Terrorist financing

Terrorist financing is a topic that shot into the limelight after the events of September 11, 2001. The US passed the USA PATRIOT Act, among other reasons, to ensure that both combating the financing of terrorism (CFT) and anti-money laundering (AML) was given adequate focus by US financial institutions. The act also had extra-territorial impact and non-US banks having correspondent banking accounts or doing business with US banks had to upgrade their AML/CFT processes.

Initially the focus of enforcement efforts for CFT purposes were on charities, unregistered money services businesses(MSBs) (so called underground banking or ‘Hawalas’), and registered MSBs that were unregulated for CFT. The FATF (working with the US) brought in 9 special recommendations for CFT which were recommended standards applicable to all FATF members who were expected to upgrade their laws, regulations and enforcement efforts including through Financial Intelligence Units (FIUs) and cross-border sharing of information for CFT purposes. The FATF black-list (the NCCT list) mechanism was used to coerce countries to bring about change.

Although efforts have brought about a huge change to global CFT regulations and have ushered in a new era of information sharing. Saudi Arabian charities, which were prime sponsors of terrorist groups around the world, are now under much tighter controls albeit there is still a lot to do in the Middle East and South Asia. Terrorist groups like Al Qaeda are on the run albeit they are also innovating – in making/moving monies and in hiring of their key operatives - the new terrorist is a western educated middle class technology savvy person and the source for getting information on a do-it-yourself bomb is the internet.

Money laundering

Often linked in legislation and regulation, terrorist financing and money laundering are conceptual opposites. Money laundering is the process where cash raised from criminal activities is made to look legitimate for re-integration into the financial system, whereas terrorist financing cares little about the source of the funds, but it is what the funds are to be used for that defines its scope.

While the fund required for a terrorist act may be as small as US$5,000, the process of recruiting, training and sustaining sleeper operations over years requires significant amounts of money. Since it is becoming more difficult for terrorists to raise funds from charities, they have resorted to money laundering. Terrorists are now working with drug traffickers and criminals to make and launder the proceeds of crime like fraud, prostitution, intellectual property theft, smuggling - this is now routine for them. Terrorists use low value but high volume fraud activity to fund their operations. Paramilitary groups in Northern Ireland are using legitimate businesses such as hotels, pubs and taxi operators to launder money and fund political activities. Even beyond Ireland, terrorists are buying out/controlling front-end businesses especially cash-intensive businesses including in some cases money services businesses to move monies. Bulk cash smuggling and placement through cash-intensive businesses is one typology. They are now also moving monies through the new online payment systems. They also use trade linked schemes to launder monies. Nonetheless, the older systems have not given way. Terrorists also continue to move monies through MSBs/Hawalas, and through international ATM transactions. Charities also continue to be used in countries where controls are not so stringent.

Suspicious activity

Operation Green Quest was the US multi-agency task force set up in October 2001 to combat terrorist financing and had developed a checklist of suspicious activities. The following patterns of activity indicate collection and movement of funds that could be associated with terrorist financing:

#Account transactions that are inconsistent with past deposits or withdrawals such as cash, cheques, wire transfers, etc.
#Transactions involving a high volume of incoming or outgoing wire transfers, with no logical or apparent purpose that come from, go to, or transit through locations of concern, that is sanctioned countries, non-cooperative nations and sympathiser nations.
#Unexplainable clearing or negotiation of third party cheques and their deposits in foreign bank accounts.
#Structuring at multiple branches or the same branch with multiple activities.
#Corporate layering, transfers between bank accounts of related entities or charities for no apparent reasons.
#Wire transfers by charitable organisations to companies located in countries known to be bank or tax havens.
#Lack of apparent fund raising activity, for example a lack of small cheques or typical donations associated with charitable bank deposits.
#Using multiple accounts to collect funds that are then transferred to the same foreign beneficiaries
#Transactions with no logical economic purpose, that is, no link between the activity of the organisation and other parties involved in the transaction.
#Overlapping corporate officers, bank signatories, or other identifiable similarities associated with addresses, references and financial activities.
#Cash debiting schemes in which deposits in the US correlate directly with ATM withdrawals in countries of concern. Reverse transactions of this nature are also suspicious.
#Issuing cheques, money orders or other financial instruments, often numbered sequentially, to the same person or business, or to a person or business whose name is spelled similarly.

