Did the terrorists combine their 11 September operations with massive financial speculation? Unusual short selling in the days preceding the tragedy of stocks that were bound to be the most affected – airlines, insurance companies, investment banks (particularly Morgan Stanley, one of the main tenants of the World Trade Centre, and neighbouring Merrill Lynch) – aroused suspicion.
Italian defence minister Antonio Martino declared that states and terrorist organisations "were among those who speculated on international markets". This seemed plausible given that Osama bin Laden, the Saudi billionaire commonly suspected of being the mastermind behind the operations, had first gained prominence as the financier of Afghan resistance against the Soviet invasion in the 1980s. In the words of the Italian minister, "the person who organised the attacks has a lucid mind and knows that money gives power" (1).
Regulatory authorities on three continents investigated. But after a few days, the Securities and Exchange Commission (SEC) and its British, German, Dutch, Italian, French and Japanese counterparts announced that there had been no evidence of concerted speculation, insider trading or stock manipulation.
There are more convincing – and less sinister – explanations to the short selling of specific stocks. On the eve of the tragedy, airline and insurance analysts were predicting disappointing results for these industries; the business press was giving extensive coverage to the legal and financial problems of Merrill Lynch and Morgan Stanley; and market professionals were increasingly pessimistic about the stock market (2).
The speedy closure of inquiries reflects the impotence of regulatory authorities – which in theory enjoy significant enforcement powers – in an increasingly opaque system, as well as the reluctance of major financial players to shed light on lucrative but little-known practices. Whereas simple transactions can easily be traced, the more "sophisticated" products – those derivatives created by financial "engineers" precisely to stay one step ahead of national regulators, as well as the operations of secretive hedge funds based in tax havens – remain mysterious.
Since the early 1980s regulatory constraints have crumbled. The trend toward deregulation, liberalisation, and privatisation started in the United States, but soon spread to the entire world. In the name of a true global capital market, financial institutions were given unprecedented freedom, both domestically and internationally. The financial world experienced a tremendous boom, at the price of the destabilisation of the underlying economy and of a sharp rise in financial criminality (3).
The exception to this trend was the campaign against money laundering. As part of the war on drugs, striking at the financial end of drug trafficking was meant to starve drug dealers financially: moneymaking was their motivation, but they would be unable to launder their illegal revenues through the global economic system. The fight, begun by the Reagan administration and justified by the increase in drugs in American cities, was expanded in the Bush Senior and Clinton years. Although the methods (confiscation of assets, mandatory sentencing, etc) and "zero tolerance" occasionally clashed with constitutional protection and with the prevailing ideological mood, the war on drugs continued unabated. Money laundering was expanded to include dirty money generated by other forms of organised crime, as well as corruption and terrorism, and extended beyond US borders, particularly when the G7 created the Financial Action Task Force (FATF) in 1989, whose mission was to ensure that no country would serve as a haven for dirty money.
The George W Bush administration originally meant to soften money laundering rules and regulations. In the words of Treasury Secretary Paul O'Neill, "For the last 15, maybe even 25 years, this nation has had a program aimed at so-called money laundering, which is trying to get at evildoers who are moving cash around the world economy. And there has been an enormous amount of activity upwards of $700m a year spent on this subject. And when I began asking the question of what have we gotten for the money we spent, I must say I was very disappointed that over this period of time, there's one famous case that produced a significant amount of money that was caught. We should insist that we get value for money spent." Failed policies had been perpetuated simply because "too often there is an acceptance of activity for progress" (4). And although its achievements were scant, the apparent non-stop activity surrounding the war on drugs – new committees, international conferences, freezing of accounts, beefing up of bureaucracies – did create the impression of constant progress.
But 11 September resulted in a re-evaluation of the position on money laundering. The first battle in the "new kind of war" against terrorism, took place on the financial terrain. On Sunday 23 September, with his Treasury Secretary and Secretary of State Colin Powell, Bush announced: "We have launched a strike on the financial foundation of the global terror network". Recognising that most of those assets were outside the US, Bush gave notice to international financial institutions: "If you do business with terrorists, if you support or sponsor them, you will not do business with the United States of America."
A presidential decree simultaneously blacklisted 27 individuals and groups: Osama bin Laden, 11 of his principal aides, 11 terrorist organisations, and four charitable groups. A week later, when he announced that 50 new accounts would be frozen, Bush proclaimed that this constituted "progress on the financial front" (5). More measures have since been taken, a new harsh legislation is in the works, and the resources of anti-laundering organisations, and in particular of the FATF, have been significantly increased.
The financial focus may be misplaced. It is based on the assumption that "most serious and organised crime is motivated by financial gain" (6). Yet the real logic of terrorism is different from that of drug trafficking and other forms of organised crime. According to the FBI's estimates, the 11 September operations cost less than $200,000. Most terrorists led modest lives, survived on low-paid jobs, or received money from their families. The one item that may have required outside support was the cost of flying lessons. The first attack against the World Trade Centre in 1993, which resulted in six dead and 1,000 wounded, cost somewhere between $10,000 and $20,000 (7). It is doubtful that drying up money sources would seriously deter further terrorist acts.
With this form of terrorism, it is not dirty money that is being laundered, but a tiny percentage of clean money that is being soiled. The distinction is crucial, though it was lost in the rush to devise a tough response. There is a need for new thinking on counter-terrorism, for strategies centred on the quality of intelligence and the infiltration of radical groups – as opposed to strengthening the existing apparatus. Financial institutions have been obliged to alert political authorities to their clients' suspicious transactions for the past few years. Now they are asked to investigate and police, or get punished. Large institutions may be able to slip through the net, but smaller establishments, especially those connected to the Islamic world, have an almost impossible task proving that they are not facilitating terrorism.
Suspicions now extend beyond banks and established financial institutions and reach into the entire informal sector as well as the world of charity. When it was revealed that the terrorists were involved in three transfers totalling $15,000 through a hawala (8), those remittance outfits that cater primarily to expatriate workers were investigated by law enforcement. And almost every Islamic charity is now under surveillance. Some anti-Islamic commentators have long argued that the raison d'être of many philanthropic organisations was to finance terrorism or provide a front for it (9). But the size and ubiquity of the charitable sector have a simpler explanation: almsgiving, or zakat, is one of the five pillars of Islam (10).
In a paranoid time, the tendency to equate Islam with terrorism has spread to finance: any financial flow associated with the Islamic world is presumed guilty until proved innocent. The logic of collective punishment will result in substantial collateral damage.
* Research associate at Harvard University and author of Islamic Finance in the Global Economy, Edinburgh University Press, 2001
(1) The Guardian, September 18, 2001.
(2) See for example The Wall Street Journal, 11 September 2001.
(3) Ibrahim Warde, "Les assises du système bancaire ébranlées par la déréglementation", Le Monde diplomatique, January 1991.
(4) The Newshour with Jim Lehrer, PBS, 19 September 2001.
(5) Financial Times, 1 October 2001.
(6) National Criminal Intelligence Service (NCIS), Overview of Money Laundering www.ncis.co.uk
(7) The New York Times, 25 September 2001.
(8) Money changers and small fund-transfer agencies commonly found in the Middle East and the Indian sub-continent.
(9) The Wall Street Journal, 24 August 1998.
(10)See Ibrahim Warde, "Islamic finance", Le Monde diplomatique English edition, September 2001.
Original text in English