Tuesday, December 06, 2011

I spy money – no you don’t!

Money Laundering Bulletin

Intelligence agencies are, by definition, secretive. So, too, are their budgets and how they finance covert activity, especially in foreign jurisdictions and where they carry out so-called ‘black ops’. If spies use techniques to quietly transfer funds that resemble the practices of organised crime or terrorist groups, there is one major difference, writes Paul Cochrane: the sometimes tacit cooperation between government agencies and the financial sector.

Espionage accounts

Of course, nailing down proof of such collaboration is not easy. In researching this piece, MLB was not, alas, granted access to the accounting books of the world’s intelligence agencies, so it is based on informed sources and research. Interestingly, of the anti-money laundering (AML), financial crime, compliance officers and other experts contacted, the vast majority were surprised by the topic itself and not able to comment. “Exotic”, the article was called by a few, while, in conversation with others, the words ‘Hollywood’ and ‘James Bond’ cropped up. Some, intrigued, speculated as to how spies could be financed but thought that money laundering was not involved. Others did not return requests for interviews despite initial interest. One reply was revealing, stating the article was “inappropriate”…

Telling though is the finding that the topic of spies and money laundering seems not to have been given much thought from a regulatory or risk perspective by AML professionals, perhaps unsurprisingly as they are primarily focused on regulations relating to organised crime, illicit transactions and terrorist financing - espionage funding does not, for example, feature in the Financial Action Task Force’s (FATFs) 40+9 Recommendations.

Furthermore, intelligence agencies, with the exception of those linked to ‘rogue’ states, are not deemed a risk for compliance and due diligence. After all, the secret services work closely with the finance industry to thwart money laundering and terrorist financing, as well as monitor for those on sanctions lists. There is also a degree of mutual understanding, with bankers, at least at senior levels, very aware of the diplomatic and national security ramifications if the funding methods of intelligence agencies were exposed.

No information then was available on whether and if so which illicit financing techniques are utilised by the intelligence services – except by venturing into conspiracy theory territory (the CIA, MI6 involved in drug trafficking and so on). But we do know that they have used illicit financing in the past and therefore, most probably, are still doing so.

The most famous case in recent history is the Luxembourg-registered Bank of Credit and Commerce International (BCCI), which was brought down in 1991 for laundering money for such a plethora of dictators and criminal enterprises that it was jokingly referred to as the ‘Bank of Crooks and Criminals International’. One customer was the CIA, which used the bank to finance foreign operations, including what became known as the Iran-Contra scandal, as well as to fund the Afghan Mujahideen to fight the Soviets in the 1980s. The CIA’s involvement with the bank was the subject of a 1992 US Congressional report by Senator John Kerry. The then incumbent head of the CIA, and recently retired US Secretary for Defense, Robert Gates, was also questioned.

The long game

While the Cold War is long gone, internecine struggles between western and Russian intelligence agencies continue. Last year, 10 Russian spies were arrested in the US following a seven-year investigation by the FBI. An eleventh member was the suspected paymaster. The sleeper cells had jobs, owned houses and ran front companies. “Money laundering happens but we don’t find it so much with the intelligence services,” according to Mark Birdsall, editor of Eye Spy, a magazine on international intelligence. “In some respects money laundering has been overtaken by the creation of legitimate companies,” he said, “Now rather than create spy networks, the Chinese, for instance, are setting up networks to create front companies in the US, and have managed to win defence contracts, a problem as, once inside the industry, they can access all sorts of secrets. The Chinese and Russians are very patient, and will wait years to enable an operation to happen. Usually it is hiding in plain sight.” Clandestine operations by the likes of the CIA also work in the same way, added Birdsall, spending years to establish a seemingly legitimate front company. “It is very similar to what organised crime is doing,” he said.

Indeed, Russian intelligence agencies have been linked to organised crime and money laundering. In a February 2010 leaked US embassy cable, Spanish national court Prosecutor José Grinda Gonzalez alleged that Russia’s Federal Security Service (FSB), the Foreign Intelligence Service (SVR) and military intelligence (GRU) “control organised crime in Russia” and launder money through front companies across Europe: the claim was made at the US-Spain Counter-Terrorism and Organised Crime Experts Working Group meeting in Madrid in January 2010.

