second, another piece of authority that professor shay highlighted in his article was something known as code section 956, which, as professor shay described, when these earnings accrue overseas and are used in the u.s., sort of akin to withdrawing from your i.r.a., used in the u.s. in a variety of ways, whether they're paid back to the u.s. company or the u.s. shareholders, whether they're loaned back to the u.s. company,

or in a number of different other circumstances guaranteed debts and the like. those trigger a current inclusion of these deferred income that's been allowed to accrue tax free just like your i.r.a. has been allowed to accrue tax free. and in code section 956, congress authorized treasury to write regulations to prevent the avoidance of the provisions of the section through reorganizations or otherwise. so, again, treasury has been given authority under this code section to tackle the kinds of problems, economic challenges that the inversion phenomena exists. as i mentioned, there are over 500 specific grants of authority. i'm only highlighting two here. i could speak to many more, but i'll let the discussion continue. >> thanks. so i'm going to return back to steve again. steve, i want to ask if there's any other tools you want to add to that list, and then we'll

spend a few minutes talking about first the impact of using those tools and then secondly how we think that would -- the wisdom of doing so. go ahead, steve, if you will. >> i just wanted to mention that one of the tools an agency always has is enforcement of the law as it is. and my article was directed at to address issues that might not be able to reached under current law. but i didn't discuss in that ç article an anti-abuse regulation under section 956 that as i read it on its terms and because of some peculiar aspects that are quite expansive, could actually be used to treat what is called a hopscotch loan from a controlled foreign subsidiary. if we had the picture back up -- i don't know if that's

possible -- up to the new foreign parent as in many cases, not every case, but in many cases as a deemed dividend to the u.s. company. so, the real need for regulations, in my view, is cases where that regulation with respect to using the offshore earnings would be cases that that regulation would not reach or that the i.r.s. which has great discretion under that regulation chooses not to apply it and in particular cases where there's post inversion planning that would, without triggering a u.s. tax, allow those old earnings to no longer be subject to u.s. tax jurisdiction. i've been called professor a lot today. i've been a professor -- this is my fourth year. i spent 30-plus years advising multinational companies, so i really -- my dna is much more in

the tax planner mode than it is in the professorial mode, just for what that's worth. and i see lots of tax-planning opportunities. as to any of the transactions that are out there, that have been proposed, i would be happy to discuss things that i would do as a tax planner that would allow post-conversion effective tax rate of those companies to be reduced. and that's why we're talking about this subject. >> so it appears that having a bow tie is not an indication of professorial stature but instead tax planning advice. i didn't realize it came with the job description. john, back to comments you made earlier. you started us off by talking about the fact that your view, this set of practices were a symptom of a larger set of drivers in the corporate tax structure and that ultimately, and i think you wouldn't get any disagreement with anyone here, we need to be addressing those.

larger drivers. but in the context of the current debate, first of all, can i ask you to ask would the measures that steve and steve have put on the table be effective and then we can go beyond that to say should treasury take it. let's start with be effective. >> so the answer is i don't think so. but there's an overarching point before i get back into the weeds which is why are we trying to raise the bar so it will be harder for companies to leave the united states. why aren't we trying to do something to make it more attractive for them to stay here. it's just -- we are really losing our focus. but coming back to whether there should be targeted regulatory action, the first suggestion steve and steve made is to use a code section called 385 to characterize debt as equity to limit the ability of these companies to reduce their tax with interest deductions. that isn't why companies are doing these inversions.

if you look at the administration's proposal, the camp proposal, that's chairman camp, senator baucus' proposal, they all propose to tighten 163 j. that's a targeted section limiting interest deductibility. so companies is read the tea leaves. they know this is very likely to happen. they will make a big deal planning into what is likely to be coming down the pipe. i don't think they have the legislative authority under 385 and i will admit, i was at the treasury and put out the first 385 regs which were ultimately withdrawn. but there's nothing in the statute or legislative history that says you can target 385 to a subclass of transactions involving foreign lenders and borrowers. when we put out the regs, we weren't even sure they applied to foreign transactions. when you read the preamble to

the regs, they did not apply to foreign transactions. there's no application, treasury will consider this. that was 34 years ago, 1980. a lot of time has gone by, treasury has been thinking about it, they obviously haven't thought up until now they should use this tool. >> so let me just -- i want to get you to your second point. >> let me just stop on that point. i want to turn to sally to make an observation here. it strikes me the plain reading of the statute of this code section 385 is so directive and so broad -- and i've read the legislative history of 385, other provisions. i've gone through everything for the last 40 years. i don't think -- i think this is an easy question, that, of course, treasury has the authority here. but here is the question which i would like to pose to sally. in 1969, there was no notion of inversions.

i agree completely with john on that. and so when congress delegated broad authority for treasury to tackle what -- when should instruments be treated as debts so payments are deductible and when as stock payments are not deductible, congress, yes, did not have inversions in mind. but let me is you, sally, so what happens in these circumstances? does congress need to have a crystal ball when it writes it needs to expressly anticipate marked developments and what happens with other agencies? this can't be unique to treasury. >> i want to make it easier for sally to answer the question. >> it's really easy right now. >> okay. harder. >> you want to make it harder? then i'll speak first. why should i let you do that to me? the answer is, no, congress doesn't have to have a crystal ball. if i could refer to climate change, for example.

when they wrote the clean-air act, they weren't thinking greenhouse gases and yet the supreme court has said that there is the authority there. things will change. and one of the markers i laid down earlier in my overview, my two-minute overview of administrative law is that an agency could change its mind. it could say 35 years ago, we're not sure this covers foreign corporations and now it can be damn sure it does. it can change its mind and that won't impair its credibility and that won't cut into the amount of deference that it might receive. i don't know what would happen in this particular instance because the tax may have beenen mavens know the code, not me, but as a general proposition, the answer would be, no, congress does not have to have a crystal ball. >> i think we have an incomplete record because 385 was enacted in 1969. in 1989, congress enacted a

specific code section aimed at foreign related party debt to limit interest deductions. very targeted to this particular perceived abuse. not aimed at inverted companies but across the board. treasury did a study in 2007 and thought, gee, inverted companies -- 163 j is not tough enough on inverted companies and recommended and therefore in the last two budgets the administration has recommended that legislation be enacted to restrict interest deductibility by inverted companies. i'll read here, the treasury explanation, the administration explanation say it is necessary to amend section 163 j to fix this problem and they score revenue of $4.6 billion, which i think the convention is you can't raise revenue unless you're changing current law.

so, against the record of treasury saying we need -- asking congress twice, we need to change the law to address interest stripping on inverted parties, how can they then go back and say, a-ha, i didn't really need to change the law, i could have done it all along using 385. there's a very recent case, the most recent case striking down an i.r.s. regulation in the d.c. circuit said administration can always change its mind if it goes a very long time and indicates it doesn't have the authority and then all of a sudden decides that it does, it's at least a telling factor. >> steve, you will get another shot back in here, but john had a second point on the question. i want us to get past all of the statutory interpretations so we come back to the policy. >> but the larger point here is i actually don't think -- we'll get into whether treasury should. i don't think the authority exists under 385. most tax lawyers think 385 was aimed at something different.

if treasury wanted to put out -- >> second point. >> -- a broad 385 rule on all related parties, not just foreign, but to all, then maybe. but not a targeted sub-class. >> you had one other question on whether it would work and then we'll get steve in here. >> i don't think it would work because i don't think it is what is driving these transactions because companies aren't counting on this benefit going forward. >> okay. steve? >> i think we have two threads and i think i want to stick with the authority thread so we finish that. i'm happy to defer to steve first. >> short points. short points. one of the interesting things is administrative law in the tax area is quite settled, and especially now that we've imported sally into the tax world, we've got it made. the mayo case said it didn't matter loug a statute stayed out there. treasury can issue regulations,

it can change its mind. so the point of length really is irrelevant. second, yes, there is a specific regime to address earnings stripping by foreign companies generally. and there's a specific regime to address a variety of issues dealing with u.s. companies that invert. but the 385 debt regime was left in place throughout. in 1989 when the specific regime was added for interest stripping, congress also amended 385 and left in place the full authority. indeed, if you look to the legislative history of 163 j they actually allude when they grant treasury authority to address guaranteed debt as a means of a u.s. company withdrawing foreign earnings, they say in passing, of course, we're not changing treasury's authority to figure out what is debt and equity. so i'll leave it at that.

