Monday, September 29, 2014

Airstrikes may end up fueling militant wave

Op-Ed Global Times *

The airstrikes against the IS will have minimal effect. As with other militant Islamist groups, cut off the head and two more grow back, unless the core issues are addressed that give rise to such extremist movements in the first place. This US-led coalition will not do this, but will instead fuel further militancy.
Illustration: Liu Rui/GT

It has been several weeks since the US started airstrikes against the Islamic State (IS) in Iraq, with the operation recently expanding into northeastern Syria, the militant group's stronghold. While Washington has been quick to call the strikes a "success," facts on the ground tell another story.

The IS has adapted to and is rebounding from the coalition attacks. This has been noted by the Pentagon, with Lieutenant General William Mayville Jr. saying exactly that following the first raid on Syria, "They will adapt to what we've done [...] We have seen evidence that they have already done that."

While the IS is taking causalities and facing setbacks, such losses are being countered following a surge in recruitment since the attacks were launched, with more than 6,000 new fighters joining, of which 1,300 are allegedly foreign fighters, according to the Syrian Observatory for Human Rights. Such factors indicate the fight against the IS will be a drawn-out affair.

Not since the Mujahideen fought against the Soviets in Afghanistan in the 1980s, has there been such a well organized, well funded, and well armed campaign by a Sunni Islamic militant group.

The IS has had years to build up to a strength that enabled it to seize control of swathes of northern Syria and northern Iraq.

Its ranks are made up of seasoned fighters that earned their laurels in Chechnya fighting the Russians, in Afghanistan against NATO, and in Iraq fighting the US forces from 2003 until 2011.

Their operational expertise is bolstered by former Iraqi and Syrian army officers, intelligence officers and former policemen, and their governing capacity by former accountants and surgeons. It is a movement that should have been nipped in the bud early on before developing into a multinational menace, but was instead allowed to flourish by nearly every actor in the Middle East today.

Turkey opened its borders to allow militants to flow into Syria to overthrow the government of Bashar Assad; training and arms were provided to rebel movements by US and European special forces; Islamist rebels were financed by donors in Saudi Arabia, Qatar and Kuwait; and the Syrian government itself released several hundred Islamists from prison - many of whom had fought the Americans in Iraq - to weaken the rebels by turning the conflict into a national struggle against Islamic extremism.*

The IS is therefore very much a demon born from the Middle East's protracted problems and decades of failed policy decisions.

It is also what is feeding the IS' popularity among Jihadists, being a group that is challenging the established order, with its successes touted on social media.

Countering the IS is going to take more than bombs. It is about countering the ideology of the IS, which is to establish a caliphate based on Sharia law.

A major problem here is that the US-led coalition is made up of the very states that have promoted and funded such an ideology for the past 50 years.

The Kingdom of Saudi Arabia and Qatar are both Wahhabi, an extreme form of Islam that came out of Saudi Arabia in the 18th century, which petrodollars enabled to be exported globally.

From being on the periphery of the Middle East, militant Islamism has gradually moved to Iraq and Syria, and is now getting close to the center of Islam itself, Mecca and Medina.

That is what is causing concern among the Saudi elite, which had previously exported their Islamist "bad boys," only to find them back in the Saudi backyard trying to set up the type of state idealized by Saudi Arabia's fundamentalist theology.

Indeed, while the IS' highly publicized beheadings deserve to be denounced, the kingdom itself has beheaded 41 people so far this year.

The airstrikes against the IS will have minimal effect. As with other militant Islamist groups, cut off the head and two more grow back, unless the core issues are addressed that give rise to such extremist movements in the first place. This US-led coalition will not do this, but will instead fuel further militancy.  

* Addition made to published text.

