Money laundering schemes involve using tainted, or ill-gotten money to purchase assets (gold, diamonds, promissory notes, stock certificates, or commercial products) that are legal, transportable and transferable. These assets can then be moved legally from one place to another, transferred to a different owner and converted back to cash.

Islamist terrorist groups have access to an established and unique underground financial system known as hawala. The system is not unlike Western Union, except that it is based primarily on trust and involves very little record keeping. An individual needing money (party-A) contacts his source who deposits funds with a hawaladar. The hawaladar phones an associate in another location, authorizing disbursement for an equal amount of money that can then be handed to Party-A. The hawaladars keep a simple ledger of their transactions at settle up with their counterparts as needed.

The Muslim world also has its own formal banking system, which is often closely linked to the various state governments, as in the western world. Few, if any, terrorist bombings have targeted Islamic financial institutions, even though they would appear to be likely targets of disgruntled radicals. Although Islamist extremists oppose the authoritarian state regimes, they rarely attack their facilities or institutions.

Saudi Arabia, for example, is criticized by the US for lending support to Islamist madrasses (religious schools) that preach against the US, capitalism and western values and culture. This financial support can be characterized as protection money – as long as the government, or financial institutions provide funds, or resist efforts to provide access to privileged financial records they are not targeted. Although the US criticizes refusals to provide assistance in the war on terror, it’s arguable that such cooperation could prove very costly to collaborators.

The same intelligence methods that facilitate tracking and disrupting terrorist groups can affect the operation of charitable organizations or could be used against legitimate political organizations and individuals. Many people that have emigrated from their home country contribute money to families, charities and political groups in their homeland. Many organizations serve legitimate humanitarian needs, some are merely fronts for terrorist groups, others serve dual roles and any can be coerced into supporting terrorist groups. The US has proscribed contributions to certain charitable groups and frozen assets of several organizations, but has yet done little to help facilitate operations of legitimate charities.

One of Islam’s “five pillars” is the requirement for devout Muslims to donate 2.5% of their income to charity. This tithe, called zakat is of tremendous humanitarian value, but is also subject exploitation. In a region rife with anti-American and anti-Western sentiment, any intrusive attempts to regulate, or disrupt the zakat could be counter-productive, give credence to charges that the US engaged in a holy war and increase hostility, both in the Muslim world and within the American Muslim community.

Once government agencies have access to financial records there is an inevitable temptation to use that access for duplicitous ends.

For years, UK businessman Dodi al-Fahad, for instance, has been a constant thorn in the cushion of the British royal throne. He has launched a quest demand an investigation into the alleged murder of his son and Princess Diana in Paris, the implication being that the royal family may have been behind the murder. Etc etc.

Drug trafficking is a huge source of funds for terrorist organizations. Wherever the drug trade flourishes, violence is sure to follow, making it superfluous to differentiate between drug lords and war lords. For decades the drug trade in Latin America has financed civil discord in Colombia, Peru, Bolivia and elsewhere. Asia is home to the world’s number one and two producers of heroin – Afghanistan and Myanmar (Burma).

In economically destitute Afghanistan, the Taliban regime thrived on taxes collected from opium poppy growers and heroin producers. After the Taliban banned opium poppy cultivation in 2000, due to international pressure, heroin production dropped from 3500 metric tons to just 75 tons. Since the US invasion and occupation, opium production has skyrocketed to over 4,000 tons. According to the International Monetary Fund (IMF), heroin now represents 40-50% of Afghanistan’s economy – and perhaps 95% of its economic recovery.

Afghanistan’s warlords oversee and profit from opium production. The US and its allies remain based around the capitol in Kabul, have little influence in the remote provinces where opium is king, and have done nothing to reinforce Taliban’s opium ban. At last report, the US Drug Enforcement Agency (DEA) had sent two agents to “monitor” the heroin trade. Arguably, any effort to suppress the drug trade would alienate the Afghani warlords and possibly inflame a renewed conflict that could overwhelm the limited U.S. and NATO troops, as it did during Russia’s Afghanistan debacle.

Meanwhile, as coalition partners tolerate and condone Afghanistan’s resurgent drug trafficking, massive amounts of funds are becoming available to the warlords, the Taliban and al-Qaeda.

