NORTHWESTERN UNIVERSITY Follow the Money: Transparency

NORTHWESTERN UNIVERSITY

Follow the Money: Transparency, Risk, and Financial Regulation in the Age of Terror

A DISSERTATION

SUBMITTED TO THE GRADUATE SCHOOL IN PARTIAL FULFILLMENT OF THE REQUIREMENTS

for the degree

DOCTOR OF PHILOSOPHY

Field of Sociology

Anna Hanson

EVANSTON, ILLINOIS

June 2017 2

3 ABSTRACT

After 9/11 there was a shift in the rhetoric surrounding counter-terrorism. Suddenly, the language of risk, security and prevention was being utilized to justify a new set of global financial regulations headed up by international organizations such as the United Nations, The

Financial Action Task Force, and the IMF/World Bank. This project sits at the nexus of finance and security, and argues that the fight against terrorism financing has important implications not just within the security realm, but for everyday financial practices and the ways in which global financial flows are understood and governed. In other words, how do regulators and financial actors govern, monitor, and hopefully prevent the financing of terrorism, without hindering the facilitation of global financial flows? From a broader perspective, analyzing the shift to the use of financial data in order to help fight terrorist financing touches upon much broader themes; the relationship between transparency, liberalization and re-regulation of financial markets, the proliferation of privatized power and the relationship between freedom and security. This dissertation adopts the governmentality (Foucault 2007) approach in order to analyze how terrorism financing is governed, or in this case prevented, through the monitoring and eventual determination of whether basic financial activities can be considered ‘normal’ or

‘suspicious’, and what are the unintended consequences of such a system that ultimately comes to view everyone as suspicious?

4 ACKNOWLEDGEMENTS

There are several people who provided insight, guidance, support and friendship throughout this dissertation process, and I want to take a moment to thank them. First off, I want to thank Patricia Parker and John Hagan for suggesting all those years ago that I think about pursuing a PhD at Northwestern. Without their belief and support this would not have been possible. I am deeply grateful for the mentorship and support I received over the years. I want to thank my advisor John Hagan for introducing me to the world of criminology and international criminal law, and for always encouraging my idea that transnational anti-terrorism financing regulations were in fact a ‘sociology problem’. John’s work has been a constant source of inspiration, and I am incredibly grateful for the opportunity to not just study under him, but to collaborate with him on numerous publications as well. I want to thank Grégoire

Mallard and Ron Levi for their guidance and support. Not only did they take an interest in my work, they were always available to not only offer advice and constructive criticism, but words of encouragement that I was in fact going down the right path as well. Thanks to Bruce

Carruthers for agreeing to be a reader for this project and for providing insight and constructive criticism when needed.

I would also like to thank my family, because without their love, support, and unwavering belief that I could achieve anything I put my mind to, I would not be where I am today. I also want to thank from the bottom of my heart the members of my cohort, I could not have asked for a better group of people to share this experience with. The friendships that were developed throughout my time at Northwestern were a constant source of inspiration,

5 comfort and enjoyment. They provided the most incredible support system, and I can say without a doubt that this dissertation would not be possible without them. I would especially like to thank Iga Kozlowska, Alka Menon, Hannah Wohl, Kang San-Lee, Marcel Kundsen, David

McElhattan, Yuhan Jao, and Anthony Johnson, and Carlo Felizardo.

Finally, I would like to acknowledge the support, both institutionally as well as financially, that I received from the Sociology Department, the Buffett Institute, the Graduate

School of Northwestern, and the École doctoral of SciencesPo.

6 LIST ACRONYMS AND ABBREVIATIONS

ACLU American Civil Liberties Union

AIAI Al-Ittihad al-Islamiya

AML Anti-Money Laundering

AML-CTF Anti-Money Laundering-Counter-Terrorism Financing

AQAP Al-Qaida in the Arabian Peninsula

BBC British Broadcasting Corporation

BIC Bank Identifier Code

BSA Bank Secrecy Act

CDD Customer Due Diligence

CIA Central Intelligence Agency

CTF Counter-Terrorism Financing

CPA Coalition Provisional Authority

CTC Counter-Terrorism Committee

DPA Deferred Prosecution Agreement

EU European Union

FARC Revolutionary Armed Forces of Columbia

FATF Financial Action Task Force

FBI Federal Bureau of Investigation

FIU Financial Intelligence Union

7 FinCen Financial Crimes Enforcement Network

FSRB FATF-Style Regional Bodies

HLF Holy Land Foundation

ICE Immigration and Customers Enforcement

IEEPA International Emergency Economic Powers Act

IMF International Monetary Fund

IVTS Informal Value Transfer Systems

KYC Know Your Customer

KYCC Know Your Customer’s Customer

MSB Money Service Business

NCCT Non-Cooperating Countries and Territories

NSA National Security Agency

OCC Office of the Comptroller of the Currency

OFAC Office of Foreign Assets Control

PEP Politically Exposed Person

PI Privacy International

PNR Passenger Name Records

ROSCs Reports on the Observance of Standards and Codes

STR Suspicious Transaction Reports

SWIFT Society for Worldwide Interbank Financial Telecommunication

8 TFTP Terrorism Financing Tracking Program

TFTS Terrorism Financing Tracking System

TIDE Terrorist Identities Datamart Environment

UAE United Arab Emirates

UNSCR United Nations Security Council Resolution

9 Table of Contents ABSTRACT ...... 3 ACKNOWLEDGEMENTS ...... 4 LIST ACRONYMS AND ABBREVIATIONS ...... 6 Table of Contents ...... 9 List of Figures ...... 11 INTRODUCTION ...... 12 Combating Terrorism Financing: The Invisible War ...... 14 Theoretical Framework: Transparency and Governmentality ...... 19 Methodology: ...... 24 Documentary Research and Textual Analysis: ...... 25 Expert Interviews: ...... 30 Chapter Overview: ...... 34 Chapter One: From Al Capone to Osama Bin Laden: The Historical Narrative of AML/CTF ...... 36 The Genealogical Method: ...... 36 “If You Can Tax It, You Can Regulate It” ...... 38 Money Laundering and The Seizing of Assets ...... 41 The Rise of Neoliberal Economic Policies: ...... 45 “A New Penology” ...... 48 Exporting US Reporting Rules ...... 51 The Sanctions Decade ...... 54 Popular Discourses on Terrorism Financing: ...... 59 FATF and IMF Involvement in AML/CTF: ...... 68 Conclusion: ...... 73 Chapter Two: Hawala Networks and the Push for Transparency and Legibility ...... 74 Transparency and the Neoliberal Economy: ...... 75 Hawala-An Ancient Network: ...... 77 “A Banking System Built for Terrorism” ...... 79 Waging ‘Financial Warfare’: ...... 85 The Targeting of Al-Barakaat ...... 92 Regulating the Informal: ...... 104 “So, Mr. Bremer, Where Did All The Money Go?” ...... 111 CONCLUSION: ...... 116 Chapter Three: “Money Trails Don’t Lie”: Technology, Data-Mining, and Risk Assessment .. 117 Financial Data in a Post-9/11 Order ...... 117 Financial Datamining: ...... 119 No, Not That Charles Taylor: The Problem with False Positives ...... 123 ‘Most’ Americans Would Not Be Banking There ...... 133 Deviations from the Norm ...... 135 Conclusion: ...... 139 Chapter Four: Risk of What? De-risking and Expertise ...... 140

10 Cracks in the Network: De-risking ...... 142 What is Driving De-Risking? ...... 145 Perceived Risk: ...... 147 ‘Operation Choke Point’ ...... 152 Increases in the Cost of Compliance ...... 154 Increased Fines and Criminal Charges ...... 157 Reputational Concerns ...... 158 ...... 158 Holding Those Responsible Accountable ...... 160 Client Profitability ...... 162 Mapping out the Existing Narratives ...... 166 From Trust in Numbers to Trust in Experts? ...... 171 Conclusion ...... 178 References ...... 180

11 List of Figures

Figure 2.1: Hawala Alternative Remittance System & Its Role in Money Laundering ...... 84 Figure 2.2: Hawala Ledgers (A) ...... 94 Figure 2.3: Hawala Ledgers (B) ...... 94 Figure 2.4: Typology 6 Regulatory Investigation Detects and Disrupts Terrorist Activity ...... 100 Figure 2.5: The Remittance Dillemma ...... 104 Figure 3.2 AML Software Slide (A) ...... 152 Figure 3.3 AML Software Slide (B) ...... 153 Figure 4.1 “Hail King Lawsky” ...... 202

12 INTRODUCTION

Money is the lifeblood of terrorist operations. Today, we're asking the world to stop payment.

—President George W. Bush (2001)

For money is the oxygen of terrorism. Without the means to raise and move money around the world, terrorists cannot function.

—Colin Powell, US Secretary of State (2001)

On June 30 2014, the New York Times ran an article titled “A Grieving Father Pulls a

Thread That Unravels BNP’s Illegal Deals”. The article, which more closely resembles a plot from a John le Carré novel, begins its story in 2006, when the Manhattan district attorney’s office stumbled upon an obscure lawsuit. This lawsuit was filed by a grieving father who blamed Iran for financing a terrorist attack in Gaza that killed his daughter. More specifically, the father claimed that a charity which owned an office tower on Fifth Avenue, was actually a ‘front’ for the Iranian government (a claim the prosecutors were later able to verify) (Silver-Greenberg and Protess, 2014).

The discovery of this law suit led prosecutors to the realization that international banks such as BNP Paribas, Credit Suisse and Lloyds, had acted as Iran’s conduit into the United States financial system. In an attempt to hide the illegal transactions, Credit Suisse and Lloyds exchanged the Iranian clients’ names from wire transfers to the Fifth Avenue charity, and affiliated entities (Silver-Greenberg and Protess, 2014). Throughout the course of the

13 investigation authorities discovered countless documents that perfectly illustrated exactly how

Iranian banks were funneling money into the United States. To avoid detection, the banks falsified money-transfer paperwork, replacing the name of the Iranian bank in question with their own. “Please do not mention our name to any bank in the USA” one Iranian bank wrote to

Lloyds in one of the documents obtained by prosecutors (Silver-Greenberg and Protess, 2014).

Interestingly, during this time the Justice Department’s criminal division in Washington had its own separate investigation into Credit Suisse. The inquiry from the division’s asset forfeiture and money laundering section began with a tip from an IRS agent who had spotted a suspicious transaction. These separate investigations turned into a collaborative effort in 2007, when a lawyer from the district attorney’s office had lunch with a Justice Department Official.

Out of this meeting emerged a plan to go after no only Credit Suisse and Lloyds, but other foreign banks suspected of bypassing US sanctions (Silver-Greenberg and Protess, 2014).

In 2009, prosecutors launched a series of cases, first taking aim at Lloyds and then Credit

Suisse. Barclays settled in 2010, laying the groundwork for ING, Standard Chartered and HSBC to come up with their own deals in 2012. As the article states “It is a cautionary tale of how

European banks, spotting a lucrative business opportunity that American rivals shunned, opened their doors to countries under sanctions and ultimately exposed their reputations to the stain of criminal cases…The twists and turns leading to the BNP case-a series of whistle blower tips and fortuitous discoveries recounted in interviews with current and former prosecutors-open a window into the interconnected yet shadowy world of global finance…and how a local prosecutor’s office in New York, perhaps better known for crackdowns on drugs and organized

14 crime, landed in the middle of an international investigation into terrorist bombings and foreign banks” (Silver-Greenberg and Protess, 2014).

I open with this story, in part because reading it for the first time in 2014 provided me with the idea for this entire dissertation project, but also because what this article illustrates is the co-mingling of finance and security with which this project is concerned. And while this co- mingling, particularly as it pertains to terrorism does not start with the attacks of 9/11, the preoccupation with terrorism as a major national security threat, has led to the so-called money trails of suspected terrorists emerging as a major issue with regards to security. More generally, the premise that “stopping terrorism starts with stopping money” because money provides the ‘blood-flow’ of terrorism has become the modus operandi of Western nations since 9/11 (Atlas and Mayeda, 2015). Moreover, the steps taken towards fighting terrorism financing is based upon a notion of preventative logic. The idea behind prevention allows for the possibility, or almost a guarantee, of identifying terrorists and their networks through financial data and stopping the attacks well before they happen (Atlas and Mayeda 2015). In other words, the appeal of using financial data is that specific actors and or targets can be identified despite the ever-changing nature of the ‘enemy’.

Combating Terrorism Financing: The Invisible War

Immediately after the terrorist attacks of September 11, 2001, government officials, policy makers and those working in law-enforcement began emphasizing the importance of combating terrorism financing as they considered money necessary for terrorism to occur. This

15 argument has often been illustrated by the fact that the 9/11 hijackers needed money for travelling, flight training and to cover living expenses (National Commission on Terrorist Attacks upon the United States, 2004). A similar story can be told of those who planned and ultimately carried out the 2005 London attacks. Those terrorists purchased materials to make the bombs, paid rent for a flat, hired a car, and needed money to travel throughout the UK (UK House of

Commons, 2006, p. 23). What followed, was the shared understanding, or at least agreement, that without money terrorist attacks would be next to impossible to plan and carry out, and therefore, as President Bush stated in the aftermath of 9/11 “the world needed to stop payment” (Bush, 2001b).

If one believes that money is an absolutely necessary component for terrorist organizations, then the logical step in tracking international terrorist organizations and ultimately thwarting their plans is to target their finances. Essentially, the argument is that their financial transactions may uncover the identity of those operating within terrorist cells, as well as providing law enforcement with the ability to uncover targeted locations before terrorist acts occur. By following the ‘money trail’ financial investigators claim to be able to disrupt entire terrorist networks. In the words of one former Treasury expert:

“When people think about intelligence, they think about James Bond and running operations against the Russians or the Chinese, and that still goes on and we shouldn’t diminish the importance of it…But if you’re looking at the other types of organizations in the global community that are causing problems for the United States and its allies, a lot of them are non-state actors, they’re criminal syndicates, they’re narcotics syndicates, they’re transnational terrorist syndicates, and the best way to figure out how these

16 organizations work, who’s part of the organizations, and the best way to degrade those organizations is follow the money” (Swift, quoted in Atlas and Mayeda, 2015).

In addition, law enforcement and regulators view financial information as far more reliable than other forms of intelligence (Biersteker and Eckert, 2008, p.2). This is generally because financial data can be analyzed prior to attacks being committed, and there is a belief that all money transfers have a purpose.

Based on these ideas the list of measures and regulatory policies to combat terrorism financing was expanded. This form of terrorist prevention can be thought of as preventative, which is achieved through combing through incredibly large sets of personal information with the assistance of private actors (in most cases bankers) and smart technologies. Essentially, this approach can be described as follows: Banks and other financial actors have large quantities of data on their customers, including, but not limited to: names, gender, passport number, place and date of birth, bank account and credit card numbers, as well as information about the amount, and destination (to and from) of financial transactions. These data are monitored and analyzed by software programs which were often times initially developed for commercial purposes, using techniques such as profiling, data-mining, social network analysis, risk analysis, and other predictive analytic methods. With the use of these programs, unusual or suspicious transactions can be identified and flagged for further analysis by either compliance officers within banks or (if the transaction is considered to be particularly suspicious or concerning) law- enforcement officers and intelligence agencies. In many instances, law enforcement also has

17 the ability to request data from banks in order to compare this information with other databases and sources of information.

Well over a decade after 9/11, targeting the money of terrorist organizations is considered to have a “proven effectiveness” (European Commission, 2011, p.1). Despite this assertion, the practices of tracking terrorism financing are still incredibly opaque. There is still much that we do not know regarding not only the professional practices of these actors, but the social, political and economic implications of using financial data in order to track and prevent terrorism. If juxtaposed with the more overt military operations that were designed to, as President Bush stated, “smoke terrorists out of their holes” (Bush, 2001a), the war on terrorism financing is:

“A war that no one saw. There was no bloodshed, no guns and no soldiers…This war is fought with bank accounts and financial transactions…tracking and attempting to dismantle terrorist organizations or rogue nations” (The Washington Post, 2011).

When it comes to the war on terror there are considered to be two separate sides to the coin.

On the one hand there is the brutal and violent war on terror which is best represented by the invasion and occupation of Iraq and Afghanistan which resulted in the death of thousands and the torture and wrongful imprisonment of terror suspects. On the other side is the more respectful (at least of basic human rights) preventative approach which uses technology and software to analyze data and produce targets and suspects before acts of terror are committed.

18 This dissertation seeks to complicate this narrative and aims to assess the assumption on which the measures and regulations designed to fight and prevent the financing of terrorism are based upon. The New York Times article referenced at the beginning of this introduction also helps to raise a number of questions concerning the practices of finance and security that are explored throughout this dissertation. The main problem this dissertation is concerned with is how terrorism, this ambiguous object is turned into an object of financial risk management without blocking the global-financial system? More specifically, how does terrorist finance come to be seen as a political problem which in turn allows for the categorization of financial behavior as either ‘normal’ or ‘suspicious’? How does the tracking and prevention of terrorist financing allow for the creation of new forms of governing that extend far beyond the war on terror and effect the everyday financial lives of the average citizen? The regulatory regime developed in the aftermath of 9/11 co-opts the financial sector and forces them to become involved in the monitoring of citizens and everyday financial activities in the name of terrorism prevention. What are the unintended consequences of outsourcing ‘terrorism prevention’ to financial institutions and private companies? Moreover, what are the implications of deciding who and what is either suspicious or normal when those decisions are made by financial actors, not trained in the world of national security?

This dissertation argues that the fight against terrorism financing has important implications not just for security practices, but for everyday financial practices and the ways in which global financial flows are understood, governed, allowed, and intercepted, as well.

Combating terrorism through the analysis of everyday financial flows can be thought of as part of larger sociological themes such as the liberalization and financialization of markets, and the

19 relationship between the need for national security versus the right to privacy. In order to understand the relationship between counter-terrorism financing and the broader sociological themes listed above, this dissertation utilizes the theory of governmentality. The Foucauldian idea of governmentality refers to the types of thought that lie beneath the surface of governance. From a scholarly perspective, it suggests exploring and examining the techniques of governing. More specifically, the governmentality approach recommends observing and understanding the ways in which institutional procedures are used to exert power. When using this to think about counter-terrorism financing, one must look at not just the operational practices of counter-terrorism, but the decision-making process that led to the development of these regulatory and operational guidelines as well. Finally, a governmentality approach can be used in order to understand how power is developed and utilized, and ultimately figure out what exactly is being governed (and how) with regards to counter-terrorism. As Amoore (2008) argues, these are necessary questions, because security precautions that are based on the monitoring and analyzing of everyday financial transactions, and the classification of normal versus suspicious upon which they are based, have very real and lasting social, political, and economic implications.

Theoretical Framework: Transparency and Governmentality

As previously stated, this dissertation utilizes a governmentality approach when thinking about the field of counter-terrorism financing. This section discusses the concept of

‘governmentality’ which Michel Foucault introduced in his 1977-1978 lectures at the Collège de

France entitled “Security, Territory and Population” (2007, p.115). During his lectures, Foucault

20 did not provide a finalized or specific framework of governmentality. Instead he made suggestions with regards to the direction future research should take. Following Foucault’s suggestion, numerous scholars have carried out research using the concept of governmentality either more generally, or following more closely the definitions given during the lectures. For those who utilize the concept of governmentality in a more general way, this theoretical approach is used to understand the ways in which power is ultimately shaped and used. From this perspective, scholars believe Foucault to be interested in asking what exactly is being governed, and how is that governance ultimately achieved. Being a combination of the words

‘government’ and ‘rationality’, governmentality highlights the motivations, or rather the principles that make-up the tangible practicalities of governing. It examines how governing involves the “production of particular truths,” using specific representations, knowledges, and expertise, and “how the history of these truths offers critical insights about the constitution of our societies and our present” (Larner and Walters, 2004, p.2).

For those who take the more structured approach, in his lectures Foucault offered a more specific understanding of governmentality which could be thought of as a process that can be traced back to eighteenth-century Europe. In this context, governmentality can be understood as:

“The ensemble formed by institutions, procedures, analyses and reflections, calculations and tactics that allow the exercise of this very specific, albeit very complex, power that has the population as its target, political economy as its major form of knowledge, and apparatuses of security as its essential technical instrument” (Foucault, 1991, pp. 102- 103).

21 Following this definition, governmentality is a form of exercising power that is still relevant today. As Foucault argued, “we could say that sovereignty is exercised within the borders of a territory, discipline is exercised on the bodies of individuals, and security is exercised over the whole population” (Foucault, 2007, p.11). In other words, the main goal of this form of power is to guarantee the survival of the state by governing its citizens through various forms of security.

Using the approach of governmentality in order to analyze and understand counter- terrorism financing is in line with this definition of governmentality. What this means, is that one must consider counter-terrorism financing as a way of exercising a specific kind of power, and analyzing and understanding the mechanisms, regulations, and other tactics that are deployed in its name.

The exercise of power through procedures and regulatory practices can be thought of as techniques of government, although Foucault did not exactly define these terms during his lectures. Examples of these techniques of government are, for instance, norms, regulation, and discipline. Fejes (2008) argues that the arts of government in relation to security can be thought of as practices designed to influence the actions of citizens by manipulating their desires, aspirations and beliefs. This manipulation can be seen through the creation and deployment of rules and regulations designed to formalize or standardize the ways in which people act.

Larner and Walters (2004) have made an important contribution to the debate by extending the notion of governmentality, which they argue has focused primarily on the exercise of power within states. Larner and Walters argue that the concept of governmentality should not be thought of as simply limited to within specific nation states. Instead, they argue

22 for a more transnational approach to governmentality, and that thinking of this concept in these terms allows for the ability to “focus[e] more fully on the various ways in which governance at the level of the world has been problematized” (Larner and Walters, 2004, p.5). A transnational approach to governmentality allows one to analyze power relations beyond the confines of the nation-state, while at the same time considering the effects of socio-economic and political situations. Moreover, with regards to counter-terrorism financing, thinking about governmentality from an international or transnational perspective allows one to widen the scope of analysis and consider a larger group of actors that otherwise would not be considered if the scope of analysis was limited to within nation states. In the words of Larner and Walters, it involves “problematizing the constitution, and governance of spaces above, beyond, between and across states” (2004, p. 2).

Similarly, when examining how Foucault’s theory of governmentality helps one to understand global economic practices, Best (2007), argues that Foucault’s insights cannot just be taken and directly applied to the international realm. Instead, they must be re-articulated within the new context. In doing so, one can see that the concept of governmentality is particularly helpful in making sense of the patterns of power beyond the state. Moreover, with the recent changes in global economic governance strategies, governmental logics are becoming increasingly prevalent. Several elements in World Bank and IMF mandates are suggestive of governmental strategies and help to make sense of their eventual involvement and the shaping of anti-money laundering/counter-terrorism financing mandates. Their emphasis on global standards illustrates the increasing influence of non-judicial norms (Babb and Chorev, 2009). Moreover, the call for global standards has been justified in both economic

23 and political terms. Best (2007) argues that while the idea of ‘best practices’ is often represented as neutral and technical, it actually involves defining practices in a given area- judging what is both good and normal. This standards-setting exercise thus involves the imposing of a set of norms developed by some states onto others. These norms, moreover are themselves political. They are not simply attempting to shape economic policies but to restructure the legal and political institutions that make them possible (Best 2007, p. 94). As

Fourcade and Woll illustrate (2013), Karl Marx argued that all economic struggles invite moral struggles, or at the very least disguise themselves as such, however, they argue that the reverse is true as well: “deep moral-political conflicts may be waged through the manipulation of economic resources.” Moreover, they have argued that policy decisions (including what to investigate and by which criteria to evaluate) are always political choices that more often than not affect the distribution of economic power throughout society (2013, p. 3). Moreover, this can be thought of as a type of liberal governmentality that works through the social, political and economic realm to achieve the desired results and thus gain some form of legitimacy

(Seabrook, 2006).

The question that needs to be asked is how are these norms imposed? What scholars have shown is that instead of through coercion, norms are implemented through forms of soft- power that usually involve assessment of state’s compliance, through organizations such as the

IMF and World Bank (Best 2007). A feature that is of vital importance when discussing counter- terrorism financing regulations. The proliferation of agencies that monitor the behavior of individuals, corporations, or nations with respect to debt, transparency, or honesty is a moral project and is completed in the name of economic expansion and democratization. Thus, as

24 Fourcade (2013) argues, the neoliberal economy is thus a governmentalized economy shaped by organizations tasked with surveillance of every day financial activity.

Thinking of fight against terrorism through this lens, any analysis must be broadened beyond decision-making institutions on the national level, to the understanding of a transnational field also encompassing international organizations such as the FATF and the IMF, as well as institutions within nation-states such as police and intelligence agencies. The governmentality approach also recognizes that non-state actors such as businesses, experts,

NGOs, and citizens are all engaged in forms of governmental activity, both in relation to themselves and to others (Barry, 2004, p.196). The inclusion of transnational actors such as the financial /banking sectors into this theoretical framework is incredibly valuable, as private actors are increasingly expected to make what amounts to security decisions (through the categorization of normal versus suspicious behavior) and thus are inadvertently or not involved in the war on terror. The theory of governmentality, and the governmentalized economy more specifically, makes it possible to study the complex forms of governance that extend from retail banks to international regulatory bodies such as the United Nations Security Council in the name of counter-terrorism.

Methodology:

The discussion of governmentality and more specifically the governmentalized economy leads to the focus of the research, and which the methodological framework has been based upon. First, the theoretical use of governmentality forces one to focus on operations and

25 practices, which in turn requires one to ask the question of how problems emerge and are ultimately defined and solved?

Techniques of governing are a second research focus. As previously stated, Foucault’s definition of governmentality requires the study of governing practices. When thinking about this through the lens of counter-terrorism financing, the question that should be asked is exactly what kinds of behavior and whose money is to be monitored and flagged as concerning?

More specifically, what kinds of regulatory best practices were developed in order to fight the proliferation of terrorism financing? And finally, what are the political and socio-economic implications of these practices? The following paragraphs explain the choice for documentary research, textual analysis, and elite interviewing as the research methods as they pertain to the questions listed above. More specifically, the following sections illustrate how each research method was utilized and what the benefits and drawbacks of each method are.

Documentary Research and Textual Analysis:

In addition to the use of secondary literature provided by academic sources, this dissertation is based on extensive primary document analysis. This includes the analysis of: official reports from international organizations (such as the IMF, the Financial Action Task

Force, the World Bank) as well as government agencies (such as United States Treasury office), press releases, political statements, laws, policy documents, (transcripts of) congressional/parliamentary hearings and debates, international news articles, published memoirs from former government officials, and finally, classified documents released by

26 Wikileaks (the use of Wikileaks for the purposes of this dissertation will be discussed at greater length below). These have been incredibly valuable sources for examining and understanding the way in which counter-terrorism financing has been operationalized. Primary document research helps in the reconstruction of events, tracing the ways in which decisions were made, and examining and analyzing a wide array of opinions, arguments, and concerned held by the various actors involved in the field of counter-terrorism financing. Moreover, documentary analysis helps one to understand the various techniques that have been deployed in the name of governance. For example, examining regulatory and/or legislative texts illustrates what the required measures banks and other financial actors have to take in order to be in compliance with the law.

With regards to the importance of these documents, it is important that authenticity be established. However, this is more a concern for historical archival documents. For the purposes of this specific dissertation project, most (if not all) the documents used in this thesis were recently written and were available either through libraries or through the official websites of the various institutional actors or media outlets. In other words, the authenticity of the primary documents has not been a matter of concern for this project.

Another issue that one should think about is the representativeness of the document.

This issue has been especially important with regards to the textual analysis discussed below.

With regards to this dissertation, research was conducted on a wide range of actors and institutions, using not only public databases, but internet search engines as well. Nevertheless, with the exception of Wikileaks (which again, will be discussed below), it should be noted that

27 only official and publicly available documents have been utilized. Internal correspondence, minutes, and other personal memos fall beyond the scope of this research.

Moreover, this dissertation utilized a wide variety of media sources. This was done for two separate reasons. With regards to issues of counter-terrorism the bulk of the information available has been published by the press, and in many instances, journalists were responsible for initially revealing secret government finance tracking programs (see the SWIFT affair which will be discussed in greater detail later on in this dissertation), as well as being the first to publish documents related to Wikileaks. While other sources, including political debates, international agreements, court decisions, and the analysis of the interactions between various actors within the field of counter-terrorism finance are also taken into account, often times these sources provide a less all-round view of specific events, regulatory practices, and debates being had within this field. Moreover, a comprehensive analysis of these media sources often times shed-light on important actors, events and even important quotes that were utilized in my eventual discussions.

