In the foreseeable future, the cost of banking security is set to rise. A bewildering number of legal and regulatory initiatives are almost certain to drive costs higher for banks and their clients in virtually all jurisdictions, with special emphasis on the Middle East.
The prospects of unavoidable higher spending on banking security refer not to needs for safeguarding authorized access to an online account, nor the cost of protecting banking customers against the theft and abuse of their card information; the real booster of banking security costs originates from the fear of terrorism and will likely entail the banks being obliged to carry out much greater scrutiny of their customers’ transactions.
In regulatory initiatives relating to the issue of cutting off terrorism financing, the United States and Europe are currently upgrading their arsenals of demands on the finance industry. These initiatives include proposals by the US Financial Crimes Enforcement Network (FinCEN) to require broader licensing of prepaid card issuers and ongoing European debates on a new European Markets Infrastructure Regulation (EMIR) on trade in derivatives and commodities.
Then there is the extension of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA PATRIOT Act), in which three tools of supervision were set to expire at the end of May. The US Congress’s extension of these enforcement powers was described as a done deal, with an agreement to keep debates to a minimum as Executive went to print.
The USA PATRIOT Act — passed in October 2001 in a vote carried out while America was still reeling in shock from the September 11 terrorist attacks — is not only one of the most contrived linguistic constructs of the epoch, it is also named with one of the most fitting terms from an American perspective: it wholly serves US interests to the potential detriment of others, including banks, as recent experience has shown.
For banks, however, probably the most consequential proposed revamp of regulations currently in the works is the discussion of updating the Financial Action Task Force (FATF) Special Recommendation VII (SR VII), which covers wire transfers. The FATF is the global community’s hammer to drive home anti-money laundering (AML) measures and to counter financing of terrorism (CFT).
If proposals to upgrade SR VII are adopted in 2012, banks could be required to not only perform checks on those sending wire transfers, as is the case today, but also demand and verify information, including address and birth date, on the beneficiary of a bank transfer under the AML/CFT standard for cross-border wire transfers.
As the FATF invited consultations, industry groups such as the International Banking Federation (IBFed, at its core a meta-association of G7 banking associations) sternly warned that such changes to requirements “are very likely to entail massive costs”. IBFed and a number of other stakeholders also expressed grave concerns over a probable explosion in the number of “false positives” — wrong AML/CFT flags.
The Association of Foreign Banks in Germany admonished, “our experience has not shown that screening transactions against sanctions lists containing mainly long Arabic-sounding names has led to successful tracing of terrorist financing transactions” [the emphasis is from the association’s own documentation].
From a vantage point in the Middle East, two elements in the current push for expanding controls are not surprising, but nonetheless deserve to be pointed out: (1) Although discussions on issues like the FATF regulations are nominally inclusive, the drivers of the initiatives are what once was called the first world; (2) in about 400 pages of comments on the FATF proposals, no banking association or federation from any Arab country was heard to voice a comment on banking requirements that could become very costly and would be difficult to implement for banks in this region.
Indeed, only one individual bank with Arab identity submitted comments in response to the FATF consultations (which will go into a next round in July): BLOM Bank Jordan, which stated its position, and effectively represented the whole Arab world, in a two-page letter.
