Financial institutions spends millions of dollars every year bolstering their defences against terrorist financing. Terrorists operate by camouflaging themselves amongst civilian populations. If they can evade the authorities and intelligence communities, how can financial institutions mount a credible defence against the threat they pose to society? For more information on ManchesterCF and other issues of Analytics please visit http://bit.ly/1p6UZyS

1. Financial institutions spend millions of dollars
each year erecting defences against money
laundering and terrorist financing. Money
laundering and terrorist financing are distinct
areas of financial crime yet they share some
common elements. Time and again, the financiers
of terrorist acts have employed money laundering
techniques to fund the young, the impressionable
and the desperate that pull
a trigger or ignite a fuse.
Erect ing defences against
terrorist financing, let alone
detecting the transactions
that finance acts of terror,
can be extremely frustrating
for a financial institution. Terrorists consider
themselves at war, one with no rules or uniform.
Terrorists camouflage themselves within a
civilian population in order to unleash their fury
on unsuspecting targets or symbolic structures.
If they can evade law enforcement and the
intelligence community to fulfil their goals, they
can avoid recognition by a financial institution.
How can a financial institution mount a
credible defence against this kind of threat?
The Financial Action Task Force (FATF)
Recommendation #5 states1:
Countries should criminalise terrorist
financing on the basis of the Terrorist
Financing Convention, and should
criminalise not only the financing of terrorist
acts but also the financing of terrorist
organisations and individual terrorists
even in the absence of a link to a specific
terrorist act or acts. Countries should
ensure that such offences are designated
as money laundering predicate offences.
As a result of FATF Recommendation #5,
civilised nations have criminalised terrorist
f inancing and integrated it into their
anti-money laundering compliance regimes.
To combat the financing of terrorism, banking
super vi sor s and f inancial
intelligence units (FIUs) release lists
of individuals and organisations that
are known to governments and the
intelligence community. Competent
financial institutions scrub their
client names and transaction
counterparties against these lists.
Canada’s Office of the Superintendent of
Financial Institutions (OSFI) publishes lists2,
as does the United States Office of Foreign
Assets Control (OFAC)3 and Her Majesty’s
Treasury (United Kingdom)4. Other nations
publish similar lists that detail the identities
of those they designate as involved in terrorist
activity. Financial institutions operating in more
than one jurisdiction must be aware of the
lists of the territories in which they operate.
If a financial institution does not wish to
monitor all the lists of designated individuals
or organisations released by governments
around the world, private-sector financial
intelligence firms are more than willing to sell
their consolidated lists. Their data is drawn from
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UNINTENDED CONSEQUENCES
All warfare is based on deception.
– Sun Tzu , The Art of War, circa 500 BC
ManchesterCF Analytics November 2014 1 of 3
ANALYTICS November
2014
“if they can evade law
enforcement and the
intelligence community
to fulfil their goals, they
can avoid recognition by
a financial institution.”

2. credible governments around the globe. These
private-sector databases include individuals or
organisations whose names do
not appear on any government
lists, yet are believed by firms’
analysts to represent a high risk
for terrorist financing activity.
The process of cross-checking
names against databases of
sanctioned individuals and entities
is a straightforward exercise. Yet
it is also a limited defence mechanism. Those
seeking to commit terrorist acts go to great lengths
to camouflage their identities and their actions.
A known terrorist who funds his campaign with
a credit card in his name will find his operational
abilities curtailed rather rapidly by the local
constabulary. Anonymity is, of course, preferred.
Financial intelligence units, aware that reporting
entities require assistance in detecting both
money laundering and terrorist financing
activity, offer guidance on how to detect
terrorist financing. An excellent report from
AUSTRAC, the Australian FIU, outlines some
of the funding mechanisms used by terrorists5:
• Self-funding
• Cross-border movement of cash
• Transmission of funds through
banking and remittance sectors
• Online payment systems
• Stored value cards
• Charities and non-profit organisations
A financial institution might have a reasonable
expectation of detecting five of the six
aforementioned financing methods – self-funding
being the exception – but the theory is,
unfortunately, rather different from the practise.
The Taliban and ISIS are engaged in all-out
war fare. A recent report on Afghanistan
from the American government
stated, “The UNODC estimates
that the value of the opium and
its derivative products produced in
Afghanistan was nearly $3 billion in
2013, up from $2 billion in 2012.”6
ISIS has seized vast tracts of ground
in Iraq and is raising millions of
dollars through a series of taxes imposed on
those living in the captured territories, bank
robbery and the sale of oil7. Given
the resources they have at their
disposal, both extremist groups are
capable of funding extensive terror
campaigns at home and abroad.
The grim reality is that terrorist
attacks are not expensive. History
shows that tremendous damage
can result from very little operating
capital. For example, the of ficial United
Kingdom House of Commons report into the
July 7 2005 bombings in London found that
comparatively small sums of money were
spent to execute this major terrorist event8.
How the operation was financed:
63. Current indications are that the group
was self-financed. There is no evidence
of external sources of income. Our best
estimate is that the overall cost is less
than £8,000. The overseas trips, bomb
making equipment, rent, car hire and
UK travel being the main cost elements.
64. The group appears to have raised the
necessary cash by methods that would be
extremely difficult to identify as related
to terrorism or other serious criminality.
The National Commission on Terrorist
Attacks Upon the United States released a
Staff Report to the Commission in which it
estimates the cost of certain terrorist events9:
• U.S. embassy bombings in East
Africa (1998) @ $10,000
• September 11th attacks in New
York, Washington and Pennsylvania
(2001) @ $400,000–$500,000
• Bali, Indonesia bombings(2002) @ $20,000
Prosecutors of the case against
three men who were implicated
in the Madrid bombings of 2004,
which killed 191 people and
injured over 1000 others, stated
that the estimated cost of the
operation was a mere GBP36,00010.
ManchesterCF
Suite 501
125-720 King Street West
Toronto, Ontario
Canada M5V 3S5
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“ISIS has seized vast
tracts of ground in
iraq and is raising
millions of dollars
through a series of
taxes, bank robbery
and the sale of oil”
“Cross-checking names
against databases of
sanctioned individuals
and entities is a
straightforward
exercise. yet it is
also a limited defence
mechancisim.”
ManchesterCF Analytics November 2014 2 of 3

