Introduction

In recent years, the issue of Islamist terrorism has attracted much attention from legislators, regulatory organizations, and the broader public, especially as a result of the rise of ISIS (the Islamic State of Iraq and Syria). ISIS has orchestrated several terrorist attacks—mainly in central Europe—and its battles over territories in Syria and Iraq have led to the displacement of over 5 million Syrians, among other negative consequences (Council of the European Union, 2020). More recently, Taliban have once again seized control of Afghanistan after the United States (US) and NATO members ordered the return of their troops stationed in the country. The developments have caused a surge in Afghans attempting to flee the country and international outcries for support (BBC, 2021; Sullivan et al., 2021). Consequently, combating Islamist terrorism has once more become a top priority for law enforcement agencies, legislators, and other relevant actors.

The combat of terrorism has been a priority for investigators since the 1980s. There are several different approaches to combating terrorism, with one of the most significant methods being the interruption of terrorist financing (countering the financing of terrorism; CFT). The first CFT measures were introduced after Al-Qaeda attacked the World Trade Center on 11 September 2001 (9/11) (Pieth, 2002). The introduction of these measures was based on the underlying assumption that many forms of terrorism depend on terrorists having access to significant financial means that are used to fund attacks, pay fighters, obtain resources, and more. Here, similarities to organized crime groups can be observed because terrorist organizations often function in similar ways, as will be shown in Sect. 2.1. In addition, terrorist financing is often associated with financial crime, at least in terms of prevention mechanisms. In particular, the financing of terrorism is usually regulated within the same scope as money laundering, for instance via the Financial Action Task Force’s (FATF) 40 + 9 regulations (see Sect. 2.3.1). Therefore, most CFT measures concentrate mainly on the financial sector, i.e., through the identification of suspicious transactions and individuals.

This study’s objective is to investigate methods of terrorist financing via the banking sector. In particular, the study analyzes how intelligent terrorist financiers manage to fly under the radar of banks’ compliance officers tasked with CFT. To investigate how terrorist financiers manage to circumvent existing compliance measures, informal interviews with 15 presumed providers of illegal financial services were conducted within the scope of a pre-study. During this pre-study, concrete methods that terrorist financiers employ to evade CFT mechanisms in the banking sector were discussed. The findings were tested through semi-structured interviews in a subsequent main study with 15 international compliance experts. These interviews were analyzed using a qualitative content analysis based on Mayring (2010). By contrasting the two perspectives, it was possible on the one hand to create a fully comprehensive overview. On the other hand, the authors were able to verify the actual relevance of the described terrorist financing methods based on the statements of the interviewees in the main study. Ultimately, the main study provides an insight into the difficulties that compliance officers encounter in combating terrorist financing which are exploited by terrorist financiers.

We argue that current CFT measures employed by banks can hardly be effective due to the knowledge gap that surrounds concrete methods terrorist financiers employ. In addition, the recent rapid uprising of the Taliban illustrates that current CFT measures are rather ineffective. Despite significant efforts by the US and the NATO, the terrorist organization has managed to upkeep its structures for decades in the underground (BBC, 2021). Of course, these structures must be financed somehow. The question is how terrorist financiers manage to transfer funds to areas of crisis where terrorist organizations operate without attracting the attention of intelligence agencies or law enforcement.

The findings of this study have implications for those who are tasked with implementing and regulating CFT measures. Future studies could build upon these findings to make suggestions for more effective CFT. This study adds to the existing literature through its innovative approach of collecting data from both ends of the terrorist financing spectrum. By analyzing both the offenders’ and the preventative perspective, novel and comprehensive insights about the perceived challenges facing those at the frontline of the banking sector in detecting and preventing terrorist financing could be won.

The rest of this paper is organized as follows. Section 2 presents a review of the literature on the issue of terrorism and existing CFT measures. In Sect. 3, the methodology is detailed. Subsequently, the empirical findings are explained in Sect. 4. The implications of these findings and potential solutions are discussed in Sect. 5. Section 6 concludes.

Background

Terrorism

Until the 9/11 terrorist attack, little empirical attention had been paid to terrorism (Decker & Bjorgo, 2014). After 9/11, all efforts to combat terrorism intensified significantly (Pieth, 2002). Apart from taking military and legal measures, many nations responded to 9/11 with a financial war on terrorism (Davis, 2003). With the rise of ISIS in the 2010s and the apparent revival of the Taliban in 2021, terrorism seems to have become a topic of increased public interest, yet again. The conflicts in Iraq and Syria have attracted an influx of so-called foreign terrorist fighters, which has led scholars and legal practitioners to devote increased attention to the issue in recent years (van der Wilt & Paulussen, 2019). Apart from the United Nations (UN) Security Council (2014), the International Centre for the Study of Radicalisation and Political Violence (Basra et al., 2016) and the Dutch National Coordinator for Security (van der Wilt & Paulussen, 2019) are among those who have expressed their concern.

The negative effects of terrorism are abundant; terrorism diverts foreign investment, reduces capital inflows, destroys infrastructure, disturbs financial markets, impedes economic growth, and has significant negative impacts on social and cultural human rights (United Nations Human Rights Council, 2017). Hence, the prevention of terrorism is highly desirable and should be a top priority.

