Tracking Terrorist Finances: Problems Remain

Efforts to track al-Qaeda finances in order to block their generation and to stymie their transfer emerged as one of the key counter-terrorist strategies after the attacks of 11 September 2001. Executive Order 13224, issued by President Bush less than two weeks after the terrorist attacks, authorised the US government to block the assets of terrorists and individuals and entities designated as providing support for terrorists and terrorist organisations. By 8 January 2002 the US had frozen more than US$33 million in assets belonging to more than 150 individuals and organisations suspected of being involved in terrorism. European countries followed this lead and also froze various accounts.

Such freezing was complemented by the adoption of enhanced means of locating accounts, the beneficial ownership of which was being masked, and identifying the means by which such monies were entering the American and European banking networks.

Both immediate and medium-term responses were thus conditioned by a recognition of the deeper and more profound vulnerabilities of the international financial system to terrorist exploitation and the need to tighten control mechanisms to prevent terrorist financial penetration.

Significantly, financing operations at both global and national levels drew upon legislative, regulatory and policing instruments already in place, though these had long been geared primarily to financial battles little connected with terrorist funding - primarily the war against drug and other criminal money laundering. In that context anti-money laundering efforts have arguably had a historically debatable impact on the level of money laundering. Furthermore, on the underlying crimes the view is that anti-money laundering efforts in the war on drugs have had a minimal impact upon the narcotics trade.

The situation in relation to terrorist financing is further complicated by the fact that it is a very different phenomenon from its criminal cousin.

For other criminals the aim of money laundering is to render dirty money clean. Through the money laundering methods of ‘placement’ (the physical disposal of cash derived from criminal actions into the financial system), ‘layering’ (the structuring of very complex layers of financial transactions to conceal sources of funds) and ‘integration’ (returning the money to the economy as bona fide business funds), what was illegal becomes ‘legal’.

For terrorists, on the other hand, what is often originally clean money is dedicated to criminal activities.

Money may in the case of terrorists be derived from legitimate businesses, charities and state sponsorship. It is the ultimate end to which the money is put after it has left the financial system that is illegal. The traditional money laundering process thus becomes inverted and terrorist financing in effect turns traditional money laundering on its head.

Not surprisingly, concepts and measures generated in response to non-political criminal financing have not proved to be entirely sensitive to what is essentially a political-orientated and political-driven financing process. A core problem becomes the actual identification of funds. It appears easier to identify illegally sourced funds against the general background of legally sourced monies than it is to differentiate terrorist funds with often legal origins within a context of other legitimate funds.

This difficulty is further reinforced by the small amounts moved by terrorists in support of their operations relative to the vast sums laundered by the drug barons. Certainly one of the major differences between terrorists and drug cartels in this context lies in the amounts moved. Terrorists need much smaller amounts of funds, making those amounts more difficult to identify as they often do not reach reporting thresholds. Much of the financing received by the 11 September hijackers was valued at less then US$10,000. Some of the hijackers were students who received funds to support studies, also reinforcing the appearance of legitimacy. Without other indicators, the transactions thus required no additional scrutiny by the financial institutions involved, either quantitatively or by category of the type.

At a national and an international level efforts have been made to adopt specific measures to tackle the unique phenomenon of terrorist financing. UN Security Council Resolution 1373, passed on 28 September 2001, required all states to work to prevent and suppress terrorist activities. One month later the Organisation for Economic Co-operation and Development’s Financial Action Task Force (FATF) adopted eight special recommendations for states to adopt in relation to terrorist financing, complementing the existing 40 recommendations and indicating that the nature of terrorist financing required special and specific measures. In summary the FATF’s recommendations are:

It is clear, however, that the war against terrorist financing is to be most effectively waged at the national level. On both sides of the Atlantic problems are being encountered.

Central to US efforts is the US Patriot Act of 2001. This provides a broad means to detect and prosecute money laundering, and works by (inter alia) requiring financial institutions to tighten their anti-money laundering controls and improve knowledge of their customer base, their record keeping and their suspicious transaction reporting requirements. ‘Special measures’ allow the US Treasury to require any bank in the US - and indeed anywhere else - to divulge to the US authorities the most sensitive information concerning their clients. Refusal can lead to that bank being excluded from the US financial system.

