ATbar Financing Terrorism: the Role of Front Companies and Registered Charities
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Financing Terrorism: the Role of Front Companies and Registered Charities

13/07/2008 | by Database Desk  

On June 19 2008, controversy erupted in New Zealand following the wide circulation of a memo by the Chartered Secretaries New Zealand association (CSNZ) describing New Zealand as “a haven for terrorists looking to finance their activities”. The memo, sent to the seven international offices of the Institute of Chartered Secretaries and Administrations and reaching an estimated 36,000-plus readers, lambasted the New Zealand Companies Office for failing to conduct adequate background checks before registering new companies. Grant Diggle, chief executive of the CSNZ, came under heavy fire for the writing and distribution of what the New Zealand government has called an “extremely alarmist and utterly irresponsible” memo, but defended his actions claiming that a lack of serious safeguards has comprised New Zealand’s corporate integrity and suggests a grave oversight in New Zealand’s fight against terrorism.[1] 

Are the CSNZ’s concerns and calls for more stringent corporate security measures indeed alarmist and unfounded? Greater insight into the sources of terrorist financing suggests otherwise. If the fight against terrorism on a logistical level is to be successful, the large role that the use of legitimate front companies play in financing terrorist organizations and activities must be realized and prevented. Additionally, increased attention must be paid to the use of charities that are either founded with the intent to divert funds towards terrorism or that are co-opted by extremists who use charitable donations to promote terrorism-related objectives. Both the use of front companies and charities are an attempt by terrorist organizations to out-maneuver law enforcement agencies and – as these methods are harder to detect due to their semi-legitimate status - are beginning to eclipse traditional sources of terrorist financing such as the illegal drug trade[2]. 

The use of legitimate front companies by terrorist organizations is a particularly difficult method of fundraising to detect and prevent. According to the New York Times, hundreds of companies worldwide are currently providing financial and logistical support to terrorist networks, with al-Qaeda alone having access to between 30-300 million dollars controlled by a network of legitimate businesses[3]. The use of front companies is a particularly efficient strategy for large terrorist networks such as al-Qaeda, as the initial set-up of such businesses requires large amounts of capital and human resources, resources which most minor terrorist organizations are unable to provide. Once in operation, front companies are so successful in funding terrorism and avoiding detection precisely because they interact primarily with the legitimate economy and often do not have to engage in illegal money laundering[4]. 

Even if detected, the frequent situation of front companies in countries with few financial regulations ensures that a comprised front company can collapse and disappear swiftly. This was the case with Maram, a Turkish travel agency and import-export business run by associates described by American officials as al-Qaeda operatives. Maram had allegedly provided money to other al-Qaeda associates and may have even been involved in efforts to obtain nuclear weapons, but following the arrest and extradition to the United States of one of the associates on charges of terrorism in 1998, the business literally disappeared overnight, the speed of which stunned neighbouring businesses[5]. 

Connections to terrorism have been found in a wide array of businesses worldwide, some even embedded within traditional local economic sectors, such as the livestock, fish, and leather trades[6]. In 2001, it was reported that al-Qaeda was funneling resources throughout its network via a chain of honey stores throughout the Middle East and Pakistan, with headquarters located in Yemen. Honey entrepreneurs such as Abu Zubeidah (a Palestinian director of al-Qaeda recruitment camps) and Khalil al-Deek (a Palestinian American arrested on charges of conspiracy to commit terrorist acts in the United States and Jordan) were not only providing legitimate revenue for al-Qaeda, but also providing a convenient method of shipping contraband such as weapons and drugs within honey shipments. Understandably, inspectors were unwilling to sift through massive amounts of messy and odorous honey to search shipments properly[7]. 

Registered charities, which, like front companies, may be established legitimately but engage in the diverting of funds for purposes of terrorism, have also recently garnered large quantities of media attention. On July 7 2008 alone, the BBC reported a raid by Israeli troops on the offices of a Palestinian charity allegedly linked to Hamas, called the Tadamun Association[8] while the Montreal Gazette reported a lawsuit against the Lebanese-Canadian Bank by Canadians injured in the 2006 war between Israel and Lebanon who claim that the bank allowed Hezbollah-affiliated charity groups to unlawfully transfer funds to Hezbollah, funds used to train, pay, and equip terrorists during the war[9]. These incidents follow a major action by the United States Department of the Treasury on June 19 2008, which moved to add the entire Al-Haramain Islamic Foundation (including branch offices worldwide) to a terrorist blacklist, freezing the charitable organization’s assets in the United States and prohibiting Americans from donating or doing any business with the foundation[10]. 

