The fast-growing “New Economy of Terror”

The Financing of Islamist Terrorism: its importance, sources, linkages, structures and mechanisms; how to shut it down and the implications for counterterrorism policy.

1. Introduction – The Importance of the ‘New Economy of Terror’

Much was written in the late 1990s and early 2000s by the world’s economic pundits regarding the vaunted “New Economy”, a phrase coined to describe either the impact of the information and communications technology revolution on the global economy, or the economic implications of the new wave of globalisation that has in recent decades swept the world. However, this process of globalisation, in conjunction with the information and communications technology revolution, together with the ‘mutation’ or ‘evolution’ of both the “global illicit trade” (Naim, 2005, p. 7) and the new era “global Salafi jihad” (Sageman, 2004, p. 1) into new decentralised, network-based forms, have all conspired to create a much more “chilling and … critical phenomenon in this period of our history – the New Economy of Terror” (Napoleoni, 2005, p. xiii).

This ‘New Economy of Terror’ is important because it represents a fast-growing international economic sub-system, which has, thanks to the historical features mentioned above, become an integral part of the global economy (at both illicit and legitimate levels), “generating vast amounts of money … with a turnover of about $1.5 trillion, twice the GDP of the United Kingdom” (Napoleoni, 2005, pp. xviii-xix) and which represents the “feeding structure which sustains and nurtures” global Islamist terror (ibid., p. xiii). It provides the links through all points on a continuum from the global illicit trade (eg., drugs and arms dealing, people smuggling and money laundering), through seemingly legitimate banks, financial structures, trusts and charities, to the actual, direct or indirect support and logistical systems for Islamist terrorist groups and cells throughout the world. In so doing, it has “devastating effects on Western business ethics … and cements the many links, and opens new ones, between the ‘New Economy of Terror’ and legal economies” (Napoleoni, 2005, p. xix).

Accordingly, it is clear from the complex web of linkages which this enormous ‘Gross Criminal Product’ (coined by Baker, cited in Napoleoni, 2005, p. 205) represents, that if we are to be effective in our counterterrorist efforts, policies and procedures in the fight against global Islamist terror, we need to wage the war increasingly on an economic front, and not just on the military and security/intelligence fronts, across the full continuum noted above from the perpetrators of the global illicit trade to the terrorists themselves, and every point in between, on an integrated and coordinated basis. For indeed, as Ehrenfeld (2005, p. xviii) notes, the perpetrators of Islamist terror are “only the expendable foot soldiers; the true blame must lie with those who make their activities possible – the paymasters”. This paper therefore seeks to examine this ‘New Economy of Terror’, its sources and linkages, structures and mechanisms, with a goal of formulating a view as to how best to shut it and its paymasters down, and what this may mean for counterterrorism policies.

2. Sources & Linkages: the Roadmap of the ‘New Economy of Terror’

Former US Attorney General, John Ashcroft, in his 2002 address to the American Chamber of Commerce (cited in Acharya, 2009, p. 7), famously stated that “terrorists cannot terrorise without money, without resources; training costs money, planning costs money, and explosives cost money, plane tickets cost money”. Accordingly, as the Financial Action Task Force (FATF) notes (cited in Acharya, 2009, p. 7), a successful terrorist group must necessarily be able to “build and maintain an effective financial infrastructure to generate income, launder the proceeds and make them available for committing terrorist acts”. With the demise of state sponsorship in the post-Cold War era, terrorist groups have learned to take full advantage of the prevailing political and economic conditions to meet these funding requirements, so that the ‘New Economy of Terror’ has exploited all the features of the modern globalised economy, in effect, becoming ‘privatised’ in a sinister ‘illicit economy’ corollary of the privatisation movement which took hold of the legitimate economy since the late 1970s, and thus turning “the fundamental strengths of the legitimate economies … into double-edged swords” (id.).

The ‘roadmap’ of the ‘New Economy of Terror’ begins with its sources of financing, which as Giraldo and Trinkunas (2007, p. 24) note, encompass both legitimate and illegitimate means, and which can be grouped under the following broad headings (Ehrenfeld, 2005, p. 3):

a. Sympathetic governments, such as Saudi Arabia and Iran;
b. Islamic charitable organisations;
c. Legitimate businesses operating as fronts;
d. Exploitation of financial markets, especially the unregulated commodities markets;
e. Money laundering and trade diversion;
f. International trade, which can, for example, convert cash into precious commodities such as diamonds and gold;
g. Criminal activities, in the context of both ‘petty crime’ and ‘organised crime’, such as:

The most important feature of this ‘roadmap’ is the interconnectedness between these various financing sources that are at the heart of the ‘New Economy of Terror’, which as Ehrenfeld (2005, p. 3) points out, has the effect of linking “money, geography, politics, arms, and tactics” to create a devastatingly powerful ‘alternative’ or ‘underground’ economy with (as we have seen above) an annual global turnover of roughly twice the GDP of the United Kingdom. As is readily apparent from the above list, these links fall into two main categories: linkages between terrorism and crime (whether organised or petty crime), and linkages between terrorism and apparently legitimate business, charitable and financial structures and mechanisms.

