AML-CTF: a forced marriage post 9/11 and its effect on financial institutions

Author:Gauri Sinha
Position:The City Law School, City University, London, UK
SUMMARY

Purpose – The purpose of this paper is to explain the incompatibility of anti-money laundering (AML) and counter-terrorist financing (CTF) measures as a hasty over-reaction after 9/11, focusing on the compliance burdens that this imposes on the regulated sector, most notably financial institutions. Design/methodology/approach – This paper explains the fundamental differences between ... (see full summary)

 
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Introduction

The post-9/11 era has seen counter-terrorist financing (“CTF”) take priority as a potentially effective tool to cripple terrorists1. As an immediate reaction to the 9/11 attacks, the Bush administration's anti-terrorist strategy2 identified money as the “lifeblood of terrorist operations”, and declared that the administration would “starve the terrorists of funding, turn them against each other […] and bring them to justice” ( Executive Order 13224, 2001 ). Shortly after, a trickle down effect was noticed across Europe. In the UK, although appropriate legislation to tackle CTF already existed, it received a complete facelift after 9/11. More stringent requirements for financial institutions were imposed, mirroring to a large extent the new regime of the USA. The UK worked with a renewed focus after the 7/7 bombings in London, which provided another mandate to Parliament to target terrorist financing ( BBC News, 2005 ).

The term “terrorist financing”, as described by the 9/11 Commission Report, is commonly used to denote two distinct types of activity. First, it can consist of the financing of operational terrorist cells, i.e. the funds the cell needs to live, plan, train for, and commit the terrorist act. The second type of terrorist financing is fund-raising – the process by which an organized terrorist group (such as al-Qaeda or Hamas) raises money to fund its activities. Such fund-raising often takes place through non-governmental organisations (“NGOs”), which may raise money for legitimate humanitarian purposes and divert a fraction of their total funds into illicit purposes ( 9/11 Commission Report, 2004 ). The Third European Union Money Laundering Directive mirrors this definition as:

[T]he provision or collection of funds, by any means, directly or indirectly, with the intention that they should be used or in the knowledge that they are to be used, in full or in part, in order to carry out any of the offences [defined as terrorism].

With the fresh impetus that CTF received post 9/11, a readymade solution was to combine the laws relating to anti-money laundering (“AML”) with CTF, thereby attempting to target both money launderers and terrorists at the same time. This implied that rather than simply looking at funds from an illegal source (which was the primary thrust of money laundering activities), the international community also began to examine funds that came from legal sources, such as charitable donations3. Consequently, AML-CTF laws put bankers, fund managers, accountants and solicitors on the lookout for terrorists, around the world ( The Economist, 2005a ).

Goede (2012) observes that terrorist financing was tagged on to AML regulatory structures for a variety of reasons. First, the haste with which measures were applied “made drawings on existing initiatives and structures attractive” ( Goede, 2012, p. 42 ). Interestingly, she argues that not only was it “convenient” to subsume terrorist financing under the AML umbrella, it was also a way to “circumvent” complex questions and issues about what terrorist financing is and whether a preventative approach can be useful in its detection. The move towards combining the two could have also been linked to political ambitions, as argued by Warde (2006) , writing in Le Monde Diplomatique. He observes that soon after 9/11, it was not possible to take immediate action against Afghanistan, which reportedly gave shelter to al-Qaeda. A “seemingly bold action” towards which Bush may have got attracted to was the instant freezing of accounts ( Warde, 2006 ).

On the one hand, 9/11 was without doubt a tragic moment. At the same time however, it is important to realise that what made it “unprecedented” was the scale and location of the attacks – in the heart of the USA ( Bigo, 2006 ). Lyon (2003) observes that post 9/11, it has frequently been suggested that everything has changed, but beyond its symbolic value, has the targeting of terrorists funds through AML laws really been successful

This paper, while recognising the importance of targeting terrorist money, contends that AML and CTF have been conjoined in a hasty reaction after 9/11. As part of the AML-CTF regime, an effective collaboration with the financial sector is considered vital in preventing terrorist abuse. Financial institutions in particular (through customer identification checks and reporting of suspicious transactions) are expected to provide vital financial intelligence in preventing terrorist financing. In explaining the non-compatibility of AML and CTF measures, this paper focuses on the compliance burdens that this process of “speculation” imposes on the regulated sector, most notably financial institutions. Although the paper aims to bring out the deficiencies in the AML-CTF legislation of the UK, it also traverses through the policies and legislation of the USA in order to best describe the “trickle down” effect.

