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Citation: 78 Rev. Jur. U.P.R. 781 2009

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THE WAR ON TERRORIST FINANCING: COLLATERAL DAMAGEFROM A HARD-NOSED SOFT LAW

ARTICLE

JONAS ANDERSON*

Introduction ............................................................................................................... 781I. Conducting Financial War: The Tawdry Trail of Laundered Money ............... 785II: The Financial Action Task Force on Money Laundering: A Soft Law

That Plays H ard Ball ............................................................................................ 787A . Structure and Purpose .................................................................................. 788B . Fatal Flaw s ...................................................................................................... 793

III. A Proposed Rem edy ............................................................................................ 796C onclusion ................................................................................................................. 797

IN THE AFTERMATH OF SEPTEMBER 11TH, 2001, THE FINANCIAL ACTION TASKForce on Money Laundering issued a surprising soft law provision thatcompels developing nations to revamp their financial monitoring sys-

tems and overhaul their regulatory infrastructure. Unfortunately, this provisionthreatens to exacerbate pre-existing ideological gaps between the industrializedWest and developing countries of the Middle East, thereby inflaming Islamicfundamentalist frustrations with Western political and economic power. As aremedy, this article recommends restructuring the Task Force provisions to offerfinancial incentives to developing nations in exchange for their compliance.

INTRODUCTION

Former Arkansas Governor Mike Huckabee has warned, "[elvery time we putour credit card in the gas pump, we're financing [terrorism]. If [we] change theoil economy, [we] starve terrorism financially."' Whether or not Huckabee's

* Lawclerk to the Honorable Deanell R., Tacha, United States Court of Appeals for the Tenth

Circuit. Duke University School of Law, J.D. and LL. M. in international and comparative law; YaleUniversity, M.S.

Winner, ist. place University of Puerto Rico School of Law Nilita Vient6s Gast6n Writing Com-petition zoo8.

1 Lara Bricker, Huckabee Mingles at Packed Campaign Stop, PORTSMOUTH HERALD NEWS, Nov. u,2007, at Ai.

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analysis is correct, his focus on terrorist financing echoes a political refrain thathas gained increased traction since the attacks of September u, 2oo. The Waron Terror, as it has been called,' is more than a war of guns, espionage, and dip-lomacy. It is a financial war as well.

In the days after 9/11, the Bush administration asserted that it had levied fi-nancial warfare. A White House Report affirmed, "[tihe President fired the firstshot in the war on terrorism with the stroke of his pen to seize terrorist financialassets and disrupt their fundraising pipelines."3 This first stroke was followed bya variety of other legislative and administrative measures aimed at choking offterrorists' flow of funds,4 most notably the upgrade of U.S. money launderingdetection and enforcement powers.5 By focusing first and foremost on moneylaundering, the Bush administration demonstrated its faith in the same followthe money6 strategy that has guided the War on Drugs7 since the Reagan Era,when the executive branch orchestrated a unified interdiction and confiscationof money-laundered proceeds to repel illegal drug imports.8 The Reagan Admin-istration's relative success in the War on Drugs, which produced "a steep and

2 See William Safire, The Way We Live Now: 9-3o-o: On Language; Words at War, N.Y. TIMES,September 30, 2ool, at Cio (noting that shortly after September 11, 2oo, George W. Bush coined thephrase when he called for a "War on Terror" during an address to a joint session of Congress); Seealso BRUCE ACKERMAN, BEFORE THE NEXT ATrACK: PRESERVING CIL LIBERTIES IN THE AGE OF TERRORISM

1-5 (2007) (contending that the phrase "'[w]ar on terror' is, on its face, a preposterous expression"because the existence of a war implies the coexistence of some enemy, and terror is an ideology, notan enemy).

3 The Global War on Terrorism, http://www.whitehouse.gov/news/releases/2oo1/12/ioodayreport.html. See also President Holds Prime Time News Conference, U.S. Department ofState, http://www. state.gov/coalition/cr/rm/zool/5335.htm (quoting President Bush as saying, "Thefirst shot in the war was when we started cutting off [the terrorists'] money, because an al-Qaedaorganization can't function without money").

4 See Martin S. Navias, Finance Warfare as a Response to International Terrorism, inSUPERTERRORISM: POLICY RESPONSES 57 (Lawrence Freedman, ed., 2002) (noting that financial warfarepost-September uth drew upon legislative, regulatory, and policing instruments already in place,though these had long been geared primarily to battles unconnected to terrorist financing).

5 SEAN S. COSTIGAN & DAVID GOLD, TERRORNOMICS 38 (20o7) ("[Tlhe U.S. Congress enacted theUSA PATRIOT Act[,] ... [which] better enabled the U.S. government to identify suspicious transac-tions, trace transfers of funds, and stop the laundering of money.").

6 Editorial, Oversight missing, again, USA TODAY, Jun. 26, 2006, at 14 A ("'Follow the money'" isan axiom long applied to catching criminals, and it quickly appeared near the top of the Bush admin-istration's 'to do' list after the 9/n attacks.").

7 See PHILIP JENKINS, DECADE OF NIGHTMARES: THE END OF THE SIXTIES AND THE MAKING OFEIGHTIES 247 (zoo6) ("In 1982, the [Reagan] administration formally declared its war on drugs, inlarge measure a crisis response to growing evidence that the nation's coasts were wide open to nar-cotic importation."); Navias, supra note 4, at 62.

8 Peter Shields, Finance warfare, surveillance and collateral damage, 16 PEACE REV., 357, 358(2004); See also JANE BOULDEN & THOMAS GEORGE WEISS, TERRORISM AND THE UN: BEFORE AND AFTER

SEPTEMBER U 211 (2004).

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THE WAR ON TERRORIST FINANCING

general decline [in drug use] among all age categories"9 during the early 198os,has perhaps made the follow the money strategy a particularly appealing tem-plate for the financial War on Terror.

