September 25, 2001

September 25, 2001 | Backgrounder on Department of Homeland Security

Stopping Terrorism: Follow the Money

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.2

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.3 Al-Qaeda also functions as "the merchant bank for terrorism," financially backing smaller terrorist groups that target Western countries.4

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.5 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.6

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.7 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.8 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.


1. The authors would like to thank James Phillips, Research Fellow in the Kathryn and Shelby Cullom Davis Institute for International Studies; Daniel J. Mitchell, McKenna Senior Fellow in Political Economy in the Thomas A. Roe Institute for Economic Policy Studies; David John, Senior Policy Analyst for Social Security; and Todd F. Gaziano, Senior Fellow in Legal Studies, at The Heritage Foundation for their comments and contributions to this paper.

2. President George W. Bush, "Address to a Joint Session of Congress and the American People," September 20, 2001 (emphasis added). See http://www.whitehouse.gov/news/releases/2001/09/20010920-8.html .

3. Kenneth Katzman, "Terrorism: Near Eastern Groups and State Sponsors, 2001," CRS Report for Congress No. RL31119, Congressional Research Service, September 10, 2001, p. 9.

4. Donna Abu-Nasr, "Bin Laden's Financial World Vast," Associated Press, September 18, 2001.

5. James Toedtman and Charles V. Zehren, "Profiting from Terror? Worldwide Probe of Surge in Trades Days Before Attack," Newsday , September 19, 2001.

6. For more information, see Organisation for Economic Co-Operation and Development (OECD), "Report on Money Laundering Typologies 1999-2000," Financial Action Task Force, FATF-XI, February 3, 2000, at http://www.oecd.org/fatf/pdf/TY2000_en.pdf , and Tim Weiner and David Cay Johnston, "Roadblocks Cited in Efforts to Trace bin Laden's Money," The New York Times , September 20, 2001.

7. President Bush took the first steps necessary to accomplish this goal in the United States on September 24 when he signed an executive order, "Blocking Property and Prohibiting Transactions with Persons Who Commit, Threaten to Commit, or Support Terrorism," that, in the words of President Bush, "immediately freezes United States financial assets of and prohibits United States transactions with 27 different entities. They include terrorist organizations, individual terrorist leaders, a corporation that serves as a front for terrorism, and several nonprofit organizations.... [T]hey oftentimes use nice-sounding, non-governmental organizations as fronts for their activities. We have targeted three such NGOs. We intend to deal with them, just like we intend to deal with others who aid and abet terrorist organizations. This executive order means that United States banks that have assets of these groups or individuals must freeze their accounts. And United States citizens or businesses are prohibited from doing business with them." See remarks by President George Bush, "President Freezes Terrorists' Assets," Office of the Press Secretary, The White House, September 24, 2001, at http://www.whitehouse.gov/news/releases/2001/09/20010924-4.html.

8. See Rob Garver, "Launder Strategy Overtaken by Attacks," American Banker , September 20, 2001, at http://www.americanbanker.com/.

About the Author

Brett D. Schaefer Jay Kingham Senior Research Fellow in International Regulatory Affairs
The Margaret Thatcher Center for Freedom

John Hulsman Senior Research Fellow