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March 10, 2005

Impact of Terror on Financial Institutions

Moderator: Arpad von Lazar
Panellists: Peter Sutherland, Reto Francioni, Hermann Alexander Schindler, Rico Carisch, Peter Eigen

In the panel The Impact of Terrorism on Financial Institutions, the panellists explored the issue from various perspectives. The long-term impact of terrorism on the stock market, one panellist maintained, was quite limited, but financial markets continued to be vulnerable to terrorist attacks, for example from cyber space. Furthermore, the participants highlighted the absolute need to combat corruption and overhaul the existing practices and methods through which terrorist financing is fought. The panel was organised in collaboration with the Instituto de Empresa.

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Transcription / Transcripción

Moderator. Arpad Von Lazar
Good Morning my name is Arpad Von Lazar. I am a very, very old professor, and now I am on the board of directors of the Instituto de Empresa which is the sponsor of this panel. We will deal with finance, we will deal with the linkages between finance, financial markets, the stock markets and terrorism and problems emanating from this relationship. I will introduce one panellist who will walk in, Peter Sutherland, in the process of this panel. That’s the nature of international air travel you sometimes can’t match comings and goings appropriately. Anyhow Peter will walk in during the session and we look forward to his comments. The rule is mano dura, that everyone makes an opening four to five minute statement, please, please so I don’t have to interrupt anybody.

A very brief introduction I will make now, as I don’t believe in long introductions and reciting everybody’s wonderful life accomplishments on my left is an old friend of mine, Alexander Schindler, a member of the board of directors of the Union Investment group in Frankfurt, one of the largest asset management groups in Germany and in the world, formerly at Commerce Bank and formerly also Managing Director of the fine German private bank Bankhaus Openhiem.

On my right is Dr Peter Eigen, lawyer by training, former manager at the World Bank, and founder and indeed chairman of Transparency International in Berlin, a world wide NGO devoted to issues of responsibility transparency in international affairs and development, much active in the sister school, one of the founders of which was I, The Kennedy School in Boston and much involved in UN matters.

Next to Peter is Reto Francioni, President and Chairman of the Swiss stock exchange in Zurich and much with dancing around in the press and otherwise these days with the interesting events between mergers and possible mergers of international stock markets. Dr Francioni, a real scholar, a fine writer, his book on equity markets in action is indeed the hottest book in US business schools on international financial managements of markets with a very distinguished career behind him.

Right most, Rico Carisch, journalist and analyst of issues of security risks, compliance, corporate network, networks, member and consultant of member of the UN panel of experts and member of the working group on terrorist finance. As I said, Peter Sutherland, Chairman and Managing Director of Goldman Sachs International, former attorney general of Ireland, EC Commissioner for Competition, Chairman of Allied Irish Bank and Director General of the World Trade Organisation. We hope to see Peter here in a few minutes.

I thought to kick off our discussion. I would like to ask Alexander to sort of lay the ground work here in terms of the impact of terrorism on financial markets. Alexander it’s yours.

Alexander Schindler
Thank you, Arpad and good morning everybody.

I would like to start off our panel discussion with some statements on the effects that in particular financial institutions, financial investors, have phased in the aftermath of the appearance of terrorism. We have analysed different events, sixteen events over the last fifteen years involving terrorist attacks all over the globe and there are definitely three from investors point of view three important issues. One is the direct impact of terrorist attacks on the financial markets behaviour. The second is the impact on the development of global economies according to these events, and last but not least which will also lead us to discussion is the consecutive regulations that national governments, United Nations and so on have issued as a pre-emptive measure to further terrorist or future terrorist events.

Let me start with just a brief outline on the capital market impact. What we found maybe not too much of a surprise is that in most markets, in particular stock markets –we are going to talk about that in more detail–, we found very little impact over a prolonged period of time. With the exception of 9/11 most markets recovered to pre terrorist attack levels after a few days, even after the Madrid event seven a year ago, two days later the market were back to normal levels. That can tell you that on one hand you could say the market participants really do not care, I would say that a market to some extent get used to terrorist events, in particular after 9/11. 9/11 was different and so far, as it really struck the heart of the financial industry in New York. The markets were closed for sometime and market participants had basically to return to offices.

What you on the other hand can tell is that uncertainty is not reflected in the capital markets as such but in the derivates markets. The derivates markets really tell you that there is uncertainty around. If you look at option volatility you will find that for much longer period of time the derivatives markets reflects these events and uncertainties. So you say the investor can certainly hatch themselves through the use of derivatives.

Let me now talk about the global economies. There are some estimates from the federal reserves but also other authorities, that 9/11 itself has reduced the growth rate in the U.S by something equivalent to 70 billion US dollars per annum. These events initiate tremendous investments in security everywhere in corporations on a national level but also international level. Whether these are productive investments one can definitely argue about. Nevertheless there is also a second impact, there is an increase in prices due to these investments in securities and there are estimates around that prices have increased by up to 3 % after the 9/11 event. This is hurting in particular the developed economies in the western world, but also in Northern Asia, Japan for example, on an absolute basis. But on relative basis the less developed regions, Northern Africa the Middle East and other parts of Asia are much more affected since they depend very much on imports and import prices have risen also on the back of oil prices rising.

