Wednesday, July 31, 2013
CFTC CHAIRMAN GENSLER TESTIFIES BEFORE SENATE COMMITTEE ON REFORM
FROM: U.S. COMMODITY FUTURES TRADING COMMISSION
Testimony of Chairman Gary Gensler before the U.S. Senate Committee on Banking, Housing and Urban Affairs, Washington, DC
July 30, 2013
Good morning Chairman Johnson, Ranking Member Crapo and members of the Committee. Thank you for inviting me to today’s hearing. I am pleased to testify along with Securities and Exchange Commission (SEC) Chair Mary Jo White.
Today’s hearing comes at an historic moment in the CFTC’s effort to implement the much-needed reforms of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). Now, three years since passage of the Dodd-Frank Act, I am pleased to report that we have nearly completed all of the necessary rule writing. Market participants are well along the path of implementing these reforms.
These reforms for the first time shine a light on a marketplace that has been opaque for far too long. These reforms mitigate risk and broaden market access through central clearing of standardized derivatives. These reforms for the first time bring oversight to swap dealers and major swap participants – some of whom were at the center of the bailouts of the financial crisis five years ago. I thank my fellow commissioners and the staff of the Commodity Futures Trading Commission (CFTC) for all of their hard work, dedication and collaboration in bringing oversight to the swaps marketplace.
Introduction
The public and the economy benefit from swap market reforms, just as the public benefitted from the historic reforms in the securities and futures markets since the 1930s. For the first time, we have in place a legal and regulatory foundation for the vast swaps markets that brings transparency and lowers risk for the American public. This new comprehensive regulatory regime includes robust rules of the road to benefit those who trade swaps as well as those who have never even heard of them.
In 2008, we witnessed widespread failure throughout the financial system and financial regulatory system. The lack of important oversight in the swaps market – oversight that we’ve had for decades in the securities and futures markets – allowed for risk to accumulate and be passed on to the public in the form of taxpayer-funded bailouts. Taxpayers sent $182 billion to AIG alone. And AIG was just one part of the larger financial crisis that nearly took down the U.S. and global economies.
Middle class Americans paid the price of the 2008 financial crisis with their jobs, their pensions and their homes. The crisis cost eight million jobs and thousands of businesses, and the swaps market was right at the center. Americans are remarkably resilient, but they do expect us to learn from the lessons of the crisis and to do everything possible to prevent this from happening again. That is why Congress passed the Dodd-Frank Act and why the hard working staff of the CFTC have worked so diligently to implement its reforms.
These rules are complementary pieces of an interconnected foundation on which the swaps market will operate in a transparent, open and competitive manner. Further, just as we have complementary commonsense rules for our roads – traffic lights, stop signs and speed limits, and cops on the streets to enforce all these rules – we need commonsense rules of the road for the swaps markets. In 2008, we had AIG recklessly driving toward failure, and it, along with other failing financial institutions, were so big that they injured millions of bystanders.
Americans would never accept a city or highway system with no rules, no streetlights, no traffic lights and no cops.
And now, with the near-completion of swaps market reforms, the American public no longer will need to accept a dark swaps market lacking commonsense rules of the road.
Credit should be shared for this reform with the SEC. We have worked collaboratively with the SEC, sharing our internal memos, term sheets and draft regulations and seeking advice and counsel every step of the way. In addition to the consultation, Congress tasked the CFTC and SEC with jointly completing a number of critical, foundational rules further defining swap dealers and swaps, among other terms. It is only with this close work and collaboration that reform came to life. We also significantly benefitted from collaboration with other U.S. and international regulators.
We have completed this reform sensitive, as Congress was, that non-financial firms, responsible for 94 percent of private sector jobs in this country, only make up approximately 10 percent of the swaps market. Congress directed that these non-financial end-users have a choice about central clearing, and our rules reflect that. Consistent with Congress’s direction related to clearing, the CFTC has proposed that margin for uncleared swaps does not have to be collected from non-financial end-users. We also have ensured that treasury affiliates of non-financial end-users will have a choice about central clearing. Further, we granted relief for inter-affiliate clearing and reporting as long as outward-facing transactions are cleared and reported.
I now will walk you through the three key areas of completed reforms: transparency, central clearing and oversight of swap dealers and other intermediaries.
Transparency and Access – Lowering Cost and Increasing Liquidity, Efficiency and Competition
A key benefit of swaps reform is providing critical transparency and access to businesses and other end-users that use the swaps market to lock in a price or hedge a risk. Transparency and access – longstanding hallmarks of the futures market, both before and after the trade – lower costs for investors, consumers and businesses.
When light shines on a market, the economy and public benefit. Transparency increases liquidity, efficiency and competition. It is the non-financial part of our economy that provides 94 percent of private sector jobs in the United States and will most benefit from transparency and access to markets. Even amongst financial entities, pension funds, community banks, insurance companies and other non-dealers will significantly benefit as they manage the savings and security of Americans.
Based upon completed reforms, the public and regulators already are benefitting from significant new transparency. Starting late last year, financial regulators have been able to look at swaps transactions that are now being reported to swap data repositories. The phased implementation of these reporting requirements is nearly complete, with just one remaining group of U.S. transactions coming into data repositories August 19. Additional reporting from offshore swap dealers will phase in later this fall.
We now have pricing, transactional, counterparty and valuation information in the data repositories for more than $360 trillion in outstanding swaps. This covers all the different asset classes, including interest rate swaps, credit index swaps, foreign currency swaps, energy swaps, metals swaps and agriculture swaps. We already are benefiting at the CFTC, reviewing this data for purposes of our oversight and surveillance.
Congress knew, though that transparency to the regulators is not enough. Markets work best when the public benefits from seeing the price and volume of transactions after they have been executed. Beginning this past January, the public can now see the prices and volume of transactions on a time delayed basis (and in a way that masks counterparties), similar to a modern-day ticker tape, free of charge and available on the internet. Further, starting today, July 30, a significant portion of the smaller-size transactions will no longer be reported on a time-delayed basis. This fulfills Congress’s mandate that transactions below a block size be publicly reported “as soon as technologically practicable.”
As the Commission recently finalized block rules for swaps, it will shortly turn to consider staff recommendations for a proposal on a futures block rule.
In addition, for the first time, all swaps trading facilities will have to register, completing the task of closing what had come to be known as the “Enron loophole.” We accomplished this through finalizing rules relating to swap execution facilities (SEFs), which are trading facilities for the transaction of swaps. SEFs already have started to register, and some are likely to be operating by August 5. Others will need to register and include the minimum trading functions, such as an order book, by October 2. All market participants shortly will have the ability to compete by making bids and offers to each other through an order book. They also benefit by seeing the prices of such orders prior to making a decision on a transaction.
Thus, market participants, whether they be pension funds, asset managers, community banks or other end users, shortly will be able to go onto a centralized market structure – a designated contract market (DCM) or a SEF – and execute their swaps transactions in a competitive marketplace, while in the past they were primarily only able to do this directly with dealers. This is a critical benefit to our overall economy. When transparency and competition come to a marketplace, costs go down.
Further, standardized swaps (swaps that are subject to the clearing requirement and made available for trading) will be subject to a trade execution requirement likely starting by early next year. A significant portion of interest rate and credit derivative index swaps will be in full view to the marketplace before transactions occur. Trading platforms also can elect to offer other types of swaps for transparent trading. This is a significant shift toward market transparency from the way it used to be.
As Congress made clear in the law, trades will be required to be executed on SEFs or DCMs only when financial institutions transact with financial institutions. Non-financial commercial companies and other end-users will benefit from access to the information on these platforms, but will not be required to use them. Further, companies will be able to continue relying on customized transactions – those not required to be cleared – to meet their particular needs, as well as to enter into large block trades.
Beyond these reforms, new CFTC rules brought additional transparency earlier this year, as customers can now see the valuation of their positions on a daily basis – either as reported by the clearinghouse or by their swap dealers as required by business conduct rules.
With these transparency reforms, the public and regulators now have their first full window into the swaps marketplace. These reforms build upon the democratization of the swaps market that is coming with the clearing of standardized swaps.
Central Clearing – Mitigating Risk and Promoting Access
Transparency is but one critical rule of the road in the swaps markets. It provides the street lamps that light the roads, but we also must ensure that the streets are safe for driving and that drivers have easy access to the highways.
Clearinghouses have operated in the futures markets since the late 19th century to lower risk and improve access for market participants. Clearinghouses reduce the risk that one entity’s failure could spread to the public by standing between the parties and maintaining resources to cover defaults. They value every position daily and require the parties to post adequate margin on a regular basis. Clearing also fosters access for the broad market as it ensures that each participant no longer has to individually worry about its counterparty’s credit characteristics.
The CFTC has implemented the two principal reforms of the Dodd-Frank Act relating to clearing.
First, consistent with the direction of the statute, the Commission in the fall of 2011 adopted a comprehensive set of rules for the risk management of clearinghouses. These final rules provided a strong set of protections for customer money posted to clearinghouses, including for the first time a requirement for gross margining as well as segregation of customer money at the clearinghouse.
These final rules were consistent with international standards as of the time that our rules were published. Subsequently, new international standards have been adopted – the Principles for Financial Market Infrastructures. Though the Commission’s clearinghouse risk management rules cover the vast majority of these new international standards, CFTC staff is working expeditiously to recommend the necessary steps to implement the remaining items that should be incorporated in our rules. Most importantly, Commissioners currently are considering finalizing a rule requiring systemically important clearinghouses to have prefunded default resources sufficient to cover the default of the two clearing members that would cause the greatest loss (after margin) in extreme but plausible circumstances.
Second, the CFTC adopted rules to implement the Dodd-Frank Act’s requirement that standardized swaps be cleared. The Commission approved the first clearing requirement last November, following through on the U.S. commitment at the 2009 G-20 meeting that standardized swaps be cleared by the end of 2012. The Commission has determined that swaps in four interest rate swap classes (U.S. Dollar, Euro, Sterling and Yen) and in two credit index swap classes (CDX and iTraxx) are subject to the clearing requirement. These asset classes account for the vast majority of interest rate and credit default index swaps.
We reached a key milestone in March when the clearing requirement for swap dealers and the largest hedge funds went into effect. Additional financial entities began clearing June 10. Compliance will continue to be phased in throughout this year. Accounts managed by third party investment managers and ERISA pension plans have until September 9. As we phase in compliance with the recently completed cross-border interpretive guidance, collective investment vehicles, including hedge funds, whose principal place of business is in the U.S. but may have incorporated offshore (for instance, in the Cayman Islands) will have to comply with the clearing requirements by October 10. Further, guaranteed affiliates of U.S. persons will have to begin complying with the clearing requirement on October 10 as well. The CFTC also fulfilled Congress’s direction to exempt non-financial end-users from the clearing requirement.
Oversight of Swap Dealers and Other Intermediaries
The third critical piece of swaps market reform is oversight of swap dealers and investment funds operating in the swaps market. To extend the highway metaphor, we require that drivers have licenses and know the rules of the road. Though Congress did not suggest this for all market participants, they were clear that the dealers themselves had to be registered and be brought under new reforms. Furthermore, Congress directed that swaps reforms extend to investment vehicles that invest in swaps.
The foundational joint rules of the CFTC and SEC further defining swap dealers and swaps went into effect last October. By last December, swap dealers began to provisionally register. We now have had 80 swap dealers and two major swap participants provisionally register with the CFTC. This group includes the largest domestic and international financial institutions dealing in swaps, including the 16 institutions commonly referred to as the G16 dealers. We expect additional entities to register as swap dealers as the recently completed cross-border interpretive guidance becomes effective later this year.
Since the beginning of this year, swap dealers have had to report their trades to both regulators and the public. They also have had to comply with various business conduct standards that lower risk and increase market integrity. These include promoting the timely confirmation of trades and documentation of the trading relationship. Swap dealers also have been required since earlier this year to implement sales practice standards that prohibit fraud, require fair treatment of customers and improve transparency.
Cross-Border Derivatives Reform
Congress was clear that the far-flung operations of U.S. enterprises are to be covered by reform. Recognizing the lessons of the crisis and modern finance, Congress was clear in section 722(d) of the Dodd-Frank Act that swaps reform does apply to activities outside our borders with “a direct and significant connection with activities in, or effect on, commerce of the United States.”
The largest banks and institutions are global in nature, and when a run starts on any part of an overseas affiliate or branch of a modern financial institution, risk comes crashing right back to our shores. The nature of modern finance is that financial institutions commonly set up hundreds, or even thousands, of legal entities around the globe. In fact, the U.S.’s largest banks each have somewhere between 2,000 and 3,000 legal entities. AIG nearly brought down the U.S. economy because it guaranteed the losses of a Mayfair Branch operating under a French bank license in London. Lehman Brothers had 3,300 legal entities, including a London affiliate that was guaranteed here in the U.S., and it had 130,000 outstanding swap transactions. Citigroup had structured investment vehicles that were set up in the Cayman Islands, run out of London, and yet were central to not one, but two bailouts of that institution. Bear Stearns, in 2007 had two sinking hedge funds organized in the Cayman Islands that had to be bailed out by the parent entity. A decade earlier, the same was true for Long-Term Capital Management.
After receiving public input and coordinating with the SEC and other regulators, working with international regulators, we issued guidance and an exemptive order to provide clarity to the market that our new rules apply to cross-border derivative activities. The CFTC interprets the cross-border provisions to cover swaps between non-U.S. swap dealers and guaranteed affiliates of U.S. persons as well as swaps between two guaranteed affiliates. The guidance does recognize and embrace the concept of substituted compliances where there are comparable and comprehensive rules abroad. Further, the interpretive guidance captures offshore hedge funds and collective investment vehicles that have their principal place of business here in the U.S. or that are majority owned by U.S. persons.
We published the proposed guidance for public comment in June of last year and then sought additional comment in December. On July 12, we gave swap dealers organized in each of six jurisdictions (Australia, Canada, the European Union, Hong Kong, Japan and Switzerland) five additional months to come into compliance with certain swaps reforms as we assess the submissions from those jurisdictions regarding substituted compliance.
Investment Funds
Furthermore, Consistent with Congress’s direction that swaps reforms extend to investment vehicles investing in swaps, the Commission approved final rules 18 months ago that increase transparency to regulators of commodity pool operators (CPOs) and commodity trading advisors (CTAs) acting in the derivatives marketplace – both futures and swaps. The rulemaking also rescinded prior exemptions from CPO registration that had been used by many hedge funds. As a result, CPOs of registered investment companies and hedge funds were required to register by December 31, 2012, and, to date, more than 500 funds and registered investment companies have done so. Pooled investment vehicles, including registered investment companies that trade more than a de minimis amount in commodities or market themselves as commodity funds now will be subject to CFTC oversight. These rules enhance transparency and increase customer protections through amendments to the compliance obligations for CPOs and CTAs. The Commission currently is considering staff recommendations to finalize a rule that seeks to harmonize with the securities laws, to the extent possible, requirements for CPOs of registered investment companies.
Looking Forward on Swaps Market Reform
Now that we have successfully completed the bulk of the rulemaking, and the market is largely implementing those reforms, the CFTC is focusing on three principal areas.
Compliance, Registration, Surveillance and Enforcement
First, with most of the new reforms’ compliance dates behind us, the CFTC is increasingly shifting toward reviewing registration applications of various entities and reviewing those entities and transactions for compliance through the agency’s surveillance, examination and enforcement functions.
The CFTC will continue to work with market participants as they phase in compliance with these completed reforms. The CFTC embraced phasing in compliance to smooth the transition to a new regulatory regime and to ensure that reform is actively implemented. Market participants began phasing in compliance last October. As I have reviewed, much already has been accomplished, but, looking ahead, there are critical compliance dates through the rest of this year and into 2014.
International Harmonization
Second, we are going to continue to work with regulators around the globe to promote reform and harmonize where we can. For example, we are working closely with our international counterparts to ensure that all U.S. persons and their guaranteed affiliates are covered by reform – either the Dodd-Frank Act reforms or through compliance with comparable and comprehensive rules of another jurisdiction.
Earlier this month, we took a significant step when the European Union and we announced a path forward regarding joint understandings for the regulation of cross-border derivatives. This was a significant step forward in harmonizing and giving clarity to the markets, particularly when there might be jurisdictional overlaps with regard to our respective reforms.
The CFTC over the next five months will be reviewing submissions from the six jurisdictions (Australia, Canada, the European Union, Hong Kong, Japan and Switzerland) to assess their regulatory regimes with regard to possible substituted compliance determinations.
We also are working with foreign regulators on memoranda of understanding to ensure that we will be able to exercise our respective supervisory responsibilities in an efficient, coordinated manner.
Dodd-Frank Rulemakings
Third, we do have a handful of rules to finalize, including capital and margin for swap dealers, the Volcker Rule and position limits.
The CFTC is collaborating closely domestically and internationally on a global approach to margin requirements for uncleared swaps. We have been working along with the Federal Reserve, the other U.S. banking regulators, the SEC and our international counterparts on a final set of standards to be published by the Basel Committee on Banking Supervision and the International Organization of Securities Commissions (IOSCO). The CFTC’s proposed margin rules exclude non-financial end-users from margin requirements for uncleared swaps. We have been advocating with global regulators for an approach consistent with that of the CFTC. I now anticipate that the final set of international standards, which are nearing completion, will not call for margin for non-systemic, non-financial entities. After the international standards are published, the CFTC will further propose margin rules likely later this year and seek to finalize those rules in the first half of 2014.
Following Congress’ mandate, the CFTC is working with our fellow domestic financial regulators to complete the Volcker Rule. In adopting the Volcker Rule, Congress prohibited banking entities from proprietary trading, an activity that may put taxpayers at risk. At the same time, Congress permitted banking entities to engage in certain activities, such as market making and risk mitigating hedging. One of the challenges in finalizing a rule is achieving these multiple objectives.
