Terrorist financing is a huge concern for governments, regulators and banks the world over. Money laundering is driven by profit, whereas terrorist financing is about funding specific activities. Even relatively small amounts of money can be used to fund activities which have massive consequences. The international bodies (FATF, UNSC etc) have responded to this in a number of ways but there are still problems with the cross-border nature of the issue, the use of new technology and the unintended consequences of regulation.
Cross-Border Complexity and Jurisdictional Issues
Terrorist financing is a global business, and cross-border complexity is a major challenge. Funds are raised in one jurisdiction, moved through several others, and then used in the jurisdictions where terrorist groups are active. The differences in law and enforcement between jurisdictions can be exploited. The 9/11 Commission Report is a case in point in that it noted Al-Qaeda used both the formal banking system and the informal hawala system to move funds across borders (National Commission on Terrorist Attacks, 2004). A similar example was the 2022 operation in which Europol and the Middle East financial intelligence units worked together to break up a terror financing network which had funds originating from donors in Europe, moving them through a series of shell companies in the Middle East and then on to support terrorist groups in Syria. The operation was a typical example of the difficulty of tracing funds through a complicated web of international transactions, and it relied on cooperation among several FIUs. Information sharing between FIUs is often delayed, and some developing-world FIUs simply don't have the resources to keep up. As a result, compliance officers need to be particularly vigilant in high-risk countries and closely monitor correspondent banking relationships to ensure they are not unintentionally facilitating illegal cross-border transactions (FATF, 2021).
Misuse of New Technologies
The explosion of new technology has brought both benefits and risks for terrorist financing. Virtual currencies and crypto-currencies in particular allow users to remain anonymous and so provide a means for terrorists to raise and move funds in secret. The use of privacy coins such as Zcash and Monero intensifies the regulatory setting. While FATF has issued guidance to VASPs (Virtual Asset Service Providers), the extent to which countries adopt it differs markedly (FATF, 2021). For example, there has been a relatively slow uptake of comprehensive FATF standards on virtual assets in certain regions such as Sub-Saharan Africa, parts of Southeast Asia and certain parts of the Middle East. This leads to a patchy regulatory system which can be exploited by terrorist groups.
The dark web has also been used by terrorist groups as a means of fundraising via illegal marketplaces, crowdfunding and peer-to-peer lending.
This makes it even more difficult for regulators and compliance people to track the money. The emergence of FinTech and mobile payment platforms in particular (within jurisdictions having weak regulation) has introduced new risks. These platforms have been a major driver of financial inclusion in Africa and South Asia, but their lack of regulation has also made them attractive to terrorist groups (World Bank, 2016). In response to this, financial institutions are now utilising blockchain analytics and AI driven monitoring tools.
Financial Inclusion vs Over-Regulation
Another issue is striking the right equilibrium between financial inclusion and regulation. If the rules are too onerous, then banks will simply stop serving certain customers or certain areas (a phenomenon recognised as 'de-risking'). That may reduce direct risk, but it will also push money into hiding. A good example is the difficulty non-profits have getting emergency funds to people in conflict zones. That can effectively stop aid from getting through and force the very people that need it to use unregulated channels such as hawala, which in turn is a channel that terrorist groups use (Keatinge & Keen, 2020). The World Bank (2016) says financial inclusion should be part of the solution. Bringing the marginalised into the regulated system enables authorities to see the money and is therefore a key part of the fight against money laundering and terrorist financing.
To deal with these issues there are a number of policy options available. You can have tiered customer due diligence whereby the level of due diligence applied is commensurate with the risk of the customer or the transaction. So for example a low value account with a refugee or an informal worker might only require a very basic level of due diligence, whereas a higher risk transaction would be subject to much more rigorous checks. Regulators could issue exclusion lists for just the most high risk jurisdictions or sectors rather than a complete ban. Improved information sharing between banks and regulators could clarify the risks associated with non-profits, reducing the need for de-risking. You could allow a certain class of trusted international NGO to pre-register and go through a standardised due diligence process so that their transactions are not delayed in an emergency. Regulatory sandboxes could be used to test out new approaches to extending financial services to the unbanked. All of these are ways of achieving greater inclusion through the adoption of targeted, risk-based policy and regulatory innovation.
Global Responses and Best Practices
International standards, national legislation and international co-operation all underpin the fight against terrorist financing. The FATF Recommendations are the primary basis for global AML/CFT policy and require countries to adopt risk-based supervision, guarantee transparency of ownership and regulate VASPs. The UNSC Resolutions 1267 and 1373 require that assets of designated terrorist groups be frozen and provide the legal basis for sanctions. The IMF and World Bank have both been active in helping countries to assess their risk and build stronger institutions (World Bank, 2016). Public/private partnerships have now kicked off a number of initiatives to improve information sharing between regulators, law enforcement and the banking sector. Technology is increasingly being used with AI, big data and blockchain all being deployed to assist compliance officers in identifying suspicious activity. For banks, the use of such tools is now a regulatory requirement rather than an option.
The assessment of the efficacy of these measures is pretty clear in terms of improving international co-operation and detection. The FATF standards have driven improved due diligence and greater transparency, in some cases effectively cutting off sources of terrorist funding. The VASP regulation requirement has started to close off some of the abuse routes in the crypto space. There are still implementation gaps and many countries are not able to enforce the standards to the extent required. That means that terrorist groups still have the ability to find ways to exploit the informal financial system and go to jurisdictions that have weaker controls. The use of AI and blockchain analytics has certainly improved the ability to detect suspicious activity but is hampered by lack of resources and lack of data sharing. Standards and new technologies are clearly a good thing, but ultimately their effectiveness will depend on the strength of enforcement, the extent of adoption, and the ability to keep up with the evolving threat landscape.
Strategic Priorities of the Future
Looking forward, the battle against terrorist financing will require even more international co-operation and innovative policy solutions. Greater cross-border co-operation and real time intelligence sharing will be vital. The FATF's work on harmonising the standards for virtual assets will be key to closing the regulatory deficiencies that new technology has created. De-risking will need to be addressed using targeted, risk based policies that preserve the element of financial inclusion.
Investing in technology is also key, as AI and blockchain analytics are powerful tools for tracking complex financial flows. There is also a need for developing countries to receive support in order to build their capacity and meet global standards. Without that technical assistance the vast majority of countries are at risk of being exploited by terrorist groups who are always on the lookout for jurisdictions with weak regulatory regimes.
Conclusion
The fight against terror financing is a complex, ever-evolving, and difficult proposition, hamstrung by a whole host of issues relating to cross-border differences in the law, the nature of the threat, and the policy landscape. Even with a global regime in place, the success of that regime will ultimately depend on how well the countries in it are able to act, adapt and cooperate. For compliance professionals and lawyers, it is not only about complying with the rules; it is about making the world a safer place. The challenge in the future will be to get the balance right between regulation, innovation and inclusion.
Despite the considerable progress made, several key questions remain to be addressed through additional academic research. These include the long term efficacy of blockchain analytics and AI in detecting new and emerging forms of terrorist financing, the ways in which information sharing can be improved between countries with very different legal systems, the impact of financial inclusion policies on the most vulnerable in conflict zones and the unintended consequences of various regulatory rules (particularly as they apply to non-profits and the delivery of humanitarian assistance). There is also a need to examine how terrorist groups will respond to new compliance regimes and use under-regulated technologies. Research into these areas would go some way to addressing the current gaps in our knowledge and would help to inform better policy.