However, following the money means something very different in each ofthese respective wars. In the War on Drugs it means tracking laundered fundsand dismantling money-laundering facilities, such that both the motive (profit)and the means (operating capital) for covert drug trafficking are eliminated."Because a major driver of the drug trade has always been personal enrichment,'when the means of this enrichment are choked off, the traffickers' motive fol-lows suit.

Conversely, tracking laundered funds and dismantling money-laundering fa-cilities in the War on Terror does not serve the same two purposes simulta-neously. Here, there is an inherent disconnect between motive and operatingcapital because terrorists are-for the most part-not in the terror business toget rich." Their primary motive is more accurately described as the execution ofa successful, violent, ideological campaign against industrial societies.13 Al-though divesting them of their money will extinguish their operating capital,' itwill not simultaneously extinguish their will to kill.'5

9 JENKINS, supra note 7, at 248.

1o Id.

1 See PAUL B. STARES, GLOBAL HABIT: THE DRUG PROBLEM IN A BORDERLESS WORLD 53 (1996) ("Theprice structure of the drug industry ... permits enormous profits to be made .. . [and] [f]or mostdrug traffickers, the promise of some portion of the enormous profits... clearly provides the primaryincentive.").

12 Christopher C. Harmon, Advancing U.S. National Interests Through Effective Counterterror-ism, Remarks to the Open Forum at Ashland University (Oct. 22, 2001),

http://www.ashbrook.org/publicat/dialogue/harmon.html (last visited Dec. 5, 2007) ("Althoughcertain low level soldiers for these [Islamic extremist] groups may be poorly paid... their motive isessentially not so much money but many other things.").

13 MICHAEL RONCZKOWSKI, TERRORISM AND ORGANIZED HATE CRIME: INTELLIGENCE GATHERING,

ANALYSIS, AND INVESTIGATIONS 44 (2oo4).

14 Brian Tumulty, Foreign banks Alerted U.S. Goes After Assets of Groups Tied to Terrorism, CHIC.SUN TIMES, Sep. 25, 2001, at 6 (quoting President Bush as saying, "We will starve them of funding,turn them against each other, root them out of their safe hiding places and bring them to justice...I).

15 See Mark A.R. Kleiman, Illicit Drugs and the Terrorist Threat: Causal Links and Implications forDomestic Drug Control Policy, Congressional Research Service, Report for Congress, (Apr. 2o, 2004),available at http:www.fas.org/irp/crs/RL32334.pdf ("[T]here is no assurance that the policies that bestimplement the mission of protecting Americans from drug abuse will also perform best in protectingthe country from terrorism. Indeed, the interests of ideology-driven terrorists and money-drivendrug traders ... diverge."); Robert E. Looney, The Mirage of Terrorist Financing: The Case of IslamicCharities, 5 STRATEGIC INSIGHTS (March 2OO6), available athttp://www.ccc.nps.navy.mil/si/2oo6/Mar/looneyMaro6.asp (observing that "much of the investiga-tion and research related to al Qaeda has dealt with its funding mechanisms and not with the moti-vation and dedication that has generated the donations" and arguing that U.S. policy should "focusnot only on money, but on the demand driving the money [because] [w]ithin such an expanded

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This fundamental disconnect has important implications for a current soft-law 6 regime aimed at suppressing terrorist financing. That regime, created by agroup of representatives from mostly industrialized nations and called the Fi-nancial Action Task Force on Money Laundering (FATF),'17 compels all countriesto ensure their financial regulatory and administrative infrastructure measuresup to ambitious standards set by FATF itself.'8 Unfortunately, not all countriesfind it easy to measure up. Developing nations have had particular difficultycomplying, primarily because their economies do not match the robustness ofthose in the developed nations that set the FATF standards. And the few devel-oping nations that do comply often spend exorbitant amounts of capital to con-struct and maintain the same level of infrastructure.' 9 Therefore, although theultimate aim of the FATF regime is to divest terrorists of their funding and dis-mantle their money-laundering facilities worldwide, in effect the regime may domore to exacerbate terrorists' frustration with the industrialized West by drain-ing substantial resources from their home jurisdictions. Even if this soft lawultimately leads to a greater depletion of terrorists' operating expenses, the onlyeffect it can possibly have on their motive will thus be to aggravate their angerand frustration.

This article argues that while divesting terrorists of their assets is itself anindisputably worthy aim, using international law and diplomacy to compel de-veloping nations-including those the terrorists call home-to revamp theirfinancial systems and overhaul their regulatory infrastructure will prove coun-terproductive unless some form of financial support is extended to them. With-out this support, these impositions will likely inflame the Islamic fundamentalistdesire to violently subvert Western political and economic power. As numeroussociologists,' scholars,2 and geopolitical luminaries 2 have observed, fundamen-

policy framework, funding for terror is viewed as a product of an ideology which must be coun-tered").

16 See Anna di Robilant, Genealogies of Soft Law, 54 Am. J. COMP. L. 499, 499 (2oo6) (offering abroad description of soft law as "those regulatory instruments and mechanisms of governance that,while implicating some kind of normative commitment, do not rely on binding rules or on a regimeof formal sanctions").

17 Financial Action Task Force (FATF), www.fatf-gafi.org (last visited Feb 22, 2009).

i8 Id. (follow "4o Recommendations" hyperlink) (last visited Feb. 22, 2009).

19 Statement of Presidential Spokesperson Ignacio R. Bunye on Major Issues, Feb. 18, 2003,http://www.news.ops.gov.ph/archives20o3/febi8.htm (last visited Feb. 22, 2009) (explaining that thePhilippines does not have the means to comply and is suffering substantial economic harm fromFATF's publicized threat to sanction it for its noncompliance).

20 See Jeffrey C. Alexander, From the Depths of Despair: Performance, Counterperformance, and"September U", 22 SOCIOLOGICAL THEORY 88, 89 (Mar. 2004) ("[T]error... flourishes only in socialsituations where politics, in the classical sense of the term, has not been allowed free play... [and][iln much of the contemporary Arab-Islamic world ... democratic, and humane forms of politicalexpression have become impossible.").

