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Combating financing of terrorism – I

“Pakistan has taken steps towards improving its AML/CFT regime, including by issuing an SRO to increase the maximum monetary sanction for non-compliance with S/RES/1267. However, despite Pakistan’s high-level political commitment to work with the FATF and APG to address its strategic AML/CFT deficiencies, Pakistan has not yet made sufficient progress in fully implementing its action plan, and certain key CFT deficiencies remain.

Specifically, Pakistan needs to amend its Anti-Terrorism Act to ensure that it meets the FATF standards regarding the terrorist financing offence and the ability to identify and freeze terrorist assets. The FATF encourages Pakistan to address the remaining deficiencies and continue the process of implementing its action plan” –

The Financial Action Task Force (FATF) Report 2013


The term ‘terrorism’ in its broadest sense implies any form of violence for the purpose of achieving political goals. The biggest challenge faced by the national and international institutions at present is tackling terrorist financing. The dangers and implications involved in terrorist financing have direct bearings for the established legal and financial systems – in the absence of comprehensive study of terrorist financing suggesting ways to counter it effectively, it is not possible to uproot the menaces of terrorism, extremisms and militancy that are posing serious threats to politico-legal systems evolved by humanity at large after hectic struggle over time. Unlike money laundering which is always preceded by an unlawful activity, terrorism may be financed from the proceeds of legal activities (humanitarian organisations, various associations, donations etc). This makes detection of terrorist financing very difficult, even more so if we bear in mind the fact that transaction amounts involved in terrorist financing often tend to be smaller than the amounts that under law have to be reported to the anti-money laundering office. As the measures taken to prevent money laundering are not sufficient in the fight against terrorist financing, they have to be supplemented by special measures prescribed by competent international bodies.

The term money laundering implies a range of activities in banking, monetary or other economic operations, the purpose of which is to conceal the actual source of money, or assets or rights acquired by means of money obtained in an unlawful manner. In general, the term ‘money laundering’ implies every activity aimed at concealing unlawfully obtained income in such a way so as to present such income as lawful proceeds. The Council of Europe first used this term in 1980 in its Recommendation No R (80) 10 on Measures Against the Transfer and the Safekeeping of Funds of Criminal Origin and in the USA the term was first officially used in a 1982 court ruling against Colombian cocaine mafia.

The first piece of legislation on money laundering (The Money Laundering Control Act) was enacted in 1986 in the US Federal State of Washington. This act envisaged severe sanctions against persons who duly failed to report monetary transactions in excess of USD 10,000 or who failed to meet the obligation to keep receipts on business transactions involving amounts in excess of USD 3,000.

Terrorism and money laundering, intrinsically linked, pose considerable threats to global peace and security as well as destabilising political and financial stability of many nation States. This twin menace assumed dangerous proportions in the wake of 9/11’s ghastly incident in New York. Since then the whole world has been suffering from what great psychologist, psychoanalyst, sociologist and humanistic philosopher Erich Fromm termed as ‘Fear of Freedom’ – terrorists have managed to create an atmosphere of uncertainty and fear all over the world. The international community is struggling hard, without much success, in monitoring and eliminating their financial support by sympathisers. Besides external resources, enormous funds are generated by terrorist networks through legal as well as illegal means, concealed and laundered using existing legal financial framework or unlawful underground networks. The terrorist networks cannot be destroyed, or even made ineffective, unless concerted efforts are made at both national and international levels to efficaciously block their financial sources.

This paper analyses some critical areas of terrorist financing and money laundering, shortcomings in the existing anti-terrorism and anti-money laundering laws and their poor enforcement, contradictory policies in vogue, faulty strategies and lack of a comprehensive international and well-integrated plan to counter a mindset that believes in using force to impose its ideas and ideology on others. The emphasis of paper is on devising a pragmatic approach to tackle the terrorist financing and develop concrete counter-terrorist apparatus – at national and international level – to stem the rising tide of militancy and other threats posed by terrorists.

International legal initiatives

International strategies and laws for combating money-laundering and terrorist financing that have developed during the last ten to thirteen years are still considered to be in the nascent stages in terms of law-making process. Since the organised crime syndicates have far-reaching tentacles and influences in the financial systems for centuries, terrorists find no difficulty in exploiting the available infrastructure. “New threats, particularly that of terrorism and its financing, require ongoing review of the validity of the strategies put into place. Moreover, the balance sheet in the fight against money-laundering is very mixed. A number of financial markets, particularly tax havens, offer too many shelters for drug traffickers and money-launderers. The transparency that has been introduced into financial transactions has not been reproduced at the level of corporate law”.