Much has been made, validly, of the former category, with authors such as Curtis & Karacan (2002) outlining, in the context of the European nexus between terrorism and organised crime, how the linkages have generally evolved in three stages over time (p. 22):

A. Linkages for mutual benefit, in which terrorists enter agreements with transnational criminals solely to gain funding, without engaging directly in commercial activities or compromising their ideologically based mission;

B. Direct involvement of terror groups in crime, removing the ‘middleman’, but maintaining the ideological premise of their strategy; and

C. A complete melding of terrorist and criminal, where the terrorist ideology is replaced almost entirely by the criminal profit motive.

Indeed, as Williams notes in Biersteker & Eckert (2008, Chapter 6, p. 136), this last stage, whereby terrorist organisations actually appropriate crime methods for their own direct use for financing (whether methods of organised crime or petty crime), “will become increasingly frequent and important” in the future, especially in the context of the modern era of decentralised global Islamist terrorism, where individual terrorist cells tend to finance themselves through criminal activities at various levels of sophistication.

Similarly to Curtis & Karacan, Marenko (cited in Biersteker & Eckert, 2008, p. 128) contends that the ‘terror-crime nexus’ represents a law enforcement continuum with traditional organised crime on one end of the spectrum and terrorism on the other, with a “gray area” in the middle where “crime and terrorism are indistinguishable from one another”, with on the one hand, criminal organisations using terrorist tactics as an operational tool to pursue political objectives, and on the other hand, terrorist groups “initially [using] criminal activities as a source of financing but subsequently [changing] from political to financial motivations. Marenko (id.,) further develops this analysis by identifying four general ‘terror-crime nexus’ relationships: “alliances, operational motivations, convergence, and the ‘black hole’ syndrome, in which convergence between criminal and political motivations within a single group allows it to subsequently gain economic and political control over a state”.

However, notwithstanding the clear importance from a counterterrorism policy perspective of this first category of linkage (viz., terrorism and crime), it is the thesis of this paper that it is the second category of linkage (viz., terrorism and apparently legitimate business, charitable and financial structures and mechanisms) which is the most critical to understand if we are to be able to effectively shut down the ‘New Economy of Terror’. This is so because the first category of linkage represents the overt and observable side of the ‘terror-crime nexus’ (eg., drugs smuggling, arms dealing, people trafficking, prostitution and credit card fraud) and is therefore well-known, capable of being identified, and relatively susceptible to well executed surveillance and enforcement measures. In contrast, the second category of linkage represents what is effectively the opaque and arcane ‘invisible hand’ of the ‘terror-crime nexus’ (eg., front companies and businesses, Islamic banks and religious charities, mosques and Islamic centres, international trade and commodities dealing, and offshore banking), and as such is much less visible and less susceptible to enforcement measures, especially in the context of traditional counterterrorism policies and procedures. It therefore represents our critical area of weakness in the fight to shut down the ‘New Economy of Terror’, because without effective countermeasures in this area, all efforts to counter the elements comprising the first category of linkage will be to little or no avail in the long term, since, to paraphrase Ehrenfeld’s point noted above, we still will not effectively have dealt with ‘the paymasters’.

Accordingly, we will now, for the bulk of this paper, turn to an examination of the elements and manifestations of this critical second category of linkage – the structures and mechanisms of how the ‘New Economy of Terror’ actually works, with a view to suggesting what policy steps can be recommended to effectively shut it down by dealing definitively with the paymasters.

3. Structures & Mechanisms: How the ‘New Economy of Terror’ Actually Works

In delving more deeply into our ‘roadmap’ of the ‘New Economy of Terror’, we find that there are seven primary categories of structures and mechanisms which actually make it work, and we shall consider each of them in turn in some detail below (noting that some of these are also, in themselves, sources of terrorist financing, beyond merely being facilitative structures and mechanisms for that financing):

a. Islamic Banks:

One of the most important lynchpins that is at the heart of facilitating the ‘New Economy of Terror’ is the Islamic banking system, the operation of which is global and governed by Islamic jurisprudence, or Sharia Law, and is therefore not yet well understood by us in the West, whether we come from the financial industry or the law enforcement and counterterrorism sector.