In the Dodd-Frank Act, Congress directed the Commission to impose limits on speculative positions in physical commodity futures and options contracts and economically equivalent swaps. The agency finalized a rule in October 2011 that addressed Congress’s direction to prevent any single trader from obtaining too large a share of the market to ensure that derivatives markets remain fair and competitive. Last fall, a federal court vacated the rule, and we currently are in the process of appealing that decision. Concurrently, we are working on developing a new proposed rulemaking to address position limits. It is critically important that these position limits be established as Congress required.
Looking Forward on Other Critical Reforms
In addition to the ongoing work on swaps market reform, the CFTC also is pursuing a number of other critical initiatives. I will highlight three such initiatives in this testimony.
Customer Protection
First, the Commission is continuing its work to enhance the protection of customer funds in both the futures and swaps markets.
We have completed amendments to rule 1.25 regarding the investment of customer funds to benefit both futures and swaps customers in December 2011. The CFTC’s gross margining rules for futures and swaps customers, which went into effect last November, require clearinghouses to collect margin on a gross basis. Futures Commission Merchants (FCMs) are no longer able to offset one customer’s collateral against another or to send only the net to the clearinghouse. Swaps customers further benefit from the new so-called “LSOC” (legal segregation with operational comingling) rules, which also became effective last year and ensure funds are protected individually all the way to the clearinghouse.
The Commission also worked closely with market participants on new customer protection rules adopted by the self-regulatory organization (SRO), the NFA. These include requiring FCMs to hold sufficient funds for U.S. foreign futures and options customers trading on foreign contract markets (in Part 30 secured accounts). Starting last year, FCMs must meet their total obligations to customers trading on foreign markets under the net liquidating equity method. In addition, withdrawals of 25 percent or more of excess segregated funds would necessitate pre-approval in writing by senior management and must be reported to the designated SRO and the CFTC.
Building upon these reforms, in the fall of 2012, the Commission sought public comment on a proposal that would further strengthen the controls around customer funds at FCMs. It would set new regulatory accounting requirements and would raise minimum standards for independent public accountants who audit FCMs. And it would provide regulators with daily direct electronic access to the FCMs’ bank and custodial accounts for customer funds.
The proposal includes a provision on residual interest to ensure that the assets of one customer are not used to cover the positions of another customer. We are considering the many comments we have received on this, consistent with the specific provisions of the Commodity Exchange Act and the overall goal of protecting customers. The Commissioners shortly will receive final staff recommendations on this rule. I think it is critical that we complete these reforms this fall.
Benchmark Interest Rates
Second, the CFTC is continuing its work with domestic and international regulators to ensure the market integrity of benchmark interest rates. Benchmark interest rates, such as the London Interbank Offered Rate (LIBOR) are very important to the American public. LIBOR is the reference rate for 70 percent of the U.S. futures market and more than half of our swaps market. It is the reference rate for more than $300 trillion in derivatives and more than $10 trillion in loans. We need to ensure that these benchmark interest rates have market integrity and that they are based on fact, not fiction.
The interbank unsecured market that the benchmarks are intended to measure, however, essentially no longer exists, particularly for longer tenors.
Furthermore, our enforcement actions against three global banks, along with those of the Financial Conduct Authority, the Justice Department and others, have shown that LIBOR, EURIBOR and similar rates have been readily and pervasively rigged. The CFTC initiated an investigation in 2008 related to LIBOR. Barclays, UBS and RBS paid fines of approximately $2.5 billion for manipulative conduct relating to these rates as a result of multiple agencies’ enforcement and criminal actions.
Given these vulnerabilities and the real risk that they will remain, to ensure market integrity and support financial stability, the Financial Stability Oversight Council recommended in its annual report that U.S. regulators work with foreign regulators, international bodies, and market participants to promptly identify alternative interest rate benchmarks that are anchored in observable transactions and are supported by appropriate governance structures, and to develop a plan to accomplish a transition to new benchmarks while such alternative benchmarks are being identified. The Council further recommended that steps be taken to plan for and promote a smooth and orderly transition to alternative benchmarks, with consideration given to issues of stability and to mitigation of short-term market disruptions.
An IOSCO task force took an important step in bringing reform to benchmark interest rates in announcing new principles earlier this month. Given the known problems with LIBOR, EURIBOR and other significant market benchmarks, I am pleased that the IOSCO Principles require that benchmarks be anchored by observable transactions and subject to robust governance processes that address potential conflicts of interest. This report establishes new international standards.
The Financial Stability Board (FSB) is building upon the work of IOSCO by initiating a review of alternatives to existing benchmark interest rates as well as considering any potential transition issues. The FSB has established an Official Sector Steering Group of regulators and central banks and will convene and guide the work of a Market Participants Group.
Direct Market Access
Third, Commission staff currently is developing a concept release for public comment concerning the testing of systems and supervision of market participants with direct electronic market access. These concepts will be designed to address potential risks that high frequency traders and others who have direct market access may cause. Working with other regulators, we hope to hear from the public on this issue soon.
Resources
Traffic laws are only as good and as valuable as the cops assigned to enforce them. While the reforms of the Dodd-Frank Act are essential to promoting transparency and lowering risk in the marketplace, they will not be sufficient to protect the public unless we have the cops on the beat to enforce them. To do so, the CFTC must be adequately funded.
The agency currently is operating on a budget of $195 million after sequestration and has a staff of 685. That is only 8 percent more staff than we had twenty years ago. Yet since that time, the futures market has grown five-fold, driven by rapid advances in technology. The swaps market is eight times larger than the futures market.
Imagine telling the South Dakota Highway Patrol or the Idaho Patrol that, instead of just patrolling the streets of South Dakota or Idaho, they are now responsible for policing a vast portion of the country’s highway system, but they can only hire 8 percent more officers.
That is basically the challenge we now face at the CFTC. Making the challenge even harder is that the new highway system we have been tasked with overseeing is much more complex. Not only do we need resources to have enough cops on the beat, but we need to make sure that our cops have the tools necessary to police the highways and protect the public.
We are not asking for eight times our current funding, but investments in both technology and people are needed for effective oversight of these markets by regulators.
Though data has started to be reported to the public and to regulators, we need the staff and technology to access, review and analyze the data. With 80 entities having registered as new swap dealers, as well as new swap data repositories, swap execution facilities and clearinghouses, we need people to review registrations and to run examinations to ensure compliance and ensure market integrity. Furthermore, as market participants expand their technological sophistication, CFTC technology upgrades are critical for market surveillance and to enhance customer fund protection programs.
The U.S. government is facing a strained budget environment, but adequately funding the CFTC is a good investment for the American public. The $182 billion AIG bailout was nearly 600 times more than the CFTC’s budget request of $315 million. Without sufficient funding for the CFTC, the nation cannot be assured that this agency can effectively enforce essential rules that promote transparency and lower risk to the economy. Without sufficient funding for the CFTC, the nation cannot be assured this agency can closely monitor for the protection of customer funds and utilize our enforcement arm to its fullest potential to go after bad actors in the futures and swaps markets.
Conclusion
Today’s hearing comes as many of the swaps market reforms that this Committee worked to include in the Dodd-Frank Act have already begun to benefit the American public. The CFTC, having completed 59 final rules, orders and guidances, has nearly completed the rule set, and market participants are coming into compliance with these reforms. Clearinghouses have begun clearing the majority of interest rate and credit index derivatives, and the biggest swap dealers have provisionally registered with the CFTC. The public and regulators are benefitting from transparency, as real time and regulatory reporting is already a reality. SEFs will be up and running soon.
Our staff has worked tirelessly to complete this reform that is so important to the American public. We will continue to work with domestic and international regulators on these critical reforms and to ensure compliance.
I am pleased to tell you that the swaps market, which once was an unregulated highway, now has streetlights and traffic laws. The dealers now have to have drivers’ licenses. Though there is still critical work to be done, the swaps marketplace will no longer be dark and will now have safer roads. Still, our traffic laws will not be fully effective without a sufficient number of cops patrolling the highways and back roads.
Thank you again for inviting me today, and I look forward to your questions.
Testimony of Chairman Gary Gensler before the U.S. Senate Committee on Banking, Housing and Urban Affairs, Washington, DC
July 30, 2013
Good morning Chairman Johnson, Ranking Member Crapo and members of the Committee. Thank you for inviting me to today’s hearing. I am pleased to testify along with Securities and Exchange Commission (SEC) Chair Mary Jo White.
Today’s hearing comes at an historic moment in the CFTC’s effort to implement the much-needed reforms of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). Now, three years since passage of the Dodd-Frank Act, I am pleased to report that we have nearly completed all of the necessary rule writing. Market participants are well along the path of implementing these reforms.
These reforms for the first time shine a light on a marketplace that has been opaque for far too long. These reforms mitigate risk and broaden market access through central clearing of standardized derivatives. These reforms for the first time bring oversight to swap dealers and major swap participants – some of whom were at the center of the bailouts of the financial crisis five years ago. I thank my fellow commissioners and the staff of the Commodity Futures Trading Commission (CFTC) for all of their hard work, dedication and collaboration in bringing oversight to the swaps marketplace.
Introduction
The public and the economy benefit from swap market reforms, just as the public benefitted from the historic reforms in the securities and futures markets since the 1930s. For the first time, we have in place a legal and regulatory foundation for the vast swaps markets that brings transparency and lowers risk for the American public. This new comprehensive regulatory regime includes robust rules of the road to benefit those who trade swaps as well as those who have never even heard of them.
In 2008, we witnessed widespread failure throughout the financial system and financial regulatory system. The lack of important oversight in the swaps market – oversight that we’ve had for decades in the securities and futures markets – allowed for risk to accumulate and be passed on to the public in the form of taxpayer-funded bailouts. Taxpayers sent $182 billion to AIG alone. And AIG was just one part of the larger financial crisis that nearly took down the U.S. and global economies.
Middle class Americans paid the price of the 2008 financial crisis with their jobs, their pensions and their homes. The crisis cost eight million jobs and thousands of businesses, and the swaps market was right at the center. Americans are remarkably resilient, but they do expect us to learn from the lessons of the crisis and to do everything possible to prevent this from happening again. That is why Congress passed the Dodd-Frank Act and why the hard working staff of the CFTC have worked so diligently to implement its reforms.
These rules are complementary pieces of an interconnected foundation on which the swaps market will operate in a transparent, open and competitive manner. Further, just as we have complementary commonsense rules for our roads – traffic lights, stop signs and speed limits, and cops on the streets to enforce all these rules – we need commonsense rules of the road for the swaps markets. In 2008, we had AIG recklessly driving toward failure, and it, along with other failing financial institutions, were so big that they injured millions of bystanders.
Americans would never accept a city or highway system with no rules, no streetlights, no traffic lights and no cops.
And now, with the near-completion of swaps market reforms, the American public no longer will need to accept a dark swaps market lacking commonsense rules of the road.
Credit should be shared for this reform with the SEC. We have worked collaboratively with the SEC, sharing our internal memos, term sheets and draft regulations and seeking advice and counsel every step of the way. In addition to the consultation, Congress tasked the CFTC and SEC with jointly completing a number of critical, foundational rules further defining swap dealers and swaps, among other terms. It is only with this close work and collaboration that reform came to life. We also significantly benefitted from collaboration with other U.S. and international regulators.
We have completed this reform sensitive, as Congress was, that non-financial firms, responsible for 94 percent of private sector jobs in this country, only make up approximately 10 percent of the swaps market. Congress directed that these non-financial end-users have a choice about central clearing, and our rules reflect that. Consistent with Congress’s direction related to clearing, the CFTC has proposed that margin for uncleared swaps does not have to be collected from non-financial end-users. We also have ensured that treasury affiliates of non-financial end-users will have a choice about central clearing. Further, we granted relief for inter-affiliate clearing and reporting as long as outward-facing transactions are cleared and reported.
I now will walk you through the three key areas of completed reforms: transparency, central clearing and oversight of swap dealers and other intermediaries.
Transparency and Access – Lowering Cost and Increasing Liquidity, Efficiency and Competition
A key benefit of swaps reform is providing critical transparency and access to businesses and other end-users that use the swaps market to lock in a price or hedge a risk. Transparency and access – longstanding hallmarks of the futures market, both before and after the trade – lower costs for investors, consumers and businesses.
When light shines on a market, the economy and public benefit. Transparency increases liquidity, efficiency and competition. It is the non-financial part of our economy that provides 94 percent of private sector jobs in the United States and will most benefit from transparency and access to markets. Even amongst financial entities, pension funds, community banks, insurance companies and other non-dealers will significantly benefit as they manage the savings and security of Americans.
Based upon completed reforms, the public and regulators already are benefitting from significant new transparency. Starting late last year, financial regulators have been able to look at swaps transactions that are now being reported to swap data repositories. The phased implementation of these reporting requirements is nearly complete, with just one remaining group of U.S. transactions coming into data repositories August 19. Additional reporting from offshore swap dealers will phase in later this fall.
We now have pricing, transactional, counterparty and valuation information in the data repositories for more than $360 trillion in outstanding swaps. This covers all the different asset classes, including interest rate swaps, credit index swaps, foreign currency swaps, energy swaps, metals swaps and agriculture swaps. We already are benefiting at the CFTC, reviewing this data for purposes of our oversight and surveillance.
Congress knew, though that transparency to the regulators is not enough. Markets work best when the public benefits from seeing the price and volume of transactions after they have been executed. Beginning this past January, the public can now see the prices and volume of transactions on a time delayed basis (and in a way that masks counterparties), similar to a modern-day ticker tape, free of charge and available on the internet. Further, starting today, July 30, a significant portion of the smaller-size transactions will no longer be reported on a time-delayed basis. This fulfills Congress’s mandate that transactions below a block size be publicly reported “as soon as technologically practicable.”
As the Commission recently finalized block rules for swaps, it will shortly turn to consider staff recommendations for a proposal on a futures block rule.
In addition, for the first time, all swaps trading facilities will have to register, completing the task of closing what had come to be known as the “Enron loophole.” We accomplished this through finalizing rules relating to swap execution facilities (SEFs), which are trading facilities for the transaction of swaps. SEFs already have started to register, and some are likely to be operating by August 5. Others will need to register and include the minimum trading functions, such as an order book, by October 2. All market participants shortly will have the ability to compete by making bids and offers to each other through an order book. They also benefit by seeing the prices of such orders prior to making a decision on a transaction.
Thus, market participants, whether they be pension funds, asset managers, community banks or other end users, shortly will be able to go onto a centralized market structure – a designated contract market (DCM) or a SEF – and execute their swaps transactions in a competitive marketplace, while in the past they were primarily only able to do this directly with dealers. This is a critical benefit to our overall economy. When transparency and competition come to a marketplace, costs go down.
Further, standardized swaps (swaps that are subject to the clearing requirement and made available for trading) will be subject to a trade execution requirement likely starting by early next year. A significant portion of interest rate and credit derivative index swaps will be in full view to the marketplace before transactions occur. Trading platforms also can elect to offer other types of swaps for transparent trading. This is a significant shift toward market transparency from the way it used to be.
As Congress made clear in the law, trades will be required to be executed on SEFs or DCMs only when financial institutions transact with financial institutions. Non-financial commercial companies and other end-users will benefit from access to the information on these platforms, but will not be required to use them. Further, companies will be able to continue relying on customized transactions – those not required to be cleared – to meet their particular needs, as well as to enter into large block trades.
Beyond these reforms, new CFTC rules brought additional transparency earlier this year, as customers can now see the valuation of their positions on a daily basis – either as reported by the clearinghouse or by their swap dealers as required by business conduct rules.
With these transparency reforms, the public and regulators now have their first full window into the swaps marketplace. These reforms build upon the democratization of the swaps market that is coming with the clearing of standardized swaps.
Central Clearing – Mitigating Risk and Promoting Access
Transparency is but one critical rule of the road in the swaps markets. It provides the street lamps that light the roads, but we also must ensure that the streets are safe for driving and that drivers have easy access to the highways.
Clearinghouses have operated in the futures markets since the late 19th century to lower risk and improve access for market participants. Clearinghouses reduce the risk that one entity’s failure could spread to the public by standing between the parties and maintaining resources to cover defaults. They value every position daily and require the parties to post adequate margin on a regular basis. Clearing also fosters access for the broad market as it ensures that each participant no longer has to individually worry about its counterparty’s credit characteristics.
The CFTC has implemented the two principal reforms of the Dodd-Frank Act relating to clearing.
First, consistent with the direction of the statute, the Commission in the fall of 2011 adopted a comprehensive set of rules for the risk management of clearinghouses. These final rules provided a strong set of protections for customer money posted to clearinghouses, including for the first time a requirement for gross margining as well as segregation of customer money at the clearinghouse.
These final rules were consistent with international standards as of the time that our rules were published. Subsequently, new international standards have been adopted – the Principles for Financial Market Infrastructures. Though the Commission’s clearinghouse risk management rules cover the vast majority of these new international standards, CFTC staff is working expeditiously to recommend the necessary steps to implement the remaining items that should be incorporated in our rules. Most importantly, Commissioners currently are considering finalizing a rule requiring systemically important clearinghouses to have prefunded default resources sufficient to cover the default of the two clearing members that would cause the greatest loss (after margin) in extreme but plausible circumstances.
Second, the CFTC adopted rules to implement the Dodd-Frank Act’s requirement that standardized swaps be cleared. The Commission approved the first clearing requirement last November, following through on the U.S. commitment at the 2009 G-20 meeting that standardized swaps be cleared by the end of 2012. The Commission has determined that swaps in four interest rate swap classes (U.S. Dollar, Euro, Sterling and Yen) and in two credit index swap classes (CDX and iTraxx) are subject to the clearing requirement. These asset classes account for the vast majority of interest rate and credit default index swaps.
