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The role of business in fighting terrorism
The role of business in fighting terrorism
Murray Weidenbaum Mallinckrodt Distinguished University Professor and Honorary Chairman, Weidenbaum Center on the Economy, Washington University, St. Louis, Missouri; 2001 member of task force on terrorism, Center for Strategic and International Studies, Washington, DC
T
he private enterprise system plays a vital but not widely appreciated role in the war on terrorism. At the outset, Secretary of Defense Donald H. Rumsfeld (2001) explained the business aspects of the struggle against global terrorist networks in vivid terms: “The uniforms of this conflict will be bankers’ pinstripes and programmers’ grunge just as assuredly as desert camouflage.” The role of business takes many forms and the effects are numerous and often indirect. Its number one task is to help cut off the flow of money to terrorists.
Cutting off the money flow
Business participates in the struggle against terrorism in many ways: helping cut off the flow of money to terrorist groups, producing anti-terrorist equipment, screening employees and visitors entering company facilities, manufacturing the medicines to respond to biological and chemical attacks, and making the weapons used by our armed forces in the fight. Nevertheless, such responses raise the cost of production and act like a new tax on private enterprise. On balance, however, the economic power of American business plays a key role in the national response to terrorism.
6
Numerous banks and other financial institutions are involved in a great many nations. The flow of money is vital to international terrorist groups, although they use relatively small amounts. The 1993 bombing of the World Trade Center killed six people and injured more than 1,000. The cost to the conspirators, however, has been estimated at less than $50,000 in bomb materials and other expenses. The cost to the terrorists of the far more deadly September 11, 2001 attacks is estimated at approximately $500,000—compared to over $135 billion of property losses, cleanup costs, and government bailouts that resulted. Thus, the effort to curtail the flow of funds to terrorists and inhibit their use of the money is akin to the proverbial search for a needle in a haystack. The global financial “haystack” is especially daunting, with more than $1 trillion crossing borders each day. The first major antiterrorist step on the part of the federal government in response to the 9/11 attack was a presidential executive order issued on September 24, 2001. It provided for a freeze on the bank accounts and other assets of specific terrorists and terrorist groups. In carrying out the President’s order, the Treasury Department directed private financial institutions to do many things (at their own expense): 1. Conduct more “due diligence” investigations of account holders, especially private banking clients, to make sure they are not terrorist groups.
Business Horizons / May-June 2003
2. Set up anti-money-laundering programs—or expand existing efforts—in order to prevent the conversion of illegal funds into legitimate financial accounts. Special focus is to be given to private banking accounts, particularly those owned by foreign political figures. 3. Report “suspicious” activities to the Treasury Department (see Figure 1 for the required Suspicious Activity Report). 4. Cease transactions with “shell banks” that have no physical presence in any country. 5. Gain more information about the foreign banks with which they do business. 6. In the case of hedge funds, refuse to accept money from anonymous sources. In carrying out these new rules, financial institutions are required to designate special compliance officers, train employees to detect money laundering, and commission independent audits. The companies must also establish specific policies and procedures to identify risks and mini-
mize the likelihood of potential terrorists slipping through the various safeguards. The anti-money laundering and related anti-terrorism efforts of financial institutions, though difficult to estimate in terms of additional expenses incurred, surely increase the overhead costs of these businesses (again, see Figure 1). To the extent that they inconvenience legitimate customers in the process, the new procedures may also reduce the amount of business transacted. Banks are not the only companies participating in the effort to stem the flow of money promoting terrorism. The anti-terrorist regulations extend to many other types of financial “intermediaries,” including brokerage firms, mutual funds, casinos, and wire transfer services. From September 2001 to May 2002, $34 million in terrorist assets were frozen in the United States. According to Thachuk (2002), another $70 million of assets in known terrorist organizations were blocked by 161 other nations that are participating in the overall effort to respond to terrorism.
Figure 1 Report required of financial institutions Part III
1
Suspicious Activity Report
FRB: FDIC: OCC: OTS: NCUA: TREASURY:
ALWAYS COMPLETE ENTIRE REPORT (see instructions)
FR 2230 6710/06 8010-9,8010-1 1601 2362 TD F 90-22.47
MM
Revised June 2000 (This revision supersedes all others)
YYYY
DD
$
YYYY
.00 ,
,
Computer intrusion
g
l
Consumer Loan Fraud
6 City
7 State
9 Address of Branch Office(s) where activity occurred 10 City
5 Primary Federal Regulator a Federal Reserve d b FDIC e c NCUA
8 Zip Code
m
12 Zip Code
Closed? Yes
b ____________________________
OCC OTS
13 If institution closed, date closed ____/ ____/ ________ MM
14 Account number(s) affected, if any a ____________________________
Yes
DD
YYYY
No
c ___________________________
Closed? Yes No
No
d ___________________________
Yes
Suspect Information
No
Suspect Information Unavailable
15 Last Name or Name of Entity
16 First Name
h
Counterfeit Check
n
False Statement
Check Fraud
i
Counter Credit/Debit Card
o
Misuse of Position or Self Dealing
d
Check Kiting
j
Counterfeit Instrument (other)
p
Mortgage Loan Fraud
e
Commercial Loan Fraud
k
Credit Card Fraud
q
Mysterious Disappearance
r
Wire Transfer Fraud
s
Other_____________________________________________________
19 SSN, EIN or TIN
20 City
21 State
36 Amount of loss prior to recovery (if applicable)
22 Zip Code
,
(
26 Occupation/Type of Business
a
Yes
b
No
40 Has any law enforcement agency already been advised by telephone, written communication, or otherwise? a DEA d Postal Inspection g Other Federal b FBI e Secret Service h State c IRS f U.S. Customs i Local j
Agency Name (for g, h or i) ___________________________________________________________
41 Name of person(s) contacted at Law Enforcement Agency
42 Phone Number (include area code)
43 Name of person(s) contacted at Law Enforcement Agency
44 Phone Number (include area code)
( (
) )
Contact for Assistance
45 Last Name
28 Admission/Confession? a Yes b No
_______/ _______/ _________ DD
,
38 Has the suspicious activity had a material impact on, or otherwise affected, the financial soundness of the institution?
