Counterterrorism Blog

I want to build on the very useful piece posted here by my colleague Jeff Breinholt, which describes the Bank Secrecy Act and the due diligence and suspicious transaction report responsibilities it imposes on US financial institutions. These responsibilities go well beyond terrorism financing and include money laundering, corrupt practices, financial fraud, and a whole range of other criminal activities.

The US has been at the forefront in putting together a workable and effective regulatory system that seeks to protect both legitimate privacy rights and national security interests. But, the greatest part of this task falls on the financial institutions themselves, and anything the government can do to assist them should be welcome. In this vein, Breinholt's observation that the government needs to do more to facilitate a two-way flow of information between the banking community and government agencies, and to provide security clearances to eligible bank compliance officers, should be taken up seriously by both Congress and the Administration.

The complexity of international financial transactions provides many opportunities for sophisticated terrorism supporting organizations, and other criminal enterprises, to mask effectively the transactions’ actual originators and/or ultimate recipients. Funds are often channeled through multiple overseas banks and accounts, making it near impossible for the banks themselves to identify and tag suspicious transactions. They often over compensate by providing a mountain of suspicious activity and other reports. As of June 30,2007 US banks and non depository financial institutions have filed some 4.7 million Suspicious Activity Reports (SARs) with FinCen, the US government agency charged with mining the data collected under the Bank Secrecy Act and linking it with law enforcement, commercial, and other intelligence data sources. A breakdown of these figures indicates that 1.68 million dealt with possible money laundering (which might also include terrorism financing). Only 3,527 SAR’s (since 2003) have been classified as possible terrorism financing (736 in 2006 and 351 for the first half of 2007). It is not clear how many of these were actually deemed to warrant further investigation.

The bulk of international terrorism financing takes place overseas and has little to do directly with American banking institutions. US banks usually find out only after the fact that they have had some tangential involvement in such transactions, and are usually unable to steer clear of these transactions because they lack the intelligence information that might have forewarned them. This is not the case, however, for foreign banks which maintain branches in the United States, but whose overseas branches may engage regularly in such questionable activities. US branches of a handful of overseas banks have been implicated in terrorism financing, and have been used, knowingly, or unwittingly, to facilitate such transactions. The problem is that transactions considered as terrorism related, and illegal by the United States, are still viewed as quite legal by their foreign (non American jurisdiction) banking regulatory regimes.

The EU has just recently begun to replicate many of the requirements contained in the US Bank Secrecy Act. But, much of the rest of the world still lacks such control measures. This is particularly the case in Saudi Arabia, and the Gulf region in general. The Saudi Financial Intelligence Unit (FIU) reportedly only got up and running in 2007 and there are still many questions as to its role and effectiveness in combating terrorism financing.

Working together with the EU and other committed foreign banking jurisdictions, US regulators and financial institutions could have a major impact on terrorism financing by holding foreign financial institutions accountable through the long reach arm of their own laws, and through imposition of increased due diligence requirements when it comes to treating with such banking systems. This was the original intent of FATF’s so called NCCT list. It’s a shame that practice has been reduced to almost nothing.

So, the fact is that we still have a long way to go, despite the obligations, recommendations, and provisions spelled out by FATF and in various UN Counter-terrorism resolutions, and the International Convention for the Suppression of Terrorism Financing, in building an effective international control system when it comes to combating terrorism financing. This is a task we should commit ourselves to, not one we should abandon.