With regards to how the actual searches for newspaper articles were conducted, I began by using Lexis-Nexis newspaper database. This database contains all major and regional newspapers for the United States, Europe, Canada, and Asia. However, after initial key-word searches, I realized that the search engine was actually leaving out key articles from a variety of newspapers, and decided I would be better served by conducting manual searches. I focused my efforts on the following major newspapers/media sites: The New York Times, The

Washington Post, The Wall Street Journal, The LA Times, American Banker, The Guardian, The

28 BBC, The Independent, and Le Monde. Articles were selected through searches using key phrases such as banking data, hawala, de-risking, the SWIFT affair etc. as well as the names of key individuals. One last comment with regards to the document research listed above, is the fact that organizations’ official documents usually disregard social interaction and struggles, as they are considered irrelevant or undesirable for the final version of the document. For this reason Atkinson and Coffey (2004) have argued that documents have a distinctive ontological status, in that they form a separate reality, which they refer to as a “document reality.” In order to complement and question the “document reality” official classified documents and memos leaked through Wikileaks, as well as interviews with key experts have been carried out.

With regards to Wikileaks, given the ‘sensitive’ nature surrounding these documents and the conflicting opinions regarding the ethics of using leaked documents I felt it necessary to briefly discuss the use of leaked documents, and my position on the matter. Gabriel J. Michael

(2015), published an article titled “Who’s Afraid of Wikileaks? Missed Opportunities in Political

Science Research”, and in this article, he argues that despite the “unique and valuable data” provided by Wikileaks scholars, in this case predominantly political scientists, have been incredibly hesitant in using leaked documents in their research. He posits that the two main reasons why scholars remain skeptical is that 1) there are concerns regarding the data quality and the legal/professional consequences and 2) some believe there is no added value for research. With regards to the first argument, issues regarding data quality and biases are no more of a concern than they would be for other mainstream data sources (Michael 2015).

Moreover, the United States Government has never denied the validity of these documents, and has gone as far as to court-martial Chelsea Manning (then Bradley Manning) of violations of

29 the Espionage Act, after giving Wikileaks almost a million classified documents. The argument can be made that these court martials amount to a tacit acknowledgement of the validity of the documents. However, it is important to note that there are actual legal concerns for those scholars who have a working relationship with the United States Government, or who have (or may want) security clearance, namely this concerns breach of contract issues. However, as I am not American, and do not have a working relationship (or will have one in the future) this does not apply directly to myself. Moreover, for broader concerns over the legality of the use of these documents I will simply argue that scholars are not the ones stealing the information, nor

(as far as I know) being given the information directly by a government official, who would be in breach of their contract and acting illegally. Personally, if I had been given information throughout the course of my research that I felt as though would have put the official in breach of contract, I simply would not have used it. Moreover, Wikileaks has been reported on extensively by major newspapers prior to academic use, and if legal action were to be taken, it would have likely been against the Guardian or the New York Times, as they were the first to report on the leaked documents.

With regards to the ‘value added’ argument, I concur with Michael’s (2015) argument that the cables are a fantastic source for any scholar interested in policy analysis and international relations/law. An analysis of the cables can help to reveal processes, concerns, disagreements between various parties, strategies as well as actor’s interpretations. And while I never directly mentioned my use of Wikileaks in any of the expert interviews that I conducted, an analysis of these documents helped to inform some of the questions that were eventually asked.

Expert Interviews:

Qualitative interviews have been a preferred methodological tool for understanding the construction of meaning in, as well as the practices and struggles of, the professional field of governing terrorism financing. This form of interviewing, otherwise known as “relational biographies” helps to discover the reasoning, motivations, attitudes and opinions of the respondents with respect to a certain subject (Dezalay and Garth 2002). Qualitative interviews are also useful to unfold the content and pattern of daily practices and experiences, and can provide insights into organizational and institutional processes (Dezalay and Garth 2002).

However, it is important to note, that there is an issue with regards to how to treat what experts say (this applies to texts as well) about what they do and what they say about why they do the things that they do. The question then becomes, what do you do with this discourse?

There is one fairly obvious answer, which is the treatment of the performance, and here the usual cautions apply, such as do not necessarily take everything at face-value and cross-check.

However, there is a set of temptations to dismiss what experts say as just talk, or rather as just tautology. But this is not a useful guide when dealing with expert discourse. There can be a temptation to limit oneself and simply say that this is just their perspective, the way they give meaning to what they are doing. Or in other words talk is simply a way to give meaning to one’s experience. In this instance, narration is simply a polite way of saying fiction.

I prefer the formulation that Foucault gives. He argues that what he studies are practices, more specifically, he states that “practices are the places, what is said and what is done, rules imposed and reasons given the plan and to take it for granted meet and interact”.

31 (Foucault 1991, p. 76). To convert a task into expert language is already doing something- you are framing it, acting it or performing it in a specific manner. There are also other ways to think about one is doing, for instance, are they assigning blame. Blaming or criticizing is an action that activates a particular kind or a smaller genealogy of the way the world is ordered and is a means of allocating worth to different actors.

The interviews carried out for this research project have been incredibly valuable in reconstructing the social interaction that has taken place between different participants in the field of governing as produced through the fight against money-laundering and terrorism financing. They provided insight into the self-definition of participants in the field and the problems they encountered. The interviews provided information about the way in which issues have been solved, how ideas were developed, and how they remained as flashpoints of contestation. Interviews were also an important tool to understand how regulations for combating terrorism financing have been translated into daily practices and how the technologies used for this purpose operate.

In practice, the interviews were semi-structured around a set of major open-ended questions in order to guide the conversation. The advantage of semi-structured interviews is that they allow the interviewer to “alter the sequence of questions and probe for more information” (Gilbert 2008, p.246). They also leave more freedom for the respondent to illustrate his or her answers with examples or stories or to branch off into related issues. The questions of the interviews can be divided between a base set of formal introductory questions and then thematic questions that were asked of everyone. For example, most interviews started with background questions that involved educational experience, previous work

32 experience and then questions such as “Can you describe your role in [organization X or situation Y]? After establishing the role and practices of the interviewee, other general questions were asked such as “Do you believe that security practices based on financial data will remain of key importance in the future?” Furthermore, because I was dealing with multiple interviewees from a variety of institutions, I was conscious of having a common thread throughout the interviews in order to better create a dialogue. That being said, with the experts

I interviewed within the regulatory institutions I focused questions around a specific practice

(hawala networks) as well as de-risking practices focused around specific countries (such as

Somalia). In addition, more tailored questions were asked in relation to the particular function and expertise of the respondent. For instance, when speaking with compliance officers I asked

“When would you send a suspicious transaction report to the Financial Intelligence Unit?”

For the purposes of this research project, 30 interviews with key persons were carried out. I spoke with 17 individuals from international regulatory bodies which included the IMF, the World Bank as well as the FATF. Seven interviews were conducted with government (three current and four former) officials from UK/ US Treasury Departments as well the European

Commission. And finally, I conducted six interviews with financial experts working in compliance departments in banks in the US, the UK and Canada.

Key individuals were selected through three strategies. First, important public and private actors such as American and European institutions, banks, and non-governmental organizations were mapped and key persons within these organizations were identified and contacted. Secondly, a ‘snowball method’ was used, asking the first key informants for further contacts who are involved within the field of counter-terrorism financing. Third, evaluating the

33 preliminary results of the interviews, a last set of respondents was interviewed in order to cover certain specific topics in more depth.

All interviews were tape-recorded and subsequently transcribed. Compared to just note taking, recording allows a more thorough examination of the respondent’s answer because it allows for the possibility to replay the response in its entirety. It was important to preserve the exact wording of the answers because of the sensitivity of the subject, and to carefully compare the opinions and positions of the different actors I interviewed. On a few occasions the respondent wished to make some comments off the record, in which case the recording was turned off. For the most part, interviews took place on location in Washington DC, New York,

Paris, London, Brussels, and Toronto. Five interviews were carried out and recorded via Skype.

The duration of the interviews was on average between one and a half to two hours. In order to guarantee the anonymity requested by the interviewees, all respondents were assigned numbers and divided into broader professional categories.

Moreover, I was invited, by to attend a number of seminars/workshops. I attended

three AML/CTF seminars held by compliance departments in banks in conjunction with

software vendors. Two I was physically present in the conference room for, and one,

which was hosted by a software vendor was held online (this was described as a

webinar). For all three seminars, I was also given the formal presentation deck. I was

also invited to attend one symposium held by the US Office of Foreign Assets Control. I

did not formally interview experts at any of these events, but all presentations were

recorded and then later transcribed.

34 Chapter Overview:

Chapter one offers a historical narrative, tracing the genealogy of the fight against terrorism financing. More specifically, this chapter seeks to challenge the notion that the post

9/11 focus on money and financing as a way to fight terrorism is natural or self-explanatory.

Instead, it considers counter-terrorism financing polices as a result of specific political choices and should be considered as part of a longer narrative that includes the rise of neoliberal governing and financial policies.

Chapter two examines the debates and regulatory interventions surrounding informal transfer systems, or as this chapter refers to them, hawala networks. This chapter seeks to understand how hawala came to be classified as an object of concern and illegitimacy, and how these understandings were then translated into regulatory polices within Western countries.

Moreover, this chapter argues that the push to regulate hawala systems was less about a concern regarding terrorism and more about the desire to regulate, make visible and thus gain access to a previously illegible economic space.

Chapter three traces further the logic of prevention and the simplistic but effective idea that “money trails don’t lie.” This has led to a heightened focus of risk-based screening practices with regards to mundane everyday financial transactions. More specifically this chapter argues that the risk-based approach to regulation results in suspicion of even the most mundane transactions within the financial sphere.

Finally, Chapter four examines the newly labeled phenomenon of ‘de-risking’. This chapter will argue that despite this seemingly cooperative network that was built across different government bodies, international organizations, and financial institutions, there was a

35 lack of a shared understanding of even the most crucial key concepts (terrorism) and practices

(risk-based approaches). Moreover, I argue that de-risking can be thought of as the unintended consequences of having a risk-based approach to complex socio-political events that cannot be reduced to the logic of governmentality.

Chapter One: From Al Capone to Osama Bin Laden: The Historical Narrative of AML/CTF

The Genealogical Method:

Accounts of policies combating the financing of terrorism often identify the 9/11 attacks as the origin of, or as a major turning point in, thinking about terrorist money as a primary security issue. Although some authors briefly mention earlier initiatives such as the adoption of the UN Convention on the Suppression of Terrorism Financing in 1999, these policies and regulations are often presented as rather insignificant when compared to the decisions that were made or policies that were developed after the terrorist attacks of 9/11. While claims that the attacks “precipitated a sea change” (Eckert, 2008, p. 210), “changed the international approach dramatically” (Biersteker et al., 2008, p. 236), or ‘changed everything’ (Meyers, 2005, p. 34) are not incorrect, what they do is serve to limit or marginalize other interpretations, and events that happened prior to 9/11. Simply focusing on the developments that transpired post

9/11, serves to isolate these policies and ignores their historical narrative, and the connection they have to past policies and ideologies.

This dissertation seeks to challenge the idea or notion that the post 9/11 focus on money and financing as a way to fight terrorism was the obvious choice. Instead, it considers

37 the counter-terrorism financing regulations as part of a narrative that includes moral opposition to specific actions (alcohol and drugs) and as part of the expansion of neoliberal financial and crime-control policies that started to emerge in the 1970s. Inspired by Foucault’s concept of genealogy, the objective of this chapter is to make the evolving representation of terrorism financing visible by providing a critical historical perspective.

When writing a genealogy, this involves the act of illustrating how something “became possible”. This involves “taking up a history of truth under different angles” (Foucault, 2008, p.33), or rather “taking up a history of truth that is coupled, from the start, with a history of law”, (Foucault, 2008, p.35). In other words, it implies illustrating the debates that occurred, and what other options were available before the final law or regulatory policy was created.

Furthermore, what a genealogy allows one to do is to look beyond the 9/11 attacks and root current counter-terrorism policies with a much longer and broader historical narrative involving other policies and debates

When thinking about the broader implications for this dissertation, historical narrative outlined in this chapter provide much needed context and help to underpin subsequent chapters. As a theoretical exercise, conducting a genealogy helps to highlight the underlying motivation or ideological positioning that ultimately shape the policies we have today. As a result, if we are able to question the most basic assumptions regarding terrorism financing, and determine that in fact President Bush’s assertion that money is “the lifeblood of terrorism” is incorrect, then other questions must be asked, and it becomes possible to criticize and question the actions taken in the name of the war on terror. What are for instance, the socio-political implications of this war on terrorism? Do the measures taken in the name of counter-terrorism

38 financing affect ‘ordinary citizens,’ and if so how? Writing a genealogy helps to analyze the motivation underlying specific policies and laws.

“If You Can Tax It, You Can Regulate It”

RT Naylor (2001) argues that the early 20th century in North America was defined by a

“wave of Puritanism.” The dominance of conservative values (not unlike today’s political climate) was the amalgamation of various socio-political events: a rejection by rural American’s against the cities, “WASP racism” against immigrants who were associated with offensive behavior (Chinese with opiate use, Irish with whiskey, Mexicans with marijuana), and a political reform movement which argued that saloons were the focal points of unsavory activity such as vote buying and election rigging (Naylor 2001). The solution to these supposed “immoral acts” was to criminalize these activities. Gambling, prostitution, recreational drug use, and even the consumption of alcohol was made to be illegal (Grey, 1998).

The US government faced initial problems when trying to implement their campaign against personal-vices since these issues seemed to be beyond the authority of the federal government (Naylor 2001). The constitution gave the authority to each state, along with the federal government, the right to legislate criminal law. However, the Supreme-Court ruled that the federal government has the “power to regulate anything it had the power to tax”. As a result, drug enforcement started in the 1890s started as a tax issue, with heavy fines levied against it. Even when drugs became fully illegal in 1914, drugs were banned under a law written as a revenue statute (Nadelman, 1993). Later regulations prohibiting alcohol were also drafted

39 as revenue measures. Which is why the agency to take the lead in the so-called “vice-wars” was

Treasury (Grey, 1998).

The result was that the United States became the first Western country use both criminal and revenue legislation as enforcement techniques. The ultimate result of that juxtaposition, was that the Internal Revenue Service was transformed into a agency with dual purpose- tax collection as well as policing and enforcement of the law (Naylor, 2001).

In 1970, After Richard Nixon’s “get tough on crime” presidential campaign, three pieces of legislation quickly followed. One was the Bank Secrecy Act. The Bank Secrecy Act (which, despite its name is actually about reducing secrecy) was prompted in part by tax evasion considerations in terms of identifying the parties with underlying financial interests, addressing concerns about tax havens, and the role of financial services providers in facilitating access to them, and dealing with international flows of funds (Naylor, 2001). Moreover, It imposed new reporting requirements on financial transactions, specifically on cash of more than $10,000 deposited in or withdrawn from financial institutions, and on imports and exports of more than

$5,000 in cash or monetary instruments. The underlying premise of this law was to create records, or a trail that law enforcement could follow when tracking “dirty money” as well as to reduce the ability of foreign bank secrecy laws in thwarting investigations (Hernandez, 1993).

The second initiative was the Racketeer influenced and Corrupt Organizations (RICO) statute, which was designed to give the US Justice Department the ability to strip the “mafia” of their control of legal businesses and unions. Conviction under RICO (of a “pattern of racketeering”) was the initial step in forcing the supposed criminal to forfeit his/her “interests” in a business obtained by racketeering (Atkinson, 1998). The third initiative was the Continuing

40 Criminal Enterprises Act (CCE), otherwise known as the so-called “kingpins” statute. This statute was designed to target the so-called ‘bosses’ of drug trafficking organizations and to force criminal forfeiture of their profits. Similarly, to what was outlined in the RICO statute, all elements had to be proven beyond a reasonable doubt, and the exact amount of money and/or the value of the property headed for forfeiture had to be clearly indicated in the indictment

(Naylor 1999).

Despite the developments of these regulations, not many criminal forfeitures were achieved. However, during this time was an explosion of activity with regards to civil forfeiture

(Naylor 1999). The most likely reason for this is that under tax law, the burden of proof is on the taxpayer to prove no arrears are due, and moreover, the IRS has the right to file “jeopardy assessments.” What this does is allow authorities to proactively freeze the assets of those who have been accused, or are suspected of criminal activity, prior to any official indictments

(Burnham, 1999). Furthermore, it was argued that among the most effective ways to combat drug trafficking was to use “jeopardy assessments” against assets of alleged traffickers

(Burnham 1999).

In 1970, the Drug Enforcement Administration (DEA) was authorized to seize illegal drugs and the equipment used to make and move them. A few years later, the Supreme Court greatly expanded this power in Calero-Toledo V. Pearson Yacht Leasing Co. This case determined that a single marijuana butt that was left behind was sufficient cause for the company to have to forfeit the yacht, even though it was never even suggested that the company had any knowledge of the drug use conducted by the person leasing the boat (Naylor

1991).

Money Laundering and The Seizing of Assets

During the 1980s, the war on drugs, allowed for the further expansion of forfeiture, in both criminal and civil law. Perhaps the most important change came with a 1984 law that allowed police forces to keep the proceeds of forfeiture and reinvest them in further police action (Naylor 1999). This was followed by the 1986 Money Laundering Control Act1. Although this act was passed in order to deal primarily with the war on drugs, it allowed for the explosion of federal offenses to include money laundering charges (Naylor, 2001).

To further facilitate asset seizures, procedures for what was referred to as administrative forfeitures became much easier to achieve. Prior to 1986, any property worth more than $10,000 had to be adjudicated. But the threshold for automatic forfeiture in the event the owner failed to post a proper bond or respond within 20 days to the seizure was raised to $100,000 (Naylor 2001). Furthermore, in order to dissuade individuals from contesting the forfeiture in court, law enforcement agencies began to initiate separate proceedings against each individual piece of property seized from any one individual (Naylor 2001). That permitted the seizure of total amounts well in excess of the $100,000 threshold.

1 The MLCA defines money laundering as conducting or attempting to conduct a financial transaction “knowing that the property [or monetary instrument] involved in [the] financial transaction represents the proceeds of some form of unlawful activity with the intent to promote the carrying on of specified unlawful activity or knowing that the transaction is designed in whole or in part to conceal or disguise the nature, the location, the source, the ownership, or the control of the proceeds of specified unlawful activity or to avoid a transaction reporting requirement under State or Federal law” (Section 1956, laundering of monetary instruments).

42 Several factors drove the US law enforcement to its present fixation on the money trail.

One reason given for the shifting attention to the money trail was the conviction that during the 1980s Western World was flooded with “narcotics,” and claims were being made that the global drug trade had brought in gross earning of at least $500 billion per annum, of which the

US alone accounted for 100 to 120 billion dollars (Reuter, 1996). This conviction perhaps reached its peak when the media was widely reporting that Columbia’s most notorious narco- baron, Pablo Escobar, once had $400 million from US cocaine sales stashed in the basement of a house (Naylor 2001). According to news reports, a pipe burst, flooding the basement and ruining the cash before he could get it safely abroad (Naylor 2001).

Throughout this time, government officials were constantly making the argument that, unlike gambling and prostitution, the sheer amount of money involved in the drug trade required that special focus be placed upon the ‘dirty-money’ that was inevitably floating around. Essentially, they were arguing that these vast sums of money could not only lead to corruption in the business world (possibly politics as well) but that it could have potentially devastating effects on the ‘legitimate’ economy and financial institutions, as well as cause national security issues by making Western countries vulnerable to the whims of these drug-

(Gilmore, 2004; Tsingou, 2010). For example, Colombia’s Medellín Cartel was described by

Washington Post columnist Jack Anderson as “a subterranean superpower that threatens US security…” And he insisted that the US government “call upon” all other countries to adopt emergency laws and treaties to confiscate drug money (Quoted in Naylor 1995).

It is important to point out, that during these years, the issue of terrorism financing appeared first as part of the war on drugs and subsequently in relation to organized crime. In

43 the early 1980s ‘narco-terrorism’ became a fashionable term linking terrorism and (revenues from) the drug trade. Initially, the term was coined to describe the violent attacks of drug dealers against the Peruvian anti-narcotics police (Smith, 1991), but quickly the understanding of the US government became predominant, defining narco- terrorism as the involvement of terrorist organizations in the production and trafficking of drugs. Groups that were typically mentioned in relation to narco-terrorism included Colombian movements such as the FARC and

M19, but also groups like the Palestine Liberation Organization (PLO), the Irish Republican Army

(IRA), and, beginning in the 1990s, the Taliban (Cassese 2004).

Moreover, terrorism became increasingly linked to the overstretched notion of organized crime. This “major threat package” (Beare, 2003, p. xv) referred to a range of threats including drug trafficking, corruption, and money laundering and justified a multitude of national and international measures. Although there was no strong empirical evidence that a nexus between drugs, organized crime, and terrorism really existed, the mainstream opinion seemed to be that “to find examples of cooperation’ [. . .] ‘would be hardly surprising”

(Williams, 2008, p. 127). For instance, the UN’s Economic and Social Council did not ascertain that any significant links existed but it considered both phenomena as dangerous and a formidable challenge to governments (UN, 1996a). It became possible to extend governments’ responses to the drug trade and organized crime, in particular their anti-money laundering initiatives, to terrorism. Furthermore, it was believed that in order to deter and punish criminals and terrorists, they needed to be deprived of their motive, in terms of profit, and/or their means, in terms of operating capital (Naylor, 1999). In the words of Warren Christopher,

44 US Secretary of State at that time, it was not enough to condemn the terrorism of Hamas,

Hezbollah, and other extremists. “A real penalty must be imposed. We must join together to turn off all foreign sources of funding for terrorism” (speech of 1994 quoted in Kash, 1998, pp.

48-49).

Added to the supposedly enormous amounts of money taken from drugs were the proceeds from a whole host of other criminal activities. Moreover, law enforcement, academic experts, and even international institutions such as the IMF and World Bank were attempting to come up with numbers that supposedly represented the amount of illegal cash that was floating around the globe. In 1996, ‘experts’ presented the world Gross Criminal Product of $1.1 trillion (Naylor 2001). However, as many have pointed out, these supposedly terrifying statistics about mind-boggling sums of “narco-dollars: or a burgeoning world Gross Criminal Product really prove nothing more than that it is unnecessary to take the square-root of a negative sum to arrive at a purely imaginary number”(Naylor 2001, 321). Or as one former regulatory expert suggests:

“Do you know how many times various organizations have tried to quantify and specifically measure the amount of criminal proceeds floating around the global financial system? Every time I have been a part of one of these efforts it has self-destructed, because literally no one can come up with a way to accurately measure the proceeds of crime, and therefore try to provide a benchmark against which you could then see the actual number. The IMF has this number, or rather a percent of global criminal capital, but the problem is-no one knows where that number came from. It is just sort of hanging around. When I was put on one of these projects, I called up the IMF and asked them to

45 give me the information with regards to how they came up with that number. And their response, I still can’t believe it, but their response was- well it was our Italian head of the department who came up with this figure, but he has since retired, and we actually do not know what calculations he used to arrive at this number. So again, that effort just sort of imploded. The short answer to this is, honestly, no one has any clue” (interview).

However, despite the inability to actually quantify, or even provide a benchmark for criminal proceeds, the overall goal was achieved. It can be argued that law enforcements’ objective was not to completely weed out crime so much as it was designed to convince politicians about the need for larger law enforcement budgets and greater police powers (Gilmore 2004). Therefore, these numbers, or rather how these numbers were achieved were very rarely questioned.

The Rise of Neoliberal Economic Policies:

It is important to also point out that part of the impetus for this new law enforcement approach, and what is of interest to this dissertation, is the emergence and dominance of neoliberal ideology that was taking over the United States, and to a certain extent in Europe as well (Blyth, 2002). As market and political forces helped to shape this emerging order, the language that was constantly being utilized was that of neoliberal economics.

On August 15, 1971, President Nixon announced his New Economic Policy, which involved the closing of the Gold Window, and the termination of the Bretton Woods system of pegged exchange rates (Polak 1991). Although the United States had taken important preliminary steps in the mid-1970s by removing capital controls and deregulating the New York

Stock Exchange, the government’s desire to embrace the domestic political costs of

46 liberalization was first demonstrated by the nomination of Paul Volcker to head the Federal

Reserve Board in 1979 (Arrighi, 1994, p. 316-317). After introducing an incredibly rigid monetary policy as an effort to eradicate inflation from the economy and regain international markets’ confidence in the dollar, Volker’s next move was to liberalize domestic and international regulations. According to Krippner (2011), “a collision between the Reagan administration’s fiscal policies and the Volcker Federal Reserve…resulted in a transition from a low to high interest rate regime” (p.24). In turn, this resulted in a highly unexpected influx of foreign capital. These policies “completed” and “perfected” (p.102) the project of deregulation

(Krippner, 2011).

These steps were replicated across the Atlantic with the election of Margaret Thatcher and her government’s subsequent removal of exchange controls. Shortly thereafter, deregulation spread throughout the Western world (Kelly, 1995). These initial moves also amplified the magnitude of market forces, marking it more costly for states to continue to control capital flows (Eichengreen, 1996). For developing and emerging economies, the decision to liberalize was also influenced by IMF and World Bank provisions that required such policy changes (Best, 2007). Throughout this entire process, the consistent justification of this change was put forth using the language of neoliberal economic theory (Blyth, 2002). The immediate goal of financial liberalization is to allow capital to move freely across boundaries. Proponents of capital liberalization argue that free capital movement will allow for a more efficient global economy: It will result in a more productive allocation of investment, with capital moving to the best opportunities regardless of national boundaries, most likely from developed to emerging markets; it will provide greater opportunities for those who save and lower costs for those who

47 need to borrow; and finally, it will provide better discipline for government policy (Eatwell,

1997, p.11).

Moreover, it is only by removing the regulations created by governments that the economy finally be free from politics (Best, 2005). After that has occurred, the global market will be able to minimize the interference of government by punishing inappropriate behavior.

The process of liberalizing global capital movements is thus seen as a means to the end of replacing the ambiguity of politics with the certainty, efficiency, and stability of a free market system (Best, 2005).

This Regan-Thatcher model of neoliberalism and global capitalism (Harvey, 2005), re- shaped the nature of international institutions such as the IMF and World Bank (Babb and

Chorev, 2009). All of a sudden, the loans issued by such institutions served as leverage in imposing neoliberal policies onto other countries (Polillo and Guillén, 2005; Vreeland, 2003;

Babb and Chorev, 2009). More specifically, the mandate of the IMF was expanded beyond just imposing monetary policies to the imposition of “structural reforms” including privatization, liberalization, and governmental reforms (Babb and Chorev, 2009). Furthermore, when the

Third World debt crisis hit in 1982, the US government decided that the IMF has the ability to stop massive default and thus a global financial crisis, and thus backed the IMF in persuading debtors and creditors to find a solution, which involved private banks agreeing to use the IMF as the main coordinator of their claims, which of course significantly increased the power of the

IMF (Cline, 1995, pp.205-8).

In 1985, Treasury Secretary James Baker developed the “Baker Plan,” which further transformed the IMF. Under this plan, debt refinancing by the IMF and multilateral/private

48 banks would be made conditional on market-liberalizing policy reforms including “the privatization of burdensome and inefficient public enterprises, the liberalization of domestic capital markets, growth oriented tax reform, the creation of more favorable environments for foreign investment, and trade liberalization” (Baker testimony quoted in Babb and Chorev, 2005 p. 469). The Baker Plan also increased “coordinated lending” between the IMF and the World

Bank, and moving forward, lending from both the World Bank and the IMF would be based on a specific “policy framework paper” that required closer collaboration on the restructuring of national economies (Polak 1996, pp. 489; Kapur et al. 1997; Babb and Chorev 2009). These new policies of coordinated lending, as well as this new relationship between the IMF and private lenders, reinforced the IMF’s ability to enforce its own policies and regulations, because a failure to meet these conditions would lead to a closing off of other sources of financing (Babb and Chorev 2009). This shift in the IMF’s mandate, as well as its increased ability to enforce regulations, becomes critically important when discussing the IMF’s involvement in the post

9/11 AML/CTF regulatory landscape.

“A New Penology”

An important component of the neoliberal ideology that emerged during the

Regan/Thatcher era is ‘fiscal restraint.’ During this time, the United States was dealing with a enormous budget deficit and huge military spending (Naylor 2001). Moreover, along side the reduction of economic regulation, was the privatization of public services. A senior official of the attorney general’s office clearly articulated this in 1982 before the US Senate Judiciary

Committee:

Official: The potential in this area is really unlimited. My guess is that, with adequate forfeiture laws, we could…

Senator: We could balance the budget.

