Briefing Book

Follow the Money

A simple reform created for stopping terrorist financiers could dramatically strengthen international sanctions, and cut off the flow of funds to some of the world’s worst regimes.

The United States and its partners are increasingly employing financial sanctions as an instrument of national power. The U.N. Security Council requires member states to impose sanctions on terrorist groups; financial sanctions are the centerpiece of resolutions dealing with Iran, Libya, and North Korea; and, while they may garner less attention in the media, the Security Council also has targeted sanctions in place related to Ivory Coast, Liberia, Libya, Somalia, Sudan, and the Democratic Republic of the Congo.

The targeted financial sanctions implemented by the United Nations have gained greater acceptance among governments and the private sector than the full-scale embargoes of years past, and they have had considerable success in advancing their goals. While these measures cannot be a policy in and of themselves, they have the tangible benefit of disrupting illicit networks and pressuring intransigent regimes by making it far more difficult for them to access needed financial services. But even these more powerful targeted sanctions could be dramatically more effective.

At present there are no real consequences, beyond the civil and criminal penalties that the United States imposes, for those who violate U.N.-mandated sanctions. The United Nations lacks enforcement mechanisms with real teeth -- a reality that is unlikely to change given the attitude of some Security Council members. There is, however, one step that could make a significant difference: The world's premier standard-setting body for combating terrorist financing and money laundering, the Financial Action Task Force (FATF), should develop and enforce standards for sanctions implementation.

FATF is well positioned to take on this mission. This organization, created by the G-7 in 1989, already has developed standards used by countries around the world to combat terrorist financing and money laundering; the expansion of its work to broadly cover sanctions implementation would be consistent with its mission of protecting the international financial system from abuse. Furthermore, more than 180 countries -- notably including China and Russia, which have often been difficult or reluctant partners on sanctions -- have committed to follow the group's standards and voluntarily subject themselves to evaluations by their peers. Finally, and perhaps most importantly, the private sector pays close attention to FATF's assessments and its identification of jurisdictions that pose a risk to the financial system.

These facts mean governments have a strong economic incentive to meet FATF's standards and respond meaningfully to its evaluations. If the United States and other concerned countries are serious about using financial tools to help solve some of the world's most intractable problems, enlisting FATF in the effort may be the single most effective step they can take to make sanctions work.

Countries or groups that face U.N. sanctions will inevitably try to evade the restrictions, often by enlisting the help of people and companies not on the sanctions list. Punishing or deterring such actions depends on imposing tangible consequences on violators. But at the moment, that almost never happens -- except in the United States.

The Security Council has set up committees, sometimes with the assistance of panels of experts, to report on sanctions implementation -- but there is little to no follow-through on the council's part in terms of punishing violators. The U.N.'s usual action, even in cases of notorious sanctions busting, is to send a letter to the relevant country seeking an explanation. Such letters are, as one might imagine, easily ignored and therefore reinforce the notion that there are no consequences for violations.

On a national level, most governments do not have the capacity to detect sanctions breaches. Even when governments are aware of violations and report them to the relevant Security Council committees, they typically do not crack down on violators. Banks and companies operating in most countries therefore have no incentive to voluntarily disclose violations, because their transgressions will likely never be found out. By contrast, in the United States, banks and companies that discover they have accidentally violated sanctions often will report what they have done to the Treasury Department in part because they understand that doing so will mitigate the penalty they will ultimately pay.

The United States, of course, has the world's most far-reaching and complex sanctions programs, so it has the greatest need for an organization to implement them. That role is filled by the Treasury Department's Office of Foreign Assets Control. For the United States to implement its 20 sanctions programs and accommodate the fact that a significant percentage of global commerce is processed through the United States, it needs this kind of organization to provide detailed guidance, issues thousands of licenses each year to deal with a variety of special circumstances that come up, and, most importantly, credibly enforce the rules and punish violators. No other country has a similar organization or capability.

The sad fact is that the United States has, for all practical purposes, become the world's sanctions enforcement police. But there is nothing inevitable about this situation: Now that sanctions have become an obligation of all states in so many circumstances, steps should be taken to ensure that each country builds the capacity it needs to implement and enforce those obligations.

