Hitting at terrorists, hurting businesses

Forcing banks to police the financial system is causing nasty side effects

KIDNAPPINGS for ransom, drug-smuggling, fake invoicing and extortion are just a few of the ways in which terrorists raise cash for their nefarious deeds. Some scams take advantage of globalisation: American officials found that Hizbullah, a Lebanese movement, raised funds by exporting used cars from America and selling them in west Africa.

Yet there are two problems with this approach. First, the regulations are so demanding and the fines so large that banks are walking away from countries and businesses where they perceive even the faintest whiff of risk. American regulators, for instance, require banks to know not only who their customers are, and what they plan to do with their cash, but also the identities and intentions of their customers' customers. Correspondent-banking relationships—the arteries of global finance that allow people and firms to send money from one country to another, even if their own bank does not have a branch there—are therefore collapsing. Some of world's biggest banks privately say they are cutting as many as a third of these relationships.

This retreat will have little impact on the rich world. Britain's Lloyds Banking Group, say, will probably always transact with Wells Fargo in America or ICBC in China. But it could prove devastating to small, poor countries whose banks lose their big international partners just because the costs of checking up on them outweigh the paltry profits they generate. Some countries risk being cut off from the financial system altogether: British banks last year threatened to close the last pipeline for money transfers into Somalia. Others will see the costs of intermediation rise: bankers talk of a tenfold increase in fees paid to send money to countries such as Tanzania. Cotton farmers in Mali and small exporters in Indonesia will find it increasingly hard to get trade finance. Even well-known charities responding to UN calls for assistance in countries such as Syria are struggling to get banks to let them send aid.

Making it harder to follow the money

Were all of this actually preventing terrorism it might be judged a fair trade-off. Yet—and this is the second problem with this approach—it seems likely to be ineffective or even counter-productive. Terrorism is not particularly expensive, and the money needed to finance it can travel by informal routes. In 2012 guards on the border between Nigeria and Niger arrested a man linked to Boko Haram, a Nigerian terror group, with 35,000 in his underpants: laughable, except that the group has killed around 1,500 people this year alone. Restrictions on banks will encourage terrorists to avoid the banking system. That may hinder rather than help the fight against terrorism. A former spy complains that it has become harder to piece together intelligence on terrorist networks now that the money flows within them are entirely illicit.

When the G20 meets later this year it should urge its members to accept the risk that even in well-regulated banking systems money may find its way to terrorists. Banks should be given clear guidance on necessary safeguards, but not held responsible for every breach.