The Global Effort to Regulate the Financing of Terrorism
Presentation to ISODARCO
Andalo, Italy
January 14, 2005
Thomas J. Biersteker
Watson Institute for International Studies
BrownUniversity
Introduction
This afternoon, I would like to speak about the global effort to regulate the financing of terrorism – a subject that involves contemporary international politics, regulatory policy, regime formation, and global cooperation. It is an issue that engages policy-makers and scholars alike.
What I would like to do is discuss:
- The priority given to curtailing access to finance for groups utilizing terrorism after 911.
- What we know about the financing of global terrorism
- How the world has responded to the challenges of terrorist financing
- How effective the effort has been to date.
- Conclude with some comments on costs, benefits, and policy recommendations going forward.
The priority given to curtailing access to finance for groups utilizing terrorism after 911.
In the immediate aftermath of the 9/11 attacks, the Bush Administration told the American public that it would not mount a traditional effort in its “war” against terrorism.
The campaign would be a protracted affair, and it would need to invoke non-traditional methods, institutions, and resources, including an effort to freeze and suppress both the raising and the movement of funds that could be used to support acts of global terrorism.
As President George W. Bush declared on September 24, 2001,
We will direct every resource at our command to win the war against terrorists, every means of diplomacy, every tool of intelligence, every instrument of law enforcement, every financial influence. We will starve the terrorists of funding, turn them against each other, rout them out of their safe hiding places, and bring them to justice.
Why try to suppress terrorist financing?
First, limiting the resources available to groups using terrorism may prevent some attacks or at least can reduce the impact of attacks that cannot be prevented by degrading the capability of groups intent on committing acts of terrorism.
For example, former FBI director Louis J. Freeh noted how the 1993 attack on the WorldTradeCenter took place earlier than planned and was less devastating than intended by Ramzi Yusef, the convicted mastermind of the attack, because of the group's limited financial resources.
Second, the imposition of effective regulatory financial controls can have a positive deterrent effect.
Once the provision of financial resources to groups engaging in acts of terrorism has been criminalized, and contributors to charitable organizations become aware of the potential diversion of their funds, there is a positive incentive for individual contributors either [a] to reduce their level of giving or [b] at least be more careful to ensure that the proceeds of their contributions are not diverted for terrorist purposes.
Third, financial controls can provide invaluable assistance in the reconstruction of events after a terrorist attack, the identification of additional members of the group utilizing terrorism and its supporters, and a better understanding of its modus operandi and organization.
It was financial information that helped law enforcement establish the first links between the hijackers and other conspirators involved in the September 11 attacks.
Financial controls, therefore, perform preventive, deterrent, investigative, and analytical functions, which are vital for both theoretical and policy purposes.
They are also useful politically. They give the appearance of doing something about a potentially intractable problem.
What do we know about the financing of Global Terrorism?
- It doesn’t take a large amount of funds to commit an act of terrorism.
September 11– according to the 911 Commission monograph on TF,
The plot cost al Qaeda somewhere in the range of $400,000–500,000, of which approximately $300,000 passed through the hijackers’ bank accounts in the UnitedStates. [page 3]
Bali Bombing in 2002 – according to US sources: $50,000-74,000, paid for out of a $130,000 transfer from al-Qaida to Jemiah al-Islamiyah, the Indonesian based group.
Istanbul bombings in 2003: $40,000
1998 Africa Embassy bombings: $30,000 - $50,000
1993 First WTC Bombing: $18,000; Reportedly, the conspirators, were able to fund the operation themselves from criminal activities such as check and credit card fraud, and through donations raised from a local charity.
2004 Madrid: around $10,000 (operational costs only); raising money by peddling hashish and Ecstasy and allegedly stuffing stolen dynamite and shrapnel into backpacks at a decrepit rural cottage with no electricity or running water.
