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Department of the Trt8S"Y
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PRESS RELEASES
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October 1, 2007
HP-583
Agencies Propose Joint Rule to Implement Unlawful Internet Gambling
Enforcement Act
The Department of the Treasury (Treasury) and the Board of Governors of the
Federal Reserve System (Board) on Monday announced the release of a joint
proposed rule to implement the Unlawful Internet Gambling Enforcement Act (the
Act). The Act prohibits gambling businesses from accepting payments in connection
with unlawful Internet gambling, including payments made through credit cards,
electronic funds transfers, and checks.
The proposed rule would require U.S. financial firms that participate in designated
payment systems to have policies and procedures that are reasonably designed to
prevent payments being made to gambling businesses in connection with unlawful
Internet gambling. The proposed rule would provide examples of such policies and
procedures. For purposes of the proposed rule, unlawful Internet gambling
generally would cover the making of a bet or wager that involves use of the Internet
and that is unlawful under any applicable federal or state law in the jurisdiction
where the bet or wager is made.
The Board and Treasury are required by the Act to develop jointly the proposed rule
in consultation with the Department of Justice. Comments on the proposed rule are
requested by December 12, 2007. The agencies request comment on all aspects of
the proposed rule. The Federal Register notice is attached.
Media Contacts:
Treasury Jennifer Zuccarelli 202-622-8657
Federal Reserve Susan Stawick 202-452-2955
REPORTS
•
Federal Register Notice of Proposed Joint Rule
http://www.treas.gov/press/releases/hp583.htm
111212007
FEDERAL RESERVE SYSTEM
12 CFR Part 233
Regulation GG; Docket No. R-1298
DEPARTMENT OF THE TREASURY
31 CFR Part 132
RIN 1505-AB78
PROHIBITION ON FUNDING OF UNLAWFUL INTERNET GAMBLING
AGENCIES: Board of Governors of the Federal Reserve System and Departmental
Offices, Department of the Treasury.
ACTION: Notice of Joint Proposed Rulemaking.
SUMMARY: This notice is published jointly by the Departmental Offices of the
Department of the Treasury (the "Treasury") and the Board of Governors of the Federal
Reserve System (the "Board") (collectively, the "Agencies") and proposes rules to
implement applicable provisions of the Unlawful Internet Gambling Enforcement Act of
2006 (the "Act"). In accordance with the requirements of the Act, the proposed rule
designates certain payment systems that could be used in connection with unlawful
Internet gambling transactions restricted by the Act. The proposed rule requires
participants in designated payment systems to establish policies and procedures
reasonably designed to identify and block or otherwise prevent or prohibit transactions in
connection with unlawful Internet gambling. As required by the Act, the proposed rule
also exempts certain participants in designated payment systems from the requirements to
establish such policies and procedures because the Agencies believe it is not reasonably
practical for those participants to identify and block, or otherwise prevent or prohibit,
unlawful Internet gambling transactions restricted by the Act. Finally, the proposed rule
describes the types of policies and procedures that non-exempt participants in each type
of designated payment system may adopt in order to comply with the Act and includes
non-exclusive examples of policies and procedures which would be deemed to be
reasonably designed to prevent or prohibit unlawful Internet gambling transactions
restricted by the Act. The proposed rule does not specify which gambling activities or
transactions are legal or illegal because the Act itself defers to underlying State and
Federal gambling laws in that regard and determinations under those laws may depend on
the facts of specific activities or transactions (such as the location of the parties).
DATES: Comments must be received on or before December 12,2007.
ADDRESSES: You may submit comments by any of the following methods:
BOARD: You may submit comments, identified by Docket Number R-1298, by any of
the following methods:
•
Agency Web site: http://www.federalreserve.gov. Follow the instructions for
submitting comments at
http://www .federalreserve. gov/ generalinfo/foia/ProposedRegs. cfm.
•
Federal eRulemaking Portal: http://www.regulations.gov. Follow the
instructions for submitting comments.
•
E-mail: regs.comments@federalreserve.gov. Include docket number in the
subject line of the message.
•
Fax: (202) 452-3819 or (202) 452-3102.
•
Mail: Jennifer J. Johnson, Secretary, Board of Govemors of the Federal Reserve
System, 20th Street and Constitution Avenue, N.W., Washington, DC 20551.
All public comments are available from the Board's Web site at http://
www.federalreserve.gov/generalinfo/foialProposedRegs.cfm, as submitted,
unless modified for technical reasons. Accordingly, your comments will not be
edited to remove any identifying or contact information. Public comments may
also be viewed electronically or in paper in Room MP-500 of the Board's Martin
Building (20th and C Streets, NW) between 9 a.m. and 5 p.m. on weekdays.
TREASURY:
•
Federal eRulemaking Portal- "Regulations.gov": Go to
http://www.regulations.gov, select "Department of the Treasury - All" from the
agency drop-down menu, then click "Submit." In the "Docket ID" column, select
"Treas-DO-2007-0015" to submit or view public comments and to view
supporting and related materials for this notice of proposed rulemaking. The
"User Tips" link at the top of the Regulations.gov home page provides
information on using Regulations.gov, including instructions for submitting or
viewing public comments, viewing other supporting and related materials, and
viewing the docket after the close of the comment period.
•
Mail: Department of the Treasury, Office of Critical Infrastructure Protection and
Compliance Policy, Room 1327, Main Treasury Building, 1500 Pennsylvania
Avenue, N.W., Washington, D.C. 20220.
Instructions: You must include "Treas-DO" as the agency name and "Docket
Number Treas-DO-2007-0015" in your comment. In general, the Treasury will
enter all comments received into the docket and publish them without change,
including any business or personal information that you provide such as name and
address information, e-mail addresses, or phone numbers. Comments, including
attachments and other supporting materials, received are part of the public record
and subject to public disclosure. Do not enclose any information in your
2
comment or supporting materials that you consider confidential or inappropriate
for public disclosure.
You may view comments and other related materials by any of the following
methods:
•
Viewing Comments Electronically: Go to http://www.regulations.gov, select
"Department of the Treasury-All" from the agency drop-down menu, then click
"Submit." In the "Docket ID" column, select "Treas-DO-2007-0015" to view
public comments for this notice of proposed rulemaking.
•
Viewing Comments Personally: You may personally inspect and photocopy
comments at the Department of the Treasury Library, Room 1428, Main Treasury
Building, 1500 Pennsylvania Avenue, N.W., Washington, D.C. You can make an
appointment to inspect comments by calling (202) 622-0990.
Commenters are requested to submit copies of comments to both Agencies.
FOR FURTHER INFORMATION CONTACT:
BOARD: Christopher W. Clubb, Senior Counsel (202/452-3904), Legal Division; Jack
K. Walton, II, Associate Director (202/452-2660), Jeffrey S. Yeganeh, Manager, or
Joseph Baressi, Financial Services Project Leader (202/452-3959), Division of Reserve
Bank Operations and Payment Systems; for users of Telecommunication Devices for the
Deaf (TDD) only, contact 2021263-4869.
TREASURY: Charles Klingman, Deputy Director, Office of Critical Infrastructure
Protection and Compliance Policy; Steven D. Laughton, Senior Counsel, or Amanda
Wise, Attorney-Advisor, Office of the Assistant General Counsel (Banking & Finance),
202/622-9209.
SUPPLEMENTARY INFORMATION:
I.
Background and Introduction
The Act prohibits any person engaged in the business of betting or wagering (as
defined in the Act) from knowingly accepting payments in connection with the
participation of another person in unlawful Internet gambling. Such transactions are
termed "restricted transactions." The Act generally defines "unlawful Internet gambling"
as placing, receiving, or otherwise knowingly transmitting a bet or wager by any means
which involves the use, at least in part, of the Internet where such bet or wager is
unlawful under any applicable Federal or State law in the State or Tribal lands in which
1
the bet or wager is initiated, received, or otherwise made. The Act states that its
1 From the general definition, the Act exempts three categories of transactions: (i) intrastate transactions (a
bet or wager made exclusively within a single State, whose State law or regulation contains certain
safeguards regarding such transactions and expressly authorizes the bet or wager and the method by which
the bet or wager is made, and which does not violate any provision of applicable Federal gaming statutes);
3
provisions should not be construed to alter, limit, or extend any Federal or State law or
Tribal-State compact prohibiting, permitting, or regulating gambling within the United
2
States. The Act does not spell out which activities are legal and which are illegal, but
rather relies on the underlying substantive Federal and State laws. 3
The Act requires the Agencies (in consultation with the U.S. Attorney General) to
designate payment systems that could be used in connection with or to facilitate restricted
transactions. Such a designation makes the payment system, and financial transaction
providers participating in the system, subject to the requirements of the regulations. 4 The
Act further requires the Agencies (in consultation with the U.S. Attorney General) to
prescribe regulations requiring designated payment systems and financial transaction
providers participating in each designated payment system to establish policies and
procedures reasonably designed to identify and block or otherwise prevent or prohibit
restricted transactions. The regulations must identify types of policies and procedures
that would be deemed to be reasonably designed to achieve this objective, including nonexclusive examples. The Act also requires the Agencies to exempt certain restricted
(ii) intratribal transactions (a bet or wager made exclusively within the Indian lands of a single Indian tribe
or between the Indian lands of two or more Indian tribes as authorized by F ederallaw, if the bet or wager
and the method by which the bet or wager is made is expressly authorized by and complies with applicable
Tribal ordinance or resolution (and Tribal-State Compact, if applicable) and includes certain safeguards
regarding such transaction, and if the bet or wager does not violate applicable Federal gaming statutes); and
(iii) interstate horseracing transactions (any activity that is allowed under the Interstate Horseracing Act of
1978, 15 V.S.C. 3001 et seq.).
The Department of Justice has consistently taken the position that the interstate transmission of bets and
wagers, including bets and wagers on horse races, violates Federal law and that the Interstate Horseracing
Act (the "IHA") did not alter or amend the Federal criminal statutes prohibiting such transmission of bets
and wagers. The horse racing industry disagrees with this position. While the Act provides that the
definition of "unlawful Internet gambling" does not include "activity that is allowed under the Interstate
Horseracing Act of 1978," 31 V.S.c. 5362(lO)(D)(i), Congress expressly recognized the disagreement over
the interplay between the IHA and the Federal criminal laws relating to gambling and determined that the
Act would not take a position on this issue. Rather, the Sense of Congress provision, codified at 31 V.S.C.
5362(10)(D)(iii), states as follows:
It is the sense of Congress that this subchapter shall not change which activities related to horse
racing mayor may not be allowed under Federal law. This subparagraph is intended to address
concerns that this subchapter could have the effect of changing the existing relationship between
the Interstate Horseracing Act and other Federal statutes in effect on the date of enactment of this
subchapter. This subchapter is not intended to resolve any existing disagreements over how to
interpret the relationship between the Interstate Horseracing Act and other Federal statutes.
231 V.S.c. 5361(b).
3
See H. Rep. No. 109-412 (pt. 1) p.l O.
The Act defines "financial transaction provider" as a creditor, credit card issuer, financial institution,
operator of a terminal at which an electronic fund transfer may be initiated, money transmitting business, or
international, national, regional, or local payment network utilized to effect a credit transaction, electronic
fund transfer, stored value product transaction, or money transmitting service, or a participant in such
network or other participant in a designated payment system.
4
4
transactions or designated payment systems from any requirement imposed by the
'regulations if the Agencies jointly determine that it is not reasonably practical to identify
and block, or otherwise prevent or prohibit the acceptance of, such transactions.
Under the Act, a participant in a designated payment system is considered to be in
compliance with the regulations if it relies on and complies with the policies and
procedures of the designated payment system and such policies and procedures comply
with the requirements of the Agencies' regulations. The Act also directs the.Agencies to
ensure that transactions in connection with any activity excluded from the Act's
definition of "unlawful Internet gambling," such as qualifying intrastate transactions,
intratribal transactions, or interstate horseracing transactions, are not blocked or
otherwise prevented or prohibited by the prescribed regulations.
The regulation being proposed by the Agencies in this notice (i) sets out
definitions for terms used in the regulation; (ii) designates payment systems that could be
used by participants in connection with, or to facilitate, a restricted transaction; (iii)
exempts certain participants in certain designated payment systems from requirements of
the regulation; (iv) requires the participants performing non-exempt functions in a
designated payment system to establish and implement policies and procedures
reasonably designed to prevent or prohibit restricted transactions, such as by identifying
and blocking such transactions; (v) provides non-exclusive examples of policies and
procedures for non-exempt participants in each designated payment system; and (vi) sets
out the regulatory enforcement framework. Comments on all aspects of the proposed
regulation are welcome; however, the Agencies are, in particular, seeking comment on
the issues noted in the section-by-section analysis below.
The Agencies desire to achieve the purposes of the Act as soon as is practical,
while also providing designated payment systems and their participants sufficient time to
adapt their policies and practices as needed to comply with the regulation. The Agencies
propose that the final regulations take effect six months after the joint final rules are
published, and request comment on whether this period is reasonable. Commenters
requesting a shorter period should explain why they believe payment system participants
would be able to modify their policies and procedures, as required, in the shorter period.
Similarly, commenters requesting a longer period should explain why the longer period
would be necessary to comply with the regulations, particularly if the need for additional
time is based on any system or software changes required to comply with the regulations.
5
II.
Section by Section Analysis
A.
Definitions
The proposed regulation provides definitions for tenns used in the regulation.
Many of the definitions (such as "bet or wager," "financial transaction provider,"
"Internet," "money transmitting business," "restricted transaction," and "unlawful
Internet gambling") follow or refer to the Act's definitions. The proposed rule does not
attempt to further define gambling-related tenns because the Act itself does not specify
which gambling activities are legal or illegal and the Act does not require the Agencies to
do so. The Act focuses on payment transactions and relies on prohibitions on gambling
contained in other statutes under the jurisdiction of other agencies. Further, application
of some of the tenns used in the Act may depend significantly on the facts of specific
transactions and could vary according to the location of the particular parties to the
transaction or based on other factors unique to an individual transaction. The purpose of
the proposed regulations is to implement the provisions of the Act that instruct the
Agencies to require participants in designated payment systems to establish policies and
procedures reasonably designed to identify and block or otherwise prevent or prohibit
restricted transactions. For these reasons, and in consultation with the Department of
Justice, the Agencies' preliminary view is that issues regarding the scope of gamblingrelated tenns should be resolved by reference to the underlying substantive State and
Federal gambling laws and not by a general regulatory definition.
The proposed rule includes definitions for some payment system tenns (such as
"automated clearing house system," "card system," "check collection system," "check
clearing house," "money transmitting business," "money transmitting service," and "wire
transfer system") because they relate to the designated payment systems, exemptions, and
required policies and procedures. The definitions of most of these payment system tenns
are based on existing regulatory or statutory definitions, such as the Board's Regulation
CC (12 CFR Part 229) or the Unifonn Commercial Code (UCC).5 Tenns used in the
context of particular payment systems are intended to be consistent with how those tenns
are used in those systems. The proposed rule incorporates by reference relevant
definitions oftenns regarding the automated clearing house (ACH) system as published
in "2007 ACH Rules: A Complete Guide To Rules & Regulations Governing the ACH
Network" (the ACH Rules) by the National Automated Clearing House Association
(NACHA). In accordance with the Act, the definitions of "money transmitting business"
and "money transmitting service" have the meanings given the tenns in the Bank Secrecy
5 The Uniform Commercial Code is a model commercial law developed by the National Conference of
Commissioners on Uniform State Law (NCCUSL) in conjunction with the American Law Institute.
NCCUSL is a non-profit organization that promotes the principles of uniformity by drafting and proposing
specific statutes in areas oflaw where uniformity between the States is desirable. No uniform statute is
effective until a State legislature adopts it as part of its State law.
6
Act,6 determined without regard to any regulations prescribed by the Treasury
thereunder. 7
In addition, the proposed regulation defines the term "participant in a designated
payment system" as an operator of a designated payment system, or a financial
transaction provider that is a member of, has contracted for services with, or is otherwise
participating in, a designated payment system. The proposed regulatory definition
clarifies that an end-user customer of a financial transaction provider is not included in
the definition of "participant," unless the customer is also a financial transaction provider
otherwise participating in the designated payment system on its own behalf.
The Agencies request comment on all of the terms and definitions set out in this
section. In particular, the Agencies request comment on any terms used in the proposed
regulation that a commenter believes are not sufficiently understood or defined.
B.
Designated Payment Systems
Section 3 of the proposed regulation designates the following payment systems as
systems used by a financial transaction provider that could be used in connection with, or
to facilitate, a restricted transaction: automated clearing house systems; card systems
(including credit, debit, and pre-paid cards or stored value products); check collection
systems; money transmitting businesses; and wire transfer systems. The broad range of
the payment systems designated by the regulation reflects the fact that a restricted
transaction may be made through many different payment systems. The designated
payment systems are described in more detail below.
1.
Automated clearing house system
The ACH system is a funds transfer system, primarily governed by the rules and
guidelines published by NACHA, that provides for the clearing and settlement ofbatched
electronic entries for participating financial institutions. 8 ACH transfers can be either
credit or debit transfers and can be either recurring or one-time transfers. Recurring ACH
transfers typically occur on a set schedule and are pre-authorized by the individual or
entity whose account is being credited or debited. Recurring credit transfers include
payroll direct deposit payments, while recurring debit transfers include mortgage and
other bill payments. One-time ACH transfers are authorized at the time the payment is
initiated. One-time credit transfers include bill payments made through the bill payer's
bank, while one-time debit transfers include bill payments made through the biller's
payment site.
6
31 U.S.C. 5330(d).
7 The Agencies believe that this cross-reference does not otherwise require the Act and the Bank Secrecy
Act to be interpreted in light of each other.
8
A primer on the ACH network is provided in the ACH Rules.
7
The designation of the originating and receiving institution in ACH terminology
is based on the participants that initiate and receive the ACH entries, rather than the
direction of the flow of funds. The originator of an ACH transfer generally sends the
payment instruction to its bank, the originating depository financial institution (ODFI), so
that the payment instruction can be entered into the ACH system. The ODFI combines
the payment instructions with payment instructions from its other customers and sends
them to an ACH operator for processing. The ACH operator will then sort and deliver
the payments to the appropriate receiving depository financial institutions (RDFIs) and
complete the interbank settlement process. The RDFIs then post the payments, either
credits or debits, to the receivers' accounts. The fundamental difference between the
ACH credit and debit transfers is that for ACH credit transfers funds are "pushed" to an
account at the institution receiving the message, while in ACH debit transfers funds are
"pulled" from an account at the institution receiving the message. In other words, for
credit transfers, the originator is requesting that funds be credited to the receiver (the
funds move in the same direction as the payment instruction), while for debit transfers,
the originator is requesting that funds be debited from the receiver (the funds move in the
opposite direction from the payment instruction).
In some instances, a "third-party sender" acts as an intermediary between an
originator and an ODFI with respect to the initiation of ACH transactions where there is
no contractual agreement between the originator and the ODFI. Under the ACH Rules, a
third-party sender assumes the responsibilities of an originator and is obligated to provide
the ODFI with any information the ODFI reasonably deems necessary to identify each
originator for which the third-party sender transmits entries. The use of third-party
senders in ACH transactions poses particular risks because the ODFI does not have a
direct relationship with the originators.
The ACH Rules also include particular provisions governing cross-border ACH
payments made in cooperation with another country's national payment system. Under
the ACH Rules, the U.S. segment of a cross-border ACH transaction is settled separately
between the U.S. participants and the U.S. gateway operator. The interface between the
two national payment systems is commonly accomplished through an "originating
gateway operator" in the originator's country and a "receiving gateway operator" in the
receiver's country. Both the originating and receiving gateway operators are participants
in their respective national payment systems and capable of clearing and settling
payments in their respective systems. In the United States, the gateway operator can be
an ODFI (for "inbound" transactions), an RDFI (for "outbound" transactions), or, with
the appropriate agreements in place, an ACH operator. Additionally, a third-party sender
may have proprietary arrangements with a foreign counterparty and accept instructions to
submit cross-border ACH entries to the appropriate ACH operator or ODFI.
In the case of inbound transactions, the "originating gateway operator" in the
country of the originator receives the entry from its national payments network and then
transmits the entry to a receiving gateway operator in the receiving country. The
receiving gateway operator then transmits the entry into its national payments system for
delivery to the intended RDFI. If a U.S. ODFI acts as a receiving gateway operator, it
8
would be the first U.S. institution involved in the transaction and would submit the
transaction to its U.S. ACH operator for further processing. Under the ACH Rules, a
U.S. receiving gateway operator for a particular cross-border transaction must make
warranties expected of an ODFI for that transaction and assumes liability for breaches of
those warranties to every RDFI and ACH operator, so in effect it becomes the ODFI for
the U.S. segment of the transaction. 9 Similarly, a U.S. depository financial institution or
third-party sender receiving instructions to originate cross-border ACH entries directly
from a foreign counterparty would be the first U.S. participant involved in the transaction
and would originate the ACH entry in the U.S. ACH system.
2. Card systems
Card systems are systems for clearing and settling transactions in which credit
cards, debit cards, pre-paid cards, or stored value products are used to purchase goods or
services or to obtain a cash advance. In a typical card system transaction, there are three
components to the transaction: authorization, clearance, and settlement.
The transaction begins when the payor provides his card or card number to the
payee, either in person or through the Internet or telephone. The payee uses that
information to create a card payment authorization request, which it sends to its bank (the
"merchant acquirer") or the bank's agent. The merchant acquirer sends an authorization
request through the card system network to the bank that issued the payor's card (the
"card issuer") or its agent. lO The authorization request includes, amongst other
information, the card number, the transaction amount, a merchant category code, and a
transaction code. The merchant category code describes generally the nature of the
payee's business and the transaction code describes whether the card was present at the
point of transaction (i.e., a point-of-sale transaction) or not present (i.e., a transaction
over the Internet or telephone). The card issuer or its agent either authorizes or declines
the transaction and the payee is immediately notified of the decision through the card
network. If authorization is granted, then the payee completes the underlying transaction
with the payor; otherwise, the transaction is cancelled.
After the transactions have been authorized, they must then be cleared. The
clearing process for personal identification number (PIN)-based debit card transactions is
different from the process for credit card and signature-based debit card transactions. For
PIN-based debit card transactions, the authorization and clearing occur at the same time
and thus a separate clearing transmission by the payee to the merchant acquirer is not
necessary. For credit cards and signature-based debit cards, the payee batches its
authorized transactions and transmits them, typically at the end of the business day, to the
merchant acquirer to be cleared through the card network. Depending on the card type,
9
See ACH Rules, Operating Rules § § 11.6 and 11.7.
10 This discussion generally relates to the card processing model of Visa and MasterCard, in which the
merchant acquirer, the card network, and the card issuer are separate entities. Other card companies, such
as American Express, may employ a model in which one company owns the card processing network and
performs all major functions involved in issuing cards and acquiring merchants to accept its cards.
9
card issuer banks memo-post or charge transactions to their customers' accounts when
the transactions are either authorized or cleared. Once the transactions have been cleared,
they are settled at a time specified by the card network and the merchant acquirer and the
card issuer are, respectively, credited and debited.
3.
Check collection systems
A check collection system is an interbank system for collecting, presenting,
returning, and settling checks or an intrabank system for settling checks deposited and
drawn on the same bank (i.e., "on-us checks"). A typical check transaction is initiated by
the payor writing a check to the order of a payee and giving the signed check to the payee
as payment. The payee deposits the check with its bank (the bank of first deposit or the
"depositary bank"). Except for on-us checks, the depositary bank will then send the
check to the bank on which it is drawn (the "paying bank") for payment.
The depositary bank may present the check for payment directly to the paying
bank, may use a check clearing house, or may use the services of an intermediary bank,
such as a Federal Reserve Bank or another correspondent bank (a "collecting bank,,).l1
These intermediaries handle large volumes of checks daily and typically rely on three
pieces of information: the routing number of the bank from which it received the check;
the routing number of the bank to which the check is destined (i.e. the paying bank); and
the amount of the check. Upon presentment, the paying bank settles with the presenting
bank for the amount of the check and debits the amount of the check from the account of
the payor.
Checks may be cleared cross-border through correspondent banking relationships.
If a U.s. payor writes a check to the order of an offshore payee, the payee will likely
deposit the check in its home country bank. The home country bank may have a
correspondent relationship with a U.S. bank for check collection and deposit the check
with its U.S. correspondent bank. The U.S. bank will then collect the check through the
U.S. check collection system. The first banking office located in the United States that
receives a check from outside the United States for forward collection inside the United
States is defined as the depositary bank for that check. 12 Accordingly, if a foreign office
of a U.S. or foreign bank sends checks to its U.S. correspondent for forward collection,
the U.S. correspondent is the depositary bank for those checks.
11 Check clearing houses generally provide a facility or mechanism for banks to exchange checks for
collection and return. The services provided by check clearing houses vary. Some merely provide space
for banks to exchange checks. Others provide the capability to exchange between banks in electronic form.
A check clearing house generally also facilitates settlement of the checks exchanged through it. Check
clearing houses are not considered collecting or returning banks.
12 CFR 229.2(0) commentary. Foreign offices of U.S. and foreign banks are not included in Regulation
CC's definition of "bank." 12 CFR 229.2(e) commentary.
12
10
4. Money transmitting businesses
A money transmitting business is a person (other than a depository institution)
that engages as a business in the transmission of funds, including any person that engages
as a business in an informal money transfer system or any network of people that engage
as a business in facilitating the transfer of money domestically or internationally outside
of the conventional financial institutions system. Money transmitters commonly will
facilitate money transmissions through agent locations, by phone, or through an Internet
website and can be used for payments to some businesses as well as money transfers to
individuals. This term includes networks such as Western Union and MoneyGram, online payment systems such as PayPal, and other electronic systems that engage in the
business of transmitting funds.
Money transmitting businesses use various operational models. In networks with
operations similar to Western Union and MoneyGram, the payor initiates the transaction
in person at the money transmitting business's location, by phone, or through the money
transmitting business's Internet site and generally can use cash, a credit card, or a debit
card to fund a transfer. The money transmitter obtains identification from the payor, as
well as identifying information for the intended payee and the location to which the
payment should be sent. The money transmitter may provide the payor with a reference
number that the payee will need in order to pick up the payment. Large money
transmitters, such as Western Union or, MoneyGram, typically transmit the payment
instructions through an internal proprietary system. The payor or the money transmitter
notifies the payee of the availability of the payment. The payee goes to one of the money
transmitting business's physical locations, provides the necessary information (such as
personal identification and perhaps the transaction reference number), and receives the
funds. Alternatively, some money transmitting businesses will transfer money directly
into a payee's bank account in certain circumstances, such as when the recipient is a
business that has been approved to receive funds through the money transmitting business
(a "commercial subscriber"). Settlement between the sending and receiving accounts or
locations is effected based on rules established by the money transmitting business.
Other money transmitters may follow the PayPal-type operational model and
provide Internet electronic payment services to facilitate purchases over the Internet,
either from vendors or through auctions. In such a model, a consumer establishes an
account with the money transmitting business and uses a debit card, credit card, or ACH
transfer to fund the account. In order to fund a purchase from a vendor with an account
with the same money transmitting business, the consumer instructs the money
transmitting business to transfer the funds to the vendor, identifying the vendor bye-mail
address. The money transmitting business sends an e-mail notification to the vendor and
transfers the funds from the consumer's account to the vendor's account. The vendor
may keep the funds in its account with the money transmitting business (and
subsequently use them to effect payments through the system) or may transfer the funds
from its account to its bank account, such as through an ACH credit transaction.
11
Other money transmitting businesses may use operational models different than
those set out above. The Agencies intend to apply the term "money transmitting
business" to cover businesses that meet the definition of the term as used in the Act,
regardless of operational model.
5. Wire transfer systems
A wire transfer system is a system through which the sender of a payment
transmits an unconditional order to a bank to pay a fixed or determinable amount of
money to a beneficiary upon receipt (or on a day stated in the order) by electronic or
other means through a network, between banks, or on the books of a bank. Wire transfer
systems are generally designed for large-value transfers between financial institutions,
but financial institutions also send lower-value, consumer-initiated payment orders
through wire transfer systems.
In a typical consumer-initiated wire transfer transaction, the consumer would
initiate the transfer after obtaining wire transfer instructions from the intended
beneficiary (such as the bank to which the beneficiary would like the funds transferred
and the beneficiary's account number at the bank). The consumer provides that
information in the payment order to its bank (the "originator's bank") to initiate the wire
transfer. The originator's bank may transfer the payment directly to the beneficiary's
bank if the banks have an account relationship.
Alternatively, the originator's bank may use the services of a wire transfer
network, such as the Federal Reserve Banks' Fedwire system or The Clearing House's
CHIPS system, to send the transfer either to the beneficiary's bank or to an intermediary
bank that has an account relationship with the beneficiary's bank. In an automated wire
transfer system such as F edwire or CHIPS, typically the information used in processing
the payment order is the routing information of the sending bank, the routing information
of the receiving bank, and the amount of the wire transfer. Although additional
information may be, and in some cases is required to be, included in fields of the payment
order message format (such as the names of the originator and the beneficiary, their
account numbers, and addresses), this information is not relied upon by the intermediary
bank to process the transfer.
Wire transfer transaction proceeds may be sent cross-border through
correspondent banking relationships. The last U.S. bank in the outgoing transaction may
either have a correspondent banking relationship with the beneficiary's foreign bank or a
foreign intermediary bank for further delivery to the beneficiary's bank. Alternatively,
the U.S. bank may have a branch in the home country of the beneficiary and can make an
"on-us" transfer to the branch for further processing through the beneficiary's home
country national payment system.
12
6.
Other payment systems
The Agencies request comment on whether the list of designated payment
systems in the proposed regulation is too broad or too narrow. In particular, the Agencies
request comment on whether there are non-traditional or emerging payment systems not
represented in the proposed regulation that could be used in connection with, or to
facilitate, any restricted transaction. If a commenter believes that such a payment system
should be designated in the final rule, the commenter should describe policies and
procedures that might be reasonably designed to identify and block, or otherwise prevent
or prohibit, restricted transactions through that system.
C. Exemptions
The Act directs the Agencies to exempt certain restricted transactions or
designated payment systems from any requirements imposed under the regulations if the
Agencies find that it is not reasonably practical to identify and block, or otherwise
prevent or prohibit the acceptance of, such transactions. Section 4 of the proposed rule
provides such an exemption for certain participants in ACH systems, check collection
systems, and wire transfer systems. The proposed regulation is structured to impose
requirements on participants in designated payments systems with respect to the
segments of particular transactions that those participants handle. Therefore, rather than
exempting entire categories of restricted transactions or entire payment systems, the
Agencies have structured the exemptions to apply to particular participants in particular
payment systems as described in greater detail below. The Agencies believe that this
limited application of their exemption authority better serves the Act's purposes of
preventing the processing of restricted transactions.
The Agencies are proposing to exempt all participants in the ACH systems, check
collection systems, and wire transfer systems, except for the participant that possesses the
customer relationship with the Internet gambling business (and certain participants that
receive certain cross-border transactions from, or send certain such transactions to,
foreign payment service providers, as discussed further below). The exemptions for these
participants reflect the fact that these systems currently do not enable the exempted
participants to reasonably identify and block, or otherwise prevent or prohibit, restricted
transactions under the Act. While other systems, such as the card systems, have
developed merchant category and transaction codes that identify the business line of the
payee (e.g., the gambling business) and how the transfer was initiated (such as via the
Internet), so that the systems are able to identify and block certain types of payments in
real time, the ACH systems, check collection systems, and wire transfer systems do not
use such codes. Moreover, as a general matter, a consumer can make payment by check,
ACH, or wire transfer to any business with an account at a depository institution. This is
in contrast to card systems and money transmitting businesses, in which consumers can
make direct payments only to those businesses that have explicitly agreed to participate
in those payment systems. As a result, the preliminary view of the Agencies is that it is
not reasonably practical for the exempted participants in ACH systems, check collection
systems, and wire transfer systems discussed below to identify and block, or otherwise
13
prevent or prohibit, restricted transactions under the Act. The Agencies intend to monitor
technological developments in these payment systems and will consider amending the
exemptions if, in the future, the technology prevalent in these payment systems permits
such participants to identify and block, or otherwise prevent and prohibit, those restricted
transactions.
No designated payment system is completely exempted by the proposed rule. The
Agencies intend that the participant with the customer relationship with the Internet
gambling business would have the responsibility in the ACH systems, check collection
systems, or wire transfer systems to prevent or prohibit restricted transactions from being
credited to the account of the gambling business through that particular payment system.
The Agencies request comment on all aspects of the exemptions, but in particular,
whether the exemptions for certain participants in the ACH systems, check collection
systems, and wire transfer systems discussed in more detail below are appropriate.
Commenters that believe that these participants should not be exempted from the
requirements of the regulation should provide specific examples of policies and
procedures that such participants could establish and implement that would be reasonably
designed to identify and block, or otherwise prevent or prohibit, restricted transactions.
1. ACH systems
With regard to an ACH system, the proposal provides an exemption from the
regulation'S requirements for the ACH system operator, the originating depository
financial institution (ODFI) in an ACH credit transaction, and the receiving depository
financial institution (RDFI) in an ACH debit transaction (except with respect to certain
cross-border transactions discussed below). The proposal does not exempt the institution
serving as the ODFI in an ACH debit transaction or the RDFI in an ACH credit
transaction because these institutions typically have a pre-existing relationship with the
customer receiving the proceeds of the ACH transaction and could, with reasonable due
diligence, take steps to ascertain the nature of the customer's business and ensure that the
customer relationship is not used to receive restricted transactions.
The proposal would provide an exemption for the ACH system operator because
it is not reasonably practical for the operator to identify and block a particular ACH
transfer as a restricted transaction. The ACH system operator's function is to act as the
central clearing facility for ACH entries. The ACH operator sorts the entries by RDFI
routing information and transmits the payment information to the appropriate RDFI for
posting. The ACH system operator would not have any direct interaction with either the
gambler or the Internet gambling business and would not be in a position to obtain the
necessary information to analyze individual transactions to determine whether they are
restricted transactions. In addition, ACH operators use highly-automated systems to sort
large volumes of ACH entries without manual intervention. A requirement to analyze
each ACH entry manually to determine whether it is a restricted transaction would
substantially increase processing times for all ACH entries, including entries that are not
restricted transactions, and reduce the efficiency of the ACH system. Moreover, even if
14
the payee information on an ACH entry is analyzed manually, it is very difficult for an
ACH operator to determine whether the ACH entry is related to a restricted transaction.
The proposal also would provide an exemption for the RDFI in an ACH debit
transaction. In this case, the exempted participant would not have any direct interaction
with its customer prior to processing the transaction. In a restricted transaction using an
ACH debit transaction, a gambler could authorize the unlawful Internet gambling
business to debit his account for the restricted transaction and the RDFI would not have
an opportunity to obtain information from its customer (the gambler in this case) to
determine whether the entry was in connection with a restricted transaction. Also, as
discussed below, information obtained from the customer may be of limited value.
In addition, the proposal would provide an exemption for the ODFI in an ACH
credit transaction. The Agencies carefully considered whether such an exemption would
be warranted. Typically, a consumer would initiate an ACH credit transaction on-line
with the ODFI, so there could be an opportunity for the ODFI to design a procedure to
obtain information on an outgoing ACH credit transaction to determine whether it is a
restricted transaction. For example, for each ACH credit transaction, the ODFI could
require the originator to submit a statement that the ACH credit transaction is not a
restricted transaction and/or a description of the nature and purpose of the transaction.
The Agencies' preliminary view, however, is that, while it may be possible at
least in some cases for an ODFI in an ACH credit transaction to obtain information from
the originator regarding whether the ACH credit transaction is a restricted transaction
under the Act, any associated benefits would likely be outweighed by the associated costs
that would be borne by ODFIs. Specifically, any process requiring the customer to
describe the nature of the transaction and/or state that the transaction does not involve
unlawful Internet gambling may be of limited value, either because a customer may
knowingly mischaracterize the actual nature of the transaction in order to avoid the
transaction being rejected or blocked, or because the customer may not actually know
whether an Internet gambling transaction is a restricted transaction under the Act. The
Agencies also believe that the ODFI would generally be unable to determine whether the
originator's characterization of the transaction is accurate. Moreover, the burden on
ODFIs in developing the necessary systems to obtain the information and determine
whether to reject or block a transaction would likely be substantial.
The Agencies specifically request comment on whether it is reasonably practical
to implement policies and procedures (including, but not limited to, those discussed
above) for an ODFI in an ACH credit transaction, whether such policies and procedures
would likely be effective in identifying and blocking restricted transactions, and whether
the burden imposed by such policies and procedures on an originator and an ODFI would
outweigh any value provided in preventing restricted transactions and a description of
such burdens and benefits. If a commenter believes that an ODFI in an ACH credit
transaction should not be exempted, the Agencies request that the commenter provide
examples of policies and procedures reasonably designed for an ODFI in an ACH credit
15
transaction to identify and block or otherwise prevent or prohibit restricted transactions in
the ACH system.
2. Check collection systems
With regard to check collection systems, the proposed rule would provide an
exemption from the regulation's requirements for a check clearing house, the paying
bank (unless it is also the depositary bank), any collecting bank (other than the depositary
bank), and any returning bank. The proposal does not exempt the institution serving as
the depositary bank (i.e., the first U.S. institution to which a check is transferred, in this
case the institution receiving the check deposit from the gambling business) in a check
transaction. The depositary bank is typically in a position, through reasonable due
diligence, to take steps to ascertain the nature of the customer's business and ensure that
the customer relationship is not used for receiving restricted transactions.
The proposed rule would provide an exemption for the check clearing house
because the check clearing house generally does not have a direct relationship with either
the payor or the payee and would not be in a position to obtain information from either
party regarding the transaction that would permit the check clearing house to determine
whether a particular check was a restricted transaction.
F or similar reasons, the proposal would provide an exemption for a collecting
bank (other than the depositary bank) and a returning bank in a check collection
transaction. Collecting banks (other than the depositary bank) and returning banks are
intermediary banks that generally do not have a direct relationship with either the payor
or the payee in the check transaction and would not be in a position to obtain information
from either party that would permit them to determine whether a particular check was a
restricted transaction.
The proposal would also provide an exemption for the paying bank (unless the
paying bank is also the depositary bank). The paying bank is generally the bank by or
through which a check is payable and to which the check is sent for payment or
collection. In a restricted transaction, this would generally be the bank holding the
gambler's checking account. While the paying bank would have a direct relationship
with the payor, it would not be in a position to obtain information from the payor prior to
the transaction being settled. Checks are processed and paid by a paying bank's
automated systems according to the information contained in the magnetic ink character
recognition (MICR) line printed near the bottom of the check. The MICR line commonly
includes the bank's routing number, the customer's account number, the check number,
and the check amount, but does not contain any information regarding the payee. A
requirement to analyze manually each check with respect to the payee would
substantially increase processing times for all checks, including checks that are not
restricted transactions, and reduce the efficiency of the check collection systems.
Moreover, even if the payee information on checks is analyzed manually, it is very
difficult for a paying bank to determine whether the check is related to a restricted
16
transaction. If the paying bank is also the depositary bank (i.e., an "on-us" transaction),
the institution would still be required to comply with the regulations as a depositary bank.
3. Wire transfer systems
With regard to wire transfer systems, the proposal provides an exemption from
the regulation's requirements for the originator's bank (i.e., the depository institution
sending the wire transfer on behalf of the gambler) and intermediary banks (other than
the bank that sends the transfers to a foreign respondent bank as discussed below). The
proposal does not exempt the institution serving as the beneficiary's bank (i.e., the
institution receiving the wire transfer on behalf of the gambling business) in a particular
wire transfer system. The beneficiary's bank typically has a pre-existing relationship
with the customer receiving a particular wire transfer and, accordingly, is in a position,
through reasonable due diligence, to take steps to ascertain the nature of the customer's
business and assess the risk that the customer may be involved in restricted transactions.
The proposal would provide an exemption for intermediary banks because it is not
reasonably practical for institutions serving in this capacity in a wire transfer system to
identify and block a particular wire transfer as a restricted transaction under the Act.
The information normally relied upon by intermediary banks' automated systems in
processing a wire transfer does not typically include information that would enable those
systems to identify and block individual transfers as restricted transactions under the Act.
In addition, intermediary banks process tremendous volumes of wire transfers in seconds
or less on an automated basis, without manual intervention. A requirement to analyze
each transaction manually to determine whether it is a restricted transaction would
substantially increase processing times for all wire transfers, including transfers that are
not restricted transactions, and reduce the efficiency of the wire transfer systems.
Moreover, even if the beneficiary information in a wire transfer payment message is
analyzed manually, it is very difficult for an intermediary bank to determine whether the
wire transfer is related to a restricted transaction.
The Agencies also carefully considered whether to grant an exemption for
portions of a wire transfer system involving the originator's bank. Similar to an ODFI in
an ACH credit transaction, the originating customer in a particular wire transfer generally
has some direct interaction with the originating institution, so there could be an
opportunity for the originating institution to design a procedure to review an outgoing
wire transfer to determine whether it is a restricted transaction. For example, for each
wire transfer (or for each transfer originated by a consumer), the originator's bank could
require the originator to submit a statement that the wire transfer is not a restricted
transaction and a description of the nature and purpose of the transaction. This two-part
submission could be made in writing for in-person originations, orally for phone
originations, or on-line for automated originations. For the casual or impulse gambler,
requiring such a statement may cause the gambler to consider carefully (or to investigate)
whether the payment is legal and even whether engaging in gambling is prudent in light
of the gambler's personal circumstances.
17
The Agencies' preliminary view is that, while it may be possible, at least in some
cases, for an originating bank to obtain such a submission from the originator, any
associated benefits would likely be outweighed by the associated costs for reasons similar
to those described above regarding the exemption for ODFIs in ACH credit transactions.
The Agencies specifically request comment on whether it is reasonably practical
for an originator's bank and an intermediary bank in a wire transfer system to implement
policies and procedures (including, but not limited to, those discussed above) that would
likely be effective in identifying and blocking or otherwise prevent or prohibit restricted
transactions; whether the burden imposed by such policies and procedures on an
intermediary bank, an originator, and an originator's bank would outweigh any value
provided in preventing restricted transactions and a description of such burdens and
benefits; and whether any policies and procedures could reasonably be limited only to
consumer-initiated wire transfers and, if so, a description of any costs or benefits of so
limiting the requirement. If a commenter believes that the originator's bank or an
intermediary bank should not be exempted, the Agencies request that the commenter
provide examples of policies and procedures reasonably designed for institutions serving
in those functions to identify and block or otherwise prevent or prohibit restricted
transactions in a wire transfer system.
D. Processing of Restricted Transactions Prohibited
Section 5 of the proposed regulations expressly requires all non-exempt
participants in the designated payment systems to establish and implement policies and
procedures in order to identify and block, or otherwise prevent or prohibit, restricted
transactions. In accordance with the Act, section 5 states that a participant in a
designated payment system shall be considered in compliance with this requirement if the
designated payment system of which it is a participant has established policies and
procedures to prevent or prohibit restricted transactions and the participant relies on, and
complies with, the policies and procedures of the designated payment system. In other
words, the Act and the proposed rule permit non-exempt participants in a designated
payment system to either (i) establish their own policies and procedures to prevent or
prohibit restricted transactions; or (ii) rely on and comply with the policies and
procedures established by the designated payment system, so long as such policies and
procedures comply with the regulation.
Section 5 also imports the Act's liability provisions, which state that a person that
identifies and blocks, prevents, prohibits, or otherwise fails to honor a transaction is not
liable to any party for such action if (i) the transaction is a restricted transaction; (ii) such
person reasonably believes the transaction to be a restricted transaction; or (iii) the person
is a participant in a designated payment system and prevented the transaction in reliance
on the policies and procedures of the designated payment system in an effort to comply
with the regulation.
Finally, section 5 implements the Act's requirement that the Agencies ensure that
transactions in connection with any activity excluded from the Act's definition of
18
unlawful Internet gambling are not blocked or otherwise prevented or prohibited by the
regulations (the "overblocking" provision). Section 5 makes clear that nothing in the
regulation requires or is intended to suggest that non-exempt participants should block or
otherwise prevent or prohibit any transaction in connection with any activity that is
excluded from the definition of "unlawful Internet gambling" in the Act, such as
qualifying intrastate or intratribal transactions, or a transaction in connection with any
activi~ that is allowed under the Interstate Horseracing Act of 1978 (15 U.S.C. 3001 et
seq.). As noted above, it also seems clear that the Act was not intended to change the
legality of any gambling-related activity in the United States. 14 Consequently, the
proposed regulations neither require nor are intended to suggest that participants in
designated payment systems should establish policies and procedures to prevent any
Internet gambling transactions that are legal under applicable Federal and State law.
Some payment system operators have indicated that, for business reasons, they
have decided to avoid processing any gambling transactions, even if lawful, because,
among other things, they believe that these transactions are not sufficiently profitable to
warrant the higher risk they believe these transactions pose.1 5 The Agencies believe that
the Act does not provide the Agencies with the authority to require designated payment
systems or participants in these systems to process any gambling transactions, including
those transactions excluded from the Act's definition of unlawful Internet gambling, if a
system or participant decides for business reasons not to process such transactions. The
Agencies request comment on the proposed approach to implementing the Act's
overblocking provision.
E. Reasonably Designed Policies and Procedures
Section 6 of the proposed regulations sets out for each designated payment system
examples of policies and procedures the Agencies believe are reasonably designed to
prevent or prohibit restricted transactions for non-exempt participants in the system.
Generally, under the proposed rule, non-exempt participants in each designated payment
system should have policies and procedures that (i) address methods for conducting due
diligence in establishing and maintaining a commercial customer relationship designed to
ensure that the commercial customer does not originate or receive restricted transactions
through the customer relationship; and (ii) include procedures reasonably designed to
prevent or prohibit restricted transactions, including procedures to be followed with
respect to a customer if the participant discovers the customer has been engaging in
restricted transactions through its customer relationship. These procedures are discussed
in more detail below.
See the discussion of the interplay between the Interstate Horseracing Act and federal gambling statutes
contained in Footnote 1.
13
14
31 U.S.c. 5361(b).
Designated payment system representatives have informally indicated to the Agencies that many
participants in their systems prefer not to process gambling-rela~ed transactions.because th~y have
experienced higher-than-usuallosses due, for example, to assertIOns that gamblIng transactIOns were
"unauthorized."
15
19
1. Due diligence
The Agencies would expect non-exempt participants' policies and procedures
addressing due diligence to be consistent with their regular account-opening practices.
The Agencies anticipate that participants would use a flexible, risk-based approach in
their due diligence procedures in that the level of due diligence performed would match
the level of risk posed by the customer. The due diligence is intended to apply to a
participant when the participant is directly establishing or maintaining a customer
relationship, but not with respect to entities with which the participant does not have a
direct relationship. For example, if a card network operator does not act as the merchant
acquirer in the network, the operator would not be expected to conduct due diligence on
the merchant customers. This function should be performed by the member institutions
of the network that are acting as merchant acquirers. However, if a card network
operator also acted as the merchant acquirer, it should conduct the appropriate due
diligence on its merchants in establishing or maintaining the customer relationship. The
Agencies expect that the most efficient way for participants to implement the due
diligence procedures in the proposed rule would be to incorporate them into existing
account-opening due diligence procedures (such as those required of depository
institutions under Federal banking agencies' anti-money laundering compliance program
requirements).16
The due diligence requirements for a participant establishing a customer
relationship in an ACH system also apply to the establishment of a relationship with any
third-party sender. Before establishing a relationship with a third-party sender, a
participant should conduct appropriate due diligence with respect to the third-party
sender. A third-party sender should conduct due diligence on its customers to ensure that
it is not transmitting restricted transactions through an ODFI, and the ODFI should
confirm that the third-party sender conducts such due diligence on its originators. In
maintaining the customer relationship with the third-party sender, the participant should
ensure that there is a process to monitor the operations of the third-party sender, such as
by audit.
The Agencies request comment as to the appropriateness of participants
incorporating into their existing account-opening procedures the due diligence provisions
of the proposed rule. The Agencies also request comment on whether, and to what
extent, the proposed rule's examples of due diligence methods should explicitly include
periodic confirmation by the participants of the nature of their customers' business.
2. Remedial action
The Agencies also would expect a non-exempt participant to have policies and
procedures to be followed if the participant becomes aware that one of its customer
relationships was being used to process restricted transactions. These policies and
procedures could include a broad range of remedial options, such as imposing fines,
restricting the customer's access to the designated payment system or the participant's
facilities, and terminating the customer relationship by closing the account. In addition,
16
See. e.g., 12 CFR 208.63.
20
as provided in section 5(e) of the proposed rule, nothing in the proposed rule modifies
any existing legal requirement relating to the filing of suspicious activity reports with the
appropriate authorities. The Agencies request comment on the appropriateness of the
proposed rule's examples of a participant's procedures upon determining that a customer
is engaging in restricted transactions through the customer relationship, and whether any
additional such procedures should be included as examples.
A participant also would be expected to take appropriate remedial action with
respect to a business engaged in unlawful Internet gambling with which it does not have a
customer relationship if the participant becomes aware that the gambling business is
using the participant's trademark on its website to promote restricted transactions. For
example, the participant could consider taking legal action to prevent the unauthorized
use of its trademark by an unlawful Internet gambling business.
3. Monitoring
The policies and procedures of non-exempt participants in card systems and
money-transmitting businesses are expected to address ongoing monitoring or testing to
detect possible restricted transactions. Examples of such monitoring or testing include
(1) monitoring and analyzing payment patterns to detect suspicious patterns of payments
to a recipient, and (2) monitoring of web sites to detect unauthorized use of the relevant
designated payment system, including unauthorized use of the relevant designated
payment system's trademarks. Unlawful Internet gambling businesses may be able to
access a designated payment system (such as a money transmitting business) that would
otherwise deny them a commercial subscriber account, by using individuals as agents to
receive restricted transactions and may advertise the use of these systems on their
website. Certain money transmitting businesses have developed monitoring procedures
to detect suspicious payment volumes to an individual recipient in order to address this
risk. 17 In addition, certain money transmitting businesses subscribe to a service that will
search the Internet for unauthorized use of the money transmitting business's trademark.
The proposed rule does not include ongoing monitoring and testing within the
examples of the policies and procedures for ACH systems, check collection systems, and
wire transfer systems because these systems currently do not have the same level of
functionality for analyzing patterns of specific payments being processed through the
system. Moreover, as mentioned above, these three systems are open, universal systems
that do not require businesses to explicitly sign up in order to receive payments through
them. The Agencies request comment on whether ongoing monitoring and testing should
be included within the examples for the ACH, check collection, and wire transfer
systems, and, if so, how such functionality could reasonably be incorporated into those
systems. As a general matter, the Agencies will continue to monitor technological
developments in all payment systems, and, as those developments warrant, will engage in
17 As provided in the Act and the proposed rule, participants that are part of a money transmitting network
may be able to rely on the network's procedures in this regard if the participants determine that the
network's procedures comply with the requirements of the regulation as applied to the participant.
21
future rulemakings to address emerging means of identifying and blocking or otherwise
preventing or prohibiting restricted transactions in the designated payment systems.
4. Coding
The policies and procedures of participants in a card system are expected to
address methods for identifying and blocking restricted transactions as they are
processed, such as by establishing one or more transaction codes and merchantlbusiness
category codes that are required to accompany the authorization request from the
merchant for a transaction and creating the operational functionality to enable the card
system or the card issuer to identify and deny authorization for a restricted transaction.
Card systems may be able to develop one or more merchant category codes for gambling
transactions that are not restricted transactions under the Act. For example, in certain
cases it may be reasonably practical for card systems to develop merchant category codes
for particular types of lawful Internet gambling transactions. The Agencies specifically
seek comment on the practicality, effectiveness, and cost of developing such additional
merchant codes.
The proposed rule does not include specific methods for identifying and blocking
restricted transactions as they are being processed within the examples of procedures for
any designated payment system other than card systems because the Agencies believe
that only the card systems have the necessary capabilities and processes in place. The
Agencies request comment on whether the procedural examples for the other designated
payment systems should encompass identifying and blocking restricted transactions as
they are being processed, and, if so, how such functionality could reasonably be
incorporated into the systems. Again, the Agencies will monitor technological
developments in all payment systems, and engage in future rulemakings as warranted to
address emerging means of identifying and blocking or otherwise preventing or
prohibiting restricted transactions in the designated payment systems.
5. Cross-border relationships
Based on the Agencies' research and statements by industry representatives, the
Agencies believe that most unlawful Internet gambling businesses do not have direct
account relationships with U.S. financial institutions. In most cases, their accounts are
held at offshore locations of foreign institutions that are not subject to the Act, and
restricted transactions enter the U.S. payment system through those foreign institutions.
In two of the designated payment systems (card systems and money transmitting
businesses), the proposed rule does not provide exemptions for any participants and the
proposed rule's requirements would apply to all U.S. participants in both domestic and
cross-border transactions. In the case of ACR, check collection, and wire transfer
systems, exemptions are provided for certain participants and examples of special
policies and procedures for cross-border transactions are provided.
In general, in the case of U.S.-only transactions, for the ACR, check collection,
and wire transfer systems, the proposed rule would require the participant in a particular
22
payment system that has the direct relationship with the gambling business to have
policies and procedures to prevent or prohibit restricted transactions through these
systems. The other participants in each of these systems would otherwise be exempt
from the requirements of the regulation. In the case of payment transactions for the
benefit of offshore gambling businesses, none of the participants in the United States that
process the transaction would have a direct relationship with the gambling business that
receives the payment and would, under the general regulatory requirements, be exempt
and not required to have policies and procedures to prevent or prohibit restricted
transactions.
In the case of incoming cross-border ACH debit and check collection transactions,
the proposed rule places responsibility on the first participant in the United States that
receives the incoming transaction directly from a foreign institution (i.e., an ACH debit
transaction from a foreign gateway operator, foreign bank, or a foreign third-party
processor or a check for collection directly from a foreign bank) to take reasonable steps
to ensure that their cross-border relationship is not used to facilitate restricted
transactions. 18 Participants in such arrangements should take steps to prevent their
foreign counterparty from sending restricted transactions through the participant, such as
including as a term of its contractual agreement with the foreign institution a requirement
that the foreign institution have policies and procedures in place to avoid sending
restricted transactions to the U.S. participant. In addition, the U.S. participant's policies
and procedures would be deemed compliant with the regulation if they also include
procedures to be followed with respect to a foreign bank or foreign third-party processor
that is found to have transmitted restricted transactions to, or received restricted
transactions through, the participant. These policies and procedures might address (i)
when access through the cross-border relationship should be denied and (ii) the
circumstances under which the cross-border relationship should be terminated.
In the case of outgoing wire transfers and ACH credit transactions, a transfer by a
U.S. gambler to a foreign Internet gambling business would be initiated in the United
States and be sent or credited to an account at the gambling business's foreign bank. In
this case, the originator's bank or the intermediary bank in the U.S. that sends the wire
transfer transaction, or the gateway operator that sends the ACH credit entry, directly to a
foreign bank should have policies and procedures in place to be followed if such transfers
to a particular foreign bank are subsequently determined to be restricted transactions. 19
18 In an incoming cross-border ACH debit transaction, if the first participant in the United States is an ACH
operator (not an ODFI), the proposed rule makes clear that, while serving in the capacity of a receiving
gateway operator, the ACH operator is not exempt from the general requirement to have policies and
procedures reasonably designed to identify and block, or otherwise prevent or prohibit, restricted
transactions.
19 The proposed rule makes clear that the originator's bank or the intermediary bank in the United States
that directly sends a cross-border wire transfer to a foreign bank, while acting in that capacity, is not
exempt from the general requirement to have policies and procedures reasonably designed to identify and
block or otherwise prevent or prohibit restricted transactions. Similarly, in an outgoing cross-border ACH
credit transaction, the ACH operator in the United States, acting as the originating gateway operator, that
directly sends the transaction to a foreign gateway operator is not exempt from the general policies and
procedures requirement while acting in that capacity.
23
For example, some Internet gambling businesses indicate on their websites the U.S.
correspondent bank through which wire transfers to them must be made. In such cases,
the U.S. participant should consider whether wire transfer services or the correspondent
arrangement should continue.
The Agencies recognize that the issue of the extent of a bank's responsibility to
have knowledge of its respondent banks' customers is a difficult one, which also arises in
the context of managing money laundering and other risks that may be associated with
correspondent banking operations. The Agencies specifically request comment on the
likely effectiveness and burden of the proposed rule's due diligence and remedial action
provisions for cross-border arrangements, and whether alternative approaches would
increase effectiveness with the same or less burden.
6. List of unlawful Internet gambling businesses
The Act does not mention the creation of a list of unlawful Internet gambling
businesses. However, the Agencies are aware that there is some interest in exploring this
idea. The Agencies considered including in the proposed rule's examples of reasonably
designed policies and procedures, examination of a list that would be established by the
U.S. Government of businesses known to be engaged in the business of unlawful Internet
gambling. Some have suggested that the obligation of financial institutions with respect
to such a list might be similar in effect to their obligations under certain other U.S. laws,
such as those administered by the Office of Foreign Assets Control (OFAC), albeit in a
different context. 20 Some have also suggested that the list could be either available
publicly in its entirety, so that financial transaction providers could check transactions
against the list themselves, or maintained confidentially at a central location, so that
financial transaction providers could submit transactions to the entity operating the
central database, which would inform the financial transaction providers whether the
transaction involved an unlawful Internet gambling business on its list. Proponents of the
list suggest that under either of these approaches, certain restricted transactions directed
to unlawful Internet gambling accounts could be blocked.
Any government agency compiling and providing public access to such a list
would need to ensure that the particular business was, in fact, engaged in activities
deemed to be unlawful Internet gambling under the Act. This would require significant
investigation and legal analysis. Such analysis could be complicated by the fact that the
legality of a particular Internet gambling transaction might change depending on the
location of the gambler at the time the transaction was initiated, and the location where
the bet or wager was received. In addition, a business that engages in unlawful Internet
gambling might also engage in lawful activities that are not prohibited by the Act. The
government would need to provide an appropriate and reasonable process to avoid
inflicting unjustified harm to lawful businesses by incorrectly including them on the list
without adequate review. The high standards needed to establish and maintain such a list
likely would make compiling such a list time-consuming and perhaps under-inclusive.
20
H. Rep. No. 109-412, Part 1, p.1l.
24
To the extent that Internet gambling businesses can change the names they use to receive
payments with relative ease and speed, such a list may be outdated quickly.
The Agencies do not enforce the gambling laws, and interpretations by the
Agencies in these areas may not be determinative in defining the Act's legal coverage.
As noted above, the Act does not comprehensively or clearly define which activities are
lawful and which are unlawful, but rather relies on underlying substantive law. 21 In order
to compile a list of businesses engaged in unlawful Internet gambling under the Act, the
Agencies would have to formally interpret the various Federal and State gambling laws in
order to determine whether the activities of each business that appears to conduct some
type of gambling-related function are unlawful under those statutes.
The Agencies request comment on whether establishment and maintenance of
such a prohibited list by the Agencies is appropriate, and whether examining or accessing
such a list should be included in the regulation's examples of policies and procedures
reasonably designed to identify and block or otherwise prevent or prohibit restricted
transactions. The Agencies also request comment on whether, if it were practical to
establish a fairly comprehensive list and a participant routinely checked the list to make
sure the indicated payee of each transaction the participant processed on a particular
designated payment system is not on the list, the participant should be deemed to have,
without taking any other action, policies and procedures reasonably designed to prevent
or prohibit restricted transactions with respect to that designated payment system.
Similarly, the Agencies also request comment on whether, if such a list were established
and a participant routinely checked the list to make sure a prospective commercial
customer was not included on the list (as well as perhaps periodically screening existing
commercial customers), the participant should be deemed to have, without taking any
other action, policies and procedures reasonably designed to prevent or prohibit restricted
transactions. Finally, assuming such a list were established and became available to all
participants in the designated payment systems, the Agencies request comment on the
extent to which the exemptions provided in section 4 of the proposed rule should be
narrowed.
Any commenter that believes that such a list should be included in the
regulation's examples of policies and procedures is requested to address the issues
discussed above regarding establishing, maintaining, updating, and using such a list. The
Agencies also request comment on any other practical or operational aspects of
establishing, maintaining, updating, or using such a list. Finally, the Agencies request
comment on whether relying on such a list would be an effective means of carrying out
the purposes of the Act, if unlawful Internet gambling businesses can change their
corporate names with relative ease.
21
See H.R. Rep. No. 109-412, at 10 (2006).
25
F. Regulatory Enforcement
As provided in the Act, section 7 of the proposed rule indicates that the
requirements ofthe Agencies' rule would be subject to the exclusive regulatory
enforcement of (1) the Federal functional regulators, with respect to the designated
payment systems and participants therein that are subject to the respective jurisdiction of
such regulators under section 505(a) of the Gramm-Leach-Bliley Act and section 5g of
the Commodity Exchange Act; and (2) the Federal Trade Commission, with respect to
designated payment systems and financial transaction providers not otherwise subject to
the jurisdiction of any Federal functional regulators.
III.
Administrative Law Matters
A. Executive Order 12866
It has been determined that this regulation is a significant regulatory action as
defined in E.O. 12866. Accordingly, this proposed regulation has been reviewed by the
Office of Management and Budget. The Regulatory Assessment prepared by the
Treasury for this regulation is provided below.
1. Description of Need for the Regulatory Action
The rulemaking is required by the Act, the applicable provisions of which are
designed to interdict the flow of funds between gamblers and unlawful Internet gambling
businesses. To accomplish this, the Act requires the Agencies, in consultation with the
Attorney General, to jointly prescribe regulations requiring designated payment systems
(and their participants) to establish policies and procedures that are reasonably designed
to prevent or prohibit such funding flows (hereafter "unlawful Internet gambling
transacti ons,,)?2
In accordance with the Act, section 3 of the proposed rule designates five
payment systems that could be used in connection with unlawful Internet gambling
transactions. Sections 5 and 6 of the proposed rule require designated payment systems
and participants in those payment systems to establish reasonably designed policies and
procedures to identify and block or otherwise prevent or prohibit unlawful Internet
gambling transactions. As required by the Act, section 4 of the proposed rule exempts
certain participants in designated payment systems from the requirement to establish
policies and procedures because the Agencies believe that it is not reasonably practical
for those participants to prevent or prohibit unlawful Internet gambling transactions. As
required by the Act, section 6 of the proposed rule also contains a "safe harbor" provision
by including non-exclusive examples of policies and procedures which would be deemed
to be reasonably designed to prevent or prohibit unlawful Internet gambling transactions
within the meaning of the Act.
2231 V.S.c. 5364.
26
2. Assessment of Potential Benefits and Costs
a. Potential Benefits
Congress determined that Internet gambling is a growing cause of debt collection
problems for insured depository institutions and the consumer credit industry?3 Further,
Congress determined that there is a need for new mechanisms for enforcing Internet
gambling laws because traditional law enforcement mechanisms are often inadequate for
enforcing gambling prohibitions or regulations on the Internet, especially where such
gambling crosses State or national borders. 24 Sections 5 and 6 of the proposed rule
address this by requiring participants in designated payment systems, which include
insured depository institutions and other participants in the consumer credit industry, to
establish reasonably designed policies and procedures to identify and block or otherwise
prevent or prohibit unlawful Internet gambling transactions in order to stop the flow of
funds to unlawful Internet gambling businesses. This funds flow interdiction is designed
to inhibit the accumulation of consumer debt and to reduce debt collection problems for
insured depository institutions and the consumer credit industry. Moreover, the proposed
rule carries out the Act's goal of implementing new mechanisms for enforcing Internet
gambling laws. The proposed rule will likely provide other benefits. Specifically, the
proposed rule could restrict excesses related to unlawful Internet gambling by under-age,
addicted or compUlsive gamblers.
The Treasury also examined the potential benefits of the establishment by the
U.S. Government of a list of entities that it determines are engaged in the business of
"unlawful Internet gambling." While the Treasury understands that interest exists in such
a list, we have tentatively concluded that the benefits of the list as an effective tool for
use by regulated entities to identify and block or otherwise prevent or prohibit unlawful
Internet gambling transactions is uncertain relative to the likely costs involved in creating
such a list.
Establishing a list of unlawful Internet gambling businesses would be a time
consuming process given the fact-finding and legal analysis that would be required. For
example, the names of the businesses directly receiving unlawful Internet gambling
payments are often not readily identifiable from their gambling websites. As a result, the
Government would have to engage in fact-finding to identify the name of each unlawful
Internet gambling business and its associated bank account numbers and bank. In
addition, to avoid inflicting unjustified harm on lawful businesses by erroneously
including them on the list, the Government would likely need to provide businesses with
advance notice and a reasonable opportunity to contest their potential inclusion on the
list. This process could result in a considerable lag time between the U.S. Government
first identifying a gambling website and ultimately adding the name of an unlawful
Internet gambling business to the list. Because it is possible for unlawful Internet
23
31 U.S.C. 5361(a)(3).
24
31 U.S.c. 5361(a)(4).
27
gambling businesses, particularly those located in foreign countries with foreign bank
accounts, to change with relative ease the business names and bank accounts of entities
directly receiving restricted transactions, the list of unlawful Internet gambling businesses
could be quickly outdated and thus have limited practical utility as an effective tool for
regulated entities to prevent unlawful Internet gambling transactions.
b. Potential Costs
Treasury believes that the costs of implementing the Act and the proposed rule are
lower than they would be if the Act and the proposed rule were to require a prescriptive,
one-size-fits-all approach with regard to regulated entities. First, both the Act and section
5 of the proposed rule provide that a financial transaction provider shall be considered to
be in compliance with the regulations if it relies on and complies with the policies and
procedures of the designated payment system of which it is a participant. This means that
regulated entities will not be required to establish their own policies and procedures but
can instead follow the policies and procedures of the designated payment system, thereby
resulting in lower costs.
Second, with regard to regulated entities that establish their own policies and
procedures, both the Act and sections 5 and 6 of the proposed rule provide maximum
flexibility. Specifically, neither the Act nor the proposed rule contain specific
performance standards but instead require that such policies and procedures be
"reasonably designed" to identify and block or otherwise prevent or prohibit unlawful
internet gambling. In addition, the proposed rule expressly authorizes each regulated
entity to use policies and procedures that are "specific to its business" which will enable
it to efficiently tailor its policies and procedures to its needs. Because the Act and the
proposed rule provide flexibility for regulated entities in crafting their policies and
procedures, allowing them to tailor their policies and procedures to their individual
circumstances, the costs imposed by the Act on regulated entities should be lower than if
the Act and the proposed rule were to take a prescriptive one-size-fits-all approach.
Third, the "safe harbor" provision, with its nonexclusive examples of policies and
procedures deemed to be "reasonably designed," provides regulated entities with specific
guidance on how to structure the policies and procedures required by the Act. As a
result, costs associated with formulating policies and procedures should be lower because
the safe harbor provision provides guidance on how to so structure the policies and
procedures.
Because the Treasury does not have sufficient information to quantify reliably the
costs of developing specific policies and procedures, the Treasury seeks information and
comment on any costs, compliance requirements, or changes in operating procedures
arising from the application of the proposed rule. Moreover, the Treasury anticipates that
the Agencies will contact trade groups representing participants, partiCUlarly those that
qualify as small entities, and encourage them to provide comments during the comment
period to ascertain, among other things, the costs imposed by this rulemaking.
28
Once the policies and procedures have been developed, however, the Treasury
believes the burden of this rulemaking will be relatively low. It is estimated that the
recordkeeping requirement required by the Act and the proposed rule will take
approximately one hour per recordkeeper per year to maintain the policies and procedures
required by this rulemaking. It is estimated that the total annual cost to regulated entities
to maintain the policies and procedures will be approximately $4 million. 25
The Treasury also considered the potential costs to the U.S. Government of
establishing a list of unlawful Internet gambling businesses, and has initially determined
that such costs would likely be significant. This is because establishing a list would
require considerable fact-finding and legal analysis once the U.S. Government identifies
a gambling website. The Government must engage in an extensive legal analysis to
determine whether the gambling website is used, at least in part, to place, receive or
otherwise knowingly transmit unlawful bets or wagers. This legal analysis would entail
interpreting the various Federal and State gambling laws, which could be complicated by
the fact that the legality of a particular Internet gambling transaction might change
depending on the location of the gambler at the time the transaction was initiated and the
location where the bet or wager was received. The U.S. Government would at the same
time also need to identify the business name and the bank account number and bank of
the entity directly receiving payments on behalf of the Internet gambling business, which
is often not readily ascertainable from the website. Identifying the business name and
bank account number of the entity directly receiving unlawful Internet gambling
payments might be challenging, especially where the Internet gambling business is
located in and maintains its bank accounts in a foreign country. Once the fact-finding
and legal analysis are concluded successfully, the U.S. Government might then need to
afford the business advance notice and an opportunity to object to its potential inclusion
on the list in order to ensure that lawful businesses are not harmed by being erroneously
included on the list. These due process safeguards would result in considerable added
costs to the U.S. Government.
2.
Interference with State, Local, and Tribal Governments
The Act does not alter State, local or tribal gaming law. 26 In addition, the Act
exempts from the definition of the term "unlawful Internet gambling," intrastate,
intratribal, and intertribal gambling transactions?? Because the proposed rule does not
This estimate is based on an estimate of 270,721 recordkeepers. The hourly cost of the person who
would be responsible for maintaining the policies and procedures is estimated to be $14.60 per hour (based
on the U.S. Department of Labor, Bureau of Labor Statistics' occupational employment statistics for office
and administrative support occupations, dated May 2006).
25
26 Specifically, the Act defines the term "unlawful Internet gambling" as a bet or wager, which involves at
least in part the use of the Internet, where such bet or wager is unlawful under any applicable Federal or
State law in the State or Tribal lands in which the bet or wager is initiated, received, or otherwise made.
31 U.S.C. 5362(1O)(A).
27
31 U.S.c. 5362(10)(B) and (C).
29
alter these defined tenns, it avoids undue interference with State, local , and tribal
governments in the exercise of their governmental functions.
B. Regulatory Flexibility Act Analysis
Congress enacted the Regulatory Flexibility Act (RFA) (5 U.S.c. 601 et seq.) to
address concerns related to the effects of agency rules on small entities and the Agencies
are sensitive to the impact their rules may impose on small entities. In this case, the
Agencies believe that the proposed rule likely would not have a "significant economic
impact on a substantial number of small entities." 5 U.S.C. 605(b). The Act mandates
that the Agencies jointly prescribe regulations requiring designated payment systems, and
all participants therein, to identify and block or otherwise prevent or prohibit restricted
transactions through the establishment of reasonably designed policies and procedures.
Comments are requested on whether the proposed rule would have a significant economic
impact on a substantial number of small entities and whether the costs are imposed by the
Act itself, and not the proposed rule.
The RF A requires agencies either to provide an initial regulatory flexibility
analysis with a proposed rule or to certify that the proposed rule will not have a
significant economic impact on a substantial number of small entities. In accordance
with section 3(a) of the RFA, the Agencies have reviewed the proposed regulation;
While the Agencies believe that the proposed rule likely would not have a significant
economic impact on a substantial number of small entities (5 U.S.C. 605(b», the
Agencies do not have complete data at this time to make this detennination. Therefore,
an Initial Regulatory Flexibility Analysis has been prepared in accordance with 5 U.S.c.
603. The Agencies will, if necessary, conduct a final regulatory flexibility analysis after
consideration of comments received during the public comment period.
1.
Statement of the need for, objectives of, and legal basis for, the proposed rule.
The Agencies are proposing a regulation to implement the Act, as required by the
Act. The Act prohibits any person in the business of betting or wagering (as defined in
the Act) from knowingly accepting payments in connection with the participation of
another person in unlawful Internet gambling. Section 802 of the Act (codified at 31
U.S.C. 5361 et seq.) requires the Agencies jointly (in consultation with the Attorney
General) to designate payment systems that could be used in connection with, or to
facilitate, restricted transactions and to prescribe regulations requiring designated
payment systems, and financial transaction providers participating in each designated
payment system, to establish policies and procedures reasonably designed to identify and
block or otherwise prevent or prohibit restricted transactions. The proposed regulation
sets out necessary definitions, designates payment systems that could be used in
connection with restricted transactions, exempts participants providing certain functions
in designated payment systems from certain requirements imposed by the regulation,
provides nonexclusive examples of policies and procedures reasonably designed to
identify and block, or otherwise prevent and prohibit, restricted transactions, and
reiterates the enforcement regime set out in the Act for designated payment systems and
30
non-exempt participants therein. The Agencies believe that the proposed regulation
implements Congress's requirement that the Agencies prescribe regulations that carry out
the purposes of the Act.
2.
Small entities affected by the proposed rule
The proposed rule would affect non-exempt financial transaction providers
participating in the designated payment systems, regardless of size. The Agencies
estimate that 4,792 small banks (out of a total of 8,192 banks), 420 small savings
associations (out of a total of 838), 7,609 small credit unions (out of a total of 8,477), and
240,547 small money transmitting businesses (out ofa total of253,208) would be
affected by this proposed rule. Pursuant to regulations issued by the Small Business
Administration (13 CFR 121-201), a "small entity" includes a commercial bank, savings
association or credit union with assets of$165 million or less. For money transmitting
businesses, a "small entity" would include those with assets of $6.5 million or less. The
Agencies propose that the requirements in this rule be applicable to all entities subject to
the Act, as implemented, regardless of their size because an exemption for small entities
would significantly diminish the usefulness of the policies and procedures required by the
Act by permitting unlawful Internet gambling operations to evade the requirements by
using small financial transaction providers. The Agencies anticipate, however, that, as
provided in the Act and the proposed regulations, small non-exempt participants in some
designated payment systems, to a large extent, should be able to rely on policies and
procedures established and implemented by the designated payment systems of which
they are participants or other existing systems. The Agencies seek information and
comment on the number of small entities to which the proposed rule would apply.
3. Projected reporting, recordkeeping, and other compliance requirements
Section 802 of the Act requires the Agencies to prescribe regulations requiring
each designated payment system, and all financial transaction providers participating in
the designated payment system, to identify and block or otherwise prevent or prohibit
restricted transactions through the establishment of policies and procedures reasonably
designed to identify and block or otherwise prevent or prohibit the acceptance of
restricted transactions. The proposed rule implements this requirement by requiring all
non-exempt participants in designated payment systems to establish and implement
policies and procedures reasonably designed to identify and block or otherwise prevent or
prohibit restricted transactions. Because the Agencies do not have sufficient information
to quantify reliably the effects the Act and the proposed rule would have on small
entities, the Agencies seek information and comment on any costs, compliance
requirements, or changes in operating procedures arising from the application of the
proposed rule and the extent to which those costs, requirements, or changes are in
addition to or different from those arising from the application of the Act generally.
Moreover, the Agencies anticipate contacting trade groups representing participants that
qualify as small entities and encouraging them to provide comments during the comment
period to ascertain, among other things, the costs imposed on regulated small entities.
31
4. Identification of duplicative, overlapping, or conflicting Federal rules
The Agencies have not identified any Federal rules that duplicate, overlap, or
conflict with the proposed rule. The Agencies seek comment regarding any statutes or
regulations that would duplicate, overlap, or conflict with the proposed rule.
5.
Significant alternatives to the proposed rule
Other than as noted above, the Agencies are unaware of any significant
alternatives to the proposed rule that accomplish the stated objectives of the Act and that
minimize any significant economic impact of the proposed rule on small entities. The
Agencies request comment on additional ways to reduce regulatory burden associated
with this proposed rule.
C.
Paperwork Reduction Act Analysis
The collection of information requirement contained in this notice of joint
proposed rulemaking has been submitted by the Agencies to the Office of Management
and Budget (OMB) for review in accordance with the Paperwork Reduction Act of 1995
(44 U.S.C. 3507(d». Comments on the collection of information should be sent to the
Office of Management and Budget, Attention: Desk Officer for the Department of the
Treasury and the Board of Governors of the Federal Reserve System, Office of
Information and Regulatory Affairs, Washington, D.C., 20503, with copies to Treasury's
Office of Critical Infrastructure Protection and Compliance Policy and the Board's
Secretary at the addresses previously specified. Because OMB must complete its review
of the collection of information between 30 and 60 days after publication, comments on
the information collection should be submitted not later than [insert 30 days from date of
publication]. Comments are specifically requested concerning:
(1) Whether the proposed information collection is necessary for the proper
performance of Agency functions, including whether the information will have practical
utility;
(2) The accuracy of the estimated burden associated with the proposed collection
of information (see below);
(3) How to enhance the quality, utility, and clarity of the information required to
be maintained;
(4) How to minimize the burden of complying with the proposed information
collection, including the application of automated collection techniques or other forms of
information technology; and
(5) Estimates of capital or start-up costs and costs of operation, maintenance, and
purchase of services to maintain the information.
32
The collection of information in the proposed rule is in sections 5 and 6. This
information is required by section 802 of the Act, which requires the Agencies to
prescribe joint regulations requiring each designated payment system, and all participants
in such systems, to identify and block or otherwise prevent or prohibit restricted
transactions through the establishment of policies and procedures reasonably designed to
identify and block or otherwise prevent or prohibit the acceptance of restricted
transactions. The proposed rule implements this requirement by requiring all non-exempt
participants in designated payment systems to establish and implement written policies
and procedures reasonably designed to identify and block or otherwise prevent or prohibit
restricted transactions. The proposed rule does not include a specific time period for
record retention, however, non-exempt participants would be required to maintain the
policies and procedures for a particular designated payment system as long as they
participate in that system.
The Agencies anticipate that, as provided in the Act and the proposed regulations,
small non-exempt participants in designated payment systems, for the most part, should
be able to rely on policies and procedures established and implemented by the designated
payment systems of which they are participants. For example, certain money
transmitting business operators may have their own centralized procedures to prevent
unlawful gambling transactions. Small money transmitters, acting as agents in these
large systems, may be able to rely on the system's policies, and therefore would not have
to create their own.
Many of the payment systems used by depository institutions, such as check
clearing, do not have centralized system operators. Therefore, depository institutions
would likely have to create their own policies for check clearing.
The likely recordkeepers are businesses or other for-profits and not-for-profit
institutions and include commercial banks, savings associations, credit unions, card
servicers, and money transmitting businesses. The Agencies have agreed to split equally
for burden calculations the total number of recordkeepers not subject to examination and
supervision by either the Board or the Treasury's Office of the Comptroller of the
Currency and Office of Thrift Supervision.
Board:
Estimated number of recordkeepers: 134,451.
Estimated average annual burden hours per recordkeeper: 25 hours for depository
institutions and card servicers, I hour for money transmitting businesses.
Estimated frequency: annually.
Estimated total annual recordkeeping burden: 322,779 hours.
Treasury:
Estimated number of recordkeepers: 136,270.
Estimated average annual burden hours per recordkeeper: 25 hours for depository
institutions and card servicers, 1 hour for money transmitting businesses.
Estimated frequency: annually.
33
Estimated total annual recordkeeping burden: 368,254 hours.
The initial burden is imposed by the Act which requires non-exempt participants to
establish policies and procedures. The Agencies estimate that this initial burden will
average 24 hours per recordkeeper for depository institutions and card servicers. The
Agencies also estimate that the annual burden of maintaining the policies and procedures
once they are established will be 1 hour per recordkeeper. 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 OMB.
D. Plain Language
Each Federal banking agency, such as the Board, is required to use plain language
in all proposed and final rulemakings published after January 1,2000. 12 U.S.C. 4809.
In addition, in 1998, the President issued a memorandum directing each agency in the
Executive branch, such as Treasury, to use plain language for all new proposed and final
rulemaking documents issued on or after January 1, 1999. The Agencies have sought to
present the proposed rule, to the extent possible, in a simple and straightforward manner.
The Agencies invite comment on whether there are additional steps that could be taken to
make the proposed rule easier to understand, such as with respect to the organization of
the materials or the clarity of the presentation.
IV.
Statutory Authority
Pursuant to the authority set out in the Act and particularly section 802 (codified
at 31 U.S.C. 5361 et seq.), the Board and the Treasury jointly propose the common rules
set out below.
V.
Text of Proposed Rules
List of Subjects
12 CFR Part 233
[Banks, Banking, Electronic Funds Transfers, Incorporation by Reference,
Internet Gambling, Payments, Recordkeeping]
31 CFR Part 132
[Banks, Banking, Electronic Funds Transfers, Incorporation by Reference,
Internet Gambling, Payments, Recordkeeping]
Federal Reserve System
Authority and Issuance
For the reasons set forth in the preamble, the Board proposes to amend Title 12,
Chapter II of the Code of Federal Regulations by adding a new part 233 as set forth under
Common Rules at the end of this document:
34
PART 233 - PROHIBITION ON FUNDING OF UNLAWFUL INTERNET
GAMBLING (REGULATION GG)
Sec.
233.1 Authority, Purpose, and Incorporation by Reference.
233.2 Definitions.
233.3 Designated Payment Systems.
233.4 Exemptions.
233.5 Processing of Restricted Transactions Prohibited.
233.6 Policies and Procedures.
233.7 Regulatory Enforcement.
Authority: 31 U.S.c. 5364.
Department of the Treasury
Authority and Issuance
F or the reasons set forth in the preamble, Treasury proposes to amend Title 31,
Chapter I of the Code of Federal Regulations by adding a new part 132 as set forth under
Common Rules at the end of this document:
PART 132 - PROHIBITION ON FUNDING OF UNLAWFUL INTERNET
GAMBLING
Sec.
132.1 Authority, Purpose, and Incorporation by Reference.
132.2 Definitions.
132.3 Designated Payment Systems.
132.4 Exemptions.
132.5 Processing of Restricted Transactions Prohibited.
132.6 Policies and Procedures.
35
132.7 Regulatory Enforcement.
Authority: 31 U.S.C. 321 and 5364.
Common Rules
The common rules that are proposed to be adopted by the Board as part 233 of
Title 12, Chapter II of the Code of Federal Regulations and by Treasury as part 132 of
Title 31, Chapter I of the Code of Federal Regulations follow:
§_.1 Authority, Purpose, and Incorporation by Reference.
(a) Authority. This part is issued jointly by the Board of Governors of the Federal
Reserve System (Board) and the Secretary of the Department of the Treasury
(Treasury) under section 802 of the Unlawful Internet Gambling Enforcement Act
of2006 (Act) (enacted as Title VIII of the Security and Accountability For Every
Port Act of2006, Pub. L. No. 109-347, 120 Stat. 1884, and codified at 31 U.S.C.
5361 - 5367).
(b) Purpose. The purpose of this part is to issue implementing regulations as required
by the Act. The part sets out necessary definitions, designates payment systems
subject to the requirements of this part, exempts certain participants in designated
payment systems from certain requirements of this part, provides nonexclusive
examples of policies and procedures reasonably designed to identify and block, or
otherwise prevent and prohibit, restricted transactions, and sets out the Federal
entities that have exclusive regulatory enforcement authority with respect to the
designated payments systems and non-exempt participants therein.
(c) Incorporation by reference-relevant definitions from ACH rules.
(1) This part incorporates by reference the relevant definitions of ACH terms as
published in the "2007 ACH Rules: A Complete Guide to Rules &
Regulations Governing the ACH Network" (the "ACH Rules"). The Director
of the Federal Register approves this incorporation by reference in accordance
with 5 U.S.c. 552(a) and 1 CFR part 51. Copies ofthe "2007 ACH Rules"
are available from the National Automated Clearing House Association, Suite
100, 13450 Sunrise Valley Drive, Herndon, Virginia 20171 (703/561-1100).
Copies also are available for public inspection at the Department of Treasury
Library, Room 1428, Main Treasury Building, 1500 Pennsylvania Avenue,
N.W., Washington, D.C. 20220, and the National Archives and Records
Administration (NARA). Before visiting the Treasury library, you must call
(202) 622-0990 for an appointment. For information on the availability of this
material at NARA, call 202-741-6030, or go to:
http://www.archives.gov/federal register/code of federal regulationslibr loc
ations.html 20002.
36
(2) Any amendment to definitions of the relevant ACH terms in the ACH Rules
shall not apply to this part unless the Treasury and the Board jointly accept
such amendment by publishing notice of acceptance of the amendment to this
part in the Federal Register. An amendment to the definition of a relevant
ACH term in the ACH Rules that is accepted by the Treasury and the Board
shall apply to this part on the effective date of the rulemaking specified by the
Treasury and the Board in the joint Federal Register notice expressly
accepting such amendment.
§_.2 Definitions.
(a) Automated clearing house system or ACH system means a funds transfer system,
primarily governed by the ACH Rules, which provides for the clearing and
settlement ofbatched electronic entries for participating financial institutions.
When referring to ACH systems, the terms in this regulation (such as "originating
depository financial institution," "operator," "originating gateway operator,"
"receiving depository financial institution," "receiving gateway operator," and
"third-party sender") are defined as those terms are defined in the ACH Rules.
(b) Bet or wager
(1) Means the staking or risking by any person of something of value upon the
outcome or a contest of others, a sporting event, or a game subject to chance,
upon an agreement or understanding that the person or another person will
receive something of value in the event of a certain outcome;
(2) Includes the purchase of a chance or opportunity to win a lottery or other prize
(which opportunity to win is predominantly subject to chance);
(3) Includes any scheme of a type described in 28 U.S.c. 3702;
(4) Includes any instructions or information pertaining to the establishment or
movement of funds by the bettor or customer in, to, or from an account with
the business of betting or wagering (which does not include the activities of a
financial transaction provider, or any interactive computer service or
telecommunications service); and
(5) Does not include(i)
Any activity governed by the securities laws (as that term is defined in
section 3(a)(47) of the Securities Exchange Act of 1934 (15 U.S.C.
78c(a)(47)) for the purchase or sale of securities (as that term is defined
in section 3(a)(10) of that act (15 U.S.C. 78c(a)(10));
37
(ii) Any transaction conducted on or subject to the rules of a registered entity
or exempt board of trade under the Commodity Exchange Act (7 U.S.C.
1 et seq.);
(iii) Any over-the-counter derivative instrument;
(iv) Any other transaction that(A) Is excluded or exempt from regulation under the Commodity
Exchange Act (7 U.S.C. 1 et seq.); or
(B) Is exempt from State gaming or bucket shop laws under section 12(e)
of the Commodity Exchange Act (7 U.S.c. 16(e)) or section 28(a) of
the Securities Exchange Act of 1934 (15 U.S.C. 78bb(a));
(v)
Any contract of indemnity or guarantee;
(vi) Any contract for insurance;
(vii) Any deposit or other transaction with an insured depository institution;
(viii)Participation in any game or contest in which participants do not stake or
risk anything of value other than(A) Personal efforts of the participants in playing the game or contest or
obtaining access to the Internet; or
(B) Points or credits that the sponsor of the game or contest provides to
participants free of charge and that can be used or redeemed only for
participation in games or contests offered by the sponsor; or
(ix) Participation in any fantasy or simulation sports game or educational
game or contest in which (if the game or contest involves a team or
teams) no fantasy or simulation sports team is based on the current
membership or an actual team that is a member of an amateur or
professional sports organization (as those terms are defined in
28 U.S.c. 3701) and that meets the following conditions:
(A) All prizes and awards offered to winning participants are established
and made known to the participants in advance of the game or contest
and their value is not determined by the number of participants or the
amount of any fees paid by those participants.
(B) All winning outcomes reflect the relative knowledge and skill of the
participants and are determined predominantly by accumulated
statistical results of the performance of individuals (athletes in the case
38
of sports events) in multiple real-world sporting or other events.
(C) No winning outcome is based-
ill On the score, point-spread, or any performance or performances of
any single real-world team or any combination of such teams, or
ruSolely on any single performance of an individual athlete in any
single real-world sporting or other event.
(c) Card issuer means any person who issues a credit card, debit card, pre-paid card,
or stored value product, or the agent of such person with respect to such card or
product.
(d) Card system means a system for clearing and settling transactions in which credit
cards, debit cards, pre-paid cards, or stored value products, issued or authorized
by the operator of the system, are used to purchase goods or services or to obtain
a cash advance.
(e) Check clearing house means an association of banks or other payors that regularly
exchange checks for collection or return.
(f) Check collection system means an interbank system for collecting, presenting,
returning, and settling checks or intrabank system for settling checks deposited in
and drawn on the same bank. When referring to check collection systems, the
terms in this regulation (such as "paying bank," "collecting bank," "depositary
bank," "returning bank," and "check") are defined as those terms are defined in
12 CFR 229.2. For purposes of this part, "check" also includes an electronic
representation of a check that a bank agrees to handle as a check.
(g) Consumer means a natural person.
(h) Designated payment system means a system listed in §_.3.
(i) Electronic fund transfer has the same meaning given the term in section 903 of the
Electronic Fund Transfer Act (15 U.S.c. 1693a), except that such term includes
transfers that would otherwise be excluded under section 903(6)(E) of that act (15
U.S.C. 1693a(6)(E», and includes any funds transfer covered by Article 4A of the
Uniform Commercial Code, as in effect in any State.
U) Financial institution means a State or national bank, a State or Federal savings and
loan association, a mutual savings bank, a State or Federal credit union, or any
other person that, directly or indirectly, holds an account belonging to a
consumer. The term does not include a casino, sports book, or other business at
or through which bets or wagers may be placed or received.
(k) Financial transaction provider means a creditor, credit card issuer, financial
39
institution, operator of a terminal at which an electronic fund transfer may be
initiated, money transmitting business, or international, national, regional, or local
payment network utilized to effect a credit transaction, electronic fund transfer,
stored value product transaction, or money transmitting service, or a participant in
such network, or other participant in a designated payment system.
(1) Interactive computer service means any information service, system, or access
software provider that provides or enables computer access by multiple users to a
computer server, including specifically a service or system that provides access to
the Internet and such systems operated or services offered by libraries or
educational institutions.
(m)Internet means the international computer network of interoperable packet
switched data networks.
(n) Intrastate transaction means placing, receiving, or otherwise transmitting a bet or
wager where (1) The bet or wager is initiated and received or otherwise made exclusively
within a single State;
(2) The bet or wager and the method by which the bet or wager is initiated and
received or otherwise made is expressly authorized by and placed in
accordance with the laws of such State, and the State law or regulations
include -
(i)
Age and location verification requirements reasonably designed to block
access to minors and person located out of such State; and
(ii) Appropriate data security standards to prevent unauthorized access by
any person whose age and current location has not been verified in
accordance with such State's law or regulations; and
(3) The bet or wager does not violate any provision of(i)
The Interstate Horseracing Act of 1978 (15 U.S.c. 3001 et seq.);
(ii) 28 U.S.C. chapter 178 (professional and amateur sports protection);
(iii) The Gambling Devices Transportation Act (15 U.S.C. 1171 et seq.); or
(iv) The Indian Gaming Regulatory Act (25 U.S.c. 2701 et seq.).
(0) Intratribal transaction means placing, receiving or otherwise transmitting a bet or
wager where -
40
(1) The bet or wager is initiated and received or otherwise made exclusively(i)
Within the Indian lands of a single Indian tribe (as such terms are
defined under the Indian Gaming Regulatory Act (25 U.S.c. 2703)); or
(ii) Between the Indian lands of two or more Indian tribes to the extent that
intertribal gaming is authorized by the Indian Gaming Regulatory Act
(25 U.S.c. 2701 et seq.);
(2) The bet or wager and the method by which the bet or wager is initiated and
received or otherwise made is expressly authorized by and complies with the
requirements of .
