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

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THE WAR ON TERRORIST FINANCING: COLLATERAL DAMAGE

FROM A HARD-NOSED SOFT LAW
ARTICLE
JONAS ANDERSON*

Introduction ...............................................................................................................
781
I. Conducting Financial War: The Tawdry Trail of Laundered Money ............... 785

II: The Financial Action Task Force on Money Laundering: A Soft Law
That Plays H ard Ball ............................................................................................
787
A . Structure and Purpose ..................................................................................
788
B. Fatal Flaw s ......................................................................................................
793
III. A Proposed Rem edy ............................................
796
Conclusion .................................................................................................................
797

IN

THE AFTERMATH OF SEPTEMBER 11TH, 2001, THE FINANCIAL ACTION TASK

Force on Money Laundering issued a surprising soft law provision that

compels developing nations to revamp their financial monitoring systems and overhaul their regulatory infrastructure. Unfortunately, this provision
threatens to exacerbate pre-existing ideological gaps between the industrialized
West and developing countries of the Middle East, thereby inflaming Islamic
fundamentalist frustrations with Western political and economic power. As a
remedy, this article recommends restructuring the Task Force provisions to offer
financial incentives to developing nations in exchange for their compliance.
INTRODUCTION

Former Arkansas Governor Mike Huckabee has warned, "[elvery time we put
our credit card in the gas pump, we're financing [terrorism]. If [we] change the
oil 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; Yale
University, M.S.
Winner, ist. place University of Puerto Rico School of Law Nilita Vient6s Gast6n Writing Competition zoo8.
1
Lara Bricker, Huckabee Mingles at Packed Campaign Stop, PORTSMOUTH HERALD NEWS, Nov. u,
2007, at Ai.

REVISTA JURIDICA UPR

VOL. 78

analysis is correct, his focus on terrorist financing echoes a political refrain that
has gained increased traction since the attacks of September u, 2oo. The War
on Terror, as it has been called,' is more than a war of guns, espionage, and diplomacy. It is a financial war as well.
In the days after 9/11, the Bush administration asserted that it had levied financial warfare. A White House Report affirmed, "[tihe President fired the first
shot in the war on terrorism with the stroke of his pen to seize terrorist financial
assets and disrupt their fundraising pipelines."3 This first stroke was followed by
a variety of other legislative and administrative measures aimed at choking off
terrorists' flow of funds,4 most notably the upgrade of U.S. money laundering
detection and enforcement powers.5 By focusing first and foremost on money
laundering, the Bush administration demonstrated its faith in the same follow
the money6 strategy that has guided the War on Drugs7 since the Reagan Era,
when the executive branch orchestrated a unified interdiction and confiscation
of money-laundered proceeds to repel illegal drug imports.8 The Reagan Administration'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 the
phrase when he called for a "War on Terror" during an address to a joint session of Congress); See
also 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, not
an 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 of
State, http://www. state.gov/coalition/cr/rm/zool/5335.htm (quoting President Bush as saying, "The
first shot in the war was when we started cutting off [the terrorists'] money, because an al-Qaeda
organization can't function without money").
4 See Martin S. Navias, Finance Warfare as a Response to International Terrorism, in
SUPERTERRORISM: POLICY RESPONSES 57 (Lawrence Freedman, ed., 2002) (noting that financial warfare
post-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 the
USA PATRIOT Act[,] ...[which] better enabled the U.S. government to identify suspicious transactions, 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'" is
an axiom long applied to catching criminals, and it quickly appeared near the top of the Bush administration's 'to do' list after the 9/n attacks.").
7
See PHILIP JENKINS, DECADE OF NIGHTMARES: THE END OF THE SIXTIES AND THE MAKING OF
EIGHTIES 247 (zoo6) ("In 1982, the [Reagan] administration formally declared its war on drugs, in
large measure a crisis response to growing evidence that the nation's coasts were wide open to narcotic 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).

N(Im. 3 (2009)

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 template for the financial War on Terror.
However, following the money means something very different in each of
these respective wars. In the War on Drugs it means tracking laundered funds
and 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 follows suit.
Conversely, tracking laundered funds and dismantling money-laundering facilities in the War on Terror does not serve the same two purposes simultaneously. Here, there is an inherent disconnect between motive and operating
capital because terrorists are-for the most part-not in the terror business to
get rich." Their primary motive is more accurately described as the execution of
13
Ala successful, violent, ideological campaign against industrial societies.
though divesting them of their money will extinguish their operating capital,' it
will not simultaneously extinguish their will to kill.'5

9
1o

JENKINS, supra note 7, at 248.

