1997 Congressional Hearings
Intelligence and Security

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Opening Comments From Chairman Kolbe

    Mr. KOLBE. The Subcommittee on Treasury, Postal Service and General Government will come to order. This morning we have, as a wrap up to the Treasury part of our hearings, we have Secretary Rubin and Assistant Secretary Munóz. Assistant Secretary Munóz was with us yesterday as well.

    This is our last hearing with Treasury in this cycle, the fiscal year 1998 appropriations cycle.

    Mr. Secretary, I just want to say that with very few exceptions I have certainly been very pleased with what I have learned about Treasury operations over the past few weeks, and I feel like I've been getting a crash course. As someone who has not been on this subcommittee before it's been a lot of work to get up to speed, and I certainly wouldn't say I'm there.

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    But I have certainly been impressed by the facets of Treasury law enforcement which runs the gamut from gang reduction—reducing violence in our streets, to a very major component, of course, with Customs and drug interdiction, to tracking the high tech criminal through intelligence networks.

    I think we've come a long way, and I give you a lot of credit for this, since the days of the good old boys round up, and last year's challenging efforts to try to get the Tax Systems Modernization plan on track—though we'll have some more issues in that to deal with.

    I was certainly pleased yesterday with Deputy Secretary Summers and his testimony. I think my friend and colleague, Steny Hoyer, said it best: once Treasury starts paying attention to a problem, they do a very good job of getting it fixed. The problem seems to have been getting Treasury sometimes to pay attention.

    And I appreciate the hard work and the dedication of both Treasury and the IRS in addressing the really serious problems of the TSM program in IRS. The candor with which you, Deputy Secretary Summers and Mr. Gross have addressed this thing I think has gone a long way to defusing what otherwise would have been a very, very contentious issue here in this subcommittee.

    So we've taken some big steps, but we're clearly not there yet, and I'm going to have some questions for you on that. So we've, I think, gotten the attention on the IRS and the TSM issue, and I certainly hope that we can keep it.

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    I want to repeat to you a commitment that I made yesterday to Deputy Secretary Summers, and that is that if you people bring us a TSM plan that works, we will fund it.

    I also said I hope you will understand the skepticism with which we approach this. This is not a partisan issue, because you can go back 20 years and look through at least 4 major efforts at modernization that have failed miserably within IRS. So it has nothing to do with which administration or who is in charge there.

    It has to do with the complexity of the tax code. It has to do with the complexity of the problems that we have to deal with. So we're going to be very skeptical of this, and ask—I hope—some intelligent and tough questions about it, but I can tell you that this subcommittee will fund a TSM plan that works if you bring one to us.

    Having said that, let me just share with you a couple of the other concerns that I have, and I have spoken to some of the component parts of Treasury when they have been before this subcommittee earlier.

    One is the continuing allegation of corruption along the border in Customs. I think it's serious. The allegations are serious. They have been numerous, more numerous than with many of the other agencies, and I think aggressive action has to be taken in this regard. I can't think of anything that will undermine our credibility, or ability to interdict drugs than to have a public perception which is to some extent taking hold along the border in my area, that there is widespread corruption.

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    We need to assure the integrity of our drug interdiction efforts.

    Second is technology investment. We have some of the appropriate investment review processes in place for IRS, but I think one of the questions we need to look at—and I'll have some questions in this area—is the technology investments that are being made in other areas of the Treasury and making sure we are reviewing those investments, and that we're making wise decisions.

    And lastly, again which I'll address some questions to, is the funding for law enforcement within Treasury, that component of our Federal law enforcement program, versus the Justice programs.

    Quite honestly, I'm just not convinced that Treasury is getting its fair share. I can fight that battle here with my counterparts in Appropriations subcommittees, and authorizing committees, but I want to address with you the question of the battle, or what you do within the administration to assure that we're getting an adequate share of law enforcement funding within the Treasury Department.

    Having said that, let me turn to my ranking member, Mr. Hoyer here, for his comments.

    Mr. HOYER. Thank you very much, Mr. Chairman. As I have said, Mr. Secretary, and you have probably heard me say it, I think the Treasury Department and all of the agencies that come within the purview of this committee are advantaged by the fact that we have as our new chairman Jim Kolbe. As I've said in the past, and you have, I'm sure, already determined, Mr. Secretary, he is one the brightest and most thoughtful members of the Appropriations Committee and of the Congress. He threatens to use that in his next campaign.

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    Mr. KOLBE. Mr. Hoyer, I assure you, that you're going to be a household word in Arizona before my next campaign.

    Mr. HOYER. Mr. Haywood thinks I already am, apparently, on the other side.

    The fact of the matter is that the chairman has raised many of the important issues that I'm sure we're going to discuss in this hearing that you have been addressing. In welcoming you to this committee, as the Secretary of Treasury, I want to say that I think the country is greatly advantaged by your agreeing to leave a very, very profitable experience in the private sector to come into government with this administration—early on in the White House, and then subsequently as the head of this critically important department.

    I think the numerous newspaper articles and comments that people have made are absolutely accurate. As somebody who has had the opportunity to work with you since before you came into government, when you were in the private sector, and who was a great admirer of yours, I think that they capture the essence of Bob Rubin correctly when they describe you as an individual who is interested in results.

    I was kidding the Secretary—I know of no secretary that I have served with, frankly, at the national or at the State level who is easier to work with, more open to suggestions, and more positive in approach.

    And I think America has benefitted by your service, Mr. Secretary, and I look forward to hearing your testimony, and to working with you as we try to solve some of the problems. And I'm going to ask some questions on what we're doing in the economy, which I obviously think is good. To some degree we ought to take credit for that. When I say we, those of us who supported the economic program of 1993, I mean.

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    But in addition, your steady hand at Treasury, I think, has been a significant—both from an international standpoint and domestic standpoint—reason for the performance that we've had. And I welcome you here.

