The Link Between Money Laundering & Terrorist Financing

Money Laundering and Terrorist Financing: The Relationship

In today’s globalized world, it is important to understand how the two spheres of money laundering and terrorist financing are interconnected. Both are unlawful activities where ze of said activities compromises the soundness of any country’s financial markets as well as security for the world as a whole. For Banks, law enforcement agencies, and policy makers, understanding this relationship is crucial for dealing with organized crime and terrorism. This article along with other literature assists in comprehensively looking at money laundering, terrorist financing, the roles they play, and regulations that seek to stem these vices.

Money Laundering: Brief Overview

In layman’s terms, the process of laundering is not only aimed at strangling illegal acquired wealth, cash, but also concealing money interceptions. It helps criminal's to enjoy the proceeds of crime without arousing any red flags. Generally, this process has three phases:

·       Placement: Putting in “dirty” money such as depositing in bank accounts.

·       Layering: Transferring money through a series of accounts, transactions, and jurisdictions to eliminate any money trails.

·       Integration: The final phase where the made clean money is reintroduced into the economy and is allege legitimate and can take the form of investments or buying things.

Money laundering is greatly utilized by criminal organizations worldwide such as drug/cartels and frauds thus allowing them to keep practicing illegal acts without fear of being prosecuted.

Terrorist Financing: Understanding the Concept

In its most basic sense, terrorist financing is the practice of collecting various forms of violence-related terrorist activities, be it execution or planning, through the provision of funds. The major difference between these two views is that rather than concentrating on hiding the source or creation of the capital like money laundering does, terrorism financing is even initiated through several means legal or illegal. Such funds have a multitude of purposes including:

·       For the purchase of weapons as well as explosives

·       For hiring as well as training of personnel

·       For doing logistics as well as dealing with communications

·       For encouraging propaganda as well as radicalization

While the core goal of money laundering is to ‘sanitize’ illegitimate funds, terrorism financing aims on raising as well as transferring funds in order for terrorist activities to occur.

The Connection: The Role of Money Laundering In The Execution of Terrorism

The connection between money laundering and terrorism is one that is simple yet complicated. Because it allows for the concealment of financial events, laundering terrorist funds allows, for the use or movement of the money without the fear of it being noticed. Here’s how these activities overlap:

1. Hiding the Source

Terror funding organizations utilize the practice of money laundering so as to hide their funding sources. As these processes are so complicated and involved so many financial websites so in the end the funding could never be pinpointed. These organizations have specialized techniques for these things such as layering which is more progressive than others in conjunction with illegal income economies or simply receiving donations that are most definitely illegal.

Illustration: A terrorist organization might utilize the earnings from the unlawful arms trade, through some shell companies which do not exist, and present it to be a revenue from a legitimate enterprise.

2. Converting Non Compliant Money into Compliant

Though the sponsors of these terrorist organizations are spread all over the world, support is solicited from the organizations’ domestic supporters too. It is possible to use methods of money laundering for these contributions and then represent them as donations, business expenses or humanitarian support.

Illustration: A fake charitable organization would raise funds from innocent people and use the money to peruse terrorism, but the use of money laundering techniques would make the transactions look legal.

3. Enabling Cross Border Payments

Terrorism is not confined to a single location but is spread over the world and this calls for moving funds from one nation to another. There are a variety of ways to apply for payment through money laundering techniques that aid to overcome the negative stigma attached to transferring money internationally.

Illustration: For example a funds launderer could send operatives in various countries money through complex global subsidaries, offshore and virtual currency accounts.

4. Targeting Weak Governance Structure

Both money launderers as well as the financers of terrorism target the areas that have the poor monitoring structure. When there is weak enforcement, little supervision and high level of corruption in such areas, they are more prone to money laundering.

Illustration: Due to the lack of developed financial markets, the countries might unintentionally allow funding terrorists operations through the money laundering schemes without raising any red flags.

5. Сombinations of Crime Syndicates

It’s not uncommon for the criminal syndicate given to money laundering to have links with terrorist organizations as well who would help provide some financing or logistical help. This combination makes it impossible to tell organized economic crime and terrorism apart.

Example: A terrorist organization might entrust a drug cartel with the laundering of its funds in return for rendering it protection or when they have other arrangements in place that are mutually beneficial.

Regulatory and Law Enforcement Responses

The international community has indicated having adequate responses designed to simultaneously deal with the problems of money laundering and terrorist financing. Main regulatory principles and actions seek to improve financial integrity, monitor and mitigate the illegal conducts and make the offenders to face the law.

1. Anti-Money Laundering (AML) Policies

The anti-money laundering policies require the financial institutions to take a more proactive approach in detecting and averting any financial wrongdoings. These include:

·       Customer Due Diligence (CDD): Detecting and determining the risks posed by clients through know your customers’ rule.

·       Transaction Monitoring: Reporting clients that seem to be acting in an abnormal way during transactions.

·       Suspicious Activity Reporting: Reporting unusual transactions and client behavior to the proper services.

AML frameworks help to combat the organized financial crime and terrorism funding.

2. KYC Procedures Approaches

KYC processes are necessary in order to verify a clients identity and his/her background, hence it becomes difficult if not impossible for criminals to infiltrate the financial systems.

Key Components of KYC:

·       The customer in question

·       The Level of Risk

·       An assessment of changing scenarios for the parties involved during transactions

3. Information Secrecy

Detecting suspicious activities and combatting them requires financial institutions and regulatory and law enforcement officials to collude. Increased information sharing capabilities lead to:

·       Precautionary measures taken before evidence of money laundering or terrorist financing comes to light.

·       Multinational efforts to counter suspected attempts of wrongdoing.

4. Relations Across Borders

There is a distinct need for relations between different countries in order to tackle the issue of international financial crime. Among private sector and government efforts to combat money laundering and terrorist financing is the work done by the Financial Action Task Force (FATF), whose purpose is to set international standards. Recommendations by the FATF assist:

·       Foster Stars for Anti-Money Laundering and Counter Terrorist Financing around the world

·       Support the fight against crime and exchange of information.

·       Impose and supervise measures against the countries that do not comply.

The links between money laundering and the financing of terrorism are complex and serious problems for the functioning of economies and the security of the world. Terrorist financing can elicit all forms of money laundering activities; therefore too much activity can tell governments, banks, and global organizations that something is wrong.

In order to combat these interlinked threats, authorities can put in place strong measures such as regulatory frameworks like AML and KYC, increasing information sharing mechanisms, and enhancing international cooperation. A joint effort to enhance transparency and watchfulness is important in order to cut off the financial resources that promote criminal and terrorist activities.

This understanding, and addressing this issue, does not only protect financial institutions, but reinforces the efforts of the global community aimed at achieving security and stability. It is a compliance requirement, but above all, it is an important step towards combating money laundering and terrorist financing.