As Acharya (2009, pp. 72-74) points out, the organisation of a typical Islamic bank provides insights into how the system can be, and is, misused for both money laundering and the financing of terrorism (whether within the Islamic world, or within the West under the guise of the increasingly common ‘Sharia-compliant’ financing divisions being introduced by Western banks to accommodate Islamic immigrants). The Islamic bank (or in the West, a ‘Sharia-compliant’ financing division within a Western bank) is obliged to have a control committee called the ‘Sharia Committee’ (more commonly known in the Islamic world as the ‘Islamic Legal Control Committee for the Preservation of Islamic Law’), which acts as a religious and accounting standards committee, making decisions about what financial instruments are able to be used by the bank under Sharia Law. The majority of the members of the committee are always Islamic clerics well-versed in Sharia Law, and the committee has wide-ranging powers over the bank’s activities, investments and operations, including its dealings in all different accounts.

One of the key accounts relevant to our discussion is the ‘Mudaraba account’ that the customer is obliged, under Sharia Law, to open with the bank to keep a part of the proceeds from investment for charity in compliance with Islamic obligations. Depending on the nature of the account, the investor is free to choose the charitable deed that he wishes to finance (a ‘free Mudaraba account’), or surrenders this responsibility to the Sharia Committee (a ‘restricted Mudaraba account’); the most important task of the committee in the latter case is to decide on the amount of zakat (alms or donation) and where this amount should go. In addition to the ‘Mudaraba accounts’, Islamic banking also involves the use of what are effectively ‘institutional asset management structures’ for Muslim assets, known as ‘Musharaka’ (joint enterprises) and ‘Murabaha’ (corporate enterprises in which the bank buys and sells goods for profit).

It is noteworthy that in all these structures, with the exception of the ‘free Mudaraba accounts’, the customer has no insight into the financial institution’s actual business operations or strategies, and no input as to which charities the zakat is placed with. Accordingly, given the generally lax oversight of Islamic banks and financial institutions within the Islamic world (Acharya, 2009, p. 73), and the lack of general understanding of the operation of the Sharia Committees within Western-based Sharia-compliant financing structures, the potential for abuse, particularly in the context of diversion of the zakat to Islamic charities which channel their contributions to Islamic terrorist groups, is significant. In addition, it goes without saying that in the case of the ‘free Mudaraba accounts’, there is no restriction on the customer directly deciding to place the zakat with such a terrorist supporting charity.

As Acharya (2009, p. 72) notes, many Islamic banks have been implicated, through these Sharia-compliant structures, in the financing of diverse Islamist terrorist groups (such as Arab Bank’s New York branch), through funnelling money into accounts controlled by charities affiliated with terrorist groups. The infamous case of the Bank of Credit and Commerce International (BCCI), which played a major role in financing the mujahidin fight against the Soviets in Afghanistan, was a classic case of how an Islamic bank can be infiltrated and misused for criminal money laundering and terrorist financing: at its height just before its collapse in 1991, the bank was incorporated in the Cayman Islands and Luxembourg and had branches in more than 70 countries, and masked its financial transactions through multiple layers of accounts in the names of charities, NGOs and businesses all controlled by Al Qaeda, with money from these entities being skimmed off and channelled to Al Qaeda cells and operatives who held accounts with the bank in false names (see Acharya, 2009, p. 73).

In addition, Ehrenfeld (2005, pp. 45-51) chronicles numerous cases of other, major name, Islamic banks being involved in the financing of Islamic terrorism through these Sharia-compliant financing structures and mechanisms, including:

• Al-Rajhi Bank: founded in 1987 and one of the top-ten companies in Saudi Arabia, comprising 378 branches in Saudi Arabia and seventeen international subsidiaries in offshore financial centres (mostly in Jersey and other U.K. locations, as well as the Netherlands Antilles), and which was the bank that held the accounts of Al Qaeda’s main European operative, Muhamma Galeb Kalaje Zouaydi, who used the bank to transfer funds directly to the perpetrators of the 9/11, Bali and Madrid attacks. In addition, the bank has extensive connections with, and moves money for, the key Islamic charities which support Al Qaeda and its satellites globally, such the SAAR, the Muslim World League, the International Islamic Relief Organisation and the al-Haramain Islamic Foundation.

• National Commercial Bank (NCB): the first commercial bank of Saudi Arabia, founded in 1950 in Jeddah, and which counted, among its other investments, a 30 per cent controlling shareholding in the corrupt BCCI. Of particular interest in our present context is the fact that an official Saudi government audit of the NCB revealed that for over ten years, the bank’s zakat committee had transferred over $74 million to Islamic charities, which then channelled the money to Al Qaeda.

