THE State Bank`s new guidance to exchange companies and banks regarding their foreign currency dealings are a step in the right direction, even if that step is a rather pusillanimous one. The guidelines, contained in a circular that aims `to prevent the possible use of the banking sector for money laundering, terrorist financing and illegal transfer of funds` direct money market players to undertake certain diligence actions that ought to have been issued long ago. The new guidelines say, for instance, that foreign currency accounts `maintained by individuals` where an amount larger than $10,000 `is deposited in, withdrawn from or remitted out from the account during the month` must be recorded as per a given template, and that these records must be kept by the institution to be produced whenever required by the authorities. It also reminds reporting entities to maintain due diligence when transacting funds to ensure that they know who their customers are and what the source of those funds really is.

The guidelines themselves are a reminder of another sort, however.

They remind us of the severe capacity weaknesses that mar all efforts to interdict terror-related financial flows in an economy where tax evasion is rampant and informal cash transactions are massive. Both of these tax evasion and informality automatically create the pathways through which funds can evade the gaze of the authorities, and also create perverse incentives in the financial sector to be more accommodating when dealing with the requirements for discretion from some of its high net worth clientele. In such an environment, detecting terror-related financing naturally becomes nearly impossible through regulatory channels alone. The State Bank cannot wage the fight against terror financing on its own given this context, and the near absence of any framework for cooperation with law enforcement is a key weakness.

Besides capacity weaknesses there is also lack of will. The circular issued by the State Bank is striking precisely because many of us would have believed that such movements are already under some form of surveillance, and that reminders to maintain records of financial transactions need not be issued when it is abundantly obvious that the country is in the midst of a war against internal elements who are using the country`s infrastructure -like the payments system and telecommunications to carry on their militant activities. But a full year after the launch of the National Action Plan, which mentioned terror financing as a key priority, if forex dealers and banks need to be reminded to be vigilant about their customers and to maintain records, it only goes to show the overall lethargy with which this crucial goal is being pursued. Even a thousand small steps of this sort will not get us anywhere in the efforts to choke off the sources of the militants` financing.