Terrorism’s Financial Lifeline: 

Can It be Severed?

by Kimberley L. Thachuk

Strategic Forum

T

he attacks of September 11 and the

global campaign against terrorism have

put the spotlight on rogue capital, a

growing problem for law enforcement and the

financial sector. Using traditional and sophisticated techniques, terrorist and criminal

groups have extended their reach beyond

states to build multinational empires with

pervasive, well-funded subsidiaries. Weak

states, lax banking regulations, persistent

corruption, and shadow financial systems

compound the problem.

Terrorists and criminals generate, manipulate, and launder funds in different ways and

for different ends, but the links between them

are growing stronger. As direct state sponsorship declines, terrorists have shifted increasingly toward illicit moneymaking. The question is how best to expose this money lifeline,

render it vulnerable, and ultimately sever it.

America has led the global effort to cut

off the sources of money to these groups. It

has worked through the Group of 8 and bilateral partners to strengthen initiatives against

money laundering and manipulation. Yet

compliance with such measures alone will

not guarantee success. Economic assistance

is needed to ease the domestic impact associated with the loss of illicit sources of

foreign exchange in weak states. Helping

such states to fight this problem is essential.

It will entail strengthening justice systems

and making bureaucracies more transparent

to offset the increasing resort to corruption

by those determined to circumvent stricter

regulations.

To operate effectively, transnational terrorists and criminals need ready access to money

and the ability to maneuver it quickly and

secretly across borders. On a large scale, such

money maneuvers can ripple across entire

regions, embroiling global markets and threatening vital American economic interests as well

as destabilizing other countries politically. The

ability to move vast quantities of wealth rapidly

and anonymously across the globe—sometimes combining modern-day wire transfers,

faxes, and Internet connections with centuriesold practices, such as the hawala, of personal

connections and a handshake—gives terrorist

and criminal networks a strategic advantage

over many states. Yet it also might be their

vulnerability.

Terrorist manipulation and laundering of

money has received particular attention since

the attacks of September 11.1 While some of the

methods used by terrorists differ from those

employed by organized crime groups, most are

similar. As state sponsorship for terrorist groups

has steadily declined in recent years, terrorists

increasingly have resorted to crime to sustain

activities. Like organized crime groups, terrorists are engaged in moneymaking schemes that

are illegal in most states. Such activities may

include drug trafficking; extortion and kidnapping; robbery; fraud; gambling; smuggling and

trafficking counterfeit goods, humans, and

weapons; soliciting both direct sponsorship and

contributions and donations from states; selling publications (legal and illegal); and deriving funds from legitimate business enterprises.

While impossible to quantify accurately, it

is estimated that illicit financial transactions

account for between 2 and 5 percent of the

world’s gross domestic product (approximately

$600 billion to $1.5 trillion). Drug trafficking

alone nets between $300 billion and $500

billion, with trafficking in humans and small

arms, counterfeiting ($150 billion to $470

billion), and computer crimes ($100 billion)

constituting the remainder of the “gross criminal profit.” More significant are the direct

threats to national security when terrorists and

organized crime groups launder money to

underwrite and strengthen operations and

global reach. The key question for policymakers is how to expose the money trail and render

it vulnerable; terrorists and international

criminal groups simply cannot function without ready access to money and an ability to

move it efficiently.

Moving Cash Illicitly

Under U.S. law, money laundering is

defined as the “movement of illicit cash or cash

equivalent proceeds into, out of, or through

United States financial institutions.”2 While

engaging in both licit and illicit transactions,

terrorists and criminal groups must be able to

obscure the movements of cash, especially as

these movements pertain to the funding of

ongoing illegal operations. This is important

regardless of whether the money is being laundered to disguise its origins or to distribute it

clandestinely to network cells of operatives, as is

the case with terrorist organizations. The

process of laundering involves three stages:

placement, layering, and integration.

Placement typically involves a

person who is adept at exploiting

loopholes in financial regulations to move money quickly

through the international

No. 191

May 2002

Institute for National Strategic Studies

National Defense University

Key Points

No. 191, May 2002 Post-9/11 Critical 

Issues Series
banking system. Such an individual might

charge a third of the total amount being laundered. Offshore banking centers that are largely

unregulated or lack transparency are often the

preferred vehicles. At approximately a dozen

locations in the Caribbean, Southeast Asia, and

Europe, for example, money may be deposited

with the assurance of secrecy and tax exemption. The United Nations International Drug

Control Programme estimates that approximately one-half of the world’s money flows

through offshore banks. Not only do terrorist

groups and criminal networks benefit from the

comparative lack of scrutiny at these offshore

banks, but they often can obtain a higher rate

of return from banking in safe havens.