    Thank you, Mr. Chairman.

    Mr. KOLBE. Thank you very much. Mr. Secretary, your full statement, of course, will be placed in the record. If you would like to summarize it, we would be happy to have you do that, and then we will go into questions.

    I might say that the Department has gotten better, during the last couple of weeks as the hearings have gone on. Mr. Munoz was wonderful in summarizing his statement yesterday. He did it in one sentence—but you don't have to do it in one sentence, Mr. Secretary.

Opening Statement of Secretary Rubin

    Secretary RUBIN. I have submitted a statement for the record, and let me summarize it in brief.

    Let me start, Mr. Chairman, by saying that we worked together on trade issues over the last 4 years, and I would echo Mr. Hoyer's comments. We enormously welcome your chairmanship, and look forward to working with you.

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    We have also had a very good working relationship with Mr. Hoyer, and I said the other day as we were talking about preparation for this hearing that in the two years—a little over two years now—that I've been Secretary of the Treasury the relations with this committee has really been a very useful and constructive one.

    I think without question, as we focus on the tax issues, that you have played a major role in causing us to pay the attention that it deserved. And now what we need to do is not only pay attention at the moment, but also to institutionalize that, and that's what we're going to do.

    Our overall budget, as you know, was designed to continue and build on the debt reduction of the last 4 years, and to balance the budget, and the Treasury budget was constructed within that context.

    My written testimony discusses all the various areas that Treasury plays a major role in. Without going through them all, let me just say that we have an enormous breadth of activity, from the IRS and tax policy; economic policy; international economic operations; to roughly 40 percent of the Federal Government's law enforcement officers, and then a very large manufacturing—what I think of as a manufacturing and processing center, manufacturing the nation's currency; payments for many of the agencies of the Federal Government, and the like.

    We have submitted a budget request of $11.7 billion. $500 million of that, as you know, is a no year request with respect to TSM. So that leaves you $11.2 billion on an operating basis, an increase of about 4.2 percent. That's basically current services for the great breadth of Treasury, and then additional funding for some special initiatives.

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    We are also one year ahead of schedule in terms of complying with the GPRA, and I think that's real tribute to George and the people who work in management, and our commitment to strategic planning and to focusing on what we're spending and what we want to get for what we're spending—to use Mr. Hoyer's word, ''results.''

    Our 1998 request includes what we consider to be a requisite funding for the Departmental offices, because that is where our policy operations are housed. And I can tell you, Mr. Chairman, in the policy deliberations of the Administration, Treasury is actively involved in the great preponderance of the issues.

    We thought it was very, very important to continue to attract and retain outstanding policy people. And that takes place predominantly, but not totally, in Departmental offices.


    Having said that, let me focus briefly on 3 key Treasury missions, and the budget request for them. As you know, with respect to law enforcement, as I said a moment ago, we have about 40 percent of the Federal Government's law enforcement officers, who focus on a broad array of issues.

    The funds requested will enable us to decrease the flow of guns to juveniles. We have a Kids and Guns initiative which has been very successful. I think it's in something like 17 demonstration cities. We've had applications from many more cities. We'd like to expand that program.

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    We have very active Customs operations, as you know. But as we put in place effective Southwest border operations, or operations in the Caribbean and the Virgin Islands, then smugglers shift their resources, and we have to strengthen the areas that they shift to. And that's part of what we're looking for in terms of Customs.

    Financial crime is an area of special focus in Treasury, and there are really, in the broadest sense, two pieces of that. One area is credit card fraud, and telephone card fraud, and the upcoming issues that could exist with respect to electronic money—all of this is becoming enormously more important as value is transferred not by cash, but by other mechanisms, all of which have the potential for fraud, an area of Treasury's jurisdiction.

    Another area that I think we need to particularly focus on as we go forward is money laundering. It obviously has the potential for destabilizing financial institutions, not only in this country, but abroad. But I think there's maybe in some ways an even larger issue, which is that while those who run organized crime or drug rings can almost always separate themselves from the people they have on the street, they can't separate themselves from their money.

    And so as they seek to launder their illegal profits, it provides a vulnerability that we can get at. We have had a tremendous focus on employing our resources around this area of money laundering.

    ATF continues its focus on decreasing explosive and arson crimes and in the context of the anti-terrorism effort, expanding our activity with the canine explosive detection program, and an arson clearinghouse.

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    We are also seeking to upgrade enforcement equipment, and I had a discussion the other day with somebody about the automobiles that we use in Treasury, and how outmoded most of these cars are. There is a real need to bring our equipment up to date, and to also make sure that FLETC, the Federal Law Enforcement Training Center, is in an appropriate state.


    In terms of managing the Government's finances, our primary focus there is the IRS. You discussed that yesterday with Larry Summers. Let me just say, as he said, that I think we have accomplished a great deal. I do believe that we really have made a sharp turn with respect to TSM, but, having said that, as was related in a New York Times article of some weeks ago, these problems with respect to systems in TSM started decades ago, and problems that are decades in the building are not going to be solved quickly.

    But if we do this right, if we go at it right, and work together, I believe that we can build on what we have done so far to get this on the right track, and over time we can provide the IRS with what it needs, which is modern systems capability.

    We have made enormous changes. I think Larry Summers went through them with you. I won't repeat them here. But I would just like to say that we're going to institutionalize the capability, the oversight capability that we have in place at Treasury, and I think, with that and various other steps we're planning to take, we are doing things that will get this on the right track.

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    We are also, in the area of financial management, very focused on electronic money. I believe that the electronic transfer of value is going to become an ever larger part of our economy, and we've got to figure out what the regulatory response to that should be. And we don't have views on that at the moment, but we have spent a lot of time on it, and at some point we'll fully develop our views.


