Counterterrorism Blog

In the most basic sense, terrorist groups require funding to achieve their goals. They must have effective financial infrastructures to include:

• Sources of funds
• The means to launder funds
• The availability of funding

This is a pretty simple concept. If only the detection, disruption or prevention of this process could be as simple. In reality, dealing with terrorist financing is extremely challenging. Terrorist financiers have had many years to quietly hone their skills and perfect their methodologies. It wasn’t until 9/11, that law enforcement, the regulators, intelligence agencies or the financial sector focused specifically on terrorist financing. In essence, this enabled terrorists to develop mechanisms and infrastructures, both legal and illegal, which have become well insulated and adept at avoiding detection.

Terrorist financing is complex and difficult to understand, let alone identify. It cannot be viewed from a generic or all encompassing standpoint. A full range of individuals and entities possess terrorist funding requirements. Therefore, detective mechanisms must be more focused. In most instances, the various types of individuals and entities will have characteristics unique to them. For example, individuals to include leaders, donors, fundraisers, recruiters, facilitators and operatives (jihadists, martyrs, suicide bombers and others) by virtue of their positions will have differing funding requirements. Likewise, financial institutions, legitimate or illegitimate businesses, charities and other conduits will have varying funding needs. Financial requirements and flows for the full gamut of terrorists and terrorist supporters vary according to factors to include their role, location and affiliation.

As a result of the multi-dimensional face of terrorism, general characteristics, warning signs or red flags can be helpful but are limited in identifying terrorist financing. A more robust process of identifying terrorist financing risk is to develop financial profiles for the specific individual and entity functions, as described above. Financial institutions and non-financial institutions should assess which terrorist groups, individuals and entities they are most likely to encounter and in what capacity. In so doing, they can more accurately develop reasonable detective mechanisms.

Terrorists are quite adept at avoiding financial detection. They rely on both the formal and informal banking systems to launder and move funds. Their choice of systems will be dependent upon a number of factors to include geography and the type of financial system more advantageous in specific locations, governmental and institutional oversight, systemic vulnerabilities and opportunities to exploit the situation. Characteristics and warning signs are non-static. Risk assessments and mechanisms to identify emerging trends are critical components for identifying and disrupting terrorist financing.

In many reports and forums discussing general comparisons between money laundering and terrorist financing, it is noted that terrorists intentionally use smaller amounts of money, particularly when dealing with financial institutions to avoid detection and circumvent Bank Secrecy Act reporting requirements. In actual context, this is not always the case. Operational funding usually follows this model. However, in terms of fundraising and revenue generation, terrorists will move more significant amounts of money. They will do so under cover of wealthy donors, legal or illegal business fronts, shell companies, charities and other entities. This applies to utilization of both the formal and informal financial systems. The level of funding will be consistent with the type of individual or business activity neccesary to avoid detection. Likewise, the notion that terrorists do not require much funding in order to commit a terrorist act is not true on all levels. The funds needed to support a terrorist act are generally more nominal. However, the funds to sustain a terrorist group, especially to facilitate training and recruitment, are quite substantial.

In simplifying the terrorist financing process, we are dealing with three steps, as delineated above:

1. Sources of funds
2. The means to launder funds
3. The availability of funds

Begin with the means to launder funds. This requires the use of the formal banking system, the informal banking system or non-financial companies. There must be a conduit that filters the source or origination of funds through a bank, non-bank financial entity or non-financial entity making it available and accessible to the individual terrorist, cell or entity at the point of distribution or use. In the majority of instances, financial institutions serve as the conduit or middle ground between the source and distribution of terrorist funding. In this context, financial institutions must understand that they service two distinct dimensions of terrorist financing. It is extremely important that financial institutions develop detective methodologies capable of identifying terrorist financing in the two distinct funding dimensions.

The first dimension is fundraising or the source of funds. This entails all fundraising mechanisms ranging from donations, charitable giving, legitimate and illegitimate business activity, to criminal activity. Larger amounts of money will be deposited or transferred in this financial dimension, consistent with the donor or business activity. The second dimension is the operational dimension which requires the availability and ultimate disposition of funds. In this dimension, terrorists will use smaller monetary amounts. In either funding stream, terrorists will take the necessary steps to avoid detection.

The unfortunate reality is that regardless of the level of vigilance and detection, terrorists will always have access to funds; however, the more robust the detective efforts, the greater the likelihood for disruption. Every disruptive success reduces the operational capability of terrorists. In this vein, one of the primary areas of vulnerability to terrorists is finance. It is critically important that financial and non-financial institutions understand this fact and the vital role they play in the process.

Two key areas where terrorists are vulnerable when dealing with financial institutions are with respect to Know Your Customer (KYC) practices and Suspicious Activity Reporting (SAR). Whether using their true names or false identities, terrorists are at risk of detection through KYC mechanisms. SARs have been instrumental to the FBI in identifying links between information reported in SARs and terrorism investigations through advanced data mining capabilities known as information data warehousing.
Steps should be taken to ensure that KYC and SAR mechanisms are as strong and viable as possible.

Financial Institutions should incorporate terrorist financing specific training into their AML training programs. It is essential to understand and simplify terrorist financing as much as possible. It is equally important for individuals in the financial and business sector to understand that they are on the front line of the economic war on terrorism and are capable of playing a vital role through risk recognition, AML monitoring and mechanisms to include KYC and SARs.