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Financing and Money Laundering of Terrorism

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Title: Financing and Money Laundering of Terrorism


1
Financing and Money Laundering of Terrorism
Instructors 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
    worlds 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 advocateJihad
    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 worlds 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
    worlds 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 Councils 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 worlds 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 Groups 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 isnt 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 worlds 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 worlds 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 maphttp//www.gccapitalideas.com/2010/0
    6/16/terrorism-reinsurers-standing-by-part-ii-risk
    s-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/ht
    ml/29843.htm
  • http//www.hks.harvard.edu/fs/aabadie/twe.pdf
  • http//www2.econ.uu.nl/users/unger/papers/Zdanowic
    z202.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/drug
    s/special/blackpeso.html
  • Map Trade Balances http//commons.wikimedia.org/w
    iki/FileCurrent_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-07-80
    46_Causes_of_Terrorism.pdf
  • All the journal articles I used are burned on
    the CD as PDFs in a folder next to the
    presentation.
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