Id.

1 See PAUL B. STARES, GLOBAL HABIT: THE DRUG PROBLEM INABORDERLESS WORLD 53 (1996) ("The
price structure of the drug industry ... permits enormous profits to be made .. . [and] [f]or most
drug traffickers, the promise of some portion of the enormous profits... clearly provides the primary
incentive.").
12 Christopher C. Harmon, Advancing U.S. National Interests Through Effective Counterterrorism, Remarks
to
the
Open
Forum
at Ashland
University
(Oct. 22,
2001),
http://www.ashbrook.org/publicat/dialogue/harmon.html (last visited Dec. 5, 2007) ("Although
certain low level soldiers for these [Islamic extremist] groups may be poorly paid... their motive is
essentially 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 TerroristThreat: Causal Links and Implicationsfor
Domestic Drug Control Policy, Congressional Research Service, Report for Congress, (Apr. 2o, 2004),
availableat http:www.fas.org/irp/crs/RL32334.pdf ("[T]here is no assurance that the policies that best
implement the mission of protecting Americans from drug abuse will also perform best in protecting
the country from terrorism. Indeed, the interests of ideology-driven terrorists and money-driven
drug traders ... diverge."); Robert E. Looney, The Mirage of Terrorist Financing:The Case of Islamic
Charities,
5
STRATEGIC
INSIGHTS
(March
2OO6),
available
at
http://www.ccc.nps.navy.mil/si/2oo6/Mar/looneyMaro6.asp (observing that "much of the investigation and research related to al Qaeda has dealt with its funding mechanisms and not with the motivation and dedication that has generated the donations" and arguing that U.S. policy should "focus
not only on money, but on the demand driving the money [because] [w]ithin such an expanded

REVISTA JURIDICA UPR

V01. 78

This fundamental disconnect has important implications for a current softlaw 6 regime aimed at suppressing terrorist financing. That regime, created by a
group of representatives from mostly industrialized nations and called the Financial Action Task Force on Money Laundering (FATF),'17 compels all countries
to ensure their financial regulatory and administrative infrastructure measures
up to ambitious standards set by FATF itself.'8 Unfortunately, not all countries
find it easy to measure up. Developing nations have had particular difficulty
complying, primarily because their economies do not match the robustness of
those in the developed nations that set the FATF standards. And the few developing nations that do comply often spend exorbitant amounts of capital to construct and maintain the same level of infrastructure.' 9 Therefore, although the
ultimate aim of the FATF regime is to divest terrorists of their funding and dismantle their money-laundering facilities worldwide, in effect the regime may do
more to exacerbate terrorists' frustration with the industrialized West by draining substantial resources from their home jurisdictions. Even if this soft law
ultimately leads to a greater depletion of terrorists' operating expenses, the only
effect it can possibly have on their motive will thus be to aggravate their anger
and frustration.
This article argues that while divesting terrorists of their assets is itself an
indisputably worthy aim, using international law and diplomacy to compel developing nations-including those the terrorists call home-to revamp their
financial systems and overhaul their regulatory infrastructure will prove counterproductive unless some form of financial support is extended to them. Without this support, these impositions will likely inflame the Islamic fundamentalist
desire to violently subvert Western political and economic power. As numerous
sociologists,' scholars,2 and geopolitical luminaries 2 have observed, fundamenpolicy framework, funding for terror is viewed as a product of an ideology which must be countered").
16

See Anna di Robilant, Genealogies of Soft Law, 54 Am. J. COMP. L. 499, 499 (2oo6) (offering a

broad 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 regime
of 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).

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 the
Philippines does not have the means to comply and is suffering substantial economic harm from
FATF's publicized threat to sanction it for its noncompliance).
19

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 social

situations 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 political
expression 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

N6im. 3 (2009)

THE WAR ON TERRORIST FINANCING

talist terrorism has sprung from the well of despair. It has been fueled in part by
the stress of rural communities evolving into burgeoning industrial societies
replete with anemic political institutions. 3 Strapping additional and unmitigated regulatory burdens on the backs of these already-weak institutions will
merely exacerbate the problem.
Part I of this article describes the money laundering process and explains its
connection to terrorism. Part II discusses the structure and purpose of FATF
and evaluates its strengths and weaknesses. Finally, Part III proposes that compensating developing nations for their successful implementation of FATF standards is an effective means of limiting the economic collateral damage currently
imposed on them.
I. CONDUCTING FINANCIAL WAR: THE TAWDRY TRAIL OF LAUNDERED
MONEY

