MONEY LAUNDERING AND TERROR FINANCING IN 2012 · 2012-03-16 · MONEY LAUNDERING AND TERROR FINANCING IN 2012 2012 ACFE European Fraud Conference ©2012 2 NOTES motivated. Nevertheless,

©2012

MONEY LAUNDERING AND TERROR FINANCING IN 2012

Combating terror finance is part of an overall war against terror organizations and their

financial supporters. Like any business entity, the terror organization needs to maintain a sound

bookkeeping infrastructure for running its financial activities, regardless of their relative low

volumes. Also it will need to cover its financial tracks by using unique money laundering

techniques. From the terror organization's point of view there are at least four reasons for

keeping such records, including the need to control its finances and budget. The importance of

analyzing bookkeeping of terror organizations lies within the definition of the investigative

auditing mission statement: prevention, detection, and quantification of terror finance and money

laundering, as well as combating terror finance by using investigative auditing methodology.

Understanding the unique money laundering techniques will make tracing terror finance easier.

YEHUDAH BARLEV, CFE, CPA (Isr.)

Managing Partner

Barlev Associates, Accountants – Investigative Audit

Tel Aviv, Israel

Mr. Yehudah Barlev is the founder and managing partner of Barlev Associates, Accountants.

Since 1990 the firm has specialized in the fields of investigative and forensic auditing. Mr.

Barlev's experience includes hundreds of cases of fraud investigations and auditing, examination

of financial and operational processes to help executives prevent fraud, computer forensics,

expert witness opinions in courts, forensic accounting in insolvency and due diligence, tracing

local and international money laundering activities, tracking and locating stolen or fraudulently

obtained property and terror finance.

Mr. Barlev consults with lawyers, accountants, internal auditors, security officers,

corporations and governmental agencies. He also gives lectures for various B.A. and M.A.

programs in universities and colleges for academic courses in investigative auditing and white-

collar crime investigations. Mr. Barlev is also the author of The Foundations of Investigative

Auditing (in Hebrew) and dozens of articles on the subject of investigative auditing.

“Association of Certified Fraud Examiners,” “Certified Fraud Examiner,” “CFE,” “ACFE,” and the

ACFE Logo are trademarks owned by the Association of Certified Fraud Examiners, Inc. The contents of

this paper may not be transmitted, re-published, modified, reproduced, distributed, copied, or sold without

the prior consent of the author.


2012 ACFE European Fraud Conference

©2012 1

NOTES Abstract

There are four layers of bookkeeping that are used in terror

organizations. At least one of these four layers is used by

every terror organization. Each layer is a solution for

problems generated by the existing environment. The

adoption of voluntary best-practice rules for charities can

substantially assist in conducting an effective investigative

audit. The factors affecting the quality of bookkeeping

records in a terror organization are internal and external.

Some external factors are derived from the mandatory

demands of regulators. Other internal factors, such as the

size of the organization and the complexity of its financial

control and the movement of funds, are also significant

factors that affect the organization’s bookkeeping

standards.

2012, with its financial and political crises, brings new

trends in terror financing as the sources of funds will be

scarce and the financial support in terror is changing.

The Preconditions of a Terrorist Act

The perpetration of a terrorist act or of terrorist activity is

based on five preconditions:

Target—people or a physical structures prone to a

violent attack

Access/opportunity—the ability of a terrorist to reach a

target

Motivation—the terrorist has a motive for his activities

Infrastructure—the ability to recruit a terrorist or

perpetrate a terrorist act depends upon a suitable

infrastructure

Finance—the last but not least important precondition,

upon which this essay focuses. The amount of funds

needed to finance a terrorist act can be very small: a

few hundreds of dollars to a few thousands of dollars,

particularly if those perpetrating the act are highly



©2012 2

NOTES motivated. Nevertheless, a terrorist act cannot occur

without financing. Money is needed to transport a

terrorist, even via the London Underground, which can

amount to only a few pounds. There are terrorists who

are willing to sacrifice their lives but not their assets,

which belong to their families. In some cases terrorists

have no financial assets.

The Sources of Funds

The “classic” sources of terror finance (TF) differ from the

sources of corrupt funds. We differentiate among the

following sources of terror finance:

Government finance—funds from the official budget

Semi-governmental funds—funds from bodies financed

by the government budget

Private sources—based on religious, ideological or

nationalistic motives

Donations—by supporters or naïve donators. In the case

of al Qaeda before 9/11 some individual donors knew,

and others did not, the ultimate destination of their

donation

Businesses—owned by terrorists’ supporters or

operated in accordance with ideological principles

Entities—owned by terrorist organizations and

producing cash or cover for terror finance, including

payment of salaries to activists

The Uses of Terror Finance

Strategically, when there is a need to maintain an active

terror organization, TF is used for the following activities:

Infrastructure—all terrorist organizations require

infrastructure supporting the population from which its

terrorists are recruited. Infrastructure includes the

following costs:

Administration

Education



©2012 3

NOTES Salaries for activists, fugitives and their families

Welfare services

Propaganda—all terrorist organizations need to

publicize their activities. Some of the larger

organizations have their own newspapers and radio and

television stations, while smaller organizations maintain

websites, publish announcements and finance

ceremonies that intensify support for and identification

with their cause. Although memorial ceremonies might

seem spontaneous, they invariably involve costs for

banners, posters, and leaflets.