    Finally, promoting a prosperous world economy, we are very active in the international economic operations, or activities of the Administration, Russia, Bosnia, Mexico, and the rest.

    This area is not under your jurisdiction, but it is our absolute conviction that if we're going to maintain our leadership position, we have to fund—meet our arrears and negotiated commitments—the World Bank, the IMF, the sister banks of the World Bank, the United Nations, and the rest. And that's not in your jurisdiction, but the support function at Treasury that works in this area is in your jurisdiction.


    Finally, Mr. Chairman, Treasury has been very active with respect to this whole question of inner cities, and people living in distressed areas, and bringing the residents of economically distressed areas into the economic mainstream.

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    There are a lot of things we have done in that respect. One of our principal initiatives is the CDFI fund, which unfortunately is not in this subcommittee. We're asking $125 million this year. It's a vibrant, successful program. It's robust. We believe it should be in this subcommittee, because we think it would get more systematic attention in this subcommittee, and it is an integral part of Treasury.

    That's a matter that is in your province to accomplish, not Treasury's.

    Let me conclude by saying something I said at the beginning of my remarks, which is that we have worked very well with this committee, certainly in the two and a half years I've been here. But I think that is a longstanding tradition.

    The committee really has played a very helpful role. It has sharpened our focus on the problems of the IRS. You've been very helpful in the law enforcement area, an area in Treasury that sometimes tends to get a touch overlooked. And I think it's very, very important that Treasury law enforcement bureaus receive appropriate funding so they can perform their vital missions.


    And finally one of the things that has struck me at Treasury, and I often say this when I speak, is that Treasury has an enormous number of extraordinarily capable people. It has been a very strong positive for me, and I would say a little bit of a surprise to find the extraordinary number of people of great ability, who are dedicated and committed, and who really do a remarkably good job at the various things that they do.

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    They very much deserve our respect and our support, and I think we all need to work together, particularly as we go through the difficulties of reaching a balanced budget, to make sure that we can continue to attract and retain and motivate the kinds of extraordinary people that make Treasury the institution that it is.

    With that, Mr. Chairman, George Munoz and I would be delighted to respond to whatever you would like to discuss.

    [The information follows:]

    "The Official Committee record contains additional material here."
    Mr. KOLBE. Thank you very much, Mr. Secretary. Let me just say once again that we'll do the questioning in the usual way, which is myself and the ranking member, and then in the order in which the members were in the room at the time we started or as they come in.

    And we will try to adhere to the 5 minute rule. I'll tap gently, but I don't want to cut anybody off in the middle of a question or a line of questioning. But I think we found it works very well, to make sure that everybody gets to have several rounds of questioning that way.


    So I will begin. Let me ask you one in the area of budget that I alluded to. You mentioned again in your testimony thereabouts, Treasury's share of law enforcement funding.

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    As I look at the budget figures, I have to tell you that it does concern me. I was just looking at a chart here of Justice versus Treasury, over the last—this is over 2 administrations, from 1990 through 1997.

    For example, in Justice, DEA is up 79 percent; INS is up 160 percent; FBI is up 70 percent. You come over to Treasury and you look at Customs, it's 30 percent; Secret Service, 49 percent; BATF is the only one that comes close, 63 percent, but it's still under the lowest, FBI, of the Justice Department law enforcement agencies. The Marshal's, by the way, is up 110 percent in Justice.

    And if you look at this year's, comparing Customs and INS, Customs is up—even though 38 percent of its effort, according to its figures, is drug interdiction, its budget is up 3 percent. INS, which has 15 percent—it's more responsible for controlling the immigration along the border and throughout the country, so only 15 percent of its effort is supposed to be in drugs, and its budget is up 13 percent.

    If you separate out the drug parts, from INS, the drug part is up 15 percent; the Customs' drug part, which is so much bigger, is up 5 percent. Customs, we're told over and over, is the front line of our defense on the interdiction effort, drug interdiction effort.

    And I just—I question whether or not we're really getting the attention to this that it deserves, and I would like some assurance, I guess, from you—I don't know what process you go through with OMB, or the White House or whatever—that you're making the case for the law enforcement efforts in Treasury, most particularly Customs, which is supposed to be our front line in drug interdiction.

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    Secretary RUBIN. I think your point is well taken, Mr. Chairman. Let me just make a few comments, if I may. One is that—I'm told by people who have been at this for a long time—that the working relationship between Treasury and Justice in the law enforcement area is A) good, and B) on a relative basis, better than it's been since these people can remember.

    I think that is very important, because it's extremely important that the two institutions work together effectively. As I say, a lot has been accomplished in that regard.

    As to the funding, I think it is very important that we do not have a national police force. From the beginning of this nation there has been this notion that you have Federal, State, and local police, and then within the Federal Government you have police powers in different agencies. It's a very sound principle for all sorts of reasons.

    But if you're going to do that, then you have to make sure that people get treated equitably, which is my point, and I agree with you.

    In terms of the Administration, because I've personally been integrally involved in our overall budget operations, I really have two opportunities to do this. George and I present the Treasury budget, certainly very forcefully, and I think we have effectively advocated sound funding with respect to Treasury law enforcement.

    And then there is an overall budget group, which I am part of, so I took the opportunity to see how different things were being done.

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    The OMB people and the Administration generally have been very responsive to the needs of the Treasury law enforcement agencies, though there has been disproportionate funding, which is I think something that needs to be focused on each year and very intensely.

    On the congressional side, I don't know how you all function, but it seems to me it is very important, since the Justice bureaus tend to have a higher profile—especially the FBI—that this committee very forcefully advocate what they think is right for Treasury.

    Mr. KOLBE. Well, I assure you that we will, that I will, and this takes place through a process that includes the discussions with the other chairmen of the subcommittees, and the full chairman of the committee, plus the leadership as we come to what's called the 602(b) allocations, where we divide the money up under law enforcement.

