AIBA Compliance Seminar Terrorist Financing June 13, 2013 Dennis M. Lormel President & CEO DML Associates, LLC

AIBA Compliance Seminar

Terrorist Financing

June 13, 2013

Dennis M. LormelPresident & CEO

DML Associates, LLC

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AIBA Compliance SeminarDennis M. Lormel | June 13, 2013

Terrorist Financing

• Introduction

• Current Events

• Facilitation Tools

• Countermeasures• Case study: Lebanese

Canadian Bank

• Conclusion

Introduction

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Lessons Learned From Boston Bombing

• We, as a society, continue to be vulnerable▫ Simplicity of bombings

likely to inspire similar attacks

• Jihadism continues to attract new adherents

• Critical importance of public / private relationships

• Vulnerabilities of terrorists▫ Finance▫ Communications

• Social media▫ Videos

• Chaos vs. communication and coordination

• Media▫ Good and bad

• The blame game▫ Easier to criticize than to

distinguish▫ Assess before judging

• Systemic v. one off problem

• Lost statistic▫ 204 arrests of would be

jihadist attackers since 9/11

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Importance of Financial Information

• As criminals and our financial system continue to become more sophisticated, financial transactional information becomes more relevant as a critically important investigative mechanism

▫ Finance and communication are biggest vulnerabilities to bad guys

• An investigator’s ability to collect and use financial information can be devastating to terrorists and criminals

• Without money, terrorist and criminal organizations cannot adequately function

• Financial investigations should be integral part of investigative strategies

• Knowing what financial information is relevant, where to collect it from, and how to use it are facts all investigators can benefit from

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Law Enforcement / Financial Institution FININT Comparison• Law enforcement

▫ Conduct financially focused investigations to disrupt and / or prevent the flow of funds to terrorists • Conducted to support the broader counterterrorism mission

▫ Collector and producer of actionable financial intelligence• Direct beneficiary of Bank Secrecy Act (BSA) data (SARs, CTRs, etc.)

▫ Perspective the “why”

▫ Personnel (agents, intelligence analysts, forensic accountants)• Financial institution anti-money laundering (AML) compliance

▫ Required by BSA to maintain robust AML program to safeguard system from money laundering and terrorist financing• Compliance (cost center) v. business (revenue center) mentality or

culture▫ Repository of financial intelligence

• Originator of BSA reports (SARs, CTRs, etc)▫ Perspective the “how”

▫ Personnel (compliance officers, analysts, investigators)

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Disruption of Funding Flows

• Back to origin / forward to strike teams▫ Funding to networks / organizations from point of origin

• Ranging from hundreds to millions of dollars

▫ Funding to operations• Ranging from thousands to hundreds of thousands of dollars

▫ Funding to individuals, cells, or groups• Ranging from hundreds to thousands of dollars

KSM Mohamed Atta

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The Players…Looking Back

• Individuals or groups engaged in fraud

• Gangs

• Drug dealers, organizations or cartels

• Ethnic organized crime groups

• Terrorists or terrorist groups

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The Players…Going Forward

• Who are we dealing with?

▫ Individuals or groups engaged in fraud

▫ Domestic criminal organizations

▫ Transnational criminal organizations

▫ Terrorists or terrorist groups

▫ State sponsors

• Commonalities

▫ Use of facilitation tools

▫ Convergence

▫ Diversification

▫ Must have ready access to money

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Threat Finance

• Threat finance is an umbrella term used to encompass various types of financing that support activities harmful to U.S. National Security

▫ Driven by Department of Defense

• No singular accepted definition

▫ Prosecution v. regulatory concern

▫ Encompasses:

• Terrorist financing

• Transnational criminal organizations

• Drug cartels

• Proliferation and weapons of mass destruction

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Intersection of Crime & Conflict

• Criminal organizations and terrorist groups have increasingly found common ground of mutual benefit▫ Each have learned how to benefit from conflict▫ Each have benefited from convergence and diversification

• Convergence: the intersection where criminals and terrorists work together to support each other with the goal to maximize the benefit to their individual causes▫ Mutual and individual benefit

• Diversification: as organizations mature in operations and sophistication, they diversify into different activities and thereby grow and strengthen their operations▫ Rely on legitimate and illegitimate fronts

Current Terrorism Threat in the United States

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Current Developments

• Growing recognition of importance of financial intelligence

▫ (Financial) intelligence drives operations

• Challenges of international terrorism more complex and diversified• Ongoing Arab spring

▫ Changing balance of power

▫ Terrorist groups taking advantage of unrest

• Evolving international terrorist landscape

▫ Al-Qaeda core greatly diminished (drone missile attacks)

▫ Continued emergence of al-Qaeda affiliate groups

▫ Potential volatility of Hizballah if Iran attacked

• Growing nexus between transnational criminal and terrorist organizations

▫ Convergence

▫ Diversification

• Growing emphasis on “threat finance” driven by DoD

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Current Terrorist Threat in the U.S.

