On April 5, 2016, about 200 individuals including high level academics, French government officials and professionals of the financial industry gathered at the Paris campus of ESCP Europe to attend a conference on combatting the financing of terrorism organized jointly by Labex ReFi (a think tank like academic organization which brings together scholars involved in Financial Regulation) and the Association of Certified Anti Money Laundering Specialists (ACAMS).
The aim of the conference was to analyze systems and enforcement procedures used in France, Europe and the United States. A first panel of experts presented a description and assessment of systems and practices currently used to detect and prevent the financing of terrorism. A second panel looked at exploring ways to improve international cooperation and make controls more efficient.
In introductory remarks, Andreas Kaplan, Dean for Academic Affairs of ESCP Europe reminded the audience that the word “terrorism” in its present form was coined during the French Revolution but took recently all its present significance; he expressed the desire that participants would leave the conference certainly better informed and hopefully more reassured.
Angela Salter, Head of ACAMS Europe thanked the sponsors, SAS, FinScan and LexisNexis BIS, and introduced ACAMS to those unfamiliar with the organization, as being dedicated to education and the development of professional best practice for its worldwide membership of more than 35,000 “AML CFT” (Anti Money Laundering and Counter Terrorist Financing) professionals. ACAMS France Chapter was launched in 2013. ACAMS is, said Salter, pleased to cooperate with Labex ReFi and ESCP Europe.
Members of the first panel were introduced by Christophe Moussu, Professor of Finance at ESCP and College of Europe who indicated how academia could help to gain a better understanding and combat terrorism by acting as a bridge between specialized professionals and offering an interdisciplinary approach.
Pierre Servan-Schreiber, a lawyer registered in both Paris and New York, explained how the American legal system currently dominates the governance and enforcement of measures related to the fight against terrorism financing. The United States was the first country to suffer from large scale terrorist attacks in 2001 and, logically, created with the USA PATRIOT Act and other laws and regulations a system to fight terrorism on a global scale which is efficient but raises ethical questions. This legal system, according to Servan-Schreiber, is extraterritorial (e.g. it is generally applicable by US enforcement agencies to entities and individuals whether they are inside or outside US territory) and it could compel any individual or organization, for instance at the risk of losing a bank license, to “cooperate with American authorities“.
In practice this means any individual or entity under suspicion has to prove their innocence and bear the costs of the discovery process. Usually this requires the hiring of specialized legal, audit and advisory firms and personnel which could be quite costly. As could be seen in recent cases this system is ruthlessly efficient to force large institutions to comply with US regulations. However when compared with traditional European legal systems, it raises ethical issues because it creates a somewhat Orwellian environment in which whistle blowing and corporate self-incrimination (in order to reach a settlement with US financial supervisors) are encouraged and, according to Servan-Schreiber, it unfairly promotes American geopolitical interests.
Didier Duval, who had worked in the French police for 27 years and was a commissioner (“controleur général”) in charge of the financial crimes unit before joining Credit Agricole 5 years ago, described the evolution of the French legal framework to fight terrorism financing. He pointed out that the FATF-GAFI, (Financial Action Task Force / Groupe d’Action Financiere Internationale) was created further to the G7 Meeting “Sommet de l’Arche” and subsequent Agreement in 1989 as the supranational body in charge of fighting dirty money which, at the time, essentially meant funds derived from criminal activities such as narcotics or human trafficking.
New laws and regulations were then issued, in France as in other countries, as there could be “no prosecution without legal basis” (“pas de poursuite sans texte”) and specialized and dedicated investigative and enforcement units were created. In 2002, further to the 9/11 attacks, the concept of financial crime was enlarged to include financial transactions linked to terrorist acts; FATF issued additional recommendations and new specialized units were created in the French legal and enforcement apparatus. Regulations currently in place rely on a close cooperation between private entities, mostly but not only banks, the “asujettis” in French legal terminology, and the government authorities to track potential terrorist threats: financial institutions and intermediaries (“asujettis”) have the obligation to report to Tracfin, the French Financial Intelligence Unit, transactions and clients which appear to be suspicious. Those reports (“declaration de soupcon” in French, “Suspicious Activity Report, SAR” in English) are then used by Tracfin for its investigations and, when warranted, legal prosecution and enforcement.
