oversight

Terrorist Financing: U.S. Agencies Should Systematically Assess Terrorists' Use of Alternative Financing Mechanisms

Published by the Government Accountability Office on 2003-11-14.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                United States General Accounting Office

GAO             Report to Congressional Requesters




November 2003
                TERRORIST
                FINANCING
                U.S. Agencies Should
                Systematically Assess
                Terrorists’ Use of
                Alternative Financing
                Mechanisms




GAO-04-163
                                                November 2003


                                                TERRORIST FINANCING

                                                U.S. Agencies Should Systematically
Highlights of GAO-04-163, a report to           Assess Terrorists' Use of Alternative
congressional requesters
                                                Financing Mechanisms



Cutting off terrorists’ funding is              Terrorists use many alternative financing mechanisms to earn, move, and
essential to deterring terrorist                store assets (see table). They earn assets by selling contraband cigarettes
operations. The USA PATRIOT Act                 and illicit drugs, by misusing charitable organizations that collect large
expanded the ability of law
enforcement and intelligence
                                                donations, and by other means. They move funds by concealing their
agencies to access and share                    assets through nontransparent mechanisms such as charities, informal
financial information regarding                 banking systems, and commodities such as precious stones and metals.
terrorist investigations, but                   To store assets, terrorists may choose similar commodities that maintain
terrorists may have adjusted their              their value and liquidity.
activities by increasing use of
alternative financing mechanisms.               The extent of terrorists’ use of alternative financing mechanisms is
GAO was asked to assess (1) the
                                                unknown, owing to the criminal nature of terrorists’ use of alternative
nature of terrorists’ use of key
alternative financing mechanisms                financing mechanisms and the lack of systematic data collection and
for earning, moving, and storing                analysis of case information. The Federal Bureau of Investigation (FBI)
terrorists’ assets; (2) what is known           does not systematically collect and analyze data on these mechanisms.
about the extent of terrorists’ use             Furthermore, the Departments of the Treasury and of Justice have not
of alternative financing                        yet produced a report, required under the 2002 National Money
mechanisms; and (3) challenges                  Laundering Strategy, which was to form the basis of a strategy to address
that the U.S. government faces in               how money is moved or value transferred via trade in precious stones
monitoring terrorists’ use of
alternative financing mechanisms.               and commodities.

                                                In monitoring terrorists’ use of alternative financing mechanisms, the U.S.
                                                government faces a number of challenges, including accessing ethnically or
GAO recommends that (1) the                     criminally based terrorist networks, targeting high-risk financing
Director of the FBI systematically              mechanisms that the adaptable terrorists use, and sharing data on charities
collect and analyze data concerning             with state officials. The Internal Revenue Service (IRS) has committed to,
terrorists’ use of alternative
financing mechanisms; (2) the
                                                but has yet to establish, procedures for such data sharing.
Secretary of the Treasury and the
Attorney General produce the                    Examples of Alternative Financing Mechanisms That May Be Used to Earn, Move, and Store
planned report based on up-to-date              Terrorist Assets
law enforcement investigations on                Alternative financing mechanisms                   Earning       Moving       Storing
precious stones and commodities;                 Trade in commodities
and (3) the IRS Commissioner                       Illicit drugs                                                             X
establish interim procedures for                   Weapons                                                                   X
sharing information on charities                   Cigarettes                                                                X
with state charity officials.                      Diamonds                                                                  X   X   X
The DOJ did not formally respond                                                                                                 X   X
                                                   Gold
to our recommendation. The
Treasury agreed to produce the                   Systems
                                                   Charities                                                                 X   X
planned report and IRS committed
to expedite issuance of procedures.                Informal banking                                                              X
                                                 Currency
                                                   Bulk cash                                                                     X   X
www.gao.gov/cgi-bin/getrpt?GAO-04-163.
                                                Sources: GAO analysis based on government, industry, and research sources.
To view the full product, including the scope
and methodology, click on the link above.
For more information, contact Loren Yager at
(202) 512-4128 or yagerl@gao.gov.
Contents


Letter                                                                                      1
               Results in Brief                                                             3
               Background                                                                   5
               Terrorists Use Various Alternative Financing Mechanisms to Earn,
                 Move, and Store Their Assets                                              9
               Extent of Use of Alternative Financing Mechanisms Is Unknown               23
               Key Challenges Impede Monitoring of Terrorists’ Use of Alternative
                 Financing Mechanisms                                                     28
               Conclusions                                                                34
               Recommendations for Executive Action                                       34
               Agency Comments and Our Evaluation                                         35

Appendix I     Objectives, Scope, and Methodology                                         38



Appendix II    Comments from the Department of the Treasury                               42
               GAO Comments                                                               46

Appendix III   Comments from the Internal Revenue Service                                 48



Appendix IV    GAO Contacts and Staff Acknowledgments                                     50
               GAO Contacts                                                               50
               Staff Acknowledgments                                                      50


Tables
               Table 1: Key U.S. Government Entities Responsible for Deterring
                        Terrorist Financing                                                 8
               Table 2: Examples of Alternative Financing Mechanisms That May
                        Be Used to Earn, Move, and Store Terrorist Assets                 10


Figures
               Figure 1: Hizballah Financiers Earn Assets through Cigarette
                        Smuggling                                                         13
               Figure 2: Location of Benevolence International Foundation
                        Offices Worldwide                                                 16



               Page i                             GAO-04-163 Alternative Financing Mechanisms
Figure 3: Example of Hawala-type Transaction                                              18




Abbreviations

ATF             Bureau of Alcohol, Tobacco, Firearms, and
                Explosives
DEA             Drug Enforcement Administration
DHS             Department of Homeland Security
DOJ             Department of Justice
FBI             Federal Bureau of Investigation
FinCEN          Financial Crimes Enforcement Network
HAMAS           Harakat al-Muqawama al-Islamiya–Islamic
                Resistance Movement
ICE             Bureau of Immigration and Customs Enforcement
INTERPOL        International Criminal Police Organization
IRS             Internal Revenue Service
OGQ             Operation Green Quest
TFOS            Terrorist Financing Operations Section
U.N.            United Nations
USA PATRIOT Act Uniting and Strengthening America by Providing
                Appropriate Tools Required to Intercept and Obstruct
                Terrorism Act



This is a work of the U.S. government and is not subject to copyright protection in the
United States. It may be reproduced and distributed in its entirety without further
permission from GAO. However, because this work may contain copyrighted images or
other material, permission from the copyright holder may be necessary if you wish to
reproduce this material separately.




Page ii                                   GAO-04-163 Alternative Financing Mechanisms
United States General Accounting Office
Washington, DC 20548




                                   November 14, 2003

                                   The Honorable Richard J. Durbin
                                   Ranking Minority Member
                                   Subcommittee on Oversight of Government Management,
                                    the Federal Workforce and the District of Columbia
                                   Committee on Governmental Affairs
                                   United States Senate

                                   The Honorable Charles E. Grassley
                                   Chairman
                                   Caucus on International Narcotics Control
                                   United States Senate

                                   U.S. government officials recognize that cutting off terrorists’ funding is an
                                   important means of disrupting their operations. The Uniting and
                                   Strengthening America by Providing Appropriate Tools Required to
                                   Intercept and Obstruct Terrorism Act (USA PATRIOT Act),1 enacted
                                   shortly after the terrorist attacks of September 11, 2001, expanded the
                                   ability of law enforcement and intelligence agencies to access and share
                                   financial information regarding terrorist investigations. As initial U.S. and
                                   foreign government deterrence efforts focused on terrorists’ use of the
                                   formal banking or mainstream financial system, terrorists may have been
                                   forced to increase their use of various alternative financing mechanisms.
                                   These mechanisms enable terrorists to earn, move, or store assets and
                                   may include a variety of commodities and informal financial systems.

                                   You requested that we review what is known about terrorists’ use of
                                   alternative financing mechanisms.2 In response, in this report we assessed
                                   (1) the nature of terrorists’ use of key alternative financing mechanisms
                                   for earning, moving, and storing terrorists’ assets; (2) what is known about
                                   the extent of terrorists’ use of alternative financing mechanisms; and (3)
                                   the challenges that the U.S. government faces in monitoring terrorists’ use



                                   1
                                    Pub. L. No. 107-56 (Oct. 26, 2001).
                                   2
                                    Terrorists are individuals who are part of international organizations with the will and
                                   means to target the United States or U.S. interests abroad with violent or dangerous acts
                                   calculated to intimidate, coerce, or retaliate against government conduct (see 18 U.S.C.
                                   2331(1), 18 U.S.C. 2332b(g)(5)).



                                   Page 1                                     GAO-04-163 Alternative Financing Mechanisms
of alternative financing mechanisms. As agreed with your staff, the
alternative mechanisms that this report addresses include the use of
commodities, bulk cash,3 charities, and informal banking systems,
sometimes referred to as hawala.4 We primarily focused on religious
extremist movements in the Middle East noted in the National Strategy for
Homeland Security, including al Qaeda, HAMAS (Harakat al-Muqawama al-
Islamiya—Islamic Resistance Movement), and Hizballah. In a subsequent
report that you have requested, we will specifically address coordination
of U.S. and international efforts abroad to deter terrorists’ use of
alternative financing mechanisms.5

In conducting our review, we examined documentation and interviewed
officials from U.S. agencies, including the Departments of Justice, the
Treasury, Homeland Security, State, and Defense, as well as from the
intelligence community. We also assessed information provided from
various nongovernmental organizations, industry and charitable
associations, researchers in the field, and the United Nations. In addition,
we conducted fieldwork in Belgium and France, where we interviewed
officials from several international entities including the Financial Action
Task Force on Money Laundering, INTERPOL (International Criminal
Police Organization), the European Union, and the World Customs
Organization. At these locations, we also assessed information from
government, law enforcement, and industry officials, as well as U.S.
embassy officials. As discussed with your offices and agreed with U.S. law
enforcement agencies, we have limited our reporting of specific examples
of terrorists’ use of alternative financing mechanisms to publicly available
information to ensure that law enforcement operations are not



3
 The use of bulk cash refers to smuggling currency, travelers checks, or similar instruments
across borders by means of a courier rather than through a formal financial system.
4
 According to the 2002 National Money Laundering Strategy, informal value transfer
systems (referred to here as “informal banking systems”) are known by a variety of names
reflecting ethnic and national origins predating the emergence of modern banking and
other financial institutions. Included, among others, are systems such as hawala or hundi,
terms commonly used when referring to Indian, Pakistani, and Middle Eastern systems.
These systems provide mechanisms for the remittance of currency or other forms of
monetary value—most commonly gold—without physical transportation or use of
contemporary monetary instruments.
5
 Also at your request, we addressed U.S. domestic coordination efforts to deter terrorist
financing under a separate report focusing on the National Money Laundering Strategy.
See U.S. General Accounting Office, Combating Money Laundering: Opportunities Exist
to Improve the National Strategy, GAO-03-813 (Washington, D.C.: Sept. 26, 2003).




Page 2                                     GAO-04-163 Alternative Financing Mechanisms
                   jeopardized. It is important to note that there are few such cases. Further
                   details about our scope and methodology are contained in appendix I.


                   Terrorists use a variety of alternative financing mechanisms to earn, move,
Results in Brief   and store their assets based on common factors that make these
                   mechanisms attractive to terrorist and criminal groups alike. For all three
                   purposes—earning, moving, and storing—terrorists aim to operate in
                   relative obscurity, using mechanisms involving close knit networks and
                   industries lacking transparency. More specifically, first, terrorists earn
                   funds through highly profitable crimes involving commodities such as
                   contraband cigarettes, counterfeit goods, and illicit drugs. For example,
                   according to U.S. law enforcement officials, Hizballah earned an estimated
                   profit of $1.5 million in the United States between 1996 and 2000 by
                   purchasing cigarettes in a low tax state for a lower price and selling them
                   in a high tax state at a higher price. Terrorists also earned funds using
                   systems such as charitable organizations that collect large sums in
                   donations from both witting and unwitting donors. Second, to move
                   assets, terrorists seek out mechanisms that enable them to conceal or
                   launder their assets through nontransparent trade or financial transactions
                   such as the use of charities, informal banking systems, bulk cash, and
                   commodities that may serve as forms of currency, such as precious stones
                   and metals. Third, to store assets, terrorists may use similar commodities,
                   because they are likely to maintain value over a longer period of time and
                   are easy to buy and sell outside the formal banking system.

