Opinion: greater KYC needed to combat terrorism financing concerns
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Opinion: greater KYC needed to combat terrorism financing concerns


In February, the United States Court of Appeals for the Second Circuit reversed a 2014 decision that had found Jordan-based Arab Bank liable for intentionally supporting the terrorist group Hamas. The original decision was made after the bank was tried by a Brooklyn-based jury for providing financing to the group, which has been linked to several militant attacks against Israel in the early 2000s. It was the first time in the US that a bank was held liable civilly for violating the Anti-Terrorism Act, which lets US citizens seek damages from international terrorism.

At the time, IFLR reported that the decision to try for terrorism financing would open the door for more civil cases to be brought against banks as an additional tool for tackling terrorist financing overseas. This would act as a strong deterrent for banks looking to enter into markets with any level of terrorist activity.

Notably, although the decision was overturned, it was not suggested that Arab Bank had not in fact been complicit in the original charges, just that the trial had not been properly handled. The bank was originally accused of handling transactions for the group, and routing money to charities that supported the group or families of militants after death. The re-emergence of the case brings the original question back to the fore – are banks more reluctant to operate in certain territories for fear of being brought to trial in the US, and to what extent is that a step in the right direction?

Banks considering emerging markets that are considered high risk and deciding not go to these regions because there is too much vulnerability is not necessarily a positive: most people in those regions are not connected with terrorism and having a strong capital flow remains important. So, if the bank had been aiding a well-known terror group with its financial business – inadvertently or otherwise – should it not have taken stronger steps to know who its customers were and not aid them in any way to avoid these negative repercussions? It is also crucial that terrorist groups like Hamas, Al-Qaeda and the so-called Islamic state do not have access to funding. Throttling the financial stream can have a huge effect on their activity, and the US government should be aided in its attempts to prevent banks from knowingly, or in this case unknowingly, doing so.

One of the best ways to combat this would be hugely improved know your customer (KYC) provisions. Banking institutions and governments across the world have already been beefing up their KYC in an attempt to tackle terrorism financing, but there is little uniformity across borders or between institutions.

The US deterrent does appear to be working either. In February, the Pakistani government took a number of measures to adhere to the US's demands after threats to once again add the country to the Financial Action Task Force, an intergovernmental organisation that fights money laundering and terrorist financing. Concern that this would damage future investment into the economy has caused Pakistan to ramp up its measures to prevent the rise of terrorism in the region, particularly neighbouring Afghanistan. This illustrates that the tactic is working – to some extent. Finally, new cryptocurrency technologies that seek to decentralise currency may well render the entire process redundant. Alternative means of transferring funds will mean terrorists can avoid more highly regulated banking institutions, but with US regulators cracking down and stricter KYC provisions expected across the board – this route may not be sustainable.

What is certainly necessary are uniform regulations across the world.

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