Financing and Money Laundering of Terrorism

1. Financing and Money Laundering of Terrorism Instructor’s Comment: A thorough research of the related background information and issues, and an interesting and bold hypothesis

2. World Map of Nominal GDP per capita

3. Wealth and Terrorism • The map on the below displays the risk of terrorism in the all of the world's countries. • The map on slide 2 shows the Nominal GDP of the world's countries. • From the two diagrams there seems to be a correlation between countries’ wealth measured in GDP per capita and their Risk of Terrorism. • Indicating that regions with low income are most threatened by terrorism. +

4. Sources of Terrorist Financing • Monitory Inflows • Most terrorist organizations operate on a not-for-profit basis. • Most of their financing comes from a number of sources: • State Sponsorship (Various governments sponsor terrorist organizations for political reasons) • Donations from Civil or Religious Organizations • Individual Financiers (E.g. Osama bin Laden) • Extralegal Activities ( E.g sale of arms and narcotics, kidnappings, currency counterfeiting) • Investments (E.g. Islamic Banking, Trusts) • According the United States’ Department of State the 9/11 Terrorist Attacks on the Pentagon in Washington D.C and the World Trade Center in New York City cost $500 000 to orchestrate. • The United States government is concerned because it is relatively inexpensive to conduct terrorist activities and in many cases they can be funded by a small group of individuals. • Organized crime and terrorist groups both use legal organizations to conceal their illegal monetary activities. • Unlike other forms of organized crime the majority of terrorist organizations are not concerned with their bottom line; therefore, they are extremely dangerous as they can use all of the money at their disposal to do evil. While, organized crime is constrained by their desire to earn a profit.

5. Money Laundering Operations • Movement of Capital • Like all other organizations, terrorist groups utilize the services of accountants and lawyers to move their wealth throughout the world. They take advantage of the established channels for movement of their financial assets. • One method to move capital is by using smuggled diamonds. These diamonds are then sold and converted into cash. • A more sophisticated means to move capital is through ‘trade-based laundry’ which involves the use of commodities, fictitious invoicing and rigging trades. • In the Western Hemisphere the Black Market Peso Exchange is the greatest example of ‘trade-based laundry’. It is mainly concerned with reintroducing drug money into the financial system. • Black Market Peso Exchange the exchange mainly involves Columbian banks who purchase American Dollars and convert them into Columbian Pesos usually at 40% below the market exchange rate. • Then the banks deal with lawful contacts who want to import goods or services; hence, they want to purchase cheap dollars. These businessmen usually buy the American currency at 20% below the official exchange rate. When their accounts are settled the drug money is ‘laundered’ and reintroduced into the financial system. • The banks make a profit from the margin of which they buy and sell the currency.

6. Laundering Through Imports and Exports • Terrorist organizations also launder money through owning legitimate companies that engage in the imports and exports of goods. • They can make money by either overvaluing imports or underpricing exports. • If an import is overvalued there is a transfer of wealth from the importer to the exporter. Permitting the exporter which may be a terrorist organization to transfer money across borders unnoticed. • On the other hand, if export is undervalued then a terrorist organization converts its money into goods. The products are then exported to an overseas partner where partner sells the products at their market price; therefore, allowing money to be transfered across borders secretively. • Undervaluing exports is the most common way to launder money out of the United States. • Below are charts of that show items that are suspected to be used by terrorist organizations to launder money. 6

7. Purchasing Power Parity • Trade Barriers • One of the main reasons that terrorist organizations can use imports and exports as effective means of laundering money is because of the trade barriers that exist in most countries. • Many of the of the countries where money laundering is most prevalent have restrictive trade barriers . (E.g. Iran, Columbia, North Korea, Russia) • These barriers prevent Purchasing Power Parity from being established on a worldwide basis. • Such barriers often prove to be advantageous for all criminal organizations including terrorist groups. • As aforementioned terrorist groups are often affiliated with companies involved in enterprises involving imports and exports. Thus, the benefits that they get from underpricing exports can potentially be modified. • In some export cases the exports do not have to be undervalued. As tariffs and trade barriers exponentially increase goods’ market value in the country where the products are transfered. Therefore, these organizations are able to transfer their funds secretively across borders and even earn interest on them. • A possible solution to this problem is for the world’s countries to agree to enforce a free movement of capital for tradable goods. Thus, ensuring that Purchasing Power Parity holds and items are priced consistently throughout the world. • In addition measure would permit law enforcement to detect discrepancies in the prices of tradable goods more easily allowing them to investigate money laundering cases more efficiently.

8. Globalization as a Cause for Terrorism • Perceived Cultural Threat from the West • There are various causes for terrorism, such as: • Nationalism/ Separatism • Rebellion against government oppression • Religion • Desire for Political Change • Globalization • From the aforesaid causes the first four are straightforward; however, globalization is the more complicated. • Groups such as Al-Qaeda that advocate‘Jihad’ against the United States and its allies. Al-Qaeda often cites globalization as a major cause of its aggression. • Terrorism is used by these organizations to battle globalization which is seen by them as a substantial cause of poverty, illiteracy and a destroyer of cultural autonomy. • It is for this reason that reason that terrorist organizations reject capitalism, democracy and freedom (as commonly defined in the modern western world). • ‘Jihad’ advocates believe that many third world countries are exploited by the American doctrine of globalization. Furthermore, they see America as the primary enforcer of the modern economic system which oppresses many third world countries. • It is for this reason that failed states (E.g. Yemen and Afghanistan) pose the greatest terrorist risk to the United States.