We reached a key milestone in March when the clearing requirement for swap dealers and the largest hedge funds went into effect. Additional financial entities began clearing June 10. Compliance will continue to be phased in throughout this year. Accounts managed by third party investment managers and ERISA pension plans have until September 9. As we phase in compliance with the recently completed cross-border interpretive guidance, collective investment vehicles, including hedge funds, whose principal place of business is in the U.S. but may have incorporated offshore (for instance, in the Cayman Islands) will have to comply with the clearing requirements by October 10. Further, guaranteed affiliates of U.S. persons will have to begin complying with the clearing requirement on October 10 as well. The CFTC also fulfilled Congress’s direction to exempt non-financial end-users from the clearing requirement.
Oversight of Swap Dealers and Other Intermediaries
The third critical piece of swaps market reform is oversight of swap dealers and investment funds operating in the swaps market. To extend the highway metaphor, we require that drivers have licenses and know the rules of the road. Though Congress did not suggest this for all market participants, they were clear that the dealers themselves had to be registered and be brought under new reforms. Furthermore, Congress directed that swaps reforms extend to investment vehicles that invest in swaps.
The foundational joint rules of the CFTC and SEC further defining swap dealers and swaps went into effect last October. By last December, swap dealers began to provisionally register. We now have had 80 swap dealers and two major swap participants provisionally register with the CFTC. This group includes the largest domestic and international financial institutions dealing in swaps, including the 16 institutions commonly referred to as the G16 dealers. We expect additional entities to register as swap dealers as the recently completed cross-border interpretive guidance becomes effective later this year.
Since the beginning of this year, swap dealers have had to report their trades to both regulators and the public. They also have had to comply with various business conduct standards that lower risk and increase market integrity. These include promoting the timely confirmation of trades and documentation of the trading relationship. Swap dealers also have been required since earlier this year to implement sales practice standards that prohibit fraud, require fair treatment of customers and improve transparency.
Cross-Border Derivatives Reform
Congress was clear that the far-flung operations of U.S. enterprises are to be covered by reform. Recognizing the lessons of the crisis and modern finance, Congress was clear in section 722(d) of the Dodd-Frank Act that swaps reform does apply to activities outside our borders with “a direct and significant connection with activities in, or effect on, commerce of the United States.”
The largest banks and institutions are global in nature, and when a run starts on any part of an overseas affiliate or branch of a modern financial institution, risk comes crashing right back to our shores. The nature of modern finance is that financial institutions commonly set up hundreds, or even thousands, of legal entities around the globe. In fact, the U.S.’s largest banks each have somewhere between 2,000 and 3,000 legal entities. AIG nearly brought down the U.S. economy because it guaranteed the losses of a Mayfair Branch operating under a French bank license in London. Lehman Brothers had 3,300 legal entities, including a London affiliate that was guaranteed here in the U.S., and it had 130,000 outstanding swap transactions. Citigroup had structured investment vehicles that were set up in the Cayman Islands, run out of London, and yet were central to not one, but two bailouts of that institution. Bear Stearns, in 2007 had two sinking hedge funds organized in the Cayman Islands that had to be bailed out by the parent entity. A decade earlier, the same was true for Long-Term Capital Management.
After receiving public input and coordinating with the SEC and other regulators, working with international regulators, we issued guidance and an exemptive order to provide clarity to the market that our new rules apply to cross-border derivative activities. The CFTC interprets the cross-border provisions to cover swaps between non-U.S. swap dealers and guaranteed affiliates of U.S. persons as well as swaps between two guaranteed affiliates. The guidance does recognize and embrace the concept of substituted compliances where there are comparable and comprehensive rules abroad. Further, the interpretive guidance captures offshore hedge funds and collective investment vehicles that have their principal place of business here in the U.S. or that are majority owned by U.S. persons.
We published the proposed guidance for public comment in June of last year and then sought additional comment in December. On July 12, we gave swap dealers organized in each of six jurisdictions (Australia, Canada, the European Union, Hong Kong, Japan and Switzerland) five additional months to come into compliance with certain swaps reforms as we assess the submissions from those jurisdictions regarding substituted compliance.
Investment Funds
Furthermore, Consistent with Congress’s direction that swaps reforms extend to investment vehicles investing in swaps, the Commission approved final rules 18 months ago that increase transparency to regulators of commodity pool operators (CPOs) and commodity trading advisors (CTAs) acting in the derivatives marketplace – both futures and swaps. The rulemaking also rescinded prior exemptions from CPO registration that had been used by many hedge funds. As a result, CPOs of registered investment companies and hedge funds were required to register by December 31, 2012, and, to date, more than 500 funds and registered investment companies have done so. Pooled investment vehicles, including registered investment companies that trade more than a de minimis amount in commodities or market themselves as commodity funds now will be subject to CFTC oversight. These rules enhance transparency and increase customer protections through amendments to the compliance obligations for CPOs and CTAs. The Commission currently is considering staff recommendations to finalize a rule that seeks to harmonize with the securities laws, to the extent possible, requirements for CPOs of registered investment companies.
Looking Forward on Swaps Market Reform
Now that we have successfully completed the bulk of the rulemaking, and the market is largely implementing those reforms, the CFTC is focusing on three principal areas.
Compliance, Registration, Surveillance and Enforcement
First, with most of the new reforms’ compliance dates behind us, the CFTC is increasingly shifting toward reviewing registration applications of various entities and reviewing those entities and transactions for compliance through the agency’s surveillance, examination and enforcement functions.
The CFTC will continue to work with market participants as they phase in compliance with these completed reforms. The CFTC embraced phasing in compliance to smooth the transition to a new regulatory regime and to ensure that reform is actively implemented. Market participants began phasing in compliance last October. As I have reviewed, much already has been accomplished, but, looking ahead, there are critical compliance dates through the rest of this year and into 2014.
International Harmonization
Second, we are going to continue to work with regulators around the globe to promote reform and harmonize where we can. For example, we are working closely with our international counterparts to ensure that all U.S. persons and their guaranteed affiliates are covered by reform – either the Dodd-Frank Act reforms or through compliance with comparable and comprehensive rules of another jurisdiction.
Earlier this month, we took a significant step when the European Union and we announced a path forward regarding joint understandings for the regulation of cross-border derivatives. This was a significant step forward in harmonizing and giving clarity to the markets, particularly when there might be jurisdictional overlaps with regard to our respective reforms.
The CFTC over the next five months will be reviewing submissions from the six jurisdictions (Australia, Canada, the European Union, Hong Kong, Japan and Switzerland) to assess their regulatory regimes with regard to possible substituted compliance determinations.
We also are working with foreign regulators on memoranda of understanding to ensure that we will be able to exercise our respective supervisory responsibilities in an efficient, coordinated manner.
Dodd-Frank Rulemakings
Third, we do have a handful of rules to finalize, including capital and margin for swap dealers, the Volcker Rule and position limits.
The CFTC is collaborating closely domestically and internationally on a global approach to margin requirements for uncleared swaps. We have been working along with the Federal Reserve, the other U.S. banking regulators, the SEC and our international counterparts on a final set of standards to be published by the Basel Committee on Banking Supervision and the International Organization of Securities Commissions (IOSCO). The CFTC’s proposed margin rules exclude non-financial end-users from margin requirements for uncleared swaps. We have been advocating with global regulators for an approach consistent with that of the CFTC. I now anticipate that the final set of international standards, which are nearing completion, will not call for margin for non-systemic, non-financial entities. After the international standards are published, the CFTC will further propose margin rules likely later this year and seek to finalize those rules in the first half of 2014.
Following Congress’ mandate, the CFTC is working with our fellow domestic financial regulators to complete the Volcker Rule. In adopting the Volcker Rule, Congress prohibited banking entities from proprietary trading, an activity that may put taxpayers at risk. At the same time, Congress permitted banking entities to engage in certain activities, such as market making and risk mitigating hedging. One of the challenges in finalizing a rule is achieving these multiple objectives.
In the Dodd-Frank Act, Congress directed the Commission to impose limits on speculative positions in physical commodity futures and options contracts and economically equivalent swaps. The agency finalized a rule in October 2011 that addressed Congress’s direction to prevent any single trader from obtaining too large a share of the market to ensure that derivatives markets remain fair and competitive. Last fall, a federal court vacated the rule, and we currently are in the process of appealing that decision. Concurrently, we are working on developing a new proposed rulemaking to address position limits. It is critically important that these position limits be established as Congress required.
Looking Forward on Other Critical Reforms
In addition to the ongoing work on swaps market reform, the CFTC also is pursuing a number of other critical initiatives. I will highlight three such initiatives in this testimony.
Customer Protection
First, the Commission is continuing its work to enhance the protection of customer funds in both the futures and swaps markets.
We have completed amendments to rule 1.25 regarding the investment of customer funds to benefit both futures and swaps customers in December 2011. The CFTC’s gross margining rules for futures and swaps customers, which went into effect last November, require clearinghouses to collect margin on a gross basis. Futures Commission Merchants (FCMs) are no longer able to offset one customer’s collateral against another or to send only the net to the clearinghouse. Swaps customers further benefit from the new so-called “LSOC” (legal segregation with operational comingling) rules, which also became effective last year and ensure funds are protected individually all the way to the clearinghouse.
The Commission also worked closely with market participants on new customer protection rules adopted by the self-regulatory organization (SRO), the NFA. These include requiring FCMs to hold sufficient funds for U.S. foreign futures and options customers trading on foreign contract markets (in Part 30 secured accounts). Starting last year, FCMs must meet their total obligations to customers trading on foreign markets under the net liquidating equity method. In addition, withdrawals of 25 percent or more of excess segregated funds would necessitate pre-approval in writing by senior management and must be reported to the designated SRO and the CFTC.
Building upon these reforms, in the fall of 2012, the Commission sought public comment on a proposal that would further strengthen the controls around customer funds at FCMs. It would set new regulatory accounting requirements and would raise minimum standards for independent public accountants who audit FCMs. And it would provide regulators with daily direct electronic access to the FCMs’ bank and custodial accounts for customer funds.
The proposal includes a provision on residual interest to ensure that the assets of one customer are not used to cover the positions of another customer. We are considering the many comments we have received on this, consistent with the specific provisions of the Commodity Exchange Act and the overall goal of protecting customers. The Commissioners shortly will receive final staff recommendations on this rule. I think it is critical that we complete these reforms this fall.
Benchmark Interest Rates
Second, the CFTC is continuing its work with domestic and international regulators to ensure the market integrity of benchmark interest rates. Benchmark interest rates, such as the London Interbank Offered Rate (LIBOR) are very important to the American public. LIBOR is the reference rate for 70 percent of the U.S. futures market and more than half of our swaps market. It is the reference rate for more than $300 trillion in derivatives and more than $10 trillion in loans. We need to ensure that these benchmark interest rates have market integrity and that they are based on fact, not fiction.
The interbank unsecured market that the benchmarks are intended to measure, however, essentially no longer exists, particularly for longer tenors.
Furthermore, our enforcement actions against three global banks, along with those of the Financial Conduct Authority, the Justice Department and others, have shown that LIBOR, EURIBOR and similar rates have been readily and pervasively rigged. The CFTC initiated an investigation in 2008 related to LIBOR. Barclays, UBS and RBS paid fines of approximately $2.5 billion for manipulative conduct relating to these rates as a result of multiple agencies’ enforcement and criminal actions.
Given these vulnerabilities and the real risk that they will remain, to ensure market integrity and support financial stability, the Financial Stability Oversight Council recommended in its annual report that U.S. regulators work with foreign regulators, international bodies, and market participants to promptly identify alternative interest rate benchmarks that are anchored in observable transactions and are supported by appropriate governance structures, and to develop a plan to accomplish a transition to new benchmarks while such alternative benchmarks are being identified. The Council further recommended that steps be taken to plan for and promote a smooth and orderly transition to alternative benchmarks, with consideration given to issues of stability and to mitigation of short-term market disruptions.
An IOSCO task force took an important step in bringing reform to benchmark interest rates in announcing new principles earlier this month. Given the known problems with LIBOR, EURIBOR and other significant market benchmarks, I am pleased that the IOSCO Principles require that benchmarks be anchored by observable transactions and subject to robust governance processes that address potential conflicts of interest. This report establishes new international standards.
The Financial Stability Board (FSB) is building upon the work of IOSCO by initiating a review of alternatives to existing benchmark interest rates as well as considering any potential transition issues. The FSB has established an Official Sector Steering Group of regulators and central banks and will convene and guide the work of a Market Participants Group.
Direct Market Access
Third, Commission staff currently is developing a concept release for public comment concerning the testing of systems and supervision of market participants with direct electronic market access. These concepts will be designed to address potential risks that high frequency traders and others who have direct market access may cause. Working with other regulators, we hope to hear from the public on this issue soon.
Resources
Traffic laws are only as good and as valuable as the cops assigned to enforce them. While the reforms of the Dodd-Frank Act are essential to promoting transparency and lowering risk in the marketplace, they will not be sufficient to protect the public unless we have the cops on the beat to enforce them. To do so, the CFTC must be adequately funded.
The agency currently is operating on a budget of $195 million after sequestration and has a staff of 685. That is only 8 percent more staff than we had twenty years ago. Yet since that time, the futures market has grown five-fold, driven by rapid advances in technology. The swaps market is eight times larger than the futures market.
Imagine telling the South Dakota Highway Patrol or the Idaho Patrol that, instead of just patrolling the streets of South Dakota or Idaho, they are now responsible for policing a vast portion of the country’s highway system, but they can only hire 8 percent more officers.
That is basically the challenge we now face at the CFTC. Making the challenge even harder is that the new highway system we have been tasked with overseeing is much more complex. Not only do we need resources to have enough cops on the beat, but we need to make sure that our cops have the tools necessary to police the highways and protect the public.
We are not asking for eight times our current funding, but investments in both technology and people are needed for effective oversight of these markets by regulators.
Though data has started to be reported to the public and to regulators, we need the staff and technology to access, review and analyze the data. With 80 entities having registered as new swap dealers, as well as new swap data repositories, swap execution facilities and clearinghouses, we need people to review registrations and to run examinations to ensure compliance and ensure market integrity. Furthermore, as market participants expand their technological sophistication, CFTC technology upgrades are critical for market surveillance and to enhance customer fund protection programs.
The U.S. government is facing a strained budget environment, but adequately funding the CFTC is a good investment for the American public. The $182 billion AIG bailout was nearly 600 times more than the CFTC’s budget request of $315 million. Without sufficient funding for the CFTC, the nation cannot be assured that this agency can effectively enforce essential rules that promote transparency and lower risk to the economy. Without sufficient funding for the CFTC, the nation cannot be assured this agency can closely monitor for the protection of customer funds and utilize our enforcement arm to its fullest potential to go after bad actors in the futures and swaps markets.
Conclusion
Today’s hearing comes as many of the swaps market reforms that this Committee worked to include in the Dodd-Frank Act have already begun to benefit the American public. The CFTC, having completed 59 final rules, orders and guidances, has nearly completed the rule set, and market participants are coming into compliance with these reforms. Clearinghouses have begun clearing the majority of interest rate and credit index derivatives, and the biggest swap dealers have provisionally registered with the CFTC. The public and regulators are benefitting from transparency, as real time and regulatory reporting is already a reality. SEFs will be up and running soon.
Our staff has worked tirelessly to complete this reform that is so important to the American public. We will continue to work with domestic and international regulators on these critical reforms and to ensure compliance.
I am pleased to tell you that the swaps market, which once was an unregulated highway, now has streetlights and traffic laws. The dealers now have to have drivers’ licenses. Though there is still critical work to be done, the swaps marketplace will no longer be dark and will now have safer roads. Still, our traffic laws will not be fully effective without a sufficient number of cops patrolling the highways and back roads.
Thank you again for inviting me today, and I look forward to your questions.
REMARKS TO U.S. DEPARTMENT OF COMMERCE BUREAU OF INDUSTRY AND SECURITY UPDATE CONFERENCE
FROM: EXPORT-IMPORT BANK
Export Control Reform Update
Remarks
Beth M. McCormick
Deputy Assistant Secretary, Bureau of Political-Military Affairs
Panel Remarks to the U.S. Department of Commerce Bureau of Industry and Security Update Conference
Washington, DC
July 24, 2013
As prepared
For decades, the U.S. export control system supported national security objectives by keeping our most sophisticated technologies out of the hands of Cold War adversaries. Our efforts produced significant successes; in many cases, the United States was the sole producer of many of those technologies and could control their export with relative ease. In the case of foreign producers of such items, the United States was able to work with their governments to similarly control these sensitive technologies.
Today, we no longer face a monolithic adversary like the Soviet Union. Instead, we face terrorists seeking to build weapons of mass destruction, states striving to improve their missile capabilities, and illicit front-companies seeking items to support such activities. To further complicate things, countries don’t always agree on the right approaches for addressing these threats.
In addition, the United States is not the only player on the court anymore. Today, cutting edge technologies are being developed at lightning speed in places all around the globe. To maintain competitiveness, many U.S. companies are partnering with foreign companies as they work to develop, produce, and sustain leading-edge military hardware and technology. And in many cases commercial technologies can be developed faster than military ones. Militaries are now using these commercial technologies, and the line between what is military and what is commercial has become blurred.
In the face of all these changes, our export control system failed to keep pace. By 2009, our munitions licensing system was processing over 80,000 license applications per year. The military forces of our allies faced unpredictable and, in some cases, quite lengthy delays in their efforts to obtain U.S. defense articles – even when they were working alongside U.S. forces in theatres of conflict.
U.S. exporters were experiencing the growing efforts of foreign competitors to replace or remove U.S. defense articles from their products. By doing so, foreign companies could avoid having to deal with our licensing system, or obtaining our permission if they wanted to re-export a product that contains a U.S. defense article – even something as small as a bolt. The developing trend of avoiding the International Traffic in Arms Regulations, also referred to as going “ITAR-free”, is quite troubling.
President Obama came into office strongly believing that we needed to improve the outdated export control system in order to strengthen U.S. national security and advance U.S. foreign policy interests. He also believed that we needed to create an efficient and predictable system using modern business practices and tools to help our exporters become more competitive now and in the future.