CFT mechanisms

One of the most valued tools in the fight against terrorism is to interrupt terrorist organizations’ access to funding. Although some types of terrorist attacks can be carried out inexpensively, it can be expected that organizations like ISIS or Al-Qaeda require significant financial means to pay their fighters, purchase weapons and explosives, and orchestrate attacks. Researchers have found that the budgets of larger terrorist groups can consist of hundreds of millions of dollars per year (Chernick, 2007; Horgan & Taylor, 1999; Passas, 2007; Roth & Sever, 2007).

Terrorist financing can be defined as “the stage at which funds are legally or illegally provided and collected for the commission of the crime of terrorism in the future” (Al-Suwaidi & Nobanee, 2020: 2) and is therefore “preparatory in nature” (Al-Suwaidi & Nobanee, 2020: 2). Terrorism financing mechanisms can be legal or illegal, with terrorists often operating in closed, ambiguous networks and industries (Forman, 2006).

The FATF 40 + 9 recommendations

Relevant CFT measures are defined by the 40 + 9 Financial Action Task Force (FATF) recommendations. In 1989, the FATF published 40 anti-money laundering (AML) recommendations, and after 9/11, an additional nine recommendations aimed at preventing terrorism were implemented (Jayasekara, 2020).

The FATF is the most prominent global AML/CFT watchdog, and its recommendations form the foundation of its 39 member countries’ national AML/CFT frameworks. Compliance with the FATF recommendations is assessed via mutual evaluation reports (Goldbarsht & Harris, 2020). Countries that do not comply sufficiently are assigned more accountabilities and responsibilities that may result in economic and non-economic consequences (Jayasekara, 2020). Jayasekara (2020) has found that global standards—most importantly, the national implementation of AML and CFT frameworks—are effective in combating money laundering and terrorist financing. By using a compliance index to measure the AML/CFT compliance levels of FATF member states, Mekpor (2019) has found a low level of AML/CFT compliance globally and has shown that there has not been a steady or progressive increase in compliance levels between 2004 and 2016. United Nations Security Council Resolutions (UNSCR), conventions drafted by the International Monetary Fund (IMF) and the World Bank, and the Egmont documents are examples of attempts to enforce compliance (Malakoutikhah, 2020). However, Malakoutikhah (2020) has criticized the guidelines put forth by organizations such as the Joint Money Laundering Steering Group and the FATF for not being effective enough because they focus mainly on the criminalization of terrorist financing rather than establishing detailed prevention mechanisms.

EU Legal provisions

In terms of legal provisions, European Union (EU) CFT measures include several anti-money laundering directives that establish the AML and CFT measures which must be transposed into national law by EU member states. The fourth AML Directive (AMLD4) of 20 May 2015, which had been inspired by revisions to the FATF recommendations adopted in February 2012, improved EU measures against money laundering and terrorist financing with a particular focus on the financial system. The AMLD4 aimed to strengthen international cooperation and harmonize AML approaches across the EU with an emphasis on the risk-based approach rather than the rule-based system that had been used previously (Koster, 2020; Ross & Hanan, 2007). Within the scope of the risk-based approach, all actions undertaken by member states, organizations, and supervisors must be subjected to regular risk assessments pertaining to countries, geographic areas, customers, transactions, products and services, and delivery channels carried out by diligent entities such as banks, as well as the implementation of policies, controls, and procedures to mitigate these risks (Koster, 2020). Moreover, the AMLD4 set out new rules for simplified due diligence (SDD) and enhanced due diligence (EDD), especially in relation to transparency on beneficial owners.

The fifth AML Directive (AMLD5), published on 19 June 2018 and implemented by member states by 20 January 2020, is an amendment to the AMLD4 that directly reacts to the publishing of the Panama Papers in April 2016. The AMLD5 focuses on the regulation of services related to virtual currencies, such as exchanges and virtual wallets, as well as tax-related services, traders of art, and the identification of politically exposed persons (PEPs) (Koster, 2020). Moreover, the AMLD5 creates mechanisms to access information about the holders of bank accounts and safe deposit boxes throughout the EU, ends the anonymity of savings accounts, bank accounts, and safe deposit boxes, and allows public authorities to centrally access information on real estate holders. The AMLD5 also regulates general public access to information about the beneficial owners of EU-based companies (Koster, 2020). The sixth AML Directive (AMLD6) was published on 12 November 2018 and establishes a unified list of predicate offenses that give rise to money laundering offenses (Koster, 2020).

How do banks translate CFT regulations into their compliance mechanisms?

According to Malakoutikhah (2020), the three leading CFT mechanisms employed by banks are customer due diligence (CDD), monitoring systems, and suspicious transaction reports (STRs). CDD is employed by banks and financial institutions before they enter into a business relationship with a potential customer and revolves around the identification and verification of beneficial owners and the purpose and nature of the business relationship (Biali, 2012; FATF, 2012). Sometimes, especially in developing countries, confirming a customer’s identity can be difficult, as it requires the bank to obtain their legal name, payment address, telephone number, place and date of birth, occupation, and nationality (Basel Committee, 2003).

The monitoring system entails that after conducting CDD, banks usually create a risk profile for the respective customer. Based on their risk level, the bank may adopt EDD or SDD. EDD will be adopted in cases where transactions involve high-risk countries, complex transactions, or when transactions seem to lack an economic purpose. PEPs, persons that have been entrusted with a prominent public function, will usually be subject to EDD (Edmond, 2017). Regions that are considered high risk include Afghanistan, Iraq, Iran, and Syria due to geographical factors, implementation of law standards, and more (European Commission, 2016; Joint Money Laundering Steering Group, 2017). From fear of facing harsh sanctions, many banks tend to not enter into business relationships with high-risk customers (Malakoutikhah, 2020).

