CATF Reports Mar. 8, 2016, 2:48pm


Much has been written about the financial infrastructure provided by informal banking systems like Hawala, currency traders, and mom and pop money remitters. The proliferation of informal payments mechanisms after 9/11 has proved to be an enduring and frustrating challenge for U.S. intelligence and law enforcement agencies. The takeover of large swaths of Iraq and Syria by ISIS has only made the situation worse.

In spite of sustained, aggressive U.S. and allied attacks against ISIS’s financial infrastructure, the terror network manages to endure. Because they are rare, confiscations of assets and disruption of their flow through the international system make little if any difference. Thus, the reasons for ISIS’s economic resilience present even more daunting challenges than is popularly conceded. The major factor was called out in a recent report:

ISIL presents a policy and intelligence challenge because it derives its financial strength largely from internal sources. Th[e] ability to survive and grow independent of external funding…make it difficult for the U.S.-led coalition to target the group's funding using traditional measures.

The reasons for U.S. difficulty in exploiting traditional sanctions require some explanation. First, one of the strengths of ISIS “internal funding” are money exchanges that function as formalized Hawalas, taking in payments at one location and dispensing payment at often distant venues, and generally devoid of accounting records that render surveillance of transactions virtually impossible. If an exchange is dissolved for regulatory violations, it can resurface under a new name which merely serves as a “front” for the real owner. Endemically lax on regulatory oversight, Iraqi government control of money exchanges is nonexistent in ISIL dominated areas while international banking conventions designed to freeze terrorist assets and prevent their transfer, are simply absent where ISIS reigns.

Second, to buttress itself against unprecedented U.S. activism, ISIS has resorted to strategies that combine its own strengths with those of experienced but morally bankrupt allies--traditional organized crime groups. Drug traffickers and other racketeers have amassed experience over decades hiding narcotics and other underworld assets from whatever government sought to uncover them. A Congressional report highlighted the challenge and registered a critically important distinction:

Entities engaged in terrorist activities may borrow methods from criminal enterprises, but ultimately the two groups have different aims. Criminal networks aim to maximize profit, relying on a relatively stable, functioning state to provide a consumer base. Terrorist entities seek to undermine that stability to achieve a new status-quo. They tend to be more political than their traditional criminal counterparts. 

This contrast emphasizes the need for counterterrorism forces to understand where productive collaboration stops—a crucial step in creating more effective counter measures. The U.S. has already worked successfully to deny banks in ISIS dominated regions access to international wire transfer networks, leaving money exchanges as the only viable means of transferring funds. However, the ominous dark cloud of terror finance does have one silver lining: money transfers to outlets in ISIS territories are often made from participating networks in Turkey, Jordan, and Syria. This means that money exchange venues in Turkey, for example, function in regulatory environments known for higher levels of counterterrorism compliance and cooperation. This offers U.S. and partner intelligence agencies an opportunity to backtrack the transactions and work to follow and intercept them at their origins.    

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