Transnational regulatory networks: a study in compliance and legitimacy in counter-terrorist financing
| Date | 01 June 2020 |
| Published date | 01 June 2020 |
| Pages | 855-870 |
| DOI | https://doi.org/10.1108/JFC-01-2020-0013 |
| Author | Doron Goldbarsht,Hannah Harris |
| Subject Matter | Accounting & Finance,Financial risk/company failure,Financial crime |
Transnational regulatory
networks: a study in compliance
and legitimacy in
counter-terrorist financing
Doron Goldbarsht and Hannah Harris
Macquarie Law School, Macquarie University, Sydney, Australia
Abstract
Purpose –This paper aims to explorethe case of counter-terrorist financing (CTF) within the transnational
regulatory network (TRN) of the Financial Action Task Force (FATF). The paper demonstrates how the
structure and operationof the FATF reflect those of a TRN and shows how the FATF has been successful in
securingformal compliance with CTF policies.
Design/methodology/approach –The paper stresses that formalcompliance does not guarantee actual
compliance or effective enforcement. It is argued that the FATF and the CTF regime must balanceconcerns
for legitimacy with those of flexibility and efficiency. Traditionally, TRNs have focused on flexibility,
efficiency and informal cooperation over legitimacy. This paper demonstrates that legitimacy concerns
cannot be ignored.
Findings –A lack of legitimacy may ultimatelyresult in non-compliance and ineffectiveness. On thisbasis,
current efforts to build legitimacythrough the FATF are noted but deemed insufficient. If this balance is not
struck, the FATF may be doomed to failurethrough an overreliance on coercive methods. Particularly inthe
case of CTF, coercion is insufficient for meaningful compliance. Global enforcement by diverse states is a
necessarycondition for the success of the regime.
Originality/value –This paper willfill the gaps existing in the literature by examining CTF, as well as the
FATF as an example of TRN. Thisapproach differs from other literature in the field, which deals solelywith
the effectivenessof the FATF and the global CTF without considering the effect of legitimacy on compliance.
Keywords Legitimacy, Compliance, Financial action task force, Counter-terrorist financing,
Transnational regulatory networks
Paper type Research paper
1. Introduction
The emergence of several major cooperative initiatives among national regulators began
engaging the attention of international law scholars decades ago (Keohane and Nye, 1974).
Early commentators expressed concern that these initiatives evidenced a shift toward
disaggregated global governance by experts acting outside the constraints of domestic
political structures and the normal foreign affairs process (Kennedy, 2001). Other scholars
suggested that this disaggregationwas an innovative and positive development and that:
[...] seeing the world through the lenses of disaggregated rather than unitary states allows
leaders, policy makers, analysts, or simply concerned citizens to see features of the global political
system that were previously hidden (Slaughter, 2004).
Scholars have proposed detailed accounts of this disaggregation process, using the term
“transnational regulatory networks”(TRNs). In doing so, they identify several important
characteristics and purposes (Slaughter, 2004). According to their accounts, TRN members
Study in
compliance
and legitimacy
855
Journalof Financial Crime
Vol.27 No. 3, 2020
pp. 855-870
© Emerald Publishing Limited
1359-0790
DOI 10.1108/JFC-01-2020-0013
The current issue and full text archive of this journal is available on Emerald Insight at:
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are not always states but might also be unions and national regulatory agencies, and the
networks have no international legal personality or status beyond that conferred on their
organization under the national law of their host country. The network operates by
consensus without formal voting procedures, membership is selective and many of the
network meetings and negotiations are kept secretuntil the resulting document is released.
Most importantly, the guidelines, recommendations and other documents they promulgate
have no international legalstatus, meaning that they are soft law (non-binding): they donot
create international legal obligationsand they do not require the same domestic ratification
procedures as treaties. Finally, the networksdo not formally monitor the implementation of
their decisions (Zaring,1998).
TRNs have recently come under the spotlight as an illustration of the disaggregation of
the state in the conduct of its internationalrelations. These networks see government actors
negotiate directly with their foreign counterparts and reach informal understandings
relating to their areas of responsibility.It is argued that their expertise and insulation from
domestic political pressures allows them to solve problems that traditional international
organizations cannot adequately address. Proponents suggest that TRNs can solve the
“globalization paradox”: globalization creates global problems that can only be addressed
on a global scale, but world government is both infeasible and undesirable –it would not
only fail to provide meaningful democraticrepresentation but could also threaten individual
freedoms. Thus, TRNs can be used to effectively address global problems that individual
governments cannot tackle alone. Because the actors in the networks are domestically
accountable, they do not risk eroding democracy or national sovereignty in a manner that
would make world governmentundesirable [1].
Several examples of TRNs have been put forward to illustrate this positive impact. One
is the International Organization of Securities Commissions, a powerful informational
network that has effectivelycoordinated research to respond to new challenges in securities
markets regulation [2]. Anotherexample is the harmonization networks enabled by mutual-
recognition agreements, which allow states to agree on common regulatory principles and
allow regulators to cooperate directly. For example,the US Federal Aviation Authority and
Food and Drug Administrationhave delegated regulatory authority to foreign regulators in
foreign jurisdictionsbased on these agreements, effectively creating a transnationalnetwork
of aviation and pharmaceutical regulators, respectively [3]. Despite the proliferation and
purported benefits of these arrangements, there are well-founded concerns that extensive
regulatory cooperation withouttraditional oversight may be harmful to a variety of interest
groups (Beare, 2003)[
4]. Furthermore, it is possible that suchnetworks may evolve in ways
that limit their own success or compromisetheir objectives or both.
This article explores the case of counter-terrorist financing (CTF) as one example of a
TRN, suggesting that such risks are salient. It seems that this network suffers to some
degree from a lack of legitimacy, which may pose a threat to democracy or to its own
effectiveness. This articleassesses the structure of the Financial Action Task Force (FATF)
and demonstrates the features thatclassify it as a TRN. Close attention is paid to the unique
characteristics that makethe FATF compliance mechanisms so effective, particularly in the
context of CTF, and at the same time raise legitimacy concerns. We then consider the
potential risk to the CTF regime, despite its impressive influence to date, if it continues to
operate without regardfor formal legitimacy.
Following this introductorySection 1, Section 2 introduces the features of TRNs and the
issues of legitimacy and compliance that stem from this unique form of disaggregated
regulation and decision-making.Section 3 focuses on the FATF, a TRN that operates in the
field of global CTF and sets the standard in this area. In Section 4, we shed light on the
JFC
27,3
856
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