fighting terror with error: effects of fact-free policy...
TRANSCRIPT
4/27/2009 1
Fighting Terror with Error:Effects of Fact-free Policy Making
Nikos PassasNortheastern University
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Rationale for Financial Controls
• Reduce possible harm• Monitor militant activities• Reconstruct events-conspiracies• Force tactical changes and
communications – more opportunities for intelligence gathering
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Synchronizing counter-terror and economic policy
• "We will starve terrorists of funding, turn them against each other, rout them out of their safe hiding places, and bring them to justice." President George W. Bush; September 24, 2001
• AML/AC• “…remittances…are a tremendous source of capital
flowing directly into the hands of consumers and households in the developing world. We agreed to work on reducing the roadblocks for people sending money back to their families. This means identifying and removing the barriers that slow the flow of remittances, make transactions expensive or encourage money to flow through informal channels” US Treasury Secretary John Snow, February 2004, G7.
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Objectives
• Crime Control– Transparency (operators, clients and traceability)– Deterrence and prevention of abuse– Prevent terrorist finance (asset seizures)– Monitor militants
• Enhance free remittance/capital flows– Lower cost and access to widen range of options for
remittances– Compliance– Consumer protection
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Risks of erroneous AML/CTF
• Driving networks/transactions underground• Collateral damage• Alienation of ethnic groups• Neglect of more serious problems• Increase of economic/other asymmetries• More grievances = fertile ground for
recruiting militants
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Summary of Findings
• Informal remittance channels facilitate serious crime, but no significant role in the 9/11 or other terrorist operations in N. America and Europe.
• Regulation inconsistent, misapplied, mis-measured, ineffective, costly, counter-productive
• Regulation necessary but proportionate to the risk and appropriate to socio-economic and cultural environments.
• Current policies formed with imperfect knowledge of sectors and networks subject to regulation, independently of industry/community views, and without coordination at the national and international levels.
The Three Flows
• Financial • Messaging• Trade/commercial
– Current AML/CFT regimes are porous and vulnerable
– As illustrated by Informal value transfer systems (IVTS)
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Problem
• Overemphasis on certain financial flows at the expense of riskier ones
• Example of money transfer regulation and reliance on private sector
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Comparing rates
PKR-DRH rates in various markets on 8 December, 2003 in Dubai.
PKR for 1,000 DRH Options11,905 [minus fees] Draft/bank rate
12,391 Money exchange rate12,660 Hawala rate
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Comparative amounts received in Pakistan for 100 USD from Dubai
Method of remittance Charges Total paid PK Rupees received
Draft (exchange house)
1.36 - 2.722 101.36 - 102.722 5901 – 5910
Draft (Bank) 2.722 - 6.80 102.722 - 106.80 5890
TT (exchange house) 9.52 - 16.33 109.52 - 116.33 5901 – 5910
TT (Bank) 12.25 - 27.22 112.25 - 127.22 5890
Western Union 9.52 109.52 5858
Hawala NIL 100 5920
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What is the cost of current regulations?
• International reg. environment• US regulation of money transfers
– Federal v. States regulation– Due process and quality of evidence (al
Barakaat case)
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Country Regulatory Regime KYC threshold Record keeping Filings Fees Canada No registration/ no
licensing CAN$ 3,000 5 years STR
CTR above CAN$ 10,000 none
France Full bank license Comprehensive prudential
regime
n/a n/a n/a
Hong Kong Registration HK$ 20,000 6 years STR none Germany Licensing € 2,500 6 years STR € 1,000/percentage
of annual turnover – min. € 650
India 1) wire transfer services: Registration
2) other forms of remittances, incl. banking
channels, under the ‘Money Transfer Service
Scheme’: licensing
All transactions 10 years STR (once FIU is set up and becomes operational)
?
Italy Licensing € 12,500 10 years STR none Netherlands Licensing All transactions 5 years STR
CTR over € 2,000 Percentage of
annual turnover – min € 3,000
Spain Licensing All transactions 6 years STR CTR over € 3,000
?
United Arab Emirates
1) Hawala: registration 2) Exchange Houses:
licensing
1) all transactions
2) AED 2,000
1) n/a 2) all transactions over AED 2,000
1) STR 2) STR
?