• Al-Barakaat Bank: headquartered in Dubai, which, in addition to being, as we shall see later, a major Islamic offshore banking centre and free trade zone, is one of only three world governments which maintained diplomatic relations with the Taliban (the others being Saudi Arabia and Pakistan). Al-Barakaat was founded in 1989, by a Somali financier and close friend of Osama bin Laden, Ahmed Nur Jimale. Ehrenfeld (2005, p. 49) quotes former US Treasury Secretary Paul O’Neill as stating that the bank and its subsidiaries and affiliated companies “are the money movers, the quartermasters of terror … [and] are the principal source of funding, intelligence and money transfers for bin Laden”; its operations were shut down and its assets frozen by executive order of the U.S. President on November 7, 2001.

• Al-Taqwa Bank: established in 1988 in the Bahamas by the naturalised Italian citizen Youssef Nada, with operations in more than thirty countries, the bank has been a key money launderer for Al Qaeda and has been described by the Italian anti-terrorist agency, DIGOS, as “the most important financial structure of the Muslim Brotherhood and Islamic terrorist organisations” (Ehrenfeld, 2005, p. 50); it has funded not only Al Qaeda, but also HAMAS, the Algerian Salvation Front and Armed Islamic Group and Tunisia’s An-Nahda terror organisation. In particular, through its funding of the Qatar Charitable Society (QCS), it funded Al Qaeda’s 1998 bombing of the U.S. Embassies in Kenya and Tanzania, as well as providing funding to Al Qaeda terrorists in Chechnya. Moreover, it has also funded and sponsored the seemingly innocuous (at least to Westerners) Islamic Centre in Geneva and the Islamic Cultural Centre of Milan. In November 2001, the U.S. Treasury Department, at the same time as the shutting down of the Al-Barakaat Bank, froze the assets of Al-Taqwa Bank and sixty-two organisations associated with both banks.

b. Islamic Charities and Mosques:

As can be seen from the preceding section, and driven by the fact that one of the five pillars of Islam and the religious duty of all Muslims is to give at least 2.5 percent of their income to Islamic charities, these charities are a particularly important mechanism for the storage, movement and laundering of terrorist funds (Greenberg, 2002, p. 7). Indeed, “they are the conduits through which billions of dollars reach the Islamist network every year, [such that] … it is reasonable to assume that a large portion of charity funds act as a sort of international pool of money, ready to be channelled to whichever armed group is in need in the Muslim world” (Napoleoni, 2005, p, 173).

Comras (2005) provides an excellent overview of the various significant Islamic charities implicated in the financing of Al Qaeda and its satellites, which is indicative of the importance of the role of Islamic charities more generally as one of the key mechanisms facilitating the financing of the ‘New Economy of Terror’. He recounts (ibid., pp. 3-5) how, in the wake of the 9/11 attacks, intelligence and enforcement agencies around the world put together “a composite sketch of the activities of more than 50 international and local [Islamic] charities …which were used … to assist in financing Al Qaeda … [including] some of the major Islamic umbrella organisations headquartered in Saudi Arabia …[such as] the International Islamic Relief Organisation (IIRO), the Benevolence International Foundation, the al Haramain Islamic Foundation, Blessed Relief (Muwafaq) Foundation … the Muslim World League … and the [Pakistan-based] Rabita Trust”.

As has been alluded to in the preceding section, the issue of terror funding through the mechanism of Islamic charities is particularly grave because of the opacity of the ‘sources and uses of funds’ by them. Donations in large measure remain anonymous and there is almost no oversight of them, primarily because they hide behind the fact that they are charities, and rely on the general lack of knowledge, particularly in the West, about the real nature of Sharia Law and Islamic financing structures, which together means that there is a general assumption that, being charities, they exist to do ‘good works’ (rather than understanding that, more often than not, these ‘good works’ are a mask for their other more nefarious activities regarding the financing and support of terror and Islamic jihad). Indeed, in this connection, Napoleoni (2005, p. 173) importantly notes that “the combination of humanitarian aid and illegal activity is typical of Islamic charities”. In addition, the importance of this issue is magnified when one notes that, in one form or another, Al Qaeda has “infiltrated one-fifth of all Islamic charities – which, even if we limit ourselves to the jurisdictions of England and Wales and the Netherlands, would amount to some 2,000 charities [based on] … the rough estimate that there are of the order of 10,000 Islamic charities in these two jurisdictions” (Gunning: “Terrorism, charities and diasporas”, in Biersteker & Eckert, 2008, chapter 5, p.94). This is a truly terrifying figure from a counterterrorism policy perspective when used as a proxy for the number of Islamic charities operating globally that are likely being used for the purposes of supporting the ‘New Economy of Terror’.

