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A man counts Pakistani Rupee (PKR) notes. - Reuters/file
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SOMETIME in the first half of 2009, officers in a small bank with substantial foreign stake noticed something odd. An account was showing extremely high monthly turnover, almost 640pc the declared income of the account’s owner.
The bank observed the account for almost three years, before the branch manager decided that the individual’s profile did not match the volumes being transacted. He reported the matter to his compliance division, who studied the activity and discovered that the funds were being deposited in Karachi and withdrawn from another branch of the same bank located in a small town exactly equidistant from three large conflict zones in the country. Towards the end of 2012, they instructed the branch manager to call the individual in and ask him about the source of the funds travelling through the account.
When contacted, the individual agreed to come in but failed to show up on the agreed time. Then he vanished. The bank authorities closed the account, which had no funds in it at the time, and generated a Suspicious Transaction Report (STR).
The STR was sent to the Financial Monitoring Unit (FMU) at the State Bank, a quasi-autonomous department charged with receiving all STRs from banks and financial institutions and analysing them to determine the nature of the activity they might be connected with.
The FMU would have called for a detailed transaction history of the account in question, and looked for any other accounts operated by the same individual in other banks. They would then determine whether the activity in question connects with money laundering (concealing funds generated from criminal activity), drug-related offences, corruption by politicians or civil servants, tax evasion or terrorism. Depending on each case, the STR would get forwarded to the relevant government department for action.
This process took almost two years. The STR in this case was forwarded to the FIA director general in June 2014, and landed on the desk of an investigating officer by September, a full two years after the last suspicious transaction. By then, the account was closed and the owner had vanished.
In the twelve months of the year 2014, this was the only terror-related STR to be received by the FIA Circle South, which includes the city of Karachi. By some estimates, the city accounts for around 20pc of the total depository base of the banking system. The other ten STRs received by this circle were all about more routine criminal matters, like credit card fraud or abuse of used car import scheme.
Last week, the DG of the FMU told a Senate committee that out of 5,774 STRs generated over the past five years, only 34 have been in connection with terror financing cases, illustrating the weak ability of the financial system to detect or monitor funds connected with terrorism. He did not say how many of those were actually prosecuted, and how many convictions were obtained.
That job — investigating and prosecuting terror financing — belongs to the FIA, and it was not part of the hearings.
Vague guidelines
Funds connected with illicit activity will often use informal channels to move around, but contrary to popular perception, even the most informal of channels will touch the banking system at some point, say sources in the FIA.
Detecting them when that happens is currently the banks responsibility, and the State Bank has issued a set of detailed guidelines, last updated in 2012, that give “examples or characteristics of possible suspicious transactions for money laundering or financing of terrorism”.
Of the 65 bullet-pointed examples of suspicious transactions given in Annexure 2 of those guidelines, only a handful relate to terror financing.
The rest all relate to money laundering. Even those that talk about terror financing, the guidelines are very vague. For example, one bullet point states “[a]n account opened in the name of a legal entity, a foundation or an association, which may be linked to a terrorism organisation and that shows movements of funds above the expected level of income”.
So how is a bank supposed to know whether an organisation is linked with terrorism or not? “Banks typically use [information gleaned from] the media to trigger scrutiny” of an individual or an entity, says FMU director general Mansoor Ali Khan.
One problem with detecting terror financing is that it has no characteristic signature, unlike money laundering or hundi/hawala transactions, he adds. For money laundering, for example, one key signature can be “[a]n account operated in the name of an offshore company with structured movement of funds”.
In the case of hundi/hawala, the signature can include an account with high turnover but “low beginning and ending daily balances”. This was the signature used to catch Khanani and Kalia in 2009, for example.
The problem with terror financing is that it is mostly legitimate in its appearance, says Khan, “and even though some guidelines exist for heightened scrutiny, capturing these transactions can be very difficult”.
Salim Raza, who served as State Bank governor when the Khanani and Kalia case was prosecuted, agrees that detecting terror financing is enormously tricky by comparison to other illicit funds. “A lot of investigation is required behind the scenes before banks are tasked with monitoring such funds,” he says. “Otherwise you could set the cat among the pigeons.”
Banks routinely use system-generated alerts to detect unusual commercial transactions, for instance a large charge to a debit card or an online transaction that departs from the customer’s usual profile of activity.
But when it comes to terror financing, “only some banks might be using system-generated alerts”, says Khan. “Most of them rely on manual detection” by bank staff, like branch managers or relationship managers.
Manual detection complicates the task enormously. In the city of Karachi alone, for example, more than 2.5m cheques are presented for clearing every month.
Intercepting its finances is key to fighting terror. But that interception cannot happen if detection is weak.
Banks don’t know what exactly to look for when trying to monitor terror financing. Even when suspicious transactions are detected, they are years old by the time they arrive in the hands of law enforcement agencies. By then chances of mounting an effective investigation have largely fizzled out, let alone building a case for successful prosecution.
Published in Dawn January 25th , 2015
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