Families of activists are sometimes the show pieces of

terror organizations. Suffering families can slow the

recruitment of new members and dampen the level of

support for organizational needs. Therefore the funding

of families of killed, imprisoned, detained or fugitive

terrorists is an important part of the budget of any terror

organization, much like the welfare budget of most

states.

Prisoners and detainees are usually “terrorists in transit”

and are a part of the terror organization. They have

special needs such as legal expenses, food, and

sometimes communication costs. Their families, as

mentioned above, must also receive support.

Militant acts, including expenses for weapons, bombs,

transportation, safe houses, communication, are

essential.

Finance and management expenses must also be paid.

The conduct of terrorist activity varies according to its

geographical location global or global disperse. The

European environment, for example, is much more

expensive than a Central Asian environment.



©2012 4

NOTES The Techniques: Principles

There are dozens of money laundering techniques for

criminal money and terror finance in current use, but all

these techniques are subject to change in accordance with

the prevailing business environment, technologies,

regulations, and the needs of the perpetrators.

Some techniques are based on the old Hawala system with

modern adjustments. Hawala grants the depositor and the

recipient anonymity, even under the strict regulations

enacted in the last ten years.

Today, there is a drive by monetary authorities to scan the

tens of millions of daily electronic fund transfers (EFTs)

throughout the world. The main problem is to spot the

suspicious EFTs from these tens of millions of transfers,

and this can only be done using state-of-the-art

technologies.

The Terror Finance Process: Concealment

Money laundering works in many ways like a fraud,

consisting of two main elements:

Confusion

Concealment

The first element is intended to create chaos and havoc,

while the second element obscures illegal activities. For

example, during the 1930s the Chicago mafia owned many

laundromats in the United States. This was perceived as a

legitimate business, but could not be controlled by

accounting and tax regulations in an accurate manner,

making it difficult for the authorities to track the volume of

the business.

Concealment is needed to avoid detection and is also used

for terror finance. For example charity organizations that



©2012 5

NOTES are controlled by terror organizations show purportedly

high standards of control to the regulatory agencies, but

conceal the transfer of funds to support terror activities.

The Importance of Analyzing Bookkeeping of Terror

Organization

Bookkeeping, in any variance or standard, is the main tool

for control and inspection when money is involved.

Bookkeeping is also the basis for conducting any

investigative auditing or for using investigative auditing

techniques as a tool for combating terror finance.

The goal of locating and analyzing bookkeeping of terror

organizations is to identify one or more of the following:

Sources of finance—the source of finance has a strong

effect on the way the books are kept. For example, a

public or governmental source will require stricter

standards of bookkeeping, which are open for

inspection.

Activities—as the activities of the organization involve

expenses, tracing these expenses can produce an outline

of plans, potential targets and modus operandi, from

which preventive measures can be constructed.

Members—records of memberships, money transfers,

transactions, and expenses including salaries can

expose leaders, members, conspirators, operatives, and

assisting personnel.

The structure of the organization—including personnel

and positions, can be drawn out from the bookkeeping

records.

The Four Layers of Terror Finance Bookkeeping

We can divide the bookkeeping of terror organizations into

four layers; the first layer is kept in strict confidential

environment, if it exists at all, and the fourth layer is open



©2012 6

NOTES to regulators, government agencies, and sometimes even

the public:

The first layer—bookkeeping of military/terror

operations. In large terror organizations that consist of

thousands of armed members, these records show

administrative budgets, including incoming sources of

funds, payment of salaries, cost of weapons and

ammunition, food, shelter, transportation,

communication, and other costs involving armed

activities.

The second layer—bookkeeping of infrastructure costs,

such as religious, educational, ceremonies, media, etc.

International charities and use of tithing by religious

believers is the next desirable activity, mixing both licit

and illicit funds to complicate the money trail. The

methods employed seek nontransparent systems in

which they are able to hide transactions and transfers

across borders; legitimate systems are sometimes used

as well, although the means of transfer are illegal by

nature, such financial transactions may be layered for

additional protection for the transfer.

The third layer—bookkeeping of funds generated from

traceable sources whereas reconciliation is needed for

tracing the money, such as bank transfers, Hawala, or

exports and imports of commodities. The lack of a

paper trail undoubtedly frustrates any law enforcement

agencies’ effort to investigate the source and

destination of Hawala-driven financial flows.

The Hawala system, in contrast to common

knowledge, cannot survive without strict

bookkeeping. Hawala bookkeeping emphasizes

keeping track of how much money is owed to

whom and the profits generated from each

transaction. As the Hawala or any alternative or

parallel remittance system is based on profits by the

hawaladars, or hawala dealers, in the absence of a



©2012 7

NOTES strict bookkeeping the hawaladars will lose tracks

of the transaction details. Such bookkeeping might

be complicated but traceable.