(i)
The applicable tribal ordinance or resolution approved by the Chairman
of the National Indian Gaming Commission; and
(ii) With respect to class III gaming, the applicable Tribal-State compact;
(3) The applicable tribal ordinance or resolution or Tribal-State compact includes
(i)
Age and location verification requirements reasonably designed to block
access to minors and person located out of the applicable Tribal lands;
and
(ii) Appropriate data security standards to prevent unauthorized access by
any person whose age and current location has not been verified in
accordance with the applicable tribal ordinance or resolution or TribalState Compact; and
(4) The bet or wager does not violate any provision of (i)
The Interstate Horseracing Act of 1978 (15 U.S.C. 3001et seq.);
(ii) 28 U.S.C. chapter 178 (professional and amateur sports protection);
(iii) The Gambling Devices Transportation Act (15 U.S.c. 1171 et seq.); or
(iv) The Indian Gaming Regulatory Act (25 U.S.c. 2701 et seq.).
(p) Money transmitting business and money transmitting service have the meanings
given the terms in 31 U.S.c. 5330(d) (determined without regard to any
regulations prescribed by the Secretary of the Treasury thereunder).
(q) Participant in a designated payment system means an operator of a designated
payment system, or a financial transaction provider that is a member of or, has
contracted for financial transaction services with, or is otherwise participating in,
a designated payment system. This term does not include a customer of the
financial transaction provider if the customer is not a financial transaction
41
provider otherwise participating in the designated payment system on its own
behalf.
(r) Restricted transaction means any of the following transactions or transmittals
involving any credit, funds, instrument, or proceeds that the Act prohibits any
person engaged in the business of betting or wagering (which does not include the
activities of a financial transaction provider, or any interactive computer service
or telecommunications service) from knowingly accepting, in connection with the
participation of another person in unlawful Internet gambling (1) Credit, or the proceeds of credit, extended to or on behalf of such other person
(including credit extended through the use of a credit card);
(2) An electronic fund transfer, or funds transmitted by or through a money
transmitting business, or the proceeds of an electronic fund transfer or money
transmitting service, from or on behalf of such other person; or
(3) Any check, draft, or similar instrument that is drawn by or on behalf of such
other person and is drawn on or payable at or through any financial institution.
(s) State means any State of the United States, the District of Columbia, or any
commonwealth, territory, or other possession of the United States, including the
Commonwealth of Puerto Rico, the Commonwealth of the Northern Mariana
Islands, American Samoa, Guam, and the Virgin Islands.
(t) Unlawful Internet gambling means to place, receive, or otherwise knowingly
transmit a bet or wager by any means that involves the use, at least in part, of the
Internet where such bet or wager is unlawful under any applicable Federal or
State law in the State or Tribal lands in which the bet or wager is initiated,
received, or otherwise made. The term does not include placing, receiving, or
otherwise transmitting a bet or wager that is excluded from the definition of this
term by the Act as an intrastate transaction or an intra-tribal transaction, and does
not include any activity that is allowed under the Interstate Horseracing Act of
1978 (15 U.S.c. 3001 et seq.). The intermediate routing of electronic data shall
not determine the location or locations in which a bet or wager is initiated,
received, or otherwise made.
(u) Wire transfer system means a system through which an unconditional order to a
bank to pay a fixed or determinable amount of money to a beneficiary upon
receipt, or on a day stated in the order, is transmitted by electronic or other means
through the network, between banks, or on the books of a bank. When referring
to wire transfer systems, the terms in this regulation (such as "bank," "originator's
bank," "beneficiary's bank," and "intermediary bank") are defined as those terms
are defined in 12 CFR part 210, appendix B.
§_.3
Designated Payment Systems. The following payment systems could be used
42
by participants in connection with, or to facilitate, a restricted transaction:
(a) Automated clearing house systems;
(b) Card systems;
(c) Check collection systems;
(d) Money transmitting businesses; and
(e) Wire transfer systems.
§_.4 Exemptions.
(a) Automated clearing house systems. The participants providing the following
functions of an automated clearing house system with respect to a particular ACH
transaction are exempt from this regulation's requirements for establishing written
policies and procedures reasonably designed to prevent or prohibit restricted
transactions (1) The ACH system operator, except as provided in §_.6(b)(2) and
§_.6(b)(3);
(2) The originating depository financial institution in an ACH credit transaction;
and
(3) The receiving depository financial institution in an ACH debit transaction.
(b) Check collection systems. The participants providing the following functions of a
check collection system with respect to a particular check transaction are exempt
from this regulation's requirements for establishing written policies and
procedures reasonably designed to prevent or prohibit restricted transactions (1) A check clearing house; and
(2) The paying bank (unless it is also the depositary bank), any collecting bank
(other than the depositary bank), and any returning bank.
(c) Wire transfer systems. The participants providing the following functions of a
wire transfer system with respect to a particular wire transfer are exempt from this
regulation's requirements for establishing written policies and procedures
reasonably designed to prevent or prohibit restricted transactions-
(1) The operator of a wire transfer network; and
(2) The originator's bank and any intermediary bank, except as provided in
§
.6(f)(2).
§_.5 Processing of Restricted Transactions Prohibited.
(a) All non-exempt participants in designated payment systems shall establish and
43
implement written policies and procedures reasonably designed to identify and
block or otherwise prevent or prohibit restricted transactions.
(b) A non-exempt financial transaction provider participant in a designated payment
system shall be considered to be in compliance with the requirements of
paragraph (a) of this section if it (1) Relies on and complies with the written policies and procedures of the
designated payment system that are reasonably designed to (i)
Identify and block restricted transactions; or
(ii) Otherwise prevent or prohibit the acceptance of the products or services
of the designated payment system or participant in connection with
restricted transactions; and
(2) Such policies and procedures of the designated payment system comply with
the requirements of this part.
(c) As provided in the Act, a person that identifies and blocks a transaction, prevents
or prohibits the acceptance of its products or services in connection with a
transaction, or otherwise refuses to honor a transaction, shall not be liable to any
party for such action if (1) The transaction is a restricted transaction;
(2) Such person reasonably believes the transaction to be a restricted transaction;
or
(3) The person is a participant in a designated payment system and blocks or
otherwise prevents the transaction in reliance on the policies and procedures
of the designated payment system in an effort to comply with this regulation.
(d) Nothing in this regulation requires or is intended to suggest that designated
payment systems or participants therein must or should block or otherwise
prevent or prohibit any transaction in connection with any activity that is excluded
from the definition of "unlawful Internet gambling" in the Act as an intrastate
transaction, an intratribal transaction, or a transaction in connection with any
activity that is allowed under the Interstate Horseracing Act of 1978 (15 U.S.C.
3001 et seq.).
(e) Nothing in this regulation modifies any requirement imposed on a participant by
other applicable law or regulation to file a suspicious activity report to the
appropriate authorities.
§_.6 Policies and Procedures.
44
(a) The examples of policies and procedures to identify and block or otherwise
prevent or prohibit restricted transactions set out in this section are non-exclusive.
In establishing and implementing written policies and procedures to identify and
block or otherwise prevent or prohibit restricted transactions, a non-exempt
participant in a designated payment system may design and use other policies and
procedures that are specific to its business and may use different policies and
procedures with respect to different types of restricted transactions ..
(b) Automated clearing house system examples.
(1) Except as provided in paragraphs (b )(2) and (b )(3) of this section, the policies
and procedures of the originating depository financial institution and any
third-party sender in an ACH debit transaction, and the receiving depository
financial institution in an ACH credit transaction, are deemed to be reasonably
designed to prevent or prohibit restricted transactions if they (i)
Address methods for conducting due diligence in establishing or
maintaining a customer relationship designed to ensure that the customer
will not originate restricted transactions as ACH debit transactions or
receive restricted transactions as ACH credit transactions through the
customer relationship, such as (A) Screening potential commercial customers to ascertain the nature of
their business; and
(B) Including as a term of the commercial customer agreement that the
customer may not engage in restricted transactions; and
(ii)
Include procedures to be followed with respect to a customer if the
originating depository financial institution or third-party sender becomes
aware that the customer has originated restricted transactions as ACH
debit transactions or if the receiving depository financial institution
becomes aware that the customer has received restricted transactions as
ACH credit transactions, such as procedures that address(A) When fines should be imposed;
(B) When the customer should not be allowed to originate ACH debit
transactions; and
(C) The circumstances under which the account should be closed.
(2) The policies and procedures of a receiving gateway operator and third-party
sender that receives instructions to originate an ACH debit transaction directly
from a foreign sender (which could include a foreign bank, a foreign third-
45
party processor, or a foreign originating gateway operator) are deemed to be
reasonably designed to prevent or prohibit restricted transactions if they (i)
Address methods for conducting due diligence in establishing or
maintaining the relationship with the foreign sender designed to ensure
that the foreign sender will not send instructions to originate ACH debit
transactions representing restricted transactions to the receiving gateway
operator or third-party sender, such as including as a term in its
agreement with the foreign sender requiring the foreign sender to have
reasonably designed policies and procedures in place to ensure that the
relationship will not be used to process restricted transactions; and
(ii) Include procedures to be followed with respect to a foreign sender that is
found to have sent instructions to originate ACH debit transactions to the
receiving gateway operator or third-party sender that are restricted
transactions, which may address (A) When ACH services to the foreign sender should be denied; and
(B) The circumstances under which the cross-border arrangements with
the foreign sender should be terminated.
(3) The policies and procedures of an originating gateway operator that receives
an ACH credit transaction containing instructions to send or credit a
transaction to a foreign bank directly or through a foreign receiving gateway
operator are deemed to be reasonably designed to prevent or prohibit
restricted transactions, if they include procedures to be followed with respect
to a foreign bank that is found to have received from the originating gateway
operator either directly or indirectly transactions that are restricted
transactions, which may address (i)
When ACH credit transactions for the foreign bank or through the
foreign gateway operator should be denied; and
(ii)
The circumstances under which the cross-border arrangements with the
foreign bank should be terminated.
(c) Card system examples. The policies and procedures of a card system operator, a
merchant acquirer, and a card issuer, are deemed to be reasonably designed to
prevent or prohibit restricted transactions, if they (1) Address methods for conducting due diligence in establishing or maintaining a
merchant relationship designed to ensure that the merchant will not receive
restricted transactions through the card system, such as (i)
Screening potential merchant customers to ascertain the nature of their
46
business; and
(ii) Including as a term of the merchant customer agreement that the
merchant may not receive restricted transactions through the card
system;
(2) Include procedures reasonably designed to identify and block or otherwise
prevent or prohibit restricted transactions, such as (i)
Establishing transaction codes and merchantlbusiness category codes
that are required to accompany the authorization request for a transaction
and creating the operational functionality to enable the card system or
the card issuer to identify and deny authorization for a restricted
transaction;
(ii)
Ongoing monitoring or testing to detect potential restricted transactions,
including (A) Conducting testing to ascertain whether transaction authorization
requests are coded correctly;
(B) Monitoring of web sites to detect unauthorized use of the relevant card
system, including its trademark; or
(C) Monitoring and analyzing payment patterns to detect suspicious
payment volumes from a merchant customer; and
(3) Include procedures to be followed with respect to a merchant customer if the
card system, card issuer, or merchant acquirer becomes aware that a merchant
has received restricted transactions through the card system, such as -(i)
When fines should be imposed; and
(ii) When access to the card system should be denied.
(d) Check collection system examples.
(1) Except as provided in paragraph (d)(2) of this section, the policies and
procedures of a depositary bank are deemed to be reasonably designed to
prevent or prohibit restricted transactions if they (i)
Address methods for conducting due diligence in establishing or
maintaining a customer relationship designed to ensure that the customer
will not receive restricted transactions through the customer relationship,
such as-
47
(A) Screening potential commercial customers to ascertain the nature of
their business; and
(B) Including as a term of the commercial customer agreement that the
customer may not deposit checks that constitute restricted transactions;
and
(ii)
Include procedures to be followed with respect to a customer if the
depositary bank becomes aware that the customer has deposited checks
that are restricted transactions, such as procedures that address (A) When checks for deposit should be refused; and
(B) The circumstances under which the account should be closed.
(2) The policies and procedures of a depositary bank that receives a check for
collection directly from a foreign bank are deemed to be reasonably designed
to prevent or prohibit restricted transactions if they -
(i)
Address methods for conducting due diligence in establishing or
maintaining the correspondent relationship with the foreign bank
designed to ensure that the foreign bank will not send checks
representing restricted transactions to the depositary bank for collection,
such as including as a term in its agreement with the foreign bank
requiring the foreign bank to have reasonably designed policies and
procedures in place to ensure that the correspondent relationship will not
be used to process restricted transactions; and
(ii) Include procedures to be followed with respect to a foreign bank that is
found to have sent checks to the depositary bank that are restricted
transactions, which may address (A) When check collection services for the foreign bank should be denied;
and
(B) The circumstances under which the correspondent account should be
closed.
(e) Money transmitting business examples. The policies and procedures of a money
transmitting business are deemed to be reasonably designed to prevent or prohibit
restricted transactions if they -
(1) Address methods for conducting due diligence in establishing or maintaining
commercial subscriber relationships designed to ensure that the commercial
subscriber will not receive restricted transactions through the money
transmitting business, such as -
48
(i)
Screening potential commercial subscribers to ascertain the nature of
their business; and
(ii) Including as a term of the commercial subscriber agreement that the
subscriber may not receive restricted transactions; and
(2) Include procedures regarding ongoing monitoring or testing to detect potential
restricted transactions, such as (i) Monitoring and analyzing payment patterns to detect suspicious payment
volumes to any recipient; or
(ii) Monitoring web sites to detect unauthorized use of the relevant money
transmitting business, including their trademarks; and
(3) Include procedures to be followed with respect to recipients that are found to
have engaged in restricted transactions, that address (i)
When fines should be imposed;
(ii) When access should be denied; and
(iii) The circumstances under which an account should be closed.
(t) Wire transfer system examples.
(1) The policies and procedures of the beneficiary'S bank in a wire transfer are
deemed to be reasonably designed to prevent or prohibit restricted transactions
if they (i)
Address methods for conducting due diligence in establishing or
maintaining a commercial customer relationship designed to ensure that
the commercial customer will not receive restricted transactions through
the' customer relationship, such as (A) Screening potential commercial customers to ascertain the nature of
their business; and
(B) Including as a term of the commercial customer agreement that the
customer may not receive restricted transactions.
(ii) Include procedures to be followed with respect to a commercial customer
if the beneficiary's bank becomes aware that the commercial customer
has received restricted transactions, such as procedures that address -
49
(A) When access to the wire transfer system should be denied; and
(B) The circumstances under which an account should be closed.
(2) An originator's bank or intermediary bank that sends or credits a wire transfer
transaction directly to a foreign bank is deemed to have policies and
procedures reasonably designed to identify and block, or otherwise prevent or
prohibit restricted transactions, if the policies and procedures include
procedures to be followed with respect to a foreign bank that is found to have
received from the originator's bank or intermediary bank wire transfers that
are restricted transactions, which may address (i)
When wire transfer services for the foreign bank should be denied; and
(ii) The circumstances under which the correspondent account should be
closed.
§_.7
Regulatory Enforcement. The requirements under this regulation are subject
to the exclusive regulatory enforcement of (a) The Federal functional regulators, with respect to the designated payment systems
and participants therein that are subject to the respective jurisdiction of such
regulators under section 505(a) of the Gramm-Leach-Bliley Act (15 U.S.c.
6805(a)) and section 5g of the Commodity Exchange Act (7 U.S.c. 7b-2) ; and
(b) The Federal Trade Commission, with respect to designated payment systems and
financial transaction providers not otherwise subject to the jurisdiction of any
Federal functional regulators (including the Commission) as described in
paragraph (a) of this section.
50
[THIS SIGNATURE PAGE PERTAINS TO THE NOTICE TITLED, "PROHIBITION
ON FUNDING OF UNLA WFUL INTERNET GAMBLING"]
By order ofthe Board of Governors of the Federal Reserve System, October 1,
2007.
Jennifer J. Johnson (signed)
Jennifer J. Johnson,
Secretary of the Board.
51
[THIS SIGNATURE PAGE PERTAINS TO THE NOTICE TITLED, "PROHIBITION
ON FUNDING OF UNLAWFUL INTERNET GAMBLING"]
Dated: October 1, 2007
By the Department of the Treasury.
Valerie A. Abend (signed)
Valerie A. Abend
Deputy Assistant Secretary for Critical Infrastructure Protection and Compliance Policy.
52
Page 1 of 1
October 2, 2007
HP-584
Today: Paulson to Host Capital Markets Competitiveness Briefing
Secretary Henry M. Paulson, Jr. and Under Secretary for Domestic Finance Robert
K. Steel will hold a press conference today at 1 p.m. in the Treasury Department
media room to discuss the next steps in Treasury's capital markets competitiveness
initiative announced in May. The following event is open to media:
Who
Secretary Henry M. Paulson, Jr.
Under
Secretary for Domestic Finance Robert K. Steel
What
Press Conference on Capital Markets
When
Tuesday, October 2, 2007 1 p.m. (EDT)
Where
U.S. Treasury Department
Media Room
1500 Pennsylvania Ave., NW
Washington, D.C.
Note
Media without Treasury press credentials should contact Frances Anderson at
(202) 622-2960, or francesanderson@dotreas.gov with the following information:
full name, Social Security number and date of birth.
http://www.treas.gov/press/reJeases/hp584.htm
1115/2007
Page 1 of 4
PRESS ROOM
October 2, 2007
2007 -10-2-11-47 -56-26456
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 $68,977 million as of the end of that week, compared to $68,519 million as of the end of the
prior week.
I. Official reserve assets and other foreign currency assets (approximate market value, in US millions)
I
I
IA. Official reserve assets (in US millions unless otherwise specified)
II
IISeptember 28, 2007
IIYen
IITotal
II
11 13 ,831
II
11 11 ,076
11 68 ,977
lof which: issuer headquartered in reporting country but located abroad
II
II
11 0
I(b) total currency and deposits with:
II
11 13 ,817
115,455
1(1) Foreign currency reserves (in convertible foreign currencies)
Ita) Securities
10) other national
central banks, BIS and IMF
IIEuro
II
II
II
II
Iii) banks headquartered in the reporting country
II
lof which: located abroad
II
l(iii) banks headquartered outside the reporting country
II
lof which: located in the reporting country
II
1(2) IMF reserve position
114,457
1(3) SDRs
11 9 ,301
1(4) gold (including gold deposits and, if appropriate, gold swapped)
1111 ,041
I--volume in millions of fine troy ounces
11 261 .499
1(5) other reserve assets (specify)
11
I--financial derivatives
I--Ioans to nonbank nonresidents
I--other
lB. Other foreign currency assets (specify)
II
11 24 ,907
1/
11 19 ,272
11 0
11 0
11 0
11 0
I
I
I
0
II
II
II
II
I
I--securities not included in official reserve assets
1
I--deposits not included in official reserve assets
1
--loans not included in official reserve assets
I
--financial derivatives not included in official reserve assets
I
--gold not included in official reserve assets
I
[ --other
II
II
I
II. Predetermined short-term net drains on foreign currency assets (nominal value)
I[L_ _ _------111.-1_ _---'11-1_ _~III-_ _-.JII,--__--.111--1_ _--.JII
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I
\I
IIMaturity breakdown (residual maturity)
I
I
More than 1 and
up to 3 months
Up to 1 month
Total
I
More than 3
months and up to
1 year
1. Foreign currency loans, securities, and deposits
I--outflows (-)
II Principal
I
I--inflows (+)
II Interest
I
IIPrincipal
IIlnterest
2. Aggregate short and long positions in forwards and
futures in foreign currencies vis-iFvis the domestic
currency~ncludin~ the forward leg of currency swaps)
I
I (a) Short positions ( - )
r (b) Long positions (+)
I
I
I
II
I
3. Other (specify)
II
II
I
--outflows related to repos (-)
--inflows related to reverse repos (+)
--trade credit (-)
--trade credit (+)
"
II
--other accounts payable (-)
II
--other accounts receivable (+)
II
III. Contingent short-term net drains on foreign currency assets (nominal value)
I
II
I
I
II
II
I,Maturity breakdown (residual maturity, where
applicable)
"
"
11. Contingent liabilities in foreign currency
(a) Collateral guarantees on debt falling due within 1
year
More than 1 and
up to 3 months
Up to 1 month
IITotal
II
I
I
More than 3
months and up to
1 year
II
I
II
!
I(b) Other contingent liabilities
2. Foreign currency securities issued with embedded
options (puttable bonds)
II
13. Undrawn, unconditional credit lines provided by:
lI(a) other national monetary authorities, BIS, IMF, and
other international organizations
II
I
I--other national monetary authorities (+)
I--BIS (+)
I
I--IMF (+)
(b) with banks and other financial institutions
headquartered in the reporting country (+)
J!
(c) with banks and other financial institutions
headquartered outside the reporting country (+)
Ji
IUndrawn, unconditional credit lines provided to:
(a) other national monetary authorities, BIS, IMF, and
other international organizations
Ji
I
I--other national monetary authorities (-)
I
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II
1\
II
I
I
1115/2007
Page 3 of 4
I--SIS (-)
I--IMF (-)
(b) banks and other financial institutions headquartered
in reporting country (- )
(c) banks and other financial institutions headquartered
outside the reporting country ( - )
II
II
I
II
I
I
I
I
II
II
I
I
I
"
4. Aggregate short and long positions of options in
foreign currencies vis-a-vis the domestic currency
I(a) Short positions
I
II
II
I(i) Sought puts
I(ii) Written calls
I(b) Long positions
l(i) Sought calls
II
I
II
I
I
II
II
II
II
II
I
I
II
I(ii) Written puts
II
I
IpRO MEMORIA: In-the-money options 11
II
1(1) At current exchange rate
Ita) Short position
\I
I(b) Long position
1(2) + 5 % (depreciation of 5%)
I(a) Short position
I(b) Long position
1(3) - 5 % (appreciation of 5%)
I(a) Short position
I(b) Long position
II
1(4) +10 % (depreciation of 10%)
Ita) Short position
I
II
I
I
I
II
Itb) Long position
I
I
II
1(5) - 10 % (appreciation of 10%)
I(a) Short position
I
I
I(b) Long position
1(6) Other (specify)
I(a) Short position
I(b) Long position
I
II
I
IV. Memo items
I
1(1) To be reported with standard periodicity and timeliness:
I(a) short-term domestic currency debt indexed to the exchange rate
(b) financial instruments denominated in foreign currency and settled by other means (e.g., in domestic
currency)
I--nondeliverable forwards
I --short positions
/ --long positions
II
II
IIII
I
I
i--other instruments
/(c) pledged assets
i--included in reserve assets
--included in other foreign currency assets
11
r
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111512007
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II
I(d) securities lent and on repo
I--Ient or repoed and included in Section I
I--Ient or repoed but not included in Section I
I
--borrowed or acquired and included in Section I
I--borrowed or acquired but not included in Section I
I(e) financial derivative assets (net, marked to market)
I--forwards
I--futures
I--swaps
I--options
I--other
(f) derivatives (forward, futures, or options contracts) that have a residual maturity greater than one
year, which are subject to margin calls.
--aggregate short and long positions in forwards and futures in foreign currencies vis-a-vis the domestic
currency (including the forward leg of currency swaps)
I
I
I
I(a) short positions ( - )
I(b) long positions (+)
I--aggregate short and long positions of options in foreign currencies vis-a-vis the domestic currency
I(a) short positions
I(i) bought puts
I{ii) written calls
I(b) long positions
l(i) bought calls
I(ii) written puts
1(2) To be disclosed less frequently:
I(a) currency composition of reserves (by groups of currencies)
1\68,977
I--currencies in SDR basket
11 68 ,977
I--currencies not in SDR basket
II
II
II
I--by individual currencies (optional)
I
Notes:
1/ Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market
Account (SOMA), valued at current market exchange rates. Foreign currency holdings listed as securities reflect markedto-market values, and deposits reflect carrying values.
2/ The items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF
and are valued in dollar terms at the official SDR/dollar exchange rate for the reporting date. The entries for the latest
week reflect any necessary adjustments, including revaluation, by the U.s. Treasury to IMF data for the prior month
end.
3/ Gold stock is valued monthly at $42.2222 per fine troy ounce.
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Page 1 of3
October 2, 2007
hp-585
Paulson Announces Auditing Committee Members to Make
Recommendations for a More Sustainable, Transparent Industry
Washington, DC- Secretary Henry M. Paulson, Jr. announced the members of the
Treasury Advisory Committee on the Auditing Profession today. The public
committee, which Secretary Paulson first announced in May, will make
recommendations to encourage a more sustainable auditing profession. The
Treasury Department worked with Committee Chairmen Arthur Levitt, Jr., former
Securities and Exchange Commission Chairman, and Donald T. Nicolaisen, former
SEC Chief Accountant, to choose members through a public nomination process
and based on their diverse experiences and perspectives.
"Investor trust in the integrity of our capital markets is vital to the strength of the
U.S. economy. Investor trust is based on accurate financial reporting, and a vibrant
auditing profession is essential for a well-functioning financial reporting system,"
said Secretary Paulson. "This Committee has been chartered to develop
recommendations as to what can best be done to sustain a vibrant auditing
profession, a profession whose work is critical to investor confidence in our capital
markets."
Secretary Paulson announced a series of initiatives this year to enhance U.S
capital markets competitiveness, one of his top priorities since taking office. Areas
of focus include strengthening financial reporting and seeking a more sustainable
auditing profession.
The committee will examine auditing industry concentration, financial soundness,
audit quality, employee recruitment and retention, in addition to other topics.
Treasury expects the committee to produce findings and recommendations by early
summer 2008.
The committee structure will encourage an open and public discussion, with no
predetermined outcomes. Meetings will be open to public attendance and comment
at the Committee website. The committee members represent a broad range of
perspectives, including investors, auditors, large and small public companies,
insurance companies, lawyers and regulators. Treasury also selected official
observers representing the domestic and international regulatory and policy bodies.
The first meeting will be held at the Treasury Department on Monday, October 15 at
10:00 a.m. in the Cash Room.
Committee members include:
Arthur Levitt, Jr. (Co-Chair) was the 25th Chairman of the SEC. First appointed by
President Clinton in July 1993, and reappointed in May 1998, he was the longest
serving SEC Chairman when he left on February 9, 2001. He is presently Senior
Advisor to The Carlyle Group and Wisdom-Tree, on the Board of Bloomberg LLP as
well as a member of the American Academy of Arts & Sciences.
Donald T. Nicolaisen (Co-Chair) was the Chief Accountant at the SEC from
September 2003 to November 2005. He serves on the Board of Directors of
Morgan Stanley, MGIC Investment Corporation, Verizon Communications Inc. and
Zurich Financial Services. In addition, Mr. Nicolaisen is on the Board of Advisors for
the University of Southern California, Leventhal School of Accounting. Mr.
Nicolaisen also serves in a variety of advisory capacities to other Fortune 25
companies.
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Alan L. Beller is a partner at Cleary Gottlieb Steen & Hamilton LLP. Mr. Beller was
the Director of the Division of Corporation Finance of the SEC and Senior
Counselor to the SEC from 2002 until 2006.
Amy Woods Brinkley is the Global Risk executive for Bank of America. She
serves on the Risk & Capital Committee, which oversees allocation of capital to all
business lines, and is a member of the bank's Management Operating Committee.
Mary K. Bush is President of Bush International and serves on the Boards of four
publicly traded companies--Briggs and Stratton (Audit Committee), Discover
Financial Services, ManTech Corporation and United Air Lines (Audit Committee)-and the Pioneer Family of Mutual Funds.
H. Rodgin Cohen is Chairman of Sullivan & Cromwell LLP. He has acted in most
of the major U.S. bank acquisitions as well as in numerous leading cross-border
and cross-industry acquisitions.
Timothy P. Flynn is Chairman and Chief Executive Officer of KPMG LLP. He is a
member of the Governing Board of the Center for Audit Quality, and the Boards of
Trustees of the Financial Accounting Foundation (FAF), FAF's Audit, Development
and Strategic Planning committees, and the University of st. Thomas.
Robert Glauber is a Lecturer at Harvard's Kennedy School of Government.
Previously, he served as Chairman and Chief Executive Officer of NASD (now
FINRA) from September 2001 to September 2006, after becoming NASD's CEO
and President in November 2000 and a member of NASD's Board in 1996.
Ken Goldman is Chief Financial Officer of Fortinet, Inc. He is a member and former
President of The Financial Executive Institute, Santa Clara chapter, and served as
an advisory council member of the Financial Accounting Standards Board from
2000 to 2004.
Gaylen R. Hansen is an audit partner at Ehrhardt Keefe Steiner & Hottman PC and
serves on the Colorado State Board of Accountancy and the board of directors of
the National Association of State Boards of Accountancy. He is also a member of
the Standing Advisory Group that advises the Public Company Accounting
Oversight Board.
Barry C. Melancon is the President and Chief Executive Officer of the American
Institute of Certified Public Accountants. Prior to joining the AICPA, Mr. Melancon
served for eight years as Executive Director of the Society of Louisiana CPAs.
Anne M. Mulcahy is Chairman and Chief Executive Officer of Xerox Corporation.
In addition to the Xerox Board, Ms. Mulcahy serves on the Boards of Citigroup Inc.,
Fuji Xerox Co. Ltd., Target Corporation, and is the Chairman of the Corporate
Governance Task Force of the Business Roundtable.
Richard H. Murray is Managing Director and Chief Claims Strategist of Swiss Re.
Mr. Murray serves on the Supervisory Board of the Centre for the Study of Financial
Innovation, the Advisory Board of Oxford Analytica, the Advisory Board of the
Northeast Business Law Center, as a member of the Commission on the U.S.
Capital Markets in the 21 51 Century, and the Institute of International Finance.
Gary John Previts is a Professor of Accountancy at Case Western Reserve
University. He is a member of the Accountability Advisory Council of the U.S.
Government Accountability Office and President of the American Accounting
Association.
Damon A. Silvers is an Associate General Counsel for the AFL-CIO. Mr. Silvers
led the AFL-CIO legal team that won severance payments for laid off Enron and
WorldCom workers.
Richard A. Simonson is Executive Vice President and Chief Financial Officer of
Nokia Corporation. Mr. Simonson has been a member of the Group Executive
Board of Nokia since 2004 and the Board of Nokia Siemens Networks since April 1,
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2007.
Sarah E. Smith is the Controller and Chief Accounting Officer of Goldman Sachs.
She also serves on the firm's Risk Committee, the Commitments Committee, the
Partnership Committee and the Private Equity Investment Committee and has
oversight of Operational Risk. She is a member of the Washington-based
Committee for Economic Development.
William D. Travis has been President and Chief Executive Officer of Bailiwick Data
Systems, Inc. since 2007 and currently serves on the Board of Directors of
McGladrey & Pullen, LLP, where he was previously Managing Director and
Chairman.
Lynn E. Turner served as the Chief Accountant at the SEC from 1998 to 2001. He
serves as a senior advisor to Kroll Zolfo Copper and is a member of the Standards
Advisory Group of the Public Company Accounting Oversight Board and the
Financial Accounting Standards Board Investor Technical Advisory Committee.
Paul A. Volcker served as Chairman of the Board of Governors of the Federal
Reserve System. He is former Chairman of Wolfensohn & Co., Inc., as well as
Professor Emeritus of International Economic Policy at Princeton University. He
was recently Chairman of the Board of Trustees of the International Accounting
Standards Committee.
Ann Yerger, CFA, is the Executive Director of the Council of Institutional Investors.
She joined the Council in early 1996 as the Director of the Council's Research
Service. She was named Executive Director in January 2005.
Committee observers include:
Robert H. Herz, Chairman of the Financial Accounting Standards Board
Mark W. Olson, Chairman of the Public Company Accounting Oversight Board
Zoe-Vanna Palmrose, Deputy Chief Accountant for Professional Practice in the
Office of the Chief Accountant at the Securities and Exchange Commission
Michel Prada, Chairman of the Autorite des Marches Financiers in France
Sir David Tweedie, Chairman of the International Accounting Standards Board
-30-
REPORTS
•
Paulson's Remarks at Announcement of Committee
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October 2, 2007
HP-586
Statement by Secretary Henry M. Paulson, Jr. at Press
Conference on Advisory Committee on the Auditing Profession
Washington, DC--During my time at Treasury the competitiveness of our capital
markets has been one of my highest priorities. Investor trust in the integrity of our
capital markets is vital to the strength of the U.S. economy.
Investor trust is based on accurate and transparent financial reporting, and a vibrant
auditing profession is essential for a well-functioning financial reporting system. The
auditor's role is key: to examine financial statements and express an opinion that
conveys reasonable, but not absolute, assurance as to the truth and fairness of
those statements.
The Sarbanes-Oxley Act of 2002 enhanced financial reporting integrity, including
mandating major changes affecting the auditing profession. The act created the
Public Company Accounting Oversight Board to replace self-regulation of the public
company auditing profession, and mandated auditor independence requirements.
The Act also fundamentally altered the interactions between auditors and corporate
management and boards of directors in a number of ways, some of which are not
constructive.
As part of our overall effort on capital markets competitiveness, we have recognized
the many changes that have impacted the auditing profession in recent years and
some of the challenges it still faces. And so, in May, I asked Arthur Levitt, former
SEC chairman, and Donald Nicolaisen, former SEC chief accountant, to co-chair a
committee to examine key issues facing the auditing industry. I want to thank Arthur
and Don for their willingness to lead this important effort.
The Committee will be a public forum, and its members represent a wide range of
views - including small and large investors, auditors, financial institutions, public
company executives, international regulators and universities.
The Committee has been chartered to develop recommendations as to what can
best be done to sustain a vibrant auditing profession, a profession whose work is
critical to investor confidence in our capital markets. We have asked for this
Committee's views and look forward to receiving their recommendations.
One of the great strengths of our markets is their dynamism - that they change to
serve the needs of investors and businesses. Yet, our markets are not immune to
challenges. We need to understand whether our markets are producing the highquality audits and attracting the talented auditors we need. There are legitimate
questions about the sustainability of the auditing profession's business model and
concern about the high degree of auditor concentration among the largest public
companies.
Our goal is to help ensure that U.S. capital markets remain effiCient, innovative and
continue to drive capital to its most productive uses. Our markets must retain the
integrity and efficiency that has contributed greatly to prosperity in America and
around the globe. Through its work, the Committee will help sustain a vibrant
auditing profession, and contribute to the broader examination of U.S.
competitiveness.
REPORTS
•
Press Release Announcing the Committee
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October 2, 2007
HP-587
Deputy Secretary Kimmitt to Announce $3.9 Billion in
Tax Credits for Low-Income Community Investment
U.S. Treasury Deputy Secretary Robert M. Kimmitt and Treasury's Community
Development Financial Institutions (CDFI) Fund Director Kimberly A. Reed will
travel to New Orleans, La., this week to award $3.9 billion in tax credits to
organizations investing in rural and urban low-income communities across the
United States. The awards are being made under the 2007 round of the New
Markets Tax Credit (NMTC) Program and will include $400 million allocated
specifically for the redevelopment and reconstruction of the Hurricane Katrina Gulf
Opportunity Zone (GO Zone).
Deputy Treasury Secretary Kimmitt and CDFI Fund Director Reed also will focus on
the area's recovery after Hurricane Katrina and see how the CDFI Fund's NMTC
Program is making an impact, including by helping to expand the National World
War II Museum. Tourism and tourism related activities are a major source of
employment and tax revenue for the city and state.
Deputy Secretary Kimmitt and Director Reed will join Chairman Don Powell, the
President's Federal Coordinator for the Gulf Coast Rebuilding, to see how the
NMTC Program is helping to repair areas of Ochsner Baptist Medical Center that
were damaged by Hurricane Katrina. After the tour, they will make the national
announcement of the organizations selected to receive allocations under the 2007
NMTC Program. The following events are open to credentialed media:
Who
Deputy Treasury Secretary Robert M. Kimmitt
CDFI Fund Director Kimberly A. Reed
What
Tour of National World War II Museum
When
Friday, October 5, 1:45 PM (COT)
Where
945 Magazine Street
New Orleans, La.
Who
Deputy Treasury Secretary Robert M. Kimmitt
CDFI Fund Director Kimberly A. Reed
Chairman Don Powell
What
Tour of Ochsner Hospital, National New Markets Tax Credit Program Award
Announcement
When
Friday, October 5, 2: 15 PM (COT)
Where
Ochsner Baptist Medical Center
2700 Napoleon Avenue
New Orleans, La.
About the New Markets Tax Credit Program
The NMTC Program, established by Congress in December 2000, provides
individual and corporate taxpayers with a credit against federal income taxes for
making qualified equity investments in investment vehicles known as Community
Development Entities (CDEs). Substantially all of the taxpayer's investment must be
used by the CDE to make qualified investments supporting certain business
activities in low-income communities. More information on the NMTC program can
be found at www.cdfifund.gov.
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1116/2007
Page 1 of 1
October 2, 2007
hp-588
Media Advisory:
U.S. Treasurer to Speak at Conference on Reaching the Unbanked
U.S. Treasurer Anna Escobedo Cabral will discuss ways to bring more Americans
into the financial mainstream at the Financial Education and Literacy Commission's
regional conference in New York City on Thursday.
More than 10 million Americans do not have access to mainstream financial
services, such as banks or credit unions, making them more likely to pay
extraordinarily high fees for basic services and less likely to save for the future.
Deputy Assistant Secretary for Financial Education Dan lannicola, Jr. will join
officials from the National Credit Union Administration and the New York City
Department of Consumer Affairs as featured speakers.
The regional conference is the fourth in a series of national discussions that will be
held as part of the Financial Literacy and Education Commission's National
Strategy for Financial Literacy. For more information about the Commission visit its
website at wwwmymoneygov.
What
U.S. Treasurer Anna Escobedo Cabral
Deputy Assistant Secretary for Financial Education Dan lannicola, Jr.
Remarks on Reaching Unbanked People
When
Thursday, October 4,9 a.m. (EDT)
Where
Northeast Regional Conference on Reaching Unbanked People
CUNY Graduate Center
365 Fifth Avenue
New York, NY
Who
-30-
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October 3, 2007
HP-589
Remarks by Treasury Secretary Henry M. Paulson, Jr.
at the
U.S. Treasury Department's Annuallftaar Dinner
Washington, DC -Peace be with you. Dear friends, I enjoyed our discussions
earlier this evening and now am honored that you have joined me for this Iftaar
during these holiest days of the Muslim faith.
During Ramadan, Muslims reflect and remember dependence on God through
fasting and prayer. It is also a time full of special devotion to family, to kindness and
acts of charity.
It is an important and treasured time of year, and I think a reminder to all of us that
a day spent dedicated to compassion and service is a day well-spent. This country
appreciates and honors Muslims throughout America - for your friendship and
contributions to our society, our economy and the enrichment of our culture.
A large part of your contributions include helping to create opportunity and
prosperity for your fellow citizens. Our gathering tonight includes successful
businessmen and women who innovate and create the jobs that fuel our economy,
academicians who, through research and teaching, provide road maps and promise
for the future, and those who spend the year-round in charitable work, helping those
in need.
I am certain that today's meetings have been informative for all of us. We discussed
U.S. capital market competitiveness, charitable giving, tax and economic policy
matters, the need to stop illicit finance and the importance of trade and open
investment to economic growth. We continued to build a partnership for working
together on economic issues in the future.
Thank you again for coming to the Treasury Department today, and staying with us
this evening. Ramadan Mubarak.
-30-
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October 3, 2007
HP-590
Prepared Remarks of Office of Foreign Assets Control Director
Adam J. Szubin on the Treasury
Department's Role in Addressing the Situation in Darfur
Before the Senate Committee on Banking, Housing and Urban Affairs
Washington, DC -- Chairman Dodd, Ranking Member Shelby and Members of the
Committee, thank you for the opportunity to speak to you today about the Treasury
Department's role in addressing the situation in Darfur and the Sudanese
Government's support for terrorism, as well as its views regarding the various
Sudan-related pieces of legislation that are pending in the Congress. I welcome the
Committee's interest in these matters, and want to take this opportunity to thank the
Committee for its continued support of Treasury and OFAC and its mission over the
years, in particular as we have pursued sanctions against governments like Sudan.
We share an acute concern about the devastating suffering in Darfur, and an
understanding that economic pressure can play an important role in bringing about
a political resolution to this complex situation. Secretary Paulson has made it clear
that we should spare no effort in using all tools at the Treasury Department's
disposal to advance this goal. For OFAC, and for myself in particular, imposing
smart and effective pressure on Sudan has been a foremost priority.
Treasury Department Actions against Sudan
The Scope of Sanctions
The United States has levied economic sanctions against Sudan since 1997. At that
time, the Government of Sudan's support for international terrorism and widespread
human rights violations led President Clinton to impose comprehensive trade
sanctions against Sudan, and block all property of the Government of Sudan in the
United States or within the control of U.S. persons anywhere in the world.
Acting with Congress, President Bush amended these broad sanctions in 2006 to
carve out certain areas from our sanctions, notably Southern Sudan and Darfur,
provided that the relevant transactions do not involve Sudan's petroleum or
petrochemical industries or any property or property interest of the Government of
Sudan.
In addition to these comprehensive sanctions, the President recently imposed strict
economic sanctions against persons responsible for violence or atrocities in Darfur.
Issued in accordance with actions taken by the United Nations Security Council,
Executive Order 13400 blocked the property of four individuals connected to the
conflict in Darfur. It also authorized the Treasury Department to block the property
and interests in property of persons determined to: constitute a threat to the peace
process in, and stability of, Darfur; be responsible for conduct related to the conflict
in Darfur that violates international law; be responsible for heinous conduct with
respect to human life or limb related to the conflict in Darfur; have supplied, sold, or
transferred arms or any related materiel related to military activities to the warring
parties in Darfur; or be responsible for offensive military overflights in and over the
Darfur region. Treasury's authority applies as well to those determined to have
materially assisted or supported, or to have acted for or on behalf of, any of the
above.
Recent Actions
A primary objective of these sanctions, of course, has been to alter the behavior of
those responsible for the terrible suffering in Darfur, first and foremost the
Sudanese Government of President Bashir. This past April, on Holocaust Memorial
http://www.treas.gov/press/releases/hp590.htm
11/612007
Page 2 of 4
Day, the President issued a clear warning to the Sudanese Government. Either
they would live up to their prior commitments and allow the deployment of a joint
United Nations-African Union peacekeeping force, or the United States would
impose further economic sanctions on the Sudanese Government and seek a
United Nations Security Council Resolution to do likewise.
When President Bashir did not follow through, President Bush did. On May 29,
Treasury announced the designation of three additional Sudanese individuals and
thirty-one additional Sudanese companies subject to the asset freeze strictures of
Executive Orders 13067, 13400, and 13412. We imposed sanctions against three
individuals and one company because of their role in the ongoing violence in
Darfur. We designated Ahmad Muhammed Harun, Sudan's State Minister for
Humanitarian Affairs, and Awad Ibn Auf, Sudan's head of Military Intelligence and
Security, who are among Khartoum's senior leadership and have acted as liaisons
between the Sudanese government and the Government-supported Janjaweed
militias. We also designated Khalil Ibrahim, leader of the Justice and Equality
Movement (JEM), a rebel group that has been responsible for a number of violent
incidents, and the Azza Air Transport company, which had been conveying artillery,
small arms, and ammunition to Sudanese government forces and Janjaweed militia
in Darfur for their activities in Darfur.
Simultaneously, we targeted 30 additional companies owned or controlled by the
Government of Sudan, thereby subjecting them to the asset freeze imposed on the
Government by Executive Orders 13067 and 13412. These targeted companies
included five petrochemical companies, Sudan's national telecommunications
company, and an entity that has supplied armored vehicles to the Sudanese
Government for military operations in Darfur.
In addition to these actions to strengthen our financial measures against Sudan, we
have stepped up enforcement of our Sudan sanctions, and have made such
enforcement a top priority within OFAC. While I cannot comment on specific open
enforcement cases, I can tell you that we are aggressively pursuing a number of
violators to expose and penalize those who are violating our sanctions and deter
those who might think of dOing so.
In this regard, I would like to thank the Chairman and this Committee for its support
in passing S. 1612, the International Emergency Economic Powers Enhancement
Act, which provides for increased civil penalties for violations of IEEPA - the statute
pursuant to which our sanctions against Sudan are imposed. We have sought these
increased penalties in no small part because we faced impediments to obtaining
meaningful enforcement of our sanctions against Sudan. The passage of this bill
will provide a strong tool to make our sanctions effective.
It can be notoriously difficult to measure and attribute the impact of sanctions, when
the ultimate objective is a change in regime behavior. It is certainly true that our
sanctions were watched very carefully in Khartoum and taken seriously.
Immediately after the sanctions were announced, the Sudanese Government took
steps to sell off Government assets that we had identified and its Central Bank
imposed broad restrictions on the movement of foreign currency. And, most
importantly, we believe that the new U.S. sanctions - and the threat of international
sanctions along similar lines - played a role in President Bashir's announcement in
early June that Sudan would allow the deployment of a joint Afr'lcan Union-United
Nations peacekeeping force in Darfur.
In addition to ensuring that our sanctions have the maximum possible effect on the
Government of Sudan (GOS), we are also taking steps to protect the Government
of Southern Sudan (GOSS) and humanitarian aid efforts in Darfur and elsewhere.
We have prepared regulations that will help clarify the scope of sanctions with
respect to South Sudan, Darfur and other exempt areas, and hope that those
regulations will spur interest in investment and economiC development in the South.
And to facilitate the vital assistance activities of our State Department and USAID
colleagues and those in the NGO community, we are licensing humanitarian work.
Since January, 2006, we have issued approximately 87 licenses and registered
approximately 48 NGOs to conduct this critical assistance work.
Pending Legislation Concerning Sudan
We appreciate and share the concerns that animate the various pieces of Sudan-
http://www.treas.gov/press/releases/hp590.htm
11/612007
Page 3 of 4
related legislation pending before Congress. Let there be no mistake - these
concerns are deeply shared by the Treasury Department and the entire
Administration.
A Government-Generated List
In imposing economic sanctions or other measures against Sudan - or any other
regime - we must always keep in mind the ultimate goals of those sanctions. While
the Department shares the Committee's and the Congress' goal of increasing
pressure on the Sudanese government to end the violence in Darfur, we have
several concerns with the various legislative proposals that have been introduced
and discussed in the Congress.
Of particular concern are the various proposals that would require either the
President or the Secretary of the Treasury to prepare a list of all companies
engaged in specified business activities in Sudan. The preparation and publication
of such a list raise a series of significant concerns for the Department, and may not
add much value, given that non-governmental organizations have produced such
lists for purposes of divestment.
A primary concern with the creation of such a list is the impact it is likely to have on
our ability to maintain multilateral pressure on the regime in Khartoum. Because of
the United States' broad sanctions against Sudan, no U.S. companies are likely to
be included on such a list, as investment by such companies in Sudan is generally
prohibited absent a license from OFAC. Consequently, the list would consist of
foreign companies whose activities in Sudan are most likely legal in their home
countries. Such a list likely will be viewed by our allies as a U.S. Government
"blacklist" - not of Sudanese government entities - but of other companies based in
their nations, and, therefore, as an unwelcome effort by the United States to expand
the scope of our sanctions. As a result, such a list seriously risks alienating the very
countries whose assistance we need to maintain and increase international
pressure on the Bashir regime. These third countries hold important leverage that
may be needed to threaten and ultimately impose additional measures against the
Bashir regime, should it fail to follow through on its commitments. The promulgation
of what will likely be perceived as a U.S. Government blacklist targeted at the lawful
conduct of non-GOS companies based in these allied nations, however, risks
shifting the focus of the debate from the Bashir government's compliance to the
propriety of U.S. actions, and thus jeopardizes the international coalition that has
helped bring about the recent positive developments in Sudan. Particularly in light
of the current track of negotiations, including upcoming peace talks in Libya later
this month, we strongly believe that requiring the promulgation of such a list is
unwise.
In addition, creation of such a list raises a host of practical concerns. Any such list
created by the U.S. Government will necessarily be incomplete. It would not identify
those companies whose involvement in Sudan is not sufficiently established or is
known only through classified information. The resultant list would be limited to
publicly available information. Such a list would attempt to duplicate similar lists
already compiled by non-governmental organizations based on public information
but it would likely be less inclusive in light of the government's inability to rely on
certain sources of information.
Further, the agency tasked with creating such a list would face difficult issues in
determining what type and amount of evidence would suffice to include a company
on the list. And, the inclusion or exclusion of certain companies from the list could
subject the agency to legal challenges under the Administrative Procedure Act.
Creation of a list would also impose an ongoing, burdensome requirement on the
agency tasked with its creation, especially a list that would need to be updated
continually or on a regular basis as called for by some legislative proposals. These
demands will necessarily divert resources from other important government
functions. Indeed, those on my staff who have the most familiarity with Sudan are
currently working to target companies and individuals for additional sanctions.
With relevant lists already available from non-governmental sources, all of the
above costs would seem to greatly outweigh what incremental benefit a new
government-generated list might provide.
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111612007
Page 4 of4
Other Policy Proposals
Many legislative proposals would encourage and affirmatively authorize State and
local government action. As noted by my State Department colleague, the
Administration opposes proposals to authorize divestment by state and local
governments, which impair the ability of the president to act on behalf of the nation
as a whole and risk creating a multiplicity of foreign policies.
I understand that the Committee is considering alternative proposals to a
government-generated list. We look forward to continuing to work with you and your
staffs as you consider the costs and benefits of such proposals, and would look
forward answering the Committee's questions regarding these issues.
Conclusion
We all share the same objective when it comes to Darfur: a negotiated settlement
that will bring a stable and lasting peace to Darfur. We remain committed to
continuing the constructive dialogue we have had with your staffs on these
important issues, as we very much want to ensure that the U.S. Government has all
appropriate tools at its disposal to address this situation. Thank you again for the
opportunity to testify today about this important issue.
http://www.treas.gov/press/releases/hp590.htm
1116/2007
Page 1 of3
October 4, 2007
HP-591
Treasurer Anna Escobedo Cabral Remarks
Before the Eastern Regional Conference
on Reaching Unbanked People
New York City - Thank you for that introduction. I'm pleased to be here this
morning and to welcome all of you to the Eastern Regional Conference on
Reaching Unbanked People. I want to recognize our many partners who have
helped organize this conference. I also want to thank all of you for being here and
joining us in our efforts to reach some of America's most financially vulnerable
citizens - those who have no relationship with mainstream financial institutions,
such as banks or credit unions.
Your participation is important today for a few reasons. First, I've spent the majority
of my career working for the federal government, and I've learned that the
government is most effective when we enlist the help of our many partners - the
private sector, state and local governments and community-based organizations.
For example, Treasury is beginning an aggressive outreach campaign to connect
with the homeowners who cou Id face foreclosure in the next 18 months to two
years. We want to encourage these homeowners to reach out to their lenders
before they're hit with the payment shock of a mortgage reset. We know that for
many people, products exist to help them. We want these homeowners to begin
paying attention to their mortgage statements and talk to their lenders to determine
their options early in the process.
There's a common misconception from borrowers that lenders want to take their
homes, and as a result, borrowers do not reach out for help. In fact, we've heard
that in 50 percent of foreclosures, the borrower never even spoke with their lender
or a counselor. It is critical for borrowers to reach out as early as possible. In many
cases, there may be a possibility to refinance or reduce the payment so the family
can keep their home. If we can help keep more families in their homes, individuals,
families, and our communities benefit, and our country and economy are better off
as a whole.
The challenge to reaching struggling homeowners is similar to the challenge of
reaching the unbanked. Just as we have to find creative ways to break down the
barriers that keep borrowers from contacting their lenders, we must be innovative in
our approaches to welcoming people into the financial mainstream. Our progress in
reaching the unbanked population is only as strong as the partnerships we can
create with each other.
This is a theme we've heard echoed in each of the three previous conferences
we've held across the United States.
In Chicago we learned of effective partnerships and saw examples of the great
work the Chicago Fed, community banks and others are doing to reach unbanked
populations and new immigrants. In Texas, we learned about the unique challenges
in border communities and saw creative business models community credit unions
have adopted to bring in new customers. For example, one credit union offered
small loans without a credit check on the condition that the individual receive
broader financial education. Earlier this year, at the conference in Seattle, we heard
about the efforts of Washington Mutual to reach out to the unbanked. We also
heard about the unique challenges faced in serving diverse communities.
Today we're building on these discussions, and it's appropriate that we're here in
New York City - the financial capital of the world.
http::llww w.treas.gov/press/releases/hp591.htm
1116/2007
Page 2 of3
That brings me to the second reason I think it's important that you're here. Each of
you has unique perspectives and expertise to bring to the table. We benefit greatly
when we can get your thoughts, hear what works and what doesn't. So I invite you
to share your ideas with us and with each other.
Finally, I think it's critical that we're all here to talk about the issue of banking the
unbanked, because at the end of the day, this is an issue of improving quality of life
for individuals and families. This is about strengthening our communities and
bringing Americans who are living on the edge of opportunity into the financial
mainstream to experience the great promise our country has to offer.
After all, knowing how to manage your finances and take advantage of the wide
array of financial products that exist in today's marketplace is critical to economic
mobility. But we can't even begin to talk about financial education with the
estimated 10 million Americans who remain outside of the financial mainstream. For
these individuals, learning how to manage their personal finances is critical but
abstract because they're outside of the system.
Now many people aren't familiar with the issues surrounding the unbanked, and
they're surprised at the large amount of individuals who do not have a relationship
with a bank or credit union. Quite frankly, it is surprising when most of us have
several different accounts and a few too many credit cards. I'm sure there are a lot
of us who could fall into the category of "overbanked" if it existed.
So why should we care about people who are unbanked? The answer is simple.
Getting more Americans involved in the mainstream financial sector is about
investing in our communities. If we can help individuals and families climb the
ladder of economic success - our communities prosper and our entire country
benefits. Becoming a part of the financial mainstream is the first step on that ladder.
It's our job - working together everyone in this room - to find creative ways to lay
out the welcome mat.
For our part at Treasury, we look for ongoing opportunities to demonstrate the
importance of establishing a relationship with a financial institution. For example,
the CDFI Fund does great work to support community financial institutions which
often provide enhanced access to financial services and build bridges to the
unbanked.
The Earned Income Tax Credit provides low income working families with a little
extra money, and can be a valuable tool in lifting people out of poverty and opening
up an opportunity to create a nest egg for the future. In fact, a recent Census study
found that 4.6 million people were lifted out of poverty in 2002 thanks to the tax
credit.
From our perspective at Treasury, this is a great opportunity to reach those families
who don't have a bank account and raise awareness about the doors that could be
opened by entering the financial mainstream. The IRS does a tremendous job
working with organizations like the United Way and city mayors to help spread the
word about the tax credit and encourage people to build on this wealth by opening a
bank account and saving for the future.
Treasury also works hard on an outreach campaign called Go Direct which
encourages people to sign up for direct deposit to receive their federal benefit
payments. About 80 percent of federal benefits are made by direct deposit. That
means more than 12 million Americans still receive their federal benefits in the form
of a paper check through the mail. About 4.5 million of these recipients do not have
a bank account, and we're working hard to let them know the potential benefits of
direct deposit with a bank or credit union. In addition to saving the government
money - it costs 80 cents to mail a paper check - direct deposit protects against
identity theft and fraud and offers a more reliable and convenient method of
receiving payments.
Our work with the Earned Income Tax Credit and Go Direct outreach efforts raises
the point that the unbanked are in many cases hard-working Americans who are
often good savers. We know there are many reasons why people are unbanked some face language or cultural barriers, some live in rural areas with no convenient
access to financial institutions, and some simply have never had a relationship with
http://www.treas.gov/press/releases/hp591.htm
1116/2007
Page 3 of3
a financial institution.
To be sure, the unbanked population is diverse, and a diversity of financial products
and services is required in order to meet their unique needs. This means that in
some cases financial institutions might need to change their business models. For
example, we've seen successful models of credit unions in immigrant communities
who provide multilingual materials and put employees behind the counter who can
speak the same language. Others found that simply changing the workplace attire
from coat and tie to khakis and a polo shirt helped provide a more welcoming
atmosphere for new customers.
We've also heard that many unbanked people prefer face to face interaction. Most
of us today do our banking on-line and visit ATM machines, rarely stepping foot
inside our financial institutions. This isn't the case with everyone. Some people
would like to see their bankers and interact with a trusted representative because
for them there's a certain comfort level that can be established.
The idea is that we need to know and understand the consumer - that includes
knowing both current customers and potential customers. We need to identify their
perspectives and experiences in order to understand how to reach them and what
products we can develop to truly serve them. This can be a difficult task but also
one that is worthwhile.
Today, I thank you again for being here and for your continued hard work to help
more Americans experience the hope, promise and opportunity our country offers. I
call on you to listen and learn from each other today and forge new partnerships
that will help strengthen our efforts going forward. This is work that has the potential
to not only make a positive difference for families and communities here and now,
but it can help build a better life for generations that follow.
Thank you.
http://www.treas.gov/press/releases/hp591.htm
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Page 1 of2
October 5, 2007
hp-592
Treasury Economic Update 10.5.07
"Today's data demonstrate the resilience of the U.S. economy. Steady job
creation, rising wages, and still-low unemployment mean that the U.S.
economy is in good shape to weather the difficulties we are seeing in housing
and credit markets. ..
Assistant Secretary Phillip Swagel, October 5, 2007
Job Creation Continues:
Job Growth: 110,000 new jobs were created in September, the 49th straight month
of job gains. The United States has added 1.6 million jobs in the past 12 months
and over 8.4 million jobs since August 2003. Employment increased in 48 states
and the District of Columbia over the year ending in August. (Last updated: October
5,2007)
Low Unemployment: September's 4.7 percent unemployment rate is close to its
lowest reading in 6 years. Unemployment rates have declined or held steady in 29
states and the District of Columbia over the year ending in August. (Last updated:
October 5, 2007)
There are Still Many Signs of Economic Strength:
Economic Growth: Real GOP growth was 3.8 percent in the second quarter of
2007, supported by strong gains in business investment and exports. (Last
updated: September 27, 2007)
Business Investment: Business spending on commercial structures and
equipment strengthened in the second quarter. Strong corporate profits and healthy
balance sheets bode well for continued investment growth. (Last updated:
September 27, 2007)
Exports: Strong global growth is boosting U.S. exports, which grew by 7.1 percent
over the past 4 quarters. (Last updated: September 27, 2007)
Inflation: Core inflation remains contained. The consumer price index excluding
food and energy rose 2.1 percent over the 12 months ending in August. (Last
updated: September 19, 2007)
Tax Revenues: Tax receipts rose 11.8 percent in fiscal year 2006 (FY06) on top of
FY05's 14.6 percent increase. As a share of GOP, FY07 receipts are projected to
be above their 40-year average. (Last updated: July 13, 2007)
Americans Are Keeping More of Their Hard-Earned Money:
Real Wages Increased 2.2 percent Over the Past 12 Months (ending in August).
This translates into an <;ldditional $720 above inflation for the average full-time
production worker over the last year.
Pro-Growth Policies will Enhance Long-Term U.S. Economic Strength:
We are on track to balance the budget by 2012. The Mid-Session Review of the
FY 2008 Budget shows that we are on track to achieve a small surplus in 2012.
http://www.treas.gov/press/releases/hp592.htm
11/6/2007
Page 2 of2
This year, the deficit is projectedto be down to 1.5 percent of GOP. Much of the
improvement in the deficit reflects strong revenue growth, which in turn reflects the
continued strength of the U.S. economy. Looking ahead, higher spending on
entitlement programs dominates the future fiscal situation; we must squarely face
up to the challenge of reforming these programs.
www.treas.gov/economic-plan
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111612007
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The U.S. economy is strong and getting stronger. Since the
President signed the Jobs & Growth Act in May 2003, providing
much needed tax relief, the U.S. economy has made a remarkable
recovery. This Administration will continue pursuing pro-growth
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Treasury Releases Social Security Papers on Common Ground
To build on the discussions that Secretary Paulson has had with
members of Congress in both parties, Treasury will release a series
of issue briefs that will discuss Social Security reform, focusing on
the nature of the problem and those aspects of reform that have
broad support.
sound labor market is vital fa
to continue to see ri~
We are encouraged b.
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Paulson Statement on Treasury Social Security Papers on
Common Ground
Issue Brief 1: Social Security Reform: The Nature of the
Problem
Issue Brief 2 : Social Security Reform A Framework for
Analysis
MORE INFORMATION
Job Creation Continues:
• Job Growth: 166,000 new jobs were created in October, the
50th straight month of job gains. The United States has
added 1.7 million jobs in the past 12 months and about 8
and a half million jobs since August 2003. Employment
increased in 49 states and the District of Columbia over the
year ending in September. (Last updated: November 2,
2007)
• Low Unemployment: October's 4.7 percent unemployment
rate is close to its lowest reading in 6 years. Unemployment
rates have declined or held steady in 27 states and the
District of Columbia over the year ending in September.
(Last updated: November 2, 2007)
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There are Still Many Signs of Economic Strength:
•
Economic Growth: Real GOP growth was 3.9 percent in
the third quarter of 2007, supported by strong gains in
business investment and exports. (Last updated: October
31,2007)
• Business Investment: Business spending on commercial
structures and equipment rose solidly in the third quarter.
Strong corporate profits and healthy balance sheets bode
http://www.treas.gov/economic-plan/
1116/2007
mited States - Department of The Treasury - Economy
Page 2 of2
well for continued investment growth. (Last updated: October
31,2007)
• Exports: Strong global growth is boosting U.S. exports,
which grew by 9.6 percent over the past 4 quarters. (Last
updated: October 31,2007)
• Inflation: Core inflation remains contained. The consumer
price index excluding food and energy rose 2.1 percent over
the 12 months ending in September. (Last updated: October
17,2007)
• Tax Revenues: Tax receipts rose 6.7 percent in fiscal year
2007 (FY07) on top of FY06's 11.8 percent increase. As a
share of GOP, FY07 receipts exceeded their 40-year
average. (Last updated: October 12, 2007)
Americans Are Keeping More of Their Hard-Earned Money:
• Real Wages Increased 1.3 percent Over the Past 12
Months (ending in September). This translates into an
additional $449 above inflation for the average full-time
production worker over the last year. (Last updated: October
17,2007)
Pro-Growth Policies will Enhance Long-Term U.S. Economic
Strength:
• We are on track to make significant further progress on
the deficit. The FY07 budget deficit was down to 1.2
percent of GOP, from 1.9 percent in FY06. Much of the
improvement in the deficit reflects strong revenue growth,
which in turn reflects the continued strength of the U.S.
economy. Looking ahead, higher spending on entitlement
programs dominates the future fiscal situation; we must
squarely face up to the challenge of reforming these
programs.
Last Updated: November 2, 2007
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October 5, 2007
HP-593
Treasury Awards $3.9 Billion to Encourage Private Sector Investments in
Distressed Communities
Awards Announced Under 5th Round of New Markets Tax Credit Program
New Orleans- U.S. Treasury Deputy Secretary Robert Kimmitt and Treasury's
Community Development Financial Institutions (CDFI) Fund Director Kimberly Reed
announced today in New Orleans, La., the 61 organizations selected to receive
$3.9 billion in tax credits for use in low-income communities. Treasury awarded the
credits under the 2007 round of the New Markets Tax Credit (NMTC) Program.
Deputy Secretary Kimmitt and Director Reed were in the Gulf for the announcement
to highlight the 11 organizations receiving $400 million in NMTC for specific use in
the redevelopment of the Hurricane Katrina Gulf Opportunity Zone (GO Zone). The
61 allocatees are headquartered in 24 states and the District of Columbia, but
anticipate serving 45 states, D.C. and Puerto Rico. The remaining five states would
be served by allocatees with a national service area.
"These tax credits are intended to spur new private sector investment in
communities in need across the United States and encourage continued
redevelopment and reconstruction in the Hurricane Katrina Gulf Opportunity Zone,"
said Deputy Secretary Kimmitt. "The vision of the Community Development
Financial Institutions Fund is to help give all Americans access to affordable credit,
capital, and financial services."
"These tax credits, totaling $3.9 billion, are important to encourage investment in
rural and urban low-income communities across the United States," said CDFI
Fund Director Reed. "We also are committed to helping those affected by Hurricane
Katrina, and I am pleased how the New Markets Tax Credit Program is making a
difference in the redevelopment of communities across the Gulf Coast."
The NMTC Program attracts private-sector capital investment into the nation's
urban and rural low-income areas to help finance community development projects,
stimulate economic growth and create jobs.
The NMTC Program, established by Congress in December 2000, permits
individual and corporate taxpayers to receive a credit against federal income taxes
for making qualified equity investments in investment vehicles known as
Community Development Entities (CDEs). The credit provided to the investor totals
39 percent of the cost of the investment and is claimed over a seven-year period.
Substantially all of the taxpayer's investment must in turn be used by the CDE to
make qualified investments in low-income communities. The 61 organizations were
selected through a competitive application and rigorous review process.
The NMTC program is administered by Treasury's Community Development
Financial Institutions (CDFI) Fund. Throughout the life of the NMTC Program, the
CDFI Fund is authorized to allocate to CDEs the authority to issue to their investors
up to the aggregate amount of $19.5 billion in equity as to which NMTCs can be
claimed, including $1 billion for use in the GO Zone. In the five rounds to date, the
CDFI Fund has made 294 awards totaling $16 billion in tax credit authority.
A complete list of the 61 organizations selected and additional information on the
NMTC Program can be found on the CDFI Fund's web site at: www.cdfifulld gOY
·30 .
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111612007
Page 1 of 1
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October 9, 2007
hp-594
Treasury, IRS Issue Pension Protection Act Guidance
Washington, DC--The Treasury Department and the Internal Revenue Service
(IRS) today issued a notice providing guidance on the corporate bond yield curve
and associated segment rates that will be used under the enhanced pension
funding rules enacted by the Pension Protection Act of 2006 (PPA).
Under PPA, Treasury was required to produce a yield curve and simplified segment
rates for investment-quality corporate bonds that are in the top three quality levels
for use by private pension plans in determining their funding obligations and the
amounts of lump-sum payments to retirees. IRS Notice 2007-81 outlines the
methodology used by Treasury in producing the yield curve.
The Notice also provides the full yield curve and various segment rates for August
2007 together with the 23 months of historical segment rates extending back to
September of 2005. In addition, each month IRS will publish a standard notice
containing updated monthly yields along with the additional rates required under the
provisions of PPA.
The initial yield curve, as well as monthly updates will also be posted on the IRS's
website. Notice 2007-81 is attached.
-30-
REPORTS
•
Notice 2007 -81
http://www.treas.goy/press/releases/hp594.htm
111612007
Part III --- Administrative, Procedural and Miscellaneous
Interest Rate Modification
Notice 2007-81
This notice provides guidance on the corporate bond yield curve and the
segment rates required to compute the funding target and other items under § 430 of the
Internal Revenue Code of 1986 (Code) and § 303 of the Employee Retirement Income
Security Act of 1974 (ERISA). In addition, this notice provides guidance on the interest
rates for determining minimum present values as required under § 417 (e )(3) of the Code
and § 205(g)(3) of ERISA. This notice implements changes to the funding rules and
minimum present value requirements made by sections 101, 102, 111, 112, and 302 of
the Pension Protection Act of 2006, P.L. No.1 09-280 (PPA).
BACKGROUND AND PRIOR LAW
Section 412 of the Code provides minimum funding requirements that generally
apply for defined benefit plans. Under § 412(b)(5)(A) prior to amendment by PPA, the
funding standard account (and items therein) must be charged or credited with interest
at the appropriate rate consistent with the rate or rates of interest used under the plan to
determine costs.
Section 412(b)(5)(B) prior to amendment by PPA provides rules for specifying the
interest rate that is used to determine a plan's current liability for purposes of § 412(1)
and for purposes of the minimum full funding limitation under § 412(c)(7)(E). Section
412(b)(5)(B)(ii)(III) prior to amendment provides that, for plan years beginning in 2004,
2005,2006, and 2007, the interest rate used to determine current liability must not be
above and must not be more than 10 percent below the weighted average of the rates of
interest on amounts invested conservatively in long-term investment-grade corporate
bonds during the 4-year period ending on the last day before the beginning of the plan
year. Notice 2004-34,2004-1 C.B. 848, specified the corporate bond indices and the
methodology for determining these corporate bond rates.
Section 417(e)(3) provides assumptions for determining minimum present values
for certain purposes. For plan years beginning before 2008, the applicable interest rate
for these purposes is the annual rate of interest on 30-year Treasury securities as
prescribed by the Commissioner.
PENSION PROTECTION ACT OF 2006
PPA makes extensive changes to the minimum funding requirements that
generally apply for plan years beginning on or after January 1, 2008. However, certain
plans have delayed effective dates for these amendments provided under sections 104,
105, and 106 of PPA.
Section 430 of the Code, added by section 112 of PPA, specifies the minimum
funding requirements that apply to single employer plans pursuant to § 412 of the Code.
Section 430(a) defines the minimum required contribution for a single employer plan as
the sum of the plan's target normal cost and the shortfall and waiver amortization
charges for the year. Under § 430(b), a plan's target normal cost is generally equal to
the present value of all benefits expected to accrue or be earned under the plan during
the plan year. Under § 430(d)(1), a plan's funding target for a plan year is generally
equal to the present value of all benefits accrued or earned under the plan as of the
beginning of the plan year.
Section 430(h)(2) specifies the interest rates that must be used to determine a
plan's target normal cost and funding target. Under this provision, present value is
generally determined using three interest rates ("segment rates"), each of which applies
to cash flows during specified periods.
Each segment rate is, for any month, the single rate of interest determined by the
Secretary for such month on the basis of the applicable corporate bond yield curve for
that month, taking into account only that portion of such yield curve applicable to that
segment. Section 430(h)(2)(D)(i) provides that the Secretary shall prescribe a corporate
bond yield curve applicable for each month. The applicable corporate bond yield curve
is, with respect to any month, a yield curve which reflects a 24-month average (the
average of the yield curve values for the preceding month and the prior 23 months) of
the yields on investment grade corporate bonds with varying maturities and that are in
the top 3 quality levels available. Under § 430(h)(2)(D)(ii), an election may be made to
use the corporate bond yield curve determined without regard to the 24-month averaging
in lieu of the segment rates.
A transitional rule under § 430(h)(2)(G) applies for plan years starting in 2008
and 2009 (if the plan had its first plan year before 2008). Under this rule, the 24-month
average segment rates as computed above are blended with the corporate bond
weighted average rates determined under § 412(b)(5)(S)(ii)(II) (prior to amendment).
However, § 430(h)(2)(G)(iv) provides that an election may be made to apply the 24month average segment rates without applying the blended rates under the transitional
rule of § 430(h)(2)(G).
Generally, section 302(b) of PPA amends § 417 (e )(3) of the Code to provide that
the interest rates used for the determination of minimum present values are segment
rates as computed under § 430(h)(2), but determined without regard to yield curve rates
from the preceding 23 months. However, for plan years beginning in 2008, 2009, 2010,
and 2011 these segment rates are blended with the applicable rate of
§ 417(e)(3)(A)(ii)(II) as in effect for plan years beginning in 2007. This amendment is
effective for plan years beginning after December 31,2007. PPA provides conforming
amendments to ERISA for the amendments to §§ 412, 417, and 430 of the Code.
Section 430(h)(2)(F) provides that the Secretary shall publish each month the
corporate bond yield curve and the rates described above. In addition, the Secretary
shall publish a description of the methodology used to determine such yield curve and
such rates in sufficient detail to enable plans to make reasonable predictions regarding
the yield curve and rates for future months.
DETERMINATION OF THE SEGMENT RATES
The following methodology is established to determine the corporate bond yield
curve and the segment rates. A yield curve is calculated for each business day of the
2
month based on investment grade corporate bonds in the top three quality levels. The
construction of the yield curve for a given day is explained in Appendix A to this notice.
This daily yield curve is expressed as the yield for a zero coupon bond at each maturity
point from }'2 year to 100 years, in }'2 year intervals. The value at any maturity point of
the monthly yield curve is set equal to the arithmetic average for all of the business days
in a month of the values for that maturity point from the daily yield curves. The monthly
yield curve then is the set of values for each of the 200 maturity points. The monthly
corporate bond yield curve derived from August 2007 data is shown in Table I of
Appendix B. The monthly corporate bond yield curve is the table which would be used if
an election is made under § 430(h)(2)(O)(ii).
The first segment rate applicable for a given month is the arithmetic average over
the 10 maturity points from }'2 year to 5 years of the applicable corporate bond yield
curve. This is mathematically the same as the arithmetic average for the preceding 24
months of the "spot" first segment rates that can be developed from each of the monthly
yield curves (as the arithmetic average over the 10 maturity points from }'2 year to 5
years of those monthly yield curves) and this second approach has been used in order
to facilitate presentation of the segment rates. Similarly, the second segment rate
applicable for the given month is the arithmetic average for the preceding 24 months of
the spot second segment rates for those months (where the spot second segment rate
for a month is the arithmetic average over the 30 maturity points from 5}'2 years to 20
years of the monthly yield curve). The third segment rate applicable for the given month
is the arithmetic average for the preceding 24 months of the spot third segment rates for
those months (where the spot third segment rate for a month is the arithmetic average
over the 80 maturity points from 20}'2 years to 60 years of the monthly yield curve).
These 24-month average segment rates are the rates that would be applicable if an
election was made under § 430(h)(2)(G)(iv) not to use the transitional rule of
§ 430(h)(2)(G), or if a plan's first plan year begins after 2007. The three 24-month
average corporate bond segment rates applicable for September 2007 are as follows:
24-Month Average Segment Rates
Applicable For September 2007
First
Segment
Second
Segment
Third
Segment
5.26
5.82
6.38
The funding transitional segment rates determined under § 430(h)(2)(G)
applicable for September 2007, taking into account the corporate bond weighted
average of 5.86 for September 2007 published in Notice 2007-68,2007-35 I.R.B. 468,
are as follows:
3
Funding Transitional Segment Rates
Applicable For September 2007
For Plan Years
Beginning in
First
Segment
Second
Segment
Third
Segment
2008
5.66
5.85
6.03
INTEREST RATE FOR MINIMUM PRESENT VALUE
Generally for plan years beginning after December 31,2007, the applicable
interest rates under § 417(e)(3) are segment rates computed without regard to a 24month average. These are the monthly spot segment rates. For plan years beginning in
years 2008,2009,2010, and 2011, the applicable interest rate is the monthly spot
segment rate blended with the applicable rate under § 417(e)(3)(A)(ii)(II) as in effect for
plan years beginning in 2007, where the blending ratio depends on the plan year. The
minimum present value transitional segment rates determined under § 417(e)(3)(O) for
August 2007, taking into account the August 2007 30-year Treasury rate of 4.93
published in Notice 2007-68, are as follows:
Minimum Present Value Transitional Segment Rates
For August 2007
For Plan Years
Beginning in
First
Segment
Second
Segment
Third
Segment
2008
5.02
5.18
5.28
SUPPLEMENTAL INFORMATION
The spot first, second, and third segment rates for August 2007 are, respectively,
5.40, 6.20, and 6.66. The spot segment rates for each of the months from September
2005 through August 2007 are shown in Table II of Appendix B. These rates are
preliminary values from which the 24-month average segment rates and the minimum
present value transitional segment rates provided above can be derived.
MONTHLY PUBLICATION OF RATES
Each month, the Service publishes by notice the corporate bond weighted
average applicable for the current month as provided under § 412(b )(5)(B) prior to
amendment by PPA and the 30-year Treasury rate as provided under § 417(e)(3). In the
same notice, the Service will publish the monthly corporate bond yield curve of
§ 430(h)(2) derived from the preceding month (and the corresponding spot segment
rates), the 24-month average funding segment rates applicable for the current month,
and the funding transitional segment rates under the transition rule of § 430(h)(2)(G)
applicable for the current month. In the same notice, the Service will also publish the
4
minimum present value segment rates as required under the transitional rule provided in
§ 417(e)(3)(D).
DRAFTING INFORMATION
The principal author of this notice is Tony Montanaro of the Employee Plans, Tax
Exempt and Government Entities Division. However, other personnel from the Service
and the Treasury Department participated in preparing this notice. Mr. Montanaro may
be e-mailed at RetirementPlanQuestions@irs.gov.
APPENDIX A
The daily yield curve for a given day is constructed under methods and
assumptions as described in this section. The description applies to the methodology in
use at the present time. Any significant changes in this methodology will be announced
by notice.
Data Set
The following criteria are provided for identifying those bonds to be included in
the database used to construct the yield curve. The universe of possible bonds consists
of a set of bonds which are designated as corporate, have high quality ratings (AAA, AA,
or A) from nationally recognized statistical rating organizations, and have at least $250
million in par amount outstanding on at least one day during the reporting period. The
database is extended for maturities below 1 year by using AA financial and AA nonfinancial commercial paper rates, as reported by the Federal Reserve Board. The bonds
chosen for the bond set pay fixed nominal semiannual coupons and the principal amount
at maturity. Bonds with different or additional characteristics are generally excluded.
The main exclusions are:
(1) bonds not denominated in U.S. dollars;
(2) bonds not issued by U.S. corporations;
(3) bonds which are capital securities (hybrid preferred stock);
(4) bonds having variable coupon rates;
(5) convertible bonds;
(6) "Agency" bonds, such as FNMA bonds;
(7) asset-backed bonds;
(8) callable bonds unless the call feature is make-whole;
(9) putable bonds; and
(10) bonds with sinking funds.
In addition, a bond is excluded from use with respect to a given day if the bond has for
that day:
(1) a par amount outstanding below $250 million;
(2) a maturity greater than 30 years; or
(3) a rating below A.
5
These criteria leave about 1,400 bonds in each daily set of bonds. For each day, the
database information for each bond includes the bid price (for commercial paper, it is the
ask price), coupon rate, maturity, par amount outstanding, and ratings.
Derivation of the Yield Curve
The daily yield curve is derived from a pricing model that gives the price of a
bond as the discounted present value of its cash flows plus adjustment factors for credit
quality. The results of the model generate a discount function, and the rates for the daily
yield curve are calculated from the discount function. The discount function is derived
from the daily determination of the instantaneous forward interest rates for each point in
the future.
Derivation of Forward Interest Rates
The forward interest rates are assumed to be described as a series of cubic
polynomials that are smoothly joined at specified knot points. The specified knot points
are maturities of 0, 1.5, 3, 7, 15, and 30 years, and having a smooth junction at a knot
means that the two polynomials that are meeting at the knot have the same value, the
same derivative, and the same second derivative at that knot point. Such a series of
cubic polynomials is called a cubic spline.
Three constraints are placed on the forward interest rate function. First, the
second derivative of the function is set to zero. at maturity zero. Second, the value of the
forward rate function at and after 30 years is constrained to equal its average value from
15 to 30 years. Third, the derivative of the forward rate function is set to zero at maturity
30 years.
Using these constraints, the assumed cubic spline for the forward interest rate
function can be described as a linear combination of B-splines, with five parameters.
Thus, the daily forward rate function can be defined by determining the five daily
parameters for the B-splines. Thes,e parameters, together with two adjustment factors
described below, are estimated from the bond data.
Adjustment Factors for Credit Quality
In the pricing model, the adjustment factors for credit quality are added to the
present value of the bond's cash flows as given by the forward rate and the discount
function. Specifically, the adjustment factors are made up of two linear regression
variables added to the present value with two respective regression coefficients that
need to be estimated. These variables adjust the bond prices so that the discount
function and the spot rates represent market-weighted average credit quality of the top
three quality levels (AAA, AA, and A).
Specifically, some of the deviation between the predicted price for the bond
(based on the cash flows and the discount function) and the actual price for the bond
can be attributed to differences in credit quality and some of the deviation is an error
factor. The model determines the portion of the deviation that is attributable to credit
quality by determining the two adjustment factors that reflect the relative proportion of Arated bonds within the data set and the relative proportion of AA-rated bonds within the
subset of AA- and AAA-rated bonds. A high proportion of A-rated bonds results in a
6
larger deviation in price for the higher quality bonds, which means that the discount
function used to develop the yield curve is more closely aligned with a discount function
for A-rated bonds than for the higher rated bonds. Similarly, a higher proportion of AArated bonds within the subset of AA- and AAA-rated bonds means that the discount
function is more representative of the AA-rated universe than the AAA-rated bonds.
These adjustment factors allow the yield curve to be based on the proportion of
bonds at the three quality levels in the market determined over the entire maturity
spectrum (rather than on the proportion at each specific maturity point). This avoids
potential distortions which could arise because of different proportions of bonds at the
three quality levels at various maturity points.
Estimates for the parameters
These seven parameters, comprising five parameters in the cubic spline and the
two adjustment coefficients on the bond-quality adjustment variables, are estimated from
the bond price data. The estimation is done by nonlinear least squares, that is, the
seven parameter estimates are chosen to minimize the sum of the squared differences
between the actual bond prices and the prices given by the bond price model.
Before the estimation is carried out, the bond data are weighted. The weighting
consists of two stages. In the first stage, equal weights are assigned to the commercial
paper rates at the short end of the curve, and the par amounts outstanding of all the
bonds are rescaled so that their sum equals the sum of the weights for commercial
paper. Then, the squared price difference for each bond is multiplied by the bond's
rescaled par amount outstanding, and the squared difference for each commercial paper
rate is multiplied by the commercial paper weight. In the second stage, for bonds with
duration greater than 1, the weighted squared price difference for each bond from the
first stage is divided by duration.
Additional Information
Additional background information regarding the daily corporate bond yield curve
can be found at the following URL:
http://www.ustreas.gov/offices/economic-policy/reports/corporate yield curve 2007.pdf
Other developmental papers on the corporate bond yield curve can be found at the
following URL:
http://www.ustreas.gov/offices/economic-policy/speeches testimony refund.shtml
7
APPENDIX 8
Table I
Monthly Yield Curve Derived From August 2007 Data
Maturity
Yield
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
8.0
8.5
9.0
9.5
10.0
10.5
11.0
11.5
12.0
12.5
13.0
13.5
14.0
14.5
15.0
15.5
16.0
16.5
17.0
17.5
18.0
18.5
19.0
19.5
20.0
5.47
5.37
5.29
5.26
5.28
5.33
5.40
5.47
5.54
5.62
5.69
5.75
5.81
5.86
5.91
5.95
6.00
6.04
6.07
6.11
6.14
6.17
6.19
6.22
6.24
6.27
6.29
6.31
6.33
6.34
6.36
6.38
6.39
6.41
6.42
6.43
6.44
6.46
6.47
6.48
Matunty
20.5
21.0
21.5
22.0
22.5
23.0
23.5
24.0
24.5
25.0
25.5
26.0
26.5
27.0
27.5
28.0
28.5
29.0
29.5
30.0
30.5
31.0
31.5
32.0
32.5
33.0
33.5
34.0
34.5
35.0
35.5
36.0
36.5
37.0
37.5
38.0
38.5
39.0
39.5
40.0
V,ie Id
Maumy
t't
6.49
6.50
6.51
6.51
6.52
6.53
6.54
6.55
6.55
6.56
6.57
6.57
6.58
6.58
6.59
6.59
6.60
6.60
6.61
6.61
6.62
6.62
6.63
6.63
6.63
6.64
6.64
6.65
6.65
6.65
6.66
6.66
6.66
6.66
6.67
6.67
6.67
6.68
6.68
6.68
40.5
41.0
41.5
42.0
42.5
43.0
43.5
44.0
44.5
45.0
45.5
46.0
46.5
47.0
47.5
48.0
48.5
49.0
49.5
50.0
50.5
51.0
51.5
52.0
52.5
53.0
53.5
54.0
54.5
55.0
55.5
56.0
56.5
57.0
57.5
58.0
58.5
59.0
59.5
60.0
8
v,'Ie Id
6.68
6.69
6.69
6.69
6.69
6.70
6.70
6.70
6.70
6.70
6.71
6.71
6.71
6.71
6.71
6.71
6.72
6.72
6.72
6.72
6.72
6.72
6.73
6.73
6.73
6.73
6.73
6.73
6.73
6.74
6.74
6.74
6.74
6.74
6.74
6.74
6.75
6.75
6.75
6.75
Maumy
t 't
60.5
61.0
61.5
62.0
62.5
63.0
63.5
64.0
64.5
65.0
65.5
66.0
66.5
67.0
67.5
68.0
68.5
69.0
69.5
70.0
70.5
71.0
71.5
72.0
72.5
73.0
73.5
74.0
74.5
75.0
75.5
76.0
76.5
77.0
77.5
78.0
78.5
79.0
79.5
80.0
v,'Ie Id
6.75
6.75
6.75
6.75
6.75
6.75
6.76
6.76
6.76
6.76
6.76
6.76
6.76
6.76
6.76
6.76
6.77
6.77
6.77
6.77
6.77
6.77
6.77
6.77
6.77
6.77
6.77
6.77
6.77
6.78
6.78
6.78
6.78
6.78
6.78
6.78
6.78
6.78
6.78
6.78
Maturity
Yield
80.5
81.0
81.5
82.0
82.5
83.0
83.5
84.0
84.5
85.0
85.5
86.0
86.5
87.0
87.5
88.0
88.5
89.0
89.5
90.0
90.5
91.0
91.5
92.0
92.5
93.0
93.5
94.0
94.5
95.0
95.5
96.0
96.5
97.0
97.5
98.0
98.5
99.0
99.5
100.0
6.78
6.78
6.78
6.78
6.79
6.79
6.79
6.79
6.79
6.79
6.79
6.79
6.79
6.79
6.79
6.79
6.79
6.79
6.79
6.79
6.79
6.79
6.79
6.80
6.80
6.80
6.80
6.80
6.80
6.80
6.80
6.80
6.80
6.80
6.80
6.80
6.80
6.80
6.80
6.80
6
Table II
Historical Spot Segment Rates
Month
September
October
November
December
January
February
March
April
May
June
July
August
September
October
November
December
January
February
March
April
May
June
July
August
2005
2005
2005
2005
2006
2006
2006
2006
2006
2006
2006
2006
2006
2006
2006
2006
2007
2007
2007
2007
2007
2007
2007
2007
First
Segment
Second
Segment
Third
Segment
4.44
4.78
4.95
4.96
4.96
5.19
5.27
5.43
5.52
5.67
5.67
5.46
5.32
5.33
5.25
5.16
5.35
5.31
5.13
5.23
5.32
5.58
5.53
5.40
5.23
5.50
5.60
5.54
5.49
5.61
5.77
6.06
6.19
6.21
6.19
5.98
5.81
5.81
5.64
5.60
5.78
5.76
5.68
5.81
5.85
6.21
6.22
6.20
6.05
6.27
6.34
6.24
6.14
6.09
6.31
6.67
6.79
6.78
6.75
6.59
6.42
6.36
6.07
6.09
6.22
6.13
6.19
6.34
6.32
6.61
6.60
6.66
9
i
1/0/ LVV /
Page 1 of6
October 9, 2007
hp-595
Assistant Secretary for Financial Institutions
David G. Nason
Remarks before The National Organization of Life & Health Insurance
Guaranty Associations
~melia Island, Fla. - Thank you for that kind introduction .. It is a pleasure for me to
lOin you here today. I appreciate the invitation to come back before you to discuss
the economy, in which insurance plays an important role, and the credit and
mortgage markets. I also plan to talk about how public policy makers are
evaluating and thinking about the regulatory structure of the insurance industry.
Lastly, I will provide a brief legislative update on terrorism risk insurance and share
the Treasury Department's perspective on this important topiC.
Financial Market Developments
It has been an especially busy time at Treasury. As you know, there has been an
adjustment taking place in the overall credit market and the mortgage market in
particular.
Largely because of lax underwriting, the mortgage market, especially the subprime
market, has been experiencing a high number and percentage of delinquencies and
defaults. As a result, subprime mortgage-backed securities have performed
poorly.
This has led investors to reassess the risk of these securities and subsequently to
reassess price.
Because of the interrelation of our capital markets, the concerns we have seen in
subprime mortgages and related securities have had an impact on investors'
confidence and assumptions about the credit quality and value of other assets,
especially asset backed securities.
This has lead to a rather widespread reassessment of risk, and a subsequent
revaluation across capital markets globally. Certain asset classes were able to
reprice fairly quickly and investors have greater confidence in their fundamental
assessments. In such markets, liquidity has returned and markets are operating in
a more customary fashion. Good examples of these would include most world
equity markets, sovereign debt markets, and even investment grade corporate
debt. Alternatively, certain markets are still operating under stress with impaired
liquidity. These would include the jumbo mortgage market, the leveraged loan
market, and the asset backed commercial paper market.
In general, the marketplace reaction to some of these excesses has been severe.
Many of the mortgage originators with weak underwriting standards are out of
business. Investors in the mortgage markets are experiencing heavy losses,
especially those that failed to perform adequate due diligence to understand the
risks of their investments. We expect the markets to continue to impose discipline
on those lenders and investors who took risks without proper diligence.
We have seen the effects in the financial markets, and it will take some time for
these market adjustments to play out. During this time, our country and the
Treasury Department are very fortunate to have Secretary Paulson serving in
office. At the Treasury Department, we have been actively engaged in the situation
as it has continued to develop. Secretary Paulson has been working with financial
regulators and with market participants. At a time like this when risk is being
reappraised and market discipline is being imposed, confidence is key. Having the
Treasury led by a Secretary who has spent his life in the financial markets, through
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11/612007
Page 2 of6
good times and bad times, is significant and meaningful.
Given the importance of credit markets to the functioning of our economy, when we
experience a fundamental reappraisal like we have over the last several weeks and
months, it is not a surprise that this event will have an impact on the economy. And
at the same time, households were already feelings strains from high energy prices
and the ongoing slowdown in the housing market after several years of
extraordinary gains. Working in our favor was that the capital markets stress
occurred against the backdrop of a strong global economy that has boosted U.S.
exports. Moreover, the U.S. economy went into the credit disruption with some
notable positive aspects. Most importantly, our labor market has remained healthy,
with a still-low unemployment rate, ongOing job creation, and sizeable wage gains.
And, business investment has picked up in the middle of 2007 after a slowdown in
late 2006 and early 2007.
All told, the recent reappraisal of risk will result in a penalty to economic growth.
We will continue to analyze this situation. It will take time for the current reappraisal
to work itself out, but in our view the underlying strength of the economy should
enable continued growth.
Housing Impact
Regardless of their eventual impact on the economy, these looming problems are
incredibly meaningful to the homeowners undergoing strain. Therefore, I thought I
would take a few moments to share the Administration's current thinking regarding
the proper public policy response to these straining times.
We at Treasury are very focused on the difficulties facing many homeowners.
Recently, President Bush, with Secretary Paulson and Housing and Urban
Development (HUD) Secretary Jackson, announced an aggressive plan to help as
many homeowners as possible stay in their homes and to improve our mortgage
finance system for the future. It is important to note at the outset the principles that
we use to approach this problem. First, our efforts are targeted at homeowners that
have the financial ability to own a home over the long-term. Second, our efforts will
not be targeted to speculators that acquired real estate for investment purposes.
Third, we want to avoid bailing out lenders. Lenders must recognize the value of
these impaired mortgages and should not expect government assistance in their
commercial transactions.
This summer, President Bush renewed his calion Congress to pass Federal
Housing Administration (FHA) modernization legislation, which would lower down
payment requirements, allow FHA to insure bigger loans, and give FHA more
pricing flexibility and offer more options to homeowners looking to refinance their
existing mortgage.
The Administration has launched a new FHA program to help people who have
good credit but who have not made all of their payments on time because of rising
mortgage payments. For the first time, FHA will be able to offer many of these
homeowners an option to refinance their existing mortgage so they can make their
payments and keep their homes. FHA will also charge mortgage insurance
premiums based on the individual risk of each loan, using traditional underwriting
standards, so it can expand access and help even more families.
