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HSPI Issue Brief Series

THE NEXT DECADE OF COUNTERING THREAT FINANCE: RISKS, OPPORTUNITIES, AND LIMITATIONS

HSPI Issue Brief 15

June 12, 2012

Scott Helfstein

Almost ten years after the September 11 attacks, domestic terrorist plots linked to

Islamic extremism continue rising. The evolving nature of sub-state threats makes it

critically important to evaluate the strengths and weaknesses of the counterterrorism

toolkit in the hope of maintaining an efficient and effective security posture. Counter

threat finance has proven a valuable instrument in hindering terrorist activity over the

past decade, making it all the more important to evaluate existing shortfalls and

consider opportunities for future action.

Counter threat finance is the practice of attacking the financial lifelines of those intent

on harming the Unites States, its citizens, and its allies.1 There are many different

elements associated with countering financial activities of illicit actors such as

monitoring flows, stopping transfers, prosecuting criminal activity, and seizing funds

bound for illicit use. It is difficult to quantify the impact of these efforts, but anecdotal

evidence suggests that it has been reasonably effective with some variation across

domains. Since 2009, al-Qaeda leaders prioritized calls for financial support, which

many see as an indication of funding troubles.2 Financial tools have also been one of

the few successful tools brought to bear in confrontations with drug cartels and

curtailing North Korea’s weapons proliferation.

To date, successful counter threat finance operations have resulted in the tracking and

arrest of terrorists, international fund seizures, domestic prosecutions for material

support to terrorists, and fines levied against financial institutions found in violation of

federal law. The Department of Treasury has taken the lead by providing intelligence

support and policy guidance, but law enforcement agencies like the Federal Bureau of

Investigation and the Drug Enforcement Agency, and Combatant Commands like U.S.

Central and Pacific Commands, as well as other departments in the executive branch

like Commerce and State all utilize these tools to differing degrees.

Despite the investment in building counter threat finance capability and the impressive

array of accomplishments over the past ten years, this remains a relatively new tool in

the security kit. The decentralization and adaptation of the terrorist threat, the

evolution of technology, and emerging frontiers of international law and cooperation

present a unique set of risks, opportunities, and limitations for countering threat

finance.

A risk assessment reveals that many organizations and individuals involved in illicit

activity are quite comfortable using the modern financial system. The interconnected

nature of the financial industry and the global reach through correspondent banks offer

illicit actors many ways of getting funds into and out of the system. Add to this rapid

technological change associated with delivery of financial services such as mobile

phone transfers, retail foreign exchange, prepaid debit cards, and the growth of online

transactions. In theory, regulatory practices exist to monitor these activities, but

financial institutions and government authorities are often overwhelmed by the data

streams. These regulatory measures incentivize banks to build out compliance

functions that are supposed to keep a watchful eye for suspicious activity with financial

punishments looming for failure to follow prescribed procedure.

Despite an array of risks facing the public and private sectors, there are a number of

opportunities to strengthen threat finance initiatives and build a better system for the

future. Some of these changes are fairly small, while others are more substantial. The

regulatory structure offers a place to start. The current approach does not necessarily

incentivize financial institutions to adopt an activist role in counter threat finance,

which means that authorities are not yet leveraging every tool at their disposal. With

much of the Dodd-Frank Act yet to be written, there may be opportunities to change

the tenor of counter threat finance interaction without passing further legislation.

Regulatory change in itself may not be sufficient to promote change through greater

activism, but it will play an important role in shifting the domestic and international

mindset.

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Technological innovation often associated with increased risks simultaneously offers a

powerful tool for addressing some of the shortcomings in the current counter threat

finance environment. In an environment where data streams grow ever larger and

algorithmic information processing is constantly improving, it is important to consider

how these tools may be best be applied to current and future challenges. As the

technology of big data analysis develops, it will help to keep costs of monitoring,

reporting and investigating low despite the steadily growing stream of information.

Complex analysis of large-scale data also places certain limitations squarely in focus.

Both the public and private sectors face serious issues in maintaining the technological

skill set to thwart financial activities of illicit actors as adversaries grow increasingly

sophisticated. It may be possible to incentivize third parties like the hacker population

to crowd source solutions, but this also involves risks. Further, technological tools

aimed at intelligently exploiting patterns in data also raise serious privacy concerns. It

is important to promote discussions about the benefits and costs associated with

integrated information systems in countering threat finance.

