Cooper SECURITYTERRORISMFINANCING 2016

OXFORD
SECURITY FROM TERRORISM FINANCING: MODELS OF DELIVERY APPLIED TO INFORMAL

VALUE TRANSFER SYSTEMS
Author(s): Karen Cooper and Clive Walker
Source: The British Journal of Criminology, Vol. 56, No. 6, SPECIAL ISSUE: Rethinking
Security Studies Across Disciplinary Boundaries (November 2016). pp. 1125-1145
Published by: Oxford University Press
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d0i:10.1093/bjc/azw057 BRIT. J. CRIMINOL. (2016) 56, 1125-1145
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SECURITY FROM TERRORISM FINANCING: MODELS OF

DELIVERY APPLIED TO INFORMAL VALUE TRANSFER SYSTEMS
KAREN CoOPER and CLIVE WALKER*
After 9/11, international counter terrorism financing efforts have delivered measures under both
a criminal justice model and a regulatory risks model. Questions therefore arise about the delivery
of justice within these respective models, alongside doubts about their capacity to yield meaningful
impacts from an ‘all risks’ platform rather than a targeted criminal suspect approach. Particular
reference is made to informal value transfer systems, such as hawala, which have come under sus-
tained suspicion. This article presents original insights from a fildwork survey of UK counter ter-
rorism legislation and practices in order to assess their intended and, to some extent, unintended
consequences.
Keywords: terrorism, IVTS, hawala, regulation, financial sanctions
Introduction—The Impact of 9/11 and Emergent Counter Terrorist Approaches

The events of 9/11 have deepened and widened strategies to counter the financing
of terrorism. The resulting assemblage is designed to capture financial intelligence,
enable criminal detection and prosecution, and allow civil law action by way of reg-
ulation, litigation or sanctions (de Goede 2012a; Ryder 2015). As governance within
the formal financial sector has increased, so too has the scrutiny of informal methods
for transferring funds, in particular informal value transfer systems (IVTS) such as
hawala. International concerns relating to IVTS originated in the early 1990s, because
of their supposed vulnerability to money laundering from drug trafficking, an ongoing
apprehension complicated by their importance for developing economies and migrant
diaspora communities worldwide.
IVTS (including hawala) are financial services whereby funds or value are moved
from one site to another through a personal network which typically has ties to a par-
ticular geographical location, though often with some connection to the regulated
banking system (FATF 2013). The demand for control over these systems stemmed from
international concern regarding their susceptibility for terrorism financing, amplified
by the deep suspicion with which IVTS was viewed by Western stakeholders including
the UN, the Financial Action Task Force (FATF) and International Monetary Fund
(IMF). These suspicions were then fuelled by US discourses as to the risks presented by
IVTS and allegations as to their role in the events of 9/11. Thus, the 9/11 Comumission
Report documented the movement of Al Qaeda funds through hawala networks in
Pakistan and the Middle East prior to 9/11, though allegations as to their enablement
of the 9/11 attacks were not sustained (National Commission on Terrorist Attacks on
the United States 2004: 167, 173, 237).
*Karen Cooper, School of Law, Liverpool John Moores University, Brownlow Hill, Liverpool L3 5UG, UK; Clive Walker,
Centre for Criminal Justice Studies, School of Law, University of Leeds, Leeds LS2 9JT, UK; law6cw@leeds.ac.uk.
1125
© The Author 2016, Published by Oxford University Press on behalf of the Centre for Crime and Justice Studies (ISTD).
All rights reserved. For permissions, please e-mail: journals.permissions@oup.com
COOPER AND WALKER
Prior to 9/11, a lack of impetus had characterized international cooperation on coun-

ter terrorism financing (Adams 1986), a situation brought to an abrupt end following
the 9/11 attacks. The subsequent UN Security Council Resolution (UNSCR) 1373 of 28
September 2001 demanded full international cooperation and the national implemen-
tation of terrorism-related sanctions and conventions, prioritizing the UN Convention
on the Suppression of Terrorist Finance (1999), which criminalizes terrorism financ-
ing. As a result, the four nations which had become signatories before 9/11 (including
the United Kingdom) were joined within two years by 128 others.
The UN Terrorism Financing Convention drew heavily upon what might be termed
a ‘criminal justice model’ (CJM) to tackle the problem of terrorist finance, but equally
recognized that pressing security concerns required more pervasive and agile responses
to offer more immediate disruption to terrorist funding. These modes, such as asset
freezes or travel banning orders, are often referred to as ‘pre-crime’ or ‘quasi-crime’
measures (Zedner 2007; Schuilenburg 2012; Ashworth and Zedner 2013). They are
anticipatory, preventative and pre-emptive in nature and apply without the need for
evidence or proof to the level of arrest, charge or conviction and so aim to capture
a much wider range of behaviours and suspicions (McCulloch and Pickering 2009;
Walker 2012). Therefore, the more prevalent aspect of this assemblage of measures is
the security-driven ‘regulatory risks model’ (RRM), whereby the international commu-
nity and individual nation states impose on the financial sector their unwillingness to
accept terrorism risk to the same degree as the risk of ‘ordinary’ crime given the threat
it poses to international security. This ‘all-risks’ stance views every person as a potential
terrorist (Walker 2009; Donkin 2014) and everyday financial transactions as potentially
requiring scrutiny.
The UN began to draw on this RRM when authorizing and enabling the monitor-
ing, interdiction and freezing of terrorist assets through the asset-freezing regime com-
menced under UNSCR 1267 of 5 October 1999 against the Taliban, later extended to
Al Qa’ida by UNSCR 1333 of 19 December 2000 (now set out in UNSCR 1988 and 1989
of 17 June 2011) and to Islamic State by UNSCR 2253 of 17 December 2015. The capac-
ity to freeze the assets of individuals and entities represented a more risk-averse stance
as part of 'a critical bulwark’ against terrorism (HM Treasury 2007: 5).
In summary, two approaches to countering terrorism financing have emerged:
the CJM and RRM. The review of these models within this article is confined to the
treatment of IVTS, especially hawala, within the United Kingdom. The regulation of
these systems is analysed by drawing on research findings from 20 semi-structured
qualitative interviews undertaken during 2012, from a sample of 3,600 registered
Money Service Businesses (MSB) within the United Kingdom. The sampling applied
drew on data from the World Bank (2011), the UK 2011 Census (Office for National
Statistics 2012), and HMRC to select five geographical areas of high density remitter
populations and MSBs locations from which a random interview sample was derived.
A qualitative approach through semi-structured interviews enabled the investigation
of operators’ attitudes and perceptions in relation to: service use and process, money
laundering and terrorist finance, effectiveness and impact regulation and regulatory
enforcement (further methodological details and critique are available in Cooper
2014).The sample size limits the reliability and transferability of the research find-
ings. However, given that only one rather impressionistic survey of UK MSBs has
otherwise emerged (John Howell & Co 2016: 48), these research findings offer a
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SECURITY FROM TERRORISM FINANCING
unique contribution to the application of a discrete aspect of counter-terrorism

