Treasury Casts a Wide Net Under Patriot Act

By Kevin G. Hall
McClatchy Newspapers

Monday 12 March 2007

Washington - Under a little-noticed provision in the USA Patriot Act, the Treasury Department has ordered severe restrictions against foreign banks or countries for reasons beyond the stated purpose of the law and without producing evidence.

Section 311 of the 2001 Patriot Act was drafted to halt terrorist financing and money laundering, but the Bush administration has used it against an alleged source of terrorist financing - a bank in Syria - only once. The Treasury has invoked it more often to punish alleged human-rights abuses or offshore banking havens.

Although Congress has yet to examine the Treasury's use of Section 311, the provision is likely to add to the controversy over other sweeping powers the executive branch of government acquired under the Patriot Act. According to a recent audit, the FBI used the act illegally to obtain personal information about U.S. citizens, and the administration has agreed to abandon a provision that it used to replace eight U.S. attorneys for what Democrats charge were partisan political reasons.

"It becomes a form of expanding executive power that's difficult to check," said Shayana Kadidal, staff attorney for the New York-based Center for Constitutional Rights, a rights organization that's critical of many Patriot Act provisions.

Supporters view Section 311 as a diplomatic sledgehammer that gets results. Critics - many of whom refused to speak on the record, saying they feared retribution - complain that the provision denies suspects due process and presumes that the accused are guilty rather than innocent.

Through Section 311, the Treasury doesn't have to tell accused banks or countries what threat they allegedly pose to the U.S. financial system, and the Treasury has the power to act as both prosecutor and judge.

"There is certainly an element of unfairness when you are accused," said Peter G. Djinis, a money-laundering expert and former high-level Treasury official who was involved in the earliest Section 311 proceedings. "First, you don't know who the accusers are, and the strength of their convictions, and you have to work yourself out of the hole. And in many cases you won't succeed."

The Treasury used Section 311 against the Commercial Bank of Syria and its Lebanese affiliate in a final ruling last March for allegedly funding terrorism and laundering the proceeds from illicit Iraqi oil sales. The Treasury has used less sweeping measures against other Lebanese and Iranian banks, also accusing them of funding terrorism.

Since Section 311 was first employed in December 2002, however, it also has been used:

• In 2002 against Ukraine for allegedly weak money-laundering controls.
• In April 2003 to pressure Nauru, a 10-square-mile island nation in the Pacific, to stop licensing offshore banks.
• In April 2004 to punish the human rights abuses of the generals who rule Myanmar, formerly known as Burma.
• In 2004 against a company and bank in Belarus for participating in U.N. corruption in the Iraq oil-for-food program.
• In 2005 against two Latvian banks for "accepting illicit gains from various mob groups."

The most controversial known use of the provision has been against Banco Delta Asia, a tiny bank in the Chinese enclave of Macau that North Korea's communist leaders allegedly used for their personal accounts. The Treasury accused the bank in September 2005 of laundering the North Korean regime's allegedly illicit proceeds and shepherding counterfeit U.S. $100 bills into the global financial system.

An internal audit by the accounting firm Ernst & Young found no evidence of willful wrongdoing, according to Banco Delta's New York-based law firm, Heller Ehrman. The Treasury is sticking to its allegations, but hasn't produced any evidence against the bank.

Critics note that the charges are based on classified information, and the proceedings - which may take the form of a Treasury audit of a bank's books - are extraterritorial and secret, with no direct oversight by any U.S. or foreign court or legislature.

The Section 311 provision has helped curb money-laundering, prompting Ukraine, Macau and Latvia to adopt more stringent laws. The threat of applying the provision led Argentina's Banco de la Nacion to agree March 6 to U.S. demands for better money-laundering controls.

The criticism is that Section 311, which was drafted as standalone legislation by Sen. John Kerry, D-Mass., but incorporated into the Patriot Act, denies the accused due process, which the Fifth and 14th amendments to the Constitution guarantee U.S. citizens. Those provisions apparently don't apply to extraterritorial administrative proceedings.

The accused do have rights, said Molly Millerwise, a Treasury spokeswoman.

"We have previously lifted proposed rules when the institution took appropriate steps to strengthen their controls," she said. "Moreover, as with all regulatory actions, 311 rules can be challenged in federal court."

But because many of the cases are built on classified information, the federal courts are of limited use. Millerwise added that there's a comment period during which the accused can respond.

"I understand what the arguments (for it) are, but as a practical matter, proving your innocence is the task of proving a negative, and the task is all on you," said a former U.S. prosecutor who demanded anonymity because of past involvement in Section 311 cases.

A senior attorney for a global bank, who also demanded anonymity, said Section 311 granted the executive branch far too much power.

"The (U.S.) government says, `Trust us, trust us. Give us all the information and we'll figure it out,'" said the veteran lawyer, who points to Latvia in stressing that Section 311 often hurts good actors along with bad ones. "I'm not quibbling that there's some value, but you have to think about unintended consequences, and I'm not sure that always gets considered."

Once the Treasury has made a Section 311 allegation, many companies and financial institutions take self-protective steps to end their relationships with businesses in the accused country. This indirectly expands the Treasury's reach.

"The impact of that particular authority has been very effective and powerful," Treasury spokeswoman Millerwise said, noting that "the deterrent and indirect effects of these types of measures are sometimes just as significant as their direct result."

One reason Section 311 is so controversial is that the Treasury's allegations often are based on classified information. When the Treasury issued its final Section 311 ruling last July against Latvia's VEF Banca, it was based on information culled "from a variety of sources including classified information." That was the extent of Treasury's disclosure.

Without being told the specifics or being shown proof, and after hiring an international accounting firm and closing 600 questionable accounts, VEF Banca effectively was locked out of the global financial system. It followed the same course as Multibanka, another accused Latvian bank; however, Treasury's final rule last July cleared Multibanka but not VEF Banca.

"We strongly believe that there are no grounds whatsoever" to punish Latvia, said Agnese Kalnina, the first secretary at the Latvian Embassy in Washington.

Some experts warn that the unilateral imposition of Section 311 may, over time, provoke an anti-American backlash and erode any benefits from the provision.

Millerwise said Section 311 actions against foreign governments had been in support of multilateral action by a 33-country Financial Action Task Force. Group action against individuals and banks is difficult, she said, because no other country has similar authority with respect to foreign financial institutions.

"The extraterritorial part of it, we just don't have that" in Europe, said Karen Briggs, the London-based head of a global anti-money-laundering committee for KPMG, the big international audit and compliance adviser.

In other words, no other country grants its regulators such sweeping reach. The Treasury is lobbying European allies to give their finance ministries similar extraterritorial investigative powers.