Where There’s Smoke, There’s Fire

Merkel enjoys being the CFO of the EU. The rest of the world does, too: They look much more to her for financial stability than to Mario Draghi (president of the European Central Bank) or Jean-Claude Juncker (president of the European Commission). German economic might is not the only reason. For the past 70 years Germany has eschewed “national interest” and instead focused on becoming (one of the few) both fiscally responsible and non-belligerent European powers. Many of the country’s most basic laws are a reductio ad absurdum of the European subsidiarity principle: nearly all regulation is pushed down to the level of the German states. The federal government is an exercise in minimalism.

While this comports well with German Schuld (guilt, shame or debt) over World War II, many of its partners would welcome a more assertive national government, especially when it comes to doing something to stop material support for terrorism. The United Nations, the Organization for Economic Cooperation and Development (OECD) and the Financial Action Task Force (FATF) have all found Germany subpar in its financial regulations against terrorism. Embarrassed, Germany is scrambling to pass legislation to fix this, but the draft legislation is deficient.

Germany’s new draft counter threat finance legislation, which is on course to be signed into law in May, is an effort to implement U.N. Security Council Resolution 2178. Adopted last September, the resolution calls on member states to pass legislation to stem the flow both of foreign terrorist fighters and the financing that enables them. Germany’s draft law focuses nearly exclusively on stemming the flow of fighters in support of the Islamic State (nothing to sneeze at, as more than 600 of its citizens have joined ISIS), while doing almost nothing about the lucrative grey economy in which its own (and other Western) businesses participate. This, at a time when ISIS, al Qaeda, and Hezbollah are increasingly profiting from illicit trade (smuggling or counterfeiting) of otherwise legal consumer goods: oil, pharmaceuticals, tobacco, etc.

Resolution 2178, which the German law is supposed to implement, makes specific mention of Interpol as a relevant authority seeking information for enforcement actions against support of terrorism, and Interpol has been pretty clear on what they want from the German government: They want companies to implement know-your-customer regulations to ensure they are not entering into transactions with criminal organizations engaged in illicit trade that funds terrorism.

Consider the counterfeiting and smuggling of tobacco products, one of the most lucrative such trades (and one I know well, as subchair on tobacco for an OECD task force on charting illicit trade). As Interpol’s former secretary general Ron Noble stated in March 2014: “It is in the interest of all governments to establish due diligence frameworks and ‘know your customer’ programs such as those required for banks, and to demand track and trace systems for key component manufacturers to help combat the illicit trade in tobacco products.” Interpol and the OECD are focused on illicit tobacco trade because it is now as profitable as drug smuggling and growing at a rapid rate. The Center for International Maritime Security has identified shipments going through the Assad-controlled Syrian port of Latakia and ultimately being taxed by ISIS on their way into Syria and Iraq. 

Germany sits astride this illicit trade both as a consumer of goods flowing in from the Balkans and the former Soviet Union and as a source of key inputs. In the case of tobacco, these are cigarette filters made by Rhodia GmbH, the third largest manufacturer in the world. (The top two, Eastman and Celanese, are in America.)

The OECD and FATF have been clear on what it would take to disrupt illicit trade in tobacco and other goods: The same regulations we now take for granted in banks should be applied up and down industrial supply chains. Germany’s draft bill makes specific mention of meeting the standards of the FATF, which sits in the OECD and collects data from all the financial intelligence units that comprise it, but the bill takes no specific steps that would meet those standards. Nor does it do anything to meet the EU’s most recent anti-money laundering directive, which is being considered in the European Parliament at the same time as the German counter threat finance law is being voted in Germany. As an EU member, Germany will in any event be obliged to meet the standards of the anti-money laundering directive within two years. Why not do so now?

Criminal and terrorist organizations are increasingly engaging in the trade of counterfeit consumer goods. But if criminals can’t make the products, they can’t profit from them. The extension of know-your-customer rules to key input suppliers in the consumer goods industry (including tobacco) should be codified in the German counter threat finance law, as well as in the EU, TTIP and other agreements. Corporations upstream in the supply chain should not profit from the murderers from whom governments are trying to protect their people. 

This is Germany’s chance to be a good Kantian global citizen and further the fight against terrorism by wielding its favorite weapon: finance. As Merkel was pleased to argue when the issue was sanctions instead of weapons for Ukraine: If you cut off the flow of money, you are less likely to need the weapons.

Vanessa Neumann is president & CEO of Asymmetrica, a public-private partnership that counters illicit trade.