Report to Congressional Requesters

United States General Accounting Office 

GAO 

November 2003 TERRORIST 

FINANCING 

U.S. Agencies Should 

Systematically Assess 

Terrorists’ Use of 

Alternative Financing 

Mechanisms 

GAO-04-163 
www.gao.gov/cgi-bin/getrpt?GAO-04-163.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Loren Yager at 

(202) 512-4128 or yagerl@gao.gov. 

Highlights of GAO-04-163, a report to 

congressional requesters 

November 2003 

TERRORIST FINANCING

U.S. Agencies Should Systematically 

Assess Terrorists' Use of Alternative 

Financing Mechanisms 

Terrorists use many alternative financing mechanisms to earn, move, and 

store assets (see table). They earn assets by selling contraband cigarettes 

and illicit drugs, by misusing charitable organizations that collect large 

donations, and by other means. They move funds by concealing their 

assets through nontransparent mechanisms such as charities, informal 

banking systems, and commodities such as precious stones and metals. 

To store assets, terrorists may choose similar commodities that maintain 

their value and liquidity. 

The extent of terrorists’ use of alternative financing mechanisms is 

unknown, owing to the criminal nature of terrorists’ use of alternative 

financing mechanisms and the lack of systematic data collection and 

analysis of case information. The Federal Bureau of Investigation (FBI) 

does not systematically collect and analyze data on these mechanisms. 

Furthermore, the Departments of the Treasury and of Justice have not 

yet produced a report, required under the 2002 National Money 

Laundering Strategy, which was to form the basis of a strategy to address 

how money is moved or value transferred via trade in precious stones 

and commodities. 

In monitoring terrorists’ use of alternative financing mechanisms, the U.S. 

government faces a number of challenges, including accessing ethnically or 

criminally based terrorist networks, targeting high-risk financing 

mechanisms that the adaptable terrorists use, and sharing data on charities 

with state officials. The Internal Revenue Service (IRS) has committed to, 

but has yet to establish, procedures for such data sharing. 

Examples of Alternative Financing Mechanisms That May Be Used to Earn, Move, and Store 

Terrorist Assets 

Alternative financing mechanisms Earning Moving Storing 

Trade in commodities 

 Illicit drugs X 

 Weapons X 

 Cigarettes X 

 Diamonds X X X 

 Gold X X 

Systems 

 Charities X X 

 Informal banking X 

Currency 

 Bulk cash X X 

Sources: GAO analysis based on government, industry, and research sources. 

Cutting off terrorists’ funding is 

essential to deterring terrorist 

operations. The USA PATRIOT Act 

expanded the ability of law 

enforcement and intelligence 

agencies to access and share 

financial information regarding 

terrorist investigations, but 

terrorists may have adjusted their 

activities by increasing use of 

alternative financing mechanisms. 

GAO was asked to assess (1) the 

nature of terrorists’ use of key 

alternative financing mechanisms 

for earning, moving, and storing 

terrorists’ assets; (2) what is known 

about the extent of terrorists’ use 

of alternative financing 

mechanisms; and (3) challenges 

that the U.S. government faces in 

monitoring terrorists’ use of 

alternative financing mechanisms. 

GAO recommends that (1) the 

Director of the FBI systematically 

collect and analyze data concerning 

terrorists’ use of alternative 

financing mechanisms; (2) the 

Secretary of the Treasury and the 

Attorney General produce the 

planned report based on up-to-date 

law enforcement investigations on 

precious stones and commodities; 

and (3) the IRS Commissioner 

establish interim procedures for 

sharing information on charities 

with state charity officials. 

The DOJ did not formally respond 

to our recommendation. The 

Treasury agreed to produce the 

planned report and IRS committed 

to expedite issuance of procedures. 
Page i GAO-04-163 Alternative Financing Mechanisms 

Letter 1

Results in Brief 3

Background 5

Terrorists Use Various Alternative Financing Mechanisms to Earn, 

Move, and Store Their Assets 9

Extent of Use of Alternative Financing Mechanisms Is Unknown 23

Key Challenges Impede Monitoring of Terrorists’ Use of Alternative 

Financing Mechanisms 28

Conclusions 34

Recommendations for Executive Action 34

Agency Comments and Our Evaluation 35

Appendix I Objectives, Scope, and Methodology 38 

Appendix II Comments from the Department of the Treasury 42 

GAO Comments 46

Appendix III Comments from the Internal Revenue Service 48 

Appendix IV GAO Contacts and Staff Acknowledgments 50 

GAO Contacts 50

Staff Acknowledgments 50

Tables 

Table 1: Key U.S. Government Entities Responsible for Deterring 

Terrorist Financing 8

Table 2: Examples of Alternative Financing Mechanisms That May 

Be Used to Earn, Move, and Store Terrorist Assets 10

Figures 

Figure 1: Hizballah Financiers Earn Assets through Cigarette 

Smuggling 13

Figure 2: Location of Benevolence International Foundation 

Offices Worldwide 16

Contents 
Page ii GAO-04-163 Alternative Financing Mechanisms 

Figure 3: Example of Hawala-type Transaction 18

Abbreviations 

ATF Bureau of Alcohol, Tobacco, Firearms, and 

 Explosives 

DEA Drug Enforcement Administration 

DHS Department of Homeland Security 

DOJ Department of Justice 

FBI Federal Bureau of Investigation 

FinCEN Financial Crimes Enforcement Network 

HAMAS Harakat al-Muqawama al-Islamiya–Islamic 

 Resistance Movement 

ICE Bureau of Immigration and Customs Enforcement 

INTERPOL International Criminal Police Organization 

IRS Internal Revenue Service 

OGQ Operation Green Quest 

TFOS Terrorist Financing Operations Section 

U.N. United Nations 

USA PATRIOT Act Uniting and Strengthening America by Providing 

 Appropriate Tools Required to Intercept and Obstruct 

 Terrorism Act 

This is a work of the U.S. government and is not subject to copyright protection in the 

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Page 1 GAO-04-163 Alternative Financing Mechanisms 

November 14, 2003 

The Honorable Richard J. Durbin 

Ranking Minority Member 

Subcommittee on Oversight of Government Management, 

 the Federal Workforce and the District of Columbia 

Committee on Governmental Affairs 

United States Senate 

The Honorable Charles E. Grassley 

Chairman 

Caucus on International Narcotics Control 

United States Senate 

U.S. government officials recognize that cutting off terrorists’ funding is an 

important means of disrupting their operations. The Uniting and 

Strengthening America by Providing Appropriate Tools Required to 

Intercept and Obstruct Terrorism Act (USA PATRIOT Act),1

 enacted 

shortly after the terrorist attacks of September 11, 2001, expanded the 

ability of law enforcement and intelligence agencies to access and share 

financial information regarding terrorist investigations. As initial U.S. and 

foreign government deterrence efforts focused on terrorists’ use of the 

formal banking or mainstream financial system, terrorists may have been 

forced to increase their use of various alternative financing mechanisms. 

These mechanisms enable terrorists to earn, move, or store assets and 

may include a variety of commodities and informal financial systems. 

You requested that we review what is known about terrorists’ use of 

alternative financing mechanisms.2

 In response, in this report we assessed 

(1) the nature of terrorists’ use of key alternative financing mechanisms 

for earning, moving, and storing terrorists’ assets; (2) what is known about 

the extent of terrorists’ use of alternative financing mechanisms; and (3) 

the challenges that the U.S. government faces in monitoring terrorists’ use 

 1

Pub. L. No. 107-56 (Oct. 26, 2001). 

2

Terrorists are individuals who are part of international organizations with the will and 

means to target the United States or U.S. interests abroad with violent or dangerous acts 

calculated to intimidate, coerce, or retaliate against government conduct (see 18 U.S.C. 

2331(1), 18 U.S.C. 2332b(g)(5)). 

United States General Accounting Office

Washington, DC 20548 
Page 2 GAO-04-163 Alternative Financing Mechanisms 

of alternative financing mechanisms. As agreed with your staff, the 

alternative mechanisms that this report addresses include the use of 

commodities, bulk cash,3

 charities, and informal banking systems, 

sometimes referred to as hawala.4

 We primarily focused on religious 

extremist movements in the Middle East noted in the National Strategy for 

Homeland Security, including al Qaeda, HAMAS (Harakat al-Muqawama alIslamiya—Islamic Resistance Movement), and Hizballah. In a subsequent 

report that you have requested, we will specifically address coordination 

of U.S. and international efforts abroad to deter terrorists’ use of 

alternative financing mechanisms.5

In conducting our review, we examined documentation and interviewed 

officials from U.S. agencies, including the Departments of Justice, the 

Treasury, Homeland Security, State, and Defense, as well as from the 

intelligence community. We also assessed information provided from 

various nongovernmental organizations, industry and charitable 

associations, researchers in the field, and the United Nations. In addition, 

we conducted fieldwork in Belgium and France, where we interviewed 

officials from several international entities including the Financial Action 

Task Force on Money Laundering, INTERPOL (International Criminal 

Police Organization), the European Union, and the World Customs 

Organization. At these locations, we also assessed information from 

government, law enforcement, and industry officials, as well as U.S. 

embassy officials. As discussed with your offices and agreed with U.S. law 

enforcement agencies, we have limited our reporting of specific examples 

of terrorists’ use of alternative financing mechanisms to publicly available 

information to ensure that law enforcement operations are not 

 3

The use of bulk cash refers to smuggling currency, travelers checks, or similar instruments 

across borders by means of a courier rather than through a formal financial system. 

4

According to the 2002 National Money Laundering Strategy, informal value transfer 

systems (referred to here as “informal banking systems”) are known by a variety of names 

reflecting ethnic and national origins predating the emergence of modern banking and 

other financial institutions. Included, among others, are systems such as hawala or hundi, 

terms commonly used when referring to Indian, Pakistani, and Middle Eastern systems. 

These systems provide mechanisms for the remittance of currency or other forms of 

monetary value—most commonly gold—without physical transportation or use of 

contemporary monetary instruments. 

5

Also at your request, we addressed U.S. domestic coordination efforts to deter terrorist 

financing under a separate report focusing on the National Money Laundering Strategy. 

See U.S. General Accounting Office, Combating Money Laundering: Opportunities Exist 

to Improve the National Strategy, GAO-03-813 (Washington, D.C.: Sept. 26, 2003). 
Page 3 GAO-04-163 Alternative Financing Mechanisms 

jeopardized. It is important to note that there are few such cases. Further 

details about our scope and methodology are contained in appendix I. 

Terrorists use a variety of alternative financing mechanisms to earn, move, 

and store their assets based on common factors that make these 

mechanisms attractive to terrorist and criminal groups alike. For all three 

purposes—earning, moving, and storing—terrorists aim to operate in 

relative obscurity, using mechanisms involving close knit networks and 

industries lacking transparency. More specifically, first, terrorists earn 

funds through highly profitable crimes involving commodities such as 

contraband cigarettes, counterfeit goods, and illicit drugs. For example, 

according to U.S. law enforcement officials, Hizballah earned an estimated 

profit of $1.5 million in the United States between 1996 and 2000 by 

purchasing cigarettes in a low tax state for a lower price and selling them 

in a high tax state at a higher price. Terrorists also earned funds using 

systems such as charitable organizations that collect large sums in 

donations from both witting and unwitting donors. Second, to move 

assets, terrorists seek out mechanisms that enable them to conceal or 

launder their assets through nontransparent trade or financial transactions 

such as the use of charities, informal banking systems, bulk cash, and 

commodities that may serve as forms of currency, such as precious stones 

and metals. Third, to store assets, terrorists may use similar commodities, 

because they are likely to maintain value over a longer period of time and 

are easy to buy and sell outside the formal banking system. 