Layering is the process of redistributing

funds to obscure their origins and give them the

appearance of being legitimate. Such layering

techniques as smurfing, or conducting multiple cash deposits or wire transfers for amounts

under the standard $10,000 reporting requirement for a Currency Transaction Report, are the

most popular devices. Another technique is to

create multiple accounts under different names

and then move the money back and forth

through these accounts to complicate detecting

their origins. Because of heightened monitoring

of bank accounts since the September 11 terrorist attacks, layering has become exceedingly

difficult to accomplish, at least in the United

States and close partner countries. 

Integration involves the use of funds for

other transactions, such as payments to persons

or front companies involved in the laundering

conspiracy. The money is further invested in

legitimate businesses, real estate, or moneygenerating activities to hide its origins and to

increase profits. In recent years, up to $7 billion is estimated to have moved illegally from

Russia through the Bank of New York alone.

Over time, such sums can facilitate the control

by terrorist and criminal groups over a number

of major banks and private businesses. With

such significant economic power, terrorist and

criminal groups are able to suborn public

officials and legislators to obstruct unfavorable

legislation or to gain preferential treatment in

a number of sectors. It also can contribute to

instability in the form of rampant inflation, an

exponentially increased dependence on a false

economy, widespread corruption, and increasing violence and lawlessness in weak states.

Effects of Globalization

Traditionally, illicit money movements

involved black market currency exchanges and

parallel remittances. In the case of black market money exchanges, the proceeds of criminal

activity would be generated in one currency,

sold to a currency broker, then exchanged for a

different currency. To thwart illicit transactions,

most initial money laundering legislation

focused on large cash deposits in excess of

$10,000. Given the physical bulk of cash proceeds raised by criminal activity at the retail

level (for example, drug sales), disclosure of

large deposits was an important step forward.

As recently as 1999, 70 to 80 percent (approximately $200 million) of the U.S. Treasury

Forfeiture Fund came from currency seizures,

as most illegal money maneuvers continue to

be in cash. To make the tracking of funds

difficult, however, the manipulators of money

shifted tactics and began to buy jewelry, real

estate, stocks and bonds, vehicles, furniture,

antiques, and other expensive items to be

resold at a later date.

As law enforcement has refined its ability

to detect and interdict illegal money movements, criminal methods have become significantly more complex.3 Intricate financial

trading schemes, at times involving “U-turn”

movements of funds through various shell

companies in several countries, are more

representative of money laundering today. Yet

the more transactions that occur, the longer the

paper trail becomes—and thus the greater

possibility for detection, tracking, and successful prosecution.

It is clear that financial globalization

generally has been a boon for money manipulators. With advancements in banking techniques and information-age technology, criminals more easily can find and penetrate states

whose laws (or lack thereof) make them susceptible to criminal financial transactions. We

are witnessing the increasing criminal exploitation of on-line banking, automated teller machines, and Internet casinos; the misuse of

trusts and other noncorporate vehicles (such as

credit card fraud) to launder and obscure

money; the employment of lawyers, accountants, and other professionals to act as legitimate

cloaks for transactions; the greater use of methods other than cash in laundering and manipulation schemes; and an upsurge in suspicious

wire transfer activity involving shell and front

companies. All this would be daunting enough

were it not for the fact that the increasing

reliance by terrorists on laundered and manipulated money means that what may appear to be

a law enforcement problem is in fact a national

security threat with criminal elements.

Among all these trends, the importance of

offshore banking cannot be exaggerated. While

proximity to major financial centers was once

paramount, now anonymity and remote locations in the world are more beneficial for anyone wishing to obscure the source of money. For

small countries that have few or no natural

resources or industry, banking is an attractive

way to become incorporated into the global

economy. For example, with 570 banks, 2,240

mutual funds, 500 insurance companies, and

45,000 offshore businesses, the Cayman Islands

(with just 350,000 inhabitants) have benefited

from assets exceeding $670 billion. Other safe

havens—such as Antigua and Barbuda,

Bahrain, Dominica, Grenada, Liechtenstein,

Nauru, Niue, the Seychelles, Tuvalu, and Vanuatu—quickly have realized the opportunities

for healthy profits in the offshore banking and

business market.

