The Road to Hell is paved with good intentions: The Case of Terrorism Finance Regulation
Terrorism financing is like the head of the Lernaean Hydra – cut one avenue off and two more grow back. In the opening stages of the War on Terror in the aftermath of 9/11, then-President George W. Bush signed Executive Order 13224 which prohibited financial and other transactions with terrorist suspects. Within a week, the United Nations Security Council issued a resolution to prevent and suppress terrorism financing. In the eyes of governments, terrorism is an expensive affair and they have sought extensively to stifle terrorists’ access to the global financial system, introducing legislation, sanctions, blacklists and asset freezes, increasing compliance costs and potentially reduced billions in more productive economic activity. 16 years later, the effects of these polices are mixed. In 2015, the group known as ISIS was estimated to have a net worth of about $1.8 billion, according to a study by Ernst and Young, while the total amount of “terrorist assets” frozen or seized worldwide amounted to a paltry $60 million.
In the aftermath of the terrorist attack in Paris on 13 November 2015, former French Minister of Finance Michel Sapin called more regulations to be imposed: greater scrutiny by financial institutions, more regulations on crypto and digital currencies, and a freeze on financial assets. Curiously in the same speech, Monsieur Sapin mentioned that ISIS’ main revenue streams came from selling oil, the black market antiquity trade, kidnap ransoms and human trafficking. Yet far from recommending steps to halt oil smuggling and human trafficking, he proposed the above recommendations instead. While governments acknowledge the main sources of terrorism financing, ever more regulations on the international financial system seems to be the go-to method of combating this issue. Reaction in the finance sector has been swift: international banks are spending ever greater resources on anti-money laundering (AML) and combating the financing of terrorism (CFT) framework developed by the Financial Action Task Force (FATF), a policy body to “set standards and promote effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system”.
De-risking spawns new problems
HSBC, Europe’s largest bank by assets, estimated that it spent $800m in the first quarter of 2017 on compliance and regulatory programmes, eroding its ability to commit to its core business of providing loans and other financial services. On the other end of the spectrum other financial institutions seek to “de-risk” by exiting markets and ceasing operations of select services. For example, all major banks in the United States and the United Kingdom have ceased wire transfers to Somalia in order to avoid terrorism financing risks. The bank accounts of refugees, charities that operate in Somalia, and even Western citizens with family links to Somalia have been closed. Because roughly 40% of the Somali population depend on overseas remittances, the economic and social impact huge. Rather than depending on the financial institutions, Somalis abroad are increasingly relying on an informal money transfer system known as Hawala to remit money. Instead of complying with FATCA regulations, these informal networks do not require extensive identification, maintain little or no records and operate unregulated. Consequently, closing access to the global financial system has made it relatively easier for terrorists to move unregulated and untraceable money around. Greater financial regulation has definitely deterred sympathizers and terrorists from utilizing the global financial system, an unintended consequence was to push such activity further underground.
Know Thy Enemy (and his price)
The trend of terrorist attacks has moved from constructing homemade bombs to cheaper methods. A NBC news article from 2016 cited Abu Muhammad al-Adnani, the deceased former ISIS second-in-command who incited lone-wolf terrorist attacks on the West, to have said “if you can kill a disbeliever…kill him in any manner or way however it may be. Smash his head with a rock, slaughter him with a knife, run him over with your car, throw him down from a high place, choke him or poison him”. Even the most stringent of FATF regulations would be hard-pressed to detect transactions to finance the actions mentioned above. Indeed, the attack on Bastille Day in Nice, the Christmas market attack in Berlin and the attack outside the Houses of Parliament in London wouldn’t cost more than the price of a car rental and some fuel.
A 2015 study the Norwegian Defence Research Establishment found that between 1994 and 2013, over 90% of jihadist cells in Europe were self-funded either through personal savings or crime. The individuals who carried out the attack at the offices of Charlie Hebdo, a French magazine, financed that attack by taking out loans, selling counterfeit goods and peddling drugs. Police interviews of returning fighters from conflict areas in Iraq and Syria revealed that personal funds, be it from legitimate sources or other small-scale illicit operations financed their trip to Syria through Turkey. A quick search online returned a one-way trip from Milan to Istanbul would cost a mere €200.
For regulators, trying to starve ISIS financially has been challenging. Blacklisting individuals and freezing of overseas assets have proven ineffective because ISIS derives the bulk of its revenue internally from looting, tax receipts, tariffs, and from the oil fields it controls. Instead, a physical incursion into ISIS territory proved to be much more effective in cutting off financing. A study by released in June 2017 by IHS Markit, a consultancy, estimated that ISIS oil revenue has plummeted 80% from its peak of $200m annually 2 years ago as international coalition forces started to take back territories previously controlled by the group. Limiting ISIS’ territory has scrupled its ability to derive revenue to support a bureaucracy and maintain the grip on power. The resulting cash shortage has not only weakened ISIS military power but also blunted its ideological appeal. ISIS has responded by attempting to increase its financial ‘reserves’ by forcing people living in the Caliphate to pay all transactions with the “Golden Dinar”, ISIS’ official currency.
Cauterizing the origins
After spending close to two decades of trying to counter terrorism financing, results have been mixed. To truly be effective against terrorism financing, we have to look towards the main revenue stream of these organizations. Terrorist organisations derive the majority of their revenue not from overseas contributions but from the sale of oil, antiquities, diamonds, kidnapping ransom and uniquely in the case of ISIS, taxation. Financial sanctions and compliance will not stop ‘lone wolf’ attacks from stabbing a crowd, nor will it be effective against a quasi-state organisation like ISIS that derives its main sources of revenue from internal sources. An unfortunate by-product of overzealous regulation has led to human hardship (Somalia) and adverse economic effects on firms and consumers (by stifling bank lending) without having a material impact of curbing terrorist activity in the world.
Instead of trying to come up with ever more novel (and costly) policies to regulate the global financial system, government could take a more practical approach, including greater military and diplomatic means. In January 2016 for example, CNN reported that that the US Air Force bombed ISIS’ cash storage facilities, resulting in ‘tens of millions’ worth of currency lost in a single strike. While that may seem insignificant considering the annual revenue of ISIS, that amount is many times more than what regulators seized since the Caliphate was declared in 2014. In essence, ways to curb terrorism financing should be customised to the organisation being targeted and not be lazily applied across the board. At the FATF office in Paris, curbing terrorism financing could be greater monitoring on crime and monitoring extremist forums. In ISIS’ capital of Raqqa, the most effective method would be to simply bomb oil fields. A more pragmatic approach could yet prove more effective than more financial ‘ingenuity’, an approach with varied results.
WRITTEN BY FELIX LIM FOR BESA
PLEASE DIRECT ANY INQUIRY TO AS.BESA@UNIBOCCONI.IT