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Stemming the Flow of Terrorist Financing: Practical and Conceptual Challenges

Matthew Levitt

Also available in

Fletcher Forum of World Affairs

Winter–Spring 2003

On November 5, 2002, Germany's chief of foreign intelligence warned that the risk of new and devastating al-Qaeda attacks in Europe has reached new heights. "The danger is so concrete that we have to count on a new attack, an attack of a much larger dimension," he said.1 The public warning was based on "intelligence material," as well as the threatening statement of al-Qaeda's second-in-command, Ayman al-Zawahiri, broadcast on October 13 on al-Jazeera satellite television. Specifically citing Germany and France as potential targets, Al-Zawahiri warned: "By God, the youths of God are preparing for you things that would fill your hearts with terror and target your economic lifeline until you stop your oppression and aggression."2

Three days later, the chief of Interpol warned that al-Qaeda was planning a "large-scale terrorist operation" targeting multiple countries at once.3 "The field of battle," he explained, "now stretches to all countries and mobilizes several terrorist groups."4 The same day, Britain's Home Office warned that intelligence shows an ongoing pattern of al-Qaeda activity, and cautioned that these "dedicated fanatical extremists" will indeed inflict whatever damage they can. An early version of the alert, subsequently amended, warned of possible chemical or "dirty bomb" attacks.5

Attacks such as these target civil society itself. In light of Europe's proactive counterterrorism efforts over the past year, al-Qaeda terrorism is just as likely to target Spain, Italy and other European powers, much as it has already targeted Germany and France, who lost citizens to al-Qaeda attacks in Tunisia and Pakistan, respectively.

To be sure, al-Qaeda, its affiliated groups, and other international terrorist organizations will continue to attempt to carry out increasingly heinous attacks; all too often they will succeed. It is a painful reality that no counterterrorism technique or effort, however extensive, international or comprehensive, will put an end to such attacks or uproot terrorism. In fact, there will always be people and groups with stagnating causes, an overwhelming sense of frustration, a self-justifying ideological or theological world view, and a healthy dose of evil, who will resort to violence as a means of expression. The goal of counterterrorism, therefore, should be to constrict the environment in which terrorists operate, to make it increasingly difficult to carry out their plots of destruction and death. This includes cracking down not only on operational cells, but on their logistical and financial support networks as well.


The synchronized suicide attacks of September 11 highlighted the critical role financial and logistical support networks play in the operations of international terrorist organizations. The challenge in tackling these networks, however, is that they are well-entrenched, sophisticated, and often shrouded in a veil of legitimacy (such as operating under the camouflage of charitable or humanitarian activity).

The investigative value of following the trail of terrorist financing has long been known. Then-FBI Director Louis Freeh testified before Congress in 1999 that a shortage of funds prevented the 1993 attack on the World Trade Center from being as devastating as it otherwise could have been. After his capture in 1995, Ramzi Yousef, the convicted mastermind behind the 1993 bombing and other attacks, admitted that the terrorists were unable to purchase sufficient material to build as large a bomb as they had intended because they were strapped for cash. In fact, the operation itself was rushed and carried out earlier than planned because the cell simply ran out of money. In the end, the terrorists' attempt to reclaim the deposit fee on the rental truck used to transport the bomb provided a key break in the case.6

The al Qaeda suicide hijackings underscored the post-blast, investigative utility of tracking the money trail, but they also drove home the critical need to preemptively deny terrorists the funds they need to conduct their attacks. Early financial leads in the September 11 investigation established direct links between the hijackers of the four flights, identified co-conspirators, and led investigators to logistical and financial support cells in Germany and elsewhere in Europe as well as in the Gulf. Financial leads led investigators to key al-Qaeda operatives and money-men such as Ramzi Bin al-Shibh in Germany and Mustafa Ahmed al-Hasnawi in the United Arab Emirates. Financial analysis provided some of the earliest evidence proving the synchronized suicide hijackings were an al-Qaeda operation, and linked the German cell, the hijackers, and Zacarias Moussaoui. Wire transfers between Moussaoui and Bin al-Shibh played a crucial role leading to Moussaoui's indictment for his role in the attacks. Financial investigation also established links between Moussaoui and members of the al-Qaeda associated cell of Jama'ah al-Islamiah terrorists arrested in Malaysia.7


