Ibrahim Warde
11/01/2007
You might recall the time in 2004 when former presidential candidate Bob Dole learned that Riggs National Bank had been filing suspicious activities reports (SARs) notifying the Financial Crimes Enforcement Network, or FinCEN, a division of the Treasury Department, that he had been making cash withdrawals averaging $12,000 a month from his account. There was nothing nefarious about such transactions—Dole simply preferred cash over credit cards or checks.
Frank Carlucci, chairman emeritus of the Carlyle Group, learned three years ago that he, too, had been a victim of the banking sector’s newfound zeal. "Having been the national security advisor, the deputy director of the CIA and the secretary of defense, I am an unlikely prospect for helping terrorists," he remarked. "I just use a lot of cash, that’s all."
U.S. banks must secretly notify FinCEN of any cash transaction exceeding $10,000 or any transactions that do not fit a client’s profile (deposit and withdrawal patterns consistent with one’s occupation). Just about every country now has a FinCEN-like agency that operates behind a veil of secrecy. Indeed, anyone inside a bank who informs the customers about such filings is breaking the law.
When Congress enacted stringent bank reporting laws following the Sept. 11 attacks, expanding greatly upon the provisions of the 1970 Bank Secrecy Act, the Wall Street Journal warned that "laws that target 100 percent of the population to control the behavior of 0.001 percent are also seldom productive, not least because they tell the 0.001 percent how not to get caught." It is estimated that more than 1 million SARs are now filed every year in the United States at an annual cost of $8 billion to banks and $3 billion to other industries. Most of the reports go unread and unprocessed. Furthermore, there is no evidence that a single act of terror was foiled through information disclosed by those reports.
A Paper Bag Economy
Clearly, the system needs a major overhaul. To start, let’s clear up the common confusion between money laundering and terrorist financing. Money laundering, which is hiding the proceeds of crime in the financial system, was criminalized in 1986 in the midst of the war on drugs. The anti-money laundering arsenal grew exponentially, albeit with scant results. When George W. Bush became president, most of his economic advisors were bent on dismantling the anti-money laundering apparatus.
But after Sept. 11, the same advisors expanded it with the zeal of new converts, uncritically transposing the money laundering template to the fight against terror. A new acronym appeared—AML/CFT, for anti-money laundering and combating the financing of terrorism—making the two nearly indistinguishable.
In reality, terrorism is neither costly nor driven by financial profit. The Sept. 11 terrorists needed only $300,000 to cause massive destruction; the London subway attacks of July 2005 cost less than $1,000.
With ideologically driven terrorism, it is not the proceeds of
crime that are laundered, but clean money, usually undetectable by banks, that
is soiled. The distinction is crucial, though it was lost in the rush to devise
a swift and tough response following Sept. 11. The high-profile nature of the
financial war on terror has also given potential terrorists ample notice about
how not to get caught—which has often meant shunning the financial system
altogether.
What the financial war on terrorism has produced, and what has
become the measure of its success, is the sheer magnitude of databases and
volume of bureaucratic business. In the words of former Treasury secretary Paul
O’Neill, "Too often there is an acceptance of activity for progress." When in
December 2005, the bipartisan 9/11 Commission assigned letter grades to the
government for its conduct of the war on terror, the commission gave its best
grade to the effort against terrorist financing. In an otherwise dismal report
card, the government received an A-minus for its "vigorous effort against
terrorist financing."
In this context, lawmakers are loath to change the status quo.
A notable exception is Ron Paul, the iconoclastic Texas representative and
Republican candidate for president who opposed both the Patriot Act and the war
in Iraq. Paul said: "Aside from raising serious concerns about the government’s
respect for individual privacy, a system with this amount of false positives
diverts valuable law enforcement resources away from the investigation of real
terrorist threats, to the harassment of innocent citizens."
Ibrahim Warde teaches international business at the Fletcher School, Tufts University, Medford, Mass., and is the author of
The Price of Fear: The Truth
Behind the Financial War on Terror.