After the attacks of September 11th, the US Congress passed the Patriot Act, which includes broad powers to combat money-laundering and new financial record-keeping regulations and requirements. One of many controversial elements of the Patriot Act are provisions – ‘special measures” - that allow the President to restrict or prohibit access to the U.S. financial system by states and/or foreign financial institutions that lack adequate anti–money laundering controls.

The intent of these special measures is similar to coercive measures used to force Latin American states to pursue more aggressive drug enforcement programs under threat of losing US economic and military aid. Those programs had little impact on drug trafficking but did provoke increased civil conflict that approached civil war.

Clearly there are US policy contradictions between applying collective punishment to legitimate financial institutions that fail to address terrorist financing, while acquiescing to drug trafficking that produces money to fund terrorist operations. Meanwhile, accountability and transparency is needed to prevent governmental abuse of access to private financial transactions.

Guidelines for Financial Institutions

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Case Studies of Suspicious Terrorist Financial Activity

Example 1: Front for individual with suspected terrorist links revealed by suspicious transaction report.

The financial intelligence unit (FIU) in Country D received a suspicious transaction report from a domestic financial institution regarding an account held by an individual residing in a neighbouring country. The individual managed European-based companies and had filed two loan applications on their behalf with the reporting institution. These loan applications amounted to several million US dollars and were ostensibly intended for the purchase of luxury hotels in Country D. The bank did not grant any of the loans.

The analysis by the FIU revealed that the funds for the purchase of the hotels were to be channelled through the accounts of the companies represented by the individual. One of the companies making the purchase of these hotels would then have been taken over by an individual from another country. This second person represented a group of companies whose activities focused on hotel and leisure sectors, and he appeared to be the ultimate buyer of the real estate. On the basis of the analysis within the FIU, it appeared that the subject of the suspicious transaction report was acting as a front for the second person. The latter as well as his family are suspected of being linked to terrorism.

Example 2: Individual’s account activity and inclusion on UN list show possible link to terrorist activity

An individual resided in a neighbouring country but had a demand deposit account and a savings account in Country N. The bank that maintained the accounts noticed the gradual withdrawal of funds from the accounts from the end of April 2001 onwards and decided to monitor the accounts more closely. The suspicions of the bank were subsequently reinforced when a name very similar to the account holder’s appeared in the consolidated list of persons and/of entities issued by the United Nations Security Council Committee on Afghanistan (UN Security Council Resolution 1333/2000). The bank immediately made a report to the financial intelligence unit (FIU).

The FIU analysed the financial movements relating to the individual’s accounts using records requested from the bank. It appeared that both of the accounts had been opened by the individual in 1990 and had been fed mostly by cash deposits. In March 2000 the individual made a sizeable transfer from his savings account to his checking account. These funds were used to pay for a single premium life insurance policy and to purchase certificates of deposit.

From the middle of April 2001 the individual made several large transfers from his savings account to his demand deposit account. These funds were transferred abroad to persons and companies located in neighbouring countries and in other regions. In May and June 2001, the individual sold the certificates of deposit he had purchased, and he then transferred the profits to the accounts of companies based in Asia and to that of a company established in his country of origin. The individual also cashed in his life insurance policy before the maturity date and transferred its value to an account at a bank in his country of origin. The last transaction was carried out on 30 August 2001, that is, shortly before the September 11th attacks in the United States.

Finally, the anti-money laundering unit in the individual’s county of origin communicated information related to suspicious operations carried out by him and by the companies that received the transfers. Many of these names also appeared in the files of the FIU. This case is currently under investigation.

Example 3: Diamond trading company possibly linked to terrorist funding operation

The financial intelligence unit (FIU) in Country C received several suspicious transaction reports from different banks concerning two persons and a diamond trading company. The individuals and the company in question were account holders at the various banks. In the space of a few months, a large number of fund transfers to and from overseas were made from the accounts of the two individuals. Moreover, soon after the account was opened, one of the individuals received several USD cheques for large amounts. According to information obtained by the FIU, one of the accounts held by the company appeared to have received large US dollar deposit originating from companies active in the diamond industry. One of the directors of the company, a citizen of Country C but residing in Africa, maintained an account at another bank in Country C. Several transfers had been carried out to and from overseas using this account. The transfers from foreign countries were mainly in US dollars. They were converted into the local currency and were then transferred to foreign countries and to accounts in the Country C belonging to one of the two subjects of the suspicious transaction report.

