Monday, February 08, 2016

Shaky foundations – real estate compliance

Money Laundering Bulletin

Real estate has only recently started to come under the regulatory AML spotlight shone on other sectors, says Paul Cochrane, and not before time.

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Monday, February 01, 2016

Revealed: Secret details of Turkey's new military pact with Qatar

Middle East Eye

Documents obtained by Middle East Eye show strategic alliance includes pledge by Ankara to protect Gulf state from external threats

In December 2015, Turkey announced, to the surprise of many, that it planned to establish a military base in Qatar. Behind the scenes, the agreement was about forming a major strategic alliance.
After a 100-year hiatus, Turkey is militarily back in the Gulf and ramping up its presence overseas. In January, Ankara announced that it would also establish a military base in Somalia.
Specific details about the Qatar agreement, which Turkey described as an alliance in the face of "common enemies", remain scant, but Middle East Eye has acquired copies of the agreements, as well as further details, which include a secret pledge by Ankara to protect Qatar from external threats.

A long time coming?

Turkish-Qatari defence and military agreements go back nearly a decade. In 2007, Ankara and Doha signed a defence industry cooperation agreement, and in 2012, signed a military training agreement. (For the agreements go to bottom of article).
In March 2015, the Turkey-Qatar Military Cooperation Agreement was passed by the Turkish parliament, but the negotiations to create an overarching comprehensive agreement were still ongoing. Only in July 2015, according to France-based Intelligence Online, did the Qatari Emir, Tamim bin Hamad al-Thani, first tell the Saudi king about the true extent of the agreement. Under the agreement, about 3,000 Turkish troops, air and naval units, as well as special forces are to be based in Qatar for training and joint exercises. The two countries also promised greater bilateral cooperation between intelligence services.
Riyadh reportedly welcomed the deal to help counter Iran's growing regional influence as Turkey's military's presence will bring additional foreign muscle in the Gulf, joining the United States' Al Udeid air base in Qatar, the French naval base in Abu Dhabi, and the US and British naval bases in Bahrain, among others.
But the move was not unanimously accepted in the Gulf Cooperation Council (GCC). When Abu Dhabi got wind of the agreement in the wake of the 35th GCC summit in December, it was not viewed positively, with the Emirates fearing stronger Turkish-Qatari ties could reverse the regional fortunes of the down-on-its-heels Muslim Brotherhood.

A comprehensive agreement

According to the news outlet Intelligence Online, the head of Turkey's National Intelligence Organisation (Milli Istihbarat Teskilati – MIT) made multiple trips to Doha in December to cement a secret pledge that Ankara would protect Qatar from external military threats. In return, Doha would help offset Ankara's strained relations with Moscow following Turkey's downing of a Russian jet. Qatar would shore up the Turkish economy due to the loss of Russian tourists – estimated at some $3bn - as well as provide gas export guarantees if Moscow turns off the taps.
While the economic assistance is a typical sweetener by Gulf states securing bilateral agreements, it is the defence pledge that is of greatest significance. Whether the pledge has been actually signed has not been reported outside of Intelligence Online. There is no mention of it in the comprehensive agreement that was signed in December, but talks are reportedly ongoing.
“Turkey and Qatar are in the process of devising a possible 'Status of Forces Agreement'. In the deliberations that are said to be under way, the two sides would have discussed the incorporation of a casus foederis ["case for the alliance"] clause in the agreement,” said Dr Eyup Ersoy, an international relations expert at Turkey's Bilkent University.
“However, first, this clause, if agreed upon, could be confidential and may not be revealed to the public. Second, the substance of the clause, again if agreed upon, would be qualified. For example, it may read that Turkey will provide diplomatic and military assistance to the extent possible in case of armed aggression against Qatar. In other words, it may not be unequivocal and unconditional.”
As such, the agreement may not be overly different from unwritten pledges by the UK and the US to aid the Gulf states in the advent of an attack, last evidenced in the 1990 Gulf War. What is clear from the comprehensive agreement is that the Turkish base will be under Qatari control, with the possibility for Qatar to establish a base in Turkey.
While the agreement states that Turkey is to cover the Qatari base's expenses, there are no details about overall costs.
“Since the base is to be under Qatari military structure, it is simply a Qatari base put to the use of the Turkish military, so Doha will bear the financial costs of it,” said Ersoy.
If this is the case, it will follow the precedent of Qatar reportedly covering the $1bn construction cost of the US's Al Udeid air base.

Strategic goals

That the two countries have become closer through the agreement has not come as a surprise.
“Turkey has been pursuing a strategic relationship with Qatar for over a year. I don't think it was necessary to sign the deal as it was very obvious to anyone watching,” said Jonathan Schanzer, vice president for research at the Foundation for Defense of Democracies.
Ersoy however thinks the agreement was essential to provide a legal foundation and create political legitimacy to further Ankara's goals in the Gulf, even if the "Status of Forces Agreement" is not made public.
“In my view, the ‘real’ motivation, from Turkey’s perspective, is to transform the regional alignment with Qatar into a tentative alliance. This military cooperation agreement is imperative for the sustainability of Turkey's strategic relations between Qatar, and by extension, between Turkey and the Gulf,” he said.
The two states had found a common cause in meddling in the so-called "Arab Spring", particularly in Egypt, where both support the Muslim Brotherhood, as well as in Syria. Their backing of the Muslim Brotherhood had invoked the ire of other GCC states, especially the UAE and Saudi Arabia.
But since the overthrow of Egyptian president Mohamed Morsi in 2013, and Riyadh last year reconciling itself with the party, Ankara is using Doha as an inroad to the rest of the Gulf.
Furthermore, Turkey is being viewed as an additional line of defence against Iran following the normalising of relations with Tehran by the West. This is considered the prime motivation for the agreement. In December, the Turkish ambassador to Qatar had told Reuters that the agreement was to face "common enemies," considered a veiled allusion to Iran.
“I don't know if the US would fight for Qatar, as the whole region is afraid that the US has sold them out to Iran. The [Turkish] soldiers in Somalia are there for formality, to show the flag, whereas in Qatar it's a real fighting force,” said Atilla Yesilada, an Istanbul-based analyst at Global Source Partners, Inc.