Clearly, following the money trail represents a critical and effective tool both in reacting to terrorist attacks and engaging in preemptive disruption efforts to prevent future attacks. Since last September, America—together with many of its allies—has spearheaded a groundbreaking and comprehensive disruption operation to stem the flow of funds to and among terrorist groups. Combined with the unprecedented law enforcement and intelligence effort to apprehend terrorist operatives worldwide, which constricts the space in which terrorists can operate, cracking down on terrorist financing denies terrorists the means to travel, communicate, procure equipment, and conduct attacks. Though the amount of money frozen internationally remains negligible, the impact of freezing terrorists' assets can be significant if the right accounts, companies or front organizations are shut down. Denying terrorists access to their preferred means of raising, laundering and transferring funds complicates their efforts to conduct their activities.

And yet, when it comes to cracking down on terrorist financing we have barely skimmed the tip of the iceberg. Much remains to be done. The environment in which terrorists raise, launder and transfer funds to further their activities remains all too permissive, while the international effort to constrict this environment remains insufficiently coordinated.

Cracking down on terrorist financing demands an all-encompassing approach to have any chance of successfully disrupting terrorist activity, targeting the full array of groups, individuals, businesses, official and unofficial banking systems, criminal enterprises and humanitarian organizations that finance terrorism.8

The Financial Action Task Force on Money Laundering (FATF) has, in fact, laid the groundwork for establishing a baseline of international standards for combating terrorist financing. The Task Force, an inter-governmental body co-chaired by the United States and Spain and focused on developing and promoting national and international policies to combat money laundering, issued both a list of eight "special recommendations" on curbing terrorist financing as a starting point for governments,9 as well as a report offering guidance to financial institutions on "detecting the techniques and mechanisms used in the financing of terrorism."10 In civil societies, counterterrorism efforts are often most effective—especially regarding terrorist financing—when public and private sectors work together.

The Financial Action Task Force's eight special recommendations are:

• Ratifying and implementing UN instruments

• Criminalizing the financing of terrorism and associated money laundering

• Freezing and confiscating terrorist assets

• Reporting suspicious transactions related to terrorism

• Formalizing greater international cooperation through treaties or other agreements

• Licensing and registering businesses engaged in alternative forms of remittance

• Requiring accurate and meaningful originator data for wire transfers

• Reviewing the adequacy of laws regulating non-profit organizations


These recommendations, while extremely broad and beset by cultural, institutional and other practical obstacles to implementation, are nonetheless a strong starting point. For example, fully implementing the 1999 UN International Convention for the Suppression of the Financing of Terrorism, even if accompanied by the implementation of UN Security Resolution 1373 and other related resolutions, is a praiseworthy objective but is likely to have little impact on terrorists' continued ability to raise funds. The United Nations' Counterterrorism Committee (CTC) is not empowered to sanction noncompliant countries. It plays a purely advisory role, meaning it will primarily affect only those countries inclined toward and already trying to curb terrorist financing. It is a commendable step forward in terms of fostering a global front against terror financing, but it should be kept in perspective since it fails to address the problem of uncooperative states.

In fact, this is just a subset of the larger challenge of international cooperation. While the need for international cooperation simply cannot be overstated, there is no one central organization dedicated to combating terrorist financing. The global nature of today's terrorist threat stems not only from the targets of the terrorists' attacks (from Djerba, Tunisia to Bali, Indonesia, and everywhere in between), but from the global marketplace, in particular the cross-border opportunities created by the global financial and communications markets. Without international cooperation, we are left with a patchwork of domestic, bilateral and regional efforts that at best work in parallel but not complimentary fashion, and at worse work at cross-purposes. There is a need for an international organization dedicated to fighting terrorist financing that would support, reinforce, coordinate and centralize the ad hoc efforts of the FATF, the UN Counterterrorism Committee, the Egmont Group, the European Union and many other organizations and committees. It could set standards and procedures for designating individuals or groups as terrorist entities, regulating charitable and humanitarian organizations as well as official and unofficial banking systems, and for reporting suspicious financial activity.

