171 ESCTER 14 E bis
ESC
171 ESCTER 15 E bis
Original: English
NATO Parliamentary Assembly
Economics and security
committee
Terrorism financing
Report
Nathalie GOULET (France)
Rapporteur
Sub-Committee on Transatlantic Economic Relations
www.nato-pa.int 10 October 2015
171 ESCTER 15 E
TABLE OF CONTENTS
I. Introduction 1
II. THE FINANCIAL REQUIREMENTS OF TERRORIST ORGANIZATIONS 1
III. MOVING FUNDS FROM THE POINT OF GENERATION TO THE TERRORIST GROUP 3
IV. DRUG TRAFFICKING 5
V. ARMS TRAFFICKING 6
VI. HUMAN TRAFFICKING 6
VII. MISUSE OF THE LEGAL BANKING SYSTEM, CREDIT CARD AND CHECK FRAUD 7
VIII. THE PROBLEM OF FAILED STATES, SAFE HAVENS AND QUASI STATES: THE ISIS CASE 8
IX. THE USA PATRIOT ACT AND TERRORIST FINANCING 10
X. INTERNATIONAL AGREEMENTS 11
XI. CONCLUSION: COUNTERING TERRORIST FINANCE - GUIDELINES FOR GOVERNMENTS 13
BIBLIOGRAPHY 16
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171 ESCTER 15 E bis
I. Introduction
1. Western governments engaged in an enduring and difficult struggle against terrorism are compelled to operate on many levels. The effort typically involves myriad ministries and an array of security and police forces. The financial dimension of the challenge, however, is assuming ever greater prominence. Terrorist organizations cannot operate without funding and that requirement represents a potential Achilles heel which exposes these organizations to countermeasures and offers a line of inquiry for those engaged in counter-terrorist endeavours. Even insular and selfcontained terrorist organizations often need to look beyond their immediate group to generate and move funds, and this offers counter-terrorist operators a unique and vital opportunity to track and degrade these organizations. Yet, these organizations have also proven highly adaptable, and their techniques rapidly evolve as the regulatory environment shifts and as current counter-terrorist methods become understood.
2. The challenge is daunting. Terrorism has taken on myriad forms and comes in all sizes. Daesh or ISIS (Islamic State of Iraq and Syria) is now considered the world’s richest and largest terrorist organization. It controls a substantial amount of territory in both Syria and Iraq and has taken on the form if not the legitimacy of a quasi-state with multiple sources of financing for its military-terrorist operations. It is equally evident that so-called lone wolf terrorists operating in relative isolation can carry out psychologically devastating acts of terror that have substantial political consequences. Beyond any sense of a shared mission, what unites these two extremes is a common need for funding to carry out operations, sustain those who carry out these operations and underwrite their organizational, outreach and recruiting expenses. Generally speaking, the larger the organization, the easier it should be to track its funding. In this regard, lone wolves can pose a particularly daunting challenge as they do not require funding from external sources and thus operate below the radar screen of those seeking to “follow the money”.
3. Tracking the funding of terrorist organizations has thus assumed a central place in the fight against terrorism. This report will explore how this element of the counter-terrorist effort is now conducted, the ways in which it has and can bear fruit and the continued obstacles to exposing these groups through financial detective work.
II. THE FINANCIAL REQUIREMENTS OF TERRORIST ORGANIZATIONS
4. Running a terrorist organization can be expensive. Funds are needed not simply to carry out violent operations, but also to pay the salaries of committed members, to recruit and train new adherents, to generate and distribute propaganda including written material, websites and videos, to underwrite infrastructure and self-defence-security costs, to cover travel expenses and, indeed to move money from the point of collection to those who will use these funds to carry out the work of the organization. In financial terms, therefore, the military operations are simply the tip of the spear.
5. It is important firstly to note that conducting terrorist operations is not in itself a terribly expensive undertaking. It has been estimated that the September 11, 2001 attacks on the UnitedStates exacted a toll worth as much as $3.3 trillion in terms of physical damage, economic impact, homeland security costs, war funding related costs and future war and veteran support costs. The cost to al-Qaeda for that operation, however, was roughly $500,000 (Cartier & Cox). This cost asymmetry is obviously of great concern. In an era in which advanced societies are stitched together by highly integrated networks, the vulnerabilities to such operations are substantial. The capacity of individuals to wreak havoc has substantially increased as information and infrastructure networks become increasingly interlinked.
