Combating Terrorist Financing: A Key Aspect of the War on Terrorism

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Tech Sergeant
Nov 5, 2005
Finances are a critical resource of terrorist organizations. Given this, targeting them should be a major facet of the U.S. War on Terrorism. Until the attacks of Sept. 11, 2001, terrorism was not a major focus of U.S. policymakers. Moreover, terrorist financing was a minor blip on the radar screen of counterterrorism priorities. This changed after the attacks on the World Trade Center and the Pentagon. Policymakers recognized the gravity of the terrorist threat as well as the significant role that financing played. They also realized that in order to effectively combat this aspect of terrorism, policymakers would need to better understand the variety of financial mechanisms that terrorists employ to fund their organizations.

Financing International Terrorism

Terrorists manipulate formal financial systems by executing legal transactions to fund illegal activities. Cases of 'money soiling' occur when funds are generated legally, such as the profits of a legitimate business or the donations of a charity, and subsequently used for illicit activities.[1] Osama bin Laden's al-Qaida network, prior to the Sept. 11 attacks, was funded in part through the diffusion of profits from legitimate enterprises and the donations of charities established as front companies.[2] Because these companies were not inherently illegal, it was difficult to determine which were used for terrorist purposes and to take action against them.[3]

Conversely, 'money laundering' occurs when money that is generated illegally is cleansed to obscure its source.[4] Terrorists employ unlawful activities to generate 'dirty money' and these finances are redistributed among legitimate institutions to disguise their origins and make them appear to derive from legal transactions, thus hampering the ability of law enforcement authorities to track these funds. As government authorities have improved their ability to detect money laundering, terrorists have been driven further underground and increasingly employed alternative and unorthodox financing mechanisms.

The prevalence of Internet and offshore banking presents additional barriers to law enforcement and intelligence authorities in their attempts to monitor global finances. Internet banking enables terrorists to transfer funds quickly and virtually anonymously and, due to its extensive use by the general public and the plethora of transactions that occur each day, tracking these is a major logistical challenge. There is no institution to regulate the Internet and few national (and no international) laws guiding its use, so states have modest resources to scrutinize Internet banking. Offshore banks also present a hurdle to law enforcement agencies because of bank secrecy laws that exist in places such as the Bahamas and the Cayman Islands. Bank accounts are protected and can remain so absent overwhelming evidence that they are connected to illegal activities, which is oftentimes extremely difficult to procure.[5] The burden of proof lies with law enforcement agencies because national banking laws do not easily transfer from one state to another and actions that are deemed illegal by the United States may not be considered so overseas.

Terrorists also rely on charitable donations as a major financing alternative to formal banking systems. Charities are a major source of income for people in impoverished or developing regions of the Muslim world and charitable giving – zakat – is one of the five pillars of Islam and a seriously accorded religious duty. Islamic charities account for billions of dollars worth of financial transfers to Muslim countries each year.[6] Many donations go toward humanitarian efforts. Indeed, terrorist organizations often utilize charities to generate and dispense funds for humanitarian purposes as a means of generating positive publicity and gaining popular support. For example, Hamas, annually listed by the State Department as a foreign terrorist organization, operates a large charity that raises money for Palestinians.[7] Hamas and other terrorist groups, such as al-Qaida, also exploit the charities they operate to generate funds for terrorist purposes. These charities, in effect, serve as front organizations for terrorist groups that enable them to generate money legally without incurring the attention of law enforcement authorities. To further complicate matters, governments are currently unable to effectively monitor these charities, and many states in the Muslim world, where the majority of these funds go, are reluctant to take definitive action against them lest they incur popular dissent.

Hawalas (Arabic for transfer or remittance) are money transfer ventures that operate outside formal banking systems. They are a prominent aspect of Muslim economies. Authorities in Muslim countries are thus hard-pressed to crack down on the hawala system because it represents a major source of income for their populations.[8] This is an attractive financing option for terrorists because it is a way to move money anonymously with no paper or electronic means of tracking the exchanges.[9] Hawalas also generally involve the transfer of relatively insignificant amounts of cash. This makes them desirable for terrorists as small sums can transit the 'gray' financial network more anonymously than large ones. However, collectively these transfers result in a great deal of money, with billions of dollars believed to change hands via hawalas each year. Pakistan's government alone estimates that hawala transfers into its economy amount to $7 billion per year.[10]

Terrorists also engage in criminal activity to raise money, and the lines between terrorist and criminal networks have become increasingly blurred as a result. The criminal enterprises that terrorists have undertaken include drug trafficking, weapons smuggling and the illegal trade of diamonds and precious stones.[11] By forming their own initiatives and aligning themselves with criminal organizations that pursue these ventures -- such as drug cartels in Colombia and South/Southeast Asia, small arms dealers in the former Soviet Union and diamond smugglers in Africa -- terrorists exploit the vast global market for these goods to generate immense profits.[12] By pursuing these activities, terrorists are also able to spread their influence, undermine state authority and gain footholds in unstable and critical regions. A prominent example of this trend is the alliance between al-Qaida and the Taliban in Afghanistan that generated billions of dollars through the global opium trade. Afghanistan remains the world's largest opium producer (and Europe's top supplier) despite the fact that production declined following the defeat of Taliban and al-Qaida forces by the United States in late 2001.[13]

