The International Standards On Countering The Financing Of Terrorism

Abstract: International recommendations on countering the financing of terrorism have been accepted as the benchmark when drafting national policies against terror financing. Still, the international recommendations are yet to clarify what needs to be included in terrorist financing. This paper examines the necessity to revise the international standards catered to countering the financing of terrorism. The landscape of terrorist financing has changed since the inception of the recommendation about 20 years ago. In addition, the mechanisms in place to identify what is or is not terrorist financing are also explored to better grasp what is scrutinized as terrorist financing on the ground level. In line with that, this paper provides an insight into what could be the components of terrorist financing that need to be considered when revising the international standards on countering the financing of terrorism.

Problem statement: How can the growing need to revise the international standards on countering the financing of terrorism be understood?

So what?: By critically assessing the validity of recommendation 5 of the FATF, which referred to terrorist financing, this paper calls for the attention of policymakers regarding the fact that certain revisions need to be made to specify what must be considered when revising the existing recommendation to counter the present system(s) of terror finance.

The FATF’s Recommendation On Terrorist Financing

The Financial Action Task Force (FATF), the international policy setter on anti-money laundering and the countering of the financing of terrorism, has set international standards that countries need to adapt in their respective jurisdictions to counter transnational crimes of money laundering and terror finance. Out of forty recommendations, recommendation 5 sets out the international standards to criminalize terror finance. Since these are international standards, all the member countries are obliged to follow them when drafting their national policies. As such, the meaning of “international standards” is important to counter terrorism on the ground level. When analyzing the components of international recommendations to counter-terror finance, it is observed that said recommendations are not comprehensive enough to capture the recent developments in terror finance. The financing of terrorism depends on many factors, including the phenomenon of the terrorist group, their operational capacity, targets, and the source of funds. FATF initially introduced the international recommendation on terrorist financing to disrupt Al-Qaeda’s financial flow as it created shock waves with the multiple terrorist attacks on September 11, 2001, known as the 9/11 attacks in the USA.[1] Unfortunately, the landscape of terrorist financing has changed ever since. Better said, the paradigm shift of terrorist financing from regulated to unregulated sectors and terrorist organizations to small cells and lone actors justifies the necessity to review the 20-year-old recommendation on countering the financing of terrorism.

FATF initially introduced the international recommendation on terrorist financing to disrupt Al-Qaeda’s financial flow as it created shock waves with the multiple terrorist attacks on September 11, 2001.

Global Standards On Countering the Financing Of Terrorism

The United Nations Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances (1988) was initiated to prevent criminals from spending the earnings of their crimes and mainly focused on drug proceeds. The UN Office on Drugs and Crime determined that limiting money laundering to merely drug earnings would not achieve the goals of the anti-money laundering policies. The policymakers came to this conclusion after learning about the drug network and its organized structure. Arguably, money laundering must include other grave offences. The UN Convention against Transnational Organized Crime (2000) aims to capture transnational organized crime. These conventions established a universal prohibition on the proceeds of crime. In fact, the FATF was established in 1989 by the G7 nations with the initial mandate to promulgate recommendations to combat money laundering. After the shock of the 9/11 attacks, the effort to prevent the financing of terrorism was emphasized even more. Said terrorist events led to a revision in the FATF’s mandate and the adoption of nine special recommendations to counter the financing of terrorism.

As per recommendation 5 of the FATF, the terrorist financing offence reads as follows: ‘Countries should criminalize terrorist financing on the basis of the Terrorist Financing Convention and should criminalize not only the financing of terrorist acts but also the financing of terrorist organizations 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.’

Further to recommendation 5, an interpretive note provided by the FATF includes the characteristics of the terrorist financing offence. Accordingly, these characteristics refer to providing funds irrespective of their origin, i.e., legitimate or illegitimate, providing other material support to terrorists, and financing their travel. Member countries have used the recommendation on countering the financing of terrorism as a guideline for drafting national policies to frame their laws in an effort to curb terrorist financing.