Official:…There clearly would be millions and hundreds of millions available… (Drug

Enforcement Administration Oversight and Authorization, 1988).

A few years later, former Attorney General Richard Thornburgh very proudly announced that,

“it’s now possible for drug dealers to serve time in a forfeiture-financed prison after being arrested by agents driving a forfeiture-provided automobile while working in a forfeiture- financed sting operation” (Quoted in de Feir, 1992). In a number of states, forfeited property under state law goes to education, but when the property is seized and confiscated in collaboration with the federal authorities, the state law enforcement authorities can keep what is returned by the federal authorities for their own use- which is 80 percent of the total amount confiscated (Reuter and Truman 2004). It has been argued that such arrangements may distort law enforcement in the direction of pursuing cases that have larger expected value in the forfeiture dimension, which may not be the same as those with larger expected value on the scale of other enforcement priorities. As Rep. Bob Barr (R-Georgia) said in 1999, “In many jurisdictions, it [confiscations] has become a monetary tail wagging the law enforcement dog”

50 (quoted in Reuter and Truman 2004, p. 69). John Kerry (1997, 176), reflecting on his experience as chairman and ranking member of the Senate Subcommittee on Terrorism, Narcotics, and

International Operations, warned against the “dark and dangerous underside of asset seizure in which defendants got lighter sentences by bargaining with hidden property”. Despite these concerns, asset seizure as a tool for law enforcement continued to be expanded and utilized.

As previously stated, closely related to that shifting ideological climate was a change in the attitude to the causes of crime. For instance, Rose (2000) argues that there was a shift in the form of governing more akin to neoliberalism, which emphasizes individual responsibility and independence. Individual responsibility emerged as a mode of rule in criminal justice policies with regards to drugs/alcohol and even gambling. Moreover, in relation to regimes of governing justice, Garland (2001) describes this transformation as a shift from “penal welfarism”, as a governmental rationality to a “culture of control”. Beck (1992), argues that beginning in the late 20th century, the West went from being an industrial society to a risk society. Moreover, he argues that the cause of this social shift is the erosion of the dominant social and organizational structures, which allows for greater self-actualization and reflection.

This in turn creates a high degree of individualization, where problems are seen as fundamentally individual rather than social. Moreover, scholars argued that there was rise in regulatory mechanisms of control by which “risk” groups are surveyed (Ericson and Haggerty

19971; Hudson 2003). A “new penology” (Feeley and Simon 1995) concerned with the control of risk as opposed to the moral state of the offender or his/her rehabilitation was developed.

For decades, academics and activists had been arguing that the focus should be on removing the underlying socioeconomic factors that pushed certain at-risk individuals into a life of crime.

51 The new era of free-market neo-liberalism, favored punishing individual criminals. If crime resulted from social conditions, then it is the responsibility of governments to intervene and alleviate those conditions. However, if criminal action was simply the fault of the perpetrator, then response can be to simply punish and deter(Brake and Hale, 1992).

This new attitude towards criminal behavior, added a new dimension to terrorism as well, through its association with the declared war on drugs and organized crime (Friedrichs

2006). Highlighting the potential links between terrorism and the drug trade or organized crime helped to stigmatize and delegitimize organizations with perceived terrorist ties, and those who help them as evil criminals. Essentially, what developed were new strategies of risk management, which were suggestive of an attempt at preventative crime control, or rather a shift from risk management to risk control. These factors help to account for the enthusiasm with which the US embraced the follow-the money doctrine.

Exporting US Reporting Rules

Despite the vigor through which the US perused deregulation, this new focus on neoliberal free-market economic policies posed a dilemma for the United States. Around the world, the US dollar is by far the most popular currency. The US Federal Reserve estimated that by the late 1980s perhaps 75% (by value) of all $50 and $100 notes were in circulation outside the US (Sprinkle, 1993). The cost of printing a $50 or $100 note is a few cents. Therefore, exporting cash has been by far the cheapest way to finance US federal government

52 expenditures(Naylor, 2001). By raising the prestige and value of the US currency, it allowed for more legitimate trade to be financed through US dollar transactions. The more prestigious and in demand the US dollar, the more competitive the position of US banks vis-a-vie other western banks.

However, the international dominance of US currency made its own anti-laundering initiatives more difficult (Naylor 2001). The easiest way to bypass US reporting requirements was to simply use cash for all transactions. The greater the acceptability of the US dollar internationally, the easier it is to exchange the dollars for other assets (Naylor 2001). Moreover, during this time there was an explosion in private banking and more generally the financial services sector. Traditionally dominated by Swiss and British banks, by the 1980s it was an area the major US banks were eager to jump into. However, incredibly stringent anti-money laundering rules made the US the least desirable of the major jurisdictions in terms of offering foreign clients privacy and confidentiality (Naylor, 2001).

Therefore, the US faced a dilemma. The US dollar was the most desirable of the western currencies, meaning that the world’s wealthiest wanted to hold the bulk of their assets in US dollars. However, when your assets are held in US dollars, you are subject to US banking and privacy laws, and during this time almost ever other Western country could offer more discrete services. At that point, (then) Senator John Kerry offered an amendment to a 1988 money laundering law that required the US Treasury to negotiate with other countries the imposition of rules similar to those enforced in the United States. Senator Kerry was clear about the danger:

53 “If our banks are required to adhere to a standard, including offshore, and other banks do not, and rush for deposits in those [US] banks, we will have once again taken a step that will have disadvantaged our economic structure and institutions relative to those against whom we must compete in the marketplace” (US Senate Committee on Banking, Housing and Urban Affairs, 1990).

Therefore, instead of restricting the export of US bank notes, or relaxing the US reporting rules with regards to money laundering in order to attract more foreign fund management business, the strategy the US adopted was to force other countries to impose on their own banks the same reporting rules, thus ensuring everyone was playing by the exact same market rules. Initially, those reporting rules were demanded for all cash transactions conducted by foreign banks in US dollars over the $10,000 threshold (Naylor 2001). But as we will see after 9/11, those rules changed once again.

In order to ensure that every country adopted the US reporting rules, and the Kerry

Amendment more specifically, was the very real threat that if countries did not comply, their banks would be prevented from using the American-controlled international wire transfer

(CHIPS) system, which would have almost assuredly wiped out their ability to compete at the international level. Before the UN General Assembly in 1996, President Clinton declared: “We will help nations to bring their banks and financial systems in conformity with international [sic] anti-money laundering standards, and if they refuse, apply the appropriate sanctions”- namely, by excluding them from the US market (Banker, 1996). The US State Department even began handing out what essentially amounts to bonus points to countries according to how closely they adopted the American legal initiatives (Beare and Martens, 1998). Furthermore, in order

54 to appease countries and reward them for their compliance, the United States expanded the aspect of sharing proceeds acquired from confiscations with other countries. Since the US ratification of the 1988 UN Drug Convention, the United States has had a program of equal sharing of the assets that had been forfeited or frozen due to criminal activity with foreign governments that cooperate and assist in investigations. From 1989-2002, the international program shared 44 percent ($171.5 million) of eligible forfeited assets with 26 foreign governments (US Treasury 2012, 61). However, it is important to note that this policy of sharing assets becomes complicated when discussing Iraq and the war on terror. While this will be discussed in more detail in the following chapter, I want to point out that there was a lot of international tension, particularly with Kuwait, surrounding the US decision to keep all the sequestered and frozen assets, as well as the revenue from resumed oil exports (which in total was estimated at around $10 billion in the year following the invasion) in order to pay for the

“reconstruction” of Iraq (Harriman, 2005).

The Sanctions Decade

Following the Kerry Amendment, and Clinton’s commitment to sanction non-compliant countries, The 1990s became known as the ‘sanctions decade’ (Cortright & Lopez, 2000).

Moreover, there was an increased focus in tackling issues of terrorism. Throughout the 1990s, the UN issued three sanctions regimes combating state support for terrorism. In 1992 and

1993, sanctions, including travel restrictions, an arms embargo, and the freezing of Libyan funds and financial resources in other countries, were issued against Libya in response to the 1988

Lockerbie attack. In 1996 Sudan faced diplomatic sanctions and the threat of travel restrictions,

55 punishing the country for offering shelter to the suspects in the attempt to assassinate Egyptian

President Mubarak. In 1999, the UN Security Council adopted resolution 1267 against the

Taliban regime in Afghanistan for sheltering Osama bin Laden and his associates who were accused of, among other things, the 1998 US Embassy bombings in Nairobi and Dar-es-Salaam and of providing sanctuary and training international terrorists. An amended resolution was adopted in 2000 (UNSCR 1333) expanding the travel ban and asset freezing to Osama bin

Laden, the Al Qaida network, and their associates. This sanctions regime is significant for the shift towards more selective ‘smart’ sanctions targeting individuals rather than states.

Moreover, after 9/11 resolution 1267 constituted one of the first measures on which the War on Terror was built.

Mainstream academic literature (Crenshaw, 1995, Freedman et al., 1986, Kusher, 1998,

Laqueur, 1987, 1999, Schmid & Crelinsten 1993, Wilkinson, 1986a) often briefly mentioned terrorism financing but only in the margins of the larger debate on terrorism. When financing was discussed, it was mainly in relation to the issue of ‘state-sponsored terrorism’, which became a popular term in the 1980s. State terrorism having become ‘a major preoccupation of

Western governments’ (Roberts, 1986, p. 11), Iran, Iraq, Libya, Syria, Cuba and to a lesser extent Sudan and North Korea were often mentioned as state sponsors of terrorism.

Interestingly, three of these countries, Iran, Iraq, and North Korea, were later included in the

‘axis of evil’ in President George W. Bush’s terminology of the ‘War on Terror’. Although state- sponsored terrorism has existed for centuries, making states explicitly responsible for terrorist groups operating on their territory made it possible to deal with terrorism in the Westphalian

56 normative system of international relations. Consequently, hostile states, instead of certain violent groups or movements without a recognized status in international law, could be pointed out as the real cause of terrorism and could hence be sanctioned according to UN guidelines

(Crenshaw, 1995, p. 10).

The concept of state-sponsored terrorism made it possible for states to issue international sanctions in order to eliminate terrorism. The purpose of these sanctions was to change the attitude of states supporting terrorism as well as to stigmatize terrorism (Friedrichs

2006). Individual states, most prominently the US, but also groups of states such as the EC’s

TREVI group, have adopted various diplomatic, economic, or even military sanctions to combat the funding of terrorism by states (see, e.g., Jimenez, 1993, Kash 1998). Since terrorism financing was defined as being intimately related to states and because of the freedom of the

UN to respond to a wider range of threats after the Cold War, the UN Security Council could also take action.

It must be emphasized, however, that although the international and national initiatives against money laundering flourished, most notably through the creation of the Financial Action

Task Force (FATF) in 1989, terrorism and its financing were not central in these initiatives. In the absence of a suitable definition of terrorism, only a few states undertook action to criminalize terrorist funding (Gilmore, 2004, Pieth, 2002). The UK, for instance, in response to the conflict in Northern Ireland, had already adopted laws criminalizing the financing of terrorism in the form of the Northern Ireland Emergency Provisions Act in 1973 and the Prevention of Terrorism

Act in 1974. In the 1980s the provisions in these acts were gradually expanded and

57 strengthened and included: the forfeiture and freezing of terrorists’ assets, the obligation to report information on money allegedly related to terrorism, and the criminal liability of those who (help) fund terrorism (Bonner, 1993, pp. 180-181, Donohue, 2006, pp. 325-343). In 1996, the US adopted the International Crime Control Act, expanding the list of money-laundering predicate crimes to include terrorism (Kash, 1998, p. 167). The FATF anti-money laundering guidelines left it up to the member states to decide on including terrorism as one of the predicate offences.

In the 1990s, terrorism finance also started to be defined as a crime in itself, autonomous from drug trafficking or organized crime. In 1992, the UK hosted seminars within the TREVI framework during which the Judicial Cooperation Working Group started investigating terrorist funding and laws in each country (Bunyan, 1993, p. 2). In the mid-1990s the funding of terrorism was discussed during several G7/G8 summits and states were encouraged to take measures to prevent terrorists from raising funds (G7 1995, 1996a, 1996b,

G8, 1998). At the 1996 Sharm el-Sheikh Summit for instance, the G7 called for ‘the ending of terrorism by cutting the flow of money from private Arab individuals to terrorist groups’

(quoted in Kash 1998, p. 169). Political leaders, especially in the US, were increasingly concerned about wealthy Arab businessmen and Islamic leaders, such as Osama Bin Laden, financing terrorist groups throughout the Middle East (Donohue, 2006, p. 350, Kash, 1998, p.169, Laqueur, 1999, p. 182). At the same time, the prevention of terrorism funding also made its first appearance in a UN resolution on Measures to Eliminate International Terrorism (1996

UN Res. 51/210).

58 It is important to highlight that by defining terrorism financing as a separate problem, it became possible to add a new element to its definition. It opened up the understanding of terrorism financing for funding unconnected to criminal activity. Consequently, it became possible to discuss the use of charities as a vehicle for financing terrorists (de Goede 2012).

Beginning in the mid-1990s states were urged to prevent and take steps to counteract, through appropriate domestic measures, the financing of terrorists and terrorist organizations, whether such financing is direct or indirect through organizations which also have, or claim to have charitable, social or cultural goals, or which are also engaged in unlawful activities such as illicit arms trafficking, drug dealing, and racketeering (G7, 1996b, UN 1996b). The understanding of terrorism financing as being either legally or illegally acquired money for the purpose of preparing or committing terrorist acts is still an important assumption in the War on Terror.

The 1999 UN Convention for the Suppression of the Financing of Terrorism, proposed by

France and supported by the G8, was a milestone for the construction of the notion of terrorism financing in the sense that it established combating terrorism financing as an object of international law. Compared to previous UN counter-terrorism conventions, ‘the Terrorist

Financing Convention is in fact a radically different instrument which breaks new ground with regards to not only the obligations of states but also, in particular questions of individual criminal responsibility’ (Letho, 2008, p. 344). As a legal instrument, it is remarkable in the sense that it criminalizes behavior that is non-violent in and of itself and not necessarily illegal. Unlike terrorism, which consists of violent acts committed in the name of a political ideal, the act of terrorism financing does not involve violence and does not make victims in a direct and obvious

59 manner. Moreover, the sources of terrorist money may consist of legal donations to charities or revenues from legitimate businesses that only become criminal due to the intention or knowledge that the money will be used for terrorism (De Goede 2012).

Another important element of the Convention is its focus on prevention (Letho, 2008).

Instead of prosecuting suspected terrorists and punishing state sponsors of terrorism after the occurrence of a terrorist act, the Convention has been designed effectively to cut off financial flows of terrorist networks in order to prevent terrorist acts from happening. In this respect it can be argued that the Convention introduces into international law the focus on prevention and non-state actors that characterize the follow-the-money methods. After the 9/11 attacks, the rapid ratification of the Convention became one of the priorities in the early days of the

War on Terror.

Popular Discourses on Terrorism Financing:

As previously stated, in the 1980s and 1990s, the increasing popularity of the follow-the- money methods in the War on Drugs and against organized crime with which terrorism became associated, overshadowed critical perspectives that questioned the effectiveness and logic of attacking financial assets. As was previously suggested, seizing assets is not a strong deterrent to criminal behavior because criminals are not only motivated by profits, and as such, taking away their profits may even force them to continue their crimes as they may have few alternative career paths (Naylor 1999). Moreover, seizing assets does not punish criminals very

60 severely, as they often consider illegally earned income as ‘easy-come, easy- go’. Likewise,

Naylor(1999) states that the investment of illegally earned money in the legitimate economy is unlikely to corrupt markets and legitimate businesses. He is also critical of the idea that asset seizure takes away the capital essential to commit future crimes (pp. 11-15). These arguments are perhaps even truer for terrorists, as self-enrichment is usually not their main objective. Yet, arguments against follow-the-money methods remained marginal in this period.

Notwithstanding the relatively swift negotiations and the unanimous adoption of the

1999 UN Convention for the Suppression of Terrorism Financing, ‘terrorism financing was not a familiar concept’ and it was ‘not easily accepted or readily understood’ (Letho, 2008, p. 357). As mentioned above, it was not evident how terrorism financing constituted a crime since the criminality of the act is purely based on terrorist intent and it does not (necessarily) involve illegal transactions or violence. Therefore, some states questioned the need for a separate convention on terrorism financing, as they considered that financiers of terrorism should be deemed accomplices of terrorism as defined in other international conventions. Other states were in favor of establishing terrorism financing as a principal offence by adopting a new convention, because they considered that financiers should face the same treatment as terrorists (Aust, 2001, p. 288).

Another highly contentious issue was the definition of terrorism on which the crime of terrorism financing fully depends. States had not succeeded in reaching an internationally accepted definition of terrorism due to its political sensitivity. However, if one were to criminalize terrorism finance, it was not possible anymore to elude the definition of terrorism.

61 Two approaches were advanced: a list enumerating specific terrorist offences circumventing the debate on the definition of terrorism, and what was called a mini-definition of terrorism – a definition of terrorism that goes beyond the listing of specific terrorist offences but that does not touch upon the question how terrorists differ from freedom fighters. Despite the fear of some states that the latter would delay or threaten the adoption of the convention, it proved to be not too difficult to reach a consensus on a generic mini-definition of a terrorist crime (Aust,

2001, 292, Letho, 2008, p. 358). To emphasize the instability of terrorism financing as a natural object of international law, it is important to emphasize that the negotiation of the Convention was a ‘torturous path’ that ‘required creative thinking to overcome some new problems’ (Aust,

2001).

Several other discourses were given more priority in the 1990s, which thwarted terrorism financing being considered a crucial issue. First, with the exception of the United

Kingdom, until the mid-1980s the question of cutting off terrorists from their money was not a political or law-enforcement priority since it was still believed that the amounts of money involved in terrorism were too insignificant to justify a great deal of effort in combating terrorism financing. As a result, in 2001 a legal framework dealing with terrorism financing was close to non-existent in most states. Moreover, in many states terrorism was not a crime under the law, because arriving at a definition of terrorism was too contentious. Indirectly, the EU’s

Second Anti-Money Laundering Directive, adopted in 2001, would have covered the financing of terrorism if terrorism were nationally defined as a serious organized crime. However, according to two EU officials, “before 2001 terrorism financing was not in the minds of the

62 European legislators” (interview).

Secondly, governments and the private sector were not very keen on introducing additional burdens on the financial sector through enhanced monitoring and control.

Supported by the ideology of free markets and deregulation, the financial sector argued that this extra administrative work would too heavy be a burden on businesses and would negatively impact on national economies due to reduced competitiveness (Levi and Reuter

2006). These economic considerations were also taken into account in the UN resolutions and

G7/G8 declarations on terrorism financing. These state that to combat the financing of terrorism regulatory measures may be adopted as long as they do not impede ‘in any way the freedom of legitimate capital movements’ (UN 1999).

A third important discourse concerned civil liberties. In 1999, the US Treasury proposed strengthened Know Your Customer (KYC) regulations. These proposals faced stiff opposition in the US Congress for anti-regulatory reasons, but the main issue at stake was concerns over privacy (Eckert, 2008, p. 213, Napoleoni, 2004, p. 219). The US Treasury received more than

200,000 negative responses to its proposal from all political backgrounds objecting to the proposed requirements for banks to obtain extensive private information (Donohue, 2006, p.

359). The KYC proposal was also criticized for being a potential source of mistrust and resentment of government, particularly among immigrants and minority groups, as well as an undesirable form of generalized spying and reporting on citizens (Cato Institute, 1999).

Furthermore, the use of sanctions became an object of debate in the late 1990s. Only

63 sparsely used during the Cold War, sanctions became a popular tool to alter the behavior of certain states in the 1990s. Yet, the use of general trade sanctions became a controversial issue given the devastating humanitarian consequences they have on the general population. Some countries refused to respect the sanctions out of concern for human rights, while others advocated the use of targeted or ‘smart sanctions’. Moreover, many states failed effectively to enforce economic sanctions for economic reasons. Some states even benefited from the economic sanctions as they took advantage of the reduced competition with other states that respected the sanctions and froze their trade with the sanctioned state. Vetschera mentions in this respect the case of Austria, which strengthened its economic and political ties with Libya while Libyan leader Gaddafi was subjected to sanctions for supporting terrorism (1993, p. 221).

The lack of urgency concerning terrorism and its financing was enhanced by the absence of major terrorist attacks on European or American soil during the 1990s. Although combating terrorism was featured under the third pillar of the Treaty of Maastricht as well as in a number of joint declarations and recommendations issued in the 1990s, the EU never intensified the intergovernmental cooperation initiated in the mid-70s. With only a few EU member states affected by terrorism domestically in the 1990s, ‘it seemed as if the issue had temporarily disappeared from the stage’ (Den Boer, 2003, p. 1). Hence, the European institutions were dedicated to the issue only on paper, treating the threat as ‘rather hypothetical’ (Tsoukala,

2004, p. 418). Moreover, the fact that prior to 9/11 the EU member states had never agreed on a common definition of terrorism or on developing a common strategy, let alone a separate policy combating terrorism financing, demonstrates the insignificance and the politically

64 controversial nature of the topic.

Similarly, Eckert (2008) asserts that at that time the issue received little public attention in the US; only a few regulatory programs indirectly addressed the issue and its working remained mainly of interest only to a small group of experts (p. 209). Significantly, until 9/11 no one on the White House’s National Security Committee was working full-time on countering terrorism financing. Until then, terrorism-related issues were part of a broader set of transnational threats (interview).

The attacks of 11 September 2001 substantially changed the urgency and importance assigned to these different debates. The relative insignificance of the amounts of money involved in terrorism, the burden on the financial sector, the civil liberties implications of strengthened regulation, and the doubts about the use of UN economic sanctions, all became subordinate to the increased urgency of terrorism. Although the 9/11 Commission would estimate in 2004 that the total costs of the attacks was between $400,000 and $500,000 and concluded that the costs of the attacks were relatively low compared to the amounts of daily financial transactions worldwide (2004, pp. 186-189), a radically different conclusion was drawn in the immediate aftermath of the 9/11 attacks. Depriving terrorists of their money had become a key objective within global governance.

Within a few weeks a comprehensive global framework against the financing of terrorism started to take shape. On September 12, 2001, the UN General Assembly adopted

Resolution 56/1 through which it condemned the terrorist attacks and called urgently for the

65 international community “to prevent and eradicated acts of terrorism (UN Doc. A/Res/56/1.)

That same day, the UN Security Council passed Resolution 1368 in which it called the attacks “a threat to international peace and security” (UN Doc. S/Res/1368 (2001)) and urged the international community to fight terrorism. Most importantly, on September 28 2001, the

Security Council passed Resolution 1373, a drastic and essentially legislative resolution that, for the first time in the Security Council’s history, used binding authority under Chapter VII of the

UN Charter2 to require all member states to change their domestic laws in very specific ways. In particular, Resolution 1373 states that member states shall take extraordinary measures to monitor and intercept the international system for financing terrorist attacks (Szasz 2002). This includes directing states to criminalize the financial sources to be used in terrorist acts, to freeze all economic resources of persons who are involved in terrorism as well as of those entities which are ‘directly or indirectly controlled by such persons, and to prohibit their nationals from making any funds available to persons who may be involved in terrorism (Szasz

2002).

The resolution further “decides” that “all states shall…refrain from providing any form of support, active or passive, to entities or persons involved in terrorist acts” and further includes the more active requirements that a state act to suppress recruitment of members into terrorist organizations and to eliminate the supply of weapons to such groups. States must take

“necessary steps to prevent the commission of terrorist act,” “[d]eny safe haven for those who finance, plan, facilitate or commit terrorist acts from using their respective territories…ensure

2 Chapter VII of the UN Charter gives the Security Council the power to order states to adopt measures under pain of sanctions.

66 that any [such] person…is brought to justice…And ensure that…such terrorist acts are established as serious criminal offences in domestic laws and regulations and that the punishment duly reflect the seriousness of such terrorist acts.”

After the UN Security Council unanimously adopted Resolution 1373, a special committee of the United Nations was established to develop lists of people and organizations whose assets were to be frozen and with whom financial institutions were to be forbidden to deal worldwide (Biersteker and Eckert 2008). This was yet another drastic shift which moved the sanctions regime past just the traditional disciplining of states to the disciplining of individuals as well. As Scheppele (2006) notes, in international law, individuals had been the subjects of protection under international human rights and humanitarian law, however they had never been the focus of the Security Council and its mandatory jurisdiction. The use of the sanctions list got a further boost from UN Security Council Resolution 1455, which called upon states to help compile names of those who might be possible Taliban and al-Qaeda members

(UN Security Council Resolution 1455, 17 Jan 2003, S/RES/1455 (2003) at point 4.) While one may wonder how the Sanctions Committee determines whether to add names to the list, neither this resolution, nor any of the previous ones, indicated what sort of proof of terrorist activity would be necessary to add an individual or group to the list (Scheppele 2006).

Furthermore, the UN Sanctions Committee process for determining who should be a target of sanctions by states is not transparent either in its standards of evidence or in specifying the standard of proof that must be met for listing a specific individual (Scheppele 2006). But as soon as names are added to the list, member states of the UN are under obligation to immediately freeze the assets of the named individuals. Before 2006, there was no provision

67 for an individual to have direct contact with the United Nations. The individual was dependent entirely on the readiness of their state to press a case in the exercise of diplomatic protection.

Responding to the criticism of the de-listing procedure, in December 20063, the Security Council directed the Secretary General to establish a focal point within the Secretariat to receive de- listing for the first time directly from individuals or groups (Halberstam and Stein, 2009)4.

Moreover, with the development of new legal technologies, such as the Patriot Act, the

US was able to gain access to global financial transactions that were both directly, and indirectly linked with the United States. Through the use of Executive Orders, US Presidents (both Bush and Obama) have added banks, individuals, organizations and companies to US sanctions lists.

The so-called ‘bad-bank’ designations by the US Treasury Department utilized article 311 of the

Patriot Act as a means to, as one expert put it, “weaponize finance” (Bremmer, 2015).

Essentially, these legal tools forced the international community to choose between their financial dealings within the United States or their dealings with those designated banks.

Despite the legislative reforms put forth by the Security Council and the United States,

3 As of 2016, there have been twenty-five requests for de-listing resulting in three requests being granted. http://www.un.org/sc/committees/dfp.shtml.

4 In 2008, the European Court of Justice delivered its judgment in Kadi & Al Barakaat International Foundation V. Council and Commission. This case involved a challenge by an individual to the EC’s implementation of UN SC 1373, which had identified him as being involved with terrorism and mandated that his assets be frozen. The ECJ’s judgment annulled the relevant implementing measures and declared that they violated fundamental rights protected by the EC legal order (Burca 2010). Moreover, in 2008, the Warsaw Convention came into effect. This convention was an attempt to mediate the difficulties that arose in enforcing the coercive financial measures agreed by the Security Council. This Convention obliges states to ensure that those affected by the SC enforcement measures “shall have effective legal remedies in order to preserve their rights” (Article 8).

68 additional regulatory mechanisms were needed in order to ensure the compliance with these reforms. The difficulty for a practical harm reduction policy is that sources from which terrorism is financed have been (and remain) various and not mutually exclusive. Some ‘rogue states’ sponsored terrorist groups, crimes such as theft, fraud, robbery and trafficking funded it in various countries (Acharya 2009); political/ethnic/religious sympathizers funded it from their lawful income, often as charitable donations or zakat. Despite this diversity, the argument has been that Anti-Money Laundering (AML) legislation and enforcement (which concentrated exclusively on proceeds of crime) was the best fit available. However, other international forums such as the World Bank, the IMF and the FATF did not consider terrorism financing as a pressing concern nor a topic with which the organization should be “dealing with” (interview).

FATF and IMF Involvement in AML/CTF:

The designation of the FATF as a key player in the fight against terrorism financing is revealing in this context. Despite the claims of the US Treasury Secretary at that time that

“FATF is uniquely positioned to take up the challenges of terrorist financing” (O’Neill, 2001) and of the FATF President that its “mission is to strangle and cut the supply of money and assets that is the lifeblood of terrorists” (FATF, 2001), several options were on the table in the first weeks after the attacks. In some Western European countries for instance there were very intense discussions as to ‘whether the FATF was the appropriate forum’ (interview). Another proposal was to create a new structure to deal with terrorism finance, but it was taken off the table as too ambitious to set in motion. Moreover, according to an expert at the FATF, at that

69 time ‘the initial reaction of the FATF, then presided by Hong Kong, was very reluctant’. “They didn’t want to deal with terrorism financing because it was too political. However, the US,

France, and the UK pushed for it to happen”. In the words of this same expert:

The Executive Secretary of the FATF was called by a government official saying: “I think it is going to happen. The political pressure is incredibly strong so my advice is that you give a call to the FATF President and tell her that if she doesn’t want to do it, she is going to be pushed aside and completely out-maneuvered (interview).