Individual terrorist attacks cost relatively little to plan and execute. Even
the dramatic, highly destructive attacks on 9/11 cost the terrorists less than
$500,0o0 . 4 Nevertheless, a viable global terrorist campaign requires extensive
and consistent financing to pay for recruitment initiatives, training camps, weapons, explosives, communications instruments, forged identity papers, travel
documents, and a host of other expenses. 5 For this reason, nations concerned
with safeguarding their national security have generally favored measures that
obstruct terrorist financing. z6

the price of oil, and hence income... [led to young Saudi men's] discouragement, not only with their
own prospects relative to their parents' generation but also with their children's prospects relative to
their own"); JEAN BAUDRILLARD, THE SPIRIT OF TERRORISM 66 (2003) (contending that the side of Islam
that 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 by
an absence of political choice, honest governance, economic opportunities, and personal freedom
can create incubators for extremism . . . [and] terrorists exploit despair and hopelessness to win
recruits.").
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 plotters

eventually 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 InternationalFinancialWar Against Terrorism:Myths and Reality
in JENNIFER GUNNING & SOREN HOLM, 2 ETHICS, LAW, AND SOCIETY 211 (2005) (noting that soon after
September uth "the purpose of the war against terrorism had become a worldwide priority, assuming
as an essential strategic objective the dismantling of the forms of financing to fundamentalist
groups").

REVISTA JURfDICA UPR

VOL. 78

By late 2003, 173 countries had implemented orders to freeze terrorist assets,
more than ioo countries had introduced new legislation to choke off terrorist
financing, and 84 countries had established financial intelligence units to share
information.2 7 Additionally, the United Nations Security Council had unanimously adopted Resolution 1373, requiring all member states to "[flreeze without
delay funds and other financial assets or economic resources of persons who
commit, or attempt to commit, terrorist acts."8 Each of these initiatives was
founded on the premise that stopping terrorist money laundering is an effective
way to stop terrorism.
At its basic level, money laundering is "[tihe act of transferring illegally obtained money through legitimate people or accounts so that its original source
cannot be traced."' 9 A precursor to money laundering is therefore the commission of a crime that generates illegal proceeds-such as drug trafficking, wea3
pons smuggling, fraud, or theft?.
These precursor crimes principally connect money laundering to terrorism
in two ways. First, terrorist activities may be funded directly from the proceeds
of the crimes, and the perpetrators must then find ways to launder or conceal
the origin of the funds in order to use them later without drawing the attention
of law enforcement? Second, the crime itself may be a conspiracy to commit a
terrorist act, so that a person, organization, or government that chooses to fund
a terrorist organization must first launder the money to conceal both its source
and its purpose.?
Once the precursor crime is committed and illegal funds are acquired, money laundering proceeds through three distinct stages. At the placement stage,
criminals deposit, wire transfer, or otherwise channel cash derived from their
illegal activities into an account at a financial institution.3 An initial barrier
awaits them at this stage, as many governments now require their banks and
financial institutions to report cash transactions of extraordinary sums, with
$1o,ooo serving as the threshold in the United States.34 Second,
during the
layering stage, the launderer executes sophisticated transactions through various
financial institutions and across multiple jurisdictions to obscure the funds' ori27
Progress
in
the
War
on
Terrorist
Financing,
http://www.treas.gov/press/releases/reports/js721.pdf (September u, 2oo3).

Overview,

28
Press Release, Security Council, SC/7158, Security Council Unanimously Adopts Wide-Ranging
Anti-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
BUSINESS AND FINANCE 22 (2004).

THE WORLD OF

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.