Owing to the criminal nature of terrorists’ use of alternative financing 

mechanisms and the lack of systematic data collection and analysis, the 

extent of terrorists’ use of alternative financing mechanisms is not known. 

U.S. law enforcement agencies, and specifically the Federal Bureau of 

Investigation (FBI), which leads terrorist financing investigations, do not 

systematically collect and analyze data on alternative financing 

mechanisms. The lack of such data hinders the FBI from conducting 

systematic analysis of trends and patterns focusing on alternative 

financing mechanisms. Without such an assessment, the FBI does not have 

analyses that could aid in assessing risk and prioritizing efforts. Moreover, 

despite an acknowledged need for further analysis of the extent of the use 

of alternative financing mechanisms by terrorists, few rigorous studies 

have been conducted. For example, the Departments of the Treasury and 

Justice did not produce a report on the links between terrorist financing 

and precious stone and commodity trading, as was required by March 2003 

under the 2002 National Money Laundering Strategy. 

Results in Brief 
Page 4 GAO-04-163 Alternative Financing Mechanisms 

In monitoring terrorists’ use of alternative financing mechanisms, the U.S. 

government faces a number of significant challenges, a few of which 

include accessibility, adaptability of terrorists, and competing priorities. 

First, according to law enforcement agencies and researchers, it is difficult 

to access or infiltrate ethnically or criminally based networks that operate 

in a nontransparent manner, such as informal banking systems or the 

precious stones and other commodities industries. Second, the ability of 

terrorists to adapt their methods hinders efforts to target high-risk 

industries and implement effective mechanisms for monitoring high-risk 

industry trade and financial flows. According to the FBI, once terrorists 

know that an industry they use to earn or move assets is being watched, 

they may switch to an alternative commodity or industry. Finally, 

competing priorities create challenges to federal and state officials’ efforts 

to use and enforce applicable U.S. laws and regulations in monitoring 

terrorists’ use of alternative financing mechanisms. For example, although 

the Internal Revenue Service (IRS) agreed with us in 2002 to begin 

developing a system, as allowed by law, to share with states data that 

would improve oversight6

 and could be used to deter terrorist financing in 

charities, the IRS has not made this initiative a priority due to competing 

priorities. 

In this report, we recommend that the Director of the FBI, in consultation 

with relevant U.S. government agencies, systematically collect and analyze 

information involving terrorists’ use of alternative financing mechanisms. 

We also recommend that the Secretary of the Treasury and the Attorney 

General produce the report on the links between terrorism and the use of 

precious stones and commodities that was required by March 2003 under 

the 2002 National Money Laundering Strategy based on up-to-date law 

enforcement investigations. Finally, we recommend that the 

Commissioner of the IRS, in consultation with state charity officials, 

establish interim IRS procedures and state charity official guidelines, as 

well as set milestones and assign resources for developing and 

implementing both, to regularly share data on charities as allowed by 

federal law. 

The Department of Justice (DOJ) did not formally respond to our 

recommendation that the Director of the FBI, in consultation with relevant 

 6

See U.S. General Accounting Office, Tax-Exempt Organizations: Improvements Possible 

in Public, IRS, and State Oversight of Charities, GAO-02-526 (Washington, D.C.: Apr. 30, 

2002). 
Page 5 GAO-04-163 Alternative Financing Mechanisms 

U.S. government agencies, systematically collect and analyze information 

involving terrorists’ use of alternative financing mechanisms. However, in 

DOJ’s technical comments they agreed with our finding that the FBI does 

not systematically collect and analyze such information, but they did not 

specifically agree or disagree with our recommendation. In response to 

our recommendation regarding a planned report on precious stones and 

commodities, the Department of the Treasury responded that the report 

would be issued as an appendix to the 2003 National Money Laundering 

Strategy. However, the strategy was to be issued in February 2003 and had 

not been issued as of our receipt of Treasury’s comments on October 29. 

The IRS agreed with our overall recommendation to establish IRS 

procedures and state charity official guidelines to regularly share data on 

charities as allowed by federal law. The IRS also committed to expedite its 

efforts to establish procedures and guidelines by one year, the end of 

calendar year 2003, rather than 2004 as originally planned. However, the 

IRS did not address establishing milestones and assigning resources to 

meet the target date or interim guidelines should they miss the 2003 target 

date. 

In its fight against terrorism, the United States has focused on individuals 

and entities supporting or belonging to terrorist organizations including al 

Qaeda, Hizballah, HAMAS and others. Al Qaeda is an international terrorist 

network led by Osama bin Laden that seeks to rid Muslim countries of 

western influence and replace their governments with fundamentalist 

Islamic regimes. The al Qaeda network conducted the September 11 attack 

on the United States and was responsible for the August 1998 bombings of 

U.S. embassies in Kenya and Tanzania, as well as other violent attacks on 

U.S. interests. Al Qaeda reportedly operates through autonomous 

underground cells in 60 to 100 estimated locations worldwide, including 

the United States. Hizballah is a Lebanese group of Shiite militants that 

seeks to create a Muslim fundamentalist state in Lebanon modeled on Iran. 

Hizballah has planned, or been linked to, numerous terrorist attacks 

against America, Israel, and other western targets. Although Hizballah’s 

leadership is based in Lebanon, Hizballah is a vast organization with a 

global network of supporters and established cells in Africa, North and 

South America, Asia, and Europe. According to the State Department, 

HAMAS has pursued the goal of replacing Israel with an Islamic 

Palestinian state.7

 While HAMAS supplies humanitarian aid to Palestinians 

 7

U.S. Department of State, Patterns of Global Terrorism 2002 (Washington, D.C.: April 

2003). 

Background 
Page 6 GAO-04-163 Alternative Financing Mechanisms 

and has participated in peaceful political activity, the organization 

conducts large-scale suicide bombings. According to the State 

Department, HAMAS currently limits its terrorist operations to targeting 

Israeli civilians and the Israeli military in the Gaza Strip, the West Bank, 

and Israel, but Americans have been killed in HAMAS attacks, and the 

organization raises funds in North America and Western Europe. 

These terrorist organizations are known to have used alternative financing 

mechanisms to further their terrorist activities. Government officials and 

researchers believe that terrorists do not always need large amounts of 

assets to support an operation, pointing out that the estimated cost of the 

September 11 attack was between $300,000 and $500,000. However, 

government officials also caution that funding for such an operation uses a 

small portion of the assets that terrorist organizations hold—assets 

earned, moved, or stored through mainstream financial or alternative 

financing mechanisms. According to the Treasury’s Office of Foreign 

Assets Control, the support infrastructure critical for indoctrination, 

recruitment, training, logistical support, the dissemination of propaganda, 

and other material support requires substantial funding. 

A number of strategies and laws guide the U.S. government in deterring 

terrorists’ use of alternative financing mechanisms.8

 Among the strategies, 

for example, the Departments of Justice and the Treasury publish an 

annual National Money Laundering Strategy, which has increasingly 

focused on terrorist financing, including alternative financing methods. 

This strategy sets goals for U.S. agencies in combating terrorist financing 

and reports on progress made in implementing these goals. In addition, the 

Department of State issues an annual International Narcotics Control 

Strategy Report,

9

 which features a section describing mechanisms, cases, 

and efforts to deter terrorist financing. Moreover, the President’s National 

Security Strategy of the United States of America10 calls for the United 

States to work with its allies to disrupt the financing of terrorism by 

blocking terrorist assets, and the National Strategy for Combating

 8

We did not evaluate the adequacy or implementation of these strategies, with the 

exception of the 2002 National Money Laundering Strategy as it pertains to alternative 

financing mechanisms. 

9

U.S. Department of State, International Narcotics Control Strategy Report (Washington, 

D.C.: March 2003). 

10Office of Homeland Security, the White House, President’s National Security Strategy of 

the United States of America (Washington D.C.: July 2002). 
Page 7 GAO-04-163 Alternative Financing Mechanisms 

Terrorism11 includes an objective to interdict and disrupt material support 

for terrorists. Regarding laws, the authority of the USA PATRIOT Act of 

2001 significantly expanded U.S. law enforcement’s ability to deter, 

investigate, and prosecute cases of terrorist financing. More recently, the 

United States enacted the Suppression of the Financing of Terrorism 

Convention Implementation Act of 2002,12 which implements the 

requirements of the 1999 International Convention for the Suppression of 

the Financing of Terrorism. Among its provisions, this act makes it a crime 

to provide or collect funds with the intention of using the money for 

terrorist activities.13

Deterring terrorists’ use of alternative financing mechanisms falls within 

the overall U.S. interagency framework of plans, agency roles, and 

interagency coordination mechanisms designed to combat terrorism. In 

general, the National Security Council manages the overall interagency 

framework. The National Security Council heads the Counterterrorism 

Security Group, which is composed of high-level representatives (at the 

Assistant Secretary level) from key federal agencies that combat terrorism. 

To implement directives and strategies, various federal agencies are 

assigned key roles and responsibilities based on their core missions. 

Numerous components of the Departments of Justice, the Treasury, State, 

Homeland Security, and other agencies participate in efforts to combat 

terrorist financing (see table 1). In addition, the intelligence community 

plays a significant role.14

 11The White House, National Strategy for Combating Terrorism (Washington D.C.: 

February 2003). 

12Pub. L. No. 107-197, Title II (June 25, 2002). 

13See 18 U.S.C. 2339C(a)(1). 

14The intelligence community includes the Office of the Director of Central Intelligence; the 

Central Intelligence Agency; the National Security Agency; the National Imagery and 

Mapping Agency; the National Reconnaissance Office; the Defense Intelligence Agency and 

other offices within the Department of Defense for the collection of specialized national 

intelligence through reconnaissance programs and the intelligence elements of the Army, 

the Navy, the Air Force, and the Marine Corps; the FBI; the Department of the Treasury; the 

Department of Energy; the State Department’s Bureau of Intelligence and Research; and 

such other elements of any department or agency as may be designated by the President or 

jointly by the Director of Central Intelligence and the head of the department or agency 

concerned. 
Page 8 GAO-04-163 Alternative Financing Mechanisms 

Table 1: Key U.S. Government Entities Responsible for Deterring Terrorist Financing 

Department Bureau/division/office Role 

Central Intelligence 

Agency 

 Leads gathering, analyzing, and disseminating 

intelligence on foreign terrorist organizations and their 

financing mechanisms; charged with promoting 

coordination and information-sharing between all 

intelligence community agencies. 

Bureau of Customs and Border Protection Detects movement of bulk cash across U.S. borders 

and maintains data about movement of commodities 

into and out of the United States. 

Bureau of Immigration and Customs Enforcement 

(ICE - formerly part of the Treasury’s U.S. Customs 

Service) 

Participates in investigations of terrorist financing cases 

involving U.S. border activities and the movement of 

trade, currency, or commodities. 

Homeland Security 

U.S. Secret Service Participates in investigations of terrorist financing 

cases, including those involving counterfeiting. 

Bureau of Alcohol, Tobacco, Firearms, and 

Explosives (ATF) 

Participates in investigations of terrorist financing cases 

involving alcohol, tobacco, firearms, and explosives. 

Civil Division Defends challenges to terrorist designations. 

Criminal Division Develops, coordinates, and prosecutes terrorist 

financing cases; participates in financial analysis and 

develops relevant financial tools; promotes international 

efforts and delivers training to other nations. 

Drug Enforcement Administration (DEA) Participates in investigations of terrorist financing cases 

involving narcotics and other illicit drugs. 

Justice 

Federal Bureau of Investigation (FBI) Leads all terrorist financing investigations and 

operations; primary responsibility for collecting foreign 

intelligence and counterintelligence information within 

the United States. 

National Security 

Council 

 Manages the overall interagency framework for 

combating terrorism. 

