5 terror finance predictions for 2016

• TrendMicro says “2016 will be the year of online extortion.” Rather than simply holding data for ransom, hackers will threaten to divulge personal information about users if a ransom isn’t paid. Cyber-criminals will use the psychology of fear to a greater extent than ever before through ransomware.
• Enhanced financial monitoring in EU. This is as much of a reflection on 2015 as it is a prediction for 2016, but second-generation Muslim immigrants will continue returning from the Syrian front to Europe. Domestic intelligence services will be too under-resourced to monitor all of the jihadist returnees. A British psychic website goes as far as to predict a terrorist attempt to assassinate Chancellor Angela Merkel. While there is no way of predicting such a thing, it does seem that since Germany has been such a favored destination for Middle Eastern transients, Germany could very well be targeted by ISIS operatives for a major operation. German authorities would do well to beef up customs and border searches for the possibility of bulk smuggled cash and to increase monitoring by undercover agents of black market firearms purchases by suspected Islamists.
• Forecasters are predicting a modest rebound but a continued low price for oil in 2016. This will put pressure on the budgets of the Arab Gulf monarchies. It should also mean that they’ll have less money to export Wahhabism and fund Islamist rebellions.
• Expect Washington to promulgate more counter-terror finance regulations that paint with a broad brush. Compliance officer Doug Cornelius predicts that “FinCEN will come out with new regulations imposing anti-money laundering requirements on investment advisors and fund managers.”
• Taliban spending spurt. There are mixed predictions for the Taliban in 2016. Some analysts predict that the Taliban will topple the Afghan government again, while others predict that the leadership scuffle in the wake of Mullah Omar’s reported death, the rival appeal of ISIS in Afghanistan, the strength of Afghan security forces, could weaken the Taliban or force it to a negotiated settlement. Sensing that it’s do or die for the Taliban, Money Jihad predicts they’ll employ more aggressive and audacious tactics, and they’ll be willing to expend hundreds of millions of dollars for their militant operations in 2016.

FinCEN pooh-poohs knowing your customer

A federal financial crime agency has issued a statement imploring banks to continue or resume doing business with money services businesses (MSB’s)—many of which are hawala companies—despite the risks of hawala financing domestic and international terrorism. FinCEN’s statement stems in large part from pressure brought to bear by Democratic politicians, Somali activists, and well-meaning but misguided international charities who believe that remittances are an effective channel for humanitarian relief to corruption-plagued hot zones abroad. These parties fail to understand that remittances are fuel to the fire in places like Somalia where remittances are siphoned off by al-Shabaab to perpetuate the cycle of violence and misery in that country.

In the statement, FinCEN even goes out of its way to instruct banks that they do “not need to know the MSB’s individual customers” to remain compliant with know-your-customer provisions of the Bank Secrecy Act. This instruction seems at odds with years of federal regulatory admonitions for banks to know their customers.

Financial crimes analyst Kenneth Rijock does a wonderful job picking apart FinCEN’s pronouncement, posing the following observations about MSBs:

1. They are frequently used by both money launderers, and terrorist financiers. This is a sad fact of life; laundrymen know that many MSBs are storefront operations, poorly run, and who would consider  accepting dirty money, to earn a handsome profit.
2. They exist in jurisdictions where regulatory agencies are either non-existent, or unable or unwilling to enforce AML/CFT laws. Therefore, the MSB has no reason to have an effective compliance program.
3. They may be actually owned, or controlled by, criminal elements; Look at Mexico.
4. They are not like licensed financial institutions, the licensing requirements are often minimal, and corrupt government agencies, once paid off, are usually eager to qualify individuals who are unacceptable as NBFI operators.
5. If a client cannot go to a bank in his or her jurisdiction, to send larger amounts of funds, it is often because their dodgy business is not wanted at legitimate financial institutions.
6. MSBs in many countries are known for dysfunctional AML programs. Can we really expect US banks, who are held to best practices standards, to risk accepting money from them ?

Read Rijock’s full analysis here.

Illicit transfer news: recommended reading

• Palestinian Islamic Jihad “receives between $100-$150 million dollars annually from Iran,” says an Iranian expert… more>>

• FinCEN shuts down a Michigan-based hawala dealer who sent 8,000 wires to Yemen and never checked a single customer’s ID… more>>

• We don’t know how much money is financing terrorism, and we don’t know how much it costs to combat its financing either, so how do we know if what we’re doing is working?  More>>

• A New Jersey company illegally shipped $70,000 worth of protective gloves to Iran… more>>

FinCEN overreaches on beneficial ownership

The Democrats in Congress weren’t making much progress with their silly attempt to force a federal mandate down the throats of state officials who register and regulate corporations.  Despite arm-twisting and getting the Obama administration on board with Sen. Levin’s “incorporation transparency” bill, and getting Time magazine to write a glowing piece about the proposed law, the bill’s sponsors are stuck.

