06 September 2004	Monday	20 Rajab 1425

On August 25, the UN Committee on anti-terrorist sanctions released its long awaited report on compliance by member states. Not surprisingly, it painted a dismal picture because of the casual approach to compliance adopted by the vast majority of its member states.

Only 34 states filed compliance reports with Portugal reporting having confiscated only 325 euros, and Azerbaijan just $40.

The reason: in most member states, governments passed on this function to banks and financial institutions. As governments liberalize their markets, they lumber financial institutions with heaps of regulations requiring them to perform many crucial functions of the state.

In several areas, it amounts to requiring financial institutions to exercise checks and balances that they simply can't do without, or even with the confused and legally inadequate mandates provided to them to perform these functions.

A case in point is the State Bank of Pakistan that churns out instruction circulars, virtually everyday; bankers are often at a loss in convincing themselves about the older circulars that have been superseded.

While bewildered financial institutions struggle to prevent financial crime, shrewd criminals thrive in committing every conceivable financial crime, which is the gist of the United Nations report on compliance with anti-terrorist sanctions.

Barring the incidents (and there could be many) where their employees connive with criminals, financial institutions have no clue about the crimes they are getting involved in because these institutions were never conceived to perform the role of crime detection agencies.

Traditionally, for opening accounts, bankers sought satisfactory references from the prospective customers' other bankers, buyers and suppliers. They were required to guard against credit (non-payment) and market (volatility and trading cycle) risks.

They therefore aspired to master skills for managing business and transaction risks, and based on the logic that banks are not geared for crime detection or customer surveillance, ICC regulations governing trade also specify their liability only for 'dealing' in documents evidencing shipment, not in the underlying goods. But this scenario is changing fast because governments and their agencies have impliedly accepted their failure in performing their functions. Government agencies and regulators charged with the responsibility of detecting financial crime are now shifting their onus on to the bankers.

Offering a rare mix of abdicating responsibility without authority, operating manuals are being drafted to incorporate crime detection angles into the operations of financial institutions.

This trend, which is diverting bankers' attention from their main task of safeguarding against credit and market risks, would eventually have serious consequences. According to the Bank for International Settlements (BIS), banks and financial institutions face an enormous escalation in market risk rooted in the rapid rising speed of the trading cycles and volatility in commodity, foreign exchange and money markets.

This volatility now impacts borrowers much more severely and results in bankruptcies, virtually overnight. The BIS feels so strongly about the limitations of bankers in facing up to the fast changing profile of risk that it now insists on every bank having a separate division exclusively for risk management.

This division is required to guide the units managing the bank's asset-liability profile and credit, treasury and operational risks. This division is also required to continuously up-date the risk control and management systems of all other units and to devise strategies accordingly for changing the risk-asset profile of the bank.

In this scenario, expecting bankers to stretch themselves for controlling financial crime seems most unreasonable. Instead of helping financial institutions by devising regulation and enacting legislation that reduces market volatility, governments are adding to it by imposing tax and tariff regimes that encourage crime.

In this context, lowering trade barriers (that governments now claim as their major achievement) has only added to market volatility and the woes of the financial institutions. Conditionalities imposed by international agencies like WTO add to the complexities in no less measure.

The hype for controlling money flow to terrorists has little to do with controlling financial crime; it went on in Europe for centuries (remember the 'numbered' bank accounts?) but as long as activities that now fall within the definition of 'financial crimes' ensured transfer of wealth from poor nations to the rich West, no one saw anything wrong with it.

Remember the Shah of Iran, Suharto, Ferdinand Marcos, Hissen Habre and several African and Middle Eastern heads of state who transferred their national wealth to the West? Their bank accounts never qualified for scrutiny.

Nor were the accounts of United States and British-backed terrorist organizations created to topple populist governments in their countries. Remember Khmer Rouge, Contras, and use of Kurds in Iraq and Mujahedeen in Afghanistan?

Were their financiers hounded as relentlessly? Funding terrorism became an unforgivable crime only after West became the target of Islamic fundamentalist-financed terrorism. Without doubt it is bad but were the seeds of it not sown by the West?

Too bad that the crop is much worse than the West anticipated. While there can be no two opinions about controlling crime of every kind, especially support of even the feeblest kind to terror financiers, the fundamentally important issue is to establish the responsibility therefor.

The state has the primary responsibility in this regard and non-state institutions have the duty to cooperate in the effort but cooperation should not be stretched to include taking responsibility for policing it.

Inept state policies on taxation, tariffs, embargos on trade and flow of capital and ill-conceived development priorities create new venues that clever criminals exploit. Financial institutions are then lumbered with the responsibility of scuttling the ingenious efforts of the criminals to circumvent these measures.

This is a tough proposition given the rapid rise in resources that financial institutions need to dedicate for managing their primary business risks. Given the spectacular rise in the speed with which money now travels around the world (courtesy modern computer and internet technologies) and changes its colour as it travels through banks, bankers face a rapidly escalating level of disadvantage in establishing its origin.

Technology inventors quite unwittingly overlooked the continuing downslide in the quality of governance of the state and the way speed will be exploited by the ever-expanding community of criminals. What their inventions have created is an uncontrollable monster.

Even developed country financial institutions equipped with sensitive technology and advanced levels of expertise, are not equipped for it. Crime-generated money still travels to the West, courtesy these institutions, not because they want to be a part of crime but because they don't represent the sort of institutional arrangements that can control smart financial crime that is committed with continuously evolving ingenuity.

Bankers can't always keep pace with it. Criminals are created by the quality of state governance and the inequalities it creates. Bankers have no role therein. The buck for controlling financial crime cannot be passed on to financial institutions.

It simply wouldn't work What states need to mend collectively are their faulty styles of governance that give rise to economic inequalities. Widespread frustration rooted therein raises the spectre of a world becoming hostage to criminals.