Monday, September 22, 2014

Never the Low-Risk Bank Client, U.K. Charities Say Financial Woes Have Worsened

I was interviewed by ACAMS on charities and counter finance terrorism following a webinar I presented for Thomson Reuters on the topic, and based on a recent paper I wrote (see post below and to download clink on this link) -
 Irene Madongo, September 17
Recent political turmoil and ever-rising regulatory expectations for banks have made it significantly tougher for British charities to send financial aid abroad, according to a survey.
Those findings, confirmed by non-profit groups interviewed by ACAMS, will be released later this year by London-based Charity Finance Group (CFG). The majority of charities responding to the query characterized the shift as a consequence of banks’ growing averseness to serving risky clients.
“The consequences of greater de-risking by banks in terms of the additional administrative burden it places on charities and the limiting of their ability to operate efficiently can be significant,” said Caron Bradshaw, the group’s chief executive officer.
The findings by CFG follow complaints by Muslim charities about HSBC Holdings Plc.’s decision to drop their accounts due to risk concerns.
While charities have long found it difficult to open bank accounts to send money to third-parties in troubled parts of the world, their standing with financial institutions has worsened to the point that even the largest non-profits have encountered difficulties moving money.
Alternative routes
That happened last year for Oxfam International, which coordinates the efforts of 17 affiliated organizations to fight poverty and deliver aid to disaster victims. Although well-regarded, the group ran into hurdles that delayed aid for Syrians by five months, according to Bob Humphreys, the organization’s finance director.
“The last time I had a conversation with my peer finance directors, I think we were still one of the very, very small number of agencies that had succeeded in getting money into Syria,” said Humphreys. “So I suspect that it is still proving an issue.”
The delays largely revolve around internal controls intended to ensure that the funds don’t end up in the hands of blacklisted entities. Those efforts are then vetted by banks, said Humphreys, adding that smaller charities frustrated with the process may ultimately ask financial institutions in less risk-averse institutions in other countries to handle the transfers.
In such a scenario, small charities may turn to partners “willing to move the funds in some way across the border, and [the charities] simply won’t ask what the mechanism is that they are using because, as soon as [they] know, [they] will have to do something about it,” he said.
‘Chase and chase’
But charities aren’t finding trouble sending money to conflict zones only, according to Bradshaw. Some groups have encountered problems in “unexpected” places with tough regulations, such as the United States, she said.
Earlier this year, London-based Christian charity Tearfund ran into bank resistance related to funds destined for South Asia, according to the group’s finance director, Alison Hopkinson.
“We have had a lot of problems with sending money to India, which surprises me,” she said, adding that: “it just got held up and the banks were not willing to move and we just had to chase and chase until we got it through, and we were never given the explanation as to why.”
Elsewhere, financial institutions have implemented blanket bans on sending cash, according to Hopkinson.
“We have to find other banks, other ways of getting the money across,” she said. “You never know when the bank is going to change its attitude toward a certain country, so you have to keep your options open.”
Conflicting reports
Media reports—some misleading—have also contributed to the sector’s troubles.
Last October, the Telegraph amended a news story and headline claiming that “millions” of pounds from the Disasters Emergency Committee had ended up in the hands of Syrian terror groups. The newspaper changed the story after the Charity Commission, which regulates the non-profits in England and Wales, said it had “no evidence” that “huge amounts” had gone to terror groups.
“The story had to be retracted but reputational damage was certainly done, and Syria is a focus for the Charity Commission,” said Paul Cochrane, a Beirut-based freelance reporter who recently spoke on the topic during a Thomson Reuters webinar.
The commission has launched a separate investigation into whether Human Aid U.K. has implemented poor recordkeeping and fundraising controls as well as little oversight of its trustees. According to records filed with the agency, Human Aid’s income grew by 500 percent last year, with much of the money going to Syrian aid.
“Those working in counter-extremism networks were not surprised to hear that Human Aid is under investigation, given the kind of networks it is involved with here in the U.K.,” said Sam Westrop, director London-based anti-extremism group Stand for Peace. “Human Aid has hosted radical Islamist speakers such as Adnan Rashid, Abdul Hadi Arwani, Yusha Evans and Yvonne Ridley,” he said.
Human Aid denied wrongdoing in a statement posted to its Web site and characterized governmental scrutiny as “an active policy to restrict the work of charities in Syria through continuous monitoring and investigation.” In a statement to ACAMS, the group said it will cooperate with the commission.

