2005 Speech to Cambridge Symposium on Economic Crime

9th September 2005

​Speech 7 September 2005


by Peter Neville,

Director General of the Guernsey Financial Services Commission

This session focuses specifically on what is called “the financial war on terror”.  It is a dramatic title and one that reflects the seriousness of the threat we all face.  I have just one small quibble with the title – this is not, in my opinion, as the title suggests, primarily a financial war.  Instead, it is a war we are waging against the mis-use of the financial system for terrorist purposes.  The weapons we use – and these are what characterise the nature of the war – are not financial.  We may obtain information from the financial system but the weapons we use are the old tried and tested ones of intelligence, communication, firepower and engagement.  In the main, jurisdictions have the firepower – in other words the powers to take action, such as freezing accounts – and they are fully engaged – in other words committed to preventing abuses if they can.  My fear is that by losing sight of the need to review what we are doing in the areas of intelligence and communication we may be less effective in fighting terrorism than we should be. 

 Let me draw on another war analogy to make this point.  I have heard it said many times that no battle plan survives beyond the point of first engagement with the enemy.  My experience in contested financial services transactions and in regulating confrontational situations certainly bears out that assessment.  As soon as you understand what it is you are dealing with you have to reassess your strategy and draw up new plans, to make sure you use your powers as effectively as possible.

