A Critical Assessment of the UN Security Council and Financial Action Task Force Counter-Terrorist Financing Regimes

Completed in Partial Satisfaction of MSc Global Crime, Justice & Security at the University of Edinburgh Lachlan Craigie

Introduction In this paper it is argued that current United Nations Security Council (UNSC)/Financial Action Task Force (FATF)-led counter terrorist-financing efforts are unrealistically broad in scope, inconsistently implemented and unjustifiably costly to the rights of individuals. In responding to the above question this paper is divided into two sections. The first section includes a comprehensive summary of anti-money laundering (AML) and counter terrorist-financing (CTF) approaches adopted by the international community. The second section presents a critical assessment of current CTF regimes, in terms of overall strategy, compliance and costs. Section I: The Evolution of International AML/CTF Approaches Although the ultimate focus in this section is upon the respective CTF regimes deriving from the FATF and UNSC resolutions 1267 and 1373, these approaches cannot be understood without some consideration of the CTF foundations laid by earlier international, regional and national CTF approaches. It will be demonstrated that current international CTF efforts have essentially piggy backed off a more comprehensive AML regime. The result is that current CTF strategies are overly reliant upon the passive regulatory tools of AML. A: The role of early international AML instruments Among the earliest antecedents to the current CTF regimes was the approach taken by the Council of Europe in response to the violence committed in the 1970s by the Rote Armee Fraktion and Brigate Rosse.1 Recommendation (80) 10 of the Council of Europe on Measures Against the Transfer and the Safekeeping of Funds of Criminal Origin, adopted 27 June 1980, recommended members arrange in their respective banking systems a range of measures designed to trace criminal cash flows. The measures included customer identity checks, close national and international co-operation (assisted by Interpol) between banks and authorities and the introduction of basic cashtracing machinery. Such customer identification and track and trace measures were to become the foundation of mandatory EU and Council of Europe AML regimes beginning with the 1990 Council of Europe Convention on Laundering, Search, Seizure and Confiscation of the Proceeds from Crime, and the 10 June 1991 EEC Directive 91/308 on the Prevention of the Use of the Financial System for the Purpose of Money Laundering. The European regional approach was also aided by the development of various
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M Levi, Combating the Financing of Terrorism [2010] 50 British Journal of Criminology 650 at 653

international instruments that included an AML focus. Article 3 (1)(b) of the 1988 UN Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances2, although not referring explicitly to money laundering, required state parties to criminalize the equivalent conduct in respect to the proceeds of drug-related crime.3 The 1990 Council of Europe Convention drew directly on this definition of money laundering in Article 9 of its own text. The 1988 Convention was also significant in establishing several precedents in the treatment of money laundering offences, including the rejection of the political offence exception to extradition (Article 3 (10)) and the explicit overruling of bank secrecy provisions (Article 5(3)). Somewhat controversially, the 1988 Convention also introduced in Article 5 (7) an optional provision enabling the reverse burden of proof in regard to the lawful origin of the alleged proceeds of drug-related offences.4 This provision is particularly significant in respect to the later development of international CTF regimes as it is indicative of a shift in the international community towards the normalization of suspicion and pre-emptive security measures in respect to money laundering-type offences.5 All of the above provisions were incorporated into the 1990 Council of Europe Convention. It is important to note that while no explicit mention of terrorist finances was made in any of the conventions discussed above, these early AML measures fundamentally underpinned the CTF regimes that were to follow. For example the 1990 Council of Europe Convention was later supplemented by the 2005 Council of Europe Convention on Laundering, Search, Seizure and Confiscation of the Proceeds from Crime and on the Financing of Terrorism. Paragraph 24 of the explanatory report to the 2005 Convention explained that the convention was the result of international recognition of the clear link between the financing of terrorism and money laundering and the equal effectiveness of the tools of AML in combating the financing of terrorism. B: The role of the FATF Of additional significance to the development of international AML and CTF regimes was the establishment of the FATF in 1989 by the G-7 Summit in Paris. This resulted in the release in April 1990 of the FATF 40 Recommendations against money laundering.
Henceforth referred to as 1988 Vienna Convention Article (3) (1)(b) requires each party to establish as criminal offences under domestic law when committed intentionally i) The conversion or transfer of property, knowing that such property is derived from any offence or offences established in accordance with subparagraph a) of this paragraph, or from an act of participation in such offence or offences, for the purpose of concealing or disguising the illicit origin of the property or of assisting any person who is involved in the commission of such an offence or offences to evade the legal consequences of his actions; ii) The concealment or disguise of the true nature, source, location, disposition, movement, rights with respect to, or ownership of property, knowing that such property is derived from an offence or offences established in accordance with subparagraph a) of this paragraph or from an act of participation in such an offence or offences 4 Article 5 (7) states Each Party may consider ensuring that the onus of proof be reversed regarding the lawful origin of alleged proceeds or other property liable to confiscation, to the extent that such action is consistent with the principles of its domestic law and with the nature of the judicial and other proceedings. 5 W Gilmore, Dirty Money: The Evolution of International Measures to Counter Money Laundering and the Financing of Terrorism [2011] 63.