Common enemies

Turkey's move into Qatar, and the GCC's general acceptance of the deal is considered a form of security diversification. David Roberts, a lecturer in the Defence Studies Department of King’s College London, thinks that the Gulf has interpreted US strategy incorrectly, that the pivot to Asia is not about abandoning the GCC but rather a pivot away from Europe.
“There is perhaps a slight loss of confidence, and the US are blue in the face about it. What can they possibly do? They have invested huge amounts in Al Udeid, which has a major role in the US defence review,” he said. Indeed, since 2009, Al Udeid has been the headquarters of the US Central Command (CentCom), covering 20 countries in the region.
The US is considered to have approved the strategic alliance, not wishing to ruffle the feathers of either country in the current regional environment.
“I'd not expect to see anything from CentCom on this, given how important the Incirlik air base [in Turkey is for strikes against the Islamic State group] and the Al Udeid base is to the US,” said Schanzer.
The US is not however expected to be undermined when it comes to arms deals with Qatar or the GCC at large, with Turkey only accounting for 2.4 percent of overall sales to the GCC between 2010-14 (by comparison the US is 48.1 percent and Britain 18.6 percent), according to SIPRI figures.
“For Turkey it could be a golden opportunity to develop their military-industrial complex by cashing-in with Qatar. However, they've kind of missed the boat a bit as Qatar is cutting back on spending - the military not so much - but it's not the good old days,” added Roberts.
The training aspect of the agreement also does not appear to be of major strategic important to Qatar.
“What is this alliance about? If it is about military training with counterparts, Qatar already has the Brits and the Americans doing training. How many trainers do you need? And they already have a smorgasbord of international equipment, although it is another NATO country [Turkey] joining them. Qatar is in desperate need of one unified security document,” said Roberts.

Thursday, January 07, 2016

The Terrorist Financing Tracking Programme (TFTP). In tension over terrorist finance – EU to US data transfer & privacy rights

Money Laundering Bulletin

The 'Freiheit statt Angst' (Freedom instead of fear) demonstration in Berlin in August 2014 , protesting against the mass surveillance of the NSA, GCHQ and BND, and in support of whistleblower Edward Snowden.

US intelligence has access to European Union citizens’ banking transfer records by virtue of a controversial 2010 agreement. Paul Cochrane examines the Terrorist Financing Tracking Programme, currently set for renegotiation.

The Terrorist Financing Tracking Programme (TFTP), used by the United States, and revealed by the media in 2006, remains cloaked in secrecy. Implemented by the US Department of Treasury following the September 11th attacks in 2001, it utilises data provided by the Brussels-based Society for Worldwide Interbank Financial Telecommunication (SWIFT) through a private agreement.

Europol inspection

The transfer of financial data from the European Union (EU) to the US was legitimised through a EU-US TFTP agreement in 2010. Supervision of US data searches was henceforth assigned to EU police agency Europol.

The agreement was to be renegotiated this year, but talks have stalled over data privacy concerns, especially in the European Parliament. That said, an 'Umbrella Agreement' on all kinds of exchanges between the EU and the US was reached in September 2015 (1) - it mandates both sides to protect personal data exchanged during criminal and terrorism investigations. The deal followed four years of negotiations between the two jurisdictions and should cover the TFTP. Moreover, the 2010 TFTP agreement does not have a sunset clause and remains in force.

The programme, exposed by the New York Times in June 2006, caught the EU and nearly all 7,800 banks sending client data to SWIFT unaware that confidential information was being provided to the US Treasury. Although strongly condemned in the EU as breaching citizens' privacy rights, it was not annulled.

Snowden reopens debate

The TFTP came under renewed scrutiny following the 2013 revelations by American whistleblower Edward Snowden of widespread surveillance by the US' National Security Agency (NSA) of European governments. Leaked classified documents showed the NSA had access to SWIFT's internal data traffic, with one document from 2011 designating the SWIFT computer network an agency “target”.

“The Snowden revelations had a gigantic impact on the programme and US-EU relations,” said Camino Mortera-Martinez, a Research Fellow on Justice and Home Affairs at the Centre for European Reform, a UK think-tank, in Brussels. “Because of that we've seen stronger and more open discussions about privacy.”

In 2014, the European Court of Justice (ECJ) requested that EU governments and the US make the TFTP’s practices more transparent. Concerned that the EU might amend the agreement this year (2015), Adam Szubin, director of the US Treasury's Office of Foreign Assets Control (OFAC), has been actively lobbying the EU to keep the TFTP in place, arguing that it is essential to countering the Islamic State (IS).