21 See MARCUS NOLAND & HOWARD PACK, THE ARAB ECONOMIES IN A CHANGING WORLD 8o (20O7)(noting that 15 of the 19 9/u hijackers were Saudis and that before 2001, a "two-decade-long decline in

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talist terrorism has sprung from the well of despair. It has been fueled in part bythe stress of rural communities evolving into burgeoning industrial societiesreplete with anemic political institutions. 3 Strapping additional and unmiti-gated regulatory burdens on the backs of these already-weak institutions willmerely exacerbate the problem.

Part I of this article describes the money laundering process and explains itsconnection to terrorism. Part II discusses the structure and purpose of FATFand evaluates its strengths and weaknesses. Finally, Part III proposes that com-pensating developing nations for their successful implementation of FATF stan-dards is an effective means of limiting the economic collateral damage currentlyimposed on them.

I. CONDUCTING FINANCIAL WAR: THE TAWDRY TRAIL OF LAUNDERED

MONEY

Individual terrorist attacks cost relatively little to plan and execute. Eventhe dramatic, highly destructive attacks on 9/11 cost the terrorists less than$500,0o0 4. Nevertheless, a viable global terrorist campaign requires extensiveand consistent financing to pay for recruitment initiatives, training camps, wea-pons, explosives, communications instruments, forged identity papers, traveldocuments, and a host of other expenses. 5 For this reason, nations concernedwith safeguarding their national security have generally favored measures thatobstruct terrorist financing. z6

the price of oil, and hence income... [led to young Saudi men's] discouragement, not only with theirown prospects relative to their parents' generation but also with their children's prospects relative totheir own"); JEAN BAUDRILLARD, THE SPIRIT OF TERRORISM 66 (2003) (contending that the side of Islamthat is regressive and fundamentalist has become so "out of despair").

22 See Ambassador Dell C. Dailey, An "All Elements of Power" Strategy for Combating Terrorism,http://www.washingtoninstitute.org/templateCo5.php?CID=2697 ("Systems that are characterized byan absence of political choice, honest governance, economic opportunities, and personal freedomcan create incubators for extremism . . . [and] terrorists exploit despair and hopelessness to winrecruits.").

23 Id.

24 THOMAS H. KEAN & LEE H. HAMILTON, THE 9/11 COMMISSION REPORT: FINAL REPORT OF THE

NATIONAL COMMISSION ON TERRORIST ATrACKS UPON THE UNITED STATES 169 (2004) ("The 9/11 plotterseventually spent somewhere between s4oo,ooo and $500,000 to plan and conduct their attack ...[and] al Qaeda funded the plotters.").

25 RACHEL EHRENFELD, FUNDING EVIL: How TERRORISM IS FINANCED-AND HOW TO STOP IT 1(2003).

26 See Donato Masciandro, The International Financial War Against Terrorism: Myths and Realityin JENNIFER GUNNING & SOREN HOLM, 2 ETHICS, LAW, AND SOCIETY 211 (2005) (noting that soon afterSeptember uth "the purpose of the war against terrorism had become a worldwide priority, assumingas an essential strategic objective the dismantling of the forms of financing to fundamentalistgroups").

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By late 2003, 173 countries had implemented orders to freeze terrorist assets,more than ioo countries had introduced new legislation to choke off terroristfinancing, and 84 countries had established financial intelligence units to shareinformation.2 7 Additionally, the United Nations Security Council had unanim-ously adopted Resolution 1373, requiring all member states to "[flreeze withoutdelay funds and other financial assets or economic resources of persons whocommit, or attempt to commit, terrorist acts."8 Each of these initiatives wasfounded on the premise that stopping terrorist money laundering is an effectiveway to stop terrorism.

At its basic level, money laundering is "[tihe act of transferring illegally ob-tained money through legitimate people or accounts so that its original sourcecannot be traced."' 9 A precursor to money laundering is therefore the commis-sion of a crime that generates illegal proceeds-such as drug trafficking, wea-pons smuggling, fraud, or theft?.3

These precursor crimes principally connect money laundering to terrorismin two ways. First, terrorist activities may be funded directly from the proceedsof the crimes, and the perpetrators must then find ways to launder or concealthe origin of the funds in order to use them later without drawing the attentionof law enforcement? Second, the crime itself may be a conspiracy to commit aterrorist act, so that a person, organization, or government that chooses to funda terrorist organization must first launder the money to conceal both its sourceand its purpose.?

Once the precursor crime is committed and illegal funds are acquired, mon-ey laundering proceeds through three distinct stages. At the placement stage,criminals deposit, wire transfer, or otherwise channel cash derived from theirillegal activities into an account at a financial institution.3 An initial barrierawaits them at this stage, as many governments now require their banks andfinancial institutions to report cash transactions of extraordinary sums, with$1o,ooo serving as the threshold in the United States.34 Second, during thelayering stage, the launderer executes sophisticated transactions through variousfinancial institutions and across multiple jurisdictions to obscure the funds' ori-

27 Progress in the War on Terrorist Financing, Overview,http://www.treas.gov/press/releases/reports/js721.pdf (September u, 2oo3).

28 Press Release, Security Council, SC/7158, Security Council Unanimously Adopts Wide-RangingAnti-Terrorism Resolution, U.N. Doc. SC/ 7158 (Sep. 28, 2001).

29 BLACK'S LAW DIC'rONARY 312 (8th ed. 2004).

30 CHRIS MATHERS, CRIME SCHOOL: MONEY LAUNDERING : TRUE CRIME MET THE WORLD OFBUSINESS AND FINANCE 22 (2004).

31 The IMF and the Fight Against Money Laundering and the Financing of Terrorism,http://www.imf'org/external/np/exr/facts/amI.htm.