The patterns of troublesome offshore

banking practices are familiar. The states in

question enact laws that establish strict bank

secrecy, criminalize the release of customer

information, prohibit cooperation with international law enforcement, and allow the licensing of banks that have neither personnel nor a

2 Strategic Forum No. 191, May 2002

Kimberley L. Thachuk is a senior research fellow in the Institute for National Strategic Studies at the

National Defense University. Dr. Thachuk may be reached by phone at (202) 685–2377 or by e-mail 

at thachukk@ndu.edu.

increasing reliance by

terrorists on laundered

and manipulated money

means that what may

appear to be a law

enforcement problem 

is in fact a national 

security threat 
physical presence in the country. Further, the

creation of anonymous companies, assetprotection trusts, numerous tax advantages,

and even the sale of economic citizenship

provide advantages to terrorists and criminals

who need to conceal and manipulate money

efficiently. Trusts, in particular, are generally

the source of operating funds for charities,

some of which have recently been revealed as

raising and manipulating money for terrorist

organizations. Not only have these countries

cut Faustian bargains to make quick profits,

but they also have used their sovereign status to

establish relations with banks in other states.

Hence, they are moving rogue capital into the

international financial system via legal state

channels. In addition to the manipulation and

laundering of money, many safe havens also

are acting as transit zones for illegal arms,

drugs, and smuggled and trafficked humans.

Contrasting Money Flows

Criminals and terrorists manipulate

money in somewhat different ways. Organized

criminal activity is motivated by simple

profit—amassing staggering sums either

legally or illegally. For terrorist groups, though,

the money (however amassed) is a means to

other ends.

Generally, organized criminal activity,

such as drug trafficking, generates such great

quantities of small bills that traffickers are

known to weigh money rather than count it.

The retail transactions of drugs are mostly in

5-, 10- and 20-dollar bills such that some

distributors accumulate 1,000 to 3,000 pounds

of bills on a monthly basis, which means that

it must be carried in suitcases, on the persons

of human carriers known as mules, or shipped

in cargo containers.4 The money is often a

liability, as it necessitates a near-constant

search for safe storage, discreet bankers to help

invest it legitimately, and any number of

schemes to obscure its origins. This situation

leaves the operations of international criminals

vulnerable to disruption by law enforcement

and other officials.

Terrorists, however, are interested in

sustaining an interlocking global cell structure

and finding ways to distribute money discreetly. Logistically, the biggest obstacle that

terrorists face is bank reporting requirements.

Groups such as Al Qaeda must find ways to

disaggregate and distribute significant

amounts of money into smaller denominations to sustain or expand a network of comparatively small cells (typically 3 to 4 operatives) that do the recruitment and conduct

operations. Additionally, if the money is derived from criminal activity, such as narcotics

trafficking, it must first be amassed, laundered, and then redistributed. Again, the more

transactions that occur, the more vulnerable

these groups are to detection.

A Shadow System

The hawala (or trust) system is an alternate method by which Islamic terrorists and

organized crime groups distribute money.5 The

system works on an honor scheme, with transaction records being kept only until the money

is delivered, at which time they are destroyed.

Anyone can go to a hawala dealer in thousands

of cities around the world and have any quantity of cash transferred to any place on the globe

in a matter of hours. In this way, no cash moves

across a border or through an electronic or

financial transfer system. The sender typically

identifies neither himself nor the recipient.

Rather, a code word is used that will allow the

recipient to collect the cash from a trusted

associate of the originating hawala dealer (or

hawaladar). Over time, the accounts between

dealers are balanced through future money

transfers or exchanges between the two hawaladars or a number of hawaladars in their

circle of associates. The accounts may be reconciled by mutual agreement as an exchange of

money or goods.

The ancient Chinese used a similar system

called fei qian, or flying money, which Arab

traders adopted to avoid robbery on the Silk

Road. Millions of hardworking Pakistanis,

Indians, Filipinos, and others living abroad use

the system to send remittances home to family

members. Hawala merchants typically charge

a 1 percent commission for a completed transaction; their main profit comes from currency

fluctuations and extra fees for moving large

amounts of money for big clients, who at times

happen to be drug traffickers and smugglers of

other illicit goods.

In September 2001, President George W.

Bush listed 27 terrorist organizations and

individuals whose assets were to be blocked in

American financial institutions. Since then,

more than 202 entities and individuals have

been identified for punitive financial action

worldwide. The principals behind the Al Qaeda

financing network reportedly are Al Barakaat

and Al Taqwa/Nada Management Group. Al

Barakaat is a Somali-based international

financial conglomerate with operations in over

40 countries, including the United States. The

organization’s founder, Shaykh Ahmed Nur

Jimale, reportedly is closely linked to Osama

bin Laden and has used Al Taqwa/Nada Group

to facilitate the financing and operations of Al

Qaeda and other terrorist organizations, such

as Hamas. Before its U.S. operations were

closed down, Al Barakaat reportedly wired at

least $500 million in annual worldwide profits

to the company’s central money-exchange

office in the United Arab Emirates. Al Qaeda

allegedly received a flat 5 percent cut of that

money, amounting to approximately $25

million a year.

