Consequences of Assessments of Effectiveness for Counterterrorist Financing Policy

Abstract

Assessments are an important instrument in shaping global counterterrorist financing (CTF) policy. However, while CTF policies had an impact on terrorist activity, it is not clear which CTF measures are useful and which are not. Past assessments have had a bias toward expanding the scope and intensity of CTF regulations and implementation because of their focus on output and outcome of measures, rather than on their impact on terrorist activity. The article discusses major features of CTF evaluations and places them into wider frameworks of assessments in high-risk politics.

Keywords

evaluations counterterrorism international organizations assessments risk politics

Introduction

The prime objective of counterterrorism policy is to prevent major terrorist attacks. In most parts of the world, such attacks are fairly rare. As a consequence, there is little evidence to go on to find the best way to counter terrorism or to establish whether certain measures are useful for preventing terrorism.

Under these circumstances, the standard cycle of policy making, policy assessments, and recursive policy correction is under duress. Standard procedures of policy evaluation, such as cost–benefit analysis, are difficult to apply.

The article’s argument is that under such circumstances, assessments run the danger of promoting ineffective and inefficient policy measures. The main reason is that, instead of investigating the impact of policies on the targeted objective, assessments focus on indicators of the implementation of policies, which may or may not be effective with respect to the targeted objective.

This is particularly true, when security risks are at issue. The “securitization” of threats enhances their urgency.¹ Examples include both traditional, military dangers and “new” security threats such as terrorism. It is very difficult to assess whether military spending and military doctrines are appropriate to external threats (Enthoven & Smith, 2005). It is similarly difficult to gauge whether drone strikes (Bergen & Rowland, 2013) or electronic surveillance (Stutzer & Zehnder, 2013) improve security.

The argument is substantiated by an analysis of evaluation practice in the field of counterterrorist financing (CTF). The scope of CTF measures has been greatly expanded since 2001. Even more impressive is the proliferation of standards throughout the globe. All this has occurred with limited evidence whether, and if so which, CTF measures reduce the probability of terrorist attacks.

The article is organized as follows. A brief discussion on principal issues related to assessments in high-risk policy fields is followed by a description of the particular problematique of CTF evaluations, both with respect to the strong pressure to conduct assessments and the scant knowledge of the importance of financing for terrorism. After describing some relevant procedures, an assessment of the likely effects of evaluations is presented. This includes the argument that the way in which evaluations are performed leads to an expansion of CTF measures, regardless of their impact on terrorist activities. The final section looks at costs of CTF, which need to be considered to prioritize CTF policies.

While the focus is on the particular case of CTF, results are likely to be relevant for other security policy fields marked by low probability/high consequences such as the ones mentioned above. What makes CTF special, however, is the extent of routine assessment against internationally accepted standards.

Criteria and Indicators of Effectiveness

Effectiveness of policies can be assessed at various levels (Brzoska, 2008). In policy cycle analysis, the distinction between output, outcome, and impact has proven to be useful (Easton, 1965). Output refers to the broader, particularly legal, framework of shaping interventions in a policy field. Outcome addresses the question of whether this framework is implemented in the mandated way. Output and outcome are thus largely under the control of those policy makers who want to shape a policy field. Impact, to the contrary, also depends on the behavior of those addressed by policies, including their adaption and evasion strategies and tactics. Because impact is shaped by the addressees of policy measures, in addition to the intended effect, it may also include further, non-intended consequences. These consequences may enhance the impact of a policy or policy measure, but they may also counteract the intended effect or create costs in other directions (Hegemann, Heller, & Kahl, 2013).

Output and outcome measures are generally seen as important preconditions for impact, which is generally understood in the policy literature as the ultimate measure of effectiveness. However, as mentioned above, impact is often difficult to assess, particularly in areas that can be classified as urgent high-risk politics, where potential damage, or at least its perception, is extensive but probabilities of such an occurrence are low or very hard to estimate. Sometimes the goal to avoid risks leads to the adoption of the “precautionary principle.” However, costs are generally high or even prohibitive, as in the case of national defense, where an effort to prevent all kinds of eventualities would lead to very high military budgets. For practical purposes, such as budget allocations, it remains important to find indicators that link policies with measures of success.