Bureau of Economic and Business Affairs Chairs coalition subgroup of a National Security Council 

Policy Coordinating Committee, which leads U.S 

government efforts to develop strategies and activities 

to obtain international cooperation. 

Bureau of International Narcotics and Law 

Enforcement Affairs 

Implements U.S. technical assistance and training to 

foreign governments on terrorist financing. 

State 

Office of the Coordinator for Counterterrorism Coordinates U.S. counterterrorism policy and efforts 

with foreign governments to deter terrorist financing. 

Treasury Executive Office for Terrorist Financing and 

Financial Crime 

Develops U.S. strategies and policies to deter terrorist 

financing, domestically and internationally; develops 

and implements the National Money Laundering 

Strategy as well as other policies and programs to 

prevent financial crimes. 
Page 9 GAO-04-163 Alternative Financing Mechanisms 

Department Bureau/division/office Role 

Financial Crimes Enforcement Network (FinCEN) Supports law enforcement investigations to prevent and 

detect money laundering, terrorist financing, and other 

financial crime through use of analytical tools and 

information-sharing mechanisms; administers the Bank 

Secrecy Act. 

Internal Revenue Service (IRS) Criminal 

Investigation 

Participates in investigations of terrorist financing cases 

with an emphasis on charitable organizations. 

IRS Tax Exempt and Government Entities Administers the eligibility requirements and other IRS 

tax law that apply to charitable and other organizations 

that claim exemption from federal income tax. 

Office of Foreign Assets Control Develops and implements U.S. strategies and policies 

to deter terrorist financing; imposes controls on 

transactions; and freezes foreign assets under U.S. 

jurisdiction. 

Office of the General Counsel Chairs Policy Coordination Committee for Terrorist 

Financing, which coordinates U.S. government efforts 

to identify and deter terrorist financing; coordinates U.S. 

government actions regarding implementation of, and 

imposition of, economic sanctions under Executive 

Order 13224 with respect to the freezing of terroristrelated assets. 

Office of International Affairs Provides advice, training, and technical assistance to 

nations on issues including terrorist financing 

deterrence. 

Sources: GAO, using information from the Departments of Justice, the Treasury, State, and Homeland Security. 

Terrorists use an assortment of alternative financing mechanisms to earn, 

move, and store their assets. Terrorists, like other criminals, focus on 

crimes of opportunity in vulnerable locations worldwide and seek to 

operate in relative obscurity by taking advantage of close-knit networks of 

people and nontransparent global industry flows when earning, moving, 

and storing their assets.15 To earn assets, they focus on profitable crimes or 

scams involving commodities such as smuggled cigarettes, counterfeit 

goods, and illicit drugs and the use of systems such as charitable 

organizations that collect large sums. To move assets, terrorists use 

mechanisms that enable them to conceal or launder their assets through 

nontransparent trade or financial transactions such as charities, informal 

banking systems, bulk cash, and commodities such as precious stones and 

metals. To store assets, terrorists may use commodities that are likely to 

 15These preexisting networks are based on ethnic, geographic, or criminal links, providing 

access to people with similar interests and to established financing structures founded on 

trust-based relationships and often lacking substantial formal documentation. 

Terrorists Use Various 

Alternative Financing 

Mechanisms to Earn, 

Move, and Store Their 

Assets 
Page 10 GAO-04-163 Alternative Financing Mechanisms 

maintain their value over time and are easy to buy and sell outside the 

formal banking system. For example, terrorists may use precious stones 

and metals that serve as effective forms of currency. Table 2 shows 

examples of mechanisms that terrorists may use to earn, move, and store 

assets and also shows that terrorists may use assets for more than one 

purpose. 

Table 2: Examples of Alternative Financing Mechanisms That May Be Used to Earn, 

Move, and Store Terrorist Assets 

Alternative financing mechanisms Earning Moving Storing

Trade in commodities 

Illicit drugs X 

Weapons X 

Cigarettes X 

Diamonds X X X

Gold X X

Systems 

Charities X X 

Informal banking X 

Currency 

Bulk cash X X

Sources: GAO analysis based on information from government, industry, and research sources as noted in the scope and 

methodology. 

Terrorists earn assets through illicit trade in myriad commodities, such as 

drugs, weapons, and cigarettes, and systems, such as charities, owing to 

their profitability. Like other criminals, terrorists can trade any commodity 

in an illegal fashion, as evidenced by their reported involvement in trading 

a variety of counterfeit and other goods.16 However, although terrorists 

are generally motivated by ideological factors rather than pure profit, 

terrorists, like other criminals, benefit most from smuggling those 

commodities with the highest profit margins. Terrorist organizations have 

also earned funds using systems such as charitable organizations. The 

 16Although U.S. law enforcement agencies discussed some examples of terrorists’ use of 

scams involving common household commodities and the illicit sales of a variety of 

counterfeit goods, with the exception of one public cigarette case, examples are not 

included in this report because, according to the FBI, the cases are still open and 

discussion may jeopardize investigations and prosecutions. 

Terrorists Earn Assets via 

Systems and Commodities 

That Are Highly Profitable 
Page 11 GAO-04-163 Alternative Financing Mechanisms 

potential misuse of charitable contributions by terrorist organizations can 

take many forms, sometimes with the knowledge of the charity or donor 

and sometimes without their knowledge. 

Globally, trafficking in illicit drugs and weapons is a profitable means for 

terrorists to earn assets. Terrorists have been reportedly involved in 

trafficking illicit drugs, the most lucrative commodity illegally traded, 

according to the U.S. State Department’s Bureau of International Narcotics 

and Law Enforcement Affairs.17 According to the U.S. State Department’s 

2003 International Narcotics Control Strategy Report, this trade is valued 

in the billions and allows drug traffickers to corrupt government and law 

enforcement officials worldwide, particularly in countries with weakly 

enforced laws and regulations where officials are poorly paid. In East Asia, 

trafficking in drugs and weapons—as well as engaging in organized crime 

and official corruption—are serious international crimes that terrorist 

organizations have exploited to finance their operations.18 In South Asia, al 

Qaeda is reported to have trafficked heroin to support its operations and 

Osama bin Laden was reportedly involved.19 In Latin America, terrorists 

trafficked in drugs and arms to finance their activities. In some South 

American countries, international terrorist groups have established 

support bases that sustain their worldwide operations. For example, the 

triborder area where the borders of Argentina, Brazil, and Paraguay 

converge continues to be a safe haven for Hizballah and HAMAS, where 

the organizations raise funds to finance their operations through criminal 

enterprises. According to the DEA, terrorist operatives associated with 

Hizballah generate significant income from contraband, including drugs in 

several Latin American countries, to support their organization in 

Lebanon. 

Terrorists have earned assets through the highly profitable illicit trade in 

cigarettes. According to officials from the ATF, Hizballah, HAMAS, and al 

Qaeda have earned assets through trafficking in contraband cigarettes or 

 17The estimated 100 metric tons of cocaine that the U.S. government seizes each year could 

be worth as much as $10 billion to the drug trade. 

18U.S. General Accounting Office, Combating Terrorism: Interagency Framework and 

Agency Programs to Address the Overseas Threat, GAO-03-165 (Washington, D.C.: May 23, 

2003). 

19Southeast Asian terrorist organizations that have cells linked to al Qaeda were discovered 

in 2001 in Malaysia and Singapore, and their activities, movements, and connections 

traverse the entire region, but little information is available about their financing methods. 

Trafficking in Illicit Drugs and 

Weapons to Earn Assets 

Cigarette Smuggling and 

Counterfeiting to Earn Assets 
Page 12 GAO-04-163 Alternative Financing Mechanisms 

counterfeit cigarette tax stamps.20 ATF officials told us that as of August 

20, 2003, they were investigating at least six such cases with ties to 

terrorist groups. ATF officials also believe that there are several other 

investigations under way that may produce evidence linking them to 

terrorist groups. In the one closed case example, during 2002, an ATF 

investigation revealed a conspiracy where the defendants were illegally 

trafficking cigarettes from 1996 to 2000 between North Carolina, a low tax 

state, and Michigan, a high tax state, and funneling some of the illegal 

proceeds back to the Hizballah. In this case, family and religious ties 

enabled the smugglers to sell illegal cigarettes at a network of small 

convenience stores in Michigan. Figure 1 shows how the Charlotte, North 

Carolina, Hizballah cell profited from this illegal activity. The total value of 

the assets seized was about $1.5 million and consisted of cigarettes, real 

property, and currency. The investigation resulted in at least two 

convictions, in June 2002, for cigarette trafficking, money laundering, and 

providing material support to a terrorist organization.21 More generally, the 

opportunity to earn illegal profits in the cigarette industry is significant 

given the growing trend of counterfeit cigarettes and Internet cigarette 

sales.22 According to a European Commission Anti-Fraud Office official, 

cigarette smuggling is widespread in Europe, and in many eastern 

European countries smuggled cigarettes are commonly used as currency. 

(The Anti-Fraud Office could not formally discuss ongoing cases involving 

terrorists’ links, because it would jeopardize ongoing investigations.) 

 20In the United States, many states require the payment of an excise tax, a tax on the sale or 

manufacture of a commodity, usually a luxury item, on the sale of cigarettes. Some states 

require proof of payment in the form of tax stamps. 

21According to DOJ, the investigation also resulted in an additional 22 convictions by plea 

bargain on related charges. 

22The Phillip Morris Company estimates that the revenue loss to New York City from one 

shipping container of counterfeit cigarette sales is roughly $1.6 million. 
Page 13 GAO-04-163 Alternative Financing Mechanisms 

Figure 1: Hizballah Financiers Earn Assets through Cigarette Smuggling 

Terrorist organizations have earned funds using systems such as 

charitable organizations that provide a ready source of sizable funds 

generated from religious, ethnic, or geographic ties between people with 

similar interests.23 In many countries, charitable giving is a religious duty 

and, although most contributions are intended for legitimate humanitarian 

purposes, terrorists are able to divert these funds owing to the lack of 

 23According to DOJ, it has issued indictments in five cases involving the misuse of a 

charitable organization to earn assets, move assets, or both. Additionally, the FBI has 

discussed two additional ongoing cases. 

Misuse of Charitable 

Organizations to Earn Assets 
Page 14 GAO-04-163 Alternative Financing Mechanisms 

oversight or financial controls for charities to ensure that moneys are 

spent according to their intended purpose. The potential misuse of 

charitable contributions by terrorist organizations can take many forms. 

According to the Financial Action Task Force on Money Laundering’s 

2002-2003 Report on Money Laundering Typologies, some charitable 

organizations were established with a stated charitable purpose but may 

actually exist in part or only to earn funds for a terrorist organization. For 

example, according to the Treasury, Holy Land Foundation for Relief and 

Development in Texas raised $13 million in the United States in 2000, 

claiming that the money it solicited went to care for needy Palestinians, 

although evidence shows that HAMAS used some of the money that the 

Holy Land Foundation raised to support suicide bombers and their 

families.24 Terrorists or their supporters may also infiltrate legitimate 

charitable organizations and divert funds to directly or indirectly support 

terrorist organizations. In both cases, the charitable organizations may 

collect donations from both witting and unwitting donors. An example of a 

witting donor would be one who donated funds to a charity knowing that 

the funds would go to al Qaeda. An unwitting donor would be one who 

donated funds to the charity not knowing that funds would go to al Qaeda. 

