Terrorism financing indicators for financial institutions in the United States.

• Author: Gordon, Richard
• Position: Confronting Complexities Through the Diversity of International Law

At least since the Financial Action Task Force (FATF) first published its Forty Recommendations, financial institutions in FATF-compliant jurisdictions have been required to implement preventive measures that require FIs to identify customers, establish client profiles, monitor for unusual transactions, review those transactions to see if there was suspicion that the), involved the proceeds of crime and, if so, report the transaction to the authorities in the form of a suspicious transaction report (STR). When these requirements were first established, neither financial institutions nor their supervisors/regulators had much experience as to what in a client's profile and the client's patterns of transactions might indicate money laundering. However, based on an expanding knowledge of how criminals tend to launder their money, over time financial institutions have developed increasingly effective detection and reporting systems. By studying known examples of laundering, the FATF, FATF-Style Regional Bodies, and national competent authorities (especially financial intelligence units) have identified patterns or indicators of possible money laundering, and made them available to .financial institutions as money laundering typologies. In addition, there has been some feedback from financial intelligence units and other competent authorities to financial institutions with respect to their anti-money laundering programs. Using these sources, financial institutions have been able to develop systems to help them determine which transactions carry a materially greater risk that laundering is involved.

Following the terrorist attacks of September 11, 2001, the FATF adopted the VIII Special Recommendations on terrorist financing. Among these new requirements were that financial institutions also report to authorities if they suspected that a transaction involved the financing of terrorism. However, there was little in the way of known patterns of terrorism financing that financial institutions could use to help identify such transactions. While since that time a number of limited typology studies have been made available by the FATF, no comprehensive study of terrorism financing typologies has yet been published. For this reason, the Counter-terrorism Implementation Task Force requested a comprehensive study on past terrorism financing techniques that would add to value to efforts by both financial institutions and governmental authorities in identifying terrorism financing transactions or patterns, also known as typologies.

This preliminary report on prosecutions in the U.S examined 266 instances of prosecutions that involve charges of terrorism, material support of terrorism, or other terrorism-related matters. Of that number, thirty were determined to involve financial institutions. Using only publicly available information, the study found twenty-four where there was sufficient information on financial transactions to see if there were any discernible patterns or typologies for terrorism financing. The study revealed that sixteen of those indicated known typologies of money laundering, although an additional three appear to involve diversion of charitable donations. In only one was there a typology that suggested possible terrorism financing and not laundering. Of the sixteen cases involving suspicious transactions only three appeared to involve criminal proceeds. From these cases, it appears that terrorists often use money laundering techniques to disguise the origins of funds or to prevent competent authorities from tracing payments from end-users to originators, even when the origin is not criminal proceeds. However, because it was not possible to review any STRs (referred to in the U.S. as Suspicious Activity Reports or SARs) that may have been filed by financial institutions with respect to these transactions, it was not possible to determine if financial institutions, in conducting their review of those transactions, had determined that they were suspicious with respect to money laundering or terrorism financing. It was also impossible to know if FinCEN had referred such SARs to law enforcement for further investigation, or if they had added actionable intelligence to the SARs that would suggest either money laundering or terrorism financing. Such reviews would be most helpful in completing the study.

1. THE GLOBAL STANDARD AGAINST MONEY LAUNDERING AND TERRORISM FINANCING A. Overview B. Financial Sector Role 1. Overview 2. Details C. Public Sector Role II. DETECTION OF TERRORISM FINANCING A. Overview B. Terrorism Typologies/Indicators/Red Flags III. STUDY TO IDENTIFY TERRORISM FINANCING INDICATORS A. Overview B. Steps 1 & 2: Terrorism Case Selection, Identification of those Involving Financial Transactions and Collection of Transaction Records 790 C. Step 3: Analysis of Transactions for Indicators D. Step 4: Review any SAPs Filed E. Response to New Regulation Preventing Implementation of Step 4 F. New Step 5: Review Documents released by Reporting Persons IV. CONCLUSIONS SUMMARY TABLE DATA, TYPE OF TRANSACTION(S), SUSPICIOUS TRANSACTION I. THE GLOBAL STANDARD AGAINST MONEY LAUNDERING AND TERRORISM FINANCING (1)