46 First Name
47 Middle
)
27 Date of Birth MM
,
,
23 Country
25 Phone Number – Work (include area code)
)
.00
39 Has the institution’s bonding company been notified? a Yes b No
Part IV 24 Phone Number – Residence (include area code)
37 Dollar amount of recovery (if applicable
.00 $
$
17 Middle
18 Address
Defalcation/Embezzlement
Bribery/Gratuity
c
(type of activity)
Multiple Branches (include information in narrative, Part V)
11 State
,
Debit Card Fraud
b
3 EIN
4 Address of Financial Institution
(
MM
Money Laundering
Reporting Financial Institution Information
2 Name of Financial Institution
Part II
DD
2
34 Total dollar amount involved in known or suspicious activity
35 Summary characterization of suspicious activity: a Bank Secrecy Act/Structuring f
1 Check box below only if correcting a prior report. Corrects Prior Report (see instruction #3 under “How to Make a Report”)
Part I
Suspicious Activity Information
33 Date or date range of suspicious activity From ____/ ____/ _______ To ____/ ____/ _______
OMB No. 7100-0212 OMB No. 3064-0077 OMB No. 1557-0180 OMB No. 1550-0003 OMB No. 3133-0094 OMB No. 1506-0001
YYYY
48 Title/Occupation
49 Phone Number (include area code)
(
)
50 Date Prepared _______/ _______/ __________ MM DD YYYY
51 Agency (if not filed by financial institution)
29 Forms of Identification for Suspect: a Driver’s License/State ID
b
Passport
c
Number _____________________
Alien Registration
d
Other ___________
Issuing Authority _____________________
30 Relationship to Financial Institution: a
Accountant
d
Attorney
g
Customer
j
b
Agent
e
Borrower
h
Director
k
Shareholder
c
Appraiser
f
Broker
i
Employee
l
Other ______________________
31 Is the relationship an insider relationship? If Yes specify:
a
Yes
b
No
c
Still employed at financial institution
e
Terminated
d
Suspended
f
Resigned
Officer
32 Date of Suspension, Termination, Resignation _______/ _______/ _________ MM
DD
YYYY
Source: US Department of the Treasury
The role of business in fighting terrorism
7
Business and homeland security
T
he federal government sets the basic policies on screening transfers at border crossings and airports and determines many other internal security matters. However, on a day-to-day basis, most people interact more frequently with corporate security people and, especially in their working lives, encounter the security policies of businesses. Thus, private enterprises such as factories and building managements increasingly screen customers, visitors, and their vehicles. Private employers more often do background reviews on new hires, while mail and other deliveries to private establishments are more carefully checked than prior to 9/11. Business also designs and produces the anti-terrorist equipment and systems used by both the public and private sectors. This market is hardly stagnant. The demand for bomb-sniffing dogs has grown dramatically. A man-
The outlook is for reduced investments in developing nations due to higher perceived risks, as well as higher costs of exports and imports due to delays resulting from heightened border security. In effect, terrorism has imposed a new tax on international business. and-dog team costs $100–$250 an hour, with a typical daily minimum charge of $2,000. Sales of gloves and other protective devices for people have risen rapidly; so have sales of explosive-detecting gadgets. Guards and inspectors of all sorts are in demand, as are the metal detectors they use. The construction of vehicle barriers has become increasingly common, as has the use of identification cards and security keys and readers. The application of new technology is in high demand, notably the stepped-up R&D and production of new electronic systems to locate and identify terrorists. Invariably, consultants with various specialties are heavily involved, especially those with experience relevant to terrorism and other forms of unconventional warfare. In addition, business develops and produces the medicines and the related equipment used to respond to bio8
logical and chemical attacks. Unlike nuclear materials (which are almost all controlled by governments), chemical and biological agents are mainly in the possession of private industry. Thus, business bears the primary responsibility for devising ways to keep such materials out of the hands of potential evildoers. Shortly after 9/11, Air Products and Chemicals Corporation established a high-level Director of Product Safety Integrity, a new function that combines corporate security with the activities of the company’s product safety specialists. Medicines to alleviate and vaccines to prevent such diseases as anthrax and smallpox have become an important category of health care budgets. A great variety of new items is being marketed. An example of special equipment is the Bio-Threat Alert Test Set-Up, a small plastic device to detect anthrax, botulism, plague, and other toxins. A box of 25 strips reportedly sold for $495 in late 2001. Finally, businesses design and produce the weapon systems used by our armed forces in military operations against terrorist groups and against the nations that harbor and support them. Current outlays and future budgets are rising for the procurement of aircraft, bombs, missiles, ships, and related equipment, especially tracking and communication devices.
The indirect roles of business
B
usiness also contributes in many indirect ways to the fight against terrorism (see the box on the next page). In its overseas activities, private enterprise helps bolster the economies of the nations that are America’s allies in the struggle. Many of those countries are poor and developing and represent fertile ground for the recruitment of future terrorists. Their economic health and national stability often depend in good measure on the income from exports. Pakistan, an especially strategically located ally, employs about 60 percent of its industrial work force in textiles and apparel manufacturing. The continuing openness of the US market is especially important to this vital industry of a key ally. Thus, international trade policy intersects with antiterrorist policy, although the two are developed by different executive agencies and congressional committees. The interest of the Department of Commerce and the US Trade Representatives in negotiating market-opening policies would seem to support the efforts of the State and Defense Departments in maintaining a global coalition in this struggle. Unfortunately, instability in Pakistan—partly a result of its cooperation in fighting terrorism—has diminished the attractiveness of its textile and clothing industries as sources of supply to American retailers. Business Horizons / May-June 2003
What is terrorism? There is no universally accepted definition of terrorism. In fact, many discussions of the subject proceed without any formal terminology. One of the most useful definitions is provided by Christopher C. Harmon, professor of international relations at the Marine Corps University: “Terrorism is the deliberate and systematic murder, maiming, and menacing of the innocent to inspire fear for political ends.” As would be expected, official definitions are more detailed as well as broader. In the Executive Order of September 24, 2001, blocking terrorist funds, President George W. Bush used the following language: “[T]errorism means an activity that— 1. involves a violent act or an act dangerous to human life, property, or infrastructure; and 2. appears to be intended— a. to intimidate or coerce a civilian population; b. to influence the policy of a government by intimidation or coercion; or c. to affect the conduct of a government by mass destruction, assassination, kidnapping, or hostage-taking.” President Bush’s definition of terrorism is deliberately broad, especially in using the phrase “appears to be intended.”
