Legislative activism triggered by current terrorist threats lacks the co-ordination to be effective, says Mark Pieth - Oct 24 2001 19:49:35
After a decade of struggling to combat organised criminals through the forfeiture of their "ill-gotten" gains and punishment of money-launderers, it seems obvious to seek to hit terrorists where they are most accessible: where they make use of the financial system for their money management. Alas, the prospects of finding traces of this common enemy may prove to be as remote as the Afghan mountains. Ways to hide money in offshore companies or by hiding behind lawyers and other holders of professional privilege are manifold.
No wonder, then, that governments are rushing through measures to deal with terrorist funds. At the same time many must be astonished that existing laws seem so incomplete and inadequate. After all, the concept of combating money-laundering was first developed to frustrate hijackers, extremists and terrorists such as the Red Brigades, the IRA and Eta.
So are we just experiencing a new form of government activism following a moral panic? The German, US or UK proposals may suggest significant developments but taken together they are unco-ordinated and patchy and can be fitted into one of two categories: they are either measures that are already part of international standards and should have been implemented long ago; or they are innovative but will not necessarily be effective - and contain the risk of overkill.
Germany's suggestion to create a central notification body to report cases of suspected money-laundering is a measure adopted by the Financial Action Task Force, an intergovernmental body,10 years ago and has been part of worldwide standards since 1996.
The US has rediscovered ideas such as the embracing of basic "know your customer" standards that were brushed aside by Republicans in the last years of the Clinton administration. The US focus is primarily on identification of foreign account-holders and on the position of foreign correspondent banking, as if terrorism were by definition a foreign problem and terrorists would abstain from using US citizens as stooges or deploying Delaware companies as fronts for their nefarious activities.
The revised directive announced by the European Union as a new international benchmark in the fight against money-laundering was similarly foreshadowed by the FATF. Its implementation is long overdue.
Other projects that appear genuinely innovative, such as the central registration of all banking clients, as suggested by German bank supervisors, seem to ignore the fact that the most valuable information would be the identification of beneficiaries for whom the client might be acting. The German register would contain plenty of information, including the names of holders of savings accounts, but organised criminals and terrorists will easily evade such bureaucratic controls. It would make more sense to develop the traditional approach of holding financial institutions responsible for the identification and profiling of their clients and for informing authorities of suspect transactions.
Identification and profiling of customers have, of course, long been established in international rules but the beneficiaries behind the customer should also be identified. This applies not only to individuals but also - and especially - to corporate vehicles. Until now regulators, if they insisted on this rule at all, have been satisfied with a simple declaration of names. Documentation to corroborate the identity of the beneficiary has not been required.
The most recent recommendations for customer due diligence from the Basle committee go some way towards a requirement of evidence but they are not explicit enough. The principle is worth developing.
Furthermore, all countries should be able to search, seize and forfeit property belonging to a terrorist organisation, even if such property has been acquired legitimately (or its illegal provenance is not provable). Helping an organisation to hide its finances should also be a criminal offence.
Last, it should be mandatory to notify the authorities of suspect funds belonging to (that is, legally or factually under the control of) a criminal organisation.
Those countries, such as Italy and Switzerland, that expanded their legislation in the early 1990s to counter the threat of mafia money should meet these goals easily. Others are struggling to create new laws in response to September 11.
The forthcoming extra- ordinary meeting of FATF should bring some co-ordination to all this activity. But there is a need, too, to make the fight against the financing of terrorism truly global by including countries - Iran and Russia, for example - that have expressed solidarity but are not currently participants in anti-laundering codes. Putting them on a black list and hoping that this will motivate them to co-operate is not likely to yield results.
The writer is chairman of the OECD's working group on bribery in international business transactions and a former member of the FATF