john and i will disagree and i'm happy to -- >> let me ask a question. >> certainly. >> do you think treasury was then wrong in its budget proposal saying it is necessary to amend section 163 j to address earnings stripping by inverted companies? because that is the language, it's necessary. >> i'll defer to steve this time. >> if you classify debt as equity under 385, you are not doing what 163 j does. you are saying an instrument to the extent that you're reclassifying it, should be treated as equity for purposes of the code. one effect of that is to transform a payment on that instrument from interest to dividend to the extent of earnings or profits or the other outcomes of payment on stock. the other is it has an effect on withholding taxes under treaties. the other is it's treated different under the

nondiscrimination article of treaties. the whole argument that's being made so far that congress spoke to 163 j, therefore you can't use 385, then there are several major problems with that argument. first, congress didn't say that when they enacted 163 j, and we can turn to sally what the implications of that might be without getting her into the tax weeds. second, there is evidence that steve has deduced and referred to his blog that the legislative history suggests that they didn't intend to restrict treasury's ability to use 385. third, 385 is different. it does different things. and in some respects it's actually a better tool than 163 j, and in some respects it's less flexible. but in terms of authority, to my mind there's no doubt. for that, i just turn to the statute itself which in 385 b says that among the factors taken into account in determining with respect to a

particular factual situation whether a debt or a creditor relationship exists, a particular factual situation. that gives treasury the clear authority to distinguish inverted from non-inverted cases. having said that, john and i actually agree on something. >> bow ties. >> in addition to the bow ties. i think that if we get into debt equity rules with respect to inverted companies, i think the better answer over time -- and i said this in my article -- they should apply to all foreign controlled companies. but -- and here is the problem, when the patient is bleeding and an artery is open, you put on a tourniquet, and then you have to have time to come back. now, is the u.s. tax system falling apart because of inversions? no. but the corporate tax base is risking an irreversible decrease by reason of companies taking

assets out from the reach of the corporate tax space if they both invert and then decontrol their foreign corporations and take assets that have been earned while in the u.s. corporate tax space as to which the united states reasonably was expecting to -- a tax to be paid ultimately and denying that ultimate conclusion. that is why acting now is

and i apologize, that's not a direct quote, but that was clearly -- he is saying that there's a difference as to what we don't know for sure how treasury will interpret it's own authority. he said he wants to take an action that he thinks will be careful within -- indisputably within treasury's aauthorities. so let's take that as an assumption for the moment. let's assume that whatever action he takes will be one that he feels and perhaps even john will feel is consistent with his authority. question is, if that action is one that is sufficient to reduce the level of economic incentive for inversions, to make it -- perhaps can't prevent them certainly and i don't think he would want to, but to make it less economically attractive to do this for purposes of reducing your u.s. tax burden. is that a good policy to take?

and this is what i think, steve, you were starting to get at. in an ideal world we would have a tax law that's not designed to be aimed particularly at this transaction. we would have our interest provisions and others be more universally applicable. john, you said we all think we should be dealing with the incentive issue, not the deterrent, not the punishment issue for people that move overseas. but congress does not seem likely to do comprehensive tax reform in the near term. so each of you, if you would, give me your views on the merits, the policy merits of acting now, and let me just ask the second question so you can choose which one you want to answer, the political merits. does moving forward with a provision to address inversions now make it more or less likely that the change that everyone up here believes is a good idea, which is to deal with comprehensive business tax reform, is it more or less likely to happen if the

administration uses its executive authority in this way? john first, we'll just go down the row. >> you ask a number of questions there, but -- >> three-minute answers. >> the answer is i do not think regulations would be effective, which is really important because the transactions would just morph into another form. i think to the -- i think they would make tax reform -- i am more optimistic than you on comprehensive tax reform sooner rather than later. i think the president wants to do it. >> how soon is soon? >> i think in the next two years. i think the administration wants to do it. i know the republicans in the house want to do it, and i'm sure that ron widen i know wants to do it and certainly orrin hatch does, and the business community does. i want to be very clear on that. so i do think -- i'm not a pessimist. i'm an optimist. i think regulations would make tax reform more difficult, not less difficult because, a, to the extent they were effective, and i'm not sure they would be.

they might be on inversions but transaction would say morph into another form, they would antagonize the congress. the political comity would be destroyed. speaker boehner has written an op-ed saying, please, mr. president, don't rewrite the tax code yurourself around inversio. so i think it would be a bad idea in terms of moving us to where we need to be as a country. i also think it would be bad -- this is in the long run maybe the most important factor -- create a dangerous precedent and damage the institutional integrity of the office of tax policy at the treasury. there was a letter written to tax notes by dennis ross, a former tax official, expressing dismay over the use -- potential regulatory use of 385 to stop inverses.

as dennis pointed out, there's enormous value in the policy and technical integrity of the office of tax policy calling it the way it sees it. and anybody who has served in that -- and not interpreting the tax laws to advance whatever the political or policy issue du jour is. anybody who served in that office knows the importance of that mission. there's been pressure, for example, to index capital gains through regulations. there's been pressure to call an unborn child a dependent. the office of tax policy has always resisted that. and i think to twist the tax regulation process to attempt to stop, and i don't think you would stop these transactions, puts our tax system over the long term at greater risk than inversions do in the short term

because i'm confident inversions will be dealt with in tax reform by the congress. >> steve, is two years soon enough? sally? >> he's yielding to me. >> only temporarily. >> i guess i have three reactions. if john is right that doing any of the things that have been suggested will not decrease the amount of inversions and so it will have no practical effect, then a regulation such as this would not have any benefit. it would have some transaction costs and other downsides and in a cost/benefit analysis, one would say don't go ahead. i don't know whether he is correct that it would not work, but that is the issue that would have to be addressed. in terms of the regs, issuance of regs antagonizing the congress, which otherwise loves to work hand in glove with the administration, i have to say

that that is not very persuasive as i look at the grand scheme. again, i'll return to the epa, which is the poster child for the hatred of the congress and their work on greenhouse gases, for example. climate change. they begged -- the administration begged the congress to enact climate change legislation. they were passionate on the subject. they said, as secretary lew said today about tax reform, much better if congress does it than if we have to do it. but congress didn't do it, wouldn't do it, couldn't do it, you supply the verb in there, but in any event, epa felt it had to go ahead. did it alienate the congress? yes. is that the reason we don't have climate change legislation?

i would submit, no, you wouldn't have it even if they had not gone ahead. what it does show is what the administration is prepared to do, so you know the other marker. so you know that if we don't do something, this is what is likely to be occupying the field. that's helpful for analyzing whether or not you want to go ahead. and in terms of the authority, the appropriate authority for executive action, secretary boehner -- secretary boehner, excuse me, speaker boehner has authorized a lawsuit against the president for using undue executive action. now, that's in the field of health care. but you could substitute immigration reform or you could substitute climate change. again, looking writ large at the administrative state, there are any number of areas where congress not acting has led to

the executive branch acting and in its actions i don't think the marginal further antagonism of congress is something that would be remarkable. finally, you spoke about the damage to the institutional integrity of the tax policy. i care fervently about that even though i'm not a tax lawyer. i believe -- no, i believe that government employees try to do the right thing. i believe they are committed public ser vants, and tax policy does have a reputation, even to non-tax people, as a home for such high integrity. but your assumption is that they're not calling it as they see it. >> no, no, excuse me. i never said that. i said they're being urged. >> they may be -- >> they haven't done anything yet. >> they are facing very different circumstances. secretary lew, i've got the

right secretary this time, secretary lew provided a lot of data showing a remarkable increase in inversions in recent times and potentially the consequences to the tax base. under those circumstances careful, thoughtful, rational examination of the data could lead up with, independent of being told to do so, to the decision that this is the right thing to do. and so i wouldn't sell out -- and you weren't selling out but i'm using a little hyperbole here, the integrity of the tax policy people. >> i want to get the audience in, so steve, share if you will. >> i just want to say, first question you had is will it work? and i also agree with john. if you adopt regulations in the two areas that i've discussed, some deals will still go forward.

