The U.S. Treasury maintains a sophisticated global banking network that tracks money for laundering, destinations, use, recipients and interim banks. But why is the top person in charge of tracking dark money not using the tools when it comes to the increasing wealth of Islamic State? The answer is chilling.
Corruption Currents: Islamic State Receives Millions in Ransom Payments
Bribery:
Brazil’s bribery probe of Petrobras SA is threatening the firm’s debt financing. A suspect in the scandal turned himself in. (Bloomberg, AP)
The former chief executive of a Virginia defense contractor pleaded guilty to providing gratuities to a federal contracting official, and the company agreed to pay a $300,000 fine. (Washington Post)
Fewer Filipinos are giving bribes, according to a survey, but opposition politicians doubted the findings. (Philippine Star, Philippine Daily Inquirer, ABS-CBN News, Manila Standard-Today)
Tom Fox navigates resource reductions, spots the Chamber of Commerce defending the FCPA and discusses doing business in India. The FCPA Blog notes a purge of ad men in China and reports on recent remarks from the SFO director. The FCPAProfessor runs a guest post about challenges in pursuing bribe-takers.
Fraud:
A grand jury found that fraud persists in programs meant to bring New York contracts to businesses owned by women and minorities. (NY Times)
Money Laundering:
An Indian regulator tightened regulations targeting money laundering. (Economic Times)
The founder and former president of a community bank was sentenced to two years in federal prison for bank fraud and money laundering. (AP)
A senior executive FIFA’s ticketing and hospitality partner could be jailed if he returns to Brazil to await trial for charges including money laundering, racketeering and illegally selling World Cup tickets. The executive denies the charges. (Bloomberg)
Iran and China agreed to fight money laundering together, Iranian media reported. (FARS)
A Thai court extended detention for family members accused of helping their “big brother,” a former top police official, launder bribes. The two denied the allegations. Thai police say the “big brother” confessed to the charges, including soliciting bribes for job appointments and allowing illegal gambling and oil smuggling. (Bangkok Post, AP)
Sanctions:
Republicans are fuming about the Iran nuclear talks extension. Both sides are racing to sign a deal before the new, Republican-controlled Congress takes office. Oman has played a low-key but important role in the negotiations. (National Journal, NY Times, Guardian, ABC News, BuzzFeed)
The extension in talks leaves a U.N. atomic agency probe in limbo; it needs more money to continue the investigation. (Reuters, Reuters)
A European court awarded damages, for the first time, in a sanctions case. (European Sanctions)
Terrorism Finance:
The Islamic State has received between $35 million and $45 million in ransom payments in the past year, a U.N. report said. (AP)
How can a bank know if it’s holding money for a terrorist? (Top Broker)
General Anti-Corruption:
China’s corruption watchdog launched a series of inspections of state-owned enterprises and government bodies, state media reported. (Reuters)
FIFA’s general secretary said the body will need years to repair its reputation. (NY Daily News, AP, Reuters)
The first tennis official to be banned for life from the sport for corruption said he’s innocent and is being used as a scapegoat. (Bloomberg)
What do you do when corruption is treated as part of the business process? (HR Reporter)
Corrupt politicians only suffer when there are local media organizations to report on it. (Nieman Lab)
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No Blacklist Yet for Islamic State Banks
Why the United States isn’t using its biggest financial weapon against banks in the Islamist militant group’s territory.
In June, the Islamic State of Iraq and al-Sham (ISIS) militants inspired fear and awe when they swept into Iraq’s second-biggest city, Mosul, and reports spread that they looted the city’s banks and walked away with more than $400 million.
Those claims were later contested, but the group’s reputation for being not only savagely violent, but also incredibly wealthy, was already set. In July, the Financial Times reported that armed guards from the Islamic State, as the group later renamed itself, were stationed outside the banks, but that the banks’ coffers had not been pillaged.
Over the summer, the United States continued blacklisting members of the group and its supporters, but not the financial institutions in territory under Islamic State control. The Treasury Department traces its efforts against the group and its predecessor, al Qaeda in Iraq, back to 2004. In August, the United States froze the assets of three key terrorist financiers, one of whom allegedly helped funnel money through Kuwait to ISIL, as the U.S. government calls the group.
In September, 11 more names of individuals were added to the list for allegedly helping move funds and fighters to facilitate terrorist organizations from Iraq to Indonesia. Still, the banks that were so brazenly overrun in Mosul and those in the rest of Islamic State-controlled territory were never named. The reasoning behind that decision illustrates how fraught the U.S. fight to disrupt the Islamic State’s funding has been, as even the best U.S. tools for fighting terrorist financing are ill-suited to the task.
The Islamic State evolved out of earlier extremist groups in the region and improved upon their financial models as it grew. Instead of relying mostly on outside donations, the Islamic State earns most of its money through criminal activity — from oil smuggling to kidnapping — within the territory it controls, which makes it less reliant on the formal financial system. The group’s ability to make money in the illegal financial sector using cash for dealings in stolen oil and antiquities means it is less vulnerable to the biggest weapon the United States uses to go after its enemies’ finances: shutting down the banks, accountants, and middlemen that keep the money flowing.
