President George W. Bush, in his September 20
speech on terrorism before a joint session of Congress, vowed
that
We will direct every resource at our command--every means of
diplomacy, every tool of intelligence, every instrument of law
enforcement, every financial influence and every necessary weapon
of war--to the disruption and defeat of the global terror
network.... [E]ither you are with us, or you are with the
terrorists.
The President made clear that America's arsenal of weapons
against terrorism would include shutting down their avenues of
financing and seizing their assets. He understands that financial
support is necessary for terrorists to project their activities
from their base of operations to the United States and other
developed nations. Identifying and cutting off terrorist
groups--such as Osama bin Laden's al-Qaeda--from their existing
bank accounts and other sources of financing must be a necessary
component of a successful war against terrorism.
More than a military leader, Osama bin Laden is a modern
financier dedicated to supporting terrorist acts through a complex
financial network. A multimillionaire, he utilizes not only his own
resources, but also money that flows in from supporters around the
world, rich and poor. As a sort of diabolical grant maker, he
distributes funds to groups that are planning to harm Western and
particularly American interests. Each terrorist act brings in fresh
funds.
Terrorism is a business the fruits of
which are nurtured by these financial flows. Cut off these flows,
and the terrorist's activities will be stunted no matter how
fanatical the devotion of their followers. To defeat terrorism at
its base, the United States must:
- Determine what countries and
institutions are safeguarding bin Laden's fortune and publicly
demand that they freeze his assets or face the consequences.
- Increase coordination among those who
police financial transactions to detect terrorist group activities
and to prosecute the individuals or banks involved.
- Expand
the network of mutual legal assistance treaties and implement
procedures to ensure timely and effective international cooperation
in the fight against crime and terrorism.
- Increase intelligence resources
dedicated to infiltrating and monitoring criminal use of informal
money transfer networks.
Financial Links to Terrorism
A
key means for combating terrorism is to cut off terrorists from the
funds they need to finance their activities. As clues from the
September 11, 2001, terrorist attacks have been released to the
public, it is increasingly evident that the operation was highly
sophisticated and involved years of planning, intelligence, and
training. Such an operation was not conducted on a shoe-string
budget. It required large amounts of money for support of covert
agents, bribes, logistics, supplies, and
training.
The
group that makes the most extensive use of private funding for
terrorist activities is Osama bin Laden's al-Qaeda. Bin Laden's
extensive business interests around the world, most of which are
not listed in his name, are used to transfer and exchange money and
financially support those activities. Bin Laden uses his estimated
$300 million in financial assets to fund the activities of the
al-Qaeda network of as many as 3,000 Islamic militants. Al-Qaeda
also functions as "the merchant bank for terrorism," financially
backing smaller terrorist groups that target Western countries.
Terrorists use the global banking system
to move funds around the world. This is true whether terrorists use
the system to withdraw cash from automated teller machines or money
is dispatched through correspondent banks and via wire
transfers.
The
securities industry has also been drawn into the terrorist web.
German authorities have uncovered a set of trades conducted on the
German stock exchange that may be connected to the September 11
attack.
Certain individuals had sold short their shares of stock in
airlines and insurance companies.
Short-selling is a legitimate activity by
which investors who have reason to expect that a company's share
price may fall in the future can sell their shares today. Those
investors must "cover" that sale either by delivering some of their
already owned shares to the buyer or by purchasing
shares--presumably at a price lower than that received at the
sale--and delivering these to the buyer. Parties with foreknowledge
about the terrorist attacks on New York and Washington could have
sold short before the attacks with the intent of using the earned
profits from their sales to finance future terrorist
activities.
However, the United States must not
overlook informal financial networks in its efforts to curb the
financial activities of terrorist groups, since these networks can
move vast amounts of funds across borders without using banks or
other formal financial agents. One example is the "hawala" system
(Hindi for "in trust") used in Pakistan and India to avoid paying
bribes or taxes when transferring money across borders. The hawala
system can be used to transfer large sums from one country to
another without the money's ever crossing borders.
In
the hawala system, a money broker (or "hawaladar") collects funds
at one end of the operation in Country A, and another hawaladar in
Country B distributes the funds at the other end. Information on
the amount of money and the person for whom it is intended
(identified through a code word or other means) is transferred via
e-mail or letter. Because individual hawaladars are typically small
business owners who operate hawala activities on the side, monetary
obligations are generally tracked through a system of chits or
verbal agreements with few written records. Because the system
requires complete trust, the two brokers are often of the same
clan. According to the Financial Action Task Force (FATF) of the
Organisation for Economic Co-Operation and Development (OECD),
Hawala remains a significant method for
large numbers of businesses of all sizes and individuals to
repatriate funds and purchase gold.... It is favoured because it
usually costs less than moving funds through the banking system, it
operates 24 hours per day and every day of the year, it is
virtually completely reliable, and there is minimal paperwork
required.
Cutting Off The Money
Most
terrorist activities require foreign funds and financial markets to
operate. The reason: The states that harbor them have deficient
legal and economic institutions that preclude the emergence of
functioning economies. The 2001 Index of Economic Freedom, a joint
publication of The Heritage Foundation and The Wall Street Journal,
rated Iran, Iraq, and Syria as "repressed" economies--the worst
rating. Sudan's rating was suspended because of a brutal civil war
waged by the government against its own people. Afghanistan was not
included because it lacks a functioning economy.