    We get it in a function, and then we have to divide it up. But I have to tell you, it makes it tougher when we have in front of us requests from the Administration which so clearly emphasize the Justice programs and not Treasury law enforcement.

    Secretary RUBIN. Well, I think that's a valid comment. I don't actually know how we did this year relative to Justice, but I can assure you——

    Mr. KOLBE. Well, I gave you those figures a moment ago.

    Secretary RUBIN. Were those one year figures?

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    Mr. KOLBE. The one year figure is 3 percent for Customs. This is just Customs only.

    Secretary RUBIN. Yes.

    Mr. KOLBE. 3 percent versus 13 percent for INS. So 4 times as much in INS. 3 times as much if you separate out the drug function.

    Secretary RUBIN. OMB had actually said to us at one point that they were going to focus on equitableness of funding between the two.

    I'm outside of my expertise so I'll go carefully on this—but I think there was a special issue with respect to INS that may have resulted in that funding.

    Mr. KOLBE. Let me just ask, you said——

    Secretary RUBIN. But I will say we do everything on our part, because the principle is right. Now, as I said, my impression is there are certain circumstances with respect to INS, or at least there were deemed to be.


    Mr. KOLBE. My time is about up, so I just want to ask this one other question. I don't feel I have a very clear idea, and maybe you can help me clarify this, about the Office of the Under Secretary, Mr. Kelly, for law enforcement.

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    Do you see this as an operational entity, or an oversight function? It's not clear to me in the organization chart exactly how he fits in here.

    Secretary RUBIN. Well, it's a good question, and I think that that has evolved some over even the time that I have been there. Not necessarily in the dichotomy that you mentioned, but in terms of what—if you look back at the Waco report—I don't know if you have read that or not, but it was really a very good piece of work. We can see what Mr. Hoyer thinks.

    But my view is that you need is an effective and professional oversight capability that is able to exercise serious oversight of the law enforcement bureaus. I think that's what it's function ought to be.

    When you talk about very major operations, if that's what you're asking—I don't think you should have a shadow head of each of these institutions. I do not believe that.

    But I do think when you have very major operations, that those should get a review. One of the criticisms of the Waco experience at Treasury, as you know, is that none of it was reviewed at the Assistant Secretary—there was no Under Secretary then. There was a feeling on the part of many, including many in Congress, and I think rightly, that there should have been a greater review, and that was one of the conclusions that was drawn from this.

    And so what Under Secretary Kelly is doing, and I think rightly doing, is building the capability to perform that function effectively. And also there needs to be a strong policy operation in the Under Secretary's office.

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    Mr. HOYER. I'd like to just follow up on what you said, Mr. Chairman, and what the Secretary has said. As someone who went through Waco from beginning to end, I think sometimes we learn lessons from incidences which aren't there.

    And what happened in Waco, from my perspective, is that the oversight within ATF left to the law enforcement side the oversight of that—not even at the Director's level. Because Higgins, of course, came out of regulatory side, he had served with the law enforcement people for a long time, and effectively allowed them to be the overseers of that operation.

    So it did not get to the secretary level. Director Higgins essentially knew about it, had been informed about it, agreed on it, but of course what ultimately happened in Waco was that a grievous error was made on the ground at the time of the implementation of the effort to arrest Koresh and others at the site.

    They were found out, and they should have aborted, and they didn't. That was the ultimate mistake. But I agree with the Secretary, Mr. Chairman, in the sense that I think that we now have some extraordinary leaders of the component parts of our law enforcement in Treasury, and that Assistant Secretary Kelly's role is not as the operating head of the agency, but as the CEO to whom the operating agencies report to insure that policy is being implemented properly and procedures followed properly.

    And to that extent, Mr. Secretary, you and I agree, and I think that works well. And particularly now, when you have John Magaw at ATF. He is an outstanding law enforcement official himself, as well as having a keen understanding of the regulatory side. ATF has two roles to play.

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    But I agree, and think that's an important issue. And as I've mentioned on a number of occasions, Mr. Secretary, the Waco report from Treasury is the best example I know of an agency looking at itself in a very critical, but also constructive way.

    That report really said, look, we messed up in this, this and the other area. It took personnel actions, as you know. Some of those were reversed, at least partially. But nevertheless they took corrective action. And although I don't want to pick on Justice, the Justice analysis was far less, self critical or useful because of that.


    Mr. Secretary, let me ask you a couple of questions, first on Tax Systems Modernization. Deputy Secretary Summers did respond. You have mentioned it in your opening statement briefly.

    There has been some suggestion about privatization—not privatization necessarily, but splitting off IRS as an independent agency. I personally think that would be a mistake, but I would like to hear your thoughts on the record on that issue.

    Secretary RUBIN. I've also heard the thought put forth. I think TSM is clearly an area that is absolutely essential. You cannot have an IRS that does not have modern systems capability. We've got to get there.

    I think that the kinds of things that we're doing today at Treasury, and the institutionalization, through Executive Order or otherwise, plus additional things we can do, will provide us, and I think are in the process of providing us with the right program to get what we need to get.

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    And there really has been a sharp turn. I think the notion of splitting the IRS off would be precisely the wrong thing to do, because that will reduce the probability of getting—I feel this way very strongly—what we need to get, instead of enhancing it.

    There is a notion around that, if you can just get a few private sector people to oversee this, that somehow that will deliver us. I was in the private sector for 26 years. I've been here now for a little over 4 years. There are enormous differences between managing the private sector and the public sector, and I think we need to recognize those when you think about structure and governance.

    I do think the MMB was a very good idea—it was Mr. Summer's idea, as far as I know. It certainly wasn't my idea. That I do know. But I think it was a very, very good idea. And as you know, we have people from OMB and a performance review on that.