N(Jm. 3 (2009)

THE WAR ON TERRORIST FINANCING

gin and ownership. 3 Massive flows of legitimate transactions facilitate these

funds' concealment, as more than 700,000 wire transfers cross global payment
systems each day with an approximate value of $2 trillion36 Finally, during the
integration stage the funds are invested in securities, real estate, or other legitimate financial instruments to effectively circulate them into the mainstream
financial marketplace. 7 After this final step, illicit monies are practically imposs8
ible to detect2
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 primary
concern of both the International Monetary Fund (IMF) 39 and the seven most
industrialized nations of the world (G7).4 ' There were several reasons for this.
First, many nations were affected by declining tax revenues and a pervasive
worldwide criminal drug market that flourished with the benefit of laundered
funds. 4' Although it is difficult to quantify the criminal profits processed
through international financial systems each year, reports estimate that it exceeded hundreds of billions of dollars. 4 Second, advances in electronic technology had created a proliferation of cross-border financial transactions and fostered international banking, which in turn facilitated high-speed money transfers across an increasingly expansive financial network. 43 Finally, this broader
network gave criminals access to a wider array of discrete institutions where they
could 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 threatens
to undermine the stability and integrity of financial markets.").
4o Todd Doyle, Cleaning Up Anti-Money Laundering Strategies: Current FATF Tactics Needlessly
Violate InternationalLaw, HOUST. J. INT'L L. Z92 (2002) (noting that 199o marked "the outset of the
world-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.

REVISTA JURfDICA UPR

V01. 78

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 established by the G7 countries in 1989.46 Its original purpose was limited to developing and advocating an international response to criminal activities like organized
crime and drug cartels,4 7 and it remains today "the only international body dedicated solely to attacking financial crime."4 Its definition of financial crime includes money laundering, and FATF expanded its mission to explicitly include
terrorist financing in 2001.49 FATF has received praise for its role as "the international standard setter for anti-money laundering efforts""0 and "the institutional
centerpiece of the bureaucratic mechanism driving international efforts to tackle
money laundering."5'
This praise is justified for several reasons. First, FATF brings together a diverse collection of international luminaries-including legal, financial, and law
enforcement experts-to create policies that serve as models for national legislation and regulatory responses to money laundering.? Currently, more than 13o
countries have adopted FATF, 53 as have several associate organizations that mirror FATF's form and purpose on a regional level. Examples of these organizations include The Asia/Pacific Group on Money Laundering and the Middle East
and North Africa Financial Action Task Force. Several of the world's preeminent
financial organizations and administrative bodies also work cooperatively with
FATF, including the European Central Bank and the Organization for Economic
Cooperation and Development (OECD)? 4 While these organizations are generally restricted to observer status-meaning they are fully engaged in plenary
sessions and working groups with FATF but are not entitled to vote 55- FATF's
45

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

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"

2009).

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 and
observers hyperlinks) (last visited Feb. 22, 2009).

54

Id.

55

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

N(Jm. 3 (2.009)

THE WAR ON TERRORIST FINANCING

secretariat is located at the OECD in Paris and all of FATF's member countries
are also members of the OECD. s6
FATF's three principal functions are: (i) monitoring members' progress in
implementing anti-money laundering measures; (2) reviewing and reporting on
laundering trends, techniques, and countermeasures; and (3) promoting the
adoption and implementation of FATF anti-money laundering standards globally."7 It has also adopted The Forty Recommendations on Money Laundering,
which are designed and intended for adoption by countries and territories across
the globe. They offer a comprehensive framework of anti-money laundering
strategies."s
In response to the attacks of September nth, FATF has also produced The
9
Nine Special Recommendations on Terrorist Financing."
Along with The Forty
Recommendations, these nine recommendations "constitute international mini"6
mum standards in the fight against money laundering and terrorist financing. ,
Included in these recommendations, which were drafted in October 2oo and
later updated in October 2004,6 are the following provisions:
Each country should criminalize the financing of terrorism, terrorist acts and
terrorist organizations[,] ... should take measures to require financial institutions.., to include accurate and meaningful originator information (name, address and account number) on fund transfers[,] ... should review the adequacy
of laws and regulations that relate to entities [such as charities] that can be
abused for the financing of terrorism[,] ... [and] should have measures in place
to detect the physical cross-border transportation of currency and bearer negotiable instruments, including a declaration system or other disclosure obligation."62

56

ALEXANDER, DHUMALE, & EATWELL, supra note 39, at 69.

57

Id.

58 The 4o Recommendations on Money Laundering, FATF/GAFI, http://www.fatf-gafi.org (follow

4o Recommendations" and "Methodology" hyperlink) (last visited May 5, 2009) (listing the Recommendations, including that "'[clountries should criminalise money laundering and apply the crime
to all serious offenses, with a view to including the widest range of predicate offenses;' and '[financial
institutions should maintain, for at least five years, all necessary records on transactions, both domestic or international, to enable them to comply swiftly with information requests from the competent 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 Recommendations).
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.