The last topic I want to address is the appearance of regulations after in particular 9/11. I personally feel that on a national level most governments have reacted immediately, whether they have reacted properly one can really argue. In some countries I would say, even in my own country, measures have been taken not only to prevent for terrorist events but also to impose transparency on bank accounts and so on. So bank secrecy laws have basically been lifted everywhere. Investors have to some extent much more difficulties to transfer money, but I guess that is something that Peter Eigen is going to approach later on.

Arpad Von Lazar
Thank you Alexander. Wonderful, you stuck to the time. Reto, would you like to take the next shot and brief us in terms of stock markets and exchange rates?

Reto Francioni
Thank you, Arpad. Let’s start.

Stock exchanges basically work to a market driven by a central order book and a network which usually covers a time zone. So this network is customised. It is not public. You can trade almost from everywhere but you can also attack it from everywhere and the task of the stock exchange is just to enable an accurate price discovery. To bring bid and ask together, to build an accurate price. So price discovery is the heart of the stock exchange secondary marketing in equities as an example. In addition to price discovery we have several other missions.

One is investor protection. Another is capital allocation. This is basically an economic mission. Then out of [ ...] just to rise share holders equity as cheap as possible. And last but not least technical security out of the view of the user reliability, trust, these are really key assets of stock exchange.

On the other hand the stock exchange is part of the final centre. It’s not the financial centre. It is just part of it and it is only one element which makes finance a place. And it’s also only one element of the value chain consisting out of the following elements: an investor has an order passes it to the intermediary or stock exchange member; from there the order is routed to the stock exchange where the matching takes place; from there the match order is routed to the sample counter party, a very important new element in the value chain. All the risk of the system is in the central counter party now. And goes then from the central counter party out to the clearance settlement organisation, delivery versus payment, and there back to the stock exchange member and from there back to the investor. So we have closed the circle.

Once again damage or the stock exchanges trust bond element damage can be caused lets say most effectively in the clearing and settlement organisation but is most visible at the stock exchange itself. So to just raise some issues probably for further discussion, the stock exchange as a part of the value chain has also a symbolical value and the represent [...] targets in combination with all the targets for instance of the elements of the value chain or the organisations of the capital market. A physical attack against country’s financial infrastructure systems as a whole which means in their entirety with the aim to inflict lasting impairment is highly complex and demanding.

Financial infrastructure services are increasingly susceptible to electronic attacks from cyber space. They should be considered to be infrastructures of national interest and be protected by continuous checks and regulatory oversights. So there we have a kind a trade off in between public utility on the one hand and the [...] companies in a regular competition.

The relevant international standards are in place but there is a tough optimisation procedure between security and profit, between security and time to market for instance, and security and productivity. A coordinated electronic attack against the infrastructure services represents the most dangerous and potentially most lasting detrimental attack any group can launch against the financial market place.

On one hand we have best practices like technical and operational redundancy, consequent business continuity planning, keeping the security infrastructure up to date. And on the other hand we have protective measures. We should probably address this process, how to build it up, and what the content is later on. But while it will simply not possible to completely avert all these threats, I mentioned by implementing best practices, it is still possible to minimise the impact on the continued operating on the service provider. And all in all I can say that the stock exchanges as such are technically in quite a good shape where security is concerned. Thank you.

Arpad Von Lazar
Thank you, Reto. By the way I am delighted to greet Peter Sutherland who just joined our panel, who blamed everything on airplanes here. Peter will come in with his comments after Peter Eigen’s comments gives his comments next. Peter it’s yours.

Peter Eigen
Thank you very much. I am also happy that Peter Sutherland is here although I was hoping that I would get some of the minutes of this Peter to talk about corruption and the impact of corruption or the relation of corruption to the theme or terrorism and its impact on the financial system. I would like to do this in two parts. One deals more with the underlying causes of terrorism and the second one deals more with the immediate causes of corruption on facilitating terrorism.

The first part came very strongly to my mind when we opened our conference against corruption in October 2001 in Prague, just a few weeks after September 11. And at the opening speech in the[ ..], Vaclav Havel made a very powerful statement about the fact that corruption is one of the main obstacles to economic development, one of the main obstacles to fighting poverty in particular in the poorest countries of the world, that corruption breeds instability, that corruption is one of the reason why there is so much hopelessness, so much misery and also so much anger in many societies of the world, anger which was alluded to in the pervious sessions by professor [...] and is indeed one of the underlying causes of violence, of conflict and in the final analysis of terrorism.

And it is this part of corruption which in my opinion will take a long term coordinated effort of the global community in order to make it possible to fight poverty, to fight misery, to fight injustice in a globalised economy where we see at this time many developments in the wrong direction and therefore in my opinion also some of the fall out which is violent and dangerous and risky for all of us.