                   Owing to the criminal nature of terrorists’ use of alternative financing
                   mechanisms and the lack of systematic data collection and analysis, the
                   extent of terrorists’ use of alternative financing mechanisms is not known.
                   U.S. law enforcement agencies, and specifically the Federal Bureau of
                   Investigation (FBI), which leads terrorist financing investigations, do not
                   systematically collect and analyze data on alternative financing
                   mechanisms. The lack of such data hinders the FBI from conducting
                   systematic analysis of trends and patterns focusing on alternative
                   financing mechanisms. Without such an assessment, the FBI does not have
                   analyses that could aid in assessing risk and prioritizing efforts. Moreover,
                   despite an acknowledged need for further analysis of the extent of the use
                   of alternative financing mechanisms by terrorists, few rigorous studies
                   have been conducted. For example, the Departments of the Treasury and
                   Justice did not produce a report on the links between terrorist financing
                   and precious stone and commodity trading, as was required by March 2003
                   under the 2002 National Money Laundering Strategy.



                   Page 3                              GAO-04-163 Alternative Financing Mechanisms
In monitoring terrorists’ use of alternative financing mechanisms, the U.S.
government faces a number of significant challenges, a few of which
include accessibility, adaptability of terrorists, and competing priorities.
First, according to law enforcement agencies and researchers, it is difficult
to access or infiltrate ethnically or criminally based networks that operate
in a nontransparent manner, such as informal banking systems or the
precious stones and other commodities industries. Second, the ability of
terrorists to adapt their methods hinders efforts to target high-risk
industries and implement effective mechanisms for monitoring high-risk
industry trade and financial flows. According to the FBI, once terrorists
know that an industry they use to earn or move assets is being watched,
they may switch to an alternative commodity or industry. Finally,
competing priorities create challenges to federal and state officials’ efforts
to use and enforce applicable U.S. laws and regulations in monitoring
terrorists’ use of alternative financing mechanisms. For example, although
the Internal Revenue Service (IRS) agreed with us in 2002 to begin
developing a system, as allowed by law, to share with states data that
would improve oversight6 and could be used to deter terrorist financing in
charities, the IRS has not made this initiative a priority due to competing
priorities.

In this report, we recommend that the Director of the FBI, in consultation
with relevant U.S. government agencies, systematically collect and analyze
information involving terrorists’ use of alternative financing mechanisms.
We also recommend that the Secretary of the Treasury and the Attorney
General produce the report on the links between terrorism and the use of
precious stones and commodities that was required by March 2003 under
the 2002 National Money Laundering Strategy based on up-to-date law
enforcement investigations. Finally, we recommend that the
Commissioner of the IRS, in consultation with state charity officials,
establish interim IRS procedures and state charity official guidelines, as
well as set milestones and assign resources for developing and
implementing both, to regularly share data on charities as allowed by
federal law.

The Department of Justice (DOJ) did not formally respond to our
recommendation that the Director of the FBI, in consultation with relevant



6
 See U.S. General Accounting Office, Tax-Exempt Organizations: Improvements Possible
in Public, IRS, and State Oversight of Charities, GAO-02-526 (Washington, D.C.: Apr. 30,
2002).




Page 4                                    GAO-04-163 Alternative Financing Mechanisms
             U.S. government agencies, systematically collect and analyze information
             involving terrorists’ use of alternative financing mechanisms. However, in
             DOJ’s technical comments they agreed with our finding that the FBI does
             not systematically collect and analyze such information, but they did not
             specifically agree or disagree with our recommendation. In response to
             our recommendation regarding a planned report on precious stones and
             commodities, the Department of the Treasury responded that the report
             would be issued as an appendix to the 2003 National Money Laundering
             Strategy. However, the strategy was to be issued in February 2003 and had
             not been issued as of our receipt of Treasury’s comments on October 29.
             The IRS agreed with our overall recommendation to establish IRS
             procedures and state charity official guidelines to regularly share data on
             charities as allowed by federal law. The IRS also committed to expedite its
             efforts to establish procedures and guidelines by one year, the end of
             calendar year 2003, rather than 2004 as originally planned. However, the
             IRS did not address establishing milestones and assigning resources to
             meet the target date or interim guidelines should they miss the 2003 target
             date.


             In its fight against terrorism, the United States has focused on individuals
Background   and entities supporting or belonging to terrorist organizations including al
             Qaeda, Hizballah, HAMAS and others. Al Qaeda is an international terrorist
             network led by Osama bin Laden that seeks to rid Muslim countries of
             western influence and replace their governments with fundamentalist
             Islamic regimes. The al Qaeda network conducted the September 11 attack
             on the United States and was responsible for the August 1998 bombings of
             U.S. embassies in Kenya and Tanzania, as well as other violent attacks on
             U.S. interests. Al Qaeda reportedly operates through autonomous
             underground cells in 60 to 100 estimated locations worldwide, including
             the United States. Hizballah is a Lebanese group of Shiite militants that
             seeks to create a Muslim fundamentalist state in Lebanon modeled on Iran.
             Hizballah has planned, or been linked to, numerous terrorist attacks
             against America, Israel, and other western targets. Although Hizballah’s
             leadership is based in Lebanon, Hizballah is a vast organization with a
             global network of supporters and established cells in Africa, North and
             South America, Asia, and Europe. According to the State Department,
             HAMAS has pursued the goal of replacing Israel with an Islamic
             Palestinian state.7 While HAMAS supplies humanitarian aid to Palestinians


             7
              U.S. Department of State, Patterns of Global Terrorism 2002 (Washington, D.C.: April
             2003).



             Page 5                                    GAO-04-163 Alternative Financing Mechanisms
and has participated in peaceful political activity, the organization
conducts large-scale suicide bombings. According to the State
Department, HAMAS currently limits its terrorist operations to targeting
Israeli civilians and the Israeli military in the Gaza Strip, the West Bank,
and Israel, but Americans have been killed in HAMAS attacks, and the
organization raises funds in North America and Western Europe.

These terrorist organizations are known to have used alternative financing
mechanisms to further their terrorist activities. Government officials and
researchers believe that terrorists do not always need large amounts of
assets to support an operation, pointing out that the estimated cost of the
September 11 attack was between $300,000 and $500,000. However,
government officials also caution that funding for such an operation uses a
small portion of the assets that terrorist organizations hold—assets
earned, moved, or stored through mainstream financial or alternative
financing mechanisms. According to the Treasury’s Office of Foreign
Assets Control, the support infrastructure critical for indoctrination,
recruitment, training, logistical support, the dissemination of propaganda,
and other material support requires substantial funding.

A number of strategies and laws guide the U.S. government in deterring
terrorists’ use of alternative financing mechanisms.8 Among the strategies,
for example, the Departments of Justice and the Treasury publish an
annual National Money Laundering Strategy, which has increasingly
focused on terrorist financing, including alternative financing methods.
This strategy sets goals for U.S. agencies in combating terrorist financing
and reports on progress made in implementing these goals. In addition, the
Department of State issues an annual International Narcotics Control
Strategy Report,9 which features a section describing mechanisms, cases,
and efforts to deter terrorist financing. Moreover, the President’s National
Security Strategy of the United States of America10 calls for the United
States to work with its allies to disrupt the financing of terrorism by
blocking terrorist assets, and the National Strategy for Combating



8
 We did not evaluate the adequacy or implementation of these strategies, with the
exception of the 2002 National Money Laundering Strategy as it pertains to alternative
financing mechanisms.
9
U.S. Department of State, International Narcotics Control Strategy Report (Washington,
D.C.: March 2003).
10
  Office of Homeland Security, the White House, President’s National Security Strategy of
the United States of America (Washington D.C.: July 2002).




Page 6                                     GAO-04-163 Alternative Financing Mechanisms
Terrorism11 includes an objective to interdict and disrupt material support
for terrorists. Regarding laws, the authority of the USA PATRIOT Act of
2001 significantly expanded U.S. law enforcement’s ability to deter,
investigate, and prosecute cases of terrorist financing. More recently, the
United States enacted the Suppression of the Financing of Terrorism
Convention Implementation Act of 2002,12 which implements the
requirements of the 1999 International Convention for the Suppression of
the Financing of Terrorism. Among its provisions, this act makes it a crime
to provide or collect funds with the intention of using the money for
terrorist activities.13

Deterring terrorists’ use of alternative financing mechanisms falls within
the overall U.S. interagency framework of plans, agency roles, and
interagency coordination mechanisms designed to combat terrorism. In
general, the National Security Council manages the overall interagency
framework. The National Security Council heads the Counterterrorism
Security Group, which is composed of high-level representatives (at the
Assistant Secretary level) from key federal agencies that combat terrorism.
To implement directives and strategies, various federal agencies are
assigned key roles and responsibilities based on their core missions.
Numerous components of the Departments of Justice, the Treasury, State,
Homeland Security, and other agencies participate in efforts to combat
terrorist financing (see table 1). In addition, the intelligence community
plays a significant role.14




11
 The White House, National Strategy for Combating Terrorism (Washington D.C.:
February 2003).
12
 Pub. L. No. 107-197, Title II (June 25, 2002).
13
 See 18 U.S.C. 2339C(a)(1).
14
  The intelligence community includes the Office of the Director of Central Intelligence; the
Central Intelligence Agency; the National Security Agency; the National Imagery and
Mapping Agency; the National Reconnaissance Office; the Defense Intelligence Agency and
other offices within the Department of Defense for the collection of specialized national
intelligence through reconnaissance programs and the intelligence elements of the Army,
the Navy, the Air Force, and the Marine Corps; the FBI; the Department of the Treasury; the
Department of Energy; the State Department’s Bureau of Intelligence and Research; and
such other elements of any department or agency as may be designated by the President or
jointly by the Director of Central Intelligence and the head of the department or agency
concerned.




Page 7                                       GAO-04-163 Alternative Financing Mechanisms
Table 1: Key U.S. Government Entities Responsible for Deterring Terrorist Financing

Department              Bureau/division/office                                Role
Central Intelligence                                                          Leads gathering, analyzing, and disseminating
Agency                                                                        intelligence on foreign terrorist organizations and their
                                                                              financing mechanisms; charged with promoting
                                                                              coordination and information-sharing between all
                                                                              intelligence community agencies.
Homeland Security       Bureau of Customs and Border Protection               Detects movement of bulk cash across U.S. borders
                                                                              and maintains data about movement of commodities
                                                                              into and out of the United States.
                        Bureau of Immigration and Customs Enforcement       Participates in investigations of terrorist financing cases
                        (ICE - formerly part of the Treasury’s U.S. Customs involving U.S. border activities and the movement of
                        Service)                                            trade, currency, or commodities.
                        U.S. Secret Service                                   Participates in investigations of terrorist financing
                                                                              cases, including those involving counterfeiting.
Justice                 Bureau of Alcohol, Tobacco, Firearms, and             Participates in investigations of terrorist financing cases
                        Explosives (ATF)                                      involving alcohol, tobacco, firearms, and explosives.
                        Civil Division                                        Defends challenges to terrorist designations.
                        Criminal Division                                     Develops, coordinates, and prosecutes terrorist
                                                                              financing cases; participates in financial analysis and
                                                                              develops relevant financial tools; promotes international
                                                                              efforts and delivers training to other nations.
                        Drug Enforcement Administration (DEA)                 Participates in investigations of terrorist financing cases
                                                                              involving narcotics and other illicit drugs.
                        Federal Bureau of Investigation (FBI)                 Leads all terrorist financing investigations and
                                                                              operations; primary responsibility for collecting foreign
                                                                              intelligence and counterintelligence information within
                                                                              the United States.
National Security                                                             Manages the overall interagency framework for
Council                                                                       combating terrorism.
State                   Bureau of Economic and Business Affairs               Chairs coalition subgroup of a National Security Council
                                                                              Policy Coordinating Committee, which leads U.S
                                                                              government efforts to develop strategies and activities
                                                                              to obtain international cooperation.
                        Bureau of International Narcotics and Law             Implements U.S. technical assistance and training to
                        Enforcement Affairs                                   foreign governments on terrorist financing.
                        Office of the Coordinator for Counterterrorism        Coordinates U.S. counterterrorism policy and efforts
                                                                              with foreign governments to deter terrorist financing.
Treasury                Executive Office for Terrorist Financing and          Develops U.S. strategies and policies to deter terrorist
                        Financial Crime                                       financing, domestically and internationally; develops
                                                                              and implements the National Money Laundering
                                                                              Strategy as well as other policies and programs to
                                                                              prevent financial crimes.