So what have they done?  Pres. Obama’s Treasury Department has established a rule that Congress could not get passed as a law.  Rather than getting the states to hunt down the “beneficial owners” (ie, the true owners of the corporation), the new rules established by FinCEN, an agency within Treasury, will require banks to discover the beneficial owners of all their commercial accounts.  This burden on the compliance division of banks will not be well-received by the business end of a still recovering financial sector.

Giving the states an unfunded mandate through a law would be bad enough, but imposing a costly regulation on the private sector through a backdoor rule is even worse.

This rule will not prevent terrorist financing or secret business activities by Iran.  The effect will be to increase tax revenues to the federal government by forcing banks to figure out what entities may be subject to additional American taxes.  If it is discovered that the customer is subject to a foreign tax, it may well be that the State Department will be lobbying the governments of those countries for a reciprocal law or rule to target Americans who off-shore their wealth.

The rule will also gum up the works at American financial institutions by creating new regulations that banks will have to pay for by increasing bank fees for ordinary customers.

From Complinet with a hat tip to Bachir El Nakib:

U.S. Treasury proposes due diligence and beneficial ownership clarifications for financial firms

Mar 01 2012 Brett Wolf

U.S. financial institutions’ obligations to know their customers have for years been implicit in anti-money laundering rules, but the time has come for an explicit rule to clarify and strengthen those requirements, especially with regard to accounts held by legal entities, the U.S. Treasury Department said on Wednesday.

Treasury’s Financial Crimes Enforcement Network (FinCEN), proposed such a rule and called for industry feedback. It cited concerns about “shell” companies that aid money laundering, terrorism financing, weapons proliferation and tax evasion by hiding the identities of participants from law enforcement authorities in the United States and abroad.

Ideally, financial institutions can mitigate such risks by conducting customer due diligence (CDD), which involves obtaining so-called “beneficial ownership” information necessary to reveal the people behind the legal documents.

Although AML regulations stemming from the USA Patriot Act clearly require CDD and more thorough enhanced due diligence measures in the relatively high-risk private banking and correspondent banking arenas, there is more ambiguity in other business lines, sources say.

Still, financial institutions are clearly required to know their customers well enough to develop a risk profile and spot transactions that are suspicious, which requires knowing who is behind accounts, FinCEN says.

“The explicit requirement that a financial institution know its customers, and the risks presented by its customers, is basic and fundamental to both serving those customers and implementing a program that protects a financial institution from abuse by illicit actors,” said FinCEN Director James Freis, Jr. “The comments we receive will help us balance the information needs of law enforcement with the responsibilities placed on the financial industry.

“Broad public input … will assist FinCEN in considering a CDD obligation that would bring consistency and uniformity both within and across financial institution sectors. With this consistency, FinCEN seeks to disrupt the ability of criminals to hide their assets behind the shroud of anonymity.”

Lack of “uniformity and consistency”

FinCEN expressed concern that its efforts over the past decade to highlight and clarify financial institutions’ obligations with regard to CDD and the collection of beneficial ownership information may have been insufficient. Specifically, it said it was “concerned that there is a lack of uniformity and consistency in the way financial institutions address these implicit CDD obligations and collect beneficial ownership information within and across industries.”

It cited a beneficial ownership survey it conducted in 2008 and industry reaction to guidance it issued a year later, both of which it said suggested that not all financial institutions understood their obligations. It also cited recent regulatory actions against several banks and broker-dealers, including the high-profile actions targeting HSBC Bank USA and Wachovia Bank (now part of Wells Fargo).

It added that it envisions a requirement obliging financial institutions to collect beneficial ownership information for all account holders, with possible “limited exceptions based upon lower risk.”

FinCEN’s proposal is primarily aimed at banks, brokers-dealers, mutual funds, futures commission merchants, and introducing brokers in commodities. However, it said it is also considering extending a rule to money services businesses, insurance companies, casinos, non-bank mortgage lenders or originators and other entities with AML program rules.

Historical challenge has new implications

Determining beneficial ownership of certain corporate accounts has long been a challenge for U.S. financial institutions, primarily because some states do not collect the information during the incorporation process. Some financial institutions have argued that the government is in a better position to determine beneficial ownership and therefore should shoulder the burden.

