Following the terrorist attacks of September 11th, the financing of terrorist crimes has been an issue of high importance, especially for financial institutions. Everyone can see the importance of directly fighting against terrorist activities. But fighting the financing behind these activities is also of paramount importance.
As part of this battle, the US government has created laws and regulations for monitoring financial transactions and enforcing the proper organization and recording of such transactions. These policies exist under the umbrella of counter-terrorist financing policy (CFT).
The relationship to money laundering
Terrorist financing broadly refers to the illegal funding of terrorist organizations in order to carry out terrorist crimes. As with money laundering crimes, terrorist financing typically operates due to weaknesses or oversights in the financial system. Consequently, many terrorist funding operations are linked to money laundering. Therefore, the relationship between these two crimes is an important point of awareness for financial organizations.
How terrorist financing works
The funding for terrorist organizations typically hides in small, seemingly harmless transactions, so as to not raise any red flags. In order to “clean” their money or move it internationally, terrorist organizations use measures such as trade-based laundering. In trade-based laundering, criminal organizations can conceal the illicit nature of their money by using legitimate trade transactions.
Additionally, terrorist organizations are increasingly using online money transfer systems to conceal their transactions. Because many terrorist financing schemes use a combination of these and other methods, it can be difficult to detect the exact illicit financial activities of these organizations.
Measures taken against terrorist financing
The greatest course of action taken against terrorist groups has been the establishment of many institutions, laws, and guidelines devoted to preventing financial crimes. The most significant legislature that was adopted in response to the September 11 attacks in 2001 was the USA Patriot Act. This anti-terrorism legislation made a point to combat the funding of terrorist organizations.
In that same year, the Financial Action Task Force (FATF) expanded its objectives beyond anti-money laundering to include the prevention of terrorist financing. The FATF has encouraged states to take action against such financing. And it generates and publishes reports specifically naming the states who fail to do so.
Banks are on the front lines of protecting the financial system. They can help prevent money laundering and terrorist financing by complying with AML regulations and taking a risk-based approach. This includes:
- Conducting thorough risk assessments
- Establishing compliance with the Bank Secrecy Act (BSA)
- Transaction monitoring
- Screening for violations against the Office of Foreign Assets Control (OFAC) sanctions
- Reporting suspicious activity
Banks take many of these steps when screening their clients as well as through ongoing monitoring to determine potential involvement with financial crimes, including financing of terrorism.