Most people can recall what they were doing on September 11, 2001, when their otherwise normal Tuesday was interrupted as they were drawn to a nearby television to watch in horror and disbelief as two hijacked aeroplanes – one a United Airlines flight and the other an American Airlines carrier – crashed into the World Trade Centre in the Lower Manhattan borough of New York. Within an hour and 42 minutes both the North and South towers had collapsed. Still reeling, the world was then informed that a third plane had crashed into the Pentagon. A fourth, which was headed towards San Francisco, crashed into a field, with the heroic passengers having managed to thwart the plans of their hijackers. Nearly 3 000 people were killed, and a further 6 000 were injured.
The 9/11 attack is one of the most shocking events in modern history – in mere moments, the entire population of the world’s most powerful country had been reduced to a state of fear, panic, and confusion. People evacuated business buildings unsure of whether theirs might be the next target. Families desperately tried to make contact with one another to ensure their loved ones were safe. Alarm spread throughout the world – for if America was not safe, who was? To think that anyone could have planned to benefit financially from such an event is almost beyond human comprehension. And yet, in the days leading up to the attack, trading in derivatives on both United Airlines’ and American Airlines’ stock – and only these two airlines’ stock – was unusually erratic. At one point, the put-to-call ratio in United Airlines was at 12:1, where it would normally be about 1:1. It was self-evident that certain parties had known that the attack was going to happen and used this knowledge to make a profit.
An investigation by the National Commission on Terrorist Attacks Upon the United States determined in 2003 that the unusual financial activity was coincidental and not the result of informed trading. But articles published in The Journal of Business in 2006 and The Foreign Policy Journal in 2010 outlined how researchers had uncovered new evidence using statistical analyses that confirmed that put buying in the airlines was consistent with informed investors having traded their stock before the attack. This evidence stretched beyond just the airlines, suggesting also that traders from around the world had colluded in manipulating international markets by trading shares in insurance companies that would be liable to pay out billions of dollars after the attack. The Wall Street Journal also noted unusual activity in the trading of Treasury bonds.
In piecing together the strange movements in financial markets leading up to 9/11, researchers had to sift through an inordinate amount of seemingly unrelated information to be able to construct a stable argument that demonstrates that there were people who knew about the attacks before they happened and that they planned to benefit from them. The reason that it was so difficult to unravel these transactions is that they were often performed through shell companies based in offshore domiciles and through over-the-counter trading. These transactions were not regulated through an exchange, ensuring that those who benefitted from them were hidden behind an opaque screen that protected their anonymity and concealed their involvement in terrorist activities. The uncomfortable reality is that the financial activities of specific persons in the days before 9/11 may have been enough to indicate, before that tragic Tuesday morning, that the attacks were going to happen, if anyone had been watching close enough to identify and connect the clues.
The 9/11 case highlighted the fundamental fact that financial institutions can play a central role in safe- guarding not only the international monetary system, but the physical and social well-being of the general public as well. As a result, the responsibilities of banks have changed substantially in recent years. Banks are no longer simply institutions where we keep our money or where we obtain loans, and they are no longer only responsible for the business of banking. They have become paramount in the detection of terrorist, criminal or otherwise unethical behaviour through their focus on preventing money laundering, terrorist financing, and tax evasion. Through anti-money laundering (AML) and counter-terrorist financing regulations, banks have become responsible for investigating the origin of funds that are transferred through their systems, as well as for flagging suspicious transactions that may be connected to terrorist activities. In addition, regulations such as IT3B, Automatic Exchange, and the Foreign Account Tax Compliance Act (FATCA) aim to reduce the effects of tax evasion, essentially rendering banks extensions of the State, responsible for ensuring that tax laws are adhered to, and reporting on cases where they are not. This has not always been the case, however. Historically, in most countries, a sectoral model of regulation has dominated the financial sector, resulting in banks being regulated separately from other kinds of financial institutions, such as insurance companies. In 1995, Dr Michael Taylor – an official with the Bank of England – suggested that this model was outdated, given the overlap that was regularly occurring in the work of different regulators. He proposed a “Twin Peaks” structure for regulation in the financial industry: one regulator to oversee prudential regulation – which is concerned with elements such as capital levels and liquidity – and one regulator for ensuring good market conduct and consumer protection – through regulations concerned with AML and counter-terrorist financing, for example. Both of these regulators would be responsible for both banks and other financial institutions. After the 2007/2008 financial crisis, this model was applied in many countries and South Africa is currently in the process of migrating to the Twin Peaks system.
The Twin Peaks approach to regulation represents a fundamental shift in the role banks play in society. In the past, banks were simply expected to manage the credit and market risk inherent in their positions. They were not expected to monitor the origins and purposes of funds, or identify the people who moved them, and this made offshore structures an especially easy target for criminal activity. However, new market conduct regulations require that banks evaluate their customers and their transactions on a much more personal level, culminating in the need for a substantial amount of personalised information about the people who use a bank’s services. Through the Know-Your-Customer process, banks are required, on an ongoing basis, to verify the identities of potentially high-risk clients, such as politically exposed persons, to assess the potential risk of accepting them as clients. They do this through a detailed analysis of documentation and other external data, and continually monitor their transactions for any suspicious behaviour.
Banks have essentially become crucial watchdogs in larger State efforts to predict and quell criminal activity. And the need for banks to ensure effective client background checks and to perform ongoing surveillance of the funds that are channelled through their business is more pressing than we may have realised, until recently. For whilst an analysis of the unusual trades leading up to 9/11 may provide an extreme example of the ability for greed or destructive impulses to eclipse all sense of morality, the reality is that unethical financial activities are disturbingly commonplace – as the Panama Papers case clearly demonstrated.
