Download Money Laudering and Terrorism

Financing and
Money Laundering
of
Terrorism
Instructor’s Comment: A thorough
research of the related background
information and issues, and an
interesting and bold(and creative)
hypothesis, which is the best part of this
project.
World Map of Nominal
GDP per capita
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Wealth and Terrorism
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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. +
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.
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 ‘tradebased 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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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Global Economic Impact of Terrorism
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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. 14
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.
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Work Cited
1.Terrorist map:http://www.gccapitalideas.com/2010/06/16/terrorism-reinsurers-standing-by-part-ii-risks-threats-andexposures/
2.GDP Map: http://www.econguru.com/2007-gdp-nominal-per-capita-world-map-imf/
3.Bentekas, Ian. “The International Law of Terrorist Financing.” The American Society of International Law 97 (2003):
315-333.
4.http://www.state.gov/p/inl/rls/nrcrpt/2003/vol2/html/29843.htm
5.http://www.hks.harvard.edu/fs/aabadie/twe.pdf
6.http://www2.econ.uu.nl/users/unger/papers/Zdanowicz%202.pdf
7.Zachary Abuza. “Funding Terrorism in Southeast Asia: The Financing Network of Al Qaeda and Jemaah Islamiya.”
Contemporary Southeast Asia 25 (2003): 167-197.
8.http://www.pbs.org/wgbh/pages/frontline/shows/drugs/special/blackpeso.html
9.Map Trade Balances: http://commons.wikimedia.org/wiki/File:Current_account_balance_world.PNG
10.http://www.imf.org/external/np/leg/amlcft/eng/aml1.htm
11.http://www.un.org/en/sc/ctc/
12.http://www.egmontgroup.org/about
13.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.