and that is fine in my judgment to the extent that those are good business deals and are not being driven by tax savings. so that's part of the careful, thoughtful analysis that treasury has to reach. the second is will it hurt tax reform. in my judgment, it hurts tax reform for some companies to be able to put themselves in a different position as foreign parent companies from other companies. those are where some of the dividing lines are that create differences in approach within the business community. and so i don't think it helps tax reform to allow this to happen. you create more differences in winners and losers. so i think that acting regulatorily now is important. that brings me to the last comment. i don't know if there's going to be tax reform. i'm a huge skeptic because i don't see the political dynamics to bring about tax reform. i don't see the consensus. but if you take regulatory

action and tax reform happens in the next two years, you can correct any errors that are made, and if it doesn't happen for four or five years, then you have stopped the bleeding. to me it is a no-brainer. if you think you can come up with a rule that is responsible, that effects good tax policy, and you have authority, which in my view you have all three, i don't -- the argument of waiting for tax reform carries no weight with me at all. >> so steve, let me ask everyone and then i'm going to turn to the audience, let's assume for the moment that john is right, the two years is how long to waste. the secretary said he himself had changed his thinking about this issue because the pace at which invertsions have been accelerating. is two years -- what kind of -- give the public who is not following this as closely some

sense of scale in order of magnitude here. at the rate of acceleration of pace of change of these transactions, are we going to see our tax corporate tax base in two years disappear? where is the sense of urgency from? let me ask steve to answer and then i'll come back to you, john, and then we'll turn to the audience. steve, where is -- it's in the headlines a lot, it's embarrassing if we talk about the burger king going overseas. but is this a very significant shift in the location of the u.s. tax base? >> well, it can be. let's keep all this in perspective. the corporate tax base is only 10% in a good year of our total federal revenues. some of this isn't just about the corporate tax base. it's about americans seeing taxpayers be able to do things they cannot do. it's about protecting the integrity of the tax system as a whole. but just to be more specific, i

think what attracted secretary lew's attention almost certainly was first the pfizer deal which did not go forward, which was not quite $100 billion deal. two announced deals are each over $50 billion. all those occurred in the last several months. there are deals waiting in the wings of size we don't know. when i looked at walgreen's, which did not go forward, i pointed out in my article that if they did what the barclays analysts suggested they should do, they were talking about $980 million a year, one company, of tax savings, not all of which would be eliminated by the proposals. they would be reduced. let's say it's a couple of hundred million. we're talking real money even for the federal government. >> john? >> i think that's a great question, are we on a burning platform? is our hair on fire? the joint committee who is the arbiter of this has an answer to

that question. and the administration has a proposal to address a legislative proposal to address inversion. if enacted, that proposal would raise $20 billion over ten years. $20 billion. sounds like a lot of money, is a lot of money, but it's not a lot of money in the context of the projected corporate tax receipts over the next ten years. in fact, it is less than one-half of 1% of the projected tax, and that's over ten years. so congress has time to deal with this. this notion of -- or the burning concern about interest stripping by inverted companies. there's a revenue estimate on that proposal by the joint committee that says it will raise over 10 years $4.6 of 1% of corporate tax receipts. the house isn't on fire. these are not -- i'm not defending inversion. i'm not defending interest stripping. i'm just telling you there

aren't a reason for us to run helter-skelter and do -- and >> steve, i'm sure you'll find a way to answer the question as part of a comment in response to the audience. so let me make sure we get them in. thank you very much. so i would ask if anyone has a question, please raise your hand. as you ask your question or if you would please identify yourself and -- your name and

where you're from. all right. in the first row up here, please. if you could wait for the mic, please. thank you. here it comes. >> question for john and the other panelists, i guess. when i served at treasury between 2001 and 2003, we described in congressional testimony the u.s. tax system as america's berlin wall and said really the only way to stop companies from wanting to leave, if it's in the economic interest to leave, is to tear down that wall and go to a territorial system and you can still raise 10% of the u.s. revenue from the corporate base and no one will need to leave. any comments on that? >> steve, do you want to start? >> sure, i can address that. >> i do not think shifting to a territorial system is a panacea, jeff. the two problems that we've highlighted here are earning stripping and the deferred accumulated earnings of these

controlled foreign corporations. if we shift to a territorial system in which a u.s. company is only taxed on its u.s. source income and not taxed on its foreign income, there will be all the more incentive for multi-nationals to strip income from the u.s. base and shift it abroad. >> isn't that the first step and then you deal with all those issues -- >> let me finish my answer. so as part of any consideration of territorial, we need to address the earnings stripping issues that we're discussing here. one of the observations professor shay made in his article was he wanted treasury to adopt regulations that could fold into tax reform, and we've got to address earnings stripping, and we've got to do it sensibly, and i think we could fold that in. second, the other problem that we've highlighted here is the large stock of accumulated earnings offshore, the huge i.r.a.s that have not been subject to u.s. tax. i disagree with john.

i think the problem of inverted companies is serious and pressing. there's a $2 trillion stock of deferred earnings abroad. and whether we go to territorial or tackle tax reform in any particular fashion, the deal sunday our worldwide system today that u.s. companies are expected to pay tax on their worldwide income. we granted them relief by allowing them to park their earnings abroad with the expectation that they would be returned and subject a tax. we granted one holiday in 2004 and promised never to grant a holiday again. so we've got to deal with that issue as we shift to reform as well. so i don't think there's a panacea of let's just tackle all of this in reform and leave the rest for later. >> just a clarification. i think the deal was that if they brought the money back, it would be subject to u.s. taxation. if it's offshore and it stays offshore and you're going to a

territorial system, is there really a disconnect there? >> john, you wanted to answer. >> let me try to respond. steve again said a lot on this issue of transition to a territorial system. there's a question of what do you do with the historic earnings of u.s. companies. at least the bills that have been put forth -- i'll say when japan and the uk moved to territorial systems, they just let the companies bring it back, no toll charge. the u.s. -- all the bills that have been introduced impose a toll charge of 5%, 8%, depends on the proposal. none of this inversion activity changes that. steve didn't get this quite right in his article. the u.s. company after an inversion is still a u.s. company, still owns cfcs and those will still be subject to the toll tax. they would be very happy to find out they aren't, but they will be.

so i think that's a red herring. i don't think there's any panaceas. but this question of moving to a territorial system and will that exacerbate earnings stripping. maybe. if it does, then we should address that earning stripping issue directly. i will point out the rest of the world have moved to territorial systems. the rest of the world do not seem to be having earnings stripping problems that we're conjuring up today. the uk, it's not a problem with the uk. it's not a problem in japan, and if it's a problem here, we can deal with that problem. >> sir, can i continue to address -- i just -- john, i'm not recalling saying what you said in the article but -- >> it's in a footnote. >> but if a company is under a u.s. company, those earnings still remain subject to u.s. tax jurisdiction. i think i said that before here. but it is possible through a

post-inversion planning transaction to decontrol that company in a range of circumstances, sometimes it won't be practical but sometimes it's practical, and it can be done without triggering a u.s. tax. if that is done, then those earnings are no longer subject to the u.s. tax net. so that's the concern. again, guiding us into the weeds and we can talk about that later. >> i agree with what you said. >> okay. >> let me just say, i will note to the audience that we're going to try to avoid detailed statutory interpretation in q & a as best we can. i have a number of comments. they are terrific comments and we'll share them with folks. there will be a side bar here after the panel for people what want to press those. i want to keep it broader for all of the audience. let me mention two questions i will ask anyone who wants to respond and then we'll take another question from the room that are of this other order. one question is i think there's a general confusion about whether or not inversions result

in employment in the united states shifting or not. so i'm going to ask folks to address that. the second -- and that was from jennifer. sam sabo from online asks us also about the decision made by walgreen's when they purchased boots and chose not to invert. and they said that at the time that if they chose to invert they would be subject to intense scrutiny from the irs for many years to come and the impact of that uncertainty was sufficient to deter them from inverting. specifically, they said, a protracted controversy with the irs including litigation that could go on for years, almost a direct quote, would complicate and impede everyday tax and business planning so that with the implicit threat of such uncertainty, et cetera, et cetera. if you would comment, please, on maybe -- are there some firms that will not undertake this direction simply because of the sort of heightened scrutiny it will subject them to? >> so let me take the first question first because i think it's really important.

are any jobs leaving the u.s. because of these inversions. the answer -- can you put the chart back up, the picture -- do we still have that available? the u.s. company after the transaction still exists. it's just owned by a foreign company. no jobs leave the united states. no real assets leave the united states. no capital leaves the united states. all that's happened is the shareholders of the former u.s. company are now shareholders of a foreign parent. capital isn't leaving the united states. jobs aren't leaving the united states. capital is actually coming back to the united states through the techniques that steve would like to stop through regulation, the self help territoriality. it is true -- and if the u.s. company is larger than the foreign company, so the foreign company still can't be a minnow. it has to be 25% the size of the u.s. company. the management of the combined company will be a u.s. company.