finance legislation.
The two models of governance are analysed as to their fairness, effectiveness and
impact upon the framework of governance relating to IVTS within the United Kingdom.
This analysis of the UK context is one facet of international counter terrorism policy
and regulatory responses designed to protect the state and individual from terror-
ist threats and to deliver human security. The human security paradigm legitimizes
international and state counter terrorism measures, provided they operate holistically
through the creation of development opportunities to address all forms of insecuri-
ties (Liotta and Owen 2006; Evans 2008). As a holistic concept, human security places
value on all forms of security, including integral fundamental freedoms and rights,
so encompassing economic, financial inclusion, humanitarian support and sustain-
able development (McDonald 2002; Commission on Human Security 2003; Roberts
2010). Insecurity arises from political tensions and instability, inequalities and dispari-
ties in economic and social opportunities, and mass international displacement and
migration, all associated with the drivers of terrorist ideology (Callaway and Harrelson-
Stephens 2006; Zwitter 2011). The impact of the counter terrorism finance framework
in protecting financial and human security, including in relation to its application to
IVTS in the United Kingdom, must be considered within this broad framework that
accounts not only for the impact of legal and financial practices but also for their social
and cultural environments.
Hawala—Regulatory Rebirth: From Informal Relationship to Financial Institution

Although a comprehensive analysis of IVTS is beyond the scope of this article, an over-
view of the basic operational methods and the risks associated with these systems will
provide an important context for the subsequent analysis.
IVTS are informal financial systems which have the capacity to deliver funds or
‘value’ between jurisdictions, Hawala being the most common form. IVTS are prevalent
within the Indian subcontinent, Africa, and the Middle East (Perkel 2004; IMF 2005).
Ethnicity, culture and religion (the latter arising from the Muslim charitable obliga-
tions of Zakaat) are important determinants of the membership, operation and usage
of these systems, with system cohesion and operation reliant upon personal, social and
business connections and ‘trust’ between parties, rather than elaborate bureaucracies.
The traditional model of operation involves a customer in jurisdiction A contacting
a hawaladar (operator) A to arrange for an overseas payment. Hawaladar A relies on a
contact, hawaladar Bl, in the recipient jurisdiction B to make the payment to the recipi-
ent. The collection of funds being authorized using a unique identifier code, forwarded
by the sending customer to the recipient and communicated between hawaladars. The
debt created between hawaladars by transaction payments is ‘settled’ later, possibly by
reverse remittances but more often by the parallel trade in goods or by cash couriers
(Vaccani 2009: 5). This ‘settlement’ process may occur through the banking sector, cur-
rency exchange houses, wire transfer or through bulked payments.
IVTS methodology involves separate pathways for the transfer of funds and transac-
tion information, with a further separation of transaction pathways between the cli-
ent/recipient and those between the hawaladars. Operational methods make use of
1127
COOPER AND WALKER
combining transactions into bulk payments for ease and efficiency in the ‘settlement’
process between hawaladars, potentially also involving third parties and beneficiar-
ies who can readily remain anonymous. These operational characteristics obscure the
totality of information relating to the entire transactions process, exacerbated by idio-
syncratic and non-standardized record-keeping (Thompson 2007: 297) with data often
only retained until the transaction is complete (de Goede 2003: 532). These practices
contribute to a lack of transaction transparency and so limit investigation of suspi-
cious transactions. System cohesion is founded on reciprocal trust between hawaladars
which derives from shared ethnicity, religion, social standing and business connections
(Bowers 2009: 383-5) and reduces the need for close scrutiny of the identity of par-
ties, source of funds or transaction purpose, the verification of which are de rigueurin
Western systems.
IVTS remain important vehicles for the delivery of financial support from migrant
diaspora to developing countries (UK Remittance Working Group 2005: 1). They are
also important conduits facilitating access to financial services to remote areas without
banking facilities and enable the delivery of humanitarian aid to areas of conflict and
natural disaster. For such populations, IVTS assist financial inclusion and consequent
financial security. Worldwide remittance volumes through the more formal portion
of the IVTS sector (involving some connection with formal regulated systems) were
estimated at $582 billion in 2014, with $435 billion received by developing countries
(World Bank 2014); the informal sector is estimated conservatively to involve at least
half that of formal flows (World Bank 2011: 19). The accompanying unease about ter-
rorism insecurity and the more general undermining of the regulatory protection of
the formal financial sector is shared by UK regulators, given that the United Kingdom
is a significant remittance-sending state (World Bank 2011). The United Kingdom has a
Muslim population of 2.7 million, with other ethnic groups associated with remittance
cultures (such as East Africans) adding to this cohort (Office for National Statistics
2012: 7). One in four UK remitters was born in the United Kingdom, suggesting that
the cultural tradition of migrant remittances may be transferred across generations
(Boon 2006: 160). Against this backdrop, UK remittance outflows are to areas of regu-
latory concern, mainly India, Nigeria and Pakistan, total around £2bn (UK Remittance
‘Working Group 2005; Amjad 2013; World Bank 2014).
Prior to 9/11, IVTS were largely unregulated in the United Kingdom and elsewhere
(FATF 2005: 5). However, in view of the suspicions triggered by terrorism (Passas 2006),
this era was hastened to an end. The FATF, founded in 1989 by the (then) G7, has set the
international standard for the formalization of IVTS, through a ‘soft law’ approach, sig-
nalled by its nine Special Recommendations adopted on 29 and 30 October 2001. FATF
Special Recommendation VI (now recommendation 14, as consolidated in 2012) com-
mits members to ‘Impose anti-money-laundering requirements on alternative remit-
tance systems’ (FATF 2010; 2013). This edict has reverberated around the globe, with
major security and social consequences.
In the United States, allegations against Al Barakaat, the principal Somali-based
remittance operator, prompted its sanctions listing (from 2001 to 2012) by the UN,
leading to the collapse of its business. The extent to which this action was lawful,
fair or effective in stemming terrorism financing has since been questioned on the
grounds that measures may have adversely undermined humanitarian purposes and
in light of the lack of consideration as to their impact on financial inclusion and the
1128
lack of congruence with the holistic and developmental approach of the human secu-
rity framework (Scheinin 2007: para. 48; Donohue 2008: ch. 3; Heupel 2013). In the
United Kingdom, IVTS were viewed as being subject to ‘witting and unwitting’ misuse
(HM Treasury 2006: para.6.2), a risk underlined by subsequent investigations but not
by any prosecutions (HM Revenue & Customs 2009: para. 9). The official response was
to regulate them as MSB pursuant to EC Money Laundering Directives, the latest of
which, the Money Laundering Regulations 2007 (MLR 2007), apply the Third Directive
(2005/60/EC). Whether these national responses amount to the fair and effective man-
agement of risk will be considered after a brief survey of the alternative CJM.
The Criminal Justice Model

