Terrorist groups are not a financial island
Christine Duhaime, B.A., J.D., Certified Financial Crime Specialist
Christine Duhaime is a lawyer, writer and frequent speaker on financial crime and counter terrorist financing.
Published September 29, 2014; updated October 23, 2014 to include news that ISIS has set up businesses in Turkey.
As the threat of the Islamic State (ISIS or ISIL), increases globally, there will be enormous pressure to stop the financing of ISIS.
The goal of terrorist groups like ISIS is to create a state of tension in western states. In addition to violent acts, such as beheadings (which they say are coming on our soil), they aim is to cripple our industries by attacking critical infrastructure, draining our economies and bankrupting us to create chaos so they can achieve political control, eradicate existing culture and establish dominance. In the last 18 months, ISIS and its forefathers have promised to “drown us all in blood” and “bleed us dry.” And worse.
Importantly, they need money to do this, and most importantly, access to our financial system. This latter point is unfortunately lost in some circles. If we are willing, we could shut ISIS down in a month with a global denial to them of our financial system.
We should make no mistake about this fact – ISIS and its sympathizers and members use our banks and our global financial system. Money and value goes in and out of Syria and Iraq for and from ISIS and their leaders, most of which is attached in some way to accounts at financial institutions.
Financing of ISIS
Here is a synopsis of what we know about terrorist financing involving ISIS.
There are generally three significant baskets of terrorist financing taking place in respect of ISIS that engage external states and international financial institutions (described below).
The 1st is the sale of crude oil from Iraq and Syria from oil fields acquired by ISIS, sometimes referred to as terrorist oil; the 2nd is funding from individuals in developed countries to ISIS directly and indirectly; and the 3rd is self-funded activities such as ransom payments from the kidnapping of foreigners, taxes imposed on businesses, Christians and financial transactions in captured territories, stolen currency and gold from banks and the sale of looted goods. Governments underestimate by a wide margin the amount of money generated by this third basket which is a mistake – it is now by far their largest, sustainable and growing source of revenues.
According to experts, ISIS has over $2 billion in cash in the coffers and as well as an unknown amount in banks.
How ISIS initially was funded is another story but according to the US Treasury, a lot of it was from private donations from people in Qatar and Kuwait. In 2013, Qatari authorities apparently only filed one suspicious transaction report under anti-money laundering laws for the whole country yet some of its richest individuals paid million of dollars in cash and via wire transfers to ISIS. A fundraiser known as Tariq Al Tunisi is alleged to have arranged for ISIS to receive $2 million from Qatar in one transaction alone, which flowed, in part, through the financial system unimpeded. This was not the one SAR filed.
Another fundraiser from Qatar, Abd al-Rahman bin Umayr al-Nuaymi is alleged to have sent more than $1 million per month to an al-Qaeda group that morphed into the Islamic State. Al-Nuaymi was an advisor to the Qatari government and was placed on the US sanctions list in December 2013 and only recently placed on the UK sanctions list.
1. Terrorist oil sales
The bulk of the terrorist financing to ISIS until recently was generated by terrorist oil sales, hence the impetus to destroy oil and gas infrastructure controlled by ISIS because it will remove one of the most significant sources of revenues necessary for their operations.
It is not possible to traffic in terrorist oil without the involvement of, and support from, financial institutions whether unwittingly or not.
According to US intelligence and Hisham Alhashimi, an ISIS expert in Iraq, ISIS earns approximately $150 million per month from the sale of crude oil sold on the black market in Turkey or Kurdistan, mostly Turkey. This activity engages terrorist financing involving global financial institutions because both the vendors (ISIS) and the purchasers must use the banking system to effect the transactions equaling $150 million per month. Note that there are multiple daily sales transactions, that together, equal $150 million, ergo thousands of terrorist financial transactions going through banks.
The first point of contact for ISIS in banking in the west would appear to be local banks in Istanbul and Ankara who bank them, although likely under beneficial ownership structures. I’m surmising these bank accounts were set up a while ago and ISIS (the forefather group) became the bank’s VIP customers as more and more revenues were deposited. The best way to avoid detection for suspicious activities is to become a bank VIP and move to private banking under a beneficial ownership structure. Although private banking clients are more high risk for financial crime, many banks treat such customers preferentially in terms of identity, transaction monitoring and anti-money laundering reporting. ISIS is sufficiently sophisticated to issue corporate annual reports highlighting their financing activities; there can be no question they have corporate vehicles through which they launder their proceeds of crime.