At home, private enterprise contributes in many ways. Companies provide a variety of assistance to domestic victims of terrorism. Direct corporate financial contributions to the victims and their families have been substantial. Counseling services to employees are also provided, especially in industries hit by terrorists or particularly subject to attacks. Psychiatrists, psychoanalysts, and terrorism experts are benefiting from this new demand for services. The most indirect role of business may be the most powerful: to maintain the flow of goods and services to consumers and, in the process, generate the jobs, incomes, and taxes that keep the economy moving ahead and the government adequately financed. Psychologically, maintaining the pace of economic activity in the face of rising costs and disruptions stemming from the fight against terrorism is an important positive response to the fears that terrorist groups are trying to generate. The role of economic policy is very different in these circumstances than in conventional wars. In previous conflicts, civilian spending had to be restrained in order to provide adequate resources for a military effort that quickly used up a great amount of resources. Under current circumstances, however, the need is to maintain the strength of the national economy so it can support a longterm struggle. There are few shortages of supplies for miliThe role of business in fighting terrorism
tary operations. Most of the actual operations involve equipment already in the Pentagon’s inventory, or items that can readily be ordered from existing production lines. Thus, the main task of business is to continue “minding the store.” Perhaps the most underappreciated role of business is the day-to-day interaction overseas with the residents of other nations. In many foreign countries, more of the local people interact with US businesses than with US government officials—either as employees of American companies or their suppliers, or as purchasers and users of US-produced or designed products and services. The latter cover a wide terrain, ranging from the food and refreshments marketed by such well-known American companies as McDonald’s, Coca-Cola, and KFC to movies, music, and videos. Numerous US companies doing business overseas are employers of local labor and often follow company standards that are higher than those prevailing in the foreign country in which their factories are located.
However, such a benign relationship is not always the case. Some products identified with the United States may violate prevailing local customs and mores. Local contractors and subcontractors of American companies do not always follow the highest standards in dealing with their employees. Business needs to be aware of the powerful, albeit indirect, impacts of its actions overseas, particularly in the vital worldwide battle for hearts and minds.
The negative side From the viewpoint of the individual enterprise, heightened security measures are basically an expense. A bigger outlay for these overhead items raises the cost of production. For the economy as a whole, as a general proposition, this means producing the same output with more input—which results in a decline in productivity and is a downward force on the national standard of living. These new costs are numerous: security services, personnel investigations, protective equipment, higher insurance premiums, more inventory to protect against delays in delivery, and the acquisition of teleconferencing equipment and services to replace travel. For example, in making the deliveries of the company’s products, Filterfresh’s 250 drivers report an average delay of about an hour a day as a result of dealing with fortified security arrangements in the buildings of their customers. Food producers and distributors now follow the detailed but “voluntary” guidelines on food supply security issued 9
Figure 2 FDA guidelines for food supply security ☛ Inspect incoming and outgoing vehicles for suspicious activity ☛ Restrict access to laboratories and to bacteria and toxins ☛ Beware of employees coming in unusually early or staying late ☛ Prevent employees from bringing personal items into areas processing food ☛ Conduct regular inspections of employees’ vehicles, bags, and lockers ☛ Restrict access to computer control systems ☛ Inspect ingredients, compressed gas, packaging, and returned products for signs of tampering ☛ Watch for unusual behavior by new hires ☛ Guard against unexpected visitors Source: US Food and Drug Administration
by the US Food and Drug Administration (see Figure 2). Though voluntary, these guidelines are issued by the agency that is also the prime regulator of many companies in the food sector of the economy. Economist David Hale (2002) estimates that overall workplace security costs in the year following the 9/11 attacks rose by 15 percent, or approximately $18 billion. Total additional costs due to companies responding to the continuing threats of terrorism have been estimated at $150 billion a year, with higher costs of logistics and insurance as the major components. Simultaneously, a slowdown in globalization is occurring, particularly a review of international supply chains with a view toward their curtailment. New anti-terrorist measures to check cargoes intended for the United States prior to their leaving the exporting nation are estimated to extend from eight days to ten or more—the time it takes for shipments to cross the Atlantic Ocean from Western Europe. There is also greater reluctance to travel by air, especially abroad. Fewer Americans want to work overseas, especially in countries where terrorism is a major threat. Thus, the outlook is for reduced investments in developing nations due to higher perceived risks, as well as higher costs of exports and imports due to delays resulting from heightened border security. In effect, terrorism has imposed a new tax on international business. Surely, many security measures have been very effective. A striking example was provided by the immediate grounding of all planes within US air space on September 11, 2001, which prevented a fifth hijacking—and maybe others. More indirectly, the costly planning efforts for Y2K in
10
late 1999, widely viewed with skepticism in early 2000, were essential in getting many companies back in operation quickly after the 9/11 terrorist attacks.
New business opportunities
A
lthough the continuing struggle against international terrorism imposes significant costs on society in general and on business in particular, it is also a source of new or expanded market opportunities for some companies. The rise of terrorist threats also influences business decision making in other important ways. These latter effects range from locational decisions and changes in procurement patterns to a far more fundamental shift in emphasis away from enhancing productivity via new investments and toward controlling rapidly mounting overhead costs.
Producing anti-terrorist equipment and services Many firms that have been producing for conventional markets are adapting their products to meet the rapidly rising demand for anti-terrorist equipment. InVision Technologies is retooling medical CAT scan technologies into machines that scan luggage for explosives. Bismuth Cartridge, which sells duck-hunting bullets that shatter on impact, offers its product to sky marshals in case they have to shoot while in the passenger cabin of an airplane (the bismuth prevents the bullets from penetrating the body of the plane). Other companies find that their products are directly relevant to the new marketplace. Traditional providers of security services, such as Pinkerton and Wackenhut Corporation, have experienced substantial increases in demand, as have suppliers of gloves and other equipment used by mail sorters who fear another anthrax episode. Traditional suppliers of military equipment have been trying to adapt their products and capabilities to homeland security needs. Northrop Grumman believes that some of its advanced technology can be used in developing difficult-to-forge “smart cards” containing biometric and other personal identification information. Raytheon is experimenting with advanced communications equipment that would help direct police, fire, and medical personnel in responding to terrorist attacks. Boeing is studying whether sensors designed to track missiles could be used to identify hijacked airlines; the company obtained a major order (in excess of $500 million) to install and maintain explosive-detecting machines at US airports. Lockheed Martin has won contracts to train the newly federalized workforce of airport baggage and passenger screeners. It also received a contract to redesign airport security checkpoints to accommodate new metal detectors and federal screenBusiness Horizons / May-June 2003
ers. General Dynamics hopes to sell armored personnel vehicles to police departments. Figure 3 provides a sample of the variety of companies involved and products offered, ranging from bomb-detecting dogs to voice recognition and other personnel recognition systems.
