Introduction
Terrorism stands for illegal activities, including murder, kidnapping, and the destruction of property, to achieve specific political goals. It is a practice widely considered harmful around the world, yet widely used by irregular militias, political movements, and even governments, against their foes (White, 2016). Despite various sanctions and restrictions intended to prevent funding for such organizations, the annual budgets of terrorist organizations are estimated at around 3.6 billion USD (Combs, 2022).
The majority of insurgency movements that implement such tactics have their own sources of illegal income. Some of the methods they utilize include the extraction of minerals, oil, and materials, the slave and organ trade, drug production, and arms dealing, among others (Combs, 2022). Money received from these activities is unaccounted for; therefore, it is difficult to use to buy products and services that terrorists need to continue their activities. One of the most common ways of turning illegal money into legitimate money is called money laundering. This paper will cover the practice itself, its connection to financing terrorism, and the most common methods of prevention.
Money Laundering
Definition
Money laundering is a process through which illegal money is introduced into the white sector of the economy. It is highly illegal, as it involves falsification of documents, breaking of laws, and funding of terrorist organizations later on (Lutz & Lutz, 2019). It follows the PLI (Placement, Layering, Integration) framework, and abuses the imperfections of the financial code to achieve its ends.
Process
The first part of the criminal activity involves introducing dirty money into the economy. This is typically done by creating a false legal premise to which the money would legally belong. It could be a business or a bank, a count, usually both. The second stage of the process involves spreading transactions and expenditures across numerous locations, typically using loopholes in financial codes, to make the source of dirty money more difficult to trace (White, 2016).
Finally, integration occurs – at this stage, the illegitimate funds are inseparable from the legal revenue stream. It is used to purchase items, resources, and services legally. This is the end goal for terrorist organizations, which typically lack many of the resources necessary to continue their operations (Achim & Borlea, 2020). Weapons, medicine, tools, and technologies are all necessary for a successful insurgency.
Examples
Some of the most basic examples of money laundering facilities involve cash transactions. These include fast-food restaurants, corner stores, beauty salons, and other places, where legitimate cash flow can be mixed with finances obtained illegally. Because physical cash is more difficult to trace, it is favored for laundering. For example, a company may record only 100,000 USD in profits but claim to have reached 200,000 USD in its books (Achim & Borlea, 2020). Doing so will enable the injection of an additional 100,000 USD into the economy.
Another way to legalize money is through the purchase of real estate properties. Terrorists may fund the purchase of land or houses by buying them from a co-conspirator at exorbitant prices. The excess is the money laundered and then spent by that individual to purchase whatever the illegal organization needs to continue functioning (Combs, 2022).
The third example concerns the practice of gambling in casinos. This method is among the most dangerous, as many countries do not require these establishments to verify their clients’ sources of cash. Thus, illegal money can be used to purchase chips, which are then lost or cashed in, creating a clean legal trail. Participants can use false names and documents to complicate efforts to detect and counteract the practice (Combs, 2022). Clean money can then be used to fund terrorist activities.
Negative Effects
In addition to enabling violence to spread around the world through insurgency, suicide bombings, and attacks on peaceful populations, money laundering has a deleterious effect on the local economy of any country involved in the process. Undocumented cash flows cause inflation, leading to higher prices and the impoverishment of local communities (Lutz & Lutz, 2019). In addition, the practice undermines public trust in financial institutions and promotes corruption – unregistered funds can be used to bribe public officials and facilitate illicit activities.
Finally, money laundering makes legal investments less attractive to local and international fundraisers, since doing so off the books is potentially easier and less expensive, allowing them to avoid government taxation and oversight (Combs, 2022). Thus, terrorist organizations can weaponize their own laundering methods against countries they see as enemies. The US may become one of the primary targets of this type of economic warfare.
Preventing Terrorist Financial Flows
The first and most prominent way to counteract money laundering is through a universal anti-money laundering act. Part of the reason terrorists can exploit imperfections in the legal and financial systems of various countries is that they do not share the same standards (White, 2016). Thus, it is possible to find countries with weak laws and corrupt governments, and use that corruption as an insurgency’s means.
Currently, there is the Financial Action Task Force – an international organization that works in coordination with the IMF (International Monetary Fund) and over 200 governments (Combs, 2022). However, its scope is somewhat limited, as any government holds sovereignty over what it considers its internal economic matters. Such a discrepancy significantly reduces the effect of any universal agreement. Thus, the majority of efforts to fight terrorism funding are reduced to domestic-level policies.
Another way to reduce money laundering is to increase the use of cashless payments. With electronic money, it is much easier to identify payment sources and their recipients, making it harder for terrorists to avoid inspection (Combs, 2022). Cashless businesses are riskier for criminals to manage and maintain, as they always run a significant risk of losing their gains, potentially resulting in significant losses and interruptions to cash flow.
Standardizing codes and organizational structures is another way to curb domestic money laundering. Typically, terrorist organizations take advantage of convoluted and shady institutional frameworks to find ways of legalizing their ill-gotten gains (White, 2016). Removing that element, along with unifying financial reporting across industries and organizational types, makes it harder for them to hide.
The most effective anti-money laundering practices, however, have more to do with verifying customers and the funds they bring to pay for services and goods. Terrorists often bypass these protection measures in places where it is easy to forge identification or obtain it through corrupt officials (Lutz & Lutz, 2019). However, in places where verification is extensive and widespread, these measures become less effective, increasing the likelihood of detection. Thus, governments are urged to ensure increased verification of customers and cash flows.
Finally, money laundering can be prevented through vigilance of associated financial control systems. Typically, laundering organizations are very successful, showing higher revenues than other companies in their chosen industry (Lutz & Lutz, 2019). That is because they have to run a legitimate business and mix the clean money from it with the money they wish to launder. As a result, the total amount exceeds the average. Taxation and financial agencies can monitor such businesses and review them to ensure nothing is acquired illegally (Achim & Borlea, 2020). Doing so would significantly complicate terrorists’ efforts to obtain legitimate funding for their organizations.
Conclusions
Money laundering is one of the significant ways in which terrorists receive their financial support. It enables them to continue operations in the short to long term by supplying their organizations with everything they need, ranging from weapons and supplies to propaganda. It is in the international community’s interest to curtail its cash flows.
The mechanisms used by money laundering organizations are well-studied and known. In the majority of cases, they exploit a lack of vigilance, combined with various financial and legal loopholes, to avoid justice. In many instances, they use the premise of legitimate businesses to camouflage their malevolent intentions.
The practice itself harms the countries chosen as targets of financial injections, while allowing violence to continue elsewhere. Some of the primary identified means of combating money laundering include creating unified taxation and reporting policies, increasing vigilance towards suspiciously profitable organizations, going cashless, and implementing more stringent customer verification. Together, these solutions would make it more challenging to legalize illicit gains.
References
Achim, M. V., & Borlea, S. N. (2020). Economic and financial crime. Springer International Publishing.
Combs, C. C. (2022). Terrorism in the twenty-first century. Taylor & Francis.
Lutz, J., & Lutz, B. (2019). Global terrorism. Routledge.
White, J. R. (2016). Terrorism and homeland security (9th ed.). Cengage Learning.