What's yours is ours

An ongoing issue for the EU is the essentially one-way aspect of the TFTP. While Europol ensures data provided to the US complies with the Swift agreement, EU officials are not able to scrutinise documents of Europol's internal data protection committee, the Joint Supervisory Body. In January 2015, Washington prevented Europol from accessing classified data they had contributed, on the ground that parts of the report were compiled in the US.

“What is the US doing with the data? We don't know,” noted Dr Mara Wesseling at the Centre de Sociologie des Organisations at Sciences-Po, Paris. “It is probably link analysis and social network analysis, but we're not sure, as there is no public information, we have no oversight, and we have to believe it is efficient.”

Take it on trust

She added: “The number of data sets sent to Treasury is also secret. The Belgian Privacy Commission tried to find out, as European members of parliament [MEPs] want transparency on the volume of data, which is something the US doesn't want to disclose.”

According to the latest joint report (2013) on TFTP provided data by the EU Commission and the US Treasury (2), since 2001 the programme “has produced tens of thousands of leads and over 3,000 reports (which contain multiple TFTP leads) to counter terrorism authorities worldwide, including over 2,100 reports to European authorities.”

But other than such published figures, MEPs and most EU officials have largely been kept in the dark. To ease concerns, an EU TFTP overseer was appointed, who is privy to US intelligence. However, his identity is hidden for privacy reasons. “This is very mysterious as his role is to give more legitimacy and confidence in the programme, but at the same time we do not know the person,” explained Wesseling.

How successful has the TFTP been? That's the rub. We've collected all of this data, but just a few cases can be released to the public, and due to the very nature of it, like suspicious activity report (SAR) disclosures, we can't discuss it,” said Dr. Michelle Frasher, an independent research scholar previously affiliated with the European Union Centre at the University of Illinois at Urbana-Champagne.

Inside view

While SWIFT did not respond to questions from MLB about the issue, Europol did. A spokesperson said: “The TFTP is an important instrument to provide timely, accurate and reliable information about activities associated with suspected acts of terrorism or terrorist financing. It helps to identify and track terrorists and their support networks worldwide.” She added that more than 13,000 leads to support investigative activities have been generated by the TFTP to date: “The significance of the phenomenon of so called travelling fighters can also be identified from the TFTP. While in 2014 there were over 900 leads [from the overall number mentioned before] of relevance to 11 EU member states, the developments in 2015 show that since the beginning of the year, over 6,300 leads – of relevance to all 28 EU member states – were retrieved.”

A former FBI special agent, who set up and ran the US intelligence service's terrorist financing section, agreed that TFTP had “definitely provided a lot of good results”: Dennis Lormel, who now runs DML Associates, added, “I am definitely an advocate for that programme to continue, and surprised of the longevity it's had in terms of being kept secret. When I was involved - I can't speak of where it evolved to - it was extremely limited to terrorist specific threats. The perception that we are overstepping our authority or misusing information is totally wrong. It is one of the most tightly monitored programmes I've been involved in.”

Not such a bad idea

In July 2011, the European Commission outlined its plans for an EU-TFTP that would monitor suspects' financial transaction data in real-time, allow for searches of transactional data, and create a international communications system and database for suspicious transactions.

The plan has repeatedly been put on hold despite sporadic calls for its implementation, for example by the French government following the Charlie Hebdo attacks in January 2015. An EU-TFTP would be very dependent on whether the Swift agreement with the US is renegotiated.
“In my discussions with diplomats they are very tight lipped about TFTP and renegotiations, saying it is not going to be challenged,” said Dr Frasher. “There's plenty to believe that right now, but we're also seeing things happen like the Umbrella Agreement and France saying there needs to be a EU-TFTP.”

Expect more argument

Significant concern and opposition about sharing data with the US persists in member states and at the EU Commission and the EU Parliament. Furthermore, the Fourth EU Money Laundering Directive contains multiple references to data protection that will need to be addressed with regard to any information-sharing with Washington. “I expect the renegotiation of TFTP to be a bloodbath again if they open it up for discussion, particularly [with regard to] what the oversight is, as the European Council is up in arms about the lack of accountability,” said Mortera-Martinez. “The Council would need clear examples of how the TFTP has disrupted terrorism, but they can only do that after a plot is discovered.”

EU reforms to its data protection framework, currently grinding on, mean that many decisions face delay, not least until controls around the Passenger Name Record (PNR) database on flying in and out of the EU are resolved. “When the PNR is in place maybe an EU-TFTP would be on the table again,” Dr Frasher added.


1) Joint Report from the EU Commission and the U.S. Treasury Department regarding the value of TFTP Provided Data, 2013 -

Photograph by Markus Winkler, via Wikicommons

Dualism – Russian Anti-Money Laundering and Sanctions

Money Laundering Bulletin

Annexation of Crimea comes at a high price: the sanctions against Russia hurt; they are, though, to be distinguished from AML by, if not bright lines, at least a continuing dialogue with international partners through the Financial Action Task Force, says Paul Cochrane. Some, though, question Moscow's real compliance agenda.

US and European Union (EU) sanctions (1) against Russia continue to biting - domestic banks are closing, Western banks are de-risking Russian assets and clients - but have the same measures undermined Moscow's role in global compliance initiatives? The fact that Russia has an asset amnesty in place to repatriate capital, whether clean or dirty, suggests that its grip, never rock solid, maybe slipping.