                                            Page 8                                    GAO-04-163 Alternative Financing Mechanisms
 Department                           Bureau/division/office                                                   Role
                                      Financial Crimes Enforcement Network (FinCEN)                            Supports law enforcement investigations to prevent and
                                                                                                               detect money laundering, terrorist financing, and other
                                                                                                               financial crime through use of analytical tools and
                                                                                                               information-sharing mechanisms; administers the Bank
                                                                                                               Secrecy Act.
                                      Internal Revenue Service (IRS) Criminal                                  Participates in investigations of terrorist financing cases
                                      Investigation                                                            with an emphasis on charitable organizations.
                                      IRS Tax Exempt and Government Entities                                   Administers the eligibility requirements and other IRS
                                                                                                               tax law that apply to charitable and other organizations
                                                                                                               that claim exemption from federal income tax.
                                      Office of Foreign Assets Control                                         Develops and implements U.S. strategies and policies
                                                                                                               to deter terrorist financing; imposes controls on
                                                                                                               transactions; and freezes foreign assets under U.S.
                                                                                                               jurisdiction.
                                      Office of the General Counsel                                            Chairs Policy Coordination Committee for Terrorist
                                                                                                               Financing, which coordinates U.S. government efforts
                                                                                                               to identify and deter terrorist financing; coordinates U.S.
                                                                                                               government actions regarding implementation of, and
                                                                                                               imposition of, economic sanctions under Executive
                                                                                                               Order 13224 with respect to the freezing of terrorist-
                                                                                                               related assets.
                                      Office of International Affairs                                          Provides advice, training, and technical assistance to
                                                                                                               nations on issues including terrorist financing
                                                                                                               deterrence.
Sources: GAO, using information from the Departments of Justice, the Treasury, State, and Homeland Security.




                                                                 Terrorists use an assortment of alternative financing mechanisms to earn,
Terrorists Use Various                                           move, and store their assets. Terrorists, like other criminals, focus on
Alternative Financing                                            crimes of opportunity in vulnerable locations worldwide and seek to
                                                                 operate in relative obscurity by taking advantage of close-knit networks of
Mechanisms to Earn,                                              people and nontransparent global industry flows when earning, moving,
Move, and Store Their                                            and storing their assets.15 To earn assets, they focus on profitable crimes or
                                                                 scams involving commodities such as smuggled cigarettes, counterfeit
Assets                                                           goods, and illicit drugs and the use of systems such as charitable
                                                                 organizations that collect large sums. To move assets, terrorists use
                                                                 mechanisms that enable them to conceal or launder their assets through
                                                                 nontransparent trade or financial transactions such as charities, informal
                                                                 banking systems, bulk cash, and commodities such as precious stones and
                                                                 metals. To store assets, terrorists may use commodities that are likely to


                                                                 15
                                                                   These preexisting networks are based on ethnic, geographic, or criminal links, providing
                                                                 access to people with similar interests and to established financing structures founded on
                                                                 trust-based relationships and often lacking substantial formal documentation.




                                                                 Page 9                                                GAO-04-163 Alternative Financing Mechanisms
                             maintain their value over time and are easy to buy and sell outside the
                             formal banking system. For example, terrorists may use precious stones
                             and metals that serve as effective forms of currency. Table 2 shows
                             examples of mechanisms that terrorists may use to earn, move, and store
                             assets and also shows that terrorists may use assets for more than one
                             purpose.

                             Table 2: Examples of Alternative Financing Mechanisms That May Be Used to Earn,
                             Move, and Store Terrorist Assets

                              Alternative financing mechanisms                                 Earning                   Moving                     Storing
                              Trade in commodities
                                  Illicit drugs                                                          X
                                  Weapons                                                                X
                                  Cigarettes                                                             X
                                  Diamonds                                                               X                        X                      X
                                  Gold                                                                                            X                      X
                              Systems
                                  Charities                                                              X                        X
                                  Informal banking                                                                                X
                              Currency
                                  Bulk cash                                                                                       X                      X
                             Sources: GAO analysis based on information from government, industry, and research sources as noted in the scope and
                             methodology.




Terrorists Earn Assets via   Terrorists earn assets through illicit trade in myriad commodities, such as
Systems and Commodities      drugs, weapons, and cigarettes, and systems, such as charities, owing to
That Are Highly Profitable   their profitability. Like other criminals, terrorists can trade any commodity
                             in an illegal fashion, as evidenced by their reported involvement in trading
                             a variety of counterfeit and other goods.16 However, although terrorists
                             are generally motivated by ideological factors rather than pure profit,
                             terrorists, like other criminals, benefit most from smuggling those
                             commodities with the highest profit margins. Terrorist organizations have
                             also earned funds using systems such as charitable organizations. The


                             16
                               Although U.S. law enforcement agencies discussed some examples of terrorists’ use of
                             scams involving common household commodities and the illicit sales of a variety of
                             counterfeit goods, with the exception of one public cigarette case, examples are not
                             included in this report because, according to the FBI, the cases are still open and
                             discussion may jeopardize investigations and prosecutions.




                             Page 10                                                      GAO-04-163 Alternative Financing Mechanisms
                                   potential misuse of charitable contributions by terrorist organizations can
                                   take many forms, sometimes with the knowledge of the charity or donor
                                   and sometimes without their knowledge.

Trafficking in Illicit Drugs and   Globally, trafficking in illicit drugs and weapons is a profitable means for
Weapons to Earn Assets             terrorists to earn assets. Terrorists have been reportedly involved in
                                   trafficking illicit drugs, the most lucrative commodity illegally traded,
                                   according to the U.S. State Department’s Bureau of International Narcotics
                                   and Law Enforcement Affairs.17 According to the U.S. State Department’s
                                   2003 International Narcotics Control Strategy Report, this trade is valued
                                   in the billions and allows drug traffickers to corrupt government and law
                                   enforcement officials worldwide, particularly in countries with weakly
                                   enforced laws and regulations where officials are poorly paid. In East Asia,
                                   trafficking in drugs and weapons—as well as engaging in organized crime
                                   and official corruption—are serious international crimes that terrorist
                                   organizations have exploited to finance their operations.18 In South Asia, al
                                   Qaeda is reported to have trafficked heroin to support its operations and
                                   Osama bin Laden was reportedly involved.19 In Latin America, terrorists
                                   trafficked in drugs and arms to finance their activities. In some South
                                   American countries, international terrorist groups have established
                                   support bases that sustain their worldwide operations. For example, the
                                   triborder area where the borders of Argentina, Brazil, and Paraguay
                                   converge continues to be a safe haven for Hizballah and HAMAS, where
                                   the organizations raise funds to finance their operations through criminal
                                   enterprises. According to the DEA, terrorist operatives associated with
                                   Hizballah generate significant income from contraband, including drugs in
                                   several Latin American countries, to support their organization in
                                   Lebanon.

Cigarette Smuggling and            Terrorists have earned assets through the highly profitable illicit trade in
Counterfeiting to Earn Assets      cigarettes. According to officials from the ATF, Hizballah, HAMAS, and al
                                   Qaeda have earned assets through trafficking in contraband cigarettes or



                                   17
                                    The estimated 100 metric tons of cocaine that the U.S. government seizes each year could
                                   be worth as much as $10 billion to the drug trade.
                                   18
                                    U.S. General Accounting Office, Combating Terrorism: Interagency Framework and
                                   Agency Programs to Address the Overseas Threat, GAO-03-165 (Washington, D.C.: May 23,
                                   2003).
                                   19
                                     Southeast Asian terrorist organizations that have cells linked to al Qaeda were discovered
                                   in 2001 in Malaysia and Singapore, and their activities, movements, and connections
                                   traverse the entire region, but little information is available about their financing methods.




                                   Page 11                                     GAO-04-163 Alternative Financing Mechanisms
counterfeit cigarette tax stamps.20 ATF officials told us that as of August
20, 2003, they were investigating at least six such cases with ties to
terrorist groups. ATF officials also believe that there are several other
investigations under way that may produce evidence linking them to
terrorist groups. In the one closed case example, during 2002, an ATF
investigation revealed a conspiracy where the defendants were illegally
trafficking cigarettes from 1996 to 2000 between North Carolina, a low tax
state, and Michigan, a high tax state, and funneling some of the illegal
proceeds back to the Hizballah. In this case, family and religious ties
enabled the smugglers to sell illegal cigarettes at a network of small
convenience stores in Michigan. Figure 1 shows how the Charlotte, North
Carolina, Hizballah cell profited from this illegal activity. The total value of
the assets seized was about $1.5 million and consisted of cigarettes, real
property, and currency. The investigation resulted in at least two
convictions, in June 2002, for cigarette trafficking, money laundering, and
providing material support to a terrorist organization.21 More generally, the
opportunity to earn illegal profits in the cigarette industry is significant
given the growing trend of counterfeit cigarettes and Internet cigarette
sales.22 According to a European Commission Anti-Fraud Office official,
cigarette smuggling is widespread in Europe, and in many eastern
European countries smuggled cigarettes are commonly used as currency.
(The Anti-Fraud Office could not formally discuss ongoing cases involving
terrorists’ links, because it would jeopardize ongoing investigations.)




20
 In the United States, many states require the payment of an excise tax, a tax on the sale or
manufacture of a commodity, usually a luxury item, on the sale of cigarettes. Some states
require proof of payment in the form of tax stamps.
21
 According to DOJ, the investigation also resulted in an additional 22 convictions by plea
bargain on related charges.
22
 The Phillip Morris Company estimates that the revenue loss to New York City from one
shipping container of counterfeit cigarette sales is roughly $1.6 million.




Page 12                                     GAO-04-163 Alternative Financing Mechanisms
Figure 1: Hizballah Financiers Earn Assets through Cigarette Smuggling




Misuse of Charitable                    Terrorist organizations have earned funds using systems such as
Organizations to Earn Assets            charitable organizations that provide a ready source of sizable funds
                                        generated from religious, ethnic, or geographic ties between people with
                                        similar interests.23 In many countries, charitable giving is a religious duty
                                        and, although most contributions are intended for legitimate humanitarian
                                        purposes, terrorists are able to divert these funds owing to the lack of



                                        23
                                         According to DOJ, it has issued indictments in five cases involving the misuse of a
                                        charitable organization to earn assets, move assets, or both. Additionally, the FBI has
                                        discussed two additional ongoing cases.




                                        Page 13                                     GAO-04-163 Alternative Financing Mechanisms
                             oversight or financial controls for charities to ensure that moneys are
                             spent according to their intended purpose. The potential misuse of
                             charitable contributions by terrorist organizations can take many forms.
                             According to the Financial Action Task Force on Money Laundering’s
                             2002-2003 Report on Money Laundering Typologies, some charitable
                             organizations were established with a stated charitable purpose but may
                             actually exist in part or only to earn funds for a terrorist organization. For
                             example, according to the Treasury, Holy Land Foundation for Relief and
                             Development in Texas raised $13 million in the United States in 2000,
                             claiming that the money it solicited went to care for needy Palestinians,
                             although evidence shows that HAMAS used some of the money that the
                             Holy Land Foundation raised to support suicide bombers and their
                             families.24 Terrorists or their supporters may also infiltrate legitimate
                             charitable organizations and divert funds to directly or indirectly support
                             terrorist organizations. In both cases, the charitable organizations may
                             collect donations from both witting and unwitting donors. An example of a
                             witting donor would be one who donated funds to a charity knowing that
                             the funds would go to al Qaeda. An unwitting donor would be one who
                             donated funds to the charity not knowing that funds would go to al Qaeda.


