Eliminating Terrorist Financing Without Damaging Legitimate Transactions

Addresses Terrorist Finance Elimination and Legitimate Transaction and Family Remittance Enhancement

Eliminating Terrorist Funding while Enhancing Legitimate Commercial Transactions and Family Remittances

There is consensus that financing terrorism, via the international financial system, must be systematically eradicated while maintaining channels for legitimate commercial and family-related financial transactions.  Unfortunately, many international banking conglomerates refuse to do business with certain countries altogether, as their costs of compliance outweigh the fees produced for providing financial services to people and places perceived as risky. Therefore, fostering principles that uphold and enhance financial integrity is a laudable goal that can be pursued in tandem with the systematic degradation of terrorist financing networks, as opposed to unofficially blacklisting or de-risking entire countries or communities from commercial development.

The Complexities of Terrorist Funding

The Islamic State in Iraq and Syria (ISIS) receives substantial mainstream media attention for its brutal acts of violence and diverse yet sophisticated funding structures. ISIS’s rapid ascents, in territory, manpower and materiel obligations, have placed increasing pressure on their revenue streams. By far the largest source of its revenue is oil sales, by some estimates “providing around $2.5 million a day…with a selling price ranging from $25 to $60 a barrel.”[1] Other sources of funding include: suitcases loaded with smuggled cash, donations from wealthy financiers often disguised as humanitarian aid, kidnappings and antiquity thefts and sales on the international market.[2] All of these financing sources were outlawed by U.N. Resolution 2199 (2015)[3] as “terrorist and criminal acts threatening international security.”[4]

The resolution is a meaningful first step, but enforcement is another issue entirely. While these measures would likely prevent ISIS tapping into large global banks, it does not address the issue of grassroots financing through banks seized by force in Mosul, Iraq, or account for other localized small scale commercial ventures.[5] For instance, an alleged terrorist, in a recent attack, sold counterfeit sneakers, while other sympathizers have engaged in equally petty crimes, presumably to avoid detection.[6] Additionally, money transfers have also been flagged for monitoring.[7] While connecting and disallowing the criminal network that ostensibly funds ISIS is of utmost importance, legitimate money transfers arising from legitimate transactions will undoubtedly come under increased scrutiny.

Financing Terrorism vs. Money Laundering

Terrorist finances can be raised from legitimate sources as well as criminal sources.[8] By contrast, money laundering involves “disguising funds derived from illegal activity so they may be used without detection of the illegal activity, while terrorist financing can involve the use of legally derived money to carry out illegal activities.”[9] Even though Iraq enacted the Anti Money Laundering Act in 2004, money laundering is considered only a misdemeanor, unless a more serious predicate crime also occurred.[10] A new law, enacted last year, has strengthened the fight against money laundering and is combating the financing of terrorism, but the Financial Action Task Force (FATF) still lists Iraq as a jurisdiction with strategic deficiencies, largely lacking: a legal framework and procedures for identifying funds and freezing assets, adequate customer due diligence requirements in financial institutions, and an effective oversight program to regulate the financial industry.[11] These goals will take both significant monetary resources and political will, in order to implement sustainable measures.

Impact on Iraqi Consumers

Meanwhile, the average consumer in Iraq is marginalized in terms of their options for sending or receiving money from overseas. The Iraqi Central Bank has issued very strict rules regarding U.S. Dollar amounts outside Iraq.[12] The USA Patriot Act can have a significant effect on non-U.S. financial institutions, even those that do not have any operations in the United States. Specifically, the Act authorizes the use of various measures to obtain information and compel compliance.[13] While the U.S. effectively lifted most sanctions against Iraq in 2010,[14] the threat of re-imposing sanctions is omnipresent. Furthermore, it is impossible for the Iraqi retail banking sector to thrive due to ongoing corruption. Citizens often use Western Union or friends in the Kurdish region to transfer their money abroad, due to exorbitant fees from larger commercial banks.[15] In short, moving money effectively, in and out of Iraq for legitimate purposes, would require a complete overhaul of the system, and a structure of good governance to allow legitimate commerce and family remittances to proceed unimpeded.

Conclusion

The correlation between terrorist financing and money laundering overlaps but is simultaneously divergent. Seemingly legitimate funds can flow to terrorist organizations in relatively lawless corners of the world, due to complicity and a lack of enforcement infrastructure. While laws and regulations do exist, both in Iraq and in the U.S., greater cooperation and intelligence on the ground is the most effective mechanism for rooting out these sources of funding. Collateral damage will continue to occur however, as ordinary Iraqis are penalized in attempts to move their money overseas or vice versa, as legitimate banking institutions refuse to take the risks associated with doing business in Iraq. Unfortunately, there does not appear to be an end to this cycle, and everyday consumers will continue to be pushed into nefarious channels for transferring money, until big banks determine that the cost of compliance with extensive international finance regulations is commercially viable.

The author of this article is Winfield Glascock, a licensed solicitor in New South Wales, Australia working with Price Benowitz, LLP.

Disclaimer: Blog posts should not be relied upon as legal advice and are only provided for informational purposes.  Information contained in blog posts may also become outdated with the passage of time as laws change and U.S. foreign policy and national security objectives evolve.


[1] Janine Di Giovanni & Leah McGrath Goodman & Damien Sharkov, HOW DOES ISIS FUND ITS REIGN OF TERROR? 11/6/14 http://www.newsweek.com/2014/11/14/how-does-isis-fund-its-reign-terror-282607.html

[2] Ibid

[3]S.C. Res. 2199 ¶ 1-3 (February 12, 2015).

[4] Ibid

[5] Tracey Samuelson, Tracking terror funding enters a new era, Marketplace, November 19, 2015, http://www.marketplace.org/2015/11/19/world/tracking-terror-funding-enters-new-era

[6] Ibid

[7] Ibid

[8] Guide to U.S. Anti-Money Laundering Requirements Nov 2012 https://www.protiviti.com/en-US/Documents/Resource-Guides/Guide-to-US-AML-Requirements-5thEdition-Protiviti.pdf

[9] Ibid Pg. 10-11

[10] Bureau of International Narcotics And Law Enforcement Affairs, 2015 International Narcotics Control Strategy Report (INCSR) Report 4/20/16 http://www.state.gov/j/inl/rls/nrcrpt/2015/vol2/239082.htm

[11] FATF, Improving Global AML/CFT Compliance: on-going process 2/19/16 http://www.fatf-gafi.org/publications/high-riskandnon-cooperativejurisdictions/documents/fatf-compliance-february-2016.html#iraq

[12] IRFAD, A History of Iraqi Banking 4/20/16 http://www.irfad.org/iraq-banking/

[13] Requirements could result in: asking for additional customer information if a transaction was processed through a U.S. financial institution, (2) seizure of an institution’s funds to seizure if they are located in the U.S., and/or (3) threatening them with sanctions against the institution or the country in which it operates. Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA Patriot Act), 115 Stat. 272, Public Law 107–56 (2001) § 311, 312, 313, 314, 319, 326 and 352, reprinted in: Guide to U.S. Anti-Money Laundering Requirements: https://www.protiviti.com/en-US/Documents/Resource-Guides/Guide-to-US-AML-Requirements-5thEdition-Protiviti.pdf Pg. 79.

[14] BBC, UN Lifts Sanctions Against Iraq, 12/15/10 http://www.bbc.com/news/world-middle-east-12004115

[15] IRFAD, A History of Iraqi Banking 4/20/16 http://www.irfad.org/iraq-banking/