The increased risk of terrorist financing: now is the right time to review CTF programs

In response to the events in Israel in October the last year, the U.S. Financial Intelligence unit (FINCEN) released a warning regarding potential threats, related to financial flows intended to finance terrorist activities of HAMAS. At the end of January this year, Spanish officials reported the arrest in Barcelona of a thirty-year old who created a system for supporting the terrorists with crypto currencies. He collected sums totaling approximately 200 000 EUR. In such a background of global events our country is not unique.

According to the State Security Department of Lithuania, the national terrorism threat currently is low. However, at the end of December, the Financial Crimes Investigation Service (FCIS) and the Bank of Lithuania warned financial market participants and other obliged entities under the Law on the Prevention of Money Laundering and Terrorist Financing of the Republic of Lithuania about the increased risks of terrorist financing activities in Israel and the Gaza Strip. Although the national risk of terrorist activity is low, the warning of the authorities invites us to focus and evaluate the defensive mechanisms.

Terrorist financing is difficult to spot

Development of the terrorist financing risk management scenarios in monitoring systems is a serious task even for very mature financial institutions. Terrorist groups are usually financed in extremely small amounts, the origin of the funds can be clear and legal, which can make it difficult to distinguish between these operations and usual financial activities.

Alternative financial systems are also used, such as havala, which is based on tradition and mutual trust by transferring funds through members of the community.  Additionally, terrorists themselves finance their activities through organizations in the captured territories. Due to these features of the alternative payment system, no suspicious activity is reported to the law enforcement authorities.

A great deal of effort is needed to prevent the potential financing of terrorism when funds travel through companies with complex management structures. Such structures can be created purposefully to conceal the final beneficiaries; therefore, before establishing business relationships, it is necessary to correctly evaluate this aspect and get to know the client properly.

Criminals are often highly educated, adapt to changes in the financial market and use new technologies. For example, in the aforementioned case of Spain, the financing of terrorist activities was allegedly organized by a person with extremely deep knowledge of blockchain technology. Considerably cheap, and often decentralized transactions in cryptocurrency are attractive due to the speed and conditional anonymity. As a result, the funds of terrorist sponsors may hide behind the usual flows. It is seen particularly in aggregated payments when sums are transferred in a single transfer to dozens of recipients. The specifics of these operations require considerable efforts from service providers, as the latest technologies primarily attract customers who have nothing to do with crime.

The market faces an uneven risk of terrorist financing

The financial market in Lithuania is strongly developed and has international elements – the services of financial institutions are used not only by the residents of our country, but also by citizens of other states. Also, its participants often have incorporated foreign intermediaries in their business. As one of the leaders in Europe in promoting technological progress, system availability and user friendliness, Lithuania has become home to different financial institutions and virtual currency service operators that vary in service spectrum and maturity. For this reason, it is only natural that we face an uneven risk of terrorist financing.

Regarding defense mechanisms for the terrorist financing, compliance with existing regulation is a necessary and non-negotiable aspect. However, the tactics used by criminals also change with time, so the internal review of prevention programs helps to more accurately assess in which direction to improve. The effectiveness of the defensive mechanisms – the procedures used, and the tools used – is the common denominator that binds both the experienced financial market players and newcomers, since all market participants are potentially at risk of finding themselves in the chain of supporting terrorists.

Therefore, to meet the expectations of supervisory authorities, investments in high-quality identification tools and specialized monitoring systems are inevitable, but no less important are investments in human capital because even the best tools are worthless if there is a lack of specialists who are able to use them.

Open source is another free tool

Specialists in the prevention of money laundering and terrorist financing must not only delve into current issues but also be able to properly recognize typologies, have real opportunities to stop operations, and be able to determine the origin of assets and the economic basis of orders.

In order to avoid false positives in systematic screening, it is important to be able to combine different criteria such as sums, keywords, checklists, as well as real-time and retrospective monitoring and evaluation of KYC information. An effective monitoring system can be useful, as indicated by the FCIS, to carefully check public sources: use search engines, data published by national and international law enforcement or supervisory authorities, investigative journalism, or specialized niche news on the prevention of money laundering and terrorist financing research and insights published by portals. These sources contain up-to-date data on funding patterns and individuals associated with gangs identified by law enforcement officials, as well as free, easily accessible and usable resources to help determine whether the subject being investigated is hiding behind an illogically constructed fictitious name and surname, e.g. female name and male surname, location coordinates, address authenticity, website traffic, IP addresses, historical domain owners, etc. Also, public sources can serve well in deepening knowledge about new, emerging typologies, technological innovations, and in this way help to form active response models.

Funds received by terrorists are used to finance “here and now” activities, so spotting terrorist support operations after they have occurred is not an optimal outcome for effective corporate relationship monitoring. Undoubtedly, retrospective identification of sponsors helps, but proactive blocking of financial flows intended for terrorist organizations is the most important weapon to prevent an armed terrorist attack in time.

For all these reasons, it is not surprising that the institutions call for strengthening the KYC and transaction monitoring procedures. The raised expectations also remind us of the importance of cooperation – being different and innovative, we can also rely on mutual trust, talking about what we observe and turning the combating the terrorism to the advantage of the democratic world.