Shifting purchasing patterns and operating systems Following the dramatic 9/11 attacks, many firms have altered the way they do business. Acquiring anti-terrorist equipment and services, as described in the previous section, is the most obvious “first order” type of response. The “second order” responses may be far more important over the years. Domestically, some companies are decentralizing their operations to avoid excessive concentration of resources in one highly visible and vulnerable headquarters office. Specifically, several financial institutions that had centered their operations in or near the World Trade Center in Manhattan have been moving portions of their activities to nearby locations in Connecticut and New Jersey. Many individuals—both businesspeople and consumers—are traveling by railroad with far greater frequency than in the recent past, and using phone calls and
e-mail rather than conventional post office services. Overseas, some US corporations are shifting activities from nations deemed to be unstable to more stable, albeit more expensive, areas of operation. Similarly, many senior executives of widely known companies, concerned about kidnapping or other hazards, are changing the pattern of their day-to-day activities. CEOs who only occasionally hired an unarmed bodyguard to accompany them on some overseas trips now prefer armed guards and drivers, as well as bulletproof vehicles. Using private airplanes based at company-controlled locations has become more popular. Such moves are also encouraged by the increased “hassle factor” involved in going through the more burdensome security procedures of major airports and commercial airlines. Some of these changes may expand domestic employment. Movie producers, who have often used cheaper overseas locations, are shifting away from some of the “exotic” locales deemed to be relatively dangerous. Thus, more carpenters, hairdressers, lighting technicians, and extras—all of whom tend to be hired in the locality where the movies are made—are finding jobs with film studios in the Los Angeles area.
Figure 3 Companies providing anti-terrorist equipment and services Company American Science and Engineering Annin & Co. Bankers Systems Bayer Bismuth Cartridge Blue Lance Boeing Choice Point Inc. Control Risks Group Detection Support Services Forensic Investigative Associates Hire Right Identix InVision Technologies Lockheed-Martin Meridian Medical Technologies Nuance Communications Pearl Software Tetracore, Inc. Versar Inc. Wackenhut Corp.
The role of business in fighting terrorism
Typical product or service Makes X-ray gear Manufactures flags Offers software to comply with Patriot Act Produces CIPRO, used against anthrax Makes safer bullets and shotgun shells (composed of bismuth) Provides computer security products Produces explosive-detection machinery Does employee background screening Offers security consultant services Hires out bomb-detecting dogs and handlers Gives advice on security systems Checks employee backgrounds Sets up security systems using fingerprints for identification Develops machines that scan luggage for explosives Redesigns airport security checkpoints Markets equipment that injects antidotes to nerve gas Supplies voice recognition technology Makes tools for Internet monitoring Manufactures devices to detect toxins Tests mailrooms for biological contamination Provides security guards and related services
At all levels of management, telecommuting has become more popular, with more people opting to work from an office at home. In some ways, working at home can be a substantial cost saver, especially when combined with various forms of advanced technology. Meetings that hitherto required participants to fly to a common location are now often replaced by conference calls or videoconferencing. Frequently, such activity requires a variety of communication or transportation support services, including sending each participant the material to be covered at the meeting via e-mail, fax, or special messenger service. The continuing concerns about future terrorist attacks are prompting companies of all sizes to do more disaster planning. For larger companies, this often involves some form of “off site” computer backup to supplement in-house records should they be destroyed. Private firms, such as Iron Mountain, Inc., store paper records and computer tapes at numerous locations around the world. Following 11
the 9/11 attacks, nearly 100 customers ordered more than a million tapes from Iron Mountain’s vaults. Its prompt service was critical to the quick recovery experienced by many firms in the financial district of lower Manhattan. Anti-terrorism planning often requires developing a closer interaction with the local community. Because of the multiplicity of chemical plants in New Jersey, companies in the chemical industry have taken the lead in setting up Community Advisory Panels (CAPs). The CAP for Woodbridge, New Jersey, in addition to five chemical companies, consists of representatives of a railroad, a refinery, a natural gas pipeline, and a utility. The CAP briefings are attended by local government officials and interested civic leaders. Some businesses are developing their own contingency plans to deal with future terrorist attacks, particularly if they operate in a variety of countries. As a result, risk assessment and risk reduction services report expanded demand as their analyses of country risk receive more serious attention. The services desired include risk profiles for senior executives who may face challenging situations, especially overseas.
T
he struggle against terrorism may be viewed as being waged on two fronts. The first is the most obvious: government forces, military and civilian, directly fight the terrorists and their networks. The second front is also vital, especially for a long struggle. It is to maintain—and use—the economic power of the United States. The heart of that strength is the private enterprise
12
system (in World War II, it was called the “Arsenal of Democracy”). In time, business is likely to develop more effective and less costly ways of responding to the concerns generated by terrorist threats. Nevertheless, the ongoing activities of international terrorist groups will continue, in effect, to levy a hidden tax on American business in the form of added costs of operation. ❍
References and selected bibliography Bernasek, Anna. 2002. The friction economy. Fortune (18 February): 104-112. Bush, President George W. 2001. Executive order blocking property and prohibiting transactions with persons who commit, threaten to commit, or support terrorism. Washington: The White House (24 September). Hale, David D. 2002. Rethinking safety and security in business and government. Presentation to the Davos World Economic Forum, New York City (2 February). Mullin, Rick. 2002. Getting a jump on hometown security. Chemical Weekly (3 July): 50. Ports in a storm. 2002. Economist (6 July): 62. Rumsfeld, Donald H. 2001. A new kind of war. New York Times (27 September): A21. Thachuk, Kimberly L. 2002. Terrorism’s financial lifeline. Strategic Forum (May): 4. Weidenbaum, Murray. 2002. Economic warriors against terrorism. Washington Quarterly 25/1 (Winter): 43-52. Weintraub, Sidney. 2002. Disrupting the financing of terrorism. Washington Quarterly 25/1 (Winter): 53-60.
