Terrorist Financing:

U.S. Agencies Should Systematically Assess Terrorists' Use of Alternative Financing Mechanisms

GAO-04-163: Published: Nov 14, 2003. Publicly Released: Dec 12, 2003.

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Cutting off terrorists' funding is essential to deterring terrorist operations. The USA PATRIOT Act expanded the ability of law enforcement and intelligence agencies to access and share financial information regarding terrorist investigations, but terrorists may have adjusted their activities by increasing use of alternative financing mechanisms. GAO was asked to assess (1) the nature of terrorists' use of key alternative financing mechanisms for earning, moving, and storing terrorists' assets; (2) what is known about the extent of terrorists' use of alternative financing mechanisms; and (3) challenges that the U.S. government faces in monitoring terrorists' use of alternative financing mechanisms.

Terrorists use many alternative financing mechanisms to earn, move, and store assets. They earn assets by selling contraband cigarettes and illicit drugs, by misusing charitable organizations that collect large donations, and by other means. They move funds by concealing their assets through nontransparent mechanisms such as charities, informal banking systems, and commodities such as precious stones and metals. To store assets, terrorists may choose similar commodities that maintain their value and liquidity. The extent of terrorists' use of alternative financing mechanisms is unknown, owing to the criminal nature of terrorists' use of alternative financing mechanisms and the lack of systematic data collection and analysis of case information. The Federal Bureau of Investigation (FBI) does not systematically collect and analyze data on these mechanisms. Furthermore, the Departments of the Treasury and of Justice have not yet produced a report, required under the 2002 National Money Laundering Strategy, which was to form the basis of a strategy to address how money is moved or value transferred via trade in precious stones and commodities. In monitoring terrorists' use of alternative financing mechanisms, the U.S. government faces a number of challenges, including accessing ethnically or criminally based terrorist networks, targeting high-risk financing mechanisms that the adaptable terrorists use, and sharing data on charities with state officials. The Internal Revenue Service (IRS) has committed to, but has yet to establish, procedures for such data sharing.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: In November 2003, after the issuance of the GAO report, the Secretary of the Treasury and the U.S. Attorney General released the 2003 National Money Laundering Strategy. According to its Executive Summary, the 2003 National Money Laundering Strategy reflects the U.S. government's ongoing commitment to attack money laundering and terrorist financing on all fronts, including the formal and informal components of both the domestic and international financial systems. The 2003 National Money Laundering Strategy has 3 overarching goals, of which Goal 1 - - Safeguard the International Financial System from Money Laundering and Terrorist Financing-- pertains directly to combating terrorist financing. Six objectives provide the framework for this goal, including one objective that focuses efforts on financing mechanisms suspected of being of particular use by terrorist and other criminal organizations. This objective describes federal efforts to combat terrorist financing and how money is being moved or value is being transferred via different types of alternative financing mechanisms, such as charities, Hawala/Alternative Remittance Systems, bulk cash smuggling, trade-based movements, and cyber crime. A separate appendix D, entitled "Trade Based Money Laundering and Terrorist Financing," provides more detail on alternative remittance systems and trade in gold, diamonds, and other precious metals and gems.

    Recommendation: Moreover, to create a basis for an informed strategy for determining how money is being moved or value is being transferred via the trade in precious stones and commodities, the Secretary of the Treasury and the U.S. Attorney General should produce a report on this subject, fulfilling their overdue action item under the 2002 National Money Laundering Strategy. Such a report should be based on up-to-date law enforcement investigations of links between precious stones and commodity trading and the funding of terrorist groups, as required under the strategy.

    Agency Affected: Department of the Treasury

  2. Status: Closed - Implemented

    Comments: In November 2003, after the issuance of the GAO report, the Secretary of the Treasury and the U.S. Attorney General released the 2003 National Money Laundering Strategy. According to its Executive Summary, the 2003 National Money Laundering Strategy reflects the U.S. government's ongoing commitment to attack money laundering and terrorist financing on all fronts, including the formal and informal components of both the domestic and international financial systems. The 2003 National Money Laundering Strategy has 3 overarching goals, of which Goal 1 - - Safeguard the International Financial System from Money Laundering and Terrorist Financing-- pertains directly to combating terrorist financing. Six objectives provide the framework for this goal, including one objective that focuses efforts on financing mechanisms suspected of being of particular use by terrorist and other criminal organizations. This objective describes federal efforts to combat terrorist financing and how money is being moved or value is being transferred via different types of alternative financing mechanisms, such as charities, Hawala/Alternative Remittance Systems, bulk cash smuggling, trade-based movements, and cyber crime. A separate appendix D, entitled "Trade Based Money Laundering and Terrorist Financing," provides more detail on alternative remittance systems and trade in gold, diamonds, and other precious metals and gems.