It is appealing to view these integrated tools as a catch all capable of crippling the

activities of illicit organizations while also providing early warning on radicalized

individuals at a time when the strategic center of gravity in terrorism is devolving. In

many ways, this assumption is a failure of lexicon, and one that establishes an

unreasonable standard. Estimates suggest that illicit activity might be as high as one-

third of global GDP and confronting radicalized individuals through the financial

toolkit amid this deluge of illicit activity may be akin to finding a needle in a haystack.3

The importance of leveraging the tool and identifying illicit activity should not be

underestimated. David Coleman Headley, the Lashkar-e-Taiba operative in charge of

reconnaissance for the deadly 2008 Mumbai attack, had a history of illicit business and

financial activity. In that case, the system’s inability to link the illicit commercial

activity with terror connections created space for a massive attack when it could have

served as a warning.

Work on countering threat finance to date offers good reasons for optimism, and there

is great opportunity to improve capabilities in the future. Policy making and

implementation efforts must be clear about the aims of counter threat finance efforts

by setting priorities and expectations appropriately across range of threats.

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Known and Hidden Hazards

The Hawallah System

In the years following the September 11 attacks, a great deal of time was spent talking about the hawallah system as means for funneling funds to terrorist organizations outside the watchful eyes of law enforcement and intelligence officials.1 Hawallahs are informal money transfer outlets common throughout the Middle East, North Africa and South Asia. These businesses operate based on trust among the counterparties transferring funds. There is little record keeping and those that exist are often handwritten ledgers. Substantial sums of money flow through these outlets, which are the most common form of money transfer and remittance throughout a large part of the world. The large sums of money, the tradition of secrecy, and the minimal record keeping in these transfer outlets offered good reason to generate concern. It is one area where officials have struggled to make any inroads. At the same time,

Among the tools that the United States and its partners can bring to bear against

terrorist and other illicit transnational actors, countering threat finance is reasonably

low cost. The benefits of integrating counter threat finance with more traditional tools

over the past decade offered a new way to engage enemies, but it would be a disservice

to ignore the remaining and emerging risks. With ten years of data since the September

11 attacks behind us, it is important to reassess the assumptions undergirding risks and

priorities associated with threat finance especially at a time when government will be

asked to do more with less.

The risk of terrorist exploitation of the

financial system is by no means new and

quite well-documented. The September 11

hijackers allegedly received money through

wire transfers from the United Arab

Emirates to Florida-based SunTrust Bank.4

Since then, significant resources have been

devoted to denying illicit actors access to the

financial system, but these measures have

not deterred many that seem quite

comfortable with the global financial

system. A rational deterrence theorist might

argue that these actors must believe that

punishment is unlikely or find significant

benefits to utilizing the system.

Cases around the world reflect that illicit

actors remain content using the global

financial system. It is an advantageous way

to move, launder, store, and generate funds.

In April 2011, the Brazilian authorities

arrested Khaled Hussein Ali, who had been

running a media and fundraising network

for al-Qaeda while possibly planning attacks

in Latin America.5 Many details of the case

remain shrouded in secrecy, but the

Brazilian government noted that there were

a number of legitimate financial transfers to

the Middle East.

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the intense focus on this area may not be the best place to focus on going forward for two reasons. First, time and historical evidence have proven that reducing illicit actors’ use of the legitimate financial system represents as much of a challenge if not more so.1 Second, the current legal means and analytical resources offer little leverage in addressing this issue. Quite simply, there are other areas that offer greater potential gains for an identical investment. There is little evidence that terrorists striking the U.S. homeland, with the possible exception of the Time Square bomber Faisal Shahzad, have made significant use of the hawallah system to fund attacks.1 Even if illicit organizations were using this informal system to covertly transfer vast sums, many would still look for somewhere to store the money. Undoubtedly, there are funds funneled to illicit organizations through these outlets, but there is also significant use of the legitimate financial system. This is a difficult issue, yet it is one that the U.S. government is far better equipped to address.

Charitable organizations like the Holy

Land Foundation and Benevolence

International are attractive fronts to raise

funds and access the financial system with

little suspicion.6

In June 2011, the U.S. government took

steps to seize control of al-Qaeda assets

that were used to open an investment

account at Chicago-based R.J. O'Brien &

Associates. The brokerage account was

opened by Abu al Tayyeb in 2005 with a

deposit of $26.7 million, which was raised

in Saudi Arabia allegedly through an

investment scheme.7 Within a year, the

account value declined to $7 million

courtesy of a poor investment strategy.