• Homegrown violent extremists▫ …homegrown extremists are increasingly more savvy, harder to detect, and

able to connect with other extremists overseas• Current threat

▫ Al-Qaeda ▫ Groups affiliated with al-Qaeda

• Al-Qaeda in the Arabian Peninsula• al Shabaab• Lashkar-e-Taiba (LeT) (Mumbai style attack)

▫ Iran and Iranian proxies▫ Hizballah▫ Hamas

• The internet has expanded as a platform for spreading extremist propaganda, a tool for online recruiting, and a medium for social networking with like-minded violent extremists, all of which may be contributing to the pronounced state of radicalization inside the U.S.

• Adaptability/flexibility/anonymity/vulnerability

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Jihadist Movement

• Jihadist movement divided into three basic elements▫ Al-Qaeda core organization

▫ Regional jihadist franchises▫ Grassroots operatives

• Two distinct types of operatives▫ Professionals▫ Amateurs

• Al-Qaeda and regional groups▫ For the most part, highly trained professional terrorists

• Grassroots operatives▫ Amateurs▫ Continuum ranging from untrained lone wolves to one who

received varying levels of training▫ Never joined al-Qaeda or other formal militant groups

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Transnational Criminal Organizations

• Represent increasing threat to U.S. security and interests, both domestically and internationally

• Organizations that carry out criminal operations across international borders

• Their interest in “bottom line” makes them more dangerous• Located in countries with weak rule of law• Present greater threat to regional security• Willingness to work and provide material support to terrorists

▫ Mexican drug cartels▫ Violent street gangs▫ International criminal organizations

Los Zetas

MS 13D-Company(Pakistan)

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Transnational Criminal Organization Activities• Drug trafficking, one of the most common criminal activities

▫ Most profitable• Increases levels of corruption• Leads to regional violence and instability in many regions• Causes health and social issues

• Arms trafficking• Human smuggling and trafficking• Product counterfeiting• Trafficking in contraband• Sea Piracy• Money laundering

▫ Hawala▫ Trade based▫ Black Market Peso Exchange (BMPE)

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Threats Posed by Illicit Networks

• Violence and intimidation

▫ Threat to national security

• Criminal activity

▫ Threat to economy

• Corruption

▫ Acts as an enabler (like a disease)

• Cyber security

▫ Increasingly significant threat

Facilitation Tools

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Facilitation Tools

• Wire transfer▫ Electronic funds transfer (fast channel for moving money

between countries and accounts)• Correspondent banking

▫ Financial institution that provides services on behalf of another (relies on correspondent to conduct due diligence)

• Illegal money remitters▫ Not licensed and / or registered (most significant vulnerability)

• Shell companies▫ Operates without active business operations or significant assets

• Electronic mechanisms▫ Finance and communications

• What is the common thread or vulnerability between the above facilitation tools?

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Beneficial Ownership

• The term “beneficial ownership” when used to refer to beneficial ownership of an account in AML context is conventionally understood as equating to ultimate control over funds in such account, whether through ownership or other means. “Control” in this sense is to be distinguished from mere signature authority or legal title.

▫ The ability to conceal beneficial ownership is extremely attractive to bad guys

▫ The ability to conceal beneficial ownership is a detriment to law enforcement

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Bulk Cash Smuggling

• Evading of currency reporting requirements▫ Concealing more than $10,000 in currency or monetary

instruments

▫ Into or out of the United States

• Criminal organizations smuggle bulk cash to keep their proceeds and related activities away from the scrutiny of financial regulators and law enforcement

• Bulk cash smuggling is extremely harmful▫ Removes billions of dollars from commerce

▫ Diminishes integrity of financial system

▫ Fuels criminal enterprises

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Trade Based Money Laundering

• The use of international trade to move money, undetected, from

one country to another is one of the oldest techniques used to

circumvent government scrutiny

• The international trade system is clearly subject to a wide range

of risks and vulnerabilities exploited by criminal organizations

and terrorists

▫ Trade based money laundering represents an important channel of

criminal activity

▫ Growth of world trade enhances vulnerability

• As standards applied to other money laundering techniques

become increasingly effective, the use of trade based money

laundering will increase

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Free Trade Zones (FTZs)