To move assets, terrorists use mechanisms that enable them to conceal or 

launder their assets through nontransparent trade or financial transactions 

such as charities, informal banking systems, bulk cash, and commodities 

such as precious stones and metals. Although charities and informal 

banking systems serve many legitimate purposes, they entail a significant 

degree of nontransparency that terrorist groups and their supporters can 

exploit to move funds raised in the United States and elsewhere across 

borders. To carry assets across borders without detection, terrorists seek 

to smuggle bulk cash or convert their assets into commodities that are 

relatively liquid and easy to conceal. Terrorists can also convert their 

assets into internationally traded commodities that serve as forms of 

currency, such as gold, but are not subject to standard financial reporting 

requirements. Commodities that can be smuggled owing to their ease of 

concealment are particularly attractive. While terrorists use legitimate 

systems and commodities in an illicit manner to move their assets, they 

may also use illicit means such as trade-based money laundering to move 

 24In Holy Land Foundation v. Ashcroft, 219 F.Supp.2d 57, 75 (D.D.C. 2002), aff’d, 333. F.3d 

156 (D.C. Cir. 2003), the U.S. Court of Appeals for the District of Columbia Circuit found 

the evidence tying the Holy Land Foundation for Relief and Development to the terrorist 

organization Hamas to be substantial. 

Terrorists Move Assets via 

Systems and Commodities 

That Allow Ease of 

Concealment and Liquidity 
Page 15 GAO-04-163 Alternative Financing Mechanisms 

assets or settle accounts. Moreover, according to law enforcement 

officials, they may use more than one mechanism, layering their activities, 

to better hide the trail of their transactions. 

Terrorists may be attracted to charities to move their assets owing to the 

industry’s nontransparent nature. According to the Financial Action Task 

Force on Money Laundering’s 2002-2003 Report on Money Laundering 

Typologies, in addition to serving as a direct source of income, some 

charities may have served as a cover for moving funds to support terrorist 

activities, usually on an international basis. For example, according to 

court documents,25 the Global Relief Foundation, an Illinois-based charity, 

sends more than 90 percent of its donations abroad, and, according to 

DOJ, the foundation has connections to and has provided support and 

assistance to individuals associated with Osama bin Laden, the al Qaeda 

network, and other known terrorist groups. The Global Relief Foundation 

has also been linked to financial transactions with the Holy Land 

Foundation. Similarly, the DOJ asserts that the Illinois-based Benevolence 

International Foundation moved charitable contributions fraudulently 

solicited from donors in the United States to locations abroad to support 

terrorist activities.26 As shown by the shaded locations in figure 2, the 

foundation has offices worldwide through which it could facilitate the 

global movement of its funds. 

 25Global Relief Foundation vs. Paul H. O’Neil, et al., 207 F. Supp. 2d 779, U.S. District 

Court, Northern District of Illinois, Eastern Division, June 11, 2002. 

26U.S. v. Enaam Arnaout, Case No. 02CR892, U.S. District Court, Northern District of 

Illinois, Eastern Division, April 2002. 

Misuse of Charities to Move 

Assets 
Page 16 GAO-04-163 Alternative Financing Mechanisms 

Figure 2: Location of Benevolence International Foundation Offices Worldwide 

Terrorist organizations use a type of informal banking system sometimes 

known as hawala to move their assets, owing to the system’s 

nontransparent and liquid nature. An informal banking system is one in 

which money is received for the purpose of making it, or an equivalent 

value, payable to a third party in another geographic location, whether or 

not in the same form. Such transfers generally take place outside the 

conventional banking system through nonbank money services businesses 

or other, often unregulated and undocumented, business entities whose 

primary business activity may not be the transmission of money.27

Traditionally, expatriates—traders and immigrant laborers—used informal 

banking systems by sending money home from or to countries lacking 

formal and secure banking systems. Informal systems are still used by 

 27For example, according to an FBI press release, on August 13, 2003, a New York diamond 

jeweler was indicted for conspiring to operate an unlicensed money remittance system 

(informal banking system). Prosecutors alleged that the system was to be used in a 

terrorist financial transaction involving the purchase of a shoulder-fired missile. 

Misuse of Informal Banking 

Systems to Move Assets 
Page 17 GAO-04-163 Alternative Financing Mechanisms 

immigrant ethnic populations in the United States and elsewhere today.28

Such systems are based on trust and the extensive use of connections such 

as family relationships or regional affiliations. These systems also often 

involve transactions out of the United States to remote areas with no 

formal banking system or to countries with weak financial regulations, 

such as Afghanistan and Somalia, where the Al Barakaat informal banking 

system moved funds for al Qaeda. Figure 3 provides an example of how a 

simple hawala transaction can occur. 

 28U.S. and international law enforcement officials, as well as academic researchers, have 

identified a variety of ethnically based informal banking systems that originated in China, 

India, Pakistan, Vietnam, and Somalia, among numerous others. Officials and researchers 

note that these informal banking systems generally predate formal banks, and that some 

groups may consider them more familiar and trustworthy than formal banks. 
Page 18 GAO-04-163 Alternative Financing Mechanisms 

Figure 3: Example of Hawala-type Transaction 

According to FinCEN, while the majority of informal banking systems’ 

activity may be legitimate in purpose, these systems have been used to 

facilitate the financing of terrorism and the furtherance of criminal 
Page 19 GAO-04-163 Alternative Financing Mechanisms 

activities.29 As a result, law enforcement and international entities have 

focused a great deal of attention on the possibility that terrorist financing 

takes place through informal banking systems such as hawala to move 

money, particularly since September 11. For example, according to the 

FBI, some of the 19 September 11 hijackers allegedly used hawala to 

transfer thousands of dollars in and out of the United States prior to their 

attacks. Somalis working in the United States used the Al Barakaat 

informal banking network, founded with a significant investment from 

Osama bin Laden, to send money to their families in Somalia.30 According 

to a September 2002 Treasury fact sheet on terrorist financing, Al 

Barakaat’s worldwide network was channeling several million dollars a 

year to and from al Qaeda.31

The law enforcement community has long suspected that some terrorist 

organizations use bulk cash smuggling to move large amounts of currency. 

Bulk cash smuggling is an attractive financing mechanism because U.S. 

dollars are accepted as an international currency and can always be 

converted; there is no traceable paper trail; there is no third party such as 

a bank official to become suspicious of the transaction; and the terrorist 

has total control of the movement of the money. Conversely, the factors 

against cash smuggling include the costs of couriers and equipment, the 

risk of the courier stealing the money, the risk of informants within the 

network, or losses due to border searches or government inquiries that 

could compromise the network or mission. In the United States, bulk cash 

smuggling is a money laundering and terrorism financing technique that is 

designed to bypass financial transparency reporting requirements.32 Often 

the currency is smuggled into or out of the United States concealed in 

 29A Report to the Congress in Accordance with Section 359 of the Uniting and 

Strengthening America by Providing Appropriate Tools Required to Intercept and 

Obstruct Terrorism Act of 2001, Submitted by the Secretary of the U.S. Department of the 

Treasury, (Nov. 2002). 

30According to DOJ, Al Barakaat operated a hybrid hawala in which its informal system 

interconnected with the formal banking system. Because Al Barakaat also used financial 

institutions, law enforcement was able to discover the transactions to Somalia by analyzing 

Suspicious Activity Reports generated by the banks pursuant to their obligations under the 

1970 Bank Secrecy Act [Pub. L. No. 91-508, 84 Stat. 1114 (1970) (codified as amended in 12 

U.S.C. §§ 1829(b), 1951-1959 (2000); 31 U.S.C. §§ 5311-5330 (2000)]. 

31Treasury did not report a time frame during which this money was channeled. 

32Financial transparency reporting requires Currency and Monetary Instrument Reports, 

which obligates the filer to declare if he or she is transporting across the border $10,000 or 

more in cash or monetary instruments. 

Smuggling of Bulk Cash to 

Move Assets 
Page 20 GAO-04-163 Alternative Financing Mechanisms 

personal effects, secreted in shipping containers, or transported in bulk 

across the border via vehicle, vessel, or aircraft. According to the FBI, 

some of the 19 September 11 hijackers allegedly used bulk cash as another 

method to transfer funds. 

Furthermore, in response to the September 11 events, Customs33 initiated 

an outbound-currency operation, Operation Oasis, to refocus its efforts to 

target 23 identified nations involved in money laundering. According to the 

Department of Homeland Security’s (DHS) ICE, between October 1, 2001, 

and August 8, 2003, Operation Oasis had seized more than $28 million in 

bulk cash. However, according to ICE officials, while some of the cases 

involved were linked to terrorism, they were unable to determine the 

number and the extent to which these cases involved terrorist financing. 

Terrorist organizations have also reportedly traded in precious stones 

such as diamonds to launder money or transfer value because it is easy to 

conceal these materials and transfer them. Terrorists can move their 

assets by converting moneys into a commodity, such as diamonds, that 

serves as a form of currency. U.S. law enforcement and others told us that 

there is a potential for the use of gold to move assets, but little has been 

reported on the link between terrorists and gold, other than by the media. 

As we previously reported,34 diamonds can be used in lieu of currency in 

arms deals, money laundering, and other crimes. Diamonds are also easily 

smuggled because they have high value and low weight and are 

untraceable and odorless.35 The international diamond industry is 

fragmented, with numerous small mining operations located in remote 

areas of Africa, in countries that have porous borders and no rule of law. 

There is limited transparency in diamond flows owing to the complex way 

in which diamonds move from mine to consumer, the existence of 

significant data inconsistencies, and the industry’s historical avoidance of 

close scrutiny. Diamonds are often traded fraudulently, and smuggling 

 33Operation Oasis was established under the former U.S. Customs Service. The U.S. 

Customs Service was transferred to the Department of Homeland Security and its 

investigators were transferred to ICE. 

34U.S. General Accounting Office, International Trade: Critical Issues Remain in 

Deterring Conflict Diamond Trade, GAO-02-678 (Washington, D.C.: June 14, 2002). 

35According to the Congressional Research Service, a pound of diamonds in 2002 was 

worth around $225,000, compared with a pound of cash that was worth $45,000 and a 

pound of gold, which was worth $4,800. 

Trafficking in Precious Stones 

and Metals to Move Assets 
Page 21 GAO-04-163 Alternative Financing Mechanisms 

routes for rough diamonds are well established by those who have used 

such routes for decades to evade taxes or move stolen diamonds. 

According to a Belgian law enforcement official, a substantial number of 

the diamonds traded in Antwerp, the world’s largest trading center, are 

sold on the black market with no transaction records. Most officials and 

researchers we spoke with recognized a highly probable link between 

Hizballah and a part of the Lebanese diamond-trading network in West 

Africa. The U.N. Special Court Chief Prosecutor and the Chief Investigator 

in Sierra Leone both reported that the problem is current. 

Moreover, though U.S. law enforcement has been unable to substantiate 

the reports, officials from the U.N. Special Court for Sierra Leone,36

representatives of Global Witness (a London-based nongovernmental 

organization), media, and other U.S. and international experts have also 

stated that al Qaeda was reportedly buying diamonds from rebel groups in 

West Africa in the months leading up to September 11 and may still be 

involved in the trade.37 According to officials of the U.N. Special Court and 

Global Witness, they have witnesses of such a connection. U.S. 

government officials both within and among agencies remain divided over 

whether there is sufficient evidence to establish a current link between al 

Qaeda and the diamond trade. 

Gold also presents an opportunity for moving terrorist assets.38 As 

highlighted in a number of money-laundering cases, gold can be smelted 

into any form, camouflaged, and smuggled across borders. Because its 

form can be altered, gold used in trade often has no valid paper trail. 

ICE officials and researchers have focused on the possibility that terrorists 

may use trade-based money laundering to move their assets, owing to its 

 36In August 2000, the United Nations and the government of Sierra Leone agreed to 

establish a Special Court for Sierra Leone to prosecute persons bearing responsibility for 

serious violations of international humanitarian law and Sierra Leonean law committed in 

the territory of Sierra Leone since November 1996. 

