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Tuesday, 19 March, 2002, 10:21 GMT
Banks face loyalty dilemma
Person catching falling coins
Can the banks catch the criminals?

With all the fuss about terrorist finance, it's sometimes easy to forget that the argument about how to track dirty money is a very old one indeed.

Regulators and law enforcement agencies want to know everything about money flowing through the financial system.

Bankers, on the other hand, owe their clients a duty of discretion - however that can be defined.

The emphasis on tracking terrorist finance since 11 September has, however, made the debate even more difficult.

It's one thing to try to spot millions of dollars being pushed through international banks - via a handful of dodgy offshore transactions, of course - and ending up in a remote bank account.

But what about the few tens of thousands of dollars needed for a terrorist strike - which may very well come from an entirely legitimate source. A near-impossible task, perhaps.

Times change

It certainly doesn't make the job of being a banker any more straightforward.

After all, once upon a time it was all so much easier. Clients opened accounts, put money in and took it out. What they did with it - or how they came by it - was none of your business.

New York, London and the other big centres get used because they're the big clearing houses... But when the music stops, the banks have red faces, and they haven't a clue who's behind the money

Jermyn Brooks
executive director, Transparency International
This shield of discretion and anonymity was very useful from a crook's point of view, of course.

But in the long run it was no larger a systemic problem in terms of the big financial picture than if the felon had instead chosen to stash his cash under the mattress - and not much more of a problem for law enforcement.

All change

Those days are long gone. The advent of electronic transfers, capable of winging millions across the world in a blink of an eye, means that dirty money can wing its way through half a dozen countries and twice as many different accounts before the police can pull their boots on.

And that spells trouble - not only for banks, but for a raft of other financial institutions from bureaux de change to insurers.

Over the past few years, professionals in the finance business have found themselves held responsible for the dirty dealings which go on under their noses.

At least in the industrialised countries, they are required to know much more about their customers - and in the case of agents or companies, whoever may be behind them.

The idea is to make the private sector the first line of defence against money laundering, by making it report anything it finds suspicious - or, increasingly common, make additional checks when any transaction above a certain size gets made.

Blood on their hands?

It will come as little surprise that there has been a certain amount of resistance to this from the banking community.

Late Nigerian dictator Sani Abacha
The Abacha scandal was a key trigger for Wolfsberg
The traditions of discretion die hard, particularly in corporate finance and the secretive world of private banking catering to the wealthy.

Dozens of states, often islands in the Caribbean or Pacific but elsewhere too, have long been happy to keep taking in funds no questions asked.

But the pressure has built, fuelled by the need to crack down on the drugs trade.

Old staples like the Cayman Islands - once seen as a real problem case, with 35,000 people, 600 banks and 50,000 companies, mostly no more than shells - have begun to fall into line.

And following 11 September, the new political impetus to track terror funding as well as money laundering has dissolved much governmental reluctance to go beyond "light-touch" financial regulation.

Setting it straight

The increasing bad publicity attached to dirty money has persuaded several of the biggest international banks to try to put their own house in order.

Citigroup, for instance, was found to be harbouring money stolen from Mexico by Raul Salinas, the brother of its former president.

Wolfsberg Group members
ABN Amro
Banco Santander Central Hispano
Bank of Tokyo-Mitsubishi
Barclays Bank
Credit Suisse Group
Deutsche Bank
Goldman Sachs
J.P. Morgan Chase
Société Générale
UBS in Switzerland was embarrassed to discover large chunks of cash hoarded by the Marcoses while they ruled the Philippines.

And Barclays was among the many banks in whose coffers were unearthed the proceeds of late dictator Sani Abacha's looting of Nigeria.

Along with eight other banks they formed the Wolfsberg Group, pulling in anti-corruption NGO Transparency International to help them draw up best practice principles - published in October 2000 - on how to spot dirty money.

Jermyn Brooks, Transparency InternationaI's executive director, says the banks knew they had to break what was rapidly becoming a vicious cycle of reputational damage.

"New York, London and the other big centres get used (for suspicious transactions) because they're the big clearing houses. But when the music stops, the banks have red faces, and they haven't a clue who's behind the money," he said.

Thus the principles, which demand more care about establishing the identity of the beneficiary of a banking service and spell out extra steps to be taken when trying to judge whether a transaction counts as suspicious or not.

Within weeks of 11 September, the Wolfsberg Principles were added to, to take into account terrorist finance.

Holes in the net

Mr Brooks notes that the big challenge now is for finance and law enforcement to rediscover how to co-operate.

"Patterns are the key," he says. "The banks say, we'll co-operate, but you - the police - have to help us to understand the patterns of behaviour, so we can build them into our systems."

Highly advanced computer software scans the financial system 24 hours a day, looking for sets of transactions which look like they could involve dirty money. Without up-to-date intelligence, Mr Brooks says, these systems can't do their job properly.

Counting money
Banks are not yet ready to count the cost
But even that is not necessarily going to do much good. "Don't expect us - except in exceptional cases where we get lucky - to report on sleepers living on a couple of thousand a month." Law enforcement will have to find other ways of looking for them, he says.

And in any case, the financial institutions' readiness to co-operate is not guaranteed. The old habits are still there, and the Group - says Mr Brooks - still does not work hard enough to spread its ideas among its peers.

Part of it, strangely, is a fear of the law. While money laundering or corruption involves covering up a crime in the past, funds for terrorism are being stockpiled for the future.

"The banks are scared stiff of recovery issues," he says. "If they're found to have frozen the wrong people's money on suspicion, they don't want to be sued as a result."

That indemnity, unfortunately, is nowhere to be seen - despite ideas from some regulators about using the Bank for International Settlements, the central bankers' central bank in Basel, Switzerland, as the repository.

And until bankers and regulators across the world can come up with a solution, holes in the net are going to persist.

Tracking down how terrorist organisations fund their operations suddenly took on new importance after 11 September 2001


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