Where impact indicators fail, outcome and even output assessments are often viewed as second-best alternatives. However, output and outcome are not necessarily good indicators of impact. Fielding a high number of weapon systems, for instance, does not necessarily deter an aggressor from attack, as the United States learned on September 11, 2001, nor does it guarantee success in war (Mack, 1975).

The extensive academic CTF literature (for overviews, see, for example, Biersteker & Eckert, 2008; Cortright & Lopez, 2007) has focused on output and outcome measures. However, there have also been some attempts at assessing the impact effectiveness of CTF (Brzoska, 2009; Chaikin, 2009; de Goede, 2012). One problem is that facts are often difficult to establish. The case of the “underwear bomber,” Umar Farouk Abdulmutallab, for instance, is highlighted in a recent report by the U.K. Serious Organized Crime Agency (2010) as proof of the effectiveness of CTF because his past whereabouts and connections to other people could be reconstructed through financial transactions. However, it is not clear whether this information did more than lead to a more complete picture of Abdulmutallab’s life history.

This example points to the crucial difficulty of CTF measures, that of establishing causality between outcome and impact on the major objective of reducing the incidence of terrorist attacks. In addition to the data problem—there is very little publicly available information on attacks that were planned but did not take place—it is often difficult to assess whether or not a lack of finance was a factor (Biersteker, Eckert, & Romaniuk, 2008; Passas, 2007; Roth, Greenburg, & Wille, 2004).

An alternative approach to the investigation into data and causality is to ask relevant audiences about their views on the effectiveness of CTF measures. Results are not uniform and not very reliable. In a report funded by the City of London in 2004, the average score of responses from the wider financial community to the question of the effectiveness of money laundering activities, including CTF, was quite high (Yeandle, Mainelli, Berendt, & Healy, 2005). However, another survey among actors from the financial sector in Germany, Singapore, and Switzerland revealed a high degree of skepticism. CTF was generally seen as being ineffective when it comes to preventing terrorist attacks (Geiger & Wuensch, 2007).

The argumentation of this article is in line with the literature linking risks, uncertainty, and insecurity with the difficulties of evidence-based policies. Risks are increasingly incalculable, while their scope for catastrophic damage grows (Beck, 2000). For security policy, including counterterrorism policy, this implies that rationalist behavior toward risk is rendered more difficult. Tools for governing which have been useful under different conditions lose their power and may even become counterproductive in dealing with risks. Theorists who base their work on Foucault’s analysis of gouvernmentalité argue that the shift in risk perception fosters a shift away from the control of deviant behavior to the use of surveillance (Aradau & van Munster, 2007; de Goede, 2012).

For the particular topic of CTF, both approaches to risk lead to predictions of a tendency of permanent expansion of CTF as a policy dealing with potentially high damage but low probabilities of occurrence. Impact assessment of effectiveness and assessments of efficiency are potential countermeasures to such tendencies (de Goede, 2012; Rasmussen, 2006); however, they have not been part of official CTF assessments in the past.

The Problematique of Official CTF Assessments

Considering the difficulties of CTF assessments, the level and intensity of official assessments are remarkable. The number and extent of official CTF assessments (particularly in combination with assessments of anti-money laundering [AML] policies) are extensive. The Financial Action Task Force (FATF), a central organization in the field, and the affiliated FATF Style Regional Bodies (FSRBs) have conducted initial AML/CTF evaluations for more than 160 states since 2005 (FATF, 2012, 2013a; International Monetary Fund [IMF], 2011). The IMF also has conducted numerous evaluations within its general framework of improving the soundness of financial systems. The EU has conducted two rounds of evaluations of its member states, focusing on CTF measures adopted by the organization (Council of the European Union, 2005, 2010). The UN Counter-Terrorism Committee (CTC) is tasked with reporting on the implementation of the relevant resolutions by member states, in addition to assisting countries with closing legislation gaps (CTC, 2009).

