The Cause of Misfire in Counter-Terrorist Financing Regulation
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UNIVERSITY OF CALIFORNIA RIVERSIDE Making a Killing: The Cause of Misfire in Counter-Terrorist Financing Regulation A Dissertation submitted in partial satisfaction of the requirements for the degree of Doctor of Philosophy in Political Science by Ian Oxnevad June 2019 Dissertation Committee: Dr. John Cioffi, Chairperson Dr. Marissa Brookes Dr. Fariba Zarinebaf Copyright by Ian Oxnevad 2019 The Dissertation of Ian Oxnevad is approved: ________________________________________________ ________________________________________________ ________________________________________________ Committee Chairperson University of California, Riverside ABSTRACT OF THE DISSERTATION Making a Killing: The Cause of Misfire in Counter-Terrorist Financing Regulation by Ian Oxnevad Doctor of Philosophy, Graduate Program in Political Science University of California, Riverside, June 2019 Dr. John Cioffi, Chairperson Financial regulations designed to counter the financing of terrorism have spread internationally over past several decades, but little is known about their effectiveness or why certain banks get penalized for financing terrorism while others do not. This research addresses this question and tests for the effects of institutional linkages between banks and states on the enforcement of these regulations. It is hypothesized here that a bank’s institutional link to its home state is necessary to block attempted enforcement. This research utilizes comparative studies of cases in which enforcement and penalization were attempted, and examines the role of institutional links between the bank and state in these outcomes. The case comparisons include five cases in all, with three comprising positive cases in which enforcement was blocked, and two in which penalty occurred. Combined, these cases control for rival variables such as rule of law, state capacity, iv authoritarianism, and membership of a country in a regulatory body while also testing for the impact of institutional linkage between a bank and its state in the country’s national political economy. Within cases, institutional linkages and independence are traced through the creation of histories for each bank, and its role in its home state’s political economy. These histories are developed using documentary data from court cases, bank publications, existing historical studies, economic studies, memoirs, government reports, and diplomatic data. This same data is used to examine the adoption of financial regulations designed to counter terrorist financing, and the defensive measures taken by states to defend their banks. The finding of this research concludes that institutional links between banks and their home states are necessary to block attempts at regulatory enforcement. The implications of this research are profound for both studies of international law and finance, as well as for issues of counterterrorism and security at the policy level. The key theoretical takeaway for questions of international finance is that state power continues to matter despite assertions of globalization and a neoliberal financial order. v Table of Contents Introduction………………………………………………………………………….1 Chapter 1: Enforcement Outcomes in Terrorist Financing Introduction……………………………………………………………………8 Theory………………………………………………………………………. 33 Hypothesis…………………………………………………………………... 35 Variables and Conceptualization…………………………………………… 44 Cases and Method…………………………………………………………... 48 Rival Hypotheses and Case Coding………………………………………… 49 Data…………………………………………………………………………. 54 Chapter 2: Bank of China Introduction……………………………………………………………..……56 The Development of the Bank of China……………………...……………...57 China’s Fortified Finance Regime………………………...…………………78 Bank of China and Blocked Enforcement…………………….……………..84 Analysis………………………………………………………………………94 Chapter 3: Al Rajhi Bank in Saudi Arabia Introduction………………………………………………….……………….97 Al Rajhi Bank, Legitimacy, and Regime Binding……………………...……98 Al Rajhi Bank and the Saudi Regulatory System…………………………..104 Counter-Terrorist Financing and Al Rajhi Bank…………………...………111 Blocked Enforcement………………………………………………………121 vi Analysis………………………..……………………………………………130 Chapter 4: Halk Bank of Turkey Introduction…………………………………………………………………134 Halk Bank and Statist Legacies…………………………………………….135 Partial Liberalization and Domestic Coalition Binding………………….…139 Fortified Finance in Turkey………………………………………...………147 Halk Bank, Iran, and Blocked Enforcement………………………………..155 Analysis……………………………………………………………………..173 Chapter 5: Institutional Independence and Regulatory Enforcement Introduction……………………………………………………………...….178 Enforcement Against BCCI……………………………………...…………179 Enforcement Against Arab Bank of Jordan……………………………...…200 Analysis………………………………………………………….