Forcing banks to police the financial system is causing nasty side effects
KIDNAPPINGS for ransom, drug-smuggling, fake invoicing and extortion are just a few of the ways in which terrorists raise cash for their nefarious deeds. Some scams take advantage of globalisation: American officials found that Hizbullah, a Lebanese movement, raised funds by exporting used cars from America and selling them in west Africa.
Governments are understandably keen to cut terrorists off from sources of cash, and have been taking drastic steps to punish banks for involvement in financing dangerous people. In 2012 the American authorities imposed a $1.9 billion fine on HSBC, a British bank, for lax controls on money-laundering. Big fines have been meted out to Barclays, ING and Standard Chartered for money-laundering or sanctions-busting. BNP Paribas of France is said to be facing a fine of as much as $10 billion in America. Such stiff penalties are popular, and provide great press for ambitious prosecutors. Cut the flow of money to terrorism, their thinking goes, and it will wither.
Yet there are two problems with this approach. First, the regulations are so demanding and the fines so large that banks are walking away from countries and businesses where they perceive even the faintest whiff of risk (see article). American regulators, for instance, require banks to know not only who their customers are, and what they plan to do with their cash, but also the identities and intentions of their customers’ customers. Correspondent-banking relationships—the arteries of global finance that allow people and firms to send money from one country to another, even if their own bank does not have a branch there—are therefore collapsing. Some of world’s biggest banks privately say they are cutting as many as a third of these relationships.
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