Welcome Back!
Todays topic is introduction to Terrorist
Financing
To begin with, Terrorism has long threatened
nation states. However, especially since the
attacks on the World Trade Centre in New York
on September 11, 2001, terrorism has become
a major challenge for all countries in the
international arena. While domestic terrorism
still accounts for the majority of terrorist
incidents, transnational terrorism has become
more relevant and is now considered as particularly
dangerous. The direct and indirect costs of
terrorism, ranging from the loss of human
lives and assets to reduced growth and life
satisfaction, are substantial, making it advisable
to fight terrorism with a variety of means
at the same time.
Terrorists want to achieve the biggest possible
(political) effect in terms of media attention
and destabilization. This, however, can be
achieved at rather low cost, so that most
terrorist attacks are rather inexpensive.
This imposes further challenges for prosecutors
as the financial flows they need to detect
are usually small. Especially since terrorists
are increasingly organized in networks nowadays,
anti‐money laundering instruments may fail
to yield the desired success, while at the
same time interfering with fundamental civil
rights in a problematic way. Terrorism may
harm the economy directly and indirectly,
where the latter effect refers to the reaction
of economic agents (e.g., consumers, foreign
investors, government) to terrorism.
Similar to the negative economic consequences
of civil war, there exist several channels
of transmission from terrorism to the economy,
namely destruction, disruption, diversion,
dissaving and portfolio substitution. Destruction
refers to the direct costs of terrorism. Human
and physical capital is destroyed through
terrorist attacks, resulting in a reduced
economic output. The other effects refer to
the indirect consequences of terrorism on
the economy that emerge from the response
of economic agents. The disruption effect
may become manifest in higher transaction
costs, as the effectiveness of public institutions
is challenged and manipulated by terrorism,
or as insecurity in general increases. For
instance, given that terrorism creates uncertainty,
it may consequently lead to the postponement
of long‐term investments and thus reduced
economic activity. Diversion occurs when public
resources are shifted from output‐enhancing
to non‐productive expenditures.
For instance, a government may increase spending on security at the expense of (more
productive)  spending  on  education 
and  infrastructure,  which  may  impede
future  economic  development.  Dissaving refers 
to a  decline  in  savings  that  affects
an  economy's  capital  stock. Portfolio
substitution means the flight of human, physical
and financial capital from a country in the
face of conflict.
Terrorism financing can be raised by legitimate
sources such as fund-raising activities and
business profits, as well as illegitimate
sources such as the drug trade and fraud.
The fight against terrorism financing requires
an understanding of the way terrorist organisations
obtain their money as given below:
1) Illegal Activities: Terrorists obtain funds
from illegal activities such as drug trafficking,
smuggling, kidnapping and extortion. Drug
trafficking is particularly lucrative. In
Latin America, 'narco-terrorist' obtain much
of their money from the drugs trade.
2) Wealthy Sponsors: Terrorists may receive
funds from wealthy individual or sponsors
which can support their terrorist activities.
3) Charitable and Religious Institutions:
Legitimate charitable and religious institutions
can be a source of funding for terrorists.
They are ideal conduits because they are very
lightly regulated and do not need to provide
a commercial justification for their activities.
4) Commercial Enterprises: Terrorist organisations
may run or own otherwise legitimate commercial
enterprises to generate profits and commingle
illegal funds. These include jewellery businesses,
trading companies, convenience stores, real
estate ventures and investment management
firms.
5) State Sponsors: A number of rogue nations
have been known to provide assistance, financial
support and safe harbour to terrorist organisations.
A prime example of this was Afghanistan under
the Taliban regime.
Going ahead, Terrorist organisations need
money to:
1. Recruit and sustain: money is needed to
recruit, support, train, transport, house,
compensate and equip terrorist agents
2. Acquire influence: money is needed to sustain
media campaigns and win political support
3. Build the support base: money is needed
for educational and social programs to win
members and create a support base
4. Carry out terrorist activity.
Their success in accessing and deploying this
money has disastrous results. Terrorist organisations
do not require a lot of money to achieve disastrous
results. Now let us understand how terrorist
usually move money.
1) Financial Institutions: Often, individual
accounts are opened and small withdrawals
and deposits of less than reportable thresholds
are made in order to avoid the reporting requirements
of anti-money laundering and counter-terrorism
financing legislation.
2) Alternative Remittance Systems: Unregulated
remittance systems such as 'Hawala' and 'Hundi'
are extensively used to transfer funds without
any documentation.
3) Currency transfers: Cash is smuggled across
borders, particularly through land crossings
and sea shipments.
4) Trade financing: With the growth of terrorist-owned
commercial firms, trade finance is increasingly
being used.
5) Theft of personal Id: The theft of personal
identity information is a common method used
by terrorists and criminals to operate in
the legitimate system.
Lastly, let us understand some of the facts
of September 11 Case:
The United States Federal Bureau of Investigation
(FBI) uncovered some of the financing techniques
used by the terrorist during (September 11,
2001) attack. The 9/11 terrorists opened a
set of 24 accounts at a bank in the United
States using false identities, social security
numbers and documents. About US$325,000 was
deposited into such accounts from benefactors
in different countries. The terrorists also
used debit cards issued by foreign banks to
finance their activities in the United States.
Hence, Countering terrorism financing is
therefore an essential part of the global
fight against terror threat.
That’s all for today.
Thank you.
Hope you all now have a fair idea about Terrorist
Financing and you may now apply this knowledge
to your day to day work.
I will come back with more such structures
in K.Y.C Bytes.
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