15 Years of Anti-Terrorist Financing: Why One Size Does Not Fit All

Written by:
Jochen Best, Assessor juris, CAMS-Audit
I. Abstract/Executive Summary

Almost 15 years after the terrorist attacks on September 11, 2001, and the implementation of countless
United Nations Resolutions, international standards from government and private organizations as well
as national legislation anti-money laundering/anti-terrorist financing (AML/ATF) compliance professionals
around the globe still struggle with successfully mitigating the risks posed to their financial institution or
financial services providers. Screening watch and sanctions lists and freeze assets as a consequence was
and probably never will be the silver bullet in the fight against sophisticated terrorist groups like the
Iranian Qods Force or the Islamic State of Iraq and Syria (ISIS), since they are still very much in business
despite the Financial Action Task Forces (FATF) assessment in its 2008 report that state-sponsored
terrorism is in the decline.1 In its most recent report, the FATF even confirmed the authors view that the
most common countermeasures are not suitable to undermine ISIS funding.2

In order to strengthen an AML/ATF compliance regime, the author advocates to categorize terrorist
groups into three distinct groups: (i) state sponsored, (ii) traditional and (iii) self-sufficient, since terrorist
groups are not created equal and not all rely on Zakat as their primary source of funding. This
categorization would open the opportunity to conduct a comprehensive risk assessment, which would
subsequently lead to the development and implementation of suitable countermeasures for each specific
category.

II. Brief History of Anti-Terrorist Financing Legislation, Recommendations and Standards

a. UNSC Resolution 1373

The United Nations Security Council (UNSC) adopted UNSC Resolution 13733 (UNSCR 1373) unanimously
17 days after the terrorist attacks on September 11, 2001. Although the legal status of UNSCR 1373 was
heavily debated among legal scholars4 all around the world it is now common understanding that UNSCR
1373 is legally binding for all United Nations member states since September 28, 2001,5 because it was
adopted under Chapter VII of the United Nations Charter. Although UNSCR 1373 does not include a
definition of the term terrorism, the Resolution prescribes in Sec. 1(a) to (d) ATF measures such as
preventing and suppressing the financing of terrorist acts, criminalizing the willful provision or collection
of funds with the intention or the knowledge that they will be used to carry out terrorist acts, the freezing
of funds or other financial assets of individuals and entities who commit or attempt to commit terrorist
acts and the prohibition to make funds or other economic resources available to individuals who commit

1
Financial Action Task Force, Terrorist Financing, February 29, 2008, page 15, http://www.fatf-
gafi.org/media/fatf/documents/reports/FATF%20Terrorist%20Financing%20Typologies%20Report.pdf
2
Financial Action Task Force, Financing the Terrorist Organization Islamic State in Iraq and the Levant, February 27,
2015, page 40, http://www.fatf-gafi.org/media/fatf/documents/reports/Financing-of-the-terrorist-organisation-
ISIL.pdf
3
Refer to following link for UNSC 1373,
http://www.un.org/en/sc/ctc/specialmeetings/2012/docs/United%20Nations%20Security%20Council%20Resoluti
on%201373%20%282001%29.pdf
4
Refer to: Mirko Sosai, UN SC Res. 1373 (2001) and International Law-making: A Transformation in the Nature of
the Legal Obligations for the Fight against Terrorism?, http://www.esil-sedi.eu/sites/default/files/Sossai_0.PDF
5
Refer to: Andrea Bianchi, Assessing the Effectiveness of the UN Security Councils Anti-terrorism Measures: The
Quest for Legitimacy and Cohesion, http://ejil.oxfordjournals.org/content/17/5/881.full#fn-12

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or attempt to commit terrorist acts. The vast majority of United Nation member states implemented
national legislation in order to comply with UNSCR 1373.6

b. Uniting and Strengthening America by Proving Appropriate Tools Required to Intercept and Obstruct
Terrorism Act (USA Patriot Act)

On October 26, 2001, President George W. Bush signed the USA Patriot Act into law. The USA Patriot Act
was one of the measures the U.S. took in order to comply with UNSCR 1373. In its mandatory report7 in
accordance with Sec. 3.6 of UNSCR 1373 dated December 19, 2001, to the UNSC, the U.S. pointed out that
additional measures were taken under Executive Order 13224 like the listing of terrorist organizations on
September 23, October 5 and 12, November 2 and 7, and December 5, 2001. The USA Patriot Act, which
originally included 10 titles, amended and changed a broad array of existing U.S. laws. The most important
one (from an ATF perspective) was Title 3: International Money Laundering Abatement and Financial Anti-
Terrorist Act of 2001. The Titles three sections primarily amended portions of the Money Laundering
Control Act of 1986 and the Bank Secrecy Act (BSA) of 1970.

c. Canadian Anti-Terrorism Act (ATA)

In order to comply with UNSCR 1373 the Canadian government introduced omnibus Bill C-36, "An Act to
amend the Criminal Code, the Official Secrets Act, the Canada Evidence Act, the Proceeds of Crime (Money
Laundering) Act and other Acts, and to enact measures respecting the registration of charities in order to
combat terrorism," as pointed out in Canadas Report to the UN Counterterrorism Committee on
December 12, 2001. 8 The ATA came into force on December 18, 2001 by receiving Royal Assent.

d. FATF Special Recommendations on Terrorist Financing

FATF amended its mandate to include terrorist financing during an extraordinary session held in
Washington, D.C., on October 29-30, 2001. 9 As result of the extraordinary session, FATF published its 8
Special Recommendations on Terrorist Financing, which set a new international standard for combating
terrorist financing. On October 22, 2004, FATF10 amended its Special Recommendations on Terrorist
Financing.

