Terrorism’s International Monetary Arrangements Every industrialized nation’s treasury is monitoring money transactions that may support terrorism. There are also international coordination efforts. The Financial Action Task Force on Money Laundering (FATF), established by the G7 countries (France, Germany, Canada, Japan, Italy, the United Kingdom and the United States), develops and promotes policies that make money laundering more difficult and riskier. This group works closely with the IMF, the World Bank, the United Nations, and national bodies such as the U.S. Department of the Treasury. It regularly reviews and reports on antilaundering standards in specific countries and publishes the results. If the FATF report is critical, all governments are notified to advise their banks and other financial institutions to exercise appropriate due diligence and caution when transacting business in the listed countries. On February 14, 2014, for instance, the FATF listed Iran and the Democratic People’s Republic of Korea (North) as actively financing terrorism and Algeria, Ecuador, Ethiopia, Indonesia, Myanmar, Pakistan, Syria, Turkey, and Yemen as making insufficient progress on addressing deficiencies in their financial institutions.2 The financial world is watching the listed countries closely, though some argue that these measures actually force the transfer of value into less obvious methods and institutions. The FATF offers suggestions to help safeguard against terrorism: criminalize the financing of terrorism; freeze and confiscate terrorist assets; report suspicious transactions related to terrorism; track parallel or alternate remittance systems such as hawala; and monitor wire transfers, nonprofit organizations, and cash couriers. The U.S. Department of the Treasury lists countries, individuals, and networks subject to “311 actions,” named after the section of the USA Patriot Act that provides the Treasury secretary with options to sanction specific organizations. You can see the updated 311 list at http://www.treasury.gov/resource center/terrorist-illicit-finance/311-Actions/ 209 Pages/311-Actions. aspx/. Terrorist operations are costly, and funding them requires the ability to launder money, disguise its sources, and move it unmonitored across international borders. Let’s look at some ways security professionals think terrorist funding is transferred today and how governments have been responding to the nonbank financial institutions that serve terrorism.1 A popular and informal funds-transfer method in India, Africa, and the Middle East is hawala (an Arabic word for “transfer”), which leaves few or no traces. In its legitimate use, foreign workers who want to send money home give the funds to their local hawala (the word describes both the process and the person who conducts it), with directions about who should receive it. The hawala then contacts his counterpart in the destination, and the designated recipient is told she can draw the funds. Brokers at both ends of the hawala transaction run balances that can be settled over time through cash or noncash transactions. They keep detailed records, but the sender receives no contract, receipt, or legal documentation; the transfer, communicated via phone, fax, or e-mail, is based on trust and honor. Hawalas, who may be part of the same extended family, make a small commission on the transaction, plus something on the exchange rate, although their rates often are better than those available at banks. The majority of hawala transactions are legal, and they serve an important function well, yet you can see how they would also meet the needs of terrorists. But there are many other ways in addition to hawalas to transfer value without a trail. One is to manipulate sales invoices so that excess value is transferred to the payee. An invoice for $200,000 inflated 30 percent transfers $60,000 without a traceable record of the cash transfer. There are also schemes to divert trade, to use charities, and to use Internet-based payments. Each of these approaches is complex and not easily traceable. The International Monetary System: A Brief History The international monetary system consists of institutions, agreements, rules, and processes that allow for the payments, currency exchange, and cross-border movements of capital required for international transactions.3 Because an understanding of the way these institutions and arrangements have evolved helps make your picture of current arrangements fall more readily into place, we begin with a brief history of the global monetary system. First we look at the gold standard and a monetary system to support trade called the Bretton Woods system. Then we review the inherent conflict in having a national currency serve as a reserve currency and look at the evolution of the monetary system, leading up to the floating rate system. LO 8-1 Describe the international monetary system’s history.
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