Keeping money out of terrorist hands


    Key points

  • Terrorist groups are able to transfer large sums of money across the globe virtually undetected by taking advantage of international banking practices.

  • The EU, the UN and the international Financial Action Task Force are all taking steps to deprive terrorists of their sources of funding.

  • While a series of measures are in place to halt the transfer of illicit monies, more international co-operation is needed.

Like many of their criminal counterparts, modern terrorist organisations have taken full advantage of the opportunities offered by the globalisation of the capital markets to raise and transfer funds to provide logistical support and training for terrorists to purchase and transport weapons, and collect information.

The financial industry is highly attractive for 'money-dirtying' purposes in particular as it provides a greater than normal degree of 'opacity', since the exchange of information on the flow of funds is filtered and managed by competent operators who, on the basis of their privileged position, have access to sensitive information that they keep undisclosed. The non-permeability of the financial and banking systems of offshore and non-cooperative countries is particularly enticing to entities linked to terrorist organisations as it reduces the likelihood of foreign regulatory authorities obtaining information. Therefore, opening bank accounts in non-cooperative countries and investing in offshore products, or through offshore brokers and trusts, is a very safe way for terrorists to make profitable investments under a cloak of secrecy.

In addition, apparently legitimate Islamic financial transactions and investment funds conforming to the principles of Sharia law may be effective vehicles for collecting large amounts of capital, which directly, or indirectly through the payment of the zakat - a regular payment which every adult, working Muslim is obliged to make to support needy parts of society - may be used to finance terrorist networks. Cross-border wire transfers, internet banking, over-invoicing related to import-export trading, money-transfer systems and underground banking systems such as hawala, are all effective channels upon which Islamic terrorist network may rely to transfer cash from one country to another.

Tracking terrorists' financial transactions and funds is therefore more difficult than following the money-laundering trail of criminal organisations, because most terrorism financing channels are legitimate and their involvement in illegal activities may remain unsuspected.

Key UN instruments

The need to prevent the terrorist menace by depriving terrorists of the resources required to finance their activities was already felt on the international scene before the attacks in the US on 11 September 2001.

In light of the delicate political and economic situation in Afghanistan after the Taliban faction had taken power, in 1999 the UN Security Council issued Resolution 1267 to call on states to implement the no-fly zone in Afghan territory and adopt the measures necessary to freeze the capital and other financial resources that could be directly or indirectly associated with individuals or organisations belonging to the Taliban. Furthermore, Resolution 1267 set up the Committee for Sanctions against the Taliban, in charge of identifying individuals to whom the freezing provisions were to be applied.

On 9 December 1999, the UN passed the Convention for the Suppression of the Financing of Terrorism, which require states to:

  • take steps to prevent and counteract the financing of terrorists, whether direct or indirect, through legitimate or illegitimate sources

  • hold those who finance terrorism criminally, civilly or administratively liable

  • provide for the identification, freezing and seizure of funds allocated for terrorist activities.

    The UN Convention is, beyond doubt, the international legal instrument that states are expected to adopt as a basis for introducing effective national legislation aimed at combating international terrorism and suppressing the sources that finance it. It should be noted that by 11 September 2001, the UN Convention had not reached the number of ratifications required for it to come into force. Of the 119 states that had signed it, only four - Botswana, Sri Lanka, Great Britain and Uzbekistan - had ratified it at that time and it entered into force only in 2002.

    In the wake of the 11 September 2001 attacks on the US, on 28 September, the UN Security Council unanimously adopted Resolution 1373, which requires states to:

  • criminalise the wilful provision or collection of funds to be used for terrorist attacks

  • freeze the funds, financial assets and economic resources of those who commit, attempt to commit, participate in or facilitate the commission of terrorist acts and of persons and entities acting on behalf of terrorists

  • deny persons who commit or attempt to commit, facilitate or participate in the commission of terrorist acts access to funds, financial assets, economic resources and financial services.