The Definition’s Missing Building Blocks

The FATF recommendation on countering the financing of terrorism broadly covered the area of terrorist financing, but academically, terrorist financing itself has been categorized under different limbs. Santoso and Laksmi[2] further subdivided terrorist financing into the raising of funds, movement of funds, and the use of funds”. On this premise, the definition of terrorist financing is not coherent and needs a comprehensive definition.

The FATF recommendation on countering the financing of terrorism broadly covered the area of terrorist financing, but academically, terrorist financing itself has been categorized under different limbs.

Since the international recommendation on terrorist financing has not been comprehensively defined in terms of what exactly constitutes terrorist financing, the definition needs to be academically reviewed. Terror is derived from the Latin term terrere, which refers to terrify or scare. Creating a level of terror is subjective, according to a country’s tolerance level. For example, a knife attacker killed two people and injured five in Romans-sur-Isere, France, in June 2020, and Europol classified this as a terrorist attack.[3] Therefore, the classification of terrorist financing may vary from country to country. Certianly, and as the policy-setter, the FATF should direct the member countries on what is required to be included in the definition of terrorist financing. RUSI proceeds to propose that the pattern of terrorist financing depends on the organizational structure of the terrorist group: territory-controlling groups, organized crime-type groups, lone actors, and small cells may or may not be inspired by foreign terrorist groups.[4]

Terrorist financing is multifaceted and can be broadly divided into two categories. In the first category, the money has already been generated in the form of cash; in the other category, the money will be generated through economic resources. Even in the first category, although the money has been generated as cash, said money may again be subdivided into legitimate or illegitimate (apparently legitimate) money. The present definition provides no reference to the economic resources that can be or have been used for terror finance. The definition of terrorist financing, therefore, must also cover the use of economic resources for terrorist financing and money, irrespective of its nature: legitimate or illegitimate. Recommendation 5 does not explicitly mention that providing non-cash benefits or material support falls under the recommendation. Rather in the interpretative note, it is mentioned that material support is covered. One might argue that the definition needs to be precise enough to allow the reader to understand what is covered by it without referring to further sections or documents. Especially if one merely looks at the definition without referring to further sections or documents will not grasp what is prohibited under the recommendation.

Another missing point from recommendation 5 is that it does not direct who should execute the provisions of the definition. Prima facie, the recommendations given in the FATF addressed policymakers in the financial sector. Still, while examining the nature of offences, it requires other stakeholders also to take part in implementing the recommendations. For example, in certain contexts, terrorist financing requires military strategies to disrupt the flow of money. If the money is derived through economic resources, for example, Al-Shabaab, the Somalian-based territory-controlling terrorist group, received money through charcoal. In contrast, Al-Qaeda received money through crude oil, such activities must be prevented through military operations. According to Omenma,[5] there are two ways military activities have an impact on countering terrorism. Military actions will first deny terrorists the ability to control a region. Consequently, the terrorists’ economic resources for making money are also affected when they cannot govern areas. If recommendation 5 is comprehensive in its context, it is dedicated to detailing to the stakeholders about their role in countering the financing of terrorism.

Al-Shabaab, the Somalian-based territory-controlling terrorist group, received money through charcoal. In contrast, Al-Qaeda received money through crude oil, such activities must be prevented through military operations.

When it comes to countering the financing of terrorism, the provisions cannot be limited to money itself, as policymakers need to identify other less explicit but potential economic resources that could generate money for terrorist financings, such as real estate, crude oil, charcoal, valuable metals, and precious stones. On this premise, the international recommendation on countering the financing of terrorism needs to be revised to include access to economic resources as part of countering the financing of terrorism.

Tracing the Flow Of Money

What needs to be included in the definition of terrorist financing has to be identified by examining the (potential) sources of funds. Terrorist financing certainly includes cash, but how policymakers understand the origin of the cash of a terrorist financier can be quite problematic. In contrast to the offence of money laundering, terrorist financing includes both legitimate and illegitimate money, whereas money laundering captures only illegitimate money. It is, therefore, easier to determine the parameters of money laundering since what is prohibited by law is covered by the definition of money laundering. To revise the recommendation, what is captured in the offence of terrorist financing will depend on the ability of the policymakers to understand the source of funds. Granted that it is difficult to understand the source of funds, compliance officers can at least scrutinize customer transactions with the intention that they will be able to understand suspicious transactions, which may lead them to unveil the source of funds. On this premise, a further reason to revise the recommendation on terrorist financing is that it needs to evaluate the present system that identifies the source of terrorist financing.

