LONDON, 28 January — The reports are now becoming routine. This or that country has frozen the accounts of this bank or the assets of that individual or such an organization. All supposedly in the hunt for alleged terrorist funds, and all at the beckoning of the US Treasury Department.
Unfortunately, this rush to impose strict new financial compliance seems to be eroding that fundamental tenet of the so-called Western law and justice — that “you are innocent until proven guilty.” As horrific as the attacks on the United States on Sept. 11 were, there can be no justification for a Wild West revision of the above principle that post-Sept. 11, “you are guilty until proven innocent.”
Take for instance the Luxembourg Monetary Institute (the Central Bank’s) decision a few weeks ago to force Pictet et Cie, a leading Swiss private bank, to suspend dealings in three private equity funds, for whom it was the investment adviser.
Perhaps, it was pure coincidence that the funds are all Islamic equity funds — Al-Dar World Equities, Al-Dar European Equities and Al-Dar East European Equities — all promoted by The International Investor (TII), which is based in Kuwait.
Pictet is a blue-chip Swiss private bank, which has an excellent record of managing Islamic investment funds. It has a long history of private banking relationships with investors in particular from the Middle East. So much so that Pictet set up a joint venture fund management company with TII called Al-Bait (S.A.).
No doubt, Pictet was livid at this apparent smear tactic, and using its influence both in Switzerland and with the Luxembourg authorities, the regulator of the funds, is trying to get the matter sorted out.
What is disturbing is that the funds were suspended before any investigation into any alleged irregularity or connection with the US suspect list had even commenced. It appears that the action was taken simply on the orders of the European Commission which was acting at the behest of the US Treasury Department.
Carlo Zayan, the Luxembourg public prosecutor, at the time confirmed, according to the London-based Financial Times, that the assets of “a good half dozen companies and investment funds had been frozen. It is not yet confirmed that there is any terrorist financing taking place related to Luxembourg.”
Perhaps, this is a mere manifestation by the Luxembourg regulatory authorities of the new international financial regulatory architecture, which is now been increasingly shaped on the back of the aftermath of the events of Sept. 11.
After all, this is the very Luxembourg regulatory authority which so majestically abdicated any responsibility in the nefarious Bank of Credit & Commerce International (BCCI) collapse and scandal. Yes, Luxembourg was one of two countries, the other was the UK, where the two important BCCI subsidiaries were domiciled.
Could it be that Luxembourg, post-BCCI, has been trying to revamp its image as a domicile for mutual funds by being tough on “money laundering and the causes of money laundering,” to twist a Blairism?
After all, most financial institutions and fund managers agree that as a fund domicile, Luxembourg is expensive and bureaucratic sometimes to the point of arrogance. And yet, Luxembourg is very popular with especially American financial institutions.
Revisionism, as decades of Communist rule in the former Soviet Union and now even in the new China has shown, can be contagious even in Western democracies. In the post-Sept. 11 context, the Bush administration is trying to revise the definition of “what constitutes a war” and therefore who qualifies to be a “prisoner of war.”
In the financial services arena, we have to ask whether compliance post-Sept. 11 is going too far, and who benefits the most out of these new measures? How can the balance between the non-negotiable need for regulation and compliance against money laundering and other such illegal activities, and the market need for client confidentiality be restored?
The global fight against money laundering, whether to root out terrorism funds or the secret funds of corrupt politicians, is of universal importance, and not the monopoly of the Western democracies.
In fact, evidence suggests that many of these democracies have turned a blind eye over the years to the above activities because of the “national interest” by sustaining corrupt regimes; paying bribes for contracts especially lucrative but unnecessary defense contracts; and even using proceeds from the drug trade to finance illegal activities to arm right-wing militia and opposition groups to oust leftist regimes, especially in Central and South America.
As to who stands to benefit most from the new compliance measures, it seems that some American banks are already imposing extra costs on correspondent relationships with smaller, less financially powerful banks through agency processing, a practice which is not required under US regulations nor for that matter under any other international agreement. This is irrespective of the length of any relationship between the two institutions.
All these additional requirements are going to make banking more costly. At the end of the day, it is the customer that will pay for the new compliance regulations, and indirectly for the US war against terrorism funding.