The UK government’s Counter Terrorism Strategy against international terror-
ism (CONTEST) asserts that prosecution is the priority wherever possible (Home
Office 2006: para. 69; Walker 2014a: ch. 1). The CJM, endorsed by UNSCR 1373 and
the Terrorism Finance Convention 1999, aims to secure a common standard for the
criminalization of terrorist financing. It is mainly actioned in the United Kingdom
through offences criminalizing the raising of funds, possession, provision, use, reten-
tion or laundering of terrorist property, contained in Part III of the Terrorism Act 2000
(Walker 2011: ch. 9).
The CJM serves a number of objectives. First, it provides a vivid demonstration of
‘symbolic solidarity’ (Walker 2012: 142-3) by reflecting the threat to international
security from terrorism (Beck 2006: 36) and also enabling at national level the pub-
lic denunciation of terrorism as ‘an attack on society as a whole, and our democratic
institutions’(Lord Lloyd 1996: para. 29).
Second, it can vindicate constitutional values by contrasting them with terrorist ideol-
ogy. The criminalization process itself is subject to democratic institutional scrutiny of
enabling legislation, and judicial involvement affords stringent accountability through
transparent processes which demonstrate respect for the rule of law and due process
protections. The UK CJM has, despite the strain of prescient security threats, resisted
changes to accommodate prosecutorial needs through closed proceedings, a feature
of the RRM-based asset-freezing regimes (discussed below), though some vague and
wide-ranging offences have been inaugurated under the Terrorism Acts 2000 and 2006
(Walker 2013).
Third, the CJM sends a powerful signal of the state’s duty (reflected in the right to
life under article 2 of the European Convention on Human Rights) to provide human
security.
Conversely, the CJM betrays limitations. Pre-emptive action in response to potential
threats in advance of the infliction of potentially catastrophic terrorist harm is prefer-
ential to consequential punishment after the fact (UNODC 2006: para. 14). Here the
CJM encounters limits in the immediacy of its response to human security threats,
since even inchoate criminal liability and special precursor offences, whilst promising
a net-widening approach, still intervene at a relatively advanced stage in the terrorism
enterprise. Additionally, reliance on specialist terrorist offences criminalizing mem-
bership, financial and material support, the possession of property and information,
training, and all manner of distant preparations can undermine cherished standards
1129
COOPER AND WALKER
of justice and the legitimacy. The precise and robust standard of criminal proof and
procedural rules relating to disclosure might be at odds with security agency objectives
in drawing on intelligence for use in disruptive activities, where such sensitive material
is never intended for public disclosure (Walker 2006). Indeed, the CJM may sometimes
be deployed as an instrument to facilitate intelligence-gathering rather than prosecu-
tions, through the ‘far reaching’ criminal offences in the Terrorism Act 2000 which
compel the production of information from the financial sector (in sections 19 and
21A-D), extended further (by the Counter Terrorism Act 2008, section 77) to include
information received in the course of a trade, profession, business or employment and
charitable sector.
Given this clash of objectives, it follows that the success of the CJM in delivering
security and deterrence in respect of terrorism is questionable. Notably, there have
been few prosecutions for terrorist funding offences, with only 16 convictions under
the Terrorism Act 2000 for the period 2001-12 (Home Office 2012), though criminal
provisions under the Proceeds of Crime Act 2002 remain an option (King and Walker
2015). Notably no conviction has been reported within the regulated hawala sector, yet
it is still reckoned to be vulnerable and ‘high risk’ (National Crime Agency 2013; 2014:
11), and so terrorist financing offences are still considered important sites for investiga-
tion and disruption of terrorism (Sproat 2010: 321).
The Regulatory Risks Model

The distinctions in approach, operation and consequences between the CJM and the
RRM are manifold. The former is a hostile imposition which can lead to damaging
consequences by way of conviction and reputational damage. The latter is potentially
more inclusive in allowing for dialogue by way of sector consultation as to standards,
operations and consequences. However, these distinctions can be diminished in the
sphere of counter-terrorism financing, especially as applied to IVTS, where at least two
smoothing factors apply. The first is that some of the RRM tactics are rigidly applied
‘from above’—a prominent feature of asset freezing, as described next, as compared to
the more routinized observance of rules and guidelines associated with financial regu-
latory measures which allow for some application and adaptation ‘from below’. The
second factor is that the MSB businesses most affected by counter terrorism measures
tend to be small-scale, localized and personalized rather than international corpora-
tions, thereby marginalizing the IVTS operators and exposing them to disproportion-
ate compliance costs and personal accountability. Here, it is important to set the legal
and financial regimes in the context of the social setting of the IVTS sector providers
and not just that of its customers.
Regulation from above: Asset sanctions listings