We are seeing that process of reassessment taking place in the way the politicians are approaching the war on terror.  One example of this reassessment was evidenced by the report contained, at the beginning of August, in the UK’s Financial Times.  This reported a shift in the language being used by the Bush administration from the GWOT – “Global War on Terror” – to a new approach known as SAVE – “The Struggle [or Strategy] Against Violent Extremism”.  The report drew attention to the move away from an emphasis on a military approach towards efforts intended to undermine the appeal of Muslim extremism by working with moderate groups.
In the same way, now that we – as regulators and law enforcers – have experience of applying the FATF standards and requiring financial services firms to identify and report all suspicious transactions, it is time to evaluate whether what we are doing is the most effective way to play our part in countering the terrorist threat.
A year after the 9/11 attacks, the UK Chancellor, Gordon Brown, said “If fanaticism is the heart of modern terror, finance is its lifeblood.”  With three further years of experience under out belts, how effective have we been at cutting-off that life-blood?  The UK, EU and US maintain long lists of individuals and organisations whose bank accounts and assets must be frozen – once they have been located and identified – and for whom banks and financial institutions are banned from acting.  The UK Home Office has stated that US$112 million has been frozen worldwide since 9/11.  In total, in the UK, around US$500,000 of suspected terrorist assets are currently frozen.
This is a small amount in the scheme of things, but perhaps more importantly - as we know –  the funding of terrorist attacks does not take a lot of money.  Neither the 9/11 nor the 7 July attacks required sums of money that would have been likely to set off transaction monitoring alarm bells.  In the US, the greatest expense was probably the flying lessons, and in the UK it was probably the ingredients for the homemade bombs.  Costs are measured in hundreds not thousands of pounds.
What we can glean from publicly available information, and what we can deduce from the nature of the attacks themselves, therefore indicates quite strongly that the current requirements as they stand at present are unlikely to be effective in preventing terrorist atrocities.
How does the war on terror look from the point of view of the financial services regulators and the financial services firms themselves?
The problem for the firms has always been: how do you decide whether a transaction will be used to finance a terrorist attack?  Terrorism around the world may be funded by a variety of means, including smuggling, extortion, drug trafficking, theft, counterfeiting of goods, vice and fraud.  In other cases, terrorist funding can come from legitimate sources of income, such as donations to well-founded and altruistic charities whose funds are diverted into the funding of terrorism.  The money transfer may be entirely legitimate, being not only from a verified and honest source, but also being in relation to a legitimate underlying transaction.  What the financial services firms are expected to do is decide whether a transaction is suspicious.  They have to reach into the minds of those involved and understand what is going to be done with that money after the transaction.  Asking the firm and the individuals working for a firm to make such a guess, and to reach the right conclusion when making that guess, is asking the impossible.  Of course, the system does not place the final responsibility for making a judgement on the firm.  That responsibility is placed on the authorities to whom the suspicious transaction or suspicious activity reports are made.  But this still leaves the firms in the invidious position of having to operate a very bureaucratic set of procedures, backed up by extremely punitive sanctions on both the individuals and the firms if they fail to observe those procedures, with very little useful or specific information to go on.  The result is an avalanche of suspicious activity reports, reporting far too many transactions for the authorities in many countries to be able to process effectively.
In the absence of a crash course in mind-reading skills, what is needed is for the financial services firms to be given more reliable and more accurately focussed information.  The firms need help to be able to target the individuals, firms and transactions that the intelligence services consider to be high risk.  In this way the financial services firms will be able either to pass on more useful information, that is less swamped by irrelevant noise, or to take appropriate action – such as freezing accounts – themselves.
Following 9/11, I made a plea to the financial services firms in Guernsey to help us to counter the threat of terrorism, by checking all their customer accounts and records of transactions involving the individuals and organisations whose names were listed by the UN, OFAC and other agencies.  I was impressed by the support we received in doing this.  Everyone was genuinely committed to finding the terrorists and putting a stop to their attacks.  A lot of people worked very hard for a very long time to provide the reports and put in place the procedures that we asked for.  And I know that the same is true in terms of the commitment and effort put in by firms in other jurisdictions.
But the time has now come to make sure we do not lose the commitment of the firms – or even, and perhaps even more importantly, the support of the public at large.  Winning the hearts and minds of those who are at the front line implementing the procedures, and the support of those who are inconvenienced by the bureaucracy that is involved - as well as being literally in the front line when it comes to the attacks themselves - is essential if we are to be able to monitor the financial system effectively and to be able to prevent these atrocities.  The perceived ineffectiveness of the current regime, and the enormous cost and bureaucracy involved in monitoring and reporting so many transactions, is making many people question whether we really are going about things in the right way.
Please do not misunderstand me.  I am not in any way saying we must scrap everything we have put in place so far.  Guernsey, along with all other major financial centres, is whole-heartedly committed to stopping criminals abusing the financial system.  We have a whole range of weapons we use to counter money laundering and other crimes, and to freeze and seize the proceeds of crime.  Since the late 1980s, the FATF has been doing excellent work in determining how to counter the use of the international financial system for criminal purposes.  In 2001, the FATF reviewed its requirements and introduced Special Recommendations to combat terrorist financing.  What we need to do now is to refine our approach to disrupting and if possible ending the funding of terrorism in order to make that approach more effective.
The recent passing by the United Nations Security Council of Resolution 1617 supports the taking of vigorous and effective action against al-Qaeda and the Taliban.  It extends the sanctions against al-Qaeda and the Taliban and reiterates the need for close cooperation among competent authorities – as a basis for more effective action.  The effectiveness of that action will depend, however, on cooperation between the authorities and the industry to ensure that the relevant information is available in the right place and that appropriate action is then taken.
Financial services firms have to recognise – and I believe they do recognise – that they have a vital role to play.  Most importantly, they must know who their customers are and they must understand the business their customers are involved in.  The good thing about this is that it amounts to no more than firms should be doing in any case – for sound, commonsensical, commercial reasons.
My experience is that firms are – in general – doing well in discharging this responsibility by adopting a risk based KYC process.
As regulators, law enforcement authorities and intelligence services, we also have a responsibility to help the financial services firms.  We are often the ones who receive information first, and we certainly have access to more sensitive information and are able to exchange that information more easily than the firms themselves can.
The whole subject of international co-operation is at the top of the international regulatory agenda at present.  The Financial Stability Forum and the IMF have both been carrying out work in this area.  All the international agencies, including the standard setters such as the IAIS, are working to identify what barriers exist to effective international co-operation.  IOSCO’s Multilateral Memorandum of Understanding is seen as being increasingly important in enabling regulators to demonstrate their commitment to cooperate with each other.
The area of activity that does need more attention is the giving of better and more accurately focused information to financial services firms.
Let me finish by emphasising again what we need to do to make our efforts to counter the funding of terrorism more effective.  Firstly, we need to improve the provision of intelligence to regulators and firms – including feedback on suspicious activity reports made by the firms.   Secondly, we must continue to improve communication between regulators, firms, law enforcement authorities and intelligence services – not only cross-border but within jurisdictions.  Thirdly, we need to make sure that firms are not over-burdened with bureaucracy and that the requirements that we place on those firms are revisited on a regular basis.  Not only must the regime be as effective as we can make it, but we must also retain the support both of the firms and of the public by engaging both the hearts and the minds of those who are affected by the requirements.
Thank you.