is at an all-time high.
While economic growth in other industrialized countries has stagnated - with
unemployment rates reaching into double-digits in some cases - the American
economy has continued to set the standard for economic performance among
industrialized nations,
We have every reason to believe that our path of growth and job creation will
continue. We are looking forward to continued robust growth in payrolls and, as
headline inflation recedes, real wage growth. I'd also expect to see continued GDP
growth in the range of what we've seen over the past couple of years.
It is a responsibility of government to create the conditions for prosperity. President
Bush's economic policies, centered on lower tax rates on both labor and capital,
encourage entrepreneurship and reward workers' efforts. And America has the
most productive workers and businesses in the world. Along with sound monetary
policy from the Federal Reserve, these policies are delivering results and proving
the pessimists and naysayers wrong.
In May 2003, President Bush worked with Congress to enact the tax policy that
breathed life into the economy, and has since encouraged a strong recovery.
Critics of the proposal disputed our view that this reform would create jobs and spur
economic growth. One critic called the plan "tragic"; another leader said it was
"reckless" and wouldn't create jobs.
Hindsight has a way of settling these debates, The facts are now in, Since May of
2003, GDP has grown at above 4% on average and turned in an impressive 4.3%
growth rate for the third quarter of this year. Growth that strong, even in the face of
the challenges presented by the Gulf Coast hurricanes, is a testament to the
resiliency and fundamental strength of the American economy,
Job creation is the reward of strong economic growth, and November's employment
report brings the total of jobs created since May of 2003 to four and a half million -with 1,8 million new jobs created this year. The 215,000 jobs added in November
continue 30 months of uninterrupted economic growth,
There were some who said government revenues would plummet if we reduced
taxes. That hasn't happened either. Since May 2003, strong economic growth has
driven federal revenues to record levels proving that lower taxes are consistent with
higher federal receipts.
American families are enjoying the benefits of a strong economy, Last week, we
http://treas.goYJpress/releaseS/j s3048 .htm
113/2006
Page 2 of2
learned that household wealth reached an all-time high of $51.1 trillion in the third
quarter. This means that the value of average Americans' bank accounts, 401 Ks,
and homes has never been higher.
The picture is of an American economy that is doing well. But there is more work to
be done. The President will not be satisfied until every American is doing well, in
an economy that does well. That is why this President is so committed to tackling
the things that get in the way of prosperity such as higher taxes. My colleagues,
Secretaries Gutierrez and Chao, will now offer some more detailed insight into how
businesses and workers are doing and then we'll take your questions at the end.
END
LINKS
•
•
Q@artment of _Commerce
DepadmenLQfLClbor
REPORTS
•
•
•
R~marks bfrQrnmerce Secreta1Y-Carlo~ GutLerrez
Rem_aJJ<~_ bYL.!3bor_SecrillaryJ;laine 1_" ChaQ
Ch<;lrts and Grapb~
http://treas.govJpress/releases/js3048.htm
113/2006
cr~JMMERCE
NEWS
UNITED STATES DEPARTMENT OF COMMERCE
IOffice of the ~ec-'=.etary_~_~a!:3hin9t0f2.. qC_~0230 • vvvvvv. doc. govl
FOR IMMEDIATE RELEASE
WEDNESDAY, DECEMBER 14,2005
Contact: Christine Gunderson/Dan Nelson
202-482-4883
Carlos M. Gutierrez
U.S. Secretary of Commerce
Prepared Text for Year-End Economic Briefing
In this holiday season, the good news is that thanks to hard-working Americans and the
President's pro-growth, pro-jobs policies, our economy is robust, business is booming
and U.S. productivity is growing at the fastest rate in nearly 40 years.
As Secretary Snow said, our workers, our companies and our nation have a lot to be
proud of.
Yesterday's retail sales report was another indication that our economy is on the right
track.
Retailers are optimistic that last-minute shoppers like me will propel the holiday sales
season to a strong finish.
The tax relief that President put in place is generating growth, investment and new
American jobs.
Importantly, it is letting Americans keep and spend more of their own money.
Yet, there are Grinches who would take this tax relief away from the American people.
The President's economic agenda is working for American business and American
workers.
We need to keep the momentum going.
Over the past four years, the United States has experienced faster growth in real GDP
than any other major industrialized nation.
Our 2005 GDP per capita is higher than that of Japan, the UK, Germany, France, Italy
and Canada.
The U.S. economy is growing well over twice as fast as that of the European Union.
Our unemployment rate is 5 percent. This is lower than Canada's 6 percent, Italy's 7
percent, Gennany's 8 percent and France's 9 percent unemployment rate.
The last time we experienced unemployment as high as France and Gennany are dealing
with now was 22 years ago.
Where's this growth coming from?
Since the President took office, real after-tax per capita personal income has increased by
roughly $1,600.
This is important because consumer spending accounts for approximately 70 percent of
GDP.
Since the tax cuts:
o This measure has been growing by 3.8 percent per year.
o
And total retail sales are up 19 percent.
More good news for families is that assets are appreciating and they are getting wealthier.
Household net worth exceeded $50 trillion during the third quarter - that's an all-time
high.
Increased business investment is also triggering economic growth.
Since the 2003 tax cuts, real investment has increased by 22 percent. Investment in
equipment and software is up 28 percent. And investment in industrial equipment is up
10 percent.
The result is higher profits, higher productivity and Americans receiving more dividend
payouts
We've also seen an increase in foreign investment here.
Foreign finns operating in the United States now employ 6 million American workers,
enough to populate the entire State of Maryland.
From day one, free and fair trade has been a critical element of the President's growth
and job creation agenda.
About 95 percent of the world's potential customers live beyond our borders.
We're aggressively working to open these markets and opportunities to U.S. companies
and workers.
2
This Bush administration has signed free trade agreements with 11 countries into law,
more than all other administrations combined.
We're taking the lead in promoting a successful conclusion to the Doha global market
opening negotiations.
Since 2003, our export growth has been averaging over 8 percent per year.
Real goods exports have grown 8.5 percent annually since the tax cut, and real services
exports have grown 7.2 percent, supporting millions of U.S. jobs.
For more on the subject of jobs, I would like to tum the podium over to my colleague,
Secretary Chao.
###
3
Remarks Prepared for Delivery by
U.S. Secretary of Labor Elaine L. Chao
Economic Team Press Conference
Washington, D.C.
Wednesday, December 14, 2005
Thank you.
I am pleased to join my colleagues on the economic development team to talk
about the strength of our nation's economy and the good jobs that are being
created.
[Slide #1: Household survey-record number ofAmericans working]
As you can see from this slide, there are more Americans working than ever before
in our nation's history. More than 142 million Americans are on the job.
A little over a week ago, the Department released the most recent employment
numbers and they were very strong. November job growth exceeded expectations
at 215,000 net new jobs.
Our economy has seen 30 consecutive months of job growth. That's a total of 4.5
million net new jobs created since May 2003. With the exception of the two
months following the recent hurricanes, job growth has been averaging about
200,000 per month in 2005.
Meanwhile, our national unemployment rate is steady and low at 5 percent. This is
lower than the average of the 1990s, which was 5.7 percent. It is also four-tenths
of a percent lower than it was at the same time in the economic expansion of the
1990s.
[Slide #2: Growth sectors of the economyJ
Equally important is the widespread nature of the job growth, as this slide shows.
Sectors gaining jobs included construction and the skilled trades, healthcare,
professional and business services, and transportation.
Page 1 of3
Since May 2003, the fastest growing sector has been professional and business
services, which added more than 1.1 million jobs. Health services have also been a
leader with 777,000 new jobs. Employment in construction has grown by 660,000
jobs and is at an all-time high with 7.4 million workers.
[Slide#3: Quality jobs with above average wages}
It is also important to note that most of the new jobs being created are in
occupations that pay above average wages.
As the next slide shows, from 2003 through 2005, more than 2.5 million jobs-or
63 percent-were created in occupations with above average compensation.
During the same period, employment in occupations with less than average
compensation grew by only 1.4 million jobs.
This is an important trend we are seeing. The better paying jobs require higher
skills and more education. To take advantage of these opportunities, it's critical
for workers to get a good education and to continually upgrade their skills.
The President's policies have had a positive impact on workers paychecks. Lower
taxes have increased the take home pay for workers. In addition, the revised
numbers for October showed a 10-cent-an hour up-tick in average hourly earnings,
which is the largest monthly increase on record. In November, average hourly
earning increased an additional 3 cents. And 3rd quarter productivity growth
exceeded expectations at 4.7 percent, which also means higher wages for
America's workers. In fact, individual, after-tax personal income is up 6.4 percent
in real terms since January 2001.
[Slide #4: Small Business engine for job growth}
And finally, I want to call your attention to new data that was just released by the
U.S. Department of Labor last week. For the first time, data in the Business
Employment Dynamics Survey is broken down by firm size. This allows us to
take a closer look at job growth in small and large businesses.
These data show that the entrepreneurial spirit is alive and well in America and
that smaller firms have led the recovery. It confirms the commonly held notion
that small businesses are the engine of job growth in America. Since the recovery
began in 2003, more than 70 percent of net new job growth has come from
businesses with fewer than 500 employees.
Page 2 of3
[Slide #5: State of the Economy 2005; Treasury Secretary John Snow, Commerce
Secretary Carlos Gutierrez, Labor Secretary Elaine L. Chao}
To continue the kind of job growth I've outlined today, we need to stay the course. It is
critical to implement the President's proposals to strengthen our nation's economy and oUl
workforce. This includes enacting Association Health Plans, which enable small business,
and their employees to access quality affordable health care. It includes making the tax cu
permanent, so workers can keep more of their hard-earned wages. And it includes investit
in worker training and refonning publicly funded training programs. According to the mo
recent JOL IS [Job Openings and Labor Turnover Survey} survey, there were four million
unfilled job vacancies at the end of October. So we must close the skills gap to ensure tha
our nation's workforce remains competitive in the 21 5t century.
###
Page 3 of3
Year-End Economic Briefing 2005
Treasury Secretary John W. Snow
Commerce Secretary Carlos M. Gutierrez
Labor Secretary Elaine L. Chao
December 14, 2005
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Year-End Economic Briefing 2005
Business Report
Commerce Secretary Carlos M. Gutierrez
Decennber14,2005
December 14, 2005
Real Average Annual GOP Growth
2001-2005
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December 14,2005
Real Personal Consumption
Expenditures
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December 14, 2005
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December 14, 2005
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Year-End Economic Briefing 2005
Employment Report
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December 14, 2005
((1).1
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~. ·11~
December 14, 2005
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1995
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Ranked by September 2005 Compensation.
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Year-End Economic Briefing 2005
Treasury Secretary John W. Snow
Commerce Secretary Carlos M. Gutierrez
Labor Secretary Elaine L. Chao
December 14, 2005
Page 1 of 1
PRESS ROOM
December 14, 2005
JS-3049
Statement by Deputy Secretary Kimmitt on the
Vote to Reauthorize the USA PATRIOT Act
Deputy U. S. Treasury Secretary Robert M. Kimmitt released the following statement
today on the pending vote in Congress to reauthorize the USA PA TRIOT Act:
"The USA PATRIOT Act is crucial to protecting our homeland and keeping
Americans safe from the terrorists and criminals whose mission is to destroy the
freedoms we hold dear.
"Not only has the Act better equipped our law-enforcement officials to investigate
and take legal action against terrorists, but the Act has also strengthened our
defenses against those who seek to abuse the U.S. financial system to bankroll
terrorists' deadly agendas.
"The PATRIOT Act is one of the most valuable weapons in our arsenal against
groups that have pledged their alliance to terror, such as al Qaida and Hizbollah.
The successes achieved under the PATRIOT Act - from breaking up terrorist cells
operating in the United States to safeguarding the financial system from illicit
money flows - have been essential to protecting America.
"We must always stay one step ahead of the terrorists; our vigilance in this fight,
therefore, cannot waver. I strongly urge a bipartisan vote in Congress to reauthorize
the USA PATRIOT Act," said Kimmitt.
http://treas.govJpressireleases/js3049.htm
1/3/2006
JS-3050 - Treasury International Capital Data for October
Page 1 of2
PHCSS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
We recommend printing this release using the PDF file below.
To view or print the PDF content on this page, download the free
/1(/[)/)('"
'AC/U/Jd/"" Red(!r'I"".
December 15, 2005
JS-3050
Treasury International Capital Data for October
Treasury International Capital (TIC) data for October are released today and posted on the U.S. Treasury web site (www.treas.gov/tic).
which will report on data for November, is scheduled for January 18, 2006.
Net foreign purchases of long-term securities were $106.8 billion.
• Net foreign purchases of long-term domestic securities were $110.3 billion, $13.0 billion of which were net purchases by foreign
$97.3 billion of which were net purchases by private foreign investors.
• U.S. residents purchased a net $3.5 billion in foreign issued securities.
Foreigners' Transactions in Long-Term Securities with U.S. Residents
(Billions of dollars, not seasonally adjusted)
12 Months Through
1 Gross Purchases of Domestic Securities
2 Gross Sales of Domestic Securities
3 Domestic Securities Purchased, net (line 1 less line
Jul-
2003
2004
Oct-
Oct-
13526.0
12806.1
719.9
15178.9
14262.5
916.4
14469.9
13580.7
889.2
17157.3
16099.7
1057.6
1279.0
1177.9
101.0
1414.6
1326.7
87.9
Aug-05
4
5
6
7
8
Private, net 12
Treasury Bonds & Notes, net
Gov't Agency Bonds, net
Corporate Bonds, net
Equities, net
585.0
159.7
129.9
260.3
35.0
680.8
150.9
205.6
298.0
26.2
656.5
172.7
173.8
281.3
28.7
920.9
240.1
227.1
359.9
93.8
90.7
24.9
32.1
23.3
10.3
83.5
25.0
16.9
38.1
3.6
9
10
Official, net
Treasury Bonds & Notes, net
Gov't Agency Bonds, net
Corporate Bonds, net
Equities, net
134.9
103.8
25.9
5.4
-0.3
235.6
201.1
20.8
11.5
2.2
232.7
200.7
22.6
9.6
-0.2
136.7
79.9
35.8
18.3
2.7
10.4
3.6
5.7
1.4
-0.3
4.4
3.2
-1.2
2.1
0.3
2761.8
2818.4
-56.5
3123.1
3276.0
-152.8
3041.8
3171.8
-130.0
3564.3
3705.7
-141.4
273.3
287.1
-13.7
311.7
310.6
1.1
32.0
-88.6
-67.9
-85.0
-57.2
-72.7
-27.7
-113.7
-5.1
-8.7
17.1
-16.0
663.3
763.6
759.3
916.2
87.3
89.0
II
12
13
14 Gross Purchases of Foreign Securities
15 Gross Sales of Foreign Securities
16 Foreign Securities Purchased, net (line 14 less line
17
18
Foreign Bonds Purchased, net
Foreign Equities Purchased, net
19 Net Lon2-Term Flows (line 3 plus line 16)
http://treas.govJpress/releases/js30S0.htm
4/6/2006
IS.3050 . Treasury rnternational Capital Data for October
II
12
13
Page 2 of2
Net foreign purchases of U.S. securities (+)
Includes International and Regional Organizations
Net U.S. acquisitions of foreign securities (-)
REPORTS
• (PDF) Foreigners' Transactions in Long-Term Securities with U.S. Residents (Billions of dollars. not seasonally adjusted)
http://treas.govJpress/releases/js30S0.htm
4/6/2006
DEPARTMENT OF THE TREASURY
OFFICE OF PUBLIC AFFAIRS
December 15, 2005
EMBARGOED UNTIL 9:00 AM
Contact: Tony Fratto
202-622-2910
TREASURY INTERNATIONAL CAPITAL DATA FOR OCTOBER
Treasury International Capital (TIC) data for October 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
November, is scheduled for January 18,2006.
Net foreign purchases of long-term securities were $106.8 billion.
•
Net foreign purchases oflong-term domestic securities were $110.3 billion, $13.0 billion of
which were net purchases by foreign official institutions and $97.3 billion of which were net
purchases by private foreign investors.
•
U.S. residents purchased a net $3.5 billion in foreign issued securities.
Foreigners' Transactions in Long-Term Securities with U.S. Residents
(Billions of dollars, not seasonally adjusted)
I
2
3
Gross Purchases of Domestic Securities
Gross Sales of Domestic Securities
Domestic Securities Purchased, net (line 1 less line 2) II
12 Months Through
Oct-04
Oct·05
Aug·05
Sep-05
Oct-OS
2003
2004
13526.0
12806.1
719.9
15178.9
14262.5
916.4
14469.9
13580.7
889.2
17157.3
16099.7
1057.6
1279.0
1177.9
101.0
1414.6
1326.7
87.9
1656.5
1538.4
118.1
1473.7
1363.4
110.3
Jul·05
4
5
6
7
8
Private, net /2
Treasury Bonds & Notes, net
Gov't Agency Bonds, net
Corporate Bonds, net
Equities, net
585.0
159.7
129.9
260.3
35.0
680.8
150.9
205.6
298.0
26.2
656.5
172.7
173.8
281.3
28.7
920.9
240.1
227.1
359.9
93.8
90.7
24.9
32.1
23.3
10.3
83.5
25.0
16.9
38.1
3.6
113.8
22.9
18.4
48.9
23.6
97.3
25.5
29.0
32.4
10.4
9
10
11
12
13
Official, net
Treasury Bonds & Notes, net
Gov't Agency Bonds, net
Corporate Bonds, net
Equities, net
134.9
103.8
25.9
5.4
-0.3
235.6
201.1
20.8
11.5
2.2
232.7
200.7
22.6
9.6
-0.2
136.7
79.9
35.8
18.3
2.7
10.4
3.6
5.7
1.4
-0.3
4.4
3.2
4.3
.1.1
2.2
2.2
1.0
13.0
4.9
6.2
1.7
0.2
2761.8
28 I 8.4
-56.5
3123.1
3276.0
-152.8
3041.8
3 I 71.8
-130.0
3564.3
3705.7
-141.4
273.3
287.1
-13.7
311.7
310.6
1.1
319.2
335.6
-16.4
379.9
383.4
-3.5
32.0
·88.6
-67.9
-85.0
-57.2
-72.7
-27.7
·1 13.7
·5.1
-8.7
17.1
-16.0
-9.4
-7.0
2.4
·5.9
663.3
763.6
759.3
916.2
87,3
89.0
101.7
106.8
14
15
16
17
18
Gross Purchases of Foreign Securities
Gross Sales of Foreign Securities
Foreign Securities Purchased, net (line 14 less line 15) /3
Foreign Bonds Purchased, net
Foreign Equities Purchased, net
19
Net Long-Term Flows (line 3 plus line 16)
/I
Net foreign purchases of U.S. securities (+)
Includes International and Regional Organizations
Net U.S. acquisitions of foreign securities (-)
12
/3
-1.2
2.1
0.3
Page 1 of 1
PRESS ROOM
December 15, 2005
JS-3051
Snow Statement on Growth in Hourly Wages
"Following on last week's record household wealth levels and a 0.5 percent
increase in real hourly earnings in October, today's announcement that inflation
adjusted hourly wages grew 1 percent in November is welcome news for America's
workers and another sign of the strength of the U.S. economy.
"One way to look at the health of the economy is to view where we are compared to
previous business cycles. Real hourly wages are up 1.1 percent versus the
previous business cycle peak in early 2001. That means workers are today earning
more per hour in real terms than they did at the height of the 1990s expansion. By
comparison, at the same point in the business cycle of the 1990s, real hourly wages
were down 2.1 percent.
"When the ingenuity of American workers and entrepreneurs is free to create and
innovate, the result is economic growth and higher standards of living. That is why
it is so important that we keep in place President Bush's economic policies of lower
taxes on individuals and investment. These policies, combined with sound
monetary policy from the Federal Reserve, have set our economy on the right
course of sustained economic growth.
"Higher real wages, combined with 4.5 million new jobs created since May of 2003
and GOP growth that has averaged 4.1 percent, with 4.3 percent growth in the most
recent quarter, gives us much reason for good cheer in this holiday season."
http://treas.govJpress/releases/js30S1.htm
1/3/2006
Page 1 of 1
PRESS ROOM
to view or pnnt me put- content on tnls page, C1owntoaC1 me free Adabel") Acrabat<!0 Heade((fj!.
December 16, 2005
js-3052
Report on IMF Legislative Provisions
See Related Documents Below,
REPORTS
http://treas.govJpressireleases/js3052.htm
1/312006
IMPLEMENTATION OF
LEGISLATIVE PROVISIONS
RELATING TO THE
INTERNATIONAL MONETARY FUND
A Report to Congress
in accordance with
Sections 1503(a) and 1705(a) of the
International Financial Institutions Act
and
Section 801(c)(1)(B) of the
Foreign Operations, Export Financing, and Related Programs
Appropriations Act, 2001
United States Department of the Treasury
November 2005
Table of Contents
Introduction ............................................................................................................................... 1
International Financial Institutions Act, Section ]503 Provisions, by Subsection
1. Exchange Rate Stability ................................................................................................. l
2. Independent Monetary Authority, Internal Competition, Privatization,
Deregulation, Social Safety Nets, Trade Liberalization ................................................ 2
3. Strengthened Financial Systems .................................................................................... 5
4. Bankruptcy Laws & Regulations ................................................................................... 6
5. Private Sector Involvement.. .......................................................................................... 6
6. Good Governance .......................................................................................................... 8
7. Channeling Public Funds Toward Productive Purposes ................................................ 9
8. Individual Economic Prescriptions ............................................................................... 9
9. Core Labor Standards .................................................................................................. 10
10. Discouraging Ethnic and Social Strife ......................................................................... 10
11. Environmental Protection ............................................................................................ 10
12. Greater Transparency ................................................................................................... 11
13. Evaluation .................................................................................................................... 11
14. Microenterprise Lending .............................................................................................. 11
15. Anti-Money Laundering and Combating the Financing of Terrorism ......................... 12
Foreign Operations, Export Financing, and Related Programs Appropriations Act, 200], Section
80] (c) (l)(B) Provisions, by Subsection
I. Suspension of Financing for Diversion of Funds ........................................................ 13
II. IMF Financing as Catalyst for Private Sector Financing ............................................. 13
III. Conditions for Disbursement ....................................................................................... 14
IV. Trade Liberalization ..................................................................................................... 14
V. Focus on Short-Term Balance of Payments Financing ................................................ 14
VI. Progress toward Graduation from Concessionary Financing ...................................... 14
Introduction
This is the seventh report prepared in accordance with Sections 1503 and 1705(a) of the
International Financial Institutions Act (the IFI Act - codified at 22 United States Code sections
2620-2 and 262r-4).1 This report also covers policies set forth in Section 801(c)(l)(B) of the
Foreign Operations, Export Financing, and Related Programs Appropriations Act, 2001, 2 as
required by amended Section 1705 of the IFI Act. The report reviews actions taken by the
United States to promote these legislative provisions in International Monetary Fund ("IMF" or
the "Fund") country programs. Earlier reports under these provisions are available on the
Department of the Treasury's website (www.treas.gov/pressireports.html).
The Treasury Department and the Office of the United States Executive Director ("USED")
at the IMF consistently endeavor to build support in the IMF's Executive Board for the
objectives set out in this legislation. These efforts include meetings with IMF staff and other
Board members on country programs and IMF policies, formal statements by the USED in the
IMF Board, and USED votes in the Executive Board. The Treasury Department's objective is to
support strengthened commitments in IMF programs, policy actions by program countries, and
policy decisions at the IMF itself.
Assessments of the overall effectiveness of the Treasury and USED's office in promoting the
legislative provisions are published annually by the GAO and are available online. 3 The most
recent report states that the "Treasury continues to promote the task force as a tool for
monitoring and promoting legislative mandates and other policy priorities." The Treasury
Department task force is charged with increasing awareness among Treasury staff about
legislative mandates and identifying opportunities to influence IMF decisions.
Report on Specific Provisions
I.
Section 1503(a)
(1) Exchange Rate Stability
Article I of the IMP's Articles of Agreement states that one of the purposes of the IMF is "to
promote exchange stability, to maintain orderly exchange arrangements among members, and to
avoid competitive exchange depreciation." The IMF advises countries that exchange rate
stability can only be achieved through the adoption of sound macroeconomic policies. While the
Fund recognizes the right of each member country to choose its own exchange rate regime, it
advises countries on macroeconomic and financial policies necessary to support the
sustainability of that regime and raises a note of caution where it views arrangements to be
I These provisions were enacted in Sections 610 and 613 of the Foreign Operations, Export Financing, and Related
Programs Appropriations Act, 1999 (Public Law 105-277, division A, § 101(d), title VI, §§ 610 & 613). Section
1705(a) was amended by Section 803 of the Foreign Operations, Export Financing, and Related Programs
Appropriations Act, 2001 (Public Law 106-429, title VIII, § 803).
2 Public Law 106-429, title VIII, § 801(c)(l)(B).
3 Treasury Continues to Maintain Its Formal Process to Promote u.s. Policies at the International Monetary Fund,
General Accounting Office (GAO), September 2005.
inconsistent with broader macroeconomic policy choices. The U.S. Treasury has urged the Fund
to exercise finn surveillance over exchange rates.
•
•
rged t
In China's most recent Article IV discussions, the USED strongly supported the move toward
greater exchange rate flexibility. The Chinese authorities allowed a 2% revaluation in July
2005, and in September widened the daily trading band for major currencies (excluding the
US dollar) to 3 percent from 1.5 percent. 4
lation
excluc
In its January 2005 statement on Korea's Article IV, the USED urged the Koreans to allow
more flexibility in their exchange rate and noted that this would "provide scope for an
independent monetary policy and the delinking of domestic and foreign interest rates."
eans 1
scope
rates.'
(2) Policies to increase the effectiveness of the IMF in promoting market-oriented reform,
trade liberalization, economic growth, democratic governance, and social stability
through:
mov~
nted
~ial
:
(A) Establishment of an independent monetary authority
With the support of the United States, the IMF has been a consistent advocate of greater
independence of monetary authorities across a range of countries. IMF conditionality frequently
includes measures to strengthen central bank autonomy and accountability. The IMF also
provides technical assistance to help countries achieve these goals. In addition, the Fund
promotes these objectives through assessments of compliance with internationally-agreed upon
standards and codes, as well as rules for safeguarding the use of IMF resources. Examples of
United States activities in the last year with regard to these issues include the following:
te of
ty fre
1e II\
<n, th
agre(
Exan
ng:
•
In its August 2005 statement on Paraguay's SBA review, the USED urged continued efforts
on increasing the independence of the central bank. 5
inuec
•
In a statement on the Kyrgyz Republic's PRGF review in October 2005, the USED supported
IMF staff s recommendation to strengthen the legal basis for an independent central bank. 6
D su
ral h
•
In its statement on Mongolia's Article IV review in September 2005, the USED emphasized
the need to improve governance at the independent oversight body at the central bank and
strengthen governance in general.
~al b,
emp
(B) Fair and open internal competition among domestic enterprises
4 Article IV reviews are surveillance reports that provide a comprehensive economic analysis of member country
economic policies, including: (i) exchange rate, monetary, and fiscal policies; (ii) financial sector issues; (iii) risks
and vulnerabilities; (iv) institutional issues; and (v) structural policies.
5 The Stand-By Arrangement (SBA) is the Fund's standard lending instrument for middle-income countries with
short-term balance of payments needs. The basic (SDR) rate of charge is applied, and repayment is typically
expected within 2 ';" - 4 years.
6 The Poverty Reduction and Growth Facility (PRGF) is the IMF's lending instrument for low-income countries.
The PRGF carries a below-market interest rate of 0.5% and a 5 1,-10 year repayment schedule.
2
)er co
!s; (iii
ltries
)icall)
coun
With United States support, the IMF encourages member countries to pursue policies that
improve internal economic efficiency. These measures may include ending directed lending (or
other relationships between government and businesses based on favoritism), improving antitrust enforcement, and establishing a sound and transparent legal system. While the World Bank
has the lead mandate on these issues, the IMF has at times provided related policy advice
through surveillance or programs when it considered them critical to macroeconomic stability.
For example,
•
The USED noted the importance of the establishment of a commercial court in the November
2004 Board IMF statement on Peru. The creation of the court was a performance criterion
under the IMF program and is expected to help promote investment and competitiveness.
•
In its March 2005 Board statement on Lithuania's Article IV, the USED commended the
authorities for strengthening the business environment and making good progress on
privatization. The statement also calls for progress on increasing the competitiveness of small
and medium enterprises.
(C) Privatization
The IMF has made privatization a component of country programs where significant
distortions and government ownership of business enterprises have created substantial
inefficiencies in the allocation of resources and the production of goods. Collaborating with the
World Bank, the Fund has supported the use of competitive and transparent means of
privatization so that borrowing countries might achieve gains in economic efficiency and
improve their fiscal positions. Examples of IMF programs in which the USED has advocated
privatization include the following:
•
The USED supported Pakistan's PRGF, which called for far-reaching structural reforms,
including those in the financial sector. Nearly 80 percent of the country's banking sector
assets are now in private banks, compared with 34 percent five years ago.
•
In a September 2005 Board statement on Post-Program Monitoring for the Philippines, the
USED welcomed the government's commitment to sell 70% of the national power
company's generating assets.
•
In board statements for the November 2002 and May 2004 Article IV reviews of Egypt, the
USED stressed the importance of privatizing the four state-owned banks that dominate the
Egyptian banking sector. In late 2004, Egypt agreed and began the process of privatizing the
first of the four state-owned banks.
(D) Economic deregulation and strong legal frameworks
Markets are distorted and entrepreneurship is stifled without strong property rights,
enforcement of contracts, and fair and open competition. While these issues are often addressed
as part of the World Bank's mandate, the IMF periodically includes policy advice in its programs
or surveillance on measures considered critical to the member country's macroeconomic
3
performance.
following:
•
Examples of United States' efforts to encourage these reforms include the
In its February 2005 Board statement on the Article IV for Italy, the USED noted the
importance of simplifying legal procedures to improve the environment for private sector-led
growth. Soon after, the Italian authorities unveiled plans to increase competitiveness and
reform of the bankruptcy law; faster procedures in the judicial system were key features. The
reform package was passed into law in May.
(E) Social safety nets
While growth is an essential ingredient for poverty reduction, investment in human
development and basic social services is also critical. Cost effective social safety nets can play
an important role in promoting building domestic support for economic reform, and in alleviating
the direct impact of poverty. Against this background, the United States has been a strong
advocate of strengthened IFI support for productivity-building investments in public education,
health and other social services. Importantly, the US has secured grants windows in the
International Development Association of the World Bank Group, the African Development
Fund, and the Asian Development Fund that will strengthen MDB assistance in these important
sectors.
The IMF does not lend directly for budget support to build social safety nets. However, the
Fund's policy advice, and its focus on macroeconomic stability, encourage domestic policy
makers to develop fiscal strategies that address the needs of the poor. IMF advice is developed
within a country-specific poverty reduction strategy (PRS) that encourages accountability
between donors and recipients. In a September 2005 review of the PRS approach, the USED
welcomed the increased focus on accountability, results, the critical link between improved
budgeting systems and the success of PRS initiatives, and the importance of participation.
•
Approximately 2/3 of PRGF-supported programs include countervailing measures aimed at
offsetting the impact of macroeconomic and structural policies on the poor.
•
As a result of its financial crisis, the poverty rate in Uruguay increased from 18% to over
30% between 2000 and 2003. The USED supported the government's introduction of a
Social Emergency Program to provide monetary support and social services to families
meeting income and other eligibility requirements. At the same time, the USED supported
IMF staff s call for careful targeting of the program and a timely phase-out to avoid
weakening fiscal and debt sustainability.
(F) Opening of markets for agricultural goods through reductions in trade barriers
The IMF encourages a multilateral, rules-based approach to trade liberalization across all
sectors of the global economy, including, but not limited to, the agricultural sector. The IMF has
played a supportive role in promoting trade liberalization, particularly in the context of the WTO
4
trade negotiations under the Doha Development Agenda (DDA). In April 2004, the Fund
approved the Trade Integration Mechanism (TIM) to provide financial support to countries
facing balance of payments problems resulting from trade adjustment. The proposal represents a
concrete response to developing country concerns over the potential negative impacts from
multilateral trade liberalization. The IMF is prepared, along with the World Bank, to provide
transitional assistance to member countries experiencing payment imbalances arising from the
passage of trade reform.
•
In its 2004 Board statement on the Article IV for France, the USED urged France to support
an ambitious conclusion to the Doha round, including the liberalization of trade on specific
agricultural products and noting that early and aggressive implementation of CAP (Common
Agricultural Policy) reform would greatly enhance this effort.
•
In its Board statement for the German Article IV, the USED welcomed Germany's efforts
within the EU to advance the Doha round, including the liberalization of trade on specific
agricultural products and efforts to decouple CAP support from production.
(3) Strengthened financial systems and adoption of sound banking principles and practices
The joint IMF-World Bank Financial Sector Assessment Program ("FSAP") has emerged as
a critical instrument for financial sector surveillance and advice. As of February 2005, eightytwo FSAP assessments had been completed with seventeen additional reviews planned.
Results from the FSAPs are used to generate assessments of compliance with key financial
sector standards such as the Basel Committee's Core Principles for Effective Banking
Supervision, the International Organization of Securities Commission's Objectives and
Principles of Securities Regulation, and the IMF's own Code of Good Practices on
Transparency in Monetary and Financial Policies. The FSAPs are also used to develop
Financial System Stability Assessments ("FSSA") which are often provided to the public through
the Reports on the Observance oj Standards and Codes ("ROSCs"). In the March 2005 review of
the FSAP program, the USED underlined the importance of improving coordination and followup of the FSAP process to ensure that lessons learned on how to strengthen financial systems are
embedded in surveillance and program work of the World Bank and IMF. In the July 2005
discussion of the Standards and Codes Initiative, the U. S. pushed for increased integration of the
ROSC into other IFI activities and improved accessibility and pUblication of the reports. Some
key examples of where the USED has supported the strengthening of financial systems are:
•
Under the U.S.-supported IMF program for Argentina, the Argentine Central Bank
established a clear regulatory framework and a plan for banks to rebuild capital in order to
minimize remaining vulnerabilities.
•
In the August 2005 Article IV discussion on China, the USED encouraged the Chinese to
address the stock of non-performing loans (NPLs) in the predominantly state-owned banking
system, and underscored the importance of improved bank supervision, more effective
corporate governance, and state bank privatization to prevent the creation of new NPLs.
5
•
The USED board statement in May 2005 supported key structural economic reforms in
Turkey's IMF program, including strengthening of the banking regulatory and supervisory
framework through swift passage and implementation of key amendments to the banking act.
The Turkish Parliament passed the necessary legislation in this area in October.
•
Under its u.S.-supported IMF Stand-By Arrangement, the Brazilian Central Bank has created
a centralized credit information bureau. This enables loan applicants and banks to have
access to the central bank's centralized credit rating system, with a view to make available to
competing banks information on a borrower's credit.
(4) Internationally acceptable domestic bankruptcy laws and regulations
The IFIs have continued to build upon work started after the Asian financial crisis to promote
more effective insolvency and debtor-creditor regimes. While the World Bank normally leads
reviews of domestic insolvency laws, the IMF actively supports this agenda. The IMF and the
World Bank have supported adoption of the Model Law on Cross-Border Insolvency developed
by the UN (the UNCITRAL Model Law) to facilitate the resolution of increasingly complex
cases of insolvency where companies have assets in several jurisdictions. The IFIs also provide
technical assistance to help emerging market economies develop efficient insolvency regimes.
With the support of the United States, the IMF has worked with the World Bank to promote
improved insolvency regimes in a number of countries.
•
During the July 2005 ROSC review, the United States urged the IMF, World Bank and
UNCITRAL to swiftly reach agreement on a unified standard for insolvency.
•
The USED has pressed for a reform of Brazil's bankruptcy law in the context of its IMF
program. The Brazilian Congress has passed a bankruptcy law that provides a chapter 11type system and encourages extra-judicial workouts in cases of default.
•
Regarding the Czech Republic's continual delays in adopting bankruptcy legislation, the
USED notes in its 2005 Article IV Board statement that bankruptcy reform remains an urgent
priority for the Czech Republic.
(5) Private Sector Involvement
The United States continues to work to ensure that the private sector plays an appropriate
role in the resolution of financial crises. Over the past several years, the IMF, with the support
of the United States, has taken important steps towards strengthening crisis prevention and
resolution. The Fund has strengthened its surveillance of member countries and instilled more
discipline in the use of official sector financing, especially through the establishment of rules and
procedures governing exceptional access to Fund resources. Additionally, the use of collective
action clauses (see Section C, below), supported by the IMF, as an accepted contractual, marketbased approach to sovereign debt restructurings should help a sovereign restructure its debt when
under financial distress. The IMF recognizes the need to preserve the fundamental principles that
6
(a) creditors should bear the consequences of the risks they assume and (b) debtors should honor
their obligations.
In particular, the United States has advocated policies that include:
(A) Increased Crisis Prevention through Improved Surveillance and Debt and Reserve
Management
The United States has urged the IMF to strengthen further its surveillance function and crisis
prevention capabilities. In particular, the USED has supported the balance sheet approach to
measure vulnerabilities in emerging markets and has called for greater focus on debt
sustainability in both low-income and emerging market countries.
•
In two recent reviews of program design (December 2004 and August 2005), the U.S. Board
Statements in both cases emphasized that the Fund needs to increase its focus on debt
sustainability in addition to appropriate fiscal adjustment.
•
In its September 2005 statement on the Philippines, the USED called for greater fiscal
consolidation in order to improve public debt dynamics.
The IMF continues to encourage, with strong United States support, member countries to
make their economic and financial conditions more transparent. Countries are urged to provide
additional information to private market participants by publishing Article IV assessments and
program documentation as well as by regularly releasing data consistent with the IMF's Special
Data Dissemination Standard (SDDS).
•
Fund members subscribing to either the General or Special Data Dissemination Standards
increased from 60% of all members in 2005 to 75% in 2005. In an October 2005 USED
statement on data standards, the USED called for mandatory reporting on the currency
composition of reserves in order to improve crisis prevention.
(B) Strengthening of Emerging Markets' Financial Systems
The IMF continues to work with other IFIs to promote stronger financial systems in
emerging market economies (see Section 3). It is also actively involved, with the World Bank,
in monitoring the implementation of the Core Principles for Effective Banking Supervision. The
IMF, with United States support, has increased its cooperation with the World Bank in this area,
through the joint FSAP and cooperative assessments of other standards and codes.
(C) Strengthened Crisis Resolution Mechanisms
The United States, in cooperation with the IMF and the broader international financial
community, has promoted a strengthened framework for crisis resolution through use of
collective action clauses (CACs), application of the lending into arrears policy, and clear limits
on the use of official finance.
7
(i) Collective Action Clauses
Sovereign bonds governed by New York law conventionallaw convention
which would permit modification of key payment terms by less ~nt terms by Ie,
restriction made these bonds harder to restructure when a sccture when a
distress. The United States has worked actively with the IMF an' with the IMF
the market's adoption of CACs in order to improve debt restruOrove debt rest
now become the market standard under NY law.
CACs are now included in 53 percent of the stock of exte:he stock of e)
emerging markets, and all new issuances since March 2005 - w March 2005 included CACs. The IMF, encouraged by the United States, 1 United States
element of its crisis resolution agenda. The IMF has indicatedv1F has indicat
future issuers to follow this trend in strengthening market practiceg market practi'
(ii) Lending into Arrears
The IMF lending into arrears policy permits the Fund to pro vi the Fund to pn
adjustments, despite the presence of actual or impending arrearsmpending arre;
private creditors, where: (i) prompt IMF support is considere(lort is conside
implementation of the member's adjustment program; and (program; and
appropriate policies and is making a good faith effort to reach a effort to read
creditors. IMF efforts in recent years have focused on applyingused on apply:
specific cases, including Argentina, the Dominican Republic, Iraq, m Republic, Ira
(iii) Clear Limits on Official Finance
The United States continues to press the IMF to improve its[F to improve
explicit criteria were developed for extending loans to countridoans to coun1
normal limits ("exceptional access"). These include: (i) the nclude: (i) th{
"exceptional balance of payments pressures on the capital accounhe capital acco
with normal resources, (ii) an analysis of sustainable debt levels, (:lble debt leveh
that the member will regain access to private capital markets duri]}ital markets dl
the member's policy program can reasonably be expected to suce expected to SI
were introduced to require: (i) a "higher burden of proof in progrof proof in pro
consultation with the Board on sovereign creditor negotiations, (iir negotiations,
specifically outlining all of the relevant considerations, and (iv) antions, and (iv)
program within twelve months of its completion. In an April 2005 In an April 20(
USED argued for retaining the existing limits on exceptional accn exceptional (;
presumption of a one-program exit strategy.
(6) Good governance
The IMF's commitment to promoting good governance is outlinvernance is ou1
Partnership for Sustainable Global Growth and its 1997 Guidelinfls 1997 Guidell
IMF also supports good governance through its emphasis on trans:mphasis on tra
8
market-based reforms.? Recently, the IMF has been particularly active in promoting good
governance through its efforts to protect against abuse of the financial system and to fight
corruption.
The Fund's involvement has focused on those governance aspects that are generally
considered part of the IMF's core expertise, such as improving public administration, increasing
government transparency, enhancing data dissemination, and implementing effective financial
sector supervision. The IMF promotes best practice principles through its code and standards,
such as the Report on the Observance on Standards, Codes on Fiscal Transparency, and is
collaborating with the World Bank on strengthening the capacity of RIPe countries to track
public sector spending. Examples of U.S. efforts to encourage good governance include the
following:
•
The USED strongly supported the recently issued Guide on Resource Revenue Transparency
and encouraged the Fund to promote these principles in countries with large extractive
industries sectors.
•
The USED emphasized the critical importance of aggressively implementing anti-corruption
measures in its December 2004 statement on Kenya's Article IV and PRGF review. IMF
staff postponed the subsequent program review (and associated loan disbursements) until
specific conditions on anti-corruption measures were met.
•
The USED encouraged Nigeria to undertake a public investment review, develop an
expenditure tracking system, and strengthen transparency in public procurement in its July
2005 statement on Nigeria's Article IV.
(7) Channeling public funds away from unproductive purposes, including large "show case"
projects and excessive military spending, and toward investment in human and physical
capital to protect the neediest and promote social equity
The Fund published a Code of Good Practices on Fiscal Transparency in 1998 that aims to
enhance fiscal policy transparency, promote quality audit and accounting standards, and reduce
or eliminate off-budget transactions, which are often the source of unproductive government
spending. The IMF also encourages countries to conduct "public expenditure reviews" with the
World Bank.
•
In Rwanda, a reduction in military spending enabled a reallocation of government resources
to priority areas such as education (spending as a percentage of GDP from 1998-2004
increased from 2.2% to 4.0%), health (increased over the same period from 0.4% to 1.0%),
and infrastructure (increased over the same period from 0% to 1.1 %).
(8) Economic prescriptions appropriate to the economic circumstances of each country
7 IMF financing is provided to central banks to address balance of payments difficulties. The IMF does not lend to
fund specific projects in member countries aimed at procurement and financial management controls.
9
The United States has supported flexibility in Fund programs while emphasizing the need to
focus conditionality on issues critical to growth and macroeconomic stability using measurable
results. Partly as a result of U.S. efforts, program conditions have focused increasingly on debt
and financial vulnerability in middle-income countries and macroeconomic management in lowincome countries. In low-income countries, the U.S. has supported the use of Poverty Reduction
Strategy Papers ("PRSP"), which are developed by local authorities and civil society and help
ensure that IMF programs meet specific needs of the country.
(9) Core Labor Standards (CLS)
Core labor standards provide a useful benchmark for assessing countries' treatment of
workers against internationally agreed-upon standards. The Treasury Department monitors labor
standards in all IFI borrower countries and is mandated to submit a separate report to Congress
assessing progress made with respect to internationally recognized worker rights.
(10) Discouraging practices that may promote ethnic or social strife
By helping to create the conditions for a sound economy, IMF assistance facilitates the
reduction of ethnic and social strife, to the extent such strife is driven in part by economic
deprivation. For example, with United States support, the IMF has increasingly encouraged the
strengthening of social safety nets. The IMF also encourages consultation with various segments
of society in the development of programs so that these segments have an opportunity to
participate in the implementation of national priorities. IMF assistance has helped to free up
resources for more productive public investment by contributing to a reduction in country
military expenditures. The United States has also advocated that an analysis of the impact on the
poor, carried out by the World Bank, be conducted and that remedial measures, as appropriate,
be incorporated into Fund programs.
•
In its November 2004 statement on Estonia, the USED advocated the targeting of labor
market policies to the depressed Northeast region (which has a high concentration of ethnic
Russians) in order to reduce the high unemployment rate in this area.
•
For Zimbabwe's Article IV review in September 2005, the USED condemned the
"devastating economic and social consequences" of Mugabe's demolition and eviction
operations conducted under "Operation Restore Order."
(11) Link between environmental and macroeconomic conditions and policies
With respect to its individual lending operations, the IMF does not itself evaluate positive or
negative linkages between conditions and environmental sustainability. Rather, the IMF
coordinates with the World Bank which, unlike the IMF, possesses the internal expertise to
address such linkages. In the past, the United States has urged the inclusion of measures in IMF
programs to tax polluting activities, fund environmental protection efforts, and remove subsidies
on environmentally-harmful products or activities.
10
•
Gabon's 2005 Article IV discussed progress made in reforms to the forestry sector, including
simplifying forestry taxation, improving transparency in the allocation of forestry permits,
and announcing the elimination of the monopoly on the export of logs. The USED welcomed
progress, and noted staff s recommendations to accelerate land titling, strengthen
transparency and governance, and ensure productive use of public resources.
(12) Greater transparency
Over the last several years, the IMF has increased significantly the amount of information on
its programs that it has made available to the public. The United States has stressed the need to
build on this progress and expand the number of publications and IMF practices open to public
scrutiny. As of July 2004, publication of all Article IV and Use of Fund Resources staff reports
is presumed unless a country objects. In addition, all exceptional access reports will generally be
published as a pre-condition for the Board's approval of such an arrangement. 8 The USED
consistently encourages countries to publish the full Article IV staff report on the IMF's public
website. As of end-2004, 78% of IMF staff reports were published, up from 71 % as of mid-2003.
•
Following prompting by the USED in this year's board statement, Egypt agreed to publish its
2005 Article IV for the first time.
(13) Greater IMF accountability and enhanced self-evaluation
In April 2000, with the strong urging of the USED, the Executive Board agreed to establish
an Independent Evaluation Office ("lEO") to supplement existing internal and external
evaluation activities. The lEO provides objective and independent evaluation on issues related to
the IMF and operates independently of Fund management and at arm's length from the IMF
Board. Since its inception, the lEO has published seven comprehensive reviews, including
assessments of the IMF's engagement in Argentina, recent capital account crises, and fiscal
adjustment in IMF-supported programs. Reports on structural conditionality, the IMF's
assistance to Jordan, and others are forthcoming. All reports are publicly available from the
lEO's website at (http://imf.org/externallnp/ieo/index.htm).
(14) Structural reforms which facilitate the provision of credit to small businesses, including
microenterprise lending
The lack of financial services available to the poor is a significant obstacle to growth for
many developing countries. The Treasury Department engages with the IFIs to promote
structural reforms that encourage the provision of credit to small and micro enterprises. The
microfinance sector is frequently reviewed in the context of the Financial Sector Assessment
Program (FSAP) in developing countries.
•
8
In the March 2005 discussion on Senegal's 2nd PRGF program review, the USED welcomed
progress on structural reforms such as enhanced access to information and judicial reform,
"Exceptional access" refers to financing arrangements in amounts that exceed the Fund's normal limits.
II
which would improve the overall business climate and boost access to credit for small and
medium business.
•
In Cameroon's May 2005 Article IV, the USED welcomed the authorities' progress on
various structural reforms, including the licensing of micro finance institutions, but also
emphasized that much remains to be done on governance and the jUdiciary to improve the
investment climate.
(15) Anti-Money Laundering and Combating the Financing of Terrorism (AMLICFT)
Comprehensive integration of the IMF and the other IFI efforts as part of the global war on
terrorism has been a consistent policy priority for the United States and its partners. We have
encouraged collaboration between the IFIs and the Financial Action Task Force (FA TF) to assess
global compliance with the anti-money laundering (AML) and counter-terrorist financing (CFT)
standards based on the FA TF 40 Recommendations on Money Laundering and the 9 Special
Recommendations on Terrorist Financing.
Collaboration with the F ATF and the FA TF -style regional bodies, with the assessors using
the same common assessment methodology, institutionalizes the global fight against terrorist
financing and money laundering, broadens the effort world-wide, and helps countries identify
shortfalls in their AML and CFT regimes.
As a result of U.S. leadership, in March 2004, the IMF and World Bank Boards endorsed a
common, uniform assessment methodology drafted by the FATF that provides a consistent
framework for assessing compliance with the FATF Recommendations. At the same time, in
recognition of the importance of effective AMLlCFT regimes to sound financial systems and
growth, the Boards agreed that assessments of countries' compliance with the FATF
recommendations would form a regular part of their financial sector assessments, surveillance,
and diagnostic activities and offshore financial center assessments. By the end of 2005, the IMF
and World Bank will have conducted over 50 assessments of country compliance with
AMLlCFT.
The IMF is also a substantial source of funding for countries' efforts to strengthen their own
counter-terrorist financing regimes - an activity that the U.S. Treasury has supported and has
joined to leverage our own bilateral efforts.
Most recently, Treasury, along with our G7 colleagues, persuaded the IMF and World Bank to
increase technical assistance. During the period January 2002 to December 2003, the Fund and the
Bank undertook 117 TA projects, providing assistance to 130 countries. Of these, 85 projects
provided direct assistance to 63 countries while 32 projects were undertaken on a regional basis. The
pace ofTA delivery has quickened, and between January 1,2004 and June 30, 2005, the Bank and
the Fund delivered 210 TA projects.
This major effort is reflected in the latest Communique of the International Monetary and
Financial Committee of the Board of Governors of the International Monetary Fund (IMFC) - the
Treasury Secretary is the Governor for the U.S. - where the IMFC reiterated its support for the IMF's
12
efforts to implement its intensified AMLlCFT work program, and noted the critical importance of
supporting countries' efforts with well-targeted and coordinated technical assistance.
The USED/IMF office played a crucial role in mobilizing the IMF Board support for this
initiative, as well as making sure note is taken of AMLlCFT issues in Article IV reports, IMF
programs, and other regular reviews of country progress. Examples include:
•
China became an observer to the Financial Action Task Force (FA TF) in early 2005. In
discussions on China's 2005 Article IV statement, the USED welcomed China's efforts to
draft AMLlCTF legislation consistent with FATF recommendations.
•
The Philippines has established a Financial Intelligence Unit (FlU) that will analyze financial
data, coordinate national efforts and facilitate international cooperation - and in doing so
have been removed from the Financial Action Task Force (F ATF) non-cooperative list.
•
In a June 2005 IMF Board statement, the USED commended the leadership role taken by
Peru's new Financial Intelligence Unit in anti-money laundering efforts in South America.
II. Section 801(c)(1)(B)
(/) Suspension of [MF financing if funds are being diverted for purposes other than the
purpose for which the financing was intended
With strong United States support, the IMF has taken steps in the past several years to
ensure that IMF resources are used solely for the purposes for which they are intended. These
steps constitute a serious and far-reaching initiative to strengthen the system for safeguarding the
use of Fund resources and for deterring the misreporting of data to the IMF.
The IMF's safeguards framework requires countries receiving funds to submit to external
financial audits of their central bank's data. This process is designed to ensure that central banks
have adequate control, accounting, reporting and auditing systems in place to protect central
bank resources, including IMF disbursements. Any critical gaps identified during the assessment
process must be remedied before additional IMP resources can be disbursed.
As of March 2005, the IMF had completed 111 safeguard assessments covering 69 central
banks. Member countries had implemented 97% of the Fund's recommendations, proposed
under program conditionality or letter of intent commitments.
•
The USED statement stressed that the IMF should not allow standards to be weakened out of
a desire to remain engaged, and that as a rule, key weaknesses should be addressed prior to
the second program review.
•
Mauritania was found to have serious and prolonged data misreporting to the IMF in 2004.
The IMF subsequently cancelled Mauritania's lending program and was repaid in full. Most
recently in a July 2005 Board statement, the USED has insisted that the authorities resolve all
outstanding data issues prior to re-establishing relations with the IMF.
13
(II) IMF financing as a catalyst for private sector financing
The IMF recognizes that if structured effectively, official financing can complement and
attract private sector flows. The Fund promotes policy reforms that catalyze private financing
and, in cases of financial crisis, allow countries to regain access to international private capital
markets as quickly as possible. (See Section 5 above for a more in-depth discussion of private
sector involvement.)
(III) Financing must be disbursed (i) on the basis of specific prior reforms; or (ii)
incrementally upon implementation of specific reforms after initial disbursement
The United States has been an advocate of conditionality on IMF loans and has supported the
Fund's increased focus on results-oriented lending. IMF disbursements are tranched based on a
country's performance against specified policy actions, both prior to and during the program
("prior actions").
(IV) Open markets and liberalization of trade in goods and services
The IMF has been a consistent advocate of open markets and trade liberalization. The Fund
also recognizes that trade adjustments can cause temporary balance of payments problems and
has developed the Trade Integration Mechanism to provide transitional financial assistance to
countries.
•
In Nigeria, the U.S. has consistently encouraged dismantling of the various import bans, most
recently in an October 2005 statement on Nigeria's request for a Policy-Support Instrument
(PSI). The import bans provide rent-seeking opportunities and 'tax' Nigerian consumers and
foreign-input dependent exporters.
•
In 2004, Bangladesh became the first country to access the TIM.
(V) IMF financing to concentrate chiefly on short-term balance ofpayments financing
In September 2000, with strong United States support, the IMF agreed to reorient IMF
lending to discourage casual or excessive use, and provide incentives to repay as quickly as
possible. In particular, the IMF shortened the expected repayment periods for both Stand-By and
Extended Arrangements and established surcharges for higher levels of access.
•
In a June 2005 review of charges, the USED called for increased level- and time-based
charges and application of both types of charges to address concerns related to exceptional
access and prolonged use.
•
In addition, the US has supported the creation of a "shocks" window within the PRGF that
would focus specifically on short-term balance of payments needs among low-income
countries.
14
(VI) Graduation from receiving financing on concessionary terms
The United States supports comprehensive growth strategies to move countries from
concessional to market-based lending. The United States works closely with the IMF and World
Bank to promote a growth-oriented agenda in developing countries based on strong monetary
and fiscal policies, trade liberalization, and reduction of impediments to private sector job
creation. The IMF extends concessional credit through the PRGF. Eligibility is based
principally on a country's per capita income and eligibility under the International Development
Association ("IDA"), the World Bank's concessional window (the current operational cutoff
point for IDA eligibility is a 2004 per capita GNI level of $965). Factors that would contribute
to reduced reliance on concessional resources include a country's growth performance and
prospects, capacity to borrow on non-concessional terms, vulnerability to adverse external
developments such as swings in commodity prices, and balance of payments dynamics.
• In 2005, the US gained support at the Board for the creation of a non-borrowing arrangement
("Policy Support Instrument," or PSI) that would be used primarily by countries graduating from
Fund assistance but which desire the benefits of close Fund engagement. Nigeria became the
first user in October 2005.
• In addition, the US has championed the cause of 100% debt relief for HIPCs (Highly
Indebted Poor Countries) in an effort to improve these countries' balance of payments needs and,
over time, reduce their dependency on Fund finance. As of the writing of this report, formal IMF
and World Bank Board approval of the G-8 debt relief initiative was pending.
15
Page 1 of 1
PRESS ROOM
/0 view or pnnt tne put- content on tnlS page. Clown/oaCl tne tree A(Jobe(f<) Acrobat',R) Kf1~,(je!SRJ.
December 19. 2005
JS-3053
Treasury and IRS Announce U.S. Federal Tax
Classification of Certain Japanese Business Entities
The Department of the Treasury today announced that the Treasury Department
and the Internal Revenue Service have issued a revenue ruling that addresses the
U.S. federal tax classification of certain Japanese business entities.
The revenue ruling responds to numerous regarding the effect that newly enacted
Japanese laws have on the existing Yugen Kaisha (YK) business entity. Under the
new Japanese laws. all existing YKs will be converted into Tokurei Yugen Kaisha
(TYK) business entities, and will be considered a type of Kabushiki Kaisha (KK)
business entity. Generally under the entity classification regulations, which apply
for U.S. federal tax purposes, a business entity is eligible to elect its tax
classification (partnership, corporation, or entity disregarded as separate from its
owner). However, certain business entities, such as the Japanese KK, are always
considered corporations. Under the regulations, a Japanese YK business entity is
an entity that is eligible to elect its U.S. federal tax classification.
The revenue ruling concludes that even though a YK that becomes a TYK under
the new Japanese law will be considered a type of KK business entity under such
law. it will, for U.S. federal tax purposes. remain an eligible entity that is eligible to
elect its U.S. tax classification.
REPORTS
• £6 CFR 301.7701-2: Business entities; definitio.l1$
http://treas.govJpressireleases/js3053.htm
1/3/2006
Part 301
Section 7701 Definitions
26 CFR 301.7701-2: Business entities; definitions
Rev. Rul. 2006-3
ISSUE
Will a Japanese Yugen Kaisha business entity (uYK") that becomes a Japanese
Tokurei Yugen Kaisha business entity (UTYK") pursuant to the Kaisha Ho, Law No. 86 of
2005 (Company Law) and the Seibi Ho, Law No. 87 of 2005 (the Law Concerning the
Coordination, Etc., of Associated Laws in Connection with the Enforcement of the
Companies Law) (Coordination Law), as promulgated on July 26, 2005, remain an
eligible entity for purposes of § 301.7701-1 through 3 of the Procedure and
Administration Regulations?
FACTS
On July 26, 2005, the Japanese Diet reorganized Japanese corporate law
through the promulgation of the Company Law and the Coordination Law, which were
passed on June 29,2005. Pursuant to the Coordination Law, the YK will be abolished
as a Japanese corporate entity. All YKs in existence as of the effective date of the
2
Coordination Law will continue as TYKs, a special type of Kabushiki Kaisha business
entity ("KK") under the Company Law. The effective date of these laws will be
determined by a Cabinet enforcement order; however, the provisions will be effective no
later than January 26, 2007. After the effective date of the new laws, no new YKs or
TYKs may be formed.
LAW AND ANALYSIS
Section 301.7701-2(a) defines the term "business entity" as any entity recognized
for federal tax purposes (including an entity with a single owner that may be disregarded
as an entity separate from its owner under § 301.7701-3) that is not properly classified
as a trust under § 301.7701-4 or otherwise subject to special treatment under the Code.
A business entity with two or more members is classified for federal tax purposes as
either a corporation or a partnership. A business entity with only one owner is classified
as a corporation or is disregarded. However, § 301.7701-2(b)(8) provides that certain
foreign business entities are always classified as corporations for federal tax purposes
(per se corporations). Under § 301.7701-2(b)(8), a KK is a per se corporation. Further,
a YK is an eligible entity, for which an entity classification election can be made under
§ 301.7701-3.
Based on the Company Law and Coordination Law promulgated on July 26.
2005, TYKs are not per se corporations described in § 301.7701-2(b)(8) and will be
classified in the same manner as YKs were prior to the effective date of the new
Japanese corporate law. Therefore, a YK that becomes a TYK will remain an eligible
entity for purposes of § 301.7701-1 through 3.
3
HOLDING
A Japanese YK that becomes a Japanese TYK, pursuant to the Company Law
and the Coordination Law, as promulgated on July 26,2005, will remain an eligible
entity for purposes of § 301.7701-1 through 3.
DRAFTING INFORMATION
The principal author of this revenue ruling is Ronald M. Gootzeit of the Office of
Associate Chief Counsel (International). For further information regarding this revenue
ruling, contact Ronald M. Gootzeit on (202) 622-3860 (not a toll-free call).
Page 1 of 1
PRESS ROOM
December 20, 2005
JS-3055
Statement of Secretary John W. Snow
On November Housing Starts
"News that the construction of new homes in the month of November was up 5.3
percent over October and 17.5 percent over last year is the latest indication that the
American economy is growing at a steady pace, and that the benefits of that growth
are touching more Americans every day.
"We can see now that 2005 will be a record year for housing starts, and with
permits to build continuing to exceed starts, it appears as if residential construction
will remain robust - and that's great news for American families.
"There was additional good economic news this morning that wholesale inflation fell
in November by the largest amount in two and a half years, thanks largely to
welcome relief in the area of energy prices. From record levels of home ownership
to the creation of four and a half million new jobs, the economic news continues to
paint a clear picture: that the opportunities created by lower taxes and sound
monetary policy have helped the American economy grow and maintain its position
as the envy of the world.
"Today more Americans than ever before can say 'I'll be home for the holidays.'"
http://treas.govJpressireleases/js3055.htm
1/3/2006
Page 1 of 1
PRESS ROOM
December 16, 2005
JS-3054
Statement of Treasury Under Secretary Randal Quarles on
Terrorism Risk Insurance Legislation
Congress has agreed on legislative language that meets the critical goals set out by
Secretary Snow when he delivered the Treasury's TRIA report in June: a
significantly reduced TRIA program, more room for private sector innovation,
greater protections for the taxpayer, and recognition of the temporary nature of the
program. Many thought these goals were not achievable when this debate began,
but the House and Senate worked very constructively to achieve this outcome, and
we think the American taxpayer can be satisfied with the result.
http://treas.govJpressireleases/js3054.htm
113/2006
Page 1 of2
PRESS ROOM
December 20,2005
2005-12-20-11-22-52-25530
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 $69,715 million as of the end of that week, compared to $68,488 million as of the end of the prior week.
I. Official U.S. Reserve Assets (in US millions)
[
Decemb~L~2~0~
I'
68,488
TOTAL.!
[1. Foreign Currency Reserves 1
II
Euro
II
I
11,026
a. Securities
Yen
10,559
Of which, issuer headquartered in the U. S.
I
DecempgL16, 2005
II
69,715
II
1/
TOTAL
Euro
Yen
TOTAL
21,585
11,210
10,994
_22,204
I
0
I
15,632
0
b. Total deposits with:
I
10,520
b.i. Other central banks and B/S
5,112
I
I
b.ii. Banks headquartered in the U. S.
b.ii. Of which, banks located abroad
0
0
10,692
I
16,014
5,322
I
I
I
0
0
b.iii. Banks headquartered outside the U. S.
0
0
b.iii. Of which, banks located in the U.S.
0
0
12,116
12,252
2. IMF Reserve Position 2
3. Special Drawing Rights (SDRs) 2
4. Gold Stock 3
5. Other Reserve Assets
8,114
I
8,204
11,041
I
11,041
0
0
II. Predetermined Short-Term Drains on Foreign Currency Assets
I
1. Foreign currency loans and securities
~I
I
Del;ember 9, 2005
I
Euro
TOTAL
Yen
December 16--lOj)5
Yen
Euro
TOTAL
0
0
2. Aggregate short and long positions in forwards and futures in foreign currencies vis-a-vis the U.S. dollar:
[~.a. Short positions
~b. Long positions
~. Other
I
I
I
I
0
0
0
0
0
"
I
0
1/
"
III. Contingent Short-Term Net Drains on Foreign Currency Assets
December
December 9, 2005
Euro
1. Contingent liabilities in foreign currency
Yen
TOTAL
0
I
I
1.a. Collateral guarantees on debt due within 1
year
I
http://treas.gov!press/releases/2005122011225225530.htm
16~
Yen
Euro
I"
II
2005
I
TOTAL _
0
I
113/2006
Page 2 of2
11.b. Other contingent liabilities
1
1
2. Foreign currency securities with embedded
options
0
3. Undrawn, unconditional credit lines
0
~a. With other central banks
I
1
I
I
1
1
1
I
I
3.b. With banks and other financial institutions
[EleadqUartered in the U. S.
II
I
3.e. With banks and other financial institutions
\
I
0
0
I
I
1/
1
Headquartered outside the U. S.
4. Aggregate short and long positions of options=
in foreign
0
Currencies vis-a.-vis the U.S. dollar
[4.a. Short positions
1
\4.a.1. Bought puts
II
1
14.a.2. Written calls
II
II
0
II
II
I
I
I
4.b. Long positions
4.b.1. Bought calls
4.b.2. Written puts
Notes:
11 Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account
(SOMA), valued at current market exchange rates. Foreign currency holdings listed as securities reflect marked-to-market values, and
deposits reflect carrying values. Foreign Currency Reserves for the latest week may be subject to revision. Foreign Currency
Reserves for the prior week are final.
21 The items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF and are
valued in dollar terms at the official SDR/doliar exchange rate for the reporting date. The entries for the latest week reflect any
necessary adjustments, including revaluation, by the U.S. Treasury to IMF data for the prior month end.
3/ Gold stock is valued monthly at $42.2222 per fine troy ounce.
http://treas.gov!press/releases/2005122011225225530.htm
11312006
Page 1 of 1
PRESS ROOM
December 20, 2005
JS-3055
Statement of Secretary John W, Snow
On November Housing Starts
"News that the construction of new homes in the month of November was up 5.3
percent over October and 17.5 percent over last year is the latest indication that the
American economy is growing at a steady pace, and that the benefits of that growth
are touching more Americans every day.
"We can see now that 2005 will be a record year for housing starts, and with
permits to build continuing to exceed starts, it appears as if residential construction
will remain robust - and that's great news for American families.
"There was additional good economic news this morning that wholesale inflation fell
in November by the largest amount in two and a half years, thanks largely to
welcome relief in the area of energy prices. From record levels of home ownership
to the creation of four and a half million new jobs, the economic news continues to
paint a clear picture: that the opportunities created by lower taxes and sound
monetary policy have helped the American economy grow and maintain its position
as the envy of the world.
"Today more Americans than ever before can say 'I'll be home for the holidays.'"
http://treas.govJpress/releases/js30S 5 .htm
3/3112006
Page 1 of2
PRESS ROOM
December 20,2005
JS-3057
Treasury Kicks Off Working Group to
Strengthen Defenses Against Terrorist
Financing, Money Laundering in Middle East
& North Africa
The U.S. Department of the Treasury hosted the inaugural meeting of a new
international private sector outreach working group that unites public and private
sector entities - both foreign and domestic - in an effort to strengthen defenses
against terrorist financing and money laundering in the Middle East and North Africa
(MENA).
