<http://globalpolitician.com/articles.asp?ID=329&print=true> Global Politician SR-IX: Using the Wrong Tool in the Wrong Place By Peter Gallo In the aftermath of the 9/11 terrorist attacks, the Financial Action Task Force ("FATF") expanded its brief from the fight against money laundering to include also terrorist financing, and, to this end, issued 8 'Special Recommendations' at the end of October 2001. Despite all the rhetoric and the considerable efforts since that time, however, none of this appears to have had much tangible success in achieving the stated objective of 'starving terrorists of funds.' Undeterred, on 22 October last year, the FATF issued a further Special Recommendation ("SR-IX") relating to Cash Couriers. This states: "Countries should have measures in place to detect the physical cross-border transportation of currency and bearer negotiable instruments, including a declaration system or other disclosure obligation." One cannot, of course, deny it is possible that terrorists routinely carry cash across international borders, but whether this is an area that should - or can - be addressed by additional legislation is debatable. Moreover, what not been made clear, however, is how such legislation is expected to have any material effect in the fight against terrorism, or even whether it is warranted. The manner in which SR-IX grew out of a pre-existing recommendation is itself a curious insight into the FATF's internal political machinations. What were originally #22 (relating to the reporting of cross-border cash movements) and #23 (reporting of cash transactions above a given threshold amount) in the 1996 edition of the FATF 40 Recommendations, were combined as Recommendation # 19, paragraphs 'a' and 'b' in the 2003 Revision. These, of course, related to conventional criminal money laundering. What has subsequently happened, is 19a has been removed from the 40 and published as SR-IX so it is now portrayed as an anti-terrorist measure, giving it enhanced importance. Moreover, the language that used to read "Countries should consider implementing feasible measures to detect and monitor the physical cross-border transportation of currency etc " now reads "Countries should have measures in place to detect the physical cross-border transportation of currency." First and foremost in considering such a measure, must be the practical issues of the feasibility and utility of implementing such a programme, given the benefits it would offer. The implication in this new Special Recommendation is that terrorist groups use couriers to hand carry large quantities of cash from one country to another to be used for terrorist purposes. This is, of course, not only very possible, it is quite likely that if a terrorist group were operating and traveling across an international border, they would prefer to carry cash with them rather than remit it by other means. What we do not know, however, is if this represents a significant vulnerability to the way in which terrorist operations are financed. On the contrary, the 9/11 attacks in the US, the events that have attracted most US attention on the whole subject of terrorist financing, were funded largely by remittances through the banking system. The best evidence as to the funding of the Bali bombings in 2002 appear to indicate the small amount of money needed to finance the attack was raised locally, and even it if was not, it is unlikely it was brought into Indonesia through an official border crossing point. Focusing attention on the international transportation of cash seems to ignore all the evidence that points to one fundamental conclusion; that most terrorist groups (at least in Asia) are primarily funded by local criminal activity, including extortion and kidnapping. It is entirely possible money is being smuggled into Iraq and used to fund attacks against the US forces there, but to believe that this could be prevented by introducing cash declarations on the border with either Turkey, Syria or Iran is stretching credibility. Terrorism in the Middle East may, admittedly, be funded differently from Asia, but even so; if groups in Palestine and elsewhere are being funded by donations from overseas; will a cash declaration requirement actually stop the money flow? In Asia, the borders of most concern, being the Sulu Sea between Indonesia and the Philippines, or the mountains between Afghanistan and Pakistan, already represent some of the most challenging Border Management problems in the world today. For hundreds of years, the competent authorities have been unable to prevent the flow of people across these borders. These people have a long history of carrying with them anything they chose, firearms included, along with all manner of contraband and other goods on which duty was never paid. One is at something of a loss, therefore, to understand what practical effect a cash declaration form will have. The requirement to declare cash over a given threshold amount when crossing an international border is not new. It has been a feature of the anti-money laundering legislation in the US for a number of years, but it is not possible to state with any confidence that it has put an end to cash smuggling related to crime, nor that it made it significantly harder for for criminal groups to move money across borders and or made it harder for Transnational Organised Crime groups to operate. The amounts of money required to finance terrorism are much smaller than encountered in conventional money