37Al Qaeda first set up diamond mining and trading companies during the 1990s in Kenya 

and Tanzania. Although these diamond-trading operations were not fully developed, they 

did provide some financial returns and expertise for involvement in diamond trading in 

Sierra Leone. 

38According to the DHS ICE, in a drug-trafficking sting operation in the jewelry district of 

New York, 11 individuals were indicted for money laundering by accepting more than $1 

million cash in exchange for smelted gold items and diamonds they had reason to believe 

were going to be smuggled to South America. 

Use of Trade-based Money 

Laundering to Move Assets 
Page 22 GAO-04-163 Alternative Financing Mechanisms 

criminal and nontransparent nature.39 ICE defines trade-based money 

laundering as the use of trade to legitimize, conceal, transfer, and convert 

large quantities of illicit cash into less conspicuous assets such as gold or 

diamonds. In turn, these criminal proceeds are transferred worldwide 

without being subject to bank secrecy laws. For example, hawala 

operators reportedly use false (under- or over-) invoicing40 to balance 

books or move assets. According to the FBI, some cases of terrorist use of 

trade-based money laundering to move assets may exist but are too 

sensitive for discussion at this time. 

Terrorists may store assets in cash, or in commodities, that serve as forms 

of currency that are likely to maintain value over longer periods of time 

and are easy to buy and sell outside the formal banking system. However, 

little has been reported concerning the storing of terrorist assets in 

alternative financing mechanisms. The FBI testified in the case of the 

United States versus the Benevolence International Foundation that a 

key associate of Osama bin Laden kept thousands of dollars of cash in 

several currencies in shoeboxes in his apartment.41 According to a 

September 2002 United Nations Security Council letter, al Qaeda was 

believed to have shifted a portion of its assets to gold, diamonds, and other 

untraceable commodities. In 2002, we reported that diamonds might be 

used as a store of wealth for those wishing to hide assets outside the 

 39According to the 2002 National Money Laundering Strategy, the Black Market Peso 

Exchange, the largest known trade-based money laundering system in the Western 

hemisphere, is a system that converts and launders illicit drug proceeds from dollars to 

Columbian pesos. Typically, narcotics dealers sell Columbian drugs in the United States 

and receive U.S. dollars. The narcotics traffickers thereafter sell the U.S. currency to a 

Columbian black market peso broker’s agent in the United States. In return for the dealer’s 

U.S. currency deposit, the agent deposits the agreed-upon equivalent of Columbian pesos 

into the cartel’s bank account in Columbia. At this point, the cartel has successfully 

converted its drug dollars into pesos, and the Columbian broker and his agent now assume 

the risk for integrating the drug dollars into the U.S. banking system. The broker funnels 

the money into financial markets by selling the dollars to Columbian importers, who then 

purchase U.S. goods that are often smuggled back into Columbia to avoid taxes and 

customs duties. 

40False invoicing is a simple way of moving money across borders. For example, if a 

container of goods is worth $100,000, but is invoiced for $150,000, the subsequent payment 

of $150,000 will allow the movement of $50,000 to illicitly cross borders. 

41United States vs. Benevolence International Foundation, Inc. and Enaam Arnaout, 

Case Number 02 Cr. 0414, United States District Court, Northern District of Illinois, Eastern 

Division, April 2002. 

Terrorist Organizations 

May Store Assets in Cash 

or Commodities That 

Serve as Forms of 

Currency and Maintain 

Value and Liquidity 
Page 23 GAO-04-163 Alternative Financing Mechanisms 

banking sector, where assets could be detected and seized.42 According to 

Global Witness, a nongovernmental organization, British forces in 

Afghanistan found an al Qaeda training manual in December 2001 that 

addressed how to smuggle gold. While various press reports suggested 

that al Qaeda was shifting assets into gold last fall, U.S. law enforcement 

has been unable to substantiate these allegations. Terrorists may store 

their assets in gold because its value is easy to determine and remains 

relatively consistent over time. There is always a market for gold given its 

cultural significance in many areas of the world, such as Southeast Asia, 

South and Central Asia, the Arabian Peninsula, and North Africa.43 Gold is 

considered a global currency and is easily exchanged throughout the 

world. 

The true extent of terrorist use of alternative financing mechanisms is 

unknown, owing to the criminal nature of the activity and the lack of 

systematic data collection and analyses. Although we recognize that the 

criminal nature of terrorist financing prevents knowing the full extent of 

their use of alternative mechanisms, systematic data collection and 

analyses of case data does not yet exist to aid in determining the 

magnitude of the problem. The limited and sometimes conflicting 

information available on alternative financing mechanisms adversely 

affects the ability of U.S. government agencies to assess risk and prioritize 

efforts on terrorist financing mechanisms. 

It would be unrealistic to expect U.S. law enforcement to determine the 

full extent of terrorist or criminal use of alternative financing mechanisms. 

As we noted, terrorists, like other criminals, strive to operate in obscurity 

and thus seek out nontransparent mechanisms that have little or no paper 

trail, often operating in weakly regulated industries. The terrorist link may 

be difficult to determine or define. While dollar amounts of funds frozen in 

terrorist-related bank accounts have been used to serve as rough 

indicators of the extent of terrorist financial flows through the formal 

financial networks, researchers and government officials have presented 

 42GAO-02-678. 

43For example, in many of these countries, gold is commonly displayed in weddings, as a 

form of economic status, or to settle books in informal banking systems. 

Extent of Use of 

Alternative Financing 

Mechanisms Is 

Unknown 

Criminal Nature of 

Terrorists’ Use of 

Alternative Financing 

Mechanisms Precludes 

Knowledge of True Extent 
Page 24 GAO-04-163 Alternative Financing Mechanisms 

few such indicators about terrorist assets outside of formal mechanisms.44

Further, limited useful information exists about the total annual flow of 

assets through some types of alternative financing mechanisms, such as 

informal banking systems, and on what portion of that total may be 

terrorist assets. For example, there is a wide range of estimates about the 

total annual flow of transactions through informal banking systems; the 

United Nations estimates $200 billion, the World Bank and International 

Monetary Fund estimate tens of billions of dollars, and a FinCEN report 

noted that quantifying the amount with certainty is impossible. Moreover, 

officials and researchers we spoke with could not provide estimates on the 

extent of terrorist use of informal banking systems and other alternative 

financing mechanisms. 

U.S. law enforcement agencies—specifically, the FBI, which leads terrorist 

financing investigations and operations—do not systematically collect and 

analyze data on terrorists’ use of alternative financing mechanisms.45 When 

agencies inform the FBI that an investigation has a terrorist component, 

the FBI opens a terrorism case. However, the FBI cannot, through its 

existing processes, furnish the numbers of open or closed terrorist 

financing cases and cannot furnish the numbers of those cases broken 

down by funding source. According to the FBI’s Terrorist Financing 

Operations Section (TFOS) officials,46 most, if not all, terrorist cases 

involve a financial aspect, known as a “funding nexus,” which is normally 

considered to be a component of the overall investigation. However, the 

FBI does not currently isolate terrorist financing cases from substantive 

international terrorism cases, and its data analysis programs do not 

designate the source of funding (i.e., charities, commodities, etc.) for 

terrorist financing. The lack of such data hinders the FBI from conducting 

systematic analysis of trends and patterns focusing on alternative 

 44According to the Treasury’s Office of Foreign Assets Control, the United States had frozen 

$719,832 in al Qaeda assets as of July 31, 2003. 

45Once a U.S. law enforcement agency (for example, ATF, DEA, ICE, etc.) identifies a 

terrorist nexus in an investigation they are to notify the FBI. Information is to be shared 

through the FBI-led Joint Terrorism Task Forces in the field or the National Joint 

Terrorism Task Force in FBI headquarters. Agencies have representatives at each others’ 

locations to facilitate information-sharing. 

46The FBI’s Terrorist Financing Operations Section provides overall operational command 

to the interagency National Joint Terrorism Task Force at FBI headquarters and the Joint 

Terrorism Task Forces in the field that conduct terrorist financing investigations and 

operations. 

U.S. Law Enforcement 

Does Not Systematically 

Collect and Analyze Data 

on Terrorists’ Use of 

Alternative Financing 

Mechanisms 
Page 25 GAO-04-163 Alternative Financing Mechanisms 

financing mechanisms from its case data. Without such an assessment, the 

FBI would not have analyses that could aid in assessing risk and 

prioritizing efforts to address these and other mechanisms. According to 

TFOS, it and the DOJ Counterterrorism Section have initiated a number of 

proactive data mining47 and data link analyses using a number of 

government and private data sources to identify potential terrorists and 

terrorist-related financing activities, but these initiatives generally focus 

on formal financial systems, not alternative financing mechanisms. 

According to the Chief of TFOS, the FBI plans to collect information from 

the field offices through its Crime Survey/Threat Assessment and Annual 

Field Office Reports, and these tools might include information on 

alternative financing mechanisms. However, the formats and results of 

these tools were not available to us during our review. Although the FBI 

reported that it solicited information from the field on identified threats 

and efforts including terrorist financing, we received no evidence showing 

that these reports addressed alternative financing mechanisms using a 

systematic methodology. The FBI disseminated its Crime Survey/Threat 

Assessment to all of its field offices, and the responses were due to FBI 

headquarters in August 2003 after we completed our fieldwork. According 

to the TFOS Chief, this information from the field was to highlight the 

threats identified in the field and might include discussions of alternative 

financing mechanisms. Also, according to the TFOS Chief, the Annual 

Field Office Reports were to be disseminated in April 2003 and finalized 

before conclusion of our fieldwork on July 30, 2003. However, as of July 

30, 2003, the Annual Field Office Reports had not been finalized, and their 

status was unavailable. According to the TFOS Chief, the Annual Field 

Office Reports, once finalized in their new format, would furnish myriad 

useful documentation concerning the FBI’s efforts within the International 

Terrorism program and the terrorist financing arena. However, it remained 

unclear to what extent these documents would address alternative 

financing mechanisms. 

The DHS’s ICE, which participates in terrorist financing investigations in 

coordination with the FBI, also does not systematically collect and analyze 

data on terrorists’ use of alternative financing mechanisms. The former 

U.S. Customs Service initiated Operation Green Quest (OGQ) in October 

 47Data mining is the process of extracting meaningful information from large databases. 

Once extracted, the information can be analyzed to reveal hidden patterns, trends, 

relationships, and correlations between the data. 
Page 26 GAO-04-163 Alternative Financing Mechanisms 

2001 to focus on terrorist financing,48 and some of its data collection and 

analysis were intended to focus on alternative financing mechanisms. 

However, first, Customs officials were unable to furnish accurate numbers 

of open and closed terrorist financing cases. According to OGQ officials, 

they had approximately 580 open terrorist financing cases and 559 closed 

cases between OGQ’s inception in October 2001 and February 2003. 

However, Customs officials told us that, although cases may initially be 

thought to have a terrorist link and be categorized as such in their 

database, they might not be recategorized as nonterrorist cases once no 

terrorist link was found. Rather, the database captured criminal cases that 

may or may not have had a terrorist link; and the number of actual cases 

with a terrorist link, which would also depend on how “link” is defined, is 

not readily known. Second, ICE officials and former OGQ officials 

confirmed that they could not readily distinguish among the types of 

alternative financing mechanisms in their case database. According to 

these officials, it would take an intensive effort to segregate data by 

categories of alternative financing mechanisms. They said that they 

believed they could accomplish this, but that it would take resources and 

time, because the system was not set up to search for these mechanisms. 

Further, this method does not identify a terrorist link, requiring further 

effort to determine whether such a link existed. 