does that mean they have to move overseas? no. management can still stay in milwaukee or in whatever city they're in. will there be board meetings in the uk or the -- sure. but a board meeting is hardly a major loss of jobs or capital. and that is really confused in the public discussion on these transactions. people think we're hollowing out real assets, real investment. we are not. >> steve, how big a deterrent is the heightened scrutiny that any company would get from treasury if they inverted? >> to talk specifically about walgreen's to put that in perspective, walgreen's was -- had already acquired 55% of its target and activist investor came in and said we want you to turn the rest of your acquisition into an inversion. in order to do that, they would have had to restructure the

transaction in a way that would have raised a number of issues under existing law that would properly have attracted scrutiny by the irs. so that is a special case. and i think for those of us who served in the tax function in government, either the treasury or the irs, know, a, how incredibly important the integrity of treasury and irs is to our government, and, b, that the irs really plays it straight and looks for where there are tax issues for which there is a real potential adjustment. and i don't think -- just because they're inverted, it depends how you do it, how clean it is, what issues will be raised. there certainly could be a transaction like that that would not attract material scrutiny. it all depends on the facts of the transaction, and walgreens is actually an example of that. >> okay, great. other comments in the room here? you have a question right here

and then we'll go back to the back of the room. so right here and then back there. we're waiting for a mic to get to you in the second row, please. thank you. >> thank you. my name is buck chapten. i'm with brown advisory. john, i i'll just get to the point when you said there's no there, there, the transaction, capital comes in way, jobs stay here. i worry about the point i guess steve made that that really speaks to the integrity of the tax system, doesn't it? people read about it in the paper, it happening, and nothing really changes. they just avoid a tax. and let me just say one other thing, the walgreens story before they decided not to do it, it was either in the journal or "the times." the spokesman for walgreens talked about, i couldn't believe it, he talked about what they could do if he inverted and he specifically referred to earnings stripping. after that statement i suppose

the irs would be pretty stupid if they didn't take a closer look at inverting. >> can i respond to buck? >> why don't you go ahead and we'll come over there afterwards. >> buck, i do not think nothing happens in these transactions. and that's why i don't think of them as inversions. the original inversion transaction is when a company merged into its own subsidiary. it was an artificial transaction. nothing did happen there, and they did it to get their money back. congress didn't like that so in 2004 they enacted a statute to stop that, but they wanted legitimate mergers to continue. and indeed secretary lew said he wants legitimate mergers to continue. congress defined a legitimate merger as one where the foreign company was at least worth 25% of the u.s. company. so there is a legitimate transaction going on here. and i do not think companies by and large are doing this just to get -- these are business combinations.

you don't take your company and merge it with another company that's 25% your size just for tax reasons. you find a real business combination to be sure you have the foreign company be the parent for tax reasons, just like happened in chrysler daimler. >> well, but the point is, is it not, that the acquired company, if you will, the former u.s. company, it doesn't change anything. it may call its address there, but its people are managed here. >> no. what's changed is it's now got -- it's combined with a foreign business. look, i do not think companies should have to do this and i don't want to defend these transactions. i think we need to change our tax code so they don't have to do them. i can't believe you think we should force companies to keep their cash outside the united states.

>> if i can just add to -- look, folks who do acquisitions look at discounted cash flow and say, am i richer afterwards or not? and part of that discounted cash flow are tax savings. and you weight them differently depending on your management, frankly. it varies from company to company. what buck is referring to is the fact that in contemplating the inversion in the walgreens transaction, a very substantial amount of the potential discounted cash flow benefit came from tax savings. that is all we're trying to deal with. we're trying to say get the law, whether by regulation or law, to a situation where deals are done on pretax economics. if they work, they work. if they don't work, they don't work. and so part of the reason why i'm more sanguine than a lot of people about putting in regulations if they're well designed and fair is because if a transaction -- a transaction

will still go forward if they can do it by the rules that are properly designed, okay. the fact is that the current rules -- we've said since 2007 in a treasury report issued by the bush administration are not working. and that is why there have been budget proposals almost since and now we're paying a cost of having done nothing on this subject. >> but i haven't heard you or ]y steve -- i agree with you -- address the fact that therefore treasury said to the congress, please change the law. we need the law changed, amend section 163 j. congress hasn't -- for inverted companies. congress hasn't gotten around to doing that yet, but that's congress' decision. once treasury decides congress isn't going to do it, they say well we're going to act on your own. we'll issue some regulations. >> i think there's a subtle difference here in that it would be more desirable for congress to do it, and secretary lew said that.

the best practice is for there is a saying that when the facts change, you should change your thinking. and i think what we heard from secretary lew this morning was his thinking has changed. and it's clear that it's changed because of those developments. and we can disagree with whether it's right, and that's perfectly fine. i happen to agree with the

secretary. this is important. these facts, these change in facts are important and the treasury needs to act. >> so i agree when the facts change you should change your opinion. i don't think when the facts change it changes your authority i don't think when the facts change it changes your authority to act. i think it makes it more important for congress to act, much more important. i think congress should act. i hope they do act. but i don't think because facts change it changes the law. >> sally said before, just because you have the authority doesn't mean you have to uzomah it, it's clear that the treasury didn't. i disagree with your reading of the budget statement as saying they can't. it seems evident that they have the authority. >> i had promised back on the left there. could you stand so we could see you. >> mindy with tax analysts. part of my question was answered by the previous question, but -- >> could you stand up?

>> i'm sorry. >> thank you. >> professor, maybe you could clarify what you meant when you were saying that your proposal would target only ex patrioting companies. i think what you meant was that it would target all inbound companies but you would it would impact companies that were ex pay tree eighting in order to push that down? >> what my article actually said was essentially good policy would be to cover all foreign-controlled companies. but that there's authority, which i read earlier from the statute to take on particular factual cases. there's data supporting looking at inverted companies differently, and in order to act quickly and to deal with the immediate problem, the tourniquet so to speak, in my

article i actually recommended only applying theheightened standards to inverted companies. i mentioned in the footnote that there was a political reason to not target everybody, basically reduce the number of lobbyists you have to deal with in the short term. i'm glad you laughed because it was facetious. >> could i get a microphone down here? thank you very much? could you stand up for the benefit of those in the back? thank you. >> i guess my question, there has been a lot of question about the regulatory authority. sally, you talked about what the due process was. that seems to be one of the things that's really absent if the administration just makes unilateral changes, and in particular, some of the things

that professor shea talks about on 385 seems somewhat arbitrary in determining what is or what isn't. i'm curious, how is due process carried out if in a matter of weeks the rules of changed. >> due process is normally carried out in rule-making through the notice and comment process. it takes more than a few weeks, i will grant you that. but it can be done in fairly quick time frame. i'm reminded of a regulation that was done by the department of treasury -- department of transportation that had to do with car seats in the front because the air bags were exploding and were smothering children and women of short stature.

to stop that, dot put out a notice called for comments in 30 or 45 days and were able to turn it around in about five days so that the total lapse period was about two months. that's fast. but it can be done. if there is a need -- and i can't speak to that -- if we do have the tourniquet issue, you could do the notice, you could get the comments. it sounds to me like most of you are pretty up to speed so that if the notice of proposed rule making were to issue, you might be able to get those comments in very quickly. the treasury people could review them very quickly or the irs people could review them very quickly in a final review without going through ira could issue in a matter of months, not a matter of weeks. that is due process.

the courts have consistently held that where the public participation follows the rules of the apa, section 553 since you're pulling out section numbers, 553 of the apa, that that does satisfy the requirements and provides the public the opportunity. there is in addition a weird provision in the congressional review act that any regulation that is issued could conceivably be set aside through a motion of disproval if both houses of congress and the president sign off on it and it's a pure majority. now, if it happens during this administration, presumably the president would veto that even if both houses of congress chose to disapprove it. but there's a claw-back provision -- this is more than you ever wanted to know, i'm sure.

but it enables the congress to look back, to claw back if there were, for example, a republican president in 2016 and both houses were held by the republicans in 2016, they could claw back as far as may or june of 2015. that should set treasury thinking we don't have until next november or the following year. there's a time frame that they would want to get their reg finished so it can't be claw back. if you really care about this, look up the history of the ergonomics rule during the clinton administration where in 2000 they clawed back to a june or july rule and disapproved it. very rare, but it's out there and it's part of the due process scheme. >> steve, you wanted to comment. treasury acts for interpret tif rules -- are you okay?