Police information obtained by the FIU revealed that an investigation had already been initiated relating to these individuals and the trafficking of diamonds originating from Africa. The large funds transfers by the diamond trading company were mainly sent to the same person residing in another region. Police sources revealed that this person and the individual that had cashed the cheques were suspected of buying diamonds from the rebel army of an African country and then smuggling them into Country C on behalf of a terrorist organisation.

Further research by the FIU also revealed links between the subjects of the suspicious transaction report and individuals and companies already tied to the laundering of funds for organised crime. This case is currently under investigation.

Example 4: Cash deposits to accounts of non-profit organisation allegedly finance terrorist group

The financial intelligence unit (FIU) in Country L received a suspicious transaction report from a bank regarding an account held by an offshore investment company. The bank’s suspicions arose after the company’s manager made several large cash deposits in different foreign currencies. According to the customer, these funds were intended to finance companies in the media sector. The FIU requested information from several financial institutions. Through these enquiries, it learned that the managers of the offshore investment company were residing in Country L and a bordering country. They had opened accounts at various banks in Country L under the names of media companies and a non-profit organisation involved in the promotion of cultural activities.

According to the analysis by the FIU, the managers of the offshore investment company and several other clients had made cash deposits to the accounts. These funds were ostensibly intended for the financing of media based projects. The analysis further revealed that the account held by the non-profit organisation was receiving almost daily deposits in small amounts by third parties. The manager of this organisation stated that the money deposited in this account was coming from its members for the funding of cultural activities. Police information obtained by the FIU revealed that the managers of offshore investment company were known to have been involved in money laundering and that an investigation was already underway into their activities. The managers appeared to be members of a terrorist group, which was financed by extortion and narcotics trafficking. Funds were collected through the non-profit organisation from the different suspects involved in this case. This case is currently under investigation.

Example 5: High account turnover indicates fraud allegedly used to finance terrorist organisation

An investigation in Country B arose as a consequence of a suspicious transaction report. A financial institution reported that an individual who allegedly earned a salary of just over USD 17,000 per annum had a turnover in his account of nearly USD 356,000. Investigators subsequently learned that this individual did not exist and that the account had been fraudulently obtained. Further investigation revealed that the account was linked to a foreign charity and was used to facilitate funds collection for a terrorist organisation through a fraud scheme. In Country B, the government provides matching funds to charities in an amount equivalent to 42 percent of donations received. Donations to this charity were being paid into to the account under investigation, and the government matching funds were being claimed by the charity. The original donations were then returned to the donors so that effectively no donation had been given to the charity. The charity retained the matching funds. This fraud resulted in over USD 1.14 million being fraudulently obtained. This case is currently under investigation.

Example 6: Lack of clear business relationship appears to point terrorist connection

The manager of a chocolate factory (CHOCCo) introduced the manager of his bank accounts to two individuals, both company managers, who were interested in opening commercial bank accounts. The two companies were established within a few days of each other, however in different countries. The first company (TEXTCo) was involved in the textile trade while the second one was a real estate (REALCo) non-trading company. The companies had different managers and their activities were not connected. The bank manager opened the accounts for the two companies, which thereafter remained dormant. After several years, the manager of the chocolate factory announced the arrival of a credit transfer issued by the REALCo to the account of the TEXTCo. This transfer was ostensibly an advance on an order of tablecloths. No invoice was shown. However, once the account of TEXTCo received the funds, its manager asked for them to be made available in cash at a bank branch near the border. There, accompanied by the manager of CHOCCo, the TEXTCo manager withdrew the cash. The bank reported this information to the financial intelligence unit (FIU).

The FIU’s research showed that the two men crossed the border with the money after making the cash withdrawal. The border region is one in which terrorist activity occurs, and further information from the intelligence services indicated links between the managers of TEXTCo and REALCo and terrorist organizations active in that region.

2. A dormant account containing a minimal sum suddenly receives a deposit or series of deposits followed by daily cash withdrawals that continue until the transferred sum has been removed.

3. When opening an account, the customer refuses to provide information required by the financial institution, attempts to reduce the level of information provided to the minimum or provides information that is misleading or difficult to verify.

4. An account for which several persons have signature authority, yet these persons appear to have no relation among each other (either family ties or business relationship).

5. An account opened by a legal entity or an organisation that has the same address as other legal entities or organisations but for which the same person or persons have signature authority, when there is no apparent economic or legal reason for such an arrangement (for example, individuals serving as company directors for multiple companies headquartered at the same location, etc.).

