Strife

The Academic Blog of the Department of War Studies, King's College London

You are here: Home / Archives for money laundering

money laundering

Financial institutions as enablers of global conflicts: the implications of the FinCEN leaks

by

By Sandra Huang

Protesters in Kuala Lumpur, Malaysia calling for then Prime Minister’s resignation over 1MDB embezzlement scandal in August 2015

The fundamental role of the global financial system is often overlooked when it comes to the discussion of international conflict, where attention is primarily concentrated on the state actors involved. However, what is alarming is the actor that is beyond the state control. Given that the financial system is an essential instrument for conflict actors to access their resources and carry out their activities, global financial institutions play a critical role in blocking the flow of money and intervening such activities. Nonetheless, the fact that the financial system is globalised and run by the profit-seeking private sector has made an effective state control challenging and resulted in numerous scandals of its misuse across multiple jurisdictions by the ill-intentioned actors. Consequently, the potential of financial institutions to enable global conflict warrants further scrutiny.

As a standardised control measure, financial institutions in most countries are required by law to submit suspicious activity reports (SARs) to the authorities if a customer activity is suspected of being involved in financial crimes. In the US, SARs are filed to the Financial Crimes Enforcement Network (FinCEN), a bureau of the US Treasury dedicated to combating financial crimes. In 2019, news agencies and investigative journalists worldwide received over 2,000 leaked SARs submitted to the FinCEN between 2000 and 2017 as well as other government reports. Their investigations of the leaked files, publicised in September 2020 and known as the FinCEN leaks, attributed the suspicious financial activities to organised criminals, prominent officials, terrorists and sanctioned individuals who were linked to a number of high-profile security incidents over the last two decades.

Those ill-intentioned individuals exploited the complexity of the global financial system to launder their money so that the illegal aspects of their activities could go undetected. Although the leaked files only reflected pure suspicions of compliance officers in financial institutions, they nonetheless provided valuable trails of scandals in the past and underlined the inadequacy of control measures in curbing financial crime, which has led to a variety of security issues beyond the financial arena. 

Among those security issues are socio-economic grievances and associated social unrest. They are usually triggered by the poor governance that failed to utilise public funding to provide better living conditions. For instance, the investigations into the FinCEN files revealed that the Venezuelan construction magnate, Alejandro Ceballos Jiménez, received over $146 million between 2013 and 2014 from government contracts to build public housing, while an excessive amount of the money was suspected of having been diverted to his family members through a money laundering scheme set up by Swiss lawyers. In 2015, an investigation into the housing project suggested that it was overcharged and that it was not properly furnished. The close relationship between the Ceballos family and the ruling elites has granted the family business numerous government contracts and sustained a luxurious lifestyle that can be witnessed through their high-end properties in the US; contrastingly, the ordinary Venezuelans are still suffering from the collapsed economy, poverty and insecurity. Notably, this is only a minor part of more than $4.8 billion involved in SARs related to Venezuela from 2009 to 2017, nearly 70% of which involved public money.

On the other side of the world, Malaysia was struck by large-scale protests between 2015 and 2016 over then-Prime Minister Najib Razak’s alleged embezzlement of billions of US dollars from an economic development fund, 1 Malaysia Development Berhad (1MDB). The scandal, which was brought to light in 2015 following a leak from a former Swiss banker, revealed a complex money laundering scheme, which spanned across multiple jurisdictions and involved Razak and his close associate Jho Low. While the trial over the case has been ongoing, the FinCEN files further revealed suspicious transactions involving over $2.5 billion between 2009 and 2016 linked to Jho Low and the 1MDB fund. Despite strong suspicions, those transactions were still carried out by multiple multinational banks throughout the whole period. Among the banks involved, Goldman Sachs was charged with the largest penalties of $5 billion by multiple jurisdictions for its role in facilitating and profiting from the money laundering scheme of the 1MDB fund. Troublingly, suspicions of corruption and money laundering revealed by the FinCEN leaks are not limited to these countries but are observed on a global scale, largely connected to powerful and well-connected individuals who pursue their self-interest at the expense of public good. 

Another security issue stems from terrorist financing, which refers to the way terrorist groups gain access to financial resources to support their operations. To combat terrorist financing, financial institutions are on the front line to detect and block the flow of money that fund terrorist activities. However, there is much to be improved in this area. Among the most notable examples revealed in the FinCEN leaks were transactions involving over $4 billion to and from Iraqi banks in SARs filed by Deutsche Bank’s US branches and Bank of America in 2014 and 2015.  During this period, the extremist Islamic State (IS) group controlled a large swath of territories in Syria and Iraq and seized over 120 Iraqi banks. Although the SARs submitted did not clearly state the senders or recipients, which made direct attribution unfeasible, considering IS’s funding sources and financial activities, there is a high possibility that related transactions were made by the IS to channel its funds into the legitimate banking system in order to purchase weapons or receive funding from overseas charities. After all, SARs were filed by the banks with delays, by which point the transactions of suspected terrorist money had already been processed through the global financial system, representing a loophole in the global counter-terrorism efforts. 