“International judicial co-operation is in its infancy and does not provide the ability to respond quickly enough in view of the nearly instantaneous speed ofelectronic funds transfers. Should we, therefore, question the effectiveness of the current strategy? In fact, the strategies are sound, however, it must be noted that the objectives the international community set for itself in combating money laundering and terrorism financing are far from being attained, given the lack of universal implementation of the established standards. It is on this point that all efforts must henceforth be brought to bear, in order to ensure sufficient financial transparency for tracking the movements of funds of criminal origin. The mobilisation of governments must be incessantly pursued, and the collaboration of both the financial sector and more generally the private sector must also be thorough”.

Pierre Kopp (1995) explains that one of the problems in combating money-laundering “comes from the information asymmetry in principal-agent relationships between the State (the principal) charged with implementing the fight against money-laundering, and the financial sector (the agent),” the only entity that has the data on illegal transactions. The difficulty thus lies in the fact that the authorities charged with implementing policies to combat money-laundering have the power to act but do not have access to information that would allow them to act. It is the financial institutions that have this information but they do not have power to act. Therefore, the detection of money-laundering operations necessarily involves collaboration and information exchange between the financial sector and the authorities responsible for legal procedures. Without this collaboration, there is little chance that money-laundering operations could ever become known, as they are by nature hidden. Given the confidentiality of the information held by banks, it has been necessary to establish bridges between prosecution and enforcement authorities and financial institutions in order to allow this information to circulate while honouring confidentiality requirements. These bridges take the form of Financial Intelligence Units (FIUs). Notwithstanding law enforcement’s access to this information, officials would not be in a position to identify, among the mass of information generated by the daily financial transactions of a financial sector institution, operations that are suspicious or that conceal money-laundering activities. According to Jean-François Thony, a notable authority on the subject of terrorist financing, “this is all the more true because the suspicious nature of a transaction most often results not from the intrinsic characteristics of the transaction itself but rather from factors extraneous to the transaction”.

“A reporting system has thus been introduced in most jurisdictions requiring professionals subject to this requirement to inform the legally designated authority of any transactions he believes could be linked to money-laundering operations. This is the system for reporting suspicious transactions that has been progressively adopted by most States. It transforms the financial sector professional into a filter responsible for separating economically justified operations from operations linked to the activities of a criminal organisation. Bankers, particularly due to their knowledge of their clients and of the economic and financial arena, have detection measures that go beyond the formal criteria that might characterise a suspicious transaction. This is all the more important because in most cases there is no difference in the manner in which money-laundering operations and legal operations are carried out. It is in this spirit that the international community in the late 1980s instituted an international legal framework which is still in its development, specifically to confront new threats, but also to remain informed of new money-laundering techniques.

The promotion of well-regulated financial systems and services is central to any effective and comprehensive Anti-Money Laundering and Terrorist Financing (AML/CFT) regime. However, applying an overly cautious approach to AML/CFT, safeguards can have the unintended consequence of excluding legitimate businesses and consumers from the financial system.

In June 2011, FATF published a Guidance paper which provided support to countries and their financial institutions in designing AML/CFT measures that meet the national goal of financial inclusion, without compromising the measures that exist for the purpose of combating crime. Following the revision of its Recommendations in February 2012, FATF adopted an updated version of its Guidance on financial inclusion in February 2013. This project was conducted in partnership with the World Bank and the Asia/Pacific Group on Money Laundering (APG), and in consultation with the financial industry. The Guidance paper focuses on ensuring that AML/CFT controls do not inhibit access to well-regulated financial services for financially excluded and underserved groups, including low income, rural sector and undocumented groups. The document provides clarity and guidance on the FATF Recommendations that are relevant when promoting financial inclusion and shows how the Recommendations can be read and interpreted to support financial access.

The revised Guidance seeks to reflect the changes brought to the FATF Recommendations in 2012. It focuses in particular on the reinforcement of the risk-based approach (RBA), as a general and underlying principle of all AML/CFT systems. FATF believes that the development of risk-sensitive AML/CFT frameworks will be a key step for countries that wish to build a more inclusive formal financial system, and give access to appropriate financial services to a larger proportion of the population, including the most vulnerable and un-served groups.

(To be continued tomorrow)

Dr. Ikramul Haq, "Combating financing of terrorism – I," Business recorder. 2013-04-26.
Keywords: Political issues , Social issues , Political problems , International politics , Political goals , Terrorism law , Terrorists , Terrorist attacks , Extremism , Money laundering , FATF