What does terrorist financing look like? And what are the measures you can implement to counter terrorist financing? We explore the answers to these and other questions, including the potential legal consequences of not being vigilant.
What is terrorist financing?
Terrorist financing is providing or collecting funds with the intention or knowledge that the money is for terrorist activities – even if it isn’t eventually used for that purpose. Terrorism funding also doesn’t just come from unlawful activities or resources. Legitimately-sourced money is used, too.
Funds are required for several reasons – not only for attacks, but to pay for bribery, false documents, safe houses, training and recruitment, plus everyday expenses like food and travel.
Unlike money laundering (which often goes hand-in-hand with terrorist financing), terrorists need comparatively little funds, and raising money is not the ultimate goal. As a result, businesses may have to look harder to detect suspicious activity.
What are the stages of terrorist financing?
The stages in financing terrorist activity mirror money laundering – raising or collecting funds, moving, transferring or separating the funds to cover tracks, and finally, using them.
Money laundering is often crucial in ‘cleaning’ funds destined for terrorism, so it is critical that organisations fully understand the processes involved, and equip themselves with the knowledge and tools to prevent it.
Money laundering uses financial systems and processes to switch illegal funds into legitimate cash or property. Typically, this involves three steps:
The money is placed directly into the financial system, such as a bank account or other financial means. GoCardless suggests this happens by:
- Creating false invoices to match the cash placed.
- Putting money into cash-based businesses with few or variable costs.
- Opening foreign bank accounts.
- Creating offshore companies.
- Moving small amounts of money at a time.
Layering breaks up larger amounts of money into several separate, smaller transactions below the AML threshold of €10k. This can often involve accounts or companies outside the UK, making them harder to detect and trace.
- Trading in international markets or foreign currencies.
- Buying foreign money orders.
- Buying and selling luxury items.
This stage removes the money without attracting attention, so it can be used legitimately. As well as trading luxury goods, other methods include:
- Paying fake employees.
- Paying ‘loans’ to directors or shareholders.
- Paying dividends to shareholders of criminal-controlled companies.
How can businesses stop terrorist financing?
The UK government suggests organisations subject to anti-money laundering regulations adopt a risk-based approach that includes a number of steps:
- Identifying money laundering risks.
- Conducting a detailed risk assessment, focusing on customer behaviour, delivery channels etc.
- Conducting a risk assessment of your customers.
- Designing and embedding controls to manage and reduce risks.
- Monitoring the controls to improve efficiency.
- Keeping records of what you did and why.
Red Flag Alerts highlights AML risk assessments can help businesses reduce the risk of money laundering and terrorist financing, and ensure they remain compliant. As well as supporting the identification and prevention of money laundering, a risk assessment can also help organisations:
- Understand the risks associated with business relationships and commercial activities.
- Create financial crime policies, procedures and controls.
- Make informed decisions about employees and clients.
- Identify transactions and relationships with at-risk or sanctioned countries or individuals.
- Evaluate existing risk reduction measures.
The depth of your risk assessment will depend on your business size and structure, plus its range of activities, services and products. However, you should at least consider the top five key risk indicators highlighted in our ‘Signs of terrorist financing’ section below.
Once you have assessed these individual factors, you should give a low, medium or high-risk rating to a transaction or customer relationship, adding very low or very high for more advanced risks.
After completing your risk assessment, act on it immediately to put the necessary policies, procedures and controls in place. Monitor it continually, so it remains effective and up-to-date with current legislation. And, critically, remember to identify and report any suspicious activity.
What are the signs of terrorist financing?
Businesses should look out for warning signs across the three money laundering stages. Financial risk experts, Red Flag Alert, suggest the following key risk drivers:
- The size, nature and complexity of a client's business structure. Organisations with wide, branching corporate structures can pose a greater financial crime risk.
- The type of customer involved – B2B or B2C.
- The types of products and services involved in a transaction.
- The methods used to onboard new customers and communicate with existing ones.
- The geographical factors in a transaction.
- An international element to a transaction or commercial relationship. Overseas transactions can significantly increase the risk of money laundering and terrorist financing.
- The substance of a transaction. For example, high-value transactions generally pose a greater risk.
- A transaction involving a commission payment that could give rise to a conflict of interest.
- The involvement of third parties, especially if they are paying or being paid. Third-party movement of assets can contribute to money laundering, so it's essential to identify the source of funds for each transaction.
Why is it so important to counter terrorist financing?
The main reason is, of course, to prevent terrorist acts. The Financial Action Task Force (FATF) – the global money laundering and terrorist financing watchdog – states disrupting and preventing terrorism-related financial flows and transactions are an effective and “essential part of the global fight against terror.”
The footprints left by terrorists’ purchases, withdrawals and other financial transactions also provide valuable investigation information.
The Institute of Chartered Accountants of Scotland (ICAS) points out strict anti-money laundering rules make it difficult to hide illegal funds under layers of fictitious companies. They also strengthen checks on risky third-world countries and improve access to, and the exchange of, information.
However, as technology advances and terrorists become increasingly sophisticated in exploiting gaps or loopholes, the rules need to evolve with them, especially given the rise of crypto-currencies and global terrorist organisations.
What are the penalties for terrorist financing?
Under the Terrorism Act 2000, it is an offence to use, possess, or raise funds for terrorist purposes or arrange for others to do so. The Act doesn’t apply directly to businesses.
However, it (together with the Proceeds of Crime Act 2002) requires people working in the regulated sector to submit a Suspicious Activity Report (SAR) if they know or suspect someone of carrying out or attempting money laundering or terrorist financing.
In some cases, people may also need to submit a SAR, even if they’re not working in the regulated sector. Failure to submit a SAR when required may result in both employee and employer facing prosecution and/or regulatory action. The penalty can be up to five years imprisonment, a fine, or both.
The UK government’s latest National Risk Assessment (NRA) from 2020 identified the following high-risk areas:
- Client account services
- Trust and company formation
- Financial technology services
- Cash-related services
- The use of crypto assets and virtual money
The Criminal Finances Act 2017 enables the UK government to tackle money laundering and terrorist financing by seizing or freezing assets. It also includes processes for mandatory and voluntary disclosure of information by regulated firms. The penalty can be an unlimited fine plus potentially irreparable reputational damage.
The Money Laundering, Terrorist Financing and Transfer of Funds Regulations 2017 (and its September 2022 amendments) require the UK’s regulated sector to carry out detailed customer due diligence and ongoing monitoring. Non-compliance can again see organisations facing an unlimited fine. Legal entities can also be prosecuted under the Proceeds of Crime Act 2002.
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