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In addition to requiring the ratification of the 1988 Vienna Convention (recommendation 1), the FATF 40 recommendations and subsequent revisions (1996, 2003 and 2012) provided international leadership and guidance in AML regulation for banks and non-bank financial institutions.6 In the original 1990 text, recommendations 12 to 20 established clear requirements for customer identification, record-keeping, suspicious transaction reporting and AML staffing for financial institutions and their branches and subsidiaries abroad. A standardized reporting and information sharing structure was eventually introduced in the 2003 revised 40 recommendations. Recommendation 26 of the 2003 text required countries to establish a Financial Intelligence Unit to receive, analyse and disseminate suspicious transaction reports. The FATF was assisted in this regard by the Egmont Group of Financial Intelligence Units, which from 1995 worked to harmonize and standardize relations between the range of national authorities which acted as national FIUs.7 Interpol also assisted in AML police cooperation, first, through the Fopac group from 1983, and from 2001 through the Financial and High Tech Crime Sub-Directorate.8 The Council of Europe also established the Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism (MONEYVAL) in 1997. MONEYVAL monitors and assists Council of Europe members in the implementation of the 40 + 9 FATF recommendations and measures required by the Vienna Convention and the 1999 International Convention for the Suppression of the Financing of Terrorism. In addition to producing model financial regulation, the FATF established a permanent framework for the international roll out and monitoring of domestic AML regulation implementation through the use of a semi-coercive graduated approach to noncompliant jurisdictions. In this respect the FATF recommendations, although nonbinding, may be considered a soft law instrument with a hard edge.9 The FATF utilizes four methods of implementation monitoring self-assessment, mutual evaluation, cross-country review and the Non-Cooperative Countries and Territories Initiative (NCCI replaced by the International Cooperation Review Group (ICRG) from 2007). Self-assessment is the most common form of review (occurring annually) however since 9/11 the FATF has added emphasis to mutual evaluation reports supplemented by annual follow up reports.10 Non-compliant jurisdictions may be subject to suspension of FATF membership and severe countermeasures by FATF members under Recommendation 21 (as per 1990 text). The harshest of these non-compliance measures include the conditioning, restricting and even prohibition of financial transactions with entities in non-compliant jurisdictions.11 Such mechanisms have proven highly effective in achieving compliance among member states that have taken a

V Mitsilegas & W Gilmore The EU Legislative Framework against Money Laundering and Terrorist Finance [2007] 56 ICLQ 130 7 Gilmore (n 5) at 83 8 Ibid. at 80 9 J Gurule, The Demise of the UN Economic Sanctions Regime to Deprive Terrorists of Funding [2009] 41 Case Western Reserve Journal of International Law 19 10 J M Koh, Suppressing Terrorist Financing and Money Laundering [2006] at 164 11 FATF, Report on Non-Cooperative Countries and Territories [14 Feb 2000] at 9
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selective approach to the implementation of the recommendation set.12 As a result FATF membership has expanded from 16 members in 1990 to 34 countries and 8 FATF-style regional bodies that collectively include almost all other country jurisdictions as of 2012. Thus in respect to international CTF cooperation, the FATF AML regime provided an actionable structure for deep-reaching international financial regulation. It is evident that the availability of such a structure contributed to the ambition of the UNSC in creating its own global CTF regimes pursuant to Resolutions 1267 and 1373 (FavarelGarrigues et al, 2011).13 Indeed the FATF itself went on to directly exploit this progress in AML cooperation with the expansion of its mandate in October 2001 to include terrorist financing through the 8 (now 9) Special Recommendations on Terrorist Financing. The final key antecedent to the UNSC CTF regimes was the 1999 International Convention for the Suppression of the Financing of Terrorism. The 1999 Convention was developed to further the implementation of international counter-terrorism measures pursuant to General Assembly resolution 51/210 specifically paragraph 3, subparagraph (f) which calls upon states to counteract the financing of terrorists and terrorist organizations.14 Critical to the establishment of a global CTF regime, the 1999 Convention established a two-part definition of terrorism. Article 2 (1)(a) defines terrorist offences through reference to a list of treaties annexed to the convention, in addition Article 2 (1)(b) provides a generalized definition of terrorism as: any other act intended to cause death or serious bodily injury to a civilian, or to any other person not taking an active part in the hostilities in a situation of armed conflict, when the purpose of such act, by its nature or context, is to intimidate a population, or to compel a government or an international organization to do or to abstain from doing any act The FATF subsequently drew upon this definition in its IX Special Recommendations on Terrorist Financing, which have since been incorporated into the February 2012 text of the 40 recommendations.15 In addition to requiring states to criminalize the funding of terrorism in Article 2, the 1999 Convention also requires parties to identify, detect and
See. Koh (n 10) at 164, for a summary of FATF success in responding to non-compliance by Austria and Turkey 13 G Favarel-Garrigues et al, Reluctant Partners? Banks in the Fight Against Money Laundering and Terrorism Financing in France [2011] 42 Security Dialogue 179 14 The full text of paragraph 3(f) requires states To take steps to prevent and counteract, through appropriate domestic measures, the financing of terrorists and terrorist organizations, whether such financing is direct or indirect through organizations which also have or claim to have charitable, social or cultural goals or which are also engaged in unlawful activities such as illicit arms trafficking, drug dealing and racketeering, including the exploitation of persons for purposes of funding terrorist activities, and in particular to consider, where appropriate, adopting regulatory measures to prevent and counteract movements of funds suspected to be intended for terrorist purposes without impeding in any way the freedom of legitimate capital movements and to intensify the exchange of information concerning international movements of such funds 15 See Interpretive Notes to FATF Special Recommendation II on Terrorist Financing, Para 2 (c)
