What is Terrorist Financing?

by the Financial Intelligence Unit Fri, Mar 30. 2012

Individuals in the United States are moved by an advertisement on television to donate funds to the ‘Save the Forest Fund’, a non-profit organization set up to provide funding to orphans in Haiti. Caring, unsuspecting individuals make donations to an account in First Bank in the United States. At the end of each week, the funds are accessed by an individual in Tehran and funneled to an account in Afghanistan. Money is consistently withdrawn via ATM Machine and distributed to terrorist cells who purchase weapons and equipment.{{more}} Two (2) weeks later a parked car is detonated outside the United States Embassy in Syria.

Terrorist financing provides funds for terrorist activity. It may involve funds raised from legitimate sources, such as personal donations and profits from businesses and charitable organizations, as well as from criminal sources, such as drug trafficking, smuggling of weapons and other goods, fraud and kidnapping.

Terrorists use techniques like those of money launderers to evade authorities’ attention and to protect the identity of their source and of the ultimate beneficiaries of the funds. However, financial transactions associated with terrorist financing tend to be in smaller amounts than is the case with money laundering, and when terrorists raise funds from legitimate sources, the detection and tracking of these funds becomes more difficult.

To move their funds, terrorists use the formal banking system, informal value-transfer systems and the oldest method of asset-transfer, the physical transportation of cash.

Difference Between Money Laundering and Terrorist Financing

There is a subtle but important difference between terrorist financing and money laundering activities. Money Laundering is the term used to describe the use of the financial system by criminals to hide the source of funds gained from illegal activity such as drug trafficking, theft, fraud or other criminal activity, as the criminals try to make their ill-gotten gains appear legitimate.

In summary, Money Laundering is about turning dirty money into clean money. Terrorist Financing can be the opposite of this in that clean money (often in legitimate donations to charities) is misdirected by account holders to their criminal colleagues in what appear to be legitimate activities.

Threats and Effects on Financial Institutions

The reputation of a financial institution can be significantly damaged by the implication that it has been used as a conduit to provide funds which have been used to finance a terrorist act. Even if the institution is an innocent participant, the very link of its name to death and carnage can be damaging. The institution, therefore, needs as much help as possible to identify and exclude known terrorists from its business and also indentify criminals who may have slipped through the cracks by conducting ongoing customer due diligence (CDD).

There are two aspects in which a financial institution can protect itself from the risk of both money laundering and terrorist financing. Implementation of strong Know Your Customer (KYC) policies and continued verification of accounts and transactions. KYC describes the means by which the identity, background and other aspects of potential customers can be checked, so that known and suspected terrorists can be excluded. The Proceeds of crime and Money Laundering (Prevention) Regulations require institutions to obtain evidence of identity of a customer at the account opening stage and to keep a record of that evidence for as long as there is a relationship with a customer and for a period of seven (7) years thereafter.

Institutions are also required to keep up to date knowledge of a customer throughout the life of the relationship, so that changes in the customer’s activity can be assessed and dealt with – all with the principal aim of preventing Money Laundering and Terrorist Financing.

Good quality KYC policies will ensure that an institution knows the background of an individual customer as well as the identity and background of the shareholders and key principals behind a corporate entity or joint venture. This allows the risk-aware financial institutions the comfort in knowing that the institution is not exposing itself to excessive risk of being used by criminals to finance terrorism

Fighting Terrorist Financing

The terrorist attacks in New York and Washington in 2001 provided the impetus for the implementation of robust and wide ranging laws to counter the financing of terrorism (CFT). National legislation and international cooperation is needed to target those who finance terrorist networks, be they charities, businesses, individuals or even states which provide finance and sanctuary to terrorists. In all, major jurisdictions around the world, criminal legislation and regulations make it an offence (often criminal) to make funds available to an individual or corporate entity for the purposes of terrorism. St. Vincent and the Grenadines is no different.

In St. Vincent and the Grenadines, the piece of legislation implemented to fight terrorism and its financing is the United Nations (Anti-Terrorism) Measures Act, Chapter 183 of the 2009 Revised Laws, adopted in 2002.

The Financial Action Task Force has also included specific Recommendations and guidance on terrorist financing. Since October 2001, the Financial Action Task Force (FATF) mandate includes terrorist financing. A ninth Special Recommendation was added in June 2004. The Special Recommendations may be accessed on the FATF’s website www.fatf-gafi.org.

Whilst there are no known instances of terrorist financing in St. Vincent and the Grenadines, it is still incumbent upon us as a nation to be aware of the threat of terrorism and its financing. Only increased global awareness and cooperation can curb this threat. Locally, you can do your part by being aware. Financial institutions, know your customers! Be aware of unusual or suspicious transactions and make reports to the Financial Intelligence Unit, the entity responsible for investigating this offence in conjunction with the Royal St. Vincent and the Grenadines’ Police Force. Help us in this fight as we seek to make St. Vincent and the Grenadines a safer place for all.