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.”
The same problems have haunted the pursuit of the September 11 terrorists, says Bates. “When September 11 occurred the various agencies issued lists of names to the banks. This was like reverse engineering. They looked through their accounts and if they saw anything suspicious, they were told to tell the police. That is a bit odd because a lot of these accounts will not look suspicious. The terrorists who did the stuff in the US lived pretty normal lives when they lived in the US. They weren’t very odd people who spent lots of money.”
The low levels of terrorist cash requirements are one reason why banking systems fail to pick them up. Systems designed to catch financial criminals are largely geared to the scale of the bank’s own financial risk from black money, so the larger the suspicious amount, the louder the signal will ring that something is wrong. Terrorists live cheaply and the costs of their materiel are low, so even if the bank does sense something amiss, it is likely to trigger only a low-level investigation.
The banality of evil The September 11 terrorists funded their operations, which reputedly may have cost no more than $500,000, with a mixture of cash and wire transfers from a bank account in the Gulf, according to law enforcement sources. These were banal transactions that interested nobody. A Gulf-based money exchange house transferred funds to its correspondent account at a New York bank. A credit was sent to a Florida bank and then credited to the hijackers who had accounts at the bank. Stefan Cassella, an official at the US Department of Justice, says: “On the surface, these transactions were completely innocuous. The funds come from an unknown source, which may have been the personal fortune of a wealthy businessman or may have been money raised for humanitarian purposes. The source of the money doesn’t matter, what matters is the deadly purpose the money was intended to fund. The terrorists stood in line and wire-transferred the remaining unspent funds that they had been using to finance their operation back to the Gulf so that they could be recycled and used by the next group to perpetrate the next terrorist act.”
Banks are now under greater pressure than ever to understand reverse laundering by terrorists and implement the principles involved in dealing with it. Cassella says: “It is as important to harness the tools of money-laundering enforcement, like bank regulation, know-your-customer policies, prosecution and asset confiscation to interrupt these terrorist schemes that have yet to reach fruition as it is to recover the proceeds of crimes that have already been committed in the past.”
Adapting banks’ surveillance systems to incorporate checks on reverse laundering sounds fine in theory, but implementation poses problems. Existing anti-money-laundering systems are based on computer-based measures of probability and risk, linked to unusual transactions or activity. But reverse laundering requires much closer analysis of sources and destinations of funds. It also requires banks and government to keep and update libraries of names of fraudsters, criminals and terrorists. At the very least, closer cooperation between the public and private sectors will be required, with civil-liberty objections to snooping into bank accounts foremost in the public’s minds.
The Financial Action Task Force, the international body setting guidelines for national polices against money laundering, is currently examining procedures for wire transfers to ensure banks have greater information about the beneficiary of the transfer and that as much information as possible is supplied throughout the payment chain.
Banks aren’t going to wriggle away from the requirement to clamp down on terrorist money just by claiming that it is hard to do when the money may originate from an honest source.
Terrorists’ use of the cash economy has led to a beefing-up of laws on cash movement and handling. So in the US bulk cash smuggling or currency smuggling (that is moving cash abroad without notifying US Customs) has been made a felony subject to lengthy prison terms. The free transport of currency in any amount in or out of the US is still entirely legal. All a traveller has to do is to report if he is transporting more than $10,000 in or out of the country. This report is logged by US Customs. But failure to make this report equates to smuggling and is punished accordingly. The smuggled money can also be confiscated in the same way as jewels or counterfeit CD recordings are confiscated.
Chains of remittance Money remitters are pulled into US law for the first time with the USA Patriot Act. Transmitters are defined as “people who either formally or informally engage in the transfer of money from one place to another for third parties”. The money remitter who knows that money he sends will be used for a crime is treated as a reverse launderer.
The scale of money remittance in the US and elsewhere is such that licensing and regulation have proved extremely controversial. Indeed, it is understood the US and UK authorities are currently at loggerheads with European governments over the feasibility of regulating money remitters that now operate on the fringe of the regulated banking systems.
