Source:
http://www.antimoneylaunderinglaw.com/2014/09/islamic-state-who-finances-isis-and-bank-risk-factors-for-terrorist-financing.html
By Christine Duhaime | September 29th, 2014
Terrorist groups are not a financial island
Christine Duhaime, B.A., J.D., Certified Financial Crime Specialist
Christine Duhaime is a Canadian lawyer, writer and
frequent speaker on financial crime (including counter terrorist
financing) and financial technology and innovation issues.
Updated October 18, 2014
When it comes to terrorist financing, the statement “no man is an
island” is fitting except that in this case, it may be more accurate to
say that ”no terrorist organization is a financial island”.
The financing of terrorism presently involves the use of our banks
and the larger global financial system. Money and value goes in and out
of Syria and Iraq for and from the Islamic State (“ISIS” or “ISIL” in
the US) and their leaders, most of it attached in some way to accounts
at financial institutions.
As a result, it may be easier both to detect and stop the flow of
funding to IS if we are willing to invest in the technology and manpower
to do so.
Here is a synopsis of what we know about terrorist financing
involving the Islamic State and what financial institutions, governments
and private enterprise actors can do to mitigate the risks of terrorist
financing and the attendant threats to international security.
There are generally three significant baskets of terrorist financing
taking place in respect of IS that engage external states and their
financial institutions.
The first is the sale of crude oil from Iraq and Syria from oil
fields acquired by the IS, sometimes referred to as terrorist oil; the
second is funding from individuals in developed countries to IS directly
and indirectly; and the third is self-funded activities such as ransom
payments from the kidnapping of foreigners, taxes imposed on businesses,
Christians and financial transactions in captured territories, stolen
currency and gold from banks and the sale of looted goods.
According to experts, IS has over $2 billion in cash in the coffers and as well as an unknown amount in banks.
How IS initially was funded is another story but according to the US
Treasury, a lot of it was from private donations from people in Qatar
and Kuwait, in particular from charities. In 2013, Qatari authorities
apparently only filed one suspicious transaction for the whole country
yet some of its richest individuals paid million of dollars in cash and
via wire to IS. A fundraiser known as Tariq Al Tunisi is alleged to have
arranged for IS to receive $2 million from Qatar in one transaction
alone, which flowed through the financial system unimpeded.
Another fundraiser from Qatar, Abd al-Rahman bin Umayr al-Nuaymi is
alleged to have sent more than $1 million per month to an al-Qaeda group
that morphed into the Islamic State. Al-Nuaymi was an advisor to the
Qatari government and was placed on the US sanctions list in December
2013 and only recently placed on the UK list.
1. Terrorist oil sales
The bulk of the terrorist financing to IS is generated by terrorist
oil sales, hence the impetus to destroy oil and gas infrastructure
controlled by IS because it will remove the most significant source of
revenues necessary for their operations.
It is not possible to traffic in terrorist oil without the
involvement of, and support from, western financial institutions whether
unwittingly or not.
According to US intelligence and Hisham Alhashimi, an IS expert in
Iraq, ISIS earns approximately $150 million per month from the sale of
crude oil sold on the black market in Turkey or Kurdistan, mostly
Turkey. This activity engages terrorist financing involving western
financial institutions because both the vendors (IS) and the purchasers
must use the modern banking system to effect the transactions equaling
$150 million per month. Note that there are multiple daily sales
transactions, that together, equal $150 million, ergo thousands of
terrorist financial transactions going through banks.
Banking the ISIS
Breaking it down, the first point of contact would appear to be local
banks operating in Istanbul who bank the IS, although likely under
beneficial ownership structures or their accounts would be shut down.