This is where FATF comes in. The organization has successfully changed the international landscape on financial controls for combating money laundering and terrorist financing. By publishing standards -- embodied in its "40+9" recommendations -- FATF has incentivized countries to continually improve. Most countries seek to be part of this process and gain FATF's seal of approval, or at least not warrant its disapproval. Its efforts are viewed as nonpolitical and therefore are treated with respect.

FATF's evaluations are the key to its success. Governments understand that the results of their evaluations will be made public and will have a direct impact on their ability to do business in the global marketplace. Financial institutions in particular closely monitor the evaluations, which they use in their decisions about where and how to do business, and in their customer risk assessments. That means a negative evaluation can make it more difficult for banks, companies, and even individuals in a country to access needed financial services.

This process has inspired something of a "race to the top" dynamic in which governments want to be positively evaluated. Countries that have significant deficiencies identified in their mutual evaluations are referred to a special committee, which works with them to develop action plans for improving. Countries that cooperate with this process and make a high-level political commitment to implementing the action plan are placed on a publicly released "gray list," which provides them with a strong incentive to continue to cooperate. That list has most recently included countries such as Argentina, Morocco, and Pakistan.

Countries that are deemed uncooperative after a year are given a public warning and, if no effort is made to improve after that, they are moved to the black list. As of this June, the list included Bolivia, Burma, Cuba, Ethiopia, Kenya, Sri Lanka, Syria, and Turkey. Being on this list matters; it is an important factor that will contribute to banks' decisions about the extent to which they will do business in a particular country. In cases where countries have such great deficiencies that they pose a risk to the international financial system, FATF can also publicly call for other governments to implement countermeasures to protect their financial systems from the risk -- it has done so recently in the cases of Iran and North Korea, two countries that now find it nearly impossible to secure legitimate banking and business partners. Most countries put forth significant effort to avoid being singled out by FATF, and especially to being put on the black list.

FATF has promulgated standards for implementing one U.N. sanctions program: the prohibition on funding terrorism embodied in Security Council Resolutions 1267 (regarding al Qaeda and the Taliban) and 1373, adopted after the 9/11 attacks. FATF added nine special recommendations for combating terrorist financing in 2001 and 2004. These recommendations provide a model for the steps that should be taken with respect to all U.N.-mandated sanctions.

Two of FATF's counterterrorist financing recommendations are particularly relevant because they address countries' U.N. sanctions obligations. First, FATF recommends that countries criminalize the financing of terrorism, terrorist acts, and terrorist organizations. The purpose of this recommendation is to ensure countries have the legal capacity to prosecute and apply criminal sanctions to people who finance terrorism. Second is a recommendation that each country "should implement measures to freeze without delay funds or other assets of terrorists ... in accordance with the United Nations resolutions" and that each country "should also adopt and implement measures, including legislative ones, which would enable the competent authorities to seize and confiscate property that is the proceeds of, or used in, or intended or allocated for use in, the financing of terrorism, terrorist acts or terrorist organizations."

There is no logical reason to limit FATF's sanctions standards to counterterrorism. Promoting adherence to all U.N.-mandated financial sanctions is fully consistent with FATF's mission to protect the integrity of the financial system from illicit conduct. An expanded set of recommendations would need to address a variety of questions: Is there any way for financial institutions to screen against past sanctions violators as they consider whether to accept or reject business? Does the country have a mechanism for ensuring that its financial institutions (and others) are aware of new sanctions programs? Are the financial institutions required to include sanctions compliance in their internal controls? Can the government investigate or otherwise detect violations? Are consequences imposed on violators, such as civil or criminal penalties? Similar questions are currently asked about money laundering and terrorist financing -- why not about sanctions compliance?

Expanding FATF's mandate to cover all financial sanctions would dramatically improve the potential of international sanctions regimes by creating incentives for governments to more fully implement and enforce them. Governments would understand that failure to develop such capabilities would risk a negative evaluation and, in the worst-case scenario, result in being deemed a risk to the international financial system. Of course, no one expects the countries targeted by sanctions or those considered international pariahs to attempt to honor the standards. But almost all of the rest will -- because being branded as a risk to the financial system is a black mark that almost no country can afford.

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Briefing Book

Is Pakistan's Army as Islamist as We Think?

New data suggest it may be even more liberal than Pakistani society as a whole.