FinCEN’s proposal notes that Treasury’s “strategy” to address “ongoing abuse of legal entities” will also depend on Congress enacting a law requiring that the states collect beneficial ownership information…

10 years after 9/11, Treasury looks at hawala

The failed Times Square bombing has prompted FinCEN to consider tightening the screws on hawala.  The shocking thing about this article from MoneyLaundering.com on June 14 is that it has taken so long for FinCEN to become concerned about hawala.  The 9/11 Commission found that hawala played a significant role in Al Qaeda’s financing, particular after the East Africa embassy bombings, but also including 9/11 itself.  We also already knew that Italian hawaladars played a role in financing the 26/11 terror attacks against Mumbai.

The sad thing is that, even though FinCEN has become more worried, the only apparent “solution” offered in this article is closer cooperation with law enforcement.  Here’s a suggestion:  outlaw hawala in the U.S., and as soon as any hawala operator is discovered, get a warrant, seize his records, cuff him, jail him, put him on trial, and bulldoze his office after his conviction.

Failed Bombing Prompted Treasury to Scrutinize Unregistered MSBs, Hawala Networks: Sources

By Brian Monroe

Last year’s failed Times Square car bombing has been the chief impetus behind a recent U.S. Treasury Department’s initiative to identify unregistered money services businesses and hawala networks, according to sources.

The department’s Financial Crimes Enforcement Network (FinCEN) began more closely screening the suspicious activity reports (SARs) it receives after it was disclosed that Pakistan-born Faisal Shahzad, who attempted in May 2010 to blow up an explosive-packed Nissan in the heart of Manhattan, had received funding for the operation through hawala brokers, said an individual familiar with the matter.

After the disclosure, the bureau began more closely working with regional law enforcement officials and regulators to determine how to better identify similar brokers, known as hawaladars, said the person, who asked not to be named. In May, FinCEN asked money services businesses (MSBs) to report the names and tax identification numbers of their agents, among other data.

After the attempted bombing, FinCEN officials were “very worried” because, along with the Internal Revenue Service, the bureau is responsible for oversight and enforcement of MSBs, said the person. FinCEN officials wanted to find a way to thwart transfers similar to those received by Shahzad, who accepted $12,000 in funding via a hawaladar from co-conspirators in Pakistan.

Following Shahzad’s arrest, there is a “greater realization in law enforcement that these hawalas can be tied to some pretty serious stuff,” including terrorist financing, said Martin Ficke, a former U.S. Immigration and Customs Enforcement special agent. “These agencies have to do something to close that gap.”

The number of hawala brokers in the country remains a guess at best. While FinCEN lists more than 42,000 registered MSBs on its Web site, the number of unregistered MSBs, including hawala operations, is close to 160,000, according to a 1997 estimate by a third-party consultant commissioned by FinCEN…

New FinCEN proposal: “more hay to the haystack”

FinCEN director Jim Freis

Juan Zarate

 

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Juan Zarate, a former counterterrorism official and U.S. Treasury assistant secretary for terrorist financing and financial crimes under George W. Bush, has come out against the Obama administration’s new sweeping proposal for banks to rat on their customers to the feds for any and all overseas money transfers.  Currently, financial institutions are required to report transactions greater than $10,000 and to file reports on any transactions that appear suspicious. 

In an interview yesterday, Zarate told NPR’s Dina Temple-Raston that the new proposal to report all foreign transactions would be increase the amount of data without isolating truly suspicious activity:

There is already evidence that anti-money laundering and CFT compliance is too invasive and costly.  James H. Freis, the Treasury official responsible for the new proposal, claims the new requirement would present only a “modest cost,” and “will greatly assist law enforcement in detecting and ferreting out transnational organized crime, multinational drug cartels, terrorist financing and international tax evasion.”

Meanwhile, cash smuggling by Muslim American charities into Karachi airport will be mostly ignored…

Poor follow-through by FinCEN?

Over the past five years, the anti-money laundering staff of the IRS has referred 60 significant money laundering cases to FinCEN which has resulted in only four fines by FinCEN.  This embarrassing revelation comes from an Aug. 31 article by MoneyLaundering.com:

IRS AML Exam Violation Letters, Referrals Lead to Few FinCEN MSB Penalties

By Brian Monroe

The division of investigatory and enforcement powers between two U.S. Treasury Department agencies has resulted in few monetary penalties for anti-money laundering compliance lapses by money services businesses and tension between the two agencies, say current and former government officials.