In August 2009, President Obama directed a task force to review the whole export control system and recommend how to modernize it in order to better address current threats, and today’s rapidly changing technological and economic landscapes. The task force included representatives from the Departments of State, Defense, Commerce, Energy, Treasury, Justice, Homeland Security, and the Office of the Director of National Intelligence.
The task force completed its initial review of our export control system in early 2010, finding numerous deficiencies. In addition to the problems I mentioned previously, agencies had no unified computer system that let them communicate effectively with each other, let alone with U.S. exporters.
Licensing requirements were not only onerous, they were confusing, which delayed U.S. exporters and made them less competitive in overseas markets. The task force also found that this confusion could help those who might evade our controls. The task force also noted enforcement activities that were ineffective and wasteful, mostly due to poor communication among the various export enforcement entities.
To address these problems, the task force recommended reforms in four key areas:
Licensing policies and procedures
Control lists
Information technology
Export enforcement
Current Developments
President Obama directed agencies to implement the recommendations in three phases. In the first phase, we made core decisions on how to rebuild our lists, recalibrate and harmonize our definitions and regulations, update licensing procedures, create an Export Enforcement Coordination Center, and build a consolidated licensing database. Agencies are now in the second phase of work, which is the implementation of all of those decisions.
I am pleased to report that last week, a major milestone was reached when DDTC transitioned from DTRADE2 to the Department of Defense’s secure export licensing database – called “USXports,” which will help to make the export licensing review process a more seamless one.
A lot of what we have been doing in Phase 2 has involved revising the U.S. Munitions List (the USML) and the Commerce Control List (CCL). The purpose of this is to make sure that the items of greatest concern from a military perspective will remain on the USML, and be subject to the strictest licensing requirements, while items of less sensitivity will be moved to the CCL. I want to emphasize a key point: items moving to the CCL will remain controlled. They are not being “decontrolled.” It is only under specific circumstances that items will be eligible for export under Commerce’s more flexible licensing mechanisms. We are making tremendous progress in the effort to rewrite the USML categories. We have published thirteen revised USML categories in the Federal Register in proposed form for public comment. We recently concluded the public comment period for USML Category XV on spacecraft, and took comments from over 80 parties. Additionally, we will be publishing our proposed revisions for USML Category XI (electronics) this week.
As you know, we have already published several final revised categories. The first pair, Category VIII and Category XIX covering Aircraft and Engines respectively will take effect on October 15. We published final rules for Categories VI and VII – Vessels of War and Military Vehicles, as well as Categories XIII and XX – Auxiliary Military Equipment and Submersible Vessels, which will take effect on January 4th.
In addition to revising the control lists, we are updating our regulations to help streamline the licensing process. For example, the new definition of “specially designed” was published in April and will become effective on October 15th. Although one of the goals of the ECR initiative is to describe USML controls without using design intent criteria, certain sections in the revised categories nonetheless use the term “specially designed.” It was, therefore, necessary for the Administration to define the term.
The specially designed definition has a two-paragraph structure, a broad “catch” that would control an item, and then a series of “yes/no” questions which may “release” the item from being specially designed. Paragraph (a) identifies which commodities and software are specially designed” and paragraph (b) identifies which parts, components, accessories, attachments, and software are excluded from specially designed. For USML sections containing the term “specially designed,” a defense article is “caught” – it is “specially designed” – if any of the two elements of paragraph (a) applies and none of the elements of paragraph (b) applies.
Additionally, we published a proposed redefinition of “defense services” along with USML Category XV and are in the process of reviewing the public comments we received.
As you know, a proposed revision of the definition of defense service, pursuant to ECR, was first published on April 13, 2011. In that rule, the Department explained that the current definition is overly broad and captures certain forms of assistance or services that do not warrant ITAR control.
Rather than proceed to a final rule on the definition, the Department republished a second proposed rule, which incorporates certain changes stemming from the public comment review of the first proposal, but also includes in the definition the provision of certain assistance with regard to spacecraft.
A change to the proposed rule is that services based solely upon the use of public domain data would not constitute a defense services and would not require a license, TAA, or MLA to provide to a foreign person.
However, a new provision controls as a defense service the "integration" into defense articles whether or not ITAR-controlled "technical data" is provided to a foreign person during the provision of such services. The proposed definition defines “integration” and distinguishes it from “installation.”
The new rule specifies training for foreign "units or forces" will be considered a defense service only if the training involves the tactical employment of a defense article, regardless of whether technical data is involved.
Finally, we will be revising other parts of our regulations, including the definition of “public domain,” and creating new exemptions for replacement parts and incorporated articles.
Next Steps
In Phase 3, the Administration will work with Congress on legislation to conclude the reform initiative by creating a single export control agency and consolidate some of our enforcement units. We have much more work to do to complete our work in the second phase, so there are still a lot of decisions remaining about how to approach that effort.
In closing, I want to thank you for supporting the Administration’s Export Control Reform initiative. The inputs of the exporting community to this process have been invaluable. We look forward to working with you as we continue to bolster our national security, strengthen foreign policy goals, and protect and increase American jobs through export control reform. And I look forward to your questions.
Export Control Reform Update
Remarks
Beth M. McCormick
Deputy Assistant Secretary, Bureau of Political-Military Affairs
Panel Remarks to the U.S. Department of Commerce Bureau of Industry and Security Update Conference
Washington, DC
July 24, 2013
As prepared
For decades, the U.S. export control system supported national security objectives by keeping our most sophisticated technologies out of the hands of Cold War adversaries. Our efforts produced significant successes; in many cases, the United States was the sole producer of many of those technologies and could control their export with relative ease. In the case of foreign producers of such items, the United States was able to work with their governments to similarly control these sensitive technologies.
Today, we no longer face a monolithic adversary like the Soviet Union. Instead, we face terrorists seeking to build weapons of mass destruction, states striving to improve their missile capabilities, and illicit front-companies seeking items to support such activities. To further complicate things, countries don’t always agree on the right approaches for addressing these threats.
In addition, the United States is not the only player on the court anymore. Today, cutting edge technologies are being developed at lightning speed in places all around the globe. To maintain competitiveness, many U.S. companies are partnering with foreign companies as they work to develop, produce, and sustain leading-edge military hardware and technology. And in many cases commercial technologies can be developed faster than military ones. Militaries are now using these commercial technologies, and the line between what is military and what is commercial has become blurred.
In the face of all these changes, our export control system failed to keep pace. By 2009, our munitions licensing system was processing over 80,000 license applications per year. The military forces of our allies faced unpredictable and, in some cases, quite lengthy delays in their efforts to obtain U.S. defense articles – even when they were working alongside U.S. forces in theatres of conflict.
U.S. exporters were experiencing the growing efforts of foreign competitors to replace or remove U.S. defense articles from their products. By doing so, foreign companies could avoid having to deal with our licensing system, or obtaining our permission if they wanted to re-export a product that contains a U.S. defense article – even something as small as a bolt. The developing trend of avoiding the International Traffic in Arms Regulations, also referred to as going “ITAR-free”, is quite troubling.
President Obama came into office strongly believing that we needed to improve the outdated export control system in order to strengthen U.S. national security and advance U.S. foreign policy interests. He also believed that we needed to create an efficient and predictable system using modern business practices and tools to help our exporters become more competitive now and in the future.
In August 2009, President Obama directed a task force to review the whole export control system and recommend how to modernize it in order to better address current threats, and today’s rapidly changing technological and economic landscapes. The task force included representatives from the Departments of State, Defense, Commerce, Energy, Treasury, Justice, Homeland Security, and the Office of the Director of National Intelligence.
The task force completed its initial review of our export control system in early 2010, finding numerous deficiencies. In addition to the problems I mentioned previously, agencies had no unified computer system that let them communicate effectively with each other, let alone with U.S. exporters.
Licensing requirements were not only onerous, they were confusing, which delayed U.S. exporters and made them less competitive in overseas markets. The task force also found that this confusion could help those who might evade our controls. The task force also noted enforcement activities that were ineffective and wasteful, mostly due to poor communication among the various export enforcement entities.
To address these problems, the task force recommended reforms in four key areas:
Licensing policies and procedures
Control lists
Information technology
Export enforcement
Current Developments
President Obama directed agencies to implement the recommendations in three phases. In the first phase, we made core decisions on how to rebuild our lists, recalibrate and harmonize our definitions and regulations, update licensing procedures, create an Export Enforcement Coordination Center, and build a consolidated licensing database. Agencies are now in the second phase of work, which is the implementation of all of those decisions.
I am pleased to report that last week, a major milestone was reached when DDTC transitioned from DTRADE2 to the Department of Defense’s secure export licensing database – called “USXports,” which will help to make the export licensing review process a more seamless one.
A lot of what we have been doing in Phase 2 has involved revising the U.S. Munitions List (the USML) and the Commerce Control List (CCL). The purpose of this is to make sure that the items of greatest concern from a military perspective will remain on the USML, and be subject to the strictest licensing requirements, while items of less sensitivity will be moved to the CCL. I want to emphasize a key point: items moving to the CCL will remain controlled. They are not being “decontrolled.” It is only under specific circumstances that items will be eligible for export under Commerce’s more flexible licensing mechanisms. We are making tremendous progress in the effort to rewrite the USML categories. We have published thirteen revised USML categories in the Federal Register in proposed form for public comment. We recently concluded the public comment period for USML Category XV on spacecraft, and took comments from over 80 parties. Additionally, we will be publishing our proposed revisions for USML Category XI (electronics) this week.
As you know, we have already published several final revised categories. The first pair, Category VIII and Category XIX covering Aircraft and Engines respectively will take effect on October 15. We published final rules for Categories VI and VII – Vessels of War and Military Vehicles, as well as Categories XIII and XX – Auxiliary Military Equipment and Submersible Vessels, which will take effect on January 4th.
In addition to revising the control lists, we are updating our regulations to help streamline the licensing process. For example, the new definition of “specially designed” was published in April and will become effective on October 15th. Although one of the goals of the ECR initiative is to describe USML controls without using design intent criteria, certain sections in the revised categories nonetheless use the term “specially designed.” It was, therefore, necessary for the Administration to define the term.
The specially designed definition has a two-paragraph structure, a broad “catch” that would control an item, and then a series of “yes/no” questions which may “release” the item from being specially designed. Paragraph (a) identifies which commodities and software are specially designed” and paragraph (b) identifies which parts, components, accessories, attachments, and software are excluded from specially designed. For USML sections containing the term “specially designed,” a defense article is “caught” – it is “specially designed” – if any of the two elements of paragraph (a) applies and none of the elements of paragraph (b) applies.
Additionally, we published a proposed redefinition of “defense services” along with USML Category XV and are in the process of reviewing the public comments we received.
As you know, a proposed revision of the definition of defense service, pursuant to ECR, was first published on April 13, 2011. In that rule, the Department explained that the current definition is overly broad and captures certain forms of assistance or services that do not warrant ITAR control.
Rather than proceed to a final rule on the definition, the Department republished a second proposed rule, which incorporates certain changes stemming from the public comment review of the first proposal, but also includes in the definition the provision of certain assistance with regard to spacecraft.
A change to the proposed rule is that services based solely upon the use of public domain data would not constitute a defense services and would not require a license, TAA, or MLA to provide to a foreign person.
However, a new provision controls as a defense service the "integration" into defense articles whether or not ITAR-controlled "technical data" is provided to a foreign person during the provision of such services. The proposed definition defines “integration” and distinguishes it from “installation.”
The new rule specifies training for foreign "units or forces" will be considered a defense service only if the training involves the tactical employment of a defense article, regardless of whether technical data is involved.
Finally, we will be revising other parts of our regulations, including the definition of “public domain,” and creating new exemptions for replacement parts and incorporated articles.
Next Steps
In Phase 3, the Administration will work with Congress on legislation to conclude the reform initiative by creating a single export control agency and consolidate some of our enforcement units. We have much more work to do to complete our work in the second phase, so there are still a lot of decisions remaining about how to approach that effort.
In closing, I want to thank you for supporting the Administration’s Export Control Reform initiative. The inputs of the exporting community to this process have been invaluable. We look forward to working with you as we continue to bolster our national security, strengthen foreign policy goals, and protect and increase American jobs through export control reform. And I look forward to your questions.
MAN INDICTED FOR FILING FALSE LIENS AGAINST TWO FEDERAL JUDGES
FROM: U.S. DEPARTMENT OF JUSTICE
Thursday, July 25, 2013
Flossmoor, Ill., Man Indicted for Obstruction of Justice and Filing False Liens Against Two Federal Judges and Other Government Employees
The Justice Department announced today that Tyree Davis Sr. of Flossmoor, Ill., was arrested on an eight-count indictment charging him with obstruction of justice and filing fraudulent multi-billion dollar liens against government employees. The indictment was returned on July 24, 2013, by a federal grand jury in Chicago.
According to the indictment, Davis obstructed justice by sending correspondence threatening to arrest two federal judges: the chief judge of the Northern District of Illinois and the judge who presided over the 2010 tax trial of LaShawn Littrice, whom Davis refers to as his wife. Littrice was convicted by a jury in June 2010 and sentenced to 42 months in prison in December 2010. Davis also filed false liens, titled Notice of Maritime Liens, against both judges and notified others that he had filed the liens. In addition to the two judges, Davis filed false liens against the U.S. Attorney and Clerk of Court for the Northern District of Illinois, an Assistant U.S. Attorney and an Internal Revenue Service-Criminal Investigation Special Agent. All the liens were publicly filed with the Cook County Recorder’s Office and claimed that each individual owed $100 billion. The liens were re-recorded two and three times in order to add property descriptions to them.
An indictment merely alleges that a crime has been committed, and a defendant is presumed innocent until proven guilty beyond a reasonable doubt. If convicted, Davis faces a maximum of 80 years in prison and a maximum fine of $2 million dollars.
The case is being investigated by the U.S. Treasury Inspector General for Tax Administration (TIGTA) and the FBI, and is being prosecuted by Tax Division Senior Litigation Counsel Jen E. Ihlo and Trial Attorney Matthew J. Kluge.
Thursday, July 25, 2013
Flossmoor, Ill., Man Indicted for Obstruction of Justice and Filing False Liens Against Two Federal Judges and Other Government Employees
The Justice Department announced today that Tyree Davis Sr. of Flossmoor, Ill., was arrested on an eight-count indictment charging him with obstruction of justice and filing fraudulent multi-billion dollar liens against government employees. The indictment was returned on July 24, 2013, by a federal grand jury in Chicago.
According to the indictment, Davis obstructed justice by sending correspondence threatening to arrest two federal judges: the chief judge of the Northern District of Illinois and the judge who presided over the 2010 tax trial of LaShawn Littrice, whom Davis refers to as his wife. Littrice was convicted by a jury in June 2010 and sentenced to 42 months in prison in December 2010. Davis also filed false liens, titled Notice of Maritime Liens, against both judges and notified others that he had filed the liens. In addition to the two judges, Davis filed false liens against the U.S. Attorney and Clerk of Court for the Northern District of Illinois, an Assistant U.S. Attorney and an Internal Revenue Service-Criminal Investigation Special Agent. All the liens were publicly filed with the Cook County Recorder’s Office and claimed that each individual owed $100 billion. The liens were re-recorded two and three times in order to add property descriptions to them.
An indictment merely alleges that a crime has been committed, and a defendant is presumed innocent until proven guilty beyond a reasonable doubt. If convicted, Davis faces a maximum of 80 years in prison and a maximum fine of $2 million dollars.
The case is being investigated by the U.S. Treasury Inspector General for Tax Administration (TIGTA) and the FBI, and is being prosecuted by Tax Division Senior Litigation Counsel Jen E. Ihlo and Trial Attorney Matthew J. Kluge.
CLINIC DIRECTOR SENTENCED FOR ROLE IN $63 MILLION HEALTH CARE FRAUD
FROM: U.S. DEPARTMENT OF JUSTICE
Thursday, July 25, 2013
Health Care Clinic Director Sentenced for Role in $63 Million Health Care Fraud Scheme
A former health care clinic director and licensed clinical psychologist at defunct health provider Health Care Solutions Network Inc. (HCSN) was sentenced today in Miami to serve 135 months in prison for her central role in a fraud scheme that resulted in more than $63 million in fraudulent claims to Medicare and Florida Medicaid.
Acting Assistant Attorney General Mythili Raman of the Justice Department’s Criminal Division; U.S. Attorney Wifredo A. Ferrer of the Southern District of Florida; Special Agent in Charge Michael B. Steinbach of the FBI’s Miami Field Office; and Special Agent in Charge Christopher B. Dennis of the Miami office of the U.S. Department of Health and Human Services’s Office of Inspector General (HHS-OIG) made the announcement.
Alina Feas, 53, of Miami, was sentenced by U.S. District Judge Cecilia M. Altonaga in the Southern District of Florida. In addition to her prison term, Feas was sentenced to three years of supervised release and ordered to pay $24.1 million in restitution.
On May 7, 2013, Feas pleaded guilty to one count of conspiracy to commit health care fraud and one substantive health care fraud count. During the course of the conspiracy, Feas was employed as a therapist and clinical director of HCSN’s Partial Hospitalization Program (PHP). A PHP is a form of intensive treatment for severe mental illness.
HCSN of Florida (HCSN-FL) operated community mental health centers at two locations. In her capacity as clinical director, Feas oversaw the entire clinical program and supervised therapists and other HCSN-FL personnel. She also conducted group therapy sessions when therapists were absent, and she was aware that HCSN-FL paid illegal kickbacks to owners and operators of Miami-Dade County Assisted Living Facilities (ALF) in exchange for patient referral information to be used to submit false and fraudulent claims to Medicare and Medicaid. Feas also knew that many of the ALF referral patients were ineligible for PHP services because many patients suffered from mental retardation, dementia and Alzheimer's disease.
