By Sandra Huang
The fundamental role of the global financial system is often overlooked when it comes to the discussion of international conflict, where attention is primarily concentrated on the state actors involved. However, what is alarming is the actor that is beyond the state control. Given that the financial system is an essential instrument for conflict actors to access their resources and carry out their activities, global financial institutions play a critical role in blocking the flow of money and intervening such activities. Nonetheless, the fact that the financial system is globalised and run by the profit-seeking private sector has made an effective state control challenging and resulted in numerous scandals of its misuse across multiple jurisdictions by the ill-intentioned actors. Consequently, the potential of financial institutions to enable global conflict warrants further scrutiny.
As a standardised control measure, financial institutions in most countries are required by law to submit suspicious activity reports (SARs) to the authorities if a customer activity is suspected of being involved in financial crimes. In the US, SARs are filed to the Financial Crimes Enforcement Network (FinCEN), a bureau of the US Treasury dedicated to combating financial crimes. In 2019, news agencies and investigative journalists worldwide received over 2,000 leaked SARs submitted to the FinCEN between 2000 and 2017 as well as other government reports. Their investigations of the leaked files, publicised in September 2020 and known as the FinCEN leaks, attributed the suspicious financial activities to organised criminals, prominent officials, terrorists and sanctioned individuals who were linked to a number of high-profile security incidents over the last two decades.
Those ill-intentioned individuals exploited the complexity of the global financial system to launder their money so that the illegal aspects of their activities could go undetected. Although the leaked files only reflected pure suspicions of compliance officers in financial institutions, they nonetheless provided valuable trails of scandals in the past and underlined the inadequacy of control measures in curbing financial crime, which has led to a variety of security issues beyond the financial arena.
Among those security issues are socio-economic grievances and associated social unrest. They are usually triggered by the poor governance that failed to utilise public funding to provide better living conditions. For instance, the investigations into the FinCEN files revealed that the Venezuelan construction magnate, Alejandro Ceballos Jiménez, received over $146 million between 2013 and 2014 from government contracts to build public housing, while an excessive amount of the money was suspected of having been diverted to his family members through a money laundering scheme set up by Swiss lawyers. In 2015, an investigation into the housing project suggested that it was overcharged and that it was not properly furnished. The close relationship between the Ceballos family and the ruling elites has granted the family business numerous government contracts and sustained a luxurious lifestyle that can be witnessed through their high-end properties in the US; contrastingly, the ordinary Venezuelans are still suffering from the collapsed economy, poverty and insecurity. Notably, this is only a minor part of more than $4.8 billion involved in SARs related to Venezuela from 2009 to 2017, nearly 70% of which involved public money.
On the other side of the world, Malaysia was struck by large-scale protests between 2015 and 2016 over then-Prime Minister Najib Razak’s alleged embezzlement of billions of US dollars from an economic development fund, 1 Malaysia Development Berhad (1MDB). The scandal, which was brought to light in 2015 following a leak from a former Swiss banker, revealed a complex money laundering scheme, which spanned across multiple jurisdictions and involved Razak and his close associate Jho Low. While the trial over the case has been ongoing, the FinCEN files further revealed suspicious transactions involving over $2.5 billion between 2009 and 2016 linked to Jho Low and the 1MDB fund. Despite strong suspicions, those transactions were still carried out by multiple multinational banks throughout the whole period. Among the banks involved, Goldman Sachs was charged with the largest penalties of $5 billion by multiple jurisdictions for its role in facilitating and profiting from the money laundering scheme of the 1MDB fund. Troublingly, suspicions of corruption and money laundering revealed by the FinCEN leaks are not limited to these countries but are observed on a global scale, largely connected to powerful and well-connected individuals who pursue their self-interest at the expense of public good.