And no consideration of the role of Islamic charities as a key financing mechanism for Islamic terrorism would be complete without reference to the role that mosques and Islamic centres worldwide play in this equation. As Comras (2005, p. 3) points out, “Al Qaeda has taken full advantage of [the] lack of oversight [of both mosques and charities] to open its own charities and to solicit funds through collection boxes at mosques and Islamic centres”, and Napoleoni (2008) notes that in the West, the network of mosques and Islamic centres has been so successful in this process of “recruiting and fundraising … that [many] have now become hotbeds of potential terror fighters, who have been fed an explosive mixture of religion and political ideology” (p. 133), and that in Europe, counterterrorism agencies perceive the mosque network “as the most powerful instrument for recruiting, funding and coordinating the activity of cells and armed groups linked to Islamist terror in Europe and abroad” (p. 221). Indeed, recent press articles by Hengst (2010) and Morgan (2010) regarding the closure of Hamburg’s main Taiba Mosque due to its use by Islamic extremists for the support of Islamist terrorism, including the 9/11 attacks, are timely indications of the recognition of the role of the mosque network in the facilitation of the ‘New Economy of Terror’, especially in view of recent proposals in the U.S. regarding the ‘Ground Zero Mosque’.

Accordingly, in tandem with Islamic banks, the global network of Islamic charities, mosques and Islamic centres can clearly be seen to be major contributors to the ‘New Economy of Terror’ phenomenon, which together represent “an international network of economic and financial ties as a ‘predatory alternative’ to the traditional world economy” (Napoleoni, 2008, p. 140).

c. Informal Value Transfer Systems (IVTS):

Informal Value Transfer Systems (IVTS) are systems or networks that transfer value outside the conventional regulated financial system, in which transfers generally take place through non-bank financial institutions or other business entities whose primary business activity may not be money transfer; many of these systems predate the emergence of modern banking and financial practices, and in many countries (particularly in the Islamic world) they function in parallel with, or as a substitute or alternative for, the formal banking system, operating in relative obscurity, using mechanisms that involve close-knit networks with little or no transparency (Acharya, 2009, p. 75).

These IVTSs have been extensively used for the facilitation of capital flight, tax evasion, fraud, money laundering, and most especially, terrorist financing. The most common system, prevalent “in almost all continents of the world” (Acharya, 2009, id.), is the Islamic IVTS, the Hawala, which in Arabic means ‘transfer’. The size of annual Hawala transactions throughout the Islamic world is enormous: for example, in Pakistan, between $2-5 billion in foreign remittances annually pass through the Hawala system, as compared with around $2.5 billion which are transferred via the banking system, and in Malaysia in 1998, when the Government introduced capital controls to prevent capital flight and counter the ‘Asian Currency Crisis’, the Hawala system became the main source of foreign exchange in that country (Napoleoni, 2009, p. 218). Indeed, Acharya (2009, p. 76) quotes a World Bank estimate that over $300 billion have been transferred around the world in the past two decades using Hawala networks.

And predictably, the great advantage to Islamist terror groups is that this unregulated, opaque and informal Hawala system is widespread in all the areas of the Islamic world where Islamist terror is growing and the banking system is weak. As Acharya (2009, id.) notes, despite the advent of new technologies changing the Hawala system into an updated, relatively sophisticated means of monetary exchange, the essential features of the practice, “which include lack of paper trails, expediency of transfers, and low costs, remain unchanged … there is no physical transfer of money … [and] the settlement of accounts between Hawaladors is accomplished through various mechanisms such as reciprocal remittances, manipulation of trade invoices, smuggling of gold or drugs, or through the physical movement of cash by trusted couriers”. Further, Ehrenfeld (2005, p. 15) notes that Hawala transactions are often completed more rapidly than international wire transfers that involve legitimate banks, which is quite astonishing.

Clearly, its speed, coupled with the facts that no paperwork is needed and no money physically crosses borders, makes the Hawala system an ideal financial structure and mechanism for the underpinning of the ‘New Economy of Terror’. In a chilling example of how useful this Hawala system is in the facilitating of Islamist terror, Acharya (2009, p. 76) cites the investigative work of Willman, who found that Mohamed al-Owhali, one of the suicide bombers of the U.S. Embassy in Nairobi, received $1,000 at the Nairobi office of a Hawalador without carrying any identification (due to his having destroyed all his identification papers in preparation for the suicide attack), because the transferring party wrote a note requesting that “This person doesn’t have any proper documents … please give him [money] without documents”. Acharya (2009, id.) also documents the fact that the Hawala system was used to transfer funding for the July 2006 Mumbai train bombings, and the transfer of money from Sweden to Islamist militants in Northern Iraq. And Napoleoni (2009, p. 218) cites the use of the Hawala system by Western backers of Islamist terror as well: for example, in 2002, the Indian police unmasked a scheme through which money was raised by a pro-Kashmiri Islamist charity group in Britain, and transferred to the Kashmiri Islamist terror organisations via Hawaladors.

d. Correspondent Banking:

In the formal financial sector, it is well known that the weakest link, from a supervision, security and law enforcement perspective, is the international network of ‘correspondent banks’. Correspondent banking refers to the global network of relationships between major, ‘brand name’ banks and smaller banks in foreign jurisdictions (including, but not limited to, tax havens), which the major banks have used since the early days of modern banking in the 19th century, to service the needs of their clients in foreign jurisdictions, but which Naim (2005, pp. 145-146) explains, surged “in the 1990s on the strength the emerging markets boom”, with the major banks wanting to access new clients in new markets, and to give the impression of having an office in every market, but which has unfortunately brought with it the opening of “a conduit to the international bank’s global network that it cannot directly monitor and police, and through which funds can pass at the stroke of a computer key”.