Obviously, there are strong political pressures to produce CTF assessments. Several factors come together to explain this high degree of activity. One is the importance of counterterrorism policies. Terrorism is a major concern to policy makers and the general public. If attacks occur, they have major repercussions in terms of domestic and often international politics. Electorates tend to punish policy makers who are not attempting to reduce the likelihood of terrorist attacks as much as feasible (Oates, Kaid, & Berry, 2010). Thus, there is an incentive for policy makers to be seen as actively fighting terrorism, even if they have little or no knowledge of whether their policies work.

Second, policy makers are under political pressure to demonstrate that policies are rational. Assessments of effectiveness and efficiency are a core element of “evidence-based policy.” They have become standard in many areas of public spending and public policy (Wollmann, 2007). They provide legitimacy to policies, supply guidance for the cost-saving allocation of scarce resources, detect crucial deficiencies in policies, and, more generally, improve policy making. Policy assessments are an important tool in this respect, even where policy effectiveness with respect to targeted objectives is difficult to establish. As mentioned, the degree of implementation of policy measures is a particularly strong candidate to substitute for the impact of policy measures on targeted objectives in such cases (Hegemann et al., 2013). However, measuring the degree of policy implementation, or output, is only useful if its impact on the targeted objective is appropriately correlated.

A third factor is specific to CTF. The attacks of 9/11 made measures against the financing of terrorism a major policy issue. It became intimately linked to another policy field, money laundering. While there is considerable overlap between these two policy fields where crime and money mix, particular with respect to “follow the money” in post-crime investigations, there are also major differences (Levi, 2010; Tubman, 2009). For instance, while in money laundering, the main objective is to prevent the channeling of illegally gained income into the legal part of the economy; in terrorism, the main objective is to prevent the transfer of “legal” money to persons willing to conduct attacks but being short of sufficient financial means.

In effect, CTF became tagged onto money laundering post 9/11. Measures that are crucial for combating money laundering such as the principle of “know your customer” became central also for CTF policy even though its principle value for preventing terrorism is questionable (Parker & Taylor, 2010; Takats, 2010). Specific CTF concerns, such as those about unconventional means of financial transfers, for instance, the “Hawala” system, and the collection of money in charities with links to organizations using terrorist strategies, were added. This resulted in a rather complex mixture of measures, some of which had a demonstrable, or at least likely, impact on the incidence of terrorism, while others did not (de Goede, 2012).

A fourth factor, also deriving from 9/11, is the strong influence of the U.S. government on CTF policies. The U.S. government has effectively used international arrangements and institutions, in particular the FATF, as important levers to spread its perception of high standards of CTF. After the horrendous attacks of September 11, 2001,² the U.S. government declared the suppression of terrorism financing to be one of the prime tools for stopping future terrorist attacks. A typical statement expressing the urgency attached to countering terrorism financing can be found in a report of the U.S. government outlining its policy 5 years after the attacks:

Before 9/11, financiers of terrorism and terrorist financing networks went untouched and largely ignored by the international community. Today, we continue the aggressive worldwide campaign to disrupt terrorism financing, making it harder, costlier, and riskier for al-Qaida and other terrorist groups to raise and move money around the world. (White House, 2006)

Based on these factors, assessments of CTF have been driven by a desire to improve the standards of control over financial transactions. Assessments are predominantly made against “best practice” standards and not against evidence of reducing terrorist activity. They thus tend to identify implementation deficits, generally recommending remedies requiring additional CTF measures. As a result, CTF effectiveness and efficiency assessments are biased in the direction of expanding CTF measures. The increase in the number of measures as well as improvements in their implementation support the fight against terrorism as long as they are actually reducing terrorist activity. However, measures that are not effective create unnecessary costs. The problem is not the expansion of CTF measures as such, but the expansion of measures that are not based on the assessment of policy impacts.

