Blowing the whistle on terror funding

September 02, 2005|By Ira E. Hoffman

A YEAR AGO, the 9/11 commission urged the government to keep tracking of terrorist financing front and center in U.S. counterterrorism efforts. But experts told the Senate Banking Committee recently that terrorists have developed adept new tactics to evade our controls over money transfers. These tactics range from sophisticated money laundering to low-tech/no-tech methods such as money exchange brokers and couriers.

Unfortunately, the hearing produced no new proposals for solving the problem soon. But we should not despair. Instead, we should look to Abraham Lincoln for an idea that could work effectively and quickly: Fortify law enforcement personnel monumentally by creating incentives for private citizens to blow the whistle on fraud.

True, Lincoln was not confronted with Islamic extremists using fraudulent means of financing their attacks. But rampant fraud by unscrupulous military contractors who overcharged the Union army or endangered soldiers by substituting inferior supplies, or both, posed as grave a problem during the Civil War.

To clamp down on the widespread fraud that was harming the war effort, Lincoln had Congress pass the False Claims Act (FCA), which gave the attorney general primary responsibility for investigating fraudulent claims.

But it also provided for private citizens to file qui tam, or whistleblower, lawsuits on behalf of the United States for a portion of the proceeds uncovered in the case. In other words, the FCA provided a bounty, a financial incentive, for reporting fraud. Or, as one U.S. Court of Appeals described it in a 1992 case, Congress "let loose a posse of ad hoc deputies" to uncover and prosecute fraud against the government.

In today's world, amending our banking laws to include whistleblower provisions modeled on the FCA would enable the government to deputize everyone who works in the financial services industry. According to the Bureau of Labor Statistics, that would add more than 2.5 million experienced insiders for detecting the suspicious actions that terrorists use to finance their operations.

Granted, our banking laws already require financial institutions to file Suspicious Activity Reports (SARs) whenever they detect dubious transactions. The banking laws also require financial institutions to have Customer Identification Programs (CIPs) for discerning the true identity of each customer. In that way, banks, securities firms and insurance companies must look beyond a shell or front to determine whether the customers are legitimate or are terrorist abettors.

But the effectiveness of these laws depends largely on the vigilance and diligence of the financial institutions and their personnel in filing SARs and implementing CIPs. As with all other criminal laws against fraud, the government has no choice but to rely extensively on earnest, law-abiding citizens. Still, there is no shortage of financial crimes.

For that reason, creating monetary incentives for financial industry insiders to become whistleblowers would significantly help in the fight against terrorist financing. Whistleblower cases have enabled the government to recover more than $13 billion from defrauding contractors in the last 20 years, and there is no reason to believe that a similar law would fight terrorist financing less effectively.

Since all property related to terrorist financing is subject to forfeiture, and since all people with knowledge of suspicious transactions are required to report such activity, the proposed amendment to the banking laws would not change substantive law.

Instead, all it would do is provide a procedural mechanism for whistleblowers to report potential terrorist financing, albeit with the incentive of reaping a portion of the forfeited proceeds upon settlement or judgment.

The amendment also would embolden industry insiders to come forward by protecting them from retaliation by their employers. In addition, it would conserve judicial resources by giving the Justice Department the discretion to intervene in meritorious cases and to move to dismiss bad cases.

Amending the banking laws to add whistleblower provisions based on the FCA would give the government far more resources to fight terrorism at no cost to the taxpayer. That's what Lincoln would have done, and that's what President Bush should do.

Ira E. Hoffman, who taught at the London School of Economics and was counsel to Israel's Defense Ministry Mission to the United States, is the founder of a law and consulting firm in Rockville.

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