Financial institutions spend millions of dollars each year erecting defences against money laundering and terrorist financing. Money laundering and terrorist financing are distinct areas of financial crime yet they share some common elements. Time and again, the financiers of terrorist acts have employed money laundering techniques to fund the young, the impressionable and the desperate that pull a t rigger or ignite a fuse.

Erec t ing defences agains t terrorist financing, let alone detecting the t ransactions that finance acts of terror, can be extremely frustrating for a financial institution. Terrorists consider themselves at war, one with no rules or uniform. Terrorists camouflage themselves within a civilian population in order to unleash their fury on unsuspecting targets or symbolic structures.

If they can evade law enforcement and the intelligence community to fulfil their goals, they can avoid recognition by a financial institution. How can a financial institution mount a credible defence against this kind of threat?

The Financial Action Task Force (FATF) Recommendation #5 states1:

Countries should criminalise terrorist financing on the basis of the Terrorist Financing Convent ion, and should

criminalise not only the financing of terrorist acts but also the financing of terrorist organisations and individual terrorists even in the absence of a link to a specific terrorist act or acts. Countries should ensure that such offences are designated as money laundering predicate offences.

As a result of FATF Recommendation #5, civilised nations have criminalised terrorist f inancing and integrated i t into their anti-money laundering compliance regimes.

To combat the financing of terrorism, banking s u p e r v i s o r s a n d f ina n c ia l intelligence units (FIUs) release lists of individuals and organisations that are known to governments and the intelligence community. Competent financial institutions scrub their client names and transaction counterparties against these lists.

Canada’s Office of the Superintendent of Financial Institutions (OSFI) publishes lists2, as does the United States Office of Foreign Assets Control (OFAC)3 and Her Majesty’s Treasury (United Kingdom)4. Other nations publish similar lists that detail the identities of those they designate as involved in terrorist activity. Financial institutions operating in more than one jurisdiction must be aware of the lists of the territories in which they operate.

If a financial institution does not wish to monitor all the lists of designated individuals or organisations released by governments around the world, private-sector financial intelligence firms are more than willing to sell their consolidated lists. Their data is drawn from

ManchesterCF provides financial crime risk management training programs, advisory services and project management to financial institutions, financial intelligence units and public-sector agencies around the globe.

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UNINTENDED CONSEQUENCES

All warfare is based on deception. – Sun Tzu , The Art of War, circa 500 BC

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ANALYTICS November2014

“if they can evade law enforcement and the intelligence community to fulfil their goals, they can avoid recognition by a financial institution.”

credible governments around the globe. These private-sector databases include individuals or organisations whose names do not appear on any government lists, yet are believed by firms’ analysts to represent a high risk for terrorist financing activity.

The process of cross-checking names against databases of sanctioned individuals and entities is a straightforward exercise. Yet it is also a limited defence mechanism. Those seeking to commit terrorist acts go to great lengths to camouflage their identities and their actions.

A known terrorist who funds his campaign with a credit card in his name will find his operational abilities curtailed rather rapidly by the local constabulary. Anonymity is, of course, preferred.

Financial intelligence units, aware that reporting entities require assistance in detecting both money laundering and terrorist financing activity, offer guidance on how to detect terrorist financing. An excellent report from AUSTRAC, the Australian FIU, outlines some of the funding mechanisms used by terrorists5:

• Self-funding• Cross-border movement of cash• Transmission of funds through

banking and remittance sectors• Online payment systems• Stored value cards• Charities and non-profit organisations

A financial institution might have a reasonable expectation of detecting five of the six aforementioned financing methods – self-funding being the exception – but the theory is, unfortunately, rather different from the practise.

The Taliban and ISIS are engaged in all-out warfare. A recent report on Afghanistan from the American government stated, “The UNODC estimates that the value of the opium andits derivative products produced in Afghanistan was nearly $3 billion in 2013, up from $2 billion in 2012.”6

ISIS has seized vast tracts of ground in Iraq and is raising millions of

dollars through a series of taxes imposed on those living in the captured territories, bank

robbery and the sale of oil7. Given the resources they have at their disposal, both extremist groups are capable of funding extensive terror campaigns at home and abroad.

The grim reality is that terrorist attacks are not expensive. History shows that tremendous damage can result from very little operating

capital. For example, the of ficial United Kingdom House of Commons report into the July 7 2005 bombings in London found that comparatively small sums of money were spent to execute this major terrorist event8.

How the operation was financed:

63. Current indications are that the group was self-financed. There is no evidence of external sources of income. Our best estimate is that the overall cost is less than £8,000. The overseas trips, bomb making equipment, rent, car hire and UK travel being the main cost elements.