    Recommendation: Moreover, to create a basis for an informed strategy for determining how money is being moved or value is being transferred via the trade in precious stones and commodities, the Secretary of the Treasury and the U.S. Attorney General should produce a report on this subject, fulfilling their overdue action item under the 2002 National Money Laundering Strategy. Such a report should be based on up-to-date law enforcement investigations of links between precious stones and commodity trading and the funding of terrorist groups, as required under the strategy.

    Agency Affected: Department of Justice

  3. Status: Closed - Implemented

    Comments: In November 2003, we recommended (Terrorist Financing: U.S. Agencies Should Systematically Assess Terrorists' Use of Alternative Financing Mechanisms (GAO-04-163)), that the FBI, in consultation with relevant U.S. government agencies, systematically collect and analyze information involving terrorists' use of alternative financing mechanisms. In response to our recommendation, the FBI took steps to initiate procedures and in February 2004 agreed to implement specific measures to satisfy the recommendation. In May 2004, we found that the measures were not implemented. Subsequently, in February 2007, the FBI reported that it now had implemented specific measures meeting the recommendation and that this had resulted in numerous measurable results including changes to the manner in which terrorism investigations are conducted and the dissemination of financial-based intelligence. First, the FBI has published standard intelligence requirements including intelligence collection requirements for alternative financing mechanisms. Second, subsequent to its establishment of the Program Management and Coordination Unit (PMCU) within the Terrorist Financing Operations Section (TFOS) in 2003, it has implemented a number of measures to increase the Unit's capacity to capture information related to the financing of terrorism. In direct response to the GAO report, the Program Management Group within PMCU has been tasked to track the financial investigative component for the FBI's Full Field Investigations. A comprehensive data base is now maintained to track methods of earning, storing and moving money by suspected terrorists. From December 2006 to February 2007, approximately 300 cases had been systematically reviewed and will be reviewed each six months until the case is closed. Third, in November 2005, TFOS established the Financial Intelligence Team (FIT) which is responsible for monitoring the database, identifying and analyzing trends, and disseminating information to law enforcement and the intelligence community. FIT is involved in an ongoing effort to proactively exploit data obtained pursuant to the Bank Secrecy Act to identify previously unknown terrorist financing networks, among other efforts. In February 2007, the FBI reported that these efforts have enhanced TFOS' capacity to routinely and systematically collect and analyze information in an ongoing, sustained basis relative to the manner in which terrorist networks finance operations and specifically their use of alternative financing mechanisms.

    Recommendation: To establish a basis for an informed strategy to focus resources on the most significant mechanisms that terrorists use to finance their activities, the Director of the FBI should, in consultation with relevant U.S. government agencies, systematically collect and analyze information involving terrorists' use of alternative financing mechanisms.

    Agency Affected: Department of Justice: Federal Bureau of Investigation

  4. Status: Closed - Implemented

    Comments: GAO found that the Internal Revenue Service (IRS) had not taken advantage of existing law to enable greater information-sharing with states concerning the oversight of charities. Terrorist abuse of charities highlighted the increased need for such information-sharing. Although the IRS told GAO in February 2002, that it had begun to develop a system to share data with the states for the oversight of charities as allowed by law, the IRS had not made this initiative a priority, and had not developed and implemented the system. At the conclusion of GAO's fieldwork, IRS officials told GAO that they planned to establish improved information-sharing with states by December 31, 2004. To improve the oversight of charities, leading to the possible disruption of terrorist financing, GAO recommended that the Commissioner of the IRS, in consultation with State charity officials, establish interim IRS procedures and state charity official guidelines, as well as set milestones and assign resources for developing and implementing both, to regularly share data on charities as allowed by federal law. In response to GAO's draft report and recommendation, the IRS expedited efforts and issued IRS procedures and state guidance on December 31, 2003, a year earlier than planned. On December 31, 2003, they issued new procedures in their Internal Revenue Manual (IRM 7.28.2) detailing how employees are to disclose information about tax exempt organizations to appropriate state officials under Internal Revenue Code 6104(c). These procedures allow sharing of certain information on suspect charities. Also, the IRS sent a letter dated December 31, 2003, to state charity officials with the enclosure "Sample Access to Federal Charity Information - A Guide for State Charity Officials," which describes implementation of the information-sharing program.

    Recommendation: Finally, to improve the oversight of charities, leading to the possible disruption of terrorist financing, we recommend the Commissioner of the IRS, in consultation with state charity officials, establish interim IRS procedures and state charity official guidelines, as well as set milestones and assign resources for developing and implementing both, to regularly share data on charities as allowed by federal law.

    Agency Affected: Department of the Treasury

 

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