Terrorist Financing
U.S. Agencies Should Systematically Assess Terrorists' Use of Alternative Financing Mechanisms Gao ID: GAO-04-163 November 14, 2003Cutting off terrorists' funding is essential to deterring terrorist operations. The USA PATRIOT Act expanded the ability of law enforcement and intelligence agencies to access and share financial information regarding terrorist investigations, but terrorists may have adjusted their activities by increasing use of alternative financing mechanisms. GAO was asked to assess (1) the nature of terrorists' use of key alternative financing mechanisms for earning, moving, and storing terrorists' assets; (2) what is known about the extent of terrorists' use of alternative financing mechanisms; and (3) challenges that the U.S. government faces in monitoring terrorists' use of alternative financing mechanisms.
Terrorists use many alternative financing mechanisms to earn, move, and store assets. They earn assets by selling contraband cigarettes and illicit drugs, by misusing charitable organizations that collect large donations, and by other means. They move funds by concealing their assets through nontransparent mechanisms such as charities, informal banking systems, and commodities such as precious stones and metals. To store assets, terrorists may choose similar commodities that maintain their value and liquidity. The extent of terrorists' use of alternative financing mechanisms is unknown, owing to the criminal nature of terrorists' use of alternative financing mechanisms and the lack of systematic data collection and analysis of case information. The Federal Bureau of Investigation (FBI) does not systematically collect and analyze data on these mechanisms. Furthermore, the Departments of the Treasury and of Justice have not yet produced a report, required under the 2002 National Money Laundering Strategy, which was to form the basis of a strategy to address how money is moved or value transferred via trade in precious stones and commodities. In monitoring terrorists' use of alternative financing mechanisms, the U.S. government faces a number of challenges, including accessing ethnically or criminally based terrorist networks, targeting high-risk financing mechanisms that the adaptable terrorists use, and sharing data on charities with state officials. The Internal Revenue Service (IRS) has committed to, but has yet to establish, procedures for such data sharing.
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Director: Team: Phone:GAO-04-163, Terrorist Financing: U.S. Agencies Should Systematically Assess Terrorists' Use of Alternative Financing Mechanisms
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Report to Congressional Requesters:
United States General Accounting Office:
GAO:
November 2003:
Terrorist Financing:
U.S. Agencies Should Systematically Assess Terrorists' Use of
Alternative Financing Mechanisms:
GAO-04-163:
GAO Highlights:
Highlights of GAO-04-163, a report to congressional requesters
Why GAO Did This Study:
Cutting off terrorists‘ funding is essential to deterring terrorist
operations. The USA PATRIOT Act expanded the ability of law
enforcement and intelligence agencies to access and share financial
information regarding terrorist investigations, but terrorists may
have adjusted their activities by increasing use of alternative
financing mechanisms. GAO was asked to assess (1) the nature of
terrorists‘ use of key alternative financing mechanisms for earning,
moving, and storing terrorists‘ assets; (2) what is known about the
extent of terrorists‘ use of alternative financing mechanisms; and
(3) challenges that the U.S. government faces in monitoring
terrorists‘ use of alternative financing mechanisms.
What GAO Found:
Terrorists use many alternative financing mechanisms to earn, move,
and store assets (see table). They earn assets by selling contraband
cigarettes and illicit drugs, by misusing charitable organizations
that collect large donations, and by other means. They move funds by
concealing their assets through nontransparent mechanisms such as
charities, informal banking systems, and commodities such as precious
stones and metals. To store assets, terrorists may choose similar
commodities that maintain their value and liquidity.
The extent of terrorists‘ use of alternative financing mechanisms is
unknown, owing to the criminal nature of terrorists‘ use of
alternative financing mechanisms and the lack of systematic data
collection and analysis of case information. The Federal Bureau of
Investigation (FBI) does not systematically collect and analyze data
on these mechanisms. Furthermore, the Departments of the Treasury and
of Justice have not yet produced a report, required under the 2002
National Money Laundering Strategy, which was to form the basis of a
strategy to address how money is moved or value transferred via trade
in precious stones and commodities.
In monitoring terrorists‘ use of alternative financing mechanisms,
the U.S. government faces a number of challenges, including accessing
ethnically or criminally based terrorist networks, targeting high-risk
financing mechanisms that the adaptable terrorists use, and sharing
data on charities with state officials. The Internal Revenue Service
(IRS) has committed to, but has yet to establish, procedures for such
data sharing.
What GAO Recommends:
GAO recommends that (1) the Director of the FBI systematically
collect and analyze data concerning terrorists‘ use of alternative
financing mechanisms; (2) the Secretary of the Treasury and the
Attorney General produce the planned report based on up-to-date law
enforcement investigations on precious stones and commodities; and (3)
the IRS Commissioner establish interim procedures for sharing
information on charities with state charity officials.
The DOJ did not formally respond to our recommendation. The Treasury
agreed to produce the planned report and IRS committed to expedite
issuance of procedures.
www.gao.gov/cgi-bin/getrpt?GAO-04-163.
To view the full product, including the scope and methodology, click
on the link above. For more information, contact Loren Yager at (202)
512-4128 or yagerl@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
Terrorists Use Various Alternative Financing Mechanisms to Earn, Move,
and Store Their Assets:
Extent of Use of Alternative Financing Mechanisms Is Unknown:
Key Challenges Impede Monitoring of Terrorists' Use of Alternative
Financing Mechanisms:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Objectives, Scope, and Methodology:
Appendix II: Comments from the Department of the Treasury:
GAO Comments:
Appendix III: Comments from the Internal Revenue Service:
Appendix IV: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
Staff Acknowledgments:
Tables:
Table 1: Key U.S. Government Entities Responsible for Deterring
Terrorist Financing:
Table 2: Examples of Alternative Financing Mechanisms That May Be Used
to Earn, Move, and Store Terrorist Assets:
Figures:
Figure 1: Hizballah Financiers Earn Assets through Cigarette Smuggling:
Figure 2: Location of Benevolence International Foundation Offices
Worldwide:
Figure 3: Example of Hawala-type Transaction:
Abbreviations:
ATF: Bureau of Alcohol, Tobacco, Firearms, and Explosives:
DEA: Drug Enforcement Administration:
DHS: Department of Homeland Security:
DOJ: Department of Justice:
FBI: Federal Bureau of Investigation:
FinCEN: Financial Crimes Enforcement Network:
HAMAS: Harakat al-Muqawama al-Islamiya-Islamic Resistance Movement:
ICE: Bureau of Immigration and Customs Enforcement:
INTERPOL: International Criminal Police Organization:
IRS: Internal Revenue Service:
OGQ: Operation Green Quest:
TFOS: Terrorist Financing Operations Section:
U.N.: United Nations:
USA PATRIOT Act: Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism Act:
United States General Accounting Office:
Washington, DC 20548:
November 14, 2003:
The Honorable Richard J. Durbin:
Ranking Minority Member:
Subcommittee on Oversight of Government Management, the Federal
Workforce and the District of Columbia:
Committee on Governmental Affairs:
United States Senate:
The Honorable Charles E. Grassley:
Chairman:
Caucus on International Narcotics Control:
United States Senate:
U.S. government officials recognize that cutting off terrorists'
funding is an important means of disrupting their operations. The
Uniting and Strengthening America by Providing Appropriate Tools
Required to Intercept and Obstruct Terrorism Act (USA PATRIOT
Act),[Footnote 1] enacted shortly after the terrorist attacks of
September 11, 2001, expanded the ability of law enforcement and
intelligence agencies to access and share financial information
regarding terrorist investigations. As initial U.S. and foreign
government deterrence efforts focused on terrorists' use of the formal
banking or mainstream financial system, terrorists may have been forced
to increase their use of various alternative financing mechanisms.
These mechanisms enable terrorists to earn, move, or store assets and
may include a variety of commodities and informal financial systems.
You requested that we review what is known about terrorists' use of
alternative financing mechanisms.[Footnote 2] In response, in this
report we assessed (1) the nature of terrorists' use of key alternative
financing mechanisms for earning, moving, and storing terrorists'
assets; (2) what is known about the extent of terrorists' use of
alternative financing mechanisms; and (3) the challenges that the U.S.
government faces in monitoring terrorists' use of alternative financing
mechanisms. As agreed with your staff, the alternative mechanisms that
this report addresses include the use of commodities, bulk
cash,[Footnote 3] charities, and informal banking systems, sometimes
referred to as hawala.[Footnote 4] We primarily focused on religious
extremist movements in the Middle East noted in the National Strategy
for Homeland Security, including al Qaeda, HAMAS (Harakat al-Muqawama
al-Islamiya--Islamic Resistance Movement), and Hizballah. In a
subsequent report that you have requested, we will specifically address
coordination of U.S. and international efforts abroad to deter
terrorists' use of alternative financing mechanisms.[Footnote 5]
In conducting our review, we examined documentation and interviewed
officials from U.S. agencies, including the Departments of Justice, the
Treasury, Homeland Security, State, and Defense, as well as from the
intelligence community. We also assessed information provided from
various nongovernmental organizations, industry and charitable
associations, researchers in the field, and the United Nations. In
addition, we conducted fieldwork in Belgium and France, where we
interviewed officials from several international entities including the
Financial Action Task Force on Money Laundering, INTERPOL
(International Criminal Police Organization), the European Union, and
the World Customs Organization. At these locations, we also assessed
information from government, law enforcement, and industry officials,
as well as U.S. embassy officials. As discussed with your offices and
agreed with U.S. law enforcement agencies, we have limited our
reporting of specific examples of terrorists' use of alternative
financing mechanisms to publicly available information to ensure that
law enforcement operations are not jeopardized. It is important to note
that there are few such cases. Further details about our scope and
methodology are contained in appendix I.
Results in Brief:
Terrorists use a variety of alternative financing mechanisms to earn,
move, and store their assets based on common factors that make these
mechanisms attractive to terrorist and criminal groups alike. For all
three purposes--earning, moving, and storing--terrorists aim to operate
in relative obscurity, using mechanisms involving close knit networks
and industries lacking transparency. More specifically, first,
terrorists earn funds through highly profitable crimes involving
commodities such as contraband cigarettes, counterfeit goods, and
illicit drugs. For example, according to U.S. law enforcement
officials, Hizballah earned an estimated profit of $1.5 million in the
United States between 1996 and 2000 by purchasing cigarettes in a low
tax state for a lower price and selling them in a high tax state at a
higher price. Terrorists also earned funds using systems such as
charitable organizations that collect large sums in donations from both
witting and unwitting donors. Second, to move assets, terrorists seek
out mechanisms that enable them to conceal or launder their assets
through nontransparent trade or financial transactions such as the use
of charities, informal banking systems, bulk cash, and commodities that
may serve as forms of currency, such as precious stones and metals.
Third, to store assets, terrorists may use similar commodities, because
they are likely to maintain value over a longer period of time and are
easy to buy and sell outside the formal banking system.
Owing to the criminal nature of terrorists' use of alternative
financing mechanisms and the lack of systematic data collection and
analysis, the extent of terrorists' use of alternative financing
mechanisms is not known. U.S. law enforcement agencies, and
specifically the Federal Bureau of Investigation (FBI), which leads
terrorist financing investigations, do not systematically collect and
analyze data on alternative financing mechanisms. The lack of such data
hinders the FBI from conducting systematic analysis of trends and
patterns focusing on alternative financing mechanisms. Without such an
assessment, the FBI does not have analyses that could aid in assessing
risk and prioritizing efforts. Moreover, despite an acknowledged need
for further analysis of the extent of the use of alternative financing
mechanisms by terrorists, few rigorous studies have been conducted. For
example, the Departments of the Treasury and Justice did not produce a
report on the links between terrorist financing and precious stone and
commodity trading, as was required by March 2003 under the 2002
National Money Laundering Strategy.
In monitoring terrorists' use of alternative financing mechanisms, the
U.S. government faces a number of significant challenges, a few of
which include accessibility, adaptability of terrorists, and competing
priorities. First, according to law enforcement agencies and
researchers, it is difficult to access or infiltrate ethnically or
criminally based networks that operate in a nontransparent manner, such
as informal banking systems or the precious stones and other
commodities industries. Second, the ability of terrorists to adapt
their methods hinders efforts to target high-risk industries and
implement effective mechanisms for monitoring high-risk industry trade
and financial flows. According to the FBI, once terrorists know that an
industry they use to earn or move assets is being watched, they may
switch to an alternative commodity or industry. Finally, competing
priorities create challenges to federal and state officials' efforts to
use and enforce applicable U.S. laws and regulations in monitoring
terrorists' use of alternative financing mechanisms. For example,
although the Internal Revenue Service (IRS) agreed with us in 2002 to
begin developing a system, as allowed by law, to share with states data
that would improve oversight[Footnote 6] and could be used to deter
terrorist financing in charities, the IRS has not made this initiative
a priority due to competing priorities.