………….225 Chapter 6: Conclusion…………………………………….………………………231 Bibliography……………………………………………………………………….245 vii List of Figures Chapter 1 Figure 1.1: Phenomena of Money Laundering and Terrorist Financing….…29 Figure 1.2: Formal Hypothesis………………………………………………35 Figure 1.3: Institutional Linkage……………………………………..………46 Figure 1.4: Enforcement Blockage………………………………..…………47 Chapter 4 Figure 4.1: Halk Bank Institutional Structure……………..………………..145 viii List of Tables Chapter 1 Table 1.5: Case Table………………..………………………………………51 Chapter 2 Table 2.1: Timeline of Regulatory Adoption in China…………….…...……79 Table: 2.2: Bank of China Terrorism Transactions………...………………..88 Chapter 5 Table 5.1: Arab Bank Hamas Account Transfers……………………..……220 ix Introduction International politics in the 21st century has thus far been characterized by terrorism and financial crisis. The new millennium’s optimism came to an abrupt halt in September 2001, when Al Qaeda hijacked jets and crashed them into the World Trade Center in New York, and the Pentagon in Washington DC. With nearly 3,000 casualties, few at the time could imagine that the literal fusing of capitalism’s epicenter and religious fanaticism in a fireball would open a new era of financial regulation. This new era of financial rules and geopolitics related to counter-terrorist finance (CTF) not only heralded the creation and expansion of a set of financial institutions worldwide, but was also driven by the power politics and security considerations behind them. The expansion of financial regulations designed to counter terrorist financing served to further integrate different countries into the American-led international financial system, and brought a liberalized financial system into direct conflict with the logic of national security. On the practical level, the expansion of these regulations mixed the market-oriented world of financial institutions and bankers with that of terrorists, spies, and law enforcement. Complicating matters further, the international prominence of the dollar and the origins of the CTF regime in a US legal system characterized by adversity brought other states and their banks into complicated issues of jurisdiction and hegemony. This research is about the efficacy of these regulations; and more importantly, the determinants of enforcement outcomes of these regulations when banks finance terror. 1 Since 2001 the research on threat finance has grown substantially; however, research on both anti-money laundering (AML), and CTF lacks theoretical cohesion, as well as a clear theoretical and analytical center. Largely due to divisions within political science as a discipline, work on threat finance has either focused on the political economy of regulatory growth and harmonization, or on the financing and resource management of specific terrorist groups. With scholarly attention divided between the financial regulatory world and terrorism, a focus on banks and financial institutions as actors, and their relationships to terrorist groups has been neglected. This inattention to banks leaves a theoretical blank spot for understanding the inner-workings of counter- terrorist financing institutions within the financial system. It is banks that connect the worlds of regulation and terrorist groups, and this connection warrants focusing upon them as a unit of analysis. Criminal organizations and terrorist groups have long used financial institutions for holding wealth, moving it around the globe, and laundering it to separate funds from illicit activity. Since the advent of AML/CTF rules in the 1970s, banks have also taken on the additional role of serving as instruments of security for the states that regulate them. Tasked with following customer due diligence rules, collecting data, adhering to sanctions regimes, and gathering financial intelligence, banks have emerged as the intersection of criminal and terrorist organizations on the one hand, and the states seeking to counter them on the other. With banks comprising the central actor involved in the phenomenon of threat finance, this lack of scholarly focus on them as a unit of analysis leaves significant questions unanswered. 2 Regarding terrorist financing and CTF, literature focused on the regulatory side of the equation outlines a contradictory understanding of the effectiveness of such institutions. At the international level, an image emerges of profound regulatory harmonization and deepening. Beginning in the 1980s onwards, great powers and financial centers pioneered the development of financial regulation as a means of advancing security against the threat of transnational crime and terrorism. Embodied first in the domestic regulatory regimes of the United States and United Kingdom, such institutions quickly spread across the industrialized world, despite overall