REVISTA JURfDICA UPR

VOL. 78

Unlike general money laundering guidelines, these provisions are counterterrorist by design, as they urge the use of optimal strategies to detect and prosecute terrorism's financiers.
Following the September nth attacks, Recommendation 19 of The Forty Rec63
ommendations was also amended to give it a sharper bite on terrorist financing.
It now admonishes countries to adopt "a system where banks and other financial
institutions . .. report all domestic and international currency transactions
above a fixed amount to a national central agency with a computerized data
base," which is to be made available to competent authorities to detect and pros64
ecute terrorist financing.
Of special significance to smaller nations, developing nations, or those with
less sophisticated political infrastructure is the fact that such recommendations
may require both a large-scale revamping of their administrative bureaucracy
and a potentially costly implementation of new electronic systems. Unfortunately, no FATF provision accords these nations international support to assist in
financing the cost of these recommendations. Thus, while FATF has evolved to
become a more aggressive, sophisticated tool in fighting terrorism, its evolution
has likewise made it substantially more demanding on poorer and developing
member countries.
Moreover, members are not the only countries expected to comply. Although FATF is technically soft law 65 and The Forty Recommendations were initially introduced merely as codes of best practice, they have effectively become
binding provisions on all countries and territories. 66 This broad application may
seem counterintuitive, given that FATF is-even by its own terms-merely a set
of recommendations. Nonetheless, FATF's stated mission is to promote the
adoption of international anti-money laundering standards in all countries, not
67
just in its member nations.
Therefore, while FATF officially sanctions only its members and territories
for noncompliance, it targets all jurisdictions that have weak legal, regulatory, or
administrative safeguards against money laundering. 68 It expects the entire international community to achieve its recommendations and it monitors each
nation's compliance by scoring it on an assessment of 25 criteria, each of which
are consistent with The Forty Recommendations.69 If a country fails to make
FATF'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 at
the Economic Crime Symposium, Jesus College, Cambridge, UK (Sept. 8, 2003).
67 SCHOTT, supra note 5o, at II1-io
(emphasis added).
68

ALEXANDER, DHUMALE, & EATWELL, supra note 39, at 71.

69

Id.

NCIm. 3 (2009)

THE WAR ON TERRORIST FINANCING

cooperative countries and territories" (NCCTs).7 NCCTs continue to be actively

monitored 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 actions
related to their areas of noncompliance, which may include financial supervision, criminal law, customer identification, suspicious transaction reporting, and
international cooperation.' If an NCCT fails to do so, FATF member states may
take specific actions against it, including prohibiting corporations in its jurisdiction from doing business with their jurisdictions' financial institutions and refusing to allow the NCCT's banks or financial institutions within their borders.'
Recommendation 21 is the most severe penalty enforced by FATF. It allows
FATF to petition financial institutions worldwide to closely scrutinize business
relations and transactions with people, businesses, and financial institutions
domiciled in any country that fails to take adequate legal and regulatory safeguards against money laundering. 74 FATF first invoked this Recommendation in
1996, when after many failed efforts to convince the government of Turkey to
pass laws criminalizing money laundering and to take further steps to abide by
The Forty Recommendations, it issued a press release admonishing financial institutions to scrutinize transactions with persons and entities domiciled in Turkey. 75 Because the statement publicly humiliated Turkey and threatened to dash
its hopes of entering the European Community, Turkey hastened to enact legislation making money laundering a criminal offense, and it implemented other
mandatory FATF standards?'6 The impact of the NCCT list and other FATF pressures thus can have a tremendous influence on both member and nonmember
state behavior.'7
The novelty and effectiveness of FATF's soft law strategy has not gone unnoticed. In an era where international legal standards continue to evolve and "the
use 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 FATF
Standards" hyperlink) (last visited May 5, 2009); See also Navias, supra note 4, at 64 ("FATF currently
blacklists as NCCT's nineteen jurisdictions, including Russia, Egypt, Ukraine, Nigeria, Guatamala, the
Philippines, Dominica, Indonesia, Hungary, and Lebanon.").

71

Navias, supra note 4, at 64.

72

Id.

73

SCHOTr, supra note 50, at Ili-n.

74

ALEXANDER, DHUMALE, & EATWELL, supra note 39, at 69.

75

Id. at 70.

76

Bruce Zagaris, A Brave New World: Recent Developments in Anti-money Laundering and Related

Litigation Trapsfor the Unwary in InternationalTrust Matters,VAND. J. TRANS. L. 320, 330 (1999).