In this report, we recommend that the Director of the FBI, in
consultation with relevant U.S. government agencies, systematically
collect and analyze information involving terrorists' use of
alternative financing mechanisms. We also recommend that the Secretary
of the Treasury and the Attorney General produce the report on the
links between terrorism and the use of precious stones and commodities
that was required by March 2003 under the 2002 National Money
Laundering Strategy based on up-to-date law enforcement investigations.
Finally, we recommend that the Commissioner of the IRS, in consultation
with state charity officials, establish interim IRS procedures and
state charity official guidelines, as well as set milestones and assign
resources for developing and implementing both, to regularly share data
on charities as allowed by federal law.
The Department of Justice (DOJ) did not formally respond to our
recommendation that the Director of the FBI, in consultation with
relevant U.S. government agencies, systematically collect and analyze
information involving terrorists' use of alternative financing
mechanisms. However, in DOJ's technical comments they agreed with our
finding that the FBI does not systematically collect and analyze such
information, but they did not specifically agree or disagree with our
recommendation. In response to our recommendation regarding a planned
report on precious stones and commodities, the Department of the
Treasury responded that the report would be issued as an appendix to
the 2003 National Money Laundering Strategy. However, the strategy was
to be issued in February 2003 and had not been issued as of our receipt
of Treasury's comments on October 29. The IRS agreed with our overall
recommendation to establish IRS procedures and state charity official
guidelines to regularly share data on charities as allowed by federal
law. The IRS also committed to expedite its efforts to establish
procedures and guidelines by one year, the end of calendar year 2003,
rather than 2004 as originally planned. However, the IRS did not
address establishing milestones and assigning resources to meet the
target date or interim guidelines should they miss the 2003 target
date.
Background:
In its fight against terrorism, the United States has focused on
individuals and entities supporting or belonging to terrorist
organizations including al Qaeda, Hizballah, HAMAS and others. Al Qaeda
is an international terrorist network led by Osama bin Laden that seeks
to rid Muslim countries of western influence and replace their
governments with fundamentalist Islamic regimes. The al Qaeda network
conducted the September 11 attack on the United States and was
responsible for the August 1998 bombings of U.S. embassies in Kenya and
Tanzania, as well as other violent attacks on U.S. interests. Al Qaeda
reportedly operates through autonomous underground cells in 60 to 100
estimated locations worldwide, including the United States. Hizballah
is a Lebanese group of Shiite militants that seeks to create a Muslim
fundamentalist state in Lebanon modeled on Iran. Hizballah has planned,
or been linked to, numerous terrorist attacks against America, Israel,
and other western targets. Although Hizballah's leadership is based in
Lebanon, Hizballah is a vast organization with a global network of
supporters and established cells in Africa, North and South America,
Asia, and Europe. According to the State Department, HAMAS has pursued
the goal of replacing Israel with an Islamic Palestinian
state.[Footnote 7] While HAMAS supplies humanitarian aid to
Palestinians and has participated in peaceful political activity, the
organization conducts large-scale suicide bombings. According to the
State Department, HAMAS currently limits its terrorist operations to
targeting Israeli civilians and the Israeli military in the Gaza Strip,
the West Bank, and Israel, but Americans have been killed in HAMAS
attacks, and the organization raises funds in North America and Western
Europe.
These terrorist organizations are known to have used alternative
financing mechanisms to further their terrorist activities. Government
officials and researchers believe that terrorists do not always need
large amounts of assets to support an operation, pointing out that the
estimated cost of the September 11 attack was between $300,000 and
$500,000. However, government officials also caution that funding for
such an operation uses a small portion of the assets that terrorist
organizations hold--assets earned, moved, or stored through mainstream
financial or alternative financing mechanisms. According to the
Treasury's Office of Foreign Assets Control, the support infrastructure
critical for indoctrination, recruitment, training, logistical
support, the dissemination of propaganda, and other material support
requires substantial funding.
A number of strategies and laws guide the U.S. government in deterring
terrorists' use of alternative financing mechanisms.[Footnote 8] Among
the strategies, for example, the Departments of Justice and the
Treasury publish an annual National Money Laundering Strategy, which
has increasingly focused on terrorist financing, including alternative
financing methods. This strategy sets goals for U.S. agencies in
combating terrorist financing and reports on progress made in
implementing these goals. In addition, the Department of State issues
an annual International Narcotics Control Strategy Report,[Footnote 9]
which features a section describing mechanisms, cases, and efforts to
deter terrorist financing. Moreover, the President's National Security
Strategy of the United States of America[Footnote 10] calls for the
United States to work with its allies to disrupt the financing of
terrorism by blocking terrorist assets, and the National Strategy for
Combating Terrorism[Footnote 11] includes an objective to interdict and
disrupt material support for terrorists. Regarding laws, the authority
of the USA PATRIOT Act of 2001 significantly expanded U.S. law
enforcement's ability to deter, investigate, and prosecute cases of
terrorist financing. More recently, the United States enacted the
Suppression of the Financing of Terrorism Convention Implementation Act
of 2002,[Footnote 12] which implements the requirements of the 1999
International Convention for the Suppression of the Financing of
Terrorism. Among its provisions, this act makes it a crime to provide
or collect funds with the intention of using the money for terrorist
activities.[Footnote 13]
Deterring terrorists' use of alternative financing mechanisms falls
within the overall U.S. interagency framework of plans, agency roles,
and interagency coordination mechanisms designed to combat terrorism.
In general, the National Security Council manages the overall
interagency framework. The National Security Council heads the
Counterterrorism Security Group, which is composed of high-level
representatives (at the Assistant Secretary level) from key federal
agencies that combat terrorism. To implement directives and strategies,
various federal agencies are assigned key roles and responsibilities
based on their core missions. Numerous components of the Departments of
Justice, the Treasury, State, Homeland Security, and other agencies
participate in efforts to combat terrorist financing (see table 1). In
addition, the intelligence community plays a significant role.[Footnote
14]
Table 1: Key U.S. Government Entities Responsible for Deterring
Terrorist Financing:
Department: Central Intelligence Agency; Bureau/division/office:
[Empty]; Role: Leads gathering, analyzing, and disseminating
intelligence on foreign terrorist organizations and their financing
mechanisms; charged with promoting coordination and information-
sharing between all intelligence community agencies.
Department: Homeland Security; Bureau/division/office: Bureau of
Customs and Border Protection; Role: Detects movement of bulk cash
across U.S. borders and maintains data about movement of commodities
into and out of the United States.
Bureau/division/office: Bureau of Immigration and Customs Enforcement
(ICE - formerly part of the Treasury's U.S. Customs Service); Role:
Participates in investigations of terrorist financing cases involving
U.S. border activities and the movement of trade, currency, or
commodities.
Bureau/division/office: U.S. Secret Service; Role: Participates in
investigations of terrorist financing cases, including those involving
counterfeiting.
Department: Justice; Bureau/division/office: Bureau of Alcohol,
Tobacco, Firearms, and Explosives (ATF); Role: Participates in
investigations of terrorist financing cases involving alcohol, tobacco,
firearms, and explosives.
Bureau/division/office: Civil Division; Role: Defends challenges to
terrorist designations.
Bureau/division/office: Criminal Division; Role: Develops,
coordinates, and prosecutes terrorist financing cases; participates in
financial analysis and develops relevant financial tools; promotes
international efforts and delivers training to other nations.
Bureau/division/office: Drug Enforcement Administration (DEA); Role:
Participates in investigations of terrorist financing cases involving
narcotics and other illicit drugs.
Bureau/division/office: Federal Bureau of Investigation (FBI); Role:
Leads all terrorist financing investigations and operations; primary
responsibility for collecting foreign intelligence and
counterintelligence information within the United States.
Department: National Security Council; Bureau/division/office:
[Empty]; Role: Manages the overall interagency framework for combating
terrorism.
Department: State; Bureau/division/office: Bureau of Economic and
Business Affairs; Role: Chairs coalition subgroup of a National
Security Council Policy Coordinating Committee, which leads U.S
government efforts to develop strategies and activities to obtain
international cooperation.
Bureau/division/office: Bureau of International Narcotics and Law
Enforcement Affairs; Role: Implements U.S. technical assistance and
training to foreign governments on terrorist financing.
Bureau/division/office: Office of the Coordinator for
Counterterrorism; Role: Coordinates U.S. counterterrorism policy and
efforts with foreign governments to deter terrorist financing.
Department: Treasury; Bureau/division/office: Executive Office for
Terrorist Financing and Financial Crime; Role: Develops U.S. strategies
and policies to deter terrorist financing, domestically and
internationally; develops and implements the National Money Laundering
Strategy as well as other policies and programs to prevent financial
crimes.
Bureau/division/office: Financial Crimes Enforcement Network (FinCEN);
Role: Supports law enforcement investigations to prevent and detect
money laundering, terrorist financing, and other financial crime
through use of analytical tools and information-sharing mechanisms;
administers the Bank Secrecy Act.
Bureau/division/office: Internal Revenue Service (IRS) Criminal
Investigation; Role: Participates in investigations of terrorist
financing cases with an emphasis on charitable organizations.
Bureau/division/office: IRS Tax Exempt and Government Entities; Role:
Administers the eligibility requirements and other IRS tax law that
apply to charitable and other organizations that claim exemption from
federal income tax.
Bureau/division/office: Office of Foreign Assets Control; Role:
Develops and implements U.S. strategies and policies to deter terrorist
financing; imposes controls on transactions; and freezes foreign assets
under U.S. jurisdiction.
Bureau/division/office: Office of the General Counsel; Role: Chairs
Policy Coordination Committee for Terrorist Financing, which
coordinates U.S. government efforts to identify and deter terrorist
financing; coordinates U.S. government actions regarding
implementation of, and imposition of, economic sanctions under
Executive Order 13224 with respect to the freezing of terrorist-related
assets.
Bureau/division/office: Office of International Affairs; Role:
Provides advice, training, and technical assistance to nations on
issues including terrorist financing deterrence.
Sources: GAO, using information from the Departments of Justice, the
Treasury, State, and Homeland Security.
[End of table]
Terrorists Use Various Alternative Financing Mechanisms to Earn, Move,
and Store Their Assets:
Terrorists use an assortment of alternative financing mechanisms to
earn, move, and store their assets. Terrorists, like other criminals,
focus on crimes of opportunity in vulnerable locations worldwide and
seek to operate in relative obscurity by taking advantage of close-knit
networks of people and nontransparent global industry flows when
earning, moving, and storing their assets.[Footnote 15] To earn assets,
they focus on profitable crimes or scams involving commodities such as
smuggled cigarettes, counterfeit goods, and illicit drugs and the use
of systems such as charitable organizations that collect large sums. To
move assets, terrorists use mechanisms that enable them to conceal or
launder their assets through nontransparent trade or financial
transactions such as charities, informal banking systems, bulk cash,
and commodities such as precious stones and metals. To store assets,
terrorists may use commodities that are likely to maintain their value
over time and are easy to buy and sell outside the formal banking
system. For example, terrorists may use precious stones and metals that
serve as effective forms of currency. Table 2 shows examples of
mechanisms that terrorists may use to earn, move, and store assets and
also shows that terrorists may use assets for more than one purpose.
Table 2: Examples of Alternative Financing Mechanisms That May Be Used
to Earn, Move, and Store Terrorist Assets:
Alternative financing mechanisms: Trade in commodities:
Alternative financing mechanisms: Illicit drugs; Earning: Yes; Moving:
No; Storing: No.
Alternative financing mechanisms: Weapons; Earning: Yes; Moving: No;
Storing: No.
Alternative financing mechanisms: Cigarettes; Earning: Yes; Moving:
No; Storing: No.
Alternative financing mechanisms: Diamonds; Earning: Yes; Moving: Yes;
Storing: Yes.
Alternative financing mechanisms: Gold; Earning: No; Moving: Yes;
Storing: Yes.
Alternative financing mechanisms: Systems; Earning: No; Moving:
No; Storing: No.
Alternative financing mechanisms: Charities; Earning: Yes; Moving: Yes;
Storing: No.
Alternative financing mechanisms: Informal banking; Earning: No;
Moving: Yes; Storing: No.
