Money Laundering and Terrorism Financing

Terrorist organisations often rely on funding from various sources, including criminal activities, such as drug trafficking, kidnapping and extortion. This money, like any other illicit funds, needs to be laundered to make it appear legitimate and minimise the chances of detection by the authorities.

Criminal money is sometimes referred to as ‘dirty’ money and the act of laundering makes it appear ‘clean’.

Introduction

The threat of terrorism continues to be a global concern, with the financing of these activities often linked to money laundering.

Currently there are 80 terrorist organisations proscribed in the UK under The Terrorism Act 2000. According to the UK government, an organisation will be prohibited and placed on this list by the Home Secretary if there is a legitimate concern that the organisation is involved in terrorist activities and it is ‘proportionate’ to do so.

This means that the organisation:

Participates in, plans or commits acts of terrorism
Promotes, encourages and/or glorifies terrorism
Is otherwise concerned with terrorism

It is an offence to belong to these proscribed groups, invite support for them or arrange meetings on behalf of the organisation. It is also an offence to financially support a proscribed terrorist group.

Understanding money laundering

Money laundering is the process of disguising the origins of illicit funds, often derived from criminal activities such as drug trafficking, fraud and extortion. The methods used in money laundering can be complex, involving multiple transactions, shell companies and offshore accounts to conceal the true source of the funds.

Criminals will sometimes use what appears to be a legitimate business as a ‘front’ for their activities. They will put parts of their illicit money through the books of this business, making it appear to be ‘clean’ and legal money.

Terrorism financing explained

Terrorism financing refers to the funding of terrorist activities, which can include both legal and illicit sources of funds. You are said to have funded terrorism if you directly or indirectly, unlawfully and willingly, collected or provided funds to be used by a proscribed terrorist organisation.

Terrorist organisations rely on a variety of methods to generate revenue, such as extortion, kidnapping, drug trafficking and government corruption. These funds are then used to finance their operations, including the purchase of weapons, recruitment and propaganda.

Terrorist organisations are backed and funded by their members and supporters. Many times, this is done through crime and illegal activities. Sometimes, terror groups are state-sponsored or receive money through ‘legitimate’ means.

Some legal sources of funding for terrorist organisations can include:

Charitable organisations: Terrorist groups may exploit charitable organisations to funnel funds to their activities. They may infiltrate these organisations or create front organisations to collect donations and divert the funds to their operations.
Businesses and investments: Terrorist organisations may establish or invest in legitimate businesses to generate income. These businesses can range from small-scale operations to larger enterprises, such as real estate or construction companies.
State sponsorship: In some cases, terrorist organisations may receive financial support from state sponsors, which can be in the form of direct funding or indirect assistance, such as providing training, weapons or logistical support.
Crowdfunding and online platforms: Terrorist organisations may use crowdfunding and online platforms to solicit donations from supporters. These funds can then be used to finance their activities.

It is essential for governments, financial institutions and individuals to remain vigilant and identify any suspicious activities related to the legal funding of terrorist organisations, as these sources can be just as critical in enabling terrorist activities as illicit sources (and will often be easier to locate and track).

The intersection: How money laundering facilitates terrorism financing

Money laundering and terrorism financing are often interconnected, with illicit funds being laundered to disguise their origins and make them appear legitimate. This allows terrorist organisations to move funds across borders, avoid detection and finance their activities.

Terrorism is highly illegal, therefore the people involved with it want to avoid getting caught. By using complex financial systems and money laundering techniques, less of a paper trail is left behind. The goal of these criminals is to avoid detection. By using illicit funds and laundering money, these organisations are able to receive significant financial backing to help them to:

Buy weapons (including guns, bombs and biological weapons)
Purchase items to be used in terrorist attacks (such as chemicals)
Carry out attacks
Create media and propaganda items to attract more members
Run terrorist training camps
Buy vehicles to use for transporting illegal goods and people and to use as weapons in their attacks
Take part in human trafficking rings
Buy anything else they require to sustain themselves and their organisation

Example of money laundering

In 2023, a Lebanese art collector, Nazem Ahmad, was accused of multiple charges including:

money laundering, and
violating terrorism related sanctions

after the US government had identified him as a financier of Hezbollah.

