BANKING ON NONPROLIFERATION

Abstract

In the past decade, governments have increasingly relied on financial sanctions to counter the proliferation of weapons of mass destruction. By targeting not only individuals and entities involved in illicit activities, but also banks that allow transactions to occur, financial sanctions were expected to stanch the flow of funds that support proliferation and compel compliance with international law—notably by Iran. Ten years later, Iran's nuclear program has advanced, calling into question the effectiveness of financial sanctions. Previous research evaluating the effectiveness of financial sanctions has focused on the impact of sanctions on the targeted country or on the enforcement of sanctions by the international community. Little attention has been devoted to their implementation by banks and government agencies. Based on interviews with US and European bank and government representatives, this article argues that the inefficiency of financial sanctions is due to shortcomings in training and information support from governments to financial institutions; governments on both sides of the Atlantic have provided little or no assistance to enable banks to identify patterns of proliferation financing and implement the sanctions regime. To transform financial sanctions into effective nonproliferation tools, governments need to play a greater role in their implementation.

Keywords:

• Financial sanctions
• counterproliferation
• money laundering
• antiterrorism
• Iran
• export-import controls

ACKNOWLEDGMENT

The research for this article was funded with a grant from the George Mason University College of Humanities and Social Sciences.

Notes

1. National Defense Authorization Act for Fiscal Year 2012, H.R. 1540, sec. 1245, <www.gpo.gov/fdsys/pkg/BILLS-112hr1540enr/pdf/BILLS-112hr1540enr.pdf>.

2. Treasury Department, “Finding That the Islamic Republic of Iran is a Jurisdiction of Primary Money Laundering Concern,” Federal Register 76 (November 25, 2011), p. 72882.

3. Brendan Taylor, Sanctions As Grand Strategy (London: Routledge for IISS, 2010).

4. Joanna Chung and Peter Thal Larsen, “Lloyds in $350m US Settlement,” Financial Times, January 9, 2009, <www.ft.com/cms/s/0/a3905d28-dea6-11dd-9464-000077b07658.html#axzz1RSHQexAg>.

5. Dina Esfandiary and Mark Fitzpatrick, “Sanctions on Iran: Defining and Enabling Success,” Survival 53 (October/November, 2011), pp. 143–56.

6. See, for example, David Cortright and George A. Lopez, eds., Smart Sanctions: Targeting Economic Statecraft (New York: Rowman & Littlefield, 2002); Solomon Major and Anthony J. McGann, “Caught in the Crossfire: Innocent Bystanders as Optimal Targets of Economic Sanctions,” Journal of Conflict Resolution 49 (June 2005), pp. 337–59; Ella Shagabutdinova and Jeffrey Berejikian, “Deploying Sanctions while Protecting Human Rights: Are Humanitarian ‘Smart’ Sanctions Effective?” Journal of Human Rights 6 (2007), pp. 59–74; United Nations Secretariat, “Smart Sanctions, The Next Step: Arms Embargoes and Travel Sanctions,” Second Expert Seminar, Berlin, December 3–5, 2000, <www.un.org/Docs/sc/committees/sanctions/overview.pdf>; and Arne Tostensen and Beate Bull, “Are Smart Sanctions Feasible?” World Politics 54 (April 2002), pp. 373–403.

7. Andreas Keiser, “Banking Secrecy Is Made to Measure,” SwissInfo.ch, March 14, 2012, <www.swissinfo.ch/eng/Specials/Rebuilding_the_financial_sector/Spotlight_on_banking_secrecy/Banking_secrecy_is_made_to_measure_.html?cid=31285662>; “International Law Advisory: Swiss Bank to Pay $536 Million Fine in Largest Ever U.S. Economic Sanctions Penalty,” Steptoe and Johnson LLP, December 22, 2009, <www.steptoe.com/publications-6532.html>.

8. “EU Iran Sanctions: Ministers Adopt Iran Oil Imports Ban,” BBC News, January 23, 2012, <www.bbc.co.uk/news/world-europe-16674660>; Council of the European Union, “Council Conclusions on Iran,” 3142th Foreign Affairs Council Meeting, Brussels, January 23, 2012, <www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/EN/foraff/127446.pdf>.

9. UK Treasury, “The Financial Restrictions (Iran) Order 2011,” November 21, 2011, <www.detini.gov.uk/financial_restrictions_iran_order2011.pdf>.

10. Robert Kimmitt, “The Role of Finance in Combating National Security Threats,” presentation to the 2007 Soref Symposium, Washington Institute for Near East Policy, Washington, DC, May 10, 2007; “Iran ForEx Reserves Jump on High Oil Prices,” Agence France Presse, September 13, 2007, <www.haaba.com/node/15722/topic/it>.

