. we have enduring interest in this part of the world. where do we want to be 20 or 30 years from now? what do we need to do today to get there? we have been doing a good job of managing it. i cannot think of another time when there have been so many overlapping crises at once. i think this is the cumulative effect of failing economies. governments do not deliver for their people. each case has specific drivers. the complaints have been coming for a long time. we cannot put our american security ahead of the needs of the people in the region. that equation does not work. we need to change how we interact with that part of the world. there's also a contagion effect. nobody thought he would fall in

tunisia. nobody thought mubarak for the egyptian government would fall before it did. this should lead people not to make any predictions about what will happen in the region. we're far from over this. there are no models of the past to tell us what will happen now. we're learning as we go. host: christopher boucek from carnegie, thank you for your time. tomorrow, we will have a political roundtable double feature talking about politics in the 2012 presidential race in light of the debate taking place on monday. karen elzey will join us to talk about president obama and his expansion of job training initiatives. our final segment will discuss

the future of opec and an explanation and the role and mission of opec. we will also look to the newspapers and take your calls and tweets. we will see you then. [captions copyright national cable satellite corp. 2011] [captioning performed by national captioning institute] >> next, a discussion on the growth of cyber attacks. after that, it form on the future of u.s.-pakistan relations. then, a senate hearing on the 2012 budget for the internal revenue service. next, former officials from the cia, the defense department, and

the national security council discussed the nature of cyber threats and the increase in the attacks. analysts discuss the recent cyber attack on defense contractor lockheed martin and another targeting iran caused nuclear program. this is part of a conference on global security hosted by the center for strategic and international studies. this is about one hour, 35 minutes. >> we will bring up a set of incidents. every time we thought we had a final, our foreign friends would do something fungi.

funky. we have some goals today. that are different from the normal discussions of cyber security. when we look to these incidents, the u.s. has a national doctrine. it was previewed in the president paused may 29 speech. you will see more of it when the dod strategy emerges in the next year or two. joke. [laughter] it didn't work. cyberspace is a vital national asset and we will use all means to defend it. what does that mean? we have a very experienced and distinguished panel who will go for these incidents and tell us

when does something justify a military response? when does something justify the use of force? when is title 10 appropriate? how do we signal to militias actors in cyberspace our discomfort or our intent to do something in response? one of the measures we can use -- we say we use all means to defend it -- what are those means and how would we deploy them? these are not questions that have been asked publicly before. we will bring up an incident. andl get relevant details the senior officials will tell us what the u.s. responses could be and what of the restraints and legal requirements. i think this will be a lot of fun. >> no briefer was ever this concise. google revealed that its network

had been hacked. the company reported it traced the attack to computers at two campuses in china. google had recently clashed with the chinese government over censorship of google search engines. the state department filed with the chinese government but received no response. >> this was a particularly galling incident in some ways. how should the u.s. respond when we see things like this? what should we do. ? some incidents get closer to use of force. some get closer to the ability to confirm attribution. some are directed at high value military targets. we have one in here about breaking into defense contractors. in this google episode, what

should the u.s. have done in retrospect? if you have some allegations and some evidence and we might want to talk about what evidence is necessary for planning a u.s. response, what would a good response have been? in.let me pitch and duri >> sorry for the lead. it was mechanical. if you are having a real discussion with officials about this, you would know more about what has been briefly said. you also know a lot that you did not know. you would have much more

available than what has just been teed up for this discussion. you have would have an opportunity to query a whole range of people and the government about what they actually knew. there is an inherent lack of rigor in discussing this. the reason i am pushing that point is that i think that happens a lot in our discussions. one of our biggest problems is that we operate at a level of generality and the level of abstraction that makes it hard to have the kind of detailed discussion about what the u.s. should do. one of my teams is that we should be more transparent in talking about the kind of attacks we're up against and what we might be able to do in response without giving up the crown jewels of the specifics.

we can talk with more candor and affect about what we are saying than simply saying it is cyber. second, one of the reasons that i push that point is that because we never get beyond abstraction, we never actually create a policy to speak out. the u.s. is in the process of trying to do that. you like to have in international framework for this discussion. you might very well say that if china had been doing this for a long time and people had been attacking google and other systems in the united states, there is a possibility that you could say if you can attribute this to the chinese government, if they can't control their own people in an effective way,

there may be some discussions that go beyond about their responsibility and what the u.s. government properly can do in taking steps that don't look totally ineffectual. >> i think the nature of cyber is ambiguity. we are moving into an era where we have to face choices with far more ambiguity and ever have in the past. in the cold war or the soviet union engaged in a resist espionage -- in egregious as but not -- esplanades -- -- espiobnage, we traced back to a soviet policy that there were going after us for competitive and national security reasons. in this case today, you --

university servers are notoriously vulnerable. it could have been a pastor to a u.s. competitor launching the probe for it from the united states or it could have been somebody from the eu looking for high tea from a competitor elsewhere or it could have been a chinese commercial competitor as well as a chinese government interested in that. our default after the brutal hack was that this was the chinese government going after gmail to repress chinese dissidents and we made some gross assumptions. ultimately, we could not prove them. it could very well have easily been a chinese the very end to go looking for their search algorithms. we have to be very careful,

immediately said stating this as a nascent state problem. the largest strategic issue is the italians of dollars and 90 that is stolen every year on a commercial -- the large strategic issue is the try and set dollars of it that is stolen every year. you have to pry out the intent of this to accommodate for the ambiguous intent of the actor as well as the actual event itself. >> one of the things that a policy maker would have to confront at the very beginning of all of this is what kind of constraints do we want to apply to what we may be doing. in the world of title 10 and title 50, the policymakers need

to be very careful about setting standards which apply to everybody else except us. we are not that good that we would not get caught at some point. that is an overarching element for this entire discussion. secondly,judy was spot on when she talked about discussions on rules of the road. i think there are two elements of rules of the road. in the world of commercial intercourse, we will have to leave all overtime some way for people to protect commercial it. even that is in the chinese interest over time. that is something that can and has to be worked out. just as in the cold war, we were able to sit down with an

implacable enemy, the soviet union, and work out means of discussing first strategic arms and limiting them, there is a way forward here that requires government involvement. the second part of the rules of the road which does not apply to this case but which appl \y to other cases is that even in the cold war, there were pretty much rules of the road in espionage. there were things that we did and the kgb did and did not do. when one side or the other cross the line, they blamed the other side. it does not apply here but i think the concept of rules of the road in an official and public way and also in an official and private way is something that demands a great deal more thought as to how to bring the actors to together.

there is the problem of patriotic ofhackers in it for their own benefit. the united states government does not have the ability to take care of all the nuts running around this country. it is a problem that fits into the rules of the road and criminal conduct. >> on the rules of the road for the u.s. and what is at stake -- deputy secretary lynn this morning made a fairly clear reference to the point that the united states is more dependent at this moment on it than anyone else. we should be clear about that. my own opinion that it is more important to protect all the stuff we are dependent on them

to protect the ability to have some cattle offensive capability that we would like to use but would not want to see used against us. >> i would like to make a general point. i am expressing my own views. i am not expressing the views of the u.s. government or any agency. i have no insider information on these events. to me, i'm not sure if the problem starts here but it is worsened by the fact that we do a legal regime to address these issues. what we have our various laws basically designed against hackers, or in the case of nsa, laws dealing with foreign intelligence collection.

what we don't have is a legal regime dealing with the protection of i.t. if you listen to news broadcasts about hacker attacks, it is almost always something like it is believed the that these attacks come from country x. imagine if we were attacked by a rocket and the military came back and said we are not sure but we believe the attack came from some country. people would be outraged by that. the fact is that because of our legal regime, it is often unclear where the attacks come from. that is because there is not a legal way of doing hacking back to a a way that is likely to be successful.

the information protectors' would like to take an attack and start tracing the jump backward. under current law, that is not possible. what we end up with in this country is a fortress regime. it is a fortress pentagon, a fortress fort meade, a fortress america. that is good. i am not attacking those defensive measures but the fact is that that is not likely to be successful in the long run any more than fortress america works in the chaotic sense. what i believe is true here is that we need a new legal regime specifically to address attacks. people will say he is -- is that likely to have nsa folks running back for university servers?

the answer is probably yes. i cannot believe that we could not design a legal regime where that would be possible in a way that would satisfy privacy advocates. my metaphor for this is there is a very big difference between cops breaking into a house in order to search it and firemen breaking into a house to put out a fire. i think holmes said that even a dog knows the difference between being stumbled over and being kicked. in this context, intention melete matters. >> -- intention melete matters. -- intentionality matters. people here probably know more about this than i did you make some johnson a foreign country

and you come to this country and go through university servers and my server at home and supper then finally conducted the attack. that is what makes attribution so difficult. >> title 10 and title 50 is also the divide between military and police work. they can do this kind of backtracking without any difficulty. it is not necessarily that we don't have the legal regime that you cannot pass together and make work. we are putting it together because we are trying to make statutes and authorities that were designed truly in a different world for a different purpose and trying to make them work instead of taking a step back which can always be exciting and sent to congress

that you have to change some of this. i agree you can do this and sustain privacy. you need to bake it in at the get go to you have credibility with everyone in this country about what we are doing. you can do that. you don't have to give up and i think you can create a consensus of some sort that would allow us to have a legislative change. it would be at least a building block. >> there is one element that complicates all of this. law enforcement may be reluctant to reveal the fact that they can trace it back. there may be times where they can be prepared to do that and maybe of the times when they are not that does complicate our ability to go to this kind of regime.

i support very much the notion that if we don't move to that rule law, it will be bad for everybody. >> there were ways in the past that we could signal the other side when we were unhappy that they had crossed some line. what would that look like in cyberspace? does an unwillingness to reveal what we may know complicate that? >>true. i think the signaling is undeclared. you cannot handle this with eight demarche. it is less like a theater on the international stage. you have to show that by demonstrating that that behavior has some equivalents from our

perspective. if you assume poa did the google hack there are ways you can noise we go about demonstrating that like during the cold war, we used to fly up and down coastlines in a sometimes provocative demonstrations that said we will be as aggressive as you are. i also have a situation where i will quietly conduct intelligence operations. at the san time, will be very noisy. i will put some sort of equivalent operational on this so we can finally have some dialogue at the diplomatic level until you start showing an is a reciprocal action at a penpoint the begins

to make them pay attention, that will not happen. >> we will probably use this one slide to bring this entire discussion forward. one of the interesting elements in signaling or indeed even in responding is to understand that you don't have to do so in the same medium. that particularly applies to countries who are not written as reliant as we are on cyber. if you want to inflict pain or you want to signal that to have the capability to inflict pain, you need to find a point of pain. the main lobby and the cyberworld. maybe elsewhere. that is why i think this entire discussion is a really rare vein

because you have to figure out what the vulnerabilities of the other side are and you have to be able to say that i know you are doing something that is bad and other things could happen in other realms that would not be a good thing for you. it requires us to think through a whole lot more carefully rather than to go into the reflexive. >> we established kabuki theater with our cold war opponents. when you talk to some of the potential opponents today other than the russians, they don't have that understanding. how would you develop this capability? i was in china a couple of weeks

ago talking to someone from a pla and brought the notion of equivalence of. up. i said some people use of this stuff for intelligence. they did not like that. there is a formal rules of the road but there's also some informal understandings. >> that is one of my hobbies and it applies to our relations with other governments whether they are friendly, foreign, or neutral. one of the lessons of the past several decades is that we cannot rely on being too subtle. there are times when we think we have communicated a message and the other side does not have a clue.

there are numerous instances. what ever it is we do in terms of signaling, it has to be accompanied by a pretty clear message in private to someone in authority who understands what we have done or we could say that you may not have noticed but we have done something because we are not happy with what you did. i think it is a combination of really blunt diplomacy. >> let me use that as a transition point to the next incident. this one is clear. rer. we have strong ideas about who is responsible. >> and fall of 2010, dod revealed that the classified military networks had been penetrated by a service member in iraq. this created an opportunity for

the ex filtration of sensitive data to a foreign service. dod says the attack was perpetrated by a foreign government. >> in this case, i don't know what do you treat this as one for their side and now we run around on the defense? what would a response look like? this would not rise to the level of being considered under international law. an active use of force. >> unless you knew they -- unless you really knew they left behind things that the block all system. -- that could blow up all system v. there is nothing in these facts that would get too close to that. >> that is one of the threshold want to get to.