Feas submitted claims to Medicare for individual therapy she purportedly provided to HCSN-FL patients using her personal Medicare provider number, knowing that HCSN-FL was simultaneously billing the same patients for PHP services. She continued to bill Medicare under her personal provider number while an HCSN community health center in North Carolina (HCSN-NC) simultaneously submitted false and fraudulent PHP claims.
Feas was also aware that HCSN-FL personnel were fabricating patient medical records. Many of these medical records were created weeks or months after the patients were admitted to HCSN-FL for purported PHP treatment and were used to support false and fraudulent billing to government-sponsored health care benefit programs, including Medicare and Florida Medicaid. During her employment at HCSN-FL, Feas signed fabricated PHP therapy notes and other medical records used to support false claims to government-sponsored health care programs.
At HCSN-NC, Feas was aware that her co-conspirators were fabricating medical records to support the fraudulent claims she was causing to be submitted to Medicare on behalf of HCSN-NC. She knew that a majority of the fabricated notes were created at the HCSN-FL facility for patients admitted into the PHP at HCSN-NC. In some instances, Feas signed therapy notes and other medical records even though she never provided services in HCSN-NC’s PHP.
From 2004 through 2011, HCSN billed Medicare and the Medicaid program more than $63 million for purported mental health services.
This case is being investigated by the FBI and HHS-OIG and was brought as part of the Medicare Fraud Strike Force, supervised by the Criminal Division's Fraud Section and the U.S. Attorney's Office for the Southern District of Florida. This case was prosecuted by Trial Attorneys Allan J. Medina, former Special Trial Attorney William Parente and Deputy Chief Benjamin D. Singer of the Criminal Division’s Fraud Section.
Since its inception in March 2007, the Medicare Fraud Strike Force, now operating in nine cities across the country, has charged more than 1,500 defendants who have collectively billed the Medicare program for more than $5 billion. In addition, HHS’s Centers for Medicare & Medicaid Services, working in conjunction with HHS-OIG, is taking steps to increase accountability and decrease the presence of fraudulent providers.
Thursday, July 25, 2013
Health Care Clinic Director Sentenced for Role in $63 Million Health Care Fraud Scheme
A former health care clinic director and licensed clinical psychologist at defunct health provider Health Care Solutions Network Inc. (HCSN) was sentenced today in Miami to serve 135 months in prison for her central role in a fraud scheme that resulted in more than $63 million in fraudulent claims to Medicare and Florida Medicaid.
Acting Assistant Attorney General Mythili Raman of the Justice Department’s Criminal Division; U.S. Attorney Wifredo A. Ferrer of the Southern District of Florida; Special Agent in Charge Michael B. Steinbach of the FBI’s Miami Field Office; and Special Agent in Charge Christopher B. Dennis of the Miami office of the U.S. Department of Health and Human Services’s Office of Inspector General (HHS-OIG) made the announcement.
Alina Feas, 53, of Miami, was sentenced by U.S. District Judge Cecilia M. Altonaga in the Southern District of Florida. In addition to her prison term, Feas was sentenced to three years of supervised release and ordered to pay $24.1 million in restitution.
On May 7, 2013, Feas pleaded guilty to one count of conspiracy to commit health care fraud and one substantive health care fraud count. During the course of the conspiracy, Feas was employed as a therapist and clinical director of HCSN’s Partial Hospitalization Program (PHP). A PHP is a form of intensive treatment for severe mental illness.
HCSN of Florida (HCSN-FL) operated community mental health centers at two locations. In her capacity as clinical director, Feas oversaw the entire clinical program and supervised therapists and other HCSN-FL personnel. She also conducted group therapy sessions when therapists were absent, and she was aware that HCSN-FL paid illegal kickbacks to owners and operators of Miami-Dade County Assisted Living Facilities (ALF) in exchange for patient referral information to be used to submit false and fraudulent claims to Medicare and Medicaid. Feas also knew that many of the ALF referral patients were ineligible for PHP services because many patients suffered from mental retardation, dementia and Alzheimer's disease.
Feas submitted claims to Medicare for individual therapy she purportedly provided to HCSN-FL patients using her personal Medicare provider number, knowing that HCSN-FL was simultaneously billing the same patients for PHP services. She continued to bill Medicare under her personal provider number while an HCSN community health center in North Carolina (HCSN-NC) simultaneously submitted false and fraudulent PHP claims.
Feas was also aware that HCSN-FL personnel were fabricating patient medical records. Many of these medical records were created weeks or months after the patients were admitted to HCSN-FL for purported PHP treatment and were used to support false and fraudulent billing to government-sponsored health care benefit programs, including Medicare and Florida Medicaid. During her employment at HCSN-FL, Feas signed fabricated PHP therapy notes and other medical records used to support false claims to government-sponsored health care programs.
At HCSN-NC, Feas was aware that her co-conspirators were fabricating medical records to support the fraudulent claims she was causing to be submitted to Medicare on behalf of HCSN-NC. She knew that a majority of the fabricated notes were created at the HCSN-FL facility for patients admitted into the PHP at HCSN-NC. In some instances, Feas signed therapy notes and other medical records even though she never provided services in HCSN-NC’s PHP.
From 2004 through 2011, HCSN billed Medicare and the Medicaid program more than $63 million for purported mental health services.
This case is being investigated by the FBI and HHS-OIG and was brought as part of the Medicare Fraud Strike Force, supervised by the Criminal Division's Fraud Section and the U.S. Attorney's Office for the Southern District of Florida. This case was prosecuted by Trial Attorneys Allan J. Medina, former Special Trial Attorney William Parente and Deputy Chief Benjamin D. Singer of the Criminal Division’s Fraud Section.
Since its inception in March 2007, the Medicare Fraud Strike Force, now operating in nine cities across the country, has charged more than 1,500 defendants who have collectively billed the Medicare program for more than $5 billion. In addition, HHS’s Centers for Medicare & Medicaid Services, working in conjunction with HHS-OIG, is taking steps to increase accountability and decrease the presence of fraudulent providers.
Tuesday, July 30, 2013
SECRETARY OF STATE KERRY'S REMARKS ON MIDDLE EAST PEACE PROCESS TALKS
FROM: U.S. DEPARTMENT OF STATE
Remarks on the Middle East Peace Process Talks
Remarks
John Kerry
Secretary of State
Israeli Justice Minister Tzipi Livni and Palestinian Chief Negotiator Saeb Erekat
Benjamin Franklin Room
Washington, DC
July 30, 2013
SECRETARY KERRY: I’m delighted to stand here – I think it’s still morning – it is still – with Minister Tzipi Livni and Dr. Saeb Erekat, both of whom I’ve had the privilege of knowing for some period of time and enjoyed working with for all of it.
As all of you know, it has taken an awful lot of work and a long time, a lot of time, to reach this new moment of possibility in the pursuit of an end to the Israeli-Palestinian conflict. It’s taken the leadership of President Obama, who set this process in motion with his historic visit to the region this spring. And then he spoke powerfully about the necessity and possibility of peace, not only to the leaders but also to citizens who overwhelmingly hope for a better future for their children and for their countries, for their peoples.
The President’s support for our efforts, including his personal engagement with the parties this morning, has been essential, and I thank him for that. And we had a very positive meeting with the President and the Vice President earlier this morning at the White House. I want to also emphasize that Prime Minister Netanyahu and President Abbas have both demonstrated courageous leadership to bring us here, and I commend them for the tough choices that they made in terms of the politics at home.
I know the path is difficult. There is no shortage of passionate skeptics. But with capable, respected negotiators, like Minister Tzipi Livni and Dr. Saeb Erekat, standing side by side here today and last night sharing an Iftar meal together with all of us, with their efforts, their expertise, and their commitment, I’m convinced that we can get there.
We’re here today because the Israeli people and the Palestinian people both have leaders willing to heed the call of history, leaders who will stand strong in the face of criticism and are right now for what they know is in their people’s best interests. Their commitment to make tough choices, frankly, should give all of us hope that these negotiations actually have a chance to accomplish something.
I’m pleased to report that in the conversations we’ve had last night and again today, we’ve had constructive and positive meetings, both meetings with the United States present and also meetings with the parties by themselves. The parties have agreed to remain engaged in sustained, continuous, and substantive negotiations on the core issues, and they will meet within the next two weeks in either Israel or the Palestinian Territories in order to begin the process of formal negotiation.
The parties have agreed here today that all of the final status issues, all of the core issues, and all other issues are all on the table for negotiation. And they are on the table with one simple goal: a view to ending the conflict, ending the claims. Our objective will be to achieve a final status agreement over the course of the next nine months. The parties also agreed that the two sides will keep the content of the negotiations confidential. The only announcement you will hear about meetings is the one that I just made. And I will be the only one, by agreement, authorized to comment publicly on the talks, in consultation, obviously, with the parties. That means that no one should consider any reports, articles, or other – or even rumors – reliable, unless they come directly from me, and I guarantee you they won’t.
The United States will work continuously with both parties as a facilitator every step of the way. We all understand the goal that we’re working towards: two states living side by side in peace and security. Two states because two proud peoples each deserve a country to call their own. Two states because the children of both peoples deserve the opportunity to realize their legitimate aspirations in security and in freedom. And two states because the time has come for a lasting peace.
We all appreciate – believe me – we appreciate the challenges ahead. But even as we look down the difficult road that is before us and consider the complicated choices that we face, we cannot lose sight of something that is often forgotten in the Middle East, and that is what awaits everybody with success. We need to actually change the way we think about compromise in order to get to success. Compromise doesn’t only mean giving up something or giving something away; reasonable principled compromise in the name of peace means that everybody stands to gain. Each side has a stake in the other’s success, and everyone can benefit from the dividends of peace.
We simply wouldn’t be standing here if the leaders – President Abbas and Prime Minister Netanyahu – and their designated negotiators and all of us together didn’t believe that we could get there. We can envision a day when Palestinians can finally realize their aspirations for a flourishing state of their own, and the groundbreaking economic initiative that we’ve been working on the with the Quartet and with Tony Blair and others, with the help of the private sector, can help transform the Palestinian economy and build up unprecedented markets and unblocked waves of foreign investment. And we shouldn’t forget that the new jobs, the new homes, the new industries that can grow in a new Palestinian state will also benefit Israelis next door, where a vibrant economy will find new partners.
We can also envision a day when Israelis actually can truly live in peace – not just the absence of conflict, but a full and a lasting peace with Arab and Muslim nations, an end once and for all to the pernicious attacks on Israel’s legitimacy. Israel and – Israelis and Palestinians both have legitimate security concerns. Our commitment to Israel’s security is why President Obama’s Administration has done more than any before it to strengthen our unshakeable bond and why General John Allen is on the ground working to ensure Israel’s security needs will be met. And I emphasize we have worked very closely with our Palestinian friends to help develop Palestinian security capacity. And we cannot forget that the security of Israel will also benefit Palestinians next door.
The Israeli Government has recognized this, which is why it will be taking in the next days and weeks a number of steps in order to improve conditions in the West Bank and in Gaza. And the Palestinian security forces have recognized this, which is why we have seen such a dramatic improvement in law and order and such a dramatic decrease in terror attacks originating from the West Bank.
The Israeli and Palestinian people understand their common interests, and that’s why they continue to take positive steps on the ground to improve relations between themselves. I also want to point out that the Arab League understands this too, which is why it has reaffirmed the Arab Peace Initiative and provided vital statements of support for this process.
Finally, I’d just say everywhere I go, leaders from around the world understand that they share a stake in this endeavor’s success. They all have a role to play, which is why they have continued to contribute to this effort, to advise, to make commitments of support, and to push and advocate and encourage the parties every step of the way. And President Obama and I joined in thanking all of them for their concern and initiative.
So many things are already happening. When somebody tells you that Israelis and Palestinians cannot find common ground or address the issues that divide them, don’t believe them. Just look at the things they are doing together and trying to do together. There are many reasons why we need to solve this conflict, but none more important than the security and dignity of the next generations of Israelis and Palestinians, Jews, Muslims, and Christians, and the generations who will follow them and benefit from these negotiations hopefully.
I think everyone involved here believes that we cannot pass along to another generation the responsibility of ending a conflict that is in our power to resolve in our time. They should not be expected to bear that burden, and we should not leave it to them. They should not be expected to bear the pain of continued conflict or perpetual war.
So while I understand the skepticism, I don’t share it and I don’t think we have time for it. I firmly believe the leaders, the negotiators, and citizens invested in this effort can make peace for one simple reason: because they must. A viable two-state solution is the only way this conflict can end, and there is not much time to achieve it, and there is no other alternative. We all need to be strong in our belief in the possibility of peace, courageous enough to follow through on our faith in it, and audacious enough to achieve what these two peoples have so long aspired to and deserve.
Dr. Erekat.
MR. EREKAT: Thank you, Mr. Secretary. Thank you, Minister Livni. On behalf of President Mahmoud Abbas, I would like to extend our deepest appreciation to President Barack Obama and to you, Secretary Kerry, for your relentless efforts and unwavering commitment to achieve a just, comprehensive, lasting peace between Palestinians and Israelis. Palestinians have suffered enough, and no one benefits more from the success of this endeavor more than Palestinians. I am delighted that all final status issues are on the table and will be resolved without any exceptions, and it’s time for the Palestinian people to have an independent, sovereign state of their own. It’s time for the Palestinian people to have an independent, sovereign state of their own. It’s time for the Palestinians to live in peace, freedom, and dignity within their own independent, sovereign state.
Thank you, Mr. Secretary. Thank you, Minister Livni.
JUSTICE MINISTER LIVNI: Okay. Thank you. Thank you, Secretary Kerry, on behalf of Prime Minister Netanyahu, the Israeli Government, and the state of Israel for your determination, for not giving up, because you need to know that I think it was our first meeting during this process that you said to me that failure is not an option. And you proved today that failure is not an option. And this is the man, Secretary Kerry, who showed everyone that nothing can stop true believers. And thank you for that.
I also want to thank President Obama for his personal commitment to peace and to Israel’s security. The powerful impression left by the President’s last visit to Israel still remains in the hearts of the Israeli people. We came here today – Mr. Molho, the Special Envoy of Prime Minister Netanyahu, and myself – after years of stalemate. We came here today from a troubled and changing region. We are hopeful, but we cannot be naive. We cannot afford it in our region. We owe it to our people to do everything, but everything we can for their security and for the hope of peace for future generations.
But it took more than just a plane ticket to be here today. A courageous act of leadership by Prime Minister Netanyahu that was approved by the Israeli Government made this visit here and the beginning of the negotiation possible. We all know that it’s not going to be easy. It’s going to be hard, with ups and downs. But I can assure you that these negotiations – in these negotiations, it’s not our intention to argue about the past, but to create solutions and make decisions for the future.
You know, Saeb, we all spent some time in the negotiations room. We didn’t reach dead end in the past, but we didn’t complete our mission. And this is something that we need to do now in these negotiations that will be launched today. A new opportunity is being created for us, for all of us, and we cannot afford to waste it. Now, I hope that our meeting today and the negotiations that we have re-launched today will cause, I hope, a spark of hope, even if small, to emerge out of cynicism and pessimism that is so often heard. It is our task to work together so that we can transform that spark of hope into something real and lasting.
And finally, I believe that history is not made by cynics. It is made by realists who are not afraid to dream. And let us be these people. Thank you.
SECRETARY KERRY: Thank you very, very much.
Remarks on the Middle East Peace Process Talks
Remarks
John Kerry
Secretary of State
Israeli Justice Minister Tzipi Livni and Palestinian Chief Negotiator Saeb Erekat
Benjamin Franklin Room
Washington, DC
July 30, 2013
SECRETARY KERRY: I’m delighted to stand here – I think it’s still morning – it is still – with Minister Tzipi Livni and Dr. Saeb Erekat, both of whom I’ve had the privilege of knowing for some period of time and enjoyed working with for all of it.
As all of you know, it has taken an awful lot of work and a long time, a lot of time, to reach this new moment of possibility in the pursuit of an end to the Israeli-Palestinian conflict. It’s taken the leadership of President Obama, who set this process in motion with his historic visit to the region this spring. And then he spoke powerfully about the necessity and possibility of peace, not only to the leaders but also to citizens who overwhelmingly hope for a better future for their children and for their countries, for their peoples.
The President’s support for our efforts, including his personal engagement with the parties this morning, has been essential, and I thank him for that. And we had a very positive meeting with the President and the Vice President earlier this morning at the White House. I want to also emphasize that Prime Minister Netanyahu and President Abbas have both demonstrated courageous leadership to bring us here, and I commend them for the tough choices that they made in terms of the politics at home.
I know the path is difficult. There is no shortage of passionate skeptics. But with capable, respected negotiators, like Minister Tzipi Livni and Dr. Saeb Erekat, standing side by side here today and last night sharing an Iftar meal together with all of us, with their efforts, their expertise, and their commitment, I’m convinced that we can get there.
We’re here today because the Israeli people and the Palestinian people both have leaders willing to heed the call of history, leaders who will stand strong in the face of criticism and are right now for what they know is in their people’s best interests. Their commitment to make tough choices, frankly, should give all of us hope that these negotiations actually have a chance to accomplish something.
I’m pleased to report that in the conversations we’ve had last night and again today, we’ve had constructive and positive meetings, both meetings with the United States present and also meetings with the parties by themselves. The parties have agreed to remain engaged in sustained, continuous, and substantive negotiations on the core issues, and they will meet within the next two weeks in either Israel or the Palestinian Territories in order to begin the process of formal negotiation.
The parties have agreed here today that all of the final status issues, all of the core issues, and all other issues are all on the table for negotiation. And they are on the table with one simple goal: a view to ending the conflict, ending the claims. Our objective will be to achieve a final status agreement over the course of the next nine months. The parties also agreed that the two sides will keep the content of the negotiations confidential. The only announcement you will hear about meetings is the one that I just made. And I will be the only one, by agreement, authorized to comment publicly on the talks, in consultation, obviously, with the parties. That means that no one should consider any reports, articles, or other – or even rumors – reliable, unless they come directly from me, and I guarantee you they won’t.