The relatively low cost of operations has prompted some [former US Attorney Mary Jo White] to argue, that because terrorist acts are so “alarmingly inexpensive” that finding, freezing and seizing assets is absolutely critical. "Every dollar matters."
While the same finding prompts some others to suggest that it is an impossibly hopeless task.
Personally closer to the first assessment, though I do not want to underestimate the difficulties involved.
I say this because the 1993 attack on the World Trade Centre illustrates just how important money can be in these cases, at an operational level.
In 1995 Ramzi Yousef, the confessed organizer of the operation, admitted that the terrorists had wanted to build a bigger bomb but were not able to, due to lack of funds.
A key break in the investigation came because the terrorists attempted to recover a deposit fee they paid on a rented truck used to transport the bomb.
In spite of the relatively low cost of committing acts of terrorism, it is important to notethat actual terrorist operations useonly a small portion of the funds that terrorist organizations require for their support infrastructure such as recruitment, indoctrination, training, logistical support, the dissemination of propaganda, political activities, and other material support
Australian Commonwealth Director of Public Prosecutions, Damian Bugg, estimates “that al Qaeda spends about 10% of its income on operational costs. The other 90% goes on the cost of administering and maintaining the organization, including the cost of operating training camps and maintaining an international network of cells. So called ‘sleepers’ must also cost significant sums to establish and maintain.”
According to the “Terrorism Financing: Roots and Trends of Saudi Terrorism financingReport,” prepared for President of UN Security Council, Dec 19, 2002:
Al-Qaida clearly distinguishes in various documents, including its training manuals, between “organizational funds” and “operational funds.”
In the final analysis, while the operational costs of terrorism may be low (from $10,000 for multiple bomb attacks on trains and subways to $500,000 for the destruction of two skyscrapers), the total cost of a terrorist attack is believed to be much higher (up to 10x) due to the requirements of recruiting, training, indoctrination, living expenses, disseminating information, etc.
Even if we accept those figures, as Donald Rumsfeld has lamented, it costs them millions, while it costs us billions. It is an asymmetric response to an asymmetric threat.
- There are a variety of different methods for raising, moving, and storing funds (and it is important to distinguish between them).
Al-Qaeda poses a new kind of security threat.
It is not a threat emanating from another state or from a terrorist organization located within a state.
It is a threat from a non-state actor, a transnational organization or movement,using tactics of terrorism and operating on a global scale.
Although there are some similarities, the threat from al-Qaeda is qualitatively different from either state terrorism or terrorism emanating from within, directed against, and largely contained within, a single state (such as the LTTE in Sri Lanka or the FARC in Colombia).
Al-Qaeda is a global, complex, transnational, networked phenomenon, with a capacity to inflict harm and impose costs on people and institutions across the planet.
Efforts to counter it effectively will require a networked, multilateral response.
It is an extremely complex and difficult project.
However it is not an impossible one, and the technology, if not always the political will to employ it, is available.
What do we know about al-Qaeda and its financial network?
(Drawn from the Council on Foreign Relations Task Force report, on which I served)
AQ is notably and deliberately decentralized, compartmentalized, flexible and diverse in all of its operations, including financial
Not just based on bin Laden’s personal wealth; indeed, it appears largely depleted (though was significant at the outset, in the early and mid-1990s)
Its financial network is characterized by layers and redundancies
Raises funds from a variety of sources and moves it in a variety of different ways
It has changed its structure, recruitment, and operating modalities, over time – in ways that have significance for the raising, moving, storing, and utilizing of financial resources.