>> i'm not sure that would be a threshold. this can have a dual purpose as where you can control data and you can disrupt the integrity or you can pull data off. it is well known malware. the means to tap the data was well known. if it was done are not is not subject for debate. there is no leave behind -- it infers the intent to do damage to that network. >> going back to how you don't have to be confined to the cyber realm to think about how to respond in a variety of ways -- one of the things i have noticed that we tend to do is to look at the actual attack itself instead

of saying that we have other intel sources and other ways of figuring out what is going on in the world. it is not just confined to the cyber tracing back road. in theory, you can realize that they have some intent that goes well beyond what our particular facts are. that would create a different discussion, i think. >> my sense is that we got out witted and you will not start a war with something like this. assuming there were no leaves behind, it strikes me that there are some morals that should be drawn from this for our side. i cannot and imagine doing much of anything else. >> i think we have to

continually desensitized our audiences evidently policy makers. we can say this is happen for the last 2000 years in conflict and peacetime. finding an intelligence capability inside our network will happen as a standard and that is something we have to accept. i think the military is finally grappling with the fact that our network will be penetrated as a norm and we will have to work on how to fight through that. we got that now. from a policy perspective, as intelligence and forensics start to roll in, you have to make sure you couch that very carefully as far as what data we don't have. i think that is very important.

we tend to still over hide these things in policy making but also in the media where it becomes a mass of becker chamber. -- a mass echo chamber. >> i think that's right. when they have this discussion, they throw out most of the people in the room and have a real discussion. someone in the room would stand up and say that we need to talk about intelligence preparation. that opens up a giant door. i thank you are absolutely right. i think we have to get used to the notion that people will be operating inside our networks and me to figure out which now works will be vulnerable and which will be sacrosanct. i don't know whether leave behinds is where you draw the

line. think it is but i the discussion of both of those aspects that our own intelligence preparation whatever they may be and what a potential enemy may do and what we are prepared to accept or no \ that forms the basis for this discussion. >> the more fundamental point dod is grappling with, you can assume that the internet is open. it can be easily penetrated. that raises all sorts of questions about reliability of our defense capability in a big way. if commanders worry that a

spoofed and they can i use kinetic force because of the internet connections, that is a big deal. one of the things that i think we should have more on the table then we have had so far is a real discussion about architecture. i have to look to the people who are computer engineers and know how the system works. i think we should start thinking about whether some of the first principles that we put forward on the internet and the ones we have been building on cents which is basically speed as opposed to security, i think we need to stay -- take a step back. there should be some u.s. leadership about whether there are things we can do like not shed down the internet but things we can do that actually

build in some of the issues we are facing. if you look at the sony play station which has been in the news recently and i think, "the wall street journal"or somebody reported they quantified their loss today at $170 million. i have had discussions with'ceos where they say they cannot invest in cyber security. the sony play station example is in a different realm the national security. i think the quantified in a way that would get everyone's attention. for a successful company, that is will money and it goes straight to the bottom line. i think that might open a different way of discussing whether it is worth spending a little more money and research

to think a different way for this architecture to operate so we don't have to have been given that every system we have can be penetrated. fundamentally, that is where we are. i personally believe that if we continue with architecture we've got, that the g winningame for us. >> in terms of signaling, we have to say there are certain things that are off-limits. we have to say to other countries not to mess with our warning networks. if they mess with them, we will believe -- we may do something they will regret. that should merit a strong response.

on defense will always lag offense. we can learn from this incident. three training, we can get our people to be just a little bit smarter there is a certain embassy in town here that will go unnamed that for christmas a couple of years ago was and t outhumb tribes of the capital city in winter. there are things we can tell people that will not be foolproof. we can make people a lot more intelligent about the kind of things they are doing even on the unclassified front. >> under any set of the rules of the road we have been talking about, i think we will need some kind of rules of the road. would some more forceful response to this be justified? will this end up being like any

other intelligence gaffe? what will the rules of the road look like for this kind of thing? it was significant. it was against the military and it was a foreign government. is it the same as everything else? >> there is another element of this particular case in that it disrupted combat operations. it was disclosed in the media. what if a third party actually interrupted combat operations in vietnam and what would we do to that third party? the idea of chinese involvement in north vietnam and the russian involvement, we still have rules of the road as far as what we would do to them that i think remain sacrosanct even in the cyber rig up. a reno.

er arena. the kind ofect behavior again. the problem remains that ambiguity. we don't know who to talk to. there is a sufficient gap between the responsible officials you can talk to and a potential actor. in this case, attribution still remains foggy. the responsible officials could say they have no idea. this is a new era where we have to figure out how to bridge that gap between responsibility and the action. we are still bad and her head against the wall. >> i suggested briefly that you could look at the response if you have it in a country. you can look at the responsibility of the country

for enforcing rules of the road for its citizens. one of the rolls may not -- may be that it has happened here a billion times but we don't know how it happens. >> that will ultimately have to be the answer. the implications are that in the estonian denial of service case, if you flip that scenario that the estonians have the right to attack us and converse like what was the united states government responsibility for that attacking force? what could we have done under the rule will block to alleviate law?

>> attacks are really cheap. in the old days, you don't build muscles in your backyard. these days, a sophisticated hacker can do enormous arms. the attack may look to a rational player as a the came from a government. it could well -- it could as well come from an underemployed you. th. that makes this more complicated. >> what is the drawback to telling these countries to stop? what is the drawback that ambiguity creates? how much does aggregation influence ambiguity? you have 30% certainty that was

a country like russia and it is not enough the first and and you have 30% the second and 30% at what point do you say to heck with it? wendy go to the country and say we have discerned a pattern and what will you do? is ambiguity that big a threshold for going to someone. ? at what point are other factors other than specific evidence reduce that ambiguity? >> ambiguity is a factor in a couple of ways. if you go and accused somebody -- and accuse somebody and they are the wrong person, you risk having that information get back

to the real perpetrator thereby reinforcing the perpetrator. that is one issue. you want to have a pretty good case going forward. your lawyers will make sure you do and rightly so. aggregated series starts to undercut the notion of ambiguity. don't ask me to comment about compound probabilities. the third thing is you need to choose your target. you need to choose the person to whom you are speaking with great care. you could go into the foreign ministry at a senior level and top three foreign minister. they would say you are wrong and

i know nothing about it and it could little rock -- it could literally be true. if a maded pleaseemarches, they might have to be -- if you make a these desmarches, they might have to be senior officials. >> we what the panel to reflect that we have two policy guidance and two operators and two lawyers. that struck me as a realistic reference. [laughter] >> yet another slander, judy. >> it was a subtle slander. [laughter] >> maybe we should go to the next incident. this a little clearer and this

one is different because it crosses the line. >> in september, 2010,malware wiped out nearly 1/5 of iran's nuclear centrifuges. in the u.s., 36% of industry direct execs from critical electricity infrastructure enterprises queried in the 2011 study malware on their system. >> this one strikes me that there is one area where it is not ambiguous. there was physical destruction it would be interesting to know if you agree this could qualify as something that was the cyber equivalent to the use of force. there was actual damage and destruction. it is not dramatic and are not

thrilling photos of ruins. you still have to go through analysis of whether or not the response has been for something else. that is affected a great deal by how much damage occurred. and whether it is necessary to use force in the same realm or a different drum to respond. i think the physical destruction -- you could up the ante and and you ma 8lwarthe malware have evidence that they were across the systems, that would be a really an interesting problem.

the first problem would be to get it out of there before everything crashes. we might want to think about responding to that. and quickly >> the most damaging attacks have traditionally been from insiders who know the system and the processes they intend to disrupt. economically, instead of threats to critical infrastructure is a big deal. if we were all in iran getting this intelligence briefing, i would try to throw it right back at the briefer and says who says it was not an iranian inside a caused this? prove to me that somebody else did this. as opposed to an insider. prove to me that it actually happened.

prove to me what aspects of this attacked were nascent state versus economic. -- or nation-state reverses economic. there is a lot of questions that still have to be answered. as you start tearing about bridget ma apartlware, -- as you start tearing apart theis malware, there are limits. they were concerned about international law when there were crafting that.

because the mall where proliferated, there was an element of desperation or somebody goofed. everybody can afford to police say that it was a nation-state attack. the ambiguity of the cyber rig is not here. that malware has lowered the threshold for conflict in the cyberworld. somebody got away with it. somebody actually damaged a strategic asset in another country. i think we now have to say that that inherent threshold of deterrence or inhibition for cyber operations has been lowered inextricably for the first time in history. that is an interesting concept to explore because now you have to start saying who is living in the glass house and are we

prepared, are the israelis prepared, are the chinese prepared for the next round that will inevitably occur? somebody has the architecture for some advanced malware and control system attacks. >> i don't know that you can set as a threshold the fact that something was destroyed. it is very serious but then again, can one say there has never been an intelligence operation in history of the cold war that did not destroy something? tom reid has a couple of books out that we blew up a soviet pipeline. i don't know if that is true. is the physical destruction of something the red line or is it

physical destruction which threatens grave losses. we will come to that later. physical destruction, yes/no, and then the other point -- having taken this kind of action, you would expect that the other side might melt some retaliatory action. is there a signal that says we did this but don't even think about coming back because -- you are right, people need to think about what the third and fourth and fifth step is down the line. anybody coming in with a bright idea n tosc or the deputies

committee meeting had better have that sort of chain of events. thought through and build a plausible case. >> it seems the issue is not only the immediate destruction but what else was put there. this applies to our next scenario but it is one thing to damage something. it is another thing to put in trojan horses or whatever, logic bombs that could cause an enormous debt is down the road. it seems you would want to look at those carefully as well to decide what kind of response is needed. >> the electric grid is in the united -- in the united states is an excellent example as a premise for saying that would be something you'd want to think

seriously about responding to appropriately. if you took down a tiny bank -- some small bank in some place -- that would be a very different kind of analysis. we would probably not think that would start world war three. >> will lead to grope our way toward something. >> we do it all the time in the kinetic world. it is not rocket science to apply the standards that we have and we have used routinely and i would argue reasonably successfully for decades in the kinetic world. we're just not used to doing it in part because we're not

transparent and not to talk about what these capabilities are. we have not practiced this enough. if you are walking into a deputies' meeting, the people around the table don't know what you are talking about. they have been a great variety of things that are endemic to national security. >> what is the cause for potential damage? >> that is kind of crucial. we have treated cyber attack as a unique thing. the more we can push it into the

realm of traditional experience noting there will be areas of ambiguity, that the more we can say that this conflict applies and the easier this will be to deal with and think of a response. >> i think universally all four of us have lived through that. the more you deal with cyber, the more you realize it is the same rules of the road that applied. y. these beat me over the head. >> only when you deserve it. [laughter] >> this reverts back to an earlier part of our discussion about rules of the road. a small bank in some states may not be a big deal but as the

world is just so light a e terms of-, sand e-banking, it may not be impossible to develop a rule of the road among nation-states. unless it's world war three, you don't touch the financial sector. everybody is implicated in the end. you don't touch electrical grids. there may be areas where you can actually get people to cooperate. >> i share the view of my colleagues that we have models from the kinetic world that are applicable. this is not all new. what makes it somewhat different to that we need to understand is, again, some real destructive stuff can be done by a couple of people.

that is different. i can easily imagine a scenario in a which wedemarches some government and they have no idea what we are talking about. what might be a little different in the future is this could end up being more police-style action as opposed to armed conflict. >> we have traditional models for law enforcement. >> we do? >> the whole debate after 9/11 and how we handle terrorists where terrorists candlemas of lease destructive things and there is no nation-state behind them. goo >>d point. >> if you went to another government and ask what happened and they said they have no idea -- maybe the next question could be to have them cooperate with us in the investigation. if the sayno, that is a

goodtip. the next step may be that it was not by you but help me investigate. >> that is part of the responsibility of the nation- state i was trying to suggest earlier which is you can't just say it has happened. there is more to it. i think there are lots of examples in the connecticut world that absolutely apply here. the fact that people don't get it requires us to have a more explicit international conversation about what those rules are and how they do work in this world even though it should not be rocket science to figure it out. >> it was a self-interested

question. >> i think it is hard. i remember seeing that there were some efforts, as i recall, pushed in part by russia in the 1990's, that had a complexity behind the motivations. i am not saying that it is necessarily easy to do. as countries overtime and i don't know how quickly a country like china will recognize the tipping point as, or they have as much at risk as they do togain, over time, countries will get more sophisticated about this. if it can hit all these things, maybe there is something that they should be talking about.

we have treaties for lots of stuff. we can start having a process that would lead whether to a treaty or rules of the road. there are various convening mechanisms we have used in the past. we should settle on one or two and go for it. >> someone from the pla said that united states has a big rocket it's embedded also has a big plate glass window. but >> their concern is internet freedom and their ability to control voices and potential internal unrest. it is the same for the middle east. if you come here, you'll have

conversations about control system attacks, catastrophic process, the electric power grid, air traffic control. anytime you go internationally, you need to talk about that symmetrically. if you wind up taking up my i.p ., i may consider revoking at the internet policies -- relook at the internet policies. in the eu, they're so concerned about privacy that it is a different conversation. the need to be prepared to deal with those internet asymmetries. >> there is a linkage between what happens in this world and the other kinds of policies that we pursue. without passing judgment on the administration's about freedom

policy, it is clearly the government's view that it is an extremely unfriendly act. certainly since the carter ministration, and even before, there has always been a debate to the degree where human rights and hit it national- security goals. that, again, would have to be entered into all of this. there may be areas where we say we are going to throttle back a bit on the policy because we understand we are causing internal political problems which are serious and which can lead to possible losses. >> becomes more complicated because this is a very decisive issue at home.

>> before we go marching on to international conferences, it strikes me that it would be useful to focus on u.s. policy, as well. you could hook up any old piece of equipment to the internet in. i find it astonishing now and let me say that i am neither bird in your blessed with ignorance of the technology involved. -- i am either burden or blessed. there is a tag "ul" and it certifies the device will no low -- bonot blow up. there is no equivalent in the computer world. all sorts of devices can be hooked up to the internet that are extraordinarily vulnerable. it seems to me under the

interstate commerce clause that congress could easily say that there are so many vulnerabilities here and tighten of the laws on what is allowed on the internet. i know there is the ball to the even dodge city realised some rules were usefull. >> i will never talk about liability, but let me talk about internet freedom. i have had officials and tell me that information is a weapon and the u.s. uses it against them. one chinese official said it twitter was an american plot to undermine government. >> that is a legitimate observation and you need to factor that in.

>> they also think we have a greater control over our media. they do not believe it. what do you do in a situation like that? one thing is it to hearken back to the helsinki accord when you had a certain degree of freedom in exchange for recognition of borders. is that model at all reasonable for this type of approach? what would it look like? >> said the graph to of knowledge that the internet is becoming nationalized. syria cut the entire country off from the internet. iran tries to do that. iraq tried to do that for keeping the population and it's all the structure when we rolled into baghdad. i think we to recognize that the

internet as we know it is changing rapidly. it is becoming an instrument of state power just like every other capitalized process. and will drive such a multiplicity of policy complexities that we're going back to start dealing with more nuances than we traditionally had in internet policy. >> an elite and authoritarians states the freedom of information as a thread. -- in an off their tyrian -- in an authoritarian state, freedom of information is a threat. >> like in europe, they jammed and we kept broadcasting.

i am not prepared to come up with something off of the top of my head, but the idea you came up with, the helsinki talks about various national security requirements is not a bad place to start. >> let's go to the next slide and this gets to where we are at the end of the conversation. >> the phrase free flow of information" means different things to the different countries. as a spring 2011, u.s. and mexico company networks have said that their companies' networks have been infiltrated at least monthly. 74% believe there'll be a major cyber incident within the next

two years. senior intelligence officials say some of these intrusions represent reconnaissance by potential opponents. >> let me get on my soap box here. show me the data. show me the intense that it is reconnaissance as opposed -- and i love picking on the chinese, as opposed to a chinese company is interested in how a u.s. electric power utility accommodates for weather fluctuations in flow and balance operations. a costly see the collection of data between nation states for commerce purposes, and yet we somehow automatically tag everything in the cyber army as a national-security a threat.