The preeminent concern among Americans -- and increasingly among many Pakistanis too -- is that some personnel may support Islamist terrorism in the region and beyond or that perhaps a radical, rogue Islamist column may split off within the Army, endangering Pakistan's stability and the security of its nuclear weapons. Others fear that radical personnel might even give nuclear devices or technology to terrorists. Equally important is that some U.S. observers equate greater Islamization with deepening anti-Americanism within the Army.

These apprehensions have been galvanized by the numerous terrorist attacks on military and intelligence institutions and personnel that have involved assistance from within the armed forces. Most recently, the May attack on a Karachi naval facility was likely facilitated by an al Qaeda cell within the Navy itself. Chief of Army Staff Ashfaq Parvez Kayani and other Army brass are worried about the enemy within. In recent months, Pakistani Army personnel have been arrested for ties with Hizb ut-Tahrir, an outlawed extremist organization in Pakistan.

But these fears may be overblown. Despite the importance of this issue, few data sources have permitted observers to evaluate these claims with any precision.

Using Army recruitment data from Pakistani analyst Shuja Nawaz, with whom I co-authored a paper in the Journal of Strategic Studies this year describing these data and the changes they evidence, I find no systematic evidence that conservative areas are producing more officers than other areas as late as 2002.

Islam's Long History in the Pakistani Army

The Pakistani Army has long relied on Islam within the institution. The faith has long served -- with varying degrees of success -- as a unifying force to supersede ethnic, sectarian, and communal fissures that have long cut through Pakistan's polity. During the tenure of Pakistan's second military leader, Gen. Agha Mohammad Yahya Khan, the Army assumed a new role of defending not only Pakistan's territorial sovereignty but also Pakistan's "ideological frontiers." To defend Pakistan is to defend Islam.

Islam has also served to motivate the Army to fight an enemy that has always been conventionally superior: India. The Army cultivates deep respect for the military value of jihad, which is evident in its professional literature. The Army uses Islam to bolster its will to fight by debasing the enemy. During the 1971 civil war, Yahya Khan motivated his soldiers by declaring the Mukti Bahini (the Bengali guerrillas) to be a kafir army against which the Pakistani Army was waging a legitimate jihad. Brig. Javed Hassan (who retired a major general), while a faculty member at the Command and Staff College in Quetta, authored a study titled India: A Study in Profile. It is required reading at Pakistan's National Defense University. Hassan argues that India is "less warlike" than Pakistan and attributes India's military failures to its Hindu characteristics.

Pakistan's Army likely needs such motivation against a larger, existential nemesis because -- though it has started every war with India -- it has never won any of them.

With little hope of defeating India on the battlefield, Pakistan has pursued an asymmetric form of warfare consisting of guerrilla and terrorist attacks under the security of its creeping nuclear umbrella. The Pakistani Army and the intelligence agency it controls (the Inter-Services Intelligence directorate, or ISI) have long instrumentalized Islam to prosecute Pakistan's interests in Afghanistan and India, using a bevy of Sunni Islamist militant groups and other means to keep the country's enemies off balance.

Gen. Muhammad Zia ul-Haq, who seized Pakistan's government in a coup in 1977 and ruled until his mysterious death in a plane crash in 1988, was most notorious in efforts to Islamize the Army. He permitted religious groups to distribute their materials to the rank and file and officers alike. Under Zia, Islamic training was introduced in the curriculum of the Command and Staff College, which provides important training for promising officers of the captain or major rank. South Asia scholar Stephen P. Cohen found long ago that the Army's professional journals contained numerous essays that studied the question of Islamization of the military and the degree to which the Pakistani Army should achieve greater adherence to Islamic principles. Pakistani military analyst Hasan Askari Rizvi has noted that Zia's orthodoxy changed recruitment and retentions patterns by ensuring that piety was a part of an officer's evaluation. Despite Zia's efforts to Islamize the Army and the state, however, Cohen found that the changes in the officer corps, while important, were in fact quite modest at the time of his research.

