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PRESIDENT BUSH declared economic war on terrorism this week, freezing the
assets of 27 individuals and organisations, and declaring that foreign banks
must follow suit. But can anyone really cut off the terrorists’ financial
lifeblood?

The 1999 UN Convention for the Suppression of Financing for
Terrorism—which the US has not ratified—makes it a criminal offence
to knowingly fund terrorism. But spotting terrorist money can be even harder
than tracing criminals’ ill-gotten gains from drugs, prostitution or
gambling.

“Much terrorist money has a perfectly legal origin, such as donations,” says
Nigel Morris-Cotterill, editor of the World Money Laundering Report.
While a criminal may attract suspicion when unusually large sums first enter
their bank account, the same isn’t true of legally earned funds.

In 1990 the OECD’s Financial Action Task Force recommended “know your
customer” legislation to help fight money laundering. This requires financial
institutions to collect information on their customers’ sources of income. Alarm
bells are supposed to ring if irregularities emerge—such as a low-paid
clerk splashing out on flying lessons.

Compared with Europe, the US has very weak know-your-customer laws. And no
country requires banks to systematically compare client information to
transactions.

Even if they spot something, sounding the alarm may not always achieve
anything. In the US, banks report suspicious behaviour to the Financial Crimes
Enforcement Network in Washington DC, which searches for patterns that might
reveal illegal activity. But the agency does not systematically receive input
from other law-enforcement agencies, so separate pieces of the puzzle may never
meet.

And not surprisingly, terrorists have many ways to avoid arousing suspicions.
One ploy is to set up a company, then bring in money to pay non-existent
employees. Switzerland, with its banking secrecy, has a reputation as a
terrorist’s haven. But a better destination for terrorists might be the US state
of Delaware, where you can set up a company with few background checks and
little identification.

What’s more, terrorists can avoid money altogether by buying goods and
selling them across the globe. Such transactions can be very hard to trace, and
whenever goods or bank accounts are converted to cash, the electronic trail goes
cold.

Internet banking is making things even harder for the authorities. With
computers increasingly separating banker from client, there may be no one to
notice any incongruities, such as someone with no apparent income depositing a
large amount of cash.

The US may yet track the money that paid for the attacks. Mohammed Atta, one
of the suspected hijackers, is reported to have sent a package recently to a man
in the United Arab Emirates whom US authorities suspect of being bin Laden’s
financial middleman. His recent financial dealings are now under intense
scrutiny.

But can future terrorist attacks ever be foiled by cutting off funds?
Industry insiders say the only hope is to enforce tougher know-your-customer
rules, so someone will notice if a terrorist slips up. Yet the FBI estimates
that this month’s attacks in the US may have cost the terrorists just
$200,000.

Such money can be moved in dribs and drabs so that not even a vigilant banker
would grow suspicious. For such money movements to be picked up, surveillance
would have to be so strict that people’s daily transactions would need to be
scrutinised. Even if that were possible, it would destroy the very freedoms the
world is trying to defend.