I’m surmising these bank accounts were set up years ago and as time went
on, IS entities became the bank’s VIP customers as more and more wealth
was deposited. As the IS and their agents likely determined, the best
way to avoid bank detection for suspicious activities is to become a
bank VIP and move to private banking under a beneficial ownership
structure. Although private banking clients are more high risk for
financial crime, many banks treat such customers preferentially in terms
of identity, transaction monitoring and anti-money
laundering reporting. IS is sufficiently sophisticated to issue
corporate annual reports highlighting their financing activities; there
can be no question they have corporate vehicles through which they
launder proceeds of crime (specifically, from numerous terrorist acts).
Banking ISIS leaders
What about IS leaders? Historically speaking, state leaders who
acquire power undemocratically have taken enormous pains to acquire
great wealth and to preserve it by removing funds from domestic areas of
conflict to overseas safe tax havens for future use by them or their
families, usually their children. The reason we have a politically
exposed person (“
PEP“) reporting regime is to prevent
this from happening. The best way to preserve wealth in a war-torn
conflict area is to move it to a more stable economy or a tax haven
where beneficial ownership disclosure is protected.
We can expect, therefore, that the IS elite have moved or will move,
vast sums of money to other jurisdictions in the world through close
family members (PEPs). The money and its ownership will be more
difficult to tie to IS leadership because,
inter alia, it
originates from a state over which they have effective control and in
which they can create an endless number of new identities and passports
to use for travel and to open and use foreign bank accounts.
We have already started to see IS officials
moving into Turkey
with vast sums of money, renting or buying luxury homes in Istanbul and
Ankara with cash. The next step will be the purchase of luxury vehicles
and sending their children to elite schools in the UK with terrorist
funds. According to news reports, IS has opened up its first consulate
office in Ankara to issue official visas for defectors from other
countries to enter Syria to fight for the IS. They have also opened
several businesses in Ankara and Istanbul.
All of these activities, from purchasing houses, cars, consulates,
and offices requires the constant use of bank accounts and banking
relationships in Turkey. The IS move into Turkey to set up businesses is
likely being done to establish bank relationships through commercial
activities so that IS can access financial institutions in Europe, an
activity that is difficult from Syria or Iraq with significant sanctions
in place. Unfortunately, some banks have no qualms about servicing
terrorists.
Banking oil sales agents
The banks banking the agents and purchasers of terrorist oil are
likely foreign banks in Istanbul. The reason why this is likely the case
is because the entities and persons, particularly agents, purchasing
terrorist oil have a pressing desire to move the proceeds of crime from
the sale of the oil overseas to protect it, and hence protect their
wealth. They need a bank with a good network of international
correspondent banking relationships to ensure that can happen quickly
and efficiently, with wealth management ties to tax havens. These bank
accounts are likely also structured in ways in which beneficial
ownership is obscured.
Foreign banks, particularly in Dubai, Amsterdam, Paris, Vienna and
London, should exercise extra due diligence to ensure that they do not
violate sanctions and counter-terrorist laws by banking persons and
entities dealing with terrorist funds. Entities or persons who have an
unusual or extraordinary amount of cash dealings connected to conduit
countries such as Kurdistan, Lebanon, Jordan or Turkey are a banking
concern for terrorist financing. Sanctions and counter-terrorist
financing laws globally also capture the indirect facilitation of
banking or financial services for terrorist activities so financial
institutions, including wealth managers in tax havens, all along the oil
transactional chain of finance are exposed for providing services for
these transactions.
Some theorists have hypothesized that hawalas and cash couriers are
being used for payments of terrorist oil. Hawalas and money mules are
prevalent in many IS transactions but not for terrorist oil transactions
– there is too much money in terms of volume and its too impractical.
2. Christian taxes; kidnapping and ransom
The second way in which IS is financed is by self-funding methods
such as taxes Christians must pay to remain alive and ransom payments
from foreign governments for kidnapped foreigners. According to experts,
IS earns $10 million per month in ransom payments and, unlike terrorist
oil payments, ransom payments are made in US cash using external
foreign banks. Under this method, agents bring the cash into Iraq, Syria
or a conduit state in exchange for the prisoner. IS agents bring the
cash back to headquarters but the agents liaising for the foreign
governments bank their commissions in foreign banks, only in this case,
they are likely using foreign banks in Europe which have ties to tax
havens through wealth management firms or bank branches.