9. Map of Sovereign States’ Current Account Surpluses and Deficits Map Key: Red- deficit (more imports than exports) Blue- surplus (more exports than imports) Grey- no dat Current account balance world figures, from CIA factbook, accessed April 2006.

10. Global Investment Trends and Terrorism • The Economics Behind ‘Jihadist’ Anti-Globalization Claims • In class we learnt that there is a strong negative correlation between a country’ current account and investment in that country. • From the map on slide 9 it clear that many countries that provide heavens to Al-Qaeda have positive (blue) trade balances. (E.g.Yemen, Indonesia, Lebanon, Syria, Algeria, Malaysia) Indicating that these countries most likely to lack the investment necessary for them to attain economic prosperity. Many countries that harbor ‘Jihadist’ organizations experience little to no economic growth. • Thus, providing at least a justification as to why they hate the United States, which is the most prosperous country in the world. They might rightfully believe that the United States is deflationary to their economies. • It is no coincidence that the United States also has the worlds largest trade deficit. Trade deficits are determined by: EX-IM = S-I + T-G. • The majority of the world’s investors are confident that the United States will be the most prosperous nation in the future that they want to invest large amounts of capital in it; hence, America cannibalizes the investment of the rest of the world. • One of the reasons that these countries might be inclined to harbor Al-Qaeda is that it at least provides some investment. For these countries unlike the United States investment is hard to come by so they are more desperate and are willing to sacrifice their morals for it. • In addition, they are more likely to be sympathetic to the idea of destroying the financial system of the modern world as they see themselves as the victims of this system; they have nothing to lose and everything to gain.

11. Surveillance of Terrorist Finances • Domestic Laws • Terrorist Financing has been a concern of global governments even before the 9/11 terrorist attacks on the United States. • In 1999 the United Nations passed the Terrorist Financing Convention after which a number of countries including France took measures to combat money laundering. • France amended its anti-money laundering laws to include terrorism. It created new procedures to increase bank transparency and freeze assets. • Since the 9/11 terrorist attacks, most of the world’s countries have taken measures to prevent terrorist organizations from laundering money within their borders. • The Russian Federation adopted a presidential decree criminalizing the funding of terrorism and freezing the assets of terrorist organizations. • In late October 2001 as a response to the attacks, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (also know as the Patriot Act) was passed in the United States. • The Patriot Act requires that Suspicious Activity Reports are filed by financial brokers and institutions when they suspect money laundering. Furthermore, this act expended the powers of American law enforcement to monitor foreign banks. • The Patriot Act also has punitive consequences for failure to comply reporting suspicious activities. These include the search and seizure of the funds that were either not reported or not reported properly. Moreover, the scope of the search and seizure is not limit to any currency or monitory instrument.

12. Surveillance of Terrorist Finances • International Laws and Organizations • Terrorist financing has been perceived as a crucial international issue since the United Nations’ 1999 Terrorist Financing Convention was passed. • In addition, in the aftermath of the 9/11 terrorist United Nation Resolution 1373 was adopted. This resolution criminalizes all terrorist financing activities and obligates all nations to prevent their citizens and companies from engaging in them. • The United Nations’ Security Council’s Counter Terrorism Committee was established to guarantee that all member nations abide by its anti-terrorism agreements. • In addition, there are a number of Financial Intelligence Units that monitor the financial activities most of the world’s citizens and banks. Mostly these are not law enforcement agencies but they collaborate with law enforcement to process information necessary for convictions. • An example of an of this type organization that operates on a global scale is the Egmont Group of Financial Intelligence Units. Its member organizations include: • Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) in Canada • Traitement du renseignement et action contre les circuits financiers clandestins (TRACFIN) in France • Australian Transaction Report & Analysis Centre (AUSTRAC) in Australia • Financial Intelligence Centre (FIC) in South Africa • Conselho de Controle de Atividades Financeira (COAF) in Brazil • Japan Financial Intelligence Center (JAFIC) • Federalnaja Sluzhba po Finansovomu Monitoringu in Russia • Zentralstelle für Verdachtsanzeigen in Germany • Financial Crimes Enforcement Network (FinCEN) in the US • These organizations among others all cooperate, under the Egmont Group’s leadership, sharing and managing information related to money laundering by criminal organizations such as terrorist groups.

