Banks enlisted for war on terrorism

Washington's pressure on banks to crack down on illicit money will impel fearful bankers into still tougher surveillance. To the tangle of checks on money laundering and flows to tax havens must now be added the hunt for often legal money flowing to what are deemed illicit activities. Banks face a huge reputational risk. But the extent to which they can take on policing roles and take initiatives to avert crime remains highly contentious. Neither the technology nor systems exist to make tracing tainted cash straightforward. So is the ultimate answer creating more vigilant, yet less commercial, corporate cultures?

Bush: putting banks worldwide on notice

When he unveiled his executive order on terrorist financing on September 24, president George W Bush described certain of the powers as "draconian". The order will enable the US to freeze, or possibly even to seize, the US assets of any bank that has had dealings with named terrorists. Follow-up legislation passing through Congress would impose mandates on banks to scrutinize customers and report suspicious activity. It would also give the US Treasury broad powers to track money overseas and to punish governments that fail to help in the crackdown.
On the face of it, this is a sweeping example of America's global reach and of Washington's deadly serious intent. David Hughes, a partner at law firm DLA, says: "It's a genuine threat. The long-arm jurisdiction says that if you touch US dollars, the US has jurisdiction to come after you. They can stretch outside America and reach other countries."
Bush declared that one dime going into terrorism was one dime too much and added: "We're putting banks and financial institutions round the world on notice."
Yet in Europe, the authorities at first scarcely reacted. In London, for example, banking organizations shrugged aside the notion that this war on terrorism was a major departure. And the Banque de France reportedly got in touch with its counterparts elsewhere in Europe saying its experts were baffled as to how to respond to the executive order.
One problem for banks is that there are already a confusing number of blacklists circulating. Countries such as the UK were geared up to respond to UN lists, not those being issued by Washington.
On top of that, the executive order's preamble was, one informed source insists, "woolly and inconsistent, with irrelevant references" - a sign presumably of the White House's anxiety to get the thing drafted and published as quickly as possible.
So was this an opening shot in a war against terrorism, or was Bush posturing in a bid to regain an initiative stolen from the US by the terrorist networks of Osama bin Laden and his allied companies and charities?
The answer is that in developing what Bush dubbed the "international equivalent of law enforcement's 'most wanted list'", the US was invoking an existing doctrine about America's extra-territorial reach. Yet in subsequent briefings on the executive order, Bush acknowledged that in Europe, for example, some laws would need to be changed "in order for those governments to react the way we expect them to".
The US move falls back heavily on the long-standing international processes grinding though various institutions to tighten up on tainted money. Even so banking institutions have jumped to attention and checked out the list of 27 terrorist names announced.
Emma Codd, of Deloitte&Touche's Business Intelligence Service, says: "There is this terrifying threat that if we find we are dealing with these people then you can forget ever dealing with the US again. People are terrified that their names are going to appear in the newspapers as well.
"The number of names we've got on the US list is going to grow and grow. And Germany has suddenly produced all these accounts that were the Taliban's - so they are all coming out of the woodwork."
Yet some question the efficacy of the action. Consultancies such as Andersen are busy advising financial institutions how to tighten up. Artificial intelligence is among the tools being introduced to spot telltale patterns of illicit cash flows as banks respond to pressure to take more initiatives. But the sheer scale and complexity of the task remains daunting. Paul Doxey, a partner in Andersen's fraud and integrity risk group, comments: "The industry has been caught on the hop over terrorists. It started back in 1994 in a rather mechanistic way with drug money as the main target. But things have moved on. Having dealings unwittingly with Osama bin Laden is now an operational risk facing every bank."
Eliminating the risk absolutely isn't practicable. A big bank has too many disaggregated systems and sub-systems running. Account names, especially foreign names, may not match exactly with official lists and remote branch offices may keep records manually.
"So it becomes a question of judgement just how exhaustively you are prepared to check and recheck and what level of risk of missing something an institution is prepared to live with in the current climate," says Doxey.
Existing legislation under-used
Open scepticism about a wave of new US and European initiatives and laws is expressed by Toby Graham, a solicitor at London law firm Taylor, Joynson and Garrett and the convenor of a working group on money laundering. "There's a lot of talk about new international legislation. But what is needed is decent enforcement of the existing legislation, which is not perfect, but adequate. That would do much more to ensure that the likes of bin Laden are not able to pass money through the financial system.

Carol Sargeant

"A further wave of legislation might have a sort of scare effect but it's a bit like the introduction of the money-laundering initiatives here in Britain. Initially there was a sort of burst of excitement but since then nobody has got prosecuted for money laundering, and nobody has heard of anybody getting prosecuted for money laundering. So people started to take the whole anti-money-laundering campaign with a pinch of salt."
Such a stance is extremely dangerous, both to society's security and to banks' reputations, says a European intelligence operator. "Terrorism is high profile. Banks will have no excuse since these events. If something comes to light over the next two years that banks did not take the proper steps during this critical period, the authorities will take a very dim view."
Certainly, those who flout the new spirit of probity and caution will face serious scrutiny and censure, says Charles Webb, managing director of business intelligence consultancy Ciex. "There is a new level of enforced responsibility, and also commercial risk. Terrorist and criminal groups have used the financial system for years, largely with impunity. Institutions and trading companies cannot hope to rely on mechanical observation of issued lists of suspect companies to protect their reputations. The next time that a bank is identified as being party to money laundering or the transfer of terrorist funds, their defence of bare minimum, tick-in-the-box due diligence, may look pretty stark in the spotlight."
  Page 1 of 3  Next | Single Page