Asset sanctions listings are imposed ‘from above’ as non-negotiable edicts from gov-
ernmental authority. Their impact on the target is wholly negative: assets of a specified
individual or entity are frozen, and further financial dealings involving the subject are
strictly prohibited (subject to licenses for living costs) and enforced by criminal penal-
ties. Three tiers of operative powers apply in the United Kingdom (Walker 2011: ch. 9).
1130
The UNSCR 1267 regime outlined earlier is enforced in the United Kingdom by
the Afghanistan (Asset-Freezing) Regulations (2011) and the Al-Qaida Asset Freezing
Regulations (2011). Listing decisions are made by the UN Security Council, with listing
being open-ended, save for a mandatory three year review. The UNSCR 1267 regime
has been much condemned for its minimal transparency and fairness. The initial list-
ing does not identify the proposing state authority, disclose detailed reasons for listing,
or tolerate rights of defence to advocate delisting. The UN Security Council, a remote
intergovernmental institution, is more familiar with handling wayward governments
through diplomatic channels than according quasi-judicial protections to individuals.
No system of review or removal existed for those affected until 2006. The subsequent
appointment of an Ombudsperson (UNSCR 1904 of 17 December 2009) has secured a
more accessible delisting process but still fails to offer minimum due process guaran-
tees. This deficiency has caused tensions with the expectations as to individual rights
specified by the European Court of Justice (European Commission v Kadi 2013b) and the
European Court of Human Rights (Al-Dulimi 2016). The absence of forensic testing and
detailed explanations relating to listings are questioned as to their effective contribu-
tion to security, and their considerable cost to individual rights and personal security is
indubitable, as the Al Barakaat case demonstrates.
The same controversies have affected the next two sanctions listing systems. The
European Union reinforced UNSCR 1373 by deploying Council Common Position
2001/931/CFSP, which requires another listing and asset freezing system to address ter-
rorism extending beyond the borders of one member state (Eckes 2009; Cameron 2013).
Enforcement by Council Regulation (EC) 258072001 of 27 December 2001 is directly
binding on member states, supported by national criminal sanctions. Regulation
2580/2001 targets European-specific terrorist groups which present a European-wide
threat—mainly secessionists and some international terrorist organizations. A work-
ing party examines proposals for listing (and delisting) on nomination by a state’s
‘Competent Authority’ (such as the UK’s HM Treasury) with a six monthly review of the
entire list. Once again, the fairness of the processes has been found wanting (People’s
‘Mojahedin Organization of Iran 2011).
Within the United Kingdom, enforcement of European Union autonomous sanctions
is provided under the Terrorist Asset Freezing etc Act 2010 (TAFA 2010), which also
affords HM Treasury an independent power to select subjects to be sanctioned—mostly
involving persons charged or convicted of terrorism offences in the United Kingdom
(Anderson 2014). Listing under TAFA 2010 is more rigorous and subject to more due
process than under the supranational codes. Section 2 requires reasonable belief that
the person is or has been involved in terrorism activity, with the order being necessary
for the protection of members of the public. Nevertheless, the listing decision is by the
Secretary of State (and not a court) and draws on a looser range of intelligence than the
evidential standards required of the CJM. Whilst listing decisions are subject to appeal
to the High Court (TAFA 2010, section 26), concerns about security sensitive material
can involve proceedings being closed to the suspect.
The amounts frozen under these schemes remain modest: for TAFA 2010, £15,000 in
relation to 36 accounts; for the UN regime, £60,000 in respect of 33 accounts; under the
EU regime £11,000 in relation to 10 accounts (Hansard 2016). Whilst few are affected
(18 individuals and 7 entities and cash amounts are ‘remarkably low’ (Anderson 2014:
para. 2.24), small sums can still impact on contemporary terrorism which often lacks
1131
COOPER AND WALKER
elaborate structures (Sageman 2011). However, a conclusive evaluation of impact is

impossible because of security restraints on access to the data. One suspects that sym-
bolic solidarity is again in play in several cases.
The financial sector must rigidly adhere to the various sanctions regimes, otherwise
regulatory or criminal penalties may ensue. TAFA 2010, sections 20 and 21, allow HM
Treasury access to financial information held by financial institutions, underpinning
the observance of sanctions and licences. The observance of sanctions scheme is chal-
lenging, given their complexity, the number of listings and the numerous aliases and
names common to some cultural groups (Thompson et al. 2013: 49).
Regulation from below