11. Rick Gladstone, “India Explores Economic Opportunities in Iran, Denting Western Sanctions Plan,” New York Times, February 9, 2012, <www.nytimes.com/2012/02/10/world/middleeast/india-sees-economic-opportunities-in-iran.html>; Jim Yardley, “India Defends Oil Purchases from Iran,” New York Times, February 11, 2012, <www.nytimes.com/2012/02/12/world/asia/india-trumpets-ties-with-us-amid-iran-oil-deal.html>; Peter Enav, “US Bid to Crimp Iranian Oil Sales to Asia Stumbles,” Associated Press, February 15, 2012, <www.businessweek.com/ap/financialnews/D9STLIL02.htm>.

12. Thomas Erdbrink and Joby Warrick, “As Currency Crisis and Feud with the West Deepen, Iranians Brace for War,” Washington Post, January 5, 2012, <www.washingtonpost.com/world/national-security/iranians-brace-for-war-as-feud-with-west-reaches-critical-point/2012/01/05/gIQA8oygdP_story.html?hpid=z3>.

13. Although the United States and the United Kingdom had incorporated measures targeting terrorism finance in their preexisting counterterrorism legislation, the impetus to focus on terrorism finance as a primary policy to prevent terrorism came from the events of 9/11. Note also that the International Convention for the Suppression of the Financing of Terrorism, which criminalizes terrorism financing, was signed in 1999 but came into force only in April 2002, almost a year after the terrorist attacks of 9/11. See Michael Levi, “Combating the Financing of Terrorism,” British Journal of Criminology 50 (2010), pp. 650–69; Brian Monroe and Colby Adams, “Ten Years Ago, a Morning that Launched CFT Compliance,” September 13, 2011, <dmlassociatesllc.com/files/TenYrs090911.pdf>; “International Convention for the Suppression of the Financing of Terrorism,” James Martin Center for Nonproliferation Studies, primer, <cns.miis.edu/inventory/pdfs/finterr.pdf>.

14. “Financial Crimes Enforcement Network Amendment to the Bank Secrecy Act Regulations—Anti-Money Laundering Programs for Insurance Companies,” Federal Register 70 (November 3, 2005), p. 66754, <www.fincen.gov/amlforinsurancecompany.html>. See also Monroe and Adams, “Ten Years Ago, a Morning that Launched CFT Compliance.”

15. Established in 1989, the FATF is an intergovernmental body of thirty-six members that initially aimed to promote policies and standards to combat money laundering. The group's mandate was extended after 9/11 to include terrorism financing and, more recently, proliferation financing. Created in 1995, the Egmont Group is an informal association of 128 financial units that aim to improve cooperation in the fight against money laundering and terrorism financing by sharing information, training, and expertise. The Egmont Group has observer status at FATF meetings and is also engaged in discussions related to proliferation financing.

16. For a sample of a bank's customer due diligence (CDD) and accounting monitoring practices, see “Policies for Money Laundering Prevention and Combat Terrorism Financing/Know Your Customer,” Bladex, 2008, <www.blx.com/Comunicados_de_Prensa/Politicas_procedimientos_lavado_eng.pdf>.

17. “Treasury's Cohen Warns of Terrorists’ Ties to Organized Crime, While Citing Success in Cutting Fun[ds],” Moneylaundering.com, October 20, 2009, <www.rumormillnews.com/cgi-bin/archive.cgi/noframes/read/158411>.

18. North Korea is known to have been engaged in money laundering, currency counterfeiting, and narcotics trafficking (among other criminal activities) to support the country's economy and, more importantly, its regime. It is likely that these funds have also been used to support its nuclear weapons program. However, once the funds are in government hands, it becomes difficult to distinguish between government funds with a criminal origin and those emanating from legitimate activities such as taxation. In addition, although North Korea has outsourced some of its criminal activities to criminal groups, proliferation activities are still undertaken by state organizations. US Treasury, “New Executive Order Targeting Proliferation and Other Illicit Activities Related to North Korea,” fact sheet, August 30, 2010, <www.treasury.gov/press-center/press-releases/Pages/tg839.aspx>; Sheena Chesnut, “Illicit Activity and Proliferation: North Korean Smuggling Networks,” International Security 32 (Summer 2007), pp. 80–111.

19. Sensitive goods are defined as goods and technologies that can be used to produce WMD and missiles. This includes dual-use goods, which can be used for military as well as civilian purposes.

20. “Press Release by Inspector-General of Police in Relation to Investigation on the Alleged Production of Components for Libya's Uranium Enrichment Programme,” Royal Malaysia Police Office, February 20, 2004, <www.iranwatch.org/government/Malaysia/malaysia-police-libyareport-022004.htm>; Raymond Bonner and Craig S. Smith, “Pakistani Said to Have Given Libya Uranium,” New York Times, February 21, 2004, <www.nytimes.com/2004/02/21/world/pakistani-said-to-have-given-libya-uranium.html?src=pm>.