Not surprisingly, this difficult to police network of correspondent banking has been heavily used by terrorists in the financing of their operations, and represents a key element of the infrastructure of the “New Economy of Terror”. For example, Naim (2005, p. 144) notes that during his time in the Sudan from 1991 to 1996, Osama bin Laden used accounts at Khartoum’s al-Shamal Islamic Bank to access the world banking system and purchase aircraft which were used in the transport of Stinger missiles from Pakistan to the Sudan; this was made possible because, although “established only in 1984, not to mention [being] located in a country considered at the time to be a dusty backwater, al-Shamal was a local correspondent for Credit Lyonnais, Commerzbank, Barclays and a Saudi affiliate of ABN Amro”. Similarly, Acharya (2009, p. 72) notes how the correspondent banking network was used by Osama bin Laden and his associates to transfer money to facilitate the 9/11 attacks, from accounts in Dubai with the Dubai Islamic Bank to the 9/11 hijackers’ accounts with SunTrust Bank in Florida by wire transfer.

e. Offshore Banking, Offshore Financial Centres and Free Trade Zones:

That part of the international financial system which has historically been largely beyond the reach of the law and the appetite of tax authorities of Western jurisdictions has long been called ‘offshore’. As Naim (2005, pp. 140-141) notes, ‘offshore banking’ and ‘offshore financial centres’ (OFCs) have the “express aim of attracting capital from other countries, which they reward with more lenient rules than it would encounter at home”, with the benefits to the host nation being revenues generated by “charging fees for the issuance of various licenses and documents, such as articles of incorporation or licences for banking services and mutual and hedge funds”. As such, their more lenient rules, lax supervision and general opacity to regulatory scrutiny make them perfectly suited for performing their role as part of the day to day financial infrastructure of organised crime and the ‘New Economy of Terror’, through facilitating funds transfers through the international banking system, while at the same time effectively concealing both the true identities of the real owners and the actual purpose of the funds transfers (Ehrenfeld, 2005, p. 13).

The use of OFC financing structures and mechanisms is well known and well documented by the leading practitioners in the field of counterterrorism financing, and the various permutations are exhaustively summarised by Pieth et al., (2009) in their collection of papers from the second ‘Giessbach’ seminar on counterterrorist financing organised by the Basel institute of Governance in October 2008. Indeed, the Financial Action Task Force (FATF), established in 1989 by the G-7 Summit, and now comprised of 34 member jurisdictions and 2 regional organisations, representing most major financial centres in all parts of the globe, with the specific mission of ensuring global action to combat money laundering and terrorist financing, has introduced a range of recommendations and requirements aimed at reducing the utility of OFCs to organised crime and terrorist organisations, through enhanced transparency and disclosure, increased regulatory supervision and electronic tracking of financial transactions.

However, notwithstanding these important and positive regulatory and enforcement developments in relation to OFCs generally, from the materials reviewed in connection with the writing of this paper, one ‘jewel’ in the modern Islamic world stands out above all other jurisdictions and OFCs as warranting close and ongoing scrutiny in connection with our efforts to shut down the paymasters of the ‘New Economy of Terror’: the Emirate of Dubai and its ‘Free Trade Zone’ (FTZ) of Jebel Ali. In regard to the facilitation of Islamic terrorist financing, Cassara (2007, pp. 107-131) notes pointedly that “all roads lead to Dubai”, and he documents in great detail the results of his investigative work as a CIA Case Officer which show the significant extent (as has already been revealed earlier in this paper) to which, as the historical smuggling hub of the Arab world, Dubai and its modern-era FTZ have for decades been routinely at the centre of the financing of Islamist terror operations through the utilisation of the full comingled spectrum of illicit tools from banking, charities, Hawala, smuggling, fraud, money laundering, mis-invoicing of trade goods, and front companies. Accordingly, as Cassara (id., p. 111) concludes, detailed investigation of Dubai and its FTZ continue to provide valuable insights into “the riddle” that is Islamic terrorist financing, as well as important clues for effective enforcement action, so it is essential that they should remain a sharp point of the focus of our efforts to shut down the ‘New Economy of Terror’.