President Bush also announced a new foreclosure avoidance initiative to help
struggling homeowners find ways to refinance their homes. Treasury and HUD
have begun reaching out to a wide variety of groups that offer foreclosure
counseling and refinancing for American homeowners. These groups include
community organizations like NeighborWorks, mortgage lenders and loan servicers,
FHA, and Government-Sponsored Enterprises like Fannie Mae and Freddie Mac.
The goal of this initiative is to expand mortgage financing options, identify
homeowners before they face hardships, help them understand their financing
options, and allow them to find a mortgage product that works for them.
Financial Services Regulatory Review
While Treasury has been focused on these important issues, it has not detracted us
from our other important work. One of the most exciting projects underway involves
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11/612007
Page 3 of6
our examination of the U.S. financial services regulatory system. As some of you
know, earlier this year Secretary Paulson asked the Treasury Department to
engage in a broad, ongoing initiative to examine and strengthen the
competitiveness of our capital markets.
The structure for regulating financial institutions in the United States generally has
served us well. Much of this basic regulatory structure has developed over time.
And while there have been important changes in the way financial institutions are
regulated, the Treasury Department believes it is important to continue to evaluate
our regulatory structure and to consider ways to improve efficiency, to reduce
overlap, to strengthen consumer and investor protection, and to ensure that
financial institutions have the ability to adapt to constantly-changing strategies and
tools.
The Treasury Department's review of the financial regulatory structure is focused
on all types of financial institutions: commercial banks and other insured depository
institutions; securities firms; commodities firms; other financial intermediaries - and,
important for this group, insurance firms.
Issues of regulatory structure are not new to you in the insurance industry. Unlike
banks and other financial institutions that are regulated primarily at the federal level
or on a dual federal/state basis, insurance companies are regulated solely by the
states. This regulatory approach developed historically from the chartering of
insurance companies by state legislatures and the evolution of state tax and
insurance codes. The state-based regulatory approach was reaffirmed in 1945 by
the McCarran-Ferguson Act and in 1999 by the Gramm-Leach-Bliley Act, which
allowed for greater affiliations across financial firms.
Many believe that the patchwork of a more than 51-state regulatory system has led
to market inefficiencies and that the insurance regulatory structure needs to be
modernized to reflect the complexities of today's global marketplace. The full
spectrum of proposals have included: total federal preemption; dual federal/state
systems under an optional federal charter approach; mandating national standardS
on the state-based system; and harmonizing and making more uniform regulation
among the states.
As part of Treasury's ongoing study, the Department is reaching out to experts
concerning the regulatory structure of financial institutions in the United States.
These are complicated issues that do not lend themselves to easy solutions. We
plan to release the results of our review, which will include a discussion on
insurance regulation, early next year.
We have not made any decisions regarding the recommendations of our regulatory
structure review. However we provided some views on insurance regulatory
modernization in testimony before the Senate Banking Committee in July 2006.
Treasury testified that the issues surrounding insurance regulation are significant
because the U.S. financial services industry is one of our country's most important
areas of economic activity, and the insurance industry is a large part of the U.S.
financial sector. The testimony reflected our focus on three main issues:
•
potential economic inefficiency, resulting both from the substance (such as
price controls) and structure of state regulation;
• international impediments, both questions of comity (facilitating international
firms' operations in the U.S.) and competitiveness (facilitating U.S. firms'
operations abroad); and
• systemic "blind spots" - the inability of the official sector to understand and
respond to the insurance sector's evolving contribution to risks affecting the
financial system as a whole.
Treasury is continuing to monitor closely the developments of the various
approaches to modernizing insurance regulation, including proposals to establish
an optional federal charter (OFC), which would establish a federal insurance
regulator and would allow both life and property/casualty insurers to obtain federal
charters. Many of the largest domestic insurance institutions believe that this
approach is better suited to deal with their worldwide operations. Treasury is
interested to see how this approach could potentially address these issues. We will
also focus on approaches that are best suited to provide appropriate consumer
nmtpr.tinn
http://www.treas.gov/press/releases/hp595.htm
111612007
Page 4 of6
As you know, the 11 Oth Congress is actively looking at insurance regulation. In the
Senate, Senators Sununu and Johnson have introduced their updated bipartisan
bill, the National Insurance Act of 2007; in the House, Representative Melissa Bean
and Representative Ed Royce have introduced a bipartisan companion bill.
Last week the House Subcommittee on Capital Markets, Insurance, and
Government Sponsored Enterprises held a hearing on the need for insurance
regulatory reform.
The OFC bills are substantially similar to those introduced in the last Congress, but
there are some key differences, including several changes in Title VI applicable to
guaranty funds. Clearly guaranty funds play an important role in the insurance
industry by providing a level of protection to policyholders, and they have provided
this service well for many years. Further understanding and refining how the
guaranty funds would operate under an OFC model is important to evaluating the
overall model. We look forward to continuing to evaluate this issue in the coming
months.
Another issue in the insurance industry that is related to regulatory structure is the
NAIC's efforts to modernize its treatment of reinsurance collateral requirements.
Given the cross border nature of the reinsurance industry, this issue also is directly
related to how the U.S. insurance industry interacts with the rest of the world.
Under the current state-based insurance system, a non-U.S. reinsurer can do
business in the U.S. by subjecting itself to state-SOlvency regulation by becoming
licensed or creating and licensing a U.S. affiliate or branch in each state it does
business; or, by posting 100 percent collateral on its gross U.S. obligations. For the
past several years, non-U.S. reinsurers have pursued changes to the U.S.
reinsurance collateral rules on the basis that the rules do not adequately account
for the underlying credit quality on non-U.S. reinsurers. It has been a tortuous
process thus far, with most U.S. insurers and reinsurers opposed to any change.
The NAIC has attempted to resolve the dispute by proposing various alternative
regulatory regimes, but none have gained any traction.
The NAIC initiated its latest effort for a solution last month when its Reinsurance
Task Force released a new proposal that would revamp the entire state regulatory
structure for reinsurance, including but not limited to collateral requirements. The
new proposal envisions a regulatory system for U.S.-licensed reinsurers where one
state would be solely responsible for their U.S. regulation. As to non-U.S.
reinsurers not wishing to become licensed or post 100 percent collateral, the new
proposal envisions a third option: certification, which would be broadly based on a
mutual recognition framework with individual "port-of-entry" states still allowed to
set collateral requirements (minimum 60 percent). The certification requirements
are rather complicated and still generating considerable concern among non-U.S.
reinsures and foreign regulators.
The NAIC plans to continue its work on the proposal, but as with other recent efforts
on reinsurance collateral it remains unclear as to whether it can achieve a solution
or if the current state-based regulatory system can be effectively integrated into the
global insurance marketplace. While this is a very technical issue, it is helpful to
show the impact that regulatory structure has on an industry's ability to remain
competitive in a global marketplace.
Terrorism Risk Insurance
I would like to use the rest of my time here today to talk about terrorism risk
insurance. This issue is being heavily debated in Washington because the current
program is scheduled to expire at year-end.
Following the significant economic dislocation that occurred in the wake of the
September 11 attacks, President Bush and Congress responded by passing the
Terrorism Risk Insurance Act of 2002, known as TRIA. TRIA ensured the
continued widespread availability and affordability of commercial property and
casualty terrorism coverage by basically placing the government in the reinsurance
business.
Temporary by design, TRIA provided time for insurers and others to adjust to the
http://www.treas.goy/press/releases/hp595.htm
11/612007
Page 5 of6
risks made clear by the September 11 terrorist attacks. Subsequently, there were
positive market responses by insurers and reinsurers to the reductions in the
federal role over the five years that TRIA was in place. The most notable one was
the increasing role of the private sector in each year of the program. Insurers
increased their terrorism risk exposure as TRIA scaled back, and prices for
terrorism risk coverage declined or remained stable. In some sense, we conducted
a market experiment under TRIA that illustrated that the private sector is capable of
taking on increasing amounts of terrorism risk as the Federal Government's role
recedes. TRIA generally was effective in encouraging the greater provision of
terrorism risk insurance, while at the same time encouraging and supporting private
market development.
Given the success achieved under TRIA to date, the obvious question is whether or
not the Federal Government should maintain a limited role in the provision of
terrorism risk insurance going-forward. Based on where the market for terrorism
risk insurance is today, it is Treasury's view is that TRIA should continue to be
phased out in order to increase private sector participation. Earlier this year
Treasury laid out three critical elements needed if TRIA is to be reauthorized for a
second time:
• that the program remains temporary and short-term;
• that private sector retentions are increased; and
• that there is no expansion of the program.
Unfortunately, the bill the House passed, H.R. 2761, does not meet these critical
elements. There are some particularly objectionable provisions in the House bill
such as:
•
an extension of the program for 15 more years - a de facto permanent
extension;
• the failure to continue to increase private sector retentions;
• the expansion of the program to add group life insurance; and
• for the first time, the mandate for insurers to offer coverage for nuclear,
biological, chemical and radiological (NBCR) attacks.
I realize that the addition of group life insurance, as well as insurers taking on more
NBCR risk may be of particular interest to some in this room. Let me briefly
address those two issues.
As a basic principle, the Federal Government's role in any market, including the
market for terrorism risk insurance, should be limited to those areas where private
markets cannot function and hence broader costs are imposed on our nation's
overall economy. As found by government studies in 2003 and 2006, group life
insurance is still widely available in the private market even though it is not part of
the TRIA program. Group life insurers acknowledge that competitive pressures
have caused them to make coverage available, even in the absence of TRIA
protection. Thus, the private market is functioning in this area.
With regard to NBCR risk, even prior to September 11, insurance typically does not
cover these losses, regardless of the cause, except when mandated by state law,
such as with workers' compensation. Still, TRIA covers insured losses from NBCR
losses resulting from a certified act of terrorism if the coverage is provided in the
insurance policy. But it seems clear to us that TRIA has been largely ineffective in
spurring the development of a private NBCR market because even with TRIA, there
is limited availability.
While the facts are less than clear that TRIA can help, there are indications that
amending TRIA in this way can be harmful. If insurers must offer NBCR-terrorism
coverage, insurer capacity might draw from conventional attack capacity.
Moreover, some insurers are concerned about taking on such exposure and the
effect on credit ratings and more importantly their solvency in the event of an actual
attack.
Most recognize that the Federal Government is already involved in the sharing of
NBCR-terrorism risk given the expectation that uninsured losses will be likely
compensated through federal disaster aid programs. We agree that this is an
important and complex issue and acknowledge the absence of a functioning private
http://www.treas.gov/press/releases/hp595.htm
1116/2007
Page 60f6
market for NBCR risks. However, based on the last five years of experience with
the TRIA program, we at Treasury are not convinced that the House's approach will
lead to the development of a NBCR market.
These are very significant changes to a program that was designed to be
temporary. For this reason, the Administration noted that senior advisors to
President Bush would recommend that he veto the bill. Despite this, the House bill
passed by a wide margin and all eyes are on the Senate. I am hopeful that the
Senate will work toward legislation that addresses the critical elements the
Administration laid out so that a scaled-back TRIA program can be reauthorized.
As you can see, we have a number of issues on our plate right now. These are
incredibly interesting times to be serving in the public sector at the Treasury
Department. Thank you for listening and I would be happy to take a few questions.
- 30 -
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Page 1 of 1
October 9, 2007
hp-596
Secretaries Paulson and Jackson to Join Mortgage Servicers, Housing
Counselors and Investors to Announce Efforts to Help Struggling
Homeowners
Treasury Secretary Henry M. Paulson, Jr. and HUD Secretary Alphonso Jackson
will be joined by mortgage market participants tomorrow to announce the formation
of a new alliance that will develop strengthened efforts to help struggling
homeowners keep their homes.
In the wake of housing market weakness and credit market turmoil, many
Americans face mortgage resets that pose significant challenges. On August 31,
President Bush announced an Initiative to help as many Americans as possible
keep their homes. Foreclosures are painful not only for families, but also for
neighborhoods and for the economy. He asked Secretaries Paulson and Jackson to
spearhead an effort to identify and help struggling homeowners. Treasury and HUD
have been meeting with the nation's leading mortgage counselors, mortgage
servicers, lenders, investors and other industry experts to explore ideas on how to
reach and help as many homeowners as possible.
Who
Treasury Secretary Henry M. Paulson, Jr.
HUD Secretary Alphonso Jackson
NeighborWorks America CEO Ken Wade
Wells Fargo Home Mortgage Co-President Michael J. Heid
American Securitization Forum Executive Director George Miller
What
Announcement of New Effort to Help Struggling Homeowners
When
Wednesday, October 10, 10:30 a.m. (EDT)
Where
Treasury Department
Media Room - 4121
1500 Pennsylvania Avenue, NW
Washington, D.C.
Note: Media without Treasury press credentials should contact Anita Hunt at (202)
622-2920, or anita.hunt@do.treas.gov with the following information: full name,
Social Security number and date of birth.
·30 .
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1116/2007
Page 1 of 4
PRESS ROOM
October 9, 2007
2007 -10-9-15-27 -9-317 4
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 $68,589 million as of the end of that week, compared to $68,977 million as of the end of the
prior week.
I. Official reserve assets and other foreign currency assets (approximate market value, in US millions)
!
II
I
IA. Official reserve assets (in US millions unless otherwise specified)
IIOctober 5, 2007
IIEuro
liVen
IITotal
II
11 10 ,900
11 68 ,589
I(a) Securities
II
1113,781
lof which: issuer headquartered in reporting country but located abroad
II
II
11 0
I(b) total currency and deposits with:
II
11 13,764
II
I(i) other national central banks, BIS and IMF
Iii) banks headquartered in the reporting country
II
lof which: located abroad
II
11 0
11 0
I(iii) banks headquartered outside the reporting country
II
110
lof which: located in the reporting country
110
1(1) Foreign currency reserves (in convertible foreign currencies)
1(2) IMF reserve position
II
114,454
1(3) SDRs
11 9 ,281
1(4) gold (including gold deposits and, if appropriate, gold swapped)
11 11 ,041
I--volume in millions of fine troy ounces
11261.499
1(5) other reserve assets (specify)
11 0
t-financial derivatives
II
[--loans to nonbank nonresidents
II
E-other
II
@' Other foreign currency assets (specify)
II
5,369
11 24 ,681
II
11 19,133
I
II
[--securities not included in official reserve assets
t-depoSits not included in official reserve assets
E-Ioans not included in official reserve assets
E-financial derivatives not included in official reserve assets
t90ld not included in official reserve assets
[-other
II
II
II. Predetermined short-term net drains on foreign currency assets (nominal value)
r~
__________~I~1____~II~____~I~I
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_ _ _ _~I~I
____~II~____~II
1116/2007
Page 2 of 4
[
[
I
IIMaturity breakdown (residual maturity)
II
Total
More than 3
months and up to
1 year
More than 1 and
up to 3 months
Up to 1 month
11. Foreign currency loans, securities, and deposits
I--outflows (-)
Ilprincipal
I
I--inflows (+)
IIlnterest
I
IIlnterest
Ilprincipal
2. Aggregate short and long positions in forwards and
futures in foreign currencies vis-a-vis the domestic
currency (includingthe forward leg of currency swaps)
I (a) Short positions ( - )
(b) Long positions (+)
II
I
3. Other (specify)
II
II
1/
--outflows related to repos (-)
II
--inflows related to reverse repos (+)
II
--trade credit (-)
II
--trade credit (+)
II
--other accounts payable (-)
II
I --other accounts receivable (+)
I
I
1/
II
III. Contingent short-term net drains on foreign currency assets (nominal value)
I
II
I
"I
I
"IMaturity breakdown" (residual maturity, where
Up to 1 month
Total
I
I
applicable)
More than 1 and
up to 3 months
More than 3
months and up to
1 year
11. Contingent liabilities in foreign currency
(a) Collateral guarantees on debt falling due within 1
year
I(b} Other contingent liabilities
2. Foreign currency securities issued with embedded
options (puttable bonds)
I
13. Undrawn, unconditional credit lines provided by:
(a) other national monetary authorities, 81S, IMF, and
other international organizations
II
I
[--other national monetary authorities (+)
1--8Is (+)
I
I--IMF(+)
(b) with banks and other financial institutions
headquartered in the reporting country (+)
(e) with banks and other financial institutions
headquartered outside the reporting country (+)
~ndrawn,
I
I
II
"I
"II
unconditional credit lines provided to:
II~a) other national monetary authorities, 81S, IMF, and
other international organizations
lother national monetary authorities (-)
r
http://www.treas.gov/press/releases/2007109152793174.htm
II
I
II
I
I
II
I
II
I
1116/2007
Page 3 of 4
\:BIS (-)
t lMF (-)
II
(b) banks and other financial institutions headquartered
in reporting country (- )
I
I
II
(c) banks and other financial institutions headquartered
outside the reporting country ( - )
4. Aggregate short and long positions of options in
foreign currencies vis-a-vis the domestic currency
[a) Short positions
~) Bought puts
II
II
II
II
/I
I
I
II
I
II
II
\I
[(ii) Written calls
II
lib) Long positions
II
Ki) Bought calls
II
I
mil Written puts
~RO MEMORIA:
II
II
I
I
I
"
II
II
I
I
I
\I
In-the-money options 11
1(1) At current exchange rate
I(a) Short position
I(b) Long position
1(2) + 5 % (depreciation of 5%)
I(a) Short position
I(b) Long position
1(3) - 5 % (appreciation of 5%)
I
I
I
II
II
II
I
I
I(a) Short position
I
I(b) Long position
1(4) +10 % (depreciation of 10%)
I(a) Short position
I(b) Long position
1(5) -10 % (appreciation of 10%)
I(a) Short position
l(b) Long position
1(6) Other (specify)
I(a) Short position
I(b) Long position
I
II
II
II
II
II
II
II
I
I
\I
II
II
II
II
II
II
I
I
I
I
IV. Memo items
I:
I~j) To be reported with standard periodicity and timeliness:
I(a) short-term domestic currency debt indexed to the exchange rate
(b) financial instruments denominated in foreign currency and settled by other means (e.g., in domestic
currency)
II
II
II
II
I
I
I
\
I--nondeliverable forwards
I~ --short positions
[--long positions
[~other instruments
~) pledged assets
[;nCluded in reserve assets
--included in other foreign currency assets
r
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II
II
11/6/2007
Page 4 of4
I(d) securities lent and on repo
II
I--Ient or repoed and included in Section I
I--Ient or repoed but not included in Section I
I--borrowed or acquired and included in Section I
\--borrowed or acquired but not included in Section I
I(e) financial derivative assets (net, marked to market)
I--forwards
I--futures
I
I--swaps
II
I--options
II
I--other
I
(f) derivatives (forward, futures, or options contracts) that have a residual maturity greater than one
year, which are subject to margin calls.
--aggregate short and long positions in forwards and futures in foreign currencies vis-a-vis the domestic
currency (including the forward leg of currency swaps)
I(a) short positions ( - )
I(b) long positions (+)
I--aggregate short and long positions of options in foreign currencies vis-a-vis the domestic currency
I(a) short positions
I(i) bought puts
I
I(ii) written calls
I(b) long positions
I
l(i) bought calls
I(ii) written puts
1(2) To be disclosed less frequently:
I(a) currency composition of reseNes (by groups of currencies)
1/68,589
I--currencies in SDR basket
11 68 ,589
I--currencies not in SDR basket
II
I--by individual currencies (optional)
II
I
II
Notes:
1/ Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market
Account (SOMA), valued at current market exchange rates. Foreign currency holdings listed as securities reflect markedto-market values, and deposits reflect carrying values.
2/ The items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF
and are valued in dollar terms at the official SDR/doliar exchange rate for the reporting date. The entries for the latest
week reflect any necessary adjustments, including revaluation, by the U.s. Treasury to IMF data for the prior month
end.
3/ Gold stock is valued monthly at $42.2222 per fine troy ounce.
http://www.treas.gov/press/releases/2007109152793174.htm
11/6/2007
Page 1 of 1
October 9, 2007
HP-597
Treasury Secretary Henry M. Paulson, Jr. to Travel to Austin to Participate in
the National Park Foundation Summit Next Week
Secretary Henry M. Paulson, Jr. will participate in The National Park Foundation
Leadership Summit on Partnership and Philanthropy on Monday, Oct. 15. Paulson
will speak about the importance of supporting our national parks.
The following event is open to media:
Who
Treasury Secretary Henry M. Paulson, Jr.
What
The National Park Foundation Leadership Summit on Partnership and Philanthropy
The Business Case: A Conversation with Secretary Paulson
When
Monday, October 15, 9:55 a.m. CDT
Where
The University of Texas at Austin
Etter-Harbin Alumni Center
2110 San Jacinto Blvd.
Austin, Texas
Note: Press must register with Mollie Fullington at mfullington@lakpr.com or 917414-1639.
- 30 -
http://www.treas.gov/press/releases/hp597.htm
111612007
Page 1 of 4
PRESS ROOM
October 10, 2007
2007 -10-10-10-45-44-17660
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 $68,589 million as of the end of that week, compared to $68,977 million as of the end of the
prior week.
I. Official reserve assets and other foreign currency assets (approximate market value, in US millions)
I
I
IA. Official reserve assets (in US millions unless otherwise specified)
II
1I0ctober 5, 2007
II Euro
IIYen
IITotal
II
11 10 ,900
11 68 ,589
I(a) Securities
II
11 13 ,781
lof which: issuer headquartered in reporting country but located abroad
II
II
110
I(b) total currency and deposits with:
II
II
I(i) other national central banks, BIS and IMF
11 13 ,764
115,369
Iii) banks headquartered in the reporting country
II
lof which: located abroad
II
II
II
l(iii) banks headquartered outside the reporting country
II
II
lof which: located in the reporting country
II
114,454
II
1(2) IMF reserve position
1(3) SDRs
119,281
1(4) gold (including gold deposits and, if appropriate, gold swapped)
1111 ,041
I--volume in millions of fine troy ounces
11 261 .499
1(1) Foreign currency reserves (in convertible foreign currencies)
11 24 ,681
II
11 19 ,133
11 0
11 0
11 0
11 0
0
1(5) other reserve assets (specify)
I--financial derivatives
I--Ioans to nonbank nonresidents
I--other
lB. Other foreign currency assets (specify)
I--securities not included in official reserve assets
I
I--deposits not included in official reserve assets
II
[--loans not included in official reserve assets
II
E-financial derivatives not included in official reserve assets
II
[--gOld not included in official reserve assets
II
[--other
II
II
II
I\. Predetermined short-term net drains on foreign currency assets (nominal value)
[,_[_ _ _ _ _ _ _ _ _ _ _ _~I~I_ _ _ _ _I~I_ _ _ _~I~I_ _ _ _ _I~I_ _ _ _~I,~I_ _ _ _~II
http://www.treas.gov/press/releases/2007101010454417660.htm
111612007
Page 2 of 4
II
I
[
I
IIMaturity breakdown (residual maturity)
Total
More than 3
months and up to
1 year
More than 1 and
up to 3 months
Up to 1 month
II
II
II
[ 1. Foreign currency loans, securities, and deposits
I--outflows (-)
IIPrincipal
I
IIlnterest
1--infIOws (+)
IIprincipal
I
II
IIlnterest
II
I
2. Aggregate short and long positions in forwards and
futures in foreign currencies vis-a-vis the domestic
currency_Cincluding the forward leg of currency swaps)
I
I
II
(a) Short positions ( - )
(b) Long positions (+)
3. Other (specify)
--outflows related to repos (-)
--inflows related to reverse repos (+)
--trade credit (-)
--trade credit (+)
--other accounts payable (-)
I
--other accounts receivable (+)
III. Contingent short-term net drains on foreign currency assets (nominal value)
I
II
I
II
II
II
II
IMaturity breakdown (residual maturity, where
applicable)
11. Contingent liabilities in foreign
More than 3
months and up to
1 year
More than 1 and
up to 3 months
Up to 1 month
Total
I
I
currency
I,(a) Collateral guarantees on debt falling due within
year
1
II
I(b) Other contingent liabilities
112. Foreign currency securities issued with embedded
lIoptions (puttable bonds)
13. Undrawn,
II
I
unconditional credit lines provided by:
(a) other national monetary authorities, 81S, IMF, and
other international organizations
II
II
[--other national monetary authorities (+)
[--8IS (+)
E-IMF (+)
(b) with banks and other financial institutions
headquartered in the reporting country (+)
JI
(c) with banks and other financial institutions
headquartered outside the reporting country (+)
II
~ndrawn,
II
I
unconditional credit lines provided to:
(a) other national monetary authorities, 81S, IMF, and
other international organizations
http://www.treas.goy/pressireleases/2007101010454417660.htm
I
I
I
II
[other national monetary authorities (-)
r
I
I
II
"
I,
1116/2007
Page 3 of 4
I--BIS (-)
II
(b) banks and other financial institutions headquartered
in reporting country (- )
(c) banks and other financial institutions headquartered
outside the reporting country ( - )
II
II
I--IMF (-)
1/
"II
II
4. Aggregate short and long positions of options in
foreign currencies vis-a-vis the domestic currency
I
I
I(a) Short positions
I
I(i) Bought puts
"
"
I(ii) Written calls
II
I(b) Long positions
l(i) Bought calls
l(ii) Written puts
II
IPRO MEMORIA: In-the-money options 11
II
1(1) At current exchange rate
I(a) Short position
I(b) Long position
1(2) + 5 % (depreciation of 5%)
"
"
I
I(a) Short position
I(b) Long position
1(3) - 5 % (appreciation of 5%)
I(a) Short position
I(b) Long position
1(4) +10 % (depreciation of 10%)
ha) Short position
I(b) Long position
I
1(5) - 10 % (appreciation of 10%)
I(b) Long position
"
1(6) Other (specify)
II
I(a) Short position
"
II
I(a) Short position
I(b) Long position
"
II
IV. Memo items
I
1(1) To be reported with standard periodicity and timeliness:
[&) short-term domestic currency debt indexed to the exchange rate
(b) financial instruments denominated in foreign currency and settled by other means (e.g., in domestic
currency)
I
tnondeliverable forwards
[ --short pOSitions
[ --long positions
I
Eother instruments
K?l pledged assets
[inCluded in reserve assets
t!nCluded in other foreign currency assets
r
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I
I
11/6/2007
Page 4 of4
I(d) securities lent and on repo
I
I--Ient or repoed and included in Section I
I
I
t-Ient or repoed but not included in Section I
I--borrowed or acquired and included in Section I
I
I
I--borrowed or acquired but not included in Section I
I(e) financial derivative assets (net, marked to market)
I
I
I--forwards
I
I--futures
I
I
I--swaps
I--options
I--other
(f) derivatives (forward, futures, or options contracts) that have a residual maturity greater than one
year, which are subject to margin calls.
--aggregate short and long positions in forwards and futures in foreign currencies vis-a-vis the domestic
currency (including the forward leg of currency swaps)
I(a) short positions ( - )
I(b) long positions (+)
I
I--aggregate short and long positions of options in foreign currencies vis-a-vis the domestic currency
I(a) short positions
I(i) bought puts
l(ii) written calls
I(b) long positions
"
l(i) bought calls
II
I(ii) written puts
II
1(2) To be disclosed less frequently:
II
I(a) currency composition of reserves (by groups of currencies)
11 68 ,589
I--currencies in SDR basket
11 68,589
I--currencies not in SDR basket
II
II
II
I--by individual currencies (optional)
I
Notes:
1/ Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market
Account (SOMA), valued at current market exchange rates. Foreign currency holdings listed as securities reflect markedto-market values, and deposits reflect carrying values.
2/ The items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF
and are valued in dollar terms at the official SDR/dollar exchange rate for the reporting date. The entries for the latest
week reflect any necessary adjustments, including revaluation, by the U.s. Treasury to IMF data for the prior month
end.
3/ Gold stock is valued monthly at $42.2222 per fine troy ounce.
http://www.treas.goy/press/releases/2007101010454417660.htm
11/6/2007
Page 1 of2
October 10, 2007
HP-598
Treasury Designates Three Key Terrorist Financiers
The U.S. Department of the Treasury today designated as Specially Designated
Global Terrorists (SDGTs) three individuals based in Saudi Arabia who have served
as significant sources of financial and other support to individuals and entities in
Southeast Asia previously named as SDGTs and listed pursuant to United Nations
Security Council Resolution (UNSCR) 1267.
"These three terrorist financiers were instrumental in raising money to fund
terrorism outside of Saudi Arabia," said Stuart Levey, Under Secretary for Terrorism
and Financial Intelligence. "In order to deter other would-be donors, it is important
to hold these terrorists publicly accountable."
Abdul Rahim AI-Talhi, Muhammad 'Abdallah Salih Sughayr, and Fahd Muhammad
'Abd AI- 'Aziz AI-Khashiban were designated for providing support to the Abu
Sayyaf Group (ASG), an al Qaida-affiliated terrorist group responsible for multiple
bombings, kidnappings and other terrorist attacks in Southeast Asia.
Today's action was taken pursuant to Executive Order 13224. E.O. 13224 is aimed
at financially isolating terrorists and their support networks. Designations made
under this authority freeze any assets the designees may have under U.S.
jurisdiction and prohibit transactions by U.S. persons with the designees. This
action under E.O. 13224 also implements yesterday's decision by the UN 1267
Committee to include these three persons on its Consolidated List of persons and
entities associated with al Qaida, the Taliban, or Usama bin Laden. This UN
decision obligates UN member countries around the world to freeze the assets of
the designees.
Identifying Information
The three individuals who have been designated have been known by a variety of
name spellings and aliases. Those can be found on the website of the Office of
Foreign Assets Control (OFAC), http//www.treasury.gov/ofac.
Abdul Rahim AI- Talhi
ADDRESS: Buraydah, Saudi Arabia
DOB: December 8, 1961
POB: AI- Taif, Saudi Arabia
NA T10NALlTY: Saudi Arabian
PASSPORT: F275043, issued 05129104, expires 04105/09
Abdul Rahim al-Talhi (al-Talhi) was designated under E.O. 13224 for providing
support to the ASG. AI-Talhi is an al Qaida-affiliated financier, a loyal colleague of
Usama bin Laden, and a member of a Saudi Arabia-based donor network funding
terrorists and supporting extremist activity.
AI-Talhi provided financial and other assistance to the ASG in the Philippines for
many years. In the early 1990s, al-Talhi visited the Philippines with the goal of
financing the ASG in its fight against the Philippine government. By the mid-1990s,
al-Talhi was providing the ASG with financial assistance derived from donors in
Saudi Arabia and other Gulf states. In addition, al-Talhi regularly supplied al Qaida
ideological and training materials, including the al Qaida operations manual, to
Philippine contacts.
In the late 1990s, Muhammad 'Abdallah Salih Sughayr. who was also designated
http://www.treas.gov/press/reJeases/hp598.htm
1116/2007
Page 2 of2
today, was selected to succeed al-Talhi as the principal backer of the ASG and its
affiliates in the Philippines. AI-Tal hi remained active, however. As of early 2003, alTalhi was assisting Sughayr in obtaining financial support from Saudi Arabia-based
extremist donors. As of December 2006, al-Talhi had helped groom ASG leaders.
Muhammad 'Abdallah Salih Sughayr
DOB: August 20, 1972
Alternate DOB: August 10, 1972
POB: AI-Karawiya, Saudi Arabia
NA TlONALlTY: Saudi Arabian
Muhammad 'Abdallah Salih Sughayr (Sughayr) was designated today under E.O.
13224 for supporting the ASG. Sughayr has a history of providing support to
terrorist groups in Southeast Asia and has been identified as one of the major
financial supporters of the ASG. Recent information indicates that he continues to
be active in transferring funds to the Philippines.
In the late 1990s, unidentified Saudi extremist donors wishing to provide financial
and ideological support to the ASG network in the Philippines selected Sughayr to
be their principal conduit. Sughayr was to succeed AI-Talhi, a Saudi national and al
Qaida-affiliated financier who had recently left the Philippines. Sughayr, however,
continued to receive support from AI-Talhi. From 1998 to 2003, Sughayr ensured
continued financial and ideological support to the ASG and its affiliates in the
Philippines. He also facilitated unspecified weapons and ammunition shipments to
the ASG and provided advice and assistance to the group. In addition, he recruited
foreign fighters to fill out ASG ranks and gave specialized training in guerilla
operations to the ASG.
In one instance in June 2004, Sughayr was made aware of certain ASG financial
needs and deposited an unspecified sum of money into an account and alerted a
possible ASG associate the deposit had been made. Also in 2004, Sughayr
planned to send money for weapons to an ASG member. Sughayr was arrested by
Philippine authorities in 2005 and subsequently deported to Saudi Arabia.
Fahd Muhammad 'Abd AI- 'Aziz AI-Khashiban
DOB: October 16, 1966
POB: 'Aniza, Saudi Arabia
NA TlONALlTY: Saudi Arabian
Fahd Muhammad Abd AI-'Aziz AI-Khashiban (Khashiban) was designated today
under E.O. 13224 for supporting the ASG, including ASG's leadership. In the early
2000s, Khashiban gave then-ASG leader Khadaffy Janjalani approximately US
$18,000 to finance a planned ASG bombing operation targeting either the U.S. or
the Australian embassy in Manila. Philippine authorities disrupted this plot before its
completion, but Khashiban continued to routinely provide money to the ASG.
http://www.treas.gov/press/reJeases/hp598.htm
11/6/2007
Page 1 of2
October 10, 2007
HP-599
Statement by Secretary Henry M. Paulson, Jr.
on Announcement of New Private Sector Alliance - HOPE NOW
Washington, DC--Thank you, Secretary Jackson, for being here today. And thank
you to everyone here today with one common objective - helping homeowners stay
in their homes. We all know well the turmoil in today's mortgage markets. A
combination of stagnant or falling house prices, low down payment mortgages and
resetting adjustable-rate mortgage rates are creating real challenges for many
American homeowners. More and more homeowners are having trouble meeting
their monthly mortgage payments, and foreclosure rates have risen in recent
quarters. Foreclosures are painful not only for families, but also for neighborhoods,
for mortgage servicers, for mortgage investors, and for the economy as a whole.
This morning, I welcome you all here to applaud a new alliance of mortgage market
participants who recognize that cost, and are stepping up efforts to prevent it for as
many families as possible.
On August 31, President Bush announced a foreclosure prevention initiative. He
asked Secretary Jackson and me to spearhead an effort to identify struggling
homeowners and help as many as possible to keep their primary residences. We
have been meeting with the nation's leading mortgage counselors, mortgage
servicers, lenders, investors and other industry experts to explore their ideas on
how to reach and help homeowners.
We learned that many individual participants are already actively engaged. Leading
mortgage servicers have increased their outreach to borrowers who may need help.
Mortgage counselors have been working hard to support the large numbers of
homeowners who are calling them and asking for help. State and local
governments across the country have started innovative programs targeted at
people and neighborhoods hit worst by the market downturn.
Each of these steps is critical, and each has an impact. But we also know that we
will not be nearly as effective as we need to be unless everyone is working
together. Only through better integration of their efforts can mortgage counselors
and mortgage servicers reach the greatest number of borrowers facing payments
they can't meet and only with increased coordination can they be more effective in
finding solutions for those homeowners.
Today, for the first time, 11 of the largest mortgage servicers representing 60
percent of the mortgages in America, several of the leading mortgage counselors,
investors, and large trade organizations have come together and formed a
partnership to help more Americans keep their homes. These leaders recognize
that by working together, coordinating and scaling up their activities, they will be
able to work toward the goal to help more homeowners.
Their partnership, called HOPE NOW, has put together an aggressive plan to reach
more homeowners and help them find a way to stay in their homes. And I'm glad to
see the American Securitization Forum, representing investors as well as servicers,
is joining this alliance, recognizing that mortgage investors also have an interest in
expanding the reach of mortgage counselors to prevent foreclosures whenever
possible.
This coalition has a lot of work to do - I applaud you for running toward this
challenge. I'm pleased that in my discussions with members of Congress on this
initiative I've heard bipartisan support for this effort. I also hope to see this alliance
grow. Although, the servicers here represent 60 percent of mortgages outstanding,
we need greater participation if we are going to get to all those that need help as
quickly as possible. Others have good reason to join this alliance, because
http://www.treas.gov/press/reJeases/hp599.htm
11/6/2007
Page 2 of2
minimizing foreclosures benefits lenders and investors as well as homeowners.
Thank you all for what you are doing, and keep up the effort. I know you are
working to develop standardized metrics to track your progress and effectiveness in
reaching and helping borrowers. I am also convinced that only by working together
do we have any chance of being as successful as we need to be. A unified strategy
and better integration will mean homeowners get better help with their mortgages,
servicers get better responses when they reach out to people, and our communities
will see fewer foreclosures.
Let me be clear. I'm not announcing we have solved this problem. What we're
announcing is a necessary step toward a very important objective. We all have a lot
more work to do. And we at Treasury look forward to working with this group and
with Congress as we continue to confront this challenge.
The alliance members standing here with us today will give you more detail on their
plans. But first, let me turn the microphone to Secretary Jackson, and let me put in
a plug for his agency. As we all know, the sooner a troubled borrower reaches out
to explore financial options, the more likely he or she will be able to find an
affordable mortgage solution. Anyone worried today - please call your lender or go
on the HUD website to find a mortgage counselor and ask for help. I'm sure
Secretary Jackson will say that too - but it bears repeating.
http://www.treas.gov/press/reJeases/hp599.htm
11/6/2007
Page 1 of2
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October 10, 2007
hp-600
Treasury Targets Financial Empire of Colombian Trafficker
The U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC)
today added to its list of Specially Designated Narcotics Traffickers seven
individuals and 14 companies tied to Colombian narcotics trafficker Juan Carlos
Ramirez Abadia (a.k.a. Chupeta). Among those designated today are key financial
associates of Ramirez Abadia, including Diego and Tulio Alzate Jimenez, and a
Colombian currency exchange and money remittance company (casa de cambio).
"Today's designations are the latest in a series aimed at Chupeta's illicit business
empire," said OFAC Director Adam J. Szubin. "This action targets Cambios y
Capitales S.A., a major money service business, along with several of Chupeta's
most important financial associates."
Juan Carlos Ramirez Abadia, who was identified as a Specially Designated
Narcotics Trafficker by OFAC in August 2000, was arrested in Brazil on August 7,
2007. He was previously indicted on federal drug trafficking charges in Colorado in
1994 and the Eastern District of New York in 1995 and 2004. In 2004, Colombia's
North Valle drug cartel was indicted in the District of Columbia under the federal
Racketeer Influenced and Corrupt Organizations Act. Juan Carlos Ramirez Abadia
was identified in this U.S. indictment as one of the cartel's leaders.
OFAC has worked closely with the Drug Enforcement Administration and the U.S.
Attorney's Office for the Eastern District of New York on this sanctions investigation.
Diego Uriel Alzate Jimenez, Luis Holmes Alzate Jimenez, and Tulio Hernando
Alzate Jimenez are among the primary shareholders of Cambios y Capitales S.A.,
which is headquartered in Bogota, Colombia. One of the brothers, Tulio Hernando
Alzate Jimenez, was indicted on federal narcotics-trafficking and money- laundering
charges in the Southern District of Florida in 1994. The Alzate Jimenez brothers are
also owners of Andinaenvios AN EN SA, a courier and money remittance business
located in Quito, Ecuador, which was also designated today by OFAC.
Another key group of financial associates for Juan Carlos Ramirez Abadia identified
by OFAC today are the Lopera Barbosa siblings. Adriana Lopera Barbosa, Jairo
Humberto Lopera Barbosa, and Juan Carlos Lopera Barbosa own and manage four
Colombian companies, including Coinemp SA and J.A.J. Barbosa y Cia. S.C.S.,
that act as real estate holding firms to hide the assets of Ramirez Abadia. Another
Ramirez Abadia front person, Nelson Salazar Lugo, helps manage the Colombian
tourism company Turismo Hansa S.A. The Alzate Jimenez brothers and the Lopera
Barbosa siblings also play ownership and management roles in Turismo Hansa
SA on behalf of Juan Carlos Ramirez Abadia.
Today's announcement marks OFAC's third action targeting the assets of Ramirez
Abadia since 2006. In August 2006, OFAC designated the Colombian
pharmaceutical distribution company Disdrogas Uda. along with Ramirez Abadia's
parents, who were managing the company on his behalf. On August is, 2007,
OFAC designated several of Ramirez Abadia's key lieutenants as well as a theme
park (Parque Yaku) and a paso fino horse breeding farm (Criadero Santa Gertrudis
SA) located near Cali, Colombia.
A detailed look at the program against Colombian drug organizations is provided in
OFAC's March 2007 Impact Report on Economic Sanctions Against Colombian
Drug Cartels. (see link below)
http://www.treas.gov/press/reJeases/hp600.htm
1116/2007
Page 2 of2
LINKS
•
•
Chart
Impact Report on Economic Sanctions Against Colombian Drug Cartels
(March 2007)
http://www.treas.g ov/ press/releases/hp600.htm
111612007
SDNT Principal since 2000
North Valle Cartel
Financial Network
U.S. Department of the Treasury
Office of Foreign Assets Control
Specially Designated
Narcotics Traffickers
October 2007
-
Indicted on Narcotics Trafficking &.
Money laundering Charges
Southern District of Florida (1994)
Arrested in Brazil on
August 7, 2007
Juan Carlos RAMIREZ ABADIA
(a.k.a. "Chupeta")
CC 16684736 (Colombia)
Front Persons for "Chupeta"
Diego Uriel
ALZATE JIMINEZ
CC 16658014 (Colombia)
Tulio Hernando
ALZATE lIM INEZ
CC 16659731 (Colombia)
Luis Holmes
ALZATE lIMINEZ
CC 16597861 (Colombia)
Nelson
SALAZAR LUGO
CC 16594719 (Colombia)
ma
Adriana
LOPERA BARBOSA
CC 31930002 (Colombia)
lairo Humberto
LOPERA BARBOSA
CC 16792756 (Colombia)
Juan Carlos
LOPERA BARBOSA
CC 16746731 (Colombia)
Associated Companies
III
ANDINAENVIOS
III
ASESORIA Y 50LUCIONES
AN EN S.A.
Quito, Ecuador
RUC # 1791769155001 (Ecuador)
GRUPO CONSULTOR S.A.
Cali, Colombia
NIT # 805018000-1 (Colombia)
III
FINANCIACION Y
III
FUNDASOCIAL
EMPRESA S.A
Cali, Colombia
NIT # 800153965-0 (Colombia)
Cali, Colombia
NIT # 800142875-9 (Colombia)
III
INVERSIONES SARDI
AUATE S.C.S.
Cali, Colombia
NIT # 805009126-0 (Colombia)
III
l.A.l. BARB05A
Y CIA. S.C.S.
Cali, Colombia
NIT # 800214437-6 (Colombia)
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Bogota, Colombia
NIT # 805001015-5 (Colombia)
III
OUTSOURCING DE
OPERACIDNES S.A.
Bogota, Colombia
NIT # 805021157-8 (Colombia)
III
CONSTRUCTORA E
INMOBIUARIA ANDINA S.A.
Cali, Colombia
NIT # 800155233-7 (Colombia)
III
INVERSIONES
CORPORATIVAS LTDA.
Cali, Colombia
NIT # 800203027-2 (Colombia)
III
T.H. AUATE
Y CIA. S.C.S.
Cali, Colombia
NIT # 805008972-0 (Colombia)
III
COINEMP S.A.
(f.k.a. ASECOM S.A.)
Cali, Colombia
NIT # 890326149-8 (Colombia)
III
INVERSIONE5
EPOCA S.A.
Cali, Colombia
NIT # 805012582-7 (Colombia)
III
TURISMO
HAN5A S.A.
5an Andres, Colombia
NIT # 860027780-4 (Colombia)
Page 1 of8
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October 10, 2007
HP-601
Testimony of Treasury Assistant Secretary for
Tax Policy Eric Solomon before the House
Oversight Subcommittee on Domestic Policy
on Tax Exempt Bond Financing
Washington, DC -- Chairman Kucinich, Ranking Member Issa, and distinguished
Members of the Subcommittee:
I appreciate the opportunity to appear before you today to discuss certain Federal
tax issues regarding the use of tax-exempt bond financing. The Administration
recognizes that tax-exempt bond financing plays an important role as a source of
lower-cost financing for State and local governments. As a nation, we are focusing
on the critical need to support capital investment in public infrastructure. The
Federal government provides an important Federal subsidy for tax-exempt bond
financing through the Federal income tax exemption for interest paid on State or
local bonds under Section 103 of the Internal Revenue Code (the "Code"), which
enables State and local governments to finance public infrastructure projects and
other public-purpose activities at lower costs.
The cost to the Federal government of tax-exempt bonds is significant and growing.
Unlike direct appropriations, however, the cost of this Federal subsidy receives less
attention because it is not tracked annually through the appropriations process. In
addition, it also is important to recognize that the Federal subsidy for tax-exempt
bonds is less efficient than that for direct appropriations because of the inefficiency
of priCing in the tax-exempt bond market. In this regard, since some bond
purchasers have higher marginal tax rates than those of the bond purchasers
needed to clear the market, tax-exempt bonds cost the Federal government more in
foregone revenue than they deliver to State and local governments in reduced
interest expenses. The steady growth in the volume of tax-exempt bonds reflects
the importance of this incentive in addressing public infrastructure and other needs.
At the same time, it is appropriate to review the tax-exempt bond program to ensure
that it is properly targeted and that the Federal subsidy is justified in light of the lost
Federal revenue and other costs imposed.
My testimony covers four main issues. First, my testimony provides an overview of
the legal framework for tax-exempt bonds. Second, it discusses the use of taxexempt bonds to finance public infrastructure projects and stadium projects under
the existing legal framework. Third, my testimony comments on certain tax policy
and regulatory authority considerations. Finally, it provides certain statistical data on
tax-exempt bonds for background.
Overview of Legal Framework for Tax-Exempt Bonds
A. Introduction
In general, there are two basic types of tax-exempt bonds: Governmental Bonds
and Private Activity Bonds. Bonds generally are classified as Governmental Bonds
if the proceeds are used for State or local governmental use or the bonds are
repaid from State or local governmental sources of funds. Bonds generally are
classified as Private Activity Bonds if they meet the definition of a Private Activity
Bond under the Code, based on specified levels of private business involvement. In
general, the interest on Private Activity Bonds is taxable unless the bonds meet
qualification requirements for financing certain projects and programs specifically
identified in the Code.
http://www.treas.goy/press/releases/hp601.htm
111612007
Page 2 of8
B. Governmental Bonds
State and local governments issue Governmental Bonds to finance a wide range of
public infrastructure projects. The Code does not provide a specific definition of
"Governmental Bonds." Instead, bonds are generally treated as Governmental
Bonds if they avoid classification as Private Activity Bonds, as defined in the Code,
by limiting private business use or private business sources of payment or security,
and also by limiting private loans. Here, it is important to appreciate that bonds can
qualify as Governmental Bonds if they are either used predominantly for State or
local governmental use or payable predominantly from State or local governmental
sources of funds, such as generally applicable taxes. Stated differently, under the
current legal framework, Governmental Bonds can be used to finance a project that
has significant private business use or that are payable from significant private
business sources of payment, but not both.
In order for the interest on Governmental Bonds to be excluded from the bond
holder's gross income for Federal tax purposes, a number of general eligibility
requirements must be met. Requirements generally applicable to all tax-exempt
bonds include arbitrage restrictions, bond registration and information reporting
requirements, a general prohibition on Federal guarantees, advance refunding
limitations, restrictions on unduly long spending periods, and pooled financing bond
limitations.
c. Private Activity Bonds
1. In General
Under section 141 of the Code, bonds are classified as Private Activity Bonds if
more than 10 percent of the bond proceeds are both:
(1) used for private business use (the "private business use limitation"); and
(2) payable or secured from payments derived from property used for private
business use (the "private payments limitation").
Bonds also are treated as Private Activity Bonds if more than the lesser of $5
million or 5 percent of the bond proceeds are used to finance private loans,
including business and consumer loans. The permitted private business thresholds
are reduced from 10 percent to 5 percent for certain private business use that is
"unrelated" to governmental use or that is "disproportionate" to governmental use
financed in a bond issue. These tests are intended to identify arrangements that
have the potential to transfer the benefits of tax-exempt financing to
nongovernmental persons.
2. Projects and Programs Eligible for Tax-Exempt Private Activity Bond Financing
Private Activity Bonds may be issued on a tax-exempt basis only if they meet the
requirements for qualified Private Activity Bonds, including targeting requirements
that limit such financing to specifically defined facilities and programs. Under
present law, qualified Private Activity Bonds may be used to finance eligible
projects and activities, including the following: (1) airports, (2) docks and wharves,
(3) mass commuting facilities, (4) facilities for the furnishing of water, (5) sewage
facilities, (6) solid waste disposal facilities, (7) qualified low-income residential rental
multifamily housing projects, (8) facilities for the local furnishing of electric energy or
gas, (9) local district heating or cooling facilities, (10) qualified hazardous waste
facilities, (11) high-speed intercity rail facilities, (12) environmental enhancements
of hydroelectric generating facilities, (13) qualified public educational facilities, (14)
qualified green buildings and sustainable design projects, (15) qualified highway or
surface freight transfer facilities, (16) qualified mortgage bonds or qualified veterans
mortgage bonds for certain single-family housing facilities, (17) qualified small issue
bonds for certain manufacturing facilities, (18) qualified student loan bonds, (19)
qualified redevelopment bonds, (20) qualified 501 (c)(3) bonds for the exempt
charitable and educational activities of Section 501 (c)(3) nonprofit organizations,
(21) certain projects in the New York Liberty Zone, and (22) certain projects in the
Gulf Opportunity Zone.
Qualified Private Activity Bonds are subject to the SClme general rules applicable to
http://www.treas.goy/press/releases/hp601.htm
11/612007
Page 3 of8
Governmental Bonds, including the arbitrage investment limitations, registration and
information reporting requirements, the Federal guarantee prohibition, restrictions
on unduly long spending periods, and pooled financing bond limitations. In addition,
most qualified Private Activity Bonds are also subject to a number of additional
rules and limitations. One notable additional rule limits the annual amount of these
bonds that can be issued in each state (the "bond volume cap" limitation) under
section 146 of the Code. Another notable additional rule prohibits advance
refundings for most Private Activity Bonds under section 149(d)(2) (other than for
qualified 501 (c)(3) bonds). Further, unlike the tax exemption for interest on
Governmental Bonds, the tax exemption for interest on most qualified Private
Activity Bonds is generally treated as a preference item under the alternative
minimum tax ("AMT"), meaning that the benefit of an exclusion from income for
interest paid on these bonds can be taken away by the AMT.
The current legal framework for Private Activity Bonds was enacted as part of the
Tax Reform Act of 1986. The basic purpose of the Private Activity Bond limitations
was to limit the ability of State and local governments to act as conduit issuers in
financing projects for the use and benefit of private businesses and other private
borrowers except in prescribed circumstances. Prior to the Tax Reform Act of 1986,
the predecessor legal framework had more liberal rules regarding the use of taxexempt bonds for the benefit of private businesses (then called "industrial
development bonds"), including a more liberal 25-percent limitation on permitted
private business use and private payments (as compared to the present 10-percent
private business and private payment limitations), and it did not include bond
volume cap limitations on private activity bonds.
Prior to the Tax Reform Act of 1986, stadiums were on the list of eligible facilities
that could be financed with tax-exempt industrial development bonds. Stadiums
were removed from the list of facilities eligible for tax-exempt Private Activity Bond
financing in 1986, but stadiums remain eligible for Governmental Bond financing
notwithstanding the substantial private business use of these facilities if they meet
the requirements for Governmental Bonds. Under current law, these requirements
can generally be met when State and local governments subsidize the projects with
governmental revenues or generally applicable taxes.
3. The Private Business Use Limitation
In general, private business use of more than 10 percent of the proceeds of a bond
issue violates the private business use limitation. Private business use generally
arises when a private business has legal rights to use bond-financed property.
Thus, private business use arises from ownership, leasing, certain management
arrangements, certain research arrangements, certain utility output contract
arrangements (e.g., certain electricity purchase contracts under which private
utilities receive benefits and burdens of ownership of governmental electric
generation facilities), and certain other arrangements that convey special legal
entitlements to bond-financed property.
Various exceptions and safe harbors apply with respect to the private business use
limitation, which allow limited private business use of property financed by Private
Activity Bonds in prescribed circumstances. Exceptions to the private business use
limitation include exceptions for use in the capacity as the general public, such as
use by private businesses of public roads ("general public use"), certain very shortterm use arrangements, certain de minimis incidental uses, certain uses as agents
of State and local governments, and certain uses incidental to financing
arrangements (e.g., certain bondholder trustee arrangements). In addition, safe
harbors against private business use apply to certain private management and
research arrangements. Thus, for management contracts, in Rev. Proc. 97-13,
1997-1 C.B. 632, the IRS provided safe harbors that allow private businesses to
enter into certain qualified management contracts with prescribed terms and
compensation arrangements without giving rise to private business use to
accommodate public-private partnerships for private management of public
facilities. For research contracts, in Rev. Proc. 2007-47, 2007-29 I.R.B. 108 (July
16,2007), the IRS provided updated safe harbors that allow certain research
contract arrangements with private businesses at tax-exempt bond financed
research facilities without giving rise to private business use (e.g., certain Federally
sponsored research).
4. The Private Payments Limitation
http://www.treas.gov/press/releases/hp601.htm
11/612007
Page 4 of8
In general, private payments aggregating more than 10 percent of the debt service
on a bond issue (on a present value basis) violates the private payments limitation.
The private payments limitation considers direct and indirect payments with respect
to property used by private businesses that represent sources of payment or
security for the debt service on a bond issue. For example, if a private business
pays rent for its use of the bond-financed property, the rent payments give rise to
private payments. Various limited exceptions apply for purposes of the private
payments limitation.
5. The Generally Applicable Taxes Exception to the Private Payments Limitation
A notable exception to the private payments limitation applies to payments from
generally applicable taxes. In the legislative history to the Tax Reform Act of 1986,
Congress indicated its intent to exclude revenues from generally applicable taxes
from treatment as private payments for purposes of the private payments limitation.
The Conference Report to the Tax Reform Act of 1986 included the following
statement:
Revenues from generally applicable taxes are not treated as payments for
purposes of the security interest test; however, special charges imposed on
persons satisfying the use test (but not on members of the public generally) are so
treated if the charges are in SUbstance fees paid for the use of bond proceeds.
Consistent with this legislative history, Treasury Regulations define a generally
applicable tax as an enforced contribution imposed under the taxing power that is
imposed and collected for the purpose of raising revenue to be used for a
governmental purpose. A generally applicable tax must have a uniform tax rate that
is applied equally to everyone in the same class subject to the tax and that has a
generally applicable manner of determination and collection. By contrast, a
payment for a special privilege granted or service rendered is not considered a
generally applicable tax. Special assessments imposed on property owners who
benefit from financed improvements are also not considered generally applicable
taxes. For example, a tax that is limited to the property or persons benefiting from
an improvement is not considered a generally applicable tax. Although taxes must
be determined and collected in a generally applicable manner, the Treasury
Regulations permit certain agreements to be made with respect to those taxes. An
agreement to reduce or limit the amount of taxes collected to further a bona fide
governmental purpose is such a permissible agreement. Thus, an agreement to
abate taxes to encourage a property owner to rehabilitate property in a distressed
area is a permissible agreement.
In addition, the Treasury Regulations treat certain "payments in lieu of taxes" and
other tax equivalency payments ("PILOTs") as generally applicable taxes. Under
the current Treasury Regulations, a PILOT is treated as a generally applicable tax if
the payment is "commensurate with and not greater than the amounts imposed by
a statute for a tax of general application." For instance, if the payment is in lieu of
property tax on the bond-financed facility, it may not be greater in any given year
than what the actual property tax would be on the property. In addition, to avoid
being a private payment, a PILOT must be designated for a public purpose and not
be a special charge. Under this rule, a PILOT paid for the use of bond-financed
property is treated as a special charge.
In 2006, the Treasury Department and the Internal Revenue Service (IRS)
published Proposed Regulations to modify the standards for the treatment of
PILOTs to ensure a close relationship between eligible PILOT payments and
generally applicable taxes. Under the Proposed Regulations, a payment is
commensurate with general taxes only if the amount of the payment represents a
fixed percentage of, or a fixed adjustment to, the amount of generally applicable
taxes that otherwise would apply to the property in each year if the property were
subject to tax. For example, a payment is commensurate with generally applicable
taxes if it is equal to the amount of generally applicable taxes in each year, less a
fixed dollar amount or a fixed adjustment determined by reference to characteristics
of the property, such as size or employment. The Proposed Regulations permit the
level of fixed percentage or adjustment to change one time following completion of
development of the property. The Proposed Regulations also provide that eligible
PILOT payments must be based on the current assessed value of the property for
property taxes for each year in which the PILOTs are paid, and the assessed value
must be determined in the same manner and with the same frequency as property
subject to generally applicable taxes. A payment is not commensurate if it is based
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11/612007
Page 5 of8
in any way on debt service with respect to an issue or is otherwise set at a fixed
dollar amount that cannot vary with the assessed value of the property. The
Treasury Department and the IRS are in the process of reviewing the public
comments on the Proposed Regulations regarding the treatment of PILOTs.
Governmental Bonds for Public Infrastructure Projects and Private Stadiums
Under the Existing Legal Framework
A. Public Infrastructure Projects
For public infrastructure projects, qualification for Governmental Bond financing
focuses on limiting private business use to not more than i0-percent private
business use under the first prong of the Private Activity Bond definition. In general,
Governmental Bonds are an important tool that State and local governments use to
finance public infrastructure projects to carry out traditional governmental functions,
such as providing public roads, bridges, courthouses, and schools. Typically, State
and local governments finance public infrastructure projects with Governmental
Bonds based on predominant State or local governmental use of the projects and
limited private business use within the permitted i0-percent private business use
limitation for Governmental Bonds. Often, State and local governments finance
public infrastructure projects with Governmental Bonds based in part on reliance on
the general public use exception to private business use. Thus, for example, public
roads may be financed with Governmental Bonds even if private businesses use
them in the same way as individual members of the general public.
The tax policy justification for a Federal subsidy for tax-exempt bonds is strongest
in circumstances where State or local governments use Governmental Bonds to
finance public infrastructure projects and other traditional governmental functions to
carry out clear public purposes.
B. Private Stadiums
For stadium projects that are acknowledged to exceed the i0-percent private
business use limitation, qualification for Governmental Bond financing depends on
limiting private payments to comply with the i0-percent private payments under the
second prong of the Private Activity Bond definition. Here, it is important to
recognize that, under the existing legal framework, bonds are classified as Private
Activity Bonds only if they exceed both the i0-percent private business use
limitation and the 1O-percent private payments limitation. Thus, a State or local
government may issue tax-exempt Governmental Bonds to finance a project that is
i00-percent used for private business use, such as a stadium that a private
professional sports team uses 1OO-percent for private business use, provided that
the issuer does not receive private payments from the team or elsewhere that in the
aggregate exceed the 1O-percent private payments limitation. Alternatively, a State
or local government may issue tax-exempt Governmental Bonds to finance a
stadium to be used for private business use if it subsidizes the repayment of the
bonds with State or local governmental funds, such as generally applicable taxes.
For example, a city could pledge revenues from a city-wide sales tax, hotel tax, car
tax, property tax, or other broadly based generally applicable tax to pay the debt
service on Governmental Bonds to finance a stadium.
The tax policy justification for a Federal subsidy for tax-exempt bonds is weaker
when State or local governments use Governmental Bonds to finance activities
beyond traditional governmental functions, such as the provision of stadiums, in
which the public purpose is more attenuated and private businesses receive the
benefits of the subsidy.
Certain Tax Policy and Regulatory Authority Considerations
Regarding Tax-Exempt Bond Financing
A. Targeting the Federal Subsidy for Tax-Exempt Bonds in General
In general, it is important to ensure that the Federal subsidy for tax-exempt bonds is
properly targeted and justified. A rationale for a Federal subsidy for tax-exempt
bonds for State and local governmental projects and activities exists when they
serve some broader public purpose. The tax policy justification for a Federal
subsidy for State or local governmental projects and activities is clearest in the case
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1116/2007
Page 60f8
of traditional public infrastructure projects to carry out traditional governmental
functions where the public purpose is clear, particularly when the Federal subsidy is
necessary to induce the projects to be undertaken.
The tax policy justification for this Federal subsidy becomes weaker, however, in
cir~u.mstances that are more attenuated from traditional State or local governmental
activities, such as circumstances that lack a clear public purpose justification,
provide significant benefits to private businesses, or involve projects that might
have been undertaken in any event without the benefit of the Federal subsidy.
In addition, it also is important to recognize that, in general, the Federal subsidy for
tax-exempt bonds is less efficient than that for direct appropriations because of the
inefficiency of pricing in the tax-exempt bond market. In this regard, since some
bond purchasers have higher marginal tax rates than those of the bond purchasers
needed to clear the market, tax-exempt bonds cost the Federal government more in
foregone revenue than they deliver to State and local governments in reduced
interest expenses. Thus, for example, if taxable bonds yield 10 percent and
equivalent tax-exempt bonds yield 7.5 percent, then investors whose marginal
income tax rates exceed 25 percent will derive part of the Federal tax benefits,
resulting in a subsidy to the State and local governmental issuer that is less than
the reduction in Federal revenue.
At the same time, it is important to point out that tax-exempt bond financing has
advantages over the use of appropriated funds by government agencies. The
involvement of private investors in the decision-making process for infrastructure
investment can bring with it greater sensitivity to actual project costs and returns
than in public sector investment decision-making. In some cases, this enhanced
sensitivity to project costs and returns may compensate for the somewhat lower tax
efficiency of tax-exempt bonds and lead to a more efficient investment outcome
overall. In 2005, the Administration supported legislation that extended Private
Activity Bond authority to qualified highway and surface freight transfer facilities in
the highway and transit reauthorization based in part on these considerations.
B. Certain Tax Policy Considerations regarding Tax-Exempt Bond Financing
of Stadiums
From a tax policy perspective, the ability to use Governmental Bonds to finance
stadiums with significant private business use when the bonds are subsidized with
State or local governmental payments, such as generally applicable taxes, arguably
represents a structural weakness in the targeting of the Federal subsidy for taxexempt bonds under the existing legal framework.
At the same time, the tax policy justification in favor of the existing two-pronged
Private Activity Bond definition is that it gives State and local governments
appropriate flexibility and discretion to finance with Governmental Bonds a range of
projects in public-private partnerships with significant private business use when the
projects are sufficiently important to warrant subsidizing them with State and local
governmental funds, such as generally applicable taxes. Here, political constraints
against commitment of such governmental funds ordinarily serve as a sufficient
check against excess financing of such projects. An argument can be made,
however, that this justification may be debatable in certain cases, such as in the
case of certain stadium financings.
Several options could be considered to address the possible structural weakness in
the targeting of the tax-exempt bond subsidy relative to tax-exempt Governmental
Bonds for stadium financings.
First, Congress could consider repealing the private payments prong of the Private
Activity Bond definition for stadiums only. This possible change would prevent use
of tax-exempt Governmental Bonds to finance a stadium whenever the stadium has
more than 10 percent private business use, as would typically be the case with any
professional sports stadium. This option would preserve the ability of State and
local governments to use Governmental Bonds to finance stadiums used primarily
for governmental use (e.g., stadiums for state universities or city-sponsored
amateur sports). This option would ensure targeting of the Federal subsidy for taxexempt Governmental Bonds to circumstances involving predominant State or local
governmental use of stadiums. In its Options to Improve Tax Compliance and
Reform Tax Expenditures (JCS-02-05, January 27,2005), the Congressional Joint
http://www.treas.gov/press/releases/hp601.htm
11/6/2007
Page 7 of8
Committee on Taxation included this option to repeal the private payments
limitation for stadium financings.
Second, Congress could consider combining the first option described above with
an amendment to Section 142 of the Code to allow the use of tax-exempt Private
Activity Bonds to finance stadiums used primarily for private business use within the
constraint of the annual State tax-exempt Private Activity Bond volume caps. This
measured option would constrain stadiums to compete with other eligible projects
for allocations of this bond volume cap.
Third, Congress could consider banning tax-exempt bond financing for stadiums
altogether. In 1996, Senator Patrick Moynihan sponsored a widely-publicized
legislative proposal to this effect, which was never enacted into law.
Fourth, Congress could consider a broader option to repeal the private payments
prong of the Private Activity Bond definition altogether. This possible change would
treat bonds as Private Activity Bonds whenever private business use exceeded the
10 percent private business use limitation. This broader option would have an effect
well beyond stadiums. This broader option would affect all types of projects with
significant private business use that otherwise could be financed currently with
Governmental Bonds based on payments from governmental funds. In its 2005 tax
compliance options mentioned above, the Joint Committee on Taxation also
discussed this broader option to repeal the private payments limitation altogether.
At this time, the Administration does not take a position on any specific policy option
with respect to possible legislative changes to the tax-exempt bond provisions
relative to stadium financings. This topic raises difficult questions which require
balancing the interests of State and local governments in flexibility to finance
projects they deem sufficiently important to subsidize with governmental funds and
the Federal interest in ensuring effective targeting of the Federal subsidy for taxexempt bonds. The Administration recognizes that review of this important Federal
subsidy may be appropriate in considering ways more generally to simplify this area
and to ensure effective targeting of this subsidy for public infrastructure in order to
justify its cost.
C. Certain Regulatory Authority Considerations
The question has been raised whether the Treasury Department has the regulatory
authority to restrict the use of tax-exempt bond financing for professional sports
stadiums. The existing legal framework allows the use of Governmental Bonds to
finance professional sports stadiums when the bonds are payable from
governmental sources of funds, such as generally applicable taxes. In the
legislative history to the present tax-exempt bond provisions of the Code, Congress
clearly stated its intent to allow Governmental Bonds when secured by generally
applicable taxes. The Treasury Department's and the IRS's roles in providing
regulatory guidance are to interpret the Code in a manner consistent with
Congressional intent.
Therefore, while the Treasury Department and the IRS have broad regulatory
authority to interpret the Code, neither the Treasury Department nor the IRS has
regulatory authority so broad as to read the private payments limitation out of the
Private Activity Bond definition under Section 141 of the Code or to disregard
Congress' expressed intent to exclude generally applicable taxes from private
payments for this purpose. Thus, we do not believe the Treasury Department has
the regulatory authority to prohibit use of Governmental Bonds to finance stadiums
under the existing statutory structure.
Certain Statistical Data on Tax-Exempt Bonds
The Treasury Department estimates that Federal tax expenditures for the Federal
subsidy for tax-exempt bonds grew from about $26 billion in 1998 to about $30.9
billion in 2006. This tax expenditure is estimated to grow to about $41.1 billion in
2012. Attached ,to my testimony is certain statistical data on tax-exempt bonds. One
chart provides information on long-term new money (versus refinancing) tax-exempt
bond issuance from 1991-2005, derived from IRS Statistics of Income data, and
shows that annual total tax-exempt bond issuance grew from about $100 billion in
1991 to over $200 billion in 2005. Two additional charts provide breakdowns of the
http://www.treas.gov/press/releases/hp601.htm
11/612007
Page 8 of8
types of projects financed with Governmental Bonds and Private Activity Bonds
from 1991-2005.
Although the Treasury Department has no specific data on tax-exempt bond usage
for stadiums, in a U.S. Government Accounting Office ("GAO") Report entitled
"Federal Tax Policy: Information on Selected Capital Facilities Related to the
Essential Governmental Function Test" (GAO-06-1082, dated September 2006),
the GAO estimated that, during the period from 2000 through 2004, approximately
$5.3 billion in tax-exempt bonds were issued in about 119 bond issues to finance
stadiums and arenas.
Conclusion
The Administration recognizes the important role that tax-exempt bond financing
plays in providing a source of lower-cost financing for critical public infrastructure
projects and other significant public purpose activities. It is important to ensure that
the tax-exempt bond program is properly targeted so that it works most effectively
and that the Federal subsidy for tax-exempt bonds is justified in light of the revenue
costs and other costs imposed. The Administration would be pleased to work with
the Congress in reviewing possible options to try to improve the effectiveness of
this important Federal subsidy.
Thank you again, Mr. Chairman, Ranking Member Issa, and other Members of the
Subcommittee for the opportunity to appear before you today. I would be pleased to
answer any questions.
- 30-
REPORTS
•
•
•
Chart 1
Chart 2
Chart 3
http://www.treas.gov/press/releases/hp601.htm
11/6/2007
Governmental Tax-Exempt Bonds by Purpose, 1991-2005
100%
90%
80%
Q)
u
70%
c
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en
Je
iii
'0
to-
'0
60%
50%
Q)
01
S
c
40%
Q)
~
Q)
Q.
30%
20%
10%
0%
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Year
I_ Education -
Health and Hospital~a-Transportation 0 Public Safety. Environment • Housing • Utilities III BANs and TRANs. Other 1
Private Activity Bond Issuance by Purpose, 1991 M2005
100%
80%
c»
c:»
60%
!c»
~
c»
A.
40%
20%
0%
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Year
• Energy. Poliutipn/Sewage 0 Small Issue lOBs 0 Mortgage subsidy. Rental _Airports & Docks. Student Loans /ill Private Education • Hospitar
Long-Term, New Money Tax-Exempt Debt Issuance, 1991-2005
250.----------------------------------------------------------------------------------.
200+1------------------------~--------------~--------~----------~=_~
...en
c 150
~
iii
cu
c
u
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; 100
.!!
50
o
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
Year
[il Governmental a-onds
• Private Activity Bonds 1
2002
2003
2004
2005
Page 1 of 1
/0 view or pont tne f-JUI- content on tnlS page, Gown/oaG the free AeJolJel[y AcrOba/'.R) Ke8CierN
October 11, 2007
HP-602
Treasury Requests Public Input on Review
to Improve Regulatory Structure
Washington- The Department of the Treasury today released a request for public
input as it prepares a blueprint for an improved U.S. financial regulatory structure.
Secretary Paulson first announced his plans to review and recommend
improvements to the regulatory structure in June as part of his initiative to
strengthen U.S. financial markets' ability to compete in the global economy.
The blueprint, set for release early next year, will seek a more effective regulatory
structure that can adapt to the dynamic U.S. marketplace while improving oversight.
Treasury believes it is important to continue to evaluate our regulatory structure to
consider ways to improve efficiency, reduce overlap, strengthen consumer and
investor protection and ensure that financial institutions have the ability to keep
pace with evolving markets.
The Department's review of the financial regulatory structure will focus on all types
of financial institutions: commercial banks and other insured depository institutions;
insurance companies; securities firms; futures firms; and other types of financial
intermediaries.
Treasury asks for public comments on topics including overlapping state and
federal regulation, ways to improve market discipline and consumer protection, the
strengths and weaknesses of having multiple regulators and multiple federal
charters for financial institutions, as well as other issues.
Comments are due by Wednesday, November 21 and may be submitted at
www.regulations.gov.
REPORTS
•
Federal Register Notice
http://www.treas.gov/press/releases/hp602.htm
1116/2007
BILLING CODE 4811-42
DEPARTMENT OF THE TREASURY
Review by the Treasury Department of the Regulatory Structure Associated with
Financial Institutions.
AGENCY: Department of the Treasury, Departmental Offices.
ACTION: Notice; request for comments.
SUMMARY: The Treasury Department is undertaking a broad review of the regulatory
structure associated with financial institutions. To assist in this review and obtain a broad
view of all perspectives, the Treasury Department is issuing this notice seeking public
comment.
DATES: Comments should be submitted electronically and received by Wednesday,
November 21,2007.
ADDRESSES: Please submit comments electronically through the Federal eRulemaking
Portal- "Regulations.gov." Go to http://www.regulations.gov, select "Department of the
Treasury - All" from the agency drop-down menu, then click "Submit." In the "Docket
ID" column, select "TREAS-DO-2007-0018" to submit or view public comments and to
view supporting and related materials for this notice. The "User Tips" link at the top of
the Regulations.gov home page provides information on using Regulations.gov, including
instructions for submitting or viewing public comments, viewing other supporting and
related materials, and viewing the docket after the close of the comment period.
Please include your name, affiliation, address, e-mail address and telephone number(s) in
your comment. Where appropriate, comments should include a short Executive
Summary (no more than five single-spaced pages). All statements, including attachments
and other supporting materials, received are part of the public record and subject to
public disclosure. You should submit only information that you wish to make available
publicly.
FOR FURTHER INFORMATION CONTACT: Jeffrey Stoltzfoos, Senior Advisor,
Office of the Assistant Secretary for Financial Institutions, (202) 622-2610 or Mario
Ugoletti, Director, Office of Financial Institutions Policy, (202) 622-2730 (not toll free
numbers).
SUPPLEMENT ARY INFORMATION: The Treasury Department is currently
engaged in a number of initiatives associated with maintaining the competitiveness of
United States capital markets. One of those initiatives is evaluating the regulatory
structure associated with financial institutions.
The regulatory structure for financial institutions in the United States has served us well
over the course of our history. Much of the basic regulatory structure associated with
financial institutions was established decades ago. While there have been important
changes over time in the way financial institutions have been regulated, the Treasury
Department believes that it is important to continue to evaluate our regulatory structure
and consider ways to improve efficiency, reduce overlap, strengthen consumer and
investor protection, and ensure that financial institutions have the ability to adapt to
evolving market dynamics, including the increasingly global nature of financial markets.
The Treasury Department's review of regulatory structure will focus on all types of
financial institutions: commercial banks and other insured depository institutions;
insurance companies; securities firms; futures firms; and other types of financial
intermediaries.
The Treasury Department is soliciting comments to assist in this review. The Treasury
Department would be particularly interested in comments on the specific questions set
forth below, or on other issues related to the regulatory structure associated with financial
institutions. We are also interested in specific ideas or recommendations as to how we
can improve our current regulatory structure.
I.
General Issues
1.1
What are the key problems or issues that need to be addressed by our review of
the current regulatory structure for financial institutions?
1.2
Over time, there has been an increasing convergence of products across the
traditional "functional" regulatory lines of banking, insurance, securities, and futures.
What do you view as the significant market developments over the past two decades (e.g.
securitization, institutionalization, financial product innovation and globalization) and
please describe what opportunities and/or pressures, if any, these developments have
created in the regulation of financial institutions?
1.2.1
Does the "functional" regulatory framework under which banking,
securities, insurance, and futures are primarily regulated by respective functional
regulators lead to inefficiencies in the provision of financial services?
1.2.2
Does the "functional" regulatory framework pose difficulties for
considering overall risk to the financial system? If so, to what extent have these
difficulties been resolved through regulatory oversight at the holding company level?
1.2.3
Many countries have moved towards creating a single financial market
regulator (e.g., United Kingdom's Financial Services Authority; Japan's Financial
Services Agency; and Germany's Federal Financial Supervisory Authority (BaFin».
Some countries (e.g., Australia and the Netherlands) have adopted a twin peaks
model of regulation, separating prudential safety and soundness regulation and
conduct-of-business regulation. What are the strengths and weaknesses of these
structural approaches and their applicability in the United States? What ideas can be
gleaned from these structures that would improve U.S. capital market
competitiveness?
1.3
What should be the key objectives of financial institution regulation? How could
the framework for the regulation of financial institutions be more closely aligned with the
objectives of regulation? Can our current regulatory framework be improved, especially
in terms of imparting greater market discipline and providing a more cohesive look at
overall financial system risk? If so, how can it be improved to achieve these goals? In
regards to this set of questions, more specifically:
1.3.1
How should the regulation of financial institutions with explicit
government guarantees differ from financial institutions without explicit guarantees?
Is the current system adequate in this regard?
1.3.2
Is there a need for some type of market stability regulation for financial
institutions without explicit Federal Government guarantees? If so, what would such
regulation entail?
1.3.3
Does the current system of regulating certain financial institutions at the
holding company level allow for sufficient amounts of market discipline? Are there
ways to improve holding company regulation to allow for enhanced market
discipline?
1.3.4
In recent years, debate has emerged about "more efficient" regulation and
the possibility of adopting a "principles-based" approach to regulation, rather than a
"rules-based" approach. Others suggest that a proper balance between the two is
essential. What are the strengths, weaknesses and feasibility of such approaches, and
could a more "principles-based" approach improve U.S. competitiveness?
1.3.5
Would the U.S. financial regulatory structure benefit ifthere was a
uniform set of basic principles of regulation that were agreed upon and adopted by
each financial services regulator?
1.4
Does the current regulatory structure adequately address consumer or investor
protection issues? If not, how could we improve our current regulatory structure to
address these issues?
1.5
What role should the States have in the regulation of financial institutions? Is
there a difference in the appropriate role of the States depending on financial system
protection or consumer and investor protection aspects of regulation?
1.6
Europe is putting in place a more integrated single financial market under its
Financial Services Action Plan. Many Asian countries as well are developing their
financial markets. Often, these countries or regions are doing so on the basis of widely
adopted international regulatory standards. Global businesses often cite concerns about
the costs associated with meeting diverse regulatory standards in the numerous countries
in which they operate. To address these issues, some call for greater global regulatory
convergence and others call for mutual recognition. To what extent should the design of
regulatory initiatives in the United States be informed by the competitiveness of U.S.
institutions and markets in the global marketplace? Would the U.S. economy and capital
market competitiveness be better served by pursuing greater global regulatory
convergence?
II.
Specific Issues
2.1
Depository Institutions
2.1.1
Are mUltiple charters for insured depository institutions the optimal way to
achieve regulatory objectives? What are the strengths and weaknesses of having
charters tied to specific activities or organizational structures? Are these distinctions
as valid and important today as when these charters were granted?
2.1.2
What are the strengths and weaknesses of the dual banking system?
2.1.3
What is the optimal role for a deposit insurer in depository institution
regulation and supervision? For example, should the insurer be the primary regulator
for all insured depository institutions, should it have back-up regulatory authority, or
should its functions be limited to the pricing of deposit insurance, or other functions?
2.1.4
What role should the central bank have in bank regulation and
supervision? Is central bank regulatory authority necessary for the development of
monetary policy?
2.1.5
Is the current framework for regulating bank or financial holding
companies with depository institution subsidiaries appropriate? Are there other
regulatory frameworks that could or should be considered to limit the transfer of the
safety net associated with insured depository institutions?
2.1.6
What are the key consumer protection elements associated with products
offered by depository institutions? What is the best regulatory enforcement
mechanism for these elements?
2.2
Insurance
2.2.1
What are the costs and benefits of State-based regulation of the insurance
industry?
2.2.2
What are the key Federal interests for establishing a presence or greater
involvement in insurance regulation? What regulatory structure would best achieve
these goalslinterests?
2.2.3
Should the States continue to have a role (or the sole role) in insurance
regulation? Insurance regulation is already somewhat bifurcated between retail and
wholesale companies (e.g., surplus lines carriers). Does the current structure work?
How could that structure be improved?
2.2.4
States have taken an active role in some aspects of the insurance
marketplace (e.g., workers' compensation and residual markets for hard to place
risks) for various policy reasons. Are these policy reasons still valid? Are these
necessarily met through State (as opposed to federal) regulation?
2.3
Securities and Futures
2.3.1
Is there a continued rationale for distinguishing between securities and
futures products and their respective intermediaries?
2.3.2
Is there a continued rationale for having separate regulators for these
types of financial products and institutions?
2.3.3
What type of regulation would be optimal for firms that provide financial
services related to securities and futures products? Should this regulation be driven
by the need to protect customers or by the broader issues of market integrity and
financial system stability?
2.3.4
What is the optimal role for the states in securities and futures regulation?
2.3.5
What are the key consumer/investor protection elements associated with
products offered by securities and futures firms? Should there be a regulatory
distinction among retail, institutional, wholesale, commercial, and hedging
customers?
2.3.6
Would it be useful to apply some of the principles of the Commodity
Futures Modernization Act of 2000 to the securities regulatory regime? Is a tiered
system of regulation appropriate? Is it appropriate to make distinctions based on the
relative sophistication of the market participants and/or the integrity of the market?
Dated:
Taiya Smith
Executive Secretary of the Treasury
Page 1 of 4
10 vIew or pnnt me ~Ut- Content on tnJS page, Ciownloaa me tree AaolJe\i<) ACTOlJ(J[f!') KeaaeN!.
october 11, 2007
HP-603
Joint Statement of
Henry M. Paulson, Jr., Secretary of the Treasury,
And Jim Nussle, Director of the Office of Management and Budget,
on Budget Results for Fiscal Year 2007
SUMMARY
The Administration today released the September 2007 Monthly Treasury
Statement of Receipts and Outlays of the United States Government. The
statement shows the actual budget totals for the fiscal year that ended September
30,2007, as follows:
•
•
•
A deficit of $163 billion;
total receipts of $2,568 billion; and
total outlays of $2,731 billion.
"This year's budget results demonstrate the remarkable strength of the U.S.
economy. This strength has translated into record-breaking revenues flowing into
the U.S. Treasury and a continued decline in the federal budget deficit. President
Bush's fiscal policies have helped promote economic growth and steady job
creation. We must keep taxes low and restrain federal spending to continue the
economic expansion in the wake of credit market disruptions and the housing
market downturn. Shrinking the budget deficit and keeping the economy strong are
critical elements to help us address the coming wave of entitlement spending. We
must work together to find a solution to this problem, or we will cripple future
generations with obligations they cannot afford."
- Treasury Secretary Henry M. Paulson, Jr.
"This year's budget results further demonstrate how the President's tax relief,
combined with spending discipline, has helped promote a sustained
economic expansion, which led to revenue growth, and resulted in a declining
deficit. Our short-term budget outlook is improving, but beyond the horizon is a
huge budgetary challenge - the unsustainable growth in Social Security, Medicare
and Medicaid. The President has proposed reasonable changes that begin
to fix this serious problem. For the sake of our children and
grandchildren, Congress should begin to take action to prevent this fiscal train
wreck."
- OMB Director Jim Nussle
Table 1. TOTAL RECEIPTS, OUTLAYS AND SURPLUS/DEFICIT (-)
(in billions of dollars)
Receipts
Outlays Surplus/Deficit (-)
2006 Actual.......... ............ ..............
2,407
2,655
-248
FY 2007 Estimates:
FY 2008 Budget........................
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2,540
2,784
-244
11/6/2007
Page 2 of 4
FY 2008 Mid-Session Review...
2,574
ActuaL......... ..... .......................... 2,568
2,779
2,731
-205
-163
The FY 2007 unified deficit was $163 billion, or an estimated 1.2 percent of the
Gross Domestic Product (GOP). At this level, the deficit is half of the 40-year
average of 2.4 percent of GOP. The deficit for FY 2007 was $42 billion lower than
projected in July in the Mid-Session Review (MSR) because outlays were $48
billion lower than expected and receipts were $6 billion lower than expected. The
deficit was also $81 billion lower than projected last February in the FY 2008
Budget, with receipts coming in $28 billion higher and outlays $54 billion lower than
projected.
Overall, receipts in FY 2007 were 6.7 percent higher than in FY 2006, marking the
third consecutive year in which receipt growth outpaced growth in GOP. Receipts
rose from 18.5 percent of GOP in FY 2006 to 18.8 percent of GOP in FY 2007. This
level of receipts is above the 40-year historical average of 18.3 percent.
Outlays for FY 2007 grew by $76 billion, or 2.8 percent, from last year, representing
the smallest percentage growth in outlays in 10 years. The increase was driven by
growth in the Departments of Defense and Health and Human Services and the
Social Security Administration. Overall, outlays decreased as a percent of GOP,
from 20.4 percent in FY 2006 to 20.0 percent in FY 2007. This spending level is
below the 40-year historical average of 20.6 percent.
RECEIPTS
Total receipts for FY 2007 were $2,568 billion, $6 billion lower than the MSR
estimate of $2,574 billion. Table 2 displays actual receipts and estimates from the
Budget and MSR by source.
•
Individual income taxes were $1,163 billion, $5 billion lower than the MSR
estimate. An accounting adjustment based on more recent data reallocated
$3 billion less than had been expected in withheld tax payments from the
Social Security and Medicare Trust Funds to individual income taxes,
reducing withheld individual income taxes $3 billion below the MSR
estimate. Lower-than-estimated non-withheld payments reduced individual
income taxes an additional $3 billion below the MSR estimate. These
shortfalls in payments of withheld and non-withheld taxes were partially
offset by lower-than-expected refunds.
• Corporation income taxes were $370 billion, $1 billion lower than the MSR
estimate. Lower-than-estimated corporate tax payments of $2 billion, which
were partially offset by lower-than-estimated refunds, were responsible for
the difference in collections relative to the MSR.
• Social insurance and retirement receipts were $870 billion, the same as the
MSR estimate, despite the lower-than-expected reallocation of withheld tax
payments from the Social Security and Medicare Trust Funds to individual
income taxes, as described above.
• Other sources of receipts (excise taxes, customs duties, estate and gift
taxes, and miscellaneous receipts) were $164 billion, the same as the MSR
estimate, due to small offsetting changes among these sources of receipts.
OUTLAYS
Total outlays were $2,731 billion, $48 billion below the MSR estimate. Outlays for
nearly all agencies were lower than MSR estimates, with the largest differences in
the Departments of Defense, Health and Human Services, and Homeland Security.
Table 3 displays actual outlays by agency and major program as well as estimates
from the Budget and the MSR. The largest changes in outlays from the MSR were
in the following areas:
•
Department of Agriculture - Department of Agriculture outlays were $84
billion, $4.5 billion below the MSR estimate. The Farm Service Agency's
(FSA) FY 2007 outlays were $2.7 billion below the MSR estimate. FSA did
not outlay $1.4 billion in planned disaster assistance in FY 2007; these
payments will now be made in FY 2008. Also, commodity prices were
slightly stronger than anticipated, which contributed to lower-than-
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11/6/2007
Page 3 of 4
•
•
•
•
•
•
•
•
•
anticipated commodity payments and also resulted in fewer producers
taking FSA loans on the 2007 crop than anticipated in the MSR.
Additionally, outlays for the Risk Management Agency were lower than the
MSR estimate because the weather for areas where the bulk of crops is
insured was better than expected, reducing crop insurance payments.
Department of Defense - Military outlays were $530 billion in FY 2007, $9
billion (1.7 percent) below the MSR estimate. Outlays for military personnel,
operations and maintenance, and procurement were all lower than
expected. The late passage of the FY 2007 emergency supplemental
caused the military services to restrain spending and delay planned
activities. At the time of the MSR, many of these programs projected rapid
recovery from these disruptions. However, while outlays have picked up
gradually since June, spending has not been as high as projected.
Department of Education - Outlays for the Department of Education were
$66 billion in FY 2007, $1.5 billion below the MSR estimate. This stemmed
from lower-than-estimated outlays for several programs in the Office of
Elementary and Secondary Education, other offices with formula grant
programs, and appropriations provided for hurricane relief.
Department of Energy - Outlays for the Department of Energy were $20
billion, $1 billion lower than the MSR estimate. Program outlays for the
National Nuclear Security Administration were $0.7 billion lower than
expected. In addition, net outlays for the Bonneville Power Administration
were $0.5 billion less than estimated in the MSR due to higher-thanexpected secondary market revenues. Secondary market revenues, which
result from Bonneville selling surplus power in the wholesale market, are
difficult to predict in advance because they are primarily driven by weather
events, such as heavy rain or snow pack.
Department of Health and Human Services - Outlays for the Department of
Health and Human Services were $672 billion, $7.1 billion lower than the
MSR estimate. Outlays for Medicaid were $6.2 billion lower than projected
in the MSR, due to lower-than-expected claims for Federal share
reimbursement of State Medicaid spending. Additionally, Medicare gross
outlays increased by $3.2 billion (0.7 percent) compared to MSR estimates.
Key factors explaining the difference include higher-than-expected skilled
nursing facility and home health spending, partially offset by lower-thanexpected inpatient hospital spending.
Department of Homeland Security - Outlays for the Department of
Homeland Security were $39 billion in FY 2007, $7.1 billion below the MSR
estimate. Nearly $3 billion of this difference is attributable to delayed
obligations by Customs and Border Protection and Immigration and
Customs Enforcement from supplemental funding and capital investments in
the Secure Border Initiative. In the Federal Emergency Management
Agency, outlays were $2.6 billion less than estimated in the MSR, due
primarily to reduced estimates for flood insurance claims related to
hurricane Katrina. In addition, spending for the Bioshield program was $1.0
billion less than anticipated because private sector demand for next
generation vaccine development dollars has not materialized as expected at
the time of the MSR.
Department of State - Outlays for the Department of State were $13.7
billion in FY 2007, $2.9 billion below the MSR estimate. Outlays for
Administration of Foreign Affairs were $2.1 billion below the MSR estimate
due to slower-than-expected spending on capital construction projects,
lower-than-expected outlays for Iraq operations and other supplemental
funding received late in the fiscal year, and higher-than-expected proceeds
for sale of real property overseas. In addition, outlays were $0.6 billion
lower for International Organizations due to the timing of payments to the
United Nations and $0.5 billion lower than the MSR estimate for
International Narcotics Control and Law Enforcement programs.
Department of Transportation - Department of Transportation outlays were
$61.7 billion in FY 2007, $2.4 billion below the MSR estimate. The
decrease was due to slower-than-anticipated obligation and spending of
funds for many Federal-Aid Highway grants, surface transportation safety
bureaus, Federal Aviation Administration grants and capital investments.
Department of the Treasury - The Department of the Treasury had actual
outlays of $491 billion, $2.0 billion higher than the MSR estimate. Interest
on the public debt was $430 billion, $0.7 billion higher than the MSR
estimate. The remainder of the difference is in offsetting receipt amounts,
primarily due to lower-than-anticipated interest received from credit
financing accounts.
Department of Veterans Affairs - Outlays for the Department of Veterans
Affairs were $73 billion, $2.0 billion lower than estimated in the MSR. The
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Page 4 of 4
difference was largely due to lower-than-anticipated spending in veterans'
medical care. Outlays for benefit programs were $0.7 billion lower than
expected, primarily for the compensation and pension programs.
• Army Corps of Engineers - FY 2007 outlays for the Corps of Engineers
were $3.9 billion, $2.8 billion below MSR projections. The majority of the
difference is attributable to higher-than-expected reimbursements from
FEMA for Corps activities in response to the 2005 hurricanes. Other
differences are due in large part to weather, legal and other natural-disaster
delays or adjustments.
• International Assistance Programs - Outlays for International Assistance
Programs were $12.8 billion in FY 2007, $4.0 billion below the MSR
estimate. Outlays for the Economic Support Fund were $1.2 billion lower
than the MSR estimate, and outlays for the Agency for International
Development were $0.8 billion lower due in part to slower-than-expected
obligations of FY 2007 supplemental funds for Iraq and Afghanistan.
Foreign Military Financing program outlays were $0.4 billion lower than
estimated in the MSR due to slower-than-expected release of full-year
funding for grant programs.
REPORTS
•
•
Additional Table 2
Additional Table 3
http://www.treas.gov/press/releases/hp603.htm
11/6/2007
Table 2.--2007 BUDGET RECEIPTS BY SOURCE
(fiscal years; in millions of dollars)
2006
Actual
2007
Estimate
Budget
Mid-Session
Actual
Change, 2007 Actual from:
Budget Mid-Session
Receipts by Source
Individual income taxes ..................................................... ,.. ,.......
Corporation income taxes ............................................................
Social insurance and retirement receipts:
Employment and general retirement:
On-budget. ...........................................................................
Off-budget. ...........................................................................
Subtotal, Employment and general retirement... ..............
Unemployment insurance .........................................................
Other retirement contributions ..................................................
Subtotal, Social insurance and retirement receipts ..............