The financing of terrorism in the form of cash is generally monitored through customer due diligence measures. Recommendation 10 of the FATF requires financial institutions to undertake customer due diligence measures when establishing business relationships and maintaining customer relationships. The customer due diligence measures are executed through a compliance officer who functions as a guardian to trigger suspicious financial transactions by detecting unusual and suspicious transactions.

Financial institutions are legally obliged to report suspicious transactions. Therefore, they work as gatekeepers in anti-money laundering and countering the financing of terrorism regimes.[6] As required by the customer due diligence rules, customers must provide identification details such as a full name, address, date of birth, mode of income, and expected turnover for the month with verification documents. Thereafter, the economic profile of the customer will be monitored through the transactions carried out by the customer. If the transactions are incompatible with the economic profile, the compliance officer is responsible for reporting the transactions to the respective country’s Financial Intelligence Unit.

Financial institutions are legally obliged to report suspicious transactions. Therefore, they work as gatekeepers in anti-money laundering and countering the financing of terrorism regimes.

Unfortunately, no specific definition is given to understand what constitutes a suspicious report. Therefore, countries adopt different approaches to flag suspicious reports. It can be argued that national money laundering and terrorist financing threats vary from country to country and from time to time: therefore, the FATF cannot provide an international definition of what is or would be suspicious. In Sri Lanka, for example, there is a paradigm shift in the terrorist financing threat from territory-controlling terrorist groups to small cells. On the other hand, what is suspicious depends on the context. The strength of the suspicious reports is vested in how the financial sector analyses what is suspicious and what is not. If the financial sector or reporting institutions cannot identify what is suspicious, the sources of terrorist financing may go undetected.

Further to the above, Halliday et al.[7] propose that detecting what is suspicious out of thousands of transactions may be difficult in the anti-money laundering regime. This situation is highly comparable to finding a needle in a haystack. One of the limitations of this statement is that Halliday et al. focused only on generating a suspicious transaction report and did not explain the mechanism of identifying suspicious activities themselves. All the FATF recommendations are or can be intertwined. In the FATF recommendations, there is a mechanism to identify what is suspicious; therefore, to trigger a suspicious report, the whole mechanism should be taken into consideration rather than one recommendation. As an example, in terms of recommendation 1 of the FATF, a country needs to have an overall and sector-wise risk assessment. The FATF further states that “based on the assessment, countries should apply a risk-based approach to ensure that measures to prevent or mitigate money laundering and terrorist financing are commensurate with the risk identified”.[8] In addition to recommendation 1, recommendation 10 also intersects with suspicious reports, as said recommendation deals with customer due diligence.

All the FATF recommendations are or can be intertwined. In the FATF recommendations, there is a mechanism to identify what is suspicious.

Although the FATF provides recommendations to identify suspicious activities, it does not provide a mechanism that needs to be followed to identify them. There are two possible approaches a financial institution could take. One method is to screen the customer against watch lists, freeze their funds, and file a suspicious report with the Financial Intelligence Unit. This can be referred to as the top-down approach. Another method is to trigger the suspicious activity first and then follow the money trail to identify the actor behind the transaction and report the suspicious activity to the Financial Intelligence Unit, which can be referred to as a bottom-up approach. The FATF policy has also been changed from a rule-based approach to a risk-based approach to identify high-risk customers and high-risk transactions, but this risk-based approach does not demonstrate a mechanism to follow up. Scholars analyse the shift from a rule-based to a risk-based approach mainly from the perspective of the cost of compliance.[9] Verhage discussed the practical framework of the anti-money laundering policy. In contrast, Silva discussed the effective measures that are in place to identify the money laundering and terrorist financing risks and threats. Verhage and Silva’s studies would have been more useful had they focused on how categorizing customers according to risk helps financial institutions identify what is suspicious.

