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Disrupting the Financing of Terrorism
The fight against terrorism has two broad economic components. The first is essentially positive, involving the stimuli needed to invigorate the U.S. economy. The appropriate actions for this aspect of economic policy are aggressive monetary and fiscal measures to counteract the sluggish demand that was evident even before September 11 and was aggravated after that day's carnage. Elements of this positive economic aspect are covered in Murray Weidenbaum's article in this issue. The second element is preventive--cutting off, or at least reducing, the financing that makes terrorism possible. Some efforts against this financing were in place before September 11, but they clearly were inadequate and ultimately unsuccessful, as we learned to our dismay.
The open nature of U.S. society, the international financing system that exists today, and the sheer volume of capital transfers that regularly take place--more than a trillion dollars a day--make tracing terrorist funds an exquisitely difficult task. Legitimate daily financial transfers are the bedrock of what we know as globalization, and the United States has no desire to stop them. The movement of funds finances international trade, provides profits to those engaged in moving the money, and makes resources available for investment in countries that receive the flows. The international financial system is unfortunately used for clandestine and often nefarious purposes as well, such as avoiding taxes and laundering billions of dollars of receipts from the narcotics trade. Tracing terrorist funds is exactly as difficult as some have described it--looking for the needle in a large and essential haystack. [End Page 53]
Yet the effort must be made. Intelligence, human and otherwise, will never uncover all terrorist planning. The United States cannot profile everybody who might be a terrorist. Following the money trail that makes it possible for people such as Osama bin Laden or countries that harbor terrorists to operate on the deadly scale that they do is an essential element in the fight against terrorism. How can this antiterrorist fight be waged without disrupting the necessary functions of the international financial system and without intruding excessively on the civil rights of U.S. citizens and residents?
Defining the Problem:
Money Laundering and Tax Havens
Senator Paul Sarbanes (D-Md.), chairman of the Banking, Housing, and Urban Affairs Committee, described money laundering as "the transmission belt that gives terrorists the means to carry out their campaigns." 1 Cooperation between the administration and Congress to try to close off money laundering is already substantial, even if not complete. Yet no single money-laundering technique exists, and the methods used in years past are different from those in use today. Even those tactics now being employed will change as the United States, in cooperation with other countries, moves to disrupt current practices. U.S. laws to counter money laundering, when first enacted in 1986, were designed to frustrate a domestic problem. Today, currencies, monetary instruments, and electronic funds flow easily across borders--this is globalization--from and to the United States and perhaps as many as 100 other countries. Going it alone is not a viable option for the United States. Launderers include narcotics traffickers, smugglers, persons engaged in securities fraud and other white-collar crimes, profiteers moving migrants illegally around the world, and terrorists. Laundering institutions are banks that launderers control; nonbank financial institutions; and informal financial networks, such as the hawalas in the Middle East (and equivalent mechanisms in all regions). The end purpose of laundering money is to have funds that superficially appear "clean" in place to use for legitimate purposes such as buying assets, paying for imports, and meeting other obligations. A former high-level official at the International Monetary Fund (IMF) has estimated the amount of worldwide money laundering at 2-5 percent of gross global product, or between $800 billion and $2 trillion a year.
A principal at Ernst and Young, who earlier ran the Treasury Department's financial crimes enforcement network that was established to combat money laundering stemming from the Colombian...