21. See, for instance, “Press Release by Inspector-General of Police in Relation to Investigation on the Alleged Production of Components for Libya's Uranium Enrichment Programme,” Royal Malaysia Police Office; Bruno Gruselle, “Proliferation Networks and Financing,” Fondation pour la Recherche Strategique, March 3, 2007; “Nuclear Black Markets: Pakistan, A.Q. Khan and the Rise of Proliferation Networks—A Net Assessment,” IISS Dossier, May 2007; Michael Leidig, “Austria Accuses North Korean Bank of Spying,” Telegraph, July 22, 2003, <www.telegraph.co.uk/finance/2858506/austria-accuses-north-korea-bank-of-spying.html>; “A.Q. Khan and Iran,” Global Security, undated, <www.globalsecurity.org/wmd/world/iran/khan-iran.htm>; “Who Paid for A.Q. Khan Network?” IntellibriefsBlog, December 22, 2004, <intellibriefs.blogspot.com/2004/12/who-paid-for-aq-khan-network.html>.

22. International Banking Federation (IBFed), Letter to FATF, “Re: Combating Proliferation Financing: Policy Options for the FATF,” December 2, 2009, hardcopy provided to author by association representatives in June 2011.

23. Sally J. Scutt, deputy chief executive of British Bankers’ Association and chairman of the International Bankers Federation (IBFed); and Catriona Shaw, director financial crime, British Bankers’ Association, interview with author, London, United Kingdom, June 6, 2011.

24. Scutt and Shaw, interview with the author; Séverine Anciberro, adviser, retail financial services, legal and social affairs, European Banking Federation, interview with author, Brussels, Belgium, May 26, 2011.

25. US Treasury, “Specially Designated Nationals and Blocked Persons,” April 19, 2012, <www.treasury.gov/ofac/downloads/t11sdn.pdf>.

26. Anciberro, interview with the author.

27. Scutt and Shaw, interview with the author.

28. Anciberro, interview with the author.

29. Anciberro, interview with the author.

30. “Working Group 3: Notes from Expert Meeting,” Brussels, July 15, 2002, <www.smartsanctions.se/stockholm_process/reports/Brussels_rep1.htm>.

31. Julien Ernoult, adviser, European Association of Public Banks, interview with author, Brussels, Belgium, May 24, 2011; European Union, “Consolidated List of Persons, Groups, and Entities Subject to EU Financial Sanctions,” April 20, 2012, <eeas.europa.eu/cfsp/sanctions/consol-list_en.htm>.

32. Ernoult, interview with the author; Anciberro, interview with the author; Florence Ranson, senior adviser, public relations and communications, European Banking Federation, interview with author, Brussels, Belgium, May 26, 2011. For an example of one such database service, see World-Check, < www.world-check.com/>.

33. Stuart Levy, former US Treasury undersecretary for terrorism and financial intelligence, interview with author, Washington, DC, July 26, 2011.

34. Several reports are available at FinCEN, “Financial Institutions Outreach Initiatives,” undated, <www.fincen.gov/news_room/rp/financial_institutions_outreach_initiative.html>.

35. Levy, interview with the author; Robert Rowe, vice president/senior counsel, American Bankers Association, interview with author, July 19, 2011.

36. Rowe, interview with the author.

37. See for instance UN Resolutions 1737, 1695, 1718, and 1747.

38. Scutt and Shaw, interview with the author.

39. Levy, interview with the author. See also, Levi, “Combating the Financing of Terrorism.”

40. Rowe, interview with the author. Under section 505 of the PATRIOT Act, a national security letter allows US government agencies to acquire information about individuals/entities not suspect in criminal acts and without judicial oversight. See PATRIOT ACT of 2001, <www.gpo.gov/fdsys/pkg/PLAW-107publ56/pdf/PLAW-107publ56.pdf>.

41. Scutt and Shaw, interview with the author.

42. Scutt and Shaw, interview with the author.

43. Ernoult, interview with the author.

44. Anciberro, interview with the author; and Ranson, interview with the author.

45. Ernoult, interview with the author.

46. Anciberro and Ranson, interview with the author.

47. Anciberro and Ranson, interview with the author; Scutt and Shaw, interview with the author.

48. FATF, “Proliferation Financing Report,” June 18, 2008, <www.fatf-gafi.org/media/fatf/documents/reports/Typologies%20Report%20on%20Proliferation%20Financing.pdf>.

49. It is worth noting that most banking representatives interviewed were unaware of the existence of this analysis. FATF, “Combating Proliferation Financing: A Status Report on Policy Development and Coordination,” February 2010, footnote 13, p. 21, <www.ctif-cfi.be/website/images/EN/typo_fatf/proliferation_financing.pdf>. Several issues of the Suspicious Activity Report Activity Review can be viewed at FinCEN, <www.fincen.gov/news_room/rp/files/reg_sar_index.html#International-OFAC>.