A similar story can be told of the IMF’s involvement with AML/CTF. As one expert stated:

“There wasn’t just hesitation to take on CTF, there was hesitation about even taking on AML. We were all sort of asking each other, can we even make the argument that this is really part of the Fund’s mission? I mean, is this really about getting the bad guy, and going after the credited crime? If that is the case, is that the Fund’s job? Are we going to be getting involved in the individual enforcement and individual prosecution? We just thought it was completely inappropriate for the Fund to inject itself into those sorts of issues” (interview).

Moreover, internal IMF Board documents reveal that those within the IMF were skeptical that anti-money laundering and terrorist financing prevention could be dealt with using the same regulations:

“The events of September 11 have brought to the fore the questions of whether and how the Fund could extend its activities to prevent the use of financial systems for terrorist financing, and while we agree that both crimes are varieties of financial abuse that can compromise the integrity of the national and international financial system…it needs to

70 be noted that in substance terrorist financing is an issue distinct from money laundering because it involves the processing of funds, often from legitimate origins, to be used for future crimes, rather than the processing of criminal proceeds to disguise their illegitimate origin…as a result, many of the measures to deter money laundering, especially those that involve identifying criminal proceeds, are not effective in deterring terrorism. Moreover, while what constitutes ‘laundering’ and ‘financing’ are understood and broadly accepted, what constitutes a predicate crime to money laundering and what constitutes the crime of terrorism are not.” (IMF, 2001).

Despite these controversies and negotiations within international organizations and national bureaucracies, actors took up their new roles and their involvement in combating terrorism financing appeared to be at least grudgingly accepted. As one expert from the IMF put it, “it was 9/11, one of the planes crashed just blocks from here and AML/CTF is America’s lovechild- they were pushing hard for this, who exactly was going to say no.” in 2001, FATF’s mandate was expanded to include not only money laundering, but terrorism financing as well.

This approach is reflected in a series of eight Special Recommendations that the FATF adopted.

While some of these Recommendations reflect pre-existing commitments undertaken in the framework of the UN and obligations imposed by the Security Council5, others refer specifically to the use of anti-money laundering framework in this context. Here the focus has been on the monitoring of wire transfers, the regulation of alternative remittance systems, the targeting of cross-border cash movements by terrorists, and taking steps to reduce the vulnerability of the

5 These include the 1999 UN Convention for the Suppression of the Financing of Terrorism and Security Council Resolution 1373 (2001), both calling for the criminalization of terrorist finance.

71 non-profit sector to abuse6.

Similarly, in April of 2002, the Board of the IMF “decided to enhance the Fund’s activities in AML/CTF, notably through the development and application of a detailed methodology to assess compliance with relevant financial supervisory principles, and closer cooperation with FATF, which is the recognized standard-setter in this area” (IMF, 2002). As one expert noted

“The G7 saw the Fund as a pretty effective institution with a staff that had the capacity to do this technical work. Therefore, wanted the Fund, even though it wasn’t obvious that it was central to the mission, wanted the Fund to be a way of universalizing the FATF standard…So basically, take the standard and now we want you to apply it across a number of countries-It is an effective way of doing it, and similar to what we had done in the past with other polices. So that is where they were coming from. Honestly though, from the Fund’s perspective, we ended up going along with this in part, because we began to realize that there was a relationship between this issue and the Fund’s main objectives.”(interview).

Another expert echoed this sentiment when he stated that:

“For us, all of this is just about integrating AML/CTF into the broader macro-economic stability goals. There are still people here in this organization that don’t think we should be involved in this at all, some of them just really don’t like us. Or think [AML/CTF] is a bit dirty, you know? Their point is how do you measure it? How do you measure TF [terrorist financing] and its impact on macro-economics? You can’t put it in a graph, it’s not as though the financiers of Al-Shabab are actually creating projections and balance sheets. They are not submitting their data to international statistics agencies. But we keep making the point that, while at the beginning it wasn’t clear why we were getting involved, over time it’s become clearer and clearer, that if we keep our role within the Fund’s mandate,

6 See Financial Action Task Force: Annual Report 2004-2005 (FATF, 2005)8.

72 so only focus on areas that relate to the integrity or stability of the financial system, then it makes more sense for us to be involved. Plus it helps us make sure that countries are getting in line and tackling other issues that could be linked, like corruption. So making sure that we were operating within the interests of the Fund’s mandate is also why we made sure that the Board empowered us to negotiate with FATF and have more and more of a risk based approach- so looking at not just what’s formally in place, but how it’s applied. I think there was a consensus within the IMF, but it was more of a compromise for FATF because they wanted to also have an assessment based on the law. But we wanted it to be more on the application… The reason this system is run on a risk-based approach is because we pushed for it.” (interview).

In 2012 the FATF once again updated its Recommendations. And as the statement above indicates, one of the most significant changes was the increased emphasis on the Risk

Based Approach to AML/CFT, especially with regards to preventative measures and supervision

(FATF 2014). Whereas the 2003 Recommendations provided the application of a risk based approach in some areas, the 2012 Recommendations consider the risk-based approach to be

“an essential foundation of a country’s AML/CFT framework” (FATF 2014). Adopting a risk- based-approach to AML/CFT means that countries, authorities, as well as financial institutions are expected to “identify, assess and understand the money laundering and terrorism financing risks to which they are exposed and take AML/CTF measures commensurate to those risks in order to mitigate them effectively” (FATF 2014). Furthermore, the FATF adopts the IMF’s position, and argues that this approach allows countries to adopt a more flexible set of measures in order to target their resources more effectively and apply preventative measures that are “commensurate to the nature of risks, in order to focus their efforts in the most effective way.”

73 Conclusion:

To conclude, the genealogical analysis in this chapter has attempted to illustrate that the emergence of the fight against terrorism financing as an object of governing was gradually constructed from the 1970s/1980s. It considers CTF policies as a construction reflecting certain political choices, and can be considered part of a narrative that includes moral opposition to specific actions (alcohol and drugs) and as part of the expansion of neoliberal financial and crime-control policies that began to emerge in the 1970s. More specifically, the involvement of international regulatory bodies such as the FATF, the World Bank and specifically the IMF in

AML/CTF should be thought of as a continuation of the expansion these organizations’ mandates to not only impose economic reforms, but far reaching structural reforms as well.

Despite concerns from within the organizations’ that money laundering and terrorism was beyond the scope of their missions, experts came to realize that AML/CTF regulations provided them with an even stronger set of tools to impose their structural reforms on countries and financial systems that were previously beyond their control.

In the following chapters, genealogical analysis is used to understand the current efforts in the fight against terrorism financing. These modes of thought are expressed in the practices of governing, as “practices do not exist without a certain regime of rationality” (Foucault, 1991, p.561). The following case studies examine the practices of governing in order to understand the rationality of the fight against terrorism financing and the new forms of exercising power that have been developed in the name of this fight.

Chapter Two: Hawala Networks and the Push for Transparency and Legibility

As previously argued, the tracking of terrorist financing, is not simply global governance in which states are strong-armed into enforcing certain laws and regulations. Instead, what it more closely resembles Is Fourcade’s (2007) notion of a governmentalized economy, in which everyday financial transactions are actively moralized and thus brought under a new form of security. This chapter seeks to narrow the scope of analysis by examining a set of practices, debates, and regulatory interventions regarding hawala7 in particular. In order to understand the emergence and evolution of these practices and interventions, it is important to examine how hawala came to be understood and classified as an object of concern and illegitimacy and how these understandings were then translated into regulatory policies within Western countries that had ramifications across the globe. This chapter utilizes the well-known case study of al-Barakaat, a Somali money transmitter that was accused of being the conduit

7 Hawala is an Arabic term that just simply means to transfer. For the purposes of this chapter, I am using the term to refer broadly to money transfer systems that exist in the absence of, or parallel to, formal banking channels. While the term can be used in some countries to refer to formal sector money transfers, that definition will not be used in this project. Moreover, it has been suggested that the term ‘informal value transfer system’ is more accurate than hawala, alternative banking, or underground banking. And although I agree with scholars such as Passas (1999, 9-12) who have argued this point, I have chosen to use the term hawala throughout this specific chapter because I am interested in how Western discourses of ‘hawala’ systems have developed and have subsequently influenced policy decisions and regulations. However, subsequent chapters will use more accurate terms when discussing informal systems at a more general level.

75 through which al-Qaeda was moving its money and funding its operations, and will argue that despite the assertion that al-Qaeda and the 9/11 hijackers had used hawala networks to move their money and finance the attacks, the push to regulate hawala systems was less a concern about terrorism, and criminal activity, and more about the realization that Western authorities now had the ability and the moral authority to regulate, make visible, and thus gain access to a previously unregulated, invisible economic space.

Transparency and the Neoliberal Economy:

The push towards transparency can be viewed through a series of policy prescriptions that argue that the correct step towards combating international financial troubles is better and more information (Best 2005). As British foreign secretary Robin Cook argued:

The second lesson…is that transparency and free trade are more necessary than ever…Rigging the markets-through corruption or denying them transparency-can only bring short term relief. The markets always know; and they impose a heavy penalty. The discipline of the market is not always welcome, but it is a powerful ally of truth, efficiency and transparency” (quoted in Best 2005, p.140).

Attempting to achieve transparency is much easier said than done. As Best (2007) points out, the word transparency is far from neutral, and that in fact, it carries significant moral and political implications (Best 2007). Furthermore, the language of transparency is deceptive, for while the word suggests a lack of mediation achieving transparency requires a considerable amount of intervention. To make a particular financial practice transparent, we must be able to measure and interpret it in a way that is quantifiable (Best 2007). Moreover, Best argues that

76 transparency should be considered a “disciplining strategy” due to the fact that economies must adhere to specific standards and codes. “If international standards are the norm against which countries are measured, transparency is the rationality that ensures that they are measurable” (Best, 2005 p. 95). This argument is in line with Fourcade’s (2007) notion that no economic model is ever free from moral judgements, and that the expansion of agencies tasked with monitoring the behavior of individuals, corporations or nations is an incredibly moral project that is done in the name of economic expansion and democratization. Or as Lascoumes and Le Galé (2005) suggest, economies are shaped by the moral attitudes and beliefs of the individuals as much as they are governed through techniques and numbers. Thus, Fourcade

(2007) argues, that the neoliberal economy is a governmentalized economy, shaped by the surveillance/ technical capabilities and the beliefs of the governing actors (p. 304).

This is the theoretical framework upon which this chapter is based. As will be shown, transparency, or in the case of hawala networks a lack of, acts as a disciplining strategy, and takes on not just the moral category of what constitutes good versus bad behavior, the absence of transparency becomes an indication of deviance and criminality.

77 Hawala-An Ancient Network:

Hawala networks are believed to have originated in Asia centuries ago as a means of providing a safe route along the Silk Road so individuals could move their money. The modern understanding of hawala is linked to the 1947 partition between India and Pakistan, when exchange controls made it illegal to transfer money between the countries (Miller, 1999).

Hawala networks set up and organize the transfer of money domestically or internationally and may sometimes provide services that are not dissimilar to a line of credit as well. Although there is a fair amount of discussion regarding the underground economy or the black market, hawala transactions are not illegal in most countries8. In principle, hawala transactions are not actually that different from the international money transfers performed by mainstream financial institutions, and hawaladars (hawala brokers) in Western cities do not actually operate underground, but rather are quite visible in many immigrant communities and will even advertise their services in local newspapers etc. (Passas 1999, 20).

The Financial Action Task Force outlines how hawala systems work as follows: If, for example, a migrant worker in the US wanted to send money to their family in, for example

Somalia, the worker can bring the money to a hawaladar in the US. The US based hawaladar

(hawaladar A) will send a message (by phone, text, or e-mail) to his or her contact in Somalia

(hawaladar B). Hawaladar B then delivers the money (after taking a fee), which has been converted into the local currency, to the worker’s family, after the family member has

8 India, Pakistan, and Saudi Arabia are notable exceptions to this statement.

78 identified his or herself (not necessarily through formal identification, such as drivers licences or passports, but with a previously arranged password). Hawaladar A will now owe the amount of the transfer to hawaladar B. Eventually, the hawaladars may settle their debt through the under-invoicing or over-invoicing of shipped goods (for instance, hawaladar A sends goods to hawaladar B, but charges $500 less than the actual value of the shipment). Debts may also be settled through international bank transfers, or by payments in cash or jewelry (FATF 2013).

The following (very dated) diagram was taken from a manual prepared by FinCEN and

INTERPOL titled “Hawala Alternative Remittance System and its Role in Money Laundering”

(undated) and attempts to visually summarize the way in which hawala systems work.

Figure 2.1 (FinCEN and INTERPOL, undated).

“A Banking System Built for Terrorism”

In October 2001, Time magazine ran an article titled “A Banking System Built for

Terrorism,” this article offered one of the first mainstream/popular descriptions of what it called “the world of hawala,” and described it as:

“an international underground banking system that allows money to show up in the bank

accounts or pockets of men like hijacker Mohammed Atta, without leaving any paper trail.

There are no contacts, bank statements or transaction records, and yet those who use the

hawala networks can move thousands of dollars around the world in a matter of hours…All

that hawala requires is trust” (Ganguly, 2001).

In his memoires, John B. Taylor, former head of Treasury’s International finance division, has given a similar account of a suspicious, hard to track, alternative financial system:

A hawala can be located anywhere, in a storefront, or in a section of a jewelry store.

Suppose a Pakistani cab driver in San Francisco wants to send $1,000 to his mother who

lives in Karachi. The cab driver gives the money to a person working at the hawala. The

hawala calls or e-mails a contact in Karachi, tells the contact to deliver the $1,000 to the

cab driver’s mother, and the money is delivered within hours. No money is ever shipped.

There are no records. Everything is based on trust…With larger volume of money transfers

going from the United States to Pakistan than in the other direction, at some point the

hawala would have to settle with its contact in Pakistan; but this would occur much later

80 and not be related to the individual transactions. For example, if there was a credit in favor

of the Pakistani-based hawalas, it could be cleared off the books when some used

American cars were shipped to Karachi, If a shipload of one hundred $6,000 used cars was

sent to Karachi, but only $5,000 per car was invoiced, the $100,000 difference would be

enough to clear the books of many individual transactions” (Taylor 2007, 23).

Prior to 9/11, hawala was not a particularly well known concept, however, that largely changed after the attacks (Passas 2008; Passas and Maimbo 2005). in the aftermath of 9/11, hawala suddenly became a reoccurring topic in newspaper articles and political speeches. In

November 2001, the US Senate Committee on Banking, Housing and Urban Affairs held a hearing on hawala systems, where Chairman Evan Bayh argued in his opening statement that:

One system which bin Laden and his terrorist cells use to covertly move funds around the

world is through “hawala,” an ancient informal, and widely unknown system for

transferring money…Although most Americans have never heard of hawala, that system

almost certainly helped al Qaeda terrorists move the money that financed their attack on

the World Trade Center and the Pentagon” (Senate Committee on Banking, Housing and

Urban Affairs, 2001).

The very idea that al Qaeda and specifically the 9/11 hijackers, had used an ancient, almost untraceable network to move their money around played a large part in grabbing the media’s attention, and shortly thereafter, articles were being published that painted a

81 description of hawala networks as these highly suspect, dark smoky places where large amounts of suspicious cash are handled, started to emerge. Shortly after 9/11 the LA Times ran an article which provides a clear illustration of how these networks were being perceived and redefined not just as illegitimate but almost as an unstoppable threat to security as well.

“Hawala is a credit system for transferring funds over long distances… It was born of a time when traders were more confident in their skills as bookkeepers than in their chances of not being robbed on the caravan trail…Now ancient necessity has become a convenient way to launder money, evade taxes or--in the case of Bin Laden's militant Al Qaeda network, financial experts believe--move millions of dollars around the world to fund a holy war. The city of Peshawar, near Pakistan's northwestern border with Afghanistan, is a place where Bin Laden has old roots and strong support, where people are suspicious of outsiders and accustomed to having things their way. A leading money-changer, who works on the edge of Chowk Yadgar square in a shop the size of a walk-in closet, summed up America's chances of cutting the terrorists' secret cash lifeline here: "Impossible." Colleagues, smoking and reclining on the floor nodded in agreement. "If you arrest one person, or keep watch on another in the market, someone will just replace him. There are a lot of people involved in this [hawala] business. Everyone needs money. Everyone needs hard currency. So how can you stop this?" Hawala banking… relies on something older than money itself: a person's word. Nothing could be more discreet. There is no need to smuggle large amounts of cash from one country to another or to fill out bank forms that can draw unwanted attention. No need, in fact, for detailed bank records. A person simply hands over cash at one end and it is paid out at the other, leaving virtually no paper trail to follow…No cash is moved through legal banking channels. The hawala money trader and his partner simply keep straight between themselves who owes what to whom and settle their own debts--in cash, gold or other commodities--when convenient.

82 The trail can get muddy, a banker Says” (Daniszewski and Watson, 2001).

Two elements were constantly being emphasized in the reports that helped to portrait hawala networks as criminal financial spaces that required regulation and increased transparency. The first issue is the lack of records. Over and over official reports and media accounts emphasize the fact that hawala networks do not keep formal records. For instance,

FATF (2012) writes that “hawala networks are cash in cash out businesses…that keep only limited information on clients.” Moreover, in their report to the Council on Foreign Relations,

Greenberg, Wechsler and Wolosky describe hawala as a “cash business that leaves behind few, if any, written or electronic records for use by investigators in following money trails. It operates out of nondescript storefronts and countless bazaars and souks…All the hawala system needs to operate are a network of hawaladers, trust and open phone lines” (Wechsler and Wolosky 2002,

10-11).

Second, hawala is usually associated with cultural stereotypes that are believed to underlie it. Again, FATF’s (2013) report on hawala systems states that “hawala and other similar service providers tend to be popular among migrants because of familiar, regional or tribal affiliation.” By comparison, Nick Kochan’s (2005, p. 212) investigation of money-laundering and terrorism financing describes hawala as a “means of moving money across borders… that primarily relies on the trust that exists between members of the same ethnic group”. One former FATF expert seconds this sentiment by stating that “the ethnicity issue is an important one…customers are often very nervous, and are used to being nervous or weary of mainstream

83 financial service providers. They are much happier dealing with people of their own ethnic background” (interview). And Jonathan Winer (2001), a former state department official bluntly draws on incorrect stereotypes to draw a link between hawala and (Islamic) terrorism. “It would have been culturally familiar to the terrorists…It would have been a logical thing for them to use”.

Although hawala became an object of concern through the prism of terrorism financing, it should be understood as part of a larger concern with regards to what many were calling the

“dark side” of globalization. Globalization became even more contested in the wake of 9/11.

Specifically, the idea that globalization increases one’s ability for travel and communication and that in turn gave way to unprecedented opportunities for criminals and terrorists became an increasingly popular discourse. As Bibler Coutin et al (2002) argue “these debates assume that there is a coherent field (of subjects, nations and so forth) that “flows” of people, capital and images threaten to destroy or open up” (p. 804). A report written by the United Nations Office on Drugs and Crime (2010) titled the Globalization of Crime illustrates this point nicely:

“Global governance has failed to keep pace with economic globalization. Therefore, as unprecedented openness in trade, finance, travel and communication has created economic growth and well being, it has also given rise to massive opportunities for criminals to make their business prosper…Organized crime has diversified, gone global and reached macro-economic proportions…Crime is fueling corruption, infiltrating business and politics, and hindering development. And it is undermining governance by empowering those who operate outside the law” (p. 6)

84 Similarly, an article in Foreign Policy posits this as the global problem of the twenty-first century and writes:

The bad news of the 21st century is that globalization has a significant dark side. The

container ships that carry manufactured Chinese goods to and from the United States also

carry drugs. The airplanes that fly passengers nonstop from New York to Singapore also

transport infectious diseases. And the internet has proved just as adept at spreading

deadly, extremist ideologies as it has e-commerce” (Weber et al. 2007 49).

It can be argued that hawala networks came to be viewed as part of the flows of money that were directly threatening the stability and safety of Western states. However, what is interesting, is that what seems to concern regulators is that there is a substantial global, unregulated, illegible, financial space that they do not have access to. This is illustrated in one

EU official’s testimony before the UK House of Lords in 2009:

“the problem with the alternative remittance and Hawala systems at the moment is that there is no control. The businesses which are executing these kinds of services are not registered, they are not licensed…there is no record keeping, no suspicious transactions reporting and so on, so it is completely in the dark” (House of Lords 2009).

Or as one Financial Action Task Force official stated: “While hawala is not outlawed by FATF,

FATF says that if it exists, it needs to be legislated, licensed…more open for inspection. They need to be transparent, and at the very least they need to be registered” (interview).

85 To maintain a level of belief in the legitimate and transparent world of global neoliberal polices, then there must be at least a façade of control over the criminal world of terrorism, trafficking, or illegal immigration. With respect to globalized financial flows, the way in which such control is produced, is partly by coming up with records illustrating the origin, source, and purpose of transactions. Again, Bibler Coutin, Maurer, and Yngvesson (2002) articulate this point particularly well: “To be legitimate such movements must be transparent, that is, they must be cohesive accounts with clear origins, histories, destinations, and trajectories.

Movements that lack such characteristics are considered nontransparent and illegitimate”

(Coutin, Maurer, and Yngvesson, 2002 p.817). Even though financial transactions that have the required documentation cannot be considered free of risk, official documentation and records symbolizes security and legitimacy (Razavy and Haggerty, 2009).

Waging ‘Financial Warfare’:

The labeling of hawala as a criminal space where the financing of terrorism occurs, has allowed for the development and acceptance of law enforcement and regulatory initiatives in the years following 9/11. As Juan Zarate, former Deputy National Security Advisor for

Combating Terrorism, has stated in his memoirs:

“Such an approach was possible because of the unique international environment after September 11. The environment after the terrorist attacks allowed for amplified and accelerated use of financial tools…to attack asymmetric and transnational threats…The United States leveraged the entire tool kit, and the aversion of the international banking system and commercial environment to illicit capital, to craft a new way of waging financial warfare” (Zarate 2013, 9).

This new form of ‘financial warfare’ is perhaps best represented by the actions taken on

November 7, 2001 against a number of hawaladers in the US. These coordinated raids took place across five states, including Washington, Massachusetts and Minnesota, where substantial Somali communities are located. The largest organization targeted during this raid was the Somali money transmitter al-Barakaat, on which we focus in more detail in the next section. At the time of these raids, President Bush stated: “Today’s action disrupts al Qaeda’s communications, blocks an important source of funds, obtains valuable information, and sends a clear message to global financial institutions: You are with us, or with the terrorists. And if you are with the terrorists, you will face the consequences” (White House 2001). The raids took place in the context of Operation Green Quest, a multiagency taskforce charged with targeting terrorism financing.

Despite Bush’s argument that the actions simply blocked funding, in reality the raids disrupted the everyday lives of the Somali and Iraqi communities in which they took place.

Small businesses such as grocery stores and gift shops were torn apart during these raids.

Moreover, property and merchandise were completely destroyed, and in a lot of instances, mundane items such as frozen food and videotapes were seized (Davilla, 2001). Goods were returned only after senators and the American Civil Liberties Union (ACLU) stepped in and filed legal action on behalf of those affected by the raids. Locals worried about how to wire money to their families in Somalia and called the raided businesses “a lifeline for relatives in their homeland” (Davilla, 2001). Despite these controversies, Operation Green Quest framed as a success in relation to the larger ‘war on terror’, and in 2002, Kenneth Dam of the US Treasury

87 testified before a senate hearing that “when we shut down the Al-Barakaat hawala network, we seized $1.9 million in assets” (US Senate Committee on Banking, Housing and Urban Affairs,

2002).

In conjunction with the November 7 raids, the US government pressured Middle Eastern governments in general, and the United Arab Emirates (UAE) in particular to regulate the hawala sector, especially after revelations that some of the money that sustained the 9/11 hijackers while they were in the United States had been wired from the UAE (but not through hawala) (Gerth and Miller, 2001). In May 2002, the Central Bank of the United Arab Emirates organized a conference on hawala, which was attended by US Customs officials as well as by representatives from Middle Eastern and Somali banks and academic experts. This meeting was vital in the development of a more comprehensive understanding of what exactly hawala is, and the necessary services that it provides. Passas offered many examples of ledgers and other methods of recordkeeping by hawaldars, thus complicating the myth surrounding the lack of documentation and records used in hawala networks.

Figure 2.2 & 2.3 Hawala ledgers (Passas, 2002)

The 2002 UAE meeting resulted in the Abu Dhabi Declaration on Hawala, in which participants pledged to “better understand hawala” and to recognize its “many positive aspects” but also to strengthen regulatory efforts and “to ensure that this system is not abused by money launderers and terrorist financiers” (AE Central Bank, 2002). Subsequent conferences were organized by the UAE Central Bank in 2004, 2005, and 2007 during which even more participants, including the IMF, FATF, and US Treasury’s FinCEN became involved (Johnston,

2005). Despite international involvement and pledges to “better understand hawala” tensions over definitions and understandings continued. In official classified cables released by

89 Wikileaks, UAE officials were expressing concerns that despite guidelines provided by US officials, they were still very unclear as to how the United States differentiated between “actual terrorist financiers, and conduits that had the potential to be used by terrorists” (Wikileaks).

UAE officials linked this request to the issue of the hawaladar al-Barakat, stating that “The UAE would like the US to produce a paper explicitly stating the differences between terrorist financiers and conduits…adding that if al-Barakat is only a conduit, then the Emiratis need to know so they can pass this information along to their judicial system, because the Central Bank would like to drop the case” (Wikileaks).

Despite this increase in the international understanding and political support for hawala networks, raids, closures, and prosecutions continued, particularly in the United States. Under the Patriot Act, informal transmitters became subject to new licensing laws (Smith, 2001). The

Immigration and Customs Enforcement (ICE), part of the US Department of Homeland Security, actively pursued hawalas who failed to comply with these new regulations. Raids were conducted in May 2004 against seventeen unlicensed hawalas in the Washington area, among which was the Eritrean Cultural Civic Center, where Ethiopian migrants had been able to send money home for years (Sheridan, 2004). In May 2005, a large number of raids and arrests were made of unlicensed hawalas, which put the total post-9/11 count on 140 hawaladars arrested,

138 indicted and $25.5 million seized (ICE Cornerstone Report, 2005). The ICE press release explained that these “illegal operations” were targeted “because we know that terrorist and other criminal organizations can use these underground businesses to move illicit funds anywhere in the world with no questions asked” (ICE Cornerstone Report, 2005).

90 Although the United States has been by far the most ardent pursuer of hawalas, it is important to emphasize that it has not been alone. In fact, especially after the most recent attacks in Paris, experts at the FATF and the World Bank in particular have noticed a dramatic increase by countries other than the United States attempting to further crack down on these systems and to “make sure full due-diligence is done for every single remittance, even ones done for under 100 Euros” (interview). In the United Kingdom, a “hostile attitude” toward hawala from authorities and regulators developed after 9/11, and a number of larger hawaladars were targeted by customs (Ballard, 2005 p. 339). However, as in the “normal” financial system, some of the larger hawaladars act as “clearinghouses” within conduit states (a topic which will be discussed further in a subsequent chapter) which adds a layer of financial complexity and thus makes it difficult to account for the entire chain of transactions.

Post 9/11 efforts to license, regulate, and monitor informal remitters now have become compulsory for all countries wishing to participate in the global financial system. Number six of the FATF’s Special Recommendation on Terrorism Financing makes the licensing and regulation of informal value transmission services mandatory and specifically requests that countries devise appropriate sanctions for those who remit illegally. FATF’s International Best Practices paper on the regulation of hawalas, or HOSSPs (hawala and other similar service providers) as

FATF (2013) now calls them, recommends that oversight should include licensing and registration of persons carrying out the services, doing background checks on hawala operators, and ensuring they are in compliance with anti-money laundering laws (FATF, 2013). FATF also recommends that law enforcement should take a proactive approach to identifying unlicensed hawalas by “examining the full range of media to detect advertising” and “giving particular

91 attention to the printed media in various communities; and monitoring activities in certain neighborhoods” (FATF, 2003). In other words, FATF encourages law enforcement agencies to monitor migrant communities with the goal of identifying unlicensed remitters. Furthermore,

FATF states that:

“In the first decade after 9/11, the globe has been largely ineffective in supervising HOSSPs. The international community must address the resulting vulnerability by bringing the HOSSPs under a risk-based AML/CTF regulatory and supervisory framework that is effectively implemented” (FATF, 2013 p. 8).