The second point I wanted to make was also alluded to at this conference in Prague, when Ron Nobel said that the September 11 attacks would not have been possible without corruption. He said if customs, police, security professionals are corrupt no expense of high tech devices will provide our citizens the security they deserve. Corrupt public servants provide false identity documents terrorists, will move more freely throughout the world and all of our societies will remain threatened. Ron Noble made a similar statement here at this conference and this is of course one of the major immediate and concrete challenges to us to make sure that corruption will not have a devastating impact on this immediate efforts of our governments to protect us against terrorism.

And it is in this context that I would also like to mention the financial systems because it is of course the possibility of terrorists to assemble large amounts of money in black bank accounts to move huge amounts of money around the world to protect their confidentially which has tremendous facilitating impact on terrorism. It has as an aside also tremendous impact on fighting corruption because it is of course a great incentive for the [...] of this world for the Marcos, for the Noriegas of this world to assemble money where it cannot be touched by the authorities. And I would have to say there I would have a particular challenge to the financial institutions and the government institutions partly assembled in this room to give up this idea that one has to protect a certain amount of secrecy in the banking systems in order to facilitate the avoidance of tax payments. This is unfortunately still recognised by many as a legitimate reason for keeping a certain degree of bank secrecy which then of course allows others to abuse this perhaps legitimate purpose of bank secrecy.

It is in this sense that my organisation, Transparency International, has worked hard to avoid money laundering. We have tremendous support of the banking community. Many of you may know the [...] principles which have at least established a firm principle of at least of knowing your customers. We have also worked hard to get asset recovery clauses into the UN convention against international corruption which hopefully everybody will have ratified in the next couple months. We are trying to do in regional conventions and in the African union –I was the day before yesterday in Ethiopia promoting the ratification of the African regional convention– this question of recovery of assets is an important element. And of course with this would come an attempt of the international community to make financial institutions much more transparent.

The role of the financial action task force their initiative their 9 principals against terrorism which I can circulate if people are interested but they can also be found on the Internet. These are all matters which will only succeed if we all work on this together and working together in my opinion means a very strong a very competent and a very effective role of civil society everywhere in the world. Because we have seen in general in the area of fighting corruption, how traditional governments and the international institutions have failed to deal with corruption. They have allowed until about five years ago that countries form the rich North would systematically go into the Third World, go into other countries to bribe their decision makers. And thereby they have contributed so much to perverted economic management in Africa and Latin America and Asia which is at the root of the injustice and instability and violence which comes out of these regions.

So I would like to appeal again. Let’s try to get together in a magical triangle of cooperation, governments, private sector, including the financial institutions and civil society in a strong diagnosis of the roots of corruption in developing strong remedies against corruption together and in developing joint processes of introducing change on a global basis, on a regional, but also of course in a national and local context. Thank you.

Arpad Von Lazar
Thank, you Peter. Just in case you were wondering about our accents, there is no conspiracy here, expect Reto is Swiss, this guy is German, speaks with a German accent, Alexander is German, I’m Hungarian but I speak English with a German accent... So now we can turn to a genuine Anglo Saxon accent and indeed there is no conspiracy here. Peter would you take a few minutes to share your thoughts with us?

Peter Sutherland
Well the first thing I have to do is correct you. I’m a Celt. And the second point I would make is that the best English has always been both written and spoken by the Celts and particularly by the Irish but I can say that with a certain degree of modesty because I don’t have to make the point too strongly because anybody here with any education knows that what I am saying is correct.

Having said that, I was trying to reflect on my delayed flight coming down here this morning what I might say to you and I’m going to restrict myself to the non technical material that I have been given by those more expert than myself in Goldman Sachs on the specifics. But to make a couple of general observations which I think are perhaps relevant to the overall issue –and I do that from the background of having been in a very difficult time in the history of my country the Attorney General of Ireland during the period between 1980 to 1985, early 1985, when we were dealing specifically with the issues of terrorism which have been part and parcel of the recent history of my country.

The first point I would make is that it is very difficult in talking about terrorism to speak about it as if it is a universally similar phenomenon. Every case and every incidence of it has its own peculiarities its own historic origins and its owns issues. Of course, one can draw some general conclusions as to the evil that is at its core, as to the anti democratic nature of its essence and as to the damage that it causes to the sake of the development of interdependence and humanity living together, which is after all is what really globalization which we are now experiencing should be about, the development of interdependence. But I think I can draw a number of conclusions. Of course Peter is absolutely right in saying that we have to address causes and, amongst the causes for the debilitation of states, one of the most essential is the issue of corruption.

Corruption is evident everywhere. It is particularly evident it should be said in a many developing countries and the corruption whether it is the fault of the giver or the taker is a question one that can debate, but we need a global compact in terms of dealing with that issue and the work of Transparency International is extremely important in that. And I would like to say putting on a different that there are companies such as BP with which I am also associated with who have publicly declared and will and do announce publicly every payment that they make to governments in a way which clearly discloses what is happening and if the assets are sequestered in large Swiss bank accounts at least it is obvious what has happened.

