The financing of terrorism is often difficult to detect because it follows only few fixed patterns. For instance, an investigation into the financial transactions of some high profile terrorists and hijackers showed that most of the individual transactions were not that unusual. The account holders appeared to be foreign students receiving money to fund their studies; in such a way, the transactions then would not be flagged as suspicious transactions needing a special scrutiny by the financial institutions involved. Terrorist funding may therefore originate from legitimate sources, criminal sources or a combination of the two.
This represents a significant difference between money laundering and terrorist financing. The latter may involve funds from legitimate sources, such as charitable donations, that are in turn funnelled to terrorist organisations or individual terrorists. The donors may or may not know that the funds are being utilised to support terrorist activities. Terrorists and terrorist financiers use several ways to disguise and conceal the source of their funding so that their financial activities can go undetected. Furthermore, given their efforts to use the informal sector, the focus on targeting terrorists’ financial support networks may not be very effective. For example, if terrorists were to just carry between 5,000 to 10,000 US dollars in cash without routing it through the formal financial system, then they would be able to avoid standard counter-terrorist financing (CTF) measures and detection systems.
CTF measures by financial institutions
Financial institutions often shoulder a heavy responsibility with respect to CTF and they devote considerable energy to CTF measures. Their fundamental means of control is screening customer accounts and transactions against name lists from sanction databases. Some institutions supplement the official sanction lists with commercial sanction databases for more comprehensive checks. Commercial intelligence companies have indicated that there is a wide gap between the number of terrorists officially sanctioned by the world’s key sanctioning bodies and the number of individuals and organisations who are actually involved in terrorism. For instance, the four lists issued by the UN Security Council (UNSC), the US Office of Assets Control (OFAC), the UK Treasury, and the European Union (EU) designate a list of about eight hundred terrorist entities; conservative estimates put the number of operatives trained in al-Qaida camps alone at between 50,000 and 100,000. In any case, even if authorities and financial institutions were to know the exact number of terrorists, they would not know all of their names. Financial institutions also use technologies and software that provide link analysis. These systems analyse and connect data based on parameters fed into the system by financial institutions to identify potentially suspicious transactions from a CTF perspective. These transactions are then flagged and reported to the local Financial Intelligence Unit (FIU). In addition, banks use and incorporate knowledge gleamed from available typologies and case studies to design detection rules in order to identify off-market or suspicious transactions.
Contributions by the financial sector
1. Generating leads by reporting suspicious transactions
As terrorists do not follow fixed patterns in moving their money, financial institutions cannot develop and apply generic indicators to detect terrorist money as such. However, they can see when a designated person or organisation has opened an account and they can detect unusual or suspicious transactions that may later prove to be related to terrorist financing. In this respect, the financial sector makes an important – albeit indirect – contribution to CTF by performing customer due diligence and monitoring transactions. With the knowledge they have of their customers, financial institutions can see when transactions are out of line with the customers’ profiles or their transaction history, and report them to the FIU for further investigation. According to the Financial Action Task Force (FATF), the most frequently reported suspicious activities from a CTF perspective are:
- Unusual business activity
- Funds for which the source cannot be ascertained
- Multiple deposits at different branches
- Third party deposits in US cash
- Wire transfers following cash deposits
- Regular wire transfers to specific locations or accounts
- Large cash deposits
These suspicious transaction reports may be instrumental in assisting law enforcement agencies to initiate or supplement major terrorist financing investigations and other criminal cases.
The foiled bomb plot against flights between the UK and the US in August 2006 demonstrates how financial institutions can play an important role in flagging suspicious transactions and providing information to law enforcement agencies. Rashid Rauf, allegedly one of the key players in the plot, was placed under police surveillance, along with a number of others, after banks reported that his account had received very large wire transfers as ‘earthquake relief’ from a charity. The arrest of the terrorist operatives helped to disrupt the terrorists’ plot. Had it succeeded, Rauf and his accomplices would have destroyed as many as ten aircraft flying from the UK to the US using liquid explosives brought on board as hand luggage.
2. Using financial customer and account information to assist investigations
Financial institutions also store financial information about individuals, which can be valuable to intelligence and law enforcement agencies in counter-terrorism investigations. The information includes, for example, financial reports of large cash transactions, wire transfers and cross-border currency movements. These figures can significantly increase the pool of financial information available to investigators in uncovering the operational infrastructure of a terrorist organisation. For instance, in the aftermath of the London bombings of 2005, financial institutions worked around-the-clock to provide financial records relating to a credit card fragment belonging to one of the bombers. The records were voluminous and ongoing cooperation was necessary to resolve the inquiry, but it could provide crucial leads as to the financial profile of the terrorist, its connection with other members of the terrorist group, their spending patterns and training expenses.
3. Using other compliance systems to detect terrorist activity
There also appears to be a growing nexus between terrorism and money laundering. Terrorists increasingly turn to criminal ventures to fund their terrorist activities and to money laundering to move these funds. In this context, some financial institutions have been able to use their anti-money laundering (AML) capacities to detect suspicious transactions. Reports filed with the FIU can produce crucial leads on terrorist activities. A case highlighted by the financial action task force illustrated how a financial institution queried a customer whose account was credited with significant cash deposits. It was able to flag out transactions, which were not in line with the customer’s profile. The information was then forwarded to the local FIU, combined with counter-terrorist intelligence and investigations and eventually assisted authorities in linking the funds to terrorist activities.
Collaborative efforts between the private and public sectors
Financial institutions need sound intelligence in order to detect the financing of terrorism. Sharing intelligence is particularly important given the changing face of global terrorism. It is to be expected that terrorists and terrorist groups will be innovative, that they will look for new sources of funds, new ways to move money around, new ways to recruit operatives and to carry out operations. Some terrorist operatives do not rely on external sources of money but are already funding themselves through legitimate business activities or employment. Likewise, we should expect that terrorists will react quickly to new legislation, law enforcement interventions and technological developments. They may be younger individuals, who are quite capable of making bombs by themselves using information on the Internet.
Therefore, it is particularly important that national authorities share intelligence that would help financial institutions identify new forms of terrorist financing. It is important that intelligence agencies provide timely information to the financial sector and assist financial institutions to gain a good understanding of the evolving nature and scope of the national, regional and global threats.
All things considered, countering the financing of terrorism is a multi-dimensional challenge. Collaboration between law enforcement, intelligence agencies and financial institutions is critical in identifying and tracking the flow of terrorist and extremist money. Each jurisdiction and sector of the economy and society has a role to play in sharing information on terrorist financing cases, typologies, detection techniques and best practices. They should collectively aim to contribute to a better understanding of terrorist financing and to disrupt and prevent terrorist financing and terrorism activities.
* Daniel Theleskaf is co-executive director of the Basel institute on Governance.