Another Type of Financial Crisis?

The Washington Post recently published an article highlighting that the global system of financial constraints on suspected terrorist organizations and their financiers may be in trouble. Apparently, the UN blacklist program aimed at freezing the assets of suspected terrorist groups has been eroding due to both national and regional laws that challenge the legality of the restrictions.

There are a number of reasons why states are failing to monitor and restrict financial activities of those groups on the UN blacklist. One issue seems to be that the UN program has no mechanism to allow for individuals or organizations that are on the list to contest their placement. As a result, some groups have gone to regional and state authorities to have courts overturn governments’ participation in the program. Some of the targeted individuals have even petitioned the European Court of Human Rights to have restrictions removed in European Banks. Slowly, these types of challenges are chipping away at the UN programs what was supposed to ensure worldwide coordination in restricting terrorist financing.

The United States has its own list, longer than the UN version, that it provides to other countries in an effort to have them take action to stop financial transaction on their soil. The drawback of this technique is that the US has no way to enforce its recommendations in other jurisdictions.

The difficulty of coordinating these efforts highlights the problems that come in trying to get the world community to act in unison. Although many of the countries highlighted in the article understand the need to track and cut off the funds used by extremist groups, there are many national and regional differences in laws and in who is considered a terrorist. The European Court of Justice and other national courts in Europe may soon rule that the UN blacklist violates human rights. Furthermore, some states that were unhappy with the US invasion of Iraq in 2003 have used this as a reason not to support the UN or US programs against terrorist financing. Some also accuse the US of using its own list as a political tool, blacklisting individuals who are opponents to governments that the US has close ties to- such as in Saudi Arabia. The differences in interpreting human rights law, as well as the distrust among states, means that the barriers to effective coordination on this issue will not be easily overcome.

In addition to all of this, some experts do not really believe that these types of programs are effective because groups like Al Qaida know they can be tracked through mainstream financial markets. They point out that many terrorist attacks may not take large amounts of cash that would need to be transferred through the banking system. Consequently, groups have turned to a cash-based system to move smaller amounts of money from person to person. This system, called hawala or hundi, relies on personal connection to transfer funds across borders. It is an old method and is not only used by terrorists, but by money launderers, and regular individuals who do not understand or feel comfortable using modern banks. If these experts are right, the hawala system will most definitely make tracking terrorist finance networks much more difficult, with or without an international blacklist.