   1. Overview

      Over the past forty years, anti-money laundering rules have been expanded and refined. (2) The vast majority of the world's jurisdictions now endorse the latest version of the Financial Action Task Force's (FATF) Forty Recommendations on Money Laundering (FATF 40 Recommendations) (3) and accompanying Methodology for Assessment. (4) Starting in 1990, these global standards have required financial institutions (5) to monitor the transactions of their customers, to examine unusual transactions to determine if they might involve the proceeds of crime (6) and since 2001--the financing of terrorism, (7) and to report any suspicious transactions to special government authorities known as financial intelligence units (FIUs). The FIUs then analyze the reports (known as suspicious transaction reports (STRs)), along with other relevant data, and make recommendations to law enforcement as to which clients or transactions should be investigated. (8)

      The terrorist attacks of September 11, 2001 resulted in governments greatly intensifying their anti-money laundering activities and prompted an intensified global effort against terrorism financing. (9) In 2002, the International Monetary Fund and the World Bank adopted the FATF 40 Recommendations and the eight new Special Recommendations on Terrorism Financing (Special Recommendations) as a world standard. (10) They, along with the FATF and various regional anti-money laundering groups known as FATF-Style Regional Bodies (FSRBs), also began a joint global compliance program by assessing the extent to which individual countries were implementing those standards. (11) Failure to implement the standards adequately can result in a broad application of sanctions or countermeasures, including bans on doing business with financial institutions located within the borders of non-complying jurisdictions. (12) As a result, millions of STRs have been forwarded to Flus by financial institutions throughout the world, although how many have resulted in further investigation, prosecution, and conviction is not publically available. (13)

      The FATF's 40 Recommendations and the Special Recommendations are designed to "provide an enhanced, comprehensive and consistent framework of measures for combating money laundering and terrorist financing." (14) Together they cover, among other things, the criminalization of money laundering and terrorism financing, the freezing and seizing of criminal proceeds and terrorism funds, key preventive measures against laundering and terrorism financing for financial institutions and other institutions subject to preventive measures, FIUs, and international cooperation. (15) The 40 Recommendations have included similar preventive measure requirements since the original 1990 draft. (16) In effect, these Recommendations divide the responsibility for preventing and uncovering money laundering between the private and public sector.

   2. Financial Sector Role

      1. Overview

         FATF Recommendations 5 through 13, plus 21 and 22 (and the relevant materials in the accompanying Methodology for assessment of compliance) set out the part of the preventive measures system that applies financial institutions. Unfortunately these Recommendations are not a model of clarity and are not easy for non-experts to comprehend. (17) However, they are designed to create a five-part requirement: (18) financial institutions must (1) establish and maintain customer identity (including beneficial owner and controller of the legal title holder of the account); (2) create and maintain an up-to-date customer profile; (19) (3) monitor transactions to see if they fit with the customer profile of transactions that are legitimate; (4) if not, examine further any such transaction to see if it might represent the proceeds of crime or financing of terrorism, including by examining the source of funds; and (5) if so, report the transaction to the FIU, along with a description of why the financial institution believes that the transaction is suspicious. Recommendations 18, 19, and 26 through 34 (and the relevant materials in the accompanying Methodology for assessment of compliance) address both the supervisory system to ensure that the financial institution comply with their preventive measures requirements and the criminal investigation and prosecution system.

         The financial institution's role focuses on three basic objectives. The first is to help exclude from the financial system possible criminal and terrorist elements. The FATF 40 and Special IX do this by making financial institutions identify and profile potential--and, periodically, existing--customers to screen out possible criminals and terrorists. (20) The second is to make available to law enforcement financial...