The IS has other internal funding methods such as taxes imposed on
people in acquired territories and transactional fees for people to
remove funds from their bank accounts that engage the local economy and
do not likely flow through the modern banking system.
For example, they have set up sex slavery businesses in most towns
and cities in which they occupy using primarily teenage girls that they
refer to as the so-called “spoils of war” to work in such businesses.
They also sell captured women and children (those that are Christian or
Yazidi women) in the local marketplace. According to human rights
agencies, there are websites in which captives are priced and listed for
sale.
Then there are the Christian taxes, which are taxes Christians must
pay in occupied towns as a “tolerance” fee if they do not convert, or
are not first killed. The Christian tax is paid for the privilege of
life. If a Christian cannot pay or refuses to, they are killed.
There are also bank fees to pay to IS. They have taken over banks in
towns in which they occupy and in order to withdraw funds, account
holders must go through a 3-person committee to prove they are the
account holder and are not Christians, Yazidis, Shiite Muslims or
members of the government. This group of prohibited persons has
forfeited money held in their accounts to the IS. If a person is not
within the prohibited group, in order to withdraw funds, a commission
has to be paid to the IS.
As for Christians and Yazidi workers, the IS has already confiscated
their salaries and about 5% is being deducted from everyone else’s
salary by the IS.
The IS taxation system on people, businesses and services should not
be underestimated as a significant source of growing revenue. Not
surprisingly, banks under the control of the IS are being used for tax
collection purposes for the IS, including the Raqqa Credit Bank which
now apparently collects municipal taxes for the IS circumventing the
government payment system.
Finally, the IS also traffics antiquities from Syria to western
collectors. Payments for antiquities sales all involve foreign banks and
are a form of terrorist financing that is obviously prohibited.
While initially, the self-funding methods (such as the sale of young
teenagers into slavery) may not go through our traditional banking
methods, those funds end up in the hands of the IS elite, whose close
advisors and family members are branching out to Turkey and Lebanon
(perhaps other places as well) to set up businesses and buy houses, all
with terrorist funds which requires banking relationships (see below).
3. Payments from foreign countries
In Iraq, the advance force of IS, called the House
of Islam, is dominated by foreigners, including several hundred
Europeans, Australians, Canadians and Americans. They land in places
like Turkey then cross over to Syria and join ISIS where they are put at
the front lines to fight. They leave places like Germany, the
UK, Canada and the US with debit cards, value added cards and credit
cards linked to bank accounts in their home countries. Those cards are
used when defectors arrive overseas. Their friends and families are then
called upon to fund their activities by loading up bank accounts so
that funds can be withdrawn in the Middle East. One preferred method of
terrorist financing in the credit and charge card world is to over-pay,
or pre-pay charge cards in one country so that there is a large credit
balance on the account that can be used in another jurisdiction by a
supplementary card holder.
Before stored value cards were invented, this was a preferred way of
sanctions avoidance in places like Iran where family members could be
financially supported through pre-paid credit card payments. Because
funds cannot be sent among certain sanctioned countries, credit cards
are used to buy goods and services instead as a way to transfer value
undetected by the financial system. Financial institutions, money
services businesses and other remittance services are unwittingly used
to finance terrorism by facilitating payments and funds transfers for
use in terrorist hot spots.
All financial institutions can know with the push of a computer
button, the extent to which their customers are undertaking financial
transactions in hot spots. Credit and debit card issuers also know in
real time when their products are used and precisely where by virtue of
the card magnetic strips that generate an electronic message to the
issuer through the merchant’s POS machine or ATM machine.
Several Tweet accounts of IS members have joked about how the US has
tried to harm IS financially and noted that there are still ATM machines
all around from which they readily withdraw cash from overseas.