    I think it is that kind of proactive oversight that we needed. We've been very receptive to having the input of private sector people. The question is how do you structure that.

    One thing you surely do not do, at least that I think would be just the opposite of a constructive approach, would be to split IRS off from the Treasury. There is also the very serious problem of how you would then handle the integration, which exists today, between the tax policy people in the Treasury and the people who perform similar functions in the IRS, because they work very closely together, and that is, as you know, a critical component of the administration of the nation's tax law.

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    Mr. HOYER. Mr. Secretary, I have a number of questions, but the last one I'll ask on this round is—I'll preface it with——

    Secretary RUBIN. Can I add just one more thing, Mr. Chairman? You know, I've been here 4 years now. I have a general belief that the way you get things right is to have accountability to elected officials. I really have come to believe that very strongly.

    And what you have right now is accountability to elected officials. And ultimately it's the President, but in this case it's the Secretary of the Treasury, Deputy Secretary and the rest. And partly through the efforts of this committee and partly for other reasons we have become very much focused on the IRS, and I have no doubt that the Treasury will continue to be that way going forward, while we're here and whoever follows us is here.

    It's that kind of accountability that provides the key to doing what needs to be done.


    Mr. HOYER. Thank you. On the issue of Mexico, and our loan to Mexico, I was one who thought that your leadership in this area, as well as in others, was extraordinarily good. I think your advice and counsel has proved to be excellent, and we were successful in this effort.

    But I would like you to comment on Mexico's present position, its stability. Obviously they have paid us back. We made a profit on our loan. They paid us back early, but how do we see them as our NAFTA partner, and their stability at this point in time?

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    Secretary RUBIN. At the time of the support program, we said it was enormously in our economic and national security interest that Mexico have a healthy economy, and I believe that unquestionably.

    We also said there are no certainties in life, and Mexico was facing extremely difficult conditions. In our judgment in that context the right thing for this country to do was the support program.

    If you bring that concept now to the present day, you have a Mexican president for whom I have developed enormous respect. The things that he did in putting in place his economic program were tremendously courageous. And they have had real effect, though there are many economic challenges left in Mexico.

    I believe that the best thing that we can do in terms of trying to maximize the probability that Mexico will deal with its very considerable problems—and they are very considerable—social problems, political problems, economic problems, and issues of corruption and drugs—is to support a courageous and honest president.

    And so that leads me to believe that we did the absolutely right thing with respect to certification. But we all need to recognize that we are dealing with a country that has enormous challenges to meet.

    Mr. HOYER. Thank you.

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    Secretary RUBIN. Could I say one more thing on the independence question? There are many issues in the IRS. It is also a vital national asset. As I go around to other countries and meet with finance ministers, this Internal Revenue Service, for all of its problems, is in some sense the envy of the world. We have something like an 85 percent compliance rate, voluntary compliance rate, which is pretty much unheard of around the world.

    It is a vital national asset. It has problems. We recognize that. We have to deal with them. They will not be solved over night. But it is enormously important that we work together on these in a constructive fashion.

    I think there are temptations sometimes for people to use those problems to advance other purposes, and that is really not constructive and not in the interests of this country.

    Mr. HOYER. Thank you, sir.

    Mr. KOLBE. Mr. Istook.

    Mr. ISTOOK. Thank you, Mr. Chairman.

    Mr. Secretary, good to be with you this morning. I would like to explore with you part of the area that has to do with your Department as the core center for economic policy development. But I want to get into a particular area, because I think it is of enormous impact right now.

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    This deals with the proposed new regulations on clean air standards from the EPA, the Environmental Protection Agency. I am aware that although the EPA has submitted what they say is an estimate of $8.5 billion a year as the cost of its proposals, the Council of Economic Advisors calculated in a memo in December that the cost of the ozone rule of that they estimated would be about $60 billion, compared to, on that factor, an EPA cost estimate of $2.5 billion.

    Now, I don't expect you, of course, to be focusing on all the details of the environmental impact. I know that you want clean air. I want clean air. That goal is not in question.

    What is in question is the level of the benefit, compared to the level of the cost, and whether we have an accurate gauge of each of them. Your expertise, of course, has to do more with the area of the cost, not the benefit.

    But since there are some conflicting figures coming out from within the administration, since you act as a clearinghouse for generalized, broad-based economic impact, and this one is about as broad as it gets, could you expand for my benefit, and that of others what is going on within Treasury, within the administration on trying to get a correct handle on that?

    Is there a problem with the initial figures from the EPA? What's under way, and how is it being approached?

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    Secretary RUBIN. You raise an important question. Let me give you a process answer, if I may, because I don't know the substantive answer. I just had a memo from our Assistant Secretary for Economic Policy over the weekend—actually, that's not true; he gave it to me a week or so ago, but I didn't have a chance to read it until last weekend—in which he talked about a number of the environmental issues the administration is dealing with, and the processes that are going on therewith.

    With respect to the Clean Air Act, which I really have no personal knowledge of at all, I wrote back a note to him that said the National Economic Council—which is really responsible for dealing with issues that aren't ordinarily thought of as economic, but have very large economic ramifications—needs to get its arms around this and work with the EPA and with environmental people in the White House to sort out what we think in terms of the benefits. As you say, we all want clean air. I happen to think it's a very, very important thing we're doing.

    But what are the costs and how do we deal with all of this? I don't really have any wisdom for you other than to say it's very important that we have the appropriate process around this, and I am confident we will.

    Mr. ISTOOK. Let me urge you, then, because I recognize that your position is—I'm just going to refer to it as the clearinghouse position. Certainly there are the different councils, there are the different assessments and different departments, but you are there at the heart of the matter.

