Combating terrorist financing challenges banks

Banks monitor huge quantities of financial transactions on a daily basis, with the aim to combat money laundering and the financing of terrorism. Political scientist Esmé Bosma studied the ways in which banks experiment with digital technologies and how they implement counter-terrorist financing regulations. She concludes that in practice there is limited success in terms of detecting transactions that might be associated with the financing of terrorism. At the same time, the aggregate of regulations does have implications for society. She will defend her PhD thesis at the University of Amsterdam on Friday 18 February.

Since the 1990s, the role of banks in the fight against money laundering and terrorist financing has become more relevant. Banks are increasingly obliged to carry out customer research, monitor transactions and report suspicious transactions to the Financial Intelligence Unit (FIU). Hence the traditional role of banks as intermediary has morphed into one of private security actor. Political scientist Esmé Bosma studied how the banking sector is fulfilling this ’gatekeeping’ role and what the role of technology and data is in this regard: ’I am analysing security at the human-technology interface’.

Fieldwork observations in day-to-day practice

In order to acquire insight into the day-to-day dilemmas faced by banks when it comes to detecting terrorist financing, Bosma performed field work observations in the financial crime sector in the Netherlands and the United Kingdom. She found out how risk profiles are created, which mark customers as ’acceptable’ or ’unacceptable’. ’The dynamic process of risk assessments, screening and monitoring increasingly depends on public sources and the data underlying digital technologies’

Automated systems can be ineffectual Esmé Bosma

Bosma also explored the ways in which banks are experimenting with automated systems to monitor transactions. In that respect, she saw how challenging it is to formulate terrorist financing indicators and thus to identify useful input for these systems. After all, how does a software system go about recognising a transaction that will finance terrorism? Bosma also scrutinised the design and usage of algorithms such as machine learning models. These frequently produced ethical and privacy-related dilemmas for the banks’ analysts, as honing the monitoring soon gets the banks embroiled in ethnic profiling.

A misalignment has emerged

Bosma reached the conclusion that a misalignment has emerged between the regulations that oblige banks to detect and prevent terrorist financing and the practical reality within banks. ’Screening terrorism lists is possible for banks, and obviously they need to keep customer records in order’, says Bosma. ’But detecting transactions that might be associated with the financing of terrorism is incredibly difficult.’ In Bosma’s view, such transactions get overlooked because they often involve small sums of money, also from legitimate sources such as wages or benefit payments. ’Which makes it differ substantially from money laundering.’

’If you then look at what is being done with banks’ reporting of unusual transactions’, Bosma continues, ’it transpires that only about 10% of their reports result in further investigation, and most of that relates to suspicions of money laundering.’ A greater degree of efficacy is now being sought through (for example) artificial intelligence and the intensification of public-private partnerships.

Implications for society

At the same time, regulations do have implications for society, such as the impact of mass financial surveillance on citizens’ privacy. Or the unintended consequences of the system, such as the financial exclusion of high-risk groups of customers, which would adversely affect many non-profit organisations seeking to provide aid to risk regions. And the blurring of the lines when it comes to accountability in an increasingly digitised security context. ’We need to be clear about the objectives motivating the creation of tools to combat terrorist financing and whether these objectives are being achieved. At the end of the day, the role to be played by private actors in far-reaching security decisions is a political matter.’ Follow entailed political scientists studying how anti-terrorist financing legislation and regulations are being implemented in day-to-day practice and what impact this is having. They focused on three links in the anti-terrorist financing chain: banks (detecting and reporting), the Financial Intelligence Units (investigating and declaring suspicions) and courts (hearing cases). Read more on this research.