Fighting Terror with Error: Effects of Fact-free Policy Making
Nikos Passas Northeastern University 4/27/2009
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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. 4/27/2009 3
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 4/27/2009
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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. 4/27/2009
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The Three Flows • Financial • Messaging • Trade/commercial – Current AML/CFT regimes are porous and vulnerable – As illustrated by Informal value transfer systems (IVTS)
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 11,905 [minus fees] 12,391 12,660
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Options Draft/bank rate Money exchange rate 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 Canada France
Regulatory Regime No registration/ no licensing Full bank license
Hong Kong Germany
Registration Licensing
India
1) wire transfer services: Registration
KYC threshold CAN$ 3,000
Record keeping 5 years
Fees none
n/a
Filings STR CTR above CAN$ 10,000 n/a
Comprehensive prudential regime HK$ 20,000 € 2,500
6 years 6 years
STR STR
All transactions
10 years
STR (once FIU is set up and becomes operational)
none € 1,000/percentage of annual turnover – min. € 650 ?
n/a
2) other forms of remittances, incl. banking channels, under the ‘Money Transfer Service Scheme’: licensing
Italy Netherlands
Licensing Licensing
€ 12,500 All transactions
10 years 5 years
STR STR CTR over € 2,000
Spain
Licensing
All transactions
6 years
United Arab Emirates
1) Hawala: registration 2) Exchange Houses: licensing Registration
1) all transactions 2) AED 2,000
1) n/a 2) all transactions over AED 2,000 5 years
STR CTR over € 3,000 1) STR 2) STR
Registration
US$ 3,000
United Kingdom USA -4/27/2009 Federal
5 years
none Percentage of annual turnover – min € 3,000 ? ?
STR
GB£ 60 per office
SAR over US$ 2,000 CTR over US$ 10,000
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Recommendation VI: 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 FATF Recommendations 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
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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. 14
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.: $1,000 Lic.: up to $4,000 Biannual 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, 17 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 4/27/2009
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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 4/27/2009
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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 alBarakaat’s financial records, the FBI could not substantiate any links between alBarakaat and terrorism” 4/27/2009
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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 4/27/2009
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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 4/27/2009
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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 4/27/2009 24 • Air India bombings – 3,000 CAD
• 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 remittancereceiving countries, and their own intended objectives (transparency, accountability, crime control and security). 4/27/2009
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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 4/27/2009
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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 4/27/2009 29 success
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 4/27/2009
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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 4/27/2009
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• Formalism or pragmatism? • Effectiveness or paper compliance and windowdressing? • 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 4/27/2009
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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 capacity 3. 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 4/27/2009
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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.
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Thank you so much
Nikos Passas +1-617-373 4309
[email protected]
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