Unfortunately, obtaining granular data on this issue is daunting. In principle, one could do surveys, but the sample size would have to be enormous (perhaps as high as 1 million) to identify enough military personnel to say anything meaningful about their views. The Pakistani Army has strictly sought to limit visibility of the organization, and U.S. defense attachés may interact with about 100 officers from an army of 520,000, mostly at the ranks of colonel and above. Attachés may even attend graduation at the National Defense University and do "beard counts," which is an extremely crude measure of Islamism in the military. The few U.S. officers attending the Command and Staff College (one attends each year) have the uncommon experience of meeting those with ranks of majors and captains, but the ISI scrupulously oversees foreign interactions and briefs officers for such meetings on the key positions to maintain. As U.S.-Pakistan relations have been fraught for decades, too little is known about this important institution. Yet understanding it is critical to the bilateral relationship.

What the Data Tell Us

In the absence of ideal data on officers, I did the next best thing: provide insights into the kind of areas that produce officers. To do so, I used the data obtained by Nawaz, which provided the numbers of officers recruited and retired from specific districts for several years between 1992 and 2002. To characterize these districts that produce officers, I used data from Pakistan's Federal Bureau of Statistics.

Working with several quantitative analysts, I developed a panel dataset of household characteristics (such as employment, educational background, and demographic information) as well as district characteristics (number of hospitals, family planning clinics, and so on in a district). Specifically, this analysis uses data from 1991, 1995, 1998, and 2001 from Pakistan's Federal Bureau of Statistics and district-level Army data from 1992, 1996, 1999, and 2002. The survey data and the Army data were merged on the one thing they have in common: the district. (The "lag" between recruitment and survey data is deliberate because socioeconomic and other effects should only influence recruitment outcomes in subsequent years.)

To understand how these district characteristics explain differences in recruitment outcomes, we used an analytical technique known as panel regression analysis. This kind of analysis allows us to discern the impact of key variables on recruitment outcomes for any given district and year.

In particular, we examined the effects of demographic, economic, military and "social liberalism" variables. (There is no direct measure for religiosity in the data.) Variables indicating some measure of social liberalism, which are at the core of this study, include the average age of female at first marriage; the numbers of sons in a household in private schools divided by all sons in the household; the average number of family planning clinics in a district; and the difference in educational differences of males and females.

Four key findings emerge from this analysis. First, among the demographic variables, districts with more people who could do basic math were more likely to produce officers. This suggests that foundational human capital matters to the Army, as expected.

Second, districts with more private high schools in a district are less likely to produce officers than those with fewer private high schools. This is consistent with the conventional wisdom that the Army no longer recruits from Pakistan's elite families.

Third, as in the United States, the presence of retired officers is a strong and significant predictor of recruitment outcomes. This suggests that retirees create positive, pro-military environments conducive to recruitment. Retired officers also can offer helpful advice to aspirants about how best to impress the examiners and otherwise prepare for the rigorous admission process.

Fourth, our analysis of social liberalism characteristics suggests that in many ways more liberal districts are producing officers. One of the most important indicators of social liberalism, the propensity of households to send more sons to private schools, was strongly associated with recruitment in a district. Private-school utilization correlates with socially liberal views in Pakistan. (This appears to conflict with the finding above, but it does not. The numbers of private high schools reflect an aggregated demand for elite education -- few Pakistanis attend any high school, much less private high schools -- and signifies financial wherewithal to pay for such schools. Taste for private schools at a lower level signifies social liberality, holding district economic factors constant.) Similarly, in districts where men and women have roughly equal educational attainment or in districts where women are more educated, recruitments are more likely than in districts where men's education exceeds that of women. The presence of family-planning clinics is also positively and significantly correlated with recruitment.

These findings suggest that more socially liberal districts are more likely to produce officers than are socially conservative ones.

The Limits of the Data

The Pakistani Army has used Islam for a variety of institutional and national goals. Elements of the Army have indeed radicalized as evidenced by the rare -- but increasing and devastating -- terrorist attacks in Pakistan that have involved military personnel. Our findings, however, suggest the Pakistani Army, at least until 2002, was no more likely to recruit from conservative areas of the country, suggesting in turn that perhaps -- perhaps -- there is less radicalization than is commonly assumed.

Admittedly, these conclusions are tentative, and these measures of social liberalism are no doubt imperfect. This study, moreover, cannot be conclusive as it can only speak to the districts that produce officers, not the worldview of officers themselves. Given the high stakes involved, this subject requires more thorough data collection and analysis. Understanding these dynamics is vital for the United States, but it's perhaps even more important for Pakistan and Pakistanis who rely on their military to protect their country.