6
Refer to: Counter-Terrorism Committee Global Survey Of The Implementation Of Security Council Resolution
1373 (2001) By Member States, http://www.un.org/en/sc/ctc/docs/2011-globalsurvey1373.pdf?m=S/2011/463
7
U.S. Report to the UN Counterterrorism Committee (a subcommittee of the UNSC),
http://www.state.gov/p/io/rls/rpt/2001/6917.htm and Overview Of Country Reports by the UN Counterterrorism
Committee, http://www.un.org/en/sc/ctc/resources/1373.html
8
Refer to: http://daccess-dds-ny.un.org/doc/UNDOC/GEN/N01/704/97/PDF/N0170497.pdf?OpenElement
9
Financial Action Task Force On Money Laundering, Annual Report 2001/2002, June 21, 2002, page 5,
http://www.fatf-gafi.org/media/fatf/documents/reports/2001%202002%20ENG.pdf
10
Financial Action Task Force, Annual Report 2004/2005, June 10, 2005, page 8, http://www.fatf-
gafi.org/media/fatf/documents/reports/2004%202005%20ENG.pdf

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e. Wolfsberg Group Statements on the Suppression of the Financing of Terrorism

The Wolfsberg Group is an association of 11 private banks.11 The Wolfsberg Group Statement on the
Financing of Terrorism was published in January 2002.12 In contrast to UNSCR 1373, national legislation
and the FATF Special Recommendations, the Wolfsberg Group Statement was the first standard setting of
a group of private bankers, whereas this had previously been the preserve of lawmakers and regulators.

f. International Convention for the Suppression of the Financing of Terrorism

On December 9, 1999, the General Assembly of the United Nations adopted an international convention
designed to cut off funding for terrorist activities called International Convention for the Suppression of
the Financing of Terrorism. The convention came into force on April 10, 2002 and has been ratified by
186 United Nations Member States,13 but not by Burundi, Chad, Eritrea, Gambia, Iran, Lebanon, Somalia,
South Sudan, Tuvalu and Zambia.

III. Terrorist Financing: Definition, Methodologies and Countermeasures

a. Definition of Terrorism and Terrorist Financing in Accordance with Relevant Legislation and Standards
mentioned under II

i. UN Resolutions

Although UNSCR 1373 is widely seen as legally binding to UN Member States to implement measures
against terrorism and terrorist financing, it does not contain a definition of terrorism nor of terrorist
financing. This oversight led to a consequence that left UN Member States to determine whether violent
acts, such as the 9/11 attacks, constitute an act of terrorism. Therefore, UN Member states were allowed
to develop their own definitions of terrorism, which may be ambiguous and contradictory. This changed
with the adoption of UNSC Resolution 1566 (UNSCR 1566) on October 8, 2004. UNSCR 1566 defines
terrorism as:

Criminal acts, including against civilians, committed with the intent to cause death or serious bodily
injury, or taking hostages, with the purpose to provoke a state of terror in the general public or in a group
of persons or particular persons, intimidate a population or compel a government or an international
organisation to do or to abstain from doing any act, which constitute offences within the scope of and as
defined in the international conventions and protocols relating to terrorism.

The problem with this definition is that it is, in contrast to UNSCR 1373, not legally binding on UN Member
States with the consequence that UN Member States do not have to comply with the definition in
determining their own policy with respect to the prosecution of terror suspects. As a result, UN Member
States still have the capacity to create their own unilateral definitions of terrorism.

11
Refer to Groups website at http://www.wolfsberg-principles.com/ for membership information.
12
Wolfsberg Group Statement on the Suppression on the Financing of Terrorism, 2002, http://www.wolfsberg-
principles.com/pdf/standards/Wolfsberg_Statement_on_the_Suppression_of_the_Financing_of_Terrorism_%282
002%29.pdf
13
Refer to overview provided by the United Nations about ratification status,
https://treaties.un.org/Pages/ViewDetails.aspx?src=TREATY&mtdsg_no=XVIII-11&chapter=18&lang=en

3|P a ge
The United Nations, however, were able to define what constitutes terrorist financing. Article two of the
International Convention for the Suppression of the Financing of Terrorism defines terrorist financing as:

1. Any person commits an offence within the meaning of this Convention if that person by any
means, directly or indirectly, unlawfully and wilfully, provides or collects funds with the intention
that they should be used or in the knowledge that they are to be used, in full or in part, in order
to carry out:

a. An act which constitutes an offence within the scope of and as defined in one of the
treaties listed in the annex; or
b. Any other act intended to cause death or serious bodily injury to a civilian, or to any other
person not taking an active part in the hostilities in a situation of armed conflict, when
the purpose of such act, by its nature or context, is to intimidate a population, or to
compel a government or an international organization to do or to abstain from doing any
act.
c. For an act to constitute an offence set forth in paragraph 1, it shall not be necessary that
the funds were actually used to carry out an offence referred to in paragraph 1,
subparagraphs (a) or (b).