Terrorists Move Assets via   To move assets, terrorists use mechanisms that enable them to conceal or
Systems and Commodities      launder their assets through nontransparent trade or financial transactions
That Allow Ease of           such as charities, informal banking systems, bulk cash, and commodities
                             such as precious stones and metals. Although charities and informal
Concealment and Liquidity    banking systems serve many legitimate purposes, they entail a significant
                             degree of nontransparency that terrorist groups and their supporters can
                             exploit to move funds raised in the United States and elsewhere across
                             borders. To carry assets across borders without detection, terrorists seek
                             to smuggle bulk cash or convert their assets into commodities that are
                             relatively liquid and easy to conceal. Terrorists can also convert their
                             assets into internationally traded commodities that serve as forms of
                             currency, such as gold, but are not subject to standard financial reporting
                             requirements. Commodities that can be smuggled owing to their ease of
                             concealment are particularly attractive. While terrorists use legitimate
                             systems and commodities in an illicit manner to move their assets, they
                             may also use illicit means such as trade-based money laundering to move


                             24
                               In Holy Land Foundation v. Ashcroft, 219 F.Supp.2d 57, 75 (D.D.C. 2002), aff’d, 333. F.3d
                             156 (D.C. Cir. 2003), the U.S. Court of Appeals for the District of Columbia Circuit found
                             the evidence tying the Holy Land Foundation for Relief and Development to the terrorist
                             organization Hamas to be substantial.




                             Page 14                                    GAO-04-163 Alternative Financing Mechanisms
                              assets or settle accounts. Moreover, according to law enforcement
                              officials, they may use more than one mechanism, layering their activities,
                              to better hide the trail of their transactions.

Misuse of Charities to Move   Terrorists may be attracted to charities to move their assets owing to the
Assets                        industry’s nontransparent nature. According to the Financial Action Task
                              Force on Money Laundering’s 2002-2003 Report on Money Laundering
                              Typologies, in addition to serving as a direct source of income, some
                              charities may have served as a cover for moving funds to support terrorist
                              activities, usually on an international basis. For example, according to
                              court documents,25 the Global Relief Foundation, an Illinois-based charity,
                              sends more than 90 percent of its donations abroad, and, according to
                              DOJ, the foundation has connections to and has provided support and
                              assistance to individuals associated with Osama bin Laden, the al Qaeda
                              network, and other known terrorist groups. The Global Relief Foundation
                              has also been linked to financial transactions with the Holy Land
                              Foundation. Similarly, the DOJ asserts that the Illinois-based Benevolence
                              International Foundation moved charitable contributions fraudulently
                              solicited from donors in the United States to locations abroad to support
                              terrorist activities.26 As shown by the shaded locations in figure 2, the
                              foundation has offices worldwide through which it could facilitate the
                              global movement of its funds.




                              25
                               Global Relief Foundation vs. Paul H. O’Neil, et al., 207 F. Supp. 2d 779, U.S. District
                              Court, Northern District of Illinois, Eastern Division, June 11, 2002.
                              26
                                U.S. v. Enaam Arnaout, Case No. 02CR892, U.S. District Court, Northern District of
                              Illinois, Eastern Division, April 2002.




                              Page 15                                     GAO-04-163 Alternative Financing Mechanisms
Figure 2: Location of Benevolence International Foundation Offices Worldwide




Misuse of Informal Banking              Terrorist organizations use a type of informal banking system sometimes
Systems to Move Assets                  known as hawala to move their assets, owing to the system’s
                                        nontransparent and liquid nature. An informal banking system is one in
                                        which money is received for the purpose of making it, or an equivalent
                                        value, payable to a third party in another geographic location, whether or
                                        not in the same form. Such transfers generally take place outside the
                                        conventional banking system through nonbank money services businesses
                                        or other, often unregulated and undocumented, business entities whose
                                        primary business activity may not be the transmission of money.27
                                        Traditionally, expatriates—traders and immigrant laborers—used informal
                                        banking systems by sending money home from or to countries lacking
                                        formal and secure banking systems. Informal systems are still used by




                                        27
                                          For example, according to an FBI press release, on August 13, 2003, a New York diamond
                                        jeweler was indicted for conspiring to operate an unlicensed money remittance system
                                        (informal banking system). Prosecutors alleged that the system was to be used in a
                                        terrorist financial transaction involving the purchase of a shoulder-fired missile.




                                        Page 16                                   GAO-04-163 Alternative Financing Mechanisms
immigrant ethnic populations in the United States and elsewhere today.28
Such systems are based on trust and the extensive use of connections such
as family relationships or regional affiliations. These systems also often
involve transactions out of the United States to remote areas with no
formal banking system or to countries with weak financial regulations,
such as Afghanistan and Somalia, where the Al Barakaat informal banking
system moved funds for al Qaeda. Figure 3 provides an example of how a
simple hawala transaction can occur.




28
  U.S. and international law enforcement officials, as well as academic researchers, have
identified a variety of ethnically based informal banking systems that originated in China,
India, Pakistan, Vietnam, and Somalia, among numerous others. Officials and researchers
note that these informal banking systems generally predate formal banks, and that some
groups may consider them more familiar and trustworthy than formal banks.




Page 17                                     GAO-04-163 Alternative Financing Mechanisms
Figure 3: Example of Hawala-type Transaction




According to FinCEN, while the majority of informal banking systems’
activity may be legitimate in purpose, these systems have been used to
facilitate the financing of terrorism and the furtherance of criminal




Page 18                               GAO-04-163 Alternative Financing Mechanisms
                            activities.29 As a result, law enforcement and international entities have
                            focused a great deal of attention on the possibility that terrorist financing
                            takes place through informal banking systems such as hawala to move
                            money, particularly since September 11. For example, according to the
                            FBI, some of the 19 September 11 hijackers allegedly used hawala to
                            transfer thousands of dollars in and out of the United States prior to their
                            attacks. Somalis working in the United States used the Al Barakaat
                            informal banking network, founded with a significant investment from
                            Osama bin Laden, to send money to their families in Somalia.30 According
                            to a September 2002 Treasury fact sheet on terrorist financing, Al
                            Barakaat’s worldwide network was channeling several million dollars a
                            year to and from al Qaeda.31

Smuggling of Bulk Cash to   The law enforcement community has long suspected that some terrorist
Move Assets                 organizations use bulk cash smuggling to move large amounts of currency.
                            Bulk cash smuggling is an attractive financing mechanism because U.S.
                            dollars are accepted as an international currency and can always be
                            converted; there is no traceable paper trail; there is no third party such as
                            a bank official to become suspicious of the transaction; and the terrorist
                            has total control of the movement of the money. Conversely, the factors
                            against cash smuggling include the costs of couriers and equipment, the
                            risk of the courier stealing the money, the risk of informants within the
                            network, or losses due to border searches or government inquiries that
                            could compromise the network or mission. In the United States, bulk cash
                            smuggling is a money laundering and terrorism financing technique that is
                            designed to bypass financial transparency reporting requirements.32 Often
                            the currency is smuggled into or out of the United States concealed in



                            29
                             A Report to the Congress in Accordance with Section 359 of the Uniting and
                            Strengthening America by Providing Appropriate Tools Required to Intercept and
                            Obstruct Terrorism Act of 2001, Submitted by the Secretary of the U.S. Department of the
                            Treasury, (Nov. 2002).
                            30
                              According to DOJ, Al Barakaat operated a hybrid hawala in which its informal system
                            interconnected with the formal banking system. Because Al Barakaat also used financial
                            institutions, law enforcement was able to discover the transactions to Somalia by analyzing
                            Suspicious Activity Reports generated by the banks pursuant to their obligations under the
                            1970 Bank Secrecy Act [Pub. L. No. 91-508, 84 Stat. 1114 (1970) (codified as amended in 12
                            U.S.C. §§ 1829(b), 1951-1959 (2000); 31 U.S.C. §§ 5311-5330 (2000)].
                            31
                             Treasury did not report a time frame during which this money was channeled.
                            32
                             Financial transparency reporting requires Currency and Monetary Instrument Reports,
                            which obligates the filer to declare if he or she is transporting across the border $10,000 or
                            more in cash or monetary instruments.




                            Page 19                                      GAO-04-163 Alternative Financing Mechanisms
                                 personal effects, secreted in shipping containers, or transported in bulk
                                 across the border via vehicle, vessel, or aircraft. According to the FBI,
                                 some of the 19 September 11 hijackers allegedly used bulk cash as another
                                 method to transfer funds.

                                 Furthermore, in response to the September 11 events, Customs33 initiated
                                 an outbound-currency operation, Operation Oasis, to refocus its efforts to
                                 target 23 identified nations involved in money laundering. According to the
                                 Department of Homeland Security’s (DHS) ICE, between October 1, 2001,
                                 and August 8, 2003, Operation Oasis had seized more than $28 million in
                                 bulk cash. However, according to ICE officials, while some of the cases
                                 involved were linked to terrorism, they were unable to determine the
                                 number and the extent to which these cases involved terrorist financing.

Trafficking in Precious Stones   Terrorist organizations have also reportedly traded in precious stones
and Metals to Move Assets        such as diamonds to launder money or transfer value because it is easy to
                                 conceal these materials and transfer them. Terrorists can move their
                                 assets by converting moneys into a commodity, such as diamonds, that
                                 serves as a form of currency. U.S. law enforcement and others told us that
                                 there is a potential for the use of gold to move assets, but little has been
                                 reported on the link between terrorists and gold, other than by the media.

                                 As we previously reported,34 diamonds can be used in lieu of currency in
                                 arms deals, money laundering, and other crimes. Diamonds are also easily
                                 smuggled because they have high value and low weight and are
                                 untraceable and odorless.35 The international diamond industry is
                                 fragmented, with numerous small mining operations located in remote
                                 areas of Africa, in countries that have porous borders and no rule of law.
                                 There is limited transparency in diamond flows owing to the complex way
                                 in which diamonds move from mine to consumer, the existence of
                                 significant data inconsistencies, and the industry’s historical avoidance of
                                 close scrutiny. Diamonds are often traded fraudulently, and smuggling



                                 33
                                   Operation Oasis was established under the former U.S. Customs Service. The U.S.
                                 Customs Service was transferred to the Department of Homeland Security and its
                                 investigators were transferred to ICE.
                                 34
                                  U.S. General Accounting Office, International Trade: Critical Issues Remain in
                                 Deterring Conflict Diamond Trade, GAO-02-678 (Washington, D.C.: June 14, 2002).
                                 35
                                  According to the Congressional Research Service, a pound of diamonds in 2002 was
                                 worth around $225,000, compared with a pound of cash that was worth $45,000 and a
                                 pound of gold, which was worth $4,800.




                                 Page 20                                   GAO-04-163 Alternative Financing Mechanisms
                            routes for rough diamonds are well established by those who have used
                            such routes for decades to evade taxes or move stolen diamonds.
                            According to a Belgian law enforcement official, a substantial number of
                            the diamonds traded in Antwerp, the world’s largest trading center, are
                            sold on the black market with no transaction records. Most officials and
                            researchers we spoke with recognized a highly probable link between
                            Hizballah and a part of the Lebanese diamond-trading network in West
                            Africa. The U.N. Special Court Chief Prosecutor and the Chief Investigator
                            in Sierra Leone both reported that the problem is current.

                            Moreover, though U.S. law enforcement has been unable to substantiate
                            the reports, officials from the U.N. Special Court for Sierra Leone,36
                            representatives of Global Witness (a London-based nongovernmental
                            organization), media, and other U.S. and international experts have also
                            stated that al Qaeda was reportedly buying diamonds from rebel groups in
                            West Africa in the months leading up to September 11 and may still be
                            involved in the trade.37 According to officials of the U.N. Special Court and
                            Global Witness, they have witnesses of such a connection. U.S.
                            government officials both within and among agencies remain divided over
                            whether there is sufficient evidence to establish a current link between al
                            Qaeda and the diamond trade.

                            Gold also presents an opportunity for moving terrorist assets.38 As
                            highlighted in a number of money-laundering cases, gold can be smelted
                            into any form, camouflaged, and smuggled across borders. Because its
                            form can be altered, gold used in trade often has no valid paper trail.

