New regulations to prevent terrorism financing announced in New York and Paris.

A comparative article published by one of our new members – MICHEL PEREZ – in the « Revue Trimestrielle de Droit Financier ».

Michel A. Perez, CAMS, MBA, JD candidate, is a New York based Director of Club Praxis and associate member of Labex ReFi. He is a specialist in anti-money laundering, consultant to Promontory Financial Group and a seasoned international banker who has studied, lived and worked in Europe and the Americas.

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New regulations to prevent terrorism financing announced in  New York and Paris.

On December 1st,  in the wake of  recent terrorist attacks in Paris and elsewhere,  Andrew Cuomo, Governor of the State of New York announced his proposal for additional stricter regulations to prevent terrorism financing. “At a time of heightened global security concerns, it is especially vital that banks and regulators do everything they can to stop that flow of illicit funds." said the Governor. The proposed regulations are expected to become enforced by the New York Department of Financial Services (NYDFS) in 2016.

The key requirements of the new anti-terrorism and anti-money laundering regulation  include  the establishment, maintenance and regular update  by  all financial institutions  and firms connected to the financial industry  of  enhanced  "Transaction Monitoring and  Watch List  Programs" which were  already mandated by the Bank Secrecy  Act , the USA PATRIOT Act and OFAC regulations.  The Governor's presentation however clarified some technical standards and augurs a stricter enforcement.  The novel feature is the requirement of an "Annual Certification" to be submitted to the NYDFS every April 15. The purpose, modeled on the Sarbanes-Oxley legislation, is to compel senior financial executives to affirm that their institutions have sufficient systems in place to detect, weed out, and prevent illicit transactions. The certification needs to be "executed by the Chief Compliance Officer or functional equivalent" who thus becomes personally liable to criminal charges, including in cases of error or omission that could lead to hefty fines and jail sentences.   Since its inception in October 2011, the NYDFS has been a strict supervisor and enforcer, compelling some large banks, including European ones, to agree to the payment of huge monetary penalties (amounting to several billions of euros), remediation actions spread over several years and requiring large investments in personnel and technology and, in some cases, the nomination of a special monitor, reporting to the supervising authorities but paid by the entity under scrutiny. In some cases the NYDFS demanded, and obtained, the firing of key executives, including non US based ones. The new measures announced by the Governor will confirm the NYDFS role in investigating and, in case of infraction, prosecuting the entities and individuals subject to its far reaching jurisdiction.  As concurrence from the US federal government or Congress is not required for the measures to become effective, it is probable they will soon be open for a period of 45 days of public commentary and published in the New York Register after which they will become mandatory.

A few days earlier, on November 23, Michel Sapin, French Minister of Finance, announced a series of measures.  He promised a better coordination between the different ministerial departments and governmental agencies in France involved in the fight against terrorism and its financing. He announced stricter controls to restrict the anonymity of means of payment, in particular regarding the sale and utilization of prepaid cards. Increased scrutiny, or "EDD, enhanced due diligence" in American parlance, will be required from financial institutions, advisers, intermediaries and all persons who could be connected with terrorism financing. This will include art dealers since the smuggling of art works has been proven to be one of the funding sources of the Islamic State. In addition, a new bill on the "Transparency and Modernization of Economic Life" will "very soon" be reviewed by the Conseil d'Etat (in its advisory role to the French Administration) and then submitted to a vote from Parliament. The new law will implement the transposition into French Law of the dispositions of the 4th European Union AML Directive, authorize the freezing of assets of any entity or person "financing or involved ("acteurs", actor) in terrorism" and increase the investigative powers of Tracfin, the French Financial Intelligence Agency.  The Minister  is  keen to promote European and international cooperation: in Brussels on December 8, he urged his European colleagues  to facilitate and implement  open exchanges of information regarding banking accounts and financial transactions; in New York, at the United Nations Security Council on December 17,  he pleaded for a renewed sense of urgency and advocated for an increased role for FATF (the Financial Action Task Force, or GAFI, Groupe d'Action Financiere Internationale, in French), an international agency  based in Paris that was created in 1989 to combat money laundering and  whose mandate now includes  terrorism financing.

The measures announced in New York and in Paris will help to make the world safer.  However considerable investments, mostly by banks, in personnel and technology will be required to  meet the new proposed standards and satisfy  financial supervisors on both sides of the Atlantic.  As compliance officers will understandably want increased protection from their employers, an unintended consequence may also be an increase in assignments for specialized consultancy firms and additional D&O (Directors and Officers) insurance expenses, likely to be passed on, directly or indirectly, to the financial services clients. In addition to  the costs of implementation,  there are  legal and sovereignty  issues.  Some consider that the demands formulated by the Governor of New York are a new example of "American unilateralism": new constraints are imposed by one single authority on the entire financial industry with little or no inputs from external sources. but the new requirements will become mandatory for all banks which do international business, regardless of their country of origin. Regarding the bill proposed by the French Minister of Finance, heated discussions could be expected as how to define and prove who is an "actor" in financing terrorism and little was said about enforcement mechanisms.  Calls for European and international cooperation are sensible but implementation is tricky and slow: it took more than two years of convoluted negotiations for the European Union to publish its 4th AML Directive, still not implemented in most countries; FATF and the United Nations specialized task forces produce detailed and well researched papers on terrorism financing but they have, at least presently no enforcement powers.  The fight against terrorism financing is thus proceeding at different paces, more slowly in Europe than in America, but there is a convergence of objectives which should lead  to further developments: it is a work in progress.

Michel A. Perez, CAMS, MBA, JD candidate, is a New York based Director of Club Praxis and associate member of Labex ReFi. He is a specialist in anti money-laundering, consultant to Promontory Financial Group and  a seasoned international banker who has studied, lived and worked in Europe and the Americas.