Terrorism financing is widely acknowledged to be an essential component of terrorist activity. Accordingly, and especially after 9/11, combating the financing of terrorism was deemed to merit its own specialization and was subsequently elevated to the level previously reserved for the combating of money laundering. The Financial Action Task Force (FATF) developed special recommendations that have since been considered the standards in the fight against terrorist financing. The Security Council of the United Nations appointed the Counter-Terrorism Committee (CTC) to supervise the implementation of state obligations relating to terrorist financing. Since 9/11, the European Union, the United States and others have published lists of persons and entities suspected of terrorism and are calling for the blocking of all related assets and the facilitation of international investigative cooperation. UN Security Council resolution 1267 is of particular importance in this regard, mandating the blocking of assets attributable to persons and entities suspected of terrorism.
Nature of the problem
The criminal phenomenon of money laundering can be described in practical terms. In the case of terrorist financing, however, only the theory is clear: it is reverse money laundering. While money laundering is concerned with laundering assets of illegal origin and bringing them back into legal economic circulation, the financing of terrorism is concerned with using legal assets for an illegal activity, namely terrorist attacks. In other words, with money laundering the illegal activity can be located at the beginning of the process whereas in terrorism financing the entire process is reversed.
Repression of money laundering is already difficult enough. The problems relating to individual procedural steps are sufficiently well known (obtaining information during the entire chain of money laundering, blocking assets, international legal cooperation, etc.). But, how should an investigation be conducted which, in the case of terrorist financing, essentially relies on subjective criteria? What is the intention of the sender of the money, who is the recipient of the money, how is the money ultimately used and what amount should be blocked?
The demands on the prevention of terrorist financing are, compared with money laundering, incomparably more difficult, affecting core components of the Western understanding of fundamental political and human rights. Official “lists,” for example, publicly assert a connection between persons/entities and terrorism, with little or no explanation. It is now possible – after a long and tedious process – to appeal against being listed or to request deletion from a list, but the appeals process does not live up to any serious criteria of fundamental rights.
Finally, there is no unanimous opinion on who precisely is a terrorist or what constitutes a terrorist organization. While regional entities such as the EU have agreed on internal definitions of terrorism, this continues to be impossible at the global level (i.e., at the United Nations), despite almost twenty years of sustained effort. In short, the political, repressive, and preventive problems in combating terrorist financing are numerous. Financing of terrorist attacks may still be identified ex post facto, but preventive identification of intent is nearly impossible.
Business relations as an example
Business relationships develop over the course of decades, especially when they are cultivated in an intercultural and inter-religious context. Accordingly, different generations of financial intermediaries deal with the same clients. Such business relationships are, as a rule, entered into by wealthy clients. A wide range of financial products are the subject of discussion over these years. The mutual trust cultivated in this way may distort the ability to identify complex overall circumstances that are not directly related to business. In other words, this type of business relationship is focused on the business partner. In such cases concepts such as reputation, risk management, and the questioning of well-tried practices are often not as significant as they should be in the decision-making process.
For instance, tax optimization may have been the actual intent of investments and transactions at one point, but after the fact, it may turn out that this tax optimization did not constitute the core element of the business activity, but rather a diversionary maneuver to support charities that are now considered questionable.
Only clear preventive strategies can help the financial center identify such risks at an early stage. Based on the KYC (“know your customer”) principle used in the suppression of money laundering, the KYP (“know your partner”) principle can be derived. Partners in this context include the actual business partner, but also the partners of the business partner, the environment of the partners of the business partner, and therefore also the former partners of the business partner. This information is crucial for addressing the central question in the suppression of terrorist financing: “Where does the money go?” The investigation of “where do assets come from” in the suppression of money laundering already imposes comprehensive demands on financial intermediaries, not only financially and in terms of infrastructure, but also especially in terms of client relations and client supervision.
The investigations necessary for “where do the assets go” are incomparably more extensive, not primarily in terms of infrastructure, but especially in terms of client relations. Necessary in this respect are, on the one hand, background information on persons, entities, networks of entities, macro-economic knowledge, and knowledge of the business conduct and practices in a particular region. On the other hand, a relationship of trust with the clients must be developed that actually allows the question of “where does the money go” to be successfully posed in the first place. A financial intermediary takes on this effort if he or she regards as important the risks and damage to reputation of being brought into connection with terrorism in the broadest sense. At the very least, all financial intermediaries around the world are now likely to take this as a given.
A sustainable implementation of the KYP idea primarily depends on three preconditions: namely permanent monitoring, cultivation, and supervision of the business relationship. This updating of the client’s situation, business partners, the environment of the business partners, and the business circumstances is not uncontrolled and does not interfere with business. If these activities are undertaken in a targeted manner appropriate to the risk level, they will focus on the identifiable risk clients. In other words only with the aid of a template for client relationships can a useful and sensible supervision of business relationships be ensured. This in turn entails that every activity in the business relationship that does not conform to the profile and that is not plausible must trigger more detailed investigations of the matter.
In order to implement this entire process in a timely way, access to information which is not automatically available to a financial institution is a key asset. In practice, the permanent monitoring of the business relationship does not pose the main difficulty in identifying suspicious activities. The important thing to ascertain in this context is the real identity of the individual that the financial intermediary is dealing with. Useful aids in this regard include information from public sources (news databases such as Reuters, etc.), lists of names of persons suspected of terrorism published by the United Nations and other organizations and countries, so-called “PEP databases” (politically exposed persons), and other sources that vary by country.
All this information may be insufficient in the final analysis. Only State authorities have access to updated and thematic knowledge about individual persons and entities that are subject to scrutiny due to suspected participation in terrorist organizations or their financing.
This knowledge should, in one form or other, be provided to a financial intermediary upon request in as up-to-date a manner as possible. In other words, in cases where an internal investigation does not lead to a conclusion but nonetheless the suspicion of terrorist financing persists, and the central question revolves around the identity of particular persons and entities, the financial intermediary should be able to request further information from a state authority. This request, as well as follow-up discussions and information exchanges, must be provided for by law. In addition to this undoubtedly important formal basis, however, the following point is crucial: whether a financial intermediary will even request the support of a state authority in such a sensitive situation depends not so much on the relevant legal provisions, but rather on trust in the authority itself, and trust in the authority’s discretion and competence.
Therefore, from a practical perspective, efficient suppression of terrorist financing depends on the following preventive preconditions:
– Profiles of the business relationships;
– Permanent monitoring of the business relationships with respect to profile conformity (KYP);
– Legal bases for requests by the financial sector to State authorities in individual cases for the purpose of verifying persons and entities; and
– Trust in the discretion and competence of the authority responsible for acting upon the request.
The global threat of terrorist attacks is not diminishing. Right now courageous and unconventional steps are necessary to efficiently advance the mutual interest of everyone – citizens, financial institutions, and authorities alike – in combating the threat of terrorism and it’s financing. It must not be forgotten, however, that despite this overwhelming desire to combat and prevent terrorism and terrorist financing, the open Western social order and its concomitant economic prosperity are fundamentally grounded in the unreserved and lasting observance of fundamental and human rights. The approach outlined here is not intended to outline general and abstract possibilities, but rather to show – in a targeted manner applicable to individual cases – which conditions, according to the author’s own experience, efficiently lead to results without upsetting the Western social order.