In order to comply with regulatory obligations banks rely on their staff, hence the need for training, as well as on sophisticated systems which can find among millions of transactions, transfers or patterns which create alerts that are then further investigated and may lead to the preparation of a report. Duval pointed out that to be efficient the tracking and prevention of terrorism financing requires (1) a horizontal approach (“decloisonnement”) among specialized services; (2) a close cooperation between private (banks and financial intermediaries) and government sectors where communications, through reports and other means, should be encouraged both bottom up and top down; and (3) dedicated technical means that could track and detect potential terrorist threats at both the macro and micro levels, for instance filters and software that detect unusual and atypical activities.
Dan Benisty, Head of Compliance at Western Union France, explained that because his employer’s business is to handle fund transfers, most of them not backed by bank accounts, on a worldwide basis, it has to be particularly diligent in screening clients and transactions to be compliant with regulations applicable in all the 200 territories and countries in which it operates. Western Union handles 730 million transactions per year for an aggregate amount of $85 billion; it has 147 million clients including 700 NGOs which require special attention. It has a total staff of about 10,000 of which 2,200 are dedicated to compliance work and more than 3.5% of its global revenues are spent on compliance. To fulfill its AML CFT mission, Western Union has a policy of close cooperation with supervisory authorities and has devised a structure with three complementary departments to identify, analyze and manage AML CFT threats; create analytics to define terror financing typologies; conduct dedicated intelligence analysis and investigations; establish post-transaction monitoring controls; develop dedicated training programs for staff and agents; work closely with enforcement authorities by cooperating with investigations and file reports whenever warranted.
Special focus was put on the Foreign Fighter Terrorist issue and specific typologies were constructed incorporating specific characteristics and funding mechanisms. Algorithms are developed taking into account countries of origin or destination of the funds, age and sex, names and family relations among known parties, existence of alias names, frequency of transfers to/from individuals or patterns such as “one to many” or “many to one” which create alerts. Such algorithms are frequently verified, updated and discussed with supervising authorities so the system is constantly refined. NGOs represent special challenges as their workers tend to work in critical geographic areas. An efficient alert system thus should enable the compliance officer to differentiate between legitimate and potentially threatening transactions so that the reports sent to the supervisory authorities are as useful and exploitable as possible.
Francois-Gilles LeTheule, affiliate Professor (ESCP Europe) and Executive Director of Labex Refi, introduced members of the second panel focused on public policies and ways to improve an efficient cooperation between the private and public sectors as well as among different jurisdictions.
Rick McDonell, Director of ACAMS and former General Secretary of FATF-GAFI explained the structure and functions of FATF. He pointed out that, compared to other international bodies, it has the advantage of being a “task force” as opposed to an “organization” and has therefore fewer constraints and could move faster than traditional UN organizations. Established in 1989 at the outset of the G7 Paris Meeting, as an inter-governmental technical policy body, its original mandate was to devise ways to fight money laundering from drug trafficking. Its mission was enlarged in October 2001 to include terrorism financing and in 2012 to include the financing of the proliferation of mass destruction weapons. FATF is thus the global standard-setter for compliance for those areas of illicit financial activity. Its mandate is reviewed every four years in plenary session by the competent ministers representing each of the member States.
Currently the FATF’s membership includes 195 countries as well as the European Commission and the Gulf Cooperation Council and 20 organizations with observer status including the United Nations, the International Monetary Fund, the World Bank and the Egmont Group of Financial Intelligence Units (such as FinCen for the United States or Tracfin for France); it has 9 regional bodies and the secretariat is based in Paris. The FATF issues Recommendations which constitute a corpus of “soft law” to be transposed into laws and regulations by each member State; those cover legal, financial, regulatory and law enforcement and cover matters such as risk assessment, policies and national coordination, preventing measures in the financial and other reporting sectors, transparency and beneficial ownership (sometimes referred to as KYC for Know Your Customer) requirements, powers and responsibilities of competent authorities and international cooperation. Beneficial ownership, as demonstrated by the recent press coverage of the “Panama Papers” has become a particularly hot button. In addition to issuing ‘Recommendations’, the FATF has instituted a system of mutual evaluations conducted by multinational teams with stringent follow up mechanisms. This has proven to be quite useful in raising AML CFT standards as evaluation reports are discussed and then made public.
The FATF is well aware that detecting and repressing terrorism financing involves specific tools and challenges. In territories controlled by Daesh, it has established that terrorism is funded through banks, looting, extortion, human trafficking, the control and sale of gas and oil reserves, smuggling art works, kidnapping for ransom and proceeeds from religious charities. The FATF has published special reports on ISIL and terrorist financing in West Africa, and has regular meetings with the Coalition Counter ISIL Financing Group.