Without passing judgment on al-Qaeda’s

asset management prowess, the group

clearly believed that US capital markets

offered refuge to hide cash and perhaps

even secure a positive return for future

illicit activity.

Other terror financiers like Mansour al-

Kassar proved far more adept at generating

positive returns on ill-gotten gains that

likely funded future illicit activity.8 The

international arms dealer and supporter of

jihad had bank accounts in Europe’s

largest institutions, investments in hedge

funds, and real estate interests on multiple

continents. This financial empire, built on

illicit activities, is an important reminder that there is more to be done.

Current approaches to countering threat finance draw from anti-money laundering

(AML) laws, a seemingly reasonable place to start.9 It is important to recognize,

however, that AML has more data points for banks and authorities to exploit. With

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AML, parties have the chance to observe the criminal activity generating the illicit

funds, or the banking behavior tied to laundering the money. By contrast, much of the

funding that goes to terrorist activity is perfectly legitimate until it gets used for illicit

purposes. In the instances where terrorist funds are procured illegally, the dollar

amounts involved are usually far below those associated with criminal activity

perpetrated for profit.

The power of terrorism lies in the psychological power of a small group of political

dissidents with few resources attacking civilian targets. Al-Qaeda in the Arabian

Peninsula (AQAP) claims that the 2009 mail bombs intercepted before reaching

Chicago cost $4,200.10 At the top end of the range, the September 11 attacks cost

approximately $500,000. Given the amount the US has spent on counterterrorism in

the past ten years, that is a return on capital making Warren Buffet’s annualized 28%

percent seem paltry.

Licit money transfer systems also present a unique set of problems. A cyber security

expert, posing as a westerner interested in jihad, approached some users on a radical

online bulletin board. After communicating in English and Arabic, and continually

expressing his interest in jihad, an individual with a French Yahoo email account told

him to participate in financial jihad. He was subsequently instructed to procure a fake

identification and then map all of the local Western Union and Money Gram outlets.

The handler told him to send small denominations using different stores, all going to

the same location in Paris, France.

These licit transfer services are invaluable to the global economy as remittances play a

large role in underdeveloped economies. It is easy, however, to exploit these services

for nefarious purposes. Clearly, extremists and terrorists are not deterred from using

these licit payment systems throughout the West. Given the volume of legitimate

transfers that go through these systems on a daily basis, it seems easy to hide illicit

activity among normal commerce.

The foreign exchange (FX) market, particularly the emerging arena of retail FX, is

another challenge given the transaction volume associated with this newly emerging

financial platform. FX markets deal with approximately $4 trillion dollars of

transactions daily, and a terrorist attack costs a tiny fraction of that volume. It is the

largest exchange by volume globally.

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Retail foreign exchange platforms, which emerged so that smaller investors could

access markets usually restricted to large investors, do have some important controls to

prevent terrorist use. The systems appear to offer open access to the foreign exchange

market, but the interfaces are actually proprietary systems where the company trades

in the markets on behalf of the investor using a closed platform. These brokers are also

subject to rules requiring them to know their counter parties, but the prospectus of one

such company notes that 55% of its business is conducted in jurisdictions that are not

subject to regulatory requirements.

The frontiers of finance, capital markets, and intermediation also pose unique

challenges to counter threat finance. In many instances products and markets are

introduced before proper precautions are established to deny illicit use. For example,

the newly developed carbon trading exchange aimed at promoting environmental

conservation was defrauded of millions. It is speculated that some may have gone to

fund terrorism. Those developing new markets and products must be proactive in

developing countermeasures to ensure that these financial innovations do not serve as

lucrative outlets.

Similarly, emerging technologies pose a similar challenge. Growth of virtual worlds

such as Second Life, World of Warcraft and Facebook inadvertently create unregulated

markets and economies. Mobile banking and trading offer technology savvy actors new

ways of defrauding the financial system, and prepaid debit cards offer a method to

launder funds in small and medium size denominations. Given the strategic nature of

the adversaries, it is important to remember that innovation and progress might

inadvertently spawn new hazards.

Prospects for Improvement and Innovation

Despite the array of persistent and emerging counter threat finance risks, there is

opportunity for improvement and innovation that builds on the success to date. Three

of these prospects seem particularly pertinent: the incentive structure constructed by

regulatory activity, international cooperation, and technological solutions.