FATF has recognized this deficit and recently begun to remedy it. In February 2013, a new procedure to assess AML and CTF measures was mandated by the FATF general assembly. In addition to assessing policy, effectiveness is to be assessed (FATF, 2013b). This is a welcome change in view of the earlier practice of assessments as analyzed in this article. It remains to be seen how peer reviewers will grapple with the measurement of effectiveness. However, the official recognition that outcome evaluations do not suffice and indeed may support counterproductive policy measures is an important change in FATF’s approach toward improving, instead of expanding, CTF measures.

Changes in Terrorism Financing

This section is designed to give some more background on terrorism financing, particularly addressing issues related to its importance in the fight against terrorism. It indicates that the availability of outside financing may have been an important factor enabling terrorist activities in some, but not in most, cases. Furthermore, partly because of the implementation of CTF measures, the importance of the availability of outside funding for terrorist activity has most likely declined in recent years.

Single attacks are generally cheap. The attackers of September 11, 2001, probably spent less than half a million U.S. dollars (National Commission on Terrorist Attacks Upon the United States, 2004). Still this is mentioned in the relevant literature as one of the most expensive terrorist attacks. Other prominent attacks, such as those in Madrid in 2004 and in London in 2005, probably cost less than US$10,000 (U.K. Home Office, 2006; United Nations, 2004). Much more expensive is the maintenance of a large organization committing terrorist acts or a major network of such organizations over a longer period of time, such as al-Quaida (Acharya, 2009; Haigner, Schneider, & Wakolbinger, 2012). Financing needs, as well as funding activities, of those committing terrorist acts vary greatly. There is little in common between individuals or small groups of “home grown terrorists,” such as those that exploded bombs in London in July 2005, and an organization such as Hamas that has been involved in sponsoring terrorist attacks.

Variety in the financing of terrorist acts is nothing new. However, some of the patterns of terrorist financing have changed in the last few decades, and so have some of the elements in the financial environment in which groups committed to terrorist violence operate (Biersteker & Eckert, 2008; Cortright & Lopez, 2007).

The most important change in the 1990s was the “transnationalization” of a good part of terrorist activity. Although not a totally new phenomenon, the operation of terrorist groups across borders as well as the transnational linkage of various such groups grew after the end of the Cold War. This partial but significant shift from predominantly national to predominantly transnational terrorism between the 1970s and the 1990s has been facilitated by globalization, which allows for the easier movement of ideas, goods, and, though considerably less so, people. It is also connected to the rise of terrorist acts motivated by Islamic fundamentalism, because of its transnational nature. Another factor was the withdrawal of a number of governmental sponsors of national terrorist activities, such as the Libyan government (Giraldo & Trinkunas, 2007, pp. 8-12).

Transnationalization of finance is primarily linked to the rise of al-Quaida. The extension of al-Quaida’s activities beyond Afghanistan, beginning in the 1990s, was clearly facilitated by a transnational financial network involving substantial amounts of funding. Even though some terrorist organizations harvested large private donations from external sponsors during the Cold War period—examples include the Irish Republican Army (IRA) in Northern Ireland and the Mujahideen in Afghanistan—the scope and scale of al-Quaida’s financial activities in the 1990s were substantially larger (Gunaratna, 2008; Wright, 2006). Already before the September 11, 2001, attacks, a number of governments, particularly the U.S. government, had argued for a focus on financial transactions and the freezing of assets in counterterrorism efforts. However, it took the attacks to move CTF from a side issue to front stage in counterterrorism.

During the first decade of the 2000s, al-Quaida changed its nature, resulting from a weakening of its base in Afghanistan and the Afghanistan/Pakistan border region. al-Quaida has become a rather loose network, with little financial flows between affiliates. This decline and reconfiguration is an indicator of the success and failure of counterterrorism measures. For instance, most attacks in recent years in Europe have been conducted by “home grown” terrorists, with very limited funds. In other parts of the world, such as Iraq and Afghanistan, transnational personal links remain important, while funding seems to be predominantly local (Tubman, 2009). This indicates that a shift away from transnational terrorism occurred in the early 2000s, at least when it comes to the financing of terrorism which, however, has not led to an overall major reduction in terrorist activity (U.S. Department of State, 2013). Transnational terrorism has been largely superseded by local terrorism, albeit often with a transnational ideologies flare. It is difficult to assess the contribution of CTF measures to this change. The evidence on the prevention of terrorist activities has always been scant and has become more so in recent years. Convictions for violation of CTF laws are easier to find. In the United Kingdom, for instance, there have been about 10 convictions for CTF offenses annually in the late 2000s (out of about 100 convictions under terrorism legislation; Sproat, 2010). It is not clear whether this low and fluctuating number of convictions demonstrates the impact of CTF or its failure.