STRs represent the third core element of preventive measures in the financial system. Financial institutions must report suspicious transactions to the authorities. STRs are considered a powerful investigative tool and intelligence-gathering method (HM Treasury, 2007). The number of STRs has risen significantly in recent years, as banks fear violating the increasingly strict regulations to which they are subject (Malakoutikhah, 2020). In fact, more than 70% of all STR submissions for terrorism financing between 2015 and 2018 came from the banking sector (UK National Crime Agency, 2017, 2018).

Methodology

During the literature review, a literature gap pertaining to concrete methods that terrorist financiers employ was identified. Most literature focuses on prevention mechanisms and the sanctioning of terrorist financiers. The accounts frequently lack a detailed understanding of the offender’s perspective, which should serve as the basis for such regulations. Only when compliance officers know how to emphasize with the offenders will they be able to identify and persecute them successfully. To investigate concrete methods that terrorist financiers use to fly under the radar of banks’ compliance mechanisms, a qualitative study with both presumed terrorist financiers and compliance experts was conducted. The intention is to raise compliance officers’ awareness of terrorist financiers’ way of thinking and operating, and to highlight obstacles they face when terrorist financiers employ these methods.

The study was split into a pre- and a main study. During the pre-study, presumed providers of illegal financial services were interviewed regarding sources of income and transfer methods that terrorist financiers employ with a particular focus on the banking sector. The findings of the pre-study informed the subsequent main study, which tested whether the compliance officers are aware of terrorist financiers’ methods and identified loopholes in the CFT system from their perspectives.

Pre-study

The pre-study’s intention was to gain first access to the field and collect qualitative data that could be validated within the scope of the subsequent main study. In particular, interviewees were asked to make statements regarding methods and sources of income that terrorist financiers employ when using the banking sector. The pre-study comprised qualitative interviews with 15 presumed providers of illegal financial services, i.e., facilitators of terrorist financing, located in Russia, Italy, Switzerland, Kazakhstan, Dubai, Liechtenstein, Ukraine, Monaco, and Austria. Interviewees were presumed to be providers of illegal financial services based on their reputation, which was assessed through the first author’s personal network. However, the subject of the interviews was not related to a specific crime. The interviews focused on hypotheses about the possible modus operandi of smart criminals. They were predominantly employed in the judiciary, in consulting, or in the financial services industry. Potential interviewees were identified via online research and the first author’s personal network based on previous empirical investigations. Participants were selected based on their expertise and personal experiences. To avoid negative repercussions, the interviewees, all of which had provided their informed consent to participate, were guaranteed anonymity, which is why no personal details can be provided here. Prior to the interviews, interviewees were informed of the purpose of the research and asked not to discuss specific crimes or reveal personal details. Although the scope of the investigation is limited to the interviewees’ experiences in their respective jurisdictions, it was determined that their explanations are universally applicable because data saturation was reached.

Concerned about possible prosecution, terrorist financiers are usually reluctant to be recorded sharing their vast knowledge with researchers. Therefore, the interviewees were promised anonymity, the pre-study interviews were not recorded. Instead, they were protocolled via memory minutes. Although this method is not optimal from a methodological standpoint, this was the only possible way to collect data directly from terrorist financiers’ associates that could be validated within the scope of the main study. Therefore, it was decided that this approach was most suitable. Interviews were conducted in person and revolved around hypothetical situations rather than concrete offenses that the interviewees had committed (Teichmann, 2020).

Main study

The main study was conducted to verify the findings of the pre-study and to contrast the perspectives of terrorist financiers with those of compliance experts. The findings of the pre-study revealed that terrorist financing is a multinational offense and that terrorist financiers acquire knowledge of banks’ CDD measures to attempt to fly under the radar when using the banking sector to finance terrorists. These were used to plan the main study; however, they were not detailed enough to facilitate the formulation of hypotheses, especially since they had not been recorded. Due to this study’s exploratory nature, a qualitative approach seemed most suitable for the main study, as well. In particular, this study investigates a field that has not been previously analyzed in depth. Therefore, 15 exploratory interviews were conducted with compliance experts. Unlike the pre-study interviews, these interviews were recorded. The findings of the main study could serve as a basis for the formulation of new hypotheses (Teichmann, 2020).

The interviewees were selected based on their expertise and professional experience working in the area of terrorist financing prevention. The intention was to find interviewees whose expertise extended beyond the scope of the findings of the literature review and who had knowledge of the concrete methods that terrorist financiers employ. Suitable interviewees were identified via a literature review and online research. How the individuals could best be accessed was considered during the selection of the interviewees. In all cases, the interviewees were contacted in writing and informed of the intentions of the study and why they might be suitable candidates. Interviews were conducted in person and continued until the interviewees’ statements began to repeat, i.e., until theoretical saturation was reached. Interview partners were commenting from their experience working in the area of compliance and terrorist financing prevention.

