The lost trail

THE best test of a regulation is that its constraints work cost-effectively against the problem it was introduced to solve. Alas, on that simple measure the elaborate efforts by western politicians, with George Bush and Tony Blair to the fore, to curb terrorism by stopping the flows of money that sustain it, must be judged a failure. Complex and unwieldy regulations have been imposed, but are not working, indeed arguably were always misguided. They should be scrapped and resources concentrated more productively elsewhere.

That might seem a harsh conclusion, even a hasty one, given that the battle against terrorism is likely to be lengthy. What if a bank monitoring its transactions could spot an imminent attack by a terrorist cell? Wouldn't that justify almost any expenditure? If lives were saved, surely the answer is yes.

Unfortunately such a scenario is mostly fantasy. Banks have been forced by onerous new compliance rules to spend hundreds of millions of dollars recording more details about almost every transaction. But they freely admit in private that their systems are unlikely to spot an impending terrorist attack. One reason is that terror funds are tiny—perhaps 1% of the dirty money that sloshes around the financial system—because it does not cost much to commit an atrocity. Another is that terrorists do not need the international banking system in order to pursue their wickedness. Indeed, they have learned to avoid it wherever possible, which is why the informal remittance systems known as hawalas are probably more fertile ground for the authorities than bank accounts. But over-regulation there, too, carries risks: millions of immigrants rely on hawalas as a cheap way to send money home.

Banks do not say any of this in public for fear of being labelled as soft on terrorists. But the evidence is overwhelming (see article) and even big intelligence agencies admit that there is little preventive value in the flood of information being generated by anti-terrorist regulations. The only practical use of data about transactions is after an attack, when there might be some chance of tracing links in the networks that sustain terrorist movements (as there was after the September 11th 2001 attacks). But information to allow this existed before the introduction of today's massive regulatory system.

The effort is as vast as the benefits are negligible. Few outside the financial industry are aware that America alone has at least 20 federal agencies addressing terror financing. The biggest costs have been imposed on the private sector, and these are borne by millions of consumers in the form of higher fees and longer waiting times. Multiply these costs across nations, and the burden on the global economy is significant.

There is no great risk in scrapping the specific rules relating to terrorist finance. Much information will still be captured, because parallel efforts to combat money laundering will continue (and are anyway more effective). But precious resources would be freed that could be spent elsewhere, for instance in cracking down on the use of multiple identities to commit welfare and credit-card fraud. This is worth doing for its own sake and may, incidentally, also help to catch terrorists—some recent attacks have been paid for with the proceeds of such fraud. However, loading down the world's financial system with a heavy new regulatory burden makes little sense. Politicians have rushed into this as a way to look as if they are taking bold action against terrorism. But this particular effort is misconceived and pointless.