*EPF505 12/12/2003
Text: Report Finds Gaps in U.S. Efforts Against Terror Financing
(GAO recommends up-to-date assessments, information sharing) (1320)

U.S. federal agencies should step up efforts to track and shut down the financial activities of terrorist and criminal networks, says a new report by the investigative arm of the U.S. Congress.

A General Accounting Office (GAO) report published December 12 found that terrorist organizations such as Hizballah continue to earn and transfer funds in a variety of ways, including through crimes involving precious stones and metals, drugs and counterfeit goods.

GAO said that the full extent of terrorists' use of alternative financing mechanisms is unknown, due in part to the lack of data collection and analysis by the federal government.

The report also noted that the U.S. Departments of the Treasury and of Justice have not yet produced a report, required under the United States' 2002 National Money Laundering Strategy, on illegal money transfers via trade in precious stones and commodities.

Outlining the challenges facing law enforcement, GAO said that U.S. federal agencies have found it difficult to infiltrate terrorist and criminal networks and that such networks are adept at switching from one method of financing to another.

Terrorists' methods for obtaining funds include selling contraband cigarettes and illicit drugs and misusing donations from charitable organizations. The networks often move funds by concealing their assets through nontransparent mechanisms such as charities, informal banking systems and commodities. To store assets, terrorists may utilize precious stones or other valuables that maintain their value and liquidity, the GAO report says.

GAO recommends that the Federal Bureau of Investigation (FBI) collect and analyze data on terrorists' use of alternative financing mechanisms, and that the secretary of the Treasury and the attorney general produce the planned report on precious stones and commodities. The agency also recommends that the commissioner of the Internal Revenue Service (IRS) establish interim procedures for sharing information on charities with state charity officials.

A copy of the report can be found on the GAO website at http://www.gao.gov/new.items/d04142.pdf

Following is the "Results in Brief" section of the report:

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U.S. General Accounting Office

Terrorist Financing: U.S. Agencies Should More Systematically,
Assess the Use of Alternative Financing Mechanisms

Results in Brief

Terrorists use a variety of alternative financing mechanisms to earn, move, 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.

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 oversight 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 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.

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(Distributed by the Bureau of International Information Programs, U.S. Department of State. Web site: http://usinfo.state.gov)

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