One of the successes President Donald Trump can tout from his first foreign trip was putting forth an agreement between the United States and the Gulf states to combat the bankrolling of terrorism around the world. As terrorist groups such as the so-called Islamic State (IS) grow more decentralized and nebulous, financial institutions and governments are making it a strategic priority to cut extremists off from funds for weapons, training, recruiting, member compensation, and social services. But both rapid technological advances that make the movement of money faster, and ancient systems that allow for or encourage anonymity and opaque record-keeping, are making this effort yet another seemingly intractable front in the war on terrorism and extremism.
Efforts against terrorism financing were thrust into the spotlight in the aftermath of 9/11, when it was revealed that Al-Qaeda operatives received funding through legal, semi-legal, and illegal channels to plan and carry out the coordinated attacks. The USA PATRIOT Act, passed just one month after the attacks, aimed to strengthen safeguards against money laundering techniques and gaps in “Know Your Customer” (KYC) procedures developed for financial institutions.
The key issue policy makers and stakeholders now face, as they did in 2001, is how to turn off the spigot of funds for terrorists, while leaving it flowing for developing economies that depend heavily on the revenue stream of remittances (in some countries, such as Tajikistan, remittances make up more than half of Gross Domestic Product), and for a global population that is becoming more and more mobile, in every sense of the word.
Financial technology, or FinTech, is now under intense scrutiny as governments and financial regulatory bodies race to stanch the flow of funds to extremist groups. FinTech innovations and companies aim to make financial services more efficient, more accessible, and more secure, but these features could become dangerous bugs in the hands of violent extremist groups.
“Financial technology, or FinTech, is now under intense scrutiny as governments and financial regulatory bodies race to stanch the flow of funds to extremist groups.”
Take two case studies of FinTech firms. Prosper, a US-based online lending platform, came into the spotlight after it was discovered that they had provided Syed Rizwan Farook with a $28,500 loan, which he obtained legitimately, but may have used to plan and carry out a massacre at an office in San Bernardino, California. Prosper had virtually no way to know that Farook, whose record was clean, would use their loan to commit a terrorist act, and yet the firm has been implicated in the crime.
Other FinTech firms are working to develop safeguards against the predicament Prosper now faces. WorldRemit, founded by Somali refugee-turned-entrepreneur Ismail Ahmed, is a FinTech operation that provides a variety of low-cost, mobile-based money transfer solutions for customers around the world. WorldRemit hopes to balance security with user-friendliness: key for a company focused on helping poor and working-class migrants, who are often unbanked and sometimes undocumented, send money to relatives in their countries of origin. Ahmed’s startup, founded in 2010, uses computer technology to track and flag suspicious transactions, and requires government-issued identification from all users. But as evidenced by the events in San Bernardino, analysts are concerned that it’s nigh impossible to track the “last mile” – what happens to the funds once they reach their destination. Furthermore, how do FinTech firms combat terrorists when no red flags appear until it’s too late?
On the other side of the equation, regulatory bodies struggle to harness technology to address these challenges. In a 2017 Financial Action Task Force (FATF) report on the state of Sweden’s CFT efforts, FATF noted that deficiencies in Swedish law enforcement’s IT infrastructure stymie the nation’s efforts to combat money laundering and effectively use financial intelligence, and to keep up with the technological advancements in internet/mobile banking and virtual currency that have effectively made Sweden a nearly cashless society. If Sweden, a country with a high standard of living and strong infrastructure, falls short, what of countries with far fewer resources?
Despite technological advances, terrorist and extremist groups often rely on lower-tech methods to move money quickly and anonymously. The ancient Islamic money transfer system known as hawala is, when used legitimately, a fast, easy, and secure way to transmit funds from one person to another. As detailed in a report by the US-based Financial Crimes Enforcement Network (FinCEN), hawalas do not rely on promissory notes; rather they rely on trust and community networks to move funds across borders.
While hawalas are illegal in the United States and in many of the “destination” countries, the vast majority of hawala users are the clientele FinTech firms like WorldRemit hope to woo: working-class migrants sending remittances to their families. Policy makers and stakeholders face the same dilemma with the hawala system as they do with its high-tech descendants: how to preserve and sustain an easy-to-use, secure service on which thousands of legitimate users rely, while preventing criminal elements from taking advantage of it.
“How many can slip through the nets before legitimate customers must sacrifice convenience, liberty, or access? At its heart, the dilemmas faced by actors combatting financing of terrorism are no different from those present in any other front in the war on terror.”
The growth of a truly global economy and the increasing interconnectedness and rapid technological advancements in the world of finance have brought opportunity and connectivity to an ever-expanding swath of the world’s working population, but financial regulatory bodies and regimes have struggled to keep up, leaving financial systems old and new (and their legitimate users) vulnerable to exploitation by violent extremists. Moreover, financial regulatory bodies and governments struggle to balance civil liberties and economic need and opportunity with security concerns. How many can slip through the nets before legitimate customers must sacrifice convenience, liberty, or access? At its heart, the dilemmas faced by actors combatting financing of terrorism are no different from those present in any other front in the war on terror. But with the health of developing economies and the future of how the world does business riding on the success (or failure) of efforts to prevent the bankrolling of extremism, the stakes are higher than most care to acknowledge.