Charities that divert funds to terrorist networks are particularly elusive sources of terrorist funding, and have been called a “crucial weak point in the war on terror”[11]. Fraudulent charities are difficult to pinpoint especially in cases where the charity itself was not founded with the express purpose of contributing to terrorism, but has instead been hijacked by extremists who then funnel resources into their own causes. The blacklisting or shutting down of charities also results in a much more negative public image for governments wishing to prevent the financing of terrorism, and increased public protest - especially amongst Muslims for whom charity (zakat) is a key aspect of religion[12]. 

Faced with this threat from fraudulent charities, numerous governments have enacted legislation and have taken steps to prevent deceptive charities from gaining a foothold in their respective countries. In the United States, a 2005 study by the Government Accountability Office on the United States’ West Bank and Gaza humanitarian aid program shockingly revealed that six organizations cleared to receive American aid were found to have possible connections to terrorist organizations, including Hamas. In response, the Bush administration enacted a new screening process on August 23 2007 applying to non-profit organizations (NPOs) and charities that receive funding from the US Agency for International Development (USAID). The new screening process requires charities and NPOs to release detailed information about key personnel to the FBI and other intelligence agencies to ensure no connection to terrorists or terrorist organizations. Previously, charities and NPOs were responsible for conducting checks on their own employees, and merely had to certify to USAID that none of their employees were associated with known terrorists or terrorist groups[13]. 

However, the difficulty in isolating and shutting down fraudulent charities was illustrated in the 2007 trial against five key associates of the Holy Land Foundation for Relief and Development, an Islamic charity based outside Dallas accused of passing on funds to Hamas. The case, called the American government’s “largest and most complex legal effort to shut down what it contends is American financing for terrorist organizations in the Middle East”, involved over a decade of investigation and two months of testimony, and provoked massive controversy amongst the American public. On October 22, 2007, the presiding judge declared a mistrial after the jury panel was unable to come to a unanimous decision, stunning those following the case, and providing further ammunition to critics of the United States’ anti-terrorism legislation.[14] 

In Canada, lawmakers have also made a concerted effort to stem terrorist financing through legislation. In 2000, amendments to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act established the Financial Transactions and Reports Analysis Centre of Canada (FINITRAC) which has as its mandate the collection and analysis of information in an attempt to specifically prevent terrorist financing. On December 14th, 2007, the Canadian Parliament passed Bill C-25 which “expand[ed] the type of information collected and dispersed by FINTRAC and inflate[d] the number of agencies, both domestic and foreign, that are the potential recipients of the information”. In particular, Bill C-25 was designed to provide oversight of Canadian charities by requiring Canadian charities to provide comprehensive information on their employees and their business practices to avoid possible connections to terrorism.[15] 

As a consequence of the increased oversight over charities afforded to Canadian law enforcement agencies by legislation such as Bill C-25, on June 16 2008, the World Tamil Movement was added to Canada’s list of prohibited terrorist organizations, the first NPO to be added to the list since the list’s inception in 2002. The World Tamil Movement, self-described as a community association involved in humanitarian work, has allegedly funneled financial resources into the Liberation Tigers of Tamil Eelam (LTTE). The listing of the World Tamil Movement signaled the willingness of Canadian officials to more thoroughly scrutinize charities and NPOs, and hopefully indicates a significant step towards making the recognition of fraudulent charities a top priority in the fight against terrorism.[16] 

As demonstrated, the trend towards increased terrorist financing through legitimate companies and registered charities presents a difficult challenge for law enforcement agencies wishing to curb the logistical infrastructure of terrorist organizations. The CSNZ memo accurately warns of the dangers in failing to provide adequate oversight of the corporate sector, and is correct in suggesting that any government unwilling to submit to more stringent security measures may be fostering conditions under which fundraising for terrorism-related purposes may thrive. 

 


 

Works Cited: 

BBC News, “Israelis close ‘Hamas Charity’”, 7 July 2008. 

Carters Professional Association, “First Canadian Non-Profit Added to Terrorism List”, 25 June 2008. 

Council on Foreign Relations, “Tracking Down Terrorist Financing”, 4 April 2006. 

International Herald Tribune, “Judge declares mistrial in Muslim charity case”, 22 October 2007. 

Jeanne K Giraldo, Harold A Trinkunas, “Terrorism Financing and State Reponses”, 2007. 

Law Times, “Anti-Terrorism Law Increases Burden for Charities”, 5 February 2007. 

