| Banks, money laundering and terrorism |
Money laundering practice is in confusion as banks struggle to understand
terrorist financing and government fails to support the financial
community with resources skills and systems. That is the conclusion
of two years of frantic activity and expenditure by the world’s
banking system, post September 11. The implications for global
security are obvious and alarming.
The importance of the banks’ role in the fight against
terrorism could not have been spelt out more clearly by George
W Bush himself, 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.” The message
was clear: banks were in the front line as government agents
against terrorist money laundering. Two years later, a balance
sheet of the financial community’s success against terror
can be drawn up. The results are not looking very satisfactory.
There are two explanations. Either the terrorist money was
never in the system, or the money was in the system, but the
controls were not adequate to spot and seize it. Strong evidence
published after the September 11 outrage suggested al-Qaeda
used couriers to move cash rather than banks to carry wire
transfers. 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.”(1)
Terrorists
have understood the anti-money laundering systems enough to
avoid them, but has the financial system understood terrorists
enough to catch their money. September 11 undoubtedly provoked
a massive clampdown on loose practices with strengthened controls
on customers, and identity checks imposed routinely for new
customers. Banks and financial institutions spent heavily hiring
large numbers of anti-money laundering (AML) staff. Lowly-paid
officials from state law enforcement organisations moved in
droves into banks’ AML systems. Qualified anti-money
laundering officers were scarce and commanded a premium. One
of these, Rick Small, a former investigator at the Federal
Reserve, was hired to Citibank for a reputed seven figure salary.
They 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. |
| For all
the expense and new law, money laundering systems and staff
struggled to adapt anti-money laundering mechanisms to the
peculiarities of terrorist financing. The two sources of money
are very different. Whereas organised crime uses the system
to wash large sums of cash obtained from drugs deals, prostitution,
below-the-counter business of all kinds, terrorist money is
much murkier. These underground operators have neither large
amounts of dirty cash to deposit, nor do they want to clean
it. Terrorist money bypasses the ‘layering’ stage
in the criminal money laundering process because its transfer
is determined by the immediate purpose for which it is required,
namely funding an outrage not hiding or making money for its
own sake. |
| The low
levels of terrorist cash requirements are paradoxically 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 the black money,
so the larger the suspicious amount, the louder the signal
will ring that something is wrong. Terrorists live cheaply
and their materiel costs are low so even if the bank does spot
something amiss, it is likely to trigger only a low level investigation
unless the external warning signs are very strong. |
| 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 United Arab Emirates.
These were banale transactions that interested nobody. A UAE
money exchange house transferred funds to its correspondent
account at a New York bank. A credit was sent to the Florida
bank. It was then credited to the hijackers who had accounts
at the bank. Says Casella, ‘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 it 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 United Arab Emirates so that they could be re-cycled and
used by the next group to perpetrate the next terrorist act. |
| Large cash
deposits and bogus purchases of houses or valuable products
ring alarm bells. But unknown charities, wealthy donors or
apparently reputable corporations, the likely sources of terrorist
funds, do not ring such alarms. Arguing that these sources
handle dirty cash or fund terror takes a bold bank and police
force with deep investigative skills. |
| Government
cannot be satisfied until banks are capable of examining sources
of funds for their criminal potential, says Department of Justice
official, Stephan Cassela. He demands that banks revise their
procedures to accommodate the terrorist threat. Casella argues
that funds need to be analysed for the crime they are about
to finance in the future, rather than the crime with which
they may have been associated in the past. This variation on
the AML theme is called reverse laundering.‘Reverse money
laundering examines the conduct of financial transactions that
look towards the commission of a future crime. It is very simple
and narrow, like the statute that says it is a crime to conduct
a financial transaction to conceal or disguise the proceeds
of drug trafficking. Statutes need to make it an offence to
conduct a transaction intended to disguise the provenance of
any crime that is foreign or domestic.’ |
| Casella
attacks current money laundering standards.‘We have been
looking backwards at what happened in the past and how that
has been hidden. Now we need to look forward to what the criminal
may intend to do with these same dollars as he launders them
in the same way. Criminals can use clean money or money from
an unknown source to commit some crime in the future. Casella
attacks American legislation on money laundering which he says
is ‘mostly backward-looking and not forward looking’.