ii. U.S. Law

The USA Patriot Act did not include a definition of terrorist financing nor did it make U.S. AML legislation
specifically applicable to terrorist financing offenses.14 The Suppression of the Financing of Terrorism
Convention Implementation Act of 2002 (with which the U.S. implemented the UN Convention of 2002)
codified in 18 U.S.C. 2339C a definition of terrorist financing. This section makes it a crime to unlawfully
and willfully provide or collect funds with the intention or knowledge that the funds are to be used to: (i)
commit an offense under a specified anti-terrorism treaty, or (ii) carry out any act intended to cause death
or serious injury to a civilian, or to any other person not taking an active part in the hostilities in a situation
of armed conflict, when the purpose of such an act, by its nature or context, is to intimidate a population,
or to compel a government or an international organization to do or abstain from doing any act. 18 U.S.C.
2339C was further amended in 2004 by the Intelligence Reform and Terrorism Prevention Act.

iii. Canadian Law

The ATA amended the Canadian Criminal Code by adding Sections 83.02, 83.03 and 83.04.15 A definition
of terrorist financing was also introduced into the Proceeds of Crime (Money Laundering) and Terrorist
Financing Act (PCMLTFA), which was amended by the ATA. The PCMLTFA defines terrorist activity
financing as: an offence under section 83.02, 83.03 or 83.04 of the Criminal Code or an offence under
section 83.12 of the Criminal Code arising out of a contravention of section 83.08 of that Act.

14
Jennifer Wispinski, The USA Patriot Act and Canadas Ant-Terrorism Act: Key Differences in Legislative Approach,
March 31, 2006, http://www.parl.gc.ca/content/lop/researchpublications/prb0583-e.htm#newcrimes
15
Refer to: Justice Laws, Anti-Terrorism Act, http://laws-
lois.justice.gc.ca/eng/annualstatutes/2001_41/FullText.html

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b. Common Methodologies

It is often mentioned in connection with terrorist attacks how cheap it is to commit them. The Oklahoma
City bombing cost around $4,000, the attack on the USS Cole was approximately $10,000 and the London
subway bombings roughly $14,000.16 This led to the common belief that terrorists use techniques similar
to those of money launderers with the difference that terrorist financing related financial transactions
tend to be in smaller amounts.17 However, this all too simplistic view does not distinguish between raising
and transferring funds for an individual event or a series of events and the funds necessary to maintain
the necessary infrastructure to maintain a capable terrorist network.

i. Funding from legitimate sources

It is a widely accepted fact that terrorist organizations receive considerable funds through charities. The
fact that charities often enjoy the public trust, their activities are cash-intensive (fund raising), often have
an international or global presence and often a less restrictive regulatory environmentin particular, if
compared to financial institutions, it makes them a suitable vehicle to raise and transfer funds for terrorist
activity.

Terrorists also self-fund their activities through employment or business income, savings or welfare
payments. This phenomenon is known as black-washing where funds originating from legal activities are
diverted for the purposes of radicalization, recruitment or terrorist activity.

Another form of legitimate funding typical for Islamic charities is Zakat. Zakat is the fifth pillar of Islam and
is basically the mandatory taxation of income and wealth of a Muslim.

ii. Funding from criminal activity

Terrorist organizations, in particular Islamic terrorist organizations, are often involved in the drug trade.
According to a report from the Special Inspector General for Afghanistan Reconstruction (SIGAR) despite
spending approximately $7 billion to combat poppy cultivation in Afghanistan, poppy cultivation levels hit
an all-time high in 2013 and is expected to further grow in 2014. It is estimated that the value of the opium
and its derivative products produced in Afghanistan alone is approximately $3 billion in 2013.18

However, funding from criminal activity is not limited to the drug trade. Terrorist organizations also
engage in extortion (in particular within diaspora communities), cheque and credit fraud as well as
cigarette smuggling.19

16
Federal Bureau of Investigation, Terror Financing: Following the Money Trails, July 5, 2013,
http://www.fbi.gov/news/stories/2013/july/terror-financing-tracking-the-money-trails/terror-financing-tracking-
the-money-trails
17
Financial Transactions and Reports Analysis Centre of Canada (FINTRAC), What is terrorist financing,
http://www.fintrac-canafe.gc.ca/fintrac-canafe/definitions/terrorist-terroriste-eng.asp;
FATF, Terrorist Financing, February 29, 2008, page 4, http://www.fatf-
gafi.org/media/fatf/documents/reports/FATF%20Terrorist%20Financing%20Typologies%20Report.pdf
18
Special Inspector General for Afghanistan Reconstructions (SIGAR), SIGAR-15-10-SP Special Report: Poppy
Cultivation in Afghanistan, 2012 and 2013 http://www.sigar.mil/pdf/Special%20Projects/SIGAR-15-10-SP.pdf
19
See Footnote 15: FATF 2008 Report

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Although terrorists use various methods to move funds (e.g., alternative remittance systems like hawala
and hindi), the FATF came to the conclusion that wire transfers are the primary technique due to the
significant amount of money that can be moved in a rather short period of time.20 Terrorists avoid
detection by employing false names, shell corporations, conduits as well as complex structured legal
entities.

c. Countermeasures

UNSCR 1373 as well as the FATFs 8 (and later 9) Special Recommendations on Terrorist Financing required
UN Member States to implement countermeasures to prevent the exploitation of the worldwide financial
system for their illegal purposes. In order to meet its international obligations under the aforementioned
standards, the Canadian government expended the scope of the Proceeds of Crime (Money Laundering)
Act as well as the mandate of the Financial Transactions and Reports Analysis Centre (FINTRAC). The
PCMLTFA and PCMLTFR widened the requirements to ascertain the identities of individuals, entities and
beneficial owners, implemented the requirement to file terrorist property reports (TPRs) and share them
with the Royal Canadian Mounted Police (RCMP) and the Canadian Security Intelligence Service (CSIS),
keep prescribed know your customer (KYC) information up-to-date and monitor on an ongoing basis all
transactions and account activities.