Sources of Funds

Abuse of charitable organizations poses

another problem. A number of Islamic organizations allegedly have been penetrated and

manipulated by terrorist groups such as Al

Qaeda. In other instances, terrorists have

formed charitable organizations as fronts for

distributing money to international networks.

In both cases, it is likely that numerous innocent citizens have been contributing to what

they think are charities for causes such as

refugee resettlement and the nourishment of

children in Palestine. One of the largest such

charitable organizations in the United States,

the Holy Land Foundation, recently had its

assets frozen by the U.S. Government for its

alleged funding of Hamas activities. The Holy

Land Foundation raised a reported $13 million

from Americans last year. Other moneymaking

schemes include raising money from wealthy

patrons and providing seed funding to start-up

terrorist cells. It further involves shake-downs

and extortion, protection rackets, racketeering,

and credit card fraud.

No. 191, May 2002 Strategic Forum 3

a significant revenue

source for terrorist

networks is the trafficking and smuggling of

narcotics, arms, and people
4 Strategic Forum No. 191, May 2002

A significant revenue source for terrorist

networks is the trafficking and smuggling of

narcotics, arms, and people. Al Qaeda has been

supported by the trafficking of heroin—if not

directly, at least indirectly via the Taliban in

Afghanistan. Heroin destined for European

markets originates primarily in the Golden

Crescent region of Southwest Asia, which includes parts of southern Afghanistan, northern

Pakistan, and eastern Iran, as well as Central

Asia. In 2000, Afghanistan was estimated to

have produced between 3,276 and 3,656 metric

tons of opium. This represents about 70 percent

of the world’s supply and is valued between

$190 and $212 million. The Taliban allegedly

replaced smaller criminal traffickers and exercised a virtual monopoly for drugs exported

from that country.

The illicit sale of gold, diamonds, and

other precious gems is another method Al

Qaeda uses to generate and hide revenues.

Diamonds purchased illegally and below fair

market value from rebels in Sierra Leone are

then resold in Europe at a significant profit.

Gems are easy to hide, generally maintain

their value, and are virtually untraceable. Gold

is often used by hawaladars to balance the

accounts. Its origins also are untraceable

because it can be smelted, made into jewelry,

and reconstituted in a variety of forms. Gold is

probably more easily manipulated than gems

because it can be deposited on account without

a transaction report being required. Dubai is

one of the world’s least regulated gold markets.

Situated as it is at the center of the Gulf,

Africa, and South Asia, it is reportedly one

financial hub for militant groups that use gold

for illicit purposes.

Bin Laden’s Terror Capital

Since September 11, $34 million in terrorist assets, including $27 million belonging to Al

Qaeda and bin Laden, have been frozen in the

United States. A total of 161 nations have

blocked the assets of known terrorist organizations, amounting to another $70 million.

Action also is being taken to disrupt severely the

misuse of the hawala system and other underground remittance systems used by bin Laden,

Al Qaeda, and other terrorist organizations.

Not surprisingly, Osama bin Laden excels

at amassing and distributing large sums of

money to support his terrorist schemes. His

main sources for financial support include his

personal wealth, estimated between $280 million and $300 million, funds siphoned from

overt Muslim charities, and wealthy wellwishers, especially in the Gulf States. Allegedly,

a wide variety of international banks in the

Gulf are used to manipulate and move funds

using business front organizations owned by

bin Laden. Mohammad Jamal Khalifa, bin

Laden’s brother-in-law, is responsible for managing parts of the financial network that deal

with major investments in Malaysia, Mauritius,

the Philippines, and Singapore.6 Reportedly, bin

Laden has funded a number of network cell

operating expenses, including accommodations, safe houses, cars, and payments to operatives for the recruitment of new members. His

contributions have further purchased explosives and key components for explosive devices.

At least $5,000 is known to have been transferred from bin Laden holdings to operatives in

Yemen to fund the attack against the U.S.S.

Cole in 2000. The investment for bin Laden to

mount the September 11 attacks is estimated to

have been approximately $500,000, while the

total costs to the United States for cleanup,

property losses, and Federal Government

bailouts will exceed $135 billion.

Addressing the Problem

Although financial manipulation and

money laundering have long been stigmatized

in various resolutions by the United Nations

and other intergovernmental organizations,

broad-based declarations generally have lacked

muscle. The focal point for more serious practical cooperation has been the Group of 8

(G–8), which in 1989 established the Financial

Action Task Force (FATF) on Money Laundering. While this task force does not have universal membership and operates on consensus, the

effect of peer pressure by this multidisciplinary,

intergovernmental organization on states that

do not comply with its mandates is nevertheless

significant. It is composed of 29 member states,

as well as international organizations, such as

the United Nations, European Union, and

World Bank.

