Banking Without Borders

Money laundering and terrorism financing are global problems that transcend national boundaries, and launderers and terrorists are constantly adapting their techniques to exploit vulnerabilities in the financial system to disguise the movement of funds.

Key Points

  • Criminals and terrorists conduct billions of dollars in transactions each year through the formal financial sector, the informal financial sector, the trade system and cash smuggling.
  • Despite international attempts to develop a blueprint for fighting money laundering and terrorism financing, several countries and jurisdictions – particularly in the Middle East – have refused to implement anti-money laundering benchmarks and consequently lack the basic controls necessary to ensure that the international financial sector is not exploited by criminals, terrorists and their support networks.
  • The US government and its international partners continue to blacklist countries that either fail to comply with international standards or refuse to have their financial systems evaluated.

In the past three months, two London-based banks – HSBC and Standard Chartered – have been accused by the US government of serving as a gateway for Iran into the international financial market. Both financial institutions have come under scrutiny from United States (US) regulators, who have made it clear that banks doing business in the US must cut their ties with illicit Iranian entities or risk losing access to the US market.

On 17 July 2012, the US Senate Permanent Subcommittee on Investigations issued a 335-page report (in addition to several hundred pages of supporting evidence, including bank records and internal emails) accusing HSBC of exposing the US financial system to a range of money laundering, drug trafficking and terrorist financing risks due to its poor anti-money-laundering (AML) controls. According to the report, which was released following a yearlong investigation into the bank, HSBC reportedly laundered money on behalf of Mexican drug cartels; acted as a major conduit to rogue regimes, initiating over 25,000 transactions on behalf of Iran in amounts totaling USD19.4 billion through its American affiliate, HSBC Bank USA, NA (known as HBUS) alone; provided correspondent banking services to suspect banks, including Saudi Arabia's Rajhi Bank (whose key founder was a generous Al-Qaeda donor) and other suspect clients; and offered services to bearer share corporations, used by money launderers to move funds, despite repeated warnings from regulators.

HSBC executives testified during a Senate hearing on the issue in July, at which the head of group compliance, David Bagley, announced that he would be stepping down amid the claims. The bank subsequently apologized for a "shameful" systems breakdown that failed to prevent money laundering activities and set aside USD700 million to pay for potential fines that may arise from the investigation, The Guardian reported on 30 July.

The following month, on 6 August, the New York State Department of Financial Services (DFS) accused Standard Chartered PLC of laundering over USD250 billion on Iran's behalf and facilitating over 60,000 transactions, The New York Times reported. According to a DFS order document, for almost 10 years, the bank operated as a "rogue institution" that served as a "front for prohibited dealings" with Iran. The Federal Bureau of Investigation (FBI) subsequently launched an investigation that reportedly uncovered money flowing to Iran, Libya, Myanmar and Sudan, in addition to a manual teaching employees how to mask illegal transactions. Standard Chartered issued a statement, published on its website, on 6 August that "strongly rejects the position and portrayal of facts" made by the DFS. Even so, on 14 August, the bank agreed to pay USD340 million to the DFS to settle the laundering claims, The Guardian reported.

As these investigations demonstrate, money laundering and terrorism financing are global problems that transcend borders. Those who engage in such activities are constantly adapting their techniques, while law enforcement and intelligence agencies attempt to keep pace. It is a complex challenge to combat, largely due to the diversity of methods used.

Launderers and terrorists both exploit vulnerabilities in the financial system to disguise the movement of funds. Money launderers make their money illegally and try to "clean" it to conceal its origins. Terrorist financiers, on the other hand, can make their money legally or illegally – their aim is to conceal both its origin and its ultimate intended use. In short, money launderers convert dirty money into clean money, while terror financiers take money and make it dirty by funding acts of violence.

The international community has over time realized and reacted to the enormity of the problem, calling for the establishment of comprehensive anti-money-laundering/combating the financing of terrorism (AML/CFT) regimes. Three objectives are central to these efforts: protecting the integrity of the international financial system; identifying, disrupting, and dismantling financial networks that underpin international criminal and terrorist organizations; and making it more difficult for criminals and terrorists to profit from their crimes.

It is an axiom within the US law enforcement and intelligence communities that the key to disrupting and dismantling criminal organizations is to "follow the money". The same is true with terrorist organizations. Following the 11 September 2001 attacks, officials in the US and abroad recognized that effectively fighting terrorist financing (and its corollary, money laundering) might be one of the most effective ways to prevent future catastrophic terrorist incidents. Unfortunately, many governments have had a difficult time converting this theoretical understanding into effective action.

As a new generation of public servants develop the skills necessary to contribute to the war on terrorism financing, the proven tactic of following the money will become more central than ever. At the same time, this task is also becoming increasingly complex due to the skill and ability of adversaries to avoid traditional financial counter-measures. Law enforcement and intelligence officials must learn to understand the sometimes obscure methodologies employed by terrorist organizations to raise, transfer, and store money – whether these activities stem from Al-Qaeda, rogue regimes such as Iran and North Korea, or members of Hizbullah, Hamas or a host of other like-minded organizations.

A borderless problem

Time-tested means of moving money and disguising its origin are still effective, although each method has its vulnerabilities. Criminals and terrorists conduct billions of dollars in transactions each year through four principal means: the formal financial sector (banks); the informal financial sector (such as hawala – a simple broker system based on trust); the trade system (commodities); and cash smuggling. Terrorists and their supporters have also perfected the exploitation of charities – including the Holy Land Foundation and Benevolence International Fund, both designated by the Treasury in the early-2000s as financiers of terrorism – which use all of these methods.

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