Use of Trade-based Money    ICE officials and researchers have focused on the possibility that terrorists
Laundering to Move Assets   may use trade-based money laundering to move their assets, owing to its



                            36
                              In August 2000, the United Nations and the government of Sierra Leone agreed to
                            establish a Special Court for Sierra Leone to prosecute persons bearing responsibility for
                            serious violations of international humanitarian law and Sierra Leonean law committed in
                            the territory of Sierra Leone since November 1996.
                            37
                             Al Qaeda first set up diamond mining and trading companies during the 1990s in Kenya
                            and Tanzania. Although these diamond-trading operations were not fully developed, they
                            did provide some financial returns and expertise for involvement in diamond trading in
                            Sierra Leone.
                            38
                             According to the DHS ICE, in a drug-trafficking sting operation in the jewelry district of
                            New York, 11 individuals were indicted for money laundering by accepting more than $1
                            million cash in exchange for smelted gold items and diamonds they had reason to believe
                            were going to be smuggled to South America.




                            Page 21                                     GAO-04-163 Alternative Financing Mechanisms
                           criminal and nontransparent nature.39 ICE defines trade-based money
                           laundering as the use of trade to legitimize, conceal, transfer, and convert
                           large quantities of illicit cash into less conspicuous assets such as gold or
                           diamonds. In turn, these criminal proceeds are transferred worldwide
                           without being subject to bank secrecy laws. For example, hawala
                           operators reportedly use false (under- or over-) invoicing40 to balance
                           books or move assets. According to the FBI, some cases of terrorist use of
                           trade-based money laundering to move assets may exist but are too
                           sensitive for discussion at this time.


Terrorist Organizations    Terrorists may store assets in cash, or in commodities, that serve as forms
May Store Assets in Cash   of currency that are likely to maintain value over longer periods of time
or Commodities That        and are easy to buy and sell outside the formal banking system. However,
                           little has been reported concerning the storing of terrorist assets in
Serve as Forms of          alternative financing mechanisms. The FBI testified in the case of the
Currency and Maintain      United States versus the Benevolence International Foundation that a
Value and Liquidity        key associate of Osama bin Laden kept thousands of dollars of cash in
                           several currencies in shoeboxes in his apartment.41 According to a
                           September 2002 United Nations Security Council letter, al Qaeda was
                           believed to have shifted a portion of its assets to gold, diamonds, and other
                           untraceable commodities. In 2002, we reported that diamonds might be
                           used as a store of wealth for those wishing to hide assets outside the



                           39
                             According to the 2002 National Money Laundering Strategy, the Black Market Peso
                           Exchange, the largest known trade-based money laundering system in the Western
                           hemisphere, is a system that converts and launders illicit drug proceeds from dollars to
                           Columbian pesos. Typically, narcotics dealers sell Columbian drugs in the United States
                           and receive U.S. dollars. The narcotics traffickers thereafter sell the U.S. currency to a
                           Columbian black market peso broker’s agent in the United States. In return for the dealer’s
                           U.S. currency deposit, the agent deposits the agreed-upon equivalent of Columbian pesos
                           into the cartel’s bank account in Columbia. At this point, the cartel has successfully
                           converted its drug dollars into pesos, and the Columbian broker and his agent now assume
                           the risk for integrating the drug dollars into the U.S. banking system. The broker funnels
                           the money into financial markets by selling the dollars to Columbian importers, who then
                           purchase U.S. goods that are often smuggled back into Columbia to avoid taxes and
                           customs duties.
                           40
                            False invoicing is a simple way of moving money across borders. For example, if a
                           container of goods is worth $100,000, but is invoiced for $150,000, the subsequent payment
                           of $150,000 will allow the movement of $50,000 to illicitly cross borders.
                           41
                            United States vs. Benevolence International Foundation, Inc. and Enaam Arnaout,
                           Case Number 02 Cr. 0414, United States District Court, Northern District of Illinois, Eastern
                           Division, April 2002.




                           Page 22                                     GAO-04-163 Alternative Financing Mechanisms
                           banking sector, where assets could be detected and seized.42 According to
                           Global Witness, a nongovernmental organization, British forces in
                           Afghanistan found an al Qaeda training manual in December 2001 that
                           addressed how to smuggle gold. While various press reports suggested
                           that al Qaeda was shifting assets into gold last fall, U.S. law enforcement
                           has been unable to substantiate these allegations. Terrorists may store
                           their assets in gold because its value is easy to determine and remains
                           relatively consistent over time. There is always a market for gold given its
                           cultural significance in many areas of the world, such as Southeast Asia,
                           South and Central Asia, the Arabian Peninsula, and North Africa.43 Gold is
                           considered a global currency and is easily exchanged throughout the
                           world.


                           The true extent of terrorist use of alternative financing mechanisms is
Extent of Use of           unknown, owing to the criminal nature of the activity and the lack of
Alternative Financing      systematic data collection and analyses. Although we recognize that the
                           criminal nature of terrorist financing prevents knowing the full extent of
Mechanisms Is              their use of alternative mechanisms, systematic data collection and
Unknown                    analyses of case data does not yet exist to aid in determining the
                           magnitude of the problem. The limited and sometimes conflicting
                           information available on alternative financing mechanisms adversely
                           affects the ability of U.S. government agencies to assess risk and prioritize
                           efforts on terrorist financing mechanisms.


Criminal Nature of         It would be unrealistic to expect U.S. law enforcement to determine the
Terrorists’ Use of         full extent of terrorist or criminal use of alternative financing mechanisms.
Alternative Financing      As we noted, terrorists, like other criminals, strive to operate in obscurity
                           and thus seek out nontransparent mechanisms that have little or no paper
Mechanisms Precludes       trail, often operating in weakly regulated industries. The terrorist link may
Knowledge of True Extent   be difficult to determine or define. While dollar amounts of funds frozen in
                           terrorist-related bank accounts have been used to serve as rough
                           indicators of the extent of terrorist financial flows through the formal
                           financial networks, researchers and government officials have presented




                           42
                            GAO-02-678.
                           43
                             For example, in many of these countries, gold is commonly displayed in weddings, as a
                           form of economic status, or to settle books in informal banking systems.




                           Page 23                                   GAO-04-163 Alternative Financing Mechanisms
                           few such indicators about terrorist assets outside of formal mechanisms.44
                           Further, limited useful information exists about the total annual flow of
                           assets through some types of alternative financing mechanisms, such as
                           informal banking systems, and on what portion of that total may be
                           terrorist assets. For example, there is a wide range of estimates about the
                           total annual flow of transactions through informal banking systems; the
                           United Nations estimates $200 billion, the World Bank and International
                           Monetary Fund estimate tens of billions of dollars, and a FinCEN report
                           noted that quantifying the amount with certainty is impossible. Moreover,
                           officials and researchers we spoke with could not provide estimates on the
                           extent of terrorist use of informal banking systems and other alternative
                           financing mechanisms.


U.S. Law Enforcement       U.S. law enforcement agencies—specifically, the FBI, which leads terrorist
Does Not Systematically    financing investigations and operations—do not systematically collect and
Collect and Analyze Data   analyze data on terrorists’ use of alternative financing mechanisms.45 When
                           agencies inform the FBI that an investigation has a terrorist component,
on Terrorists’ Use of      the FBI opens a terrorism case. However, the FBI cannot, through its
Alternative Financing      existing processes, furnish the numbers of open or closed terrorist
Mechanisms                 financing cases and cannot furnish the numbers of those cases broken
                           down by funding source. According to the FBI’s Terrorist Financing
                           Operations Section (TFOS) officials,46 most, if not all, terrorist cases
                           involve a financial aspect, known as a “funding nexus,” which is normally
                           considered to be a component of the overall investigation. However, the
                           FBI does not currently isolate terrorist financing cases from substantive
                           international terrorism cases, and its data analysis programs do not
                           designate the source of funding (i.e., charities, commodities, etc.) for
                           terrorist financing. The lack of such data hinders the FBI from conducting
                           systematic analysis of trends and patterns focusing on alternative


                           44
                            According to the Treasury’s Office of Foreign Assets Control, the United States had frozen
                           $719,832 in al Qaeda assets as of July 31, 2003.
                           45
                             Once a U.S. law enforcement agency (for example, ATF, DEA, ICE, etc.) identifies a
                           terrorist nexus in an investigation they are to notify the FBI. Information is to be shared
                           through the FBI-led Joint Terrorism Task Forces in the field or the National Joint
                           Terrorism Task Force in FBI headquarters. Agencies have representatives at each others’
                           locations to facilitate information-sharing.
                           46
                             The FBI’s Terrorist Financing Operations Section provides overall operational command
                           to the interagency National Joint Terrorism Task Force at FBI headquarters and the Joint
                           Terrorism Task Forces in the field that conduct terrorist financing investigations and
                           operations.




                           Page 24                                     GAO-04-163 Alternative Financing Mechanisms
financing mechanisms from its case data. Without such an assessment, the
FBI would not have analyses that could aid in assessing risk and
prioritizing efforts to address these and other mechanisms. According to
TFOS, it and the DOJ Counterterrorism Section have initiated a number of
proactive data mining47 and data link analyses using a number of
government and private data sources to identify potential terrorists and
terrorist-related financing activities, but these initiatives generally focus
on formal financial systems, not alternative financing mechanisms.

According to the Chief of TFOS, the FBI plans to collect information from
the field offices through its Crime Survey/Threat Assessment and Annual
Field Office Reports, and these tools might include information on
alternative financing mechanisms. However, the formats and results of
these tools were not available to us during our review. Although the FBI
reported that it solicited information from the field on identified threats
and efforts including terrorist financing, we received no evidence showing
that these reports addressed alternative financing mechanisms using a
systematic methodology. The FBI disseminated its Crime Survey/Threat
Assessment to all of its field offices, and the responses were due to FBI
headquarters in August 2003 after we completed our fieldwork. According
to the TFOS Chief, this information from the field was to highlight the
threats identified in the field and might include discussions of alternative
financing mechanisms. Also, according to the TFOS Chief, the Annual
Field Office Reports were to be disseminated in April 2003 and finalized
before conclusion of our fieldwork on July 30, 2003. However, as of July
30, 2003, the Annual Field Office Reports had not been finalized, and their
status was unavailable. According to the TFOS Chief, the Annual Field
Office Reports, once finalized in their new format, would furnish myriad
useful documentation concerning the FBI’s efforts within the International
Terrorism program and the terrorist financing arena. However, it remained
unclear to what extent these documents would address alternative
financing mechanisms.

The DHS’s ICE, which participates in terrorist financing investigations in
coordination with the FBI, also does not systematically collect and analyze
data on terrorists’ use of alternative financing mechanisms. The former
U.S. Customs Service initiated Operation Green Quest (OGQ) in October



47
 Data mining is the process of extracting meaningful information from large databases.
Once extracted, the information can be analyzed to reveal hidden patterns, trends,
relationships, and correlations between the data.




Page 25                                   GAO-04-163 Alternative Financing Mechanisms
2001 to focus on terrorist financing,48 and some of its data collection and
analysis were intended to focus on alternative financing mechanisms.
However, first, Customs officials were unable to furnish accurate numbers
of open and closed terrorist financing cases. According to OGQ officials,
they had approximately 580 open terrorist financing cases and 559 closed
cases between OGQ’s inception in October 2001 and February 2003.
However, Customs officials told us that, although cases may initially be
thought to have a terrorist link and be categorized as such in their
database, they might not be recategorized as nonterrorist cases once no
terrorist link was found. Rather, the database captured criminal cases that
may or may not have had a terrorist link; and the number of actual cases
with a terrorist link, which would also depend on how “link” is defined, is
not readily known. Second, ICE officials and former OGQ officials
confirmed that they could not readily distinguish among the types of
alternative financing mechanisms in their case database. According to
these officials, it would take an intensive effort to segregate data by
categories of alternative financing mechanisms. They said that they
believed they could accomplish this, but that it would take resources and
time, because the system was not set up to search for these mechanisms.
Further, this method does not identify a terrorist link, requiring further
effort to determine whether such a link existed.

Moreover, while ICE officials use an analytical tool known as the
Numerically Integrated Information System to investigate money
laundering, terrorist financing, and other criminal activities, the tool, while
useful, could not be used to automatically analyze information on
alternative methods of terrorist financing and the extent of their use. The
tool enables users to analyze databases for anomalies, criminal patterns,
and specific transactions in global commerce when the user knows what
to look for, based on other information or a tip; however, the tool does not
automatically identify problem areas for attention. For example, if ICE
officials know to compare export and import data between the United
States and another country, and that country shares its data, then trade
anomalies can be identified and further investigated using a number of
databases and features. Customs officials used the system to identify



48
  According to the May 13, 2003, Memorandum of Agreement between the Department of
Justice and the Department of Homeland Security Concerning Terrorist Financing
Investigations, after June 30, 2003, OGQ no longer existed as a program name. DHS was to
pursue terrorist financing investigations and operations solely through its participation in
the FBI’s National Joint Terrorism Task Force, the Joint Terrorism Task Forces, and the
Terrorist Financing Operations Section.