However, regardless of one’s view on this issue, contrary to the late 1990s, an increase in the level of CTF measures seems to need strong justification after al-Quaida had largely ceased to be a transnational funder of terrorist activity.

Introducing and Widening CTF Policies

While the attacks of September 11, 2001, put on a bright spotlight on terrorist financing, measures had already been discussed and taken at an earlier stage. In Europe, early activity took place in the late 1970s to counter national terrorist organizations being active in a number of countries (Giraldo & Trinkunas, 2007). In the United States, legal tools were first adopted in the early 1970s, allowing the U.S. government to stop financial transfers and seize assets, including bank accounts, related to states and organizations identified as “terrorism sponsors.” In the mid-1990s, this was expanded to also cover transactions and actions by individuals (Levi, 2010, p. 652). Legal options were further expanded after the attacks against U.S. embassies in East Africa in 1998.

With some delay, international efforts at controlling and reducing illegal flows of money were initiated. At the United Nations, negotiations of a convention on terrorism financing took place in the late 1990s, resulting in the 1999 International Convention for the Suppression of the Financing of Terrorism.³ Before it entered into force, it was effectually implemented by United Nations Security Council Resolution (UNSCR) 1373, where it was decided that all states should prevent and suppress the financing of terrorism as well as criminalize the willful provision or collection of funds for such acts. The Council demanded all UN member states to prevent their nationals, persons, or entities in their territories from making funds, financial assets, economic resources, financial, or other related services available to persons who commit or attempt to commit, facilitate, or participate in the commission of terrorist acts.

UNSCR 1373, while largely motivated by the September 11, 2001 attacks, had a predecessor in UNSCR 1267 of 1999 as well as other activities by the UN Security Council. This resolution demanded all member states to freeze all assets of al-Quaida and the Taliban. A sanctions committee was instituted to decide on the names of organizations and individuals whose assets should be banned. By 2000, the list contained almost 500 names of individuals and organizations.⁴ Although the UN has been remarkably active in the CTF field, its role has remained limited. In particular, the implementation of standards and measures remains the sole prerogative of member states (Romaniuk, 2010).

After September 11, 2001, efforts took a new and decisive turn by linking CTF to AML. FATF, initiated by the G-7 states in 1989 but often hampered by lackluster support of other states and jurisdictions, became a core actor for the implementation of CTF. Interestingly, the addition of CTF to the FATF’s agenda also provided a major push for the organization’s international clout in AML (Passas, 2007). As mentioned earlier, a main reason was the interest of the U.S. government in internationalizing strong controls on flows of money to actual or potential terrorists (Zarate, 2013).

The FATF, which as a club can only formulate “soft law,” nevertheless has become a powerful organization. Its main tools are the setting of standards and peer evaluation of their implementation for the financial sector. The weight of the FATF (and the FSRBs linked to it) is based on not only the economic and political power of the 34 individual governments, including the major industrialized states, and two regional organizations standing behind the FATF, but also its credibility as an institution promoting financial markets (Gardner, 2007; Jakobi, 2012).

FATF standards appear as a set of 40 “recommendations,” some of which are “special recommendations” on terrorism financing.⁵ Recommendations are formulated in general terms but are translated in FATF documents into more specific requirements for national laws, institutions, and procedures. Most of these standards address the improvement of knowledge of financial transactions, which can be used by post-crime investigators. Some also aim at the prevention of crimes, including terrorism, for instance by urging governments to introduce legal penalties for violations of the relevant obligations. FATF has regularly expanded the scope of the interpretation of the special recommendations, for instance by adding additional types of financial actors, such as lawyers, or activities, such as gambling.