United Kingdom
Registration 5 years STR
GB£ 60 per office
USA - Federal Registration US$ 3,000 5 years SAR over US$ 2,000 CTR over US$ 10,000
none
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p RecommendationVI: Alternative Remittance - IVTS• Each country should take measures to ensure that
persons or legal entities, including agents, that provide a service for the transmission of money or value, including transmission through an informal money or value transfer system or network, should be licensed or registered and subject to all the FATFRecommendations that apply to banks and non-bank financial institutions. Each country should ensure that persons or legal entities that carry out this service illegally are subject to administrative, civil or criminal sanctions.
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FATF: Good Marks for USA (2006)
SR VII Wire transfer rules
LC
•Threshold of USD 3,000 instead of USD 1,000 as is required by the revised Interpretative Note•It is not mandatory to include all required originator information on batch transfers.
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USA Federal regime
• Registration• Record Keeping• Reporting Suspicious Transactions• KYC• AML procedures even for unregistered
agents
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US States
• Licensing• Bond, capitalization, net worth, fees• Non-pragmatic and unaffordable
patchwork of rules
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State Net worth Bond Fee
California min $ 500,000 in equity Determined by Commissioner $ 5,000 plus $50 per agent
Florida min. 100,000 plus $ 50,000 per location in FL up to $ 500,000 - may
be waived upon request
Set by commission rule – max. $ 250,000 – up to $500,000 in
exceptional circumstances - may be waived upon request
Appl.. $500 plus $50 per agent; renewal $1000 $50 per agent up to $20,000
New Jersey (1) min. $100,000 plus $25,000 per location or agent in NJ up to $1,000,000.(2) $50,000 for foreign money transmitter plus $10,000 per location or agent up to $400,000
(1) min $100,000 up to $1,000,000(2) foreign remitters: depending on
volume $25,000-$100,000 -commissioner may require up to
$900,000
Appl.: $1,000Lic.: up to $4,000Biannual fee $25 per location up to $5,000
New York Investments equivalent to outstanding payments
Min. $ 500,000, unless superintendent determines lower
amount suffices
$ 500 annual + $1,000 investig.
Illinois $35,000-$500,000 depending on number of locations
Min. $100,000 or average daily outstanding for 12 months - max.
$2,000,000
$100 appl.$100 license
$10 per/l – ren.$100- $10 p/l
Pennsylvania $500,000 $1,000,000 Appl. $ 1,000, renewal $300
Texas $25,000 per location up to $1,000,000
Min. $300,000 determined by commissioner
$ 100,000 for first location, $ 50,000 for each additional up to $ 400,000
Appl./lic., invest. and renewal
[$500 licensing + $2,500 invest.]
Virginia $100,000-1,000,000 as determined by the Commission
$25,000-1,000,000 as determined by the Commission
License $ 500, renewal $750
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Lawful but awful: Account Closings
• OCC advisory• Examiners’ practice• Bank initiative• 100s of legitimate accounts closed• Underserved and undeserved: Private industry
ended up deciding who would get indispensable services and who would not
• Risk-based? Look at trade
• Wrong priorities anyway: formal sector/trade
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Barakaat Case
• Press conferences• World-wide closure• Arrests• Records seized• Assets frozen• No terrorism charges filed
– unlicensed money transfer charges
• Names still on the lists• Unsubstantiated
allegations reiterated in FATF report in June 2005
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9/11 Commission Staff report on Terrorist Finance
• “…notwithstanding the unprecedented cooperation by the UAE, significant FBI interviews of the principal players involved in al-Barakaat (including its founder), and complete and unfettered access to al-Barakaat’s financial records, the FBI could not substantiate any links between al-Barakaat and terrorism”
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• The regulatory regime in the US can be more effective and pragmatic; lacks consistency and uniformity, while its complexity and rising costs lead to confusion, over-reactions and uncertainty
• Remittance flows driven underground: many cases of unlicensed money transmission operations detected.
