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From Securities Regulation Daily, December 20, 2016

House FSC staff report offers recommendations on combating terror finance

By Mark S. Nelson, J.D.

A Congressional task force led by Michael Fitzpatrick (R-Pa) and Stephen Lynch (D-Mass), both members of the House Financial Services Committee, published a report detailing the many steps the U.S. can take to improve its anti-terror financing efforts in the face of a growing and increasingly sophisticated threat. The report was prepared by the Republican and Democratic staff of the Task Force to Investigate Terrorism Financing. The task force expired in July and the report’s recommendations have not been formally endorsed by the task force or by the House FSC. An appendix to the report contains additional information set out in memoranda prepared at the task force’s request by the Congressional Research Service plus numerous task force hearing summaries and other materials.

Terror financing has been a critical focus of the federal government, especially since the attacks of September 11, 2001 and as other countries persist in their quest to acquire nuclear weapons. For example, within the past month, both houses of Congress overwhelmingly passed legislation to extend the duration of economic sanctions on Iran, a country that received extensive treatment in the task force report partly because of its ties to terror financing and partly because of the Obama Administration’s attempt to re-establish relations with Iranian leaders in order to curb Iran’s nuclear weapons program. President Obama recently let the extension bill become law without his signature (Exchange Act Section 13(r) references the underlying Iran sanctions law).

The threat. The report and its accompanying memos describe a threat that has become less one-dimensional and local to one that has evolved into a global, multidimensional risk to financial systems. The sources of terror financing tend to be state sponsors, charities, and criminal organizations.

Global financial systems are at risk from three primary modes terror groups use to move illicit funds: physical movement of cash by couriers; use of bank and non-bank financial institutions; and trade-based money laundering which involves seemingly unrelated goods used to launder illicit proceeds.

The report cited five major terror groups that operate globally despite being based mostly in the Middle East, Africa, and Latin America. An April 2015 CRS memo gave the example of Islamic State, which in 2014 reportedly had revenues of $1 million per day from oil smuggling. All of the major terror groups mentioned in the report generate revenues from a variety of sources, including trade in oil, kidnapping, piracy, drug trafficking, and extortion.

The appendix contains a May 2015 memo positing that terror groups and criminal organizations may increase their ties, if only for complementary purposes. Traditionally, anti-terror finance efforts assumed that terror groups are motivated by ideology and criminals are motivated by profit such that the two types of organizations would tend not to work together. But sources cited in the memo suggest that these groups, despite their different motivations, may collaborate for transactional and convenience reasons or for the purpose of fundraising.

Another area of long-standing concern is the lack of information about the beneficial owners of companies. The report noted the now increased verification requirements contained in rules issued earlier this year by the Treasury Department for banks, securities broker-dealers, mutual funds, futures commission merchants, and introducing brokers in commodities. But the report observed that state data on beneficial owners remains scant. Still another area of concern is the increasing sophistication of cyber attacks on financial institutions, which a June 2015 memo said are a "prime target" because they hold both cash and personally identifiable information.

Recommendations. The need for greater coordination among federal government agencies, including Treasury, banking regulators, and agencies that oversee securities and commodities markets is a cornerstone of the report’s recommendations. Legislation passed by the House during the 114th Congress could provide the blueprint for similar near term efforts in the next Congress.

For one, the National Strategy for Combating Terrorist, Underground, and Other Illicit Financing Act (H.R. 5594), sponsored by task force Chairman Fitzpatrick and passed by a voice vote, seeks a "whole-of-government" approach by the federal government to anti-terror financing that would help Congress make decisions about allocation of resources. A bill (H.R. 5602), pressed by task force Ranking Member Lynch, would expand Treasury’s ability to use Geographic Targeting Orders. The Lynch bill passed the House easily, and sailed through the Senate on a voice vote, but also with an amendment which the House was unable to consider before it adjourned.

Two other bills would target information sharing among banks and increase Treasury’s overseas presence or help the federal government to target assets involved in corruption. The Kleptocracy Asset Recovery Rewards Act (H.R. 5603), another bill sponsored by Lynch but which never came up for a vote in the House, would clarify U.S. authorities regarding assets involved in foreign government corruption. Representative Robert Pittenger (R-NC), introduced the Anti-terrorism Information Sharing Is Strength Act (H.R. 5606), which deals with safe harbors for banks regarding information sharing, but it failed by a vote of 229-177 while needing a two-thirds majority. The bill also had backing from House FSC Ranking Member Maxine Waters (D-Cal).

Yet another bill would give Treasury experts a heightened presence at American embassies. The Enhancing Treasury’s Anti-Terror Tools Act (H.R. 5607), also sponsored by Pittenger, aims to correct the existing situation where fewer than two dozen Treasury officials are posted at U.S. embassies. The bill easily passed the House.

Longer term goals cited by the report include a re-examination of U.S. anti-terror financing efforts due to more prevalent terrorism risks, the globalization of drug trafficking and other crimes, and the use of sanctions to promote American diplomacy. While some long term goals overlap with near term goals (e.g., more Treasury staff at embassies), the report suggested the need to conduct a pilot program that would create a "utility" to perform know your customer verifications. Still other proposals would target trade-based money laundering, emerging value transfer technology, and beneficial ownership of shell companies.

Another key to the report’s long-tern approach is the re-instatement of the Terrorist Financial Working Group. This interagency group was created in 2001, but has since ceased its activities.

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