77

Id.

78

William Scharlemann, Changing Patternsof EuropeanSecurity 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)).

REVISTA JURfDICA UPR

VOL. 78

"[tihe crown jewel of soft law."79 Legal observers commend its rigorous monitoring process, which "capitalizes on the non-binding format's flexibility, facilitating [the] transparency ...of participating states, helping to ensure compliance,
and allowing elaboration of general principles for particular situations."8 Although it is technically nonbinding, it effectively "provides... [an] ordering of
relations within the international community " s' and accomplishes it without the
imposition of hard law duties and obligations.
Even some of those who find fault with FATF recognize that it "is probably
the most effective international standard-setting body for implementing and
enforcing its standards. "s At a minimum, its success in galvanizing cooperation
among Western nations is difficult to dispute. At a recent FATF meeting in Paris, more than 400 delegates from approximately thirty-four of these nations and
twenty international organizations were also in attendance.8" The pressures exerted 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 and
Liechtenstein-have taken their NCCT listing seriously enough to significantly
reform the practices of their financial institutions.8 4
Additionally, FATF has proven to be remarkably flexible in marshalling its
resources to different fronts in the financial war on terror. Very recently it took
a hard-line stance on illicit funding streams in Iran, adding its voice to those
already exerting diplomatic pressure there.8 1 Additionally, former U.S. Diplomat
Victor Comras believes FATF's next initiative will entail dismantling the proliferation of nuclear materials by choking off the financiers of this activity." FATF
is thus not only doing more to stem money laundering than could be achieved in
its absence; it is using its innate structural flexibility to impact a multitude of
current global concerns connected to terrorism.

79

GuY STESSENS, MONEY LAUNDERING:

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 (last

visited 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-money
laundering and counter-terrorist financing (AML/CFT) controls. FATF members are advising their
financial 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 international financial activities, adding nuclear proliferation financing to its focus of attention.").

Ndm. 3 (2009)

THE WAR ON TERRORIST FINANCING

B. Fatal Flaws
Nevertheless, FATF is not without its critics. Phil Williams, a respected authority on money laundering, has called it "totally fatuous and wrong headed.""'
He argues that it represents an elevation of style over substance because many
nations report a high-level of compliance even while money laundering runs
rampant on their soil.' He also suggests that instead of putting a stop to money
laundering, FATF merely drives it into geographic locations where detection
risks are low.8 In Williams' view, the extraordinary implementation costs of
FATF 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 crime
that persists in much of the world despite the administrative and legal changes
FATF has catalyzed.9 ' Money launderers have proven capable of adapting to and
evading regulatory detection, thereby "grow[ing] abroad in novel and sophisticated ways." 92 In the words of a U.S. State Department report on money laundering, "[t]he closer we looked at banks, the faster the money seemed to shift to
non-traditional money movers-gem and jewelry dealers, real estate, charities,
and attorneys or their intermediaries. As these entities were brought under the
purview of anti-money laundering laws and regulations, the money moved further underground."93 Internet gambling sites have also become a popular haven
for money launderers, who can purchase gambling chips online using a credit
card or a wire transfer, place a few small bets, and redeem the remaining chips
from the online cashier, who then releases a printable receipt so that a legitimate
source for the funding is documented. 4

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

Cooperation,

88 Id. ("[S]tates with the best regulation, the United States and many of the states in the European
Union, are also the biggest laundering threats in the world.... [l]n Europe, there's a very poor record
of 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").
ANDREW L. SANDLER ET AL., CONSUMER FINANCIAL SERVICES 6-68 (2001).
93 International Narcotics Control Strategy Report, "Money Laundering and Terrorist FinancingA Global Threat," quoted in SANDLER ETAL., supra note 92, at 6-54 (2001).
92

94

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

(2005).