-- in the cyber arena as a national-security threat. what assumptions have gone into this? show me the data. if we have not, do not make that leap. bad things happen when we make leaps in the national security arena. i would suggest the data says that this is not a national- security problem. google, this is your problem. you got in bed in china, and you knew that was a hostile environment. you know that it was on govern the terrain and you should have been better prepared. electric and power utility, you have information you need to protect from operational methodologies that even your competitors would like to have and they can go fishing on the internet, so shame on you. from a policy perspective, we constantly see bill intent and i do not think it is good for not only the public-private by law

as public policy, but it certainly is not good for international relations if we go gone -- jumping into those things. >> i agree with volvo which makes me question myself -- i agree with bob. we are old colleagues, so do not take that seriously. i expected is very tempting for executives of any private company to want to shift costs to a governmental agency. implicit in being attacked is that you, the military, has to stop those attacks on me. i do not think that is inaccurate assumption, and it seems to me that he is right in the sense that if your system is so volatile that you are being attacked monthly, maybe you ought to tighten up your system

and limit that. >> it is interesting because ferc has a some authority of this, and but they just get to review the standards put forward by the kind of industries and groups that come up with them. not think has really happened. this is the discussion we had in the 1990's and having it again now. nothing has changed. perhaps the ability of hackers, whether they are nation states or kids, has grown. there is legislation pending on the hill and it is part of the president's own initiatives to have different approaches to cyber attacks. but my bias is putting aside whether we have definitive evidence of someone doing something really malicious, and right now is clearly a

vulnerability and we have to find a way to address it. we need to mandate standards from congress, and that is my personal opinion. then you probably have to find a way to finance it because the utility companies, for better or worse, they really do not want to do anything. they have to pass the costs on. if you do not have a basis for doing that, they will not spend the money. i actually think we should pick off of the grid and get it done even as we are working. >> i agree absolutely. based on some experience i had a couple of years ago consulting with one of the larger cyber defense companies in town, the electrical company grades are just not interested. they are not going to spend the money to protect the grid, and i

think they should be made to do so. there may be some federal assistance, but i think it has to be done. i think, also, that this is the kind of message that needs to be put out by the united states government publicly that interference with the grid constitutes an extremely serious acting which could lead to potential loss of life in the united states and it would be subject to very serious retaliation, whenever that may be. we suffer outages after a thunderstorm and things are bad. i was recently in tuscaloosa after the tornado and they lost power for about eight days. they lost power and water.

you can cascade this, but if you lose the ability to generate or distribute power to an entire region in this country, we're going to be in very serious trouble as a nation. there will be loss of life and huge economic impact. it is not impossible to take or verb portions of the networks and destroy in -- it is not impossible to take over portions of the networks. we do not have the ability to manufacture those in this country anymore so there's a lag of about two years. these are the kinds of things where you're absolutely right and we need to push industry, but we also need to put down very clear markers. to me, the two key areas are the financial sector and an electrical distribution networks. >> beyond that, pipelines, the

whole industry out there. >> absolutely. >> i think there's an interesting argument to be had about the efficacy of the compliance regime. over the period of four or five years, the costs $3 billion. one could argue that .gov is no more secure. it is a hybrid were you need to have compliance in the regulatory regime and a true partnership between the u.s. government and critical infrastructure. it is not where the government comes in and beats a utility company in over the had actually comes in and helps. there are encouraging trends from the national security side and dhs that is moving away from

pure compliance and -- into a system. i think that is the key for critical infrastructure providers. i will tell you that they are operating on a razor-thin margins, as judy alluded to, and if role in and say you need to move all of your networks of the nation state standards, that they will roll over and die. you have to come up with a better solution than that. >> i thought that was kind of interesting because it links us back to the domestic measures you need to take to guard from, but also international measures, and you need them both. you need to tell other countries that this is the particular sensitive area. if you cannot do one by itself, that is inadequate. a lot of the security focus has

been on the domestic side. we have never actually done the declaratory approach. >> someone will immediately jump up and say you are drawing a line and saying everything on the side of the line is up for grabs. i'd stand that point, but it does not justify inaction. >> this would also seem to be the sort of activity, if it was a government and they were doing reconnaissance, that is something we would normally tolerate. it is different because they are interesting in to u.s. space in a way that other reconnaissance activities do not, -- true. >> i do not notify would agree with that.

do military,g to and god knows we used to have lots of discussions about what targets were legitimate and what targets were not, but that was a different world. well -- i do not know. [laughter] it seems to me that this demonstrates a hostile intent to the digger -- degree that we can identify the source. they need to make it clear that there are legal lines that could be activated to disable or destroy the network. if one found those kinds of things, i would take that

seriously and i would expect the government to. we were at war with iraq and we took out their electrical generation distribution centers and i was not privy to those discussions at the time. if i were a government official, then i would take this extremely seriously. >> when you talk about electricity generation as part of the control structure mode, hostile forces, if we were actually at war, you can then have a discussion about whether that is inappropriate target and what it does in terms of collateral damage. is it acceptable? is to ration a big deal? there is a whole set of issues you can go through in the

kinetic world and you need to do the same in this world. if your conclusion is that this type of activity to take down the entire electrical grid of the country for six months as opposed to 20 seconds, that would be a big deal, you know? the facts matter here. >> suppose there is planning to do leave behind. aniline this world, you have lowered the temperature -- in the kinetic world, you have lowered the temperature were networks are and -- indefensible, so do we just a grand and bear it? >> you hide your defenses. the question is how you pay for it. there's also a word in the

lexicon both here and in one of the state department studies that was done on cyber defense and that is resilience. we need to look at ways to be able to suffer some damage and still be able to recover. it is a government policy in cooperation with the industry. when you prepare for worst case situation and decide what to riyadh is necessary and make certain you have the capacity to do that three hours. >> and that is why we talk about architecture and going back to first principles. the internet grew and in a was optimize oand around principles that made sense at the time, but they can be written, i would argue. it might make it possible to

have less abject ability to actually defend the network. i do not know whether that is possible, but some of my friends-less than that no one will pay for it and it is not a priority as a result. again, looking at some of the real damage it has done in cases not just like lockheed, sony, and you could ask people whether they should reconnect. this does not mean the end of the internet, but we should relook at how to do it. >> they have suggested a parallel internet where you pay for security. i do not know if there is a business model for that, but

there are these levels of subscribers. in criticalgov infrastructure, and those things need to be protected. >> the u.s. paid it's hard in some aspects of the critical infrastructure during the 1950 proxy and the 1960 proxy. it was run by private industry, but it was federally funded. or think the same can be said about critical infrastructure and the resilience issue is interesting. they suggested that there was an aspect of deterrence that comes from resilience and complexity. as opposed to a big strategic target that is extremely brittle that will guaranteeing to attract hackers like flies, let me see how big i can achieve, yet if we build the brazilian infrastructure, that is

continually updated dynamically against new threats, and all this and you'll find them going after softer targets. it is like putting a deterrent on your steering wheel so someone will steal the car next year. the same deterrent happens in the cyberworld. you want them to go after frank's car. >> if you do all of that stuff and you do not fundamentally changed operates, you make it harder for the kids and the people who are not super sophisticated. you weed out some of the real jerks. if you have a strong people, organized crime, or whoever, and spends the money on it, it does at least near the playing field in terms. >> one of my assumptions is you compare who has the capabilities 12 years ago, which was kids,

and we will squeeze out the lower end and we will be left with civilized criminals and a think we are moving toward the high end. we will be in an environment where there will be fewer opportunities, but we will have a harder time stopping them. >> that is why the government approach, and law enforcement in particular, needs to be involved. from the original cnci, originally talked about security. strategiesedy -- trac become important. no amount of network pardoning will stop a dedicated attack forever. you have to have diplomacy. you have to have international legal regimes that provide you.

>> and you need to have a deterrent. >> to have to figure out what makes the other side attack, and you need to make clear that certain things happen and life will not be much fun at all. >> let's use that as a transition point. >> we have changed the name to protect the innocent. you can probably figure out who this was. >> it is not too subtle. >> speak for yourself. >> phishing techniques reused by major defense contractors and the authentication was used in an attempt to penetrate defense contractor networks infiltrate data on advanced weaponry. based on forensic evidence, the companies involved had a proxy's

acting on behalf of the foreign intelligence service in asia. >> ok. you are all smiling. i did not know if that is good or bad. first, this was a two step, and we are making some assumptions here and you could push back on that. somebody did something that was a preparatory action that was then used later in the what would appear to be more class activities, but what is the response here? some of the very rules may be how often we see this? is it the same actor? how confident do you feel? if you do not know what was lost, does that inhibit your ability to respond? would you do in a case like this? this is the kind of thing that i think we will see consistently in the future, very

sophisticated set ups. >> what you have not told me is if anything was lost. we've are describing an act of espionage, whether industrial or nation state. but you have not told me if there was any damage. you have not described in methodology that is more sophisticated in that instead of one key in order to break in, i would have to steal two in this case to get both keys in the same locker. it is fundamentally the same act. the techniques and tactics leading up to and were a little bit more complex which is it good news from the defense of side, you force the attacker to actually do a lot more work, but unfortunately they did the work very well and it was an attack.

we have not seen the rest of that story. again, i would recommend, and the media went crazy, when they did not have any of the data. they did in attack, they did it nicely, from a technology perspective, but it was ultimately no story in that nothing was lost. from a policy perspective, we need to hear the rest of that story before we start looking at options that we would present to the white house. >> can we necessarily expect industry to want to give us that information? >> in this case, there is a great dialogue and you do not bite the hand that feeds you. i have known of cases where that has not happened in the past. the further away you get from

government contractors, in the purely private sector, recommendation in the responding to those are the you do not roll in and save, "give me all that what has happened, "and you ask what has happened and it will change significantly." >> it is interesting that with the explosion and huge growth and public posture of the internet that espionage activities like this get a lot of play from the press. in the past, if you could find something, get something, nobody was the wiser. now has shifted into this room. -- this realm.

this does not excite me very much because it applies -- implies we are not doign the same -- doing the same thing to outhther countries. this is going to happen. shame on us or on the companies that allow really sensitive data to be classified as fouo and stored in places where people can get at it. izationswhat intel orgin do. this has been going on. this does not bother me that much. >> it can bother you only in the

sense of the authentication technology that people buy. maybe one of the reasons the media has been excited about this is that to the extent, most significative companies think if they can rely on this particular type of technology as another fire wall, as a real protective device, and behind it, it is really something you can kind of rely on and it shows that you cannot. with this really does is deliver the message again that we have been saying throughout the session that there is not any one sure way of protecting things right now. that is something, i think it, we ought to grapple with the. you are right, frank, that this has always gone on, but it is still in our competitive interest not have everything flow in one direction. >> just because this can happen,

it does not mean we should allow it to happen in terms of letting data be unprotected. as far as carrying them from state to state, that is a different story. shame on us for having data and there was all the data that was stolen was on classified, but when aggregated come it became classified. well, we're the people during industrial security at the various companies and that should not happen. that is our fault. >> i have to admit i admire the guy who figured this one out. they identified a crucial part that there were multiple points of entry. we are at the end of the time, so i will do two things. you guys did better than i expected. [laughter]

expectations were, of course, and exceeded. i will ask if you have any final quick words. on ambiguity and uncertainty, that was interesting. the notion that we are in a permeable and are meant that may not be taxable without some very large strategic level changes. the application of bending the rules and how we think about policy making and wall that we use for kinetic instances and the entire government approached, right, as a way to think about this problem, particularly in the roles of the road internationally, which signals a common understanding. i thought that was great. finally, the discussion of critical infrastructure and for these guys, it is business.

they have to remember how do we get to them in any investment and the example of hardening telecom structure during the cold where -- cold war. we got a lot of good stuff out of this. final comments? >> applied to just comment about the economics of this. there were tremendous savings available to companies, and i think companies kind of thought these were free goods. the point in number of us has made is that these are not free goods and there is a tremendous potential cost. the question is that who will bear the cost? that is the foundation of our tort system. who pays for injury? a serious conversation needs to be had on that basis if this is a government responsibility or

do i have some responsibility to put a lock on my door docks -- on my door? >> we are really in the infancy of policy, strategic, architectural, and it is odd that we have not been able to advance this discussion more in the last 20 years, despite working on it all the time. it is simply amazing. i would like to see a little bit more urgency around this problem because there are just too many examples, weather is sunny, the electric grid, or whatever, but there is a real problem to work on it correctly thought about it, we might be able to fix it. >> the only thing i would add to your list is pushing the

government to identify our the red lines and the thinking for the threats they would like to make which would not be mirror image threats to make clear that there are things we will not tolerate in this realm. the other question, i think, there is some thinking and discussion which is how do we balance the problem? how do we balance the policies about internet freedom, which other states do as cost file acts, and water are concerned about our own political abilities to what they do to us? >> one the more fascinating areas of understanding cyber security and network intrusions is the psychology of it. people forget that this is not just technology but there are people involved. there is a gap between operator and policy makers and a

legislator. there is a gap between how cultures perceive operations and activities on the internet that you have to accommodate four. then there is a gap between technology developer and the operator that has to use it. in the psychology of understanding why you cleat -- keep on clicking on the url that comes in an email from a prince of nigeria. the biggest problems i have seen in my career has been in the people-ware and as ecology of trying to explain this problem and in the sense of violation that people get to a more rational understanding of what the real problem is, what is the threat, and what can we do about it? >> they join me in thanking our gas. -- please, join me in thanking

our guests. [applause] >> please pick up the information from the back of the room before you headed to the next session. [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2011] >> former cia man and less numbers right gal discusses relations between the u.s. -- former cia analyst bruce riegel. he predicted that the u.s.- pakistan relationship would continue to deteriorate. >> did afternoon. i'm the vice president for research and programs and thank