Still in the fold

US and EU moves against Russia in March 2014 caused some consternation at the Financial Action Task Force (FATF), since their target held the presidency until July 2014, and a high-level meeting of anti-money laundering (AML) officials was scheduled to be held in Moscow in June. In the event, the meeting did proceed. 

Unlike the Group of Eight (G8), which expelled Russia to become the G7 once more at the same time as imposing sanctions, international regulators, including FATF, were keen to keep Russia on-side of AML and counter terrorist financing (CTF).

“FATF recognises [Russia's financial intelligence unit, FIU] Rosfinmonitoring as one of the most powerful FIU's in existence,” said Andrew Bowen, a researcher for geopolitical consultancy Wikistrat. 

So far, FATF’s good offices seem to be working. “I wouldn't say that the sanctions [have] impacted the issue of AML in a material way. Apart from different political views, all governments are interested in tightening scrutiny on those issues,” said Mikhail Kazantsev, a partner at Moscow law firm Egorov Puginsky Afanasiev & Partners.

Sanctions – impact assessment

Sanctions have, though, shaken up capital flows. In 2014, US$151.5 billion exited the Russian economy; the figure was US$32.6 billion in the first quarter of 2015, according to Central Bank of Russia data. “The sanctions are starting to bite. It is delaying certain energy projects in Russia, and sanctions relief is at the top of their policy agenda, so I can't imagine them doing something to undermine that,” said Shane Martin, regulatory compliance director at Walkers, the law firm. “The other point is that Russia is a member of FATF, and I've seen no evidence of them stopping efforts in terms of supervising AML. You often hear sanctions being described as smart or targeted, so I expect Russia to be smart, and not give a knee jerk reaction.”

Russia’s plunging economy and associated compliance risks due to the sanctions have prompted some foreign financial institutions to withdraw. “My sense is that banks are certainly de-risking, although they won't say so,” said Dennis M Lormel, head of DML Associates, LLC, in the US. 

The most high profile example so far came in September 2015, when Deutsche Bank closed its onshore corporate banking and securities business, the biggest foreign securities firm in Russia. The bank is also being probed by financial regulators, including the UK’s Financial Conduct Authority (FCA), over an alleged money-laundering scheme by Russian clients involving US$6 billion in trades in Moscow and London. 

Local enforcement

Russian banks are also closing operations, attributed to the economic recession and central bank action to rein in risky lenders. “Historically there were a huge number of banks, over 900, and 90 per cent were small regional banks associated with regional business. For wealthy businessmen it was nice to have their own bank within the group. Now the central bank is tightening screws and every other week we see a bank licence revoked as not compliant, so banks are either merging, being liquidated or going bankrupt,” said Kazantsev.
In September, the central bank closed 37 banks, out of a total of 55 closed this year, reducing the number of banks from 783, at the beginning of 2015, to 728, according to central bank data. Over 140 banks have closed since 2013. Moreover the central bank has barred more than 4,100 Russian citizens from commercial bank management for alleged involvement in risky activity that resulted in past bank failures.

Underlying motive, perhaps

While the central bank and its FIU are enforcing compliance, the motivation may not simply be a cleaner and positive FATF evaluation, in 2018, according to Bowen: “Rosfinmonitoring has become a repository of information on shady deals, assets of the elite, and a massive surveillance monitoring system, like a financial NSA [the US' National Security Agency]. Rosfinmonitoring is directed at ensuring the regime can monitor the elites, and two, reinforces the agreement that elites only have their money as the state allows them to,” he argued. “At any moment assets could be revoked; it is a Damocles sword hanging over the heads of the elite. These are methods of control and allows the regime to justify it as regulatory control.”

Capital crimes – an amnesty

The FIU's moves tie in with new policies by the Kremlin to stem the outflow of illicit cash from Russia, estimated at US$1.3 trillion between 1994 and 2012, according to US-based Global Financial Integrity figures released this January. In November 2014, the Russian federal parliament passed a law requiring citizens to pay tax on offshore assets – Federal Law No. 376 ‘On amendments to parts one and two of the Russian tax code (concerning taxation of income of controlled foreign corporations and proceeds of foreign organisations)'. And in June 2015 a capital amnesty bill was passed, authorising a no-questions-asked repatriation of illicit funds that is to last until the end of the year (2015). Russia’s finance minister Anton Siluanov has said the law "declares immunity from criminal, administrative and tax punishment” for capital returned to Russia.

FATF acquiescence

Despite concerns over the possible origins returning capital, FATF has gone along with the law. “I recently helped the finance ministry on the amnesty of capital law. One of the key principles is to fully comply with FATF. There have been a lot of discussions with them, and at the end of the day, said they were comfortable with the amnesty law,” claimed Kazantsev. An FATF spokesperson said the organisation had reviewed Russia’s capital repatriation initiative, adding, “The programme met the requirements of the FATF’s basic principles. While the programme is in effect, the FATF will continue to monitor whether any suspicious transactions in relation to the [programme] are reported." 

Return on leniency

Russia expects the amnesty law to bring in US$4.3 billion in taxes over the next year and 10% of the assets lost since 2014. However, no figures have been released as to the law's current effectiveness. “We've no idea of how much money has come in, but there's still a net outflow, as the de-offshorisation law came at the same time as concerns about sanctions and how the situation will develop,” said Bowen. Russia's ministry of economic development forecasts capital flight to slow to US$70 billion in 2016, and to US$55-60 billion in 2017.