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VOL. 78

Perhaps this explains why a relatively small fraction of laundered wealth has
been interdicted and placed beyond the grasp of criminals and terrorists. 9 A
U.S. Congressional Report laments that "the international money laundering
situation is out of control in the western hemisphere, and [U.S.] efforts ... at
best expose only a small percentage of ongoing money laundering operations...
[and] do not interdict or suppress the crime."96 Excluding drug asset forfeiture
cases, estimates indicate that laundered monies removed from global circulation
represent less than o.ooi percent of the total volume of assets subject to regulatory seizure. 97
Unfortunately, all of this futility comes at a tremendous cost. Former Treasury Secretary Paul O'Neill notes that the U.S. spends $1.1 billion in the battle
against money laundering each year. 98 These funds are principally devoted to
the collection and management of vast stockpiles of data from financial institutions across the globe and to monitoring irregular activities in that data. 99 As
O'Neill notes, "[t]hese huge data grabs take time and enormous resources and
yield very little. We've invested a lot in this technique but it doesn't mean it
works."'0 0
Yet the United States sacrifices much less, as a percentage of its overall economic wealth, than developing countries that are compelled to either adopt
FATF recommendations or submit to the public scrutiny and humiliation of its
name and shame list. Many once-defamed countries that have incurred substantial expense to move off the list-including underdeveloped Caribbean and Pacific Island nations-have done so to avoid severe economic sanctions.' 1 Their
compliance has often further enfeebled their modest economies, as their financial institutions have failed, their jobs have vanished, and their revenue streams
have dried up.' In 2003, the Office of the President of the Philippines opined in
an official government press release,
[w]e are now suffering the effects of the anticipated imposition of FATF sanctions. 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, Drug
Policy, and Human Resources of the Comm. on Govt Reform, lo6th Cong. 112 (zooo) (statement by

Kenneth Rijock, a confessed career money launderer who worked for lo years "to ensure that the
proceeds of narcotics crime made it safely through the world banking system and into tax havens").

97

Money LaunderingMonitor (Institute for Security Studies), Oct.

98

Shields, supra note 8, at 361.

99

Id.

oo

Id. at 361-62.

101

Id. at 362.

loz

Id.

2001.

N(Im. 3 (2009)

THE WAR ON TERRORIST FINANCING

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 have
the capacity to conduct the thorough overhaul of its financial regulatory infrastructure that FATF demands. Hence, sanctions-however damaging to the
economy and the morale of the people-appear inevitable.
Unfortunately, FATF offers no financial recourse or support to developing
nations to enable them to adopt its recommendations. This oversight is unfortunate, given that as Anne Clunan suggests, "[t]he existence of a ...small group
of powerful states that is both willing and able to promote and underwrite an
international counter-terrorist finance regime is essential" to bringing developing nations on-board.0 4 The thirty-four members of FATF could feasibly play
this role. Yet their failure to offer developing nations the necessary financial
incentives to assure universal compliance costs everyone, including themselves,
dearly. They pay billions upon billions of dollars to pursue funds laundered
through unregulated safe havens that crop up because developing nations have
no means, or perhaps no incentive, to comply. Meanwhile, developing nations
are faced with a lose-lose alternative: either they cripple their own economies by
complying with FATF recommendations or they allow FATF to cripple their
economies by blacklisting them. Although developing nations thus face substantial 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 additional
deficiencies stemming from its disconnectedness with the developing world.
While 130 countries have endorsed the FATF, its thirty-four members-which
are nearly all developed nations-essentially enjoy exclusive control over the
content of its standards.'" From a geographic and socio-economic perspective
they are also conspicuously non-representative. The only African member is
South Africa, while its only Middle Eastern member is Turkey.'7 Furthermore,
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).

1o3

1o4 Anne L. Clunan, U.S. and InternationalResponses to Terrorist Financing,in JEANNE K. GIRALDO
& HAROLD A. TRINKUNAS, TERRORISM FINANCING AND STATE RESPONSES: A COMPARATIVE PERSPECTIVE,
262 (2007).

See Jason Sharman, The Cost of the InternationalAnti-Money LaunderingRegime to Developing

Countries: Damned ifthey Do, Damned ifthey Don't?, paper presented at the annual meeting of the
International
Studies
Association,
Oct.
5,
2006,
available
at
http://www.allacademic.com/meta/poo752_index.html ("Current[anti-money-laundering] regulations are generally expensive to implement, are designed to fit developed economies rather than
developing, and have only uncertain effectiveness in actually reducing and deterring financial
crime.").
105

io6

ALEXANDER, DHUMALE, & EATWELL,

supra note 39, at 72.