On Thursday the Obama administration will face questions from Republican lawmakers about U.S. attempts to undercut the Islamic State’s funding. Treasury Department anti-terrorism finance chief David Cohen is set to testify before the House Financial Services Committee.
Texas Republican Jeb Hensarling, the committee chairman, said the hearing would “examine the adequacy of international banking policies to combat the new challenges that the Islamic State and groups like it present.”
In remarks prepared for Thursday’s hearing, Cohen states that the United States is working with “Iraqi authorities, Iraqi bank headquarters, and the international financial community to prevent ISIL from using the scores of bank branches located in territories where it operates.
“The results of this work have begun to show,” Cohen’s remarks state. “We’ve seen a decline in financial activity in areas where ISIL operates, and banks under ISIL influence are losing their access to the international financial system.”
Cohen is also expected to say that U.S.-led airstrikes are taking a toll on the Islamic State’s oil smuggling operations. Since mid-June, the group reportedly has been taking in $1 million a day in illicit oil revenue, but Cohen says that the bombing has lessened the haul to “several million dollars a week” — an imprecise figure, to be sure.
According to Cohen, the United States is also trying to improve its ability to track the extremist group’s money: “We are working with our counterparts in the intelligence community to ramp up collection on ISIL’s finances.”
In addition, the United States is combing through financial data for potential connections to the Islamic State. The Financial Crimes Enforcement Network is assisting in the effort by looking at the data the agency collects in the United States and through the agency’s connections with international financial intelligence-gathering institutions, a spokesman for the agency said Tuesday.
The risk of the Islamic State using the banks to move money internationally has to be weighed against the possible effect on the local population if Treasury tries to cut off those institutions. In a speech last month, Cohen acknowledged that the United States was not using its biggest weapon — shutting banks out of the financial system — against the institutions that had fallen into the hands of the extremists for exactly that reason.
“Our interest is not in shutting down all the economic activity in the areas where ISIL normally operates,” Cohen said. “They are subjugating huge swaths of the population, millions of people, who are still trying to live their lives. And banks, as everybody knows, are important lubricants for the economy.”
Vanda Felbab-Brown, an expert on illicit money at the Brookings Institution, said there are more than humanitarian factors to consider; the United States also doesn’t want to anger locals and push them closer to the extremists.
“At the end of the day what will make a difference in debilitating ISIL will be how much the local population turns against the group,” Felbab-Brown said. “This very tempting desire to shut down the financial system will tremendously worsen the lives of people that are already living in desperation.”
Felbab-Brown said that Somalia taught the United States that lesson. The United States sanctioned al-Shabab in 2010 as a terrorist group, but the move also scared humanitarian organizations out of the country just as a devastating famine was bearing down. Although many blamed the resulting suffering and starvation on al-Shabab, concerns grew that the anger and frustration would push more people toward the militant group.
Felbab-Brown praised the Treasury Department’s careful approach.
“The good thing about Shabab and ISIL is that they’re very heavy-handed and tend to really overplay their hand in terms of violence to the local population,” Felbab-Brown said. Without interference, that violence often becomes intolerable and eats away at the group’s local political support.
“One has to judge very carefully the likelihood of making a difference,” Felbab-Brown said. “And what are the political effects of any policy.”
Dennis Lormel, who led the FBI’s terrorism-financing investigations after the Sept. 11, 2001, terrorist attacks, said the United States doesn’t want to give the extremists an opening to demonstrate leadership.
“If they come out because they have the money to fund social programs that help the local economy and help the people, then they’re going to tout that and they’re going to demonstrate that they care and that the West doesn’t care,” Lormel said. “And they’ll use that as a recruitment tool.”
Perhaps acknowledging the importance of keeping the local economy going, if only so the group can continue extorting money from it, the Islamic State reportedly reopened the banks in Mosul in September, three months after it took control of them. Local reports said the Sunni militants allowed certain account holders to take out money, subject to the approval of an Islamic State committee and a hefty fee off the top.
Some analysts speculate that Treasury could also be keeping the banks open in order to glean intelligence that could help paint a clearer financial picture of the group.
“It’s considered to be more useful to try to watch what’s going on rather than to take some hard, punitive action right away and disrupt the process before you understand how it works and leverage your understanding,” said Patrick Johnston, a counterterrorism expert with the Rand Corp.
Even if the banks were blacklisted, though, it’s not clear that would keep the group from using them.
“They actually could be quite useful for ISIL without even having any real ability to transact with any foreign entity,” Johnston said.
Johnston said the conundrum for the United States is that even if they were to be cut off from the international financial system, the banks could be used to store and transfer money within the group’s territory for much the same reasons of efficiency and security that make banks a preferable way to move money in other countries.
“It really shows the challenge ahead of Treasury as much as anything else,” Johnston said.
