Perspectives on Criminal and Terrorist Money Laundering

By Dennis Lormel

When developing, implementing or modifying Anti-Money Laundering (AML) strategies, it is important to understand who and what you are dealing with. Who is the enemy and what is the threat they pose? In the post 9/11 world, this is an increasingly vexing question. With that context in mind, the enemy can be characterized in two broad categories, criminals and terrorists. Criminals are motivated by greed, in the form of profit and/or power, and represent a threat to the economy. Terrorists are motivated by ideology and present a threat to National Security.

The one most important commonality between criminal organizations and terrorist groups is that money laundering is an essential operating tool. For criminal organizations and terrorist groups to succeed, they must possess the means to launder funds. Why is this important and why should it matter to financial institutions and non-financial institution businesses alike? It’s critically important because financial institutions and many businesses are susceptible to money launderers. Money laundering transcends geographic boundaries and business lines. Wherever criminals and terrorists can exploit systemic and institutional vulnerabilities they will. By establishing viable anti-money laundering programs and strategies, financial institutions and non-financial institutions help to diminish threats to the economy and National Security.

It is important to understand the differences and contrasts between criminal and terrorist interests in money laundering. The most fundamental and essential difference is that criminals launder money for profit. Laundering for terrorist financing is based on ideology. The profit vs. ideology factor is very significant when it comes to developing investigative and detective methodologies. In general, it’s easier to identify and disrupt criminal money laundering operations because you can exploit the greed factor. It’s more challenging and difficult to exploit terrorist money laundering operations because generally, there is no greed factor to exploit. The functional mechanics of terrorist financing are multi-dimensional and less recognizable than the functionality of criminal money laundering. Criminal money laundering is more one dimensional and identifiable. In addition, terrorists are usually more adept at avoiding detection.

Other differences to be mindful of include the fact that terrorists will launder funds siphoned from charities, contributed by wealthy donors or from State sponsors of terrorism. These funds were not derived directly from criminal activity but were seemingly clean funds which were intended to support terrorist activities. In addition to relying on traditional banks, terrorists will launder money through Islamic charities and Islamic banks. Terrorists also favor informal financial systems to launder funds, more so than criminal elements. Criminal money launderers usually deal in more significant transactional amounts of currency, whereas terrorist transactional amounts offer a contrast. For fundraising, terrorist funding flows will be both significant and nominal. For operational purposes terrorist funding flows will be more nominal.

There are many similarities between money laundering for criminal purposes and money laundering for the finance of terrorism. For instance, both criminal and terrorist elements will use mechanisms to include money exchange firms, front companies, shell companies, cash shipments, hawalas, commercial banks and criminal activities. There are other similarities in how funds are derived and moved by criminals and terrorists.

An important evolving trend is that criminal organizations and terrorist groups are learning from each other. In so doing, they are perfecting their illicit skills. Terrorist groups, in particular, are learning organizations. They consistently adapt to better exploit systemic vulnerabilities.

One of the most important distinctions between criminal and terrorist money laundering is the circular versus linear flow of funds. Criminal money laundering is a circular process. The person(s) and/or entities responsible for placing the funds are the ultimate beneficiaries after the assets flow through the layering and integration phases. Terrorist financing is linear. The individuals placing the funds are typically not the beneficiaries. The funds flow in a linear fashion to other individuals. The beneficiaries use the proceeds in furtherance of terrorist activity.

Although financial activity that supports terrorism is often simplistic, terrorist financing presents a myriad of complex challenges. By its nature, in most applications, the movement of funds to support terrorism is through legal and undetectable means. We should be mindful that terrorist financing encompasses a wide variety of activities. This is a factor that makes detecting terrorist financing more difficult than detecting criminal money laundering. Terrorist financing consists of fundraising mechanisms, operational and administrative support mechanisms, and other considerations, which require use of the formal and informal financial systems. This variance is exacerbated by the range of positions and responsibilities individual terrorists and terrorist supporters assume to include leaders, fundraisers, financiers, facilitators, operatives and suicide bombers. Financial requirements and flows for the full gamut of terrorists and terrorist supporters vary according to factors to include their role, location and affiliations.

Government agencies and financial institutions must identify and assess warning signs within their jurisdictions and areas of operation by understanding money laundering, terrorist and terrorist financing risk factors, systemic vulnerabilities, and institutional vulnerabilities. Companies should develop risk/vulnerability matrices and identify countermeasures and control mechanisms to mitigate risks and vulnerabilities.

By understanding and identifying areas of risk and vulnerability to criminal and terrorist money laundering, we can implement procedures to strengthen internal controls and minimize risk. In so doing, we are positioned to deal with criminal and terrorist threats and better safeguard the economy and National Security.

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