The interviewees in the main study were located in Germany, Switzerland, Austria, and Liechtenstein and worked in several different fields (see Table 1). Thus, multiple perspectives could be considered. Due to the fact that some of the interviewees worked in highly exposed positions, they were promised anonymity so that none would suffer any negative consequences from participating in this study. Because technical knowledge (data and facts) about terrorist financing can be derived from other sources, the interviewees were asked to provide mainly procedural and interpretative knowledge. In addition, collecting accurate data on terrorist financing is difficult. It can be expected that there is a high number of undetected cases of terrorist financing. It can also be expected that many terrorist financiers are intelligent and educated (Raghavan & Balasubramaniyan, 2012), which is why this study focuses mainly on attempting to reconstruct how intelligent offenders operate.

Because the interviews were semi-structured, the questions were predetermined but the interviewees could answer at their own discretion. Questions were sometimes amended according to the situation or the interviewee. For instance, it made sense when interviewing money transfer service providers to use questions about their particular field of work that were more in depth. Because this was not a quantitative study, this approach did not impact the comparability of the findings. The order of the questions was also amended based on the course of the interview.

As mentioned above, all interviews were recorded. They were subsequently transcribed and analyzed. During the analysis, relevant information was extracted from the text whereas information that was irrelevant for the purposes of the study was deleted. With qualitative content analyses, initially, analysis entities are determined. Thereafter, statements are paraphrazed and the level of abstraction is determined. Paraphrases are generalized on this level. The next step constitutes a first reduction phase, during which repetitive paraphrases are deleted. During the subsequent reduction phase, the statements are pooled, and a category system that is validated based on the source material is designed. For this study, this procedure was facilitated by analysis software MAXQDA.

Limitations to this approach are that the findings are comprised to the elaborations of the interview partners and the geographical region of the German-speaking countries. Interviews with respondents from different countries or at different times might have led to different findings. However, theoretical saturation was reached and all interviewees had significant international experience working in compliance.

Table 1 Interviewees in the main study
Full size table

Empirical findings

In order to narrow down and identify the subject of the main study, the purpose of the preliminary study was to highlight the basic procedures of terrorist financiers. According to the interviewees in the preliminary study, it can be assumed that criminals who are well known to the police and the supervisory authorities will not approach a bank in person but will instead hire a straw man. Sophisticated criminals also tend to use either online banks or regionally specialized financial service providers to transfer money, according to the preliminary study. The fact that the relationship between the bank and the customer is based on written correspondence rather than face-to-face contact is one of the main reasons for using online banks. Lies are harder to detect in writing because there are no vocal cues, gestures, and expressions. Thus, despite the numerous compliance mechanisms that have been put in place, banks continue to provide viable opportunities for terrorist financing. However, it was necessary to conduct a main study with formal expert interviews, as the informal expert interviews were not recorded and therefore not transcribed. The author explicitly states that the methods described in the preliminary study will be explained in more detail in the evaluation of the results of the main study. This was necessary in order to gain a deeper insight into terrorist financing practices, which could serve as a basis for legislative recommendations.

The findings of the qualitative study are detailed in the following. According to interviewee 7, the patterns of terrorist financiers are not well known, which is why it can be difficult for compliance officers to identify offenders. The present study contributes to the closing of this knowledge gap by illustrating concrete methods for the transfer of money to terrorist organizations. Generally, regulations in the banking sector are much stricter than those in other sectors. However, it can be difficult to differentiate between terrorist financiers and legitimate customers because banks do not typically have the resources to conduct background checks on every customer. Frequently, banks simply rely on the information provided to them by customers. In addition, CFT measures are often mixed up with AML measures, which leads to a lack of focused action, according to the compliance experts. Smaller transfers especially do not attract much attention, which can give rise to money laundering and terrorist financing. Although some countries are considered high risk due to their proximity to areas of crisis (e.g., Turkey,Footnote 1 which borders Syria), a wire transfer to one of those countries does not necessarily attract attention. As a result, the banking sector continues to be at risk for facilitating terrorist financing. In the following sections, concrete methods for sending funds for the financing of terrorism via the banking sector are reconstructed based on the interviewees’ statements (Teichmann, 2020).

General suitability of the banking sector for terrorist financing

In comparison to other sectors, banks usually apply extraordinarily strict control mechanisms to their services. Service providers in the financial sector must establish compliance departments that design control mechanisms and monitor certain processes to ensure that all relevant regulations are observed. Therefore, it could be assumed that banks would be rather unsuitable facilitators of terrorist financing. However, interviewee 8 explained that not all banks are “clean,” and while it might seem significantly more difficult to use a bank transfer than other transfer methods to finance terrorism, a deeper analysis proves that this is untrue. The main reason is that it is nearly impossible for bankers and compliance officers to distinguish terrorist financiers from legitimate customers: “It is incredibly difficult to identify the few bad ones—I do believe that there are only a few—from the ‘good’ majority of customers” (interviewee 8). This is especially true of intelligent offenders who are well aware of how banks expect terrorists to look and behave and take calculated actions to seem unsuspicious (Teichmann, 2020).

According to interviewees in the pre-study, it can be assumed that offenders who are well known to police and supervisory authorities will not personally approach a bank but rather employ straw people. Nonetheless, from the bank’s perspective it does make sense to continue to create risk profiles for offenders, since there will likely always be terrorist financiers that act carelessly because they lack the necessary expertise to operate in a way that helps them evade these mechanisms. According to the interviewees in both studies, these offenders will probably have a low rank in the terrorist organization’s hierarchy: “That is the most fascinating part: only small links in the chain are caught—the big players hardly ever make an appearance. These people must be attacked on a whole other level” (interviewee 8).

