This post will begin by defining money laundering, as well as explain terrorism funding before briefly exploring the origins of terror funding and the early efforts by the international community to stem the flow of terrorism money after 9/11. It will explore the way several nations, including the United States and Great Britain, are fighting money laundering to prevent the flow of cash to terrorist organizations and to stop the flow of money from illegal criminal operations into the coffers of terrorist organizations worldwide. The research will also include an exploration of the new and developing efforts in anti-money-laundering efforts.
Money laundering is a process of disguising profits from some sort of criminal activity, such as drug smuggling, human trafficking, or illegal commodity exporting, by concealing their origins and funneling them into legitimate accounts or products. When done effectively, the true source of the money – some type of criminal activity- is hidden (Chatain, 2004, p. 190). Accomplished in three stages, money laundering is first begun by placement. This refers to the dumping of illegal funds, either within the local economy or in the foreign market through placing the funds in a domestic or off-shore financial institution. It can also be used to purchase luxury goods such as paintings, real estate or precious metals or, in simpler times, carried on flight to a foreign destination. If goods are purchased, they are resold to gain payment through legitimate checks or wire transfers. Proceeds from illegal activities can also be converted to negotiable instruments, such as cashier's checks, money orders, or traveler's checks. Obvious obstacles stand in the way of simply depositing money, however, primarily when it concerns the United States. Provisions of the Bank Secrecy Act of 1970 require that financial institutions file a Currency Transaction Report when a person carries out one or more cash transactions in a single day which involve, in total, over $10,000. The Act also requires reporting when transactions valuing $10,000 or more are transported into or out of the United States (Lyden, 2003, pp. 205-207). The placement stage of money laundering is the most risky for criminals, because it involves the greatest likelihood of detection.
The second step is called layering, the purpose of which is to convolute the source of monetary funds through an intricate web of transactions that will further disguise any audit trails. This is often done through a series of wire transfers into different accounts, through trading in financial markets, or by transferring funds to offshore "shell" corporations that have been carefully established so as to conceal the identity of the owner. The Bahamas, Switzerland, the Cayman Islands, and Hong Kong, are frequently chosen for such schemes because they have lenient bank reporting laws (Lyden, 2003, p. 207).
The final stage of money laundering combines all of the illegal funds and allows the criminals free access to these funds. This step, called integration, is frequently established through obtaining loans from shell corporations or by exploiting bank privacy laws of some countries to use the deposits as collateral to obtain more loans (Russel, 2004, p. 260). This final phase returns the laundered money into expendable funds for the criminals typically to use in further criminal activities or to invest in legitimate businesses that continue to support organized crime. At this point, the money is usually safe from detection by authorities, because it has traveled through a sufficient number channels as to make it virtually untraceable. According to Malkin & Elizur, money that has been laundered is quite easy to find, but the trail to connect it to terrorist money is a long and difficult process. They state “[m]oney-laundering authorities follow the trail to a legal account from dirty money earned by drugs, prostitution, extortion, payoffs, or corruption on a grand scale” and then the resulting paper trail is followed to the account holder who is prosecuted for the crimes (Malkin & Elizur, 2002, p. 64). The push towards globalization has increased the flow of capital across borders and created a greater need to monitor possible money laundering schemes, particularly those that put money into the hands of terrorist organizations.
Terrorist funding or terrorism financing refers to any type of monetary support of terrorism or terrorist activities (Chatain, 2004, p. 190). This funding was destined to be connected to money laundering. In the early 1990s, some experts predicted the convergence of international terrorism and transnational organized crime. This indeed took place when terrorists simply imitated the criminal behavior, borrowed techniques from money launderers, such as credit card fraud, that is referred to as” activity appropriation” which can lead to more close connections between terrorists and professional criminals within a short time (Shelley & Picarelli, 2005, pp. 52-54). Without the large-scale funding gained through criminal operations such as drug running, operations and training for would-be terrorist events are much more difficult to carry out. Criminal activities in Paraguay, Brazil, and Argentina alone generate as much as 261 million dollars annually to fund Hezbollah, Hamas, and Islamic Jihad operations (Shelley & Picarelli, 2005, p. 65). Organized crime as a primary funding source for terrorism exists across the globe, from Russia, to Indonesia, South Africa, and beyond. Money laundering has become a highly sophisticated operation in itself to cover-up these criminal sources of terror funding.