The
United States and other developed nations, then, can impede
terrorism by more carefully policing private domestic and
international financial flows that are of a questionable nature in
order to cut terrorists off from their financial lifeblood. In
pursuit of this goal, the Bush Administration should:
- Determine what
countries and institutions are safeguarding Osama bin Laden's
fortune and publicly demand that they freeze his assets .
It is certainly possible that the financial experts at the Central
Intelligence Agency (CIA) and Federal Bureau of Investigation (FBI)
will soon determine the whereabouts of bin Laden's $300 million
fortune. Afghanistan's rudimentary banking system cannot possibly
be the primary depository of his banking fortunes or provide his
banking needs.
Once the whereabouts of bin Laden's fortune have been
ascertained conclusively, the U.S. government should publicly
demand that the countries and institutions involved immediately
freeze his assets. Such a sudden and decisive
action would certainly cripple, and could well lead to the
permanent demise of, his terrorist organization. In the era of
transnational terrorist organizations like bin Laden's, these tools
become the most effective means of dealing with cross-state
menaces.
- Increase
coordination in policing financial transactions in order to detect
transactions among terrorist groups, and prosecute banks or
individuals that consciously or through their negligence assist
those transfers . Bankers whose institutions are being
perverted by terrorists have a moral responsibility to end the
terrorists' use of the banking system. It surely would be a bank
CEO's worst nightmare to discover that he is bin Laden's banker.
Banks have a practical interest in developing their own solution to
the problem before Congress imposes a draconian measure on the
industry.
Of course, even the most diligent banks may unwittingly be used
as a conduit for financial transfers among terrorists. Ample
information is collected by the Federal Reserve System, the
Financial Crimes Enforcement Network (FinCEN) in the U.S. Treasury,
and banking regulators in other countries to stop these movements.
Law enforcement agencies, however, have not made effective use of
that information to apprehend the global criminals who use the
modern financial system to finance their business.
Therefore, the United States must focus on monitoring and
tracing financial activities of terrorist groups. The recent
announcement that FinCEN data will be used by the new interagency
Foreign Terrorist Asset Tracking Center (FTAT) is a positive
step.
FTAT's express purpose will be to locate and disrupt terrorist
funding sources, including finding any links between U.S. financial
institutions and funding networks.
The United States must diligently prosecute and hold liable
individuals and banks involved in these activities. Liability
creates incentives for bankers to report suspicious transactions as
soon as they notice them. Banks and bankers who exercise due
diligence should not be held liable when sophisticated terrorists
use their services in ways they could not reasonably detect. Banks
or individual bankers who have been negligent should be punished
with stiff civil fines (and liability lawsuits initiated by
government regulators) for the consequential damages caused by such
conduct, up to and including the loss of their licenses to conduct
banking in the United States. The aiding and abetting of a
terrorist act is itself a terrorist act. If done consciously, such
an act should be prosecuted criminally to the full extent of the
law, including punitive damage suits and criminal liability for
murder.
While short-selling is a legitimate financial activity used by
individuals to hedge against financial risk and loss, creating the
condition that causes the share price to fall is securities fraud.
If it involves a heinous criminal act, such as occurred on
September 11, that fraud would compound the felony.
- Expand the
network of mutual legal assistance treaties and implement
procedures to ensure timely and effective international cooperation
in the fight against crime . Law enforcement officials
generally can count on international cooperation because of mutual
legal assistance treaties and other international commitments.
Nations traditionally have observed the principle of "dual
criminality," which means that they help each other investigate and
prosecute actions that are against the law in both nations.
Murder, of course, is universally recognized as a crime, so all
jurisdictions should cooperate in the battle to catch and punish
the terrorists. Governments should work together to expand these
treaties to cover all jurisdictions and to create procedures that
will allow quick compliance in high-priority cases. They should be
prepared to ostracize and punish jurisdictions that resist by
placing them on a watch list of countries, more carefully
scrutinizing financial transactions originating from those
countries, and, in extreme cases, restricting the ability of their
financial institutions to conduct financial transactions within the
United States.
- Increase
intelligence resources dedicated to infiltrating and monitoring
criminal use of informal money transfer networks .
Terrorist groups can also transfer money around the world without
using the services of a financial institution by utilizing informal
money transferring networks or alternative remittance systems.
Regulating banks and implementing money laundering laws will have
little effect on these informal networks, which function largely
without documentation. Therefore, the United States must dedicate
increased human intelligence resources to combating the use of this
system, which is largely immune to electronic surveillance because
of its rudimentary nature, to support terrorist activities.
Conclusion
Terrorists cannot subsist on fanaticism
alone. They require financial backing to conduct their activities.
President Bush made clear his understanding of this fact on
September 20, when he told a joint session of Congress that "We
will starve terrorists of funding."
In
order to fulfill his promise to combat terrorism, America and its
allies in the war on terrorism must cut off terrorist groups from
the international financial flows that support them. This will
require greater oversight of formal and informal financial
transactions, as well as pursuing and punishing those who
facilitate the financial transfers to terrorists.
Gerald P. O'Driscoll,
Jr., Ph.D., is Director of the Center for
International Trade and Economics, Brett D.
Schaefer is Jay Kingham Fellow in International Regulatory
Affairs in the Center for International Trade and Economics, and John C. Hulsman,
Ph.D., is a Research Fellow for European Affairs in the Kathryn
and Shelby Cullom Davis Institute for International Studies, at The
Heritage Foundation.