America, for example, has a variety of terrorism lists that are not necessarily complimentary.11 Individual European countries, the European Union and the United Nations each have their own lists, and then there are a host of terrorist entities designated by individual countries or pairs or groups of countries—but not universally. Central to any effort to institute greater international cooperation on this front is the need to find a way of sharing intelligence on suspected terrorist entities while protecting sources and methods.

It is critical, as recommended in a recent report commissioned by the prestigious Council on Foreign Relations, that the international community establish a specialized international organization whose sole purpose would be combating terrorist financing.12

The need to criminalize terrorist financing and money laundering is also critical, and gets to the larger need for individual states to pass domestic legislation to facilitate freezing terrorists' funds and cracking down on terrorists' logistical and financial support networks. Not only must terrorist fundraising and laundering be criminalized, such acts must incur sufficient penalties as to deter disenchanted recruits from participating in the activities of their more fanatic associates. In the United States, for example, while it is illegal to provide material support to a designated terrorist organization, it is not illegal to be a member of such an organization. Terrorists are aware of the shortcomings and limitations of our domestic legal systems, and proactively exploit these gaps to their advantage. They raise tremendous amounts of money in the United States and Western Europe, they abuse broad freedom of speech laws in Britain, privacy laws in Germany, and banking laws in countries that allow offshore accounts. They knew, for example, that until recently Switzerland was the best place to purchase a certain type of prepaid international cell phone because purchasers there were required to provide no identifying information (making tracing calls from that phone almost impossible).13

Regulating banking systems is the only way to deny terrorists easy access to the international financial system for the purpose of laundering and transmitting funds. To this end, all manner of official and unofficial remittance systems must be regulated, from Hawala to major international banks. Moreover, suspicious activities must be reported in a timely and efficient manner. The FATF's guidance to financial institutions is a strong step in this direction. A painful footnote to the events of September 11 is that while some of the hijackers' financial transactions were sufficiently suspicious to warrant reporting, none of those reports reached the proper authorities until after 9-11 because of the inefficiency of the reporting system.14

Terrorists raise funds through a variety of businesses, criminal enterprises, and front organizations, each of which is significant in its own right, and all the more so when applied in tandem. Charitable and humanitarian organizations, however, have played a particularly disturbing role in terrorist financing, and present an especially sensitive challenge as authorities are faced with discerning between legitimate charity organizations, those unknowingly hijacked by terrorists who divert funds to finance terrorism, and others proactively engaged in supporting terrorist groups.15 Regulating the industry of charity and humanitarian assistance is critical not only because of the extent to which terrorists operate front organizations raising funds under the guise of charity, but because of the critical need to preserve our ability to give of ourselves on behalf of others without fear that in trying to make the world a better place we actually make it worse.

As if these practical challenges to stemming the flow of terrorist financing were not enough, the two greatest obstacles to successfully cracking down on terrorist financing are actually conceptual: (1) debunking the myth of distinct wings within terrorist organizations, and (2) untangling the terror web—that is, al-Qaeda is not the only element.


On May 3, 2002, the EU added eleven organizations and seven individuals to its financial-blocking list of "persons, groups, and entities involved in terrorist acts." The action was particularly significant because it marked the first time the EU froze the assets of non-European terrorist groups.

The EU list now includes the Taliban, al-Qaeda, Palestinian Islamic Jihad (PIJ), the Iranian dissident group Mujahedin-e-Khalq, and the Izz al-Din al-Qassem Brigades (the military wing of Hamas). It also includes the Kurdistan Workers' Party (PKK), which has recently adopted a new name, the Kurdistan Freedom and Democracy Congress (Kadek).16

Far more telling than the names that were added to the list, however, are the names that were omitted—Hizballah, the Popular Front for the Liberation of Palestine (which was later added), and Hamas itself. According to press accounts, the EU was looking to maintain a distinction between terrorist groups' political and charitable activities on the one hand, and their direct terror wings on the other.17

Consistent with this interpretation, the EU placed several individual Hizballah terrorists on its list, but not the organization itself. This implies that these Hizballah operatives somehow work independently of the group that recruits, trains, and funds them for terror missions. Similarly, listing only the military wing of Hamas but not the group itself suggests that Hamas is solely a charitable and political organization somehow disconnected from the heinous suicide bombings coordinated, funded, and lauded by its leaders in the West Bank, Gaza, and Damascus. In fact, Hamas social-welfare organizations play a direct role in facilitating Hamas terrorist attacks, including suicide bombings. A November 5, 2001, FBI memorandum on the Holy Land Foundation for Relief and Development—which served as a Hamas front organization in the United States until it was closed down in December 2001—provided convincing evidence that Hamas social-welfare organizations (e.g., charity committees and hospitals) form the core of the group's logistical and financial support network, including support for terror attacks.18