you for being here today. we are here to talk about pakistan and the u.s.-pakistan relationship. to my right is bruce riegel with brookings. he has authored a very great book on pakistan recently. he has a long and distinguished career in the government in the famously lead the afpak review. he is probably the most prolific and well-known scholar. tony also has a long and distinguished career in government. he authored a report looking at pakistan. tony won the coin toss and will go first. bruce will follow. then we will have a discussion

and open the floor for questions. tony, please. >> the good afternoon, ladies and gentlemen. i actually will use a power point. i will use it very quickly. if you want to actually look at it, we have given you a sheet which indicates where these are on the internet. since i will tie this to a recently learned in pakistan, we will be reference to a report that will bring you up-to-date on the situation there. let me begin by saying that i think the operative aspect of this session is the phrase "parallel course." to be perfectly honest, in a real world, i think a bilateral relations are as good as they are likely to get as bad as they

happen to be. there is always the possibility that pakistan could find itself thrust by its own internal pressures into an open confrontation with the afghan taliban with the remnants of al qaeda. as much as i would like to see that from an american viewpoint, quite frankly, i do not believe it is likely. i think it is far more likely that pakistan will continue to pursue a strategy which, in many ways, is different than ours with different priorities and to focus on their own internal security dynamics. as for the phrase "regional solutions," after 50 years of hearing about them, my instinctive reaction is to leave the room the time anyone -- anytieme it's mentioned. i think it is about as likely as

an arab-israeli peace settlement. at the real issue for us -- i think the real issue for us that dominates talking is the role of pakistan in the conflict. we are heading towards an undefined but almost as bad certain transition in 2014. i think that, will not only shaped our near-term relations, but it will confront the both countries with the question of what is the enduring u.s. role in central and south asia? how does pakistan fit in that process? let me begin with the issue of

how pakistan fits into the afghan war. let me know to that this particular side is drawn from the time i spent working with the general mcchrystal and the team that was developing the strategy that was recommended to bruce and others in washington. pakistan fits into a set of problems. there are ones we will or will not solve in the course of the afghan war. one is whether we can defeat the insurgency tactically, and there we are making, i think, very significant process. -- progress. at this point in time, the idea of creating an effective nato approach, an integrated approach, is moot. it will not happen. countries are departing.

and we are seeking to build up ineffective afghan national security force. those of you who have seen the papers of the last few days probably realize that there is a major gap between 2014 as a date and the fact that the particular buildup can occur between 2016- 2018. one of the problem of finding a way of creating an effective, legitimate afghan government. it is a warning perhaps to all of us that karzai is supposed to leave office in 2014, the transition year. we have the search for an integrated civil military effort, which we had optimism about in 2009, and is not without optimism today, as those of you have seen the washington

post may realize. it is something we cannot achieve at this point in time. finally, we come down to the reality that winning in afghanistan, unless it means some kind of a more stable pakistan, and far better relations with pakistan, will almost certainly not achieve a stable, strategic transition or outcome. we may win the war, but we cannot control the future of the region. it is important to note that it was recognized in the new strategy. i will not read you this slide, but it is sometimes forgotten that all these warnings were given very clearly to the white house and to the congress, and particularly the warning about the challenge of pakistan. i mention different strategic goals, and i think this is something that we cannot alter

through dialogue, 80, or good intentions. pakistan can see that we're going to leave, the question is when and in what way. 2014 is not far enough in the future for pakistan to see the u.s. has committed indefinitely if iraq and afghanistan. it's roles in afghanistan are to achieve and withstand its own influence, particularly in a postion to block india from having in the -- pahstun to keep india to influence, weak en some areas, and strengthen others. why theyraphy explains

will not willingly attack taliban or al qaeda. we can succeed on occasion must limit to the pressure. the way that we are giving aid it is still spelled b-r-i-b-e but it could rent some degree of limited support and the compliance a long as it is sustained. india will continue to play the game as a third player and the world may be more moderate because their needs are more moderate, but they are a player in this equation. when we look at the challenge of relations, these slides are not mine, and they come from experts in the area. we're basically dealing with a

pakistan that is pursuing their goals as well as the search for stability on a much broader level and as a priority confrontation with india. nothing we do is going to change that equation in the near term. it drives what happens within the military, within the intelligence structure, and this is the group that dominates the pakistan government behavior, and will continue to during this war. we have contributed to the problem, but let me know to for any of you who wonder about what i am saying, many people never saw the report that the president sent congress several months ago. it is a very good idea to read it, because in this is a very clear morning that what i have

just outlined to you is not a personal view but a view and a set of concerns which represent u.s. policy as presented to the congress. it is not a casual said of judgments. it came on hard and this document was debated with a great deal of interest and concern. let me just note that what does that lead us to? it leads us to where we are. last week, we heard u.s. experts in pakistan describing u.s.- pakistan relations as being at their worst since 2001. i think that is a fair judgment. pakistan cannot easily separate themselves from us, not giving the aid or the value in some ways of our presence to the extent that the fed to their

interest. we cannot separate ourselves from pakistan, but public opinion, attention with pakistan intelligence community, with the military have grown steadily for the last six months. it is very unlikely they will diminish, particularly if we announce that we are making major troop cuts and we put ourselves on a doctor where they can say we are leaving quickly. whether it would be any different if we were leaving slowly and have less serious troop cuts is somewhat uncertain. when you look at this, the supply line is critical. you can talk about pakistan as being a great strategic interest, but it is not. they are a practical interest during this war because we need the supply line. it is a tactical interest

because we need their support in fata. this is not aat, o critical, or in many ways, important strategic american interest. as for operations, pakistan has acted to some extent in areas under pressure that had helped us, but these are primarily the areas which also the fact their own security men. not the afghan taliban, not the haqqani network, the operations of al qaeda or mola omar, but of direct interest to pakistan and the interests or the have been most active have been pakistan forces coming and there have been no pakistan team action. this is not a battle that people

like to ignore, but it is a fact that pakistan has had troops and capabilities in the area. quickly, going through the numbers, they have held up capabilities. unfortunately, they have also, in many areas, and up, pounding the area of people by displacing. that has not been true everywhere. there has been some corrective action, but in general, when the great problems that they face, even when the military acts, the government cannot. the civil side remains in after whether it is a flood or dealing with the displaced people in combat. public opinion, you obviously cannot see the details here, but it is very mixed for operations

in fata and different from the immediate interest outside the immediate interests of us. when it comes down to the attitudes in popular terms, we are, by far, the most unpopular single factor aside from india, in public opinion, and that was true when a survey was taken six months ago. it was looking at the indications and things have deteriorated steadily from that time. a lot of the reason is obvious. pakistan has not developed fata. they have not put resources into them. it has relied on repression and not on reform.

when they have talked a reform, it is not executed. the data that you find from pakistan sources makes this all too clear. the violence level is raising as development, as you can see from the bar graph, falls far short of the average level of development in pakistan which is in the darker blue. we have the fact that this is only one of a series of areas of violence. we focus on this because it affects our strategic interest. in fairness to pakistan, the majority of threats to pakistan stability are not in this area. they are in the other parts of pakistan. one of the keys is broadly permeating nature of violence and the wide variety of groups that exist throughout the country.

this is the country, like much of the region, which is also failing to come to grips with a massive population rise. the population is four times what it was in 1950 and under current demographics it will be eight times what it was in 1950 by 2015. in general, the pakistan government has failed in every civil area to come to grips with the impact of these demographics and population growth. creating a budget is not one of the favorite activities, but it should be. when you see where the money should have gone, not where it has gone from you get an idea of how imbedded the problems are and how much they are driven by failures in everything from education to infrastructure. again, the anchor -- anger and

lack of support, the extent to which the people see us as a group you can have no confidence in, the confidence in president obama before relations began to deteriorate was 8%. 64% wanted relations to improve. let me just close of. we do have a quid pro quo. we have drone strikes in pakistan. 40% have nothing to do with our goals in terms of al qaeda or threats to us. they are a way of supporting the government because that is the target base. it is outside of our concern.

our assistance has been massive. when you cannot figure out where the money goes, when there is no public accountability, when you are not managing your findings dream, this is not come in the conventional sense, aid, but in the military side, you can see a lot of the hardware and equipment so you have some idea where some of the other funding went. in the case of u.s. civilian aid, we have zero accountability. you look to the publications from the state department and usaid, and you have a broad area of where the money went by category in the u.s. budget. you have absolutely no idea of what we are buying, where it is going, and how it is being accounted for and if any of you

have seen a "the washington post" today, you probably realize this is not one of our current strikes. this is a grim picture. it was a grim when we develop a new strategy and it has grown more dam with time. unless something radical happens to change pakistan's behavior between now and 2014, relations will probably be, at best, as strange as they are now or if pakistan was more and more to try to position themselves to win the transition in terms of pakistan's strategic goals. thank you. >> thank you very much for the fine introduction and thank all

of you for coming today. it is always a daunting task to follow tony like this. usually he covers the issue is so well and we are in agreement with each other, i find myself wondering what i will talk about or do i just sit down and let the questions began? , to i'd like to focus on follow up, was a little bit more detailed in the u.s.- pakistan bilateral relationship, where it is going, and then offer may be a few thoughts on how to recalibrate the u.s.- pakistan relationship. .

the bottom line for pakistan is it may follow yemen as the second country in the world where major cities literally do not have enough water to go on. u.s.-pakistani relations have a very sickle quality to them. for 60 years the u.s.-pakistani relationship has been like a roller coaster. we have gone up through periods of great love affair with each other followed by bitter and ugly divorces. during the periods of great love affairs, the united states throws money at pakistan like it was a drunken sailor and asks for no accountability

whatsoever. and we turn a blind eye to everything they do that we might not like. during the periods of divorce, we are angry with each other, frustrated, we call each other names, we sanction them enormously, and we achieve absolutely nothing by doing so. the consequence of this roller roaster is that pakistanis have come to a conclusion, it's evident in the polling data you saw, united states is not a reliable ally. nobody in their right mind living in pakistan would come to any other conclusion than that based on the last 60 years of american-pakistani relations. the highs in american-pakistani relationship have all been based around secret projects. in the 1950s, and 195060s it was the you two base in pesh

war, then it was the opening to 2 china, then it was the war against the soviet union, and in the last deckade it was the war against al qaeda. the pakistanis do have nostalgia, and that was the war against the soviet union because for them that was the perfect relationship, what they called reagan rules. we give them money, actually a check, literally, and make no attempt to supervise what they do with the money. they could hand it out to whatever group they wanteded, they could buy and they could divert as much as they wanted to their nuclear weapons program and the united states said nothing. and in addition, the united states had almost no footprint in the country. but we're not going back there. in fact, the latest high in u.s.-pakistani relations, which began shortly after september 11, was already beginning to

erode by the end of the bush administration. by the end of 2007 and early 2008, the high had lost and we were in decline. three reasons for this. first, the musharyaffgovet. our man, literally, fell apart. we tried to stand by him until the bitter end. that just alienated the pakistanis more. secondly, our growing doubts about whether they were really on our side in the war against al qaeda. these doubts were personified in 2008 in one man, na deem tash, then director general of the isi. it's worth noting that his previous appointment before hevs given general directorship was commandant of the military academy in pakistan. curious coincidence. we can talk about more in questions and answers.

but during his short 11-month tenure as director general of the isi, the united states found him doing two things. one, blowing up the indian embassy in kabul, and we have their hands all over it, and two, telling every target of our drone strikes in 2007 and 2008 and 2007 and 2008 that the americans are coming, you'd better get out of the way. talk about dupe policety being caught, we caught this one. he was promoted to be a corps commander in the pakistani military. and of course the third event that led to the downturn in 2008 was the mum by terrorist operation. i think the obama administration deserves credit for coming in with its eyes wide open. i think it deserves credit for trying to reset u.s.-pakistani relations, but i think the task from the beginning was daunting indeed. for the reason that tony has laid out quite well.

fundamental differences in national security outlook, fundamental differences in world outlook, fundamental doubts about each other, and fundamentally different interests in many ways. those things are not easily changed even by large aid budgets like kerry-lugor and impressive dialogues like the strategic dialogue we had with pakistan for the last two years. we are now at a new turning point. the culmination of a number of events this year but especially abutebad has put us at a new turning point. secretary clinton said that very clearly during her six-hour visit to islam bad last month. either we see some dramatic change in pakistani behavior, and that change would be manifested in the demise of the

certain known number of senior terrorist officials harbored in pakistan today, or we're going to see this decline continue. i told tony before the event, i am an eternal opt mist about pakistan because messism does nothing for you. but even i am pretty skeptical that we are going to see them take care of the hit list that mrs. clinton gave to the pakistanis last month. much more likely will be a continued deterioration and decline in the u.s.-pakistani relationship. it could be gradual, it could be as we've seen this year punchingswutted by events like the ray monday davis event, or it could be much, much quicker. there are at least four scenarios that are entirely plausible which could lead to a

further and dramatic and start reduction in u.s.-pakistani bilateral relations. first, there's another abudebad. there is every reason to believe that in that mountain of data we took out of that villa we will find other information on other telephone numbers that will lead us to other targets. second, is another mumbai. india and pakistan are engaged in the world's most dangerous game of russian roulet. and it's mostly played by the pakistanis. we are very lucky that we have not had a mass casualty terrorist attack in india in the last two and a half years and it is almost entirely due to luck. third, we could have another 9/11. and let me be clear what i mean by that. a mass casualty terrorist attack in the united states

postmarked pakistan. we narrowly averted one only a year a few weeks ago in new york city. had fisel shazad been better at building a bomb, had he listened to the instructions he had been given about how to build a bomb, he would have created a fire bal in the middle of new york city in manhattan that would have reached in five blocks in each direction. it might not have killed as many people as september 11th, but it certainly would have led to a crisis in u.s.-pakistani relations. and the fact that his father is an air vice marshall in the pakistani air force would not have been overlooked by most americans. and fourth is a cue day that. pakistan is rapidly reaching the point where it is overdue for its next military dictator to arrive. it's a depressing cycle of pakistani politics but

certainly nothing in the history of the government would lead inn to believe that civilian government 234 pakistan today has turned a corner and that therefore we should expect we won't return to a military government at some point. how do we reverse this? what do we do now to try to prevent these things from happening? i think the first place to start is with hue millty. there's not a whole lot we can do. pakistan is a very, very difficult nut to crack. people say afghanistan is hard. to me, afghanistan looks surprisingly fasile and easy compared to pakistan. hue millty is in order. pakistanis will determine the future of pakistan, not americans. but i think that there are a couple of recal brations or mid-course corrections that might help. one is what i call accountability.

