forex currency trading

Regulating terrorism

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 institutions6-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. The September 11 operations reportedly cost a mere $500,000.9 By way of comparison, the daily turnover of the U.S. stock exchange is estimated at $10 billion, and an estimated $1.5 trillion flows through international currency markets each day;10 Al Qaeda's money looks no different from the rest. Many financial institutions handle millions of transactions involving billions of dollars each day. Searching for terrorist money by examining these money flows is much more difficult than searching for the proverbial needle in the haystack; it is, rather, akin to searching for an indistinguishable needle among a stack of needles.

The U.S. government's response to terrorist finance in the weeks after September 11 is hardly surprising. The "do something" impetus that resulted in legislation and regulation requiring U.S. businesses to report or record information about financial transactions derives from an existing policy paradigm. Over the past thirty years, the Bank Secrecy Act, the federal statute that provides the basis for most anti-money laundering regulations, frequently has been amended to impose increasingly greater reporting and disclosure obligations on U.S. financial institutions.11 These rules and regulations are intended to ferret out financial transactions attendant to criminal acts, such as drug trafficking.

However one may feel about this regulatory paradigm in other contexts, terrorism is different. The anti-money laundering regulatory structure from which the government's new initiatives derive is particularly ill-suited to combat terrorism. Terrorist financing typically entails the disbursement of small amounts of money derived from legitimate or quasi-legitimate sources. The chances of financial institutions detecting such financing activities are negligible under a regulatory framework constructed for far different purposes.

That is not to say that financial regulations cannot help to address the problem of terrorist financing, but the regulations must be geared toward creating a closer partnership between financial institutions and the government. Financial institutions can help reduce the funding available to terrorists only when they have detailed information about who is suspected of being (or helping) a terrorist organization. And only the government is capable of providing that information. Absent a far different relationship between the government and financial institutions, additional regulation is unlikely to have a significant effect.

In the aftermath of September 11, financial institutions were willing participants in the war against terrorism. New lines of communication were opened with law enforcement, intelligence, and policy officials. Millions of dollars of terrorist money was seized,12 but only after the government quickly and proactively provided critical information to financial institutions to enable them to identify terrorists' money.

To combat terrorist financing, the government would be wise to replicate the partnership approach it has followed to assure the security of cyberspace. Similar to the financial system, computer networks constitute a critical national infrastructure with potentially devastating security vulnerabilities. Significant components of both the financial and cyber infrastructure are privately owned, managed, and maintained. But in the cyber context, rather than imposing solutions through legislation and regulation, the Bush administration has launched an exhaustive and successful campaign to coax and to coordinate with industry participants. Continuing activities begun by the Clinton administration, the Bush administration has held countless private meetings, launched an aggressive public awareness campaign, formed a government-industry coordinating board, invited industry to participate in the development of a national plan, and even invited an industry representative to join the White House staff.13 As a result, information about cybersecurity now flows freely in both directions; not only does industry provide information to the government, but the government also provides, formally and informally, essential information to the businesses on which this aspect of U.S. national security depends.

A similar approach should guide the government's efforts to curtail the financing of terrorism. In the end, private businesses cannot intercept telephone calls, run clandestine operations, or liaise with foreign intelligence and law enforcement officials. They can freeze accounts, monitor transactions and provide information about transactional parties and counterparties-but only when the government provides meaningful information about what to seek.

1. See Financial Record-Keeping and Reporting of Currency and Foreign Transactions, 31 C.F.R. [sec] 103 (2002).

2. See Bank Secrecy Act, 31 U.S.C.A. [sec][sec] 5312(a) (2) (A)-(Z) (West 1983 & Supp. 2002).

3. See 31 C.F.R. [sec][sec] 103.18-.20.

4. See id. [sec][sec] 103.18-.38.

5. See id. [sec][sec] 103.32-.39.

6. As of October 3, 2002, federal law enforcement agents review over 15,000 suspicious activity reports each month. The Administration's National Money Laundering Strategy for 2002: Hearing Before the Senate Comm. on Banking, Hous., and Urban Affairs, 107th Cong. (2002) (statement of Kenneth W. Dam, Deputy Secretary of the Treasury), available at http://banking.senate.gov/ 02_10hrg/100302/dam.htm.

7. See Chuck Murphy, Fighting Terror: Could It Happen Again?, ST. PETERSBURG TIMES, Mar. 10, 2002, 2002 WL 15926337.

8. Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT) Act of 2001, Pub. L. No. 107-56, 115 Stat. 272 (2001).

9. See, e.g., John Crewdson & Cam Simpson, U.S. Zeroing in on Terror's Money Trail, CHI. TRIB., Sept. 5, 2002, at 20.

10. See, e.g., FOREX Currency Trading, Why FOREX? More Than 1.5 Trillion Dollars Changing Hands Daily on the Forex Market!, at http://www.forex-currency-trading.com/forex.htm (last visited Oct. 30, 2002).

11. See 31 U.S.C.A. [sec]5311 (West 1983 & Supp. 2002).

12. See The Administration's National Money Laundering Strategy for 2002: Hearing Before the Senate Comm. on Banking, Hous., and Urban Affairs, 107th Cong. (2002) (statement of Kenneth W. Dam, Deputy Secretary of the Treasury), available at http://banking.senate.gov/02_10hrg/100302/dam.htm.

13. See, e.g., Center for Democracy & Technology, Cyber-Security Action: Critical Infrastructure Protection (Oct. 28, 2002), at http://www.cdt.org/security/critinfra; see also Exec. Order No. 13,231, 66 Fed. Reg. 53,063 (Oct. 18, 2001).

LEE WOLOSKY AND STEPHEN HEIFETZ*

* Mr. Wolosky, who practices corporate and international law at Boies, Schiller & Flexner LLP, served as the lead anti-money laundering official on the National Security Council staff under Presidents William J. Clinton and George W. Bush. Mr. Heifetz practices law at Wilmer, Cutler & Pickering and has previously served as an attorney at the Central Intelligence Agency and in the Asset Forfeiture and Money Laundering Section of the Department of Justice. The views in this article are their own and do not represent the views of their former or current employers.

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