32 MATHERS, supra note 30, at 22-23.

33 Shields, supra note 8, at 357.

34 Id.

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gin and ownership.3 Massive flows of legitimate transactions facilitate thesefunds' concealment, as more than 700,000 wire transfers cross global paymentsystems each day with an approximate value of $2 trillion36 Finally, during theintegration stage the funds are invested in securities, real estate, or other legiti-mate financial instruments to effectively circulate them into the mainstreamfinancial marketplace. 7 After this final step, illicit monies are practically imposs-ible to detect28

II: THE FINANCIAL ACTION TASK FORCE ON MONEY LAUNDERING: A

SOFT LAW THAT PLAYS HARD BALL

By the end of the zoth century, money laundering had emerged as a primaryconcern of both the International Monetary Fund (IMF) 39 and the seven mostindustrialized nations of the world (G7).4 ' There were several reasons for this.First, many nations were affected by declining tax revenues and a pervasiveworldwide criminal drug market that flourished with the benefit of launderedfunds. 4' Although it is difficult to quantify the criminal profits processedthrough international financial systems each year, reports estimate that it ex-ceeded hundreds of billions of dollars. 4 Second, advances in electronic technol-ogy had created a proliferation of cross-border financial transactions and fos-tered international banking, which in turn facilitated high-speed money trans-fers across an increasingly expansive financial network.43 Finally, this broadernetwork gave criminals access to a wider array of discrete institutions where theycould cache their ill-gotten gains.4 4 In response, the major industrialized nations

35 Id. at 357-58.

36 Id. at 358.

37 Id.

38 See Navias, supra note 4, at 63 (discussing stages of money laundering).

39 KERN ALEXANDER, RAHUL DHUMALE, & JOHN EATWELL, GLOBAL GOVERNANCE OF FINANCIAL

SYSTEMS: THE INTERNATIONAL REGULATION OF FINANCIAL SYSTEMS 67 (2OO6) ("The International Mone-tary Fund's Executive Board has called money laundering 'a problem of global concern' that threatensto undermine the stability and integrity of financial markets.").

4o Todd Doyle, Cleaning Up Anti-Money Laundering Strategies: Current FATF Tactics NeedlesslyViolate International Law, HOUST. J. INT'L L. Z92 (2002) (noting that 199o marked "the outset of theworld-wide push to hang money launderers out to dry").

4i Navias, supra note 4, at 62-63.

42 PETER REUTER & EDWIN M. TRUMAN, CHASING DIRTY MONEY: THE FIGHT AGAINST MONEY

LAUNDERING 138 (2004).

43 Id. at 63.

44 Id.

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of the world established the Financial Action Task Force on Money Laundering(FATF), 45 a major international legal and diplomatic undertaking.

A. Structure and Purpose

FATF is an independent intergovernmental organization that was estab-lished by the G7 countries in 1989.46 Its original purpose was limited to develop-ing and advocating an international response to criminal activities like organizedcrime and drug cartels,4 7 and it remains today "the only international body dedi-cated solely to attacking financial crime."4 Its definition of financial crime in-cludes money laundering, and FATF expanded its mission to explicitly includeterrorist financing in 2001.49 FATF has received praise for its role as "the interna-tional standard setter for anti-money laundering efforts""0 and "the institutionalcenterpiece of the bureaucratic mechanism driving international efforts to tacklemoney laundering."5'

This praise is justified for several reasons. First, FATF brings together a di-verse collection of international luminaries-including legal, financial, and lawenforcement experts-to create policies that serve as models for national legisla-tion and regulatory responses to money laundering.? Currently, more than 13ocountries have adopted FATF, 53 as have several associate organizations that mir-ror FATF's form and purpose on a regional level. Examples of these organiza-tions include The Asia/Pacific Group on Money Laundering and the Middle Eastand North Africa Financial Action Task Force. Several of the world's preeminentfinancial organizations and administrative bodies also work cooperatively withFATF, including the European Central Bank and the Organization for EconomicCooperation and Development (OECD)? 4 While these organizations are gener-ally restricted to observer status-meaning they are fully engaged in plenarysessions and working groups with FATF but are not entitled to vote55- FATF's

45 Financial Action Task Force (FATF), www.fatf-gafi.org (last visited Feb. 22, 2009).

46 See Id.47 Navias, supra note 4, at 63

48 ALEXANDER, DHUMALE, & EATWELL, supra note 39, at 67.

49 FATF/GAFI, http://www.fatf-gafi.org (follow "About the FATF" and "Terrorist Financing"hyperlinks) (last visited Feb. 22, 2oo9).

50 PAUL ALLAN SCHOTF, REFERENCE GUIDE TO ANTI-MONEY LAUNDERING AND COMBATING THE

FINANCING OF TERRORISM, I-3 (2OO6).

51 Navias, supra note 4, at 63.

52 SCHOT7, surpa note 51, at 111-8.

53 See FATF/GAFI, http://www.fatf-gafi.org (follow "About the FATF" and "FATF members andobservers hyperlinks) (last visited Feb. 22, 2009).

54 Id.

55 SCHOT'T, surpa note5l, at 111-8.

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secretariat is located at the OECD in Paris and all of FATF's member countriesare also members of the OECD.s6

FATF's three principal functions are: (i) monitoring members' progress inimplementing anti-money laundering measures; (2) reviewing and reporting onlaundering trends, techniques, and countermeasures; and (3) promoting theadoption and implementation of FATF anti-money laundering standards global-ly."7 It has also adopted The Forty Recommendations on Money Laundering,which are designed and intended for adoption by countries and territories acrossthe globe. They offer a comprehensive framework of anti-money launderingstrategies."s

In response to the attacks of September nth, FATF has also produced TheNine Special Recommendations on Terrorist Financing."9 Along with The FortyRecommendations, these nine recommendations "constitute international mini-mum standards in the fight against money laundering and terrorist financing. "6

,

Included in these recommendations, which were drafted in October 2oo andlater updated in October 2004,6 are the following provisions:

Each country should criminalize the financing of terrorism, terrorist acts andterrorist organizations[,] ... should take measures to require financial institu-tions.., to include accurate and meaningful originator information (name, ad-dress and account number) on fund transfers[,] ... should review the adequacyof laws and regulations that relate to entities [such as charities] that can beabused for the financing of terrorism[,] ... [and] should have measures in placeto detect the physical cross-border transportation of currency and bearer nego-tiable instruments, including a declaration system or other disclosure obliga-

tion."62


57 Id.

58 The 4o Recommendations on Money Laundering, FATF/GAFI, http://www.fatf-gafi.org (follow4o Recommendations" and "Methodology" hyperlink) (last visited May 5, 2009) (listing the Recom-

mendations, including that "'[clountries should criminalise money laundering and apply the crimeto all serious offenses, with a view to including the widest range of predicate offenses;' and '[financialinstitutions should maintain, for at least five years, all necessary records on transactions, both do-mestic or international, to enable them to comply swiftly with information requests from the compe-tent authorities'").

