Banking on terrorism

AL QAEDA HAS PROVIDED A PAINFUL reminder that crime is global but law enforcement is not. Criminal law is still largely a national or local matter while international criminals are often better organised than national governments and their police forces. Criminals can move across borders more easily than police officers, who are restricted in their powers of detection, arrest and detention. There is no international force to arrest wrongdoers and no international prison.

Tax havens provide an example of the lack of such cooperation. This is not a new issue - the writer W Somerset Maughan once described Monaco as a `sunny place for shady people: This image has not changed much - a June 2000 French parliamentary report said that Monaco would be an ideal place to launder money because of its deliberately lax banking laws.

Several small countries have become tax havens or locations for criminal activity. The empire has struck back. It may well be that the British government thought it could reduce its foreign aid bill by encouraging some of its newly independent colonies to become tropical Switzerlands. Among the countries causing concern are the Bahamas, the British Virgin Islands, the Cayman Islands, Antigua and Barbuda, and Nauru. These territories have succeeded only too well and British and other financial authorities are now trying to rein them in.

The Organisation for Economic Co-operation and Development (OECD) has been encouraging international cooperation against thirty five countries it identifies as tax havens operating in ways that frustrate the ability of other jurisdictions to collect tax. The Clinton administration supported that work.

CHANGING TUNE

But the Bush administration has been more willing to listen to lobbying by US non-governmental organisations viewing the OECD approach as a way of dictating taxation policy and seeking to harmonise taxation rates around the world.

Last May, US Treasury Secretary Paul O'Neill in effect withdrew support from crucial parts of the OECD initiative. There was concern about taxation in particular and a broader issue of philosophy at a time when Washington was pulling out of a number of international ventures. O'Neill's views were endorsed by some US politicians.

September 11 has forced Washington to be more cooperative, if only because it needs international assistance to try to seize the funds of foreign terrorist organisations: For example, in January O'Neill noted that the United Arab Emirates and Switzerland had blocked thirty terrorist-related accounts containing $15 million. The previous month be estimated that worldwide about $61 million in Taliban and Al Qaeda assets bad been blocked.

There may be long term problems with this approach. Offshore financial organisations could argue that it is not their task to assess the morality or potential intentions of clients. They are there to handle money, not to make value judgements. If people want money transferred and can pay for it, then they will do the work. Banking is a competitive business: if one organisation will not make the transfer, the client will go elsewhere.

LAUNDERING IN REVERSE

The New York and Washington attacks have also focused attention on reverse money laundering - where money gained for legal purposes is eventually used to finance terrorist ones. This is in contrast to criminally acquired money - such as that from drugs being laundered and becoming clean. Some of the money that financed Osama Bin Laden and Al Qaeda came from funds collected for Islamic charities and other good causes.

Washington has two problems: the outlawing of specific terrorist groups and their front organisations. In 1996 the US began designating certain groups as foreign terrorist organisations in terms of the Immigration and Nationality Act, as amended by the Antiterrorism and Effective Death Penalty Act. This makes it illegal for people in the US or subject to US jurisdiction to provide material support to foreign terrorist organisations; it requires financial institutions to block assets held by them; and enables the government to deny visas to their representatives. The June list contained over two hundred such organisations and indicated that this was not the final version and other groups would be added.

Of course, some foreign governments - such as that

in Britain - may privately feel that, considering the amount of past assistance given to groups involved in conflict by people and organisations in the US, as distinct from official government sources, this process is a case of too little too late. The Irish Republican Army (IRA), for example, was not outlawed and its veterans who fled to the US were not extradited, although the breakaway Real IRA has been listed as a foreign terrorist organisation.

Washington refused extradition of IRA suspects on the grounds that, as long as the offence would have been legitimate for a soldier in armed struggle, then the `political offence' exception applied. Courts applied a rule meaning that the US could provide asylum for soldiers opting out of conflict. Many Americans are descendents of refugees from the losing side of conflict in their home countries and so feel an inherent sympathy for rebels.

FRONTING UP

Now Washington is having to deal with organisations that have allegedly been raising money for terrorism. Last December, the administration froze the assets of three Hamas-controlled organisations - The Holy Land Foundation for Relief and Development, Beit Al-Mal Holdings and Al-Aqsa Islamic Bank - using an Executive Order on blocking terrorist property. In January two more organisations were added: the Afghan Support Committee and the Afghanistan and Pakistan offices of the Revival of Islamic Heritage Society.

However, new front organisations can be created virtually overnight, it may take time before flair true nature is identified, and a great deal of money may be collected and transferred in the meantime. Some, such as the Afghan Support Committee, have very innocent names that ordinary people may well feel inclined to support. Ironically, the administration is encouraging faith-based initiatives, where religious organisations conduct more educational and social welfare programmes to ease pressure on government. Such initiatives may provide a further facade behind which front organisations can operate.

But this is a sensitive issue because charity is a central pillar of Islam. In many parts of the world, religious bodies provide much of the social infrastructure such as orphanages, hospitals and schools. It is important that authentic charity work continues. The problem is to distinguish between various types of fundraising.

BANKING ON TRUST

Some Al Qaeda money moved through the hawala banking system. This is the second oldest banking system in the world and a very effective way of moving money across national boundaries. The Chinese developed an earlier version over a thousand years ago to minimise the movement of cash and possible theft by the bandits operating on roads and rivers.

Under the hawala system, no money moves from one country to another, or between locations in the same country. Instead, a client gives a dealer a sum of money, and a message is sent from that dealer to another instructing its payment to a particular person. Many such messages go back and forth for various payers and receivers, and so the total funds remain roughly balanced in each dealer's consolidated fund.

Western banks are now held in contempt for their greed - even the conservative Australian Prime Minister, John Howard, has complained about Australian banks looking after shareholders rather than customers. It is ironic that a banking system several centuries older than the western model should continue to be based on trust and integrity. It continues to flourish because it is cheaper than sophisticated western electronic transfer. The disgraced Bank of Credit and Commerce International targeted overseas Asian remittances and charged funds both at the beginning and the end of their journey.

Hawala money moves outside official government channels and cannot be monitored for domestic taxation. Pakistan, for example, estimates that four times as much money moves through the hawala system from its citizens working overseas than is sent through official routes.

The US Treasury is examining the hawala system but it is doubtful whether it could be entirely closed. The system has been around three times as long as the United States; it is deeply embedded in the culture of many countries; too many people have too many uses for it; and American hostility towards Al Qaeda is not necessarily shared by all who use it.

The best way to curb the system would be for commercial bankers to look after their customers better, by reducing the cost of international transactions. But, as even John Howard might speculate, that type of reform is about as likely as Washington putting a total stop to funds being transferred for terror.