Ever inventive – the money will flow

Given Rosfinmonitoring's actions and the country’s recession, it is no surprise that sanctions are being circumvented. In the Crimea, rather than VTB or banks owned by state gas giant Gazprom opening, “small banks move in and suddenly expand as they are not as exposed to sanctions or compliance issues,” said Bowen. “The way Russia is paying pensions in Donetsk [in eastern Ukraine] is by sending transactions via South Ossetia to eastern Ukraine, so a 'quasi layering' effect. Money is also going from Russia to Moldova, then to Latvia and onto London. Russia is exploiting the financial system as much as financial players in the West allow them,” said Bowen. 

The more traditional offshore hubs used by Russians to launder money, such as Cyprus and Dubai, have also rebounded, and now Russians are expanding their horizons. “Russians are looking to exploit Singapore and Asia. Before [the sanctions] launderers were purely looking at Europe; now they're looking elsewhere,” Bowen added. 

While there is speculation that Russia will pivot eastwards to overcome Western sanctions through major unilateral trade deals with China, private businesses have not followed Moscow's lead. “Both Russia and China are trying to extend the economic relationship, but private businesses have not been enthusiastic,” said Kazantsev. “But if the current situation continues, it will be one of the few options on the table for Russian business. Will eastern partners substitute for western ones? Probably not, but business with the east will increase.”

Political restraint

Looking ahead, further sanctions against Moscow are not likely, as Russia’s entry into the Syrian conflict in September has created further geopolitical concerns to address. “Because of the political importance of the Russian role in Syria, I do not think that currently anyone – the US Treasury or the EU – is willing to sanction the Russian leadership and further ossify any meaningful movement towards a political solution [in Syria],” explained Bowen. “Rather than creating momentum for more sanctions it will actually create momentum to reduce, or at least be less enthusiastic about enforcing, the current sanctions.” 

Photograph by Anubis8, via Wikicommons

Saturday, November 28, 2015

Syria crisis hits Jordanian meat market (copyright protected)

THE DEMAND for meat in Jordan has been weakened by the conflict in its troubled neighbour Syria, with the Jordanian economy slowing down due to regional instability, impacting consumer purchasing power. However, at the same time, demand for meat is being bolstered by Syrian refugees.
A country of 6.6 million people, Jordan is currently hosting 937,830 Syrian refugees, according to the United Nations High Commissioner for Refugees (UNHCR), with 80% living outside of refugee camps. The influx of Syrians has boosted meat imports, mirroring the impact of an influx of Iraqi refugees following the US-led invasion in 2003.
“At a food level it has been a plus as increased imports of meat, like when the Iraqis came from 2003 onwards. But there are psychological differences. The Iraqis had money but the Syrians less so, and are more conservative in spending,” said Ali Noor, general manager of Kaylani Food Centre, a meat distributor in Amman, Jordan’s capital.
Until 2014, food was provided to refugees by the UN and aid agencies, in addition to handouts from wealthy Gulf Arab donors, purchased either via international tenders or local retailers. Over the past year, however, food vouchers have been provided to 538,274 refugees, according to the UNHCR, to buy whatever food they need: “Syrians go to the supermarket, to Carrefour, with coupons for rice, sugar, oil and sometimes meat,” said Noor.

Market Instability
However, regional instability has seriously impacted Jordan's economy by warding off tourists and foreign investment. Economic growth is forecast at just 2.8% this year, according to the World Bank.
“For commercial products – beef and lamb – you see demand going up and down. Is it a reflection of the crisis? Possibly, but I can't put my finger on it and say for certain,” said Noor.
The crisis has also affected trade that had previously transited through Syria to and from Turkey and Europe. “Meat imports from Turkey are taking up to 21 days instead of a week, due to having to ship to Aqaba port (in southern Jordan),” said Ahmad Al-Hamad, Kaylani's commercial manager.
But while logistical costs have risen, the domestic market has been bolstered by the closure of the border with Syria. “People used to buy in Syria as it was 2 Jordanian Dinar (USD2.80) for a kilo of lamb compared to 10 JD (USD14) in Jordan. There was price gouging with people taking advantage (of the price difference), but the government has stopped this,” said Noor.

Fear of Disease
However, despite Jordan's borders being better monitored by the authorities and restricting meat trades, there is a high risk of disease due to smuggled livestock from both Syria and Iraq. “The threat of transboundary animal disease has increased,” said Markos Tibbo, livestock officer at the UN's Food & Agriculture Organisation (FAO) for the Near East and North Africa. “I think the vaccination coverage in Jordan is not up to the recommended standard as their capacity and resources are limited in undertaking disease surveillance and control.” He noted: “We've helped Lebanon vaccinate the entire livestock population via a USD5.6 million programme from the UK's Department of International Development (DFID), implemented in 2014-15. We want to repeat this in Jordan, as well as to protect the livestock assets of the poor.”

Wednesday, November 04, 2015

IS, and will be yet - Islamic State and Terrorist Financing

Money Laundering Bulletin

Islamic State controlled areas in Syria and Iraq 

The oil price may have dropped but Islamic State runs varied funding streams, making it brutally resilient. New thinking on financial lines of attack may be needed, discovers Paul Cochrane, in Beirut.