Although laundering money through banks and other financial institutions, as well as through the sale and transfer of goods, was previously mentioned in detail this multi-layered, complex system is not the only way that terrorist cells are being funded. Money often moves through money transfer businesses such as Western Union and local storefronts called hawalas (Malkin & Elizur, 2002, p. 65). Money is transferred in small amounts so as not to be detected. Funds sent by usual, law-abiding customers, namely workers from India, Europe, and North America who send money home to their families, are indistinguishable from criminals sending money to terrorist organizations. At the hawalas, customers bring the cash that they want to send and they receive a receipt in return. The store manager faxes a code word to a trusted associate overseas, and the office there pays when the receiver shows up with the code word. This type of money transfer system has been around for centuries. In nineteenth century England, the Rothschild family banks worked much the same way. Any faxed evidence of these transfers is quickly destroyed, although papers found in Al Qaeda’s Kabul offices after the Taliban were chased from the Afghan capital implicated that cell in funding the October 12, 2000 attack on the U.S. destroyer Cole in the port of Yemen. Still the cost of this entire operation was only $10,000 – an insignificant amount that easily flew under the radar of any federal regulations on the reporting on money transfers (Malkin & Elizur, pp. 64-65).
One of the most notorious organizations that operate these types of money transfer services is Al Barakaat, a telecommunications and financial company in Somalia. Suspicion surrounds its owner and founder Shaykh Ahme Nur Jimale, whom the United States believes was connected to Osama bin Laden and used Al Barakaat offices to transmit money, intelligence, and instructions to terrorist cells. In November of 2001, international efforts put in place long before the attacks on September 11th helped suspend operations by Al Barakaat (Zagaris, 2002, pp. 69, 71). This was a significant show of cooperation among several countries including many European countries, U.A.E., Liechtenstein, and the Bahamas.
Even before the attacks on the United States by Al Qaeda operatives on the morning of September 11, 2001, the international community saw a need to collectively suppress terrorist funding. International money laundering has been a problem for generations and the current implications of these operations on terror funding has brought new challenges to disabling these operations and a greater imperative to track down money laundering schemes. In November of 2000, the United Nations Convention against Transnational Organized Crime (UNCTOC) adopted a definition of to money laundering as the “intentional conduct of the conversion or transfer of property, knowing that such property is the proceeds of crime” for the purpose of concealing the origin of the property; or the concealment of the “true nature, source, location, disposition, movement or ownership of or the rights with respect to property, knowing that such property is the proceeds of crime” (Sham, 2006, p. 380).
The renewed focus by the international community to stop this transfer of funds reached critical levels in a race to stay ahead of the money after the terrorist attacks in the U.S. on 9/11. Besides the danger to personal safety and security, both money laundering and terrorism are considered vitally important problems within the international community. Many countries have since enacted their own laws to prevent the funding of terrorist activities. China, for example, enacted legislation in December of 2001 that amended the criminal law of China. It extended the crime of money laundering to include a fourth category covering terrorist activities. It has also increased the penalty of serious cases of money laundering which involved the units or persons directly in charge or responsible to a sentence of at least five years imprisonment to a maximum of ten years imprisonment (Sham, 2006, p. 393). Money laundering basically did not exist before China opened up its economy in 1978, but the country has found many ways to curb the activities by increasing penalties and setting up departments to detect and stop operations at the earliest stages.
In the United States, even before 9/11, banks and other financial institutions have been required to report large monetary transactions. The primary method of doing this is the Suspicious Activity Report. The SAR is a tool that banks use to report any transaction that “has no business or apparent lawful purpose or is not the sort in which the particular customer would normally be expected to engage.” Unfortunately, since this is basically a judgment call, authorities are inundated with so much paperwork that there is just no way to monitor all of it effectively (Malkin & Elizur, 2002, p. 62). Efforts have been made to open up the flow of information among agencies, allowing more regulated and required sharing of intelligence across multiple industries and government organizations. A newer Patriot Act law also prohibits anonymous account holders and prevents American banks and finical firms from accepting money for so-called shell banks. These are banks established at offshore island locations expressly for covering up the identity of account holders and to escape the watchful eye of federal overseers. The law also blocks U.S. banks from accepted bundled deposits from numerous different sources because this makes it impossible to distinguish legally obtained funds from criminal funds. Another important but little noted policy now requires that high-end businesses ranging from Mercedes dealers to Tiffany’s are also subject to federal reporting of transactions in excess of $10,000 (Malkin & Elizur, p. 62). This information must be shared upon request with other agencies fighting money laundering and terrorism and can no longer be held by the Internal Revenue Service. All anti-money laundering efforts currently fall under the U.S. Treasury Department’s Enforcement Division.
The success of anti-money laundering operations, laws, and activities depends not only on individual countries regulating their own financial activities, but also on an international level of oversight on global trade and banking. On a larger international level, the United Nations, the Organization for Economic Co-operation and Development, the Financial Action Task Force (OECD/FATF), the World Bank, the International Money Fund (IMF), and Interpol are all working to create and enforce legislation by member nations to cut off terrorism where it has the most impact, financially (Shehu, 2005, p. 221). By strengthening international cooperation, the goal is to prevent the flow of money to terrorist organizations. This combined multi-national partnership works in conjunction with implementing the universal criminalization of money-laundering, increased efforts to trace, freeze, and confiscate proceeds of illegal activity, and the application of regulatory tools to thwart the use of the financial system for the purpose of money laundering (Arnone & Borlini, 2010, p. 240).
