Combating the financing of terrorism

Why it will take more than sanctions and laws to stop terrorists from accessing money.

In the post 9/11 period it was recognised that one of the key enablers of violent extremism is access to finance and the ability to move money. The global nature of terrorist financing and money-laundering has required a global response to the problem. The Global Financial Action Task Force’s (FATF) and the 40+9 recommendations are now seen as the golden standard for Anti-money laundering/ Combatting the financing of Terrorism (AML/CFT) actions.

Non-compliance with AML/CFT legislation can be a costly affair. Between 2013 and 2016, international financial institutions alone were fined more than $10 billion for failing to meet AML regulations.  At the same time however, the 40+9 FATF recommendations are not enforceable and rely on voluntary compliance, monitoring and implementation by countries around the world. A quick look at compliance, for example, in 18 African countries identified by the United Nations Development Programme as violent extremism hotspots, shows that compliance levels average below 50 per cent.

Compliance with AML/CFT legislation requires a multi-layered and coordinated response from financial institutions and government and the degree of compliance will be affected both by the costs of compliance and by the political will to comply.

Costs to states can be in the form of enacting legislation and creating oversight institutions and enforcement mechanisms. To banks and other financial institutions, costs can cover a range of operating expenses from a human resources aspect such as staff hiring, training and salaries, through to technological aspects such as software purchase and record keeping. In terms of political will, evidence gathered by the Institute for Economics and Peace suggests that sometimes, those in charge of implementing the legislation can be the ones to lose out the most, as illicit black market, overtly corrupt dealings, or informal economic activities may be curbed.

Why Legislation May Not Be Enough to Combat Terrorist Financing

Even with improvements in compliance, AML/CFT legislation may remain less than effective in combating terrorist financing in many countries around the world for three main reasons.

First, many developing countries are heavily cash-based economies. Buying, selling, lending and borrowing very often occur directly with cash payments leaving no paper trail and making enforcement of any regulations around monetary flows virtually impossible. This, together with the often porous borders and difficulties associated with patrolling these, has meant that terrorist groups have been able to raise and move funds anonymously and often without leaving a paper trail.

Second, the ways in which terrorist organisations finance themselves are evolving. Terrorist groups often behave similarly to organised crime by adapting quickly, recognising financing opportunities and utilising small-scale sources of funds. Terrorist activity is funded through various legal and illicit avenues, often benefiting from corruption and support from the edges of the formal economy. New developments in technology and financial instruments means that terrorist groups also have a diversified portfolio of mechanisms to move funds at their disposal. Traditional methods to move funds include the use of banking systems, money value transfer systems and the physical transportation of cash. New payment methods such as crypto-currencies and internet-based payment services such as Paypal, are becoming increasingly prevalent in the financing of terrorist groups and activities.

Third, AML/CFT legislation may be ineffective at curbing terrorist attacks because the cost of perpetrating terrorist attacks are decreasing as terrorist tactics are changing, with groups increasingly relying on self-funded individuals to carry out attacks. As armed assaults are becoming increasingly more the method du jour of terrorist groups, the biggest costs associated with such attacks is generally the cost of the weapons. Attacks using vehicles, such as in Nice in 2016, are inexpensive to conduct, and is a reason why the use of vehicles as weapons has become more common recently.

The opinions expressed throughout this article are the opinions of the individual author and do not necessarily reflect the opinions of Vision of Humanity or the Institute for Economics & Peace. 

Andrea Abel van Es

Research Fellow

Dr. Andrea Abel van Es is a consulting research fellow at the Institute for Economics and Peace. She works on a portfolio of peacebuilding, conflict prevention and democracy projects with a regional focus on Africa. Her research interests lie in “following the money,” in terms of both conflict and democracy. Dr Abel Van Es is the co-author and editor an Oxford University Press publication Checkbook Elections: Political Finance in Comparative Perspective.