f. Trade Diversion:

deKeiffer (cited in Biersteker & Eckert, 2008, p. 150) notes that international trade diversion is heavily used in connection with the financing of Islamic terrorism and is “one of the most sophisticated methods of laundering large amounts of money … [because] unlike other transactions [it] relies upon ‘hiding in plain sight’ … [whereby] large transactions are disguised as legitimate, using well-known and respected firms to accomplish the transfer”. It includes mis-invoicing of trade goods in respect of both price and destination, and in addition to being an effective method of laundering money, it can also be used to actually raise significant amounts of funding; for example, “by simply understating the value of a commodity, the seller can easily provide funds to the buyer, who sells it at a higher price and keeps the difference … to finance … terrorist operations” (Giraldo & Trinkunas, 2007, Pp. 30-31).

As Giraldo & Trinkunas (2007, id.) note, trade diversion functions in the “nearly unregulated international trading system, where it is almost impossible to disentangle truthful from deceptive international trade and invoicing practices …where tremendous wealth crosses borders without leaving traces and without raising suspicions … [in transactions amounting] to billions of dollars … each year … [to] provide cover for terrorist finance”. Further, deKeiffer (cited in Biersteker & Eckert, 2008, p. 150) confirms that “not only is trade diversion difficult to detect, it is also versatile in that it can allow funds to remain in numerous countries (including the United States) without prompting serious inquiry by the authorities … [and] therefore has important implications for terrorist financing in that it potentially enables terrorist groups to raise and hide funds while evading government scrutiny”.

A good illustrative example of trade diversion being actually used in the U.S. to finance Islamist terrorism in the Middle East is cited in Biersteker & Eckert (2008, p. 157-158), where Mohamad Youssef Hammoud and his associates were convicted in 2003 and sentenced to 155 years imprisonment for using trade diversion in connection with cigarette smuggling to fund activities and make purchases for Hezbollah. In that case, the enterprise would obtain low-taxed or un-taxed cigarettes in North Carolina and the Cattaraugus Indian Reservation in New York, and bring them into Michigan for the purpose of evading Michigan cigarette taxes, while selling the cigarettes as if taxes had been paid, thus diverting an amount equivalent to the Michigan tax to Hezbollah.

g. Multiple Redundancies:

Finally, it is critical to emphasise that one of the most troubling features of the fundraising structure of the ‘New Economy of Terror’ remains its decentralised, network-based system, which, in the financial parallel to Sageman’s (2004) characterisation of the modern decentralised ‘Salafi jihad’ itself, is “compartmentalised, flexible and diverse … [and] characterised by layers and redundancies … [and which] raises money from a variety of sources and moves money in a variety of manners” (Greenberg, 2002, p. 6).

While this point may verge on stating the obvious, it is an absolutely essential final point to make in leading into our following discussion of the policy conclusions to be drawn from the above analysis: for at the beginning and end of any consideration of the ways to shut down the ‘New Economy of Terror’, we are confronted continuously by the complexity created by the decentralised, network-based, multiple redundancy ridden nature of modern Islamist terrorism, which has itself taken every conceivable advantage afforded to it by the modern era of globalisation, thus making our task of dealing with the ‘paymasters of terror’ that much more difficult.

4. Conclusion: A View on the Implications for Counterterrorism Policy

We have seen from the above analysis that the ‘New Economy of Terror’ consists of a continuum of linkages between terrorists and their supporters, from the full spectrum of organised and petty crime activities, to both the legitimate and illegitimate sectors of traditional economies, all integrated together in what Napoleoni (2005, p. 225) has described as a “web based on terror, crime, corruption and deceit”. Clearly therefore, the central implication of this for counterterrorism policy is that, if we are to be effective in ‘shutting down the paymasters of terror’ our primary approach must be to push for a fully integrated ‘holistic’ scheme, which integrates all the different segments of our existing response into a single unified ‘counterterrorism financing task-force’, comprised of a multi-disciplinary staff drawn from law enforcement, security/intelligence forces, counterterrorism bodies, financial regulatory authorities and also from the private sector in business and finance. Such a scheme can be created firstly at national level, by governments which understand the full implications of the nexus of linkages that form the ‘New Economy of Terror’ as described in this paper, and from that national level, then build up an international cooperation strategy between like-minded countries on a bi-lateral and multi-lateral basis, and then use that international cooperation strategy as a springboard to the potential creation of a uniform international ‘criminal code for terrorism and terrorist financing’ with strong enforcement provisions using bodies such as the International Criminal Court (including enforcement provisions requiring the confiscation of assets accumulated in the course of aiding and abetting terrorist financing, which would extend to confiscation of such assets accumulated by Islamic banks, charities, mosques and Islamic centres).