Implications for U.S. Policy

Terrorist financing is a multifaceted problem that requires an intricate U.S. policy response. The core of U.S. strategy consists of "three pillars" – namely, detecting, dismantling, and deterring terrorist financial networks. Law enforcement and intelligence agencies must coordinate their efforts to designate and investigate terrorist financiers and block their assets. This strategy also requires the United States to work with other countries to track terrorist finances and secure international financial institutions.[14]

Since Sept. 11, the administration of President George W. Bush has taken several steps to improve the United States' ability to undermine terrorist financial networks. Preliminary efforts were centered on Executive Order (EO) 13224, which allows the United States to freeze terrorist assets by designating entities that financially support identified terrorist organizations.[15] As a result, by 2003 the assets of 321 entities had been frozen. The State Department's Foreign Terrorist Organization (FTO) list is crucial to this because it provides the basis for identifying sources of terrorist financing.[16] The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT) Act of 2001 complemented EO 13224 and expanded the existing legal authority to disrupt terrorist financial networks.[17]

Prior to Sept. 11, the major terrorist financing statutes were 18 USC Sections 2339 A (1994) and 2339 B (1996), which make terrorist financing a crime, outlaw the material support of terrorist groups and provide U.S. law enforcement agencies with the authority to investigate and prosecute terrorist financiers.[18] The Suppression of the Financing of Terrorism Convention Implementation Act implemented the 1999 international convention of the same name that criminalized terrorist financing on an international level and required state parties to outlaw it.[19] In addition, the International Emergency Economic Powers Act allows for the prosecution of entities that finance groups the president deems national security threats (i.e., those on the FTO, Specially Designated Global Terrorist and State Sponsors of Terrorism lists).[20] The PATRIOT Act extends the definition of "material support" consistent in these statutes to encompass all aspects of financing and provides for greater cooperation between law enforcement and intelligence agencies in conducting terrorist financing investigations and operations.
International Implications

Such measures are welcome; however, terrorist financing is a transnational problem that cannot be approached solely from a traditional state-centric perspective. U.S. terrorist financing statutes identify it as a crime (unlike the wider focus of the so-called 'war on terrorism' which views terrorism as an act of war) and, thus, current policy confronts it from a law enforcement standpoint. This has led to improved capabilities to attack terrorist finances and monitor legitimate financial institutions within U.S. jurisdictions. However, the law enforcement framework restricts the United States in its efforts to combat alternative financing mechanisms. The U.S. law enforcement apparatus is not adequately geared to attack these avenues of terrorist financing, and it is subject to jurisdictional limitations which restricts its ability to monitor underground financial networks (like hawalas) and aspects of terrorist financing that occur in other countries.

The law enforcement approach has undeniably led to an improved response to the terrorist financing problem, yet more can be done to approach terrorist financing from a transnational perspective. As such, the United States can augment its multilateral efforts to improve the counterterrorism financing capabilities of other states, especially in key regions like the Middle East and Southern Asia. The Financial Action Task Force (FATF) is an inter-governmental organization that was created in 1989 by the (then) G-7 to confront money laundering and has since broadened its mission to combat terrorist financing. It has issued a total of 49 recommendations to deal with money laundering and terrorist financing and collaborates with member states to enforce these.[21] The United States; working through the UN Counterterrorism Committee, the G-8 Counterterrorism Action Group, and other regional bodies; should create unified and coordinated mechanisms for implementing these among member states in addition to bringing developing countries into the FATF framework.[22] The bulk of terrorist financing occurs in or is directed to the developing world and promoting greater cooperation with these countries can be vital to ensuring success in combating terrorist financing on a global scale.

A comprehensive international approach that focuses on alternative financial mechanisms could also be useful. Alongside this the United States should promote an increased focus in the United Nations on terrorist financing, money laundering and the interplay of terrorism and transnational crime. Such a focus would allow Washington to work with the International Monetary Fund and the World Bank, in addition to the United Nations and regional organizations, to identify countries that need assistance in improving their institutional capabilities to combat terrorist financing. Furthermore, the United States can endorse multilateral efforts (through institutions such as the European Union, APEC and Interpol) to monitor global financial flows and conduct joint terrorist financing investigations.

Possibilities for Future Improvement

Alternative financing options (such as charities, hawalas and criminal activity) represent an increasingly prominent component of terrorist financing. Most terrorist financing occurs overseas and much of it transits gray financial networks outside state control. As such, U.S. intelligence agencies should devote increased attention to analyzing alternative mechanisms and coordinating with law enforcement agencies and the financial community to institute mechanisms to better monitor, regulate and track these financial conduits.

Possible steps may include creating a joint terrorist financial database, establishing a terrorist financing office in the National Counterterrorism Center and promoting increased cohesion among international financial intelligence units. The United States should also cooperate with foreign governments to promote capacity-building measures, share intelligence and conduct joint investigations.

Such suggestions do not represent cure-all solutions – challenges will undoubtedly arise as terrorist organizations adapt their financial networks in response to actions taken to counter them. The United States must therefore remain flexible in formulating its counterterrorism policy to ensure that the strategies it pursues are commensurate with the threat it is combating.

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