• Terrorist operations often cheap and involve amounts that cannot be detected by current measures and filters
• intelligence and analytical functions of financial controls are more useful and realistic but remain comparatively neglected
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Remittances and terrorist finance
• Disconnect between tons of money and lack of resources in discovered cases
• Wide range of fund raising and transfer methods used by militants
• Informal channels not the most important one
• Most 9/11 funds transferred through banks and formal remitters
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It’s Right but it
Ain’t Legal
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Cost of Attacks• Madrid 2004 - ca 15,000 € (operational costs); explosives barter
deal for drugs with street value of 35,000 €• Bali nightclub bombings – about $20,000• US embassy bombings in Kenya and Tanzania – about $10,000• Attacks in Istanbul – less than $40,000 • 9/11– about $320,000 for 19 hijackers over about two years• Paris bombs – a few hundred €• USS Cole 2000 attack in Aden - less than $10,000• Bishopsgate IRA attack - £3000• London 2005 attacks – a few hundred £• Jakarta 2003 Marriott Hotel bombing - about $30,000• Chechnya: $4,000 for airplanes; $7,000 for attacks on
Kashirskoye Highway and near metro station; Beslan $9,500• Germany: 2006 train bomb attempt –€200; Cologne bomb $241• Air India bombings – 3,000 CAD
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• Controls not always based on sufficient evidence.
• Unnecessary economic disruption and damage to innocent parties
• Control practices not perceived as consistent and fair.
• Externalities to the private sector, the wider society in remittance-sending and remittance-receiving countries, and their own intended objectives (transparency, accountability, crime control and security).
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• Even more serious crime is being committed through other channels, including trade
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Fighting a war on terror and shooting ourselves in the foot
• Networks of terror v. networks against terror• Current efforts in need of evaluation and
improvement• Away from a bulldozer approach to regulatory
symmetry• Away from embedded academics, media and
single-cause NGOs• Shift towards more balanced, consensus based,
genuinely collaborative, international effort
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Context of Financial Controls
• The “regulatory tsunami”: UNTOC, UNCAC, AML/CFT
• Main goal: fight serious crime• Other goals too: security, peace, good governance,
human rights, poverty, economic growth, public health, the environment
• Externalities: privatization of controls, less accountability, risk of injustice, economic disruptions
• Ignorance of externalities, persistence and thoughtless application: “regulatory fundamentalism”
• Legitimacy v. “paper compliance” and illusions of success
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Recommendations
• Establish facts on informal remittance infrastructures and comparative risks
• Look carefully into trade issues• Enforce laws in context of wider social objectives• Smart use of technologies and human capital• Outreach and two-way communication with
stakeholders and participants in markets• Role of private sector – proactive and innovative
on what to report and how to regulate• Multi-agency and international efforts• Resources to plan well and make this all happen
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Policy Implications
• Encourage banks to stop going overboard, while MSBs and ethnic remitters go underground– Assume right to bank account/services– Due process for restriction– Definition of risk– Outline of good practices– Ensure no unneeded information collection/action
• Re-think the definition of MSBs and diversify rules among different service providers?
• Simplify regulation and harmonize at the national and international levels
• Consistent and evidence-based enforcement
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• Formalism or pragmatism? • Effectiveness or paper compliance and window-
dressing? • Unnecessary rigidity of rules applicable in very diverse
contexts to be avoided• Support initiatives for country- or region-specific
AML/CTF approaches consistent with international standards as well as economic/other policy objectives.
• distinguish between transparency (instant or automated visibility) and traceability of transactions
• Enhance trade transparency
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AML/CFT consistent with socio-economic goals
1. Financial exclusion undermines effectiveness of AML/CFT
2. Effectiveness of AML/CFT linked to capacity3. Broader financial regulation aimed at economic
growth, access, rule of law, governance, wider policy consistency strengthens AML/CFT
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• Establish extent of informal sector and what drives it• Consider risk mitigating factors (low/no verification for
trivial amounts)• Assess institutional capacity• cost-benefit analysis of current approaches to determine
at what point we face an issue of diminishing returns is urgent
• well-designed research, solid data and thoughtful analysis to uncover the highest risks, worse threats and top policy priorities – fact-free policy making fails
• security, due process, rule of law, fairness, economic policy objectives, perception issues, etc. can be addressed in a pragmatic fashion simultaneously
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• Outreach to all stakeholders, seminars and training of agency staff and financial institution officials is vital for the achievement of all these goals as is the independent and critical analysis of available information on terrorist finance, money laundering or other serious crime.
