Black Market Billions: How Organized Retail Crime Funds Global Terrorists (Gal Zentner's Library) (31 page)

Continued Failure to Regulate IFTs: The Costs to Local and Federal Governments as Well as Retailers

According to the BSA and Anti-Money Laundering Examination Manual for the Federal Financial Institutions Examination Council, the Patriot Act is “arguably the single most significant AML law that Congress has enacted since the BSA itself.” Among other things, the Patriot Act criminalized the financing of terrorism and augmented the existing BSA framework by doing the following:

• Strengthening customer identification procedures

• Prohibiting financial institutions from engaging in business with foreign shell banks

• Requiring financial institutions to have due diligence procedures and, in some cases, enhanced due diligence procedures for foreign correspondent and private banking accounts

• Improving information sharing between financial institutions and the U.S. government
¹²

The only problem was that BSAs couldn’t tell authorities what was going on financially in countries like Pakistan, India, Afghanistan, and Somalia.

Even with India’s recent appointment to the FATF, regulatory measures within the national banking system were in shambles. To get a firsthand look at just how bad it was, I took a trip to the State Bank of Hyderabad in India, to carry out an average retail banking transaction. What was most surprising was how the transaction was done: without computers. The day’s transactions were written down in ledgers and filed away. When I asked to get an account balance “on behalf of someone else,” my banker gave it to me without asking for
my identification. But the most shocking part about my retail banking experience was that when I returned home, I realized that my banker had given me someone else’s statement, complete with his name, account information, and
balance.

“That’s just the tip of the iceberg considering some of the stories we’ve heard,” says Prashant Muddu, chief executive of Jocata, a financial and technology advisory company that specializes in helping banks become compliant with AML and Combating the Financing of Terrorism (CFT). “There are banks we’ve worked with that don’t know how many customers they even have, much less know what type and the amount of funds are being transferred between accounts.” Muddu, along with his colleague Gokul Kollayikal, explains while meeting with me over a cup of coffee in Hyderabad that many banks believe that extra paperwork required to track accounts and get them up to bank regulatory standards deters customers from wanting to bank with them. Therefore, they either refuse to embrace standards or turn a blind eye to them. “When you have a bank employee who is getting paid based on the amount of accounts he can bring in, why would he try and alienate potential business?” asks Kollayikal.

Failure to Regulate Hawalas

According to the World Bank, immediately following the failed bombing in Manhattan, investigators began unraveling the money trail to identify coconspirators in the attack planned and financed by the TTP. On September 15, 2010, prosecutors announced they had arrested and charged Mohamad Younis with helping finance the attack by serving as a hawaladar. Prosecutors said Younis had engaged in unlicensed hawala transactions with Shahzad and charged him with operating an unlicensed money transfer business between the U.S. and Pakistan.

As the investigation into the failed Times Square bombing shows, the use of hawalas remains a viable method for moving terrorist finances. Although expanded application of BSA reporting and recordkeeping requirements regulates hawalas and hawaladars, regulations need to start from outside the U.S. in addition to hawalas within the U.S.

“In the war on terrorism, a major challenge will be to infiltrate and monitor hawala networks in the Middle East,” says Robert E. Looney, an analyst with the Center for Contemporary Conflict. “A crackdown by Arab and South Asian governments at the behest of Western governments is simply not feasible. The vast majority of the money is from legal, legitimate sources, and the hawala organizations are numerous and extremely powerful.”
¹³

But international cooperation from governments in countries that depend on the hawala system is difficult. People who live in rural areas of Afghanistan, Pakistan, Somalia, the Congo, and many Asian and Latin American countries use hawalas to transfer funds across borders because formal banking systems are nonexistent. Because hawalas are independently run and the networks are so vast, it is nearly impossible for governments to monitor transactions, how much money is being transferred, and to whom it is being transferred. Pakistan established a Special Investigation Group (SIG) in its Federal Investigation Agency (FIA) to counter terrorism. In addition to monitoring the cash flows of suspected terrorist groups, the group can enforce hawala regulations.
¹⁴
But currently the SIG is doing very little.

It wasn’t until 2008 that the Pakistani government and the FIA cracked down on two business owners who allegedly transferred $10 billion out of Pakistan by way of hawalas. Javed Khanani and Munaf Kalia were partners in a foreign currency exchange business and were known to run their own separate and unregistered hawala counters. In addition, nine officials of the National Database and Registration Authority (NADRA) were arrested for allegedly making fake identity cards.
¹⁵

Just months before the arrest, the SIG released a special report on the flight of dollars from the country. It stated that a forex (foreign exchange) crisis would occur in the country in the not-so-distant future.
¹⁶
The government reported that the smuggling of foreign currency has diminished the country’s forex reserves from more than $16 billion in October 2007 to less than $7 billion at present.
¹⁷
In addition, Khanani and Kalia were known to have transferred millions of dollars in funds through hawalas for politicians, bureaucrats, army officers, and businessmen to send money for their children’s education. They also paid installments on costly properties abroad.
¹⁸
Their actions prompted the Pakistani government to crack down on hawalas. In the wake of a global financial crisis, the mass exodus of foreign exchange from the banking system, along with rising inflation, was creating mounting financial instability in the country and costing it billions of dollars.
¹⁹