The United States will work continuously with both parties as a facilitator every step of the way. We all understand the goal that we’re working towards: two states living side by side in peace and security. Two states because two proud peoples each deserve a country to call their own. Two states because the children of both peoples deserve the opportunity to realize their legitimate aspirations in security and in freedom. And two states because the time has come for a lasting peace.
We all appreciate – believe me – we appreciate the challenges ahead. But even as we look down the difficult road that is before us and consider the complicated choices that we face, we cannot lose sight of something that is often forgotten in the Middle East, and that is what awaits everybody with success. We need to actually change the way we think about compromise in order to get to success. Compromise doesn’t only mean giving up something or giving something away; reasonable principled compromise in the name of peace means that everybody stands to gain. Each side has a stake in the other’s success, and everyone can benefit from the dividends of peace.
We simply wouldn’t be standing here if the leaders – President Abbas and Prime Minister Netanyahu – and their designated negotiators and all of us together didn’t believe that we could get there. We can envision a day when Palestinians can finally realize their aspirations for a flourishing state of their own, and the groundbreaking economic initiative that we’ve been working on the with the Quartet and with Tony Blair and others, with the help of the private sector, can help transform the Palestinian economy and build up unprecedented markets and unblocked waves of foreign investment. And we shouldn’t forget that the new jobs, the new homes, the new industries that can grow in a new Palestinian state will also benefit Israelis next door, where a vibrant economy will find new partners.
We can also envision a day when Israelis actually can truly live in peace – not just the absence of conflict, but a full and a lasting peace with Arab and Muslim nations, an end once and for all to the pernicious attacks on Israel’s legitimacy. Israel and – Israelis and Palestinians both have legitimate security concerns. Our commitment to Israel’s security is why President Obama’s Administration has done more than any before it to strengthen our unshakeable bond and why General John Allen is on the ground working to ensure Israel’s security needs will be met. And I emphasize we have worked very closely with our Palestinian friends to help develop Palestinian security capacity. And we cannot forget that the security of Israel will also benefit Palestinians next door.
The Israeli Government has recognized this, which is why it will be taking in the next days and weeks a number of steps in order to improve conditions in the West Bank and in Gaza. And the Palestinian security forces have recognized this, which is why we have seen such a dramatic improvement in law and order and such a dramatic decrease in terror attacks originating from the West Bank.
The Israeli and Palestinian people understand their common interests, and that’s why they continue to take positive steps on the ground to improve relations between themselves. I also want to point out that the Arab League understands this too, which is why it has reaffirmed the Arab Peace Initiative and provided vital statements of support for this process.
Finally, I’d just say everywhere I go, leaders from around the world understand that they share a stake in this endeavor’s success. They all have a role to play, which is why they have continued to contribute to this effort, to advise, to make commitments of support, and to push and advocate and encourage the parties every step of the way. And President Obama and I joined in thanking all of them for their concern and initiative.
So many things are already happening. When somebody tells you that Israelis and Palestinians cannot find common ground or address the issues that divide them, don’t believe them. Just look at the things they are doing together and trying to do together. There are many reasons why we need to solve this conflict, but none more important than the security and dignity of the next generations of Israelis and Palestinians, Jews, Muslims, and Christians, and the generations who will follow them and benefit from these negotiations hopefully.
I think everyone involved here believes that we cannot pass along to another generation the responsibility of ending a conflict that is in our power to resolve in our time. They should not be expected to bear that burden, and we should not leave it to them. They should not be expected to bear the pain of continued conflict or perpetual war.
So while I understand the skepticism, I don’t share it and I don’t think we have time for it. I firmly believe the leaders, the negotiators, and citizens invested in this effort can make peace for one simple reason: because they must. A viable two-state solution is the only way this conflict can end, and there is not much time to achieve it, and there is no other alternative. We all need to be strong in our belief in the possibility of peace, courageous enough to follow through on our faith in it, and audacious enough to achieve what these two peoples have so long aspired to and deserve.
Dr. Erekat.
MR. EREKAT: Thank you, Mr. Secretary. Thank you, Minister Livni. On behalf of President Mahmoud Abbas, I would like to extend our deepest appreciation to President Barack Obama and to you, Secretary Kerry, for your relentless efforts and unwavering commitment to achieve a just, comprehensive, lasting peace between Palestinians and Israelis. Palestinians have suffered enough, and no one benefits more from the success of this endeavor more than Palestinians. I am delighted that all final status issues are on the table and will be resolved without any exceptions, and it’s time for the Palestinian people to have an independent, sovereign state of their own. It’s time for the Palestinian people to have an independent, sovereign state of their own. It’s time for the Palestinians to live in peace, freedom, and dignity within their own independent, sovereign state.
Thank you, Mr. Secretary. Thank you, Minister Livni.
JUSTICE MINISTER LIVNI: Okay. Thank you. Thank you, Secretary Kerry, on behalf of Prime Minister Netanyahu, the Israeli Government, and the state of Israel for your determination, for not giving up, because you need to know that I think it was our first meeting during this process that you said to me that failure is not an option. And you proved today that failure is not an option. And this is the man, Secretary Kerry, who showed everyone that nothing can stop true believers. And thank you for that.
I also want to thank President Obama for his personal commitment to peace and to Israel’s security. The powerful impression left by the President’s last visit to Israel still remains in the hearts of the Israeli people. We came here today – Mr. Molho, the Special Envoy of Prime Minister Netanyahu, and myself – after years of stalemate. We came here today from a troubled and changing region. We are hopeful, but we cannot be naive. We cannot afford it in our region. We owe it to our people to do everything, but everything we can for their security and for the hope of peace for future generations.
But it took more than just a plane ticket to be here today. A courageous act of leadership by Prime Minister Netanyahu that was approved by the Israeli Government made this visit here and the beginning of the negotiation possible. We all know that it’s not going to be easy. It’s going to be hard, with ups and downs. But I can assure you that these negotiations – in these negotiations, it’s not our intention to argue about the past, but to create solutions and make decisions for the future.
You know, Saeb, we all spent some time in the negotiations room. We didn’t reach dead end in the past, but we didn’t complete our mission. And this is something that we need to do now in these negotiations that will be launched today. A new opportunity is being created for us, for all of us, and we cannot afford to waste it. Now, I hope that our meeting today and the negotiations that we have re-launched today will cause, I hope, a spark of hope, even if small, to emerge out of cynicism and pessimism that is so often heard. It is our task to work together so that we can transform that spark of hope into something real and lasting.
And finally, I believe that history is not made by cynics. It is made by realists who are not afraid to dream. And let us be these people. Thank you.
SECRETARY KERRY: Thank you very, very much.
USDA ADDRESSES OVERSUPPLY OF SUGAR
FROM: U.S. DEPARTMENT OF AGRICULTURE
USDA Announces Additional Actions to Address the Domestic Sugar Surplus
WASHINGTON, July 23, 2013 - The U.S. Department of Agriculture today announced that in order to continue to address the domestic sugar surplus at the least cost to the federal government, purchase invitations have been sent to domestic sugarcane processors soliciting bids to sell raw cane sugar to the Commodity Credit Corporation (CCC). The CCC will purchase sugar from domestic sugarcane processors under the Cost Reduction Options of the Food Security Act of 1985, and simultaneously exchange this sugar for credits offered by refiners holding licenses under the Refined Sugar Re-export Program.
USDA is taking this action based upon the success of similar actions last month which removed almost 300,000 metric tons of import supply in exchange for 91,000 metric tons of CCC inventory for a cost of $43 million, saving an estimated $66.9 million in avoided sugar forfeitures. Today's action is expected to remove an additional 136,000 metric tons of import supply of raw cane sugar at a cost of $18.7 million, reducing federal sugar program expenditures by an estimated $37.6 million, which would be incurred if the sugar were forfeited to CCC.
The invitation for the sugar purchase and exchange announced today will be administered similarly to the purchase announced on June 18, 2013.
The sugar purchase and exchange offer differs from the earlier action in that only sugarcane processors may offer to sell sugar to CCC because raw cane sugar poses the greatest risk of forfeitures at this time. This purchase offer also differs from the earlier purchase in that any sugar offered to CCC must be under CCC loan. The exchange invitation and selection process will be administered in the same way as the sugar action announced on June 18, 2013.
USDA Announces Additional Actions to Address the Domestic Sugar Surplus
WASHINGTON, July 23, 2013 - The U.S. Department of Agriculture today announced that in order to continue to address the domestic sugar surplus at the least cost to the federal government, purchase invitations have been sent to domestic sugarcane processors soliciting bids to sell raw cane sugar to the Commodity Credit Corporation (CCC). The CCC will purchase sugar from domestic sugarcane processors under the Cost Reduction Options of the Food Security Act of 1985, and simultaneously exchange this sugar for credits offered by refiners holding licenses under the Refined Sugar Re-export Program.
USDA is taking this action based upon the success of similar actions last month which removed almost 300,000 metric tons of import supply in exchange for 91,000 metric tons of CCC inventory for a cost of $43 million, saving an estimated $66.9 million in avoided sugar forfeitures. Today's action is expected to remove an additional 136,000 metric tons of import supply of raw cane sugar at a cost of $18.7 million, reducing federal sugar program expenditures by an estimated $37.6 million, which would be incurred if the sugar were forfeited to CCC.
The invitation for the sugar purchase and exchange announced today will be administered similarly to the purchase announced on June 18, 2013.
The sugar purchase and exchange offer differs from the earlier action in that only sugarcane processors may offer to sell sugar to CCC because raw cane sugar poses the greatest risk of forfeitures at this time. This purchase offer also differs from the earlier purchase in that any sugar offered to CCC must be under CCC loan. The exchange invitation and selection process will be administered in the same way as the sugar action announced on June 18, 2013.
TREASURY SANCTIONS OPERATIVES LINKED TO LOS ZETAS
FROM: U.S. DEPARTMENT OF TREASURY
Action Targets Individuals Laundering Money for Trevino Morales
WASHINGTON – The U.S. Department of the Treasury today designated two Mexican nationals, Jose Odilon Ramirez Perales and Ismael Lopez Guerrero, pursuant to the Foreign Narcotics Kingpin Designation Act (Kingpin Act) for their ties to Mexico’s violent Los Zetas drug trafficking organization. Ramirez Perales is a powerful financial operative responsible for controlling and laundering tens of millions of dollars in funds smuggled from the U.S. to Mexico for Los Zetas leaders Miguel Trevino Morales and Omar Trevino Morales. Lopez Guerrero collects illicit monies from Los Zetas operations in Nuevo Laredo, and he sends large quantities of smuggled cash to Ramirez Perales for safeguarding and processing in Coahuila, Mexico.
“The momentous arrest of Miguel Trevino Morales, who was captured last week, took place in the early morning hours with two of his closest advisors by his side, including a key accountant. This is another clear example of the central importance of financial operatives within the operational structure of drug cartels,” said Treasury’s Director of the Office of Foreign Assets Control (OFAC) Adam J. Szubin. “Treasury’s action today targets the activities of two other significant financial operatives for Los Zetas. We will continue to support our Mexican partners to target those laundering Los Zetas’ ill-gotten gains.”
Ramirez Perales is wanted in the Southern District of Texas for money laundering relating to drug trafficking. Ramirez Perales and his other co-defendants are subject to the forfeiture of approximately $20 million in the Southern District of Texas. In October 2012, Mexican authorities captured Ramirez Perales, and they arrested Lopez Guerrero after a July 2012 gun battle. Lopez Guerrero, who uses the alias Gilberto Godina Guerrero, was alleged to possess ammunition, drugs, and currency at the time of his arrest. The arrests of these individuals and other high level Los Zetas members such as Miguel Trevino Morales, along with the death of former Zeta leader Heriberto Lazcano-Lazcano, has played a vital role in weakening of the organization.
Today’s action generally prohibits U.S. persons from engaging in any transactions with these individuals and freezes any assets they may have under U.S. jurisdiction.
The President identified Los Zetas as a significant foreign narcotics trafficker pursuant to the Kingpin Act in April 2009. On July 24, 2011, the President named Los Zetas as a significant Transnational Criminal Organization in the Annex to Executive Order 13581 (Blocking Property of Transnational Criminal Organizations). Additionally, OFAC designated Los Zetas leaders Miguel and Omar Trevino Morales on July 20, 2009 and March 24, 2010, respectively. Since 2009, OFAC has designated several dozen key plaza bosses, drug traffickers, and money launderers operating on behalf of Los Zetas using Kingpin Act authorities.
Internationally, OFAC has designated more than 1,200 individuals and entities linked to 103 drug kingpins since June 2000. OFAC designations are part of an ongoing effort to apply financial measures against significant foreign narcotics traffickers and their organizations worldwide. Penalties for violations of the Kingpin Act range from civil penalties of up to $1.075 million per violation to more severe criminal penalties. Criminal penalties for corporate officers may include up to 30 years in prison and fines up to $5 million. Criminal fines for corporations may reach $10 million. Other individuals face up to 10 years in prison and fines pursuant to Title 18 of the United States Code for criminal violations of the Kingpin Act.
Action Targets Individuals Laundering Money for Trevino Morales
WASHINGTON – The U.S. Department of the Treasury today designated two Mexican nationals, Jose Odilon Ramirez Perales and Ismael Lopez Guerrero, pursuant to the Foreign Narcotics Kingpin Designation Act (Kingpin Act) for their ties to Mexico’s violent Los Zetas drug trafficking organization. Ramirez Perales is a powerful financial operative responsible for controlling and laundering tens of millions of dollars in funds smuggled from the U.S. to Mexico for Los Zetas leaders Miguel Trevino Morales and Omar Trevino Morales. Lopez Guerrero collects illicit monies from Los Zetas operations in Nuevo Laredo, and he sends large quantities of smuggled cash to Ramirez Perales for safeguarding and processing in Coahuila, Mexico.
“The momentous arrest of Miguel Trevino Morales, who was captured last week, took place in the early morning hours with two of his closest advisors by his side, including a key accountant. This is another clear example of the central importance of financial operatives within the operational structure of drug cartels,” said Treasury’s Director of the Office of Foreign Assets Control (OFAC) Adam J. Szubin. “Treasury’s action today targets the activities of two other significant financial operatives for Los Zetas. We will continue to support our Mexican partners to target those laundering Los Zetas’ ill-gotten gains.”
Ramirez Perales is wanted in the Southern District of Texas for money laundering relating to drug trafficking. Ramirez Perales and his other co-defendants are subject to the forfeiture of approximately $20 million in the Southern District of Texas. In October 2012, Mexican authorities captured Ramirez Perales, and they arrested Lopez Guerrero after a July 2012 gun battle. Lopez Guerrero, who uses the alias Gilberto Godina Guerrero, was alleged to possess ammunition, drugs, and currency at the time of his arrest. The arrests of these individuals and other high level Los Zetas members such as Miguel Trevino Morales, along with the death of former Zeta leader Heriberto Lazcano-Lazcano, has played a vital role in weakening of the organization.
Today’s action generally prohibits U.S. persons from engaging in any transactions with these individuals and freezes any assets they may have under U.S. jurisdiction.
The President identified Los Zetas as a significant foreign narcotics trafficker pursuant to the Kingpin Act in April 2009. On July 24, 2011, the President named Los Zetas as a significant Transnational Criminal Organization in the Annex to Executive Order 13581 (Blocking Property of Transnational Criminal Organizations). Additionally, OFAC designated Los Zetas leaders Miguel and Omar Trevino Morales on July 20, 2009 and March 24, 2010, respectively. Since 2009, OFAC has designated several dozen key plaza bosses, drug traffickers, and money launderers operating on behalf of Los Zetas using Kingpin Act authorities.
Internationally, OFAC has designated more than 1,200 individuals and entities linked to 103 drug kingpins since June 2000. OFAC designations are part of an ongoing effort to apply financial measures against significant foreign narcotics traffickers and their organizations worldwide. Penalties for violations of the Kingpin Act range from civil penalties of up to $1.075 million per violation to more severe criminal penalties. Criminal penalties for corporate officers may include up to 30 years in prison and fines up to $5 million. Criminal fines for corporations may reach $10 million. Other individuals face up to 10 years in prison and fines pursuant to Title 18 of the United States Code for criminal violations of the Kingpin Act.
SECRETARY OF STATE KERRY AND PRESIDENT HADI OF YEMEN MAKE REMARKS BEFORE THEIR MEETING
FROM: U.S. DEPARTMENT OF STATE
Remarks With President of Yemen Abdo Rabbo Mansour Hadi Before Their Meeting
Remarks
John Kerry
Secretary of State
Treaty Room
Washington, DC
July 29, 2013
SECRETARY KERRY: Thank you very much. It’s my great pleasure to welcome President Hadi of Yemen here this afternoon. Yemen has been going through an extraordinary transformation, moving towards democracy, and is working in comprehensive ways with the United States and others to transform its economy, to open up the opportunity for economic cooperation with the Gulf countries, and also to attract investment from abroad.
The President is leading a national dialogue. There are some 565 delegates who have come together – it’s unique in the history of Yemen, and they are from all diverse walks of life – in an effort to help in this transformation. And we also have very significant security and humanitarian cooperation.
So it’s my pleasure to welcome the President here to Washington. I look forward to a good discussion of the issues we just mentioned and some others. One of those others is the effort to close the Guantanamo detention center, and we are working with the Yemenis to develop a rehabilitation and re-education initiative in the country that will assist us in the effort to try to transfer some of the Yemenis.
So we’re very grateful for the cooperation. The President just mentioned to me that he has fond memories of Cleveland. He’s just come from Cleveland, Ohio. He had an operation there once upon a time a long time ago, and he’s pleased to say that his heart is strong and he’s grateful to the people in Cleveland for their help with respect to his personal health issues.
So welcome, Mr. President, and I’ll let the translation take place.
Mr. President, would you like to say something?
