Using beneficial ownership data for national security
Countering the financing of terrorism
The Global Terrorism Database and the Global Terrorism Index define terrorism as “the threatened or actual use of illegal force and violence by a non-state actor to attain a political, economic, religious, or social goal through fear, coercion, or intimidation”. Following this definition, jurisdictions on all continents are affected by terrorism, and it is subsequently deemed a national security threat in most jurisdictions.
Following the 11 September 2001 terrorist attacks, the US government and North Atlantic Treaty Organization (NATO) allies focused their attention on terrorist financing.[32] A United Nations (UN) Security Council resolution supported the endeavour,[e] and the FATF extended its remit and issued eight (later nine) Special Recommendations on Terrorism Financing in October 2001. Since then, countering the financing of terrorism (CFT) has gone hand in hand with AML, frequently jointly referred to AML/CFT.
There has been both criticism and support for placing a responsibility with companies to counter the financing of terrorism. Critics argue that it is one thing for the government to give financial institutions a list of names of people it deems terrorists,[f] but that it is unrealistic for financial institutions to detect suspected financing of terrorism if the government itself does not fully understand how terrorism is financed.[g] The idea that anonymously owned shell companies[h] are widely used in terrorism financing is one that has entered public discourse but not one for which much publicly available evidence exists, especially for more recent international terrorism threats. The EU’s fifth Anti-Money Laundering Directive (AMLD5) was deemed a response to the 2015 terror attacks in France and Belgium, despite the main method of moving and using funds being prepaid cards rather than legal entities.[33] The attacks are thought to have been largely self-funded through job earnings and government benefits.[34]
A review of 263 cases in the US found only “one instance where a shell company might possibly have been involved, nine instances where active charities were involved, and six instances where legitimate companies were involved”. Another part of the same research project focused on non-US cases and found no instances involving shell companies.[35] Whilst it is believed significant financial infrastructure is required to sustain international terrorist networks,[36] the sums involved in terrorist attacks and transfers abroad to sustain these networks are small. In many cases, the source is not necessarily illicit and often largely cash-based.[37] Consequently, the search by banks for transactions potentially funding terror is challenging, and has limited success.[38] This leads some to conclude the war on terrorism financing has failed.[39] Meanwhile, the response by financial institutions has been to de-risk or fully end business relationships with certain clients or categories of clients (e.g. based on geography) due to the challenges in assessing risk. This can have the counterproductive consequence of pushing financial flows into less regulated (e.g. cash-based) channels, and can sever remittance channels.[40]
There is also evidence that, despite global uptake of regulations, enforcement actions against state-affiliated financial institutions can fail, especially when this conflicts with local national security priorities.[41] Others say the war on terrorism financing has been more successful than other efforts to fight terrorism, if measured by the global adoption of CFT legislation.[42] There are several cases where there has been evidence of designated terrorist groups using shell companies where the line between terrorism and organised crime blurs. For example, the Revolutionary Armed Forces of Colombia (FARC), which Colombia and others designated a terrorist organisation in 1997, was heavily involved in organised criminal activities, including drug-trafficking, to finance its activities and had an extensive transnational money laundering network.[43]
The role of beneficial ownership transparency
BOT is most relevant for national security where corporate entities are involved, and where there is a crossover between organised criminal activities and terrorist networks. Whilst there is less evidence of anonymously owned shell companies being used in terrorism financing than the policy response may suggest, it is possible for these structures to be used for financing terror. BO disclosures can play a crucial role in preventing this from happening and deterring abuse of corporate structures for these purposes. However, for this to be effective, governments should make up-to-date lists of known and suspected terrorists and financiers available to financial institutions and DNFBPs, and successfully enforce transgressions.[44] This will be further explored in the following section on economic and financial sanctions. Full transparency in company ownership allows all companies to know with whom they are doing business, and would therefore make it easier for them to screen the names of individuals behind companies. BOT could serve as a deterrent to anonymously owned companies being abused by a range of actors, including terrorism financiers. However, BOT is by no means a silver bullet for countries aiming to tackle terrorism financing, as many of the financial channels used will remain out of scope of these measures.
Footnotes
[e] See: S.C. Res. 1373, U.N. Doc. S/RES/1373 (Sept. 28, 2001): Recognising “the need for States to complement international cooperation by taking additional measures to prevent and suppress ... the financing and preparation of any acts of terrorism”.