Business Horizons / May-June 2003
Murray Weidenbaum Mallinckrodt Distinguished University Professor and Honorary Chairman, Weidenbaum Center on the Economy, Washington University, St. Louis, Missouri; 2001 member of task force on terrorism, Center for Strategic and International Studies, Washington, DC
T
he private enterprise system plays a vital but not widely appreciated role in the war on terrorism. At the outset, Secretary of Defense Donald H. Rumsfeld (2001) explained the business aspects of the struggle against global terrorist networks in vivid terms: “The uniforms of this conflict will be bankers’ pinstripes and programmers’ grunge just as assuredly as desert camouflage.” The role of business takes many forms and the effects are numerous and often indirect. Its number one task is to help cut off the flow of money to terrorists.
Cutting off the money flow
Business participates in the struggle against terrorism in many ways: helping cut off the flow of money to terrorist groups, producing anti-terrorist equipment, screening employees and visitors entering company facilities, manufacturing the medicines to respond to biological and chemical attacks, and making the weapons used by our armed forces in the fight. Nevertheless, such responses raise the cost of production and act like a new tax on private enterprise. On balance, however, the economic power of American business plays a key role in the national response to terrorism.
6
Numerous banks and other financial institutions are involved in a great many nations. The flow of money is vital to international terrorist groups, although they use relatively small amounts. The 1993 bombing of the World Trade Center killed six people and injured more than 1,000. The cost to the conspirators, however, has been estimated at less than $50,000 in bomb materials and other expenses. The cost to the terrorists of the far more deadly September 11, 2001 attacks is estimated at approximately $500,000—compared to over $135 billion of property losses, cleanup costs, and government bailouts that resulted. Thus, the effort to curtail the flow of funds to terrorists and inhibit their use of the money is akin to the proverbial search for a needle in a haystack. The global financial “haystack” is especially daunting, with more than $1 trillion crossing borders each day. The first major antiterrorist step on the part of the federal government in response to the 9/11 attack was a presidential executive order issued on September 24, 2001. It provided for a freeze on the bank accounts and other assets of specific terrorists and terrorist groups. In carrying out the President’s order, the Treasury Department directed private financial institutions to do many things (at their own expense): 1. Conduct more “due diligence” investigations of account holders, especially private banking clients, to make sure they are not terrorist groups.
Business Horizons / May-June 2003
2. Set up anti-money-laundering programs—or expand existing efforts—in order to prevent the conversion of illegal funds into legitimate financial accounts. Special focus is to be given to private banking accounts, particularly those owned by foreign political figures. 3. Report “suspicious” activities to the Treasury Department (see Figure 1 for the required Suspicious Activity Report). 4. Cease transactions with “shell banks” that have no physical presence in any country. 5. Gain more information about the foreign banks with which they do business. 6. In the case of hedge funds, refuse to accept money from anonymous sources. In carrying out these new rules, financial institutions are required to designate special compliance officers, train employees to detect money laundering, and commission independent audits. The companies must also establish specific policies and procedures to identify risks and mini-
mize the likelihood of potential terrorists slipping through the various safeguards. The anti-money laundering and related anti-terrorism efforts of financial institutions, though difficult to estimate in terms of additional expenses incurred, surely increase the overhead costs of these businesses (again, see Figure 1). To the extent that they inconvenience legitimate customers in the process, the new procedures may also reduce the amount of business transacted. Banks are not the only companies participating in the effort to stem the flow of money promoting terrorism. The anti-terrorist regulations extend to many other types of financial “intermediaries,” including brokerage firms, mutual funds, casinos, and wire transfer services. From September 2001 to May 2002, $34 million in terrorist assets were frozen in the United States. According to Thachuk (2002), another $70 million of assets in known terrorist organizations were blocked by 161 other nations that are participating in the overall effort to respond to terrorism.
Figure 1 Report required of financial institutions Part III
1
Suspicious Activity Report
FRB: FDIC: OCC: OTS: NCUA: TREASURY:
ALWAYS COMPLETE ENTIRE REPORT (see instructions)
FR 2230 6710/06 8010-9,8010-1 1601 2362 TD F 90-22.47
MM
Revised June 2000 (This revision supersedes all others)
YYYY
DD
$
YYYY
.00 ,
,
Computer intrusion
g
l
Consumer Loan Fraud
6 City
7 State
9 Address of Branch Office(s) where activity occurred 10 City
5 Primary Federal Regulator a Federal Reserve d b FDIC e c NCUA
8 Zip Code
m
12 Zip Code
Closed? Yes
b ____________________________
OCC OTS
13 If institution closed, date closed ____/ ____/ ________ MM
14 Account number(s) affected, if any a ____________________________
Yes
DD
YYYY
No
c ___________________________
Closed? Yes No
No
d ___________________________
Yes
Suspect Information
No
Suspect Information Unavailable
15 Last Name or Name of Entity
16 First Name
h
Counterfeit Check
n
False Statement
Check Fraud
i
Counter Credit/Debit Card
o
Misuse of Position or Self Dealing
d
Check Kiting
j
Counterfeit Instrument (other)
p
Mortgage Loan Fraud
e
Commercial Loan Fraud
k
Credit Card Fraud
q
Mysterious Disappearance
r
Wire Transfer Fraud
s
Other_____________________________________________________
19 SSN, EIN or TIN
20 City
21 State
36 Amount of loss prior to recovery (if applicable)
22 Zip Code
,
(
26 Occupation/Type of Business
a
Yes
b
No
40 Has any law enforcement agency already been advised by telephone, written communication, or otherwise? a DEA d Postal Inspection g Other Federal b FBI e Secret Service h State c IRS f U.S. Customs i Local j
Agency Name (for g, h or i) ___________________________________________________________
41 Name of person(s) contacted at Law Enforcement Agency
42 Phone Number (include area code)
43 Name of person(s) contacted at Law Enforcement Agency
44 Phone Number (include area code)
( (
) )
Contact for Assistance
45 Last Name
28 Admission/Confession? a Yes b No
_______/ _______/ _________ DD
,
38 Has the suspicious activity had a material impact on, or otherwise affected, the financial soundness of the institution?