In this regard, the analysis in this paper can be viewed as an opportunity for ‘recalibration’ of the existing counterterrorist financing regime, which is flawed in that it is based on a series of ad hoc approaches and measures, developed over time, and is not in fact a single regime at all, but a series of measures “based on the idea that one set of measures against one sort of actor can resolve the problem of terrorism or its financing for all time” (Pieth et al., 2009, p. 283). Accordingly, I suggest that this paper serve as a starting point for the development, by interested national governments in the West, of the new integrated ‘uniform code’ referred to above.

In doing so, if we are to truly stem terrorist financing and shut down the ‘New Economy of Terror’, which I am convinced is absolutely achievable, political will and leadership is a must, as is the requirement of resisting the ever-present march toward political correctness which prevents us from confronting the thorny details of the real enemy in this equation: resurgent Islamism. For the clearest message which rang loudest in all the materials reviewed in the course of writing this paper is that the overriding issue confronting us in dealing head-on with the ‘Islamic aspects’ which are at the heart of the ‘New Economy of Terror’, and that we in the West continue to fail to understand properly (if at all), is this one: the central role that Sharia-compliant financing, Islamic charities, mosques and Islamic centres, and the worldwide Hawala system, all play in the network of paymasters for Islamic terror. For it is only by confronting these unique ‘Islamic aspects’ of terrorist financing, which on the surface look so beguilingly normal and harmless to us in the West (until we look deeper), that the new recalibrated ‘uniform code’ that I am suggesting can have a chance of being successful in severing the channels of interaction which facilitate the ongoing financing of the ‘New Economy of Terror’. These may seem like hard choices, but as Napoleoni (2005, p. 227) correctly observes, “similar hard choices have been required of us in wartime … [and] the threat of inaction may be more fateful, and more global, than at any other time in our history”. We must, therefore, take the hard choices and recalibrate our approach, for otherwise, we will surely fail.

References:

Acharya, Arabinda. (2009). Targeting Terrorist Financing – international cooperation and new regimes. New York, NY. Routledge – Contemporary Terrorism Studies.

Biersteker, Thomas J., & Eckert, Sue E., (eds.). (2008). Countering the Financing of Terrorism. Abingdon, Oxon., UK. Routledge.

Cassara, John. (2007). Hide & Seek – Intelligence, law enforcement, and the stalled war on terrorist finance. Dulles, Virginia. Potomac Book.

Comras, Victor. (2005). “Al Qaeda Finances and Funding to Affiliated Groups”, Strategic Insights, January 2005. http://www.nps.edu/Academics/centers/ccc/publications/OnlineJournal/2005/Jan/comrasJan05.html.

Curtis, Glenn E. and Karacan, Tara. (2002). The Nexus Among Terrorists, Narcotics Traffickers, Weapons Proliferators, and Organized Crime Networks in Western Europe, Federal Research Division, Library of Congress, December 2002. http://www.loc.gov/rr/frd/pdf-files/WestEurope_NEXUS.pdf

Ehrenfeld, Rachael. (2005). Funding Evil – How terrorism is financed – and how to stop it. Chicago, IL. Bonus Books.

Giraldo, Jeanne, & Trinkunas, Harold (eds.). (2007). Terrorism Financing and State Responses – a comparative perspective. Stanford, California. Stanford University Press.

Greenberg, Maurice M. (2002). Terrorist Financing – Report of the Independent Task Force Sponsored by the Council on Foreign Relations. New York, NY. Council on Foreign Relations.

Hengst, B. & Scheuermann, C. (2010). Closure of Taiba Mosque – Hamburg Hate Preachers Lose Their Home. Speigel Online article, 9 August 2010. http://www.spiegel.de/international/germany/0,1518,710952,00.html

Morgan, A. (2010). Hamburg’s 9/11 Mosque: A Warning for America? Family Security Matters, 11 August 2010. http://www.familysecuritymatters.org/publications/id.7014/pub_detail.asp

Naim, Moises. (2005). Illicit – how smugglers, traffickers, and copycats are highjacking the global economy. New York, NY. Anchor Books, Random House.

Napoleoni, Loretta. (2005). Terror Incorporated – tracing the dollars behind the terror networks. New York, NY. Seven Stories Press.
Pieth, M., Thelesklaf, D., Ivory, R., (eds.) – Basel Institute on Governance. (2009). Countering Terrorist Financing – the practitioners point of view. Oxford. Peter Lang.

Sageman, Marc. (2004). Understanding Terror Networks. Philadelphia. University of Pennsylvania Press.

Steve Barber, based on the Sunshine Coast, has more than 25 years’ experience internationally in law, finance, operational risk management and counterterrorism issues. Until recently he was an active member of the Liberal National Party’s Policy Standing Committee and the Chairman of the LNP’s Federal Trade & Resources Policy Committee. The views expressed here are his own. Steve can be reached by email at steve@nationalone.org