Moreover, while ICE officials use an analytical tool known as the 

Numerically Integrated Information System to investigate money 

laundering, terrorist financing, and other criminal activities, the tool, while 

useful, could not be used to automatically analyze information on 

alternative methods of terrorist financing and the extent of their use. The 

tool enables users to analyze databases for anomalies, criminal patterns, 

and specific transactions in global commerce when the user knows what 

to look for, based on other information or a tip; however, the tool does not 

automatically identify problem areas for attention. For example, if ICE 

officials know to compare export and import data between the United 

States and another country, and that country shares its data, then trade 

anomalies can be identified and further investigated using a number of 

databases and features. Customs officials used the system to identify 

 48According to the May 13, 2003, Memorandum of Agreement between the Department of 

Justice and the Department of Homeland Security Concerning Terrorist Financing 

Investigations, after June 30, 2003, OGQ no longer existed as a program name. DHS was to 

pursue terrorist financing investigations and operations solely through its participation in 

the FBI’s National Joint Terrorism Task Force, the Joint Terrorism Task Forces, and the 

Terrorist Financing Operations Section. 
Page 27 GAO-04-163 Alternative Financing Mechanisms 

money laundering based on irregular patterns in the gold trade between 

the United States and Argentina. However, the tool cannot be used to 

automatically flag anomalies in all U.S. imports and exports. Officials 

agreed that an automated feature would be beneficial and they believed 

that it would be developed in the future.49 Further, according to the May 

13, 2003, DOJ and DHS memorandum of agreement concerning the FBI’s 

management of terrorist financing cases, resulting DHS analyses will be 

shared with the FBI, but it remains unclear how or if this information 

might be integrated with FBI databases or analyses. 

Despite an acknowledged need from some U.S. government officials and 

researchers for further analysis of the extent of terrorists’ use of 

alternative financing mechanisms, in some cases, U.S. government 

reporting on these issues has not always been timely or comprehensive. 

This could affect planning efforts. Upon requesting U.S. government 

studies on terrorist or criminal use of alternative financing mechanisms, 

we found that few rigorous studies exist. We also found that studies from 

researchers and information from various government and 

nongovernmental sources sometimes conflict. 

The Departments of the Treasury and of Justice have yet to produce their 

report on how money is being moved or value is being transferred via the 

trade in precious stones and commodities. This report was required by 

March 2003 under the 2002 National Money Laundering Strategy. The 

information gained in the report was to form the basis of an informed 

strategy for addressing this financing mechanism. According to Treasury 

officials, the report was drafted in April and will be released as an 

appendix in the yet-to-be-released 2003 National Money Laundering 

Strategy. The draft was not made available for our review, and it remains 

unclear whether the report addresses the recent investigative efforts of 

other U.S. government and international entities on this subject. Moreover, 

we found widely conflicting information in numerous interviews 

concerning the use of precious stones and commodities and in the 

available reports and documentation. 

 49According to ICE’s technical comments on our draft report, an artificial intelligence 

function is being developed for utilization in the NIIS program, but ICE did not provide 

evidence of its development or what it would accomplish regarding alternative financing 

mechanisms. 

Analysis and Reporting on 

Terrorist Use of 

Alternative Financing Is 

Limited and Sometimes 

Conflicting 
Page 28 GAO-04-163 Alternative Financing Mechanisms 

Further, while a Treasury report to Congress on informal value transfer 

systems, required under the USA PATRIOT Act,50 described informal 

banking systems and related regulations, as required, it did not discuss 

terrorist use of such systems and did not include a review of the potential 

use of precious stones and commodities in such systems. While a 

discussion of precious stones and commodities was not specifically 

required under the USA PATRIOT Act, the report notes that there is a need 

for further research, particularly with regard to understanding the range of 

mechanisms associated with informal banking systems, including the use 

of gold and precious gems in hawala transactions, among others. 

The U.S. government faces challenges in monitoring terrorists’ use of 

alternative financing mechanisms, a few of which include accessibility to 

networks, the adaptability of terrorists, and competing priorities within 

the U.S. government.51 We recognize the inherent difficulty in monitoring 

terrorists’ use of alternative financing mechanisms and highlight three key 

challenges in this report. First, accessing the networks through which 

alternative financing mechanisms operate is difficult for U.S. authorities, 

because such systems are close knit and nontransparent. Second, the 

adaptable nature of terrorist groups can hinder authorities’ efforts to 

target industries and systems vulnerable to terrorists’ use. Finally, when 

monitoring alternative financing mechanisms, U.S. agencies face 

competing priorities that may present challenges for utilizing and 

enforcing existing laws and regulations or fully implementing strategic 

efforts. 

The difficulty of accessing the networks through which alternative 

financing mechanisms operate represents a significant challenge for U.S. 

efforts to monitor terrorists’ use of such mechanisms. In particular, these 

networks are difficult to access because they are close knit and based on 

trust. Informal banking systems, the diamond industry, and organized 

crime networks such as those that smuggle cigarettes and drugs are 

examples of alternative financing mechanisms that share these common 

factors. Similarly, terrorist organizations such as al Qaeda and Hizballah 

 50Pub. L. No. 107-56, Sec. 359(d). 

51As stated previously, issues concerning coordination and cooperation among U.S. 

government agencies and international entities abroad will be covered in a subsequent 

GAO report. 

Key Challenges 

Impede Monitoring of 

Terrorists’ Use of 

Alternative Financing 

Mechanisms 

Accessing Terrorists’ 

Close-knit, Nontransparent 

Financing Networks 

Presents Challenges for 

U.S. Law Enforcement 
Page 29 GAO-04-163 Alternative Financing Mechanisms 

are close knit and difficult to penetrate. The closeness and high degree of 

trust between parties to terrorist financing networks are often based on 

long-standing ethnic, family, religious, or organized criminal ties. 

According to officials from U.S. law enforcement and the Treasury, 

investigators who seek to monitor such networks rely on developing 

inside sources of information, but the high degree of trust within the 

networks poses challenges for recruiting informants and conducting 

undercover operations. Law enforcement and the Treasury also report that 

language and cultural barriers can increase the difficulty of accessing such 

networks by impeding communication between government officials and 

parties to the networks. 

Nontransparency in many of these alternative financing mechanisms poses 

another challenge to U.S. law enforcement’s ability to access and monitor 

terrorists’ use of them. One component of this nontransparency is lacking 

or indecipherable transaction records. While officials report that 

transaction records in the formal banking sector have been critical to their 

ability to freeze terrorists’ assets, the lack of a paper trail created by 

alternative financing mechanisms limits investigators’ ability to track and 

apprehend terrorist financiers. In one case, DEA pursued drug smugglers 

with suspected terrorist links who used hawala to transfer their profits to 

Lebanon. However, the indecipherable records of the hawala transactions 

to Lebanon impeded DEA’s ability to trace the money once it reached 

Lebanon. As a result, DEA was not able to ascertain if the smugglers were 

providing material support to terrorists. 

In addition to the lack of a paper trail, key trade data and accountability 

measures for industries vulnerable to terrorist financing can be poor or 

nonexistent, contributing to this nontransparency. For example, 

international data on the diamond industry show that import, export, and 

production statistics often contain glaring inconsistencies.52

Comprehensive international trade data on the industry are not available 

in volume terms, even though volume data are a better indicator of true 

trade flows. These data flaws inhibit analysts’ ability to find patterns and 

anomalies that could reveal criminal smuggling of the diamonds, including 

for terrorist financing. Further, as we previously reported, while a recent 

international initiative to curb trade in illicit diamonds, known as the 

 52Data inconsistencies may be attributed to various factors, including poor quality of data 

generated from many mining and trading nations, differences in how customs officials 

appraise shipments, industry practices such as selling goods on consignment or unloading 

stockpiles, false declarations by importers on the diamonds’ origin, and smuggling. 
Page 30 GAO-04-163 Alternative Financing Mechanisms 

Kimberley Process, incorporates some elements of increased 

transparency, critical shortcomings exist with regard to internal controls 

and monitoring.53

Terrorist organizations’ adaptability can hinder U.S. law enforcement’s 

efforts to target industries and mechanisms that are at a high risk for 

terrorist financing. According to law enforcement and researchers, once 

terrorists know that authorities are scrutinizing a mechanism they use to 

earn, move, or store assets, they may switch to an alternate industry, 

commodity, or fundraising scheme to avoid detection. According to a 

former intelligence official, in one case, terrorists who were counterfeiting 

household appliances switched to creating their own appliance brand 

when law enforcement began to scrutinize their activities. Analysts from 

the former Customs Service have identified various counterfeit goods 

including CDs, DVDs, and apparel as having a possible connection to 

terrorist financing. 

Additionally, according to researchers, terrorist groups such as al Qaeda 

can exploit their geographically diffuse structure to move the location of 

their operations if they are notified that authorities are pursuing their 

financing activities in a particular location. The DOJ reports that the 

Director of the Pakistan office of the Benevolence International 

Foundation, an international charity whose U.S. Executive Director was 

indicted for supporting al Qaeda and other terrorist organizations,54

avoided a Pakistani intelligence investigation by moving to Afghanistan 

with the foundation’s money and documents. Within the United States, 

geographic flexibility may also facilitate terrorist financing. For example, 

according to IRS investigators and researchers, terrorists may have moved 

their charity from one state to another and changed the charity’s name to 

evade law enforcement. 

 53GAO-02-678. Our assessment of the Kimberley Process found that it lacked controls to 

ensure that it would be effective in stemming the flow of conflict diamonds. We 

recommended that the Secretary of State, in consultation with the relevant government 

agencies, work with Kimberley Process participants to develop better controls including a 

reasonable control environment, risk assessment, internal controls, information-sharing, 

and monitoring. Our recent follow-up work showed that these weaknesses remain and 

could be exploited by financiers of terrorism. 

54On February 10, 2003, the U.S. Executive Director pled guilty to a racketeering 

conspiracy, admitting that he fraudulently solicited charitable organizations in order to 

provide financial assistance to persons engaged in violent activities overseas. According to 

DOJ, he was sentenced to 11 years in prison. 

Terrorists’ Adaptability 

Hinders Efforts to Target 

High-risk Mechanisms of 

Terrorist Financing 
Page 31 GAO-04-163 Alternative Financing Mechanisms 

This adaptability also presents challenges in monitoring terrorists’ use of 

informal banking systems, such as hawala. The USA PATRIOT Act 

strengthened existing anti-money laundering laws by requiring that 

operators of informal banking systems register with FinCEN and obtain 

state licenses, where required under state law. The act also requires that 

informal banking systems report suspicious transactions to FinCEN and 

maintain anti-money laundering programs. However, officials and 

researchers report that these requirements are difficult to enforce, and it is 

likely that numerous small hawala operations remain unregistered and 

noncompliant with one or more of these requirements. Terrorists may 

have adapted to these new regulations by developing and maintaining 

relationships and conducting business with the hawala operators that 

remain underground, increasing the likelihood that their transactions will 

not be detected. 

Addressing competing priorities presents challenges for U.S. government 

agencies’ efforts to monitor use of alternative financing mechanisms. 

Increased emphasis on combating terrorism and terrorist financing since 

the September 11 terrorist attacks has placed greater urgency on 

preexisting responsibilities for some agencies. New laws such as the USA 

PATRIOT Act are generally recognized as assisting U.S. law enforcement 

efforts but also increase the workload of agencies. While the FBI is the 

lead agency on terrorist financing investigations, all agencies have an 

inherent responsibility to aid in this effort. However, some agency officials 

noted that new tasks sometimes compete with traditional roles or increase 

workloads, creating a strain on their resources, which could slow the 

sharing of potentially useful information. As a result, agencies may fail to 

fully utilize existing laws or fully implement strategic efforts in a timely 

manner, as described below. 