46 First Name
47 Middle
)
27 Date of Birth MM
,
,
23 Country
25 Phone Number – Work (include area code)
)
.00
39 Has the institution’s bonding company been notified? a Yes b No
Part IV 24 Phone Number – Residence (include area code)
37 Dollar amount of recovery (if applicable
.00 $
$
17 Middle
18 Address
Defalcation/Embezzlement
Bribery/Gratuity
c
(type of activity)
Multiple Branches (include information in narrative, Part V)
11 State
,
Debit Card Fraud
b
3 EIN
4 Address of Financial Institution
(
MM
Money Laundering
Reporting Financial Institution Information
2 Name of Financial Institution
Part II
DD
2
34 Total dollar amount involved in known or suspicious activity
35 Summary characterization of suspicious activity: a Bank Secrecy Act/Structuring f
1 Check box below only if correcting a prior report. Corrects Prior Report (see instruction #3 under “How to Make a Report”)
Part I
Suspicious Activity Information
33 Date or date range of suspicious activity From ____/ ____/ _______ To ____/ ____/ _______
OMB No. 7100-0212 OMB No. 3064-0077 OMB No. 1557-0180 OMB No. 1550-0003 OMB No. 3133-0094 OMB No. 1506-0001
YYYY
48 Title/Occupation
49 Phone Number (include area code)
(
)
50 Date Prepared _______/ _______/ __________ MM DD YYYY
51 Agency (if not filed by financial institution)
29 Forms of Identification for Suspect: a Driver’s License/State ID
b
Passport
c
Number _____________________
Alien Registration
d
Other ___________
Issuing Authority _____________________
30 Relationship to Financial Institution: a
Accountant
d
Attorney
g
Customer
j
b
Agent
e
Borrower
h
Director
k
Shareholder
c
Appraiser
f
Broker
i
Employee
l
Other ______________________
31 Is the relationship an insider relationship? If Yes specify:
a
Yes
b
No
c
Still employed at financial institution
e
Terminated
d
Suspended
f
Resigned
Officer
32 Date of Suspension, Termination, Resignation _______/ _______/ _________ MM
DD
YYYY
Source: US Department of the Treasury
The role of business in fighting terrorism
7
Business and homeland security
T
he federal government sets the basic policies on screening transfers at border crossings and airports and determines many other internal security matters. However, on a day-to-day basis, most people interact more frequently with corporate security people and, especially in their working lives, encounter the security policies of businesses. Thus, private enterprises such as factories and building managements increasingly screen customers, visitors, and their vehicles. Private employers more often do background reviews on new hires, while mail and other deliveries to private establishments are more carefully checked than prior to 9/11. Business also designs and produces the anti-terrorist equipment and systems used by both the public and private sectors. This market is hardly stagnant. The demand for bomb-sniffing dogs has grown dramatically. A man-
The outlook is for reduced investments in developing nations due to higher perceived risks, as well as higher costs of exports and imports due to delays resulting from heightened border security. In effect, terrorism has imposed a new tax on international business. and-dog team costs $100–$250 an hour, with a typical daily minimum charge of $2,000. Sales of gloves and other protective devices for people have risen rapidly; so have sales of explosive-detecting gadgets. Guards and inspectors of all sorts are in demand, as are the metal detectors they use. The construction of vehicle barriers has become increasingly common, as has the use of identification cards and security keys and readers. The application of new technology is in high demand, notably the stepped-up R&D and production of new electronic systems to locate and identify terrorists. Invariably, consultants with various specialties are heavily involved, especially those with experience relevant to terrorism and other forms of unconventional warfare. In addition, business develops and produces the medicines and the related equipment used to respond to bio8
logical and chemical attacks. Unlike nuclear materials (which are almost all controlled by governments), chemical and biological agents are mainly in the possession of private industry. Thus, business bears the primary responsibility for devising ways to keep such materials out of the hands of potential evildoers. Shortly after 9/11, Air Products and Chemicals Corporation established a high-level Director of Product Safety Integrity, a new function that combines corporate security with the activities of the company’s product safety specialists. Medicines to alleviate and vaccines to prevent such diseases as anthrax and smallpox have become an important category of health care budgets. A great variety of new items is being marketed. An example of special equipment is the Bio-Threat Alert Test Set-Up, a small plastic device to detect anthrax, botulism, plague, and other toxins. A box of 25 strips reportedly sold for $495 in late 2001. Finally, businesses design and produce the weapon systems used by our armed forces in military operations against terrorist groups and against the nations that harbor and support them. Current outlays and future budgets are rising for the procurement of aircraft, bombs, missiles, ships, and related equipment, especially tracking and communication devices.
The indirect roles of business
B
usiness also contributes in many indirect ways to the fight against terrorism (see the box on the next page). In its overseas activities, private enterprise helps bolster the economies of the nations that are America’s allies in the struggle. Many of those countries are poor and developing and represent fertile ground for the recruitment of future terrorists. Their economic health and national stability often depend in good measure on the income from exports. Pakistan, an especially strategically located ally, employs about 60 percent of its industrial work force in textiles and apparel manufacturing. The continuing openness of the US market is especially important to this vital industry of a key ally. Thus, international trade policy intersects with antiterrorist policy, although the two are developed by different executive agencies and congressional committees. The interest of the Department of Commerce and the US Trade Representatives in negotiating market-opening policies would seem to support the efforts of the State and Defense Departments in maintaining a global coalition in this struggle. Unfortunately, instability in Pakistan—partly a result of its cooperation in fighting terrorism—has diminished the attractiveness of its textile and clothing industries as sources of supply to American retailers. Business Horizons / May-June 2003
What is terrorism? There is no universally accepted definition of terrorism. In fact, many discussions of the subject proceed without any formal terminology. One of the most useful definitions is provided by Christopher C. Harmon, professor of international relations at the Marine Corps University: “Terrorism is the deliberate and systematic murder, maiming, and menacing of the innocent to inspire fear for political ends.” As would be expected, official definitions are more detailed as well as broader. In the Executive Order of September 24, 2001, blocking terrorist funds, President George W. Bush used the following language: “[T]errorism means an activity that— 1. involves a violent act or an act dangerous to human life, property, or infrastructure; and 2. appears to be intended— a. to intimidate or coerce a civilian population; b. to influence the policy of a government by intimidation or coercion; or c. to affect the conduct of a government by mass destruction, assassination, kidnapping, or hostage-taking.” President Bush’s definition of terrorism is deliberately broad, especially in using the phrase “appears to be intended.”
