Whether driven by political, religious or personal ideology, terrorists have one thing in common – the need to finance their attacks. We take a deeper look.
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.
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.
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:
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.
Methods include:
This stage removes the money without attracting attention, so it can be used legitimately. As well as trading luxury goods, other methods include:
The UK government suggests organisations subject to anti-money laundering regulations adopt a risk-based approach that includes several steps:
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:
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.
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 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 must evolve with them, especially given the rise of crypto-currencies and global terrorist organisations.
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.
Sometimes, 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:
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.
We've created a comprehensive AML roadmap to help you navigate the compliance landscape, supported by several financial crime prevention courses in our Essentials Library.
We also have 100+ free compliance training aids, including assessments, best practice guides, checklists, desk aids, eBooks, games, posters, training presentations and even e-learning modules!
Finally, the SkillcastConnect community provides a unique opportunity to network with other compliance professionals in a vendor-free environment, priority access to our free online learning portal and other exclusive benefits.