Competing priorities slowed IRS plans to take advantage of law enabling 

greater information-sharing with the states. Although the IRS told us in 

February 2002 that it had begun to develop a system to share data with the 

states for the oversight of charities as allowed by law,55 the IRS has not 

 55The appropriate state officials can obtain details about the final denials of applications, 

final revocations of tax-exempt status, and notices of a tax deficiency under section 507, or 

chapter 41 or 42, under the Internal Revenue Code. However, IRS does not have a process 

to regularly share such data. See U.S. General Accounting Office, Tax-Exempt 

Organizations: Improvement Possible in Public, IRS, and State Oversight of Charities, 

GAO-02-526 (Washington, D.C.: Apr. 30, 2002). 

Competing Priorities 

Present Challenges for 

Monitoring of Alternative 

Financing Mechanisms 

Oversight of Charities 
Page 32 GAO-04-163 Alternative Financing Mechanisms 

made this initiative a priority and has not developed and implemented this 

system. While neither the IRS’s nor the states’ primary goal is deterring 

terrorism, using data-sharing systems is even more important now, when 

feasible, in light of the charities cases involving terrorist financing. States 

have an important role in combating terrorist financing because states 

share overall oversight responsibility for charities with the IRS. Further, 

according to state officials, questionable charities tend to move from state 

to state to avoid detection. According to the President of the National 

Association of State Charitable Organizations, the system of proactive 

information-sharing discussed with us in 2002 (including final denials of 

applications, final revocations of tax-exempt status, and notices of a tax 

deficiency) could be very useful for states in identifying and shutting down 

suspect charities, including charities involving terrorist financing. This 

system would establish uniform procedures for sending information from 

the IRS to states, including information about charities that have misused 

their funds. 

IRS officials attributed delays in fully developing and implementing the 

system to a number of factors, including competing priorities in the 

department and the desire to combine this effort with the potential for 

increased information-sharing that may be allowable under pending 

legislation.56 However, IRS officials agreed that they could have developed 

this system without passage of further legislation, and while they stated 

that they had begun to do so, as of July 31, 2003, when we concluded 

fieldwork, they had provided no evidence of work completed to date and 

had not specified a time frame for how and when implementation would 

be completed. Subsequently, on September 4, 2003, the IRS provided us 

with draft IRS procedures and draft guidelines for state charity officials. 

Officials said they were reviewing the drafts, and their proposed 

completion date for this information-sharing program is December 31, 

2004. The IRS did not establish milestones for meeting the completion date 

and did not establish interim guidelines. The President of the National 

Association of State Charitable Organizations told us that if the issuance of 

guidelines for state charity officials were further delayed, then interim 

guidelines would be useful. 

 56S.476, the Charity Aid, Recovery, and Empowerment Act of 2003. 
Page 33 GAO-04-163 Alternative Financing Mechanisms 

The extent of the workload created under the 2001 USA PATRIOT Act 

initially increased the amount of work required of FinCEN and may have 

slowed efforts to take full advantage of the act concerning the 

establishment of anti-money laundering programs. The information to be 

gained under the regulations, through financial institution registration and 

submission of required Suspicious Transaction Reports, was intended to 

be shared with law enforcement and intelligence analysts in their efforts to 

detect and deter terrorism. In October 2002, FinCEN officials told us that 

they had insufficient resources to draft regulations required under the act 

and they had not decided how to prioritize the workload. According to the 

2002 National Money Laundering Strategy issued by the Departments of 

the Treasury and Justice, the process was made more challenging by the 

fact that many of the new provisions imposed regulations on various 

sectors and financial institutions that were not previously subject to 

comprehensive anti-money laundering regulations, such as automobile and 

boat dealers, pawn brokers, and dealers in precious metals, stones, or 

jewels. This meant that time and resources were needed to study and 

consult with law enforcement and industry leaders. FinCEN rules for 

dealers in precious metals, stones, or jewels were proposed on February 

21, 2003, and have not been finalized. 

Implementation of the 2002 National Money Laundering Strategy, which 

ostensibly directs the U.S. government’s resources against money 

laundering and terrorist financing, has proven to be challenging partially 

owing to the number of competing priorities. The 2002 strategy states that 

the U.S. government has moved aggressively to attack terrorist financing 

by refocusing its ongoing anti-money laundering efforts and acknowledges 

the larger burden placed on agencies owing to provisions of the USA 

PATRIOT Act. The 2002 strategy contains 19 objectives and 50 priorities 

but does not assign resources to these priorities based on a risk or threat 

assessment. Although the Secretary of the Treasury and the Attorney 

General issued the annual strategy, Justice officials, including FBI 

officials, told us that the strategy contained more priorities than could be 

realistically accomplished, and said that it did not affect how they set 

priorities or aligned resources to address terrorist financing. Treasury 

officials said resource constraints and competing priorities were the 

primary reasons why strategy initiatives, including those related to 

alternative financing mechanisms, were not met or were completed later 

than expected. Moreover, although the 2003 National Money Laundering 

Anti-money Laundering 

Programs 

National Money Laundering 

Strategy 
Page 34 GAO-04-163 Alternative Financing Mechanisms 

Strategy was to be issued in February 2003,57 according to Treasury 

officials, as of July 31, 2003, the new strategy had not been published 

owing to the demands involved in the creation of DHS. At the conclusion 

of our review, Treasury officials told us that the Secretary of DHS would 

be added as a signatory to the 2003 National Money Laundering Strategy. 

However, subsequently, when reviewing the draft of this report, Treasury, 

DOJ, and DHS officials told us that the Secretary of the DHS would not be 

a signatory to the 2003 National Money Laundering Strategy. 

Efforts to disrupt terrorists’ ability to fund their operations may not 

succeed if they focus solely on the formal banking or mainstream financial 

sector. To form a viable strategy, the U.S. government and others face 

challenges in understanding the nature and extent of terrorists’ use of 

alternative financing mechanisms and in monitoring these and emerging 

mechanisms. While we recognize that the full extent of criminal activity 

cannot be determined, information can be systematically collected and 

synthesized to provide a useful gauge. We recognize that such analyses are 

difficult, but without an attempt to do so, information about terrorists’ 

usage and potential usage remains unknown, leaving vulnerabilities for 

terrorists to exploit. Since current FBI systems do not allow for such data 

collection and synthesis, linkages, patterns, and emerging trends may not 

be effectively identified and, thus, resources may not be focused on the 

most significant mechanisms. Further, without rigorous assessments of 

high-risk industries and systems, critical information may remain 

unidentified or unexplored, leaving such industries and systems vulnerable 

to exploitation by terrorists. Without good data and analysis, leading to 

viable threat assessments and strategies, U.S. government officials cannot 

make good decisions among competing priorities and the resources to 

address them. 

To establish a basis for an informed strategy to focus resources on the 

most significant mechanisms that terrorists use to finance their activities, 

we recommend that the Director of the FBI, in consultation with relevant 

 57The Money Laundering and Financial Crimes Strategy Act of 1998 (Strategy Act, see Pub. 

L. No. 105-310, 112 Stat. 2941 codified as 31 U.S.C. §§ 5340-42, 5351-55 (1998)) requires the 

President –acting through the Secretary of the Treasury and in consultation with the 

Attorney General and other relevant federal, state, and local law enforcement and 

regulatory officials –to develop and submit the annual National Money Laundering Strategy 

to Congress by February 1 of each year from 1999 through 2003. 

Conclusions 

Recommendations for 

Executive Action 
Page 35 GAO-04-163 Alternative Financing Mechanisms 

U.S. government agencies, systematically collect and analyze information 

involving terrorists’ use of alternative financing mechanisms. 

Moreover, to create a basis for an informed strategy for determining how 

money is being moved or value is being transferred via the trade in 

precious stones and commodities, we recommend that the Secretary of the 

Treasury and the U.S. Attorney General produce a report on this subject, 

fulfilling their overdue action item under the 2002 National Money 

Laundering Strategy. Such a report should be based on up-to-date law 

enforcement investigations of links between precious stones and 

commodity trading and the funding of terrorist groups, as required under 

the strategy. 

Finally, to improve the oversight of charities, leading to the possible 

disruption of terrorist financing, we recommend that the Commissioner of 

the IRS, in consultation with state charity officials, establish interim IRS 

procedures and state charity official guidelines, as well as set milestones 

and assign resources for developing and implementing both, to regularly 

share data on charities as allowed by federal law. 

We provided draft copies of this report to the following agencies for 

review: the Department of Justice, the Department of the Treasury, the 

Internal Revenue Service, the Department of Homeland Security and the 

Department of State. We received formal comments from the Treasury and 

IRS (see apps. II and III). We received technical comments from DOJ, 

DHS, and State, which we incorporated in the report as appropriate. 

The DOJ did not formally respond to our recommendation that the 

Director of the FBI, in consultation with relevant U.S. government 

agencies, systematically collect and analyze information involving 

terrorists’ use of alternative financing mechanisms. However, in DOJ’s 

technical comments, they agreed that the FBI does not systematically 

collect and analyze such information, but they did not specifically agree or 

disagree with our recommendation. DOJ commented that it designates 

sources of funding in its terrorist financing cases, but it does not initiate or 

organize investigations on an industrywide basis or as a result of the type 

of commodity used or particular means of transfer. Additionally, DOJ 

suggested that the effort might more appropriately be a function of the 

Treasury based on Treasury’s prior work on alternative financing 

mechanisms. However, according to FBI TFOS, their mission is to 

centralize and coordinate all terrorist financing investigations. As stated in 

this report, TFOS officials said that they and the DOJ Counterterrorism 

Agency Comments 

and Our Evaluation 
Page 36 GAO-04-163 Alternative Financing Mechanisms 

Section have already initiated a number of data mining and data link 

analysis initiatives to identify terrorist-related financing activities focusing 

on formal financing systems, but not alternative financing mechanisms. 

Further, TFOS officials said they plan to evaluate the feasibility of adding a 

separate designation for terrorist financing in their data system according 

to the source of funding. We continue to believe the FBI should work in 

consultation with relevant U.S. government agencies to systematically 

collect and analyze information involving terrorists’ use of alternative 

financing mechanisms, which would include strategizing with and 

engaging the expertise of other agencies such as Treasury and DHS, 

among others. 

In response to our recommendation that the Secretary of the Treasury and 

the U.S. Attorney General produce a planned report on precious stones 

and commodities, the Department of the Treasury responded that the 

report would be issued as an appendix to the 2003 National Money 

Laundering Strategy. However, the strategy was to be issued in February 

2003 and had not been issued as of our receipt of Treasury’s comments on 

October 29, 2003. Further, the Treasury did not address whether their 

report would include up-to-date information from law enforcement 

investigations of links between precious stones and commodity trading 

and the funding of terrorist groups, as required under the strategy. The 

Department of Justice did not comment on this recommendation. We 

continue to recommend that their report be based on up-to-date law 

enforcement investigations given the conflicting views and the lack of 

comprehensive reporting on terrorists’ use of precious stones and 

commodities. 

The IRS agreed with our overall recommendation to establish IRS 

procedures and state charity official guidelines to regularly share data on 

charities as allowed by federal law. Although IRS told us at the conclusion 

of our fieldwork that they planned to establish this information-sharing 

program by December 31, 2004, in response to our draft report and 

recommendation, the IRS committed to expediting its efforts by one year, 

having procedures in place by the end of calendar year 2003. Subsequent 

to our fieldwork, the IRS exhibited progress by producing draft 

procedures and guidelines. However, the IRS did not address our 

recommendation to establish milestones and assign resources to meet the 

target date or interim guidelines should they miss the 2003 target date. 