50. Rowe, interview with the author.

51. UK Terrorism Act 2000, <www.legislation.gov.uk/ukpga/2000/11/contents>.

52. For a complete list of laws applying to AML and terrorism financing, see FinCen, “History of Anti-Money Laundering Laws,” Treasury Department, undated, <www.fincen.gov/news_room/aml_history.html>.

53. Comprehensive Iran Sanctions, Accountability, and Divestment Act of (2010), H.R. 2194, <www.treasury.gov/resource-center/sanctions/Documents/hr2194.pdf>; “Blocking Property of WMD Proliferators and Their Supporters,” US Executive Order 13382, June 29, 2005, <www.state.gov/t/isn/c22080.htm>.

54. Peter Crail, “U.S. Wields Financial Sanctions Against Iran,” Arms Control Today, November 2008, <www.armscontrol.org/print/3422>.

55. UN Resolution 1929, S/Res/1929, June 9, 2010.

56. Council Regulation (EU) No 961/2010 of October 25, 2010, On Restrictive Measures Against Iran and Repealing Regulation (EC) No 423/2007, ch. V, art. 23, <eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2010:281:0001:0077:EN:PDF>.

57. Scutt and Shaw, interview with the author.

58. Claudio Gatti and John Eligton, “Iranian Dealings Lead to a Fine for Credit Suisse,” New York Times, December 15, 2009, <www.nytimes.com/2009/12/16/business/16bank.html>.

59. Scutt and Shaw, interview with the author.

60. International Emergency Economic Powers Act, 50 U.S.C., para. 1702(C)(3).

61. Serena D. Moe, “Critical Issues in Sanctions Compliance,” presentation, ABA/ABA Money-Laundering Enforcement Conference, November 13–15, 2001, Washington, DC.

62. Matthias Rieker, Joseph Palazzolo, and Victoria McGrane, “Banks Exit From Embassy Business,” Wall Street Journal, November 20, 2010, <online.wsj.com/article/SB10001424052748703531504575625060985983720.html>.

63. Peter Fritsch and David Crawford, “Small Bank in Germany Tied to Iran Nuclear Effort,” Wall Street Journal, July 18, 2010, <online.wsj.com/article/SB10001424052748704229004575371341662207242.html>; Avi Jorisch, “How Iran Skirts Sanctions,” Wall Street Journal, November 4, 2009, <online.wsj.com/article/SB10001424052748703298004574457322960633830.html>; and Glenn Kessler, “Iran, Trying to Skirt Sanctions, Attempts to Set Up Banks Worldwide,” Washington Post, October 23, 2010, <www.washingtonpost.com/wp-dyn/content/article/2010/10/20/AR2010102006139.html>.

64. Scutt and Shaw, interview with the author.

65. IBFed, “Re: Combating Proliferation Financing.” It is worth noting that in its 2008 report on proliferation finance, the FATF proposed criminalizing proliferation finance and offered a working definition of proliferation finance; however, the definition is too broad to serve as a basis for national legislation. See FATF, “Proliferation Financing Report,” p. 3.

66. Scutt and Shaw, interview with the author. See also Megan Davis Hodge, Testimony on Behalf of the American Bankers Association, House Subcommittee on Oversight and Investigations, Committee on Financial Services, “Hearing Regarding Suspicious Activity and Currency Transaction Reports: Balancing Law Enforcement Utility and Regulatory Requirements,” 110th Cong., first sess., May 10, 2007, <www.aba.com/NR/rdonlyres/222CE044-577A-11D5-AB84-00508B95258D/52023/FinalVersionofMeganDavisHodgeStatement1.pdf>. In the United States, section 314(b) of the PATRIOT Act allows banks located in the United States to share information about suspicious activity reports or other sanctions-related issues. This type of information sharing, however, is not permitted with banks, including branches of the same bank, located overseas. See FinCEN, “Financial Institutions Outreach Initiative: Report on Outreach to Money Services Businesses,” July 2010, < www.fincen.gov/pdf/Financial%20Inst%20Outreach%20Init%20MSB_final.pdf>.

67. For individuals, this might include aliases, date of birth, city and country of birth and residence, passport details, and Social Security numbers, while for companies it could include registration numbers, activity description, addresses, and names of owners, managers, and key employees.

68. Such interagency-industry meetings have long been valued for their ability to improve implementation in the field of export controls.

69. For a short description of trade finance, see “What is Trade Finance?,” Trade Finance Magazine, undated, <www.tradefinancemagazine.com/AboutUs/Stub/WhatIsTradeFinance.html>.