For two years after the terrorist attacks of Sept. 11, 2001, an unlicensed money transmitter in New York City used a New Jersey bank to move $1 billion in and out of foreign accounts, some belonging to black market currency traders. By law, Hudson United Bank was required to tell regulators at the Federal Deposit Insurance Corp. about such suspicious transactions, but it didn't. Instead, a probe by the New York district attorney finally alerted FDIC officials.

Earlier this year, the Federal Reserve Board fined the U.S. arm of Swiss bank UBS AG $100 million for illegally funneling $5 billion in cash to countries with which U.S. firms were banned from doing business, including Cuba, Iran and Libya. The secret cash pipeline eluded UBS's regulators at the Fed -- until U.S. soldiers in Baghdad stumbled onto a stash of U.S. bills.

And in May, the Treasury Department's Office of the Comptroller of the Currency levied a record fine of $25 million on the District's Riggs Bank for years-long failures to report unusual transactions, including those by officials at the Saudi Arabian embassy -- failures that had continued despite earlier attempts by the OCC to fix the situation.

President Bush and his top officials have repeatedly said that detecting and interrupting the flow of funds to illicit activities is a vital component in the battle against terrorism. Getting front-line financial institutions to alert officials to suspicious money movements is one key to that effort. While authorities have drawn no links between the Hudson, UBS and Riggs incidents and terrorist acts, critics see the lapses as evidence of troubling gaps in the monitoring machinery.

"You have to draw a conclusion from cases like Riggs and others," said Senate Banking Committee Chairman Sen. Richard C. Shelby (R-Ala.), who has held four hearings on combating money laundering. "You have a broad failure of regulatory agencies to provide oversight of the banking industry."

Critics in Congress say that strides have been made in the past three years to interrupt funding flows and that coordination among agencies has improved. But because underground groups are finding ever more evasive ways to maneuver and to disguise assets, the problem remains critical.

Charles Intriago, a former prosecutor who publishes Miami-based Money Laundering Alert puts it bluntly: "Bottom line: It's a piece of cake [for a terrorist or other criminal] to move $10 million into this country."

Monitoring efforts have been hindered by a historic reluctance by bank regulators to become law enforcement agents; gaps in top Treasury Department positions; fragmented state and federal bank regulation; and the inherent difficulty of writing rules that don't overburden an already highly regulated banking industry and make doing business with foreigners too cumbersome.

Shelby and others, including Sen. Paul S. Sarbanes (D-Md.) and Sen. Carl M. Levin (D-Mich.), have questioned whether bank regulators are up to the task. Lawmakers, though undecided on the matter, have considered creating a new, single anti-money-laundering agency, which bank regulators oppose. Sen. Charles E. Grassley (R-Iowa), Shelby and others are pushing for the administration to exert more leadership on the issue.

Bank regulators' principal obligation has been ensuring the financial soundness of the banking industry rather than rooting out money laundering -- the use of complex transactions that mask the connection of money to illicit activities. Regulators say they now recognize that they must play a more active role in identifying criminals who move funds through U.S. banks. The problem is how to do that.

Senior bank regulatory officials, speaking on condition that they not be named, have said that efforts to coordinate and share information among U.S. agencies about money laundering have been hampered by gaps in leadership.

David D. Aufhauser, formerly both general counsel of the Treasury and chairman of the White House's National Security Council Policy Coordination Committee on Terrorist Financing -- he stepped down from government Sept. 30, 2003 -- acted as the administration's point man to coordinate efforts by the many agencies involved. His departure has left a vacuum that the White House and Congress have been slow to fill, according to critics. The Treasury's general counsel slot was filled by Arnold I. Havens, and White House aide Frances Fragos Townsend took over the policy coordination role.

Treasury also lost another important player, undersecretary for enforcement James Gurule, whose position had been described by the agency as key in its war on terrorist financing since 9/11. Gurule stepped down in February 2003, and his position has remained unfilled for over a year.

In March, in response to criticism that the Bush administration was unorganized and needed more central planning in its push against terrorist financing, Treasury created a new Office of Terrorism and Financial Intelligence. It combines some of Aufhauser's former role as coordinator of the financial war with an expanded version of Gurule's former position.

"We're putting these pieces together in a thoughtful, considered manner," said Treasury spokesman Rob Nichols, who said the new office was created after careful consultation with key congressional committees.

Grassley subsequently wrote the president that Treasury still lacks sufficient resources and authority "to detect, investigate and prevent financial crimes."

The new office has three positions that will coordinate fund-tracking efforts by bank regulators and enforcement officials within the department. All are vacant. The president hasn't nominated anyone for assistant secretary for intelligence. The White House almost immediately announced nominations for the other two positions -- the head of the office and another assistant secretary -- but they have been held up by a four-month turf battle between Shelby and Senate Finance Committee Chairman Grassley over whose committee has jurisdiction. Last week they agreed to joint jurisdiction, with each committee holding hearings.

"We are obviously disappointed that it took the length of time that it did to come to an agreement on these nominees. They are extremely important appointments, and since the majority of their responsibilities fall within the Banking Committee's jurisdiction, we felt it critical that we are involved in their confirmation," said Andrew Gray, a spokesman for the committee.

Some critics have raised doubts about whether the restructuring itself will solve the problem. "The restructuring appears to be heavy on generals and light on soldiers," Grassley and Sen. Max Baucus (D-Montana) wrote to President Bush on March 24, raising concerns that Treasury needs both more authority and resources.