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    I would certainly encourage you to, at the Department level, try to bring these differing groups that are trying to assess this together. More and more we are hearing from the cities, we are hearing from the business, and we are hearing that this could have tremendous potential crippling effect on jobs in the country, on economic development, and to not create any appreciable improvement in air quality, and in the health that can follow from that.

    I am not asking you to, you know, share whether you think that is accurate or not, but I am asking that you make an effort, because I think you are in the key position, to bring those forces together.

    You are in the key position to have a more coordinated approach within the administration. I would encourage you to take the initiatives to do that.

    Secretary RUBIN. I just made a note for myself when I get back to call Gene Sperling, who is head of the NEC, and who is really doing a very good job. And I'll talk to Gene about this, because we clearly need to have a process—there is a process around this, but I'm just not quite sure where it stands.

    I think your point is well taken. This is a major economic issue, and we need to make sure the economic considerations are properly analyzed and weighted.


    Mr. ISTOOK. I did have a question with regard to the IRS also, if I can shift to that. There's been a lot of discussion, of course, not just of the Tax Systems Modernization, but issues about what work by the IRS potentially might be privatized, and thereby improved, because you get around some of the inherent problems that you have in the government's ability to conduct operations on this scale.

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    In that, of course, there is proper concern about issues of privacy, when you're dealing with an individual's tax return. What I would like to ask is, recognizing that it's an issue, it's a valid issue we both share, have you done any assessment as to how this relates to other privacy issues within the Government? And I'm talking about with private sector involvement.

    Tremendous amounts of the intelligence community work is done by the private sector, and certainly that's at the highest levels of secrecy and national security. The same is true for the defense industry as a whole. The Commerce Department has to deal with a large number of trade secrets and confidential economic information.

    I would appreciate it, if you don't already have it, if your Department is able to pull together an assessment of the significance of the privacy issues regarding privatization of some IRS work, as it compares with privacy issues and secrecy and confidentiality issues as they are handled by other areas of government, and compare the level of success or non-success with what we might anticipate within the IRS.

    Secretary RUBIN. Two comments on that. One, it's a very good suggestion. George is handing me a note. Let me see what it says.

    I think I might ask George to read his own note. We should see what is the optimal outsourcing. That is the question we need to face ourselves.

    My own instinct, and I know it's very much Larry Summers' instinct, is that in this whole TSM thing that we have to do a lot more outsourcing. And we actually have. It's my recollection that we've increased our outsourcing from roughly 40 percent to roughly 60 percent. And there are no secrecy issues so we don't have the problems that you are raising.

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    As you get into debt collection and other kinds of activities, you obviously get into much more sensitive areas. I don't have a personal view of the question of privatizing debt collection. I know some in the Congress have an enthusiasm for it. They may be right. I don't know.

    But the secrecy issues bother me a little bit, and we haven't sorted our way through all that. But we have talked a fair bit about the importance of protecting confidentiality. But you make a very interesting point—comparing it. If we've done it, I'm not aware of it, and it's a very good idea.

    Mr. ISTOOK. Because I think it's been kind of looked at in a vacuum, as though this was the only area of government that involved that issue, secrecy or privacy.

    Secretary RUBIN. But you raised it in the context of, for example, privatizing debt collection, or were you raising it in the context of privatizing the whole of the IRS?

    Mr. ISTOOK. Processing returns. Actually in the whole scale, whether it may be debt collection, whether it may be the processing of returns, and really just as we're having to look in the TSM process at the issue of the capability of government to take on a task such as that.

    There are the parallels with FAA and so forth. So, too, I think, as we consider this potential privatization, or outsourcing, we need to look at the broad issue of whether the private sector can deal with the issues of confidentiality equally as well as the government can, as far as looking where there's been violations, is it really getting more significant in one than the other.

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    Secretary RUBIN. Just contextually, my view is that, as I said before in response to Mr. Hoyer, we've got the governance of this thing about right. There may be some changes we should make one way or the other, but I think the basics we've got about right.

    I think within that context we can rely on the private sector a great deal more, subject to various caveats, one of which is the issue you raised. George?

    Mr. MUNÓZ. In fact because of TSM we did start looking into the whole area of outsourcing with security requirements. And it's really in that context that we have taken a very close look at it.

    All of our procurement requirements for outsourcing put high premiums on security clearances and security procedures. Beyond that, all I can say is that we approach these things extremely cautiously because there is the reality of possibly having a similar level of risk on confidentiality, but then there is the perception problem because, as the Secretary has said, we enjoy a very high level of confidence from the taxpayers' point of view in compliance.

    Mr. ISTOOK. I won't engage on that issue.

    Mr. MUNÓZ. But at least from the point of view of compliance, there's a sense of fair share, fair administration, and we want to make sure that if we get out of the box, at least from our systems, that we approach it extremely cautiously.

    Mr. ISTOOK. Thank you. I look forward to further information on that.

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    Mr. KOLBE. Mrs. Northup.

    Mrs. NORTHUP. Thank you. Secretary Rubin, there are a number of questions I would like to ask you. I'll do the first five minutes here.


    The first thing is that I hear from banks all the time about the cost of compliance with the regulatory agencies, and this drives up their costs to their consumers, of course.

    One of the things in particular that they talk about is that because there are all these laws, particularly in trying to protect against money laundering and drug operations and so forth that they feel like these regulations, in the end—quite honestly, the statement they make is, they spent all their time prosecuting us for—and they would maybe say persecuting—but prosecuting us for administrative mistakes, mistakes their bank clerks make, who are not in compliance with very technical parts of the law, instead of prosecuting the drug smugglers that they can't catch anyway.

    Now, I realize that's one sided, but could you tell me the percentage of efforts, both in enforcement and prosecution, that you all do to actually drug operations, focused on the person that is breaking the law in that area, in comparison with prosecuting banks for technical violations, errors that are made, where there is no suspicion or little evidence that they are actually engaged in money laundering or drug operations, but have made a mistake in compliance.

