What is terrorist financing?

Terrorist financing isn’t just a distant threat. It’s a real and evolving challenge that regulated professionals in the property, legal, and accountancy fields must be prepared to confront. It involves the misuse of financial resources to support terrorist activities, ranging from operational expenses to propaganda efforts.

Unlike money laundering, which often “cleans” illegal proceeds, terrorist financing can start with legitimate money that’s subsequently redirected toward illegal activities.

When and how terrorist financing occurs

Terrorist financiers are adept at exploiting gaps in the financial system. As professionals in key industries, your role in identifying and addressing these risks is pivotal.

Terrorist financing can occur during various stages of a transaction. The methods employed can range from rudimentary to highly sophisticated, depending on the scale of operations. These methods might include:

• Charitable donations: Some terrorist organisations establish fake charities or misuse legitimate ones to collect donations. These donations might appear legitimate on the surface but are ultimately redirected toward funding terrorist activities.
• Legitimate sources: Legitimate earnings such as salaries, business profits or personal savings can be diverted to fund terrorism. These funds might be disguised through complex transactions or simply transferred via online payment systems.
• Crowdfunding platforms and cryptocurrencies: The rise of online fundraising and cryptocurrencies has introduced new avenues for terrorist financing. Crowdfunding platforms can be misused to collect small amounts from multiple donors under false pretences, while cryptocurrencies provide anonymity for transferring funds.
• Criminal activities: Illicit trade, smuggling and fraud are frequently used to generate revenue for terrorist activities. These crimes could involve the sale of counterfeit goods, drug or human trafficking or financial scams.
• Exploitation of economic institutions: Terrorists can exploit weaknesses in banking and financial systems to transfer or launder money. This may include the use of offshore accounts, anonymous transactions, or shell companies to obscure the money trail.

By staying alert to these diverse methods, you not only protect your reputation but also contribute to a safer global financial ecosystem. Understanding these mechanisms is critical to identifying red flags and preventing unwitting involvement in such activities.

Real-life examples of terrorist financing

Terrorist financing (TF) continues to evolve, with recent cases highlighting the diverse methods employed by terrorist organisations to fund their activities. Understanding these cases is crucial for regulated professionals in the property, legal, and accountancy sectors to identify and mitigate potential risks.

1. Asset freeze of Armagh man linked to the New IRA (2024)

In November 2024, the UK government imposed sanctions on Brian Sheridan, a 48-year-old from Armagh, for alleged involvement in terrorist activities associated with the New IRA.

This action marked the first domestic counter-terrorism sanction by the UK Treasury concerning terrorism in Northern Ireland. The comprehensive asset freeze prevents any funds or economic resources in the UK related to Sheridan from being accessed or controlled. He is suspected of facilitating terrorism and providing financial services or resources for terrorist activities.

2. Standard Chartered’s alleged processing of payments for terror groups (2023)

In May 2023, whistleblowers alleged that British bank Standard Chartered facilitated over $100 billion in transactions for sanctioned entities, including terrorist organisations like Hamas and Al-Qaeda, between 2008 and 2013. The bank was accused of processing payments for entities linked to terrorism, despite previous fines for similar violations.

How you can become unwittingly involved

Terrorist financing often exploits professionals, such as those in the property, legal and accountancy sectors, to mask the destination of funds or legitimise illicit funds. Here’s some examples of how:

1. Property transactions
   Property purchases are a popular method for storing and transferring wealth. For instance, funds from illicit sources can be used to buy high-value properties, which are later sold to integrate the money into the financial system. Professionals involved in these transactions may unknowingly facilitate the process if due diligence is inadequate.
2. Legal and TCSP services
   Lawyers can be exploited to create complex corporate structures, such as shell companies or trusts, that conceal the ultimate beneficial owner (UBO). These structures can be used to channel funds to or from terrorist organisations without raising immediate suspicion.
3. Accountancy services
   Accountants play a crucial role in managing finances. A lack of scrutiny may allow funds linked to terrorism to pass through seemingly legitimate financial reports, tax filings or audit procedures.

Counter terror-financing measures in the UK regulations

As a regulated professional, you’re on the front line when it comes to spotting and stopping terrorist financing (TF). FATF sets the global standards for counter-terrorist financing. Countries then write these into their own domestic regulations.

1. Take a risk-based approach

FATF Recommendation 1 requires you to identify, assess and understand your terrorist financing risks and apply your resources in proportion to what you find. 

Think about the potential risks tied to your clients, transactions, products, and services. For example, your clients from high-risk countries, politically exposed persons (PEPs), or non-face-to-face interactions will need extra attention.

Questions like these will help you build a clearer picture of the risks your client base might pose.

• Are any of your clients operating in high-risk jurisdictions?
• Do transactions involve unusually high amounts or complex structures?
• Are there discrepancies in the information provided by your clients?

Write down your findings and update them regularly. If your business changes or new potential risks emerge, make sure your assessments reflect that.

2. Customer due diligence (CDD)

FATF Recommendation 10 makes CDD essential. This is where you verify your client’s identity and get a good understanding of why they’re doing business with you. 

For higher-risk cases, like clients linked to high-value cash transactions or high-risk jurisdictions, you’ll need to apply some form of enhanced due diligence (EDD). The level of EDD should be proportionate to the level of inherent risk your business faces. 

You also need to know you’re not dealing with anyone on a sanctions list. FATF Recommendation 6 requires countries to run targeted financial sanctions regimes for terrorism and terrorist financing.

CDD isn’t a “set it and forget it” process. Keep an eye on your clients and their transactions over time to spot anything unusual.

3. Report suspicious activity (SAR)

If you see something that doesn’t add up, you have a legal duty to report it. FATF Recommendation 20 requires you to report your suspicions promptly to your country’s financial intelligence unit if you suspect funds are linked to criminal activity or terrorism.

Any report you file should detail the suspicious activity, who’s involved and any evidence you have, like transaction records. 

5. Keep your records in order

Good record-keeping isn’t just helpful, it’s required. FATF Recommendation 11 sets a minimum retention period of five years for transaction records, CDD information and risk assessments.

Everything from CDD your records to risk assessments should be stored securely and be easily accessible. If law enforcement asks for them, you need to provide them quickly. Ensure that all your records related to due diligence, client interactions, and risk assessments are stored securely for at least five years from the end of your relationship with the client.

6. Train your team

FATF Recommendation 18 requires you to run an ongoing training programme so that all your staff can spot red flags and know what to do if they find something suspicious.

Teach your team about identifying TF potential risks, filing SARs, and handling client onboarding. Refresh the training at least once a year or whenever new potential risks or rules come into play.

Compliance is a collective responsibility. In a culture where employees understand the importance of CTF efforts, open communication can provide a safe environment for reporting concerns.

7. Engage with regulatory bodies and industry peers

FATF Recommendation 2 asks countries to coordinate nationally on their CTF efforts. The same idea works at a local level too. Engage with regulators, law enforcement and peers to build a unified approach to combating terrorist financing.

Final thoughts

By following these measures, you’re not just staying compliant. You’re actively protecting your business, your clients, and society from the potential risks of terrorist financing. It’s about vigilance, action and making sure your work helps build a safer financial system for everyone.

Understanding and addressing the potential risks of terrorist financing is crucial for regulated professionals. By implementing robust AML and CTF measures, staying informed about emerging threats, and fostering a culture of your compliance efforts, you can play a pivotal role in protecting the integrity of the international financial system.

Ultimately, your vigilance and proactive measures contribute to a safer and more secure society.