59 The 9 Special Recommendations on Terrorist Financing, FATF/GAFI, http://www.fatf-gafi.org(follow "9 Special Recommendations" hyperlink) (last visited May 5, 2009) (listing the Recommenda-tions).

6o ALEXANDER, DHUMALE, & EATWELL, supra note 39, at 68.

61 The 9 Special Recommendations on Terrorist Financing, FATF/GAFI, http://www.fatf-gafi.org(follow "9 Special Recs" hyperlink) (last visited May 5, 2007) (listing the Recommendations).

62 Id.

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Unlike general money laundering guidelines, these provisions are counter-terrorist by design, as they urge the use of optimal strategies to detect and pros-ecute terrorism's financiers.

Following the September nth attacks, Recommendation 19 of The Forty Rec-ommendations was also amended to give it a sharper bite on terrorist financing.63

It now admonishes countries to adopt "a system where banks and other financialinstitutions . .. report all domestic and international currency transactionsabove a fixed amount to a national central agency with a computerized database," which is to be made available to competent authorities to detect and pros-ecute terrorist financing. 64

Of special significance to smaller nations, developing nations, or those withless sophisticated political infrastructure is the fact that such recommendationsmay require both a large-scale revamping of their administrative bureaucracyand a potentially costly implementation of new electronic systems. Unfortunate-ly, no FATF provision accords these nations international support to assist infinancing the cost of these recommendations. Thus, while FATF has evolved tobecome a more aggressive, sophisticated tool in fighting terrorism, its evolutionhas likewise made it substantially more demanding on poorer and developingmember countries.

Moreover, members are not the only countries expected to comply. Al-though FATF is technically soft law 65 and The Forty Recommendations were in-itially introduced merely as codes of best practice, they have effectively becomebinding provisions on all countries and territories.66 This broad application mayseem counterintuitive, given that FATF is-even by its own terms-merely a setof recommendations. Nonetheless, FATF's stated mission is to promote theadoption of international anti-money laundering standards in all countries, notjust in its member nations.67

Therefore, while FATF officially sanctions only its members and territoriesfor noncompliance, it targets all jurisdictions that have weak legal, regulatory, oradministrative safeguards against money laundering.68 It expects the entire in-ternational community to achieve its recommendations and it monitors eachnation's compliance by scoring it on an assessment of 25 criteria, each of whichare consistent with The Forty Recommendations.69 If a country fails to makeFATF's passing grade, it is placed on a published list of shame reserved for "non-

63 Id.

64 Id.65 Robilant, supra note 16, at 499.

66 Claes Norgren, President, FATF, The FATF: Complying with the Recommendations, Address atthe Economic Crime Symposium, Jesus College, Cambridge, UK (Sept. 8, 2003).67 SCHOTT, supra note 5o, at II1-io (emphasis added).


69 Id.

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cooperative countries and territories" (NCCTs).7 ° NCCTs continue to be activelymonitored and assessed over time.7'

However, NCCTs are not indefinitely mired on FATF's black list of shame.FATF encourages them to work their way off the list by taking specific actionsrelated to their areas of noncompliance, which may include financial supervi-sion, criminal law, customer identification, suspicious transaction reporting, andinternational cooperation.' If an NCCT fails to do so, FATF member states maytake specific actions against it, including prohibiting corporations in its jurisdic-tion from doing business with their jurisdictions' financial institutions and refus-ing to allow the NCCT's banks or financial institutions within their borders.'

Recommendation 21 is the most severe penalty enforced by FATF. It allowsFATF to petition financial institutions worldwide to closely scrutinize businessrelations and transactions with people, businesses, and financial institutionsdomiciled in any country that fails to take adequate legal and regulatory safe-guards against money laundering. 74 FATF first invoked this Recommendation in1996, when after many failed efforts to convince the government of Turkey topass laws criminalizing money laundering and to take further steps to abide byThe Forty Recommendations, it issued a press release admonishing financial in-stitutions to scrutinize transactions with persons and entities domiciled in Tur-key.75 Because the statement publicly humiliated Turkey and threatened to dashits hopes of entering the European Community, Turkey hastened to enact legis-lation making money laundering a criminal offense, and it implemented othermandatory FATF standards?'6 The impact of the NCCT list and other FATF pres-sures thus can have a tremendous influence on both member and nonmemberstate behavior.'7

The novelty and effectiveness of FATF's soft law strategy has not gone unno-ticed. In an era where international legal standards continue to evolve and "theuse of soft law forms . . .has increased enormously,"78 FATF has been called

70 NCCT Initiative, http://www.fatf-gafi.org (follow "Key Topics" hyperlink, then "Meeting FATFStandards" hyperlink) (last visited May 5, 2009); See also Navias, supra note 4, at 64 ("FATF currentlyblacklists as NCCT's nineteen jurisdictions, including Russia, Egypt, Ukraine, Nigeria, Guatamala, thePhilippines, Dominica, Indonesia, Hungary, and Lebanon.").

71 Navias, supra note 4, at 64.

72 Id.

73 SCHOTr, supra note 50, at Ili-n.


75 Id. at 70.

76 Bruce Zagaris, A Brave New World: Recent Developments in Anti-money Laundering and RelatedLitigation Traps for the Unwary in International Trust Matters, VAND. J. TRANS. L. 320, 330 (1999).