The Russians, on the other hand, have accused Britain and the US several times in the past few years of using non-government organisations (NGOs) to provide cover for foreign espionage, going so far as to issue a new law in 2006 to require NGOs in the country to re-register and regulate the flow of money from external sources after 20 foreign agents and 65 people linked to spies were arrested in 2005. Moscow’s fear of NGOs has resulted in a new moniker for this phenomenon, GONGOs – ‘government-organised non-governmental organisations’.

Whatever the state of the Cold War hangover, it is, of course, the Middle East that is the key focus today of many intelligence operations. But how intelligence agents and informers in the region, if caught, are financed is invariably not revealed by the investigating authorities. In Lebanon for instance, 150 people were arrested and charged with spying for Israel in 2010 - Lebanon’s government authorities refused to comment on how the Lebanese accused were funded, but local media reports have alleged that agents made trips to Europe where they were met by a handler and paid by transfers into European bank accounts or simply in cash. GONGOs have also been flagged as possible revenue conduits.

“Someone is paying them. In a small country like Lebanon there is a huge growth in NGOs. You see their budgets and salaries, but when you visit their offices something is suspicious,” said Camille Barkho, manager of Amerab Business Solutions in Beirut, which sells AML software in the MENA (Middle East and North Africa) region.

Funding can also be very straightforward, with transfers to an informer or agent wired to an account under the US$10,000 threshold in order not to arouse any suspicion, said Barkho. Last year, according to United Arab Emirates (UAE) police reports, investigations into the assassination of a member of the Palestinian group Hamas in Dubai, carried out, say local authorities, by the Mossad, Israel’s secret service, revealed that the hit squad openly used credit cards to finance the operation.

Public funding

Of course, arguably, the major western intelligence agencies do not need to launder money or engage in illicit financing due to the immense budgets at their disposal. The 16 agencies within the US intelligence community, which includes the CIA and comes under the control of the Defense department, had a budget of US$80.1 billion in 2010, it was publicly announced. According to Gordon Thomas, an investigative journalist and author of ‘100 Years of M15 and M16’, funding for the two agencies and Britain’s GCHQ (Government Communications Headquarters) is decided upon by what is called the ‘Secret Service Vote’. “It is a figure not listed anywhere in government records. It is not voted on by anybody, or by Parliament. Only the prime minister sees it, and he is not told what it is for,” said Thomas. “The figure is decided by the heads of the intelligence services; if you need a billion you get a billion, and you don’t have to explain how it is used. The current figure I have for 2010, and the same this year, is UK£4.5 billion.”

Public-private partnership

For money to go from government accounts into the banking system and not be linked back to the state, high level contacts are used. “I know that MI5 and MI6 have former City, high-ranking people who joined them to run the finance end of things. They would then call the head of a bank to arrange for an account to be opened. It is all done at the highest levels as money is critical to make the intelligence world tick,” said Thomas.

Look the other way

Compliance officers would clearly not be aware of such accounts. AML professionals, said experts, would have to look out not for intelligence agency accounts connected to the country in which the bank is operating but for foreign agents operating in their jurisdiction who would pose a regulatory risk. That said, the Association of Former Intelligence Officers (AFIO) in the US believes the readers of MLB do not need to know how intelligence agencies are funded or if they use illicit means. “We do not see where public comments or articles on this topic serve the best interests of the US or intelligence community seeking to defend itself from terrorists or spies while having to deal with those who will secretly aid, accommodate, house, protect, and hide them from discovery or capture,” the AFIO stated in an unsigned email. “Funding the people or enterprises needed to effectively run intelligence operations is a crucial trade-craft technique in our national defense arsenal, and it does not belong in discussions in the public realm merely for readers to while away reading time with interesting, inappropriate articles against the self-interest of their country and themselves, whether they realise that or not.”

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