In July of 2010, President Barak Obama signed into law the Dodd–Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act). This legislation covers many financial policies, but most relevant to federal oversight of anti-money laundering procedures is the Private Fund Investment Advisors Registration Act of 2010 (Private Fund Act) which brings investment advisors who manage private funds, private equity funds, hedge funds, and real estate funds under the same type of reporting and record-keeping requirements as companies currently registered with the Securities and Exchange Commission (SEC). (Reider-Gordon , 2011, p. 365).
Put into action in July of 2011, the Private Fund Act requires that SEC-governed registrants will now have to provide evidence that they are complying with current legislation to write and implement anti-money laundering policies and monitoring programs. The new regulations add an extra layer of coverage on top of existing compliance programs already in place.
While these new laws affect the way banks and financial institutions in the United States do business, other countries are also enacting their own policies, procedures, and legislation to combat money laundering within their own borders and also to regulate how they do business with the United States and other nations. The United Kingdom recently began implementing the U.K. Bribery Act of 2010 (the Bribery Act), which went into effect in April of 2011. The Bribery Act impacts not only U.K. companies, but also financial institutions and companies in the U.S. The Act demands that financial institutions have a duty to disclose funds deposited and being held in their institutions that may have resulted from bribes. Although it is not mandatory for an institution or company to disclose the actual act of bribery itself, if bribery money flowed through a company and the bank failed to report it, the company would in all likelihood prompt the money laundering act and the Bribery Act to go into effect (Reider-Gordon, 2011, p. 370). This is significant to anti-money laundering measures because under United Kingdom financial law, money laundering offenses are inclusive with any type of property derived from criminal conduct such as drug trafficking or dealing in stolen goods. Therefore, if an act of bribery has occurred, there is a great likelihood that some form of money laundering of the profits from the bribery has taken place as well and companies will be held responsible. This responsibility will be extended to include bankers, accountants, and financial investment advisors who will now have the additional risk of being prosecuted for failure to report instances to the authorities where they suspect or should have suspected money laundering by their clients (Reider-Gordon, p. 370).
Australia has also made several amendments anti-money laundering legislation concerning customer identification. Specifically, three new chapters were added to the anti-money laundering (AML) / counter-terrorism funding (CTF) laws. One of them addresses the possibility that other sections of the AML/CTF Rules may not be possible under certain special circumstances, such as with stockbrokers, where “the transaction may have to occur before customer identification procedures can be accomplished due to the speed of market conditions and demands” (Reider-Gordon , 2011, p. 368). Financial institutions may now have up to five days after the transaction to identify the customer and report it through the proper channels. Another new law, Chapter 48, simplifies reporting regulations that state that the "reporting entities that provide salary packaging administrative services for an employer client," do not need to be included if the transaction does not consist of "physical currency" (Reider-Gordon , 2011, p. 368).
There are many who argue that the international efforts that are currently in use are too slow and insufficient to actually prevent terrorism (Malkin & Elizur, 2002, p. 64). The benefit of the legislation is in catching the perpetrators of money laundering only after the fact. While it is critical to the fight against terrorism to cutoff the terrorists’ financial lifelines, the most critical of which is monetary funding, it is very difficult to track money that will be used for future attacks or training. This would require a fair amount of guess work and the increasingly difficult art of staying ahead of the money as it comes through countless different channels and from multiple individual sources. Creating the proper infrastructure to undertake any counter-terrorism financing enforcement requires that law enforcement officials be prepared to deal with enforcing financial law, to be experienced in financial enforcement, and to be very knowledgeable about terrorism and money-laundering activities (Zagaris, 2002, p. 55). Cooperation with worldwide law enforcement officials is also key, as well as intelligence sharing among jurisdictions and across international borders.
This post has touched only briefly on a very complex issue that will not likely be solved anytime soon, but has highlighted efforts to combat the money laundering schemes that have been funding terrorist organization and propagating deadly attacks on foreign and domestic ground. Defining the process of money laundering is simple. It is the untangling of the multi-layered financial processes that the United States, European countries, and the rest of the world must struggle to do to track down these criminal operatives before they get a chance to build wealth. The United States has been deeply affected by deadly terrorist attacks on our own soil and on our citizens abroad; but we must not forget that many other countries face similar attacks and threats not only from Islamic extremist organizations such as Al Qaeda, but from other smaller terrorist groups. Money laundering to fund these terrorist activities is something that can be targeted by every nation to prevent a mass build-up of terrorist forces. Excellent relations with federal and state officials in our counterpart foreign law enforcement agencies, including the Financial Investigative Unit (FIU) found in most countries that are responsible for conducting anti-money laundering investigations and prosecutions, are useful to combat the funding of terrorist organizations (Zagaris, 2002, p. 55). International cooperation has always been important to ensure we manage criminal activity even within our own borders and will continue to be critical in the war on terror.
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