In the aftermath of the September 11 attacks, threat finance initiatives focused on

tightening the regulatory structure to deny illicit actors access. Part of this involved an

ever increasingly complex set of regulations and overseeing bureaucracy, which

fostered a compliance-oriented approach to security issues. The system cultivated a

“check-the-box” mentality, increasing the likelihood that institutions are reactive

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rather than proactive. This is coupled by a one way flow of information where

compliance officers at financial institutions provide reports to government, but rarely

learn whether and what types of information are useful.

This is an unfortunate irony. Despite the bad rap from the financial crisis and the

Occupy Wall Street Movement, many of those at the helm of the country’s financial

institutions are patriotic individuals that have no interest in unwittingly supporting

illicit actors or their endeavors. Many in the financial services sector want to support

government activity against terrorists and criminals, which means the next is step is

figuring out how to adjust the incentive structure to promote greater activism.

Among the biggest constraints to greater activism are the legal and financial realities

that institutions face. Banks may find themselves in legal and reputational troubles

should they attempt to gather more information on customers without encouragement

and monitoring by government entities. The second constraint is financial, as the costs

of taking a more active role may rile investors who care more about profitability. Both

of these issues must be addressed to change the tenor of cooperation.

There are three tools that undergird current countering threat finance efforts: know-

your-customer (KYC) provisions, blacklists, and suspicious activity reports (SARs).

KYC calls on financial institutions to gather information and know the people using

their services. The provisions are built on the notion that financial institutions know

their customers better than government bodies responsible for denying access, but the

incentives driving information collection are not uniform across financial products. For

example, banks have much greater incentive to gather information on those that take

loans, risking the bank’s capital base, than those making deposits, which helps build the

capital base that generates revenues. Given the incentive structure for financial

institutions, this is perfectly reasonable, but it does challenge the assumptions

underlying the KYC effort. Online banking and international correspondent banking

relationships also complicate matters, despite industry norms to understand

counterparty risk.

Blacklisting is a tool to designate individuals with whom financial institutions are

prohibited from interacting. Financial institutions face penalties should they offer

services to these entities knowingly or in ignorance of their status. There are limits to

this as well given that blacklists have force of law. For example, summing across the

lists maintained by the US, UK, Euro Zone and UN yields approximately 1,000 names

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tied to terrorism. It is difficult to imagine one can successfully counter terrorist finance

by denying service to 1,000 individuals.

SARs, which banks are required to submit on suspicious activities over $10,000, also

face a series of challenges. Banks take these reporting requirements seriously, but there

are two crucial questions in judging their efficacy. What constitutes suspicious activity

and what level of activity should banks be required to report? Since terrorism is a

relatively cheap tactic, the levels on SAR reporting have declined accordingly, but this

also creates a new dilemma. Lower SAR initiation requirements mean more reports are

filed through the course of ordinary business even if there is nothing particularly

suspicious about the transaction. This increases financial and logistical burdens on

banks and regulators, both of which feel overextended.

These three tools of KYC, SARs, and blacklisting provide a strong foundation, but it is

equally important to assess the assumptions associated with the regulatory regime. As it

currently stands, financial institutions have incentive to comply with the rules to avoid

punishment, but the problem is that the expected costs of punishment are

tremendously small. Consider the two pieces involved. The first is the likelihood of

uncovering illicit activity, and the second involves penalties levied against offending

institutions.

Both of these are relatively weak across many instances of counter threat finance. First,

the likelihood of identifying the flow of funds tied to illicit activities is relatively small

compared to the assets under management at many financial institutions. This one of

the reasons terrorists and other illicit actors continue to use legitimate financial

services. As the likelihood that illicit funds will be detected decreases, the punishments

have to get disproportionately large. To date, the government has mixed record when it

comes to punishment. Fines tied to banking with Iran have been quite large whereas

those tied to terrorism have been comparatively small.

A quick situation assessment reveals great difficulty associated with strengthening

threat finance measures, but there are a number of additional actions or new

approaches that might yield incremental or drastic improvements. Larger punishments

on institutions tied to terrorist financing would help to set the expected costs at levels

more likely to deter rational actors.

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It is also important to strengthen measures to penalize the individuals associated with

accepting or managing illicit funds beyond the institutional punishments. Many

financial institutions offer large incentives for raising capital, and individuals may

believe that they can secure monetary gain from working with illicit actors.