Page 26                                    GAO-04-163 Alternative Financing Mechanisms
                            money laundering based on irregular patterns in the gold trade between
                            the United States and Argentina. However, the tool cannot be used to
                            automatically flag anomalies in all U.S. imports and exports. Officials
                            agreed that an automated feature would be beneficial and they believed
                            that it would be developed in the future.49 Further, according to the May
                            13, 2003, DOJ and DHS memorandum of agreement concerning the FBI’s
                            management of terrorist financing cases, resulting DHS analyses will be
                            shared with the FBI, but it remains unclear how or if this information
                            might be integrated with FBI databases or analyses.


Analysis and Reporting on   Despite an acknowledged need from some U.S. government officials and
Terrorist Use of            researchers for further analysis of the extent of terrorists’ use of
Alternative Financing Is    alternative financing mechanisms, in some cases, U.S. government
                            reporting on these issues has not always been timely or comprehensive.
Limited and Sometimes       This could affect planning efforts. Upon requesting U.S. government
Conflicting                 studies on terrorist or criminal use of alternative financing mechanisms,
                            we found that few rigorous studies exist. We also found that studies from
                            researchers and information from various government and
                            nongovernmental sources sometimes conflict.

                            The Departments of the Treasury and of Justice have yet to produce their
                            report on how money is being moved or value is being transferred via the
                            trade in precious stones and commodities. This report was required by
                            March 2003 under the 2002 National Money Laundering Strategy. The
                            information gained in the report was to form the basis of an informed
                            strategy for addressing this financing mechanism. According to Treasury
                            officials, the report was drafted in April and will be released as an
                            appendix in the yet-to-be-released 2003 National Money Laundering
                            Strategy. The draft was not made available for our review, and it remains
                            unclear whether the report addresses the recent investigative efforts of
                            other U.S. government and international entities on this subject. Moreover,
                            we found widely conflicting information in numerous interviews
                            concerning the use of precious stones and commodities and in the
                            available reports and documentation.




                            49
                              According to ICE’s technical comments on our draft report, an artificial intelligence
                            function is being developed for utilization in the NIIS program, but ICE did not provide
                            evidence of its development or what it would accomplish regarding alternative financing
                            mechanisms.




                            Page 27                                    GAO-04-163 Alternative Financing Mechanisms
                             Further, while a Treasury report to Congress on informal value transfer
                             systems, required under the USA PATRIOT Act,50 described informal
                             banking systems and related regulations, as required, it did not discuss
                             terrorist use of such systems and did not include a review of the potential
                             use of precious stones and commodities in such systems. While a
                             discussion of precious stones and commodities was not specifically
                             required under the USA PATRIOT Act, the report notes that there is a need
                             for further research, particularly with regard to understanding the range of
                             mechanisms associated with informal banking systems, including the use
                             of gold and precious gems in hawala transactions, among others.


                             The U.S. government faces challenges in monitoring terrorists’ use of
Key Challenges               alternative financing mechanisms, a few of which include accessibility to
Impede Monitoring of         networks, the adaptability of terrorists, and competing priorities within
                             the U.S. government.51 We recognize the inherent difficulty in monitoring
Terrorists’ Use of           terrorists’ use of alternative financing mechanisms and highlight three key
Alternative Financing        challenges in this report. First, accessing the networks through which
                             alternative financing mechanisms operate is difficult for U.S. authorities,
Mechanisms                   because such systems are close knit and nontransparent. Second, the
                             adaptable nature of terrorist groups can hinder authorities’ efforts to
                             target industries and systems vulnerable to terrorists’ use. Finally, when
                             monitoring alternative financing mechanisms, U.S. agencies face
                             competing priorities that may present challenges for utilizing and
                             enforcing existing laws and regulations or fully implementing strategic
                             efforts.


Accessing Terrorists’        The difficulty of accessing the networks through which alternative
Close-knit, Nontransparent   financing mechanisms operate represents a significant challenge for U.S.
Financing Networks           efforts to monitor terrorists’ use of such mechanisms. In particular, these
                             networks are difficult to access because they are close knit and based on
Presents Challenges for      trust. Informal banking systems, the diamond industry, and organized
U.S. Law Enforcement         crime networks such as those that smuggle cigarettes and drugs are
                             examples of alternative financing mechanisms that share these common
                             factors. Similarly, terrorist organizations such as al Qaeda and Hizballah


                             50
                              Pub. L. No. 107-56, Sec. 359(d).
                             51
                              As stated previously, issues concerning coordination and cooperation among U.S.
                             government agencies and international entities abroad will be covered in a subsequent
                             GAO report.




                             Page 28                                   GAO-04-163 Alternative Financing Mechanisms
are close knit and difficult to penetrate. The closeness and high degree of
trust between parties to terrorist financing networks are often based on
long-standing ethnic, family, religious, or organized criminal ties.
According to officials from U.S. law enforcement and the Treasury,
investigators who seek to monitor such networks rely on developing
inside sources of information, but the high degree of trust within the
networks poses challenges for recruiting informants and conducting
undercover operations. Law enforcement and the Treasury also report that
language and cultural barriers can increase the difficulty of accessing such
networks by impeding communication between government officials and
parties to the networks.

Nontransparency in many of these alternative financing mechanisms poses
another challenge to U.S. law enforcement’s ability to access and monitor
terrorists’ use of them. One component of this nontransparency is lacking
or indecipherable transaction records. While officials report that
transaction records in the formal banking sector have been critical to their
ability to freeze terrorists’ assets, the lack of a paper trail created by
alternative financing mechanisms limits investigators’ ability to track and
apprehend terrorist financiers. In one case, DEA pursued drug smugglers
with suspected terrorist links who used hawala to transfer their profits to
Lebanon. However, the indecipherable records of the hawala transactions
to Lebanon impeded DEA’s ability to trace the money once it reached
Lebanon. As a result, DEA was not able to ascertain if the smugglers were
providing material support to terrorists.

In addition to the lack of a paper trail, key trade data and accountability
measures for industries vulnerable to terrorist financing can be poor or
nonexistent, contributing to this nontransparency. For example,
international data on the diamond industry show that import, export, and
production statistics often contain glaring inconsistencies.52
Comprehensive international trade data on the industry are not available
in volume terms, even though volume data are a better indicator of true
trade flows. These data flaws inhibit analysts’ ability to find patterns and
anomalies that could reveal criminal smuggling of the diamonds, including
for terrorist financing. Further, as we previously reported, while a recent
international initiative to curb trade in illicit diamonds, known as the


52
  Data inconsistencies may be attributed to various factors, including poor quality of data
generated from many mining and trading nations, differences in how customs officials
appraise shipments, industry practices such as selling goods on consignment or unloading
stockpiles, false declarations by importers on the diamonds’ origin, and smuggling.




Page 29                                    GAO-04-163 Alternative Financing Mechanisms
                            Kimberley Process, incorporates some elements of increased
                            transparency, critical shortcomings exist with regard to internal controls
                            and monitoring.53


Terrorists’ Adaptability    Terrorist organizations’ adaptability can hinder U.S. law enforcement’s
Hinders Efforts to Target   efforts to target industries and mechanisms that are at a high risk for
High-risk Mechanisms of     terrorist financing. According to law enforcement and researchers, once
                            terrorists know that authorities are scrutinizing a mechanism they use to
Terrorist Financing         earn, move, or store assets, they may switch to an alternate industry,
                            commodity, or fundraising scheme to avoid detection. According to a
                            former intelligence official, in one case, terrorists who were counterfeiting
                            household appliances switched to creating their own appliance brand
                            when law enforcement began to scrutinize their activities. Analysts from
                            the former Customs Service have identified various counterfeit goods
                            including CDs, DVDs, and apparel as having a possible connection to
                            terrorist financing.

                            Additionally, according to researchers, terrorist groups such as al Qaeda
                            can exploit their geographically diffuse structure to move the location of
                            their operations if they are notified that authorities are pursuing their
                            financing activities in a particular location. The DOJ reports that the
                            Director of the Pakistan office of the Benevolence International
                            Foundation, an international charity whose U.S. Executive Director was
                            indicted for supporting al Qaeda and other terrorist organizations,54
                            avoided a Pakistani intelligence investigation by moving to Afghanistan
                            with the foundation’s money and documents. Within the United States,
                            geographic flexibility may also facilitate terrorist financing. For example,
                            according to IRS investigators and researchers, terrorists may have moved
                            their charity from one state to another and changed the charity’s name to
                            evade law enforcement.


                            53
                             GAO-02-678. Our assessment of the Kimberley Process found that it lacked controls to
                            ensure that it would be effective in stemming the flow of conflict diamonds. We
                            recommended that the Secretary of State, in consultation with the relevant government
                            agencies, work with Kimberley Process participants to develop better controls including a
                            reasonable control environment, risk assessment, internal controls, information-sharing,
                            and monitoring. Our recent follow-up work showed that these weaknesses remain and
                            could be exploited by financiers of terrorism.
                            54
                             On February 10, 2003, the U.S. Executive Director pled guilty to a racketeering
                            conspiracy, admitting that he fraudulently solicited charitable organizations in order to
                            provide financial assistance to persons engaged in violent activities overseas. According to
                            DOJ, he was sentenced to 11 years in prison.




                            Page 30                                     GAO-04-163 Alternative Financing Mechanisms
                            This adaptability also presents challenges in monitoring terrorists’ use of
                            informal banking systems, such as hawala. The USA PATRIOT Act
                            strengthened existing anti-money laundering laws by requiring that
                            operators of informal banking systems register with FinCEN and obtain
                            state licenses, where required under state law. The act also requires that
                            informal banking systems report suspicious transactions to FinCEN and
                            maintain anti-money laundering programs. However, officials and
                            researchers report that these requirements are difficult to enforce, and it is
                            likely that numerous small hawala operations remain unregistered and
                            noncompliant with one or more of these requirements. Terrorists may
                            have adapted to these new regulations by developing and maintaining
                            relationships and conducting business with the hawala operators that
                            remain underground, increasing the likelihood that their transactions will
                            not be detected.


Competing Priorities        Addressing competing priorities presents challenges for U.S. government
Present Challenges for      agencies’ efforts to monitor use of alternative financing mechanisms.
Monitoring of Alternative   Increased emphasis on combating terrorism and terrorist financing since
                            the September 11 terrorist attacks has placed greater urgency on
Financing Mechanisms        preexisting responsibilities for some agencies. New laws such as the USA
                            PATRIOT Act are generally recognized as assisting U.S. law enforcement
                            efforts but also increase the workload of agencies. While the FBI is the
                            lead agency on terrorist financing investigations, all agencies have an
                            inherent responsibility to aid in this effort. However, some agency officials
                            noted that new tasks sometimes compete with traditional roles or increase
                            workloads, creating a strain on their resources, which could slow the
                            sharing of potentially useful information. As a result, agencies may fail to
                            fully utilize existing laws or fully implement strategic efforts in a timely
                            manner, as described below.

Oversight of Charities      Competing priorities slowed IRS plans to take advantage of law enabling
                            greater information-sharing with the states. Although the IRS told us in
                            February 2002 that it had begun to develop a system to share data with the
                            states for the oversight of charities as allowed by law,55 the IRS has not



                            55
                              The appropriate state officials can obtain details about the final denials of applications,
                            final revocations of tax-exempt status, and notices of a tax deficiency under section 507, or
                            chapter 41 or 42, under the Internal Revenue Code. However, IRS does not have a process
                            to regularly share such data. See U.S. General Accounting Office, Tax-Exempt
                            Organizations: Improvement Possible in Public, IRS, and State Oversight of Charities,
                            GAO-02-526 (Washington, D.C.: Apr. 30, 2002).