At home, private enterprise contributes in many ways. Companies provide a variety of assistance to domestic victims of terrorism. Direct corporate financial contributions to the victims and their families have been substantial. Counseling services to employees are also provided, especially in industries hit by terrorists or particularly subject to attacks. Psychiatrists, psychoanalysts, and terrorism experts are benefiting from this new demand for services. The most indirect role of business may be the most powerful: to maintain the flow of goods and services to consumers and, in the process, generate the jobs, incomes, and taxes that keep the economy moving ahead and the government adequately financed. Psychologically, maintaining the pace of economic activity in the face of rising costs and disruptions stemming from the fight against terrorism is an important positive response to the fears that terrorist groups are trying to generate. The role of economic policy is very different in these circumstances than in conventional wars. In previous conflicts, civilian spending had to be restrained in order to provide adequate resources for a military effort that quickly used up a great amount of resources. Under current circumstances, however, the need is to maintain the strength of the national economy so it can support a longterm struggle. There are few shortages of supplies for miliThe role of business in fighting terrorism
tary operations. Most of the actual operations involve equipment already in the Pentagon’s inventory, or items that can readily be ordered from existing production lines. Thus, the main task of business is to continue “minding the store.” Perhaps the most underappreciated role of business is the day-to-day interaction overseas with the residents of other nations. In many foreign countries, more of the local people interact with US businesses than with US government officials—either as employees of American companies or their suppliers, or as purchasers and users of US-produced or designed products and services. The latter cover a wide terrain, ranging from the food and refreshments marketed by such well-known American companies as McDonald’s, Coca-Cola, and KFC to movies, music, and videos. Numerous US companies doing business overseas are employers of local labor and often follow company standards that are higher than those prevailing in the foreign country in which their factories are located.
However, such a benign relationship is not always the case. Some products identified with the United States may violate prevailing local customs and mores. Local contractors and subcontractors of American companies do not always follow the highest standards in dealing with their employees. Business needs to be aware of the powerful, albeit indirect, impacts of its actions overseas, particularly in the vital worldwide battle for hearts and minds.
The negative side From the viewpoint of the individual enterprise, heightened security measures are basically an expense. A bigger outlay for these overhead items raises the cost of production. For the economy as a whole, as a general proposition, this means producing the same output with more input—which results in a decline in productivity and is a downward force on the national standard of living. These new costs are numerous: security services, personnel investigations, protective equipment, higher insurance premiums, more inventory to protect against delays in delivery, and the acquisition of teleconferencing equipment and services to replace travel. For example, in making the deliveries of the company’s products, Filterfresh’s 250 drivers report an average delay of about an hour a day as a result of dealing with fortified security arrangements in the buildings of their customers. Food producers and distributors now follow the detailed but “voluntary” guidelines on food supply security issued 9
Figure 2 FDA guidelines for food supply security ☛ Inspect incoming and outgoing vehicles for suspicious activity ☛ Restrict access to laboratories and to bacteria and toxins ☛ Beware of employees coming in unusually early or staying late ☛ Prevent employees from bringing personal items into areas processing food ☛ Conduct regular inspections of employees’ vehicles, bags, and lockers ☛ Restrict access to computer control systems ☛ Inspect ingredients, compressed gas, packaging, and returned products for signs of tampering ☛ Watch for unusual behavior by new hires ☛ Guard against unexpected visitors Source: US Food and Drug Administration
by the US Food and Drug Administration (see Figure 2). Though voluntary, these guidelines are issued by the agency that is also the prime regulator of many companies in the food sector of the economy. Economist David Hale (2002) estimates that overall workplace security costs in the year following the 9/11 attacks rose by 15 percent, or approximately $18 billion. Total additional costs due to companies responding to the continuing threats of terrorism have been estimated at $150 billion a year, with higher costs of logistics and insurance as the major components. Simultaneously, a slowdown in globalization is occurring, particularly a review of international supply chains with a view toward their curtailment. New anti-terrorist measures to check cargoes intended for the United States prior to their leaving the exporting nation are estimated to extend from eight days to ten or more—the time it takes for shipments to cross the Atlantic Ocean from Western Europe. There is also greater reluctance to travel by air, especially abroad. Fewer Americans want to work overseas, especially in countries where terrorism is a major threat. Thus, the outlook is for reduced investments in developing nations due to higher perceived risks, as well as higher costs of exports and imports due to delays resulting from heightened border security. In effect, terrorism has imposed a new tax on international business. Surely, many security measures have been very effective. A striking example was provided by the immediate grounding of all planes within US air space on September 11, 2001, which prevented a fifth hijacking—and maybe others. More indirectly, the costly planning efforts for Y2K in
10
late 1999, widely viewed with skepticism in early 2000, were essential in getting many companies back in operation quickly after the 9/11 terrorist attacks.
New business opportunities
A
lthough the continuing struggle against international terrorism imposes significant costs on society in general and on business in particular, it is also a source of new or expanded market opportunities for some companies. The rise of terrorist threats also influences business decision making in other important ways. These latter effects range from locational decisions and changes in procurement patterns to a far more fundamental shift in emphasis away from enhancing productivity via new investments and toward controlling rapidly mounting overhead costs.
Producing anti-terrorist equipment and services Many firms that have been producing for conventional markets are adapting their products to meet the rapidly rising demand for anti-terrorist equipment. InVision Technologies is retooling medical CAT scan technologies into machines that scan luggage for explosives. Bismuth Cartridge, which sells duck-hunting bullets that shatter on impact, offers its product to sky marshals in case they have to shoot while in the passenger cabin of an airplane (the bismuth prevents the bullets from penetrating the body of the plane). Other companies find that their products are directly relevant to the new marketplace. Traditional providers of security services, such as Pinkerton and Wackenhut Corporation, have experienced substantial increases in demand, as have suppliers of gloves and other equipment used by mail sorters who fear another anthrax episode. Traditional suppliers of military equipment have been trying to adapt their products and capabilities to homeland security needs. Northrop Grumman believes that some of its advanced technology can be used in developing difficult-to-forge “smart cards” containing biometric and other personal identification information. Raytheon is experimenting with advanced communications equipment that would help direct police, fire, and medical personnel in responding to terrorist attacks. Boeing is studying whether sensors designed to track missiles could be used to identify hijacked airlines; the company obtained a major order (in excess of $500 million) to install and maintain explosive-detecting machines at US airports. Lockheed Martin has won contracts to train the newly federalized workforce of airport baggage and passenger screeners. It also received a contract to redesign airport security checkpoints to accommodate new metal detectors and federal screenBusiness Horizons / May-June 2003
ers. General Dynamics hopes to sell armored personnel vehicles to police departments. Figure 3 provides a sample of the variety of companies involved and products offered, ranging from bomb-detecting dogs to voice recognition and other personnel recognition systems.