Alternative financing mechanisms: Currency; Earning: No; Moving:
No; Storing: No.
Alternative financing mechanisms: Bulk cash; Earning: No; Moving:
Yes; Storing: Yes.
Sources: GAO analysis based on information from government, industry,
and research sources as noted in the scope and methodology.
[End of table]
Terrorists Earn Assets via Systems and Commodities That Are Highly
Profitable:
Terrorists earn assets through illicit trade in myriad commodities,
such as drugs, weapons, and cigarettes, and systems, such as charities,
owing to their profitability. Like other criminals, terrorists can
trade any commodity in an illegal fashion, as evidenced by their
reported involvement in trading a variety of counterfeit and other
goods.[Footnote 16] However, although terrorists are generally
motivated by ideological factors rather than pure profit, terrorists,
like other criminals, benefit most from smuggling those commodities
with the highest profit margins. Terrorist organizations have also
earned funds using systems such as charitable organizations. The
potential misuse of charitable contributions by terrorist organizations
can take many forms, sometimes with the knowledge of the charity or
donor and sometimes without their knowledge.
Trafficking in Illicit Drugs and Weapons to Earn Assets:
Globally, trafficking in illicit drugs and weapons is a profitable
means for terrorists to earn assets. Terrorists have been reportedly
involved in trafficking illicit drugs, the most lucrative commodity
illegally traded, according to the U.S. State Department's Bureau of
International Narcotics and Law Enforcement Affairs.[Footnote 17]
According to the U.S. State Department's 2003 International Narcotics
Control Strategy Report, this trade is valued in the billions and
allows drug traffickers to corrupt government and law enforcement
officials worldwide, particularly in countries with weakly enforced
laws and regulations where officials are poorly paid. In East Asia,
trafficking in drugs and weapons--as well as engaging in organized
crime and official corruption--are serious international crimes that
terrorist organizations have exploited to finance their
operations.[Footnote 18] In South Asia, al Qaeda is reported to have
trafficked heroin to support its operations and Osama bin Laden was
reportedly involved.[Footnote 19] In Latin America, terrorists
trafficked in drugs and arms to finance their activities. In some South
American countries, international terrorist groups have established
support bases that sustain their worldwide operations. For example, the
triborder area where the borders of Argentina, Brazil, and Paraguay
converge continues to be a safe haven for Hizballah and HAMAS, where
the organizations raise funds to finance their operations through
criminal enterprises. According to the DEA, terrorist operatives
associated with Hizballah generate significant income from contraband,
including drugs in several Latin American countries, to support their
organization in Lebanon.
Cigarette Smuggling and Counterfeiting to Earn Assets:
Terrorists have earned assets through the highly profitable illicit
trade in cigarettes. According to officials from the ATF, Hizballah,
HAMAS, and al Qaeda have earned assets through trafficking in
contraband cigarettes or counterfeit cigarette tax stamps.[Footnote 20]
ATF officials told us that as of August 20, 2003, they were
investigating at least six such cases with ties to terrorist groups.
ATF officials also believe that there are several other investigations
under way that may produce evidence linking them to terrorist groups.
In the one closed case example, during 2002, an ATF investigation
revealed a conspiracy where the defendants were illegally trafficking
cigarettes from 1996 to 2000 between North Carolina, a low tax state,
and Michigan, a high tax state, and funneling some of the illegal
proceeds back to the Hizballah. In this case, family and religious ties
enabled the smugglers to sell illegal cigarettes at a network of small
convenience stores in Michigan. Figure 1 shows how the Charlotte, North
Carolina, Hizballah cell profited from this illegal activity. The total
value of the assets seized was about $1.5 million and consisted of
cigarettes, real property, and currency. The investigation resulted in
at least two convictions, in June 2002, for cigarette trafficking,
money laundering, and providing material support to a terrorist
organization.[Footnote 21] More generally, the opportunity to earn
illegal profits in the cigarette industry is significant given the
growing trend of counterfeit cigarettes and Internet cigarette
sales.[Footnote 22] According to a European Commission Anti-Fraud
Office official, cigarette smuggling is widespread in Europe, and in
many eastern European countries smuggled cigarettes are commonly used
as currency. (The Anti-Fraud Office could not formally discuss ongoing
cases involving terrorists' links, because it would jeopardize ongoing
investigations.):
Figure 1: Hizballah Financiers Earn Assets through Cigarette Smuggling:
[See PDF for image]
[End of figure]
Misuse of Charitable Organizations to Earn Assets:
Terrorist organizations have earned funds using systems such as
charitable organizations that provide a ready source of sizable funds
generated from religious, ethnic, or geographic ties between people
with similar interests.[Footnote 23] In many countries, charitable
giving is a religious duty and, although most contributions are
intended for legitimate humanitarian purposes, terrorists are able to
divert these funds owing to the lack of oversight or financial controls
for charities to ensure that moneys are spent according to their
intended purpose. The potential misuse of charitable contributions by
terrorist organizations can take many forms. According to the Financial
Action Task Force on Money Laundering's 2002-2003 Report on Money
Laundering Typologies, some charitable organizations were established
with a stated charitable purpose but may actually exist in part or only
to earn funds for a terrorist organization. For example, according to
the Treasury, Holy Land Foundation for Relief and Development in Texas
raised $13 million in the United States in 2000, claiming that the
money it solicited went to care for needy Palestinians, although
evidence shows that HAMAS used some of the money that the Holy Land
Foundation raised to support suicide bombers and their
families.[Footnote 24] Terrorists or their supporters may also
infiltrate legitimate charitable organizations and divert funds to
directly or indirectly support terrorist organizations. In both cases,
the charitable organizations may collect donations from both witting
and unwitting donors. An example of a witting donor would be one who
donated funds to a charity knowing that the funds would go to al Qaeda.
An unwitting donor would be one who donated funds to the charity not
knowing that funds would go to al Qaeda.
Terrorists Move Assets via Systems and Commodities That Allow Ease of
Concealment and Liquidity:
To move assets, terrorists use mechanisms that enable them to conceal
or launder their assets through nontransparent trade or financial
transactions such as charities, informal banking systems, bulk cash,
and commodities such as precious stones and metals. Although charities
and informal banking systems serve many legitimate purposes, they
entail a significant degree of nontransparency that terrorist groups
and their supporters can exploit to move funds raised in the United
States and elsewhere across borders. To carry assets across borders
without detection, terrorists seek to smuggle bulk cash or convert
their assets into commodities that are relatively liquid and easy to
conceal. Terrorists can also convert their assets into internationally
traded commodities that serve as forms of currency, such as gold, but
are not subject to standard financial reporting requirements.
Commodities that can be smuggled owing to their ease of concealment are
particularly attractive. While terrorists use legitimate systems and
commodities in an illicit manner to move their assets, they may also
use illicit means such as trade-based money laundering to move assets
or settle accounts. Moreover, according to law enforcement officials,
they may use more than one mechanism, layering their activities, to
better hide the trail of their transactions.
Misuse of Charities to Move Assets:
Terrorists may be attracted to charities to move their assets owing to
the industry's nontransparent nature. According to the Financial Action
Task Force on Money Laundering's 2002-2003 Report on Money Laundering
Typologies, in addition to serving as a direct source of income, some
charities may have served as a cover for moving funds to support
terrorist activities, usually on an international basis. For example,
according to court documents,[Footnote 25] the Global Relief
Foundation, an Illinois-based charity, sends more than 90 percent of
its donations abroad, and, according to DOJ, the foundation has
connections to and has provided support and assistance to individuals
associated with Osama bin Laden, the al Qaeda network, and other known
terrorist groups. The Global Relief Foundation has also been linked to
financial transactions with the Holy Land Foundation. Similarly, the
DOJ asserts that the Illinois-based Benevolence International
Foundation moved charitable contributions fraudulently solicited from
donors in the United States to locations abroad to support terrorist
activities.[Footnote 26] As shown by the shaded locations in figure 2,
the foundation has offices worldwide through which it could facilitate
the global movement of its funds.
Figure 2: Location of Benevolence International Foundation Offices
Worldwide:
[See PDF for image]
[End of figure]
Misuse of Informal Banking Systems to Move Assets:
Terrorist organizations use a type of informal banking system sometimes
known as hawala to move their assets, owing to the system's
nontransparent and liquid nature. An informal banking system is one in
which money is received for the purpose of making it, or an equivalent
value, payable to a third party in another geographic location, whether
or not in the same form. Such transfers generally take place outside
the conventional banking system through nonbank money services
businesses or other, often unregulated and undocumented, business
entities whose primary business activity may not be the transmission of
money.[Footnote 27] Traditionally, expatriates--traders and immigrant
laborers--used informal banking systems by sending money home from or
to countries lacking formal and secure banking systems. Informal
systems are still used by immigrant ethnic populations in the United
States and elsewhere today.[Footnote 28] Such systems are based on
trust and the extensive use of connections such as family relationships
or regional affiliations. These systems also often involve transactions
out of the United States to remote areas with no formal banking system
or to countries with weak financial regulations, such as Afghanistan
and Somalia, where the Al Barakaat informal banking system moved funds
for al Qaeda. Figure 3 provides an example of how a simple hawala
transaction can occur.
Figure 3: Example of Hawala-type Transaction:
[See PDF for image]
[End of figure]
According to FinCEN, while the majority of informal banking systems'
activity may be legitimate in purpose, these systems have been used to
facilitate the financing of terrorism and the furtherance of criminal
activities.[Footnote 29] As a result, law enforcement and international
entities have focused a great deal of attention on the possibility that
terrorist financing takes place through informal banking systems such
as hawala to move money, particularly since September 11. For example,
according to the FBI, some of the 19 September 11 hijackers allegedly
used hawala to transfer thousands of dollars in and out of the United
States prior to their attacks. Somalis working in the United States
used the Al Barakaat informal banking network, founded with a
significant investment from Osama bin Laden, to send money to their
families in Somalia.[Footnote 30] According to a September 2002
Treasury fact sheet on terrorist financing, Al Barakaat's worldwide
network was channeling several million dollars a year to and from al
Qaeda.[Footnote 31]
Smuggling of Bulk Cash to Move Assets:
The law enforcement community has long suspected that some terrorist
organizations use bulk cash smuggling to move large amounts of
currency. Bulk cash smuggling is an attractive financing mechanism
because U.S. dollars are accepted as an international currency and can
always be converted; there is no traceable paper trail; there is no
third party such as a bank official to become suspicious of the
transaction; and the terrorist has total control of the movement of the
money. Conversely, the factors against cash smuggling include the costs
of couriers and equipment, the risk of the courier stealing the money,
the risk of informants within the network, or losses due to border
searches or government inquiries that could compromise the network or
mission. In the United States, bulk cash smuggling is a money
laundering and terrorism financing technique that is designed to bypass
financial transparency reporting requirements.[Footnote 32] Often the
currency is smuggled into or out of the United States concealed in
personal effects, secreted in shipping containers, or transported in
bulk across the border via vehicle, vessel, or aircraft. According to
the FBI, some of the 19 September 11 hijackers allegedly used bulk cash
as another method to transfer funds.
Furthermore, in response to the September 11 events, Customs[Footnote
33] initiated an outbound-currency operation, Operation Oasis, to
refocus its efforts to target 23 identified nations involved in money
laundering. According to the Department of Homeland Security's (DHS)
ICE, between October 1, 2001, and August 8, 2003, Operation Oasis had
seized more than $28 million in bulk cash. However, according to ICE
officials, while some of the cases involved were linked to terrorism,
they were unable to determine the number and the extent to which these
cases involved terrorist financing.
Trafficking in Precious Stones and Metals to Move Assets:
Terrorist organizations have also reportedly traded in precious stones
such as diamonds to launder money or transfer value because it is easy
to conceal these materials and transfer them. Terrorists can move their
assets by converting moneys into a commodity, such as diamonds, that
serves as a form of currency. U.S. law enforcement and others told us
that there is a potential for the use of gold to move assets, but
little has been reported on the link between terrorists and gold, other
than by the media.