Another hinderance to the effective combat of terrorist financing is that banks frequently mix up AML and CFT. Due to this generalization, compliance measures could turn out to be less effective than intended, according to interviewee 7: “There is not much sensitivity regarding the difference between terrorist financing and money laundering.” Interviewees in the pre-study emphasized that terrorist financing and money laundering are two inherently different offenses. Although legislators around the globe often regulate both terrorist financing and money laundering within the scope of the same law, the two offenses can hardly be compared. The intention of money laundering is to conceal the origins of incriminated funds which are then integrated into the economy so they cannot be confiscated by the authorities. With terrorist financing, funds are not necessarily incriminated. To pass banks’ compliance audits, intelligent terrorist financiers do not usually use incriminated funds because doing so would ultimately subject them to double the risk—the bank could report both the suspected money laundering activities and the possibility of terrorist financing. Banks’ compliance departments must be aware of these differences and ideally alter their compliance mechanisms to target each offense individually. In addition, interviewee 6 stressed that with terrorist financing, the criminal offense has not yet happened. Hence, the compliance department would need to identify the offender’s willful misconduct, which likely exceeds the investigative capabilities of most banks. If the origins of the funds are legal and the criminal offense is set to take place in the future, banks’ AML measures cannot effectively prevent terrorist financing.

In conclusion, banks continue to provide feasible opportunities to engage in the financing of terrorism despite having established abundant compliance mechanisms. Interviewees in the pre-study argued that due to the low costs of banking and the possibility of transferring large sums relatively risk free, it can be expected that terrorist financiers will continue to use banks. However, not all financial service providers facilitate monetary transfers to all regions, which is why some background knowledge is required on the offender’s end when selecting a suitable bank. It can be expected that intelligent offenders will take these aspects into consideration when selecting which banks to use (Teichmann, 2020).

Concrete steps terrorist financiers take when using the banking sector

Understanding the system

Interviewee 8 emphasized that most terrorist financiers are intelligent and well educated: “You cannot have the illusion that they are just fanatics who want to blow up skyscrapers. These people are highly intelligent and purposely look for weaknesses [in the compliance framework].” Intelligent and educated offenders are usually familiar with the prevention measures applied by banks and thus know how to circumvent them. Terrorist financiers also have access to the same resources that banks consult to stay up to date on compliance measures and technology: “If I were a terrorist financier, I would purchase relevant literature. What’s the best way to transfer money? What do the experts suggest? You can find so much information online. Criminals are often better equipped than the police” (interviewee 1).

It was found in the pre-study that intelligent offenders usually use either online banks or financial service providers that specialize in a certain region to transfer money. One main reason for the use of online banks is that the relationship between the bank and the customer is based on written correspondence rather than personal contact. It is more difficult to uncover lies in writing because the customer’s voice, gestures, and facial expressions cannot be taken into account. Banks with foreign subsidiaries could also be suitable from the criminal’s perspective. For terrorist financiers, the advantage of international intragroup transactions is that they are likely monitored less, as one of the compliance experts pointed out: “I do not check whether a transaction is legitimate on an intragroup level” (interviewee 8). Compliance officers would assume that intragroup compliance is effective and that the involved parties have already been screened by the other subsidiary, meaning that the criminal will only need to get past one compliance check (Teichmann, 2020).

Because terrorist financiers frequently transfer small amounts of money, it can be difficult for compliance officers to identify fraudulent transactions, according to interviewee 3. Interviewee 7 explained: “When they engage in splitting [dividing large sums into several smaller transfers], they manage to subvert threshold values.” Banks simply cannot afford to subject every single transaction to detailed analysis if the respective value does not surpass the threshold value. Although transaction analysis helps identify certain tendencies and abnormalities, not every single transaction intended to finance terrorism can be flagged through this method: “I believe that with terrorist financing, it can be significantly more difficult to find anything via transaction analysis than with money laundering” (interviewee 6). The underlying reason is that as pointed out above, the offense is not in the transaction itself but in the later use of the transferred money. In addition, transactions are usually executed quickly, meaning that a comparatively short amount of time is dedicated to the analysis of individual transactions before they are complete. Transactions can be blocked to conduct further analyses, which can potentially lead the compliance department to file a report with the authorities, but due to the time and costs associated, this cannot be the standard procedure for the majority of transactions. Therefore, banks are more suitable for terrorist financing than other mechanisms such as personal transfers via courier which are associated with higher costs and risks for the perpetrator (Teichmann, 2020).

Moreover, the offender will always have plausible explanations for their transactions: “The intelligent terrorist financier will do exactly what they want and just offer good explanations for their actions” (interviewee 8). This makes it difficult for compliance officers to recognize them. Even if it becomes known ex post facto that the money was used to finance terrorism, it can hardly be proven that the financier knew what the money would be used for, which would be willful misconduct.