for the last decade, actually almost for the last two decades, we have been telling pakistan to stop playing both sides of the game in the world's war against al qaeda and relate terrorist groups. we have yelled at them, we have reasoned with them. we have argued with them. we have cajold them. we have tried to bribe them. we have tried to isolate them. it hasn't worked. so reluctantly, i come to the conclusion we have to make it personal. we have to tell pakistan that if we identify who major icfal is, to set up the attack on mumbai, we're coming after them. we're coming after him either by grabbing his assets, arresting him when he travels, or, if necessary, we'll come after him with extreme measures. this won't be easy, this won't be pretty, and i'm awfully glad i don't have to be the chay

chief of station in islam bad who delivers this message because that's one hell of a relationship to have to manage but i don't see any other way to get their attention. and in any case, we're already doing it. america through the mar vells of its own political system is taking out accountability through the isi through the court structure. the major and his successor who are usesumed to come to court in the city of new york in a civil court case which i think it is a virtual certitude they will lose and at that point we will attach government of pakistan assets to pay the victims of mumbai and mr. atadge and mr. pasha will be arrested the next time they turn up in this country. i would rather get that business out of the court system and use it effectively by the executive branch. secondly, i agree completely

with tony on the aid process. i think kerry hlugor was a very smar idea whose time has already passed. i don't see how this administration nor any administration can convince this congress to continue to provide $1.5 billion in economic assistance to pakistan. i sure wouldn't want to be the administration witness who goes up there to explain to this congress with its views about cutting spending why we're getting our money's worth out of pakistan from that aid. and that is not a negative comment about those people involved in running this aid program. i think they're trying to do a tremendous job. it's not working, it is not sustainable. so we need to switch to trade. we need to decide to allow pakistani imports into this country to face the same tariff levels as indian imports or

chinese imports. right now they are tear yiffed at a much, much rier rate and consequently you will not find pakistani products in the united states of america. every pakistani leader has asked us to do this. the prime minister asked the congress visiting congressional delegation yesterday to do this. it is time to listen to them. trade not aid by every economics is a more effective way of building the pakistani economy, requires no american bureaucracy, and no american footprint in the country. trade not aid is the second route we should take. third is focus on the issue that drives the pakistannist. india, india-pakistani dynamics. what i want to be very clear is an american mediator between new deli and islam bad. that will not work. that is the a guarantee recipe

for failure. we need to be doing something for subtle and sophisticated. we need to use our indian relationships to the extent we can to send a message to the pakistanis that yes indeed we are going out on the other date and if you don't catch on we're prepared to go out with the other date. we've got to play hard ball with the pakistanis. but we should also encourage the process by which the prime minister decided to start this year. the one little bit of good news in this part of the world in the last year was that cricket match in which they decided to resume talks. now, don't get me wrong, i don't have a lot of illusions that these talks are going very far but i do understand that they are important, they are critical and any bright ideas

we have that we can give them to help the system in moving them along we should do so. because at the end of the day, some kind of change in the indian mf pakistani relationship and the dynamics of that bilateral relationship is the only thing that is fundamentally going to change pakistan's national security calculations and its strategic movement. which gets to my final approach which is it is time to bury aff-pack. i hated it from the day that richard hole brooke told me that phrase. the time to put afghanistan and pakistan and indian, nepal back into south asia bureau. it is time to break them out of sent come and pacific command and deal with this part of the world holesically and think about it as an integrated part and only when you start thinking about it as an integrated part are you likely

to develop policies that will work. thank you very much. [applause] >> thank you for that rosey assessment. is there any way that folks involved could have not known that bin laden was there? >> that is in my view the 64 million dollar question of this year. there are only two possibilities. and just to make sure tweff strategic picture here, the villa that mr. bin laden was living in since probably 2006 is less than a mile from the military academy. at the end of -- the beginning of april of this year, chief of army staff kineie gave a speech at the kabul military academy

in which he said the back of the mill tansy has been broken. i have this vision in my head of osama bin laden standing on the roof listening to kineie as he is saying that. in that environment there are only two possibilities the pakistanis were clueless about what was going on or complicit. clueless means they really are clueless about the jihaddist frankenstein within their country. that raises all kinds of disturbing questions about the future of the mill tansy, the security of pakistan's nuclear security, its weapons, arsenals, it raises questions about the safety of americans living in this country. that's bad enough. complicit i think raises even more profound questions. when i say complicit, let me be

careful what i mean. i don't mean that general pasha visited the villa once a month to have tea with osama bin laden and plot worldwide terror. something more subtle than that. complicit would be knowing he was there and deciding that that offered them some degree of control and influence over al qaeda which was in their national interests. on the assumption that the americans would never, ever,r figure out what was going on. we have no proof of that today. from what we hear from every person in the senior ranks of this government. but, on the other hand, we continue to have the question, a clueless or complicit. that question, i suspect, will haunt u.s.-pakistani relations until we come to find out what the answer was. >> tony, do you think that

pakistan will change its course fundamentally in its fight against mill tansy as a result of the bill laden killing? >> the simple answer is why? because as bruce outlined, their interests has never been in bin laden. or, in the afghan taliban as targets. those are leaders that to some extent they've always been able to use. are we in a position to put enough pressure on them, to actually have them change the hit list? who knows? it's possible. but it seems much more likely that we will see a few scape gothse and maybe more tolerance of unmanned combat aerial vehicle strikes at the same time probably a reduction in special forces presence in pakistan. and there will be more

maneuvering because, as they can see, if we have a july announcement of u.s. troop cuts, that that means we are going to be largely leaving in 2014 at least as a major military presence. and at that point, they have every reason to try to intervene in whatever negotiations take place between the karzai government, the taliban, and try to manipulate the situation to their advantage. so this was an important event or symbol for us. it was an intense embarrassment for them just as bruce has explained. but should it change their behavior? i think we already have problems in persuading the congress to provide any more carrots much less even sustain the carrots we're giving them

and it's just not clear what our sticks are when we know we've set this deadline of 2014. >> bruce, tony argued that our interests in pakistan were limited to our operations in afghanistan. do you agree with that? do you think we have core interests in pakistan? >> i would, i guess i would differentiate a little bit between interests, whether they're tactical or strategic, and just the intrinsic importance of pakistan. pakistan is on the far side of this planet. we spent the first 200 years as a republic largely ignoring what happened over there and we seem to have gotten by ok. so i don't see this as a strategic interest on the course of western europe or japan or something like that. at the same time, we shouldn't

not ignore pakistan's weight in and of itself. this is the sixth largest country in terms of population in the world. it will very rapidly be the fifth largest country in the world. it's the second largest muslim country in the world. it will be the largest muslim country in the world. it is in fact the largest growing arsenal in the world. and as we both have laid out, it has probably gotten more terrorist per kil meter than any otherry in the world. so i don't know whether i would define that as strategic interest. i would define that as this is an important country and we ignore it at our peril. does that mean we have overlapping strategic interests with it? no. i don't think we do. >> tony, if this is as good as it gets between the relationship between u.s. and pakistan, are our expectations

too high? >> i think first, bruce outlined the cycles. the problem i think are not that our expect crations are too high if you mean the united states government. or that the people who are in pakistan are the people who developed the strategy in afghanistan. bruce made a good point about interests. we would like to have better relations, friendly relations with every country and particularly those that still have some elements of democracy. but i think the fact is that we are headed down a path where unless we can somehow actually implement all of the suggestions bruce made and do so successfully and it would be unfair to ask him to assign a quantitative probability to that, we're going to certainly

not see a major shift between now and transition in afghanistan. and if the faster that transition takes place, the steeper it is and the more it basically arbitrarily or rapidly cuts both support to afghanistan and pakistan probably the more the problem will increase. but even if we carry out the other scenarios, the situation has no reason to get immediately better. what would change it? if you actually had a pakistani government that really addressed the underlying causes of why this rise in extremism and terrorism is taking place, if you had a military with more vision that saw dealing with the causes rather than repression or military action

as a solution, if you had political parties which were less family oriented, less corrupt which actually acted on reform a rather than simply talked about it, then we might at some point have a partner. but do i expect any of that to happen? i couldn't name the person who would make the change in pakistan. maybe bruce has some suggestions. >> bruce, what scenario worries you the most? do you have confidence in the orientation of the corps commanders? you talked about the possible coups. >> i will a answer that and his question. we are again in violent agreement here. the only thing i would say is there are pakistannist who recognize every problem we have laid out and you can get on their e-mail distribution lists and be bombarded with quite

moving statements about what needs to be done flt in pakistan. and thanks to president obama, i'm on all those e-mail lists. i'm also on a lot of other e-mail lists from other people in pakistan which are not quite so pleasant to read what they say about me. the problem is those people are being murdered in front of our eyes and the pakistani government seems to be doing nothing about it. a pakistani politician who would go in the right direction, problemly sherry roffman who is now living basically in her house under threat of murder every time she goes out her front door. your question what do i worry about is the coups from within the military in which the 21st century reincar nation of dea alhack arrives, that is to say a pakistani general who is a

commited jihaddist. in 1980, such a man cam to power and we were fortunately able to point him in the direction of atheistic communism next door and together we had the highlights of u.s.-pakistani relations as the pakistanis see it. the problem is, no soviet union around any more and there's no place to deflect jihaddist views, and it will be reflected at us. is it possible? well, i think i've given you the name of a corps commander who i think it is very realistic and possible. he sure smells like a committed jihaddist to me. fortunately, he has just been promoted again to adjunct general of the pakistani military so he is no longer a corps commander. are there others like him? if i could give one piece of

advice to leon panetta and david petraeus about what one piece of information i would most like to know in the whole world right now, it is the true core beliefs of pakistan's core commanders because one of them is going to be the next leader of this country and we need to know who they are. are >> tony, what advice would you give to general petraeus? >> i think at this point we are struggling to find exactly the issues that bruce raised. it is to understand not simply the problems in fata or fallujah stan, it is to understand the problems in the country and it is not simply the wide range of violent extremist movements but the internal threats within this power structure. and that is particularly true

because you have a country which will have a major increase in its ability to produce nuclear weapons. which does manufacture missiles. and which is doing it in a climate where you are building up on both sides significant nuclear strike capabilities in an environment which is a little unique because both india and pakistan have essentially had to lie about their nuclear testing program. they are arming nuclear weapons that they have not adequately tested or characterized. and they are arming them on missiles which they have not tested to the point where they know exactly what will happen if they are fired. now, they are a long way away, but as bruce points out you

have interests that go beyond strategic interests, and the whole picture of any kind of nuclear confrontation as both sides rush to issues they don't understand, that's a very dangerous issue. >> how about china? should we worry about china and pakistan growing closer together? you mentioned that we might sort of threaten pakistan that we might start siding more with india. couldn't they come back to us and say, well, fine, you can go with india and we're going to go with china. is that a credible threat from their standpoint? >> well, it's a threat they make. we had a remarkable scene recently where pakistan's minister of defense, most of you don't know who that is because in pakistan being a civilian minister of defense in the government is the least possible important jobs in the entire cabinet. but he did get a trip to

beijing and he came back and said we're going to give china a naval base on the arabian sea and there was this kind of embarrassed silence for a few hours from beijing and then a statement that came out and said, well werks don't want a naval base on the arabian sea. i'm not a china expert so i cannot tell you the chinese part of this. but from the pakistani standpoint, they do see china as their all-weather friend which will bail them out. the truth is in every war with india they haven't bailed them out, they've stood on the sidelines. they are an important partner for pakistan in terms of military equipment, in terms of the nuclear technology and capability that tony just talked about. but i think they are more complicated ally than the pakistanis wanted to believe they are.

and here, i would also throw out there's another ally they have which is the saudis and if gulf states and there, the arab spring is moving the gulf states close tore the pakistanis as a source of reliable military man power in the event of more bahrains and more internal problems in the gulf. pakistan has alternatives to us. it likes to exaggerate the size of those alternatives but they do have alternatives to us. >> if i may make a point. there's another side of this than the purely military one and that is simply trade logistics and the rest. and there's been a lot of talk about new roads and the rest. first, pakistan is not a particularly attractive economic structure for china. it is not a particularly good route for pipe lines and roads unless you believe, a, it is

completely secure, and b, you have a real reason to move from the indian ocean north. and in fact, when you look at what china is doing, it isn't financing a major road through pakistan, it's financing a major road in iran up to her rat to connect with central asia and that is a massive investment for china. the other problem is that for obvious economic reasons you have central asia funding east-west communication lines and lines north to russia. so what you have is a rather peculiar subculture of people who study south asia who are fascinated by afghanistan and pakistan. on the other hand, you have realities on the map and they're moving east, west, and north, and in other directions. and for really clear reasons in terms of trade, economics, and energy flows.