The second point that I would make about terrorism and the real difficulty with terrorism and combating it in terms of getting at either the assets or the individuals is the issue of proof. Now that is dealt with I think rather simplistically if i may say so in the second conclusion of the working group in the paper which we have which seems to imply that it is possible to apply the ordinary levels of proof in regard to the determining where or what can be sequestered by the state or stopped by banks or whatever. The difficulty about terrorism just like the criminal acts which disfigure the world in which we live –bombings, explosions and so on– and indeed it underlies the debate about Guantánamo and so on, is how do you prove who is or is not a terrorist or what money is or is not terrorist money. And it’s obvious that in ordinary criminal terms the ordinary levels of proof that apply in respect of a murder for an example are much less easily established when you are talking about somebody walking into a supermarket putting down a bag with a bomb in it and blowing up the supermarket.

It is less obvious than would be the case in the instance of a robbery or a crime passional or a family related murder or whatever. The evidence, evidential issues are not the same. And it’s not the same either as a war where prisoners of war captured in uniform are incarcerated for the duration of the conflict before being repatriated and I think we have to recognise that this calls for extraordinary measures. But the extraordinary measures that it calls for also have to comply with certain basics rules or tenets of legal behaviour. But having said that I think that we have to recognise that forms of judicial reviews such as those proposed at an international level for national courts and so on are in my view very unlikely to be successful. This will be dealt with at national level it should be open to review and criticism within the national boundaries but I think that it is very unlikely if we are being realistic that a major country or a minor country for that matter is going to in effect divest itself of its responsibilities for prosecution of criminality by allowing for a review mechanism which interferes with its sovereignty in this a particular area.

So what I do however believe in is a changed element of the conventional mechanisms for proof. You have to be able to operate on a somewhat different basis, because the change that takes place in terrorist organisations and it’s evident very immediately in the context of events which are happening in my country at the moment, is that the metamorphosis from what might be described as political terrorist into blatant criminality, narcotics, murders, kidnappings and so on is very immediate. I believe that the change what people have to look at and accept is a different measure of proof and a different onus of proof. And then when we are looking at money for an example money being moved from one place to another, instead of the onus being imposed upon the authority to establish that the money is itself for the use of or coming from terrorist sources, I think that there has to be a significant onus in the first instance of explanation by the parties who are either lodging the money or taking the money from the accounts.

Unfortunately it seems, getting more specific moving off the generalities for a moment, it seems from the evidence which has been an is now available, that whilst we may have been talking about banks as the main conduit for resources, to money being moved from place to place and so on in the past that seems to be less and less the case. That is not to say we should not increase our diligence our requirements our review mechanisms and so on in banks, regulations in opening accounts, more money laundering regulations, international conventions, the law on fair enforcement and intelligence agencies working better together and so on is vitally important.

But we must recognise this is moving out of the banking system it is moving into areas which are most unusual. For an example, there is evidence of charities being used. There is evidence of property, trade, commodities, gems, all sorts of different types of mechanisms being used to transfer monies. From last year, the US Treasury reported only 9 million world wide was blocked off last year for an example which is a diminishing figure over the proceeding years. That to my mind in terms of what one imagines is really going on is piddling money, but I think therefore that even the U.S., which is devoting much greater resources and resolution, it has not been able to really get ahead of the game as far as I can see in terms with what is happening. Obviously, we have to pursue it further to international cooperation.

We have a situation now where the countries that have criminalised terrorist financing in 2004 now amount to [...] in certain situations. Thank you.

Arpad Von Lazar
Thank you, Peter. Rico, maybe you would like to tie together some of these arguments and also tie in the report of the Task Force if you could please in the next five minutes.

Rico Carisch
Thank you. Yes, of course we came here very much with the intention to find ways to do this within a democratic context. And what Peter Sutherland just laid out is the sort of thing that we want to prevent, and that is what we worked very hard on in the last few months. I think one of the conclusions he made very early on is that within the conventional context of thinking and approaching global threats we are probably not going to be successful with terrorism or with counter terrorism efforts. We have to rethink the entire structure. We recognise that this is a slippery path. One easily gets into highly idealistic concepts that have nothing to do with reality.

So we took the premise from the [...] that this has to be made the primary responsibility and will remain the primary responsibility of individual nations but our significant tasks that should be at least shared with the international community in the form of existing or new multilateral organisations. One of things that we have come to see clearly when we have reviewed all the various information that are available, and not too much is actually available in how terrorism is funded, there is no single method that stands out. There is no dominant technique on how terrorists raise funds. They are operating in a extraordinary opportunistic way. They are using whatever is locally available to them in whatever region they are active with. So therefore the response cannot be one single method either.