Raising funds
AQ often has operated under a cloak of legitimacy – running legitimate businesses, such as bin Laden’s businesses in Sudan or the honey traders in Yemen – profits are channeled to terrorist ends
AQ also operates criminal enterprises; some large, and some small: some cells are reputed to be self-supporting, and engage in smuggling, fraud and theft
Most important source of financial support – at least up to and immediately following 9-11 was from continuous fundraising efforts that date back to the methods established to support the mujahadeen in the 1980s: charities, NGOs, mosques, web sites, special fundraisers, intermediaries, facilitators, and direct solicitations
Zakat contributions are widely unregulated, seldom audited, often co-mingled with other funds, and can be skimmed off for other purposes
Some giving to AQ is willful (such as the Afghan Support Committee, the Pakistani Al Rashid Trust and Wafa Humanitarian Organization, the Kuwaiti Revival of Islamic Heritage, the Saudi al Haramain organization, and the US-based Holy Land Corporation); but some is not, and funds can be diverted without their donors knowledge
Most of the fundraising has taken place in the wealthier Islamic countries, and Saudi Arabia has long had a very special relationship with AQ (funding, recruitment, issue definition); though in recent years, AQ has been expanded its relationships with organizations like Jemaah Islamiyah (or JI), that have their own financial support networks; and more recently, with groups operating in Iraq.
Moving funds
Global financial system is used:note finding of 911 Commission report that $300K passed through US banking system.
Also,under or un-regulated havens (with limited bank supervision, limited anti-money laundering laws, ineffective law enforcement, and/or a culture of bank secrecy) – historically places like Dubai, the UAE, Kuwait, Bahrain, and Lebanon and moving funds into equally unregulated places like Pakistan or Afghanistan under the Taliban
Through correspondent banking relationships, and moving funds through off-shore European havens like Liechtenstein and Austria (or the Cayman Islands or the Bahamas), these places have access to any location on the globe
The Islamic banking and financial system has also been used and generally tends to be less well regulated than the global financial system
Hawala system; like the Islamic banking system, perfectly legitimate – but it is not regulated formally and are also similar to andinter-linked with systems for Chinese, Thai, and other informal transfers.
Transfer pricing mechanisms – long utilized by TNCs trying to get funds out of countries with restrictive currency controls – can also be used
Trade diversion schemes
Old fashioned smuggling – of cash, precious metals, and gemstones – using the same routes and methods employed by drug traffickers, arms dealers, and TCOs
Use of smuggling appears to have been on the rise during the past 3 years.
Storing funds
Cash
Family members, friends and close allies as safe havens; (London Times correspondent Nicholas Fielding stresses the importance of family networks).
Gemstones (note Douglas Farah’s argument re: the diamond market after the US first froze AQ funds in US financial institutions following the embassy bombings)
Ad hoc arrangements with other terrorist organizations and possibly with criminal organizations
- The social organization of different groups using terrorism (hierarchical versus networked or dispersed) can have important consequences for how they raise and move funds.
Jessica Stern, author of Terror in the Name of God, argues in our forthcoming book, Financing Global Terrorism, that different organizational forms of terrorism – ranging from hierarchical, commander-cadre terrorist organizations (like al-Qaeda was between 1996 and 2001) to virtual, networked, de-centered organizations (like radical anti-abortionists or the Aryan Nation in the US) – have significant implications for the internal workings of terrorist groups – including their mission, decision-making procedures, recruitment strategies, and their financing.
Hierarchical organizations have separate divisions responsible for the raising and moving of funds and draw on diversified sources to secure their operations (diversion of funds from charitable giving, legitimate businesses).
Virtual, decentralized networks rely more heavily on individual contributions made through the Internet.
There is widespread sentiment – reflected in the recent work of Rohan Gunaratna – that al Qaeda has morphed from a hierarchical organization into a networked movement since 9-11.
In between these two are a variety of different organizational forms associated with national self-determination movements interested in control over a discrete territorial space. Those that have succeeded to force the state out of major portions of territory – the Tamils in Sri Lanka or the FARC in Colombia – operate more like states and obtain most of their revenues from forms of taxes (on trade or from extortion of those seeking protection from potential kidnappings).
- Groups have changed their methods of raising and moving funds over time, probably in response to regulatory efforts; they have increasingly moved out of formal financial sector institutions and into illicit activities and the grey economy.