The most important FATF contribution is

setting standards. It maintains a list of 40

recommendations for combating money laundering in addition to publishing a bulletin of

noncooperative states maintained by the FATF

Non-Cooperative Countries and Territories

Initiative. These measures have become the de

facto international anti-money-laundering

standard. They cover financial systems and

their regulation, criminal justice systems,

including law enforcement, and international

cooperation. The recommendations allow

flexibility in implementation according to

particular circumstances and existing laws

and represent general principles of action to

which states have made a political commitment to adhere.

Working alongside the FATF is the Financial Stability Forum (FSF) Offshore Working

Group, which focuses almost exclusively on

offshore financial centers. Convened in 1999

at the request of the Group of 8 finance ministers, the FSF promotes international financial

stability through information exchange and

international cooperation in financial supervision. The Working Group on Offshore Financial Centers is charged with considering

the impact and significance of offshore financial centers in relation to global financial

stability. Jurisdictions are categorized in terms

of their financial supervision, cross-border

cooperation, and transparency. The weaker

states—such as Antigua and Barbuda, Aruba,

the Bahamas, Cayman Islands, Turks and

Caicos, and Vanuatu—have been identified as

undermining efforts to strengthen the global

financial system through their lack of cooperation and low-quality supervision of financial

transactions.

Following the attacks of September 11, the

FATF expanded its mission beyond money

laundering to include an effort to combat

terrorist financing. Eight special recommendations with regard to terrorist financing were

implemented in October 2001, coupled with an

appeal to all FATF members for immediate

compliance. The measures range from 

requiring members to provide closer scrutiny 

of transactions with noncooperative countries

to prohibiting financial transactions with 

these countries.

not surprisingly, Osama

bin Laden excels at amassing and distributing large

sums of money to support

his terrorist schemes
Yet these measures are not entirely new.

In October 1995, President William Clinton

signed Presidential Decision Directive 42,

which explicitly recognized that international

criminal activity poses a threat to U.S. national security. Specifically, President Clinton

noted the number of egregious overseas money

laundering centers and ordered the Departments of Justice, State, and Treasury, the Coast

Guard, the National Security Council, the

intelligence community, and other Federal

agencies to increase and integrate efforts

against international criminal activity and

money laundering. Interagency teams began

to negotiate with known money laundering

safe havens. More than a dozen countries were

identified as vulnerable to money laundering,

and these were targeted with a two-pronged

approach: increased bilateral law enforcement

cooperation using the critical nowhere to hide

principle and warnings about consequences

of failing to take action.

The consequences of failing to take action

continue to include the effective use of International Emergency Economic Powers Act authority to block foreign business and individual

assets, as well as prohibiting American entities

from dealing with them. The Office of Foreign

Assets Control oversees a sanctions program

that includes prohibitions against trading with

identified enemies of the United States as set

forth in a variety of lists generated by different

agencies in the U.S. Government. These include not only the names of known money

launderers and terrorists but also members of

narcotics cartels and individuals identified in

the Foreign Narcotics Kingpin Designation Act.

Particularly successful has been cooperation between and among financial intelligence

units (FIUs). These bodies are the vehicles for

much informal cooperation between law enforcement agencies, especially in the area of

investigative information exchanges. FIUs

receive international suspicious activity reports

(required under their respective domestic laws),

analyze financial information, disseminate

information to domestic agencies, and generally exchange information globally. The U.S.

Financial Crimes Enforcement Network (FinCEN) is in charge of enhancing the international exchange of financial intelligence

through the FIUs. In 2000, FinCEN arranged

159 information exchanges between FIUs.7

Post-9/11 Initiatives

The events of September 11 pushed

money laundering and the financing of terrorism to the forefront of domestic and foreign

policy concerns. President Bush has emphasized that the fight against terrorists cannot be

won without attacking the money that supports them: “the first strike in the war against

terror targeted the terrorists’ financial support.” As a result, Congress approved the USA

PATRIOT Act (2001).8 This act builds on and

strengthens many of the previous money

laundering acts.9 Among other things, it

amends Federal law governing a range of

illegal monetary transactions, including

money being manipulated for the purposes of

corruption of officials. It further prescribes

guidelines under which the Secretary of the

Treasury may require domestic financial

institutions and agencies to take specified

measures if reasonable grounds exist for concluding that jurisdictions, financial institutions, types of accounts, or transactions operating outside or within the United States are of

primary money laundering concern.

Along with these initiatives, asset forfeiture laws have been toughened substantially.

Funds that are found to have been laundered

are subject to seizure from interbank

accounts.10 Legislation has closed off any

possible loophole protecting legal money used

by terrorists by stating, inter alia, that any

assets used or intended to be used in the commission of a terrorist act or the proceeds of

such an offense, foreign or domestic, also are

subject to asset forfeiture.