The Islamic State is touted as the wealthiest terrorist organisation on the planet, yet the financial war against the group is stumbling, highlighting deficiencies in methodologies and approaches to countering the financing of terrorism.

There has been no shortage of effort against the IS, including: UN Security Council Resolutions for example 2199 (2015), requiring member states to do all they can to prevent its financing; the Financial Action Task Force (FATF) has published an extensive report on the group's funding; a Bahrain-hosted November 2014 meeting of counter terrorist financing (CTF) experts result in the Manama Declaration, which set out policy proposals; and Italy, Saudi Arabia, and the United States co-established a Counter-ISIL Finance Group in Rome. Despite such measures, ISIL goes from strength to strength in northern Iraq and Syria.

Black gold behind the black flag

“Twelve months ago everyone was saying ISIL [Islamic State of Iraq and the Levant] is incredibly wealthy from oil. Although it seems its ability to rely on oil revenue has declined considerably since then, it is still functioning reasonably well,” said T
om Keatinge, Director of the Centre for Financial Crime and Security Studies at RUSI in London.

Indeed, reports suggest IS was generating millions of dollars a day in oil revenues, either sold in territory under its control, smuggled over borders or, in a curious twist, sold to the Syrian regime. The group appears to have weathered the recent drop in oil prices and adapted.

“When IS first started to control territory there were a number of jackpot events; there may or may not have been a large quantity of money in the Central Bank in Mosul, and it took oil storage facilities and agricultural stores. That was phase one, using resources it gathered. Now it needs to raise finance from day to day, like any other governing authority, something it seems to do effectively albeit by imposing increasing taxes on people and businesses,” said Keatinge.

Adaptive response

Furthermore, ISIL appears to be getting around many of the financial controls arrayed against it. Jimmy Gurule, Professor of Law at Notre Dame University in Indiana, and a former undersecretary of the US Treasury, describes the CFT strategy against the group as “weak and ineffective,” saying the efforts by FATF and the US Treasury have been “misguided”.

“There are a couple of obvious observations – one, not going after the money, and if there is a strategy, it's been largely ineffective. Secondly, the current strategy is based on the old Al Qaeda model, so we need to do something different,” said Gurule.

While FATF recognises that IS presents “a new form of terrorism” and that its financing is a “constantly changing picture,” Gurule criticises the focus on money going to IS, and not out from its territories. “When money comes in typologies makes sense, but for services (ISIL needs) that is money going out, and I don't think typologies work there. Let's target service providers that help ship or transport oil, and impose sanctions on these providers,” he said.

He cited the lack of IS-linked designated individuals under US Executive Order 13224 on blocking terror funds as indicative of the difficulties of going after external financiers. “I testified before a Congressional hearing last November (2014) and I pointed out the paucity of designations, just three that worked on raising money for ISIL,” he added.

To Gurule, part of the problem is treating ISIL as a non-state actor when it controls land and is operating like a government. The international community “doesn't want to recognise it as a government or at the UN but it's a defacto state. Because of the way it's generating revenues it shouldn't be treated merely as a terrorist organisation. If it is state like, governs resources and provides services, then it needs to be treated like a state to change its behaviour. That strategy should include second tier economic sanctions that have been relatively effective against Iran.”

In February, following the release of the FATF report, a senior international AML/CFT export told MLB that “there may need to be some changes to typologies, but the existing machinery is likely to be adequate. We will be doing a typological renewal, having another look at the ways finances flow.” A new report is slated to be published in October (2015).

“I do think there is a need for a typology review, and the FATF report has been an excellent tool for the private sector,” said Jon Byrne, Executive Vice President of the Association of Certified Anti-Money Laundering Specialists (ACAMS). “The new head of FATF is actively seeking input from the private sector, and this has become increasingly important as ISIL has access to oil and other revenues, and money has to go somewhere, through legitimate institutions.”

Alternative sources of funds

To John Cassara, a former US Treasury special agent, the fight against IS has fallen short in its approach to trade-based money laundering; he argues a new methodology that adds to a fact-finding intelligence report would “break some new ground.”

“I would urge FATF, instead of getting experts with a PhD from the US or UK to (address shortcomings), to get them from MENA-FATF. Get the Lebanese, the Saudis involved, those that know the region and what needs to be reported,” he said.

With IS using multiple streams to generate funds, new typologies may need to address certain revenue streams. “The potential exfiltration of value – antiquities – is a risk spot. It is striking how little the UN appears to know about this trade. Everyone says its happening, but where is the evidence and the facts? That's where the argument stops,” said Keatinge.

An approach to tackling the smuggling of artefacts from ancient sites in Iraq and Syria that IS now controls, such as Palmyra in eastern Syria, should also include looking for orders for items. “I heard from a source that when Palmyra was overrun (in May 2015) you could ask for a specific piece. So apparently there is a pull as well as a push factor,” Keatinge added.

Gurule also raised the issue of antiquities traded on the black market. “Selling stolen artefacts is generating tens of millions of dollars, but what are the typologies?” Kidnap for ransom has also been identified by FATF as a key revenue stream for IS. “Is there a typology for money generated from the release of hostages? If the family of a victim agrees to pay $1.2 million, how is that money transferred? Are ransom payments being deposited in offshore bank accounts or disguised as donations to charities or NGOs?” said Gurule.