[f] International sanctions lists, such as the US one administered by the Office of Foreign Assets Control (OFAC), contain individuals suspected of a range of crimes, including terrorism.
[g] The 9/11 Commission extensively reviewed the financing of the 9/11 attacks and found no apparent terrorism financing indicators. See: Richard Gordon, “A Tale of Two Studies: The Real Story of Terrorism Finance”, University of Pennsylvania Law Review 162 no. 269, 2014, 274, https://scholarship.law.upenn.edu/cgi/viewcontent.cgi?article=1129&context=penn_law_review_online.
[h] A shell company is a company that engages in no substantive business activities, but instead exists as a vehicle, typically to make use of a particular legislation in another country, shield another party from liability, or hide a company’s true owner.
Endnotes
[32] Richard K. Gordon, On the Use and Abuse of Standards for Law: Global Governance and Offshore Financial Centers, 88 N.C. L. REV. 501, 577 (2010).
[33] Baker McKenzie, Mark Simpson, and Richard Powell, “Money laundering: EU responds to terrorist financing and the Panama papers affair”, Thomson Reuters, 26 July 2018, https://uk.practicallaw.thomsonreuters.com/w-015-8858.
[34] Dennis Lormel, “Lessons Learned from the Paris and Brussels Terrorist Attacks”, 29 March 2016, ACAMS Today, https://www.acamstoday.org/lessons-learned-paris-brussels-attacks/; “In the spotlight: How the EU is combatting terrorist financing”, European Comission, 29 March 2016, https://ec.europa.eu/newsroom/fisma/items/29693/en.
[35] Gordon, “A Tale of Two Studies: The Real Story of Terrorism Finance”.
[36] “Financial challenge to crime and terrorism”, HM Treasury, February 2007, https://www.loc.gov/item/2008428851/.
[37] “National risk assessment of money laundering and terrorist financing 2020”, 44; Lormel, “Lessons Learned from the Paris and Brussels Terrorist Attacks”; Uche Igwe, “We must understand terrorist financing to defeat Boko Haram and Nigeria’s insurgents”, London School of Economics (blog), 3 August 2021, https://blogs.lse.ac.uk/africaatlse/2021/08/03/terrorist-financing-economy-defeat-boko-haram-nigeria-insurgents/.
[38] “Van bank tot rechtbank, hoe effectief is de bestrijding van terrorismefinanciering?”, University of Amsterdam, 23 November 2021, https://www.uva.nl/shared-content/faculteiten/nl/faculteit-der-maatschappij-en-gedragswetenschappen/nieuws/2021/11/hoe-effectief-is-de-bestrijding-van-terrorismefinanciering.html?cb.
[39] Peter Neumann, “Don’t Follow the Money: The Problem With the War on Terrorist Financing”, Foreign Affairs, July/August 2017, https://www.foreignaffairs.com/articles/2017-06-13/dont-follow-money.
[40] “‘De-risking’ within MONEYVAL states and territories”, MONEYVAL, 15 April 2015, https://rm.coe.int/report-de-risking-within-moneyval-states-and-territories/168071510a; “Mitigating the effects of de-risking in emerging markets to preserve remittance flows”, IFC, November 2016, https://openknowledge.worldbank.org/bitstream/handle/10986/30348/110883-BRI-Note-22-EMCompass-De-Risking-and-Remittances-FINAL-PUBLIC.pdf.
[41] Oxnevad, Making a Killing: States, Banks, and Terrorism, 6.
[42] For instance: Julia Morse, “The Counterterror War That America Is Winning”, The Atlantic, 15 September 2021, https://www.theatlantic.com/ideas/archive/2021/09/america-terrorism-finance/620067/.
[43] “FARC’s Elusive Finances Undercut Support for Colombia Peace”, VOA, 13 June 2017, https://www.voanews.com/a/farc-elusive-finances-undercut-support-colombia-peace/3899184.html; “Sanctions Programs and Country Information”, U.S. Department of the Treasury, 2021, https://www.treasury.gov/resource-center/sanctions/Programs/Documents/farc_net_08262009.pdf.
[44] Enforcement can be ineffective where it is at odds with domestic national security priorities. See: Oxnevad, Making a Killing: States, Banks, and Terrorism, 6.