6. Of course, a number of recent and noted terrorist operations have cost substantially less than the 11 September attacks. The July 2005 London transport bombing, for example, probably cost no more than GBP 8,000, and experts suggest that the price tag for the Madrid train bombing stood at roughly $10,000 (FATF, 2008). Tracing such small amounts of funding can be akin to finding a needle in a haystack.
7. The good news is that while the costs for a specific operation can be relatively infinitesimal, terrorist groups have organizational requirements that demand substantially more resources than any particular operation. It is generally understood that al-Qaeda spent roughly $30 million a year prior to the September 11 attacks to underwrite living, training and military costs and to sustain the Taliban, which provided it a safe haven in Afghanistan. Most of today’s terrorist organizations, however, are more fragmented and their funding level is far lower, although ISIS-Daesh is an exception in this regard.
8. Terrorist groups can raise and move money in a number of ways, both through the legal economy and through shadowy, criminal and unmonitored channels and black markets. Some terrorists are positioned to employ legitimate charities, businesses, banks and legal alternative remittances institutions (Hawala banks, for example) for these purposes. Criminal activities represent another important source of financing and can facilitate the movement of these ill-gotten gains.
9. Tax evasion constitutes one such discreet, illegal income-generating activity that terrorist groups and their sponsors have employed. The most common form of tax evasion involves individuals or businesses simply failing to report all of their income, or overstating their deductions and thereby reducing their final tax bill. In so doing, they create an unaccountable source of cash that can then be transferred to terrorist operatives. Examples of tax evasion include failing to report all income; failing to report tax withheld from an employee's wages to the relevant regulatory body; paying wages in cash without deducting taxes; failing to lodge a tax return in an attempt to avoid payment or other obligations; and claiming deductions for expenses not incurred or legally deductible and claiming input credits for goods or services while failing to pay taxes on applicable goods and services. The value generated through this illegal activity can then be transferred either directly or indirectly to those openly engaged in planning terrorist operations.
10. State sponsored funding represents another source of income for terrorist organizations and obviously, states also have access to many vehicles to move funds across borders. There is also the related conundrum posed by failed states or safe havens within conflict-ridden states which can provide a range of funding support to terrorist organizations and which are positioned to facilitate the movement of funds to those engaged in terrorist operations.
11. Since the September 11 attacks, terrorist financing has emerged as a top priority not only for those directly engaged in anti-terrorist policy making, but also those working in the area of financial regulation. This should hardly be surprising. Rules that advance transparency in international financial transactions, that counter money laundering and that operate against tax fraud or political corruption invariably complicate the task of terrorist groups seeking to move money. In the same way, laws designed to ensnare terrorists can sometimes also strike at others engaged in financial crime and the more globalized these rules, the more efficacious they become.
12. The methods of money laundering and terrorist financing are often identical although the ends differ. Both seek to obscure the origin of financial resources and their movement from the scrutiny of government officials. In recent years, however, there is evidence that the methods of terrorist financing have shifted substantially and this requires a new set of countermeasures. It is also important to consider that different circumstances confront terrorist groups operating in the West and those operating in the Middle East, North Africa, or Sub-Saharan Africa, where the nature of the state and the political context is significantly different. Of course, the links forged between Western based terrorist organizations and those beyond North America and Europe are also consequential and provide an important part of the terrorist finance narrative.
13. Self-financed terrorist groups generate their own income, either from legal or illegal means. A research project conducted by the Norwegian Defence Research Establishment (NDRE) found that 90% of the groups it studied were involved in income-generating activities, and nearly half were entirely self-financed. Self-financing can include petty crime, but also the use of adherents’ legal salaries, social welfare payments, legitimate business activities, personal loans and support from family and friends. Foreign fighters entering Syria have often brought cash with them to underwrite their military efforts. Some of the Saudi fighters have been particularly well financed in this regard (Freeman and Ruehsen).