The terroristic type financial manipulation ‘does not
violate existing laws. In the US we have only just begun to
address this problem through legislation.’ |
| Adam Bates,
a partner at KPMG specialising in forensic issues, also dismisses
the ability of anti-money laundering controls as presently
implemented to track terrorist finance. ‘ 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. |
| ‘The
systems won’t pick up the ‘sleeper’ who comes
to live in the country. The IRA would give them £5000
to live off for a year. They would send it from accounts in
Ireland. You have to wonder who is going to question someone
who says, my father wired me the money. The money pays for
his out-goings. Students have that sort on money from their
parents and it is no different. Depending on how good the terrorist
is, he will model his behavior to seem like the perfect model
citizen. ’ |
| The
same problems have haunted the pursuit of the September 11
terrorists. 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. |
| ‘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. You need
exactly the same systems that you’d use for money laundering.
To protect a charity, you need to be able to create false invoices
and to push money offshore.’
|
| Reverse
laundering looks fine in theory, but implementation poses problems.
AML systems are based on computer-based measures of probability
and risk, linked to unusual transactions or activity. Reverse
laundering, on the other hand, 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. Closer co-operation between the public
and private sectors will be required, with civil liberty objections
to snooping into bank accounts foremost in the public’s
minds. |
| Banks must
not merely be the watchdogs for dirty money coming through
cashiers, they must also be sleuths capable of quickly unearthing
tell-tale signs of criminal potential. Networks linked to criminal
activity and a familiarity with places of criminal operation
are now parts of the banking armoury. Exclusion of ‘politically
exposed persons’ has now become established banking practice
as this new regime takes shape. |
| Reverse
laundering adds a string to the bow of the anti-money laundering
programme, but it does not replace it, says Casella. Terrorists
are capable of using the same money laundering techniques as
criminal financiers, he says. These include ‘convoluted
transactions to hide the location of the money, or its destination’.
They also use the same clandestine shipments of cash to avoid
paper trails and use international shell companies to move
funds between accounts and between countries to make money
destined to be used in a crime appear legitimate. ‘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 schemes that have
yet to reach fruition as it is to recover the proceeds of crimes
that have already been committed in the past.’ |
| Financial
sophistication displayed by terrorist groups demonstrates their
links to organised crime, argues an FBI agent, ‘we strongly
suspect that illegal networks of organised crime support small,
but deadly, groups of terrorists, who, like organised criminals,
have a need to move people and especially money from country
to country whilst escaping the scrutiny of law enforcement
agencies.’ |
| Patrick
Moulette, the head of the Financial Action Task Force, the
international body setting guidelines for national polices
against money laundering, shares this view. ‘ Terrorist
groups are themselves involved in organized crime, money-laundering
activities. One of the difficulties for the FATF is when the
money comes from a legal origin, in the case of charity foundations
and other entities. We are working on the eighth recommendation,
which deals with non-profit organizations.’ The FATF
issued eight guidelines dealing with terror finance in the
wake of September 11, to add to its authoritative list of 40
guidelines then in force. The organisation 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. |
| Jack Blum,
the authoritative Washington-based lawyer, who helped bring
the BCCI scandal to the attention of the New York authorities,
links Islamic terrorism specifically to the drugs industry. ‘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 money’s 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 ten years was heroin,
period. Heroin money built the Madrasses and bankrolled Mullah
Omah. A combination of heroin money and Saudi money brought
us this terror.’ |
| Terrorists
use of the cash economy has led to a beefing up of laws on
cash movement and handling. So ‘bulk cash smuggling’ or ‘currency
smuggling’ (that is moving cash abroad without notifying
US Customs) has been made a much more serious offence. According
to one consultant, ‘the free transport of currency in
any amount in or out of the US is still entirely legal. All
the 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.’ 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. |
| The new Act also makes it a crime
to ‘transmit, transport or transfer any amount of money,
from any source, into or out of the US if the purpose of the
transmission or transfer is to promote some criminal act.’ This
pulls in schemes quite unrelated to money laundering. So if
a fraudster attracts funds through making a false promise – the
advance fee fraud— and sends the money abroad, he is
committing ‘reverse laundering’. If found, the
money could be seized even though it was honest money, because
it was aiding a future crime. |
| The courier caught transmitting large
quantities of currency in his car or hidden on his person is
caught under the reverse money laundering principle if he knows
that the money will be used by a criminal at its destination.