"By engaging directly with the international private sector, we can help facilitate the
enhanced development and implementation of effective anti-money laundering and
counter-terrorist financing measures, particularly in regions of strategic importance
and jurisdictions that may lack fully functional AMLlCFT regimes," said Patrick
O'Brien, the Treasury's Assistant Secretary for Terrorist Financing and Financial
Crimes.
The Middle EasUNorth Africa Financial Sector Working Group (MENA FSWG),
which held its initial meeting last Friday, will focus on raising awareness and
strengthening implementation of anti-money laundering and counter-terrorist
financing (AMUCFT) practices and programs within the regions' financial industries,
particularly within the banking sectors.
"We want to help our private sector counterparts at home and abroad implement
coordinated and targeted anti-money laundering and counter-terrorist financing
programs that are consistent with international standards," O'Brien continued.
Notably, the MENA FSWG plans to draft an action plan to bolster ongoing efforts to
develop controls to detect and disrupt terrorist financing and money laundering and
foster private sector information exchange between the regions. The MENA FSWG
will put this plan into action by coordinating a series of regional AMLlCFT
conferences and workshops. Through such activities and follow-up, the Working
Group hopes to build a core understanding and develop expertise in the financial
sector across the MENA region.
The MENA FSWG will focus on several core issues, including:
• The context for private sector AMLlCFT development and implementation;
• Private sector development and implementation of core AML controls;
• Developing institutional AML controls for higher risk products, services and
relationships; and
• Developing institutional CFT controls.
The creation of the MENA FSWG is a part of the Treasury's overall international
private sector outreach strategy to enhance AMLlCFT awareness building and
implementation worldwide.
"The U.S. Treasury Department is committed to working with financial institutions both at home and abroad - that not only recognize their responsibilities, but also
have a genuine interest in promoting systems to help combat the threats posed by
terrorist financing and money laundering," said O'Brien.
The MENA FSWG is currently comprised of representatives from the MENA
Financial Action Task Force (FATF), which is dedicated to implementing the FATF
40+9 Recommendations on Money Laundering and Terrorist Financing across the
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Middle East/North Africa region; the Union of Arab Banks (UAB), which has a
membership of over 300 Arab financial institutions; the Arab Bankers Association of
North America (ABANA), a private sector association comprised of members from
the financial services industry in the Middle East and the United States; and
interested parties from the U.S. banking community. The Treasury Department and
Federal Reserve participate in the MENA FSWG on a consultative and facilitative
basis. The Group welcomes the participation of additional interested parties.
"The members of the MENA FSWG should be commended for their attention and
dedication to this crucial effort," O'Brien concluded.
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PRESS ROOM
December 15, 2005
JS-3058
Joint Statement by
Secretary John W. Snow of the United States
and
Secretary Francisco Gil Diaz of Mexico
Mexico City
We are very pleased to have this opportunity to meet to discuss our strong bilateral
partnership, as well as regional and global issues of mutual interest.
Our meeting comes at a time of strong economic performance within a context of
price stability in both of our countries. U.S. real GOP rose at an annual rate of 4.3
percent in the third quarter of 2005 - the tenth straight quarter with growth of at
least 3.~ percent. In Mexico, real GOP was up 3.3 percent in the 12 months ending
In the third quarter of 2005. For the 12 months ending in November, core inflation
was 2.1 percent in the United States and consumer price inflation was 2.9 percent
in Mexico. Total trade between the United States and Mexico was up 7 percent in
the first three quarters of 2005 versus the same period last year.
Sustaining strong economic growth is essential to raising incomes and fighting
poverty. In this context, we discussed the fundamental importance of significant
progress from this week's World Trade Organization Ministerial meeting in Hong
Kong. Further global trade liberalization in the Doha round, including in financial
services, is critically needed as an engine for higher economic growth, job creation,
and poverty reduction around the world.
Experience from around the world demonstrates that sound economic policies and
open markets are the most potent tools available for achieving large and lasting
reductions in poverty. Mexico's experience is instructive. Mexico's commitment to
strong macroeconomic policies has enabled it to seize the opportunities offered by
the North American Free Trade Agreement (NAFTA). During the last 11 years, twoway U.S.-Mexico trade increased threefold to reach around $270 billion in 2004.
The poverty rate in Mexico has dropped 17 percent since NAFTA.
We are seeking - in cooperation with our Canadian partners - to build on the
successes of NAFTA through a new partnership launched by our leaders last
spring: the Security & Prosperity Partnership of North America (SPP). Our ongoing
work on financial market linkages and on the exchange of financial information is a
key part of the SPP's comprehensive agenda for deepening North American
integration aimed at strengthening competitiveness and increasing security.
We are also committed to building on the successes of our bilateral collaboration in
the U.S.-Mexico Partnership for Prosperity (P4P). Reducing costs and facilitating
remittance transfers has been a major focus of our work under the Partnership.
Spurring greater competition in the private remittances market has reduced the
average cost of remittance transfers by two thirds since 1999. We look forward to
receiving the recommendations of the private-sector P4P Finance Issues Advisory
Group next year on how to further enhance the conditions for the provision of lowcost remittance services.
Finally, we discussed our joint efforts to increase economic growth and fight poverty
throughout Latin America. We agreed that improving the investment environment,
giving people opportunities to start and finance a business, investing in their health
and education, and building infrastructure are key.
We discussed ways in which the Inter-American Development Bank (lOB) can more
effectively meet the needs of the poorest in our Hemisphere. We look forward to
working together with the lOB Management and other shareholders to achieve
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reforms that better employ the bank's assets, expand financing to the private
sector, encourage accountability and performance, and address the debt
sustainability of the poorest countries in the region.
We exchanged ideas on strategies for increasing investment in productive
infrastructure to help Latin American countries harvest the benefits of greater
integration into the global economy. We pledged to work with others in the region to
create a multilateral Infrastructure Facility of the Americas to rate the quality of
project proposals. This rating system can help unlock larges flows of private finance
for infrastructure by improving investor information.
We look forward to deepening our economic integration and advancing our
cooperation to maximize benefits for our citizens.
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December 21, 2005
JS-3059
Statement by Secretary Snow on Third Quarter Final GOP
Today's announcement of final GOP growth of 4.1 percent for the third quarter of
this year demonstrates the power of a strong economy to overcome the two
devastating hurricanes and high energy prices that challenged growth in the third
quarter.
"We owe the resilience of the US economy to the American entrepreneurs and
workers whose creativity and adaptability have kept our economy growing. Sound
monetary policy from the Federal Reserve and the pro-growth economic strategy
pursued by President Bush have laid the groundwork for the sustained economic
growth that has created 4.5 million new jobs over the past two and a half years and
has helped the economy continue its solid performance despite the difficulties
presented in the third quarter.
"With an unemployment rate at 5 percent -- well below the modern historical
average of 5.9 percent -- household wealth at an all-time high and real hourly
wages improving, all Americans can take pride in the robust performance of the US
economy."
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December 21, 2005
JS-3060
Statement by Treasury Secretary John Snow on
Senate Passage of Deficit Reduction Act
"I was pleased by the passage today of the Deficit Reduction Act in the Senate.
Deficit reduction is an essential part of President Bush's long-term economic
strategy. The Senate's action today demonstrates the courage required to make
difficult choices that help keep us on the path of reaching the President's goal of
cutting the deficit in half by 2009."
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December 3,2005
js-3061
Statement on Actions to Combat Money Laundering and Terrorist Finance
We are committed to fight against those who seek to abuse the international
financial system for criminal or terrorist purposes. Tragic events such as those in
London, Amman and in other parts of the world remind us of the critical need for
continued action by the international community against such threats. This year we
have taken forward a program of practical measures that has significantly improved
our ability to freeze terrorist assets; enhanced the international exchange of
information relating to money laundering and terrorist financing; and developed
better tools to disrupt financial crime.
We are committed to ensuring effective and timely action to deny funds to terrorists
and encourage other countries to take similar actions. We have taken the following
specific steps that enhance processes to freeze terrorist assets and improve our
ability to disrupt terrorism: (i) ensuring up to date contact and co-ordination
arrangements; (ii) undertaking early and constructive consultation prior to
designation of terrorists; and (iii) sharing details of criteria required for designation.
Building on this, we have contributed to wider international efforts to implement UN
obligations on identifying terrorists, freezing their assets, and prohibiting
unauthorized dealings with them. We are committed in the Financial Action Task
Force to examining and strengthening implementation of such targeted financial
sanctions against terrorists.
Systems to disrupt money laundering and terrorist financing work most effectively
when information necessary for relevant authorities and private sector institutions to
operate is shared and acted upon. We urge supervisory authorities and financial
intelligence units to continue to develop and use international information sharing
arrangements. We are committed to ensure that critical information can be readily
accessed by the private sector and we are also committed to obtaining greater
private sector input to the assessment of current risks from money laundering and
terrorist finance vulnerabilities.
Organized criminals and terrorists cannot operate without ready access to financial
resources and they often exploit existing weaknesses in international financial
controls. We are committed to tackling such vulnerabilities and are working closely
with the Financial Action Task Force to develop a mechanism that provides the
capacity to better target specific threats and deploy appropriate measures to deal
with such threats.
We reiterate our full support to the permanent involvement of the international
financial institutions in the fight against money laundering and terrorist financing,
and note the critical importance of their efforts to assess compliance and to provide
countries with well-targeted and coordinated technical assistance.
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December 3,2005
js-3062
Statement by G7 Finance Ministers and Central Bank Governors
Overall global growth remains and should continue to be solid although slowed by
high and volatile oil prices. Risks include rising protectionist sentiment, the
possibility of increasing inflationary pressures and growing global imbalances,
which have been exacerbated by high oil prices. We are each taking steps to
address these imbalances as we set out at our last meeting. But more vigorous,
mutually reinforcing action is now needed from the G7 and other countries to
accelerate this process in a way that maximizes sustained growth. Recognizing the
need for greater and wider partnerships, we continued our productive dialogue with
key global economies.
We reaffirm that exchange rates should reflect economic fundamentals. Excess
volatility and disorderly movements In exchange rates are undesirable for economic
growth. We continue to monitor exchange markets closely and cooperate as
appropriate. We expect that further flexible implementation of China's currency
system would improve the functioning and stability of the global economy and the
international monetary system.
An ambitious outcome from the Doha Development Round by the end of 2006 is
essential to enhancing global growth and reducing poverty. The Hong Kong
Ministerial in ten days will be a critical step and the opportunity must be seized to
make progress including through agreeing to a comprehensive development
package that addresses the concerns of developing countries, in particular least
developed countries. We call for a multilateral rules-based global trading system
and reforms to trade policies and renewed momentum in the negotiations. We urge
all participants to maintain a high level of ambition and to make significant progress
on market access in agriculture, industrial products and services; reducing trade
distorting domestic support; eliminating all forms of export subsidies in agriculture;
making significant progress on services, including financial services as liberalization
in financial services is linked to increased growth; and on intellectual property rights
consistent with our development objectives. In this context, we welcomed the
statements made by our Brazilian, Indian and Chinese colleagues at our meeting
with them today. We recognize that least developed countries need the flexibility to
decide, plan and sequence reforms to their trade policies in line with their countryled development programs and international obligations. We agree on a series of
additional measures working with the IFls, for developing countries to ease
adjustment costs and increase their capacity to trade. We expect spending on aid
for trade to increase to $4bn, including through enhancing the Integrated
Framework. In the context of our shared commitments to double aid for Africa by
2010. we agree to give priority to the infrastructure necessary to allow countries to
take advantage of the improved opportunities to trade.
We reviewed the steps taken since our last meeting to improve stability of the oil
market and the global energy outlook, and our enhanced dialogue with oil
producers. Significant investment is needed in exploration, production, energy
infrastructure, and refinery capacity. We welcome the launch of the Joint Oil Data
Initiative (JODI) database and stress the need to improve further the transparency
of demand and supply data in the oil market, including through development of a
global common standard for reporting oil reserves. With a view to enhancing
predictability of demand, we will ask the lEA to report on progress on energy
efficiency and developing alternative sources of energy, which are key challenges
for all economies. We will include these issues in our continued dialogue with
producers. We welcome the creation of the IMF's Exogenous Shocks Facility and
support its financing including through oil producing countries' contributions. We
look forward to the launch at the Spring Meetings of the World Bank led framework
with the full participation of Regional Development Banks to enhance investment in
low carbon energy and energy efficiency in developing countries. We will review
progress on these issues at our next meeting in Washington.
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We discussed the role of the IMF in the global financial system in the context of the
Managing Director's strategic review and agreed that the IMF has an important role
through its credibility and independence to support multilateral solutions to global
economic challenges. We urge the IMF in all its surveillance work to deepen its
analysis of global economic issues, exchange rate policy issues and the spillover
effects of domestic policies In systemically Important economies. We also stress
the need to review the Fund's governance and quotas to reflect developments in
the world economy.
This year we have made important progress on development including
commitments on multilateral debt relief, aid effectiveness, and increasing resources
for development. Now they must be implemented. We welcome the adoption of the
necessary decisions by the IMF Board to implement 100 percent multilateral debt
relief and encouraged all PRGF contributors to agree the necessary consents as
soon as possible. We also encourage IDA and the African Development Fund
urgently to take all the necessary steps for implementation as soon as possible. We
welcome Minister Tremonti's report, published today, on Advance Market
Commitments (AMCs) for vaccines. Alongside direct funding of research, AMCs
could be a powerful, market-based mechanism to support research and
development of vaccines for diseases which affect the poorest countries. We agree
to work with others on developing a pilot AMC next year, including continued
discussions with expert bodies on the diseases to be addressed. We confirm our
support for the national and international processes already established to minimize
the risk and deal with the potential threat posed by a pandemic influenza.
Recognizing the vulnerability of all countries especially the poorest, to natural
disasters, we call on international institutions to improve their preparedness,
coordination and the speed and scale of their response
Finance Ministers met with Ministers Fayyad and Olmert and the Quartet's Special
Envoy, James Wolfensohn. Economic development of the West Bank and Gaza is
an indispensable element of lasting peace in the region and all parties have a role
to play. We welcome recent progress on access issues and encouraged the
authorities to build the foundations for sustained economic growth in the Palestinian
economy. We affirm our commitment to supporting the Palestinian Authority in the
context of its medium-term development plan. The regional and international
private sectors have a crucial role to play. This will be the focus of the Investors
Conference to be held in London on December 13th. We will return to these issues
at our next meeting.
Demonstrating the importance we attach to the continued fight against terrorist
financing and financial crime, we are today publishing a progress report on actions
taken this year in this area. Ministers welcome both the Financial Stability Forum's
work on the codes and standards that underpin global financial markets and the
process in relation to offshore centers established at its March meeting, and
encourage swift progress on both. We encourage the international standard setting
bodies to cooperate fully with these initiatives.
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December 22, 2005
js-3063
Tony Fratto Sworn in as Treasury Assistant
Secretary for Public Affairs
Treasury Deputy Secretary Robert M. Kimmitt today
swore in Tony Fratto as Assistant Secretary for Public
Affairs. Nominated for the position by President
George W. Bush on October 7, 2005, Fratto was
confirmed by the United States Senate on December
17,2005.
As Assistant Secretary for Public Affairs, Fratto is the
lead representative of the Treasury Department and
Secretary John W. Snow for media, business,
professional trade organizations, consumer groups, and the public. In addition to
serving as the chief spokesman, Fratto will also design and implement policies and
communications strategies for the Department that will increase the public's
knowledge and understanding of Treasury's activities and services. In his new role,
Fratto also will oversee the Office of Public Liaison.
Fratto has served at the Treasury Department since March 2001, first as a public
affairs specialist, then as the Director of the Office of Public Affairs, and most
recently as the Deputy Assistant Secretary for Public Affairs. In these positions, he
held primary responsibility for the Department's communications regarding
international finance and development issues, as well as daily oversight of the
office's personnel and budget.
Before JOining the Treasury Department, Fratto worked as a communications
specialist for the Bush-Cheney 2000 campaign in Pennsylvania. Prior to joining the
Bush-Cheney campaign, Fratto served as Vice President of Government Affairs for
the Pittsburgh Regional Alliance. Earlier in his career Fratto was the Director of
Community and Economic Affairs (Pittsburgh) for Pennsylvania Governor Tom
Ridge and Communications Director for U.S. Senator Rick Santorum (R-PA).
Originally from Pittsburgh, Pennsylvania, Fratto is a graduate of the University of
Pittsburgh, earning a BA in Economics. He also attended the University's Graduate
School of Public and International Affairs with a concentration on international
political economy.
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December 23, 2005
JS-3064
Statement by Treasury Secretary John Snow on Iraq's Successful Conclusion
of its Debt Exchange Offer
"It is a historic, unprecedented accomplishment that Iraq was able to attain 100%
participation in this exchange. We have been working with Iraq to accomplish this
and I couldn't be more pleased that it will be completed. The leadership of Minister
Allawi and Governor Shabibi, along with the work of private sector participants, has
helped Iraq to achieve another major milestone. This deal. when fully implemented,
will reduce the burden on the Iraqi people of Saddam-era debt by more than $11
billion. We also look forward today to IMF Board consideration of a stand-by
arrangement with Iraq. Resolution of Iraq's commercial debt gives further evidence
of Iraqi determination to meet its commitments to secure an IMF program. This
action is another important milestone in Iraq's reintegration into the international
community, and paves the way for the next phase of Iraq's much needed debt
reduction. If achieved, a successful IMF program would underpin economic stability
and help lay the foundation for an open and prosperous economy."
- END -
REPORTS
•
Iraqi Press Release (PDF)
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113/2006
REPUBLIC OF IRAQ
:wUI
.'
G) I'
))
Press Release
MINISTRY OF FINANCE
For Immediate Release
December 23, 2005
Iraq Announces the Successful Conclusion of
Debt-far-Debt Exchange Offer
Baghdad, Iraq: The Republic of Iraq today announced the
successful conclusion of its commercial debt-far-debt exchange offer.
Invitations were sent on November 16, 2005 to holders of large
Saddam-era commercial claims against Iraq and Iraqi public sector obligors.
These claims totaled in aggregate approximately U.S.$14 billion, or about
60% of all the commercial claims registered with Iraq's debt reconciliation
agent. The tender period for the offer expired on Wednesday, December 21,
2005.
100% of the claimants with offers on the tender due date
tendered their claims pursuant to the terms of the exchange offer. These
terms are summarized in Iraq's press release of November 16, 2005.
Tendering claimants will receive either privately-placed U.S. dollardenominated notes or an interest in a multicurrency loan, at each claimant's
election.
The final results are being verified by the exchange agent for
the offer and will be announced by press release within the next two weeks.
Final figures regarding the allocation of amounts between the new notes to
be issued and the new loan, based upon claimant elections, will be
announced at that time.
The closing for the exchange offer is expected to take place on
January 19, 2006.
*
*
*
*
*
This communicat'lon is not an offer of securities for sale in the United States. Securities may not be offered or sold in the United
States absent registration or an exemption from registration under the Securities Act of 1933, as amended. Any public offering of
securities to be made in the United States will be made by means of a prospectus that may be obtained from the issuer or selling
security holder and that Will contain detailed information about the Republic of Iraq No public offering of securrties in the United
States is contemplated by the Republic of Iraq at this time.
Neither this release nor any of the documents referred to herein constitute an offer by the Republic of Iraq or by any other party to
settle or exchange any outstanding claims, nor do they constitute an admission or acknowledgement of any such claim, or an
acknowledgement that any such claim exists or has been revived or reinstated, or an express or implied promise to pay any such
claim or any part thereof This release and the documents referred to herein are expressly published without prejudice. All
defenses available to the Republic of Iraq and any other party based upon any applicable statute of limrtations or otherwise are
expressly preserved. Neither this release nor the documents referred to herein may be relied upon as evidence of the existence of
any claim or the willingness or ability of the Republic of Iraq or any party to pay any such claim
2
Page 1 of 1
December 23, 2005
JS-3065
Statement by Treasury Secretary John Snow on IMF Approval of a Stand-By
Arrangement with Iraq
"I applaud the IMF Board's approval of a stand-by arrangement with Iraq today. The
IMF staff has done a remarkable job in working with Iraqi officials to accomplish
this. This arrangement will underpin economic stability and help lay the foundation
for an open and prosperous economy in Iraq."
- END-
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December 30,2005
js-3066
Treasury Department Announces Interim Guidance on Terrorism Risk
Insurance Extension Act of 2005
The Treasury Department issued interim guidance to assist the insurance industry
in meeting new requirements for the Terrorism Risk Insurance Program. On
December 22, 2005, President Bush signed into law the Terrorism Risk Insurance
Extension Act of 2005, which reauthorizes the Terrorism Risk Insurance Program
for two years, while expanding the private sector role and reducing the federal
share of compensation for insured losses under the program.
The interim guidance is designed to assist insurers in complying with changes to
the Terrorism Risk Insurance Program made by the Extension Act, many of which
come into effect on January 1, 2006. The guidance responds to a number of
operational issues that arise under the new law, including: continuing compliance
with TRIA's mandatory availability and policyholder disclosure requirements;
determination of the types of property and casualty insurance now included and
newly excluded from TRIA; and how the newly enacted program trigger for the
federal share of compensation will work.
This interim guidance, along with regulations issued by the Treasury Department
from July 11,2003 through June 14, 2005, can be used by insurers in complying
with the new statutory requirements and will remain in effect until superseded by
subsequent regulations or guidance. Regulations, interim guidance notices and
other information related to the Terrorism Risk Insurance Program can be found at
www.treasury.gov/trip.
-30REPORTS
•
Interim Guidance on Terrorism Risk Insurance Extension Act of 2005
://treas. gOYIpresFf'releases/j s3 066. htm
1/3/2006
This Notice has beel/ submitted to the Federal RegisterIor publicatioll. There may be
millor differences between this l/I/official copy and the official publication.
DEPARTMENT OF THE TREASURY
Departmental Offices
Interim Guidance Concerning the Terrorism Risk Insurance Extension Act of 2005.
AGENCY: Department of the Treasury, Departmental Offices
ACTION: Notice.
SUMMARY: This notice provides interim guidance to insurers, policyholders, state
insurance regulators and the public concerning recent statutory amendments to the
Terrorism Risk Insurance Act of2002 (Pub.L.I07-297, 116 Stat. 2322). In particular,
this notice provides interim guidance on the types of commercial property and casualty
insurance covered by the Act, the requirements to satisfy the Act's mandatory availability
("make available") provision and on the operation of the new "Program Trigger"
provision in section 103(e)(1)(B) of the Act.
DATES: This notice is effective immediately and will remain in effect until superceded
by regulations or by subsequent notice.
FOR FURTHER INFORMATION CONTACT: Howard Leikin, Deputy Director,
Terrorism Risk Insurance Program or David J. Brummond, Legal Counsel,
Terrorism Risk Insurance Program (202-622-6770).
SUPPLEMENTARY INFORMATION:
This notice provides interim guidance to assist insurers and policyholders in
understanding certain requirements of the Terrorism Risk Insurance Act 0[2002 as
amended by the Terrorism Risk Insurance Extension Act of2005 (Public Law 109-144,
119 Stat. 2660) pending the issuance of regulations by the Department of the Treasury.
The interim guidance contained in this notice may be relied upon by insurers in
complying with these statutory requirements prior to the issuance of regulations, but is
not the exclusive means of compliance. This interim guidance remains in effect until
superceded by regulations or subsequent notice.
I. Background
On November 26, 2002, the President signed into law the Terrorism Risk Insurance Act
of 2002 (Pub.L.107-297) (TRIA or the Act). The Act became effective immediately. It
established a temporary Terrorism Risk Insurance Program (TRIP or the Program) of
shared public and private compensation for insured commercial property and casualty
losses resulting from an act of terrorism, as defined in the Act. The Act was scheduled to
expire on December 31, 2005.
On December 22,2005, the President signed into law the Terrorism Risk Insurance
Extension Act of 2005 (Extension Act), which extends TRIA through December 31,
2007. In doing so, the Extension Act adds Program Year 4 (January 1 - December 31,
2006) and Program Year 5 (January 1 - December 31, 2007) to the Program. In
addition, the Extension Act made other significant changes to TRIA that include:
•
A revised definition of "Insurer Deductible" that adds new Program Years 4
and 5 to the definition. The insurer deductible is set as the value of an
insurer's direct earned premium for commercial property and casualty
insurance (as now defined in the Act) over the immediately preceding
calendar year multiplied by 17.5 percent for Program Year 4 and 20 percent
for Program Year 5.
•
A revised definition of "Property and Casualty Insurance" that now excludes
commercial automobile insurance; burglary and theft insurance; surety
insurance; professional liability insurance; and farm owners multi peril
insurance. Though the definition excludes professional liability insurance, it
explicitly retains directors and officers liability insurance.
•
Creation of a new "Program Trigger" for any certified act of terrorism
occurring after March 31, 2006, that prohibits payment of Federal
compensation by Treasury unless the aggregate industry insured losses
resulting from that act of terrorism exceed $50 million for Program Year 4
and $100 million for Program Year 5.
•
A change to the Federal share of compensation for insured losses. Subject to
the Program Trigger, the Federal Share is 90 percent of that portion of the
amount of insured losses that exceeds the applicable insurer deductible in
Program Year 4 and decreases to 85 percent of such amount in Program Year
5.
•
Revisions to the recoupment proVISIons. For purposes of recouping the
Federal share of compensation under the Act, the "insurance marketplace
aggregate retention amount" for the two additional years of the Program is
increased from the level in Program Year 3. For Program Year 4 the
"insurance marketplace aggregate retention amount" is established as the
2
lesser of$25 billion and the aggregate amount, for all insurers, of insured
losses during Program Year 4. The "insurance marketplace aggregate
retention amount" for Program Year 5 is the lesser of$27.5 billion and the
aggregate amount, for all insurers, of insured losses during Program Year 5.
•
A statutory codification of Treasury's litigation management regulatory
requirements in section 50.82 of title 31 of the Code of Federal Regulations
(as in effect on July 28, 2004), which requires advanced approval by Treasury
of proposed settlements of certain causes of action involving insured losses
under the Program.
II. Interim Guidance
Treasury will be issuing regulations to administer and implement TRIA, as amended by
the Extension Act. This notice is issued to assist insurers in complying with certain
statutory requirements prior to the issuance of such regulations. This notice contains
interim guidance concerning compliance with the mandatory availability or "make
available" requirements in section 103( c) of the Act, revisions to commercial lines of
property and casualty insurance as defined by section 102( 12) of the Act, and the
operation of the new Program Trigger in section 103( e) of the Act.
A. Mandatory Availability
Has the "make available" requirement changed?
For Program Year 4 (Calendar 2006) and Program Year 5 (Calendar 2007) insurers are
required to continue to "make available" coverage for insured losses as required by TRIA
and Treasury regulations. Amendments to the "make available" requirement in section
103( c) of the Act are simply conforn1ing amendments that continue the requirements
through Program Years 4 and 5. Thus, insurers issuing or renewing commercial property
and casualty insurance policies in Program Years 4 and 5 must continue to offer coverage
for insured losses resulting from an act of terrorism as required by section 103(c) of the
Act and 31 CFR sections 50.20 to 50.24 for their insured loss claims to be eligible for the
Federal share of compensation in the extended Program Years.
Does an insurer have to provide a separate, new offer of terrorism risk insurance
coverage on January 1, 2006 or shortly thereafter for property & casualty insurance
policies that are now in mid-term if the insurer previously complied with the Act's
"make available" requirement when the policy was issued or renewed in 2005?
No additional "make available" offer is required if terrorism coverage for the duration of
the policy term was offered for policies issued or renewed in 2005. No additional action
is required because the "make available" provision of section 103( c) of the Act and 31
3
CFR sections 50.20 to 50.24 has been satisfied for coverage periods extending into
Program Year 4. For example, policies with "conditional" terrorism coverage exclusions
that do not arise or become effective on or after January 1 are policies in which the
terrorism coverage portion continues to cover insured losses within meaning of the Act.
In such situations, no additional action is required for insurers to remain in compliance
with the Act's "make available" provision.
What are the "make available" requirements for insurers who issued terrorism
coverage that expired on December 31~ 2005 but the remainder of the policy
continues in force in 2006?
If terrorism coverage was made available and accepted by the policyholder but the
terrorism portion of coverage expired on December 31, the insurer must provide the
policyholder with a new offer of terrorism coverage pursuant to section 103( c) of the Act
and 31 CFR sections 50.20 to 50.24 for the remaining period of coverage for the policy.
Ideally, policyholders should be given the offer of terrorism coverage before January 1,
2006. However, Treasury recognizes the late date of passage of the Extension Act and
the administrative difficulties this poses for some insurers who otherwise have complied
with the "make available" provision in 2005. Treasury expects that all insurers will make
a good faith effort to provide policyholders whose terrorism coverage expires as of
January 1 with a new offer of terrorism coverage along with the appropriate disclosures
by January 1, 2006 or as quickly as possible following that date. In this regard, Treasury
considers January 31, 2006 to be the latest reasonable date for offers of coverage to
midterm policyholders, barring unforeseen or unusual circumstances. If the January 31
date is not met by an insurer, Treasury will expect the insurer to explain any delay as well
as its good faith efforts when submitting a claim for the Federal share of compensation
under the Program. In its discretion, Treasury will determine whether good faith efforts
to comply have been made.
What ifterrorism coverage with an expiration of December 31, 2005 was offered
and rejected by a policyholder in 2005; must an insurer that offered such coverage
renew its offer of terrorism coverage for the remaining term of a policy that extends
into 2006?
The Extension Act makes no changes to the "make available" requirement for insurers.
However, if an insurer met its "make available" obligation by offering terrorism coverage
that expired on December 31, 2005 for a policy otherwise extending into 2006, no further
"make available" requirement will be expected of insurers during the remaining 2006
term of that policy if the offer of terrorism coverage was rejected by the policyholder at
policy issuance or renewal in 2005. The insurer must nevertheless make an offer of
terrorism coverage and appropriate disclosures at time of policy renewal in 2006.
4
What if a policy renewal or application was processed in 2005 for coverage
becoming effective in 2006 and the insurer did not "make available" terrorism
coverage for Program Year 4 as contemplated by the Extension Act?
The Extension Act makes no changes to the "make available" requirement for insurers
under TRIA. If an insurer wishes to receive Federal compensation under the Program for
insured losses, the insurer must "make available" terrorism coverage for insured losses
for all polices becoming effective in 2006, even if the policy was processed in late 2005
or early 2006. However, as noted above, Treasury is mindful of the late date of the
passage of the Extension Act. Treasury expects that all insurers will make a good faith
effort to provide policyholders an offer of terrorism coverage and appropriate disclosures
as quickly as possible following January I, 2006 in circumstances where commercial
property and casualty insurance coverage was processed in 2005 to become effective on
or after January 1, 2006. As noted above, Treasury considers January 31, 2006 to be the
latest reasonable date for offers of coverage, barring unforeseen or unusual
circumstances. If the January 31 date is not met by an insurer, Treasury will expect the
insurer to explain any delay as well as its good faith efforts when submitting a claim for
the Federal share of compensation under the Program. In its discretion, Treasury will
determine whether good faith efforts to comply have been made.
Mayan insurer still use NAIC Model Disclosure Forms to meet the disclosure
requirement for property and casualty insurance policies with coverage extending
into 2006 or for policies issued, purchased or renewed early in 2006?
Pursuant to 31 CFR section 50.17, insurers are permitted to use NAIC Model Disclosure
Forms that were in existence on April 18, 2003 to satisfYing the disclosure requirements
of section 103(b)(2) of the Act. Although the Extension Act made no change to the
requirements for clear and conspicuous disclosure to policyholders of the premium
charges for insured losses covered by the Program and of the Federal share of
compensation for insured losses under the Program, revisions were made to the Act that
may require rewording of the NAIC Model Disclosure Forms. It is Treasury's intention
that an insurer may continue to use the NAIC Model Forms until such time that Treasuryendorsed revised forms are issued by NATC. Future rulemaking by Treasury will be
initiated to provide insurers with a safe harbor in satisfying the disclosure requirement of
the Act if the insurers use the latest available NAIC Model Disclosure Forms.
B. Property and Casualty Insurance
How will Treasury determine the types of property and casualty insurance that
were recently excluded from the Program?
Section 102(12) of the Act was amended by adding types of insurance that are now
excluded from the definition of property and casualty insurance under the Program. To
5
the extent the new exclusions represent specific lines of business as used on the NAIC
Annual Statement, Treasury will continue to utilize NAIC line of business definitions to
determine coverage and premium issues in implementing the Act. The newly excluded
lines of business from the NAIC Annual Statement include: Line 3 - Farmowners
Multiple Peril; Line 19.3 - Commercial Auto No-Fault (personal injury protection); Line
19.4 - Other Commercial Auto Liability; Line 21.2 - Commercial Auto Physical
Damage; Line 26 - Burglary and Theft; Line 24 - Surety; and Professional Liability
Insurance as reported on Line 17 - Other Liability (see below).
What about types of insurance that are excluded from the definition of property and
casualty insurance but are not specific lines of business on the NAIC Annual
Statement?
The only type of insurance that is newly excluded from the Act, but is not a specific line
of business on the NAIC Annual Statement, is new subsection l02(12)(xi) - professional
liability insurance. Until Treasury issues regulations or provides further guidance on the
meaning of the definition of "professional liability insurance", insurers should use the
following definition for what constitutes professional liability insurance:
Coverage available to pay for liability arising out of the performance of
professional or business duties related to an occupation, with coverage being
tailored to the needs of the specific occupation. Examples include abstracters,
accountants, insurance adjusters, architects, engineers, insurance agents and
brokers, lawyers, real estate agents and stockbrokers.
This interim definition is derived from the definition of "Professional Errors and
Omissions Liability" found in the Uniform Property & Casualty Coding Matrix currently
utilized by the System for Electronic Rate and Form Filing (SERFF) sponsored by the
National Association oflnsurance Commissioners (NAIC).l Insurers should use this
definition in identifying policies excluded from the Program, as well as for determining
policies whose premiums should be subtracted from Line 17 - Other Liability on the
NAIC Annual Statement when computing direct earned premium for Program purposes.
Directors and officers liability insurance, which is sometimes considered a type of
professional liability insurance, is not included in the definition as discussed in the next
section.
What is the effect of adding the definition of "directors and officers liability
insurance" to the definition of "property and casualty insurance" in section 102(12)
of the Act?
The explicit addition of this type of insurance to section 102(12) does not substantively
modify the previous definition of property and casualty insurance under the Act, but is a
statutory clarification that directors and officers liability insurance is distinct from
I
The Matrix can be found on the NAIC website at http://www.naic.org/industryhome.htm.
6
professional liability insurance. Premium for directors and officers liability insurance is
already included in Line 17 - Other Liability on the NAIC Annual Statement, one of the
commercial lines of business under Treasury's previous regulations defining property and
casualty insurance (31 CFR section 50.5(1». Treasury recommends that insurers consult
the definition of "Directors & Officers Liability" found in the Uniform Property &
Casualty Coding Matrix now being utilized by SERFF if further guidance is needed on
what constitutes "Directors & Officers Liability".
C. Program Trigger for Federal Share/Certification of Act of Terrorism
How does the Program Trigger for the Federal share of compensation work and
how does it coordinate with the Secretary's certification of an act of terrorism?
The Extension Act adds a new section 103(e)(1)(B) to TRIA entitled "Program Trigger."
This new provision directs the Secretary not to compensate insurers under the Program
unless the aggregate industry insured losses from a certified act of terrorism exceed
2
certain insured loss or "trigger" amounts.
The Extension Act has essentially introduced the concept of a "Program Trigger event" to
TRIA. A "Program Trigger event" is a certified act of terrorism occurring after March
31, 2006 in which the aggregate industry insured losses resulting from the event exceed
the applicable trigger amount ($50 million in 2006 and $100 million in 2007).
The new Program Trigger provision does not apply to acts of terrorism occurring on or
before March 31, 2006. The Trigger will apply to such acts that occur after March 31,
2006. Note that the application of the Trigger is based on the date of occurrence and not
the date of certification of an act of terrorism. For example, the Program Trigger shall
not apply to an act that occurs prior to March 31, 2006, but which is later certified after
March 31.
After March 31, unless an act of terrorism is a Program Trigger event, insured losses
from that act of terrorism will not be considered in any determination of or calculation
leading to any Federal share of compensation under the Act.
Treasury is considering whether further rulemaking or guidance is necessary to address
issues associated with the new Program Trigger, including whether any adjustments are
necessary to reflect the potential difference between acts that are certified under the
Program and not eligible for compensation and acts that are certified and eligible for
2 Section I 03( e)( I )(8) states: "In the case of a certified act of terrorism occurring after March 31,2006, no
compensation shall be paid by the Secretary under subsectlOn (a), unless the aggregate industry insured
losses resulting from such certified act of terrorism exceed - (i) $50,000,000, wIth respect to such Il1sured
losses occurring in Program Year 4; or (ii) $100,000,000, with respect to such insured losses occurring in
Program Year 5."
7
compensation under the Program. In terms of TRIA 's "make available" requirement
contained in Section 103(c) and Subpart C of the regulations, insurers should continue to
make coverage available for insured losses, although further consideration of issues
posed by the new Program Trigger could affect this requirement on a going forward
basis.
What losses of an insurer count towards satisfaction of the insurer dcductible and
how will the Federal share of compensation be dctermined?
In Program Year 4, only an insurer's insured losses resulting from certified acts of
terrorism occurring between January I and March 31,2006, and the insurer's insured
losses resulting from Program Trigger events after March 31, will count towards
satisfaction of the insurer deductible. Pursuant to section I 03( e)(1 )(A) of the Act, the
Federal share of compensation will be based on 90 percent of the amount of such insured
losses in excess of the insurer deductible.
In Program Year 5, only an insurer's insured losses resulting from Program Trigger
events occurring in that year will count towards satisfaction of the insurer deductible.
Again, pursuant to section 103(e)(I)(A), the Federal share of compensation will be based
on 85 percent of the amount of such insured losses in excess of the insurer deductible.
Treasury will be issuing forms changes and issuing further guidance and rulemaking as
necessary to accomplish this compensation payment scheme.
How will Treasury determine and notify insurers that the Program Trigger has
been met?
The manner in which Treasury determines whether the Program Trigger has been met
will be similar to the process for determining aggregate insured loss amounts in
connection with the certification of an act of terrorism. Treasury would contact industry
statistical reporting agencies and others to ascertain aggregate industry insured losses.
Once the Program Trigger amount has been exceeded, Treasury would notify insurers
through press release, notice in the Federal Register and po stings on the TRIP website.
This determination may be concurrent with the certification of the act of terrorism.
Dated: December 29, 2005
Howard Leikin
Deputy Director
Terrorism Risk Insurance Program
8
Page 1 of2
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December 30,2005
JS-3067
Report On U.S. Holdings of Foreign Securities At End-Year 2004
The findings from an annual survey of U,S, portfolio holdings of foreign securities at
year-end 2004 are released today and posted on the U.S. Treasury web site at
(http://www.treas.gov/ticifpishtml).
The survey was undertaken jointly by the U.S. Treasury, the Federal Reserve Bank
of New York, and the Board of Governors of the Federal Reserve System. The
previous survey was for year-end 2003. Future surveys are scheduled to be carried
out annually. The next report will present results from the survey for year-end
2005.
A complementary survey measuring foreign holdings of U.S. securities is also
carried out annually. Data from the most recent such survey, which reports on
securities held on June 30,2005, are currently being processed. Preliminary
results are expected to be reported by April 30, 2006.
Overall Results
The survey measured U.S. holdings of foreign securities at year-end 2004 of
approximately $3,787 billion, with $2,560 billion held in foreign equities, $993 billion
in foreign long-term debt securities (original term-to-maturity in excess of one year),
and $233 billion in foreign short-term debt securities. The previous survey,
conducted as of year-end 2003, measured U.S. holdings of approximately $3,152
billion, with $2,079 billion held in foreign equities, $874 billion in foreign long-term
debt securities, and $199 billion in foreign short-term debt securities (see Table 1).
The surveys are part of an internationally-coordinated effort under the auspices of
the International Monetary Fund (IMF) to improve the measurement of portfolio
asset holdings.
Table 1. U.S. holdings of foreign securities, by type of security, at end-2003
and end-2004
(Billions of dollars, except as noted)
IType of Security
II
Dec. 31, 200311
Dec. 31, 20041
I
ILong-term Securities
II
1/
2,95 4 11
I
3,5531
II
II
2,0791/
2,5601
874 11
9931
II
19911
1
equity
long-term debt
I
IShort-term debt securities
I
ITotal
II
II
II
II
3,15211
2331
I
3,7871
U.S. Portfolio Investment by Country
Table 2, U.S. holdings of foreign securities, by country and type of security,
for the countries attracting the most U.S. investment, as of December 31,
2004
ttp:lltreas.gOV/pr~ss/releases/j s3 06 7. h tm
113/2006
Page 1. at 1.
(Billions of dollars)
II
101
01
I~I
EQUilieslDI
01
DIUnited Kingdom
DIJapan
DICanada
[]IFrance
OJINetherlands
[]IGermany
OICayman Islands
OJIBermuda
DJISwitzeriand
IJ§]IAustralia
mlltaly
IJ]ISouth Korea
[J]lspain
[J]IMexico
[J]]IBrazil
~ISweden
@llreland
[J:@Finland
@lILuxembourg
[]QJIHong Kong, SAR
01Taiwan
rnllsrael
01 Norw ay
I 241lNetheriands
Antilles
01 Sin g a pore
DIRest of world
II
II
II
II
II
01
01
Ol!otal value of
rnvestment
II
II
II
II
II
II
II
738 11
384 11
345 11
21711
202 11
201 11
196 11
164 11
II
14211
10311
7811
7411
6911
II
6611
1/
6311
62 11
5511
39 11
38 11
37 11
3511
II
II
II
II
101
456 101
330101
180101
165 101
136101
124101
70 101
154101
138 101
57 101
57 101
67 101
63101
38101
43101
38101
32 101
34 101
8101
35101
35 101
I
II
341/
II
II
2911
35411
24101
211 101
II
II
101
19101
18 101
30/1
Debt securities:
I
L~e~~IDI S~~r~1
101
171 101
I
110 1
36 101
171
121
152 101
42 101
55101
68 101
114 101
10101
2101
40101
17101
7101
5101
29 101
20101
15 101
14 101
4101
27 101
2101
*101
15 101
10101
101
111
101
121
11
21
61
31
*1
11
*1
*1
101
91
11
41
*1
*1
*1
21
ID~DDDD
5101
131 101
101
*1
131
I
1~~D~DCj
• Greater than zero and less than $500 million. Note: items may not add to total
due to rounding.
The stock of foreign securities for December 31 , 2004, reported in this survey does
not, for a number or reasons, correspond to the stock of foreign securities on
December 31,2003, plus cumulative flows reported in Treasury's transactions
reporting system. An analysis of the relation between the stock and flow data is
available in Table 5 and the associated text of the final report on U.S. holdings of
foreign securities at end-year 2004.
###
REPORTS
• (PDF) Report On US. Holdings of Foreign Securities At End-Year 2004
tp:/ltreas.gov/pr~s/reteases/j s3 06 7.htm
1/3/2006
DEPARTMENT OF THE TREASURY
OFFICE OF PUBLIC AFFAIRS
EMBARGOED UNTIL 2:30 p.m. EST
December 30, 2005
Contact:
Brookly McLaughlin
(202) 622-1996
REPORT ON U.S. HOLDINGS OF FOREIGN SECURITIES
AT END-YEAR 2004
The findings from an annual survey of U.S. portfolio holdings of foreign securities at year-end
2004 are released today and posted on the U.S. Treasury web site at
(http://wv...W.treas.gov/tic/fpis.html) .
The survey was undertaken jointly by the U.S. Treasury, the Federal Reserve Bank of New York,
and the Board of Govemors of the Federal Reserve System. The previous survey was for yearend 2003. Future surveys are scheduled to be carried out annually. The next report will present
results from the survey for year-end 2005.
A complementary survey measuring foreign holdings of U.S. securities is also carried out
annually. Data from the most recent such survey, which reports on securities held on June 30,
2005, are currently being processed. Preliminary results are expected to be reported by April 30,
2006.
Overall Results
The survey measured U.S. holdings of foreign securities at year-end 2004 of approximately
$3,787 billion, with $2,560 billion held in foreign equities, $993 billion in foreign long-term debt
securities (original term-to-maturity in excess of one year), and $233 billion in foreign short-term
debt securities. The previous survey, conducted as of year-end 2003, measured U.S. holdings of
approximately $3,152 billion, with $2,079 billion held in foreign equities, $874 billion in foreign
long-term debt securities, and $199 billion in foreign short-term debt securities (see Table 1).
The surveys are part of an internationally-coordinated effort under the auspices of the
International Monetary Fund (IMF) to improve the measurcment of portfolio asset holdings.
Table 1. U.S. holdings of foreign securities, by type of security, at end-2003 and end-2004 1
(Billions of dollars, except as noted)
Type of Security
Dec. 31,2003
Dec. 3 I , 2004
Long-tenn SecuritIes
equity
long-term debt
Short-tenn debt securitIes
2,954
2,079
874
199
3,553
2,560
993
233
Total
3,152
3,787
U.S. Portfolio Investment by Country
Table 2. U.S. holdings of foreign securities, by country and type of security, for the
countries attracting the most U.S. investment, as of December 31, 2004
(Billions of dollars)
Debt securities:
Total
Equities
long-term
Short-term
1
United Kingdom
738
456
171
110
2
Japan
3H4
36
17
3
Canada
345
330
180
152
12
4
France
217
165
42
10
Netherlands
202
136
55
11
6
Germany
201
124
68
10
12
7
Cayman Is lands
196
70
114
8
Bermuda
164
154
10
I
9
Switzerland
142
Ll8
2
2
10
Australia
103
57
40
6
11
Italy
78
57
17
7
12
South Korea
74
67
13
Spain
69
63
S
14
Mexico
66
38
29
15
Bra?i1
63
43
20
16
Sweden
62
38
15
10
32
14
9
34
4
*
Ireland
55
18
Finland
39
19
luxembourg
38
8
27
20
Hong Kong. S.A.R
37
3S
2
21
Taiwan
35
35
22
Israel
34
19
15
Norway
30
18
10
2
24
Netherlands Antilles
30
29
25
Singapore
17
23
Rest of world
Total value of investment
* Greater than zero and less than $500 million.
4
29
24
354
211
131
13
3,787
2,560
993
233
Note: items may not add to total due to roundtng.
I The stock of foreign securities for December 31, 2004, reported in this survey does not, for a number or reasons,
correspond to the stock of foreign securities on December 3 1,2003, plus cumulative flows reported in Treasury's
transactions reporting system. An analysis of the relation between the stock and flow data is avaIlable in Table 5
and the associated text of the final report on U.S. holdings of foreign securities at end-year 2004.
2
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mlS page.
download me tree I-WOIJe") AcroIJarf<) Header("),
December 30,2005
js-3068
Treasury and IRS Finalize Rules Regarding Roth 401 (k) Contributions
Today, the Treasury Department and the IRS issued final regulations regarding
sections 401 (k) and 401 (m) related to designated Roth contributions. Roth
contributions were added to the Code by the Economic Growth and Tax Relief
Reconciliation Act of 2001 (EGTRRA) and are effective for taxable years beginning
after December 31,2005. Designated Roth contributions allow for employees to
designate all or a portion of their section 401 (k) employee deferrals as Roth
contributions, which would receive treatment much like a Roth IRA contribution (i.e.,
they would be contributed on an after tax basis, but qualified distributions of those
contributions, plus earnings, would be tax-free).
These regulations finalize rules that were proposed on March 2, 2005. Plan
sponsors desiring to offer employees the opportunity to make designated Roth
contributions will find these regulations useful in designing their plans to accept
such contributions. Further rules, largely focusing on the tax treatment of
distnbutions of designated Roth contributions, will be issued in proposed form in the
near future.
The text of the final regulations
js
attached.
###
REPORTS
•
Roth 401(k) Regulations
tto:lltreas.gOVIprf'oSs/releases/j s3 068 .htm
1/3/2006
[4830-01-p]
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
[TO 9237]
RIN 1545-BE05
Designated Roth contributions to cash or deferred arrangements under section 401 (k)
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains amendments to the regulations under section
401 (k) and (m) of the Internal Revenue Code. These regulations provide guidance
concerning the requirements for designated Roth contributions under qualified cash or
deferred arrangements described in section 401 (k). These regulations affect section
401 (k) plans that provide for designated Roth contributions and participants eligible to
make elective contributions under these plans.
Dates: Effective Date: These regulations are effective January 3,2006.
Applicability Date: These regulations apply to plan years beginning on or after
January 1, 2006.
FOR FURTHER INFORMATION CONTACT: Cathy A. Vohs, 202-622-6090 or R. Lisa
Mojiri-Azad, 202-622-6060 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained in these final regulations has been
reviewed and approved by the Office of Management and Budget in accordance with
the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)) under control number 15451930.
The collection of information in these regulations is in 26 CFR §1.401 (k)1(f)(1 )&(2). This information is required to comply with the separate accounting and
recordkeeping requirements of section 402A.
The estimated annual burden per respondent under control number 1545-1930 is
1 hour.
Comments concerning the accuracy of this burden estimate and suggestions for
reducing this burden should be sent to the Internal Revenue Service, Attn: IRS Reports
Clearance Officer, SE:CAR:MP:T:T:SP Washington, DC 20224, and to the Office of
Management and Budget, Attn: Desk Officer for the Department of the Treasury, Office
of Information and Regulatory Affairs, Washington, DC 20503.
An agency may not conduct or sponsor, and a person is not required to respond
to, a collection of information unless it displays a valid control number assigned by the
Office of Management and Budget.
Books or records relating to a collection of information must be retained as long
as their contents might become material in the administration of any internal revenue
law. Generally, tax returns and tax return information are confidential, as required by 26
U.S.C. 6103.
Background
2
This document contains amendments to the Income Tax Regulations (26 CFR
Part 1) under section 401 (k) and (m) of the Internal Revenue Code of 1986 (Code). The
amendments provide guidance on designated Roth contributions under section 402A of
the Code, added by section 617(a) of the Economic Growth and Tax Relief
Reconciliation Act of 2001 (Public Law 107-16,115 Stat. 38) (EGTRRA).
Section 401 (k) provides that a profit-sharing, stock bonus, pre-ERISA money
purchase or rural cooperative plan will not fail to qualify under section 401 (a) merely
because it contains a qualified cash or deferred arrangement. Contributions made at
the election of an employee under a qualified cash or deferred arrangement are known
as elective contributions. Generally, such elective contributions are not includible in
gross income at the time contributed and are sometimes referred to as pre-tax elective
contributions.
Under section 402A, effective for tax years beginning on or after January 1,
2006, a plan may permit an employee who makes elective contributions under a
qualified cash or deferred arrangement to designate some or all of those contributions
as designated Roth contributions. Designated Roth contributions are elective
contributions under a qualified cash or deferred arrangement that, unlike pre-tax
elective contributions, are currently includible in gross income. However, a qualified
distribution of deSignated Roth contributions is excludable from gross income.
Although deSignated Roth contributions under a qualified cash or deferred
arrangement bear some similarity to contributions to a Roth IRA described in section
408A (e.g., contributions to either type of account are after-tax contributions and
3
qualified distributions from either type of account are excludable from gross income),
there are many differences between these types of arrangements. For example, under
section 408A(c)(3), an individual is ineligible to make Roth IRA contributions if his or her
modified adjusted gross income exceeds certain limits, but section 402A does not
impose any comparable income limits on an individual's eligibility to make designated
Roth contributions under a qualified cash or deferred arrangement. In addition, under
section 408A(d)(3), a traditional IRA may be converted to a Roth IRA, but section 402A
does not provide for a conversion of a pre-tax elective contribution account under a
qualified cash or deferred arrangement to a designated Roth account. Also, under
section 408A(d)(4), specific ordering rules apply to distributions from Roth IRAs.
Section 402A, however, does not provide a specific ordering rule for distributions from
designated Roth accounts, so section 72 applies to determine the character of
distributions from such accounts.
On December 29, 2004, final regulations under section 401 (k) were issued (69
FR 78144). Those regulations generally apply to plan years beginning on or after
January 1, 2006, although they also may be applied to plan years ending after
December 29,2004. Under those final regulations, §1.401 (k)-1 (f) was reserved for
special rules for designated Roth contributions. On March 2, 2005, proposed
regulations to fill in that reserved paragraph and provide additional rules applicable to
designated Roth contributions were issued (70 FR 10062). Written public comments
were received on the proposed regulations and public reaction to the proposed
regulations generally was favorable. After consideration of the comments, these final
4
regulations adopt the provisions of the proposed regulations with certain modifications,
the most significant of which are highlighted below.
Explanation of Provisions
Rules Relating to Designated Roth Contributions
These final regulations retain the special rules which were included in the
proposed regulations relating to designated Roth contributions under a section 401 (k)
plan. Thus, these final regulations amend §1.401 (k)-1 (f) to provide a definition of
designated Roth contributions and special rules with respect to such contributions.
Under these final regulations, designated Roth contributions are defined as elective
contributions under a qualified cash or deferred arrangement that are: (1) designated
irrevocably by the employee at the time of the cash or deferred election as designated
Roth contributions that are being made in lieu of all or a portion of the pre-tax elective
contributions the employee is otherwise eligible to make under the plan; (2) treated by
the employer as includible in the employee's gross income at the time the employee
would have received the contribution amounts in cash if the employee had not made the
cash or deferred election (e.g., by treating the contributions as wages subject to
applicable withholding requirements); and (3) maintained by the plan in a separate
account. The regulations also provide that elective contributions may only be treated as
designated Roth contributions to the extent permitted under the plan.
Some commentators requested that an employer sponsoring a qualified cash or
deferred arrangement be permitted to offer only designated Roth contributions.
However, under section 402A(b)(1), deSignated Roth contributions are made in lieu of
5
all or a portion of elective contributions that the employee is otherwise eligible to make
under the cash or deferred arrangement. If a cash or deferred arrangement offered only
designated Roth contributions, an employee participating in the arrangement would not
be electing to make such contributions in lieu of elective contributions he or she was
otherwise eligible to make under the plan. Thus, these final regulations clarify that, in
order to provide for designated Roth contributions, a qualified cash or deferred
arrangement must also offer pre-tax elective contributions.
Separate Accounting Requirement
These final regulations also retain the rule that, under the separate accounting
requirement, contributions and withdrawals of designated Roth contributions must be
credited and debited to a designated Roth account maintained for the employee and the
plan must maintain a record of the employee's investment in the contract (i.e.,
designated Roth contributions that have not been distributed) with respect to the
employee's designated Roth account. In addition, gains, losses, and other credits or
charges must be separately allocated on a reasonable and consistent basis to the
designated Roth account and other accounts under the plan. The proposed regulations
provided that forfeitures may not be allocated to the designated Roth account. The final
regulations retain this rule and, in response to comments, clarify that no contributions
other than designated Roth contributions and rollover contributions described in section
402A(c)(3)(8) are permitted to be allocated to a designated Roth account. For example,
matching contributions are not permitted to be allocated to a designated Roth account.
The final regulations also retain the rule that the separate accounting requirement
6
applies at the time the designated Roth contribution is contributed to the plan and must
continue to apply until the designated Roth account is completely distributed.
Other Rules
These final regulations retain the requirement that a designated Roth contribution
must satisfy the requirements applicable to any other elective contributions made under
a qualified cash or deferred arrangement. Thus, designated Roth contributions are
subject to the nonforfeitability and distribution restrictions applicable to elective
contributions and are taken into account under the actual deferral percentage test (ADP
test) of section 401 (k)(3) in the same manner as pre-tax elective contributions.
Similarly, designated Roth contributions may be treated as catch-up contributions and
serve as the basis for a participant loan.
A number of commentators discussed the application of section 401 (a)(9) to
plans to which designated Roth contributions are made. These commentators pointed
out that under section 408A, Roth IRAs are not subject to the rules of section
401 (a)(9)(A) (i.e., Roth IRAs are not subject to the rules of section 401 (a)(9) while the
Roth IRA owner is alive). Although Roth IRAs are not subject to section 401 (a)(9) while
the IRA owner is alive, section 402A does not provide comparable rules regarding the
application of section 401 (a)(9) to designated Roth accounts under a cash or deferred
arrangement. Thus, such designated Roth accounts are subject to the rules of section
401 (a)(9) (A) and (8) in the same manner as pre-tax elective contributions.
In response to comments asking for clarification, the final regulations provide
rules regarding elections to make designated Roth contributions. These rules
7
specifically provide that the rules in §1.401 (k)-1 (e)(2)(ii) regarding frequency of elections
to make pre-tax elective contributions also apply to elections to make designated Roth
contributions. The rules also specifically address automatic enrollment and permit a
plan to utilize automatic enrollment in conjunction with designated Roth contributions.
Under the final regulations, a plan that provides for a cash or deferred election under
which contributions are made in the absence of an affirmative election and that has both
pre-tax elective contributions and designated Roth contributions must set forth the
extent to which those default contributions are pre-tax elective contributions or
deSignated Roth contributions. If the default contributions are designated Roth
contributions, then an employee who has not made an affirmative election is deemed to
have irrevocably deSignated the contributions (in accordance with section
402A(c)(1 )(8)) as designated Roth contributions.
A number of commentators addressed direct rollovers of amounts from a
designated Roth account. In response to these comments, the regulations clarify that a
direct rollover from a designated Roth account under a qualified cash or
deferred arrangement may only be made to another deSignated Roth account
under an applicable retirement plan described in section 402A(e)(1) or to a
Roth IRA described in section 408A, and only to the extent the direct rollover is
permitted under the rules of section 402(c). In addition, a plan is permitted to treat the
balance of the participant's designated Roth account and the participant's other
accounts under the plan as accounts held under two separate plans (within the meaning
of section 414(1)) for purposes of applying the special rule in A-11 of §1.401(a)(31)-1
8
(under which a plan will satisfy section 401 (a)(31) even though the plan administrator
does not permit any distributee to elect a direct rollover with respect to eligible rollover
distributions during a year that are reasonably expected to total less than $200). Thus,
if a participant's balance in the designated Roth account is less than $200, then the plan
is not required to offer a direct rollover election with respect to that account or to apply
the automatic rollover provisions of section 401 (a)(31 )(8) with respect to that account.
Section 1.401 (k)-2 contains correction methods that may be used when a plan
fails to satisfy the ADP test for a year. These final regulations retain the rule in the
proposed regulations relating to these correction methods that permits a highly
compensated employee (HCE), as defined in section 414(q), with elective contributions
for a year that include both pre-tax elective contributions and designated Roth
contributions to elect whether excess contributions are to be attributed to pre-tax
elective contributions or designated Roth contributions. There is no requirement that
the plan provide this option, and a plan may provide for one of the correction methods
described in the final regulations without permitting an HCE to make such an election.
These final regulations also retain the rule that a distribution of excess
contributions is not includible in gross income to the extent it represents a distribution of
designated Roth contributions. However, the income allocable to a corrective
distribution of excess contributions that are designated Roth contributions is includible in
gross income in the same manner as income allocable to a corrective distribution of
excess contributions that are pre-tax elective contributions. The regulations also
provide a similar rule under the correction methods that may be used when a plan fails
9
to satisfy the actual contribution percentage (ACP) test in §1.401 (m)-2.
Additional Plan Terms
In addition to the rules relating to section 401 (k) and (m) discussed above, there
are other aspects of designated Roth contributions that would be reflected in plan terms
and are not addressed in these regulations. For example, while a plan is permitted to
allow an employee to elect the character of a distribution (i.e., whether the distribution
will be made from the designated Roth account or other accounts), the extent to which a
plan so permits must be set forth in the terms of the plan.
Certain Issues Addressed in Proposed Regulations
These final regulations do not provide guidance with respect to the taxation of
distributions of designated Roth contributions. For example, the regulations do not
provide guidance with respect to the recovery of an employee's investment in the
contract associated with his or her designated Roth contributions. Proposed regulations
under section 402A, to be issued in the near future, address these taxation issues.
Effective Date
Section 402A is effective for an employee's taxable years beginning after
December 31, 2005. These regulations have the same effective date as the regulations
under section 401 (k) that they are amending. Thus, these final regulations are
generally applicable to plan years beginning on or after January 1, 2006. If a plan is
applying the section 401 (k) regulations as of an earlier effective date (as provided under
those regulations), to the extent that section 402A is effective, that same early effective
date applies to these regulations. For a plan that has an effective date for the section
10
401 (k) regulations that is after the effective date of section 402A (either an employer
that does not have a calendar year plan or a plan established pursuant to a collective
bargaining agreement that has a delayed effective date for the section 401 (k)
regulations), the employer may rely on these regulations prior to the effective date of the
final section 401 (k) regulations for the plan, even if the plan does not otherwise
implement the section 401 (k) regulations earlier than required.
These regulations do not provide rules for the application of the EGTRRA sunset
provision (section 901 of EGTRRA), under which the provisions of EGTRRA do not
apply to taxable, plan, or limitation years beginning after December 31, 2010. Unless
the EGTRRA sunset provision is repealed before it becomes effective, additional
guidance will be needed to clarify its application.
Special Analyses
It has been determined that these regulations are not a significant regulatory
action as defined in Executive Order 12866. Therefore, a regulatory assessment is not
required. It has also been determined that 5 U.S.C. 553(b) does not apply to these
regulations. It is hereby certified that the collection of information in these regulations
will not have a significant economic impact on a substantial number of small entities.
This certification is based on the fact that most small entities that maintain a section
401 (k) plan use a third party provider to administer the plan. Therefore, an 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
11
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 R. lisa Mojiri-Azad 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.
26 CFR Part 602
Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR parts 1 and 602 are amended as follows:
PART 1 -- INCOME TAXES
Paragraph 1. The authority citation for part 1 continues to read, in part, as
follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.401 (k)-O is amended as follows:
1. The entry for §1.401(k)-1(f) is revised and entries for §1.401(k)-1(f)(1), (2), (3),
(4) and (5) are added.
2. An entry for §1.401 (k)-2(b)(2)(vi)(C) is added.
12
The additions read as follows:
§1.401 (k)-O Table of contents.
** * * *
§1.401 (k)-1 Certain cash or deferred arrangements.
*****
(f) Special rules for designated Roth contributions.
(1) In general.
(2) Separate accounting required.
(3) Designated Roth contributions must satisfy rules applicable to elective
contri butions.
(i) In general.
(ii) Special rules for direct rollovers.
(4) Rules regarding designated Roth contribution elections.
(i) Frequency of elections.
(ii) Default elections.
(5) Effective date.
(i) In general.
(ii) Sunset provisions.
*****
§1.401 (k)-2 ADP test.
*****
(b) * * *
(2) * * *
(vi) * * *
(C) Corrective distributions attributable to designated Roth contributions.
*****
Par. 3. Section 1.401 (k)-1 (f) is revised as follows:
§1.401 (k)-1 Certain cash or deferred arrangements.
*****
(f) Special rules for designated Roth contributions--(1) In general. The term
13
designated Roth contribution means an elective contribution under a qualified cash or
deferred arrangement that, to the extent permitted under the plan, is-(i) Designated irrevocably by the employee at the time of the cash or deferred
election as a designated Roth contribution that is being made in lieu of all or a portion of
the pre-tax elective contributions the employee is otherwise eligible to make under the
plan;
(ii) Treated by the employer as includible in the employee's gross income at the
time the employee would have received the amount in cash if the employee had not
made the cash or deferred election (e.g., by treating the contributions as wages subject
to applicable withholding requirements); and
(iii) Maintained by the plan in a separate account (in accordance with paragraph
(f)(2) of this section).
(2) Separate accounting required. Under the separate accounting requirement
of this paragraph (f)(2), contributions and withdrawals of designated Roth contributions
must be credited and debited to a designated Roth account maintained for the
employee and the plan must maintain a record of the employee's investment in the
contract (i.e., designated Roth contributions that have not been distributed) with respect
to the employee's designated Roth account. In addition, gains, losses, and other
credits or charges must be separately allocated on a reasonable and consistent basis to
the designated Roth account and other accounts under the plan. However, forfeitures
may not be allocated to the designated Roth account and no contributions other than
designated Roth contributions and rollover contributions described in section
14
402A(c)(3)(B) may be allocated to such account. The separate accounting requirement
applies at the time the designated Roth contribution is contributed to the plan and must
continue to apply until the designated Roth account is completely distributed.
(3) Designated Roth contributions must satisfy rules applicable to elective
contributions--(i) In general. A designated Roth contribution must satisfy the
requirements applicable to elective contributions made under a qualified cash or
deferred arrangement. Thus, for example, a designated Roth contribution must satisfy
the requirements of paragraphs (c) and (d) of this section and is treated as an employer
contribution for purposes of sections 401{a), 401(k), 402, 404, 409, 411,412,415,416
and 417. In addition, the designated Roth contributions are treated as elective
contributions for purposes of the ADP test. Similarly, the designated Roth account under
the plan is subject to the rules of section 401 (a)(9)(A) and (B) in the same manner as an
account that contains pre-tax elective contributions.
(ii) Special rules for direct rollovers. A direct rollover from a designated Roth
account under a qualified cash or deferred arrangement may only be made to another
designated Roth account under an applicable retirement plan described in section
402A(e)(1) or to a Roth IRA described in section 408A, and only to the extent the
rollover is permitted under the rules of section 402(c). Moreover, a plan is permitted to
treat the balance of the participant's designated Roth account and the participant's other
accounts under the plan as accounts held under two separate plans (within the meaning
of section 414(1)) for purposes of applying the special rule in A-11 of §1.401(a)(31 )-1
(under which a plan will satisfy section 401 (a)(31) even though the plan administrator
15
does not permit any distributee to elect a direct rollover with respect to eligible rollover
distributions during a year that are reasonably expected to total less than $200).
{4} Rules regarding designated Roth contribution elections--(i) Frequency of
elections. The rules under paragraph (e){2)(ii) of this section regarding frequency of
elections apply in the same manner to both pre-tax elective contributions and
designated Roth contributions. Thus, an employee must have an effective opportunity
to make (or change) an election to make designated Roth contributions at least once
during each plan year.
