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Findings Report: Transborder Financial Regulation and Terrorist Financing

March 6, 2003
Council on Foreign Relations


[Note: A transcript of this meeting is unavailable. The discussion is summarized below.]

What We Know:

The fourth session of "Old Rules, New Threats" focused on transnational border threats, including the movement of money, people and black and gray market goods. This session addressed a theme that has occurred in other sessions of the Roundtable series: the gap between what is necessary and what is permissible. What is necessary is "defense in depth," or, in other words, the ability to penetrate every nook and cranny of every country on earth. Yet no existing international body has the capacity, systems or authority to address adequately these threats. And no national government—not the United States, which devotes more resources than any other country to these issues and not the EU, which has developed some special competencies—is optimally organized to counter transborder crime.

Participants discussed in detail how the World Trade Organization (WTO) could affect transborder law enforcement. The WTO does not have a policy against terrorism or other transborder illegal activity and, in fact, does not distinguish between transborder transactions that are legal and those that are illegal. Furthermore, the WTO is limited in its ability to affect transborder law enforcement because it does not deal with regulations on transfer of payment for goods and only covers regulations on transfer of payment for services when national regulations deal with foreign actors in the state (and not a state's own citizens).

Recognizing these limitations, participants suggested that the WTO might actually constrain national governments' efforts to address transborder criminal activity. For example, governments which implement multilateral trade agreements calling for trade controls on goods that may cause global harm (for example, the Kimberly Process Certification Scheme on conflict diamonds) may be in violation of the General Agreement on Tariff and Trade (GATT), which generally forbids discrimination between Most Favored Nations (MFN). The WTO will pass a waiver to allow governments to ban conflict diamonds.

On the other hand, participants argued that the WTO can offer some help to governments and regimes that are trying to address the threat of international crime and terrorist activity. Most notably, the TRIPS Agreement (The Agreement on Trade-Related Aspects of Intellectual Property Rights), which requires governments to make certain international trade and domestic activities illegal and to cooperate against illegal trade, sets a model of positive engagement that could extend to other areas of international trade beyond intellectual property.

What We Don't Know:

There are a growing number of international initiatives designed to target transborder threats. Some participants argued that these initiatives fail to address three constraints. The first constraint is that there is no global jurisdiction. Crossborder crime crosses jurisdictions and there is no clear way to determine who is going to deal with the problem on both ends. The second constraint is technological incompatibility. Differences in machines, computers, ways to gather information and rules for exchanging it make crossborder sharing very difficult. The third constraint is that the capacity for carrying out this work is weak in the EU, moderately weak in the United States, and almost non-existent in the rest of the world.

Some participants maintained that the threat of terrorism is fundamentally asymmetrical and ideological. It poses a very different kind of threat, one that is not subject to direct persuasion or diplomacy and is amplified by the proliferation of weapons of mass destruction. As a result, some participants suggested that the U.S. approach to dealing with terrorism and terrorist financing should place greater emphasis on educational systems throughout the world and focus on the problems posed by weak or failing states that can be havens for allowing the threat to metastasize.

Participants identified several holes in the current regulatory system that need attention, including "Know your customer" rules, the responsibilities of professionals who act as financial intermediaries, record-keeping of exports, accountability of persons managing charities whose funds are misused and the confidentiality clause of section 311 of the Patriot Act (which allows the United States to sanction banks or countries that do not maintain adequate systems or that pose a threat in terms of money laundering.) It was also suggested that section 314 of the Patriot Act be amended from its original form, which requires banks to file reports on people of interest to the government, to a more streamlined form, in which the government would confidentially notify financial institutions about suspicious individuals, institutions would respond if they had records on those individuals, and justice would be pursued through normal legal process.

What Are the Next Steps; What Should Be Done and by Whom?

One way to address transborder threats is to shift the approach from sticks to carrots. Participants suggested that the United States should focus on creating competitive advantages for good behavior rather than punishing bad behavior. By doing so, the United States may get the private sector on its side, which has much greater cross-border competence than the government. For example, there is a Customs Department initiative to reward people who are moving goods around the planet with swifter movement of the goods, fewer inspections, and fewer impediments in return for their agreement to put high standards in place. Some participants suggested implementing a neutral system of product barcoding that could be used by different governments to track the source of an illegal transaction.

Some in the group expressed concern about unilateral approaches to these issues, arguing that nothing the United States could do alone would have much value and that energy would be better spent convincing our allies of the need to join with existing initiatives. Some participants advocated reevaluating the goals and costs of existing programs to find ways to bring our partners on board. The example of the Wassenaar Arrangement (on Export Controls for Conventional Arms and Dual-Use Goods and Technologies) was raised to illustrate the difficulty in creating a tight global initiative when there is no consensus—even among our allies—of the objective and the means of achieving it.

There was discussion of what role regional organizations could play in developing mechanisms for administering crossborder activity. Participants cited Europol and Eurojust as positive examples of a new approach to security and jurisdiction. The Asia-Pacific Economic Cooperation (APEC) was discussed as a low-cost model of a virtual, decentralized, ministerial-based institution which addresses a range of economic issues in working groups at relatively little cost and which, at least in theory, involves the private sector.

Many members of the group viewed public/private partnerships as a way to create a "race to the top" in cross-border security rather than a "race to the bottom." The United States and the EU would need to work together to develop market access rules that create incentives for the major players to abide by the rules. Some participants argued that in developing countries, which do not have the capacity to enforce existing regulations, it is important to bring private corporations into the equation. For example, if a system were created in which the World Bank, IMF, United States, and EU agreed only to make deposits in banks that agreed to enforce high standards on a global basis, then those standards would become a global norm and compliance would create profit rather than incur cost. Other participants felt that corporations were not above corruption, citing the recent bribery convictions of the Chief Executive of the Lesotho Water Authority and Acres International on the World Bank-funded Lesotho Highlands Water Project.

There was wide agreement among participants that countering the threat of transborder networks would require transnational cooperation and that resources should be applied to building capacity in developing countries, instituting peer review processes, and sharing best practices. Participants expressed a desire to explore more ways to include private actors. There was a sense that a new "grand bargain" between developed and developing countries is emerging. Because we need developing countries to develop more transparency and better governance for our own security, we may be able to apply resources to strengthen their capacity. In addition, participants recognized that the United States has basically operated on a "something for nothing" policy. The premise has been that we have better standards than everybody else and that we should get others to come up to our standards. One successful example of this kind of diplomacy was the Convention Against Illicit Firearms Trafficking, in which the United States got the OAS to adopt the American system of international firearms regulation.

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