Government should take no quarter in pursuing, prosecuting, and punishing

individuals, not just institutions, to develop a credible deterrent.

Despite such incremental changes to the existing structure, the regulatory approach has

focused almost entirely on punishment or the cost side of incentive structure with less

regard for positive incentives.

Establishing positive incentives for financial institutions to take an activist role might

help change the counter threat finance dialogue and practice in meaningful ways.

Rather than incentivize financial institutions to generate thousands of suspicious

activity reports in order to limit costs associated with legal liability, there may be ways

to encourage financial institutions to investigate, identify, report and take actions

against illicit actors. This does, however, raise an important question. Should banks

take action against only people of interest identified by governments or adopt activist

policies independent of government bodies? If the latter, banks are likely to seek

immunity for mistakes and charges of impropriety. Governments can offer incentives

like tax breaks, seizure sharing agreements, rewards, and grants to institutions that

participate. This might help foster a culture where financial institutions see themselves

as partners in counter threat finance.

These positive incentives, particularly aspects like grants, can be used to encourage

innovation in technological platforms. Promoting investment in innovative platforms

will likely yield better results than one-off rewards. For example, many armchair

jihadists have social networking websites on platforms such as Facebook and MySpace.

Technology exists to integrate activity such as friend connections on these websites

with financial transactions using automated systems and algorithms. These types of

platforms may yield fruit where standalone financial forensics struggle. Investments

like these might also help institutions address information asymmetries in financial

intermediation to produce better returns with less risk in their core business.

Innovative efforts to counter threat finance, especially in the identification and

tracking of financial transactions tied to illicit activity, need not be limited to banks

and governments. Third parties may prove to be critically important actors if the

incentive structure could be designed to promote positive engagement. One possible

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target would be the hacker population, which has a technological skill set that the

private and public sector entities involved in counter threat finance have a difficult

time acquiring. Countering money laundering, that involves accessing and tracking

data, may be one area where partnership with positively incentivized hackers proves to

fill a current gap. Leveraging a crowd sourced approach and the technological skill set

of a broader group could augment current capabilities in interesting ways.

The benefits from evolving technological platforms are not limited to data mining and

information assessment. Widespread access to mobile phones and electronic payment

platforms, often referred to as financial inclusion, are changing the nature of commerce

in ways that may not be amenable to illicit activities, particularly in developing

economies. By improving transparency, the risk associated with illicit activities such as

terrorism, drugs, or corruption increases. Adoption of these systems in a manner

sufficient to derive benefits will require time, and more importantly, significant social

change that redefines people’s use of financial services. Merchants and customers can

break the natural inertia involved in such radical change should they find sufficient

benefit in these new systems.

Taking steps to build a more productive partnership and encourage greater industry

activism on security measures may also help crack the code on better international

cooperation. Counter threat, and particularly counter terrorism, finance proves an area

difficult to secure cooperation among international partners. This may stem from the

financial benefits of looking the other way, a desire to downplay the presence of radical

elements in a country, or a lack of political will to address the issue.

Within weeks of the terrorist attack on Mumbai, charitable fronts associated with the

perpetrators, Lashkar-e-Taiba, were blacklisted by several international bodies. A few

months later, groups operating under different names with almost identical rhetoric

were back to business as usual. One advertisement used the same logo with a different

color scheme, and below was a banking code identical to the one used before the

attack. The organization names had changed, but the accounts remained the same.

Irrespective, an incentive structure that promotes activism may pave the way for the

industry and its powerful lobby groups to promote international cooperation.

Meaningful progress will require substantial cooperation in parts of the world where

the U.S. struggles to exert influence in positive ways, and this is where industry may be

well positioned to assist and drive for higher standards.

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Expectations, Limits, and Priorities

There are many opportunities to improve counter threat finance efforts, but it is

equally important to recognize the limitations if there is any hope of developing

realistic goals and effective policies. The community has to decide whether threat

finance will focus on individuals or groups, clearly outline the relationship between

privacy and future innovation, and understand the limitations or develop alternatives

to the “public-private partnership”.

Despite much success, recent cases reflect limitations in leveraging counter threat

finance as a tactical tool capable of providing early warning on decentralized threats.