PRESIDENT HADI: (Via interpreter) I’m very happy to actually visit the United States of America, particularly today in my visit to the Department of State. We in Yemen actually tell the reporters whenever they ask about Yemen – they don’t know where the location of Yemen is. Yemen, in fact, is in the south part of the Arabian Peninsula (inaudible) that connects the Red Sea and the Arabian Sea.
We in Yemen have actually been through some of the changes that came as part of the Arab Springs. We were on the verge of a civil war, but we were actually lucky enough to have the Gulf Cooperation Council Initiative and its implementation mechanisms, so now we’re actually going through a dialogue that includes all components of society, that will include the political parties, the youth, the women, with delegates of about 565, and they’re discussing the new Yemen, the good governance, the justice, the equality, democracy, hopefully leading Yemen into a better future.
We actually had presidential – consensual presidential elections last year, February last year, whereby (inaudible) was divided with the military or from security aspect of it. But voters nevertheless went through the trenches and the weapons because the Yemenis do seek peace in the country.
In Yemen, we’re under and we’re going through this dialogue hoping that it will produce elements that would lead Yemen into security and stability and more development in that, because – so as to as to eliminate the poverty out of Yemen. And so but we still nevertheless need the assistance of the international organizations, the international community, in order for us to achieve democracy and good governance.
Presently, the majority of the Yemeni population – 75 percent, to be specific – are less than 45 years of age, the youth that without employment could actually pose a threat. So they need to have employment and live a lifestyle similar to the rest of the peoples of the world.
We hope that Yemen actually manages to reach the 21st century train station and not remain where it is.
SECRETARY KERRY: Thank you, Mr. President. Thank you very much.
Remarks With President of Yemen Abdo Rabbo Mansour Hadi Before Their Meeting
Remarks
John Kerry
Secretary of State
Treaty Room
Washington, DC
July 29, 2013
SECRETARY KERRY: Thank you very much. It’s my great pleasure to welcome President Hadi of Yemen here this afternoon. Yemen has been going through an extraordinary transformation, moving towards democracy, and is working in comprehensive ways with the United States and others to transform its economy, to open up the opportunity for economic cooperation with the Gulf countries, and also to attract investment from abroad.
The President is leading a national dialogue. There are some 565 delegates who have come together – it’s unique in the history of Yemen, and they are from all diverse walks of life – in an effort to help in this transformation. And we also have very significant security and humanitarian cooperation.
So it’s my pleasure to welcome the President here to Washington. I look forward to a good discussion of the issues we just mentioned and some others. One of those others is the effort to close the Guantanamo detention center, and we are working with the Yemenis to develop a rehabilitation and re-education initiative in the country that will assist us in the effort to try to transfer some of the Yemenis.
So we’re very grateful for the cooperation. The President just mentioned to me that he has fond memories of Cleveland. He’s just come from Cleveland, Ohio. He had an operation there once upon a time a long time ago, and he’s pleased to say that his heart is strong and he’s grateful to the people in Cleveland for their help with respect to his personal health issues.
So welcome, Mr. President, and I’ll let the translation take place.
Mr. President, would you like to say something?
PRESIDENT HADI: (Via interpreter) I’m very happy to actually visit the United States of America, particularly today in my visit to the Department of State. We in Yemen actually tell the reporters whenever they ask about Yemen – they don’t know where the location of Yemen is. Yemen, in fact, is in the south part of the Arabian Peninsula (inaudible) that connects the Red Sea and the Arabian Sea.
We in Yemen have actually been through some of the changes that came as part of the Arab Springs. We were on the verge of a civil war, but we were actually lucky enough to have the Gulf Cooperation Council Initiative and its implementation mechanisms, so now we’re actually going through a dialogue that includes all components of society, that will include the political parties, the youth, the women, with delegates of about 565, and they’re discussing the new Yemen, the good governance, the justice, the equality, democracy, hopefully leading Yemen into a better future.
We actually had presidential – consensual presidential elections last year, February last year, whereby (inaudible) was divided with the military or from security aspect of it. But voters nevertheless went through the trenches and the weapons because the Yemenis do seek peace in the country.
In Yemen, we’re under and we’re going through this dialogue hoping that it will produce elements that would lead Yemen into security and stability and more development in that, because – so as to as to eliminate the poverty out of Yemen. And so but we still nevertheless need the assistance of the international organizations, the international community, in order for us to achieve democracy and good governance.
Presently, the majority of the Yemeni population – 75 percent, to be specific – are less than 45 years of age, the youth that without employment could actually pose a threat. So they need to have employment and live a lifestyle similar to the rest of the peoples of the world.
We hope that Yemen actually manages to reach the 21st century train station and not remain where it is.
SECRETARY KERRY: Thank you, Mr. President. Thank you very much.
Monday, July 29, 2013
U.S. CONGRATULATES PEOPLE OF MOROCCO ON THEIR NATIONAL DAY
FROM: U.S. STATE DEPARTMENT
Morocco National Day
Press Statement
John Kerry
Secretary of State
Washington, DC
July 29, 2013
On behalf of President Obama and the American people, I offer warm wishes to King Mohammed VI and the Moroccan people as you celebrate your national day this July 30.
When Morocco granted American merchant ships safe passage after the outbreak of the American Revolution, it signaled the beginning of a strong and enduring friendship. We are also proud that the Moroccan city of Tangier is home to our oldest diplomatic property in the world.
After more than 225 years of friendship and peace, we continue to work together to expand trade, promote stability in the region, and enhance mutual understanding between our nations.
During this time of profound change in the region, the United States supports Morocco’s ongoing efforts to strengthen the rule of law, human rights, and good governance. We look forward to building on our long history of relations as we work together to advance common goals.
As you gather with family and friends on this special day, the United States wishes you a future of peace and prosperity. Ramadan Mubarak.
Morocco National Day
Press Statement
John Kerry
Secretary of State
Washington, DC
July 29, 2013
On behalf of President Obama and the American people, I offer warm wishes to King Mohammed VI and the Moroccan people as you celebrate your national day this July 30.
When Morocco granted American merchant ships safe passage after the outbreak of the American Revolution, it signaled the beginning of a strong and enduring friendship. We are also proud that the Moroccan city of Tangier is home to our oldest diplomatic property in the world.
After more than 225 years of friendship and peace, we continue to work together to expand trade, promote stability in the region, and enhance mutual understanding between our nations.
During this time of profound change in the region, the United States supports Morocco’s ongoing efforts to strengthen the rule of law, human rights, and good governance. We look forward to building on our long history of relations as we work together to advance common goals.
As you gather with family and friends on this special day, the United States wishes you a future of peace and prosperity. Ramadan Mubarak.
U.S. CONGRATULATES THE PEOPLE OF VANUATU ON THEIR INDEPENDENCE DAY
FROM: U.S. DEPARTMENT OF STATE
Vanuatu Independence Day
Press Statement
John Kerry
Secretary of State
Washington, DC
July 26, 2013
On behalf of President Obama and the people of the United States, I offer my sincerest congratulations to the people of Vanuatu as you celebrate the 33rd anniversary of your nation’s independence on July 30.
The partnership between our nations is built on a foundation of shared values and mutual interests. The United States looks forward to further developing this relationship through cooperation on a wide range of issues, including international security, economic development, human rights, and environmental protection.
As you celebrate your independence day, the United States remains enthusiastic about a future of continued cooperation and partnership with Vanuatu.
Vanuatu Independence Day
Press Statement
John Kerry
Secretary of State
Washington, DC
July 26, 2013
On behalf of President Obama and the people of the United States, I offer my sincerest congratulations to the people of Vanuatu as you celebrate the 33rd anniversary of your nation’s independence on July 30.
The partnership between our nations is built on a foundation of shared values and mutual interests. The United States looks forward to further developing this relationship through cooperation on a wide range of issues, including international security, economic development, human rights, and environmental protection.
As you celebrate your independence day, the United States remains enthusiastic about a future of continued cooperation and partnership with Vanuatu.
FIVE INDICTED IN LARGEST KNOWN DATA BREACH CONSPIRACY
FROM: U.S. DEPARTMENT OF JUSTICE
Thursday, July 25, 2013
Five Indicted in New Jersey for Largest Known Data Breach Conspiracy
Hackers Targeted Major Payment Processors, Retailers and Financial Institutions Around the World
A federal indictment made public today in New Jersey charges five men with conspiring in a worldwide hacking and data breach scheme that targeted major corporate networks, stole more than 160 million credit card numbers and resulted in hundreds of millions of dollars in losses. It is the largest such scheme ever prosecuted in the United States.
The charges were announced today by U.S. Attorney Paul J. Fishman of the District of New Jersey; Acting Assistant Attorney General Mythili Raman of the Justice Department’s Criminal Division; and Special Agent in Charge James Mottola of the U.S. Secret Service (USSS), Criminal Investigations, Newark, N.J., Division. The USSS led the investigation of the indicted conspiracy.
The defendants allegedly sought corporate victims engaged in financial transactions, retailers that received and transmitted financial data and other institutions with information they could exploit for profit. The defendants are charged with attacks on NASDAQ, 7-Eleven, Carrefour, JCP, Hannaford, Heartland, Wet Seal, Commidea, Dexia, JetBlue, Dow Jones, Euronet, Visa Jordan, Global Payment, Diners Singapore and Ingenicard. It is not alleged that the NASDAQ hack affected its trading platform.
According to the second superseding indictment unsealed today in Newark federal court and other court filings, the five men each served particular roles in the scheme. Vladimir Drinkman, 32, of Syktyykar and Moscow, Russia, and Alexandr Kalinin, 26, of St. Petersburg, Russia, each allegedly specialized in penetrating network security and gaining access to the corporate victims’ systems. Roman Kotov, 32, of Moscow, allegedly specialized in mining the networks Drinkman and Kalinin compromised to steal valuable data. Court documents allege that the defendants hid their activities using anonymous web-hosting services provided by Mikhail Rytikov, 26, of Odessa, Ukraine. Dmitriy Smilianets, 29, of Moscow, allegedly sold the information stolen by the other conspirators and distributed the proceeds of the scheme to the participants.
“This type of crime is the cutting edge,” said U.S. Attorney Fishman. “Those who have the expertise and the inclination to break into our computer networks threaten our economic well-being, our privacy, and our national security. And this case shows, there is a real practical cost because these types of frauds increase the costs of doing business for every American consumer, every day. We cannot be too vigilant and we cannot be too careful.”
“The defendants charged today were allegedly responsible for spearheading a worldwide hacking conspiracy that victimized a wide array of consumers and entities, causing hundreds of millions of dollars in losses,” said Acting Assistant Attorney General Raman. “Despite substantial efforts by the defendants to conceal their alleged crimes, the Department and its law enforcement counterparts have cracked this extensive scheme and are seeking justice for its many victims. Today’s indictment will no doubt serve as a serious warning to those who would utilize illegal and fraudulent means to steal sensitive information online.”
“As is evident by this indictment, the Secret Service will continue to apply innovative techniques to successfully investigate and arrest transnational cyber criminals,” said USSS Special Agent in Charge Mottola. “While the global nature of cybercrime continues to have a profound impact on our financial institutions, this case demonstrates the global investigative steps that U.S. Secret Service Special Agents are taking to ensure that criminals will be pursued and prosecuted no matter where they reside.”
Kalinin and Drinkman were previously charged in New Jersey as “Hacker 1” and “Hacker 2” in a 2009 indictment charging Albert Gonzalez, 32, of Miami, in connection with five corporate data breaches – including the breach of Heartland Payment Systems Inc., which at the time was the largest breach ever reported. Gonzalez is currently serving 20 years in federal prison for those offenses. The U.S. Attorney’s Office for the Southern District of New York today announced two additional indictments against Kalinin: one charges him in connection with hacking certain computer servers used by NASDAQ and a second indictment, unsealed today, charged Kalinin and another alleged Russian hacker, Nikolay Nasenkov, with an international scheme to steal bank account information by hacking U.S.-based financial institutions. Rytikov was previously charged in the Eastern District of Virginia with an unrelated scheme. Kotov and Smilianets have not previously been charged publicly in the United States.
Drinkman and Smilianets were arrested at the request of the United States while traveling in the Netherlands on June 28, 2012. Smilianets was extradited on Sept. 7, 2012, and remains in federal custody. He will appear in New Jersey federal court to be arraigned on the superseding indictment on a date to be determined. Kalinin, Kotov and Rytikov remain at large. All of the defendants are Russian nationals except for Rytikov, who is a citizen of Ukraine.
The Attacks
According to court documents, the five defendants allegedly conspired with others to penetrate the computer networks of several of the largest payment processing companies, retailers and financial institutions in the world, stealing the personal identifying information of individuals. They allegedly took user names and passwords, means of identification, credit and debit card numbers and other corresponding personal identification information of cardholders. The conspirators are alleged to have unlawfully acquired more than 160 million card numbers through hacking.
Court documents allege that the initial entry was often gained using a “SQL injection attack.” SQL, or Structured Query Language, is a type of programing language designed to manage data held in particular types of databases; the hackers identified vulnerabilities in SQL databases and used those vulnerabilities to infiltrate a computer network. Once the network was infiltrated, the defendants allegedly placed malicious code, or malware, on the system. This malware created a “back door,” leaving the system vulnerable and helping the defendants maintain access to the network. In some cases, the defendants lost access to the system due to companies’ security efforts, but they were able to regain access through persistent attacks.
Communications obtained by law enforcement reveal the defendants often targeted the victim companies for many months, waiting patiently as their efforts to bypass security were underway. The defendants allegedly had malware implanted in multiple companies’ servers for more than a year.
The defendants are alleged to have used their access to the networks to install “sniffers,” which were programs designed to identify, collect and steal data from the victims’ computer networks. The defendants then allegedly used an array of computers located around the world to store the stolen data and ultimately sell it to others.
Selling the Data
After acquiring the card numbers and associated data – which they referred to as “dumps” – the conspirators allegedly sold it to resellers around the world. The buyers then allegedly sold the dumps through online forums or directly to individuals and organizations. Smilianets was allegedly in charge of sales, vending the data only to trusted identity theft wholesalers. According to court documents, he charged approximately $10 for each stolen American credit card number and associated data, approximately $50 for each European credit card number and associated data and approximately $15 for each Canadian credit card number and associated data – offering discounted pricing to bulk and repeat customers. Ultimately, the end users encoded each dump onto the magnetic strip of a blank plastic card and cashed out the value of the dump by either withdrawing money from ATMs or making purchases with the cards.
Covering Their Tracks
The defendants used a number of methods to conceal the scheme. Unlike traditional Internet service providers, Rytikov allegedly allowed his clients to hack with the knowledge he would never keep records of their online activities or share information with law enforcement.
Over the course of the conspiracy, the defendants allegedly communicated through private and encrypted communications channels to avoid detection. Fearing law enforcement would intercept even those communications, some of the conspirators allegedly attempted to meet in person.
To protect against detection by the victim companies, the defendants allegedly altered the settings on victim company networks to disable security mechanisms from logging their actions. The defendants also worked to evade existing protections by security software.
* * *
Court documents allege that as a result of the scheme, financial institutions, credit card companies and consumers suffered hundreds of millions in losses, including more than $300 million in losses reported by just three of the corporate victims and immeasurable losses to the identity theft victims in costs associated with stolen identities and false charges.
If convicted, the maximum penalties for the charged counts are: five years in prison for conspiracy to gain unauthorized access to computers; 30 years in prison for conspiracy to commit wire fraud; five years in prison for unauthorized access to computers; and 30 years in prison for wire fraud.
The charges and allegations contained in the indictment are merely accusations, and the defendants are considered innocent unless and until proven guilty.
The case was investigated by the USSS Criminal Investigations Division and the USSS Newark Division. Significant assistance was provided by the Justice Department’s Office of International Affairs and the public prosecutors with the Dutch Ministry of Security and Justice and the National High Tech Crime Unit of the Dutch National Police.
The government is represented by Erez Liebermann, Deputy Chief of the New Jersey U.S. Attorney’s Office Criminal Division, Assistant U.S. Attorney Gurbir Grewal of the Computer Hacking and Intellectual Property Section of the office’s Economic Crimes Unit and Trial Attorney James Silver of the Criminal Division’s Computer Crime and Intellectual Property Section. The U.S. Attorney’s Offices in the District of Kansas and the Northern District of Georgia provided valuable contributions in the development of the prosecution.
Thursday, July 25, 2013
Five Indicted in New Jersey for Largest Known Data Breach Conspiracy
Hackers Targeted Major Payment Processors, Retailers and Financial Institutions Around the World
A federal indictment made public today in New Jersey charges five men with conspiring in a worldwide hacking and data breach scheme that targeted major corporate networks, stole more than 160 million credit card numbers and resulted in hundreds of millions of dollars in losses. It is the largest such scheme ever prosecuted in the United States.
The charges were announced today by U.S. Attorney Paul J. Fishman of the District of New Jersey; Acting Assistant Attorney General Mythili Raman of the Justice Department’s Criminal Division; and Special Agent in Charge James Mottola of the U.S. Secret Service (USSS), Criminal Investigations, Newark, N.J., Division. The USSS led the investigation of the indicted conspiracy.
The defendants allegedly sought corporate victims engaged in financial transactions, retailers that received and transmitted financial data and other institutions with information they could exploit for profit. The defendants are charged with attacks on NASDAQ, 7-Eleven, Carrefour, JCP, Hannaford, Heartland, Wet Seal, Commidea, Dexia, JetBlue, Dow Jones, Euronet, Visa Jordan, Global Payment, Diners Singapore and Ingenicard. It is not alleged that the NASDAQ hack affected its trading platform.
According to the second superseding indictment unsealed today in Newark federal court and other court filings, the five men each served particular roles in the scheme. Vladimir Drinkman, 32, of Syktyykar and Moscow, Russia, and Alexandr Kalinin, 26, of St. Petersburg, Russia, each allegedly specialized in penetrating network security and gaining access to the corporate victims’ systems. Roman Kotov, 32, of Moscow, allegedly specialized in mining the networks Drinkman and Kalinin compromised to steal valuable data. Court documents allege that the defendants hid their activities using anonymous web-hosting services provided by Mikhail Rytikov, 26, of Odessa, Ukraine. Dmitriy Smilianets, 29, of Moscow, allegedly sold the information stolen by the other conspirators and distributed the proceeds of the scheme to the participants.
