photo by Flickr user megawatts86
Keeping terrorists and criminals from using the international banking system seems like a slam-dunk idea. Why make life easy for terrorists or criminals?
The problem with slam-dunk ideas is that it usually is not a slam dunk to implement them. Come to think of it, most of us can’t slam dunk anything more challenging than a doughnut anyway. When it comes to really doing things that really matter, even simple ideas often prove to be unexpectedly complicated, which is why there is such a thing as the law of unintended consequences.
It turns out that if you close off the financial system to terrorists and criminals, they will find other ways to move their money. Terrorists and criminals are typically already good at moving all kinds of stuff, like drugs or fellow terrorists, without drawing attention. By making it inconvenient or impossible for such people to use the mainstream financial system, you accomplish very little – other than cutting off any real opportunity to observe the way they move their funds.
Oh, and you accomplish one other thing: You cut all sorts of other people off from the financial system too.
You cut off expatriate citizens who become too much trouble for foreign financial institutions to serve. Through the Foreign Account Tax Compliance Act and other regulation, the U.S. government has effectively scared many foreign financial institutions into turning away American individuals and businesses in order to avoid reporting requirements and potential legal entanglements. Expatriates have even had trouble with American mutual fund companies shutting down the option to buy or trade funds while overseas.
You also cut off charities and other nongovernmental organizations, especially those that are trying to serve victims of insurgents, terrorists and other bad actors. By definition, such organizations must go where the bad guys are operating or have recently operated. That makes it a little harder to distinguish them from the bad guys at a distance. And it makes it a lot harder to ensure that not a single penny, centime or dinar leaks into the hands of a bad guy. Because if it does, the financial institutions that service these organizations want to be as far away as possible – preferably on another planet – in order to avoid getting slammed for more punitive fines by regulators.
This explains the results of a recent investigation by The Wall Street Journal, which found that U.S. and European banks have shuttered the accounts of a number of American charities operating in Syria, Turkey and Lebanon. Other organizations faced delays in wiring money abroad or had individual requests for money transfers denied. The banks have been badly bitten by regulators; it is hardly surprising they are shy of anything that could appear to have the remotest link to money laundering or terrorism.
So that cuts out the nonprofits, especially those operating in areas where terrorism is endemic.
Now the government is shocked to discover that humanitarian organizations may be losing access to banking services. The Government Accountability Office has launched an inquiry into banks’ efforts to close high-risk accounts, The Journal reported, citing a need for “more and better data” about banks’ decisions to cut off customers, including NGOs.
Over 50 nonprofit groups jointly asked the Treasury to publicly affirm that such organizations aren’t inherently high risk for banks. The Treasury has not yet responded directly. Meanwhile, organizations attempting to help refugees and other victims of terror struggle to cope with the tenuous nature of their financial situation.
“The banks and the U.S. Treasury Department are blaming each other for the problem and to date have done little to solve it,” the groups’ collective letter to the Treasury Department said. Humanitarian organizations trying to offer relief to those who need it most are understandably more interested in a practical way to access their funds than a detailed breakdown of what went wrong up to this point. Unfortunately, nothing about the GAO probe seems particularly likely to move quickly. In the meantime, nonprofits will simply have to do the best they can, shut out of a system that criminals can work around anyway.
All of which goes to show that every terrorist action seems to draw an equal and opposite overreaction. If the 9/11 bombers moved a few hundred thousand dollars to the U.S. to finance their plot – it really did not take much – then we obviously needed to shut down every crevice of the financial system through which subsequent terrorists might operate. Those efforts, of course, didn’t bother the San Bernardino shooters one bit.
The law of unintended consequences remains in full force and effect. Maybe it is time to start thinking about it before we generate a regulatory or legislative response to every headline that damages somebody’s approval ratings.