Part 2: The law: an overview (Sub‐group 2: Impact of the initiatives against terrorist property on banks and financial institutions)

Publication Date01 July 2003
SubjectAccounting & finance
Part 2
The Law: An Overview
Sub-group 2: Impact of the initiatives against terrorist property on
banks and ®nancial institutions
Parts 1 and 2 set out to analyse the impact of the
initiatives against terrorist property on banks and
®nancial institutions by considering the principal
pressure points that such institutions (referred to in
this Introduction as `institutions' for the sake of con-
venience) have felt to date under the new initiatives,
and also by drawing upon their experience in
attempting to comply with earlier (generally anti-
money laundering) legislation and requirements.
Before turning to consideration of the practical
issues in Part 3, this section summarises (1) the UK
legislative initiatives, (2) the relevant FATF and
FSA rules/guidance, (3) the US legislative initiatives
and ®nally (4) the UN action regarding the ®nancing
of terrorism. For obvious reasons this section does not
attempt to deal with any further jurisdictions.
The practical issues
Signi®cant practical issues facing institutions attempt-
ing to abide by the initiatives stem from the problems
inherent in identifying terrorist money. Traditional
anti-money laundering techniques rely partly at
least upon the identi®cation of suspicious transac-
tions/patterns of transactions, and classically the
handling of large amounts of cash, the presence of
which cannot easily be explained given what is
known about the relevant customer. `Terrorist'
money is often generated legitimately; in such cases
it only becomes tainted when it is donated (or des-
tined to be donated) to a terrorist organisation.
`Money intended for terrorism does not move
around the ®nancial system like dirty money; it
does not need to make rapid movements between
accounts, across borders, through a range of curren-
cies, into and out of assets. It simply behaves like
ordinary money doing ordinary things and so is
almost impossible to identify. This means that the
usual range of counter-money laundering techniques
and tools are of very limited use. For example each
act of terrorism may require relatively small amounts
of money Ð and so neither the cash transaction
reporting measures nor suspicious transactions
reporting systems are triggered.'
Existing laws and systems are designed to focus on
the origins of dirty money Ð they are not designed
to try to second guess where it will be going in the
future. They are not able to `spot legitimate money
passing through for illegitimate purposes in the
Consequently it is often only if an account
holder (or counter-party to transactions on an
account) is known or suspected to be involved in ter-
rorism that a bank can be said to have reason to be
Accordingly, in attempting to implement the
initiatives institutions are highly dependent upon
information as to identity. On the assumption that
their traditional `know your customer' procedures
give them knowledge of the identity of their clients,
they have to try to establish whether any of those cli-
ents might be involved in or supporting terrorist
activity. At present, there is a multiplicity of lists of
`suspicious' persons, published (often on the internet)
by a large number of dierent bodies. Smaller institu-
tions in particular may ®nd it hard to cope (or to cope
competently) with the position as it stands. Thus
this section addresses the possibility of the creation
of a uni®ed, authoritative list, presented in a
format that makes it easy to cross check against
existing databases.
For similar reasons, this section considers the
desirability of creating a single reference point for
institutions with queries to raise or with information
to pass on, as at present responsibility is or appears to
be divided (on no easily identi®able logical basis)
between a number of dierent bodies. Two obvious
candidates for such a role are the Treasury and the
FSA; in either case it is likely that the added burden
would necessitate the creation of a new department,
but nevertheless these seem logical choices given the
tasks undertaken by them at present.
Page 217
Journal of Money Laundering Control Ð Vol. 6 No. 3
Journalof Money Laundering Control
Vol.6, No. 3, 2003, pp. 217± 232
#HenryStewart Publications
The diculties faced by institutions are rendered
more acute by the aggravated reputational risk
involved in potential breaches of the anti-terror-
ism initiatives. In the present climate any suspicion
to the eect that an institution has somehow aided
terrorists might well have a catastrophic eect on
that institution; given that in signi®cant respects the
initiatives create `strict liability oences' it will be
easier to fall foul of them than is the case with
traditional anti-money laundering rules, but the
subtleties of that distinction between the two regimes
are likely to be lost on the public. It is of course hoped
that the potential solutions mentioned in this paper
will be doubly bene®cial: they should minimise the
risk to institutions of breaching the initiatives, and
they should assist society's eorts to prevent terrorism
in aiding (particularly smaller) institutions eciently
and eectively to apply the disciplines required by
the initiatives.
In addition to the possible creation of a domestic
single reference point, the desirability of creating a
single, authoritative international reference point
has been considered. By the same logic it seems
desirable that institutions with business in more
than one jurisdiction should be able to have reference
to one source of information and guidance, con®dent
that in so doing they are meeting the obligations
imposed on them. The creation of such a body on
the international stage (or endowing an existing
body with the role) would be a much more ambitious
and dicult task, but nevertheless in our view ought
to be considered.
Suggestions similar to some of this section's have
already been promulgated by a group of large institu-
tions under the rubric of the Wolfsberg principles,
and so it was seen ®t to include a section summarising
the Wolfsberg Group's principles and recommenda-
tions (they can be viewed in more detail at
This section also highlights a number of other
discrete issues, including a possible con¯ict between
the Data Protection Act 1998 and anti-money
laundering legislation, which has been exacerbated
by the recent legislative anti-terrorism initiatives.
The con¯ict arises between rights to data access
(possibly including the fact and contents of reports
to NCIS) on the one hand, and `tipping o '
oences on the other, and ought, in the view of
this sub-group, clearly to be addressed by a blan-
ket exemption relating to (at least) terrorist-related
Given that many of the problems identi®ed stem
from the lack of any obvious `terrorist account
typology', the available evidence as to typologies is
addressed at the start of Part 3. Also considered is
the possibility of harnessing AI technology, in the
form of customer relationship management software.
Technical approaches to these problems are being
developed by the software industry. To really
`know one's customer' an institution needs to have
background information about the customer and
additionally it needs to `keep track of the banking ser-
vices used by the client and any software needs to track
the relationships between accounts and between clients in
dierent areas of an institution'.
Of course, as regula-
tory processes are strengthened terrorists will prob-
ably seek to avoid them by diversifying their
®nancial activities into multiple outlets to avoid the
build up of useful informational connections that
may trigger suspicious transaction reports Ð the
new `smur®ng'.
Some software companies, eg Risk Values Ltd, are
developing programs which attempt to identify
account holders who `exhibit the characteristics
which indicate that they would be willing to abuse
the relationship with the ®nancial institution and do
it without reference to name, colour, race, religion
or transaction history'.
The system is said to
employ standard personality analysis used in market
research. It requires the institution to ask a series of
questions. These answers are then compared to
known data. The software providers claim that the
techniques have been validated by cross-research in
cultures ranging from Turkey, Taiwan, Yucatan,
Honduras, India, USA, Canada, UK and Israel.
However, whilst software may well become a
useful tool in the future, our conclusion is that at pre-
sent at least (particularly given the absence of any
de®nitive statistical database identifying reliable
distinctions in operation between terrorist and non-
terrorist accounts) it does not provide a complete
The Terrorism Act 2000 (`Terrorism Act') and the
Anti-Terrorism, Crime and Security Act 2001
(`Anti-Terrorism Act') provide for a comprehensive
statutory scheme to deal with terrorist property and
known or suspected terrorist activity. It is not easy
Page 218
The Funding of Terror

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