Collateral Damage

Article excerpt

Legislation aimed at cracking down on funding for terrorists is having some damaging side effects for banks and businesses.

Following the attacks of September 11, 2001, US president George Bush asked the world to "stop payment" on what he termed the "lifeblood of terrorist operations": their money supply. And in an effort to make that happen, his administration passed a number of pieces of legislation that not only gave federal intelligence agencies far-reaching investigative powers but also made the provision of "material support" to designated terrorist organizations a criminal offense. Companies such as banks were forced to invest millions in training staff and implementing systems to detect "suspicious transactions" that might help provide some insight into the financing of terrorist activities.

Six years on, everyday companies going about their business are starting to feel the pinch of the legislative "war on terror." In the United States, banks are fighting multimillion-dollar lawsuits alleging their involvement in helping finance terrorist organizations. Islamic financial institution Dar al-Maal al-Islami Trust, for example, is a defendant in a consolidated $1 trillion lawsuit brought by families of those who died in the September 11 attacks. In January this year a judge at the US District Court for the Eastern District of New York refused to dismiss a lawsuit brought by survivors and families of suicide bombing victims that alleges that Jordan-based Arab Bank "knowingly and intentionally provided services to organizations it knew to be terrorist organizations."

French bank Crédit Lyonnais and British bank NatWest are also the subject of lawsuits that allege the banks channeled funds to organizations that raise money for Hamas, which is designated by the US as a terrorist organization. The suits have been filed under the USs Anti-Terrorism Act, which says it is "unlawful for any person or entity to provide material support to a designated foreign terrorist organization." The banks are accused of maintaining accounts for charities that have been branded terrorist organizations by the Bush administration, yet other countries have not outlawed these charities. The onus is now on the banks to prove that the provision of "routine banking services" does not constitute "material support" for alleged terrorist organizations.

"These are important test cases," says Rachel Ehrenfeld, director of the American Center for Democracy and author of Funding Evil: How Terrorism is Financed and How to Stop It. Despite banks having invested millions in anti-money laundering (AML) solutions and trained staff to detect "suspicious transactions," she believes banks could do more to prevent funds being channeled to terrorist groups. Although terrorist funds may be physically transported, she is adamant that the bulk of the money "is being channeled through banks." She says it is a bank's job to know who its customers are. Know Your Customer (KYC) is part of the "due diligence" provisions mandated by the US Patriot Act, which was passed following the September 11 attacks. Ehrenfeld says KYC and AML are not just about investing in automated solutions but also training bank staff to know what to look for."It may cost [the banks] more, but on the other hand it could save lives," she says.

Under the Patriot Act, law enforcement agencies are able to request that banks share account and transaction information pertaining to individuals or businesses suspected of engaging in terrorist acts or money laundering. The onus is on banks and other financial intermediaries, including money services businesses, brokers, shipping agencies, mutual funds and casinos, to file Suspicious Activity Reports (SARs), which can pertain to terrorist financing, suspected money laundering or proceeds from crime in general.

Under the UK Proceeds of Crime Act, "it is a criminal offense for anyone who works in a regulated financial firm not to report any dealing that they suspect, or ought to suspect, involves the proceeds of crime. …