The impact of 11 September
on Financial Institutions
How did the financial system and individual
firms respond to the attacks?
Under the circumstances,
the financial system responded to the crises remarkably well.
Stock and derivatives markets jointly decided to open after five
days, and by mid-October stock markets had returned to pre-attack
levels. Swift communication between all players and authorities
proved to be crucial. Firms capitalised on extensive Y2K contingency
planning and were able to quickly relocate staff in temporary
offices in the surrounding metropolitan area. Much business was
re-routed through major financial centres in Europe so that settlement
and other functions could continue smoothly: non-US markets reacted
in cooperative fashion to the disaster. Competitor firms showed
a remarkable degree of collegiality and rallied around those firms
most seriously affected by the attacks. For example, in response
to losses of personnel and equipment at some market participants,
dealers agreed voluntarily to extend settlement in the US Treasury
market to T+5 (trade date + 5 days). There were also well-publicised
instances of firms making office space, and communication links
available to competitors.
The regulatory/investigatory
response
Within hours
of the attacks, financial institutions began working with regulatory
and law enforcement agencies to establish who might have been
responsible for the attacks and where the financing had come from.
The institutions quickly began searching client records against
suspect lists provided by the US authorities. This has led to
the freezing of assets worth approximately €90 million worldwide.
Checking of records against suspect names continues. The list
of terrorist suspects has grown to approximately 3000 individuals
or entities. Overlapping but non-identical lists have been forwarded
to financial institutions by at least 12 separate authorities
including the Monetary Authority of Singapore, Swiss Federal Banking
Commission and the FBI. The task has been complicated by inconsistent
transliteration from Arabic and by the fact that many of the names
are very common, thus making it difficult to distinguish between
the intended person and innocent individuals.
In the days
following the attacks, reports of alleged short-selling/insider
dealing by terrorist suspects began to appear in the press, prompting
wide-ranging investigations in a number of countries by both regulators
and financial firms. To date, no credible evidence of such practices
has been found.
A major difficulty
for the authorities as well as financial institutions is the fact
that little, if anything, in the funding activities of the 19
hijackers involved in the attacks could be considered "suspicious"
in terms of pre-existing or newly enacted anti-money-laundering
provisions. The terrorists opened bank accounts in their own names,
using genuine passports and other means of identification, deposited
modest sums of cash and avoided applying for credit cards or other
forms of credit that might have resulted in additional checks.
It is clear that future efforts to detect terrorist use of the
financial system will depend upon accurate and timely information
about the identity of suspected terrorists.
The US response:
the USA PATRIOT Act, 2001
On 26th October,
the US Congress adopted the "Uniting and Strengthening America
by Providing Appropriate Tools Required to Intercept and Obstruct
Terrorism Act". The Act, which represents a non-partisan
agreement between both sides of Congress, was strongly supported
by the US financial services industry. It refines a range of existing
legislative requirements, and brings into force a number of pending
anti-money-laundering (AML) provisions. In particular the Act:
- extends
suspicious activity reporting obligations to the securities,
brokerage, and commodities trading industries;
- prohibits
the establishment, maintenance, administering, or managing of
correspondent accounts with shell banks (i.e. foreign bank with
no physical presence in any country);
- introduces
enhanced due diligence procedures for private banking relationships;
- tightens
existing "know your customer" rules;
- provides
extraterritorial jurisdiction to compel disclosures and secure
the forfeiture of funds; and
- increases
the penalties for money laundering violations.
Further information
relating to the USA PATRIOT Act can be found on the Congressional
website.
The European
response: new money laundering directive and ratification of UN
Convention
The Ghent European Council in October called for the immediate
adoption of the revised Directive on Money Laundering and the
speedy ratification by all Member States of the United Nations
Convention for the Suppression of the Financing of Terrorism.
With the European Parliament's approval of the Money Laundering
Directive on the 13th November, the EU extended the obligation
to notify suspicious transactions to certain non-financial professions
and sectors, and widened the definition of money laundering to
include the proceeds of all serious crime (including terrorism).