Ahmad’s case made history in the UK, with the government utilising new domestic counter-terrorism powers to freeze all of his assets and economic resources for the first time.

He is alleged to have laundered significant amounts of money, avoided sanctions placed on him in the US and moved millions of pounds in diamonds in and out of the country. It is reported Ahmad utilised his high-end art collection (rumoured to have contained an original Andy Warhol painting) and collections of rare gems to launder money to send to a terrorist organisation.

Sanctions were placed on him in 2019 due to his role in financing the terrorist group Hezbollah, both through money laundering and providing funds directly to the organisation. After the sanctions were enforced, Ahmad and his network continued to ship high value art and goods (worth over an estimated $400 million) in and out of the US and he transferred at least $6 million of his criminal proceeds to his native Lebanon.

Hezbollah is an Iran-backed Shia-Islamist military and political group based in Lebanon.

Regulatory frameworks and global efforts

In response to the growing threat of money laundering and terrorism financing, international and national regulatory frameworks have been established. Checks, balances and legislation make it more difficult for criminals to get away with their activities.

Countries that have weaker laws or ineffective controls are attractive to money launderers. This is because they can exploit these systems and move money around without being traced. This is why a global commitment to stopping money laundering is vital.

Organisations to note:

International Monetary Fund (IMF) – the IMF have been committed to combatting the financing of terrorism (CFT) through money laundering for decades. They expanded their anti-money laundering (AML) efforts in 2000 and extended them to address CFT after the devasting 9/11 terror attacks
Financial Action Task Force (FATF) – the FATF play a crucial role in setting standards and guidelines to combat these activities. They have the primary responsibility for shaping worldwide standards for AML/CFT.
US Department of the Treasury – they play a critical role in the identifying and sanctioning of the support networks of national security threats, including asset freezing and forfeiture. They also initiated the Terrorist Finance Tracking Program to help identify and pursue terrorists which has led to the prevention of (and investigation into) multiple violent terror attacks in the past ten years.

Key pieces of legislation relating to AML and CFT include:

EU Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) policy
The UK’s Money Laundering, Terrorist Financing and Transfer of Funds Act 2017, Proceeds of Crime Act 2002, and The Terrorism Act 2000
The US’s Bank Secrecy Act and The Patriot Act and The Anti-Money Laundering Act (AMLA) 2020
Switzerland’s Federal Act on Combating Money Laundering and Terrorist Financing in the Financial Sector 1997
Hong Kong’s Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO) and the Banking Ordinance (BO)

Challenges and evolving tactics

Criminals and terrorist organisations are constantly adapting their tactics to evade authorities. The rapid development of technology and the increasing interconnectedness of the global financial system present significant challenges in detecting and preventing money laundering and terrorism financing.

In the criminal underworld, cash is still king; however, the development of digital currencies, or cryptocurrencies, is beginning to change the scope and landscape of criminal financing.

One of the most significant issues in the war on terror financing is the global nature of the problem and the varying legislation and protections that financial institutions impose around the globe. A continued and concerted effort is needed, across all countries, to strengthen safeguards, monitor compliance and identify both rogue nations and individual terrorist facilitators.

Without a collaborative approach, criminals, including those who finance terrorism through money laundering, will continue to exploit weak links in the financial chain.

The role of cryptocurrency

Digital money, also known as digital currencies or cryptocurrencies, plays a role in modern-day money laundering and terrorism financing. While digital currencies offer numerous benefits, such as faster transactions and lower fees, their decentralised nature and relative anonymity make them attractive for illicit activities.

Digital money might be attractive to criminals who want to launder money to finance terrorism for various reasons:

Anonymity: Cryptocurrencies, like Bitcoin, offer a degree of anonymity to users, making it more difficult for authorities to trace transactions and identify the individuals involved. This can make it easier for criminals to launder money and finance terrorist activities.
Cross-border transactions: Digital currencies allow for quick and easy cross-border transactions, which can be useful for moving funds across borders without detection. This can facilitate money laundering and terrorism financing.
Peer-to-peer transactions: Cryptocurrencies enable peer-to-peer transactions without the need for intermediaries like banks. This can make it more challenging for authorities to monitor and detect suspicious transactions related to money laundering and terrorism financing.
Dark web: Digital currencies are often used on the dark web, a hidden part of the internet where illicit goods and services are traded. Terrorist organisations may use the dark web to raise funds or purchase resources for their activities.