>> bruce, you mentioned the arab spring. i wonder what you both think. is it possible to see the sort of popular uprising that we've seen in other places, is it possible to see that in pakistan? you had the lawyers movement a few years ago but it sort of fizzled out. could there be sort of a demonstration effect in pakistan? >> if there's one lesson of the arab spring, it is don't rule out possibilities in the future at the risk of looking foolish very quickly after you've ruled them out. so i wouldn't rule anything out. i i would invert a little bit. in many ways pakistan had its arab spring in 2007-2008. you had a n aroused citizenry that asked for the rule of law, that asked for accountability, that wanted its system to be reformed and demanded the end

of a dictator. and they succeeded. now, maybe it would have all turned out a whole lot better if mrs. bhutto hadn't been murdered but i think that's a bit of a slim hope. the problems in the pakistani system are much more indemic than that. and to give pakistanis credit, this is their fourth time at trying to build a democratic system. i give them a lot of credit for persistance, for aspiring to be a democratic modern state, but you have to believe in the triumph of hope over experience to believe that it's going to succeed. and it's not going to succeed as long as the dominant political player in the country , a state within a state, the army, is so relentlessly

focused on competition with india that it demands a exorbitant part of the national budget for its demands and demands total control over national security be held solely in the hands of the army and the civilian political leaders not even have any involvement in it. it is an army in charge of the state in many ways today, and that is a political problem which i don't think is resolved easily through the kind of political demonstrations and upheavel that we had. it is more likely to go back to military dictatorship than it is to effective functioning democracy. >> if i may. i'm always a little worried about this phrase, arab spring. first, no two arab springs are alike. so we end up describing the

french revolution and american revolution as being identical by using that same logic. and very recently i heard a senior arab described the arab spring as what you in the west don't understand is for us this spring is intensely hot and filled with sand storms. i suspect it's a little more realistic than some of the descriptions we've heard elsewhere. but what i think bruce has pointed out, first, you have put forth an option in some ways as you did in egypt between a civil elite in the military structure. and second, what you also have is not so much a national consciousness centered around one place but a whole group of separatist somewhat different movements which do not have reasons to cohere and produce some kind of unified process of change. so you may see a power struggle between the civil and military elite but that's not the same

thing i think even as the egyptian thing was. of we really i think in general need to remember that the only thing revolutions do have in common is that none of them are alike. >> if the military is part of the problem, should we think about putting greater conditions on the military aid that we give to pakistan? bruce mentioned that he thought kerry-lugor was a great idea that was passed its day. the it's under greater pressure in congress. >> you bribe people to freedom? let's be real. if what we want is to maintain the lines of communication through 2014, we will have more trouble not have more problems with strikes and occasionally have them do something useful when we're pushing them hard

enough. probably not a good idea to discover we need a really good military accounting process. i can't top that laugh. >> bruce, you probably know the dynamics within the administration as well as inn outside. i was wondering if you could characterize the state of debate on pakistan now in washington. will secretary gates' departure shift the center of gravity? how do you read things? >> traditionally, pakistan's strongest promoter inside the united states government has been the c.i.a. because the c.i.a. argued that the relationship with the isi, although very, very difficult, produced results. certainly that was the argument back in the 1980s when the isi ran the war for us and that was

the argument through most of the first half of, three quarters, of this decade. the formula the c.i.a. would repeat endlessly is that the isi is our most important ally on the war against al qaeda and the most difficult ally in the war against al qaeda. and they would point to individuals whom we had gotten through the assistance of the isi. that's changed. that has changed in the last year. it certainly has changed in light of the raymond davis affair and abutea bad changed it even more. my former colleagues are spending even more time than i am trying to answer my question, clueless, complicit? because for them it's an even

more up close and personal question. if that advocate changes as it has, that leaves in essence the uniformed military which is arguing the case that we need them for the supply line and i had a drink with kineie last night. he is an ok guy. he is not as bad as he thinks. the departure of gates and the arrival of panetta who is going to bring with him the new c.i.a. view i think is also bad news for pakistan. that will leave us as the principle defender of engagement with pakistan. the state department. which of course because it is the state department argues in favor of engagement with everybody. that's what diplomats are supposed to do. its track record of winning

those debates not just in this administration but in every administration is pretty slim. it may have engagement but is engagement wauven nothing inside of it. so my reading of the tea leaves is that not only does events on the ground argue that this relationship is going to get worse, buecratic changes and personnel changes in washington probably will add to that tendency toward getting worse. all that said, at the highest levels of this administration, as i said earlier, they've never had illusions about pakistan but they also do understand that pakistan is an important place. and they are getting angry with it, getting frustrated with it, feels good but that's all policy. anger is not a solution to this problem. the solutions are not very good but anger is the least effective of them.

>> tony, you showed our popularity plummeting in pakistan despite the aid we give, despite the strategic communication plan that's been cleared all the way up to the president. are there any communications that we could add given the drone strikes or is it a hopeless cause? >> i don't think it's hopeless but i think frankry that one of our great problems is the idea that somehow you find a message, you control it, and you keep repeating it and it somehow impacts on public opinion. if there's any place that's worked since the start of the second bush administration, i would love to hear it. i think the difficulty is if you really want to communicate to people, you have to communicate with them as realistically and as much depth as possible. and as bruce points out, you have people, not simply on the civil side but in the military, the intelligence scuent people,

who are very realistic about this rake of problems. what you don't have is a matching set of media. what you don't is a political structure that does a good job of communicating it. and i think the other problem is until pakistan's domestic politics can address pakistan's problems, they can't be realistic about us. and that's the tragedy. it wouldn't matter that much if pakistanis were angry at the united states. what does matter is the inability to focus on education, population, water, infrastructure, the failure of the central government to respond in emergencies like the flood. all of the thing it is people actually need and with that the threat that is posed by

religious and separatist extremist groups. a threat which in many ways is not directed towards us or afghanistan or inn on the outside. it's caused by the problems on the inside. >> you all have been very patient. we have about 20, 25 minutes for questions. please state your name, affiliation, and please ask a question rather than offer a speech. go ahead, please. there's a microphone there. >> a simple question. not unreasonable hypothetical that there will be a deal cut between government in kabul and the taliban. how does that change the equation? >> well, the practical problem is it can be any deal under the sun. when you cut this kind of deal, are you cutting it around us or

with us? are you cutting it with a group of taliban which might actually accept a political role or is this simply a cosmetic device by the taliban to try to manipulate the situation? is it shake owe mar? which is an uncertain deal. this particular group of bed fellows is also possible in politics, but the idea of owe mar and karzai is not something that strikes me as immediately possible. you have the problem of hack ani and how does hack ani fit into this structure? the other thing to remember is we are still fighting in many ways a tactical war to try to traps form afghanistan into a state with a more effective government with popular

support. the taliban is fighting a war of political attrition or in many ways they want to expand their influence, expand their control, and simply outwait us, which is what they need to do to win if the afghan government remains weak and something they can exploit. so the problem with most of these deals particularly until the taliban can be firmly convinced that they are going to lose unless they reach some kind of accommodation, is that this kind of negotiation can simply be an extension of insurgency by other means. and we have seen that in cambodia and we've seen it in napele and a great many other areas. it's compounded by the fact that there are a number of countries, germany in particular, that simply want

out under any form of political accommodation possible. so the pressure isn't simply pressure that affects the key negotiating partners. it's pressure within nato and ice aff and there are elements certainly here in the united states of people who believe that if frankly we can't create a stable end state any way, accommodation and departure is the better part of valor. >> i just want to add one thing. and i i agree with that. i am in favor of a political process but i'm deeply skeptical that a political process is going to merge. i'm deeply skeltcal that it will produce the outcomes. i fear that plit problems will lead to the collapse of the alliance as they say we're not interested in a political process with people whom we

regard as our mortal enemy. but i just also want to put an inconvenient fact out there. there is a great hope in certain circles here and in many, many circles in europe that the taliban can be split from al qaeda. that these are not necessarily bound together organizations. well, there's an inconvenient fact. less than 96 hours after osama bin laden was killed, the taliban assurea council put out the eulogy and bemoned this disastrous moment that has come to the islamic world and lauded mr. bin laden as a hero of islam, as a hero of their movement, as a defender of afghanistan, as a leader of the palestinian cause. everything that you would not want the afghan taliban to say

about osama bin laden they said it. now, we can dismiss it as propaganda if you want to. people will say they got carried away by the moment. well, you do that at your own peril. i think the afghan taliban revealed the relationship between al qaeda. i suspect that in that mountain of data that they're going through, they're going to find a lot more communications between mr. bin laden and taliban commanders than people would want to find. >> you're on the quieta e-mail list as well. >> yes. >> i'm from the university of richmond. i share your frustration. you have used words sickle relationship to describe relationship. i wonder if we can really

afford to divorce pakistan. bruce mentioned some of the intrinsic importance of pakistan and i would just add a few more. some of this has to do with negative importance. if we could drive pakistan into china's orbit, they can continue proliferating the aq cannes network, they can provide sanctuary to al qaeda and so on. so is marriage of an enter a relationship. what we're trying to be is realistic that engagement's prospects of success were always small and look smaller

today than they did two years ago, three years ago when president obama was elected. and i think we have to deal with that reality. there are all kinds of negatives of a pakistan that is even more hostile than the one we have today. my nightmare scenario is a jihaddist state in pakistan where through the instrument of a military coup, a leader of jihad takes control of the fastest growing nuclear arsenal in the world, the fifth largest country in terms of population. what would we do with that? what american strategy would you deal with to deal with a country like that? we're going to engage them? they're not likely to be interested in engaging us. are we going to contain them? we might have some success in that because virtually everyone

elled would find it as dangerous. are we going to use kinetic force? are we going to use force against pack stab? should we invade pakistan? i know your reaction is this guy's nuts but we have invaded three countries in the last decade. one we only invaded their air space. but in the case of pakistan this really would be insanityty taking on a nuclear armed enemy with 180 million people who as tony's poll charts show us are not exactly to be won over to the american way of life by some gis with bubble gum. it can get much worse. we're not advocating that. we're not in favor of divorce. but i think realism is important in thinking about the

future of our relations. we are in a dark place and it's getting worse. >> i think that first i'm going to have to try to get away from the ram bo part 9 as we go in to get the nuclear weapons in pakistan. where is sylvester stallone when we need him? and i don't say that totally facetiously because people say well it's nuclear power. and we have to what? and sometimes you get the sense we're going to bomb them out of nuclear weapons. or we're going to send in nuclear forces. frankly, that is an extraordinarily dangerous image. what we also have to recognize is when we talk about transitioning out of afghanistan, there is a question will we leave enough people to keep the structure together for a while?

could it hold together on its own if we do instead of fully transitioning in 2014 actually sustain the afghan national force development through 2020 2020 and beyond which is the real world plan if you wanted to hold together. if we do that, do we maintain the capability and some kind of presence to deal with extremism in pakistan that attacks terrorist targets and so-called counter terrorism strategy? if so, what do we have to pay the pakistanis and what do we have to give them to implement it. these are all strategies which we may find ourselves thrust into. they don't give you however anything like the presence or the leverage that we have now. we have $107 billion worth of military operations funded this year.

$4 billion worth of aid. $7 billion worth of additional money to deal with v.a. and the medical costs of the war which accumulate with time with the wounded and other people who are eligible. are we ever going to sustain even a fraction of that beyond 2014 if we do it even that long? and if so, what is our leverage in this region? what kind of aid would actually work with pakistan? and what is our policy towards south asia and towards central asia at a time when, yes, we have interests in pakistan, we have interests in latin america, we have interests in japan. and we are headed toward a period in time when we have to be much more careful about how we allocate these resources than we have been in the past. these are all very hard choices

. but what they all warn you against is focusing only on the present in pakistan as one country of particular interest. we've spent the last decade without a regional strategy towards anybody. we can't afford to have a pakistan centric strategy or an afghan centric strategy in the future. >> first to bruce. what makes you think that pakistan can become a jihaddist country? yes, they do not trust the united states. but they are being killed by these jihaddists who believe in global jihad. secondly, when we talk about

political negotiations with taliban and afghanistan, where do we leave pakistan in regards to its long time belief that one day u.s. is going to leave pakistan with afghanistan to deal with the situation? secondly, how do we look at the relationship with -- their relationship with hah cani and their long time wish to have a bhagor role in afghanistan after 2014? thank you. >> i think the answer to the first question is as i said before, a coups which has the reincarnation of the previous ruler. the pakistani army is at war with part of the frankenstein it created and it is in bed with part of the frankenstein it created. the complexity, the contradictions that go on in the pakistani's army's behavior towards jihadism are difficult

for the american mind to comprehend but it is these contradictions and these complexities which make this such an important and difficult problem to deal with. is such a coup imminent? is it inevitable? no. is it possible? certainly. is it the most likely outcome? fortunately, i don't think so. craig was asking me for my nightmares. usually your nightmares are not the most likely think that's going to happen to you in the next day but you are to pay attention to worst-scace scenarios. not the obsessed part of them either. . .

-- a former head of the afghan intelligence. it is a very interesting case. he has been saying for the last five years wanting over and over again. osama bin laden was not hiding in a cave. he was hiding in the heartland of pakistan probably protected by the isi. everything but that last statement is now a fact. he was right about pakistan.

>> i think if they made -- if i might turn to afghanistan, that is not just the issue. it is 2015. cars die as either change the constitution, or he is gone. no one has emerged under karzei as a strong, confident leader. any of us who have met some of the other would-be afghan leaders have good reason to be cautious about what comes next. who in the south has what political status? house separate are they? how is the network fitted into the taliban generally? is the threat still real? is omoaar still alive?

how much of the central government has evolved in a positive direction? a lot of polls indicate that basically it has not improved in popularity as a result of the new strategy nationally. it just in the areas where we now provided added security in the south and kandahar. what is the status of the northern groups in afghanistan? having had two failed elections, won for president and one for parliament, and having created a legislative body which has no clear function even if it is properly elected because we never really give them the control over their money that in the legislature should have, what actually evolves? since we cannot at this point in

time answer a single one of those questions predictably, and we have no transition plan that anybody has articulated, either in afghanistan or the administration to move toward a , i would suggest to that we need to look far beyond 2014 as quickly as possible. one thing that people forget again and again is we need money. we are already drafting the fy 2014 budget submission. that will fund the transition year. if we do that as we know are without any guidance as to the plan for transition, we present a lot of problems for us that potentially we could avoid. this is the kind of reality that we face when we start talking

substance. >> i think we have time for one or two more questions. please wait for the microphone. >> thank you. i am with help the afghan children. i have been working in afghanistan and pakistan for the past 18 years. my question is that how often afghans are engaged or involved in decisions that are made for afghans in afghanistan or about afghanistan or the future of afghanistan? are they being consulted? or their opinions considered? thank you. >> i think the answer is which

afghans? you had two elections. no one on the outside suggested we should run these elections. you do have an afghan government that is being steadily strengthened. at the fact is, at this point in time, the moneyed vastly exceeds the capacity of the government to spend it, much less spend it wisely, so the ministry cannot execute the budgets and that the draft. when you talk about civil society, we have as a result moved money to get funds for potential governors because the constitution does not provide a way of funding the governors. you have created a structure to help train and create deputy district governors.

you have created a structure to try to empower local jurors through the aid process. i am not sure who it is in the afghan process that is excluded from this. the fact is, if you look at what has actually happened, you keep hearing people in the afghan government say we should control the money. then you look at what happens when you give it to them. exitedy, you've already by far as their ability to deal with it at this point in time. let me say that you are not going to put this kind of money into ngo's. you are performing the contract in process. that will not give afghans a

opportunity to get away from the subcontracting process to go directly to afghan contractors. that would hopefully satisfy some other issues. but this is not something where you suddenly call a large =b and assembly in kavu ask people what they are doing-- in kabul and ask people what they are doing. you are running quarterly polling of afghans to figure out their perceptions and wants. certainly, you have responded because what afghans have wanted by way of aid has been not development in the classic sense, but relatively simple schools, local electric power, better roads, and water. and of course, security. they have also wanted to have

government services and less corruption, but this is very much a matter for afghans to solve. not for us. we could run drives and run the training programs in governments, but they do not reform society. if they do, we do not have a single example of success. it is not imminent anywhere i know of. we can help people help themselves. >> a final question. ok, please join me in thanking them. [applause] [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2011] >> connect with c-span on line. a continuing conversations on facebook, political places in washington and beyond.

c-span and the social media, connect today. >> irs commissioner said on wednesday that the republican house resolution would increase the deficit by decreasing revenue. he said the house proposal would cut $2 billion from the agency's budget next fiscal year and would be substantial and affect all of irs operations. he testified before a senate appropriations subcommittee. the administration's request for the irs is nearly three teen $0.3 billion, a $1.1 billion increase from the fiscal 2010 budget. this is an hour and 15 minutes.