In March 2018, Panamanian law firm Mossack Fonseca announced that it was closing its doors. The firm, which was established in 1977, had operated up until 2016 as the fourth largest provider of offshore financial services in the world, with many of its offices located in tax havens such as Jersey, Cyprus, and Luxembourg. But then came its great fall, when German newspaper Süddeutsche Zeitung revealed the central role that the company had played in helping its clients to circumvent tax regulations and commit fraud. These clients were not just a handful of gangsters or smugglers – but included respected businessmen, current and former heads of state, public officials, and celebrities. And this was not just a case of a newspaper trying to punt sensationalist news, based on a few shaky pieces of evidence. The shocking story was based on one of the largest data leaks of all time – 2.6 terabytes of data comprised of 11.5 million confidential documents that detailed the transactions of over 214 488 offshore entities from the 1970s up until 2016.
The description of the events that took place leading up to the publication of the story – as recounted by Süddeutsche Zeitung journalists Bastian Obermeyer and Frederik Obermaier in the book The Panama Papers (2016) – reads much like a John Grisham novel. Late one night, Obermeyer is contacted by a mysterious “concerned citizen” who offers him access to a well of data so enormous that it will take nearly 400 journalists from over 80 countries over a year to sift through it and follow-up on the leads it provides. The source will not give any information about him or herself, and fears for their life if they are ever found out. A secret encrypted method for sharing the files must be devised, and the journalists must piece together many disparate pieces of information to discover how the names are linked to the extraordinarily large monetary figures that are recorded.
Mossack Fonseca denied any wrongdoing after the story broke. And indeed, much of the data the journalists received detailed the use of offshore accounts for purposes that are considered perfectly legal. Business people in politically or economically volatile countries may, for example, hold financial assets offshore to protect them from being frozen or seized. Others may choose to make use of offshore accounts for estate planning and inheritance purposes. But, as the German journalists note in their book, “the fact is that people often have recourse to an anonymous offshore company because they want to hide something – from the taxman, their ex-wife, their former business partner or the prying eyes of the public.” And the data painted a clear picture of unethical and exploitative behaviour on a global scale. With Mossack Fonseca’s help, the wealthy were routinely maximising the advantages of offshore tax havens to anonymously hide vast sums of money from the governments of their home countries.
The method was relatively simple: contact was made with Mossack Fonseca through an intermediary, such as a bank or lawyer, who was then technically Mossack Fonseca’s actual client. Mossack Fonseca then acted as an incorporation agent, as the firm was licenced to register companies in Panama – a desirable business domicile with low rates of taxation and a high degree of secrecy. It was quick and relatively cheap to set up the company and its offshore bank account, and to close both when they had served their purpose. Moreover, the owner’s identity remained hidden as Mossack Fonseca appointed three directors from within its own staff base to act as the official representatives of the shell company. The real owner, or their lawyer, was given a power of attorney by the directors to access the company’s bank account – a perfectly legal loophole that most people were unaware of.
Though establishing this scheme may have been a relatively easy task, its effects were devastating, with these offshore accounts essentially working collectively to widen the already substantial gaps that exist between the very rich and the very poor through tax evasion and money laundering, and the further facilitation of criminal activities and anti-competitive business practices. And the scope of the data informing the exposé indicated just how routinely the laws and obligations of the international monetary system are manipulated for these selfish purposes.
In many ways, the exposing of the Panama Papers ushered in a new wave of investigative journalism – one that relies on huge amounts of data, sophisticated software, and mobile collaboration between various international publications. The use of computer software called Nuix – which is routinely used by international investigators – was central to the journalists’ ability to sift through the enormous amount of data they received, and to find important connections in this information. Optical character recognition was first applied to the various documents – which included shareholder registers, bank statements, passport photos, and emails – to alter the format of the data to searchable text. This enabled the journalists to search through the data using a list of keywords – which included the names of prominent politicians, criminals and celebrities – much as one would conduct a Google search. A more detailed investigation was then conducted into each of the people whose names appeared in the leaked documents.
The problem with the statistical analyses of the trades that occurred just before 9/11 and the journalists’ computer-aided investigation into the Panama Papers is that, in both cases, the patterns and connections in the data that provided the key evidence of wrongdoing could only be detected after a significant amount of damage had already been done. But what if we could monitor and detect these patterns in such a way as to predict these types of events before they occur?
In the final pages of The Panama Papers, there is a statement written by the anonymous source responsible for leaking the Mossack Fonseca data to the Süddeutsche Zeitung. In the final paragraph he or she claims: “Historians can easily recount how issues involving taxation and imbalances of power have led to revolutions in the past. Then, military might was necessary to subjugate peoples, whereas now, curtailing information access is just as effective, or more so, since the act is often invisible. Yet we live in a time of inexpensive, limitless digital storage and fast Internet connections that transcend national boundaries. It doesn’t take much to connect the dots: from start to finish, inception to global media distribution, the next revolution will be digitised.” This is the possibility that unsupervised deep-learning AI presents us with, through its ability to isolate potentially dangerous transactions and connect this to other information that would enable us to answer questions such as “Where did the money come from?”, “Where is it going?” and “Who will benefit from this?” AI can collect and process vast amounts of data and find – in moments – connections that a human would take hours, days, weeks, or even years to see, if they see it at all. And one of its most important applications is undoubtedly in the world of banking, where the detection of patterns or trends that indicate suspicious or irregular activity could not only prevent an expensive financial fallout, but protect people on a mass scale from the various criminal forces that threaten their safety.