One of the things that we also start to observe is that this very confusing [...] scenario that terrorists present us with has invited a wide spread of responses that really are related to extraneous agendas that are pre-existing. One suddenly wants to suddenly regulate tax havens, one wants to get rid of all the informal remittance systems, which are also vitally important for Third World populations, one wants to mix it up with corruption and of course organised crime. Well, sure, all of these things play a role but I think that one major and most difficult challenge we are facing with terrorism funding is that it is still possible –and 9/11 I think demonstrates that very clearly– 19 attackers were able to open bank accounts that deposit funds, transmit them, withdraw funds in perfectly normal banks in perfectly fine countries, no offshore jurisdictions and commit the attack.

Now that’s an astonishingly boring conclusion. And at the same time that is the hugest challenge one can even imagine. What are we going to do to prevent such a thing from ever happening again? How can we prevent apparently normal looking people to walk up to a bank open a bank account with the ultimate intention to a terrorist attack. Well, so we have the US Patriot Act and many other systems with which we’ve been trying to strengthen the due diligence on the financial angle. That is really what we have been looking at. Behind that whole thought is of course a very similar motivation that Alexander and Reto have. We need to protect the integrity of the financial industry. That is vital to our way of living. What we find out is that enormous amount of money has been spent, an enormous amount of know how and new technologies have been introduced to bolster the due diligence systems that the financial industry needs to perform its job, but it still is not sufficient. It still is obviously possible to use our traditional ways of dealing with money to advance terrorist goals. So that is when we start to think creatively. And one of things that we find out that probably has not been sufficiently done is look much more closely at whether we really have the pertinent pieces of information that would serve us well in a preventive scenario.

Of course we have intelligence and law enforcement that are hopefully at the fore front of gathering information. But the flow of that information to those people who in the first instance really confront terrorists, namely the banker, when the organiser of a terrorist funding network steps up and wants to start organising his network that he needs. That banker most likely does not have the relevant information. The same also goes for when then terrorists funding operator wants to establish cooperations between the various parts of that network that he wants to build he can shuffle money back and forth without being detected. The incorporation services and the corporate registers probably don’t have that information that is relevant in the preventive system.

So we feel very much that there is a need to take a new step with this whole thing and try to in great detail analyse where can we optimise the sharing of information and really take our cues from what we know not what we imagine terrorists do.

There is of course a great deal of concern and those of us who have worked for the UN and have worked with the sanction violations know that there is a big problem or a potentially big problem with the sanction regimes. We are putting people on sanction lists, we are freezing bank accounts, whole assets in fact without ever presenting any serious evidence. These 50 nations who are on the Security Council who make these decisions, make these decisions behind closed doors. For those that are affected by these decisions there is no really good recourse. When we look back at the very beginning of this war on terrorism financing, we find that on November 7 2001 the US, and two days later the United Nations Security Council, put two corporations on the black list, [...] and [...]. We have now learnt, as we have been monitoring the events that, at least according to the 9/11 Commission report, this freezing of assets and [...] /11 report, clearly the FBI, the people who were working on that case express concern with all the allegations and rumours and [...] already.

So that was not a good thing and also probably counter productive. We need to be much more creative in how we approach this whole problems and we also need to be fair and democratic and that is why we think that there has to be some sort of judicial review on some level. At the very least, when we act multilaterally, we have to have also a multilateral judicial review, inbuilt.

Arpad Von Lazar
Thank you, Rico. I think, before we open up the discussion to the floor, maybe there might be some comments by members of the panel. Maybe Alexander first and then Peter if you would care to.

Alexander Schindler
Let me just refer to your statements, Rico.

I think that over the last 15 years, let’s say after the end of 20 years of cold war period, financial markets have developed into basically a global free flow market. Before that period you had much more measures, much more difficulties to transfer money without getting the attention of maybe several banks, etc. So this is one part of the dilemma. The other part is that if we look at the findings after 9/11, a lot of attention could have been paid in advance by intelligence, by maybe financial authorities, and so on, in the preparation of what later on turned into the 9/11 event. I would in that context support what Peter Sutherland said. I think that in particular the national governments have to in a way do their homework to get in advance that information to the respective responsible authorities on a national basis. And the second issue is how, as you approach the issue, how are we going to share that information on a global basis.

But, nevertheless, there is still the fact that a lot of countries have not signed on to these agreements and its no longer necessary that you are placed in a capital market in the US or continental Europe anywhere to get financing from the private sector or other segments of the market to finance terrorist attacks on a global basis.

Arpad Von Lazar
Thank you. Peter.

Peter Sutherland
Yes, thanks.

I would just like to correct what may have been a misunderstanding in what I said. The last thing in the world that I was saying was that you should avoid judicial review or that you should not have mechanisms of judicial and transparent adjudication in the case wrong doing. What I was saying, however, having been at the face of this, in the face of it myself, that the only way that you can actually deal with this as we did –for an example, in one case, in Ireland we had the initial stage of proof being an expression of belief, no more than that, by a senior police officer that somebody was part of a terrorist organisation and that was sufficient to transfer the burden of proof to the individual to explain and argue why he wasn’t, and obviously, then, there would have to be a debate about it.