Specialized banks

One issue from the terrorist’s perspective is that areas of crisis frequently do not have the necessary infrastructure to receive wire transfers from central Europe: “It is questionable whether the recipients in Syria even have access to the necessary infrastructure” (interviewee 6). This issue, however, does not significantly impede terrorist financing. Instead of transferring money directly to Syria, offenders use neighboring countries: “There are banks that are close to the war zone, Turkish banks, that are well-equipped and professional” (interviewee 13). Banks continue to facilitate transfers to high-risk locations in countries such as Turkey because not all transactions seem suspicious. In particular, interviewee 7 explained: “Just because Turkey shares a border with Syria and there is an influx of capital into the country, it cannot be assumed that all business activities in Turkey are illegal or give rise to money laundering or terrorist financing concerns”.

Financial service providers that focus on clients from a certain region are useful for the terrorist financier, according to interviewee 8: “There are Turkish banks which have opened subsidiaries here [in Germany] to cater to immigrants.” For transfers from Germany to Turkey, these banks are especially suitable because they conduct numerous transfers between these locations, which makes it less likely that illicit transactions will be uncovered: “I take my money and go to HSBC in Germany. I tell them to put some of the money into my German account and some of the money into my Turkish or Iranian HSBC account or wherever they have subsidiaries” (interviewee 8). Sending funds directly to high-risk countries such as Iraq, however, is usually avoided by terrorist financiers because transfers to those locations would attract too much attention: “Some high-risk countries are for sure Syria, Iraq, Afghanistan, and so on. Lebanon, as well. One must carefully assess the risk associated with these destinations” (interviewee 11). This means that in addition to transactions to traditional risk areas, compliance officers should also closely monitor transfers to and from their neighboring regions such as Turkey, as the money could be physically transported to these high-risk areas across the respective border.

Straw people

Interviewees in the pre-study stressed that customarily, terrorist financiers do not operate in their own name. Instead, they select straw people who will not raise suspicion and can provide legitimate reasons for sending international wire transfers. Regarding the use of straw people, interviewee 1 explained: “That is common in all kinds of criminal activity. Besides terrorists, human or drug traffickers also use straw people. This strategy is well known.” For example, a terrorist financier intending to send money from Germany to Syria would likely employ a Turkish family man who has parents in Istanbul. A wire transfer of 2000 euros could plausibly be intended to help his parents pay their medical bills. A Syrian terrorist financier could also claim to be supporting sick relatives in their home country, as interviewee 9 explained: “There was someone who sent their brother 1000 or 2000 euros. In court, the prosecution had a difficult time proving that the money was used to finance ISIS. The person simply claimed that their brother had been sick and needed to pay his medical bills.” Interviewee 7 suggested that terrorist financiers employ refugees who pretend to make transfers to sick family members in their home country:

Especially with transfers to Turkey, terrorist financiers exploit the refugee crisis. There are many refugees that have fled from zones that are occupied by terrorists. It can be difficult to trace the background of these people who in the meantime might have established a new life or even a business.

Alternatively, one could fake a purchase or claim to have lost their wallet during a vacation in Istanbul to justify why cash withdrawals have been made in the area. This cash is then brought to the Syrian border: “For instance, there could be a French tourist of Arab origin vacationing in Istanbul. He could be a family man wanting to buy a carpet or somebody whose wallet has been stolen and who needs cash to pay for the hotel” (interviewee 13). Cities, such as Istanbul or Antalya, are tourist hotspots for hundreds of thousands of central Europeans and are therefore less suspicious and can be monitored less easily than smaller cities. After all, banks would need to investigate the withdrawals made by every single person vacationing in Turkey, which would be a logistical nightmare.

If the money is intended to go to Europe rather than Syria, one could pretend to be a tourist in Munich. Money would be withdrawn in Munich and distributed to co-conspirators there: “There are businesspeople who have millions. They receive money from home into their local account and then withdraw these funds and distribute them, which cannot be reconstructed” (interviewee 3).

When selecting straw people, smart terrorist financiers consider common biases. The authors explicitly distance themselves from these prejudices, but it cannot be denied that societies continue to be influenced by stereotypes. Offenders use these stereotypes to fly under the radar: “An intelligent person will use prejudices and create a profile that is considered low risk by banks” (interviewee 8). They purposely use straw people that would not usually be considered terrorists such as young mothers or senior citizens (Teichmann, 2020).

These insights illustrate that terrorist financiers use comparatively simple techniques to convince bankers and compliance officers of their innocence. As long as they can provide a plausible background story, they will likely be able to use bank transfers to finance terrorism.

Documentation

To increase the credibility of their background stories, terrorist financiers will likely provide legal documents. This also helps the bank document its investigations. By being cooperative and delivering appropriate documentation, the terrorist financiers facilitate the work of the compliance officers, who will likely be grateful for the smooth settlement of the transaction, according to interviewees in both studies. In particular, smart offenders support their claims by providing documentation such as certificates, invoices, and order confirmations. According to the interviewees, offenders like to use documents in foreign languages. Interviewee 8 explained that it can be difficult to interpret these documents: “First of all, you probably won’t speak the language. If worst comes to worst, the writing cannot even be deciphered” (interviewee 8). A detailed analysis will therefore be complicated significantly by language barriers. This can be especially advantageous for the offender if the documents are forged. Another way of transferring smaller amounts of money is to provide order confirmations.

The credibility of such documents can be increased with forged notary stamps. Stamps usually make documents seem legitimate, even though forging a stamp is relatively easy and stamps can be bought online. Interviewee 14 states: “Stamps are always good; it is unbelievable [how easily compliance officers are convinced of their authenticity].” Interviewee 7 explained that foreign documents could potentially raise suspicion, but when these documents are notarized, their credibility increases. Notarization also facilitates banks’ compliance procedures.