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freeze or seize terrorist funds (Article 8). The 1999 Convention also builds upon the 1988 Vienna Convention in excluding any fiscal or political offence extradition exception, in Articles 13 and 14, respectively. Furthermore Article 18 requires the adaptation of domestic legislation to include preventative regulatory measures to be undertaken by financial institutions and other professions involved in financial transactions. The measures required include the identification of legal and natural beneficiaries to accounts, reporting of suspicious transactions and the retention of transaction records for at least five years. In this respect the 1999 Convention forms a practical nexus with the FATF 40 + 9 recommendations in the overlap of financial regulations required of parties to both instruments. Indeed FATF Special Recommendation I on Terrorist Financing requires each country to take immediate steps to ratify and implement both the 1999 Convention and related UNSC resolutions, specifically UNSC res. 1373. Thus the FATF, 1999 Convention and their antecedents provided a domestic and international regulatory framework that could be vigorously exploited by the UNSC as part of post-9/11 security agenda. C: The role of the UNSC The Security Council role in CTF is principally composed of two mandatory regimes established under its Chapter VII powers of the UN Charter (Article 39). The first of these regimes derives from UNSC resolution 1267, and is dedicated to the international implementation of financial sanctions targeting a consolidated list of Al Qaeda and selected Taliban members and associates. In contrast, the second of these CTF regimes has a much broader remit deriving from UNSC resolution 1373 the goal of which is the universal criminalization and suppression of terrorist financing. UNSC resolution 1267 of 15 October 1999 marked the first foray of the Security Council into the emerging CTF agenda. In addition to demanding the Taliban cease harbouring terrorists and turn over Osama bin Laden (paragraphs 1 and 2), paragraph 4 (b) of the resolution requires all states to: freeze funds and other financial resources, including funds derived or generated from property owned or controlled directly or indirectly by the Taliban, or by any undertaking owned or controlled by the Taliban and ensure that neither they nor any other funds or financial resources so designed are made available to or for the benefit of the Taliban or any undertaking owned or controlled, directly or indirectly by the Taliban, except as may be authorized by the Committee on a case-by-case basis on the grounds of humanitarian need Additionally, states were required in paragraph 8 to bring proceedings against persons and entities that violated the measures in paragraph 4, and report to the Committee on steps taken in the implementation of these measures (paragraph 10). According to paragraph 6 (e), the list of aircraft, funds and other financial resources targeted by these broad-reaching sanctions was to be designated by a newly created committee of the Security Council (hereinafter referred to as the 1267 Committee). The names of individuals and entities on this list could be added and removed by consensus of the members of the Committee (composed of representatives of the member states of the

Security Council) or directly by the Security Council itself.16 Under resolution 1333 (2000) paragraph 8 (c) such measures were also applied to a list of members of AlQaida, Osama bin Laden and his associates, or entities owned or controlled thereof to be overseen by the 1267 Committee with the assistance of a Committee of Experts. This Committee of Experts was subsequently replaced by an ad hoc Monitoring Group pursuant to paragraph 9 of resolution 1390 (2002) and finally by a permanent Analytical Support and Sanctions Monitoring Team pursuant to resolution 1526 (2004). Other early refinements included the explicit demand in paragraph 5(e) of resolution 1390 to make the aforementioned lists publicly available. The Security Council also decided in resolution 1452 (2002) to introduce additional humanitarian provisions to the sanctions, paragraph 1(a) stating that the freezing of funds should not apply to resources necessary for basic expenses including for foodstuffs, rent or mortgage, medicines and medical treatment, taxes, insurance premiums, and public utility charges, or exclusively for payment of reasonable professional fees and reimbursement of incurred expenses associated with the provision of legal services. The development of such targeted or smart sanctions by the UNSC, that affected individuals rather than states, can arguably be attributed to growing international awareness of the negative side effects of broad economic sanctions on civilian populations.17 However the sanctions also constituted an unprecedented extension of the reach of the UNSC traditionally confined to relations between states.18 It should be noted that the response of the international community in the early years of the 1267 sanctions regime went through two very distinct periods in terms of the number of individuals and entities listed and actual assets frozen.19 The great majority of names were listed in the 12 months immediately following the September 11, however in the following years fewer and fewer names were submitted such that from 2004 the amount of assets frozen was falling.20 Furthermore, as of 1 May 2004 less than twothirds of UN membership submitted reports to 1267 committee, despite Res. 1526 (2004) requesting states explaining in writing to the committee by March 31 as to reasons for not reporting (only 9 additional country reports were obtained).21 In addition, a number of legal challenges have been lodged on behalf of listed individuals and entities in national and regional courts, as a result of attempts by domestic authorities to implement res.1267 sanctions measures. The basis of these legal challenges was the alleged violation of listed individuals recognized rights, including the right to be heard, right to property and right to a fair and impartial judicial review of any legal sanction.22 The full extent of these challenges and their outcomes is assessed in Section II.