Key EC legislation

The EC had already acted to fight the financing of international terrorism prior to 11 September 2001. Indeed, the EC had acknowledged the need to neutralise the phenomenon of terrorist financing, especially through the Taliban faction, by issuing Regulation 467/2001.

In particular, this regulation adopted the entire list drawn up by the Committee for Sanctions against the Taliban and required EC member states to enforce freezing measures on the persons and organisations contained in the list. However, it was after 11 September 2001 that the process of EC legislation gained pace. In this context, Regulation 2580/2001 and Regulation 881/2002 were adopted.

The most innovative aspect of Regulation 2580/2001 is that it produces a list of names, at European level, against which the freezing measure is to be enforced. The list, produced on the basis of the investigations conducted by each member state, supplements the list prepared by the UN Security Council.

Regulation 881/2002, which repeals Regulation 467/2001, imposes economic and financial restrictions on individuals and corporations linked to Al-Qaeda, Osama bin Laden and the Taliban, and makes it mandatory for financial intermediaries to provide national authorities with information on funds, assets or economic resources held or controlled by the individuals, corporations, groups or organisations listed in the annex of the regulation.

Unlike Regulation 2580/2001, which is based on UN Security Council Resolution 1373 and applies to all types of terrorism without referring to the territorial link to a specific country, Regulation 881/2002 applies solely to individuals or entities linked to Bin Laden, the Taliban or Al-Qaeda. Consequently, the two measures differ above all in terms of the different types of terrorism they aim to combat. Regulation 881/2002 introduces the notion of "freezing funds and economic resources".

The new notion makes it possible to freeze funds and assets that are not strictly financial. The main effect of this new definition is that the owner or possessor of the assets forfeits the right to use them for an indefinite period of time, because the freezing measure is accompanied by a ban on using the assets as collateral to obtain any further financing.

Nine special recommendations

Following the attacks of 11 September 2001, the international Financial Action Task Force, extended its mandate to include the prevention and countering of financing terrorism and add a series of special recommendations against terrorist financing to the 40 recommendations previously adopted on money-laundering.

The nine special recommendations offer governments the basic framework to develop, at a national level, an effective system to detect the flow of terrorism-related funds and to prevent and suppress the financing of terrorism at an international level.

The first five recommendations reflect the provisions of the UN Convention, UN Security Council Resolution 1373 and the Financial Action Task Force's 40 recommendations, as they invite states to:

  • take immediate action to ratify and implement the UN legal instruments

  • introduce into national law the crime of terrorist financing

  • freeze and confiscate assets belonging to terrorists

  • provide every assistance to intelligence services and supervisory authorities

  • authorise financial intelligence units to exchange the information in their possession so as to identify and neutralise possible channels for terrorist funding.

    The last four recommendations examine new areas of intervention that the UN the EC and the Financial Action Task Force had not previously addressed, as they require states to:

  • impose on money transfers the same anti-money-laundering duties imposed on banks and financial intermediaries

  • reinforce the process for identifying clients making wire transfers

  • prevent the utilisation of non-profit organisations for terrorist financing purposes and

  • identify and prevent the cross-border transportation of cash and securities related to terrorist financing.

The fact that today there is no common definition of terrorism makes the war on the financing of terrorism an even bigger task. On globalised markets, any lack of symmetry between legal systems gives terrorist organisations an additional opportunity to raise and transfer the funds they need to sustain the terrorist network. Close co-operation between states and joint measures are therefore essential to prevent terrorists accessing financial resources. Given the nature of the financing of international terrorism, the efficacy of countermeasures will depend mainly on the active role of the financial and banking sectors at the prevention stage, especially by means of exchange of information, mandatory identification, recording and reporting of suspect transactions.

Simona Sapienza is a senior associate in the International Capital Markets department of Allen & Overy LLP (Rome office). Simona was previously a legal consultant at the Centre for Comparative and Foreign Law Studies based at UNIDROIT and a lecturer in banking and financial law at the Post-graduate School in Banking Law of the University of Siena.

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