These are very difficult concepts. We have a criminal assets bureau in Ireland now which has been very successful and has just been reflected in British legislation which has followed it, which again allows for an intervention by the authorities not outside the judicial process –and I’m not arguing for, and in fact deeply oppose locking people away without any open process. I think you are in far greater danger them of creating sympathy and igniting more difficulty that you started with. But that is quite different from saying that we don’t need a different form of process an evidentiary mechanism for dealing with the peculiar difficulties of anonymous, entirely anonymous criminality and terrorism. And I think we do have to face up to that.

And my only other point was that I just don’t think it is real to have a multilateral review process of domestic terrorism legislation and its implementation. In an ideal world, I’d like a world court and everything. That’s not the point. It is what is realistic, and that is absolutely unrealistic.

Peter Eigen
I am very glad that Peter clarified what he said. Yet I would like to make one brief comment. It is perhaps a mistake to deal with terrorism with weapons of criminal law. It is in that area that societies have developed due process protection, burden of proof for the state, and so on, and I feel terrorism is a method which should be particular in its preventive tools should be dealt with not as a criminal matter, unless it can be proven to be criminal. It should be dealt with in a way that it protects society which may have to include for instance reparation of damages if innocent people are hit like one of the companies in connection with the September 11 black listing. So in my opinion it would be very important to develop a separate system from criminal law.

But I also believe that there have to international standards in particular on human rights protection which one should not dismiss as unrealistic. They have to be enforced in particular in a situation where one of the underlying reasons of terrorism is a loss of confidence worldwide, in particular among the young people in poor regions of the world, that democracy is a principle stable humane system of organising mankind, and therefore I think it is dangerous if we say it is unrealistic to have certain basic standards, like you do not torture people, like that you do not punish people before you have a burden of proof in the sense of criminal law, and this is in my opinion a very important finding which we should come up with here.

I only want to make one quick other point which is that I am a bit disappointed that Rico sort of dismissed some of the issues which I have raised. Corruption, the issue of dealing with tax havens, and so on, because this is indeed part of a holistic approach to terrorism which he advocates himself. It is in my opinion one of the problems that for other reasons, which some people still recognise as legitimate, that avoidance of tax payments in certain legislation in certain jurisdictions across the world, one protects secrecy in financial flows, and that of course creates a free [..] of terrorists who are able to move their financial assets around the world. And of course corruption, as I tried to demonstrate, is very much as a rule both of the breeding ground for terrorism, which is abject poverty for billions of people in the world, but also in terms of undermining the capacity of the authorities to protect society against corruption.

Rico Carisch
I think one of the biggest, I’d say, challenges of this topic is that in the stock exchange business you are talking about spread between [...]. On one hand we are talking in a general abstract way of this topic, and on the other hand, on the other side of the spread, it’s really the facts which matters. And to this point, and we are in between sometimes a little bit more on this end sometimes a little bit more on the other end. But it seems to me that especially the stock exchange business, what we did the last 10 to 15 years, and to come back to a key principal you mentioned, we enhanced transparency in introducing IT. We avoided the intermediary, we got to open all the books. So with the IT, every transaction becomes more traceable and you can really trace it and the question to me is now how do you use this tool of IT.

You have the data but the problem is the volume. You have the information but the problem is the skills of people; how to analyse it, how to go forward, to go back really to the market, to the facts, and to figure out, out, of this huge volumes what can be done.

So to me I think that it is really key how to use this tool of IT and like a hammer you can destroy something you can build up something or you can put it in the corner and do nothing. So there I see a lot of skills there sometimes to get out the facts and figures, how to approach it. Lack[?] of skills, knowledge on one hand, and on the other hand, if you are talking bottom up to get nearer to the regulations and to international and let’s say continental networks, the relationship in between the top down approach, to put it this way, and the bottom up approach. I think both are necessary but each alone is not sufficient.

Moderator. Arpad Von Lazar
Thank you. Rico, would you like to...? Then I would like to open up the floor for questions.

Rico Carisch
I hope I didn’t give anyone here the impression that I was not in favour of fighting corruption and all for transparency and so forth. Maybe I need to clarify the context in which we worked. We were asked to look at how terrorists use the financial systems and to come up with solutions for that. In our review then of the available data, we wanted to find some answers to very the specific steps that they have to go through, in order to commit their attacks. But I fully realise that of course that there is a larger picture behind that which is I think covered by another very good working group, who have been looking at the underlying economic issues that lead to terrorism. And absolutely we need to have more transparency.

We have to have effective means to combat corruption and I mean just one of the ideas that we have been bouncing around, not in this group, but in other groups that were participating. Why for example not every nation simply open up their corporate registry and really put them out there and put them on the Internet. A lot of very difficult research work and due diligence work could be eliminated immediately, many countries do it, but not all. I mean we need to have practical global standards that really don’t take away that much so that is one thing.

Moderator. Arpad Von Lazar
Thank you. Let’s open up to the floor. Guillermo, you wanted to make a comment or question. Please direct it to any one of the members.