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    Secretary RUBIN. I don't know the answer to your question. We can try to get it, but I must say I wouldn't frame the question that way.

    Mrs. NORTHUP. I understand.

    Secretary RUBIN. I was in a regulated industry for 26 years, and I will tell you, one of the things that is most striking about the American financial system—and it's true really in Western Europe and in some other nations like Japan as well—is how amazingly free of corruption it has remained, given the vast flows of money.

    I personally believe that it is extremely important that we have an effective and vigilant regulatory effort. So I do not agree with the premise of your question. I don't believe there is a persecutorial view. I think what you have is a very effective regulatory regime that has really prevented what could easily happen, which—given these vast amounts of money, and the temptation that has to provide to organized crime—has prevented the corruption of our system.

    And I think we need to remain very, very vigilant.

    Mrs. NORTHUP. Well, I guess, I wonder if there is a way of trying to—first of all focus our efforts on examples of corruption or opportunities of corruption. Are there times and how often when you all find a bank, or investigate a bank or whatever you do, when there is no suspicion that there is actually money laundering there, but that there was a technical violation.

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    Secretary RUBIN. Well, we can look at this for you if you like.

    Mrs. NORTHUP. Would you, please?

    Secretary RUBIN. We'd be delighted to.

    [The information follows:]


    Question. The percentage of efforts both in enforcement and prosecution, that actually involve drug operations, (i.e. involves a person breaking the law) in comparison with prosecuting banks for technical violations or errors, where there is little suspicion or evidence that the persons were actually engaged in money laundering or drug operations but have made compliance mistakes?

    Answer. The question as I understand it is whether the government has used its enforcement authority to punish financial institutions for technical mistakes rather than going after the criminals. While we do not expect banks to act as law enforcement agents, we do need and require their assistance as they are our front line of defense in the battle against money-laundering and other financial crimes.

    Because banks are most likely to have initial contact with money launderers and other financial criminals, we must require that they pay close attention to the financial activity of their customers. The government receives outstanding cooperation from the financial sector and is committed to work in partnership to reduce unnecessary burdens to permit both the industry and the government to focus its resources on more sophisticated measures and analysis to prevent and detect financial crime. We need the financial sector not to act as police but as our allies. By ensuring compliance with the currency transactions and recordkeeping requirements, we also ensured that information assists law enforcement in civil, criminal regulatory and tax investigations. There are, however, BSA requirements such as the mandatory reporting of suspicious activity that do and must involve the bank's discretion.

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    If a bank has reason to suspect that activity involves funds derived from illegal activity, or is designed to evade the BSA requirements, it is required to file a Suspicious Activity Report (SAR). In addition, if a transaction has no business or apparent lawful purpose, then the bank must examine all of the available facts and if it still finds no reasonable explanation, it must also file a SAR. SAR data is made available to more than a dozen federal law enforcement and regulatory agencies via computer. A single SAR is filed with FinCEN, thus reducing the banks' burdens as well as providing for more comprehensive analyses of these reports to identify trends and patterns. (Note: Of the almost 65,000 SARs filed to date, more than a third reported suspected money laundering activity and/or violations of the BSA.)

    Banks, their employees, officers and directors who are either knowingly involved in or willfully blind to money laundering activity face the full consequences of Title 18 U.S.C., Sections 1956 and 1957, which is administered by the Department of Justice. Financial institutions must also comply with the BSA's reporting and recordkeeping requirements to ensure that they have sufficient internal controls and compliance procedures to prevent and detect financial crime. If a bank fails to comply with these requirements, a BSA enforcement action, such as a civil money penalty or a cease and desist order issued from its federal regulator, may be considered independent of whether there is a determination that money laundering has occurred.

    Statistics on the number of banks that have been prosecuted for money laundering, drug offenses, or other federal offenses are maintained by the Department of Justice.

    Mrs. NORTHUP. Would you also tell me—there is quite a debate going on between credit unions and banks, and a point that the banks make all the time is that they have to comply with all sorts of regulatory agencies that the credit unions don't.

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    I know that CRA is in another area, but can you tell me what other—if there are any regulatory costs that the banks bear that credit unions don't?

    Secretary RUBIN. Well, we are doing—I think it's congressionally mandated, if I recollect—a credit union study. I don't know off hand when it is going to be completed.

    We'll get back to you. I just don't know when it is going to be completed. But there is a credit union study which was congressionally mandated, and it deals with all those kinds of issues.

    And so when that comes back——

    Mrs. NORTHUP. Would you respond to that for the record so that we will have that? In other words, I want that to be included in the record.

    Secretary RUBIN. We will do the best we can to give you a response for the record.

    And then, as I say, in the fullness of time we'll be getting a very thoughtful study.

    [The information follows:]

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    A congressionally-mandated credit union study is due by September 30, 1997. I fully expect that our final report will address these issues. But it would be premature for me to comment on them at this time.


    Mrs. NORTHUP. Let me ask you one more question. Since you are so involved in the question of drugs coming across the border from Mexico, did the President consult you before he—and Mr. Chairman, I'm sorry if I'm repeating another question—did he consult you, or did you make a recommendation about the recertification that happened last week?

    Secretary RUBIN. Yes. He did and I did.

    Mrs. NORTHUP. And so you suggested that Mexico be recertified?

    Secretary RUBIN. I think it was absolutely the correct thing to do.

    Mrs. NORTHUP. Why?

    Secretary RUBIN. Because you have very much the same situation that we faced back in 1995, although this time in the context of a particular law. To bring that up to the present moment, I think you have a President in Mexico who is honest and who is committed, who is dealing courageously and effectively, given the problems he's facing—the enormous economic, social and political problems that affect our economic and national security interests. Our economic and national security interests, and our law enforcement interests lie in supporting an honest and courageous president as he deals with what are unquestionably very difficult problems in a situation where they are not going to be solved over night. This is going to be a long term situation.