Human trafficking is a further area of concern. “Is IS making money from human traffickers as they seek to traffic migrants through areas under its control?” said Keatinge.

Whether typologies ought to be made public, and risk enabling IS to wise up to CFT efforts is also in question. Byrne cited the example of banks looking for account-holders who suddenly fall off the grid, and are then found to be withdrawing cash in Turkey. In another example, potential fighters or funders give a third party their ATM cards to withdraw cash in another country, such as Italy, and then the cash is taken to IS territory. “But any time you make typologies public they become stale. I think it is about staying as current as much as you can, as IS is obviously able to get hold of information so much easier now through social media,” said Byrne.

FATF's report downplayed the role of foreign 'deep pocket' funders behind IS, despite a statement in 2014 by US Vice President Joe Biden that fingered supporters in the Gulf, and other reports that have surfaced. MLB has also reported on donations and funding from the Gulf, particularly Qatar and to a lesser degree Kuwait, Saudi Arabia and the United Arab Emirates (see

Financial institutions are certainly keeping an eye on Gulf countries. “It is all very well for international banks to do their bit to interrupt IS financing, but the regulatory and enforcement structure in surrounding countries (bordering Iraq and Syria) represent possible vulnerabilities and ways IS funds could get into the international system,” said Keatinge.

The Gulf has made public moves to show it is trying to counter ISIL financing, such as organising the Manama Declaration on CFT in November 2014, but Keatinge suggests this rhetoric needs to be reinforced by continued raising of regulatory and enforcement standards.

Cassara believes more pressure should be brought on the Gulf states. “Even though for the most part they have adhered to the FATF recommendations and put in place compliance programs, with some exceptions enforcement has been somewhat lax,” he said. “If the West comes to them with a case, 'look at this', they'll do it, unless (it involves) a politically exposed person (PEP), but they rarely use their own initiative, and that is frustrating as they know what is going on or should.”

Image via Wikicommons

Monday, October 12, 2015

Interview on Al Manar's Panorama show

On Thursday 8th, I was interviewed on Al Manar TV's Panorama show about Jeremy Corbyn, British politics and foreign policy. Skip to 34 minutes in. It is dubbed into Arabic -

Sunday, September 27, 2015

FATCA – cost and effect

Money Laundering Bulletin
The United States’ Foreign Account Tax Compliance Act (FATCA) went into effect on 1 July 2014. A year on, financial institutions are filing for the first time, but teething problems abound, Paul Cochrane discovers, with some banks no longer accepting new US clients and registration volumes far below expectations.
FATCA, which requires foreign financial institutions (FFIs) to provide information on US accounts above US$50,000 to the US' Internal Revenue Service (IRS), has been a complicated piece of legislation from the get-go. The over 1,000 page Act, which is aimed at curbing tax evasion, was delayed repeatedly after its passage in 2010, as US authorities worked to persuade more jurisdictions to sign Intergovernmental Agreements (IGAs), and FFIs to secure a Global Intermediary Identification Number (GIIN). 

The uptake was slow due to FATCA's extra-territorial nature, requiring legislative changes in many countries, including override of national banking secrecy and to effect financial institution reporting to a foreign jurisdiction.

With FFIs having to screen all clients for US indicia as well as hiring new compliance staff, FATCA has proved both onerous as well as expensive to implement; it has cost an estimated $8 billion worldwide. 

Deadlines and delays

Aware of the complexities, IRS set a 'transition' period, running to the end of 2015, for 'good faith' compliance efforts by FFIs; only then would it start cracking down on what it terms 'recalcitrance' via a 30% withholding tax on US-sourced income, and the risk of being shut out of the US financial system.
Despite the transition phase, the legislation's complexities has already led jurisdictions to extend reporting deadlines, notably one of the first to sign up to FATCA, the Cayman Islands, a FATCA world leader, with 30,868 FFIs registered, pushed the date for providing details of its US reportable accounts back to 26 June 2015. Luxembourg extended its deadline from 30 June to 31 July 2015. 

“The IRS has extended FATCA reporting for 90 days, if you ask for it,” said Malek Costa, Head of Group Compliance at BLOM Bank in Lebanon, which operates throughout the Middle East. “The real issue was with the software, at first we thought it would be easy to extract data from the core banking system and send it to the IRS but it has been a difficult task and took a lot of time. It involved many processes starting from getting the authorized certifications, buying necessary software that transform the file to be reported into .xml schema, encrypting it and then decryption when extracting the IRS response when validating the file.”

It is not just upgrading software that is causing issues for financial institutions. “Bankers are frustrated at the amount of paperwork, and US citizens with the extra paperwork, of 80 pages compared to 5 to 10 pages in the US,” said Liz Zitzow, Managing Director of British American Tax, a London-based US accounting firm.

Irreconcilable differences

The extra form-filling is expected to generate numerous problems, particularly filing figures that correspond with other tax files; filing on the value of shares; around beneficial ownership and exchange rate differentials. “I think everyone is going to be off the mark and figures that match will be less than 5 percent,” added Zitzow. For example, “tax filers don't use the exchange rate that banks use as many people do their own forms.”
Filing issues are compounded by the 7.6 million US citizens abroad having to fill in the Foreign Bank Account and Financial Accounts Report (FBAR), a BE-10 form on foreign affiliates, and other tax forms. “I estimate there will be around 100,000 false positives on FATCA,” said Professor William Byrnes, Associate Dean of Special Projects at Texas A&M University's School of Law. “I find the forms difficult, and I've written a 1,500 page analysis on FATCA. Many issues are unsolved or unworkable.”