The notion of regulation ‘from below’ is somewhat misleading since the core regu-
lations applying to MSBs almost invariably involve legal impositions and penalties.
However, three features underline the distinction from regulation ‘from above’ as per
the asset sanctions systems.
Firstly, financial stakeholders may influence the design and application of regula-
tions, though this engagement favours the representation of larger financial institu-
tions within corporatist structures (Budd 2012). The regulators (HM Treasury and HM
Revenue & Customs—‘HMRC’) determine the threats to the UK MSB sector, which
remains classed as ‘high risk’ for terrorist finance (HM Treasury 2015b: 50; Home
Office and HM Treasury 2016: 11), and design strategies appropriate to the UK context.
Whilst MSB representative bodies have a role in this process, given the sector diversity
and the overall dominance of the sector by larger ‘branded high street’ MSBs (such as
Western Union), the degree of influence of smaller MSB is limited (Cooper 2014: 279;
HM Treasury 2015b: 46). This potentially distorts the sector perceptions of the burden
of compliance across the sector and the effectiveness of measures in addressing current
vulnerabilities.
The second characteristic of regulation from below is that regime in part relies upon
soft law non-enforceable guidance documents—albeit that these have come to have
sharper legal edges to enforce them. ‘Soft’ legislators comprise in the main the FATF,
the IMF, and the World Bank. Yet, they exert strong influence on national enforceable
guidance, such as that from UK's Joint Money Laundering Steering Group (2014).
The third feature derives from what is termed ‘cultural incorporation’, a regula-
tory technique designed to achieve security through pervasive influence over financial
daily routines by internal ‘professional enculturation’ rather than external policing
(Brunnermeier et al. 2009: 2). It reflects the need to guard against market failure,
whereby, in the field of counter terrorism finance, specialized regulation is required
to ensure that market participants prioritize public interests in counter terrorism even
at the expense of their own private commercial interests. At the same time, and in
line with the conditions of late modernity, it recognizes that complex financial systems
are held mainly in private hands and operate most efficiently for private purposes.
Consequently, governments cannot impose regulation evenly across all financial play-
ers and transactions but must, even in the case of counter terrorism financing, take
account of business needs and costs (Fitzgerald 2004). Promotion of ‘prudential regu-
lation’ should be at its greatest intensity where the risks of market failure are greatest,
1132
and even then should reflect competitive neutrality, cost effectiveness, transparency,
flexibility and accountability (Siminova 2011: 346).
Given that, in 2005, a fifth of the 246 money laundering investigations by HMRC
concerned MSBs (HM Treasury 2006: 17), the imposition of regulation has aimed
to deter transgressions by creating a ‘hardening of the environment’ (HM Treasury
2006: 12). At the same time, an initial tailoring of regulation still aimed for regulation
‘from below’ by being ‘deliberately light-touch, with further focus on education and
outreach’, to promote 'a vibrant and competitive MSB sector’ and embracing MSBs
as ‘active partners in the fight against crime and terrorism’ (HM Treasury 2006: 5, 6).
However, the ‘regulatory bite’ later hardened the environment by additional regula-
tory demands and enforcement aimed to exclude those whose standards were viewed
as too risky.
The MLR 2007 enforce the core of the UK’s RRM, requiring IVTS operators to
be registered as MSBs. Following an IMF review in 2011 (IMF 2011, para. 43), MSB
business owners must satisfy a ‘fit and proper’ test (Money Laundering (Amendment)
Regulations 2012, regulations 26, 28 and 30), while regulations 10 and 11 afford
broader grounds for exclusion, adding to grounds such as relevant convictions, confis-
cations and regulatory breaches to include potential insecurity from business owners
‘with regard to the risk of money laundering or terrorist financing’. Research findings
indicate that MSBs perceive the ‘fit and proper test’ to be weak in deterring potentially
unsuitable entrants (Cooper 2014: 268), suggestive that entry barriers might be circum-
vented by vesting control in others behind the scenes.
The MLR 2007 require registration of all UK MSB business premises and agents,
with MSB owners/senior managers required to risk assess their business risks relat-
ing to money laundering and terrorist financing, reflecting risk mitigation manage-
ment strategies within an AML compliance policy. A Money Laundering Reporting
Officer must be appointed, having overall responsibility for Suspicious Activity Reports
(SARs—considered later), staff training and oversight of AML and regulatory compli-
ance. The MLR 2007 set out tiers of due diligence standards to be applied, pursuant to
stipulated conditions, and now requires the maintenance and retention of transaction
records for a minimum of five years.
Given the widespread suspicion relating to IVTS after 9/11, regulation was regarded
as a necessary protection against misuse, especially because many MSBs operated as
small local or regional businesses (HM Treasury 2006: 9). However, unfairness in the
application of the regulations potentially emerges in the disproportionate targeting of
MSBs, who lack the resources of major financial businesses to handle the regulatory
impositions. This unfairness was reflected in the research interviews, whereby the sec-
tor support for regulation was said to be undermined by the treatment of the sector in
line with other financial institutions, without an appreciation of differential markets,
resources, operation logistics and capital resources (Cooper 2014: 270, 281). The impact
of the changing regulatory environment has reportedly reduced operators at the lower
end of the sector, limited access to the sector and professionalized the sector by having
‘chopped out the very bottom part of the market’ and some smaller operators (Cooper
2014: 273) because of the additional expertize required to ensure regulatory compli-
ance. As a result, some MSBs had sought the security of agency status and oversight
by a larger principal business (Cooper 2014: 272), and some had gone out of business
altogether (John Howell & Co 2016: 49). The regulatory framework was considered to
1133
COOPER AND WALKER
have impacted in a disproportionately negative way on these smaller MSBs which had
previously dominated the sector, while larger businesses were able to absorb the extra
demands of regulation. (Cooper 2014: 270). These regulatory effects have potentially
reshaped the sector, leading to the dominance of an agency franchise model, with
principals supervising form the ‘top down’ and drawing on their additional resources
to support compliance by their agents at the bottom.
The MLR 2007 rely on a risk-based approach (FATF 2009: 7) which should theoreti-
cally enable its fair and proportionate application to all businesses regardless of size,
accommodating the diverse range of MSBs (remittance forwarding, cheque cashing or
bureaux de change), and the diverse profiles of remittance users and corridors served.
One interviewee estimated that the effectiveness of the regulatory framework came
from the general deterrence and the extent of the RRM (Cooper 2014: 264). Regulatory
effectiveness by being linked to breadth and volume rather than the specific value of
tailored measures, means that the policy of promoting a level regulatory playing field is
harder to achieve in the smaller-scale MSB sector.
Regulatory adjustment has presented a further challenge in response to changing
sectoral risk, since adequate risk management is a dynamic and ongoing process requir-
ing a constant revision of guidance to the sector and its responses (Cooper 2014: 271).
Almost all surveyed businesses reported significant increased compliance costs, which,
as fixed costs, disproportionately affect businesses with smaller capital bases (Cooper
2014: 271).
In addition, due diligence linked to the risk of terrorism financing demands consid-
erable effort in respect of enhanced risks associated with the specific receiving loca-
tions, or the risk from known areas of terrorist activity, examples being Pakistan and
the Horn of Africa. Additionally, remittance activity peaks in conjunction with reli-
gious festivals and related charitable donations, where guidance requires enhanced
due diligence (EDD) in response to transaction values which exceed the total average
value of remittances (HMRC 2014: para. 8.16) or where transactions make no commer-
cial sense and regardless of the individual’s customer profile. EDD is inevitably oner-
ous at peak remittance periods, for what are essentially high volume, low value and low
profit transactions.
Supervisory guidance should be such that it informs sector risk assessment, but it can
only apply efficiently if clear, accessible and evidence-based. However, several interview-
ees commented on the lack of consistency in on-site supervisory audits and guidance,
even questioning the knowledge and experience of the supervisory teams. Where fur-
ther advice was sought, it was not always forthcoming or clear, leaving businesses uncer-
tain as to the sufficiency of their compliance but mindful of potential consequences if
later determined to be deficient (Cooper 2014: 276). In some instances, guidance was
perceived as inaccessible due to lack of specificity, vagueness and differences in subjec-
tive viewpoints, and these features dampened the motivation of the MSBs to be compli-
ant (Cooper 2014: 265, 266).
As with regulation from above as to asset freezing, the tests of effectiveness and fair-
ness as applied to the MSB regulatory regime are difficult to assess, given the diversity
of the sector in terms of size and function and the restrictions on data collection by
regulators and its accessibility to researchers. The government, however, remains com-
mitted to keeping under review the regulatory burden on business (Home Office and
HM Treasury 2016).
1134
Effectiveness within the RRM appears to be mainly measured by procedural compli-