Title III of the USA Patriot Act, also referred to as the International Money Laundering Abatement and
Anti-Terrorist Financing Act, implemented similar measures in the U.S. In addition, both Canada and the
U.S. strengthened their national ATF regimes by listing individuals and entities who are either terrorists,
supporters, conduits or shell companies on official watch and/or sanctions lists and require financial
institutions under the national ATF regime to scan all client and transaction data against those lists.

IV. Anti-Terrorist Financing: Why One Size Does Not Fit All

Although a lot of measures have been implemented on various levels as shown above to prevent terrorist
financing, terrorist groups around the world seem to be more active than ever and with it comes a need
to finance their criminal activities. This fact shows that the implemented countermeasures are not
effective enough to prevent terrorist financing. The G20 finance ministers acknowledged this during their
recent annual meeting held in Istanbul February 8-10, 2015, and voiced to further strengthen anti-terrorist
measures in the official communique21 of the summit. Canadian Finance Minister Joe Oliver asked the
Canadian House of Commons in a recent letter to launch an investigation into terrorist financing since
more can be done to prevent it.22

The measures that have been implemented since September 11, 2001, do not sufficiently acknowledge
the fact that terrorist groups are very inhomogeneous with respect to structure, objectives and financing.
The author advocates to distinguish terrorist groups into three categories: (a) state sponsored, (b)

20
FATF, Global Money Laundering and Terrorist Financing Threat Assessment, July 2010, http://www.fatf-
gafi.org/media/fatf/documents/reports/Global%20Threat%20assessment.pdf
21
G20 Finance Ministers and Central Bank Governors Summit Communique,
http://www.g20.utoronto.ca/2015/150210-finance.html
22
Canadian Finance Minister Joe Oliver on Terrorist Financing, http://www.g20.utoronto.ca/2015/150210-
finance.html

6|P a ge
traditional and (c) self-sufficient, and develop/implement counter measures that are specific and
therefore more effective to terrorist financing.

a. State-Sponsored Terrorist Group

The Islamic Revolutionary Guard Corps' Qods Force (Qods Force) falls within the category of a state-
sponsored terrorist group. Canada 23 listed the group under the measures implemented under the ATA on
December 17, 2012. The U.S. Departments of the Treasury listed the Qods Force on October 25, 2007, in
accordance with Executive Order 13224. 24 The Qods Force is the clandestine branch of the Islamic
Revolutionary Guards Corp (IRGC), which is pursuant to Article 150 of the Islamic Republic of Irans
constitution defined as "guardian of the Revolution and of its achievements." Its official mandate qualifies
the Qods Force as a state-sponsored terrorist group.

According to a Western intelligence report recently obtained by Reuters,25 the Central Bank of Iran (CBI)
holds accounts with the Bank of Kunlun Co Ltd, a China National Petroleum Corp unit. The report further
points out that the transactions are initiated by the Qods Force and that the funds are distributed directly
to Chinese entities controlled by the Qods Force shortly after they were transferred into the Bank of
Kunlun Co Ltd. account. The report concludes that the transactions are conducted with the sole purpose
that the Qods Force can meet its financial needs.

Since 2005, Iran built an impressive footprint in Latin America, in particular in Venezuela. It is estimated
that the investments in the amount of approximately $20 billion was made.26 One of the investments
made in Venezuela was the creation of the Iranian Venezuelan Bi-National Bank, a joint venture between
Iranian Export and Development Bank (EDBI) and Venezuelan Banco Industrial de Venezuela.27.The EDBI
used the Iranian Venezuelan Bi-National Bank as a front to transfer funds held with Bank of Kunlun Co Ltd.
from China to Venezuela.28 It widely anticipated that funds, which can be traced back to the Qods Force,
are used to fund its activities in South America and Venezuela in particular since one of the Forces
objectives is to create and maintain sources of revenue.29

On the African continent, the Qods Force, either directly or indirectly through Hezbollah, is engaged in
very lucrative trade-based terrorist financing operations, (e.g., the used car business). Qods Force and/or
Hezbollah operatives purchase used cars primarily in the U.S. and Europe and ship these vehicles to
countries like Benin and Togo where they are sold for U.S. dollars. The revenue will ultimately be

23
http://www.publicsafety.gc.ca/cnt/ntnl-scrt/cntr-trrrsm/lstd-ntts/crrnt-lstd-ntts-eng.aspx#2031
24
http://www.treasury.gov/press-center/press-releases/Pages/hp644.aspx
25
Louis Charbonneau, Jonathan Saul, James Pomfret: Iran uses China bank to transfer funds to Qods-linked
companies, http://www.reuters.com/article/2014/11/19/us-iran-sanctions-china-exclusive-
idUSKCN0J20CE20141119

26
Norman A Bailey, Irans Venezuelan Gateway, February 2012
27
Norman A Bailey, l.c.
28
U.S. Department of the Treasury, Press Release, May 9, 2013, http://www.treasury.gov/press-center/press-
releases/Pages/jl1933.aspx
29
Scott Modell, David Asher, Pushback Countering the Iranian Action Network, September 2013,
http://www.cnas.org/files/documents/publications/CNAS_Pushback_ModellAsher_0.pdf