A crucial tool for FATF’s work is peer-reviews. Until 2013, peer-reviews solely addressed the implementation of FATF’s recommendations (FATF, 2013a). The FATF claims that “the mutual evaluation process represents a central pillar of the work of the FATF.” The focus of the evaluations is stated as follows: “Through this process, the FATF monitors the implementation of the FATF Recommendations and assesses the effectiveness of the anti-money laundering and counter-terrorist financing systems in FATF member jurisdictions.”⁶

Consequences of Output and Outcome Evaluations

As mentioned, FATF is not the only organization conducting CTF assessments, but it represents the most thorough and extensive effort. Still, as mentioned, by maintaining the objective of reducing the probability of terrorist attacks, its evaluations have so far focused on output and outcome indicators. The same is true for the work of the IMF, the UN, and the EU. Evaluations have aimed at assessing the degree of implementation of the recommendations made by relevant international organizations, in particular the existence and effective operation of legal tools and institutional structures.

Going beyond what other institutions have achieved, FATF (and FSRBs) has adopted a system of evaluations, which aims not only at establishing gaps and deficits but also at assessing progress in closing these gaps.⁷ The first element of the system has been a number of evaluation rounds, with increasing numbers of criteria to be assessed by evaluators, based on decisions by FATF to expand the scope of its recommendations. In 2013, FATF began to plan its fourth round of peer evaluations (FATF, 2013a). A second element is follow-up procedures after assessments. Evaluators are instructed to grade the implementation of criteria representing the 49 FATF recommendations in four steps, from Non-Compliant (NC) via Partially Compliant (PC) and Largely Compliant (LC) to Fully Compliant (C). Following the discussion and adoption of an assessment, if deficits are found, a member state is made subject to either regular or enhanced follow-up reporting. Regular follow-up reporting by member states occurs on a biennial basis. In case the deficiencies are considered, by the evaluators or the FATF general assembly, to be serious, or if a member state is not making sufficient progress in addressing the deficits, the country is made subject to the enhanced follow-up process. Member states in enhanced follow-up regularly have to report at more frequent intervals about the changes they have made with addressing deficits until they are placed into regular follow-up. Ireland, for instance, had to provide 11 follow-up reports before it was removed from enhanced follow-up by the FATF general assembly.⁸

Assessments by the FATF (and FSRBs) have regularly resulted in comparatively low implementation scores on required CTF measures. In a review of FATF and FSRB peer evaluations in 2011, the IMF found that among 46 advanced economies, the implementation of the 9 special CTF recommendations rate was 50%, while it was 24.2% for 115 emerging and developing economies.⁹ In a summary statistics of evaluations of its 34 members, the FATF reported that in 2012 only three states had not been in follow-up reporting at some point between 2005 and 2012 (Belgium, France, Portugal). Five states had been in enhanced reporting (Australia, Argentine, Greece, Iceland, Turkey). Only 15 of these had clarified all issues raised in the evaluation process when the third review cycle officially ended in 2012 (FATF, 2012).

The FATF/FSRB evaluation process thus provides strong incentives for assessed countries to close gaps in implementation found by evaluators. The same can be said, albeit with less confidence, of other evaluations that have less elaborate follow-up mechanism but also expose governments to public criticism from the outside.

However, as argued above, there is no guarantee that a higher level of implementation reduces the probability of terrorist activity. Although certainly useful by themselves, evaluations of the implementation of CTF principles and guidelines are no substitute for examinations of the impact on terrorism. It can be plausibly argued that a low outcome effectiveness of CTF, such as poor coordination among relevant agencies or gaping loopholes in “know your customer” provisions, could be a factor in making terrorist attacks possible; the opposite argument, however, namely, that with better implementation attacks would decrease, cannot be assumed without evidence. This needs to be done via impact assessments. Only then can it be established whether loopholes really need to be closed.