Of course what is important to point out, is the main goal of FATF, and of course the Western states that make up its membership, is to make visible a previously inaccessible financial space.

Before the case of al-Barakaat is discussed in further detail, it is important to take a moment and discuss the rationale, or rather the ‘evidence’ supporting hawalas’ involvement in terrorism financing. Despite the widely held belief that al-Qaeda used hawala networks to fund the 9/11 attacks, the 9/11 Commission’s Monograph on Terrorism Financing states explicitly

“the extensive investigation into the financing of the 9/11 plot has revealed no evidence to suggest that the hijackers used hawala or any other informal value transfer mechanisms to send money to the United States” (2004). Instead, the 9/11 hijackers used normal US bank accounts in their own names, in which they received some wire transfers. The 9/11 Commission Report does note that al Qaeda moved much of its money through hawalas prior to 2001, but points out that “al Qaeda had no choice after its move to Afghanistan in 1996; the banking system there was antiquated and undependable” (Roth, Greenburg and Willie, 2008 p. 25). This is confirmed by the findings of Passas, who writes that his studies have “encountered no instance

92 of terrorist financing in the United States or Europe through IVTS (informal value transfer systems). In South Asia and Africa, there are such instances, but this is mostly because [of] the general use of IVTS for all kinds of transfers and payments” (Passas, 2003 p.36). Passas has repeatedly pointed out that there is no empirical evidence to suggest that hawalas would be the preferred method for terrorists, and that they would be any “more vulnerable than the regulated sector” (Passas, 2003; Lindley, 2009). With that being considered, it should not be surprising that when examining the FATF typologies reports on informal remitters there is only one case of supposed terrorism financing, which of course was the Hussein Brothers of al-

Barakat, provided by the United States (FATF, 2005).

The Targeting of Al-Barakaat

The Somali money transmitter al-Barakaat is the largest and most infamous hawala targeted in the wake of 9/11. And despite the numerous work done on this case, it is still important to take an in-depth examination of the al-Barakaat. First , even though no there has been no evidence linking this organization to al-Qaeda or any other terrorist organization, it is still regularly mentioned as a terrorist financier within the mainstream media. In addition, the case of al-Barakaat’s North American directors, the Hussein brothers, continues to be utilized in

FATF reports describing and analyzing the misuse of alternative remittance services, the following is an image taken from FATF’s 2004-2005 typologies report:

Figure 2.4 (FATF 2005)

Furthermore, this case clearly illustrates the vast transnational scope of finance and security and the extent to which the war on terror affects all aspects of the globe, as well as every day citizens. Following the al-Barakaat case also further shows the stereotyping that emerged post 9/11, and how FATF policy regulations, asset freezes, and their contestations came together to form a type of governmentalized economy (Fourcade 2007).

When al-Barakaat was targeted and raided on November 7, 2001, US Treasury Secretary

O’Neil called the company a “quartermaster of terror” as well as a “pariah in the civilized world”, and asserted it to be “tied to al Qaeda and Osama bin Laden” (Quoted in Rowan, 2002).

White House statements asserted that the network skimmed up to five percent off all transactions it handled in order to “raise funds for al Qaeda…[and to] manage and invest and distribute those funds” (White House). Al-Barakaat founder Ahmed Nur Jumale was further accused of having links to the Somali Islamist group al-Ittihad al-Islamiya (AIAI), which allegedly supported al Qaeda with “weapons, trucks, cash and other support” (Golden, 2002). AIAI was

94 also suspected of involvement in the 1993 violent attacks on US marines in Mogadishu

(Huband, 2002).

The targeting of al-Barakaat occurred in a time when there was a lot of pressure put upon the Office of Foreign Assets Control (OFAC) to take meaningful action on the war against terrorism financing. An excerpt from the National Commission on Terrorist Attacks Report (2004) states that “The post-9/11 period at OFAC was ‘chaos.’ The goal set at the policy levels of the

White House and Treasury was to conduct a public and aggressive series of designations to show the world community and our allies that the United States was serious about pursuing the financial targets”.

Al-Barakaat’s Minneapolis offices had been the subject of investigation since the late

1990s after a number of suspicious activity reports had been filed concerning their transactions.

As the 9/11 Commission report notes, “Al-Barakaat was moving significant amounts of money overseas, and to the Minneapolis criminal case agent, it seemed improbable that the relatively low-skilled Somali community in Minneapolis, although large, could have amassed so much money through legitimate wages” (Roth, Greenburg and Willie, 2008 p.74). The investigation into al-Barakaat was proceeding slowly and with difficulty; and it was considered nearly impossible to prove involvement in terrorism financing because investigators simply could not follow the money trails once they had left the United States. Another excerpt from the National

Commission on Terrorist Attacks Report (2004, p. 77) reveals that “OFAC line level analysts were nearly universal in their frustration in not being able to engage in the type of all source analysis that would be required to understand the financial links involved. One analyst with a

95 background in intelligence described the process by which OFAC obtained classified documents as 20 years behind the procedure used by the CIA”. However, these hesitations were no longer important in the wake of 9/11, when OFAC came under substantial pressure to deliver success and when action in the face of unknown threats became of prime importance. As one Treasury expert states:

“OFAC analysts started working on the designation of al-Barakat about two weeks after

the attacks. The effort won preliminary approval almost immediately from Treasury

officials on the basis of a one-page memo…Analysts were told that they did not need to

have evidence that each al-Barakat entity took part in terrorist financing; it was sufficient

to show only that the main entity itself was involved to be able to close all of the branches

and freeze all of the money… Treasury officials acknowledged that some of the evidentiary

foundations for the early designations were quite weak. One participant (and an advocate

of the designation process generally) stated that “we were so forward leaning we almost

fell on our face.” (National Commission on Terrorist Attacks Report 2004, 78-79).

The November 7 actions were enormous in scope and involved raiding al-Barakaat’s offices, freezing its assets, and arresting its managers in multiple countries over the space of one month. In the United States, $1.1 million was frozen, and in the UAE, $1 million was seized from al-Barakaat’s accounts with Emirates Bank International (EBI) (Roth, Greenburg and Wille,

2008). At this time, the US Treasury announced that “Disruptions to al-Barakaat’s worldwide cash flows could be as high as $300 to $400 million per year” and that of that sum “$15 to $20 million per year would have gone to terrorist organizations” (US Treasury). In Luxemburg, one

96 month later, $200 million was frozen and more than one hundred thousand pages of documents concerning accounts of unnamed individuals related to al-Barakaat were seized

(Rowan, 2002). In the United States, Mohamad Hussein, a Somali-born Canadian citizen who ran al-Barakaat North America, was arrested along with a number of other related and unrelated hawaladars. In Ottawa, Hussein’s brother Liban was arrested and held for one week before being released on bail. The US government had requested his extradition, but the

Canadian government refused, arguing that “the evidence produced linking him to the financing of terrorism was inadequate” (Rowan, 2002). In Sweden, the assets and accounts of three

Somali-born citizens, who ran al-Barakaat Sweden, were frozen, but the men were not arrested

(Boustany, 2002). In a related case in Pakistan, which will be discussed in greater detail below, a

Karachi hawaladar was arrested in his home in the middle of the night by Pakistani security services, which would be the beginning of his prolonged detainment by US security forces, first at Bagram airbase in Afghanistan and, from 2002, in Guantánamo Bay (White and Wilber,

2002).

Not long after the November 7 actions, however, there was pushback surrounding the closing of al-Barakaat and skepticism regarding its involvement in financing terrorism dramatically increased. Hussein’s lawyer Kevin O’Brian told reporters that

“there was no evidence to show that any money sent by Somalis back home to their families in Africa through the financial transfer system had been funneled into the Al Qaeda network…I wish the government would just come out and say we screwed up and apologize. For ten months, we asked them to produce proof, and not once did they produce a shred of information” (Rowan 2002).

Furthermore, it came to the attention of the public that al-Barakaat was one of the only banks in Somalia offering international money transfers to immigrants sending money home to relatives and to refugee camps, in fact, most of the money that was frozen were migrants’ remittances (Roth, Greenburg and Wille, 2008). Before November 7, al-Barakaat had been the largest private sector company in Somalia, with telecommunications as well as banking branches and with more than 180 offices in forty countries around the world they were employing over 3,000 people prior to the US raids (Rowan 2002). Five months after the raid, the

New York Times ran a story confirming this notion: “Al-Barakaat is not some shady money changer…it is Somalia’s biggest employer. In a land devastated by civil war and drought, it ran the biggest bank, the biggest phone system and the only water-purification plant” (McNeil,

2002). The actions against al-Barakaat not only made it harder for Somalis to send money home but also had devastating effects on the economy and caused real humanitarian distress (Rowan

2002). Aid agencies and relief workers criticized the US actions against al-Barakaat and pointed out that remittances are the country’s largest source of income, and brings in far more than foreign direct investment, or even what Somalia receives in foreign aid (Adeso, 2015). A statement issued by the United Nations Development Programme (UNDP, 2003) said that “the humanitarian impact on the population of Somalia through the closure of Al Barakaat has been great…the closure has had a destabilizing effect on the economy of Somalia-crippling telecommunications, transport and construction”. As a BBC (2002) report noted, up to 60% of the population in Somalia relied on the services of Al Barakaat, and that people who were used to receiving $30 or $50 from their relatives in other countries suddenly are receiving nothing

98 (BBC, 2002). Various sources expressed concern that these actions would have a reverse effect and foster extremism and anti-American sentiment: “The impact on the poor has been so devastating…that it may ultimately be a boon to Islamic radicals who drum up antipathy toward the United States” (Horst and van Hear, 2002).

The following figure, produced by the State Department (2014), illustrates the tension between the need and reliance upon these remitter systems, and the Western worlds continued fear of money potentially falling into the hands of would-be terrorists.

Figure 2.5 (State Department, 2014)

By early 2002, doubt about the evidence against al-Barakaat grew, and a number of courts worldwide made it difficult to uphold sanctions against it. In April 2002, Luxemburg released most of the frozen al-Barakaat money, stating that it had no reasonable cause to keep the accounts blocked (Finn, 2002). In Sweden, meanwhile, public support grew for the targeted

100 Somali Swedes who ran the Swedish branch of al-Barakaat, especially as one of them was a candidate for the Social Democratic party. Prominent Swedes defied the sanctions by giving the men money for their legal fees. When the Swedish government asked the United States for material to support a criminal case, it allegedly received a superficial twenty-seven-page document consisting mainly of news material, some background documents on al-Barakaat, and a statement by President Bush. Consequently, the Swedish government declined to press criminal charges and petitioned the UN security council for removal of the men’s names from the sanctions list (Finn, 2002). And by August 2002, the US Treasury Department removed them from the sanctions list and dropped all charges against them (Rowan, 2002).

Moreover, In 2004, the 9/11 Commission’s investigation of the al-Barakaat case further disproved any allegations. The report documents how al-Barakaat’s revenues were far overstated by the US Treasury and would have amounted to no more than $700,000 per year, of which it remains unproven that “any of that money has been skimmed” (Roth, Greenburg, and Wille, 2008 p. 83). Furthermore, despite the fact that agents went on more than one occasion to the UAE where they examined thousands of pages of al-Barakaat’s banking records,

FBI investigators were unable to substantiate links between al-Barakaat and al Qaeda. The 9/11

Commission concludes that:

Notwithstanding unprecedented cooperation by the UAE, significant FBI interviews of the principal players involved in al-Barakaat (including its founder), and complete and unfettered access to al-Barakaat’s financial records, the FBI could not substantiate any links between al-Barakaat and terrorism (9/11 Commission Report 2004, p.84).

101 Even John Taylor, would later admit in his memoirs that the evidence of al-Barakaat’s ties to al Qaeda “were not as clear-cut as we had thought and I had indicated in my press briefing” (Taylor 2007, 22). In 2009 and 2010, the al-Barakaat companies in Sweden,

Minneapolis, Seattle, and Boston were removed from the UN sanctions list, but the al-Barakaat

Group of Companies, including its finance arm in the UAE, remains listed to this day. What is important to understand, however, is that despite the unfreezing of (or rather portions of) al-

Barakaat’s money and the findings of the 9/11 Commission, al-Barakaat was never able to recover from the stigma of being considered a “pariah in the civilized world”, and those who were laid off were deemed to be ‘tainted’ by their former association with al-Barakaat. As one rival company in Somalia told the New York Times, “We don’t hire al-Barakaat employees…We’re afraid of the US” (2002).

The al-Barakaat case, highlights the connection between global finance and the more militarized security areas, specifically, Guantánamo Bay that were being utilized post 9/11.

Therefore, while the targeting of finances is commonly understood as the non-violent or ‘clean’ side of contemporary security practices, the al-Barakaat case complicates the assertion that, as the Washington Post (2011) wrote “ There was no bloodshed, no guns and no soldiers.” Instead, what the following section on the incarceration of hawaladar Mohammed Sulaymon Barre in

Guantánamo Bay illustrates is that the distinction between the military war on terror

(illustrated by the invasion of Iraq and Afghanistan) and the preventative approach of tracking and blocking terrorist financing is more blurred than previously acknowledged. Here, the

102 Guantanamo Bay (or colloquially known as the Gitmo) Wikileaks9 files, that were released to various news agencies such as the New York Times, the Guardian and the Telegraph in 2011, and that contained nearly 800 classified prisoner files dating from 2002-2008, were particularly illuminating.

As previously stated, in relation to the raids that took place in the United States, a Karachi hawaladar of Somali descent, Mohammed Sulaymon Barre, was arrested in his home in the middle of the night by Pakistani special forces (Wikileaks). After four months in Pakistani custody, Barre was handed over to US security forces, who held him at Bagram airbase where he was tortured before he was eventually transferred to Guantánamo in 2002, where he was held without being charged with an offense or given a trial. According to the Executive

Summary as part of Barre’s JTF-GTMO Detainee Assessment file:

“If released…it is assessed the detainee would seek out prior associates and reengage in hostilities and extremist support activities…Detainee is assessed to be a member of al-Qaida affiliated groups, a financier, and facilitator in the Global Jihad Support Network (GJSN)…Detainee provided direct financial support to al-Qaida, al-Wafa, and other terrorist and terrorist support entities through the Somalia-based company Dahabshil hawala…Detainee was in contact with other Somalis possibly linked to al-Qaida who were living in the US and who may have been involved in terrorist financing operations” (Wikileaks).

9 As a side note, the original source of the GITMO leak was Chelsea Manning, a United States Army intelligence analyst, who was convicted for allegedly having leaked other material to Wikileaks. On January 17, 2017, President Obama commuted all but four months of her remaining prison sentence (Savage, 2017).

103 The assumption that in his work for the Karachi-based hawala, Barre knowingly transferred money to or for terrorists is prevalent in all the US government documents concerning the case.

Furthermore, his GITMO file reveals that what was also of specific concern to the JTF was that

Barre set up an ‘illegal’ branch office in Pakistan for the hawala company Dahabshiil. The following is another excerpt from Barre’s classified JTF-GITMO file:

“In August 1998, detainee’s distant relative, Muhammad Mussa asked detainee to establish a branch office in Karachi for the Somalia-based company Dahabshiil. Detainee accepted the offer and was given $10,000 US from the Dubai, United Arab Emirates (AE) office of Dahabshiil to start the new branch. Detainee operated the branch illegally as he never procured a business license or paid taxes. Detainee operated the office from his residence and maintained business and customer contacts through Internet cafes and public e-mail domains” (Wikileaks).

The proceedings of Barre’s Administrative Review Board hearing, which took place on

September 20, 2005, reveal the concern regarding hawalas in general among the review board members, and most of the questions addressed to Barre during the hearing focused on how well he knew his customers, how well he knew the receiving parties, and whether or not he kept records of transactions.

BOARD MEMBER: Were you ever suspicious about the money transfers that you had?

DETAINEE: No, never.

104

BOARD MEMBER: Were you ever suspicious about the sums of money that you transferred?

DETAINEE: No. Not one thing was suspicious. The money that came to me was a very small amount, very simply money for the Somalians that was receiving it…

BOARD MEMBER: I want to make sure that never once were you suspicious about any transfer?

DETAINEE: I had someone call me, a Somalian [who] came to me and said they want to transfer money. I didn’t have any orders from my company, any procedures that I had to check to suspect anything. I didn’t have that.

BOARD MEMBER: No paper trail. You never kept records (Wikileaks).

It can be argued that post 9/11 what has occurred is the normalization of the targeting and freezing of assets of suspected terrorists. These actions have made it necessary and desirable for the formalization of hawaladers to occur, thus making them legible and thus accessible. However, by making remittance flows legible through licensing laws and other forms of formalization, it blurs the effectiveness and the purposes of hawala, and has real and tangible impacts in multiple societies around the globe.

Regulating the Informal:

Again, it can be argued that one of the main issues to emerge regarding hawalas in the wake of 9/11, was the belief that the main objective should be to formalize the informal, which, as previously stated, is a dominant principle of neoliberal financial policies. However, what is

105 interesting, is that along side the debates about underground money and the use of hawalas in financing acts of terror, academic and policy attention for migrants’ (informal) remittances substantially has increased in recent years. The World Bank in particular has recognized the importance of remittances to developing economies (Kapur, 2004). The size of remittance flows to non-Western countries is substantial and increasing, and it has been repeatedly noted how these flows far exceed development aid in many countries (Ratha, Mohapatra, and Xu, 2008).

While the exact amount of money that is sent through informal channels is still unknown, informal channels are thought to be “extremely important” and are estimated to deliver between 10 and 50 percent of all remittances (World Bank, 2005).In a separate report produced by the World Bank (2008), they argue that “higher remittance inflows tend to be associated with lower poverty levels and improvements in human capital indicators (education and health) of the recipient countries... and they also appear to contribute to higher growth and investment rates.” Informal channels are especially important when transferring money to rural areas and to countries whose formal financial systems could be described as non-existent, such as Afghanistan and Somalia. Nongovernmental organizations, including the United Nations, often rely on hawalas to transfer monies to such places (World Bank, 2003). According to

World Bank Reports, in 2015, world-wide remittance flows were estimated to have exceeded

$601 billion. Of that amount, developing countries were estimated to have received about $441 billion, nearly three times the amount of official development assistance. Of course, as the

World Bank acknowledges, the true amount of funds delivered through this system is impossible to gauge, but they believe the amount to have been significantly larger (World Bank

Fact-book, 2016).

106 However, despite the acknowledgement that these informal systems are incredibly important, there is still a desire in policy and development debates to formalize these systems.

The argument that is made in favor of formalization is that formal financial flows are less prone to money laundering and terrorism financing than informal flows are. As the World Bank (2008) notes, “while there is value in remittances, they should be thought of as a complement to, rather than a substitute for, proper economic policies.” Even as it has become widely recognized that cheap and accessible banking channels for migrant workers are still often lacking in the

West, maintaining informality is not regarded as an option (Ballard, 2004 P.104). Moreover, attempts have been made to improve the “security and transparency of specific remittance corridors” (World Bank, 2015). For example, in partnership with the World Bank, the UK announced a Somalia-specific Safer Corridors Project in 2013 to track payments from the UK into Somalia (World Bank 2014). This project was built upon an earlier UK-supported program in Pakistan which was developed in 2009. Despite this effort both projects have been deemed failures due to a “series of insurmountable obstacles” (Oxfam, 2015). Despite these set backs, the consensus among, financial regulators, the World Bank, IMF, and the FATF, is still that informal remittances flows need to be made visible, measurable, and governable.

Moreover, banks and other formal financial institutions are unable or unwilling to provide the same services of speed, trustworthiness, and international reach that hawalas now provide. Instead, new technologies for sending money are now quickly developing, resulting in what Maurer calls a “new payments space” (Maurer, 2008). This is perhaps best represented through the explosion of cryptocurrency technology, such as Bitcoin, in the global financial market. These digital currencies are based on the concept of anonymity, and although the

107 transactions are logged in a public ledger called a “blockchain”, the ledger does not record customer information, only the IP address of the user. Unsurprisingly, this lack of transparency has led concerns amongst regulators, and to the IRS criminal investigation unit declaring that “If

Al Capone were alive today, this is how he would be hiding his money” (Quoted in Zetter, 2015).

A recent article in the Economist, illustrats the rise of this “new payments space” and its link to hawala networks:

“Dahabshiil also provides a classic example of the move from hawala to a more formal system, mostly to satisfy western regulators. All transactions are now logged; identities of senders and recipients recorded and checked against blacklists. In countries where most people do not have passports Dahabshiil relies on tight-knit clan networks and references to prove identities…to convince western regulators of its security, the hawala system has adapted. The company, once a deeply informal business is now a sprawling empire. At the same time, Western firms are learning from the hawala system. Transferwise, a financial technology company based in London, cuts the cost of international money transfers within the west. Instead of moving customers’ money with a wire, for which banks charge hefty fees, it matches people who want to send money in each direction and then transfers the funds between their bank accounts at home. Other technology firms, such as Facebook, are getting in on the money transfer business too. Perhaps despite the regulations, it is banking-not hawala-which is the out-of-date system” (The Economist, 2015). However, these new cryptocurrencies and other practices require a level of technology that a lot of people in places such as Afghanistan and Somalia do not possess. Moreover, the new financial products or services that are being developed in order to help those without access to formal financial institutions- such as prepaid debit cards-more often than not have fees associated with their use, and charge significant sums of money for the most basic services

108 such as checking balances, using ATMs, making payments, and even for leaving accounts dormant (Martin, 2009).

Moreover, there is evidence that the regulating of hawalas can lead to unintended consequences. The first, is the risk that remittance flows, because of licensing and identification requirements, which are unavailable to a lot of people who rely on remittance systems, are pushed further underground. As one former regulator stated:

“Look, what very few people know is, for instance, the hawala market in Kabul… The

Afghanistan bank was actually quite successful in managing to monitor the hawaladars

who sat on those markets prior to US intervention. But as soon as you make that a more

prescriptive approval, with licensing laws and identification requirements etc., then you’re

likely to push more [hawalas] underground. So it’s really an art and not just a technique

of introducing a law and saying everyone needs to regulate according to this broad non-

nuanced law, and if you do not meet these specific standards than you can no longer offer

these services. But what they fail to understand of course, is that people’s livelihoods

depend on these services, so they will move on, go further underground or whatever, and

find other ways to send money to their families.” (interview).

Even FATF is slowly coming to recognize that “overly strict regulation and monitoring of informal money remitters may be a factor in driving them underground”. But it also worries that money launderers and terrorist financiers will cherry-pick where and how they send their funds by “choosing to channel money through the least regulated districts, and consequently FATF maintains its regulatory drive” (FATF, 2006).

109 The second unintended consequence taking place in the context of hawala regulation is the potential alienation and increased resentment by specific groups who perceive themselves to be unfairly targeted. Increasing resentment is also a concern with regard to new licensing laws. As Passas points out: “We’re alienating communities that we should be bringing together in our corner for coalitions against terrorism” (2006 p.17).

Another point that needs to be made, is that in the process of regulating and making visible informal remittances, one is reshaping these previously inaccessible pools of capital and re-creating or transforming them into (tradeable) financial tools. On the one hand, subjecting remittances to registration and regulations done for security purposes, by giving security forces access to information and data that would assist them in reducing the ways in which criminals, and would be terrorists, are able to transmit their ‘dirty’ money around the globe. On the other hand, formalizing remittances essentially gives states access to pools of capital that were previously out of reach. As Ester Hernandez and Susan Bibler-Coutin have pointed out, in such economic statements remittances are presented as a “cost-free source of income” even though they are “produced through great sacrifice” (Hernandez and Bibler-Coutin, 2006 p. 186). Even more interesting is the fact that once previously illegible remittances are made legible and turned into economic assets, they are then able to be utilized as government bonds (Hernandez and Bibler-Coutin, 2006). Developing governments have begun to sell their remittance receivables to international investors through complex financial products in order to improve their credit ratings and acquire lower interest rates in the international capital markets (De

Gode 2005). In fact, the World Bank encourages the securitization of remittance receivables and recommends it as an “innovative” financial structure that is attractive to international

110 investors because of its “stellar performance even in times of crisis.” A report by Standard &

Poor’s (2008) supports this claim stating

“remittance securitization and securitization of other future flow receivables in emerging markets are performing well, bucking the current trend in global credit markets…a typical remittance securitization transaction is in the investment grade (BBB-or higher) category since future flows are heavily over collateralized…it would take a huge slowdown in future remittances (of more than 95 percent) for a typical remittance securitization to default. This makes them a safe bet for ‘buy and hold’ investors such as pension funds and institutional investors.”

It should also be pointed out that what the World Bank and Standard & Poor are suggesting in terms of repurposing remittance streams, is a very similar practice to what is now understood to have caused the credit crisis (Langley, 2009).

Once again, hawala functions through its very informality. Numerous studies have affirmed that the appeal of hawala to its customers is not so much its supposed lack of records but its low cost, its reliability, and its accessibility to those populations who lack specific documentation or do not have access to formal banking institutions (Passas, 2003). The point that needs to be made is that often, policy makers and political economists lack an understanding or at the very least, they underestimate the role that informal economies play in today’s transnational societies. Thus, the characterizations that paint hawala networks as criminal systems, obscures the fact that many migrant workers have no choice but to depend on these informal networks to support themselves and their families (Passas 2003).

111

Perhaps one of the ways we can think about this discussion regarding hawala networks and informal remittances is through the lens of Zelizer’s work, which is consistently focusing on the ways in which moral categories and markets change and combine in practice ( 1978;1985).

Zelizer’s (2005) circuits of commerce, in which she argues that financial flows cannot be reduced to simple economic transactions. In other words, she focuses on the ways in which relationships are differentiated from one another, and the role that financial exchanges play in defining social ties.

“So, Mr. Bremer, Where Did All The Money Go?”

In 2004, the Onion, a satirical newspaper, ran an article titled “US to Give Every Iraqi

$3,544.91, Let Free-Market Capitalism Do the Rest.” The article goes on to make up a quote by then-US Defense Secretary Donald Rumsfeld as saying: “If we simply step back and let the market do its thing, a perfectly functioning, merit-based, egalitarian society will rise out of the ashes. Probably some restaurants or hardware-stores, or something, too” (The Onion, 2004).

While the article was obviously a satirical piece, it serves as a reminder that even the invasion of Iraq had a major economic component, which was to establish a free-market economy in

Iraq (King 2003). And while this assertion is not exactly out of the ordinary, what it helps to illustrate is the pattern of global-economic governance which seeks to expand liberal governmentality, and is based upon a morality of what is considered ‘good’ versus ‘bad’ economic practice (Fourcarde 2013). Moreover, this example provides an opening into a necessary discussion surrounding transparency, and the selectiveness in which it is used.

112 It was argued in this chapter that the drive to regulate hawala and other informal financial spaces stems not from its direct involvement in terrorism financing, but rather from a moral argument about illegible/ informal financial systems operating within Western societies.

Furthermore, labeling them as deviant and forcing these networks to formalize and become regulated and transparent, makes the billions of dollars of global remittance flows available for speculation in the financial markets. However, I think it is important to take a moment and acknowledge the selective nature of the concerns regarding unregulated cash and the informal economic spaces through which it flows. I have argued that hawala has been labeled as suspect largely on the basis of it being cash based and lacking formal records. Thinking about that argument, it is interesting to point out that between 2003-2004 the United States shipped an extraordinary amount of cash to Iraq with little to no oversight. In March 2003, Executive Order

1329 confiscated all Iraqi-owned money frozen in the wake of the first Gulf War-amounting to

$1.7 billion-and stipulated that these funds should be “used to assist the Iraqi people and to assist in the reconstruction of Iraq.” (United States Treasury). The appropriated money, in addition to other Iraqi funds, including oil revenues and proceeds from the UN oil-for-food program amounting to almost $12 billion in total, was officially intended to “stabilize” the Iraqi economy and to ensure Iraqi economic reform toward a free-market economy.