1,043,908
353,915
1,168,846
342,057
1,168,298
371,655
1,163,472
370,243
-5,374
28,186
-4,826
-1,412
181,660
608,382
790,042
43,420
4,358
837,820
189,520
634,130
823,650
44,985
4,742
873,377
188,521
632,845
821,366
43,562
4,742
869,670
189,170
635,088
824,257
41,091
4,258
869,607
-350
958
607
-3,894
-484
-3,770
649
2.243
2,891
-2,471
-484
-63
Excise taxes .................................................................................
Estate and gift taxes .....................................................................
Customs duties ....... '" ...................................................................
Miscellaneous receipts .................................................................
73,962
27,877
24,810
44,384
57,062
25,277
26,766
46,711
65,218
25,800
26,466
46,800
65,069
26,044
26,010
47,227
8,007
767
-756
516
-149
244
-456
427
Total, Receipts .............................................................................
On-budget. .................................................................................
Off-budget. .................................................................................
2,406,675
1,798,293
608,382
2,540,096
1,905,966
634,130
2,573,907
1,941,062
632,845
2,567,671
1,932,583
635,088
27,575
26,617
958
-6,236
-8,479
2,243
NOTE: Detail may not add to totals or changes due to rounding.
Table 3.--2007 BUDGET OUTLAYS BY AGENCY
(fiscal years; in millions of dollars)
Outlays by Major Agency
Legislative Branch .................................................................................. .
The Judiciary ...........................................................................................
Agriculture:
Farm Service Agency ......................................................................... .
Food and Nutrition Service:
Food stamps .................................................................................. .
Other. ..............................................................................................
Agriculture Marketing Service ............................................................ .
Natural Resources Conservation Service .......................................... .
Rural Housing Service ....................................................................... .
Risk Management Agency ................................................................. .
Rural Utilities Service ..........................................................................
Forest Service .................................................................................... .
Offsetting receipts .............................................................................. .
Other ...................................................................................................
Subtotal, Agriculture ........................................................................
Commerce ...............................................................................................
Defense-Military:
Military Personnel ................................................................................
Operations and Maintenance ..............................................................
Procurement. .......................................................................................
Research, Development, Test, and Evaluation .................................. .
Military Construction ............................................................................
Revolving and Management Funds ................................................... .
Allowance for the proposed final Continuing Resolution (distributed
across accounts in Mid-Session Review and actuals) .................... .
Other...................................................................................................
Subtotal, Defense-Military ...............................................................
Education:
Office of Elementary and Secondary Education ................................ .
Office of Special Education and Rehabilitative Services ................... ..
Office of Postsecondary Education .................................................... .
Office of Federal Student Aid ............................................................. .
Hurricane education recovery ............................................................ .
Other ...................................................................................................
Subtotal, Education ........................................................................ .
2006
Actual
4,129
5,820
2007
Estimate
Mid-Session
Budget
4,428
4,306
6,082
5,845
Actual
4,306
6,008
21,395
14,577
15,071
12,336
-2,241
-2,735
34,620
17,832
1,584
2,769
896
3,445
712
5,528
-2,683
7,428
93,533
35,564
19,172
1,272
2,821
717
3,992
-995
5,369
-1,223
7,501
88,767
35,090
18,825
1,279
3,048
711
4,382
-1,953
5,814
-1,223
7,869
88,913
34,885
18,683
967
2,730
685
3,550
-2,076
5,833
-1,759
8,602
84,437
-679
-489
-305
-91
-32
-442
-1,081
464
-536
1,101
-4,330
-205
-142
-312
-318
-26
-832
-123
19
-536
733
-4,476
6,374
6,179
6,612
6,479
300
-133
127,542
203,787
89,758
68,628
6,245
2,230
128,780
224,799
104,302
71,075
8,758
3,223
130,283
221,320
101,541
70,995
8,151
3,142
128,827
217,421
98,857
73,136
7,898
1,370
47
-7,378
-5,445
2,061
-860
-1,853
-1,456
-3,899
-2,684
2,141
-253
-1,772
1,161
499,350
4,115
3,863
548,915
3,393
538,825
2,362
529,871
-4,115
-1,501
-19,044
-1,031
-8,954
21,773
15,135
2,265
48,024
1,140
5,091
93,427
22,071
15,265
2,501
25,886
743
1,574
68,040
21,851
15,271
2,561
26,637
553
1,046
67,919
21,252
15,136
2,480
26,676
415
412
66,372
-819
-129
-21
790
-328
-1,162
-1,668
-599
-135
-81
39
-138
-634
-1,547
Change, 2007 Actual from:
Budget Mid-Session
-122
-74
163
Table 3.--2007 BUDGET OUTLAYS BY AGENCY
(fiscal years; in millions of dollars)
Outlays by Major Agency
2006
Actual
2007
Estimate
Mid-Session
Budget
Actual
Energy:
Atomic energy defense activities ........................................................ .
Other...................................................................................................
Subtotal, Energy ............................................................................. .
16,290
3,362
19,653
16,620
5,368
21,988
16,423
5,082
21,505
15,763
4,353
20,117
-857
-1,015
-1,871
-660
-729
-1,388
381,817
180,625
5,451
1,244
47,107
436,380
191,876
5,647
1,680
48,075
437,520
196,844
6,294
1,548
48,458
440,756
190,624
6,000
1,280
48,467
4,376
-1,252
353
-400
392
3,236
-6,220
-294
-268
9
20,898
26,018
-53,493
4,646
614,313
21,837
26,185
-65,433
5,007
671,254
21,642
26,253
-64,427
5,051
679,183
21,114
26,114
-66,715
4,397
672,036
-723
-71
-1,282
-610
782
-528
-139
-2,288
-654
-7,147
Homeland Security:
Security, Enforcement, and Investigations ........................................ ..
Coast Guard ........................................................................................
Federal Emergency Management Administration .............................. .
Science and Technology ................................................................... ..
Other...................................................................................................
Subtotal, Homeland Security ......................................................... ..
14,309
7,897
45,799
1,051
42
69,100
18,468
8,218
21,087
1,226
1,419
50,418
18,213
8,219
17,066
1,231
1,550
46,279
15,383
8,181
14,483
1,118
§
39,172
-3,085
-37
-6,604
-108
-1,413
-11,246
-2,830
-38
-2,583
-113
-1,544
-7,107
Housing and Urban Development:
Public and Indian Housing Programs ................................................ ..
Federal Housing Administration ......................................................... .
Other housing programs .................................................................... .
Community Planning and Development... ......................................... ..
Government National Mortgage Association ..................................... ..
Other...................................................................................................
Subtotal, Housing and Urban Development... ................................ .
31,400
2,382
312
8,570
-422
193
42,434
31,838
708
498
11,503
-324
-1,389
42,834
32,217
533
252
14,900
-324
-1,945
45,633
32,253
-4
480
14,485
-360
-1,295
45,559
415
-712
-18
2,982
-36
94
2,725
36
-537
228
-415
-36
650
-74
Health and Human Services:
Medicare (gross outlays) ................................................................... ..
Medicaid ..............................................................................................
State children's health insurance fund .............................................. ..
Other Centers for Medicare and Medicaid Services programs .......... .
Public Health Service ......................................................................... .
Temporary assistance for needy families and payments to States for
child support enforcement and family support programs ................. .
Other Administration for Children and Families ................................ ..
Proprietary receipts ........................................................................... ..
Other. ..................................................................................................
Subtotal, Health and Human Services .......................................... ..
Change, 2007 Actual from:
Budget Mid-Session
Table 3.--2007 BUDGET OUTLAYS BY AGENCY
(fiscal years; in millions of dollars)
Outlays by Major Agency
Interior .................................................................................................... .
Justice:
Office of Justice Programs ................................................................. .
Federal Bureau of Investigation ......................................................... .
Federal Prison System ...................................................................... ..
Drug Enforcement Administration ...................................................... .
Other. ..................................................................................................
Subtotal, Justice ..............................................................................
2006
Actual
9,063
2007
Estimate
Budget
Mid-Session
10,877
10,495
Actual
10,488
4,300
5,681
5,051
1,933
6,356
23,320
3,639
5,814
4,770
1,773
7,043
23,039
3,723
6,023
4,909
1,822
7,745
24,222
3,818
5,724
5,173
1,826
6,810
23,351
179
-90
403
53
-233
312
95
-299
264
4
-935
-871
Labor:
Training and employment services .................................................... .
Unemployment trust fund ....................................................................
Pension Benefit Guaranty Corporation .............................................. .
Employment Standards Administration .............................................. .
Other...................................................................................................
Subtotal, Labor................................................................................
5,255
35,104
-2,618
3,022
2,377
43,139
5,314
35,747
316
3,270
2,793
47,440
5,238
35,646
508
3,229
2,902
47,523
5,158
36,147
457
3,165
2,616
47,543
-156
400
141
-105
-177
103
-80
501
-51
-64
-286
20
State:
Administration of Foreign Affairs ........................................................ .
International organizations and conferences ..................................... .
International narcotics control and lawenforcemen!.. ........................ .
Andean counterdrug initiative ............................................................ ..
Other ...................................................................................................
Subtotal, State .................................................................................
7,701
2,023
424
678
2,130
12,957
9,934
2,417
953
680
2,338
16,322
9,730
2,690
696
733
2,819
16,668
7,616
2,119
238
698
3,078
13,749
-2,318
-298
-715
18
740
-2,573
-2,114
-571
-458
-35
259
-2,919
Transportation:
Federal Highway Administration ........................................................ .
Federal Transit Administration .......................................................... ..
Federal Aviation Administration ......................................................... .
Other ...................................................................................................
Subtotal, Transportation ................................................................. .
34,192
8,637
14,189
3,122
60,141
35,375
10,235
14,545
3,620
63,775
35,929
9,737
14,596
3,811
64,073
34,970
9,199
14,154
3,370
61,693
-405
-1,036
-391
-250
-2,082
-959
-538
-442
-441
-2,380
-917
405,872
-937
433,004
-1,405
429,266
-1,367
429,978
-430
-3,026
38
712
36,166
15,473
36,461
14,931
38,309
15,981
38,274
16,159
1,813
1,228
-35
178
Treasury:
Exchange stabilization fund ............................................................... .
Interest on the public deb!.. ............................................................... ..
Internal Revenue Service:
Earned income tax credit. .............................................................. .
Child tax credit. .............................................................................. .
Change, 2007 Actual from:
Budget Mid-Session
-389
-7
Table 3.··2007 BUDGET OUTLAYS BY AGENCY
(fiscal years; in millions of dollars)
2006
Actual
4,172
10,601
2007
Estimate
Budget
Mid-Session
4,580
3,524
10,980
10,759
Change, 2007 Actual from:
Budget Mid-Session
-1,298
-242
-170
51
Outlays by Major Agency
Refunding collections, interest. ...................................................... .
Other...............................................................................................
Financial Management Service:
Payment to Resolution Funding Corporation ................................. .
Interest paid to credit financing accounts ....................................... .
Other...............................................................................................
Federal Financing Bank ..................................................................... .
Offsetting receipts .............................................................................. .
Other...................................................................................................
Subtotal, Treasury ...........................................................................
1,979
5,200
1,987
-417
-16,756
1,385
464,745
2,140
5,067
2,245
-433
-18,818
1,287
490,507
2,140
5,090
2,548
-433
-18,810
1,670
488,639
1,987
4,604
2,574
-496
-16,663
1.474
490,615
-153
-463
329
-63
2,155
187
108
-153
-486
26
-63
2,147
-196
1,976
Veterans Affairs:
Veterans Health Administration .......................................................... ,
Benefits Programs ..............................................................................,
Other ...................................................................................................
Subtotal, Veterans ..........................................................................,
31,338
38,996
-527
69,808
31,805
40,570
-50
72,325
34,955
39,704
123
74,782
33,734
38,999
86
72,820
1,929
-1,571
136
495
-1,221
-705
-37
-1,962
6,946
7,557
6,715
3,918
-3,639
-2,797
41,145
7,067
-4,550
773
44,435
8,322
43,673
7,680
-4,400
683
47,636
8,038
43,673
7,680
-4,386
684
47,651
7,864
43,510
7,604
-4,586
584
47,112
8,258
-163
-76
-186
-99
-524
220
-163
-76
-200
-100
-539
394
5,062
316
5,378
22
2,300
377
2,677
498
2,550
381
2,931
279
2,581
376
2,957
32
281
280
-466
31
-5
26
-247
4,594
-472
2,842
824
4,623
-310
4,715
-222
3,807
987
4,658
-261
4,738
-222
4,442
1,008
4,916
-261
4,326
-274
3,285
647
4,126
-416
-389
-52
-522
-340
-532
-155
-412
-52
-1,157
-361
-790
-155
Corps of Engineers ................................................................................ .
Other Defense Civil Programs:
Military retirement fund .......................................................................'
Medicare eligible retiree health care .................................................. .
Intrabudgetary transactions ................................................................ '
Other. ..................................................................................................
Subtotal, Other Defense Civil Programs ........................................ .
Environmental Protection Agency ........................................ ,................. .
Executive Office of the President:
Iraqi relief and reconstruction fund ..................................................... .
Other ....................................................................... ,.......................... .
Subtotal, Executive Office of the President... ................................. .
General Services Administration ............................................................ .
International Assistance Programs:
International Security Assistance:
Foreign military financing program ................................................. .
Foreign military loan program ........................................................ .
Economic support fund .................................................................. .
Other ...............................................................................................
Agency for International Development... ............................................ .
Overseas Private Investment Corporation ......................... ,............... .
Actual
3,282
10,810
:1
Table 3.··2007 BUDGET OUTLAYS BY AGENCY
(fiscal years; in millions of dollars)
Outlays by Major Agency
Multilateral assistance .........................................................................
Military sales programs ...................................................................... .
International monetary programs ....................................................... .
Other. ..................................................................................................
Subtotal, International Assistance Programs ................................. .
National Aeronautics and Space Administration .................................... .
National Science Foundation ................................................................. .
Office of Personnel Management:
Civil Service Retirement and Disability Fund ..................................... .
Employees and Retired Employees Health Benefits Funds ............... .
Other...................................................................................................
Subtotal, Office of Personnel Management... ................................ .
Small Business Administration ............................................................... .
Social Security Administration:
Old age and survivors insurance (off-budget) .................................... .
Disability insurance (off-budget) ......................................................... .
Supplemental security income program ............................................. .
Other:
On-budget. ......................................................................................
Off-budget. ..................................................................................... .
Subtotal, Social Security Administration .................................... .
Other independent agencies:
Corporation for National and Community Service .............................. .
District of Columbia ............................................................................ .
Export-Import Bank ............................................................................ .
Federal Communications Commission:
Universal service fund .....................................................................
Spectrum auction subsidies ........................................................... .
Universal service fund income and other. ...................................... .
Subtotal, Federal Communications Commission ....................... .
Federal Deposit Insurance Corporation:
Deposit insurance fund ................................................................. .
FSLlC resolution fund (including RTC) .......................................... .
Other FDiC ......................................................................................
Subtotal, Federal Deposit Insurance Corporation ..................... .
Federal Drug Control Programs ......................................................... .
National Credit Union Administration ................................................. .
2006
Actual
2,533
-1,199
-77
587
13,945
15,125
5,541
2007
Estimate
Mid-Session
Budget
2,830
2,353
-1,693
Change, 2007 Actual from:
Budget Mid-Session
-164
·641
47
-1,646
-258
-258
-240
-212
-3,990
-4,297
-321
-282
-331
-415
1.024
17,061
16,143
5,860
996
16,754
16,182
5,944
Actual
2,189
-1,646
-258
784
12,764
15,861
5,529
57,983
-2,265
6,682
62,400
905
84,538
-1,597
-24,139
58,802
675
78,650
-964
-18,238
59,448
1,263
78,146
-1,031
-18,665
58,450
1,175
-6,392
566
5,474
-352
500
-504
-67
-427
-998
-88
461,025
93,572
40,203
485,204
101,396
39,457
485,931
99,729
38,999
486,392
99,850
38,461
1,188
-1,546
-996
461
121
-538
13,049
-22,106
585,742
16,283
-19,421
622,919
16,514
-19,402
621,771
16,455
-19,397
621,761
172
24
-1,158
-59
-10
842
671
-2,191
901
708
-1,337
894
738
-1,334
899
673
-1,365
-2
-35
-28
5
-65
-31
7,562
142
-782
6,922
8,601
50
-287
8,364
7,803
50
-280
7,573
7,478
32
-287
7,222
-1,123
-18
-325
-18
-1,142
-351
-1,181
481
23
-677
401
-279
-1,594
-241
26
-1,809
384
-357
-1,019
85
31
-903
384
-357
-1,235
211
26
-999
377
-363
359
452
-216
126
:§
-96
-7
-6
.
--
.
--
810
-7
-6
§
=1
Table 3.--2007 BUDGET OUTLAYS BY AGENCY
(fiscal years; in millions of dollars)
Outlays by Major Agency
2006
Actual
2007
Estimate
Mid-Session
Budget
Postal Service:
On-budget. ......................................................................................
Off-budget. ......................................................................................
Subtotal, Postal Service ............................................................. .
Railroad Retirement Board ................................................................. .
Securities and Exchange Commission ............................................... .
Tennessee Valley Authority ............................................................... .
Other (net) ...........................................................................................
Subtotal, other independent agencies ............................................ .
Allowances ..............................................................................................
Undistributed offsetting receipts:
Employer share, employee retirement (on-budget):
Military retirement and health ......................................................... .
Other...............................................................................................
Employer share, employee retirement (off-budget) ............................ .
Interest received by on-budget trust funds ......................................... .
Interest received by off-budget trust funds ......................................... .
Rents and royalties on the Outer Continental Shelf lands ................ ..
Spectrum auction proceeds ............................................................... .
Spectrum relocation activities ........................................................... ..
Other ...................................................................................................
Subtotal, undistributed offsetting receipts ...................................... .
-237,546
-263,140
Total, Outlays ......................................................................................... .
On-budget. ......................................................................................... .
Off-budget. ..........................................................................................
2,654,873
2,232,803
422,069
Deficit( -)/Surplus( +) ............................................................................... ..
On-budget. ..........................................................................................
Off-budget. ..........................................................................................
-248,197
-434,510
186,313
* indicates $500 thousand or less.
NOTE: Detail may not add to totals or changes due to rounding.
Actual
104
-1,075
-971
3,368
-1,033
-380
5,677
12,351
103
2,642
2,745
3,996
-542
-548
6.203
18,708
8,002
103
5,723
5,826
1,708
-539
-263
6,354
20,081
104
5,093
5,197
2,267
-710
-559
5,631
18,271
-27,378
-21,853
-11,625
-71,574
-97,722
-7,282
-111
-27,665
-21,180
-12,289
-75,067
-106,249
-6,810
-6,850
-7,030
-28,317
-21,185
-12,299
-71,363
-106,697
-6,391
-6,850
-6,930
Change, 2007 Actual from:
Budget Mid-Session
2,451
2,452
-1,729
-168
-11
-572
-437
-8,002
-630
-629
559
-171
-296
-723
-1,810
-28,364
-21,111
-12,299
-71,961
-106,003
-6,762
-6,850
-6,850
-699
69
-10
3,106
246
48
-47
74
-598
694
-371
180
80
:.1.
:.1.
:.1.
-260,032
-260,201
2,939
-169
2,784,267
2,332,984
451,283
2,778,632
2,325,647
452,985
2,730,505
2,276,868
453,637
-53,762
-56,116
2,354
-48,127
-48,779
652
-244,171
-427,018
182,847
-204,725
-384,585
179,860
-162,833
-344,284
181,451
81,338
82,734
-1,396
41,892
40,301
1,591
~
Page 1 of 1
10 view or pont rhe /-,UI- content on ChiS page, Clown/oaCi Che 'ree A(1o/)eW) Aero!)at''',' r<eaClGr''').
October 12, 2007
hp-604
Issue Brief No.2: Social Security Reform: A Framework for Analysis
Washington, DC-- Treasury today released the second in a series of papers on
Social Security. Issue Brief No.2 is entitled Social Security Reform: A Framework
for Analysis.
-30REPORTS
•
Issue Brief No.2 Social Security Reform: A Framework for Analysis
http://www.treas.gov/press/releases/hp604.htm
1116/2007
SOCIAL SECURITY REFORM: A FRAMEWORK FOR ANALYSIS • ISSUE BRIEF NO. 2
ISSUE BRIEF NO. 2
SOCIAL SECURITY REFORM: A FRAMEWORK
FOR ANALYSIS
INTRODUCTION
This is the second in a series of Treasury issue briefs on Social Security reform. The first brief explained
that the birth cohorts who will bear the financial consequences of reform must receive benefits whose
present value is lower than the present value of the Social Security taxes they pay by more than
$13.6 trillion. This is necessary because Social Security has paid or promised earlier birth cohorts a net
benefit of equal magnitude.! By looking at reform in terms of how it affects the well-being of different
birth cohorts, the first brief demonstrated that reform can be fairer to future generations the sooner that it
is initiated.
This brief seeks to advance the debate over Social Security reform by offering a top-down framework for
designing and evaluating Social Security reform plans. This framework centers on the following four key
questions that any plan must address.
1. Fairness across generations. How should the burden of the changes that are required 10 make Social Security solvent be distributed across generations? That is, how should current and future generations share the necessary adiustments to Social Security benefits and/or taxes?
2. Fairness within generations. How should Social Security's benefits and taxes be distributed across
people within each generation? Put differently, how progressive should Social Security's tax and
benefit structure be 2
3. Size of the safety net. How large should Social Security's benefits be? likewise, how large should
the taxes needed to support these benefits be?
4. Pre-funding future benefits. Are Social Security surpluses set aside to help pay future Social Security
benefits? More generally, do contributions in excess of benefits paid constitute true pre-funding of
future Social Security benefits? If not, how are the answers to the first three questions affected?
Once agreement is reached on the answers to these questions, it should be possible to identify specific
reforms that are consistent with them. Hence, these questions help to define a top-down framework for
designing, debating, and evaluating Social Security reform plans.
The principal purpose of this brief is to introduce this approach to Social Security reform. The brief elucidates the four key questions identified above and develops obiective metrics that can be used to assess
how reform affects the well-being of entire birth cohorts, the well-being of groups within cohorts, and the
adequacy of benefits.
As in the first issue brief, all present values discussed here are computed as of the start
U.S. DEPARTMENT OF THE TREASURY
2
of
2007
SOCIAL SECURITY REFORM: A FRAMEWORK FOR ANALYSIS • ISSUE BRIEF NO 2
The brief stops short, however, of answering these questions. Later issue briefs will propose benchmarks
for assessing fairness and benefit adequacy with an eye toward providing concrete demonstrations of
how the framework can be used to design and evaluate particular Social Security reform plans. Another issue brief will explore alternative mechonisms for ensuring that attempts to pre-fund Social Security
result in the accumulation of additional resources that can be used to finance future benefits.
A key message of this brief is that whether it is possible to truly pre-fund future benefits profoundly influences the choices that are available for ensuring fairness across generations and benefit adequacy. If
it is not possible to safeguard Social Security surpluses, then there is little prospect for a Social Security
reform that is fair to future generations. The discussion of the first three questions is therefore divided into
two parts. First, each question is discussed under the assumption that attempted pre-funding is or can
be made real. Next, how the absence of true pre-funding would affect the answers to these questions
is considered when the fourth question is discussed. Organizing the brief in this way underscores its
central point: that the ability to safeguard Social Security surpluses is an essential element in making
Social Security fair to future generations.
FIRST KEY QUESTION: HOW SHOULD THE SOCIAL SECURITY REFORM BURDEN BE DISTRIBUTED ACROSS GENERATIONS?
Treasury's first issue brief explained that the current and future generations who will bear the financial
burden of making Social Security permanently solvent will face some combination of benefit arid/or tax
adjustments amounting to $13.6 trillion in present-value terms. 2 These "reform cohorts" must in effect pay
for the excess of benefits over contributions that Social Security conveyed or has promised to the generations who preceded them and who are. not themselves subject to reform.
A natural measure of how Social Security affects the well-being of individuals and birth cohorts is the
lifetime net benefit rate. For an individual, the lifetime net benefit rate is defined as the present value
of net lifetime Social Security benefits (benefits less taxes) as a percentage of the present value of the
individual's lifetime wages. This summarizes the difference between the benefits a person eventually receives in retirement and the taxes he or she pays into the system while working. The lifetime net benefit
rate for a birth cohort is the some as that for an individual except that the numerator (net Social Security
benefits) and the denominator (lifetime wages) are sums computed over all members of the birth cohort.
Box 1 compares the lifetime net benefit rate with two other commonly used measures of Social Security's
value to individuals.
2
To put this number in perspective, permanent solvency could be achieved, for instance, with roughly a 20 percent
reduction in scheduled Ibut not payable) benefits or on immediate and permonent 3.5 percentage point increase in
the payroll tax rate on the shore of earnings that is subject to tax under current law. These figures are used purely to
illustrate the magnitude of the problem; in practice, a revenue adjustment could involve changes in the tax bose-the
taxable earnings share-as well as changes to the tax rate.
U.S. DEPARTMENT OF THE TREASURY
3
SOCIAL SECURITY REFORI\~4. FP4i0EWOPK Fe jp Fr,LLl(~1
• I (,liE GFIEF f ,I~) ~
BOX 1
SOCIAL SECURITY'S LIFETIME NET BENEFIT RATE COMPARED TO TWO COMMON
ALTERNATIVE MEASURES OF SOCIAL SECURITY'S NET VALUE TO INDIVIDUALS
Measures of the financial value of the Social Security program to an individual are useful in considering how to allocate the burden of Social Security reform across different groups. This issue brief focuses on the lifetime net benefit
rate as an indicator of the relationship between lifetime benefits received and taxes paid. Two common alternative
measures of Social Security's value to individuals are Social Security's "rate of return" and Social Security's "money's
worth ratio." It is argued below that these measures are not as useful as the lifetime net benefit rate for assessing the
fairness of Social Security reform.
Because Social Security must levy a net tax on cohorts who are subject to reform, the discussion is most naturally
couched in terms of the lifetime net tax rate, which is simply the negative of the lifetime net benefit rate (the net tax rate
is the excess of taxes over benefits divided by lifetime wages rather than the excess of benefits over taxes, with all values measured in present-value terms). The present values that are used to construct the net tax rate or net benefit rate
are computed with a risk-free rate like that on long-term government bonds.
SOCIAL SECURITyrS RATE OF RETURN
Social Security's rate of return to an individual is the answer to the follOWing question: If all of a worker's Social Security taxes were invested, what average annual rate of return must be earned in order for the investment proceeds to be
just sufficient to finance that worker's Social Security benefits? If Social Security's rate of return is equal to the return on
a long-term government bond, then individuals receive a return on their taxes that implies that their lifetime net tax rate is
zero.' In this case, Social Security is providing a return that is no belter or worse than what workers could receive from
directly investing their contributions in government bonds. If the Social Security rate of return is less than the government
bond rate, however, then the lifetime net tax rate is positive, as workers earn a lower rate of return on Social Security
taxes than what they could earn on an actual investment in government bonds and thus implicitly pay a "tax" that
reflects the foregone return on the government bond. By contrast, a Social Security rate of relurn greater than the rate
on government bonds implies that lifetime net taxes are negative and that workers are doing better by paying into the
system and receiving benefits than what they could earn by directly investing in government bonds.
Social Security's rate of return provides incomplete information, however, in terms of how Social Security refarm plans
affect the well-being of a particular indiVidual or group. This can be seen with an example. Suppose that Social Security reform plan A assesses $10,000 in taxes in year 1 and pays $10,300 in benefits in year 2, while reform plan B
assesses $1,000 in taxes in the first year and pays $1,010 in benefits in the second. In this example, then, Social
Security's rate of return is 3 percent for plan A, and 1 percent for plan B. Then judged on the basis of rates of return, it
would be concluded that reform plan A is better.
Why this conclusion is not necessarily correct can be seen from a comparison of lifetime net taxes under the two plans.
If the government bond rate is 5 percent, for example, then the lifetime net taxes under reform plan A equal the cost of
receiving 2 percentage points below the morket return on $10,000, which is $200. likeWise, for reform plan B the
lifetime net tax is the cost of receiving 4 percentage points below the market return on $1,000, or $40. Hence, reform
plan B is more beneficial to the individual-that is, it is less costly. (In this example taxes are collected at a single point
in time. Note that the cost of receiving a below-market return depends not only on the magnitude of the taxes paid,
but also on the length of time over which the below-market return is earned.)
Social Security's rate of return also may not fully capture the differential effect a particular Social Security reform has on
different individuals or groups. This can be seen in the context of an example comparing two members of a particular
birth cohort-a low-income individual and a high-income individual. Suppose a particular reform plan results in the
Social Security rate of return being 1 percent for the high-income person and 3 p~rcent for the low-inc~me pe.rson, and
Ihal ~e g"""mme,1 ba,d ",Ie ;, ago;, 5 pe<ce,i. A, wilh ~e P"'"o", example, ,I wo,1d ,01 be po",ble 10 mfe, the
1;Iei;me ,ello"", Ihol each
I
I
I
I
pe''''' P"Y' w""o", k,ow;'9 how moch goo" lox each pe''''' co,I,;b,l", 10 Ihe 'Y'lem~ __ ,i
U.S. DEPARTMENT OF THE TREASURY
SOCIAL SECURITY PEFOPt'v'\
.A FRI'J/\E\ilJORK FOR ,LJ~AL(SIS • [';';I.IE BPIEF r~() 2
BOX 1 (CONTINUEDI
SOCIAL SECURITY'S MONEY'S WORTH RATIO
Social Security's money's worth ratio is the present value of lifetime Social Security benefits divided by the present value
of lifetime Social Security taxes. As in the computation of Social Security's net lifetime taxes, the present values are
computed with 0 risk-free rate like that on government bonds. Hence, a money's worth ratio greater than one implies
that lifetime net taxes are negative, and a money's worth ratio less than one implies that lifetime net taxes are positive.
like Social Security's rate of return, the money's worth ratio may not fully capture the effect of a particular Social
Security reform. For example, if a person is offered the choice between two Social Security reforms, one in which
benefits are 10 percent lower than taxes (yielding a money's worth ratio of 0.9), and the other in which benefits are
20 percent lower than taxes (a money's worth ratio of 0.8), it is not possible to infer which is better Without haVing
additional information. If, for example, the present value of gross taxes is $100,000 when the money's worth ratio is
0.9 and $10,000 when the money's worth ratio is 0.8, then the laller case results in smaller lifetime net taxes ($2,000,
computed as 20 percent of $10,000) than the former case ($10,000, computed as 10 percent of $100,000) despite
the latter plan's lower money's worth ratio.
This example makes clear that money's worth ratios are not sufficient to assess the fairness of Social Security's treatment
of individuals at different paints in the income distribution.
On average, people who share in the burden of reform must have a negative lifetime net benefit
rate-that is, reform cohorts must on average receive benefits whose present value is less than the present value of the taxes they pay into the system. A negative lifetime net benefit rate essentially acts as a
net tax rate. For example, if the lifetime net benefit rate for the 1980 birth cohort is negative 3 percent,
then Social Security affects the cohort's well-being as if it were a 3 percent tax on the cohort's lifetime
wages-for every $100 in wages, $3 are taken by Social Security to finance the excess of benefits
over taxes that have been paid or promised to early birth cohorts Iroughly, people born prior to 1930).
In this framework, policymakers must choose lifetime net benefit rates for the various reform cohorts such
that the total burden adds up to an amount exceeding $13.6 trillion in present value. 3 Again, this can
be achieved by adjusting benefits, taxes, or some combination of the two.
Figure 1 uses lifetime net benefit rates to help assess the intergenerational fairness of two illustrative
policies that would make Social Security permanently solvent. The first policy immediately increases the
payroll tax rate by 3.5 percentage points starting in 2007, while the second policy raises the payroll
tax rate by 5.8 percentage pOints starting in 2041, which is the projected trust fund exhaustion date.
IAgain, these policies are used purely for illustration, and are not actual recommendations.) As can be
seen from the figure, waiting to reform Social Security puts a lighter burden on cohorts born prior to
2005 and a heavier burden on cohorts born after this date.
3
As noted in Treasury's first issue brief, current law already imposes a small net tax on the reform cohorts; relative to current law, it is necessary to raise the present value of contributions made by the reform cohorts and/or reduce the present
value of their scheduled benefits by $13.6 trillion. For ease of exposition, the current issue brief assumes that the net tax
that the reform cohorts must pay is exactly equal to $13.6 trillion.
Figure 1: Lifetime Net Benefit Rates by Birth Cohort
Percent
o.---------------------------------------------------------~
-1
5.8 Percentage Point
Tax Increase in 2041
-2
,,
',/
-3
-4
\
/'
-5
3.5 Percentage Point
-6 Tax Increase in 2007
\
\
........ -....
-... .... --
-7+-T-~~~~~~~~~~~~~~~~~~~~~~~~~~~~
1935
1955
1975
1995
2015
2035
2055
2075
2095
Year of Birth
Source: Deportment of the Treasury
Under both policies, lifetime net benefit rates are reduced in accordance with how long a birth cohort
faces higher taxes. In the case of the immediate tax increase, the lifetime net benefit rate bottoms out at
negative 5.1 percent for people born in 1985 (the 1985 birth cohortL who are assumed to begin work
at age 22 in 2007 The lifetime net benefit rate increases (becomes less negative) for later birth cohorts
because increasing longevity implies that they will receive benefits over a longer period of time. Under
the delayed tax increase, the lifetime net benefit rate bottoms out for the 2019 birth cohort. 4
The estimates shown in Figure 1 are very approximate. Disability benefits and taxes as well as the taxes
on Social Security benefits are not included in the calculations, and it is assumed that the tax increases
necessary to make the overall program solvent fall entirely on the retirement portion ()f the program. (In
general, Treasury's issue briefs are focused on potential reforms to the retirement income portion of Social Security, not the disability insurance portion.) Nevertheless, the basic lesson of the chart is robust:
The smaller is the reform burden imposed on early birth cohorts, the larger must be the burden that is
placed on later birth cohorts.
Finally, it should be noted that how the Social Security reform burden is allocated across generations
has implications for economic efficiency as well as fairness. This topiC is discussed in a future issue
brief.
4
Figure 1 assumes that the additional tax revenues under the two policies result in lower issuance of publicly held
debt-that is, the additional revenues are truly saved. As is discussed below with respect to the fourth key question
(regarding pre-funding), if trust fund accumulations are not truly saved then the effect that Social Security policy has on
the well-being of future generations is undone by changes in spending and taxes in other parts of the federal budget.
In that case, the usefulness of accounting measures such as those shown in the figure will be greatly reduced.
SOCIAL SECURITY REFORM: A FRAMEWORK FOR ANALYSIS • ISSUE BRIEF NO. 2
SECOND KEY QUESTION: HOW SHOULD THE SOCIAL SECURITY REfORM
BURDEN BE DISTRIBUTED WITHIN GENERATIONS?
Once a decision is made as to how the Social Security reform burden should be distributed across reform cohorts, the natural next question is how the burden should be distributed within birth cohorts. This
brief (together with future briefs) focuses on how the burden is distributed across income groups within
generations-that is, how "progressive" Social Security should be. s
For example, imagine that policymakers decide on fairness grounds that the lifetime net benefit rate
should be the same for all reform cohorts-that is, they decide that all generations affected by the reform
should face an equal net tax rate in the form of higher contributions and/or lower benefits. (This example is purely illustrative; it mayor may not be a desirable outcome in practice.) Suppose further that
the present value of wages earned by reform cohorts were projected to equal $340 trillion and that the
burden that must be imposed on the reform cohorts is precisely $13.6 trillion (as explained in footnote 3,
the true burden is somewhat larger). Then the lifetime net benefit rate that should be imposed across
all reform cohorts in order to make Social Security solvent is negative 4 percent (computed as negative
$13.6 trillion divided by $340 trillion, which is -0.04). This means that each reform cohort would be
asked to contribute 4 percent of their lifetime wages to make Social Security permanently solvent through
benefits that have a lower present value than the present value of taxes paid.
Once the decision is made that a cohort should contribute 4 percent of its wages to making Social Security solvent, it must be decided how to distribute that burden within the birth cohort. It is reasonable to
expect that this burden will be apportioned in a progressive fashion, with lower-income workers relatively
more shielded from the effects of the reform. Retirees who had lower lifetime earnings would get a net
lifetime benefit that is larger relative to their lifetime wages than people with higher lifetime earnings; that
is, the lifetime net benefit rate would be more negative as individuals' lifetime income increases (and
might even be positive for the lowest income groups). Progressivity can be achieved in any number of
ways. For example, under current law it is primarily implemented with a progressive benefit formula, but
in principle it could be achieved by varying payroll tax rates as well.
To illustrate how progressivity can be assessed, Figure 2 gives Treasury estimates of lifetime net benefit
rates by income level for the birth cohorts included in Figure 1.6 A lifetime net benefit rate profile is
computed for each of four income levels, denoted as low, average, high, and very high. Each profile
is calculated as a weighted average of several representative (but not exhaustive) family types. For
example, the high-wage composite earner is a weighted average of the lifetime net benefit rate for five
family types: a single high-wage female; a single high-wage male; a one-earner couple headed by a
high-wage male; a dual-earner couple with both earning high wages; and a dual-earner couple made
up of a female with overage earnings and a male with high earnings.
5
Although the focus here is on redistribution across income groups within a generation, one could also consider the distributional impact of Social Security along many other dimensions Isex, race, family structure, career length, and so on).
6
The measures shown in Figure 2 use current-law scheduled benefits and taxes. Social Security will certainly not evolve
in accordance with current-law benefits and taxes given that the system is insolvent; nevertheless, the figure is useful
because we are concerned with the relative differences in lifetime net benefits across income groups, not the absolute
levels of lifetime net benefits that are relevant for solvency.
U.S. DEPARTMENT OF THE TREASURY
7
SOCIAL SECURITY REFORM: A FRAMEWORK FOR ANALYSIS • ISSUE BRIEF NO 2
Figure 2: Lifetime Net Benefit Rates by
Birth Cohort and Earner Type
Percent
3~----------------------------------------------------~
2
low Composite Earner
\
o
-1
--
-2
--
-3
High Composite Earner
-4+-'-'-r-,,-'-'-'-'-r,-'-'-'-,-,,-,-,-,-,~'-'-~'-~~-'-'~
1935
1955
1975
1995
2015
2035
2055
2075
2095
Year of Birth
Source: Department of the Treasury
The progressive nature of Social Security under current law is verified by the results given in Figure 2,
which show that the lifetime net benefit rate prafile for the low-earner composite is above the profile for
the average-earner composite, which in turn is above the profile for the high-earner composite. (The
very-high-earner composite has earnings far above the maximum level subject to tax and is discussed
below.) That is, lower-income warkers receive net benefits under Social Security that are larger as a
share of lifetime income than those received by higher-income workers. lifetime net benefit rates rise for
successive birth cohorts because of increasing longevity. People living longer receive benefits over additional years, and the effect on the value of benefits is most pronounced for people with lower earnings,
as longevity increases the present value of benefits proportionately but has little effect on the contributions they make to the system because the retirement age is not changed in this calculation. Since low
earners have a relatively high ratio of benefits to lifetime wages, a propartionate increase in the present
value of benefits has a relatively large effect on their lifetime net benefit rate?
While the current-law Social Security program is progressive overall, it is regressive (as measured by
the net benefit rate) for income levels that exceed the maximum taxable earning threshold. This reflects
Social Security's original historical design: The program was intended to provide a basic level of social
insurance, not to have its contributions and benefits be based on total earnings (though rising wage inequality in recent years has left a smaller share of earnings subject to tax than in the past). In the figure,
the lifetime net benefit rate profile for very high earners lies above the corresponding profile for high
earners and average earners born prior to about 1990. Intuitively, since net benefits "bottom out" once
7
The lifetime net benefit rate profiles shown in Figure 2 assume that mortality probabilities do not depend on income.
There is some evidence that mortality rates ore lower for higher-income groups, but not by enough to change the
general implications of the figure. See Congressional Budget Office, "Is Social Security Progressive?" December 15,
2006.
u.s.
DEPARTMENT OF THE TREASURY
8
SOCIAL SECURITY REFORM: A FRAMEWORK FOR ANALYSIS. ISSUE BRIEF NO. 2
the taxable maximum is reached-neither benefits nor contributions increase further after this point-they
represent a smaller fraction of lifetime earnings the higher these earnings become. The very-high-earner
composite shown in Figure 2 has earnings far above the taxable maximum. Its lifetime net benefit rate
profile lies above the profile for the average composite up to the 1990 birth cohort, and above the
profile for the high-earner composite for all cohorts shown. This pattern reflects two independent factors.
•
First, very high earners do not pay tax or accrue benefits on the portion of their earnings that is
above the taxable maximum ($97,500 in 2007). To see how this is relevant, compare a person
earning an amount that is exactly equal to maximum taxable earnings in every year of his or her life
with someone whose earnings are many multiples higher in every year and who retires at the same
time. Both individuals pay the same tax and receive the same benefits. For incomes above the maximum taxable earnings level, therefore, net taxes paid to Social Security become smaller as a share
of lifetime wages-that is, the lifetime net benefit rate becomes less negative-the higher are earnings
above the maximum taxable earnings threshold. This explains how it is possible under current law for
the lifetime net benefit rate profile for the very-high-earner composite to be higher than the lifetime net
benefit rate profiles for some of the lower-income composites.
• Second, increasing longeVity has relatively less effect on the lifetime net benefit rate of the very-highincome composite because they have a relatively low ratio of benefits to lifetime wages. Hence,
future increases in longevity cause the lifetime net benefit rate for the very high earners to rise more
slowly than the rate for the other earners, which is why the lifetime net benefit rate profiles for these
two groups cross in the figure.
A future issue brief will consider the implications of progressivity for economic efficiency.
THIRD KEY QUESTION: HOW LARGE SHOULD SOCIAL SECURITY'S
BENEFITS BE?
Once it is decided how to allocate the burden of reform across generations and across different people
within generations (by chOOSing lifetime net benefit rates for reform cohorts and by income level within
each cohort), the next question to consider relates to the size of retirement benefits and the corresponding taxes needed to fund them. The choice of lifetime net benefit rates for birth cohorts and income
groups within birth cohorts is consistent with any level of benefits. For example, suppose policymakers
decide that the lifetime net benefit rate for a particular income group within the 2000 birth cohort should
be negative 4 percent. Then one possibility is that this group could face a 12.4 percent payroll tax
rate and receive benefits with an expected present value equal to 8.4 percent of lifetime wages. (For
simplicity, this assumes that taxable wages equal total wages.) Alternatively, one could envision having
a system with higher benefits and taxes-for example, a system with a payroll tax rate of 15 percent
and benefits whose present value equaled 11 percent of wages; still another possibility is for a low-benefit system where the tax rate is 8 percent and benefits are 4 percent of wages. There are innumerable
alternatives, each resulting in a different level of benefits and all with the same implications for the longterm solvency of Social Security and the allocation of the Social Security reform burden across cohorts.
Put another way, once it is decided how to allocate the burden of paying for the existing financing gap
of $13.6 trillion, the Social Security system can be made large or small depending on SOCiety's evaluation of the pros and cons of mandating that workers put a particular share of their earnings into the
Social Security system to fund retirement benefits. Specifically, one's judgment as to what role Social Security should play in providing retirement security and social insurance and how much choice individuals
u.s. DEPARTMENT OF THE TREASURY
9
SOCIAL SECURITY REFORM: A FRAMEWORK FOR ANALYSIS • ISSUE BRIEF NO 2
should have in making their saving and spending decisions will determine whether one prefers a system
in which high taxes finance a high level of benefits, or an alternative (but still solvent) system in which
low taxes finance a more modest level of benefits. If one believes that individuals should be allowed to
choose to save or spend their earnings as they wish, one might prefer lower taxes and benefits. If one
instead believes that workers generally do not save enough for retirement, then one might prefer higher
benefits (and thus higher taxes) since this protects workers from the consequences of their failing .to save.
The fact that benefit levels can be decided entirely independently of how Social Security's reform burden
is allocated reflects the fact that contributions to Social Security made while working can in general be
thought of as comprising a "net tax" component that goes to make the system permanently solvent and 0
"forced saving" component that funds retirement benefits. In the case of a payroll tax rate of 12.4 percent
and benefits that have a present value equal to 8.4 percent of wages, the net tax amounts to 4 percent of
wages while forced saving is 8.4 percent of wages. For the forced-saving component, Social Security
is acting like a savings account receiving 8.4 percent of woges in every working year (albeit one that
the worker is required to pay in to) that then finances benefits in retirement. By contrast, the remaining
4 percent is a pure tax from the worker's perspective, since he or she never sees it returned in the form
of benefits. Importantly, it is the forced-saving component of Social Security contributions made while
working that determines the level of benefits in retirement.
For individuals who would not save enough on their own for retirement, Social Security's forced saving
element has two important consequences. First, Social Security increases these individuals' total retirement income (albeit at the cost of their having less disposable income before retirement). Hence, to the
extent that the interests of society are served by ensuring that all persons have income in retirement that
is at least partly related to their earnings while working, the forced saving component of Social Security
represents a useful and important feature of the program. Second, forced saving affords access to Social Security's relatively advantageous annuity terms. The retirement benefit paid by Social Security is 0
real annuity; that is, it is paid out as long as the retiree is alive and is indexed to inflation once benefits
commence with retirement. Because of the program's relatively" low administrative costs and inflation-indexation provisions-and because forcing nearly all workers to participate eliminates the adverse selection problems that affect private annuities-it is likely that Social Security can transform a given amount
of forced savings into a more generous real annuity than could a private company.
For individuals who would have saved on their own, Social Security mainly acts to displace private
saving rather than to increase retirement income-someone forced to save through Social Security will
simply save less on their own. If a hypothetical change to Social Security increases taxes and benefits
by an equivalent amount, people are in essence being forced to do a larger portion of their retirement
saving through the Social Security system. People who were already happy with the amount of retirement saving that they were doing would therefore be expected to simply unwind a modest increase in
forced saving by reducing the amount of savings that they hold elsewhere in comparable investments. 8
Making such adjustments to one's asset holdings might involve some costs; for example, young people
wishing to invest their full portfolio in equities would have to borrow to neutralize their safe Social Security assets and buy equities with the proceeds. That said, Social Security's forced soving might still be
beneficial to this group to the extent that the system's annuity terms are better than what can be obtained
in the private sector and to the extent that they would want to fully annuitize this portion of their retirement savings.
8
If Social Security surpluses do not cause larger non-Social Security deficits, then such on increase in forced saving
would mean higher government saving that is offset by lower private saving Ifor individuals who would have saved on
their own). In this case, there would be no change in national saving.
u.s.
DEPARTMENT OF THE TREASURY
10
SOCIAL SECURITY REFORM: A FRAMEWORK FOR ANALYSIS. ISSUE BRIEF NO. 2
MEASURING BENEFIT ADEQUACY
One measure of benefit adequacy is the ratio of benefits to the amount of retirement income that would
be needed to sustain a person's living standard while working-what will be referred to as the "benefit
replacement rate." As a proxy for the standard of living attained while working, the measure uses the
constant level of real consumption that would be possible between the ages of 21 and 65 if all pre-tax
wages earned during those years were consumed; this then forms the denominator of the benefit replacement rate while the numerator is the level of benefits 9 Note that this measure understates the size
of benefits relative to a retiree's actual standard of living while working, because it assumes all wage
income is available for consumption when in reality some income goes to pay taxes.
Figure 3 plots the benefit replacement rate under current-law scheduled benefits for the Iow-, average-,
high-, and very-high-earning composite earners shown in Figure 2 under the assumption that all workers
retire at age 65.10 As can be seen from the figure, the benefit replacement rate falls as lifetime income
within each cohort rises: Social Security's progreSSive benefit formula implies that an increase in lifetime
earnings results in a less-than-proportionate increase in benefits. For each composite earner, the replacement rate varies a small amount for cohorts born between 1935 and 1965 before leveling out for later
birth cohorts. I I For individuals turning 62 in 2007, the estimated benefit replacement rates for the low,
average, high, and very high composite earners are 67 percent, 51 percent, 44 percent, and 19 percent,
respectively.
Benefit replacement rates tend not to change much for successive birth cohorts-the profiles shown in
Figure 3 are basically flat-because the measure of wages that enters into the benefit calculation (average indexed monthly earnings, or the AIME) tends to grow for successive birth cohorts at the same rate
as do actual real wages for successive birth cohorts.12 In addition, the benefit formula is adiusted each
year to ensure that its progressivity remains unchanged for successive birth cohorts.
9
This concept of the replacement rate is not the same as the replacement rates reported in various editions of the Trustees
Report. The Trustees Repart estimates are made for hypothetical single workers rather than the composite workers used
here. In addition, there are other important technical differences between the two measures.
10
This measure of the replacement rate is developed here to illustrate how to evaluate the impact of various changes to
the system. Because scheduled benefits are not payable Ithe system is insolvent), actually maintaining the constant
replacement rates shown in the figure would require higher revenues than what are prOVided for under current low.
11
The variation in replacement rates for the 1935-1965 birth cohorts reflects variation in real wage growth that causes
variations in the denominator in the replacement rate calculation, together with changes in the normal retirement age
and price inflation that couse variation in the numerator. By contrast, for individuals born in 1965 and later the normal
retirement age is constant at 67 and real wage growth and price inflation for most or all of peoples' lives occord with
current Social Security Administration projections, which show little variation.
12
To calculate the AIME, taxable wages at each age prior to age 60 are indexed to the level of economy-wide average
wages in the year the person is age 60 before they are averaged together. While this indexation causes the AIME to
be larger than more straightforward measures of overage actual taxable real wages while working, this overstatement
occurs for all birth cohorts and does not have any systematiC effect on the rate at which benefits rise for successive birth
cohorts.
U.S. DEPARTMENT OF THE TREASURY
11
SOCIAL SECURITY REFORM: A FRAMEWORK FOR ANALYSIS. ISSUE BRIEF NO 2
Figure 3: Benefit Replacement Rates
(Retirement Age Constant at 65)
Percent
100
80
~
jill'"
60
V
- --
jill""
40
-
A-
Low Composite Earner
Average Composite Earner
..
High Composite Earner
Very High Composite Earner
20
P"'"
o
1935
1955
1975
1995
2015
2035
2055
2155
2255
Year of Birth
Source: Deportment of the Treasury
By assuming that all workers retire at age 65, the calculations in Figure 3 do not allow for the possibility
that people will work longer as expected lifespans increase. Figure 4 therefore shows benefit replacement rates for the same set of composite earners under the alternative assumption that workers work
longer as their life expectancies increase beginning with the 1946 birth cohort (who become eligible for
benefits in 2008). SpeCifically, Figure 4 assumes that workers born prior to 1946 work until age 65,
and that later cohorts work an additional year for every two-year increase in their projected life expectancy at age 62 relative to the 1945 birth cohort. As can be seen from the figure, replacement rates
slowly rise as individuals work longer. 13 Because the calculations assume retirement on a birthday, the
assumed retirement age jumps in discrete one-year intervals, which makes the calculated benefit replacement rates trend upward in steps.
13
To keep the yardstick against which benefit adequacy is measured constant across cohorts, the denominator in the
benefit replacement rate calculation is the same in Figure 4 as was used in Figure 3. That is, the denominator in both
cases is the level of real consumption possible between the ages of 21 and 65 if all wages during those years were
consumed. The increase in benefit replacement rates as people live and work longer thus reflects both a somewhat
higher level of lifetime wages being used in the benefit computation, as well as-and more importantly-actuarial
adiustments that are made to initial benefits and that depend on the age that benefits commence.
U.S. DEPARTMENT Of THE TREASURY
12
SOCIAL SECURITY REFORM: A FRAMEWORK FOR ANALYSIS. ISSUE BRIEF NO 2
Figure 4: Benefit Replacement Rates
(Retirement Age Rises with Longevity)
Percent
100
80
.I
Low Composite Earner I
,- -
I
~
60
Average Composite Earner
--
-~
"""
v ...
40
High Composite Earner
Very High Composite Earner _
20
~----
-------""...-
-------
o
1935
1955
1975
1995
2015
2035
2055
2155
2255
Year of Birth
Source: Deportment of the Treasury
Because wages tend to rise foster than inflation over time (reflecting increased labor productivity),
lifetime earnings-and thus benefits-will rise more rapidly than inflation for each cohort. As a result,
the absolute level of real benefits for successive birth cohorts will rise more rapidly than the replacement rate. That is, Social Security is set up to provide each new generation of retirees with higher real
benefits than what previous generations received. This can be seen in Figure 5, which plots real benefit
levels for the overage composite worker in the case where the age at which individuals retire is assumed
to rise with longevity. Because absolute real benefit levels are difficult to interpret by themselves, benefits for the 1935 birth cohort are scaled to equal 100 and the benefits of all other cohorts are expressed
relative to this one; in addition, only the overage composite earner is shown because profiles for the
other three composites are essentially the some.
A future issue brief will use the concept of the benefit replacement rate to assess the effect of specific
reform provisions on benefit adequacy and compare the impact of various reform plans on both the
replacement rate and the level of real benefits.
U.S. DEPARTMENT OF THE TREASURY
13
SOCIAL SECURITY REFORM: A FRAMEWORK FOR ANALYSIS. ISSUE BRIEF NO. 2
Figure 5: Real Benefit Level
(Average Wage Composite Worker, Retirement Age Rises With Longevity)
Index: 1935 Birth Cohort = 100
800~--------------------------------
________________________~
700
600
500
400
300
200
100
0
1935
1955
1975
1995
2015
2035
2055
2075
2095
Year of Birth
Source: Department of the Treasury
FORCED SAVING AND ECONOMIC EFFICIENCY
The size of benefits (or equivalently, the amount of forced saving) has a direct relationship with the size
of the trust fund, because an increase in the amount of forced saving implies a corresponding increase
in the amount of attempted pre-funding of Social Security benefits. (Whether this attempted pre-funding
constitutes true pre-funding is discussed with reference to question four, below.) In the current system,
any increase in forced saving accumulates in the trust fund; under some reform proposals, some or all
of the increased forced saving would go into an alternative saving vehicle, such as personal retirement
accounts.
A simplified example is useful to illustrate the relationship between benefit levels and the size of the trust
fund. Suppose that for people born in 1980 one-third of the payroll taxes that workers pay under a
reformed Social Security system ore net taxes to make the system permanently solvent and two-thirds
constitute forced saving to provide retirement benefits (using the example from above, this could involve
4 percentage points of earnings going to solvency and 8 percentage points that eventually come back
as retirement benefits). Then it would be possible to eliminate two-thirds of this cohort's payroll taxes
and all of its benefits without affecting the long-term solvency of Social Security (whether this would be
a good idea is a different matter). In this case, the trust fund would have less revenue up front and a
correspondingly lower benefit obligation in the future; the result is a lower trust fund balance at all dates
between when the 1980 birth cohort first contributes taxes and when its last member dies. The same
conclusion applies to other birth cohorts and for less drastic reductions in forced saving. This illustrates
that the magnitude of retirement benefits has a direct impact on the size of the trust fund.
u.s.
DEPARTMENT OF THE TREASURY
14
SOCIAL SECURITY REFORM: A FRAMEWORK FOR ANALYSIS. ISSUE BRIEF NO 2
The Social Security system must impose a net tax exceeding $13.6 trillion on reform cohorts (through
benefits that have a lower present value than taxes paid), and the net tax will be related to wages if it
is ta be fair. Taxing work discourages work, with the magnitude of this economic impact depending on
the precise way that the burden of reform is allocated across and within generations. These incentive
effects of reform will be discussed in a future issue brief.
Social Security reform involves work disincentives because the net tax burden associated with reform
must ultimately be imposed. The size of retirement benefits, on the other hand, derives from forced saving that is not related to the net taxes that affect work incentives. Provided that forced savings add to
true pre-funding and that individuals understand that the part of their payroll taxes that constitutes forced
saving will be returned to them as benefits in retirement, having higher or lower benefit levels does not
have an additional impact on work incentives. 14 If either of these conditions does not hold, however,
increasing benefits while keeping net taxes unchanged (that is, increasing forced saving) will result in
additional economic distortions.
To illustrate this point, imagine a reform plan-call it "Plan A"-that levies a $13.6 trillion-plus net tax
on reform cohorts in a progressive manner and that involves a small amount of forced saving and thus
modest retirement benefits. This could be a plan with a 6 percent payroll tax, where 4 percentage
points go to make the system solvent and 2 percentage pOints fund future retirement benefits. Then Plan
A can be modified by introducing a second tier of benefits that is crafted so as to have potentially no
additional effect on work incentives. SpeCifically, the second tier of benefits would be funded with an
additional payroll tax that accumulates in the trust fund (or in another saving vehicle, such as a personal
retirement account), and each person's additional benefits would equal the annuity value of a hypothetical account balance computed under the assumption that their own additional payroll taxes earn the
same return as do trust fund securities (when done through the trust fund, such an arrangement is often
referred to as a "notional account" or a "cash balance account"). So long as people understand the direct relationship between taxes and future benefits, these taxes should have no effect on work incentives.
It is worth emphasizing once again that increasing taxes beyond the amount needed to achieve permanent solvency in order to fund benefits does not discourage work effort only if two key assumptions are
satisfied. First, individuals must understand that additional forced saving will be returned to them in the
form of additional benefits-put differently, they must recognize that this truly represents forced saving,
not a pure tax. Second, the additional forced saving must add to true pre-funding dollar for dollar. That
is, the additional revenues must be kept secure so that they are available to fund future benefits. (In the
context of the current system, this is the same task as ensuring that Social Security surpluses are saved.)
The possibility that this latter assumption does not hold true will now be considered.
14
In addition to these key conditions, this conclusion requires that individuals put the same value on the benefits Social
Security prOVides them in retirement as they do on income received while working.
U.S. DEPARTMENT OF THE TREASURY
15
SOCIAL SECURITY REFORM: A FRAMEWORK FOR ANALYSIS. ISSUE BRIEF NO. 2
FOURTH KEY QUESTION: IS AITEMPTED PRE-FUNDING REAL? IF NOT, HOW
DOES THAT AFFECT THE ANSWERS TO THE QUESTIONS ABOUT FAIRNESS
AND BENEFIT SIZE?
How one answers the questions about intergenerational fairness and benefit size will be profoundly
influenced by whether attempts to pre-fund future benefits by collecting current contributions in excess
of current benefits are in fact successful. The imminent retirement of the relatively large baby-boomer
cohorts and sustained improvements in longevity are expected to cause the ratio of retirees to workers to
rise rapidly over the next 30 years. In these circumstances, maintaining Social Security contributions and
benefits that are stable relative to peoples' wages while working implies that the system will collect more
revenues than it pays out as benefits in the near term when the ratio of retirees to workers (the old-age
dependency rate) is relatively low. It also implies that the system will pay more benefits than it collects
in taxes later when the old-age dependency rate is relatively high. This financing strategy is reasonable
provided that the near-term surplus revenues are safeguarded in a way that allows them to be used in
the future to pay for benefits.
If Social Security surpluses accumulate in the trust fund, these surpluses will increase the government's
capacity to pay benefits in the future only to the extent that they result in smaller amounts of public debt
issuance than would occur if there were no surpluses. This is because reducing near-term public debt
issuance would increase the government's capacity to issue debt in the future to help pay benefits (see
Box 2 for additional discussion of this point). The result would be an accumulation of real resources
now (through higher government saving) that can then be drawn upon in the future to finance benefits.
U.S. DEPARTMENT OF THE TREASURY
16
BOX 2
TRUST FUND ACCOUNTiNG: HOW iT WORKS AND vVHAT iT MEANS
As required by law, excess revenues from Social Security taxes are used to purchase special-issue federal securities that
are held in the Social Security trust fund and redeemed as needed to pay future benefits. The trust fund is credited with
interest at a rate comparable to that paid on federal debt issued to the public. Social Security benefit payments are
automatically authorized provided there are sufficient assets in the pertinent trust fund.
Because trust fund securities are themselves federal securities, they are often dismissed as IOUs that the government has
made out to itself that do not increase its ability to pay benefits. This is true in the following sense: If information about
trust fund holdings were somehow lost, there would be no impact on the government's ability to finance its overall
operations going forward because government assets and liabilities would be reduced by identical amounts. But it
does not necessarily follow that Social Security surpluses cannot increase the government's ability to pay future Social
Security benefits. Social Security surpluses increase the government's capacity to pay future benefits to the extent that
they reduce publicly held federal debt. If they reduce the issuance of publicly held federal debt now when the old-age
dependency ratio is relatively low, it would be possible to issue more publicly held debt in the future to help finance
benefits when the old-age dependency ratio is relatively high. IThese effects arise from the surpluses, not from the trust
fund accounting or the issuance of trust fund securities.)
The degree to which today's Social Security surpluses result in additional resources in the future depends on the effect
that they have on spending and taxes in the rest of the federal budget. This is an empirical question that involves the
political economy of government finance. If Social Security's finances do not influence the non-Social Security portion
of the federal budget, then Social Security surpluses pay down publicly held debt dollar-for-dollar, and the trust fund
balance at each point in time is a precise measure of how much the program has reduced publicly held federal debt
up to that point. The trust fund balance at the end of 2006 was $2 trillion. Hence, if Social Security does not influence non-Social Security fiscal deciSions, then Social Security has increased the government's capacity to issue publiCly
held debt for the sake of paying Social Security benefits by $2 trillion as of the end of 2006. To the extent, however,
that Social Security surpluses result in higher deficits in the non-Social Security portion of the budget, then government
saving is not increased by higher Social Security surpluses. In that case, future Social Security benefits that would have
been financed with higher issuance of publicly held debt will instead have to be financed with reductions in non-Social
Security spending or increases in non-Social Security taxes.
Many analysts believe Social Security surpluses do not increase the government's capacity to pay future
Social Security benefits. Under this view, Social Security surpluses are offset in the rest of the federal
budget by some combination of higher non-Social Security spending and/or lower non-Social Security
taxes. To the extent that this is true, Social Security's surpluses do not increase the government's capacity to pay future Social Security benefits. The future benefit payments that would have been financed
with public debt issuance had Social Security surpluses truly been saved must instead be financed with
lower non-Social Security spending and/or higher non-Social Security taxes. In this case, the existence
of the present Social Security surplus causes the non-Social Security budget to be more profligate, and
the future Social Security cash deficit would be expected to cause the non-Social Security budget to become more austere. Under this scenario, an attempt to make Social Security fair to future generations by
accumulating near-term surpluses in the trust fund would be undone by a non-Social Security policy that
is less fair to future generations. Rather than resulting in resources that provide future benefits, running a
Social Security surplus today would instead lead to more debt outside the trust fund that must be paid
off by future generations, leaVing them with no net gain.
u.s.
DEPARTMENT OF THE TREASURY
SOCIAL SECURITY REFORM: A FRAMEWORK FOR ANALYSIS. ISSUE BRIEF NO.2
THE IMPLICATIONS FOR REFORM OF NOT BEING ABLE TO EFFECTIVELY
PRE-FUND BENEFITS
If Social Security surpluses are not truly saved in the trust fund and if it is not possible to put in place
some other mechanism to ensure that future Social Security benefits are pre-funded (such as personal
retirement accounts or some other "Iockbox" provisions), then it would be reasonable to compromise
other reform objectives so as to limit trust fund accumulations. This can be accomplished in two ways:
by reducing benefit levels while holding reform burdens constant, and/or by reducing the share of the
Social Security reform burden that is imposed on early birth cohorts while keeping benefit levels constant. However, as will be discussed, only the first method of reducing trust fund accumulations would
benefit future generations.
Reducing Benefit Levels Holding Reform Burdens Constant
An inability to pre-fund Social Security benefits has an important effect on the decision of how large to
make benefits. Compared with a reform that would be best overall if pre-funding were real, lowering
each person's taxes paid while working and benefits received in retirement in an actuarially equivalent
manner (that is, reducing forced saving) would greatly reduce trust fund accumulations without affecting
Social Security's solvency or changing the distribution of Social Security's net taxes across birth cohorts
or income groups within birth cohorts. This policy change would have little effect on the well-being
or retirement incomes of individuals who increase their private saving by the amount of their tax reductions-such people would do less forced saving through Social Security but make it up by saving more
on their own. Individuals who do not save their tax reductions, however, might have inadequate income
in retirement. That downside must be weighed against the increased fairness of overall fiscal policy
toward future generations.
Changing the Distribution of the Reform Burden Holding Benefit Levels Constant
Suppose the level of benefits (that is, forced saving) is held constant. Then trust fund accumulations
could be reduced by shifting reform burdens only if payroll taxes were reduced for early birth cohorts
and increased for later birth cohorts. Clearly, this policy change would not benefit future generations.
However, it is worth noting that shifting the payroll tax burden from early to later generations would also
not harm later generations if trust fund accumulations are not truly saved. To see this, suppose payroll
taxes are reduced in the near term and increased in the longer term so that the present value of payroll
tax revenues is unchanged, and that the near-term payroll tax increases are exactly offset by higher nonSocial Security revenues in every year. Then the amount of publicly held debt that future generations
inherit would not be changed, and nor would their benefit payment obligations. It follows that those
generations are made no better or worse off by the policy change. 15
HOW CAN EFFECTIVE PRE-FUNDING BE ACHIEVED?
If true pre-funding is not possible, the prospects for Social Security reform that is fair to future generations
and that ensures adequate retirement incomes are greatly hindered. Rather than compromise on these
15
While total publicly held debt would be unchanged, the amount that would be attributable to past Social Security cash
flows would be larger, and the amount that would be attributable to past non-Social Security cash flows would be
smaller. So while future generations would pay higher payroll taxes to make up for the higher amounts of public debt
attributable to Social Security policy, they would pay lower non-Social Security taxes to service public debt attributable
to non-Social Security policy.
us. DEPARTMENT OF THE TREASURY
18
SOCIAL SECURITY REFORM: A FRAMEWORK FOR ANALYSIS • ISSUE BRIEF NO.2
goals, a better option would be to find a mechanism that provides more confidence that surplus revenues are truly saved. A future Treasury brief will explore this topic in detail.
CONCLUSION
This issue brief has posed four key questions that policymakers should consider as a first step to deciding
on the particular details of Social Security reform, and has offered an analytical framework to help answer them. Answers to these four questions will help define achievable goals for Social Security reform
and help guide the process of crafting a reform package.
U.S. DEPARTMENT OF THE TREASURY
19
Page 1 of 1
October 12, 2007
HP-605
Auditing Committee to Host First Public Meeting
The Department of the Treasury's Advisory Committee on the Auditing Profession
will convene its first meeting at the Treasury Department on Monday, October 15, at
10 a.m. Committee Chairmen Arthur Levitt, Jr. and Donald T. Nicholaisen will host
the meeting. Treasury Under Secretary for Domestic Finance Robert K. Steel also
will give remarks.
The public is invited to attend and submit written statements with the Advisory
Committee at its website: http//wwwtreasgovloffices/domesticfinance/acap/indexshtml. The following event is open to the press:
Who
Under Secretary for Domestic Finance Robert K. Steel
Department of the Treasury's Advisory Committee on the Auditing Profession
What
Public Meeting
When
Monday, October 15, 10 a.m. (EDT)
Where
U.S. Treasury Department
Cash Room
1500 Pennsylvania Ave.
Washington, D.C.
Note
Media without Treasury press credentials planning to attend must 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. Those
wishing to attend who are not members of the press should contact Serita
Winborne at (202) 622-4944 with the following information: name, Social Security
number and date of birth. This information may also be emailed to
serita.winborne@do.treas.gov.
http://www.treas.gov/press/releases/hp605.htm
1116/2007
Page 1 of 1
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October 12, 2007
HP-606
Statement by Secretary Henry M. Paulson, Jr.
on the FATF's Public Statements on Iran
"The Financial Action Task Force has taken a dramatic step in highlighting the
significant threat Iran poses to the international financial system. As the premier
standard-setting body for countering terrorist financing and money laundering, the
FATF's expression of concern toward Iran speaks volumes.
"Over the past year, financial institutions across the globe have been re-examining
and adjusting their relationships with Iran in light of its ongoing pursuit of nuclear
weapons in defiance of the international community, support for lethal terrorist
groups, and deceptive financial practices. FATF members advised those financial
institutions still dealing with Iran to seriously weigh the risks posed by Iran's failure
to comply with international standards.
"I commend the FATF for undertaking these actions and for calling upon Iran to
urgently address its systemic failures to combat terrorist financing and money
laundering.
"FATF separately identified customers and transactions associated with Iran as
representing a significant risk factor for financing the proliferation of weapons of
mass destruction.
"In the wake of two unanimous UN Security Council Resolutions addressing Iran's
nuclear and ballistic missile programs, Iran's extensive deceptive financial conduct,
and the statements issued by the FATF, financial institutions should be mindful of
the extraordinary risks that accompany doing business with Iran."
FATF Statement on Iran - Paris Plenary, October 11,2007
httpllwwwfatf-gafiorg/dataoecd/1/2/39481684.pdf
FATF Chairman's Summary - Paris Plenary, October 10 - 12, 2007
httpllwww.fatf-gaflorg /dataoecd/O/23/39485130,pdf
The Financial Action Task Force is an inter-governmental body whose purpose is
the development and promotion of pOlicies, both at the national and international
levels, to combat money laundering and terrorist financing. The thirty-four members
of the FA TF are: Argentina; Australia; Austria; Belgium; Brazil; Canada; China;
Denmark; the European Commission; Finland; France; Germany; Greece; the Gulf
Cooperation Council; Hong Kong, China; Iceland; Ireland; Italy; Japan;
Luxembourg; Mexico; the Kingdom of the Netherlands; New Zealand; Norway;
Portugal; the Russian Federation; Singapore; South Africa; Spain; Sweden;
Switzerland; Turkey; the United Kingdom; and the United States.
·www.treas.gov/press/releases/ho606.htm
111612007
.Iii. L
j
i§J;
Financial Action Task Force. Groupe d'action financiere
FATF STATEMENT ON IRAN
Paris, 11 October 2007
The Financial Action Task Force (FATF) is concerned that the Islamic Republic of
Iran's lack of a comprehensive anti-money laundering I combating the financing of
terrorism (AMLlCFT) regime represents a significant vulnerability within the
international financial system. FATF calls upon Iran to address on an urgent basis its
AMLlCFT deficiencies, including those identified in the 2006 International Monetary
Fund Article IV Consultation Report for Iran.
FATF members are advising their financial institutions to take the risk arising from the
deficiencies in Iran's AMLlCFT regime into account for enhanced due diligence.
FATF looks forward to engaging with Iran to address these deficiencies.
Notes:
1.
For further information, joumalists are invited to contact Mr. Rick McDonell, Executive Secretary,
FATF (email: contact@fatf-gafi.org).
2.
The FATF is an inter-governmental body whose purpose is the development and promotion of
pOlicies, both at national and international levels, to combat money laundering and terrorist
financing. The FATF Secretariat is housed at the OECD.
3.
The thirty-four members of the FATF are: Argentina; Australia; Austria; Belgium; Brazil; Canada;
China; Denmark; the European Commission; Finland; France; Germany; Greece; the Gulf Cooperation Council; Hong Kong, China; Iceland; Ireland; Italy; Japan; Luxembourg; Mexico; the
Kingdom of the Netherlands; New Zealand; Norway; Portugal; the Russian Federation;
Singapore; South Africa; Spain; Sweden; Switzerland; Turkey; the United Kingdom; and the
United States.
4.
India and the Republic of Korea are observer countries. The Asia Pacific Group on money
laundering (APG)1, the Grupo de Acci6n Financiera de Sudamerica (GAFISUD)2, the Middle East
and North Africa Financial Action Task Force (MENAFATFf and the Council of Europe
Committee of Experts on the Evaluation of Anti-Money Laundering Measures (MONEYVAL)4 are
Associate Members.
5.
The global network that is committed to combating money laundering and terrorist financing also
includes four other regional bodies: the Caribbean Financial Action Task Force (CFATF)', the
Eastern and South African Anti Money Laundering Group (ESAAMLGt, the Eurasian Group on
combating money laundering and financing of terrorism (EAGf and the Groupe Intergouvernemental d'Action contre Ie Blanchiment en Afrique (GIABA)x. The Offshore Group of
Banking Supervisors (OGBS)') is a part of this network as well.
www.apgmLorg
www.gafisud.org
www.menafatf.org
6
www.coe.intlmoneyval
www.datf.org
www.esaamlg.org
www.eurasiangroup.org
www.giaba-westafrica.org
www.ogbs.net
FATF·GAFI
Financial Action Task Force. Groupe d'action financiere
Chairman's Summary
Paris Plenary, 10-12 October 2007
12 October 2007
New steps to protect the international financial system from abuse were agreed by the FATF
at its meeting in Paris on 10-12 October 2007. Attended by over 400 delegates from 34
countries and 20 international organisations, this was the first plenary meeting under the UK
Presidency of the FATF. The FATF:
•
called upon Iran to strengthen, as a matter of urgency, its anti-money laundering and
counter-terrorist financing (AMLlCFT) controls. FATF members are advising their
financial institutions to take account of the risks in enhanced due diligence;
•
agreed new steps to strengthen private sector engagement in the global fight against
money laundering and terrorist financing;
•
committed to produce a regular global threat assessment setting out key issues of
criminal and terrorist financing concern;
•
published new guidance to address the threat of weapons of mass destruction
(WMD) proliferation emanating from Iran, in accordance with the financial provisions
of United Nations Security Council Resolution 1737; and
•
discussed and adopted an evaluation of the AMLlCFT system in Finland.
Iran
On 11 October 2007, the FATF Plenary released the following statement on Iran:
The Financial Action Task Force (FATF) is concerned that the Islamic Republic of
Iran's lack of a comprehensive anti-money laundering / combating the financing of
terrorism (AMLlCFT) regime represents a significant vulnerability within the
international financial system. The FATF calls upon Iran to address on an urgent
basis its AMLlCFT deficiencies, including those identified in the 2006 International
Monetary Fund Article IV Consultation Report for Iran.
FATF members are advising their financial institutions to take the risk arising from
the deficiencies in Iran's AMLlCFT regime into account for enhanced due diligence.
The FATF looks forward to engaging with Iran to address these deficiencies.
Strengthening dialogue with the private sector
A new forum bringing together the FATF and key private sector bodies is to be launched by
the FATF. The forum builds on existing outreach activities and will formalise and enhance
dialogue and a partnership approach between the FATF and key private sector organisations
from a wide range of sectors across the globe.
The FATF will also meet with key private sector organisations in London in December 2007.
This first joint meeting to exchange information on money laundering and terrorist financing
techniques reflects an enhanced commitment by the FATF to engage with the private sector.
Work will also commence between the FATF and representatives of key non-financial
businesses and professions to develop shared guidance on the risk-based approach to
tackling money laundering and terrorist financing. This activity builds on joint guidance on
the risk-based approach published in July 2007 by the FATF and representatives of the
international banking and securities sectors.
Global threat assessment of money laundering and terrorist financing threats
The FATF plans to produce a regular global threat assessment, setting out key issues of
criminal and terrorist financing concern.
This new threat assessment will be developed following a process of enhanced surveillance
of international money laundering and terrorist financing risks and will help national
governments and the private sector take actions to manage key international threats. This
initiative builds upon and complements the FATF's existing typologies work. The FATF has
also agreed to support countries in the development of national-level threat assessments.
Combating the financing of WMD proliferation
The FATF will continue to work on the combating of proliferation financing in response to UN
Security Council Resolutions. It is developing a new study on the trends and techniques
involved in WMD proliferation financing activity.
Other action taken this week builds on previous work published by the FATF in June and
September 2007 to assist jurisdictions in the implementation of the targeted financial
sanctions contained within UN Security Council Resolution 1737.
Specifically, the FATF agreed new guidance on the implementation of financial prohibitions
to combat the threat of WMD proliferation by Iran. This represents a major step forward in
the implementation of financial measures contained within UN Security Council Resolution
1737. The guidance, to be released on the FATF website, will facilitate further cooperation
between national governments and financial institutions in the fight against WMD proliferation
financing.
2
Finland: Evaluation of anti-money laundering and counter-terrorist financing
action
The FATF discussed and adopted a mutual evaluation report assessing Finland's
compliance with the FATF standards: the 40+9 Recommendations. A summary of the
assessment will shortly be released on the FATF website. The full report will be released
publicly in the coming weeks.
Mr James Sassoon
President, Financial Action Task Force
Paris, 12 October 2007
3
Notes:
1.
For further information, journalists are invited to contact Helen Fisher, OECD Media Relations,
(Tel: +33 1 45248097 or helen.fisher@oecd.org) or the FATF Secretariat, 2, rue Andre-Pascal,
75775 Paris Cedex 16 (tel: +33 1 45 24 79 45, fax: +33 1 44 30 61 37, email: contact@fatfgafi.org).
2.
The FATF is an inter-governmental body whose purpose is the development and promotion of
policies, both at national and international levels, to combat money laundering and terrorist
financing. The FATF Secretariat is housed at the OECD.
3.
The thirty-four members of the FATF are: Argentina; Australia; Austria; Belgium; Brazil; Canada;
China; Denmark; the European Commission; Finland; France; Germany; Greece; the Gulf Cooperation Council; Hong Kong, China; Iceland; Ireland; Italy; Japan; Luxembourg; Mexico; the
Kingdom of the Netherlands; New Zealand; Norway; Portugal; the Russian Federation;
Singapore; South Africa; Spain; Sweden; Switzerland; Turkey; the United Kingdom; and the
United States.
4.
India and the Republic of Korea are observer countries. The Asia Pacific Group on money
laundering (APG)l, the Grupo de Acci6n Financiera de Sudamerica (GAFISUD)2, the Middle East
and North Africa Financial Action Task Force (MENAFATF)3 and the Council of Europe
Committee of Experts on the Evaluation of Anti-Money Laundering Measures (MONEYVAL)4 are
Associate Members.
5.
The global network that is committed to combating money laundering and terrorist financing also
includes four other regional bodies: the Caribbean Financial Action Task Force (CFATF)5, the
Eastern and South African Anti Money Laundering Group (ESMMLG)6, the Eurasian Group on
combating money laundering and financing of terrorism (EAG)7 and the Groupe Intergouvernemental d'Action contre Ie Blanchiment en Afrique (GIABAr The Offshore Group of
Banking Supervisors (OGBS)9 is a part of this network as well.
4
6
www.apgml.org
www.gafisud.org
www.menafatf.org
www.coe.intlmoneyval
www.cfatf.org
www.esaamlg.org
www.eurasiangroup.org
www.giaba-westafrica.org
www.ogbs.net
4
Page 1 01'2
October 12, 2007
HP-G07
Treasury Releases Schedule for Fall G7 Meeting
U.S Treasury Secretary Henry M Paulson, Jr. will host a meeting of tile G7 finance
ministers and central bank governors on Friday, October 19, in Washington, D.C.
Following is a schedule of events
Who
Under Secretary for International Affairs DaVid McCormick
What
Pre-G7 Press Conference
When
Wednesday, October 17, 230 p.m. (EDT)
Where
Treasury Department Media Room (4121)
1500 Pennsylvania Avenue, NW
Washington, D.C.
Note
Media Wlttlout Treasury press credentials should contact Frances Anderson at
(202) 622-2960, or frances.anderson@do.treas.gov with the following mfonnatlon
full name, SOCIal SecLJrlty number, and date of birth.
Who
G 7 Fmance MInisters and Central Bank Governors
What
Ministerial Meetlllg - Photos at the Top
When
Friday, October 19,115 pm
(EDT)
Where
Treasury Department Cash Room
1500 Pennsylvania Avenue, NW
Washlllgton, D.C.
Note
ThiS IS a pooled photo event - photographers wishing to participate should contact
Courtney Forsell at (202) 622-2591, or
for more
mformatlon
Who
G7 Fillance Ministers and Central Bank Governors
What
Family Photo
When
Friday, Octobel' 19,400 p.1ll (EDT)
Where
Treasury Depaliment - Bell Entrance Steps (West Side of BUilding)
1500 Pennsylvania Avenue, NW
Washington, DC.
Note
Photographers wishing to parllcipate must contact Frances Anderson at (202) 6222439 or frances.anderson@do.treasgov Photographers may begin setting up at
245 p.m (EDT). Photographers must be in place no later than 330 p.m. (EDT)
http://www.treas.gov/press/releases/hp607.htm
1116/2007
Page 2 of2
Who
US Treasury Secretary Henry M Paulson. Jr.
What
Press Conference
When
Friday Octobel 19. 700 P III (EDT)
Where
Office of Thl'lft SupervIsion Audltoriulll
1700 G Street. NW
Washington. DC
Note
Media Illay begin setting up at 530 P,Ill, (EDT). Treasury. White House. and
IMF/World Bank Fall Meeting press credentials will be accepted - no additional
clearance IS needed
httMwww.treas.gov/press/releases/hp607.htm
11/6/2007
Page 1 of 1
October 12, 2007
HP-608
Secretary Paulson to Deliver Speech on Homeownership,
Mortgage Markets, and the U.S. Economy
Treasury Secretary Henry M. Paulson, JI' will deliver remarks next week on
homeownershlp, mortgage markets, and the US, economy
Who
Treasury Secretal'y Henry M Paulson, Jr,
What
Remarks on Homeownershlp, Mortgage Markets, and the US, Economy
When
11 a,m, EDT on Tuesday, October 16
Where
Georgetown UniverSity Law Center
Gewirz Student Center, 12th Floor
120 F Street, NW
Washington, D.C.
Note
Media intel'ested In attending should contact Kara Tershel at
http: //WWW.treas.gov/press/releases/hp608.htm
1116/2007
Page 1 of 1
Octobel 15, 2007
HP-609
Treasury Statement on Private-Sector Announcement
Of Liquidity Facility for Asset Backed Commercial Paper
Washington- The US Department of the Treasury issued the following statement
today regarding the Intenlion of major global banks to create a liqUidity facility to
bolster the asset backed commercial paper market:
"Treasury IS pleased With the response by the private sector to enhance liquidity In
the short term credit markets The jOlnl efforts of domestic and international
financial Inslitutlons. broker dealers, and Investors have resulted III a potential
structure to Improve liqUidity In the asset backed commercial paper markets. ThiS
proposal will complement other solutions investors and asset managers may utilize
In coml1llttlllg and deploying capital to support more efficient markets.
"The Department appreciates thiS global consortium's cooperation dUring the last
several weeks and their leadership In developlllg a market-based response to thiS
situation Such efforts help to foster orderly capital markets."
http://www .treas.gov/press/releases/hp609.htm
1116/2007
Page I of2
October 15, 2007
hp-610
Under Secretary for Domestic Finance
Robert K, Steel
Welcome and Introductory Remarks Before the
Initial Meeting of the Department of the Treasury's
Advisory Committee on the Auditing Profession
Washington - Good morning Welcome to the Department of the Treasury. Tilank
you for being here today at the Initial meeting of the Advisory Committee on the
Auditing Profession. I want to extend my gratitude as well as that of Secretary
Paulson and tile Department to the members of the Committee. We appreciate the
generosity of yOUi' service
I want to thank, in particular, the Co-Chairs of the Committee, former Securities and
EXChange Commission Chairman Arthur Levitt, Jr. and former SEC Chief
Accountant Donald T. Nicolaisen The high regard in which these two gentlemen
are held is reflected III the willlllgness of the distillguished individuals gathered
around this table to serve as members of this Committee.
As many of you know, this Committee stems from the capital markets
competitiveness lIlitiatives that Secretary Paulson has spearheaded Nearly a year
ago, the Secretary delivered a speech on the need to maintain and enhance US.
capital markets competitiveness. He specifically pOinted out tile sustainabllity of the
auditlllg profeSSion as a vital component to thiS competitlveness.[i]
The link between the auditing profession and capital markets competitiveness was
established dUring the adoption of the federal securities laws almost 75 years ago
To assist In restoring Investor confidence and encouraging capital development
after the 1929 crash, the audltlllg profeSSion, Itself, lobbied for Independent audits
of financial statements as part of tile legislative reforms Congress was conSidering.
[2]
Agreeing with the profeSSion, Congress mandated In the federal securities laws
Independently audited financial statements for all publiC companies Certifylllg
financial statements, the Independent auditor would help accomplish the aims of the
Securities Act of 1933 "to restore the confidence of the prospective investor In hiS
ability to select sound securities, ... and to bring Into productive channels of industry
and development capital which has grown timid."[3]
Congress had deCided then to bestow on the publiC company auditor a critical role
of trust, IIltegral to IIlvestor confidence, IIltegral to the flow of capital. ThiS trust
clearly broke down at the beglnnlllg of thiS century when public company
accountlllg scandals challenged the credibility of the auditing profeSSion
Congress, considering what would eventually become the Sarbanes-Oxley Act of
2002, harshly reminded the profession: "[T]he franchise given to public accountants
by the securities laws is condilional: It comes III return for the CPA's faithful
assumption of a public trus\."[4]
To restore credibility In tl18 profession, the Sarbanes-Oxley Act mandated several
major changes, the most prominent being the move from self-regulation and peer
review to a system of federal oversight The PubliC Company Accountlllg OverSight
Board, whose creation has been termed the "centerpiece" [5] of the Act, now
registers and IIlspects all publiC company audltlllg flrrns and sets and enforces
audltlllg standards. The Sarbanes-Oxley Act also enhanced auditor independence
standards, reqLJlfed mandatory audltlllg firm partner rotation, and strengthened the
audit committee's role in monitorlllg the auditor and the audit process
Five years have passed sillce the passage of thiS landmark legislation
http://www.treas.gov/press/releases/hp610.htm
The
1116/2007
Page 2of2
profession continues to adapt to these changes as It reasserts its role In enhancing
investor confidence and the competitiveness of our capital markets. At the same
time, the profession faces considerable challenges
Secretary Paulson outlined these challenges in hiS competitiveness speech last
year I repeat hiS precise words
•
"Given the importance of accounting to our financial system, IS there
enough competition?"
•
"Will our refor-med accounting system produce the high-quality audits and
attl-act the talented auditors we need?"
•
"00 auditors seek detailed rules in order to focus on technical compliance
rather than uSlllg profeSSional Judgment that could be second-guessed IJY
the PCAOB or private Iltlgants?"[6)
Ttle Department has charged the Committee with developing recommendations
taking Into consideration the Issues impacting the sustalnability of the auditing
profeSSion, including those raised by these questions. Neither the difficulty nor the
Importance of this task should be underestimated.
Again, we are grateful for your service. Secretary Paulson and the Department
await your recommendations. I now Yield the floor to the Co-Chairs for their
meeting. Thank you.
(1) Henry M. Paulson, Jr, Secretary of the US. Department of the Treasury,
Remarks on the Competitiveness of the US Capital Markets Before the Economic
Club of New York (Nov. 20, 2006).
[2] Gary John Previts & Barbara DubiS Menno, A History of Accountancy
UllIted States The Cultural Significance of Accounting 723 (1998).
117
the
(3] S. Rep. No. 47, 73 rd Cong., 1st Sess. 1 (Apr. 17, 1933).
(4] S. Rep. No 205, 107'h Cong ,2 nd Sess. 6 (July 3, 2002)
[5] Douglas R. Carmichael, The PCAOB and the SOCIal Responsibility of the
Independent Auditor, Accounting Horizons Vol. 18, No.2, 127-33 (June 2004).
[6) Henry M Paulson, Jr, Secretary of the U.S. Department of the Treasury,
Remarks on the Competitiveness of the US Capital Markets Before the EconomiC
Club of New York (Nov 20,2006).
http: //wWw.treas.gov/press/releases/hp610.htm
1l/6/2007
Page 1 af4
October 15, 2007
2007-10-15-14-13-12-20204
U,S, International Reserve Position
The Treasury Department today released US reserve assets data for the latest week, As indicated in this table, US
reserve assets totaled $68,519 million as of the end of that week, compared to $68,589 million as of the end of the
prior week,
I Official reserve assets and other foreign currency assets (approximate market value, In US millions)
I
I
11
IIOctober 12, 2007
I
IA Official reserve assets (in US millions unless otherwise specified)
IIEuro
I
IIYen
IITotal
I
11 68 ,519
I
1(1) Foreign currency reserves (in convertible foreign currencies)
II
!(a) Securities
11 13 .777
II
11 10 ,840
11 24 ,617
lof which: Issuer headqualiered In reporting country but located abroad
II
II
110
I(b) total currency and deposits With
II
11 13 ,788
II
11 5,339
II
11 19 ,127
Iii) banks headquartered In the reporting country
II
II
lof which located abroad
II
II
110
11 0
1(111) banks headquartered outside tile reporting country
1(1) other national central banks, BIS and IMF
II
II
110
lof which located in the reporting country
II
II
110
!(2) IMF reserve position
11 4 .453
I
1(3) SDRs
11 9 ,280
I
1(4) gold (including gold deposits and, if appropriate, gold swapped)
11 11 ,041
I
!--volume In millions of fine troy ounces
11 261 .499
I
1(5) other reserve assets (specify)
liD
I
I--financlal derivatives
II
I
I--Ioans to nonbank nonresidents
II
I
I--other
II
IB
II
Other foreign currency assets (specify)
--securities not Included In official reserve assets
I
--deposits not Included In official reserve assets
I
--loans not included in offiCial reserve assets
I
--financial derivatives not Included In official reserve assets
I
--gold not included in offiCial reserve assets
1
[ --other
11
I
II
I
I
II. Predetermined short-term net drains on foreign currency assets (nominal value)
[_[_ _ _ _ _--"11-1_ _ _IL-l_ _
http://WWw.treas.gav/press/releases/2007101514131220204.htm
~II-I_ _---'IL-l_-_II-I_ _ _1/
11/6/2007
Page 2 of 4
l
[
[1. Foreign currency loans, securities, and deposits
II
I Maturity breakdown (residual maturity)
IITolal
I
II
Up 10 1
II
II
II
II
II
II
II
II
II
II
/I
II
[outflows (-)
IIPrincipal
II
I
IIlnterest
II
I--Inflows (+)
IIPnnclpal
II
I
IIlnterest
II
II
I
II
2. Aggregate short and long positions In forwards and
futures In foreign currencies Vis-a-VIS tile domestic
currency (Including tile forward leq of currency swaps)
More than 1 and
up to 3 months
monlh
II
I
1\
II
I 3. Other (specify)
II
II
I --iIlfiows related to reverse repos (+)
I --trade credit (-)
I --trade credit (+)
I --other accounts payable (-)
I --other accounts receivable (+)
II
"
1/
I
I
I
"
I (a) Short positions ( - )
I (b) Long positions (+)
I --outflows related to repos (-)
I
More Ulan 3
months and up to
1 year
II
1\
II
II
II
II
1/
II
II
II
1/
"
"
I
II
II
I
II
I
III. Contingent short-term net drains on foreign currency assets (nominal value)
I
I
"II
[
IIrol31
11 Contingent liabilities In foreign currency
II
II
(a) Collateral guarantees on debt falling due within 1
year
I
II
"I
I"
~b) Other contingent
II
II
I MatUrity breakdown (residual maturity, where
applicable)
More than 3
months and up to
1 year
More than 1 and
up to 3 months
Up to 1 month
liabilities
2. Foreign currency securities issued with embedded
options (puttable bonds)
3. Undrawn, unconditional credit lines provided by
(a) other national monetary authonties, BIS, IMF, and
other international organizations
tother national monetary authOrities (+)
EBIS (+)
DMF(+)
(b) with banks and other financial institutions
headquartered in the reporting country (+)
(e) With banks and other finanCial institutions
headquartered outSide the reporting country (+)
Undrawn, unconditional credit lines provided to
(a) other national monetary authorities, BIS, IMF, and
other international organizalions
--other national monetary authorities (-)
r
I
I
II
I
I
I
I
I
I
I
II
httMwww.treas.gov /press/releases/2007101514131220204.htm
I
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1116/2007
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t-
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BIS (-)
t lMF (-)
(b) banks and other financial Institutions headquartered
In reportlllg country (- )
(c) banks and other fillancial institutions headquartered
outside the reporting country ( - )
4. Aggregate short and long positions of options If1
foreign currencies vis-a-vis the domestic currency
[(a) Shol1 posilions
[(i) Bought puts
[(il) Written calls
I(b) Long positions
[(i) Bought calls
l(ii) Written puts
IpRO MEMORIA In-the-moneyoptions
1(1) At current exchange rate
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,
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I(a) Short pOSition
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I(b) Long position
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11
1(2) + 5 % (depreciation of 5%)
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I(a) Short pOSition
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I(b) Long position
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II
1(3) - 5 % (appreCiation of 5%)
II
II
I(a) Short position
II
I(b) Long position
II
1(4) +10 % (depreCiation of 10%)
II
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II
11
I(a) Short pOSition
II
11
11
II
I(b) Long position
II
II
1/
1(5) - 10 % (appreciation of 10%)
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I(a) Short position
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1/
II
I
I(b) Long pOSition
II
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li6) Other (specify)
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I(a) Short position
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\[b) Long position
1/
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11
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IV. Memo items
[
[i) To be reported with standard periodicity and timeliness
~) short-term domestic currency debt indexed
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to the exchange rate
(b) finanCial instruments denominated in foreign currency and settled by other means (e.g .. in domestic
currency)
I
II
[--Short positions
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[-long positions
II
[other instruments
II
li:0 pledged assets
II
[[nCluded in reserve assets
II
I..:.::lncluded in other foreign currency assets
II
[nondeliverable forwards
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1116/2007
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[(d) securities lent and on repo
--lent or repoed and included In Section I
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II
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--lent or repoed but not included in Section I
I
--borrowed or acquired and included in Section I
I
--borrowed or acquired but not included in Section I
(e) financial derivative assets (net, marked to market)
[--forwards
I
II
I--futures
I--swaps
/I
I--options
/I
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I--other
/I
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(f) derivatives (forward, futures, or options contracts) that have a residual maturity greater than one
year, which are subject to marglll calls.