laundering by Transnational Organised Crime groups. Why then, is it expected that making this a Special Recommendation to deal with Terrorist Financing will be any more successful in putting an end to cash smuggling used to fund terrorism? One of the most significant and salutary lessons from the US experience of Cash reporting was that the introduction of the threshold immediately gave rise to "smurfing" - the use of couriers and structured sub-threshold transactions to deposit quantities of cash into the banking system. There is an argument that the smurfing that evolved to circumvent the CTR requirement has exposed money laundering operations to a greater risk of exposure, and that the great number of individuals involved, and the multiplicity of cut-outs, front companies and nominees, at least in theory, increases the detection risk. This, however, may have resulted in the arrest and prosecution of a lot of these couriers, but it has not been spectacularly successful in bringing down the heads of the trafficking syndicates. Moreover, it is easier to identify structuring where cash is being deposited into the banking system, but it is much harder to identify in cross-border cash movements. Obviously, even if Mr X declares he is carrying $9,900 in cash, Mrs X declares she is carrying another $9,900, and a junior Ms or Mr X of the same address declare that they too are each carrying $9,900; we might conclude that the family have shared out the funds specifically to avoid triggering the mandatory report. Would that it were always so easy to make the connection! If they have different surnames and addresses, for example, identifying a structuring or smurfing scheme becomes a tad more difficult. Just because two or more passengers on the same flight may each be carrying a quantity of cash that is $5 short of the reporting threshold does not mean they are necessarily acting in a common purpose. Notwithstanding the pre-existing and mandatory US requirement that cash over the US$10,000 threshold be declared on exiting the country, one of the observations of the increased focus on anti-money laundering after the 9/11 attacks has been an increase in reports of bulk cash smuggling. It is the nature of smuggling that the people do not declare it! We should not forget that over 200 people died in Bali, in a bombing believed to have cost as little as US$10,000. Even if that money had to be hand carried in from abroad, there is no reason to suggest it would all have had to be brought in at the same time; and even in the extremely unlikely event that it did, the only difference a cash declaration threshold at the border would make would be that it required two or three people to carry it, not just one. Futhermore, that always assumes that the money was hand carried in to Indonesia, and hand carried in through an international airport past Immigration and Customs checks. The reality of the situation is that that probably never happened The further irony is that in most cases, the international borders where terrorists would prefer to hand carry cash are those same borders where local traders and businessmen do likewise. It may be simplistic to describe these as less developed or unsophisticated economies, but without even considering any corruption problems or the effectiveness of their border management, the usefulness of any cross-border cash declaration system does not appear to be assured. In more technically advanced economies, on the other hand, like Singapore or Hong Kong, it may be possible to impose and even enforce such a system, but even then, it is extremely unlikely that it would prevent terrorists operating there. Provided that any international terrorists have some degree of local support, and it is almost inconceivable that a terrorist attack could or would ever be carried out without; there are many alternative ways and means of sending money in and out of places like Singapore or Hong Kong. Admittedly, means such as money remittances, letters of credit, bank transfers or the use of a credit card all involve some interface with the financial system, but that eliminates the risk that the terrorist courier will be caught just for carrying cash. The original "Special 8" included regulation of Alternative Remittance Systems, such as door-to-door money underground banking systems such as Hawala and the Black Market Peso Exchange. Although almost impossible to eradicate, at least some degree of control over the system offers some law enforcement benefit as it creates a paper trail where none might previously have existed. To further extend the regulatory environment, however, and create a new offence of failing to declare smuggling activities, although possibly useful in prosecuting the small number of individuals caught carrying cash; is very unlikely to make it "more difficult" for terrorist organizations to move money around the world. Even if border management authorities could prevent any cash being carried or smuggled across their borders, it would not prevent money flowing in and out of the country. The point was made above, the introduction of Cash Transaction Reporting simply created a role for 'smurfs' and although, in theory, that exposed the criminal organization to an increased detection risk, most of the prosecutions were of low-level couriers not major money launderers or drug traffickers. Those syndicates always distanced the leadership from the 'smurfs' who were exposed to the risk of detection in making cash deposits. Smurfs