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deposited into accounts held indirectly by the Qods Force or Hezbollah with financial institutions in
Lebanon.30

The Qods Force is notable for its use of legitimate-looking, profit-seeking entities as part of its covert
penetration and influence strategy globally. The Qods Force typically uses real companies to front for its
operations, rather than shell companies, and uses them to generate income for its operations as well as
provide a licit means of accessing the international system for its operatives.31

b. Traditional Terrorist Group

The al-Nusra Front (aka Jabhat al-Nusra oral-Nusra) falls within the category of a traditional terrorist
group. Canada32 listed the group under the measures implemented under the ATA on November 7, 2013.
The U.S. listed the group on December 11, 2014, in accordance with Executive Order 13224. 33 Al-Nusra is
an offshoot of the terrorist group al-Qaeda in Iraq (AQI). The close relationship between al-Nusra and AQI
ended when AQI proclaimed that the two groups had merged in order to form the Islamic State in Iraq
and al-Sham. Al-Nusras leader Abu Mohammad al-Julani pledged this allegiance to al-Queda and its
leader Ayman al-Zawahiri in 2013.34

Al-Nusra is a traditional terrorist group since it depends heavily on financing provided by individuals who
raise funds through social media and the auspices of charity.35 Significant funding comes from rich
individuals in the Persian Gulf region, in particular from Kuwait and Qatar. 36 A rich tradition of charity
work is present in Kuwait and is commonly seen as a major hub to send charitable donations to al-Nusra.37
Qatar is an even bigger source of donations for al-Nusra.38 Qatari national Abd al-Rahman bin Umayr al-
Nuaymi transferred approximately $600,000 to al-Nusra in 2013. 39

Fundraising activity for the benefit of al-Nusra is, however, not limited to Kuwait and Qatar. In September
the U.S. charged naturalized U.S. citizen Gufran Ahmed Kauser Mohammed with conspiring to provide,
and attempting to provide, material support to al-Nusra.40 In February 2016 the U.S. charged six

30
Scott Modell, David Asher, l.c.
31
Scott Modell, David Asher, l.c.
32
http://www.publicsafety.gc.ca/cnt/ntnl-scrt/cntr-trrrsm/lstd-ntts/crrnt-lstd-ntts-eng.aspx#2031
33
http://www.state.gov/r/pa/prs/ps/2012/12/201759.htm
34
Stanford University, Mapping Militant Organizations, http://web.stanford.edu/group/mappingmilitants/cgi-
bin/groups/view/493
35
US Treasury, Press Release, August 6, 2014
36
Lori Plotkin Boghardt, The Terrorist Funding Disconnect with Qatar and Kuwait, May 2, 2014,
http://www.washingtoninstitute.org/policy-analysis/view/the-terrorist-funding-disconnect-with-qatar-and-kuwait
37
Elizabeth Dickenson, The Crisis in Syria hits home, October 2, 2014,
http://www.ecfr.eu/article/commentary_kuwait_the_crisis_in_syria_comes_home323
38
David Andrew Weinberg, Qatar and Terror Finance, December 2014,
http://defenddemocracy.org/content/uploads/publications/Qatar_Part_I.pdf
39
Andrew Gilligan, The Club Med for terrorist, September 27, 2014,
http://www.telegraph.co.uk/news/worldnews/middleeast/qatar/11125897/The-Club-Med-for-terrorists.html
40
FBI, Press Release, August 8, 2013, http://www.fbi.gov/miami/press-releases/2013/two-individuals-charged-
with-material-support-offenses-involving-al-qaeda-al-qaeda-in-iraq-al-nusrah-front-and-al-shabaab

8|P a ge
immigrants from Bosnia with conspiracy to provide material support to terrorists by raising funds for al-
Nusra.41

The fundraising through auspices of charity is called Zakat. Zakat is one of the five pillars of Islam and is
an annual tax levied on two kinds of wealth: manifest (crops, cattle and property) and hidden (gold, silver
and merchandise). There are eight different disbursement categories for Zakat, which include the category
those fighting for Allah. Zakat is therefore obligated to pay for participants of Jihad.42

c. Self-Sufficient Terrorist Group

The Islamic State of Iraq and Syria (aka The Islamic State of Iraq and al-Sham, The Islamic State of Syria
and the Levant, formerly known as AQI) falls within the new category of a self-sufficient terrorist group.
ISIS does not fall within the category of a state-sponsored terrorist group since ISIS, despite its name, is
not a group sponsored by a state that is recognized by the international community. Canada43 listed the
group under the measures implemented under the ATA on August 20, 2012. The U.S. listed the group on
October 14, 2004 in accordance with Executive Order 13224 under its previous name AQI.44

A study conducted by the RAND Corporation and the Combating Terrorism Center at West Point based on
internal ISIS documents gathered by the U.S. in Iraq shows that only approximately 5 percent of ISIS
operating budget in the time from 2005 to 2010 was coming from Zakat.45

The overwhelming majority of ISISs operating budget is coming from business activities conducted within
the territory it controls in Syria and Iraq. It is conservatively estimated that ISIS is generating $1 million a
day from the sale and smuggling of oil46 although some sources suggest that the revenue could be up to
$3 million47 a day. Smuggling of oil into Turkey is particularly lucrative since oil is an expensive commodity
there with gas prices often exceeding $7.50 a gallon.48 ISIS is very effective with its oil smuggling
operations since it can rely on a network that was put in place by Saddam Hussein to circumvent UN
sanctions49 against his regime. The smuggled oil is exchanged either for cash or refined oil products.50

