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In an effort to dismantle the financial underpinnings of international terrorism, the United States is cracking down on global money laundering.
But stricter international controls on banking and greater scrutiny in the financial sector could backfire, triggering corruption scandals around the globe. Greater transparency and enforcement will also prompt terrorist groups, drug traffickers and criminal organizations to strengthen cooperation and establish more informal laundering networks.
President Bush signed into law Oct. 26 a sweeping anti-terrorism bill, which will tighten controls on banking and financial networks and expand the investigation into money-laundering rings believed to be used by the perpetrators of the Sept. 11 attacks. By making it tougher to launder illicit funds through Western institutions, Washington is attempting to dismantle the financial underpinnings of international terrorism.
But placing greater controls on U.S. banks – and by extension, their foreign counterparts – could drastically alter the landscape of international finance. A U.S.-led investigation into global money laundering could uncover corruption in businesses and governments around the world. The measures will also drive those involved in illegal activity deeper underground.
Both outcomes could have far-reaching effects. Stricter banking regulations will complicate international financial transactions, for example. Greater demands for transparency in the United States could prompt foreign banks to seek alternatives to U.S. financing and cut into the U.S. banking sector’s global market share. Companies such as Citibank and Bank of America will be forced to comply with new banking laws that their foreign counterparts may resist, and this would drive a wedge between the U.S. and foreign financial markets.
From another perspective, tighter dragnets on money laundering in Western countries could cause spikes in organized crime and drug trafficking in states with more opaque banking laws. It also would likely lead to greater use of informal transaction systems, such as the hawala money-transfer system popular in South Asia and the Middle East.
Illicit groups, such as terrorist organizations, will likely expand cooperation with other criminal gangs – including organized crime and arms smuggling entities – to evade tougher law enforcement efforts. Consequently, each organization will add new layers of protection to shield assets from one another, even as they benefit from one anothers’ “tricks of the trade.”
The closer cooperation could become an advantage for law enforcement agencies, however. Linked through assets, various criminal groups would present an inherent danger to each other: When one is discovered during the course of an investigation, others are exposed.
But the new U.S. anti-terrorism law will complicate transactions between U.S. and foreign banks. For example, the new law prohibits U.S. banks from dealing with foreign shell banks, which do not maintain physical branches. It also requires closer scrutiny and greater transparency of foreign banks’ depositor information. The legislation gives the U.S. Treasury Department broad powers to target countries or banks considered soft on money laundering.
Already, Washington is devising new ways to track the financial assets of suspected terrorists. A multinational task force, which includes representatives from Japan, the United Kingdom and the United States, met in emergency session Oct. 29 in Washington to find ways to disrupt the financial networks of terrorist groups, Agence France-Presse reported. The task force – which is part of the Organization for Economic Cooperation and Development – blacklisted 17 countries considered soft on money laundering. Those include Egypt, Guatemala, Hungary, Indonesia, Israel, Lebanon, Nigeria, the Philippines, Russia and Nauru.
Meanwhile, insurgent groups, drug cartels, organized crime outfits and terrorist organizations are converging around the globe, partly in response to declining state sponsorship.
During the past decade, the globalization of economies has generated pressure for governments to fight corruption and embrace transparency. For instance, rogue states like Iran, Libya and North Korea have all stepped back from overt support for terrorism and cracked down on drug trafficking and arms smuggling. In 1999 Tripoli handed over two men suspected of bombing Pan Am Flight 103 in 1988 – a move that ultimately led to the suspension of U.N. sanctions. In Iran, President Mohammad Khatami has repeatedly condemned terrorism, according to local newspapers. He may have been behind an apparent drawdown in Iranian support for militant groups throughout the Middle East.
Because they can no longer turn to state institutions to facilitate money laundering, underground groups are increasingly self-reliant. Many have established their own financial networks. Saudi exile Osama bin Laden, for example, is known to have invested in several East African businesses, including banks, according to U.S. government officials.
This self-reliance and diffusion of assets creates challenges for law enforcers, who are subject to jurisdictional limits and other restrictions that do not bind non-state actors such as al-Qaida, Colombian drug traffickers or East African arms smugglers.
Battling money laundering on a global basis also presents a host of difficulties for governments, including the possibility that prominent businessmen or politicians could be implicated in scandals. National criminal investigations often find unexpected culprits. In Brazil, for example, an ongoing anti-corruption drive has led to scandals that reach all the way to presidency. And in France, key business and government leaders recently have been linked to arms trafficking deals.
Historically, anti-money laundering laws have not succeeded for a number of reasons, including the desire of governments to protect the privacy of wealthy citizens. This will not change, even as U.S. efforts to locate money associated with al-Qaida expand. Individual governments may officially support the United States, but that support will not be mirrored by business elites in many nations.
Other difficulties include the growth of informal networks. For instance, particularly in South Asia and the Middle East, the well-established hawala networks will be used even more, further complicating efforts to trace suspected terrorist funds.