E Rosand, Security Council Resolution 1373, the Counter-Terrorism Committee, and the Fight Against Terrorism [2003] 97 AJIL 333 17 Koh (n 10) at 83 18 Gurule (n 9) 19 Fifth Report of the Analytical Support and Sanctions Monitoring Team [20 Sep 2006] at 22. Available at http://www.un.org/sc/committees/1267/monitoringteam.shtml 20 Gurule (n 9) at 25 21 E Rosand, The Security Councils Efforts to Monitor the Implementation of Al Qaeda / Taliban Sanctions [2004] 98 AJIL 745 at 759 22 Mitsilegas & Gilmore (n 6)
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Following the establishment of a permanent monitoring team in 2004, a slow shift began towards more active compliance monitoring of states and greater transparency in the workings of the Committee (in particular the listing process). In this vein, Resolution 1730 (2006) established a focal point to receive applications from states for the delisting of individuals and entities (note that affected individuals are dependent upon their host state to make such applications). In addition paragraph 5 of resolution 1735 (2006) required listing states to make a detailed statement of case including evidence linking the designee with any currently listed individual or entity. Equally significantly, resolution 1822 (2008) paragraph 12 required states to identify those parts of the statement of case that may be publicly released and in paragraph 13 direct the Committee to make narrative summaries of reasons for all previous listings of entities. Paragraph 17 also demanded states receiving notification of a listing (as the territorial or national state) should take all possible measures to notify or inform in a timely manner the listed individual or entity of the designation. Prior to this date listed individuals would most often not learn their assets had been frozen until trying to access their accounts.23 The rights of listed individuals were given an additional boost with the introduction of the independent and impartial Office of the Ombudsperson pursuant to paragraph 20 of resolution 1904 (2009). The Ombudsperson receives delisting requests directly from affected individuals and entities without the need for a state intermediary. After an initial period of information gathering and consultation (maximum 4 months) the Ombudsperson delivers a report on behalf of the petitioner to the 1267 Committee, to be reviewed within 30 days. The Ombudsperson then informs the petitioner of the success or failure or their delisting request. A poignant question to be answered below is why such crucial refinements to the 1267 sanctions regime took so long to be made. A final change of note to the 1267 Committee was the narrowing of its focus to Al Qaeda members and associate entities and individuals, pursuant to resolutions 1988 and 1989 of 17 June 2011. A separate committee now oversees a list of Taliban constituting a threat to the peace and stability of Afghanistan, although they are still assisted by the 1267 monitoring team established pursuant to res. 1526 (2004). In contrast to the 1267 sanctions regime, compliance and international approval of the CTF regime established pursuant to resolution 1373 has been much more forthcoming. The Security Council passed resolution 1373 on the 28th of September 2001 in an immediate response to the September 11 terrorist attacks in the United States. Paragraph 1 draws directly from the 1999 Convention in demanding states undertake a range of measures to suppress the financing of terrorist acts including, the criminalization of the wilful funding of terrorist acts and the freezing without delay of funds, financial assets or economic resources controlled directly or indirectly by terrorist entities. Paragraph 2(e) more explicitly demands that states establish the financing, planning, preparation or perpetration of terrorist acts, or support thereof, as serious criminal offences in domestic laws and regulations. In making demands directly of domestic legislature, resolution 1373 marked an additional controversial

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Gilmore (n 5)

extension of Security Council reach into national law and state sovereignty.24 Further controversy resulted from the fact that no definition of terrorism is contained within the resolution, such that states may unilaterally interpret this definition and designate terrorist groups according to their own national interests.25 Paragraph 3(d) somewhat compensates for this shortcoming in calling upon states to become parties as soon as possible to international conventions and protocols related to terrorism specifically the 1999 Convention, which does include a comprehensive definition of terrorism. Before the events of 11 September 2001, just four states (Botswana, Sri Lanka, Uzbekistan and the United Kingdom) had ratified the 1999 Convention.26 The 9/11 terrorist attacks and resolution 1373 gave enormous momentum to the 1999 Convention such that 51 additional states had ratified the convention by the end of 2002.27 The implementation of resolution 1373 has also been greatly assisted by the Counter Terrorism Committee (CTC) created precisely for this purpose, pursuant to paragraph 6 of the resolution. Paragraph 6 called upon states to report to the CTC within 90 days of the adoption of the resolution on steps taken to implement the resolution. Originally composed of just eight experts, the CTC achieved an unprecedented degree of cooperation with all 191-member states submitting first round self-assessment reports.28 However, in recognition of state difficulties in implementing the required domestic legislation and regulation demanded by resolution 1373, the Security Council established a much more substantial assisting body in the form of the Counter Terrorism Executive Directorate composed of 35 counter-terrorism experts (pursuant to paragraph 2 of resolution 1535 (2004)). Thus the CTF regime established by resolution 1373 embodied a shift towards both permanency and universality in the international communitys efforts to combat terrorist financing.29 Section II: A Critical Assessment of Current UNSC/FATF CTF Regimes The analysis in this section draws attention to fundamental limitations to the current Security Council CTF strategy deriving from resolutions 1373 and 1267 and supplemented by the FATF and partner organizations. Particular focus is given to the overall limitations to such a strategy, inconsistencies in its implementation and its cost to international human rights norms. A: Overall limitations to the UNSC/FATF CTF Strategy