A key lesson learned so painfully on September 11 is that counterterrorism efforts must target logistical cells with the same vigor as operational cells. The September 11 attacks could never have been executed without the logistical assistance of a sophisticated and well-entrenched support network. The nineteen hijackers were funded and facilitated by dozens of individuals, cells, front organizations, and affiliates that provided essential logistical support. Long-term logistical planning also went into the bombing of the USS Cole and the embassies in East Africa.

Accordingly, an individual, group, or state that provides funds, travel documents, training, or other support for terrorist activity is no less important to a terrorist network than the operative who detonates the bomb, pulls the trigger, or crashes the airplane. The very "wings" of Hamas, Hizballah and others that some are uncomfortable recognizing as terrorist, are the ones engaged in terrorist financing. September 11 was, in part, the result of this fundamentally flawed distinction between good and bad terrorists. Among the terrorists subsequently linked to the September 11 plot are a disturbing number of individuals in an alarming number of countries who, while previously known to authorities as Islamic extremists (and in some cases the subjects of surveillance), were not assigned the priority they deserved because they were merely "terrorist supporters," not actual "terrorist operatives." Similarly, low priority was assigned to eliminating the permissive operating environment provided by states that allow terrorists to maintain facilities on their territory, largely on the grounds that these states did not themselves directly plan and execute terrorist attacks.

Interestingly, the EU's decision to distinguish between the political and military wings of these terrorist organizations came at the same time that Spain boldly moved in the opposite direction on its own home front. Referring to pending Spanish legislation outlawing Batasuna, the political party affiliated with the terrorist group Basque Homeland and Liberty (ETA), Spanish prime minister Jose Maria Aznar stated, "I make no distinction between terrorists, none at all, whether they are here in the Basque country or in New York. Nothing can justify a terrorist act."19 Spain's law would outlaw any group that "encourages hatred, violence and social confrontation to further its political objectives"20—a criterion that Hizballah, Hamas, and the PFLP easily meet. Noting Batasuna's refusal to condemn ETA terrorist attacks, a leader of the Basque Socialist party observed that "in a democracy you cannot allow political groups to mock the system by acting as shields for terrorists."21 By this standard, Middle East groups like Hamas and Hizballah would certainly qualify as terrorist groups.

In fact, if authorities are serious about cracking down on terrorist financing, they must focus on the purportedly political or social-welfare "wings" of terrorist groups—because it is there that the fund raising, laundering and transferring takes place.


November's alarming warnings of pending al-Qaeda attacks highlighted once more why attention has been focused on al-Qaeda and its affiliated groups since September 11, 2001. A year on, however, other Middle Eastern terrorist groups and state sponsors of terrorism still receive inconsistent attention despite a sharp rise in their activity. In fact, militant Islamist groups from al-Qaeda to Hamas interact and support one another in an international matrix of logistical, financial, and sometimes operational terrorist activity. Inattention to any one part of the web of militant Islamist terror undermines the effectiveness of measures taken against other parts of that web.22

September 11 produced a political will, markedly absent after previous attacks, to take concrete action to counter and disrupt the terrorist threat to America and its allies. Yet, while efforts targeting Osama bin Laden and his associates are concerted and continuous, similar efforts are lacking when it comes to other terrorist groups of global reach and state sponsors of terrorism. In the months after September 2001, groups such as Hamas and Hizballah were placed on new U.S. government terrorism lists, and the primary Hamas front organization in America was shut down. Since then, however, these groups have received only fleeting attention in the U.S., even less in Europe. But the links between terrorist groups reveal a matrix of illicit activity on an international scale. Consider the following examples of the terror web:

