Banking and finance firms face a wide variety of threats from many sources. Among these is concern around counter terrorist financing. What is the nature of this threat, and what can firms do? Let’s take a look.
What is Terrorist Financing?
Terrorist financing (TF) provides funds for terrorist activity. It may involve funds raised from legitimate sources, such as personal donations and profits from businesses and charitable organizations. More often, the funds are from proceeds of crime, which have been laundered through the financial system.
What are the techniques used?
Surprisingly, financial transactions associated with terrorist financing tend to be in smaller amounts than is the case with money laundering. When terrorists raise funds from legitimate sources, the detection and tracking of these funds become more difficult.
To move their funds, terrorists use many means, including the formal banking system, informal value-transfer systems, Hawalas, Hundis (both forms of transferring money without actually moving money) and the oldest method of asset-transfer, the physical transportation of cash, gold and other valuables through smuggling routes.
What can financial businesses do to better detect TF?
Simple answer: It isn’t easy to detect TF, especially when fund amounts are varied and low, and come from legitimate sources. Many of the terrorism-related controls firms have in place are inter-mingled with their anti-money laundering (AML) measures, covering, for example, risk assessment, customer due diligence checks, transaction monitoring, escalation of suspicions and liaison with the authorities. The following controls can help firms in their efforts to spot TF, and to better separate their TF and AML activities:
- Specific Transaction Monitoring (TM) System Rules
Firms should analyse and model rules for TF based upon past experience and activities. This could be a few specific rules that are designed for this in mind.
- Knowledge Sharing
Information linked to TF should be shared. Knowledge sharing is a key point being addressed currently by government agencies, such as the United Kingdom Financial Intelligence Unit and the National Crime Agency.
- Policies and Procedures
Firms should take steps to better understand the new risks and importance of TF and refresh their policies and procedures to better deal with TF.
- Update Customer Lists
Constantly updating blacklists within monitoring systems could help detect specific Politically Exposed Persons (PEPs), known individuals and entities for TF.
- CTF Training
Businesses should cross train their analysts and investigators so that they are able to detect signs of terrorist financing.
- Cross Border Customer Due Diligence (CDD)
Firms with cross border interests should take into account CDD and risk of TF across different geographies and industry sectors.
What can firms do to create a workable balance between regulation and providing services to their clients?
Firms are becoming more and more cautious regarding which clients they will deal with in an attempt to avoid anything that can be misconstrued as terrorist financing.
Given that the United Kingdom is a leading financial center and a significant “exporter” of NGO (non-governmental organization) aid with remittance finance to high risk geographies, UK banks and their financial services peers are particularly vulnerable, and thus sensitive to these risks. For example, a few summers ago, a large, tier 1 banking institution provoked a storm of protest when it served account closure notices to several high-risk clients (primarily remittance companies). Is de-risking the business to this extent necessary?
Banks and finance firms can take some steps to move towards a more balanced risk-based approach. Specifically, they can:
- Build a robust methodology for identifying and assessing risks
- Translate risk assessments into specific monitoring activities
- Learn to better share information without “tipping off” terrorists. (The UK government is working with the relevant agencies to tackle transparency around sharing this information easily and without fear of “tipping off”)
- Update high risk customer and industry due diligence information on a regular basis
- Use correct and up to date information in investigations
To maintain confidence in their operations, firms are encouraged to use a multi-facet approach to monitor, detect and protect themselves from TF. Using a risk-based approach that includes a clear monitoring methodology and strategy in counter-terrorist financing, firms will position themselves to better balance their regulatory obligations and provide financial services their clients expect.