>> yes. steve has -- needs to make a plane back to boston to teach a class today so we're going to let him out precisely in time. so we have time for a very short final comment and then we're going to close this panel. are there any other comments? there's a hand back there, if you would, please. if you would target to one of the panelists? >> this question is for sally. on this issue of whether we can afford to wait for tax reform and the issues of retro activity that we've been talking about would congress have the ability to act retroactively than the congress would in an administrative setting? >> i haven't gone into the tax code provisions but it strikes me that the treasury has a great deal of authority here. it's always better to have congress act. they should make the law.

that's their job, and therefore it's usually less suspicious and less contested. but treasury does have some authority here, and i can't really opine on the relative merits. >> with that, thank you. i'm going to also say to david and ryan who sent comments in that were very thoughtful and also precise that we will share them with the panelists and encourage you to follow up with e-mail if you have questions. could i ask everyone to join me, this was probably for those of you who are not lawyers a little bit of a return to some statutory interpretation that we don't always get to do, but the courts may well find these very questions in front of them. i know treasury is wrestling with them now. it's great to have this really extraordinary group of people here to help us all understand and get a little bit of a flavor of what that is. thank you. >> thank you very much. this weekend on the c-span

networks, american history tv is live from baltimore's fort mchenry for the 200th anniversary of the star spangled banner sunday morning at 8:30. is the 6:00 p.m. eastern on american history tv we'll tour fort mchenry and hear how war came to baltimore in 1814, about the british barrage and why francis scott key was there to witness the fight. saturday at 8:00, former president's george w. bush and bill clinton launch the scholarship programs at the museum in washington d.c. and live coverage of the har kin steak fry. on c-span 2 saturday night at 10:00, author ken silversteen on the secret world of oil and democratic senator from kirsten

gillen brand. let us know what you think about the programs you're watching. call us at 202-626-3400 or e-mail us. join the c-span conversation. like us on facebook, follow us on twitter. on c-span 3 we're live on capitol hill now where the house subcommittee on border and maritime security. we'll be hearing from customs and border protection and state department officials about the domestic threat isis poses to the united states. this comes ahead of tonight's address by president obama where he plans to lay out his strategy for degrading the terrorist group's capabilities. representative candace miller in the chair. she's the subcommittee chairman ready to go there. sheila jackson of texas is the ranking member. we're asking you to weigh in on the question, do you this i isis is a domestic threat?

share your thoughts at facebook.com/c-span or on twitter. the hashtag is c-span chat. live coverage here on c-span 3.

this is the house homeland security subcommittee on border and maritime security. candace miller of michigan, the chairman and the ranking member is sheila jackson lee who came into the room moments ago. should get under way momentarily, looking at the potential domestic threat posed by the islamic militant group isis.

>> the committee on homeland security, the subcommittee on border and maritime are security will come to order. su today to examine the threat posed by isis foreign fighters

anniversary of the most heinous and cowardly attack of our nation that took the lives of nearly 3,000 of our fellow americans. it happened in part because our visa security and border security defenses were not very effective. among the most important weaknesses that the attackers were able to exploit was our

porous outer ring of border security. in total the 19 hijackers passed through the u.s. border security 68 times back and forth without being detected. and on that day in september we learned a very hard lesson. as noted by the 9/11 commission, i quote, for terrorists, travel documents are as important as weapons, unquote. i think that's a very, very important statement by them. it's so true. many more terrorists since have exploited the visa system in one fashion or another, and it's an ongoing vul neshlt, heightened by the significant growing threat that the islamic state of iraq and syria pose to our nation. our best estimates are that thousands of individuals carrying western passports have joined in the fight in syria and in iraq, including several hundred americans. two innocent american journalists, james foley and

steven sotloff, were brutally bye headed by an isis terrorist who is likely a british citizen. these tlugs have no regard for life and have threatened to attack our homeland. and the united states government must be prepared to prevent such an act from happening. terrorists with western passports pose an additional risk to the homeland because many are eligible for visa-free travel. terrorists could be just one visa-free flight away from arriving in the united states, bringing with them their skills and their training and their ideology and their commitment to killing americans. all these things that they've learned overseas. let us remember that zacharias moussaoui, the so-called 20th highjacker actually traveled on the visa waiver program before he enrolled in a minneapolis flight school. richard reed, the shoe bomber who tried to ignite explosives in a shoe also traveled on the

visa-waiver program and ram za yousef who was one of the main perpetrators in the world trade center bombing again used the visa waiver program to enter the country. these attacks occurred before the advent of increased scrutiny on the visa waiver countries. why i think we are confident that we can identify many threats today through the electronic system for travel authorization, commonly called esta. we'll be talking about esta today which all these waiver applicants have to fill out, it's clear that we may have trouble determining if some individuals have traveled to terrorist regions. although cvp continually vets all applicants, that information is imperfect if we do not have a complete pictured of an individual's travel route, collecting more information upfront could be very, very helpful for us to do just that. patriot and other pilot programs that look at the totality of

data on an es ta and visa application are certainly good tools to help close some of our intelligence gaps and make skek connections that we would otherwise miss. however, critical information sharing, especially with our european allies, is critical to help combat the threat of foreign fighters bound for the united states. unfortunately, europe as a whole has been reluctant to share certain passenger data with the united states and such a gap certainly puts our citizens in the united states at risk. i want to commend our allies in the united kingdom who have been quick to realize the severity of the threat, especially as many brits are among the isis fighters. we must work with our foreign allies like the united kingdom and others to quickly identify those radicalized by isis in similar groups and prevent them from traveling to the united states. like the u.k., i also think we

should be looking at the authority that we have or we may need -- and that will be a big part of our discussion here this morning -- to revoke passports of american citizens who go to fight in isis. we need to reduce their ability to travel to the united states, and i think we need to consider what it will take to strip passports from those who provide support to or fight with terrorists. i certainly look forward to hearing from our witnesses today on what further changes we have made in our visa security system to combat the threat of foreign fighters who travel often over land through neighboring turkey's porous border, into syria and into iraq before returning home to europe. it might be hard for many americans to comprehend, but for many in europe, traveling to syria is as simple as just getting in their car and driving there. today's hearing is really about one simple question. can the united states government

adequately detect terrorists' travel patterns, identify suspicious movement, and prevent those who would do us harm from coming into the united states. how can we best protect our homeland? our enemies are intent on attacking our country and are actively seeking to avoid our counter measures. we need to be one step ahead instead of constantly reacting to their latest attack. defeating terrorists' ability to move internationally has long been a focus area for this subcommittee. terrorists who have plotted horrific attacks against us have crossed the u.s. border for training or fraudulently obtaining a student or a work visa. there are certainly further opportunities that we can take to prevent attacks and to limit terrorists' mobility and that's why we are holding this hearing today. our visa security process obviously needs to be robust and we must deny terrorists freedom of movement because 13 years ago we unfortunately saw what failure looked like. the chair would now recognize

the ranking minority member of this subcommittee, the gentle lady from texas, miss jackson lee for her opening statement. >> good morning, let me thank the chair woman for yielding and let me also acknowledge the ranking member of the full committee, mr. thompson and thank him for his leadership as he is joined by the chairman of the full committee, mr. mccall and the way that they have worked diligently to provide leadership in securing the homeland. as i often remind our colleagues and as often as we are questioned by our constituents, the homeland security committee is a pivotal committee that stands in the gap of making sure that the needs of our nation, domestic needs in protecting the homeland are the priority and recognized by the american people as having a department

and a committee that is clearly assigned to protect the homeland. 9/11 continues to be a symbol for all of the untoward terrorists across and around the world. they view that as a challenge to them every year as to whether or not they can continue to intimidate the western world and, of course, the united states of america. our values are contrary to their beliefs, and therefore 9/11 poses for all of us a time of recognition that we still remain in the eye of the storm and we must be diligent. i would offer to say that we will not fall victim to the terrorists' intent, and that is that we will not terrorist ourselves. we will be vigilant which i believe is extremely important, but we will be fair and adjust and we will recognize the civil liberties of all. but we are in some very

challenging and difficult times, and so i want to thank the chair woman for allowing us and this committee in working with me and the full committee to be the very first committee that is addressing the question of isis here in the united states congress upon our return. that is an important statement for homeland security armed services, the intelligence committee are the corner stone of defending this nation, and our collaboration and working together is key. and that, we are doing. this fact-finding hearing will lay the ground work for many other hearings that will be necessary to expeditionly address this question. this evening the president will address the nation and discuss new protocols as to how we confront isis, and as he has indicated, degrade and end isis. and so i am not willing to seed the point that isis does not

represent a threat to the united states. i did not say imminent. i did not say today. but i believe this hearing recognizes that isis is a threat to the united states and to the people of the united states. again, not in the instance of being intimidated but being prepared to protect the people of the united states of america. like all americans, i was horrified, outraged and saddened by the bye headings of two american journalist, james foley and stephen sotloff by isis terrorists. they have used brutal remedies and tactics to expand control over iraq and syria, threatening the security of both countries. they have attacked, killed, kidnapped and displaced thousands of religious and ethnic minorities in the region, including christians and

including small ethnic minority groups. u.s. officials have warned that syria-based terrorist extremists may also pose a direct threat to our homeland. one concern is that foreign fighters holding western passports might travel to this country to carry out a terrorist attack. additionally, our own u.s. citizens are known to have likewise left the united states and gone to the battlefield to perpetrate jihad. the total number of armed opposition fighters engaged with various groups in syria including isle is estimated to 100,000 persons. 12,000 of foreign fighters. among those foreign fighters are estimated to be more than 1,000 individuals from europe and over 100 from the u.s. with did a dozen american fighters with icele specifically.