To avoid scrutiny from the compliance department, terrorist financiers usually provide detailed information about their business partners: “It is important to know who you’re dealing with and especially who your customer’s business partners are” (interviewee 8). Thus, terrorist financiers usually construct storylines before approaching a bank: “[If I were a terrorist financier] I don’t know whether I would tell these things right away, but as soon as I get asked, I would be prepared to say ‘yes, of course, we understand that you have compliance obligations. We know that. This is not the first time we have been asked, here are the documents’” (interviewee 14). Unprepared terrorist financiers, on the other hand, risk the bank initiating further investigations in response to a lack of documentation or storyline. Ultimately, terrorist financiers must be able to offer detailed explanations to banks that can withstand at least superficial scrutiny, according to the interviewees in the pre-study. For compliance officers, this means that their alarm bells should not only ring when they encounter unprepared customers. In particular, any documentation provided must be checked extra thoroughly for its authenticity. However, it is questionable whether this can be feasible for compliance departments considering the additional time and money, which would need to be invested.

Although it can be assumed that some banks do have an interest in preventing terrorist financing, most banks strive to avoid sanctions. Therefore, neat documentation of the compliance measures undertaken is usually more important to banks than actually fighting terrorist financing, according to several of the interviewees who explained that as long as the respective bank can prove that all necessary organizational measures have been taken, no harsh sanctions should be feared (Teichmann, 2020).

Business fronts

Interviewees in the pre-study explained that terrorist financiers frequently use businesses as fronts, which allow them to conduct international wire transfers without raising suspicion. In particular, terrorist financiers establish legal persons and use invoices and order confirmations to justify their transactions. When conducted under the umbrella of a business, transactions are unlikely to be subjected to increased scrutiny, according to the compliance experts. Particularly popular are investment and consulting companies. The main advantage of both is that their services can hardly be quantified. The value of a consulting service rendered by a company ultimately depends on the quality and scope of the consultation and on the customer’s budget. Assessment methods such as discounted cash flow analyses are vulnerable to manipulation. Although it might be possible to determine a company’s value via discounted cash flow analysis, the rate of interest can be adjusted to alter the result. These transactions could be used as a front for fraudulent transactions intended to finance a terrorist organization (Teichmann, 2020).

The interviewees in the pre-study maintained that professional terrorist financiers might establish a company in Turkey that functions as a front for their terrorist financing operations. They will likely also establish companies in western European countries, such as Germany or Switzerland, which are designed to present plausible explanations for all of their transactions. Plausible fronts include funeral homes, travel agencies, or logistics companies. Alternatively, non-governmental organizations or charity foundations could also be used: “One issue. . is that charities can be supporters of terrorists which present themselves as philanthropical organizations” (interviewee 7). For the compliance department, this means that all transactions between companies and their subsidiaries should be scrutinized in depth.

Detection

The main tool that banks use to identify illegal transactions is transaction analysis. Foreign terrorist fighter profiles are developed by financial service providers with the help of the authorities: “Commonly—this is also the case in my company—typologies are developed with the intention to recognize foreign terrorist fighters’ behavior in the financial sector” (interviewee 1). Banks increasingly rely on profiles of foreign terrorist fighters. Sometimes, simply having a common Arabic name can be enough to categorize a person as suspicious: “The striking majority of persons involved in these monetary flows had an Arabic name” (interviewee 5). A common Arabic name could be blacklisted because it is shared by a known terrorist, which leads banks to investigate all customers with the same name. Prejudice could also play a role here (Teichmann, 2020).

Making anonymous transactions is not usually possible—banks conduct background checks and have a duty to identify beneficial owners. However, banks rarely make a significant effort to identify recipients within the scope of wire transfers, according to the interviewees. Interviewee 8 finds that well-thought-out documentation decreases terrorist financiers’ risk of being detected. Ultimately, especially with smaller amounts of money, fraudulent transactions frequently disappear in the flood of legitimate transactions: “But otherwise, it is extremely difficult to recognize, because, as I said, often smaller amounts are transferred, which are not very noticeable neither at the entrance nor at the exit [of the banking system]” (interviewee 3). Transfers of high amounts, on the other hand, attract much more attention. For terrorist financiers, detection risks in the banking sector are rather low. With the use of well-thought-out techniques, their detection risk can be decreased even more. It might seem reasonable to demand stricter compliance guidelines to prevent this, but doing so would not make much sense seeing as the existing (expensive) measures are rather ineffective in combating terrorist financing, mainly due to the fact that it is difficult to prove the illegal purposes of a transaction (Teichmann, 2020).

Discussion and conclusion

The amount of terrorist attacks in recent years, the displacement of over 5 million Syrians—that has led to a global refugee crisis—, and the renewed seizure of power by the Taliban in Afghanistan have once again made the combat of Islamist terrorism one of the main priorities of law enforcement and regulatory bodies. The issue had first attracted significant international attention as a result of the 9/11 attacks. Although terrorist attacks cannot be prevented by simply interrupting the funding of terrorism (in fact, some ISIS attacks required comparatively little funding) (die Zeit, 2015), CFT is one of the main tools in the fight against terrorism. The literature review has revealed that legislators and prevention experts such as the FATF rely on banks and other financial service providers to develop, implement, and enforce suitable measures for the prevention of terrorist financing. There are several issues associated with this approach of making banks the first line of defense against terrorist financing, as banks’ compliance officers face significant systemic obstacles and weaknesses in the fight against terrorist financing.