(ii) Default elections--(A) In the case of a plan that provides for both pre-tax
elective contributions and designated Roth contributions and in which, under paragraph
(a)(3)(ii) of this section, the default in the absence of an affirmative election is to make a
contribution under the cash or deferred arrangement, the plan terms must provide the
extent to which the default contributions are pre-tax elective contributions and the extent
to which the default contributions are designated Roth contributions.
(8) If the default contributions under the plan are designated Roth contributions,
then an employee who has not made an affirmative election is deemed to have
irrevocably designated the contributions (in accordance with section 402A(c)(1 )(8)) as
designated Roth contributions.
(5) Effective date--(i) In general. Section 402A is effective for taxable years
beginning after December 31, 2005.
(ii) Sunset provisions. The rules set forth in this paragraph (f) do not address the
application of section 901 of the Economic Growth and Tax Relief Reconciliation Act of
16
2001 (Public Law 107-16; 115 Stat. 38) (under which the amendments made by that
Act do not apply to taxable, plan, or limitation years beginning after December 31,
2010).
*****
Par. 4. Section 1.401 (k)-2 is amended as follows:
1. A new sentence is added after the second sentence in paragraph (b)(1 )(ii).
2. The last sentence in paragraph (b)(2)(vi)(B) is amended by adding the phrase
", except to the extent provided in paragraph (b)(2)(vi)(C) of this section."
3. Paragraph (b)(2){vi)(C) is added.
The additions read as follows:
§1.401 (k)-2 ADP test.
*****
(b) * * *
(1) ***
(ii) * * * Similarly, a plan may permit an HCE with elective contributions for a year
that includes both pre-tax elective contributions and designated Roth contributions to
elect whether the excess contributions are to be attributed to pre-tax elective
contributions or designated Roth contributions. * * *
**** *
(2) * * *
(vi) * * *
(C) Corrective distributions attributable to deSignated Roth contributions.
17
Notwithstanding paragraphs (b)(2)(vi)(A) and (B) of this section, a distribution of excess
contributions is not includible in gross income to the extent it represents a distribution of
designated Roth contributions. However, the income allocable to a corrective
distribution of excess contributions that are designated Roth contributions is included in
gross income in accordance with paragraph (b)(2)(vi)(A) or (8) of this section (i.e., in the
same manner as income allocable to a corrective distribution of excess contributions
that are pre-tax elective contributions).
*** **
Par. 5. Section 1.401 (k)-6 is amended as follows:
1. The definitions of "Designated Roth account" and "Designated Roth
contributions" are added after the definition of Current year testing method.
2. A new definition of "Pre-tax elective contributions" is added after the definition
of Pre-ERISA money purchase pension plan.
The additions read as follows:
§1.401 (k)-6 Definitions.
*****
Designated Roth account. Designated Roth account means a separate account
maintained by a plan to which only designated Roth contributions (including income,
expenses, gains and losses attributable thereto) are made.
Designated Roth contributions. Designated Roth contributions means
designated Roth contributions as defined in §1.401 (k)-1 (f)(1).
** * * *
18
Pre-tax elective contributions. Pre-tax elective contributions means elective
contributions under a qualified cash or deferred arrangement that are not designated
Roth contributions.
*****
Par. 6. Section 1.401 (m}-O is amended by adding an entry for §1.401 (m)2(b}(2}(vi)(C) to read as follows:
§1.401 (m)-O Table of contents.
*****
§1.401 (m)-2 ACP test.
*****
(b) * * *
(2) * * *
(vi) * * *
(C) Corrective distributions attributable to designated Roth contributions.
*****
Par. 7. Section 1.401 (m}-2 is amended as follows:
1. The last sentence in paragraph (b)(2)(vi)(8) is amended by adding the phrase
", or as provided in paragraph (b)(2)(vi)(C) of this section."
2. Paragraph (b)(2)(vi)(C) is added.
The additions read as follows:
§1.401 (m)-2 ACP test.
*** * *
19
(b) * * *
(2) * * *
(vi) * * *
(C) Corrective distributions attributable to designated Roth contributions.
Notwithstanding paragraphs (b)(2)(vi)(A) and (B) of this section, a distribution of excess
aggregate contributions is not includible in gross income to the extent it represents a
distribution of designated Roth contributions. However, the income allocable to a
corrective distribution of excess aggregate contributions that are designated Roth
contributions is taxed in accordance with paragraph (b )(2)(vi)(A) or (B) of this section
(i.e., in the same manner as income allocable to a corrective distribution of excess
aggregate contributions that are not designated Roth contributions).
*** **
Par. 8. Section 1.401(m)-5 is amended by adding a new definition of
"Designated Roth contributions" after the definition of Current year testing method to
read as follows:
§1.401 (m)-5 Definitions.
* * '* * *
Designated Roth contributions. Designated Roth contributions means
designated Roth contributions as defined in §1.401 (k)-1 (f)(1).
*****
PART 602--0MB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION
ACT
20
Par. 9. The authority citation for part 602 continues to read as follows:
Authority: 26 U.S.C. 7805.
Par. 10. In §602.101, paragraph (b) is amended by adding an entry for "1.401(k)1" in numerical order to the table to read, in part, as follows:
§602.101 OMS Control numbers.
*****
(b) * * *
21
Current OMS
control No.
CFR part or section where
identified and described
*****
1.401(k)-1 .............................................................................................. 1545-1930
*****
Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.
Approved:
December 13, 2005.
Eric Solomon,
Acting Deputy Assistant Secretary for Tax Policy.
Pagelof2
January 3, 2006
2006-1-3-17-4-27-25114
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 $64,727 million as of the end of that week, compared to $69,715 million as of the end of the prior week.
I. Official U.S. Reserve Assets (in US millions)
[
December 16, 2005
II
TOTAL.!
11. Foreign Currency Reserves 1
69,715
Euro
la. Securities
II
II
11,210
IOf which, issuer headquartered in the US
II
II
II
Yen
10,994
II
II
TOTAL
22,204
II
0
II
II
December 23, 2005
II
64,727
II
II
Euro
II
Yen
11,065
II
10,926
II
II
II
II
I
TOTAL
21,991
II
0
II
15,862
lb. Total deposits with:
IbJ Other central banks and BIS
II
Ibii Banks headquartered in the US.
II
10,692
5,322
I
Ib.iii Of which, banks located in the U.S.
II
II
12. IMF Reserve Position 2
14, Gold Stock 3
15, Other Reserve Assets
0
II
Ib.,i; Banks headquartered outside the US.
Rights (SDRs) 2
0
II
Ib.iL Of which, banks located abroad
13. Special Drawing
16,014
II
II
II
II
"
"II
II
II
0
II
II
11,041
0
II
II
II
5,303
0
II
"II
II
II
8,204
10,559
II
0
12,252
II
II
II
II
0
II
0
0
II
"
II
II
II
I
I
II
II
7,685
l
8,147
I
11,041
I
0
I
"
II. Predetermined Short-Term Drains on Foreign Currency Assets
December 16, 2005
[
II
I
1. Foreign currency loans and securities
Euro
II
Yen
II
II
II
TOTAL
I
0
II
II
December 23, 2005
I
Euro
II
Yen
II
II
TOTAL
II
0
I
I
2. Aggregate short and long positions in forwards and futures in foreign currencies vis-a-vis the U ,So dollar:
~.a Short positions
~b Long positions
~ Other
II
II
II
II
II
II
II
II
II
II
0
II
II
II
II
II
II
0
II
II
0
0
I
0
I
0
I
III. Contingent Short-Term Net Drains on Foreign Currency Assets
[
~Contingent liabilities in foreign currency
1.a. Collateral guarantees on debt due within 1
year
I
I
Decemb~r
December 16, 2005
Euro
II
Yen
II
II
II
II
II
1/
1/
/IWWw.treas.!}e>V/press/reIeasesI20061.31742725114.htm
Euro
TOTAL
0
I
II
II
23, 2005
Yen
II
II
II
II
II
1/
1/
TOTAL
0
2/1/2006
Page 2 0[2
l1.b. Other contingent liabilities
II
II
II
I
I
I
I
II
II
II
/I
0
I
I
I
0
II
I
2. Foreign currency securities with embedded
options
3. Undrawn, unconditional credit lines
I
@.a. With other central banks
II
II
II
II
3.b. With banks and other financial instilutions
I
I
I
II
II
II
II
II
II
II
~eadquartered in the US
II
0
II
II
!
II
II
II
[Headquartered outside the US.
II
II
II
II
II"
4. Aggregate short and long positions of options
I
II
II
II
II
II
II
II
II
II
II
II
II
II
II
II
II
II
II
II
II
I
II
II
II
II
II
II
3c. With banks and other financial institutions
in foreign
Icurrencies vis-a-vis the U.S. dollar
48 Short positions
1
14.a.1.
Bought puts
4.a.2. Written calls
4.b. Long positions
"II
II
I
!
4.b.1. Bought calls
I
4.b.2. Written puts
I
0
0
II
"II
I
0
II
I
"I
I
I
II
II
I
Notes:
11 Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal ReseNe's System Open Market Account
(SOMA), valued at current market exchange rates. Foreign currency holdings listed as securities reflect marked-to-market values, and
deposits reflect carrying values. Foreign Currency Reserves for the latest week may be subject to revision. Foreign Currency
Reserves for the prior week are final.
21 The items, "2. IMF ReseNe 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.
31 Gold stock is valued monthly at $42.2222 per fine troy ounce.
11WWw.treas.gc;v/press/reieases1200613}.742725114.htm
2/1/2006
Page 1 of2
January 3, 2006
2006-1-3-17 -11-26-25778
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 $64,473 million as of the end of that week, compared to $64,727 million as of the end of the prior week.
I. Official U.S. Reserve Assets (In US millions)
I
11. Foreign Currency Reserves 1
la. Securities
IOf which, issuer headquartered in the US
I
December 23, 2005
II
TOTAL
64,727
64,473
Euro
II
Yen
II
TOTAL
Euro
11,065
I
10,926
I
II
21,991
11,060
II
I
I
December 30, 2005
TOTAL
Yen
0
I
I
10,789
II
I
5,235
I
I
21,849
I
0
I
b. Total deposits with:
Ibi, Other central banks and BIS
Ibii, Banks headquartered in the US
10,559
5,303
15,862
10,549
0
15,784
0
I
b,ii, Of which, banks located abroad
0
b,iii. Banks headquartered outside the US,
0
b.iii, Of which, banks located in the U.S.
0
0
7,685
7,669
8,147
8,130
11,041
11,041
2, IMF Reserve Position 2
I"
C'
. I Drawing Rights (SDRs) 2
4. Gold Stock 3
15. Other Reserve Assets
0
I
0
0
0
I
II. Predetermined Short-Term Drains on Foreign Currency Assets
December 2.3, ~005
I
Euro
I
Yen
I
1, Foreign currency loans and securities
I
I
TOTAL
0
II
II
I
I
December 30, 2005
Euro
II
II
Yen
I
I
TOTAL
I
0
I
I
I
I
0
I
0
I
0
I
TOTAL
I
2, Aggregate short and long positions in forwards and futures in foreign currencies vis-a-vis the U.S, dollar:
[3,a, Short positions
[2,b, Long positions
I
I
@. Other
0
I
I
II
I
0
I
0
I
I
I
I
I
II
III. Contingent Short-Term Net Drains on Foreign Currency Assets
[
1, Contingent liabilities in foreign currency
1,a. Collateral guarantees on debt due within 1
year
I
II
I
I
December 30, 2005
December 23, 2005
Euro
II
I
http://WWW.trew.gov/press/releases/2006j317112625778.htm
Yen
F:
AL
I
Euro
Yen
0
I
II
I
II
I
II
2/112006
Page 2 of2
1
1.b Other contingent liabilities
II
2. Foreign currency securities with embedded
options
I
II
I
\
3. Undrawn, unconditional credit lines
II
II
II
0
II
I
I
0
,II
3,8. With other central banks
~e8dquartered in the US
I
3,c. With banks and oiller financial institutions
~eadquartered outside the US.
I
I
0
0
I
3,b. With banks and other financial institutions
I
I
II
II
II
I
1/
"II
1/
1/
4. Aggregate short and long positions of options
in foreign
II
II
II
@urrencies vis-a-vis the U.S. dollar
8. 8 Sllort positions
[4.a.1. Bought puts
I
14.a .2. Written calls
II
14.b Long positions
1/
14.b 1. Bought calls
II
II
14.b.2. Written puts
I
0
II
II
II
I
1\
II
I
II
II
0
I
II
II
"II
Notes:
11 Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account
(SOMA), valued at current market exchange rates. Foreign currency holdings listed as securities reflecl marked-lo-market values, and
deposits reflect carrying values. Foreign Currency Reserves for the latest week may be subject to revision. Foreign Currency
Reserves for the prior week are final.
21 The items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF and are
valued in dollar terms at the official SDR/dollar exchange rate for the reporting date. The entries for the latest week reflect any
necessary adjustments, including revaluation, by the U.S. Treasury to IMF data for the prior month end.
31 Gold stock is valued monthly at $42.2222 per fine troy ounce.
~11D://WWw.treasgov/press/releasesI2006B17112625778.htm
2/1/2006
Page 1 0[2
January 4, 2006
js-3069
Treasury Employs Financial Sanctions Against WMD Proliferation Supporters
in Iran
The U.S. Department of the Treasury today designated two Iranian entities, Novin
Energy Company and Mesbah Energy Company, for their support of the
proliferation of weapons of mass destruction (WMD). The designation and
accompanying asset freeze is administered by the Treasury's Office of Foreign
Assets Control.
"Identifying and designating supporters of WMD proliferation disrupts the networks
that are vital to illicit weapons programs," said Stuart Levey, Treasury's Under
Secretary for Terrorism and Financial Intelligence (TFI). "We will continue to expose
and isolate the individuals and entities that facilitate these networks."
Today's action was taken pursuant to Executive Order 13382, an authority aimed at
freezing the assets of proliferators of weapons of mass destruction (WM D) and their
supporters and prohibiting transactions and trade with those designated entities.
Designation under this Order prohibits all transactions between the designated
entities and any U.S. person and freezes any assets the entities may have located
under U.S jurisdiction.
Navin Energy Company and Mesbah Energy Company met the criteria for
designation because they are owned or controlled by, or act or purport to act for or
on behalf of the Atomic Energy Organization of Iran (AEOI), which was designated
in the Annex of E.O. 13382 on June 29, 2005.
Novin has transferred millions of dollars on behalf the AEOI to entities associated
with Iran's nuclear program. Novin operates within the AEOI. and shares the same
address as the AEOI.
Mesbah is a state-owned company subordinate to the AEOI. Through its role as a
front for the AEOI, Mesbah has been used to procure products for Iran's heavy
water project. Heavy water is essential for Iran's heavy-water-moderated reactor
project, which will provide Iran a potential source of plutonium well-suited for
nuclear weapons. Heavy water is believed to have no credible use In Iran's civilian
nuclear power program, which is based on light-water reactor technology.
The designations announced today are part of the ongoing interagency effort by the
United States Government to combat WMD trafficking by blocking the property of
entities and individuals that engage in proliferation activities and their support
networks.
Today's action builds on President Bush's issuance of E.O. 13382 on June 29,
2005. Recognizing the need for additional tools to combat the proliferation of WMD,
the President signed the E.O. authorizing the imposition of strong financial
sanctions against not only WMD proliferators, but also entities and individuals
providing support or services to them. The E.O. carried with it an annex that
designated eight entities operating in North Korea, Iran, and Syria for their support
of WMD proliferation.
The Treasury designated eight additional North Korean entities on October 21,
2005, pursuant to EO 13382 These entities were owned or controlled by, or act or
purport to act for or on behalf of KOMID and Korea Ryonbong General Corporation.
which were also included in the June 2005 Annex.
-30-
lltp:/IWWw.treas ...gov/press!releases/Js3069 htm
2/112006
Page 1 of 1
January 5, 2006
js-3070
Treasury Officials to Travel to New York, South Carolina, Georgia, and
Arizona to Discuss Economic Growth
Treasury Officials will travel to New York, South Carolina, Georgia, and Arizona this
week to discuss President Bush's agenda for a strong and vibrant economy.
"There is a lot of very good news to talk about when it comes to the American
economy. We're growing at a steady pace, and the benefits of that economic
growth are touching more Americans every day. From record levels of home
ownership to the creation of four and a half million new jobs, the economic news
continues to paint a clear picture: that the opportunities created by lower taxes and
sound monetary policy have helped the American economy grow and maintain its
position as the envy of the world," said Secretary John Snow.
The following events scheduled for Friday, January 6, are open to the press:
Assistant Secretary for Financial Institutions Emil Henry Jr.
Remarks at breakfast hosted by the Greater Columbia Chamber of Commerce
Wilbur Smith Tower, Summit Club, 20 th floor
Grevais at Sumter Streets
Columbia, South Carolina
745 a.m. EST
• Media please contact Renee Joy at (803) 733-1152 or
RJoe@columt)iachamber.com to register for the event.
Deputy Secretary Robert M. Kimmitt
Roundtable discuss'lon hosted by Georgia State University Business School
Commerce Club
34 Broad Street, NW, 18 th floor, Bennett Brown Room
Atlanta, Georgia
12:30 p.m. EST
U,S. Treasurer Anna Escobedo Cabral
Remarks on Economic Growth and Financial Education
Arizona State University
Memorial Union. Alumni Lounge
Tempe, Arizona
1:00 p.m. MST
-30-
1!tp:IIWWw,treas.gov/press/releases/js3070.lJtm
2/112006
Page 1 of 4
10 view or pont tne PUr content on tnlS page. C1ownloaa me tree AOObev<) l\crobarfi HeaC1err"J
January 5, 2006
JS-3071
The Honorable John W. Snow Prepared Remarks to The National Chamber
Foundation's Outlook 2006: The State of American Business
Thank you, Tom, and thank you to the Chamber Foundation for having me here
today. This is an important meeting and I welcome the chance to cap your day of
economic discussions with my perspective on the American economy, in particular
a look at its foundation - the fundamentals that it's built on, and, therefore, foretell
our economic future.
But I want to start out by quoting something that columnist Robert Samuelson wrote
in the Washington Post yesterday. It was something that struck me as being quite
true. He said that all the good economic news - both nationally and internationally is "bad news for the news business."
I think that's right; it's an interesting, if ironic, point. A good economy doesn't make
for very exciting news stories. The press may find this economy of ours to be
downright boring. Well, I want to emphasize today that I don't find it boring - I'm
betting business owners don't find it boring either - and I'm quite sure that the
hundreds of thousands of people who are finding new jobs every month don't find it
boring at all. Rather, it is a reason for optimism.
Over the past two to three years, economic indicators have been a steady
drumbeat of good news. It's really amaZing to look back on the past five years.
When President Bush took office just five years ago he was inheriting an economy
in decline. The bursting of the stock market bubble pushed the economy into
recession and then the terrible shock of September 11 th made economic matters
even worse.
Thanks to responsible economic leadership from the President and Federal
Reserve Board, our economy is now unmistakably in a trend of expansion. GOP
growth is averaging over four percent annually. Four and a half million new jobs
have been created since May of 2003, 2 million of them in the last year alone.
Unemployment is running lower than the 1970s, 19805 and 19905, U.S. equity
markets are rising, and household wealth is at an all-time high.
The U.S. is the picture of economic health and we remain, as the President often
notes, the economic envy of the world.
When we dig deeper into this picture - when we look at the underlying
fundamentals of the economy, its strength makes even more sense, and we can
see that businesses and workers have every reason to be optimistic about the
future.
For example, we see that productivity growth remains strong. Output per hour in
the non-financial corporate sector is up 4.7 percent versus last year.
Consumer net worth - that's assets minus debts - is a record high, and not just
because of housing. Deposits - the money in checking accounts, savings accounts,
and money market funds - are at a record high and are larger as a share of
disposable income than at any time since 1993.
In the past two years, the economy has generated about 170,000 jobs per month,
and that includes the two-month slowdown in job growth in the aftermath of
Hurricanes Katrina and Rita.
http://WWw.trea~.gov/press/releases/js307l.htm
2/112006
Page 2 of4
Core inflation remains low, and that's good news for everyone.
It is also noteworthy that new orders for non-defense capital goods are up 20
percent versus last year. This tells us that the capacity of American businesses to
produce in the future is rising. Meanwhile, the capacity utilization rate is 80.2
percent, which is below the level that in the past has boen associated with rising
inflation. In other words, American businesses are increasing capacity and at the
same time have room to more intensively use the capacity they have, suggesting
low inflation in the future plus pent-up demand for labor.
Independent private-sector forecasts point to continuing good news. For 2006, they
predict a nice increase in real wages. Inflation-adjusted hourly wages are in fact
already beginning their rise, growing 1 percent in November and 0.5 percent in
October.
We are, right now, likely witnessing the tipping point on wages - when incomes rise
for workers and business combined, but workers once again increase their incomes
faster than businesses. As employers, you are familiar with the scenario: once
businesses have been doing well for a while, they ultimately compete those
increases In income away by competing harder for labor. The result is higher wages
and higher standards of living for workers.
Both on leading indicators and a deeper background analysis, the American
economy proves to be on solid footing. The question that business and government
should look at is this: why is our economy performing so well and what can we do to
continue these positive trends?
Put in the simplest of terms, you - the business community - create the jobs,
develop the new products and services and so on. And we - the government - are
responsible for creating an environment in which you can succeed.
The Federal Reserve has added to a favorable environment by implementing sound
monetary policy. And there can be no doubt that the President's economic policies
of lower taxes on income and capital have given both businesses and individuals
the room they needed to grow and prosper.
The approach of this administration has been to implement the type of policies that
have always, historically, enabled this nation to thrive. Ours is a country that is
unique in its freedoms and we owe our prosperity to those freedoms. The simple
fact that we operate as a free market is central to our success. The U.S. has tended
to encourage small-business ownership, innovation and entrepreneurship, and
that's essential for a thriving economy. Policies that let entrepreneurs and workers
simply do what they do best have always enabled our economy to be more open,
flexible, adaptive and resilient than any other in the world.
The President's tax cuts tapped into this proven, and I think uniquely American,
economic theory on promoting growth, and effectively lightened the burden on
individuals and businesses, leaving you to spend and invest, grow and create jobs.
The reduced burden especially lowered the cost of capital and encouraged
investment - the lifeblood of a free market economy. And as you are well aware,
there is a risk right now that taxes on investment and job creation could be raised.
That would be a terrible mistake, given the economic success that lower rates
precipitated.
With more Americans working than ever before, more Amencans owning stock than
ever before and with federal tax revenues at an all-time high to boot, there is simply
no reason for the Congress to accept a tax increase from the Congress. And I'm
confident the President won't accept one, period.
But this fight to keep taxes low on business, families and individuals will take an
extra effort from you and our friends on the Hill. They've got to make all of the
President's tax cuts permanent; letting them expire would be a tax increase - there
is simply no other way to put it And tax increases would be bad for the economy,
bad for every American who still needs a job or seeks a better job.
http://WWw.treas.sov/press/releases/js3071.htm
2/112006
Page 3 of 4
It quite frankly baffles me that a tax increase would be advocated by some when
the success of lower taxes is so evident. Opponents of the original tax cuts used to
argue that federal revenues would be at risk, that the President's plan was
"reckless" and wouldn't create jobs.
Well, their arguments about job creation were certainly wrong. And the facts since
2003 have shown that the economic growth spurred by the President's tax policies
have significantly swelled government coffers as well, rendering the federal revenue
argument moot.
According to our own Treasury estimates, the lower tax rate on dividends and
capital gains will ultimately increase national output by $35 billion. This is
significant because it illustrates the real paint of these policies: they increase
savings and investment, increase labor productivity through this higher capital
formation, and, ultimately, increase jobs, the size of our economy and raise livings
standards.
We still have a federal budget deficit - one that is too large and that the President is
firmly committed to reducing. But our deficits are not the result of lower receiptstax revenues are coming in strong. Deficits matter and one of our highest priorities
is to achieve the President's goal of reducing our deficit in half to below 2.3 percent
of GOP by 2009. Even in the face of increased costs to deal with last summer's
hurricanes, I am confident that we will achieve this goal through spending restraint
and continued economic growth.
Good news on spending restraint came before the holidays, with final approval in
Congress of the FY2006 budget bills The President worked with Congress to
reduce non-security discretionary spending below last year's level, terminate or
reduce funding for 89 lower-priority or poor-performing programs, and rein in
mandatory spending for the first time in nearly a decade.
The prescription for the near future, for our economy, is straightforward: if we keep
on doing what we're doing, policy-wise, we should keep getting what we're getting in this case, excellent economic growth, millions of new jobs and a deficit that is in
decline.
Can we do even better? You bet. Policies that reduce the number of baseless
lawsuits would be a great way to further free-up business and entrepreneurs to
produce and create jobs And I know how much the cost of energy impacts your
business. The President understands that, and it's why he fought so hard for last
year's historic energy bill. There's work ahead on energy issues, and a reduced
dependency on foreign sources is at the top of the President's energy agenda.
The President also appreciates the drag that excessive regulation can put on
business, and therefore on job creation and innovation. That's why he tasks his
cabinet with taking a close look at their agencies, at their regulations, and making
sure that the benefits and protections of regulation are achieved without putting an
undue hardship on you. We want you to be able to do what you do best, and that's
create jobs. So there's a balance to achieve on regulation, and this entire
administration is dedicated to achieving that balance.
Similar in some ways to excessive regulation is excessive complexity in our tax
code. The code is not where it should be. After nearly three years as Treasury
Secretary I have yet to find anyone who is happy with the tax code - unless you are
in the tax preparation business, that is. Just to navigate it, millions of Americans
have to enlist professional help. I know you've heard - and lived - the statistics billions of hours of paperwork for tax filers and businesses, $140 billion dollars in
lost time and money just trying to comply with our increasingly unwieldy tax code.
This is a drag on economic growth in America and an unnecessary burden we all
share.
The President's Tax Reform Panel did excellent work under the leadership of the
two co-chairmen, former Senators John Breaux and Connie Mack, and we're
reviewing their proposals now. We only get the chance to reform the code every
twenty years or so, so we've got \0 make sure it's done right. We're not going to
rush the reform process because America deserves a tax code that meets the
President's goals for fairness, simplicity, and economic growth.
lIto:IIWWw.treas,g\'>v/press/releases/js3071.fum
2/1/2006
Page 40f4
The rising cost of health care is another critical issue that I know you all deal with
every day, and we still need common-sense medical liability reform to help address
those costs.
The creation of Health Savings Accounts two years ago was an important step
toward reducing costs and increasing the availability of health insurance. Today,
over a million Americans - a large portion of whom were previously uninsured -are
enjoying access to more affordable health care because of the tax advantages and
savings benefits of HSAs, and I encourage all employers and individuals to
consider them as an attractive alternative to traditional health insurance.
For the longer term, we have economic issues that loom and the sooner we
address them, the better. The President did the right thing by leading on Social
Security reform. We appreCiate your support for it. It remains the right thing to do.
I also appreciate. and share, the concern of this group when it comes to the skills
and preparation of the American workforce. The need for American workers to
remain competitive with the workforce of the world is essential. and it's one of the
motivating forces behind the President's Community-Based Job Training Initiative,
which has provided $125 million in grants to community colleges. This
administration believes that institutions that have a track record of success, offer a
flexible curriculum and provide training for jobs that actually exist should receive
federal monies. Congress needs to continue funding job training programs so that
American workers can learn better skills and, ultimately, earn bigger paychecks.
Our workers are already competing with workers all around the globe, and when the
playing field is level both our workforce and our businesses will always prove
themselves. That's why a level playing field is central to the President's free and fair
trade agenda. This underscores the importance of the Doha trade round which has
the potential to boost American jobs by reducing and eliminating tariffs and other
barriers on farm and industrial goods. ending unfair subsidies and opening the
global market to American services. The U.S. will push for a bold, wide-ranging
agreement, and the President will continue to use the American influence to bring
American workers even greater opportunities. With 95 percent of America's
potential customers living abroad, opening up new markets is extremely important.
I would never advise anyone to bet against the American worker, American
business or the American economy overall. When businesses. families and
individuals are allowed to pursue their goals - with opportunities to invest and enjoy
the rewards of innovation. risk-taking and entrepreneurship - our economy is
incredibly resilient and powerful.
Again, I appreCiate the chance to talk with you today about the prospects for our
economy. I look forward to taking your questions.
END
REPORTS
•
(PDF)The Honosablc John W. Snow [lrepa~ed Remarks to ThELNaJional
Chamber Foundation's Outlook 2006: The Stato of American Business
:IIwww.treas.s.Ov/press/releases/js3071.htm
211/2006
DEPARTMENT OF THE TREASURY
OFFICE OF PUBLIC AFFAIRS
For Immediate Release
January 5, 2006
CONTACT:
Tony Fratto
(202) 622-2910
The Honorable John W. Snow
Prepared Remarks to
The National Chamber Foundation's Outlook 2006: The State of American Business
Thank you, Tom, and thank you to the Chamber Foundation for having me here today.
This is an important meeting and I welcome the chance to cap your day of economic
discussions with my perspective on the American economy, in particular a look at its
foundation - the fundamentals that it's built on~ and, therefore, foretell our economic
future.
But I want to start out by quoting something that columnist Robert Samuelson wrote in
the Washington Post yesterday. It was something that struck me as being quite true. He
said that all the good economic news - both nationally and internationally - is "bad news
for the news business."
I think that's right; it's an interesting, if ironic, point. A good economy doesn't make for
very exciting news stories. The press may find this economy of ours to be downright
boring. Well, I want to emphasize today that I don't find it boring - I'm betting business
owners don't find it boring either - and I'm quite sure that the hundreds of thousands of
people who are finding new jobs every month don't find it boring at all. Rather, it is a
reason for optimism.
Over the past two to three years, economic indicators have been a steady drumbeat of
good news. It's really amazing to look back on the past five years. When President Bush
took office just five years ago he was inheriting an economy in decline. The bursting of
the stock market bubble pushed the economy into recession and then the terrible shock of
September 11 th made economic matters even worse.
Thanks to responsible economic leadership from the President and Federal Reserve
Board, our economy is now unmistakably in a trend of expansion. GOP growth is
averaging over four percent annually. Four and a half million new jobs have been created
since May of2003, 2 million of them in the last year alone. Unemployment is running
lower than the 1970s, 1980s and 1990s, U.S. equity markets are rising, and household
wealth is at an all-time high.
The U.S. is the picture of economic health and we remain, as the President often notes,
the economic envy of the world.
When we dig deeper into this picture - when we look at the underlying fundamentals of
the economy, its strength makes even more sense, and we can see that businesses and
workers have every reason to be optimistic about the future.
For example, we see that productivity growth remains strong. Output per hour in the
non-financial corporate sector is up 4.7 percent versus last year.
Consumer net worth - that's assets minus debts - is a record high, and not just because of
housing. Deposits - the money in checking accounts, savings accounts, and money
market funds - are at a record high and are larger as a share of disposable income than at
any time since 1993.
In the past two years, the economy has generated about 170,000 jobs per month, and that
includes the two-month slowdown in job growth in the aftermath of Hurricanes Katrina
and Rita.
Core inflation remains low, and that's good news for everyone.
It is also noteworthy that new orders for non-defense capital goods are up 20 percent
versus last year. This tells us that the capacity of American businesses to produce in the
future is rising. Meanwhile, the capacity utilization rate is 80.2 percent, which is below
the level that in the past has been associated with rising inflation. In other words,
American businesses are increasing capacity and at the same time have room to more
intensively use the capacity they have, suggesting low inflation in the future plus pent-up
demand for labor.
Independent private-sector forecasts point to continuing good news. For 2006, they
predict a nice increase in real wages. Inflation-adjusted hourly wages are in fact already
beginning their rise, growing I percent in November and 0.5 percent in October.
We are, right now, likely witnessing the tipping point on wages - when incomes rise for
workers and business combined, but workers once again increase their incomes faster
than businesses. As employers, you are familiar with the scenario: once businesses have
been doing well for a while, they ultimately compete those increases in income away by
competing harder for labor. The result is higher wages and higher standards of living for
workers.
2
Both on leading indicators and a deeper background analysis, thc American economy
proves to be on solid footing. The question that business and government should look at
is this: why is our economy perfomling so well and what can we do to continue these
positive trends?
Put in the simplest of terms, you - the business community - create the jobs, develop the
new products and services and so on. And we - the government - are responsible for
creating an environment in which you can succeed.
The Federal Reserve has added to a favorable environment by implementing sound
monetary policy. And there can be no doubt that the President's economic policies of
lower taxes on income and capital have given both businesses and individuals the room
they needed to grow and prosper.
The approach of this administration has been to implement the type of policies that have
always, historically, enabled this nation to thrive. Ours is a country that is unique in its
freedoms and we owe our prosperity to thosc freedoms. The simple fact that we operate
as a free market is central to our success. The U.S. has tended to encourage smallbusiness ownership, innovation and entrepreneurship, and that's essential for a thriving
economy. Policies that let entrepreneurs and workers simply do what they do best have
always enabled our economy to be more open, flexible, adaptive and resilient than any
other in the world.
The President's tax cuts tapped into this proven, and I think uniquely American,
economic theory on promoting growth, and effectively lightened the burden on
individuals and businesses, leaving you to spend and invest, grow and create jobs.
The reduced burden especially lowered the cost of capital and encouraged investment the lifeblood of a free market economy. And as you are well aware, there is a risk right
now that taxes on investment and job creation could be raised. That would be a terrible
mistake, given the economic success that lower rates precipitated.
With more Americans working than ever before, more Americans owning stock than ever
before and with federal tax revenues at an all-time high to boot, there is simply no reason
for the Congress to accept a tax increase from the Congress. And I'm confident the
President won't accept one, period.
But this fight to keep taxes low on business, families and individuals will take an extra
effort from you and our friends on the Hill. They've got to make all of the President's tax
cuts permanent; letting them expire would be a tax increase - there is simply no other
way to put it. And tax increases would be bad for the economy, bad for every American
who still needs a job or seeks a better job.
It quite frankly baffles me that a tax increase would be advocated by some when the
success of lower taxes is so evident. Opponents of the original tax cuts used to argue that
3
federal revenues would be at risk, that the President's plan was "reckless" and wouldn't
create jobs.
Well, their arguments about job creation were certainly wrong. And the facts since 2003
have shown that the economic growth spurrcd by the President's tax policies have
significantly swelled government coffers as well, rendering the federal revenue argument
moot.
According to our own Treasury estimates, the lower tax rate on dividends and capital
gains will ultimately increase national output by $35 billion. This is significant because
it illustrates the real point of these policies: they increase savings and investment,
increase labor productivity through this higher capital formation, and, ultimately, increase
jobs, the size of our economy and raise livings standards.
We still have a federal budget deficit - one that is too large and that the President is
firmly committed to reducing. But our deficits are not the result oflower receipts - tax
revenues are coming in strong. Deficits matter and one of our highest priorities is to
achieve the President's goal of reducing our deficit in half to below 2.3 percent ofGDP
by 2009. Even in the face of increased costs to deal with last summer's hurricanes, I am
confident that we will achieve this goal through spending restraint and continued
economic growth.
Good news on spending restraint came before the holidays, with final approval in
Congress of the FY2006 budget bills. The President worked with Congress to reduce
non-security discretionary spending below last year's level, terminate or reduce funding
for 89 lower-priority or poor-performing programs, and rein in mandatory spending for
the first time in nearly a decade.
The prescription for the near future, for our economy, is straightforward: if we keep on
doing what we're doing, policy-wise, we should keep getting what we're getting - in this
case, excellent economic growth, millions of new jobs and a deficit that is in decline.
Can we do even better? You bet. Policies that reduce the number of baseless lawsuits
would be a great way to further free-up business and entrepreneurs to produce and create
jobs. And I know how much the cost of energy impacts your business. The President
understands that, and it's why he fought so hard for last year's historic energy bill.
There's work ahead on energy issues, and a reduced dependency on foreign sources is at
the top of the President's energy agenda.
The President also appreciates the drag that excessive regulation can put on business, and
therefore on job creation and innovation. That's why he tasks his cabinet with taking a
close look at their agencies, at their regulations, and making sure that the benefits and
protections of regulation are achieved without putting an undue hardship on you. We
want you to be able to do what you do best, and that's create jobs. So there's a balance to
achieve on regulation, and this entire administration is dedicated to achieving that
balance.
4
Similar in some ways to excessive regulation is excessive complexity in our tax code.
The code is not where it should be. After nearly three years as Treasury Secretary I have
yet to find anyone who is happy with the tax code - unless you are in the tax preparation
business, that is. Just to navigate it, millions of Americans have to enlist professional
help. I know you've heard - and lived - the statistics - billions of hours of paperwork for
tax filers and businesses, $140 billion dollars in lost time and money just trying to
comply with our increasingly unwieldy tax code. This is a drag on economic growth in
America and an unnecessary burden we all share.
The President's Tax Reform Panel did excellent work under the leadership of the two cochairmen, former Senators John Breaux and Connie Mack, and we're reviewing their
proposals now. We only get the chance to reform the code every twenty years or so, so
we've got to make sure it's done right. We're not going to rush the reform process
because America deserves a tax code that meets the President's goals for fairness,
simplicity, and economic growth.
The rising cost of health care is another critical issue that I know you all deal with every
day, and we still need common-sense medical liability reform to help address those costs.
The creation of Health Savings Accounts two years ago was an important step toward
reducing costs and increasing the availability of health insurance. Today, over a million
Americans - a large portion of whom were previously uninsured -are enjoying access to
more affordable health care because of the tax advantages and savings bencfits of HSAs,
and I encourage all employers and individuals to consider them as an attractive
alternative to traditional health insurance.
For the longer term, we have economic issues that loom and the sooner we address them,
the better. The President did the right thing by leading on Social Security reform. We
appreciate your support for it. It remains the right thing to do.
I also appreciate, and share, the concern of this group when it comes to the skills and
preparation of the American workforce. The need for American workers to remain
competitive with the workforce of the world is essential, and it's one of the motivating
forces behind the President's Community-Based Job Training Initiative, which has
provided $125 million in grants to community colleges. This administration believes that
institutions that have a track record of success, offer a flexible curriculum and provide
training for jobs that actually exist should receive federal monies. Congress needs to
continue funding job training programs so that American workers can learn better skills
and, ultimately, earn bigger paychecks.
Our workers are already competing with workers all around the globe, and when the
playing field is level both our workforce and our businesses will always prove
themselves. That's why a level playing field is central to the President's free and fair
trade agenda. This underscores the importance of the Doha trade round which has the
potential to boost American jobs by reducing and eliminating tariffs and other barriers on
5
fann and industrial goods, ending unfair subsidies and opening the global market to
American services. The U.S. will push for a bold, wide-ranging agreement, and the
President will continue to use the American influence to bring American workers even
greater opportunities. With 95 percent of America's potential customers living abroad,
opening up new markets is extremely important.
I would never advise anyone to bet against the American worker, American business or
the American economy overall. When businesses, families and individuals are allowed to
pursue their goals - with opportunities to invest and enjoy the rewards of innovation,
risk-taking and entrepreneurship - our economy is incredibly resilient and powerful.
Again, I appreciate the chance to talk with you today about the prospects for our
economy. I look forward to taking your questions.
END
6
Page 1 of 1
January 5, 2006
js-3072
Under Secretary Adams to meet with Local Financial Officials and Business
Leaders in Frankfurt, Paris and Tunis
Treasury's International Affairs Under Secretary Tim Adams will travel next week to
Frankfurt, Germany; Paris, France and Tunis, Tunisia to meet with local economic
officials and business leaders.
Under Secretary Adams will be in Frankfurt on Jan. 9 to meet with representatives
from the financial sector as well as European Central Bank officials. On Jan. 10 he
will participate in the WP3 meetings at the OEeD in Paris to discuss the global
economic outlook. The following day, Adams will travel to Tunis for a two-day visit
to discuss African development and trade issues with economic officials including
African Development Bank President Donald Kaberuka. Tunisian Minister of
Development and International Cooperation Mohamed Nouri Jouini, and
ambassadors from other African countries.
-30-
1to~/WWw.treas.&ov/press/releases/js3072.liItm
2/1/2006
Page 1 of 1
January 6, 2006
JS-3073
The Honorable John W. Snow Statement on December Employment Report
"The year 2005 was a very good one indeed for the 2 million Americans who found
new jobs. Today's employment report is the latest indication that the American
economy is firing on all cylinders. Before the hurricanes that hit us so hard this fall,
the U.S. economy was generating about 200,000 jobs per month. After two months
affected by the weather - September and October - it appears we have regained
that pace, creating over 400,000 jobs in the past two months. I also note that we
have enjoyed 31 straight months of job growth and, during that time, have added
more than 4.6 million jobs.
"As we begin 2006, we have every reason to be optimistic that this economy - the
most flexible, resilient and robust in the world - will continue to grow and create
good jobs. The private sector, particularly America's entrepreneurs and small
businesses, will continue to be the eng'lne of the economy as long as government
continues to give them the freedom they need to do so Making the President's tax
cuts permanent is the most important thing we can do in the coming months to
make sure the economic environment in 2006 is as healthy, and as good for jobseekers, as it was in 2005."
END
ttp1/WWw.treas.~ovIpress/releases/j s3 073 .ntm
211/2006
Page 1 of 1
January 10,2006
JS-3074
MEDIA ADVISORY:
Press Roundtable on the Release of the
Money Laundering Threat Assessment
Please join senior U.S. Government officials for a press roundtable on the release
of the Money Laundering Threat Assessment (ML TA), the first government-wide
analysis of money laundering trends and vulnerabilities in the United States.
WHO: Senior law enforcement, regulatory, and policymaking officials from offices
and bureaus within the Departments of Treasury, Justice, Homeland Security, the
Board of Governors of the Federal Reserve System and the U.S. Postal Service
WHAT: Press Roundtable
WHEN: Wednesday, January 11 at 10:45 a.m.
10:45 AM EST
WHERE: Department of the Treasury, Cash Room (use north entrance)
**No cameras, please.
Media without Treasury press credentials (including media with White House
credentials) planning to attend should contact Frances Anderson in Treasury's
Office of Public Affairs at (202) 528-9086 or e-mail to
fr,,"-ce~.anderson@do.treas ..9ov. Please be prepared to provide her with the
following information full name, social security number and date of birth by 5:00 pm
EST on Tuesday, January 10.
tlMWWw ,treas.gov/press/releases/js3074.tttm
211/2006
Page 1 of2
January 11, 2006
2006-1-11-9-28-18-27 487
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 $65,995 million as of the end of that week, compared to $64,4 73 million as of the end of the prior week.
I. Official U.S. Reserve Assets (in US millions)
December 30, 2005
TOTAL.!II
I
11. Foreign Currency Reserves
1
II
Euro
I
I
11,060
I
I
I
10,549
a. Securities
Of which, issuer headquartered in the U. S.
I
II
65,995
Yen
II
TOTAL
II
21,849
II
0
II"
II
II
15,784
II
II
10,789
II
b. Total deposits with:
b.i. Other central banks and BIS
b.ii. Banks headquartered in the U.S.
b.iL Of which, banks located abroad
II
II
II
5,235
0
I
0
b.iii. Banks headquartered outside the U. S.
0
b.iii. Of which, banks located in the U.S.
0
2. IMF Reserve Position 2
"
II
Euro
Yen
11,365
11,113
II"
"
11,114
I
II
II
II
II
5,392
II
TOTAL
II
II"
22,478
II
II
I
16,506
II
0
II
0
7,669
3. Special Drawing Rights (SORs) 2
14. Gold Stock 3
15. Other Reserve Assets
I
I
II
8,130
II
I
II
II
I
January 6, 2005
II
64,473
I
0
0
7,752
I
II
II"
II"
11,041
0
0
I
I
I
II
8,218
"
11,041
II
0
II
"
"
II. Predetermined Short-Term Drains on Foreign Currency Assets
[
Decembec30, 2005
1. Foreign currency loans and securities
II
I
II
Euro
II
II
Yen
January 6, 2005
II
II
TOTAL
II
0
Euro
"II
II
II
Yen
II
I
TOTAL
I
I
0
2. Aggregate short and long positions in forwards and futures in foreign currencies vis-a-vis the U.S. dollar:
[a. Short positions
II
II
II
[b. Long positions
[ Other
[
II
II
II
0
II
II
II
0
I
0
I
0
II
0
I
I
0
I
III. Contingent Short-Term Net Drains on Foreign Currency Assets
1. Contingent liabilities in foreign currency
1.a. COllateral guarantees on debt due within 1
year
I
January 6, 2005
December 30, 2005
II
I
I
I
Euro
I
II
II
II
1tn://WWw.treas.SUv/press/releasesI20061tJ9281827487.htm
Yen
I
II
II
1\
TOTAL
Euro
I
Yen
I
0
TOTAL
0
II
I
II
I
I
211/2006
Page 20f2
11.b. Other
contingent liabilities
2. Foreign currency securities with embedded
options
3. Undrawn, unconditional credit lines
[3a With other central banks
I
I
I
II
I
3.b With banks and other financial institutions
(HeadqUartered in the U. S.
Ie. With banks and other financial institutions
(Headquartered outside the U. S.
4. Aggregate short and long positions of options
in foreign
I
[Currencies vis-a-vis the U.S. dollar
II
[4.a Short positions
[4.a.1. Bought puts
II
II
14.a2. Written calls
I
I
II
II
II
II
II
.b.1. Bought calls
.b.2. Written puts
0
II
II
II
II
II
II
II
I
1\
II
II
II
II
II
II
II
II
II
0
\I
II
II
II
I
I
I
0
0
I
I
I
I
I
I
II
II
I
I
I
II
II
I
I
I
I
II
II
II
I
II
II
II
II
II
II
I
I
I
I
.b. Long positions
0
I
II
I
I
0
II
I
I
I
II
I
II
Notes:
11 Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account
(SOMA). valued at current market exchange rates. Foreign currency holdings listed as securities reflect marked-to-market values, and
deposits reflect carrying values. Foreign Currency Reserves for the latest week may be subject to revision. Foreign Currency
Reserves for the prior week are final.
21 The items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF and are
valued in dollar terms at the official SDR/doliar exchange rate for the reporting date. The entries for the latest week reflect any
necessary adjustments, including revaluation, by the U.S. Treasury to IMF data for the prior month end.
31 Gold stock is valued monthly at $42.2222 per fine troy ounce.
1tJl1/WWw.treas.~ov/press/releases/20061t19281827487.htm
2/1/2006
Page 1 of 1
January 11, 2006
JS-3075
Secretary Snow Names Bureau of Engraving and Printing Director
Treasury Secretary John W. Snow named Larry R Felix as the director of
Treasury's Bureau of Engraving and Printing (BEP). The Bureau produces U.S.
currency and other government securities and documents at its two facilities in
Washington, D.C., and Fort Worth, Texas.
As BEP director, Felix will work to meet the challenges of the advancements in
technology that pose evolving threats to our nation's currency and other security
documents - to stay ahead of counterfeiters, and to protect the integrity of U.S.
currency In addition, Felix will work to ensure that the bureau's resources are
appropriate to meet requirements of customer agencies.
A 23-year career Treasury employee, Felix has spent the last 13 years at BEP most
recently as Deputy Director. He previously served as BEP's associate director
(technology) and chief of external relations. He also chaired the Inter-agency
Currency Design (ICD) taskforce, a group responsible for recommending technical
enhancements to U.S. currency design.
Felix has degrees from the New York City College of Technology and the City
College of New York and did PhD work at Columbia University. Born in Port of
Spain, he grew up in New York City and currently resides with his wife and two
daughters in Virginia.
Ittp:I/WWw.treasgov/press/releases/js307~.htm
2/112006
Page 1 of2
PRESS ROOM
10 view or pnnt (ne /-'ur- content on tnlS page, C1ownloaC1 the tree A(JOIJC("J ACrolJtJ[\h) Keaoer.><i.
January 12, 2006
js-3076
OFAC Releases Sanctions Enforcement Procedures for Banking Institutions
The U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC)
today published guidelines in the Federal Register titled "Economic Sanctions
Enforcement Procedures for Banking Institutions Regulated by FFIEC-member
Supervisory Agencies"
"As the administrator of U.S. economic sanctions, OFAC emphasizes in these
internal procedures that the primary goal of enforcement actions is to promote more
effective compliance within the particular institution, as well as throughout the
industry," said OFAC Director Robert Werner
The guidelines complement and expand upon OFAC's contribution to the Bank
Secrecy Act Anti-Money Laundering Examination Manual published by the Federal
Financial Institutions Examination Council on June 30, 2005.
The procedures spell out an institutional - rather than a transactional - approach to
enforcement, taking into account risk-based efforts by financial institutions to
ensure OFAC compliance, as well evaluating violations that appear to have
occurred.
"OFAC recognizes the uniqueness of every inslitution's compliance program and
how each program must be geared toward the size of a bank's accounts, its
business volume, its customer base, and its product lines," Werner continued.
The procedures highlight OFAC's partnering with the functional bank regulators
who will receive information related to apparent violations and compliance concerns
as OFAC becomes aware of them. The regulators, in turn, will share with OFAC
their evaluations of the adequacy of banks' compliance programs.
OFAC will be reviewing apparent violations on a periodic basis in the context of
each institution's overall OFAC compliance program and specific OFAC compliance
record. The reviews will include such factors as:
•
•
•
The opinion of a bank's primary federal regulator:
The institution's history of OFAC compliance;
The circumstances surrounding any apparent violation, including any
patterns or weaknesses in an institution's compliance program and whether
those weaknesses indicate negligence or fundamental flaws:
• Whether violations were voluntarily disclosed:
• Enforcement information provided by the institution to OFAC:
• The number of transactions or accounts that the institution handled
improperly during the period under review and its responses to OFAC
administrative subpoenas;
• The number of transactions successfully blocked or rejected by the bank
during the period; and
• The actions taken by the bank to correct any violations and to ensure that
similar violations do not recur.
After evaluating the information, OFAC will contact the bank to convey a preliminary
assessment. OFAC's staff will discuss the results of its review, including any
patterns or compliance weaknesses and will indicate what administrative action
OFAC intends to take for each transaction or set of related transactions that appear
to constitute violations.
I!tpY/WWw.treas gov/press/releases/js3076.l:1tm
2/1/2006
Page 2 0[2
Once OFAC has reached a final decision, it will notify the institution in writing and
provide a copy of its evaluation letter to the institution's primary federal banking
regulator. In the event that OFAC notifies a bank of its mtent to pursue a civil
penalty, existing civil penalty procedures under OFAC regulations will be followed,
including the opportunity for informal settlement.
OFAC is soliciting comments for 60 days from the public about the new procedures,
including suggestions on how OFAC Enforcement Procedures might be made to
apply to state-regulated institutions, the insurance and securities industries, and the
import/export community.
A copy of the guidelines may be accessed here:
http://www .treas.govlofficcs/enforcemcntlofaCilegal/rogs/fr71 __ 1971.pdf
Those wishing to submit comments should visit one of the following:
•
•
The Federal eRulemaking Portal at http.l!www.regulations.gov
OF AC's website at
http://www .tre as£Jov Joffice sl enf orcementiofac/corn me nt. sh tm I
-30-
tp:I/WWw.treaF,~ov/press/releases/js3076 htm
2/1/2006
Federal Register/Vol. 71, No. S/Thursday, January 12, 200G/Rules and Regulations
party and that are incorporated by
reference as product terms.
(3)' * *
(iil * • •
(F) Securities Indexes. Routine
changes to the composition,
computation or method of security
selection of an index that is referenced
and defined in the product's rules, and
which are made by an independent
third party.
• 35. Section 40.7 is amended by adding
paragraphs (a)(3) and (b)(3) to read as
follows:
§40.7
Delegations.
(a) Procedural matters *
(3) The Commission hereby delegates
to the Director of the Division of Market
Oversight or to the Director's delegate,
with the concurrence of the General
Counselor the General Counsel's
delegate, the authority to determine
whether a rule change submitted by a
OCM for a materiality determination
under § 40.4(b)(9) is not material (in
which case it may be reported pursuant
to the provisions of § 40.6(c)), or is
material, in which case he or she shall
notify the DCM that the rule change
must be submitted for the Commission's
prior approval.
(b) Approval authority. * * *
(3) Establish or amend speculative
limits or position accountability
provisions that are in compliance with
the requirements of the Act and
Commission regulations;
.36. Section 40.8 is amended by
revising paragraph (b) to read as follows:
§40,8 Availability of public information.
*
(b) Any information required to be
made publicly available by a registered
entity under Sections 5(d)(7), 5a(d)(4)
a~d 5b[c)(2)(L) of the Act, respectively,
wIll be treated as public information by
the Commission at the time an order of
designation or registration is issued bv
the Commission, a registered entity is'
deemed to be deSignated or registered,
or a rule or rule amendment of the
registered entity is approved or deemed
to be approved by the Commission or
can first be made effective the day
following its certification by the
regIstered entity.
• 37. Appendix D to Part 40 is amended
by revising the first paragraph to read as
follows:
a designated contract market, registered
derivatives transaction execution
facility, or registered derivatives
clearillg organization to the Secretary of
the Commodity Futures Trading
Commission, at submissions@cftc.gov in
a format specified by the Secretary of
the Commission. Each submission
should include the following:
•
Issued in Washington, nc, this 5th day of
January, 200fl, by the Commission.
Jean A, Webb,
1971
after Februarv 17, 2006 and that are
subject to th~ 1997 regulations." is
corrected to read "on or after Februarv
17, 200G, and that are subject to the '
1997 regulations (defined in paragraph
(b)(l) of this section).".
Cynthia Grigsby,
Acting Chief, Publications and Regulations
Branch, Legal Processing Division, Associate
Chief COUI18P./, (Procedure and
Administration) .
IFR DDe. 06-250 Filed 1-11-06; 8:45
ami
BILLING CODe 4830-Dl-P
Secretary of the Commission.
IFR Doc. 06-242 Filed 1-11-06; 8:45 ami
BILLING CODe 6351-01-P
DEPARTMENT OF THE TREASURY
Office of Foreign Assets Control
DEPARTMENT OF THE TREASURY
31 CFR Part 501
Internal Revenue Service
Economic Sanctions Enforcement
Procedures for Banking Institutions
26 CFR Part 1
[TD 9234]
RIN 1545-AU98
Obligations of States and Political
Subdivisions; Correction
Internal Revenue Service (IRS),
Treasury.
ACTION: Correction to final regulations.
AGENCY:
SUMMARY: This document corrects final
regulations (TO 9234) that was
published in the Federal Register on
Monday, December 19, 2005 (70 FR
75028). The final regulations relates to
the definition of private activity bond
applicable to tax-exempt bonds issued
by State and local governments.
DATES: This correction is effective
February 17, 2006.
FOR FURTHER INFORMATtON CONTACT:
Johanna Som de Cerff, (202) 622-3980
(not a toll·free call).
SUPPLEMENTARY INFORMATION:
Background
The final regulations (TD 9234) that is
the subject of this correction is under
section 141 of the Internal Revenue
Code.
Need for Correction
As published, TO 9234 contains error
that may prove to be misleading and is
in need of clarification.
Correction of Publication
Appendix D to Part 40-Submission
Cover Sheet and Instructions
• Accordingly, the publication of the
final regulations (TD 9234), that was the
subject of FR Doc. 05-23944, is
corrected as follows:
A properly completed submission
cover sheet must accompany all rule
submissions submitted electronically by
• On page 75035, column 2, § 1.14115(j), lines 7 and 8, the language, "on or
§ 1.141-15
[Corrected]
AGENCY: Office of Foreign Assets
Control, Treasury.
ACTION: Interim final rule with request
for comments.
The Office of Foreign Assets
Control ("OFAC") of the U.S.
Department of the Treasury is issuing
this interim final rule, "Economic
Sanctions Enforcement Procedures for
Banking Institutions," along with a
request for comments. This interim final
rule supercedes OFAC's proposed rule
of January 29, 2003,1 to the extent that
the proposed rule applies to "banking
institutions," as defined below. These
administrative procedures are published
as an appendix to the Reporting,
Procedures and Penalties Regulations,
31 CFR Part 501.
DATES: The interim final rule is effective
for enforcement cases involving banking
institutions commencing on or after
February 13, 2006. Written comments
may be submitted on or before March
13, 2006.
ADDRESSES: You may submit comments
by any of the following methods:
• Federal eRulemaking Portal: http://
wW1N.regu}otions.gov. Follow the
instructions for submitting comments.
• Agency Web site: http://
WW»'.treos.gov/offices/enjorcement/
ojoc/comment.Mmi.
• Fax: Assistant Director of Records,
(202) 622-1657 .
• Mail: Assistant Director of Records,
ATTN: Request for Comments
(Enforcement Procedures), Office of
Foreign Assets Control, Department of
the Treasury, 1500 Pennsylvania
Avenue, NW., Washington, DC 20220.
SUMMARY:
168 FR 4422-4429 (200:1).
1972
Federal Register/Vol. 71, No. H/Thursrlay, January 12, 200n/Rules and Regulations
OFAC is also requesting comments on
this interim final rule.
In conjunction with issuing this
interim final rule, OF /\C is w'ithdrawing
the January 29, 2003 proposed rule to
the extent it applies to banking
institutions, as defined herein. For
purposes of this interim rule, "hanking
FOR FURTHER INFORMATION CONTACT:
institutions" means depository
Assistant Director of Records, (202)
institutions regulated or supervised by
622-2500 (not a toll-free call).
one of the regulators that belongs to the
SUPPLEMENTARY INFORMATION:
Federal Financial Institutions
Examination Council ("FFIEC"J. i.e., the
Electronic Availability
Board of Governors of the Federal
This document and additional
Reserve System, the Federal Deposit
information concerning OF AC are
Insurance Corporation, the National
available from OFAC's Web site
Credit
Union Administration, the Office
(http://www.treas.gov/ofac) or via
of the Comptroller of the Currency, and
facsimile through a 24-hour fax-onthe Office of Thrift Supervision. Please
demand service, tel.: 202/622-0077.
note that a depository institution may be
Procedural Requirements
a "banking institution," as that term is
defined in OFAC regulations, see, e.g.,
Because this interim final rule
31 CFR 500.314,515.314, but not a
imposes no obligations on any person,
"banking institution" for purposes of
but instead simply explains OF AC's
enforcement practices based on existing these enforcement procedures. Because
this interim final rule only applies to
substantive and procedural rules, prior
enforcement procedures for banking
notice and public procedure are not
required pursuant to 5 U.S,C 553(b)(A), institutions, as defined herein, OFAC
plans to issue guidance on its
Because no notice of proposed
enforcement procedures for other types
rulemaking is required, the provisions
of institutions and other sectors in the
of the Regulatory Flexibility Act (5
future.
U.S.C. chapter 6) do not apply. Finally,
OFAC is publishing enforcement
this interim final rule is not a significant
procedures for banking institutions
regulatory action for purposes of
because of their unique role in the
Executive Order 12866.
implementation of OFAC sanctions
Although a prior notice of proposed
programs and the nature of the
rulemaking is not required, OF AC is
transactions in which such institutiolls
soliciting comments on this interim
engage. The new enforcement
final rule in order to consider how it
procedures take into account that each
might make improvements in its
banking institution's situation is
enforcement procedures in the future.
different and that its compliance
Comments must be submitted in
program
should be tailored to its unique
writing. The addresses and deadline for
circumstances, This includes an
submitting comments appear near the
analysis of its size, business volume,
beginning of this notice. OF AC will not
customer base, and product lines.
accept comments accompanied by a
In order to implement this new
request that all or part of the submission
approach,
OF AC has been working and
be treated confidentially because of its
will continue to work in partnershi p
business proprietary nature or for any
with the federal banking regulators.
other reason. All comments received by
OF AC worked with FFIEC members to
the deadline will be a matter of public
develop standards to evaluate
record and will be made available on
compliance programs at banking
OF~C's Web site: http://www.treas.govl
institutions. In June 2005, the FFIEC
ojflces/enjarcementlofac/index.htmi.
released its Bank Secrecy Act AntiBackground
Money Laundering Examination
Manual. Portions of this mallual relate
On January 29, 2003, OFAC
published, as a proposed rule, Economic to compliance with various OFAC
sanctions programs. In addition,
Sanctions Enforcement Guidelines.
Though this proposed rule has not been working with FFIEC members, OFAC
has developed risk matrices, which lTlny
finalized, OF AC has used the
be used by depository institutions as
Guidelines as a general framework for
"best
practices." 2 The matrices provide
Its enforcement actions. OF AC has
a guide for evaluating a banking
decided that the enforcement
pro~edures with respect to banking
'These matrices can be found in Annex A to the
InstItutions should be modified and is
Interim final rule and can be accessed online at
publishing enforcement procedures for
http://www treas.govloft ices/en[oreemen tlo[aclfaq/
these entities as an interim final rule.
matnxpdf.
Instructions: All submissions received
must include the agency name and the
FR Doc. number that appears at the end
of this document. Comments received
will be posted without change to
http://www.treas.gov/o!ac, including
any personal information provided.
institlltion's risk of encountering
accounts or transactions subject to
OFAC regulations and for determining
the quality of an institution's
compliance program. As indicated in
the FFIEC examination manual, the
banking regulators evaluate a banking
institution's overall OFAC compliance
program using a similar methodology.
Also, in administering its enforcement
authority with respect to various
sanctions statutes, Executive orders, and
regulations, OFAC will provide the
federal banking regulators with
information related to apparent
violations or compliance concerns as it
becomes aware of them, In turn, OFAC
will receive information from the
banking regulators, including, for those
institutions with apparent violations,
evaluations of the sufficiency of each
such institution's implementation of
policies, procedures, and systems for
ensuring OFAC compliance.
Prior to taking enforcement actions,
OFAC generally will review apparent
violations by a particular institution
over a period of time, rather than
evaluating each apparent violation
independently, However, in regard to
what appears to be a particularly
egregious violation, OFAC may evaluate
the situation as it presents itself and
take prompt enforcement action.
Under the revised procedures, OFAC
will periodically evaluate a banking
institution's apparent OFAC-related
violations in the context of the
institution's overall OF AC compliance
program and specific OF AC compliance
record. OF AC will not conduct such a
review if there are no apparent
violations. The information reviewed
will include but not necessarily be
limited to: the evaluation of the banking
institution's OFAC compliance program
by its primary federal banking regulator;
the institution's history of OF AC
compliance; the circumstances
surrounding any apparent violation,
including what appear to be patterns Of
weaknesses in an institution's
compliance program and whether they
indicate negligence or a fundamental
flaw in the compliance effort or system
and whether they were voluntarily
disclosed; enforcement information
provided by the institution to OFAC; the
number of transactions or accounts that
the institution handled improperly
during the period under review and its
responses to any administrative
subpoenas that OF AC sent with regard
to those transadions or accounts; the
number of transactions successfully
blocked or rejected by the banking
institution during the period; the
actions taken by the banking institution
to correct any violations and to ensure
Federal Register / Vol. 71, No. 8/ Thursday, January 12, 2006/ Rules and Regulations
that similar violations do not happen
again; and other relevant i.nformation
available to OF AC at the time of the
evaluation.
After a review of apparent violations.
OFAC will contact the banking
institution. either by phone, in-person.
or in writing, regarding OFAC's
preliminary assessment of the
appropriate action with respect to the
institution. OF AC's staff will discuss the
results of its review with the institution,
including any patterns or weaknesses ill
an institution's compliance program.
With respect to particular transactions.
the discussion will cover the actions
taken by the banking institution to
ensure that similar transactions do not
take place in the future and the
adequacy of responses to any
administrative subpoenas OFAC has
sent with regard to the transactions.
OF AC will indicate the intended
administrative action to be taken for
each transaction or set of related
transactions that appear to constitute
violations of OFAC-administered
sanctions programs.
Once OFAC has reached a decision, it
will notify the institution in WTiting as
to its proposed action with regard to
each apparent violation during the
period under review. OFAC will
provide a copy of this letter to the
institution's primary federal banking
regulator. In the event that OF AC has
notified the institution of its intent to
pursue a civil penalty with regard to any
or all of the apparent violations, existing
civil penalty procedures under OFAC
regulations will be followed. These
include the opportunity for informal
settlement prior to formal initiation of
penalty action through the issuance of a
prepenalty notice.
In subsequent periodic reviews
relating to the institution's apparent
violations, all prior actions and
decisions taken by OF AC, including
cases in which the decision is to take no
action, will be considered in deciding
what action to take.
In addition to detailing these new
procedures, the interim final rule
clarifies that, for a banking institution,
a voluntary disclosure, a factor that
OFAC considers in its enforcement
decisions, does not include a disclosure
when another party is required to file a
report concerning the same transaction.
This is the case whether or not the other
party actually files a report. However,
?FAC considers reporting of violations
Important for its compliance and
enforcement programs and will consider
such reports by a banking institution a
mitigating factor in its enforcement
decisions even if they do not meet the
definition of "voluntary disclosure"
1973
contained in these enforcement
enforcement procedures for these
pror:edures. While reports that are not
entities.
voluntary disclosures will generally not
The interim final rule does not apply
be accorded the same importance as
to other finilncial sector entities, such as
voluntary disclosures. OFAC will give
insurance companies (including
such cooperation due consideration.
property and casualty, life, and
Though this interim final rule
reinsurance lines of business), pension
becomes effer:tive in 30 days, OFAC is
funds, finance companies, mortgage
soliciting comments for a 60-day period bankers, and government-sponsored
with a view to improving its
enterprises. Commenters are asked for
enforcement proced ures.
their suggestions on how enforcement
In particular, commenters are invited
procedures should be modified to apply
to address how much significance,
to these other financial sector entities
separately or collectively, OFAC should and whether and how enforcement
attribute in its enforcement decisions to
procedures for financial sector firms
such factors as a banking regulator's
should vary depending OIl the
assessments of a banking institution's
regulatory regime, if any, to which
compliance program, a banking
various financial sector firms are
institution's historical OFAC
subject.
compliance record, and a comparison of
Commenters are also requested to
that record to similarly situated banking provide suggestions concerning
institutions.
appropriate enforcement procedures for
Also, this interim final rule does not
non-financial sectors. such as importapply to entities regulated by the
export businesses, the computer and
Securities and Exchange Commission
software industries, and e-commerce.