Given the complexity and time needed to complete the effort, as described 

by the IRS, we continue to recommend that the IRS establish milestones 

and assign resources to ensure that it meets its new target date. We also 
Page 37 GAO-04-163 Alternative Financing Mechanisms 

continue to recommend that IRS establish interim procedures and 

guidance should the IRS not meet its target date. 

As agreed with your offices, unless you publicly announce the contents of 

this report earlier, we plan no further distribution until 30 days from the 

report date. At that time, we will send copies to the Attorney General, the 

Secretary of Homeland Security, the Secretary of State, the Secretary of 

the Treasury, the Commissioner of Internal Revenue, and interested 

congressional committees. We also will make copies available to others 

upon request. In addition, the report will be available at no charge on the 

GAO Web site at http://www.gao.gov.

If you or your staff have any questions about this report, please call me at 

(202) 512-4128. Other contacts and staff acknowledgments are listed in 

appendix IV. 

Loren Yager 

Director, International Affairs and Trade 
Appendix I: Objectives, Scope, and 

Methodology 

Page 38 GAO-04-163 Alternative Financing Mechanisms 

The Ranking Minority Member of the Senate Committee on Governmental 

Affairs’ Subcommittee on Oversight of Government Management, the 

Federal Workforce and the District of Columbia and the Chairman of the 

Senate Caucus on International Narcotics Control asked us to assess (1) 

the nature of terrorists’ use of key alternative financing mechanisms for 

earning, moving, and storing terrorists’ assets; (2) what is known about the 

extent of terrorists’ use of alternative financing mechanisms; and (3) the 

challenges that the U.S. government faces in monitoring terrorists’ use of 

alternative financing mechanisms. 

To determine the nature of terrorists’ use of some key alternative 

financing mechanisms for earning, moving, and storing assets, we 

reviewed past GAO work, studies, analyses, and other documents 

prepared by experts from U.S. agencies, international organizations, and 

other groups. We also interviewed officials of the U.S. government, 

international entities, foreign governments, industry, and nonprofit groups, 

as well as representatives from academia and research institutions. Our 

scope and methodology were limited by the lack of complete access to 

sensitive information and documentation. In cases where little 

documentation was provided and views conflicted, we corroborated 

information to the extent possible and noted the conflicting views. 

We reviewed available documentation and interviewed officials from the 

following U.S. departments and agencies: 

• the Department of Justice (Criminal Division; Federal Bureau of 

Investigation; Bureau of Alcohol, Tobacco, Firearms, and Explosives; 

Drug Enforcement Administration); 

• the Department of the Treasury (Executive Office of Terrorist 

Financing and Financial Crime, Office of Foreign Assets Control, 

Financial Crimes Enforcement Network, Internal Revenue Service 

(IRS), and the Office of International Affairs); 

• the Department of Homeland Security (Bureau of Immigration and 

Customs Enforcement); 

• the Department of State (Office of the Coordinator for 

Counterterrorism, Bureau of International Narcotics and Law 

Enforcement Affairs, and Bureau of Economic and Business Affairs); 

• the Department of Defense (Office of the Secretary of Defense, Office 

of Naval Intelligence, Defense Intelligence Agency); 

Appendix I: Objectives, Scope, and 

Methodology 
Appendix I: Objectives, Scope, and 

Methodology 

Page 39 GAO-04-163 Alternative Financing Mechanisms 

• the Central Intelligence Agency; 

• the Congressional Research Service; 

• the U.S. Mission to the United Nations; 

• the U.S. Embassy in Belgium (political and economic officers, 

Department of Homeland Security (Customs), Drug Enforcement 

Administration, Federal Bureau of Investigation, Defense); 

• the U.S. Embassy in France (Department of Homeland Security 

(Customs), Federal Bureau of Investigation); 

• the U.S. Mission to the European Union; and 

• U.S. representatives to INTERPOL. 

We also reviewed and assessed available documentation and interviewed 

officials from the following international entities: 

• the United Nations; 

• INTERPOL; 

• the Financial Action Task Force on Money Laundering; 

• the World Customs Organization; 

• the European Union; 

• the Charities Commission on England and Wales; and 

• the Supreme Headquarters Allied Powers Europe (one of the North 

Atlantic Treaty Organization’s military commands). 

Additionally, we interviewed officials from Belgian law enforcement, the 

Federal Prosecutor’s Office, and the Ministry of Foreign Affairs, Foreign 

Trade and International Cooperation. We also interviewed experts from 

India and Pakistan on hawala systems. We interviewed the Chief 

Prosecutor and Chief Investigator for the United Nations Special Court for 

Sierra Leone. Moreover, we reviewed studies and analyses and 

interviewed officials from industry, nonprofit groups, academia, the 

media, and research institutions such as the Belgian Diamond High 

Council, the Phillip Morris Company, Global Witness, the International 
Appendix I: Objectives, Scope, and 

Methodology 

Page 40 GAO-04-163 Alternative Financing Mechanisms 

Peace Information Service, Council on Foreign Relations, Business 

Exposure Reduction Group, the Washington Institute for Near East Policy, 

and the Investigative Project, among others. 

To determine what is known about the extent of terrorists’ use of 

alternative financing mechanisms, we reviewed studies, analyses, and 

other documents and interviewed officials from the U.S. government, 

international entities, foreign governments, industry, nonprofit groups, 

academia, and research institutions. We attended and reviewed briefings 

from the Federal Bureau of Investigation and the U.S. Customs Service 

(now part of the Department of Homeland Security) on their data 

collection, databases, and analysis methods and discussed with them what 

their systems could and could not do. We were limited by the lack of 

complete access to sensitive information and by the lack of available and 

reliable data to determine the extent of terrorists’ use of alternative 

financing mechanisms. Our reporting on the current FBI data collection 

and analysis methods was curtailed by the Department of Justice due to 

sensitivity concerns. We also discussed studies completed and expected 

from the Departments of the Treasury and Justice as required under the 

2002 National Money Laundering Strategy with officials from these 

departments. 

To determine challenges that the U.S. government faces in monitoring 

terrorists’ use of alternative financing mechanisms, we reviewed past GAO 

work and documents from U.S. and foreign governments, industry, and 

international entities including strategies, such as the National Money 

Laundering Strategy; laws, regulations, rules, policies, procedures, and 

actions; and studies. For example, we analyzed federal and state tax laws 

pertaining to the oversight of charitable organizations, including reviewing 

Internal Revenue Code section 6104 on information-sharing between IRS 

and state regulators. Further, we interviewed officials from these 

organizations to corroborate analysis and documentary evidence. We also 

interviewed officials from the National Association of State Charitable 

Organizations and state Attorneys General Offices from California, New 

York, Pennsylvania, and Texas to identify challenges to deterring the use 

of charitable organizations in terrorist financing. According to the 

President of the National Association of State Charitable Organizations, 

California, New York and Pennsylvania are heavily regulated states while 

Texas is not. Additionally, we reviewed FinCEN issuance of rules and 

regulations as allowed under the USA PATRIOT Act. Further, we assessed 

and obtained views on competing priorities involved in implementing the 

2002 National Money Laundering Strategy. 
Appendix I: Objectives, Scope, and 

Methodology 

Page 41 GAO-04-163 Alternative Financing Mechanisms 

We conducted our fieldwork in Washington, D.C., and New York, N.Y.; 

Brussels and Antwerp, Belgium; and Paris and Lyon, France. We 

performed our work from August 2002 through July 2003 in accordance 

with generally accepted government auditing standards. 
Appendix II: Comments from the Department 

of the Treasury 

Page 42 GAO-04-163 Alternative Financing Mechanisms 

Appendix II: Comments from the Department 

of the Treasury 

Note: GAO comments 

supplementing those in 

the report text appear at 

the end of this appendix. 

The page numbers in this 

letter refer to a draft of 

this report. We have 

indicated page number 

changes. 

See comment 2. 

See comment 1. 
Appendix II: Comments from the Department 

of the Treasury 

Page 43 GAO-04-163 Alternative Financing Mechanisms 

See comment 5. 

See comment 4. 

See comment 3. 
Appendix II: Comments from the Department 

of the Treasury 

Page 44 GAO-04-163 Alternative Financing Mechanisms 

See comment 9. 

See comment 8. 

Now on p. 28. 

See comment 7. 

See comment 6. 
Appendix II: Comments from the Department 

of the Treasury 

Page 45 GAO-04-163 Alternative Financing Mechanisms 

See comment 11. 

See comment 10. 

Now on p. 33. 
Appendix II: Comments from the Department 

of the Treasury 

Page 46 GAO-04-163 Alternative Financing Mechanisms 

1. The term “earn” more fully captures the criminal effort involved in the 

range of alternative terrorist financing mechanisms. 

2. While the use of terrorist funding may provide transactions that can be 

investigated, the scope of this review focused on how terrorists earn, 

move, and store their assets. The final use of terrorist funding is not 

relevant in the context of this report. 

3. We amended the description of the Executive Office for Terrorist 

Financing to incorporate additional information provided. The 

description was edited in a manner consistent with those of the other 

agencies in the table and it captures both the information provided in 

the Executive Office’s Mission Statement as well as the agency 

comments. 

4. We amended the description of the Financial Crimes Enforcement 

Network in Table 1 to include its role in administering the Bank 

Secrecy Act. 

5. The description used was obtained from IRS Criminal Investigation 

and is consistent with the format used for other agencies. 

6. We incorporated the description of the Treasury’s Office of the 

General Counsel in Table 1. 

7. We respond to this comment on page 28. 

8. We agree that the USA PATRIOT Act did not specifically require that 

the Department of the Treasury report to Congress on informal value 

transfer systems include a discussion of precious stones and 

commodities. While a discussion of precious stones and commodities 

was not specifically required under the USA PATRIOT Act, the 

Treasury report notes that there is a need for further research, 

particularly with regard to understanding the range of mechanisms 

associated with informal banking systems, including the use of gold 

and precious gems in hawala transactions, among others. We modified 

our report, accordingly. 

9. The Department of the Treasury’s comments state that their report to 

Congress on informal value transfer systems did not discuss terrorists’ 

use of these systems because there was no direct evidence that 

terrorists had used these systems in the United States. However, the 

Treasury report states that “these [informal value transfer] systems 

have been used to facilitate the financing of terrorism” and the USA 

PATRIOT Act requirement for the report addresses the transfer of 

GAO Comments 
Appendix II: Comments from the Department 

of the Treasury 

Page 47 GAO-04-163 Alternative Financing Mechanisms 

money both domestically and internationally. The Treasury report 

provides no further discussion on the link between terrorist financing 

and these systems. 

10. The sentence is characterized accurately. The context of the 

discussion was the development of regulations required under the USA 

PATRIOT Act. 

11. We have omitted the example concerning the timeline for finalizing 

anti-money laundering program rules for money service businesses 

due to conflicting information presented by FinCEN during our review 

and the Department of the Treasury’s comments. 
Appendix III: Comments from the Internal Revenue Service 

Page 48 GAO-04-163 Alternative Financing Mechanisms 

Appendix III: Comments from the Internal 

Revenue Service 
Appendix III: Comments from the Internal Revenue Service 

Page 49 GAO-04-163 Alternative Financing Mechanisms 
Appendix IV: GAO Contacts and Staff Acknowledgments 

Page 50 GAO-04-163 Alternative Financing Mechanisms 

Elizabeth Sirois (202) 512-8989 

Kathleen Monahan (415) 904-2237 

In addition to those individuals named above, Kate Blumenreich, Tracy 

Guerrero, Janet Lewis, Kendall Schaefer, Jenny Wong, Mark Dowling, 

Rona Mendelsohn, and Reid Lowe made key contributions to this report. 

Appendix IV: GAO Contacts and Staff 

Acknowledgments 

GAO Contacts 

Staff 

Acknowledgments 

(320149) 
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