LONDON, 17 February 2003 — Demonstrations on Saturday by millions of people in some 600 cities worldwide against US and UK plans to launch a war against Iraq ostensibly to disarm the regime of Saddam Hussein from weapons of mass destruction, are undoubtedly, at least for the time being, an embarrassing political setback for President George Bush and Prime Minister Tony Blair.
On the financial front too, new measures proposed by the US administration to extend the reach of the so-called US Patriot Act, passed in the wake of 9/11 ostensibly to stop US financial institutions being used by terrorists to launder money, and growing pressure from a politically-inspired shareholder minority in various US pension funds not to invest in companies or deals in so-called states sponsoring terrorism, are causing serious concern among international fund managers.
At the same time, the US-led “war on international terrorism”, which includes cutting off so-called terrorist financing and the introduction of tough new anti-money laundering compliance measures, has led to a spate of new financial and IT security products and services called “Company Psychometrics” plied by global governance and risk management firms.
In the UK too, for instance, the Financial Services Board (FSA), which regulates the industry, is working closely with the UK Treasury and the Bank of England to raise “business continuity standards” in British institutions and corporates, to enhance their capability to “recover from either a Sept. 11-type event or a local incident, such as a flood or telephony/IT problems”.
“Since the Sept. 11 terrorist attacks,” stressed FSA Managing Director Michael Foot, “we have worked to strengthen the FSA’s contingency arrangements against an emergency event that would close our main office in Canary Wharf. We have developed a fully operational back-up site and run simulations of emergency events to prepare our staff and test our infrastructure to deal with an event that would interrupt the normal operation of the financial services sector. We have also worked closely with the Treasury, the Bank of England and the financial services sector to raise business continuity standards generally. It is vital that responsibility for business continuity management (BCM) is lodged at and remains at a senior executive level to ensure that it is sufficiently resourced and prioritized so that it becomes part of ‘business as usual’ for the firm.”
But to what extent are these measures justified? Are the motives genuinely security and compliance-based, or is there a hidden political agenda? After all, terrorism, did not suddenly start with the attacks on the twin towers in New York and the Pentagon in Washington. In fact, prior to 9/11, the single largest act of terrorism in the US was the Oklahoma bombing of a US government building, for which a White American Christian Timothy McVeigh was convicted and executed.
In the UK, Irish terrorism on both sides of the religious divide — Protestant and Catholic — has plagued both Ulster and the UK mainland for the last three decades, with the loss of hundreds of lives and billions of dollars in property destruction, and subsequent reconstruction. These included the bombing of financial institutions in the City. Regulators then did not scream about business continuity management. Instead the then Thatcher government passed the burden on to companies and property owners through the introduction of compulsory “terrorism insurance” for buildings and companies in key parts of the City and the West End. Money laundering similarly is not a new-found activity. In the indictment document filed in the US against the collapsed Bank of Credit and Commerce International (BCCI), almost 30 other banks were also cited. Most of them were American banks, and a few European and Israeli banks.
Compliance against money laundering (whether for drug, terrorism, tax fraud or any other purpose), cyber-crime, internal fraud, insider dealing, accounting failures, is an essential risk management consideration for any financial institution. However, when it becomes yet another political tool for a powerful government, then it is perfectly legitimate to question the motives of that government.
In the light of the spate of recent corporate accounting and other scandals especially in the US (some uncomfortably close to key members of the Bush Cabinet and in one case the US president himself), and the inadequate response of the Bush administration in dealing with these failures, it seems that the US Treasury is operating one set of standards for the so-called Al-Qaedas and the Cali Cartels of this world, and another set for the Halliburtons, the Enrons, and the WorldComs of this world. The truth is that all of them destroy lives — the former through bombs and drugs, and the latter through stealing hard-working people’s savings and pension provisions for later life. But are also other sinister forces lurking in the background? The US Treasury, for instance, is proposing to extend the provisions of the US Patriot Act to cover offshore funds such as hedge funds “with a US nexus” — those who have US promoters, investors, or managers. The aim is supposedly to clamp down on alleged money launderers, especially wealthy ones, since hedge fund investors comprise mainly wealthy high networth individuals.
Although the US Treasury insists that it will consult the industry and that the move is merely a proposal, industry players stress that the real reason for the plan is that US security authorities want access to the files of these investors. How ironic that only a few years ago President Bill Clinton used over $500 million of US taxpayers’ money to bail out the hedge fund industry in the US following a series of hedge fund financial and management scandals.
The presence of a single US investor in a hedge fund will force the fund manager to comply with the provisions of the US Patriot Act, regardless of whether the fund is based in London or Locarno. Most current hedge funds have heavy US investor profiles. If the proposals are passed, what would the impact be on the industry? Will overseas hedge fund managers jettison US investors, and will they find others to replace them?
This US Patriot Act raises questions of data protection, client confidentiality, and regulatory sovereignty. Some Middle East bankers in London stress that this is another attempt by the US security authorities to gain access to the financial affairs of wealthy Arabs and Muslims, and have very little to do with concerns over money laundering or terrorist financing. They stress that post-9/11 financial institutions all over the world have been adopting new anti-money laundering and compliance measures anyway. Any new global initiatives should come through the Paris-based Financial Action Task Force (FATF), set up by the G-7 countries a few years ago to combat at that time primarily money laundering by drug barons and corrupt Third World politicians.
Pressure on US pension fund managers to divest from countries allegedly sponsoring terrorism — incidentally it is already illegal for US firms to invest or trade with countries such as Iran and Libya — is creating new corporate risks for US companies. One New York pension fund, due to some shareholder resolutions, for instance is asking companies in which they have largish investments to review their alleged business activities (usually through far-flung subsidiaries or nominee companies) with countries such as Iran and Syria. One such company targeted is Halliburton, the oil services firm, formerly chaired by Dick Cheney, the US vice president and with which he still has investment ties through a blind trust.
With its sheer power and military might and resources, the US is capable of playing the role of international policeman. Even post-9/11 it has been reluctant to do so. The fight against international terrorism has effectively been sidelined by the Iraq crisis, even though the threat of terrorism is kept vividly alive by the periodic and gratuitously timed announcements of imminent threats sometimes coupled with raids and various arrests, which has hitherto borne very little fruit.
However, playing the role of international financial policeman, especially for the Bush administration with its close corporate friendships and sponsorships, is fraught with pitfalls. It is Southeast and East Asian capital and investment in the US that is keeping the American economy ticking and its budget deficit sustainable. The US as a manufacturing power, save the defense and oil industries, is also in decline. Some of these over-zealous measures may eventually come home to roost. By then the politicians would have moved on — back to their cushy corporate executive positions.