("SEC") and the Commodity Futures
These procedures apply to banking
Trading Commission ("CFTC"), such as
institutions that may be part of a larger
broker-dealers, mutual funds,
corporate structure, with a parent
investment advisers, hedge fund
holding company. Comrnenters are
advisers, futures commission
asked how OF AC should consider for
merchants, commodity trading advisers, enforcement purposes complex
and commodity pool operators, even if
corporate structures, which may include
such legal entities are affiliated with a
entities regulated by the Board of
banking institution. OF AC plans to
Governors of the Federal Reserve
issue separate enforcement procedures
System, the Office of the Comptroller of
for SEC- and CFTC-regulated entities in
the Currency, the Office of Thrift
recognition that the regulatory regimes
Supervision, the SEC, and the CFTC.
administered by the SEC and the CFTC
Other affiliates, such as insurance
are significantly different from the
companies, may be regulated by state
regime administered by federal banking
regulators; some affiliates may be
regulators. Commenters are asked to
subject to the jurisdiction of foreign
address whether there is current
regulators; and some entities may not
information about the compliance
have a functional regulator. Such
programs of SEC- and CFTC-regulated
complicated structures pose challenges
entities that OFAC could use in a
for assessing compliance programs and
similar manner to the way compliance
making determinations about
information will be used for making
enforcement actions when there are
enforcement decisions for banks.
violations. Commenters are invited to
Commenters are also requested to
address the proper enforcement
provide any suggestions concerning
approach for complicated holding
how the enforcement procedures
company structures.
described in this interim final rule
List of Subjects in 31 CFR Part 501
should be modified for entities
regulated by the SEC or CFTC.
Administrative practice and
OF AC also plans to issue enforcement procedure, Banks, banking, Reporting
procedures for certain financial sector
and recordkeeping requirements.
entities regulated by state government
• For the reasons set forth in the
agencies but not by federal financial
preamble, 31 CFR part 501 is amended
regulators. This sector includes entities
as follows:
that are similar to federally-regulated
banking institutions, such as certain
PART S01-REPORTING,
credit unions and banks not insured by
PROCEDURES AND PENALTIES
an agency of the U.S. Government, and
REGULATIONS
it includes some money service
• 1. The authority citation for Part 501
businesses. Commenters are asked for
continues to read as follows:
suggestions concerning how the
enforcement procedures in the interim
Authority: 18 U.S.c. 2332d: 21 U.s.c.
final rule should be modified for the
1901-1908: 22 U.s.c. 287c; 22 U.s.C.
2370(a); 31 U.S.c. 321(b); 50 U.S.c. 1701purpose of providing separate
Federal Register I Vol. 71, No. R I Thursday, January 12, 2006 I Rules and Regulations
1974
1706; 50 U.S.c. App. 1-44; Pub. L. 101-410,
104 Stat. 890 (28 U.S.c. 2461 note); E.O.
9193.7 FR 5205,3 CFR. 1938-1943 Comp,.
p. 1174; E.O. 9989, 13 FR 4891.3 CFR. 19431948 Comp .. p. 748; E.O, 12854, 58 FR 36587,
3 CFR. 1993 Comp .. p. 614.
• 2, Part 501 is amended by adding the
following appendix A, with annexes. to
read as follows:
Appendix A to Part SOl-Economic
Sanctions Enforcement Procedures for
Banking Institutions
Note: This appendix provides a general
procedural framework for the enforcement of
all economic sanctions programs
administered by the Office of Foreign Assets
Control ("OFAC") only as they relate to
banking institutions, as defined herein.
I. Definitions
A. Banking regulator means the Board uf
Governors of the Federal Reserve System, the
Federal Deposit Insurance Corporation, the
National Credit Union Administration. the
Office of the Comptroller of the Currency, or
the Office of Thrift Su per vision.
B. Banking inslilution, for purposes of this
appendix to Part 501. means a depository
institution supervised or regulated by a
banking regulator.
C. OFACmeans the Department ofthe
Treasury's Office of Foreign Assets Control.
D. Voluntary disclosure means notification
to OFAC of
apparent sanctions violation
by the banking institution th<l.t has committed
it. However, such notification to OFAC is not
deemed a voluntary disclosure if OF AC has
previously received information concerning
the conduct from another source, including,
but not limited to, a regulatory or law
enforcement agency or another person's
blocking or funds transfer rejection report.
Notification by a banking institution is also
not a voluntary disclosure if another person's
blocking or fu nds transfer rejection report is
required to be filed, whether or not this
required filing is made. Responding to an
administrative subpoena or other inquiry
from OFAC is not a voluntary disclosure. The
submission of a license request is not a
voluntary disclosure unless it is
accompanied by a separate disclosure.
an:
II, Enforcement of Economic Sanctions in
General
A. OFAC Civil Investigation and
Enforcement Action. OFAC is responsible for
civil investigation and enforcement with
respect to economic sanctions violations
committed by banking institutions. In these
efforts. OFAC may courdinate with banking
regulators. OFAC investigations may lead to
one or more of the following: an
administrative subpoena, an order to cease
and desist. a blocking order, an evaluative
letter summarizing concerns, or a civil
penalty proceeding. In addition to or instead
?f such actions, if the banking institution
Involved is currently acting pursuant to an
OFAC license, that license may be suspended
or revoked,
B. OFAC's Evaluation of Violative
Conduct. The level of enforcement action
undnrtaken by OFAC involving a bnnking
institution depends on Ihe nature of the
apparent viulatiun, the enfurcement
obje"tives. and the rmeign policy goals uf the
particular sanctions prugram involved. [n
evaluating whether to initiate a civil penalty
action, OFAC determines whether thnrc is
reason to believe that a violatiun of the
relevant regulations, statutes, or Executive
orders has occurred. [n making
determinations about the disposition of
apparent violations by hanking institutions.
including evaluative letters and civil
penalties. OFAC will consider information
provided by the banking institution and its
banking regulator concerning the institution's
compliance program and the adequacy of that
program based on its OFAC risk profile.
Further information abuut the evaluation of
compli<l.nce programs commensurate with the
risk profile of a banking institution and a
description of a sound OF AC compliance
program are provided in Anrwxes A and B.
C. Criminal Investigations and
Prosecutions. If the evidence suggests that a
banking institution has committed a willful
violation of a subst<l.ntive prohibition or
requirement. OFAC may refer those cases to
other federal law enforcement agencies for
criminal investigation. Cases that an
investigative agency has referred to the
Department of Justice for criminal
prosecution also may be subject to OFAC
ci viI penalty action.
III. Periodic Institutional Review
A. Except for those significant violations
for which prompt action, such as a civil
penalty proceeding or referral to other federal
law enforcement agencies, is appropriate,
OFAC will review institutions with
violations or suspected violations on a
periodic basis. OFAC will review each such
institution's apparent violations uver a
period of time deemed appropriate in light of
the number and severity of apparent
violations and the institution's OFAC
compliance history.
I3. Upon completing this revip.w, OFAC
will preliminarily determine the type of
enforcement action it will pursue for each
apparent violation or related apparent
violations. or AC will then seek r.omment
from the banking institution and ask it to
provide additional information with regard to
the apparent violation or violations. OF AC
also will ask the institution to explain what
actions led to thp. apparent violation or
violations and what actions, if any, it has
taken to overcome the deficiencies in its
systems that led to the apparent improper
handling of the transactions or accounts.
Depending on the number and complexity of
the apparent violations, OFAC may grant up
to 30 days for a banking institution to
respond and may grant further extensions at
its sole discretion where it determines this is
appropriate. Upon receipt of the institution's
response, OF AC will decide whether to
pursue the intenrled administrative action or
whether some other action would serve the
same purpose.
C. OFAC will subsequently send the
banking institution a letter detailing its
findings and further actions, if any.
concerning the apparent violations. OrAC
will provide the banking institution's
primary banking regulator with a copy of this
letter.
IV. Factors Affecting Administrative Action
[n making its decision as to administrative
action, if any. OFAC will consider a number
01 factors, including. but not limitmj to, the
following:
A. The institution's history of sanctions
violations.
B. The size of the institution and the
number nfOFAC·mlated transactions
handled correctly compared to the number
and nature of transactions handled
incorrectly.
C. The quality and effectiveness of the
banking institution's overall OFAC
compliance program. as determined by the
institution's primary banking regulator and
by its history of compliance with OFAC
regulations.
D. Whether the apparent violation or
violations in question are the result of
systemic failures at the banking institution or
are atypical in nature.
E. The voluntarv disclosure to OFAC of the
apparent violatio~ or violations by the
banking institution.
F. Providing OFAC a report of, or useful
enforcement information concerning, the
apparent violation or violations. Providing a
report, but not <I. voluntary disclosure, of the
apparent violation or violations will
gene rail y be accorded less weight as a
mitigating factor than would provision of a
voluntary disclosure.
G. The deliberate effort to hide or conceal
from OF AC or to mislead OF AC concerning
an apparent violation or violations or its
OFAC compliance program.
H. l\n analysis of current or potential
sanctions harm as a result of a violation or
series of related violations. This analysis will
focus both on the specifics of the apparent
violation or violations and the institution's
compliance effort.
l. Technical. computer, or human error.
J, Applicability of a statute of limitations
and any waivers thereuf.
K. Actions taken hy the banking institution
to correct the problems that led to the
apparent violation or violations.
L. The level of OFAC action that will best
lead to enhanced compliance by the banking
institution.
M. The level of OF AC action that will best
serve to encourage enhanced complimce by
others.
N. Evidence that a transaction or
transactions could have been licensed by
OFAC under an existing licensing policy.
O. Whether other U.S. government
agencies have taken enforcement action.
P. Qualification of the banking institution
as a small business or organization for the
purposes of the Small Business Regulatory
Enforcement Fairness Act, as determined by
reference to the applicable regulations of the
Small Business Administration.
V. License Suspension and Revocation
In addition to or in lieu of other
administrative actions, OFAC authorization
to engage in a transaction or transactiuns
pursuant to a general or sper.ific license may
Federal Register/Vol. 71. No. 8/Thursday, January 12, 200fi/Rules and Regulations
be suspended or revoked with respect to a
banking institution for reasons including. but
not limited to, the following:
A. The banking institution has made or
caused to be made in any license applicatiull.
or in any report required pursuant to a
license. any statement that was. at the time
and in light of the circumstances under
which it was made, false or misleading with
respect to any material fact, or it has omitted
to state in any application or report any
material fact that was required;
B. The banking institution has failed to file
timely reports or comply with the
recordkeeping requirements of a general or
specific license;
C. The banking institutiun has violated any
provision of till' statutes cnfun;ed by UFAC
or the rules or regulat ions isstled under any
such provision or relevant Execut iVtl ordcrs
and such violation or violations are
significant and merited civil penalty or other
enforcement action;
D. The banking institution is reasonably
bdieved tu have counseled, commanded.
induced, procured. or knowingly aided or
abetted the violation uf any provision of any
legal authority referred to in paragraph C; .
E. Based on the information available to it,
OFAC considers tbe banking institution's
compliance program inadequate; ur
1975
F. The banking institution has committed
any other act or omissioll that demonstrates
unfitness to r.onduct tho transactions
authorized hy the general or specific license.
VI. Civil Penalties
The procedures for addressing the actions
of hanking institutions that OFAC decides
merit r:ivil penalty treatment arc provided in
the regulations governing the particular
sanctions prugram involved. or, in the case
of sanctions regulations issued pursuant to
the Trading with the Enemy Act. in this Part.
The factors I isted in Sectio~ IV will be
considerations in the civil penalty process.
ANNEX A.-OFAC RISK MATRICES
[The following matrices can be used by banking institutions to evaluate their compliance programs. Matrix A is from the FFIEC Bank Secrecy Act
Anti-Money Laundering Examination Manual published in 2005, Appendix M ("Quantity of Risk Matrix-QFAC Procedures")]
Low
Moderate
High
Matrix A
Stable, well-known customer base in a localized environment.
Few high-risk customers; these may include
nonresident aliens, foreign customers (including accounts with U.S. powers of attorney)
and foreign commercial customers.
No overseas branches and no correspondent
accounts with foreign banks.
No electronic banking (e-banking) services offered, or products available are purely informational or non-transactional.
Limited number of funds transfers for customers and non-customers, limited third-party
transactions, and no international funds
transfers.
No other types of international transactions,
such as trade finance, cross-border ACH,
and management of sovereign debt.
No history of OFAC actions. No evidence of apparent violation or circumstances that might
lead to a violation.
Customer base changing due to branching,
merger or acquisition in the domestic marketo
A moderate number of high-risk customers....
A large, fluctuating client base in an international environment.
Overseas branches or correspondent accounts with foreign banks.
The bank offers limited e-banking products
and services.
Overseas branches or multiple correspondent
accounts with foreign banks.
The bank offers a wide array of e-banking
products and services (Le., account transfers, e-bill payment, or accounts opened via
the Internet).
A high number of customer and non-customer
funds transfers, including international funds
transfers.
A moderate number of funds transfers, mostly
for customers. Possibly, a few international
funds transfers from personal or business
accounts.
Limited other types of international transactions.
A small number of recent actions (Le., actions
within the last five years) by OFAC, including notice letters, or civil money penalties,
with evidence that the bank addressed the
issues and is not at risk of similar violations
in the future.
A large number of high-risk customers.
A high number of other types of international
transactions.
Multiple recent actions by OFAC, where the
bank has not addressed the issues, thus
leading to an increased risk of the bank undertaking similar violations in the future.
Matrix B_ This matrix consists of additional factors that may be considered by banking institutions In assessing compliance programs
in addition to Appendix M of the FFIEC Bank Secrecy Act Anti-Money Laundering Examination Manual.
Management has fully assessed the bank's
level of risk based on its customer base and
product lines. This understanding of risk and
strong commitment to OFAC compliance is
satisfactorily communicated throughout the
organization.
The board of directors, or board committee, has
approved an OFAC compliance prograrn that
includes policies, procedures, controls. and
information systems that are adequate, and
consistent with the bank's OFAC risk profile.
Staffing levels appear adequate to properly
execute the OFAC to properly execute the
OFAC compliance program.
Authority and accountability for OFAC compliance are clearly defined and enforced, including the deSignations of a qualified OFAC
officer.
Management exhibits a reasonable understanding of the key aspects of OFAC compliance and its commitment is generally
clear and satisfactorily communicated
throughout the organization, but it may lack
a program appropriately tailored to risk.
The board has approved an OFAC compliance program that includes most of the appropriate poliCies, procedures, controls, and
information systems necessary to ensure
compliance, but some weaknesses are
noted.
Staffing levels appear generally adequate, but
some deficiencies are noted.
Authority and accountability are defined, but
some refinements are needed. A qualified
OFAC officer has been designated.
Management does not understand, or has
chosen to ignore, key aspects of OFAC
compliance risk. The importance of compliance is not emphasized or communicated
throughout the organization.
The board has not approved an OFAC compliance program, or policies, procedures,
controls, and information systems are significantly deficient.
Management has failed to provide appropriate
staffing levels to handle workload.
Authority and accountability for compliance
have not been clearly established. No
OFAC compliance officer, or an unqualified
one, has been appointed. The role of the
OFAC officer is unclear.
1976
Federal Register/Vol. 71. No. H/Thursday, January 12, 2006/Rulp.s and Regulations
ANNEX A.-OFAC RISK MATRICEs-Continued
[The following matrices can be used by banking institutions to evaluate their compliance programs. Matrix A is from the FFIEC Bank Secrecy Act
Anti-Money Laundering Exammatlon Manual published In 2005, Appendix M ("Quantity of Risk Matrtx-oFAC Procedures")]
Low
Moderate
High
Training is appropriate and effective based on
the bank's risk profile, covers applicable personnel, and provides necessary up-to-date
information and resources to ensure compliance.
The institution employs strong quality control
methods.
Training is conducted and management provides adequate resources given the risk
profile of the organization; however, some
ares are not covered within the training program.
The institution employs limited quality control
methods.
Training is sporadic and does not cover important regulatory and risk areas.
Annex B-Sound Banking Institution OFAC
Compliance Programs
A. Identification of High Risk Business
Areas. A fundamental element of a sound
OFAC compliance program rests on a
banking institution's assessment of its
specific product lines and identification of
the high-risk areas for OF AC transactions. As
OFAC sanctions reach into virtually all types
of commercial and banking transactions, no
single area will likely pass review without
consideration of some type of OFAC
compliance measure. Relevant areas to
consider in a risk assessment include, but are
not limited to, the following: retail
operations, loans and other extensions of
credit (open and closed-ended; on and offbalance sheet, including letters of credit).
funds transfers, trust, pri vate and
correspondent banking, international, foreign
offices, over-the-counter derivatives, internet
banking, safe deposit, payable through
accounts, money service businesses, and
merchant credit card processing.
B. Internal Controls. An effective OFAC
compliance program should include internal
controls for identifying suspect accounts and
transactions and reporting to OF AC. Internal
controls should include the following
elements:
1. Flagging and Review of Suspect
Transactions and Accounts. A banking
Illstitution's policies and procedures should
address how it will flag and review
transactions and accounts for possible OF AC
violations, whether conducted manually,
through interdiction software, or a
combination of both methods. For screening
purposes, a banking institution should
clearly define procedures for comparing
names provided on the OFAC list with the
names in its files or on the transaction and
for flagging transactions or accounts
involving sanctioned countries. In high-risk
and high-volume areas in particular, a
banking institution's interdiction filter
should be able to flag close name derivations
for review. New accounts should be
compared with the OFAC lists prior to
allowing transactions. Established accounts,
onc.e scanned, should be compared regularly
agamst OF AC updates.
2. Updating the Compliance Program. A
banking institution's compliance program
sbould also include pror.edures for
maintaining current lists of blocked
COuntries, entities, and individuals and for
disseminating such information throughout
the institution's domestic operations and its
offshore offices, branches and, for purposes
of the sanctions programs under the Trarl ing
with the Enemy Act, foreign subsirliaries.
3. Reporting. A complianco program
should also include procedures for handling
transactions that are validly blocked or
rejected under the variolls sanctions
prugrams. These procedures should cover the
reporting of blocked and rejected items to
OFAC as provided in § 501.603 of this Part
and the annual report of blocked proper! y
required by § 501.604 of this Part.
4. Management of blocked accounts. An
audit trail should be maintained in order to
reconcile all blocked funds. A banking
institution is responsible for tracking the
iilllount of blocked funds, the ownership of
those funds, interest paid on those funds, and
the release of blocked funds pursuant to
license.
5. Maintaining License Information. Sound
compliance procedures dictate that a banking
institution maintain copies of customers'
OF AC specific licenses on file. This will
allow a banking institution to verify whether
a customer is initiating a legal transaction. If
it is unclear whether a particular transaction
is authorized by a license, a banking
institution should confirm this with OFAe.
Maintaining copies of licenses will also be
useful if another banking institution in the
payment chain requests verification of a
license's validity. In the case of a transaction
performed under generallicellse (or, in some
cases, a specific license), it is sound
compliance for a banking institution to
obtain a statement from the licensee that the
transaction is in accordance wit h the terms
of the license, assuming the banking
institution does not know or have reason to
know that the statement is false.
e. Testing. Except for a banking institution
with a very low OF AC risk profile, a banking
institution should have a periodic test of its
OF AC program performed by its internal
audit department or by outside auditurs,
consultants, or other qualifierl independent
parties. The frequency of the independent
test should be consistent with the
institution's OrAC risk profile; however. an
in-depth audit of each department in the
banking institution might reasonably be
conducted at least once a year. The person(s)
responsible for testing should conduct an
objective, comprehensive evaluation of
OF AC policies and procedures. The audit
scope should be comprehensive and
sufficient to assess OFAC compliance risks
across the spnctrum of all the institution's
activities. If violations are discovered, they
should be promptly reported to both OFAC
The institution does not employ quality control
quality control methods.
and the banking institution's banking
regulator.
D. Respunsible Individuals. It is sound
compliance procedure for an institution to
deSignate a qualified individual or
individuals to be responsible for the day-today compliance of its OFAC program,
including at least one individual responsible
for the oversight of blocked funds. This
individual or these individuals should be
fully knowledgeable about OFAC statutes,
regulations, and relevant Executive orders.
E. Training. A banking institution should
provide adequate training for all appropriate
employees. The scope and frequency of the
training should be consistent with the OFAC
risk profile and the particular employee's
responsibilities.
Dated: December 22, 2005.
Robert W, Werner,
Director, Office of Foreign Assets Control.
Approved: December 23, 2005.
Stuart A. Levey,
Under Secretary of the Treasury. Office of
Terrorism and Financial Intelligence.
[FR Doc. 06-278 Filed 1-11-06; 8:45 am]
BILLING CODE 4810-35--1'
POSTAL SERVICE
39 CFR Part 111
Sack Preparation Changes for
Periodicals Mail
AGENCY: Postal Service.
ACTION: Final rule,
SUMMARY: This final rule adopts new
mailing standards for Periodicals mail
prepared in sacks. The standards
include two new types of sacks-a 3digit carrier routes sack and a merged 3digit sack-and a new minimum of 24
pieces for most other sacks.
DATES: Effective Date: May 11, 2006.
FOR FURTHER INFORMATION CONTACT: Joel
Walker, 202-268-7266.
SUPPLEMENTARY INFORMATION:
Background
The Postal Service published a
proposal in the Federal Register on
August 15, 2005 (70 FR 47754). to
Page 1 0[2
10 VIew or pnnt me /-'UJ- content on thIS page, Clown/oaCl me tree AUolJe r,,) J.lcrolJa/"·) Heaaer'/'!.
January 12, 2006
JS-3077
U.S. Money Laundering Threat Assessment Released
The United States Government today released the inter-agency U.S. Money
Laundering Threat Assessment (ML TA), the first government-wide analysis of its
kind, which investigates money laundering vulnerabilities across a spectrum of
techniques used by criminals.
"Before you can effectively treat a problem, you must first have an accurate
diagnosis. The Money Laundering Threat Assessment integrates information
contributed by sixteen government agencies, as well as vital Bank Secrecy Act data
provided to Treasury's Financial Crimes Enforcement Network (FinCEN) to
evaluate the range of current and emerging U.S. money laundering threats," said
Stuart Levey, Treasury's Under Secretary for Terrorism and Financial Intelligence
(TFI), "This is an example of government cooperation at its best."
Sixteen U,S. bureaus, offices and agencies collaborated on the ML TA from the
Departments of Treasury, Justice, Homeland Security, the Board of Governors of
the Federal Reserve System, and the United States Postal Service.
"One of our critical missions is to protect the integrity of our financial system. This
comprehensive assessment is a significant step towards stemming the flow of illicit
proceeds into the United States and insuring that our financial institutions are not
utilized to facilitate terrorism or criminal activities," said Chris Swecker, Assistant
Director, Criminal Investigative Division of the FBI.
Each chapter of the MLTA profiles the characteristics of a specific method of money
laundering, outlining the current legal and regulatory landscape and presenting
known patterns of abuse, geographical concentrations, and real-world case studies.
"Our teams of civil and criminal investigators are committed to the government's
National Anti-Money Laundering efforts," said Richard Speier, acting IRS Chief,
Criminal Investigation. "The scope of our commitment is demonstrated by the fact
that the IRS has on-going civil and criminal investigations in each of the 13
identified categories found in this threat assessment."
The laundering methodologies investigated range from banks and money
transmitters to alternative methods, such as casinos and trade-based money
laundering. The ML TA also looks at new and emerging industries, such as online
payment systems and stored value cards, which are vulnerable to illicit financial
activities.
"From Hawalas to the Black Market Peso Exchange to the bulk smuggling of cash
across our nation's borders, DEA is targeting drug traffickers' tainted profits like
never before. Last year, DEA seized a record $1.9 billion from the pockets of greeddriven drug traffickers worldwide. The money trail that leads to drug traffickers'
wallets is the same trail that will lead to their ultimate demise," said Donald C
Semesky Jr., DEA's Chief of Financial Operations.
"ICE is proud of its substantial contributions to the government's first national
Money Laundering Threat Assessment. We look forward to working with our
partners in formulating a comprehensive strategy to address these threats," said
Julie Myers, Department of Homeland Security Assistant Secretary for U.S.
Immigration and Customs Enforcement (ICE). "Over the past few years, ICE has
dramatically expanded its anti-money laundering efforts to address those financial
·W. WWwJreasJ!.ov/oress/releaseshs3077.btm
.
21112006
Page '2 ot '2
systems most vulnerable to criminal and terrorist exploitation."
The following bureaus, offices, and agencies collaborated on the MLTA:
Department of the Treasury
o Office of Terrorism and Financial Intelligence (TFI)
o
• Office of Terrorist Financing & Financial Crime (TFFC)
• Financial Crimes Enforcement Network (FinCEN)
• Office of Intelligence and Analysis (OIA)
• Office of Foreign Assets Control (OFAC)
• Executive Office for Asset Forfeiture (TEOAF)
Internal Revenue Service
• Criminal Investigation (CI)
• Small Business/Self Employed Division (SB/SE)
Department of Justice
•
•
•
•
•
Federal Bureau of Investigation (FBI)
Drug Enforcement Administration (DEA)
Criminal Division
National Drug Intelligence Center (NDIC)
Organized Crime Drug Enforcement Task Force (OCDETF)
Department of Homeland Security
•
•
Immigration and Customs Enforcement (ICE)
Customs and Border Protection (CBP)
Board of Governors of the Federal Reserve System
•
United States Postal Service (USPS)
o United States Postal Inspection Service (USPIS)
"By bringing together government-wide participants with the relevant expertise and
experience. we were able to produce a report that should help policymakers.
regulators, and the law enforcement community to make better-informed decisions
in allocating resources and combating money laundering," said Levey.
-30LINKS
•
(E'Dr:) Money Laundering Threat Ass.essment
tp:llwww treas.gov/presvreleasesfjS305~.htm
21112006
MONEY LAUNDERING THREAT ASSESSMENT
WORKING
G R 0 U P
Department of the Treasury
Office of Terrorism and Financial Intelligence (TFI)
•
Office of Terrorist Financing & Financial Crime (TFFC)
•
Financial Crimes Enforcement Network (FinCEN)
•
Office of Intelligence and Analysis (OIA)
•
Office of Foreign Assets Control (OFAC)
•
Executive Office for Asset Forfeiture (TEOAF)
Internal Revenue Service (IRS)
•
Criminal Investigation (CI)
•
Small Business/Self Employed Division (SB/SE)
Department of Justice
Federal Bureau of Investigation (FBI)
Drug Enforcement Administration (DEA)
Criminal Division
•
Asset Forfeiture Money Laundering Section (AFMLS)
National Drug Intelligence Center (NDle)
Organized Crime Drug Enforcement Task Force (OCDETF)
Department of Homeland Security
Immigration and Customs Enforcement (ICE)
Customs and Border Protection (eBP)
Board of Governors of the Federal Reserve System
United States Postal Service (USPS)
United States Postal Inspection Service (USPIS)
---
U. S. Money Laundering Threat Assessment
December 2005
TABLE OF CONTENTS
MONEY
LAUNDE:RING
THREAT
ASSESSMENT
Introduction...... ........................... ........ ............................................................
..... i
Banking .............................................................................................................................. 1
Money Services Businesses ..................................................................................................... 7
Money Transmitters ........................................................................................................... 11
Check Cashers ...................................................................................................................... 14
Currency Exchangers ........................................................................................................ 15
Money Orders ................................................................................................................... 17
Stored Value Cards ................. " ...................................................................................... 20
Online Payment Systems .................................................................................................... 25
Informal Value Transfer Systems ......................................................................................... 29
Bulk Cash Smuggling .................................................................................................................. 33
Trade-Based Money Laundering .. ...................................................................................... 41
Insurance Companies .................................................................................................................. 4S
Shell Companies And Trusts.............. ........................................................................ 47
Casinos ............................................................................................................................................. 51
Appendices
(A) NDIC Analysis ........................................................................................................... 57
(8) FinCEN Analysis ........................................................................................................... 59
(C) Bank Secrecy Act Reports ......................................................................................... 69
(D) Status of BSA Regulations for Financial Institutions ................................ 71
---
INTRODUCTION
INTRODUCTION
T
he 2005 Money Laundering Threat Assessment
(ML T A) is the first government-wide analysis of
money laundering in the United States. The report is
the product of an interagency working group composed
of experts from the spectrum of U.S. Government agencies, bureaus, and offices that study and combat money
laundering. The purpose of the ML T A is to help policy
makers, regulators, and the law enforcement community
better understand the landscape of money laundering in
the United States and to support strategic planning efforts to combat money launderi ng.
The working group synthesized law enforcement statistics and observations, regulatory data (such as Bank
Secrecy Act filings), private sector studies, and public
information to assess the vulnerabilities that allow criminals to launder money through particular money laundering methods or conduits.
The ML T A offers a detai led analysis of thirteen money
laundering methods. ranging from well-established techniques for integrating dirty money into the financial system to modem innovations that exploit global payment
networks as well as the Internet. Each chapter focuses
on a specific money laundering method and provides a
brief overview of the methodology, an assessment of
vulnerabilities - including geographic or other noted
concentrations - and the regulatory/public policy backdrop.
While not exhaustive, the assessment consolidates a tremendous amount of information and insight contributed
by the various participating agencies as to the major
methods of money laundering that they confront. The
overall picture is both sobering and promising. The
volume of dirty money circulating through the United
States is undeniably vast and criminals are enjoying
new advantages with globalization and the advent of
new financial services such as stored value cards and
online payment systems. At the same time, there has
been considerable progress. The approach of U.S. law
enforcement and regulatory agencies has undergone a
sea change over the past decade. such that money laundering is now treated as an independent and primary focus across all relevant agencies. With this change in
approach and focus have come marked improvements
•••
in both systemic and applied anti-money laundering
(AML) efforts. Most encouraging are interagency initiati ves and task forces that, when properly coordinated,
bring the talents, expertise. and resources of multiple
agencies to bear on a problem to great effect. With so
many agencies looking at distinct but related aspects of
this issue. it is critical that information be shared freely
and studied jointly. Highlighted below are some notable
examples of recent U.S. agency advances in organization. analysis. and execution in the fight against money
laundering:
U.S. Immigration and Customs Enforcement (lCE), has
introduced many new initiatives aimed at analyzing and
combating the movement of illicit funds by bulk cash
smuggling, trade-based money laundering, courier hubs,
money services businesses (MSBs), charities, and alternative remittance systems. These initiatives include:
• Operation Cornerstone, founded in 2003 - a private
industry partnership and aggressive outreach
program;
• A Trade Transparency Unit (TTU) aimed at
identifying anomalies related to cross-border trade
indicative of money laundering;
• A multi-agency approach (in partnership with
Internal Revenue Service - Criminal Investigation
(lRS-CT), FinCEN, and the Federal Bureau of
Investigation (FBI» to target unlicensed MSBs;
and
• A Foreign Political Corruption Task Force in
Miami to address foreign public corruption and
related money laundering.
With respect to bulk cash smuggling in palticular, ICE
is:
• WorkingwithCustomsandBordcrProtection(CBP)
to share training and expertise with the Mexican
government as to how to execute successful bulk
cash smuggling interdiction operations;
• Providing training in bulk cash smuggling
interdiction to 28 developing countries in the
Middle East, South America, Africa. and Asia, in
concert with CBP and the State Department; and
INTRODUCTION
• Conducting trammg in bulk cash sl11uggl ing
interdiction, funded by the Executive Ot1ice 1'01'
Organized Crime Drug Enforcement Task Forces
(OCDETF), in seven major cities throughout the
United States, attended by federal, state and local
law enforcement.
The FBI is working to develop advanced technologies
to exploit Suspicious Activity Reports (SARs) and other
Bank Secrecy Act (BSA) data from FinCEN by using
computer software to visualize financial patterns, link
distinct criminal activities, and display the activity in
link analysis charts. The FBI is also implementing a
next-generation electronic fi Ie management system that
will help manage investigativc, administrative, and intelligence needs while also improving ways to encourage information sharing with other agencies,
The Administrator of the Drug Enforcement Administration (DEA) issued a directive in 2003 restoring DEA's
primary focus to the financial aspects of drug investigations. Currently, every DEA investigation includes a financial component. DEA also undertook the following
steps to promote this focus:
• Established an Office of Financial Operations;
• Established specialized money laundering groups
in every DEA Field Division, and increased Special
Agent resources devoted to money laundering
invstigations in key foreign offices;
• Created and presented special ized money
laundering training to DEA agents and analysts;
• Established a "Bulk Currency Initiative" to
coordinatc all U.S. highway money seizures for
the purpose of developing the evidence necessary
to identify, disrupt, and dismantle large-scale
narcotics trafficking organizations; and
• Initiated a global money flow study, through
its position as chair of the International Drug
Enforcement Conference, to identify and target
drug proceeds flowing fi'om countries of drug
abuse to countries of drug supply.
The IRS, as part of its core tax administration mission,
addresses both the criminal and civil aspects of money
laundering, IRS-CI special agents "follow the money"
..II
INTRODUCTION
within various inter-agency task forces and centers.
IRS-CI also has 41 active Suspicious Activity Report
Review Teams (SAR-RT) reviewing and analyzing
SA R data for case development and support throughout
the country. Recently-acquired "data mining" software
is improving the ability of IRS-CI's investigators and
analysts to make connections and identi ty patterns in the
SAR data.
On the civil side, the IRS established a new organization
within its Small Business/Self-employed (SB/SE) Division, the Office of Fraud/BSA, which has end-to-end
accountability for BSA oversight of celiain non-bank
financial institutions. There are over 300 examiners
and managers who are fully trained and dedicated fulltime to the BSA program. The IRS has also completed
a model Federal/State Memorandum of Understanding
which provides both I RS and the palticipating state the
opportunity to leverage resources for BSA examinations, outreach, and training.
Treasury's Office of Terrorist Financing and Financial
Crimc (TFFC). a pali of the Office of Terrorism and
Financial Intelligence, is working to develop and drive
anti-money laundering policy and initiatives at home
and abroad. A primary initiative of this office is to lead
the interagency development of the National lv/one)'
Laundr:ring Slratef,,).!. In crafting this and other strategies, TFFC works with the law enforcement, regulatory,
and intelligence communities, in addition to the private
sector and overseas counterparts, to identi fy and address
systemic vulnerabilities. In addition. TFFC, along with
inter-agency counterparts, has been a driving force behind the worldwide propagation of strong anti-money
laundering standards via the Financial Action Task Force
(F A TF), the preeminent international body on money
laundering issues. Over the past two years, scores of
new countries - from North Africa to the Persian Gulf
region to Eurasia - have joined FATF-style regional
bodies, such that over 150 nations have now committed
themselves to adopting FA TF's standards and to being
evaluated against them.
The BSA, administered by the Treasury Dcpartment's
Financial Crimes Enforcement Network (FinCEN), is
the cornerstone of the U.S. Government's AML framework and was recently expanded in scope and depth.
Today, businesses under the BSA umbrella include casinos. jewelers, MSBs (such as check cashers and money
•••
INTRODUCTION
transmitters), securities dealers, and others.
FinCEN is itself undergoing a broad transformation.
The bureau is changing the way it analyzes information.
moving away from functioning simply as a clearinghouse, and moving towards higher-level research and
analysis, which will utilize all sources of information to
analyze the cutting-edge systems of money laundering
and illicit finance. FinCEN has also signed memoranda
of understanding with the federal regulatory agencies
that have received delegated authority from FinCEN to
examine financial institutions for compliance with the
BSA. The goal is better coordination and communication leading to effective implementation and enforcement
of the BSA. which ultimately should help to achieve a
sustained and successful attack on money laundering in
the United States.
The U.S. Postal Inspection Service (USPIS) enjoys the
advantage of having more than 100,000 postal clerks
and managers on the alert for possible suspicious activity. These employees file over 500 SARs per week to
the U.S. Postal Service (USPS) BSA Compliance Office. USPIS recently established an Intelligence Analysis Unit (IAU) at its headquarters office to ensure that
these reports as well as back room analysis are being
utilized effectively. The 1A U methodically analyzes the
USPS BSA database, searching for clues that might indicate major money laundering operations and possible
terrorist financing schemes. The IAU both responds to
investigative inquiries from field inspectors and proactively initiates investigative leads for the field.
The Department of Justice's Asset Forfeiture and Money
Laundering Section (AFMLS) reports that the USA PATRIOT Act provided a number of new tools to identify
and track criminal proceeds. Section 319(a) has been of
particular importance, allowing the government to capture criminal assets held abroad if the criminal proceeds
are deposited in a foreign bank that maintains a correspondent account in the United States. The Civil Asset
Refonn Act of 2000 is another important tool assisting
federal law enforcement in making asset forfeitures. The
law makes possible both the criminal and civil forfeiture of the proceeds of all specified unlawful activities.
Many U.S. Attorney's Offices will not approve an indict-
ment for presentation to the grand jury until a forfeiture
specialist has reviewed it for possible criminal forfeiture
andlor the filing ora parallel civil forfeiture complaint
In 2005, the Departments of Justice, Homeland
Security, I and Treasury established a multi-agency drug
and financial intelligence fusion center through the OCDETF program. Leads resulting from the efforts of the
Fusion Center will support the initiation and development of coordinated international. national, and regional
investigations. AFMLS, in partnership with OCDETF,
has conducted Financial Investigation Training Seminars in every OCDETF region in the country during the
past two years.
The National Drug Intelligence Center (NDlC), whose
mission is to develop strategic domestic drug intelligence, created a Money Laundering Unit in January
2005 to provide a multi-source fusion capability for
money laundering-related information. The mission of
this unit is to identi fy strategic money laundering trends
and patterns for national policy makers.
The Treasury Executive Office for Asset Forfeiture
(TEOAF) administers the Treasury Forfeiture Fund, and
has implemented a strategic focus on promoting "high
impact cases:' or cases that generate $100,000 or more
in forfeited value. In FY 2004, the Fund received more
than $335 million in revenue. 84% of which was derived
from "high impact cases." TEOAF then uses this money
to fund law enforcement training, special programs, and
criminal investigations.
*
Legal, structuraL and strategic advances improve the
ability of U.S. agencies to track and comhat money launderers. That said, money laundering remains a massive
and evolving challenge that will require clear, strategic
thinking. Measuring the problem is an essential first
step. Studies have traditionally looked to thal portion
of illicit activity that is apprehended by authorities as
an indicator of the types of money laundering going
on and trends within the field. Such indicators include
seized or forfeited assets, indictments, and BSA fi lings
lThe United States Coast Guard .
•••
INTRODUCTION
III
by financial institutions, such as SARs. Each of these
is admittedly imperfect, but could otTer much useful information.
Unfortunately, however, the data are not as developed
as they should be and not collected in a systematic way
across the U.S. government. It is currently not possible,
for example, to quanti fy with accuracy the total amount
of money laundering activity being apprehended by
federal law enforcement agencies, let alone state and
local law enforcement. Individual tracking systems developed and tailored to meet particular agency priorities and needs have yielded often incompatible systems.
Problems include data fields that are collected by some
but not all agencies, disparities in definitions, and redundancies wherein two or more agencies log the same
seizure or arrest because the case was handled through
a joint task force. Agencies may not even share common definitions of what constitutes "money laundering
proceeds," or what nexus to the United States warrants
defining illicit activity as "United States" money laundering.
Appendices to this assessment make the most of the existing data to offer a rough quantitative analysis of money laundering concentrations. Going forward, though,
more data needs to be collected in a more consistent way
across agencies. Of particular impOltance is information that would track, with respect to every money laundering seizure, the following: (1) the predicate crime,
(2) the money laundering method/s utilized, and (3) the
source and suspected destination of the proceeds. Accurate, comprehensive data is vitally impOItant if we are
to assess whether we are collectively gaining ground,
keeping pace, or falling behind criminal money launderers in each of the various methodologies that they employ.
IV
INTRODUCTION
•••
BANKING
Chapter 1
BANKING
anks and other depository financial institutions
in the United Stares are unique in that they alone
are allowed to engage in the business of receiving deposits and providing direct access to those deposits
through the payments system. The payments system encompasses paper checks and various electronic payment
networks facilitating credit and debit cards and bank-tobank transfers. The unique role banks play makes them
the first line of defense against money laundering.
B
Depository financial institutions (OFls), which include
commercial banks, savings and loan associations (also
called thrifts), and credit unions form the financial backbone of the United States. c Although Money Service
Businesses (MSBs) may offer an alternative to banks,
MSBs must themselves engage the services of a OFI to
hold deposits, clear checks, and settle transactions. Thus
in almost every money laundering typology, a bank is
employed domestically or abroad to hold or move funds.
The stage at which funds are introduced into the banking system is a critical one. A report from the New York
Clearing House, which operates bank payment systems,
acknowledges: "Once a person is able to inject funds
into the payment system that are a product of a criminal
act or are intended to finance a criminal act, it is highly
difficult, and in many cases impossible, to identify those
funds as they move from bank to bank."]
The BSA requires banks to establish and maintain effective anti-money laundering (!\ML) programs, implement customer identification programs, and maintain
transaction records. Banks also are obi igated to report
cash transactions exceeding $10,000 as well as transactions that appear suspicious.
Banks are ubiquitous in the United States but industry
consolidation, due to deregulation and competitive pres-
CHAPTER 1
slln~s, is reducing the number of distinct Dfls. At year
end in 2004 there were, for the first time since the FDIC
was created in 1934, fewer than 9,000 federally-insured
commercial banks and savings institutions in the United
States, not including credit unions. 4
Another significant development in the banking sector is
the ongoing decline in the use of paper checks. Ry 2003,
for the first time, most payments not made by cash were
made electronically, though it takes all forms of electronic payments combined to rival the number of checks
paid. Previously, paper checks ranked right behind cash
as the most favored form of payment. By the end of
the decade, the Federal Reserve predicts credit and debit
card payments will each surpass check volume.'
The shift from paper to electronic payments is changing
the economics of the payments business putting emphasis on lowering costs. In response, banks are increasingly using the Intemet as a means for customers to open
or access accounts. 6 Moving away from face-to-face
customer interaction, partiCUlarly for account openings,
challenges the traditional process of customer due diligence. Similarly, the steady influx of immigrants without U.S. Government-issued identification is requiring
banks to explore new ways to verify the identity of their
customers.
Despite the rapid growth in electronic payments and the
accelerating pace of change in financial services, domestic payment networks in countries around the world
do not connect with one another. A bank in the United
States cannot transmit a payment directly to a foreign
bank unless the U.S. bank has a presence in the foreign
country. That presence can be either an overseas branch
of the U.S. bank or a correspondent account. A bank
chartered in a foreign country faces the same option if it
wants to provide services in the United States for its customers. Instead of bearing the costs of licensing, staffing, and operating its own offices in the United States,
IThe term "bank" will be used generically in this chapter to refer to ull forms of DF!.
'Guidelines for Counter Moncy Laundering Policies and Procedures in Correspondent Ranking, sponsored by the New York Clearing House
ASSOciation, LLC, March 2002.
'FDIC Quarterly Banking Profile. Fourth Quatier 2004. Accessed at: htliJ:i'I, W\I ~ i,lic ,,()\·qhp2I)(I~JlT'ql'p.pdL
'The 2004 Federal Reserve Paymenl~ Study, December 15,2004.
6 Saran Ow, Jennifer, Banks Speed Process for Orening Online Accounts, Wall Street Journal, Feb. 3, 2005 .
•••
BANKING
~
CHAPTER
1
1
CHAPTER 1
BANKING
the bank can open a con·espondent accoLlnt with a U.S.
bank.7 According to a Congressional report 011 money
laundering and correspondent banking: "Today, banks
establish multiple correspondent relationships throughout the world in order to engage in international ti nancial
transactions for themselves and their clients in places
where they do not have a physical presence. Many of
the largest international banks serve as correspondents
for thousands of other banks."8
Vul ne rabi lities
Banks, although obligated to implement a customer
identification program, must contend with businesses
and consumers who may attempt to disguise their true
identity and source of income. Cash-intensive businesses, for example, may inflate how much legitimate
cash comes in each day to disguise the deposit of cash
from illegal drug sales or other criminal activity. Banks
attempt to spot these deceptions at the point accounts
are opened or to recognize suspicious deposit and withdrawal activity as it occurs.
As banks venture into opening accounts online and providing online account access, it becomes increasingly di fficult to verifY customer identification. The move away
from face-to-face account opening and account access
creates opportunities for fraud and identity theft. Unauthorized access to checking accounts is the fastest growing form of identity theft. In October 2005, the Federal
Financial Institutions Examination Council (FFIEC), a
body composed of the OFI federal regulatory agencies,
issued industry guidance titled: Authentication in an
Internet Banking Environment. The document advises
financial institutions offering Internet-based products
and services to use customer authentication techniques
"appropriate to those products and services. ·"1 According to HSBC, banks may be forced to restrict online ac-
cess only to cLlstomers with appropriate hardware and/or
software. III
rn addition to the difficulty financial institutions face
ioentifying their customers online, the growing adoption
of electronic payment systems is producing new opportunities for electronic fraud. 11 New forms of electronic
funds transfers, including Internet- and telephone-initiated payments, and the conversion at the point-of-sale of
paper checks to electronic debits, all use the automated
clearinghouse (ACH), an electronic payment network
designed for bank-to-bank transactions rather than for
direct access by consumers and businesses. 12 More than
12 billion ACH payments were made in 2004, a 20 percent increase over 2003. 13 Consumers initiated almost
one billion ACI) payments via the Internet, worth more
than $300 billion last year, which was a 40.4 percent
increase over 2003. 14
A major vulnerability the BSA attempts to address is
foreigners sending and receiving payments through
U.S. banks using "'correspondent," "payable through,"
or "nested" accounts, which, without adequate due diligence, can shield the payer's true identity. The farther
removed an individual or entity is from the bank, the
more difficult it is to verifY the identity of the customer.
Correspondent accounts and "payable through"
accounts streamline cross-border transactions but create
opportunities to use a U.S. or foreign bank without the
bank knowing the true payment originator. A "payable
through" account at a u.s. bank would, for example,
involve a foreign bank holding a checking account at
the U.S. institution. The foreign bank could then issue
checks to its customers allowing them to write checks
on the U.s. account. A foreign bank may have several hundred customers writing checks on one "payable
through" account, and all are considered signatories on
the account at the U.S. bank.
--- -------------; Minority Starr of the Permanent Subcommittt:c on Investigations R.:port on Correspondent Banking: A Gateway for Money Laundering.
February 5, 200 I.
, Ibid.
'FFIEC, Authentication in an Internet Banking Environment. Accessed at: hllr i " II \1.1 fice.gol 'pd i\IIJ1J'cillil:;J1 jOll. ~:'.jI\LjJlel·.pd I.
,
10 Goodwin, BilL HSBC Warns O/Online Banking Bans, Computerweekly.com, Apnl 12,2005. Accessed at: htlp:" w".C\IIl1\1IHCrWcchl)(oil1
Jnil"/c:;!Jflid, ij"p·!/j;\rticld J)~ I J 71<:'2& I ii\nielcl ypl'l [J I &. II ( '~1IC!,' II) II) (,,\:I 1'1 ",illie' II f.) n& I Ii Ll\(}\ull J' I &',Sc<lrch &nI'Ji-!c. I.".
" Putting an End to Account-Hijacking Identity ThefL fDTC Division of Supervision and Consumer Protection Technology Supervision
Branch, Decemher 14. 2004.
11The ACH was designed for low value recurring transactions, specifically uirect deposit of payroll anu monthly consumer bill payments that
remain the same each month.
IJ The National Automated Clearing House Association. Au:essed at: hltp/II II \\·.Ilclc:h~.,w: .
14 Ibid.
2
BANKING -
CHAPTER 1
•••
CHAPTER 1
BANKING
A variation on the "payable through" account is "nesting," in which foreign hanks open correspondent accounts at U.S. banks but then solicit other foreign banks
to use the account. Nested accounts provide indirect
access to the U.S. financial system by allowing a foreign bank that does not have a direct correspondent relationship with a U.S. fi nancial institution to usc another
bank's U.S. correspondent account. These second-tier
foreign banks then solicit individuals as customers. This
results in an exponential increase in the number of individuals having signatory authority over a single account
at a U.S. banking entity.
Of particular concern are foreign "shell banks" - foreign
banks that do not maintain a physical presence in any
country - that seek to access the U.S. fi nancial system via
correspondent accounts.
in their U.S. correspondent accounts. The checks and
money orders are bundled up at the foreign banks and
sent with a deposit slip (referred to in the industry as a
"cash letter") with the details of each check and money
order. The U.S. correspondent hank credits the foreign
bank's U.S. account and routes the individual payment
instruments to the appropriate pay ing banks and other
institutions.
Some banks handle as many as five to seven million
checks a day delivered by shipping companies in pouches and overnight bags. Processing is done as efficiently
as possible, making it very difficult to aggregate related
payments or scrutinize individual payments for evidence
of money laundering.
Private Banking
As cross border wire transfers come under increased
scrutiny and regulation, criminals have found paper
checks, money orders, and cashier's checks to be an effective method to move money internationally. These
more traditional payment instruments take a longer time
to clear when travel ing outside the United States but are
perceived by money launderers as being subject to less
scrutiny.
Private banking is defined as "the personal or discreet
offering of a wide variety of financial services and products to the affluent market. These operations typically
offer all-inclusivc personalized services. Individuals,
commercial businesses, law firms, investment advisors,
trusts, and personal investment companies may open private banking accounts."I" Private banking relationships
have proved problematic. In contrast to "nesting" or
"payable through" accounts, money laundering through
private banking relationships more often involves a
gross failure of due diligence, ifnot bank complicity.
Money launderers can transfer large dollar amounts by
writing a number of checks or buying a number of money orders at various U.S. locations, with each payment
below the reporting threshold. The dollar-denominated payments are mailed or transpotied to accomplices
overseas who deposit the checks and other payments
in foreign bank accounts. Because these are dollardenominated payments, the foreign banks that receive
them send them back to the United States for deposit
Riggs National Bank was fined over forty million dollars
as a consequence of serious deficiencies in its AML program, including in its private banking practice. 17 Riggs
opened multiple private banking accounts for former
Chilean dictator Augusto Pinochet, among other politically exposed persons, accepting millions of dollars in
deposits under various corporate and individual account
names and paying little or no attention to suspicious activity in these accounts. IS Other major banks have also
Cash Letter jPouch Activity15
t!This section is drawn from the testimony of John F. Moynihan and Larry C. Johnson, partner:;. RERG Associates, LLC, before the I louse
Committee on Financial Services, Suhcommittee on Oversight and Investigations. March II. 2003.
I'Money Laundering: A Banker's Guide to Ayoiding Problems. OHicc of the Comptroller or the Currency, Dec. 2002. Accessed at:
hHp:i!wIVwocc .r.n:a, .>!' )\'!rn"IlCV l;j un, len fl :.~2 rlI)2 .Ild I.
11 See. e.g., In the Ma~ter of Ri~gs Rank, N,A. No. 2004-0 I. Assessment of Civil Mondary Penalty (May 13. 2004): "Money Laundering and
Foreign Corruption: Enforcement and Effectiveness orthe Patriot Act," Supplemental Statf Report on U.S. ACCOllntS Used by Augusto
Pinochet, U.S. Senate Pennanent Subcommittee on Invcstigations, March 16, :W05.
I'Guidance on applying scrutiny to situations of this type has been available for some time. See Guidancc on Enhanced Scrutiny for
Transactions that May Involvt: the Proceeds of Foreign Corruption (1 allU2try 200 I). Accessed al: iH.lp:\\ \\" f(;,kr,dn:,crvc.gov, bO;lrddo\;,'
SRIYJ TFRS!2(lOhr(i! (1:1([1 ,pdl.
•••
BANKING -
CHAPTER 1
3
BANKING
(HAPTER 1
come under criticism for the laxity of their private banking AML policies and procedures.le)
In 2003, ICE established a Politically Exposed Person
(PEP) Task Force in Miami to address the vulnerability
of relationships between private banks and corrupt foreign officials. The PEP Task Force works with ICE field
offices and foreign governments in the identification of
public corruption-related proceeds laundered through
U.S. financial institutions. Increasingly, Central American, South American, and Caribbean governments are
seeking the assistance of the United States in developing
evidence against, and locating the assets of, corrupt government officials and prominent citizens involved in the
theft or embezzlement of public and private funds. ICE
agents are currently investigating several cases that involve illicit funds channeled into the United States from
Caribbean, Central American, South American, and Pacific Rim countries that were used to purchase assets domestically and abroad.
Regulation and Public Policy
Under the BSA, all financial institutions must develop,
administer, and maintain a program that ensures compliance with the law's reporting and recordkeeping requirements. The compliance program is tailored to a bank's
business operations and risks. By law, the program must
include the following four components:
• A system of internal controls to assure ong01l1g
BSA compliance;
• Independent testing of the OFI' s compliance;
• The designation of an individual responsible
for coordinating and monitoring day-to-day
compliance; and
• Training for appropriate personnel.
2
<J
Banks and c~rtail1 other OFIs must implement a written customer identification program appropriate for their
size, location, and type of business. 21 The program
must include account-opening procedures that specity
the identifying information that will be obtained from
each customer, and it must include reasonable and practical risk-based procedures for verifying the customer's
identity. The procedures are supposed to enable a bank
to form a reasonable belief that it knows the true identity
of each customer.
OFls are required to file SARs, reporting any instances
of known or sllspected illegal or suspicious activity.22
To ensure that it will be able to identity suspicious activity, a OFI should have in place a customer due diligence
(COD) program under which the organization (I) assesses the risks associated with a customer account or transaction, and (2) gathers sufficient information to evaluate
whether a particular transaction warrants the filing of a
SAR. In addition, appropriate systems and controls are
to be in place to monitor and identity suspicious or unusual activity. COD protocols vary depending on the
activities associated with different types and volumes of
banking transactions and their risk. (See Tables I and 2
for SAR data analysis).
The number ofSARs fi led by depository institutions from
1996 through 2003 increased on average by more than
25%) annually.23 The total number of suspicious activity reports filed in 2005 is projected to surpass 700,000.
FinCEN indicates that some of this increase is warranted, while some may be attributed to "defensive filing"
by financial institutions, in which SARs are filed on 11011suspicious transactions out of concern about regulatory
and criminal scrutiny. Such defensive filing dilutes the
value of the information in the BSA database. 24
Examination authority over banks and other depository
institutions for BSA compliance has been delegated by
"Testimony of Herbert A. Biern, Senior Associate Director. Division of Banking Supervision and Regulation. Federal Reserve Board. before
the Committee on International Relations, U.S. House of Represcntativcs NOvelliber 17.2004.
'"See 31 U.S.c. § 5318(h)(I).
21 See 31 U.S.c. ~ 5318(1) and 31 C.FR. ~ 103.121 (for banks. savings associations, credit unions. and certain non-federally regulated banks).
21 See 31 V.S.c. § 5318(g).
2J FinCEN. By The Numbers. Issue 3. Dec. 2004.
2'Statement of William Fox, Director Financial Crime Enforcement Network, United States Department ofthc Treasury.
before the United States !louse of Representatives Committee Oil Financial Services Subcommittee on Oversight and Investigations, May 2/),
2005.
4
BANKING -
(HAPTER 1
•••
CHAPTER 1
BANKING
FinCEN to the industry's five functional regulators. c'
The federal bank regulators include a review of BSA
compliance in their periodic examinations. [n the second half of 2004, the federal banking regulators completed 44 public enforcement actions involving RSA violations. Among the problems most often cited was the
lack of independent testing to validate BSA compliance.
In about 60% of the BSA cases that were closed in the
second half. a bank was ordered to arrange for testing or
was cited for failure to do SO.26 Several banks in recent
years have faced severe criminal and civil penalties as a
consequence of BSA lapses.
Finally, Section 319 requires covered financial institutions that provide correspondent accounts to foreign
banks to maintain records of the foreign bank's owners and to maintain the name and address of an agent in
the United States designated to accept service of legal
process for the foreign bank for records regarding the
correspondent account.
In June 2005, the FFIEC released ajoint BSAIAML examination manual. This manual will assist examiners
in evaluating banks' BSAIAML compliance programs,
regardless of the size or business lines of the bank. This
manual should provide for enhanced consistency in the
interpretation ofBSA and AML requirements across the
various agencies.
With respect to shell banks, Section 313 of the USA
PATRIOT Act and its implementing regulations prohibit covered U.S. banks and broker-dealers from establishing, maintaining, administering, or managing a
correspondent account for a foreign shell bankY In
addition, U.S. banks and broker-dealers must take reasonable measures to ensure that any correspondent account that they establish, maintain, administer, or manage for a foreign bank is not being used by the foreign
bank to provide banking services indirectly to a foreign
shell bank. 28
Section 312 of the USA PA TRIOT Act provides, among
other things, for enhanced due diligence with respect to
certain correspondent accounts held on behalf of banks
operating under an offshore license and also mandates
enhanced scrutiny for private banking accounts maintained for senior foreign political figures.
lSThe five runctional regulators for the banking industry include the Board or Governors llfthe Federal Reserve, System (Federal Reserve!, the,
Federal Deposit Insurance Corporation, the NatIOnal Credit Union Association, the Otlice of the Comptroller of the Currency, and the Otllee of
Thrift Supervision. State-chartered private hanks, trust companies. and credit unions without federal insurance have no 1edcral funelional
regulator, and come under the purview of the IRS SR/SE Division for purposes ofRSA examination,
2'Vartanian, Thomas P., Focus on BSA, Laundering Continued: Bank Secrecy Act, American 8ankcr, April I, 2005.
27
31 U.S.C ~5318U)(I); 31 CFR 103.177(a)(I)
2. 31 U.s.C ~5318U)(2): 31 eFR 103, I 77(a)(l ).
•••
BANKING
(HAPTER 1
5
CHAPTER 1
BANKING
1
351,784
24.26%
2
New York
167,635
11.56%
3
Texas
92,168
6.36%
4
Florida
89,413
6.17%
5
Illinois
51,004
3.52%
6
Arizona
48,691
3.36%
7
New Jersey
41,403
2.86%
8
Pennsylvania
37,765
2.60%
9
Ohio
34,634
2.39%
10
Michigan
34,506
2.38%
Table 1
The lOp 1m STales for SUSpiCIOUS ."1cll\·/I)" ReportfiltllgsJivm depuSi/ory II1S/llIl/IDnsfrolll Apr/II. 1996 through JUlie 3D, ::DD.f accoulltjor
two·thlrds of all SA Rsfor the perIod SOllree, FIIICEN, By The '\'l1l11l>crs. Issue J
BSA/Structuring/Money Laundering
11.65%
Check Fraud
Other
136,021
8.52%
Credit Card Fraud
77,970
4.89%
Counterfeit Check
74,891
4.69%
Check Kiting
55,940
3.51%
! 46,783
2.93%
Defal cation / Em bezzlem ent
46,323
2.90%
Mortgage Loan Fraud
40,016
2.51%
Consumer Loan Fraud
27,240
1.71%
False Statement
26,724
1.67%
Misuse of Position or Self Dealing
18,460
1.16%
Wire Transfer Fraud
17,634
1.11%
Mysterious Disappearance
17,375
1.09%
Debit Card Fraud
11,315
Less than 1%
Commercial Loan Fraud
10,699
Less than 1%
Identity Theft*
10,188
Less than 1%
Computer Intrusion*
8,319
Less than 1%
Counterfeit Credit/Debit Card
6,573
Less than 1%
Counterfeit Instrument (Other)
5,142
Less than 1%
Bribery /Gratuity
1,799
Less than 1%
971
Less than 1%
Unknown/Blank
Terrorist Financing*
6
BANKING -
CHAPTER 1
Table 2
by depOSl/or)' /n.llllullOIlS
TOnked by 5/ISPICIOIIS aefl1'II)', based on{illllgs from Api'll I,
1996 to JUlle 30, 200.f
SII.lpiCIOIIS ACI/I'If)' Report.lft/ed
• The calegory "compllti!!' IJ1truS/oIl" was added June 20()() and
"Identlf)' theit" alld'tcrrorzst/inanClllt;" were added .Jllly J003
Source: F/I/('FN, 81' 77,C NlIIllhers, Issue 3
•••
MONEY SERVICES BUSINESSES
Chapter 2
MONEY SERVICES
BUSINESSES
oney Services Businesses (MSBs) provide a
full range of financial products and services
outside of the banking system. For individuals
who may not have ready access to the formal banking
sector, MSBs provide a valuable service. They also
pose a considerable threat. MSBs in the United States
are expanding at a rapid rate. often operate without
supervision. and transact business with overseas
counterparts that are largely unregulated. Moreover,
their services are available without the necessity of
opening an account. As other financial institutions
come under greater scmtiny in their implementation of
and compliance with BSA requirements, MSBs have
become increasingly attractive to financial criminals.
M
Under existing BSA regulations, MSBs are defined to
include five distinct types of financial services providers
(including the U.S. Postal Service (USPS )): (I) currency
dealers or exchangers; (2) check cashers; (3) issuers of
traveler's checks, money orders, or stored value cards: (4)
sellers or redeemers oftraveler"s checks, money orders,
or stored value; and (5) money transmitters. Because of
the great variance in characteristics and vulnerabilities
across the various types of MSB, the main categories
ofMSBs will be treated in separate subchapters below.
Some introductory remarks follow that pertain to all
MSBs.
CHAPTER 2
rule, SUSpICIOUS activity and cunency transaction
reporting rules, and various other identification and
recordkeeping rules. 2 "
Additionally, existing BSA
regulations require certain MSB principals to register
with the Treasury Department.HJ Federal regulations
contain a definitional threshold for all MSBs except for
money transmitters: A business that engages in MSBtype transactions will be considered an MSB only if it
conducts more than $1,000 of transactions in a particular
category of money services transactions for any person
011 any day (in one or more transactions).)1 Finally, many
states have established AML supervisory requirements
that are often incorporated into the req uirement that an
MSR be licensed with the state in which it is incorporated
or does business.
Many MSBs, including the vast majority of money
transmitters in the United States, operate through a
system of agents. While agents are not presently required
to register, they are themselves MSBs that are required
to establish AML programs and comply with the other
recordkeeping and reporting requirements dcscribed
above. A 1997 Coopers & Lybrand study (Coopers
Study) estimated that approximately eight business
enterprises, through a system of agents, accounted for
the bulk of MSB financial products offercd within the
United States and the bulk of locations at which these
financial products were offered. This group comprises
large finns with significant capitalization that are
publicly traded on major securities exchanges. A larger
group of. on average, far smaller enterprises competes
with the largest firms in a highly bifurcated market for
With limited exceptions, MSBs arc subject to the full
range of BSA regulatory controls. including the AML
2,
See 3 J CFR JOJ. J25 (requirement for money services husincsscs to .::stablish and maintain an anti-money laundering program): 3 JCFR
.
.
. '
" ·t·IOn r~po
. rt-),
31 em'
10320 (requirement for money
103.22 (requirement
for money services
busmessl:s
to file cUITCncy trans"c
S.
. SCI"VICt:S
.
. .
. . reports, other than for check
,- las
" -I'
,·tions)·: :11 CFR
bus messes
to file SUSpICIOUS
activity
ling .an d'slore>d'
va Iuc>t··
I ansal
. 103.29
. ,(reqUirement for
.
.
,
I
k
.
h>
"
1
I'
ttlr
ca'l1
to
ven!y
the
Identltv
and
money services businesses that sell money orders, traveler s c lee 'S, 01 ot er inS rumen s
s
, • of the customer
.
' IUSIVC
. ).. .11 CFR 103 .33(f1 and.
(g).
(rules applicable
create and maintain a record of each cash purchase between $3, 000 an d $1 0,O(JO ' IIlC
. to
..
.reqUire
. III en t t'or CUirenc)
.
. , e'xehangers. IIlcludlil"
certain transmittals of funds); and 31 CFR 103.37 (additional
recol'dkeepll1g
'" the reqUiremcnt to
create and maintain a record of each exchange of currency in exccss of $1 .clOO).
.
.
'"See 31 CFR 103.41. The registration rcqui;emcnt upplit:s to all money sel"Vices businesses (whetheror not lIcensed as a I.noncy services
.
.
..
d S td. tes.
' 0 j',any sa.
-t'le or of unv- political subdiVISIOn of a slate, f
bUSiness
by my state) except the U S. Postal Service;
agencies
of the ']'
l mte
.Issuers, sellers, or redeemers of stort:d
. value, or any person thaI '
,
.
.',
b"
's
that
person serves
IS a moncy SI:IY Ices USIIlC:;.. solei\."Jbecause
.
.
_
b h as an. agent
. 0
b
'
tlla t,engagcs
,., 'ilaclivllIcsdcscnhcdm9103.II(uu)
ot onlt50\'"n
.
another money services business (however, a moncy SCP/ICCS
USIIlCSS
I
.
,
behalf and as ~n agent for othcrs is required to register).
"See31 eFR I03.II(uu)
•••
MONEY SERVICES BUSINESSES -
CHAPTER 2
7
MONEY SERVICES BUSINESSES
money services.)' These small enterprises may own
only one location with two to four employees, and may
provide both financial services and unrelated services
or products.)) Less is known about this second tier of
firms than about the major providers of money service
products.
commonly to clistomers attempting to evade the $3,000
funds transtCr recordkeeping requirement (or the $3,000
recordkeeping requirement for cash purchases of money
orders or traveler's checks) by either breaking up a large
transaction into smaller transactions or by spreading
transactions out over two or more customers.
Based on the Coopers Study, FinCEN estimated the
number ofMSBs nationwide in 1997 to bt: in excess of
200,000. A majority of the MSB population is made up
of agents of the major businesses (e.g, Western Union
and MoneyGram). Additionally. in 1997, approximately
40,000 MSBs were outlets of the USPS, which sells
money orders.
OCDETF identifies MSBs as an increasingly-prevalent
conduit for laundering illicit proceeds. From 2002 to
2004, OCDETF saw a 5 percent increase in MSB-related
cases, with the proportion of total money laundering
cases growing from I I % to 16%.
Outside of the major fimls, rates of registration with
Treasury have remained low. Despite repeated outreach
effol1s to the sector, only a small fraction of the total
MSBs - around 23,000 - have registered with the
federal govemment.J~ FinCEN notes that small MSBs
are largely aware of the pertinent regulations but fail to
register because of language, culture, cost. and training
issues.
FBI field offices consistently identified MSBs as the
third-most utilized money laundering method that
they encounter, after formal banking systems and cash
businesses, and particularly pointed to money remitters
as a threat. MSBs co-located with convenience stores
!
I
I
Vulnerabilities
The fleeting nature of the customer's relationship with an
MSB is a significant vulnerabi lity. In contrast to banks,
one does not need to be an ex isting "customer" of an
MSB and a customer can repeatedly use different MSBs
to transact business. This makes cllstomer due diligence
very difficult.