There is greater reliance today on the use of decentralized petty crime (self-help systems) to support the operations of semi-autonomous cells.
This eliminates the need to move and store large amounts of funds.
Credit card fraud has been one way for cellsoperating in Europe and the USto finance themselves.
As we learned from the Madrid bombings, small-scale drug trafficking, and the fraudulent sale of petty goods were also used as sources of local financing for the operation.
As formal sector channels have increasingly been closed down, groups using terrorism have increasingly moved their assets out of formal sector financial institutions.
Some are suspected to have used IVTS (hawalas) for transfers of funds; others have resorted to traditional cash smuggling; Douglas Farah argues that gemstones from the conflict zones of West Africa have been used both to store and to transfer value; still others have speculated that there are linkages to organized crime (as British investigators charged following the recent – August 2004 – arrests in London..
How has the world responded to the challenges of terrorist financing?
In the broadest sense, there has been a global export of an American regulatory approach designed to suppress the ability of groups to finance terror through formal sector channels.
The Scope of international activities following September 11
Overnight, the political will that had been absent to make targeted financial sanctions effective materialized.
Developments within the United Nations:
Resulted in unanimous passage of UNSC Resolution 1373 in September 2001 (subsequent resolutions 1377, 1456, and 1535)
UNSCR 1373 was extraordinary in breadth and scope of requirements mandatory on all States (under Chapter VII) to deny support for terrorists, including preventing the financing of terrorism prior to the commitment of an act of terrorism and the legal ability to freeze funds expeditiously
It was an unprecedented statement of international community’s political will to restrict terrorist financing in manner previously unimaginable.
Established CTC, with innovative and novel procedures requiring States to report on actions taken to implement 1373 – unique, innovative in that it established an interactive, dynamic monitoring process with States to ensure accountability and improve their ability to restrict terrorist finances.
Previously, states tended to report to UN that they were complying “to the best of their ability.”
CTC introduced mandatory reporting requirements on states; responses to specific questions; invitations to ambassadors to meet with CTC to elaborate on their reports; an innovative, interactive process of reporting.
All reports were translated and posted on the UN’s website. (You can read the reports at
CTC focused on building 1) legal bases to address financing, freeze assets, and 2) administrative mechanisms to suppress financing, including addressing charities, IVTS, hawalas, etc.
UNSCR 1373 also called upon countries to sign and ratify the UN Convention on Terrorist Financing.
Lack of capacity for many states to implement 1373 became readily apparent, so CTC began technical assistance program (through resolution 1377), and coordinated bilateral offers of assistance, as well as international, regional & sub-regional organizations involved with counter-terrorism efforts
While the CTC momentum slowed in late 2003, the Security Council adopted new measures (UNSCR 1535) in March 2004 to “revitalize” the CTC as the primary mechanism to assist States in combating terrorist financing, creating the CTED.
The UN Al-Qaida Sanctions Committee (1267 Committee, November 1999) maintains the list of individuals and groups accused of supporting or engaging in acts of terrorism.
Over time, it has expanded the list of terrorist entities against which all States are required to restrict financing.
The 1267 Committee has steadily improved the quality of information on designated individuals, groups, and their financial supporters, as well as developed innovative measures for the de-listing of falsely named individuals.
During 2003 and 2004 the 1267 Committee increased its oversight and monitoring of States’ implementation and enforcement efforts, enhancing its reporting and evaluations procedures (modeling them in part on the innovative procedures developed by the 1373 CTC).
1373 medium to long-term, strategic
1267 short to intermediate term, tactical
More recently, in October of 2004, following the Beslan (Russia) tragedy, the UNSC passed UNSCR 1566 that renews and reinvigorates its efforts against terrorism, contains elements of a definition of terrorism, establishes a call and basis for the creation of an expanded list of individuals and groups using terrorism, and establishes a continuing committee to monitor both efforts.