To further improve the efficiency of global AML / CFT policies a constant review of money and value transfer methods is necessary; greater integration between agencies fighting terrorism and the ones fighting terrorism financing would be helpful; closer cooperation with the private sector and academia would reduce the risks of bureaucratization (i.e. working in silos) and help to create a more transversal and cost efficient approach. Finally, regular reassessments of what constitute success in terms of prevention, detection and repression would foster international cooperation and lead to a safer world.
Bruno Dalles who heads Tracfin, the French FIU, and is a magistrate by training was the next speaker and joked that it was fitting he would talk after his “Dad” as Tracfin was in fact the French offspring of the FATF-GAFI agreement. His agency was born from a decree signed on May 9, 1990 which also created a twin brother, the agency in charge of financial police and legal proceedings (Office Central de Lutte contre la Grande Delinquence Financiere, OCLDF), as Tracfin is strictly an intelligence gathering service. Tracfin operates, within the framework of the French legal system, by conducting investigations rather than relying on “big data” although it uses several techniques.
Cases are analyzed using information stemming from SARs (“suspicious activity reports” in English, “declarations de soupcon” in French); 80 to 85% of such reports received come from financial institutions which are thus Tracfin’s main source. Tracfin’s job thus is to collect, cross reference, analyze and transform the information received into actionable elements which are then relayed to the police, prosecutors, the military and possibly international partners and/or financial institutions. Dalles believes an efficient system requires the flows of information to circulate both bottom up and top down. Tracfin has no judicial powers but can compel all economic entities, through requisitions, to answer its questions and provide additional information to build up cases.
Since the private sector, mostly banks, is the main provider of information, partnerships and close cooperation are essential. Guidelines (“lignes directrices”) are thus prepared in cooperation with the financial industry and its supervising authority, ACPR, which publishes them. Although the guidelines are not meant to impose mandatory rules, they lead to better understanding of risks involved and a closer coordination among partners. Regarding the fight against terrorism, Tracfin’s mission is to detect financial flows that benefit jihadists. It thus needs to identify not only the origin of funds but their real destination and what they are used for. As amounts involved in conducting terrorist activities could be relatively small, the key is to identify the “collectors” of funds and through them the individuals who are potential threats. Financial intelligence is a useful tool in fighting terrorism not only because it could lead to the arrest of criminals but also because it brings to light relations between individuals and organizations which could become bigger threats.
As terrorists use new payment systems, new surveillance systems need to be put in place. For instance, “Comptes Nickel” were created in France in February 2014 as easy to use “non-banking accounts” opened by tobacconists and could be almost immediately used to transfer funds. Tracfin lobbied the French authorities and obtained the mandatory listing of such accounts in FICOBA which is a consolidated data base of all bank accounts in France; all transactions through “comptes Nickel” could now be tracked by Tracfin. It also had a key role in the creation of reinforced identification requirements for prepaid debit cards. While the efficiency of financial intelligence has improved much more needs to be done; for instance many institutions and professions (such as lawyers) are involved in money and value transfers and, according to Dalles, should be submitted to disclosure and transparency requirements.
Finally, in the current global environment, financial intelligence could only be accurate and useful if information could be freely and speedily exchanged among Financial Intelligence Units, FIUs. In France Tracfin is one of the 8 officially recognized national intelligence agencies and has thus access to the information the 7 other sister organizations collect. It is also an active member of the Egmont group whose members are the FIUs of FATF countries. It advocates for increased national and international exchanges of information among professional units which need to do a thorough investigative job, not only check a SARs database. Other forms of cooperation including joint investigations should also be encouraged. While challenges are substantial, Tracfin is ready to confront them and work its heart out.
Marie Anne Barbat-Layani, CEO of the French Banking Federation (FBF, Federation Bancaire Francaise) reminded the audience of the longstanding commitment of French banks to fight terrorism under all its forms; her federation includes all 377 banks, including branches and subsidiaries of foreign institutions, which operate in France. This sector generates 370,000 jobs and loans outstanding of 2,089 billion euros. It takes its responsibilities very seriously and sent about 30,000 reports (SARs) to Tracfin in 2014, about 35% more than the previous year.
Banks in France follow regulations derived from FATF recommendations, European directives and specific French regulations. France recently instituted harsher rules, for instance all transactions with an amount of 1,000 euros or more need to be traceable (cash payments are no more acceptable); cash deposits or withdrawals in excess of 10,000 euros per month and per customer are systematically reported to Tracfin; all banking accounts must be registered in a central database, FICOBA; and anyone who wants to buy or sell foreign currencies in excess of 1,000 euros must show proper identification.