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

REVISTA JURfDICA UPR

VOL. 78

unrepresented developing nations have been rebuffed in their efforts to openly

discuss FATF policy. In 2005, core FATF countries blocked a lobby by several of
these nations to amend FATF standards in a way that would focus more attention on real estate related laundering.
In summary, although FATF's effectiveness in disrupting global money laundering is questionable, the collateral damage it levies on the economies of developing nations is not. 9 All developing nations with limited financial systems and
administrative capacities are affected by its strictures, regardless of whether they
comply with the strictures or not. Noncompliers suffer the additional reputational harm caused by NCCT-associated humiliation and economic stonewalling,
which appear all the more inequitable when one considers that FATF is operated
and controlled primarily by a relatively small subset of developed nations. Unfortunately, these nations have unilateral control over the development and application of FATF's recommendations. "
III. A PROPOSED REMEDY

While FATF certainly deserves praise for every bit of good it has accomplished in stemming the flow of laundered funds through international channels,
it should also stand accountable for its role in pushing developing nations into
diplomatic and economic isolation and in exacerbating their pre-existing financial hardships. Its long-term impact in repressing developing nations' economies
may produce unfortunate and unintended consequences. As former World Bank
President James Wolfensohn declared, "[o]ne of the causes of terrorism is poverty 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 of
economic exclusion, poverty, and under-development.""' Of course, poverty
alone 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 United
Kingdom, 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 GovernanceAnd TransnationalFinancialCrime: OpportunitiesAnd Tensions 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 visited
Dec. 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 Intranet, 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).

NCJm. 3 (2009)

THE WAR ON TERRORIST FINANCING

world nations would be brimming with terrorists."3 Still, sociologists report that
"widespread poverty is obviously one of the most important [factors creating a
fertile environment for terrorism], especially because of the severely unequal
distribution of wealth between and within nations."'4 Accordingly, to the extent
FATF is driving the undeveloped world deeper into poverty and broadening the
wealth 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 rewards a commitment to compliance by providing financial assistance. International environmental treaties offer a useful model of how this might work. With
regard to these treaties, "lack of financial resources is often cited as the primary
reason that developing countries are unable or unwilling to comply.""'5 The international community thus provides funding to these countries to facilitate
compliance. Both the biodiversity treaty and the climate change treaty include a
mechanism for such funding."6 This same approach should guide the thirty-four
member nations of FATF. Instead of blacklisting noncompliers or strapping
them 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 diplomatic relations between the developed and underdeveloped worlds by eliminating
FATF's current instruments of shame and isolationism. Second, it would lift
developing nations to a level of greater economic hope instead of repressing
their societies in a way that cultivates despair and violence. Finally, since money
launderers routinely "exploit the weakest link in the global regulatory and enforcement chain by shifting transactions, communications or assets to the country which has the weakest or most corruptible regulatory.. . authorities,"" 7 this
strategy would remove the weak links altogether and strengthen the entire
chain.
CONCLUSION

James Wolfensohn has said:

n3 Id.(observing that if the link between poverty and terrorism were simple, "Kenya and Tanzania
would have many homegrown terrorists rather than imported ones; India, with 400 million people
living on less than si per day, would be exporting terrorism rather than software; and Haitian suicide
bombers would make the evening news nightly").
n4 Paul R. Ehrlich, Stanford University News Release (Nov. 15,
service.stanford.edu/pr/o2/ehrlichiraqu2o.html (last visited Feb. 22,

2002),

available at http://news-

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 that

have seen little growth in the last two decades. Even in those developing countries that have been doing relatively well, hundreds of millions of people are
marginal to the progress of growth. As a result ...
[w]e have a global challenge of
inclusion."8
In its current form, FATF fails to meet this challenge. Although it is technically a soft law instrument, its uncompromising demands on developing countries are both hard-nosed and hard-headed.
Nevertheless, it has the potential to contribute to the realization of Wolfensohn's vision of inclusion in a truly remarkable way. FATF should be immediately amended to immunize developing nations from its draconian instruments of
shame and coercion. In place of these instruments, FATF's member nations
should adopt a funding measure similar to those used in environmental treaties
to secure the participation of developing nations. Terrorist financing and environmental crises both have the potential to produce dire systemic consequences
that cross jurisdictional boundaries. Therefore, both require sufficient incentives to attract participants from both the developed and developing worlds.
Financial incentives would encourage and enable developing nations to take
meaningful steps toward full compliance with FATF recommendations. These
incentives should come from FATF's constituents, who would pay less in regulating money laundering on their own soil if it were effectively regulated internationally. Thus amended, FATF would continue to play a unique role in bringing
developing and developed nations together both diplomatically and economically, lifting impoverished communities above the repressive economic influences
that germinate despair and violence.

n8

Wolfensohn, supra note n2, at u8.