Shifting purchasing patterns and operating systems Following the dramatic 9/11 attacks, many firms have altered the way they do business. Acquiring anti-terrorist equipment and services, as described in the previous section, is the most obvious “first order” type of response. The “second order” responses may be far more important over the years. Domestically, some companies are decentralizing their operations to avoid excessive concentration of resources in one highly visible and vulnerable headquarters office. Specifically, several financial institutions that had centered their operations in or near the World Trade Center in Manhattan have been moving portions of their activities to nearby locations in Connecticut and New Jersey. Many individuals—both businesspeople and consumers—are traveling by railroad with far greater frequency than in the recent past, and using phone calls and
e-mail rather than conventional post office services. Overseas, some US corporations are shifting activities from nations deemed to be unstable to more stable, albeit more expensive, areas of operation. Similarly, many senior executives of widely known companies, concerned about kidnapping or other hazards, are changing the pattern of their day-to-day activities. CEOs who only occasionally hired an unarmed bodyguard to accompany them on some overseas trips now prefer armed guards and drivers, as well as bulletproof vehicles. Using private airplanes based at company-controlled locations has become more popular. Such moves are also encouraged by the increased “hassle factor” involved in going through the more burdensome security procedures of major airports and commercial airlines. Some of these changes may expand domestic employment. Movie producers, who have often used cheaper overseas locations, are shifting away from some of the “exotic” locales deemed to be relatively dangerous. Thus, more carpenters, hairdressers, lighting technicians, and extras—all of whom tend to be hired in the locality where the movies are made—are finding jobs with film studios in the Los Angeles area.
Figure 3 Companies providing anti-terrorist equipment and services Company American Science and Engineering Annin & Co. Bankers Systems Bayer Bismuth Cartridge Blue Lance Boeing Choice Point Inc. Control Risks Group Detection Support Services Forensic Investigative Associates Hire Right Identix InVision Technologies Lockheed-Martin Meridian Medical Technologies Nuance Communications Pearl Software Tetracore, Inc. Versar Inc. Wackenhut Corp.
The role of business in fighting terrorism
Typical product or service Makes X-ray gear Manufactures flags Offers software to comply with Patriot Act Produces CIPRO, used against anthrax Makes safer bullets and shotgun shells (composed of bismuth) Provides computer security products Produces explosive-detection machinery Does employee background screening Offers security consultant services Hires out bomb-detecting dogs and handlers Gives advice on security systems Checks employee backgrounds Sets up security systems using fingerprints for identification Develops machines that scan luggage for explosives Redesigns airport security checkpoints Markets equipment that injects antidotes to nerve gas Supplies voice recognition technology Makes tools for Internet monitoring Manufactures devices to detect toxins Tests mailrooms for biological contamination Provides security guards and related services
At all levels of management, telecommuting has become more popular, with more people opting to work from an office at home. In some ways, working at home can be a substantial cost saver, especially when combined with various forms of advanced technology. Meetings that hitherto required participants to fly to a common location are now often replaced by conference calls or videoconferencing. Frequently, such activity requires a variety of communication or transportation support services, including sending each participant the material to be covered at the meeting via e-mail, fax, or special messenger service. The continuing concerns about future terrorist attacks are prompting companies of all sizes to do more disaster planning. For larger companies, this often involves some form of “off site” computer backup to supplement in-house records should they be destroyed. Private firms, such as Iron Mountain, Inc., store paper records and computer tapes at numerous locations around the world. Following 11
the 9/11 attacks, nearly 100 customers ordered more than a million tapes from Iron Mountain’s vaults. Its prompt service was critical to the quick recovery experienced by many firms in the financial district of lower Manhattan. Anti-terrorism planning often requires developing a closer interaction with the local community. Because of the multiplicity of chemical plants in New Jersey, companies in the chemical industry have taken the lead in setting up Community Advisory Panels (CAPs). The CAP for Woodbridge, New Jersey, in addition to five chemical companies, consists of representatives of a railroad, a refinery, a natural gas pipeline, and a utility. The CAP briefings are attended by local government officials and interested civic leaders. Some businesses are developing their own contingency plans to deal with future terrorist attacks, particularly if they operate in a variety of countries. As a result, risk assessment and risk reduction services report expanded demand as their analyses of country risk receive more serious attention. The services desired include risk profiles for senior executives who may face challenging situations, especially overseas.
T
he struggle against terrorism may be viewed as being waged on two fronts. The first is the most obvious: government forces, military and civilian, directly fight the terrorists and their networks. The second front is also vital, especially for a long struggle. It is to maintain—and use—the economic power of the United States. The heart of that strength is the private enterprise
12
system (in World War II, it was called the “Arsenal of Democracy”). In time, business is likely to develop more effective and less costly ways of responding to the concerns generated by terrorist threats. Nevertheless, the ongoing activities of international terrorist groups will continue, in effect, to levy a hidden tax on American business in the form of added costs of operation. ❍
References and selected bibliography Bernasek, Anna. 2002. The friction economy. Fortune (18 February): 104-112. Bush, President George W. 2001. Executive order blocking property and prohibiting transactions with persons who commit, threaten to commit, or support terrorism. Washington: The White House (24 September). Hale, David D. 2002. Rethinking safety and security in business and government. Presentation to the Davos World Economic Forum, New York City (2 February). Mullin, Rick. 2002. Getting a jump on hometown security. Chemical Weekly (3 July): 50. Ports in a storm. 2002. Economist (6 July): 62. Rumsfeld, Donald H. 2001. A new kind of war. New York Times (27 September): A21. Thachuk, Kimberly L. 2002. Terrorism’s financial lifeline. Strategic Forum (May): 4. Weidenbaum, Murray. 2002. Economic warriors against terrorism. Washington Quarterly 25/1 (Winter): 43-52. Weintraub, Sidney. 2002. Disrupting the financing of terrorism. Washington Quarterly 25/1 (Winter): 53-60.
Business Horizons / May-June 2003