Date posted: 1/12/2016 6 min read

Terrorism: Big business with deep pockets

Modern terrorist groups are increasingly financing themselves and disrupting their supply of finance is a critical issue

In brief

  • The modern terrorist group uses a sophisticated network to earn revenue to maintain operations
  • IS demand taxes and kidnapping ransoms, loot banks and sell antiquities to fund their activities
  • Australia has beefed up its anti-terror laws and given additional funding — A$20m — to AUSTRAC

By Steve Lewis

When Islamic State (IS) released a video in late January threatening to kill two hostages it signalled an alarming new phase in the militant group’s campaign of terror.

In what has become a depressingly familiar scenario, the video showed two frightened Japanese men kneeling before their would-be executioner. What stunned hardened counterterrorism experts was the size of the ransom: US$200m.

As global authorities scramble to stem the rise of radical Islam and militant groups such as IS and other al-Qaida affiliates, one critical fact is emerging — they are better resourced than ever before.

Long gone are the days of terrorist outfits relying on donations from supporters in foreign countries. The modern terrorist group — and Islamic State is perhaps the embodiment of this — uses a sophisticated network to earn revenue to maintain operations.

So, as the United States leads the charge against the rise of militant Islamic groups, disrupting supply of finance has emerged as a critical issue.

The US$200m ransom sought for the release of the Japanese hostages fits a pattern of extortion and unbridled violence that has seen the group emerge as arguably the best-equipped terrorist vehicle ever.

And while Australia and New Zealand may be struggling to stop the numbers of so-called “foreign fighters” joining the campaign in the Middle East, the emergence of IS as a quasi-corporation-cum-state is testing the resolve of authorities everywhere.

Consider this: Islamic State now controls territory in Syria and Iraq equal to the size of Great Britain. Cities such as Mosul in northern Iraq have fallen to the militant group which has exploited its military success by plundering central banks and other organisations.

Professor Greg Barton, Director of the Centre for Islam and the Modern World at Monash University, says that IS now has a “whole lot of tools available to it” that mean it resembles a country. The militant group, he argues, is functioning as a quasi-state and that relates very much to the question of financing.

“Occupying an area the size of Great Britain that is home to eight million people gives (IS) control over what it calls taxes, but what we’d call ‘stand over’ money, protection money, extortion,” he says.

On the alert

Australia’s Minister for Justice Michael Keenan says that the conflicts in Syria and Iraq currently pose the most significant terrorism financing risks to Australia.

While Australia has beefed up its anti-terror laws, it has also given additional funding — A$20m — to AUSTRAC, which monitors around A$7b in annual transactions across 5,500 remittance providers. This will allow the financial watchdog to hire a further 18 employees (it currently has 251 staff).

“Some perpetrators attempt to disguise funds collected for terrorist groups by mixing them with legitimate business or fundraising activities – this is why we have given the experts all the resources they need to detect this,” Keenan says.

But just how important is it for countries like Australia to cut off funding to IS? After all, IS has become a sophisticated unit that is able to shift funds around to ensure that its frontline troops are properly equipped.

The official Australian Government National Security website declares that Islamic State “uses funds donated for operations in Syria to also fund its activities in Iraq and transfers weapons, fighters and resources between the two countries. It also sources funding through extortion, kidnapping, theft, the black market, smuggling and legitimate businesses”.

Exactly what these legitimate businesses are the government does not say, but Islamic State — perhaps in a bid to establish its bona fides and reach out to potential backers — has been publishing annual reports since 2012 detailing its conquests both in geographical and numerical detail.

While these focus on the scale of operations — 10,000 in Iraq alone during 2013 — it also sends a strong message to potential sponsors. That Islamic State has been successful in building its resources and assets, much like any enterprise, is beyond doubt.

Tax, antiquities and ransom

When Mosul fell in June 2014, the International Business Times reported that the militant group had “looted” US$429m from the city’s central bank.

According to the report, this made IS the “richest terror group ever”, richer than al-Qaida and as wealthy as small nations such as Tonga, Kiribati and the Marshall Islands.

Along with the cash and gold bullion gained through its audacious incursions, Islamic State has also been receiving revenue for sending illegal shipments of oil from Iraq into Turkey while the sale of valuable antiquities has also been a lucrative source of money.