M de Goede Blacklisting and the Ban: Contesting targeted sanctions in Europe [2011] 42 Security Dialogue 499 at 505 25 G Sullivan & B Hayes, Blacklisted: Targeted Sanctions, Preemptive Security and Human Rights [2010] at 86 26 Levi (n 1) at 652 27 UN Status of Treaties Database. Last updated 16 April 2012. Available at http://treaties.un.org/pages/ViewDetails.aspx?src=TREATY&mtdsg_no=XVIII-11&chapter=18&lang=en 28 Rosand (n 16) at 337 29 Koh (n 10) at 88
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The current UNSC CTF strategy is arguably most limited in terms of its scope. The Consolidated List created pursuant to resolution 1267 included just 485 entries associated with Al Qaeda and the Taliban as of 13 April 2011.30 Furthermore, the CTF regime deriving from resolution 1373 does not include any designated list of terrorist entities and therefore is overly reliant on particularly prudent implementation by national authorities which in many cases has not occurred. Indeed global CTF efforts have had little externally discernible impact on reducing levels of terrorism or on criminal convictions.31 However it is important not to assess the work of the Security Council in isolation from the greater nexus of CTF strategies being undertaken at the national and international level. For example, although the al Qaeda Sanctions list is relatively concise, the US Department of Treasurys Office of Foreign Assets Control currently oversees CTF sanctions against a list of terrorist entities, of greatly varied character, some 112 pages long including a mass of new names added as recently as March 2012.32 In the same vein, additional criticisms have been levelled against the actual volume of funds frozen under the res.1267 sanctions regime. As of July 2006, a mere US$91.4 million of assets was frozen by 35 member states pursuant to res.1267.33 The plausibility of disrupting counter-terrorism through the disruption of terrorist finances is further undermined by the relatively low financial cost required to implement terror attacks. The 2005 London bombings were estimated to cost no more than 8000 and the 2004 Madrid train bombings around US$10,000.34 However, Michael Levi argues that it is a mistake to use the low costs of certain terror attacks to dismiss the value of CTF efforts, noting that the early wealth of al Qaida gave great momentum to the expansion of the organization.35 Furthermore, the UNSC sanctions regime, in conjunction with the work the FATF and Egmont Group, acts as a deterrent to potential financiers of terrorism and may also serve to expose interpersonal connections that can be exploited by counter-terrorism authorities.36 Nonetheless, in their eleventh report to the 1267 Sanctions Committee, the Analytical Support and Sanctions Team admitted they know of virtually no cases where suspicious transaction reports have led to prosecutions or even investigations of Al-Qaida or Taliban-related criminality.37 The debate over the significance of FATF in an international CTF strategy therefore also depends upon how closely one identifies the problem of terrorist financing with that of

Eleventh Report of the Analytical Support and Sanctions Team [13 April 2011] at 9. Available at http://www.un.org/sc/committees/1267/monitoringteam.shtml 31 Levi (n 1) at 650 32 US Office of Foreign Assets Control, Terrorism: What You Need to Know About U.S. Sanctions [27 Mar 2012] available at http://www.treasury.gov/resource-center/sanctions/Programs/Documents/terror.pdf 33 Fifth Report of the Analytical Support and Sanctions Monitoring Team [20 Sep 2006] at 21. Available at http://www.un.org/sc/committees/1267/monitoringteam.shtml 34 FATF, Report on Terrorist Financing [29 February 2008] at 7. Available at http://www.fatfgafi.org/dataoecd/28/43/40285899.pdf 35 Levi (n 1) at 663 36 Gurule (n 9) at 23 37 Eleventh Report of the Analytical Support and Sanctions Monitoring Team (n 30) at 19.
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the broader problem of money laundering.38 The type of regulation implemented in accordance with the FATF 40 recommendations is designed to track large sums of money. However, the sums transferred by terrorists in their operations are miniscule in the greater context of the global financial system. In recognition of this disparity between CTF methods and aims, the FATF has recommended a risk-based approach to AML/CFT regulation, believing that this will allow the private sector to better allocate resources according to the risks associated with transactions and business relationships, and apply reasonable measures commensurate with the risks.39 In its 2002 Guide for Financial Institutions in Detecting Terrorist Financing the FATF acknowledges that although financial institutions will probably be unable to detect terrorist financing as such, they are still in a position to detect suspicious transactions that, if reported, may later prove to be related to terrorist financing.40 This somewhat ambiguous assessment of the ability of financial institutions to detect and report suspicious transactions places a heavy burden of liability upon AML/CTF compliance officers. This is not to say that FATF guidance has been unclear as to the best practices to detect terrorist financing. For example, the 2002 guidance report goes on to list characteristics of associated with terrorist financing, including high account turn over between entities without a clear business relationship, multiple foreign currency transactions, transactions involving diamonds and discrepancies in identification information. However, such guidance does not help financial institutions in managing the risk of false positive and false negative suspicious transaction reports and the effect this may have on their business relationships. From a series of interviews with compliance officers, Favarel-Garrigues et al found that financial institutions have primarily engaged in defensive filing, or the reporting of everything to protect themselves from regulators.41 This defensive approach to risk management is reflected in the exponential growth in suspicious transaction reports submitted annually to US authorities from over 163,000 in 2000 to over 1.25 million in 2007.42 There is the additional concern that, given the volume of STRs, authorities have become overly focused upon large volume transactions that will result in significant seizures of funds. Some French compliance officers were found to be particularly frustrated that suspicious transaction reports of amounts less than 50,000 euros appeared to be shelved immediately by Tracfin.43 This is particularly concerning noting the relatively small sums involved in terrorist financing, discussed above. In defence of international AML/CTF efforts, Bill Gilmore argues it is important not to harbour exaggerated expectations as to the visible impact of any strategy that seeks to disrupt criminal activity through a focus on money.44 However, even if assessed in the