>> good morning. i am pleased to convene at this hearing to consider the fiscal year 2012 funding request for the internal revenue service, the largest single account within our subcommittee. our focus today is on the president's budget request for the irs, $13.6 billion in annual funding constitutes over half the total amount of discretionary funding under our jurisdiction. i am pleased to share the dai with my friend ands distinguished ranking member, sen. moran, and others who will join us. joining us is the hon. douglas shulman, now on his fourth year of a five-year term as the 47th commissioner of the internal revenue service. thanks for your service, and for accepting the challenge to help lead to the irs from good to great. i welcome the opportunity to

conduct a critical oversight of the irs and its programs through our discussion today. congress exercises its most effective oversight of agencies and programs through the appropriations process. it allows for an annual check and review of operations and spending, to complement congressional oversight, the irs' cadre of watchdogs and observers, the irs oversight board, the government accountability of this, national treasury employees union -- lots of people are watching. i appreciate the work and constructive contributions of each of these entities to help us prepare for today's hearing the irs and ministers -- the irs administers tax laws, and each year, 95,000 employees of the irs make hundreds of millions of contacts with american taxpayers and businesses. the irs represents the face of

government to more u.s. citizens than any other agency of u.s. government. on the budget, this is clear, a budget of 12.1 $5 billion, -- this fiscal year, a budget of $4.5 billion, the government collected 93.3% of all federal taxes. it processed 230 million tax returns, including 141 million individual returns, 7 million corporate, 30 million employment tax returns. they issued 109.1 million refunds, and the list goes on. for fiscal year '12, the funding request represents an overall increase of $1.1 billion, about 9.4% above fiscal year '11 level. for the irs accounts, the fiscal year '11 bill maintains funding at the same level as the funding provided in fiscal year 2010.

i recognize that such levels falls over $487 million short of what the president had requested for this year. there has been dealt-tightening all about and it has affected your agency. we will talk today about the budgetary challenges you face in the upcoming year, some of the policy challenges which drive the spending in your agency, and i look forward to hearing more about the challenges the irs faces in these difficult budgetary times. now i would like to turn the floor over to my colleague, senator moran. my colleague. >> chairman durbin, thanks for the hearing today, and welcome, commissioner shulman. tand the irs is tasked with the responsibility to collect the revenue the funds the government that administers the tax law. the ira's goal of increasing services making military compliance easier and enforcing the law to ensure everyone pays their fair share of taxes is all

laudable. we all agree we should make sure our tax code and irs compliance efforts don't make it harder for taxpayers and small businessmen and women to meet their tax obligations to the as we know the american economy is facing difficult times and we need to get the economy moving again. americans are struggling and overly burdensome regulations and requirements and for the ability of the small businesses to grow and create jobs. i was pleased to see congress address the uncertainty by passing legislation to repeal the unprecedented 1099 reporting mandate in the health care law. this marks a significant change in the health care law and the repeal of the 1099 requirement is good news for small business and agricultural producers who bear the largest burden under these provisions. i am interested in talking to you, commissioner, about the consequences of that repeal on your appropriations and budget

request. i noted that the request for all irs the fiscal year 2012 is almost 13.3 billion so an approximate 1.1 billion over dhaka 2010 enacted level and the fy 2011 level resulting in a 9% increase. almost half a billion of that increase as requested to begin implementation in the health care law given the trend fiscal reality i'm interested to learn how they intend to prioritize the goal and carry out the responsibilities and enforcement and taxpayer services and make progress on important information technology projects. i appreciate a sycophant complex responsibilities that the irs faces given our government fiscal constraints we must be careful, carefully review the agency's budget request to ensure the taxpayer dollars are receiving the best value for their dollars and make sure that we address our country's economic problems in a fiscally responsible way. mr. chairman, i look for to hearing the testimony and thank you for calling the hearing and

i look forward to working with you on this committee's jurisdiction. >> thanks a lot, senator. mr. shulman, the floor is yours. >> thank you, a ranking member moran it's good to be here and i appreciate the opportunity to testify about the 2012 budget. this budget was crafted during the time of fiscal austerity and belt-tightening in the nation to be as efficient as possible and to spend taxpayer dollars wisely this means in my mind finding savings or we can and continuing to invest in a strategic priorities to improve service and walter compliance. the fiscal year budget includes bugs 190 million in efficiencies savings and reductions and you've got my commitment to continue to look for ways to save the federal government money. against a backdrop it is clear that the irs is vital to the

functioning of the government and keeping the nation and economy strong. the collected as the chairman noted $2.345 trillion in gross revenues to fund the federal government which is partially 93% of all federal receipts. and every dollar spent on all irs weep collect $200 of revenue. one of our duties as you noted is conducting the filing season despite the tax law change it actually went relatively smoothly. as of the end of may we've got about 133 million individual returns. we did asia over 100 million refunds totaling 200 to $85 billion. we also answered over 50 million taxpayer calls this year. the irs program which is lauded

by many as one of the most successful modernization programs and all of government continues to show a growth. this year we reached two major milestones. one is for the first time we had over 100 million people electronically file, and this year we started the final program in 1986 and crossed the 1 billion electronic filing of the tax return this year. clearly it's changed the way americans interact in the irs. it's a big deal for efficiency. to process an electronically filed returns costs $3.66 to process a paper return and we've been reaping benefits and downsizing the operations ever since e-file started. we also try to help taxpayers who are struggling to regain their footing after the recession. this year we start of something we call a fresh start program which expands the offer in

compromise program and it may lean withdraw easy for the taxpayers and to enter an installment plan and change the lurleen criteria. now in recognition of the critical role we play in the economy, both helping taxpayers file their taxes and also collecting the revenue and in the irs in the 2012 budget. this is to the taxpayer service and compliance programs and our commitment to administer the tax law in the balance and fair manner. it also includes to finish for the 2012 filing season are key cord count database. if and when we have a fully operational account database it will mean faster processing of returns, expedited refunds for all americans, better customer

service and enhanced data security. i also want to emphasize because of our unique revenue collection function of the investments in the irs more than pay for themselves by generating much more revenue than they cost. i would be remiss if i didn't mention the house budget resolution which provided a funding level for financial services in general government of approximately $2 billion below the fiscal year enacted level because as you mentioned a majority of the financial-services bill cut the magnitude would be substantial and affect all operations from taxpayers' questions on of room to front-line compliance activities such as audit coverage. from the reduced tax law enforcement cuts in the house budget resolution would actually increase the deficit widened duties could decrease in

revenues. and the cans in conspicuous drops in activities could have an impact on the longer-term voluntary compliance in the country. with that said what we conclude by saying i recognize that we are in a very challenging fiscal environment and that there's going to be a lot of difficult choices you and your colleagues are going to need to make, so i look forward to the constructive dialogue over the weeks and months ahead in this subcommittee and very much appreciate the support the subcommittee has given the irs. as i mentioned in my opening statement, the irs deals with a huge volume processing more than 230 million tax returns and issuing over 109 million refunds. it is an indication of a challenge that you face and people you work with face on a regular basis. and of course there are going to be cases people set to defraud

or cheat the government in terms of filing fees tax returns. i would like to call your attention to one that has received some attention over the last year or so. and this is dhaka providing of refunds to people who are serving in prisons across the united states. the treasury inspector general for the tax administration reported that iran is prisoner refund claims are on the rise, but up to 44,944 claiming refunds of $295.1 million in the year 2009. even though the irs has been able to present large amounts of the refunds from being issued, 256 million have been rejected in 2009 and this year of the study. the amount of the falls refunds issued still hit a high $39.1 million. since 2004 when 18,103 false tax returns were filed, nearly

$123 million in fraudulent refunds have been issued to those serving in prison. now, i can think of a situation where someone serving in prison may be eligible for a refund. it could happen but clearly in this case we are dealing with those ineligible to receive refunds who are trying to defraud the government. they aren't satisfied with being punished by sitting in prison, they are dreaming up new crimes to try to get the taxpayers' expense to try to defraud the government. and so, let me ask at the outset, i understand you've spoken to the u.s. bureau to try to make sure we have the identification of the prisoners filing returns, but i also understand that when it comes to the state prison systems that your authority to have this kind of information transferred will expire at the end of this year. can you tell me what is being done to stop these false claims by prisoners? and what more we can do to

protect the head tax payers in the treasury? >> mr. chairman it is an issue we take very seriously. and we've been focused on. the bottom line is when we have the name of a prisoner we can stop the refund from going out, and we do. the problem is getting the data, and with federal prisons signed last year in a memorandum of understanding we can put screens in place to block i sent letters out to the governors of the ten states that have the highest prison populations and the biggest problems here. we spent that time signed a memorandum of seven states were in discussions with 17 other states, so we have seen some potential progress with states getting the information so we can block it. we have a bigger problem with the counties and municipalities because we need to get

information from them. they've got budget constraints and we need to get it in a format in december so we can note into the system and put blocks for the filing season. but i would tell you and i think the inspector general realized this in the last report, we are stopping more, we are detecting more and screening more. estimates are we prosecuting those who file false returns? >> one of the real issues is the biggest hammer that we have is sending someone to jail and these people are already in jail, and so actually what we've been doing in these memorandums with the states and federal government is and the authority talked about is allowing us to share tax data which generally we can't under 6103 the tax law so people can do things like have punishment in prison, wardens can put a prisoner in solitary confinement and things of that like. people we generally blocker

people that are there for life. as you mentioned there's a lot of prisoners who are married filing jointly or who do a refund is what we need to screen it and make sure we are not hurting the spells of a prisoner. so i think we've made a lot of progress. this year we have actually process and on screens and follow-ups of 100,000 more. i added to the unit that does the screening so all of this is moving in the right direction and as long as we get the information we can properly block. stomach and the infinite wisdom of the members of congress, we dream up new tax deductions and tax credits for perfectly valid reasons, at least in my opinion. and then it is up to do to try to make it work. and one of them related to tax credits for energy efficient windows, doors and insulation and geothermal heat pumps and solar heaters i probably voted for it. it sounded like a good idea.

for tax year 2000 when they claimed more than $5.8 million of the energy credit which were included in the 2009 economic stimulus recovery act. based on the review of the statistically valid sample of the 150 tax returns the treasury inspector general for the tax administration was not able to confirm who ownership for 30% of that sample, 45 of the taxpayers, which of course is required to claim the credit. so there is at least a question going forward as to whether these for 30% of the people who claim the money were eligible for it. in addition, this inspector general identified 362 and eligible individuals who were allowed to erroneously claimed $404,570 of residential energy credits on their tax returns. ..