At one end of the remitting spectrum are well-known names such as Western Union. In the middle are bureaux de change that have shop fronts. At the other end is the myriad of agents undertaking hawala (to use the Arabic term for a system used widely to send expatriate remittances to developing economies). Hawala agents, who have no public face, fall outside any formal controls. The hawala money transmission service uses agents – hawaladars – to receive and pay money within their local community on the strength of faxed requests from agents known to them in other countries. Accounts are regularly balanced by the agents, without money or goods having to leave the country.
The system flourishes particularly in the Gulf where it is used by honest parties – in particular expatriate workers – to make remittances to their families on the subcontinent. Counterparties transferring funds out of the subcontinent are largely Indian and Pakistani evaders of local currency controls. The scale of hawala is huge. For example, of the estimated $5 billion to $6 billion sent to Pakistan from Gulf states every year, until quite recently only a small portion went through mainstream banking channels. The remainder was transferred through the hawala system.
The role of the Gulf in funding terrorism has long troubled US law enforcers. They have stated publicly that they believe it is a centre of terrorist financing because of the scale of money transmitting agencies that are loosely regulated, and are exposed to abuse by Islamic and other terrorist groups.
Banks have clearly had their problems dealing with the aftermath of September 11. But so too has law enforcement. Suspicious transaction reports sent by banks to national financial intelligence units for criminal investigation have mushroomed. But police investigators have failed to harness resources or skills to pursue them. This failure was highlighted recently when the UK’s Financial Services Authority claimed that the National Criminal Intelligence Service was awash with reports that were not investigated. “NCIS is being swamped,” says Carol Sergeant, managing director for regulatory processes at the risk directorate of the FSA. “We don’t know what exactly is happening to the reports. They just take this information and analysis and shove it out at the other end. No-one knows what happens to it when it goes out to the law enforcement agencies.”
NCIS’s problems arise from a burgeoning flow of suspicious transaction reports over the past three years. The number jumped from 18,000 in 2000 to 30,000 in the following year, to 50,000 reports in 2002. The organization, which is largely staffed by policemen seconded from local forces, buckled under this strain.
Mixed messages from the government and poor coordination with the banking system have led to confusion in the financial and law enforcement community about the whole purpose of anti-money-laundering measures. Claims that anti-money-laundering systems are little more than tax-raising tools now gain credibility.
Rowan Bosworth-Davies, a consultant on money laundering, sees a political motivation in the recent anti-money-laundering campaign. “The primary focus of USA Patriot legislation is not about internal banks, it’s about dubious foreign banks. It’s all aimed outside, at ‘nasty foreigners’. Small nations are being railroaded into implementing laws and legislation which are being passed without necessarily a huge degree of thought. They’re frightened of being further marginalized.” The real target, he suggests, is not terrorists but another altogether less dangerous group. “Tax avoiders are a very potent target for democratic governments. You’ve suddenly got these massive debates about how can we recover more tax? How much more power can we give to our tax authorities?”
Tom Naylor, a professor of economics at McGill University in Canada, argues that anti-money-laundering measures will be no more effective against terror than they were against drugs or fraud. “[Anti] money laundering claimed to work pre-emptively. Its proponents argued that you stopped the terrorism from occurring by grabbing the money. But that’s the same logic they used for fighting crime. It didn’t work with crime and it’s not going to work with terrorism. They have retroactively reconstructed a trail. It’s not proactive, it is all purely retroactive. It is great to have the trail of evidence, which you will always want. But you didn’t need any of this legislation to get this evidence.”
And the unanswered question remains: what is the true extent of terrorists’ financial resources. Naylor says of law enforcement agencies: “They go all over the world looking for Osama Bin Laden’s billions. They don’t exist, boys. What he had was stolen from him by the Sudanese. Whatever little he had was frozen in Saudi Arabia or stolen by the new military government in the Sudan. When he arrived in Afghanistan he promised to build some public works in Kandahar and he ended up not being able to carry out his promises because he didn’t have any money.”
He scraped together enough, though, for the terrorist outrage two years ago this month, the aftershocks of which are still shaking the world all around us.
Nicholas Kochan’s book, Finance under Fire: Money Laundering Exposed, will be published by Texere Thompson in Spring 2004.