MSBs are llsed at all stages of the money laundering
process. A review of SARs filed '1 by MSBs from
October I, 2002 through December 31 , 2004 shows that
money laundering and structuring represented the most
frequently reported suspicious activity, cited in over
73% of MSB SARs filed. These reports point most
CASE EXA "rPI.E I
La~ering-~rO~gh 1\1;~
1
--
(:"7
S/J.VY-21J1J2- An mdlvl(Jual dekndantlaundered more than $700000 worth
of drug proceeds for a money laundering group associated with ColombIan
narcotics traffickers. The defendant WIred funds to bank accounts lJ1 Panama, Barbados. and Honduras As part of the defendant's money laundenng
scheme, between November 1998 and June 2000, he made structured cash
purchases of money orders totaling more than $600,000 without ever causmg a Currency TransacllOn Report (CTR) reporllo be filed On more than
50 occaSIons, lhe defendant made multiple small purchases of postal money
orders at vanous post omcc locatiom, as many as lion a Single day.
keeping them below lhe S3,OOO recordkecping threshold The defendant
compkkd the muncy orders III h,s munc, the name of his company, and the
nallles of relatives and fnends, and lhen deposited the money orders into
hIS company's husiness bank account. The defendant also exchanged more
than $500,000 worth of what he understood was drug money for checks
flom vaflous husiness accomplices, inc1uJlllg numerous carpet dealels.
Th,s activitv was determllled to have been an lI1tenlional circumventIon of
federal reponing reqlllrements.
For example. according to the Coopers study, at the time of that study, two money transmitters and two traveler's check issuers made up
approximately 97 percent of their respective known markets for non-bank money services. Three enterprises made up approximately 88 per
cent of the $100 billion in money orders sold annually (through approximately 146.000 locations), The retail foreign cUlTcncy exchange sector
was found by Coopers & Lybrand to be somewhat less concentrated. with the top two non-bank market partiCipants acwuntlllg tor 40 per cent
ofaknown market that accounts tor $10 billion. Check cashing is the least concentrated ufthe business sectors; the two largest non-bank
check cashing businesses make lip approximately 20 per cenl of the mallet. with a large number of competitors,
))Members of the second group may include. for exampk. a travel agency. courier serVice, conventence store, grocery or liquor storc.
Hit is not known how many unregistered MSRs exist that require registration. The 1997 Coopers Study estimate at 200.000 Included all
MSBs, and is not indicative of the number of MSRs n:ljuiring registratioll.
J5More than one violation may be identified on a singh; SAR.
II
8
MONEY SERVICES BUSINESSES -
CHAPTER 2
•••
MONEY SERVICES BUSINESSES
CHAPTER 2
and gas stations were cited as the most cOl11mon sites
for money laundering, with travel agencies that offer
MSB services also noted as an increasingly prominent
conduit for the illicit transmission of money. Anecdotal
reporting by law enforcement points to the use of MSBs
in counterfeit check schemes and non-government
charitable organizations (NGOs) utilizing MSBs to
transfer proceeds internationally to support terrorist
organizations and terrorist-related activities.
As of December 31. 200 I, all MSB principals (not
individual agents) were required to register with FinCEN,
listing the owner or controlling person. Each business
that meets the definition of an MSB Illust register, except
for the following:
Several FBI field offices reported the laundering of
millions of dollars derived from Internet extotiion and
fraud schemes through MSBs such as Western Union.
PayPal, e-gold Limited. and other online payment
systems.
• A business that is an MSR solely as an issuer,
seller, or redeemer of stored value;
Regulation and Public Policy
• A business that is an MSB solely because it serves
as an agent of another MSB;
• The USPS and agencies of the United States, of
any state. or of any political subdivision of any
state; and
Vulnerabilities particular to specific types of MSBs will
be explored in the respective sub-chapters below.
• A branch office of an MSB is not required to file its
own registration form.
Geographic Concentration
Analysis of FinCEN data from October I, 2002 through
December 31.2004 indicates that MSBs located in New
York and California filed more MSB SAR forms than
MSBs in any other state, followed by Arizona, Texas,
Florida, Colorado, New Jersey, Massachusetts, Georgia.
and Illinois. These numbers indicate a concentration
of illicit financial activity ill major, densely populated
cities and along the Southwest border.
Law enforcement
also
identified
geographic
concentrations ofMSB money laundering activity
in highly-populated cities but did not identify
California or the Southwest border as focal points
for illicit MSB activity, despite the high volume
of suspicious activity reported by MSBs in these
regions to FinCEN.
With respect to destinations, most federal law
enforcement agencies identified Mexico as the
primary destination for suspicious funds sent
through MSBs. Other prevalent destinations
were Russia, Colombia, the Dominican Republic.
and various locations in Central and South
America. The majority of these investigations
dealt with narcotics trafficking organizations.
Investigations have also noted increased money
laundering concerns among Middle Easterners in
the United States operating MSBs and sending
funds to Egypt, Sudan, and other locations in the
Middle East.
•••
MSB registrations must be renewed every two years.
Failure to register is punishable by a civil fine or criminal
prosecution under 18 U.s.c. ~ 1960, which prohibits the
operation of an unlicensed money transmitting business.
For purposes of 18 U.S.c. § 1960, an unlicensed money
transmitting business is a person who knowingly
conducts. controls, manages, supervises, directs, or
owns all or part of a money transmitting business, and
who fails to register as required with FinCEN. or in
Table 3
MSB SuspiCIOUS ActiVity Reporting Ranking by States 10/1/02-12/31/04
49%
#2
Arizona
9%
#3
Texas
8%
#4
Florida
6%
#5
Colorado
4%
#6
New Jersey
4%
#7
Massachusetts
3%
#8
Georgia
3%
119
Illinois
3%
25%
'Percentages rounded to nearest whole number.
MONEY SERVICES BUSINESSES -
CHAPTER 2
9
MONEY SERVICES BUSINESSES
certain circumstances, operates without a required state
license. MSBs which fail to register also may he liahle
for civil money penalties of up to $5,000 for each day
the violation continues and a criminal penalty of up to
five years imprisonment.
All MSBs must establish AML programs, and obtain
and veritY customer identity and record information
about the transaction, including beneficiary information
if received, for funds transfers of more than $3,000
regardless of whether the activity appears suspicious or
not. They must also keep records regarding the cash
purchase of money orders and traveler's checks between
$3,000 and $10,000, and certain records regarding their
currency exchange transactions. In addition, all MSBs
are required to file reports of transaction in currency of
more than $10,000.
As of January 1,2002 most MSBs are required to report
suspicious activity. The SAR requirement does not apply
to check cashers or to sellers and redeemers of storedvalue. An MSB is required to file a SAR on a transaction
or series of transactions conducted or attempted by, at,
or through the MSB if both of the following occur:
• The transaction or series of transactions involves
or aggregates funds or other assets of $2,000 or
more, and
• The MSB knows, suspects, or has reason to suspect
that the transaction (or a pattern of transactions of
which the transaction is a part) falls into one or
more ofthe following categories:
I. Involves funds derived from illegal activity
or is intended or conducted in order to hide or
disguise funds or assets derived fr0111 illegal
activity as part of a plan to violate or evade
any federal law or regulation or to avoid
any transaction reporting requirement under
federal law or regulation:
'J
~
10
Ts designed to evade any BSA regulation;
Has no business or apparent lawful purpose or
is not the sort in which the particular cu!'tomer
would normally be expected to engage, and
the MSB knows of no reasonable explanation
MONEY SERVICES BUSINESSES -
CHAPTER 2
for the transaction after examllllJ1g the
available facts, including the background and
possible purpose of the transaction; or
4.
Involves use of the MSB to facilitate criminal
activity.
Despite the regulatory requirements, the maJonty of
MSBs in the United States continue to operate without
registering with FinCEN. Tnformation obtained from
SAR analysis indicates some lack of understanding
by MSBs about registration requirements, especially
among operators of small businesses that also provide
MSB services. While some individuals made no
attempt to register with FinCEN, others provided partial
registration documentation. Other brokers, when given
a thorough explanation of the registration process, were
willing to comply with registration requirements. The
relative novelty of the regulatory regime and the lack
of familiarity by MSB operators about government and
vice versa will continue to present challenges for both
regulators and law enforcement.
IRS SB/SE has been delegated authority to examine MSBs
for BSA compliance. A staffofseveral hundred IRS SB/
SE full-time BSA examiners evaluates compliance with
the reporting and record-keeping requirements of the
BSA and Section 60501 of the Internal Revenue Code.
Monetary thresholds and the Sentencing Guidelines
often impede the prosecution of 18 USC § 1960
violations. U.S. Attorney's Offices may be restricted
by guidelines that force prosecutors to either decline or
defer prosecutions of 18 USC § 1960 violations because
the amount of money at issue is too small. Additionally,
the relative newness of 18 USC § 1960 may limit its
use by law enforcement and U.S. Attorney's Offices.
Despite these factors, the Department of Justice has
successfully prosecuted numerous 18 USC § 1960
violations. particularly in major metropolitan areas such
as New York and Chicago.
The following sub-chapters will address the particular
characteristics and vulnerabilities of Money Transmitters,
Check Chasers, Currency Exchangers, Money Orders,
and Stored Value Cards.
•••
MSB: MONEY TRANSMITTERS
MONEY TRANSMITTERS
he financial services industry, law enforcen.lent,
and regulators interchangeably refer to nonbank money transmitters as money remitters.
wire remitters, and wire transmitters, hereinafter money
transmitters. J6 The sheer volume and accessibility of
money transmitters makes them attractive vehicles to
money launderers operating in nearly every pat1 of the
world. Western Union runs the largest non-bank money
transmitter network, with more than 225,000 agent
locations in 195 countries and territories worldwidc. 17
T
As the overwhelming majority of wire transfers at
MSBs are paid for with cash, money transmitters
provide excellent camouflage for the initial introduction
of the illicit proceeds into the financial system. Money
transmitters offer inexpensive services, and often
impose less rigorous AML programs and compliance
than traditional financial institutions.
A funds transfer can generally be described as a series
of steps, beginning with the originator's (customer's)
instructions and including a payment message, which is
used for the purpose of making payment to the beneficiary
(receiving customer). There are a wide range of potential
sources of funds for initiating a funds transfer, which
include: cash, certified checks, cashier's checks, money
orders, traveler's checks, account withdrawal, and credit
and debit cards.
Vulnerabilities
The vulnerabilities endemic to MSBs in general
- discussed above - also apply to money transmitters.
As with all industries subject to reporting thresholds,
money launderers attempt to abuse money transmitters
by structuring transactions below federal reporting
thresholds. Owners or employees of registered money
transmitters may help money launderers avoid rep0l1ing
requirements by falsifying records to make it appear as
though a large amount of laundered money was deri ved
from a series of small transactions. Money transmitters
CHAPTER 2
may also knowingly permit individuals to make frequent
structured transactions using false names and telephone
numbers for each transaction.
The rapid movement of funds between accounts in
different jurisdictions increases the complexity of
investigations. In addition, investigations become even
more difficult to pursue if the identity of the originator
is not clearly shown in an electronic payment message
message.
Money transmitters remain a particularly attractive
vehicle for money laundering due to several inherent
characteristics of the industry:
• Large money transmitters maintain agent offices
in thousands of cities and scores of countries,
allowing customers to move funds from nearly any
location directly to any other location;
• Money transmitters provide for rapid service,
transmitting funds instantly or in days;
• The sheer volume of legitimate cash transactions
provides an excellent camouflage for money
laundering activity in the placement stage;]·
• Money transmitter services are relatively
inexpensive as compared with other means utilized
by money launderers, often charging 10-20 percent
per transmission; and
• Money transmitters increasingly provide online
payment services and accept credit and debit cards.
A!though there are often identification safeguards
in place - MSBs must verify identity with valid
forms of identification and often utilize security
features like password protection and online
validation by third pal1ies for signature verification
- the lack of face-to-face interaction between the
customer and the MSB limits the ability of MSBs
to detect suspicious activity, as with other financial
services provided through the Internet.
----_._--"Infonnal value transfer s)'stcms ([VTS), such as hawalas, an: In:atcu scp.cratcl y in Chapter 4"
.
I 1,1
' , . I·o·"aI'Oll II " II l (11'\
'''I) '('()Ulltl\. ':f' O'l.i ' , .
See "About Western Union " Accessed at: hllpJ!\\ \\\\, \\.;"lnlllllll(l/l.C\llllll1
.
,.:
. 2) L' , .'
, .
J
.
• .
.
,h' '1 'II' " . , eus are introduced Into the fmanClal system, (
il)ellng.1I1
'The three stages of money launuenng are: (I) Placement, In \\ IC 1 I Jell pIO\;e,
j'
,.t· .. all.' (3) Inl<::gration in which the illicit
.• [.rom tl1<:: en
. 'nle through ('1 .serres. [) transac IOns. u
.
. the criminal attempts to separate the proceeus
which
proceeds are made to look legitimate through investment in legal assets.
JJ
•••
MSB
MONEY TRANSMITTERS -
CHAPTER 2
11
MSB: MONEY TRANSMITTERS
Unregistered money
transmitters
ofter money
launderers many of the same advantages as registered
money transmitters, with the added benefit of additional
anonymity:
• The failure to follow tederal reporting requirements
reduces transparency yet further;
• Unregistered money transmitters frequcntly
maintain coded records which may be inscrutable
to investigators; and
• Unregistered transmitters may not advertise and
may operate from locations with other primary
purposes, such as gas stations, grocery stores, and
residences, making them more difficult to detect.
These businesses will often use such cash-intensive
retail businesses tojustify large-scale bank deposits
and transfers.
Demographic and Regional Concentrations
Ethnic immigrant communities are heavy users of money transmitter services, particularly to send money home
to their native countries. Typically, members of these
communities will use multiple services of an MSB, such
as money transmission in conjunction with check cashing and/or currency exchange. DEA, ICE. FBI, FinCEN, and OCDETF have noted Middle Eastern, Asian,
and Latin American - specifically Mexican - immigrant
communities in major metropolitan areas as primary users of money transmitter services.
Frequently identified points of origin for money transmissions were New York, Los Angeles, Chicago, Dallas, Houston, Phoenix, Tucson, Seattle, and San Juan.
Law enforcement reporting indicates that a large amount
of illicit funds laundered through money transmission
services are sent to the southwest border of the United
States. Roma, McAllen, Benita, Brownsville. Harlingen, Hidalgo, and Rio Grande City are the primary Texas border towns receiving wires, while Houston, and increasingly Dallas, are the primary cities receiving wires.
The unusually large number of wires being received at
the southwest border is particularly apparent in southern Arizona, where S 12 are received for every $1 sent.
As discussed below. this disparity may be accounted for
in bulk cash movements south of the border. Some observed trends in predicate crimes by origin/destination
are described in Table 4.
In the New YorklNew Jersey area, money transmittal
businesses are extremely prevalent and witness a great
deal of money laundering. Vulnerabilities particular to
specific types of MSBs will be explored in the respective sub-chapters below. OCDETF identified the most
prevalent area of suspicious activity as Jackson Heights,
Queens, which purportedly contains the largest Colombian community outside of Colombia itself.
OCDETF also reports Colombian and Dominican drug
trafficking organizations actively utilizing New England-based money transmitters to wire illicit drug proceeds to criminal recipients in Colombia and the Dominican Republic, despite some successful prosecutions
in this arena.
Internationally. ICE notes that wires sent from the Los
Angeles area were primarily destined for South/Central
America, Asia, Europe, and the Middle East, while wires
sent from the New York area were primarily destined for
Colombia and the Dominican Republic.
Money Transmitter Trends in Southern Arizona
Moncy transmissions received in southern Arizona and
Texas are typically sent in amounts of less than $3,000.
Table 4
12
Southern Arizona
California
Narcotics trafficking
Southwest Border
New York, New Jersey, North Carolina and FlOrida
Allen trafficking
Texas
New York, Florida, North Carolina, and New Jersey
Alien trafficking, narcotics trafficking to a lesser extent
MSB: MONEY TRANSMITTERS -
CHAPTER 2
•••
MSB: MONEY TRANSMITTERS
CHAPTER 2
When alien trafficking is the predicate crime, It IS
believed that this amount does not indicate structuring
but rather the relatively small amounts involved in
individual instances of alien trafficking. When the
transactions are received at the border, however, they
become structured as the same receiver must collect the
transactions individually in order to keep them under the
$3,000 threshold.
From the southwest border, the funds are generally
bulk shipped south. From Arizona, most of the money
is smuggled across the border in passenger cars in
amounts under $100,000, with a small amount retained
Table 5
IL
25.7
0.7
NC
12.1
0.2
NJ
16.7
0.3
NY
31.6
1.1
PA
6.6
0.3
112.6
3.4
Total
Regulation and Public Policy
In addition to the rules applicable to all MSBs, money
transmitters are required to collect information regarding
wire transfers involving $3,000 or more and retain
these records for five years. As of January 1, 2002, all
money transmitters must maintain a list of agents and
have it availahle for review. The list must include such
information as the agent's name, depository institution,
and the number of branches and subagents. A business
acting solely as an agent of a money transmitter is not
required to register with FinCEN. However, the agent
must notify the money transmitter when it establishes
subagents so that the transmitter may revise its agent list
as required by FinCEN each January I.
'Millions of u.s. Dollars'
at the border to cover the operational costs of the alien
smuggling operation. In Texas, 60-70 percent of the
funds are bulk shipped across the border. 19
After being bulk shipped across the border, the
previously wired funds are generally returned to the
United States. ICE reports that this is accomplished by
wiring the money back to the United States, although
various methods - some as simple as returning the funds
via bulk cash shipment - can be used. When reentering
the country, the illicit funds are documented, appear to
be legitimate, and may then be used to meet the financial
needs of the money launderers within the United States.
"Houston Money Laundering fnitiative (HMUJ
•••
MSB: MONEY TRANSMITTERS -
CHAPTER 2
13
;:~ ,
MSB: CHECK CASH ERS
CHECK CASHERS
heck cashers provide essential servIces for
persons without bank accounts.
Criminals
can and do abuse these services, however, to
launder illicit funds, otten in conjunction with money
transmitters and informal value transfer systems (!VTS).
Not all check cashers perform the same services and
thus not all check cashers pose the same vulnerabilities
or levels of risk,
C
Vulnerabilities
Money launderers use check-cashing businesses to
launder funds via third-party checking, To do this,
a money launderer may make daily visits to small
businesses in order to purchase checks made out to
that business by uninvolved third parties. By selling
these checks to the launderer, the business benefits by
receiving immediate cash, avoiding banking or check
cashing fees, avoiding income taxes, and passing on the
risk of bad checks to the launderer. The launderer pays
for the checks using illicit cash, and can then redeem
the checks without causing the filing of a Currency
Transaction Report (CTR) by not taking payment in
cash. Money launderers sometimes purchase check
cashing businesses outright, in which case checks can
be deposited directly into the launderer's bank account,
also without a CTR being filed.
Check-cashing businesses engaged in money laundering
via third party checks typically will only withdra\v a
portion of the sum of checks being deposited, making
up the remainder with dirty cash. This activity may
generate a SAR. However, banks and law enforcement
agencies may not immediately recognize this activity as
suspicious, as the check-cashing business may reasonably
hold accounts at other institutions from which the cash is
being withdrawn. Illicit check-cashers may also arouse
suspicion by withdrawing bills in large denominations.
To avoid scrutiny, money launderers will frequently
send endorsed third-party checks out of the country to
be cashed or deposited. When these checks are cashed
or deposited at foreign banks, the U.S. bank may take
note during the clearing process and file a SAR. Thirdparty checks are also used to send value overseas, akin
to money orders. Because these checks are physically
lighter and occupy less space than their cash equivalents,
14
MSB: CHECK CASHERS -
CHAPTER 2
it is easier for money launderers to bulk ship or mail
packages of these monetary instruments out of the
country. For narcotics traffickers, shipping checks is
also preferable to shipping currency because narcotics
residues are less Iikely to adhere to paper checks than to
currency, reducing the likelihood that police dogs will
detect them.
Law enforcement has reported several examples of
abuse in the check cashing industry. In one case, IRSCI reported that numerous corporate checks stolen from
the mail were eventually negotiated at a check casher.
The FBI has witnessed an increase in money laundering
through check cashing services and FBI field offices
throughout the United States are observing large amounts
of money flowing through structured deposits involving
check cashing services. Drug trafficking organizations
are noted as frequent users of this laundering method.
Others have observed these services used by
undocumented immigrants sending money to Mexico
and the Middle East. The lack of record-keeping
requirements for check cashers hinders law enforcement
efforts to identify the source of the suspect funds.
Regulation and Public Policy
Check cashers, like most MSBs, must register with
FinCEN. Although check cashers are required to file
CTRs for cash transactions greater than $10,000, they
arc not currently required to file SARS (although they
may do so voluntarily).
Only 24 states currently have specific check cashing
legislation or regulations. Check cashers are often
required to be licensed but are subject to less state
regulatory oversight than other money service businesses,
like sellers of money orders or traveler's checks. This is
due, in part. to a perception that check cashing poses a
comparatively smalkr risk to consumers. Likewise, net
worth requirements are typically less stringent for check
cashers. State banking authorities or other supervisory
bodies also examine these businesses less frequently.
The exemption of check cashers from SAR repolting
requirements may hinder law enforcement effOlts to
identify laundering through this channel.
•••
MSB: CURRENCY EXCHANGERS
CURRENCY EXCHANGERS
urrency exchangers. also referred to as cun'cncy
dealers, money exchangers. casas d<: call/hio,
and bureaux de changes, provide conversion
of bank notes of one country for that of another and
may be abused by criminals in order to launder illicit
funds. particularly during the placement stage of money
laundering.
C
Although currency exchange, in and of itself, poses a
less serious money laundering risk than the services
provided by other MSBs, certain elements of the currency
exchange sector, such as casas de camhio. playa major
role in money laundering operations, particularly for
narcotics organizations. Currency exchange is the MSB
subject to the least state regulation, with fewer than ten
states currently regulating this activity.
Vulnerabilities
Currency exchange businesses are predominately
located along shared borders, at international airports,
and in large tourist areas. The services provided by
currency exchange houses allow money launderers to
exchange large quantities of small-denomination bills
for large-denomination bills of the same or difTerent
currency. Thus exchanged, the bills can be more easily
bulk shipped or deposited in bank accounts. Currency
exchange houses are also used to provide additional
cloaking in a funds transfer chain. An exchange house
may, for example, accept cash from a customer which it
then deposits in its own account at a commercial banking
institution. The origin or source of the funds would be
disguised because the bank will attribute ownership to
the currency exchange busincss.
Currency exchange businesses also regularly offer
money transmission services, compounding the threat
by introducing the money transmitter risks discussed
above.
Casas de Cambio
Casas de cambio are currency exchange houses
specializing in Latin American currencies and
transactions. In the United States, these businesses are
concentrated along the southwest border, with over 1,000
casas de cambio located along the border from California
to Texas. These currency exchangers generally offer
•••
CHAPTER 2
other MSB services, and often exist in combination with
retail businesses such as gas stations and travel agencies.
These businesses are generally unregistered and noncompliant with MSB SAR reporting requirements. and
are suspected of being the primary non-bank money
laundering mechanism in the southwest border area.
Typical casas de cambia can launder as much as $5
million per month, primari lyon behalfof drug traffickers.
Casas de cambia are otten run from mobile or temporary
locations such as pickup trucks, trailers, sheds, and even
telephone booths so that operations may be quickly
relocated to avoid law enforcement. U.S.-based casas de
cambio typically maintain close relationships with their
Mexican counterparts in order to facilitate transactions
such as funds transfers.
Some casas de cambiu exist for the primary purpose of
facilitating money laundering activities. Although casas
de cambio are required to file Reports of International
Transportation of Currency or Monetary Instruments
(eMIRs) and Currency Transaction Reports (CTRs),
they will commonly move money on behalf of many
clients in a bulk transaction conducted under the name
of the exchange house, thus cloaking the identity of the
true originators. Any SARs filed in these cases by banks
or other intermediaries will report the casa de cambia as
the violator, often leading to an investigative dead end.
Seized documents in raids conducted by the Venezuelan
Guardia Nm:ional on casas de cambio and businesses in
the Venezuelan state of Tachiria revealed that a number
of casas de cambia were laundering drug proceeds
originating from the United States through Venezuela
to Colombia. Venezuela was being used to avoid
Colombia's relatively high tariff on U.S. currency. It
was later discovcred that numerous casas de camhio
involved in the money laundering process had U.S. dollar
checking accounts through correspondent accounts held
by major banks in Venezuela.
Regulation and Public Policy
Currency exchangers are subject to general MSB
regulations and are required to fi Ie SA Rs. In a sampl ing
of 44 SARs filed by Currency Exchangers, FinCEN
found that structuring \vas the 1110st reported violation
(29%), followed by altering the transaction to avoid
reporting (20%), and (wo or more indi viduals conducting
coordinated transactions (20%). The suspects reported
in these SARs resided or transacted in 1I1inois and
southwest border states. as well as Mexico, Canada,
MSB
CURRENCY EXCHANGERS
CHAPTER 2
15
Colombia, and Spain.
The amounts of violations repor1ed in these SARs
ranged from $0-$25 million. The violation ranges were
as follows:
the flIer, the suspect ceased doing business with
this MSB; and
• Unusually large exchanges of currency. One SAR
reported a suspect in connection with the exchange
Table 6
$0-$999
$1,000-$9,999
$10,000-$99,999
$100,000-$25
million
5
11%
31
70%
7
9%
1
With regard to the 13 SARs reporting violations involving
money exchangers exclusively, the violation amounts
ranged from $425 through $41,983, and structuring was
the most reported violation, appearing in 7 of the 13
SARs (54%).
A review of money exchange SAR narrati ves reveals the
following recurring patterns:
• The exchange of foreign currency for U.S. dollars
(USD);
of 100,000 pesos for USD. The suspect balked
when asked for TO, but did supply it. He latcr
returned with a woman he identified as his client,
who also exchanged 100,000 pesos for USD. A
Texas MSB reported that, in one month, a Mexican
suspect exchanged nearly $42,000. Another SAR
reported a Spanish suspect who visited two Miami
International Airport currency exchanger locations
in three days and exchanged Euros for USD in the
total amount of $21,290.
• Submitting U.S. currency in specific denominations
such as $1 's, $5's, and $1 a's;
• Odor on the currency:
• Two or more individuals working together to
exchange pesos in an amount under the reporting
requirement;
• Regular exchanges of sim ilar amounts of currency.
A California MSB rep0l1ed a customer for regularly
exchanging USD into pesos. Amounts ranging
from $300-$800 USD were exchanged daily. The
bills were all in small denominations under $1 ,000.
At one point, the customcr transacted over $1 ,000,
prompting the exchange house to ask for TO and the
pUrpose of the transactions. The suspect stated that
she had a grocery store in California and bought
supplies in Mexico. After she was questioned by
16
MSB: CURRENCY EXCHANGERS -
CHAPTER 2
•••
MSB: MONEY ORDERS
MONEY ORDERS
oney orders are a highly versatile vehicle
for money laundering, useful for a number
of financial crimes ranging from smuggling
narcotics trafficking proceeds to depositing illicit
proceeds from alien smuggling and corporate fraud into
bank accounts.
M
Money orders are used by approximately 30 million
people annually to conduct business such as paying bills
and sending money back to families in foreign countries.
It is estimated that over 830 million money orders in
excess of$100 billion are issued annually. The money
order industry is small compared to that of other MSBs
and easier to assess. Eighty percent of all money orders
are issued by the USPS, Western Union, and Traveler's
ExpresslMoneyGram.
The remaining 20 percent
are issued by smaller, regional companies scattered
throughout the United States.
Vulnerabilities
As a money laundering vehicle, money orders have
several attractions. First, money orders can be issued in
high-dollar denominations and are much less bulky than
cash. Money orders are also replaceable iflost.
CHAPTER 2
destinations include Lebanon, the Palestinian territories
United Arab Emirates, Saudi Arabia, and Central and
South America.
Financial hubs that see the greatest volume of money
order activity are New YorkfNew Jersey, Los Angeles,
El Paso, Dallas, Miami, Boston, and San Francisco.
D~A, USPIS, ICE, and the New YorkfNew Jersey High
RIsk Money Laundering and Related Financial Crimes
Areas (H IFC A) 40 all report significant money laundering
activity with money orders in these regions. OCDETF
has consistently repOlied that approximately 20 percent
of its newly-initiated money laundering investigations
contains a money order component. Law enforcement
primarily ICE and DEA, and the regulatory communit;
have seen a steady stream of money order use by
launderers moving bulk cash from narcotics transactions
to Mexico and other regions of Latin America. DEA
and ICE report an area of increasing concern is the use
of Mexican casas de cambio used to transport proceeds
through money orders into Mexico. The vulnerabilities
presented by money orders and the relative lack of
regulatory oversight of casas de cambia in many foreign
countries create an attractive environment for individuals
seeking to launder illicit proceeds.
Anonymity is another major attraction. Money orders
are issued anonymously for amounts under $3,000. Most
money order sellers/issuers do not have any relationship
with their customers and very Iittle, if any, information is
required to purchase a money order. Without originating
infonnation, it can be impossible for law enforcement to
detect patterns of unlawful activity by an individual or
group, or to track suspicious transactions to their source
or ultimate recipient.
USPIS, FBI, DEA, and ICE investigations have all
repeatedly noted dirty cash being converted to money
orders to hide its true source and/or to shrink the physical
~ize of the contraband in order to facilitate smuggling
It out of the country. Commonly cited international
"HJFCAs were conceived in the Money Laundering and financial Crimes Strategy Act of 1991! as a means of conccnlrallng law cnl()rccmcnt
efforts at the federal. state, and local levels in high intensity money laufl(.icring 7ones. J-IJfCAs may [1(; defined geographically or they can abo
be created to address money laundering ill an industry sector. a financial institution. or group of financial institutions .
..-.-----------------------------------------------------MSB
MONEY ORDERS -
CHAPTER 2
17
The illustration helow presents a typical cycle ojmofll:Y
laundering through the lise o/molley orders. n
2
Illustration 1
r
MO·sHeld by
Cnmlnals
5
money orders. The great majority of these money orderrelated SARs (93%) were filed by usps. usps reported
approximately
$296.9
111 iII ion in suspicious money
order activity equaling
approximately .0 I % of
the total face value issued
in 2003. In 2004, USPS
reported $408.5 million
SUSpICIOUS
money
in
order activity, equaling
approximately .014% of
the total face value issued.
The increase from 2003 to
2004 by .005% is believed
to reflect USPS's lowering
of its ·'back-end" threshold
for detecting suspicious
activity from $10.000 to
$5,000.
Transactions back to Cnmlnal>
Trends identified in the
SARs filed include the
following:
Further Layering
Funds Appear
Legitimate
Regulation and Public Policy
Regulatory requirements for MSBs that issue money
orders are the same as those for MSBs in general, as set
out above. In addition, many money order businesses
impose their own lower dollar thresholds, such as not
selling more than $2,000 in money orders to a customer in
a given day, which obviate the need for CTR reporting.
Of the total SARs fi led for MSBs from October I,
2002 through December 31, 2004, 32 percent involved
• The purchase of mUltiple,
structured money orders
on the same day or within
a shOlt period of time: on
many SARs it was noted
that when the customers
were informed of the
reporting threshold. they
changed their purchase to
lower amounts;
• Money order deposits to the same bank account
composed of multiple, sequentially numbered
money orders;
• Customers lacking proper identification, or
providing false identification, leading some filers
to conclude that these customers could be illegal
aliens;
• Structured purchases frequently followed by the
deposit of the money orders into the same bank
account;
" FinCEN.
18
MSB: MONEY ORDERS -
CHAPTER 2
•••
MSB: MONEY ORDERS
CHAPTER 2
• Individuals coming into the Post Offke together,
but separating inside to make the purchases from
different tellers because the combined total of the
money orders purchased exceeded the reporting
threshold; and
• Money order purchases being paid for with currency
in specific denominations, sometimes bundled into
stacks, indicating organized-crime involvement.
Anti-money laundering training is required of money
order businesses, but this training can be quite cursory.
Common vendors of money orders, such as small
convenience stores, may neither understand nor value
BSA compliance. When AML training is offered, it is
typically thin, such as requiring employees to read a brief
pamphlet. The fact that the workforce at these businesses
is frequently comprised of part-time, younger, and
less-educated employees with an extraordinarily high
turnover rate, further complicates the training effort.
There is also an accountability gap. All money order
issuers, aside from the USPS, rely to a large extent on
licensed agents, rather than employees, to sell their
instruments, The parent firms have a responsibility to
review activity across their agent network but are not
required to review individual SARs, Indeed, some finns
specifically discourage their agents from submitting
SARs to the parent firm.~2
Western Union and MoneyGram combined - which
represent over 50% of the money orders issued in the
United States - represented only I percent of all SARs
filed from October 1,2002 through December 31,2004,
where money laundering was listed as the Category of
Violation and where money orders was identified as the
Financial Service(s) Involved, By comparison, USPSwhich represents one-quarter of all money orders issued
in the United States - represented 93 percent of such
SAR activity.
---~
- -- - - - - -
"See, e.g., Travelers Express "Anti-Muney Laundering Compliance Guide," July 2002. Accessed at: IllIp' \.\\\ \\nJ()IIC) Ft:HllC,'il1llllfll.,
ag cn tguidc.pJ1.
•••
MSB
MONEY ORDERS -
CHAPTER 2
19
MSB: STORED VALUE CARDS
STORED VALUE CARDS
tored value cards (sometimes referred to as
prepaid cards) are an emerging cash alternative for
both legitimate consumers and money launderers
alike. The term "stored value cards" can cover a variety
of uses and technologies. Some cards have embedded
data processing chips, sOllle have a magnetic stripe, and
some cards (e.g. prepaid phone service cards) just have
an access number or password printed on them (the card
itself cannot access or transfer cash).
S
Stored value cards can be characterized as operating
within either an "open" or '"closed" system (See Table
7). Open system cards can be used to connect to global
debit and automated teller machine (A TM) networks.
The cards can be used for purchases at any merchant or
to access cash at any ATM that connects to the global
payment networks. 43 Such open system card programs
generally do not require a bank account or face-to-face
verification of cardholder identity. Funds can be prepaid
by one person, with someone else in another country
accessing the cash via A TM. Open system stored value
cards typically may be reloaded, allowing the cardholder
to add value.
Closed system 44 cards are limited in that they can only
be used to buy goods or services from the merchant
issuing the card or a select group of merchants or service
providers that participate in a network that is limited
geographically or otherwise. Examples of closed system
cards include retail gift cards. mal I cards. and mass transit
system cards, as well as the mUltipurpose cards used on
overseas U.S. mil itary bases and on college campuses.
These cards Illay be limited to the initial value posted to
the card or may allow the card holder to add value. 4'
Stored value cards offer individuals without bank
accounts an alternative to cash and money orders.
Target markets include teenagers, the unbanked, adults
unable to qualify for a credit card, and immigrants
sending cash to family outside the country. The
un banked in the United States comprise an estimated
10 million households and 75 million individuals. 4 (,
A growing segment of the stored value card market
consists of businesses and government agencies using
plastic cards to replace paper vouchers. checks, and cash
for per diems, insurance and health benefi t payments,
and even payroll. Issuers see the greatest fee potential,
however, among the unbanked, who, by using the cards
in place of cash and money orders, gcnerate transaction
fees with every purchase and every cash withdrawal. 47
Vulnerabilities
Stored value cards provide a compact, easily
transpol1able. and potentially anonymous \vay to store
and access cash value. Open system cards lower the
barrier to the U.S. payment system. allowing individuals
without a bank account to access illicit cash via ATMs
globally. Closed system cards, primarily store gift cards.
present more limited opportunities and a correspondingly
lower risk as a means to move monetary value out of
the country. Yet federal law enforcement agencies
"Intel11ationaI networks on which open system cards can be used include Visa's Plus (ATM) and Interlink (point·of-sale) networks and
MasterCard's Cirrus (ATM) and Maestro (point-of-sale) networks.
"Smart cards are another version of a closed system card. but arc not widcly Llsed in the U.S. In some countries, smart cards haye an
embedded data processing chip that carries hank-issued electronic money. The cards can transfer money directly to participating mt:rchants
without the transaction going through an intennediary. The merchant or service provider's bank redeems the stored electronic paymellts ilS
conventional cilSh from the bank that issued the e-mol1t:y. In some countries. smalt cards have achieved modest acceptance for domestic
small-value purchases. Smart cards are also used in countric;s with inetJicicnt telecommunications, so that merchants do not need to query a
central database for transaction authorizations.
'5S ome retailers do offer redemption of gift cards for cash, but they do not openly advertise that this is an option. In this scenario. the gift
cards can be used to launder funds and hide the paper trail Dfnot only thl: source of the funds used to purchase the cards, but also where the
funds go if the cards are redeemed for cash.
"Hillebrand, Gail. Payment Mechanism: N"w Products. New Problems, Consumers Union. pr.:sentation delivered at the Federal Reserve B,mk
i
of Chicago, May 29. 2003. Accessed at: hli r i\\ \\\1 dllc·<l~'(lJl:d lIlg 1lL:\\" and ,,< ,nll'It:llcC_l()llklc·ncl·s clnci-:\ eills Ii h:- 200:lJldj llk'n"
conference_gail lrilkhranJ prcscnLJI inl1pd r·.
"Issuers have triggered a b~·cklash by going beyond transaction fees, adding charges for cheekillg a balance. adding cash. or even doing
nothmg ("inactivity" fees), draw'ing criticism from consumer rights cldvocates and attorneys general. for exampk. Califol11ia. Washington.
and New Hampshire have passed laws curtailing prepaid card ICes and practices. Connecticut. lV1<issachusetts. New J lampshirc. and New York
have filed lawsuits against the Visa-branded Simon Malls card specifically because of i'ees.
20
MSB: STORED VALUE CARDS -
CHAPTER 2
•••
MSB: STORED VALU E CARDS
have reported both categories of stored value cards
are used as alternatives to smuggling physical cash.
Stored value card programs often accept applications
online, via fax, or through local check cashing outlets,
convenience stores, and other retailers. Programs that
lack customer identification procedures and systems
to monitor transactions for suspicious activity present
significant money laundering vulnerabilities, particularly
if there are liberal limits or no limits on the amount of
cash that can be prepaid into the card account or accessed
through A TMs. Offshore banks also otTer stored value
cards with cash access through A TMs internationally.
Further, programs designed to facilitate cross-border
remittance payments often allow multiple cards to bc
issued per account so that friends and family in the
receiving country can use the cards to access cash and
make purchases. These programs can also be used to
launder money if effective AML policies, procedures,
and controls are not in place.
Law enforcement agents on the EI Dorado Task Forcc 48
in New York found they could use false identification to
obtain prepaid cards and even have the cards sent to a
U.S. Post Office box. Secret Service investigations have
found that not only do some prepaid card applicants use
false identification; they fund their initial deposits with
stolen credit cards and money from other illicit sources.
DEA, ICE, and IRS-CI have all found prepaid cards used
in conjunction with bulk cash smuggling. Drug dealers
load cash onto prepaid cards and send the cards to their
drug suppliers outside the country. The suppliers then
use the cards to withdraw money from a local A TM.49
CHAPTER 2
Phone cards and other "closed" system prepaid cards
also present opportunities for money laundering. The
cards can be purchased for cash and transferred from
one person to another domestically or internationally
and eventually resold. Closed system cards are not
currently subject to CMIR repOliing when moved across
U.S. borders.'o ICE sees the potential for a variation
on the Black Market Peso Exchange (BMPE),I with
phone cards exchanged for drug money. Also, prepaid
cards for wireless and long-distance service are a eashintensive business, offering an opportunity to integrate
dirty money. Distributors of prepaid phone cards can
generate more than $100 million in cash annually.
Regulation and Public Policy
A stored value card used in an A TM to aceess cash from
a prepaid account operates the same way as a debit card
accessing a bank account via A TM, but there can be a
substantial di fference in how the two cards are iss ued
and the accounts managed. Banks and other depository
financial institutions are obligated to have a customer
identification program (Crr) and to report large or
suspicious transactions (SARs). "Issuers, sellers, and
redeemers of stored value" are classed as an MSB under
the relevant regulations 52 and are required to have an
AML program but arc not required to file SARs '3 or to
register with FinCEN. q
Although open system stored value cards use the same
payment networks as some bank-issued debit cards (e.g.
Visa's Plus and Interlink, and MasterCard's Cin'us and
Maestro), stored value cardholders generally are not
4'Created in 1992 to target money laundering in New York, the EI Dorado Task force became one orthe nation's most successful money
laundering task forces. It is led by ICE and includes representatives from 29 federal, state, and local agencies.
"Even prepaid cards for long distance and wireless serviccs arc proving to be money laundering tools as the wholesale distribution system for
these cards is cash-intensive, offenng cover for money laundering.
~u A Report of International Transportation of Currency or Monetary Instruments (CMIR) must be filed by each person who physically
transport~. mails, or ships. or causes to bc physically transported. mailed. or shipped currency or other monetary instruments in an aggregate
amount exceeding $10,000 at one time from the United States to any place olltside the United States or into the United States trom any place
outside the United States (FinCEN Fom1 105)
lIThe BMPE involves drug supplit:rs in Colombia working with a currel1l:Y broker. Hather than bringing their illicit dollars from the C.S. bal:k
to Colombia, the drug suppliers tum the eash over to a currency broker who can provide pesos in Colombia. The broker keeps the dollars in
the U.S., selling them to Colombian importers who need the foreign currency to purchase goods from U.s. suppliers. The importers pay for
the foreign cun'cncy with the pesos in Colombia that ultimately go to the drug suppliers.
llSee 31 CFR. §103.II(uu)(3) and (4).
53 See 31 CFR. §§103.120 and 103.20(a)(5).
5-1 See 31 CFR §103.41(a)(I).
II.
MSB
STORED VALUE CARDS -
CHAPTER 2
21
MSB: STORED VALUE CARDS
obligated to have a bank account. A common model for
stored value card programs is for a firm independent of
the bank to process all cardholder transactions through
a "pooled" bank account held in the name of the firm
managing the card program. In this arrangemcnt the
bank may have no direct contact with the individual
cardholders. Under current regulations, when a stored
value card firm uses a "pooled" account maintained in
its name for cardholder transactions, banks are required
only to conduct customer due diligence and customer
identification procedures on the card management firm
and not the individual cardholders."
MasterCard International and Visa USA have suggested
AML guidelines for card issuers including account limits
and requirements to verify identification. But web sites
for stored value card programs that promote cardholder
anonymity and flaunt a lack of AML policies suggcst
that this guidance may not be consistently enforced.
Finally, a byproduct of the global market for and use
of stored value products is that domestic action alone
will not adequately address the vulnerability presented
by these products. Issuers outside of the United States
generally are not subject to the BSA/' yet the cards they
issue may be used in the United States.
" See Deposit Insurance Coverage; Stored Value Cards and Other Nontraditional Access Mechanisms, Notice Of Proposed Rulemaking
Federal Register 70: 151 (8 August 2005): 45571 0-4S5R I.
~'Bank Secrecy Act. Titles J and II of Pub. L. 91-508. as amended. codified at 12 Us.c. .~ I 829b. 12 USc. ~~ 11)51-11)5'), and 31 USc. 9~
5311-5332.
22
MSB: STORED VALUE CARDS -
CHAPTER 2
•••
M
N
N
0::::
Tab!e 7
UJ
l-
N
<{
UJ
a:
0..
f-
J:
U
a.
<l:
I
Gift cards and
prepaid phone
services
(Single service
provider)
Store- or brand-specific
(No payment network
branding)
Cards often sold in pre-set
denom inations /Merch ant
collects full value up-front
Gift cards:
Multiple
Merchants
Multi-merchant gift card:
can be used for purchases
only (no ATM)/Can be
payment network branded
High frequency
customers
FloatS?, increased
sales
BMPE-5tyle ML's:
exchanging cash for
cards/Use as alternative
currency /Distribution
method is cash intensive
creating ML threat
u
I
Retailer-specific and
Phone service cards
VI
0
a:
<l:
u
UJ
::::J
Gift givers
i
Float, sales, and
transaction fees s9
Money laundering
through bulk card
acquisition and resale
....J
Mall card
«
>
0
UJ
a:
Payroll cards
Creates account to
facilitate direct deposit/
Cards can be used at ATM
& POS60
Unbanked workers
who are being paid
by cash or check
Fee income (lower
cost to employer)
Fraudulent businesses
could use to pay
terrorists or launder
money
0
f-
Various
VI
'"
VI
::2:
Fee income
Provides anonymous
cross-border access to
funds for purchases or
cash
Various
Unbanked, teens,
& those unable to
qualify for credit
card
Fee income
Provides anonymous
cross-border access to
funds for purchases or
cash
Various
Businesses &
government
agencies processing
high volume of
cash, checks or
vouchers
Lower cost
processing
None apparent
Transit systems/ Health
savings accounts/
Govt. benefit programs
Remittance cards
Cards are issued for
friends & family to use at
cross-border ATM & POS
Individuals who
send cross-border
remittances
General use cash
cards
Debit card good at ATM &
POS to access pre-funded
account
Function-specific
cards
Replaces paper money,
tickets, and forms for a
variety of functions
" Merchant cams interest on idle card funds.
'" Black Market Peso Exchange-type money laundering.
S9 Purchases with bank cards generale transaction fees for the issuing bank.
6Il Point-of-sale.
ONLINE PAYMENT SYSTEMS
Chapter 3
ONLINE PAYMENT
SYSTEMS
ew and innovative online payment services arc
emerging globally in response to market demand
from individuals and online merchants. Individuals, some of whom may not have a bank account or are
unable to qualify for a credit card, arc looking to online
payment services to enable online shopping, electronic
bill payment, and person-to-person funds transfers. And
some online merchants are demonstrating a willingness
to accept ncw electronic methods of payment that are
less expensive than credit cards. These payment services function as online payment systems, accepting funds
in a variety of ways for the purpose of transferring payment either to a merchant or an individual.
N
Individuals wanting to shop online or participate in an
online auction can use an existing bank account, credit
card, wire transfer, money order, and even cash to fund
an account with an online intermediary that will facilitate the payment. Some online payment services exist to
facilitate transactions for online gambling and adult content sites that U.S.-based money transmitters typically
will not service. bl U.S. citizens can access payment services online that are based outside of the United States
and transfer funds either electronically or by mail.
Online merchants, particularly those in sectors with high
"chargeback" rates, are generating demand for new payment methods. b2 These markets embrace online payment
systems that set their own clearing and settlement terms
CHAPTER 3
absent allY consumer protection or financial regulation.
Typically, transactions through these service providers
are considered final with no recourse for individuals who
believe they have been defrauded. The consequence,
according to federal law enforcement agencies, is that
these systems have become favorite payment mechanisms for online perpetrators of fraudulent investment
schemes and other illegal activity.
Some onl ine payment services defy conventional business models. "Digital currency" dealers, for example,
use precious metals (gold, palladium, platinum, and silver) as the store of value for online transactions and split
the transaction process between two business entities:
the digital currency exchange service and the digital currency dealer. Despite the appropriation of the term "digital currency" to describe the use of precious metals for
onl ine payments, digital currency remains one of many
common phrases with "digital," or "cyber" or "e-," used
to refer to any electronic payment initiated onlineY
The systems work as follows: A person wanting to use
gold for an online purchase would first open a gold account with a digital currency dealer and then fund the
account through an exchange service. Each exchange
service sets its own terms, so that while some may only
accept transfers from bank or credit card accounts, others will accept cash and money orders(J4 Similarly, each
exchange service offers di fferent options for receiving
funds. The result is that some service providers pose a
greater risk for money laundering.
The oldest and best known of the digital cun'ency services is e-gold Ltd., licensed in Nevis, with almost 2
"In 2002, PayPal, perhaps the largest and best-known online payment system (339.9 million paymcnts worth $18.9 billion in 2004), stopped
providing payment services for online gambling and adult content sites. Payl'al, wa, launched in 1998, and today has 63 millionmcmbcr
accounts in 45 countries. In addition to facilitating transactions for sites PayPal no longer services. emerging online payment systems also arc
targeting countries in which Pay Pal docs not operate. Pay Pal is a division of e-8ay, a publicly-held, U.S.-based corporation, and is licensed in
the jurisdictions where it permits customers to send and/or n:ceivc money. (Source: 1I11p '\1 \'\\'[,-1) r,II~"tIl) Pay Pal has also registered \vith
FinCEN as an MSB.
62 When a customer using a credit card disputes a charge, the customer is said to "charge hack"' the transClction. Managing charge backs is
costly to merchants who can be fined by their hank for Irequent disputes or required to pay higher transaction tees. Online gambling and adult
content web sites arc among industries prone to charge backs and arc charged higher credit card fees than brick and mortar businesses.
"The use of the teml ··currency·' in this context is not strictly cmn:cl. Curn:ncy is something mOIll:tiLed by a monetizing authority, generally
central banks. Rather than being used as currcncy, these precious metals arc uscd as a part ofa barter exchange (one party agrees to exchange
a quantity of gold for various goods or services).
"In addition to other funding options, a Calit(lmia-hast:d digital CUrrt;JlCY exchanger (Iccepts cash deli\"ered hy courier. Another service
provider based in Panama also accepts cash, but advises: "We have a limit of $2.500.99 per day, per hank for cash dcposil~. For bigger
amounts please send \-vires or postal money orders."
•••
ONLINE PAYMENT SYSTEMS -
CHAPTER 3
25
CHAPTER 3
ONLINE PAYMENT SYSTEMS
million accounts.os E-gold indicates on its web site
that its metal holdings provide a form of guarantee that
should convey trustworthiness "" - a feature alien lacking among unregulated online payment services. Digital
currency dealers also promote the global acceptance of
precious metals, observing that a buyer paying with gold
need not worry about access to or acceptance ofunderlying currencies. Merchants, online service providers, and
individuals who are willing to receive payment in precious metals are allocated a quantity based on the day's
market price. While taking delivery of the actual metal
is an option, recipients can also sell the metal through a
digital currency "exchanger" and receive payment in a
more conventional form.
The Global Digital Currency Association (GDCA) is
a trade association of digital currency dealers and exchangers pressing for self-regulation. The GDCA provides a public ranking of its membership and offers
arbitration procedures."7 However, the GDCA constitution makes no mention of AML policies and procedures
or of adhering to international AML rccommendations
Membership Awards:
Vulnerabilities
Online payment services function as international person-to-person paymcnt systems. By crossing jurisdictional lines these services potentially create difficulties
for authorities pursuing enforcement or legal actions.
Although individuals may use credit cards, wire transfers, or other bank payment tools to move funds to online payment systems, the investigative trail for law
enforcement ends there when service providers do not
have effective customer identification or recordkeeping
practices. In addition, the trail is further shortened when
service providers accept cash and moncy orders to fund
accounts.
U.S. federal law enforcement agencies have found that
some online payment services are ill-equipped to veriFigure 1
fy customer idcntification 6Q and some openly promote
anonymous payments. The type of personal information required for opening an account with a digital
currency dealer or exchanger or online payment systcm varies by service provider.
reputable and
•
Silver - Awarded to members known to be
trustworthy
•
Gold - Awarded to members known to be trustworthy, without
any reported or reputed valid customer complaints over a one
year period
•
Platinum - Rarely awarded, and when, then only to
outstanding members who are well known, have shown to
be beyond reproach and who head outstandingly upright
operations, pillars of the industry
•
Palladium - Awarded to long-serving Committee members
and officers of the COCA who Qualify for Platinum awards.
Points may be earned or lost [at the discretion of the COCAI.
* Accessed at: hllp
such as thosc promulgated by the Financial Action Task
Forcc (FATF)(,H The GDCA manages member conduct
through its "reputation ranking system," which allocates
or subtracts points based on length of membership and
dispute and dispute record. (See Figure I)
! iwww.fjdldonline.()f[j.
The FBI reports six individuals indicted in a Ponzi
scheme in March 2004 used a digital currency exchange service to transfer some $50 million from
26,000 investors. The FBI Crime Complaint Center
has received a number of complaints regarding Internet auction fraud, investment schemes, and computer
intrusions all involving digital currency services.
U.S. federal law enforcement agencies currently are
investigating a credit and debit card fraud ring that
uses stolen account information to make unauthor-
6SE-Dinar is a spin-off of e-gold. and IS affiliated WIth the Islamic MIIlt. a private organIzation dedicated to reviVing the gold and sliver currencIes
described in the Koran, the gold dinar and sliver dirham. The target market for the e-DlI1ar IS the more than olle billion 1'\'luslllllS directed by the
Koran to pay "zakat" or 2.5% of olle's net worth anllually to be lhstnbuted to the needv and the poor. Accessed at. hll[J ,(\\\\\\' c·dlnar COIll
66 Accessed at: htt)lJ\\\\\\·...:-c:, )Id.com.
'
67 Accessed at: hrtp:i!\\ II '\'.gdcaon lillt.ore!,.
~
.
FATr Standards. Accessed at: lil!p:·!\\\\\\.LJli-ea1i "1'!'f';jgc"I)}l)i«'.C!l'}')~(l ;7,) i;'J';()<)}1l I I I I I ()O hind.
"Money services businesses are not required under tht: BSA to have customer identification programs. They arc required to have programs in
place to rerfoml necessary cllstomer due diligence appropriate to the risks presented, and to comply with all recordkc:eping and reporting
requirements under the RSA.
.
26
ONLINE PAYMENT SYSTEMS -
CHAPTER 3
•••
ONLINE PAYMENT SYSTEMS
ized withdrawals. The illicit funds are then laundered
through digital currency accounts and through open system prepaid cards. Funds transferred to digital currency
accounts can be sent via money transmitters globally.
Similarly, funds transferred to prepaid card accounts can
be accessed via ATMs globally.
CHAPTER 3
systems to adopt and adhere to FA TF AML policies and
procedures, any single jurisdiction acting alone may
have only limited success in this regard.
Regulation and Public Policy
In the United States. money transmitters are among
MSBs required to register with FinCEN.71l are subject
to AML reporting and recordkeeping requirements. 71
and are often required to be licensed on the state
level. Whether an online payment system or digital
currency service meets the definition ofa money transm itter pursuant to BSA regulations, though, depends upon
its location and the ways in which it participates in or
conducts transactions. 7: Many online payment systems
are based outside the United States and are not subject
to U.S. jurisdiction. Some online payment systems
may be licensed in one country and maintain operations
(including staff. computer systems. and customers) in
various other countries without a physical retail presence
anywhere. Determining which legal entity has jurisdiction for regulatory and enforcement purposes can be
challenging. 7l Potential users around the world now are
finding they can go online to access payment options
that may be unavailable from a domestically-regulated
service provider.
Unregulated online payment systems do not have consistent or reliable AML policies and procedures. Opportunities for domestic regulation and enforcement are
limited by jurisdictional issues. Without international
coordination to encourage unregulated online payment
----.-~-----------
'"31 eFR § 103.41.
"31 eFR §§ 103.125 and 103.20.
II 31 eFR
103.II(uu) statts: "Money services business. Each agent. agency, branch. or officIO within the United States of any ptrson doing
business, whether or not on a n:gular basis or as an organized busim:ss concern. in one or mort: of the capacitits listtd in paragraphs (uu)( I)
through (uu)(6) of this section." 31 CFR § 103.II(lIu) (5) states: "Money transmitter--(i) In general i\/olley Trw/smiller: (A) Any person.
whether or not licensed or required to be licensed. who engages as a business in accepting currency. or funds denominated in currency. and
transmits the currency or funds. or the value of the currency or funds, by any means through a financial agency or institution, a Federal
Reserve Bank or other facility of one or more Federal Reserve Ranks. the Board of Govcrnors of the Federal Restrve System, or both, or an
electronic tlll1ds tnmsfer ndwork; or (B) Any other person engaged as a busil1tSS in the transkr of funds."
'lMostjurisdlctions. including the U.S .. have not established a licensing or regulatory Irame,\.ork ror online payment systems with no physical
presence in the jurisdiction. An exception is the II.K. where online payment systems come under the umbrella tenn '"electronic money issuers"
and are subject to the Financial Services and Markets Act 2000. See Financial Services Authority, The Regufa/ioll a/Elee/mllie lV/Olley Issuers.
Accessed at: htlr:.'i\\'\\\\.h<t.gov.ukcl'uh,icp. ([1117 .pel r.
*
II.
ONLINE PAYMENT SYSTEMS -
CHAPTER 3
27
INFORMAL VALUE TRANSFER SYSTEMS
CHAPTER 4
Chapter 4
INFORMAL VALUE
TRANSFER SYSTEMS
I
nformal Value Transfer Systems (IVTS)71 are efficient remittance systems based on trust that operate primarily within ethnic communities. IVTS include
various centuries-old remittance systems centered in
ethnic/national communities. the most utilized of which
are Hawala.iHundi (South AsiaV' Fei ch'ien (China),
Phoe Kuan (Thailand). and Door to Door (Philippines).
Although these systems primarily service legitimate
customers and purposes. criminal elements exploit IVTS
to launder/transfer proceeds because of their lack of
transparency and low costs. Indeed, these systems have
historically proven themselves to be among the safest
methods to transfer mone without visibility. TVTS provide transfers to and from areas where modern financial
services are unavailable, inaccessible. unaffordablc, or
localities where corruption within the financial system
is prevalent. The system provides rapid funds transfers
(usually within hours of the transaction' s initiation), under a safeguard of trust and reliability.
IVTS can be operated from virtually any location with
access to a communication network such as e-mail. tax.
or telephone. IVTS has been observed in convenience
stores and gas stations, souvenir shops, ethnic barber
shops, and restaurants, as well as private residences.
in formation concerning the transaction to a counterpart broker in country B either through telephone,
facsimile, or email. At this stage of the process, a
"collection code" is agreed upon between the two
brokers. The broker in country A will then communicate this code to the client, who, in turn, will
relay it to the designated recipient in country B.
The broker in country B will give the money to the
recipient upon presentation of the collection code.
If the sending client is also the recipient, he would
have to present the code to the counterpart broker,
upon arriving in country B before the money could
be released to him. In many cases, the payment
will be made by the counterpart broker to the designated recipient within hours after the request to
remit money was placed by the client in country A.
The income of the broker from the transaction may
come from charging a commission ranging from
0.25% to 1.25% of the amount involved or from
disparities in currency exchange rates.
illustration 2
l
HAWALADAR
IN PAKfSTAN
The following fact pattern lays out a typical rVTS transaction:
In country A, a client hands over a sum of money
to an IVTS broker and requests that the equivalent
amount (usually in the currency of the receiving
country) be sent to a designated recipient in country B. The sending broker relays all the necessary
AMJAD
PAKISTAN
MARWAN
USA
IJ(~ i
1L~
HAWALADAR
IN USA
Iliuslrmi(J!l of t1 hasif nTS pmCC'iS
[t is virtually impossible to ascertain the full extent of
IVTS activity in the United States due to the opacity of
the sector and the absence of registration by most IVTS
IVTS are oilen relt:n'ed to as Alternative Remitt,mcc Systems (ARS) in the intemationill sector. ARS are operated by entities (<Iltemative
remittance operators) for moving money or other fonns of stored value between countries on behal f of customers who do not wish to directly
use the "fonnal"' banking system.
Asia Pacific Group-Alternative Reminance Regulation Implementation Package (July 2003).
7~Although listed separately. in many countries users of haw ala and hundi often use the temlS interchangeably to des(;ribe the hawala transfer
process. Hawala, meaning transfer in Arabic. is a remittance vehicle. Hundi, l11canlllg collect. began centuries ago as a form of IOU. bill
exchange. and remittance vehicle. CUlTently. various countries l11isus~ the tcnn hundi to describe the hawala transfer process .
74
",ee
or
•••
INFORMAL VALUE TRANSFER SYSTEMS -
CHAPTER 4
29
INFORMAL VALUE TRANSFER SYSTEMS
operators. SAR information and law enforcement observations offer some clues, however, to the functioning
of this sector.
Bank Secrecy Act Data
SAR data currently provide the best means of identifying IVTS trends. A review of SAR activity for the
period March 2003-0ctober 2004 identified 174 SARs
indicating rVTS activity. The primary geographic locations in which IVTS appeared are Texas (14.4%), Illinois (12.1 %), Minnesota (6.32%), Arizona (5.75%),
Georgia (5.75%), and Michigan (5.75%). The subjects
of these violations were identified as operating cashintensive businesses for the purpose of commingling
proceeds from the {VTS with their legitimate business
earnings. Typical businesses associated with suspicious
IVTS activity included gas/convenience markets, restaurants/lounges/liquor stores, video stores, and clothing
or jewelry stores.
Suspicious transactions indicating IVTS activity included the following techniques:
• Multiple deposits of combinations of cash, money
orders, or third-party checks;
• Multiple deposits of combinations of cash, money
orders, or third-party checks made to the same
account from different states;
• Multiple structured deposits; and,
• Multiple incoming wire transfers followed by any
of the activities listed below:
I. Outgoing wire transfers, either domestic or
international;
2. Outgoing transfers via Automated Clearing
House debits to known MSBs;
J Checks written to cash by the accountholder;
4. Checks written to or endorsed by known
MSBs; or
5. ATM cash withdrawals in remote locations,
including other countries.
INFORMAL VALUE TRANSFER SYSTEMS -
III
• Structured deposits followed bv wire transfers to
unrelated businesses in Southea'st/Southwest Asia;
• Multiple financial ledgers (one for legitimate
transfers, one for criminal activity, possibly an
additional ledger for settling accounts between
brokers );
• A high volume of mail and packages from out of
state that contain various monetary instruments
such as checks or money orders;
• Short telephone calls coming into the broker
(instructions from the customer sending funds);
• Numerous lengthy telephone calls made to overseas
recipients (indicates the broker is coordinating with
counterparts and placing orders); and
• Fax transmittal logs. Faxes sent may be a rollup of the day's transactions or may be single
transactions. Faxes may contain the name of a
sender (not necessarily a real name), beneficiary,
or code used by the receiving broker to identifY the
beneficiary.
law Enforcement Data
• Daily deposits;
30
Additional indicators useful for law cnforcement
identiiying an I VTS operation include:
Law enforcement agencies encountered common patterns in their IVTS investigations, reporting concentrations of IVTS activity among Middle Eastern communities, as well as Somali, Yemeni, Pakistani, Afghani,
Filipino, Indonesian, Chinese, African, Indian, and Latino communities. Transfers by these communities are primarily directed at arcas with non-existent, unaffordable,
or untrustworthy financial institutions. Consistent with
the BSA data, law enforcement agencies observed IVTS
operations utilizing cash-intensive businesses (e.g., convenience stores/gas stations) to commingle funds.
In addition to the inherent di fficulties in penetrating IVTS
networks and proving the elements of an 18 U.S.c. §
1960 case, law enforcement has faced difficulties due to
the relative novelty of the statute and monetary threshold
issues imposed by the United States Attorney Offices.
Despite these factors, law enforcement has had some in-
CHAPTER 4
•••
INFORMAL VALUE TRANSFER SYSTEMS
CHAPTER 4
creasing success in prosecuting unlicensed and criminal
IVTS operators. Since the enactment of § \ 960, ICE
has initiated more than 260 IVTS investigations and executed more than \ 00 search warrants in connection with
these cases. During this period, ICE investigations into
unlicensed MSBs have resulted in roughly 120 arrests,
130 indictments, and the seizure of some $23 million.
A former Customs Service case illustrates the diftlculties in building IVTS cases. (See Case Example 2)
IVTS offer several business advantages over formal re7
mitters (, such as Western Union and MoneyGram, including the following:
• A formal remitter will charge the sender
approximately 10-20% of the total amount
transferred whcreas an IVTS will typically charge
0.25%-1.5%, if any commission at all;
• Formal remitters provide service to larger
population centers while IVTS provide service to
the same, as well as remote areas of the world;
CASE EXAMPLE 2
Law Enforcement Challenges
-----.~----- . - . . .--.-- -
Vulnerabilities
0
Bank records seized pursuant to search warrants revealed
that the subject. using a personal account and his business (a convenience store) account, sent checks totaling
approximately $300,000 to various individuals in Y cmen
during the years 1998 - 2002. Cash deposits wen.: made
simultaneous to the writing of the checks. and slightly
exceeded the amounts of the checks (indicative ofa iCe
being charged). The checks sent were subsequently negotiated at various banks in Yemen. The tracking of the /low
of funds stopped there.
The subject. during his interview. stated he knew what a
hawala was and the types of fees associated with its operation. However, he insisted that he \vas not operating one.
and that he was simply sending money to support family members in his native Yemen. No lists or records of
clients were ever uncovered; investigators were unable to
corroborate any testimony because the primary witnesses
were in Yemen; and no one in the local Yemeni community was able to stale that the subject and/or others were
operating hawalas. Because 0 f the lack 0 r corroboration.
the 18 USC 1960 part of the case was discontinued and
the subject was indicted on other charges.
*
This invesligalion was initialed as a resull of the former
Customs Service's Operation Green Ques/.
• Transfers initiated by formal remittance agencies
typically take days or weeks, whereas IVTS
transactions are conducted within hours with athome pick-up and delivery services; and
• Recipients must present identification when
receiving transfers at a formal agency, whereas
IVTS only require an anonymous code for receipt
of funds.
All of these factors make rVTS attractive to lawful individuals as well as money launderers.?? In addition,
money launderers are drawn to rVTS for the unparalleled confidentiality that they offer, allowing them to
conduct transactions in near anonymity. IVTS records
are typically spotty and omit all but the most perfunctory
customer identification information. Ledgers may be
kept in foreign languages or in initials and codes and are
difficult to decipher without cooperation of the remitter.
Records may also be destroyed within a short period of
time after their creation.
Even where records exist and are comprehensible, IVTS
transactions may be routed through third party accounts
of individuals or companies. Law enforcement investigations of IVTS have encountered nominee accounts.
sometimes referred to as "benami,"78 which effectively
"IVTS are iniomlal remittance systems. as they exist and operate outside Of(OI' parallel to) conventional regulated banking and fimUlcial
channels; often referred to as the formal financial sector.
17 See aIm FinCEN Advisory Issue 33. Acccessed at: h ttr :."1\ \1 1\ Ii 11([11 !lO\': .Ilhr,_'.l.pJ r.
.,. "Benami" or nominee accounts are culturally accepted in ethnic groups that also engage in hawala. Because the true beneficiary of a
transaction is not the person under whose name the transaction takes place. it is vcry hard to identifY the owners of criminal proceeds and
people who engage in illegal activities.