The new rules will cover professions not yet covered by US AML
legislation, such as accountants, auditors and lawyers. Once implemented,
the Directive should prove a useful tool in the struggle against
the terrorism and organised crime. On 27th December, the Council
adopted a framework Regulation (27/12/2001) aligning the EU with
the provisions of the United Nations Security Council Regulation
1373/2001 on combating terrorism. The measures strengthen the
legal and administrative capacity of the EU and its Member States
to take action against terrorists and their supporters. The Regulation
allows the freezing of assets across Europe as soon as an individual
or organisation has been identified as a potential source of terrorist
funding. Banks and investment firms in Europe have been working
very closely with regulators implementing the freeze of funds.
The international
response: FATF, Wolfsberg Group
Financial Action
Task Force (FATF): At an extraordinary plenary meeting on the
financing of terrorism held in Washington, DC, on 29-30 October
2001, the FATF expanded its mission beyond money laundering. It
will now focus its expertise on the worldwide effort to combat
terrorist financing. The FATF has issued new international standards
to combat terrorist financing which it calls on all countries
to adopt and implement. Further information on the FATF's recommendations
can be found at: http://www1.oecd.org/fatf/index.htm.
The 'Wolfsberg
Group': In the wake of September 11th, the Wolfsberg Group (a
private sector group working in conjunction with Transparency
International) convened a working group to study issues arising
from the attacks. The Group has made recommendations regarding
the appropriate response for governments and financial institutions
in the form of a Wolfsberg Statement on the Suppression of the
Financing of Terrorism, According to the Group, industry needs
governments to: provide detailed information and context; to give
unambiguous directions; to share intelligence on a timely basis;
and to foster enhanced global cooperation on this issues. For
its part, the financial services industry needs to: employ genuine
vigilance and robust know your customer procedures; exercise careful
judgment; provide full details to regulators and genuinely cooperate
with government. For more information about the Wolfsberg Group's
work, see: http://www.wolfsberg-principles.com.
What else
could be done?
Enhanced global
cooperation: To effectively deal with the challenge of international
terrorism, there needs to be much more effective cooperation among
governments on a global level. There is a need to provide meaningful
information in relation to patterns, techniques and mechanisms
used in the financing of terrorism and clear guidelines on appropriate
levels of heightened scrutiny in relation to sectors or activities
identified by competent authorities as being widely used for terrorist
financing.
More sharing
of intelligence: The ability of financial institutions to assist
the battle against terrorism depends greatly on the quality of
the information provided to them by the authorities. It is possible
that had the FBI passed on to banks the same information regarding
the terrorist suspects that they passed to US Customs and Immigration
in August of 2001, the suspects would have been tracked down prior
to September 11th. Whether this would have prevented the attacks
is a moot point, but it highlights the sort of cooperation that
could prove invaluable in the future.
Global safe
harbour: Generally speaking, financial institutions are granted
a "safe harbour" from prosecution under AML rules in
a given jurisdiction when they can show that they have notified
suspicions relating to the transaction to the relevant authorities
in that jurisdiction. However, such "safe harbours"
generally do not extend beyond the borders of that jurisdiction.
In an increasingly globalized market, this places financial institutions
at risk of incurring substantial liabilities in one jurisdiction
for complying with the AML laws of another.
Effective enforcement:
The importance of not only the private sector complying with the
law but also the need for authorities to devote attention and
resources to effective enforcement needs to be highlighted. Legislation
is important but effectiveness of implementation and enforcement
are crucial too. There is the need for continued attention to
contingency planning and mutual information exchange between all
levels.
Striking the
correct balance between data protection concerns and effective
AML due diligence: According to some authorities, certain data
protection legislation requires financial institutions to disclose
to a client full details regarding the filing of any suspicious
activity reports notwithstanding the anti-tipping provisions of
most AML laws. In other words, in some instances a bank may be
compelled to elect between defying the data protection law or
placing itself at risk of criminal prosecution by notifying the
client of a confidential report regarding possible money laundering
activity.
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