As we previously reported,[Footnote 34] diamonds can be used in lieu of
currency in arms deals, money laundering, and other crimes. Diamonds
are also easily smuggled because they have high value and low weight
and are untraceable and odorless.[Footnote 35] The international
diamond industry is fragmented, with numerous small mining operations
located in remote areas of Africa, in countries that have porous
borders and no rule of law. There is limited transparency in diamond
flows owing to the complex way in which diamonds move from mine to
consumer, the existence of significant data inconsistencies, and the
industry's historical avoidance of close scrutiny. Diamonds are often
traded fraudulently, and smuggling routes for rough diamonds are well
established by those who have used such routes for decades to evade
taxes or move stolen diamonds. According to a Belgian law enforcement
official, a substantial number of the diamonds traded in Antwerp, the
world's largest trading center, are sold on the black market with no
transaction records. Most officials and researchers we spoke with
recognized a highly probable link between Hizballah and a part of the
Lebanese diamond-trading network in West Africa. The U.N. Special Court
Chief Prosecutor and the Chief Investigator in Sierra Leone both
reported that the problem is current.
Moreover, though U.S. law enforcement has been unable to substantiate
the reports, officials from the U.N. Special Court for Sierra
Leone,[Footnote 36] representatives of Global Witness (a London-based
nongovernmental organization), media, and other U.S. and international
experts have also stated that al Qaeda was reportedly buying diamonds
from rebel groups in West Africa in the months leading up to September
11 and may still be involved in the trade.[Footnote 37] According to
officials of the U.N. Special Court and Global Witness, they have
witnesses of such a connection. U.S. government officials both within
and among agencies remain divided over whether there is sufficient
evidence to establish a current link between al Qaeda and the diamond
trade.
Gold also presents an opportunity for moving terrorist assets.[Footnote
38] As highlighted in a number of money-laundering cases, gold can be
smelted into any form, camouflaged, and smuggled across borders.
Because its form can be altered, gold used in trade often has no valid
paper trail.
Use of Trade-based Money Laundering to Move Assets:
ICE officials and researchers have focused on the possibility that
terrorists may use trade-based money laundering to move their assets,
owing to its criminal and nontransparent nature. [Footnote 39] ICE
defines trade-based money laundering as the use of trade to legitimize,
conceal, transfer, and convert large quantities of illicit cash into
less conspicuous assets such as gold or diamonds. In turn, these
criminal proceeds are transferred worldwide without being subject to
bank secrecy laws. For example, hawala operators reportedly use false
(under-or over-) invoicing[Footnote 40] to balance books or move
assets. According to the FBI, some cases of terrorist use of trade-
based money laundering to move assets may exist but are too sensitive
for discussion at this time.
Terrorist Organizations May Store Assets in Cash or Commodities That
Serve as Forms of Currency and Maintain Value and Liquidity:
Terrorists may store assets in cash, or in commodities, that serve as
forms of currency that are likely to maintain value over longer periods
of time and are easy to buy and sell outside the formal banking system.
However, little has been reported concerning the storing of terrorist
assets in alternative financing mechanisms. The FBI testified in the
case of the United States versus the Benevolence International
Foundation that a key associate of Osama bin Laden kept thousands of
dollars of cash in several currencies in shoeboxes in his
apartment.[Footnote 41] According to a September 2002 United Nations
Security Council letter, al Qaeda was believed to have shifted a
portion of its assets to gold, diamonds, and other untraceable
commodities. In 2002, we reported that diamonds might be used as a
store of wealth for those wishing to hide assets outside the banking
sector, where assets could be detected and seized.[Footnote 42]
According to Global Witness, a nongovernmental organization, British
forces in Afghanistan found an al Qaeda training manual in December
2001 that addressed how to smuggle gold. While various press reports
suggested that al Qaeda was shifting assets into gold last fall, U.S.
law enforcement has been unable to substantiate these allegations.
Terrorists may store their assets in gold because its value is easy to
determine and remains relatively consistent over time. There is always
a market for gold given its cultural significance in many areas of the
world, such as Southeast Asia, South and Central Asia, the Arabian
Peninsula, and North Africa.[Footnote 43] Gold is considered a global
currency and is easily exchanged throughout the world.
Extent of Use of Alternative Financing Mechanisms Is Unknown:
The true extent of terrorist use of alternative financing mechanisms is
unknown, owing to the criminal nature of the activity and the lack of
systematic data collection and analyses. Although we recognize that the
criminal nature of terrorist financing prevents knowing the full extent
of their use of alternative mechanisms, systematic data collection and
analyses of case data does not yet exist to aid in determining the
magnitude of the problem. The limited and sometimes conflicting
information available on alternative financing mechanisms adversely
affects the ability of U.S. government agencies to assess risk and
prioritize efforts on terrorist financing mechanisms.
Criminal Nature of Terrorists' Use of Alternative Financing Mechanisms
Precludes Knowledge of True Extent:
It would be unrealistic to expect U.S. law enforcement to determine the
full extent of terrorist or criminal use of alternative financing
mechanisms. As we noted, terrorists, like other criminals, strive to
operate in obscurity and thus seek out nontransparent mechanisms that
have little or no paper trail, often operating in weakly regulated
industries. The terrorist link may be difficult to determine or define.
While dollar amounts of funds frozen in terrorist-related bank accounts
have been used to serve as rough indicators of the extent of terrorist
financial flows through the formal financial networks, researchers and
government officials have presented few such indicators about terrorist
assets outside of formal mechanisms.[Footnote 44] Further, limited
useful information exists about the total annual flow of assets through
some types of alternative financing mechanisms, such as informal
banking systems, and on what portion of that total may be terrorist
assets. For example, there is a wide range of estimates about the total
annual flow of transactions through informal banking systems; the
United Nations estimates $200 billion, the World Bank and International
Monetary Fund estimate tens of billions of dollars, and a FinCEN report
noted that quantifying the amount with certainty is impossible.
Moreover, officials and researchers we spoke with could not provide
estimates on the extent of terrorist use of informal banking systems
and other alternative financing mechanisms.
U.S. Law Enforcement Does Not Systematically Collect and Analyze Data
on Terrorists' Use of Alternative Financing Mechanisms:
U.S. law enforcement agencies--specifically, the FBI, which leads
terrorist financing investigations and operations--do not
systematically collect and analyze data on terrorists' use of
alternative financing mechanisms.[Footnote 45] When agencies inform the
FBI that an investigation has a terrorist component, the FBI opens a
terrorism case. However, the FBI cannot, through its existing
processes, furnish the numbers of open or closed terrorist financing
cases and cannot furnish the numbers of those cases broken down by
funding source. According to the FBI's Terrorist Financing Operations
Section (TFOS) officials,[Footnote 46] most, if not all, terrorist
cases involve a financial aspect, known as a "funding nexus," which is
normally considered to be a component of the overall investigation.
However, the FBI does not currently isolate terrorist financing cases
from substantive international terrorism cases, and its data analysis
programs do not designate the source of funding (i.e., charities,
commodities, etc.) for terrorist financing. The lack of such data
hinders the FBI from conducting systematic analysis of trends and
patterns focusing on alternative financing mechanisms from its case
data. Without such an assessment, the FBI would not have analyses that
could aid in assessing risk and prioritizing efforts to address these
and other mechanisms. According to TFOS, it and the DOJ
Counterterrorism Section have initiated a number of proactive data
mining[Footnote 47] and data link analyses using a number of government
and private data sources to identify potential terrorists and
terrorist-related financing activities, but these initiatives
generally focus on formal financial systems, not alternative financing
mechanisms.
According to the Chief of TFOS, the FBI plans to collect information
from the field offices through its Crime Survey/Threat Assessment and
Annual Field Office Reports, and these tools might include information
on alternative financing mechanisms. However, the formats and results
of these tools were not available to us during our review. Although the
FBI reported that it solicited information from the field on identified
threats and efforts including terrorist financing, we received no
evidence showing that these reports addressed alternative financing
mechanisms using a systematic methodology. The FBI disseminated its
Crime Survey/Threat Assessment to all of its field offices, and the
responses were due to FBI headquarters in August 2003 after we
completed our fieldwork. According to the TFOS Chief, this information
from the field was to highlight the threats identified in the field and
might include discussions of alternative financing mechanisms. Also,
according to the TFOS Chief, the Annual Field Office Reports were to be
disseminated in April 2003 and finalized before conclusion of our
fieldwork on July 30, 2003. However, as of July 30, 2003, the Annual
Field Office Reports had not been finalized, and their status was
unavailable. According to the TFOS Chief, the Annual Field Office
Reports, once finalized in their new format, would furnish myriad
useful documentation concerning the FBI's efforts within the
International Terrorism program and the terrorist financing arena.
However, it remained unclear to what extent these documents would
address alternative financing mechanisms.
The DHS's ICE, which participates in terrorist financing investigations
in coordination with the FBI, also does not systematically collect and
analyze data on terrorists' use of alternative financing mechanisms.
The former U.S. Customs Service initiated Operation Green Quest (OGQ)
in October 2001 to focus on terrorist financing,[Footnote 48] and some
of its data collection and analysis were intended to focus on
alternative financing mechanisms. However, first, Customs officials
were unable to furnish accurate numbers of open and closed terrorist
financing cases. According to OGQ officials, they had approximately 580
open terrorist financing cases and 559 closed cases between OGQ's
inception in October 2001 and February 2003. However, Customs officials
told us that, although cases may initially be thought to have a
terrorist link and be categorized as such in their database, they might
not be recategorized as nonterrorist cases once no terrorist link was
found. Rather, the database captured criminal cases that may or may not
have had a terrorist link; and the number of actual cases with a
terrorist link, which would also depend on how "link" is defined, is
not readily known. Second, ICE officials and former OGQ officials
confirmed that they could not readily distinguish among the types of
alternative financing mechanisms in their case database. According to
these officials, it would take an intensive effort to segregate data by
categories of alternative financing mechanisms. They said that they
believed they could accomplish this, but that it would take resources
and time, because the system was not set up to search for these
mechanisms. Further, this method does not identify a terrorist link,
requiring further effort to determine whether such a link existed.
Moreover, while ICE officials use an analytical tool known as the
Numerically Integrated Information System to investigate money
laundering, terrorist financing, and other criminal activities, the
tool, while useful, could not be used to automatically analyze
information on alternative methods of terrorist financing and the
extent of their use. The tool enables users to analyze databases for
anomalies, criminal patterns, and specific transactions in global
commerce when the user knows what to look for, based on other
information or a tip; however, the tool does not automatically identify
problem areas for attention. For example, if ICE officials know to
compare export and import data between the United States and another
country, and that country shares its data, then trade anomalies can be
identified and further investigated using a number of databases and
features. Customs officials used the system to identify money
laundering based on irregular patterns in the gold trade between the
United States and Argentina. However, the tool cannot be used to
automatically flag anomalies in all U.S. imports and exports. Officials
agreed that an automated feature would be beneficial and they believed
that it would be developed in the future.[Footnote 49] Further,
according to the May 13, 2003, DOJ and DHS memorandum of agreement
concerning the FBI's management of terrorist financing cases, resulting
DHS analyses will be shared with the FBI, but it remains unclear how or
if this information might be integrated with FBI databases or analyses.
Analysis and Reporting on Terrorist Use of Alternative Financing Is
Limited and Sometimes Conflicting:
Despite an acknowledged need from some U.S. government officials and
researchers for further analysis of the extent of terrorists' use of
alternative financing mechanisms, in some cases, U.S. government
reporting on these issues has not always been timely or comprehensive.
This could affect planning efforts. Upon requesting U.S. government
studies on terrorist or criminal use of alternative financing
mechanisms, we found that few rigorous studies exist. We also found
that studies from researchers and information from various government
and nongovernmental sources sometimes conflict.
The Departments of the Treasury and of Justice have yet to produce
their report on how money is being moved or value is being transferred
via the trade in precious stones and commodities. This report was
required by March 2003 under the 2002 National Money Laundering
Strategy. The information gained in the report was to form the basis of
an informed strategy for addressing this financing mechanism. According
to Treasury officials, the report was drafted in April and will be
released as an appendix in the yet-to-be-released 2003 National Money
Laundering Strategy. The draft was not made available for our review,
and it remains unclear whether the report addresses the recent
investigative efforts of other U.S. government and international
entities on this subject. Moreover, we found widely conflicting
information in numerous interviews concerning the use of precious
stones and commodities and in the available reports and documentation.
Further, while a Treasury report to Congress on informal value transfer
systems, required under the USA PATRIOT Act,[Footnote 50] described
informal banking systems and related regulations, as required, it did
not discuss terrorist use of such systems and did not include a review
of the potential use of precious stones and commodities in such
systems. While a discussion of precious stones and commodities was not
specifically required under the USA PATRIOT Act, the report notes that
there is a need for further research, particularly with regard to
understanding the range of mechanisms associated with informal banking
systems, including the use of gold and precious gems in hawala
transactions, among others.