The Qatari financiers referred to above who allegedly assisted ISIS with financing are no doubt bank VIP customers in Qatar; their transactions would be less scrutinized, not more. Recall, as noted above, that just one STR was filed in Qatar last year despite the multiple million dollar withdrawals in US funds allegedly for the benefit of ISIS. The one STR filed is not for these cash withdrawals paid to ISIS.
Banking ISIS leaders
What about ISIS leaders? Historically speaking, state leaders who acquire power undemocratically have taken enormous pains to accumulate wealth and preserve it by removing funds from domestic areas of conflict to overseas safe havens for future use by them or their families, usually their children. The reason we have a politically exposed person (“PEP“) reporting regime is to prevent this from happening. We know from the Ukrainian crisis, in which an alleged $70 billion was removed to offshore accounts by PEPs, that the PEP regime is ineffective. Again, because PEPs are VIP bank customers, they get preferential treatment. The PEP regime is not limited to those who acquire power democratically – it applies to financial institutions when they bank ISIS leaders as much as it applies to banking state leaders.
We can expect, therefore, that the ISIS elite has moved or will move, vast sums of money to other jurisdictions in the world through close family members (who are also PEPs). The money and its ownership will be more difficult to tie to ISIS leadership because, inter alia, it originates from a state over which they have effective control in some parts and in which they can create an endless number of new identities and passports to use for travel and to open and use foreign bank accounts.
If we are able to demobilize and degrade ISIS, we will see a greater push by their elite (the PEPs) to get their close family members to other countries under fake IDs with lots of money. Its basic human nature to take all necessary steps to protect the family. If they succeed, it will be further evidence of the whopping ineffectiveness of global AML/CTF/PEP regimes.
There is already such evidence – according to the Turkish media, ISIS officials are openly moving into Turkey with vast sums of money, buying luxury homes in Istanbul and Ankara with cash. The next step will be the purchase of luxury vehicles and sending their children to elite schools with terrorist funds.
According to news reports, ISIS opened its first consulate office in Ankara ostensibly to be able to issue official visas for defectors from other countries to enter Syria to fight for ISIS. I say ostensibly because the Turkey-Syria border is wide open for persons to enter Syria from Turkey. ISIS has also opened several businesses in Ankara and Istanbul.
All of these activities, from purchasing houses, cars, operating consulates, and running new businesses in Turkey require the constant use of banks, bank accounts and banking relationships in Turkey.
If true, the ISIS move into Turkey to set up businesses is likely being done to formalize their operations, part of which is to establish bank relationships through commercial activities so that ISIS can access financial institutions in Europe, an activity that is difficult from Syria or Iraq with significant sanctions in place. Unfortunately, some banks have no qualms about servicing terrorists. It is equally unfortunate that banks that do have such qualms, put very little effort and expertise in understanding and complying with counter-terrorism laws.
It may seem shocking to us in the west that Turkey is allegedly letting ISIS set up shop in their country but Twitter is full of pictures from concerned citizens in Istanbul and Ankara who Tweet pictures of stores in their cities that sell ISIS garb, flags, books, magazines, propaganda and other paraphernalia, and other pictures of ISIS armored vehicles driving through the streets, unimpeded in the operation of their newly established businesses.
This is pure conjecture but given the number of girls that are missing from Syria, it is likely that they were transported to Turkey for sale and that one of ISIS’ material businesses in Turkey is human trafficking. It would explain the need for large secluded houses, armed vehicles and a multitude of bank accounts. And of course, the need for a consulate to issue fabricated documentation to allow the export of trafficked girls from Turkey to the purchaser’s destination country.
Of greater concern is that they may be issuing purportedly official documents so that they can travel to other states under new identities to gain access to other countries for trade, including financial trade.
We should not assume that ISIS has not figured out that they need to secure reliable access to the global financial system for survival and that they know we could shut them out of it and bleed them dry (as they wish to do to us) if we elected to do so by strictly enforcing CTF/PEP/AML laws immediately and globally. We should assume therefore that they have secured that access in ways that will make it hard to detect (but not impossible).