77 Id.

78 William Scharlemann, Changing Patterns of European Security and Defence, 77 INT'L. ArE. 69o ,69o (2oo1) (reviewing DINAH SHELTON, COMMITMENT AND COMPLIANCE: THE ROLE OF NON-BINDING

NORMS IN THE INTERNATIONAL LEGAL SYSTEM (zooo)).

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"[tihe crown jewel of soft law."79 Legal observers commend its rigorous monitor-ing process, which "capitalizes on the non-binding format's flexibility, facilitat-ing [the] transparency ... of participating states, helping to ensure compliance,and allowing elaboration of general principles for particular situations."8° Al-though it is technically nonbinding, it effectively "provides... [an] ordering ofrelations within the international community" s' and accomplishes it without theimposition of hard law duties and obligations.

Even some of those who find fault with FATF recognize that it "is probablythe most effective international standard-setting body for implementing andenforcing its standards. "s At a minimum, its success in galvanizing cooperationamong Western nations is difficult to dispute. At a recent FATF meeting in Par-is, more than 400 delegates from approximately thirty-four of these nations andtwenty international organizations were also in attendance.8" The pressures ex-erted by such a broad swath of the international community are hard to ignore.Since FATF's inception in 1989, a number of countries-including Israel andLiechtenstein-have taken their NCCT listing seriously enough to significantlyreform the practices of their financial institutions.8 4

Additionally, FATF has proven to be remarkably flexible in marshalling itsresources to different fronts in the financial war on terror. Very recently it tooka hard-line stance on illicit funding streams in Iran, adding its voice to thosealready exerting diplomatic pressure there.8 1 Additionally, former U.S. DiplomatVictor Comras believes FATF's next initiative will entail dismantling the prolife-ration of nuclear materials by choking off the financiers of this activity." FATFis thus not only doing more to stem money laundering than could be achieved inits absence; it is using its innate structural flexibility to impact a multitude ofcurrent global concerns connected to terrorism.

79 GuY STESSENS, MONEY LAUNDERING: A NEW INTERNATIONAL LAW ENFORCEMENT MODEL 17(2ooo).

8o SHELTON, supra note 78, at 331.

81 Id. at n6.

82 Id. at 73.

83 Chairman's Summary Paris Plenary (2007), www.fatf-gafi.org/dataoecd/o/23/3948513o.pdf (lastvisited May 5, 20o9).

84 Victor Comras, A New Mandate for FATF? Combating Nuclear Proliferation Financing (2007),http://counterterrorismblog.org/2oO7/io/a-newmandatefor-fatf combati.php (last visited May 5,2009).

85 See Id. ("The FATF ... called upon Iran to strengthen, as a matter of urgency, its anti-moneylaundering and counter-terrorist financing (AML/CFT) controls. FATF members are advising theirfinancial institutions to take account of the risks [inherent in doing business with Iran].").86 See Id. "FATF... appears to be poised to take on a greater role in combating illicit internation-

al financial activities, adding nuclear proliferation financing to its focus of attention.").

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B. Fatal Flaws

Nevertheless, FATF is not without its critics. Phil Williams, a respected au-thority on money laundering, has called it "totally fatuous and wrong headed.""'He argues that it represents an elevation of style over substance because manynations report a high-level of compliance even while money laundering runsrampant on their soil.' He also suggests that instead of putting a stop to moneylaundering, FATF merely drives it into geographic locations where detectionrisks are low.8 In Williams' view, the extraordinary implementation costs ofFATF are grossly disproportionate to its relatively modest benefits, creating a"self-delusion ... that far more is being achieved than is actually the case."9°

There are good grounds for these arguments. Money laundering is a crimethat persists in much of the world despite the administrative and legal changesFATF has catalyzed.9 ' Money launderers have proven capable of adapting to andevading regulatory detection, thereby "grow[ing] abroad in novel and sophisti-cated ways." 92 In the words of a U.S. State Department report on money laun-dering, "[t]he closer we looked at banks, the faster the money seemed to shift tonon-traditional money movers-gem and jewelry dealers, real estate, charities,and attorneys or their intermediaries. As these entities were brought under thepurview of anti-money laundering laws and regulations, the money moved fur-ther underground."93 Internet gambling sites have also become a popular havenfor money launderers, who can purchase gambling chips online using a creditcard or a wire transfer, place a few small bets, and redeem the remaining chipsfrom the online cashier, who then releases a printable receipt so that a legitimatesource for the funding is documented. 4

87 Problems and Opportunities in Transatlantic Cooperation,www.ucis.pitt.edu/euce/events/policyconf/99/Panel-i.pdf (last visited May 5, 2009).

88 Id. ("[S]tates with the best regulation, the United States and many of the states in the EuropeanUnion, are also the biggest laundering threats in the world.... [l]n Europe, there's a very poor recordof convictions for money laundering.").

89 Shields, supra note 8, at 362. (quoting Phil Williams, a renowned money laundering expert).

90 Id.91 JAMES R. RICHARDS, TRANSNATIONAL CRIMINAL ORGANIZATIONS, CYBERCRIME, AND MONEY

LAUNDERING: A HANDBOOK FOR LAW ENFORCEMENT OFFICERS, AUDITORS, AND FINANCIAL

INVESTIGATORS 44 (1999) (positing that "money laundering could now be the world's third-largest'business,' trailing only legitimate currency exchange and worldwide automobile production").

92 ANDREW L. SANDLER ET AL., CONSUMER FINANCIAL SERVICES § 6-68 (2001).

93 International Narcotics Control Strategy Report, "Money Laundering and Terrorist Financing-A Global Threat," quoted in SANDLER ETAL., supra note 92, at § 6-54 (2001).