• Created within jurisdictions to promote trade, support new business formation and encourage foreign direct investment

• Have proliferated in recent years▫ Approx. 3,000 FTZs in 135 countries

• Incentives offered to support development of exports, foreign direct investment and local employment▫ Exemptions from duty & taxes

▫ Simplified administrative procedures

▫ Duty free importation of raw materials, machinery, parts and equipment

• Two fold benefits of FTZs

▫ Legitimate

• Boosts economic opportunity

▫ Illegitimate

• Can result in reduction in finance and trade controls and enforcement

• Creates opportunity for money laundering and the financing of terror

Countermeasures

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Understanding Geographic Risk

• Geographic▫ Global▫ Regional▫ Country specific▫ Local

• Cultural vulnerabilities▫ Bribery/corruption

• Accepted business practice▫ Regulatory and law enforcement capacity and will▫ Free trade zones▫ Level of criminal and/or terrorist threat

• Business activity▫ Reasonableness▫ Red flags

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KYC: Due Diligence

• Know your customer program▫ Sound process▫ Verification▫ Documentation

• Identify beneficial ownership▫ FATF recommendations▫ FinCEN guidance

• Both stress importance of identification and consequence of risk

• Address customer risk▫ Recognition▫ Mitigation▫ Adaptability factor▫ Living process

• Assess reasonableness of business activity

• Consider enhanced due diligence

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Deconstructing Ownership & Risk

Customer Due Diligence

Process

Identify Beneficial Ownership

Adequate

Conduct Ongoing Due Diligence

Vigilance

Assess Customer RiskConsider Enhanced Due Diligence

Assess Reasonableness of Business ActivityConsider Enhanced Due Diligence

Verification Documentation

Accurate Timely

Case Study:Anatomy of a Global Narco-Terrorist

Organization

Lebanese Canadian Bank

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Anatomy of a Global Narco-Terrorist Operation • Case study demonstrating how criminal, drug trafficking and terrorist

organizations collaborated in a multi-billion dollar worldwide narco-terrorist drug trafficking and money laundering enterprise

▫ Mutually beneficial operation involving:• Joumma drug trafficking/criminal organization

• Hizballah

• Los Zetas Mexican drug cartel

• Colombian and Venezuelan drug suppliers

▫ Exploitation of financial institutions

▫ Exploitation of facilitation tools and financial mechanisms

▫ Exploitation of systemic vulnerabilities

▫ Exploitation of Lebanon’s financial system

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Factors Facilitating DTO Operations

• Lebanese Canadian Bank

▫ Management complicity and support for Hizballah

▫ Ineffective due diligence

▫ Ineffective internal controls

• Money exchange houses / hawalas

• Bulk cash shipment / smuggling

• Cross border wire transfers

• Correspondent banking

• Payable through accounts

• Shell companies / front companies

• Corruption

• Structuring

• Money laundering

• Trade based money laundering

• Black market peso exchange

Colombia

Lebanon

Europe

West Africa

United States

Drug & Laundering Flow Involving U.S.

Middle East

Colombia

Lebanon

Europe

West Africa

United States

Drug & Laundering Flow Involving Asia

Middle East

Asia

Joumaa collects 8% to 14%

Joumaa – Los Zetas Trafficking Flow

United States

Colombia

Venezuela

Los Zetas Mexico City

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Conclusion Case Study

• This case demonstrates how criminals and terrorists can benefit financially by collaborating together

• Drug trafficking remains the most prolific funding mechanism for criminals and terrorists

• Money laundering essential to successful operations

• The exploitation of systemic vulnerabilities facilitated operations

Conclusion

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Conclusion

• Growing nexus between criminal organizations and terrorist groups

▫ Convergence

▫ Diversification

• Organizational vulnerabilities of bad guys

▫ Communications

▫ Finance

• Partnerships and perspectives

▫ Law enforcement “why”

▫ Financial institutions “how”

• Importance of financial intelligence

• Be proactive and unpredictable

▫ Exploit vulnerabilities of bad guys

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Dennis M. Lormel

President & CEODML Associates, LLC

19309 Winmeade DriveLansdowne, VA 20176

[email protected]

www.dmlassociatesllc.com

mailto:[email protected]

Documents

AIBA Compliance Seminar Terrorist Financing June 13, 2013 Dennis M. Lormel President & CEO DML Associates, LLC