Thursday, September 18, 2014

Scotland, Independence and Global Impact

International Link magazine, Hong Kong

The Scottish capital Edinburgh seen from Arthur's Seat

The United Kingdom of Great Britain and Northern Ireland, to use its full title, is facing its biggest internal threat as a geographical and political entity since the Republic of Ireland was formed in 1922. On Thursday, 18 September, Scotland will vote on independence.
If the outcome is 'yes' – the independence campaign's upbeat slogan – then it will end 300 years of political union – the United Kingdom (UK) – and Scotland will stand alone as a new nation as of March 2016. If the 'no' vote wins – London's slogans are “No Thanks” and “Better Together” - then the union will remain, although the issues raised by the referendum will mean it will not be totally 'back-to-business as usual'.
The independence vote has been four years in coming since the Scottish National Party (SNP) formed a majority government in the Scottish Parliament (created in 1999 with certain powers devolved from London) and announced plans for the referendum, which, as the party's name suggests, has long been a policy objective.
The battle for hearts and minds only really started playing out over the past year, and heated up in recent months as Alex Salmond, the Scottish Premier, set out his arguments for Scotland as a “Northern Light” with progressive social policies and a thriving economy, while London pushed their position. Prime Minister David Cameron told Scottish voters this past week: “Let's stick together...There's no going back from this. No re-run. If Scotland votes 'yes' the UK will split and we will go our separate ways forever.”
Until last week, the 'No' campaign was winning in the polls. But the latest YouGov poll shows that the vote will be on a knife's edge, with the 'Yes' vote getting 51 percent for the first time in the campaign. It is certainly proving to be an issue that the Scottish public is keen to vote on, with 97 percent of eligible voters enrolled, the highest ever, and indicating a higher voter turnout than for the British general election in 2010 (65 percent), the Scottish Parliamentary elections in 2011 (45 percent) or the voter turnout for the European elections in the UK in May (36 percent).
Such high political engagement by the Scots reflects the seriousness the possibility of independence is being taken. As the quote from Cameron shows, this is a major decision that cannot be easily reversed, if at all.

The For's and Against's

London argues that Scotland will stand to lose significantly by not being in the union, primarily losing out economically but also on the global stage. This is what London has focused on its “Better Together” campaign, stating that Scotland would not be able to retain the Pound Sterling as a currency if there is independence, that financial institutions and capital would flee the capital Edinburgh for London, and implying that the new country would not be economically viable.
The 'Yes' campaigners of course argue otherwise, that Scotland would be a viable country with a highly educated population of 5.3 million people – England has 59 million – and a USD$211 billion economy which includes a sizeable financial sector, cutting-edge technology and research, oil revenues from the North Sea, tourism and whisky (USD$7 bn).
It is not just economics that has raised questions and been a cause for argument. Foreign policy and military defence have been major points of discussion, particularly as such decisions are made in London and not Edinburgh. While the Scottish parliament acquired more local powers since 1999, it is London making crucial decisions that is a driving force for the Yes voters.
Of the 650 members of parliament (MPs) currently in the Westminster Parliament, 59 represent Scottish seats. With the Conservative (Tory) party in power, Scots feels even more sidelined as the Tory party is popular in England but not at all in Scotland (just one seat). This is accompanied by nationalistic sentiment and the troubled, bloody history of England and Scotland for hundreds of years that ended in the union of 1707. In short, there is the view that Scotland is dominated by its more populous Southern neighbour and does not have control over its own affairs. However, such a sentiment is shared by yes and no voters alike. Nationalists are voting no, and the vote should not be considered as a purely knee-jerk nationalist one.
What may happen if there is independence is in many ways uncertain, particularly economically, and as polls suggest, around half of Scots are not willing to make that gamble. People are weighing up whether more local and immediate power making decisions will improve their standard of living or not, and if independence is needed for that to happen.