13. Where Do Terrorists Choose to Invest? • Southeast Asia • All Asian states differ in how strictly they enforce Regulation 1373. • In most Southeast Asian countries, with the exception of Singapore, the domestic agencies that are supposed to enforce anti-money laundering legislation are underfunded and do not have the capacities necessary to carry out this task effectively. • Countries such as such as Cambodia and Thailand are reluctant to fight money laundering and terrorist finances for political reasons. • Cambodia is willing accept terrorist investments because of the lack of financial inflows into the country. • The citizens of Cambodia are resentful of the government tries to impose sanctions against the terrorist ‘charities’ that operate within the country. They see it as unjustified external influence from the United States which creates unwanted political instability in the country. • In addition, it is well documented that in Thailand around $2 billion dollars of drug money is laundered on an annual basis. The government is reluctant to fight money laundering because it is a large source of the countries prosperity and it will be difficult to replace. • Terrorists organizations choose to use these markets because they have the experience to launder their money efficiently; thus, the Southeast Asian markets have become some of the primary investment choices for terrorist organizations. • In his paper regarding this matter Zachary Abuza points out, the problem isn’t identifying the terrorist organizations or individuals “but in the in the bureaucratic politics once these funders are identified”. • Zachary Abuza presents the example that in 2003, 300 such entities or individuals were identified to be financing terrorism, but due to political games the list was narrowed down to 38.

14. Global Economic Impact of Terrorism • Terrorism affects the global economy in the following ways: • Diminishes the capital stock both human and physical. • Increases the economic uncertainly. • Results in increased counter terrorism measures which divert resources from more productive industries. • It has negative affects on the global tourism industry. • A study conducted to determine the economic impact of the 9/11 terrorist attacks on the United states economy found that there was a loss of 0.06% in the productivity of the US economy. • This had a long run negative impact of 0.3% on the United States’ Gross Domestic Product (GDP). • Alberto Abadie and Javier Gardeazabal have developed an economic model to determine the impacts of terrorism on the global economy. Their model predicts that terrorist risk affects the international investment of countries. • Moreover, their investigations point out there is a negative correlation between Foreign Direct Investment (FDI) over GDP and risk of terrorism. • Another way that terrorism is described in an MIT paper entitled ‘International Technologies for Control of Money Laundering.’ • This paper argues that the exchange rate of the American Dollar is effected by the international surveillance on the currency. There is less demand for this currency as both investors and terrorist organizations as they know it is being surveyed. This decreases the market value of the American Dollar. • There have been large controversies regarding breach countries’ of privacy laws as a result of financial surveillance. A recent example of this can be found in Belgium. • For investors this is problematic as they value their privacy and especially fearful of ‘information free-riders’ who could have negative impact on their investments.

15. Conclusion • The financing and money laundering of terrorism is a complex global issue that is of concern to all of the world’s citizens. • There does not seem to be a simple solution to this problem as in my many cases the prosperity of nations is directly linked to terrorist money. Due to the lack of investment these countries are often inclined to accept money intended for terrorism. • Since terrorist organizations are not-for-profit organizations they are far more willing to invest in regions that are underdeveloped are considered to be unprofitable by legitimate businesses. • The best way to combat terrorism in the long-term is to bring investment into the regions that foster terrorism. Thus, providing their governments with more incentives to fight the terrorist organizations that within their borders. • This could be accomplished through collaboration between first world’s governments and these regions’ governments. Treaties that encourage the expansion of trade and investment have to be crafted. • In the short-term, the political games within law enforcement agencies have to stop and all funds that are can be attributed to terrorism have to be frozen. • In addition, governments that have a priority to stop global terrorism (such United States and United Kingdom) should invest more money into the law enforcement of the countries where terrorist financing and money laundering is prominent. As these countries’ agencies are often poorly equipped and neglected by their domestic governments. • Ultimately this a global issue that has a direct impact on world prosperity and it requires a global solution that can only he achieved through the solidarity and the cooperation of all governments.

16. Work Cited Terrorist map:http://www.gccapitalideas.com/2010/06/16/terrorism-reinsurers-standing-by-part-ii-risks-threats-and-exposures/ GDP Map: http://www.econguru.com/2007-gdp-nominal-per-capita-world-map-imf/ Bentekas, Ian. “The International Law of Terrorist Financing.” The American Society of International Law 97 (2003): 315-333. http://www.state.gov/p/inl/rls/nrcrpt/2003/vol2/html/29843.htm http://www.hks.harvard.edu/fs/aabadie/twe.pdf http://www2.econ.uu.nl/users/unger/papers/Zdanowicz%202.pdf Zachary Abuza. “Funding Terrorism in Southeast Asia: The Financing Network of Al Qaeda and Jemaah Islamiya.” Contemporary Southeast Asia 25 (2003): 167-197. http://www.pbs.org/wgbh/pages/frontline/shows/drugs/special/blackpeso.html Map Trade Balances: http://commons.wikimedia.org/wiki/File:Current_account_balance_world.PNG http://www.imf.org/external/np/leg/amlcft/eng/aml1.htm http://www.un.org/en/sc/ctc/ http://www.egmontgroup.org/about http://www.lanl.gov/orgs/nso/docs/fy07/LA-UR-07-8046_Causes_of_Terrorism.pdf *All the journal articles I used are burned on the CD as PDFs in a folder next to the presentation.