3. When the amounts involved are so trivial
compared to the money laundering activity
associated with narcotics or investment
fraud schemes, how can financial institutions
possibly hope to uncover terrorist financing?
Canada’s FIU, FINTRAC, has issued some
valuable direct ion on how to ident ify
suspicious transactions11:
Provide as many details as possible in your
report about what led to your suspicion,
including anything that made you
suspect that it might be related to terrorist
financing, money laundering, or both.
If you cannot make the distinction
based on the information available,
remember that it is the information
about your suspicion that is important,
not the distinction between money
laundering and terrorist activity offences.
FINTRAC’s message is critical.
If a staff member at a financial
institution observes suspicious
activity, it must be reported
to the FIU. It does not matter
whether or not it is labelled as
money laundering or terrorist
financing, as long as a report
is filed with the FIU for analysis.
If a report is absorbed into the FIU’s database,
it can potentially inform an analyst’s research
into money laundering or terrorist financing, or
both. The analyst’s ability to use the information
in the report is not dependent on how the
report was categorised by the reporting entity.
Analysts have access to classified information
not available to financial institutions. As a
result, they are better positioned to assess
whether or not a transaction or customer
is connected to terrorist financing activity.
As long as the reporting entity is disclosing
suspicious transactions to the FIU, the system
should be effective in identifying high areas
of risk for terrorist financing activity. If,
however, the reporting entity is attempting to
focus its attention only on what it deems to
be possible terrorist financing, it is plausible
that seemingly mundane activity will go
unreported to the FIU. As a result, huge gaps
will open up in the FIU analyst’s research.
In essence, a financial institution can do more to
combat terrorism by reporting suspicious activity
to the FIU than by attempting to identify specific
and discrete examples of terrorist financing.
By refining the basics of its anti-money laundering
and anti-terrorist financing compliance regime,
a financial institution can greatly increase
its chances of reporting a critical piece of
information about a possible or actual terrorist act.
The irony is that, in an efficient national financial
intelligence program, the reporting entity
may never find out that it has provided such a
critical piece of information. Despite the actions
of Snowden, Manning, Assange and others,
the financial intelligence community must
keep its secrets in order to operate effectively.
While this may prove frustrating for society at
large, it is the only appropriate response to
combat the financing of groups intent on
wreaking havoc on the general population.
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ManchesterCF
Suite 501
125-720 King Street West
Toronto, Ontario
Canada M5V 3S5
+1.416.388.6051
www.manchestercf.com
info@manchestercf.com
@ManchesterCF
“it is plausible that
seemingly mundane
activity will go
unreported to the fiu.
as a result, huge gaps
will open up in the fiu
analyst’s research.”
ManchesterCF Analytics November 2014 3 of 3
1 http://www.fatf-gafi.org/media/fatf/documents/recommen-dations/
pdfs/FATF_Recommendations.pdf
2 http://www.osfi-bsif.gc.ca/Eng/fi-if/amlc-clrpc/atf-fat/Pag-es/
default.aspx
3 http://www.treasury.gov/resource-center/sanctions/SDN-List/
Pages/default.aspx
4 https://www.gov.uk/government/publications/cur-rent-
list-of-designated-persons-terrorism-and-terrorist-fi-nancing
5 http://www.austrac.gov.au/files/terrorism-financing-in-aus-tralia-
2014.pdf
6 www.sigar.mil/pdf/Special%20Projects/SIGAR-15-10-SP.
pdf
7 http://www.treasury.gov/press-center/press-releases/Pages/
jl2672.aspx
8 https://www.gov.uk/government/uploads/system/uploads/
attachment_data/file/228837/1087.pdf
9 http://govinfo.library.unt.edu/911/report/index.htm
10 http://www.theguardian.com/world/2007/nov/01/spain.
international
11 http://www.fintrac-canafe.gc.ca/publications/guide/
Guide2/2-eng.asp#s6-2