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AIBA Compliance Seminar
Terrorist Financing
June 13, 2013
Dennis M. Lormel
President & CEO
DML Associates, LLC
Terrorist Financing
• Introduction
• Current Events
• Facilitation Tools
• Countermeasures
• Case study: Lebanese
Canadian Bank
• Conclusion
AIBA Compliance Seminar
Dennis M. Lormel | June 13, 2013
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Introduction
Lessons Learned From Boston
Bombing
• We, as a society, continue
to be vulnerable
▫ Simplicity of bombings
likely to inspire similar
attacks
• Jihadism continues to attract
new adherents
• Critical importance of public
/ private relationships
• Vulnerabilities of terrorists
▫ Finance
▫ Communications
• Social media
▫ Videos
• Chaos vs. communication and
coordination
• Media
▫ Good and bad
• The blame game
▫ Easier to criticize than to
distinguish
▫ Assess before judging
• Systemic v. one off problem
• Lost statistic
▫ 204 arrests of would be
jihadist attackers since 9/11
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Importance of Financial Information
• As criminals and our financial system continue to become more
sophisticated, financial transactional information becomes more
relevant as a critically important investigative mechanism
▫ Finance and communication are biggest vulnerabilities to bad
guys
• An investigator’s ability to collect and use financial information
can be devastating to terrorists and criminals
• Without money, terrorist and criminal organizations cannot
adequately function
• Financial investigations should be integral part of investigative
strategies
• Knowing what financial information is relevant, where to collect it
from, and how to use it are facts all investigators can benefit from
AIBA Compliance Seminar
Dennis M. Lormel | June 13, 2013
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Law Enforcement / Financial
Institution FININT Comparison
• Law enforcement
▫ Conduct financially focused investigations to disrupt and / or prevent
the flow of funds to terrorists
• Conducted to support the broader counterterrorism mission
▫ Collector and producer of actionable financial intelligence
• Direct beneficiary of Bank Secrecy Act (BSA) data (SARs, CTRs, etc.)
▫ Perspective  the “why”
▫ Personnel (agents, intelligence analysts, forensic accountants)
• Financial institution anti-money laundering (AML) compliance
▫ Required by BSA to maintain robust AML program to safeguard
system from money laundering and terrorist financing
• Compliance (cost center) v. business (revenue center) mentality or
culture
▫ Repository of financial intelligence
• Originator of BSA reports (SARs, CTRs, etc)
▫ Perspective  the “how”
▫ Personnel (compliance officers, analysts, investigators)
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Disruption of Funding Flows
• Back to origin / forward to strike teams
▫ Funding to networks / organizations from point of origin
• Ranging from hundreds to millions of dollars
▫ Funding to operations
• Ranging from thousands to hundreds of thousands of dollars
▫ Funding to individuals, cells, or groups
• Ranging from hundreds to thousands of dollars
KSM
Mohamed Atta
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The Players…Looking Back
• Individuals or groups engaged in fraud
• Gangs
• Drug dealers, organizations or cartels
• Ethnic organized crime groups
• Terrorists or terrorist groups
AIBA Compliance Seminar
Dennis M. Lormel | June 13, 2013
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The Players…Going Forward
• Who are we dealing with?
▫ Individuals or groups engaged in fraud
▫ Domestic criminal organizations
▫ Transnational criminal organizations
▫ Terrorists or terrorist groups
▫ State sponsors
• Commonalities
▫ Use of facilitation tools
▫ Convergence
▫ Diversification
▫ Must have ready access to money
AIBA Compliance Seminar
Dennis M. Lormel | June 13, 2013
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Threat Finance
• Threat finance is an umbrella term used to encompass various
types of financing that support activities harmful to U.S.
National Security
▫ Driven by Department of Defense
• No singular accepted definition
▫ Prosecution v. regulatory concern
▫ Encompasses:
• Terrorist financing
• Transnational criminal organizations
• Drug cartels
• Proliferation and weapons of mass destruction
AIBA Compliance Seminar
Dennis M. Lormel | June 13, 2013
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Intersection of Crime & Conflict
• Criminal organizations and terrorist groups have
increasingly found common ground of mutual benefit
▫ Each have learned how to benefit from conflict
▫ Each have benefited from convergence and diversification
• Convergence: the intersection where criminals and
terrorists work together to support each other with the goal
to maximize the benefit to their individual causes
▫ Mutual and individual benefit
• Diversification: as organizations mature in operations and
sophistication, they diversify into different activities and
thereby grow and strengthen their operations
▫ Rely on legitimate and illegitimate fronts
AIBA Compliance Seminar
Dennis M. Lormel | June 13, 2013
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Current Developments
• Growing recognition of importance of financial intelligence
▫ (Financial) intelligence drives operations
• Challenges of international terrorism more complex and diversified
• Ongoing Arab spring
▫ Changing balance of power
▫ Terrorist groups taking advantage of unrest
• Evolving international terrorist landscape
▫ Al-Qaeda core greatly diminished (drone missile attacks)
▫ Continued emergence of al-Qaeda affiliate groups
▫ Potential volatility of Hizballah if Iran attacked
• Growing nexus between transnational criminal and terrorist
organizations
▫ Convergence
▫ Diversification
• Growing emphasis on “threat finance” driven by DoD
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Current Terrorist Threat in the U.S.