we may be reminded on 9/11 the count was approximately 19 who created the most heinous terrorist act, killing over 3,000 here in the united states of america. we mourn for them and their families. many have skplesed particular concern over western foreign fighters because they hold passports from the visa waiver program which generally allows them to travel to the united states without obtaining a visa. i want assurances today that these individuals have been appropriately watch listed, and i want to discuss and look at whether or not we need to make the no-fly list more robust. i would look to the idea of legislation quickly passed that makes sure that we shore up the no-fly list, not to undermine civil liberties, but to protects the nation. i am interested in a discussion of that going forward and

classified or what is available today. i would note, however, that while these waiver travelers usually do not need a visa to visit this country, they are currently vetted upon departure and arrival to the u.s. i expect that we will discuss that process in more detail at this hearing. some are concerned about u.s. citizens who go to the fight and return to the country by air. we're aware of two who recently died in battle. i expect discussion today about what dhs and federal partners can do to address such situations beyond adding individuals to the no-fly list if and when the need arises. indeed the department of homeland security and state play a vital role in disrupting terrorists' rival to the u.s. programs are essential to addressing the foreign fighter threat to the homeland. i hope our state department

witnesses can speak to us about how these programs operate and how they can be used to address concerns regarding the vwp travel specifically. i also hope to hear from our state department witnesses about how we engage -- how we are engaging with foreign partners to help address information gaps regarding individuals of concern in their travel patterns. like chairman miller, i am glad that europe is standing up. i believe that they should stand up and collaborate while we maintain our values. we can security this nation. while the u.s. cannot resolve the larger situation in syria and iraq in its totality, we can do it collaboratively with our middle east allies and western allies. we do have the responsibility to protect the homeland from threats from isis and similar terrorist organizations. and be mindful, as we mourn and commemorate 9/11, be mindful 69 fact that we have work to do. i therefore strongly encourage

the administration congressional leadership to ensure that all relevant committees including intelligence, armed services and homeland security are included in briefings so there can be a collaborative strategy in conjunction with the administration. so we can work collaboratively together and address these issues, i know that our chair persons and ranking member are prepared to do so. finally, ij president's address to the nation tonight as he outlines his plan for combatting isil. i remain committed to working with any of my colleagues on this committee and will look forward to the property legislation that we would hope will be expedited and passed to ensure the safety and security of the homeland. it is our duty and it is our challenge. with that i yield back the balance of my time. >> the chair now recognizes the ranking member of the full committee, the gentleman from mississippi, mr. thompson for his opening statement. >> thank you very much chairman miller, ranking member jackson lee. thank you for holding today's hearing. i'd also like to thank the

witnesses for appearing to testify about the government's efforts to identify foreign fighters in syria and iraq who may seek to travel to the u.s. to do our nation harm. since its establishment in the wake of terrorist attack of 9/11, this committee has been engaged in helping to address the threats posed by terrorists' travel. for example, members of the committee advocated for a key provision in the 9/11 act requiring the implementation of an electronic system for travel authorization to enhance the security of the visa waiver program. this committee also examined the lessons learned from the attempted bombing of flight 253 on christmas day 2009 and urged dhs and the rest of the intelligence community to strengthen programs aimed at identifying travel to this country who might do us harm.

today we turn our attention to the threat posed by foreign fighters with islamic state of iraq and lebanon, isl, particularly those holding western passports who could attempt to travel to this country without obtaining a visa. top u.s. officials have made public statements warning that syrian-trained extremists, including foreign fighters linked with isil may pose a threat to this country. intelligence officials know that individuals from north america and europe that travel to syria could be exposed to radical and extremist influences before returning to their home country. as ranking member lee has already said, the u.s. government estimates that there are 12,000 foreign fighters who have traveled to syria to engage in the ongoing civil war,

including more than 1,000 europeans and over 100 u.s. citizens. of those 100 u.s. citizens fighting in the region, about a dozen are believed to be fighting along isil. i hope our conversation today provides insight into the full scope of foreign fighter issues facing the u.s. government, as well as how we, along with our foreign partners, can maximize our intelligence and information-sharing regarding these individuals. with that in mind, i want to hear from the department of homeland security and department of state witnesses about their ongoing work to identify foreign fighters coming to the u.s., and whether or not they need to increase their efforts in response to isil. we know that the threat posed by isil foreign fighters is very real and serious. the american people want

assurances that our government response is and will continue to be equal to the task at hand. again, i thank the witnesses for joining us today and the members for holding this hearing. madam chair, with that, i also yield back the balance of my time. >> i thank the gentleman very much for his opening statement. i would before we begin, would ask unanimous consent that the gentleman from nevada be included in the statement. other members are reminded that opening statements might be submitted for the record. we're pleased to have distinguished witnesses with us today to discuss this very important topic. let me formally introduce them. troy miller service as the acting skmigser for intelligence and lee a san. they are responsible for implementation of targets and supporting the primary mission

of securing america's border. mr. miller began his career in 1993 as a customs inspector in north dakota and has since held various positions throughout cvp. mr. john wa wagner is the assistant commissioner for the office of field operations and border protection. he formerly served as executive director of admissibility and passenger programs with responsibility for all traveler admissibility-related policies and programs. miss jennifer lasly is the deputy undersecretary for analysis at dhss office of intelligence and analysis, a position that she's held since april of 2013. in this role, she leads the dhs office charged with providing all intelligence analysis of threats to the homeland. prior to this assignment she served as vice deputy director for analysis at the defense intelligence agency. miss hillary johnson is the acting deputy coordinator for homeland security and multi-lateral affairs in the

state's department of bureau of counter-terrorism. she oversees approaches to protecting the homeland on issues such as cargo security, terrorism screen to include terrorism agreements with foreign partners to combat terrorist travel. with that, the chair would recognize mr. miller for his testimony. >> chair woman miller, ranking member thompson, ranking member jackson lee, distinguished members of the committee, thank you for the opportunity to discuss the role of u.s. customs and border protection and securing the homeland against terrorist threats. more than a decade after the terrorist attacks on september 11, 2001, terrorists continue to focus on commercial aviation as their primary target of interest. as this committee knows, the department of homeland security has been aware of and continues to adjust and align our

resources to address the evolving nature of the terrorist threat to the homeland. the capability has allowed us to get information and respond to emerging threats as a part of our intelligence-driven counter-terrorism strategy. of particular concern of those threats that continue to im you late from al qaeda, their affiliates, isil and other like minded terrorist organizations from across the globe. the office of intelligence has focused on the growing threat of u.s. citizens and europeans travel to support terrorist activities and those who then returned to the u.s. or allied countries. this past may a 22-year-old american citizen blew himself up while detonating a massive truck bomb at a restaurant in northern syria. in addition, in august, two u.s. citizens were killed while fighting for extremist groups. in order to address this and other emerging threats, the

office of intelligence provides operational and analytical support to our front line officers on a daily basis through situational awareness briefings and tactical intelligence such as link analysis on known subjects of interest. cvp in conjunction with our partners has long-standing protocols for identifying, examining and reporting on encounters with persons on the terrorist watch list. as a compliment to its ability to identify watch listed individuals attempting to travel, cvp also takes steps to identify those unknown to law enforcement and intelligence community for further scrutiny. these efforts occur before departure from the u.s., before departure from foreign locations destined to the u.s. or upon rival at u.s. ports of entry. through robust information sharing and collaboration, vcp continues to work with our law enforcement intelligence community partners to enhance its comprehensive intelligence driven targeting program to

detect previously unknown terrorists and their facilitators. cvp's research and analysis on a recent traveler suspected of being a syrian foreign fighter revealed the identity of a new suspect, a co-traveler, which provided previously unknown information to the investigation and expanded our intelligence framework. as a foreign fighter threat grows, cvp works in close partnership with federal law enforcement counter terrorist communities as well as the private sector to counter the threat. in addition, the threat posed by syrian foreign fighters and isil is now limited to the united states. there's a growing international commitment to combatting the shared threat to our security. staff from the national targeting center and intelligence office interact with foreign counterparts including those two the five

european countries on almost a daily basis. most importantly, intelligence works aggressively to continue leverage assets and resources across the intelligence community and other federal partners to communicate, coordinate and collaborate with our international partners which enables officers and agents to take the appropriate operational response. in conclusion, cvp will continue to work closely with the dhs, the department of the state, the department of defense, the intelligence community and our foreign counterparts to detect emerging terrorist threats such as those presented by isil and identify and address all potential security vulnerabilities. i appreciate the committee leadership and providing this opportunity to speak on this very serious issue. i look forward to working with the committee on this issue and other matters of urgency and priority. i'm happy to answer any questions you may have. >> thank you very much.