Banking oil sales agents
Back to terrorist oil sales — the banks banking the agents and purchasers of terrorist oil are likely foreign banks in Istanbul. The reason why this is likely the case is because the entities and persons, particularly agents, purchasing terrorist oil have a pressing desire to move the proceeds of crime from the sale of the oil overseas to protect it, and hence protect their revenues. They need a bank with a good network of international correspondent banking relationships to ensure that can happen quickly and efficiently. These bank accounts are likely also structured in ways in which beneficial ownership is obscured.
Foreign banks, particularly in Dubai, Amsterdam, Paris, Vienna and London, should exercise extra due diligence to ensure that they do not violate sanctions and counter-terrorist laws by banking persons and entities dealing with terrorist funds. Entities or persons who have an unusual or extraordinary amount of cash dealings connected to conduit countries such as Kurdistan, Lebanon, Jordan or Turkey are a banking concern for terrorist financing. Sanctions and counter-terrorist financing laws globally capture the indirect facilitation of banking or financial services for terrorist activities so financial institutions, online payment processors and literally any other business all along the oil transactional chain of finance are exposed for providing services for these transactions.
Some theorists have hypothesized that hawalas and money mules are being used for payments of terrorist oil. Hawalas and money mules are prevalent in many ISIS transactions but not for terrorist oil transactions – there is too much money in terms of bulky volume and its too impractical.
2. Christian taxes; kidnapping and ransom
The second way in which ISIS is financed is by self-funding methods such as taxes Christians must pay to remain alive and ransom payments from foreign governments for kidnapped foreigners.
ISIS recently confirms it earns $10 million per month in ransom payments. Unlike terrorist oil payments, ransom payments are made in US cash using external foreign banks. Under this method, foreign brokers bring the cash into Iraq, Syria or a conduit state in exchange for the prisoner. ISIS brings the cash back to headquarters. The foreign brokers liaising for the foreign governments, bank their commissions in foreign banks in Europe.
No matter how you slice it, the payment of ransom for ISIS by insurance companies or governments is terrorist financing. So too is the commission earned and banked by the foreign brokers who transit the funds to ISIS. The litigation exposure for governments, agents and brokers is enormous for all the consequently deaths and injuries sustained globally as a result of ISIS-inspired terrorist acts.
Insurance companies and agents and possibly governments, who make, broker or facilitate ransom payments for ISIS are knowingly financing terrorism and their liability is absolute if ever sued or prosecuted. In due course, they will be sued. If this wasn’t clear before it is now crystal clear after the Arab Bank case.
ISIS has other internal funding methods such as taxes imposed on people in acquired territories and transactional fees for people to remove their own funds from their bank accounts that engage the local economy and do not initially flow through the modern banking system.
For example, they have set up sex slavery businesses in most towns and cities in which they occupy using primarily teenage girls that they refer to as the so-called “spoils of war” to work in such businesses. They also sell captured women and children (those that are Christian or Yazidi women) in the local marketplace. According to human rights agencies, there are websites in which captives are priced and listed for sale from $8 to $12 per girl.
Then there are the Christian life taxes, which are taxes Christians must pay in occupied towns as a “tolerance” tax if they do not convert, or are not first killed. The Christian life tax is paid for the privilege of life. If a Christian cannot pay or refuses to, they are killed. Some Christians are killed immediately after paying the tax. On videos on YouTube, ISIS is quite open about the Christian tax and its justification, in their view.
There are also bank fees to pay to ISIS. They have taken over banks in towns in which they occupy and in order to withdraw funds, account holders must go through a 3-person committee to prove they are the account holder and are not Christians, Yazidis, Shiite Muslims or members of the government. This group of prohibited persons has automatically forfeited money held in their accounts to the ISIS. If a person is not within the prohibited group, in order to withdraw funds, a hefty commission has to be paid to the ISIS.
As for Christians and Yazidi workers, the ISIS has already confiscated their salaries and about 5% is being deducted from everyone else’s salary by ISIS.
The ISIS taxation system on people, businesses and services should not be underestimated as a significant source of growing and sustainable revenue. Not surprisingly, banks under the control of the ISIS are being used for tax collection purposes for the ISIS, including the Raqqa Credit Bank which now apparently collects municipal taxes for the ISIS, circumventing the government.