Key Challenges Impede Monitoring of Terrorists' Use of Alternative
Financing Mechanisms:
The U.S. government faces challenges in monitoring terrorists' use of
alternative financing mechanisms, a few of which include accessibility
to networks, the adaptability of terrorists, and competing priorities
within the U.S. government.[Footnote 51] We recognize the inherent
difficulty in monitoring terrorists' use of alternative financing
mechanisms and highlight three key challenges in this report. First,
accessing the networks through which alternative financing mechanisms
operate is difficult for U.S. authorities, because such systems are
close knit and nontransparent. Second, the adaptable nature of
terrorist groups can hinder authorities' efforts to target industries
and systems vulnerable to terrorists' use. Finally, when monitoring
alternative financing mechanisms, U.S. agencies face competing
priorities that may present challenges for utilizing and enforcing
existing laws and regulations or fully implementing strategic efforts.
Accessing Terrorists' Close-knit, Nontransparent Financing Networks
Presents Challenges for U.S. Law Enforcement:
The difficulty of accessing the networks through which alternative
financing mechanisms operate represents a significant challenge for
U.S. efforts to monitor terrorists' use of such mechanisms. In
particular, these networks are difficult to access because they are
close knit and based on trust. Informal banking systems, the diamond
industry, and organized crime networks such as those that smuggle
cigarettes and drugs are examples of alternative financing mechanisms
that share these common factors. Similarly, terrorist organizations
such as al Qaeda and Hizballah are close knit and difficult to
penetrate. The closeness and high degree of trust between parties to
terrorist financing networks are often based on long-standing ethnic,
family, religious, or organized criminal ties. According to officials
from U.S. law enforcement and the Treasury, investigators who seek to
monitor such networks rely on developing inside sources of information,
but the high degree of trust within the networks poses challenges for
recruiting informants and conducting undercover operations. Law
enforcement and the Treasury also report that language and cultural
barriers can increase the difficulty of accessing such networks by
impeding communication between government officials and parties to the
networks.
Nontransparency in many of these alternative financing mechanisms poses
another challenge to U.S. law enforcement's ability to access and
monitor terrorists' use of them. One component of this nontransparency
is lacking or indecipherable transaction records. While officials
report that transaction records in the formal banking sector have been
critical to their ability to freeze terrorists' assets, the lack of a
paper trail created by alternative financing mechanisms limits
investigators' ability to track and apprehend terrorist financiers. In
one case, DEA pursued drug smugglers with suspected terrorist links who
used hawala to transfer their profits to Lebanon. However, the
indecipherable records of the hawala transactions to Lebanon impeded
DEA's ability to trace the money once it reached Lebanon. As a result,
DEA was not able to ascertain if the smugglers were providing material
support to terrorists.
In addition to the lack of a paper trail, key trade data and
accountability measures for industries vulnerable to terrorist
financing can be poor or nonexistent, contributing to this
nontransparency. For example, international data on the diamond
industry show that import, export, and production statistics often
contain glaring inconsistencies.[Footnote 52] Comprehensive
international trade data on the industry are not available in volume
terms, even though volume data are a better indicator of true trade
flows. These data flaws inhibit analysts' ability to find patterns and
anomalies that could reveal criminal smuggling of the diamonds,
including for terrorist financing. Further, as we previously reported,
while a recent international initiative to curb trade in illicit
diamonds, known as the Kimberley Process, incorporates some elements of
increased transparency, critical shortcomings exist with regard to
internal controls and monitoring.[Footnote 53]
Terrorists' Adaptability Hinders Efforts to Target High-risk Mechanisms
of Terrorist Financing:
Terrorist organizations' adaptability can hinder U.S. law enforcement's
efforts to target industries and mechanisms that are at a high risk for
terrorist financing. According to law enforcement and researchers, once
terrorists know that authorities are scrutinizing a mechanism they use
to earn, move, or store assets, they may switch to an alternate
industry, commodity, or fundraising scheme to avoid detection.
According to a former intelligence official, in one case, terrorists
who were counterfeiting household appliances switched to creating their
own appliance brand when law enforcement began to scrutinize their
activities. Analysts from the former Customs Service have identified
various counterfeit goods including CDs, DVDs, and apparel as having a
possible connection to terrorist financing.
Additionally, according to researchers, terrorist groups such as al
Qaeda can exploit their geographically diffuse structure to move the
location of their operations if they are notified that authorities are
pursuing their financing activities in a particular location. The DOJ
reports that the Director of the Pakistan office of the Benevolence
International Foundation, an international charity whose U.S. Executive
Director was indicted for supporting al Qaeda and other terrorist
organizations,[Footnote 54] avoided a Pakistani intelligence
investigation by moving to Afghanistan with the foundation's money and
documents. Within the United States, geographic flexibility may also
facilitate terrorist financing. For example, according to IRS
investigators and researchers, terrorists may have moved their charity
from one state to another and changed the charity's name to evade law
enforcement.
This adaptability also presents challenges in monitoring terrorists'
use of informal banking systems, such as hawala. The USA PATRIOT Act
strengthened existing anti-money laundering laws by requiring that
operators of informal banking systems register with FinCEN and obtain
state licenses, where required under state law. The act also requires
that informal banking systems report suspicious transactions to FinCEN
and maintain anti-money laundering programs. However, officials and
researchers report that these requirements are difficult to enforce,
and it is likely that numerous small hawala operations remain
unregistered and noncompliant with one or more of these requirements.
Terrorists may have adapted to these new regulations by developing and
maintaining relationships and conducting business with the hawala
operators that remain underground, increasing the likelihood that their
transactions will not be detected.
Competing Priorities Present Challenges for Monitoring of Alternative
Financing Mechanisms:
Addressing competing priorities presents challenges for U.S. government
agencies' efforts to monitor use of alternative financing mechanisms.
Increased emphasis on combating terrorism and terrorist financing since
the September 11 terrorist attacks has placed greater urgency on
preexisting responsibilities for some agencies. New laws such as the
USA PATRIOT Act are generally recognized as assisting U.S. law
enforcement efforts but also increase the workload of agencies. While
the FBI is the lead agency on terrorist financing investigations, all
agencies have an inherent responsibility to aid in this effort.
However, some agency officials noted that new tasks sometimes compete
with traditional roles or increase workloads, creating a strain on
their resources, which could slow the sharing of potentially useful
information. As a result, agencies may fail to fully utilize existing
laws or fully implement strategic efforts in a timely manner, as
described below.
Oversight of Charities:
Competing priorities slowed IRS plans to take advantage of law enabling
greater information-sharing with the states. Although the IRS told us
in February 2002 that it had begun to develop a system to share data
with the states for the oversight of charities as allowed by
law,[Footnote 55] the IRS has not made this initiative a priority and
has not developed and implemented this system. While neither the IRS's
nor the states' primary goal is deterring terrorism, using data-sharing
systems is even more important now, when feasible, in light of the
charities cases involving terrorist financing. States have an important
role in combating terrorist financing because states share overall
oversight responsibility for charities with the IRS. Further, according
to state officials, questionable charities tend to move from state to
state to avoid detection. According to the President of the National
Association of State Charitable Organizations, the system of proactive
information-sharing discussed with us in 2002 (including final denials
of applications, final revocations of tax-exempt status, and notices of
a tax deficiency) could be very useful for states in identifying and
shutting down suspect charities, including charities involving
terrorist financing. This system would establish uniform procedures for
sending information from the IRS to states, including information about
charities that have misused their funds.
IRS officials attributed delays in fully developing and implementing
the system to a number of factors, including competing priorities in
the department and the desire to combine this effort with the potential
for increased information-sharing that may be allowable under pending
legislation.[Footnote 56] However, IRS officials agreed that they could
have developed this system without passage of further legislation, and
while they stated that they had begun to do so, as of July 31, 2003,
when we concluded fieldwork, they had provided no evidence of work
completed to date and had not specified a time frame for how and when
implementation would be completed. Subsequently, on September 4, 2003,
the IRS provided us with draft IRS procedures and draft guidelines for
state charity officials. Officials said they were reviewing the drafts,
and their proposed completion date for this information-sharing program
is December 31, 2004. The IRS did not establish milestones for meeting
the completion date and did not establish interim guidelines. The
President of the National Association of State Charitable Organizations
told us that if the issuance of guidelines for state charity officials
were further delayed, then interim guidelines would be useful.
Anti-money Laundering Programs:
The extent of the workload created under the 2001 USA PATRIOT Act
initially increased the amount of work required of FinCEN and may have
slowed efforts to take full advantage of the act concerning the
establishment of anti-money laundering programs. The information to be
gained under the regulations, through financial institution
registration and submission of required Suspicious Transaction Reports,
was intended to be shared with law enforcement and intelligence
analysts in their efforts to detect and deter terrorism. In October
2002, FinCEN officials told us that they had insufficient resources to
draft regulations required under the act and they had not decided how
to prioritize the workload. According to the 2002 National Money
Laundering Strategy issued by the Departments of the Treasury and
Justice, the process was made more challenging by the fact that many of
the new provisions imposed regulations on various sectors and financial
institutions that were not previously subject to comprehensive anti-
money laundering regulations, such as automobile and boat dealers, pawn
brokers, and dealers in precious metals, stones, or jewels. This meant
that time and resources were needed to study and consult with law
enforcement and industry leaders. FinCEN rules for dealers in precious
metals, stones, or jewels were proposed on February 21, 2003, and have
not been finalized.
National Money Laundering Strategy:
Implementation of the 2002 National Money Laundering Strategy, which
ostensibly directs the U.S. government's resources against money
laundering and terrorist financing, has proven to be challenging
partially owing to the number of competing priorities. The 2002
strategy states that the U.S. government has moved aggressively to
attack terrorist financing by refocusing its ongoing anti-money
laundering efforts and acknowledges the larger burden placed on
agencies owing to provisions of the USA PATRIOT Act. The 2002 strategy
contains 19 objectives and 50 priorities but does not assign resources
to these priorities based on a risk or threat assessment. Although the
Secretary of the Treasury and the Attorney General issued the annual
strategy, Justice officials, including FBI officials, told us that the
strategy contained more priorities than could be realistically
accomplished, and said that it did not affect how they set priorities
or aligned resources to address terrorist financing. Treasury officials
said resource constraints and competing priorities were the primary
reasons why strategy initiatives, including those related to
alternative financing mechanisms, were not met or were completed later
than expected. Moreover, although the 2003 National Money Laundering
Strategy was to be issued in February 2003,[Footnote 57] according to
Treasury officials, as of July 31, 2003, the new strategy had not been
published owing to the demands involved in the creation of DHS. At the
conclusion of our review, Treasury officials told us that the Secretary
of DHS would be added as a signatory to the 2003 National Money
Laundering Strategy. However, subsequently, when reviewing the draft of
this report, Treasury, DOJ, and DHS officials told us that the
Secretary of the DHS would not be a signatory to the 2003 National
Money Laundering Strategy.
Conclusions:
Efforts to disrupt terrorists' ability to fund their operations may not
succeed if they focus solely on the formal banking or mainstream
financial sector. To form a viable strategy, the U.S. government and
others face challenges in understanding the nature and extent of
terrorists' use of alternative financing mechanisms and in monitoring
these and emerging mechanisms. While we recognize that the full extent
of criminal activity cannot be determined, information can be
systematically collected and synthesized to provide a useful gauge. We
recognize that such analyses are difficult, but without an attempt to
do so, information about terrorists' usage and potential usage remains
unknown, leaving vulnerabilities for terrorists to exploit. Since
current FBI systems do not allow for such data collection and
synthesis, linkages, patterns, and emerging trends may not be
effectively identified and, thus, resources may not be focused on the
most significant mechanisms. Further, without rigorous assessments of
high-risk industries and systems, critical information may remain
unidentified or unexplored, leaving such industries and systems
vulnerable to exploitation by terrorists. Without good data and
analysis, leading to viable threat assessments and strategies, U.S.
government officials cannot make good decisions among competing
priorities and the resources to address them.
Recommendations for Executive Action:
To establish a basis for an informed strategy to focus resources on the
most significant mechanisms that terrorists use to finance their
activities, we recommend that the Director of the FBI, in consultation
with relevant U.S. government agencies, systematically collect and
analyze information involving terrorists' use of alternative financing
mechanisms.
Moreover, to create a basis for an informed strategy for determining
how money is being moved or value is being transferred via the trade in
precious stones and commodities, we recommend that the Secretary of the
Treasury and the U.S. Attorney General produce a report on this
subject, fulfilling their overdue action item under the 2002 National
Money Laundering Strategy. Such a report should be based on up-to-date
law enforcement investigations of links between precious stones and
commodity trading and the funding of terrorist groups, as required
under the strategy.