the chair recognizes mr. wagner for his testimony. >> thank you, chair woman miller, ranking member thompson, ranking member jackson lee, distinguished members of the committee. it's a privilege to appear today to discuss the efforts in securing the border. in response to the potential threat posed by the islamic state of iraq and other terrorist groups and supporters including those who are u.s. citizens we continually remine our border operations focusing our resources on the greatest risks before they reach the united states. because terrorist organizations continue to primarily target commercial air transportation as a means to move operatives into the united states, we detect and respond to the threats in the air. we processed over 100 million in

our airports. we have developed our resources to mitigate the risk posed by travelers at every stage along the international travel continuum, including when an individual applies for travel documents, checks in at the airport while on route and upon rival. before a foreign national travels to the united states they're first required to apply for a nonimmigrant visa with the department of state or for visa waiver programs, a travel authorization from cvp through the electronic system for travel authorization also known as esta. before issuing the visa the department screens the applicant. three es ta, we screen applicants in advance of travel in order to assess eligibility and potential of risk to the u.s. in this year we have denied applications for yearly 300 travelers for security-related reasons. before the flight departs, we

obtain and analyze all data including passenger name records and manifest information which contains the passport biographical data and the flight information to assess the risk of all passengers regardless of citizenship or visa status. the national targeting center analyzes traveler data and applies intelligence driven targeting rules to conduct a risk assessment. if derogatory information or other risks are discovered, we're able to take action prior to actual travel so we can address these concerns. in order of descending authorities and capabilities we have preclearance, the immigration advisory program and then we have our regional carrier liaison groups. our highest capability is preclearance where officers operate on foreign soil in uniform with capabilities similar to what we have in the united states.

travelers are questioned, gone through the database and inspected before they bored the aircraft. it requires clearance from the host country, but after the flight is precleared at a foreign airport, the flight is generally treated as a domestic flight once it arrives in the u.s. there are currently officers an agriculture specialists stationed in 16 locations in six countries. they have refused entry to 24 travelers for security-related reasons. our security in abu dabby which just opened this year gives cvp a location in a strategy cal location. next is the advisory program where we have officers in 11 airports in nine countries to work with carriers to work and identify potential threats. they have no search authority per se but can question travelers in an advisory capacity and recommend additional security screening or

recommend an airline not board a traveler. so far in this fiscal year, they have recommended that foreign airlines deny boarding to over 60 passengers for security-related reasons. in locations without preclearance operations, we utilize22ux our carry-on groups prevent passengers who may pose a security threat or are otherwise inadmissible from boarding flights to the united states. these are basically in constant contact with the airlines to exchange this information. it all points in the travel continuum, we continue vetting passengers and travel information including visas and es ta authorizations to ensure that any changes in a traveler's eligibility are identified in real time. this allows us to coordinate appropriate actions such as referring individuals for further inspection upon rival. so far this year it has caused almost 400 previously approved

es tas to be revoked. upon rival in the united states all travelers are subject to inspection. our officers review entry documents, conduct interviews, run biometric queries against databases. we have response protocols in place at ports of entry for passengers linked to possible terrorism. we also conduct outbound operations, leveraging all available advanced travel information and utilizing intelligence-driven targeting rules specific to the outbound environment to identify, when appropriate, interview, or app helped travelers for law enforcement or security related reasons. thank you for the opportunity to testify today and thank you for the attention you're giving to this very important issue and i stand ready to answer any of your questions. >> thank you very much, mr. wagner. the chair recognizes miss lasly. >> thank you chair woman miller,

ranking member thompson, ranking member jackson lee and distinguished members of the committee. i am pleased to be here today with my colleagues from cvp to discuss the threats to the homeland from foreign fighters traveling to syria to participate in the conflict there and what we are doing to mitigate the threats. as you have collectly stated, the on going conflict in syria has more than 1,000 europeans and over 100 u.s. persons who have joined or seek to join the fight there. our concern remains that these individuals if radicalized could return to their home countries or the u.s. and knew their skills to carry out attacks. we have seen an example of this in europe where in may a french national who fought alongside the islamic state in syria is charged with conducting a successful attack against a jewish museum in brussels, killing four people. although we currently have no credible information to indicate

that the islamic state of iraq or isil is planning to attack the homeland, we remain concerned in the long term that their access to westerners and to safe havens in the middle east will allow them to plan and coordinate attacks in the u.s. veteran al qaeda fighters have traveled to syria from pakistan to take advantage of the permissive operating environment as well as easier access to foreign fighters, particularly europeans and u.s. persons. we're concerned that syria could emerge as a base of operations for al qaeda's international agenda which would include attacks against the homeland. u.s. persons who link up with violent extremist groups in syria, regardless of their original reasons for traveling to the country could gain combat skills, extremist connections and possibly become radicalized or be further persuaded to conduct organized, coordinated

or lone wolf attacks, potentially targeting u.s. and western interests. because border transportation security and immigration personnel are at the front lines of many encounters with potential syrian foreign fighters, the department is working to ensure that they have the most up to date information and can act on it in coordination with law enforcement and partners as port. ina is working to inform dhs and state and local law enforcement partners about observable indicators of u.s. persons planning or attempting to travel to syria. we've produced tailored assessments on the motivations of u.s. travelers, their travel patterns, the role social media is playing and the way in which u.s. persons are providing support to syrian groups. ina is also partnering with dhs

operational components to help identify foreign terrorists who may be seeking to travel to the united states and are working with interagency partners to disrupt their travel or take appropriate law enforcement steps. we work every day to leverage our unique dhs data to ensure that individuals who are not fully identified in intelligence channels can be appropriately watch listed and denied entry into the united states. finally, we work hand in glove with the department to provide intelligence assessments that support the visa waiver program, a program that dhs has managed since 2003 in consultation with the state department that facilitates low risk travelers into the u.s. for tourism and business. countries participating in this program must undergo a rigorous review process and agree to share information with the u.s. our intelligence assessments

which are one factor in the country reviews look at a number of criteria for determining a country's el jilt to participate in the visa waiver program, including the terrorist threat to the u.s. posed by nationals of that country, the counter-terrorism capabilities of that country, the state of information sharing between the u.s. government and that country, and the security of passports and other identity documents. in using similar criteria, we participate in dhs-led reviews of all visa waiver program countries which must occur at a minimum every two years to evaluate whether a country should remain in the program. these are just a few of the ways in which we are working to keep the homeland safe from threats and those posed by returning foreign fighters. thank you very much for the opportunity to speak with you today about these important issues, and i look forward to your questions. >> thank you very much and the chair now recognizes miss johnson for her testimony. >> thank you. chair woman miller, ranking

member thompson, ranking member jackson lee and distinguished members of the subcommittee, thank you for the opportunity to appear today on behalf of the state department and with my colleagues from the department of homeland security or dhs. we are very deeply supportive of dhss efforts to protect the u.s. homeland and we make every effort to amplify its work through engagement with our allies and partners. we remain concerned about the terrorist activities in syria and iraq and isil. we have seen in syria a trend of foreign fighter travel for the purposes of participating in the conflict, largely driven by global connectedness through the internet and social media. the state department is working closely with countries effected by the problem to counter the threat these fighters pose. the department of state works closely with dhs to support its mission in protecting the united states by promoting effective

border security screening with foreign partners through enhanced information sharing. for example, we believe it is in our best interest to share terrorism screening information with select foreign governments as all of us face a global terrorist threat that does not recognize national boundaries. to this end, we work closely with the terrorist screening center which implements sharing agreements with foreign partners, including visa waiver programs. this helps us to deter terrorist travel and creates an extra layer of security for the united states. we also work closely with our partners at dhs to strengthen global aviation security by engaging foreign partners to bolster aviation screening at last points of departure airports with flights to the united states. we do this to identify and prevent known terrorist and attacks from global aviation.