It would be difficult to determine by the activity alone whether the particular act was related to terrorism or to organised crime. For this reason, these activities must be examined in context with other factors in order to determine a terrorist financing connection. Simple transactions can be found to be suspect and money laundering derived from terrorism will typically involve instances in which simple operations had been performed (retail foreign exchange operations, international transfer of funds) revealing links with other countries including FATF blacklisted countries. Some of the customers may have police records, particularly for trafficking in narcotics and weapons and may be linked with foreign terrorist groups. The funds may have moved through a state sponsor of terrorism or a country where there is a terrorism problem. A link with a Politically Exposed Person (PEP) may ultimately link up to a terrorist financing transaction. A charity may be a link in the transaction. Accounts (especially student) that only receive periodic deposits withdrawn via ATM over two months and are dormant at other periods could indicate that they are becoming active to prepare for an attack.

Bank processes

In addition to normal AML controls, banks must focus on the CFT angle with renewed vigor and knowledge derived from the extensive databank of case studies now available. Banks must focus on not just name matching with sanctions databases but also with other know your customer (KYC) high-risk databases of good third party vendors. They must use technologies like link analysis to establish second and third level links that identify transactions as potentially suspicious from a CFT perspective. Focus on preventing identity theft is an integral part of any CFT program. Detection rules designed to capture the suspicious activity list given above, should be evaluated. Controls out of the transaction monitoring process, for example, account openings by groups of individuals, are also important to watch for. Any bank that is used for terrorist financing will suffer tremendous reputational damage and also a real business impact in terms of share price and expensive fines.

The future of terrorist financing

Looking into the near future, if terrorist groups are replaced by smaller, decentralized groups, the premise that terrorists need a financial support network may become outdated. Moreover, some terrorist operations do not rely on outside sources of money and may now be self-funding, either through legitimate employment or low-level criminal activity, for example, the 7/7 London terrorists. Some experts argue that for anti-terrorism, disruption may be more effective than the CFT approach. If terrorists for example, just carry USD 10,000 in cash and don’t route it through the banking system, the CFT approach would not be effective.

References

* [http://www.gpoaccess.gov/911/ 9/11 Commission Report]
*cite book
last = Rohan Bedi
year = 2004
url = http://books.global-investor.com/books/16287.htm
title = Money Laundering - Controls and Prevention
publisher = ISI Publications
id = ISBN 962-7762-87-3
*cite news
first=Sharm
last=El-Sheikh
url=http://economist.com/displaystory.cfm?story_id=5053373
title= Financing terrorism: Looking in the wrong places
publisher=The Economist
date=2005-10-20
*cite news
first=Jeffery
last=Robinson
url=http://www.timesonline.co.uk/article/0,,1072-2038874,00.html
title=Brown's war just doesn't add up: you can't kill terrorists with a calculator
publisher=Times Online
date=2006-02-14

External links

;Free resources
* [http://www.state.gov/p/inl/rls/nrcrpt/ US Department of State International Narcotics Control Strategy Report (INCSR), annual report issued in March every year.] Essential reading for all compliance officers for evaluating country money laundering risk
* [http://www.fincen.gov/ US FinCEN (the US FIU)] - Periodic SAR Reviews
* [http://www.soca.gov.uk/assessPublications/downloads/threat_assess_unclass_250706.pdf UK SOCA (merges NCIS (the UK FIU)] - the UK Threat Assessment
* [http://www.alacra.com/compliance-search/ Compliance Web Search] - A Google-powered vertical search engine designed to facilitate and accelerate the account vetting process for financial institutions
* [http://www.worldbank.org/amlcft Financial Market Integrity Unit, The World Bank]
* [http://www.pvtr.org/coreprojects_strategiccounterterrorism_financing.htm International Centre for Political Violence and Terrorism Research] - Strategic Counter Terrorism - Financial Response
* [http://www.gdf.it/Editoria/Studi_e_ricerche/info430620057.html The funding of international islamic terrorism ~ Strategic analysis profiles ~ Guardia di Finanza General Headquarters - 2nd Department – Analysis Unit]
* [http://www.terrorfinance.org The Terror Finance Blog] - Blog on all aspects of terrorist financing written by a group of independent analysts

;KYC "Bad guy databases"
* [http://www.world-check.com/ World-Check.com] - The largest KYC database vendor.
* [https://www.integrascreenonline.com/ IntegrascreenOnline] - Another key KYC database vendor

;FATF
* [http://www.fatf-gafi.org/ The Financial Action Task Force website]