The outcomes

If Scotland votes 'No Thanks,' then London will be forced to address many of the issues raised during the referendum, notably to give up more powers and for Britain to become more decentralised. London has already implied greater devolution for Scotland following a No vote, such as giving the Scottish Parliament more power over taxation, spending and welfare.
London will also have to face the spectre of the independence movement not going away, and if Westminster does not follow through with its pledges, this may give further impetus for a successful Yes vote in the future.
If Scotland gets independence, there will be 18 months of negotiations between Edinburgh and London to discuss the logistics of separation. Key topics will be North Sea oil revenues, the pound, divisions of national assets, and military defence. The Queen however will remain as head of state, unless a vote is later called for.
The aforementioned will be difficult topics to hammer out as Scotland comes to grips with being a sovereign state. Other issues are just as thorny, particularly foreign affairs, which Scotland would be running by itself for the first time. Whether Scotland can remain a part of the European Union is a major issue, as no EU country has split apart and then sought to re-enter as a separate member state. Scotland is committed to the EU, but that is not a decision for Edinburgh to decide upon, and becoming a member will be key for the country's economy if there is independence.
The SNP is also opposed to nuclear weapons and has called for the Trident nuclear submarines based in Scotland – the location of Britain's nuclear fleet - to be removed. While the SNP voted in 2012 to support the North Atlantic Treaty Organization (NATO) - with the precondition that Trident would be removed following independence - it has not been a popular decision within the party, while membership of the body of 28 European and North American nations could be in doubt as nuclear weapons are a key means of NATO's overall military deterrence policy.

Global impact?

The EU will be eyeing the results of the elections carefully. The body is not keen on admitting more members, or for the union to break up into smaller states. A yes vote could galvanise the Catalonians' drive for independence in Spain, along with other separatists movements such as the island of Corsica from France, and the Basque from France and Spain. There are also murmurings in some countries about the advantages of breaking up, such as more economically rich regions like Northern Italy not wanting to fund the poorer South.
Indeed, questions are being raised as to whether a yes vote in Scotland could unleash the end of the multi-ethnic state, repeating the post-colonial period when numerous countries gained independence and the 1990s following the break-up of the Soviet Union and its satellite states, leading for instance to the creation of the Czech and Slovak republics and the Balkan states. For while the world is more interconnected than ever via financial globalisation, there are more nation states than ever, with some 194 countries, the most recent being South Sudan as of 2011.
Such further devolution is not overly probable, but a concern nonetheless, and it is not just in Europe that states are fearing devolution. The breakup of a European state, particularly a former global power like Britain, is viewed with perhaps more concern elsewhere in the world, especially in states with minorities and separatist groups that are battling central powers.
The concern, like in the EU, is that there will be a call for a referendum by separatists, especially if an independent Scotland proves to be successful, with the current economic fears not realised or overcome. It would show breaking off from a bigger country is possible and achievable in the 21st century, which could be a precedent for others to follow.
Scotland's case is different from others however, and comparisons, from the economic to the historical, hard to draw with other aspiring separatists. A major factor is that Scotland has not been under any military occupation for hundreds of years. That in fact has enabled the vote to happen, as there was no need to resort to armed struggle to achieve independence, as Ireland did from 1919-1921. London however was aware that a Yes vote in Scotland is not a certainty, which cannot be discounted as a factor in letting the vote go ahead, but the vote is going ahead in what is expected to be an open and transparent manner.
Ultimately, a No vote will be welcomed in London and Brussels, as well as in many other capitals around the world. Such a result is not likely to dent separatists aspirations, but would take some wind out of their sails. A Yes vote will have much broader ramifications for the United Kingdom, the EU and further afield. Either way, the outcome of this election will be worth following.