6. An account opened in the name of a recently formed legal entity and in which a higher than expected level of deposits are made in comparison with the income of the founders of the entity.

7. The opening by the same person of multiple accounts into which numerous small deposits are made that in aggregate are not commensurate with the expected income of the customer.

8. An account opened in the name of a legal entity that is involved in the activities of an association or foundation whose aims are related to the claims or demands of a terrorist organisation.

9. An account opened in the name of a legal entity, a foundation or an association, which may be linked to a terrorist organisation and that shows movements of funds above the expected level of income.

10. Deposits for a business entity in combinations of monetary instruments that are atypical
11. of the activity normally associated with such a business (for example, deposits that include a mix of business, payroll and social security cheques).

12. Large cash withdrawals made from a business account not normally associated with cash transactions.

13. Large cash deposits made to the account of an individual or legal entity when the apparent business activity of the individual or entity would normally be conducted in cheques or other payment instruments.

14. Mixing of cash deposits and monetary instruments in an account in which such transactions do not appear to have any relation to the normal use of the account.

15. Multiple transactions carried out on the same day at the same branch of a financial institution but with an apparent attempt to use different tellers.

16. The structuring of deposits through multiple branches of the same financial institution or
17. by groups of individuals who enter a single branch at the same time.

18. The deposit or withdrawal of cash in amounts which fall consistently just below identification or reporting thresholds.

19. The presentation of uncounted funds for a transaction. Upon counting, the transaction is reduced to an amount just below that which would trigger reporting or identification requirements.

20. The deposit or withdrawal of multiple monetary instruments at amounts which fall consistently just below identification or reporting thresholds, particularly if the instruments are sequentially numbered.

21. Wire transfers ordered in small amounts in an apparent effort to avoid triggering identification or reporting requirements.

22. Wire transfers to or for an individual where information on the originator, or the person on whose behalf the transaction is conducted, is not provided with the wire transfer, when the inclusion of such information would be expected.

23. Use of multiple personal and business accounts or the accounts of non-profit organisations or charities to collect and then funnel funds immediately or after a short time to a small number of foreign beneficiaries.

24. Foreign exchange transactions that are performed on behalf of a customer by a third party followed by wire transfers of the funds to locations having no apparent business connection with the customer or to countries of specific concern.

25. Funds generated by a business owned by individuals of the same origin or involvement of multiple individuals of the same origin from countries of specific concern acting on behalf of similar business types.

26. Shared address for individuals involved in cash transactions, particularly when the address is also a business location and/or does not seem to correspond to the stated occupation (for example student, unemployed, self-employed, etc.).

27. Stated occupation of the transactor is not commensurate with the level or type of activity (for example, a student or an unemployed individual who receives or sends large numbers of wire transfers, or who makes daily maximum cash withdrawals at multiple locations over a wide geographic area).

28. Regarding non-profit or charitable organisations, financial transactions for which there appears to be no logical economic purpose or in which there appears to be no link between the stated activity of the organisation and the other parties in the transaction.

29. A safe deposit box is opened on behalf of a commercial entity when the business activity of the customer is unknown or such activity does not appear to justify the use of a safe deposit box.

30. Unexplained inconsistencies arising from the process of identifying or verifying the customer (for example, regarding previous or current country of residence, country of issue of the passport, countries visited according to the passport, and documents furnished to confirm name, address and date of birth).

31. Transactions involving foreign currency exchanges that are followed within a short time
32. by wire transfers to locations of specific concern (for example, countries designated by national authorities, FATF non-cooperative countries and territories, etc.).

33. Deposits are followed within a short time by wire transfers of funds, particularly to or through a location of specific concern (for example, countries designated by national authorities, FATF non-cooperative countries and territories, etc.).

34. A business account through which a large number of incoming or outgoing wire transfers take place and for which there appears to be no logical business or other economic purpose, particularly when this activity is to, through or from locations of specific concern.

35. The use of multiple accounts to collect and then funnel funds to a small number of foreign beneficiaries, both individuals and businesses, particularly when these are in locations of specific concern.

36. A customer obtains a credit instrument or engages in commercial financial transactions involving movement of funds to or from locations of specific concern when there appears to be no logical business reasons for dealing with those locations.

37. The opening of accounts of financial institutions from locations of specific concern.

38. Sending or receiving funds by international transfers from and/or to locations of specific concern.