ance, and the extent, sufficiency and diligence of application. There remains no firm
estimate as to the reduction in risk of terrorism financing achieved since the ratchet-
ing up of the RRM, with reliance on intelligence from law enforcement rather than
proven evidence continuing to inform assessment of sector risk (HM Treasury 2015b:
46). Although repeated instances of charitable funding of terrorism have been sus-
tained (Walker 2014b), no formal regulatory action has been reported for terrorism
related activity through UK IVTS. Regulators and the sector accept that regulation
cannot avert all misuses, but given the lack of prosecutions or major recent changes in
regulatory rules, one must assume that the financial authorities are broadly satisfied
with the regime against terrorism financing by the MSB sector.
The risk appetite of UK regulators within the flexible regulatory regime is never-
theless also influenced by transnational and international counter terrorism financ-
ing policy and events elsewhere in the world that have little connection to the UK
MSB sector. Thus, arguably the most powerful influences in recent times have been,
first, the global financial crisis since 2008, which requires higher capital thresholds
and lower risk tolerance, and, second, US regulatory action directed against banks
through the imposition of huge penalties and Deferred Prosecution Agreements.
Though US regulatory action has mostly arisen from non-MSB problems (such as
drugs money from Mexico handled by banks: US Senate Permanent Sub-Committee
on Investigations 2012; United States Government Accountability Office 2016), the
outcome has been to hasten the withdrawal of banks from sectors which they view as
inherently risky, including aspects of the MSB and charitable sectors (John Howell
& Co 2016). The impact in terms of ‘de-banking’ will be taken up under the next
heading of this article.
De-banking is the ultimate consumer sanction against customers, but the bite of
other regulatory responses also damages their treatment. The perception arose from
interviews that the MSB services on offer are being forcibly altered from what is desired.
Extra identity checks were perceived as being tolerated by customers and yet are viewed
as intrusive, creating disproportionate delays to the transaction time, eroding the infor-
mality that makes MSBs preferable to banks, and causing customers to feel like ‘crimi-
nals’, thereby creating an ‘awkwardness’ and a ‘barrier’ to the business relationship
(Cooper 2014: 269) More generally, some element of collective injustice is also felt—the
way in which some types of activities by some ethnic groups are subjected to suspicion
and obstacles. This aspect will also be considered within the next section in this article.
Cross-cutting issues
This section of the article explores aspects of the human security concerns referred to
earlier that are consequential to the application of counter terrorism finance policy but
do not directly ‘fit’ within just one of the regulatory models presented. The two cross-
cutting aspects considered in this section of the paper relate to the practical operation
of IVTS in the United Kingdom. One relates to the filing of SARs (Home Office 2005).
The second concerns the impacts of both Models for financial inclusion and the cur-
rent ‘de-risking’ by financial institutions which potentially yields economic insecurity
for some minority ethnic groups.
1135
COOPER AND WALKER
Delivering actionable suspicion