• On February 15, 2002, Turkish police arrested two Palestinians and a Jordanian who entered Turkey illegally from Iran on their way to conduct bombing attacks in Israel. The three were members of Beyyiat el-Imam (a group linked to al-Qaeda) who fought for the Taliban and received terrorist training in Afghanistan. They were dispatched by Abu Musab Zarqawi, then in Iran and now believed to be in Syria after receiving medical treatment in Iraq.23 Zarqawi has been linked to Hizballah, as well as to a terrorist cell apprehended in Germany that had been operating under the name Tawhid.24 German prosecutors announced that the group, tied to the recently arrested Abu Qatada in Britain but controlled by Zarqawi, was planning to attack U.S. or Israeli interests in Germany. Eight men were arrested, and raids yielded hundreds of forged passports from Iran, Iraq, Jordan, Denmark, and other countries. 25

• The International Islamic Relief Organization (IIRO) finances the activities of a diverse cross-section of international terrorist groups. From 1986 to 1994, bin Laden's brother-in-law Muhammad Jamal Khalifa headed the IIRO's Philippines office, through which he channeled funds to al-Qaeda affiliates, including Abu Sayyaf and the Moro Islamic Liberation Front.26 In 1999, an IIRO employee in Canada was linked to the Egyptian Islamic Jihad.27 More recently, official Palestinian documents seized by Israeli forces in April 2002 establish that the IIRO donated at least $280,000 to Palestinian charities and organizations that U.S. authorities have linked to Hamas.28

• The al-Taqwa banking system, which was added to U.S. terrorism lists in November 2001 for al-Qaeda links, was established in 1988 with financing from the Egyptian Muslim Brotherhood.29 According to the U.S. Treasury Department, "$60 million collected annually for Hamas was moved to accounts with Bank al-Taqwa,"30 whose shareholders include known Hamas members and individuals linked to al-Qaeda.31 A 1996 report by Italian intelligence further linked al-Taqwa to Hamas and other Palestinian groups, as well as to the Algerian Armed Islamic Group and the Egyptian al-Gama'a al-Islamiyya.32

• According to U.S. officials, shortly after Palestinian violence erupted in September 2000, Iran assigned Imad Mughniyeh, Hizballah's international operations commander, to help Palestinian militant groups, specifically Hamas and Palestinian Islamic Jihad (PIJ).33 According to a former Clinton administration official, "Mugniyah got orders from Tehran to work with Hamas."34 In fact, in the March 27, 2002, "Passover massacre" suicide bombing, Hamas relied on the guidance of a Hizballah expert to build an extra-potent bomb.35 In June 2002, Iran gave PIJ a 70 percent increase in funds, and Tehran continues to train terrorists at camps in Lebanon's Beka'a Valley and in Iran proper.36 Iran also provides safe haven to two senior al-Qaeda fugitives who head the group's military committee, as well as to dozens of other al-Qaeda personnel.37 According to an Arab intelligence officer, some al-Qaeda operatives were instructed to leave the country, but were told that "they may be called on at some point to assist Iran."38

Despite an impressive collection of statements from world leaders (e.g., "there are no good terrorists" and "if you house a terrorist, you are a terrorist"),39 such rhetoric has not been followed by a fully articulated policy or persistent action against the operational, logistical and financial network of terror groups and state sponsors outside of the al-Qaeda fold.

The multifarious logistical links between international terrorist groups (including al-Qaeda, Hamas, and Hizballah), and their relationships to state sponsors of terrorism such as Iran and Syria, are most entrenched in the realm of terrorist financing. To ignore these links is to forfeit hope of any real progress toward stemming the flow of funds to terrorist groups.

The war on terror must have a strategic focus on the full matrix of international terrorism, including all its parts and all its members. The next phase of the war on terror—and of the war on terrorist financing in particular—demands greater international cooperation and more focused attention to the web of logistical and operational interaction among these various terrorist groups and state sponsors.