A Clunan, U.S. and International Responses to Terrorist Financing [2005] 4 Strategic Insights . Available at http://www.nps.edu/Academics/centers/ccc/publications/OnlineJournal/2005/Jan/clunanJan05.html 39 FATF, Response to the Public Consultation on the Revision of the Recommendations [16 Feb 2012] at 4 40 FATF, Guidance for Financial Institutions in Detecting Terrorist Financing [24 April 2002] para 9 at 3 41 G Favarel-Garrigues et al (n 13) at 185 42 R Barrett, Time to Reexamine Regulation Designed to Counter the Financing of Terrorism [2009] 41 Case Western Reserve Journal of Intl Law 7 at 11 43 G Favarel-Garrigues et al (n 13) at 185 44 Gilmore (n 5) at 133
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narrow terms of being able to disrupt the financing of selected terrorist groups, there is little evidence in support of the Security Council approach. In respect to the aim of suppressing the finances of al Qaeda, the Security Council strategy appears fundamentally misguided in its focus upon the regulation of bank and non-bank financial institutions. Due to its immense political appeal al Qaeda has decisively moved on from any reliance on a centralized leadership and its series of guesthouses and training camps in Afghanistan.45 The present al Qaeda network relies on a doctrine of financially self-sufficient terrorist cells to carry out its operations.46 In this respect the finances of low-level al Qaeda operatives differ very little from those of ordinary, innocent persons. In contrast, al Qaedas central leadership is slightly more reliant on international financial flows from a network of legitimate businesses and charities.47 It is in the targeting of these leading individuals and their correspondent financial beneficiaries that the Security Council strategy has been of some measurable utility. State authorities have had success in identifying charity fronts for al Qaeda financing in Belgium, the United Kingdom and the US.48 Most significantly, from mid-2003 Saudi Arabia previously considered the source of significant charity-based terrorist financing, has overhauled the financial regulation of charities, frozen the assets of several organizations implicated in terrorist financing, and passed new AML/CTF legislation.49 However such effective implementation of Security Council-mandated CTF measures have been the exception rather than the rule. Substantial inconsistencies in the implementation the UNSC CTF regime had fundamentally undermined attempts to deny finance to even the most recognized al Qaeda leadership. B: Inconsistencies in Implementation There are significant fears that the inconsistent implementation of CTF/AML regulation across regions and financial sectors has simply displaced terrorist finance to more difficult to reach jurisdictions and channels.50 McCulloch & Pickering argue that inconsistently stiff FATF regulation across regions has simply resulted in an artificial island of intense-financial regulation in a sea of free markets.51 As early as 2003, the 1267 monitoring group observed that in response to CTF/AML banking regulation, al Qaeda had shifted its financial activities to unregulated informal banking systems in Africa, the Middle East and Southeast Asia.52 The FATF Special IX recommendations attempted to address the concerns of alternative remittance systems, cash couriers and non-profit organizations. Paragraph 5 of the interpretive notes to Special
Barrett (n 42) at 14 M Basile, Going to the Source: Why Al Qaedas Financial Network is Likely to Withstand the Current War on Terrorist Financing [2004] 27 Studies in Conflict & Terrorism 169 47 V Comras, Al Qaeda Finances and Funding to Affiliated Groups [2005], 4 Strate gic Insights. Available at http://www.nps.edu/Academics/centers/ccc/publications/OnlineJournal/2005/Jan/comrasJan05.html 48 FATF (n 34) at 12 49 National Commission on Terrorist Attacks Upon the United States, Monograph on Terrorist Financing [2004] at 9. Available at http://govinfo.library.unt.edu/911/staff_statements/911_TerrFin_Monograph.pdf 50 Levi (n 1) at 662 51 J McCulloch & S Pickering, Suppressing the Financing of Terrorism: Proliferating State Crime, Eroding Censure and Extending Neo-Colonialism [2005] 45 British Journal of Criminology 470 at 482 52 Second Report of the Monitoring Group [2 Dec 2003] at 4. Available at http://www.un.org/sc/committees/1267/monitoringgroup.shtml
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Recommendation VI (requiring the licensing of alternative remittance networks) explicitly mentions the problem of unregulated money-value transfer systems including hawala, hundi, fei-chien and the black market peso exchange. However as of 2009 the average compliance for all IX Special Recommendations was just 25%.53 Most recently the issue of trade-based money laundering has been highlighted as an area in which CTF/AML measures are yet to achieve any significant presence. As a result of research indicating a shift by money launderers from traditional to trade based money laundering, the FATF released the 2008 Best Practices Paper on Trade Based Money Laundering.54 The 2008 paper defines trade-based money laundering as the process of disguising the proceeds of crime and moving value through the use of trade transactions in an attempt to legitimize their illicit origins, which in practice includes misrepresentation of the price, quantity or quality of imports or exports.55 CTF/AML measures in this area were found to be critically underdeveloped in a 2006 FATF survey of trade based money laundering. Of the 36 countries that responded to the survey, less than 50% indicated that customs agencies filed suspicious activity reports with their respective FIUs, and only a quarter of FIUs used trade-based databanks as part of their CTF/AML analysis.56 This issue is complicated due to the vastly different regional dynamics in the prevalence of particular money-laundering techniques. Global Financial Integrity estimated that between 2000 and 2008, just 10.8% of illicit flows in Europe occurred through trade mispricing, whereas trade mispricing comprised 89.3% of illicit flows in Asia.57 In addition, given the volume of international trade flows, an effective trade-based money laundering response would require a massive expansion of regulation to companies and authorities that previously had not been actively involved in AML/CFT safeguards. 58 Thus in the area of tradebased money laundering and terrorist financing the response of the international community is currently extremely underdeveloped. There is also the concern that AML/CTF measures have no effect upon illicit forms of value transfer. This is of particular significance given the established relationship between major terrorist groups, including al-Qaeda and FARC (Revolutionary Armed Forces of Colombia), and the illicit drug trade. The current 1267 sanctions regime has done little in addressing the link between the Afghanistan-based opium trade and alQaeda and associated Taliban. The Eleventh Report of the Analytical Support and Sanctions Team states that groups affiliated with al-Qaida and the Taliban continue to raise money through kidnapping for ransom, extortion, drug trafficking and illegal