Finally, to improve the oversight of charities, leading to the possible
disruption of terrorist financing, we recommend that the Commissioner
of the IRS, in consultation with state charity officials, establish
interim IRS procedures and state charity official guidelines, as well
as set milestones and assign resources for developing and implementing
both, to regularly share data on charities as allowed by federal law.
Agency Comments and Our Evaluation:
We provided draft copies of this report to the following agencies for
review: the Department of Justice, the Department of the Treasury, the
Internal Revenue Service, the Department of Homeland Security and the
Department of State. We received formal comments from the Treasury and
IRS (see apps. II and III). We received technical comments from DOJ,
DHS, and State, which we incorporated in the report as appropriate.
The DOJ did not formally respond to our recommendation that the
Director of the FBI, in consultation with relevant U.S. government
agencies, systematically collect and analyze information involving
terrorists' use of alternative financing mechanisms. However, in DOJ's
technical comments, they agreed that the FBI does not systematically
collect and analyze such information, but they did not specifically
agree or disagree with our recommendation. DOJ commented that it
designates sources of funding in its terrorist financing cases, but it
does not initiate or organize investigations on an industrywide basis
or as a result of the type of commodity used or particular means of
transfer. Additionally, DOJ suggested that the effort might more
appropriately be a function of the Treasury based on Treasury's prior
work on alternative financing mechanisms. However, according to FBI
TFOS, their mission is to centralize and coordinate all terrorist
financing investigations. As stated in this report, TFOS officials said
that they and the DOJ Counterterrorism Section have already initiated a
number of data mining and data link analysis initiatives to identify
terrorist-related financing activities focusing on formal financing
systems, but not alternative financing mechanisms. Further, TFOS
officials said they plan to evaluate the feasibility of adding a
separate designation for terrorist financing in their data system
according to the source of funding. We continue to believe the FBI
should work in consultation with relevant U.S. government agencies to
systematically collect and analyze information involving terrorists'
use of alternative financing mechanisms, which would include
strategizing with and engaging the expertise of other agencies such as
Treasury and DHS, among others.
In response to our recommendation that the Secretary of the Treasury
and the U.S. Attorney General produce a planned report on precious
stones and commodities, the Department of the Treasury responded that
the report would be issued as an appendix to the 2003 National Money
Laundering Strategy. However, the strategy was to be issued in February
2003 and had not been issued as of our receipt of Treasury's comments
on October 29, 2003. Further, the Treasury did not address whether
their report would include up-to-date information from law enforcement
investigations of links between precious stones and commodity trading
and the funding of terrorist groups, as required under the strategy.
The Department of Justice did not comment on this recommendation. We
continue to recommend that their report be based on up-to-date law
enforcement investigations given the conflicting views and the lack of
comprehensive reporting on terrorists' use of precious stones and
commodities.
The IRS agreed with our overall recommendation to establish IRS
procedures and state charity official guidelines to regularly share
data on charities as allowed by federal law. Although IRS told us at
the conclusion of our fieldwork that they planned to establish this
information-sharing program by December 31, 2004, in response to our
draft report and recommendation, the IRS committed to expediting its
efforts by one year, having procedures in place by the end of calendar
year 2003. Subsequent to our fieldwork, the IRS exhibited progress by
producing draft procedures and guidelines. However, the IRS did not
address our recommendation to establish milestones and assign resources
to meet the target date or interim guidelines should they miss the 2003
target date. Given the complexity and time needed to complete the
effort, as described by the IRS, we continue to recommend that the IRS
establish milestones and assign resources to ensure that it meets its
new target date. We also continue to recommend that IRS establish
interim procedures and guidance should the IRS not meet its target
date.
As agreed with your offices, unless you publicly announce the contents
of this report earlier, we plan no further distribution until 30 days
from the report date. At that time, we will send copies to the Attorney
General, the Secretary of Homeland Security, the Secretary of State,
the Secretary of the Treasury, the Commissioner of Internal Revenue,
and interested congressional committees. We also will make copies
available to others upon request. In addition, the report will be
available at no charge on the GAO Web site at http://www.gao.gov.
If you or your staff have any questions about this report, please call
me at (202) 512-4128. Other contacts and staff acknowledgments are
listed in appendix IV.
Loren Yager:
Director, International Affairs and Trade:
[End of section]
Appendix I: Objectives, Scope, and Methodology:
The Ranking Minority Member of the Senate Committee on Governmental
Affairs' Subcommittee on Oversight of Government Management, the
Federal Workforce and the District of Columbia and the Chairman of the
Senate Caucus on International Narcotics Control asked us to assess (1)
the nature of terrorists' use of key alternative financing mechanisms
for earning, moving, and storing terrorists' assets; (2) what is known
about the extent of terrorists' use of alternative financing
mechanisms; and (3) the challenges that the U.S. government faces in
monitoring terrorists' use of alternative financing mechanisms.
To determine the nature of terrorists' use of some key alternative
financing mechanisms for earning, moving, and storing assets, we
reviewed past GAO work, studies, analyses, and other documents prepared
by experts from U.S. agencies, international organizations, and other
groups. We also interviewed officials of the U.S. government,
international entities, foreign governments, industry, and nonprofit
groups, as well as representatives from academia and research
institutions. Our scope and methodology were limited by the lack of
complete access to sensitive information and documentation. In cases
where little documentation was provided and views conflicted, we
corroborated information to the extent possible and noted the
conflicting views.
We reviewed available documentation and interviewed officials from the
following U.S. departments and agencies:
* the Department of Justice (Criminal Division; Federal Bureau of
Investigation; Bureau of Alcohol, Tobacco, Firearms, and Explosives;
Drug Enforcement Administration);
* the Department of the Treasury (Executive Office of Terrorist
Financing and Financial Crime, Office of Foreign Assets Control,
Financial Crimes Enforcement Network, Internal Revenue Service (IRS),
and the Office of International Affairs);
* the Department of Homeland Security (Bureau of Immigration and
Customs Enforcement);
* the Department of State (Office of the Coordinator for
Counterterrorism, Bureau of International Narcotics and Law Enforcement
Affairs, and Bureau of Economic and Business Affairs);
* the Department of Defense (Office of the Secretary of Defense, Office
of Naval Intelligence, Defense Intelligence Agency);
* the Central Intelligence Agency;
* the Congressional Research Service;
* the U.S. Mission to the United Nations;
* the U.S. Embassy in Belgium (political and economic officers,
Department of Homeland Security (Customs), Drug Enforcement
Administration, Federal Bureau of Investigation, Defense);
* the U.S. Embassy in France (Department of Homeland Security
(Customs), Federal Bureau of Investigation);
* the U.S. Mission to the European Union; and:
* U.S. representatives to INTERPOL.
We also reviewed and assessed available documentation and interviewed
officials from the following international entities:
* the United Nations;
* INTERPOL;
* the Financial Action Task Force on Money Laundering;
* the World Customs Organization;
* the European Union;
* the Charities Commission on England and Wales; and:
* the Supreme Headquarters Allied Powers Europe (one of the North
Atlantic Treaty Organization's military commands).
Additionally, we interviewed officials from Belgian law enforcement,
the Federal Prosecutor's Office, and the Ministry of Foreign Affairs,
Foreign Trade and International Cooperation. We also interviewed
experts from India and Pakistan on hawala systems. We interviewed the
Chief Prosecutor and Chief Investigator for the United Nations Special
Court for Sierra Leone. Moreover, we reviewed studies and analyses and
interviewed officials from industry, nonprofit groups, academia, the
media, and research institutions such as the Belgian Diamond High
Council, the Phillip Morris Company, Global Witness, the International
Peace Information Service, Council on Foreign Relations, Business
Exposure Reduction Group, the Washington Institute for Near East
Policy, and the Investigative Project, among others.
To determine what is known about the extent of terrorists' use of
alternative financing mechanisms, we reviewed studies, analyses, and
other documents and interviewed officials from the U.S. government,
international entities, foreign governments, industry, nonprofit
groups, academia, and research institutions. We attended and reviewed
briefings from the Federal Bureau of Investigation and the U.S. Customs
Service (now part of the Department of Homeland Security) on their data
collection, databases, and analysis methods and discussed with them
what their systems could and could not do. We were limited by the lack
of complete access to sensitive information and by the lack of
available and reliable data to determine the extent of terrorists' use
of alternative financing mechanisms. Our reporting on the current FBI
data collection and analysis methods was curtailed by the Department of
Justice due to sensitivity concerns. We also discussed studies
completed and expected from the Departments of the Treasury and Justice
as required under the 2002 National Money Laundering Strategy with
officials from these departments.
To determine challenges that the U.S. government faces in monitoring
terrorists' use of alternative financing mechanisms, we reviewed past
GAO work and documents from U.S. and foreign governments, industry, and
international entities including strategies, such as the National Money
Laundering Strategy; laws, regulations, rules, policies, procedures,
and actions; and studies. For example, we analyzed federal and state
tax laws pertaining to the oversight of charitable organizations,
including reviewing Internal Revenue Code section 6104 on information-
sharing between IRS and state regulators. Further, we interviewed
officials from these organizations to corroborate analysis and
documentary evidence. We also interviewed officials from the National
Association of State Charitable Organizations and state Attorneys
General Offices from California, New York, Pennsylvania, and Texas to
identify challenges to deterring the use of charitable organizations in
terrorist financing. According to the President of the National
Association of State Charitable Organizations, California, New York and
Pennsylvania are heavily regulated states while Texas is not.
Additionally, we reviewed FinCEN issuance of rules and regulations as
allowed under the USA PATRIOT Act. Further, we assessed and obtained
views on competing priorities involved in implementing the 2002
National Money Laundering Strategy.
We conducted our fieldwork in Washington, D.C., and New York, N.Y.;
Brussels and Antwerp, Belgium; and Paris and Lyon, France. We performed
our work from August 2002 through July 2003 in accordance with
generally accepted government auditing standards.
[End of section]
Appendix II: Comments from the Department of the Treasury:
Note: GAO comments supplementing those in the report text appear at the
end of this appendix.
DEPARTMENT OF THE TREASURY WASHINGTON, D.C. 20220:
October 29, 2003:
Mr. Loren Yager:
Director, International Affairs and Trade
United States General Accounting Office
Washington, D.C. 20548:
Dear Mr. Yager:
The Department of the Treasury greatly appreciates the opportunity to
review and comment upon the GAO's report: "Terrorist Financing: U.S.
Agencies Should Systematically Assess Terrorists' Use of Alternative
Financing Mechanisms." Overall,
we believe the report does a very good job of assimilating a wide
variety of information and explaining the complexity of this issue. As
reflected below, we have several comments, and we would appreciate the
opportunity to meet with GAO staff once more fully to explain our
concerns.
Our comments that relate to the Report as a whole are as follows:
The report consistently speaks in terms of terrorists "earning" funds.
We request that the word "earn" be changed to "raise" throughout this
report. The concepts differ, especially in the area of charities. The
term "earn" means that one receives something as a return for effort
given or services rendered. The term "raise" means to gather, or
collect, something for a purpose. Therefore, the term "raise" appears
to be the more accurate term in the context of this report...
The other concepts of "move" and "store" are useful in this report,
although one could argue for a "use" category as well, especially from
the operational perspective. For example, buying the truck and the bomb
"used" to perpetuate the terrorist acts are examples of "using" funds
and result in transactions that can be identified and followed as
well.
Page two of the report mentions that the GAO will specifically address
coordination of U.S. and international efforts abroad to deter
terrorist's use of alternative financing mechanisms in a subsequent
report. Treasury stands ready to provide comprehensive material to the
GAO for this purpose. One of the primary missions of Treasury's
Executive Office for Terrorist Financing and Financial Crimes (EOTFFC)
is representing the U.S. in international bodies dedicated to fighting
terrorist financing and money laundering.
For example, Treasury's leadership role in international bodies such as
the Financial Action Task Force (FATF) has led to the creation of more
expansive and stringent anti-money laundering and counter-terrorist
financing international standards and best practices. These standards
directly relate to alternative financing mechanisms mentioned in your
report such as charities, alternative remittance systems (e.g.,
hawala), and dealers in precious metals and stones. Through our
efforts, we have created standards and best practices guidelines on
regulating charities and alternative remittance systems. In addition,
dealers in precious metals and stones are defined as non-financial
businesses and are now required to implement customer due diligence,
record keeping and suspicious transaction reporting requirements.