Efforts to delivery human security as applied to terrorism financing are predicated
on the search for suspects or suspicious transactions. Intelligence is drawn on an ‘all-
risks’ basis from bulk financial data collection, exemplified by the Terrorist Finance
Tracking Program’s access to data held by the Society for Worldwide Interbank
Financial Telecommunication (de Goede 2012b; European Commission 2013a).
Financial intelligence, regardless of source, can form one strand of terrorism inves-
tigations, with financial regulation compelling the search for, and notification of,
suspicious activity by the MSB sector, through the filing of SAR reports. Sectoral
capacity to support the delivery of actionable suspicion for further investigation is
reliant upon customer knowledge and transaction patterning, so as to infer abnormal
and thereby suspicious variations.
These regulatory approaches to terrorism financing investigations mirror to some
extent the established practices relating to organized crime and money laundering
investigations, thereby treating deviant criminal practices as broadly concordant to
terrorism financing. This policy transfer operates notwithstanding the marked dif-
ferences between criminal and terrorist laundering processes, both in purpose and
operation, leading some commentators to questions the wisdom of this policy (com-
pare: Parker and Taylor 2010; Levi 2010). The merger of approaches may arise as
much from bureaucratic convenience and familiarity as from evidence-based effec-
tiveness, since counter-terrorism policing practitioners commonly resort to main-
stream crime-based measures (Proceeds of Crime Act 2002) rather than specialist
powers (King and Walker 2015).
A key feature of both regimes is the requirement of financial professionals to assist
proactively in the detection and investigation of terrorism financing through duties to
report. This reporting process is relatively routinized. Disclosures by means of SARs
are stored on the ELMER database by the National Crime Agency (comprising around
1.5 m entries). The rate of reporting has increased substantially—from 18,408 in 2000
to 381,882 in 2015; the MSB sector submitted 11,120 SARs in 2014, the fourth largest
reporting sector (2.91 per cent), with 8,452 of all SARs concerning money transmission;
but just 1,899 SARs in 2015 were terrorist related, 108 associated with money transmis-
sion (5.58 per cent) (National Crime Agency 2015: 38). The relevant SARs are referred
on to the National Terrorist Finance Investigation Unit and regional Counter Terrorist
Finance Units, the challenge then being to isolate actionable reports and to discourage
defensive reporting. The Newton Report (2003: para. D136) argued for the destruc-
tion of reports unless an investigation is ongoing, a proposal rejected by the Home
Office (2004: Pt II para. 10). Although the Lander Report concluded that ‘the regime
was clearly delivering benefits in both the terrorist and money laundering contexts’
(2006: para. 2), the Government recently acknowledged that the regime was in need of
further reform including an upgrading of the UK Financial Intelligence Unit capabili-
ties (Home Office and HM Treasury 2016: 11). The House of Lords European Union
Committee (2009: paras. 108, 123, 180, 182) has advocated the exclusion from SARs of
minor crimes, case-specific feedback and more limited data retention (than 10 years),
proposals all rejected save for the reduction of the retention period to six years (House
of Lords European Union Committee—Government Reply 2009: 11).
1136
In line with the foregoing comments about the influence of mainstream money laun-
dering norms, interviewees in the field were acutely aware of the need to report sus-
picions and were relatively confident about the indicators for money laundering, on
which there was a plethora of guidance and which was at the forefront of their daily
operational decision-making, some having filed SARs on that basis (Cooper 2014: 261).
Although the filing of SARs does not require the suspicions to be firmly grounded
(Shah v HSBC 2010), reporting presupposes some level of tangible suspicion but general
money laundering indicators cannot necessarily be read across to arouse suspicion of
terrorism financing. One interviewee identified that terrorism financing would be com-
paratively challenging to detect (Cooper 2014: 252).
Sanctions listings are regarded as definitive indicators of terrors suspects, but manual
searches are time-consuming for small MSBs lacking the necessary IT infrastructure or
revenue for commercial screening packages; and even here a ‘false match’ can occur
(Cooper 2014: 253). Interviewees were less able to articulate other factual circumstances
which would arouse terrorism financing suspicion, with those mentioned mainly relat-
ing to generalized jurisdictional risk (Cooper 2014: 248). Objective factors determining
the rationale for jurisdictional risk assessment were less easy to determine, requiring in
reality a sophisticated understanding of regulatory compliance and enforcement in the
destination country within the context of current international affairs. Crucially, inter-
viewees also lacked an appreciation of the potential relevance of small sums in support-
ing terrorism (Cooper 2014: 250), a misconception underscoring the lack of effective
sector guidance. Conversely, interviewees were keen to discount any suspicion associ-
ated with community user groups, implying a sensitivity of MSBs to the allegations that
ethnicity, culture or religion can trigger suspicion (Cooper 2014: 250). Consequently,
ethnicity or religion were not relied upon as indicators of suspicion; the FATF sugges-
tion of identified name and geographical area as relevant terrorist indicators was also
subsequently retracted as too broad to secure reliable SARs (FATF 2004: 27).
The lack of feedback to the sector combined with the fact that SARs are just one ele-
ment in building up actionable intelligence make it very difficult to assess the effective-
ness of SARs. This point was confirmed by other financial sector responses to recent
Home Office Consultation on the SARs regime (Home Office and HM Treasury 2016:
Annex B). Neither can the National Crime Agency outline acceptable reporting prac-
tices with precision, other than aiming for quality over quantity (National Crime Agency
2014: 8). Even if SARs are sufficiently forthcoming, the 9/11 National Commission
doubted their impact, given that funds were moved by the attackers through the finan-
cial sector in regular ways that would not have flagged those transactions as suspicious;
as a result, ‘trying to starve the terrorists of money is like trying to catch one kind of
fish by draining the ocean’ (2004: 382).
As for fairness, the interviewees pointed to a lack of certainty as to whether, and at
what point, a SAR should be filed and what level of suspicion should trigger this. The
perceived lack of guidance would appear to disadvantage MSBs compared to large
banking corporates, especially given that the sector remains liable for not filing even if
no prosecution ensues (Mohammad Ahmad v HMA 2009). Without the desired certainty,
operators apply informal risk management strategies, such as the refusal of customers’
business (Cooper 2014: 260).
1137
CCOOPER AND WALKER
Unintended regulatory consequences and financial exclusion

Customer exclusion as an unofficial resolution to the problem of risk impacts the
second cross-cutting issue. One important consequence of both the CJM and RRM
is to demand safeguards against terrorism financing based on routinized bureau-
cratic practices rather than investment in personal trust, as traditionally character-
ized IVTS. Crucially, the banks providing financial services to MSBs are free to
make their own assessment of due diligence levels, often requiring a higher level
than the regulatory framework by applying a generic assessment of the sector rather
than individual assessment of each MSB. Regulatory supervisors have responded
by reiterating that they are unable to intervene in private commercial decisions
about service availability, merely calling on banks to apply ‘common sense’ in
determining their risk appetite (HM Treasury 2015c, Financial Conduct Authority
2015; 2016a). As UK banks have become highly ‘risk averse’ to the taint of terrorism
financing, sectoral ‘de-banking’ has been the consequence (Keatinge 2014; Adeso,
Global Center on Cooperative Security and Oxfam 2015). This practice stigmatizes
the IVTS sector as ‘high risk’, with the result that services have become unavailable
to dependent operators and consequently their customers. In short, the result is
financial exclusion (Demirguc-Kunt 2014; John Howell & Co 2016).
De-risking is a feature of the regulatory landscape within the United Kingdom
and also in the United States where, as mentioned earlier, an even more aggres-
sive regulatory regime prevails (including jaundiced views of UK standards: Weiss
v National Westminster Bank 2014: 13-4). Huge penalties for money laundering and
potential terrorism financing have been inflicted ($1.9bn in the case of HSBC in
2013: US Senate Permanent Sub-Committee on Investigations 2012; United States
Government Accountability Office 2016). The unintended consequences (though
those believing in neo-colonial conspiracy theories may construe otherwise) involve
the risk of displacing business to unregulated operators (Shehu 2012; Financial
Conduct Authority 2013: para. 7.9) or the complete withdrawal of financial facilities.
The result is the potential diminution of remittances from émigré workers and of
humanitarian relief work, both threatening the human security of the inhabitants
of dependent countries.
The leading UK judgment on de-banking is Dahabshiil Services v Barclays Bank
(2013). Barclays Bank, which serviced 69 per cent of UK MSBs, gave notice in 2013
of withdrawal of their banking services to many MSBs. Dahabshiil, a UK registered
MSB operating mainly in Somalia, brought a High Court action challenging the
termination of its contract, on the technical grounds of abuse of dominant mar-
ket position. The outcome was the suspension of Barclays’ termination of services
pending the securing of alternative arrangements by Dahabshiil. Barlcays’ deter-
mination to exit the market followed similar action by HSBC in 2012 (Lowery and
Ramachandran 2015) and raises concerns as to the potential impact on remittance-
dependent economies. Somali remittances are estimated at $1.2 billion annually
(Adeso 2015), constituting over 50 per cent of Somali income and supporting 40 per
cent of the population. A minimum of US$1.3 billion is remitted annually to Somalia
by the UK diaspora, mainly via MSBs (HM Treasury 2015a), an estimated 25-45 per
cent of the country’s GDP and a key income support for over 40 per cent of the popu-
lation (Durner and Shetret 2015: 6).
1138
With corresponding difficulties being increasingly faced by charities in transferring