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    And I believe we need to support Mexico and support the forces of reform and honesty in Mexico as they try to deal with these very difficult problems.

    Mrs. NORTHUP. Actually, I understand that they have issued some—I realize they have internal corruption that's a problem, but they actually also have issued regulations that make it harder for us to participate with them. The fact that our people can no longer carry guns when they cross the border has reduced our ability to train their people.

    There are several other restrictions they have placed on us. And I understand the importance of the trade, and I'm not at all suggesting——

    Secretary RUBIN. Well, mine was not a trade comment. If you look strictly at law enforcement, our best chance to protect our interests is to support an honest President as he tries to work his way through very, very difficult problems.

    Mrs. NORTHUP. Well, we could have not recertified them and instead just granted them a waiver, so that the economic interests could have been accommodated and still have put the pressure that personally I believe—you know, we could have made, asked for certain accommodations, so that we would be more able to, for example for them to deport people that we have named in warrants.

    If they're not willing to do that, they're not really participating.

    Secretary RUBIN. Well, you know, reasonable people could disagree about this. It was our judgment that the best chance of accomplishing, or moving forward in the areas that you're talking about is by recertification. Regarding the issue of carrying firearms into Mexico—mind you, we wouldn't be wildly enthusiastic about Mexican law enforcement officials coming here with firearms. There are very delicate sovereignty issues here.

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    But in any event, while working on extradition and the other issues, we should support the President rather than do something such as a decertification with a waiver, which is what you're referring to, which could possibly undermine him.

    And, as I say, reasonable people might disagree on that, but there is no question in my mind that we made the right judgment.

    Mrs. NORTHUP. Thank you. Most of the $52.2 million increase that you're asking for the drug work, most of it is focused on the Southwest, even though we know there's a growing trade coming from the Southeast.

    And, you know, it seems to me like we're bearing a tremendous cost to try to shore up that effort, where there is a tremendous amount of corruption across the border. I don't think they have made every accommodation, and, you know, I don't know whether you would comment on the breakdown of the $52 million, or whether you already have.

    Secretary RUBIN. I don't think they have made an accommodation. I think the question is how much it is viable for them to make. They also have a political system, and, as I said, enormous problems. I'm repeating myself now. But we thought our chances of accomplishing what we want would be greatest by supporting this President.

    Mrs. NORTHUP. And one more question. The people that oversee the agency—I've forgotten who came before us—was that a recommendation from the bottom up, or did you make that decision in your office and recommend it to the President?

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    Secretary RUBIN. Oversee which agency?

    Mrs. NORTHUP. Customs. Was the question of recertification—at what level was that decision made to recommend to the President that we recertify Mexico?

    Secretary RUBIN. In terms of the Treasury Department?

    Mrs. NORTHUP. Yes.

    Secretary RUBIN. My level.

    Mrs. NORTHUP. That's all,

    Mr. KOLBE. We have two votes on the way for sure, and a possible third, so I don't think it's fair to ask you to wait around.

    Mr. Hoyer, we have a couple of minutes. Do you want to get one in quick? And I'll try to get one in quick.


    Mr. HOYER. Because of the time, I've got a number of questions, one, on the Community Development Financial Institutions Program, you've got money in for that. I want to give you an opportunity to comment on that. We don't have time, but I'll do so for the record.

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    Also FINCEN. You mentioned the problems that we're having as we go to electronic transfers, and the money laundering capability that gives.

    I've been to FINCEN, a very important agency, but because we're going to leave, I wanted to make a comment that I would have made at the close.


    Mr. Chairman, we had a major fire over at Treasury. I went over there the day of the fire. Secretary Rubin has talked about something that I have heard every major Presidential appointee say. I'm glad that Anne stayed, Congresswoman, because we deal with Federal employees a lot.

    I don't know whether you were in the room, but he said that he was surprised. Every major business leader that has been brought into government under—and I've only been here since the Reagan administration—under the Reagan administration, the Bush administration and the Clinton administration—every one of them had been surprised as Secretary Rubin was with respect to the quality, motivation and hard work of the Federal employees.

    And I think that was demonstrated in spades at the time of this fire, which could have demoralized the agency. You weren't here. But there was a major fire at the top floor, caught between two floors. Smoke throughout the building. Luckily we didn't have as much physical damage as we could have had, but we had a lot of physical damage.

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    But the employees confronted that in absolutely an incredible fashion, both at the management level and the folks who do the work on a day to day basis level. And they are to be congratulated, Mr. Secretary. You and all of your people. I'm not going to mention all of them. Some are sitting in the room. Linda and I had spent a lot of time walking around in water and smoke.

    But they did an extraordinary job, and I was pleased to see you reference the employees, because they are an outstanding group of people, and I'm very pleased that you would mention them as you did. And I think almost every leader that comes in with the bias, the perception, the demagoguery that occurs about Federal employees, or public employees in general, has the same pleasant surprise that you had with the quality of people that we have.

    Secretary RUBIN. I think that is a challenge for all of us, to continue to attract and retain those people.

    Thank you. I think we're going to have to go. I have a series of questions that I'll have to submit for the record on the testimony of the Secret Service agents on the taggant study.

    Mr. KOLBE. And I was hoping to have a conversation with you on coin/dollar. We'll have to save that for another day.

    This subcommittee will stand adjourned.

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    [CLERK'S NOTE.—At the time of publishing, the Department of the Treasury failed to provide answers to the question for the record on the subject of the IG investigation of Secret Service Agents: Agent Testimony.]

    [Questions for the record and Treasury's Budget in Brief follows:]

    "The Official Committee record contains additional material here."