Photo by Typhanie Cochrane

Wednesday, September 17, 2014

Compliance is the big question as FATCA law enters force

Commercial Crime International, July 2014

The United States' Foreign Account Tax Compliance Act (FATCA) is to go into force on July 1. Aimed at curbing tax evasion by US citizens around the world, foreign financial institutions (FFIs) are required to report on US account holders, but over 200,000 FFIs and 123 countries have not yet signed up. This has raised issues about implementation, as certain non-compliant jurisdictions may try to attract US tax evaders, Paul Cochrane reports from Beirut.

Financial institutions around the world have been scrambling to get ready to comply with FATCA. Under the law, FFIs have to provide information on American customers to the US Internal Revenue Service (IRS). FFIs that are not compliant will be subject to a 30% withholding tax on US sourced income, and risk being locked out of the US financial system.
It is a strong incentive to comply, while compliance is also being driven by financial institutions wanting to only deal with FATCA compliant FFIs. “Very simply, any country that is not involved (with FATCA) gets cut off from the US financial markets,” said Camille Barkho, Chief Compliance Officer at the Lebanon & Gulf Bank, in Beirut.

Long haul

FATCA was introduced in 2010, but the IRS had an uphill battle to get jurisdictions on-board due to the complexities of reporting – the law is over 1,000 pages long – and because some jurisdictions have needed to amend their domestic laws to report to a foreign regulator.
Overriding banking secrecy in certain jurisdictions, for instance, has required letters of non-recourse to be signed by clients, while banks have had to improve compliance systems.
Such requirements by foreign regulators have delayed FATCA's roll out until this year. But with a firm date now in place, there has been a flurry of jurisdictions signing inter- governmental agreements (IGAs) with the IRS. Currently 34 countries have signed IGAs and 36 countries have, in the words of the IRS, “reached agreements in substance” to comply (while no IGA has been ratified, the US will treat such jurisdictions as being compliant).
But as of June, 123 countries – out of a total of 193 jurisdictions recognised by the US - have not signed an IGA or reached an agreement in substance. And while some 77,000 FFIs have signed up, according to the IRS, an estimated 200,000 FFIs have not. The number of recalcitrant FFIs could in fact be even higher as many institutions have registered subsidiaries and other entities as well. “If you look at the list it is not 77,000 FFIs, as this includes branches or affiliates. Some banks for instance are listed eight times, so in fact there are not that many,” said Barkho.

Momentum expected

Analysts expect that more jurisdictions and FFIs will sign up to FATCA once it goes live, driven in part by peer compliance and wanting to access the US market, but with so many FFIs not compliant this could present opportunities for circumventing FATCA.
“Ultimately any smart money launderer could place funds across multiple FFIs in a range of accounts, financial and non- financial, and as long as the deposited funds fall below US thresholds (of $50,000) could launder a fair bit of money that way and FATCA does little to reduce the potential for money laundering,” said Anthony Quinn, Founder of Financial Crimes Consulting in Australia.
Such risks will be greater in the initial years of FATCA until understanding of the law increases and the IRS expands its databases. For instance, a customer may not declare to an FFI that they have US citizenship. The bank has done its due diligence by asking a customer about US indicia, although the customer has effectively broken US law.
“FATCA is a long term project, and the US doesn't expect fast results, so if a taxpayer has evaded FATCA for a while, the IRS now has the ability to ask FFIs about non- reported individuals. I think that catching US tax evaders by the IRS will be only a matter of time,” said Barkho.