The FinCEN leaks also revealed other SARs involving large international banking institutions related to the financing of the sanctioned extremist groups Taliban and Al-Qaeda. This brings about another issue that is closely related to international security: sanctions evasion. Sanctions are a series of measures implemented by a country, a regional body, or an international body against targeted countries, groups or individuals for military, social or political reasons in a variety of forms, including financial restrictions, in order to effect changes to the sanctioned targets. On the first line of defence of the financial sanctions are financial institutions, whose compliance is key for a sanctions programme. Regrettably, several global banking institutions have undermined the US sanctions regime over time. For instance, in 2013, the Standard Chartered Bank (SCB) submitted the SARs against its Iranian clients following the whistleblowing of its former employees to the US authorities regarding its breaches of sanctions against Iran. The whistleblowing and the follow-up investigations by the authorities did not give the SCB penalties that were harsh enough to cut ties with Iran. Furthermore, in 2016, an Iranian-Turkish gold trader, Reza Zarrab, was arrested by the US authorities for carrying out transactions on behalf of sanctioned Iranian entities. The SCB only filed SARs against Zarrab and these entities months after the former’s arrest. Despite a number of penalties the bank received for its sanctions violations, the FinCEN files suggest that it had continued to report suspicions on Iran-related transactions until at least 2017, most of which were processed even though an SAR was filed.

Certainly, for financial institutions, gaining lucrative business deals that are likely to come from ill-intentioned actors and protecting the integrity of the financial system are two conflicting goals that are inherently difficult to maintain at the same time. By examining previous FinCEN files, it appears that the penalties imposed by the authorities have not had deterrent effects in the long term. Moreover, under the pressure of legal requirements, filing SARs has become more of a box-ticking exercise to ensure compliance, rather than a serious effort to combat money laundering, terrorist financing and other financial crimes. This is reflected in the FinCEN files where the leaked SARs were either submitted with severe delays, without sufficient information, or in a significant volume. This leads to an inefficient allocation of resources by the FinCEN as it may invest unproportionate amount of time in delving into irrelevant transactions and have limited capacity left to investigate into plausible money laundering cases, hampering its efforts to timely, effectively detect and suspend related illegitimate activities. 

To respond to this challenge, the close cooperation between the public and private sector is essential to assist financial institutions in building effective compliance programmes that meet the needs of the authorities. The prevalence of transnational transaction activities also underlines the need for global coordinated efforts to curb financial crimes. These include standardised criteria in compliance requirements across different jurisdictions so that no gaps can potentially be exploited, and a mechanism to effectively share financial intelligence among different countries to facilitate cross-border investigations.

The leak of the FinCEN files has faced criticism because it disclosed confidential information and may impede the investigations by the authorities. Financial institutions may also be reluctant to trust the authorities and file SARs in the future. However, the insights revealed by investigative journalists – who have connected the dots of security events across the world – highlighted the scale of the problem and emphasized the pressing need to improve the current system in order to safeguard not only the integrity of the financial system, but also security at the global stage.

 

Sandra recently attained her MA with distinction in Intelligence and International Security at the Department of War Studies, King’s College London. Previously, she worked as a security consultant in a private company in Beijing and London, collecting and analysing open-source intelligence regarding travel security in Asia-Pacific, Europe and parts of Africa. Her research focuses on financial intelligence and its use to combat transnational corruption and the security implications of global financial crime. You can connect with her on LinkedIn. (Disclaimer: opinions expressed in the article are those of the author and do not represent any organisation.)

The Funding of Terrorism (Part I) – Hookahs and Honey: Funding Terrorism through ‘Benign’ Activities

by

by Ian Ralby

4 August 2019

Shisha pipes across the Middle East are being filled with charcoal smuggled from Somalia. This seemingly benign but criminal activity nets the terrorist group Al-Shabaab millions, if not tens of millions, of dollars each year. (Image credit: Flickr)

 

Terrorism catches people’s attention, charcoal does not. It is a certitude much like the fact that a bomb blowing up a building will make international news and a fishing boat laden with jerry cans of diesel will not. Over the last decade, terrorist groups have increasingly sought to fund their operations using activities that many consider ‘benign’ and thus undeserving of serious scrutiny. While the trafficking of arms, drugs or humans draws significant law enforcement attention around the world, goods including fuel, charcoal, honey, sugar, fish and antiquities do not occupy prominent positions on most of these agencies’ priority lists – if they feature at all.  Noting how high-profile crimes tend to attract the close watch of national and international authorities, terrorist organisations around the world have found relative ease in recent years by funding themselves through profitable ‘benign’ operations. It is imperative for law enforcement agencies and counterterrorism authorities to increase their coordination on these matters and scrutinise such often overlooked activities as critical sources of terrorist financing.