In the fight against terrorism financing, banks are required to identify not only the origin of the funds they handle but also their destination and intended usage; this presents specific challenges as the transactions amounts could be small and the number of transactions involved high; terrorism could be financed by “clean money” and apparently legitimate forms of financing such as consumer loans, crowd funding, participative financing, real estate loans could be used for criminal purposes.
Terrorists have some characteristics which have been analyzed by the FATF as well as the European Commission which issued on February 2nd a statement recommending specific controls to be transposed into laws and regulations by member States. In France a new bill to reinforce regulations to fight terrorism is currently being discussed by the Senate and the National Assembly; it will require proper identification, regardless of the amounts involved, for any usage of prepaid debit cards. It will also allow Tracfin to flag to the banks entities of special interest that require enhanced surveillance.
This top down approach is somewhat new as until now banks only reported to Tracfin in a bottom up flow of information and their policy was frequently to close immediately any account which could be a source of concerns. Tracfin will have the power to ask the banks to maintain open the accounts of suspicious individuals or entities. While the new regulations may increase the efficiency of the fight against terrorism financing, banks must be protected against the possibility of being sued and the targets and scope of Tracfin’s requests will have to be defined as precisely as possible.
The ongoing exchange of information and close cooperation with Tracfin and financial supervisors will be key factors to successfully implement the new measures. Barbat-Layani advocates for an ambitious plan of action at the European and international levels, an enlarged scope of the entities subject to surveillance which, for instance, currently does not include certain types of funds collectors and transmitters (“agregateurs”) and the extension of reporting requirements to entities outside the financial sector, such as social media operators, of which the role in terrorism activities has been established.
Christian de Boissieu, Chairman of Scientific Council, Labex ReFi, Professor of Economics and the University of Paris I and College of Europe and member of the Autorité des Marchés Financiers, AMF, (French equivalent of the American SEC) provided the concluding remarks. All speakers agreed that tracking terrorism financing is more complex than money laundering. Systems that are being put in place improve efficiency but some gaping holes need to be plugged:
- Relationships between micro and macro financing of terrorism need to be further studied; for instance what is the exact role(s) of some States, in the Gulf in particular, that at the same time profess to combat terrorism and provide through charities or otherwise financing and safe harbor to terrorists?
- What are the non-regulated mechanisms which are used for terrorism financing? Should practices such as the African tontine (a combination of participative funding and lottery), crowd funding through internet or some forms of real estate financing be better monitored by financial supervisors?
- The extraterritorial reach of American regulations and enforcement is explained by the dominance of the dollar, which represents 60% of the world monetary reserves (compared to 22% for the euro), and the absence of meaningful enforcement in other jurisdictions. But it raises sovereignty issues and could induce systemic problems, as was recently the case in Andorra, and gives an unfair advantage to American geopolitical interests. A more federal approach at the European level would be helpful to alleviate this problem.
- The Recommendations of FATF, which is the cornerstone of the fight against terrorism financing, could be supplemented by more direct bilateral instruments. OECD for instance has signed with a number of countries MOUs (Memoranda of Understanding) which helped to reduce corruption. A similar approach should be applicable to the fight against terrorism financing.
- Some electronic platforms may present new threats. For instance it was established that FX binary trading and sports betting platforms which are aggressively advertised could be used to fund illegal activities. A dialogue between financial supervisors and operators and sports authorities would better clarify the potential risks. As has already been the case in Belgium, regulators should consider the prohibition of platforms which could hide unacceptable potential threats.
- Lack of a global enforcement system. International cooperation is clearly required to efficiently fight a global threat such as terrorism financing. The Recommendations issued by FATF and other supranational organizations constitute a soft law which is the groundwork of international financial supervision. Yet there is no enforcement mechanism at the international level. There is still no coherent European position regarding enforcement and in practice a number of countries simply ignore international regulations. While a safer environment could only appear if soft law becomes “hard” law, we must be prepared to live in a dangerous world.
The conference ended with a reception offered by the sponsors. Participants certainly learned a lot about terrorism financing and the challenges it raises for financial institutions and supervising authorities. They also can fathom the improvements needed to be reassured.
Michel A. Perez, CAMS, MBA, JD candidate
Associate Director and Representative in the United States of Labex ReFi