Counterterrorism Blog

This is the fourth in a series of five articles. In order to disrupt terrorist financing, there must be a more comprehensive understanding of the multi-dimensional elements involved in the funding process. The first article in this series provided an overview of four components that must be included in training in order to establish a framework for understanding the complexity of terrorist financing. Each of the subsequent articles focuses on one of the four components, which include:

1. Types of terrorist groups
2. Funding capacity
3. Mechanisms for fundraising and operations
4. Individuals and cells.

This article focuses on mechanisms for fundraising and operations. There are two primary methods of transferring funds, the formal and informal financial systems. The formal system consists of commercial financial institutions. The informal system moves funds by means other than using financial systems. Terrorists are quite adept at avoiding financial detection. They rely on both the formal and informal systems to launder and move funds. The degree one is used in preference of the other depends on a number of factors to include culture, sophistication of the banking system in various parts of the world, accessibility, timing, systemic vulnerabilities, opportunities to exploit the situation, situational considerations, the level of investigative scrutiny and other factors. Whichever system is used, funds are moved with the intent to avoid the attention and detection of law enforcement, intelligence and regulatory agencies.

In determining which system to use, in addition to avoiding detection, terrorists must consider the benefits and risks associated with both the formal and informal mechanisms.
Each system possesses a series of benefits and risks. Just as financial institutions assess risk and determine their risk appetite, terrorists assess the risks associated with the formal and informal systems and determine the level of risk they are willing to tolerate.

Commercial financial institutions include banks, broker dealers, credit unions, savings and loan associations, casinos, insurance companies, currency exchanges and other entities. A few benefits of using financial institutions include creating an aura of legitimacy, few people are involved in handling the transaction and security - there is less exposure to theft. A few detriments to consider in using financial institutions include creation of a document trail (financial transactions don’t lie), exposure of transactions to individuals outside the terrorist group and exposure to prosecution and forfeiture. It should be noted that the terrorists responsible for the 9/11 attacks relied primarily on the formal banking system as the funding mechanism to support their activities.

Informal methods of physically transferring funds include use of courier and bulk cash shipment through conduits to include airplane, ship, automobile, mail and freight shipment. The regional terrorist group Jemaah Islamiah received a bulk cash shipment from Al-Qaeda to help fund the Bali bombing. Benefits of physically moving funds include no traceable paper trail; no third party, such as a bank official, aware of the transaction; and total control of the movement of the money. The major detriment of moving money in this fashion includes the high risk of loss of the funds for a variety of reasons.

Since 9/11, terrorist financing methodologies have consistently evolved and changed in order to avoid detection. Terrorists and terrorist organizations are extremely adaptable and flexible. They continuously seek to identify systemic weaknesses for opportunities to exploit such vulnerabilities. To operate in western society, terrorists must rely more on formal mechanisms. To operate in less advanced financial venues, such as Afghanistan and Pakistan, more informal mechanisms are used.

Following 9/11, Al-Qaeda took steps to exploit informal financial structures in the Middle East and Central America, and to use formal facilities on a more limited basis because of the investigative scrutiny and international pressure placed on the formal banking system. However, over time and with the evolution of Al-Qaeda as a group to an ideology and subsequent reemergence as a group, they have gravitated back to the formal sector, while continuing to exploit informal channels. Al-Qaeda, like all terrorist organizations will use whichever system facilitates its needs and allows them to avoid detection.

An informal mechanism, which is much safer than physically moving money, is the Alternate Value Transfer System. This is an informal system for money payments within a country or internationally. It is a trust based system that is culturally and ethnically driven. This system has been in existence for centuries. It is known by many names, one of the most common being “hawala.” It functions as an underground banking system, operating parallel to the formal banking system. This is a desirable system for terrorists and criminals because of the ease of operation. The system is discreet and reliable. It is extremely difficult and challenging for law enforcement to trace transactions or obtain evidence. An outstanding reference document was published by Interpol, entitled “The Hawala Alternative Remittance System and Its Role in Money Laundering.”

The two most significant areas of vulnerability or weakness to terrorists and terrorist organizations are communications and finance. These two areas consistently lead to the disruption and dismantlement of terrorist groups and activities. Although terrorists consistently change their methods of operations and demonstrate adaptability at avoiding detection, they must communicate, and raise and spend money to function. This is where the government and private sector’s efforts must exploit the weaknesses of terrorists.

Terrorist financing investigative strategies should focus on the disruption of funding flows. The optimal situation would be to trace terrorist funds back to the point of origin and forward to the terrorist strike team. The next step would be to take investigative action to disrupt and dismantle the identified funding stream. To accomplish this, investigators have to identify three funding tracks. The first is to identify funding flows between a terrorist network or organization and the point of origin. The second is to identify funding flows from the network or organization to fund operations, to include organizational operations and specific terrorist activities. The third is to identify funding flows from operations to individuals, cells or groups.