In an effort to dismember Al Qaeda and

other similar groups, the U.S. Customs Service

is leading an interagency task force called

Operation Green Quest. Its main target is

abuse of the hawala system and the exploitation by Al Qaeda operatives of safe havens, such

as Dubai, Hong Kong, and Malaysia. In the

trial of the four terrorists convicted for their

role in the 1998 terrorist bombings of the

American Embassies in Tanzania and Kenya,

testimony was given that pointed to Dubai,

Hong Kong, London, and Malaysia, as the end

sources for the finances for the attacks. As a

result of this and other evidence, in 1999 and

early 2000, approximately $225 million of

assets linked to Al Qaeda through the Taliban

were blocked in U.S. financial institutions.

To strengthen law enforcement overseas,

the United States has entered into numerous

mutual legal assistance treaties (MLATs), which

provide for the exchange of financial information and evidence in criminal and related

matters. MLATs are particularly helpful in asset

forfeiture proceedings. To facilitate cooperation

in joint investigations, the United States shares

the profit of the seized assets with the state with

which it cooperated and has urged foreign

governments to share forfeited assets to improve cooperative international efforts.

The United States also has concluded a

number of customs mutual assistance agreements (CMAAs), which use the World Customs

Organization model. Using the CMAAs, the U.S.

Customs Service assists in gathering information and evidence for trade fraud, smuggling,

violations of export control laws, money laundering, and narcotics trafficking. Using agreements such as these, it is possible to attack the

elusive problem of money manipulation, albeit

more circuitously than enacting legislation.

Unfortunately, if no prior agreement exists with

a state, the United States is left in the difficult

position of painstaking negotiation on even the

most trivial details.

Shortly after the September 11 attacks,

the U.S. Treasury Department established the

Foreign Terrorist Asset Tracking Center that

aims to disrupt terrorists’ ability to manipulate

money in the international financial system.

Financial data will be used to track and target

terrorist financing worldwide and to dismantle

terrorist organizations by attacking their

financial structures. The Center is further

mandated to uncover all links between terrorist groups and legitimate business and financial institutions.

Yet exclusive focus on overseas financial

operations is inadequate. Many terrorist organizations are believed to have financial support

within the United States. In July 2000, U.S.

authorities arrested 18 Hizballah members

operating a cigarette smuggling cell in Charlotte, North Carolina. A number of these people

No. 191, May 2002 Strategic Forum 5

President Bush has

emphasized that the fight

against terrorists cannot

be won without attacking the money that

supports them
were later indicted for immigration fraud,

bribery and related conspiracies, and money

laundering. Seven of the 18 are believed to have

been providing support and resources directly to

Hizballah. In addition to Al Barakaat, which is

linked to Al Qaeda, another group—al-Itihaad

al-Islamiya—has operated a fundraising

organization in Minneapolis-St. Paul, Minnesota. These Minnesotan Somalis reportedly

have wired more than $75 million in donations

to East Africa in recent years, mainly to impoverished relatives, along with smaller sums for

guns and clan-based militia operations.11

Next Steps

Internationally, the United States and its

G–8 partners set the standard for regulations

designed to expose money manipulation. There

is, of course, no perfect way to suppress or

interdict every conceivable financial transaction

that might pose risks, even within the G–8. A

more plausible, though still ambitious, policy

goal would be to press for near-universal adoption of G–8 standards for transparent banking

practices, utilizing a mix of inducements and

pressures to obtain such adherence. The aim

would be to increase dramatically the costs and

risks of timely exposure that criminals and

terrorists would face when they seek to move

their funds into, out of, or through the publicly

regulated banking system in any country.

This objective may be accomplished in a

number of mutually reinforcing ways: first,

through capacity-building measures; second,

through measures to offset a surge in corruption that will result as financial regulations

become stricter; and third, by securing compliance with current multilateral money laundering agreements and enforcing the measures

against delinquent states as set forth in the

extraordinary FATF session in late 2001.

Capacity-Building. Building capacity will

entail a dedicated effort to assist countries to

find alternate ways to generate foreign exchange. It also will entail training law enforcement and justice officials to conduct antimoney-laundering and manipulation

investigations and prosecutions. The decrepit

condition of some criminal justice systems

constitutes an essential obstacle to attacking

money laundering and manipulation. The

criminal justice systems of some states will

require reforms so that there is a better strategic fit with other state systems.