Furthermore, output and outcome assessments cannot answer the question of how much of CTF is optimal, where marginal costs meet marginal returns. Among suggested and adopted approaches to fight terrorism, they cannot establish the importance of CTF in countering terrorism. They are built on the assumption that any type and form of CTF measures is helpful. Such an approach, however, is due to add useless to useful CTF measures. This would not be harmful if useless measures were costless, but generally they are not.

This emphasis on promoting agreed standards is understandable for organizations whose powers are limited to mutual agreement on principles and recommendations which then have to be implemented by member states and cooperating constituencies (Hülsse & Kerwer, 2007; Jakobi, 2012). The emphasis on a standardization of measures also makes good theoretical sense as a strategy to fight transnational terrorism. Rational terrorists can choose the jurisdiction with the weakest CTF provisions to conduct their financial operations. Counterterrorism efforts are therefore most likely to have effect when addressing the “weakest link” among relevant jurisdictions rather than those with high levels of control (Sandler, 2005).

The problematique of outcome measures, which have been at the core of FATF country reports, can be illustrated by looking at a particularly important element of CTF. As one of the elements of CTF, not only institutions in the financial sector but also other entities such as casinos are required under FATF-inspired legislation to report customers or transactions they suspect to be linked to criminal financing, including terrorism financing, by filing Suspicious Activity Reports (SARs). The number of SARs on AML/CTF differs very widely from country to country (see Table 1). These seem to reflect different cultures of cooperation with the government in the financial sectors of different countries, but most of all, different risk assessments by financial institutions, rather than the likelihood of violations of AML/CTF provisions (Lander, 2005; Verdugo Yepes, 2011).

Table 1.

SARs and Selected European Countries, 2009.

	United Kingdom	Germany	Switzerland
SAR	240.582	9.046	896

Source. Serious Organized Crime Agency (2010); http://www.fedpol.admin.ch/content/fedpol/de/home/dokumentation/medieninformationen/2010/2010-04-08.html; Bundeskriminalamt (2010).

Note. SARs = Suspicious Activity Reports.

Costs of CTF

The argument advanced here is that the emphasis on output and outcome measures in most CTF assessments tends to lead to an expansion of CTF measures, possibly beyond what is justified by the objective of reducing terrorist attacks. In any case, CTF measures result in costs for the financial sector, as well as for additional economic actors in the form of higher transaction costs as well as the—intangible—costs for data protection and civil rights:

Only rough estimates are available on the cost of CTF provisions for the financial sector (Bures, 2012; Reuter & Truman, 2004, p. 15; Sathye, 2008; Yeandle et al., 2005, pp. 23-35). Banks tend to claim that the costs are high (Geiger & Wuensch, 2007; House of Lords, 2009), but the organized financial sector and most banks tend to accept them without much opposition or efforts at influencing policy makers. Banks have to balance the potential loss of reputation, if they are suspected or shown to support the financing of terrorism, against the costs of implementing CTF measures.¹⁰ In general, they seem to be more wary of the first, which leads to cautious behavior (Bures, 2012; Takats, 2010). The willingness of the financial sector’s organizations to go along with CTF measures may also have to do with distributive effects. CTF costs tend to decrease with the size of financial institutions, so that CTF regulation favors larger over smaller financial institutions. There are also some concerns with international competition. CTF costs tend to be higher in some countries, such as the United Kingdom, than in others, such as Switzerland (House of Lords, 2009).

Increased transaction costs have particularly been debated with respect to traditional and wire money transfer systems such as the Hawala system. It has been claimed that the restrictions and additional information requirements put on these systems have been harmful for economic development, particularly among the poorest who do not normally have access to the banking sector (de Goede, 2012; Vlcek, 2007; Warde, 2007). Some programs were adopted by development assistance agencies to lower transaction costs for poor people, but information requirements have not been changed.

The most intense public debate is on the relationship between CTF and data protection. CTF, through SARs and the availability of private data on financial transactions and assets to public authorities in FATF-style CTF legislation, is an intrusion into privacy. In Europe, such intrusion requires a legal order against which legal redress is possible.¹¹ The United States has a different legal culture, where data protection rights are more limited. This became a much debated issue in the Society of Worldwide Interbank Financial Telecommunications (SWIFT) affair.

