Posted: 10 Jun 2008 01:08 PM CDT
By David Nordell
Anyone working in the field of anti-money laundering and counter-terror financing encounters, more or less regularly, examples of the many contradictions and unintended or even undesirable consequences created by the very complex international regulatory regime and by the tens of thousands of financial institutions trying (usually) to comply with it. But a news item a few days ago really shows the mindless stupidities that the fight against terror finance can sometimes produce.
The London ’Times’ reported on June 6th that “Barclays bank rejects customers to comply with US terror law.” At first reading, there’s nothing strange about that: banks worldwide, certainly those in FATF member states, are supposed to check both new and existing customers against the USA’s OFAC black list and various other national and international lists, and reject anyone who is identified on them as being involved with terrorism. Except that this time, the customers’ link with terrorism was tenuous, to say the least: they were completely ordinary British employees — tellers and computer engineers — working for the completely legal London branches of the Iranian banks Saderat and Melli.
Barclays, one of the largest UK banks, refused to comment on the reports; but the ’Times’ wrote that it had managed to obtain a letter from a senior Barclays lawyer saying that the bank must consider “the global regulatory environment” and that it regards “full compliance with sanctions regimes to be of extreme importance.” What doesn’t make sense, to put it mildly, is that both Saderat and Melli are licensed in the UK and fully regulated by the Financial Services Authority, and that their UK operations are not hindered in any way by the US and European Union sanctions regimes that are designed to put economic pressure on Iran. And if it were considered necessary to tighten the regulatory screws on these two banks, it would make sense for the regulators, or police, to demand details of all their customers and then force the bank to close or freeze the accounts of the ones considered dangerous. The same could perhaps be said of directors and senior managers. But ordinary operating staff? At best, this is a case of Barclays trying to cover its corporate behind against some fear of future criticism by the authorities; at worst, it’s sheer stupidity.
But this incident points to a much more serious systemic problem, one that is especially severe and noticeable in the UK because London is such a key financial centre, but actually one that exists worldwide. Six-plus years after the US Congress passed the so-called US Patriot Act, and inspired a whole slew of new international regulation in its wake, is the international regulatory system for fighting terror finance actually working well? How many compliance professionals, policemen and security service analysts are
I’m not asking these questions in order to bite at Barclays’ ankles or to make it look even more ridiculous: my purpose is much more serious. The fight against terrorism, and against rogue states such as Iran that wish to overturn whatever order exists in the world, is difficult enough anyway. The policy-wonk community of politicians, journalists and analysts is already riven by deep clefts of opinion about whether Al Qa’eda is still in business, on the decline or waiting to mount another mega-outrage; whether Islamic terrorism is now directed top-down or bottom-up; whether Pakistan can, or should, survive in its present form; whether the USA or Israel should mount a preemptive strike on Iran’s nuclear infrastructure and what the costs will be if this happens; and whether the global jihad is perhaps changing direction from violent outrages to perhaps more dangerous political directions that can’t be countered by existing legal frameworks. All of these differences are reflected also in the fight against terror finance: where and how to look for intelligence; whether regulation is falling hopelessly behind new technological innovations in global finance; what the increasingly sophisticated transaction and identity monitoring systems should be looking for; whether suspicious money flows should be followed for their intelligence value or interdicted in order to possibly save lives; whether the international regulatory regime can work when some states don’t have clear and effective laws banning terror finance; whether sanctions against troublesome states even work at all. These questions, and the implementation of the resulting policies, need a lot of time, attention and — not least — intellectual integrity. But what the wonks too often forget is that management time is not unlimited; nor is the number of good people to do the work. Bad decisions actually come at the expense of the ability to get good results.
As if to prove my point, Iran’s President Mahmoud Ahmadinejad has made total fools of the USA and the European Union by ordering Iranian banks to repatriate funds to the country’s central bank. According to a ’Daily Telegraph’ article of June 8th, Ahmadinejad was concerned that as tension mounts, the EU would step up the US-inspired sanctions against the operations of Iranian banks in Europe, especially Saderat and Melli, and so he decided to move the money home before it was too late, using a network of front companies in the Gulf.
In Melli’s case, German financial investigators had already raided the bank’s Hamburg office and ordered a freeze on the bank’s assets there; but the ’Telegraph’ quoted Western officials as being concerned that the funds had already been smuggled back to Teheran via Dubai, possibly with the help of Dutch banks. Even without collusion by the authorities in Dubai, the mini-state remains the most comfortable trading and financial channel for Iran, since there are an estimated 10,000 Iranian companies based there.
The governor of the Iranian central bank, Tahmaseb Mazaheri, may not be happy with Ahamadinejad’s move, presumably because the president’s interference will handicap the country’s economic links with Europe. But Ahmadinejad, who is no economist, was presumably more concerned about the blow to national morale of having large sums of money frozen in Europe, and equally about the opportunity to cock a snook at the US-European sanctions regime. And, to the extent that he has managed to retrieve money from being frozen in Europe, he probably feels more optimistic about being able to defy the USA over his nuclear ambitions.
It was only last week that I had cause to look, in ’Are knees beginning to quake in the Gulf?’, at how a potential military strike against Iran could result in catastrophe for the financial systems of the Gulf states in general, with severe consequences for the rest of the world’s financial institutions as well. As I pointed out then, the Gulf’s bankers and regulators will only have themselves to blame for the results. But actually I was wrong: it’s not only the greedy bankers and businessmen of the Gulf who have been driven mad by the mythical gods referred to in the title, and thus left an open door for Iran to continue doing business; it’s also those responsible for regulatory and sanctions policy in the West. Let’s hope that they can snap out of the madness quickly enough to avoid, or at least limit, the destruction