“This type of crime is the cutting edge,” said U.S. Attorney Fishman. “Those who have the expertise and the inclination to break into our computer networks threaten our economic well-being, our privacy, and our national security. And this case shows, there is a real practical cost because these types of frauds increase the costs of doing business for every American consumer, every day. We cannot be too vigilant and we cannot be too careful.”
“The defendants charged today were allegedly responsible for spearheading a worldwide hacking conspiracy that victimized a wide array of consumers and entities, causing hundreds of millions of dollars in losses,” said Acting Assistant Attorney General Raman. “Despite substantial efforts by the defendants to conceal their alleged crimes, the Department and its law enforcement counterparts have cracked this extensive scheme and are seeking justice for its many victims. Today’s indictment will no doubt serve as a serious warning to those who would utilize illegal and fraudulent means to steal sensitive information online.”
“As is evident by this indictment, the Secret Service will continue to apply innovative techniques to successfully investigate and arrest transnational cyber criminals,” said USSS Special Agent in Charge Mottola. “While the global nature of cybercrime continues to have a profound impact on our financial institutions, this case demonstrates the global investigative steps that U.S. Secret Service Special Agents are taking to ensure that criminals will be pursued and prosecuted no matter where they reside.”
Kalinin and Drinkman were previously charged in New Jersey as “Hacker 1” and “Hacker 2” in a 2009 indictment charging Albert Gonzalez, 32, of Miami, in connection with five corporate data breaches – including the breach of Heartland Payment Systems Inc., which at the time was the largest breach ever reported. Gonzalez is currently serving 20 years in federal prison for those offenses. The U.S. Attorney’s Office for the Southern District of New York today announced two additional indictments against Kalinin: one charges him in connection with hacking certain computer servers used by NASDAQ and a second indictment, unsealed today, charged Kalinin and another alleged Russian hacker, Nikolay Nasenkov, with an international scheme to steal bank account information by hacking U.S.-based financial institutions. Rytikov was previously charged in the Eastern District of Virginia with an unrelated scheme. Kotov and Smilianets have not previously been charged publicly in the United States.
Drinkman and Smilianets were arrested at the request of the United States while traveling in the Netherlands on June 28, 2012. Smilianets was extradited on Sept. 7, 2012, and remains in federal custody. He will appear in New Jersey federal court to be arraigned on the superseding indictment on a date to be determined. Kalinin, Kotov and Rytikov remain at large. All of the defendants are Russian nationals except for Rytikov, who is a citizen of Ukraine.
The Attacks
According to court documents, the five defendants allegedly conspired with others to penetrate the computer networks of several of the largest payment processing companies, retailers and financial institutions in the world, stealing the personal identifying information of individuals. They allegedly took user names and passwords, means of identification, credit and debit card numbers and other corresponding personal identification information of cardholders. The conspirators are alleged to have unlawfully acquired more than 160 million card numbers through hacking.
Court documents allege that the initial entry was often gained using a “SQL injection attack.” SQL, or Structured Query Language, is a type of programing language designed to manage data held in particular types of databases; the hackers identified vulnerabilities in SQL databases and used those vulnerabilities to infiltrate a computer network. Once the network was infiltrated, the defendants allegedly placed malicious code, or malware, on the system. This malware created a “back door,” leaving the system vulnerable and helping the defendants maintain access to the network. In some cases, the defendants lost access to the system due to companies’ security efforts, but they were able to regain access through persistent attacks.
Communications obtained by law enforcement reveal the defendants often targeted the victim companies for many months, waiting patiently as their efforts to bypass security were underway. The defendants allegedly had malware implanted in multiple companies’ servers for more than a year.
The defendants are alleged to have used their access to the networks to install “sniffers,” which were programs designed to identify, collect and steal data from the victims’ computer networks. The defendants then allegedly used an array of computers located around the world to store the stolen data and ultimately sell it to others.
Selling the Data
After acquiring the card numbers and associated data – which they referred to as “dumps” – the conspirators allegedly sold it to resellers around the world. The buyers then allegedly sold the dumps through online forums or directly to individuals and organizations. Smilianets was allegedly in charge of sales, vending the data only to trusted identity theft wholesalers. According to court documents, he charged approximately $10 for each stolen American credit card number and associated data, approximately $50 for each European credit card number and associated data and approximately $15 for each Canadian credit card number and associated data – offering discounted pricing to bulk and repeat customers. Ultimately, the end users encoded each dump onto the magnetic strip of a blank plastic card and cashed out the value of the dump by either withdrawing money from ATMs or making purchases with the cards.
Covering Their Tracks
The defendants used a number of methods to conceal the scheme. Unlike traditional Internet service providers, Rytikov allegedly allowed his clients to hack with the knowledge he would never keep records of their online activities or share information with law enforcement.
Over the course of the conspiracy, the defendants allegedly communicated through private and encrypted communications channels to avoid detection. Fearing law enforcement would intercept even those communications, some of the conspirators allegedly attempted to meet in person.
To protect against detection by the victim companies, the defendants allegedly altered the settings on victim company networks to disable security mechanisms from logging their actions. The defendants also worked to evade existing protections by security software.
* * *
Court documents allege that as a result of the scheme, financial institutions, credit card companies and consumers suffered hundreds of millions in losses, including more than $300 million in losses reported by just three of the corporate victims and immeasurable losses to the identity theft victims in costs associated with stolen identities and false charges.
If convicted, the maximum penalties for the charged counts are: five years in prison for conspiracy to gain unauthorized access to computers; 30 years in prison for conspiracy to commit wire fraud; five years in prison for unauthorized access to computers; and 30 years in prison for wire fraud.
The charges and allegations contained in the indictment are merely accusations, and the defendants are considered innocent unless and until proven guilty.
The case was investigated by the USSS Criminal Investigations Division and the USSS Newark Division. Significant assistance was provided by the Justice Department’s Office of International Affairs and the public prosecutors with the Dutch Ministry of Security and Justice and the National High Tech Crime Unit of the Dutch National Police.
The government is represented by Erez Liebermann, Deputy Chief of the New Jersey U.S. Attorney’s Office Criminal Division, Assistant U.S. Attorney Gurbir Grewal of the Computer Hacking and Intellectual Property Section of the office’s Economic Crimes Unit and Trial Attorney James Silver of the Criminal Division’s Computer Crime and Intellectual Property Section. The U.S. Attorney’s Offices in the District of Kansas and the Northern District of Georgia provided valuable contributions in the development of the prosecution.
FEMA RELEASES NUMBERS FOR ILLINOIS AID TO RESIDENTS AND NEW JERSEY COMMUNITY DISASTER LOANS
FROM: FEDERAL EMERGENCY MANAGEMENT AGENCY
Federal Disaster Aid to Illinois Residents Tops $139 Million
Main Content
Release date: JULY 19, 2013
Release Number: 4116-081
AURORA, Ill. – Federal assistance in Illinois has reached more than $139 million, distributed among more than 57,000 individuals and households, since a major disaster was declared for storms and flooding that occurred April 16 through May 5.
The latest summary of federal assistance includes:
More than $139 million in FEMA grants approved for individuals and households;
Of that amount, more than $120 million has been approved for housing assistance, including temporary rental assistance and home repair costs;
More than $19 million has been approved to cover other essential disaster-related needs, such as medical and dental expenses and damaged personal possessions;
More than 83,000 home inspections have been completed to confirm disaster damage;
More than $40 million in loans to homeowners, renters or business owners has been approved by the U.S. Small Business Administration.
FEMA COMMUNITY DISASTER LOANS IN NEW JERSEY TOTAL $125 MILLION
Main Content
Release date: JULY 23, 2013
Release Number: 4086-195
TRENTON, N.J. -- The Federal Emergency Management Agency in partnership with the State of New Jersey has approved $125 million in low-interest Community Disaster Loans for eligible jurisdictions in New Jersey. The program helps jurisdictions that have suffered substantial revenue losses from a major disaster to perform their governmental functions.
As of July 18, FEMA has received 83 loan requests and approved 53. Community Disaster Loans are intended to help local governments and jurisdictions to carry on existing official functions or to expand such functions to meet disaster-related needs.
“Community Disaster Loans are based on the need to bridge the revenue gap so local governments can continue functioning after a disaster,” said FEMA Federal Coordinating Officer Gracia Szczech. “Typically, the loans help cover operating expenses such as salaries for police officers, firefighters and teachers while the community recovers.”
The maximum loan is $5 million. Jurisdictions must demonstrate the need for assistance to perform government functions. The term is five years but can be extended to 10 years if the applicant chooses. Interest on the loans equals the rate for five-year maturities, adjusted to the nearest 1/8 percent, determined by the Secretary of the Treasury on the day the note is executed. Loans cannot exceed 50 percent of a jurisdiction’s operating budget for the year in which the disaster occurs.
The loans cannot be used as a jurisdiction’s non-federal cost share for any federal grants. Nor can they be used for capital projects, such as new buildings, or to repair or restore damaged public facilities. Congress allocated additional funds to the Disaster Assistance Direct Loan Program Account after Superstorm Sandy.
Federal Disaster Aid to Illinois Residents Tops $139 Million
Main Content
Release date: JULY 19, 2013
Release Number: 4116-081
AURORA, Ill. – Federal assistance in Illinois has reached more than $139 million, distributed among more than 57,000 individuals and households, since a major disaster was declared for storms and flooding that occurred April 16 through May 5.
The latest summary of federal assistance includes:
More than $139 million in FEMA grants approved for individuals and households;
Of that amount, more than $120 million has been approved for housing assistance, including temporary rental assistance and home repair costs;
More than $19 million has been approved to cover other essential disaster-related needs, such as medical and dental expenses and damaged personal possessions;
More than 83,000 home inspections have been completed to confirm disaster damage;
More than $40 million in loans to homeowners, renters or business owners has been approved by the U.S. Small Business Administration.
FEMA COMMUNITY DISASTER LOANS IN NEW JERSEY TOTAL $125 MILLION
Main Content
Release date: JULY 23, 2013
Release Number: 4086-195
TRENTON, N.J. -- The Federal Emergency Management Agency in partnership with the State of New Jersey has approved $125 million in low-interest Community Disaster Loans for eligible jurisdictions in New Jersey. The program helps jurisdictions that have suffered substantial revenue losses from a major disaster to perform their governmental functions.
As of July 18, FEMA has received 83 loan requests and approved 53. Community Disaster Loans are intended to help local governments and jurisdictions to carry on existing official functions or to expand such functions to meet disaster-related needs.
“Community Disaster Loans are based on the need to bridge the revenue gap so local governments can continue functioning after a disaster,” said FEMA Federal Coordinating Officer Gracia Szczech. “Typically, the loans help cover operating expenses such as salaries for police officers, firefighters and teachers while the community recovers.”
The maximum loan is $5 million. Jurisdictions must demonstrate the need for assistance to perform government functions. The term is five years but can be extended to 10 years if the applicant chooses. Interest on the loans equals the rate for five-year maturities, adjusted to the nearest 1/8 percent, determined by the Secretary of the Treasury on the day the note is executed. Loans cannot exceed 50 percent of a jurisdiction’s operating budget for the year in which the disaster occurs.
The loans cannot be used as a jurisdiction’s non-federal cost share for any federal grants. Nor can they be used for capital projects, such as new buildings, or to repair or restore damaged public facilities. Congress allocated additional funds to the Disaster Assistance Direct Loan Program Account after Superstorm Sandy.
DOJ FILES LAWSUIT AGAINST FLORIDA IN CHILDREN WITH DISABILITIES CASE
FROM: U.S. DEPARTMENT OF JUSTICE
Monday, July 22, 2013
Justice Department Files Lawsuit Against the State of Florida for Unnecessarily Segregating Children with Disabilities
The Justice Department announced today that it has filed a lawsuit against the state of Florida alleging the state is in violation of the Americans with Disabilities Act (ADA) in its administration of its service system for children with significant medical needs, resulting in nearly 200 children with disabilities being unnecessarily segregated in nursing facilities when they could be served in their family homes or other community-based settings. The lawsuit, filed in federal district court in Fort Lauderdale, Fla., further alleges that the state’s policies and practices place other children with significant medical needs in the community at serious risk of institutionalization in nursing facilities. The ADA and the Supreme Court’s decision in Olmstead v. L.C. require states to eliminate unnecessary segregation of persons with disabilities. The department’s complaint seeks declaratory and injunctive relief, as well as compensatory damages for affected children.
In September of last year, the department issued an extensive findings letter, notifying the state that it is in violation of the ADA. The letter found that the state’s failure to provide access to necessary community services and supports was leading to children with significant medical needs being unnecessarily institutionalized in, or being placed at serious risk of entering nursing facilities. The letter identified the numerous ways in which state policies and practices have limited the availability of access to medically necessary in-home services for children with significant medical needs. Additionally, the state’s screening and transition planning processes have been plagued with deficiencies. Some children have spent years in a nursing facility before receiving screening required under federal law to determine whether they actually need to be in a nursing facility.
As a result of the state’s actions and inaction, the state has forced some families to face the cruel choice of fearing for their child’s life at home or placing their child in a nursing facility. In one instance, the state cut one child’s in-home health care in half. Her family could not safely provide care themselves to make up for this reduction in services, and they felt they had no choice but to place her in a nursing home. Another child who entered a nursing facility as a young child spent almost six years in a facility before the state completed her federally mandated screening.
“Florida must ensure that children with significant medical needs are not isolated in nursing facilities, away from their families and communities,” said Eve Hill, Deputy Assistant Attorney General for the Civil Rights Division. “Children have a right to grow up with their families, among their friends and in their own communities. This is the promise of the ADA’s integration mandate as articulated by the Supreme Court in Olmstead. The violations the department has identified are serious, systemic and ongoing and require comprehensive relief for these children and their families.”
Since late 2012, the department has met with Florida officials on numerous occasions in an attempt to resolve the violations identified in the findings letter cooperatively. While the state has altered some policies that have contributed to the unnecessary institutionalization of children, ongoing violations remain. Nearly two hundred children remain in nursing facilities. Deficient transition planning processes, lengthy waiting lists for community-based services and a lack of sufficient community-based alternatives persist. The department has therefore determined that judicial action is necessary to ensure that the civil rights of Florida’s children are protected.
The ADA prohibits discrimination on the basis of disability by public entities, including state and local governments. The ADA requires public entities to ensure that individuals with disabilities are provided services in the most integrated setting appropriate to their needs. The department’s Civil Rights Division enforces the ADA, which authorizes the Attorney General to investigate allegations of discrimination based upon disability and to conduct compliance reviews regarding the programs and services offered by public entities.
Monday, July 22, 2013
Justice Department Files Lawsuit Against the State of Florida for Unnecessarily Segregating Children with Disabilities
The Justice Department announced today that it has filed a lawsuit against the state of Florida alleging the state is in violation of the Americans with Disabilities Act (ADA) in its administration of its service system for children with significant medical needs, resulting in nearly 200 children with disabilities being unnecessarily segregated in nursing facilities when they could be served in their family homes or other community-based settings. The lawsuit, filed in federal district court in Fort Lauderdale, Fla., further alleges that the state’s policies and practices place other children with significant medical needs in the community at serious risk of institutionalization in nursing facilities. The ADA and the Supreme Court’s decision in Olmstead v. L.C. require states to eliminate unnecessary segregation of persons with disabilities. The department’s complaint seeks declaratory and injunctive relief, as well as compensatory damages for affected children.
In September of last year, the department issued an extensive findings letter, notifying the state that it is in violation of the ADA. The letter found that the state’s failure to provide access to necessary community services and supports was leading to children with significant medical needs being unnecessarily institutionalized in, or being placed at serious risk of entering nursing facilities. The letter identified the numerous ways in which state policies and practices have limited the availability of access to medically necessary in-home services for children with significant medical needs. Additionally, the state’s screening and transition planning processes have been plagued with deficiencies. Some children have spent years in a nursing facility before receiving screening required under federal law to determine whether they actually need to be in a nursing facility.
As a result of the state’s actions and inaction, the state has forced some families to face the cruel choice of fearing for their child’s life at home or placing their child in a nursing facility. In one instance, the state cut one child’s in-home health care in half. Her family could not safely provide care themselves to make up for this reduction in services, and they felt they had no choice but to place her in a nursing home. Another child who entered a nursing facility as a young child spent almost six years in a facility before the state completed her federally mandated screening.
“Florida must ensure that children with significant medical needs are not isolated in nursing facilities, away from their families and communities,” said Eve Hill, Deputy Assistant Attorney General for the Civil Rights Division. “Children have a right to grow up with their families, among their friends and in their own communities. This is the promise of the ADA’s integration mandate as articulated by the Supreme Court in Olmstead. The violations the department has identified are serious, systemic and ongoing and require comprehensive relief for these children and their families.”
Since late 2012, the department has met with Florida officials on numerous occasions in an attempt to resolve the violations identified in the findings letter cooperatively. While the state has altered some policies that have contributed to the unnecessary institutionalization of children, ongoing violations remain. Nearly two hundred children remain in nursing facilities. Deficient transition planning processes, lengthy waiting lists for community-based services and a lack of sufficient community-based alternatives persist. The department has therefore determined that judicial action is necessary to ensure that the civil rights of Florida’s children are protected.
The ADA prohibits discrimination on the basis of disability by public entities, including state and local governments. The ADA requires public entities to ensure that individuals with disabilities are provided services in the most integrated setting appropriate to their needs. The department’s Civil Rights Division enforces the ADA, which authorizes the Attorney General to investigate allegations of discrimination based upon disability and to conduct compliance reviews regarding the programs and services offered by public entities.
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