The Montreal Gazette, “Bank Sued: Four Canadians Sue Lebanese-Canadian Bank for Funding Terrorism”, 7 July 2008. 

MSNBC, “U.S. Sanctions Saudi-based Charity”, 19 June 2008. 

The New York Times, “THREATS AND RESPONSES: QAEDA'S BANKROLLS; Front Companies Said to Keep Financing Terrorists”, 19 September 2002. 

The New York Times, “A NATION CHALLENGED: AL QAEDA; Honey Trade Said to Provide Funds and Cover to bin Laden”, 11 October 2001. 

The New Zealand Herald, “'Terrorist target' memo angers Beehive”, 19 June 2008. 

The Washington Post, “Foreign Aid Groups Face Terror Screens”, 23 August 2007.
Notes: 

[1] New Zealand Herald, “'Terrorist target' memo angers Beehive”, 19 June 2008, http://www.nzherald.co.nz/section/1/story.cfm?c_id=1&objectid=10517182, <6 July 2008, 12:00>. 

[2] Council on Foreign Relations, “Tracking Down Terrorist Financing”, 4 April 2006, http://www.cfr.org/publication/10356/, <06 June 2008, 11:30>. 

[3] The New York Times, “THREATS AND RESPONSES: QAEDA'S BANKROLLS; Front Companies Said to Keep Financing Terrorists”, 19 September 2002, http://query.nytimes.com/gst/fullpage.html?res=9800EFDE1330F93AA2575AC0A9649C8B63&sec=&spon=&pagewanted=print, <06 June 2008, 12:00>. 

[4] Jeanne K Giraldo, Harold A Trinkunas, “Terrorism Financing and State Reponses”, 2007. 

[5] The New York Times, “THREATS AND RESPONSES: QAEDA'S BANKROLLS; Front Companies Said to Keep Financing Terrorists”, 19 September 2002 

[6] Council on Foreign Relations, “Tracking Down Terrorist Financing”, 4 April 2006, 
http://www.cfr.org/publication/10356/, <06 June 2008, 11:30>. 

[7] The New York Times, “A NATION CHALLENGED: AL QAEDA; Honey Trade Said to Provide Funds and Cover to bin Laden”, 11 October 2001, 
http://query.nytimes.com/gst/fullpage.html?res=9906E4DB173FF932A25753C1A9679C8B63&sec=&spon=&pagewanted=print, <06 July 2008, 11:00>. 

[8] BBC News, “Israelis close ‘Hamas Charity’”, 7 July 2008, 
http://news.bbc.co.uk/2/hi/middle_east/7493025.stm, <06 July 2008, 14:00>. 

[9] The Montreal Gazette, “Bank Sued: Four Canadians Sue Lebanese-Canadian Bank for Funding Terrorism”, 7 July 2008,
http://www.canada.com/montrealgazette/news/business/story.html?id=a73899cb-54e9-4b28-a5b8-9545fb722334, <6 July 2008, 12:00>. 

[10] MSNBC, “U.S. Sanctions Saudi-based Charity”, 19 June 2008, 
www.msnbc.msn.com/id/25268064/, <6 July 2008, 13:00>. 

[11] Law Times, “Anti-Terrorism Law Increases Burden for Charities”, 5 February 2007, 
http://www.carters.ca//news/2007/lawtimes/tscssc0205.htm, <06 July 2008, 14:00>. 

[12] Council on Foreign Relations, “Tracking Down Terrorist Financing”, 4 April 2006, 
http://www.cfr.org/publication/10356/, <06 June 2008, 11:30>. 

[13] The Washington Post, “Foreign Aid Groups Face Terror Screens”, 23 August 2007. 
http://www.washingtonpost.com/wp-dyn/content/article/2007/08/22/AR2007082202847.html?hpid=topnews, <06 July 2008, 11:00>. 

[14] International Herald Tribune, “Judge declares mistrial in Muslim charity case”, 22 October 2007, 
http://www.iht.com/articles/2007/10/22/america/22holy.php, <06 July 2008, 12:00>. 

[15] Law Times, “Anti-Terrorism Law Increases Burden for Charities”, 5 February 2007, 
http://www.carters.ca//news/2007/lawtimes/tscssc0205.htm, <06 July 2008, 14:00>. 

[16] Carters Professional Association, “First Canadian Non-Profit Added to Terrorism List”, 25 June 2008, 
http://www.carters.ca/pub/alert/ATCLA/ATCLA15.pdf, <06 July 2008, 14:00>.