94 D. LARRY CRUMBLEY & G. SEVENSON SMITH, FOREIGN AND INVESTIGATIVE ACCOUNTING 7-18, 7-19(2005).

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Perhaps this explains why a relatively small fraction of laundered wealth hasbeen interdicted and placed beyond the grasp of criminals and terrorists.9 AU.S. Congressional Report laments that "the international money launderingsituation is out of control in the western hemisphere, and [U.S.] efforts ... atbest expose only a small percentage of ongoing money laundering operations...[and] do not interdict or suppress the crime."96 Excluding drug asset forfeiturecases, estimates indicate that laundered monies removed from global circulationrepresent less than o.ooi percent of the total volume of assets subject to regula-tory seizure. 97

Unfortunately, all of this futility comes at a tremendous cost. Former Trea-sury Secretary Paul O'Neill notes that the U.S. spends $1.1 billion in the battleagainst money laundering each year. 98 These funds are principally devoted tothe collection and management of vast stockpiles of data from financial institu-tions across the globe and to monitoring irregular activities in that data.99 AsO'Neill notes, "[t]hese huge data grabs take time and enormous resources andyield very little. We've invested a lot in this technique but it doesn't mean itworks."'0 0

Yet the United States sacrifices much less, as a percentage of its overall eco-nomic wealth, than developing countries that are compelled to either adoptFATF recommendations or submit to the public scrutiny and humiliation of itsname and shame list. Many once-defamed countries that have incurred substan-tial expense to move off the list-including underdeveloped Caribbean and Pa-cific Island nations-have done so to avoid severe economic sanctions.' 1 Theircompliance has often further enfeebled their modest economies, as their finan-cial institutions have failed, their jobs have vanished, and their revenue streamshave dried up.' In 2003, the Office of the President of the Philippines opined inan official government press release,

[w]e are now suffering the effects of the anticipated imposition of FATF sanc-tions. We are afraid that things could get worse once the actual sanctions are

95 NAiAs, supra note 4, at 66.

96 Combating Money Laundering: Hearing Before the H. Subcomm. on Criminal Justice, DrugPolicy, and Human Resources of the Comm. on Govt Reform, lo6th Cong. 112 (zooo) (statement byKenneth Rijock, a confessed career money launderer who worked for lo years "to ensure that theproceeds of narcotics crime made it safely through the world banking system and into tax havens").

97 Money Laundering Monitor (Institute for Security Studies), Oct. 2001.

98 Shields, supra note 8, at 361.

99 Id.

oo Id. at 361-62.

101 Id. at 362.

loz Id.

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imposed.... It should be obvious by now that [sanctions] will not only affect[overseas Filipino workers] but even our entire economy as well."°

The Philippines is one of many developing nations that simply do not havethe capacity to conduct the thorough overhaul of its financial regulatory infra-structure that FATF demands. Hence, sanctions-however damaging to theeconomy and the morale of the people-appear inevitable.

Unfortunately, FATF offers no financial recourse or support to developingnations to enable them to adopt its recommendations. This oversight is unfor-tunate, given that as Anne Clunan suggests, "[t]he existence of a ... small groupof powerful states that is both willing and able to promote and underwrite aninternational counter-terrorist finance regime is essential" to bringing develop-ing nations on-board.0 4 The thirty-four members of FATF could feasibly playthis role. Yet their failure to offer developing nations the necessary financialincentives to assure universal compliance costs everyone, including themselves,dearly. They pay billions upon billions of dollars to pursue funds launderedthrough unregulated safe havens that crop up because developing nations haveno means, or perhaps no incentive, to comply. Meanwhile, developing nationsare faced with a lose-lose alternative: either they cripple their own economies bycomplying with FATF recommendations or they allow FATF to cripple theireconomies by blacklisting them. Although developing nations thus face sub-stantial financial fallout from failing to comply with the FATF recommendations,their economies are doomed to suffer one way or the other.' 5

From a purely administrative perspective, FATF is hampered by additionaldeficiencies stemming from its disconnectedness with the developing world.While 130 countries have endorsed the FATF, its thirty-four members-whichare nearly all developed nations-essentially enjoy exclusive control over thecontent of its standards.'" From a geographic and socio-economic perspectivethey are also conspicuously non-representative. The only African member isSouth Africa, while its only Middle Eastern member is Turkey.'°7 Furthermore,

1o3 Statement of Presidential Spokesperson Ignacio R. Bunye on Major Issues, Feb. 18, 2003,

http://www.news.ops.gov.ph/archives2oo3/feb18.htm (last visited Feb. 22, 20o7).

1o4 Anne L. Clunan, U.S. and International Responses to Terrorist Financing, in JEANNE K. GIRALDO& HAROLD A. TRINKUNAS, TERRORISM FINANCING AND STATE RESPONSES: A COMPARATIVE PERSPECTIVE,

262 (2007).

105 See Jason Sharman, The Cost of the International Anti-Money Laundering Regime to DevelopingCountries: Damned if they Do, Damned if they Don't?, paper presented at the annual meeting of theInternational Studies Association, Oct. 5, 2006, available athttp://www.allacademic.com/meta/poo752_index.html ("Current[anti-money-laundering] regula-tions are generally expensive to implement, are designed to fit developed economies rather thandeveloping, and have only uncertain effectiveness in actually reducing and deterring financialcrime.").

io6 ALEXANDER, DHUMALE, & EATWELL, supra note 39, at 72.

io7 The FATF members are: Argentina, Australia, Austria, Belgium, Brazil, Canada, China, Den-mark, the European Commission, Finland, France, Germany, Greece, the Gulf Co-operation Council,

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unrepresented developing nations have been rebuffed in their efforts to openlydiscuss FATF policy. In 2005, core FATF countries blocked a lobby by several ofthese nations to amend FATF standards in a way that would focus more atten-tion on real estate related laundering. °

In summary, although FATF's effectiveness in disrupting global money laun-dering is questionable, the collateral damage it levies on the economies of devel-oping nations is not. °9 All developing nations with limited financial systems andadministrative capacities are affected by its strictures, regardless of whether theycomply with the strictures or not. Noncompliers suffer the additional reputa-tional harm caused by NCCT-associated humiliation and economic stonewalling,which appear all the more inequitable when one considers that FATF is operatedand controlled primarily by a relatively small subset of developed nations. Un-fortunately, these nations have unilateral control over the development and ap-plication of FATF's recommendations. " °

