Terrorist financing (TF) is frequently viewed as an afterthought by firms in the context of anti-money laundering (AML)/countering the financing of terrorism (CFT) frameworks.
This is perhaps unsurprising given the clear focus, until recently, by governments, regulators and the public at large on money laundering (ML) flowing from tax evasion, high-level corruption and bribery cases. It is also an uncomfortable topic for financial institutions to grapple with given the violent and graphic results of terrorist acts. Additionally, there is a common perception among offshore practitioners that terrorist financing always involves small sums of money that are difficult to identify as being linked to terrorism and that it is largely an issue for the banking community. While some of this is undoubtedly true, it would be incorrect to assume that this presents a complete picture of the threat posed by not only those who commit acts of terror but also those who stand behind them, funding the atrocities committed.
Renewed Focus on FATF Terrorist Financing (TF) Standards
For these reasons, the Financial Action Task Force (FATF), the body which sets international standards regarding AML/CFT, laid out nine special recommendations in addition to the 40 which address money laundering, to specifically address the risks arising from terrorist financing (TF). These recommendations have attracted renewed attention from the International Monetary Fund (IMF) and MONEYVAL, the bodies who police adherence with these standards. This has followed the emergence of new and more radical terrorist groups that have risen to prominence through their actions not only in the Middle East but also closer to home. This has prompted a renewed call for home legislatures and regulators to require financial institutions to specifically consider the risks arising from TF as part of national risk assessments and individual firms’ business risk assessments. By way of example, the 2016 MONEYVAL report on Guernsey’s AML/CFT regime specifically identifies that TF risks should be explicitly considered, and this has been translated to the AML/CFT Handbook, which was published earlier in the year.
One of the challenges in doing so is identifying the similarities and differences between ML and TF. Once these are understood, the chances of forestalling TF and becoming embroiled in all the consequences, which can involve criminal sanctions, international attention and reputational harm beyond that associated with ML, are significantly improved.
Differences Between Money Laundering (ML) and Terrorist Financing (TF)
Put simply, one of the key differences between ML and TF is that in TF, the source of funds can be both legitimate and illicit, whereas in ML the source is always illicit. Whether it is wealthy benefactors or individuals making donations to charitable organisations, an undue focus on the source of funds without considering the purposes to which these funds are put can lead to an illusory sense of the risks having been mitigated. Given the focus on ML, financial institutions have become preoccupied in identifying source of wealth and source of funds, whereas with TF, the risks arise from the intended destination and purpose to which those funds are put.
With so much of the due diligence effort being focused on onboarding clients and scrutinising incoming fund flows, it is all too easy to lower one’s guard when making payments or distributions.
This takes us to the second key difference. In traditional ML, the criminal’s intent is to have access to the funds at a later date, often many years in the future. This can be through receiving cash or, more likely in an offshore context, through access and use of assets or fictitious financial transactions (loans, sham consultancy arrangements and the like) which have the effect of returning funds to the source. With TF, the ultimate goal is to put funds into the hands of operators who commit acts of terror and this is where the understanding of TF is critical. It is highly unlikely that offshore structures would be used to put funds directly into the hands of terrorists – it is more likely that they would be used to accumulate funds and then distribute them to intermediary organisations who then channel that funding to operations who, in turn, provide resources to individual operatives.
Accordingly, the notion that TF only involves small amounts is a dangerous misconception. Funding organisations and operations, which are sometimes complex and opaque, requires a significant amount of resources. While we may only see the tip of the iceberg in terms of the results of terrorist activities, what lies beneath the ocean is often large and unseen.
While the level of Suspicious Activity Reports (SARs) relating to TF remains low and there is very little by way of evidence that firms in the Channel Islands are unduly exposed to it, remaining vigilant about country exposure and customers who have activities in regions, which have an elevated terrorist threat, is critical in preventing and detecting TF and also protecting firms’ and the islands’ reputations.
This article was first published in the Jersey Evening Post on September 25, 2019.