Gilmore (n 5) at 132 FATF, Best Practices Paper on Trade Based Money Laundering [20 June 2008]. Available at http://www.fatf-gafi.org/dataoecd/9/28/40936081.pdf 55 Ibid. at 1 56 FATF, Trade Based Money Laundering [23 June 2006] at 22. Available at http://www.fatfgafi.org/dataoecd/60/25/37038272.pdf 57 Global Financial Integrity, Illicit Financial Flows from Developing Countries: 2000-2009 [January 2010] at 15. Available at http://www.gfintegrity.org/storage/gfip/documents/reports/IFF2010/gfi_iff_update_report-web.pdf 58 R Delston & S Walls, Reaching Beyond Banks: How to Target Trade-Based Money Laundering and Terrorist Financing Outside the Financial Sector [2009] 41 Case Western Reserve Journal of International Law 85 at 88
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taxation.59 In recognition of this connection, the United Nations Office on Drugs and Crime has conducted a comprehensive survey and eradication program of opium plantations in Afghanistan since 2003. However in its latest survey total opium production produced in 2011 (5800 mt) was still substantially higher than pre-war levels and up 61% from the volume produced in 2010 (UNODC, 2011, p 2).60 There is also a worrying overlap between those countries where the terrorist threat is high and where it is most difficult to register commercial enterprises as well as do business formally.61 Particularly in East Africa, although the majority of states now have AML laws in place, few have undergone the resource-intensive exercise of implementing an operational capacity to freeze funds without delay.62 Moshi argues that FATF standards do not sufficiently recognize that African economies are largely cash based and rely heavily on an informal banking system and informal value transfer methods.63 In such regions, the targeting of informal of informal remittance systems may simply produce resent and resistance from poor populations by driving up the price of money transfers.64 Thus far, UN assistance to developing countries in AML/CTF has been primarily in the form of legislative and technical expertise. The UNODC produced a series of model AML laws in the early 1990s and from 1997 carried out the Global Programme against Money Laundering, Proceeds of Crime and the Financing of Terrorism (GPML), pursuant to the 1988 Vienna Convention.65 The GPML includes technical assistance in the creation of FIUs and the maintenance of the Anti-Money Laundering International Database (AMLID). However, across regions a critical issue remains a shortage of national level funding and the cost to small-scale financial institutions of AML/CTF compliance. Despite leading the demand for strong CTF measures post 9/11, according to US State Department officials total US spending on foreign technical assistance has not exceeded US$20 million.66 C: The Human Rights Dimension Heavy criticism has been directed at the listing process of the 1267 Committee on the basis that designees are denied fundamental human rights, including the right to property and the right to a timely and impartial judicial review of any legal sanction. The Security Council appears to have adopted an exceptionalist approach to the war on terror and terrorist financing in its use of such pre-emptive security measures the
Eleventh Report of the Analytical Support and Sanctions Team (n 30) at 18 UNODC, Afghanistan Opium Survey 2011: Summary Findings [October 2011] at 2. Available at http://www.unodc.org/documents/cropmonitoring/Afghanistan/Executive_Summary_2011_web.pdf 61 Fifth Report of the Analytical Support and Sanctions Monitoring Team (n 33) at 23 62 UNSC, Global Survey of the Implementation of Security Council Resolution 1373 (2001) by Member States [1 Sep 2011] at 13. Available at http://daccess-ddsny.un.org/doc/UNDOC/GEN/N11/451/21/PDF/N1145121.pdf?OpenElement 63 H Moshi, Fighting Money Laundering: The Challenges in Africa [October 2007] Institute for Security Studies. Paper 152. 64 Levi (n 1) at 663 65 Gilmore (n 5) 66 Clunan (n 38)
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sanctioning of individuals without trial.67 In this respect, the work of the Al Qaeda Sanctions Committee amounts to a circumvention of the normal criminal procedure by placing the power of designation with the executive and preventing judicial review.68 During the committees initial period of work the list was established primarily on the basis of trust and goodwill towards the United States, who submitted the vast majority of names to the list.69 Additionally, as noted earlier, the listing process did not require a substantial burden of proof until resolution 1735 (2006). Thus there is little doubt many of the earlier listings on the Consolidated List lacked the depth of evidence that would normally be required for national authorities to implement such sanctions. The process used to review listings also remains fundamentally unjust according to internationally recognized human rights principles. Despite the extremely belated introduction of an independent ombudsperson pursuant to resolution 1904 in 2009, the delisting of entities is still ultimately subject to the discretion of the 1267 Committee. Furthermore, just 25 delisting requests have been forwarded thus far from the Ombudsman to the Committee, of which just 7 resulted in delisting.70 As a result of these concerns regarding a lack of due process, the Council of Europes Committee of Legal Advisors on Public International Law (CAHDI) concluded that, in implementing the 1267 sanctions regime, parties to the European Convention on Human Rights violate Article 6 (right to fair trial), Article 1 (protection of property) and Article 13 (effective remedies).71 These apparent violations have resulted in a number of court challenges to the implementation of res. 1267 sanctions, the most decisions notable being that of Kadi & Al Barakaat v. Commission (2008) before the European Court of Justice (ECJ).72 The ECJ found that the appellants right to property, right to be heard and right to judicial review were infringed by EC Regulation 881/2002 (which established the European Community Al Qaida and Taliban sanctions list enabling the implementation of res. 1267 sanctions). Therefore the court annulled regulation 881/2002 in so far as it concerned the appellants. Controversially the EC simply moved to amend Regulation 881/2002 through Regulation 1190/2008 and promptly relisted the appellants, only to have this new regulation annulled by the General Court.73 Conclusion

