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