--aggregate short and long positions III forwards and futures in foreign currenCies vis-a-VIs the domestic
currency (including the forward leg of currency swaps)
I(a) short positions ( - )
I
/I
I
I(b) long positions (+)
I
I--aggregate short and long positions of options in foreign currencies vis-a-VIs the domestic currency
I(a) short positions
II"
I
I
"
"
II"
l(i) bought puts
I(ii) written calls
I(b) long positions
I
I
II
I(i) bought calls
I
I
II
II
I(ii) written puts
1(2) To be disclosed less frequently:
I
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I(a) currency compOSition of reserves (by groups of currencies)
11 68,519
I
I--currencies
11 68,519
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I--currencies not in SDR basket
II
I
[--by indiVidual currencies (optional)
II
I
III
SDR basket
[
II
I
Notes:
1/ Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market
Account (SOMA), valued at current market exchange rates, Foreign currency holdings listed as securities reflect markedto-market values, and deposits reflect carrying values,
2/The items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF
and are valued in dollar terms at the official SDR/dollar exchange rate for the reporting date. The entries for the latest
week reflect any necessary adjustments, including revaluation, by the U.S. Treasury to IMF data for the prior month
end.
3/ Gold stock is valued monthly at $42.2222 per fine troy ounce.
http://WWw.treas.gov/presslreJeasesI2007J01514131220204.htm
1116/2007
FROM THEC
,Ie AFFAIRS
We recommend printing this release using the PDF file below.
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October 16, 2007
HP-611
Treasury Internati
Treasury International Capital (TIC) data for August are released today
will report on data for September, is scheduled for November 16, 2007.
:) Data for August
e U.S. Treasury web site (www.treas.gov/tic). The next release, which
Net foreign purchases of long-term securities were minus $69.3 billion.
•
Net foreign purchases of long-term U.S. securities were minus:
billion, and net purchases by private foreign investors were min
•
U.S. residents purchased a net $34.5 billion of long-term foreigl
lis, net purchases by foreign official institutions were minus $24.2
Net foreign acquisition of long-term securities, taking into account adju:
ted to have been minus $85.5 billion.
Foreign holdings of dollar-denominated short-term U.S. securities, inch
holdings of Treasury bills increased $21,0 billion.
Is, and other custody liabilities increased $33.9 billion. Foreign
8anks' own net dollar-denominated liabilities to foreign residents decre
n.
Monthly net TIC flows were minus $163.0 billion. Of this, net foreign pi
billion.
ninus $141.9 billion, and net foreign official flows were minus $21.1
TIC Monthly Reports on Cross-Border Financial Flows
(Billions of dollars, not seasonally adjusted)
r--- --
http://www.treas.goY/press/releases/hp611.htm
1118/2008
20061
AU!!·061
Aug-071 Mav-07
Jun-UI
Jul-UI AUg-VI
17157.5 21186.9
16145.9 2002l.0
1011.5 1165.9
19531.8
18385.7
1146.1
26957.4
25852.8
1104.6
2429.8
2259.8
170.1
2609.4
2487.7
121.7
2474.0
2449.0
25.0
3323.7
3358.6
-34.9
2005
Foreigners' Acquisitions of Long-term Securities
1
2
3
Gross Purchases of Domestic U.S. Securities
Gross Sales of Domestic U.S. Securities
Domestic Securities Purchased, net (line 1 less line 2) II
4
5
6
7
8
Private, net 12
Treasury Bonds & Notes, net
GOy't Agency Bonds, net
Corporate Bonds, net
Equities, net
891.1
269.4
187.6
353.1
81.0
967.0
135.4
20104
485.5
144.6
985.5
193.2
207.1
435.4
149.7
940.2
175.3
145.7
457.2
162.0
158.6
27.2
14.3
74.3
42.7
93.9
18.2
23.6
24.8
27.2
20.6
-2.4
1.2
3.4
18.4
-10.6
27.1
5.5
-4.2
-39.0
9
10
11
12
13
Official, net 13
Treasury Bonds & Notes, net
GOy't Agency Bonds, net
Corporate Bonds, net
Equities, net
120.4
68.7
31.6
19.1
1.0
199.0
71.8
92.6
28.5
6.0
160.6
52.1
70.9
26.8
10.8
164.5
8.6
122.3
35.2
·1.7
11.5
-4.6
12.8
4.0
-0.7
27.8
6.4
16.0
3.7
1.7
4.4
-6.9
7.5
1.0
2.8
-24.2
-29.7
4.1
3.0
·1.6
3700.0
3872.4
-172.4
5527.1
5778.9
-251.8
4959.1
5153.1
-194.0
7510.7
7829.7
-319.0
742.3
780.0
-37.6
730.5
752.2
-21.8
759.3
764.9
-5.5
824.0
858.5
-34.5
-45.1
-127.3
-144.1
-107.7
-99.1
-94.9
-166.11
-152.9
-21.2
-16.5
-8.2
-13.5
0.9
-6.4
-21.7
-12.8
839.1
914.2
952.1
785.6
132.4
99.9
19.5
-69.3
-143.0
-169.9
-159.0
-191.5
-15.2
-15.4
-22.2
-16.1
Net Foreign Acquisition of Long-Term Securities
(lines 19 and 20):
696.2
744.21
793.11
594.11
117.2
84.4
-2.7
-85.5
Increase in Foreign Holdings of Dollar-denominated ShortU.S. Securities and Other Custody Liabilities: 16
U.S. Treasury Bills
-47.6
-58.9
135.21
-9.0
123.81
-16.0
133.41
9.4
2.5
-4.4
-16.0
-18.0
56.2
18.6
33.9
21.0
14
15
16
17
18
Gross Purchases of Foreign Securities from U.S. Residents
Gross Sales of Foreign Securities to U.S. Residents
Foreign Securities Purchased, net (line 14 less line 15) 14
Foreign Bonds Purchased, net
Foreign Equities Purchased, net
19
Net Long-Term Securities Transactions (line 3 plus line
20
Other Acquisitions of Long-term Securities, net 15
21
22
23
http://www.treas.gov/press/releaseslhp611.htm
1118/2008
24
Private, net
Official, net
25
Other Negotiable Instruments
and Selected Other Liabilities: /7
Private, net
Official, net
26
27
28
29
Change in Banks' Own Net Dollar-Denominated Liabilities
30 Monthly Net TIC Flows (lines 21,22,29) /8
of which
31
Pri vate, net
32
Official, net
/1
/2
/3
-15.6
-43.3
16.0
-25.0
-0.5
-15.4
19.5
-10.1
1.0
-5.5
-6.2
-11.8
3.3
15.3
17.2
3.8
11.4
10.6
0.8
144.2
164.0
-19.8
139.7
139.6
0.2
124.0
103.4
20.6
6.9
6.5
0.4
2.0
-2.6
4.6
37.5
36.6
1.0
12.8
-14.5
27.4
16.4
184.3
258.9
-56.2
-3.6
-15.4
40.9
-111.4
665.0
1063.7
1175.8
671.3
116.0
53.1
94.3
-163.0
578.0
87.0
921.0
142.8
1040.8
135.0
480.7
190.6
118.0
-2.0
21.1
32.0
56.0
38.4
-141.9
-21.1
Net foreign purchases of U.S. securities (+)
Includes international and regional organizations
The reported division of net purchases of long-teon securities between net purchases by foreign official institutions and net purchases
of other foreign investors is subject to a "transaction bias" described in Frequently Asked Questions 7 and 1O.a.4 on the TIC web site.
Net transactions in foreign securities by U.S. residents. Foreign purchases of foreign securities = U.S. sales of foreign securities to foreigners.
Thus negative entries indicate net U.S. purchases of foreign securities, or an outflow of capital from the United States; positive entries
indicate net U.S. sales of foreign securities.
Minus estimated unrecorded principal repayments to foreigners on domestic corporate and agency asset-backed securities +
estimated foreign acquisitions of U.S. equity through stock swaps estimated U.S. acquisitions of foreign equity through stock swaps +
increase in nonmarketable Treasury Bonds and Notes Issued to Official Institutions and Other Residents of Foreign Countries.
These are primarily data on monthly changes in banks' and broker/dealers' custody liabilities. Data on custody claims are collected
quarterly and published in the Treasury Bulletin and the TIC web site.
"Selected Other Liabilities" are primarily the foreign liabilities of U.S. customers that are managed by U.S. banks or broker/dealers.
TIC data cover most components of international financial flows, but do not include data on direct investment flows, which are collected
and published by the Department of Commerce's Bureau of Economic Analysis. In addition to the monthly data summarized here, the
TIC collects quarterly data on some banking and nonbanking assets and liabilities. Frequently Asked Question 1 on the TIC web
site describes the scope of TIC data collection.
/4
/5
/6
17
/8
REPORTS
•
(PDF) TIC Monthly Reports on Cross-Border Financial Flows (Billions of dollars, not seasonally adjusted)
http://www.treas.gov/press/releaseslhp611.htm
1118/2008
Page 1 of 8
October 16, 2007
HP-612
Remarks by Secretary Henry M. Paulson, Jr.
on Current Housing and Mortgage Market Developments
Georgetown University Law Center
Washington, DC--Good morning As students of law, busliless and pub[lc pO[ICY,
you have an Interest In real [Ife case studies that combine flilancial markets and
policy Issues. Current developments in the houslllg and mortgage markets provide
such an example. I will spend my time this morning reviewing the current state of
the housing and mortgage markets, the implications for om caplta[ markets and
economy, and the role government and the private sector should play as we go
forward.
The ongoing housing correction IS not ending as quickly as it might have appeared
[ate last year.
And it now looks like It will continue to adversely Impact our economy, our caplta[
markets, and many homeowners for some time yet. Even so, I believe we have a
healthy. diversified ecollomy that will continue to grow.
The hOUSing correction has ItS roots in an eight-year perloel of exceptional home
prtce appreciation which was fueled by an increased demand for, and an abundant
supply of easy credit. Speculation also played a significant role, as the share of
buying activity by Investors or indiViduals buying second homes more than doubled
from 2000 to 2005. Homebuilders responded to the extraordinary demand for more
and larger homes as if It would las1 forever.
As mortgage lenders and Investors reached for higher returns this "demand"
pressure, coupled with our fragmented mortgage origination process, led to a
decline In underwriting standards and a sharp increase in tile Issuance of riskier
mortgage products As demand for housing began to slow In 2004, originators,
eager to maintain high mortgage origination volumes, further lowered their
underwriting standards.
While adjustable-rate mortgages (ARMs) are not new, recent years saw an
Increase In hybrid-ARMs with low teaser rates, interest-only features, low- or nodown payments, and even negative amortization In fact, about one-quarter of
mortgage originations were non-traditional ARMs In 2005 and 2006, exposing
mortgage holders to much greater risk than the traditional 30-year fixed rate
mortgage with a 20 percent down payment
ThiS decline In lending standards was not limited to, but was most pronounced. In
the case of subprime lending, whicll grew from only about 2 pel'cent of mortgages
in 1998 to nearly 14 percent In mld-2007 A Significant percentage of the nontraditional ARMs were marketed and sold to subprlme borrowers Predictably, the
result has been progressively hlgtler rates of default on subprlme mortgages.
The inevitable correction [)egan In early 2006 Today. average nationwide home
prices are barely up In the year through June, sales of eXisting Slngle-famtly homes
are down by nearly 25 percent from the peak in 2005, and the inventory of unsold
homes has Increased to levels last seen in the early 1990s Housing should be
analyzed by local or regional markets: averages can be misleading. Areas with the
greatest price appreciation prior to the correction, such as Las Vegas, San Diego.
central California and a number of cities in Florida, have seen declines And prices
are falling in other parts of the country where economic groWttl is slower, such as
Michigan and parts of Ohio Working through the [lOUSing correction will continue to
take time.
http://wwwtreas.gov/presslreleases/hp612.htm
1116/2007
Page 2 of8
As I mentioned earllel', mortgage defaults and foreclosures are nsing While the
delinquency rate today is near the 2001 rate, there are over seven times more
subprime mortgages today than there were in 2001 At the end of the second
quarter of thiS year, more than 900,000 subprrme loans were at least 30 days
delinquent Foreclosures are also up significantly - Increasing about 50 percent
from 2000 to 2006. FOleclosures on subprrme loans are up over 200 percent in that
same period Current trends suggest there will be just over 1 million foreclosure
starts thiS year - of which 620,000 are subprime
Of the approximately 50 million outstanding mortgages Irl the US today,
approximately 10 million are subprime loans. Many have Cited the statistic that 2
million of those subprime mortgages will reset to higher rates In the next 18 months
That statistic is true, relevant, and troubling, but It IS not the complete picture of the
risk gOing forward. Many of those borrowers will be able to afford their new
mortgage payment or they Will be able to refinance Into another more affordable
mortgage. Yet, the problem today is not limited to subpnme mortgages as the
number of homeowners having trouble making payments on prrme mortgages IS
also increaSing. And finally, the Wide geographic varratlon In home prrce trends
adds to the compleXity of Sizing thiS problem With any certainty
While innovation In tile mortgage sector has brought benefits to our economy, the
industry and homeowners, It Ilas also rntroduced some challenges. Gone are the
days when a homebuyer only went to the corner bank to take out a mortgage.
Today, the mortgage process IS dlsaggregated and less personal A mortgage loan
IS likely to be originated, serviced, and owned by three different entitles. Originators
often sell mortgages to securrtizers who package them into mortgage-backed
securrtles, Wilich are then diVided and sold again to a global network of investors.
In today's decentralized system, a homeowner having trouble making payments
often does not know where to turn for assistance.
In addition to affecting Individual homeowners, the hOUSing correction is also haVing
a real impact on our economy. Annual hOUSing starts peaked at an annual rate of
almost 2.3 million units In early 2006 before failing off more than 40 percent through
August of this year. Employment In residential building, including specialty trade
contractors, has dropped by almost 200,000 since early 2006, offsetting about onequarter of the jobs garned in the housing boom. It looked like housing construction
had reached a bottom in the first half of this year, but starts have declined again
since June and data on permit applications and rnventories of unsold homes
suggest further declines lie ahead.
We confront these current challenges against the backdrop of a strong economy not just In the US, but globally. Indeed, this is the first housing downturn In the
past three decades In which US GOP growth has not turned negative Business
Investment has expanded In recent months, our exports are berng boosted by the
strong economic growth of our tradrng partners and the healthy job market has
helped consumer spending continue to grow.
But let me be clear, despite strong economic fundamentals, the hOUSing decline IS
stili unfolding and I view It as the most Significant current risk to our economy The
longer housing prices remain stagnant or fall, the greater the penalty to our future
economic growth.
So where do we go from here and what is the proper role for government?
First, our Immediate concern must be for struggling borrowers whose primary
reSidence IS at risk. We must help as many able homeowners as possible stay In
their homes. Foreclosures are costly and painful for homeowners. They are also
costly for mortgage servlcers and Investors. They can have spillover effects into
property values throughout a neighborhood, creatrng a downward cycle we must
work to avoid
Second, we must minimize the impact of the current downturn on our economy,
recognizing the tension between such actions and the pOSSibility of moral hazard
When Investors are relieved of the costs of bad decisions, they are more likely to
repeat their mistakes. I have no interest in bailing out lenders or property
http://wwwtreas.gov/presslreleases/hp612.htm
1116/2007
Page 3 of8
speculators. Still, we must recognize the very real harms to families affected by the
housing downturn. We must take steps to mlnlnllZe the neighborhood effects and
\t,e macroeconomiC effects of thiS housing market correction
Third. we need to Identify publiC policy changes that will reduce the likelihood of
repeating some of the excesses of I'ecent years while maintaining access to credit
for able homeowners
Helping Struggling Homeowners
Today's mortgage market IS different than In the past and it requires pollcymakers
to think and act creatively.
A first and Important step IS to brrng mortgage servlcers and the mortgage Investors
toge\tler In a coordinated effol·t to Identify struggling borrowers early, connect them
to a mortgage counselor and find a sustainable mOl1gage solution. In August, the
President charged Secretary Alphonso Jackson and me to lead thiS effort HUD and
Treasury have been working closely With mortgage market participants to address
tile complexities of the modification process, especially in a mortgage market
primarily based on a securitization model. The breadth of disaggregation In the
mortgage market today IS unprecedented, presenting a fundamental, practical
problem that does not lend Itself to an easy solution
Recent surveys have shown that as many as 50 percent of the borrowers who have
gone Into foreclosure never had a prior discussion with a mortgage counselor or
their servlcer. That must cllange. Early intervention IS Critical - the earlier borrowers
explore alternative options, the more likely they Will find a workable solution and
keep their home. We cannot expect to avert every foreclosure and, Indeed, some
are warranted. Even In years of strong hOUSing performance, we witness several
Ilundred thousand foreclosures. But today many homeowners out there can be
helped, and we are committed to efforts designed to do just that.
Last week, I JOined a group of mortgage serVlcers, counselors and investors as they
launched a bipartisan alliance, called Hope Now, to coordinate efforts to reach
more homeowners and find affordable solutions. I applaud this effort. ThiS
challenge is significant and only by working together Will we reach more
homeowners In need.
We have an Immediate need to see more loan modifications and refinanCing and
other flexibility For many families, this Will be the only viable solution The current
process is not working well. ThiS is not about finger pointing: it is about putting an
aggressive plan togetller and moving forward. This alliance is dedicated to seeing
that happen, and I expect to see results I also call on those servicers who are not
yet a part of thiS alliance to JOin You have an obligation to help meet thiS challenge,
and you can do so more effectively as part of an integrated effort.
Not all servicers are staffed for aggressive loss-mitigation Preventing foreclosures
is in Investors' Interest and Investors must take an active role in demanding that all
servicers, large or small, are pursuing all available loss-mitigation strategies. Today
the industry doesn't have a thorough, standardized set of loss-mitigation metrics
with which to evaluate servlcers' performance I expect the Hope Now alliance to
qUickly develop and begin reporting those metrics so Iflvestors, policy makers, and
homeowners can measure results
The efforts of thiS private sector alliance alone Will not solve the problem. But It is a
critical piece of the solution As we work with them, we will all learn and Improve the
means of reaching and helping homeowners to prevent foreclosures
We must also take steps to make more affordable mortgage products available for
struggling homeowners. In August, the President renewed hiS call on Congress to
pass FHA modernization to make affordable FHA loans more widely available To
facilitate mortgage workouts, the PreSident has also called on Congress to
temporarily eliminate taxes on mortgage debt forgiven on a prrmary reSidence
FHA reform IS moving through Congress, and I am hopeful that It Will reach the
President's desk soon. The tax relief proposal has cleared the House and is
awaiting further action in the Senate. GSE reform has cleared the House, and also
http://wwwtreas.gov/press/releases/hp612.htm
1116/2007
Page 4 of8
awaits action in the Senate Congress should enact these bills as quickly as
possible
The GSEs also have a role to f)lay In making affordable mortgage products more
widely available It IS ttleir mission The secondary market in GSE mortgage-backed
seCUrities IS functioning well. The GSEs could Increase the flow of mortgage capital
to refinance subpnme borrowers If they secuntlzed a greater number of these
mortgages. To accomplish thiS, tile GSEs must work closely With their private
mortgage Insurance company partners In the development of new products The
GSEs have additional capacity to help more blemished-credit struggling
homeowners and we are hopeful that they will step up to thiS challenge
In addition to these current IIlltlatlves, we welcome further input and Will openly
conSider other ideas to assist struggling homeowners.
Public Policy Ouestions
We also need to make some changes In our laws and rules In order to prevent
some of ttle excesses and abuses of the last few years from happening agaill. We
must do so in a balanced, ttloughtful way so as to avoid overreactlllg and
IntroduClllg ullintended consequences such as those that might shut off credit to
able borrowers.
Homeownership brings substantial benefits to our society For millions of
Americans, their Ilome is their largest financial asset, the key to their future finanCial
secunty And homeownershlp gives people a stake in their community that often
leads to more CIVIC inVolvement, better schools and safer neighborhoods.
While finanCial innovation has helped Increase the homeownershlp rate in recent
years, It has also Introduced new compleXities. Homebuyers today have more
chOices than ever before III finding a mortgage that best suits their circumstances.
Yet, comparlllg the attracliveness of one mortgage product to another can be
difficult. Homebuyer education and effective disclosure are critical to helping
borrowers understand the risks of innovalive mortgage products.
Furthermore, our complex and fragmented regulatory system complicates an
already difficult Situation EXIStlllg federal laws address mortgage fraud, disclosures,
fair lending, unfair and deceptive practices, and other aspects of the mortgage
process. But the regulatory and enforcement authority varies across different
federal agencies States have also enacted an additional layer of regulation,
typically applied only to certain institutions that operate within that state and
enforced by the state agencies
This patchwork structure should be streamlined and modernized
Treasury IS already spending considerable energy In developing Ideas on how to
improve the financial regulatory structure more broadly and, early next year, we will
release a blueprint for comprehensive overhaul Our goal IS to Improve overSight
and allow our financial services industry to better adapt and compete in the global
marketplace However, fundamental changes to our regulatory system will take
years to consider and implement. Homeowners should not wait years - we need to
move now to make Intemn Improvements to our current mortgage regulatory
system.
We can do so by focusing on four key issues disclosure, origination, predatory
lending and liability.
We need Simple, clear, and understandable mortgage disclosure We must identify
what Information IS most critical for borrowers to have so that they can make
informed decisions. At closing, homebuyers get writer's cramp from Initialing pages
and pages of unintelligible and mostly unread boJierplate that appears to be
designed to IIlsulate the originator or lender from liability rather than to provide
useful information to the borrower We can and must do better
The most Critical facts, including potential future monthly payments, should be on a
Single page in clear, easy-to-understand language, to be signed by the borrower
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1116/2007
Page 5 of8
and the lender. In my judgment, this may have prevented many of the problems that
we are seeing today.
The Federal Reserve IS leading on this Issue through a comprehenSive review of
the disclosure regime underlying the Trutll in Lending Act. As part of thiS reView, the
Federal Reserve IS engaged In extensive consumer testing to determine what types
of disclosures provide the best Information to consumers. I support the Federal
Reserve's consumer-oriented approach -- thiS testing is critical to determining what
Improved disclosures are gOing to be most useful ThiS is hard and necessary work,
but it IS very impOl1ant.
Borrowers have respollslbility as well. Mortgage providers must offer clear,
transparent and understandable Information on the mOl1gage products they sell.
And homebuyers have a I'esponslbility to use that information BUYlllg a home today
IS a complex process, but that In no way excuses homebuyers from their obligation
for due diligence. Just as Investors In the stock market have a responSibility to
understand the risks assOCiated With their Investment, homebuyers have a
responsibility to understand their mortgages.
Secondly, we need to bring a higher level of integrity to the mortgage origination
process The development of a uniform national licenslllg, education, and
monitoring system for all mortgage brokers is worth considering.
Some of the conduct and practices that I have learned about are shameful. It IS no
secret that. while not tile norm, some fraudulent actiVity on behalf of mortgage
brokers occurred.
Today, mortgage brokers are legulated at the state level, and the rigor of that
regulation varies from state to state. State regulators have begun an effort geared
toward uniform licensing and education requirements for mortgage brokers. We
support this effort. but since other brokers are employed by federally-regulated
entities, this effort Will not cover the full universe of mortgage origillators. We need
to consider a national approach tilat builds upon the state efforts that are currently
underway.
Licensing requirements should take IIlto account prior fraudulent or criminal activity,
and should require Initial and ongoing education At a millimum mortgage
originators should be able to demonstrate a sound understandlllg of the products
that tiley will be seiling.
Common sense licensing requirements that are uniformly enforced could greatly
help in weeding out the bad actors. A nationwide monitOring system that covers all
mortgage ongillators could help prevent unscrupulous mortgage originators from
moving across state lines or switchlllg employers to evade detection. ThiS IS worth
considering.
The third area that also warrants our focus is predatory lending.
Homebuyers must not be subject to unfair and deceptive lending practices. Here
too, the Federal Reserve is engaged in a comprehenSive review of its authOrity
under the Home Ownership and EqUity Protection Act, Including ItS authOrity to
broadly defille unfair and deceptive practices These rules would apply to the entire
mortgage industry.
The Federal Reserve can inject greater uniformity and objective standards into the
mortgage origination process, and I encourage them to do so.
In addition, there have been calls for legislation to address certain practices that are
often associated with predatory lending, such as prepayment penalties or statedIncome loans. There are clearly Circumstances III which these product features are
marketed inappropriately. There are also clearly circumstances In which anyone of
these features can make sense for the borrower and Significantly Improve credit
availability.
We need to strike a careful balance of providing adequate consumer protection
without limiting overall credit availability or consumer choice, especially for those
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11/6/2007
Page 6 of8
who most need that flexibility.
This is a difficult balance to achieve because each lending determination IS
relatively unique based Oil the different facts and circumstances assoCiated with
each borrower. Yet. I am hopeful that we can do It
In my view, it makes a great deal of sense to recognize that certain products are
l'lgllt for some borrowers and not for others The Fedel'al Reserve has already
stated that It Will examine some of these specifiC issues including prepayment
penalties, stated-Income loans, escrow accounts and ability-to-repay
conSiderations,
The fourth Issue that has garnered attention is whether greater liability should be
imposed on securitizers and investors In Illy view, thiS is not the answer to the
problem ImpOSing broad liability provisions on investors and securitizers would
very likely generate Significant unintended consequences It would potentially
paralyze SeCUritization, a process that has been extremely valuable In extending the
availability of credit to miliJons of Ilomeowners nationwide and lowering the cost of
finanCing, Again, balance IS critically Important Congress should proceed with
extreme caution so as to aVOid culling off Investment Inflows to the houslflg market
Before concluding I Will briefly summarize two other broad-based capital markets
related initiatives under way that Will also address some of the problems which have
arisen In the mortgage market.
Broader Capital Markets Issues
The PreSident's Working Group (PWG) - chaired by Treasury and conSisting of the
Federal Reserve, the SEC, and the CFTC -- IS leading a comprehenSive review into
tile poliCY Implications resulting from current challenges in the credit markets. A
number of these Issues are directly tied to the mortgage markets: others affect the
capital markets more broadly. Given the global nature of our financial markets, I will
also work with the G7 and through the FinanCial Stability Forum to address several
of these Issues
One area the PWG has already addressed is hedge funds Back in February, the
PWG produced forward-leaning gUidance for the industry and ItS partiCipants
including regulated financial institutions which serve as prime brokers and
counterpartles to hedge funds. Our prinCiples and gUidelines serve as a foundation
to enhance Vigilance and market disciplllle, strengthen investor protection and
guard agalilst systemic risk. While a small number of hedge funds were forced to
wind down III recent months, iii ere were no systemic events associated With their
closure, and hedge funds have not proven to be a Significant problem
The real irony IS that the matenal problems arising In recent months were III
regulated Iflstltutrons in certalfl markets. Many regulated institutions, both In the
U.S and elsewhere, appear not to have fully appreciated all of the nsks associated
with the securitized assets on their balance sheets or the many risks associated
with commitments to provide liquidity to off-balance sheet vehicles, such as
conduits and structured investment vehicles.
Detenoratlng subprlme mortgage performance over the last several months led
Investors to question their assumptions about the credit quality and value of many
assets. In July, as default rates surpassed their models' proJections. ratings
agencies downgraded billions of dollars worth of subpnme mortgage backed
seCUrities
The statement by ratings agencies that they were unable to accurately characterize
the default probabilities of subprime mortgages created broader uncertainties In
financial markets. Not surpriSingly, investors reacted by reassessing and repricing
risk across all market segments that relied heaVily on the use of ratlflgs, particularly
in complex, structured credit products. Predictably, given the Iflterconnectedness of
our capital markets, the influence of this development was global
The reassessment of risk has played out more rapidly In some markets than In
others, In certain asset classes, risk has been reassessed and repnced fairly
quickly as Iflvestors gained confidence In their fundamental assessments In such
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11/6/2007
Page 7 of 8
markets, liqUidity has returned and markets are opelatlllg normally. Good examples
would include world equity markets. sovereign debt markets. and Investment gl'ade
corporate debt.
On the other hand, some sectors that are cilaracterlzed by more complex seCUrities
or that rely mme heavily 011 securitization and ratings -- such as the jumbo
mortgage market. Ule level aged loan market. and the asset backed commerCial
paper market -- are stili operating under' some stress With Impaired liqUidity.
CondltlollS are better ttlOr) they were a few weeks ago. and we continue to see
Improvements. but It will take 10n~Jer for these sectors to fully recover
Market-based effol,ts and mitlatives are ernerglllg to address some of the current
challenges In n18 capital markets, I am pleased that yester'day a group of
commercial banks announced tilelr mtent to establish a master condUit to help
Improve liqUidity In the asset-backed commercial paper marketplace, The market
participants anel rnvestors who may voluntarily partiCipate in thiS enhanced facility
recognize the benefit of such a structure. The leading finanCial Institutions as well
as investors realize the Impmtance of Improved liqUidity In the high quality, asset
backed commercial paper sector - a sector of the market With great importance for
securitized assets such as mortgages, as well as for the broader capital markets,
ThiS IS promising Just as In the mortgage market, we need to work on parallel
tracks, addreSSing current concerns as well as addreSSing poliCY Issues to aVOid
repeatlllg the recent market turmotl,
Treasury and the President's Working Group are conducting a comprehensive
review of such issues, including two areas that have a direct relationship to the
events III the mortgage markets
First. It IS clear that we must examine the role of credit rating agencies Irlcludlrlg
transparency and potenlial conflicts of Interest. We must also assess If regulations
and supervIsory poliCies are encouraging an over-reliance on ratlrlgs by finanCial
IIlstltutlons and Irlvestors.
Second. we must continue to address flnanciallnstitulion risk management and
related regulatory Issues In particular, we must ensure that they adequately take
into account the flsks posed by protracted periods of market Illiquidity or the nsks
posed by a reduced ability to securitize and sell loans, mcludmg leveraged
syndicated loans and mortgages
Our bank regulators must evaluate regulatory capital reqUirements appllcalJle to
bank exposures to off-balance sheet vehicles. Transparency IS Important here. so
we Will also review the accountmg rules that are applicable to off-balance sheet
vehicles
We Will examine other areas that al'e Indirectly related to the mortgage market
which nevertheless Impact our capital markets, ranging from enhanCing the
management of counterparty credit risks. to market Infrastructure Issues, to issues
surrounding reportlrlg and risk disclosure, to evaluating the Important role of
Irlvestors and. finally. how our long-standlrlg regulatory structure and tools respond
to toclay's contlrluously evolvlrlg flrlanclal system
ConclUSion
Innovation IS ti,e hallmark of our capital markets and it brings With It Significant
benefits to indiVidual Irlvestors and Olll' overall economy However, IllnOvatlon often
outpaces regulation That IS not surpriSing, and we would not want t\ the other way
around If It were. we would have less competitive and effiCient markets, which
would ultimately stifle economic growth It would mean fewer jobs and lower wages
However. when problems arise, we need to shlrle a light on them and move to
address them Irl a balanced way. Today it IS clear that we need to do just that. We
have a lot of work to do We need to ensure yesterday's excesses are not repeated
tomorrow.
As the mortgage and credit markets contlllue to adjust. all of us - pollcymakers and
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1116/2007
Page 8 of8
market participants -- will no doubt learn new lessons, Through a dedicated effort
by all parties, we will work to stl'ike the right balance, pl'Otect consumers and make
mortgage capital widely available to Americans ready to be homeowners,
-30-
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October 16, 2007
HP-614
Secretaries Paulson and Gutierrez Call for Permanent Extension of Internet
Tax Moratorium
Washington,DC--US Treasury Secretary Henry M Paulson and Commerce
SecretalY Carlos M Gutierrez Issued a statement today call1l1g on Congress to
make permanent the moratorium on Internet access taxes and on multiple or
discrimlllatory taxes 011 electronic commerce. The HOLise IS scheduled to take up an
extension of the Internet Tax Moratorium today.
"Although we recognize that a temporary extension IS better than letting the
moratorium expire, we are extremely disappointed that the legislation does not
extend permanently the moratorium on Internet access taxes and on multiple or
diSCrIminatory taxes on electronic commerce. The Internet is an II1novative force
that opens up the vast potential economic and SOCial benefits of electronic
commerce.
"Preventing the taxation of Internet access and keeping the Internet free of multiple
or discriminatory taxes will help sustain an environment for Innovation, help ensure
that consumers continue to have affordable access to the Internet, and strengthen
the foundations of electronic commerce as a vital and growing part of our
economy.
"We look forward to working with Congress as the process moves forward to take
advantage of this bipartisan opportunity to extend the moratorium permanently."
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11/6/2007
Page 1 of3
10 vIew
or pnnt the /-,UI- content on thiS page, aownloaa the tree AOObe® AC[OiJqtCSJ Heao.erCSJ.
October 16, 2007
HP-615
Testimony of Deputy Assistant Secretary McDonald on Technical Assistance
Washington, DC-- Mr. Chairman and Members of the Committee, thank you for the
opportunity to testify today about Treasury Department personnel serving in Iraq
and Afghanistan.
Treasury personnel serving In these two countries represent an important part of
Treasury's overall international presence. In comparison to other agencies testifying
today, my Department's international presence IS relatively small, but the
significance of the economic and financial issues that Treasury covers is large. In
Iraq, Afghanistan and elsewhere, Treasury personnel pursue objectives that are
central to the Department's mission "to promote the conditions for prosperity and
stability in the United States and encourage prosperity and stability in the rest of the
world."
Treasury's overseas personnel fall broadly into three categories. Treasury attaches
advocate the adoption and implementation of sound policies - policies to spur
economic growth and to make the international financial system more efficient,
stable and resistant to abuse by criminals and terrorists. Currently, Treasury has
eight overseas attaches. The second category, Treasury technical assistance
providers, help developing, transition and post-conflict countries build the human
and institutional capacity they need in order to implement sound policies. Currently,
Treasury has 55 technical assistance advisors posted in 37 countries and another
70 advisors working on intermittent tasks in 47 countries. Finally, a number of
specialized offices and Treasury bureaus have officials posted overseas -- for
example the Office of Foreign Assets Control and the Internal Revenue Service.
oversee the second category, Treasury's international assistance program, but
work very closely with those who manage the attaches and other overseas
personnel. In a previous job, I was the head of a special task force set up to provide
"back office" support to Treasury officials serving in Iraq and Afghanistan.
Let me turn to the focus of today's hearing: the recruitment, retention and care of
overseas personnel in Iraq and Afghanistan. Above ali, I would like to emphasize
that Treasury places great importance on the careful recruitment, preparation,
deployment and reintegration of all of our overseas personnel -- in particular for
those serving in Iraq and Afghanistan. Over the past 5 years or so, we have learned
a great deal about the challenges of stabilization and reconstruction work. Treasury
is collaborating with interagency partners and the Coordinator for Reconstruction
and Stabilization at the Department of State to strengthen the U.S. Government's
ability to respond quickly and effectively to future stabilization and reconstruction
challenges.
Treasury personnel in Iraq and Afghanistan include both USG officials and Personal
Service Contractors (PSCs). I note this distinction because it explains the
occasional differences that apply in some areas, such as recruitment and
compensation. Regardless of their employment status, however, we prepare and
support with care all Treasury employees in their overseas assignments. Indeed,
when it comes to service in Iraq and Afghanistan we salute them for their
willingness to put their lives on the line in support of the U.S. mission.
Recruitment
Recruitment varies somewhat according to the type of Treasury representation in
question. While the recruitment for attache positions starts with current USG
Treasury officials who respond to Treasury-wide internal postings, we have also
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1116/2007
Page 2 of 3
recruited excellent talent from outside tile Department - Including for Iraq
Recruitment for technical aSSistance, Irl particular the medium to long-term
assistance emphasized by Treasury's program, usually begins outSide of tile
Department. Nonetheless, we do at times utilize talent from current Treasury and
Federal Reserve employees, and many of our advisors are retired officials from the
Treasury, the Federal Reserve and other government agencies.
Indeed, the bulk of Treasury personnel In Iraq and Afghanistan at present are either
CUITent or former USG employees who have returned to career pOSitions. We have
a few offiCials who are from other agencies (for example a budget speCialist from
Peace Corps headquarters) loaned to us through reimbursable agreements And
we have Iwed a number of PSCs With special skills In areas like systems
development, banking, debt management, and energy sector finanCing. In general,
we have been able to attract a high level of Interest in our programs to date and
have not encountered Irlsurmountable difficulties in filling our vacancies. Our
compensation packages have become more generous over time as we keep pace
with State Department changes
Benefits
In general, Treasury benefit packages are Ilrle with State Department practices, and
are Identical With respect to allowances, danger pay, and In-country medical
coverage. Our benefit packages have become more generous over time as we try
to stay aligned With State Department practices. As noted earlier, tllere are
occasional differences depending on employment status. For example, the
compensation for a regular USG hire versus a PSC may differ slightly, Irl part
because PSCs have no guarantee of further employment. Despite the fleXibility
afforded, there are only mlrlor differences between offices -- notably on the mix of
leave opportunities -- and our pay rates are fairly standard and as generous as
permissible. There are a few options, again notably in leave policies, that volunteers
can choose from that will allow the Individual to craft a package tailored to their
needs and deSires. For example, Treasury technical advisors who are on one-year
assignments can choose a mix of regional and home leave rest breaks. USG hires
on the other hand can have home leave after 24 months of continuous service.
I would now like to summarize information that IS particular to Iraq and Afghanistan.
Iraq
Treasury personnel have been present in Iraq since the first arrival of U.S. Civilians
in Baghdad in April 2003. Since then, over 75 Treasury personnel have served In
Iraq. While relatively small In number, Treasury officials have been highly
productive. Their early efforts contributed to the stabilization of Iraq's macroeconomy followlllg the fall of Saddam Hussein, the reconstitution of the Finance
Ministry and Central Bank, the negotiation of a major internalional debt relief
package, and tile Introduction of a new and stable Iraqi currency which is now used
throughout the country. More recently, Treasury personnel have contributed to the
successful negotiation of the International Compact With Iraq, strengthening Iraqi
budget execution, establishment of an electronic payments system, and the
Irlterdlctlon of terrorist finanCing Currently, Treasury has 13 full-time placements III
Iraq, including an attache, a deputy attache, 6 technical assistance prOViders, and 5
terrorist financing/financial crimes experts. In addition to the full-time placements,
Treasury sends a number of Intermittent personnel to support the miSSion. Treasury
has recently increased its overall effort in support of the President's "New Way
Forward."
At thiS time, all Treasury staff are based III Baghdad. We do not have staff based in
the ProvinCial Reconstruction Teams (PRT's), but Treasury offiCials travel wlthlrl
iI'aq In support of PRT missions and we are explOring ways to strengthen our
support. Treasury's Office of Intelligence and Analysis (OIA) and Internal Revenue
Service Office of Crimlllal Investigations are represented at the Iraq Threat Finance
Cell (ITFC) where OIA staff serve as the ITFC co-lead With the Department of
Oefense.
Afghanistan
Currently Treasury has three full-time placements based
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III
the embassy in Kabul
1116/2007
Page 3 of 3
including a Treasury attache focused Oil fiscal sustainabliity and financial sector
development and two technical assistance advisors working on debt Issues and
financial crimes enforcement capacity building Treasury and USAID are equally
sharing the costs of the technical advisOlS, and tile attache is funded out of regular
appropriations,
As In Iraq, Treasury personnel arrived in Kabul very SOOll after the cessatiorl of
hostilities, and have contributed to some significant successes, For example, the
first Afghan budget since the fall of the Taliban was crafted on a lap-top computer
by Fillance Ministry officials worklllg slde-by-side with a Treasury budget adVisor,
Treasury's debt management experts have Ilelped Afghanistan secure over $10
billion international debt relief and build capacity to aVOid falling back into
unsustainable debt. Treasury support to Afghanistan'S Financial Intelligence Unit
has expanded the reach of Central Bank regulation to include previously
unregistered hawalas and elements of the cash courier market, in addition to
improvlllg the reporting relationship With the country's formal banking institutions
Finally, Treasury's attaclH~s Ilave helped the Afghan government meet ItS IMF
program benchmarks and facilitated ItS Interactions with donor agencies, Includlllg
the World Bank and the Asian Development Bank
In Country Casualties and Medical Care
Treasury personnel are subject to the same risks as other civilian US personnel In
Iraq and Afghanistan, To do our Job effeclively, we must IIlteract with Iraqi and
Afghani government officials and venture outSide of the International Zone or
confines of the embassies, Treasury has been fortunate that we have suffered no
casualties to date, As for medical care, Treasury employees in both countries are
respectively under Chief of Mission authOrity and are eligible to use Department of
State and Defense medical system and other health resources available in country,
We are grateful for access to those services In addition, Treasury reimburses
PSCs for 50% of their medical insurance and pays for 100% of personal
accident/war risk IIlsurance, Employees are covered under the Office of Workers'
Compensation (OWC) Programs for compensable illnesses, diseases, or injUries
identified during and after deployment. Under the OWC Program, employees are
eligible for medical care at private sector medical facilities for occupational illnesses
and diseases at no cost to them
In clOSing, I would like to emphasize that the Department of the Treasury IS
committed to recruiting and cal-ing for expert personnel who will continue to serve
our country's interests in Iraq, Afghanistan and elsewhere, I appreciate the
opportunity to present IIlfOrmatlon on our program to the Committee, and I look
forward to any questions you may have,
-30REPORTS
•
Appendix
http://wwwtreas_gov/presslreleases/hp615.htm
1116/2007
SUMMARY
Treasury Employees Deployed to a Combat Zone
PERSONNEL WOUNDED OR KILLED
MEDICAL CARE
DEPLOYMENT INCENTIVES
POSITIONS REIMBURSABLE BY STATE/USAID
CONTRACTORS UNDER TREASURY SUPERVISION
TYPES OF ASSIGNMENTS
EMPLOYEES SERVING ON PRTs
°
All staff deployed under Chief of Mission (COM)
authority and are therefore eligible for all life support
services offered by Mission Medical Clinic and Army
Medical Corps. Under the OWC Program, employees
are eligible for medical care, at no cost, for
occupational illnesses, injuries, and diseases, identified
durina or
o 35% Hardship Differential (USG(PSC)
o 35% danger pay (USG(PSC)
o 3 or more rest/regional breaks, add'i admin leave
(Employee choice)
o Increased annual leave ceiling (USG/PSC)
o Rollover of compensation when capped (USG/PSC)
o $200,000 personal accident/war risk insurance
(USG/PSC)
o 1 home leave after 24 months of continuous svc
(USG)
o Relocation allowances (USG/PSC)
o Retain all rights (USG) and worker's comp benefits
o
All staff deployed under Chief of Mission (COM)
authority and are therefore eligible for all life support
services offered by Mission Medical Clinic. Under the
OWC Program, employees are eligible for medical care,
at no cost, for occupational illnesses, injuries, and
diseases, identified during or after deployment.
o 35% Hardship Differential (USG/PSC)
o 35% danger pay (USG/PSC)
o 2 or more rest/regional breaks (Employee choice)
o 1 home leave after 24 months of continuous svc
(USG/PSC)
o Increased annual leave ceiling (USG/PSC)
o Rollover of compensation when capped (USG/PSC)
o $200,000 personal accident/war risk insurance
(USG/PSC)
o Relocation allowances (USG/PSC)
o Retain all rights (USG) and worker's comp benefits
(USGjPSC)
None of the positions are reimbursed.
USAID funded two OTA Resident Advisor positions for
one year each. The remainder of activities, including
funding the resident advisors beyond the one year
USAID commitment funded from Treasury
riation within the 150
In Iraq, Treasury is implementing the procurement of an automated bank modernization system. The contractor
utilized for that activity is supervised by a contracting officer and a contracting officer's technical representative
in Washin
Resident and Temporary Duty: Financial and
Resident and Temporary Duty: Financial and Economic
Economic Attaches, Technical Assistance: Banking,
Attaches, TFI/AML Policy, Technical Assistance: Debt
Budget Analysis and Budget Execution.
Management; TFI/AMl Institutional and Capacity
Buil
°
o
Page 1 of 1
October 17, 2007
HP-616
Treasury Announces Debt for Nature Agreement to Conserve Costa Rica's
Forests
Washington, DC-- The Governments of the United States of America and Costa
Rica, the Central Bank of Costa Rica, Conservation International and The Nature
Conservancy, have concluded agreements to reduce Costa Rica's debt payments
to the United States by $26 million over the next 16 years In return, the Central
Bank of Costa Rica has committed to pay these funds to support grants to nongovernmental organizations and other groups to protect and restore the country's
important tropical forest resources.
The debt for nature program was made possible through contributions of over $12.6
million by the U.S Government under the Tropical Forest Conservation Act of 1998
and a combined donation of over $25 million from Conservation International and
The Nature Conservancy.
The funds Will help conserve several Important forest areas III Costa Rica The Osa
Peninsula IS home to the scarlet macaw and many other bird speCies, as well as to
the squirrel monkey and Jaguar The La Amistad region contains the most
extensive tract of untouched forest in tile country and is the source of much of
Costa Rica's fresh water. The Maquenque Wildlife Refuge area is home to the
great green macaw, while the Tortuguero region contalils a rich variety of forest
ecosystems. The area north of Rincon de la VleJa contains dry forest, cloud forest.
and rain forest. Nicoya Peninsula's dry forests and mangroves are important to the
preservation of water resources In the region.
The Tropical Forest Conservation Act provides opportunities for eligible developing
countnes to reduce concesslonal debt owed tile United States while generatillg
funds to conserve their forests. The program with Costa Rica, the largest of the
funds created to date, marks the 12th established under the Bush Admillistration,
follOWing agreements With Belize, Botswana, Colombia, EI Salvador, Guatemala,
Jamaica, Panama (2), Paraguay, Peru and the Philippines. These programs,
together With one established With Bangladesh in 2000, will generate more than
$163 million over 10-25 years to protect tropical forests.
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October 17, 2007
HP-617
Secretary Paulson to Deliver Speech on India
Treasury Secl'etary Henry M Paulson, Jr. Will speak next week on his upcoming trip
to India focusing 011 India's rise as an Important player on the global economic
stage.
Who
Treasury Secretal'y Henry M Paulson, Jr,
What
Remarks on India
When
12:30 p.m. EDT, Wednesday, Oct. 24
Where
CounCil on Foreign Relations
1779 Massachusetts Avenue, NW
Washlllgton, DC
Note
Media Illterested III attending must RSVP by 5 p,m Oct. 23 to:
DCpressRSVP@cfr.org. Space IS limited.
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11/6/2007
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October 17.2007
HP-618
David G. Nason, Assistant Secretary for Financial Institutions
Remarks on Financial Regulation
Before the Exchequer Club
Washington- Thank you for inviting me to Jorn you today at this luncheon I am
honored to have the opportunity to speak to this distlnguislled group of financial
services Industry profeSSionals and poliCY leaders. In its 47th year. thiS group IS
well regarded as a place where important policy Issues are contemplated and
solutions are advanced.
I am especially pleased to follow In the footsteps of other Treasury Department
offiCials who have offered remarks here at the Exchequer Club. three of with whom
I am fortunate to have worked With -- my previous Under Secretary for Domestic
Frnance Randal Quarles. my predecessor Emil Henry. and my current Under
Secretary for Domestic Finance Robert Steel who spoke here in April I would also
note that my Treasury colleague John Dugan. the current Comptroller of the
Currency. served as Chancellor of thrs distinguished clUb.
General Economic and Market Conditions
It has been an especially busy time at the Treasury Department. As you know.
there has been an adjustment takrng place rn the overall credit market and the
mortgage market In particular.
Largely because of lax underwriting. the mortgage market. especially the subprime
market. has been experrencing a high number and percentage of delrnquencies and
defaults. As a result. subprime mortgage-backed securities have performed
poorly. This has led investors to reassess the risk of these securities and as a
corollary to reassess their prrcing
Because of the interrelation of our capital markets. the concerns we first saw in
subprtme mortgages and related securities have had an impact on rnvestors'
confidence and on their assumptions about the credit quality and value of otherassets. espeCially asset-backed securities
ThiS has led to a rather Widespread reassessment of rtsk and a subsequent
revaluation across capital markets globally. In general. the marketplace reaction to
some of these excesses has been severe Many of the mortgage originators with
weak underwriting standards are out of business. Investors in the subpnme
mortgage market are experrencing heavy losses. especially those that failed to
perform adequate due diligence to understand the risks of their Investments We
expect the markets to continue to Impose disclplrne on those lenders and Investors
who took risks without proper drllgence
We have seen the effects In the finanCial markets. and it Will take time for these
market adjustments to play out. At the Treasury Department. we have been
actively engaged in the situation as It has continued to develop. Secretary Paulson
has been working With all finanCial regulators and with market partiCipants. At a
time like thiS when risk is being reappraised and market discipline is being Imposed.
confidence IS key. Having the Treasury Department led by a Secretary who has
spent his life in the finanCial markets. through good times and bad times. has been
fortunate for our country and the Treasury Department
Given the Importance of credit markets to the functioning of our economy. when we
experience a fundamental reappraisal like we have witnessed over the last several
weeks and months. it is essential that policymakers evaluate the potential Impact on
the economy. Fortunately. the capital markets stress is occurring against the
http://wwwtreas.gov/presslreleases/hp61S.htm
11/6/2007
Page 2 of 5
backdrop of a strong global economy However, as Secretary Paulson noted
yesterday, the ongolllg housing correclion, rooted In all eight year period of
exceptional tlouslng price appreciation, will continue to Impact the economy
adversely We contillually analyze thiS situation, knowing that It will take time to
work Itself out. In our View, the underlYing strength of ttle economy should enable
further continued growth Howevel, despite these strong fundamentals, It IS the
Treasury Department's View that the housing decline is the most significant current
risk to our economy.
Regulatory Blueprint
When Secretary Paulson arrived at the Treasury Department, he Immediately and
appropriately focused his attention on financial preparedness and the
competitiveness of our capitalillarkets. Today, I am here to talk about capital
markets competitiveness. Capital markets are the lifeblood of tile United States
economy They enable capital IIlvestments to fillance companies, which leads to
Job creation and economic prosperity. American consumers and investors benefit
from a vibrant and Ilealthy financial services sector that proVides opportunities to
access credit, save and Invest for the future, and IIlsure against risks. It is
Important. therefore, that our capital markets remain the best in the world.
The regulatory poliCies In place for finanCial Institutions must effectively protect
consumers and investors, while at the same time promote entrepreneuriallsm and
capitalism that are the foundation of our national economic success. These
qualities are not at alimutualJy exclUSive At the Treasury Department's Capital
Markets Competitiveness Conference earlier thiS year, regulatory effecliveness,
IIlcluding that of our regUlatory structure, was Cited repeatedly as a key IIlgredlent to
maliltallllflg our competitiveness Secretary Paulson highlighted regulatory
structure as a potential primary driver of trends cited as being troubling. He noted
that over the course of our nation's history, we have added multiple regulators to
respond to the Issues of the day. Our regulatory system has adapted to the
changing market by expandlllg, but perhaps not always by focusing on the broader
objective of regulatory effecliveness and protectlflg consumers and IIlvestors
Accomplishlllg the right regulatory balance is not a task to be undertaken Just once
and never agalll considered Markets are constantly evolVing, In recent years
particularly global markets, so it is very much an ongoing process We should
analyze and understand the rationale or Juslification for our current regulatory
structure as well as the ineffiCiencies It can breed along With the benefit and burden
of our regulations.
Pollcymakers have an obligation to assess continually whether our current
regulatory structure is serving America as well as it could Our current regUlatory
structure has been largely knit together over the last 75 years. Much of thiS
framework was put into place for particular reasons in a different time.
Therefore, under Secretary Paulson's leadership, the Treasury Department IS
engaged in a comprehenSive review of our regulatory structure to evaluate thiS
issue and propose solutions that achieve the right balance. Over the next several
months, we will produce a regulatory reform blueprint that will outlille
recommendations on how to modemize our regulatory regime The Treasury
Department IS undertaking this report on ItS own initiative, unlike prevIous reports
that were mandated by Congress. Examination and reexamination of finanCial
services regulation are essential to fuifilllllg the Treasury Department's mission to
promote the conditions for prosperity and stability III the United States and to
encourage prosperity and stability III the rest of the world. ThiS report will be
framed by the goal of ensuring America's competitiveness and anticipating potential
systemic Issues that may arise.
It has been ten years since the Treasury Department released a financial services
Industry study - a time dUring which the finanCial services Industry has undergone
significant change. Markets and capital flows ignore national boundaries and
tremors in one market can lead to Impacts across other markets. The Treasury
Department will take a holistic approach to reViewing tile current fmanCial services
regUlatory structure, taking into account all fillancial services industry players
Includlllg insurance, securities, and futures firms, in addition to depOSitory
Institutions, upon which most past Treasury Department studies have focused.
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Page 3 of 5
There is a rich tradition of this work coming from the Executive Branch In 1984
President Reagan's Administration produced the Blue Print for Reform under th~
leadersl11p of Vice PreSident Bush's Task Group on Regulation of Fll1anclal
Services. In 1991, PreSident Bush's Treasury Department authored a study known
as the Green Book Tl1ese reports shaped the debate for reform of regulation In the
1980s and 1990s. For instance, the 1984 and 1991 reports laid the foundation for
the ideas (such as functional regulation) carried through in the Gramnl-Leach-Bliley
Act of 1999
In preparing a I-egulatory reform plan, we will assess the current financial services
regulatory structure in the United States and make recommendations to modernize
overSight to fit demands of the marketplace. We believe that a 21 st Century
regulatory regime should
•
•
•
safeguard the safety and stability of the financial system,
maintain hlgl1 standards of both consumer and Investor protection, and
promote efficient and competitive capital markets.
As part of thiS effol1 and In order to Inform our work, the Treasury Department
published a Federal Register notice seeking public comment. We are asking for
thoughts on tOPICS including overlapping state and federal regulation, ways to
Improve market diSCipline and consumer protection, and the strengths and
weaknesses of haVing multiple regulators and multiple Federal charters for financial
Institutions.
We will focus our attention on depository institutions and securities, futures, and
insurance firms Our examination will include consideration of issues that are
specific to each of these three financial services functions. The Federal Register
notice raises what we believe are the Important questions for each of these areas
But, we do not believe that we should necessarily separate our work product or
recommendations among the three general areas under consideration. The
Federal Register notice also Includes a section of general questions to enable
consideration from a broad and Integrated perspective of certain Issues, Including
functional regulation, overall risk, principles for and of regulation, rules-based
regulation and macro-level regulatory structure models.
While thiS project was contemplated well before we entered this perrod of mortgage
market stress, the complexity of the mortgage market regulatory structure provides
an interesting backdrop. More people are now willing to consider and diSCUSS
regulatory structure and these events highlight the importance of the questions
posed In the Federal Register notice. In particular, at the federal level, there are
laws addressing mortgage fraud: disclosure: fair lending: unfair and deceptive
practices: and other aspects of the mortgage process. The regUlatory authorrty to
Implement these laws varies across different Federal agencies as does the
enforcement authority. States have also enacted numerous laws addreSSing
various aspects of the mortgage process. These state laws typically only apply to
certain institutions that operate within a particular state and are enforced by state
agencies. While there are various efforts underway Within the current structure to
Improve the process, we should evaluate fully how many of the problems were
related to the structure Itself.
These are significant Issues that many pollcymakers have conSidered over the
years Success of thiS Initiative Will not and should not be tied to short-term
accomplishments. Today, I have Identified the Issues and segments that we are
going to focus on during thiS project We will recommend specifiC changes to our
financial services industry regulatory structure. Some of the recommendations Will
be Immediately relevant to legislative and regulatory policy Issues. On these
matters, our hope is that the Treasury Department's report will spur near-term
tangible results. Implementation of other, longer-term recommendations Will be
subject to outside factors, but will be ready should support for these reforms
develop. Finally, our hope is that some of the recommendations Will shape debates
In the future when regulatory structure issues are considered
Government Sponsored Enterprise (GSE) Regulatory Reform
The last Issue that I would like to discuss with you today is GSE regulatory reform
This is an area where the current regulatory structure is clearly deficient. In a
period where the capital markets, espeCially the mortgage market, are undergoing
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11/6/2007
Page 4 of 5
stress, it inevitably leads to a question of tile proper role of the GSEs. The
regulatory structure of GSEs has had a long and tortured history. Looking back on
history, and given the current debate on GSE regulatory reform, the regulatory
framework establislled for Fannie Mae and Freddie Mac In 1992 that created Office
of Federal Houslllg Enterprise Oversight (OFHEO) appears to have been flawed
from the outset. However, It was the best that could be achieved at the time, and It
was largely and appropriately viewed as an improvement over what had eXisted
previously. Now is the time to build on the improvements made In 1992.
As many of you know, the Treasury Department has been and continues to be a
strong proponent of meanlllgful GSE regulatory reform. As has been well
documented, the current GSE safety and soundness regulator IS hindered by a
ilumber of shortcomings
•
•
•
•
•
there IS limited flexibility to set capital standards:
no receivership authOrity:
a bifurcation of regulatory authOrity with the Department of Housing and
Urban Development (HUD):
less authority to take enforcement actions: and
a requirement to go through the appropriations process to obtain funding
Put another way, these trillion dollar organizations are regulated by an entity With
less tools and authorities than a small community bank's regulator possesses As
Secretary Paulson recently noted in Congressional testimony, "[m)any argue that a
good solution would be for the GSEs to be regulated in a manner consistent With
regulation of large national banks. However, III our View, the GSE regulator should
have more tools available than does a bank regulator to take into account the
unique characteristics and tensions of the GSEs."
The Idea that the GSEs have unique characteristics that could create tensions or
potential problems IS not an ideological or partisan view. Policymakers have been
struggling With the IIlherent tension and the potential problems posed by the GSEs
for decades. In fact, a Treasury Department offiCial stated in testimony a few years
ago that "As the GSEs continue to grow and to play an IIlcreasingly central role in
the capital markets, issues of potential systemiC risk and market competition
become more relevant." That statement was not from a member of the Bush
Admlllistration Treasury Department, but rather from testimony delivered in March
of 2000 by former Under Secretary Gensler of the Clinton Administration Treasury
Department.
As we all know, Fannie Mae and Freddie Mac were established in part to help
provide a degree of liquidity to the secondary market for home mortgages to
increase the capital available for home mortgage financing. To perform that
miSSion. Congress granted the GSEs benefits and Imposed constraints. The most
Important benefit IS the market's mlsperceptlon that the GSEs are somehow backed
by the Federal Government. It IS ttllS misperceptlon that has provided the GSEs
with the ability to grow rapidly With little market diSCipline, and creates the potential
for the GSEs to pose systemiC risks
We have an opportunity to strengthen regulation of the GSEs. The House of
Representatives has passed a meaningful GSE regulatory reform bill that, while not
perfect, goes a long way toward addresslllg the issues that must be conSidered
Unfortunately, there has not been any action In the Senate on comprehenSive GSE
regulatory reform We Will continue to press for thiS, espeCially at a time when
Increased attention on the mortgage markets IS warranted
Unfortunately, the legislative focus now seems to be on lifting the retained portfoliO
caps put in place by OFHEO. ThiS IS an unfortunate development The reason
these caps were put III place are well documented and not worth rehashing. The
GSEs have made Improvements and are working to remedlate those problems, and
OFHEO has acknowledged their progress. However, deCisions impacting safety
and soundness should continue to be left to OFHEO, as Congress intended.
The housing market is undoubtedly going through a tranSition The Administration
has put forth a comprehenSive plan to address these issues, which include
passlllg Federal Housing Administration (FHA) modernization leglslalion: targeted
tax reform: and working With all mOl1gage market partiCipants to aVOid as many
foreclosures as possible. The GSEs can and should playa role In addreSSing
http://wwwtreas.gov/presslreleases/hpfl18.htm
11/6/2007
Page 5 of 5
current mortgage problems. and they can play ttiat mle with the cUl"rent portfolio
caps in place. The GSEs have ample opportunity to pi'ovide assistance through
additional securitization activity. WIIICII can assist multiple borrowers III comparison
to increaslllg the size of thell' retained mortgage portfolios In addition to the recent
portfoliO cap flexlbrllty granted by OFHEO. tile GSEs also Ilave additional fleXibility
under the portfolio caps as mortgages III thell eXlstlllg portfolios are paid down
There are no easy fixes to the current pmbleills In the houslllg market. But If we
are sel"ious about promoting a sound and resilient 1l0USIIlg finance system.
Congress must take action to pass a meallingful GSE regulatory I"eform bill.
Thank you for listening and. again. thank you for IIlvitlllg me to JOin you here today
I Ilope my remarks were Informative I would be happy to take a few of your
questions
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1116/2007
Page 1 of2
October 17, 2007
HP-619
Prepared Statement by Treasury Under Secretary David McCormick
in Advance of Meetings of the
G-7 Finance Ministers and Central Bank Governors,
the International Monetary Fund, and the World Bank
Washington, DC-- Good afternoon. I am looklllg forward to a very busy set of
meetings over the next several days.
Secretary Paulson will host G-7 Finance Ministers and Central Bank Governors
here at the Treasury on Fllday TileY will discuss current economic conditions and
financial market developments, trade, reform of the mternatlonal financial
institutions, development issues, and energy and the enVilonment among other
things. Clearly recent financial market turmoil will be a focal pOint and a good part of
the G-7 meetmg will be devoted to this issue.
The fundamentals of ttle US. economy remain strong even while overall growth IS
moderating. Consumer spendmg is good, unemployment remains low, export
growth is strong, the current account deficit has narrowed, and our budget Situation
has Improved considerably. We recognize the need to continue our efforts to raise
national savings and reduce the deficit. I am pleased to report that for the Justcomplete fiscal year, our deficit fell to 1.2 percent of GOP, and we remain on track
to balance the budget III 2012.
The global economy remains quite strong Wlttl a robust outlook for the remainder of
2007 and 2008. Importantly, there has been some rebalancing of domestic demand
growth and this IS belllg reflected in somewhat smaller global Imbalances, with the
notable exception of Chma, which still has a rlsmg external surplus. As in the past.
Ministers will discuss the near-term outlook and prospects for growth enhancing
reforms m Europe and Japan
The strong global economy and well-capitalized financial institutions provide a
strong platform for addreSSing recent market turbulence. Fmancial authontles
throughout the world have acted to promote systemic stability. There are signs that
financial market conditions have begun to stabilize in some areas, although we
recognize that It will take some time to work through the recent difficulties.
The Issues raised by the recent turmoil are complex and require careful analysIs.
We must undertake thiS work quickly, but we cannot rush to Judgment In this light,
Secretary Paulson - working with the G7 has asked the Fmancial Stability Forum under the leadership of Bank of Italy Governor MariO Oraghi - to form a worklllg
group to look at the underlying causes of the turbulence and offer proposals In the
areas of fisk management, the accountmg and valuation of financial derivatives, the
role and methodologies of credit rating agencies in structured finance, and basic
supervIsory principles of prudential oversight of regulated financial entities. This
weekend, Mano Oraghi IS expected to brief the G7 on the working group's work
plan going forward with an expected fmal report to be delivered next Apnl. Finally
on this front and notwithstanding the recent turmoil, we should remember that the
globalization of capital markets has brought enormous benefits to the world broader chOices III financial products, greater prosperity, and expanded opportunity
The Secretary will raise the Issue of a clean technology fund, which PreSident Bush
mentioned two weeks ago as part of the Major Economies Meeting The Fund
would help finance clean energy projects m the developmg world by focusmg on
financmg the gap between traditional and more expensive clean technology. We
enVision that the fund will leverage bilateral donor resources, multilateral
development institution resources, and pnvate resources We look forward to
working with other countries to explore thiS concept and ensure the fund's success.
http://wwwtreas.gov/presslreleases/hp619.htm
11/6/2007
Page 2 of2
The G-7 meeting will also includ e an outreach dinner on sovereign wealth funds . In
particular , we seek to discuss the implications of these funds for an international
financial system fundamentally based on the principle of private sector allocation of
resources to their most efficient uses, and to emphasize our jOint commitment to
maintain openness to investment and to promote financial stabi lity . Th e Secretary
has invited Finance Ministry and sovereign wealth fund representall ves from China,
Korea, Kuwait. Norway, Russia. Saudi Arabia, Singapore and the United Arab
Emirates to join us . We look forward to a construcllve discussion
Over til e weekend, at the Internationa l Monetary and Financial Committee and
Development Committee meetings, we wi ll discuss reform of the international
financial institutions . On th e IMF , we are going to emphasize the importance of the
IMF implementing the new surveillance procedures on exchange rate regimes as
well as the need for fundamental reform of the governance structure to reflect the
rising weight of dynamic emerging markets. Our discussions on quota reforms are
ongoing and we wi ll continue to work towards a comprehensive agreement. We will
also emphasize that in tackling the Fund's medium-term financing picture , serious
conso lidation of expenditu res mllst be on the table in tandem with a review of the
income situation. On World Bank reform , we will have an opportunity to discuss
President Zoelllck's recently announced priorities and strategy and foclls on how
the Bank can best enhance its development impact in a changing global
environment .
http://wwwtreas.gov/presslreleases/hp619.htm
1116/2007
Page 1 of2
October 17, 2007
hp620
Treasury Officials Span the Country Teaching Financial Literacy
Washington - U.S Treasury Department officials and bankers across the country
will tealll up Thursday to promote wise credit habits for US teens as part of the
American Bankers Association Education Foundation's annual Get Smart About
Credit Day. Students will participate in lessons on the responSible use of credit and
the Importance of a pOSitive credit history, as Treasury offiCials and staff travel to
schools nationwide to teach classes With local bankers.
Media interested In attendlllg classes with Treasury offiCials should contact Jennifer
Zuccarelli The follOWing events are open to the press
Syracuse, NY 8:21 am. EDT
Anthony W Ryan. Assistant Secretary for Financial Markets
Christian Brothers Academy
6545 Randall Road
Salt Lake City, Utah 900 a In. MOT
DaVid Miller. District Community Affairs Officer. Office of the Comptroller of the
Currency
West High School
241 N 300 W
PrOVidence, R.I 900 a.m. EDT
DaVid Nason, Assistant Secretary for Fillancial Inslltutions
Chanllo Regional High School
453 SWitch Road.
Boise, Idaho 930 a.m. MOT
Mary Kertz, Special Advisor. U.S.-China Strategic Economic Dialogue
Life's Kitchen
1025 S. Capitol Boulevard
Columbia. SC 1000 a.m. EDT
Roger Kodat, Deputy Assistant Secretary for Government Fillancial Policy
AC Flora High School
1 Falcon Drive
Wilmlllgton. Del. 1000 a.m EDT
Dan lannicola. Jr, Deputy Assistant Secretary for FinanCial Educalion
McKean High School
301 McKennan's Church Road
East Syracuse, NY 1030 a.m. EDT
Anthony W Ryan. Assistant Secretary for Financial Markets
East Syracuse Milloa High School
6400 Fremont Road
Catonsville, Md 1050 am. EDT
Justin Grove, Office of FinanCial Education
Catonsville High School
421 Bloomsbury Avenue
Catonsville, Md 1050 a.m EDT.
Thomas Kurek, Program Coordinator
Catonsville High School
421 Bloomsbury Avenue
http://wwwtreas.gov/presslreleases/hp620.htm
11/6/2007
Page 2 of2
EI Paso, Texas 11 :30 a.m. MOT
Anna Escobedo Cabral, US Treasul'er
Radford School
2001 Radford Street
Omaha, Neb. 1200 p.m COT
Alex Kaplan, Deputy to the Assistant Secretary Office for legislative Affairs
College of St.Mary's
7000 Mel'cy Road
Manlius, NY 1215 p.m. EDT
Anthony W Ryan. Assistant Secretary for FlClancial Mal"kets
Fayetteville-Manlius High School
8021 E. Seneca Turnpike
Alexandria, Va. 1230 p.m. EDT
Alise Deleon, FlClancial Education Analyst
T.e. Williams High School
3330 King Street
Omaha, Neb 230 p.m COT
Alex Kaplan, Deputy to the Assistant Secretary Office for legislative Affairs
College of St. Mary's
7000 Mercy Road
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http://wwwtreas.gov/press/releases/hp620.htm
11/6/2007
Page 1 of 1
October 19, 2007
HP-621
U.S. Treasurer to Visit Cleveland
to Offer Mortgage Financing Advice
The United States Treasurer Anna Escobedo Cabral will visit South Elyria
Cleveland, Ohio Thursday to deliver advice to homeowners who may be
experiencing difficulty paying their mortgage and may face foreclosure.
If)
More than half of borrowers who go into foreclosure never reach out for help.
Treasurer Cabral will deliver remarks at the South ElYria Neighborhood
Development Corp Annual Education Luncheon to discuss the mortgage financing
services and options offered by counseling agencies, which may help homeowners
find a more affordable mortgage.
The Treasurer's efforts are part of Treasury's Initiative to help sub prime
homeowners stay in their homes. Secretary Paulson and U.S Housing and Urban
Development Secretary Alfonso Jackson last week encouraged the creation of
HOPE NOW, a new national alliance of leading counselors, servicers, investors
who will work together to educate more homeowners about their mortgage options.
The announcement follows on President Bush's broad plan to help homeowners,
announced iJ1 August.
The Treasurer is available for media interviews and the following event IS open to
media.
Who
U S Treasurer Anna Escobedo Cabral
What
South Elyria Neighborhood Development Corp Annual Education Luncheon
When
Thursday, October 25, 1130 a.m. (EDT)
Where
Elyria Holiday Inn
1825 Lorain Blvd.
ElYria, Ohio
http://wwwtreas.gov/presslreleases/hp6~1.htm
1116/2007
Page 1 of 1
October 19, 2007
hp622
Treasury Continues to Pressure Burma's Regime
Action Targets AcldltlOna/ Senior Burmese Officials
The US. Department of the Treasury today IS designating 11 additional senior
Burmese Government officials, cuttlllg them off from the US. fillancial system
Treasury's action follows President George W. Bush's announcement today of
additional measures IIlcreaslllg U S sanctions against the military regime III Burma
"The President has made clear that Burmese offiCials will be held to account for the
violent oppression of their people," said Adam Szubln, Director of the Office of
Foreign Assets Control (OFAC). "Today's action targets eleven senior Burmese
offiCials, and we will continue to designate and expose those responSible."
Treasury's action follows President George W Bush's September 25,2007, speech
before the United Nations General Assembly in which he announced plans for
tightened U.S sanclions against the military regime in Burma The Treasury
Department subsequently designated 14 senior Burmese leaders on
Today's designations were made pursuant to Executive Order 13310, which
authOrizes the Secretary of the Treasury, in consultation With the Secretary of State,
to designate senior offiCials of the Government of Burma, the State Peace and
Development Council of Burma (the military regime that rules Burma), the Union
Solidarity and Development Associalion of Burma, or any of their successor
organizations, as well as any IIldividuals or entities that are owned or controlled by,
or actlllg for or on behalf of, persons whose property or Interests In property are
blocked pursuant to the order. Executive Order 13310 also blocked property and
interests In property of the four entities listed on ItS Annex, the State Peace and
Development Council of Burma, and three banks controlled by the Government of
Burma.
The Burmese government leaders designated today by OF AC are Brigadier
General Till Nalng Thelll, Minister of Commerce: Brigadier-General Thelll Zaw,
Minister of Telecommunicalions, Post, & Telegraph: Major-General Saw Tun,
Minister of Construclion, Dr. Chan Nyeln, Minister of Education, Colonel Zaw Min,
Minister of ElectriC Power 1, Major-General Hla Tun, Minister of Fillance and
Revenue: Major-General Saw LWIll, Minister of Industry 2: Soe Tha, Minister of
National Planning and Economic Development: Thaung, Millister of Science and
Technology and Minister of Labor; Dr. Kyaw Myint, Minister of Health: and
Brigadier-General Aung Thein Lin, Mayor and Chairman of Rangoon City
Development Committee
Treasury has previously designated 14 senior officials of the Government of
Burma As a result of Treasury's designations, any assets these IIldlviduals and
entities may have that are Within US. JUrisdiction must be frozen, and U.S. persons
are prohibited from transacting or doing business With them.
-30-
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11/6/2007
Page 1 of 1
September 27,2007
hp-578
Treasury Action Targets Violent Burmese Suppression
The U.S Department of the Treasury today IS designating 14 senior Burmese
Government officials In the wake of that government's longstanding oppression of
the Burmese people and its recent use of violence against peaceful demonstrators
Treasury's action follows PreSident George W Bush's announcement of plans for
tightenlllg US sanctions against the military regime in Burma, made before the UN
General Assembly on September 25,2007.
"We are today Imposing sanclions against senior offiCials of the Government of
Burma," said Adam Szubln, Director of the Office of Foreign Assets Control
(OFAC). "The President has made clear that we will not stand by as the regime
tries to silence the voices of the Burmese people through repression and
intimidation."
The designations were made pursuant to Executive Order 13310, which authorizes
the Secretary of the Treasury, in consultation with the Secretary of State, to
designate senior officials of the Government of Burma, the State Peace and
Development Council of Burma (the military regime IIlat rules Burma), the Union
Solidarity and Development Association of Burma, or any of their successor
organizations, as well as any Individuals or entities that are owned or controlled by,
or actlllg for or on behalf of, any person, whose property or Interests In property are
blocked pursuant to the order. Executive Order 13310 also blocked property and
IIlterests III property of the four entities listed on ItS Annex, the State Peace and
Development Council of Burma and three banks controlled by the Government of
Burma.
The Burmese government leaders designated today by OFAC Include Senior
General Than Shwe, Minister of Defense and Chairman of the State Peace and
Development CounCil (SPDC); Vice Senior General Maung Aye, Commander of the
Army and Vice Chairman of the SPDC: Lieutenant General Thein Sein, Acting
Prime Minister and First Secretary of the SPDC: and General Thura Shwe Mann,
JOlllt Chief of Staff, Armed Forces and Member of the SPDC. The other senior
officials of the Government of Burma named Include other members of the State
Peace and Development Council, key military officials, and other government
ministers
As a result of Treasury's designations, any assets these individuals and entities
may have that are wlthlll US Jurisdiction must be frozen, and US. persons are
prohibited from transactlllg or doing business With them
http://wwwtreas.gov/presslreleases/hp57&.htm
11/6/2007
-IP-623: Treasury Selects Professor for Competitiveness Study <br>on Financial Restatements
Page 1 of 1
October 19, 2007
HP-623
Treasury Selects Professor for Competitiveness Study
on Financial Restatements
Washington- The Treasury Department announced today the selection of
University of Kansas Professor Susan Scholz to conduct its examination of the
impact of and the reasons behind public company financial restatements. Secretary
Henry M. Paulson, Jr. discussed the need for a better understanding of this issue
when he unveiled the auditing and accounting stage of his capital markets
competitiveness initiative in May.
Numerous studies have pOinted to a significant increase in the number of financial
restatements during the past few years. Many reports attribute the growing number
of restatements to increased management and auditor focus on accurate financial
reporting due to the mandates in the Sarbanes-Oxley Act and greater financial
reporting review and enforcement by financial regulators.
However some studies suggest that while some financial restatements are clearly
material, immaterial financial restatements might pose significant and unwarranted
challenges to the capital markets. Immaterial restatements might unnecessarily
harm investor confidence by calling into question the credibility of company
management, auditors, and the financial reporting system as a whole.
Professor Scholz will examine the factors triggering publiC company financial
restatements, describe publiC company financial restatements, analyze the impact
of public company financial restatements upon investors and the capital markets,
and evaluate the significance of public company financial restatements. The study
will focus on restatements from 1997-2006. Treasury intends to make the study's
results public by early 2008.
Treasury selected Professor Scholz through the government procurement process.
She is an associate professor and Harper Faculty Fellow at the University of
Kansas School of Business. She received her doctorate degree in business
administration from the University of Southern California.
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Page 1 of 2
May 17, 2007
HP-408
:apital
Paulson Announce!
Markets,
Washington, DC- U.S. Treasury Secret,
initiatives today to enhance U.S. capital 1
strengthened financial reporting and a m
profession,
son,Jr. announced
veness, focused on
ld transparent auditing
"Strengthening the competitiveness of A
issue for me since taking office," said S€
to many diverging views on this issue, al
transparent financial reporting system ar
backbone of a marketplace investors ca'
markets must be based upon this princir
larkets has been a priority
'I have listened carefully
'Ion theme throughout: A
I profession form the
J strengthen our capital
T oday's initiatives are one piece of the fl
Competitiveness conference Secretary I
Commission Chairman Christopher Cox
finanCial reporting was one of the main t
representing investors, auditors, public (
conference raised other issues importar
markets, and Treasury will be unveiling
future.
Capital Markets
Irities and Exchange
rch. At that conference,
In among leading experts
lancial regulators. The
leness of our capital
in those areas in the near
Today's initiatives are part of an ongoinl
capital markets competitiveness. Initiati'
; the issues affecting U.S.
elude:
Provide Investors with A Transparen
Treasury Department intends to charter
recommendations to consider options a
soundness and its ability to attract and
asked former SEC Chairman Arthur Le'
Donald T. Nicolaisen to serve as co-choll;:'
IVI
'"1<:1
e Auditing System The
)mmittee to develop
then the industry's financial
rsonne/. Treasury has
. SEC Chief Accountant
IJUUllv forum.
Gain Better Understanding of Reasons for Increasing Financial Restatements
Restatements have soared during the past decade from 116 in 1997 to 1,876 in
Page 2 of 2
2006. Treasury intends to commission a rigorous analysis of the factors driving
financial restatements and their impact on investors and the capital markets.
Results of the analysis will be made public upon completion.
Additionally, the Treasury Department believes the following initiatives are
important to maintaining the competitiveness of our capital markets:
Enhance Financial Reporting U.S. Generally Accepted Accounting Principles are
comprised of more than 2000 individual pronouncements issued by various
regulatory bodies. Investors often seek information not provided under financial
reporting requirements. The Treasury Department is supportive of the SEC and the
Financial Accounting Standards Board's efforts to enhance financial reporting
transparency and accessibility for investors.
Streamline Accounting Requirements to Encourage International Companies
to List on U.S. Exchanges and Increase Investor Opportunities U.S. public
markets should not be closed off to companies that adhere to high quality
internationally accepted accounting standards. The Treasury Department is
supportive of the SEC's action to eliminate the U.S. GAAP reconciliation
requirement by 2009 of International Financial Reporting Standards reporting
companies and the continued convergence of U.S. GAAP and IFRS.
Secretary Paulson will continue to provide follow up steps to other ideas discussed
at the March conference.
United States - Department of The Treasury - U.S. Capital Markets Competitiveness
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"As the Treasury Secretary, my goal is to promote the conditions for
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competitiveness of our capital markets is central to that goal. Capital
markets are the lifeblood of our economy." - Secretary Henry M.
Paulson, Jr.
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Strengthening Our Capital Markets
The United States has the strongest capital markets in the world,
and this position is achieved through hard work and smart strategies
that keep up with a dynamic, global marketplace. Secretary Paulson
hosted a conference in March with some of the best and brightest
financial minds to examine ways to maintain U.S. capital markets
competitiveness and has embarked on multiple initiatives to
strengthen our markets.
07/20/2007
06/27/2007
06/19/2007
05/24/2007
05/17/2007
05/17/2007
05/1712007
03/09/2007
03/13/2007
11/20/2006
Under Sec Steel Statement on Basel II Resolution
Next Steps of Capital Markets Competitiveness Plan
Treasury Seeks Nominations on Accounting
Committee
Under Sec Steel Statement on 404 Action
First Stage of Treasury Capital Markets
Competitiveness Action Plan
Secretary Paulson OpEd Financial Reporting
Under Sec Steel Remarks on Capital Markets Action
Plan
Treasury Capital Markets Conference Schedule
Paulson Opening Remarks at Treasury Conference
Paulson November 2006 Speech on Capital Markets
Competitiveness
!eports
ianctions
•
Treasury Advisory Committee on the Auditing Profession
imali Business
Private Pools of Capital
The President's Working Group on Financial Markets recently
released guidance for private pools of capital, which include hedg~
funds, private equity and venture capital funds, to address systemic
risk and investor protection issues_ The guidance represents a
uniform view from Treasury and a broad group of key independent
regulators that heightened vigilance is necessary and desired to
address market developments.
09/25/2007
09/17/2007
07/11/2007
06/11/2007
03/06/2007
02/27/2007
S~cretary Paulson hosted a cont
in March to discuss the competiti
of America's capital markets with
financial experts representing pu
companies, regulators, policy ma
and investor advocates.
PWG Announces Private Sector Groups for Private
Pools of Capital
Asst Sec Ryan Remarks before SIFMA Asset
Managers
Under Sec Steel Testimony on Hedge Fund
Oversight
Asst Sec Ryan Remarks in Chicago on Hedge Funds,
Systemic Risk
Asst Sec Ryan Speech in Greenwich, CT
Under Sec Steel Remarks on Principles an.d
l:!lwww.treas.govlinitiatives!capital-markets!
Secretary Paulson spoke to Wan
Buffet about corporate governam
transparent financial reporting, in
rotection and many other issue~
affecting US. markets at TreasUi
Capital Markets Competitiveness
Conference in March.
KEY INITIATIVES
• CaR-ita I Markets Competitivene
• U.S. - China StrategiC Econom
Dialogue
• Keeping The U.S. Economy Gr
Open Markets, Investment & TI
• Secretary's Corner
11/6/2007
united States - Department of The Treasury - U.S. Capital Markets Competitiveness
Page 2 of3
GlJid~HnE1s fQr Private Pools of Capital
02/22/2007
President's Working Group Agreement on Principles
and Guidelines for Private Pools of Capital
Principles-Based Regulation
Secretary Paulson believes the U.S. financial regulatory system
should seek better managed, more competitive companies that earn
investor confidence through sound leadership, thoughtful
governance, and outstanding performance. While our existing
regulatory system was created to achieve this goal, we must seek a
system that is also flexible enough to adapt to an ever-changing
marketplace and that takes into consideration a more rigorous costbenefit analysis of new regulation.
05/17/2007
03/13/2007
02/27/2007
02/22/2007
11/20/2006
Under Sec Steel Remarks on Capital Markets Action
Plan
Paulson Opening Remarks at Treasury Conference
Under Sec Steel Remarks on Principles and
Guidelines for Private Pools of Capital
President's Working Group Agreement on Principles
and Guidelines for Private Pools of Capital
Paulson November 2006 Speech on CClpital Markets
Competitiveness
Last Updated: October 1,2007
http://www.treas.gov/initiatives/capital-m~rkets/
1116/2007
Jnited States - Department of The Treasury - U.S. Capital Markets Competitiveness
http://www.treas.govlinitiatives/capital-markets/
Page 3 of 3
11/6/2007
p-624: Statement by Treasury Secretary Henry M. Paulson, Jr. <BR>Following Meeting of G-7 Finan... Page I of 2
October 19, 2007
hp-624
Statement by Treasury Secretary Henry M. Paulson, Jr.
Following Meeting of G-? Finance Ministers and Central Bank Governors
Washington, D.C.- The G-7 FlIlance Ministers and Central Bank Governors Just
concluded their meeting. Recent global economic developments and fillancial
market turmoil dominated the discussion, though there was also a good discussion
on a number of Issues
Regardlllg the global economy and financial markets, the main focus was on the
implications of the turmoil for our economies, the extent to which the functionlllg of
various credit markets has Improved and what lessons we could draw from the
experience.
I reported to my colleagues that we confront these current challenges against the
backdrop of a strong economy - not Just in the U.S, but globally. Indeed, this IS the
first houslllg downturn in the past three decades In which U.S GOP growth has not
turned negative. Business investment has expanded in recent months, our exports
are being boosted by the strong economic growth of our trading partners and the
healthy Job market has helped consumer spending continue to grow.
The outlook for the remainder of 2007 and 2008 remains qUite healthy, influenced
heavily by the strong performance of emerging market economies - particularly
Chma - as well as some rebalancing of domestic demand growth In the Industrial
countries. In this regard, our European colleagues were able to point to the stronger
performance of their economies over the past year. The capitalization of our
financial institutions is remarkably strong, which is also a major help m addressmg
the current environment Our macroeconomic policy stances on the whole are
sound and there was complete agreement around the table that monetary poliCY
must continue to remam Vigilant in mailltainlllg price stability.
In the US I believe we have a healthy, diversified economy that Will contillue to
grow. But, despite strong economic fundamentals, the housing decline IS still
unfolding and I view it as the most significant current risk to our economy. The
longer housing prices remain stagnant or fall, the greater the penalty to our future
economic growth
Chairman Bernanke and I also reported on the steps the US. has taken to protect
the systemic stability of global fillancial markets and address the problems in the
mortgage financing sector, The US current account deficit, which was 6.75 percent
of GOP at the end of 2005, IS now 5.5 percent of GOP. I recognized the need to
Increase our national savings and contillue reduclllg the fiscal defiCIt. I was able to
report that for the Just-completed fiscal year, our defiCit fell to 1.2 percent of GOP,
and we remain on track to balance the budget III 2012. However, growing SOCial
insurance outlays pose a medium-term challenge to the fiscal outlook, which we
must address
The general feeling around the table was t1lat there are some markets are returnlllg
to normalcy as risk has been reassessed and repriced In other markets, thaI
reassessment will take longer, in part due to the complexity of underlying securities.
Competitive and innovative global markets bring many benefits - expanded Job
opportunities, broader prosperity, and widespread access to a diverse array of
financial products. Yet there are risks as well, and the Issues anslllg from the recent
turmoil are complex and require careful analYSIS I welcomed the update from
Mario Oraghi, Chairman of the FinanCial Stability Forum, on the Forum's review of
the underlying causes of recent finanCial market turbulence, and look forward to the
full report early next year. I also briefed my colleagues on the actions that were
being taken in the President's Worklllg Group on Financial Markets to address the
http://wwwtreas.gov/presslreleases/hp624.htm
1116/2007
tp-624: Statement
by Treasury Secretary Henry M. Paulson, Jr. <BR>F ollowing Meeting of G-7 Finan... Page 2 of 2
recent turbulence, and our comprehensive review of the relevant policy issues
including the role of credit rating agencies and securitization
We had a good discussion on appropnate reforms for the International financial
institutions. We heard from Ambassador Zoellick on the need to strategically deploy
the World Bank's assets and improve its development effectiveness. I am
encouraged by - and strongly support - Ambassador Zoellick's priorities and plan
for the World Bank. Regarding tile IMF, I emphasized the cnticallmperatlve of
firmly implementing the recent deciSion on exchange rate surveillance. I also
continue to urge a significant reform to the IMF's governance structure. Improvmg
the shares of dynamiC emerging markets, and I stressed that as part of the Fund's
consideration of ItS medium term financing picture, serious consolidation of
expenditures must be considered in tandem with a review of income.
We discussed the creation of an International clean technology fund to help
developing nations harness the power of clean energy technologies, and solicited
feedback on this proposal. This fund could be part of the broader major economies
initiative, in which the world's largest producers of greenhouse gas emissions will
work together to establish a new International approach on energy security and
climate change in 2008 that will contribute to a global agreement by 2009 under the
UN Framework Convention 011 Climate Change. We look forward to working With
other countries to develop this concept.
I urged my counterparts to step up efforts to restart the Doha talks, and emphasized
the equal importance of results in agriculture. non-agriculture market access, and
services - Including financial services. A Doha agreement IS withm reach and we
should not lose the opportunity before us. Success on Doha IS the smgle most
effective thing we can do to raise living standards around the world ReduCing
trade and investment barrrers and maintaining open markets IS crrtical to ensuring
that the benefits of trade are shared broadly. I also emphasized that the United
States is committed to wOl'kmg With our global trading partners to ensure a
successful Doha Round.
We reaffirmed our commitment to vigorously counter money laundering, terrorist
and proliferation financing in order to promote economic development and
safeguard the integrity of the global financial system. We discussed ways to deal
With Iran's pursuit of a nuclear capability and ballistic missiles, the regime's vast
financial support to lethal terrorist groups, and the deceptive financial tactics
employed by Iran to evade sanctions and mask illiCit transactions. We welcomed
the recent statement by the Financial Action Task Force highlighting the significant
threat Iran's illiCit conduct poses to the international finanCial system.
The Financial Action Task Force's statement has put the international financial
system on notice about the threat that Iran poses to the security and stability of the
international fmancial system I urge financial institutions everywhere to take
FA TF's action into account as they evaluate whether handling Iran-related business
is worth the risk.
http://www treas.gov/presslreleases/hp624_htm
1P-625: Statement of G-7 Finance Ministers and Central Bank Govemors<BR>October 19 , 2007
Page 1 of2
October 19, 2007
HP-625
Statement of G-7 Finance Ministers and Central Bank Governors
October 19, 2007
The global economy is In Its fifth year of robust growth. Recent finanCial market
turbulence. high oil prices, and weakness in the US housing sector will likely
moderate this growth. Nevertheless, our overall economic fundamentals continue
to be strong and emerging markets are providing critical impetus to the strength of
the world economy.
We remain committed to dOing our part In sustaining strong global growth. We
have acted resolutely to protect the systemic stability of global financial markets.
and monetary policy must remain Vigilant in maintaining price stability. We will
continue to pursue medium term structural reforms and fiscal disCipline.
Technological change and openness to trade and investment are essential for our
prosperity In a globalized world. We are committed to resisting protectionist
pressures and to a successful conclusion of the Doha Development round that
results in Significant new trade flows in the key areas of agriculture, non-agriculture
market access and sel'vices, especially financial services. Trade liberalization and
Aid for Trade are crrtical for global poverty reduction.
