SR-IX: Using the Wrong Tool in the Wrong Place

[R.A. Hettinga]

<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.



-- 
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R. A. Hettinga <mailto: rah at 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'