In the top-down approach, customers are screened against watch lists or name screen alerts. Screening customers against a list seems to be a more straightforward method of tracing potential terrorists. As discussed in the TransUnion versus Ramirez[10] judgment in the USA, it is revealed that this procedure has generated several false positives. Credit rating agencies intend to screen customers against the US Treasury Department’s Office of Foreign Assets Control (OFAC) to deter terrorists, drug traffickers, or other serious criminals from accessing financing services. What is evident in this case is that, although financial institutions are legally obliged to screen customers, the screening process has to be executed prudently: if not, it can create detrimental effects on legitimate customers. This case revealed that the barriers need to be addressed in the long run when tracking terrorists and terrorist financiers.

In the bottom-up approach, financial institutions need to understand a particular person’s transaction patterns. To understand the patterns of transactions, the financial institution needs to know the economic profile of that customer and, therefore, needs to know the customer. In the banking system, it is not easy to know all the customers, as there is a broader spectrum of customers: one-off customers, non-face-to-face customers, and occasional customers. Meaning that, at best, only the transaction patterns of long-term customers can be assessed.

To understand the patterns of transactions, the financial institution needs to know the economic profile of that customer and, therefore, needs to know the customer.

Considering the plethora of customers and transactions, it is difficult to identify what is suspicious. As proposed by Verhage,[11] distinguishing suspicious activity from non-suspicious activity requires requisite skills, and acquiring these skills requires significant investment from the financial institution. The mechanism to identify suspicious activities becomes redundant due to the undetectable simplicity of terrorist financing in small cells and by lone actors.[12] When terrorist financing becomes undetectable, the simplicity of tracing a financial footprint for suspicious activities is made even more complicated.

One argument is that if the compliance officers search for unusual and suspicious activities, it may not cover the array of modes of terrorist financing as it will not include money that is generated through legitimate sources, e.g., salary, profits of businesses and donations. In such a situation, the exposure to terrorist financing through legitimate sources will be limited, and it will create doubt about what needs to be identified as a source of terrorist financing out of the thousands of legitimate transactions. Funding terrorist activities through legitimate money cannot be neglected because self-funding for terrorism is a growing threat worldwide. Mythen et al.[13] suggest that the 9/11 attacks, terrorist attacks and bombings on transport networks in Madrid and London manifest a new form of terrorism, which was carried out by self-funded terrorism. In self-funded terrorism, the perpetrators show little to no preparation for the attack or financial resourcing, so the present anti-money laundering and countering the financing of terrorism regime is unviable. Reimer and Redhead[14] put forward seminal arguments that stimulated much research in self-funding terrorism. Reimer and Redhead counter-argued that small cells and lone actors create financial traces. The challenge is that the mechanism to identify self-funded terrorism is still at the preliminary level. One of the recommendations made by Reimer and Redhead was to develop methods of obtaining financial information to be shared with the anti-money laundering and countering the financing of terrorism reporting agencies.

One of the challenges in defining terrorist financing is that, in certain contexts, the component of terrorist financing is negligible. When it comes to small cells or lone attackers, the cost of committing a crime is decreasing with the adaptation of suicide attacks. When acting in small cells or as lone attackers, the cost of crime is low or minimal, and it can be financed through legitimate funding such as salaries.[15] When terrorists fund their own activities, the terrorist and the terrorist financier are one and the same. In such a scenario, self-funding may be the only method to generate money for one’s own terrorist activities, and it is also noted that the funding needs naturally end with the attack. Considering the nature and gravity of self-funded attacks, the importance of self-funding as a method of terror financing remains viable.

When terrorists fund their own activities, the terrorist and the terrorist financier are one and the same. In such a scenario, self-funding may be the only method to generate money for one’s own terrorist activities, and it is also noted that the funding needs naturally end with the attack.

Globally, the landscape of terrorist financing changes with the self-starter phenomenon, characteristics of the terrorist organization, self-funded terrorism, and weapons of choice. However, financial institutions still rely on traditional counterterrorist financing policies. These countering the financing of terrorism policies were drafted as a result of the 9/11 attacks to identify large, complex attacks financed through the international financial system.[16] The policies above prove to be redundant in tracing the financial footprint of the small cells and lone actors as they use little to no money to fund their attacks as of the present day. So far, the anti-money laundering and countering the financing of terrorism policies have been studied from their ability to trigger suspicious reports[17] and cost-of-compliance perspectives.[18] They have largely ignored why the system is insufficient at detecting self-funding terrorism.

