THE IMPORTANCE OF the banks' role in the fight against terrorism was spelt out bluntly by George W Bush shortly after September 11 2001. "We're putting banks and financial institutions around the world on notice. We will work with their governments and ask them to freeze or block the terrorist ability to access funds," he said.
Two years later, a balance sheet of the financial community's success in its corner of the fight against terror can be drawn up.
On the positive side, banks have become much more aware of the need to report suspicious transactions to police agencies. The number of reports being filed around the world has rocketed. Bank computer systems and training have been enhanced to deal with legal requirements to collect proofs of identity from new clients.
On the negative side, though, those reports have largely failed to help police arrest terrorists engaged in money laundering or seize their funds. There are two possible explanations. The terrorist money was never in the system, or the money was in the system but the controls were not up to the job of spotting and seizing it.
Strong evidence published after the September 11 outrage suggested that al-Qaeda used couriers rather than bank wire transfers to move cash. The International Policy Institute for Counter-Terrorism (ICT) reported: "All too often al-Qaeda operations bypass the more traditional money-laundering techniques - such as the use of electronic transfers and offshore accounts - that might provide clues to sources and methods. In many cases, there is no 'paper trail' to follow; cash is simply slipped into a suitcase and carried by a courier to its recipients."
Terrorists have understood banks' anti-money-laundering systems well enough to avoid them. Can the financial system understand terrorists sufficiently well to intercept their money?
September 11 undoubtedly provoked a massive clampdown on loose practices at banks. Know your customer has become the new mantra, with strict identity checks imposed routinely for new clients. Banks have spent heavily on hiring large numbers of anti-money-laundering staff. Low-paid officials from state law enforcement organizations moved in droves into the financial services industry.
These newcomers were quickly forced to study the complex and massive USA Patriot Act published in October 2001, which rewrote many of the conditions under which US banks could deal with non-US institutions dealing in dollars and operating in the US.
A struggle to adapt
For all the expense and new law, banks struggled to adapt anti-money-laundering mechanisms aimed at organized crime to deal with the peculiarities of terrorist financing.
There's a fierce argument at play here. Banks say that there is a big difference between the large amounts that gangsters seek to launder from the proceeds of their crimes and the much smaller amounts of often honestly acquired money that may be transmitted as cash to terrorists to fund their attacks. This distinction between terrorist and criminal is now the received wisdom in banking circles.
Many outside the banks vehemently disagree and say this distinction is merely an excuse for inaction.
Black money originates from many of those places where terrorist groups flourish. For example, it comes from Turkey, where the Kurdistan Workers Party (PKK) operates extortion networks; from Colombia where communist guerrilla group Farc runs a massive operation growing and selling drugs; and from Irish terror groups that counterfeit CDs and smuggle petrol.
Terror and organized crime are inextricably linked, says Jack Blum, the Washington-based lawyer who helped bring the BCCI scandal to the attention of the New York authorities. "Money laundering and terrorism is all one ball of wax. The terrorist marries into the lawlessness. People don't notice the connection if it suits their purposes. I am sick of people saying the [terrorist] money is a trivial amount and the odds of anybody picking it up are zero. That's not the issue. The gross national product for Afghanistan for 10 years was heroin, period. Heroin money built the madrasas and bankrolled Mullah Omar. A combination of heroin money and Saudi money brought us this terror."
Indeed, argues an FBI agent, the financial sophistication displayed by terrorist groups demonstrates the hand of organized crime. "We strongly suspect that illegal networks of organized crime support small, but deadly, groups of terrorists, who, like organized criminals, have a need to move people and especially money from country to country whilst escaping the scrutiny of law enforcement agencies," the agent says.
The cover of honesty
But while the sources of terror finance may sometimes have their origins in organized crime, the way organized crime and terror groups exploit the financial system is different. Terror launderers cover their tracks and throw banks' anti-money-laundering systems off their tracks by finding apparently honest sources who can supply their money without sending out warning signals that it is for nefarious purposes. This can be a form of identity theft, as these ostensibly honest sources may or may not know the purpose to which the money is put, or the fact that their name is linked to it.
The challenge for banks is spotting a problem in the source, investigating it and blocking the funds before they reach the murderous operative at the sharp end.
Adam Bates, a partner at KPMG specializing in forensic issues, highlights banks' problems in tracking terrorist finance. "Some terrorist money comes from straight money laundering and some of their money comes from reverse money laundering. Reverse money laundering is turning clean money into dirty money to use it as an instrumentality for terrorism. Terrorist groups need exactly the same systems to perform money laundering as they need to perform reverse money laundering. To protect a charity, you need to be able to create false invoices and to push money offshore." But he says: "[Anti] money-laundering systems generally can't trace [terrorist money]. Changing money-laundering controls wont help to catch the sleepers because they do not have any suspicious traits, they don't have big cash deposits or make any transfers to Liechtenstein."
Bates continues: "The systems won't pick up the terrorist who comes to live in the country. The IRA would give them £5,000 to live off for a year, which they would send from accounts in Ireland. You have to wonder who is going to question someone who says, 'my father wired me the money'. Students have that sort of money from their parents and it is no different. Depending on how good the terrorist is, he will model his behaviour to seem like the perfect model citizen."