To start with, Section I of this paper explains the fundamental differences between money laundering and terrorist financing. Section II follows the evolution of the marriage between AML and CTF measures in the USA and the UK, comparing the pre and post-9/11 phase. The primary objective of this section is to demonstrate that CTF was merely lifted and placed in the AML regime, without sufficient analysis. Section III consequently discusses the specific regulatory burdens placed on financial institutions as a result of this marriage. Finally, Section IV concludes the paper.

I Money laundering and terrorist financing: chalk and cheese

In order to understand the reasons behind the failure of the AML-CTF marriage, it is crucial to first analyse the fundamental differences between money laundering and terrorist financing.

Process

Believed to have been first used in the Watergate Scandal, the term “money laundering” can be described as the process of concealing the origin of illegal gains of an unlawful act4. It was a practice in the pre-9/11 phase to link this “process” with organised crime, most commonly drug trafficking. The primary motive of organised crime is to provide illegal goods and services, which results in the generation of huge profit. Criminals fear that in the absence of money laundering schemes, these profits may ring a bell with law enforcement authorities ( Stessens, 2000 ).

More recently, the International Monetary Fund ( IMF, 2012 ) described money laundering as a process by which assets generated by a criminal activity are moved or concealed to obscure their link with crime. Therefore, two key features are implicit in the definition:

  • illegality, which is a general feature; and
  • concealment, which is a specific feature.
  • The financing of terrorism on the other hand, does not necessarily involve money from an illegal source. While money laundering involves money that was already considered illegal because of past criminal activity, terrorist financing may involve money that is legal until it has been used to commit the criminal act, that is, terrorism ( Vlcek, 2008 ). Since the crime associated with the funds occurs at the end and not the beginning of the process, a US Department of Justice official has referred it to as “reverse money laundering” ( Cassella, 2002 )5.

    Measures to fight money laundering are aimed at taking away the illegal gain (and thereby the incentive) from the crime ( Eckert, 2008 ). In contrast, the financing of terrorism often finds its source of money in legitimate activities, as in the case of charitable donations or profits from fronting businesses diverted from their ostensible uses ( Eckert, 2008 ). For example, the 9/11 Commission Report (2004, p. 170) notes (taking noting of a 2002 CIA Analytic Report ) that prior to 9/11, al-Qaeda received approximately $30 million of funds per year from Islamic charities, while also noting the use of established financial intermediaries who collected money from both witting and unwitting donors, primarily in the Gulf region. It was argued in the House of Commons that even the late Osama bin Laden accumulated his wealth through large-scale government contracts, and there was hardly anything to suggest that his funding of international terrorism “would necessarily fall foul” of the money laundering provisions ( Hansard HC, 2001 ).

    Therefore, the actions towards terrorist funding may be completely legal, while also wearing the cloak of an innocent appearance. With the only hidden aspect being the intended use of the materials and services that are purchased by terrorists, it is certainly a challenge to cast the net of AML and attempting to target CTF ( Koker, 2009 ). Moreover, since alternative and informal money transfer systems such as hawala6 are extremely difficult to hunt and bring down, focusing on just traditional banking/financial institutions is insufficient, as terrorists can easily slip through the net via other alternatives which are easily available.

    Different end goals

    Broadly speaking, the constant chase of profits and the desire to expand into new areas of criminal activity fuels the need to launder money ( UN Secretary General, 1993, p. 11 ). This invariably stems from a criminal's desire for a financial reward that can be used either for personal gain, or to finance further criminal activity ( Simpson et al., 2010, p. 1 ).

    In contrast, terrorism, for the most part, is not a profit-motivated crime. For a terrorist group, the first...

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