•••
INFORMAL VALUE TRANSFER SYSTEMS -
CHAPTER 4
31
INFORMAL VALUE TRANSFER SYSTEMS
stop the money trail. Law enforcement agents arc also
faced with language and cultural barriers when trying
to communicate with suspects and conduct undercover
operations.
The informal nature of IVTS allows them to disguise
illicit transactions among the proceeds from cash intensive businesses. Businesses operating with substantial
amounts of cash or invol ving high turnover make it very
easy to hide illegallVTS transactions by creating "black
holes": pooling cash among [VTS providers, depositing
it at different financial institutions at di fferent times, and/
or using the funds to purchase commodities that then can
be traded in the United States or internationally. This
process makes matching cash withdrawals or deposits
with individual transactions virtually impossible.
Finally, the unconventional settlement between IVTS
operators often presents challenges for regulators and
law enforcement. The settlement of payments is often
unrelated in time to the actual transactions. This makes
"following the money trail" much more difficult than
traditional financial transactions. This is especially true
for IVTS operators who operate in the United States and
send funds on behalf of their customers to family and
friends located in countries abroad. This continued flow
of activity creates a surplus of funds collected by [VTS
operators in the United States, while depicting the funds
available from "cash pools" available to IVTS operators
located in countries abroad who payout funds to the
beneficiaries. Settlement payments must eventually be
made between the rVTS operators in order to reconcile
existing cash pools that are essential for sustaining rVTS
operations in addition to returning a profit for IVTS operators.
banks. ovcr- and under- invoicing schemes, and countless other methods. ;\ number of recent law enforcement cases suggest that the use of financial institutions
is a prevalent method used by IVTS operators located in
the United States to remit settlement payments to other
IVTS operators located abroad.
Regulation and Public Policy
FinCEN has issued regulations requiring IVTS to register with FinCEN, effective as of December 200 I. Failure to register is a violation of 18 U .S.c. § 196079 and
31 U.S.C § 5322.8CJ [VTS do not have to identify themselves as an [VTS; however, if they function as a money
transmitter they must provide FinCEN with contact and
identification information and file reports on transactions over $3,000, cash and coin received amounting to
$10,000 or more, and prescribed suspicious transactions.
As with all MSBs, registering these businesses has been
a slow and challenging process, particularly in the case
ofsmall businesses that offer IVTS services as a sideline
to their primary function.
[n the aftennath of the September II attacks, IVTS
have become the subject of heightened regulatory focus
around the world. g ]
The settlement process is executed by IVTS operators
utilizing numerous methods that are only limited to what
is available within a respective economy. Methods of
settling debt may include the physical transport of money, transferring funds or sending checks via traditional
- - - . - . _ - _ . _ .... _ .
See 18 V.S.c. ~ 1960 ("Whoever knowingly conJucls, controls. manages. supervises. dirt:cts. or owns all or part of an unlicensed money
transmitting business, shall be lined in accordance with this title or imprisoned not more than five years. or both.").
'USee generally "FinCFN Report to Congress in accordance with Section 359 of the USA PATRIOT Act. '. Accessed at: hllp:i \\ \V\\.linC(Il.':(J\/
hawalarptfinaII1222()02.pdf.
liThe FATF SR VI Interpretative Note undascores the need to bring ali money or value tmnsfcr servict:s. whether fomwl or informal. within
the ambit of ct:rtain minimum legal and regulatory n:quirements in accordance with the relevant FAIT recommendations. FAIT. Inlerprelalil'e
Note 10 Special Remmlllendalioll VI . A/lerna/ire Remillallc£'. Accessed at: hltp\\ \\ \\' L]tI~;2~di .(}r~id<lLI\ICCCU:':; ·:;,1/,·)2(,22') I.pdl.
1Y
32
INFORMAL VALUE TRANSFER SYSTEMS -
CHAPTER 4
.11.
BULK CASH SMUGGLING
Chapter 5
BULK CASH SMUGGLING
ederal law enforcement agencies believe bulk
cash smuggling may be on the risc due in part
to increasingly effective AML pol icies and procedures at U.S. financial institutions. The increased
transparency associated with transferring funds through
U.S. banks and MSBs is apparently a factor in money
launderers moving illicit funds out of the country to jurisdictions with lax or complicit financial institutions or
to fund criminal enterprises. Smugglers conceal cash in
vehicles. commercial shipments. express packages, luggage, and on private aircraft or boats. Law enforcement
is aware of the problem, but has concentrated resources
on screening inbound. rather than outbound, passengers
and cargo in this era of heightened caution about terrorIsm.
F
Cash associated with illicit narcotics typically flows out
of the United States across the southwest border into
Mexico, retracing the route that illegal drugs follow
when entering the United States. 82 Upon leaving the
country, cash may stay in Mexico, continue on to a number of other countries. or make a U-turn and head back
into the United States as a deposit by a bank or casu de
cambio. Illicit funds leaving the United States also flow
into Canada, which, like Mexico, is a source of illegal
narcotics. The extent to which cash smuggled out of the
United States is derived from criminal activity other than
the sale of illegal drugs is not known. Other cash-intensive sources of illicit income include alien smuggling,
bribery, contraband smuggling, extOition. fraud. illegal
gambling, kidnapping, prostitution, and tax evasion.
One source of data on currency seizures is the EI Paso
Intelligence Center (EPTC), which was established in
1974 to assist federal, state, and local law enforcement
regarding the movement of illegal drugs and immigration violations on the southwest border. EPTC has three
databases, categorized by mode of transport. that track
currency seizure information submitted by participating
law enforcement agencies:
CHAPTER 5
• Opel'ation Pipeline records seIzures made from
private cars and trucks;
• Operation Convoy records highway seizures
involving commercial vehicles; and
• Operation Jetway records seizures from airports,
train and bus stations. package shipment facilities
(i.e. Fed Ex and UPS), United States Post Offices,
and airport hotels and motels.
EPIC seizure data from 2001 through 2003 indicates
seized currency was most often coming from California,
Itlinois, New York, and Texas (see Table 8) and was
heading to Arizona. California. Florida. and Texas (see
Table 9). There is no way to know what proportion of
the seized funds was generated through drug trafficking;
however, law enforcement believes much. if not most,
of the seized cash does represent drug proceedsY
U.S. Immigration and Customs Enforcement (ICE)
plays a key role in investigating bulk cash seizures made
by Customs and Horder Protection (CBP) and state and
local law enforcement. CBP and ICE seizure and arrest
data is captured in the Treasury Enforcement Communications System II crECS
TECS II is one of world's
ro.
'--l
Bulk Cash Smuggling to Canada
D->
--.----.
----- L!
The cycle of Illegal drugs coming into the U S and illiCit proceeds
flOWing uut IS nollmllted to the solllhwest border OperatIOn Candy Box.
conduded III March 2004, illustrates the global scope of drug supply into
the U Sand correspondmg destmatlons for illiCit proceeds OpcratJon
Candy Box was a three,year Drug Enforcement Admlllistration and
ICE Investlgatlun that targetcJ a Vietnamese MDMAI and marlJllana
dlstrlbullon organiLation operating 111 the II S and Canada. MDMA
powder was Imported from the NetherlanJs and tonned 1I1to tablets in
clandestine labs In Canada ApprOXimately $5 rlllilion a 1I1011t11111 drug
proceeds was laundered In Canada commg m from the U S as bulk cash or
laundered through a network ofVlctnamese-owlled money rel11itters and
travel agencies' It IS rntcn:strng to note that the defendant charged With
money laundenng received a stiffer sentence than the defendants charged
With narcotics vlolauons
1,\f!.M fA (3~-I !!11.,'/hylcnc(/tr»;.pnefhamplli!l<-lmmd
I(
a ~ynlhr:{Jc. [lS),l:/IO{If.:IIl't..'
drug c/u.:nllcul-
I~ <;IJWlllf II) (ht: I'fun/i/onl mr.:llwnI/1htfwnullt' I.l11d ,lie Iw/lUL'IfJ(Jf,{en lnes('(1/me L)'lrct'f ntlmt!l
1~lclude Fc.~'a<;\: 4dam.
;(7'(',
hug. lIConI';, ani Im'L' drllJ!
'!r1ft'maIJIJ!/ul>'iurcIJ/ll\' ('{)IIlmi S/m/cKY N!!/'orJ. Afort h :YOU5. hili'
i'
.Jt,'
! ,\ 11.'; / .~J/ .' 1)1 ;)
Mexican criminal groups exert more inll uenee over drug tra/licking in the US. than any other group, accounting for most of the cocaine. and
much of the heroin, marijuana, ,md methamphetamine available in U.S. drug markl:ls (Suurce: National Drug Intelligence Center, Natiomll
Drug Threat Assessment, 2005).
!'National Drug Threat Assessment 2005. National Drug Intelligence Center. Accessed at: h,tp: \\ 1,'\1. u.,d(JJ.~,)\ iih!icpulJ\ II 12h20·1I1<jJ,C).
82
him!! lor.
•••
BULK CASH SMUGGLING -
CHAPTER 5
33
CHAPTER 5
BULK CASH SMUGGLING
largest databases containing over a decade of data relating to domestic and international financial crimes. x4
From 200 I through February 2005 ICE agents arrested
more than 260 individuals for bulk cash smuggling violations. Approximately 20% of the arrests resulkd from
seizures not at a border or port of entry but in the interior
of the United States. In addition. ICE and CBP have
seized a combined total of more than $107 million 111
cases where bulk cash smuggling was charged.
Bulk cash once it crosses the southwest border can take
a number of routes, including:
• Individuals depositing the cash into Mexican banks
or casas de camhio and then wiring it back into the
United States;
• Complicit
Mexican
financial
institutions
repatriating the cash to the United States via cash
couriers or armored cars, depositing the funds into
correspondent accounts;
• Smugglers moving the money on to Venezuela,
I CASE EXAMPLE 4
I
.. _ - - - - - -
-
_ . _ - _ . - - - - -•.•• _ •. _-. - ._----.-.-. --- - ••.•. ------ ---
..•
_---
,'r=,
Smugglers' Route: ll.S. Interstate 59
•. ---
Ie
J
Illicit proceeds destmed for MeXICO often are transported through
Texas on US. Interstate 59, which extends tram the US!;\1exican
border at Laredo to Houston and then north to other markets
throughout the Midwest. Currently, a portion of U.S Interstate
59 IS slated to become part ofl] S Interstate 69 The proposed
new highway will create a direct corridor between the U.S.Mexico border and the U.S.-Canada border On February 8, 2005,
Texas Department of Public Safety (DPS) troopers sei7ed $23
million followmg a vehicle stop along Us. Interstate 59 north
ofNacogdochcs A Texas DPS trooper stopped the driver of a
southbound tractor-trailer lor a speeuing violation. The urlver, who
was hauling boxes of frozen chicken, appeared to be: nervous: his
driver's log indicated that this was hiS first tnp for th~ company
A search of the vehicle revealed a hidden compartment in the
refrigerated trailer, and an Inspection of the compartmellt uncovered
the currency. DPS otIicers contiscated the currency, and the unver
was arrested on state money laundering charges. ThIS was the fourth
largest traflic stop seizure of currency in Texas DPS history'
I
Nan;OilCS nlKI!SI t-VI.!t!kly. l\rutwllal /)ruR Infe'h}!,L'n ......... ('L'Jl/t!Y, rolunIe.t, J./llmna 10.
M(JIt'h}j, :l005, Produt../
Panama, Costa Rica, or other Latin American
countries where it can be used to pay for goods
-- both legitimate and illicit - for the black market
in Colombia; and.
• Individuals moving the funds to offshore
jurisdictions with heightened bank secrecy
protections.
SARs filed by U.S. financial institutions tend to support
the view that some of the cash smuggled out of the United States to Mexico is immediately repatriated. SARs
have reported patterns of large wire transactions ($ 1.5
million or more per transaction) to U.S. payees from
Mexican money exchange hOllses and other financial institutions. This was reported in the first SAR Activity
Review in October :WOO, providing an early indication
that Mexican criminal groups had raised their profile in
drug trafficking in the United States, which correspondingly indicated an increased threat of money laundering
activity linked to Mexico.
The ICE attache in Mexico City, in coordination with
Mexican authorities, is conducting investigations into
the smuggling of bulk cash from the United States into
Mexico and onward to Central and South America .
Three separate outbound operations conducted at Benito
Juarez International Airport in Mexico City resulted in
the seizure of over $21 million and the arrest of over 50
indi viduals.
Vulnerabilities
Cash can be smuggled out of the United States through
the 317 official land. sea, and air ports of entry (POE),
and any number of unofficial routes out of the country
along the Canadian and Mexican borders. The United
States shares a 3,987 mile border with Canada and a
1,933 Illile border with Mexico.
The n0l1hern border recorded 77 million individual
crossings and 37 million vehicle crossings in 2004. In
addition to individuals carrying cash OLlt of the country or hiding it in vehicles, any of the Canada-bound
h'u, 2{)(}5-rW4X5-O/U
"These include violations of 31 USC ~ 5316 (fai lure to file a report or international transportation of cun'ene), or monetary instruments), 31
USC § 5332 (bulk cash smuggling), 1& USC !:1 1956 (laundering or monetary inslnJmenL\) and 18 USC 1957 (money laundering III property
derived from specified unlawful activity).
*
34
BULK CASH SMUGGLING -
CHAPTER 5
•••
BULK CASH SMUGGLING
shipping containers involved in commercial trade could
contain illicit cash. Canada is the largest U.S. trading
partner with $446 billion in merchandise trade last year.
Canada is also a major source of marijuana - "B.C.
Bud" or British Colombian and other hydroponic highpotency marijuana which commands a selling price of
nearly ten times that of Mexican marijuana.
The southern border has five times more traffic than the
northern border. There are 35 official ports of entry 011
the U.S. border with Mexico and some I million individuals cross over daily.s, Mexico ranks right behind
Canada as a U.S. trading partner with $267 billion in
merchandise trade last year, creating ample opportunity
to smuggle cash out of the country in shipping containers.
A significant amount of cash can be moved relatively easily, despite the bulk. Each note of U.S. currency weighs
approximately one gram and 454 grams make a pound.
Each bill is .0043 inches thick. One million dollars in
$20 bills would be six stacks of bills each three feet high
with a total weight of a little over 100 pounds. Rh Most
airlines have a carry-on weight limit of 40 pounds and a
checked baggage limit of70 pounds. Because of both its
bulk and its weight. the challenge in moving bulk cash is
either to use large containers (e.g .. commercial shipping
containers or specialized compartments in vehicles) or
split it up among many couriers. Using many couriers
has the added advantage of mitigating the risk of loss
should one or more couriers be stopped.
Transporting cash out of the U.S is so commonplace
that many criminals do not take any elaborate measures
to conceal the currency. (See Table 10) In FY2002 and
FY2003, CBP seized almost a quarter of a billion dollars
that they characterized as being "unconcealed." When
cash is concealed, the methods can be ingenious including false compartments in vehicles and luggage, special
garments designed to hold currency that are worn under
clothing, and cash packaged and wrapped to look like
gifts.
CHAPTER 5
Bulk cash smugglers arc well aware of law enforcement's
resource constraints at the border and usually cross at
busy sites, carefully timing and coordinating crossings.
Despite the relative ease of smuggling cash across official border crossing points, there is ample evidence
drug, currency, and alien smugglers use other routes as
well. Evidence frolll the apprehension of illegal aliens
emphasizes ho,,\' porous the U.S.iMexican border can
be: "U.S. officials made 1.1 million apprehensions along
the southern border last year, a 24% increase over the
year before. It is unclear whether the rising apprehensions signi fy that more people are trying to cross or that
a greater percentage are being caught. But experts in
both countries estimate that perhaps 500,000 or more
still make it through each year."!7
In addition to overland routes between the United States
and Mexico, smugglers also use tunnels. From 1990
through March I, 2005, law enforcement officials discovered 33 tunnels along the U.S.-Mexican border, 21
of which were discovered in Arizona. Nineteen extended from various locations in Nogales, Mexico, to the
adjacent city of Nogales, Arizona. Many of the tunnels
were located near ports of entry at the border and consisted of passageways linked to storm/sewer drains with
entrances concealed in residences or businesses. Two
tunnels discovered in Nogales, Arizona had entrances
hidden inside churches. ss
Bulk cash smugglers have an unlimited number of options available to move cash by land, sea, and air out
of the United States, but law enforcement resources are
limited. As of Oct. 2004, CBP had only 17 currency detector dogs assigned to 14 ports of entry to assist in interdiction efforts. gO CBP's Canine Enforcement Program
was responsible for seizures of U.S. currency worth
S27.9 million in FY2003. However, CBP's mission extends far beyond interdicting currency smuggling. On
the average day, CBP examines 1.3 million arriving pas-
Fisk, Daniel W., Deputy Assistant Secretary State for Western Ikmi'rhcrc Affairs. Statcrlll:nt Reron: the ScmHc Committee on Foreign
Relations, April 6, 2005.
"Bureau of Engraving and Printing. Accessed at: ilttr 1\ \\ '-, IlIOIl ,'.' j JU, d\ C' 'if' 'l', ill 'I. ci J1l I').
"'Sullivan. Kevin. "All Onen Crossed Line in the Sand." The Wa<;hingtoll Post. March 7,2005. P I
"'Narcotics Digest Weekly. National Drug Illtelligellce Center: Volume 4, Numhcr 14. Arml 5. 2()()5. Product '\;0.2005- R04R5-014.
"Weiss, Martin 1\., Terrorist Financing: Current Efforts and Policy Issues for Congress, CongressIOnal f.kscClrch SCI'\ICC. Order lode
RL32539, August 20,2004.
'5
•••
BULK CASH SMUGGLING -
CHAPTER 5
35
CHAPTER 5
BULK CASH SMUGGLING
sengers, 410,000 vehicles, seizes $500,000 in currcncy
and 4 tons of narcotics, arrests 2600 fugitives or violators, while facilitating commercial trade and collecting
$52 million in duty.9\)
Regulation and Public Policy
Prior to the passage of the USA PATRIOT Act, an individual smuggling bulk quantities of cash was subject to
criminal penalties andlor jail time'J1 or civil penalties'"
for the failure to file a Report of International Transportation of Currency or Monetary Instruments (CMIR) as
required by 31 U.S.c. § 5316 and 31 C.F.R. § 103.23.
The unreported currency was also subject to criminal
or civil forfeiture. QJ Forfeiture authority was curtailed
by the 1998 case United States v. Bajakajian, in which
the U.S. Supreme Court held that forfeiture in a case
involving a CMIR violation is subject to the Excessive
Fines Clause of the Eighth Amendment.\)4 The Court
concluded that, given the relatively insignificant nature
of the defendant's reporting violation in that case, the
forfeiture of over $300,000 in unreported funds would
be unconstitutionally excessive. The outcome of the
case impaired law enforcement's use of forfeiture for a
reporting violation as a method to deter the smuggling of
criminal proceeds into or out of the United States.
Aware of this impediment Congress Illade the act of
bulk cash smuggling itself a criminal offense with Section371 of the USA PATRIOT Actof2001 (31 U.S.c.
§ 5332).95 Bulk cash smuggling is defined as concealing and smuggling or attempting to smuggle more than
$10,000 in currency or monetary instruments into or out
of the United States with the intent to evade the CMIR
reporting requirement.% Bulk cash smuggling is PUIlishable by imprisonment of not more than fi ve years and
forfeiture of all property. real or personal, involved in
the offense or traceable to the offense."7
To improvc bulk cash smuggling interdiction, CBP has
developed an Outbound Currency Interdiction Trainino
(OClT) program. The training includes instruction and
practical cxerciscs to provide specialized knowledge in
currency interdiction, and has an anti-terrorism component. In FY2003, OCIT trained 56 inspectors.o g
CBP sets performance targets based on the value of outbounu currency seizures, and the effectiveness of targeting individuals and vehicles for examination. Outbound
enforcement targeting effectiveness is the total number
of positive examinations divided by the total number of
targeted examinations conducted. Oq rn FY2003 CBP's
seizure target was $49 million, and the actual seizure
amount was $51.7 million. CBP's outbound targeting
effectiveness was 5.74% (the target was 9%). Targeting
refers to identifYing high-risk passengers or vehicles for
examination.
In an effort to enlist and expand support on the Mexican
side of the border for currency interdiction, the United
States-Mexico Border Partnership was signed in March
2002.100 The initial bilateral efforts have focused on five
major programs:
• Vehicle and Cargo Inspection System (V ACTS)
refers to devices able to scan (x-ray or gamma
ray) sealed containers. The United States has
ten permanent devices capable of scanning up to
a railroad car size vehicle, three mobile VACIS
(for moveable truck or car inspection) and three
portable x-ray scanners (for inspecting luggage) at
sevcn border crossing sites. international airports,
and rail stations. The United States plans to install
the VACIS machines along the southern border
this year.
~JNational Drug Threat Assessment 2005.
"31 USc. § 5322(a) or (b).
92
31 USC § 5321(a).
'JNowcodified at 3IlJ.s.C. ~ 5317(c).
'~See United States v. Aaiaka'iian, 524 U.S. 321 (199S).
"See Section 371 of the USA PATRIOT Act of 200 I (Congressional findings in p<lragraph (all.
"31 U.S.c. § 5332.
"31 U.S.c. § 5317(c).
9RW'
. A., Terrorist Financing: Cun-cnt Efforts and Policy Issues ti:)r Congress, Congressional Research Service, Order Code
eISS, M artm
RL32539, August 20, 2004.
"For more infonnation see DHS, Pcrfonnance and Accountabilitv Rerun FY2003. n. 157.
10°F·ISk, Damel
. W .. Deputy Assistant St:cn:tmy Slate [or Wt:slelll "
llemisphere
AITairs, Statement Before the Senate Cummiltee un Foreign
Relations, April 6,2005.
36
BULK CASH SMUGGLING -
CHAPTER 5
•••
BULK CASH SMUGGLING
CHAPTER 5
• Advanced Passenger Information System (APIS)
enables the Mexican authorities to screen passenger
manifests of incoming commercial airfl ights against
law enforcement, terrorism, and immigration data
banks in both Mexico and the United States. APIS
was placed into operation in 2004.
• Secure Electronic Network for Travelers Rapid
Inspection (SENTRY) are special land border
crossing lanes for expedited inspection of preregistered, low risk, frequent travelers to reduce
CBP now has fully-funded
inspection loads.
projects underway coordinated on both sides of the
border at six principal crossing sites.
• Border Wizard is software the United States uses
that creates a simulated model of a border crossing
and inspection site as a management tool to analyze
traffic flow and resource use. The software is being
adapted for Mexico.
• Safety and Training courses for Mexican border
law enforcement personnel.
•••
BULK CASH SMUGGLING -
CHAPTER 5
37
CHAPTER 5
BULK CASH SMUGGLING
Table 8
Top Ten Origins and Number of Recorded Seizures of Cash and Monetary
Instruments (2001-2003)
Texas
140
Texas
130
Texas
128
California
122
California
126
California
115
New York
122
New York
81
New York
78
Illinois
113
Illinois
71
Illinois
77
Georgia
76
Georgia
56
Georgia
59
Ohio
60
Ohio
48
Florida
45
Michigan
57
Florida
44
Ohio
45
Florida
48
Michigan
43
Tennessee
39
Missouri
48
Tennessee
32
Michigan
37
North Carolina
47
Missouri
31
Arizona
36
Table 9
Top Ten Destinations and Number of Recorded Seizures of Cash and Monetary
Instruments (2001-2003)
California
328
Texas
244
Texas
235
Texas
304
California
238
California
231
Florida
115
Arizona
89
Arizona
99
Arizona
111
Florida
63
Florida
58
Illinois
57
Unknown
41
Georgia
38
Nevada
31
Georgia
25
New York
33
Tennessee
31
New York
25
Illinois
28
Georgia
28
Illinois
24
Tennessee
22
Maryland
28
Tennessee
21
Nevada
21
New York
25
Nevada
18
Colorado
19
No State 10
502
No State 10
333
No State 10
339
Source: EI Paso Intelligence Center
38
BULK CASH SMUGGLING -
CHAPTER 5
•••
CHAPTER 5
BULK CASH SMUGGLING
Table 10
The data below represents all CBP seizures above $30,000 from FY 2002-FY 2003.
Unconcealed
Seizures
Amount in
Millions
561
$243.0
Unconcealed
I
561
in
Millions
$243.0
317
$50.4
I
I
Other bag*
317
$50.4
lather bag*
I
Suitcase
199
$33.4
Car /Truck
194
$37.4
Car/Truck
194
$37.4
Suitcase
199
$33.4
Express
package
170
$31.8
Express package
170
$31.8
On body
139
$7.7
I
Bus/Train/Cycle
108
$30.4
Other
124
$23.2
, Other
124
$23.2
Bus/Train/
Cycle
108
$30.4
i Unidentified
43
$13.8
Clothing
86
$4.0
" Cargo
15
$9.9
Box
45
$9.1
Box
45
$9.1
Unidentified
43
$13.8
On body
139
$7.7
Camper
30
$6.3
Trunk
14
$7.1
Cargo
15
$9.9
, Camper
30
$6.3
I
I
I
Mail parcel
14
$4.3
: Mail parcel
14
$4.3
Trunk
14
$7.1
Clothing
86
$4.0
Body Cavity
4
$0.4
Cargo Container
2
$0.7
Vessel
4
$0.6
4
$0.6
Aircraft
2
$0.2
Body Cavity
4
$0.4
Cargo
Container
2
$0.7
Aircraft
2
$0.2
'!
I
I
: Vessel
Source: "Detection of Outbound Currency" by Keith A. Daum, et. aI., published by the Idaho
National Engineering and Environmental Laboratory Special Programs Department, November
2004.
* "Other bag" is any type of bag other than suitcase.
•••
BULK CASH SMUGGLING -
CHAPTER 5
39
TRADE-BASED MONEY LAUNDERING
Chapter 6
TRADE-BASED MONEY
LAUNDERING
T
r~de-b~sed money laundering encompasses a vanety ot schemes that enable the cash to be separated from the crime early in the money laundering process. The most cOl1lmon method of trade-based
money laundering in the Western Hemisphere is the
Black Market Peso Exchange (BMPE), in which Colombian drug traffickers swap illicit dollars in the United States for clean pesos in Colombia. Other methods
include manipulating trade documents to over- or underpay for imports and exports. and using criminal proceeds
to buy gems or precious metals.
Trade-based money laundering schcmes often allow
criminals to distance themselves from the monev laundering process. complicating law enforcement i-nvestigations. Immigration and Customs Enforcemcnt (ICE)
analyzes outbound trade data. and fi nancial and payment
data, including forms mandated by the BSA - the Currency Transaction Report (CTR), Report of International Transportation of Currency or Monetary Instruments
(eMIR), Rep0l1 of Cash Payments over $ I 0,000 Received in a Trade or Business (Form 8300), and the Suspicious Activity Report (SAR)~· in an effOlt to spot the
ano.maIies that would indicate trade-based money laundering. The Drug Enforcement Administration (OEA)
has recently refocused its investigative efforts to address
the BMPE as it relates to narcotics money laundering.
Black Market Peso Exchange
The BMPE emerged in the 1980s as a sophisticated altemative to laundering funds through the United States
banking system, and while used primarily in South
America and the Caribbean it is most often associated
with laundering Colombian drug profits. lnl The BMPE
IS the largest known money laundering system in the
Western Hemisphere, responsible for moving an esti-
CHAPTER 6
mated $5 billion worth of drug proceeds per year from
the United States back to Colombia. loe
The scheme aIlows drug traffickers to launder their illicit proceeds by exchanging their doIIars in the United
~tates for pesos in Colombia without physicaIIy moving
funds from one country to the other. Money brokers act
as IIltcrmediaries between the drug traffickers and Colombian businessmen. The money brokers sell the illicit dollars they buy from drug dealers in the United States
to Colombian businesses that use the money to pay for
U.S. products such as home appliances, consumer electronics, alcohol, tobacco, and used auto parts. which are
exported to Colombia and elsewhere. The BMPE has
many of the same attributes as the hawala system.
The BMPE originally was driven by Colombia's restrictive policies on currency exchange. Access to U.S. dollars is regulated by Colombian law and administered by
the central bank. Before the central bank will exchange
pesos for dollars, the importer has to demonstrate that
government import permits have bcen obtained, thereby
insuring that the applicable Colombian duties and taxes will be collected. Colombian businesses bypass the
government levies by dealing with BMPE brokers. 101
When money brokers take possession of illicit U.S. currency, they keep the funds in the United States, often
enlisting individuals to buy money orders with the drug
doIlars or deposit the money in U.S. bank accounts. As
additional drug dollars come in, the money brokers use
runners to deposit the cash or smuggle it out of the country and then wire it into the U.S. accounts from foreign
banks. The money brokers use those U.S. accounts and
money orders to pay for U.S. expOlts on behalf of their
Colombian business clients. The Colombian businesses
complete the money laundering cycle, paying for the
U.S. dollars they need with pesos in Colombia, and the
pesos, in turn, go directly to local drug traffickers who
use the money to fund the next narcotics shipment to the
United States.
lUI Zarate, Juan Carlos. Assistant Secretary Terrorist Financing and Fin<lncial Crimes, U.S. Department of the Treasury testimony bdort: the
~,:,ouse Financial Services Committee Suhcommittee on Oversight and Investigations. Fehruary 16, 2005.
Tandy. Karen P., Administrator, Drug Enforcement Administration, testiJllony before the United States Senate Caucus 011 International
Narcotics Control, March 4. 2004.
JO'Tishler, Bonni. Ass!. Commissioner. U.S. Customs Service. testimonv hefore the Senate Call<:us on Inlel11ational Narcotics Control Jlln'> 21
1999.
.
~ .
..
~.~------------------------------------------------TRADE-BASED MONEY LAUNDERING CHAPTER 6
41
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January 13,2006
JS-3078
Treasury and IRS Issues Guidance Regarding Hybrid and Lean Burn Vehicles
During a visit to the Detroit today, Treasury Secretary John Snow announced the
issuance of IRS guidance regarding the tax credit for hybrid vehicles. The credit,
which was enacted by the Energy Policy Act of 2005, may be as much as $3,400
for those who purchase the most fuel-efficient vehicles.
"The President understands how much the cost of energy impacts the budgets of
American families and of the employers who create essential jobs. That's why he
fought so hard for last year's historic energy bill - legislation which provided support
for new energy-efficient technologies, like hybrid vehicles, so that so that every
American can enjoy better energy security at lower costs.
"I'm pleased to announce the issuance of IRS guidance for the hybrid vehicle tax
credit because the development and use of hybrid vehicles is a key step toward
reducing gasoline consumption, emissions of air pollutants and greenhouse gas
emissions. I commend the manufacturers who are making these energy-efficient
and environment-friendly vehicles and hope that the President's energy bill proves
to be an important step in their rising prominence on American roads.
"This IRS guidance establishes a process that manufacturers can use to certify the
amount of credit the purchaser of the vehicle can claim. This is going to provide
much-needed certainty to Americans who are purchasing these vehicles. It means
they will be able to rely on the manufacturer's certification when they claim the
credit on their tax return. This is good news for those consumers because they are
also taxpayers who seek simpler, fairer tax filing, and it is good news for
manufacturers who can now offer reassurance to customers on the ease of the tax
rules," Snow said.
Hybrid vehicles have drive trains powered by both an internal combustion engine
and a rechargeable battery. Many currently available hybrid vehicles will qualify for
the tax credit. The guidance also provides a similar certification process for
advanced lean burn technology vehicles.
The Energy Policy Act also provides tax credits for motor vehicles that are not
covered by loday's guidance. The other vehicles eligible for credits are fuel cell
vehicles, alternative fuel vehicles, and hybrid heavy trucks. The IRS will issue
guidance providing certification procedures for these vehicles in the near future.
REPORTS
•
Credit for New Qualified Alternative Motor "Lt:thicles {~dva_nced LeaD Burn
Te_cl]nology[v1otor. Vehicle_s and_ Qualifieej Hybrid rylotor Vehicle8
p:IIWWW treas.gov/presvreleasesfjS305~.htm
Part III - Administrative, Procedural, and Miscellaneous
Credit for New Qualified Alternative Motor Vehicles
(Advanced Lean Burn Technology Motor Vehicles and Qualified Hybrid Motor
Vehicles)
Notice 2006-9
SECTION 1. PURPOSE
This notice sets forth interim guidance, pending the issuance of
regulations, relating to the new advanced lean burn technology motor vehicle
credit under § 30B(a)(2} and (c) of the Internal Revenue Code and the new
qualified hybrid motor vehicle credit under § 30B(a)(3) and (d). Specifically, this
notice provides procedures for a vehicle manufacturer (or, in the case of a
foreign vehicle manufacturer, its domestic distributor) to certify to the Internal
Revenue Service (Service) both:
(1) that a passenger automobile or light truck of a particular make, model,
and model year meets certain requirements that must be satisfied to claim the
new advanced lean burn technology motor vehicle credit under § 30B(a)(2) and
(c) or the new qualified hybrid motor vehicle credit under § 30B(a)(3) and (d); and
(2) the amount of the credit allowable with respect to that vehicle.
This notice also provides guidance to taxpayers who purchase passenger
automobiles and light trucks regarding the conditions under which they may rely
on the vehicle manufacturer's (or, in the case of a foreign vehicle manufacturer,
2
its domestic distributor's) certification in determining whether a credit is allowable
with respect to the vehicle and the amount of the credit. The Service and the
Treasury Department expect that the regulations will incorporate the rules set
forth in this notice.
SECTION 2. BACKGROUND
Section 308(a)(2) provides for a credit determined under § 30B(c) for
certain new advanced lean burn technology motor vehicles. Section 30B(a)(3)
provides for a credit determined under § 308(d) for certain new qualified hybrid
motor vehicles. The new advanced lean burn technology motor vehicle credit is
the sum of: (1) a fuel economy amount that varies with the rated fuel economy of
a qualifying vehicle compared to the 2002 model year city fuel economy for a
vehicle in its weight class; and (2) a conservation credit based on the estimated
lifetime fuel savings of the vehicle compared to fuel used by a vehicle in its
weight class and with fuel economy equal to the 2002 model year city fuel
economy. The new qualified hybrid motor vehicle credit for passenger
automobiles and light trucks is computed under the same formula as the new
advanced lean burn technology motor vehicle credit. Both the new advanced
lean burn technology motor vehicle credit and the new qualified hybrid motor
vehicle credit begin to phase out for a manufacturer's passenger automobiles
and light trucks in the second calendar quarter after the calendar quarter in which
at least 60,000 of the manufacturer's passenger automobiles and light trucks that
qualify for either credit have been sold for use in the United States (determined
on a cumulative basis for sales after December 31,2005).
3
SECTION 3. SCOPE OF NOTICE .
.01 Vehicles Covered. Both the new advanced lean burn technology
motor vehicle credit and the new qualified hybrid motor vehicle credit apply to
passenger automobiles and light trucks. The new qualified hybrid motor vehicle
credit also applies to other vehicles, but the credit for vehicles that are not
passenger automobiles and light trucks is computed under a different formula
than that applicable to passenger automobiles and light trucks. This notice
applies only to passenger automobiles and light trucks. Guidance regarding the
credit for new qualified hybrid motor vehicles that are not passenger automobiles
or light trucks will be provided in a separate notice. Guidance regarding the
credits for other vehicles that are eligible for credits under § 30B (new qualified
fuel cell motor vehicles and new qualified alternative fuel motor vehicles) will be
provided in separate notices .
.02 Rules Common to All Qualifying Vehicles. This notice does not
address a number of rules that are common to all motor vehicles that qualify for
credits under § 30B. These rules include: (1) rules under which lessors may
claim the credits allowable under § 30B; (2) the rule preventing the credits from
being used to reduce alternative minimum tax liability; and (3) rules relating to
recapture of the credit. The Service and Treasury Department expect to issue
separate guidance relating to these rules.
SECTION 4. MEANING OF TERMS.
The following definitions apply for purposes of this notice:
(1) In General. Terms used in this notice and not defined in this section
4
have the same meaning as when used in § 30B.
(2) Passenger Automobile and Light Truck. Section 30B provides that the
terms "passenger automobile" and "light truck" have the meaning given in
regulations prescribed by the Administrator of the Environmental Protection
Agency for purposes of the administration of Title II of the Clean Air Act (42
U.S.C. 7521 et seq.). Those regulations currently do not include a definition of
these terms, but § 30B(b)(2)(B) provides the 2002 model year city fuel economy
tables that must be used to determine the amount of the credit for passenger
automobiles and light trucks. Those tables do not prescribe the fuel economy for
vehicles having a gross vehicle weight of more than 8,500 pounds. Accordingly,
until either the Environmental Protection Agency issues regulations or future
guidance issued by the Service provides otherwise (whichever occurs first), any
vehicle having a gross vehicle weight of more than 8,500 pounds will not be
treated as a passenger automobile or light truck for purposes of this notice.
(3) City Fuel Economy. The term "city fuel economy" has the meaning
prescribed in 40 CFR § 600.002-85(11).
(4) Gasoline-Gallon-Equivalent. In the case of a motor vehicle that does
not use gasoline, the 2002 model year city fuel economy is determined on a
gasoline-gallon-equivalent basis. The gasoline-gallon-equivalents for the 2002
model year city fuel economy may be obtained from the Environmental
Protection Agency, Office of Transportation and Air Quality at the following
address:
Mailing Address
USEPA Headquarters
Courier Address
USEPA Headquarters
5
Ariel Rios Building
1200 Pennsylvania Avenue, N.W.
Mail Code: 6401A
Washington, DC 20460
Ariel Rios Building
1200 Pennsylvania Avenue, N.W.
Room 6502A
Washington, DC 20004
(5) Vehicle Inertia Weight Class. The term "vehicle inertia weight class"
means, with respect to a motor vehicle, its inertia weight class determined under
40 CFR § 86.129-94. Under 40 CFR § 86.082-2, the inertia weight class is the
class (a group of test weights) into which a vehicle is grouped based on its
loaded vehicle weight in accordance with the provisions of 40 CFR part 86.
SECTION 5. MANUFACTURER'S CERTIFICATION AND QUARTERLY
REPORTS
.01 When Certification Permitted. A vehicle manufacturer (or, in the case
of a foreign vehicle manufacturer, its domestic distributor) may certify to
purchasers that a passenger automobile or light truck of a particular make,
model, and model year meets all requirements (other than those listed in section
5.02 of this notice) that must be satisfied to claim the new advanced lean burn
technology motor vehicle credit or the new qualified hybrid motor vehicle credit,
and the amount of the credit allowable under § 30B(a)(2} and (c) or § 308(a)(3)
and (d) with respect to the vehicle, if the following requirements are met:
(1) The manufacturer (or, in the case of a foreign vehicle
manufacturer, its domestic distributor) has submitted to the Service, in
accordance with section 6 of this notice, a certification with respect to the vehicle
and the certification satisfies the requirements of section 5.03 of this notice;
(2) The manufacturer (or, in the case of a foreign vehicle
manufacturer, its domestic distributor) has received an acknowledgment of the
6
certification from the Service .
.02 Purchaser's Reliance. Except as provided in section 5.07 of this
notice, a purchaser of a passenger automobile or light truck may rely on the
manufacturer's (or, in the case of a foreign vehicle manufacturer, its domestic
distributor's) certification concerning the vehicle and the amount of the credit
allowable with respect to the vehicle (including cases in which the certification is
received after the purchase of the vehicle). The purchaser may claim a credit in
the certified amount with respect to the vehicle if the following requirements are
satisfied:
(1) The vehicle is placed in service by the taxpayer after December
31,2005, and is purchased on or before December 31,2010.
(2) The original use of the vehicle commences with the taxpayer.
(3) The vehicle is acquired for use or lease by the taxpayer, and not
for resale.
(4) The vehicle is used predominantly in the United States .
.03 Content of Certification. The certification must contain the information
required in section 5.03(1) of this notice and the additional information required in
section 5.03(2) or section 5.03(3), whichever applies.
(1) All Vehicles. For all vehicles, the certification must contain(a) The name, address, and taxpayer identification number
of the certifying entity;
(b) The make, model, model year, and any other appropriate
identifiers of the motor vehicle;
7
(c) A statement that the vehicle is made by a manufacturer;
(d) The type of credit for which the vehicle qualifies (that is,
either the new advanced lean burn technology motor vehicle credit, or the new
qualified hybrid motor vehicle credit for passenger automobiles and light trucks);
(e) The amount of the credit for the vehicle (showing
computations );
(f) The gross vehicle weight rating of the vehicle;
(g) The vehicle inertia weight class of the vehicle;
(h) The city fuel economy of the vehicle;
(i) A statement that the vehicle complies with the applicable
provisions of the Clean Air Act;
U) A copy of the certificate that the vehicle meets or exceeds
the applicable Bin 5 Tier II emission standard (if the vehicle has a gross vehicle
weight rating of 6,000 pounds or less), or the applicable Bin 8 Tier II emission
standard (if the vehicle has a gross vehicle weight rating of more than 6,000
pounds, but not more than 8,500 pounds) established in regulations prescribed
by the Administrator of the Environmental Protection Agency under § 202(i) of
the Clean Air Act for that make and model year vehicle;
(k) A statement that the vehicle complies with the applicable
air quality provisions of state law of each state that has adopted the provisions
under a waiver under § 209(b) of the Clean Air Act or a list identifying each state
that has adopted applicable air quality provisions with which the vehicle does not
comply;
8
(I) A statement that the vehicle complies with the motor
vehicle safety provisions of 49 U.S.C. §§ 30101 through 30169;
(m) A declaration, applicable to the certification and any
accompanying documents, signed by a person currently authorized to bind the
manufacturer (or, in the case of a foreign vehicle manufacturer, it domestic
distributor) in these matters, in the following form:
"Under penalties of perjury, I declare that I have examined this
certification, including accompanying documents, and to the best of my
knowledge and belief, the facts presented in support of this certification are true,
correct, and complete."
(2) New Advanced Lean Burn Technology Motor Vehicles. A
certification relating to a new advanced lean burn technology motor vehicle must
also contain a statement that the vehicle has an internal combustion engine that-(a) Is designed to operate primarily using more air than is
necessary for complete combustion of the fuel;
(b) Incorporates direct injection; and
(c) Achieves at least 125 percent of the 2002 model year city
fuel economy.
(3) New Qualified Hybrid Motor Vehicles. A certification relating to
a new qualified hybrid motor vehicle must also contain-(a) A statement that the motor vehicle draws propulsion
energy from onboard sources of stored energy that are both an internal
combustion or heat engine using consumable fuel, and a rechargeable energy
9
storage system;
(b) A copy of the certificate that the motor vehicle meets or
exceeds the equivalent qualifying California low emission vehicle standard under
§ 243(e)(2) of the Clean Air Act for that make and model year; and
(c) Evidence that the maximum power available from the
rechargeable energy storage system during a standard 10 second pulse power
or equivalent test is at least 4 percent of the sum of the power and the SAE net
power of the internal combustion or heat engine;
.04 Acknowledgment of Certification. The Service will review the original
signed certification and issue an acknowledgment letter to the vehicle
manufacturer (or, in the case of a foreign vehicle manufacturer, its domestic
distributor) within 30 days of receipt of the request for certification. This
acknowledgment letter will state whether purchasers may rely on the certification .
.05 Quarterly Reporting of Sales of Qualified Vehicles. A manufacturer
(or, in the case of a foreign vehicle manufacturer, its domestic distributor) that
has received an acknowledgement of its certification from the Service must
submit to the Service, in accordance with section 6 of this notice, a report of the
number of qualified vehicles sold by the manufacturer (or, in the case of a foreign
vehicle manufacturer, its domestic distributor) to a retail dealer during the
calendar quarter. For this purpose, a qualified vehicle is any passenger
automobile or light truck that is a new advanced lean burn technology motor
vehicle or a new qualified hybrid motor vehicle. The quarterly report must
contain the following information:
10
(1) The name, address, and taxpayer identification number of the
reporting entity;
(2) The number of qualified vehicles sold by the reporting entity to a
retail dealer during the calendar quarter;
(3) The make, model, model year, and any other appropriate
identifiers of the qualified vehicles sold during the calendar quarter; and
(4) A declaration, applicable to the quarterly report and any
accompanying documents, signed by a person currently authorized to bind the
manufacturer (or, in the case of a foreign vehicle manufacturer, its domestic
distributor) in these matters, in the following form:
"Under penalties of perjury, I declare that I have examined this report,
including accompanying documents, and to the best of my knowledge and belief,
the facts presented in support of this report are true, correct, and complete."
.06 Acknowledgment of Quarterly Report. The Service will review the
original signed quarterly report and issue an acknowledgment letter to the vehicle
manufacturer (or, in the case of a foreign vehicle manufacturer, its domestic
distributor) within 30 days of receipt of the request for certification. This
acknowledgment letter will state whether purchasers may continue to rely on the
certification .
.07 Effect of Erroneous Certification, Erroneous Quarterly Reports, or
Failure to Make Timely Quarterly Reports.
(1) Erroneous Certification or Quarterly Report. The
acknowledgment that the Service provides for a certification is not a
11
determination that a vehicle qualifies for the credit, or that the amount of the
credit is correct. The Service may, upon examination (and after any appropriate
consultation with the Department of Transportation or the Environmental
Protection Agency), determine that the vehicle is not a new advanced lean burn
technology motor vehicle or new qualified hybrid motor vehicle or that the amount
of the credit determined by the manufacturer (or, in the case of a foreign vehicle
manufacturer, its domestic distributor) to be allowable with respect to the vehicle
is incorrect. In either event, or in the event that the manufacturer (or, in the case
of a foreign vehicle manufacturer, its domestic distributor) makes an erroneous
quarterly report, the manufacturer's (or, in the case of a foreign vehicle
manufacturer, its domestic distributor's) right to provide a certification to future
purchasers of the advanced Jean burn technology or hybrid motor vehicles will be
withdrawn, and purchasers who acquire a vehicle after the date on which the
Service publishes an announcement of the withdrawal may not rely on the
certification. Purchasers may continue to rely on the certification for vehicles
they acquired on or before the date on which the announcement of the
withdrawal is published (including in cases in which the vehicle is not placed in
service and the credit is not claimed until after that date), and the Service will not
attempt to collect any understatement of tax liability attributable to such reliance.
Manufacturers (or, in the case of foreign vehicle manufacturers, their domestic
distributors) are reminded that an erroneous certification or an erroneous
quarterly report may result in the imposition of penalties:
(a) under § 7206 for fraud and making false statements; and
12
(b) under § 6701 for aiding and abetting an understatement
of tax liability in the amount of $1 ,000 ($10,000 in the case of understatements
by corporations) per return on which a credit is claimed in reliance on the
certification ).
(2) Failure to Make Timely Quarterly Report. If a manufacturer (or,
in the case of a foreign vehicle manufacturer, its domestic distributor) fails to
make a quarterly report in accordance with section 5.05 of this notice and at the
time specified in section 6.02 of this notice, the acknowledgement letter issued
under section 5.04 of this notice may be withdrawn, and purchasers will not be
entitled to rely on the related certification for quarters beginning after the date on
which the Service publishes an announcement of the withdrawal (generally,
quarters beginning after the due date of the report). If the quarterly report is filed
subsequently, the Service may reissue the acknowledgement letter and retract
the withdrawal announcement.
SECTION 6. TIME AND ADDRESS FOR FILING CERTIFICATION AND
QUARTERLY REPORTS
.01 Time for Filing Certification. In order for a certification under section 5
of this notice to be effective for new advanced lean burn technology motor
vehicles and new qualified hybrid motor vehicles placed in service during a
calendar year, the certification must be received by the Service not later than
December 31 51 of that calendar year .
.02 Time for Filing Quarterly Reports. A report of sales of qualified
vehicles during a quarter must be filed with the Service at the address specified
in section 6.03 of this notice not later than the last day of the first calendar month
13
following the quarter to which the report relates .
.03 Address for Filing. Certifications and quarterly reports under section 5
of this notice must be sent to:
Internal Revenue Service,
Industry Director, Large and Mid-Size 8usiness, Heavy
Manufacturing and Transportation,
Metro Park Office Complex - LMS8,
111 Wood Avenue, South,
Iselin, New Jersey 08830.
SECTION 7. PAPERWORK REDUCTION ACT
The collection of information contained in this notice has been reviewed
and approved by the Office of Management and 8udget in accordance with the
Paperwork Reduction Act (44 U.S.C. 3507) under control number 1545-1988.
An agency may not conduct or sponsor, and a person is not required to
respond to, a collection of information unless the collection of information
displays a valid OM8 control number.
The collections of information in this notice are in section 5. This
information is required to be collected and retained in order to ensure that
vehicles meet the requirements for the new advanced lean burn technology
motor vehicle credit under § 308(a)(2) and (c) or the new qualified hybrid motor
vehicle credit under § 308(a)(3) and (d). This information will be used to
determine whether the vehicle for which the credit is claimed by a taxpayer is
property that qualifies for the credit. The collection of information is required to
obtain a benefit. The likely respondents are corporations and partnerships.
The estimated total annual reporting burden is 280 hours.
The estimated annual burden per respondent varies from 35 hours to 45
14
hours, depending on individual circumstances, with an estimated average burden
of 40 hours to complete the certification required under this notice. The
estimated number of respondents is 7.
The estimated annual frequency of responses is on occasion.
Books or records relating to a collection of information must be retained as
long as their contents may become material in the administration of any internal
revenue law. Generally, tax returns and tax return information are confidential,
as required by 26 U.S.C. 6103.
SECTION 8. DRAFTING INFORMATION
The principal author of this notice is Nicole R. Cimino of the Office of
Associate Chief Counsel (Passthroughs and Special Industries). For further
information regarding this notice, contact Ms. Cimino at (202) 622-3120 (not a
toll-free call).
JS.3079 • TreasuiY Internntional CapItal Data for November
Page 1 0[2
PRESS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
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January 18, 2006
JS-3079
Treasury International Capital Data for November
Treasury International Capital (TIC) data for November are released today and posted on the U,S. Treasury web site (www.treas.govltic
date, which will report on data for December, is scheduled for February 15,2006.
Net foreign purchases of long-term securities were $89,1 billion .
• Net foreign purchases of long-term domestic securities were $103.2 billion, $5.9 billion of which were net purchases by foreign (
$97.3 billion of which were net purchases by private foreign investors.
• U,S, residents purchased a net $14.1 billion in foreign issued securities.
Foreigners' Transactions in Long-Term Securities with U.S. Residents
{Billions of dollars, not seasonally adjusted)
12 Months Through
2004
Nov-
Nov-
13526.0
12806.1
15178,9
14262.4
14889.2
13980.7
17143.4
16087.5
1412.6
1326.8
1653.9
1536.8
3 Domestic Securities Purchased, net (line 1 less line
719.9
916.5
908.6
1055.9
85.8
117.2
4
5
6
7
8
Private, net 12
Treasury Bonds & Notes, net
Gov't Agency Bonds, net
Corporate Bonds, net
Equities, net
585.0
159.7
129.9
260.3
35.0
680.9
150.9
205.7
298.0
26.2
669.5
168.8
190,7
278.0
32.0
941.2
278.4
210.7
375.0
77, I
81.4
25.0
16.9
38.1
1.5
112.8
22.9
18.6
49.3
22.0
9
10
11
12
Official, net
Treasury Bonds & Notes, net
Gov't Agency Bonds, net
Corporate Bonds, net
Equities, net
134.9
103.8
25.9
5.4
-0.3
235.6
201.1
20.8
11.5
2.2
239.0
202.8
24,2
10.5
1.5
114.6
62.6
32.8
18.1
1.2
4.4
3.2
-1.2
2.1
0.3
4.3
-1.1
2.2
2.2
1.0
2761.8
2818.4
3123.1
3276.0
3088.9
3220.2
3627.2
3770.4
312.7
312.0
319.5
336.2
16 Foreign Securities Purchased, net (line 14 less line
-56.5
-152.8
-131.3
-143.1
0.7
-16.7
17
18
32.0
-88.6
-67,9
-85.0
-53.7
-20.8
-122.3
16.9
-16.2
-9.7
-7.0
I Gross Purchases of Domestic Securities
2 Gross Sales of Domestic Securities
13
14 Gross Purchases of Foreign Securities
15 Gross Sales of Foreign Securities
Foreign Bonds Purchased, net
Foreign Equities Purchased, net
Ito'//
, WWw.treaS·Eov/presvreleaseSfjS305~.htm
-77.6
Aug-05
Sep-
2003
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Page 2 of2
JS.3079 - Treasury InternatlOnat eapttalVata tor November
19 Net Long-Term Flows (line 3 plus line 16)
/1
12
13
663.3
763.6
777.31
912.8
100.4
86.5
Net foreign purchases of U.S. securities (+)
Includes International and Regional Organizations
Net U.S. acquisitions of foreign securities (-)
REPORTS
• (PDF) Foreigners' Transactions in Long-Term Securities with U,S. Residents (Billions of dollars, not seasonally adjusted)
1tn:IIWWw.treas.st>v/press/releases/js3079.tttm
211/2006
DEPARTMENT OF THE TREASURY
OFFICE OF PUBLIC AFFAIRS
Embargoed Until 9 a.m. EST
January 18,2006
Contact:
Brookly McLaughlin
(202) 622-1996
TREASURY INTERNATIOl'lAL CAPITAL DATA FOR NOVEMBER
Treasury International Capital (TIC) data for November 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
December, is scheduled for February 15, 2006.
Net foreign purchases of long-term securities were $89.1 billion.
•
Net foreign purchases of long-term domestic securities were $103.2 billion, $5.9 billion of
which were net purchases by foreign official institutions and $97.3 billion of which were net
purchases by private foreign investors.
•
U.S. residents purchased a net $14.1 billion in foreign issued securities.
Foreigners' Transactions in Long-Term Securities with U.S. Residents
(Billions of dollars, not seasonally adjusted)
I
2
3
Gross Purcha.,es orDomestlc SecuntJes
Gross Sales of DomestIc SecuntJes
Domestic Securities Purchased, net (line I less IlIle 2) II
12 Months Through
Noy·04 Nov.05
2003
2004
13526 a
12806 I
719.9
151789
142624
916.5
14889 2
13980 7
90S.6
17143.4
16087 5
1055.9
14126
13268
85.S
16539
15368
117.2
14427
13354
\07.3
1423 I
13198
Aug·05
Sep-05
Oct-OS
Nov·05
103.2
4
5
6
7
8
Private, net 12
Treasury Bonds & Notes, net
Gov't Agency Bonds. net
Corporate Bonds, net
EqUItIes, nct
585.0
1597
1299
2603
350
680.9
1509
2057
2980
262
669.5
1688
190.7
2780
320
941.2
2784
2107
3750
771
81.4
25 a
16.9
38 I
I5
112.8
229
186
493
220
94.4
25 I
287
328
78
97.3
508
86
333
4.6
9
10
II
12
IJ
Official, net
Treasury Bonds & Notes, net
Gov't Agency Bonds, net
Corporate Bonds, net
EqUItIes. net
134.9
1038
25.9
5.4
-03
235.6
201 I
208
II 5
22
239.0
2028
242
IU 5
I5
114.6
626
32.8
18. I
I2
4.4
32
.1.2
2 I
03
4.3
·11
22
2.2
10
13.0
49
62
1.7
02
5.9
37
04
01
27618
28184
-56.5
3123 I
32760
-152.8
30889
32202
-131.3
)ti272
37704
-143.1
312 7
312 U
0.7
319 5
3362
-16.7
3749
378 I
-3.1
3383
3524
-14.1
320
-88.6
-679
-85.0
·537
·77 6
-21l 8
·122 3
169
·162
-97
-70
28
·59
:2 2
-164
663.3
763.6
777.3
912.8
86.5
100.4
\04.2
89.1
14
15
16
17
18
19
II
12
/3
Gross Purchases of Foreign Sec untIes
Gross Sales of ForeIgn Seeuntles
Foreign Securities Purchased, net (lme 14 bs Ime 15) /3
Foreign Bonds Purchased, net
ForeIgn EqUItIes PUlchased, nd
Net Lo~-Term Flows (lme 3 plus Ime 16)
Net foreIgn purchases of U S secuntles (+)
Includes Intemational and RegIonal OrgalllzatlOns
Net U S acqUISItions offorelgn seeuntles (-)
I.7
Page 1 of2
January 17, 2006
2006-1-17-17-41-9-10468
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 $65,938 million as of the end of that week, compared to $65,995 million as of the end of the prior week.
I. Official U.S. Reserve Assets (in US millions)
I
January 6, 2006
January 13,2006
65,995
65,938
TOTAL
1. Foreign Currency Reserves
1
a. Securities
Euro
Yen
11,365
11,113
Of which, issuer headquartered in the U. S.
I
I
"
b. Total deposits with:
b.i. Other central banks and BIS
I
11,114
5,392
b.ii. Banks headquartered in the U. S.
"
"
I
"I
b.ii. Of which, banks located abroad
b.Hi. Banks headquartered outside the U. S.
b.iii. Of which, banks located in the U.S.
112. IMF Reserve Position
I
I
I
2
t3 SpeC'ial Drawing Rights (SDRs) 2
4. Gold Stock 3
TOTAL
Euro
22,478
11,319
0
16,506
0
0
II
Yen
I
I
11,118
11,077
"I
I
TOTAL
0
5,393
16,470
0
0
0
0
0
I
0
II
7,761
I
7,752
II
8,218
8,227
II
11,041
11,043
5. Other Reserve Assets
I
22,437
II
I"
I
I
I
II
0
I
0
I
II. Predetermined Short-Term Drains on Foreign Currency Assets
January 6, 2006
I
Euro
I
I
Yen
JanuaryJ3,2006
I
I
I
TOTAL
II
0
Euro
0
I
TOTAL
II
0
II
II
0
I
II
I
I
0
I
I
Yen
"I
2. Aggregate short and long positions in forwards and futures in foreign currencies vis-a-vis the U.S. dollar:
1. Foreign currency loans and securities
2.a. Short positions
I
2.b. Long positions
0
~. Other
0
I
I
I
I
I
I
I
I
I
I
0
III. Contingent Short-Term Net Drains on Foreign Currency Assets
[
2- Contingent liabilities in foreign currency
1.a. Collateral guarantees on debt due within 1
year
I
January 13, 2006
January 6, 2006
II
I
I
Euro
I
IIto'.1!WWw.treasgov/press/releases/20061~71741910468.htm
Yen
II
TOTAL
II
0
I
II
Euro
II
I
Yen
II
TOTAL
I
I
0
I
I
21112006
Page 2 of2
11.b. Other
contingent liabilities
II
2. Foreign currency securities with embedded
options
@. Undrawn, unconditional credit lines
@a
II
II
I
II
II
With other central banks
II
3.b With banks and other financial institutions
~eadquartered in the US.
3.c. With banks and other financial institutions
0
I
II
II
II
II
II
II
II
II
II
II
II
II
I Headquartered outside the US.
ICurrencies vis-a-vis the U.S. dollar
II
II
0
I
I
I
I
0
II
14.a.1. Bought puts
II
14.a.2. Written calls
14b. Long positions
I
0
"
I
Short positions
0
I
I
in foreign
I
I
I
I
I
4. Aggregate short and long positions of options
14a
II
0
II
I
4.b.l. Bought calls
I
I
4.b.2. Written puts
I
II
I
II
"II
"II
II
"
Notes:
11 Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account
(SOMA), valued at current market exchange rates. Foreign currency holdings listed as securities reflect marked-to-market values, and
deposits reflect carrying values. Foreign Currency Reserves for the latest week may be subject to revision. Foreign Currency
Reserves for the prior week are final.
2J The items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF and are
valued in dollar terms at the official SDR/doliar exchange rate for the reporting date. The entries for the latest week reflect any
necessary adjustments, including revaluation, by the U.S. Treasury to IMF data for the prior month end.
31 Gold stock is valued monthly at $42.2222 per fine troy ounce.
Iltp:/IWWw.treas.~ov/press/releasesI20061171741910468.htm
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Page 1 of3
January 18, 2006
JS-3080
Treasury Designates Director of Syrian Military Intelligence
They.S. Depa~ment of the Treasury today named Assef Shawkat a Specially
Designated National (SON) of SYria pursuant to Executive Order 13338, for directly
furthering the Government of Syria's support for terrorism and interference in the
sovereignty of Lebanon.
"As the Director of Syrian Military Intelligence, Shawkat has been a key architect
of Syria's domination of Lebanon, as well as a fundamental contributor to Syria's
long-standing policy to foment terrorism against Israel," said Stuart Levey,
Treasury's Under Secretary for Terrorism and Financial Intelligence (TFI).
Today's designation freezes any assets Shawkat may have located under U.S.
jurisdiction and prohibits U.S. persons from engaging in transactions with him.
Identifier Information
Assef Shawkat
Title: Director of Syrian Military Intelligence
DaB: 1950
POB: Tartus, Syria
Nationality: Syria
Address: AI-Akkad Street, Damascus, Syria
Major General Assef Shawkat is the Director of Syrian Military Intelligence (SMI),
the strongest and most influential security service in Syria. Its broad internal and
external responsibilities include working with terrorist organizations resident in Syria
and overseeing the Syrian security presence in Lebanon.
In addition to the power he derives from his position, Shawkat also has access to
the highest levels of the Syrian power structure by virtue of his marriage to Bushra
al-Asad, the sister to Syrian President Bashar ai-Assad. Shawkat is a close
confidant of President Assad and an important member of his inner circle of
advisors.
Through his position as Director of SMI, Shawkat has directed and significantly
contributed to the Government of Syria's support for terrorism, including
coordination with Specially Designated Global Terrorists Hizballah, Popular Front
for the Liberation of Palestine-General Command ("PFLP-GC"), Hamas, and
Palestinian Islamic Jihad ("PIJ").
Information indicates that in 2005, Shaw kat met with Hizballah Secretary General
Hasan Nasrallah, PFLP-GC chief Ahmad Jibril, PIJ Secretary General Ramadan
Shallah, in addition to Hamas and PIJ officials. Shallah, Jibril and Nasrallah are
designated Specially Designated Terrorists pursuant to Executive Order 12947.
Shawkat and the officials discussed coordination and cooperation between the
terrorist groups. Shawkat and Jibril hoped to ease the freedom of movement for
Palestinian terrorist groups, including PFLP-GC in Lebanon, so that the groups
could move between Lebanon and Syria, as well as receive weapons and
ammunition more easily.
During his tenure as Deputy Director of SMI, Shawkat managed a branch of SMI
charged with overseeing liaison relations with major terrorist groups resident in
Damascus, including PFLP-GC, Popular Front for the Liberation of Palestine
(PFLP), HAMAS, and PIJ. As SMI Deputy, Shawkat helped direct operations
against Israel, some of which were coordinated with Palestinian terrorist group
leaders, including PFLP-GC leader Ahmad Jibril and PIJ leader Ramadan Shallah.
Ittp;IIWWw
treas·Eov/presvreleaseSfjS305~.htm
21112006
Page 2 of3
Information shows that in June 2003, Shawkat, through his position as deputy
director of SMI, ordered members of PIJ, Hamas, and PFLP-GC to lower their
profiles. The SMI dictated a number of changes that needed to be implemented by
the three terrorist groups. The SMI demanded that each of the groups seek
approval from Shawkat's liaison to hold meetings and gatherings inside their
respective office spaces. The SMI also demanded that the groups lower their
presence and public profile as much as possible. In return, the SMI declared that
they would not expel any of the groups' members from Syrian soil or close offices,
provided their demands were met.
Information available to the United States Government indicates that in 1997,
Shawkal instructed PIJ Secretary General Ramadan Shallah to surveil strategic
targets in a neighboring country to prepare for possible future attacks.
By virtue of his position as SMI Director, Shawkat directs and significantly
contributes to the Government of Syria's military and security presence in Lebanon.
SMI is the primary entity responsible for coordinating and implementing Syrian
Arab Republic Government's (SARG) policies in Lebanon. Shawkat has
contributed significantly to the SARG's security presence in Lebanon through his
oversight of SMI activities within Lebanon and his direct control over Brigadier
General Rustum Ghazali, who commanded SMI activities in Lebanon.
The United States Government designated Rustum Ghazali as a Specially
Designated
National pursuant to Executive Order 13338 for his role in the SARG's continued
support for terrorism and his contribution to the SARG's security and military
presence in Lebanon.
Background on Executive Order 13338
President George W. Bush signed E.O. 13338 on May 11, 2004 in response to the
Syrian government's continued support of international terrorism, sustained
occupation of Lebanon, pursuit of weapons of mass destruction and missile
programs and undermining of U.S. and international efforts in Iraq. Syria's acts
threaten the national security, foreign policy and economy of the United States.
The Order declared a national emergency with respect to Syria, and authorized the
Secretary of the Treasury to block the property of certain persons and directing
other U.S. Government agencies to impose a ban on exports to Syria.
The Treasury may designate individuals and entities found to be or to have been:
•
•
•
•
•
Directing or otherwise significantly contributing to the Government of Syria's
provision of safe haven to or other support for any person whose property or
interests in property are blocked under United States law for terrorismrelated reasons. including, but not limited to, Hamas, Hizballah, Palestinian
Islamic Jihad, the Popular Front for the Liberation of Palestine, the Popular
Front for the Liberation of Palestine-General Command, and any persons
designated pursuant to Executive Order 13224 of September 23,2001;
Directing or otherwise significantly contributing to the Government of Syria's
military or security presence in Lebanon;
. ,
Directing or otherwise significantly contributing to the Government of SYria s
pursuit of the development and production of chemical, biological, or nuclear
weapons and medium- and long-range surface-to-surface missiles;
Directing or otherwise significantly contributing to any steps taken by the
Government of Syria to undermine United States and international efforts
with respect to the stabilization and reconstruction of Iraq; or
Owned or controlled by, or acting or purporting to act for or on behalf of,
directly or indirectly, any person whose property or interests in property are
blocked pursuant to this order.
Click the following link for further information on the June 30, 2005 designation of
two individuals, pursuant to E.O. 13338:
bttp://wwvv Jr(3as.goy/press/releasesljs2617. htm.
Click the following link for the full text of E.O. 13338:
http :lfwww~whitehousegovfnews/releases/2004/05f20040511-G. htl11l.