41
United States District Court Eastern District of Missouri Eastern Division, File # 4:15CR00049 CDP/DDN, February
5, 2015, http://www.justice.gov/usao/moe/news/2015/february/terorism_indictment.pdf
42
William Gawthrop, Zakat: A Warfare Funding Mechanism, April 2010,
http://micastore.com/Vanguard/PastIssues/2010April.pdf
43
http://www.publicsafety.gc.ca/cnt/ntnl-scrt/cntr-trrrsm/lstd-ntts/crrnt-lstd-ntts-eng.aspx#2031
44
http://www.state.gov/j/ct/rls/other/des/143210.htm
45
Hannah Alam, Records show how Iraqi extremists withstood U.S. anti-terror efforts, June 23, 2014,
http://www.mcclatchydc.com/2014/06/23/231223/records-show-how-iraqi-extremists.html
46
Louise Shelley, Blood Money: How ISIS Makes Bank, November 30, 2014,
http://www.foreignaffairs.com/articles/142403/louise-shelley/blood-money
47
Al-Arabiya News, August 28, 2014, http://english.alarabiya.net/en/perspective/analysis/2014/08/28/Experts-
ISIS-makes-up-to-3-million-daily-in-oil-sales.html
48
Scott Bronstein and Drew Griffin, Self-funded and deep rooted: How ISIS makes it millions,
http://www.cnn.com/2014/10/06/world/meast/isis-funding/
49
Louise, Shelley,l.c.
50
Chris Dalby, Who Is Buying the Islamic States Illegal Oil, http://oilprice.com/Energy/Crude-Oil/Who-Is-Buying-
The-Islamic-States-Illegal-Oil.html

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It is believed that the second most important revenue source of ISIS is antiquities looting and smuggling51
with an estimated review of tens of millions.52 The antiquities are sold to black market dealers against
cash before being sold to international buyers.53

Other income sources are kidnap for ransom, extortion,54 levying taxes on goods, services and income,
road tolls and customs 55 within the territory it currently controls. In its pursuit of legitimacy by becoming
a nation state, ISIS is apparently branching out into the financial sector by setting up its own bank.56

V. How to Test for an effective Anti-Terrorist Financing Compliance Regime: A Methodology for Audit

The analysis under section IV shows that terrorist groups differ significantly with respect to organization
and funding. The ATF measures implemented as a consequence of September 11, 2001, up to this day are
best suited to disrupt the funding of traditional terrorist groups like al-Nusra based on the fact that funds
are frozen and alleged supporters and financiers are being indicted and sentenced (as shown above).
Although the international community led by the U.S. imposed a tight net of sanctions against the Islamic
Republic of Iran since the revolution in 1979 the Qods Force is very successful at financing state-sponsored
terrorist activity through international business operations that appear to be legitimate at first sight. Up
to this day international and national countermeasures did not diminish the Forces success significantly.
The contrary seems to be the case with the Force being able to establish a heavy footprint in China and
South America, in particular Venezuela. ISIS, as an example of a self-sufficient terrorist group, is not less
successful than the Qods Force but is using completely different means to ensure its funding. The diversity
of the different groups makes it so challenging to successfully disrupt their funding and it becomes obvious
that one size does not fit all.

a. Risk Assessment

In order to test for the robustness of an ATF regime, auditors are required to closely review the risk
assessment, which financial institutions and other financial services providers are required to conduct in
accordance with the aforementioned international and national standards. The risk assessment can only
be considered to be thorough if it addresses the diversity of terrorist groups by distinguishing them into
different categories. The author advocates to distinguish terrorist groups by their primary source of
funding into three different categories: state sponsored, traditional and self-sufficient because this
ensures that the findings laid out in common subsequent risk areas like customer, counterparty, product
and geographic risk are relevant to implement suitable risk mitigation measures. A risk assessment that

51
Joe Parkinson, Ayla Albayrak, Duncan Marvin: Syrian Monuments Men Race to Protect Antiquities as Looting
Bankrolls Terror, http://www.wsj.com/articles/syrian-monuments-men-race-to-protect-antiquities-as-looting-
bankrolls-terror-1423615241
52
Russell D Howard, Jonathan Prohov, Marc Elliot, How ISIS Funds Terror Through Black Market Antiquities
Trade, http://news.usni.org/2014/10/27/isis-funds-terror-black-market-antiquities-trade
53
Russel D Howard, Jonatham Prohov, Marc Elliot, l.c.
54
Julie Hirschfield Davis, U.S. Strikes Cut Into ISIS Oil Revenue, Treasury Official Says, October 23, 2014,
http://www.nytimes.com/2014/10/24/world/middleeast/us-strikes-cut-into-isis-oil-revenues-treasury-official-
says.html?_r=00
55
Matthew Levitt, Terrorist Financing and the Islamic State, November 13, 2014,
http://www.washingtoninstitute.org/uploads/Documents/testimony/LevittTestimony20141113.pdf
56
Imran Khan, ISIL in pursuit of legitimacy, http://blogs.aljazeera.com/blog/middle-east/isil-pursuit-legitimacy

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fails to address terrorist financing risk by not properly categorizing terrorist groups has to be qualified as
non-sufficient by the auditor with the consequence that a finding is being made in the auditors report.

