Concluding its research into stopping the financing of terrorism, the bipartisan Task Force to Investigate Terrorism Financing of the U.S. House of Representatives's Financial Services Committee has released a report of its findings. Stopping Terror Finance: Securing the U.S. Financial Sector, is the product of 11 hearings over two six-month periods, beginning in April 2015.
In March 2016, the Task Force examined the U.S. Treasury Department's efforts to to help developing countries strengthen anti-money laundering (AML) and counter terrorist financing (CFT) defenses and in May, it looked at Treasury’s National Terrorist Financing Risk Assessment, which details the exposure of the U.S. financial system to terrorist financing risks. These two hearings, along with one in September 2015 titled "Could America Do More?" are of particular interest to nonprofit organizations. The report notes that terrorists obtain some of their funding through charitable organizations, but explains that usually this is carried out through sham charities, rather than any charitable organization recognized by the U.S. government. It describes this phenomenon as "an emerging trend" rather than an established mechanism.
The September 2015 hearing identified charities as a means of moving illicit money, stating, "Charitable organizations are attractive for terrorist financing because of their presence in distressed parts of the world where terrorists often operate. Such organizations may be exploited as a source of income or as a cover for moving funds internationally in a nontransparent way." It adds that many donors are "unaware that their funds may be clandestinely diverted for non-legitimate purposes."
In the March 2016 hearing, the Task Force discussed the global phenomenon of de-risking, in which financial institutions drop, rather than manage, clients perceived to be high-risk. Testimony was received from Robert Kimmitt, former Deputy Treasury Secretary, Under Secretary of State for Political Affairs and National Security Council Executive Secretary and General Counsel, who warned of the unintended consequences of aggressive implementation of AML/CFT standards. He stated,
"[A]s we work with U.S. and overseas financial institutions, let us not forget the laws of unintended consequences. If we so harshly regulate banks that they withdraw services from post-conflict and other developing countries that are ideal breeding grounds for terrorists and their financiers, we will drive the work of these financiers into the shadows.… We must expect banks to be held to high standards in this area, but not set the bar so impossibly high that the only rational business decision is to withdraw."
Clay Lowery, Vice President at Rock Creek Global Advisors and former Assistant Secretary for International Affairs at the Treasury Department, also spoke at the March hearing. He described the severe negative consequences that de-risking can have on remittances to poor nations like Somalia. The report notes that over the past several years, "U.S. and international financial institutions have been refusing to process payments to Somalia, which receives an estimated $100 million in remittances from the U.S. annually," mostly because they cannot determine whether these funds would end up in the wrong hands. "Sizeable Somali communities in Minneapolis, Minnesota, and Columbus, Ohio, have been particularly affected by what amounts to a de-facto ban on legitimate remittances to the country," it states. He explained, "[E]ither people who depend on these financial flows for their everyday livelihood will suffer or we will see more and more of these funds chased into the shadows, as desperate people will find less transparent means to move money overseas."
Lowery added that de-risking undermines the very objectives of AML/CFT policies, and suggested clarifying the intent and scope of the existing AML/CFT regulations and enforcement procedures and a concerted effort to lower the costs of compliance. Kimmitt added that the U.S. should avoid any regulatory action that produces unintended “de-risking” in post-conflict and developing countries.
Among the Task Force's recommendations are the following:
- Development of a harmonized regulatory and examination procedure for nonbank financial institutions—primarily money service businesses but also emerging value transfer technologies—to squeeze out illicit finance and provide banks the comfort necessary for them to again widely offer MSBs retail account services, and
- Development of a whole-of-government strategy to combat terror finance and other forms of financial crimes.
Read the full report here.