For example, the attempted Times Square bomber Faisal Shahzad, was in default on his

house when he carried out his plot.11 This is an example where the individual had a

banking relationship, based on loans rather than deposits, used informal remittance

systems to fund the attack, and never drew suspicion. While this is frustrating, it is also

unreasonable to argue that the associated financial institutions should have identified

him as a possible bomber based on current standards and capabilities.

Najibullah Zazi, the attempted New York subway bomber, also accessed the US

financial system accruing $51,000 in personal debt.12 He eventually declared

bankruptcy and moved out of his uncle's house when he could no longer pay rent.

There is no evidence to suggest that the borrowed funds played a role in acquiring

materials for his subsequent plot, but they did sustain his lifestyle. Despite the financial

incentives to know debtors, and the legal requirements to know your customer, Zazi

escaped identification for months during planning. This anecdote reinforces the

difficulty associated with countering terrorist finance in the current environment.

The number of attacks conducted by individuals inspired by al-Qaeda's ideology, those

unconnected to the actual organization, increased drastically within the US over the

past few years. It is important to recognize that efforts to counter terrorist finance, or

using terrorist financial transactions for intelligence purposes, will yield little benefit

when it comes to these small scale incidents.13

Scouring the financial system to find the next Shahzad or Zazi will only overwhelm

both regulators and financial institutions. As currently practiced, efforts to counter

terrorist finance should focus on terrorist organizations or infrastructure, platforms

that could be used to launch multiple attacks. This seems like a simple point, but the

current lexicon does not distinguish between these different types of threats, thereby

running the risk of setting unrealistic goals and misallocating resources.14

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The focus on groups, networks, and attack infrastructure will also help moderate the

privacy considerations associated with integrating different information sources with

financial data. It is perfectly reasonable for both financial institutions and intelligence

agencies to use all publicly available information to assess threats and minimize risks.

This includes social networking, videos, blog posts and the like. Things become

infinitely more complicated with the possibility of integrating publicly available data

with the proprietary, and ostensibly private, information on spending patterns that the

financial institutions access.

These legitimate and serious privacy concerns will limit the ability to integrate data

streams and build early warning platforms capable of finding radicalized individuals. It

should not, however, prevent institutions from investigating whether funds are tied to

illicit activities by any legal means at their disposal including automated and integrated

platforms. In this regard, private institutions may actually have more latitude than the

government, and in fact most of the social media tools, websites, and apps we use on a

daily basis are already doing much more extensive mining on our individual activities

than financial institutions and domestic law enforcement agencies. If expectations are

appropriately set, there is ample room to develop new capacities while being mindful

of privacy.

The relationship between the public and private sectors is another area with promise

and limits. There is a steady and ever louder drum beat of public-private partnership,

particularly in areas of counterterrorism and homeland security. While this buzz

phrase will certainly be with us for some time to come, it evokes very different

responses among the public and private sector participants. Many in the public sector

believe that there are unique resources that private sector financial institutions can

bring to bear on a host of issues. They are absolutely correct. Unfortunately, the

concept often invokes skepticism or outright contempt as some on the private side see

it as a way for the public sector to abdicate certain roles or pass responsibility to others

without much support.

This is not a reason to abandon the notion of public-private partnership, or the more

express goal of integrating the financial services industry into discussions of national

security in a more robust way, but it does mean that it needs mending and tending. The

private sector needs to believe they have a partner willing to bring tangible capabilities

to the table and incentive structures that help them to help the public sector.

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One method of signaling the commitment to change might focus on the bureaucracy

itself. The array of government agencies and offices involved in suspicious transactions

and countering terrorism finance is difficult to navigate to say the least. The Treasury

Department has at least four offices involved in these efforts, the Departments of

Justice and Homeland Security both play important roles, and banking regulators such

as the FDIC and Federal Reserve are responsible for direct oversight. This patchwork of

bureaucracy should be rationalized to help shift the burden of compliance and open

space for different types of engagement.

Conclusions

Make no mistake: the last decade of counter threat finance is a story of success. It is one

of the most efficient and effective tools in promoting security, and one that should gain

increased attention and resources despite the constrained environment. At the same

time, it is important to constructively focus on ways of building on that success to

create a system that will confound our adversaries, from terrorists to smugglers to

proliferators.

