A Hard Slog for Financial "Special Forces"

Treasury's money warriors are finding the battle is all uphill

Like the ground war, the fight against terrorists' money is entering a new phase. A sweeping crackdown on two financial networks allegedly linked to Osama bin Laden and al Qaeda--including raids in five American cities on Nov. 7--capped the initial campaign on the financial front.

Treasury Dept. officials say that so far they have netted $56 million in assets and bank accounts from the 150 individuals, charities, and businesses they have accused of funding terror. "We're bombing the bridges of bin Laden's financial schemes," says a top Treasury official.

JUMP TEAMS. But that was just the beginning. Now, the U.S. financial warriors are following "an audit trail for terrorist money" laid out in records seized from those targets, especially the al Taqwa and al Barakaat networks of banks, money transmitters, and trading firms, says a senior U.S. official. The Treasury, the FBI, and the Federal Reserve have assembled "jump teams" of accounting, banking, and criminal investigators ready to fly abroad to squeeze evidence of new linkages from the records. "We have our own Special Forces," says the official. In the first week after the al Barakaat raids, two such teams were dispatched--and more are being readied.

But even as the U.S. widens the financial front, it faces steep hurdles at home and abroad. U.S. banks are growing restive under investigators' barrage of requests for data. Their enforcement systems--designed to detect huge transfers by drug traffickers and other money launderers--are poorly suited to ferreting out the small, routine transactions of terrorist cells. "A good-size bank has 1 million to 5 million ATM transactions a day, 10,000 to 100,000 wire transfers. What do you look for in all that?" asks the security chief at a major regional bank. Privately, bankers fret that Treasury's freeze orders will put them on the hook for lawsuits and worry that Americans may balk at higher costs and greater scrutiny of their financial lives.

And abroad, too, the money warriors are fighting uphill. While the Bush Administration has won unprecedented international cooperation, foreign law enforcement agencies and courts are starting to ask for stronger evidence to back up Washington's asset freezes. The requests will turn into demands if, as financial sources suggest, Treasury's next list of businesses targeted for seizures includes foreign banks that U.S. investigators believe cooperate with al Qaeda.

LATE START. Treasury officials say better tools and communication between probers and bankers will overcome the objections. Catching terrorists "is not something you're going to do by looking at the haystack of financial transactions," says Treasury Secretary Paul H. O'Neill. "It comes from intelligence" that provides banks and allies with targeted accounts to watch.

In Washington, at least, the financial war is raising cooperation to new heights. The decision to raid al Barakaat's worldwide operations, for example, drew in agencies from the CIA to the IRS. But it took weeks for such coordination to reach the front lines. The Securities & Exchange Commission didn't give brokers and mutual funds its first "control list" of suspects, whose accounts should be watched, until Nov. 5. And local police say they're being frozen out: Police Chief Michael Chitwood of Portland, Me., says his force and the FBI were both investigating two men eventually linked to al Barakaat, but the feds won't share information.

Financial institutions are struggling to overhaul money-laundering controls for new duties. Terrorist money is hard to catch because many transactions--car rentals, hotel rooms, and small wire transfers--"fall below the radar screen," says Ellen Zimiles, a partner at KPMG's forensics practice. "You can't track every $1,000 transaction that passes by."

The raids on al Barakaat revealed another weakness. U.S. banks, from Key Bank to Chase Manhattan, routinely wired al Barakaat's funds from the U.S. to Dubai without realizing it was operating as a hawala--a Middle Eastern remittance system unregulated by the federal government and poorly overseen by states. "U.S. banks are clueless about hawala and parallel banking"--ways to move money without using banks--says Patrick Jost, a former Treasury financial investigator who is now a security consultant at SRA International. U.S.-based money-transfer companies such as Western Union also need tighter controls.

Banking executives insist that they're not even thinking about the cost of stricter enforcement--although it's adding up. A large bank typically spends $10 million a year to fight money-laundering, says KPMG's Zimiles. The search for terror money is boosting their tab--and adding new costs for brokers, insurers, and money-transfer businesses.

Most of the battles on the financial front will be fought abroad. The U.S. has rallied 120 nations to block assets of suspected terrorist groups. The latest raids even enlisted support from such staunch supporters of bank privacy as Liechtenstein and the United Arab Emirates.

The cooperation goes beyond terror money: Several small tax-haven nations will soon sign information-exchange treaties that will help the U.S. catch tax dodgers, says Treasury's O'Neill. But he wants to go further. "We need nations all over the world identifying from their own intelligence nominees for blocking," he says.

Some nations, however, haven't been so responsive. Sweden referred the Treasury's request to freeze al Barakaat assets to the Stockholm police--and they're still investigating. And a British court has ruled that a Saudi businessman can challenge a U.S.-requested freeze on his accounts.

HIDDEN DAMAGE. Unlike troops in Afghanistan, money warriors can't always tell how much damage they've done to the enemy. Treasury officials suspect they've snipped only a few strands of al Qaeda's financial web and will need to move against dozens, if not hundreds, more businesses, charities, hawala offices, and banks. Even then, the cost of terrorism is so low that a smuggled suitcase of cash could fund another attack.

So even as the financial front broadens and deepens, no one in the top ranks is predicting victory yet. Americans are likely to live with the war's costs--in limitations on their financial privacy, in friction in doing business--for years to come.

By Mike McNamee, with Amy Borrus, in Washington, Heather Timmons in New York, and David Fairlamb in Frankfurt

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