With millions of people living in IS-controlled territory, the organisation has been able to demand the payment of “taxes” and other levies. And the organisation has been able to raise a significant amount of money through its kidnapping efforts. The current price per head on a European hostage is between US$5 and US$10 million, according to many experts.

Last year the New York Times (NYT) reported that Islamic State and other groups affiliated to al-Qaida have earned at least US$125m from kidnappings since 2008 — and that European nations had paid out US$66m in one year — 2013 — alone.

“Kidnapping Europeans for ransom has become a global business for al-Qaida, bankrolling its operations across the globe,” the NYT said.

Clearly it has been a successful business model, although the US has been vocal in calling on countries not to give in to the kidnappers’ demands. It appears highly likely that Islamic State will continue to take hostages as it continues its campaign of terror in the Middle East and beyond.

These payments from European countries were often funnelled through a network of proxies, with the money sometimes masked as development aid.

It’s no longer the case that if we stop the flow of funds out of Australia, that we’ve dealt a serious blow to these groups.

New model

Militant Islamic groups appear to have moved on from the early al-Qaida model, which involved receiving the bulk of its funding from deep-pocketed donors. Now the bulk of finances for recruitment, training, and arms purchases comes from kidnapping and from extracting revenue from territories under control. This is a very different model to groups like the once proscribed terrorist organisation, Liberation Tigers of Tamil Eelam, which relied on donations from supporters in countries like Australia to fund its campaign against the Sri Lankan government.

Barton says the Islamic State finance model is now being copied by other like-minded organisations, most notably Boko Haram in Nigeria.

In addition to looting central banks, kidnapping and standover “taxation”, IS has also opened up a market selling oil from fields it controls, which is then resold through middlemen to traders. This vast “black market” has reportedly involved large-scale trade with Turkey, whose border straddles both Iraq and Syria.

Given these apparent riches, how important is it that countries like Australia and New Zealand successfully cut off finance to IS and other terrorist organisations?

Minister Keenan argues that the government’s efforts on terrorist financing are helping to make Australia a safer place and points to recent convictions, including against a money remitter service in western Sydney.

This service, Bisotel Rieh, had its registration suspended by AUSTRAC in September 2014 after it failed to declare A$9 million of transfers between January and August 2014.

The money laundering watchdog found the company, which is owned by the family of convicted terrorist Khaled Sharrouf, represented a significant terrorism financing risk. Police who investigated the service, after being tipped off by AUSTRAC, believe that more than A$200,000 was sent via Dubai to a long time friend of Sharrouf’s in Syria.

But while that stands as a victory in the campaign against terrorism financing, Australia’s tougher laws and heightened terror alert are also having unintended consequences for law-abiding citizens who have relied on banks and other financial institutions to remit monies back to their homelands.

It was reported in November 2014 that at least one of Australia’s major banks had closed its remittance service amid fears it could incur massive penalties under counter-terror laws.

This triggered concerns that anti-terror laws were imposing an unnecessary cost on the community and would cause a bigger problem down the track. Greens deputy leader Adam Bandt expressed concerns that the push to curb terrorist financing would leave the remittance industry “adrift”.

“Legitimate security concerns must be addressed but the big banks’ desire to avoid risk could create a bigger problem as, unless there’s a government-supported ‘safe corridor’, the remittance system will be driven underground and new routes to finance terrorism potentially opened,” Bandt said.

Needle in the haystack

As AUSTRAC sifts through millions of legitimate transactions each week, it is seeking out illegal payments to an overseas entity, often paid through third, or conduit, countries.

According to the watchdog’s chief executive Paul Jevlovic, it is akin to finding that needle in the haystack.

“That is our biggest challenge. That among all the legitimate transactions that occur, we need to find those that are linked to organised crime and/or terrorism,” Jevlovic says.

The number of “suspected matter reports” has increased significantly, according to AUSTRAC’s 2013/14 annual report.

But there remain serious doubts that groups such as Islamic State are reliant in even a small manner on payments through countries such as Australia.

Barton says it is “delusional” to believe AUSTRAC can starve terrorist groups like IS of funds.

So what can be achieved by AUSTRAC and other authorities working to close the tap on terrorist financing?

“What we can achieve is to target the domestic Australian networks of these groups and we can lay charges, can prosecute – and that’s of value in and of itself,” Barton says.