                            Page 31                                     GAO-04-163 Alternative Financing Mechanisms
made this initiative a priority and has not developed and implemented this
system. While neither the IRS’s nor the states’ primary goal is deterring
terrorism, using data-sharing systems is even more important now, when
feasible, in light of the charities cases involving terrorist financing. States
have an important role in combating terrorist financing because states
share overall oversight responsibility for charities with the IRS. Further,
according to state officials, questionable charities tend to move from state
to state to avoid detection. According to the President of the National
Association of State Charitable Organizations, the system of proactive
information-sharing discussed with us in 2002 (including final denials of
applications, final revocations of tax-exempt status, and notices of a tax
deficiency) could be very useful for states in identifying and shutting down
suspect charities, including charities involving terrorist financing. This
system would establish uniform procedures for sending information from
the IRS to states, including information about charities that have misused
their funds.

IRS officials attributed delays in fully developing and implementing the
system to a number of factors, including competing priorities in the
department and the desire to combine this effort with the potential for
increased information-sharing that may be allowable under pending
legislation.56 However, IRS officials agreed that they could have developed
this system without passage of further legislation, and while they stated
that they had begun to do so, as of July 31, 2003, when we concluded
fieldwork, they had provided no evidence of work completed to date and
had not specified a time frame for how and when implementation would
be completed. Subsequently, on September 4, 2003, the IRS provided us
with draft IRS procedures and draft guidelines for state charity officials.
Officials said they were reviewing the drafts, and their proposed
completion date for this information-sharing program is December 31,
2004. The IRS did not establish milestones for meeting the completion date
and did not establish interim guidelines. The President of the National
Association of State Charitable Organizations told us that if the issuance of
guidelines for state charity officials were further delayed, then interim
guidelines would be useful.




56
 S.476, the Charity Aid, Recovery, and Empowerment Act of 2003.




Page 32                                  GAO-04-163 Alternative Financing Mechanisms
Anti-money Laundering       The extent of the workload created under the 2001 USA PATRIOT Act
Programs                    initially increased the amount of work required of FinCEN and may have
                            slowed efforts to take full advantage of the act concerning the
                            establishment of anti-money laundering programs. The information to be
                            gained under the regulations, through financial institution registration and
                            submission of required Suspicious Transaction Reports, was intended to
                            be shared with law enforcement and intelligence analysts in their efforts to
                            detect and deter terrorism. In October 2002, FinCEN officials told us that
                            they had insufficient resources to draft regulations required under the act
                            and they had not decided how to prioritize the workload. According to the
                            2002 National Money Laundering Strategy issued by the Departments of
                            the Treasury and Justice, the process was made more challenging by the
                            fact that many of the new provisions imposed regulations on various
                            sectors and financial institutions that were not previously subject to
                            comprehensive anti-money laundering regulations, such as automobile and
                            boat dealers, pawn brokers, and dealers in precious metals, stones, or
                            jewels. This meant that time and resources were needed to study and
                            consult with law enforcement and industry leaders. FinCEN rules for
                            dealers in precious metals, stones, or jewels were proposed on February
                            21, 2003, and have not been finalized.

National Money Laundering   Implementation of the 2002 National Money Laundering Strategy, which
Strategy                    ostensibly directs the U.S. government’s resources against money
                            laundering and terrorist financing, has proven to be challenging partially
                            owing to the number of competing priorities. The 2002 strategy states that
                            the U.S. government has moved aggressively to attack terrorist financing
                            by refocusing its ongoing anti-money laundering efforts and acknowledges
                            the larger burden placed on agencies owing to provisions of the USA
                            PATRIOT Act. The 2002 strategy contains 19 objectives and 50 priorities
                            but does not assign resources to these priorities based on a risk or threat
                            assessment. Although the Secretary of the Treasury and the Attorney
                            General issued the annual strategy, Justice officials, including FBI
                            officials, told us that the strategy contained more priorities than could be
                            realistically accomplished, and said that it did not affect how they set
                            priorities or aligned resources to address terrorist financing. Treasury
                            officials said resource constraints and competing priorities were the
                            primary reasons why strategy initiatives, including those related to
                            alternative financing mechanisms, were not met or were completed later
                            than expected. Moreover, although the 2003 National Money Laundering




                            Page 33                             GAO-04-163 Alternative Financing Mechanisms
                      Strategy was to be issued in February 2003,57 according to Treasury
                      officials, as of July 31, 2003, the new strategy had not been published
                      owing to the demands involved in the creation of DHS. At the conclusion
                      of our review, Treasury officials told us that the Secretary of DHS would
                      be added as a signatory to the 2003 National Money Laundering Strategy.
                      However, subsequently, when reviewing the draft of this report, Treasury,
                      DOJ, and DHS officials told us that the Secretary of the DHS would not be
                      a signatory to the 2003 National Money Laundering Strategy.


                      Efforts to disrupt terrorists’ ability to fund their operations may not
Conclusions           succeed if they focus solely on the formal banking or mainstream financial
                      sector. To form a viable strategy, the U.S. government and others face
                      challenges in understanding the nature and extent of terrorists’ use of
                      alternative financing mechanisms and in monitoring these and emerging
                      mechanisms. While we recognize that the full extent of criminal activity
                      cannot be determined, information can be systematically collected and
                      synthesized to provide a useful gauge. We recognize that such analyses are
                      difficult, but without an attempt to do so, information about terrorists’
                      usage and potential usage remains unknown, leaving vulnerabilities for
                      terrorists to exploit. Since current FBI systems do not allow for such data
                      collection and synthesis, linkages, patterns, and emerging trends may not
                      be effectively identified and, thus, resources may not be focused on the
                      most significant mechanisms. Further, without rigorous assessments of
                      high-risk industries and systems, critical information may remain
                      unidentified or unexplored, leaving such industries and systems vulnerable
                      to exploitation by terrorists. Without good data and analysis, leading to
                      viable threat assessments and strategies, U.S. government officials cannot
                      make good decisions among competing priorities and the resources to
                      address them.


                      To establish a basis for an informed strategy to focus resources on the
Recommendations for   most significant mechanisms that terrorists use to finance their activities,
Executive Action      we recommend that the Director of the FBI, in consultation with relevant



                      57
                        The Money Laundering and Financial Crimes Strategy Act of 1998 (Strategy Act, see Pub.
                      L. No. 105-310, 112 Stat. 2941 codified as 31 U.S.C. §§ 5340-42, 5351-55 (1998)) requires the
                      President –acting through the Secretary of the Treasury and in consultation with the
                      Attorney General and other relevant federal, state, and local law enforcement and
                      regulatory officials –to develop and submit the annual National Money Laundering Strategy
                      to Congress by February 1 of each year from 1999 through 2003.




                      Page 34                                     GAO-04-163 Alternative Financing Mechanisms
                     U.S. government agencies, systematically collect and analyze information
                     involving terrorists’ use of alternative financing mechanisms.

                     Moreover, to create a basis for an informed strategy for determining how
                     money is being moved or value is being transferred via the trade in
                     precious stones and commodities, we recommend that the Secretary of the
                     Treasury and the U.S. Attorney General produce a report on this subject,
                     fulfilling their overdue action item under the 2002 National Money
                     Laundering Strategy. Such a report should be based on up-to-date law
                     enforcement investigations of links between precious stones and
                     commodity trading and the funding of terrorist groups, as required under
                     the strategy.

                     Finally, to improve the oversight of charities, leading to the possible
                     disruption of terrorist financing, we recommend that the Commissioner of
                     the IRS, in consultation with state charity officials, establish interim IRS
                     procedures and state charity official guidelines, as well as set milestones
                     and assign resources for developing and implementing both, to regularly
                     share data on charities as allowed by federal law.


                     We provided draft copies of this report to the following agencies for
Agency Comments      review: the Department of Justice, the Department of the Treasury, the
and Our Evaluation   Internal Revenue Service, the Department of Homeland Security and the
                     Department of State. We received formal comments from the Treasury and
                     IRS (see apps. II and III). We received technical comments from DOJ,
                     DHS, and State, which we incorporated in the report as appropriate.

                     The DOJ did not formally respond to our recommendation that the
                     Director of the FBI, in consultation with relevant U.S. government
                     agencies, systematically collect and analyze information involving
                     terrorists’ use of alternative financing mechanisms. However, in DOJ’s
                     technical comments, they agreed that the FBI does not systematically
                     collect and analyze such information, but they did not specifically agree or
                     disagree with our recommendation. DOJ commented that it designates
                     sources of funding in its terrorist financing cases, but it does not initiate or
                     organize investigations on an industrywide basis or as a result of the type
                     of commodity used or particular means of transfer. Additionally, DOJ
                     suggested that the effort might more appropriately be a function of the
                     Treasury based on Treasury’s prior work on alternative financing
                     mechanisms. However, according to FBI TFOS, their mission is to
                     centralize and coordinate all terrorist financing investigations. As stated in
                     this report, TFOS officials said that they and the DOJ Counterterrorism


                     Page 35                              GAO-04-163 Alternative Financing Mechanisms
Section have already initiated a number of data mining and data link
analysis initiatives to identify terrorist-related financing activities focusing
on formal financing systems, but not alternative financing mechanisms.
Further, TFOS officials said they plan to evaluate the feasibility of adding a
separate designation for terrorist financing in their data system according
to the source of funding. We continue to believe the FBI should work in
consultation with relevant U.S. government agencies to systematically
collect and analyze information involving terrorists’ use of alternative
financing mechanisms, which would include strategizing with and
engaging the expertise of other agencies such as Treasury and DHS,
among others.

In response to our recommendation that the Secretary of the Treasury and
the U.S. Attorney General produce a planned report on precious stones
and commodities, the Department of the Treasury responded that the
report would be issued as an appendix to the 2003 National Money
Laundering Strategy. However, the strategy was to be issued in February
2003 and had not been issued as of our receipt of Treasury’s comments on
October 29, 2003. Further, the Treasury did not address whether their
report would include up-to-date information from law enforcement
investigations of links between precious stones and commodity trading
and the funding of terrorist groups, as required under the strategy. The
Department of Justice did not comment on this recommendation. We
continue to recommend that their report be based on up-to-date law
enforcement investigations given the conflicting views and the lack of
comprehensive reporting on terrorists’ use of precious stones and
commodities.

The IRS agreed with our overall recommendation to establish IRS
procedures and state charity official guidelines to regularly share data on
charities as allowed by federal law. Although IRS told us at the conclusion
of our fieldwork that they planned to establish this information-sharing
program by December 31, 2004, in response to our draft report and
recommendation, the IRS committed to expediting its efforts by one year,
having procedures in place by the end of calendar year 2003. Subsequent
to our fieldwork, the IRS exhibited progress by producing draft
procedures and guidelines. However, the IRS did not address our
recommendation to establish milestones and assign resources to meet the
target date or interim guidelines should they miss the 2003 target date.
Given the complexity and time needed to complete the effort, as described
by the IRS, we continue to recommend that the IRS establish milestones
and assign resources to ensure that it meets its new target date. We also



Page 36                              GAO-04-163 Alternative Financing Mechanisms
continue to recommend that IRS establish interim procedures and
guidance should the IRS not meet its target date.


As agreed with your offices, unless you publicly announce the contents of
this report earlier, we plan no further distribution until 30 days from the
report date. At that time, we will send copies to the Attorney General, the
Secretary of Homeland Security, the Secretary of State, the Secretary of
the Treasury, the Commissioner of Internal Revenue, and interested
congressional committees. We also will make copies available to others
upon request. In addition, the report will be available at no charge on the
GAO Web site at http://www.gao.gov.

If you or your staff have any questions about this report, please call me at
(202) 512-4128. Other contacts and staff acknowledgments are listed in
appendix IV.




Loren Yager
Director, International Affairs and Trade




Page 37                             GAO-04-163 Alternative Financing Mechanisms
              Appendix I: Objectives, Scope, and
Appendix I: Objectives, Scope, and
              Methodology



Methodology

              The Ranking Minority Member of the Senate Committee on Governmental
              Affairs’ Subcommittee on Oversight of Government Management, the
              Federal Workforce and the District of Columbia and the Chairman of the
              Senate Caucus on International Narcotics Control asked us to assess (1)
              the nature of terrorists’ use of key alternative financing mechanisms for
              earning, moving, and storing terrorists’ assets; (2) what is known about the
              extent of terrorists’ use of alternative financing mechanisms; and (3) the
              challenges that the U.S. government faces in monitoring terrorists’ use of
              alternative financing mechanisms.