The fourth layer—bookkeeping of front entities like

supportive business entities, charities or nonprofit

organizations, or non-governmental organizations.

These bookkeeping records are open and are prepared

for the inspections of the authorities and are usually

audited by professionals. These entities are under de-

facto control of the terror organizations and are used as

financing sources or for money laundering purposes or

for covering other activities.

Factors Affecting the Quality of Records and

Bookkeeping of Terror Organizations

The welfare organizations belonging to terrorist groups

must maintain sound bookkeeping for the following

reasons:

To pass inspections of the authorities

To show “clean hands” to contributors

To manage cash flow

To report to the financial management of the

organization

The bookkeeping records can be categorized as follows:

Primitive—methods are either in “notebook” form or

some other form, usually handwritten or stored on an

electronic spreadsheet. They might also be found in

word-processing documents.

Advanced—written in bookkeeping software with all

the reporting modes required by the authorities.

Integrated—gives the opportunity to create the correct

reports for external inspection, which show legal

financial operations and use of funds. Internally the

bookkeeping supports the control over the illegal

financial activities and terror/military actions.



©2012 8

NOTES The motivation of the terror organization to keep a high or

a low standard of bookkeeping is based on various factors.

Among these factors are:

Size—the lowest form of bookkeeping that we know is

the one used by small terror cells, which generate their

funds independently. Their bookkeeping is what we call

“notebook” bookkeeping that is used for short-term or

perishable bookkeeping. The larger the terror

organization is, the greater the necessity of sound

bookkeeping.

Complexity—the amount of financial activities and

transactions is a dominant factor for a high of standard

bookkeeping because of the need to keep control over

the budget, the income, and the expenses as well as to

report to the organization’s leaders obligate proper

bookkeeping.

Income from intellectual property crimes, for

example, would require much more sophisticated

bookkeeping methods, capable of monitoring

expenses, salaries, raw materials, suppliers, and

income. “Legal” expenses, such as flight,

accommodation, rent, lease, printing, for which

bank accounts are used, also need reconciliation

based on bookkeeping.

Like any business or public entity, a terror

organization faces the everyday needs of

bookkeeping for purposes of casual management,

budget control, planning, and distribution of funds

and also for observing internal regulations, like

religious finance principles.

Sources—the source of funds has a strong effect on the

quality of the bookkeeping and the reports conducted

by the organizations. Sources like donators, government

budgets, semi-government, or donation bodies that are

usually regulated by government agencies want to make

sure that the funds are used according to the approved



©2012 9

NOTES goals of the organization, and thus require higher

reporting standards.

We can compare the structure of a large terror

organization to a charity organization both having

boards and officers that carry fiduciary

responsibilities in preserving the charitable assets

and meeting the charitable purposes of the

organization. A primary responsibility of directors

and officers is to ensure that the organization is

accountable for its programs and finances to its

contributors, members, and public and government

regulators.

Regulatory environment—regulators and other

enforcement bodies are the biggest threat to terror

organizations and their oversight affects the behavior of

these organizations. The regulatory affect operates in

two different directions:

Outwards—towards the authorities, the

organizations act to:

Cover tracks and avoid audit trails of the

financial activities

Withhold civil authorities from obstructing their

activities

Inwards—for internal regulations, organizations

show donators, suppliers, and customers their

obedience to the law and regulations, for example,

observing religious regulations

The supportive entities are either those owned by the terror

organization or those that are supportive to the cause but

are independent of the terror organization. These entities

will keep a high standard of bookkeeping towards the

authorities, including the tax authorities.



©2012 10

NOTES Trends in Terror Finance in 2012

Global Changes

The effect of the 2011–12 economic crisis on terror

finance

The effect of the Arab Spring on terror finance

The effect of the 2011–12 economic crisis on

money laundering techniques

The social unrest in Europe (PIIGS, UK), the

Middle East (Arab Spring, Israel), and the United

States (Occupy Wall Street) and terror finance

Financial and Technological Developments

Online trade

Electronic purse

International trade and finance

Online banking

Cyber money

Techniques

Classic

Simple

Advanced

Sophisticated

Profile of a CFO in a Terror Organization

Education

Experience

Profession

Position in the organization

Characteristics of the Modern Terrorist Cell

Salaries—individual operatives need to cover their day-

to-day expenses.

Subsistence—the cell must provide it if there is no

other source of income for the operatives and their

dependents.



©2012 11

NOTES Communications—a cell will also need to communicate

with its members and perhaps the parent network.

Training—the operatives’ training continues to be an

important investment for terrorists.

Travel—the financial facilitation of travel, which can

include the procurement of real or false documentation,

represents an important cost for any terrorist cell.

Logistics

Shared funding—a cell that shares a common goal or

ideological or religious background with another cell

might be called upon or feel compelled to provide

financial support.

Documents

MONEY LAUNDERING AND TERROR FINANCING IN 2012 · 2012-03-16 · MONEY LAUNDERING AND TERROR FINANCING IN 2012 2012 ACFE European Fraud Conference ©2012 2 NOTES motivated. Nevertheless,