Combating financial crime: How can banks play their part?

By Olivia Robinson, on 25 September 2014

By Olivia Robinson

Corruption, tax evasion, fraud, human trafficking and arms smuggling are just a small number of the many crimes practiced to obtain money illegally. This money is used to fund a range of purposes from buying luxury cars, to funding terrorism. For example, the Al-Qaeda in North Africa operates kidnap-for-ransom and smuggling activities in order to pay for weapons to fight against Malian and French forces, and to fund the training of Boko Haram operations. The current growth in power of the Islamic State in Iraq and Syria (ISIS) is largely funded by their extortion of corporate taxes and control of oil establishments and granaries. Most of this laundered money will go via international banks and, in an age of increasing information and transparency, there has been a huge push for banks to help in the combat against financial crime. This was the subject of the IPPR talk given by Pieter van den Akker, Managing Partner of international KYC (which stands for “know your customer”), a leading anti-money laundering advisory and training firm. He emphasised the importance of tackling money laundering and the key role that banks play in it.

Money laundering is the “method by which criminals disguise the illegal origins of their wealth and protect their asset bases, so as to avoid suspicion of law enforcement and to prevent leaving a trail of incriminating evidence” (UNODC 2014). There are three phases to this process: placement, layering, and integration. Placement is the stage where cash gets placed into the financial system. For disguising purposes, it is often co-mingled with legally acquired cash. Layering is the transfer of funds through multiple jurisdictions or tax havens, as a way of hindering its detection. Integration is the assimilation of the funds back into legal or illegal economic activity.

It is difficult to know exactly how big the problem is: money laundering is illegal and so there are no reliable statistics. However, the United Nations Office on Drugs and Crime estimates that the amount of criminal money laundered annually is equivalent to 2.7% of global GDP, or roughly USD 1.6 trillion. 70% of this passes through the financial sector. According to van den Akker, we are only able to capture 1% of this money, leaving critical room for improvement.

Why is preventing money-laundering so important? It is actually much more pervasive than we think, and affects our lives much more than we imagine. Not only is financial crime linked to funding major terrorist activities across the world, but it can erode public trust in financial institutions, and threaten national economies. For example, during Viktor Yanukovych’s reign as President of Ukraine, an estimated USD 37 billion of state funds went missing.

How to improve anti-money laundering operations is the question on van den Akker’s lips. Banks and other reporting entities are the prime actors made responsible by law to intercept money-launderers. Banks have a number of tools at hand for approaching this task, including: risk management, internal audits, and transaction monitoring. And still, significant penalties have been placed on banks who have not lived up to this duty. Barclays was fined USD 298 million, HSBC was fined USD 1.9 billion, and BNP Paribas has recently been fined USD 8.9 billion for violating anti-money laundering regulations.

Banks face numerous challenges in conducting anti-money laundering effectively. The fact that it is inherently a cross-border issue, and that the legislation and regulation on the subject is extensive and overlapping in multilateral agreements, international organisations, national legislation and national institutions, makes it a very complex landscape to navigate. Additionally, banks deal not only with regular currencies, but alternative ones too that include features making laundering difficult to detect such as bitcoin, hawala, and Liberty Reserve (shut down in 2013), the latter allowing anonymous transfers of money across the globe via virtual accounts. Money-launderers are not simply crook look-a-likes with suitcases filled with wads of moolah. They in fact look like any other businessman that walks through the door, and so are difficult to detect. Van den Akker notes also that banks face management challenges in this area, where business values vary from country to country, and staff behaviour may differ accordingly.

The biggest challenge to van den Akker’s pursuit is the question, is it really appropriate for banks to be responsible for tackling financial crime? After all, banks’ first purpose is to serve and respect their clients and make profit. The Economist argues that there are two problems with placing the burden on banks. Firstly, the incredibly demanding regulations and fines are causing banks to pull out of countries and businesses that might carry the slightest risk, meaning poor countries especially are losing their international banking partners. This makes it more expensive and therefore out-of-reach for small businesses to access foreign money transfers, or countries in crisis to access aid transfers. For example cotton farmers in Mali are having increasing difficulty obtaining trade finance, and charities in Syria are battling to get aid because banks no longer want to take the risk of doing business in these countries. Secondly, it argues that regulations will encourage criminals to avoid the banking system and channel their funds through informal routes, making it even harder to track financial crime.

Even so, van den Akker proposes that the most promising method of reducing financial crime is for banking regulation to be made clearer, for staff to be properly trained, and for banks learn how to properly Know Your Client.

New security threat: Young Western nationals fighting in Syria

By Claire McNear, on 19 December 2013

By Aydan Sarikaya

The threat of terrorists on the home front has become increasingly worrisome. News agencies are reporting a surge of individuals that have traveled from the United Kingdom to Syria to fight. The New York Times, the BBC, and The Telegraph estimate that roughly 1000 Western passport-holders are fighting against the regime of Bashar al-Assad, of which 200 to 300 are British nationals.

It is relatively easy to travel to and from Syria. Most of the fighters who are entering Syria from the West do so through Turkey, and often return to the West by the same route. Intelligence officials are concerned with the potential ties these individuals may develop with terrorist groups abroad. Once back in the West, these guerilla fighters may continue to operate and communicate with terrorists. Needless to say, these individuals pose a national security threat when they return to the countries of their citizenship, which has prompted Home Secretary Theresa May to propose rescinding the passports of convicted UK terrorists. When asked by the BBC what he thought of May’s proposal, a Bangladeshi-British fighter in Syria stated that he had no desire to return to the UK, regardless of what regulations were to be imposed.

Most Western nationals fighting in Syria are young. And most of the jihadists from the UK are university-educated Muslims of Pakistani origin in their 20s, according to the Centre for the Study of Radicalisation at King’s College London. An interesting case of Europeans traveling to Syria is that of the two Somali-Norwegian teenage sisters (16 and 19) who, according to their father, “ran away” from their home in Norway in October, telling their family that they wanted to help the Syrian rebels. The sisters have only just been located by Norway with the help of Interpol, and it is said that one of the sisters is recuperating from a bullet wound. Recently, the most publicized example of homegrown terrorists from the UK is that of the “white widow”, Samantha Lewthwaite, the British wife of one of the 7/7 London bombers. Lewthwaite has become powerful within al-Shabaab, the infamous Somali terrorist group with ties to al-Qaeda operating in East Africa. The 2013 Nairobi mall shooting may have been orchestrated by Lewthwaite. It is speculated that an individual exists within the Syrian context with power comparable to that of Lewthwaite.

The threat that these individuals pose when they return to the country of their citizenship is very real. However, the question remains of what criteria are to be imposed when monitoring these individuals and when assessing what makes an individual a threat. Should their passports be rescinded? What would happen were these individuals to become stateless? Would stateless individuals add to further instability in places like Syria? Is this an issue of immigration for Western countries? Should immigration policies be changed, and if so, how? What I would urge governments to keep in mind when addressing these national security issues is that any policy changes will inevitably create unintended consequences, which, in turn, will alter the very landscape of national security itself.