US CONGRESSIONAL HEARING WEIGHS IMPACT OF DE-RISKING ON TERROR FINANCE DATA

To better thwart the finances of terror groups, the US government needs to expand its use of technical assistance programs to foreign countries, even those regions it may be politically at odds with, while simultaneously helping developing jurisdictions build capacity beyond fighting financial crime.

Those are just some of the conclusions of a hearing before the House Financial Services Committee Tuesday entitled “Helping the Developing World Fight Terror Finance,” part of the Task Force to Investigate Terrorism Financing.

Several panelists also stated that the massive anti-money laundering (AML) penalties handed down by the federal government against banks for compliance lapses, figures that have soared into the billions of dollars at individual institutions and risen some 400 percent in recent years, could be having the unintended consequence of causing banks to “de-risk” out of entire sectors and regions and thus cutting off a valuable source of intelligence for investigators the world over.

Critical to the success of any technical assistance endeavor in fighting financial crime, however, is that the host government receiving the support be given a tailored program that inculcates broader, international standards and practices, but is also informed by local nuances, said Ambassador Robert Kimmitt, Senior International Counsel at law firm WilmerHale.

“The host governments with whom we work to provide technical assistance and other support in the fight against illicit finance must be full partners in the effort,” he said in his prepared statements.

“If they believe that the international community is simply and paternalistically imposing a program on them, that program will never have sustained success. And one size does not fit all – each country program will have a common core but also unique local features. That is where technical assistance is so important.”

In addition, Kimmitt said, the strategy will only work by garnering global support, even with countries currently or once perceived as enemies.

Beyond working to bolster capacity in smaller, less developed host countries, the United States must “also enlist friends, allies, and even competitors like Russia and China to join us in this fight,” he said.

Part and parcel of that is going through influential international bodies.

For instance, getting the UN Security Council to pass a resolution on a given financial crime issue can “lay the most effective international foundation for common efforts,” since both countries and international organizations like the World Bank more quickly allocate priority and resources to UN-mandated missions.

Providing technical assistance to help other countries improve their own ability to harden their own banking systems against misuse by terrorists and to disrupt terrorist finances once found, “can be a cost-effective way to degrade terrorist groups abroad and protect the U.S. financial system from abuse,” said William Wechsler, a Senior Fellow at the Center for American Progress.

“Such technical assistance can be an important element of a wider strategy to build partner counterterrorism capacity, which itself is a critical line of operation in any strategy that emphasizes indirect action,” meaning action apart from direct military engagements, like missile strikes.


Technical (assistance) support

Here are some of the critical details to be ironed out to ensure that technical assistance on fighting financial crime, including terrorist financing, will be successful in both immediate and long term implementation, according to James Adams, the former vice president for East Asia and the Pacific Region at the World Bank:

  • An explicit long range plan that would (i) set out levels of expertise required for what period and (ii) detail the needed training to ensure that local staff would be trained to replace all international experts;
  • An explicit commitment of the local staff required to both work with international experts and eventually replace those experts;
  • A budgetary commitment of the local counterpart resources needed to support any local benefits of international expert and salaries of local staff.
  • At the same time donors need to get their act together. I see the following changes in traditional practices as offering potential:
  • A commitment to fully fund the recipient’s proposed long term program of expert support and local training; in most cases this will require commitments beyond the typical 5 year project assumptions of most donors.
  • The increased use of twinning recipient agencies with their counterparts from more developed countries; using general consulting firms for TA has numerous advantages but I feel that the longer-term programs suggested above can be better implemented by using the established capacity of government or banking staff that have real time responsibility for overseeing key financial flows;
  • Finally, a consortium of a limited number of donor and recipient governments would be established to oversee the country programs; this would reflect the clear priority given this effort, and would ensure that standards are maintained, that the lessons of experience (good and bad) would be learned and that any funding issues could be more easily resolved.

Foreign oversight critical

In addition, the foreign capacity building on terror finance should be monitored not just by the country itself, but on-the-ground sentries already in country, such as those staffing foreign embassies, to ensure the country is following through on its promises, Kimmitt said

The interagency meetings at which counterterrorism efforts are coordinated and effected are “not just in the White House Situation Room and elsewhere in Washington; they also take place at embassies and military commands around the world,” he said.

“We need to ensure, then, that not only agencies in Washington but also their overseas posts have individuals identified to ensure counterterrorism efforts are a priority both at home and abroad.”

During his many years in the US government, Kimmitt noted that he oversaw the increase from three to 24 of U.S. embassies that had assigned Treasury attachés, and he also fostered the movement of Treasury officers to military commands and brought military officers into Treasury to support the effort to counter terror finance.

Those US embassies can be a critical nexus point to gauge foreign countries’ allegiance to uncovering terrorist cells and their financiers.

“One question you should ask as your effort continues is whether, in developing countries of particular concern, Treasury – as the U.S. Government lead – has representation at the U.S. embassy in that country,” Kimmitt queried.

“If not, who in the embassy has the lead on countering terrorism finance and how often does she or he meet with the Ambassador and country team to ensure both priority attention and interagency coordination? Again, the best laid of Washington plans can founder in the absence of attention to implementation, both at home and especially abroad.”

Big penalties lead to intelligence drought

Surprisingly, though, one of the major stumbling blocks to uncover some of the illicit financial networks tied to terror groups is the United States’ own aggressive policies against banks for financial crime missteps, said Clay Lowery, Vice President of Rock Creek Global Advisors LLC and a visiting fellow for the Center for Global Development.

“From a national security perspective, current AML/CFT policies may be self-defeating to the extent that they catalyze finance moving from the formal financial system to the more opaque parts of the system,” he stated in his testimony.

Under the current AML/CFT approach, banks are asked to prevent sanctions violations and assess and mitigate money laundering and terrorist financing risks, or face penalties, leading to simplified risk scoring to identify any entity with even a small amount of risk.

“While there may not be clarity in terms of defining the management of those risks, the penalties have increased to the point that taking zero risk may seem like the best option,” Lowery wrote.

By the working group’s calculations, in the five-year period from 2010 to 2014 – the number of AML/CFT fines more than doubled while the amount of those fines went from less than $1 billion in total fines to over $15 billion, he wrote.

“Even putting aside a few headline cases, the fines have still increased over 400% in a very short period of time,” Lowery noted.

“While it is not the only factor, it is pretty clear that AML/CFT policies have led banks to adopt an understandably conservative position when working in risky developing countries in areas such as correspondent banking or facilitating remittances,” he wrote.

“The result includes financial institutions exiting from providing services to firms, market segments and countries that are seen as higher risk, lower profitability and could become the source of costly future fines, monitorships or even prosecutions,” Lowery concluded.