AML‐CTF: a forced marriage post 9/11 and its effect on financial institutions
| Pages | 142-158 |
| Date | 03 May 2013 |
| DOI | https://doi.org/10.1108/13685201311318494 |
| Published date | 03 May 2013 |
| Author | Gauri Sinha |
| Subject Matter | Accounting & finance |
AML-CTF: a forced marriage
post 9/11 and its effect on
financial institutions
Gauri Sinha
The City Law School, City University, London, UK
Abstract
Purpose – The purpose of this paper is to explain the incompatibility of anti-money laundering
(AML) and counter-terrorist financing (CTF) measures as a hasty over-reaction after 9/11, focusing on
the compliance burdens that this imposes on the regulated sector, most notably financial institutions.
Design/methodology/approach – This paper explains the fundamental differences between
money laundering and terrorist financing. It follows the evolution of the marriage between AML and
CTF measures in the USA and the UK, comparing the pre and post-9/11 phases. Consequently,
the specific legal burdens placed on financial institutions as a result of this marriage are discussed.
Findings – The paper, while recognising the importance of targeting terrorist money, contends that
inherent differences exist between money laundering and terrorist financing, and fusing them together
is a hasty reaction to the 9/11 attacks. It argues that the need of the hour is to focus on terrorist
profiling, rather than attempting to target terrorist financing through the AML regime. It also
concludes that financial institutions are unfairly burdened with the task of “suspecting” terrorist
funds, while receiving little or no guidance in this respect.
Originality/value – This paper is of value to governments, regulators, and financial institutions
considering the effective implementation of the AML-CTF regime in the UK and the USA.
Keywords Anti-Money Laundering, Counter-TerroristFinancing, Financial Institutions,Compliance,
Compliance burden,9/11 over-reaction, Suspiciousactivity reports, United Kingdom,
United Statesof America, Terrorism, Money laundering
Paper type Research paper
Introduction
The post-9/11 era has seen counter-terrorist financing (“CTF”) take priority as a
potentially effective tool to cripple terrorists[1]. As an immediate reaction to the 9/11
attacks, the Bush administration’s anti-terrorist strategy[2] identified money as the
“lifeblood of terrorist operations”, and declared that the administration would “starv e
the terrorists of funding, turn them against each other [...] and bring them to justice”
(Executive Order 13224, 2001). Shortly after, a trickle down effect was noticed across
Europe. In the UK, although appropriate legislation to tackle CTF already existe d,
it received a complete facelift after 9/11. More stringent requirements for financial
institutions were imposed, mirroring to a large extent the new regime of the USA. The
UK worked with a renewed focus after the 7/7 bombings in London, which provided
another mandate to Parliament to target terrorist financing (BBC News, 2005).
The term “terrorist financing”, as described by the 9/11 Commission Report, is
commonly used to denote two distinct types of activity. First, it can consist of the
financing of operational terrorist cells, i.e. the funds the cell needs to live, plan, train for,
and commit the terrorist act. The second type of terrorist financing is fund-rais ing –
the process by which an organized terrorist group (such as al-Qaeda or Hamas)
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Journal of Money Laundering Control
Vol. 16 No. 2, 2013
pp. 142-158
qEmerald Group Publishing Limited
1368-5201
DOI 10.1108/13685201311318494
JMLC
16,2
142
raises money to fund its activities. Such fund-raising often takes place through
non-governmental organisations (“NGOs”), which may raise money for legitimate
humanitarian purposes and divert a fraction of their total funds into illicit purposes
(9/11 Commission Report, 2004). The Third European Union Money Laundering
Directive mirrors this definition as:
[T]he provision or collection of funds, by any means, directly or indirectly, with the intention
that they should be used or in the knowledge that they are to be used, in full or in part,
in order to carry out any of the offences [defined as terrorism].
With the fresh impetus that CTF received post 9/11, a readymade solution was to
combine the laws relating to anti-money laundering (“AML”) with CTF, thereby
attempting to target both money launderers and terrorists at the same time. This
implied that rather than simply looking at funds from an illegal source (which was the
primary thrust of money laundering activities), the international community also
began to examine funds that came from legal sources, such as charitable donations[3].
Consequently, AML-CTF laws put bankers, fund managers, accountants and solicitor s
on the lookout for terrorists, around the world (The Economist, 2005a).
Goede (2012) observes that terrorist financing was tagged on to AML regulatory
structures for a variety of reasons. First, the haste with which measures were applied
“made drawings on existing initiatives and structures attractive” (Goede, 2012, p. 42).
Interestingly, she argues that not only was it “convenient” to subsume terrorist
financing under the AML umbrella, it was also a way to “circumvent” complex
questions and issues about what terrorist financing is and whether a preventative
approach can be useful in its detection. The move towards combining the two could
have also been linked to political ambitions, as argued by Warde (2006), writing in
Le Monde Diplomatique. He observes that soon after 9/11, it was not possible to take
immediate action against Afghanistan, which reportedly gave shelter to al-Qaeda.
A “seemingly bold action” towards which Bush may have got attracted to was the
instant freezing of accounts (Warde, 2006).
On the one hand, 9/11 was without doubt a tragic moment. At the same time however,
it is important to realise that what made it “unprecedented” was the scale and location of
the attacks – in the heart of the USA (Bigo, 2006). Lyon (2003) observes that post 9/11,
it has frequently been suggested that everything has changed, but beyond its symbolic
value, has the targeting of terrorists funds through AML laws really been successful?
This paper, while recognising the importance of targeting terrorist money, contends
that AML and CTF have been conjoined in a hasty reaction after 9/11. As part of the
AML-CTF regime, an effective collaboration with the financial sector is considered
vital in preventing terrorist abuse. Financial institutions in particular (through
customer identification checks and reporting of suspicious transactions) are expected
to provide vital financial intelligence in preventing terrorist financing. In explain ing
the non-compatibility of AML and CTF measures, this paper focuses on the compliance
burdens that this process of “speculation” imposes on the regulated sector, most
notably financial institutions. Although the paper aims to bring out the deficiencies in
the AML-CTF legislation of the UK, it also traverses through the policies and
legislation of the USA in order to best describe the “trickle down” effect.
To start with, Section I of this paper explains the fundamental differences
between money laundering and terrorist financing. Section II follows the evolution
AML-CTF:
a forced
marriage
143
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