While the IRS’s anti-money laundering (AML) examination division issued more than 10,000 letters to money services businesses (MSBs) and referred more than 60 cases of “significant noncompliance” to the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) over the past five years, only four have resulted in monetary penalties, according to government data.

It’s a system that undermines AML compliance, said Dave Tilzer, the former head of the New York IRS AML division. MSBs that deserve monetary penalties, including those who have shirked off several warning letters, are not being penalized, he said.

“We are the biggest paper tiger,” Tilzer said of the IRS’s AML examiners. The New York IRS division referred several cases to FinCEN the group believed were deserving of monetary penalties, “but the referrals didn’t go anywhere,” he said…

Some officials have argued that there were few penalties because the MSBs corrected their noncompliant behavior before the case progressed any further.  Nevertheless, one wonders why FinCEN can’t fine an MSB for prior noncompliant activity while acknowledging that it has taken the steps to correct it going forward.

It doesn’t look like MoneyLaundering.com could get a quote for this story from FinCEN Director James H. Freis, Jr. or Deputy Director Charles M. Steele, but I’d love to hear their reaction.

FinCEN adds Somali language to its brochures

Gee, wonder why?  From FinCEN’s press office on July 28:

VIENNA, Va. – FinCEN today announced the availability of Somali language brochures to facilitate money services businesses’ (MSBs) ability to more easily comply with the requirements of the Bank Secrecy Act (BSA). The materials made available today cover BSA compliance obligations, currency transaction reporting, and suspicious activity reporting.

The Somali language brochures are in addition to outreach materials for MSBs that are already available in English and the following seven foreign languages: Spanish, Chinese, Vietnamese, Korean, Arabic, Farsi, and Russian. These new materials are intended to enhance FinCEN’s outreach efforts to communities with significant numbers of MSBs…

Just for “outreach.”  Couldn’t possibly have anything to do with illegal money transfers from Somalis in Minneapolis to the old country to support jihad in Somalia, right?  See here, here, and here.

Weekly word: structuring

Paul Freeman, an anti-money laundering investigator and educator, defines structuring as “the act of altering a financial transaction to avoid a reporting requirement.”

Criminals in the U.S. know that money services businesses are required to report transactions under the Bank Secrecy Act (BSA) if those transactions occur in a specific manner above a specific amount of money.  So they structure their transactions to fall just under the amount that would trigger a filing.

FinCEN created a 15 minute video about the BSA.  The middle five minutes are especially useful for the examples they include about structuring:

If an MSB suspects that a customer is engaging in structuring, they need to file a Suspicious Activity Report (SAR).  But when you have hawaladars who are in bed with their customers to avoid all reporting requirements, there’s only so much FinCEN can do…

Increase in suspicious activity at casinos

A June 23 report by FinCEN, a division of the U.S. Treasury Department, shows a continuing increase in suspicious action reports (SARs) filed by casinos and card clubs.  SARs may involve money laundering, tax evasion, or terrorist financing.  FinCEN found that, “the number of filings in 2009 increasing 8% over those filed in 2008,” and included this graph in their report:

In separate guidance, FinCEN provides the following example scenarios related to terrorist financing that casinos should be on the lookout for:

customer requests suspicious wire transfers to financial institutions in countries known as friendly to terrorism;

customer requests wire transfer to charity that is unfamiliar to the casino or appears to have links to countries that are friendly to terrorism;

fund transfer to a customer or from a customer that is routed through multiple financial institutions or jurisdictions in an apparent attempt to disguise their origin; or

a customer may ask for airplane tickets, jewelry or other non-cash gifts (easily converted to cash) to be comped to a friend or to an unknown party.

The suspicious activity trend is well worth watching, but we should also remember that most terrorist dollars originate from zakat and are transferred by hawala.

Wednesday word: FIU

FIU stands for financial intelligence unit.  The Egmont Group, an informal association of FIUs from around the world, defines an FIU as follows:

A central, national agency responsible for receiving (and as permitted, requesting), analyzing and disseminating to competent authorities, disclosures of financial information:

i.  concerning suspected proceeds of crime and potential financing of terrorism, or

ii.  required by national legislation or regulation, in order to combat money laundering and terrorist financing.*

The FIU for the United States is the Financial Crimes Enforcement Network (FinCEN), an office within the Treasury Department which is also responsible for administering and enforcing the Bank Secrecy Act.

The director of FinCEN is James H. Freis, Jr., a Bush-era holdover.

FinCEN Director James H. Freis, Jr.

At least 115 other countries have financial intelligence units according to the membership rolls of the Egmont Group.

*  Schott, Paul Allan, Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism, second edition (The World Bank:  2006).