Finally, in order to diminish the attractiveness of alternative
mechanisms, the Treasury Department has undertaken a series of
bilateral and multilateral initiatives focused on channeling
remittances through the formal financial systems. These initiatives are
designed to heighten international attention on the market incentives
that drive legitimate customers to use informal remittance channels and
to address structural and other impediments in the formal financial
system that may prevent the provision of efficient and accessible
remittance services.
Our comments on specific portions of the Report are as follows:
Table 1 on Key U.S. Government Entities:
The following changes are requested:
The role of the Executive Office of (change to "for") Terrorist
Financing and Financial Crimes should be changed to the following:
"Works domestically and internationally to preserve and protect the
integrity of the financial system and the economic and physical safety
of America. Ensures that all possible diplomatic, policy, and strategic
steps are taken to prevent the corruption of the financial system and
to prevent terrorism and other financial crimes.":
Regarding the role of the Financial Crimes Enforcement Network
(FinCEN), the following statement should be added to their role:
"Administers the Bank Secrecy Act (B SA).":
The role of the Internal Revenue Service CI in the anti-terrorist
financing arena is much broader than merely supporting investigations
of charities. We request that the language describing the IRS role be
changed to the following: "Identifies cases that might lead to
terrorist connections, and supports investigations of terrorist
financing involving all methodologies, including money remitters,
bulk cash movements and charities, described in this report.":
We also request that Treasury's Office of the General Counsel be added
to the list of relevant offices within Treasury. Its current role,
which may change in the near future, is defined as follows: "Chairs
Policy Coordination Committee (PCC) for Terrorist Financing.
Coordinates U.S. government actions regarding implementation of, and
imposition of economic sanctions under, Executive Order 13224 to with
respect to the freezing of terrorist-related assets.":
Report on Trade Based Monev Laundering in Terrorist Financin:
Throughout the report, reference is made that the Departments of the
Treasury and Justice have not yet produced a planned report, which was
to form the basis of a strategy to address how money is moved or value
transferred via trade in precious stones and commodities. As stated in
our interviews, the said report is contained in an Appendix to the 2003
National Money Laundering Strategy (NMLS) which is being transmitted to
Congress shortly.
FinCEN report to Congress on Informal Value Transfer Systems:
On page 20 of the draft GAO report, a paragraph mentions FinCEN's
report to Congress on Informal Value Transfer Systems (IVTS). The
comments there appear to expand the scope of the report beyond what was
required at the time. Thus, the comments about the IVTS report are
inaccurate on two points. First, the report under Section 359 of the
PATRIOT Act was not intended to discuss use of precious stones and
commodities. The legislative requirement was first to evaluate the risk
posed by hawala-type IVTS in moving monetary value into, out of or
within the United States. Section 359 asked that the FinCEN report
comment on the need for additional legislation, including whether
existing thresholds for reporting suspicious transactions should be
changed. No requirement --express or implied --to look at commodities
or precious stones in the IVTS context was made, during FinCEN's
discussions with congressional staff when Section 359 was being
drafted, nor at any time during the research/drafting process. Second,
the report did not discuss terrorist use of IVTS because there was no
direct evidence that terrorists had used the system in the U.S. (Use in
other criminal activity was found and was discussed in the report.)
Therefore, we request that the text of that paragraph be changed to the
following language:
"Further, a Treasury report to Congress on informal value transfer
systems, required under the USA PATRIOT Act, while describing informal
banking systems and related regulations, as required, did not discuss
terrorist use of such systems and did not include a review of the
potential use of precious stones and commodities in such systems.
Further, Treasury issued a report to Congress evaluating the risk posed
by hawala-type Informal Value Transfer Systems in moving monetary value
into, out of or within the U.S. and to provide comment on the need for
additional regulations to address any such risk, as required under the
USA PATRIOT Act.":
Anti-Money Laundering Programs/Regulations:
Enclosed with these comments is a Summary of the Anti-Money Laundering
Provisions of the USA PATRIOT Act and the steps taken to implement
them. This summary is also contained as an Appendix to the 2003 NMLS.
In order to reflect accurately the progress made on imposing
regulations on various sectors, the GAO may wish to include this
summary in its report.
On page 24, please delete the following sentence: "In November 2002,
FinCEN officials told us that they had insufficient resources to draft
regulations required under the act and they had not decided how to
prioritize the workload." This statement might have been taken out of
context and was not directly related to the regulatory requirements.
FinCEN has met most of the USA Patriot Act deadlines. On page 24, the
last sentence of the paragraph on Anti-Money Laundering Programs should
be changed to the following:
"This meant that time and resources were needed to study and consult
with law enforcement and industry leaders. FinCEN rules concerning
anti-money-laundering programs for money service businesses, which
include hawalas, were issued in an interim final status on April 29,
2002, and remained open for comment. The comment period closed 30 days
after the issuance of the interim final rule, on May 29, 2002. All
financial institutions subject to rules were required to be in full
compliance within 90 days of the interim final rule. FinCEN rules for
dealers in precious metals, stones, or jewels were proposed on February
21, 2003, and have not been finalized.":
Thank you for the opportunity to comment on the draft report. We look
forward to meeting with you again and continuing to work with you on
this important issue.
Sincerely:
Juan C. Zarate:
Deputy Assistant Secretary:
Executive Office for Terrorist Financing and Financial Crimes:
Signed by Juan C. Zarate:
Enclosure:
GAO Comments:
1. The term "earn" more fully captures the criminal effort involved in
the range of alternative terrorist financing mechanisms.
2. While the use of terrorist funding may provide transactions that can
be investigated, the scope of this review focused on how terrorists
earn, move, and store their assets. The final use of terrorist funding
is not relevant in the context of this report.
3. We amended the description of the Executive Office for Terrorist
Financing to incorporate additional information provided. The
description was edited in a manner consistent with those of the other
agencies in the table and it captures both the information provided in
the Executive Office's Mission Statement as well as the agency
comments.
4. We amended the description of the Financial Crimes Enforcement
Network in Table 1 to include its role in administering the Bank
Secrecy Act.
5. The description used was obtained from IRS Criminal Investigation
and is consistent with the format used for other agencies.
6. We incorporated the description of the Treasury's Office of the
General Counsel in Table 1.
7. We respond to this comment on page 28.
8. We agree that the USA PATRIOT Act did not specifically require that
the Department of the Treasury report to Congress on informal value
transfer systems include a discussion of precious stones and
commodities. While a discussion of precious stones and commodities was
not specifically required under the USA PATRIOT Act, the Treasury
report notes that there is a need for further research, particularly
with regard to understanding the range of mechanisms associated with
informal banking systems, including the use of gold and precious gems
in hawala transactions, among others. We modified our report,
accordingly.
9. The Department of the Treasury's comments state that their report to
Congress on informal value transfer systems did not discuss terrorists'
use of these systems because there was no direct evidence that
terrorists had used these systems in the United States. However, the
Treasury report states that "these [informal value transfer] systems
have been used to facilitate the financing of terrorism" and the USA
PATRIOT Act requirement for the report addresses the transfer of money
both domestically and internationally. The Treasury report provides no
further discussion on the link between terrorist financing and these
systems.
10. The sentence is characterized accurately. The context of the
discussion was the development of regulations required under the USA
PATRIOT Act.
11. We have omitted the example concerning the timeline for finalizing
anti-money laundering program rules for money service businesses due to
conflicting information presented by FinCEN during our review and the
Department of the Treasury's comments.
[End of section]
Appendix III: Comments from the Internal Revenue Service:
DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224:
COMMISSIONER:
October 28, 2003:
Mr. Loren Yager:
Director, International Affairs and Trade
United States General Accounting Office Washington, D.C. 20548:
Dear Mr. Yager:
I am responding to your report entitled TERRORIST FINANCING: United
States Agencies Should Systematically Assess Terrorists' Use of
Alternative Financing Mechanisms (GAO-04-163). The Internal Revenue
Service is very committed to shutting down the stream of terrorist
funding, and we consider it one of our highest priorities.
Although the Federal Bureau of Investigation (FBI) is designated as the
primary agency in terrorist financing matters, our Criminal
Investigation Division (CI) special agents have led this effort in a
number of ways and are an integral part of the Joint Terrorism Task
Forces (JTTF). These JTTF team members bring invaluable assistance from
their many years of experience working complex financial
investigations. CI also furnishes forensic financial accountant
expertise in several overseas assignments, often alongside the FBI. CI
participates in every major terrorist financing investigation, many of
which involve violations of the Internal Revenue Code and related
offenses. CI also assists the Treasury Department in efforts to locate
and freeze terrorist funds and repatriate stolen Iraqi assets.
I agree that law enforcement agencies should have a better approach to
assessing the use of alternative financing mechanisms. The GAO findings
regarding the misuse of charities to raise funds and the transmission
of illegal proceeds are consistent with our experience in this area.
The report was well balanced in setting forth the significant
challenges to increasing law enforcement's tracking of terrorism
alternative financing. The IRS has long dealt with similar obstacles in
the trade-based part of the underground economy and in our
investigations of the laundering of illegal proceeds.
Criminal Investigation has been proactively educating the civil
functions of the IRS regarding the various methods of terrorist
funding. Specifically, CI is working with the IRS Tax Exempt and
Government Entities (TE/GE) Division to educate the auditors about the
use of charitable organizations by terrorist organizations. CI agents
taught numerous TE/GE training seminars. Recently, CI and TE/GE jointly
made presentations to financial analysts from both the CIA and FBI on
issues regarding the procedure for revocation of exempt status and
indicators of potential misuse of
charitable organizations. We are also working to obtain additional
security clearances for TE/GE personnel so that they may continue to
actively participate and assist in terrorist financing investigations.
I also agree that the IRS should expedite the process of establishing
procedures and guidelines to share data on charities with states as
allowed by federal law. Let me assure you that the lack of formal
procedures has not hampered our continuing work with the states. We
have a good existing partnership with state charity officials and have
always shared information as permitted by law on important topics. In
the area of terrorist financing for example, we have shared with the
National Association of State Charities Officials the list of
organizations designated as terrorist organizations by Executive Order.
We have also briefed their membership on our activities in this area.
We will continue to share important information as necessary.
As you note, the GAO issued an April 30, 2002 report, Tax-Exempt
Organizations-Improvements Possible in Public, IRS, and State Oversight
of Charities (GAO-02-526), in which it recommended that IRS develop, in
consultation with state charity officials, procedures to regularly
share IRS data with states as allowed by federal law.
An IRS team has developed a program of information sharing as provided
by section 6104(c) of the Internal Revenue Code. The team drafted
procedures and guidelines for information sharing with the states that
will appear in the Internal Revenue Manual (IRM). This draft was shared
with the National Association of State Charities Officials, and we are
in receipt of their comments. I am confident that we will have formal
procedures in place by the end of this calendar year.
As you are aware, pending legislation (e.g., S. 476, the Charity Aid,
Recovery, and Empowerment Act of 2003) would increase available
information sharing with the states. If passed, we will take
expeditious steps to implement the provisions of that legislation.
If you have any questions, or if you would like to discuss this
response in more detail, please contact Vicki Duane, Deputy Director,
Operations Policy and Support, at 202-622-6547.
Sincerely,
Signed for:
Mark W. Everson:
[End of section]
Appendix IV: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
Elizabeth Sirois (202) 512-8989 Kathleen Monahan (415) 904-2237:
Staff Acknowledgments:
In addition to those individuals named above, Kate Blumenreich, Tracy
Guerrero, Janet Lewis, Kendall Schaefer, Jenny Wong, Mark Dowling, Rona
Mendelsohn, and Reid Lowe made key contributions to this report.
FOOTNOTES
[1] Pub. L. No. 107-56 (Oct. 26, 2001).
[2] Terrorists are individuals who are part of international
organizations with the will and means to target the United States or
U.S. interests abroad with violent or dangerous acts calculated to
intimidate, coerce, or retaliate against government conduct (see 18
U.S.C. 2331(1), 18 U.S.C. 2332b(g)(5)).
[3] The use of bulk cash refers to smuggling currency, travelers
checks, or similar instruments across borders by means of a courier
rather than through a formal financial system.
[4] According to the 2002 National Money Laundering Strategy, informal
value transfer systems (referred to here as "informal banking systems")
are known by a variety of names reflecting ethnic and national origins
predating the emergence of modern banking and other financial
institutions. Included, among others, are systems such as hawala or
hundi, terms commonly used when referring to Indian, Pakistani, and
Middle Eastern systems. These systems provide mechanisms for the
remittance of currency or other forms of monetary value--most commonly
gold--without physical transportation or use of contemporary monetary
instruments.