Here in lies the problem: Because Iraq did not have a functioning banking system all transfers and payments were made in cash. This involved an enormous operation in which:

“The Federal Reserve had to pack 281 million individual bills-including-more than 107 million

$100 bills –onto wooden pallets to be shipped to Iraq. The cash weighed more than 363 tons and was loaded onto C-130 cargo planes to be flown into Baghdad”. (Committee on Oversight

113 and Government Reform, 2007, p.6). Details of the shipments were outlined in a memorandum prepared for the meeting of the House Committee on Oversight and Government Reform, which was tasked with examining Iraqi reconstruction. The chairman, Senator Henry Waxman stated that “the way the cash has been handled was mind-boggling…the numbers are so large that it doesn’t seem possible that they are true.” (quoted in Pallister, 2007).

What took place upon the arrival of the cash in Iraq was a dispersal of the money to ministries, construction companies, and local Iraqi partners, with little to no records being kept.

Multiple audit reports by KPMG, as well as by the Special Inspector General for Iraq

Reconstruction, have stated that improper, incomplete, and insufficient documentation was kept with regards to the distribution of the funds. As Ed Harriman (2005) states: “the mentality of the American occupation authorities led to a handing out [of] truckloads of dollars for which neither they nor the recipients felt any need to be accountable”. This sentiment is echoed in the statement Paul Bremer, former head of the Coalition Provisional Authority (CPA), gave to

Congress in 2007, in which he argued that: “The subject of today’s hearing is the CPA’s use and accounting for funds belonging to the Iraqi people held in the so-called Development Fund for

Iraq. These are not appropriated American funds. They are Iraqi funds. I believe the CPA discharged its responsibilities to manage these Iraqi funds on behalf of the Iraqi people.”

Furthermore, Bremer’s Financial adviser, retired Admiral David Oliver took an even blunter tone in an interview with the BBC World Service. When asked what had happened to the billions of dollars sent to Iraq he replied:

114 Oliver: “I have no idea. I can’t tell you whether or not the money went to the right things or didn’t-nor do I actually think it’s important.

Q: “But the fact is, billions of dollars have disappeared without a trace.”

Oliver: “Of their money. Billions of dollars of their money, yeah I understand. I’m saying what difference does it make?”

This double standard with regards to transparency and regulation as it pertains to cash, has not gone unnoticed by the countries who have been particularly targeted by the United

States for allowing hawala systems to operate within their borders. The following exchange between UAE Central Bank Governor Al Suweidi and former Assistant Secretary to the Office of

Terrorist Financing and Financial Crimes, Pat O’Brien, is particularly telling in this situation; the following quotation is taken from a classified US government cable provided by Wikileaks:

“Governor Suweidi asked the U.S. delegation about how UAE Customs officers should deal

with U.S. military officers bringing large amounts of cash with them as they travel through

the UAE to or from Iraq. O’Brien noted that since there is not a formal financial system in

Iraq many USG [United States Government] contracts are paid in cash. A/S [Assistant

Secretary] Sullivan said that U.S. officials are obligated under UAE law to report the cash

they carry. He added that the USG would follow up on this issue. (Comment: The fact that

the UAE is aware that cash is couriered through the UAE is interesting and worth noting.

It indicates the UAE Customs officers may be tracking cross-border cash movements more

closely than the USG has previously thought. On the other hand, the Governor could have

115 mentioned this issue to us in order to simply prove a point that the USG facilitates cash

couriers) End Note.” (Wikileaks).

As Senator Waxman (2007) put it in the same congressional hearing referenced above,

“Who in their right mind would send 363 tons of cash into a war zone?” Senators were particularly concerned that some of the cash may have ended up in the hands of Iraqi insurgents and potential terrorists. “Could we have undermined our efforts in Iraq by actually funding the enemy?” asked Waxman (Committee on Oversight and House Reform, 2007).

During these hearings, Bremer defended himself with an argument that hawaladers have tried, unsuccessfully, to use in their own defense when he said: “Well, we were dealing in a cash economy with no banks, no funds transfers, no national telephone system…In a cash economy, it is not obvious to me what the alternative was, frankly.” (Committee on Oversight and House

Reform 2007). It needs to be pointed out, that I am not interested in whether or not US authorities accidentally financed terrorists through their negligence. I am interested more in the discourses surrounding issues of transparency, illegibility, and the regulatory demands for licensing/ registering informal remittance flows that US regulators believed was impossible to provide, when it was convenient for them. As Bremer put it before the House hearing: “I acknowledge that I made mistakes and that with the benefit of hindsight, I would have made some decisions differently…I think under the circumstances that we faced in the middle of a war on the back of a basically bankrupt country, we met our obligations” (Committee on Oversight and House Reform 2007). One should keep in mind that this description could easily apply to either Somalia or Afghanistan, and yet this argument remains ineffective for hawaldars

116 operating under similar circumstances. The point being, is that regulators ignore certain institutions or practices that are as opaque as the ones they focus on, thus complicating or rather shedding light on, the hypocrisy surrounding the push for transparency.

CONCLUSION:

As previously argued, the tracking of terrorist financing, is not simply global governance in which states are strong-armed into enforcing certain laws and regulations. Instead, what it more closely resembles Is Fourcade’s (2007) notion of a governmentalized economy, in which every day financial transactions are actively moralized and thus brought under a new form of security. Or as Agamben (1998) argues, power seeks to make distinctions- to draw lines between the inside and the outside between us and them. The international standards developed by the FATF, IMF and World Bank play a role in the process of discrimination or boundary drawing. These standards and codes define what constitutes a ‘good economy’, and through the application of the standards it is possible to determine who is within the bounds, and who is not, of “normal” economic behavior.

Moreover, The regulation of hawala networks should not be thought of as simply a means to achieve transparency and economic efficiency. Instead, It makes available to governments and international investment markets the previously inaccessible pools of capital provided by the amounts remitted by millions of migrant workers around the globe, and can be seen as yet another merging of finance and security.

117

Chapter Three: “Money Trails Don’t Lie”: Technology, Data-Mining, and Risk Assessment

Financial Data in a Post-9/11 Order

It was argued earlier that the desire and the insistence on transparency is part of a broader neoliberal effort to replace more ambiguous and individualized decision making with specific processes (Best 2007). This is done while also supporting the effort of agencies such as the IMF and World Bank to promote the securitization of international credit whilst imposing new standards of transparency across the globe. However, once such standardized practices have been established, the goal then becomes monitoring and ensuring that these standards are in fact being followed, and that everyone continues to play by the exact same rules (Best,

2005). This requires not just the collection of information, but better and more precise information, which then in turn, leads to the necessity for the development of new forms of surveillance and monitoring. Or, in the words of Porter (1996), this emphasis on transparency, in a system that does not have universal acceptance of some of its most fundamental concepts

(terrorism), requires “mechanical objectivity,” a strict following of what are deemed to be best practices, and above all, a ‘trust in numbers.’

Thinking about the post-9/11 landscape through this lens, it is not surprising that financial data became prevalent. Following the notion of trust in numbers (Porter, 1996), was the idea that “money trails do not lie”. Thus, financial data and its subsequent analysis came to be viewed as the way in which terrorist networks could be identified and ultimately stopped. As

118 Washington Post journalist, Robert O’Harrow Jr (2005) put it, financial data, including “bank transfers; the ties among customers; the use of automated teller machines… amount to a new kind of weapon in the amorphous war on terrorism” (p.260).

Two points need to be emphasized when discussing the use of financial data and its perceived importance. First, there was an increasing belief that financial data could be used as a way to identify targets and prevent terrorist attacks before they occurred. As then US Treasury

Secretary John Snow argued, “Hidden among the case number of financial transactions that move through our financial system are clues…whether an address or a link between two conspirators, that can mean the difference between a successful investigation and a dead end.

We must do everything we can to search out these clues and exploit them. Money trails don’t lie” (Council on Foreign Relations, 2007).

Second, the post-9/11 the use of financial datamining has substantially increased in recent years. This is in large part because regulators have now extended their reach to actors outside of the traditional banks and financial institutions. Reporting obligations are now being required from places such as money transfer businesses, art dealers, casinos and to a certain extent even lawyers and accountants. This dramatic expansion now ensures that everyday financial transactions are being monitored. No transaction is considered too small to be outside the scope of concern. And any donation, or purchase can potentially indicate a suspicious transaction, worthy of increased scrutiny As Jeff Breinholt, a former US Department of Justice official stated:

119 “In the game of prevention… it is not enough to expect law enforcement [to] uncover the bomber before he detonates the bomb. The goal of pursuing terrorism financing as a crime is to widen the universe of possible criminal defendants so that we can prosecute before the terrorist act occurs” (Quoted in Chedik, 2005).

If discovering a suspicious transaction is the main objective of financial data mining, this chapter is interested in understanding how risk, reporting, and prevention are understood, and how, given the sheer number of transactions that occur in everyday banking, suspicious transactions are even identified. This chapter is interested in examining the development in financial transactions reporting, and the smart technology programs that support it in order to shed light on how the expansion of the risk-based approach with regards to counter-terrorism financing has led to everyone and everything being labeled and suspicious.

Financial Datamining:

Although recently there has been an increasingly vocalized concern regarding issues of privacy with regards to datamining and the use of personal financial data in order to monitor for suspected terrorist activity, the use of financial datamining is at an all-time high. The rational behind the continued use of datamining is that it is almost next to impossible to ascertain any kind of continued financial pattern for terrorist, or other would be criminals. As a result, regulators in favor of the continued risk based approach, have argued that continued datamining is necessary in order to stay on top of the ever changing patterns of criminal financial behavior. As the UK Treasury put it, banks and financial institutions need to be “as supple as the criminals and terrorists themselves” (Financial Challenge). Again, based off this

120 logic, one could argue that the ways in which terrorism financing are monitored and prevented are constantly shifting and thus, they are incredibly difficult to predict.

What is interesting is that the acknowledgement of the constant shift in methods and the unpredictable nature of the system has led to an increased dependence on financial datamining, and the constant monitoring of everyday financial transactions. Again because it is impossible to establish set profiles for criminal or terrorist financial behavior, the parameters used in datamining are based on constantly changing ideas of what is considered ‘normal’ behavior (Amoore 2008). Drawing on Foucault once again, he argues that the normal and the norm are central mechanisms through which modern power operates. Foucault argues that

“the norm is not simply and not even a principle of intelligibility…it is an element on the basis of which a certain exercise of power is founded and legitimized” (Foucault, 1975 p.50) This specific idea of power is closely related to his theory on governmentality, as it manifests itself through the self-regulation of individuals who adhere to specific notions of what is normal behavior

(Foucault 1975; Amoore 2008 p.853). Essentially what this means is that because regulators are insisting on the ‘flexible’ and ever changing model of the risk based approach, the problem becomes that definitions and understanding of what constitutes normal non suspicious behavior are constantly changing. And the problem for banking institutions as well as their customer base is that it becomes almost impossible to determine a set of standards against which transactions can be judged and ultimately rendered normal or suspicious.

Before the section examines how changing standards of what is normal work, it should be clarified that financial datamining did not originate after 9/11, but rather, has its history in customer relations management (CRM). For years now, banks have used datamining for

121 commercial purposes in order to profile their customers and determine client profitability, and what promotions to send to which clients. Because of this, banks and the financial sector more generally have a wealth of information on their clients as well as on their businesses and personal finances. Since the early 1990s, there has been an increased understanding that these large data sets can be mobilized for increased business opportunities (Dibb and Meadows,

2004). Obviously what aided in the growth of these data sets was the technological development that has occurred in the last few decades. These “unbundled service and access packages are intended to maximize the bank’s profitability but also continuously and invisibly classify standardize, and demarcate rights, privileges, inclusions, exclusions and mobilities of financial clients” (Graham, 2005). Moroever, as Danna and Gandy argue: “The idea that some customers are worth more than others is the foundation for customer relationship management” (Danna and Gandy, 2002).

In the wake of 9/11 and under the risk-based approach for combatting terrorism financing, CRM technology has been coopted in order to help with the identification of suspicious transactions, withdrawals and transfers. This technology is vital in helping to pinpoint a supposed suspicious transaction in a sea of millions upon millions of financial transactions that occur each and every day. Again, in order for this software to be effective, a modeling of “normal” and predictable account use of clients is needed (Canhoto and

Backhouse, 2007). This kind of predictive patterning does not just record how the customer has behaved but attempts to anticipate how the customer will behave. Some financial institutions have developed their own software for datamining, but more often than not, they rely on software packages developed by outside vendors such as NetEconomy, Oracle (formerly

122 Mantas), Norkom, World-Check, ATTIV/O, and QuantaVerse. The use of such software packages has not only become unavoidable for financial institutions, but they are actively being sought out and partnerships with various tech companies has emerged. For example, Credit Suisse recently announced that it was partnering with Palantir on a project called Signac in order to further develop AI software that attempts to catch “rogue behavior” (Crossman, 2016), and

HSBC just developed an advisory board comprised of various CEO’s and technology scientists working in Silicon Valley to provide it guidance on technology and digital strategies (Macheel,

2017).

Many banking executives argue that “we are not talking about this stuff as if compliance officers are going to be unemployed any time soon. A lot of AI is still in sort of a developmental or beginning stage, and I am not quite prepared to call what the software does as

‘intelligent’…but where I think it is helpful is in providing an extra layer of help. There is so much being thrown at compliance officers in terms of the regulatory environment, and I just think that it is just too much for humans to keep up with the increasing demand” (interview). Banking and finance experts have argued that AI software would be particularly useful in separating false positives from actual compliance violations by being able to recognize and flagging the most

“urgent” laundering cases, and assist compliance officers in reading and understanding the extensive regulations such as the 3,000 plus page Dodd-Frank Act, as well as updates to those regulations. As one interviewee stated

“Each regulatory document is insanely long, and you have to go through thousands of pages just to parse out the things you have to do or the things you have to avoid…simply

123 going through all of that and understanding where to apply things is really difficult. Firms spend a ton on money on this, and what makes it even more challenging is the fact that the regulations are constantly changing. It is almost impossible to keep up with it” (interview).

The idea behind AI is that the software could begin by finding words that imply requirement such as “must” or “shall,” then it could identify the entities involved. In theory what this software should allow financial institutions to do, is figure out what process is affected by regulations dealing with anti-money laundering/counter-terrorism. “If you can pull out specific things and tag them, then you can easily just send those to the people in the bank or whatever organization deal with these things or are likely to be interested in them…you still need a person who can say that’s right or that is wrong, but with regards to the amount of work and time it takes to identify and send each flagged item- the software really helps to cut that down”

(interview).

No, Not That Charles Taylor: The Problem with False Positives

As previously stated, industry experts argue that where the AI software would also be of value is in assisting with the problem of the excessive number of false positives. FATF defines false positives as “potential matches to listed persons and entities either due to the common nature of the name or due to ambiguous identifying data, which on examination prove not to be matches” (FATF 2013: 16). The issue of false positives has plagued both the banking industry as well as regulatory bodies. “Another constant challenge faced by financial institutions is verifying that a possible match is a true match with the specially designated individual or entity on a

124 sanctions list. FATF should encourage all governmental authorities to provide sufficient resources to help financial institutions resolve questions about whether a subject is truly the entity or individual covered by the sanctions program, and this should include a reasonable timeframe for resolving uncertainties” (International Banking Federation, 2011:2).

International banking representatives and even international regulators have been fairly critical of the UN-related lists of ‘terrorists’ due to the lack of identifiers necessary to be able to both freeze specific assets and reduce the rate of false-positives (Amicelle, 2014). The issue of false-positives is a recurrent problem with terrorist lists, but it also exists with other sanctions regimes and lists:

“The fact of the matter is, is that there is no review process. So the countries we work with always have problems with asset freezes and false positives…You freeze someone’s assets, but it is for an indefinite period of time and that goes against a lot of principles of national justice…Let’s take the Muslim community, there are an extraordinary number of people with similar sounding names, and especially if you are converting the spelling from different languages, like Arabic, into English you run into a lot of problems. So you know a name like, Mohammad Bin Ali, do you know how many people in the world have that name. I mean take a small town in Pakistan even, there could be however many Mohammad’s in one village, and this becomes a big problem for identifying specific individuals… They have gotten better in the sense that the identifiers to the names have gotten better…but this is still a major issue. There are court cases across the globe right now dealing with issues of mistaken identity. So in theory while these lists have a purpose, the major question that still plagues everyone is how do you implement this? It is incredibly difficult.” (Interview).

125 Or as one compliance officer stated:

“Investigators are under a ton of pressure to just finish an investigation. Their bosses either want it either tossed aside or passed along to the necessary…False positives are always an issue, especially because there is always the fear that humans miss something. And in terms of false positives, dealing with that requires time and resources and it is by no means foolproof. The number of times global retail banks have frozen the assets of individuals because they shared the same name or even just surname as someone on a sanctions list is crazy. Take a name like Charles Taylor, do you know how many Charles Taylors there are in North America alone, and every time that name comes up we have to do extensive checks to make sure that he is not that Charles Taylor, the dictator from Liberia- even though he was sent to prison… software can help with this…From our perspective, if software can handle a large chunk of data gathering and pass an intital judgement on whether or not a case is worth pursuing, then actual investigators can focus on, and dedicate more time to the actual complex cases…The thing is, what AI cannot do is make decisions in a kind of murky area. If an actual person sees something that resembles money laundering, for example, then a computer has no problem replicating and storing that pattern of behavior. The problem is, is that the judgement of an actual person is still needed when it comes to filling out a suspicious transaction report. The software-programs do not yet have the capability to make a decision about accusing somebody of committing a crime which, for all intents and purposes is what an STR [suspicious transaction report] does.” (Interview).

Speed and quickness with regards to the flow of money and transactions is essential for those in compliance departments who have to parse through the large number of false positives that can slow down “traffic flow in the financial system…Resolving these questions and conflicts is important to avoid unnecessary disruption of international commerce and to avoid

126 unfairly penalizing innocent parties” (International Banking Federation, 2011: 2). The following figures are slides taken from the presentation of a software vendor discussing the benefits of artificial intelligence programs within compliance departments, more specifically the reduction in false positives, time of investigation, and above all cost.

127

128

Figure 4.2 & 4.3 AML Software Seminar Slides (ATTIV/O, 2016)

Despite the fact that compliance officers maintain that human judgement is needed in order to determine suspicious behavior from normal behavior, these software programs are still being used across all major banks. As a result, what needs to be asked, is if these programs are still very much determining what is normal versus suspicious, what elements, or patterns of behavior are programmed in order to help the software make these determinations? Although software vendors emphasize that their models can be altered to the risk profiles of a specific business (i.e. private banking versus charity organizations), it is possible to identify a number of areas through which financial datamining operates. These include the use of public and private

129 terrorist watch-lists and other sanctions lists, a focus on certain (but still shifting) geographical areas and territories (i.e. the Middle East and North Africa), and finally a determination of what makes sense economically. When thought of collectively, these factors represent a shift from simply creating profiles of terrorist financial behavior, toward a continuous (ever changing) model of what is normal financial behavior.

Although terrorism blacklists existed prior to 9/11, their use was dramatically expanded following 9/11, and the September 24 Executive Order signed by Bush, increased both the number of individuals and organizations named on the US list as well as the ability of US authorities to detect and detain transactions associated with individuals on those lists.

However, as previously noted, checking for blacklisted names is not as straightforward as it may sound. Not only are transnationally operating banks required to check against several national lists-including, for example the US, UK, EU, Israeli, and UN lists- but they are also required to check against privately compiled politically exposed persons (PEP) lists, which include individuals who, because of their political roles, may be increasingly vulnerable to corruption

(Basel Committee on Banking Supervision, 2001). When combined, these public and private watch-lists are estimated to include between half a million and a million individuals and organizations and are updated on a daily basis (Norkom Technologies, 2015, p.7). Name similarities, transcription problems, and the fact that these lists are always changing, means that sophisticated software is needed in order to complete the checking of these lists. As one industry white paper puts it: “All permutations and combinations [of name spellings] need to be checked and matches then prioritized based on risk profile and supporting evidence in order to separate the wood from the trees” (Norkom Technology, 2008, p.9).

130 Risk based approaches are combined with sorting devices to make the lists, transaction monitoring and the issue of false-positives manageable. Aradu (2015) uses the metaphor of finding a needle in a haystack as the justification of security programs with mass surveillance capabilities. However, the increasing use of algorithms for data filtering has become less and less about uncovering dirty money or terrorism financing. Instead, what it is doing, is helping to shield the global financial system from getting completely bogged down in overly excessive detection, monitoring, and reporting requirements. Thus helping to reduce the risk that global financial flows will inadvertently be halted because of the war on terror. The risk-based approach is primarily implemented to deal with financial (security) risk rather than (national) security risk. With regard to their business partnership with the corporate bank Mizuho,

FircoSoft representatives emphasize that

Once the solutions were implemented, the next step was to work with Compliance and IT to implement rules and exceptions to reduce false positive hits. Approximately 170 exceptions and 60 rules were written by the team. After testing, with the rules in place, the system achieved Mizuho’s hit rate requirement (2014c).

Again, what this demonstrates is that a lot of times the appeal of this software has less to do with discovering terrorist money than avoiding any catastrophic halting of financial flows because of counter-terrorism measures. In other words, the ways in which ‘terrorist lists’ are being used have been expanded by banking and financial actors to make sure global financial circulation remains in tact. (Ancell and Jacobsen, 2016 p.99). Moreover, moving beyond just compliance with regards to AML/CTF, the ways in which banks are utilizing this software has

131 been expanded to other forms of business that have zero connection with counter-terrorism or money laundering.

For example, the bankruptcy of Lehman Brothers was at the very least anticipated in

September 2008 when the German bank KfW accidentally sent (and subsequently lost) 300 million euros to Lehman’s on the same day that it declared insolvency (Kulish, 2008). A bank spokesperson said that the transaction was part of a regular currency swap, but with Lehman declaring insolvency, the swap became one-sided- with euros going to Lehman, but no US dollars coming back to KfW (Kulish, 2008). And while the New York Times ran an article titled,

“German bank is dubbed ‘dumbest’ for transfer to bankrupt Lehman Brothers” and mocked the bank for this error, the truth is, a wide range of international banks were almost put in the exact same situation. To avoid the same fate as KfW, compliance officers in other banks began to use their AML/CTF detection software to avoid accidentally sending money to Lehman

Brothers and other failed banks. They listed Lehman Brothers so that filtering practices would automatically stop any financial flows to the US bank (Kulish, 2008).

With the credit crunch and the Island banks issue, there are screening systems in banks

which were used for sanctions and that were suddenly used to make sure that you protect

your investors’ interests. Money wasn’t sent to banks which weren’t sanctioned but where

we knew that if we sent anything the customer would have lost money, so the industry

has started to use those [filtering] systems for other purposes…Other banks were in

trouble. Lots of banks dealt with Island Banks and Lehman and the only difference was to

132 try to stop the money going out, so people put those banks on their filter systems and

blocked the money (Quoted in Amicell and Jacobsen, 2016 p. 99).

What has been argued is that the expansion of the software into areas other than money laundering and terrorism prevention further expands the definition of good versus bad money and financial flows to other categories. For example, banks can use this software to help determine with whom they do not want to have a relationship with (Amicell and Jacobsen,

2016). The software and the subsequent lists it produces is thus used to identify and exclude both those who are suspected of criminal or terrorist activity, as well as unwanted clients, a topic which will be discussed further in the following chapter.

Numerous compliance officers also add bank employees to lists to filter and monitor their business relationships and operations in order to prevent internal fraud (Amicell and

Jacobsen, 2016). Part of the program Credit Suisse is developing with Palantir is specifically targeted towards being able to recognize and uncover fraudulent behavior amongst employees

(Crossman, 2016). While the stated purpose of list-related devices is to comply with requirements of financial sanctions against specific “bad-boys”, targeting abilities are interpreted in a broader sense as a way of keeping the financial system free from ‘bad’ clients and employees. Or in other words, it helps banks maintain relationships with only those who they deem appropriate (Amicell and Jacobsen, 2016).

133 ‘Most’ Americans Would Not Be Banking There

Another element going into software-based datamining is the notion of risky territories, including, but not limited to countries with a “reputation” for being tax havens and countries

“supporting” terrorism. To a certain extent, what this system does, is to focus on the individual, or rather the types of individuals, who would be sending money abroad, and like we saw with hawala systems, it attaches stereotypes and helps to raise unfounded concern regarding why certain people would be sending abroad.

There are a multitude of ways to illustrate the ways in which certain areas and regions have come to be viewed of as suspicious. However, FinCen’s 2002 special bulletin illustrates this point nicely. These cases draw attention to wire transfers to an unnamed “Persian Gulf state,” checks cleared through banks in a “Middle Eastern country,” transactions with Lebanon and with beneficiaries “with Middle Eastern names,” and wire transfers being sent to Afghanistan, the United Arab Emirates and other countries in the Middle East (FinCen, 2002 p.1-4). The 2008

FATF report on terrorist financing is not quite as obvious with naming international transactions explicitly as suspect, although twenty-five of its thirty-nine case studies also contain international jurisdictions outside of Western states. In this report FATF emphasizes the risks of business with “safe-havens, failed states and states sponsors…who may provide support for terrorist organizations,” and specifically names Somalia, Iraq, and the Pakistan-Afghanistan border as high-risk geographies (FATF, 2008).

What should also be pointed out with regards to the focus on the risky territories, international transactions, and wire transfers that it coincides with a removal of FATF’s non- cooperating countries and territories list (NCCT list)- of course one should keep in mind that

134 high-risk countries are named in other reports. FATF’s NCCT list of suspected tax havens and money laundering centers had as many as twenty-one countries in 2001, but in 2006, the last two remaining countries (Nigeria and Myanmar) were removed, and the list was discontinued

(FATF, 2006). According to Hulsse and Kerwer, the demise of the NCCT list was related to the delegitimizing effect of a coercive approach to anti-money laundering and the shift towards more of a standard-setting normative approach (Hulsse and Kerwer, 2007), an approach, that

(as was illustrated earlier) is favored by the IMF. This position is supported both by internal IMF

Board documents as well as interviews conducted with experts within the IMF. As one interviewee stated:

“The IMF never engaged in the naming and shaming process, we just do our assessments and publish them, but we are not putting countries on a specific list…I mean one of the reasons we got into the AML/CTF game, and one of the reasons why our membership wanted the Fund involved, is they wanted a more collaborative process. That naming and shaming-they didn’t like what the FATF was doing because basically the perception was, was that it was the OECD countries ganging up on the smaller ones. And that just does not look good. The Fund is a universal membership, and they wanted a governing structure that was not like what FATF had set up. Also, because we have our own staff, our evaluations are a pretty rigorous process, and one of the things about the way FATF set this up, is that the NCCT lists are decided after mutual evaluations-so with that there could be a little bit of the you scratch my back I’ll scratch yours-and there is always a concern about that.” (interview).

The demise of the NCCT list, juxtaposed with the increase of risk-based geographical suspicious transactions mining, suggests like other forms of financial behavior, there has been a shift towards a more ambiguous constantly changing idea of so-called risky territories-

135 therefore, making it difficult for financial actors and or clients to figure out which regions or specific countries are going to have increased scrutiny (De Gode 2012).

Deviations from the Norm

In terms of financial suspicion there are, of course, the transactions that, in the words of one interviewee at a compliance department, “are just really weird and do not make any sort of sense economically” (interview). As the Basel Committee on Banking Supervision’s guidance on customer due diligence for banks suggests: “Certain types of transactions should alert banks to the possibility that the customer is conducting unusual or suspicious activities. They may include transactions that do not appear to make economic or commercial sense” (BCBS, 2001).

These claims of actions that make economic sense can be thought of in two ways. First, financial behavior and how accounts can be expected to be used are based off past behavior of the account holder as well as the type of account. Banks have to develop a “thorough understanding of who all their customers are and what they’re doing” (Buchanan, 2006). This understanding of client behavior in line with the know your customer procedures for new account openings. The new emphasis in compliance, however, is far less about the procedures involving the opening accounts, instead, the new emphasis is on continuous monitoring. And naturally, software companies are more than happy to provide continuous monitoring services, for an appropriate fee (De Gode 2012). For example, one interviewee at a North American bank, confirms that their software is monitoring millions of transactions per day: “The software we use doesn’t just stop vetting or checking once the account has been opened. It used to be more, did you do your due diligence in terms of know-your-customer. But in recent years there

136 really has been a sort of emphasis put on a continuous monitoring effort. This is on top of the risk profile that has already been developed. So now there is almost like a vetting process that is being run 24 hours a day” (interview). Essentially, what is being developed is a strategy is to profile account use over time so that behavior that seems to deviate from something of an established pattern can be identified (De Gode 2012).

In addition to profiling the account use of individual customers, continuous monitoring is conducted through what is now being referred to as “peer grouping.” Here, the idea of transactions that ‘make sense’ is defined through the recognition of “reasonable account activity of customer groups, so that it becomes possible to detect any unexpected and unexplained changes or inconsistencies in the behavior of an account” (Fiserv, 2015, p.24).