In brief, the common assumption that terrorist financing is limited to depositing relatively small sums into
accounts, consolidate these funds in another account and subsequently transferring these funds either
domestically or internationally does not consider the sophistication of certain terrorist groups in particular
since the category of self-sufficient terrorist groups seems to be out of reach of common ATF measures.57

b. Risk Mitigation Measures

The testing has to include a comprehensive review of the implemented risk mitigation measures, in
particular policies and procedures, in order to determine if these measures are (i) addressing different
forms of terrorist groups and their primary source of funding and (ii) are suitable to prevent terrorist
funding for state sponsored, traditional and self-sufficient terrorist groups. The testing has to include the
rationale/methodology behind know your customer/customer due diligence (KYC/CDD) procedures at the
time of onboarding and during the business relationship in particular with respect to state-sponsored
terrorist groups like the Qods Force, since they have a long track record of using companies that are
actually not just shells for illegal purposes. Equally important is an assessment of the risk mitigation
measures that are put in place regarding counterparty risks(e.g., correspondent banks). As shown above,
sophisticated terrorist groups like the Qods Force are going a great length in order to introduce funds into
the financial system and take into account that the funds often cannot take a direct way in order to avoid
detection. In order to test the robustness of the implemented processes in an effective way, the review
should not be limited to the review of samples of compliance questionnaires provided by the
counterparties, but should include a holistic review of all existing counterparty relationships in order to
understand their own capabilities of transmitting funds internationally since this is the foundation for an
assessment if the own financial institution is at risk.

c. Training

Effective testing of the robustness of an ATF regime has to include a comprehensive review of the training
that has to be provided to all staff in accordance with the aforementioned international and national ATF
legislation, regulations and standards. The training regime has to include profound information about the
different categories of terrorist groups based on their primary source of funding for all employees of a
financial institution or financial service provider, so that staff could anticipate potential exploitations of
products and services and fulfill their role as the institutions first line of defense. Audit should further
determine if role-specific training exists and if the content is adequate. An individual working in the
corporate banking division, for example, has to be educated how state-sponsored terrorist groups like the
Qods Force operate, what their primary source of funding is and how the onboarding process including
KYC/CDD is being designed to obtain valuable information with the intention to mitigate risk. Without that
information this individual would not be up to par with experienced and sophisticated Qods Force
operatives when establishing new or maintaining existing banking relationships in order to transfer funds
all around the world on behalf of legitimate looking business entities. Staff responsible for the execution
and processing of international funds transfers should be provided with training regarding current Zakat

57
Russel D Howard, Jonatham Prohov, Marc Elliot, l.c.; David S Cohen, Attacking ISILs Financial
Foundation,October 23, 2014, http://www.treasury.gov/press-center/press-releases/Pages/jl2672.aspx

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hot spots in order to determine if potentially suspicious changes in payment patterns occur so that we
risk associated with traditional terrorist groups could be mitigated effectively.

Role-specific training is eagerly important for compliance staff and should therefore also be included in
the testing of the training material. Only with specific insight about the primary sources of funding will
compliance staff responsible for the review of electronic monitoring risk models be able to determine if
these need to be adjusted in order to reflect ever-changing risk exposure. For example, changing
payment/transaction patterns involving Turkey or antiquities dealers/auction houses which potentially
could be associated with illegal oil smuggling and black market antiquities activities would not raise any
red flags if the systems are not set up to screen for this kind of indicia. Role-specific training regarding the
proposed categorization of terrorist groups and their primary source of funding should therefore be
considered a prerequisite for the implementation of effective risk mitigation measures such as transaction
monitoring (see below). The absence of role-specific training or gaps have to be mentioned in the audit
report since this would have an impact on the robustness of the ATF regime.

The audit review should not only include the content but also the training concept and how often training
is provided. In particular, role-specific training should be conducted in accordance with the risk-based
approach, which is an integral concept of all aforementioned international and national ATF standards
since primary funding methods evolve, sometimes even in short time spans. This is particularly true for
self-sufficient groups like ISIS since their primary sources of funding are required to adjust to international
military measures.

d. Transaction Monitoring

Although transaction monitoring is a risk mitigation measure and could therefore be included in point b,
the author chose to address the testing separately since a thorough understanding is crucial to assess the
robustness of an ATF regime. A sophisticated state-sponsored terrorist group like the Qods Force will most
likely not show the still widely anticipated transaction pattern of small amounts and high volume.58 A
proper testing has to include a thorough analysis of the developed risk and monitoring models. If these
models do not take into consideration that terrorist groups have to be categorized into separate groups,
the transaction monitoring application will not be able to identify potentially suspicious transactions and
activity typical for state-sponsored terrorist group and to a certain extent for a self-sufficient terrorist
group. The author advocates that the risk/monitoring models are specifically designed to detect
potentially suspicious transactions/activities based on the primary sources of funding in particular, since
the most common countermeasures are most likely useless with respect to a self-sufficient group like
ISIS.59

e. Resource

The testing has to include a thorough review of the resources that are available for the ATF regime. A
particular focus should be the expertise and experience of key compliance staff and should concentrate
on the question if the necessary human resources are at hand that are necessary to understand different
terrorist financing typologies. Terrorist financing activity by sophisticated groups like the Qods Force and

58
FINTRAC, l.c.
59
FATF, Financing of the Terrorist Organization Islamic State in Iraq and the Levant, February 27, 2015,
http://www.fatf-gafi.org/media/fatf/documents/reports/Financing-of-the-terrorist-organisation-ISIL.pdf

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ISIS are not only ever-changing, but also very complex to understand and analyze. Depending on the
business model and size of the financial institution in accordance with the concept of a risk-based
approach the testing should also include a review to determine if the ATF group is sufficiently staffed.