Guillermo
Yes. Just to make another provocative comment.

This all is a question of information, to know how and why terrorism is financed. The information cannot be gathered if for instance you only use cash. If you only use cash there is no trace, so it is very difficult to prove anything. Then there is another step in which you use cash to open bank accounts in circumscriptions or countries that have secrecy, so therefore you can move through the bank accounts. Then there is a trace. But if you move it always within secret bank accounts, it is almost impossible to find it. Then there is a more risky [way]. There [are] corporations that we know that exist in many countries that devote some money to terrorism and they finance terrorism. This is more risky because you can find out. Maybe after a terrorist attack, but you can find out.

But coming back to the cash, that is the simplest. The issue is that still today governments love to have seniorage. So the governments would prefer themselves to finance through the issue of notes that are a perpetual debt without being remunerated, so it is like perpetual bond without interest rate and they like to get this way of finance as an alternative issuing bonds. This is a big issue because now we have this discussion at the ECB. When we created the Euro we said, look, how many dollars are going around the world outside the United States in the form of notes? Almost 500 billion are circulating around the world in cash terms, and of course the biggest amount of a dollar note is a hundred. So there was a discussion. If we want to compete for seniorage with the dollar we should have an even higher note, 500 Euros. But in fact these notes usually end up in the hands of people that are using them for more or less tax avoiding or criminal situations. So I mean the issue of cash is a very interesting one to look at; seniorage, to see if we could reduce the amount of seniorage of the governments by reducing the amount of cash going around the world in big nomination notes. Thank you.

Moderator. Arpad Von Lazar
By the way there are 2 members of the panel here who have 100 dollar bills in their pockets. Any comments to Guillermo’s suggestion? Other question please?

Delegate from the floor
Thank you. I am Miguel García […] from the Ministry of Foreign Affairs of Spain and I play a modest role in following financing of terrorism in our ministry and I’d like to thank the panel for their comments and for raising the many of issues that we deal with on the issue of terrorist financing.

I don’t want to make any comment, just two questions which might in themselves be comments. You talked about the cost for the financial sector of terrorist attacks, one of them being the regulations consequent to terrorist attacks which are imposed on the banking sector, the financial sector, etc. As I have an interest in finding out a little your opinion on the balance between how onerous regulations are for the financial sector in general and how effective or efficient you deem them to be from your point of view. Related to that, I would also be interested in hearing how the financial institutions feel in general about obligations to block accounts and transactions of the customers subsequent an administrative or quasi judicial decision or a judicial decision. Thank you.

Arpad Von Lazar
Who would like to take a crack, Peter.

Peter Sutherland
Well, just one aspect of it. If you take the cusp of anti money laundering over the last 3 years, KPMG in 2004 did a survey on this. And the cost of anti money laundering compliance has risen by 61% over 3 years. This regulation I think is driven by a concern about terrorism as much as organised crime. And that was the point I was making about the overlap between organised crime and terrorism. Again, I’m going back to my country with a 20 million pound robbery in Northern Ireland in the recent past which has been ascribed to terrorist organisation. FARC in Columbia is another obvious example. So the cost is going up. But I think, as far as I know, there is a general recognition and understanding of that rather than a rejection of it by financial institutions.

Alexander Schindler
As an additional comment on your question with regard to legislation and how far national governments basically really practically enforce law on money laundering and other issues, what we found, in particular in Europe after 9/11, was numerous amount of different regulations and if you look at the process of transferring EU law into national law, you will find that at the end of the day the national laws all are different. So once we talked about global coordination. I doubt that this is really existing. And on top of that we feel particularly from the financial industry, that most regulations are not really well thought through before they are issued because we find so many amendments which at the end of day, in a practical matter, have to be programmed somewhere until they become effective so we lose a lot a efficiency. And maybe just another comment from my end on the cash transfer or the cash amounts. Maybe that’s another reason why the ECB is introducing the chip [?] to the notes so that you not only can make the notes more reliable but also can basically trace each note from each owner to the next.

Moderator
Peter your comments

Peter Eigan
As far as the attitude of the financial institutions to regulations are concerned, it is very obvious that they find it onerous and counter productive. If you talk to bankers in Germany for instance, they will say they make tremendous disclosures and basically it all disappears somewhere in the waste paper basket and is useless, but I know that indeed there are systems being introduced in particular against corruption in which suspicious transactions are observed and they include live cash payments. In some of the developing countries which are most hard hit by corruption, like Nigeria for instance, new financial intelligence units are introduced with the support of some of the international donors in order to make sure that they understand what is happening, that they can trace the money, in particular also investments in connection with the petroleum sector and so on, from the point of income into the country all the way down to the end user.

And they expect from this, and they are very enthusiastic about it, the possibility to even make a dent on corruption in a country like Nigeria. But there we should remember that the UN convention, which by now 160 countries have signed in the last 2 years, [there is] this recommendation that developing countries should be given assistance to build up their capacity to deal exactly with these costly and complex issues. I would like to make this particular appeal, not only to ratify the convention but also, amongst rich countries, to be ready to support countries in the developing world to use these new tools and use legal requirements which have been put into place in an international context.