Likewise, the government of Afghanistan was under investigation in late June 2010 regarding the nearly $3 billion in cash being transferred out of the country by airplane over three years from airport hawalas. With the economy in its infancy, Afghanistan depends on hawalas as its financial sector backbone. But the Afghan government has no way of tracking who sends money through hawalas and who is on the receiving end of transfers. According to Afghan customs records, between 2007 and 2010, close to $3.18 billion was recorded as leaving the airport. However, a courier was documented as carrying close to $2.3 billion between 2008 and 2009, and it went undocumented.
²⁰

Government officials also believe the money was siphoned off from money meant for Western aid projects and U.S., European, and NATO contracts providing security, supplies, and reconstruction work for coalition forces in Afghanistan.
²¹

“It’s virtually impossible to regulate the hawala system in countries that depend on it,” says Looney. “A crackdown that attempts to ban the networks would simply drive them underground. And many
of these citizens in these countries would view actions of this sort as caving to Western demands at the expense of Muslim tradition, and it could also create a backlash against the governments.”
²²

IFTs Get Sophisticated: Stored Value Cards

According to the Commodity Futures Trading Commission (CFTC) web site, a financial institution and any “nonfinancial trade or business” must also report a transaction (or series of related transactions) in excess of $10,000 in currency.

In addition, the BSA requires the filing of a Form 105, Report of International Transportation of Currency and Monetary Instruments (CMIR), by anyone who physically transports, mails, ships, or causes to be physically transported, mailed, or shipped currency or other in an aggregate amount exceeding $10,000 on any one occasion, whether that transportation is into or out of the U.S. This includes the following:

• Coin or currency of the U.S. or any other country

• Travelers checks in any form

• Negotiable instruments (including checks, promissory notes, and money orders) in bearer form, endorsed without restriction, made out to a fictitious payee, or otherwise in such form that title thereto passes upon delivery

• Incomplete instruments (including checks, promissory notes, and money orders) that are signed but on which the name of the payee has been omitted

• Securities or stock in bearer form or otherwise in such form that title thereto passes upon delivery
²³

Even when you embark from an international flight, the first thing customs asks you is if you have anything more than $10,000 to declare. But criminals got sneaky.

The Patriot Act never took into consideration that money could be moved around on plastic cards that could be carried in a wallet, pocket, or handbag with amounts of up to $500,000 on them.

Bulk Cash Smuggling Comes in a Smaller Package

In the past, terrorist groups relied on methods such as bulk cash smuggling if they wanted to move large sums of money from one location to another. “Bulk cash smuggling” sounds exactly like what you would imagine it to be: thick wads of cash stashed in duffle bags, boxes, or suitcases making their way across borders undeclared and undetected by customs. As financial institutions started implementing AML programs and increased record-keeping and reporting requirements, terrorist groups realized moving money in that way was risky. Bulk cash smuggling would always be a part of their methods; it just needed more stealth. What better way to transport large sums of money than on a stored value card (SVC) that blends right into a billfold?

“No one is going to go through your wallet and ask you how much is on your credit cards,” says Detective Amaury Guevara in the conference room at LAPD headquarters. He showed me all the different types of SVCs, ranging from American Express cash cards to debit cards that look similar to what I carry in my wallet. “Someone could be transporting millions of dollars a month overseas, and customs would never know, because the amounts are all on SVCs.”
²⁴

The Treasury Department defines SVCs as “smart cards with electronic value... The technology eliminates coin, currency, scrip, vouchers, money orders, and other labor-intensive payment mechanisms.”
²⁵
Similar to gift cards, SVCs can be obtained in a variety of locations, often without verifying identities, making them ideal as a conduit to move funds globally. The implications of this technological development in terms of terror financing and our government’s inability to combat it are daunting. The threat is exacerbated by the fact that although the Treasury Department is reviewing these new products, SVCs are not currently considered “monetary instruments” for reporting and record-keeping purposes.
²⁶

To prove how antiquated government agencies and nongovernmental organizations (NGOs) are about trying to investigate potential terrorist financing, I read
Combating Money Laundering and the Financing of Terrorism
, the comprehensive workbook issued by the World Bank. Although this training manual was revised in 2009, it still doesn’t take into consideration the new instruments terrorists are using to transfer funds. For example, the manual explains why money laundering has negative effects on developing nations, and what the FATF does. But when it comes to explaining what types of measures I should take if I encounter someone trying to smuggle more than $10,000 across the border, it lists the following tactics:

• Work with customs enforcement agents to identify the instruments (diamonds, cash, checks, and so on)

• File cash transaction reports (CTRs)

• Question clients if accounts seem to have suspiciously large sums of money being transferred

• Analyze bank records

• Work with Financial Intelligence Units (FIUs)

FATF regulations never mention funds transferred by other means, such as SVCs and online accounts, or through stolen merchandise such as DVDs, handbags, high-end clothing, and electronics.

According to Detective Guevara, what comes as a surprise to most law enforcement officials (but shouldn’t) is the rapid evolution of these monetary instruments. He points out that today government officials and decision makers are talking about SVCs. Meanwhile, terrorist groups are looking at the online game Second Life, where members purchase fake items with real dollars online, as a way to move money. The terrorists’ Internet and gaming savvy clearly is dwarfing the scope of law enforcement.

“Rather than simply [resting] on their laurels, terrorist groups have shown an incredible ability to adapt changing technologies to their needs and stay one step ahead of our regulatory and law enforcement officers,” says Stephen I. Landman, Director, National Security Law and Policy at the Investigative Project on Terrorism. “The creation of stored value cards and the expansion of the Internet are just two of the problems that those tasked with countering terrorist financing will face over the next decade.”