when people want to give incentives and when there was a major economic melt down across the globe, people quickly used the tax system to push a lot of money out, to help stabilize economies. the tax system is sufficient and may be an interaction that can happen every year with most americans. when we have time, we can set up filters, find out whether there

is potential leakage find out what data we can get in to get through an electronically filed returns and set up screens and filters and we do that. and so, for instance, the report you reference, it happened very quickly when we were trying to do some things. we set out a set of filters. it is generally viable service. we put more filters in place while they're having dialogue with that report. some leakage occurred, which would like to have zero leakage with any credits because really going to because really going to be able to screen and follow up with a certain amount. but we do do follow-ups. things happen quickly sometimes more refunds go with a terrific and we have an audit program of the audit and find out what they

will follow up in clothes. make no mistake. i think you're getting and sophisticated filters and stuff the vast majority of going out. the tax system is built on voluntary compliance and it's got to get balance right between the three friends to people and he's been spent or them to spend an block in the bad ones, there is going to be some leakage. our ballistic at the balance right, to hear the leakage as much as we can. >> senator brandt, just bear with me. i want to answer questions. and the most egregious cases, when someone is claiming their homeowner title ii these critics and effect are not convinced that they clearly misrepresented the legibility for programs. not a math error, clear misrepresentation. in those cases we need to take

them come is a follow-up in terms of penalties, fines, prosecution? >> penalties, gas, fines , yes. pgh prosecutions we have limited prosecutorial resources. resources and places that are the most long-term deterrence. our criminal investigation is things around, prepare your side, identity theft fraud and very specific tax fraud. we try to allocate resources. so the answer is yes. a lot of times you'll see a scheme where one person is this a bunch of false claims and come off as a return, comes back. usually an individual with a thousand dollars credit for themselves fraudulently used it will be find it much more of a simple context in a criminal

context. the bigger the crime, the more it happens and i see no partnership at the justice department and local u.s. attorneys. >> i've talked about this specific credit. last question here. if you could take a look at the overall landscape, which we find find the most proud in terms of claiming that they are not entitled to. >> you know, the tax code is incredibly complex. there's a fair amount of noncompliance. some of it is confusion. some of it is fraud. the police is refocused, which is really think that most leverages for the texas and to make sure we protect the fifth is overseas and off shore tax evasion, people parking overseas, complexity is where people hate them push the envelope. we've been focused around preparer fraud because we think it's a big point of leverage if

one preparer gets 1000 taxpayers and encourages them to do something fraudulent, a lot of time to taxpayers or expect to become like that down as the big link in the system. refundable credit, places where you can get a tax credit that's large defined fried. we did a lot of focus on first-time home buyer, where is the big refundable credit for this temporary, quick. we put a lot of effort there around both civil and criminal follow-up in this set of credits that you talked about is where we put a lot of effort. >> thank you. thank you, senator graham. >> commissioner, following that line of questioning, how often is that the irs finds the fraud as compared to an inspector general's report tory gao report requested by congress? how actively engaged in how successful are you impaired

enough the problem without some other agency pointing out the fraud with the challenge? >> so, every tax return is three spree. it is our fraud filters and it looks fuller returns that have the same addresses. 100 returns at the same addresses. big change in income. you know, not having the proper documentation attached for information in the return. preset filters intolerances frankly based on resources. a lot of these are in dacia that we need to follow up on and so we have units. this little units that call employers can say is this income accurate? and then it takes such a criminal who develop schemes and beats her criminal prosecution. what i would say is gao, inspect your general, congressional

oversight really helps us by focusing on places where they cartoonishly cage. i don't think there's been an instance since i've been there where people have found more fraud in their investigation can be factually wrong. to see these cents anonymous to, ice cream filters take out between what 2 million tax returns the year that we do follow up on. we block every year and reject 2 million returns to have duplicate ssn, dependents or individuals. and sometimes as a transcription error, but sometimes it is some of the trying to defraud the system. in utc alone we protect $4 billion annually through our enforcement efforts and blocking refunds go out. so we've got incredibly active program name. do you know, it's helpful to the people overseeing the program,

finding that there's too much leakage and the continual evolution and take a nap. frankly, the real fraudster art semifamous and her assistants and lewis have to be one step ahead. >> two examples that chairman durbin indicated that the prisoner example is something you would've no before we read about in the paper? shura, we've had extensive conversations. the root word -- let a counterintuitive to a average american set of prisoner can get a tax refund. >> i think the reality is some prisoners can't get tax refunds. we need to do screening. if you actually look at the report does say there have been more, they also show we been screening more and blocking board and identifying mark. the gross volume every time this year, the numbers, percentages were taught, the amount we filtered or protect them a lot

more money. as a fraction, moore was going out. >> you talked about the philemon savings that come from the successful program. first of all, how much more potential is there for savings? is the more opportunity for more defiling expected? secondly, you talk about the 190 million in efficiency savings reductions in nonrecurring committees. what does that mean in the budget and appropriations process? >> so, keyfile, just to tell you what we've done, we've shut down five of our 10 processing centers over the last six years. hasn't been popular with folks for those processing centers for, but we've been very clearly reaping the savings that he

finally and for right now we plan with a series of shutdowns, but certainly we're going to look to be ignored. 75% individuals defiling. 20 years from now, the irs won't take any paper. we still take some paper. i am hoping the percentage will just keep going up in madison great working with the with individuals connected to security very seriously and no one has been worried with returns there's going to be any leakage. since i came here and for every budget for the last two years that i've submitted, we've always submitted financial stadiums. i believe this ahead of the agency do you can always find efficiencies and you've always got to be looking at corporation , stopping operations that don't make sense if you can reinvest in the future. this year, the 190 million are

savings turned keyfile, repeat cutting down or processing operations reducing i.t. infrastructure. we been through a capable maturity models which is standard track is what they been stockmarkets and the computer systems, where you bring in an standardize your processes across your whole i.t. infrastructures. you are on standard ways of documenting, outside of the thing of software engineering that action will come in and do random audits to see. is that we've been promising for the last two years 75 million a year at the more efficient and more standardized and cheap to elegy officers signed up for the

saving. as i missing here you just ask act will keep doing savings than just corporations. it actually increases it will save you money. this year we didn't send out any 1040 forms. as the family we crossed a threshold. within in the past if he filed for the 1040, who attenuate 1040. i thought that was a self-fulfilling prophecy. we're not going to spend $10 million printing and sending out those who prepare contracts. this is just a series of issues. to be honest, as the chairman said, we've been under acr because their sensation in teams like rent and other things an effective cut them into an aggressive cost cutting this year as well, and he on the things listed in our 2011 budget as cost savings. the immaculate across

$190 million more in your appropriations request and budget request before the savings. >> correct. >> what percentage of american individuals filed the return with the assistance of a professional preparer? >> about 60% was last year. that number is actually going up. and another 20% use prepackaged software. 80% are using them sort of -- some of the professional realm to help them with their tax return. >> at e.u. summit in the film, is not an automatic defile or their prepares on paper? >> so, one of the things it becomes one of our processing centers, which drives me crazy, when i walk around us have it printed after the attacks are turned on the computer and send it to us that the people they're tacky is back and after it's already been type to influence. you know, there is a 10% error.

through their reducing, but that's how you transcription errors. it's incredibly inefficient. last year, congress actually passed in the final man date for preparers. we've been seizing again. gives it ready to have any preparer who files can return to the file. this year we started preparers with 100 returns. you know, that the thing about keyfile and i think we get this rate over the years is the only guy to mandate once we really had meant some and i must everyone we could convince voluntary be to cendant had involuntarily. really increased use on others to mandate that says very prepare using software unique keyfile blessed to get a waiver from your client to really wants to send it in on paper. >> chairman, at other questions. >> so, we are in this debate here about our deficit in how we can come up with savings of

$4 trillion over 10 years of roughly 400 alien dollars a year, either intended spending so that is kind of the standard greasing. save 400 billion. it is estimated $345 billion in federal taxes go and collected, a noncompliance rate of 16.3%. this growth problem illustrates an enormous untapped resource of federal revenue, which could go a long way to dealing with their shortfalls in our deficit. most of the tax gap maternity 5 billion out of 345 is attributable to underreporting of tax liability. 197 billion on thoughts from individual income taxpayers. underreporting can be the result of understated income, improper reductions, overstay reduction

expenses and erroneously claimed credit. so we went through an exercise here in the affordable health care and decided one way we can capture some of these uncollected tax revenues when it came to small businesses was to have more reporting from them, more 1090 nines reflect in their business committee. well, naturally there was huge pushback from the business community, seymore paperwork, thank you, washington. so we packed track walked away from that and said we won't take them in the system. so i want to ask you a pretty obvious question with a pretty obvious answer insured. is there a way to address this tax gap without more reporting, more regulation and more disclosure? >> so, our statistics basically show we have information with

porting and withholding. so the average american's paycheck is withheld and the employer since then the taxes and they get a refund. you're over 99% compliance. or you have some information reporting, mortgage interest, deduction, 1090 nines reporting for interest on bank account, you know, that kind of thing is that 95, 96% compliance. where you have no information with porting from a cash economy, businesses, you know, compliance -- it's hard to do the studies. they are by their nature and accurate. recoded to research, to some statistically select did samples, et cetera. you get 50%, 60% compliance, 70% compliance. to really answer that please are his leverages information reporting. as you said, we separate tax system is a voluntary tax

system, we are fully forthcoming with the government, report which you know we keep an eye on things. the week in a broad coverage is having a third party to information reporting. it's the only efficient way to go in the tax gap. because it affects a lot of people at the tax code, it becomes politically unpopular like he said that the 1090 nines reporting. i fully understand both politics realities around small businesses and what people are trying to do cheers and so it is very tough. there is an economist who spent a lot of time to set the thing to remember about the tax gap if it is like deep shale oil preserved. this is not just minicity mutates easily tap. we have in many ways tapped the money. we actually have a very high tax tax compliance rate.

there's only five countries to study the tax gap and we are as high as any of them. the way to go at the tax cuts is better information reporting. but it brings with it some burden. i do think there's just basically said offender information technology to become more ubiquitous. it is lower cost and easier for people to the reporting. a good example is history we are implementing the credit card reporting, where we would get from credit card processors and people like paypal gross receipts that were paid into businesses that's not a direct match because some industries have high credit card receipts. some industries have lower credit card receipts. we will look at the statistics and it will be another factor reuse in our audit selection and site selection. but we sure could do is spend time i'm not placed tax payers.

>> was way to ask a question about the countries do it for's leg and we do and i think he said with a top-five and clients, but if there is mixing old of a country that figured out how to do this is great proficiency in terms of collecting taxes owed, i would appreciate you sharing it. the second part i think you've alluded to, as we started off with the premise, i receive it to be two and 44 from the irs can sit down and to really fill it out, sign it in the mail back at some human being receives the paper and goes through it to see if i'm telling the truth or if it looks presentable. the whole system is starting to change and become paperless and information is flowing back and forth without the traditional peeper for them. so where would the king -- looking to a transformation in information gathering is the just described with credit cards

that may make compliance easier, where he may not be burdening local businesses so much with filing forms, but rather having some basic flow through information that tells us what we need to know if to assert tax liability? >> so i think there are a couple possibilities. i laid out a long-term vision. we've got to get some of our quartet elegy done of actually trying to get btus, 1090 nines loaded into our system before filing. so right now, the way out the reporting happened if those don't get it until after people file. so they can't use those as screens and blacks and visits back to the refundable credit question. and we got a concept of basically said we can figure out a way to frontload the issue, actually potentially work with private sector can make information available to people.

rapid people scrambling and looking to file for envelopes of the important tax return information and open it up or keep a phyletic, we have a database that would have that. when people filed if there was a mismatch, but have to correct it before it came in. it would come into us. we got a lot better compliance on the front and in creed a lot less hassle for taxpayers because taxpayers are now defiling get it wrong, six months later you get a letter from s. beauty then have to scramble future records, pay them again ago 32nd loop, which is probably unnecessary. i think that's one thing we can potentially do. second is i actually started an office reporting directly to me and compliance data analytics, which is looking at databases can try to make sure we are really smart about information we have and we are applying appropriate treatment screens. so for instance, we are looking at things like rather than sending out the standard for

letters to taxpayers, which they get overtime, making a call to a taxpayer immediately when they have a tax liability to sort things out much like the credit card company and continually looking at data analytics to get better. on the flow through, it is more of a conceptual conversation, when we have took a full vetting with congress. as the 1090 nines issue showed, people are very sensitive about burden, but also the voluntary nature of our tax system in the government not knowing too much about people. in her complaint shall be javaone be want as much information as we can. i think the world is what are information available that can move around a lot quicker and could be less burdensome ways to get information. >> one last question is do you have the information to elegy capability and staff capability to develop what you just discussed? a new generation about collecting and processing

information that doesn't rely on the transfer paper? >> we've had this conversation. i think we have the staff capability. by i.t. leadership team that we have recruited that would put up against anyone else in the private air. we brought in a cto would then have to elegy for boeing, visa international has built an incredibly strong team and that's why we are able under tough budget circumstances to finish this twenty-year modernization of our account database. with that said, where i came from, building big tech elegy in benchmarks and financial services you spend somewhere between 10% and 20% on capital investment because you're all about processing money, getting information, serving people, which is a similar model to

worse. our capital investment, this president has asked almost doubled from 1.5% of their budget to just under 3%. so my object in view is that the agency for 20 years has been underfunded and kind of interesting technology in the future. we are just getting there and recognize constraints were under. i'm not going to make a request for a 10% increase or 10% of our technology budget the technology investment, but i do think the future of running the nation's tax system is all about investment elegy, investment information that we need to keep investing. >> thank you. >> mr. chairman, thank you and aired the fire is 1090 nines issue to chairman durbin just talk about, as i understand your

budget request included 23.382 million full-time employees attributed to the health care loss provisions. in light of this repeal, the irs request is reduced by 23.3 million a change -- i'm sorry, 82 full-time employees? >> yes, that's dropped. >> good. >> which escapes the money. >> what chairman durbin was talking about caused me to want to inquire about the security. he mentioned the voluntary nature concern by americans about information -- the federal government having information about them. how secure of a system do we have in place that protects taxpayer information from those who would want to be there harm the system or steal information for their abuse?

>> is very secure knockdowns. i tell everybody i was sworn in, came back to the office and the first briefing i had as irs commissioner was about protection of taxpayer data and data security. it's really built in the dna of the irs. there are laws that give it our individual employees from sharing information that any individual taxpayer with anyone and we prosecute aggressively when anything happens. from the pure data security infrastructure, we've got extensive perimeter infrastructure around the web and we are continually monitoring that. we coordinate with all the federal national security agencies to make sure infrastructure is good. internal security we have blogs, monitoring, back down to one of

the things i committed when i came it is any type what you put online lap 100% locked down data security. you have to make choices, but were never going to make a choice and data security. we take this very seriously and will stay focused on it. >> one of the reasons -- all shift topics, but one reason you would request for money and personnel is passage of the affordable care act. its constitutionality is being tested in a simpleton like what we decided about the united states from court. in light of whatever the answer to deas, the magnitude, is the irs operating as if it is kind to shill going to be fully implemented? is very middle-of-the-road approach? i assume you're not sitting there waiting for constitutionality to be determined. are you behaving differently in the expenditure of money coming

use of personnel, focusing resources because of the constitutional challenge? .. we had started with a small amount of problem. we move toward what the laws on the books. >> timeframe wise for implementation of dca, what happens incrementally between now and 2014 towards full

implementation? >> we go through series of additional use of resources, personnel and tax collections and enforcement. >> yeah, so you can really break up the work that we are going to need to do on the affordable care act into the technology infrastructure largely rounded refundable credits and connecting with the state exchanges and that is our biggest list between now and 2014. technology and operations is 82% of the request and the 2012 budget. it is building the infrastructure to hook up with all the state exchanges so that when people are registering, they can find out their eligibility for tax credit, can find out for tax credit and then we have the information flows in the money flows with the insurance companies to be paying those on a regular basis. and then there are some very -- tax law in the affordable care act that