Thursday, June 8

Fund No Harm: Stopping the Financing of Unlawful Organizations

By Claire Chen

iStock Photo by Andrii Yalanskyi (2019)

Vanderbilt’s latest Greek-life controversy saw the suspension of Sigma Chi due to “accountability issues.” Though this explanation provides little insight into the fraternity’s inner workings, to say nothing of the timeline for potential reintegration into campus life, the consequences of the suspension are clear: for the time being, Sigma Chi will no longer have the privileges of a Vanderbilt student organization. These range from dull logistical details such as branding and room-renting in addition to the existentially significant matter of financial estrangement, and Sigma Chi can no longer look forward to “[f]inancial support from the University” and the “[o]pportunity to solicit funds from, or make sales to, members of the University community on campus.”

It turns out that the United States federal government has similar powers with the obvious caveat that even the most sensational Vanderbilt student organizations are nothing like the organizations that the United States ends up prohibiting. Per the Office of Foreign Assets Control, sanctions are applied to those “engaged in activities related to the proliferation of weapons of mass destruction, and other threats to the national security, foreign policy or economy of the United​ States.” Sanctioned entities range from individuals to corporations to other governments. But it is one particular subset of this diverse group that draws widespread interest: terrorist groups. The designation as a Foreign Terrorist Organization (FTO) carries significant financial consequences. Most notably:

1. It is unlawful for a person in the United States or subject to the jurisdiction of the United States to knowingly provide “material support or resources” to a designated FTO. […]

3. Any U.S. financial institution that becomes aware that it has possession of or control over funds in which a designated FTO or its agent has an interest must retain possession of or control over the funds and report the funds to the Office of Foreign Assets Control of the U.S. Department of the Treasury.

Foreign Terrorist Organizations,” U.S. Department of State

It is first necessary to clarify that the question of what constitutes a terrorist organization, or any other banned organization, is fraught. But however flawed the process to sanction these groups, it is certainly true that it is in the best interest of society to prevent especially pernicious organizations from operating through the legal structures designed to prevent such organizations from operating.

For example, the first law listed is designed to curtail individuals from willfully pursuing a financial relationship with terrorist organizations, of which there are several shocking examples. The motivation to pursue and prosecute these cases is self-evident. However, it is also true that there are also far more ambiguous cases related to illegal financing. For example, individuals have unwittingly donated to terrorist organizations through fraudulent or deceptive online fundraising campaigns. It is here that corporate vigilance enters the discussion. After all, the financial impact of individuals is limited when compared to the billions of dollars that financial intermediaries such as banks and other corporations move daily.

This is why the second law, which mandates corporate vigilance against illegal transactions, is crucial in the campaign to eliminate sources of terrorist funding. The United States government has created an extensive network of related regulations concerning ethical financial engagement. In addition to the previously-discussed sanctions enacted by the Office of Foreign Assets Control, additional financial regulations are enforced by the Financial Crimes Enforcement Network, and both of these organizations collaborate extensively to prevent financial crimes.

Accordingly, corporations have created robust structures allowing them to identify and report illegal activity. First is the creation of corporate policy consistent with regulations about illegal financing. The enforcement of these policies is itself the foundation of an entire career: the compliance departments attached to financial institutions “[ensure] that a business adheres to external rules and internal controls.” Certain employees are even legally required to complete training on the Bank Secrecy Act and the Anti-Money Laundering Act, explaining the sub-economy of training courses designed to ensure employees have the knowledge needed to act effectively.

But despite these theoretical guidelines, some corporations have still become entangled with illegal financing operations. The first and most common variety is motivated by negligence. Recent examples from the Securities and Exchange Commission (SEC) include a $4.8 million fine against LPL Financial for failing to vet information associated with a defrauding scheme, and a $7 million fine against Wells Fargo for failing to report suspicious transactions “in a timely manner.” In both these cases, it is striking that the structure needed to stop illegal transactions existed, but the implementation of its requirements nevertheless failed. The aforementioned SEC releases make it evident that LPL Financial was able to vet customer information: the sanction was because the company failed to do so. Similarly, Wells Fargo could have reported the transactions had its detection system been adequately tested.

Therefore, strengthening the corporate incentive to enforce existing compliance structures is key to resolving this type of financial entanglement. This means that sanctions must be designed such that they are not the price to pay for mismanagement; rather, they ought to motivate institutions to proactively prevent illegal transactions from occurring. United Nations documents suggest that broader cooperation can help meet this goal, suggesting, “efforts to counter the financing of terrorism need to rely more on financial intelligence sharing between countries and enhanced coordination between the public and private sector.” 

The other type of corporate entanglement can be better described as corporate affiliation: in rare but egregious cases, corporations deliberately finance unlawful organizations for the opportunity to make an ill-gotten profit. In October of 2022, the French concrete company Lafarge S.A. was fined $778 million after pleading guilty to conspiracy to provide material support to a terrorist organization in what has been described as “the U.S. government’s first-ever prosecution of a corporation for providing material support for terrorism.” The Department of Justice press release notes that the company “negotiated agreements to pay armed factions in the [Syrian] Civil War to protect LCS [subsidiary] employees, to ensure continued operation of the Jalabiyeh Cement Plant, and to obtain economic advantage over their competitors in the Syrian cement market.”

Unlike the previous instances of financial impropriety, the Lafarge case makes clear that even the strongest compliance structures fail if compliance is not the goal in the first place. The law firm White & Case acknowledges this problem in its case study of Lafarge and suggests that “[a] robust compliance programme should also include a whistleblowing mechanism, which allows diligent employees and third parties to raise concerns of unlawful or unethical behaviour.” The firm also suggests increasing the awareness of terrorist financing operations as “its own distinct issue” whose “forward looking” approach to illegal activity requires further training to eliminate.

In fact, recent conversation has made it clear that eliminating sources of terrorist financing has become a priority in the public consciousness. For example, the consequences of the Lafarge case continue to unfold, including a New York lawsuit brought by the families of U.S. soldiers seeking “compensatory damages” for its actions. More broadly, efforts toward international cooperation have defined conversation about this topic. U.S. officials have, as recently as January 2023, created dialogue with international partners about illegal transactions.

As for the future, one can expect the 2023 National Illicit Finance Strategy published by the U.S. Department of the Treasury to be released soon; in prior years, this document has been released anywhere from February to May. As this investigation’s case studies have shown, the gaps in current regulations surrounding illegal financing requires anti-terrorist financing to remain a pertinent topic for lawmakers, corporations, and the public alike. Clearly, current financial guidelines need to be consistently enforced and new guidelines need to be implemented in order to prevent harmful organizations from receiving funding, and generating interest is crucial in creating the impetus for this change.