… and financial warfare is unleashed

The threat of banks de-risking and exiting regions and businesses in fear of sanctions-related fines is upon us, said Juan Zarate, the ex-deputy national security advisor for combating terrorism to US President George W Bush. Zarate was speaking at a Standard Chartered session yesterday morning about his new book, Treasury Wars: The Unleashing of a New Era of Financial Warfare

“We are reaching a tipping point where major banks may get out of providing ‘risky’ services to avoid being fined,” he said. He added that it felt like there was a zero tolerance environment for banks at the moment and that “there may be an over-reliance on the financial sanction playbook now”.

Addressing the key anti-money laundering (AML), know your customer (KYC) and Office of Foreign Assets Control (Ofac) stipulations at the US Department of the Treasury where he used to work, Zarate added that there was opportunity too, however, for those banks that cared to grasp it. Introducing appropriate dynamic risk assessment procedures might mean forward-thinking banks can pick up business that others refused, he explained.

Zarate, now a senior advisor at the Center for Strategic and International Studies (CSIS) think-tank in Washington, shared his insider’s thoughts on why financial warfare is moving up the political and economic agenda. In the future, he said, US hegemony in this area may be challenged by Russia and China as they seek to impose their own world view on global financial transactions.

Banks can get caught in the middle while this debate rages, but Zarate provided valuable context about why the post 11 September 2001 regime of tighter AML, KYC and other controls emerged to restrict terrorist financing. Latterly it’s been deployed as a tool of US foreign policy against companies, governments and individuals to promote regime change as in the case of North Korea and Iran. Sanctions are also used to punish recalcitrant individuals or nations to try to get them to stop trafficking drugs or change policy, as in the case of Russia over its stance in Ukraine.

“This field will get more complicated as new actors enter,” said Zarate, pointing to Chinese efforts to fight corruption and the declining effectiveness of US financial restrictions as, for instance, the Renminbi (RMB) rises as an alternative trade finance currency. “Russia too will fight the package of financial exclusion measures deployed against it, which has the potential to cause a ‘Balkanisation’ of global finance.”

Banks are stuck in the middle of this ‘new era of financial warfare’ outlined in Zarate’s book. But there is another danger that crypto-currencies such as Bitcoin might displace established banking and finance instruments as governments make it more difficult for banks to comply with proliferating regulations. “We don’t want to stifle innovation,” he said, “but Bitcoin and other such systems have systems that drive anonymity.”

The issue of banks moving on to shared sanctions screening platforms in an effort to cut costs via economies of scale savings was not directly addressed in the lively question and answer session, but it is certainly a live issue at this year’s Sibos as Swift promotes its new KYC utility and seeks to add compliance traffic to its existing payment and securities flows.

The debate about the role of financial sanctions in global finance, their implementation and future direction will no doubt rage throughout this week at Sibos: Zarate’s insider viewpoint shows that it certainly isn’t going away and will likely remain a key topic for Sibos delegates.