III. A PROPOSED REMEDY

While FATF certainly deserves praise for every bit of good it has accom-plished in stemming the flow of laundered funds through international channels,it should also stand accountable for its role in pushing developing nations intodiplomatic and economic isolation and in exacerbating their pre-existing finan-cial hardships. Its long-term impact in repressing developing nations' economiesmay produce unfortunate and unintended consequences. As former World BankPresident James Wolfensohn declared, "[o]ne of the causes of terrorism is pover-ty in the sense that it creates an environment in which terrorism can flourish" . ... [M]easures must be taken to address.., the root causes of terrorism: those ofeconomic exclusion, poverty, and under-development.""' Of course, povertyalone does not make the terrorist. If it did, most if not all of the world's third-

Hong Kong, Iceland, Ireland, Italy, Japan, the Netherlands, Luxembourg, Mexico, New Zealand,Norway, Portugal, Russia, Singapore, South Africa, Spain, Sweden, Switzerland, Turkey, the UnitedKingdom, and the United States. http://www.fatf-gafi.org (follow "About FATF", then "Members &Observers" hyperlinks) (last visited May 5, 2009).

lo8 Eleni Tsingou, Global Governance And Transnational Financial Crime: Opportunities And Ten-sions In The Global Anti-Money Laundering Regime, Working Paper (May 2005)http://wwwz.warwick.ac.uk/fac/soc/csgr/research/workingpapers/2005/wp161o5.pdf (last visitedDec. 5, 2oo7)

1o9 ALEXANDER, DHUMALE, & EATWELL, supra note 39, at 72.

no Id. at 72-73.

m James D. Wolfensohn, Poverty is Related to Terrorism, Staff Connections--World Bank Intra-net, http://econ.worldbank.org (follow "data and research", "trade research", "news & events", and"internal news" hyperlinks) (last visited Dec. 5, 2007).

n2 James D. Wolfensohn, Making the World a Better and Safer Place: The Time for Action is Now,22 POLMCS ui8, 18 (2002).

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world nations would be brimming with terrorists."3 Still, sociologists report that"widespread poverty is obviously one of the most important [factors creating afertile environment for terrorism], especially because of the severely unequaldistribution of wealth between and within nations."'4 Accordingly, to the extentFATF is driving the undeveloped world deeper into poverty and broadening thewealth gap among nations, it may also be planting seeds of violence and terror.

The resolution to this problem must naturally entail narrowing this gap.One of the most obvious ways to do this would be to revise FATF so that it re-wards a commitment to compliance by providing financial assistance. Interna-tional environmental treaties offer a useful model of how this might work. Withregard to these treaties, "lack of financial resources is often cited as the primaryreason that developing countries are unable or unwilling to comply.""'5 The in-ternational community thus provides funding to these countries to facilitatecompliance. Both the biodiversity treaty and the climate change treaty include amechanism for such funding."6 This same approach should guide the thirty-fourmember nations of FATF. Instead of blacklisting noncompliers or strappingthem with administrative and regulatory burdens they cannot afford to bear,these member nations should provide them with financial incentives.

Such a strategy has at least three benefits. First, it would enhance diplomat-ic relations between the developed and underdeveloped worlds by eliminatingFATF's current instruments of shame and isolationism. Second, it would liftdeveloping nations to a level of greater economic hope instead of repressingtheir societies in a way that cultivates despair and violence. Finally, since moneylaunderers routinely "exploit the weakest link in the global regulatory and en-forcement chain by shifting transactions, communications or assets to the coun-try which has the weakest or most corruptible regulatory.. . authorities,""7 thisstrategy would remove the weak links altogether and strengthen the entirechain.

CONCLUSION

James Wolfensohn has said:

n3 Id. (observing that if the link between poverty and terrorism were simple, "Kenya and Tanzaniawould have many homegrown terrorists rather than imported ones; India, with 400 million peopleliving on less than si per day, would be exporting terrorism rather than software; and Haitian suicidebombers would make the evening news nightly").

n4 Paul R. Ehrlich, Stanford University News Release (Nov. 15, 2002), available at http://news-service.stanford.edu/pr/o2/ehrlichiraqu2o.html (last visited Feb. 22, 2009).

H5 PAMELA S. CHASEK ETAL, GLOBAL ENVIRONMENTAL POLITICS 156 (2000).

n6 Id.

fl7 ERNESTO UGO SAVONA, RESPONDING TO MONEY LAUNDERING: INTERNATIONAL PERSPECrIVES 54

(2000).

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Nearly half the developing world-some 2 billion people-live in countries thathave seen little growth in the last two decades. Even in those developing coun-tries that have been doing relatively well, hundreds of millions of people aremarginal to the progress of growth. As a result ... [w]e have a global challenge ofinclusion."8

In its current form, FATF fails to meet this challenge. Although it is techni-cally a soft law instrument, its uncompromising demands on developing coun-tries are both hard-nosed and hard-headed.

Nevertheless, it has the potential to contribute to the realization of Wolfen-sohn's vision of inclusion in a truly remarkable way. FATF should be immediate-ly amended to immunize developing nations from its draconian instruments ofshame and coercion. In place of these instruments, FATF's member nationsshould adopt a funding measure similar to those used in environmental treatiesto secure the participation of developing nations. Terrorist financing and envi-ronmental crises both have the potential to produce dire systemic consequencesthat cross jurisdictional boundaries. Therefore, both require sufficient incen-tives to attract participants from both the developed and developing worlds.

Financial incentives would encourage and enable developing nations to takemeaningful steps toward full compliance with FATF recommendations. Theseincentives should come from FATF's constituents, who would pay less in regulat-ing money laundering on their own soil if it were effectively regulated interna-tionally. Thus amended, FATF would continue to play a unique role in bringingdeveloping and developed nations together both diplomatically and economical-ly, lifting impoverished communities above the repressive economic influencesthat germinate despair and violence.

n8 Wolfensohn, supra note n2, at u8.

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Documents

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