Increasingly, then, banks record in detail the business, profession and account purpose of their clientele. A representative of the American Banking Association explains:

You want to find out what kind of business [the client] wants to conduct with the bank. And the bank has to make an evaluation, is that the kind of business I would expect this kind of customer to engage in? If it is unusual, you might be required to file what is called a suspicious activity report. This is not a report that the customer is doing anything illegal, it’s just the customer is doing something that’s significantly out of the ordinary (Quoted in Buchanan 2010, p.102).

Accordingly, industry white papers emphasize the goal of “painting a complete picture of your customer” (Fiserv, 2015 p. 26) by tracking specific details such as where they live, what their jobs are etc. An excerpt from a seminar on AML/CTF software that I attended offers the

137 following example of how clustering certain types of individuals based off common characteristics helps them in flagging suspicious transactions:

Suppose within your bank’s client base there are roughly around five hundred dentists. And let’s say, for the purposes of this exercise, that dentists have something of a routinized, easy to follow pattern of behavior. Now, let us suppose for a moment that dentists make around eight thousand dollars per month. Every month they receive this amount into their bank account on the same day. And let’s also say that part of their behavior is to make a withdrawal-maybe four or five times per month for standard expenses, mortgage payments, food etc., and the rest of the money is saved, put into a retirement fund or something along those lines. That is the average behavior that we can profile. Now of course that was a very simple example, and naturally it could be much more complex. It could be the case that someone’s profile consists of three or four different types of behavior. If there is a criminal or a terrorist among the group, you would see that his behavior, even though he claims to be a dentist, he would deviate quite drastically from that pattern. And we can see that because maybe this person is transferring small amounts of money multiple times per month to another country… So you have 499 dentists and all of their financial transactions pretty much fit the standard pattern outlined above, but you have one that doesn’t fit at all- What does that tell you? Well, it should tell you that person is not a dentist because his transactions are deviating wildly from the behavior that was profiled. (AML Seminar Speaker).

A particularly important aspect of such software models is their supposed intelligence, or the ability to evolve and adapt through artificial intelligence. Interviewees within compliance departments confirm that artificial intelligence and software modeling can identify what would appear to be irregular patterns of financial behavior and adjust their alerts accordingly. For instance, one expert stated that “even within groups of similar individuals there will be times

138 throughout the year where there are changes in the financial behavior of that group. When this happens, the software has to adapt and learn that at certain points there are going to be fluctuations, and thus send out alerts accordingly”. Moreover, when asked what happens when compliance officers see slight deviations from the average pattern of behavior, this respondent argued:

It is easy to say that something is not quite ‘normal’, but I think a lot of times that activity that does not quite conform to a certain pattern is normal for that specific person. So, while it is probably cliché, people actually have to ‘know their customers’. We would like to say that everyone fits clearly into groups, but we know that things happen in life and that not everyone fits neatly into a box, but I do think that if you pay attention and look closely enough you will see some kind pattern of financial behavior based off that individual (interview).

The standard against what makes sense or is considered ‘normal’ financial behavior varies according to the type of client, geographic location, lifestyle, and a whole host of other factors that are either not-disclosed or have simply not been applied as of yet. This is seen as a positive by regulators who argue that the ability of the criteria to constantly change allows those involved in the prevention of and tracking of crime to adapt to ever changing threats (De

Gode 2012). Part of this is necessary because of the acknowledgement that terrorism specifically is an incredibly “low probability event with a particularly fragile connection to statistical technology” (Bougen, 2010). However, as we will see in the following chapter, this ever changing approach to security, and the inability to actually know by what standards

139 ‘normal’ behavior is being judged has unintended consequences for the financial system as a whole.

Conclusion:

In its ideal form, financial datamining can be thought of as smart, side-effect-free governance through which the suspicious actions can be identified and targeted. With the help of software and artificial intelligence, financial institutions record, analyze, and intercept millions of transactions daily. What is important to recognize within this form of governance, are the understandings of money, financial transactions and what constitutes normal financial behavior. This idea of ‘trust in numbers’ and that ‘money trails do not lie’ is effective however, it is important to understand, and question how data (and what kinds of data) is being analyzed, and how it is interpreted. In other words, the problem with the idea that money does not lie, is that it assumes there is nothing complicated or ambiguous about financial transactions. In this sense, this trust in numbers, helps to obscure the political choices and motivations that have gone into determining what is normal versus what is considered to be suspicious.

Moreover, this system is not an ideal form of terrorist prevention through pin-point intervention, but rather a system of broad targeting (Amoore, 2008). Instead, what can be argued is that it is simply the appearance of the ability to specifically target, amid billions of daily transactions, those that are ‘suspicious.’ As the following chapter will illustrate, without that appearance, the continued operation of global financial flows is put in jeopardy.

140

Chapter Four: Risk of What? De-risking and Expertise

Professor Aziz: What we have learned in these cases…is that good men accept a little bit of bad as a necessary element of their work. For some it may be as much as twenty percent. For others twelve or ten. For others again, even as little as five. But five percent bad can be very bad indeed, even if the remaining ninety-five percent is very good.

Banker Tommy Brue: Five percent bad how? Brue was thinking angrily in his nervousness…So tell me who isn’t five percent bad?... [Bank] Brue Frères, with its dodgy investments, dodgy clients, and [black money accounts]? Plus a bit of insider-dealing when we can get away with it? I’d give us more like fifteen.

-John LeCarré, A Most Wanted Man

What are the implications of the risk-based approach for the role of banks and other financial institutions? Mark Pieth and Gemma Aifolfi's (2005) study of global anti-money laundering regulatory regimes, for example, concludes that the risk-based approach has far reaching implications for banking practices, and they write; "Financial institutions are being increasingly drawn into doing what so far had been the task of the public sector: anticipating risk [and] defining the details, for example, in relation to what constitutes terrorist threats” (p.

6). Put simply, the risk-based approach works to spread out responsibility for security decisions toward and within financial institutions themselves. For some, the new independence of banks within reporting practice means, quite bluntly, that they have been "deputized by law enforcement" (Naylor quoted in Shields 2005, p.490). Others have conceptualized the relation between banks and security practice more subtly, arguing that a form of “hybridization of

141 professional competence” is developing-a topic that will be discussed in greater detail later on in this chapter.

As the previous chapter illustrated, certain financial actors are authorized to make potentially far-reaching security decisions, including the closing of accounts and the freezing of transactions. It is increasingly delegated to compliance officers and other midlevel financial bureaucrats to deem whether a transaction is suspicious or not. This is not done against a basic and determined set of rules, rather it has to be done with the constantly changing understandings of what constitutes normal versus suspicious financial behavior (Amoore 2006).

This process of merging finance and security poses problems for both the regulators and the financial industry, which is unsurprising given the fact that the risk-based approach favored by regulators was designed to deal with financial risk, not national security risk. As seen throughout this dissertation, one of the central problems is how to turn terrorism, this nebulous object into an object of financial risk management without blocking global financial flows. Herein lies the dilemma: How do you turn terrorism into something you can govern and control, and yet, make sure you are not blocking access to the world’s financial system? In theory, one could make the argument that this is the exact purpose of risk-management and the agencies that rate countries on levels of political risk. However, what this chapter will argue is that in this instance risk-management fails because when every individual and territory can be viewed as suspicious, how can banks or international financial institutions tell with whom (or with what regions) they can do business? It is in this context that risk management has multiple meanings, because the question becomes risk of what? Risk of financing terrorism, risk of

142 getting sanctioned by the United States Treasury, or the risk of hindering global financial flows.

Or put into Woll’s (2013) terminology there is a dilemma between “systemic risk” versus the

“moral hazards.” Therefore, despite what appears to be a seemingly cooperative transnational network, built across governments, international regulatory bodies, and the international banking system, a lack of a shared understanding of some of the most fundamental concepts, specifically terrorism and what constitutes risky behavior, has led to a series of unintended consequences, and tensions within this fragile network.

Cracks in the Network: De-risking

As previously stated, despite the seemingly cooperative network that was built across the different actors, government institutions, and international organizations, part of this network is built upon is a sense of fear which allows for cooperation but ignores the lack of a shared understanding of certain key concepts and practices. Over the last few years, reports have been surfacing within the United States and abroad, where banks are supposedly perceiving a zero-tolerance regulatory regime with regards to money laundering and counter- terrorism financing. The resulting action of this is that financial institutions are said to be cutting off whole industries and entire geographies. This is being referred to as "de-risking."

Officially, the Financial Action Task Force (FATF) states that:

"de-risking refers to the phenomenon of financial institutions terminating or restricting business relationships with clients or categories of clients to avoid, rather than mange, risk in line with the FATF's risk-based approach. De-risking can be the result of various

143 drivers such as concerns about profitability, prudential requirements, anxiety after the global crisis, and reputational risk. It is a misconception to characterize de-risking exclusive as an anti-money laundering issue/counter-terrorism financing trend." (FATF 2015).

A number of newspaper articles and reports have been produced in the last two years highlighting this trend. For instance, in 2015, the Wall Street Journal announced that California

Merchants Bank, the last national bank in the United States willing to have a banking relationship with Somalia, terminated all remittances. “The California Merchants decision to stop money transfers to Somalia is an example of a widespread trend in banking called ‘de- risking.’ Reacting to pressure by various government regulators and private litigants, banks are rejecting customers in risky regions and industries” (Saperstein and Sant, 2015). Moreover, throughout 2014, J.P Morgan Chase dropped more than 100,000 accounts because they were considered ‘risky’ for money laundering and terrorism financing. Between 2013, and 2014,

Standard Chartered closed 70,000 accounts and ended hundreds of relationships with banks in

Latin America and Central Europe (Wack 2014). De-risking has also had effects within the

United States as well. J.P Morgan Chase, Bank of America and Citigroup’s Banamex USA all closed branches in American boarder towns with Mexico in order to “avoid any unintended connection to illegal drugs or human trafficking”. In response, Arizona Senator John McCain and

Jeff Flake, urged regulators to “balance valid security concerns with unnecessary regulatory hurdles” (Saperstein and Sant, 2015). Despite these assertions, citing continued regulatory pressure and a $140 million fine Citigroup proceeded to close all Banamex USA branches

144 (American Banker 2015). Similarly, European Central Bank reported that banks have steadily cut their correspondent relationships- that is, the other banks they work with in order to facilitate sending money around the globe. HSBC alone closed more than 326 correspondent bank accounts between 2010 and 2012, and to this day refuses to do business in “high-risk” countries such as Myanmar, Angola, and Iraq (American Banker 2015).

Despite the agreement that de-risking is occurring, pin-pointing causes or rather the drivers of this phenomenon have proved to be difficult. As one expert stated:

“We need to get a better handle on the drivers for de-risking. I think right now there is a lot of talk and blame going around, and I think the problem is, is that the talk is abundant but the data is quite limited…I think data can explain or shed light on the drivers, also on the scope and magnitude of the impact, but as of right now everyone is sort of guessing and all we are doing is just repeating each other” (interview).

Although there has been recent the efforts from organizations such as the IMF and World Bank, to gather data, such efforts have come up short. Both the IMF (in conjunction with the Union of

Arab Banks) and the World Bank have conducted their own surveys of compliance departments within banks across the world (IMF 2015; World Bank 2016), however, in both instances incredibly low response rates limit one’s abilities to draw any kind of conclusion from the surveys. Moreover, according to experts within the IMF, there were problems with how the questions in the survey were phrased and how the survey itself was administered.

145 “Turns out, how you formulate questions in a survey matters. Let me put it this way, if you ask very general questions, you get- how can I say this politely- very general, rather useless responses…So despite these surveys being done, we still cannot really pinpoint the issues. Is it overall regulatory changes, is it the AML/CTF standard, is it tax issues, or is it a combination of all of them? Right now you can’t give weight to any one of those. So everybody lumped them together and then you tend to hear back, oh yeah it is AML/CTF. One of these days someone will figure out that how you design questions matters and actually design a survey that gets in a way to the heart of the issue” (interview).

In the absence of any conclusive data, regulators and those working within the financial sector have taken to blaming one another for this occurrence. While the following sections will discuss the perceived drivers of this phenomenon from the point of view of both the regulators as well as those within the financial industry, it is not the objective of this chapter to take a stand in terms of the causes of de-risking. Rather, the point of the chapter is to highlight the ways in which blame has been allocated, and to highlight the breakdown of translation, and the resulting cracks in this supposedly cooperative network.

What is Driving De-Risking?

The 2008 financial crisis had far-reaching consequences, including a shift in the dynamic between regulatory authorities and financial institutions. In response to accusation they were lax in their duties before the crisis (Financial Crisis Inquiry Commission, 2011), US regulators have increased scrutiny on financial institutions, particularly as it pertains to AML/CTF.

Allegations had been made, that proceeds from organized crime and drug smuggling provided

146 the liquidity necessary for banks on the verge of collapse during the crisis (Financial Crisis

Inquiry Commission, 2011 ). Moreover, it has been suggested that there is a perception that banks were not held sufficiently accountable for their role in the 2008 crisis, (Financial Crisis

Inquiry Commission) and the rise in enforcement actions for AML/CTF may be an attempt by regulators to punish banks for their wrongdoing.

Financial institutions have responded by significantly scaling back “risk appetites”, which has resulted in the de-risking of entire customer bases. Financial institutions use different measures and indicators to assess termination of accounts and do not publicly release information about the criteria they use to determine when relationships will be formally exited.

These benchmarks vary significantly across institutions due to a number of factors, including bank-size, “risk appetite” and the willingness of financial institutions to absorb risk given the regulatory climate, and finally, the profitability, or lack of, with regards to engaging in certain business or even entire regions. These factors, juxtaposed with increasing AML/CTF scrutiny are the most commonly cited reasons for de-risking. However, the core issues are much more nuanced and involve a complex mix of factors that involve both financial and regulatory actors.

The following sections seeks to illustrate the drivers of de-risking from both the sides of financial experts, as well as regulators. Again, while data limitations prevents this project from making statements with regards to the prevalence of any one factor, I think when looked at collectively, the issues highlight the problem of attempting to treat national security problems as financial problems. Below is a summary of some the key factors driving de-risking practices.

It is also important to point out, that while these factors have been argued as stand-alone

147 issues, more often than not, there are levels of connectedness, and should be considered together as part of a larger problem.

Perceived Risk:

Underlying the practice of de-risking is the assumption that the affected customers present a higher risk of moving and saving funds that are somehow ‘dirty’. For example, the accounts could be used to launder money, finance terrorist activity, violate sanctions regimes, or support other illicit activities, such as drug smuggling or tax evasion. One sector that has traditionally been perceived has high risk are money services business (MSBs). MSBs are non- bank institutions that provide financial services such as money transmission (such as hawala networks), currency exchange, or check cashing, often with much lower fees than traditional banking institutions and without the requirement to maintain a formal account (FATF 2015).

However, as the previous chapter illustrated, limited levels of regulation and formalization, as well as challenges to conducting customer due diligence (CDD) have raised concerns about

MSBs somehow being linked to AML/CTF (FATF 2015). Even if MSBs are in full compliance with international regulations, the transactions they engage in are often perceived as risky when the recipient jurisdiction (such as Somalia) lacks adequate AML/CTF capabilities, or are in the midst of conflict, such as Somalia or Afghanistan, which makes regulating these transactions next to impossible. Additionally, those operating MSBs will often pool funds from several individual transactions to deposit in one lump sum, which obscures information about the original source of funds (FATF 2015). These funds are then transferred to clearinghouses, which often reside in

148 "conduit states," such as Jordan Turkey and the UAE. This additional stopover of funds adds a layer of suspicion and complexity, particularly when conduit states are perceived to have lax

AML/CTF controls (FATF 2015). As previously discussed, MSBs suffered significant reputational setbacks following the terrorist attacks of September 11, 2001, when the US government shut down the largest MSB, al-Barakaat, over suspicions that it had been used to funnel money to al-

Qaida. As the previous chapter already stated, that while the 9/11 Commission eventually found no evidence that MSBs, including al-Barakaat, had been used to fund the attacks, (9/11

Commission Report) the industry has continued to suffer reputational repercussions as a result of the negative publicity. For Somali MSBs in particular, the current concern revolves around al-

Shabaab and piracy (FATF 2016). Given the lack of a formal banking structure in Somalia, MSBs provide vital financial services to the Somali community.

MSBs have arguably become the focal point of the de-risking debate, in large part because of the humanitarian concerns related to the reduction of remittance flows to vulnerable communities in Somalia (FATF 2016). However, correspondent banking relationships have also been targeted as a key vulnerability in AML/CTF regimes and have been subjected to de-risking practices. Correspondent banks provide back-end services such as check clearing, foreign exchange trading, and fund transfers on behalf of another financial institution (Durner and Shetret, 2016). Frequently, foreign financial institutions will keep correspondent banking accounts at US banks to gain access to the US financial system and currency. However, these practices are also considered vulnerable to money laundering and terrorism financing (Durner and Shetret 2016).

149 Financial institutions also view certain foreign embassies as high-risk clients. Foreign embassies and Permanent Missions to the UN in the US rely on US bank accounts to provide services such as payroll issuance and cash management. Perhaps the most widely discussed example regarding de-risking as it pertains to foreign embassies, dates back to May 13, 2004, when FinCEN and the OCC issued a $25 million fine to Riggs Bank of Washington, DC, for violations of suspicious activity reporting and for failure to establish adequate AML/CTF controls for its numerous foreign diplomat and embassy clients. As a result of the subsequent reputational damage, Riggs Bank was forced to sell its operations to PNC Bank of Pittsburgh in

July 2004. As Zarate (2013) writes in his memoires:

“One example in particular demonstrates the dynamics that would define the landscape for our Bad Bank Initiative. On May 13, 2004, the Treasury rocked the Washington banking establishment. That day, the OCC and FinCen fined Riggs Banks in Washington, DC,…for willful violations of suspicious activity and currency transaction reporting and for failing to establish an adequate anti-money laundering system. Long a revered Washington institution, Riggs served a long list of distinguished clients, especially foreign diplomats and embassies. After 9/11, Riggs had come under the microscope in part because of its lax anti-money laundering controls related to foreign embassy and diplomatic accounts-and in particular, its banking relationship with Saudi Arabia and Equatorial Guinea. Riggs had built the premier banking business, catering to embassies and foreign diplomats and officials. In other times, the traditional winks and nods of private bankers with privileged customers would have been accepted as the norm. Unfortunately for Riggs, these were not normal times”(p. 148).

The fallout from the Riggs bank fiasco left embassies scrambling to find new banks to

150 take their accounts, while the banks the embassies approached, wary of heightened scrutiny and reputational risk were not eager to absorb their business (Zarate, 2013). Instead, banks began shedding foreign embassy accounts. The embassy of Angola, in Washington DC, was the first to have all of its US bank accounts closed against its will, when Bank of America terminated business with the embassy in 2010. In response, the Angolan government threatened to close the bank accounts of US companies in Angola, such as Chevron, Exxon, BP, and Boeing, as well as all US embassy bank accounts (Rogin, 2010). American businesses with interests in Angola began to express their concern to government officials and banks (Reed, 2010). With diplomatic and organizational interests at stake, in a letter to the American Bankers Association (ABA), then-US Treasury Secretary Timothy Geithner and then-US Secretary of State Hillary Clinton pressed banks to resume business with foreign embassies, warning of the negative effect of account closures on US diplomatic relations. ABA president and CEO Frank Keating responded that the regulatory regime made banking with embassies nearly impossible (Keating, 2011). US

Treasury and State Department officials were pushing banks to engage with embassies but could not guarantee leniency on behalf of regulators, who had warned that foreign embassies pose heightened money-laundering risks as diplomatic immunity exempts them from reporting the source of funds in their account (Palazzolo and Rieker, 2012).

Moreover, embassies often struggle with issues related to politically exposed persons and are viewed as vulnerable to the laundering of the proceeds of corruption and the embezzling of state funds. Foreign embassies also present risks related to potential sanctions violations. For example, in 2014, JP Morgan blocked a transfer from a Russian embassy in

151 Kazakhstan to an insurance company owned by a US-Sanctioned bank. This came after a 2011 decision by the bank to exit relationships with many foreign diplomatic outposts over concerns about money laundering and terrorist financing (Baron, 2014). These concerns are further complicated by diplomatic immunity and the embassies' legal status as a foreign territory, which limit the banks' ability to monitor transactions (Palazzolo and Rieker, 2012). Certain types of charities and NGOs are perceived as particularly risky as well, either because of the nature of their work transferring money internationally, their areas of operation, including conflict zones and other high-risk environments, or both (Durner and Shetret 2012). One concern is that terrorist organizations may pose as a legitimate NGOs or charity in order to engage in fundraising activities, or that legitimate funds or assets may be misappropriated to finance terrorist activity. One notable case involves the US labeling of the Yemini politician Abdulwahab al-Humayqani as a "specially designated global terrorist" because of allegations that he used his prominent status to fundraise through his affiliated charities and then transferred the proceeds to al-Qaida in the Arabian Peninsula (AQAP) (Baron, 2014). However, NGOs remain reluctant to speak out about the impact of de-risking practices, as they fear reputational damage and greater financial exclusion (Keatinge, 2013).

As previously stated, de-risking is not just taking place abroad. Instead, banks are terminating relationships within the United States as well due to the perception that certain types of business are deemed to be too risky, and that US regulators are going after banks that maintain relationships with these sectors.

152

‘Operation Choke Point’

First made public in March 2013, Operation Choke Point was an initiative by the US

Department of Justice for investigating financial institutions doing business with industries deemed to be at high risk for fraud. According to a Justice Department official quoted in the

Wall Street Journal, "we are changing the structures within the financial system that allow all kinds of fraudulent merchants to operate [with the intent of] choking them off from the very air they need to survive" (Zibel and Kendall, 2013). Operation Choke Point was predicated on a

2012 policy announcement from the US Federal Deposit Insurance Corporation (FDIC), which included a list of both legitimate and illegitimate merchant categories that have been

"associated with high risk activity" (Committee on Oversight and Government Reform, 2014).

Operation Choke Point interpreted existing law to imply that providing financial services to these merchant categories creates a "reputational risk" that is sufficient to trigger a subpoena by the Department of Justice (Committee on Oversight and Government Reform, 2014).

However, a report by the US house of Representatives Committee on Oversight and

Government Reform found that the Department of Justice lacked adequate legal justification for this initiative and called for its dismantling (Committee on Oversight and Government

Reform, 2014). Additionally, the report disclosed evidence which suggested that the true goal of the operation was to target industries that were deemed "high risk," or that were otherwise perceived as questionable to the Obama administration (Committee on Oversight and

Government Reform, 2014). The operation focused particularly on short-term lenders, including check cashiers and payday lenders, but also extended to other industries such as firearms. The

153 Department of Justice issued 50 subpoenas to banks and payment processors as part of the operation, which resulted in the abrupt closure of accounts associated with these merchant categories (Committee on Oversight and Government Reform, 2014). As a result of the operation, the report said, "Banks are put in an unenviable position: discontinue longstanding, profitable relationships with fully licensed and legal businesses, or face a potentially ruinous lawsuit by the Department of Justice" (Committee on Oversight and Government Reform).

In response to backlash from Operation Choke Point, the FDIC issued a letter indicating that all banks should take a risk-based approach to assessing individual client relationships on a case- by-case basis and not by industry operational risk (Federal Deposit Insurance Corporation,

2015). This was followed by a memorandum to supervisory staff requiring examiners to put in writing their recommendation to terminate an account, which the financial institution must then have reviewed before the account was terminated (Federal Deposit Insurance

Corporation, 2015).

There are clear similarities between the de-banking resulting from Operation Choke

Point and the de-risking challenges currently facing hawalas and other MSBs. Although there is no longer a federally defined list of high-risk merchant categories, the stigma and reputational damage done by being on that list in the first place is ongoing. As Durner and Shetret argue

“Low profitability, rising compliance costs, reputational concerns, and increasing fears over civil and criminal penalties have all helped create a system in which risk avoidance has replaced risk management” (2016).

154 However, the same factors that contribute to the high-risk assessment of these clients are also what make them most reliant on banking services. For many of these clients, banking relationships offer critical access to the global financial system for vulnerable and otherwise underserved communities, and account closures negatively affect both financial inclusion and

AML/CTF objectives in the immediate and longer terms (FATF 2015). As previously stated, although financial institutions have found themselves at the center of the de-risking debate, they have been reluctant, or unwilling to comment, or participate in exploratory studies about the handling of the practice. The resulting ambiguity has led to further confusion regarding how the customer base can best adapt practices to avoid being de-banked. The banking industry argues that it is the lack of clarity from regulators about what qualifies these various industries as high-risk, as well as what criteria trigger the decision to exit these relationships. In many instances, the lack of clarity stems from concerns about regulatory enforcement and the broad assessment of risk based on entire merchant categories, not individual compliance measures.

Increases in the Cost of Compliance

“A few months ago I was at [compliance]department meeting, and everyone was there, not just the guys working in the AML/CTF unit. And the head of our department had brought in a consultant to give a presentation. And the first thing he said was please raise your hand if you work in AML/CTF. So those of us in that specific unit raised our hands. The consultant then yells WRONG! Every single person here should have their hands raised. This entire department should view itself as working on the frontlines of money- laundering and terrorism prevention” (interview).

155

I use this quote to illustrate the expansion of compliance departments in the years following 9/11. Long lists of suspicious indicators published by FATF and other bodies, as well as the general heightened concern surrounding the issue of terrorism financing, led to an explosive growth in suspicious transaction reports in the wake of 9/11. In the United States, suspicious transaction reports (STRs) by banks and other depository institutions grew from

202,538 to 273,823 in 2002 and 649,176 in 2007 (FinCen, 2007). If this growth continued a trend that started before 9/11, the sharp rise in 2002 was really incredible. Terrorism financing was added as a separate category on the US STR forms in 2003, but less than one percent of all annual reports in the period from 2003 to 2007 were filed under that heading (FinCen, 2007).

Similarly, in the United Kingdom STRs almost doubled annually in the years after 2001, from about 30,000 in 2001 to 55,000 in 2002, 95,000 in 2003 and 155,000 in 2004 (Flemming,

2005). According to the 2014 KPMG Global Anti-Money Laundering Survey, 78 percent of compliance professionals in top global banks reported increases in the total investment in AML compliance, with 22 percent of those respondents indicating an increase of 50 percent during the three-year period from 2011 to 2014 (KPMG 2014). Translating that into concrete expenditures, HSBC spent $800 million on its compliance and risk management program in

2014, an increase of $200 million from the previous year (KPMG 2014). Australian investment bank Macquarie told investors that its direct compliance costs had tripled over the past three years to nearly $250 as of 2014 (KPMG 2014). At Standard Chartered, regulatory costs are adding one to two percent to annual costs, totaling approximately $100-200 million each year.

156 The bank has also doubled the number of staff in its financial crime unit and increased legal compliance staff by 30 percent (Monroe 2015). Although these sums should not be considered crippling for large financial institutions, they are often cited as a key factor in the decision to de- bank, as rising compliance costs further cut into the profitability of certain customer bases that may already be considered not that profitable (Durner and Shetret). Moreover, the divergence of regulatory approaches across state, national and international jurisdictions is a key factor in driving up compliance costs (De Gode 2012). She argues that “this divergence can be viewed as an invisible cost of globalization, with traditionally jurisdiction-focused regulatory frameworks struggling to keep up with an increasingly integrated global economy”. Navigating these complex regulatory frameworks can be difficult and costly, and as De Gode (2012) points out,

“increasing scrutiny from regulators has heightened concerns that procedures will be deemed inadequate”. The trend that is now taking place, is that the cost of regulatory compliance may be shifted to bank customers in the form of higher fees, restricted credit, and a reduction in available services and products (KPMG, 2014). For low-income individuals and low profit margin businesses that are unable to absorb these additional fee structures, this cost shifting may result in the “effective discontinuation of services and exclusion from the financial sector”

(Durner and Shetret, 2016).

157 Increased Fines and Criminal Charges

Further influencing the risk-versus-profitability analysis for financial institutions is the imposition of massive fines for AML/CTF deficiencies and sanctions violations. Data from the

Association of Certified Anti-Money Laundering Specialists (ACAMS) indicates that although there was a small rise in AML/CTF-related enforcement actions in 2012, in the same year there was a 131-fold increase in fines and monetary settlements paid by banks for AML/CTF and sanctions violations (English and Hammond, 2012). Regulatory fines and monetary settlements under deferred prosecution agreements rose from $26.6 million in 2011 to $3.5 billion in 2012

(Durner and Shetret 2016). This includes a $1.9 billion settlement paid by HSBC to US and UK regulators for their failure to properly monitor wire transfers that were linked to Mexican drug cartels, and for violation of sanctions laws through their business with clients in Iran, Sudan,

Myanmar, and Cuba (Viswanatha, 2012).