funds to zones of the world affected by conflict and terrorism (Counterterrorism and
Humanitarian Engagement Project 2014; Walker 2014b; Wynn-Pope 2015: 253), the UK
Department for International Development (DfID) and HM Treasury established in
2013 a multi-agency Action Group on Cross Border Remittances. This Group aims was
to identify ways to develop safe corridors (Hansard 2013; HM Treasury 2013: Appendix
11; DfID 2015), and a number of detailed technical studies have been conducted into
the security and verification of the processes of money transfer (Makin and Clarke
2014; Makin et al. 2015). However, no resolution has been secured, and the mind-set of
banks remains fixated elsewhere—on the more hostile environment of financial over-
sight since the global financial crisis and especially on the threat from US regulators,
such as the Department of Treasury Financial Crimes Enforcement Network, which
remain much more hostile to MSBs in countries at risk, with the exception perhaps of
Western Union which benefits from the confidence of, and close cooperation with, US
authorities. For their part, UK regulators continue to express themselves as ‘unable’ to
intervene in private commercial arrangements, but this places the loss of humanitar-
ian support from charitable donations and private remittances at odds with policy on
support for overseas development (HM Treasury 2015d) and social inclusion (Financial
Inclusion Commission 2015; Financial Conduct Authority 2016b).
Looking to the future, the UK government could assume more risk through under-
writing mechanisms, as has applied to reinsurers affected by terrorism (Walker 2004).
The enforcement of risk regulation on a transnational basis, especially by US authori-
ties, could also be curtailed by diplomatic interventions. However, there currently
appears to be no UK appetite for radical interventions in the remittance or humanitar-
ian marketplaces.
Conclusions
Combating terrorism finance remains a multifaceted project (Gardella 2003), but with
the RRM predominating over the CJM in terms of pervasiveness and impact. The lat-
ter may be procedurally superior in offering a fair balance between state and societal
interests and the securing individual rights. However, the limits of the CJM create a
space for precautionary logic to drive pre-emptive and exclusionary action through the
RRM in order to reassert security, and absent the safeguards of the former, the RRM
potentially allows for ‘policy laundering’ through soft law approaches which allow the
introduction and expansion of pervasive and sometimes drastic financial regulation
which lacks accountability or fairness (Hayes 2012).
The analysis of these two approaches in relation to the regulation of IVTS shows
that terrorism finance measures do not operate in a vacuum. Although socio-economic
conditions can adjust and accommodate increased regulation in the name of security,
there is a limit to tolerance at the expense of valued norms. This equally applies to both
models but is more keenly felt within the RRM where accountability is weaker.
Effectiveness has proven more difficult to discern, other than that new edifices of
regulatory routines and extended criminal codes have been devised and imposed.
Therefore, further research is needed in order to capture the full impact of the rela-
tive contributions of the models identified to deliver security and to develop a more
1139
CCOOPER AND WALKER
nuanced understanding of how suspicion and risk and vulnerabilities are conceptual-
ized and applied across the range of actors and communities. Further consideration of
impact and effectiveness need also to be informed of potential adverse consequences
on vulnerable communities. As is the case elsewhere in the financial sector, more faith
has been placed in the impact of the RRM than the CJM, but that faith may now be
waning in view of repeated findings of widespread and deliberate regulatory infrac-
tions by banks, which have persisted despite harsh sanctions (Arnold 2015).
This article has confirmed that counter terrorism is in part being ‘fought out in
the halls of our financial institutions’ (Ayers 2002: 58, 59). A financial front has been
opened, with many late modern attributes of public-private partnership, soft laws and
multi-tiered governance. What has been delivered in terms of fairness and effective-
ness is not only hard to assess but also seems at times to be beside the point to those in
positions of power who appear have pre-determined security and commercial agendas.
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Cooper SECURITYTERRORISMFINANCING 2016

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SECURITY FROM TERRORISM FINANCING: MODELS OF DELIVERY APPLIED TO INFORMAL

SECURITY FROM TERRORISM FINANCING: MODELS OF

Keywords: terrorism, IVTS, hawala, regulation, financial sanctions

Introduction—The Impact of 9/11 and Emergent Counter Terrorist Approaches

Prior to 9/11, a lack of impetus had characterized international cooperation on coun-

unique contribution to the application of a discrete aspect of counter-terrorism

Hawala—Regulatory Rebirth: From Informal Relationship to Financial Institution

The Criminal Justice Model

The Regulatory Risks Model

Regulation from above: Asset sanctions listings

elaborate structures (Sageman 2011). However, a conclusive evaluation of impact is

Regulation from below

Effectiveness within the RRM appears to be mainly measured by procedural compli-

Delivering actionable suspicion

Unintended regulatory consequences and financial exclusion

With corresponding difficulties being increasingly faced by charities in transferring

CooPER, K. (2014), ‘A Critical Examination of the Anti-Money Laundering Legislative

FITZGERALD, V. (2004), ‘Global Financial Information, Compliance Incentives and Terrorist

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