Terrorist financing (TF) is widely regarded as one of the most serious financial crime threats facing the world today. It doesn't necessarily rely on proceeds of crime in the same way as previous forms of illicit finance. TF can be funded by both legal and illegal sources and is used for a range of purposes including planning, recruitment, propaganda and the commission of violence. For the analyst, the lawyer, and the compliance officer, it is vital to understand how TF operates, how it differs from money laundering, and to stay up to date with the international regime.
These distinctions themselves have very real consequences for the compliance professional. A risk assessment must take into account the real possibility that a transaction that is perfectly legitimate could be diverted for terrorist purposes. Transaction monitoring systems must be set up to pick up not just classic money laundering indicators, but also more unusual flows that may indicate terrorist financing (e.g., a series of small payments, a series of donations to a high-risk country). Day-to-day compliance work therefore requires you to adapt your due diligence and alerting processes to the specific risks of terrorist financing.
Defining Terrorist Financing
The Financial Action Task Force (FATF) defines terrorist financing as the provision of funds of any amount for terrorism or for those who support it (FATF, 2023). That definition clearly indicates that terrorist financing can be both legal and illegal. The illegal methods (drug trafficking, extortion, smuggling etc.) remain a common way of raising funds. Terrorists also use legal sources of finance, such as donations, legitimate businesses, and individual sponsorship.
This is what makes terrorist financing different from other financial crimes. The transactions can start life as perfectly legitimate. The key to spotting the suspicious is in the context, the patterns and the intent. A small regular payment to an overseas organisation may not in itself be suspicious. It could be perfectly legitimate. But if it fits into a pattern involving dubious charities or areas of conflict then it may well be a case of terrorist financing.
Compliance teams should watch for certain red flags when monitoring for terrorist financing. These include: a number of small transactions which in the aggregate amount to a substantial sum; donations to charities in high risk or conflict areas; use of a personal or business account to gather funds and then rapidly disburse them to a number of different recipients; a sudden change in the pattern of account activity (particularly in the case of international transfers); transfers with very vague payment details (especially to or from areas of higher terrorist activity); and clients who are reluctant to provide any information as to the source or reason of the funds. Recognising these typologies will help compliance to identify and prevent the use of the financial system for terrorist purposes.
Difference Between Terrorist Financing and Money Laundering
AML/CFT policies address terrorist financing similarly to money laundering, though their objectives differ. Money laundering is all about hiding the illegal origin of the criminal funds so that the criminals can use their 'dirty' money in the legitimate economy. Terrorist financing can use both clean and dirty money to fund terrorist activities.
This also affects the flow of funds. In money laundering you have money going from dirty to clean. In terrorist financing you have money that's ostensibly clean ending up being used for terrorist purposes. The IMF puts it quite clearly: money laundering "cleans dirty money" whereas terrorist financing "dirties clean money" (IMF, 2021). Given that, conventional AML controls may not be sufficient to detect terrorist financing.
The Significance of Counter-Terrorist Financing Threats
Terrorist financing isn't simply about individual acts. At a local level the groups need the money to recruit, to buy weapons and to run their propaganda. Cutting them off is often the most effective way of stopping them. If banks or other institutions are being used to fund terrorism then that's a direct attack on the integrity of the financial system. Poor compliance regimes put institutions at risk of damage to reputation, regulatory penalties and operational problems.
Terrorist financing is a source of global instability in that it's inherently linked to sanctions evasion, organised crime and corruption. ISIS for instance has raised funds through the sale of antiquities and oil smuggling. Al-Qaeda has used charitable foundations as a mechanism for fund raising. The hawala system (an informal system of money transfer) is very effective at moving money across borders with scant documentation and hence is very difficult to track. These are all examples of how terrorist financing is both a political and a financial crime.
The International Regulatory Response
Following 9/11 the worldwide effort to stop terrorist financing was significantly stepped up. The UN led this effort through binding Security Council Resolutions. Resolution 1373 (2001) is the key resolution in this respect, and it is binding on all member states because it requires the criminalisation of the financing of terrorism, the freezing of terrorist assets, and the strengthening of international co-operation. Resolution 1267 (1999) established the sanctions lists against terrorist organisations and individuals, which in turn led to targeted financial action.