[5] Also at your request, we addressed U.S. domestic coordination
efforts to deter terrorist financing under a separate report focusing
on the National Money Laundering Strategy. See U.S. General Accounting
Office, Combating Money Laundering: Opportunities Exist to Improve the
National Strategy, GAO-03-813 (Washington, D.C.: Sept. 26, 2003).
[6] See U.S. General Accounting Office, Tax-Exempt Organizations:
Improvements Possible in Public, IRS, and State Oversight of Charities,
GAO-02-526 (Washington, D.C.: Apr. 30, 2002).
[7] U.S. Department of State, Patterns of Global Terrorism 2002
(Washington, D.C.: April 2003).
[8] We did not evaluate the adequacy or implementation of these
strategies, with the exception of the 2002 National Money Laundering
Strategy as it pertains to alternative financing mechanisms.
[9] U.S. Department of State, International Narcotics Control Strategy
Report (Washington, D.C.: March 2003).
[10] Office of Homeland Security, the White House, President's National
Security Strategy of the United States of America (Washington D.C.:
July 2002).
[11] The White House, National Strategy for Combating Terrorism
(Washington D.C.: February 2003).
[12] Pub. L. No. 107-197, Title II (June 25, 2002).
[13] See 18 U.S.C. 2339C(a)(1).
[14] The intelligence community includes the Office of the Director of
Central Intelligence; the Central Intelligence Agency; the National
Security Agency; the National Imagery and Mapping Agency; the National
Reconnaissance Office; the Defense Intelligence Agency and other
offices within the Department of Defense for the collection of
specialized national intelligence through reconnaissance programs and
the intelligence elements of the Army, the Navy, the Air Force, and the
Marine Corps; the FBI; the Department of the Treasury; the Department
of Energy; the State Department's Bureau of Intelligence and Research;
and such other elements of any department or agency as may be
designated by the President or jointly by the Director of Central
Intelligence and the head of the department or agency concerned.
[15] These preexisting networks are based on ethnic, geographic, or
criminal links, providing access to people with similar interests and
to established financing structures founded on trust-based
relationships and often lacking substantial formal documentation.
[16] Although U.S. law enforcement agencies discussed some examples of
terrorists' use of scams involving common household commodities and the
illicit sales of a variety of counterfeit goods, with the exception of
one public cigarette case, examples are not included in this report
because, according to the FBI, the cases are still open and discussion
may jeopardize investigations and prosecutions.
[17] The estimated 100 metric tons of cocaine that the U.S. government
seizes each year could be worth as much as $10 billion to the drug
trade.
[18] U.S. General Accounting Office, Combating Terrorism: Interagency
Framework and Agency Programs to Address the Overseas Threat,
GAO-03-165 (Washington, D.C.: May 23, 2003).
[19] Southeast Asian terrorist organizations that have cells linked to
al Qaeda were discovered in 2001 in Malaysia and Singapore, and their
activities, movements, and connections traverse the entire region, but
little information is available about their financing methods.
[20] In the United States, many states require the payment of an excise
tax, a tax on the sale or manufacture of a commodity, usually a luxury
item, on the sale of cigarettes. Some states require proof of payment
in the form of tax stamps.
[21] According to DOJ, the investigation also resulted in an additional
22 convictions by plea bargain on related charges.
[22] The Phillip Morris Company estimates that the revenue loss to New
York City from one shipping container of counterfeit cigarette sales is
roughly $1.6 million.
[23] According to DOJ, it has issued indictments in five cases
involving the misuse of a charitable organization to earn assets, move
assets, or both. Additionally, the FBI has discussed two additional
ongoing cases.
[24] In Holy Land Foundation v. Ashcroft, 219 F.Supp.2d 57, 75 (D.D.C.
2002), aff'd, 333. F.3d 156 (D.C. Cir. 2003), the U.S. Court of Appeals
for the District of Columbia Circuit found the evidence tying the Holy
Land Foundation for Relief and Development to the terrorist
organization Hamas to be substantial.
[25] Global Relief Foundation vs. Paul H. O'Neil, et al., 207 F. Supp.
2d 779, U.S. District Court, Northern District of Illinois, Eastern
Division, June 11, 2002.
[26] U.S. v. Enaam Arnaout, Case No. 02CR892, U.S. District Court,
Northern District of Illinois, Eastern Division, April 2002.
[27] For example, according to an FBI press release, on August 13,
2003, a New York diamond jeweler was indicted for conspiring to operate
an unlicensed money remittance system (informal banking system).
Prosecutors alleged that the system was to be used in a terrorist
financial transaction involving the purchase of a shoulder-fired
missile.
[28] U.S. and international law enforcement officials, as well as
academic researchers, have identified a variety of ethnically based
informal banking systems that originated in China, India, Pakistan,
Vietnam, and Somalia, among numerous others. Officials and researchers
note that these informal banking systems generally predate formal
banks, and that some groups may consider them more familiar and
trustworthy than formal banks.
[29] A Report to the Congress in Accordance with Section 359 of the
Uniting and Strengthening America by Providing Appropriate Tools
Required to Intercept and Obstruct Terrorism Act of 2001, Submitted by
the Secretary of the U.S. Department of the Treasury, (Nov. 2002).
[30] According to DOJ, Al Barakaat operated a hybrid hawala in which
its informal system interconnected with the formal banking system.
Because Al Barakaat also used financial institutions, law enforcement
was able to discover the transactions to Somalia by analyzing
Suspicious Activity Reports generated by the banks pursuant to their
obligations under the 1970 Bank Secrecy Act [Pub. L. No. 91-508, 84
Stat. 1114 (1970) (codified as amended in 12 U.S.C. §§ 1829(b), 1951-
1959 (2000); 31 U.S.C. §§ 5311-5330 (2000)].
[31] Treasury did not report a time frame during which this money was
channeled.
[32] Financial transparency reporting requires Currency and Monetary
Instrument Reports, which obligates the filer to declare if he or she
is transporting across the border $10,000 or more in cash or monetary
instruments.
[33] Operation Oasis was established under the former U.S. Customs
Service. The U.S. Customs Service was transferred to the Department of
Homeland Security and its investigators were transferred to ICE.
[34] U.S. General Accounting Office, International Trade: Critical
Issues Remain in Deterring Conflict Diamond Trade, GAO-02-678
(Washington, D.C.: June 14, 2002).
[35] According to the Congressional Research Service, a pound of
diamonds in 2002 was worth around $225,000, compared with a pound of
cash that was worth $45,000 and a pound of gold, which was worth
$4,800.
[36] In August 2000, the United Nations and the government of Sierra
Leone agreed to establish a Special Court for Sierra Leone to prosecute
persons bearing responsibility for serious violations of international
humanitarian law and Sierra Leonean law committed in the territory of
Sierra Leone since November 1996.
[37] Al Qaeda first set up diamond mining and trading companies during
the 1990s in Kenya and Tanzania. Although these diamond-trading
operations were not fully developed, they did provide some financial
returns and expertise for involvement in diamond trading in Sierra
Leone.
[38] According to the DHS ICE, in a drug-trafficking sting operation in
the jewelry district of New York, 11 individuals were indicted for
money laundering by accepting more than $1 million cash in exchange for
smelted gold items and diamonds they had reason to believe were going
to be smuggled to South America.
[39] According to the 2002 National Money Laundering Strategy, the
Black Market Peso Exchange, the largest known trade-based money
laundering system in the Western hemisphere, is a system that converts
and launders illicit drug proceeds from dollars to Columbian pesos.
Typically, narcotics dealers sell Columbian drugs in the United States
and receive U.S. dollars. The narcotics traffickers thereafter sell the
U.S. currency to a Columbian black market peso broker's agent in the
United States. In return for the dealer's U.S. currency deposit, the
agent deposits the agreed-upon equivalent of Columbian pesos into the
cartel's bank account in Columbia. At this point, the cartel has
successfully converted its drug dollars into pesos, and the Columbian
broker and his agent now assume the risk for integrating the drug
dollars into the U.S. banking system. The broker funnels the money into
financial markets by selling the dollars to Columbian importers, who
then purchase U.S. goods that are often smuggled back into Columbia to
avoid taxes and customs duties.
[40] False invoicing is a simple way of moving money across borders.
For example, if a container of goods is worth $100,000, but is invoiced
for $150,000, the subsequent payment of $150,000 will allow the
movement of $50,000 to illicitly cross borders.
[41] United States vs. Benevolence International Foundation, Inc. and
Enaam Arnaout, Case Number 02 Cr. 0414, United States District Court,
Northern District of Illinois, Eastern Division, April 2002.
[42] GAO-02-678.
[43] For example, in many of these countries, gold is commonly
displayed in weddings, as a form of economic status, or to settle books
in informal banking systems.
[44] According to the Treasury's Office of Foreign Assets Control, the
United States had frozen $719,832 in al Qaeda assets as of July 31,
2003.
[45] Once a U.S. law enforcement agency (for example, ATF, DEA, ICE,
etc.) identifies a terrorist nexus in an investigation they are to
notify the FBI. Information is to be shared through the FBI-led Joint
Terrorism Task Forces in the field or the National Joint Terrorism Task
Force in FBI headquarters. Agencies have representatives at each
others' locations to facilitate information-sharing.
[46] The FBI's Terrorist Financing Operations Section provides overall
operational command to the interagency National Joint Terrorism Task
Force at FBI headquarters and the Joint Terrorism Task Forces in the
field that conduct terrorist financing investigations and operations.
[47] Data mining is the process of extracting meaningful information
from large databases. Once extracted, the information can be analyzed
to reveal hidden patterns, trends, relationships, and correlations
between the data.
[48] According to the May 13, 2003, Memorandum of Agreement between the
Department of Justice and the Department of Homeland Security
Concerning Terrorist Financing Investigations, after June 30, 2003, OGQ
no longer existed as a program name. DHS was to pursue terrorist
financing investigations and operations solely through its
participation in the FBI's National Joint Terrorism Task Force, the
Joint Terrorism Task Forces, and the Terrorist Financing Operations
Section.
[49] According to ICE's technical comments on our draft report, an
artificial intelligence function is being developed for utilization in
the NIIS program, but ICE did not provide evidence of its development
or what it would accomplish regarding alternative financing mechanisms.
[50] Pub. L. No. 107-56, Sec. 359(d).
[51] As stated previously, issues concerning coordination and
cooperation among U.S. government agencies and international entities
abroad will be covered in a subsequent GAO report.
[52] Data inconsistencies may be attributed to various factors,
including poor quality of data generated from many mining and trading
nations, differences in how customs officials appraise shipments,
industry practices such as selling goods on consignment or unloading
stockpiles, false declarations by importers on the diamonds' origin,
and smuggling.
[53] GAO-02-678. Our assessment of the Kimberley Process found that it
lacked controls to ensure that it would be effective in stemming the
flow of conflict diamonds. We recommended that the Secretary of State,
in consultation with the relevant government agencies, work with
Kimberley Process participants to develop better controls including a
reasonable control environment, risk assessment, internal controls,
information-sharing, and monitoring. Our recent follow-up work showed
that these weaknesses remain and could be exploited by financiers of
terrorism.
[54] On February 10, 2003, the U.S. Executive Director pled guilty to a
racketeering conspiracy, admitting that he fraudulently solicited
charitable organizations in order to provide financial assistance to
persons engaged in violent activities overseas. According to DOJ, he
was sentenced to 11 years in prison.
[55] The appropriate state officials can obtain details about the final
denials of applications, final revocations of tax-exempt status, and
notices of a tax deficiency under section 507, or chapter 41 or 42,
under the Internal Revenue Code. However, IRS does not have a process
to regularly share such data. See U.S. General Accounting Office, Tax-
Exempt Organizations: Improvement Possible in Public, IRS, and State
Oversight of Charities, GAO-02-526 (Washington, D.C.: Apr. 30, 2002).
[56] S.476, the Charity Aid, Recovery, and Empowerment Act of 2003.
[57] The Money Laundering and Financial Crimes Strategy Act of 1998
(Strategy Act, see Pub. L. No. 105-310, 112 Stat. 2941 codified as 31
U.S.C. §§ 5340-42, 5351-55 (1998)) requires the President -acting
through the Secretary of the Treasury and in consultation with the
Attorney General and other relevant federal, state, and local law
enforcement and regulatory officials -to develop and submit the annual
National Money Laundering Strategy to Congress by February 1 of each
year from 1999 through 2003.
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