The banking sector continues to be the most reliable and efficient way to move funds internationally, and remains vulnerable to Terrorist Financing (TF). The low value of funds often used by terrorist financiers, and the size and scope of financial flows make these transactions more challenging for financial institutions to identify.
Different types of banking pose different types of TF risk. Correspondent banking is particularly vulnerable as there is a higher likeliness of incomplete information in relation to ultimate originators and beneficiaries of cross-border transfers. Retail banking that allows for person-to-person fund transfers can be misused by terrorist supporters moving funds to terrorist targets overseas.
Characteristics indicating a higher risk of TF involvement of a corporate customer include cash-based businesses that could be shell companies. For individual customers, signs include little knowledge or reluctance to disclose information about the payee or recipient and involvement in transactions with no obvious ties to the destination country without further explanation.
Terrorist financing risks, and how terrorist organisations raise and move money, also greatly depends on jurisdiction. Although it is easy to associate TF with organised crime and human trafficking, these are not necessarily the main source of funding for terrorist organisations in all jurisdictions. However, in jurisdictions where organised crime and human trafficking are widespread, these are often methods used for TF[i].
Some jurisdictions also have a widespread use of money or value transfer systems (MVTS), with a portion of that being unlicensed and therefore unregulated. These underground banking systems exist in several regions of the world, particularly in China and India, and are thought to be used for terrorist financing.
One example of an underground banking system is Hawala, which is an alternative remittance system operating outside of traditional financial channels and offers a faster, cheaper way to transfer money across borders with less paper trail[ii], providing an ideal environment for terrorist financing.
Although some TF happens through organised crime, human trafficking and unregulated money transfer systems (such as the Hawala), it is believed that the majority takes place through regular banking transactions. A FATF 2014 Afghan drugs trafficking report noted that the Taliban are believed to have used the regulated banking system (as well as money service businesses) to move the proceeds from drug trafficking[iii].
What specific products, clients and transactions pose a greater risk of TF and how can financial institutions spot and report these?
Funds used for TF often originate from legitimate sources such as a salary. A terrorist financier may transfer part of their salary to family members or acquaintances overseas with the intention of supporting a terrorist organisation. The money may be (and often is) used for rent and food for the members of the terrorist organisation, making it very challenging for financial institutions to identify the transactions as illicit. Members of the terrorist organisation can then use means obtained locally to pay for weapons or finance the planning of an attack.
Past FATF reports have identified the use of pre-paid cards for TF purposes, although this has been disputed by other sources, such as author of “Illicit Money: Financing Terrorism in the 21st Century”, Jessica Davis. She has claimed the use of pre-paid cards does take place but is “pretty limited”[iv]
Traditional banking products can be abused for terrorist financing. For example, a supporter of a terrorist group can open a savings account and give the debit card associated with the account to members of a terrorist organisation for overseas cash withdrawals[v]. In this instance, if the financial institution has a well-functioning transaction monitoring system in place, unusual behaviour like repeated cash withdrawals from a country where the account holder does not reside should create an alert and can be reported to the relevant authorities.
Digital assets, such as cryptocurrencies, may also pose a significant illicit finance risk. These provide a higher level of anonymity and has been less regulated than more traditional transactions and currencies. Governments are increasingly recognising the need to regulate digital assets and many governments are working on launching digital currencies. China has already launched theirs; the US and EU digital currencies are underway[vi].
In 2018, FATF expanded the scope of its recommendations to also apply to virtual asset service providers (VASPs)[vii]. Following this, the Joint Working Group on interVASP Messaging Standards developed a new technical standard (interVASP Messaging Standard IVMS 101), outlining required originator and beneficiary information between VASPs. Standardisations such as this are instrumental in helping financial institutions identify potential terrorist financing. In conjunction with the creation of national digital currencies and standards, the private sector is developing software- and expertise to aid financial (and non-financial) institutions in their effort to prevent terrorist financing.
At Contineo we have the subject matter expertise as well as proprietary software with the ability to identify money laundering and the movement of potential illicit money using traditional methods as well as newer technologies such as cryptocurrencies.
[vi] : https://www.acfcs.org/in-new-u-s-crypto-executive-order-tethers-to-fincrime-compliance-global-investigations-sanctions-busting-cyber-fraud-and-potential-preview-of-digital-dollar-dominance/