In October 2023, US Deputy Treasury Secretary Wally Adeyemo warned cryptocurrency firms that if they did not take steps to prevent “illicit financial flows” that the US government would. His speech followed a letter penned by Senator Elizabeth Warren, where she cited a report claiming that the terror groups Hamas and Palestinian Islamic Jihad had raised in excess of $130 million in cryptocurrency in recent years.

The role of financial institutions

Financial institutions have a vital role to play in combatting money laundering and terrorism financing. They must implement robust customer due diligence (CDD) and Know Your Customer (KYC) procedures to identify and report suspicious activities. This includes background checks, identifying politically exposed individuals and conducting risk assessments for criminal activity.

Threats of terrorism increase the political and social instability of a region. By understanding the connection between money laundering and terrorism financing, banks and other institutions can make changes to combat these threats and protect both local and global security. By making these connections, flagging suspicious transactions and conducting due diligence, financial institutions can detect and disrupt terror financing.

It is important that those tasked with monitoring compliance and recommending changes are able to keep up to date with new mechanisms that are being developed through technology. Technological advancements are increasingly being exploited for criminal gain and many countries are still under-resourced when it comes to digital literacy.

The FATF plays a key role in global efforts to tackle terrorist financing. They also publish guidelines on tackling the issue to try to support countries around the world who are struggling with trying to implement measures to combat money laundering and terror financing.

The FATF work closely with other institutions such as:

World Bank
United Nations (UN)

Financial institutions, public and private sector businesses, stakeholders and individuals have a role to play in combating money laundering and terrorism financing. This includes:

Investing in education, training and software
Implementing robust anti-money laundering (AML) regulations
Counter-terrorism financing (CTF) regulations
Sharing information
Staying up to date with key developments
Reporting suspicious activity
Raising awareness

Combatting the link

Governments, financial institutions and individuals can take various measures to combat the link between money laundering and terrorism financing. These include:

Implementing and enforcing strict anti-money laundering (AML) and counter-terrorism financing (CTF) regulations.
Strengthening international cooperation and information sharing among financial institutions and law enforcement agencies.
Raising awareness among the public and private sectors about the risks associated with money laundering and terrorism financing.
Encouraging the development of innovative technologies to detect and prevent financial crimes.

Governments and financial institutions have become increasingly aware of the risks associated with digital currencies and are implementing measures to combat their use in money laundering and terrorism financing. These measures include (but are not limited to):

Regulatory frameworks: Governments are introducing regulations to monitor and control the use of digital currencies, requiring exchanges and other service providers to implement Know Your Customer (KYC) and anti-money laundering (AML) procedures.
Collaboration: Financial institutions and law enforcement agencies are working together to share information and develop strategies to detect and prevent the misuse of digital currencies for illicit activities.
Technology: Developing advanced analytics and artificial intelligence tools to identify suspicious patterns and transactions in digital currency networks.
Staying up to date with new trends and new developments so they can identify weaknesses or close loopholes before they are utilised for criminal means.

To recap, money laundering is the process of disguising the origins of illicit funds, often derived from criminal activities. Terrorism financing refers to the funding (financial backing) of terrorist activities, which can include both legal and illicit sources of funds. Money laundering and terrorism financing are often interconnected, with illicit funds being laundered to disguise their origins, making them appear legitimate and reducing the chances of being identified by the law. Digital currencies, like Bitcoin, can be used in money laundering and terrorism financing due to their decentralised nature and relative anonymity.

To continue to combat the global issue of money laundering that funds terrorism, it is essential to promote an approach that favours understanding, collaboration and regulation. This means sharing information, making legislative changes and supporting countries that have vulnerabilities in their financial frameworks.