• Homegrown violent extremists
▫ …homegrown extremists are increasingly more savvy, harder to detect, and
able to connect with other extremists overseas
• Current threat
▫ Al-Qaeda
▫ Groups affiliated with al-Qaeda
• Al-Qaeda in the Arabian Peninsula
• al Shabaab
• Lashkar-e-Taiba (LeT) (Mumbai style attack)
▫ Iran and Iranian proxies
▫ Hizballah
▫ Hamas
• The internet has expanded as a platform for spreading extremist
propaganda, a tool for online recruiting, and a medium for social
networking with like-minded violent extremists, all of which may be
contributing to the pronounced state of radicalization inside the U.S.
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• Adaptability/flexibility/anonymity/vulnerability
Jihadist Movement
• Jihadist movement divided into three basic elements
▫ Al-Qaeda core organization
▫ Regional jihadist franchises
▫ Grassroots operatives
• Two distinct types of operatives
▫ Professionals
▫ Amateurs
• Al-Qaeda and regional groups
▫ For the most part, highly trained professional terrorists
• Grassroots operatives
▫ Amateurs
▫ Continuum ranging from untrained lone wolves to one who
received varying levels of training
▫ Never joined al-Qaeda or other formal militant groups
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Transnational Criminal Organizations
• Represent increasing threat to U.S. security and interests,
both domestically and internationally
• Organizations that carry out criminal operations across
international borders
• Their interest in “bottom line” makes them more dangerous
• Located in countries with weak rule of law
• Present greater threat to regional security
• Willingness to work and provide material support to terrorists
Los Zetas
▫ Mexican drug cartels
MS 13
▫ Violent street gangs
▫ International criminal organizations
D-Company
(Pakistan)
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Dennis M. Lormel | June 13, 2013
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Transnational Criminal Organization
Activities
• Drug trafficking, one of the most common criminal activities
▫ Most profitable
• Increases levels of corruption
• Leads to regional violence and instability in many regions
• Causes health and social issues
•
•
•
•
•
•
Arms trafficking
Human smuggling and trafficking
Product counterfeiting
Trafficking in contraband
Sea Piracy
Money laundering
▫ Hawala
▫ Trade based
▫ Black Market Peso Exchange (BMPE)
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Threats Posed by Illicit Networks
• Violence and intimidation
▫ Threat to national security
• Criminal activity
▫ Threat to economy
• Corruption
▫ Acts as an enabler (like a disease)
• Cyber security
▫ Increasingly significant threat
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Dennis M. Lormel | June 13, 2013
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Facilitation Tools
Facilitation Tools
• Wire transfer
▫ Electronic funds transfer (fast channel for moving money
between countries and accounts)
• Correspondent banking
▫ Financial institution that provides services on behalf of another
(relies on correspondent to conduct due diligence)
• Illegal money remitters
▫ Not licensed and / or registered (most significant vulnerability)
• Shell companies
▫ Operates without active business operations or significant assets
• Electronic mechanisms
▫ Finance and communications
• What is the common thread or vulnerability between the
above facilitation tools?
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Beneficial Ownership
• The term “beneficial ownership” when used to refer to
beneficial ownership of an account in AML context is
conventionally understood as equating to ultimate control over
funds in such account, whether through ownership or other
means. “Control” in this sense is to be distinguished from
mere signature authority or legal title.