Finally, ISIS also traffics antiquities from Syria to western collectors. Payments for antiquities sales all involve our banks and are a form of terrorist financing that is obviously prohibited. A western collector found in possession of such antiquities can expect a long jail term if ever detected for deliberately financing ISIS. No doubt these transactions are being looked at by governments (wires from western countries to Turkey; corresponding shipments from the Middle East to the payee).
While initially, the self-funding methods (such as the sale of young teenagers into slavery) may not go through our banking system, those funds end up in the hands of the ISIS elite, whose close advisors and family members are branching out to Turkey and Lebanon (perhaps other places as well) to set up businesses and buy houses, all with terrorist funds which require banking relationships.
This week, people in the Middle East Tweeted pictures of toddler ISIS soldiers dressed in their new winter combat gear. From a terrorist financing perspective, the pictures were noteworthy because the children were wearing factory-made ISIS-logo headdresses. However, factories in Syria were destroyed according to the Syrian Economic Forum. ISIS must be ordering combat gear with their logos emblazoned on them from foreign factories. Apart from the shocking fact that a foreign factory would accept the order, foreign banks had to have been used to pay for factory goods outside of Syria.
3. Payments from foreign countries
In Iraq, the advance force of ISIS, called the House of Islam, is dominated by foreigners, including several hundred Europeans, Australians, Canadians and Americans. They land in places like Turkey then cross over to Syria and join ISIS where they are put at the front lines to fight. They leave places like Germany, the UK, Canada and the US with debit cards, value added cards and credit cards linked to bank accounts in their home countries. Those cards are used when defectors arrive overseas. Their friends and families are then called upon to fund their activities by loading up bank accounts so that funds can be withdrawn in the Middle East. One preferred method of terrorist financing in the credit and charge card world is to over-pay, or pre-pay charge cards in one country so that there is a large credit balance on the account that can be used in another jurisdiction by a supplementary cardholder.
Financial institutions, money services businesses and other remittance services are unwittingly used to finance terrorism by facilitating payments and funds transfers for use in terrorist hot spots.
All financial institutions can know with the push of a computer button, the extent to which their customers are undertaking financial transactions in hot spots. Credit and debit card issuers also know in real time when their products are used and precisely where by virtue of the card magnetic strips that generate an electronic message to the issuer through the merchant’s POS machine or ATM machine.
Western wives of ISIS members have Tweeted about how the US has tried to harm ISIS financially and noted that there are still ATM machines all around from which they readily withdraw cash that comes from their home countries. Although it seems inconceivable, many western banks, including in Canada, support terrorism by providing financial services to defectors in Syria and Iraq through the ATM network. They likely haven’t thought about it in that way but it’s time that they did. I can’t see there being any less exposure for them arising from injuries sustained by victims of ISIS terrorist acts regardless of where situated in the world. A $1 ATM network fee paid to a western bank for processing a transaction in Syria for a western cardholder may end up being a $1 billion miscalculation if it later emerges that the withdrawal was made by a defector who became an ISIS member.
4. Payments in the west
In addition to funding terrorist attacks on critical infrastructure and to individuals, terrorist financing is used to support homegrown terrorist attacks in places like Canada, France, Germany, Australia and the US. Terrorist financing supports the violent aspects of terrorism but it also supports the non-violent activities such as paying for operations in western countries (e.g., travel, training, rent, social media activities, Internet access, cellular phones, phone plans and credit card expenses).
Terrorist financing in this area involves payments from the exterior to lone wolf-types persons or larger groups and it also involves internal payments or funding (domestic) whereby persons fund a lone wolf or another group’s activities in furtherance of terrorist activities that are domestic. The numbers are significantly lower than other types of terrorist financing but are just as significant because an attack to domestic critical infrastructure unfortunately requires much less in the way of an economic investment by terrorists. Domestic monitoring by financial institutions and money services businesses in the west is critical to detecting and preventing domestic terrorist financing.
Stopping ISIS financing
Insurance companies, financial institutions, and other financial payment methods that assist terrorist financing, even unwittingly, negatively impact the integrity of the global financial system and threaten international security.
Insurance companies, and banks risk reputational damage to their organization and may harm NGOs that provide humanitarian and other aid to hotspots for engaging in terrorist financing. Obviously, as well, they are exposed to litigation claims for terrorist financing, sanctions avoidance and regulatory action for doing so, both institutionally and for their directors and officers individually.