FATF has backed this with its 40 Recommendations and specific guidance on terrorist financing. They promote a risk-based approach with improved due diligence for high-risk clients, sectors and countries. In the US, the USA PATRIOT Act (2001) greatly improved the ability to track and freeze funds associated with terrorism. Europe has enacted a number of Anti-Money Laundering Directives (AMLDs) which contain terrorist financing provisions. The IMF and World Bank have also helped developing countries strengthen their AML/CFT regimes (World Bank & IMF, 2006).
Emerging Trends and Compliance Challenges
Despite all the regulatory changes, terrorist financing is still going on. The principal issue now is the growing use of fintech. Prepaid cards, virtual currencies and online crowdfunding are increasingly being used to move and hide funds. FATF have responded to this by calling on countries to apply the 'same risk, same regulation' principle to virtual assets (FATF, 2022). To deal with this, compliance teams should be strengthening their controls in respect of virtual assets and fintech channels. This could entail the use of specialist tools to monitor virtual asset transactions, the application of improved due diligence (EDD) to customers who are dealing in virtual currencies, verification of the source and destination of funds and the setting of alerts for suspicious activity such as the quick movement of crypto assets or large amounts being sent to high risk wallets. Staff training and working with blockchain analytics providers would also be beneficial in helping organisations to keep abreast of the developing threat in the virtual asset space.
Another issue is the abuse of the non-profit sector. Of course the vast majority of NPOs are perfectly legitimate but there are some that have been used to funnel money to terrorist groups, particularly in the more poorly regulated parts of the world where the risk of abuse is higher. The recommendation from the regulators is that you need a moderate approach which protects the legitimate charity whilst not unduly burdening it. The differences in enforcement across countries also create gaps which terrorists can exploit. To deal with the international risk you can have a range of cross-border compliance approaches in place such as formal information sharing arrangements between the local and the foreign FIUs, joining public/private partnerships and participating in international task forces which are specifically focused on terrorist financing. Mutual legal assistance treaties, memoranda of understanding and immediate communication channels between banks, regulators and law enforcement are all useful in closing the compliance gaps and making it harder for the terrorists to take advantage of the weaknesses in the system. Improved information sharing between the FIUs, the regulators and the private sector is key.
Strengthening Best Methods and Compliance
For the financial institution and compliance professional the answer to stopping terrorist financing is in having the right systems in place, doing the job properly and working across the sector. To get the most out of your resources, prioritise the following: apply improved due diligence (EDD) to high-risk clients and situations (i.e. verify beneficial ownership, track transactions, understand the risk of the jurisdiction, etc.). Tune your transaction monitoring to detect both normal money laundering patterns and specific terrorist financing patterns (e.g. small, frequent payments, payments to high-risk jurisdictions). Of course, you need robust sanctions screening. Enhanced CDD is particularly important in the case of high-risk clients (e.g. PEPs, charities in high-risk jurisdictions). You need to prioritise these activities and focus on EDD, transaction monitoring and sanctions screening.
Transaction monitoring software should be in place to pick up not just large or obviously suspicious transfers, but small, repetitive ones often associated with terrorist financing. Sanctions screening needs to be robust, constantly updated, and applied to all parties rather than just principal customers. Public/private sector co-operation and information sharing are useful in this respect, and regular staff training is essential to keep them up to date with new risks and rules.
Conclusion
Terrorist financing threatens national, financial, and global security. It can be done with clean money and is therefore much harder to detect than money laundering. The UN, FATF, and various national governments have established a strong set of standards to combat it. Success will depend on international co-operation, the use of technology to monitor and the persistent vigilance of the institutions.
For compliance professionals, the aim is not merely to meet future requirements but to anticipate new threats, think ahead, and improve cooperation between industries and countries. Financial institutions are central to protecting the financial system from terrorist networks.