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Headline: Banks enlisted for war on terrorism Source: Euromoney Date: November 2001 Author: Nick Kochan 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?
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.
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.” The principle of using the banking system to expose terrorist funds and track the terrorists is plausible enough. Yet the practicability of orientating an entire system to this end is now questioned by some bankers. The correspondent banking system has been heavily criticized for providing an open gateway to onshore and regulated banks. But opening up the paper trails between onshore and offshore jurisdictions could pose a major, perhaps insuperable, administrative challenge. According to Neil Jeans, a compliance officer for ABN Amro’s UK operation, speaking before the September 11 attacks: “In a correspondent banking relationship, you probably wouldn’t find the evidence [of wrongdoing]. You’re seeing the money flows, you’re seeing a number of transactions into sterling, and a number of transactions out of sterling through that account. You may see account identifiers, but do you want to monitor those transactions personally when you have computers to monitor those transactions? You don’t know who the underlying client is, so you don’t know whether that business is appropriate or not. You rely on the other institution.” Alan Chapman, compliance officer at Unicredito Italiano, gives an indication of the work involved. “It has added a lot of double checking,” he says. “Sanctions notices were first issued in July 2000 for the Taliban. Over the last two years, it has built up into quite a list. But there are different designations and the UN designation may have a different code to an EC designation. Lists issued by the Federal Bank of New York add a further layer. I am having to juggle all the lists – it’s quite onerous.” Blacklists have to be distributed around the banks, to the corporate section and the payments section just in case. Turning bank staff into policemen, as many regulators in effect advocate, to examine capital flows and interrogate account applicants, is also a concern for many compliance officers and money-laundering reporting officers, who doubt whether levels of training are adequate. One compliance officer for a major UK bank says: “Everybody in the financial sector is being used as an unpaid unofficial investigator and police officer. We are neither staffed for this role nor trained for it. A lot more of what could be argued to be government responsibilities are now being carried out by private industry, directly or indirectly.” Doxey says: “The climate has changed. There are now fiercer political and moral pressures on banks. There is more emphasis on the industry, especially through the know-your-customer doctrine, to be actively on the look out for wrongdoing. But there are questions about how much you can realistically expect banks to do. Ultimately, it becomes an issue of their willingness to adopt a certain type of corporate culture.” The complexity of the task is appreciated by the UK banking regulator. Carol Sargeant, managing director at the Securities & Futures Authority, takes a pragmatic stance. “We are not looking for 100%; we are looking for a robust system that has a high confidence level in detecting these things,” she says. “Unless banks turn themselves into some kind of police force, I don’t think that they could ever be 100% certain. Even if they are doing a pretty good job, it doesn’t mean that they will necessarily be completely immune to ever taking on the account of a money launderer, because these people are very clever.” The SFA’s role is to ensure that UK banks and other financial institutions keep up with a fast-changing body of law and regulations dictating approaches to new customers, new sources of funds, and changes of businesses and personnel. Regular checks are made of banking systems, and many bankers are now so concerned about the possibility of getting a black mark from the SFA that they would rather call in a big-name consultant, such as Andersen, to tighten up the system than run into trouble. Many are taking this route, and the consultant industry may be set for a bonanza of near Y2K proportions. The number of money-laundering rules and regulations has been mounting since 1993, when cleansing dirty money first became an offence. But the rules are set to be stiffened by a new wave of global controls. The key date as far as the UK banking system is concerned is December 1, when the SFA acquires new powers to punish firms whose systems fail to comply with the law. These include the power to mount prosecutions against banks that could result in directors being subject to two years’ imprisonment. The new measure, called N2, also extends the powers of the “money laundering reporting office”. A new EU directive, now in the final stages of preparation, will enable prosecutors to act against directors who had responsibility for a failure, even if a director can show that he or she did not know and the failure was the responsibility of a junior colleague. The UK Proceeds of Crime Bill, now in its final parliamentary stages, tackles the same point, by introducing an “objective” test. If a director “should” have known about an abuse but did not, he remains liable. According to one European intelligence officer: “No longer can a director say our bank was collectively negligent, it’s dreadful, we accept responsibility, our reputation is in ruins, and then quietly pick up business. “There are provisions in the new directive for asking whether any of the senior executives are personally liable. That will cause the directors to quake. They will want to know if there are any senior executives, apart from the bank clerk who is a dumb employee, who should have known about this, who was responsible for training bank staff, who was responsible for the investment in that country.” Systematic action against tainted funds was already evident long before the September outrages. When the minions of Nigeria’s deceased former president, general Sani Abacha, were exposed as money launderers of around $1.3 billion, some 15 banks were named and shamed. Prosecution of some of those is now under