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
approprrate. We welcome China's decIsion to Increase the flexibility of its currency,
but In view of ItS rising current account surplus and domestic inflation, we stress ItS
need to allow an accelerated appreciation of its effective exchange rate.
FollOWing recent global market turbulence. the functioning of financial markets is
Improving. Strong global fundamentals and well-capitalized financial Institutions
provide a sound and resilient basis but uneven conditions are likely to persist for
some time and will require close monitoring.
Our response to recent financial turbulence must be based on full analysIs of ItS
causes. Securrtization and financial Innovation have contributed Significantly to the
growth of our economies. We expect market participants to address many of the
shortcomings that were exposed by recent events. To ensure a sound, transparent,
and comprehensive framework. we have asked the Financial Stability Forum (FSF)
to analyze the underlying causes of the turbulence and offer proposals In the areas
of liquidity and rrsk management; accounting and valuation of financial derivatives:
role, methodologies and use of credit rating agencies in structured finance; and
basIc supervisory principles of prudential oversight, including the treatment of offbalance sheet vehicles. We received an outline of the work plan from FSF Chair,
Mario Draghi, and look forward to his further reports at our upcoming meetings in
Japan and Washington.
We discussed progress made In Implementing the FSF recommendations on Highly
Leveraged Institutions. In this context, we welcome the work undertaken by private
sector representatives in the United Kingdom and the United States to develop
strengthened best practices.
We discussed World Bank and IMF reform We received a report from World Bank
President Zoellick on IllS Ideas for the Institution's work gOing forward and we look
forward to further discussing With him and other shareholders hiS plan for ensuring
the Bank successfully meets ItS evolving challenges in promoting economic growth
and poverty reduction. We thanked Rodrigo De Rato for his contribution to the
work of the IMF and look forward to working With the incoming Managing Director,
Dominique Strauss-Kahn. We remain committed to achieVing an ambitiOUS
http://www treas.gov/presslreleases/hp625 htm
11/6/2007
HP-625: Statement ofG-7 Finance Ministers and Central Bank Govemors<BR>October 19,2007
Page 2 of 2
package of fundamental reforms Quota shares and VOice should better reflect the
realities of the world ecollomy Illcluding the growing weight and role of dynamic
members. many of which are emerging markets. We also agreed that the vOice of
low Income countries should be enhanced We welcome the deCISion to modernize
the Fund's framework for surveillance. Including for exchange rates. and we look
forward to Its firm and even-handed Implementation IMF finances need to be put
on a sustainable footing. but concurrently. the IMF must undertake a serious review
of its actiVities and consolidation of ItS spending
We discussed the Importance of unified action to address energy security and
global climate change while supporting growth and economic development We are
committed to working With major economies and through the UN climate process to
that end We agree that market based poliCY measures should be effectively
deSigned to meet speCifiC conditions In each country. We noted the need for
scaling up Investments In cleaner and lower carbon technologies through eXisting
mechanisms such as the Clean Energy and Investment Framework and agreed to
explore the creation of a clean technology fund to support the deployment of clean
energy technologies to developing countries
Cross-border. market-based Investmellt IS a major contributor to robust global
growth. In thiS context we agreed that sovereign wealth funds (SWFs) are
IncreaSingly Important partiCipants III tile International finanCial system and that our
economies can benefit from openness to SWF Investment flows We see merit In
Identifying best practices for SWFs In such areas as Institutional structure. nsk
management. transparency and accountability. For reCIpients of governmentcontrolled Investments. we think It IS Important to build on pnnclples such as
nondlscnmlnatlon. transparency. and predictability. We are committed to
strengthening our dialogue With countries Involved and look forward to diSCUSSing
these Issues at our OutreaCh Dinner later thiS evening. We ask the IMF. World
Bank. and OECD to examine these Issues We will explore opportunities to
enhance Investment flows between our economies and continue our diSCUSSions on
mutual recognition of comparable securities regimes
We asked the Fund. the World Bank. and the African Development Bank to actively
support the Implementation of the "G-8 Action Plan for Good FinanCial Governance
In Africa" and to better align their strategies In thiS area We remain concerned
about the problem of aggressive litigation against HIPC countrres. We welcome the
steps already taken by the Paris Club to address thiS problem. urge all sovereign
creditors not to on-sell claims on HIPCs. and are examining additional steps that
might be taken. We discussed the Implementation Report on the G-8 Action Plan
for Developing Local Bond Markets In Emerging Market Economies and Developing
Countnes and welcomed the work underway. We calion all IMF members to
respond to the current Situation In Liberia and follow us In finanCing full debt relief at
the IMF
We remain committed to fighting money laundering. terrorist finanCing and other
illiCit finanCing InvolVing Similar risks to finanCial markets. and we commend the
FinanCial Action Task Force (FATF) for ItS ongOing work examining the risks of
weapons of mass destruction proliferation finance. enhanCing ItS surveillance of
global threats. and deepening ItS dialogue With the private sector. We call upon the
IMF and World Bank to continue their close cooperation With the FATF. and we
urge the FATF to collaborate IntenSively With Jurisdictions that have failed to
recognize International standards We look forward to meeting With other FA TF
Ministers next Spring to refresh the mandate of the FATF
We particularly commend FA TF for taking steps to protect the international finanCial
system from the various money laundering and terronst finanCing risks related to
Iran. In the wake of two unanimous UN Security Council Resolutions addreSSing
Iran's nuclear and ballistiC miSSile programs. and the FATF's actions Identifying the
risks of IlliCit finance assOCiated With Iran. financial Institutions are adVised to take
into account these risks.
http://wwwtreas.gov/press/releases/hp625.htm
11/6/2007
lp-626: Statement by U.S. Treasury Secretary Henry M. Paulson, lr.<br>at the International Monetary... Page 1 of 3
October 20, 2007
hp-626
Statement by U.S. Treasury Secretary Henry M. Paulson, Jr.
at the International Monetary and Financial Committee Meeting
Washington, D.C.- I welcome the opportunity to discuss global economic and
financial developments and IMF reform this mornillg. Let me take this opportunity
to thank Rodrigo de Rato for his able leadership of the IMF, for ttle reform
accomplished during his tenure and the groundwork laid for additional reform. I
look forward to working with Dominique Strauss-Kahn, as he takes on this role. Let
me also welcome my highly talented and experienced colleague, Tommaso PadoaSchioppa, as our new IMFC Chair
The World Economy
Today's meeting takes place agalilst the backdrop of continued strength In the
global economy, though downside risks have Increased following recent financial
turbulence. Real global GOP growth IS expected once again to be near 5% this
year and next. with emerging markets providing well over half of that growth. In
addition. there has been some progress toward strengthening domestic demand
abroad on a sustainable basis. which should help maintalll forward growth
momentum. Nonetheless. recent stress in financial markets is a reminder to all of
us that continued vigilance is required
Recent credit market events will impose some penalty on US economic growth, but
I expect continued growth Our financial Institutions are in a strong financial
pOSition, and our economiC fundamentals are healthy: low unemployment, nSlng
real wages. and strong global growth is boosting US. expol1s We have made
considerable progress in reducing the federal deficit in the past few years Our
fiscal year just ended with a bUdget deficit of 1.2% of GOP. This IS half the US 40year average. with growth of expenditures belllg at a 1O-year low. The FY2007
deficit was down to 1.2% of GOP compared to 1.9% last year and 3.6% in FY2004.
Key to the strength of the U.S economy is our commitment to open trade and
investment. as President Bush underscored III his public statement on open
economies this past May
Our financial markets are working through a I'eassessment and repricing of risk. In
some sectors, this reassessment has played out more quickly, liqUidity has returned
and markets are operating more normally. In other sectors that are characterized
by more complex securities or that rely more heavily on seCUritization and ratings.
conditions are imprOVing. but adjustment will take longer to play out. Fortunately,
the global economy's underlYing strengths should limit the negative effects that the
turmoil might have on global real economic activity We need to learn from these
events, and take steps to address the policy Issues that arise. We welcome the
work of the Financial Stability Forum on these Issues. and the participation of the
IMF in this work.
In recent years, we have witnessed a remarkable rise III cross-border official
assets, coupled with prOjections of continued rapid accumulation ThiS appears to
represent a significant structural shift In the International financial system, where
free market economies are fundamentally based on private sector allocation of
resources to their most effiCient uses. The IIlcrease in size and number of
sovereign wealth funds (SWFs), in particular, has received Increasing attenlion due
to their potential implications for financial markets and Investment. Our
fundamental premise IS that open financial markets and IIlvestment poliCies are
benefiCial to our well-being and SWFs, first and foremost, should be seen in thiS
light. That said, the growing Importance of SWFs merits cautious, well-conSidered
public policy responses The United States believes a multilateral approach to
SWFs that maintalils open investment policies IS in the best Interest of countries
that have these funds, and countries In which they invest Tile IMF IS uniquely
http://wwwtreas.gov/presslreleases/hp626.htm
1116/2007
tp-626: Statement by U.S. Treasury Secretary Henry M. Paulson, lr.<br>at the International Monetary ... Page 2 of 3
positioned to identify best pl-actices for SWFs, building on the eXisting Guidelines
for Foreign Exchange Reserve Management Best practices would provide
multilateral guidance to new funds on how to make sound decIsions on how to
structure themselves, mitigate any potential systemic risk, and help demonstrate to
critics that SWFs can be constructive, responsible participants In the International
finarlClal system. ReCIpient countries of SWF investment also have a responsibility
to maintain openness to investment and should work through the OECD to develop
best practices for inward government-controlled Investment Last night's G7
outreach dinner with countries that have sovereign wealth funds was an Important
Initial step in the process of developing consensus and collaboration around thiS
Important issue.
The successful conclusion of the Doha Round of trade talks IS both more difficult
and more important, as global growth slows and protectionist sentiments resurface
At thiS critical Juncture, major tradrng nations, both developed and developing, need
to step up and lower barners to trade to ensUl"e a successful Doha Round in order
to sustarn the future growth of global Incomes. As finance ministers, we have a
special responsibility to ensure that the benefits of greater openness In financial
services are fully appreciated
IMF Reform Agenda
The IMF IS an essential Institution for global monetary cooperation, and we place a
high prrorlty on supporting meaningful IMF reform In order to maintain its credibility
and relevance in the rapidly changing global economy.
Firm surveillance over exchange rates is at the very core of the IMF's
responsibilities In the international monetary system. The June 2007 reviSion of the
1977 Decision on Surveillance over Exchange Rate Policies was an extremely
important achievement, but rigorous Implementation IS essential. The IMF's ability
to carry out thiS pnorlty function will define its relevance In the global economy In
the years to corne. DiSCUSSion of exchange regimes and rates, and the spillover
effects of members' economic poliCies on other members, is the one area over
which the Fund can clalln a unique purview, which it should not sacnflce by failing
to meet ItS own responsibility for surveillance.
The IMF's governance structure needs fundamental reform to reflect the realities
of the evolving global economy. Quotas must be adjusted Significantly to give
greater weight to dynamic emerging market economies, while protecting the vOice
of the poorest countries. We repeat our commitment to forgo the additional quota
we would receive In the second stage increase beyond what we need to maintain
our pre-Singapore voting share. I call on all members to reenergize their work to
forge a consensus on a strong quota reform package in order to bolster the
legitimacy and relevance of the Fund and to keep members from dnfting away from
thiS critical global institution.
Wittl a structural declrne In IMF lending, the IMF's finances Ilave become
unsustainable. There has been mucll attention to possible new income sources
and the Crockett Committee has made a constructive contribution However, an
equally important part of the solution must be to seriously reduce spending by realigning staff and expenditures to focus on the IMF's core miSSion It IS time to roll
up our sleeves on the expenditure Side. A plan for the SWift reform of the Fund's
expenditure and staffing must be an early priollty for the incomrng Managing
Director. Alongside a concrete work plan for consolidation, we Will work on longerterm sources of income for the IMF.
The IMF has an Important role to play In low-income countries, prOViding policy
adVice and technical assistance In ItS core areas of expel1lse, and balance of
payments financing, when needed We welcome the IMF's efforts to re-focus ItS
engagement with low-income countries on addressing the macroeconomic impacts
of scaled up aid, but caution against the IMF's over-reachrng on longer-term
development issues better SUited to the multilateral development banks The IMF's
marn role witll respect to the millennium development goals must be to help
countries marntain macroeconomic stability and debt sustalnabillty, and accelerate
growth through appropnate macroeconomic frameworks To thiS end, Vigilant
application of the Debt Sustainabrlity Framework and renewed empllasis on the
importance of responsible borrOWing and lending deCISions must be a cornerstone
of the IMF's work III low-income countries.
http://www treas.gov/presslreleases/hp626 htm
1116/2007
p-626: Statement by U.S. Treasury Secretary Henry M. Paulson, Jr.<br>at the International Monetary... Page 3 of 3
We believe a clear division of labor between the IMF and World Bank. In terms of
areas of policy focus and respective finanCing roles, will serve to strengthen the
work of both institutions. We tl18refore welcome continued follow-up on the
recommendations of the Malan Report on Bank-Fund Collaboration
Other Key Issues
We must continue to apply robust efforts to combat illicit money flows to safeguard
the financial system from abuse, support development and economic growth, and
protect citizens wOI'ldwide. By implementing the Financial Action Task Force's
(FATF's) international standards on money laundering and terrorist financing,
countries worldWide can help make the global financial system an IIlhospltable
venue for terrorists, prollferators, narcotics traffickers, and other rogue actors.
FATF's close cooperation With the IMF and World Bank has been Vital to these
contillued efforts, and we applaud their sustained commitment.
Moving forward, we urge FATF to contillue its ongoing work to examille the risks of
WMD proliferation finance, and its efforts to identify and engage intensely with
Jurisdictions that have failed to implement international standards, Further, we call
on all countries to fulfill their UN obligations by Implementing UN Security Council
Resolutions 1540, 1718, 1737, and 1747 against WMD proliferation, particularly the
economic and financial provisions of those resolutions. Continued vigilance by both
the public sector and the private sector is vital to combatlllg abuse of the
IIlternational financial system by those who are pursuing weapons of mass
destruction and their delivery systems in defiance of the international community.
-30-
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1116/2007
1P-627: Statementoy Secretary Henry M. Paulson, Jr.<br> at the Development Committee Meeting
Page I of 3
October 21 , 2007
HP-627
Statement by Secretary Henry M. Paulson, Jr.
at the Development Committee Meeting
The global economic environment has evolved substantially in recent decades with
the increase in the size and sophistication of private capital markets, the growing
level of official and private development assistance, and the continuing rapid
expansion of international trade. Despite these positive developments, the World
Bank has a large unfinished agenda 111 promoting economic growth and poverty
reduction In the developll1g world At the same time it is also being asked to devote
resources toward addressll1g a growing list of global problems that require
collective actions. Recognizing that the resources of the World Bank Group are
IlIlllted while demands on them are risll1g, we fully support and encourage President
Zoellick's efforts to develop a long-term strategic approach to optimal deployment
and leveraging of the World Bank Group's resources in this changing environment.
Changing Development EnvlIDnment
In undertaking thiS task we must recognize that the needs and challenges of
developing countries have evolved and have become more complex. For the
poorest countries there continues to be broad agreement that IDA, the World
Bank's concesslonal window, will remain an essential tool, and we applaud
President Zoellick's efforts that have resulted In the IBRD and IFe Boards' recent
endorsement that these Institutions seek to contribute a combll1ed $35 billion for
IDA 15. Notwithstanding thiS positive development, the share of IDA resources
relative to other forms of development assistance is likely to conlinue to declille due
to the rapid growth in development assistance from other sources. While this aid IS
welcomed, the administrative challenges for developing country governments
arising from the growing number of donors and the increasll1g level of earmarking
can diminish overall aid effectiveness. We therefore strongly support IDA as an
organization that, because of ItS convening power, strong analytical work, and
country-based approach, can play an important role in helping recipient
governments align funding from multiple sources.
At the other end of the development spectrulll we see that a growing nUlllber of
middle-income countries are benefltll1g from improved access to private finanCial
flows. For these countries, the traditional World Bank product. cOlllposed of loans
combined With a package of tecllnlcal and adVisory serVices, IS no longer as
appropriate as in the past We believe the World Bank can conlinue to help tllese
countries but it Will require that the World Bank become more focused, efficient and
seleclive in seeking ways to provide ItS expertise where financing may no longer be
required.
We also are Increasingly aware that weak private sector activity In the poorest
countries as well as In large portions of Inlddle-income countries IS due to a
cOlllbinalion of factors including a lack of credit, investment resources and good
business practices on the one hand, and institutional barriers and governance
problems on the other. These impediments not only constrain domestic growth and
employment, as the private sector is ultimately the main driver of both, but prevent
developing countries from fully exploiting the opportunities offered by the rapidly
expanding volume of global trade. We believe a more integrated approach focused
on private sector-led growth is needed and applaud the Board of Directors' recent
deCision to deepen the connection between IFe and IDA as part of a larger growth
strategy for IFe to expand its private sector Investments In developing countries.
Long- Term Strategy
In developing a long-term strategy to address our challenges we believe that it must
http://wwwtreas.gov/presslreleases/hp627.htm
11/6/2007
IP-627: Statement by Secretary Henry M. Paulson, lr.<br> at the Development Committee Meeting
Page 2 of3
first be grounded in a few guiding principles World Bank engagement should be
limited to programs that clearly meet Its core mission of promoting economic growth
and poverty reduction, and that the manner rn which the World Bank engages rn
programs should reflect Its comparative advantages
Some areas where we believe tile Bank enJoys clear comparative advantage
Include infrastructure, private sectol' development, the benefits of trade
liberalization, donor coordination, and the development of public financial
management and accountability systems for management of public resources
The economic challenges posed by environmental threats and climate
change clearly present the Bank with opportunities to exerCise Its comparative
advantage Tile global public goods nature of these challenges pOints to the
usefulness of international approaches that can leverage the Bank's convening
power as well as Its financing capabilities We look forward to working With the
Bank and all the multilateral development Institutions through PreSident Bush's
major economies Initiative that focuses on collaborating With the world's largest
producers of greenilouse gas emissions, both developed and developing nations, to
establish a new international approach on energy security and climate change in
2008 that will contribute to a global agreement by 2009 under the UN Framework
Convention on Climate Change As part of that Initiative President Bush has
proposed the creation of a new International clean technology fund to help
developing nations harness the power of clean energy technologies. ThiS fund Will
help finance clean energy projects In ttle developing world, The PreSident has
asked me to coordrnate thiS effort - and I will continue to reach out to the
International community, including the development instrtution, In the coming
months to discuss how best to design, finance and implement such a fund
Exploiting the Bank's comparative advantages Implies that it should seek to
complement the activities of other donors including the regional development
banks, In thiS regard, we encourage the World Bank and the regional banks to
undertake more rigorous efforts to coordinate their country development strategies
along the lines of their respective comparative advantages.
As the World Bank attempts to maintain its engagement With emergrng economies
through the proviSion of new IIlnOvatlve and customized products, it should aVOid
duplication of services and financing that can be prOVided by the private sector,
Where consistent with the country-based model, the Bank should also seek to
unbundle its poliCY adVisory and techlllcal assistance products from its lending
services, In Its efforts to reduce ttle non-financial costs of dOing business With
these countries it must ensure that ItS environmental, social and fiduciary safeguard
poliCies are not diluted At all times the Bank needs to weigh the costs and benefits
of these new programs against expected development results.
We believe a long-term strategy must also address the Issue of how to make the
World Bank s public sector arms, the IBRD and IDA, and its private sector arms,
the IFC and MIGA, work in a more Integrated fashion to address the multiple
barriers to private sector development In IDA countries and in poorer or frontier
development areas of middle-income countries, Too often these institutions
operate in Isolation and address separate impediments to private sector
development when a more rntegrated approach is required We encourage
President Zoelirck to develop additional incentives to encourage the staff of these
institutions to work in a more rntegrated way to promote private sector
development. Likewise, It IS Important to deepen relationships with other
IIlstitutions, such as regional development banks and export credit agencies, which
also provide finanCing to companies in developrng countries.
As Paul Volcker has most recently reminded us in his commiSSion's rnvaluable work
on the Bank's anti-corruption actiVities, good governance is Vital to successful
economic development and the Bank must continue ItS vigorous efforts to
investigate and combat corruption In the Institution and ItS countries of operation
We look forward to working With PreSident Zoellick and other shareholders as we
carry this essential work forward.
It is essential that a long-term strategy focus on the need to Improve the effiCiency
of administrative expenditures Within the Bank Group, Including the quality and
flexibility of its human resources Too often the Bank Group has been slow In
redeploying its resources and has deployed the wrong mix of resources at the
http://wwwtreas.gov/presslreleases/hp627.htm
1116/2007
HP-627: Statement by Secretary Henry M. Paulson, Jr.<br> at the Development Committee Meeting
Page 3 of 3
expense of poor execution on new high priority programs Implementing more
budget discipline including comparisons of the costs and benefits of eXlstlllg
programs compared to new lIlitlatlves, combilled with tile Incorporation of proper
staff incentives to ensure that the required human resources call be deploy qUickly
to where they are most needed Will free up resources to support new strategic
priOrities as the global development environment evolves.
Lastly and most importantly, It IS Imperative that we contillue to focLis on the need
to Illlprove the achievement and reporting of concrete results from the Bank's
prOjects and programs. It remains the central mganlzlng principle for everything the
Bank does.
http://wwwtreas.gov/presslreleases/hp627.htm
11/6/2007
-IP-628: Treasury Onder Secretary for Domestic Finance<br>Robert K. Steel<br> Remarks before the ... Page I of 4
October 20. 2007
HP-628
Treasury Under Secretary for Domestic Finance
Robert K. Steel
Remarks before the Institute of International Finance
Washington- Thank you. I appreciate the invitation to be here today. And to those of
you who have traveled from abroad to be here, It is my privilege to welcome you to
the United States. For 25 years. the Institute of International Finance has been
committed to being an mfluentlal global association of fmanclal Institutions. Your
research. analysis, and best practices are always taken seriously, and it is an honor
to be here today. I feel especially honored to be included among such a
distinguished group of panelists.
Introduction - Regulation
Ifl
a Global Economy
As a former busmess person, I understand that the nature of business today is
global and without boundaries. None of us view our business models as beginning
or ending within the context of territoriality.
Regulation, on the other hand, has not histOrically taken that borderless
perspeclive. Today's tOpIC, regulation in a globalized economy, is something upon
which Treasury is spending considerable energy analyZing. We are doing our best
to examine ways of modernizing our regulatory approach to more accurately reflect
business models Ifl today's global finanCial system.
For example, recent action we have taken with regard to private pools of capital
reflect a more global regulatory approach. In February, the President's Working
Group on Financial Markets (PWG) released a comprehensive set of principles and
guidelines to address the two main challenges that private pools of capital, which
include hedge funds. private equity and venture capital. pose to our financial
markets: systemic risk and investor protection.
ThiS principles-based framework lays a strong foundation for how market
participants- investors, asset managers, creditors, counterparties, and
policymakers- should enhance their practices and fulfill their responsibilities
More recently. on September 25, we created two private-sector committees to
develop best practices for the hedge fund Industry. USlflg our principles and
guidellfles as a framework, these two committees - one comprised of asset
managers and the other comprised of investors - will develop best practices. In
these efforts, we are collaborating with our British counterparts, to build upon their
work underway.
Capital Markets Competitiveness
Making our regulatory structure more effective is one area we have been focuslflg
on at Treasury under a broader rubric of maintamlllg and enhancing US capital
markets competitiveness. Last November, Secretary Paulson gave a major speech
on capital markets competitiveness and identified three areas of priOrity (1) our
regulatory structure and philosophy, (2) our auditing and accountmg profeSSion, and
(3) legal and corporate governance Issues
Secretary Paulson hosted a conference in March on capital markets
competitiveness at Georgetown University. We heard from key policymakers,
consumer advocates, business representatives and academiCS. each With different
perspectives on ways to keep U.S. capital markets the strongest and most
innovative in the world. Several initiatives have been launched as a result of what
62S.htm
1116/2007
IP-628: Treasury Under Secretary for Domestic Finance<br>Robert K. Steel<br> Remarks before the ... Page 2 of 4
we heard at that conference
•
•
•
Advisory Committee on the Auditing Profession The Treasury Department
has chartered a non-partisan, public committee to develop
recommendations to address the challenges facing the audltlllg profeSSion,
Includlllg IIldustry concentration and competition, and employee recruitment
and retention.
Study on FlIlanclal Restatements Treasury has comlllissioned an academic
study to understand the reasons for the growing number of public company
financial restatements over the past decade. The study will explore potential
policy Implications
Regulatory Blueprint The Treasury Department IS working on a
comprel,enslve report that Will examine the regulatory structure and
philosophy of our financial services industry and the protections they offer to
investors. We will produce a blueprint that will outline recommendations on
how to modernize our regulatory regime to keep pace with a global mal'ket
place and uphold the highest IIlvestor protection standards.
Regulatory Blueprint
Our review of the US financial regulatory system is particularly relevant today, so I
would like to discuss thiS more in-depth
While our efforts to modernize regulation were contemplated well before we entered
the current period of mortgage market stress, issues of regulation are particularly
relevant today. as recent challenges III the credit and housing markets have
highlighted the need to modernize and streamline the U.S. regulatory structure.
Our fragmented regulatory system has complicated an already difficult situation
the housing and credit markets. Existing federal laws address mortgage fraud,
disclosure, fair lending, unfair and deceptive practices, and other aspects of the
mortgage process. But regulatory enforcement authority varies across federal
regulatory agencies.
III
Moreover, many states have enacted additional layers of regulation. These laws
often apply exclUSively to institutions that operate within a particular state, creating
confusion and compleXity. This creates a difficult environment for both regulators
and those being regulated. Our patchwork regulatory structure needs to be
streamlined and modernized.
We believe this issue is so important to our global competitiveness that Treasury
Department undertook this report on our own initiative, unlike previous reports
mandated by Congress. It has been 10 years since the Treasury Department
undertook thiS type of review and the fillancial services industry has evolved
conSiderably.
We will take a comprehensive approach as we examine our regulatory structure,
taklllg into consideration the entire financial services Industry, Including Insurance,
securities and futures firms, and a tOpiC that was the focus of most past Treasury
Department studles- the depOSitory Institutions
Our hope is that this regulatory paper would also have a long-lasting effect, helping
to shape the debate about longer-term regulatory reform, as have previous
Executive Branch works on fillancial services regulation For example,
Administration reports in 1984 and 1991 laid the foundalion for the ideas that
carried through In the Gramm-Leach-Bliley Act of 1999, such as functional
regulation.
Such a project gives us the benefit of thinking about what the ideal regulatory
structure should look like. If we were startlllg fresh and had a blank page, 110 one
would choose to draw a regulatory structure that resembles our current picture. For
this reason, we are seeklllg broad publiC comment on a series of Ideas that affect
our financial regulatory structure.
Too often discussions about ideal regulatory philosophy and structure have been
reduced to a black and white debate of rules vs. principles ThiS oversimplification
undermines the compleXity of these Issues, and IS not constructive The optimal
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11/6/2007
HP-628: Treasury Under Secretary for Domestic Finance<br>Robert K. Steel<br> Remarks before the '"
Page 3 of 4
construct should balance both rules and pnnciples A modernized approach
recognizes that we should be gUided by principles at an overarchlllg level
But regulation at the retail level will require some focus on rules, particularly to
protect less sophisticated market participants, where Investor protection must be a
paramount focus.
A key element of a modernized approach IS a benefit-burden analysis
Policymakers should reject calling for regulation just for regulation's sake. Instead,
we should engage in rigorous cost-benefit analysis of proposed and current
regulation.
Additionally, there must be engagement between regulators and the regulated
Pollcymakers must to faCilitate a move for constructive dialogue between regulators
and the entitles they regulate. There should be a clear process for bUSinesses to
engage with their regulators when they have questions or need clanflcatlon
Current Market Conditions
Let me conclude by spending Just a minute discussing an announcement made
earlier this week by private sector tJanks to create a potential market-based solution
to Improve liquidity in the asset-backed commercial paper (ABCP) markets.
As Secretary Paulson and I have said many times, the markets needed to reassess
and reprice risk. In early August, uncertainty regarding the future prospects of
mortgage-backed securities, particularly those with subprime exposure, caused
investors to reassess the risk of these securities and subsequently readjust and
reassess prices
ThiS uncertainty and subsequent illiquidity began to spread to the ABCP market,
tYPically a very liqUid and important market. After the initial repriclllg of risk. markets
begin to adjust and in most cases began a steady but gradual process of
improvement. The ABCP market, however, while shOWing some signs of
improvement. seemed to be Improving slower than other segments of the market
The particular risk of a disorderly unwindlllg of structured Investment vehicles
(SIVs) became a matter of focus for market participants and the Treasury
Department.
As part of our effort to Vigilantly monitor markets, we brought together market
participants to speak about market conditions, particularly conditions III the credit
markets. Throughout these diSCUSSions Treasury was In regular dialogue With
appropriate US and international regulators. It became clear III discussions With
IIlvestors across markets, that while there has been some improvement III the
ABCP market. thiS Improvement could be enhanced and complemented by market
partiCipants working together.
The structure they are developlllg IS expected to be temporary and serve as a
bridge, which Will prOVide some time for partlcipatlllg SIVs to restructure in a more
orderly fashion. The technical organization of thiS solution IS complex. Initial
progress is being made by the lead banks and partiCipation is expected to broaden
in the weeks ahead.
We believe that the effect of these complementary efforts should be to enhance the
current rate of improvement, and give further IIlvestor confidence to the Important
ABCP market. ThiS effort IS focused on Improving market condllions so as to benefit
all market participants, and not a particular subset of the market.
As regularly IIldicated, It will take a whlie for markets to re9alll full confidence even with this structure. But we are fortunate to have a backdrop of strong US
fundamentals and a growing global economy.
Thank you and I look forward to our diSCUSSion
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11/6/2007
lIP-629: Secretary Paulson's Plenary Remarks at the Annual International Monetary Fund and World ...
Page 1 of 2
October 22,2007
HP-629
Secretary Paulson's Plenary Remarks at the Annual International Monetary
Fund and World Bank Meetings
Welcome to Washmgton. I'm pleased with the new leadership we have at the
World Bank and the IMF. I have great confidence in Bob Zoellick and he has
clearly hit the ground running I am really looking forward to working with
DOillmlque Strauss Kahn--a proven leader. And a big thank you to Rodrigo de Rato
for his leadership over the last few years I wish him the best in his future
endeavors.
The Changmg Global EcononJlc and Fmancial Landscape
The context to these annual meetings is continued strong global economic
conditions and the recent finanCial turbulence. ThiS context reminds us of the
changing and challenging financial landscape and how imperative it IS that we
adapt ourselves and our institutions to meet these challenges Let me hit on a few
of the key changes we see First, deeper, more sophisticated, more globallyinterconnected capital markets have helped underpin growth in both developed and
developing countries, but have also created new compleXities. Second, global
growth and financial soundness depend increasingly on dynamic emerging market
econOmies, rather than overwhelmingly on industrial countries. Finally, accelerating
globalization has heightened our awareness of the links between energy and
environmental policies and longer-term global economic prospects.
International capital markets have become more effiCient and offer a growing array
of Innovative financial instruments. The volume of cross-border financial flows has
expanded substantially in Just tile last five years, as has tile daily volume of foreign
exchange transactions. Innovation brings Important economic benefits, promoting
growth through ti,e effiCient allocation of capital, increaSing access to credit and
helping spread risks more broadly But Innovation has also brought increased
compleXity, new risks, new challenges and some new problems, which are now
being examined by policymakers and regulators. We need to continue to be
vigilant. because all of our capital markets are not yet functioning normally. As we
move to address current problems, we must also address poliCy Issues to prevent a
repeat of recent excesses Cooperative bodies like the FinanCial Stability Forum,
the Basel Committee on Banking Supervision and the International Organization of
Securities CommiSSions have a key role to play Internationally, complementing
domestic regulatory responses.
Global economic trends are Inueasingly Impacted by developments In emerging
markets. China, India and RUSSia presently account for half of global growth.
Emerging markets as a whole are growing more than tWice as fast as IIldustnai
economies, and account for a rislIlg share of global trade and investment. Sucil
realities need to be reflected III InternatJonal financial and economic Institutions,
both in the focus of their work, and In their governance structures.
Any long-term view of global economic prospects must take Into account energy
security, deal with the global challenge of climate change and address
environmental impacts for future generations The cross-border nature of thiS
challenge pOints to the need for IIlternational approaches. President Bush's major
economies iniliatlve, to work with the world's largest producers of greenhouse gas
emiSSions to reach agreement by 2009, and his proposal for an international clean
technology fund are Important steps In tilis direction
Modernizing the International FinanC/allnstitutions
To remain relevant In thiS changlllg landscape, the IIlternatlonal finanCial IIlstltutlons
http://wwwtreas.gov/presslreleases/hp629.htm
1116/2007
HP-629: Secretary Paulson
s ~lenary Remarks at the Annual International Monetary Fund and World ...
Page 2 of2
must better define their core missions, and align staff and other resources
accordingly. Future credibility of the institutions also requires that governance
structures evolve to reflect new global realities
International Monetary Fund
A defining issue for the IMF is how to exercise effective surveillance over member
country exchange rate policies in a world of fixed and fleXible exchange rate
regimes The recent updating of the IMF's exchange rate surveillance mandate
was an essential step, and Implementation is equally critical. IMF staff needs to roll
up their sleeves, undertake thorough analYSIS, and put forward their Judgments.
Without meanlllgful exchange rate surveillance, governance and management
reform will ring I'ollow.
Fundamental changes to the IMF's governance structure to reflect the growlllg role
of dynamic emerging markets in the global economy must remain a priority. While
such changes are not easy to achieve, a strong, credible IMF is in all of our
interests. On behalf of the US, It is lime that we ask emerging markets to take on
greater responsibility in the international financial system. But it is fair for them to
ask for a greater share in representation in return.
Changes are also needed to put IMF finances on a sustainable footing. One part of
the solution must be to reduce expenditures by re-evaluating the IMF's core mission
and maklllg difficult deCisions on priOrities Hand-In-hand With this, we recognize
that we need to consider longer term sources of income for the IMF over the next
year.
Multilateral Development Banks
Multilateral development banks also must adapt while continuing to focus on their
core miSSions of economic growth and poverty reduction. On the one hand, there is
the challenge of their contilluing relevance in countries whose economic success
means they no longer need MOB finance. On the other, the poorest countries ~
espeCially in Africa ~ continue to need concesslonal assistance that is resultsoriented, performance-based and focused on each bank's comparative advantage.
We look forward to a successful replenishment of IDA to help meet those needs.
Fighting corruption, a fundamental challenge to growth and development, must
continue to be central to World Bank operations and poliCies, as the Volcker
committee has recently reminded us. In addition, access to energy and the
consequences of climate change have clear Implications for growth In the
developing world, and the World Bank can and must respond.
The World Bank must also enhance coordination among the World Bank Group
Itself to serve as one institulion on behalf of its clients. At the same time, It must
maintain a rigorous focus on defining, managing for, and achieVing the desired
results. AddreSSing these multifaceted challenges IS no small task, but one that
shareholders are demanding and deserve.
I look forward to working together to advance this important agenda
- 30-
http://wwwtreas.gov/presslreleases/hp629.htm
11/6/2007
-Ip-630: U.S., Iceland to Sign New Income Tax Treaty
Page 1 of 1
October 22, 2007
HP-630
U.S., Iceland to Sign New Income Tax Treaty
Treasury Deputy Secretary Robert M. Klmmitt Will join Icelandic Finance Minister
Arnl M. Mathiesen tomorrow, Tuesday, October 23, In signing a new income tax
treaty between the two countries
Who
Deputy Secretary Robert M Klmmitt
Icelandic FlIlance Minister Arnl M. Mathiesen
What
U.S.-Iceland Tax Treaty Signing
When
2 pm, EDT
Where
Diplomatic Reception Room (3311)
U.S. Department of the Treasury
Note
Media without Treasury press credentials should contact FI'ances Anderson at
(202) 622-2960, or frances.anderson@do.treas.gov With the follOWing information
full name, Social Security number and date of birth.
http://www treas.gov/presslreleases/hp630 htm
11/6/2007
-Ip-631: Treasury, fRS Extends Transition Relief for Deferred Compensation Plans
Page 1 of 1
10 view or pnnt tne /-'Ur content on this page, Gown/oaG the free AaODe® AcroDat® Keaaer®.
October 22,2007
HP-631
Treasury, IRS Extends Transition Relief for Deferred Compensation Plans
Washington, DC--The Treasury Department and the Internal Revenue Service
(IRS) announced today in Notice 2007-86 that the transition relief for compliance
with tile final regulations under section 409A of the Internal Revenue Code (409A)
has been extended generally for one year
Seclion 409A was effective on January 1. 2005 and all affected nonquallfied
deferred compensation plans have been required to comply with the statute since
that date. Under prior guidance. these plans were reqUired to comply In operation
With the final regulations beginning In 2008. Notice 2007-86. Issued today,
generally extends the tranSitional period for compliance With the final regulations to
December 31, 2008. The notice also confirms that tile Treasury Department and
the IRS expect to issue guidance regarding a correction program as soon as
possible.
The regulations provide gUidance regarding the requirements for deferral elections
and payment tlllling under section 409A. The regulations were in response to
legislation enacted by Congress In 2004 to address concerns involVing reported
abuses of nonquallfied deferred compensation plans
REPORTS
http://wwwtreas.gov/presslreleases/hp631.htm
1116/2007
Part III - Administrative, Procedural, and Miscellaneous
Notice of Additional 2008 Transition Relief under Section 409A
Notice 2007-86
SECTION 1. PURPOSE
This notice provides additional transition relief regarding the application of
section 409A of the Internal Revenue Code to nonqualified deferred compensation
plans. Generally, this notice extends to December 31, 2008, the transition relief that
was scheduled to expire on December 31,2007, as provided in Notice 2006-79,200643 IRS 307, and the preamble to the final regulations under section 409A (72 Fed. Reg.
19234 (April 17, 2007)) (the final regulations preamble). This transition relief revokes
and supersedes the transition relief provided in § III of Notice 2007-78,2007-41 IRS
780, and modifies the relief provided in § IV of Notice 2007-78 related to employment
agreements, as described below. This transition relief does not affect the guidance
provided in § IV of Notice 2007-78 related to predetermined cashout features, or the
guidance provided in § VI of Notice 2007-78, related to the application of
section 409A(b) (restrictions on certain trusts and other arrangements).
SECTION 2. BACKGROUND
Section 409A provides certain requirements applicable to nonqualified deferred
compensation plans. If a plan does not meet those requirements, participants in the
plan are required to immediately include amounts deferred under the plan in income
1
and pay additional taxes on such income. Beginning with Notice 2005-1,2005-1 CB
274 , the Treasury Department and the IRS have issued several notices and other
guidance providing transition relief intended to permit and promote compliance with the
requirements of section 409A. The Treasury Department and the IRS also issued
proposed regulations under section 409A (70 Fed. Reg. 57930 (Oct. 4, 2005)) (the
proposed regulations), and final regulations under section 409A in April 2007 (the final
regulations).
On September 10, 2007, the Treasury Department and the IRS issued Notice
2007 -78, granting certain transition relief intended to facilitate compliance with the
written plan requirements set forth in the final regulations. See § 1.409A-1 (c).
Commentators stated that although the Notice 2007-78 transition relief was helpful, the
transition relief in that notice did not adequately address the need for additional time for
service recipients and service providers to analyze all of their plans and make informed
and reasoned decisions regarding the changes that would be necessary to bring
existing arrangements into compliance with the final regulations. This notice addresses
these concerns by generally extending the transition relief currently scheduled to expire
on December 31,2007 through December 31,2008. Section III of Notice 2007-78 is
revoked and superseded by this notice.
2
SECTION 3. EXTENSION OF TRANSITION RELIEF
.01 Extension of Transition Relief Provided in Notice 2006-79
Section 3 of Notice 2006-79 is modified and superseded in accordance with
paragraphs (A) and (8) of this § 3.01.
(A) General rule. During 2008, taxpayers are not required to comply with the
requirements of the final regulations. Instead, they are required to operate a
nonqualified deferred compensation plan in compliance with the plan's terms, to the
extent consistent with section 409A and the applicable guidance (including Notice 20051). Where a provision of Notice 2005-1 is inconsistent with the final regulations,
taxpayers may rely upon either Notice 2005-1 or the final regulations. To the extent an
issue is not addressed in Notice 2005-1 or other applicable guidance, taxpayers must
apply a reasonable, good faith interpretation of the statute. Reliance upon the final
regulations is treated as applying a reasonable, good faith interpretation of the statute.
Taxpayers may not rely upon the provisions of the proposed regulations for
periods after December 31,2007, except that taxpayers may continue to rely on
sections II.E and VI.E of the preamble to the proposed regulations (relating to the
application of section 409A to partners and partnerships) until further guidance is issued
and sections XI.C (relating to changes in payment elections or conditions) and XI.H
(relating to sUbstitutions of non-discounted stock options and stock appreciation rights
for discounted stock options and stock appreciation rights) of the preamble to the
proposed regulations continue to apply to the extent provided in § 3 of Notice 2006-79,
as modified and superseded by paragraph (8) of this § 3.01.
(8) Section 3 of Notice 2006-79 modified and superseded.
3
(1) Paragraphs .01, .02, .03 and .04 of § 3 of Notice 2006-79 are modified and
superseded to reflect the general rule provided in paragraph (A) and to read as follows:
.01. Amendment and operation of plans adopted on or before December 31,
A plan adopted on or before December 31, 2008 will not be treated as violating
section 409A(a)(2), (3) or (4) on or before December 31,2008 if the plan is operated
through December 31, 2008 in compliance with the provisions of section 409A and
applicable provisions of Notice 2005-1 and any other generally applicable guidance
published with an effective date prior to January 1, 2008, and the plan is amended on or
before December 31, 2008 to conform to the provisions of section 409A and the final
regulations under section 409A (70 Fed. Reg. 19234 (April 17, 2007)) with respect to
amounts subject to section 409A. For such periods, to the extent an issue is not
addressed in an applicable provision of Notice 2005-1 or other generally applicable
guidance published with an effective date prior to January 1, 2008, the plan must be
operated consistent with a good faith, reasonable interpretation of section 409A, and, to
the extent not inconsistent therewith, the plan's terms. For purposes of this notice,
"generally applicable guidance published with an effective date prior to January 1, 2008"
does not include the final regulations.
Compliance with the proposed regulations is not required and compliance with
the final regulations before January 1, 2009 is not required. However, for periods
before January 1, 2008, compliance with the proposed regulations or the final
regulations will constitute reasonable, good faith compliance with the statute. For
periods after December 31, 2007 and before January 1, 2009, compliance with the final
4
regulations (but not the proposed regulations) will constitute reasonable, good faith
compliance with the statute. To the extent that a provision of either the proposed
regulations or the final regulations is inconsistent with a provision of Notice 2005-1 , or a
provision of the proposed regulations is inconsistent with a provision of the final
regulations, for periods before January 1, 2008, the plan may comply with the provision
of the proposed regulations, the final regulations or Notice 2005-1. To the extent that a
provision of the final regulations is inconsistent with a provision of Notice 2005-1 , after
December 31, 2007 and before January 1, 2009, the plan may comply with the
provision of the final regulations or Notice 2005-1 .
A plan will not be operating in good faith compliance if discretion provided under
the terms of the plan is exercised in a manner that causes the plan to fail to meet the
requirements of section 409A. For example, if an employer retains the discretion under
the terms of the plan to delay or extend payments under the plan in a manner that
violates section 409A and exercises such discretion, the plan will not be considered to
be operated in good faith compliance with section 409A with regard to any plan
participant. However, an exercise of a right under the terms of the plan by a participant
solely with respect to that participant's benefits under the plan, in a manner that causes
the plan to fail to meet the requirements of section 409A, will not be considered to result
in the plan failing to be operated in good faith compliance with respect to other
participants. For example, the request for and receipt of an immediate payment
permitted under the terms of the plan if the participant forfeits 20 percent of the
participant's benefits (a haircut) will be considered a failure of the plan to meet the
5
requirements of section 409A with respect to that participant, but not with respect to all
other participants under the plan .
.02. Change in payment elections or conditions on or before December 31,2008
The transition relief provided in section XI.C of the preamble to the proposed
regulations generally continues to apply through December 31,2008, with certain
clarifications described below, and subject to limitations for certain discounted stock
rights also described below. Accordingly, with respect to amounts subject to
section 409A, a plan may provide, or be amended to provide, for new payment elections
on or before December 31,2008, with respect to both the time and form of payment of
such amounts and the election or amendment will not be treated as a change in the
time or form of payment under section 409A(a)(4) or an acceleration of a payment
under section 409A(a)(3), provided that the plan is so amended and elections are made
on or before December 31, 2008. With respect to an election or amendment to change
a time and form of payment made on or after January 1, 2006 and on or before
December 31,2006, the election or amendment may apply only to amounts that would
not otherwise be payable in 2006 and may not cause an amount to be paid in 2006 that
would not otherwise be payable in 2006. With respect to an election or amendment to
change a time and form of payment made on or after January 1, 2007 and on or before
December 31 , 2007, the election or amendment may apply only to amounts that would
not otherwise be payable in 2007 and may not cause an amount to be paid in 2007 that
would not otherwise be payable in 2007. With respect to an election or amendment to
change a time and form of payment made on or after January 1, 2008 and on or before
December 31, 2008, the election or amendment may apply only to amounts that would
6
not otherwise be payable in 2008 and may not cause an amount to be paid in 2008 that
would not otherwise be payable in 2008. So, for example, where an amount would
otherwise be payable upon an event, such as a separation from service, an election in
2008 cannot change the amount that would be payable in 2008 if the service provider
separated from service in 2008. In addition, a deferral election may be made with
respect to an amount that is a short-term deferral within the meaning of proposed
§1.409A-1(b)(4), provided that the election is made before January 1, 2008 and before
the year in which the amount would otherwise have been paid. Also, a deferral election
may be made with respect to an amount that is a short-term deferral within the meaning
of final § 1.409A-1 (b)( 4), provided that the election is made before January 1, 2009 and
before the year in which the amount would otherwise have been paid.
This provision applies to elections or amendments by a service provider, a
service recipient, or both a service provider and a service recipient. A service provider
or service recipient may make more than one change or amendment under this relief,
provided that each such change or amendment is made in accordance with the
deadlines and conditions set forth in the applicable transition relief. For example, a
service provider that in 2005 elected to change the time and form of payment of
deferred compensation to a lump sum payment in 2010, may elect again in 2006, 2007
or 2008 to change the time and form of payment in accordance with this paragraph.
However, a service provider that in 2005 elected to be paid an amount in 2008 (and that
did not change such election in 2006 or 2007) may not in 2008 change the time and
form of payment to be paid in a later year.
7
Similarly, except as provided below with respect to certain discounted stock
rights, an outstanding stock right that provides for a deferral of compensation subject to
section 409A may be amended to provide for fixed payment terms consistent with
section 409A, or to permit holders of such rights to elect fixed payment terms consistent
with section 409A, and such amendment or election will not be treated as a change in
the time and form of payment under section 409A(a)(4) or an acceleration of a payment
under section 409A(a)(3), provided that the option or right is so amended, and any
elections are made, on or before December 31,2008. For this purpose, a stock right
will not be treated as payable in a year solely because the stock right is exercisable
during that year, if the stock right is also reasonably expected to be exercisable in a
subsequent year .
.03 Payments linked to qualified plans and certain other plans
The ability to link a payment election under a nonqualified deferred compensation
plan to an election under a qualified plan is extended through 2008. In addition, this
relief is extended to payment elections under nonqualified deferred compensation plans
that are linked to certain additional employer plans, including section 403(b) annuities,
section 457(b) eligible plans, and certain foreign broad-based plans. Accordingly, (i) for
periods ending on or before December 31, 2007, an election as to the time and form of
a payment under a nonqualified deferred compensation plan that is controlled by a
payment election made by the service provider or beneficiary of the service provider
under a qualified employer plan described in proposed or final §1.409A-1(a)(2), a plan
that includes a trust described in section 402(d), a plan described in section 1022(i)(1)
or (2) of the Employee Retirement Income Security Act, or a foreign broad-based plan
8
described in proposed or final §1.409A-1 (a)(3)(v), will not violate the requirements of
section 409A, provided that the determination of the time and form of the payment is
made in accordance with the terms of the nonqualified deferred compensation plan that
govern payment elections, as in effect on October 3,2004 and (ii) for periods ending
after December 31, 2007 and before January 1, 2009, the rules discussed in (i) will be
applied by reference to the provisions of the final regulations only. For example, where
a nonqualified deferred compensation plan provides as of October 3, 2004, that the time
and form of payment to a service provider or beneficiary will be the same time and form
of payment elected by the service provider or beneficiary under a qualified plan, it will
not be a violation of section 409A for the plan administrator to make or commence
payments under the nonqualified deferred compensation plan on or after January 1,
2005, and on or before December 31, 2008, pursuant to the payment election under the
qualified plan. Notwithstanding the foregoing, other provisions of the Internal Revenue
Code and common law tax doctrines continue to apply to any election as to the time and
form of a payment under a nonqualified deferred compensation plan .
.04 Substitutions of non-discounted stock options and stock appreciation rights
for discounted stock options and stock appreciation rights
Notice 2005-1, Q&A-18( d) provides that it will not be a material modification to
replace a stock option or stock appreciation right otherwise providing for a deferral of
compensation under section 409A with a stock option or stock appreciation right that
would not have constituted a deferral of compensation under section 409A if it had been
granted upon the original date of grant of the replaced stock option or stock appreciation
right, provided that the cancellation and reissuance occurs on or before December 31,
9
2005. Section XI.H of the preamble to the proposed regulations extended the period
during which the cancellation and reissuance may occur until December 31, 2006, but
only to the extent a cancellation and reissuance in 2006 does not result in the
cancellation of a deferral in exchange for cash or vested property in 2006. Except with
respect to certain discounted stock rights described in § 3.07 of Notice 2006-79, the
period during which the cancellation and reissuance may occur is extended until
December 31, 2008, but only to the extent such cancellation and reissuance in 2007
does not result in the cancellation of a deferral in exchange for cash or vested property
in 2007 and only to the extent such cancellation and reissuance in 2008 does not result
in the cancellation of a deferral in exchange for cash or vested property in 2008. For
example, a discounted option generally may be replaced through December 31, 2008
with an option that would not have provided for a deferral of compensation, although the
exercise of such a discounted option after 2005 and before the cancellation and
replacement generally would result in a violation of section 409A unless such exercise
complied in operation with the requirements of section 409A and the applicable
guidance.
Where replacement stock options or stock appreciation rights that would not
constitute deferred compensation subject to section 409A are issued in accordance with
the conditions set forth in Notice 2005-1, Q&A-18( d), the preamble to the proposed
regulations and this notice, such replacement stock options or stock appreciation rights
will be treated for purposes of section 409A as if granted on the grant date of the
original stock option or stock appreciation right. For a discussion of certain methods
10
that commentators proposed to use to compensate option holders for the value of a lost
discount, see section XI.H of the preamble to the proposed regulations.
(2) Paragraph .06 of § 3 of Notice 2006-79 is modified and superseded to read
as follows:
.06 Other transition issues
Notice 2005-1, Q&A-21 provided relief with respect to certain initial deferral
elections, generally providing that certain requirements would not be applicable to
elections made on or before March 15, 2005. One of the conditions of the relief was
that the plan be amended to comply with the requirements of section 409A in
accordance with Notice 2005-1, Q&A-19. Notice 2005-1, Q&A-19 generally required
that plans be amended by December 31, 2005. The March 15, 2005 deadline for initial
deferral elections was not extended in the preamble to the proposed regulations;
however, the plan amendment requirement generally was extended to December 31,
2006. Although the initial deferral election relief contained in Notice 2005-1, Q&A-21
only referred to the requirements of Notice 2005-1, Q&A-19, the Treasury Department
and the IRS have become aware that many taxpayers interpreted the extension of the
plan amendment deadlines as flowing through to the requirements of Notice 2005-1 ,
Q&A-21. To avoid unintentional noncompliance in this area, the deadline for a plan to
be amended to reflect use of the relief provided in Notice 2005-1, Q&A-21 is extended
to December 31, 2008. However, taxpayers retain the burden of demonstrating
satisfaction of the requirement by showing that the deferral election was made by the
March 15, 2005 deadline, in accordance with the plan terms in effect on or before
11
December 31 , 2005 (other than a requirement to make a deferral election on or before
March 15,2005). See Notice 2005-1, Q&A-21.
(3) Paragraphs .05 and .07 of § 3 of Notice 2006-79 are not affected by this
notice .
.02 Modification of Transition Relief Provided in the Final Regulations Preamble
The relief provided in sections XII and XIII of the final regulations preamble is
modified to reflect the extension of the Notice 2006-79 transition relief through
December 31,2008, and the guidance provided in section XIV of the final regulations
preamble is modified with respect to periods after December 31, 2007, as follows:
(A) General rule. Sections XII and XIII of the final regulations preamble are
applied by substituting references to December 31, 2008 for references to December
31,2007, and substituting references to January 1,2009 for references to January 1,
2008. However, references to April 10,2007 (the date of issuance of the final
regulations) and October 3,2004 (the enactment date of the statute) are not modified.
(8) Section XII.C. With respect to the determination of the fair market value of
stock, the last sentence of the second paragraph of section XII.C of the final regulations
preamble is modified to delete the words "proposed or" so as to eliminate reliance on
the provisions of the proposed regulations.
(C) Section XII.D. With respect to programs established before April 10,2007
where initial deferral elections have not been made by January 1, 2008, the transition
relief provided in the second paragraph of section XII.D of the final regulations preamble
remains unchanged (that is, no further transition relief is provided by this notice).
(D) Section XIV. The guidance provided in section XIV of the final regulations
preamble (Calculation and Timing of Income Inclusion Amounts, Reporting and
12
Withholding) on the application of section 409A before January 1,2008 is extended to
apply before January 1, 2009 except that paragraph A of such section is not changed.
SECTION 4. EFFECT ON OTHER DOCUMENTS
Nothing in this notice is intended to limit the scope or applicability of the transition
relief provided in Notice 2005-1, the proposed regulations or Notice 2006-79 for periods
before January 1, 2008. This notice does not affect the guidance provided in
Notice 2006-33,2006-15 IRS 754 (relating to the application of section 409A(b)),
Notice 2005-94, 2005-2 CS 1208 (relating to reporting and wage withholding for 2005)
and Notice 2006-100,2006-51 IRS 1109 (relating to reporting and wage withholding for
2006). Notwithstanding the section of the final regulations preamble entitled "Effect on
Other Documents", Notice 2005-1 is obsoleted only for taxable years beginning on or
after January 1, 2009, except for the following sections of Notice 2005-1, which remain
effective after that date as modified by any other applicable guidance: Q&A-6
(application to arrangements covered by section 457); Q&A-7 (application to
arrangements between a partnership and a partner of the partnership); and Q&A-24
through Q&A-38 (information reporting and withholding guidance).
Pursuant to this notice, Notice 2006-4, 2006-3 IRS 307 (relating to the application
of section 409A to certain outstanding stock rights), is superseded by the final
regulations with respect to stock rights issued in taxable years of the service provider
beginning after December 31,2008. Notice 2006-64,2006-29 IRS 88 (relating to the
acceleration of payments to comply with certain conflict of interest rules), is superseded
by the final regulations effective for taxable years of the service provider beginning after
December 31,2008.
13
Section III of Notice 2007-78 is revoked and superseded by this notice. Pursuant
to this notice, the penultimate paragraph and the first sentence of the final paragraph of
§ IV.A of Notice 2007-78 are modified by substituting references to December 31,2008
for references to December 31, 2007. The guidance otherwise provided in § IV of
Notice 2007-78 is not affected by this notice. Section 3 of Notice 2006-79 is modified
and superseded as provided in this notice. The guidance and relief provided in the final
regulations preamble is modified as provided in this notice.
The Treasury Department and the IRS anticipate issuing guidance as soon as
possible with respect to the correction program and other matters discussed in § V of
Notice 2007-78 and this notice does not affect that section. In addition, this notice does
not affect the guidance provided in § VI of Notice 2007-78.
SECTION 5. DRAFTING INFORMATION
The principal authors of this notice are Stephen Tackney and Bill Schmidt of the
Office of Division Counsel/Associate Chief Counsel (Tax Exempt and Government
Entities), although other Treasury Department and IRS officials participated in its
development. For further information on the provisions of this notice, contact Stephen
Tackney or Bill Schmidt at (202) 927-9639 (not a toll-free number).
14
Page 1 of4
October 22. 2007
2007 -10-22-16-9-58-26584
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 $69,181 million as of the end of that week, compared to $68,519 million as of the end of the
prior week.
I. Official reserve assets and other foreign currency assets (approximate market value. in US millions)
I
II
IIOctober 19, 2007
I
IA Official reserve assets (in US millions unless otherwise specified)
IIEuro
IIYen
IITotal
1(1) Foreign currency reserves (in convertible foreign currencies)
II
11 13 .917
II
1111.073
1169.181
I(a) Securities
11 24 ,990
lof which issuer headquartered in reporting country but located abroad
II
II
11 0
I(b) total currency and depOSits with
II
II
I(i) other national central banks. SIS and IMF
11 13 .892
11 5 .448
II
1119.340
Iii) banks headquartered in the reporting country
II
II
lof which: located abroad
II
II
1(111) banks headquartered outside the reporting country
II
II
lof which: located in the reporting country
II
II
1(2) IMF reserve position
1/ 4 .4 7 8
I
1(3) SDRs
11 9 .332
I
1(4) gold (Including gold deposits and. if appropriate. gold swapped)
11 11 .041
I
I--volume In millions of fine troy ounces
11 261 ,499
I
1(5) other reserve assets (specify)
11 0
I
[--financial derivatives
II
I
II
I
t~oans to nonbank nonresidents
[other
II
[[ Other foreign currency assets (specify)
II
--securities not Included In official reserve assets
II
--deposits not included in official reserve assets
11 0
11 0
11 0
11 0
II
--loans not included in official reserve assets
JI
--financial derivatives not included in official reserve assets
JI
--gold not included in official reserve assets
JI
[other
II
II
II
II. Predetermined short-term net drains on foreign currency assets (nominal value)
http://wwwtreas.gov/presslreleases/hp2007 10221695826584.htm
11/6/2007
Page 2 of 4
I
II Maturity breakdown (residual maturity)
I[
Tot
I
II
I
"
1--outfIOws (-)
IIprincipal
II
I
I--Inflows (+)
IIlnterest
II
II
II
II
IIPrincipal
II
II
I
IIlnterest
II
II
I
II
1. Foreign currency loans, securities, and deposits
I
2. Aggregate short and long positions in forwards and
futures in foreign currencies Vis-a-VIS tile domestic
currency (includinq the forward leg of currency swaps)
I (a) Short positions ( - )
I (b) Long positions (+)
I 3. Other (specify)
--outflows related to repos (-)
II
I
!!
II
I
II
II
I
I
I
I
I
I
I
I
II
II
II
I --other accounts payable (-)
II
II
II
II
I --other accounts receivable (+)
II
II
--trade credit (+)
II
II
I
--trade credit (-)
I
II
II
II
--inflows related to reverse repos (+)
More than 1 and
up to 3 months
Up to 1 month
I
More than 3
months and up to
1 year
I
II
II
I
II
II
II
II
II
I
I
I
III. Contingent short-term net drainS on foreign currency assets (nominal value)
I
II
I
II
I
11
Contingent liabilities in foreign currency
(a) Collateral guarantees on debt falling due within 1
year
II
I Maturity breakdown (reSidual maturity, where
applicable)
IITota,
I
II
II
I
II
II
II
II
II
II
II
II
II
II
(+)
II
II
[IMF (+)
II
[(b) Other contingent liabilities
2. Foreign currency securities Issued with embedded
options (puttable bonds)
B· Undrawn, unconditional credit lines prOVided by
(a) other national monetary authorities, BIS, IMF, and
other international organizations
[other national monetary authorities (+)
t- BIS
(b) with banks and other financial institutions
headquartered in the reporting country (+)
(c) with banks and other financial institutions
headquartered outSide the reporting country (+)
Undrawn, unconditional credit lines provided to
II
--other national monetary authorities (-)
r
II
II
II
II
II
II
I
II
I
II
II
I
I
II
I
II
II
I
II
II
I
II
II
II
I
I
II
JI
II
II
JI
II
II
JI
II
II
II
II
II
II
II
II(a) other national monetary authorities, BIS, IMF, and
Ilother international organizations
More than 1 and
up to 3 months
Up to 1 month
I
More than 3
months and up to
1 year
II
II
http://wwwtreas.gov/presslreleases/hp200710221695826584.htm
II
I
I
\
II
I
I
I
I
I
1116/2007
Page 3 of 4
lBIS (-)
II
EIMF (-)
II
II
II
II
II
II
II
I
II
1/
I
I
II
II
I
I
I
II
II
I
/I
I
/I
/I
I
(b) banks and other financial institutions headquartered
in reporting country (- )
(e) banks and other financial institutions headquartered
outside the reporting country ( - )
4. Aggregate short and long positions of options In
foreign currencies vis-a-vis the domestic currency
[a) Short positions
1/
lli) Bought puts
1/
llii) Written calls
/I
~) Long positions
llil Bought calls
[Iii) Written puts
I
I
I
I
II
II
/I
1/
I
II
I
II
I
iPRO MEMORIA In-the-money options
II
1(1) At current exchange rate
/I
I
I
I
I
I
I(a) Short position
I
II
I
I(b) Long position
/I
I
1(2) + 5 % (depreciation of 5%)
II
I
/I
I(a) Short position
I(b) Long position
1(3) - 5 % (appreciation of 5%)
I(a) Short position
I
II
/I
I(b) Long position
1(4) +10 % (depreciation of 10%)
I(a) Short position
"
I(b) Long position
1(5)-10 % (appreciation of 10%)
I(a) Short position
/I
/I
/I
/I
/I
/I
/I
/I
/I
I
I
/I
/I
/I
/I
/I
/I
II
II
/I
/I
I(b) Long position
I
/I
1(6) Other (specify)
/I
II
I(a) Short position
/I
I(b) Long position
II
/I
/I
I
I
,
I
"
II
I
II
I
IV. Memo items
[
II
[1) To be reported with standard periodicity and timeliness
~) short-term
domestic currency debt indexed to the exchange rate
(b) finanCial instruments denomillated in foreign currency and settled by other means (e.g., in domestic
currency)
[nondeliverable forwards
[:-Short positions
/I
/I
II
II
II
[:-Iong positions
II
Gther instruments
GCluded in reserve assets
/I
/I
/I
l.:!nCluded in other foreign currency assets
11
~:Pledged assets
r-
http://wwwtreas.gov/presslre1eases/hp200710221695826584.htm
I
I
I
I
I
I
I
II
11/6/2007
Page 4 of 4
l(d) securities lent and on repo
[--lent or repoed and included in Section I
I--Ient or repoed but not included in Section I
II
I
II
I
--borrowed or acquired but not included in Section I
II
I(e) financial derivative assets (net, marked to market)
[--futures
I--swaps
II
I--options
1\
1\
I--other
IW) derivatives (forward, futures, or options contracts) that have a residual maturity greater than one
year, which are subject to margin calls.
In
foreign currencies vis-a-vis the domestic
II
II
I(a) short positions ( - )
1\
I(b) long positions (+)
II
I--aggregate short and long positions of options in foreign currencies vis-a-vis the domestic currency
II
I(a) short positions
1\
1\
1(1) bought puts
I(ii) written calls
II
I(b) long positions
1\
1(1) bought calls
II
I(ii) written puts
1\
1(2) To be disclosed less frequently:
II
I(a) currency composItion of reserves (by groups of currencies)
I--currencies in SDR basket
1\69,181
1\69,181
I--currencies not
1\
In
I
I
1\
1\
1\
I--forwards
--aggregate short and long positions in forwards and futures
currency (including the forward leg of currency swaps)
I
I
1\
-II
--borrowed or acquired and included in Section I
SDR basket
I
I
I
I
I
I
I--by individual currencies (optional)
II
I
I
1\
I
Notes:
1/ Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market
Account (SOMA), valued at current market exchange rates, Foreign currency holdings listed as securities reflect markedto-market values, and deposits reflect carrying values.
LIThe items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF
and are valued in dollar terms at the official SDR/dollar exchange rate for the reporting date. The entries for the latest
week reflect any necessary adjustments, including revaluation, by the U.S. Treasury to IMF data for the prior month
end.
3/ Gold stock
is valued monthly at $42.2222 per fine troy ounce.
http://wwwtreas.gov/presslreleases/hp200710221695826584.htm
11/6/2007
hp-632: Treasury Department Names Brian O'Neill as Deputy Assistant Secretary <br>for Western He...
Page 1 of J
October 22,2007
hp-632
Treasury Department Names Brian O'Neill as Deputy Assistant Secretary
for Western Hemisphere
Washington, D.C. - Treasury announced that Brian O'Neill Joined the Office of
International Affairs as the Deputy Assistant Secretary for the Western Hemisphere
O'Neill replaces Nancy Lee, who is taklflg an ii-month sabbatical at the Center for
Global Development to work on models for regionallfltegration Most recently,
O'Neill has served as Managing Director and Vice-Chairman, Investment Banklflg
at JPMorgan. He joined The Chase Manhattan Bank in 1977, and has spent his
career working with governments, financial institutions, and corporate clients
throughout the countries of Latlfl America as well as Canada.
O'Neill worked in corporate and investment banking in Chile from 1978 until 1982,
in Argentina from 1983 until 1988, and in Brazil from 1989 until 1991. He returned
from Sao Paulo, Brazil to New York to serve as Corporate Finance Executive for
Latin America in 1991. O'Neill became Latin America Executive in 1994 and added
the newly created title of Chairman in 1999. In 2001, he became Chairman of
Canada and Latin America for JPMorgan. He served in the role of Managing
Director and Vice-Chairman, Investment Banking beginning in 2005.
O'Neill is a Director of the Council of the Americas and of the Americas Society. He
is a life member of The Council on Foreign Relations; Member of the PaCific
Council on International Policy; Fellow of the Foreign PoliCY Association; and a
member of the Advisory Committee for the David Rockefeller Center for Latlfl
American Studies at Harvard University
He holds a BA degree from the University of San Diego and a Master's degree
from the American Graduate School of International Management. In 1991, he
completed the Executive Program at the Amos Tuck School at Dartmouth College.
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October 23, 2007
hp-633
Remarks by Secretary Paulson on Managing Complexity and
Establishing New Habits of Cooperation in U.S.-China Economic Relations
at the 2007 George Bush China-U.S. Relations Conference
Washington, DC--Good morning, General Scowcroft, Vice President li, President
Davis and Ambassador Popadiuk. I appreciate the opportunity to be here at the
Third George Bush China-U.S. Relations Conference.
This room is filled with the very best of China expertise and experience from both
sides of the Pacific. I applaud your commitment to thiS bilateral relationship. And of
course, there is no better example of this than former President Bush - who has
long been a stalwart advocate of advancing U.S.-China ties.
I have devoted much of my professional life - and far too many hours on planes to learning about and increasing US commercial ties with the People's Republic of
China. Now, as Treasury Secretary, I would like to share my thoughts With you on
the future of the U.S.-China economic relationship.
New Global Realities and Emerging Bilateral Challenges
China's re-emergence on the global stage is one of the most consequential
geopolitical events of recent times. China's global influence IS expanding. A
cooperative, constructive and candid U.S.-China relationship is central to
understanding and responding to China's re-emergence, in all its possible
manifestations. The United States must manage our disagreements With China,
foster greater bilateral cooperation and improve our ability to work construclively
with China across all dimensions of national power.
There is hardly an issue - from trade, to national security, to climate change - or a
place - from North Korea to Iran to Sudan - where American and Chinese interests
do not increaSingly overlap. Because China is now integrated into the global
economy, what happens in China's economy affects the entire International
community. The U.S.-China relationship has become central not only to each
nation's interests, but also to the maintenance of a stable, secure and prosperous
global system - which benefits the world.
My focus at Treasury is on the U.S.-China economic relationship, which is a core
element of our overall bilateral ties. Yet, the tectonic plates of the U.S.-China
economic relationship are shifting. This demands new Visions from our leaders and
new mechanisms from our governments.
First, U.S.-China economic interdependence is deepening We need each other
more and on a broader number of economic and economically consequential
issues. Over the past five years, US exports to China have grown at five times the
pace of U.S exports to the rest of the world, and China has become our fourth
largest export market.
Exports to China benefit American bUSinesses by providing new market
opportunities for American products and services Imports from China continue to
benefit the American economy and the American consumer by providing an
increased diverSity of products at lower prices. Imports from China also raise
challenges, as I will diSCUSS in a moment. Just as competilion from trade with
China pushes our industries to stay on the cutting edge, competition will also speed
China's development as a more market-oriented and balanced economy.
Moreover, the United States and China are shaping, and being shaped by, global
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energy and environmental trends, which have strong economic consequences Our
countries are the world's largest energy consumers and the largest emitters of
greenhouse gases. What happens with Chllla's environment Impacts all nations; air
and water know no boundaries.
These trends create challenges that can not be resolved by the United States or
Chma alone. They certainly can not be solved without China at the table.
Second, whereas trade and investment were once largely a source of stability in
bilateral relations, they are now increasingly also a source of tension. Such tensions
are straming our domestic consensus on the benefits of economic engagement
America's large corporations - the longtime proponents of bilateral engagement as well as America's smaller businesses - who are finding new markets m China mcreasingly are concerned about the openness of China's economy, and Chillese
counterfeiting of trademarks and pirating of intellectual property. Some American
workers believe tile field of competition is uneven and unfair. Also, American
consumers have very real concerns about the safety of food and product imports
from Chilla
These anxieties manifest themselves III several ways, which leads me to the third
dynamic confrontlllg us: the rise of economic nationalism and protectionism in both
our nations. These sentiments may constrain leaders from adopting policies that
are in the long-term interests of the citizens and economies of the United States
and China. Such views also obscure each nation's ability to assess the others'
long-term intentions.
In responding to globalization, pollcymakers in both countries must resist the
Impulse to discard the hard-fought and long-term gains of open economies by
pursuing short-term and misguided policy responses. I am committed to working to
maintain an open trade and investment climate III America and to working to open
markets in China to greater competition from American goods and services.
These three emerging dynamics to our economic relationship - deepening
interdependence, a strained policy consensus, and the rise of economic
protectionism - are mutual and require cooperative solutions.
Managing Complexity and Establishing New Habits of Cooperation
These dynamics informed the creation of the Strategic Economic Dialogue (SED)
by President Bush and President Hu Jintao in 2006. They enVisioned a forum to
allow both governments to communicate at the highest levels and With one vOice on
Issues of long-term and strategic importance to ensure bilateral economic stability
and prosperity.
By definition, this is a complex relationship and managing complexity is daunting. It
begins With speaklllg to the right people - at the right time - on the right issues and In the fight way.
The Strategic Economic Dialogue - as a new and leading instltulion in U.S.-Chilla
relations - has created these useful channels among policymakers in Washington
and Beijing. Through thiS framework we have advanced the U.S.-China economic
relationship by establishing new habits of bilateral cooperation and re-settlllg the
foundation for stable and prosperous economic interactions
We have embraced a broad agenda that covers cross-cuttlllg economic and
economically consequential issues, including regulatory transparency, energy
conservation, environmental protection, food and product safety, as well as the
important economic issues of exchange rate policy, market access, finanCial sector
liberalization, and macroeconomic policy.
Our approach engages multiple and diverse government offiCials in both countries
to facilitate more inclUSive interactions. It breaks down classic bureaucratic stovepipes that hillder effective communication and impede results. At the same time, we
have contillual, high-level interactions to set priorities and ensure their full
implementation. I talk regularly on the phone with my counterpart Vice Premier Wu
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Yi, and our staffs are in constant contact.
That said - process is not result.
Dialogue among senior Chinese and American officials, while useful, needs to be
more than talking for the sake of talklllg and can not give leaders "a pass" on Issues
of disagreement. It IS about setting priorities, specifying consequences and
fashioning practical solutions.
And that's what direct engagement does it keeps the relationship on an even keel
by lessenlllg miscommunication and dispelling misperceptions so common in the
history of the U.S.-China relationship.
Moreover, solidifying these habits of cooperation is critical to sustallllllg America's
broader China POliCY, both at home and abroad. It further Signals to China that we
welcome the rise of a confident, peaceful and prosperous China, while also helping
America to hedge against an uncertain Chillese future A weak and insecure Chilla
is not in America's economic or security interests.
In addition to establishing new ways of working together, It is vitally important that
our poliCies accelerate and deepen China's ongoing economic transition.
We applaud China's efforts to transition to an economy that is more marketoriented, less reliant on low-cost manufacturing exports, one that depends more on
the skills and resourcefulness of the Chinese people and less on material Inputs
and natural resource consumption.
The pace of China's growth has clearly been remarkable, but it carries both
opportunity and risk.
I liken It to some of America's fastest growing entrepreneurial companies, who see
sales rise exponentially III a short time and then must earnestly work to build the
IIlfrastructure to sustain those sales. This is the challenge that China's leaders now
face - to make the Jump in strategy and poliCY needed for an economy that is no
longer in the first stages of growth
A major risk China faces IS that its government won't act quickly enough to take the
policy steps necessary to deal with the economic and social imbalances created by
its growth model. Without strong policy underpinnings and implementation, China's
economic performance becomes unsustainable. We are encouraging key reforms
that will help China manage the blistering pace of ItS economic growth: these
include finanCial market liberalization and a plan for rebalancing growth China has
proven to the world that it can grow fast, but can It grow differently and, ultimately,
grow smarter?
Bold structural policies are needed to shift China's growth away from heavy
IIldustry, high energy use, and dependence on exports - towards greater reliance
on domestic demand, greater production of services, and greater provision of
material well-being to China's population
As I have said before, this will be much easier, and the prospects for achieving
sustained, balanced growth in China and in the world economy much greater, If the
Chillese Increase the pace of RMB appreCiation in the short term and implement a
fully market-determilled currency in the medium term Currency appreciation to
date has not slowed the Chinese economy.
Accelerating the rate of appreciation and introduction of flexibility will help China
deal with the imbalances that have grown in the economy and make monetary
policy much more effective In responding to inflation
We must also recognize that currency is not the only driver of China's economic
imbalances. Even more fundamental and important are internal structural Issues,
such as why Chinese households save so much and consume so little.
Rebalancing China's growth is necessary for China to grow without generating
large external imbalances.
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A key to China's success here will be its willingness to accelerate the pace of its
market~based economic reforms Going beyond its WTO commitments, resisting
protectionist sentiment, and opening up ItS economy to greater international
competition for goods and services will help rebalance the Chtnese economy and
spread prosperity more broadly among the Chinese people.
These reforms are - and Will continue to be - resisted by Increasingly influential
Chtnese businesses In my Judgment, the greatest risk to China's long-term
economic security IS that protectionists prevail, and Chinese reforms proceed too
slowly.
And finally, we are also encouraging China to act responsibly as a global economiC
power China is influencing capital and resource markets all over the world. ItS
economic Influence is being felt from Chicago, to Sao Paolo, to Ktnshasa
We welcome China Into key International financial Institutions and are giving China
a greatel' vOice In them as welL Increased participation will allow China to advance
its interests in those institutions, but it is also Important that Beijtng recognize the
responsibilities of greater participation
China has become a major source of foreign aid for many of the poorest countnes.
We look forward to working with China to assure that foreign aid and lending
practices promote sustainable development.
ThiS new era in U.S.-China economic relations requires new and dynamic ways of
dotng business. We are meeting these challenges through the creation of the
political space and the InstltutJonal capacity for long-term stability In our bilateral
economic relations.
Signposts and Benchmarks
While dialogue and negotiations are important, they are far from suffiCient to ensure
that we keep the bilateral relationship future-oriented and on an even keel. The
SED IS both long-term and strategic, but tangible progress in the form of sign posts
and benchmarks IS Critically important to demonstrating that we are maktng
progress in achieving our long term objectives.
I believe that we are making progress and we are able to point to steps that are
enhancing and transforming our economic relationship in mutually benefiCial ways.
Three brief examples Illustrate my POtnt: Civil aviation, energy and the environment,
and ftnancial services.
In May, we announced a new air services agreement that will make it easier,
cheaper, and more convenient to fly people and to ship goods across the Pacific.
Not only will thiS agreement stimulate an estimated $5 billion in new business over
the next several years, the new routes will double passenger traffiC by 2012 and
allow full air cargo services by 2011. Perhaps as early as April 2008, there Will be
the first non-stop flight between Atlanta and Shanghai, the first from America's
southeast for a US airline.
The benefits of the Civil aViation accord are many, Including more commerce,
greater cultural exchanges, and enhanced understanding
We have also collaborated With Chlila on a series of poliCies to help promote
energy conservation and environmental protection Those specific agreements
foster demand for the development and deployment of clean and effiCient, nextgeneration energy technology. This, in turn, will create a future in which two of the
largest economies in the world become examples of bilateral cooperation towards
sustainable development.
The SED has made consistent strides to further develop China's capital markets.
As a result of our deliberations, the New York Stock Exchange and NASDAQ Will
open offices In China. China has also removed a barrier to the entry of new foreign
securities firms, and will expand the scope of bUSiness open to forelgn-tnvested
securities firms.
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These actions do not only expand the opportunities for international financial
services firms. By allowing greater financial flows, they will help China move more
qUickly to a fully market-determined exchange rate. Competitive and effiCient capital
markets are also key to balanced, sustainable and higher quality economic growth
- a critical Chinese goal over the next two decades
In addition to the areas of positive cooperation, our enhanced dialogue means we
must confront problems frankly and honestly - and often rapidly Recent and
repeated repolis of tainted food and product Imports are causlllg fear and
uncertainty in American consumers and harming the "Made If1 China" brand here In
the United States.
The effectiveness With which China manages these safety Issues will have long
term implications fOi U.S .-Chlna trade relations, the integration of China mto the
global tradlllg system, and the sustalilability of China's economic growth trajectory
We are actively working together to enhance the safety of products COnllllg fmm
Chilla and to protect the American consumer. We also need to make sure that
policymakers in both countries are focused on science-based safety deCISions, not
protectionism or retaliation
Towards a New Future for Bilateral Economic Relations
PreSident Bush and PreSident Hu have set a pOSitive agenda for strengthening our
economic relationship The SED IS a core part of that agenda because it is longterm in ItS VISion, comprehenSive In its scope, and Immediate In ItS ability to deal
With the most sensitive bilateral economic tensions.
I congratulate the Chinese on the successful conclUSion of their 17th Party
Congress and related events. My colleagues and I look forward to developing
constructive and productive relationships with the new members of Chinese
leadership team In his political report to the 17th Party Congress last week,
President Hu emphasized the dual goals of continuing market reform and global
integration, while simultaneously worklllg to alleviate the negative domestic
consequences of rapid economic growth.
Our next meeting of the SED in December will discllss a number of these
objectives. Specifically, we will focus on the integrity of trade, balanced economic
development, energy conservation, financial sector reform, environmental
sustalnability, and advancing bilateral investment.
The economic and geopolitical landscape of the 21 st century will be greatly
influenced by the way in which the United States and China work together That
emerglllg future requires a distinct vIsion and effective mechanisms toachleve it
The SED has allowed both the United States and China to begin to wllte the next
chapter of our strategic economic relationship
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hp-634: U.S., iceland SIgn New Income Tax Treaty
Page 1 of 1
I a View or pont me /-,UI- content on tnlS page, Gown/aaa the tree AGooe® Acrooat® HeaaerCBJ.
October 23, 2007
hp-634
U.S., Iceland Sign New Income Tax Treaty
Washington, DC-- The Treasury Department announced today that Deputy
Secretary Robert M. Kimmltt <Jnd Icelandic Fiflance Minister Arnl M. Mathiesen
signed a new Income tax treaty between the United States and Iceland.
In a ceremony held at the Treasury Department. the two officials signed a new tax
treaty that brings the eXisting agreement Into closer conformity Wlttl current US. tax
treaty policy. For example, the new treaty contains a comprehensive limitation on
benefits pl'ovislon that is consistent with many recently concluded U.S. tax treaties.
The agreement also maintains the exisling treaty's withholding tax exemption on
cross-border Interest payments and as well as the eXisting treaty's reductions in
withholding taxes on cross-border dividend payments.
The final version of the treaty is attached.
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REPORTS
•
U.S.-Iceland Income Tax Treaty
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1116/2007
CONVENTION BETWEEN
THE GOVERNMENT OF THE UNITED STATES OF AMERICA
AND THE GOVERNMENT OF ICELAND
FOR THE A VOIDANCE OF DOUBLE TAXATION
AND THE PREVENTION OF FISCAL EVASION
WITH RESPECT TO TAXES ON INCOME
The Government of the United States of America and the Government of Iceland,
desiring to conclude a Convention for the avoidance of double taxation and the prevention of
fiscal evasion with respect to taxes on income,
HAVE AGREED as follows:
, . '
2
ARTICLE 1
General Scope
I. This Convention shall apply only to persons who are residents of one or both of the
Contracting States, except as otherwise provided in the Convention.
2. This Convention shall not restrict in any manner any benefit now or hereafter
accorded:
a) by the laws of either Contracting State; or
b) by any other agreement between the Contracting States.
3.
a) Notwithstanding the provisions of subparagraph b) of paragraph 2:
(i) the provisions of Article 24 (Mutual Agreement Procedure) of this
Convention exclusively shall apply to any dispute concerning whether a measure
is within the scope of this Convention, and the procedures under this Convention
exclusively shall apply to that dispute; and
(ii) unless the competent authorities determine that a taxation measure is
not within the scope of this Convention, the non-discrimination obligations of
this Convention exclusively shall apply with respect to that measure, except for
such national treatment or most-favored-nation obligations as may apply to trade
in goods under the General Agreement on Tariffs and Trade. No national
treatment or most-favored-nation obligation under any other agreement shall
apply with respect to that measure.
b) For the purposes of this paragraph, a "measure" is a law, regulation, rule,
procedure, decision, administrative action, or any similar provision or action.
4. Notwithstanding any provision of the Convention except paragraph 5 of this Article,
a Contracting State may tax its residents (as determined under Article 4 (Resident», and by
reason of citizenship may tax its citizens, as if the Convention had not come into effect.
Notwithstanding the other provisions of this Convention, a former citizen or long-term resident
of the United States may, for the period often years following the loss of such status, be taxed
in accordance with the laws of the United States.
5. The provisions of paragraph 4 shall not affect:
a) the benefits conferred by a Contracting State under paragraph 2 of Article 9
(Associated Enterprises), paragraphs 2 and 4 of Article 17 (Pensions, Social Security,
and Annuities), and Articles 22 (Relief from Double Taxation), 23
(Non-Discrimination), and 24 (Mutual Agreement Procedure); and
b) the benefits conferred by a Contracting State under Articles 18 (Government
Service), 19 (Students and Trainees), and 26 (Members of Diplomatic Missions and
Consular Posts), upon individuals who are neither citizens of, nor have been admitted
for permanent residence in, that State.
, . '
3
6. An item of income derived through an entity that is a partnership, trust or estate
under the laws of either Contracting State shall be considered to be derived by a resident of a
State to the extent that the item is treated for purposes of the taxation law of such Contracting
State as the income of a resident, either in its hands or in the hands of its partners or
beneficiaries.
ARTICLE 2
Taxes Covered
1. This Convention shall apply to taxes on income imposed on behalf of a Contracting
State, irrespective of the manner in which they are levied.
2. There shall be regarded as taxes on income all taxes imposed on total income, on
total capital, or on elements of income, including taxes on gains from the alienation of movable
or immovable property (real property), taxes on the total amounts of wages or salaries paid by
enterprises, but excluding social security taxes, as well as taxes on capital appreciation.
3. The existing taxes to which the Convention shall apply are:
a) in Iceland:
(i) the income taxes to the state (tekjuskattar rikissj6os); and
(ii) the income tax to the municipalities (zitsVQJ),
(hereinafter referred to as "Icelandic tax");
b) in the United States:
(i) the Federal income taxes imposed by the Internal Revenue Code; and
(ii) the Federal excise taxes imposed with respect to private foundations
(hereinafter referred to as "United States tax"),
4, The Convention shall apply also to any identical or substantially simIlar taxes that
are imposed after the date of signature of the Convention in addition to, or in place of, the
existing taxes. The competent authorities of the Contracting States shall notify each other of
any significant changes that have been made in their respective taxation or other laws that
significantly affect their obligations under this Convention.
ARTICLE 3
General Definitions
I. For the purposes of this Convention, unless the context otherwise reqUIres:
a) the term "Iceland" means Iceland and, when used in a geographical sense,
means the territory of Iceland, including its terrItorial sea, and any area beyond the
territorial sea within which Iceland, in accordance with international law, exercises
jurisdiction or sovereign rights with respect to the sea bed, its subsoil and its superjacent
waters, and their natural resources;
.
.
'
4
b) the term "United States" means the United States of America, and includes
the states thereof and the District of Columbia; such term also lIlcludes the territorial sea
thereof and the sea bed and subsoil of the submarine areas adjacent to that territorial
sea, over which the United States exercises sovereign rights in accordance with
international law: the term, however, does not include Puerto Rico, the Virgin Islands,
Guam or any other United States possession or territory;
c) the term "person" includes an individual, an estate, a trust, a partnership. a
company and any other body of persons;
d) the term "company" means any body corporate or any entity that is treated as
a body corporate for tax purposes according to the laws of the state in which it is
organized:
e) the term "enterprise" applies to the carrying on of any business;
f) the terms "enterprise of a Contracting State" and "enterprise of the other
Contracting State" mean respectively an enterprise carried on by a resident of a
Contracting State and an enterprise carried on by a resident of the other Contracting
State;
g) the terms "a Contracting State" and "the other Contracting State" mean
Iceland or the United States as the context requires;
h) the term "international traffic" means any transport by a ship or aircraft,
except when such transport is solely between places in a Contracting State;
i) the term "competent authonty" means:
(i) in the case of Iceland: the Minister of Finance or his authorized
representative; and
(ii) in the case of the United States: the Secretary of the Treasury or his
delegate;
j) the term "national" means:
(i) any individual possessing the nationality or citizenship of a
Contracting State;
(ii)
any legal person, partnership or association deriving its status as
such from the laws in force in a Contracting State;
k) the term "business" includes the performance of professional services and of
other activities of an independent character;
1) the teml "pension scheme" means any plan, scheme, fund, trust or other
arrangement established in a Contracting State that:
(i) is generally exempt from income taxation in that State; and
(ii) operates principally to administer or provide pension or retirement
benefits or to earn income for the benefit of one or more such arrangements.
2. As regards the application of the Convention at any time by a Contracting State any
term not defined therein shall, unless the context otherwise requires, or the competent
)
'.
5
authorities agree to a common meaning pursuant to the provisions of Article 24 (Mutual
Agreement Procedure), have the meaning that it has at that time under the law of that State for
the purposes of the taxes to which the Convention applies, any meanIng under the applicable
tax laws of that State prevailing over a meaning given to the term under other laws of that
State.
ARTICLE 4
Resident
I. For the purposes of this Convention, the term "resident of a Contracting State"
means any person who, under the laws of that State, is liable to tax therein by reason of his
domicile, residence, citizenship, place of management, place of incorporation or any other
criterion of a similar nature, and also includes that State and any political subdivision or local
authority thereof. This tem1, however, does not include any person who is liable to tax in that
State in respect only of income from sources in that State or capital situated therein or of profits
attributable to a pennanent establishment in that State.
2. The term "resident of a Contracting State" includes:
a) a pension scheme;
b) a plan, scheme, fund, trust, company or other arrangement established in a
Contracting State that is operated exclusively to administer or provide employee
benefits and that, by reason of its nature as such, is generally exempt from income
taxation in that State; and
c) an organization that is established exclusively for religious, charitable,
scientific, artistic, cultural, or educational purposes and that is a resident of a
Contracting State according to its laws,
notwithstanding that all or part of its income or gains may be exempt from tax under the
domestic law of that State.
3. Where by reason of the provisions of paragraph I an individual is a resident of both
Contracting States, then his status shall be detennined as follows:
a) he shall be deemed to be a resident only of the State in which he has a
permanent home available to him; if he has a permanent home available to him in both
States, he shall be deemed to be a resident only of the State with which his personal and
economic relations are closer (center of vital interests);
b) if the State in which he has his center of vital interests cannot be determined,
or ifhe has not a permanent home available to him in either State, he shall be deemed to
be a resident only of the State in which he has an habitual abode;
c) ifhe has an habitual abode in both States or in neither of them, he shall be
deemed to be a resident only of the State of which he is a national;
, . '
6
d) Ifhe is a national of both States or ofneither of them, the competent
authorities of the Contracting States shall settle the question by mutual agreement.
4. Where by reason of the provisions of paragraphs I and 2 of this Article a person
other than an individual is a resident of both Contracting States, the competent authorities of
the Contracting States shall endeavor to determine by mutual agreement the mode of
application of this Convention to that person. If the competent authorities do not reach such an
agreement that person shall not be entitled to claim any benefit provided by this Convention,
except those provided by Article 23 (Non-Discrimination) and Article 24 (Mutual Agreement
Procedure).
ARTICLE 5
Permanent Establishment
I. For the purposes of this Convention, the term "permanent establishment" means a
fixed place of business through which the business of an enterprise is wholly or partly carried
on.
2. The term "permanent establishment" lI1cludes especially:
a) a place of management;
b) a branch;
c) an office;
d) a factory;
e) a workshop; and
f) a mine, an oil or gas well, a quarry or any other place of extraction of natural
resources.
3. A building site or construction or installation project, or an installation or drilling rig
or ship used for the exploration of natural resources constitutes a permanent establishment only
if it lasts or the activity continues for more than twelve months.
4. Notwithstanding the preceding provisions of this Article, the term "permanent
establishment" shall be deemed not to include:
a) the use of facilities solely for the purpose of storage, display or delivery of
goods or merchandise belonging to the enterprise;
b) the maintenance of a stock of goods or merchandise belonging to the
enterprise solely for the purpose of storage, display or delivery;
c) the maintenance of a stock of goods or merchandise belonging to the
enterprise solely for the purpose of processing by another enterprise;
d) the maintenance of a fixed place of business solely for the purpose of
purchasing goods or merchandise, or of collecting information for the enterprise;
e) the maintenance of a fixed place of business solely for the purpose of
carrying on, for the enterprise, any other activity of a preparatory or auxilIary character;
, . '
7
f) the maintenance of a fixed place of business solely for any combination of
activities mentioned in subparagraphs a) to e), provided that the overall activity of the
fixed place of business resulting from this combination is of a preparatory or auxiliary
character.
5. Notwithstanding the provisions of paragraphs I and 2, where a person -- other than
an agent of an independent status to whom paragraph 6 applies -- is acting on behalf of an
enterprise and has, and habitually exercises, in a Contracting State an authority to conclude
contracts in the name of the enterprise, that enterprise shall be deemed to have a pemlanent
establishment in that State in respect of any activities which that person undertakes for the
enterprise, unless the activities of such person are limited to those mentioned in paragraph 4
which, if exercised through a fixed place of business, would not make this fixed place of
business a permanent establishment under the provisions of that paragraph.
6. An enterprise shall not be deemed to have a permanent establishment in a
Contracting State merely because it carries on business in that State through a broker, general
commission agent or any other agent of an independent status, provided that such persons are
acting in the ordinary course of their business as independent agents.