The government role is to provide greater and better education on terrorist financing to financial institutions and the population generally. Its role also should involve greater regulatory scrutiny over financial institutions, money services businesses and online payment processors for compliance with terrorist financing laws.
In order to protect the financial system from being used for the financing of terrorism and minimize the risks to international security, there are six key areas with which banks should be careful in addition to those that arise from the foregoing:
- Funds involving the use of conduit countries to fund terrorism such as Turkey, Lebanon, Jordan and UAE and sanctioned areas.
- Use of the banking system by ISIS, its agents, terrorist oil purchasers and others to move funds to and from terrorist organizations and in many cases to tax havens through wealth management companies using beneficial ownership structures.
- Co-mingling funds such as sending multiple wires in a bundle to hide the actual sender or recipient of the funds.
- Sending funds to known hotspots using remittance services and banks, between individuals in home jurisdictions and the hot spots, mostly from western states to conduit countries.
- Online payment systems and stored value cards, particularly in conjunction with social media wherein, according to media reports, ISIS allegedly uses Twitter and WhatsApp to solicit requests for payments allegedly by PayPal and other online payment methods. Banks providing services to online payment service companies should be exceedingly cautious in respect of unwittingly facilitating (by transferring and providing banking services) payments to ISIS.
- According to AUSTRAC, digital payment systems which are new, such as digital (or virtual) currencies like Bitcoin, pose an emerging risk of terrorist financing which may increase as they grow in popularity, particularly given that they are by design, anonymous and it is not possible to know, in every case, who the transactor is behind transfers of digital payments.
Domestic red flags
Canada is more at risk of terrorist attacks in my estimation for two reasons: (a) we have a greater proportionate share of homegrown terrorists than some western nations; and (b) although I don’t believe it is entirely accurate, we are noted for having relaxed financial crime controls (a key component of which is counter-terrorist financing expertise and implementation).Terrorist financing involves raising funds, transferring them and then using the funds. Different private enterprise participants have different roles to play in each of those aspects. The difficulty in this area is drawing a link between the activities and terrorist financing.
Some indicators that may raise a red flag domestically for financial institutions in the west include:
- Wiring funds to high risk jurisdictions in close geographical proximity to ISIS (conduit countries such as Turkey, Lebanon);
- Use of debit cards in high risk jurisdictions, particularly in cases where the client is in the west but the card is being used in the Middle East;
- Multiple beneficiaries in a wire being sent from one sender to the Middle East;
- Multiple low-value transfers domestically and internally without any reason or obvious connection;
- Sudden activity in an account that is inconsistent with customer profile; and
- Multiple parties using the same telephone number or address to conduct wire transfers.
If we want to stop terrorist financing, we have to make a greater effort to require that financial institutions of all types, including money services businesses, quit providing banking services to terrorist organizations and their sympathizers wherever they may be in the world, including in the west.
It will require building the public-private partnerships necessary to do that and investing in counter-terrorist financing compliance regimes that are actually effective. Financial institutions that do not do so are imperiling themselves on the basis of the Arab bank case. It is not the time in the history of financial services to take shortcuts in the quality and effectiveness of counter-terrorism efforts. Apparent dollars saved in compliance will be paid ten times over in liability costs for terrorist-related compliance failures.
 There are a multitude of examples but see: (a) “Follow The Money: Is Canada Making Progress in Combatting Money Laundering And Terrorist Financing? Not Really”, a Report of the Senate of Canada, March 2013. See: (b) 2014 “International Narcotics Control Strategy Report” in which Canada is listed as a major money laundering country, March 2014. See: (c) “Canada’s Diamond Trade being used for Money Laundering and Terrorist Financing, Report Finds” here in which the FATF reported that jewelry businesses are engaged in terrorist financing in Canada. See: (d) “FATCA Regime may have Unintended Consequences”, South China Morning Post, August 4, 2014 (at the end on how routine it is to transport hundreds of millions of dollars into Vancouver unimpeded in suitcases).
 In the Arab Bank case, a global bank was found liable potentially in the hundreds of billions of dollars for the deaths and injuries sustained by victims of terrorist acts for providing banking services to persons associated with terrorist organizations who were unlisted at the material time.