VI. Summary/Conclusion

All of the aforementioned ATF measures that were implemented since September 11, 2001, did not meet
the objective to fully disrupt terrorist financing successfully. Some concepts worked for traditional
terrorist groups, but failed and continue to fail for sophisticated state-sponsored and self-sufficient
terrorist organizations. In order to make a step forward it is necessary to give up the assumption that as
long as watch/sanctions list screening is being conducted and the electronic monitoring systems is set up
in a way that in and outgoing Zakat payments are being captured, the implemented ATF compliance
regime is robust. In order to really strengthen the robustness of your regime revisit the section of the risk
assessment that addresses terrorist financing risk in order to review if it is in line with the advocated
methodology to categorize terrorist groups by their primary method of funding. This ensures that you
draw the right conclusions and implement risk mitigation measures that have a fair chance to deliver
adequate results and therefore minimizes the risk exposure to be a potential financier of terrorist activity.
The author recommends to focus on hiring/maintaining a highly qualified compliance staff that is capable
to understand and analyze the political background and implications, which is a prerequisite to
understand the primary source of funding and complex payments patterns. The secondary focus should
be on training the entire staff in an effort to eliminate the still predominant stereotype that all terrorists
are wearing beards and have Arabic-sounding names.

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VII. References (listed chronologically)

Financial Action Task Force, Terrorist Financing, 29 February 2008

Financial Action Task Force, Financing the Terrorist Organization Islamic State in Iraq and the Levant, 27
February 2015

Mirko Sosai, UN SC Res. 1373(2001) and International Law-making: A Transformation in the Nature of
the Legal Obligations for the Fight against Terrorism?

Andrea Bianchi, Assessing the Effectiveness of the UN Security Councils Anti-terrorism Measures: The
Quest for Legitimacy and Cohesion, The European Journal of International Law, Vol 17 no.5 2007

Counter-Terrorism Committee Global Survey Of The Implementation Of Security Council Resolution

1373 (2001) By Member States

U.S. Report to the UN Counterterrorism Committee, 19 December 2001

Financial Action Task Force On Money Laundering, Annual Report 2001/2002, 21 June 2002

Financial Action Task Force, Annual Report 2004/2005, 10 June 2005

Wolfsberg Group Statement on the Suppression on the Financing of Terrorism, 2002

Jennifer Wispinski, The USA Patriot Act and Canadas Ant-Terrorism Act: Key Differences in Legislative
Approach, 31 March 2006

Federal Bureau of Investigation, Terror Financing: Following the Money Trails, 5 July 2013

Financial Transactions and Reports Analysis Centre of Canada, What is terrorist financing

Special Inspector General for Afghanistan Reconstructions, SIGAR-15-10-SP Special Report: Poppy
Cultivation in Afghanistan, 2012 and 2013

Financial Action Task Force, Global Money Laundering and Terrorist Financing Threat Assessment, July
2010

Louis Charbonneau, Jonathan Saul, James Pomfret: Iran uses China bank to transfer funds to Qods-linked
companies, 18 November 2014

Norman A Bailey, Irans Venezuelan Gateway, The American Foreign Policy Council, February 2012

Scott Modell, David Asher, Pushback Countering the Iranian Action Network, Center for New American
Security, September 2013

Stanford University, Mapping Militant Organizations

Lori Plotkin Boghardt, The Terrorist Funding Disconnect with Qatar and Kuwait, The Washington
Institute, 2 May 2014

Elizabeth Dickenson, The Crisis in Syria hits home, The European Council on Foreign Relations, 2 October
2014

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David Andrew Weinberg, Qatar and Terror Finance, Foundation for Defense of Democracies, December
2014

Andrew Gilligan, The Club Med for terrorist, 27 September 2014

William Gawthrop, Zakat: A Warfare Funding Mechanism, The Vanguard Journal of the Military
Intelligence Corps Organization, April 2010

Hannah Alam, Records show how Iraqi extremists withstood U.S. anti-terror efforts, McClatchyDC, 23
June 2014

Louise Shelley, Blood Money: How ISIS Makes Bank, 3 Council on Foreign Relations, 30 November 2014

Scott Bronstein, Drew Griffin, Self-funded and deep rooted: How ISIS makes it millions

Chris Dalby, Who Is Buying the Islamic States Illegal Oil, 30 September 2014

Joe Parkinson, Ayla Albayrak, Duncan Marvin: Syrian Monuments Men Race to Protect Antiquities as
Looting Bankrolls Terror

Russell D Howard, Jonathan Prohov, Marc Elliot, How ISIS Funds Terror Through Black Market Antiquities
Trade, USNI News, 27 October 2014

Julie Hirschfield Davis, U.S. Strikes Cut Into ISIS Oil Revenue, Treasury Official Says, 23 October 2014

Matthew Levitt, Terrorist Financing and the Islamic State, The Washington Institute For Near East Policy,
13 November 2014

Imran Khan, ISIL in pursuit of legitimacy, 5 January 2015

David S Cohen, Attacking ISILs Financial Foundation, 23 October 2014

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