The first step of the Bush administration’s post-9/11 ‘War on Terror’ was to sign Executive Order 13224 with the aim of launching “a strike on the financial foundation of the global terror network” in order to “starve the terrorists of funding.”[1] Within 100 days, the White House was already hailing the success of this effort.[2] But with the passing of the 12th anniversary of 9/11, it is timely to consider the unintended consequences of the proliferation of such laws and regulations. It is doubtful whether the unchecked growth of this counter terrorist financing (CTF) regime has been proportional to the actual threats present. At best, it has added significant cost to the operations of banks and those that use their financial services, including charities. At worst it has created a chilling effect that impedes humanitarian efforts, drives legitimate funds underground, and creates a vacuum into which bad actors can step.
Financial inclusion of the poor into the financial sector has been particularly impacted. According to the World Bank, ‘three quarters of the world’s poor do not have a bank account, not only because of poverty, but [also] the…amount of paper work involved in opening an account.’[3] And the Financial Action Task Force (FATF) itself notes that, “…applying an overly cautious approach to [CTF] safeguards can have the unintended consequence of excluding legitimate businesses and consumers from the financial system.”[4]
At the heart of this dilemma is the importance of maintaining proportionality. Research undertaken by the World Bank and the Consultative Group to Assist the Poor (CGAP) concludes that the interaction between the provision of financial services to the poor and the establishment of an effective CTF regime are “complementary,” because “without a sufficient measure of financial inclusion, a country’s [CTF] system will safeguard the integrity of only [the formal] part of its financial system… leaving the informal and unregistered components vulnerable to abuse.” [5]
Broadening financial inclusion should be seen as a key and desirable element of establishing an effective CTF policy, and thus steps taken by banks and authorities that exclude users from the financial system and make use of the underground economy appear more attractive are counterproductive.[6] Particularly in the case of fragile states such as Somalia, the creation of greater financial inclusion is likely to benefit security rather than detract from it, and global authorities need to monitor closely whether their measures support or undermine this goal.
A concerted globally-coordinated effort is needed to ensure proportionality is established and maintained. Much research has been published consistently highlighting the negative consequences of the global CTF regime and the overwhelming benefits of financial inclusion. In what Ian Bremmer (President of the Eurasia Group) terms a ‘G-Zero World,’ a lack of political leadership is to blame for the vicious spiral created by ever-increasing CTF pressure. Countries such as the U.S. and UK need to prioritise taming a system that appears on the whole increasingly wasteful and redundant.
There is an imminent opportunity for leadership to be demonstrated when the UK Government convenes an upcoming roundtable to consider the plight of UK-based Money Service Businesses (MSBs), which are losing their bank accounts because banks fear the regulatory and reputational risks, and associated sanctions and penalties, of serving clients that transfer money to regions afflicted by terrorism. Without political leadership, banks, fearful of the consequences of CTF regulation, will balance risk and return and will exclude an ever-greater number of people and organisations from the financial system.
Rather than “trying to catch one kind of fish by draining the ocean,”[7] committed political leadership is needed. Policymakers need to rethink why they have a CTF strategy, what are the explicit goals of this strategy, and how these goals are being benchmarked and measured. If these goals are not being achieved they should have the courage to modify, replace, or scrap them rather than allow the continued and unchecked proliferation of regulation that inflicts unnecessary cost and burden on corporations and nations, and restricts well-intentioned access to financial services for people in need, leading to greater use of the informal and black economies.
No one suggests that CTF is not important, but a balanced reassessment of the effectiveness of an often counterproductive regime is urgently needed. Proportionality is key.
Tom Keatinge is a banker with nearly 20 years’ experience. He recently completed a sabbatical year studying for a Masters in the War Studies Department of King’s College London where he wrote his dissertation on the question of the role played by the global counter-terrorist financing effort in international security. He is co-author of the recently published article ‘Draining the Ocean to Catch one Type of Fish: Evaluating the Effectiveness of the Global Counter-Terrorism Financing Regime’ in Perspectives on Terrorism (Vol 7, Issue 4)
[1] US Department of the Treasury (2002) Contributions by the Department of the Treasury to the Financial War on Terrorism: Fact Sheet (accessed 19 Aug 2013), p.2
[2] White House (2001), Fact Sheet on Terrorism (accessed 19 Aug 2013) http://2001-2009.state.gov/s/ct/rls/fs/2001/6992.htm
[3] World Bank (2012) Three Quarters of the World’s Poor Are “Unbanked” (accessed 19 Aug 2013) http://go.worldbank.org/61TLX5WSP0
[4] FATF (2013), Anti-money laundering and terrorist financing measures and financial inclusion (accessed 19 Aug 2013) http://www.fatfgafi.org/media/fatf/documents/reports/AML_CFT_Measures_and_Financial_Inclusion_2013.pdf, p.5
[5] Bester, H., D. Chamberlain, L. De Koker, C. Hougaard, R. Short, A. Smith & R. Walker (2008) Implementing FATF Standards in Developing Countries and Financial Inclusion: Findings and Guidelines, The FIRST Initiative (Washington, DC: The World Bank) www.cenfri.org/documents/AML/AML_CFT%20and%20Financial%20Inclusion.pdf
[6] Isern, J., and L. De Koker (2009) AML/CFT: Strengthening Financial Inclusion and Integrity, Focus Note 56. (CGAP, Washington, DC) www.cgap.org/gm/document-1.9.37862/FN56.pdf (accessed 19 Aug 2013)
[7] 9/11 Commission (2004), The 9/11 Commission Report: Final Report of the National Commission on Terrorist Attacks Upon the United States(Washington, DC: National Commission on Terrorist Attacks upon the United States), p.382