Much frustration, confusion, and uncertainty often accompany the reform of justice

agencies. Two issues are critical. The first concerns the efficiency and effectiveness of criminal

justice generally. Frequently, a change in the

focus of jurisdictional responsibility requires a

corresponding reassessment of the management

and administrative structures. Systems that are

marred by mismanagement of scarce resources,

administrative duplication, poor communication, inefficiency, and ineffectiveness inevitably

find it difficult to sustain the confidence of the

publics that they serve, let alone be effective

international partners. Second, justice agencies

must aspire to the greatest possible openness in

their work, making it subject to external audit

and review. This helps justice institutions to

garner respect both symbolically and practically,

but, as with any bureaucratic entity, openness

does not come easily.

Curbing Corruption. The relationship

between money manipulation and corruption

is often overlooked in combating terrorist and

criminal activity; corruption is a critical enabler of terrorists and organized crime. Not

only does corruption minimize opportunities

for state control over the activities of international organized criminals and terrorists, but

also it inevitably prevents real sovereignty from

being exercised. Secret networks that operate

fluidly across the frontiers of several states

require impunity from detection and capture.

The subornation of public officials through

bribery, graft, collusion, or extortion is the

vehicle by which to secure that exemption.

Moreover, resort to such methods likely will

increase in vulnerable states as international

pressures begin to produce stricter financial

controls at the national level.

Any effort to suppress corrupt practices

must necessarily involve greater transparency

as well as administrative constraints within the

official institutions. Furthermore, mechanisms

that detect and punish corruption and limit

opportunities for corrupt behavior will assist in

the cleanup effort. The media can be put to

good use in such anticorruption campaigns;

publicizing and scrutinizing the behavior of

public servants regularly acts as a deterrent to

would-be abusers of power.

Multilateral Agreements. Internationally,

wider reporting of suspicious transactions to

the FATF of issues related to terrorism is a

logical complement to effective mutual law

enforcement assistance on a bilateral basis.

Such reporting, symbolically, is quite significant as it demonstrates that countries are not

solely responsible for the activities of transnational actors within their sovereign borders.

Hand-in-hand with wider reporting, foreign

countries must be urged to impose anti-moneylaundering laws on alternate remittance systems and ensure that nonprofit organizations,

such as charities, cannot be used to finance

terrorism. This would close the door on groups

that are using underground methods to obscure international money laundering and

manipulation schemes.

It is evident that terrorists and criminals

are more adroit than many states at adapting

to the realities of a globalizing world. Governments not only must catch up to the methods

being employed by such groups, but they also

must surpass them by responding creatively,

consistently, and quickly to new challenges.

The sooner the source of funding for organized

crime and terrorists can be halted significantly,

the sooner their operations will be restricted. A

number of multilateral and bilateral vehicles

which the United States can use to elicit cooperation already exist. What is needed is the

enforcement of existing methods and practices

for the suppression of money laundering and

manipulation. Yet more work needs to be done

to understand why this problem exists and

what the inherent constraints are in achieving

positive results.

Inherent Limitations

While tightening the noose around illicit

financial transactions is clearly necessary, the

scale of the challenge remains forbidding. To

start with, policymakers face continued challenges posed by poor or uneven sharing of

information between various states. Classified

information cannot easily be shared with

foreign nationals, complicating prosecution or

extradition proceedings. A concerted effort must

be made to ensure that information that is

unclassified remains so in order to guarantee

6 Strategic Forum No. 191, May 2002

a more plausible policy

goal would be to press

for near-universal

adoption of G–8 standards for transparent

banking practices
that it may be shared with other countries. At

the same time, more effective informationsharing necessarily requires greater numbers of

analysts with expertise on the international

financial system, as well as greater numbers of

people in international law enforcement with

fluency in foreign languages.

Beyond the problems of informationsharing, policymakers would be ill-advised to

ignore the factors that impel developing and

transitional economies to tolerate—indeed

often to encourage—illicit money transactions in the first place. The so-called losers of

globalization are finding it difficult to survive

in an increasingly competitive and interconnected world. Hence, simply condemning such

states as being uncooperative, setting standards

of best practices, or increasing scrutiny by FATF

member states will do little for their balance of

payments deficits. Many of the states currently

operating as safe havens are democratizing.

Their leaders now have to respond to citizen

demands for prosperity. If looking the other

way means vast amounts of foreign exchange

will flow into the country, governments may

find themselves bending to their need for

political survival first and international public

opinion second.

For these reasons, economic assistance

needs to be factored in as a way to cushion the

impact on weak states of complying with internationally recognized anti-money-laundering

regulations. After all, if financial systems were

brought to the verge of bankruptcy, the countries themselves would be destabilized. Organized crime and terrorist groups could more

easily infiltrate such regions, using the dual

strategies of corruption and extortion of officials. Consequently, to close loopholes for

money laundering and manipulation, countries in the money laundering business need to

find alternate sources of foreign exchange

while simultaneously detecting and preventing

official state corruption.