R Martin, An Empire of Indifference: American War and the Financial Logic of Risk Management [2007] G Sullivan & B Hayes, Blacklisted: Targeted Sanctions, Preemptive Security and Human Rights. [2010] at 82 69 E Rosand (n 21) at 749 70 Al Qaida Sanctions Committee, Delisting, last updated 28 March 2012. Available at http://www.un.org/sc/committees/1267/delisting.shtml 71 I Cameron, The European Convention on Human Rights, Due Process and United Nations Security Council Counter-Terrorism Sanctions (2006) 6 February. Available at http://www.coe.int/t/dlapil/cahdi/Texts_&_Documents/Docs%202006/I.%20Cameron%20Report%2006.p df 72 Yassin Abdullah Kadi & Al Barakaat International Foundation v. Council of the European Union and Commission of the European Communities [2008] ECR I. Joined Cases C-402P & C-415/05P. 3 September 73 Yassin Abdullah Kadi v. European Commission [2010] General Court of the European Union 7. T-85/09. 30 September
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From the above discussion it is evident that the international community has failed to produce a realistic CTF strategy in respect to both specific terrorist organizations, such as al Qaeda, and terrorism in general. The combined UNSC/FATF CTF strategy is fundamentally limited by its over-reliance on passive regulatory tools. Additionally, even in the formal banking sector, where CTF measure compliance is strongest, there is no demonstrated ability to efficiently detect the minor transactions that characterize terrorist finance. The resource-intensive rollout of regulation involved in this strategy has only served to solidify terrorist use of harder to detect channels of funding in less regulated geographical regions and financial sectors. Furthermore, such a passive regulatory approach to CTF overlooks opportunities for more proactive and impactful, but admittedly more costly, short-term operations against sources of terrorist funding in the form of suppression of the drug trade, smuggling and other illicit funding channels. Finally, the UNSC sanctions regime pursuant to resolution 1267 should be singled out for especially heavy criticism as the least effective and most costly of CTF approaches. The 1267 sanctions regime has relied upon the blatant circumvention of international human rights in the listing process of targeted individuals. In addition, this shameful strategy by the UNSC has failed to have any meaningful impact on the finances of the Taliban or al Qaeda. In summary, the efforts of the international community in combating the financing of terrorism have been unjustifiably costly and often counterproductive. Bibliography Cases, Statutes and Legislation Case Yassin Abdullah Kadi & Al Barakaat International Foundation v. Council of the European Union and Commission of the European Communities [2008] ECR I. Joined Cases C-402P & C-415/05P. 3 September Case Yassin Abdullah Kadi v. European Commission [2010] General Court of the European Union 7. T-85/09. 30 September Council of Europe Convention on Laundering, Search, Seizure and Confiscation of the Proceeds from Crime (1990) Council of Europe Convention on Laundering, Search, Seizure and Confiscation of the Proceeds from Crime and on the Financing of Terrorism (2005) International Convention for the Suppression of the Financing of Terrorism (1999) UN Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances (1988) UN Security Council Resolution 1267 (1999) on the situation in Afghanistan UN Security Council Resolution 1333 (2000) on the situation in Afghanistan

UN Security Council Resolution 1390 (2002) Threats to peace and security caused by terrorist acts UN Security Council Resolution 1526 (2004) Threats to peace and security caused by terrorist acts UN Security Council Resolution 1535 (2004) Threats to peace and security caused by terrorist acts UN Security Council Resolution 1730 (2006) General issues relating to sanctions UN Security Council Resolution 1735 (2006) Threats to peace and security caused by terrorist acts UN Security Council Resolution 1822 (2008) Threats to peace and security caused by terrorist acts UN Security Council Resolution 1904 (2009) Threats to peace and security caused by terrorist acts Books, Articles and Reports Al Qaida Sanctions Committee, Delisting, last updated 28 March 2012. Available at http://www.un.org/sc/committees/1267/delisting.shtml Barrett, R, Time to Reexamine Regulation Designed to Counter the Financing of Terrorism [2009] 41 Case Western Reserve Journal of Intl Law 7 Basile, M, Going to the Source: Why Al Qaedas Financial Network is Likely to Withstand the Current War on Terrorist Financing [2004] 27 Studies in Conflict & Terrorism 169 Cameron, I, The European Convention on Human Rights, Due Process and United Nations Security Council Counter-Terrorism Sanctions (2006) 6 February. Available at http://www.coe.int/t/dlapil/cahdi/Texts_&_Documents/Docs%202006/I.%20Cam eron%20Report%2006.pdf Clunan, A, U.S. and International Responses to Terrorist Financing [2005] 4 Strategic Insights. Available at http://www.nps.edu/Academics/centers/ccc/publications/OnlineJournal/2005/Ja n/clunanJan05.html Comras, V, Al Qaeda Finances and Funding to Affiliated Groups [2005], 4 Strategic Insights. Available at http://www.nps.edu/Academics/centers/ccc/publications/OnlineJournal/2005/Ja n/comrasJan05.html

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UNSC, Global Survey of the Implementation of Security Council Resolution 1373 (2001) by Member States [1 Sep 2011] Available at http://daccess-ddsny.un.org/doc/UNDOC/GEN/N11/451/21/PDF/N1145121.pdf?OpenElement US Office of Foreign Assets Control, Terrorism: What You Need to Know About U.S. Sanctions [27 Mar 2012] available at http://www.treasury.gov/resourcecenter/sanctions/Programs/Documents/terror.pdf