Conclusion

The intention of the policymakers was not only to bring terrorists before the court of law but also to enhance law enforcement investigative tools to prevent future crimes. In such a situation, what constitutes terrorist financing or not has to be clarified to apply the law to counter the financing of terrorism effectively. To overcome the problems related to financing terrorist activities, the 20-year-old international recommendation on countering the financing of terrorism must be revised. Some thoughts for improvement of the recommendation on international standards to counter the financing of terrorism are:

Countries should criminalize terrorist financing based on the Terrorist Financing Convention. Further, terrorist financing includes legitimate and illegitimate money and funding one’s own terrorist activities. Legitimate money may originate from one’s legitimate activities or be derived from legitimate sources, including bank loans, government benefit schemes, and unemployment benefit schemes. This definition covers utilizing economic resources, including natural resources that could be used to fund terrorist activities. In addition, countries should criminalize not only the financing of terrorist acts but also the financing of terrorist organizations and individual terrorists, even in the absence of a link to a specific terrorist act or acts or their own terrorist activities. Countries should ensure that such offences are designated as money laundering predicate offences.

[1] Featured Commission Publications, “The 9/11 Commission Report: Final Report of the National Commission on Terrorist Attacks upon the United States (9/11 Report),” https://www.govinfo.gov/app/details/GPO-911REPORT.

[2] Agus Santoso and Sylvia Windya Laksmi, “Regional Terrorism Financing Risk Assessment Framework: Southeast Asia and Australia,” Counter Terrorist Trends and Analyses 8, no. 10: 20-24.

[3] Idem.

[4] Stephen Reimer and Matthew Redhead “Financial intelligence in the age of lone actor terrorism,” CRAAFT_+RB3_Reimer+Redhead.pdf.

[5] J T Omenma, “Untold story of Boko Haram Insurgency: The Lake Chad Oil and Gas Connection,” Politics and Religion, 2020.

[6] J. Simser, “Money Laundering: Emerging Threats and Trends,” Journal of Money Laundering Control 16(1) 2013: 41-54; E. Ebikake, “Money Laundering: An Assessment of Soft Laws as a technique for Repressive and Preventive Anti-Money Laundering Control,” Journal of Money Laundering Control 19(4) 2016: 346-375; A. Verhage, Great expectations but little evidence: Policing money laundering, International Journal of Sociology and Social Policy 38 (7/8), 477-490, doi: 10.1108/IJSSP-06-2016-0076; P. G. Silva, Recent developments in EU legislation on anti-money laundering and terrorist financing, New Journal of European Criminal Law 10 (1), 57-67.

[7] Terence Halliday, Michael Levi and Peter Reuter, “Anti-money laundering: an inquiry into a disciplinary transnational legal order,” Anti-Money Laundering: An Inquiry into a Disciplinary Transnational Legal Order 4 UC Irvine Journal of International, Transnational, and Comparative Law 2019 (heinonline.org).

[8] The Financial Action Task Force Recommendations, “Financial Action Task Force,” FATF-GAFI.ORG – Financial Action Task Force (FATF).

[9] Idem.

[10] TransUnion LLC v Ramirez, 141 S Ct 2190 (2021).

[11] Idem.

[12] Idem.

[13] Mythen et al., “Why should we have to prove we’re alright? Counter-terrorism Risk and Practice Securities,” Sociology 47(2) 2012: 383-398.

[14] Idem.

[15] Michael Levi and Peter Reuter, Money laundering, Crime and Justice 34(1), 289 – 375; Terence Halliday, Michael Levi and Peter Reuter, “Anti-money laundering: an inquiry into a disciplinary transnational legal order,” Anti-Money Laundering: An Inquiry into a Disciplinary Transnational Legal Order 4 UC Irvine Journal of International, Transnational, and Comparative Law 2019 (heinonline.org).

[16] Reimer and Redhead, “Financial intelligence in the age of lone actor terrorism.”

[17] Idem.

[18] Idem.