Another security issue stems from terrorist financing, which refers to the way terrorist groups gain access to financial resources to support their operations. To combat terrorist financing, financial institutions are on the front line to detect and block the flow of money that fund terrorist activities. However, there is much to be improved in this area. Among the most notable examples revealed in the FinCEN leaks were transactions involving over $4 billion to and from Iraqi banks in SARs filed by Deutsche Bank’s US branches and Bank of America in 2014 and 2015. During this period, the extremist Islamic State (IS) group controlled a large swath of territories in Syria and Iraq and seized over 120 Iraqi banks. Although the SARs submitted did not clearly state the senders or recipients, which made direct attribution unfeasible, considering IS’s funding sources and financial activities, there is a high possibility that related transactions were made by the IS to channel its funds into the legitimate banking system in order to purchase weapons or receive funding from overseas charities. After all, SARs were filed by the banks with delays, by which point the transactions of suspected terrorist money had already been processed through the global financial system, representing a loophole in the global counter-terrorism efforts.
The FinCEN leaks also revealed other SARs involving large international banking institutions related to the financing of the sanctioned extremist groups Taliban and Al-Qaeda. This brings about another issue that is closely related to international security: sanctions evasion. Sanctions are a series of measures implemented by a country, a regional body, or an international body against targeted countries, groups or individuals for military, social or political reasons in a variety of forms, including financial restrictions, in order to effect changes to the sanctioned targets. On the first line of defence of the financial sanctions are financial institutions, whose compliance is key for a sanctions programme. Regrettably, several global banking institutions have undermined the US sanctions regime over time. For instance, in 2013, the Standard Chartered Bank (SCB) submitted the SARs against its Iranian clients following the whistleblowing of its former employees to the US authorities regarding its breaches of sanctions against Iran. The whistleblowing and the follow-up investigations by the authorities did not give the SCB penalties that were harsh enough to cut ties with Iran. Furthermore, in 2016, an Iranian-Turkish gold trader, Reza Zarrab, was arrested by the US authorities for carrying out transactions on behalf of sanctioned Iranian entities. The SCB only filed SARs against Zarrab and these entities months after the former’s arrest. Despite a number of penalties the bank received for its sanctions violations, the FinCEN files suggest that it had continued to report suspicions on Iran-related transactions until at least 2017, most of which were processed even though an SAR was filed.
Certainly, for financial institutions, gaining lucrative business deals that are likely to come from ill-intentioned actors and protecting the integrity of the financial system are two conflicting goals that are inherently difficult to maintain at the same time. By examining previous FinCEN files, it appears that the penalties imposed by the authorities have not had deterrent effects in the long term. Moreover, under the pressure of legal requirements, filing SARs has become more of a box-ticking exercise to ensure compliance, rather than a serious effort to combat money laundering, terrorist financing and other financial crimes. This is reflected in the FinCEN files where the leaked SARs were either submitted with severe delays, without sufficient information, or in a significant volume. This leads to an inefficient allocation of resources by the FinCEN as it may invest unproportionate amount of time in delving into irrelevant transactions and have limited capacity left to investigate into plausible money laundering cases, hampering its efforts to timely, effectively detect and suspend related illegitimate activities.
To respond to this challenge, the close cooperation between the public and private sector is essential to assist financial institutions in building effective compliance programmes that meet the needs of the authorities. The prevalence of transnational transaction activities also underlines the need for global coordinated efforts to curb financial crimes. These include standardised criteria in compliance requirements across different jurisdictions so that no gaps can potentially be exploited, and a mechanism to effectively share financial intelligence among different countries to facilitate cross-border investigations.
The leak of the FinCEN files has faced criticism because it disclosed confidential information and may impede the investigations by the authorities. Financial institutions may also be reluctant to trust the authorities and file SARs in the future. However, the insights revealed by investigative journalists – who have connected the dots of security events across the world – highlighted the scale of the problem and emphasized the pressing need to improve the current system in order to safeguard not only the integrity of the financial system, but also security at the global stage.
Sandra recently attained her MA with distinction in Intelligence and International Security at the Department of War Studies, King’s College London. Previously, she worked as a security consultant in a private company in Beijing and London, collecting and analysing open-source intelligence regarding travel security in Asia-Pacific, Europe and parts of Africa. Her research focuses on financial intelligence and its use to combat transnational corruption and the security implications of global financial crime. You can connect with her on LinkedIn. (Disclaimer: opinions expressed in the article are those of the author and do not represent any organisation.)