Southeast Asian countries are cracking down on money laundering and illegal terrorist financing by upgrading banking regulations. But there is still much to be done to halt the illegal transfer of funds and improve regional security.

Money laundering and terrorist financing reforms in Southeast Asia's banking sector are at the forefront of efforts to improve security and strengthen the region's banking systems.

Tougher laws have been gradually introduced over the past few years, initially aimed at stopping the flow of money from the illegal narcotics trade. Since the September 11, 2001, attacks in the United States, the focus has been on cutting off funds to terrorists.

For instance, Thailand's three-year-old Anti-Money Laundering Office has built its reputation by seizing the earnings of drug smugglers. The country's well-developed banking infrastructure enabled illegal funds from the narcotics trade to be laundered, or hidden easily, but new laws give authorities more tools to fight the trade. But Southeast Asia's banking sector is diverse. While economies such as Hong Kong and Singapore have strong financial sector laws, others, such as Indonesia, are only now seeing legislation being implemented.

Makmur Widodo, Indonesia's deputy foreign minister, says some countries need outside support to strengthen their banking systems. "In reality ... Indonesia has just enacted laws on money laundering, but to have that law implemented then we need some resources," he said.

Mr. Makmur, who was co-chairman of a recent conference on regional money laundering, says Indonesia's challenge is enforcing the laws, as well as building the necessary regulatory infrastructure.

People who want to hide illegally earned money transfer cash among different accounts and businesses, from country to country. The practice, called money laundering, is particularly common among drug dealers, organized crime groups and terror organizations.

The main concern for authorities now is that just a relatively small amount of illegal cash can finance terrorist attacks.

Indonesian Foreign Minister Hassan Wirajuda notes it took just $30,000 to carry out the October 12 Bali bombings that killed about 190 people mostly foreign tourists. Investigators are trying to find how the money got to the attackers.

Mr. Hassan says regional security is the key element in efforts to fight money laundering. "In this difficult but necessary endeavor, we, the countries of the region, can make a valuable contribution to the global fight against terrorism and to the building of a more peaceful and secure world," he said.

But Motoo Noguchi, an advisor with the Asian Development Bank, says money laundering and terrorist financing are often considered separate issues. Mr. Noguchi said governments have been more successful in curbing money laundering than in cutting funds to terrorists. "For the moment there is a tendency that anti-money laundering efforts have been developed better than anti-terrorist financing regimes because obviously anti-money laundering efforts have started earlier," he said.

The bombing in Bali led the Indonesian government to clamp down on terrorist financing. But Mr. Noguchi says regional governments need to overhaul their financial and banking systems to really fight the problem.

"In the wider context - including Indonesia - all of the countries are requested to strengthen their [financial] regimes," he said. "Not only anti-money laundering and terrorist financing but also strengthen their overall financial sector integrity and governance.

But the Asian regional director of Commerzbank, Thomas Verlohr, says Southeast Asia governments and central banks have made considerable progress. "I think various countries have done quite a lot, Thailand in particular," he said, adding that Thai authorities "are very tight on the regulations for every account opened and transferred, in and out of the account by residents and non-resident, they have to report irrespective of the amount."

Singapore and Malaysia have strict controls also, he says, but Indonesia is "a little bit lagging behind." But while central banks can track flows of money from account to account, there are other ways to hide money. "Once it's outside the system," said Mr. Verlohr, if someone brings in a shipload of God-knows-what - cement [for example] - who would know where the money is going to."

Mr. Verlohr warns that authorities will never be able to completely shut down the flow of illegal funds, in part because some people have taken to converting cash into precious commodities, such as diamonds, that can easily be hidden.