Perhaps the best-known instance, at least in counterterrorism circles, of seemingly benign economic activity that actually finances terrorist organisations is the trading of Somali charcoal to the Middle East. Acacia charcoal, excellent for use in shisha pipes, has been exported from Somalia for decades. As Al-Shabaab, a terrorist group established in 2006, took over parts of Somalia, it sought to benefit from the lucrative trade in various ways, including through informal taxes and port revenues.  In response, the Transitional Federal Government banned the export of charcoal from Somalia and later the international community imposed an embargo on it. The result has been an extensive smuggling operation in an effort to maintain the income stream. Publicly disclosed estimates from the British Royal Navy suggest that this operation currently yields $7 million per year for Al-Shabaab. Prior to substantial interdiction efforts, that figure was once estimated to be in the tens, or even hundreds, of millions.  Unlike issues like piracy or wildlife trafficking, charcoal has not captured public attention in the same way, and thus has not garnered the same political interest, though recent exposés have sought to change that. While the counterterrorism community is heavily focused on charcoal, many politicians still view it as a low priority, since compared to other goods it still seems relatively benign.  And even if charcoal does gain further visibility, the situation with Al-Shabaab is only one example of a larger phenomenon.

The same apathy towards smuggling of a benign commodity has been a major factor in illicit oil and fuel activities becoming a substantial source of terrorist financing.  The majority of people around the world rely on fuel in their daily lives. Consequently, it is perhaps the most ubiquitous commodity and one which people are most interested in obtaining at a discount.  Too often, widespread and seemingly harmless shopping for discounts equates to a willingness on the part of law enforcement and the political establishment to overlook the sources of cheaper-than-market-price fuel. They disregard what seem to be low-scale illicit operations as not meriting the attention of law enforcement. This salutary neglect of black market fuel trading has become a major point of manipulation for terrorist groups looking for under-the-radar income streams.

Furthermore, the success of the Islamic State in Iraq and Syria (ISIS) has inspired groups around the world to adopt a Jihadi-Salafist philosophy and seek to ‘restore’ the early Islamic caliphate.  ISIS-inspired groups, however, are inspired not only by ISIS ideology but also by ISIS methods and it is well-known that ISIS’ principle source of income has been proceeds from illicit oil and fuel activities. It is therefore not surprising that affiliated groups in other regions of the world have turned to fuel smuggling as their primary source of income. In the Philippines for example, Abu Sayyaf used fuel smuggling both to fund itself and to reinforce smuggling routes that supported its movement of weapons and ammunition in the lead-up to and throughout the year-long siege of Marawi.  In Trinidad and Tobago, a similar co-location of ISIS ideology and rampant fuel smuggling has given rise to significant international concern. As with charcoal, a prevalent perception of the commodity itself as being benign has created a blind spot that allows terrorist groups to earn substantial profits with little interference or even interest.

Beyond charcoal and fuel, other goods such as fish, livestock, honey, sugar, minerals and antiquities, depending on their availability, profitability, and relative visibility by law enforcement, have all become sources of income for terrorist groups. Osama Bin Laden used honey trading both to make profits and for money laundering.  Few goods could seem less sinister than honey, and that provided the perfect cover and income stream for one of history’s most ominous terrorists.  Whether the trade is initially illegal, as with fuel smuggling, or technically legal, as with honey or charcoal trading, the very fact that it is being used to fund terrorist organisations makes it illegal.

The point is that terrorist groups are relying on economic activities perceived as benign in order to make, maintain and move their wealth. And wealth is extremely important for terrorism, as evidenced by the direct correlation between the number of attacks perpetrated by a group and its relative financial stature.  In a 2016 interview, Maj. Gen. Amos Gilad, former Director of the Israeli Defense Ministry’s Political-Military Bureau, stated, ‘The financial component of terror organizations is critical, and its indispensability for terror attacks is like fuel for the car’. As true as this statement is, the irony is that the financial component of terror organisations may literally be fuel for the car.

To change this dynamic, law enforcement agencies and counterterrorism units need to become more proactive in identifying their own blind spots and false perceptions.  This means consciously reexamining those matters they have overlooked in the past.  That, however, is not easy to do.  Terrorist groups will continue to seek, find and exploit economic opportunities that occupy lower positions on the priority lists of the authoritaries. Inevitably, as law enforcement approaches change, so, too, will terrorist activities. But, it is imperative that the crimes and trading activities that have been relegated to benign status be reconsidered not just in their own right but for their malignant implications.  The profits accruing from such overlooked criminal goods as shisha charcoal, farm diesel or artisanal honey, may actually be funding deadly bombings, hijackings, or militant offensives.

Dr. Ian Ralby is a leading expert in international law, maritime security and countering transnational organized crime.  He and his team at I.R. Consilium, LLC have world leading expertise in oil and fuel crimes, and the nexus between maritime crimes and both criminal and terrorist activities.  Among other degrees, he holds a J.D. from William & Mary and a Ph.D. from the University of Cambridge where he was a Gates Scholar.