Since the 1970s financial regulators around the world have increasingly focused on introducing Anti Money Laundering (“AML”) measures to fight organised crime and tax evasion. While several national and international acts have set a legal framework for enforcement, the terrorist attacks on 11th September 2001 (“9/11”) have established fighting terrorist financing as another major objective among regulators. In subsequent years AML measures have constantly been revised to adjust to the complexity of the international financial markets. As a result financial institutions have to cope with additional costs, more difficult customer relations and legal as well as geographical constraints. More comprehensive customer due diligence and complex mandatory monitoring system in particular cause difficulties for the banking sector. Consequently several big institutions such as HSBC and Citigroup have already been fined for failing to comply with AML laws. Regulations have changed the financial sector. This essay will analyse the impact of the 9/11 attacks on the regulatory framework as well as the effects of AML on the financial industry.
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2. MEASURES TAKEN
AML has been on the agenda of regulators well before 9/11. However, the actions of prosecutors were more focused on fighting organised crime, drug and weapon dealing as well as tax evasion. 9/11 shifted the attention towards fighting terrorism and initiated Counter Terrorist Financing (“CTF”) laws.
It was not until 9/11, that strict reporting rules known as “Know Your Customer” were introduced in the US. Before, the banking lobby could prevent further regulations, however, the US PATRIOT Act 2001, in response to 9/11, took AML and CTF measures to a new level. Since 2001 a comprehensive due diligence for high-risk products and especially for so-called “Politically Exposed Persons” is mandatory in the US. Foreign investors, for example, are required to disclose the ultimate beneficiary from proceeds of investments in the US in order to evade a 31% withholding tax. Such regulations had significant impact on foreign direct investments in the US. Additionally, George W. Bush’s Executive Order 13224, an amendment to the International Emergency Economic Powers Act (IEEPA) shortly after 9/11, extended the reach of US sanctions and enforcement globally. Subsequently, the US has the right to block assets of US entities (not just financial institutions) in foreign countries and of foreign banks in the US if they can be associated with terrorism. While the sanctions formerly have only targeted terrorists that represented a risk to peace in the Middle East, the reach has been extended to any individual or organization that can be associated with terrorism and is posing a threat to the US (Zagaris, 2004). The IEEPA also bans commercial activities with countries that according to the US violate human rights or suppress democracy such as Iran, Sudan or Syria, which gives the US the possibility to use AML/CTF measures as an instrument of political power (Shamir, 2012).
The international community quickly reacted to the terrorist attacks on 9/11 as well. One day after the attack the United Nations (UN) Security Council adopted Resolution 1368 condemning the
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Additionally, the Financial Action Task Force on Money Laundering (FATF), which was founded in 1989 by the G7, added CTF to its responsibilities. In October 2001 it released eight special recommendations on how to counter terrorist financing in addition to the forty AML recommendations it had initially published in 1990. Since then the FATF has constantly revised its recommendations and published the latest edition in February 2012 including the following extended nine CTF recommendations: (1) Ratification and implementation of UN instruments, (2) Criminalizing the financing of terrorism and associated money laundering, (3) Freezing and confiscating terrorist assets, (4) Reporting suspicious transactions related to terrorism, (5) International Co-operation, (6) Alternative Remittance, (7) Wire transfers and (8) Closer surveillance of non-profit organizations (FATF, 2012).
The 9/11 terrorist attacks have also put CTF on the agenda of more regional regulatory bodies. The EU responded ten days after the attack by announcing a Europe-wide arrest warrant and creating a list of all known terrorist entities. In December 2001 a new EU Directive was amended calling for comprehensive due diligence by all parties involved in financial transactions and planning. Furthermore each member state is supposed to establish an independent Financial Intelligence Unit. Similarly, the Organization of American States introduced additional CTF measures and created the Inter-American Convention Against Terrorism (Zagaris, 2004).
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The terrorist attacks on 9/11 have lead to a wave of actions round the world introducing CTF as another major goal besides AML among financial regulators. Thereby, a special focal point lays on increased due diligence and increased transparency as well as improved information exchange with public entities. However, the US is clearly a leading figure in the global AML/CTF environment having initiated most of the regulations and still claiming the right to enforce its laws on a global scale. Terrorism is a global issue and as terrorist organisations are widely interlinked they can only be fought on an international basis. In contrast to organised crime, money transfers usually precede the crime, which gives AML/CTF measures and regulators the possibility to actually prevent attacks. 9/11 has proven these circumstances to the world and has lead international organisations to introduce new CTF measures on a global scale. The progress has to be evaluated with some reservations, though, since most of the UN and FATF initiatives are mere resolutions and recommendations, they leave some room for discretion on the national level (Shamir, 2012). Often nations only seriously pursue AML enforcements that are coherent with their political interests. The US is a good example for these practices as the later discussion of several big AML fines imposed reveals.