4. Payments in the west
In addition to funding terrorist attacks on critical infrastructure
and to individuals, terrorist financing will be used to support
home-grown terrorist group attacks in places like Canada, France,
Germany, Australia and the US. Terrorist financing supports the violent
aspects of terrorism but it also supports the non-violent activities
such as paying a group’s operations in western countries (e.g., travel,
training, rent, social media activities, and credit card expenses).
Terrorist financing in this area involves payments from the exterior
to lone wolf-types persons or larger groups and it also involves
internal payments or funding (domestic) whereby persons fund a lone wolf
or another group’s activities in furtherance of terrorist activities
that are domestic. The numbers are significantly lower than other types
of terrorist financing but are just as significant because an attack to
domestic critical infrastructure unfortunately requires much less in the
way of an economic investment by terrorists. Domestic monitoring by
financial institutions and money services businesses in the west is
critical to detecting and preventing domestic terrorist financing.
Stopping the financing of terrorism
Financial institutions, and other financial service vehicles that
assist terrorist financing, even unwittingly, negatively impact the
integrity of the global financial system and threaten international
security.
Banks risk reputational damage to their organization and may harm
NGOs that provide humanitarian and other aid to hotspots for engaging in
terrorist financing. Obviously, as well, they are exposed to litigation
claims for terrorist financing, sanctions avoidance and regulatory
action for doing so, both institutionally and for their directors and
officers individually.
The government role is to provide greater and better education on
terrorist financing to financial institutions and the population
generally. Its role also should involve greater regulatory scrutiny over
financial institutions for compliance with terrorist financing.
In order to protect the financial system from being used for the
financing of terrorism and minimize the risks to international security,
there are six key areas with which banks should be careful in addition
to those that arise from the foregoing:
- Funds involving the use of conduit countries to fund terrorism such as Turkey, Lebanon, Jordan and UAE and sanctioned areas.
- Use of the banking system by IS, its agents, terrorist oil
purchasers and others to move funds to and from terrorist organizations
and in many cases to tax havens through wealth management companies
using beneficial ownership structures.
- Co-mingling funds such as sending multiple wires in a bundle to hide the actual sender or recipient of the funds.
- Sending funds to known hotspots using remittance services and banks,
between individuals in home jurisdictions and the hot spots, mostly
from western states to conduit countries.
- Online payment systems and stored value cards, particularly in
conjunction with social media wherein the IS allegedly uses Twitter and
WhatsApp to solicit requests for payments by PayPal and other online
payment methods. Likely, such accounts are held in the names of multiple
individuals in order to avoid detection.
- According to AUSTRAC, digital payment systems which are new, such as
digital (or virtual) currencies such as Bitcoin, pose an emerging risk
of terrorist financing which may increase as they grow in popularity,
particularly given that they are by design, anonymous.
Domestic red flags
Terrorist financing involves raising the funds, transferring them and
then using the funds. Different private enterprise participants have
different roles to play in each of those aspects. The difficulty in this
area is drawing a link between the activities and terrorist financing.
Some indicators that may raise a red flag domestically for financial institutions in the west include:
- Wiring funds to high risk jurisdictions in close geographical proximity to IS (conduit countries such as Turkey, Lebabon);
- Use of debit cards in high risk jurisdictions, particularly in cases
where the client is in the west but the card is being used in the
Middle East;
- Multiple beneficiaries in a wire being sent from one sender to the Middle East;
- Multiple low-value transfers domestically and internally without any reason or obvious connection;
- Sudden activity in an account that is inconsistent with customer profile; and
- Multiple parties using the same telephone number or address to conduct wire transfers.
If we want to stop terrorist financing, we have to make a greater
effort to require that financial institutions of all types, including
money services businesses, quit providing banking services to terrorist
organizations and their sympathizers wherever they may be in the world,
including in the west.
We ultimately want terrorist organizations to be a financial island.