In 2006, it was leaked that an interbank cooperative subject to Belgian law had transferred data on financial transactions to the U.S. government without the consent of its customers. The SWIFT, registered in La Hulpe, Belgium, daily processes an average of 12 million financial messages. The data were stored, until late 2009, in two mirror sites, one in the United States and the other in Belgium. In 2002, under its Terrorist Financing Tracking Program, the U.S. government began to issue subpoenas to SWIFT to get access to the data. SWIFT concurred after informing the National Bank of Belgium, which is overseeing SWIFT, but without consulting data protection authorities. The undisclosed transfer of data to the United States, in the absence of the possibility of legal redress, occurred in violation of Belgian and EU data protection regulations. When the information was published, it led to a public outcry, reinforced by strong statements by European institutions as well as most EU member governments. There also was an uproar among companies in Europe, who had suspicions that the information was used for commercial purposes (González Fuster, De Hert, & Gutwirth, 2008). Council and Commission engaged in discussions with the U.S. government, which resulted in a series of changes in the data transmission. The issue has now been settled in compromise but continues to illustrate the costs of CTF measures in terms of data protection and privacy.

Even though they have not been an element of official evaluations, the costs of CTF measures are well known. They have been raised by political actors such as bankers, lawyers, and accountants to restrict the scope of CTF measures. This has slowed down the implementation of CTF regulations (Thony & Png, 2007). However, they have, at least so far, not entered the realm of official evaluations and their follow-up process. In addition to the uncertainty of whether CTF measures have an impact on the incidence of terrorism, lack of consideration of costs limits the usefulness of official evaluations for making priority-based CTF policy choices.

Conclusion

International assessments of national CTF policies and their implementation are a core element of international CTF policy. Assessments have been plentiful but have overwhelmingly been performed with the objective of identifying gaps in the implementation of laws and agreements. Yardsticks very often are “best practices,” that is, particularly comprehensive and well-resourced ways of implementing CTF measures.

Such assessments have legitimacy and functionality. More comprehensive CTF policies and, particularly, improvements in implementation have contributed to the fight against terrorism (Biersteker & Eckert, 2008; Brzoska, 2008). However, the focus on output and outcome has biased assessments toward expanding the scope and intensity of CTF regulations and implementation. Assessments primarily based on output and outcome indicators carry the danger of promoting unsuitable and costly measures. They have a tendency to extend the range of policies beyond what can be defended on the basis of their impacts on reducing the incidence of terrorist attacks.

A complete evaluation of effectiveness needs to consider impact. While impact measurement is difficult, academic work has shown that more can be done, for instance by more closely investigating failed and implemented terrorist plots. Official assessments, which have better access to case data, would provide a better basis for such analyses. It is very welcome that the FATF has decided in 2013 to expand its mutual evaluations to include impact assessments (FATF, 2013a). Furthermore, policy analysis also needs to consider costs, in relation to benefits, to be able to prioritize policies. Another important issue is availability of data. To the extent that it can, relevant data collected by agencies on the successes and failure of CTF measures in preventing terrorism should be made available for assessments. External researchers need to be encouraged to conduct open source assessments. These could act as a check on assessments performed by relevant institutions.¹²

CTF certainly is a difficult field to apply standard policy cycle analysis, but taking the shortcut of only evaluating output and outcomes is a problematic way to deal with the difficulties. This is increasingly being recognized but more could be done to avoid the negative effects of evaluations in a high-risk/low-probability event policy field.

Footnotes

Declaration of Conflicting Interests

The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.

Funding

The author(s) disclosed receipt of the following financial support for the research, authorship, and/or publication of this article: This study was supported by EU’s Seventh Research Framework Program “EUSECON” Project, Grant Agreement Number 218105.

Notes

Author Biography

Michael Brzoska is director of the Institute for Peace and Security Studies and a professor at the University of Hamburg. His research has focused on the links between economic and political aspects of both traditional and non-traditional security.

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