Storming The Fortress Of Hidden Terrorist Funds

It's not hard for criminals to hide illegitimate money in legitimate banks. Terrorists can raise funds by setting up legal businesses, collecting donations through charitable fronts or (as is suspected of the Qaeda network) trafficking in heroin culled from Afghan poppy fields. According to the Paris-based Financial Action Task Force on Money Laundering (FATF), whose work is sponsored by the Organization for Economic Cooperation and Development, a terrorist will typically begin by depositing these funds in small amounts in various local banks. Then, says Willy Bruggeman, deputy director of the Pan-European police agency Europol, "they'll look for a weak link in the [global] financial system."

The weakest links are well known. According to the FATF, there are 19 particularly vulnerable states, including Russia, Hungary, the Philippines, Indonesia, Burma, Egypt, Guatemala and tiny nations like Nauru. Financial regulation in these countries is lax at best. So terrorists can hide their tracks by moving money into these areas and switching it around as many as 200 times in a tactic called "layering." The trail is further obscured by the use of false fronts, including charities, foundations, shell corporations and trusts. "There are huge problems with this, particularly in offshore financial centers," says Patrick Moulette, executive secretary of the FATF. In fact, the U.S. most-wanted list includes three charities and one corporation.

By the time terrorist money makes its way into a major financial center like London or New York, it may look pretty clean. Nearly all Western financial institutions, even highly secret Swiss banks, have strict "know your customer" rules. But terrorists and other criminals with detailed knowledge of global financial markets have proved they can beat the system. The notoriously corrupt late Nigerian dictator Sani Abacha simply asked his son (who has a different name) to open an account for him at Credit Suisse. And banking secrecy hinders police use of the strategy that brought down Al Capone--prosecuting major criminals on relatively minor financial charges like tax evasion. Because tax evasion isn't a crime in banking havens like Switzerland and Luxembourg, police can't force bankers there to share financial in-formation about individuals by bringing such a charge. That limits their ability to "fish" for more information about more serious crimes.

The sheer volume and complexity of global financial transactions can also shelter terrorists. Jermyn Brooks, the executive director of Transparency International, an anticorruption nonprofit organization headquartered in Berlin, has worked with major banks like Citibank, Chase, Morgan Stanley, Credit Suisse, UBS Warburg, Barclays, HSBC, Societe Generale and ABN AMRO on how to spot dubious transactions. "They are very concerned," he says. "They recognize that given the volume and complexity of their business, it's quite possible that mistakes can be made." In the year 2000, for example, more than 6 billion financial transactions were made in Britain. But only 18,048 reports of "suspicious transactions" were made to authorities (62 percent came from banks). Out of 575 registered banks, only 170 institutions made any reports. That means less than 30 percent of banks reported any suspicious transactions. It's likely that banks that don't report may soon be hit with penalties.

Around the world, legislators are trying to make sure that law enforcement has the tools to uncover terrorist funds. In the United States, new anti-money-laundering proposals are making their way through Congress. Germany's brand-new Financial Intelligence Unit may end up relaxing bank-secrecy laws. In Britain, new legislation will ease law-enforcement access to financial information. British Chancellor of the Exchequer Gordon Brown has pointed a finger at the Swiss for not opening their books fast enough, and would like to see tax reform in places as close to home as the Isle of Man and the Channel Islands. Work on a new EU money-laundering directive is likely to expand the rules beyond drug trafficking to encompass organized crime, fraud and all terror-related crimes. The new law will cover not only banks but also real-estate agents, lawyers, casino owners, jewelers and anyone else who might have financial dealings with criminals. As money becomes a weapon against terror, Europe is joining the war.

Stefan Theil in Hamburg, Friso Endt in The Hague and Alison Langley in Bern

© 2001