US: How to Combat Terrorist and Other Illicit Financing?

The U.S. federal government may have been shut down for several weeks, which has certainly grabbed global headlines ever since it started on December 22, 2018. Just two days before, the U.S. Treasury Department published an important report about illicit activities in the realm of global finance. In a nutshell, its message is that our security is at risk.

The 2018 U.S. “National Strategy for Combatting Terrorist and Other Illicit Financing,” is a coldly terrifying document. It shows that threats are probably escalating, while the responses by law enforcement worldwide are inadequate.

ISIS cash

On the terrorist front, ISIS, for example, continues to raise funds to support terrorism. It obtains money from selling stolen oil, extorting funds from the people whose villages and towns it controls, the proceeds of crime as well as from U.S. citizens.

The cash raised by ISIS, and other terrorist organizations, buys them arms and entangles them in an international web of corruption and organized crime. Despite ramped-up efforts by law enforcement, the new report provides no hope that the cash flowing to terrorists is being curtailed.

The various state-sponsored networks, terrorist groups, perpetrators of large-scale cross-border fraud, including cyber crime, as well as drug-trafficking and other criminal organizations might be directed from headquarters beyond U.S. borders.

However, many of their financial transactions go through the U.S. capital market and are skilfully processed through U.S. banks.

This is unsettling news. After all, efforts to monitor the trillions of dollars of financial transfers flowing through U.S. banks every year have never been more rigorous and sophisticated.

And yet, the U.S. Treasury acknowledges that U.S. banks “generally may be unwitting and can encounter difficulties in identifying the underlying illicit actors given the information available to them.”

Major efforts are being made, according to the Treasury’s report, to strengthen intelligence sharing across the key departments of the U.S. government and foreign governmental counterparts. Even so, there is not a scintilla of evidence that the amount of illicit finance crossing the world has declined.

The only comfort may lie in the fact that U.S. authorities have not increased their 2015 estimate that domestic financial crime, excluding tax evasion, generates approximately $300 billion of proceeds each year for potential laundering. Aside from the fact that this is almost certainly a most conservative estimate, it is also in and by itself a staggeringly high number.

Dark commerce

By coincidence, the U.S. Treasury’s disturbing study has been published at the same time as an extraordinary book, Dark Commerce-How a New Illicit Economy is Threatening Our Future, by George Mason University professor Louise I. Shelley.

Her research shows the deepening international ties between corrupt governments and organized crime. Their joint activities range from vast trafficking in people to ivory and counterfeit goods of all kinds.

All of this can only take place when the criminals secure the complicity of bribe-taking officials, from the helm of some governments down to border customs agents.

Both Shelley and the U.S. Treasury underscore that the uses of crypto-currencies in illicit finance is increasing and placing an even greater challenge on detection and law enforcement.

The Treasury’s Financial Crimes Enforcement Network (FinCEN) estimates that, over the last two years, virtual currency transactions include over $1 billion in ransomware extortion funds. In addition, over $1.5 billion has been stolen through hacks of virtual currency exchangers and administrators. Again, this may well be a conservative estimate.

The importance of Shelley’s book is that it not only deepens our overall knowledge of the scale of illicit crime and finance, and the extraordinary strategic security threats that are posed, but it forces us to consider the impact on world trade and legitimate commerce of counterfeiting.

In 2005, journalist Moisés Naím wrote a powerful book called ILLICIT – How Smugglers, Traffickers and Copycats are Hijacking the Global Economy. Shelley, who acknowledged the pioneering work done by Naím, now adds enormous detail about the world of fake products, from medicines and pesticides, to cigarettes and luxury goods of all types.

She stressed that the scale of such crimes is rising with the greater use of new technologies, social media and other means to market goods, steal and transfer cash.

Legislation on the way

The Treasury report, like Shelley’s book, point to security challenges that are given insufficient priority by leading U.S. politicians and the U.S. media. An important step in the right direction will be seen in coming weeks with legislation to be advanced in the U.S. Congress.

Its intent is to provide the U.S. Treasury with powers to obtain comprehensive knowledge of the true beneficial owners of all holding companies investing in the United States, from those registered in the state of Delaware, to those in the British Virgin Islands and other offshore centers.

The legislation, promoted by The Fact Coalition, comprising more than 100 interest groups, has bi-partisan support and, significantly, the backing of leading banking associations who see it as a means of reducing their most substantial regulatory compliance costs.

The proposed legislation should be viewed as an important first step. Far more needs to be done given the magnitude of the threats that the U.S. Treasury and Louise Shelley describe.

Policymakers and the media – not just in the United States, but worldwide — need to wake up to the fact that the scale of illicit finance, and all the crimes it reflects, are a matter of the highest national security priority. Unless there is this appreciation, the problems and the threats will multiply.