Fallout from the 2008 financial crisis, including the widespread negative media coverage, has been cited as contributing to the rise in monetary fines. Public pressure has prompted regulators to actually hold financial institutions accountable for their misconduct as opposed to just letting them off with a warning (Carter, 2014). Regulators have indicated that hefty fines and enforcement actions are imposed “only on the most willful, sustained, and egregious offenders” (Durner and Shetret 2016). For example, the 2012 HSBC fines marked the third time in a decade that the bank had been penalized for lax controls and ordered by US authorities to improve its monitoring practices (Viswanatha, 2012). However, as William

Hoffman, a former chief counsel at the Office of Foreign Assets Control said, ''It can be

158 frustrating for banks because they are throwing millions of dollars a year into sanctions and

AML compliance programs and they are the front cops for the US Government, but they are still getting these huge penalties." (Quoted in McKendry, 2014 ). As another compliance officer stated "We are kind of in a Ping-Pong match between financial inclusion and avoiding regulatory scrutiny and we are the ball...Our sense of how well we have to manage that risk is evolving with the regulatory landscape. And the result is that we are exiting and becoming more conservative about providing services to certain segments." (interview)

Reputational Concerns

The implications of non-compliance extends beyond the imposition of fines. On the extreme end of the spectrum, failure to comply with regulations or being accused of sanctions busting etc. can even result in the revocation of the bank's operating charter (Durner and

Shetret 2016). One area of concern is the potential reputational damage that could be incurred if enforcement actions are actually taken against a bank (Durner and Shetret 2016). As Durner and Shetret (2016) have argued “regulatory scrutiny increases, so does the likelihood that a bank will be found in violation of, or, at the very least, deficient, in its sanctions and AML/CTF procedures”. As one compliance officer stated "It is a risky world for us in terms of enforcement actions and other actions...I think if there is a tipping point-[banks] are probably going to de- risk...At this point, I don't think financial institutions can take their own risk of not making that determination to de-risk" (quoted in Mckendry 2015).

Concern over the ability of banks to survive the reputation damage of having fines and

159 charges brought against it can also negatively affect relationships with investors and have a volatile impact on stock prices (Durner and Shetret 2016). For example, at HSBC, one high- profile fund manager announced in September 2013 that he was selling a multi-billion dollar holding as a direct result of concern over the impact of future fines (McKendry, 2013). Rumors of impending enforcement actions for BNP Paribas triggered an overall market loss of approximately $12.7 billion, despite a slight increase in stock prices following the announcement that the bank had sufficient funding to pay the $8.9 billion fine (English and

Hammond, 2014). These enforcement actions also have implications for balance sheets, as regulators use their power to force firms to hold more capital, liquidity, solvency, or all three to protect against failure (Durner and Shetret 2016). Although they are frequently cited as a main driver, the long-run implications of reputational damage remain to be seen. For example, every

"global systemically important bank, or bank whose failure may trigger a financial crisis, as identified by the Financial Stability Board, has been fined, which makes it difficult for investors and stakeholders to avoid engagement with tarnished institutions” (English and Hammond).

Quoting Zarate (2013) again, he argues that

“We had realized that a new banking ecosystem had emerged. This was now an environment in which banks were acutely sensitive to their reputation and the risks of doing business with suspect individuals and entities under the international regulatory and enforcement microscope. Banks were willing to cut financial and commercial relations with rogue regimes, criminals, and terrorists, given the right conditions…this new ecosystem also relied on a globalized financial infrastructure. The system connected all international actors-states and non-states-with its leading node in the United States-New York. New York serves as the most important financial center in the world, and the dollar

160 serves as the global reserve currency and dominant currency for international trade, including oil. The twenty-first-century financial and commercial environment had its own ecosystem that could be leveraged uniquely to American advantage. In this system, the banks were prime movers” (p. 150).

On the other hand, de-risking itself has public relations repercussions, since banks are being portrayed as cutting off crucial lifelines to vulnerable communities. This adds to the already existing negative perceptions of financial institutions that were brought about after the

2008 financial crisis. As a result, there are potential "reputational returns" for banks who continue to engage in services with certain communities (Durner and Shetret 2016).

Holding Those Responsible Accountable

Historically, regulators have shied away from actually indicting banks and prosecuting them for AML/CTF violations over concern that the repercussions, including the potential revocation of a bank charter, would throw into jeopardy the broader financial system, thus giving rise to the concept of "too big to jail" (Carter and Nasiripour, 2014). One of the cases most commonly cited as a deterrent to criminal prosecution is that of the accounting firm

Arthur Andersen LLP, which in 2002 was convicted of obstruction of justice related to the shredding of documents tied to the Enron securities fraud case. This conviction was later overturned in 2005, but by then the firm had effectively gone out of business (Greenhouse,

2005). Instead of criminal prosecution, regulators in the US and UK have traditionally relied on deferred prosecution agreements (DPAs), according to which banks voluntarily agree to a set of

161 conditions in exchange for the suspension of criminal charges (Durner and Shetret 2016). DPA conditions can include monetary penalties, improvements in compliance measures, changes to bank management, and cooperation with regulatory and law enforcement authorities. For example, in addition to the $1.9 billion fine levied on HSBC, the bank also signed a five-year DPA that included the placement of 100 monitors from US regulatory authorities to ensure that remedial actions were being implemented. If HSBC is found non-compliant during that period, it runs the risk of both a criminal conviction and the potential loss of its US banking license

(English and Hammond, 2014). As the shock value of large fines eventually wears off, some are concerned that financial institutions have begun to view fines simply as the ''cost of doing business," and as a result, they are not likely to have a long-term impact or change the historically bad or risky behavior of banks (Durner and Shetret 2012). In response, regulators have made a deliberate shift toward stronger enforcement measures to ensure both corporate and individual accountability (English and Hammond, 2014). For example, France's largest bank, BNP Paribas10, pled guilty in June 2014 to charges related to the processing of more than

$8 billion in transactions on behalf of Sudanese, Iranian, and Cuban entities subject to US economic sanctions. This represented the first time that a global bank had pled guilty to large- scale systematic violations of US economic sanctions, and resulted in the imposition of an $8.9

10 “BNP Paribas Agrees to Plead Guilty and to Pay $8.9 Billion for Illegally Processing Financial Transactions for Countries Subject to US Economic Sanctions”, Department of Justice, 30 June 2014, https://www.justice.gov/opa/pr/bnp-paribas-agrees-plead-guilty-and-pay-89-billion- illegaIly-processing-financiaI

162 billion fine. Conditions of the BNP Paribas plea deal included action against 45 employees, including dismissals, cuts in compensation, and demotions (English and Hammond, 2014).

Beyond repercussions levied at the banking institutions, senior staff have also begun to incur direct personal impacts. Setting an important precedent, the BNP Paribas deal does not mention immunity from prosecution for any associated individual (Department of Justice,

2014). As One European banking executive framed it, "From my point of view, there is an orange suit is sitting in the US and the regulator is saying if s there waiting for me." (Quoted in

McKindrey 2015).

Client Profitability

Low profitability of the customer base has often been cited as a key, if not the most important, driving factor behind de-risking practices from the point of view of the regulators who have consistently argued that the decision to end services in certain regions or for certain kinds of business is nothing more than a business decision (Durner and Shetret 2016). Although

MSBs offer a regular, and substantially large client base, the average transaction amount is small. Moreover, the large quantity of transactions adds additional compliance costs, which is further compounded by complex regulatory work that is involved in dealing with transactions that cross international jurisdictions (British Financial Services Authority). As Durner and Shetret

(2016) point out, “In the final analysis, the volume of transactions often does not offset the additional costs of banking this customer base”. For example, profitability was a factor in

163 Barclay's decision to close all MSB accounts. Barclays developed a "Minimum Standards" document in 2013 following a review of its MSB client base. At the draft stage, one of the requirements was that the customer should “yield actual or potential annual revenue of at least

100,000 GBP and have at least 10 million GBP in net tangible assets” (Barclay’s 2013). Although the first consideration was removed from the final document, the idea that “high profitability can offset high risk remained a key consideration in the subsequent de-banking decisions related to MSB accounts” (Durner and Shetret 2016). Out of its total 414 MSB clients, Barclays decided to continue to provide banking services to 156, including only 19 of the 165 money remitters

(Barclay’s 2013).

Profitability is also a factor in assessing correspondent banking relationships. In the face of rising scrutiny, financial institutions have increasingly found themselves accountable for knowing not only their customers but also their customer's customers (Know Your Customers'

Customers, or KYCC) as well (Durner and Shetret 2016). This requirement increases the risk for banks engaging in correspondent bank relationships, particularly in those jurisdictions labeled

“high risk” (McKendry, 2014). KYCC is a very costly process for financial institutions, and moreover, the tense relationship and the lack of trust between financial institutions and their perceived 'high-risk' clients because of the AML/CTF regulations has often led banks to decide the risk is not worth the cost in these sectors (Durner and Shetret 2016).

As argued in the previous chapter, the articulation between the list, and the compliance software’s algorithmic calculation and filtering, forms the basis for a complex sorting and profiling of clients according to certain risk criteria. In theory, this should make it possible to

164 enlarge the range of population included in the formal banking system. However, more often than not, the use of these programs leads to the filtering of clients considered to be either

“suspicious” or not profitable for the bank and those clients considered to be “low risk and more lucrative” (Rathod et al. 2012). For instance, if over a period of time, a customer does not comply with the requirements of the bank, such as keeping a certain minimum amount in their account, they are designated as a non-lucrative client: “If customers are not profitable for the bank, we filter them out” (Quoted in Amicelle and Jacobsen 2014 p. 101). Risk assessments with the application of KYC processes also make it possible to single out potential high-value customers and provide them with preferential treatment. Such customers are seen not only as preferrable but also as profitable (Amicelle and Jacobsen 2014). Larger international banks in particular therefore assign what are known as relationship managers to these customers.

Moreover, because of their assets, listed high-risk customers such as politically exposed persons (PEPs) also tend to be the most lucrative customers of the bank (Amicelle and Jacobsen

2014). As a result, the need to follow up with clients allows for the continuous monitoring of clients for suspicious transactions, and gives the bank an excuse to follow up with a client that has been listed as desirable or profitable, thus giving off the impression of special treatment

(Amicelle and Jacobsen 2014). As Amicelle and Jacobsen argue: “Both the beliefs and the everyday practices of bankers reflect the idea that a personalized relationship between the banker and the client is important not only for compliance with KYC requirements but also for the growth and profit of the bank”.

165 In 2015, the Globe and Mail ran an interesting article that illustrates this point nicely:

“Ontario sisters Catherine and Emilie Taman both said in interviews they received mysterious phone calls from their separate banks, asking intrusive questions… Catherine’s banker eventually explained why: Her mother was a foreign PEP. The Taman sisters’ mother is Louise Arbour, who apart from being a retired Supreme Court judge, is also a former international war-crimes prosecutor and a former United Nations human rights commissioner. Catherine said when she refused to answer the questions (on her mother’s advice), her account was frozen, which she discovered when she tried to use her bank card in a restaurant. A letter she provided to The Globe showed her bank asking questions such as, “From whom/where are you getting money?” “How did you accumulate your wealth/net worth?”

How the banks knew the Taman sisters were Ms. Arbour’s daughters was a mystery to all three women, but experts contacted by the Globe say a small group of private companies provide lists of foreign PEPs and their families, and banks run new customers through those computerized lists, for a fee…In a commentary piece Ms Arbour calls the program a ‘useless bureaucratic nightmare’, and that her children should be left alone by their bankers” (Fine, 2015).

166 Mapping out the Existing Narratives

Responsibility for addressing the problem of de-risking has continually shifted among regulators, policymakers, banks and the customer base (Durner and Shetret 2016). Regulatory actors continue to favor, and push for a “risk-based approach that relies on financial institutions' risk assessments and compliance monitoring mechanisms to identify, disclose, and terminate suspicious activity” (Durner and Shetret 2016). However, the lack of transparent rationale on behalf of the banks for why they chose to de- risk, has left effected customers unclear with regards to what to do next, as well as left them feeling unduly persecuted (Durner

Shetret 2016). Those voicing their concern regarding the clients left without formal banking institutions, have focused their messages on the humanitarian impact de-risking has or will have on these already vulnerable communities. However, as Durner and Shetret (2016) note

“their pleas do not appear to resonate with business-minded financial executives, who may fear criminal liability and financial repercussions”.

However, for the regulators, the decision to de-risk is an over-reaction, and that the concerns over repercussions of doing business with higher risk individuals, financial sectors, or even countries is largely unfounded. The FATF has argued that they have recognized the importance of balancing AML/CTF with financial inclusion goals, and has raised the issue of de- risking during its tri-annual Plenary Session. Their official statement is that:

"The FATF Recommendations only require financial institutions to terminate customer relationships, on a case-by-case basis, where the money laundering and terrorist financing risks cannot be mitigated. This is fully in line with AML/CFT objectives. What is

167 not in line with the FATF standards is the wholesale cutting loose of entire classes of customer, without taking into account, seriously and comprehensively, their level of risk or risk mitigation measures for individual customers within a particular sector" (FATF 2014).

Unsurprisingly, US regulatory bodies have adopted a similar understanding with regards to the issue of de-risking. As previously mentioned, the US dollar is the most commonly used currency for cross-border capital flows, rendering those transactions subject to US AML/CTF laws. This has obviously made the US a major player in AML/CTF regulation, so considerable attention has been paid to the regulatory climate and approaches adopted by US regulators

(Durner and Shetret 2016). On the whole, US regulators have reiterated their commitment to the risk-based approach as the most effective means for balancing financial inclusion and

AML/CTF goals. However, some view the US as applying a much stricter standard than that outlined by the FATF Recommendations above (2014).

In April 2005 the Financial Crimes Enforcement Network (FinCEN) and the Federal

Banking Agencies issued a joint guidance note on obtaining and maintaining banking services for MSBs. The note was designed to clarify the requirements for, and assist banking organizations in, appropriately assessing and minimizing risk posed by providing baking services to MSBs. In November 2014, FinCEN issued a new statement on the topic excerpted here:

"Refusing financial services to an entire segment of the industry can lead to an overall

reduction in financial sector transparency that is critical to making the sector resistant to

168 the efforts of illicit actors. This is particularly important with MSB remittance operations.

FinCEN does not support the wholesale termination of MSB accounts without regard to

the risks presented or the bank's ability to manage the risk. As noted, MSBs present

varying degrees of risk, and not all [MSBs] are high-risk. Therefore, when deciding whether

to provide services to an MSB customer, financial institutions should assess the risks

associated with that particular MSB customer" (FinCen 2014).

The Office of the Comptroller of the Currency (OCC) also issued a statement in November 2014 which, rather unsurprisingly took a similar position:

"As a general matter, the OCC does not direct banks to open, close, or maintain individual accounts, nor does the agency encourage banks to engage in the termination of entire categories of customer accounts without regard to the risks presented by an individual customer or the bank's ability to manage the risk. The OCC has always taken on the position that banks must apply the requirements of the Bank Secrecy Act based on their own assessment of risk for all customer accounts. The safety and soundness of an institution can be threatened when a bank lack appropriate risk management systems and controls for the products or activities it provides or the customers it serves. Moreover, the failure to implement and maintain such controls can provide money launderers, fraudsters, terrorists, and other criminals with access to our financial system" (Office of Comptroller of the Currency).

Additionally, Thomas J. Curry, Comptroller of the OCC, spoke on the topic at an ACAMS conference in March 2014:

169 "You shouldn't feel that you can't bank a customer Just because they fall into a category that on its face appears to carry an elevated level of risk. Higher risk categories of customers call for stronger risk management and controls, not a strategy of avoidance. Obviously if the risk posed by a business or an individual is too great to be managed successfully, then you have to turn that customer away. But you should only make those decisions after appropriate due diligence" (Curry, 2014).

Moreover, de-risking and the resulting financial exclusion, poses a legitimacy problem not just for the banks, but for the regulators, particularly institutions such as the IMF and World

Bank- whose central mandate revolves around the promotion of international monetary cooperation, and the maintenance and assistance of strong economies. As one expert from the

IMF stated:

“from the Fund’s perspective, for our members in the emerging markets or frontier markets, they are being shut out of the system, and that creates enormous hardships for them, which goes against everything the IMF is supposed to stand for. We are being put in a position where we have to figure out this very delicate balancing act between enforcing AML/CTF standards but making sure these regulations do not close off the

financial system” (interview).

Some regulators believe that to a certain extent de-risking is the result of a lack of a shared understanding of what the international standards require. As one official stated:

“I had a number of interactions in the Caribbean region specifically…I am convinced that they simply misunderstood what was required by us…they thought that every nonprofit organization no matter how big or small needed to have money laundering reporting

170 officers, needed to be registered, all funds transmitted to them and made no distinction between one non-profit and the other, no distinction between mutual benefit organizations and charities that funnel funds out. So all sorts of honestly held mistaken beliefs. Again, I don’t think there was any malice there. One of the banking executives I have spoken to was very eloquent about this and said ‘you know the talk is all about the risk based approach but what we have is a fear based approach’. I thought that was a very articulate way of putting it”(interview).

However, other regulators were not as forgiving, and are arguing that it is less about a misunderstanding of what the expectations are, and more about the banks using these regulations as a scapegoat to justify their exit from industries or regions that are simply not profitable enough for them. As one FATF expert stated:

“This term de-risking is being used now… Major global banks have been cutting off whole sectors from banking in the last couple of years, and it is increasing. One of the reasons is purely commercial, it is just not profitable enough versus the reputational risk of doing business, for instance in Somalia. There is a huge controversy going on in the UK for the last 18 months because banks like Barclays have decided that they will simply not do business with Somalia at all. So all the Somali citizens of the UK, in which there is a significant number cannot send money home. So now the NGOs are complaining, with some justification obviously. The banks say, this is not our fault it is the FATF’s fault, when it is really not our fault. It is increasingly happening with some of the larger banks whose reputational risk like HSBC has plummeted in the last year or two. They are just cutting their risk. For instance, there are other social imperatives like financial inclusion, which we take an interest in, for two reasons. One, we do not want to make the risk higher by excluding people from the banking sector and then having them go to something more risky like hawala dealers, but also our standards do not require, or do not support at all I should say, banks cutting off or closing accounts and blaming our standards. We have

171 asked the banks to apply a risk based approach and they are not doing that. They are just saying it is just too risky in Mexico for example” (interview).

Moreover, regulators have also argued that if one simply looks at the pattern of who has been fined or brought up on charges for non-compliance, it is cases of large scale violations and blatant law-breaking that have been targeted.

“What you are seeing with the sanctions-busting cases are the institutions that have just completely broken the law- it is HSBC, BNP Paribas- these were egregious violations. We are not going after banks that simply had short-comings in their customer due diligence, we are not going to give out fines for simply failing to tick off boxes. We are talking about institutions that were fully aware that they were breaking the law…we have found cases where firms actually had been notified of the fact that their client was under investigation for corruption, fraud and even possible terrorist ties, and they were still doing business with them because of the money. But this is the mentality of the banking industry-what is the risk of doing business and what is the risk of getting caught? For them to say that they are not going to do business in an entire region because they think the risk of fines is too high is ridiculous. They decided that certain areas just did not bring in enough revenue to justify the costs of doing business there. Fine, they are allowed to make that call- but don’t go around blaming the regulations for your business decisions” (interview).

From Trust in Numbers to Trust in Experts?

As we have seen throughout this dissertation, one of the problems facing experts and regulators is, how to turn terrorism, this nebulous ambiguous object, into an object of financial risk management. This is no small feat, and why, as one interviewee put it, there is this “ping-

172 pong” effect happening. On the one hand, as was discussed earlier, there is no objective definition of terrorism, as the saying goes ‘one man’s terrorist, is another man’s freedom fighter’. Of course this statement is further complicated by the fact that terrorism is not simply committed by individuals, there could be state terrorism, or as we know with something like

ISIS, there could be terrorist organizations that call themselves a state. While in the pre-9/11

Westphalian order this could be dealt with between states, and in fact could only be dealt with between states, post 9/11 we have an emergent global legal order, in where there is an attempt to produce an authoritative accepted definition of terrorism and terrorist actors- however this is setting one’s self up for failure, much like before. The creation of sanctions lists by states and international organizations like UN Security Council, for individuals that are banned from financial, transactions creates an unprecedented legal relationship between global legal bodies and individuals; without the mediation of the state to which those individuals belong (Mallard 2016).

However, on the other hand, despite these new legal precedents being set, terrorism financing needs to be converted into something quantifiable, so as to facilitate global financial flows, lending, investment etc. This is the dilemma that is at the heart of this project, the ‘ping- pong’ issue if you will. How do you take the issue of terrorism financing and turn it into something that you can govern and control, yet at the same time, not block the world-financial system? On the surface one would assume that risk management was created for this exact purpose. There are agencies that rate countries on levels of political risk, and these agencies are used like credit ratings and can be fed into investment and lending calculation. However, as this

173 chapter has attempted to illustrate, risk management is failing in this particular instance- How can a bank or an international financial institution tell with whom they can safely conduct business when, for example, a Jordanian bank could be hauled before a New York court for doing what is completely legitimate in Jordan? Again, in this context, risk management has multiple meanings. There is a question of the risk of what? The risk of financing terrorism, the risk of being prosecuted by the US Government, or the risk of financial exclusion. It therefore should not come as a surprise that some banks opt to de-risk, thereby endangering one of the two functions of the system- the facilitation of financial flows.

One could analyze this as trials of attribution between regulators and the banks shifting who is responsible for de-risking, but also perhaps thinking with regards to organizational forms in which attribution is to the banks and to the regulators. But the other aspect of this, is the possibility that this matter will be dealt with by the migration of experts (from US Treasury etc.) into the private sector. To reverse Porter’s (1995) argument, where objectivity fails, perhaps trust in experts can replace trust in numbers? In some respect this is what this dissertation, and more specifically this chapter is about. When everything gets put into the ‘moral blender’ (Eyal,

2010), and it becomes impossible to distinguish the financial behavior of criminals/terrorists from “normal” everyday financial flows, perhaps then we will start to see a shift from trusting the numbers, to trusting the experts, especially if the expert carries a residual aura of belonging within the official.

There are already, well documented examples of this ‘revolving-door’ of expertise.

Specifically, US regulators have begun to consult for the compliance departments of the

174 international banks that they have targeted while holding US public office. For instance, Stuart

Levey (who has been mentioned throughout this dissertation), first served as the Deputy

Assistant Attorney in the Department of justice before becoming the first Under Secretary for

Terrorism and Financial Intelligence within the Treasury Department (directly in charge of

OFAC) under the Bush administration, entered the private sector, in 2012, when he joined HSBC as its Chief Legal Officer. Former NY district prosecutor, Robert Morgenthau- whose father had been Roosevelt's Secretary of the Treasury, and who worked with OFAC to help litigate the case against BNP-Paribas, became a partner at the New York law firm of Wachtell, Upton, Rosen &

Katz. A similar story can be told for Joseph Meyer, who is currently Vice President of BSA/AML

Risk Assessment at Western Union. His prior positions include assistant general counsel and head of the Financial Integrity Group in the Legal Department of the International Monetary

Fund (the section of the IMF responsible dealing with compliance and enforcement of the

AML/CTF rules and regulations), director at the National Security Council at the White House, and finally senior advisor to the Under Secretary of the Department of the Treasury.

But one of the more interesting private sector recruits has been Benjamin Lawsky, the former federal prosecutor who headed up the Department of Financial Services in New York-

An agency created by Gov. Andrew Cuomo after the financial crisis to better regulate Wall

Street. During his tenure, Lawsky was responsible for the case brought against Standard

Chartered, in which he accused the bank of “scheming with the Iranian government for nearly a decade and hiding from regulators $250 billion in transactions through its New York branch”

(Protess and Greenburg 2014). In order to secure the $340 million dollar settlement from the

175 bank, he threatened to revoke Standard Chartered’s license to operate in New York (a threat he levied amongst numerous banks to acquire settlements), and when he caught them

“backsliding” two years later he imposed another $300 million penalty. His insistence on prosecuting cases of corporate recidivism as well as the actions against BNP Paribas, Credit

Suisse, and PricewaterhouseCoopers, earned him the nickname “Sheriff of Wall St,” and online images of him seated atop the ‘Game of Thrones’ locus of power with the caption “Hail King

Lawsky” went viral especially throughout the financial community (Greenberg and Protess,

2015). When Lawsky announced his retirement from government, the New York Times (2015) reported on the “sheer delight” of Wall Street. Lawsky has since opened up his own consulting firm which provides compliance and risk management advice to companies and financial institutions (Greenberg and Protess, 2015).

Figure 4.1 (New York Times 2015)

176

This idea of a revolving door of expertise was also supported through the interviews conducted for this dissertation. What became clear, was that it was not uncommon for interviewees to have gained professional experience in, for instance, a combination of law, finance, and on occasion law-enforcement. At least four interviewees had combined three different positions in the field as they had worked on anti-money laundering cases with national police departments, and as consultants/ trainers on AML-CTF issues for major international banks prior to joining an international regulatory body such as the FATF or the IMF/World Bank.

Favarell-Garrigues et al. (2008, 2009), and their work on compliance departments within

French banks further supports this assertion. Favarel-Garrigues and his colleagues argue that the appropriation of anti-money laundering and counter-terrorism financing objectives has led to the emergence of new types of exchange, including the creation of a joint form of surveillance shared by two professional groups not accustomed to cooperating in the past: bankers and law enforcement agents (p. 2). Furthermore, they argue that:

“The confluence of various forms of expertise into one well defined specialty has been precipitated by three major factors: training programs, the creation of professional networks, and the development of new technologies. It has resulted in the establishment of a core curriculum at the heart of the anti-money laundering struggle, consisting of the creation of new organizations and the elaboration of procedures and a set of functional norms-all of which denote a new form of specialization in the making, and in some respects, a new profession” (p. 6).

A closer examination of the migration of experts is one of the areas this project is

177 seeking to expand. More specifically, I am interested in the institutional innovation of compliance departments and the careers of the experts within them, as well as the conditions which may allow for a trust in experts to be developed. Or in other words, under what conditions do you go in the opposite direction from productivity and a trust in numbers to a trust in experts instead?

178 Conclusion

The goal of this dissertation was to shed light on the less visible aspects of the war on terror, and assess the assumption on which the measures to combat terrorism financing are built. Moreover, this project sought to make the argument that the fight against terrorism financing has important implications not just for security practices, but for everyday financial practices and the ways in which global financial flows are understood, governed, allowed, and intercepted, as well. Moreover, instead of just focusing on the legal, political, or operational aspects, a more comprehensive governmentality approach is taken in this dissertation in order to understand not only how power is shaped, but what is being governed, and what are the unintended consequences of a system that ultimately ends up viewing even the most banal everyday transaction as suspicious.

First this dissertation sought to challenge the notion that the post 9/11 focus on money and financing was natural or self-explanatory. Instead, it argued that counter-terrorism financing polices were the result of specific political choices and should be considered as part of a longer narrative that includes the rise of neoliberal governing and financial policies.

I then sought to illustrate the debates and regulatory interventions surrounding hawala networks, looking not only at how hawala came to be classified as an object of concern and illegitimacy, but also how these understandings were then translated into regulatory policies.

Moreover, I argued that the push to regulate hawala systems was less about terrorism

179 concerns, and more about the desire to regulate, make visible and thus gain access to a previously illegible economic space.

Further examining the logic of terrorism prevention, I examined the emergence and fixation on risk-based screening practices with regards to mundane everyday financial transactions. More specifically, I argued that the risk-based approach to regulation results in suspicion of even the most mundane transactions within the financial sphere.

Finally, I analyzed the debates surrounding the newly labeled phenomenon of ‘de- risking’. I argued that despite this seemingly cooperative network that was built across different government bodies, international organizations, and financial institutions, there was a lack of a shared understanding of even the most crucial key concepts (terrorism) and practices (risk- based approaches). Moreover, I argue that de-risking can be thought of as the unintended consequences of having a risk-based approach to complex socio-political events that cannot be reduced to the logic of governmentality. Finally, I posit about the possibility that the translation problem which has led to de-risking, will eventually be resolved through the migration of experts from the regulatory field into the private sector.

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