64. The group appears to have raised the necessary cash by methods that would be extremely difficult to identify as related to terrorism or other serious criminality.

The National Commission on Terroris t Attacks Upon the United States released a Staff Report to the Commission in which it estimates the cost of certain terrorist events9:

• U.S. embassy bombings in East Africa (1998) @ $10,000

• September 11th attacks in New York, Washington and Pennsylvania (2001) @ $400,000–$500,000

• Bali, Indonesia bombings(2002) @ $20,000

Prosecutors of the case against three men who were implicated in the Madrid bombings of 2004, which killed 191 people and injured over 1000 others, stated that the estimated cost of the operation was a mere GBP36,00010.

ManchesterCFSuite 501125-720 King Street WestToronto, Ontario Canada M5V 3S5+1.416.388.6051www.manchestercf.cominfo@manchestercf.com@ManchesterCF

“ISIS has seized vast tracts of ground in iraq and is raising millions of dollars through a series of taxes, bank robbery and the sale of oil”

“Cross-checking names against databases of sanctioned individuals and entities is a straightforward exercise. yet it is also a limited defence mechancisim.”

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When the amounts involved are so trivial compared to the money laundering activity associated with narcotics or investment fraud schemes, how can financial institutions possibly hope to uncover terrorist financing?

Canada’s FIU, FINTRAC, has issued somevaluable direc t ion on how to identif ysuspicious transactions11:

Provide as many details as possible in your report about what led to your suspicion, including anything that made you suspect that it might be related to terrorist financing, money laundering, or both.

If you cannot make the dist inct ion based on the information available, remember that it is the information about your suspicion that is important, not the dist inct ion between money laundering and terrorist activity offences.

FINTRAC’s message is critical. If a staff member at a financial institution observes suspicious activity, it must be reported to the FIU. It does not matter whether or not it is labelled as money laundering or terroristfinancing, as long as a reportis filed with the FIU for analysis.

If a report is absorbed into the FIU’s database, it can potentially inform an analyst’s research into money laundering or terrorist financing, or both. The analyst’s ability to use the information in the report is not dependent on how the report was categorised by the reporting entity.

Analysts have access to classified information not available to financial institutions. As a result, they are better positioned to assess whether or not a transaction or customer is connected to terrorist financing activity.

As long as the reporting entity is disclosing suspicious transactions to the FIU, the system should be effective in identifying high areas of risk for terrorist financing activity. If, however, the reporting entity is attempting to focus its attention only on what it deems to be possible terrorist financing, it is plausible

that seemingly mundane activity will go unreported to the FIU. As a result, huge gaps will open up in the FIU analyst’s research.In essence, a financial institution can do more to combat terrorism by reporting suspicious activity to the FIU than by attempting to identify specific and discrete examples of terrorist financing.

By refining the basics of its anti-money laundering and anti-terrorist financing compliance regime, a financial institution can greatly increase its chances of reporting a critical piece of information about a possible or actual terrorist act.

The irony is that, in an efficient national financial intelligence program, the reporting entity may never find out that it has provided such a critical piece of information. Despite the actions of Snowden, Manning, Assange and others, the financial intelligence community must keep its secrets in order to operate effectively.

While this may prove frustrating for society at large, it is the only appropriate response to combat the financing of groups intent on wreaking havoc on the general population.

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ManchesterCFSuite 501125-720 King Street WestToronto, Ontario Canada M5V 3S5+1.416.388.6051www.manchestercf.cominfo@manchestercf.com@ManchesterCF

“it is plausible that seemingly mundane activity will go unreported to the fiu. as a result, huge gaps will open up in the fiu analyst’s research.”

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1 http://www.fatf-gafi.org/media/fatf/documents/recommen-dations/pdfs/FATF_Recommendations.pdf 2 http://www.osfi-bsif.gc.ca/Eng/fi-if/amlc-clrpc/atf-fat/Pag-es/default.aspx3 http://www.treasury.gov/resource-center/sanctions/SDN-List/Pages/default.aspx4 https://www.gov.uk/government/publications/cur-rent-list-of-designated-persons-terrorism-and-terrorist-fi-nancing5 http://www.austrac.gov.au/files/terrorism-financing-in-aus-tralia-2014.pdf6 www.sigar.mil/pdf/Special%20Projects/SIGAR-15-10-SP.pdf7 http://www.treasury.gov/press-center/press-releases/Pages/jl2672.aspx8 https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/228837/1087.pdf9 http://govinfo.library.unt.edu/911/report/index.htm10 http://www.theguardian.com/world/2007/nov/01/spain.international11 http://www.fintrac-canafe.gc.ca/publications/guide/Guide2/2-eng.asp#s6-2