              To determine the nature of terrorists’ use of some key alternative
              financing mechanisms for earning, moving, and storing assets, we
              reviewed past GAO work, studies, analyses, and other documents
              prepared by experts from U.S. agencies, international organizations, and
              other groups. We also interviewed officials of the U.S. government,
              international entities, foreign governments, industry, and nonprofit groups,
              as well as representatives from academia and research institutions. Our
              scope and methodology were limited by the lack of complete access to
              sensitive information and documentation. In cases where little
              documentation was provided and views conflicted, we corroborated
              information to the extent possible and noted the conflicting views.

              We reviewed available documentation and interviewed officials from the
              following U.S. departments and agencies:

              •   the Department of Justice (Criminal Division; Federal Bureau of
                  Investigation; Bureau of Alcohol, Tobacco, Firearms, and Explosives;
                  Drug Enforcement Administration);

              •   the Department of the Treasury (Executive Office of Terrorist
                  Financing and Financial Crime, Office of Foreign Assets Control,
                  Financial Crimes Enforcement Network, Internal Revenue Service
                  (IRS), and the Office of International Affairs);

              •   the Department of Homeland Security (Bureau of Immigration and
                  Customs Enforcement);

              •   the Department of State (Office of the Coordinator for
                  Counterterrorism, Bureau of International Narcotics and Law
                  Enforcement Affairs, and Bureau of Economic and Business Affairs);

              •   the Department of Defense (Office of the Secretary of Defense, Office
                  of Naval Intelligence, Defense Intelligence Agency);



              Page 38                              GAO-04-163 Alternative Financing Mechanisms
Appendix I: Objectives, Scope, and
Methodology




•   the Central Intelligence Agency;

•   the Congressional Research Service;

•   the U.S. Mission to the United Nations;

•   the U.S. Embassy in Belgium (political and economic officers,
    Department of Homeland Security (Customs), Drug Enforcement
    Administration, Federal Bureau of Investigation, Defense);

•   the U.S. Embassy in France (Department of Homeland Security
    (Customs), Federal Bureau of Investigation);

•   the U.S. Mission to the European Union; and

•   U.S. representatives to INTERPOL.

We also reviewed and assessed available documentation and interviewed
officials from the following international entities:

•   the United Nations;

•   INTERPOL;

•   the Financial Action Task Force on Money Laundering;

•   the World Customs Organization;

•   the European Union;

•   the Charities Commission on England and Wales; and

•   the Supreme Headquarters Allied Powers Europe (one of the North
    Atlantic Treaty Organization’s military commands).

Additionally, we interviewed officials from Belgian law enforcement, the
Federal Prosecutor’s Office, and the Ministry of Foreign Affairs, Foreign
Trade and International Cooperation. We also interviewed experts from
India and Pakistan on hawala systems. We interviewed the Chief
Prosecutor and Chief Investigator for the United Nations Special Court for
Sierra Leone. Moreover, we reviewed studies and analyses and
interviewed officials from industry, nonprofit groups, academia, the
media, and research institutions such as the Belgian Diamond High
Council, the Phillip Morris Company, Global Witness, the International


Page 39                                GAO-04-163 Alternative Financing Mechanisms
Appendix I: Objectives, Scope, and
Methodology




Peace Information Service, Council on Foreign Relations, Business
Exposure Reduction Group, the Washington Institute for Near East Policy,
and the Investigative Project, among others.

To determine what is known about the extent of terrorists’ use of
alternative financing mechanisms, we reviewed studies, analyses, and
other documents and interviewed officials from the U.S. government,
international entities, foreign governments, industry, nonprofit groups,
academia, and research institutions. We attended and reviewed briefings
from the Federal Bureau of Investigation and the U.S. Customs Service
(now part of the Department of Homeland Security) on their data
collection, databases, and analysis methods and discussed with them what
their systems could and could not do. We were limited by the lack of
complete access to sensitive information and by the lack of available and
reliable data to determine the extent of terrorists’ use of alternative
financing mechanisms. Our reporting on the current FBI data collection
and analysis methods was curtailed by the Department of Justice due to
sensitivity concerns. We also discussed studies completed and expected
from the Departments of the Treasury and Justice as required under the
2002 National Money Laundering Strategy with officials from these
departments.

To determine challenges that the U.S. government faces in monitoring
terrorists’ use of alternative financing mechanisms, we reviewed past GAO
work and documents from U.S. and foreign governments, industry, and
international entities including strategies, such as the National Money
Laundering Strategy; laws, regulations, rules, policies, procedures, and
actions; and studies. For example, we analyzed federal and state tax laws
pertaining to the oversight of charitable organizations, including reviewing
Internal Revenue Code section 6104 on information-sharing between IRS
and state regulators. Further, we interviewed officials from these
organizations to corroborate analysis and documentary evidence. We also
interviewed officials from the National Association of State Charitable
Organizations and state Attorneys General Offices from California, New
York, Pennsylvania, and Texas to identify challenges to deterring the use
of charitable organizations in terrorist financing. According to the
President of the National Association of State Charitable Organizations,
California, New York and Pennsylvania are heavily regulated states while
Texas is not. Additionally, we reviewed FinCEN issuance of rules and
regulations as allowed under the USA PATRIOT Act. Further, we assessed
and obtained views on competing priorities involved in implementing the
2002 National Money Laundering Strategy.



Page 40                              GAO-04-163 Alternative Financing Mechanisms
Appendix I: Objectives, Scope, and
Methodology




We conducted our fieldwork in Washington, D.C., and New York, N.Y.;
Brussels and Antwerp, Belgium; and Paris and Lyon, France. We
performed our work from August 2002 through July 2003 in accordance
with generally accepted government auditing standards.




Page 41                              GAO-04-163 Alternative Financing Mechanisms
                             Appendix II: Comments from the Department
Appendix II: Comments from the Department
                             of the Treasury



of the Treasury

Note: GAO comments
supplementing those in
the report text appear at
the end of this appendix.

The page numbers in this
letter refer to a draft of
this report. We have
indicated page number
changes.




See comment 1.



See comment 2.




                             Page 42                                GAO-04-163 Alternative Financing Mechanisms
                 Appendix II: Comments from the Department
                 of the Treasury




See comment 3.


See comment 4.




See comment 5.




                 Page 43                                GAO-04-163 Alternative Financing Mechanisms
                 Appendix II: Comments from the Department
                 of the Treasury




See comment 6.




See comment 7.



Now on p. 28.




See comment 8.


See comment 9.




                 Page 44                                GAO-04-163 Alternative Financing Mechanisms
                  Appendix II: Comments from the Department
                  of the Treasury




Now on p. 33.

See comment 10.

See comment 11.




                  Page 45                                GAO-04-163 Alternative Financing Mechanisms
               Appendix II: Comments from the Department
               of the Treasury




               1. The term “earn” more fully captures the criminal effort involved in the
GAO Comments      range of alternative terrorist financing mechanisms.

               2. While the use of terrorist funding may provide transactions that can be
                  investigated, the scope of this review focused on how terrorists earn,
                  move, and store their assets. The final use of terrorist funding is not
                  relevant in the context of this report.

               3. We amended the description of the Executive Office for Terrorist
                  Financing to incorporate additional information provided. The
                  description was edited in a manner consistent with those of the other
                  agencies in the table and it captures both the information provided in
                  the Executive Office’s Mission Statement as well as the agency
                  comments.

               4. We amended the description of the Financial Crimes Enforcement
                  Network in Table 1 to include its role in administering the Bank
                  Secrecy Act.

               5. The description used was obtained from IRS Criminal Investigation
                  and is consistent with the format used for other agencies.

               6. We incorporated the description of the Treasury’s Office of the
                  General Counsel in Table 1.

               7. We respond to this comment on page 28.

               8. We agree that the USA PATRIOT Act did not specifically require that
                  the Department of the Treasury report to Congress on informal value
                  transfer systems include a discussion of precious stones and
                  commodities. While a discussion of precious stones and commodities
                  was not specifically required under the USA PATRIOT Act, the
                  Treasury report notes that there is a need for further research,
                  particularly with regard to understanding the range of mechanisms
                  associated with informal banking systems, including the use of gold
                  and precious gems in hawala transactions, among others. We modified
                  our report, accordingly.

               9. The Department of the Treasury’s comments state that their report to
                  Congress on informal value transfer systems did not discuss terrorists’
                  use of these systems because there was no direct evidence that
                  terrorists had used these systems in the United States. However, the
                  Treasury report states that “these [informal value transfer] systems
                  have been used to facilitate the financing of terrorism” and the USA
                  PATRIOT Act requirement for the report addresses the transfer of


               Page 46                                 GAO-04-163 Alternative Financing Mechanisms
Appendix II: Comments from the Department
of the Treasury




    money both domestically and internationally. The Treasury report
    provides no further discussion on the link between terrorist financing
    and these systems.

10. The sentence is characterized accurately. The context of the
    discussion was the development of regulations required under the USA
    PATRIOT Act.

11. We have omitted the example concerning the timeline for finalizing
    anti-money laundering program rules for money service businesses
    due to conflicting information presented by FinCEN during our review
    and the Department of the Treasury’s comments.




Page 47                                 GAO-04-163 Alternative Financing Mechanisms
              Appendix III: Comments from the Internal Revenue Service
Appendix III: Comments from the Internal
Revenue Service




              Page 48                                  GAO-04-163 Alternative Financing Mechanisms
Appendix III: Comments from the Internal Revenue Service




Page 49                                  GAO-04-163 Alternative Financing Mechanisms
                            Appendix IV: GAO Contacts and Staff Acknowledgments
Appendix IV: GAO Contacts and Staff
Acknowledgments

                  Elizabeth Sirois (202) 512-8989
GAO Contacts      Kathleen Monahan (415) 904-2237


                  In addition to those individuals named above, Kate Blumenreich, Tracy
Staff             Guerrero, Janet Lewis, Kendall Schaefer, Jenny Wong, Mark Dowling,
Acknowledgments   Rona Mendelsohn, and Reid Lowe made key contributions to this report.




(320149)
                  Page 50                              GAO-04-163 Alternative Financing Mechanisms
                         The General Accounting Office, the audit, evaluation and investigative arm of
GAO’s Mission            Congress, exists to support Congress in meeting its constitutional responsibilities
                         and to help improve the performance and accountability of the federal
                         government for the American people. GAO examines the use of public funds;
                         evaluates federal programs and policies; and provides analyses,
                         recommendations, and other assistance to help Congress make informed
                         oversight, policy, and funding decisions. GAO’s commitment to good government
                         is reflected in its core values of accountability, integrity, and reliability.


                         The fastest and easiest way to obtain copies of GAO documents at no cost is
Obtaining Copies of      through the Internet. GAO’s Web site (www.gao.gov) contains abstracts and full-
GAO Reports and          text files of current reports and testimony and an expanding archive of older
                         products. The Web site features a search engine to help you locate documents
Testimony                using key words and phrases. You can print these documents in their entirety,
                         including charts and other graphics.
                         Each day, GAO issues a list of newly released reports, testimony, and
                         correspondence. GAO posts this list, known as “Today’s Reports,” on its Web site
                         daily. The list contains links to the full-text document files. To have GAO e-mail
                         this list to you every afternoon, go to www.gao.gov and select “Subscribe to e-mail
                         alerts” under the “Order GAO Products” heading.


Order by Mail or Phone   The first copy of each printed report is free. Additional copies are $2 each. A
                         check or money order should be made out to the Superintendent of Documents.
                         GAO also accepts VISA and Mastercard. Orders for 100 or more copies mailed to a
                         single address are discounted 25 percent. Orders should be sent to:
                         U.S. General Accounting Office
                         441 G Street NW, Room LM
                         Washington, D.C. 20548
                         To order by Phone:     Voice:    (202) 512-6000
                                                TDD:      (202) 512-2537
                                                Fax:      (202) 512-6061


                         Contact:
To Report Fraud,
                         Web site: www.gao.gov/fraudnet/fraudnet.htm
Waste, and Abuse in      E-mail: fraudnet@gao.gov
Federal Programs         Automated answering system: (800) 424-5454 or (202) 512-7470


                         Jeff Nelligan, Managing Director, NelliganJ@gao.gov (202) 512-4800
Public Affairs           U.S. General Accounting Office, 441 G Street NW, Room 7149
                         Washington, D.C. 20548