are obviously seen as disposable, and in extreme islamist terrorism, where suicide bombing has become commonplace; the terrorist attackers themselves are disposable. They can, in that case, use credit cards and write cheques with little regard for the consequences, the practical chances of tracing funds back to a terrorist source are slim, and the chances of a cash courier being able to identify the source of the funds are even slimmer. There are two scenarios in considering the courier, he could be a member of the terrorist organization who knows he is carrying cash for a terrorist purpose; in which case he is probably very unlikely to make any voluntary declaration or disclosure that will be of any value, or he could be courier with no knowledge of the organization for whom he is carrying the money; in which case the best that one could hope for would be that he could identify the individual who gave them the job. Bankok jails are full of people who were unable to do that when arrested in possession of a suitcase full of heroin. The Recommendation addresses penalties for persons making false declarations; but the practical reality is identifying them in the first place. If the authorities are in receipt of credible intelligence to indicate that a passenger on a certain inbound flight is a courier for a terrorist organization, it should be possible to detain him under existing anti-terrorism legislation anyway. Under the existing law in most countries whose legislation already complies with the FATF 40 Recommendations, any individual carrying cash for the purpose of furthering a terrorist activity will already committing an offence, without the need for further legislation. Money intended to, say, buy materials that will be used to build a bomb - clear use of money intended to be used in connection with an indictable offence - so this would generally be covered by existing anti-money laundering legislation . If, on the other hand, the money was to be used generally to support a terrorist organization, legislation introduced to implement United Nations Security Council Resolution 1373 should already make that a criminal offence. Whether the courier is a terrorist himself or just a cash courier is irrelevant, any hopes that the Government may have that he would declare the cash it is probably fanciful. None of this, of course, addresses the threshold level, stipulated in SR-IX to be a maximum of US$15,000. One of the bigger problems associated with the use of anti-money laundering legislation against terrorist financing is the amounts of money involved. Terrorism, unfortunately, is cheap. The financial cost of an enormous terrorist atrocity such as the US$10,000 Bali bombing is so small, that it is difficult to see what possible benefit a US$15,000 declaration limit would have. Even if the threshold is set much lower, sat US$5,000; the only inconvenience that would present a terrorist organization intent on importing cash would be the need to 'smurf' it over the border in smaller amounts. It is difficult to understand how the FATF could say this additional Special Recommendation is expected to "make it tougher to move terrorist money across borders and make it harder for terrorists to operate." Will a system of cross-border cash declarations be any beneficial value at all? Curiously enough, despite all of this negative criticism, it might. It may be a total irrelevance as an anti-terrorist measure, but there are other reasons why cash is carried across borders; these include money smuggling, particularly in connection with the adjustment of balances in underground banking operations out of Taiwan, and straight-forward capital flight out of China. Of course, the downside is that these may have a negative effect on tourism or the retail sector in Hong Kong, but that was not the question. The greater danger, however, is that we focus attention in the wrong place. In order to starve terrorists of funds, (if such a thing is even possible) we need to concentrate on the source, not the application of funds. In order for the banking system to play a meaningful role; they need to share much more information with Law Enforcement than they already do, and mechanisms to lift the veil of secrecy that surrounds financial information. Even then, such actions will almost certainly result in more prosecutions for conventional money laundering, particularly relating to tax evasion, than it ever will to terrorist financing. The problem is that a lot of that tax evasion takes place with the professional support and collusion of the financial industry; so that would involve requiring the private sector to surrender themselves in order to capture a tiny minority whose involvement with the financial system may be marginal at best. None of this addresses the underlying problem; that terrorist groups are not profit motivated, they do not depend on large, and people do not join them, or support them, for financial reasons. They join them or support them for other reasons, and preventing money being carried across international borders is not going to have any impact on that whatsoever. -- ----------------- R. A. Hettinga <mailto: rah@ibuc.com> The Internet Bearer Underwriting Corporation <http://www.ibuc.com/> 44 Farquhar Street, Boston, MA 02131 USA "... however it may deserve respect for its usefulness and antiquity, [predicting the end of the world] has not been found agreeable to experience." -- Edward Gibbon, 'Decline and Fall of the Roman Empire'