▫ The ability to conceal beneficial ownership is extremely
attractive to bad guys
▫ The ability to conceal beneficial ownership is a detriment to
law enforcement
AIBA Compliance Seminar
Dennis M. Lormel | June 13, 2013
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Bulk Cash Smuggling
• Evading of currency reporting requirements
▫ Concealing more than $10,000 in currency or monetary
instruments
▫ Into or out of the United States
• Criminal organizations smuggle bulk cash to keep their
proceeds and related activities away from the scrutiny of
financial regulators and law enforcement
• Bulk cash smuggling is extremely harmful
▫ Removes billions of dollars from commerce
▫ Diminishes integrity of financial system
▫ Fuels criminal enterprises
AIBA Compliance Seminar
Dennis M. Lormel | June 13, 2013
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Trade Based Money Laundering
• The use of international trade to move money, undetected, from
one country to another is one of the oldest techniques used to
circumvent government scrutiny
• The international trade system is clearly subject to a wide range
of risks and vulnerabilities exploited by criminal organizations
and terrorists
▫ Trade based money laundering represents an important channel of
criminal activity
▫ Growth of world trade enhances vulnerability
• As standards applied to other money laundering techniques
become increasingly effective, the use of trade based money
laundering will increase
AIBA Compliance Seminar
Dennis M. Lormel | June 13, 2013
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Free Trade Zones (FTZs)
• Two fold benefits of FTZs
• Created within jurisdictions to
promote trade, support new business
▫ Legitimate
formation and encourage foreign
• Boosts economic
direct investment
opportunity
• Have proliferated in recent years
▫ Approx. 3,000 FTZs in 135 countries
• Incentives offered to support
development of exports, foreign direct
investment and local employment
▫ Exemptions from duty & taxes
▫ Simplified administrative procedures
▫ Duty free importation of raw
materials, machinery, parts and
equipment
▫ Illegitimate
• Can result in reduction in
finance and trade controls
and enforcement
• Creates opportunity for
money laundering and the
financing of terror
AIBA Compliance Seminar
Dennis M. Lormel | June 13, 2013
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Countermeasures
Understanding Geographic Risk
• Geographic
▫
▫
▫
▫
Global
Regional
Country specific
Local
• Cultural vulnerabilities
▫ Bribery/corruption
• Accepted business practice
▫ Regulatory and law enforcement capacity and will
▫ Free trade zones
▫ Level of criminal and/or terrorist threat
• Business activity
▫ Reasonableness
▫ Red flags
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KYC: Due Diligence
• Know your customer
program
▫ Sound process
▫ Verification
▫ Documentation
• Identify beneficial
ownership
▫ FATF recommendations
▫ FinCEN guidance
• Address customer risk
▫
▫
▫
▫
Recognition
Mitigation
Adaptability factor
Living process
• Assess reasonableness
of business activity
• Consider enhanced due
diligence
• Both stress importance of
identification and
consequence of risk
AIBA Compliance Seminar
Dennis M. Lormel | June 13, 2013
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Deconstructing Ownership & Risk
Customer Due Diligence
Verification
Process
Documentation
Identify Beneficial Ownership
Adequate
Accurate
Timely
Conduct Ongoing Due Diligence
Vigilance
Assess Customer Risk
Consider Enhanced Due Diligence
Assess Reasonableness of Business Activity
Consider Enhanced Due Diligence
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Lebanese Canadian Bank
Case Study:
Anatomy of a Global NarcoTerrorist Organization
Anatomy of a Global Narco-Terrorist
Operation
• Case study demonstrating how criminal, drug trafficking and terrorist
organizations collaborated in a multi-billion dollar worldwide narcoterrorist drug trafficking and money laundering enterprise
▫ Mutually beneficial operation involving:
• Joumma drug trafficking/criminal organization
• Hizballah
• Los Zetas Mexican drug cartel
• Colombian and Venezuelan drug suppliers
▫ Exploitation of financial institutions
▫ Exploitation of facilitation tools and financial mechanisms
▫ Exploitation of systemic vulnerabilities
▫ Exploitation of Lebanon’s financial system
AIBA Compliance Seminar
Dennis M. Lormel | June 13, 2013
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Factors Facilitating DTO Operations
• Lebanese Canadian Bank
▫
Management complicity and support for Hizballah
▫
Ineffective due diligence
▫
Ineffective internal controls
• Money exchange houses / hawalas
• Bulk cash shipment / smuggling
• Cross border wire transfers
• Correspondent banking
• Payable through accounts
• Shell companies / front companies
• Corruption
• Structuring
• Money laundering
• Trade based money laundering
• Black market peso exchange
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Drug & Laundering Flow Involving U.S.
Europe
United States
Lebanon
Middle East
West Africa
Colombia
Drug & Laundering Flow Involving Asia
Europe
United States
Lebanon
Middle East
West Africa
Colombia
Asia
Joumaa – Los Zetas Trafficking Flow
United States
Joumaa collects 8% to 14%
Los Zetas
Mexico City
Venezuela
Colombia
Conclusion Case Study
• This case demonstrates how criminals and terrorists can
benefit financially by collaborating together
• Drug trafficking remains the most prolific funding
mechanism for criminals and terrorists
• Money laundering essential to successful operations
• The exploitation of systemic vulnerabilities facilitated
operations
AIBA Compliance Seminar
Dennis M. Lormel | June 13, 2013
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Conclusion
Conclusion
• Growing nexus between criminal organizations and terrorist groups
▫ Convergence
▫ Diversification
• Organizational vulnerabilities of bad guys
▫ Communications
▫ Finance
• Partnerships and perspectives
▫ Law enforcement  “why”
▫ Financial institutions  “how”
• Importance of financial intelligence
• Be proactive and unpredictable
▫
Exploit vulnerabilities of bad guys
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Dennis M. Lormel
President & CEO
DML Associates, LLC
19309 Winmeade Drive
Lansdowne, VA 20176
571-333-0300
[email protected]
www.dmlassociatesllc.com
AIBA Compliance Seminar
Dennis M. Lormel | June 13, 2013
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