NOTES 1 "Al-Qaeda planning big attack: German intelligence," Agence France Presse, November 5, 2002

2 Mark Huband and Haig Simonian, "Risk of al-Qaeda strike 'has reached new dimension' Terrorism Security Chief Warns of Threat of Large-Scale Attack, Especially in France or Germany," Financial Times, November 6, 2002

3 "Large-Scale al Qaeda Attack Planned, Interpol's Chief Says," Associated Press, November 8, 2002

4 "Al Qaeda Seen Planning Major Strikes—Interpol," Reuters, November 8, 2002

5 Alan Travis and Nicholas Watt, "Ministers step up terror alert Extremists may resort to use of poison gas and 'dirty bombs'," The Guardian, November 8, 2002



8 For a more detailed discussion of these trends, see Matthew Levitt, "Charitable and Humanitarian Organizations in the Network of International Terrorist Financing," Testimony before the Subcommittee on International Trade and Finance, Committee on Banking, Housing, and Urban Affairs, United States Senate (August 1, 2002), available online at

9 "Special Recommendations on Terrorist Financing," Financial Action Task Force on Money Laundering (FATF), October 31, 2001, available online at

10"Guidance for Financial Institutions in Detecting Terrorist Financing," Financial Action Task Force on Money Laundering (FATF), April 24, 2002, available online at

11 See "Navigating the U.S. Government's Terrorism Lists," in Matthew Levitt, Targeting Terror: U.S. Policy toward Middle Eastern State Sponsors and Terrorist Organizations, Post-September 11 (The Washington Institute, October 2002)

12 Maurice R. Greenberg, Chair, "Terrorist Financing: Report of an Independent Task Force Sponsored by the Council on Foreign Relations," The Council on Foreign Relations, October 2002. Available online at

13 "Sept 11 Terrorists Bought Mobile Phone Cards in Switzerland," Agence France Presse, August 8, 2002

14 "The SAAR Activity Review: Trends, Tips, and Issues, Issue 4," Published under the auspices of the Bank Secrecy Act Advisory Group, August 2002, available online; see also Statement for the Record, FBI Director Robert S. Mueller III, Joint Intelligence Committee Inquiry, available online at

15 see Levitt, "Charitable and Humanitarian Organizations in the Network of International Terrorist Financing."

16 Council of the European Union, "Fight against Terror, Updated List," press release, May 3, 2002, available online at, and Philip Shishkin, "EU Labels Dissidents in Iran As Terrorists, Pleasing Tehran," Wall Street Journal, May 3, 2002

17 Edward Alden and Michael Mann, "Brussels Moves To Block Assets of 11 Terrorist Organizations," Financial Times, May 3, 2002

18 Dale L. Watson, assistant director for counterterrorism, Federal Bureau of Investigation, "Holy Land Foundation for Relief and Development, International Emergency Economic Powers Act, Action Memorandum," memorandum to R. Richard Newcomb, director of the Office of Foreign Assets control, U.S. Department of the Treasury, November 5, 2001

19 Keith Richburg, "A Close European Ally Hopes To Fortify U.S. Partnership," Washington Post, May 1, 2002

20 Leslie Crawford, "Madrid Seeks To Outlaw Basque Political Party," Financial Times, May 9, 2002. See also "Ban on Party Linked to ETA,", June 26, 2002; available online at

21 Crawford, "Madrid Seeks To Outlaw Basque Political Party"

22 For a complete study of this phenomenon, see Levitt, Targeting Terror

23 Douglas Frantz and James Risen, "A Secret Iran-Arafat Connection is Seen Fueling the Mideast Fire," New York Times, March 24, 2002, and David Kaplan, "Run and Gun: Al Qaeda Arrests and Intelligence Hauls Bring New Energy to the War on Terrorism," U.S. News and World Report, September 30, 2002, available online at

24 Kaplan, "Run and Gun"

25 Philipp Jaklin and Hugh Williamson, "Terror Suspects Detained in Germany," Financial Times, April 24, 2002; Edmund L. Andrews, "German Officials Find More Terrorist Groups, and Some Disturbing Parallels," New York Times, April 26, 2002

26 Jay Solomon, "Manila Suspends Talks with Rebels after Allegations of al-Qaeda Links," Wall Street Journal, March 12, 2002

27 Minister of Citizenship and Immigration v. Mahmoud Jaballah, Federal Court of Canada, Docket: Des-6-99, November 2, 1999. See also Laurie P. Cohen et al., "Bush's Financial War on Terrorism Includes Strikes at Islamic Charities," Wall Street Journal, September 25, 2001

28 Israel Defense Forces, "Documents Captured by the IDF: Large Sums of Money Transferred by Saudi Arabia to the Palestinians Are Used for Financing Terror Organizations (Particularly the Hamas) and Terrorist Activities (Including Suicide Attacks i