“But it’s no longer the case that if we stop the flow of funds out of Australia, that we’ve dealt a serious blow to these groups.”

Hunting funds

AUSTRAC is a rare gem among public service agencies. At a time when Australia’s federal bureaucracy is facing severe cutbacks, the Australian Transaction and Reports Analysis Centre is expanding, and with good reason.

AUSTRAC and its trans-Tasman partner, New Zealand’s Financial Intelligence Unit, are at the vanguard of the campaign to detect and stop terrorist financing.

Using sophisticated software — and employing just over 250 staff — AUSTRAC is charged with monitoring millions of transactions conducted through banks, casinos, real estate agents and other organisations that might be linked to terrorist financing.

As chief executive Paul Jevlovic explains, the job is only growing.

“We now have something like half a billion reports in our data holding and that is going to be upwards of a billion in the next couple of years at the rate at which data is being received,” Jevlovic says.

With an additional A$20 million in funding, another 18 staff will be hired but AUSTRAC can’t rely on human intelligence alone.

“When you are talking about the volume of data we process, you just can’t process it using human capital. I would need a workforce of around 50,000.”

With an estimated 150 Australian “foreign fighters” in Syria and Iraq — New Zealand has between 30 to 40 on a watchlist — authorities on both sides of the Tasman are carefully checking counter-terrorism legislation.

Australia has one of the “most robust money-laundering, terrorism-financing frameworks in the world”, Jevlovic claims.

But he says it would be “absolute arrogance, given the current climate” to not reflect constantly on the adequacies of our legislative framework and to that end the government is doing so.

This review of Australia’s anti-money laundering and counter-terrorism financing (AML/CTF) regime — being undertaken by the Attorney-General’s office — will also consider whether the regulated population should be expanded to include accountants, along with lawyers and real estate agents.

While unwilling to comment specifically on the legislative review, Jevlovic says he wants to take the relationship with accountants and other professionals “to a whole new level” of co-operation.

“Accountants are particularly well aware that they are often privy to information that could lead authorities to the identification of serious crime and terrorism, so we call on them to exercise judgement. We are constantly looking at how we might harness their knowledge,” he says.

AUSTRAC reports an increase in the number of suspicious matter reports (SMR). In 2013/14, the number of SMRs jumped 45 per cent to more than 64,000 — a sign that AUSTRAC’s role in the campaign against terrorism financing is increasingly critical.

Details about current obligations and compliance requirements for businesses can be read at austrac.gov.au/businesses

Liberty vs security?

As governments scramble to introduce tougher anti-terror laws, the question is being asked: are we sacrificing our liberty for security?

On both sides of the Tasman, parliamentarians and civil liberty groups have expressed concerns over the unprecedented surveillance powers awarded to secretive intelligence agencies.

Both the Australian and New Zealand parliaments in late 2014 passed laws designed to protect the community from potential terrorist attacks. And while these reforms had overwhelming political support, the changes were not without controversy and rancour.

In the wake of the deadly attacks in France in early January, jittery world leaders can be expected to take even further steps to beef up the capacity of intelligence agencies to do what they do best. Spy.

But there has been little serious public debate down under about the need to give police and intelligence agencies greater powers that will allow them, in some cases, to act unilaterally without waiting for the consent of the relevant minister.

Never before have our intelligence agencies been granted such powers to engage in surveillance activities. Really it has been just a handful of parliamentarians – largely the Greens and a small number of Australian “independent” MPs — who have expressed reservations, and in some cases voted against the reforms.

They worry the laws will curtail press freedom and potentially trample civil liberties.

In Australia, Liberal Democratic Party Senator David Leyonhjelm was nearly a lone voice when he suggested the changes would have a “chilling effect” on free speech.

Across the Tasman, the public was given just two days to make submissions on Countering Terrorist Fighters Legislation that significantly widens the reach of intelligence agencies to conduct surveillance. Despite concerns the government was rushing the legislation through, the Bill was given the thumbs up by the NZ parliament by 94 votes to 27 in early December.

“It was reported in November 2014 that at least one of Australia’s major banks had closed its remittance service amid fears it could incur massive penalties under counter-terror laws.”

Steve Lewis is an author, journalist and senior adviser with Newgate Communications.

This article was first published in the March 2015 issue of Acuity magazine.

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