~j/WWw treas.gov/pres1i7releasesfjS305S.htm
2/112006
Page 1 of 3
June 30, 2005
JS-2617
Treasury Designation Targets Individuals
Leading Syria's Military Presence in Lebanon
The U.S. Department of the Treasury today named Ghazi Kanaan and Rusturn
Ghazali Specially Designated Nationals (SONs) of Syria pursuant to Executive
Order 13338, which is aimed at financially isolating individuals and entities
contributing to the Government of Syria's problematic behavior.
"Actions like tod~y's are intended to financially isolate bad actors supporting Syria's
efforts to destabilize Its neighbors," said Treasury Secretary John W. Snow.
"We are seeing democracy take hold in Lebanon and other places in the Middle
East, yet Syria continues to support violent groups and political strife. Syria needs
to join its neighbors in embracing the progress towards liberty," Snow continued.
Information available to the U.S. Government indicates that Kanaan and Ghazali
have directed the Syrian Arab Republic Government's (SARG) military and security
presence in Lebanon and/or contributed to the SARG's support for terrorism. Both
Ghazali and Kanaan allegedly engaged in a variety of corrupt activities and were
reportedly the beneficiaries of corrupt business deals during their respective
tenures in Lebanon.
Today's designation freezes any assets the designees may have located in the
United States, and prohibits US. persons from engaging in transactions with these
individuals.
IdentLfying Inf()rm;;ltion
Ghazi Kanaan
DOB: circa 1943
POB: Near Qerdaha, Syria
Nationality: Syria
Address: Damascus, Syria
Position: Minister of Interior
According to information available to the U.S. Government, prior to his brief
appointment as Chief of the Syrian Political Security Directorate and his current
position as SARG Interior Minister, Ghazi Kanaan served as Syrian Military
Intelligence (SMI) Chief for Lebanon for approximately 20 years. He was replaced
by Ghazali in late 2002. During his command of SMI in Lebanon, Kanaan ensured
that Syrian military intelligence officers remained deeply involved in Lebanese
political and economic affairs.
Information available to the U.S. Government indicates that as an SMI commander
in Lebanon, Kanaan contributed to the SARG's provision of support to Specially
Designated Global Terrorist groups (SOGT), such as Hizballah. In 2002, three
rockets in a convoy allegedly escorted by Kanaan were personally delivered across
the Syrian-Lebanese border to Hizballah in Lebanon. In May 2001, in a meeting
between Kanaan and Hizballah security leaders, Hizballah agreed to Syria's
request that Hizballah refrain from executing any military operations without first
notifying Syria, according to information available to the U.S. Government.
However, in the same meeting, Hizballah also agreed to continue its casing and
reconnaissance operations.
Information available to the U.S. Government indicates that Kanaan also enjoyed
extensive influence over Lebanon's military and security services. In late
tto:IIWWw,treas.gov/press/releases(js26 17.t1tm
211/2006
Page 2 of3
December 2001, a Lebanese Armed Forces (LAF) commander reportedly declared
that. e~ectlve January 2002, weapons permits and security passes issued by Syrian
institutions would no longer be valid except for those passes and permits issued by
Kanaan. Only those passes and permits Issued by Kanaan would continue to allow
the holder to. carry weapons and to. pass through LAF and Syrian military
checkpoints In Lebanon without being questioned or searched.
Allegedly, in August 2001, the S~RG believed that the Lebanese prime minister,
the speaker of the Lebanese parliament, and a sectarian leader had created a new
alliance that was, in Syria's assessment, a violation of Syria's long-standing policy
to prevent anyone political party or bloc from dominating Lebanese politics.
Furthermore, SYria believed that the new alliance could weaken Lebanese political
parties' dependence on Damascus and diminish SARG influence within Lebanese
politics. In response to this alliance, Kanaan met with the speaker of parliament to
remind him that his best interests lay with the Syrians and that he should impress
that fact upon others within parliament with whom the speaker had influence.
Additionally, press accounts observed that dUring the 2000 Lebanese parliamentary
elections, Kanaan appeared to oversee the entire electoral process.
Rustum Ghazali
DOB: circa 1949
Nationality: Syria
Address: Syria
Position: Chief of Syrian Military Intelligence for Lebanon
Ghazali assumed command of Syrian Military Intelligence in Lebanon after
replacing Ghazi Kanaan, his mentor, in late 2002. U.S. Government information
reports that Ghazali was the implementing agent of Syrian policies in Lebanon until
Syria's withdrawal from Lebanon in April 2005. During his command, Ghazali
directed and significantly contributed to the SARG's military and security presence
in Lebanon. Information available to the U.S. Government indicates that Ghazali, in
his responsibilities for Lebanese affairs, reported directly to President Asad and
then-SMI Director Hasan Khalil.
Information available to the U.S. Government indicates that Ghazali manipulated
Lebanese politics to ensure that Lebanese officials and public policy remained
committed to the SARG's goals and interests. In late 2004, Ghazali reportedly
warned that Syria was determined to physically harm anyone who interfered with
Lebanon's economic situation and caused a crisis of confidence. Also, as of late
2004, Lebanese President Lahoud allegedly consulted with Ghazali before
selecting positions within his cabinet.
Reportedly, Ghazali could influence a number of the Lebanese members of
parliament, and did so notably on the renewal of Lebanese President Lahoud's term
in office. After the Lebanese constitution was amended to allow President Lahoud
to renew his term, some commentators noted that this appeared to be the second
time that Damascus had imposed a president on Beirut. Press reports indicate that
in 1995, the presidential term of Elias Hrawi was also extended for three years at
the urging of Syria.
Information available to the U.S. Government indicates that Ghazali also has
exerted considerable control over the Lebanese military. As of mid-2003, SMI did
not need to maintain as large a presence among the mid-levels of each of the
Lebanese security services, because Ghazali allegedly required the heads of the
LAF Directorate of Intelligence, the Internal Security Forces and the Directorate of
General Security to report to him on a daily, and at times hourly, basis. In a further
indication of his influence over security and political issues in Lebanon, as of late
2003, Ghazali had significant input into all internal matters in the LAF, including
promotions and assignments to key positions.
Allegedly, in November 2003, senior LAF Intelligence Directorate officers continued
to stress to their subordinates the importance of strengthening ties between LAF
and SMI. Furthermore, they encouraged subordinates to coordinate even more
closely than previously with SMI on all issues.
Background on Executive Order 13338
~:IIWWw,treas..gov/press/releases/js2b r r htm
21112006
Page 3 of3
President George W. Bush signed E.O. 13338 on May 11,2004 in response to the
Syrian government's continued support of international terrorism, sustained
occupation of Lebanon, pursuit of weapons of mass destruction and missile
programs and undermining of U.S. and international efforts in Iraq. Syria's acts
threaten the national security, foreign policy and economy of the United States.
The Order declared a national emergency with respect to Syria, and authorized the
Secretary of the Treasury to block the property of certain persons and directing
other U.S. Government agencies to impose a ban on exports to Syria.
The Treasury may designate individuals and entities found to be or to have been:
•
•
•
•
•
Directing or otherwise significantly contributing to the Government of Syria's
provision of safe haven to or other support for any person whose property or
interests in property are blocked under United States law for terrorismrelated reasons, including, but not limited to, Hamas, Hizballah, Palestinian
islamic Jihad, the Popular Front for the Liberation of Palestine, the Popular
Front for the Liberation of Palestine-General Command, and any persons
designated pursuant to Executive Order 13224 of September 23, 2001;
Directing or otherwise significantly contributing to the Government of Syria's
military or security presence in Lebanon;
Directing or otherwise significantly contributing to the Government of Syria's
pursuit of the development and production of chemical, biological, or nuclear
weapons and medium- and long-range surface-lo-surface missiles;
Directing or otherwise significantly contributing to any steps taken by the
Government of Syria to undermine United States and international efforts
with respect to the stabilization and reconstruction of Iraq; or
Owned or controlled by, or acting or purporting to act for or on behalf of,
directly or indirectly, any person whose property or interests in property are
blocked pursuant to this order.
Click the fol/owing link for the full text of E. O. 13338.
{lttpjlwwwwhitellOuse.govlnewslrefeasesI2004105120040511-6hJ.l11 i
IttP://WWw,trea~'.gov/press/releases/j s2617 -btm
2/1/2006
Executive Order: Blocking Property of Certain Persons and Prohibiting the Export of Certain Goods to S... Page 1 of 4
Click to PI int
this document
For Immediate Release
Office of the Press Secretary
May 11. 2004
Executive Order: Blocking Property of Certain Persons and Prohibiting the Export of Certain Goods
to Syria
By the authority vested in me as President by the Constitution and the laws of the United States of America, including the
International Emergency Economic Powers Act (50 U.S.C. 1701 et seq.) (IEEPA), the National Emergencies Act (50 U.S.C. 1601
et seq.) (NEA), the Syria Accountability and Lebanese Sovereignty Restoration Act of 2003, Public Law 108-175 (SM), and
section 301 of title 3, United States Code,
I, GEORGE W. BUSH, President of the United States of America, hereby determine that the actions of the Government of Syria in
supporting terrorism, continuing its occupation of Lebanon, pursuing weapons of mass destruction and missile programs, and
undermining United States and international efforts with respect to the stabilization and reconstruction of Iraq constitute an
unusual and extraordinary threat to the national security, foreign policy, and economy of the United States and hereby declare a
national emergency to deal with that threat. To address that threat. and to implement the SM, I hereby order the following:
Section 1. (a) The Secretary of State shall not permit the exportation or reexportation to Syria of any item on the United States
Munitions List (22 C.F.R. part 121).
(b) Except to the extent provided in regulations, orders, directives, or licenses that may be issued pursuant to the provisions of this
order in a manner consistent with the SM, and notwithstanding any license, permit, or authorization granted prior to the effective
date of this order, (i) the Secretary of Commerce shall not permit the exportation or reexportation to Syria of any item on the
Commerce Control List (15 C. F.R. part 774); and (ii) with the exception of food and medicine, the Secretary of Commerce shall
not permit the exportation or reexportation to Syria of any product of the United States not included in section 1(b)(i) of this order.
(e) No other agency of the United States Government shall permit the exportation or reexportation to Syria of any product of the
United States, except to the extent provided in regulations, orders, directives, or licenses that may be issued pursuant to this order
in a manner consistent with the SM, and notwithstanding any license, permit, or authorization granted prior to the effective date
of this order.
Sec. 2. The Secretary of Transportation shall not permit any air carrier owned or controlled by Syria to provide foreign air
Iransportation as defined in 49 U.S.C. 401 02(a)(23), except that he may, to the extent consistent with Department of
Transportation regulations, permit such carriers to charter aircraft to the Government of Syria for the transport of Syrian
government officials to and from the United States on official Syrian government business. In addition, the Secretary of
Transportation shall prohibit all takeoffs and landings in the United States, other than those associated with an emergency, by any
such air carrier when engaged in scheduled international air services.
Sec. 3. (a) Except to the extent provided in section 203(b)(1), (3), and (4) of the IEEPA (50 U .S.C. 1702(b)(1 ), (3), and (4 )), and
the Trade Sanctions Reform and Export Enhancement Act of 2000 (title IX, Public Law 106387) (TSRA), or regulations, orders,
directives, or licenses that may be issued pursuant to this order, and notwithstanding any contract entered into or any license or
permit granted prior to the effective date of this order, all property and interests in property of the following persons, that are in the
United States, that hereafter come within the United States, or that are or hereafter come within the posseSSion or control of
United States persons, including their overseas branches, are blocked and may not be transferred, paid, exported, withdrawn, or
otherwise dealt in: persons who are determined by the Secretary of the Treasury, in consultation with the Secretary of State,
(i) to be or to have been directing or otherwise significantly
contributing to the Government of Syria's provision of safe haven to
or other support for any person whose property or interests in
Executive Order: Blocking Property-6f Certain Persons and Prohibiting the Export of Certain Goods to S... Page 2 of 4
property are blocked under United States law for terrorism-related
reasons, including, but not limited to, Hamas, Hizballah, Palestinian
Islamic Jihad, the Popular Front for the Liberation of Palestine, the
popular Front for the Liberation of Palestine-General Command, and
any persons deSignated pursuant to Executive Order 13224 of September
23, 2001;
(ii) to be or to have been directing or otherwise significantly
contributing to the Government of Syria's military or security
presence in Lebanon;
(iii) to be or to have been directing or otherwise significantly
contributing to the Government of Syria's pursuit of the development
and production of chemical, biological. or nuclear weapons and
I
medium- and long-range surface-to-surface missiles;
(iv) to be or to have been directing or otherwise significantly
contributing to any steps taken by the Government of Syria to
undermine United States and
international efforts with respect to the stabilization and
reconstruction of Iraq; or
(v) to be owned or controlled by, or acting or purporting to act for
or on behalf of, directly or indirectly, any
person whose property or interests in property are blocked pursuant
10 this order.
(b) The prohibitions in paragraph (a) of this section include, but are not limited to, (i) the making of any contribution of funds,
goods, or services by, to, or for the benefit of any person whose property or interests in property are blocked pursuant to this
order; and (ii) the receipt of any contribution or provision of funds, goods, or services from any such person.
Sec ..4. (a) Any transaction by a United States person or within the United States that evades or avoids, has the purpose of
evading or aVOiding, or attempts to violate any of the prohibitions set forth in this order is prohibited.
(b) Any conspiracy formed to violate the prohibitions set forth in this order is prohibited.
Sec. 5. I hereby determine that the making of donations of the type of articles specified in section 203(b)(2) of the IEEPA (50
Executive Order: Blocking Property of Certain Persons and Prohibiting the Export of Certain Goods to S... Page 3 of 4
U.S.C. 1702(b)(2)) wou.ld seriously imp~ir the ability to deal with the national emergency declared in this order, and hereby
prohibit, (i) the export~tlon or reexportation of su~h donated articles to Syria as provided in section 1(b) of this order; and (ii) the
making of suc~ donations by, to, or for the benefit of any person whose property and interests in property are blocked pursuant to
section 3 of thiS order.
Sec. 6. For purposes of this order:
:a) the term "person" means an individual or entity;
b) the term "entity" means a partnership, association, trust, joint venture, corporation, group, subgroup, or other organization;
c) the term "United States person" means any United States citizen, permanent resident alien, entity organized under the laws of
he United States or any jurisdiction within the United States (including foreign branches), or any person in the United States;
d) the term "Government of Syria" means the Government of the Syrian Arab Republic, its agencies, instrumentalities, and
:ontrolled entities; and
e) the term "product of the United States" means: for the purposes of subsection 1(b), any item subject to the Export
\dministration Regulations (15 C.F.R. parts 730-774); and for the purposes of subsection 1(c), any item subject to the export
censing jurisdiction of any other United States Government agency.
jec. 7. With respect to the prohibitions contained in section 1 of this order, consistent with sUbsection 5(b) of the SM, I hereby
letermine that it is in the national security interest of the United States to waive, and hereby waive application of subsection 5(a)
1) and subsection 5(a)(2)(A) of the SM so as to permit the exportation or reexportation of certain items as specified in the
lepartment of Commerce's General Order No.2 to Supplement No.1, 15 C.F.R. part 736, as issued consistent with this order
nd as may be amended pursuant to the provisions of this order and in a manner consistent with the SM. This waiver is made
ursuant to the SM only to the extent that regulation of such exports or reexports would not otherwise fall within my constitutional
uthority to conduct the Nation's foreign affairs and protect national security.
ec. 8. With respect to the prohibitions contained in section 2 of this order, consistent with subsection 5(b) of the SM, I hereby
etermine that it is in the national security interest of the United States to waive, and hereby waive, application of subsection 5(a)
!)(O) of the SM insofar as it pertains to: aircraft of any air carrier owned or controlled by Syria chartered by the Syrian
:)Vernment for the transport of Syrian government officials to and from the United States on official Syrian government business,
I the extent consistent with Department of Transportation regulations; takeoffs or landings for non-traffic stops of aircraft of any
Jch air carrier that is not engaged in scheduled international air services; takeoffs and landings associated with an emergency;
ld overflights of United States territory.
ee. 9. I hereby direct the Secretary of State to take such actions, including the promulgation of rules and regulations, as may be
~cessary to carry out subsection 1(a) of this order. I hereby direct the Secretary of Commerce, in consultation with the Secretary
State, to take such actions, including the promulgation of rules and regulations, as may be necessary to carry out subsection 1
) of this order. I direct the Secretary of Transportation, in consultation with the Secretary of State, to take such actions, including
e promulgation of rules and regulations, as may be necessary to carry out section 2 of this order. The Secretary of the Treasury,
consultation with the Secretary of State, is hereby authorized to take such actions, including the promulgation of rules and
gulations, and to employ all powers granted to the President by the IEEPA as may be necessary to carry out sections 3,4, and
of this order. The Secretaries of State, Commerce, Transportation, and the Treasury may redelegate any of these functions to
her officers and agencies of the United States Government consistent with applicable law. The Secretary of State, in
Insultation with the Secretaries of Commerce, Transportation, and the Treasury, as appropriate, is authorized to exercise the
nctions and authorities conferred upon the President in sUbsection 5(b) of the SM and to redelegate these functions and
Ithorities consistent with applicable law. All agencies of the United States Government are hereby directed to take all
'propriate measures within their authority to carry out the provisions of this order and, where appropriate, to advise the
lcretaries of State, Commerce, Transportation, and the Treasury in a timely manner of the measures taken.
lC. 10. This order is not intended to create, and does not create, any right or benefit, substantive or procedural, enforceable at
or in equity by any party against the United States, its departments, agencies, instrumentalities, or entities, its officers or
lployees, or any other person.
IV
iC. 11. For those persons whose property or interests in property are blocked pursuant to section 3 of this order who might have
:onstitutional presence in the United States, I find that because of the ability to transfer funds or assets instantaneously, prior
Executive Order: Blocking property ot l.'ertam Persons and Prohibiting the Export of Celiain Goods to S... Page 4 of 4
notice to such persons of measures to be take~ p~rsuant to ~his order ~ould render these measures ineffectual. I therefore
determine that for these measures t? be effective In addres~lng the national emergency declared in this order, there need be no
prior notice of a listing or determination made pursuant to thiS order.
Sec. 12. The Secretary of the Treasury, in consultation with the Secretary of State, is authorized to submit the recurring and final
reports to the Congress on the national emergency declared in this order, consistent with section 401 (c) of the NEA, 50 U.S.C.
1641(c), and section 204(c) of the IEEPA, 50 U.S.C. 1703(c).
Sec. 13. (a) This order is effective at 12:01 eastern daylight time on May 12,2004.
(b) This order shall be transmitted to the Congress and published in the Federal Register.
GEORGE W. BUSH
THE WHITE HOUSE,
May 11,2004.
###
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PRESS ROOM
Janual'y 13, 2006
JS-3081
Treasury Deputy Secretary Robert M. Kimmitt
Luncheon Keynote at American Council on
Germany Conference
Washington, DC
Reinvigorating the US-German Economic Partnership
Good afternoon.
Thank you, Dr. Oetker, for your very kind Introduction, and also for your years of
support for stronger German-Amellcan relations.
I would also like to thank the co-sponsors of this event, the German CounCil on
Foreign Relations and the American Council on Germany, especially my friends
and former colleagues Garrrck Utley, Bill Drozdiak, and - of course - Karen Furey.
My first interaction with these two Councils came over two decades ago at a very
different time In German-American and transatlantic relations. A conference
arranged Jointly by these two groups during the Cold War might not have taken the
time to discuss globalization in detail or to hear from the US Treasury Department,
because the emphasis durrng that period was understandably on the political and
seculity dimensions of the relationship. Today. however, the economic and
finanCial component is widely recognized as an essential element of the foundation
of the relationship - Indeed, some would say the component of the relationship that
helped weather recent stormy relations on the political/military front. So it is
Important to look not just at where we are, but at what we can do to reinvigorate the
German-American economic partnership.
When President George H.W. Bush called in Mainz in the sprrng of 1989 for
Germany and the United States to be "Partners In Leadership," considerable
attention was focused on the word leadership, a word that then and even now
causes historrcal ripples In Germany. and not enough on partnership, which was
and is tile essence of our relationship and where we should focus our attention
today.
Chancellor Merkel has already made history. as the first woman chancellor and the
first from the East. But I believe that when we look back at her first visit to
Washington as head of government, it Will be seen as pivotal not because of
personalities but because it launches a renewal of the German-American
partnership. This is not to say our fundamental relationship was ever in doubt. But
it has not fulfilled its full potential for creating benefits for our own countries and for
the world.
The challenges and opportunities that face us include addressing global financial
imbalances and fighting global poverty; safeguarding the environment; opening
world trade; fighting the war on terror; rebuilding Iraq and Afghanistan; and
addressing pressing issues in Iran, the Palestinian territories, and Lebanon Such
issues are in many ways as daunting as those confronting the world In 1989. Then
the Cold War was endlllg at breathtaking speed, with little certainty as to what lay
on the other side. Now democracy is again opening once-closed doors in some
places while remaining blocked in others
In Mainz in 1989 the first President Bush talked about "the vision, the concept of
free peoples In North America and Europe working to protect their values." That
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vision had created NATO, helped defeat communism, and began to lay the
foundation for the post-Cold War world. It is now tlille to renew that vision based
on the same values of democracy, collective security, and free markets to 'address
the 21 st Century's most pressing problems The new Merkel government's coalition
agreement Identifies the German-U.S partnership as a key Instrument to "support
peace, democracy and freedom In the world". Our task 110W is to convert these
good intentions on both sides to effective policies and actions.
Economic partnership
However, global engagement and leadership must be grounded on a strong
economic base at home. That is true for both the United States and Germany. We
in the United States strongly support the new government's focus on putting its
economic house in order and do not consider a focus on domestic economic reform
as being in conflict with cooperation on global issues QUite the opposite. Reforms
that lead to stronger, Internally-generated growth in Germany will make it a stronger
global player, including a stronger voice in the EU to push common interests and a
more effective partner for the United States on Issues of common concern
Likewise, maintaining strong rates of U.S. growth is what will allow us to continue to
play our part in meeting global challenges while keeping our economic house in
order, including significantly reducing our budget deficit over time.
Growth in Germany is Important for other reasons as well. The German economy is
the engine of Europe -- almost 30% of total output and the top export market for
most of the rest of the EU. If Germany is not firing on all cylinders, then neither is
the rest of Europe.
Together with increasing US national savings and Asian currency flexibility, faster
growth In Europe in turn is an essential prerequiSite for redressing the problem of
global financial imbalances. There has been conSiderable attention lately on the
question of Asia, and especially China, moving toward market-determined
exchange rates. This IS the first vital step in the process. But Europe's role is
equally important in the medium term. If the United States were to increase
significantly its rate of national savings - in other words, reduce demand - in the
absence of more domestic demand in Europe and As a to take up the slack, the
results for the world economy could be disruptive We share a compelling common
interest in growth and orderly adjustment in imbalances that reqUires us all to tackle
our respective policy challenges.
For too long the German economy has been flying on only one engine - exports
while the domestic economy - investment and consumption - has been stalled.
Exports have always been a catalyst for growth In Germany, and m the past have
ignited a cycle whereby export revenues generate funds for Investment, which in
turn creates jobs and sparks consumption. But in the last few years we have all
been waiting - and waiting - for the cycle to start. Analysts on both Sides of the
Atlantic began to speculate on whether past economic linkages were breaking
down.
In the last few months, however, we have seen some hopeful signs that the virtuous
cycle may finally be underway. Investment was up 7% in the most recent quarter,
and business confidence IS at ItS highest level since August 2000. Even
consumption is shOWing signs of life with positive reports of iloliday sales by
retailers.
The investment numbers are particularly encouraging as they reflect a vote of
confidence by German and foreign investors in Germany's investment climate The
entire international economic system is best served by policies that promote not
only free trade and fleXible exchange rates but also the free flow of capital across
borders. Both Germany and the United States maintain and benefit from open
investment regimes - just look at the current BASF bid for Engelhard or the
Unicredito deal with Hypobank. But some of the riletoric that came from Germany
last year - talk of "swarms of locusts" - sent a negative signa/. When Germany IS
trying to boost growth, It cannot afford to cut off the kind of Investment that Will
make it stronger. Restrictions on private equity or Implementing the EU Takeover
Bids Directive by Incorporatmg potentially discriminatory "reciprocity" provisions
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would do just that.
I find tile attitude of tile Ilead of a German company recently sold to an overseas
private equity gmup to be refreshing. He said "We are flattered that so many
private equity flnns have shown Interest in us. Locusts are drawn to green grilss
We are clearly a JUICY bite. We need their money for expansion." Germany's
economy can do worse ttlan being called "Juicy"
I appreciate the tensions underlying an open Investment policy. Although the
United States has long advocated such a policy, recent controversy over CNOOC's
pmposed acquisition of Unocal has caused some to question our investment policy
and how the US. government monitors acquisitions to protect national security
interests. Given tile increaSing number of cross-border transactions, It is important
for US and International busillesses that the US. government operate in a manner
that facilitates an open Investment policy that both promotes foreign direct
investment In the United States and addresses national security concerns. Of
course, some of the most difficult cases we face involve state-owned or -controlled
companies that seek to invest or expand in the United States while restricting
Investment and expansion opportunities In their home markets. That is something
many European countries, Including Germany, need to realize, especially with
regard to former state monopolies.
Another important signal to Investors would be to modernize the current U.S.German tax treaty relationship. A new agreement further reducing barriers to
cross-border trade and Investment, particularly with respect to cross-border
dividends, would complement other investment-friendly policies. It will also ensure
that investment is not diverted to other countries that have reached such a
modernized agreement with the United States We hope that we will be able to
conclude such a new agreement In the reasonably near future.
And, as the new government moves forward on its economic agenda, we hope
there will not be a repeat of the 2002 efforts to apply new taxes or revoke tax
preferences on a retroactive basis. The predictability and reliability of taxation rules
IS an essential element in encouraging investors to continue to evaluate
opportunities, espeCially In companies or sectors under stress.
The signs of renewed investment indicate a nascent upturn that is probably in part a
delayed cyclical upturn It IS also likely to be the lagged effects of reforms made
over the last few years. It shows that reforms matter and are essential to reverse
the long slide in Germany's potential GOP, the determiner of growth over tile
medium term. German potential growth - another word for cyclically adjusted
growth - fell from nearly 4% In the 80's to 1.25% according to the latest IMF
calculation, and, without structural reform, it is forecast to fall further.
Obviously, this IS not news to German pollcymakers who have been struggling With
the politiCS of reform for several years. Most of the major parties now recognize
that Germany needs more flexible labor and product markets, better higher
education, and lower barriers to entrepreneurship and Innovation if it is to regain its
competitiveness in the modern, globalized economy. The "freedom agenda" laid
out by Chancellor Merkel applies with equal force to economic reform.
Meanwhile, change is happening on the ground. Germany's superb export record
is partially the result of firms and unions working together to maintain
..
competitiveness through more flexible labor agreements that boost productiVity.
Unit labor costs have fallen faster than in other major European countries.
Germany needs to change its laws and regulatory structures to allow the reforms at
the firm level to spread throughout the economy. The Government's agreed
program makes concrete, If modest. steps in this direction. by reducing the tax
burden on labor and labor market restrictions. More Important, It IS an Important
signal of the government's resolve to move forward. It makes clear that more
reform is the solution not the pmblem.
An accelerated reform process in Germany would have repercussions throughout
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Europe. The Lisbon Agerlda was designed to use peer pressure to motivate
difficult but Ilecessary refor-ms What it has lacked, despito Its well-grounded
valldatloll as a structural reform agenda, IS real leadership by example. If Germany
becomes that leader, the rest of the contillont will follow.
In urging reform, I want to be clear that the United States is In no way trying to
impose the U.S. economic model on Germany or ilny other country. Europe has
plenty of successful economic growth stories, ranging from Ireland to the Nordic
countries, that provide useful lessons for reform The NordiC countries, in
particular, have III recent years achieved relatively strong performance while
maintaining their generous social safety net. Key factors seem to be sustainable
fiscal policies, better incentives for labor participation and hiring. a better
environment for technology development and entreprerleurship, and higher
educatiollal achievement.
Of course, much of the new government's economic program is focused on
redUCing the defiCit, a priority for both of our administrations, made more urgent by
the demographic imperative of aging populations_ Germany invented the Stability
and Growth Pact and must be the leader in reestablishing EU fiscal discipline. But
fiscal tightening IS coming Just as a fragile recovery seems to be taking hold. Deficit
reduction must be achieved in a way that does not undermine growth. In particular,
potential negative effects of the VAT increase set to go Into effect in 2007 must be
mitigated.
Encouraging signs Include the apparent strong base of public support for the new
government's economic program and German investor confidence. which is at a
two-year high. Other countries have been able to consolidate budgets and sustain
robust economic growth because they had the confidence of the population that
economic policy was on the right track and being implemented effectively. If this is
to be the scenario for Germany, it must be clear that tax increases are being
minimized and balanced with real expenditure cuts.
The US. experrence highlights the importance of growth and public confidence to
deficit reduction. Last year the federal deficit fell by about one-fourth, despite the
costs of Hurricane Katrina, Iraq. and the war on terror. In fiscal year 2005. the
deficit was 2.6 percent as a share of GOP - lower than the shares in 16 of the last
25 years and only slightly above the 2.3 percent average over the past 40 years.
ThiS deficit reduction was spurred by an average growth rate of better than 4% in
the third quarter and a strong increase in federal revenues. Federal revenues for
fiscal year 2005 totaled $2.15 trillion - the highest level ever - and a 14.6%
increase over fiscal year 2004. This IS the largest year-aver-year increase in more
than 20 years. Further, this deficit reduction has occurred Without any tax
increases. In fact, PreSident Bush's tax cuts in 2003 have played an important role
in reViving the U.S. economy by lowering the cost of capital Secretary Snow
recently said that making these tax cuts permanent is "essential" to continuing a
strong, positive trend in business investment and the U.S. economy overall.
Although revenues are up, the United States stili has a federal budget deficit that is
too large. President Bush has stated a goal of reducing our deficit by one-half. to
below 2.3 percent of GOP by 2009, and Secretary Snow said earlier this week that
further reducing the deficit is our top priority at the Treasury. To reach this goal, the
U.S government must implement tight spending restrictions. I was heavily involved
in preparing the Treasury Department's budget for fiscal year 2007, and I can tell
you that the President is committed to this goal of deficit reduction, even with the
continued costs associated with HUrricane Katrina, fighting terrorism, and
supporting democratic transition In Iraq. It is difficult work to cut spending, but cuts
are necessary, and we will work with Congress to make it happen.
Partnership on global challenges
So both Germany and the United States Will continue to place a significant priority
on reducing deficits, stimulating growth, and increasing employment at home. In
parallel, and not on a zero-sum, either-or basis, there are several areas of global
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interest where we call work togethel' based on our shared values:
Democracy in Europe Tile lure of the EU has beell a powerful beacon for
democracy and reform 011 Ellrope's periphery but there IS much work yet to be
done. Determining final status for Kosovo, sustaining tile democratic gains from
color revolutions In Ukraine and Georgia, and achieving change In Europe's last
true dictatorship, Belarus, are all areas where the United States and Europe _ with
German leadership - must continue to coordinate closely. And economic progress
and financial stability are key elements In the democracy equation.
Energy Security The recellt Russia-Ukraine gas dispute highlights the need to
cooperate on diversifying global energy production and transport, and developing
Innovative technologies to reduce our long-term dependence on fossil fuels. I look
forward to learning the results of the panel on thiS critical subject that follows this
luncheon.
WTO As one of the world's largest exporters, Germany benefits enormously from
free trade and globalizatioll As Chancellor Merkel said last evening, protectionism
serves no one's interests. Germany has a particularly strong interest in leading EU
trade policy, where protection of the farm sector seems to have eclipsed the
broader interests of Illany EU members. The doorway to a successful round is
agriculture and the key to that door is a more ambitious agriculture market access
proposal from the EU. With a stronger German role, we can unlock the growth
potential of trade liberalization
We have also identified four particular priorities for strategic Investments we need to
consider in the Muslim and Arab worlds:
Afghanistan: As the President made clear to the Chancellor today, the United
States is exceptionally grateful for the strong leadership role Germany has played
both on security and in the reconstruction of Afghanistan, including hosting the
landmark Bonn Conference in 2002. We are now at a critical stage in the history of
Afghanistan. With the completion of the Bonn Process, even strong contributors
like Germany need to redouble efforts to help ensure that Afghanistan's nascent
democracy flourrshes into a thriVing nation and economy The upcoming donors'
conference in London at the end of this month provides an opportune moment for
Germany to renew its leadership role on Afgllan reconstruction A strong German
role. Including through NATO, is key to enhancing domestic security and promoting
economic development in Afghanistan In that regard, I thought Chancellor
Merkel's references last evening to NATO's centrality, even primacy, on both Inand out-of-area challenges were qUite noteworthy.
Iraq We look forward to cooperating With Germany as we engage with the new
Iraqi authorrtles to help them realize their Vision of a Vibrant, market-based
economy and to further develop democratic Institutions. Iraq's leaders who emerge
from December's historic elections warrant our strong support in their efforts to
develop sound, credible institutions and construct the infrastructure necessary to
ensure the realization of their enormous economic potential. While most of our
discussion of Iraq In past years was defined by differences over "boots on the
ground," diSCUSSion now must focus on the strategic significance to us and the
region of success in Iraq. And that success, as in any democratic transition, IllUSt
include economic progress In that regard, not only the elections on December 15
but also the December 23 unanimous approval by the Board of the International
Monetary Fund of a stand-by agreement for Iraq is a Significant milestone
Palestinian Authority: The EU continues to be a strong voice for reform in the
Palestinian terrrtorres and a key player in support of the peace process. The United
States looks forward to working closely with Germany in its capacity as a leader In
the EU and as a bilateral actor in support of Palestinian economic reVitalization.
The United States and Germany share a vision of reVitalized economic activity In
the West Bank and Gaza, supported by stlong and credible institutions
Lebanon: Germany and other frrends of Lebanon have a unique opportunity to
support the efforts of the newly-elected government to implement economic and
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Page 60f6
political reforms that will put Lebanon on the path toward stability and growth.
International donor assistance to support these efforts should be provided in the
context of a strong and credible reform program, ideally one supported by the IMF
and the World Bank.
Stopping terrorist fillancing Chancellor Merkel remarked last evening that fighting
terrorism may be even more difficult than fighting the Cold War and that we need to
consider how best to organize for that cl1allenge. We at Treasury are engaged in
that fight in many ways, notably trying to spur development in countries and regions
that are fertile breeding grounds for extremists, but also by using all possible means
to deny terrorists the resources to fund their evil enterprises Germany and the
United States are global leaders In the International finanCial system, both
governmental and commercial. Both countries recognize the vital Importance of a
robust international financial system that can stimulate and sustain economic
growth and technological development. Our countries must also be global leaders
in protecting the international financial system from abuse by terrorist organizations
and other criminal interests. We must continue to promote transparency across all
finanCial sectors. and we must develop and apply finanCial authorilies to identify,
isolate, and impede terrorist and criminal threats to the international finanCial
system. ThiS requires national authorities with operational capabilities to attack the
illiCit financial support networks that enable terronst organizations, WMO
proliferation interests, transnational organized crime groups, and other threats to
international peace and security. Perhaps most importantly, this requires national
leadership and political will to develop and apply these authorities. Germany and
the United States must work together as closely and diligently in protecting the
international finanCial system as we do in promoting its ongoing development And
that Includes our common efforts regarding Iran.
Conclusion
Today's meetings - both at the White House and here across Lafayette Park - will
provide new Impetus to the U.S.-German relationship, and it is Incumbent on us to
seize the opportunity of a new sense of partnership to achieve concrete results that
benefit our people and the world. As Chancellor Merkel said last evening, those
results will depend on more than several hours of diSCUSSion every few months, so
we in the U.S. government have committed to a deeper, more direct, and sustained
dialogue with Germany on our rich and varied agenda In addition to our work
together in the G-7, G-8, and, increasingly, G-20, a steady stream of American
viSitors will be III Berlin over the next few months, to begin to move forward on our
common objectives, including economic and financial measures to enhance this
most important transatlantic relationship I look forward to being one of those
visitors in the very near future. For now, thank you for your attention, and I would
be pleased to field your questions
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PRESS ROOM
January 20, 2006
JS-3082
Treasury Department Hosts Radio Day on the Economy
Secretary Snow Welcomes Hosts, Administration Officials to Historic Cash
Room
WASHINGTON, DC - The U.S. Department of the Treasury today is hosting a
Radio Day focusing on the state of the American economy. From 7 a.m. until 7
p.m., radio hosts will broadcast from the Treasury's historic Cash Room, and call-in
to radio shows across the nation. More than 20 senior Administration officials will
visit throughout the day to talk about economic growth and job creation, including
in-depth analyses of leading economic indicators and a look at the work
government can do to keep the economy on a strong growth path.
"The American economy is truly the envy of the world, and its strength comes from
our small-business owners and entrepreneurs, our outstanding workforce and the
simple fact that we operate as a free market," Secretary John Snow said. "Our role
is to create an environment in which workers and businesses can either thrive or
struggle. Right now, jobs are being created and the economy is thriving, and we
want to make sure that path of growth continues. That means making sure that the
right policies are in place - especially low marginal tax rates," he went on. "I'm very
pleased that we are able to have this important discussion about the economy here
at the Treasury, in the historic Cash Room. Ongoing conversations about the health
of the economy are central to maintaining that health."
Stations and hosts participating in Economic Radio Day include CBS Market Watch,
Radio Bilingue/Latino USA, Bloomberg Radio, Kirby Wilbur from KVI in Seattle,
Washington, and Sean Hannity from ABC.
Administration officials participating in Treasury's Radio Day:
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•
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•
Secretary John Snow - Department of the Treasury
Deputy Secretary Robert Kimmitt - Department of the Treasury
U.S. Treasurer Anna Cabral- Department of the Treasury
Assistant Secretary Emil Henry, Jr. - Department of Treasury
Assistant Secretary Mark Warshawsky - Department of the Treasury
Under Secretary Randy Quarles - Department of the Treasury
Secretary Carlos Gutierrez - Department of Commerce
Deputy Secretary David Sampson - Department of Commerce
Secretary Elaine Chao - Department of Labor
Deputy Secretary Steven Law - Department of Labor
Secretary Alphonso Jackson - Department of Housing and Urban
Development
Ambassador Rob Portman - U.S. Trade Representative
Karl Rove - Assistant to the President, Deputy Chief of Staff and Senior
Advisor
Dan Bartlett - Counselor to the President
Nicolle Wallace - White House Communications Director
Josh Bolten - Director of the Office of Management and Budget
AI Hubbard - Assistant to the President for Economic Policy and Director of
the National Economic Council
Keith Hennessey - Deputy Director of the National Economic Council
.
Ruben Barrales - Director, White House Office of Intergovernmental Affairs
###
tqJ:IIWWw.treasgov/press/releaseS/ls3081.htm
21112006
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PRESS ROOM
January 23, 2006
JS-3083
Treasury Secretary Snow to Release DVD on
Identity Theft to Help Better Protect Consumers
from Financial Fraud
Treasury Secretary John W. Snow will launch a DVD on Thursday January 26,
2006 that provides consumers with information on how to recognize identity theft,
how they can protect themselves, and what they should do if they become a victim.
The DVD, entitled Identity Theft Outsmarting the Crooks, features experts from the
government and the private sector talking about the scope of the identity theft
problem and how a few simple steps can significantly increase protection.
The launch event will take place in Treasury's Media Room (4121) at 10 a.m. on
January 26. Secretary Snow will be joined by representatives that participated in
the creation of the DVD from the Federal Trade Commission, Departments of
Justice and Defense, the U.S. Secret Service, the U.S Postal Inspection Service,
the American Bankers Association, National Association of Federal Credit Unions,
the Consumer Data Industry Association, and the Florida Bankers Association.
Media without Treasury press credentials planning to attend should contact Frances
Anderson in Treasury's Office of Public Affairs at (202) 622-2960 or (202) 528-9086
with the following information: name. Social Security number and date of birth. This
information may also be emailed to frances.C1ndorson@do.treas.gov.
To view the Video News Release (VNR) please click the link below:
LINKS
•
Video News Release (VNR)
Ittp:IIWWw.treas . $bv/press/releases/js3083 ..}l.tm
2/1/2006
Page 1 of 1
PRESS ROOM
January 23, 2006
JS-3084
Treasury Names Financial Attaches in Brussels and Tokyo
Treasury announced today that it is appointing Barbara C. Matthews as the
Department's Financial Attache in Brussels and Maureen Grewe to the attache post
in Tokyo. Matthews will work closely with the U.S. Mission to the European Union
on financial services and macroeconomic issues, and serve as the U.S. Treasury's
representative in Europe. Grewe will take over as financial attache in Tokyo in
August of this year.
Matthews has recently served as senior counsel to the House Financial Services
Committee where she was responsible for international issues. Prior to joining the
Financial Services Committee in August of 2003, she was the Banking Advisor and
Regulatory Counsel at the Institute of International Finance where she identified
and analyzed key global financial and regulatory trends.
Matthews joined the Institute in 1992 as its Associate Banking Advisor until August
1994, when she left to practice law with Morrison & Foerster. She returned to the
II F In January 1996 in the expanded role of Banking Advisor & Regulatory Counsel.
Matthews earned simultaneously a J.D. and an LL.M. in Foreign and International
Law from Duke Law School, graduating in 1991. She holds a B.Sc.F.S. from
Georgetown University's School of Foreign Service, where she was inducted into Pi
Sigma Alpha (the National Political Science Honor Society) and Alpha Sigma Nu
(the National Jesuit Honor Society). Matthews is a member of the International
Association of Financial Engineers, the American Bar Association, and the Bar of
the State of New York and has been elected to the Council on Foreign Relations.
Grewe is currently serving as senior policy advisor in the East Asia Office at the
Treasury Department. In this capacity she deals with a full range of Japan issues
and works closely with the Embassy staff. Grewe takes over the attache post in
Tokyo after ten years at Treasury that include holding positions as: assistant
financial attache in Tokyo, Treasury representative in Seoul and regional Treasury
representative for Southeast Europe. Grewe has also been the Director of the
Office of Middle East and South Asian Nations, special assistant for the Assistant
Secretary and the Korea desk officer while at Treasury.
Prior to joining Treasury, Grewe was an assistant vice president in the commercial
real estate division at Shawmut Bank, and the division financial manager for
Trammell Crow's residential property division in Boston, Massachusetts.
Grewe earned an MPA degree from the Woodrow Wilson School at Princeton
University in 1995. She has a BS in Finance and Economics from Boston College,
graduating in 1987. Grewe is a member of the CFA Institute and has been a
Chartered Financial Analyst since 1992.
1tp:/IW\\-w,treas.gQ\r!press!releasesf]s3084.DUn
2/1/2006
Page 1 of2
PRESS ROOM
January 23, 2006
2006-1-23-17 -22-4 7-25960
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 $65,783 million as of the end of that week, compared to $65,938 million as of the end of the prior week.
I. Official U.S. Reserve Assets (in US millions)
January 13, 2006
TOTAL
January 20, 2006
I
65,783
65,938
1. Foreign Currency Reserves 1
a. Securities
Euro
II
Yen
11,319
II
11,118
, issuer headquartered in the US
II
II
II
TOTAL
Euro
22,437
11,309
II
0
II
16,470
II
II
Yen
11,025
II
II
II
I
TOTAL
22,334
0
b. Total deposits with:
b.i. Other central banks and BIS
11,077
5,393
5,347
11,080
16,427
b.i; Banks headquartered in the US.
0
I
Ib.ii. Of which, banks located abroad
0
a
Ib.iii. Banks headquartered outside the US.
a
a
II
I
0
Ib.iii. Of which, banks located in the U.S.
12. IMF Reserve Position 2
II
14. Gold Stock 3
15. Other Reserve Assets
I
I
0
7,761
I
13. Special Drawing Rights (SDRs) 2
0
I
7,756
8,227
8,222
I
11,043
11,043
I
0
II
0
I
II. Predetermined Short-Term Drains on Foreign Currency Assets
January 13, 2006
Yen
Euro
I
TOTAL
a
1. Foreign currency loans and securities
January 20, 2006
II
II
Euro
I
Yen
0
II
I
2. Aggregate short and long positions in forwards and futures in foreign currencies vis-a-vis the U.S. dollar:
[2.a Short positions
II
@.b Long positions
II
II
II
[3. Other
II
II
II
0
II
II
0
0
II
II
II
I
TOTAL
II
II
II
II
0
II
II
0
I
I
a
I
III. Contingent Short-Term Net Drains on Foreign Currency Assets
[
January 20, 2006
January 13, 2006
I
Yen
Euro
OTAL
'-" , v
0
1. Contingent liabilities in foreign currency
1.a. Collateral guarantees on debt due within 1
year
I
I
http://WWw.treaa.gov/press/releases/2006}2317224725960.htm
II
Il
I
I
I
II
Yen
TOTAL
0
I
I
I
I
21112006
Page2of2
11.b . Other
contingent liabilities
2. Foreign currency securities with embedded
options
II
1\
II
0
@. Undrawn, unconditional credit lines
I
II
0
@.a. With other central banks
II
3.b With banks and other financial institutions
I
II
II"
II
J!ieadqualtered in the US.
II
I
3.e. With banks and other financial institutions
I
"
""II
II"
"II
I
II
/I
II
II
II
II
"II
"
14.a.1. Bought puts
14.a.2. Written calls
14b
Long positions
14.b.1. Bought calls
14.b.2. Written puts
I
I
I
0
II
I
/I
II
"I
I
Icurrencies vis-a-vis the U.S. dollar
14.a. Short positions
I
0
I
[Headquartered outside the US
4. Aggregate short and long positions of options
in foreign
/I
/I
I
"II
"
"
"II
II
"
I
II
II
II
II
II
II
II
II
II
II
II
II
II
0
II
II"
I
II
"II
II
II
II
II
II
II
"II
II
II
0
II
"
Notes:
11 Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account
(SOMA). valued at current market exchange rates. Foreign currency holdings listed as securities reflect marked-to-market values, and
deposits reflect carrying values. Foreign Currency Reserves for the latest week may be subject to revision. Foreign Currency
Reserves for the prior week are final.
21 The items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF and are
valued in dollar terms at the official SDR/dollar exchange rate for the reporting date. The entries for the latest week reflect any
necessary adjustments, including revaluation, by the U.S. Treasury to IMF data for the prior month end.
31 Gold stock is valued monthly at $42.2222 per fine troy ounce.
http://WWw.trea.I:~~ov/press/releases/2006~12317224725960.htm
211/2006
Page 1 of 1
PRESS ROOM
January 25, 2006
js-3085
Treasury Secretary John Snow Signs
Statement of Support for Guard and
Reserve Employees
In a ceremony at the Department of the
Treasury this morning, Secretary John
Snow signed a statement of support that
joined the Treasury Department with other
employers by pledging the following:
1. Employment will not be denied because
of service in the Guard or Reserve;
2. Employee job and career opportunities
will not be limited or reduced because of
service in the Guard or Reserve;
3. Employees will be granted leaves of
absence for military service in the Guard
or Reserve, consistent with existing laws,
without sacrifice of vacation; and
4. [The) agreement and its resultant policies will be made known throughout the
organization.
"It is with great respect for the National Guard and Reserves that I sign this
Statement of Support," Secretary Snow said. "As civil servants, I believe we should
all be humbled to work alongside the men and women who are giving twice to their
country - first by serving in the Federal Government and second by volunteering for
the ultimate in service, the defense of our great nation and all its precious
freedoms. I am proud to affix my signature to a document that makes official my
heartfelt support, and deep support from the Treasury, of these valiant federal
employees."
http://W\\-w,treas gov/press/releases/js3085 htm
21112006
Page 1 of 1
PRESS ROOM
10 view or pnnt the PUr content on thiS page, aown/oaa the tree AdOI)OO,) Acrobat'''; Keaae!V<)
January 25, 2006
js-3086
Treasury and IRS Propose Rules Regarding Designated Roth Contributions
Today, the Treasury Department and the IRS issued proposed regulations under
sections 402(g), 402A, 403(b), and 408A, regarding designated Roth contributions.
Roth contributions were added to the Code by the Economic Growth and Tax Relief
Reconciliation Act of 2001 (EGTRRA) and are effective for taxable years beginning
after December 31,2005. Designated Roth contributions allow for employees to
designate all or a portion of their elective contributions under a section 401 (k) plan
of a section 403(b) annuity plan as Roth contributions, These contributions would
receive tax treatment much like a Roth IRA contribution, meaning that they would
be contributed from after-tax income but, later, "qualified distributions" of the
contributions plus earnings would be completely tax-free.
These proposed regulations address issues with respect to designated Roth
contributions not addressed in the final regulations under section 401 (k) regarding
section 402A that were published in the Federal Register on January 3,2006 (71
FR 6), including the definition of a qualified distribution, the taxation of distributions
of designated Roth contributions that are not qualified, coordination of designated
Roth contributions and Roth IRAs and rules for Roth contributions under section
403(b) plans.
The text of the proposal regulations is attached
###
REPORTS
http://WWw,trea!'',gov/press/releases/js3086 htm
21112006
Page 2 of2
industry to find more ways to address identity theft. Treasury, in conjunction with
the IRS and the FDIC, held a series of outreach meetings in cities across the
country to educate consumers on how they can protect themselves from becoming
victims of identity theft.
In the creation of this DVD, Treasury worked with: the Federal Trade Commission,
Departments of Justice and Defense, the U.S. Secret Service, the U.S. Postal
Office, the American Bankers Association, National Association of Federal Credit
Unions, the Consumer Data Industry Association and the Florida Bankers
Association.
The disk includes English subtitles for the hearing impaired and Spanish language
dubbing. It can be viewed individually via a computer or DVD player or in a group
learning environment. A PowerPoint presentation available from the resource
library tracks the content of the video and can be used as a teaching aid or
handout. The DVD runs approximately 80 minutes but can be viewed selectively in
shorter segments on specific topics.
Consumers can obtain the DVD from the Federal Citizen Information Center
address in Pueblo, Colo. for a handling charge of $2 (order information below).
Mail- FCIC -058, PO 80x tOO, Pueblo, CO 81002
Phone - 1-888-8 PUEBLO
Fax - 719-948-9724
Internet - www.pueb/o.gsa.gov
Order Code Number - 635NN
Item - OVO. Identity Theft. Outsmarting tile Crooks
For more information check out Treasury's Identity Theft Resource page at:
http:/{www,treas.goy!office.s/qQmestic-financelfin9ilcialinstitution/cip/identity:theft.shtml
-30-
~ttp:IIWWw.treas.-gov/press/releases/js3087 htm
2/1/2006
S. Treasury - Offiee of Domestie PInance - Office of Critical Infrastructure Protection and Compliance... Page 1 of 3
l'
~
I T E
[I
S T .\ T E S
DI~p:\Rrrrtll':'l'
CU'
1'1"': l' It t:}\ S IJ It\'
OFFICE OF DOMESTIC FINANCE
fsearch
News
Direct Links
Key Topics
Press Room
About Treasury
Offices
Domestic Finance
Speeches ane! Teslllllony
Financial InstilutllHlS
Financial rvlarkels
Fiscal Service
Economic Policy
General Counsel
International Aff8irs
Management
Public Affairs
Tax Policy
Terrorism and Financial
Intelligence
Treasurer
Bureaus
Office of Critical Infrastructure Protection and
Compliance Policy
IDENTITY THEFT RESOURCE PAGE
< BACK
To view or print the PDF content on this page. download the free Adobe"') AcrotJatr0 Reader'@
"One of the most harmful abuses of personal information is identity theft."
- President George W. Bush, February 2002
There are many different definitions of what constitutes "Identity Theft" Under the Fair and
Accurate Credit Transactions Act of 2003 (FACT Act), the definition is broad: "a fraud
committed or attempted using the identifying information of another person without authority."
Whatever definition is used, identity theft is a growing crime that can threaten the confidence
we share in our open and robust financial system if we don't take action. We all have a role to
play in combating identity theft
This page contains information on what identity theft is, simple steps individuals can take to
prevent it, and what they can do if they become victims. There is also information on what
industry and law enforcement are doing to fight the crime and a report on various
technologies used to combat identity theft. The Treasury Department also developed "Identity
Theft: Outsmarting the Crooks," a DVD that includes a Resource Library of supporting
materials which are provided below.
Education
Identity Theft: Outsmarting the Crooks
Site Policies and Notices
_~~<ijJlri'<:£~+s~;;:lB2:;§~
Copies of the Treasury Department DVD, "Identity Theft:
Outsmarting the Crooks" are available through the Federal Citizen
Information Center. Contact the FCIC at www.pueblo.gsa.gov.tollfree at 1-888-878-3256, or by writing to: FCIC -05B, PO Box 100,
Pueblo, CO 81002. The DVD is free, but there will be a modest
handling and shipping charge. Supplies are limited. Order Number
635NN.
Streams of DVD Excerpt
•
•
WincJQV\isMedia Player
Rnal Player
Resource Library Materials: The Resource Library materials contained in the DVD can
be downloaded from a personal computer and are accessible below. They are drawn from
the video discussion, developed as background by the Treasury Department, or taken
from the Federal Trade Commission's useful identity theft web site
(wwwconsumers.gov/idtheft). The PowerPoint Companion Learning Guide accessible
below generally tracks the content of the DVD, while the English and Spanish transcripts
capture the video verbatim. Web links relate to the agencies and organizations that were
represented or mentioned in the video.
DVD Companion Learning Guide
• Identity Theft Companion Learning Guide G
Obtaining Credit Reports
• FTC Facts: Your Access to Free Credit f~eports I2J
• Obtaining Your Credit F\epprts: Nationwide Credit Bureaus IE
• AUDual Credit Report RequE~st Form IE
Identity Theft Tips, Forms, and Facts
•
Affidavit
IE
lttp://WWw.tre(t&.gov/offices/domestic-fI~ance/financial-institution/cip/identity-theft.shtml
2/1/2006
U.S. Treasury ~ Office of Domestic Finance - Office of Critical Infrastructure Protection and Compliance... Page 2 of 3
• Do's and Don'ts IE
• FACT Act Provisions G
• FTC Brochure: Take Charge: Fighting Back Against Identity Theft IE
• En Espanol: Tom~) Control Deficndase Contra el Robo de Identidad G
• FTC: Brief SUlllmary of Rights IE
• En Espanai: Un breve resumen de los derecflOs IE
• IRS: Identity Theft Message G
Phishing
•
•
•
•
FTC Consumer Alert. "Phlshlng" IE
En Espanol: Alorta do la FTC "Phishing"1E
Anli-Phishlng Working Group: I'hishing Activity Trends Report Lessons G
Lessons Learned by Consumers, Financial Sector Firms, and Government
Agencies IE
Transcripts of the DVD
• English IE
• En Espanol G
Identity Theft Links
•
Selected Identity Theft Web Links IE
»
Remarks of Deputy Assistant Secretary for Critical Infrastructure Protection D.
Scott Parsons Beating Identity Crime: How the Pliblicand Private Sectors_are
Working Together to Help Consumers and Put Fraudsters Behind Bars FDIC
Identity Theft Symposium
»
The Use of Technology to Combat Identity Theft: Report on the Study
Conducted Pursuant to Section 157 of the Fair and Accurate Credit
Transactions Act of 2003 IE
-.
--
»
Fair and Act:.urate Credit Transactionsj\ct of20031E
» "Identity Thoft Threatens Credit System",by TreasurySecretaJY John\j\j
Snow, Albuquerque Journi;3l, August 7~2003
» Treasury Secretary JohnVV. SnowT~timonyon Strengtllening Consumer
Interests of the Fair Crodit Rt)porting Act BeJore the Committee SJr.LBanhing,
Housing, a_nd Urban Affairs, July 31, 20_Q3
)} Treasury Secretary John W. Snow TesJimony Advocating the Renev@1 of the
FalrCreditReportlng Act Before the Committee onf:lDanc@1 Servic_e_s JuJy_9,
2QQ3
» United StatQs Trea~LJry Secretary JQhn w. Snow Rem.ilLks AQyocatLngthe
F~er1ewal of the Fair Creditf~eportingAct June
D~partmEl.nLCash F~oom Wa"blo.gtoll, D_C
»
»
30 2003 The IreaslJr'j
United States Treasury Secc.~tary JoimW Snm,v I~emarks Advocating .the
f~enewalof the Fair Credit F\eporting Act June 30 2003 The Tmasury
Department, Cash r':;oo_m Washington, DC
Identity Theft Penalty Enhancement Act of 2004
Disclaimer for Web Sites
With regard to the Web site addresses that appear in this DVD that are created and
maintained by both non-government entities and by government entities other than the
Treasury:
• The Treasury does not control, endorse, or guarantee the accuracy, relevance,
timeliness or completeness of information contained in such Web sites.
• The Treasury does not endorse the sponsors of the non-governmental Web sites nor
does it control, endorse, or guarantee the views expressed or the products/services
offered in such Web sites.
• The Treasury is not responsible for transmissions users receive from such Web sites.
• The Treasury does not guarantee that the Web sites comply with Sections 504 or 508
(Accessibility Requirements) of the Rehabilitation Act of 1973 (29 U.S.C. 794 and
794d), as applicable, or any other applicable law.
• The Treasury makes no warranty, express or implied, regarding these Web sites.
Non-Endorsement Disclaimer
http://WWw.tre(l6.gov/offices/domestic-finance/financial-institution/cip/identity-theft.shtml
211/2006
U.S. Treasury - Office of~mes1ie Fmance - Office of Critical Infrastructure Protection and Compliance ... Page 3 of 3
The participation of and references to non-governmental entities in the power point
presentation or other materials offered here do not constitute or imply the endorsement by
the U.S. Government, including the U.S. Department of the Treasury, of such nongovernmental entities. The services, advice, and products mentioned in this power point
presentation or other materials offered here by non-governmental entities are neither
endorsed nor guaranteed by the U.S. Government.
Last Updated: January 26, 2006
http://WWw.trea~.gov/offices/domestic-fimlllce/financjal-instjtution/cip/identity-theft.shtml
211/2006
Page 1 of 1
PRESS ROOM
January 26, 2006
2006-1-26-14-0-46-27061
Photo Gallery: Economic Radio Day
The U.S. Department of the Treasury hosted a Radio Day on January 20th which
focused on the state of the American economy.
View the photo~from Radio Day
All media queries should be directed to
The Press Office at (202) 622-2960.
Only call this number if you are a member of the media.
n~:/IWWw.treA.s.gov/press/releases/20aol.261404627061.htm
2/1/2006
Photo Essay. 2006 Radio Day on the Economy
Page 1 of 1
PRESS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS:
A Photo Essay - Economic Radio Day
Note: Accessing the Flash Version of this slideshow requires the froo FlashPlayer software. Download and
install the free FlashPiayer Software.
The U.S. Department of the Treasury hosted a Radio Day on January 20th which focused
on the state of the American economy. Radio hosts broadcast their shows from the
Treasury's historic Cash Room throughout the day, and call-in radio shows across the
nation heard from more than 20 Administration officials who participated in the event.
Topics of discussion included economic growth and job creation, including in-depth
analyses of leading economic indicators and a look at the work government can do to
keep the economy on a strong growth path.
"The American economy is truly the envy of the world, and its strength comes from our
small-business owners and entrepreneurs, our outstanding workforce and the simple fact
that we operate as a free market," Secretary John Snow said. "Our role is to create an
environment in which workers and businesses can either thrive or struggle. Right now,
jobs are being created and the economy is thriving, and we want to make sure that path
of growth continues. That means making sure that the right policies are in place especially low marginal tax rates," he went on. "I'm very pleased that we were able to
have this important discussion about the economy here at the Treasury, in the historic
Cash Room. Ongoing conversations about the health of the economy are central to
maintaining that health."
•
•
HTML Version (Modem)
Flash Version (Hi-Speed)
Introduction I Photo Gallery I Press f~oorn
http://WWw.tre?.s.gov/press/releases/doc~hoto-gallery/radioday2006/
2/1/2006
Page 1 of 1
PRESS ROOM
January 27, 2006
JS-3088
Statement by Treasury Secretary John Snow
on the Release of Preliminary Estimates of Fourth
Quarter 2005 GDP
The advanced estimate of fourth quarter 2005 GOP released this morning is
inconsistent with the underlying strength of the U.S. economy.
I would not read too much into loday's numbers, They are somewhat anomalous,
reflecting some special factors. They are not consistent with other data on the U.S.
economy which paint a picture of good growth:
• Durable goods numbers are strong;
• The manufacturing sector is doing well;
• Labor markets strengthening;
• Unemployment is at historically low levels; and
• Initial claims for unemployment insurance are the lowest in five years:
The American economy is on a good course and I am very confident. I am
optimistic about the first quarter and the year ahead and am confident that we will
see strong growth for the year.
On a year-over-year basis the economy has grown at 3.5%, which is certainly good
strong growth. We will look forward to revisions of the preliminary estimates in the
coming months. Economic fundamentals point to continued strong economic
performance in the United States in 2006. The U.S. economy is performing well.
http://WWw.trea~.gov/press/releases/js30gs htm
211/2006
Page 1 of 1
PRESS ROOM
10 view or pnnt the /-,UI- content on thiS page, downloaO the tree /\dOIJC(e<) 11 crol) 3 1"'; l<erKJcr(!'J.
January 30, 2006
JS-3089
Treasury and IRS Issue Final Regulations Relating to U,S Possessions
WASHINGTON, DC - The Treasury Department and IRS today issued final
regulations to provide guidance regarding taxation in Us, possessions, The
regulations reflect amendments to the Internal Revenue Code made by the
American Jobs Creation Act of 2004 (AJCA), The final regulations provide
guidance for determining whether an individual is a bona fide resident of the
following U,S, possessions: American Samoa, Guam, the Northern Mariana
Islands, Puerto Rico, and the U,S, Virgin Islands,
The income tax laws of the United States have long contained special provisions for
the taxation of individuals residing in U.S. possessions. AJCA revised certain
aspects of these provisions to prevent individuals who live and work in the United
States from inappropriately reducing their combined US. and possessions tax. The
Treasury Department and IRS issued a comprehensive package of proposed and
temporary regulations in April of 2005 relating to U.S. possessions, including the
determination of bona fide residency in a possession. In response to extensive
comments on the regulations dealing with the determination of residency, Treasury
and the IRS have amended and finalized the regulations dealing with residency.
These final regulations incorporate many of the comments received on the
proposed and temporary regulations, including a number of revisions intended to
better reflect the realities of possessions life.
The text of the proposal regulations is attached.
###
REPORTS
•
TO 9248
Ihttp://WWw.trea'O.gov/press/releases/js308') htm
2/1/2006
[4830-01-p]
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
[TO 9248]
RIN 1545-BC86
Residence Rules Involving U.S. Possessions
AGENCY:
Internal Revenue Service (IRS), Treasury.
ACTION:
Final regulations, temporary regulations, and removal of temporary
regulations.
SUMMARY: This document contains final regulations that provide rules for
determining bona fide residency in the following U.S. possessions: American
Samoa, Guam, the Northern Mariana Islands, Puerto Rico, and the United States
Virgin Islands under sections 937(a) and 881 (b) of the Internal Revenue Code
(Code).
DATES: Effective Date: These regulations are effective January 31, 2006.
Applicability Dates: For dates of applicability, see §§1.881-5(f)(8) and 1.937-1 (i).
FOR FURTHER INFORMATION CONTACT: J. David Varley, (202) 435-5262
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collections of information contained in these final regulations have
been reviewed and approved by the Office of Management and Budget in
- 1-
accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)) under
control number 1545-1930.
The collections of information in these final regulations are in §1.937-1.
The collection of information required by §1.937-1 (h) is to ensure that individuals
claiming to become, or cease to be, residents of a U.S. possession file notice of
such a claim with the Internal Revenue Service in accordance with section 937(c)
of the Code. Individuals subject to this reporting requirement must retain
information to establish their residency as required by section 937(c) of the Code
and §1.937-1. An additional collection of information in these final regulations is
in §1.937 -1 (c)(4 )(iii). This information is required to satisfy the documentation
and production requirements for individuals who come within an exception to the
presence test of §1.937-1 (c) as a consequence of receiving (or accompanying
certain family members who receive) qualifying medical treatment.
The collections of information are mandatory and will be used for audit
and examination purposes. The likely respondents are individuals who become
(or cease to be) bona fide residents of a U.S. possession and individuals who, in
satisfying the presence test requirement for bona fide residence in a possession,
exclude days in the U.S. or include days in a relevant possession because they
receive (or accompany certain family members who receive) qualifying medical
treatment.
Estimated total annual reporting and/or recordkeeping burden: 300,000
hours.
Estimated average annual burden hours per respondent: 4 hours.
-2-
Estimated number of respondents: 75,000.
Estimated annual frequency of responses: annually.
An agency may not conduct or sponsor, and a person is not required to
respond to, a collection of information unless it displays a valid control number
assigned by the Office of Management and Budget.
Comments concerning the accuracy of this burden estimate and
suggestions for reducing this burden should be directed to the Office of
Management and Budget, Attn: Desk Officer for the Department of Treasury,
Office of Information and Regulatory Affairs, Washington, DC 20503, with copies
to the Internal Revenue Service, Attn: IRS Reports Clearance Officer,
SE:W:CAR:MP:T:T:SP, Washington, DC 20224.
Books or records relating to a collection of information must be retained as
long as their contents might become material in the administration of any internal
revenue law. Generally, tax returns and tax return information are confidential,
as required by 26 U.S.C. 6103.
Background
The American Jobs Creation Act of 2004 (Public Law 108-357) was
enacted on October 22, 2004. Section 809 of the Act added section 937 to the
Code, relating to residence, source, and effectively connected income with
respect to the U.S. possessions. On April 11,2005, the IRS and Treasury
published in the Federal Register temporary regulations (TD 9194, 70 FR
18920, as corrected at 70 FR 32589-01), which provided rules to implement
section 937 and to conform existing regulations to other legislative changes with
-3-
respect to U.S. possessions. A notice of proposed rulemaking (REG-159243-03,
70 FR 18949) cross-referencing the temporary regulations was published in the
Federal Register on the same day. Written comments were received in
response to the notice of proposed rulemaking and a public hearing on the
proposed regulations was held on July 21, 2005. The proposed regulations
relating to the residence rules (specifically, §§1.937-1 and 1.881-5T(f)(4)) are
adopted as amended by this Treasury decision, and the corresponding
temporary regulations are removed. The revisions are discussed below. The
remainder of the proposed and temporary regulations, relating to source and
effectively connected income with respect to U.S. posseSSions, will be finalized
together with the other conforming changes in a forthcoming Treasury decision.