Recalcitrant jurisdictions

A bigger issue where the outcome is less certain is the number of recalcitrant jurisdictions, including Russia and China (note: both countries signed up at the last minute, prior to publishing). By not being compliant, this could play into a jurisdiction's hands: “I think that what may occur is certain jurisdictions will hold out, looking for an opportunity to be the destination of funds from jurisdictions that have signed with the IRS,” said Joe Bognanno, Principal, AML Solutions – Americas, at NICE Actimize, a financial crime, compliance and risk management solutions provider in the US. “It is interesting to look at the parallels between jurisdictions that are a risk for money laundering that are also recalcitrant in signing IGAs,” he added.
Indeed, out of the 65 countries of “primary concern” in the US State Department's ‘International Narcotics Strategy Report: Money Laundering and Financial Crimes Volume 2’, March 2014, there are 30 jurisdictions that do not have an IGA in effect or in substance. Other countries that are on the OECD's Financial Action Task Force's (FATF) list of high-risk and non-cooperative jurisdictions are also not in compliance, notably Myanmar, Nigeria, Pakistan, Iran, Syria and North Korea.


What may hinder the effectiveness of FATCA is that it is unilateral. If the multilateral tax enforcement initiatives that are being mulled by the OECD and G20 go into effect, this would bolster FATCA while also leading to greater transparency and a reduction in tax crimes. “One of two things may happen (because of FATCA): account holders will either move to another FFI or some FFIs may say get me out of the US market to where we get 100 percent returns. But that will be a short term thing unless the OECD initiative doesn't happen,” said Bruce Zagaris, a partner at law firm Berliner, Corcoran & Rowe in Washington DC. “With the automatic exchange of tax information it is going to be more difficult for people to conceal their income and assets from the tax authorities, especially as tax authorities are going to be comparing notes and facilitating information, so I think there will be less not more financial crime.”
FATCA's success will depend on greater global adoption, while the IRS has indicated it will provide FFIs with a degree of flexibility in the first 18 months, such as the requirement for banks to carry out know your customer (KYC) on all clients to check for US citizen indicia. Only then will the financial sector and regulators really be able to gauge whether FATCA is open to abuse or not.
“With new regulations and controls there is always the initial execution and then a period to see how effective it is and what gaps there are, which is what we have seen in anti-money laundering laws, that people find new ways around regulations. I am sure FATCA will be the same,” said Bognanno.

Thursday, September 04, 2014

Charities and Terrorism Financing Compliance – Approaches and Challenges in 2014

White paper - Thomson Reuters
Regulatory oversight is key to protecting the charitable sector and the financial institutions that deal with them from abuse by terrorist organizations. While compliance with anti-money laundering (AML) and countering the financing of terrorism (CFT) rules has increased globally, particularly by financial institutions wary of falling foul of regulators, the non-profit sector has been given less attention and compliance at the global level is weak.
Only now, over a decade after CTF and AML regimes were established, are the regulations being re-assessed and are non-profit organizations (NPOs) being brought into reviews of typologies. The sector is also under greater scrutiny due to a rise in terrorism in the Middle East, especially due to the conflict in Syria.
At such a juncture, lessons can be learned from more regulated jurisdictions, such as the UK, which have been struggling to get the balance right between over-regulating the NPO sector, addressing the risks, and ensuring that donations reach their intended target.
This paper also discusses ways to improve compliance and enforcement, such as implementing FATF’s risk-based approach that brings together NPOs, regulators and the financial sector at the local, regional and global level.

Charities and Terrorism Financing Compliance – Approaches and Challenges in 2014 - See more at:
Charities and Terrorism Financing Compliance – Approaches and Challenges in 2014 - See more at:

This paper examines charities and Countering the Financing of Terrorism (CFT) regimes, looking into the perceived threats of non-profit organizations (NPOs) being used as front companies and conduits for terrorist or threat financing. The paper provides a global overview of regulations and enforcement related to NPOs and CFT, the current challenges and the approaches being taken to reduce sectoral risk.
- See more at:

This paper examines charities and Countering the Financing of Terrorism (CFT) regimes, looking into the perceived threats of non-profit organizations (NPOs) being used as front companies and conduits for terrorist or threat financing. The paper provides a global overview of regulations and enforcement related to NPOs and CFT, the current challenges and the approaches being taken to reduce sectoral risk.
- See more at: