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Terrorist financing involves the collection, movement, and disguising of money in order to finance terrorist operations.
Terrorist activities can be financed from both legal and illegal sources – from political donations, to trading digital currencies, to proceeds of crime, e.g., kidnapping for ransom and fraud, and terrorist financiers often exploit intermediaries in the legitimate economy to hide their illicit activities (think financial institutions, charities, religious organisations, and other shell companies).
Because terrorist financing can be hard to detect, and money can pass through many hands and several territories before reaching its final destination, it’s important that organisations train their employees on how to spot signs of potential terrorist financing and also how to report any suspicious activity they come across whilst being vigilant.
Anti-terrorist financing procedures are often thought-of alongside anti-money laundering practices since the techniques used by terrorist financers to disguise and move money around are closely related to money laundering techniques and sometimes involve actual money laundering.
The signs and red flags for terrorist financing therefore overlap with money laundering red flags, so it’s important to offer training to employees in both subjects alongside your anti-money laundering modules.
What constitutes a terrorist financing offence?
Terrorist financing is any form of financial support for terrorism, terrorist organisations, or anyone encouraging acts of terrorism. This includes direct funding as well as the processing of funds intended to facilitate terrorist operations.
Regulations and legislation criminalise the direct funding of terrorism, as well as activities that can contribute to terrorist financing. While specific definitions of terrorist financing offences vary by jurisdiction, they generally include:
- Knowing or having a reasonable suspicion that fundraising money or property may be used for terrorism. This may include making payments, giving loans, inviting others to make payments, or receiving payments that may be used to fund terrorism.
- Using or acquiring money or other property for terrorist purposes or with reasonable suspicion that it will be used for terrorist purposes.
- Entering into an agreement intended to make money or other property available to another person if it will or may be used for terrorist purposes.
- Facilitating retention or control of terrorist property in any way. This might be on behalf of another person, by concealment, through moving it out of the jurisdiction, or via transfer.
- Failing to report red flags, suspicions, or knowledge of terrorist financing activity.
- Alerting a person or organisation that they are under suspicion or investigation for terrorism-related activities. This is known as tipping off.
The importance of due diligence
Client/customer due diligence (CDD) is a key element of the anti-money laundering (AML) and counter-terrorist financing regime.
Performing proper due diligence should uncover any stakeholder who has a controlling influence on a customer or supplier and who benefits from that account or organisation. These stakeholders are known as ultimate beneficial owners (UBOs).
Since those involved in terrorist financing may not be known to authorities or belong to a terrorist organisation, and since UBOs may not be listed as a legal owner and may be hidden behind layers of ownership, terrorist financers often channel money to hidden UBOs who turn out to be terrorists or other sanctioned entities.
This is exactly why the importance of customer and supplier due diligence checks is emphasised in the fight against terror.
The three component parts of customer/supplier due diligence are as follows:
- Identifying the client or supplier, unless the identity of that client/supplier is already known to you and has been verified by you
- Verifying that identity (unless the client’s/supplier’s identity has already been verified by you)
- Assessing and (where appropriate)gathering more information on the purpose and intended nature of the business relationship or occasional transaction
Due diligence is required whenever a new business relationship is established or where organisations carry out odd/occasional transactions.
It is also good practice to carry out additional due diligence (and report!) if you suspect money laundering or terrorist financing is taking place, or if you doubt the veracity or adequacy of documents or information previously obtained for the purposes of identification or verification
Find out more about due diligence.
Red flags of potential terrorist financing activity
Being able to spot and report warning signs of potential terrorist financing activity is an essential component in stopping the flow of terrorist funds, protecting your organisation, and maintaining national security.
In order to remain compliant with anti-terrorist directives, employees should look out for the following red flags:
- Unknown source of funds
- Funds transferred from a jurisdiction subject to sanctions or increased monitoring
- New accounts with more than one signatory in different locations and there is no apparent connection between the signatories
- Address changes, particularly involving a sanctioned jurisdiction
- Transactions do not match the wealth of the account holder
- High volumes of low-value cash transactions or ATM withdrawals
- Transfer destination in a jurisdiction subject to sanctions or increased monitoring
- Evasiveness, e.g., reluctance to provide information when requested or provision of vague or unsatisfactory explanation for unusual account activity
- Suspicious purchases, including purchase of weapons or materials that may be repurposed to build weapons, sudden trade in high-risk assets such as gems, precious metals, or high volumes of cash, or other uncharacteristic high-risk purchases
- Inaccurate or incomplete information and documentation
- Inconsistencies in information, including seemingly innocent typos
- Inconsistent or insufficient due diligence on suppliers farther upstream in the supply chain
- Negative media exposure that suggests links to terrorism Negative media exposure that suggests links to money laundering or other financial crime
- Customer or supplier screening result suggesting a link to terrorism or financial crime
International sanctions
Terrorists and terrorist organisations are often subject to international sanctions. Sanctions are restrictions imposed on individuals or legal entities (otherwise known as targets) to restrict access to financial services, funds, or economic resources. For example, terrorist organisations such as Al-Qaeda as well as individual Al-Qaeda operatives appear on international sanctions lists.
Different jurisdictions maintain their own sanctions lists. It is therefore important to screen customers and suppliers against your organisation’s consolidated list, which will include sanctioned entities from all jurisdictions where you operate.
How to report suspicious or unusual activity
Your organisation should have a procedure for internal reporting of red flags and other suspicious activity. These reports are commonly known as suspicious activity reports (SARs), suspicious transaction reports (STRs), or unusual activity reports (UARs).
It’s the Money Laundering Reporting Officer (MLRO)’s – or other nominated officer’s – responsibility to determine whether further action is required and whether the report is escalated to the authorities.
Some organisations have a special form to fill in for reporting suspicious activity, whilst others permit reports to take any form such as an email, a phone call, or a face-to-face meeting. Always use the method required by your organisation (and if more than one is offered, choose whichever you are most comfortable with).
Regardless of the format, reporting suspicious activity is a confidential process. Only share report details with colleagues who need the information to do their job, and never tip off a customer or supplier that a report has been submitted about them – this is a criminal offense!
If you are ever unsure how to report a suspicion or whether an activity is suspicious, seek advice from your manager. Your organisation’s nominated officer or MLRO can also advise whether a report is needed.
The important thing to remember is that failure to report a red flag or other suspicious activity is illegal, so you must never ignore it. If something doesn’t seem right, seek additional information, get advice, or submit a report.
Need more information?
We hope this article has helped our readers understand what terrorist financing is and how to help prevent it taking place at your organisation. If you need help training your employees on anti-money laundering and anti-terrorist financing best practices, feel free to drop our friendly team a line via email or on 01509 611019. We’re a friendly bunch and would be more than happy to help!
Click here to view our updated for 2022 anti-money laundering collection of eLearning courses!
All business interactions require thorough and effective due diligence in order to confirm that customers and suppliers are who they say they are.
This involves conducting checks at the initial onboarding stage, at ongoing regular intervals thereafter, and if any change in circumstance should trigger concern (e.g., if someone has lost their job but appears to have a lot of newly acquired funds – as this could be perceived as a red flag).
The aim of due diligence is to detect, deter, and prohibit money laundering and associated terrorist financing activity from taking place, and it’s important that everyone at your organisation understands the role they play in mitigating these risks.
It is estimated that money laundering activities in the UK equate to approximately 2-5% of GDP. This means that between £36-90 billion of criminal finances are laundered through the UK economy annually (and that’s a prudent estimate!).
People who commit financial crimes are not always easy to spot; they often distance themselves from suspicious activity by using third parties, moving money around different jurisdictions, or hiding behind shell (false) companies.
There are signs and risk factors that indicate that a link to money laundering could be likely, however – and this is exactly why knowing your customer and performing effective due diligence for each client, supplier, and transaction is an essential part of anti-money laundering compliance.
Put simply, due diligence helps organisations tackle financial crimes and ensures your assets and your customers’ assets stay safe.
Know your customer
Standard due diligence involves a process called ‘know your customer’ or ‘KYC’. This process is designed to protect organisations against types of fraud, corruption, money laundering, and terrorist financing and involves three steps:
- Establishing customers/suppliers’ identity (in The UK, for example, this commonly involves checking that the individual is on the electoral register and asking them to provide a current passport, driving license, or birth certificate, as well as a utility bill, council tax bill, or mortgage statement as proof of address).
- Understanding the nature of the customer/suppliers’ activities and checking the source of their funds is legitimate (this may also include checking the person is not politically exposed and is not on any sanction lists, such as the one published by The International Criminal Police Organisation, Interpol).
- Performing continuous monitoring (this process ensures that business relationships and transactions are consistent and that no unusual activity, or ‘red flags’, appear once the relationship is established).
Recently banks and other regulators have indicated that a move towards standardised KYC requirements would be beneficial. After all, having common internal processes across the board would remove any ambiguity about KYC procedures and ensure everyone – no matter the size of their company or the industry in which they operate – performs these checks to a universally accepted, basic level.
Unfortunately, there is still a way to go before we achieve this, and a number of global and local initiatives to collaborate on this and set standarised KYC checks have failed to stick.
With this is mind, it’s more important than ever that each organisation take responsibility for performing their own KYC to a high standard, training employees on its importance, and ensuring appropriate steps are in place to protect individuals and the company alike.
Enhanced due diligence
For some customers and suppliers understood to be ‘high risk’, standard due diligence is not enough.
In fact, in order to mitigate the risk of financial crime effectively, it’s imperative that organisations make additional, in-depth background checks on certain people. This is known as ‘enhanced due diligence’ or ‘EDD’.
EDD is essentially a risk-based approach; it doesn’t automatically suggest wrongdoing by anyone, rather it’s a way of ensuring protections against financial crime remain effective.
High risk clients or suppliers who necessitate EDD might include:
- Politically exposed persons (PEPs), in other words people with high-profile political roles or who perform prominent public functions (this also includes the family members and close associates of PEPs).
- Special interest persons (SIPs), in other words those who have a known history of involvement with financial crimes. Remember, a person doesn’t have to have been convicted to be considered an SIP. They could have been previously accused of financial crimes or be currently facing court proceedings.
- Anyone with sanctions against them.
- People who have had negative media reports made against them.
- People with a high-net worth.
- Clients who are involved in unusual, complex, or seemingly purposeless transactions (these can be large amounts of money or very tiny transactions).
There are other geographical factors considered high-risk and that would necessitate EDD too, these include people with links to:
- Countries that have sanctions or embargoes against them
- Countries on the Financial Action Task Force’s (FATF) list of Other Monitored Jurisdictions (greylist)
- Countries on the FATF list of Call for Action Jurisdictions (blacklist)
- High-risk third countries
- Countries containing proscribed terrorist organisations (including the UK)
Additionally, any person using private, offshore, or correspondence banking may be considered high risk (particularly if they have no family or business ties to where their bank is geographically located). The high-levels of confidentiality that private banks offer make them much more likely to be involved with money laundering and clients of these organisations are therefore subject to additional EDD checks.
What does enhanced due diligence involve?
Enhanced due diligence involves requesting additional identity documents in order to verify that customers are who they say they are and often includes more in-depth background checks and additional investigations.
When performing enhanced due diligence it’s important to:
1. Establish the origin and ultimate beneficial ownership (UBO) of funds
This means obtaining proof to indicate the origin of wealth and ensure its legitimacy.
Organisations may also compare the value of a person’s financial and non-financial assets with that of their real assets to ensure the numbers add-up and seem viable. Inconsistencies between net-worth, source of wealth, and earnings should be cause for suspicion and trigger further investigation work to take place.
If the person owns an organisation, it will also be important to establish who benefits financially from the ownership and to thoroughly verify this identity.
2. Track ongoing transactions
Organisations will need to keep a close eye on the transaction history of their client or supplier, including that of any interested stakeholders, persons, or organisations, and analyse the purpose and nature of these transactions.
In particular, be on the lookout for inconsistencies between the projected value of goods and services and the amount paid or received. Again, any inconsistencies should trigger alarm bells and will require a valid explanation.
3. Check for adverse media coverage
Negative news reports about your client or supplier should be a red flag, as these speak to the track record and public reputation of the person or entity you’re about to enter into business with.
Any past accusations of financial crime – even if charges were dropped – will be cause for enhanced monitoring and investigation and, of course, established involvement with financial crime indicates a very high risk indeed.
4. Conduct an onsite visit
You may wish to visit your client or supplier at their physical business address to verify their place of work and to verify they are the person they claim to be.
This is also an opportunity to check that the operation address matches the address on any documentation they have provided (e.g., invoices). If these addresses do not match, or the organisation you find is not what you expected based on the information your customer presented to you, this is cause for concern.
An on-site visit may also be vital to obtain physical verification documents that cannot be sourced digitally.
5. Create a further investigation plan
After you’ve conducted all the above processes and determined that the client in question isn’t too high-risk for you to continue working with them, you’ll need to create a report outlining your EDD plans for monitoring your client in the future.
A timetable should be included in this report, detailing when certain monitoring actions will be carried out. Your report, along with all of the information you’ve acquired up to this point, should be kept in a secure location.
6. Develop an ongoing monitoring strategy
Make a plan to keep track of your client’s progress in the future. This should be done alongside a thorough review of the information they’ve already provided. Certain transactions may not appear suspicious in isolation, but they may be part of a larger pattern of activities that point to illegal activity.
Can we help?
Did you know, getting your employees up to speed on the latest AML regulations, including the importance of due diligence checks, is one of the most effective ways to protect your company and its assets from illegal activity?
We hope this article has helped our readers understand the importance of due diligence and what it means for your organisation. However, if there’s anything we can help you with, please do get in touch via email or on 01509 611019.
Check out our freshly updated, all new, anti money laundering collection including short courses on Due Diligence and Enhanced Due Diligence.
Our upgraded Performance suite is continuing to grow. Following the four releases we announced in January, we’re pleased to announce the arrival of six new Performance courses.
There are several more currently in the pipeline, so expect regular updates about the new content coming across employee relations, performance management and recruitment.
The New Performance Courses
Flexible Working – COVID-19 prompted a rethink of working practices in many industries. Flexible working arrangements are now a bigger part of life than ever and are likely to remain so. In our Flexible Working course, managers learn how to implement new working agreements to benefit their teams, themselves and their organisation.
Managing Change – All organisations go through times of change. Navigating these challenging times well requires good management. Our Managing Change course shows managers how to handle change effectively in their organisations.
Managing Grievances – When employees raise a grievance, it is vital for managers to ensure everyone is treated fairly and the processes are followed. Our Managing Grievances eLearning course shows you how to achieve this.
The Performance Management Lifecycle – Successful performance management focuses on three key areas: planning, monitoring and supporting, and reviewing. In our Performance Management Lifecycle course, managers learn the theory of this and how to put it into practice in their own teams.
Managing Disciplinaries – The disciplinary process is never the easiest part of a manager’s job, but with our Managing Disciplinaries course, managers can understand how best to approach the process and what to take into account.
Managing Sickness Absence – When sickness strikes, it’s important for the employee off sick, their manager, their colleagues and the business that it is managed appropriately. Our Managing Sickness Absence helps managers through the relevant processes and considerations.
The Upgraded Performance Suite
We’re excited about our new, upgraded Performance suite. Brought completely up-to-date, our Performance online learning equips all users with the skills they need to thrive in the ever-changing working world.
So, what are we doing with our new suite?
- Redesigning the suite into a larger number of shorter bite sized courses
- Focusing on transferable skills, such as Active Listening, Effective Questioning and Giving Useful Feedback
- Expanding the focus beyond Managers Training into Personal Effectiveness
- Introducing new content areas such as Wellbeing and Coaching/Mentoring
- Using gamified and immersive learning treatments to increase learner engagement
- Applying a modern redesign to the content
- Making all new modules compatible with the MyAstute App
Look out for more newly redeveloped Performance courses within the coming weeks. If you are not currently a customer and would like to know more about our all-new Performance suite, please email [email protected]