As demonstrated in Sect. 2, banks generally make an effort to combat terrorist financing, mainly to avoid damages to their reputation and maintain the trust of the public (Beekarry, 2011). In addition, breaches usually lead to harsh sanctions (Zagaris, 2004). Therefore, it is not surprising that banks monitor their customers’ transactions and cash withdrawals (Barrett, 2011). However, the expert interviews have demonstrated how intelligent terrorist financiers are able to game the system by blending in. Little is known about how terrorist financiers act and operate, meaning that it is extremely difficult for compliance officers to identify them. Although banks create risk profiles to identify potential terrorist financiers, these profiles are often based on assumptions and prejudices about certain ethnic groups. Hence, they tend to be rather basic and often ineffective, according to the interviewees. Our research contributes to the closing of this knowledge gap by illustrating concrete methods that terrorist financiers employ to fly under the radar of compliance officers. As the empirical results show, smart terrorist financiers are aware of how the “typical” terrorist is profiled and will employ several different diversion techniques, including the use of straw men and forged documents, to prevent being categorized as suspicious. When compliance officers are aware of these methods, they will be able to better identify and anticipate them.

The main issue, however, is that organized crime, especially money laundering and terrorist financing are often regulated in the same vain. In line with regulatory standards, banks’ compliance departments use mechanisms that aim to prevent both money laundering and terrorist financing at the same time, even though the two offenses have little in common. This approach fails to recognize how fundamentally different terrorist financing is from other organized crime offenses both in terms of offenders’ motivation and their operations.

The main reason why terrorist financiers should be persecuted differently than money launderers is that they do not usually use incriminated funds when sending money via the banking sector. When the origins of funds are unsuspicious, only their designated purpose could serve as a point of reference. Unlike with money laundering, terrorist financing intends to support the execution of a criminal offense that is set to take place in the future, meaning that banks, financial service providers, investigators, and law enforcement agencies have two options—they must either be able to anticipate the offender’s intentions (which could be difficult to substantiate) or risk a terrorist organization gaining financing before they have enough evidence to arrest the offender. Since the criminal offense has not yet taken place, a bank’s transaction analyses are largely ineffective in identifying the illegal transaction. A prosecution is only successful when a connection between the offender and a terrorist organization can be identified. In addition, even when a connection is determined, terrorist financiers rely particularly heavily on the fact that it can be difficult for law enforcement to substantiate that the person sending the funds truly intended to finance a terrorist organization (willful misconduct) by claiming that the offense was committed unintentionally. It can thus be expected that identifying offenders’ intentions will be extraordinarily difficult for compliance officers and not very realistic. As long as the customer manages to explain their transfer’s plausibly and can provide appropriate documentation, they will probably not be suspected of terrorist financing (Teichmann, 2020). In terms of carrying out an investigation, this reality is problematic.

Moreover, money laundering involves certain steps and processes by which illicit funds are integrated into the financial system. On their way to the formal economy, illicit funds pass through a series of transactions with the aim of disguising their illegal origin. However, the financing of terrorism is not about the hiding of illicit funds, it is about the raising of funds for the financing of criminal activities involving the suppression of a state by means of violence and coercion. The main objective of terrorist financiers is therefore not necessarily the concealment of the source of funds, but the concealment of both the funding and the nature of the funded activity. In conclusion, there is a difference in the motivation of the two offences. The purpose of terrorist financing is purely ideological: to finance terrorist activities, whether legal or illegal. On the other hand, the main purpose of money laundering is to make a profit from criminal activities.

The findings of the empirical analysis illustrate that compliance officers cannot make the mistake of underestimating who they are up against. Terrorist financiers are intelligent and educated in terms of their sophistication and understanding of how compliance systems work. Hence, identifying intelligent terrorist financiers can be extremely difficult. Although the financial sector is significantly more regulated than any other sector, due to these systemic issues banks seemingly continue to offer loopholes for terrorist financiers to exploit. This implies that banks alone cannot effectively prevent terrorist financing. After all, they are not investigative authorities, and they usually lack the necessary means to carry out deeper investigations.

This paper makes a contribution to the extant literature by illustrating concrete methods that terrorist financiers use to remain undetected. It depicts the issue from a novel perspective, thus complementing the existing research and facilitating a more comprehensive understanding of terrorist financing. Future research could build on these conclusions by on the one hand designing innovative technological CFT solutions, particularly regarding risk profiles and transaction analyses. Banks require more nuanced CFT mechanisms that pay tribute to the differences between terrorist financing and other organized crime —especially money laundering— whose effectiveness can be tested quantitatively. According to the interviewees, implementing technologies such as blockchain and artificial intelligence would increase security while decreasing bureaucratic obstacles to international information exchange, which slow down or inhibit banks’ investigations. Of course, such measures must be backed with appropriate legal frameworks. This goes to show that, on the other hand, banks alone do not have the power to prevent terrorist financing. Future research could build upon the empirical results to make a case for and develop improved investigative measures using means such as electronic surveillance and undercover investigations, which were mentioned by the interviewees.