Terrorism Financing Indicators for Financial Institutions in the United States

69 Pages Posted: 26 Jan 2014

See all articles by Richard K. Gordon

Richard K. Gordon

Case Western Reserve University School of Law

Date Written: 2012

Abstract

At least since the Financial Action Task Force (FATF) first published its 40 Recommendations, financial institutions (FI) in FATF-compliant jurisdictions have been required to implement preventive measures that require FIs to identify customers, establish client profiles, monitor for unusual transactions, review those transactions to see if there was suspicion that they involved the proceeds of crime and, if so, report the transaction to the authorities in the form of a suspicious transaction report (STR). When these requirements were first established, neither financial institutions nor their supervisors/regulators had much experience as to what in a client’s profile and the client’s patterns of transactions might indicate money laundering. However, based on an expanding knowledge of how criminals tend to launder their money, over time financial institutions have developed increasingly effective detection and reporting systems. By studying known examples of laundering, the FATF, FATF-Style Regional Bodies (FSRBs), and national competent authorities (especially financial intelligence units) have identified patterns or indicators of possible money laundering, and made them available to financial institutions as money laundering typologies. In addition, there has been some feedback from financial intelligence units and other competent authorities to financial institutions with respect to their anti-money laundering (AML) programs. Using these sources, financial institutions have been able to develop systems to help them determine which transactions carry a materially greater risk that laundering is involved.

Following the terrorist attacks of September 11, 2001, the FATF adopted the VIII Special Recommendations on terrorist financing. Among these new requirements were that FIs also report to authorities if they suspected that a transaction involved the financing of terrorism. However, there was little in the way of known patterns of terrorism financing that financial institutions could use to help identify such transactions. While since that time a number of limited typology studies have been made available by the FATF, no comprehensive study of terrorism financing typologies has yet been published. For this reason, the Counter-terrorism Implementation Task Force requested a comprehensive study on past terrorism financing techniques that would add to value to efforts by both financial institutions and governmental authorities in identifying terrorism financing transactions or patterns, also known as typologies.

This preliminary report on prosecutions in the United States examined 266 instances of prosecutions that involve charges of terrorism, material support of terrorism, or other terrorism-related matters. Of that number, 30 were determined to involve FIs. Using only publicly available information, the study found 24 where there was sufficient information on financial transactions to see if there were any discernable patterns or typologies for terrorism financing. The study revealed that 16 of those indicated known typologies of money laundering, although an additional 3 appear to involve diversion of charitable donations. In only one was there a typology that suggested possible terrorism financing and not laundering. Of the 16 cases involving suspicious transactions only 3 appeared to involve criminal proceeds. From these cases, it appears that terrorists often use money laundering techniques to disguise the origins of funds or to prevent competent authorities from tracing payments from end-users to originators, even when the origin is not criminal proceeds. However, because it was not possible to review any STRs (referred to in the United States as Suspicious Activity Reports or SARs) that may have been filed by financial institutions with respect to these transactions, it was not possible to determine if financial institutions, in conducting their review of those transactions, had determined that they were suspicious with respect to money laundering or terrorism financing. It was also impossible to know if FinCEN had referred such SARs to law enforcement for further investigation, or if they had added actionable intelligence to the SARs that would suggest either money laundering or terrorism financing. Such reviews would be most helpful in completing to study. Until such time, researchers propose to convene a seminar of experts to review and discuss the available materials concerning the 24 cases of possible terrorism finance to determine if the tentative conclusions appear warranted and suggest how such conclusions might inform/improve current standards on the financing of terrorism.

Keywords: Money Laundering, Financial Institutions, Suspicious Transaction Report

JEL Classification: K14, K23, K42

Suggested Citation

Gordon, Richard K., Terrorism Financing Indicators for Financial Institutions in the United States (2012). 44 Case Western Reserve Journal of International Law 765 (2012). Available at SSRN: https://ssrn.com/abstract=2384710

Richard K. Gordon (Contact Author)

Case Western Reserve University School of Law ( email )

11075 East Boulevard
Cleveland, OH 44106-7148
United States

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