14. Individuals who have plotted attacks in Western Europe have commonly relied on funding from the salaries and savings of cell members. Nevertheless some groups and individuals do receive funding from international groups. Approximately a quarter of the organizations the NDRE studied received direct external support (Oftedal). Cells which had sent fighters abroad tended to receive funding from foreign based terrorist organisations. Such groups were more likely to cultivate potential sponsors while training overseas. Those personal contacts invariably facilitate the transfer of cash and other instruments bearing value.
III. MOVING FUNDS FROM THE POINT OF GENERATION TO THE TERRORIST GROUP
15. Terrorists move funds in numerous ways. Internationally connected banks have played an important role in this regard, although the level of controls over these institutions has increased markedly since 2011 and by using these services, terrorists now expose themselves to a greater risk of apprehension. Value can also be transmitted physically through couriers, although this is obviously inefficient and puts the terrorist group at the risk of exposure. The international trading system offers another vehicle and this can include the physical movement of goods such as diamonds. Each of these methods poses unique challenges to counter-terrorist efforts. It is often not easy for the security services and financial regulators to distinguish between legitimate and illegitimate activities, and, as suggested above, terrorist groups are very aware of the counter-measures that they confront and adapt constantly to evade detection.
16. It is more helpful to terrorist organizations if they can move large amounts of cash in single shipments, but this too can be risky. Cash itself is bulky and moving it across borders can easily draw the attention of border guards. It is thus not the most reliable way to move value. Obviously banking and Hawala systems are capable of moving large sums of value in a reliable fashion but they also expose the operation to detection, particularly when and where financial regulations are strong. Convenience is a related factor and certainly influences decisions, for example, to move value via small and easily concealable diamonds as opposed to far heavier and bulkier gold shipments. Measures of convenience, however, are also conditioned by local cultures, infrastructure, geographical location and features and trading networks. Terrorists also prize simplicity over complexity and will seek to minimize the number of actors involved in transactions. Cost considerations are also important and terrorists will seek to minimize the cost of operations to protect their capital. Finally, terrorists also need to consider the speed with which they can carry out these operations (Freeman and Ruehsen).
17. There are several well-established paths that terrorist networks use to move money to finance their activities:
1) Cash couriers physically move cash or other physical financial instruments. Such operations are more common in regions where banking systems are under-developed and poorly integrated. The values of individual transactions are not necessarily very large, but the advantage is that this kind of activity is difficult to track. The Financial Action Task Force (FATF) has produced special recommendations to help governments to cope with this specific challenge and to impede the activities of operators wittingly or unwittingly working on behalf of terrorist organizations. These include: recommended penalties for those falsely declaring the value of assets on their person as they cross borders, and endowing border agents with the authority to confiscate suspicious funds. There have also been cases in which terrorist financiers have used cargo shippiments to move large amounts of cash to terrorist operatives.
2) Alternate remittance systems, or Hawala banks, are an important subset of the international banking system. Like the modern banking system, Hawala institutions, which certainly serve a legitimate purpose, are now subject to more stringent controls, including requirements that the institution satisfactorily identify those sending and receiving funds. There are different types of Informal Funds Transfer Systems (IFT systems) depending on the location. These networks operate in remote geographical areas where formal banking is out of reach. It does not require the physical movement of cash across borders, as it is a trust-based arrangement between two hawaladars (hawala dealers). Hawala and other IFT systems are fast (transactions usually happen within hours), relatively inexpensive (with competitive exchange rates and moderate transfer fees), anonymous and potentially global in reach. Prior to the September 11 attacks, al-Qaeda used Hawala for moving a large share of its funds across borders.
3) Terrorist groups have been known to employ Money Services Businesses (MSBs), or wire transfer arrangements, to transfer funds quickly at minimal costs and initially at low risk. MSBs were initially distinct from formal banks insofar as they did not routinely follow rigorous ‘Know Your Customer’ (KYC) procedures. Those are now required. MSBs were one of the preferred methods for moving terrorist funds, but increased government attention has helped close this particular loophole.