the department of state is leading interagency efforts to engage with partner partners to prevent foreign extremist travel to syria and we work closely with the interagency including dhs to expedite approaches. this includes facilitating foreign exchange with partners, building partner capacity and developing shared objectives. the ambassador robert bradkey, senior advisor on foreign fighters leads this work for the state department and has met with officials from the member countries, north africa, the gulf, the ball cans and the asian pacific to discuss this threat. important progress has been made but more work remains. countries in the ball cans have recently adopted or are considering more counter-terrorism laws. other countries have increased penalties related to terrorist

financing. the european council recently called for the acceleration in support of member states to combat foreign fighters. this includes finalizing a pnr proposal by the end of this year and increasing cooperation with partner nations such as the united states to strengthen border and aviation security in the region. we will continue to work closely with partners in the coming months to enhance this cooperation and build on our efforts today. in the week of september 24th, president obama will chair a security summit on the rising tlelt posed by fighters. this presence a unique opportunity to demonstrate the breath and build momentum on policy issues at home and abroad. that same week secretary kerry and the turkish morning minister with co-chair a gctf minute tier

yal meeting. at this meeting members will adopt the first ever set of global good practices to address the foreign terrorist fighter threat. gctf members will also launch a group dedicated to working globally to advance implementation of these practices. the department of state remains deeply supportive of dhss efforts to protect the homeland. this is a critical component to combatting terrorist travel. i look forward to answering your questions and working closely with you and our friends and allies across the globe to make the united states safer. thank you. >> thank you all very much. this subcommittee and our full committee has had a number of hearings about visa, about our visas, about the status of our visa programs. we certainly have had a lot of discuss about the visa waiver program and i'm hearing that we had a year ago this month in a

hearing in march of this year, this subcommittee has asked a lot of questions about the visa waiver program, so we certainly understand that the program started back in the mid '80s really to expedite tourism and travel which was a very good idea at that time. but the world is changing. as we think about things that we need to do to grow our economy, we also have to consider some of these various processes and systems that we have in place with other countries, our allies, our friends, and what kinds of programs we've actually put in place that put america at risk. and so to that i guess my first question would be -- we haoh --d estimates of as many as 12,000 that are from countries that are

in the visa waiver program, et cetera, and one of the things obviously in the visa waiver program requires information sharing. as we sit here on the day before -- we're talking about 9/11 really, one of the things that the 9/11 commission recommendation that they made, an observation that they made that always sticks in my mind is how we had to move from the need to to know to the need to share information. information sharing is such a critical component to be a country that's participating in the visa waiver program here with the united states. and we certainly see, for instance, the passenger name record, the pnr data which we can utilize to identify fighters or suspicious travelers or what have you, we see our ally as i mentioned in my opening statement, the u.k. being so great on sharing information. everybody gives them act laids

their their sharing of information with us, but some of the other european countries may be not so good. it appears that mexico is pretty good, at least i have heard that. canada, there has been some concerns raised about information sharing there. i guess i would say, first of all, how many countries do we currently have? i think it's close to 30. are there any -- are there any that have ever been eliminated from this program? are there any that we are thinking about? are there things that the agencies are able to do to really be much more aggressive about making sure that we are getting the information that we think we need shared with us in order for these countries to participate in the visa waiver? are there things that we need to be doing legislatively to assist

the agencies? i'm not quite sure who i'm directing this question to. who would like to start with that? mr. wagner, mislasly? >> i can how many members we have today in the visa waiver program. so currently we have 38 members. 30 from europe. seven from the asia-pacific region, and one in latin it's my understanding that we have, since the inception of the program, as you have stated, two countries have been taken from the visa waiver program list. that was argentina and uruguay. and it was many years ago and not because of terrorism issues but more economic issues. >> is there any thought -- is there anything that you need from us legislatively to assist you in being more aggressive? if there are these kinds of concerns about information sharing for many of these

countries, should we be much more aggressive about the information that we think we need in order to feel comfortable to continue to have visa waiver eligibility from the various countries. >> so, we do get a lot of information from the countries. every two-year we do a review of the countries and their proceed yours. they do report their lost and stolen passports. and then all the travelers do fill out the application where we get about 17 data elements. which we run through a series of background checks and recurring checks, some of the members i mentioned earlier. you know we denied this fiscal year which is coming to close in a couple of weeks.

and this was after it was issued. new information came to light that caused us to issue that revocation. our total applications we've denied is over 35,000. so it's a small number of overall denials, but consequential and important numbers. so some of the things we are looking at is reviewing all of our procedures, our data collection efforts. are there other elements we need? are there other elements we can use? >> how does it impact the privacy of individuals? how does it impact our travel and tourism facilitation efforts as well? but these are the things we are revealing. > >>, along with many other procedures and things we do in all of our programs. >> the electronic system for travel authorization, as you know, was added as a security requirement. by congress, actually.

after 9/11. previous to that, we didn't have it. as you mentioned, 17 different elements that you're asking on the form, mr. wagner. the name, obviously the name, passport number, et cetera, et cetera. information elements that you're obtaining that you can then check again on the data bases. et cetera. but the full visa application, you have to have about 110 pieces of information apparently required. and in regards to what's been revoked and denied, et cetera. i'm drafting legislation right now. and this is one of the things i was going to ask you. currently hope to be introduced today to clarify what the purpose is. that we need to ensure that terrorists don't get on airplanes. and then asking the department to tell us what other changes to

esta may be necessary to increase security. i'm asking you, what your thought is on legislation like that. do you think the agencies, again, have the authority short of any congressional legislation to ask for additional -- it would seem to me, i'm not in your business, but it would seem to me asking for legislation particularly from a number of the countries in the visa waiver program, more than just 15 or 17 pieces of information would be something under consideration, and again, you think you have the authority to do that, understanding that esta was initiated again by the congress after 9/11. after the commission from the recommendations, and should we be giving you legislation to assist you there? >> thank you. we are reviewing this as well as a number of other programs that we have part of that review is do we need additional

authorities to collect additional information? i believe we have the authorities, but that's one of the things we are reviewing. what other types of information could we need, could we use it? how would we collect it? is it verifiable information? is it useful information? and do we have systems to make the data that we could collect and would it be helpful? so we are looking at those things as an operational operation, we're always looking for additional data and additional data sources. but again with respect to people's privacy, and is there a useful need for us to collect that information, and can we actually put it to use. but in general, it's coupled with the pnr and airline data. it really helps us paint a better picture of travelers and where they're going, for how long, and what other information we can relate that to. so having in general terms a broader set of data to allow us

to identify individuals or identify individuals not the person we're looking for because we have the additional data and we can dismiss any connections we think are there with the person. but that's one of the things is balancing the privacy and the costs and where we would keep the information. >> just being cognizant of my time here, but i am going to ask one other legislation. in addition to that piece of legislation, i'm also preparing another piece of legislation that would seek to clarify the authorization that i think the department or state already has, in order to revoke passports. we're looking at what cameron is doing in the uk and with dual citizenship, et cetera. we are a very free and open society. but we are looking at a changing world here. and whether or not you have the

authorization to revoke the passports, how can we help you clarify that? because i was looking for the -- trying to become familiar with exactly what has to happen to lose your citizenship. for instance, it talks about if you're entering or serving in the armed forces of a foreign state. perhaps that's ambiguous a bit when we're talking about terrorist operations because they're not really a foreign state. these are the kinds of things that this committee is looking for today from you. we want to give you the tools you need to help you to protect the homeland. and if there's a flaw in what we have, it's not strong enough, we need the feedback from all of you. i don't know if anyone has any comment on that. >> briefly the state department does have the authority to evoke passports on national security grounds. we are very concerned about the over 100 americans in the foreign fighter ranks.

we do work very closely with law enforcement intelligence partners on information because we don't just unilaterally revoke passports, of course. so we are reviewing right now in consultation with the law enforcement intelligence partners our current tools at our disposal and authorities because this is a big concern. that we want to look to be able to use the authority if we need it, but not interrupt legitimate travel of other u.s. citizens engaged in the region. >> now i appreciate that. i would just mention time is of the essence here, i think. i i think you're going to be looking at, as i say, one member that is going to be introducing legislation today about these issues. i'm trueing to assist you and you know, we'll see quickly the congress can act. but we are looking for feedback

from all of you. with that, the chair recognizes miss jackson lee from texas. >> again, let me thank the chairman and thank my ranking member and as well as the chairman of the full committee. again, this hearing is not to draw you over here to the united states house as much as it is to make an important statement of oversight to act. and i started my remarks by saying that in the -- on the eve of 9/11, and although there had been much commentary of the potential threat that isil poses, i'm not willing to agree to those who have a perspective that the united states may not be in the eye of the storm. i think the way we respond to it is experienced, and balanced and sure as it relates to providing

security for our citizens. and i thank you all for being on the the front lines of doing that. that is what the department was created for. and that is what the committee is created for as well. so i want to go to a pointed question in the collaboration between state and the department of homeland security in particular, intelligence. and dealing with cbp. is it your thought that the isil actions in syria and iraq and the isil profile could be a threat to the united states? mr. miller? >> yes, ma'am, as you stated over 100 americans to fight with isil and the western