Explanation of Provisions and Summary of Comments
The proposed and temporary regulations under Code section 937(a)
provide rules for determining whether an individual is a "bona fide resident" of a
U.S. possession. Generally, §1.937-1 T provides that an individual is a bona fide
resident of a possession if the individual meets a presence test, a tax home test
and a closer connection test. The IRS received comments relating to each of the
three tests.
I. Presence Test
A. General rule
Under section 937(a)(1), in order to satisfy the presence test, a person
must be present in the possession for at least 183 days during the taxable year
(the 183-day rule). The proposed and temporary regulations provide several
-4 -
alternatives to the 183-day rule for purposes of satisfying the presence test.
Thus, an individual who does not satisfy the 183-day rule nevertheless meets the
presence test under the proposed and temporary regulations if the individual
spends no more than 90 days in the United States during the taxable year; the
individual spends more days in the possession than in the United States and has
no earned income in the United States; or the individual has no permanent
connection to the United States.
The proposed and temporary regulations also provide a special rule for
nonresident aliens in lieu of the 183-day rule and its alternatives. This special
rule reflects the intention of the IRS and Treasury to adopt, to the extent possible,
the generally applicable rules of residence with respect to nonresident aliens.
Thus, the special rule requires nonresident aliens to satisfy a mirrored version of
the substantial presence test of section 7701 (b) in order to meet the presence
test of section 937(a)(1).
A number of commentators suggested that the IRS and Treasury should
also allow U.S. citizens and residents to satisfy the 183-day rule of section
937(a)(1) by satisfying a mirrored version of the substantial presence test of
section 7701 (b). These comments generally argued that the 183-day rule fails to
provide the flexibility necessary to reflect the realities of island life. The
comments also stated that the proposed and temporary regulations subject U.S.
citizens and residents to a higher presence requirement than nonresident aliens.
The final regulations do not incorporate the rules of section 7701 (b) as an
alternative to the 183-day rule of section 937(a)(1) for U.S. citizens and
-5-
residents. Congress considered but specifically rejected adopting section
7701 (b) as the general rule for determining residency in a possession. See H.R.
Conf. Rep. No. 108-755, at 791-795 (2004). Instead, Congress adopted the 183day rule and gave the Service authority to adopt appropriate exceptions to the
rule to provide sufficient flexibility. The proposed and temporary regulations
follow that approach and provide alternatives to the 183-day rule intended to
address the necessity of off-island travel. The IRS and Treasury do not believe it
is appropriate to adopt a section 7701 (b) rule by regulations when Congress
expressly rejected this view. Accordingly, the IRS and Treasury generally retain
the approach of the proposed and temporary regulations in the final regulations
but also provide additional flexibility in the application of the 183-day rule and its
alternatives to meet the needs of island residents and offset differences between
the rules applicable to U.S. citizens and residents and the rules applicable to
nonresident aliens.
Commentators also suggested that the 183-day rule should serve as a
safe harbor whereby individuals who were present in the possession for at least
183 days would not need also to satisfy the tax home and closer connection
tests. The IRS and Treasury believe that this type of safe-harbor rule is
inconsistent with the three-part test provided by Congress under section 937(a),
which requires individuals to pass an objective presence test as well as the more
subjective tax home and closer connection tests. In addition, the IRS and
Treasury believe that applying the presence test in combination with the tax and
-6-
closer connection tests is the most reliable method of determining whether an
individual is a bona fide resident of a possession.
B. Counting days of presence
A number of commentators suggested that certain days an individual is
not physically present in the possession nevertheless should be considered days
during which the individual is present in the possession. Specifically,
commentators suggested that days spent outside of the possession for medical
treatment of the individual or a family member or because of a natural disaster in
the possession, a family emergency, charitable pursuits, or business travel
should be counted as days of presence in the possession for purposes of
applying the 183-day rule. Similarly, commentators suggested that days spent in
the United States for such purposes should not count as days spent in the United
States under the alternatives to the 183-day rule.
In response to these comments, the final regulations liberalize the rules on
counting days of presence. Consistent with the legislative history of section
937(a), the IRS and Treasury believe that it is desirable to allow for situations in
which an individual's presence outside the possession is unlikely to be
attributable to a tax avoidance purpose. See H.R. Conf. Rep. No.1 08-755, at
791-795 (2004). Accordingly, the final regulations provide additional flexibility for
certain situations involving medical conditions and natural disasters.
The proposed and temporary regulations provide that any day that an
individual is prevented from leaving the United States because of a medical
condition that arose while the individual was present in the United States is not
-7-
treated as a day of presence in the United States for purposes of the alternatives
to the 183-day rule. In response to the comments received, the final regulations
provide additional flexibility for medical treatment. Under the final regulations, a
temporary stay in the United States for certain documented medical treatment of
the individual, or a parent, spouse or child whom the individual accompanies to
the treatment, will not count as days spent in the United States for purposes of
the alternatives to the 183-day rule, irrespective of where the medical condition
arose. Further, such a temporary stay outside of the possession, whether in the
United States, another possession or a foreign country, also will count as days of
presence in the possession. Qualifying medical treatment generally involves any
period of inpatient care in a hospital or hospice in the United States, and any
temporary period of time spent in the United States for medically necessary
inpatient care in a residential medical care facility. The final regulations focus on
the place of treatment and the formal credentials of the health care provider as
an objective proxy for a determination that a medical condition is serious enough
to entail periods of treatment that may not be readily covered by other
alternatives to the 183-day rule.
With respect to disasters, the final regulations provide that if an individual
leaves, or is unable to return to, a relevant possession during (1) a two-week
period within which an officially declared major disaster in the relevant
possession occurs, or (2) the period in which a mandatory evacuation order
applies, then the individual will not count any day during either period as a day of
presence in the United States, even though the individual has evacuated to or is
-8-
otherwise present in the United States. The Federal Emergency Management
Agency lists officially declared major disasters on its website at
www.fema.gov/news/disasters.fema. Furthermore, the individual may count that
day (whether the individual's temporary presence was in the United States or in
some other location outside the relevant possession) as a day of presence in the
relevant possession even though the major disaster or mandatory evacuation
order prevented the individual from being physically present in the relevant
possession.
The final regulations do not adopt commentators' suggestion that days
spent outside of a possession for nonmedical family emergencies, charitable
pursuits or business travel should count as days spent in the possession and
outside the United States. These additional exceptions would have been
administratively difficult to implement and monitor. The IRS and Treasury believe
that in these situations, and in medica! situations not otherwise provided for in the
final regulations, the 183-day rule in combination with the alternatives to that rule,
as liberalized in these final regulations, provide sufficient flexibility to
accommodate absences from the possession to pursue a range of activities.
c.
Permanent connection
Under the proposed and temporary regulations, an individual may satisfy
the presence test if the individual has "no permanent connection" to the United
States during the taxable year. The proposed and temporary regulations provide
a nonexclusive list of three items each of which constitutes a permanent
connection. The enumerated items are a "permanent home" in the United
-9-
States, a spouse or dependent having a principal place of abode in the United
States, and current registration to vote in any political subdivision of the United
States.
The IRS and Treasury believe that the term significant connection is more
precise and accurate than the term permanent connection. As a result, the final
regulations use the term significant connection rather than permanent
connection. In addition, the IRS and Treasury have concluded that the rules of
the proposed and temporary regulations should be amended in several respects.
The IRS and Treasury believe that it is not appropriate for the listing of
items constituting a significant connection to be a nonexclusive list that leaves
open the possibility that undefined or unspecified factors could result in a
determination that an individual has a significant connection to the United States
in a particular case. The significant connection test is an alternative under the
presence test, which itself is fundamentally an objective standard. Section
937(a) and the regulations already provide a more subjective, facts-andcircumstances standard in the form of the closer connection test. With respect to
the significant connection test, the IRS and Treasury believe that the regulations
should provide certainty and that the three items enumerated in the proposed
and temporary regulations are the critical significant connections. Accordingly,
the final regulations adopt these items as the exclusive list of significant
connections to the United States.
The proposed and temporary regulations define permanent home by
general reference to §301.7701 (b)-2(d)(2). Commentators asserted that this
- 10-
definition does not provide adequate guidance as to the application of the
significant connection test in the common situation of individuals who own
several homes, including vacation homes. In response to these comments, the
final regulations provide an exception for rental property.
With respect to a spouse or dependent whose principal place of abode is
in the United States, commentators requested that an estranged spouse and a
child of a noncustodial parent not be treated as a significant connection. These
commentators observed that the noncustodial parent may not have any control
over the place where the child resides and that a finding of significant connection
in such circumstances would be inappropriate. The IRS and Treasury agree, and
the final regulations exclude such children from the definition of significant
connection. In addition, the final regulations provide that only minor children are
the type of dependent that constitutes a significant connection. Further, the final
regulations do not treat as a significant connection a minor child who resides in
the United States as a student, or a spouse from whom the individual is legally
separated.
D. Earned income
The proposed and temporary regulations provide that an individual may
satisfy the presence test if the individual spends more days in the possession
than in the United States and has no earned income in the United States.
Commentators suggested that the regulations should permit an individual to
qualify under this alternative even with some de minimis amount of earned
income in the United States. In addition, commentators suggested that income
- II -
earned on any day excluded for purposes of counting days of presence in the
United States under the presence test (for example, for certain medical
treatment) should be excluded from earned income.
The IRS and Treasury agree that from the standpoint of practicality,
fairness and administrability, de minimis amounts of U.S.-earned income should
not render unavailable this alternative to the 183-day rule. In establishing a
permitted amount of earned income for this purpose, the IRS and Treasury
believe it appropriate to look to existing de minimis provisions of the Code
involving compensation for services. In this regard, the final regulations crossreference the maximum amount ($3,000 under current law) of compensation for
labor or personal services performed in the United States that is not deemed to
be income from sources within the United States under section 861 (a)(3). The
final regulations do not incorporate the suggestion that income earned on days
excluded for purposes of counting days of presence should be excluded from
earned income. The IRS and Treasury believe that this type of exclusion from
earned income would be difficult to administer and could lead to abuse of this
alternative, particularly given the additional flexibility provided in the final
regulations with respect to days that can be excluded for purposes of counting
days of presence.
Commentators also suggested that the no-U.S.-earned-income alternative
to the 183-day rule should be applied by treating each state or other defined
geographic area as a separate location so that the United States is not treated as
a Single location for purposes of determining if an individual was present for more
- 12 -
days in the possession than in the United States under this alternative. The IRS
and Treasury believe that this type of rule could be easily manipulated and
difficult to administer. Further, with respect to residency determinations, the
Code typically treats the United States as a single location. Therefore, the final
regulations do not adopt this suggestion.
II. Tax Home Test
Sections 931,932,933 and 935 generally apply to an individual who is
considered a bona fide resident of the respective possession under Code section
937(a) for the entire taxable year. The proposed and temporary regulations treat
an individual as a bona fide resident of a possession for the entire taxable year
only if the individual satisfies the presence, tax home, and closer connection
tests for the taxable year.
Commentators suggested that it may be difficult for an individual moving
to a possession during a taxable year to satisfy the tax home test if the individual
had a regular or principal place of business in the United States or a closer
connection to the United States for the portion of the year prior to the date of the
move to the possession. These commentators suggested that individuals should
be able to prorate their income for the taxable year of the move in accordance
with the portion of the year for which they satisfy the tax home test.
The IRS and Treasury agree that special rules are appropriate for the year
of a move to a possession and believe that similar rules are appropriate for the
year of a move out of a possession. However, the IRS and Treasury do not
believe that general statutory authority exists for the proration of a taxpayer's
- 13 -
income for the taxable year in this context. Only in the case of Puerto Rico does
the Code expressly allow for prorating income according to periods of residency,
and then only when an individual moves out of Puerto Rico. See section 933(2).
Sections 931, 932 and 935 contain no analogous proration provisions. As a
result, except for a special rule applicable to certain individuals who move from
Puerto Rico, the final regulations do not provide proration rules.
Instead, the final regulations adopt a standard whereby an individual
moving to a possession during the taxable year generally will satisfy the tax
home test if the individual does not have a tax home outside that possession
during any part of the last 183 days of that taxable year. To prevent abuse of this
special rule, the regulations further require in order to use the rule that the
individual not have been a bona fide resident of the relevant possession during
the three taxable years before the move and that the individual continue to
qualify as a bona fide resident of the possession for the three taxable years
following the year of the move. Corresponding rules will apply to the taxable year
in which an individual moves from a possession. However, reflecting that section
933(2) provides for proration of a U.S. citizen's income with respect to bona fide
residents who move from Puerto Rico, the final regulations provide a special rule
that allows qualifying individuals to be treated as bona fide residents for the part
of the year before they move from Puerto Rico.
Under the tax home test, the proposed and temporary regulations provide
a special rule applicable to seafarers. The special rule prevents an individual
from being considered to have a tax home outside a particular possession solely
- 14 -
by reason of employment on a ship or other seafaring vessel that is used
predominantly in local and international waters. As set forth in the proposed and
temporary regulations, the special rule does not specify how to treat time that the
ship spends in waters of another possession. The final regulations clarify that
time spent in the waters of another possession is treated the same as time spent
in the waters of the United States or a foreign country. Thus, under the final
regulations, a ship is considered to be used predominantly in local or
international waters if the total time it is used in local and international waters
during a taxable year exceeds the total time it is used in the territorial waters of
the United States, another possession, and any foreign country.
See section V of this preamble for an explanation of the transition rule
concerning the effective date of the tax home test.
III. Closer Connection Test
Under section 937(a)(2), in order to be a bona fide resident of a
possession, a person must not have a closer connection (determined under the
principles of section 7701 (b){3)(8)(ii)) to the United States or a foreign country
than to the relevant possession. The regulations under section 7701 (b )(3)(8)(ii)
provide a facts-and-circumstances test to determine whether an individual has a
closer connection with the United States or with a foreign country. This factsand-circumstances test provides a nonexclusive list of factors to be taken into
consideration. See §301.7701 (b)-2(d). The proposed and temporary regulations
under section 937 apply the principles of and factors provided in §301. 7701 (b)-
- 15 -
2(d) in determining whether an individual meets the closer connection test of
section 937.
Commentators suggested that the final regulations designate certain
factors as primary and others as secondary, thereby indicating the relative weight
of the factors listed in §301.7701 (b)-2(d). Alternatively, commentators requested
that the final regulations indicate that an individual who meets a majority of
factors establishes a closer connection. Some commentators criticized
Example 6 under §1.937-1T(f) (the closer connection example) for failing to take
into account all factors listed in §301.7701 (b)-2(d) and for not providing an
analysis of how the example concludes that the individual fails to satisfy the
closer connection test. These commentators appeared to believe that the closer
connection example suggests that the location of an individual's spouse and
children is more important than other factors or even is determinative of whether
the individual has a closer connection to the United States or the possession.
Some commentators also seemed to confuse these factors with the permanent
connection alternative to the presence test and believed that the closer
connection test requires an individual's spouse and dependent children also to
reside in the possession. Commentators noted that if it applied, this requirement
would apparently conflict with the joint filing rule of section 932(d).
The closer connection test is a facts-and-circumstances test. The very
nature of the test does not allow for weighting of factors because a factor with
respect to one set of facts and circumstances may be less important than with
respect to another set of facts and circumstances. Because the test must be
- 16 -
applied to a wide variety of individual situations, the final regulations do not
designate specific factors as primary, adopt a weighting of factors, or adopt a rule
that counts a majority of the factors to determine closer connection. Further,
because the list in §301.7701 (b)-2(d) is not exclusive, other factors, including, for
example, whether the individual was born and raised in the relevant possession,
may be considered in the determination. The final regulations amend Example 6
to demonstrate that all factors (including any factors important in a particular
case but not on the nonexclusive list) must be considered in determining an
individual's closer connection.
Although the location of the individual's family is often a very important
factor, it is one of many factors to be evaluated qualitatively under the facts-andcircumstances test, and in a particular case it may not be an important or
overriding factor. Thus, unlike the no-significant-connection alternative
(previously the no-permanent-connection alternative) to the presence test, the
closer connection test can be satisfied, depending on an individual's particular
facts and circumstances, even if, for example, the individual's spouse resides in
the United States. In addition, Congress provided in section 937(a) that
individuals must satisfy the closer connection test to establish bona fide
residency in a possession notwithstanding the statutory joint filing rule provided
in section 932(d). For these reasons, the regulations under section 937 do not
conflict with section 932(d).
The proposed and temporary regulations require that an individual satisfy
the closer connection test for the entire taxable year in order to be considered a
- 17 -
bona fide resident of a relevant possession. Commentators noted that, as with
the tax home test, it may be difficult for an individual moving into a possession
during a taxable year to satisfy the closer connection test for the entire taxable
year. Accordingly, the final regulations provide special year-of-move rules under
the closer connection test similar to those described in section II of this preamble
(relating to the tax home test).
The final regulations make clarifying amendments to the closer connection
test. Section 1.937-1T(e)(2) of the proposed and temporary regulations specifies
that another possession is not considered a foreign country for purposes of the
closer connection test. The final regulations do not specify this because a
special rule distinguishing possessions from foreign countries is unnecessary
and potentially confusing. In the absence of an explicit provision, possessions
are not treated as foreign countries under the Code or Treasury Regulations.
The final regulations also clarify that an individual's connections to the United
States and foreign countries are considered in the aggregate, rather than on a
country-by-country basis, when comparing those connections with the
individual's connections to the relevant possession.
See section V of this preamble for an explanation of the transition rule
concerning the effective date of the closer connection test.
IV. Withholding Tax Exceptions for Certain Possessions Corporations
Section 881 (b) provides exemptions from, or reductions of, withholding tax
and branch profits tax on certain U.S.-source income received by corporations
organized in U.S. possessions. As one of the conditions for such treatment in
- 18 -
certain cases, section 881 (b)( 1)(C) sets forth a "base-erosion" test requiring that
no substantial part of the possessions corporation's income be used to satisfy
obligations to "persons" who are not bona fide residents of such a possession or
of the United States. Section 937(a) provides in relevant part that for purposes of
section 881 (b), except as provided in regulations, a "person" is a bona fide
resident if the person satisfies the requirements of section 937(a). For purposes
of the base-erosion test, §1.881-5T(f)(4)(i) defines a bona fide resident of a
possession by reference to §1.937-1T, which provides that only a natural person,
rather than a juridical person, may qualify as a bona fide resident of a
possession. Similarly, §1.881-5T(f)(4 )(ii) defines bona fide residents of the
United States for purposes of the base-erosion test as including only certain
individuals who are citizens or residents of the United States.
Commentators observed that the interaction of these rules in the proposed
and temporary regulations could result in disqualifying income from the
withholding tax exceptions in any situation where the possessions corporation
makes payments to satisfy obligations to persons other than individuals. These
commentators further noted that many common business arrangements would
run afoul of the base-erosion test if corporations cannot constitute bona fide
residents.
The IRS and Treasury agree that such results would be undesirable and
unintended. In the context of section 881 (b), the IRS and Treasury believe that
the statutory terms persons and bona fide residents should not be interpreted as
limited to individuals. Accordingly, the final regulations additionally provide that a
- 19 -
corporation, or a business association that is treated as a corporation for tax
purposes, may qualify as a bona fide resident of a relevant possession or the
United States for purposes of the base-erosion test if it is created or organized in
that jurisdiction. The final regulations reflect that section 937(a) and the
regulations under that section are intended to apply only to individuals in
determining whether a person is a bona fide resident of a possession within the
meaning of section 881 (b)(1 )(C).
Note that the IRS and Treasury believe that the words "direct or indirect" in
section 881 (b )(1 )(C) (and §1.881-5(c)(3)) would authorize an anti-abuse rule that
prohibits payments to possessions corporations that are a part of back-to-back
loan arrangements or other base erosion schemes. Accordingly, the IRS and
Treasury are strongly considering including such an anti-abuse rule when
finalizing the remaining proposed and temporary regulations under section
881 (b). It is expected that any such anti-abuse rule would be retroactive to
January 31,2006.
Commentators also proposed that the final regulations adopt a special rule
whereby publicly traded corporations may qualify for favorable tax treatment
without regard to the conditions under section 881 (b)(1), including the baseerosion test. A similar rule is provided under section 884(e)(4)(8) and §1.8845(d) under the branch profits tax. However, the final regulations do not adopt
such a special rule in this context. The IRS and Treasury note that section
881 (b) does not grant authority to depart from the statutory conditions of section
881(b)(1), including the base-erosion test.
- 20 -
V. Effective Date
The proposed and temporary regulations are generally effective for tax
years ending after October 22, 2004. Consistent with the effective date of
section 937{a}, the proposed and temporary regulations provide a transition rule
that delays the effective date of the presence test until tax years beginning after
October 22, 2004 (tax year 2005 for calendar year taxpayers). A number of
commentators suggested that the final regulations should provide a similar
transition rule with respect to the effective date of the tax home and closer
connection tests so that the prior-law, facts-and-circumstances test continues to
apply through tax years beginning on or before October 22,2004.
The IRS and Treasury believe that it is appropriate to provide a transition
rule with respect to the tax home and closer connection tests consistent with the
effective date of the presence test. The effective date of the final regulations
reflects the fact that most taxpayers already will have filed their income tax
returns for taxable year 2004. As a result, this transition rule is elective so that
taxpayers may apply at their option the prior-law test for determining residency.
Under section 937(a), an individual'S tax home outside the relevant
possession conclusively forecloses bona fide residency in the possession, rather
than being one of a number of facts and circumstances that are considered
under the prior-law test. However, in most instances the outcome of the
residency determination under prior law should be the same as with the
application of the section 937(a) tax home and closer connection tests because
individuals are required to demonstrate similar factors to support claims that they
- 21 -
are bona fide residents of a particular possession. See, e.g., Sochurek v.
Commissioner, 300 F.2d 34, 38 (7th Cir. 1962) (enumerating representative
factors), and Bergersen v. Commissioner, 109 F.3d 56, 61-62 (1 51 Cir. 1997), aff'g
T.e. Memo 1995-424 (applying prior-law facts-and-circumstances test in same
way closer connection test is applied by "taking account of all of the [taxpayers']
ties to both places" to determine residency under principles of §§1.871-2 through
1.871-5). The optional effective date for the tax home and closer connection
tests is intended to create symmetry with the effective date of the presence test.
No inference is intended or may be drawn from this transition rule as to the result
under prior law.
VI. Miscellaneous Changes
Consistent with section 937(a), the final regulations specify that the
residency rules apply for purposes of the income tax and certain other
enumerated provisions of the Code. With respect to the estate and gift taxes,
see §§20.2209-1 and 25.2501-1 (d).
The final regulations also reflect various nonsubstantive stylistic edits to
the proposed and temporary regulations to enhance clarity and readability.
VII. Mutual Agreement Procedures
In the application of the operative provisions of the Code relating to
possessions, for example sections 931 through 935, section 937(a) and the final
regulations govern whether an individual is a bona fide resident of a particular
possession. A commentator observed that there is a possibility that the IRS and
the taxing authority of a particular possession might reach different conclusions
- 22 -
with respect to certain determinations, including residency, when administering
their respective income tax laws. In such cases, taxpayers are advised that
mutual agreement procedures are available. For procedures to request the
assistance of the IRS when a taxpayer is or may be subject to inconsistent tax
treatment by the IRS and a possession tax agency, see Revenue Procedure 89-8
(1989-1 C.B. 778).
Special Analyses
It has been determined that this Treasury decision is not a significant
regulatory action as defined in Executive Order 12866. Therefore, a regulatory
assessment is not required. It also has been determined that section 553(b) of
the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these
regulations. Because the regulations do not impose a collection of information
on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not
apply. Pursuant to section 7805(f) of the Code, the notice of proposed
rulemaking preceding these regulations was submitted to the Chief Counsel for
Advocacy of the Small Business Administration for comment on its impact on
small business.
Drafting Information
The principal author of these regulations is J. David Varley, Office of the
Associate Chief Counsel (International), IRS. However, other personnel from the
IRS and Treasury Department participated in their development.
List of Subjects
26 CFR Part 1
- 23 -
Income taxes, Reporting and recordkeeping requirements.
26 CFR Part 602
Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR parts 1 and 602 are amended as follows:
PART 1 -- INCOME TAXES
Paragraph 1. The authority citation for part 1 is amended by adding
entries in numerical order to read, in part, as follows:
Authority: 26 U.S.C. 7805 * * *
Section
Section
Section
Section
1.931-1T also issued under 26 U.S.C. 7654(e).
1.932-1T also issued under 26 U.S.C. 7654(e).
1.935-1T also issued under 26 U.S.C. 7654(e). * * *
1.937-1 also issued under 26 U.S.C. 937(a). * * *
Par. 2.
Section 1.881-5 is added to read as follows:
§ 1.881-5 Exception for certain possessions corporations.
(a) through (f)(3) [Reserved]. For more information, see §1.881-5T(a)
through (f)(3).
(f)( 4) Bona fide resident-(i) With respect to a particular possession, means-(A) An individual who is a bona resident of the possession as defined in
§1.937-1; or
(B) A business entity organized under the laws of the possession and
taxable as a corporation in the possession; and
(ii) With respect to the United States, means--
- 24 -
(A) An individual who is a citizen or resident of the United States {as
defined under section 7701 (b){1 )(A)); or
(8) A business entity organized under the laws of the United States or any
State that is classified as a corporation for federal tax purposes under
§301.7701-2{b) of this chapter.
(5) through (7) [Reserved]. For more information, see §1.881-5T(f)(5)
through (7).
(8) Effective date. This section applies to payments made after January
31, 2006. However, taxpayers may choose to apply this section to all payments
made after October 22, 2004 for which the statute of limitations under section
6511 is open.
(g) through (i) [Reserved]. For more information, see §1.881-5T(g)
through (i).
Par. 3. In §1.881-5T, paragraph (f)(4) is revised to read as follows:
§1.881-5T Exception for certain possessions corporations (temporary).
* ** * *
(f)(4) [Reserved]. For more information, see §1.881-5(f)(4).
*****
§1.931-1T [Amended]
Par. 4. In §1.931-1T, paragraph (a)(2) is amended by removing and
reserving the Example.
- 25 -
§1.932-1T [Amended]
Par. 5. In §1.932-1 T, paragraph (i) is amended by removing and reserving
Example 2.
§1.933-1T [Amended]
Par. 6. In §1.933-1 T, paragraph (a)(2) is amended by removing and
reserving the Example.
§1.935-1 T [Amended]
Par. 7. In §1.935-1 T, paragraph (f) is amended by removing and
reserving Examples 1 and
g.
Par. 8. Section 1.937-1 is added to read as follows:
§1.937-1 Bona fide residency in a possession.
(a) Scope-- (1) In general. Section 937(a) and this section set forth the
rules for determining whether an individual qualifies as a bona fide resident of a
particular possession (the relevant possession) for purposes of Subpart D, Part
III, Subchapter N, Chapter 1 of the Internal Revenue Code as well as section
865(g)(3), section 876, section 881 (b), paragraphs (2) and (3) of section 901 (b),
section 957(c), section 3401 (a)(8)(C), and section 7654(a).
(2) Definitions. For purposes of this section and §§1.937-2 and 1.937-3-(i) Possession means one of the following United States possessions:
American Samoa, Guam, the Northern Mariana Islands, Puerto Rico, or the
Virgin Islands. When used in a geographical sense, the term comprises only the
territory of each such possession (without application of sections 932(c)(3) and
935(c)(2) (as in effect before the effective date of its repeal)).
- 26 -
(ii) United States, when used in a geographical sense, is defined in section
7701 (a)(9), and without application of sections 932(a)(3) and 935(c)(1) (as in
effect before the effective date of its repeal).
(b) Bona fide resident-- (1) General rule. An individual qualifies as a bona
fide resident of the relevant possession if such individual satisfies the
requirements of paragraphs (c) through (e) of this section with respect to such
possession.
(2) Special rule for members of the Armed Forces. A member of the
Armed Forces of the United States who qualified as a bona fide resident of the
relevant possession in a prior taxable year is deemed to have satisfied the
requirements of paragraphs (c) through (e) of this section for a subsequent
taxable year if such individual otherwise is unable to satisfy such requirements by
reason of being absent from such possession or present in the United States
during such year solely in compliance with military orders. Conversely, a
member of the Armed Forces of the United States who did not qualify as a bona
fide resident of the relevant possession in a prior taxable year is not considered
to have satisfied the requirements of paragraphs (c) through (e) of this section for
a subsequent taxable year by reason of being present in such possession solely
in compliance with military orders. Armed Forces of the United States is defined
(and members of the Armed Forces are described) in section 7701 (a)(15).
(3) Juridical persons. Except as provided in §1.881-5(f):
(i) Only natural persons may qualify as bona fide residents of a
possession; and
-27-
(ii) The rules governing the tax treatment of bona fide residents of a
possession do not apply to juridical persons (including corporations,
partnerships, trusts, and estates).
(4) Transition rule. For taxable years beginning before October 23, 2004,
and ending after October 22, 2004, an individual is considered to qualify as a
bona fide resident of the relevant possession if that individual would be a bona
fide resident of the relevant possession by applying the principles of §§1.871-2
through 1.871-5.
(5) Special rule for cessation of bona fide residence in Puerto Rico. See
paragraph (f)(2)(ii) of this section for a special rule applicable to a citizen of the
United States who ceases to be a bona fide resident of Puerto Rico during a
taxable year.
(c) Presence test-- (1) In general. A United States citizen or resident alien
individual (as defined in section 7701 (b)(1 )(A)) satisfies the requirements of this
paragraph (c) for a taxable year if during that taxable year that individual-(i) Was present in the relevant possession for at least 183 days;
(ii) Was present in the United States for no more than 90 days;
(iii) Had earned income (as defined in §1.911-3(b)) in the United States, if
any, not exceeding in the aggregate the amount specified in section 861 (a)(3)(8)
and was present for more days in the relevant possession than in the United
States; or
(iv) Had no significant connection to the United States. See paragraph
(c)(5) of this section.
- 28 -
(2) Special rule for alien individuals. A nonresident alien individual (as
defined in section 7701 (b)(1 )(8)) satisfies the requirements of this paragraph (c)
for a taxable year if during that taxable year that individual satisfies the
substantial presence test of §301.7701 (b)-1 (c) of this chapter (except for the
substitution of the name of the relevant possession for the term United States
where appropriate).
(3) Days of presence. For purposes of paragraph (c)(1) of this section-(i) An individual is considered to be present in the relevant possession on:
(A) Any day that the individual is physically present in that possession at
any time during the day;
(8) Any day that an individual is outside of the relevant possession to
receive, or to accompany on a full-time basis a parent, spouse, or child (as
defined in section 152(f)(1)) who is receiving, qualifying medical treatment as
defined in paragraph (c)(4) of this section; and
(C) Any day that an individual is outside the relevant possession because
the individual leaves or is unable to return to the relevant possession during any-(1) 14-day period within which a major disaster occurs in the relevant
possession for which a Federal Emergency Management Agency Notice of a
Presidential declaration of a major disaster is issued in the Federal Register; or
(.f.) Period for which a mandatory evacuation order is in effect for the
geographic area in the relevant possession in which the individual's place of
abode is located.
~
29
~
(ii) An individual is considered to be present in the United States on any
day that the individual is physically present in the United States at any time
during the day. Notwithstanding the preceding sentence, the following days will
not count as days of presence in the United States:
(A) Any day that an individual is temporarily present in the United States
under circumstances described in paragraph (c)(3)(i)(8) or (C) of this section;
(8) Any day that an individual is in transit between two points outside the
United States (as described in §301.7701 (b)-3(d) of this chapter), and is
physically present in the United States for fewer than 24 hours;
(C) Any day that an individual is temporarily present in the United States
as a professional athlete to compete in a charitable sports event (as described in
§301.7701 (b)-3(b)(5) of this chapter);
(0) Any day that an individual is temporarily present in the United States
as a student (as defined in section 152(f)(2)); and
(E) In the case of an individual who is an elected representative of the
relevant possession, or who serves full time as an elected or appOinted official or
employee of the government of the relevant possession (or any political
subdivision thereof), any day spent serving the relevant possession in that role.
(iii) If, during a single day, an individual is physically present-(A) In the United States and in the relevant possession, that day is
considered a day of presence in the relevant possession;
- 30 -
(8) In two possessions, that day is considered a day of presence in the
possession where the individual's tax home is located (applying the rules of
paragraph (d) of this section).
(4) Qualifying medical treatment--(i) In general. The term qualifying
medical treatment means medical treatment provided by (or under the
supervision of) a physician (as defined in section 213(d)(4)) for an illness, injury,
impairment, or physical or mental condition that satisfies the documentation and
production requirements of paragraph (c)(4)(iii) of this section and that involves-(A) Any period of inpatient care in a hospital or hospice and any period
immediately before or after that inpatient care to the extent it is medically
necessary; or
(8) Any temporary period of inpatient care in a residential medical care
facility for medically necessary rehabilitation services;
(ii) Inpatient care. The term inpatient care means care requiring an
overnight stay in a hospital, hospice, or residential medical care facility, as the
case may be.
(iii) Documentation and production requirements. In order to satisfy the
documentation and production requirements of this paragraph, an individual
must, with respect to each qualifying medical treatment, prepare (or obtain),
maintain, and, upon a request by the Commissioner (or the person responsible
for tax administration in the relevant possession), make available within 30 days
of such request:
(A) Records that provide--
- 31 -
(1) The patient's name and relationship to the individual (if the medical
treatment is provided to a person other than the individual);
(.f.) The name and address of the hospital, hospice, or residential medical
care facility where the medical treatment was provided;
(;i) The name, address, and telephone number of the physician who
provided the medical treatment;
(1,) The date(s) on which the medical treatment was provided; and
(§.) Receipt(s) of payment for the medical treatment;
(8) Signed certification by the providing or supervising physician that the
medical treatment was qualified medical treatment within the meaning of
paragraph (c)(4)(i) of this section, and setting forth-(1) The patient's name;
(.f.) A reasonably detailed description of the medical treatment provided by
(or under the supervision of) the physician;
(;i) The dates on which the medical treatment was provided; and
(~J
The medical facts that support the physician's certification and
determination that the treatment was medically necessary; and
(C) Such other information as the Commissioner may prescribe by notice,
form, instructions, or other publication (see §601.601 (d)(2) of this chapter).
(5) Significant connection. For purposes of paragraph (c)(1 )(iv) of this
section-(i) The term significant connection to the United States means-(A) A permanent home in the United States;
- 32 -
(8) Current registration to vote in any political subdivision of the United
States; or
(C) A spouse or child (as defined in section 152(f)(1)) who has not
attained the age of 18 whose principal place of abode is in the United States
other than-(1) A child who is in the United States because the child is living with a
custodial parent under a custodial decree or multiple support agreement; or
(~) A child who is in the United States as a student (as defined in section
152(f)(2)).
(ii) Permanent home-- (A) General rule. For purposes of paragraph
(c)(5)(i)(A) of this section, except as provided in paragraph (c)(5)(ii)(8) of this
section, the term permanent home has the same meaning as in §301.7701 (b)2(d)(2) of this chapter.
(8) Exception for rental property. If an individual or the individual's spouse
owns property and rents it to another person at any time during the taxable year,
then notwithstanding that the rental property may constitute a permanent home
under §301.7701 (b)-2(d)(2) of this chapter, it is not a permanent home under this
paragraph (c)(5)(ii) unless the taxpayer uses any portion of it as a residence
during the taxable year under the principles of section 280A(d). In applying the
principles of section 280A(d) for this purpose, an individual is treated as using the
rental property for personal purposes on any day determined under the principles
of section 280A(d)(2) or on any day that the rental property (or any portion of it) is
not rented to another person at fair rental for the entire day. The rental property
- 33 -
is not used for personal purposes on any day on which the principal purpose of
the use of the rental property is to perform repair or maintenance work on the
property. Whether the principal purpose of the use of the rental property is to
perform repair or maintenance work is determined in light of all the facts and
circumstances including, but not limited to, the following: the amount of time
devoted to repair and maintenance work, the frequency of the use for repair and
maintenance purposes during a taxable year, and the presence and activities of
companions.
(iii) For purposes of this paragraph (c)(5), the term spouse does not
include a spouse from whom the individual is legally separated under a decree of
divorce or separate maintenance.
(d) Tax home test-- (1) General rule. Except as provided in paragraph
(d)(2) of this section, an individual satisfies the requirements of this paragraph (d)
for a taxable year if that individual did not have a tax home outside the relevant
possession during any part of the taxable year. For purposes of section 937 and
this section, an individual's tax home is determined under the principles of
section 911 (d)(3) without regard to the second sentence thereof. Thus, under
section 937, an individual's tax home is considered to be located at the
individual's regular or principal (if more than one regular) place of business. If
the individual has no regular or principal place of business because of the nature
of the business, or because the individual is not engaged in carrying on any trade
or business within the meaning of section 162(a), then the individual's tax home
is the individual's regular place of abode in a real and substantial sense.
- 34 -
(2) Exceptions-- (i) Year of move. See paragraph (f) of this section for a
special rule applicable to an individual who becomes or ceases to be a bona fide
resident of the relevant possession during a taxable year.
(ii) Special rule for seafarers. For purposes of section 937 and this
section, an individual is not considered to have a tax home outside the relevant
possession solely by reason of employment on a ship or other seafaring vessel
that is predominantly used in local and international waters. For this purpose, a
vessel is considered to be predominantly used in local and international waters if,
during the taxable year, the aggregate amount of time it is used in international
waters and in the waters within three miles of the relevant possession exceeds
the aggregate amount of time it is used in the territorial waters of the United
States, another possession, and a foreign country.
(iii) Special rule for students and government officials. Any days
described in paragraphs (c)(3)(ii)(O) and (E) of this section are disregarded for
purposes of determining whether an individual has a tax home outside the
relevant possession under paragraph (d)(1) of this section during any part of the
taxable year.
(e) Closer connection test-- (1) General rule. Except as provided in
paragraph (e)(2) of this section, an individual satisfies the requirements of this
paragraph (e) for a taxable year if that individual did not have a closer connection
to the United States or a foreign country than to the relevant possession during
any part of the taxable year. For purposes of this paragraph (e )--
- 35 -
(i) The principles of section 7701 (b)(3)(8)(ii) and §301.7701 (b)-2(d) of this
chapter apply (without regard to the final sentence of §301 .7701 (b )-2(b) of this
chapter); and
(ii) An individual's connections to the relevant possession are compared to
the aggregate of the individual's connections with the United States and foreign
countries.
(2) Exception for year of move. See paragraph (f) of this section for a
special rule applicable to an individual who becomes or ceases to be a bona fide
resident of the relevant possession during a taxable year.
(f) Year of move-- (1) Move to a possession. For the taxable year in which
an individual's residence changes to the relevant possession, the individual
satisfies the requirements of paragraphs (d)(1) and (e)(1) of this section if-(i) For each of the 3 taxable years immediately preceding the taxable year
of the change of residence, the individual is not a bona fide resident of the
relevant possession;
(ii) For each of the last 183 days of the taxable year of the change of
residence, the individual does not have a tax home outside the relevant
possession or a closer connection to the United States or a foreign country than
to the relevant possession; and
(iii) For each of the 3 taxable years immediately following the taxable year
of the change of residence, the individual is a bona fide resident of the relevant
possession.
- 36 -
(2) Move from a possession-- (i) General rule. Except for a bona fide
resident of Puerto Rico to whom §1.933-1 (b) and paragraph (f)(2)(ii) of this
section apply, for the taxable year in which an individual ceases to be a bona fide
resident of the relevant possession, the individual satisfies the requirements of
paragraphs (d)(1) and (e)(1) of this section if-(A) For each of the 3 taxable years immediately preceding the taxable
year of the change of residence, the individual is a bona fide resident of the
relevant possession;
(8) For each of the first 183 days of the taxable year of the change of
residence, the individual does not have a tax home outside the relevant
possession or a closer connection to the United States or a foreign country than
to the relevant possession; and
(C) For each of the 3 taxable years immediately following the taxable year
of the change of residence, the individual is not a bona fide resident of the
relevant possession.
(ii) Year of move from Puerto Rico. Notwithstanding an individual's failure
to satisfy the presence, tax home, or closer connection test prescribed under
paragraph (b)(1) of this section for the taxable year, the individual is a bona fide
resident of Puerto Rico for that part of the taxable year described in paragraph
(f)(2)(ii)(E) of this section if the individual-(A) Is a citizen of the United States;
(8) Is a bona fide resident of Puerto Rico for a period of at least 2 taxable
years immediately preceding the taxable year;
- 37 -
(C) Ceases to be a bona fide resident of Puerto Rico during the taxable
year;
(D) Ceases to have a tax home in Puerto Rico during the taxable year;
and
(E) Has a closer connection to Puerto Rico than to the United States or a
foreign country throughout the part of the taxable year preceding the date on
which the individual ceases to have a tax home in Puerto Rico.
(g) Examples. The principles of this section are illustrated by the following
examples:
Example 1. Presence test. W, a U.S. citizen, lives for part of the taxable
year in a condominium, which she owns, located in Possession P. W also owns
a house in State N where she lives for 120 days every year to be near her grown
children and grandchildren. W is retired and her income consists solely of
pension payments, dividends, interest, and Social Security benefits. For 2006, W
is only present in Possession P for a total of 175 days because of a 70 day
vacation to Europe and Asia. Thus, for taxable year 2006, W is not present in
Possession P for at least 183 days, is present in the United States for more than
90 days, and has a significant connection to the United States by reason of her
permanent home. However, under paragraph (c)(1 )(iii) of this section, W still
satisfies the presence test of paragraph (c) of this section with respect to
Possession P because she has no earned income in the United States and is
present for more days in Possession P than in the United States.
Example 2. Presence test. T, a U.S. citizen, was born and raised in State
A, where his mother still lives in the house in which T grew up. T is a sales
representative for a company based in Possession V. T lives with his wife and
minor children in their house in Possession V. T is registered to vote in
Possession V and not in the United States. In 2006, T spends 120 days in State
A and another 120 days in foreign countries. When traveling on business to
State A, T often stays at his mother's house in the bedroom he used when he
was a child. T's stays are always of short duration, and T asks for his mother's
permission before visiting to make sure that no other guests are using the room
and that she agrees to have him as a guest in her house at that time. Therefore,
under paragraph (c)(5)(ii) of this section, 1's mother's house is not a permanent
home of T. Assuming that no other accommodations in the United States
constitute a permanent home with respect to T, then under paragraphs (c)(1 )(iv)
and (c)(5) of this section, T has no significant connection to the United States.
- 38 -
Accordingly, T satisfies the presence test of paragraph (c) of this section for
taxable year 2006.
Example 3. Alien resident of possession-- presence test. F is a citizen of
Country G. F's tax home is in Possession C and F has no closer connection to
the United States or a foreign country than to Possession C. F is present in
Possession C for 123 days and in the United States for 110 days every year.
Accordingly, F is a nonresident alien with respect to the United States under
section 7701 (b), and a bona fide resident of Possession C under paragraphs (b),
(c)(2), (d), and (e) of this section.
Example 4. Seafarers-- tax home. S, a U.S. citizen, is employed by a
fishery and spends 250 days at sea on a fishing vessel in 2006. When not at
sea, S resides with his wife at a house they own in Possession G. The fishing
vessel upon which S works departs and arrives at various ports in Possession G,
other possessions, and foreign countries, but is in international and local waters
(within the meaning of paragraph (d)(2) of this section) for 225 days in 2006.
Under paragraph (d)(2) of this section, for taxable year 2006, S will not be
considered to have a tax home outside Possession G for purposes of section 937
and this section solely by reason of S's employment on board the fishing vessel.
Example 5. Seasonal workers-- tax home and closer connection. P, a
U.S. citizen, is a permanent employee of a hotel in Possession I, but works only
during the tourist season. For the remainder of each year, P lives with her
husband and children in Possession Q, where she has no outside employment.
Most of P's personal belongings, including her automobile, are located in
Possession Q. P is registered to vote in, and has a driver's license issued by,
Possession Q. P does her personal banking in Possession Q and P routinely
lists her address in Possession Q as her permanent address on forms and
documents. P satisfies the presence test of paragraph (c) of this section with
respect to both Possession Q and Possession I, because, among other reasons,
under paragraph (c)(1 )(ii) of this section she does not spend more than 90 days
in the United States during the taxable year. P satisfies the tax home test of
paragraph (d) of this section only with respect to Possession I, because her
regular place of business is in Possession I. P satisfies the closer connection
test of paragraph (e) of this section with respect to both Possession Q and
Possession I, because she does not have a closer connection to the United
States or to any foreign country (and possessions generally are not treated as
foreign countries). Therefore, P is a bona fide resident of Possession I for
purposes of the Internal Revenue Code.
Example 6. Closer connection to United States than to possession. Z, a
U.S. citizen, relocates to Possession V in a prior taxable year to start an
investment consulting and venture capital business. Z's wife and two teenage
children remain in State C to allow the children to complete high school. Z
travels back to the United States regularly to see his wife and children, to engage
- 39 -
in business activities, and to take vacations. He has an apartment available for
his full-time use in Possession V, but he remains a joint owner of the residence in
State C where his wife and children reside. Z and his family have automobiles
and personal belongings such as furniture, clothing, and jewelry located at both
residences. Although Z is a member of the Possession V Chamber of
Commerce, Z also belongs to and has current relationships with social, political,
cultural, and religious organizations in State C. Z receives mail in State C,
including brokerage statements, credit card bills, and bank advices. Z conducts
his personal banking activities in State C. Z holds a State C driver's license and
is registered to vote in State C. Based on the totality of the particular facts and
circumstances pertaining to Z, Z is not a bona fide resident of Possession V
because he has a closer connection to the United States than to Possession V
and therefore fails to satisfy the requirements of paragraphs (b)(1) and (e) of this
section.
Example 7. Year of move to possession. 0, a U.S. citizen, files returns
on a calendar year basis. From January 2003 through May 2006, 0 resides in
State R. In June 2006, 0 moves to Possession N, purchases a house, and
accepts a permanent position with a local employer. D's principal place of
business from July 1 through December 31, 2006 is in Possession N, and during
that period (which totals at least 183 days) 0 does not have a closer connection
to the United States or a foreign country than to Possession N. For the
remainder of 2006, and throughout years 2007 through 2009, 0 continues to live
and work in Possession N and maintains a closer connection to Possession N
than to the United States or any foreign country. 0 satisfies the tax home and
closer connection tests for 2006 under paragraphs (d)(2), (e)(2), and (f)(1) of this
section. Accordingly, assuming that 0 also satisfies the presence test in
paragraph (c) of this section, 0 is a bona fide resident of Possession N for all of
taxable year 2006.
Example 8. Year of move from possession (other than Puerto Rico). J, a
U.S. citizen, files returns on a calendar year basis. From January 2007 through
December 2009, J is a bona fide resident of Possession C because she satisfies
the requirements of paragraph (b)( 1) of this section for each year. J continues to
reside in Possession C until September 6,2010, when she accepts new
employment and moves to State H. J's principal place of business from January
1 through September 5, 2010 is in Possession C, and during that period (which
totals at least 183 days) J does not have a closer connection to the United States
or a foreign country than to Possession C. For the remainder of 2010 and
throughout years 2011 through 2013, 0 continues to live and work in State Hand
is not a bona fide resident of Possession C. J satisfies the tax home and closer
connection tests for 2010 with respect to Possession C under paragraphs
(d)(2)(i), (e)(2), and (f)(2)(i) of this section. Accordingly, assuming that J also
satisfies the presence test of paragraph (c) of this section, J is a bona fide
resident of Possession C for all of taxable year 2010.
- 40 -
Example 9. Year of move from Puerto Rico. R, a U.S. citizen who files
returns on a calendar year basis satisfies the requirements of paragraphs (b)
through (e) of this section for years 2006 and 2007. From January through April
2008, R continues to reside and maintain his principal place of business in and
closer connection to Puerto Rico. On May 5, 2008, R moves and changes his
principal place of business (tax home) to State N and later that year establishes a
closer connection to the United States than to Puerto Rico. R does not satisfy
the presence test of paragraph (c) for 2008 with respect to Puerto Rico.
Moreover, because R had a tax home outside of Puerto Rico and establishes a
closer connection to the United States in 2008, R does not satisfy the
requirements of paragraph (d)(1) or (e)(1) of this section for 2008. However,
because R was a bona fide resident of Puerto Rico for at least two taxable years
before his change of residence to State N in 2008, he is a bona fide resident of
Puerto Rico from January 1 through May 4, 2008 under paragraphs (b)(5) and
(f)(2)(ii) of this section. See section 933(2) and §1.933-1 (b) for rules on
attribution of income.
(h) Information reportinq requirement. The following individuals are
required to file notice of their new tax status in such time and manner as the
Commissioner may prescribe by notice, form, instructions, or other publication
(see §601.601 (d)(2) of this chapter):
(1) Individuals who take the position for U.S. tax reporting purposes that
they qualify as bona fide residents of a possession for a tax year subsequent to a
tax year for which they were required to file Federal income tax returns as
citizens or residents of the United States who did not so qualify.
(2) Citizens and residents of the United States who take the position for
U.S. tax reporting purposes that they do not qualify as bona fide residents of a
possession for a tax year subsequent to a tax year for which they were required
to file income tax returns (with the Internal Revenue Service, the tax authorities
of a possession, or both) as individuals who did so qualify.
(3) Bona fide residents of Puerto Rico or a section 931 possession (as
defined in §1.931-1T(c)(1)) who take a position for U.S. tax reporting purposes
- 41 -
that they qualify as bona fide residents of that possession for a tax year
subsequent to a tax year for which they were required to file income tax returns
as bona fide residents of the United States Virgin Islands or a section 935
possession (as defined in §1.935-1T(a)(3)(i)).
(i) Effective date. Except as provided in this paragraph (i), this section
applies to taxable years ending after January 31,2006. Paragraph (h) of this
section also applies to a taxpayer's 3 taxable years immediately preceding the
taxpayer's first taxable year ending after October 22, 2004. Taxpayers also may
choose to apply this section in its entirety to all taxable years ending after
October 22, 2004 for which the statute of limitations under section 6511 is open.
§1.937-1T [Removed]
Par. 9. Section 1.937-1T is removed.
PART 602 -- OMB CONTROL NUMBERS UNDER THE PAPERWORK
REDUCTION ACT
Par. 10. The authority citation for part 602 continues to read as follows:
Authority: 26 U.S.C. 7805.
Par. 11. In §602.1 01, paragraph (b) is amended by removing the entry for
"1.937-1T" and adding a new entry for "1.937-1" in numerical order to the table to
read as follows:
- 42 -
§602.101 OMS Control numbers.
** ** *
(b) * * *
CFR part or section where
identified and described
Current OMS
control No.
*****
1.937-1 .............................................................................. 1545-1930
*** * *
Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.
Approved: January 20,2006.
Eric Solomon,
Acting Deputy Assistant Secretary of the Treasury (Tax Policy).
Page 1 of 1
PRESS ROOM
January 30, 2006
js-3090
Statement by Deputy Assistant Secretary Dan lannicola
Before the National Association of School Boards of Education (NASBE)
Commission on
Financial Literacy and Investor Education
Alexandria, Virginia
Deputy Assistant Secretary lannicola helped the Nalional Association of School
Boards of Education (NASBE) launch its Commission on Financial Literacy and
Investor Education today. The Commission will produce a report which will help
state school boards consider policy options for raising financial literacy among
students. "If financial literacy is to take firm root in America's schools it will be due
in large part to policy makers at the state and local level. That's why I commend
the National Association of State Boards of Education for exploring the issue of
financial literacy. The state school board members I spoke with today came from
allover the country, but each recognizes his or her state's children share a common
need for financial education. The board members were very engaged and asked
the right questions about how to support local schools, administrators and teachers
as they try to prepare all of our kids for their financial futures. The Department of
the Treasury is happy to lend a hand with this important project," DAS lannicola
said.
1!tp:IIWWW.treps.gov/press/releases/js3<J9..0.htm
21112006
Page 1 of2
PRESS ROOM
10 view or Print me PUr content on this page. download me tree A(}o/Je("; AcrofJE!n; HeaCletc)<!.
January 30, 2006
JS-3091
Treasury Announces Market Financing Estimates
The Treasury Department announced today that it expects net borrowing of
marketable debt to total $188 billion in the January - March 2006 quarter. The
estimated cash balance on March 31 is $15 billion. On October 31. Treasury
announced estimated net market borrowing of $171 billion this quarter and a March
31 cash balance of $15 billion. Adjusting for a beginning-of-quarter cash balance
that was $12 billion higher than estimated in October, the current borrowing
estimate is $29 billion higher than previously announced. The increase in
anticipated borrowing is primarily the result of higher outlays, including a timing shift
from the October - December 2005 quarter, and lower net issues of State and
Local Government Series securities. Based on current projections. Treasury
continues to believe that the statutory debt limit will be reached in mid-February
2006.
Treasury also announced that it expects a net pay down in marketable debt of $30
billion in the April - June 2006 quarter. The estimated cash balance on June 30 is
$25 billion.
Treasury borrowed $93 billion in net marketable debt in the October - December
2005 quarter. The cash balance on December 31 was $37 billion. On October 31,
Treasury announced estimated net market borrowing of $96 billion and an end-ofquarter cash balance of $25 billion. Adjusting for the higher-than-estimated cash
balance at quarter-end, the net market borrowing need was $15 billion lower than
announced in October. The improvement was primarily the result of lower outlays
and unanticipated repayments of outstanding debt to the IMF.
Additional financing details relating to Treasury's Quarterly Refunding will be
released at 9:00 A.M. on Wednesday, February 1. The following link provides
access to Treasury documents related to this Quarterly Refunding.
(http Ilwww.treas.gov/offices/domcstic-finance/debt-mdnag 0 montlq ua rterlyrefunding!)
Today, the Treasury Department announced net borrowing of marketable debt for
the January-March 2006 and April-June 2006 quarters.
Quarter
I
Estimated
Borrowing
($ billion)
I
.
IApr-Jun 2006
11($30)
Estimated
End-ot-Quarter
Cash Balance
($ billion)
I~J=an=-M=a=r=20=06======~I:I$:18:8::::::::::II~$=15==========~1
11$25
1
Since 1997, the average absolute forecast error in net borrowing of marketable debt
for the current quarter is $10 billion and the average absolute forecast error for the
end-of-quarter cash balance is $9 billion. Similarly, the average absolute forecast
error for the following quarter is $31 billion and the average absolute forecast error
for the end-of-quarter cash balance is $11 billion.
The following tables reconcile the variation between forecasted and actual net
borrowing of marketable debt in the October-December 2005 quarter.
ttp:IIWWw. treas,~ov/press/releases/j s309' 1 htm
2/1/2006
Page 2 of2
Quarter
Estimated
Borrowing
($ billions)
Oct-Dec 2005 $96
Actual
Borrowing
($ billions)
Estimated
End-ofQuarter Cash
Balance
($ billions)
ActuaIEnd-ofQuarter Cash
Balance
($ billions)
$93
$25
$37
Categories
Chg from
Nov Estimate
Receipts
Outlays
Other
Larger End-ot-Quarter Cash
Balance
$1
$7
$8
($12)
Additional financing details relating to Treasury's Quarterly Refunding will be
released at 9:00 A.M. on Wednesday, February 1. The following link provides
access to Treasury documents related to this Quarterly Refunding.
(httQ:!Iwww.treas.govlofficQs/domestL<:::finance/debt -manag ernenUq uarterly~
refu nd.i ng/)
REPORTS
•
Financing E:~t.!nlates
bltp:/lwww.treas.gov/press/releases/Js3Wl.htm
2/1/2006
DEPARTMENT OF THE TREASURY
OFFICE OF PUBLIC AFFAIRS
For Immediate Release
January 30, 2006
CONTACT: Sean Kevelighan
(202) 622-6865
TREASURY ANNOUNCES l\IlARKET FINANCING ESTIl\IlA TES
The Treasury Department announced today that it expects net borrowing of marketable debt to total
$188 billion in the January - March 2006 quarter. The estimated cash balance on March 31 is $15
billion. On October 31, Treasury announced estimated net market borrowing of $171 billion this
quarter and a March 31 cash balance of $15 billion. Adjusting for a beginning-of-quarter cash
balance that was $12 billion higher than estimated in October, the current borrowing estimate is $29
billion higher than previously announced. The increase in anticipated borrowing is primarily the
result of higher outlays, including a timing shift from the October - December 2005 quarter, and
lower net issues of State and Local Government Series securities. Based on current projections,
Treasury continues to believe that the statutory debt limit will be reached in mid-February 2006.
Treasury also announced that it expects a net pay down in marketable debt of $30 billion in the
April - June 2006 quarter. The estimated cash balance on June 30 is $25 billion.
Treasury borrowed $93 billion in net marketable debt in the October - December 2005 quarter. The
cash balance on December 31 was $37 billion. On October 31, Treasury announced estimated net
market borrowing of $96 billion and an end-of-quarter cash balance of $25 billion. Adjusting for
the higher-than-estimated cash balance at quarter-end, the net market borrowing need was $15
billion lower than announced in October. The improvement was primarily the result of lower
outlays and unanticipated repayments of outstanding debt to the IMF.
Additional financing details relating to Treasury's Quarterly Refunding will be released at 9:00
A.M. on Wednesday, February 1. The following link provides access to Treasury documents
related to this Quarterly Refunding. (http://www.treas.gov/offices/domestic-financc/dcbtmanagement/quarterly-refunding/)
2
TREASURY ANNOUNCES MARKET FINANCING ESTIMATES
Today, the Treasury Department announced net borrowing of marketable debt for the lanuaryMarch 2006 and April-June 2006 quarters.
Quarter
Jan-Mar 2006
Apr-Jun 2006
Estimated
End-of-Quarter
Cash Balance
($ billion)
$15
$25
Estimated
Borrowing
($ billion)
$188
($30)
Since 1997, the average absolute forecast error in net borrowing of marketable debt for the current
quarter is $10 billion and the average absolute forecast error for the end-of-quarter cash balance is
$9 billion. Similarly, the average absolute forecast error for the following quarter is $31 billion and
the average absolute forecast error for the end-of-quarter cash balance is $11 billion.
The following tables reconcile the variation between forecasted and actual net borrowing of
marketable debt in the October-December 2005 quarter.
Quarter
Estimated
Borrowing
($ billions)
Actual
Borrowing
($ billions)
Oct-Dec 2005
$96
$93
Categories
Receipts
Outlays
Other
Larger End-ofQuarter Cash
Balance
Estimated
End-ofQuarter Cash
Balance
($ billions)
$25
Actual
End-ofQuarter Cash
Balance
($ billions)
$37
Chg from
Nov Estimate
$1
$7
$8
($12)
Additional financing details relating to Treasury's Quarterly Refunding will be released at 9:00
A.M. on Wednesday, February 1. The fo11owing link provides access to Treasury documents
related to this Quarterly Refunding.
(http://www.treas.gov/offices/domestic-finance/debtmanagement/gualterly-rcfunding0
###
Page 1 0[2
PRESS ROOM
January 30, 2006
JS-3092
Assistant Secretary of the Office of Economic Policy Mark J. Warshawsky
Statement for the Treasury Borrowing Advisory Committee of the Bond
Market Association
In the three mont~s since the Committee's last meeting, economic activity
continued at a solid pace, core inflation remained steady, and the labor market
Improved. The year 2005 marked the fourth straight year of expansion and, in our
View, economic performance was right on target. Real GOP grew 3.5 percent on an
annual average basis, in line with the Administration's projection of 3.6 percent
growth made at the beginning of the year. Personal consumption expenditures
grew by 3.6 percent while business investment in equipment and software rose at a
double-digit pace for the second straight year. Residential building was a source of
strength again in 2005: housing starts hit a 33-year high, and single family homes
sales posted a fresh record. The unemployment rate declined from 5,4 percent to
4.9 percent by the end of 2005. Nonfarm payrolls increased by over 2.0 million.
Inflation rates in 2005 were remarkably similar to those in 2004: headline inflation
was 3.4 percent last year, about the same as in 2004. The CPI's energy
component rose by 17 percent during both years. Core price inflation (excluding
food and energy), too, was unchanged from the previous year, at 2.2 percent. All of
these indicators suggest that, though the economy was buffeted by the Gulf Coast
hurricanes and the related spike in energy prices, it recovered quickly and is on firm
footing.
The just-released advance figures for the fourth quarter of 2005 suggest that real
GOP advanced at a relatively low 1.1-percent annual rate. Fourth-quarter real GOP
growth was restrained by a slowing of real personal consumption expenditures and
business investment, a drag from international trade, and a drop in Federal defense
spending. These forces were only partially offset by a rebound in inventory
investment.
A deeper look at the accounts suggests that the factors that held down fourth
quarter growth are temporary. The one-percent annual rate increase in consumer
spending in the fourth quarter was mainly a reaction to the third quarter's auto sales
surge, fueled by employee pricing incentives. In the final months of the year, it
appeared that consumer spending was again on the rise, providing a strong starting
point as we entered the new year. Oil imports, which temporarily surged to take the
place of shut-in production following the hurricanes, subtracted about 0.5
percentage point from GOP. With Gulf of MeXICO production largely back on line,
that oil import surge is not likely to continue this year Finally, the sharp decline in
defense purchases in 200504 is not likely to be repeated in early 2006 and may
even be reversed.
In recent years, the economy's resilience in the face of a range of unprecedented
shocks has been perhaps its most outstanding characteristic, and that resilience
was evident once again in the face of the energy price shock of the past two years.
The expansion has continued with solid growth of real GOP, steady job creation,
and low core inflation. The economy remains well-positioned to maintain healthy
economic and employment growth with benign inflation. The Administration's
forecast for 2006 projects a real GOP increase of 3.4 percent over the four quarters
of the year, essentially in line with the pace in 2005. The rate of headline inflation
as measured by the consumer price index is projected to fall by a full percentage
point to 2.4 percent. The unemployment rate is expected to remain near
5.0 percent, and job growth should be on the order of 176,000 ~er month. In short,
real GOP and payrolls will continue to grow steadily, while Inflation remams tame.
Some analysts suggest that the negative personal saving rate that emerged In 2005
casts a shadow over the outlook for the economy, as efforts to rebuild personal
ttp:/IWWw.tre~.gov/press/releases/Js30~2.htm
2/1/200f.
Page 2 of2
saving could threaten personal consumption. In 2005, the personal saving rate
declined to -0.5 percent, the lowest in more than seventy years. The decline in
personal saving was the result of a two-decade downtrend in which it appears that
a combination of measurement and fundamental issues played a role. The trend
seems unlikely to be reversed in an abrupt or severe fashion.
Personal saving in the national income and product accounts is calculated as the
residual when personal outlays are subtracted from disposable personal income.
The national accounts measure income from current production and therefore do
not fully reflect the resources that households have available to fund consumption,
such as capital gains on corporate equities, mortgage equity withdrawal, or
distributions of pensions to retirees. Adjusting disposable income for some of these
developments would help to explain part of the decline in personal saving. Another
part of the decline may paradoxically be reflecting the success in the economy. In
1982, when the personal saving rate was at its peak, the economy had suffered
runaway inflation and severe recession. Over the past two decades, the economy
has become much more stable, likely reducing the perceived need for
precautionary saving. In addition household net worth has grown on its own and,
relative to disposable income now stands at a level well above that of anytime from
the 1950s through mid-1990s. Because for most households, the purpose of
saving is to build wealth, the surge in wealth that has occurred has likely reduced
the incentive to save.
In sum, the decline in the saving rate is a long-term phenomenon driven by a
variety of factors and some of the factors - such as rising equity and housing
values and low interest rates - are acknowledged to be positives for the economy.
A less-rapid rise in wealth, an increase in interest rates, or a reduction in home
equity extraction may reverse the path of personal saving. But consumption growth
can still be well-maintained as employment continues to expand and wages rise.
As a result. we are optimistic about the prospects for personal consumption and the
economy overall as we enter 2006.
###
1!tp:IIWWw.treas.gov/press/releasesljs3092.htm
2/1/2006
Page 2 0[2
11.b . Other
contingent liabilities
2. Foreign currency securities with embedded
options
0
~. Undrawn, unconditional credit lines
0
@.a. With other central banks
3.b. With banks and other financial institutions
II
I
~
1/
1/
1/
II
II
II
I
I
I
[2eadQualtered in the US
Jc. With banks and other financial institutions
II
I
I
I
I
0
0
I
I
II
l!!eadQuartered outside the US.
4. Aggregate short and long positions of options
in foreign
@urrencies vis-a-vis the U.S. dollar
8.a. Short positions
I
"I
0
I
I
"
"
I
I
0
"[
[4.a.1. Bought puts
[4.a.2. Written calls
[4.b Long positions
[
4.b.1. Bought calls
I
14.b.2. Written puts
I
I
I
[
I[
[
"
Notes:
11 Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account
(SOMA), valued at current market exchange rates. Foreign currency holdings listed as securities reflect marked-to-market values, and
deposits reflect carrying values. Foreign Currency Reserves for the latest week may be subject to revision. Foreign Currency
Reserves for the prior week are final.
2J The items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF and are
valued in dollar terms at the official SDR/doliar exchange rate for the reporting date. The entries for the latest week reflect any
necessary adjustments, including revaluation, by the U.S. Treasury to IMF data for the prior month end.
31 Gold stock is valued monthly at $42.2222 per fine troy ounce.
bttp:IIWWW.trea1;.gov/press/releaseSI20(X)1311151427903.htm
2/1/2006
Page 1 of 1
PRESS ROOM
January 31,2006
JS-3093
Statement by Assistant Secretary for Financial Institutions Emil Henry
before the Financial Literacy and Education Commission
Today's meeting of the Financial Literacy and Education Commission marks the
group's second anniversary. The Commission was given the important task of
improving financial literacy in the United States. Since its inception, the Commission
has been working hard towards that goal, but we recognize that there is still a lot
more to do. This Commission meeting is another step in the right direction by
bringing together once again financial education leaders from the federal
government and from the for-profit and non-profit sectors. Strong coordination
across the federal government on financial education efforts and the growing
enthusiasm of the private sector on this issue have helped the Commission in its
work.
http://WWw.treas.gov/press/releaseS/JS3893.htm
2/112006
@FedFRASER