Anti-money laundering regulations are blunt instruments in the fight against terrorism. Effectiveness is hampered through a lack of standardised regulations across the financial industry worldwide. There is an important distinction between following the money trail and following copious nugatory reports. The difference comes down to intelligence: without carefully directed information the effectiveness of regulation is negligible.
Anti-money laundering (or more specifically, anti-terrorist funding) legislation has become a major part of the 'war on terror'. Despite a dismal track record of governments successfully pursuing money laundering cases, international organisations, such as the Financial Action Task Force (FATF), continue to stress the importance of anti-money laundering regulation in the fight against terrorism.
FATF regulations were expanded in 2003 to incorporate eight new recommendations on how to combat terrorist financing; these measures have subsequently been adopted by the majority of member governments. On top of this, the scope of regulation has expanded to include industries as diverse as gambling establishments, car salesrooms, antique dealers and jewellers. However, the amount of money laundered globally each year is estimated at around the US$1 trillion mark - a healthy slush fund for the world's criminal and terrorist organisations. As intergovernmental bodies attempt to create universally standardised regulations, the effectiveness of combating terrorism through choking the funding has yet to be proven effective or possible.
Northern Bank robbery: a prime example
Despite this, investigations into the Northern Bank robbery on 20 December 2004 in Belfast, in which £26.5 million (US$50.7 million) was stolen, supports the growing belief within Western governments that following the trail of dirty money will lead to the dismantling of terrorist networks (the authorities in the UK and Ireland have accused the Irish Republican Army (IRA) of involvement in the robbery).
Yet this case is an exception, rather than the rule. The circumstances surrounding the Northern Bank robbery and its aftermath place false confidence in the ability of regulations to combat the perpetrators of terror. Regulations are effective at raising the cost of laundering - and can be a useful tool in law enforcement - but it would be excessive to talk of regulations improving national security. The Northern Bank robbery is a good example of the obstacles that governments have managed to impose on launderers. The theft will not yield the perpetrators as large sums as might have been expected. This is not solely due to regulations already in place but is helped considerably by the type of banknotes stolen and the subsequent actions of Northern Bank. Most of the serial numbers were known for £16.5 million worth of new Northern bank notes, making their re-circulation unlikely since notes are easy to track.
UK banks have been put on alert for any large deposits of Northern Irish currency and suspicious transaction reporting has been given high importance in the fight against laundering. Northern Bank also took the unprecedented step of withdrawing and re-issuing all notes in a different style, essentially making the £16.5 million dangerous to use. The other £10 million was a combination of Northern Irish and English used notes; this is where the effectiveness of regulation will be tested.
The IRA has a long history of funding their activities through bank robberies, drug trafficking and extortion. They have proved very proficient at hiding their money. Numerous insurance policies or investment bonds can be purchased and then cashed in early.
The launderer can also pay over the odds for the premium on a policy and then receive a legitimate refund. These methods reduce the final sum but legitimise the money, enabling it to be spent freely. A further option may be to purchase an asset, comprehensively insure it, then destroy it and make a claim on insurance.
Another well-established way of integrating illegal funds into the financial system is through 'smurfing'. This is the process whereby several workers (the 'smurfers'), holding small amounts of dirty cash, open new bank accounts and deposit an amount (below £10,000 in the UK, the threshold where reporting becomes compulsory) under a false name. These transactions usually go unnoticed and will be moved about regularly until their origin has been effectively hidden.
The IRA, with an estimated 400 hardcore activists and a further 400 'auxiliary' workers, could launder £4 million using this method. In the case of the Northern Bank robbery, with heightened publicity and public denial of involvement by the IRA, it is unlikely that this method would be used. IRA operatives would not want to risk being apprehended carrying parcels of dirty money to deposit into the banking sector.
Specific money laundering regulations fail to combat this well-established mode of laundering, because thresholds for reporting will always be avoided by the depositors and 'smurfer' deposits blend in easily with legal transactions.
A popular method of laundering cash is through front companies or shell banks. The latter provide perfect cover for large transactions, as dirty money can be disguised as loans or investment returns. Front companies provide criminals with supposedly legitimate bank accounts through which they can withdraw or transfer funds. The shell banks or front companies are frequently under direct control of criminals and often exist for the sole purpose of laundering funds that flow through them. These companies do not adhere to regulations.
The criminal will set up a shell bank in a country with poor financial regulations. Funds will then be transferred through to these banks or paid out to front companies under false names with no real identification checks; it can then be withdrawn with a clean bill of health. Once the money enters a country that adheres to the FATF's 'know your customer' and due diligence requirements, information is fabricated by the foreign front companies. Regulations imposed in countries dedicated to the eradication of money laundering are ineffectual in dealing with such institutions; it is general law enforcement in the foreign country that will shut these businesses down.
International regulations can only be imposed on countries who agree to implement them and inconsistencies in international regulations limit the effectiveness of policy. Presently, terrorist organisations can take advantage of these inconsistencies; businesses in poorly regulated countries will be prime targets for terrorists and criminals alike to launder their funds.
Terrorist finances will manoeuvre around countries that obstruct the free passage of money, while the onus is on legitimate financial institutions to investigate and pass judgement on their client's activities, a difficult task when customer satisfaction is also a requirement. Intelligence is needed for regulated industries since the bovine application of regulations leads nowhere.
Regulations succeed in increasing the cost of laundering considerably. As such rules are tightened and more industries fall under regulator jurisdiction, so the ability to launder money requires increasing expertise, which does not come cheaply. The US Treasury estimates that the cost of laundering cash is usually 4-8 per cent of the original haul, although estimates can range as high as 12 per cent.
Regulations have a role to perform in the fight against terrorism but this has been overplayed by governments. Investigations into the Northern Bank robbery were helped by an increased awareness of suspicious financial transactions but the police's success stems from their crime-detection expertise.
The indiscriminate application of regulations leads to meagre returns; what is needed is intelligence that can be augmented by regulations. Criminals will not be captured by regulations alone. Money can lead police to the criminals but cash is not the only reason that terrorist and criminal networks exists. Ideological, racial, and cultural ties are much stronger than financial connections. Despite governments cracking down on the funding, the cause is left intact.
Anti-money laundering regulations and anti-terrorist financing regulations can diminish the network's financial cache but combating terrorism through its financing is a futile exercise. It is worth remembering that terrorists do not need very large sums of money to wreak havoc in highly regulated Western countries: the 11 September 2001 attacks on the US only cost Al-Qaeda an estimated US$400,000-US$500,000.
Katherine Baskerville serves as Money Laundering Analyst at Exclusive Analysis, a strategic intelligence company