Terrorist Financing: U.S. Agencies Should Systematically Assess Terrorists' Use of Alternative Financing Mechanisms
Published: 2003-11-14T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: 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.
section_title: What GAO Found
paragraphs: Terrorists use many alternative financing mechanisms to earn, move, and store assets. 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.

section_title: Letter
paragraphs: 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), 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. 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  of alternative financing mechanisms. As agreed with your staff, the  alternative mechanisms that this report addresses include the use of  commodities, bulk cash, charities, and informal banking systems,  sometimes referred to as hawala. 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 al- Islamiya—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.
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  jeopardized. It is important to note that there are few such cases. Further  details about our scope and methodology are contained in appendix I.
subsections: section_title: Background
paragraphs: 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. While HAMAS supplies humanitarian aid to Palestinians  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. 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, 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 America 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  Terrorism 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, 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.
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.
section_title: Terrorists Use Various Alternative Financing Mechanisms to Earn, Move, and Store Their Assets
paragraphs: 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. 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  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.
subsections: section_title: Terrorists Earn Assets via Systems and Commodities That Are Highly Profitable
paragraphs: 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. 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  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.
subsections: section_title: Trafficking in Illicit Drugs and Weapons to Earn Assets
paragraphs: 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. 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. In South Asia, al  Qaeda is reported to have trafficked heroin to support its operations and  Osama bin Laden was reportedly involved. 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.
section_title: Cigarette Smuggling and Counterfeiting to Earn Assets
paragraphs: 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  counterfeit cigarette tax stamps. 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. 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. 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.)
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. 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  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. 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.
section_title: Terrorists Move Assets via Systems and Commodities That Allow Ease of Concealment and Liquidity
paragraphs: 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  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.
subsections: section_title: Misuse of Charities to Move Assets
paragraphs: 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, 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. 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.
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.  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  immigrant ethnic populations in the United States and elsewhere today.  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.
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  activities. 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. 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.
section_title: Smuggling of Bulk Cash to Move Assets
paragraphs: 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. Often  the currency is smuggled into or out of the United States concealed in  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, Customs 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.
section_title: Trafficking in Precious Stones and Metals to Move Assets
paragraphs: 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, 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. 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  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,  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. 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. 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.
section_title: Use of Trade-based Money Laundering to Move Assets
paragraphs: ICE officials and researchers have focused on the possibility that terrorists  may use trade-based money laundering to move their assets, owing to its  criminal and nontransparent nature. 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-) invoicing 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.
section_title: Terrorist Organizations May Store Assets in Cash or Commodities That Serve as Forms of Currency and Maintain Value and Liquidity
paragraphs: 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. 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  banking sector, where assets could be detected and seized. 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. Gold is  considered a global currency and is easily exchanged throughout the  world.
section_title: Extent of Use of Alternative Financing Mechanisms Is Unknown
paragraphs: 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.
subsections: section_title: Criminal Nature of Terrorists’ Use of Alternative Financing Mechanisms Precludes Knowledge of True Extent
paragraphs: 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  few such indicators about terrorist assets outside of formal mechanisms.  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.
section_title: U.S. Law Enforcement Does Not Systematically Collect and Analyze Data on Terrorists’ Use of Alternative Financing Mechanisms
paragraphs: 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. 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, 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  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 mining 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  2001 to focus on terrorist financing, 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  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. 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.
section_title: Analysis and Reporting on Terrorist Use of Alternative Financing Is Limited and Sometimes Conflicting
paragraphs: 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.
Further, while a Treasury report to Congress on informal value transfer  systems, required under the USA PATRIOT Act, 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.
section_title: Key Challenges Impede Monitoring of Terrorists’ Use of Alternative Financing Mechanisms
paragraphs: 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. 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.
subsections: section_title: Accessing Terrorists’ Close-knit, Nontransparent Financing Networks Presents Challenges for U.S. Law Enforcement
paragraphs: 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  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.  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  Kimberley Process, incorporates some elements of increased  transparency, critical shortcomings exist with regard to internal controls  and monitoring.
section_title: Terrorists’ Adaptability Hinders Efforts to Target High-risk Mechanisms of Terrorist Financing
paragraphs: 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,  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.
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.
section_title: Competing Priorities Present Challenges for Monitoring of Alternative Financing Mechanisms
paragraphs: 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.
subsections: section_title: Oversight of Charities
paragraphs: 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, the IRS has not  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. 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.
section_title: Anti-money Laundering Programs
paragraphs: 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.
subsections: section_title: National Money Laundering Strategy
paragraphs: 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  Strategy was to be issued in February 2003, 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.
section_title: Conclusions
paragraphs: 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.
section_title: Recommendations for Executive Action
paragraphs: 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  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.
section_title: Agency Comments and Our Evaluation
paragraphs: 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  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  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.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: 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);  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 Financial Action Task Force on Money Laundering; the World Customs Organization; 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  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.
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.
section_title: Appendix II: Comments from the Department of the Treasury
subsections: section_title: GAO Comments
paragraphs: 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  systems  have been used to facilitate the financing of terrorism” and the USA  PATRIOT Act requirement for the report addresses the transfer of  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.
section_title: Appendix III: Comments from the Internal Revenue Service
section_title: Appendix IV: GAO Contacts and Staff Acknowledgments
subsections: section_title: GAO Contacts
section_title: Staff Acknowledgments
paragraphs: 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.