A concern for FFIs is that the IRS will audit institutions over the data they send, with the ability to go over 10 years of records.
“They have the data to match taxpayers information with the information they're receiving from financial institutions. So if the IRS knows Mr X made a transfer from the US to an account in bank Y, and the bank did not report this account, the IRS may ask bank Y if the account is still active. If the bank says yes, the IRS will ask why it wasn't reported. They could investigate,” said Costa. “If the client declared non-US status with no US indicia in the electronic and paper records, the bank is then covered. The reason for doing enhanced due diligence is to mitigate the risk of identifying the accounts with US indicia and thus minimizing IRS investigations. This is a conservative approach for applying the FATCA procedures.”

American exodus

While banks have to screen for clients above $1 million, the next IRS requirement, by 2016, is to screen for all US clients.
An unintended consequence of FATCA has been Americans renouncing their citizenship due to the extra due diligence. Already a record 1,336 Americans have done so in 2015, according to the IRS, while earlier this year a survey by the deVere Group, a financial consultancy, found that 73% of expatriate Americans were considering relinquishing their passports due to FATCA. 

Banks are also shunning American clients, unless high net worth individuals, due to the extra due diligence required. “Over half of UK banks will not take Americans anymore,” said Zitzow.
Furthermore, FATCA is impacting the employment prospects of American managers abroad due to filing requirements. “Many Americans are becoming unemployable as they are not being given signing authority as (companies would then be) exposed to FATCA,” said Jim Jatras, Manager of in Washington D.C.

Not a priority for all

But despite the fallout (or maybe because of it), there is still a long way to go for global FATCA compliance. As of June 2015, 165,461 FFIs have registered on the IRS FATCA portal, according to Byrnes. Such a figure is well below what the IRS initially suggested, of 500,000 potential FFIs to be registered worldwide, while others suggested 800,000 to 900,000 FFIs. Indicative of the low uptake, the HM Revenue & Customs estimated that 75,000 UK financial institutions would be impacted, yet just 23,256 GIINs are in place in the mainland UK. The UK and its 10 main dependencies and overseas territories – the Cayman Islands, the British Virgin Islands, Montserrat, the Turks & Caicos Islands, Anguilla, Bermuda, Gibraltar, the Isle of Man, Jersey, and Guernsey - comprised 74,694 of the GIINs, representing 45% of the total, according to Byrnes. Of concern to global roll-out, of the four BRIC countries, there are just 8,254 FFI registrations. “At the end of the day the lagging GIIN registrations tell us FATCA is a back burner issue for most foreign governments,” said Byrnes. “The IRS should have upfront employed a more diplomatic and inclusive stakeholder approach.”

Regarding IGAs, 57 countries have signed Model 1 agreements (with 11 signed this year) as framed in FATCA, whereby the FFI reports directly to their central bank/regulator, which then reports to the IRS; and seven countries have signed Model 2, where the FFI reports directly to the IRS. A further 48 jurisdictions have signed onto FATCA “in substance,” bringing the total to 112 jurisdictions, according to IRS figures. The US, meanwhile, recognises 250 jurisdictions and territories worldwide. There are some 6,296 GIINs in 131 jurisdictions without an IGA. 

“The IGAs are potentially a weak link as without them FATCA is not enforceable - as the IGAs are not legal [agreements in the conventional sense], having not gone through Congress or the usual international treaties processes, and these vulnerabilities could be exploited,” said Jatras. There is a degree of uncertainty about the “consequences of sanctioning foreign institutions.”

Exaggerated claims

Meanwhile, FATCA is not expected to repatriate the amount of tax stated by the IRS and US Treasury in 2010 of more than $100 billion annually. In 2013, the Congressional Joint Committee on Taxation estimated that FATCA “will generate additional tax revenue of approximately $8.7 billion over the next 10 years,” or $870 million a year. “That is a pretty big difference. So where did the $100 billion come from? It was made up. My conclusion is FATCA will never pay for itself, as amounts are so small in the big picture of things,” said Byrnes. “The goal was already being achieved through the normal tools the IRS has at its disposal and through negotiations with Switzerland. There were 150,000 evaders before FATCA. Now, 100,000 of them have been caught (through tax evasion probes into banks in Switzerland and elsewhere), so that leaves only 50,000 left. As a percentage of 150 million tax payers, that is not even a correction error. A 50 percent whistle blower reward to find a tax dodger would have been a better idea.”

With some banks reluctant to on-board US customers due to the extra due diligence, and certain Americans not wanting to hand over their financial data to the IRS, an up-tick in financial crime is expected. “I think shell companies will increase as it is a way to evade tax, although AML (anti-money laundering) procedures are playing a strong role in fighting tax evasion by finding out who is the real beneficial owner of an account as this later may be a US person,” said Costa.

Looking ahead, FATCA is expected to play a role in the upcoming US presidential elections, with Senator Rand Paul proposing through Senate Bill S66 amendments to the IRS Code, which would amend FATCA. Also, the Organisation for Economic Cooperation & Development's (OECD) tax information sharing initiative is gaining steam, which could have implications for FATCA implementation and compliance.