Time also has been lost in turf battles between Homeland Security on the one side and the FBI and its parent, the Justice Department, on the other. The White House eventually intervened, making the FBI the lead investigative agency. FBI and Homeland Security officials now say the two agencies are working well together.

Another problem is that nearly three years after Congress passed the Patriot Act, Treasury has not yet issued final rules requiring banks and other financial institutions, including casinos, insurers and brokerage firms, to scrutinize financial transactions of foreign customers for indications of money laundering, foreign corruption or terrorist financing. Although Treasury requires banks to comply with the proposed rules now, nearly all other financial organizations, such as casinos, pawn shops and currency exchanges, operate outside the guidelines, Treasury acknowledges. Treasury officials say they expect to issue final rules soon.

But even final rules won't provide a "how-to" manual on what to look for, critics say. "There's no meaningful guidance from government for the financial industry on how to detect and report terrorist financing," said Joseph M. Myers, a lawyer who in January stepped down as a career staffer on the White House's National Security Council, where he was the day-to-day coordinator among various federal agencies on the terrorism financing issue.

He said, for example, that law requires banks and securities firms to try to verify an individual's name, address, date of birth and Social Security number before opening a new account. But without written permission from the individual, the Social Security Administration will not tell banks or other financial institutions if a Social Security number and name match, severely cramping verification efforts.

John Byrne, head of compliance for the American Bankers Association, said even if Social Security numbers could be easily verified, tracking terrorist dollars would still be hard. He points out that the men involved in the 2001 attacks used their real names to open bank accounts, and that the money they shuffled around involved relatively tiny amounts of cash and seemingly ordinary transactions. "Terrorist financing cannot be detected by banks," he said. "It's virtually impossible without intelligence from the government."

Another source of confusion, according to critics in government and the banking industry, has been a decade-long lack of focus at the Financial Crimes Enforcement Network (FinCen), a 14-year-old Treasury unit that is supposed to enforce key elements of U.S. anti-money-laundering and terrorist financing law and be a resource that law enforcement can use to track suspects. The banking industry -- and Aufhauser -- have long complained that FinCen does little with the millions of suspicious activity reports financial institutions are supposed to file, and that there is insufficient use of computer technology to highlight troubling transactions.

"Much of the information . . . is merely lodged like a book on a library shelf without a card-catalogue," said Aufhauser in congressional testimony earlier this year. "In the absence of an express and pointed request from law enforcement, the information remains unexploited. Surely we ought to have an artificial intelligence program that red flags patterns and concerns for investigation."

A new FinCen director, William J. Fox, has said he is trying to turn the unit into a coordinator for bank regulators to keep problems like those at Hudson Bank, UBS and Riggs from slipping through the cracks again.

Bankers, regulators and the FBI have been feuding for years over proposed reforms in the number and usefulness of the reports banks must fill out for large or suspicious transactions.

In addition to suspicious activity reports, which have no dollar threshold and are required whenever a transaction seems strange, banks also must file currency transaction reports for most cash transactions of $10,000 or more. The banking industry wants to increase the threshold to $20,000, saying inflation has made the current amount too low.

About 13 million currency transaction reports were filed last year. The ABA's Byrne and bank regulators say the majority are useless as law enforcement tools. But the FBI and other law enforcement agencies are adamant that the threshold remain $10,000, according to sources inside the agencies. A Treasury official, speaking on the condition of anonymity, said bank regulators are currently meeting with the FBI and other law enforcement agencies are trying to come up with a compromise that would reduce the number of currency transaction reports.

To U.S. bank regulators at the Fed, the FDIC and the comptroller's office, well-publicized cases such as UBS, Hudson Bank and Riggs are isolated cases of banks unwittingly being used by criminals. And even the harshest critics in government and industry are quick to point out ways government agencies work well together to combat terrorist financing, no small feat given the long list of agencies and groups involved, which in addition to Treasury, Homeland Security, the FBI and Justice Department and bank regulators includes the Pentagon, the State Department, the CIA, the Securities and Exchange Commission and financial regulators from 50 states.

The lack of centralized enforcement authority at the federal level is also exacerbated by the dual state/federal nature of most financial regulation. James W. Nall, Hudson United's chief financial officer, said his bank bought the correspondent banking unit in July 2002 from an FDIC receivership of a failed Connecticut state bank. Presuming the correspondent division had been given a clean bill of health -- Hudson was in effect buying the unit from the government -- Nall said Hudson officials did not consider it a high-risk area. Hudson, chartered by the state of New Jersey, is examined by the FDIC every other year, trading off years with state bank regulators. No one regulator, Nall said, was looking specifically at money laundering risk at Hudson until it was too late.

"It came as a surprise for most everyone," Nall said of the revelations of potential money laundering at the bank's New York correspondent banking unit. "I think it's safe to say our Bank Secrecy Act compliance could have and should have been stronger."

Yet for Shelby, Sarbanes and others, the bureaucratic complexity is no excuse for failures to find serious, sometimes years-long transgressions.

"The entire system could stand some substantial improvement," said Intriago, the publisher of Money Laundering Alert. "There have been long-standing problems on the enforcement side and the regulatory side."

The U.S. arm of Swiss bank UBS AG funneled cash to Cuba, Iran and Libya, the Federal Reserve Board said.Hudson United Bank of New Jersey failed to report suspicious activity by a New York correspondent unit, one it purchased out of FDIC receivership.