7. The fact that a company which is a resident of a Contracting State controls or is
controlled by a company which is a resident of the other Contracting State, or which carries on
business in that other Stale (whether through a permanent establishment or otherwise), shall not
constitute either company a permanent establishment of the other.
ARTICLE 6
Income from Immovable Property (Real Property)
I. Income derived by a resident of a Contracting State from immovable property (real
property), including income from agriculture or forestry, situated in the other Contracting State
may be taxed in that other State.
2. The term "immovable property (real property)" shall have the meaning which it has
under the law of the Contracting State in which the property in question is situated. The term
shall in any case mclude property accessory to immovable property (real property), livestock
and equipment used in agriculture and forestry, rights to which the provisions of general law
respecting landed property apply, usufruct of immovable property (real property) and rights to
variable or fixed payments as consideration for the working of, or the right to work, mineral
deposits, sources and other natural resources; ships, boats and aircraft shall not be regarded as
immovable property (real property).
3. The provisions of paragraph I shall apply to income derived from the direct use,
letting or use in any other form of immovable property (real property).
4. The provisions of paragraphs I and 3 shall also apply to the income from immovable
property (real property) of an enterprise .
. .
'
ARTICLE 7
Business Proms
I. The profits of an enterprise of a Contracting State shall be taxable only in that State
unless the enterprise carries on business in the other Contracting State through a permanent
establishment situated therein. If the enterprise carries on business as aforesaid, the profits of
the enterprise may be taxed in the other State but only so much of them as is attributable to that
permanent establishment.
2. Subject to the proviSions of paragraph 3 of this Article, where an enterprise ofa
Contracting State carries on business in the other Contracting State through a permanent
establishment situated therein, there shall in each Contracting State be attributed to that
permanent establishment the business profits that it might be expected to make if it were a
distinct and separate enterprise engaged in the same or similar activities under the same or
similar conditions and dealing wholly independently with the enterprise of which it is a
permanent establishment. For this purpose, the business profits to be attributed to the
permanent establishment shall include only the profits derived from the assets used, risks
assumed and activities performed by the permanent establishment.
3. In determining the profits of a permanent establishment, there shall be allowed as
deductions expenses which are incurred for the purposes of the permanent establ ishment,
including executive and general administrative expenses so incurred, whether in the State in
which the permanent establishment is situated or elsewhere.
4. No profits shall be attributed to a permanent establishment by reason of the mere
purchase by that permanent establishment of goods or merchandise for the enterprise.
S. For the purposes of the preceding paragraphs, the profits to be attributed to the
permanent establishment shall be determined by the same method year by year unless there is
good and sufficient reason to the contrary.
6. Where profits include items of income which are dealt with separately in other
Articles of this Convention, then the provisions of those Articles shall not be affected by the
provisions of this Article.
7. In applying this Article, paragraph 6 of Article 10 (Dividends), paragraph 3 of
Article II (Interest), paragraph 4 of Article 12 (Royalties), paragraph 3 of Article 13 (Capital
Gains) and paragraph 2 of Article 20 (Other Income), any income or gain attributable to a
permanent establishment during its existence is taxable in the Contracting State where such
permanent establishment is situated even if the payments are deferred until such permanent
establishment has ceased to exist.
, . '
9
ARTICLE 8
Shipping and Air Transport
1. Profits of an enterprise of a Contracting State from the operatIOn of ships or aircraft
in international traffic shall be taxable only in that State.
2. For the purposes of this Article, profits from the operation of ships or aircraft include
profits derived from the rental of ships or aircraft on a full (time or voyage) basis. They also
include profits from the rental of ships or aircraft on a bareboat basis if such ships or aircraft
are operated in international traffIc by the lessee, or if the rental income is incidental to profits
from the operation of ships or aircraft in international traffic. Profits derived by an enterprise
from the inland transport of property or passengers within either Contracting State shall be
treated as profits from the operation of ships or aircraft in mternational traffic if such transport
is undertaken as part of international traffic.
3. Profits of an enterpnse ofa Contracting State from the use, maintenance, or rental of
containers (including trailers, barges, and related equipment for the transport of containers)
used in international traffic shall be taxable only in that State.
4. The provisions of paragraphs I and 3 shall also apply to profits from the
participation in a pool, a joint business or an international operatmg agency.
ARTICLE 9
Associated Enterprises
1. Where
a) an enterprise of a Contracting State participates directly or indirectly in the
management, control or capital of an enterprise of the other Contracting State, or
b) the same persons participate directly or indirectly in the management, control
or capital of an enterprise ofa Contracting State and an enterprise of the other
Contracting State,
and in either case conditions are made or imposed between the two enterprises in their
commercial or financial relations which differ from those which would be made between
independent enterprises, then any profits which would, but for those conditions, have accrued
to one of the enterprises, but, by reason of those conditions, have not so accrued, may be
included in the profits of that enterprise and taxed accordingly.
2. Where a Contracting State includes in the profits of an enterprise of that State --and
taxes accordingly -- profits on which an enterprise of the other Contracting State has been
charged to tax in that other State and the other Contracting State agrees that the profits so
included are profits which would have accrued to the enterprise of the tirst-mentioned State if
the conditions made between the two enterprises had been those which would have been made
between independent enterprises, then that other State shall make an appropriate adjustment to
the amount of the tax charged therein on those profits. In determining such adjustment, due
,
.
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10
regard shall be had to the other provisions of this Convention and the competent authorities of
the Contracting States shall if necessary consult each other.
ARTICLE IO
Dividends
1. Dividends paid by a company which is a resident of a Contracting State to a resident
of the other Contracting State may be taxed in that other State.
2. However, such dividends may also be taxed in the Contracting State of which the
company paying the dividends is a resident and according to the laws of that State, but if the
beneficial owner of the dividends is a resident of the other Contracting State, the tax so charged
shall not exceed:
a) 5 per cent of the gross amount of the dividends if the beneficial owner is a
company which holds directly at least 10 per cent of the share capital of the company
paying the dividends;
b) 15 per cent of the gross amount of the dividends in all other cases.
This paragraph shall not affect the taxation of the company in respect of the profits out of
which the dividends are paid.
3. Subparagraph a) of paragraph 2 shall not apply in the case of dividends paid by a
Regulated Investment Company (RIC) or a Real Estate Investment Trust (REIT). In the case of
dividends paid by a RIC, subparagraph b) of paragraph 2 shall apply. In the case of dividends
paid by a REIT, subparagraph b) of paragraph 2 also shall not apply unless:
a) the beneficial owner of the dividends is an individual holding an interest of
not more than 10 percent in the REIT;
b) the dividends are paid with respect to a class of stock that is publicly traded
and the beneficial owner of the dividends is a person holding an interest of not more
than 5 percent of any class of the REIT's stock; or
c) the beneficial owner of the dividends is a person holding an interest of not
more than 10 percent in the REIT and the REIT is diversified.
The rules of this paragraph shall also apply to dividends paid by companies resident in Iceland
that are similar to the United States companies referred to in this paragraph. Whether
companies that are residents of Iceland are similar to the United States companies referred to in
this paragraph will be determined by mutual agreement of the competent authorities.
4. Notwithstanding paragraphs 2 or 3, dividends shall not be taxed in the Contracting
State of which the company paying the dividends is a resident if the beneticial owner of the
dividends is resident in the other Contracting State and is described in subparagraph a) or b) of
paragraph 2 of Article 4 (Resident), provided that such dividends are not derived from the
carrying on of a business, directly or indirectly, by such pension scheme or employee benefit
organization.
, .
11
5. For purposes of this Article, the term "dividends" means income from shares or other
rights, not being debt-claims, participating in profits, as well as income that is subjected to the
same taxation treatment as income from shares under the laws of the State of which the payer is
a resident.
6. The provisions of paragraphs 1 through 4 shall not apply if the beneficial owner of
the dividends, being a resident of a Contracting State, carries on business in the other
Contracting State of which the company paying the dividends is a resident, through a
permanent establishment situated therein and the holding in respect of which the dividends are
paid is effectively connected with such permanent establishment. In such case the provisions of
Article 7 (Business Profits) shall apply.
7. A Contracting State may not impose any tax on dividends paid by a resident of the
other State, except insofar as the dividends are paid to a resident of the first-mentioned State or
the dividends are attributable to a permanent establishment, nor may it impose tax on a
corporation's undistributed profits, except as provided in paragraph 8, even if the dividends
paid or the undistributed profits consist wholly or partly of profits or income arismg in that
State.
8. A company that is a resident of one of the States and that has a permanent
establishment in the other State or that is subject to tax in the other State on a net basis on its
income that may be taxed in the other State under Article 6 (Income from Immovable Property
(Real Property» or under paragraph 1 of Article 13 (Capital Gains) may be subject in that other
State to a tax in addition to the tax allowable under the other provisions of this Convention.
Such tax, however, may be imposed on only the portion of the business profits of the company
attributable to the permanent establishment and the portion of the income referred to in the
preceding sentence that is subject to tax under Article 6 or under paragraph I of Article 13 that,
in the case of the United States, represents the dividend equivalent amount of such profits or
income and, in the case of Iceland, is an amount that is analogous to the diVidend equivalent
amount.
9. The tax referred to in paragraph 8 may not be imposed at a rate in excess of the rate
specified in subparagraph 2 a).
ARTICLE 11
Interest
1. Interest arising in a Contracting State and beneficially owned by a resident of the
other Contracting State shall be taxable only in that other State.
2. The term "interest" as used in this Article means income from debt-claims of every
kind, whether or not secured by mortgage and whether or not carrying a right to partiCipate
111
the debtor's profits, and in particular, income from government securities and income from
bonds or debentures, including premiums and prizes attaching to such securities, bonds or
,
I,
12
debentures, and all other income that
IS
subjected to the same taxation treatment as Il1comc
from money lent by the taxation law of the Contracting State in which the income arises.
Income dealt with in Article 10 (Dividends) and penalty charges for late payment shall not be
regarded as interest for the purpose of this Article.
3. The provisions of paragraph 1 shall not apply if the beneticial owner of the interest,
being a resident of a Contracting State, carries on business in the other Contracting State in
which the interest arises, through a permanent establishment situated therein and the debt-claim
in respect of which the interest
IS
paid is effectively connected with such permanent
establishment. In such case the provisions of Article 7 (Business Profits) shall apply.
4. Where, by reason of a special relationship between the payer and the benefiCial
owner or between both of them and some other person, the amount of the interest, having
regard to the debt-claim for which it is paid, exceeds the amount which would have been
agreed upon by the payer and the beneficial owner in the absence of such relationship, the
provisions of this Article shall apply only to the last-mentioned amount. In such case, the
excess part of the payments shall remain taxable according to the laws of each Contracting
State, due regard being had to the other provisions of this Convention.
5. Notwithstanding the provisions of paragraph 1:
a) interest paid by a resident of a Contracting State and that is determined with
reference to receipts, sales, income, profits or other cash flow of the debtor or a related
person, to any change in the value of any property of the debtor or a related person or to
any dividend, partnership distribution or similar payment made by the debtor to a
related person also may be taxed in the Contracting State in which it arises, and
according to the laws of that State, but if the beneficial owner is a resident of the other
Contracting State, the gross amount of the interest may be taxed at a rate not exceeding
the rate prescribed in subparagraph b) of paragraph 2 of Article 10 (Dividends); and
b) interest that is an excess inclusion with respect to a residual interest in a real
estate mortgage investment conduit may be taxed by each State in accordance with its
domestic law.
ARTICLE 12
Royalties
1. Royalties arising in a Contracting State and beneficially owned by a resident of the
other Contracting State may be taxed only in that other State.
2. Notwithstanding the provisions of paragraph 1, such royalties may also be taxed in
the Contracting State in which they arise if they constitute consideration for the use of, or the
right to use
. .
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13
a) a trademark and any information concerning industrial, commercial or
scientific experience provided in connection with a rental or franchise agreement that
includes rights to use a trademark, or
b) a motion picture film or work on film or videotape or other means of
reproduction for use in connection with television,
however the tax so charged shall not exceed 5 percent of the gross amount of the royalties.
3. The term "royalties" as used in this Article means payments of any kind received as
a consideration for the use of, or the right to use, any copyright of literary, artistic, scientific or
other work (including computer software, and cinematographic films), any patent, trade mark,
design or model, plan, secret formula or process, or for information concerning industrial,
commercial or scientific experience.
4. The provisions of paragraphs 1,2 and 3 shaH not apply if the beneficial owner of the
royalties, being a resident of a Contracting State, carries on business in the other Contracting
State in which the royalties arise, through a permanent establishment situated therein and the
right or property in respect of which the royalties are paid is effectively connected with such
permanent establishment. In such case the provisions of Article 7 (Business Profits) shall apply.
5. For the purposes of this Article,
a) Royalties shall be deemed to arise in a Contracting State when the payer is a
resident of that State. Where, however, the person paying the royalties, whether he is a
resident of a Contracting State or not, has in a State a permanent establishment in
connection with which the obligation to pay the royalties was incurred, and such
royalties are borne by such permanent establishment, then such royalties shall be
deemed to arise in the State in which the permanent establishment is situated and not in
any other State of which the payer is a resident;
b) Where subparagraph a) does not operate to treat royalties as arising in either
Contracting State, and the royalties are for the use of, or the right to use, in one of the
Contracting States, any property or right described in paragraph 3, the royalties shall be
deemed to arise in that State.
6. Where, by reason of a special relationship between the payer and the beneficial
owner or between both of them and some other person, the amount of the royalties, having
regard to the use, right or informatIOn for which they are paid, exceeds the amount which
would have been agreed upon by the payer, and the beneficial owner in the absence of such
relationship, the provisions of this Article shall apply only to the last-mentioned amount. In
such case, the excess part of the payments shall remain taxable according to the laws of each
Contracting State, due regard being had to the other provisions of this Convention .
. .
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14
ARTICLE I3
Capital Gains
I. Gains derived by a resident of a Contracting State from the alienation of immovable
property (real property) situated in the other Contracting State may be taxed in that other State.
2. For the purposes of this Article the term "immovable property (real property)
situated in the other Contracting State" shall include:
a) immovable property (real property) referred to in Article 6 (Income from
Immovable Property (Real Property»;
b) rights to assets to be produced by the exploration or exploitation of the sea
bed and sub-soil of that other State and their natural resources, including rights to
interests in or the benefit of such assets;
c) where that other State is the United States, a United States real property
interest; and
d) where that other State is Iceland,
(i) shares, including rights to acquire shares, other than shares in which
there is regular trading on a stock exchange, deriving their value or the greater
part of their value directly or indirectly from immovable property (real property)
situated in Iceland; and
(ii) an interest in a partnership or trust to the extent that the assets of the
partnership or trust consist of immovable property (real property) situated in
Iceland, or of shares referred to in clause i) of this subparagraph.
3. Gains from the alienation of movable property forming part of the business property
of a permanent establishment which an enterprise of a Contracting State has in the other
Contracting State and gains from the alienation of such a permanent establishment (alone or
with the whole enterprise) may be taxed in that other State.
4. Gains derived by an enterprise of a Contracting State from the alienation of ships,
aircraft, or containers operated or used in international traffic or personal property pertaining to
the operation or use of such ships, aircraft, or containers shall be taxable only in that State.
5. Gains from the alienation of any property other than that referred to in the preceding
paragraphs shall be taxable only in the Contracting State of which the alienator is a resident.
6. The provisions of paragraph 5 shall not affect the right of each of the Contracting
States to levy according to its own law a tax on gains from the alienation of shares or rights in a
company, the capital of which is wholly or partly divided into shares and which under the laws
of that State is a resident of that State, derived by an individual who is a resident of the other
Contracting State and has been a resident of the first-mentioned State in the course of the last
five years preceding the alienation of the shares or rights .
.
-
.
'
.
15
ARTICLE 14
Income from Employment
1. Subject to the provisions of Articles 15 (Directors' Fees), 17 (Pensions, Social
Security, and Annuities), and I X (Government Service), salaries, wages and other similar
remuneration derived by a resident of a Contracting State in respect of an employment shall be
taxable only in that State unless the employment is exercised in the other Contracting State. If
the employment is so exercised, such remuneration as is derived therefrom may be taxed in that
other State.
2. Notwithstanding the provisions of paragraph I, remuneration derived by a resident
of a Contracting State in respect of an employment exercised in the other Contracting State
shall be taxable only in the first-mentioned State if:
a) the recipient is present in the other State for a period or periods not exceeding
in the aggregate 183 days in any twelve-month period commencing or ending in the
fiscal year or the taxable year concerned, and
b) the remuneration is paid by, or on behalf of, an employer who is not a
resident of the other State, and
c) the remuneration is not borne by a permanent establishment which the
employer has in the other State.
3. Notwithstanding the preceding provisions of this Article, remuneration described in
paragraph I that is derived by a resident of a Contracting State in respect of an employment as
a member of the regular complement of a ship or aircraft operated in international traffic shall
be taxable only in that State.
ARTICLE 15
Directors' Fees
Directors' fees and other similar payments derived by a resident of a Contractlllg State
in his capacity as a member of the board of directors of a company which is a resident of the
other Contracting State may be taxed in that other State.
ARTICLE 16
Artistes and Sportsmen
I. Income derived by a resident of a Contracting State as an entertainer, such as a
theater, motion picture, radio, or television artiste, or a musician, or as a sportsman, from his
personal activities as such exercised in the other Contracting State, which income would be
exempt from tax in that other Contracting State under the provisions of Articles 7 (Business
Profits) and 14 (Income from Employment) may be taxed in that other State, except where the
amount of the gross receipts derived by such entertainer or sportsman, including expenses
, . '
16
reimbursed to him, or borne on his behalf, from such activities does not exceed twenty
thousand United States dollars ($20,000) or its equivalent in Icelandic kronur for the taxable
year concerned.
2. Where income in respect of activities exercised by an entertainer or a sportsman in
his capacity as such accrues not to the entertainer or sportsman himself but to another person,
that income, notwithstanding the provisions of Article 7 (Business Profits), may be taxed in the
Contracting State in which the activities of the entertainer or sportsman are exercised, unless
such other person establishes that neither the entertamer or sportsman nor persons related
thereto participate directly or indirectly in the profits of that other person in any manner,
including the receipt of deferred remuneration, bonuses, fees, dividends, partnership distributions, or other distributions.
ARTICLE 17
Pensions, Social Security, and Annuities
1. Subject to the provisions of paragraph 2 of Article 18 (Government Service),
pensions and other similar remuneration paid to a resident of a Contracting State in
consideration of past employment shall be taxable only in that State.
2. Notwithstanding the proVIsions of paragraph I, payments made by a Contracting
State under provisions of the social security or similar legislation of that State to a resident of
the other Contracting State or to a citizen of the United States shall be taxable only in the firstmentioned State.
3. AnnUIties derived and beneficially owned by an individual resident of a Contracting
State shall be taxable only in that State. The term "annuities" as used in this paragraph means a
stated sum paid periodically at stated times during a specified number of years, under an
obligation to make the payments in return for adequate and full consideration (other than
services rendered).
4. Where a resident of a Contracting State is a beneficiary of a pension scheme resident
in the other Contracting State, income earned but not distributed by the pension scheme may be
taxed in the first-mentioned State only at such tIlne as and, subject to paragraph l, to the extent
that a distribution is made from the pension scheme.
ARTICLE 18
Government Service
1.
a) Salaries, wages and other similar remuneration, other than a pension, paid
from the public funds of a Contracting State or a political subdivision or a local
authority thereof to an individual in respect of services rendered to that State or
, . '
17
subdivision or authority in the discharge of functions of a governmental nature shall be
taxable only in that State.
b) However, such salaries, wages and other similar remuneration shall be
taxable only in the other Contractll1g State if the services are rendered in that State and
the individual is a resident of that State who:
(i) is a national of that State; or
(ii) did not become a resident of that State solely for the purpose of
rendering the services.
2.
a) Any pension paid by, or out of funds created by, a Contracting State or a
political subdivision or a local authority thereof to an indiVIdual in respect of services
rendered to that State or subdivision or authority in the discharge of functions of a
govemmental nature (other than a payment to which paragraph 2 of Ar1icle 17
(Pensions, Social Security, and Annuities) applies) shall be taxable only in that State.
b) However, such pension shall be taxable only in the other Contracting State if
the individual is a resident of, and a national of. that State.
3. The provisions of Ar1icles 14 (Income from Employment), 15 (DIrectors' Fees), 16
(Ar1istes and Sp0r1smen), and 17 (Pensions, Social Security, and Annuities) shall apply to
salaries, wages and other similar remuneration and to pensions in respect of services rendered
in connection with a business carried on by a Contracting State or a political subdivision or a
local authority thereof.
ARTICLE 19
Students and Trainees
a) An individual who is a resident of one of the Contracting States at the time
1.
he becomes temporarily present in the other Contracting State and who is temporarily
present in that other Contracting State for the primary purpose of:
(i) studying at a university or other recognized educational institution in
that other Contracting State, or
(ii) securing training required to qualify him to practice a profession or
professional specialty, or
(iii) studying or doing research as a recipient of a grant, allowance, or
award from a govemmental, religious, charitable, scientific, literary, or
educational organization,
shall be exempt from tax by that other Contracting State with respect to amounts
described in subparagraph b) for a period not exceeding 5 taxable years from the date of
his arrival in that other Contracting State.
b) The amounts referred to in subparagraph a) are:
,-
-
-
-
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--
- -
---
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18
(i) gi Its from abroad for the purpose of his maintenance, education,
study, research, or training:
(ii) the grant, allowance, or award: and
(iii) income fi'om personal services performed in that other Contracting
State in an amount not in excess of nine thousand United States dollars ($9,000)
or its equivalent in Icelandic kronur for any taxable year.
2. An individual who is a resident of one of the Contracting States at the time he
becomes temporarily present in the other Contracting State and who is temporarily present in
that other Contracting State as an employee of, or under Contract with, a resident of the firstmentioned Contracting State, for the primary purpose of:
a) acquiring technical, professional, or business experience from a person other
than that resident of the first-mentioned Contracting State or other than a person related
to such resident, or
b) studying at a university or other recognized educational institution in that
other Contracting State,
shall be exempt from tax by that other Contracting State for a period of 12 consecutive months
with respect to his income from personal services in an aggregate amount not in excess of nine
thousand United States dollars ($9,000) or its equivalent in Icelandic kronur.
3. An individual who is a resident of one of the Contracting States at the time he
becomes temporarily present in the other Contracting State and who is temporarily present in
that other Contracting State for a period not exceeding 1 year, as a participant in a program
sponsored by the Government of that other Contracting State, for the primary purpose of
training, research, or study, shall be exempt from tax by that other Contracting State with
respect to his income from personal services in respect of such training, research, or study
performed in that other Contracting State in an aggregate amount not in excess of nine
thousand United States dollars ($9,000) or its equivalent in Icelandic kronur.
ARTICLE 20
Other Income
1. Items of income beneficially owned by a resident of a Contracting State, wherever
arising, not dealt with in the foregoing Articles of this Convention shall be taxable only in that
State.
2. The provisions of paragraph I shall not apply to income, other than income from
immovable property (real property) as defined in paragraph 2 of Article 6 (Income from
Immovable Property (Real Property», if the beneficial owner of such income, being a resident
of a Contracting State, carries on business in the other Contracting State through a permanent
establishment situated therein and the right or property
lJ1
respect of which the income is paid is
, . '
19
effectively connected with such permanent establishment. In such case the provisions of Article
7 (Business Profits) shall apply.
ARTICLE 21
Limitation on Benefits
I. A resident of a Contracting State shall be entitled to benefits otherwise accorded to
residents of a Contracting State by this Convention only to the extent provided in this Article.
2. A resident of a Contracting State shall be entitled to all the benefits of this
Convention if the resident is:
a) an individual;
b) a Contracting State or any political subdivision or local authority thereof;
c) a company
it~
(i) its principal class of shares is regularly traded on one or more
recognized stock exchanges, and either
A)
its principal class of shares is primarily traded on a
recognized stock exchange located in the Contracting State of which the
company is a resident; or
B)
the company's primary place of management and control
is in the Contracting State of which it is a resident; or
(ii) at least 50 percent of the aggregate vote and at least 50 percent of the
aggregate value of the shares in the company are owned directly or indirectly by
five or fewer companies entitled to benefits under clause (i) of this
subparagraph, provided that, in the case of indirect ownership, each intermediate
owner is a resident of either Contracting State;
d) a person described in paragraph 2 of Article 4 (Resident) of this Convention,
provided that, in the case ofa person described in subparagraph a) or subparagraph b) of
that paragraph, more than 50 percent of the person's beneficiaries, members or
participants are individuals resident in either Contracting State; or
e) a person other than an individual, if:
(i) on at least half the days of the taxable year at least 50 percent of each
class of shares or other beneficial interests in the person is owned, directly or
indirectly, by residents of that State that are entitled to the benefits of this
Convention under subparagraph a), subparagraph b), clause (i) of subparagraph
c), or subparagraph d) ofthis paragraph, provided that, in the case of indirect
ownership, each intermediate owner is a resident of that Contracting State; and
(ii) less than 50 percent of the person's gross income for the taxable
year, as determined in the person's State of residence, is paid or accrued,
directly or indirectly, to persons who are not reSidents of either Contracting
.
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20
State entitled to the benefits of this Convention under subparagraph a),
subparagraph b), clause (i) of subparagraph c), or subparagraph d) of this
paragraph in the form of payments that are deductible for purposes of the taxes
covered by this Convention in the person's State of residence (but not including
am1' s length payments in the ordinary course of business for services or tangible
property and payments in respect of financial obligations to a bank, provided
that where such a bank is not a resident of a Contracting State such payment is
attributable to a permanent establishment of that bank located in one of the
Contracting States).
3.
a) A company that is a resident of a Contracting State shall also be
entitled to the benefits of the Convention if:
(i) at least 95 percent of the aggregate vote and at least 95 percent of the
value of all its shares is owned, directly or indirectly, by seven or fewer persons
that are residents of Member States of the European Union, or of the European
Economic Area, or parties to the North American Free Trade Agreement or the
European Free Trade Agreement that, in any case, meet the requirements of
subparagraph b), or any combination thereof; and
(ii) less than 50 percent of the company's gross income for the taxable
year is paid or accrued, in the form of deductible payments, directly or
indirectly, to persons who are not residents of Member States of the European
Union, or of the European Economic Area, or parties to the North American
Free Trade Agreement or the European Free Trade Agreement that, in any case,
meet the requirements of subparagraph b), or any combination thereof.
b) For purposes of subparagraph a), a person will be treated as a resident of a
Member State of the European Union or of the European Economic Area or party to the
North American Free Trade Agreement or the European Free Trade Agreement only if
such person:
(i) is a resident ofa Contracting State entitled to the benefits of this
Convention by reason of subparagraph a), subparagraph b), clause (i) of
subparagraph c), or subparagraph d) of paragraph 2; or
(ii) (A) would be entitled to the benefits ofa comprehensive income tax
convention in force between any Member State of the European Union or of the
European Economic Area or party to the North American Free Trade Agreement
or the European Free Trade Agreement and the Contracting State from which
the benefits of this Convention are claimed, analogous to subparagraph a),
subparagraph b), clause (i) of subparagraph c) or subparagraph d) of paragraph
2, provided that if such other convention does not contain a comprehensive
limitation on benefits article, the person would be entitled to the benefits of this
Convention under subparagraph a), subparagraph b), clause (i) of subparagraph
. '
21
C), or subparagraph d) of paragraph 2 if such person were a resident of one of
the Contracting States under Article 4 (Resident) of this Convention; and
(8) with respect to income referred to in Articles 10 (Dividends), II
(Interest) or 12 (Royalties), would be entitled under the convention referred to in
clause (ii) of this subparagraph to a rate of tax with respect to the particular class
of income for which benefits are being claimed under this Convention that is at
least as low as the rate applicable under this Convention.
4.
a) A resident of a Contracting State will be entitled to benefits of the
Convention with respect to an item of income derived from the other State, regardless
of whether the resident is entitled to benefits under paragraph 2 or 3 of this Article, If
the resident is engaged in the active conduct of a trade or business in the first-mentioned
State (other than the business of making or managing investments for the resident's own
account, unless these activities are banking, insurance or securities activities carried on
by a bank, insurance company or registered securities dealer), and the income derived
from the other Contracting State is derived in connection with, or is incidental to, that
trade or business and that resident satisfies any other conditions for obtaining such
benefits.
b) If the resident or any of its associated enterprises carries on a trade or
business activity in the other Contracting State which gives rise to an item of income,
subparagraph a) of this paragraph shall apply to such item only if the trade or business
activity in the first-mentioned State is substantial in relation to the trade or business
activity in the other State. Whether a trade or business activity is substantial for
purposes of this paragraph will be determined based on all the facts and circumstances.
c) In determining whether a person is "engaged in the active conduct of a trade
or business" in a Contracting State under subparagraph a) of this paragraph, activities
conducted by a partnership in which that person is a partner and activities conducted by
persons connected to such person shall be deemed to be conducted by such person. A
person shall be connected to another ifone possesses at least 50 percent of the
beneficial interest in the other (or, in the case of a company, at least 50 percent of the
aggregate vote and at least 50 percent of the aggregate value of the shares in the
company or of the beneficial equity interest in the company) or another person
possesses, directly or indirectly, at least 50 percent of the beneficial interest (or, in the
case of a company, at least 50 percent of the aggregate vote and at least 50 percent of
the aggregate value of the shares in the company or of the beneficial equity interest in
the company) in each person. In any case, a person shall be considered to be connected
to another if, based on all the relevant facts and circumstances, one has control of the
other or both are under the control of the same person or persons.
5. Notwithstanding the preceding provisions of this Article, where an enterprise of a
Contracting State derives income from the other Contracting State, and that income is
, . '
22
attributable to a permanent establishment which that enterprise has in a third jurisdiction, the
tax benefits that would otherwise apply under the other provisions of the Convention will not
apply to any item of income if the combined tax that is actually paid with respect to such
income in the first-mentioned State and in the third jurisdiction is less than 60 percent of the tax
that would have been payable in the first-mentioned State if the income were earned in that
State by the enterprise and were not attributable to the permanent establishment in the third
jurisdiction. Any dividends, interest or royalties to which the provisions of this paragraph apply
shall be subject to tax at a rate that shall not exceed 15 percent of the gross amount thereof.
Any other income to which the provisions of this paragraph apply will be subject to tax under
the provisions of the domestic law of the other Contracting State, notwithstanding any other
provision of the Convention. The provisions of this paragraph shall not apply if:
a) in the case of royalties, the royalties are received as compensation for the use
of. or the right to use, intangible property produced or developed by the permanent
establishment itself; or
b) in the case of any other income, the income derived from the other
Contracting State is derived in connection with, or is incidental to, the active conduct of
a trade or business carried on by the permanent establishment in the third jurisdiction
(other than the business of making, managing or simply holding investments for the
person's own account, unless these activities are banking or securities activities carried
on by a bank or registered securities dealer).
6. Notwithstanding the preceding provisions of this Article, if a company that is a
resident of a Contracting State, or a company that controls directly or indirectly such a
company, has outstanding a class of shares:
a) which is subject to terms or other arrangements which entitle its holders to a
portion of the income of the company derived from the other Contracting State that is
larger than the portion such holders would receive absent such terms or arrangements
("the disproportionate part of the income"); and
b) 50 percent or more of which is owned by persons who are not entitled to
benefits under paragraph 2 of this Article;
the benefits of this Convention shall not apply to the disproportionate part of the income.
7. A resident of a Contracting State that is not entitled to benefits pursuant to the
preceding paragraphs of this Article shall, nevertheless, be granted benefits of the Convention
if the competent authority of the other Contracting State determines that the establishment,
acquisition or maintenance of such person and the conduct of its operations did not have as one
of its principal purposes the obtaining of benefits under the Convention. The competent
authority of the other Contracting State shall consult with the competent authority of the firstmentioned State before denying the benefits of the Convention under this paragraph.
8.
a) For purposes of this Article the term "principal class of shares" means the
ordinary or common shares of the company, provided that such class of shares
1
23
represents the majority of the voting power and value of the company. II' no single class
of ordinary or common shares represents the majority of the aggregate voting power
and value of the company, the "principal class of shares" is that class or those classes
that
111
the aggregate represent a majority of the aggregate voting power and value of the
company.
b) For purposes of this Article the term "recognized stock exchange" means:
(i) the NASDAQ System owned by the National Association of
Securities Dealers, Inc. and any stock exchange registered with the U.S.
Securities and Exchange Commission as a national securities exchange under
the U.S. Securities Exchange Act of 1934;
(ii) the Icelandic Stock Exchange;
(iii) the stock exchanges of Amsterdam, Brussels, Copenhagen,
Frankfurt, Hamburg, Helsinki, London, Oslo, Paris, Stockholm, Sydney, Tokyo,
and Toronto; and
(iv) any other stock exchange agreed upon by the competent authorities
of both Contracting States.
c)
For purposes of this Article a company's primary place of management
and control will be in the State of which it is a resident only if executive officers
and senior management employees exercise day-to-day responsibility for more
of the strategic, financial and operational policy decision making for the
company (including its direct and indirect subsidiaries) in that State than in any
other state, and the staffs conduct more of the day-to-day activities necessary for
preparing and making those decisions in that State than in any other state.
ARTICLE 22
Relief from Double Taxation
I. In accordance with the provisions and subject to the limitations of the law of the
United States (as it may be amended from time to time without changing the general principle
hereof), the United States shall allow to a resident or citizen of the United States as a credit
against the United States tax on income:
a) the income tax paid or accrued to Iceland on behalf of such citizen or
resident; and
b) in the case ofa United States company owning at least 10 percent of the
voting stock of a company that is a resident of Iceland and from which the United States
company receives dividends, the income tax paid or accrued to Iceland by or on behalf
of the payer with respect to the profits out of which the dividends are paId.
For the purposes of this paragraph, the taxes referred to in subparagraph a) of paragraph 3 and
paragraph 4 of Article 2 (Taxes Covered) shall be considered income taxes.
, . '
24
2. For the purposes of applying paragraph I of this Article,
a) subject to subparagraph b) of this paragraph, an item of gross income, as
determined under the laws of the United States, derived by a resident of the United
States that, under this Convention, may be taxed in Iceland shall be deemed to be
income from sources in Iceland;
b) however, gains derived by an individual while that individual was a resident
of the United States, that are taxed by the United States in accordance with the
Convention, and that may also be taxed in Iceland by reason only of paragraph 5 of
Article 13 (Capital Gains), shall be deemed to be gain.s from sources in the United
States.
3. In the case of Iceland, double taxation shall be avoided as follows:
a) When a resident of Iceland derives income which, in accordance with the
provisions of this Convention, may be taxed in the United States, Iceland shall allow as
a deduction from the tax on the income of that resident an amount equal to the income
tax paid in the United States;
b) Such deduction shall not, however, exceed that part of the income tax, as
computed before the deduction is given, which is attributable to the income that may be
taxed in the United States;
c) When a resident of Iceland derives income which,
Il1
accordance with the
provisions of this Convention, shall be taxable only in the United States, Iceland may
include this income in the tax base but shall allow as a deduction from income tax that
part of the income tax which is attributable to the income derived from the United
States.
For the purposes of this paragraph, the United States taxes referred to in subparagraph b) of
paragraph 3 and paragraph 4 of Article 2 (Taxes Covered) shall be considered income taxes,
and shall be allowed as a deduction against the Icelandic tax on income.
4. Where a United States citizen is a resident of Iceland:
a) with respect to items of income that under the provisions of this Convention
are exempt from United States tax or that are subject to a reduced rate of United States
tax when derived by a resident of Iceland who is not a United States citizen, Iceland
shall allow as a credit against Icelandic tax, only the tax paid, if any, that the United
States may impose under the provisions of this Convention, other than taxes that may be
imposed solely by reason of citizenship under the saving clause of paragraph 4 of
Article I (General Scope);
b) for purposes of computing United States tax on those items of income
referred to in subparagraph a), the United States shall allow as a credit against United
States tax the income tax paid to Iceland after the credit referred to in subparagraph a);
the credit so allowed shall not reduce the portion of the United States tax that is
creditable against the Icelandic tax in accordance with subparagraph a): and
,.'
------------.
'
25
c) for the exclusive purpose of relieving double taxatIOn in the United States
under subparagraph b), items of income referred to in subparagraph a) shall be deemed
to arise in Iceland to the extent necessary to avoid double taxation of such income under
subparagraph b).
ARTICLE 23
Non-Discrimination
1. Nationals of a Contracting State shall not be subjected in the other Contracting State
to any taxation or any requirement connected therewith, which is other or more burdensome
than the taxation and connected requirements to which nationals of that other State
!O
the same
circumstances, in particular with respect to residence, are or may be subjected. This provision
shall, notwithstanding the provisions of Article 1 (General Scope), also apply to persons who
are not residents of one or both of the Contracting States. However, for the purposes of United
States taxation, United States nationals who are subject to tax on a worldwide basis are not in
the same circumstances as nationals of Iceland who are not residents of the United States.
2. The taxation on a permanent establishment which an enterprise of a Contracting
State has in the other Contracting State shall not be less favourably levied in that other State
than the taxation levied on enterprises of that other State carrying on the same activities. This
provision shall not be construed as obliging a Contracting State to grant to residents of the other
Contracting State any personal allowances, reliefs and reductions for taxation purposes on
account of civil status or family responsibilities which it grants to its own residents.
3. Except where the provisions of paragraph I of Article 9 (Associated Enterprises),
paragraph 4 of Article J J (Interest), or paragraph 6 of Article 12 (Royalties), apply, interest,
royalties and other disbursements paid by an enterprise of a Contracting State to a resident of
the other Contracting State shall, for the purpose of determining the taxable profits of such
enterprise, be deductible under the same conditions as if they had been paid to a resident of the
first-mentioned State. Similarly, any debts of an enterprise of a Contracting State to a resident
of the other Contracting State shall, for the purpose of determining the taxable capital of such
enterprise, be deductible under the same conditions as if they had been contracted to a resident
of the first-mentioned State.
4. Enterprises of a Contracting State, the capital of which is wholly or partly owned or
controlled, directly or indirectly, by one or more residents of the other Contracting State, shall
not be subjected in the first-mentioned State to any taxation or any requirement connected
therewith which is other or more burdensome than the taxation and connected requirements to
which other similar enterprises of the first-mentioned State are or may be subjected.
5. Nothing in this Article shall be construed as preventing either Contracting State from
imposing a tax as described in paragraph 8 of Article 10 (Dividends) .
.
'
26
6. The provisions of this Article shall, notwithstanding the provisions of Article 2
(Taxes Covered), apply to taxes of every kind and description imposed by a Contracting State
or a political subdivision or local authority thereof.
ARTICLE 24
Mutual Agreement Procedure
1. Where a person considers that the actions of one or both of the Contracting States
result or will result for him in taxation not in accordance with the provisions of this
Convention, he may, irrespective of the remedies provided by the domestic law ofthose States,
and the time limits prescribed in such laws for presenting claims for refunds, present his case to
the competent authority of either State.
2. The competent authority shall endeavor, if the objection appears to it to be justified
and if it is not itself able to arrive at a satisfactory solution, to resolve the case by mutual
agreement with the competent authority of the other Contracting State, with a view to the
avoidance of taxation which is not in accordance with the Convention. Any agreement reached
shall be implemented notwithstanding any time limits or other procedural limitations in the
domestic law of the Contracting States.
3. The competent authorities of the Contracting States shall endeavor to resolve by
mutual agreement any difficulties or doubts arising as to the interpretation or application of the
Convention. In particular the competent authorities of the Contracting States may agree:
a) to the same attribution of income, deductions, credits, or allowances of an
enterprise of a Contracting State to its permanent establishment situated in the other
Contracting State;
b) to the same allocation of income, deductions, credits, or allowances between
persons;
c) to the same characterization of particular items of income, including the same
characterization of income that is assimilated to income from shares by the taxation law
of one of the Contracting States and that is treated as a different class of income in the
other State;
d) to the same characterization of persons;
e) to the same application of source rules with respect
to particular items of income;
f) to a common meaning of a term; and
g) to the application of the provisions of domestic law regarding penalties,
fines, and interest in a manner consistent with the purposes of the Convention.
They may also consult together for the elimination of double taxation in cases not provided for
in the Convention.
, . '
27
4. The competent authorities of the Contracting States may communicate with each
other directly, for the purpose of reaching an agreement in the sense of the preceding
paragraphs.
ARTICLE 25
Exchange of Information and Administrative Assistance
l. The competent authorities of the Contracting States shall exchange such information
as is relevant for carrying out the provisions of this Convention or of the domestic laws
concerning taxes of every kind imposed by a Contracting States, insofar as the taxation
thereunder is not contrary to the Convention including information relating to the assessment or
collection of, the enforcement or prosecution in respect of, or the determination of appeals in
relation to, the taxes covered by the Convention. The exchange of information
IS
not restricted
by paragraph I of Article I (General Scope) and Article 2 (Taxes Covered). Any information
received by a Contracting State shall be treated as secret in the same manner as information
obtained under the domestic laws of that State and shall be disclosed only to persons or
authorities (including courts and administrative bodies) involved in the assessment, collection
or administration of, the enforcement or prosecution in respect of, or the determination of
appeals in relation to the taxes referred to above, or the oversight of the above. Such persons or
authorities shall use the information only for such purposes. They may disclose the information
in public court proceedings or in judicial decisions.
2. If information is requested by a Contracting State in accordance with this Article, the
other Contracting State shall obtain that information in the same manner and to the same extent
as if the tax of the first-mentioned State were the tax of that other State and were being imposed
by that other State, notwithstanding that the other State may not, at that time, need such
information for purposes of its own tax.
3. In no case shall the provisions of paragraphs I and 2 be construed so as to impose on
a Contracting State the obligation:
a) to carry out administrative measures at variance with the laws and
administrative practice of that or of the other Contracting State;
b) to supply information which is not obtainable under the laws or in the normal
course of the administration of that or of the other Contracting State;
c) to supply information which would disclose any trade, business, industrial,
commercial or professional secret or trade process, or information, the disclosure of
which would be contrary to public policy (ordre public).
4. If specifically requested by the competent authority of a Contracting State, the
competent authority of the other Contracting State shall provide information under this Article
in the form of depositions of witnesses and authenticated copies of unedited original documents
(including books, papers, statements, records, accounts, and writings), to the same extent such
,.'
28
depositions and documents can be obtained under the laws and administrative practices of that
other State with respect to its own taxes.
5. Each of the Contracting States shall endeavor to collect on behalf of the other
Contracting State such amounts as may be necessary to ensure that relief granted by the
Convention from taxation imposed by that other State does not inure to the benefit of persons
not entitled thereto. This paragraph shall not impose upon either of the Contracting States the
obligation to carry out administrative measures that would be contrary to its sovereignty,
security, or public policy.
6. The competent authority of a Contracting State intending to send officials of that
State to the other Contracting State to interview individuals and examine books and records
with the consent of the persons subject to examination shall notify the competent authority of
the other Contracting State of that intention.
ARTICLE 26
Members of Diplomatic Missions and Consular Posts
Nothing in this Convention shall affect the fiscal privileges of members of diplomatic
missions or consular posts under the general rules of intemational law or under the provisions
of special agreements.
ARTICLE 27
Entry Into Force
I. This Convention shall be subject to ratification in accordance with the applicable
procedures of each Contracting State. The Contracting States shall notify each other in writing,
through diplomatic channels, when their respective applicable procedures have been satisfied.
2. The Convention shall enter into force on the date of the later of the notifications
referred to in paragraph I, and its provisions shall have effect in both Contracting States:
a) in respect of taxes withheld at source, on income derived on or after 1
January in the calendar year next following the year in which the Convention enters into
force;
b) in respect of other taxes, for taxes chargeable for any tax year beginning on
or after I January
II1
the calendar year next following the year in which the Convention
enters into force.
3. The Convention between the United States of America and the Republic of Iceland
for the Avoidance of Double Taxation and the Prevention of Fiscal EvaSion with Respect to
Taxes on Income and Capital, signed May 7, 1975, ("the prior Convention") shall cease to have
effect in relation to any tax from the date on which this Convention has effect in relation to that
tax in accordance with paragraph 2 of this Article. Notwithstanding the preceding sentence,
, . '
29
where any person entitled to benefits under the prior Convention would have been entitled to
greater benefits thereunder than under this Convention, the prior Convention shall, at the
election of such person, continue to have effect in its entirety with respect to such person for a
twelve-month period from the date on which the provisions of this Convention otherwise would
have effect under paragraph 2 of this Article. The prior Convention shall terminate on the last
date on which it has effect in relation to any tax in accordance with the foregoing provisions of
this paragraph.
4. Notwithstanding the entry into force of this Convention, an individual who was
entitled to benefits of Article 21 (Teachers) of the prior Convention at the time of the entry into
force of this Convention shall continue to be entitled to such benefits until such time as the
individual would cease to be entitled to benefits if the prior Convention remained in force.
ARTICLE 28
Termination
This Convention shall remain in force until terminated by a Contracting State. Either
Contracting State may terminate the Convention, through diplomatic channels, by giving notice
of termination in writing at least six months before the end of any calendar year. In such event,
the Convention shall cease to have effect in both Contracting States:
a) in respect of taxes withheld at source, on income derived on or after I
January in the calendar year next following the.year in which the notice is given;
b) in respect of other taxes, for taxes chargeable for any tax year beginning on
or after I January in the calendar year next following the year in which the notice is
given.
IN WITNESS WHEREOF the undersigned, being duly authorized thereto by their respective
Governments, have signed this Convention.
Done in duplicate at Washington on this twenty-third day of October 2007, in the English and
Icelandic languages, both texts being equally authentic.
FOR THE GOVERNMENT OF
THE UNITED STATES OF AMERICA:
FOR THE GOVERNMENT OF
ICELAND:
.-.'
30
Protocol
At the signing of the Convention concluded today between the Government of the United
States of America and the Government of Iceland for the A voidance of Double Taxation and
the Prevention of Fiscal Evasion with Respect to Taxes on Income, the undersigned have
agreed upon the following additional provisions which shaIl form an integral part of the said
Convention.
1. With reference to Article 3 (General Definitions)
The foIlow1l1g shaIl be considered to meet the requirements of subparagraph I) of paragraph 1:
a) in Iceland: any pension fund or pension plan qualified under the Pension Act or any
identical or substantially similar schemes which are created under any law enacted after the
signature of the Convention.
b) in the United States, qualified plans under section 401(a) of the Internal Revenue Code,
individual retirement plans (including individual retirement plans that are part ofa simplified
employee pension plan that satisfies section 408(k), individual retirement accounts, individual
retirement annuities, section 408(p) accounts, and Roth IRAs under section 408A), section
4S7(g) governmental plans, section 403(a) qualified annuity plans, and section 403(b) plans, or
any identical or substantially similar schemes which are created under any law enacted after the
signature of the Convention.
2.
With reference to Article 7 (Business Profits)
The principles of the OECD Transfer Pricing Guidelines shall apply, by analogy, for the
purposes of determining the profits attributable to a permanent establishment. Accordingly,
any of the methods described therein, including profits methods, may be used to determine the
income of a permanent establishment so long as those methods are applied in accordance with
the Guidelines.
3.
Articles 7 (Business Profits) and 23 (Non-Discrimination) shaIl not prevent Iceland from
continuing to tax permanent establishments of United States insurance companies in
accordance with Article 70, paragraph 2, section 3 of the Icelandic Tax Code, nor shaIl it
prevent the United States from continuing to tax permanent establishments of Icelandic
insurance companies in accordance with section 842 (b) orthe Internal Revenue Code.
, . '
31
4.
With reference to paragraphs g and 9 of Article 10 (Dividends)
The general principle of the "dividend equivalent amount", as used in United States law, is to
approximate that portion of the income mentioned in paragraph 7 of Article 10 that is
comparable to the amount that would be distributed as a dividend if such income were earned
by a subsidiary incorporated in the United States. For any year, a foreign corporation's
dividend equivalent amount is equal to the after-tax earnings attributable to the foreign
corporation's (i) income attributable to a permanent establishment
111
the United States, (ii)
income from real property in the United States that is taxed on a net basis under Article 6
(Income from Immovable Property (Real Property», and (iii) gain from a real property interest
taxable by the United States under paragraph I of Article 13 (Capital Gains), reduced by any
increase in the foreign corporation's net investment in U.S. assets or increased by any reduction
in the foreign corporation's net investment in U.S. assets.
5.
With reference to Article 16 (Artistes and Sportsmen)
Nothing shall preclude a Contracting State from withholding tax from such payments according
to its domestic laws. However, if according to the provisions of this Article, such remuneration
or income may only be taxed in the other Contracting State, the first-mentioned Contracting
State shall make a refund of the tax so withheld upon a duly filed claim. Such claim must be
filed with the tax authorities that have collected the withholding tax within five years after the
close of the calendar year in which the tax was withheld.
6.
With reference to Article 21 (Limitation on Benefits)
The competent authorities of the Contracting States shall consult together with a view to
developing a commonly agreed application of the provisions of this Article. The competent
authorities shall, in accordance with the provisions of Article 25 (Exchange of Information and
Administrative Assistance), exchange such information as is necessary for carrying out the
provisions of this Article.
7.
With reference to Article 25 (Exchange of Information and Administrative Assistance)
The powers of each Contracting State's competent authority to obtain infornlation include
powers to obtain information held by financial institutions, nominees, or persons acting in an
agency or fiduciary capacity (not including information that would reveal confidential
communications between a client and an attorney, solicitor or other legal representative, where
the client seeks legal advice), and information relating to the ownership oflegal persons, and
that each Contracting State's competent authority are able to exchange such information in
accordance with the Article.
,.'.
32
IN WITNESS WHEREOF the undersigned, being duly authorized thereto by their respective
Governments, have signed this Protocol.
Done in duplicate at Washington on this twenty-third day of October 2007
III
the English and
Icelandic languages, both texts being equally authentic.
FOR THE GOVERNMENT OF
THE UNITED STATES OF AMERICA:
,
FOR THE GOVERNMENT OF
ICELAND:
.
'
,
hp-635: Treasury Secretary Paulson to Visit India
Page 1 of 2
October 26 , 2007
hp-635
Treasury Secretary Paulson to Visit India
Treasury Secretary Henry M. Paulson, Jr. will travel to India this week to meet with
government officials and business leaders. The Secretary will also deliver remarks
at a conference on infrastructure in Mumbai and participate in a discussion in New
Delhi on India's rise as an important player on the global economic stage .
The Secretary will be in Kolkata on Oct. 28 to meet with West Bengal Chief Minister
Bhattacharya and local business leaders. He will then travel to Mumbai where he
will deliver remarks to the U.S.-India CEO Forum Infrastructure Conference and
meet with various officials including Reserve Bank of India Governor Reddy and
Securities and Exchange Board of India Chairman Damodaran. From there, he
travels to New Delhi where he will participate in a discussion at the Fortune Global
Forum . He will also meet with government leaders including Finance Minister
Chidambaram.
The following events are open to the media :
Who
What
When
Where
U.S. Treasury Secretary Henry M. Paulson , Jr.
Roundtable with SmartCard Customers and Demonstration on Mobility
of SmartCard Device in Rural India
Sunday, October 28, 10 a.m. Local Time
Grameen Sanchar SOCiety
Amtala , Kriparampuz, D-H Road
P.S. Bishmupur
Block - Bishmupur II
Kolkata
Who
What
When
Where
U. S. Treasury Secretary Henry M. Paulson , Jr.
Remarks to U.S.-India CEO Forum Infrastructure Conference
Monday, October 29, 9 a.m. Local Time
Taj Mahal Palace and Tower Hotel
Apollo Bunder
Mumbai
Who
What
When
Where
U. S. Treasury Secretary Henry M. Paulson, Jr.
Discussion on India's Economy at Fortune Global Forum
Tuesday, October 30, 9:40 a.m . Local Time
The Imperial New Delhi
Janpath
New Delhi
-30-
http://www treas.gov/presslreleases/hp635 htm
111812008
hp.635: Treasury Secretary Paulson to Visit India
http://wwwtreas.go v/ presslreleaseS/hp6 35.htm
Page 2 of 2
111812008
&-636: Remarks by Secretary Henry M. Paulson, lr. <br>on the Economic Power and Promise of Indi... Page 1 of 5
October 24, 2007
HP-636
Remarks by Secretary Henry M. Paulson, Jr.
on the Economic Power and Promise of India
before The Council on Foreign Relations
Washington, DC--Thank you, Peter. It is good to be with the Council here in
Washlllgton I appreciate the opportunity to talk with you today about the economic
power and promise of India
Earlier this year, Prime Minister Singh referred to India's history as "An open house.
an open society, open to the free flow of ideas and sCholarship" I will travel to India
next week, and look forward to being a guest in India's house. My objective IS to
contribute to the strong. growing partnership between India and the United States. I
hope to help the Indian government advance their economic reform agenda, which
will benefit India's citizens and the world
India IS a vibrant nation, whose strength lies in its commitment to equal rights - and
to speech, religious and economic freedoms that enrich the lives of all citizens.
India is not only the world's largest democracy: it is also a secular, pluralistic
society, committed to inclusive growth.
Through PreSident Bush and Prime Minister Singh's leadership, political, economic,
and cultural ties between the United States and India have never been stronger.
These lies enjoy bipartisan support in both countries. In the last few years, we have
launched important Initiatives in areas Including counter-terrorism cooperation,
space research, clean energy, agriculture, education, and economic development
The historiC agreement on civilian nuclear cooperation IS an important part of the
US. - India relationship, and it is beneficial to both countries. India is one of the
world's largest and most peaceful states with advanced nuclear technologies, and
has been isolated from the rest of the world on nuclear issues. This agreement will
bring India IIlto the nuclear nonproliferation mainstream, providing access to the
technology which can help it reach ItS economic and environmental objectives The
United States remains committed to thiS agreement.
The ties of our governments are, in some sense, catching up to the long history of
personal and profeSSional friendships among Indians and Americans. For decades,
Indians have immigrated to the United States, JOined our communities and raised
their families while maintaining their cultural heritage. Indian-Americans are
physiCians, engineers, CEOs, professors, teachers, entrepreneurs. They are a vital
part of the United States' economic and social fabric. Because of this long history,
the bonds among our people and our cultures will remain strong.
India's Economic Emergence
Prime Minister Singh is to be commended for beginning the process of transformlllg
India Into a global economic power by initiating economic liberalization In the early
1990's. These economic reforms have continued at varying speed throughout the
past 15 years, regardless of the party in power. Observers do not question whether
India's reforms will continue; they ask only about the pace.
The great Indian poet Tagore wrote that he had become his own verSion of an
optimist. He said, "If I can't make It through one door, I'll go through another dooror I'll make a door." The revolution in Indian economic thinking is "making doors"
and JIlvigoratJllg the Indian economy. India is a young country, With a young ..
population that will be looking for stable, well-paying jobs to support their families.
These reforms will help provide the jobs they will need.
http://www treas.gov/presslreleases/hp636 htm
11/6/2007
HP·636: Remarks by Secretary Henry M. Paulson, Jr. <br>on the Economic Power and Promise of Indi... Page 2 of 5
Through dramatic increases In mutual trade and foreign direct investment, the
United States has been a partner in India's economic emergence. In the last few
years, Indian exports to the United States have almost doubled to $21 billion, while
US. exports to India have doubled to $10 billion Similarly, investment flows have
increased dramatically. Indian firms have Invested $2 billion III the United States.
And US companies invested about $2 billion in India last year
As the Indian government has embraced greater economic openness, the creativity
and expertise of the Indian workforce has been unleashed onto the world economic
stage. We share Indian pollcymakers' belief that market-based policies and
programs Will spread oppoliunity to all levels of society - reachll1g aam aadmi, the
common man
The success of India's software IIldustry is often told, and the story bears repeating
here. Through the combination of expertise gained at the Indian Institutes of
Technology, and through innovative thll1king, Indian Industry has demonstrated that
it can, as the CEO of an Indian software company recently said, "Take the work
from any part of the world and do it In any part of the world."
India's GOP grew nearly 10 percent In 2006, compared to the world average of five
and a half percent. India's economic reforms have taken root. and by acceleratll1g
them, the government can help ensure that India's growth rate will be, as proJected,
at least 8 percent for the foreseeable future. I am optimistic about India's prospects.
Similar Values and Challenges
In pursuing economic growth, India and the United States share Similar values and
Similar challenges. We understand that the global economy is here to stay. To keep
growing and leading the world in innovation and opportunity, the United States and
India must trade freely, openly, and according to the principles of the global
marketplace. Trade also brings a wider variety of lower priced goods, and this
especially benefits lower-income citizens
I look forward to talking with the Indian government about making progress In the
Doha Development Round. Working together to successfully conclude a Doha
agreement will be the single most effective thing we can do to help raise liVing
standards in India and around the world. A Doha agreement is within reach, and the
potential is so great, that we must not let It slip through our grasp.
We also understand how rapidly-changing economies can lead to uncertainty,
causing many to doubt that trade brings greater benefits than costs. Together, India
and the United States must resist this protectionist sentiment. I am committed to
working to maintain an open trade and investment climate in the US.
Both India and the United States recognize that an integrated world economy
requires protecting the global fll1ancial network against those who want to harm our
people and our free economic systems by financing terrorism, weapons proliferation
or other, dangerous illicit activity. We will continue implementing financial system
safeguards to help ensure our countries' and our citizens' security.
The US. and India also share the challenge of ensuring secure and clean energy
supplies. We understand that economic growth and environmental responsibility are
necessary, compatible goals. MOVing forward with the civilian nuclear agreement IS
one part of the solution Workll1g together on a post-20 12 framework through the
UN climate change process is another
It is in the best interest of India, the United States and the world for India to
continue, and even accelerate, the pace of economic reform and openness. As with
any democratic transformative effort, India faces political challenges - somethll1g
the United States also knows well.
The government is to be applauded for what it has already accomplished, and
encouraged to move forward. We stand With them as a partner as they do. Other
countries are also developing financial sophistication and globalilltegration. If India
slows its pace now, It risks losing the ground it has worked so hard to gall1
http://www treas.gov/presslreleases/hp616 htm
1116/2007
HP·636: Remarks by Secretary Henry M. Paulson, Jr. <br>on the Economic Power and Promise of Indi... Page 3 of 5
The United States as a Partner India's Transformation
Now. let me talk about two areas where the United States. and particularly the
Department of Treasury. wants to be a partner in advancing reform and inclusive
economic growth .
First. by aSSisting the government's plans to finance physical infrastructure
Improvements. which will benefit Indian families' daily lives and fuel the economy.
Second . by supporting steps to strengthen and expand India's financial system by
building an International Financial Center. a so-called IFC. in Mumbai.
Achieving these two goals will require a firm commitment to adopt international
standards and to move forward aggressively with reforms . despite polilical risks .
Physical Infrastructure Improvements
The Indian government estimates that to further transform its economy. it needs to
spend close to $500 billion over the next five years to build physical infrastructure
that will deliver power to cities and villages. and transport people and goods to
markets . Given India's fi scal constraints. it is looking to the private sector to fund up
to one-third of this needed investment
The United States wants to support this effort to attract private financing . During my
trip. I will participate in the India Infrastructure Finance Conference in Mumbai . At
that conference and afterwards . we will highlight the opportunities of India's
infrastructure initiatives to US . businesses.
This infrastructure Investment is important to helping India achieve its second
Green Revolution. as Prime Minister Singh has called for. Our private sectors must
take an active role in developing a sophisticated agricultural market in India . where
farmers can tap modern supply chains and processing technologies to improve their
productivity and the lives of their families .
The government can do more to encourage this private investment by establishing
more hospitable investment. regulatory and financial regimes. Capital limitations.
combined with on-going uncertainty about contract enforcement and regulatory
consistency. will make infrastructure investment more difficult to obtain.
International Financial Center in Mumbai
Let me turn now to the expansion of India's financial sector. specifically.
establishing a financial center in Mumbai . In 2006 . Prime Minister Singh said that it
is possible for Mumbal to "emerge as a new financial capital of Asia . and be the
bridge between Asia and the West In the world of finance."
Properly-regulated and well-functioning financial markets are critical for balanced
development and strong. inclusive growth. This is an area of enormous opportunity
for India. Efficient markets link capital with ideas and ambition - they are the
economic lifeblood through which people find the means to rise out of poverty . This
is true in India . in the United States and around the world.
Today . Indian firms In Bangalore playa key role in the back office operalions of
global. multinational firms. In this. India has re volutionized. forever. theway the .
world does business. The next step is for India to develop front offices In Mumbal
that provide financial services to companies and investors in India and across the
region .
By establishing an IFC in Mumbai. India will build a financial system that will help
large and small businesses Shopkeepers, farmers and craftsmen need access to
credit. financial and insurance products, as much as the large. industrial
manufacturer does.
The Indian government has recognized this need , and commissioned a report from
.
a High Powered Expert Committee The Committee's report outillled the
requirements and a timetable for developing an IFC In Mumbal The Report IS bold ,
http://wwwtreas.gov/presslreleases/hp636.htm
1116/2007
HP-636: Remarks by Secretary Henry M. Paulson, lr. <br>on the Economic Power and Promise of Indi... Page 4 of 5
thorough and ambitious. I believe it IS the right path. A financial footprint In Murnbai
makes a door through which the world can invest in India, and India can Invest In
the world. EquallYHnportant, it gives India an Important stake In the rapidly growing
finanCial services Industry.
The Report identifies the needed changes to fiscal and monetary policy, and to
finanCial regulation It also outlines that Mumbai's own urban infrastructure must be
Improved This demonstrates the wisdom of the Indian government's emphaSis on
phYSical and financial infrastructure Improvements Both goals must be met in order
to achieve the tranSition that will provide Inclusive growth.
India has already made significant accomplishments in developing its financial
sector, and the economy has responded positively. India's stock and commodity
exchanges are thriVing Since deregulation, the asset management Industry has
grown and now manages over $100 billion in assets.
By reducing constraints on financial firms, India's government can foster a more
efficient allocation of financial resources. This will free capital to finance
infrastructure Investment, develop new innovations in other Industries, and extend
financial services to a larger portion of the population
India's large and growing middle class stands to benefit from new financial products
that will help them to achieve homeownership and to invest in the best possible
education for their children.
Many of the world's leading finanCial firms have already opened offices in Mumbai;
they are eager to do their part in building an International Fillancial Center. I urge
my Indian colleagues to move fmward qUickly on the recommendations of their
expert committee report.
On-going Efforts by the United States
The United States will continue as a partner with India In its economic
transformation. Treasury and the Finance Ministry have led an ongoing dialogue for
several years among U.S and Indian regulators to share experiences and best
practices. We will kick-off another session to help advance the Indian government's
economic reform agenda when I am in New Deihl next week. Mumbal's
development into an IFC is an important element of that agenda.
U.S. experience can help Indian government and industry as they work to develop
an IFC in Mumbal. And the private sector stands ready to share their experiences in
dealing With the development of domestic bond markets and other elements that
create the backbone of a financial center.
We understand that Indian officials are concerned that greater capital flows
associated with a financial center could add to Inflationary pressures, destabilize
the domestic financial sectm m add to exchange rate volatility. For the most part,
India IS on the right path to reduce these risks. India has allowed greater flexibility In
the exchange rate in recent months, and the appreciation in the rupee has helped
to reduce inflationary pressures.
India has also taken administrative steps to adjust the pace of capital outflows and
Inflows. As recent expenence in the region has shown, administrative restrictions of
capital flows are blunt instruments and can Ilave unintended consequences They
tend to inhibit effiCiency and lose their effectiveness over time. I encourage India to
continue liberalizing such restriclions Steps to broaden and deepen the domestic
financial sector will also help to mitigate the risks posed by greater capital flows.
India's development plans will require additional capital, innovative financial
Instruments and a commitment to financial openness Recent growth In India's
savings base and In the number of global firms seltlng up shop in India suggest that
all of this is possible --- that India can be a Significant exporter of finanCial flows and
investment in the years ahead
The development of Mumbai as a financial center will take some years to come to
fruition. Nonetheless, it is a path worth taking, a path that Will Yield benefits all along
http://www treas.gov/presslreleases/hp616 htm
11/6/2007
&-636: Remarks by Secretary Henry M. Paulson, Jr. <br>on the Economic Power and Promise of Indi ... Page 5 of 5
the way for India and for the global eco nomy
Conclusion
The remarkabl e growth brought about by India's economic reforms has proven the
wisdom of those reforms and their promise for the future . As Prime Minister Singh
said , India is "an open house." It can become more open, more integrated into the
global communi ty Thi s wi ll brlllg the inclusive growth which is India's aim - an
economy in which the small farmer, the craftsman and the next Indian en trepreneur
with a dream makes a door. and fulfills that dream .
India and the United Sta tes have made a very good start at delivering on our new
partnership , and we can do more to reach our full strategic and economic potential.
I look forward to learning from my Indian colleagues during my visit, and to working
with t11em on these, and future , initiatives.
Thank you and I welcome your questions .
http://www treas.gov/press/releases/hp636 htm
1116/2007
HP·643: Treasury,--Pnvate Sector Release Initial ResuIts<br>ofFlu Pandemic Excrcise<br>Nearly All ".
Page 1 of 1
I 0 view or pone me /-,UI- coneerl1 on tnls page, aown/oaa tne free A(}obe® Acrobat® Kea(}er®.
October 24, 2007
HP-643
Treasury, Private Sector Release Initial Results
of Flu Pandemic Exercise
Nearly All Participants Find Critical Gaps in Plans
Washington - The Treasury Department. the Financial Services Sector
Coordlnatirlg Council for Cntlcal Infrastructure Protection and Homeland Security,
and tile Securities Industry and Financial Marlagement Association today released
the preliminary results of the Industry-wide pandemiC flu exercise.
"The strong public-private coordination on this exercise allowed us to reach more
Institutions than we ever expected," said Valerie Abend. Treasury's Deputy
ASSistant Secretary for Cntlcal Infrastructure Protection "And by allOWing almost all
partiCipants to find critical gaps in their planning, this exercise was all
unquestiorlable sllccess In helping the industry prepare for sucll a crisis'"
More than 2.700 organizations registered to partiCipate anonymously in the online
financial services Industr'y exercise. which begall in September and ran for three
weeks. While banks made up the majority of participants. insurance companies,
securities firms and exchanges and state and federal regulators also took part in
tile exercise.
The exercise Simulated a pandemiC wave with a peak absenteeism rate of 49
percent. Tile exercise examined a number of Issues including human resources,
continUity of operations, and dependenCies on other sectors such as transportation,
energy and telecommunications
The results released today offer a basic first look at the potential Impact of a
pandemiC flu outbreak More detailed results on the pandemic's impact and tile
industry's response will be released in tile coming months, as data IS analyzed.
PreSident Bush directed Treasury In May 2006 to coordinate witll the banking and
finance sector to better prepare ItS response to a pandemic crisis.
REPORTS
•
Presentation on Initial Results
http://wwwtreas.gov/presslreleases/hp643.htm
11/6/2007
HP-643: Treasury, Private Sector Release Initial Results<br>of Flu Pandemic Exercise<br>Nearly All
Page 1 of 1
10 view or pnnt the r-'UI- content on thiS page. Gown/oad tne free ACloOe® AcroOat® Keader®.
October 24. 2007
HP-643
Treasury, Private Sector Release Initial Results
of Flu Pandemic Exercise
Nearly All Participants Find Critical Gaps in Plans
Washington - The Treasury Department, the Financial Services Sector
Coordinating Council for Critical Infrastructure Protection and Homeland Security,
and the Securities Industry and Financial Management Association today released
the preliminary results of the Irldustry-wlde pandemic flu exercise.
"The strong public-private coordination on this exercise allowed us to reach more
IIlstitutlons than we ever expected," said Valerie Abend, Treasury's Deputy
ASSistant Secretary for Critical Infrastructure Protection. "And by allowing almost all
participants to find critical gaps In their plannlllg, this exercise was an
unquestionable success in helping the Irldustry prepare fm such a criSIS ..
Mme than 2,700 organizations registered to participate anonymOUSly in the online
financial services Irldustry exercise, which began in September and ran for three
weeks. While banks made up the majority of participants, Insurance companies,
securities firms and exchanges and state and federal regulators also took part in
the exercise.
The exercise Simulated a pandemic wave with a peak absenteeism rate of 49
percent. Tile exercise examlrled a number of Issues including human resources,
contillLJlty of operations, and dependencies on other sectors such as transportation,
energy and telecommuilications.
The results released today offer a basic first look at the potential Impact of a
pandelllic flu outbreak Mme detailed results on the pandemic's illlpact and the
industry's response will be released in the coming months, as data IS analyzed.
PreSident Bush directed Treasury in May 2006 to coordinate with the banking and
finance sector to better prepare its response to a pandemic criSIS.
REPORTS
•
Presentation on Initial Results
http://wwwtreas.gov/presslreleases/hp643.htm
1116/2007
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From September 24 through October 12, the Financial Banking
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States
~
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~
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Distribution of Exercise Registrants
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13%
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18%
• Northeast
• Mid-Atlantic
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Mid-Atlantic
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Employee Numbers
25,000 - 50,000
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10,000 - 25,000
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• 25,000 - 50,000
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69%
5
Revenue
50 - 100 Billion
1%
1 - 50 Billion
Over 100 Billion
1%
9%
500 - 1 Billion
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14%
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Does your organization have business continuity
plans for a pandemic?
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Based on lessons learned from the exercise,
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Note: Dependencies may include telecommunications, energy, transportation,
information technology, and other service providers
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Will your organization initiate additional all-hazard plan
refinement based upon your organization's
lessons learned during the exercise?
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How significantly has the closing
of all schools affected your organization?
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What steps is your organization taking to ensure
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during [the height] of the pandemic? Check all that apply.
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15
hp-644: Fact Sheet: Designation ofIranian Entities and Individuals for Proliferation Activities and Sup",
Page 1 of 4
10 view or prml tile /-,UI- cOntent on 1I11S page, Gown/oaG tile (ree AaObe(8) Acrooat® Heaaer&,
October 25, 2007
hp-644
Fact Sheet: Designation of Iranian Entities and Individuals for Proliferation
Activities and Support for Terrorism
The US. Government is taking several major actions today to counter Iran's bid for
nuclear capabilities and support for terrorism by exposing Iranian banks, companies
and IndiViduals that !rave been Involved In these dangerous actiVities and by cutting
them off from the US financial system
Today. the Department of State designated under Executive Order 13382 two key
Iranian entities of proliferation concem: the IslamiC Revolutional'y Guard Corps
(IRGC: aka Iranian Revolutionary Guard Corps) and the Ministry of Defense and
Armed Forces Logistics (MODAFL). Additionally, the Depanment of the Treasury
designated for proliferation activities under E.O. 13382 nine IRGC-affliiated entities
and five IRGC-affiliated IndiViduals as denvatives of the IRGC, Iran's state-owned
Banks Melli and Mellat. and three individuals affiliated with Iran's Aerospace
Industries Organization (AIO).
The Tl'easury Department also designated the IRGC-Oods Force (IRGC-OF) under
E.O. 13224 for prOViding material support to the Tallban and other terrorist
organizations, and Iran's state-owned Bank Saderat as a terrorist financier.
Elements of the IRGC and MODAFL were listed In the Annexes to UN Security
Council Resolutions 1737 and 1747. All UN Member States are required to freeze
the assets of entities and indiViduals listed In the Annexes of those resolutions, as
well as assets of entities owned or controlled by them, and to prevent funds or
economic resources from being made available to them.
The Financial Action Task Force, the world's premier standard-setllng body for
countering terrorist financing and money laundering, recently highlighted the threat
posed by Iran to the International financial system. FATF called on its members to
adVise institutions dealing with Iran to seriously weigh the risks resulting from Iran's
failure to comply With International standards. Last week, the Treasury Department
Issued a warning to U S banks setting forth the risks posed by Iran. (For the text of
the Treasury Department statement see'
http/fwwwfincen gov/guidance fl_ltlcreaslllg_mIUranlanpdf) Today's actions are
consistent With thiS warning, and provide additionalillformation to help financial
institutions protect themselves from deceptive financial practices by Iranian entities
and IIldividuals engaged in or supporting proliferation and terrorism.
Effect of Today's Actions
As a result of our actions today, all transac!lons involving any of the designees and
any US. person will be prohibited and any assets the deSignees may have under
US. Jurisdiction will be frozen. Notltlg the UN Security Council's grave concern over
Iran's nuclear and ballistic miSSile program activities. the United States also
encourages all Jurisdictions to take Similar actions to ensure full and effective
Implementation of UN Security Council Resolutions 1737 and 1747.
Today's deSignations also notify the International private sector of the dangers of
doing business With three of Iran's largest banks. as well as the many IRGCaffiliated companies that pervade several baSIC Iranian Itldustrles.
Proliferation Finance - Executive Order 13382 Designations
http://wwwtreas.gov/press/releases/hp644.htm
11/6/2007
1p-644: Fact Sheet: Designation of Iranian Entities and Individuals for Proliferation Activities and Sup...
Page 2 of 4
E.O.13382, signed by the President on June 29, 2005, is an authority aimed at
freezing the assets of proilferators of weapons of mass destruction and their
supporters, and at isolatmg them from the US. fmancial and commercial systems
Designations under the Order prohibit all transactions between the designees and
any US. person, and freeze any assets the designees may have under US
Jurisdiction
The Islamic Revolutionary Guard Corps (IRGC) Considered the military vanguard
of Iran, the IslamiC Revolutionary Guard Corps (IRGC: aka Iranian Revolutionary
Guard Corps) IS composed of five branches (Ground Forces, Air Force, Navy, BaslJ
militia, and Oods Force special operations) In addition to a counterintelligence
directorate and representatives of the Supreme Leader. It runs prisons, and has
numerous economic interests Involving defense production, construction, and the
oil industry. Several of the IRGC's leaders have been sanctioned under UN Security
CounCil Resolution 1747.
The IRGC has been outspoken about its willingness to proliferate ballistic missiles
capable of carrying WMD The IRGC's ballistic missile Inventory includes missiles,
which could be modified to deliver WMD. The IRGC IS one of the primary regime
organizations lied to developing and testing the Shahab-3. The IRGC attempted, as
recently as 2006, to procure sophisticated and costly equipment that could be used
to support Iran's ballistic missile and nuclear programs
Mmlstry of Defense and Armed Forces Logistics (MODAFL): The Ministry of
Defense and Armed Forces Logistics (MODAFL) controls the Defense Industries
Organization, an Iranian entity identified in the Annex to UN Security Council
Resolution 1737 and designated by the United States under E.O. 13382 on March
30,2007. MODAFL also was sanctioned, pursuant to the Arms Export Control Act
and the Export Admmlstration Act, in November 2000 for its involvement in missile
technology proliferation activities
MODAFL has ullimate authority over Iran's Aerospace Industries Organization
(AIO). which was designated under E.O. 13382 on June 28.2005. The AIO IS the
Iranian organization responsible for ballistic missile research, development and
production activities and organizations, including the Shahid Hemmat Industries
Group (SHIG) and the Shahid Bakerl Industries Group (SBIG), which were both
listed under UN Security Council Resolution 1737 and designated under E.O.
13382. The head of MODAFL has publicly indicated Iran's willingness to continue to
work on ballistic missiles. Defense Minister Brigadier General Mostafa Mohammad
Najjar said that one of MODAFL's major projects IS the manufacturing of Shahab-3
missiles and that It will not be halted. MODAFL representatives have acted as
facilitators for Iranian assistance to an E.O. 13382- designated entity and, over the
past two years, have brokered a number of transactions involving materials and
technologies with ballistic missile applications.
Bank Melli, ItS branches, and subsidiaries Bank Melli is Iran's largest bank. Bank
Melli prOVides bankmg services to entitles Involved in Iran's nuclear and ballistiC
missile programs, Includlllg entities listed by the U.N. for their involvement in those
programs. This includes handling transactions in recent months for Bank Sepah,
Defense Industries Organization, and Shahid Hemmat Industrial Group Following
the designation of Bank Sepah under UNSCR 1747, Bank Melli took precautions
not to identify Sepah in transactions. Through its role as a financial conduit. Bank
Melli has facilitated numerous purchases of sensitive materials for Iran's nuclear
and missile programs. In dOing so. Bank Melli has provided a range of financial
services on behalf of Iran's nuclear and missile industnes, including openlllg letters
of credit and maintaining accounts.
Bank Melli also provides banking services to the IRGC and the Oods Force. Entities
owned or controlled by the IRGC or the Oods Force use Bank Melli for a variety of
financial services. From 2002 to 2006, Bank Melli was used to send at least $100
million to the Oods Force. When handling financial transactions on behalf of the
IRGC, Bank Melli has employed deceptive banking practices to obscure its.
involvement from the international banking system. For example, Bank Melli has
requested that its name be removed from financial transactions
Bank Mellat, its branches, and subsldianes Bank Mellat provides banking services
in support of Iran's nuclear entities. namely the Atomic Energy Organization of Iran
(AEOI) and Novln Energy Company. Both AEOI and Novin Energy have been
http://wwwtreas.gov/presslreleases/hp644.htm
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Page 3 of 4
designated by the United States under E.O. 13382 and by the UN Security Council
under UNSCRs 1737 and 1747. Bank Mellat services and maintains AEOI
accounts, mainly through AEOI's finanCial conduit, Novin Energy Bank Mella! has
facilitated the movement of millions of dollars for Iran's nuclear program since at
least 2003. Transfers from Bank Mellat to Iranian nuclear-related companies have
occurred as recently as thiS year
IRGC-owned or -controlled companies Treasury is designating the companies
listed below under E.O 13382 on the basIs of their relationship to the IRGC These
entitles are owned or controlled by tile IRGC and ItS leaders. The IRGC has
Significant political and economic power in Iran, with ties to companies controlllllg
billions of dollars In business and construction and a growing presence in Iran's
financial and commercial sectors. Through its companies, the IRGC IS involved in a
diverse array of activities, Including petroleum production and major construction
projects across the country In 2006, Khatam al-Anbiya secured deals worth at least
$7 billion In the oil. gas, and transportation sectors, among others.
•
•
•
•
•
•
•
•
•
Khatam al-Anbya Construction Headquarters
Oriental Oil Kish
Ghorb Nooh
Sahel Consultant Engilleerlllg
Ghorb-e Karbala
Sepasad Engineering Co
Omran Sahel
Hara Company
Gharargahe Sazandegi Ghaem
IRGC Individuals: Treasury IS designating the individuals below under E.O 13382
on the basis of their relationship to the IRGC. One of the five is listed on the Annex
of UNSCR 1737 and the other four are listed on the Annex of UNSCR 1747 as key
IRGC Individuals.
•
•
•
•
•
General Hosein Salimi, Commander of the Air Force, IRGC
Bngadler General Morteza Rezaie, Deputy Commander of the IRGC
Vice Admiral Ali Akhbar Ahmadian, Most recently former Chief of the IRGC
Joint Staff
Brigadier Gen Mohammad Hejazl, Most recently former Commander of
BassiJ resistance force
Brigadier General Oasem Soleimani, Commander of the Oods Force
Other Individuals involved in Iran's ballistic missile programs E.O. 13382 derivative
proliferation designation by Treasury of each of the individuals listed below for their
relationship to the Aerospace Industries Organization, an entity previously
designated under E.O. 13382. Each indiVidual is listed on the Annex of UNSCR
1737 for belllg Involved in Iran's ballistic missile program
•
•
•
Ahmad Vahld DastJerdi, Head of the Aerospace Industry Organization (AIO)
Reza-Gholi Esmaeli, Head of Trade & International Affairs Dept.. AIO
Bahmanyar Morteza Bahmanyar, Head of Finance & Budget Department,
AIO
Support for Terrorism -- Executive Order 13224 Designations
E.O. 13224 is an authority aimed at freezing the assets of terrorists and their
supporters, and at isolatlllg them from the US fillancial and commercial systems
DeSignations under the EO. prohibit all transactions between the deSignees and
any U.S person, and freeze any assets the designees may have under US
JunsdlctJon.
IRGC-Oods Force (IRGC-OF) The Oods Force, a branch of the Islamic
Revolutionary Guard Corps (IRGC, aka Iranian Revolutionary Guard Corps), .
proVides material support to the Tallban, Lebanese Hlzballah, Hamas, Palestinian
IslamiC Jihad, and the Popular Front for the Liberation of Palesline-General
Command (PFLP-GC).
The Oods Force is the Iranian regime's primary instrument for provldlllg lethal
support to the Taliban. The Oods Force provides weapons and financial support to
http://wwwtreas.gov/presslreleases/hp644.htm
11/6/2007
hp-644: Fact Sheet: Designation of Iranian Entities and Individuals for Proliferation Activities and Sup...
Page 4 of 4
the Taliban to support anti-U.S and anti-Coalition activity In Afghanistan. Since at
least 2006, Iran has arranged frequent shipments of small arms and associated
ammunition, rocket propelled grenades, mortar rounds, 107mm rockets, plastic
explosives, and probably man-portable defense systems to the Taliban. This
support contravenes Chapter VII UN Security Council obligations. UN Security
Council resolution 1267 established sanctions against the Tallban and UN Security
Council resolutions 1333 and 1735 Imposed arms embargoes against the Taliban
Through Oods Force matenal support to the Taliban, we believe Iran is seeking to
inflict casualties on U.S. and NATO forces.
The Oods Force has had a long history of supporting Hizballah's military,
paramilitary, and terrorist activities, prOViding it with guidance, funding, weapons,
intelligence, and logistical support. The Oods Force operates training camps for
Hizballah in Lebanon's Bekaa Valley and has reportedly trained more than 3,000
Hizballah fighters at IRGC training facilities in Iran. The Oods Force proVides
roughly $100 to $200 million in fundlflg a year to Hizballah and has assisted
Hlzballah in rearming in violalion of UN Security Council Resolution 1701.
In addition, the Oods Force provides lethal support in the form of weapons, tralfllflg,
funding. and guidance to select groups of Iraqi Shi'a militants who target and kill
Coalition and Iraqi forces and innocent Iraqi civilians.
Bank Saderat, its branches, and subSidiaries: Bank Saderat, which has
approximately 3200 branch offices, has been used by the Government of Iran to
channel funds to terrorist organizations, including Hizballah and EU-designated
terrorist groups Hamas, PFLP·GC, and Paleslinian Islamic Jihad. For example,
from 2001 to 2006, Bank Saderat transferred $50 million from the Central Bank of
Iran through its subSidiary in London to its branch In Beirut for the benefit of
Hizballah fronts in Lebanon that support acts of violence. Hizballah has used Bank
Saderal 10 send money to other terrorist organizations, including millions of dollars
on occasion, to support the activities of Hamas. As of early 2005, Hamas had
substantial assets deposited in Bank Saderat, and, in the past year, Bank Saderat
has transferred several million dollars to Hamas.
REPORTS
•
Treasury and State Department Iran Designations Identifier
http://wwwtreas.gov/presslreleases/hp644.htm
11/6/2007
Treasury and State Department Iran Designations Identifier Information
Pursuant to E.O. 13224 (Terrorism) and E.O. 13382 (WMD)
October 25, 2007
E.0.13224
1. Entity:
AKA:
AKA:
Location:
Location:
Location:
Location:
Location:
Location:
Location:
Location:
Location:
Location:
Location:
Location:
Location:
Location:
Location:
Location:
Location:
Location:
Location:
Location:
Location:
Location:
Location:
Location:
2. Entity:
AKA:
AKA:
BANK SADERAT IRAN
Iran Export Bank
Bank Saderat PLC
PO Box 15745-631, Bank Saderat Tower, 43 Somayeh Avenue, Tehran,
Iran, and all offices worldwide, including:
16 rue de la Paix, 75002 Paris, France
Postfach 160151, Friedenstr 4, 0-603111 Frankfurt am Main, Germany
Postfach 112227, Deichstrasse 11, 20459 Hamburg, Germany
PO Box 4308, 25-29 Venizelou St, GR 105 64 Athens, Attica, Greece
rd
3 Floor, Aliktisad Bldg, Ras El Ein Street, Baalbak, Baalbak, Lebanon
1st Floor, Alrose Bldg, Verdun Rashid Karame St, Beirut, Lebanon
PO Box 5126, Beirut, Lebanon
Alghobeiri Branch - Aljawhara Bldg, Ghobiery Blvd, Beirut, Lebanon
Borj Albarajneh Branch - Alholom Bldg, Sahat Mreijeh Kafaat St, Beirut,
Lebanon
Sida Riad Elsoleh St, Martyrs Square, Saida, Lebanon
PO Box 1269, 112 Muscat, Oman
PO Box 2256, Doha, Qatar
nd
No 181, Makhtoomgholi Ave, 2 Floor, Ashgabat, Turkmenistan
PO Box 700, Abu Dhabi, UAE
PO Box 16, Liwara Street, Ajman, UAE
PO Box 1140, AI-Am Road, AI-Ein AI Ain, Abu Dhabi, UAE
PO Box 4182, Murshid Bazar Branch, Dubai City, UAE
Sheikh Zayed Rd, Dubai City, UAE
Khaled Bin Al Walid St, Dubai City, UAE
PO Box 4182, Almaktoum Rd, Dubai City, UAE
PO Box 316, Bank Saderat Bldg, Al Arooba St, Borj Ave, Sharjah, UAE
5 Lothbury, London, EC2R 7HD, UK
PO Box 15175/584, 6 th Floor, SadafBldg, 1137 Vali Asr Ave, 1511943885, Tehran, Iran
ISLAMIC REVOLUTIONARY GUARDS CORPS (lRGC)- QODS FORCE
Pasdaran-e Enghelab-e Islami (Pasdaran)
Sepah-e Qods (Jerusalem Force)
DESIGNATIONS BY THE STATE DEPARTMENT
PURSUANT TO E.O. 13382
1. Entity:
ISLAMIC REVOLUTIONARY GUARD CORPS
AKA:
AKA:
AKA:
AKA:
AKA:
AKA:
AKA:
AKA:
AKA:
AKA:
AKA:
AKA:
AKA:
AKA:
AKA:
Location:
lRGC
IRG
AGIR
The Iranian Revolutionary Guards
The Army of the Guardians of the Islamic Revolution
Sepah-e Pasdaran-e Enqelab-e Eslami
Pasdaran-e Enghelab-e Islami
Pasdaran-e Inqilab
Revolutionary Guards
Revolutionary Guard
Sepah
Pasdaran
Sepah Pasdaran
Islamic Revolutionary Corps
Iranian Revolutionary Guard Corps
Tehran, Iran
2. Entity
AKA:
AKA:
AKA:
Location:
MINISTRY OF DEFENSE AND ARMED FORCES LOGISTICS
Ministry of Defense and Support for Armed Forces Logistics
MODAFL
MODSAF
Located on the West Side of Dabestan Street, Abbas Abad District,
Tehran, Iran
DESIGNATIONS BY THE TREASURY DEPARTMENT
PURSUANT TO E.O. 13382
Bank Melli
1. Entity:
Location:
Location:
Location:
Location:
Location:
Location:
Location:
Location:
Location:
Location:
Location:
Location:
Location:
BANK MELLI IRAN
Ferdowsi Avenue, P.O. Box 11365-171, Tehran, Iran, and all offices
worldwide, including:
43, Avenue Montaigne, Paris 75008, France
Holzbrucke 2, 20459 Hamburg, Germany
Nobel A venue 14, Baku, Azerbaijan Republic
P.O. Box 2643 PC 112, Muscat, Oman
P.O. Box 5270, Oman Street, Al Nakheel, Ras al Khaimah, UAE
P.O. Box 248, Al Marash RIA, Hamad Bin Abdullah Street,
Fujairah, UAE
P.O. Box 459, Al Burj Street, Sharjah, UAE
P.O. Box 1888, Clock Tower, Industrial Road, Al Ain,
Abu Dhabi, UAE
P.O. Box 2656, Hamdan Street, Abu Dhabi, UAE
P.O. Box 3093, Khalid Bin WaIeed Street, Bur Dubai, UAE
P.O. 1894, Beniyas Street, Dubai, UAE
No.1 I 1-27, Alley - 929, District - Arasat Street, Baghdad, Iraq
Location:
704-6 Wheelock House, 20 Pedder Street, Hong Kong, China
2. Entity:
AKA:
Location:
BANK KARGOSHAEE
Kargosa'i Bank
587 Mohammadiye Square, Mowlavi St., Tehran, I 1986, Iran
3. Entity:
Location:
BANK MELLI IRAN ZAO
Number 911, Ulitsa Mashkova, Moscow 103064, Russia
4.
Entity:
Location:
MELLI BANK PLC
I London Wall, London, EC2Y 5EA, United Kingdom
5. Entity:
ARIAN BANK (Joint Venture between Banks Melli and Saderat)
Aryan Bank
House 2, Number 13, Wazir Akbar Khan, Kabul, Afghanistan
AKA:
Location:
Bank Mellat
6. Entity:
Location:
Location:
Location:
BANKMELLAT
327 Taleghani Avenue, 15817 Tehran, Iran, and all offices worldwide,
including:
P.O. Box 375010, Amiryan Street #6, P/N-24, Yerevan, Annenia
Keumkang Tower, 13 th and 14th Floors, 889-13 Daechi-Dong,
Gangnam-Ku, Seoul 135-280, South Korea
P.O. Box 79106425, Ziya Gokalp Bulvari No. 12, Kizilay,
Ankara, Turkey
Cumhuriyet Bulvari No. 881 A, PK 7103521, Konak, Izmir, Turkey
Buyukdere Cad, Cicek Sokak No. I-I, Levent, Istanbul, Turkey
7. Entity:
AKA:
Location:
MELLAT BANK SB CJSC
Mellat Bank DB AOZT
P.O. Box 24, Yerevan 0010, Republic of Armenia
8. Entity:
Location:
Persia International Bank PLC.