Funds sent by wire, as a cash deposit, a monetary instrument,
or in the form of a real estate transactions are equally suspect. |
| Money remitters are pulled into US
law for the first time with the 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 send will be used for a crime, is treated as a reverse launderer.
The scale of money remitting both in the US and abroad 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. |
| At
one end of the remitting spectrum are Western Union, in the
middle are bureaux de change who have shop fronts. At the other
end is the myriad of Hawala agents. |
| Hawala agents,
who have no public face, fall outside any controls. The Hawala money transmission service uses agents – called
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 in the Indian Sub-Continent. Counterparties transferring
funds out of the Sub-continent are largely Indian and Pakistani
evaders of local currency controls. The scale of Hawala is
huge. For example, of the estimated $5-6bn sent to Pakistan
from Gulf states every year, only $1bn goes through normal
banking channels. The remainder is thought to be transferred
through the Hawala system. |
| The role of Dubai has long troubled
US law enforcers, who have stated publicly that they believe
it is a centre of terrorist financing. They say that Dubai’s
massive money transmitting agencies are loosely regulated,
exposing them to abuse by Russians engaged in capital flight
and by Islamic and other terrorist groups. |
| America ’s
assault on Hawala in the wake of September 11 was focused on
two Hawala money transmission schemes, called Barakat and
al-Taqwa. These schemes acted as money transmission services
between the US and Islamic parts of Africa, and were both closed.
Paul O’Neill,
Secretary to the Treasury, declared their closure a great victory
on “the quartermasters of terror”(2) |
| It is not known how much, if any terrorist
money was seized, or frozen when US marshals moved in to Barakat,
but the damage it did to the Somali financial system was quickly
evident. Barakat was Somalia’s primary money transmission
mechanism, and when it was closed down, part of the Somali
economy ground to a halt. One resident working for Seattle
Public Schools explained “there’s no other way
any more to send money home to our families.” Another
with 15 dependent relatives in Somalia worried that “if
we can’t send them our money, I’m definitely sure
they will die."(3) Five
months after Barakat was closed down, the United Nations Development
Programme (UNDP) launched a programme to formalise and legalise
Barakat by bringing its workings into line with international
law in order to avoid an even greater humanitarian crisis than
already existed.(4) At
the same time, US authorities admitted their suspicions about
Barakat’s
role in funding al-Kaida was ill-founded. |
| The failure of global financial institutions to produce a coherent
front against terrorist money laundering suggests either the
problem does not exist. Or else that the approach
adopted by banks and law enforcement is missing the mark. |
| 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
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 Financial Services Authority. ‘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.’ |
| The crisis of confidence in the UK’s
anti-money laundering system forced the Government to spend £450,000
on an investigation of the system by KPMG. Sources in the Home
Office, which sponsors the report, admitted the system ‘could
work better’. |
| NCIS’s problems flow from a
burgeoning of suspicious transaction reports over the last
three years. The number jumped from 18,000 in 2000 to 30,000
in the following year, to 50,000 reports in 2002. The organisation,
which is largely composed of policemen seconded from local
forces, buckled under this strain. Regulatory pressures on
banks were recently weakened by an FSA relaxation of guidelines
for banks money laundering monitoring systems. |
| Mixed
messages from Government and poor co-ordination with the banking
system has led to confusion in the financial and law enforcement
community about the purpose of anti-money laundering measures.
Claims that anti-money laundering systems are little more than
tax raising tools now gain credibility, says Rowan Bosworth-Davies,
a consultant with Control Risks. |
| Bosworth-Davies
sees a political motivation in the the recent money laundering
campaign. ‘The primary
focus of 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 marginalised. Tax avoiders are a very potent
target for a 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, the provocative Canadian
academic, see the hand of law enforcement in the push for tougher
anti-money laundering activity, and he says that AML will be
no more effective against terror than it was against drugs
or fraud. ‘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! Its 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! |
| ‘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!’ |
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