Myriad other measures, including dedicating increased resources to the Department of Homeland Security, the Treasury Department and the FBI for purposes of tracking terrorist financing, have led to some successes. These include the unravelling of a US-based network of Islamic charities that are suspected of funnelling money to terrorist organisations and the freezing of more than US$130 million of assets.

Nevertheless, a recent report by the US General Accounting Office criticised government agencies for still failing to understand how terrorist funds are hidden and moved. Furthermore, these agencies have failed to properly gather and share information and are not preventing terrorist financial transactions. In response, one Justice Department official has been quoted as saying that tracking terrorist financing where operations can be conducted for as little as US$50,0000 to US$70,000 is virtually impossible. The finance war appears far from being won in the US.

In the UK anti-money laundering objectives are achieved by way of the Proceeds of Crime Act 2002 complemented by various other pieces of legislation, including the Anti-Terrorism Crime and Security Act 2001; the Financial Services Authority’s (FSA’s) money laundering rules; the Joint Money Laundering Steering Group’s guidance notes; and various money laundering regulations.

Similarly to US legislation, an emphasis is placed on improving knowledge of the customer base and suspicious transaction reporting to the relevant authorities. Notably in the UK, much responsibility is placed on the reporting financial institution or business. This responsibility arises because in terms of whether to report a transaction which may be suspicious - with all that that implies for client confidentiality and the progress and completion of the financial transaction in question - a court will ultimately be concerned primarily with the objective test of whether there were ‘reasonable grounds for knowing or suspecting that another person is engaged in money laundering’, rather than what in the subjective view of the financial institution or business was suspicious and reportable.

Since failure to report gives rise to liability and as there is no minimum transaction size below which the requirement to report falls away, the obligations placed upon financial institutions, businesses and individuals responsible for monitoring and reporting suspicious transactions are indeed onerous.

Instituting proper anti-money laundering procedures, including staff training and the appointment of money laundering officers, is proving to be a time-consuming, costly and difficult process. Abbey National was fined £2.3 million (US$4.1m) for its failure to monitor compliance with the FSA’s money laundering rules. Earlier, the Royal Bank of Scotland had suffered similar penalties and its chief executive was driven to complain that Britain’s six largest lenders were being required to shoulder too much of the burden of halting crime.

That said, however, the most recent raft of money laundering regulations, due to come into force in March 2004, will extend suspicious transaction reporting requirements to lawyers; insolvency practitioners; auditors; tax advisers; company formation agents; estate agents; casinos; and in certain circumstances dealers in high-value goods. These institutions, similarly to the banks, will find themselves being effectively forced to report defensively - that is, to report where there is the slightest doubt as to whether a particular transaction is suspicious. Given the difficulty of discerning a relevant transaction or patterns of transactions reflecting terrorist financing activities, the result is likely to be a continued deluge of reports and continued partial systemic overload.

Indeed, tens of thousands of filed suspicious reports - in May 2003 the figure was believed to be around 58,000 - have yet to be fully dealt with, despite Herculean efforts by the National Criminal Intelligence Service (NCIS) unit tasked to deal with these matters. In this context the challenge of identifying useful information for countering terrorist financing remains challenging to say the least. Clearly, difficulties being encountered in the US in the anti-terrorist financing campaign are in many cases being mirrored in the UK.

Two important steps, one legislative and one bureaucratic, may help the situation. These are to narrow the scope of the new money laundering regulations, thereby reducing the number of businesses required to report; and significantly increase the number of personnel at the NCIS tasked with dealing with the suspicious transaction reports.

Obviously there are financial costs involved with the first recommendation and the possibility remains that some terrorist transactions will escape the net if the ambit of the new money laundering regulations is constricted. Nevertheless, without such modifications it may not be possible to see the wood for the trees.

Martin Navias is a banking lawyer working in London and is a research associate in the Department of Mediterranean Studies and the Centre of Defence Studies, both at King’s College London