Number 6 Lothbury, Post Code: EC2R 7HH, United Kingdom
Location:
Location:
Location:
IRGC Entities:
9. Entity:
AKA:
AKA:
AKA:
Location:
KHA TAM OL ANBIA GHARARGAH SAZANDEGI NOOH
Khatam 01 Ambia
Ghorb Khatam
Khatam AI-Anbya
Number 221, North Falamak-Zarafshan Intersection, 4th Phase, ShahrakE-Ghods, Tehran 14678, Iran
10. Entity:
Location:
Alternate location:
ORIENTAL OIL KISH
nd
2 Floor, 96-98 East Atefi St., Africa Blvd., Tehran, Iran
Dubai, UAE
11. Entity:
AKA:
AKA:
Location:
GHORB KARBALA
Gharargah Sazandegi Karbala-Moasseseh Taha
Gharargah Karbala
No.2 Firouzeh Alley, Shahid Hadjipour St., Resalat Highway, Tehran,
Iran
12. Entitv:
Location:
SEPASAD ENGINEERING COMPANY
Number 4 corner of Shad Street, Mollasadra Ave., Vanak Square, Tehran,
Iran
13. Entitv:
Location:
GHORBNOOH
P.O. Box 16765-3476, Tehran, Iran
14. Entity:
Location:
OMRAN SAHEL
Tehran, Iran
15. Entity:
Location:
Mailing address:
SAHEL CONSULTANT ENGINEERS
Number 57, Eftekhar Street, Larestan Street, Motahhari Avenue, Tehran,
Iran
P.O. Box 16765-34, Tehran, Iran
16. Entity:
AKA:
Location:
HARA COMPANY
Hara Institute
Tehran, Iran
17. Entity:
AKA:
Location:
GHARARGAHESAZANDEGIGHAEM
Gharargah Ghaem
Number 25, Valiasr Street, Azadi Square, Tehran, Iran
AIO Individuals:
18. Individual:
DOB:
POB:
Passport:
Alternate Passport:
BAHMANY AR MORTEZA BAH MANY AR
December 31, 1952
Tehran, Iran
10005159 (Iran)
10005159 (Iran)
19. Individual:
AKA:
DOB:
Passport:
AHMAD V AHID DAST JERDI
AHMED DASTJERDI VAHID
January 15, 1954
Diplomatic Passport A0002987 (Iran)
20. Individual:
DOB:
POB:
Passport:
REZA-GHOLI ESMAELI
April 3, 1961
Tehran, Iran
A0002302 (Iran)
IRGC Individuals:
21. Individual:
AKA:
DOB:
MORTEZA REZAIE
Morteza Rezai
circa 1956
22. Individual:
DOB:
MOHAMMAD HEJAZI
circa 1959
23. Individual:
AKA:
DOB:
POB:
ALI AKBAR AHMADIAN
Ali Akbar Ahmadiyan
circa 1961
Kerman, Iran
24. Individual:
AKA:
AKA:
AKA:
Passport:
HOSEIN SALIMI
Hossein Salami
Hoseyn Salami
Hussayn Salami
008531177 (Iran)
25. Individual:
AKA:
AKA:
AKA:
AKA:
AKA:
AKA:
AKA:
AKA:
DOB:
POB:
Passport:
QASEM SOLEIMANI
Ghasem Soleymani
Qasmi Sulayman
Qasem Soleymani
Qasem Solaimani
Qasem Salimani
Qasem Solemani
Qasem Sulaimani
Qasem Sulemani
March 11,1957
Qom, Iran
1999 Diplomatic Passport 008827 (Iran)
P-645: Statement oy Secretary Paulson on Iran Designations
Page I of 1
October 25, 2007
HP-645
Statement by Secretary Paulson on Iran Designations
Washington, DC-- Treasury released the following statement by Secretary Henry
M. Paulson, Jr. on Iran designations announced today:
"Iran exploits its global financial ties to pursue nuclear capabilities, develop ballistic
missiles and fund terrorism. Today, we are taking additional steps to combat Iran's
dangerous conduct and to engage financial Institutions worldwide to make the most
informed decisions about those with whom they choose to do business
"The Iranian regime's ability to pursue nuclear and ballistic missile programs in
defiance of UN Secunty CounCil Resolutions depends on its access to the
International commercial and financial systems. Iran also funnels hundreds of
millions of dollars each year through the international financial system to terrorrsts.
Iran's banks aid this conduct, using a range of deceptive financial practices
intended to evade even the most stringent rrsk-management controls. In dealing
with Iran, it is nearly impossible to know one's customer and be assured that one is
not unwittingly facilitating the regime's reckless conduct. The recent warning by the
Financial Action Task Force, the world's premier standard-setting body for
countering terrorist financing and money laundering, confirms the extraordinary
rrsks that accompany dOing business with Iran
"We have been working closely and intensely with our international partners to
prevent one of the world's most dangerous regimes from developing the world's
most dangerous weapons Part of that strategy involves denying supporters of
Iran's illiCit conduct access to the international finanCial system: these actors should
find no safe haven In the reputable world of finance and commerce. The UN
Security Council has reqUired member states to freeze the assets of, and prohibit
persons from doing business with, a number of entities and indiViduals supporting
Iran's nuclear or ballistic miSSile activities, Including Iran's state-owned Bank Sepah.
"Today, we are deSignating Iran's Bank Melli, Bank Mellat, and Bank Saderat.
These are three of Iran's largest banks, and they all have facilitated Iran's
proliferation activities or its support for terronsm We are also deSignating the
IslamiC Revolutionary Guard Corps for proliferation activities and its Oods Force for
providing matenal support to the Tallban and other terrorist organizations. The
IRGC is so deeply entrenched in Iran's economy and commercial enterprises, It IS
increasingly likely that, if you are dOlllg business with Iran, you are dOlllg business
With the IRGC. We call on responSible banks and companies around the world to
terminate any business With Bank Melli, Bank Mellat, Bank Saderat, and all
companies and entities of the IRGC
"As awareness of Iran's deceptive behavior has grown, many banks around the
world have decided as a matter of prudence and Integrrty that Iran's bUSiness IS
simply not worth the risk. It IS plain and simple: reputable institutions do not want to
be the bankers for this dangerous regime We Will contillue to work With our
international partners to prevent Iran from abusing the International finanCial system
to advance Its illicit conduct"
http://wwwtreas.gov/press/releases/hp645.htm
1116/2007
IP-646: Paulson Statement -on Chairman Rangel's Tax Proposals
Page 1 of 1
October 25, 2007
HP-646
Paulson Statement on Chairman Rangel's Tax Proposals
Washington, DC-- The Treasury Department released the following statement from
Secretary Henry M. Paulson, Jr. on the mtroduction of Chairman Rangel's tax
overhaul legislation
"In February the President proposed in hiS budget an AMT patch without raising
any other taxes. ThiS IS the right policy.
"It is obvious that Congress does not have the time thiS year to undertake a large,
complex tax bill, and I am IIlcreasingly concerned that we are not seeing timely
action on an AMT patch. We have only weeks to act to avoid the risk of unilltended
tax increases or significant delays for taxpayers receiving refunds.
"The legislation unveiled today would dramatically raise taxes in ways that in my
Judgment would hinder America's ability to compete in the global economy. The
proposed new surtax on individual income would burden millions of small
businesses, and undermine Job creation. The corporate proposals will hurt the
ability of our businesses and workers to compete in a global economy.
"I appreciate that Chairman Rangel wants to look at our corporate tax structure in
the context of competitiveness, and I have had constructive preliminary
conversations with the committee on this subject, building on Treasury's own work
on busilless tax competitiveness. I have said we need to do more work on tilis, and
we look forward to continuing that discussion. ThiS is a separate and longer-term
discussion.
"As our economy grapples with a housing downturn, the last thlllg we need IS a tax
Increase. I urge the Congress to take up the AMT patch as quickly as possible."
http://wwwtreas.gov/presslreleases/hp646.htm
11/6/2007
IP-647: Under Secretary for International Affairs McConnick to Deliver Speech in Kuwait
Page 1 of I
October 26, 2007
HP-647
Under Secretary for International Affairs McCormick to Deliver Speech in
Kuwait
Treasury Under Secretary for International Affairs David H. McCormick will speak
Sunday in Kuwait on trade and open investment. He will address economic and
marketing finance students at American UniverSity of Kuwait.
•
•
•
•
Who: Treasury Under Secretary for International Affairs David H.
McCormick
What: Remarks on Trade and Open Investment
When: 3:30 p.m , local time, Sunday, October 28
Where: American University of Kuwait
Kuwait City, Kuwait
- 30 -
http://wwwtreas.gov/presslreleases/hp647.htm
11/6/2007
fP-648: Remarks by Secretary Henry M. Paulson, lr. <br>on the United States as a Partner in India's <... Page 1 of 5
October 29, 2007
HP-648
Remarks by Secretary Henry M. Paulson, Jr.
on the United States as a Partner in India's
Continued Growth at the US-India Forum
Mumbai, INDIA--Thank you, Bill. It is a pleasure to be here with my frrends
Minister Chldambaram and Deputy Chairman Ahluwalia. The U.S.-India CEO
Forum has worked particularly well because of strong leadership and the natural
affinity between the people of our two nations. Montek and my colleague, AI
Hubbard, have done an excellent Job facilitating government engagement with the
CEO Forum. And, of course, Ratan Tata and Bill Harrison have provided real
leadership for the highly engaged group of CEOs that has provided concrete,
actionable recommendations towards reaching a number of ambitiOus goals,
including the doubling of US-Indian trade in three years
I have participated in US.-India CEO Forum events in the United States. Thank
you, Chairman Tata, for gathering us in Mumbai. Since President Bush and Prime
Minister Singh ushered in a new era of cooperation between India and the United
States, we have seen Just a glimpse of what that cooperative future can bring. The
Forum is an important part of this, by providing a venue for Indian and American
businesses to raise Issues that impact our economic relationship
Through PreSident Bush and Prrme Minister Srngh's leadership, political, economiC,
and cultural ties between the United States and India have never been stronger.
These Ires enJoy bipartisan support rn both countrres. In the last few years, we
have launched important initiatives in areas including counter-terrorism cooperation,
space research, clean energy, agriculture, education, and economic development.
The historic agreement on civilian nuclear cooperation is an important part of the
U.S - India relationship, and It is beneficial to both countries. India is one of the
world's largest and most peaceful states with advanced nuclear technologies, and
has been isolated from the rest of the world on nuclear issues. This agreement Will
provide India access to the technology which can help it reach ItS economic and
environmental objectives. The United States remains committed to this agreement.
The US and India share tile challenge of ensurrng secure and clean energy
supplies. We understand that economic growth and environmental responSibility
are necessary, compatible goals. Moving forward with the ciVilian nuclear
agreement is one part of the solution. Working together on a post-2012 framework
through the UN climate change process is another. And, if we are to be successful
in meeting our energy and environmental challenges, it must be against the
backdrop of a strong economy.
The Prime Minister and Finance Minister are to be commended for beginning the
process of transforming India Into a global economic power by initiating economic
liberalization in the early 1990s. These economic reforms have continued at
varying speed throughout the past 15 years, regardless of the party rn power.
Observers do not question whether India's reforms Will continue: they ask only
about the pace.
And the United States Will continue to partner witll India, as India moves forward
with its economic reform agenda that will spread growth to the benefit of all of
India's people. The United States understands that this is a democratic,
transformatlve effort and that India faces political challenges. That IS something our
governments also share, and we share the history of meeting and overcoming
difficulties.
I urge my Indian colleagues to continue, and accelerate, their efforts to liberalize the
http://wwwtreas.gov/press/releases/hp648.htm
11/6/2007
HP-648: Remarks by Secretary Henry M. Paulson, Jr. <br>on the United States as a Partner in India's <... Page 2 of 5
economy and develop the financial system -- to assure that the Vibrancy and growth
that the Indian economy now enJoys continues well Into the future.
u.s. -India
Economic Policies
In pursuing economic growth, India and the United States share Similar values and
similar challenges We understand that a globalized economy IS here to stay
Trade [inks India with the world, and brmgs diverse and attractlve[y-priced goods to
the Indian people DUring my triP, I hope to have producllve talks with ttle [ndlan
government about making progress III the Doha Deve[opment Round A Doha
agreement is Within reach, and the potential benefits are so great, that we must not
let It slip through our grasp Working together to successfu[ly conclude a Doha
agreement will be the single most effective thing we can do to help raise living
standards In India and around the world.
We also undel'stand how the dislocations from trade and rapidly-changing
production technology can lead some to doubt the benefits from competition and
trade. Together, India and the United States must resist protectionist, anti-trade
poliCies that mean slower growth, fewer jobs, and lower Incomes In the U.S, India,
and around the world. Openness to competition has made the U.S economy
dynamiC, has created better jobs and higher incomes, and has kept the United
States on the cutting edge of innovation. We must remember that pro-growth
po[icles will smooth transitions by supporting Job creation.
The United States we [comes foreign investment. [t creates high-qua[lty Jobs, spurs
healthy competition that leads to greater innovation by American workers and
companies It contributes to our domestic economic expansion and supports local
communities across a wide span of industries. It is important that the United States
and India work together to resist protectionist sentiment that would limit foreign
investment In both our countries.
We also welcome the contributions of the many Indians who have come to study.
work, and live In the United States. For decades, Indians have immigrated to the
United States, joined our commuilities and raised their families while maintainlllg
their cultural heritage. [ndlan-Americans are physicians, engilleers, CEOs,
professors, teachers, entrepreneurs. As a result, there IS a long history of personal
and professlona[ friendships among Indians and Americans. Indians are a vital part
of the US economic and social fabriC
The President asked the U.S Congress to help meet the need for hlgh-skll[ed
workers as a part of comprehensive immigration reform That bill has not yet
become law: political constraints are a reality in the United States as they are in
India Our government has also taken steps to reduce the backlog of visa
app[icatlons from India
Now, let me talk about two of the ambitious and worthy goals the Indian
government has outlined towards further economic tranSition and inclusive growth,
which the United States supports and hopes we can assIst.
First, as thiS conference highlights, is the improvement of physicalillfrastructure.
Second, and [ think necessary to accomp[lsh the first, IS Improving India's flllanCla[
infrastructure. A critlca[ part of thiS will be taking the steps to build Mumbai IIltO an
Internationa[ Flnancla[ Center
Improving India's Physical Infrastructure
Over 30 US. firms are represented at this conference dedicated to investment
opportunities In [ndlan infrastructure They are a resource for comp[etlng the $500
bll[ion the [ndlan government estimates It needs to IIlvest over the next five years,
on roads, ports, housmg, railways, airports and te[ecommunlcatlons Given [ndla s
fiscal constraints, India is looking to the private sector to fund up to one-third of ttllS
investment. [n response, the government has developed an ambitiOUS pub[lcprivate partnership framework
The United States supports this effort to attract private finanCing [trust that the
discussions - among financial mvestors, project developers and government
officials - will be productive After this conference, we wll[ contillue to hlgh[lght the
http://www treas.gov/presslreleases/hp648 htm
1116/2007
HP-648: Remarks by S-ecretary Hen-ry M. Paulson, Jr. <br>on the United States as a Partner in India's <... Page 3 of 5
opportunities of India's infrastructure initiatives to US businesses
The Indian Government has made an impressive effort to promote awareness of
these investment opportunities It has priontized those projects considered most
critical to India's growth, and provided best practice gUidance to states developing
private sector contracts. These efforts are to be commended - and judging by the
conference's attendance - I would say they have already met with some success
Looking forward, the result of India's efforts will ultimately be seen in the kilometers
of new roads added to India's highway system, the megawatts of capacity added to
India's power grid, and the homes that gain access to clean water. Already, India
can point to successful examples. such as the Golden Quadrilateral highway
system and the Delhi metro
Our private sectors must also playa more active role in developing a sophisticated
agricultural market rn India. This rnvestment will help India achieve Its second
Green Revolution It will help farmers tap modern supply chains and processing
technologies that will improve their productiVity and the lives of their families.
Continued economic reform will also encourage investment more broadly.
Investors, especially those who must make long-term commitments as in most
infrastructure projects, want certainty in their operatrng environments. This means
transparent and independent regulatory frameworks. In sectors where government
entities act as both regulators and providers of financial services. this sort of
Independence IS difficult to achieve, and private sector investment Will be difficult to
attract.
Investors also want to know that contracts can be legally enforced, and that they
have recourse to a fair and timely arbitration or JudiCial process when needed In
order to meet infrastructure investment needs, real efforts must be made to address
this area.
Mumbai as an International Financial Center
The Department of Treasury also supports steps to strengthen and expand India's
financial system by developrng Mumbai into an International Frnanclal Center, a socalled IFC In 2006. Prime Minister Singh said that It is pOSSible for Mumbai to
"emerge as a new frnanclal capital of ASia, and be the bridge between ASia and the
West In the world of finance."
Expansion of the financial sector through the development of Mumbal Into an IFC is
an enormous opportunity for India Properly-regulated and well-functioning
financial markets are the economic arteries through which balanced development
and inclusive growth flows. EffiCient markets provide the means to help all people.
including the ones most in need, improve their lives. This is true in India, in the
United States and around the world.
Today, Indian firms in Bangalore and other cities playa key role In the back office
operations of global, multinational firms. In this, India has revolutionized the way
the world does business. The next step is for India to develop front offices rn
Mumbai that provide financial services to companies and investors in India and
across the region.
Experience with new financial centers in other countries demonstrates that the
overwhelming majority of jobs created will be for Indians. In addition to finanCial
services pOSitions, many new jobs will be created In sectors provldrng support to the
frnancial services industry. As new workers locate in Mumbal, they Will also create
additional jobs as they seek housing, food. transportation and other services
Mumbai's development as a financial center will help not just large, but also small
businesses. Shopkeepers, farmers and craftsmen need access to credit, frnanclal
services, and insurance products, as much as large, Industrral manufacturers do
India's middle class will also benefit from new finanCial products tilat can lead to
homeownershlp and fundrng for the best pOSSible education for their children
In recognition of this need, the Indian government commiSSioned a report from a
http://wwwtreas.gov/presslreleases/hp648.htm
1116/2007
IP-648: Remarksb:y" Secretary Henry M. Paulson, Jr. <br>on the United States as a Partner in India's <... Page 4 of 5
High Powered Expert Committee. The Committee's report outlined the
requirements and a timetable for developing Mumbai into an IFC. The Report IS
bold, thorough and ambitious I believe It demonstrates the right path With
Mumbai as an internationally competitive financial center, the world can Invest In
India, and India can invest In the world. Equally important, an IFC would give India
an important stake In the rapidly growing global finanCial services Industry
us. experience can inform the Indian government as It works to develop Mumbal
Into an IFe. Our private sector stands ready to share their experiences In dealtng
with the development of domestic bond markets and other elements that create the
backbone of a financial center. Infrastructure investment requires long-term
financing. The development of corporate bond markets will provide opportunities
for such long-term investment by insurance companies and penSion funds.
For several years, the Department of Treasury and the Finance Ministry have led
an ongoing dialogue among U.S. and Indian regulators to share experiences and
best practices. We will begin another session tomorrow In New Delhi. Issues
related to developing Mumbal as an IFC are an important element of that agenda.
We understand that Indian officials are concerned that greater capital flows
associated with a financial center could add to Inflationary pressures, destabilize
domestic financial markets or add to exchange rate volatility. For the most part,
India IS on the right path to reduce these risks. India has allowed greater flexibility
in the exchange rate in recent months, and the appreciation in the rupee has helped
to reduce inflationary pressures.
India has also taken administrative steps to adjust the pace of capital outflows and
inflows. As recent experience in the region has shown, administrative restrictions of
capital flows are blunt instruments and can have unintended consequences. They
tend to inhibit efficiency and lose their effectiveness over time. I encourage India to
continue liberaliZing such restrictions. Steps to broaden and deepen the domestic
financial sector will also help to mitigate the risks posed by greater capital flows.
In the long term, India can take a number of steps to become even more
competitive, such as redUCing requirements that financial institutions hold large
amounts of government debt, reduclllg requirements for banks to prOVide credit to
certain priority sectors, and removing various restrictions and caps on foreign
Investment. Limits on debt and eqUity financing, and asset allocation restrictions on
financial institutions, are impediments to putting resources to their most productive
use.
Conclusion
India's remarkable growth has proven the wisdom of economic reforms and their
promise for the future. The United States looks forward to working closely with
India in advanclllg your economic reform agenda to proVide inclUSive growth.
The development of India's infrastructure and capital markets will take some years
to come to frUition We recognize this, and do not mlnlnllZ:e the challenges ahead.
Experience shows, however, that once on the path, it is better to move steadily and
expeditiously toward that goal India's people will see many benefits all along the
way.
I expect that, when I have completed thiS three day VISit to Kolkata, Mumbal and
New Delhi, I will be even more optimistic about India's future. As the Finance
Minister said recently, "The goal of a country committed to democratic development
is to measure up 10 the rising aspirations of its people" The Indian people's
aspirations are many, and the country is rising to meet them
I look forward to my upcoming meetings With my Indian colleagues, and to working
With them on these, and future, mitiatlves
Thank you.
http://wwwtreas.gov/press/releases/hp648.htm
11/6/2007
HP.649: Statement by Secretary Paulson After Meeting with Smartcard Recipients in Kolkata
Page 1 of 1
October 28, 2007
HP-649
Statement by Secretary Paulson After Meeting with Smartcard Recipients in
Kolkata
Kolkata, India-- U.S Treasury Secretary Henry M. Paulson, Jr. Issued the following
statement after a meeting with recipients of smartcards in Kolkata to highlight the
importance of financial Inclusion and extending the benefits of financial services to
more Indian people
"I Just participated in a private sector initiative to bring financial services directly to
people in rural India. I commend Financial Information Network and Operations
(FINO), ICICI Bank and Grameen Sanchar Society (GRASSO) for their valuable
work in bringing flllancial service tools to people, enabling them to JOin the
economic mainstream. Technology plays an important role here and we saw that
first-hand today.
"The Indian government IS focused on making sure that the benefits of economic
growth are shared throughout the country with all Indian people so that they can
access credit. facilitate savings vehicles and obtain IIlsurance Private sector
initiatives such as thiS are critical to that effort."
-30-
http://wwwtreas.gov/presslreleases/hp649.htm
1ll6/2007
HP-650: Statement by US Treasury Secretary Henry M. Paulson, lr. <br>After Meeting with West Ben... Page I of I
October 28, 2007
HP-650
Statement by US Treasury Secretary Henry M. Paulson, Jr.
After Meeting with West Bengal Chief Minister Bhattacharjee
Kolkata, India-US. Treasury Secretary Henry M. Paulson, Jr. issued the following
statement following a meeting with West Bengal Chief Minister Bhattachaqee
"The United States admires India's progress over the last decade as a result of
economic reforms from leaders such as the Honorable Chief Minister. We
discussed ways to Increase Investment in West Bengal. The US IS very interested
In increasing such investment.
"The Chief Minister and I discussed the civil nuclear deal. The U.S. believes it will
help India meet its energy and environmental objectives. We remain committed to
the deal. We respect India's deomcratic process and we hope India will decide to
implement the agreement as soon as possible."
P:llWWW.treas.gov/presslrelea~hp6S0.htm
11/6/2007
hp-651: Treasury Announces Market Financing Estimates
Page 1 of 1
10 vIew or pnnt rne ~u!- content on tnlS page, aOWnloaa tne tree AaObe® Acrobat® Keader®.
October 29, 2007
hp-651
Treasury Announces Market Financing Estimates
Washington- Treasury announced today its current estimates of net marketable
financing for the October - December 2007 and January - March 2008 quarters:
•
Over the October - December 2007 quarter, the Treasury expects to borrow
$68 billion of net marketable debt, assuming an end-oF-December cash
balance of $45 billion The current estimate IS $6 billion less than
announced in July 2007. The reduction in borrowing is pnmanly the result of
lower outlays.
•
Over the January - March 2008 quarter, the Treasury expects to borrow
$133 billion of net marketable debt, assuming an end-of-March cash
balance of $25 billion.
During the July - September 2007 quarter, Treasury borrowed $105 billion of net
marketable debt, finishing with a cash balance of $75 billion at the end of
September. In July 2007, Treasury announced net marketable borrowing of $73
billion, assuming an end-of-September cash balance of $60 billion. The increase in
borrowing was primarily the result of lower receipts, lower net Issuances of State
and Local Government Series securities, and adjustments in cash balances.
Since 1997, the average absolute forecast error In net borrowing of marketable debt
for the current quarter is $12 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 $33 billion and the average absolute forecast error
for the end-of-quarter cash balance is $11 billion.
Additional financing details relating to Treasury's Quarterly Refunding will be
released at 9:00 a.m. on Wednesday, October 31
-30-
REPORTS
•
Sources and Uses Table
P:!lwww.treas.goy/press/releases/hp651.htm
1116/2007
Sources and Uses Reconciliation Table
Financing
Need
Marketable
Borrowing
(2)
Financing
All Other
Sources
Total
(4) = (2) + (3)
Change in
Cash Balance
(5) = (4) - (1)
Memo
End-OfQlI1Jrter
Cash Balance
(6)
98
1
....................37................ ....
144
(28)
8
38
46
~nnouncement Date
(1)
2005
Actual
97
Jan - Mar
2006
Actual
173
158
f-.(1~_
2006
Actual
(137)
(92)
-(7) __ f--- (99)
Jul- Sep
2006
Actual
19
45
2006
Actual
70
42
Jan -Mar
2007
Actual
IS9
126
Apr - Jun
2007
Actual
(153)
(139)
~.
__ (16) __
Quarter
Oct - Dec
(3)
, .............................. ...............................
93 .... -......... .......... ...................
6
...............
-
Apr - Jun
.................... ....................
(19)
26
6
52
6
48
(21)
31
-- f-.-2--- 1--_ 134
(25)
6
(133)
19
25
57
85
28
35
50
15
60
75
Oct - Dec
~-
1------- f---
Jul- Sep
2007
Ju~y 30, 2007
Actual
Memo: Forecast Revision
22
3S
13
73
105
32
Oct - Dec
July 30, 2007
92
74
(12)
f-.----
62
(30)
30
October 29, 2007
Memo: Forecast RevIsiOn
8S
(7)
68
f-.J!.3L_
(1)
55
(7)
(30)
(0)
45
(6)
October 29,2007
142
133
f-----r-.l!.!L_
122
(20)
25
2007
Jan -Mar
2008
Notes All data reported on a cash basis
(20)
(4)
15
15
hp-652: Treasury AsslsfanfSecretary tor Economic Policy<br>Phillip Swagel<br>Statement for the Tr... Page 1 of 2
October 29, 2007
hp-652
Treasury Assistant Secretary for Economic Policy
Phillip Swagel
Statement for the Treasury Borrowing Advisory Committee of the
Securities Industry and Financial Markets Association
Washington- A variety of indicators suggest that the economy grew at a healthy
pace in the third quarter, notwithstanding the housing slump, credit market
disruptions, and high energy prices. While the weak housing sector looks to be a
drag on GDP for the next several quarters, the housing downturn does not appear
to have had serious impacts on other parts of the economy. The labor market
remains broadly healthy, with low unemployment, continuing job creation, and wage
gains that should support consumer spending. World output growth has boosted net
exports. Core inflation appears to be contained. Looking forward, however, the
ongOing drag from construction, the problems In credit markets, and higher 011
prices have led pnvate forecasters to reduce their projections for GDP growth in the
fourth quarter of 2007 and into 2008.
The downturn in the housing sector has not ended as quickly as appeared to be
possible at the end of 2006. The houslllg correction comes after an eight-year
period of exceptional home price appreCiation, in which strong demand for housing
was fueled in part by ample liquidity. Rising homebuilding actiVity helped to propel
GDP growth, adding an average of about half a percentage point to GDP growth
rates in each quarter from 2003 to 2005. Easy credit took the form of increased use
of adjustable-rate mortgages (ARMs), hybrid-ARMs with low teaser rates, Interestonly features, low- or no-down payments, and even negative amortization. These
practices exposed mortgage holders to greater risk than with a traditional 30-year
fixed rate mortgage with a 20 percent down payment. A significant percentage of
non-traditional ARMs went to subpnme borrowers, as the subprime component of
total lending grew from about 2 percent of mortgages in 1998 to nearly 14 percent
in mid-2007.
The houslllg correction began in early 2006. Home prices have decelerated
considerably over the past year, with some measures of nationwide home prices
showlllg outright declines over the past four quarters. Sales of existlllg single-family
homes are down by 30 percent from the peak in 2005, and the inventory of unsold
homes has increased to levels last seen In the early 1990s. While the subprime
delinquency rate today is near the level seen III 2001, there are over seven times
more subprtme mortgages today than there were In 2001. It appears likely that the
increased number of delinquencies will translate IIlto further increases In mortgage
defaults and foreclosures. Current trends suggest there will be just over 1 million
foreclosures started this year, of which two-thirds will be in the subprtme market.
Declining residential building activity has subtracted substantially from GDP growth
since the correction began. Annual hOUSing starts peaked at an annual rate of
almost 2.3 million units in early 2006 before failing nearly 50 percent through
September of this year. Employment in residential building, Including specialty trade
contractors, has dropped by almost 200,000 since early 2006, offsetttng about onequarter of the jobs gained In the housing boom. Although it appeared that
homebuilding activity had reached a bottom In the first half of this year, starts and
permits have both fallen further since June and the elevated level of IIlventories of
unsold homes suggest that home construction will remain weak going forward
Despite the downdraft from housing, other sectors of the economy have been
broadly healthy--indeed, this is the first housing downturn in the past three decades
in which U.S. GDP growth has not turned negative. Business Investment has
expanded in recent months. exports are growing strongly, and continued job
creation has helped support consumer spending. Data available through August
suggest that real personal consumption expenditures are on track to contribute
~://www.treas.gov/presslreleases/hp652.htm
11/6/2007
hp-652: Treasury AssIstant Secretary for Economic Policy<br>Phillip Swagel<br>Statement for the Tr
Page 2 of2
about 2 percentage pOints to real GOP growth in the third quarter (at an annual
rate), more than consumption contributed m the second quarter, when real GOP
rose by 3.8 percent at an annual rate. Solid income gains and healthy household
balance sheets have helped support household spending: Real disposable income
rose 4.4 percent over the twelve months ended in August, and household net worth
remained high relative to income ill the second quarter
in the business sector, core capital goods shipments rose smartly in August alld
September, slgnalmg a pickup In equipment and software investment toward the
end of the third quarter Orders for core durable goods remain ahead of shipments,
though the volatility of the orders data means that this provides only a modest
suggestion of future strength In the durable goods categories that are most closely
linked to business investment.
Export growth remained solid well into the third quarter, supported in large part by
strong economic growth overseas Over the year ended in August, U S exports of
goods and services rose 128 percent Strong export growth and slower growth of
imports has narrowed the trade deficit considerably in recent months. Net exports
are poised to make another substantial contribution to 03 real GOP growth after
adding 1.3 percentage points to growth in the second quarter
Job growth moderated in the third quarter and the unemployment rate ticked higher
but labor markets still appear healthy overall. Nonfarm payrolls expanded by an
average of 97,000 a month in the third quarter, down from the average monthly Job
gain of 134,000 in the first half of the year. The unemployment rate edged up to
4.6 percent In the third quarter from 4.5 percent m the previous three quarters Real
wages in September were 1.3 percent higher than a year earlier. The level of mitial
claims for unemployment insurance moved up somewhat in October, but remains at
a level consistent with ongoing job creation.
The federal government's fiscal position continued to improve in the fiscal year that
just ended The federal budget deficit shrank by $85 billion in FY2007 to $163
billion, due to a combmation of strong receipts growth and a moderate rise In
spending. The FY2007 deficit was equivalent to 1.2 percent of GOP--half of the 40year average of 2.4 percent. At the same time, the fiscal challenge of rising
entitlement spending looms just over the horizon.
Headline consumer price inflation has moved higher but core inflation remams
broadly contained. Headline consumer price inflation was 2.8 percent over the
twelve months ended in September, up from a 2.1 percent pace over the yearearlier period. Energy prices increased 5.4 percent over the latest twelve months,
although prices have been volatile in this period, and crude oil prices have surged
in the most recent few weeks. Food prices accelerated notably over the past year:
September's twelve-month change of 4.4 percent was up from 2.6 percent a year
ago. Excluding food and energy, consumer prices advanced 2.1 percent over the
last 12 months, down from 2.9 percent in the prevIous 12 months.
The sharp run-up m oil prices since mid-August has prompted forecasters to lower
their prOjections for near-term growth. The one-month futures pnce of West Texas
Intermediate crude oil broke through the $90 a barrel mark late last week and IS
nearing the inflation-adjusted peak recorded in 1980. Production In the U.S
economy is less energy-intenSive than was the case thirty years ago, so that the
current high level of oil prices is not expected to exact the same heavy toll on the
economy as in the 1970s and 1980s. Even so, high energy prices remain a
challenge for consumer and business spending, while tight inventOries and limited
global production capacity mean that the possibility of sharply higher oil prices from
a supply disruption is a key downside risk for the economy.
In sum, the U.S economy looks set to grow at a moderate pace, even while the
downdraft from the homebuilding sector and recent credit market disruptions exact
a penalty on growth.
-30-
tp:!IWW w.treas.gov/press/releases/hp652.htm
11/6/2007
Page lof4
October 29, 2007
2007-10-29-16-27 -52-1493
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 $69,668 million as of the end of that week, compared to $69)81 million as of the end of the
prior week.
I. Official reserve assets and other foreign currency assets (approximate market value, in US milliolls)
!
II
IIOctober 26, 2007
I
I
IA Official reserve assets (in US millions unless otherwise specified)
II Euro
IIYen
IITotal
II
11 11 ,186
11 69 ,668
I(a) Securities
II
11 14 ,055
11 25 ,241
lof which: issuer headquartered in reporting country but located abroad
II
II
11
I(b) total currency and deposits with:
1(1) other national central banks, SIS and IMF
II
11 14 ,026
II
11 5 ,503
II
11 19 ,529
Iii) banks headquartered in the reporting country
II
II
lof which: located abroad
II
II
11 0
11 0
I(iil) banks headquartered outside the reporting country
II
II
lof which: located in the reportlllg country
II
11 4 ,493
II
1(1) Foreign currency reserves (in convertible foreign currencies)
1(2) IMF reserve position
0
11 0
11 0
!
I
I
1(4) gold (includlllg gold deposits and, if appropriate, gold swapped)
11 9 .364
11 11 ,041
I--volume in millions of fine troy ounces
11261499
I
1(5) other reserve assets (specify)
/10
I
I--financial derivatives
II
I
I--Ioans to nonbank nonresidents
II
!
t-other
II
[8
II
1(3) SORs
Other foreign currency assets (specify)
--securities not included in official reserve assets
II
--deposits not included in official reserve assets
II
--loans not included in official reserve assets
JI
--financial derivatives not included in official reserve assets
JI
--gold not included
JI
III
offiCial reserve assets
[--other
II
I
II
/I
I
II. Predetermined short-term net drains on foreign currency assets (nominal value)
[ ____________
~I~I_ _ _ _~!I~_ _--~I~I_ _ _ _~IL!_ _ _ _~I~I----~!I
~://WWW.treas.gov/pr~ss/releases/200710291627521493.htm
11/6/2007
Page 2 of 4
[
II
[
[1. Foreign currency loans, securities, and deposits
t-outflOWS (-)
IIPrincipal
[
IIlnterest
I--inflows (+)
IIPrincipal
I
IIlnterest
I (b) Long positions (+)
I 3. Other (specify)
I --outflows related to repos (-)
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
II
II
II
II
II
II
II
II
II
II
II
"
II
II
II
--inflows related to reverse repos (+)
--trade credit (-)
--trade credit (+)
More than 1 and
up to 3 months
IUp 10 1 moolh
II
II
II
II
--other accounts receivable (+)
II
II
I
I
I
II
1/
II
II
I
1/
II
--other accounts payable (-)
I
More than 3
months and up to
1 year
IIToial
2 Aggregate short and long positions in forwards and
futures in foreign currencies vis-a-vis the domestic
currency (includinQ the forward leq of currency swaps)
I (a) Short positions ( - )
IIMaturity breakdown (residual matunty)
I
II
II
I
I
II
I
II
III. Contingent short-term net drains on foreign currency assets (nominal value)
II
I
I
I
[1 Contingent liabilities III foreign
currency
(a) Collateral guarantees on debt falling due within 1
year
II
II
applicable)
IIToial
Up to 1 month
II
II
2. Foreign currency securities issued with embedded
options (puttable bonds)
II
More than 3
months and up to
1 year
II
I
I
I
I
I
Undrawn, unconditional credit lines provided by:
(a) other national monetary authonties, BIS, IMF, and
other international organizations
"II
II
[--other national monetary authorities (+)
t
maturity, where
More than 1 and
up to 3 months
II
I(b) Other contingent liabilities
I~·
II
I Maturity breakdown (residual
I
BIS (+)
[IMF (+)
(b)
with banks and other financial institutions
headquartered in the reporting country (+)
(c) with banks and other financial institutions
headquartered outside the reporting country (+)
~ndrawn,
II
I
II
II
unconditional credit lines provided to:
(a) other national monetary authorities, BIS, IMF, and
other international organizations
I
Gther national monetary authorities (-)
r
~:IIWWw.treas.gov/press/releases/200710291627521493.htm
II
II
II
II
I
II
II
II
II
1\
II
II
II
II
II
\I
II
II
1116/2007
Page 3 of4
t BIS (-)
It
[IMF (-)
II
(b) banks and other fmanclal institutions headquartered
in reporting country (- )
(c) banks and other financial instltulions headquartered
outside the reporting country ( - )
I
I
/I
II
II
II
I
II
II
I
II
II
I
II
I
II
I
II
II
/I
I
I
II
/1
4. Aggregate short and long positions of options in
foreign currencies ViS-a-VIS the domestic currency
[
~a) Short positions
I[
II
II
II
I
1/
1/
1/
II
I
II
II
I
I(b) Long positions
I[
II
II
1/
I(i) Bought calls
II
II
II
II
II
I
II
1/
II
I
II
II
I
II
I
I(i) Bought puts
I(ii) Written calls
I(ii) Written puts
IpRO MEMORIA In-the-money options
I[
1(1) At current exchange rate
II
I(a) Short position
I(b) Long position
II
II
II
II
II
I
II
]1
1/
II
I
II
II
II
II
II
II
II
II
II
II
"
1(2) + 5 % (depreciation of 5%)
I(a) Short position
II
I(b) Long position
II
1(3) - 5 % (appreciation of 5%)
11
I(a) Short position
II
II
II
"
I(b) Long position
1(4) +10 % (depreciation of 10%)
II
I(a) Short position
I
"
"II
"
1/
II
II
II
II
II
II
II
II
I
I
I
I
I
I
II
I
II
I
I(b) Long position
II
II
II
II
I
1(5) - 10 % (appreciation of 10%)
II
II
1/
1/
I
I(a) Short position
II
I(b) Long position
1/
II
II
I
1(6) Other (specify)
II
II
II
II
II
II
I(a) Short position
1/
II
II
II
I
I(b) Long position
II
II
II
II
I
"
II
I
I
IV. Memo items
[
II
I
U1) To be reported with standard periodicity and timeliness:
I
(a) short-term domestic currency debt indexed to the exchange rate
II
I
I
(b) financial instruments denominated
currency)
In
foreign currency and settled by other means (e.g,
In
domestic
I
[nondeliverable forwards
[-Short pOSitions
I
I
I
[-long pOSitions
II
I
[other instruments
II
I
lli:) pledged assets
II
I
[inCluded in reserve assets
II
I
--included in other foreign currency assets
II
I
r
:!p:IIWWw.treas.gov/press/releases/200710291627521493.htm
II
I
11/6/2007
Page 4 of 4
li9) securities lent and on repo
--lent or repoed and included in Section I
--lent or repoed but not included in Section I
--borrowed or acquired and Included in Section I
--borrowed or acquired but not included in Section I
(e) financial derivative assets (net, marked to market)
II
I
II
)
II
I
II
I
II
)
II
I
I--forwards
I
I--futures
I
[--swaps
I
I--options
I--other
(f) derivatives (forward, futures. or options contracts) that have a residual maturity greater than one
year, which are subject to margin calls.
--aggregate short and long pOSitions in forwards and futures in foreign currencies vis-a-vis the domestic
currency (including the forward leg of currency swaps)
I
I
II
I
II
II
I
I
I(a) short positions ( - )
II
I(b) long POSitions (+)
II
I
I--aggregate short and long positions of options in foreign currencies vis-a-vis the domestic currency
II
I
I(a) short positions
II
I
II
II
I(i) bought puts
I(il) written calls
II
I(b) long positions
)
I
I
I
I
II
II
I(i) bought calls
I(ii) written puts
1(2) To be disclosed less frequently
I(a) currency composition of reserves (by groups of currencies)
11 6 9,668
I--currencies
)169,668
I
I--currencies not in SDR basket
II
I
I--by individual currencies (optional)
II
I
I
II
I
In
SDR basket
Notes:
1/ Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market
Account (SOMA), valued at current market exchange rates. Foreign currency holdings listed as securities reflect markedto-market values, and depOSits reflect carrying values.
2/ The items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF
and are valued in dollar terms at the official SDR/dollar exchange rate for the reporting date. The entries for the latest
week reflect any necessary adjustments, including revaluation, by the U.S. Treasury to IMF data for the prior month
end.
3/ Gold stock is valued monthly at $42.2222 per fine troy ounce.
1tp://www.treas.gov/press/releases/200710291627521493.htm
11/6/2007
HP-653: Treasury Assistant Secretary David Nason <br>Remarks before the Women in Housing and F...
Page I of 5
October 30, 2007
HP-653
Treasury Assistant Secretary David Nason
Remarks before the Women in Housing and Finance
Washington- Thank you for inviting me to Join you today at this luncheon. I am
honored to have the opportunity to speak to this distinguished group of financial
services Industry professionals and policy leaders. It is great to see so many
familiar faces here. Women in Housing and Finance is a significant contributor to
the success of many women in the financial services arena, particularly here in our
Nation's capital.
It has been an especially busy time at the Treasury Department so there are plenty
of Issues that are ripe for our discussion today. I would like to begin my remarks
with a brief economic update after which I will cover two issues that are currently
front and center at the Treasury Department, particularly for Domestic Finance:
housing policy issues and capital markets competitiveness.
General Economic and Market Conditions
As you know, there have been adjustments taking place in the credit and mortgage
markets. Largely because of lax underwritmg, the mortgage market, especially the
subprime market, has been experiencing a high number of delinquencies and
defaults. As a result, subprime mortgage-backed securities have performed poorly
This has led investors to reassess the risk and as a corollary reassess the pricing of
these securities.
At the Treasury Department, we have been engaged actively in this developing
situation. Secretary Paulson has been working with financial regulators and market
participants. At a time like this when markets are reappraising risk and Imposing
market discipline, confidence is key. Our country and the Treasury Department are
fortunate to have a Treasury Secretary who has spent his life in the financial
markets, through good times and bad times.
Fortunately, this market stress is occurring against the backdrop of a strong global
economy. However, as Secretary Paulson noted recently, the ongoing housing
correction, rooted in an eight year period of exceptional housing price appreciation,
will continue to Impact the economy adversely. We continually analyze this
situation, knOWing that it will take time to work itself out. In our view, the underlymg
strength of the economy should enable further continued growth. However, despite
these strong fundamentals it is the Treasury Department's view that the housing
decline is the most significant current risk to our economy.
Housing Policy Issues
The AdmmistratlOn's Response
The Administration recognizes the importance of housing to our economy and the
fact that a significant number of homeowners will experience strain due to resetting
mortgage rates and housing pricing pressures. In August, PreSident Bush laid out
an aggressive plan to stem the rising tide of foreclosures HIS plan IS motivated by
the realization that many distressed homeowners can avoid foreclosure with
additional flexibility.
The Administration's foreclosure avoidance plan has three main parts. First, the
Administration renewed its call on Congress to modernize the Federal Housing
Administration (FHA). This FHA modernization proposal would lower down payment
requirements, allow FHA to insure bigger loans, and give FHA more pricing
~:IIWWw.treas.gov/press/releases/hp653.htm
1116/2007
HP·653: Treasury AssIstant Secretary David Nason <br>Remarks before the Women in Housing and F... Page 2 of 5
flexibility. Second, we called on Congress to change the Federal Tax Code
temporarily so it does not punish homeowners who have mortgage debt cancelled
Third, we announced a foreclosure avoidance initiative, which sought the
assistance and expertise of housing counselors and coordinated the response
efforts of mortgage industry market participants in a way that is flexible and
adaptive to the subprime mortgage market challenges.
I would like to discuss the foreclosure initiative In greater detail, but first it IS
Important to make two general observations about the Administration's plan The
components of the plan enjoy wide bipartisan support on Capitol Hill. FHA
modernization language has passed the House twice. In the Senate, FHA
modernization legislation passed the Senate Banking Committee and has wide
biparlisan support. The Administration's tax code proposal is also bipartisan, with
Republican and Democratic support in each chamber.
The second general point I would like to make is that time is of the essence.
Adjustable rate mortgage resets will occur in the coming months regardless of
Congressional action. It IS Important to act qUickly. Homeowners not reached before
their resets occur are at a much higher risk of defaulting. Our plan supports an
increased role for housing counselors, but their efforts will be less meaningful if the
appropriate tools are not available.
The Joint Economic Committee, under the leadership of Chairman Charles
Schumer and Vice Chair Carolyn Maloney, issued several reports on the current
housing market. Their reports repeatedly recognize the appropriateness of the
Ideas in the Administration's plan to minimize foreclosures. The Committee's poliCY
recommendations Include passing FHA modernization legislation, changing the
Federal Tax Code so cancelled mortgage debt is not treated as income, and
acknowledging the importance of housing counselors to the loan modification
process. Just last week, the JOint Economic Committee, in another published
report, repeated its call for these issues (and others) to be addressed. Congress
should send legislation to the President on these bipartisan efforts as soon as
possible.
HOPE NOW Alliance
On October 10, consistent with President Bush's call for action. Secretary Paulson
and Department of HOUSing and Urban Development Secretary Jackson Joined a
group of mortgage servlcers. counselors and Investors as they launched an effort.
called the HOPE NOW Alliance, to coordinate efforts to reach more homeowners
and find long-term solutions I would like to discuss with you the issues that the
Alliance has Identified and its strategy for success.
First. as I already stated, but it is worth restating, the earlier we Identify struggling
borrowers, the more likely they will be able to modify their mortgage or refinance
into a sustainable mortgage. If we wait until borrowers default, their credit will be
damaged and they will have far fewer options.
Second, borrowers are fearful of foreclosure and not aware that their lenders may
be able to work out a solution Many borrowers mistakenly believe that lenders
want to repossess their homes through foreclosure. Foreclosure is very costly for
lenders too. According to most of the servicers and counselors with whom we have
spoken. 50 percent of those who lose their homes to foreclosure never contacted
their mortgage servicers or mortgage counselors We must work around the
unfortunate stigma that many homeowners mistakenly associate With asking for
mortgage help.
Third, while bringing benefits to our economy and homeowners. innovation In the
mortgage sector has also introduced some challenges. Today, the mortgage
process is disaggregated A mortgage loan is likely to be originated, serViced. and
owned by three different entities. In today's system, a homeowner haVing trouble
making payments often does not know where to turn for assistance
The Alliance members believe they can keep more Americans in their homes by
jOining together to address the problems in the subprime mortgage market. They
have identified a set of specifiC actions to pursue
1p:IIWWw.treas.gov/press/releases/hp653.htm
1116/2007
HP·653: Treasury Assistant Secretary David Nason <br>Remarks before the Women in Housing and F... Page 3 of 5
•
•
•
•
•
•
Counseling - Local housing counselors are already III place and have the
required expertise. The Alliance is working with counseling organizations
such as NelghborWorks to establish a simple, clear, and uniform message
for homeowners that they counsel.
Communication - Servicers indicated that they have poor success rates
when they reach out to homeowners directly, sometimes as low as 3 to 5
percent. Homeowners are far more responsive to independent counselors,
so the Alliance will develop in the near future a direct mail campaign
directing distressed homeowners to counselors.
Process - Servicers and counselors lack established protocols and
standards for working together. Members of the Alliance have agreed to
adopt standard praclices to increase process efficiency.
Investors - In the past housing counselors were funded by federal, state
and local governments, but the investor community has now recognized that
counselors play an important role in foreclosure avoidance. The American
Securitization Forum has joined the Alliance and announced that counseling
fees can be reimbursed from securitization transactions in appropriate
circumstances.
Performance Measurements - Today the industry does not have a
thorough, standardized set of metrics with which to evaluate servicers' lossmitigation performance or to evaluate counselors' effectiveness. The
Alliance is developing these standard metrics which policymakers,
homeowners, and investors need in order to monitor performance and
develop loss mitigation strategies.
Technology - The servicers have agreed to work toward cross-industry
web-enabled technology solutions to connect servicers and counselors
more effectively In order to better serve the homeowner. This should
increase the speed of the loan modification process.
Recently, there has been a great deal of dlscuss'lon about voluntary modifications.
Preventing foreclosures is in Investors' and homeowners' interests. Investors must
take an active role in demanding that all mortgage servicers, large or small, are
pursuing all available loss-mitigation strategies. We have an immediate need to see
more loan modifications and refinancing and other flexibility But, genuine voluntary
actions are best taken under informed circumstances. The HOPE NOW Alliance IS
well sUited to help homeowners and investors understand the value of their
Impaired assets by developing reliable housing data and encouraging the creation
of industry guidance to Increase effectiveness and standardize loss mitigation
efforts.
There are many dedicated people working very hard on this initiative and their
efforts should be appreciated. This IS a very complex set of problems without an
easy solution. I encourage you and your members to think creatively on these
issues and communicate your Ideas to us and Congress.
Capital Markets Competitiveness
When Secretary Paulson arrived at the Treasury Department, he immediately and
appropriately focused his attention on financial preparedness and the
competitiveness of our capital markets. Capital markets are the lifeblood of the
United States economy They enable capital investments to seed new companies,
.
leading to job creation and economic prosperity American consumers and
investors benefit from a vibrant and healthy financial services sector that provides
opportunities to access credit, save and invest for the future, and insure against
risks. It is important, therefore, that our capital markets remain thebestln the world.
Accordingly. I would like to discuss three competitiveness-related initiatives that are
underway at the Treasury Department.
Auditing Profession
In an address last November, Secretary Paulson specifically pointed out a strong
and viable auditing profession as a crucial component of capital markets
competitiveness. For nearly 75 years, the auditing profeSSion has been charged
with certifying public company financial statements. The fulfillment of thiS charge IS
critical to investor confidence in financial reporting, critical to the flow of capital, and
thus critical to capital markets competitiveness.
Recognizing the challenges facing the auditing profession, Secretary Paulson
MWWw.treas.gov/press/releases/hp653.htm
1116/2007
HP-653: Treasury AssIstant Secretary David Nason <br>Remarks before the Women in Housing and F... Page 4 of 5
announced last May the creation of a federal advisory committee to examine and
develop recommendations relating to the sustainability of the auditing profeSSion
Co-Chaired by former Securities and Exchange Commission (SEC) Chairman
Arthur Levitt. Jr. and former SEC Chief Accountant Donald T. Nicolaisen and made
up of a diverse group of Impressive members representing Investors, auditors, large
and small publiC companies, insurance companies, lawyers and regulators, the
AdVisory Committee on the Auditing ProfeSSion convened its first meeting two
weeks ago. By all accounts, the meeting was a success and we are thankful that
this extraordinary group has agreed to take on these challenging Issues.
The Advisory Committee will be considering several issues confronting the auditlllg
profession These Issues include: the auditing profession's ability to attract and
retalll the human capital necessary to meet developments in the business and
finanCial reportlllg enVironment, audit market competition and concentration, alld
the financial resources of the auditing profession. By early Summer 2008, the
Advisory Committee expects to deliver recommendations to the Treasury
Department
Restatement Study
The second capital markets competitiveness initiative I would like to discuss is the
Treasury Department's public company financial restatement study. Numerous
studies have pOinted to a significant increase in the number of financial
restatements over the past decade.
On the one hand, many reports attribute the growing number of restatements to
increased management and auditor focus on accurate financial reporting due to the
mandates in the Sarbanes-Oxley Act of 2002 and greater financial reporting review
by the SEC and the Public Company Accounting Oversight Board.
However some studies suggest that while some financial restatements are clearly
material, immaterial financial restatements might pose significant and unwarranted
challenges to the capital markets. Immaterial restatements might unnecessarily
harm IIlvestor confidence by calling into question the credibility of company
management, auditors, and the financial reporting system as a whole.
Earlier this month, the Treasury Department announced the selection of University
of Kansas Professor Susan Scholz to conduct its examination of the impact of and
the reasons behind publiC company financial restatements. Professor Scholz will
describe these restatements, examine the factors triggering these restatements,
and analyze their significance on IIlvestors and the capital markets.
The study will analyze restatement data from 1997 to 2006 in order to perform a
thorough assessment of several recent changes III the financial reporting system,
includlllg the impact of the Sarbanes-Oxley internal control requirements and SEC
Staff Accounting Bulletin No. 99--Materiality. Through this process, our goal is to
understand the significance of restatements upon investors and capital markets.
The Treasury Department intends to make the study's results publiC by early 2008
Regulatory Bluepnnt
Finally, I would like to discuss regulatory structure issues assoclatedwlth the US
financial services industry. The regulatory policies in place for finanCial institutions
must effectively protect consumers and Investors, while at the same time promote
entrepreneuriallsm and capitalism that is the foundation of our national economic
success These qualities are not at all mutually exclusive. Our regulatory system
has adapted to the changing market by expanding, but perhaps not always by
focuslllg on the broader objective of regulatory effectiveness and protecting
consumers and IIlvestors. We should analyze and understand the rationale or
Justification for our current regulatory structure as well as the inefficiencies It call
breed along With the benefit and burden of our regulations.
Therefore, under Secretary Paulson's leadership, the Treasury Department IS
engaged in a comprehenSive review of our regulatory structure to evaluate these
issues and propose solutions that achieve the right balance Overthe next several
months, we will produce a regulatory reform blueprint that Will outline
recommendations on how to modernize our regulatory regime
http://www.treas.gov/press/releases/hp653.htm
1116/2007
HP-653: Treasury AsslstanfSecretary David Nason <br>Remarks before the Women in Housing and F... Page 5 of 5
While this project was contemplated well before we entered this period of mortgage
market stress, the complexity of the mortgage market regulatory structure provides
an interesting backdrop More people are now willing to consider and discuss
regulatory structure and these issues associated with the current situation In the
mortgage market are directly related to some of the specific questions posed In the
Treasury Department's recent Federal Register notice seeking comments on our
comprehensive review of regulatory structure.
In particular, the nollce asked about what role states should have In the regulation
of financial instltullons. This issue has been debated for a long time, but IS taking
even greater prominence with the consideration of current proposals related to
mortgage originators and long-term structural issues.
Much like evaluating federal versus state issues in other areas of regulation, In
financial services, consideration of what areas are appropriate for federal
standards, and if so, what role should the states have in setting or enforcing those
standards is the appropriate approach The notice also specifically asks If the
current regulatory structure adequately addresses consumer or investor protection
issues. Much of the current debate on issues related to mortgage origillation
focuses on enhancing consumer protection In the mortgage origination process,
with current proposals focusing on tightening current standards or providing new
regulatory authority to a number of agencies. Again, as the Treasury Department
looks to the future in thiS report, one aspect that the Department will focus on is
what regulatory structure is the most effective from a consumer protection
perspective, and what type of regulatory structure is necessary to perform that
function effectively
These are Significant Issues that many policymakers have considered over the
years. Success of thiS initiative will not and should not be tied to short-term
accomplishments. We Will recommend specific changes to our financial services
industry regulatory structure. Some of the recommendations will be immediately
relevant to legislalive and regulatory policy issues. On these matters, our hope IS
that the Treasury Department's report Will spur near-term tangible results.
Implementation of other, longer-term recommendations will be subject to outside
factors, but Will be ready should support for these reforms develop. Finally, our
hope IS that some of the recommendations will shape debates in the future when
regulatory structure Issues are considered.
The Treasury Department is pursuing each of these three initiatives as part of the
Secretary's broader competitiveness agenda, which seeks to ensure that US
capital markets remain efficient, innovative, and continue to drive capital to ItS most
productive uses. Our markets must retain the integrity and efficiency that has
contributed greatly to prosperity in America and around the world. Thank you for
listening. I would be happy to take a few questions.
~:IIWWw.treas.gov/press/rele::lses/hp653.htm
11/6/2007
HP.654: Statemem of Daniel Heath Nominee for U.S. <br>Alternate Executive Director International...
Page 1 of 1
October 30, 2007
HP-654
Statement of Daniel Heath Nominee for U.S.
Alternate Executive Director International
Monetary Fund Before the Senate Foreign Relations Committee
Chairman Menendez, Ranking Member Hagel, and members of the Committee,
thank you for the opportunity to appear before you today. I am honored that
President Bush has nominated me to serve as the United States Alternate
Executive Director at the International Monetary Fund, and if confirmed, I pledge to
work with this Committee, the full Congress. Secretary Paulson and the rest of the
Administration in furthering US. international economic policy goals and the wellbeing of the American people.
First, I would like to thank my wife Jane and our sons for their support of my
commitment to public service. For much of the past six years I served as Associate
Director of the National Economic Council. In this capacity, it has been my privilege
to promote policies leading to economic growth and stability for the good of all
Americans. Throughout my prevIous roles in Federal government and the private
sector III Europe, I worked to expand international trade and investment of benefit
to our country. If confirmed, I look forward to bnnging my skills, knowledge and
experience to help pursue policies that are a priority for the United States
As you know, the IMF is entenng a new period, marked by new leaders, credit
market turbulence, and strength of emerging market countries. Its mandate to
promote international monetary cooperation and expand job-creating trade will
require the IMF to intensify its own leadership towards transparency in public policy,
market-based reforms to generate sustained growth, and fiscal and monetary
policies that strengthen government accounts and reduce the risk of crisis. With ItS
near global membership, and effective US. gUidance, the IMF is well-positioned to
set standards In these important areas. The United States strongly supports recent
IMF decisions to better assess countries' economic policies, including exchange
rate activities If confirmed, I look forward to working with my colleagues to
implement these vital reforms.
Mr. Chairman, dedicated Administration officials and Congressional leaders over
many years have helped to expand economic opportunity in the U.S. through
domestic policies and the policy fundamentals for economic growth and stability in
other countnes. There are new challenges to global economic performance, and if
confirmed, I will demonstrate enthusiasm and good judgment In doing my part to
improve IMF policies and practices needed III our time.
I am grateful to have the pnvilege of your conSidering my nomination I would be
pleased to answer any questions. Thank you.
Dttp:llwww .treas.goY/presslreleases/hp654.htm
11/612007
HP-655: Treasury AssisTant Secretary for Financial Markets<br>Anthony W. Ryan<br>November 200... Page I of 1
October 31, 2007
HP-655
Treasury Assistant Secretary for Financial Markets
Anthony W. Ryan
November 2007 Quarterly Refunding Statement
Washington - We are offermg $180 billion of Treasury securities to refund
approximately $51.5 billion of privately held securities maturing or called on
November 15 and to pay down approximately $33.5 billion. The securities are
•
•
A new 10-year note in the amount of $13.0 billion, maturing November 15,
2017;
A reopening of the 29 3/4-year bond in the amount of $50 billion, matUring
May 15, 2037.
These securities will be auctioned on a yield basis at 1:00 p.m. EDT on
Wednesday, November 7, and Thursday, November 8, respectively. Both auctions
wJiI settle on Thursday, November 15. The balance of our financing requirements
wJiI be met with weekly bills, monthly 2-year and 5-year notes, the December 10year note reopening, and the January 10-year and 20-year TIPS. Treasury also is
likely to issue cash management bills in mid and late November, early December
and possibly in early January.
New Treasury Auction System
In the first half of 2008, as part of its Cash and Debt Management Modernization
initiative, Treasury expects to introduce its new Treasury Automated Auction
Processing System (T AAPS). This enhanced auction system wJiI significantly
upgrade Treasury's auction process by improving system flexibility, reliability,
security, analytics and transparency
We will be providlJlg more IJlformatlon on the conversion to the new processing
system as a part of our next quarterly flJlancing release on January 30, 2008.
Treasury auction participants should already have completed submitter agreements
and local admmistration forms to ensure a smooth transition to the new auction
system Any concerns should be addressed to the Bureau of Public Debt at (202)
504-3550 or emailed to ,'I:' 1:'\:"",: ili)l: I'f"l', 'i(J'.'.
Lowering the Minimum Denomination in Treasury Auctions
We are lowering the minimum purchase amounts for Treasury auctions from $1,000
to $100. This change will be made subsequent to the rollout of the new auction
procesSing system
We will provide further detaJis regarding this change in our February quarterly
financing release
The next quarterly refunding announcement Will take place on Wednesday, January
30,2008.
- 30 -
.ttp:llwww.treas.gov/press/releases/hp655.htm
111612007
HP-656: Report to me Secretary ofthe Treasury from The Treasury Borrowing Advisory Committee 0... Page I of 4
10 vIew or pnnt tne put- content on tnlS page, OownlOao tne tree AOooe® Acrooat® Keaaer®.
October 31.2007
HP-656
Report to The Secretary of the Treasury from The Treasury Borrowing
Advisory Committee of The Securities Industry and Financial Markets
Association
October 30, 2007
Dear Mr. Secretary:
Since the Committee's previous meeting In July, credit conditions have become
more challenging and the outlook for the economy has turned less certain.
Economic growth this summer withstood the re-priclng of risk in some segments of
the financial markets. But the combination of less secure financial underpinnings,
and the ongoing housing downturn. suggest that GOP will remain on a fairly modest
track ahead and that the outlook is subject to greater uncertainty than in recent
quarters.
Inflation has remained somewhat elevated this year due to price increases for food
and energy. The slowing III economic growth has had a moderating effect on a wide
array of other consumer prices. most notably motor vehicles and other large
household goods. As a result, core consumer price measures have cooled from a
2-Y2% to 3% range to a 1_3;';% to 2-%% rate. Some additional improvement is
possible, but the failing U.S dollar and high and rising commodity prices have kept
alive concerns about inflationary pressures.
Financial market disturbances, and the protracted weakness in housing, led the
Federal Reserve to lower the Federal funds target by 50 basis points to 4-'1'4% in
September. Policy makers also narrowed the spread between the funds target and
the discount rate in an effort to restore stability to money markets. Futures markets
anticipate further reductions in the policy rate ahead, while expectations for a lower
funds rate have contributed to a steeper Yield curve. Yields across the U.S.
Treasury curve are below August levels with short- to intermediate-term Yields
having declined the most.
The Federal Government's budgetary deficit improved In the fiscal year ended
September 30 amid strong revenue collection and a modest expansion in public
expenditures. Looking forward however, there is increasing evidence that the
growth in individual and corporate tax receipts has and may continue to moderate
as economic conditions slow. Consequently, market expectations for the budget
deficit for FY 2008 center around $200 billion which is a moderate increase over the
FY 2007 figure of approximately $163 billion
After a brief presentation by Treasury summarizing recent changes in the
components of the budget defiCIt. the issuance pattern of Treasury debt. and other
important market developments, the Committee addressed the charges presented
to it.
In its first charge. the Treasury solicited the Committee's advice on the composition
of Treasury debt Issuance In light of intermediate and long-term fiscal and market
trends.
The general view of the Committee was that the coming year's upward deficit
forecast should alleViate the pressure on Treasury towards reducing and eilrnlnatlng
coupon issuance to keep bill issuance at minimum levels and to ensure suffiCient
short-term market liquidity.
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One member noted that the amount of bills outstanding as a percentage of overall
Treasury debt had fallen to multi-year lows recently simultaneous to increased
volatility in the credit markets, which Increased the demand for "risk-free" short-term
US Government debt. Most members agreed that If additional debt Issuance IS
needed that the bill market IS well poised to absorb these increases
Financing needs in the amounts anticipated by deficit projections and even larger
amounts of as much as an additional $100 billion over current levels could easily be
absorbed by the bill market over the next year if done in a deliberate and
transparent way.
In the second charge, the Committee was asked to address their views regardlllg
recent market dislocations in the short-term credit markets and their relationship, If
any, with Treasury markets. A Committee member delivered an extensive review of
the securitization markets and their subsequent influence on the volatility of the
overall credit markets.
This member cited the dramatic increase in securitization Issuance and the diverse
set of asset classes through which those structures are formed. There was specific
reference to that issuance as being global, with a large percentage (roughly one
third) of the product emanating out of Europe. The member cited that while this IS a
global phenomenon, much of the stress associated with these structures was due
to pressures within the U.S. subprime mortgage market.
References were made to the high demand for yield-oriented product in the markets
influencing increasing levels of asset-creation and consequently more lax
underwriting standards. The result being a large universe of subprime issuance
into the capital markets as opposed to in the traditional domalll of the banklllg
system One member commented that the banking system has historically had to
deal Internally with these market cycles, yet the re-prlcing of asset-backed
securities and other structured securities had to now be solved within the open
market.
There was diSCUSSion and a general skepticism regarding the role of the rating
agencies in the securitization market. The presenting member suggested some
potential flaws in the model-based assumptions underlying some of the structures.
Data was presented to show unusually high ratings changes in the 2006 vintage
production for subprime origination. A number of members mentioned that the
complexity of the implicit data, and the nature of the ratings agencies mandate to
serve a number of constituents, potentially compromised the quality of the ultimate
ratings.
The ensuing instability in the asset-backed and short-term credit markets was
suggested to be a result of a heavy reliance on the quality of those ratlllgs and a
need to mark-to-market what soon would become very illiquid securities. There
was extensive discussion among the members regarding the lack of transparency
underlying some of these structures and the nature of "fat tail" risk events which
tend to follow the ultimate need to reduce exposure to non-cash flow transparent
assets.
The presenting member described the Implicit need in the markets for effective
seCUritization, which is largely to disperse risk and more efficiently utilize limited
financial capital. A number of proposals were put forth to enhance the nature of
seCUritization going forward including improvement of underwriting practices and/or
some form of external monitoring of the ratings process
A discussion followed regarding the Impact from increased volatility In the shortterm credit market on Treasury securities as the demand for "risk-free" assets
increased as investors sought safety and liquidity.
The Committee was also asked for its thoughts regarding current and future
demand for Treasury securities One member made a prepared presentation on
thiS subject as a backdrop
ThiS member noted that while budget and trade deficits were largely funded
internally by U.S. investors In the 1980's and early 1990's, foreign investorshave
provided the bulk of needed funding for much of the past decade ThiS foreign
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demand has come from both private and official sources. and whi le the official flows
seem to garner the most publicity. it has actually been the private flows that dwarf
these official flows .
It was also noted that the composition of these foreign flows has changed
considerably over time. Japan. for example. was the largest foreign buyer of US
Treasury debt for many years but recently other countries such as the UK .
developing countries such as the BRICs and OPEC-related countries have
increased their participation in the purchase of US Treasuries and other U.S
fixed-income securities . (It was noted and largely accepted that much of the
purchas ed debt that is credited to the UK in the TIC data is actually for the accounts
of other indi viduals and institutions outside the UK but doing business in the UK .)
This member suggested that the primary drivers behind the demand for U .S. debt
varies but is largely the result of (1) the reinvestment of trade flows. (2) the
investment of FX reserves into the U.S. dollar. and (3) net investm ent flows .
The recent TIC data highlights the reduction in demand for U.S. Treasuries by
foreign parti cipants and. in fact . showed a surprising drop in holdings in the most
recent release. Most members seemed to ag ree that while the demand has been
falling modestly ove r the resent past. the August data may not be indicative or even
reliable as a measure of a change in the trend .
There was . of course. sign ifica nt market volatility in August and it is likely as one
member pOinted out that some investors may simply have let some short-term bills
mature rath er than roll given the significant premium that was priced into the market
for liquidity at this time . Others suggested that the data is very subject to revisions
and that the y wou ld wait before concluding that a "sea change" had taken place in
the foreign demand for U.S. fixed-income securities.
That said. a number of Committee members agreed that foreign demand for US .
Treasuries had eased over the last years and in particular as a percentage of
overall foreig n purchases of US . fi xed-income securities .
Members cited several reasons for this change including (1) the absence of
Japanese foreign exchange flows , (2) the diversifi cation of investors including
sovereign wealth funds to hi gher yielding fixed-income securities and (3) the
movement of investors into other currencies.
Several members relayed anecd otal evidence that many foreign investors are still
most attracted to U .S Treas ury securities given their tremendous liquidity and
perceived safety . And the va lue of these securities become more attractive in
volatile and uncertain times.
In the final section of the charge, the Committee considered the composition of
marketable financing for the October-December quarter to refund the approximatel y
$51 .5bn of privately held notes and bonds maturing on November 15, 2007. as well
as the composition of marketable financing for the remainder of the quarter ,
including cash management bills, as well as the composition of marketable
fin ancing for the January-March quarter.
To refund $51.5bn of privately held notes and bonds maturing on October 15 . 2007
the Committee recommended a $13bn 1O-year note due October 15. 2017 and a
$5bn re-ope ning of the 30-year bond due May 15, 2037. For the remainder of the
quarter, the Committee recommended $20bn 2-year notes in Novemb er and
December . a $13bn 5-year in November, and an $8bn re-openlng of the 10-yea r
note December. The Committee also recommended a $1Obn 8-day cash management bill maturing November 23. 2007, a $15bn 17-day cash management
bill maturing December 17 . 2007 and a $15bn 4-day cash management bill
maturing December 17. 2007 .
For the January-March quarter. the Committee recommended fin ancing as found In
the attached table . Relevant figures include three 2-year note Issuances monthly .
three 5-year note issuances monthly. a 1O-year note issuance in January followed
by a re -o pening in March , a 30-yea r bond opening m January , as well as a 10-yea r
Tips open ing in January. and a 20-year TIPS opening later that same month .
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Respectfully submitted,
Keith T. Anderson
Chairman
Rick Rieder
Vice Chairman
Attachments (2)
Table 04 07
Table 01 08
REPORTS
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US TREASURY FINANCING SCHEDULE FOR 4th QUARTER 2007
BILLIONS OF DOLLARS
ISSUE
ANNOUNCEMENT AUCTION SETILEMENT
DATE
DATE
DATE
4·WEEKAND
3&6 MONTH BILLS
9/27
10/4
10/11
10/18
10125
1111
1118
11115
11/21
11/29
12/6
12/13
12120
10/1
10/9
10/15
10122
10/29
11/5
11112
11/19
11/26
1213
12/10
12/17
12/24
10/4
10/11
10/18
10125
11/1
11/8
11/15
11/21
11/29
12/6
12/13
12/20
12127
OFFERED
MATURING
AMOUNT
AMOUNT
NEW
MONEY
54.00
46.00
42.00
-14.00
-7.00
-3.00
41.00
42.00
41.00
3.00
16.00
4-WK
3-MO
10.00
8.00
8.00
16.00
16.00
16.00
10.00
20.00
22.00
30.00
30.00
22.00
20.00
18.00
20.00
21.00
22.00
23.00
23.00
23.00
12.00
12.00
12.00
2300
22.00
22.00
6-MO
14.00
15.00
15.00
16.00
18.00
19.00
20.00
20.00
42.00
44.00
58.00
58.00
64.00
62.00
52.00
21.00
30.00
29.00
7.00
5.00
-9.00
-9.00
100
716.00
646.00
70.00
20.00
20.00
20.00
19.00
19.00
CASH MANAGEMENT BILLS
8·DAY BILL
11/14
11/15
10.00
10.00
0.00
11/28
11/29
15.00
15.00
0.00
12/12
12/13
15.00
15.00
0.00
Matures 11/23
17-DAY BILL
Matures 12117
4-DAY BILL
Matures 12/17
0.00
COUPONS
CHANGE
IN SIZE
10-Year TIPS-R
5-Year TIPS-R
2-Year Note
5-Year Note
10-Year Note
6.00
10/9
10/11
10/15
6.00
10/18
10/23
10/24
10/31
10/31
10/31
20.00
13.00
19.00
20.00
11/15
11/15
13.00
5.00
51.50
-33.50
19.20
13.80
10/22
10/22
10/25
6.00
10/31
10/31
11/7
2-Year Note
5-year Note
11/26
11/27
11/26
11/28
11/30
11/30
20.00
13.00
10·Year Note·R
12/10
12/13
12/17
8.00
2-Year Note
12/24
12/24
12/26
12/27
12/31
12/31
20.00
13.00
19.50
13.50
135.00
109.40
25.60
30-Year Bond-R
5-year Note
11/8
8.00
Estimates are italicized
NET CASH RAISED THIS QUARTER:
R=Reopening
95.60
US TREASURY FINANCING SCHEDULE FOR 1st QUARTER 2008
BILLIONS OF DOLLARS
ISSUE
ANNOUNCEMENT AUCTION SETTLEMENT
DATE
DATE
DATE
4.WEEK AND
3&6 MONTH BILLS
12/27
1/3
1/10
1/17
1/24
1/31
2/7
2/14
2/21
2128
316
3113
3/20
CASH MANAGEMENT BILLS
l8·DAY BILL
Matures 3/17
6·DAY BILL
Matures 3/17
12/31
1/7
1/14
1/22
1/28
2/4
2/11
2/19
2125
313
3/10
3117
3/24
1/3
1/10
1/17
1/24
1/31
2/7
2/14
2/21
2128
316
3/13
3120
3/27
4-WK
OFFERED
AMOUNT
3-MO
6-MO
12.00
12.00
12.00
12.00
15.00
20.00
25.00
30.00
2B.00
25.00
25.00
25.00
22.00
22.00
22.00
22.00
22.00
22.00
24.00
26.00
26.00
26.00
24.00
22.00
22.00
22.00
1900
1900
19.00
19.00
19.00
21.00
21.00
21.00
21.00
21.00
20.00
19.00
19.00
MATURING
AMOUNT
NEW
MONEY
50.00
43.00
44.00
46.00
49.00
51.00
51.00
52.00
5700
60.00
63.00
65.00
63.00
3.00
1000
9.00
700
700
14.00
21.00
25.00
18.00
1000
4.00
1.00
0.00
823.00
694.00
129.00
2128
2/29
25.00
25.00
0.00
3/11
3/17
1000
1000
0.00
000
COUPONS
CHANGE
IN SIZE
lO·Year TIPS
1/7
1/10
1/15
BOO
19.10
-11.10
20·Year TIPS
2·Year Note
5·Year Note
1/17
1124
1124
1/24
1128
1/29
1/31
1131
1/31
B.OO
20.00
13.00
21.60
19.40
10·Year Note
30· Year Bond
1/30
2/6
2/15
1/30
2/7
2/15
13.00
9.00
54.60
-32.60
2-Year Note
5-year Note
2125
2/25
2127
2/28
2/29
2/29
20.00
13.00
21.10
11.90
10·Year Note-R
3/11
3/13
3/17
BOO
2-Year Note
5-year Note
3/24
3/24
3/26
3/27
3131
3/31
20.00
13.00
20.20
12BO
143.00
136.10
6.90
8.00
Estimates are italicized
NET CASH RAISED THIS QUARTER:
R: Reopening
135.90
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October 31.2007
HP-657
Minutes of the Meeting of the Treasury Borrowing Advisory Committee of the
Securities Industry and Financial Markets Association
October 30, 2007
The Committee convened in closed session at the Hay-Adams Hotel at 10:30 a.m
All Committee members except Gary Cohn were present. Assistant Secretary for
Financial Markets Anthony Ryan. Deputy Assistant Secretary for Federal Finance
Matthew Abbott. and Office of Debt Management Director Karthik Ramanathan
welcomed the Committee and gave them the charge.
The Committee addressed the first item In the Committee charge (attached)
regarding debt issuance In light of Intermediate and longer-term fiscal trends.
Director Ramanathan presented a series of charts related to the fiscal situation. and
noted some current trends. includlllg positive but slower revenue growth. reduced
growth in outlays. and increased volatility in State and Local Government Securities
(non-marketable debt) issuance. The charts also highlighted the recent volatility in
Treasury cash balances as well as recent data outlining net purchases of Treasury
securities by international investors.
Several themes related to the short end of the Treasury market and credit markets
as a whole also emerged from the charts. While credit conditions have improved
since summer. Director Ramanathan noted that Treasury needs to be cognizant of
the potential challenges to economic growth as well as their implications on debt
issuance. Given that. on average. deficit estimates can vary by nearly $100 billion
in either direction twelve months in advance of the end of the fiscal year. debt
managers need to maintain flexibility. In addition. shifts in revenues and outlays III
FY 2008 may be less gradual than expected. and may necessitate increased
reliance on bills from current. relatively low issuance levels.
In addition. Director Ramanathan reiterated his prior comments that Treasury
continues to consider the four-week bill as a cash management tool which may be
subject to greater variations in issuance when compared to other Treasury
securities. Given the potential for adjustments to the economic outlook, such
variations In bill Issuance Will continue in the future. Nonetheless. the volatility of
issuance has not significantly differed versus prior years. While market partiCipants
encountered increased uncertainty In the bill sector this past summer. the actual
volatility of issuance In the sector overall remains fairly stable. For example. one
measure of relative volatility. the coefficient of variance of issuance for the fourweek bill. has moved marginally to 34% in FY2007 from 33% at the end of FY2006,
implying fairly consistent Issuance patterns
Following this discussion. Director Ramanathan focused on recent events in shortterm credit markets. including volatility in money market rates such as LlBOR.
commerCial paper. asset backed commercial paper. and Treasury bills. The flight to
quality in August 2007 as a result of credit events both domestically and in Europe
benefited Treasury from the perspective of increased issuance of securities at low
interest rates.
However. the large variations in rates and persistent demand for shorter dated
securities - particularly in the Treasury bill market - were unprecedented. according
to Director Ramanathan As a result. the appetite for risk temporarily diminished.
and In the process. impacted Treasury auctions. Market participants and Investors
perceived the auctions in August (including the four-week bill which tailed over 200
basis points) as anomalies Moreover. these auction results did not warrant
adjustments by Treasury. be it earlier auction times or adjustments to the auction
calendar. In addition. auctions since August have been performed well. suggesting
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that the auctions in August may have precipitated the repricing of risk to more
rational levels.
Nonetheless, Director Ramanathan stated that the auctions in August drew the
attention of Treasury, and led to an evaluation of the situation in short-term credit
markets and the root causes of this flight to quality.
In conclusion, the charts noted that Treasury faces uncertainty given the fiscal and
economic outlook, and that flexibility is Critical to managing potential borrOWing
scenarios. According to Director Ramanathan, Treasury could raise over $200
billion with relative ease if necessary given the low level of bills outstanding and
reduced coupon issuance sizes. Financing decisions will continue to be made in a
transparent manner and in consultation with market partiCipants.
The Committee began the discussion of the first charge with one member noting
that events in the short-end of the market this summer were related to supply and
demand imbalances exacerbated by an extreme movement out of commercial
paper into risk-free TreaSUries. As short rates richened, demand declined
temporarily, and the market readjusted accordingly. Another member noted that
credit markets faced the "perfect storm" In August and that all asset classes were
impacted. This member noted that the flight to quality to Treasuries once again
showed the importance of the Treasury market on a global basis.
The Committee then turned to the issue of how Treasury should proceed with
adjustments to borrowing over the next fiscal year in light of recent intermediate to
long-term fiscal trends. Deputy Secretary Abbott asked if the current auction
calendar was sufficient to confront potential downside and upside variations to the
deficit forecast. The Committee noted that over the last few years, the deficit has
improved as receipts increased substantially while outlays grew at a slower than
expected rate. The Treasury has managed the reduced borrowing need by reducing
bill issuance along with coupon sizes. One member noted that there may be some
risk to a higher than expected deficit given the potential for the growth in receipts to
fall, the pace of outlays to increase in 2008 from current moderate levels, and the
reversion of SLGS issuance to more normal levels from near record net issuance in
FY2007,. In that case, the Committee recommended that Treasury address any
upside surprise In funding needs mainly through Increases In bill issuance and
shorter dated securities.
One member noted that the market could easily absorb another $100 billion in bill
issuance if it occurred gradually. Another member noted that bills as a percent of
Treasuries outstanding were near 1O-year lows and there was plenty of capacity to
increase Issuance. The member further noted that capacity was not the issue in the
bill market provided that Treasury continues to be transparent about its issuance
deciSions. A few other members noted that there was a renewed appetite for riskfree credit assets, and that issuing more bills in this environment may benefit the
market as a whole.
Another member asked if the risk to the deficit was asymmetric, i.e., could the
deficit Improve In FY 2008 If Congress and the President remain in deadlock over
spending. A member stated In response that even if the pace of spending slows,
revenue growth could fall even further which would lead to increased borrowing
needs. Another member agreed and stated that the likelihood of a positive surprise
remained low. However, the Committee acknowledged that risk needed to be
considered and could be addressed through reductions in the bill sector or other
means if necessary.
The Committee then addressed recent market dislocations in short term credit
markets and their relationship, if any, With Treasury markets. A Committee member
was asked to address this item and presented a series of slides showing that
securitization has been beneficial to investors, generally offering higher yield
spreads and diversification, while helping disperse throughout the global financial
system risks that were once concentrated in a handful of large banks. However,
according to the presenting Committee member, the recent developments
stemming from trouble in the sub-prime mortgage market Illustrate some of the
potential threats of structured finance
According to the presenting Committee member, securitization offers many
benefits, but because it disperses risk so Widely, the process has made It harder to
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pinpoint where the risks reside and how investors may behave In times of market
stress. Domestic sub-prime mortgage loans were marketed to investors In the form
of asset-backed securities (ABS), which bundle together multiple subprime home
loans. Some of the riskiest tranches of these ABS were subsequently resecuritlzed
into COOs, further Increasing their complexity. Complex investments like structured
investment vehicles purchased some securitized products, and were unable to roll
over their asset backed commerCial paper (ABCP) financing when markets seized
this summer.
The presenting Committee member stated that ratings agencies have exacerbated
the problem by giving Investors a sense of comfort through ratings that have In
many cases proven to be flawed. According to the presenting member, agencies
should be encouraged to address conflicts of interest, perhaps by correlating
payment for services to the long-term stability of ratings, or by asking issuers to
prepay in full for ratings and disclose such ratings to all market participants.
The presenter concluded that more regulation to securitization IS not the answer to
resolving the problems in the capital markets, although lenders should be reminded
of the moral hazards of short-term lending against long-term assets. A reevaluation
of "truth in lending" may be needed in the mortgage banking business, which lacks
the fidUCiary culture that exists in the investment banking and broader financial
industry.
In the diSCUSSion that followed the presentation, the Committee began by noting the
reputation of securitization has been tainted by a small portion of the assets that are
securitized - i.e. the majority of the assets underlying ABS are considered high
quality, and the small minority of poor assets has effectively "contaminated" the
whole sector. A larger problem is the lack of transparency regarding the credit
quality of these underlying assets and other structured finance products. Another
member agreed with this perspective, and added that models used by the rating
agencies may be flawed in terms of data quality and economic assumptions;
moreover, rating agencies may even have a conflict of interest In the rating process
since the originator of the product they are rating is effectively "paying" for the
rating.
Another member noted that structured financial products tend to "become fatal
when they get sick" unlike traditional diversified investments. ThiS member noted
that the risk distribu\!on in structured products does not follow a traditional bell
shaped, normal distribution, but instead IS characterized by a distribution with "fat
tails".
One member, noting the status of the rating agencies and how the rating agencies
potentially mishandled recent events, rhetorically suggested that ratings agencies
may need to reconsider their private status. The member Indicated that the analysis
of credit risk on an independent basis was difficult because data needed to
adequately assess risk was often only available to ratings agencies. The time and
effort to do thiS analysis was also prohibitive for some investors
Another member noted that risk was in the process of being repriced, and it would
probably take another six months to a year for this to occur As a result, liquidity
and volatility in these markets will be Impacted. The discussion then turned to the
structure proposed by the private sector In relation to the ABCP market. Assistant
Secretary Ryan gave a brief overview of the proposed structure, and Treasury's
role in facilitating the development of this private sector initiative. The proposed
structure, as well as the many other alternative structures being considered in the
market at this time, may potentially preclude a low probability/ high impact event by
providing backstop liquidity to the ABCP market. A private sector initiative that was
designed to bring about orderliness to the repricing of risk and that could help in the
price discovery process could potentially be useful.
Most Committee members agreed that an orderly unwind of these assets was a
pOSitive outcome given the alternative scenario Some Committee members opined
that the orderliness to the risk-repriCing that the proposed structure was designed to
achieve may delay the repriCing of risk. Another member stated that, slOWing the
repricing of risk was not the issue that would settle markets; instead, more
transparency into the structured transactions IS what was needed before liqUidity
would return .. Another member added that given that economics would influence
the participation or lack thereof of liquidity providers, and that partiCipation by end
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users also appeared to be voluntary, such a proposal would complement other
responses being implemented in capital markets currently. Two members then
concluded the diSCUSSion of the structure statlllg that the private sector IIllliatlve
would be better evaluated when more details of the proposal were released.
In terms of the implications for the Treasury market, the Committee members
generally felt that the events would enhance demand for Treasury secunties. They
noted that because many investors do not have the time or expertise to do nsk
analysis on their own for complicated structured products and because the rating
agencies were having difficulty in establishlllg ratings in which investors have
confidence, more market participants and traditional ABS buyers may shift IIlto
Treasury or agency products in the coming year.
Finally, the Committee was asked about their thoughts regarding current and future
demand for Treasury secunties. A Committee member presented a series of slides
IlIlklllg the current account deficit to strong demand for Treasury secunties from
foreign investors which has funded the federal deficit. Demand has not only come
from the official sector but also private investors. The presenting member stated
that structural factors - not market dynamics - have created demand for Treasunes
from oil producing countries and Asian economies which trade with United States.
Central banks and sovereign wealth funds have marginally diversified out of the
dollar, but private investors contillue to be net buyers of Treasuries.
The presenting member noted that one month of data may not indicate a change in
trend, and given the slope of the demand curve over the past four years, a pullback
was to be expected Moreover, the presenting member noted that emerging
nations, many not fully captured In publicly available data, remalll strong buyers of
US TreaSUries III one form or another. These purchasers may believe that large
foreign exchange reserves create increased stability in times of stress. The
presenting member concluded by stating a number of factors needed to be
evaluated to determine future Treasury demand including international currency
policy, foreign exchange reserve accumulation, private sector flows, the global
economic outlook, geopolitical issues, pension fund demand, and potential
entitlement changes.
Committee members generally agreed with the presenting Committee member.
One member noted that recent stresses in the credit market may precipitate further
buying of Treasuries in the future. Another member noted that the composition of
buyers in foreign jurisdictions such as the United KlIlgdom and the Caribbean may
encompass many other nations or types of IIlvestors.
A Committee member asked why Treasury thought investors remained so
committed to the domestic markets. Director Ramanathan stated that, in general,
major investors and reserve managers prefer the liquidity, the transparency, and
the depth of the US Treasury market, and preserving these fundamental
characteristics was critical to ensuring continued demand in the future.
The Committee then reviewed the financing for the remainder of the October
through December quarter and the January through March quarter
The meeting adjourned at 1208 p.m.
The Committee reconvened at the Hay-Adams Hotel at 5:00 p.m. All the Committee
members except Gary Cohn were present. The Chairman presented the Committee
report to ASSistant Secretary Ryan A brief diSCUSSion followed the Cha,irman's
presentation but did not raise significant questions regarding the report s content.
The meeting adjourned at 515 p.m.
Karthik Ramanathan
Director
Office of Debt Management
~://WWw.treas.gov/press/releases/hp657.htm
11/6/2007
HP-657: Minutes of the Meeting of the Treasury Borrowing Advisory Committee of the Securities Ind...
Page 5 of 5
October 30, 2007
Certified by
Keith T. Anderson, Chairman
Treasury Borrowing Advisory Committee
of The Securities Industry and Financial Markets Association
October 30, 2007
Treasury Borrowing Advisory Committee Quarterly Meeting Committee
Charge - October 30, 2007
Fiscal Outlook
In light of Intermediate and longer-term fiscal trends as well as recent economic and
market conditions, what advice would the Committee give In terms of Treasury's
debt issuance?
Securitization, Rating AgenCies and the Money Markets
What are the Committee's views regarding recent market dislocations in short term
credit markets and their relationship, if any, with Treasury markets?
Treasury Market DynamiCS
What are the Committee's thoughts regarding current and future demand for
Treasury securities?
Financing this Quarter
We would like the Committee's advice on the following:
•
•
•
The composition of Treasury notes and bonds to refund approximately
$51.5 billion of privately Ileld securities maturing or callable on November
15,2007
The cornposltion 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.
P:11www.treas.gov!press!releases!hp657.htm
1116/2007
HP·658: Treasury Assistant Secretary Swagel to Hold Monthly Economic Briefing
Page I of 1
October 31,2007
HP-658
Treasury Assistant Secretary Swagel to Hold Monthly Economic Briefing
u.s.
Treasury Assistant Secretary for Economic Policy Phillip Swagel will hold a
media briefing to review economic indicators from the last month as well as discuss
the state of the U.S Economy The event IS open to credentialed media
Who
U. S. Treasury Assistant Secretary Phillip Swagel
What
Economic Media Bnefing
When
Friday, November 2,2007, 1000 a.m (EDT)
Where
Treasury Department
Media Room (Room 4121 )
1500 Pennsylvania Ave, NW
Washington, DC
Note
Media without Treasury press credentials should contact Frances Anderson at
(202) 622-2960, or frances.anderson@do.treas.gov with the following information
full name, Social Security number and date of birth.
):llwww.treas.gov/press/releases/hp658.htm
1116/2007
HP-659: Secretary Paulson Remarks Following Hope Now Meeting
Page 1 of2
October 31.2007
HP-659
Secretary Paulson Remarks Following Hope Now Meeting
Washington ~ Good afternoon I've Just met with the Hope Now alliance, to get an
update on their efforts to reach struggling homeowners and avoid preventable
foreclosures. Foreclosures are not only painful for homeowners. but are costly for
servlcers and Investors. who in many cases are better off when they can modify or
refinance a mortgage and keep the homeowner in his home. Early action by
servlcers and homeowners can preserve investor value and achieve sustainable
results.
There are two parts to the effort to avoid foreclosures - first. making contact With a
borrower who IS in trouble, and second. determining if there IS an affordable
mortgage product for that borrower and taking action.
The members of this coalition are doing a lot of great work on both fronts. Most of
the servicers have aggressive programs underway to reach borrowers who are
having trouble paying their mortgages. But they are finding that the response rate
isn't high enough. As the alliance IS announcing today, they are producing a Single
letter on the Hope Now letterhead, providing at-fisk borrowers a phone number to
call for help. They are incorporating lessons each has learned from their indiVidual
mailing strategies, and they expect a stronger response from this unified approach.
which could have a big impact in reaching homeowners who need help. Letters
begin to go out on November 19th
We in government also have a role to play - urging borrowers who receive thiS
letter to act on il. I will do that. as will other senior Treasury officials, and I will urge
members of Congress to highlight the letter to their constituents, so they know
where they can find help if they need II.
The second piece of the puzzle. after making contact with struggling borrowers. IS
to determine if there IS a mortgage they can afford. Many servlcers today are
already stepping up their efforts here as well. A few of the leading servlcers have
developed specific criteria for quickly assessing a borrower's financial situation.
categorizing borrowers who qualify for loan modifications or refinancings and taking
action
Today members of the alliance told me they are developing methods. criteria and
metrics that any industry participant can use to systematically evaluate borrowers'
ability to pay resetting adjustable rate mortgages. For example, borrowers who are
current on payments at the lower rate might be candidates for fast tracking into a
refinance or a loan modification. Others who struggled even with payments at the
teaser rate may not have these options.
I am calling on industry participants to review their existing practices and adopt
specific criteria that will qUickly identify borrowers who can keep their homes and
follow up with a refinancing, a loan modification or other fleXibility. This approach
Will be the most effective means of handling the expected volume of inquiries. And
developing clear criteria now will allow us to gauge the success of these efforts In
avoiding preventable foreclosures I look forward to hearing an update from the
alliance at the earliest pOSSible time. I am pleased to see that more industry
participants have Joined the alliance and adopted their commitments I encourage
other industry participants to Join thiS effort.
Just as the alliance members expect to be more successful in reaching troubled
borrowers, I am confident that working together through Hope Now. counselors and
servicers can streamline and systematize their processes to more qUickly meet the
needs of more borrowers.
)://www.treas.gov/press/releases/hp659.htm
1116/2007
HP-659: Secretary Paulson Remarks Following Hope Now Meeting
Page 20[2
I want to help as many able homeowners as possible To do that requires
continuous learning. We must deepen our understanding of how many borrowers
can be helped and the most effeclive mortgage solutions for them. As I have said
before, this housing and mortgage market decline is stili unfolding. Resetting ARM
rates are one factor which will play out over the next 18 months. Declining home
values will also significantly affect default rates going forward. We've also learned
that default rates are far higher on mortgages made in 2006 and 2007, due to lax
underwriting standards. We have work to do to understand how many of these
borrowers are able to afford their homes.
I view the housing and mortgage market decline as the most significant current risk
to our economy. Even so, today's GDP numbers reinforce my belief that we have a
healthy, diversified economy that will continue to grow. I am eager to work with
Congress, With HUD, With mortgage counselors and with mortgage market
participants to take all reasonable steps to avoid unnecessary foreclosures and
minimize the Impact of recent market turmoil on homeowners and on our economy.
l:llwww.treas.gov/press/releases/hp659.htm
1116/2007
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