Over the past months, as part of the Bush administration's broader war on terrorism, the U.S. Treasury Department has set out a thicket of new anti-money laundering regulations affecting a wide range of financial institutions. (1) The regulations may ultimately reach not only banks, brokerage houses, insurance companies, mutual funds and other investment companies, but also diverse small businesses such as automobile and boat sellers, check cashiers, jewelers, pawnbrokers, and travel agencies. (2)
The new regulations impose mandatory "suspicious activity report," (3) due diligence, (4) and recordkeeping requirements. (5) The suspicious activity report requirement obligates certain financial institutions to file reports regarding "suspicious" activity, yet the regulations provide little guidance about what kinds of activities are suspicious. Generally the more concrete due diligence and recordkeeping requirements are intended to ensure that financial institutions discern the identity and background of their account-holders and keep related records. These measures better enable investigators to follow the money trail after a crime occurs.
U.S. businesses will collectively spend hundreds of millions of dollars to hire and retrain personnel and to put in place comprehensive compliance regimes in order to comply with the new regulations.
There is one problem with the U.S. government's approach: there is scant indication that it will work. Already, tens of thousands of suspicious activity reports are filed each year by U.S. financial institutions (6)--including one reportedly filed on transactions made by highjacker Mohammed Atta in the months prior to September 11, 2001. (7) Unfortunately, most of these reports are stashed away in basements and remain unread by overworked and under-resourced government employees. The U.S. government has not put forward any strategy for analyzing and making effective use of the thousands of more reports to be filed under the new regulations or for the revitalization of the federal agencies charged with this critical function. More fundamentally, financial institutions themselves will simply never have the resources to find terrorists that have eluded the U.S. government with its far greater resources.
The new financial regulations are being promulgated pursuant to the USA PATRIOT Act, the broad anti-terrorism legislation signed into law in October 2001. (8) Given the national mood at the time, it is hardly surprising that the stringent anti-money laundering measures enjoyed wide support. But now that the immediate national crisis has abated, it is appropriate to ask whether the proposed regulatory regime will achieve its intended objective, namely disrupting and dismantling international terrorist networks.
Separating terrorists from their money is unquestionably a critical component of the war on terrorism. As many now more fully appreciate, attacks like those of September 11 require money to build and maintain terrorist training camps, to buy weapons, communications equipment, and forged documents, to move personnel and materiel, to bribe government officials and establish front companies, and to pay for operatives' rent, food, and other basic necessities, along with special activities like flying lessons.
More often than not, the terrorist money trail originates or leads overseas. The multi-jurisdictional nature of these investigations invariably complicates them because our foreign counterparts often lack the political will or the technical know-how to be of effective assistance. But money that aids and abets terrorism can sometimes be seized even when the terrorists themselves remain protected by mountains, caves, or foreign governments. That is especially true when the money is held by, or passes through, U.S. businesses.
Identifying terrorists' money is not easy. Only a small amount of money, a fungible commodity, is needed to purchase bombs or other weapons that can have devastating effects. …