Terrorism and insurgencies are very expensive. They need money to buy weapons off the black market, hire freelance bomb-makers, communicate, transport men and material, and so on. Insurgent organizations can partially fund themselves through local crime and taxation, but their real source of income comes from abroad. They exchange services and money with drug smugglers, other insurgent groups, and otherwise work within the massive global black market.
Financial institutions and governments are trying to detect and stop money laundering to stop the growth of criminal and insurgent organizations.
All the benefits of globalization – economy of scale, comparative advantage, fluid capital – benefit the bad guys too. The Global Black Market produces at least $1 trillion per year.
The Communists first experimented with this during the Cold War. The Soviet Union served as a clearing house for communist insurgencies so the financial exchanges were safe. Today, Islamists, Communists, Nationalists and criminals, operate within our own financial networks.
Criminals learned how to disguise their tracks and launder drug money through banks. They used formal and informal means, by abusing privacy laws, using off-shore banking, proxy accounts, fake charities, and other types of fraud. Another trick is to have large number of individuals lauder very small amounts each to lower risk. Other non-state actors used these methods for their illegal financing operations.
Dennis Lormel at the Counterterrorism blog summarizes the problem:
In the most basic sense, terrorist groups require funding to achieve their goals. They must have effective financial infrastructures to include:
• Sources of funds
• The means to launder funds
• The availability of funding
This is a pretty simple concept. If only the detection, disruption or prevention of this process could be as simple. In reality, dealing with terrorist financing is extremely challenging. Terrorist financiers have had many years to quietly hone their skills and perfect their methodologies. It wasn’t until 9/11, that law enforcement, the regulators, intelligence agencies or the financial sector focused specifically on terrorist financing. In essence, this enabled terrorists to develop mechanisms and infrastructures, both legal and illegal, which have become well insulated and adept at avoiding detection.
The Treasury Department, the National Security Agency, and others work together to break these illicit financial networks.
There are a number of laws which outlaw money laundering already – like the Bank Secrecy Act. The Patriot Act amended the BSA to target terror financing as well.
Matthew Levitt discusses some of the means of blocking illicit finance:
Unlike information derived from human spies or satellite intercepts, which require considerable vetting to determine their authenticity, a financial transfer is a matter of fact. Definitively linking people with numbered accounts is a powerful intelligence tool, often leading authorities to conduits between terrorist organizations and individual cells.
As intelligence agencies build capacity to collect and exploit financial intelligence for pre-emptive action, they are sure to build on the experience of law-enforcement agencies that have long employed financial tools to solve crimes and build prosecutions. With nearly every recent terrorist attack, the post-blast utility of financial investigative tools has been reaffirmed. Financial data provided investigators critical and early leads immediately following the attacks on Sept. 11, as they did following the July 7 attacks in London and the March 11 attacks in Madrid, among others.
But by virtue of their covert nature, financial intelligence operations of a preventive nature are conducted out of the limelight. While understandable, this leaves the public little by which to judge their usefulness beyond general trends and periodic anecdotes hinting of other unspoken successes.
Deputy Secretary of Treasury Kimmitt discusses the role of finance in the war. Treasury created the Office of Terrorism and Financial Intelligence to handle this problem.
The US is using financial sanctions to punish terrorist organizations and their supporters. For instance, the US recently designated the Iranian Revolutionary Guard as terrorists to place these financial sanctions on Iran.
Some of these targeted measures require financial institutions to freeze funds and close the accounts of designated actors, effectively denying these actors access to the traditional financial system. Other measures impose bans on travel or arms transfers, serving to isolate the target. These kind of measures have several advantages over broad-based sanctions programs. Most importantly, instead of designating an entire country, they single out those responsible for supporting terrorism, proliferation, and other criminal activities, and such targeted measures are more likely to be accepted by a wider number of international actors and governments.
The general concept is this: Intel agencies use data-mining and signals intel to track suspected individuals and trace financial transactions. Sometimes they intercept and sieze the money. Usually, it’s better to track the financial flow to reveal more of the criminal or terrorist network.
Intel identifies the individuals, follow the money, and then attack and take down both sides of the operation.
For larger organizations, the US and its allies apply financial sanctions to deny them access to the world markets.
The problem is that non-state actors respond quickly to new espionage methods. They adapt and evade once they figure out they are being watched. And they are always trying to leverage public opinion or privacy laws to their advantage.