Moderator
Rico, you wanted to...

Rico Carisch
Yes, just briefly. I think that’s exactly the biggest problem or one of the biggest problems that we find. You have actually quite a lot done. There is a huge amount of investment by the financial industry to control all these laws and regulations. Part of the reason why they are not as quite as efficient or as successful as they probably should be is because the information that is being provided to the financial industry is not sufficient is not concrete enough and every compliance officer at every bank will tell you he have about 50 Ali Ahmeds in his client list and of course there are about 3 of them on the UN black list. Now which one is it, it is impossible. There has to be much more specific, much more targeted information sharing.

Arpad Von Lazar
Thank you. Celia and then the gentleman back there.

Participant from the floor
Thank you. I am Celia Bianca from the Instituto de Empresa. My question will be related to Islamic banking. For the last three years there has been a lot of complaints from the Islamic banking industry in Europe that they have been much more regulated and controlled than other Islamic institutions operating in conventional banks like Barclays or any other. Now I would like to ask maybe Peter Eigen or any other of the panel, is there any other kind of higher collaborations now with the Islamic banking industry in Europe in order to get some kind of consensus for transparency?

Arpad Von Lazar
Would anyone like to answer on the panel?

[...]
Well, yes actually if I can reinforce your point, even. I notice that western financial, particularly the investment groups of course are now offering also participation in sharia style or Islamic style investment without interest rates, what kind of due diligence goes into that before you decide with whom you partner up?

Moderator. Arpad Von Lazar
Well, we seem to be at a loss here. The gentleman at the back.

Participant from the floor
I am Grzegorz Ko_odko, professor of economics and Director of TIGER –Transformation, Integration and Globalisation Economic Research–, former Polish Deputy Premier and Finance Minister. I would like to support what my friend Guillermo [...] has said and I wouldn’t make an illusion that one can accomplish a lot through the attempt of controlling the financial flow as far as counteracting terrorism is concerned. I don’t know any terrorist, at least I am not aware of the fact, but I presume that they are not extreme idiots and to transfer money in the contemporary way is very, very easy. What all around us we do now. So what we can in a realistic way is to make the things as difficult as possible but nothing more. Because otherwise we may contribute to the implementation of another major terrorist aim that is paralysing the international finance system.

Maybe this is also on the agenda to also make things more difficult for the decent harmless people, business bankers, etc. Of course there must be political commitment to fight as much money laundering as financing of international terrorism. And from a technical view point there is not that big a difference. Maybe the big difference is that I think that now the financing of the terrorist network is very much decentralised. Nobody is transferring a million dollars from one Al Qaeda secret account to another secret account of Al Qaeda cell because that is too risky for these people. There are making detail business which is very, very difficult to scrutinise unless one has intelligence information or unless there is a failure. If one is coming to US one has to declare if one is bringing in cash more than 10 thousand dollars. Or one can take a risk not to do so. But therefore there is the risk that one can lose the money or one can get in very big troubles.

So I think that a political commitment here is very important. The world has changed, maybe not only because of these terrorist attacks, but also because of other nasty things. For instance, the [...] capitalism in Russia during the transition in the 90s and stealing millions of dollars during the mismanaged privatisation process. [The] explosion of this system was somehow tolerated by our financial partners in the West. Was it a secret they didn’t know? They did know. Simply there was a lack of political commitment to act against because the policy was “ok, let’s bygones be bygones and then it will not be important in the first place where the capital had come from. But it came from untransparent [...] businesses so for that reason simply I would like to say that my point is that we should be as tough as possible but we shouldn’t expect too much from this side as counteracting terrorism is concerned, and maybe the people which are not professionals or technicians in financial matters, they ask the bankers the finances why do you allow for the money going round. Because it is virtually impossible to close the pipeline without making much more harm where we want the money to flow freely because of the business, because of the globalisation, because of the decent and harmless capital flows. So that is my point and support for what professor [...] said. Thank you.

Moderator
Thank you, Alex you need to respond.


(Continued in: Impact of Terror on Financial Institutions, part 2).


Photos



Panel 'The Impact of Terrorism on Financial Institutions'; left to right Peter Eigen, Chairman, Transparency International, Germany; the moderator, Arpad von Lazar, Professor Emeritus, The Fletcher School, Tufts University, USA; Hermann Alexander Schindler, Board Member, Union Investment, Germany; Peter Sutherland, Chairman, Goldman Sachs International, United Kingdom. (Photo: Club de Madrid)

Panel 'The Impact of Terrorism on Financial Institutions'; left to right Rico Carisch, Journalist and Analyst, USA; Reto Francioni, President and Chairman, Board of SWX-Group, Italy; Peter Eigen, Chairman, Transparency International, Germany. (Photo: Club de Madrid)

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