consideration. Sargeant will only say that they are being examined on a “case-by-case basis”, and the SFA will not rush into a high-profile and expensive prosecution. A campaign against banks that took the ill-gotten gains of the Nigerian general is likely to be the SFA’s first task. Sargeant insists that the organization will be cautious. “We won’t be leaping around criminally prosecuting everybody in sight. Decisions will involve a bit of cost-benefit analysis. Prosecutions are very expensive to mount, so the offences will have to be pretty bad to justify the costs.” The Abacha case was one of four examined by the US Senate sub-committee on money laundering, which in 1999 published a devastating investigation of Citibank’s private-banking department. A year later, the sub-committee warned of the dangers of working with correspondent banks in unregulated jurisdictions. Disclosures that a number of onshore banks dealt with a Sudanese bank raised doubts about the due diligence carried out into the ownership and management. Further evidence of a new toughness in the UK was provided in August this year, when the SFA extracted a record fine of £350,000 from London-based PaineWebber International UK (since acquired by UBS) for having poor internal controls. One immediate response has been to send employees for training, and banks are taking no chances, says Gil Christie, the managing director of 7city Learning, a leading banking trainer in money-laundering systems. “Bankers who do not face clients and therefore do not need to take many of the examinations, are being sent to sit them so that banks make absolutely sure they are compliant. It would be an exaggeration to say they are in a state of panic, but many are very concerned about how the SFA will use its new powers.” Cultural as much as technical change will prepare organizations best to root out illicit money flows. According to one banker: “There will be a change of priority in banks. Instead of promoting salesmen whose instinct is to make money through whatever clever scheme, they must encourage those who are cautious.” And Graham adds: “Whereas before it was the sales people who were calling the shots and they were rewarded by how much they brought in, now they should be rewarded by how much black money and bad people they catch.” The task is nevertheless vast. The UK government estimates that the amount of drugs money and proceeds of organized crime washing round London is upwards of £8.5 billion ($12.3 billion), while IMF figures for the global drugs business top $1.2 trillion. Investigators say that these numbers are seriously understated. Different or additional techniques, though, will be needed to track down money used for terrorism to those used for tracking criminal activity. Tax evaders, robbers seeking to make themselves untraceable, government officials and smugglers breaking local laws, or those engaged in illegal trades such as pornography, drug peddling and prostitution use banks to legitimize black money. The terrorist case is different. This money is not necessarily tainted by the way that it was created or earned but by the means to which it is going to be put and the individuals to whom it is being sent. Terrorists seek weakest link Says Sargeant: “The terrorist stuff is about looking at distribution mechanisms – how the financial system is being used to distribute the funds to the terrorists, that they can then use to do their evil acts. Not all of that money necessarily comes from criminal sources, so you’re looking at it in a slightly different way. Since February this year, people have had the obligation under the terrorist reporting requirements to report anything suspicious.” Deloitte & Touche’s Codd says: “Terrorist funds are almost always more difficult to spot and you’ve just got to know who you are dealing with. You’ve got to check sanctions lists and you’ve just got to do proper digging.” Evidence from the UK’s National Criminal Intelligence Service reveals that banks have responded to Bush’s call for a financial campaign against terrorist funds. Reports by banks of suspicious transactions have increased exponentially, although NCIS still protests that only 160 of the UK’s 570 financial institutions have ever filed a “suspicious transaction report”. The bulk come from just 10 institutions. The information that banks gather about terrorists will help their loan officers, but it will also assist those engaged in the international hunt for terrorist funds and terrorist cells. Observers of the new environment expect security services to want access to financial data gathered by banks. Collaboration between the financial system and the security services is well established, although arguably it had weakened in the run-up to September 11. Such relationships remain completely informal in the UK and probably never go much further than discreet meetings between a bank’s compliance or security director and an MI6 officer. But there was well-substantiated evidence produced following the closure of the Bank of Credit & Commerce International in July 1991 that the Central Intelligence Agency had supported the bank for many years to allow it to track large customers such the Islamic terrorist Abu Nidal and a number of Islamic and US arms dealers. Civilian agencies also want to recruit bankers to the intelligence task, says Edward Venning of the NCIS. “A lot of the world’s finest brains work in commerce and in driving the economy, that’s great. What we’re asking is to borrow some of that brainpower. That flicker of recognition when a financial transaction looks a bit odd can be crucial. What we need is a reserve army of bankers against money laundering. A lot of people resist this approach, saying it’s an administrative burden. It’s not, you have a legal duty. It’s a question of training.” The flow of illicit funds does not relent, but constantly seeks out the part of the financial system with laxest scrutiny. As Andersen’s Doxey says: “If the system as whole is tightening up, you must too, otherwise you will become the weakest link.” But no-one in the industry can promise to prevent a single dime getting through. Bush’s executive order may have implied clear-cut remedies are at hand, but in reality this is an unending process. |
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