Policymakers also need to anticipate that

increasingly successful interdiction of illegal

monetary transactions by law enforcement will

tend to drive terrorists and criminal groups

further underground or toward more sophisticated methods of evasion. Thus, to the greatest

extent possible, anti-money-laundering/manipulation operations must address entire networks

rather than component parts; partial quick fixes

will only generate new problems. If only some

members of a terrorist network are apprehended

and their assets forfeited, for example, other

members will simply fill the void.

The pressures facing countries to make

the global financial system more transparent

are bound to increase over time, especially in

the face of ongoing threats of catastrophic

terrorism. The question is how to maintain the

right set of incentives to elicit the collaboration

of countries.

For the moment, the main obstacle that

confronts cooperation on money laundering

and manipulation remains the same one that

plagues the detection and prosecution of terrorists and criminals more generally. Sovereign

powers interpret public international law,

treaties, and agreements discretely. Terrorists

and criminals move through jurisdictions with

relative ease, while state and law enforcement

officials remain behind to negotiate effective

instruments that transcend borders. The exigencies of political survival for some national

leaders may also constrain international cooperation, if that means ultimately to surrender

one’s nationals to foreign law enforcement.

Ironically, domestic law enforcement authorities may find that their interests are more in

line with their counterparts in other states than

they are with other agencies in their own

governments. While none of these factors

should dissuade aggressive law enforcement

action against financial activity that underwrites terrorists and criminals, they do need to

be considered in devising a long-term strategy

for combating the problem.

Clearly, the exploitation of global financial systems by terrorists and criminals poses

threats to international security that cannot be

ignored. Money laundering and manipulation

are problems that know no boundaries and yet

are within the means of states to resolve. Meeting these challenges head-on must be part of

an overall campaign plan if the global war on

terrorism is ultimately to be won.

Notes

A version of this paper with additional citations can be

found at <www.ndu.edu/inss/insshp.html> 1

Money manipulation connotes the ability to move and

maneuver sums of money without detection, while money

laundering denotes the steps by which the proceeds of a crime

must be obscured and reintroduced into the financial system. 2

“The Money Laundering and Financial Crimes Strategy

Act of 1998” Pub.L. 105–310, U.S.C. 5340(2)(A), October 1998. 3

Cash transactions comprise between two-thirds and

three-quarters of all suspicious transaction reports in the

Organization for Economic Cooperation and Development

countries, which is surprising as the reliance on cash by the

general public has decreased rapidly in favor of a reliance on

credit and debit cards. 4

For example, 25 pounds of $20 bills may be carried in a

briefcase, but this only amounts to $20,000. $1.8 million in $20

bills weighs 184 pounds and would fit into a suitcase. Twenty

million dollars weighs 2,000 pounds, and $300 million weighs

30,000 pounds, which would require a C–130 or a cargo

container to transport. One billion dollars would require a

container or airplane such as a 747 with a payload of 100,000

pounds.5

I am indebted to Esther Bacon for her background

research on the hawala system, bin Laden’s financial holdings,

and Somali operations in the United States. 6

One of the four main committees that report directly to

bin Laden. The others are military, religio-legal, and media. 7

See, for example, The 2001 National Money Laundering Strategy (Washington, DC: U.S. Department of Treasury,

Office of Enforcement in Consultation with the U.S. Department

of Justice, September 2001). 8

Otherwise known as the Uniting and Strengthening

America by Providing Appropriate Tools Required to Intercept

and Obstruct Terrorism (USA PATRIOT Act) Act of 2001. 9

See especially Title III of International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001. 10 For the purposes of this act, foreign banks that have a

correspondent banking relationship with banks in the United

States are defined as being, for the purposes of summons and

subpoena power, the same as a bank in the United States. 11 Al-Itihaad al-Islamiya is thought to have formed in

Somalia following the 1991 overthrow of Muhammad Siad

Barre. It initially served as a fundraising apparatus for bin

Laden’s fledgling terrorist network. Prominent businessmen

associated with Al-Itahhad and acted as conduits for the money.

Through its separate business operations, al-Itihaad al-Islamiya

is one of the most financially influential groups in Somalia. AlItihaad members control telecommunications firms and moneytransfer companies. The group also profits from the trade of

khat, a leaf that many Somalis chew.

No. 191, May 2002 Strategic Forum 7

economic assistance

needs to be factored in 

as a way to cushion the

domestic impact in weak

states of compliance with

anti-money-laundering

regulations
8 Strategic Forum No. 191, May 2002

The Strategic Forum series presents original research by

members of the National Defense University as well as

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those of the contributors and do not necessarily reflect

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