There are serious shortcomings in the current system, but there are some limitations

that might be circumvented with some innovative thinking and constructive

engagement. The hardest aspect will be aligning incentives in ways to maximize

performance, first with the financial services industry and then with foreign partners

and third parties. The capacity to effect serious change not only exists, but has already

come to fruition. Building the will, among the private sector and foreign countries, to

take on these issues despite the political and economic costs is difficult. Nonetheless,

these issues should take front and center in planning for the next decade.

Dr. Scott Helfstein is an HSPI Senior Fellow, and Director of Research at the Combating Terrorism Center of the United States Military Academy. The views expressed in this Issue Brief are the author’s and do not necessarily reflect those of the Combating Terrorism Center, U.S. Military Academy, Department of Defense or U.S. government. The author would like to thank Jeff Bardin, Lauren Burns, Sharon Cardash, Joseph Clark, Gary Howe, John Solomon, Jim Spencer, Janey Wright, and Elad Yoran for their helpful comments. All errors are my own.

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Founded in 2003, The George Washington University Homeland Security Policy Institute (HSPI) is a nonpartisan “think and do” tank whose mission is to build bridges between theory and practice to advance homeland security through an interdisciplinary approach. By convening domestic and international policymakers and practitioners at all levels of government, the private and non-profit sectors, and academia, HSPI creates innovative strategies and solutions to current and future threats to the nation. The opinions expressed in this Issue Brief are those of the author alone. Comments should be directed to [email protected].

1 Tony Capaccio, “U.S. Military to Target Terror Finance Networks,” Bloomberg News, December 8, 2008, http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aWCdqrmv031g. 2 Douglas Farah, “The Success of Counter-Terror Financial Measures,” October 14, 2009,

http://www.douglasfarah.com/article/509/the-success-of-counter-terror-financial-measures.com. 3 Moises Naim, Illicit: How Smugglers, Traffickers and Copycats are Hijacking the Global Economy (Doubleday: New York, NY, 2005); Moises Naim, “It's the Illicit Economy, Stupid: How Big Business

Taught Criminals to Go Global, Foreign Policy, November 9, 2005, http://www.foreignpolicy.com/articles/2005/11/09/its_the_illicit_economy_stupid. 4 National Commission on Terrorist Attacks Upon the United States, “The 9/11 Commission Report,” 1st

ed.(New York: Norton, 2004). 5 “Al Qaeda Members Hide in Brazil, Raise Money: Report,” Reuters, April 2, 2011, http://www.reuters.com/article/2011/04/02/us-brazil-qaeda-idUSTRE7312LJ20110402. 6 “Finance And Economics: The iceberg beneath the charity; Terrorist finance.” The Economist, March 15, 2003: ABI/INFORM Global, ProQuest. Web. 29 Nov. 2010. 7 Annie Sweeney, “Al-Qaida Operative Invested with Chicago Brokerage House in 2005,” Chicago Tribune, June 21, 2011, http://articles.chicagotribune.com/2011-06-21/business/ct-met-terrorism- financing-20110621_1_al-qaida-qaida-al-ghamdi. 8 Patrick Radden Keefe, “The Trafficker: The Decades-Long Battle to Catch an International Arms

Broker,” The New Yorker, February 8, 2010, http://www.newyorker.com/reporting/2010/02/08/100208fa_fact_keefe.

Read more http://www.newyorker.com/reporting/2010/02/08/100208fa_fact_keefe#ixzz1jDTcdBMD 9 Laura K. Donohue, “Anti-Terrorist Finance In The United Kingdom And United States,” Michigan Journal of International Law 27 (2006): 303-435. 10 “Small-scale Attacks to Continue, Al Qaeda Group Says,” Reuters, November 21, 2010, http://www.reuters.com/article/2010/11/21/yemen-qaeda-idUSLDE6AK01H20101121. 11 Josh Barbanel, Andrew Grossman and Sumathi Reddy, “From New Citizen to Suspect in a Year,” Wall Street Journal, May 5, 2010, http://online.wsj.com/article/SB10001424052748703866704575224451665380256.html.

James Gordon Meek, Judith Crosson, Rocco Parascandola and Larry Mcshane, “A Dozen On Constant

Watch Including Najibullah Zazi In FBI's Terrorist Probe,” September 18, 2009,

http://articles.nydailynews.com/2009-09-18/news/17931114_1_najibullah-zazi-fbi-law-enforcement.

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13 The Financial Action Task Force Report, February 29, 2008, highlights the low costs associated with

direct operation support. 14 Ibid., the Financial Action Task Force Report does draw the distinction in scale and scope.

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