Banking Without Borders

The International Monetary Fund (IMF) has estimated that money laundering accounts for 3-5 per cent of the world's gross domestic product (GDP). According to the World Bank, global GDP was approximately USD72.3 trillion in 2007, which would place international money laundering somewhere between USD2.17 and USD3.61 trillion annually.

Given this scale and geographic scope, no country is immune to the challenge of stopping the flow of illicit money. Money launderers and terrorism financiers have moved funds into all jurisdictions, including those with robust laws to counter such activity. Over the past 15 years, a few members of the international community have banded together to create a blueprint for fighting money laundering and terrorism financing. Unfortunately, several countries and jurisdictions – particularly in the Middle East – have refused to implement this blueprint. As a result, they lack basic controls necessary to ensure that the international financial sector is not exploited by criminals, terrorists and their support networks.

Just as the financial system has become global in nature, so too has the threat posed by tainted money. In confronting this threat, the system is only as strong as its weakest link – or as Daniel L Glaser, assistant secretary for terrorist financing at the US Department of the Treasury, noted in September 2005: "Laxity in just a few jurisdictions undermines the efforts made by the rest."

Still, most countries in the Middle East have not taken even the most basic steps, such as criminalizing money laundering and terrorism financing, instituting controls in their formal and informal financial sectors, curbing cash smuggling, preventing abuse in the trade sector, and safeguarding the charitable sector. The inaction on the part of these countries continues to threaten the security of all nations.

Establishing an international framework

Governments serious about cracking down on illicit actors hiding the movement of their funds have taken the lead in creating international organizations with mandates to combat money laundering and terrorism financing. The most important of these organizations is the Financial Action Task Force (FATF), established

by members of the G-7 (an international group consisting of the finance ministers from the US, UK, Canada, France, Germany, Italy and Japan) in 1989. FATF has since issued a set of standards on effective AML/CFT efforts and created a framework to assess compliance by individual countries. Although the organization has a limited membership of only 36 members, and lacks an enforcement capability, it has been surprisingly effective in curbing the ability of illicit actors to abuse the international financial sector.

FATF's principal contribution is its frequently- updated International Standards on Combating Money Laundering and the Financing of Terrorism and Proliferation (or the 40 Recommendations). Typically referred to as "the international standard" for AML/CFT efforts, these recommendations were issued with the intention of universal application, to serve as a comprehensive framework against the movement of illicit money. These include the criminalization of money laundering and terrorism finance, implementation of proper controls in the financial sector to curb abuse and the blacklisting of rogue actors. These standards center on three principles. First, countries must improve their national infrastructure to combat money laundering and terrorism financing. Second, each country is obliged to strengthen its financial system.

Both banking and non-banking institutions must establish procedures to identify clients and detect suspicious transactions, as well as develop secure and modern transaction protocols. Third, countries must strive to improve international co-operation by collecting, analyzing and sharing AML/CFT-related information at the administrative and judicial levels. This includes sharing information on international currency flows and developing mutual judicial-assistance programs in order to investigate, freeze and confiscate illicit funds.

FATF's official policy is to blacklist countries that either fail to comply with the international standard or refuse to have their financial system evaluated. This list is then published on the organization's website, and FATF urges member states to send it to financial institutions and law enforcement agencies so they can take appropriate action. Although the blacklist has no enforcement mechanism, it has nevertheless had an impact in changing the behavior of designated countries. For example, historically, once a country or jurisdiction has been blacklisted by FATF, financial institutions and other good corporate citizens have been reluctant to do business with, or in, these locations. Moreover, blacklisted countries that refuse to take remedial action have at times lost significant international investment as a result. In fact, the IMF and World Bank have sometimes chosen to downgrade a blacklisted country's credit rating – a significant punishment given the interconnected nature of financial markets. This has forced many countries to remediate their policies and procedures and implement more robust controls.

Case study 1: Iran

As Iran continues to flout United Nations Security Council Resolutions (UNSCRs) putting pressure on its nuclear proliferation activities and sponsorship of terrorism, policymakers in Europe and the US have come to view sanctions as the last peaceful means by which to bring the Iranian government into compliance. Much of the controversy regarding its nuclear program has centered on Iran's consistent failure to declare sensitive enrichment and reprocessing activities to the International Atomic Energy Agency (IAEA). Properly targeted sanctions may serve as a credible way of influencing the Iranian regime to change course.

Denied hard currency, Iran would find it far more difficult to continue pursuing nuclear weapons, supporting its surrogates around the world and inciting violence. Accordingly, both the UN and the US have taken steps to isolate Iranian banks suspected of funding such activities via the international financial system.

Unfortunately, as the allegations against HSBC and Standard Chartered indicate, Iran still appears to have access to the financial sector through international banks that directly aid and abet it in obtaining foreign currencies, in direct disregard of the sanctions regime put in place by the international community.

Despite the sanctions and a concerted effort by many Western nations, several banks around the world continue to do business with Iranian financial institutions that are complicit in supporting terrorist groups and spreading nuclear weapons. On 4 January 2012, US President Barack Obama signed into law sanctions against the Central Bank of Iran (CBI; or Bank Markazi), penalizing foreign financial institutions that do business with the bank, The Wall Street Journal reported. The following month on 6 February, the Obama administration also authorized legislation allowing US institutions to freeze the property and interests of the CBI, according to a White House press release. Nevertheless, the CBI still has access to the international financial sector, even though it has been accused of helping fund Iran's nuclear weapons program, proliferating weapons of mass destruction and facilitating money transfers to terrorist organizations.

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