June 17, 2016 | Forbes
What ISIS Is Banking On
As jihadist groups gain control of cities across the Middle East and Africa, preventing their access to the global financial system is increasingly critical to regulators. Anti-money laundering and counter-terror finance (AML/CTF) measures enacted since the September 11 attacks have made it easier for the international community to isolate financial institutions that allow terrorists to move money. But even constrained banking environments in terrorist-held areas still leave openings for militant groups to raise funds, whether by extorting bank customers or tapping informal money-transfer systems. Regulators must identify the active financial operators in contested territories, punish those who abet terrorists, and ensure the AML/CTF compliance of those seeking to do business in good faith.
The seizure by Islamic State (IS) of parts of Iraq and Syria since July 2014 has caused the banking system in those areas to shrink as most major financial institutions have shut down. Still, IS has found ways to eke out revenue from what remains of reduced banking infrastructure in its territory. Last year, the intergovernmental Financial Action Task Force on Money Laundering identified more than 20 Syrian financial institutions still operating in IS-held territory—many with links to the international banking system. In some places where banks still operate, the terrorist group forces locals to pay a percentage of money withdrawn from accounts.
Although banks’ concerns about terror financing and safety have disrupted much of the formal banking activity in IS territory, traditional money exchanges are filling the void. Such exchange houses are vital for day-to-day economic transactions, but many lack safeguards to stop IS from using their services. Moreover, some money-exchange owners are benefitting from the group’s presence. For example, one money-exchange house in Iraq places a 10% surcharge on cash coming in and out of militant territory, calling the Islamic State “good for business.”
Study countries outside of Iraq and Syria
U.S. officials have examined this problem in Iraq and Syria, but have barely studied it in other battlefields of extremist activity.
Yemen is one jurisdiction deserving greater study. In April 2015, al-Qa’ida in the Arabian Peninsula (AQAP) seized the country’s fifth-most populous city, Mukalla. It immediately looted the local branch of the Yemen Central Bank. A Saudi-led coalition dislodged the group from the city a year later (AQAP still controls seven other towns in southern Yemen), but according to multiple on-the-ground sources, the banking situation there remained surprisingly intact during AQAP occupation.
At least three banks remained open: Tadhamon International Islamic Bank, Alkuraimi Islamic Bank, and International Bank of Yemen, although it is unclear if they were processing international transactions. At least three exchange houses capable of performing foreign transfers were also active. Despite AQAP’s ouster, Islamic State is active in Mukalla and launched suicide attacks against Yemeni soldiers and police recruits in mid-May.
Libya also warrants further analysis. IS currently is seeking to keep control of the port city of Sirte and territory stretching 120 miles east along Libya’s coast. The current operating status of several domestic and regional banks in this contested area is unclear. Hawalas are central to Libya’s underground economy, with security officials noting that IS uses the informal money transfer system to send funds from Iraq and Syria to its Libyan affiliate.
Smaller regional banks and informal money-exchange houses are important
Financial intelligence officials must be vigilant in preventing terrorist groups from leveraging banks still functioning in terrorist-controlled territory. Equally important, smaller regional banks—which are likelier than their global counterparts to transact with banks in terrorist-held areas—must bolster their compliance programs. This will help ensure that those smaller banks’ correspondent accounts with global counterparts stay open, and minimize the potential for larger banks to de-risk from the region altogether.
Furthermore, regulators must give greater assistance to informal money-exchange houses to help them improve compliance and anti-terror funding efforts. Last year, the Counter-ISIL Financing Group, co-chaired by the United States, Italy, and Saudi Arabia, outlined the international community’s measures to collaborate on combating IS fundraising. However, this coordination should not be restricted to fighting only that group, or only the areas in Iraq and Syria that form its heartland.
It is critical for U.S. policymakers to examine other battlegrounds where extremists are vying for capital. Stopping these groups’ expansion calls for creating a regulatory system that ensures that the most vulnerable institutions do not let the world’s most ruthless organizations line their coffers.