Countering the Financing of Terrorism: Definition, Risk, and Best Practices

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COUNTERING THE FINANCING OF TERRORISM

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In thIs month's Issue: Terrorist Financing - What is it?

Terrorist financing is the earning, solicitation, collection, or provision of funds--from  Terrorist Financing (TF)

both legitimate (e.g. donations, business profits) and illegal sources (e.g. trafficking,  Terrorist Financing Risk fraud)--with the intent or knowledge that these funds will be used to support  Good Practices to enhance terrorist acts or organizations. Using funds and other assets involves not only the direct

funding of terrorist attacks but also the funding of preparatory and support activities. Effectiveness

Terrorist financing activities can include:  the role of the Private sector

• The use of the financial services system to maintain and/or move funds which  Producing and Using Financial would be used to fund terrorist activities or organizations. Intelligence
• The establishment of entities such as companies and non-profit organizations  Investigating, Prosecuting and which can be used to collect, earn or raise funds for terrorism. Sanctioning Offenders  Implementing Targeted Illegal Sources: Legal Sources: Financial Sanctions  Drug trafficking;  Business Profits;  Enhanced International  Fraud and cybercrime;  Donations to charities or Cooperation Non-profit organizations;  Kidnapping for ransom;  Case Study  Community fundraising  Extortion; and

activities; and  Smuggling (weapons, people and  Salaries. goods).

What is Terrorist Financing Risk?

Terrorist Financing (TF) risk is the potential for funds or assets to be solicited, collected, moved or used to support terrorist acts, organizations or individuals. Risk is typically assessed as functions of three (3) elements:

 Threats: The potential for a person, entity or group to cause harm by raising, storing or using funds for terrorist purposes.  Vulnerabilities: Features in a jurisdiction or sector that can be exploited by terrorist groups, individuals or entities.  Consequences: The social, economic and political outcomes if a TF event occurs.

1. VULNERABILITIES 3. CONSEQUENCES 1. THREATS  Presence of terrorists;  Weak AML/CFT/CPF controls;  National security threats;  Links to high-risk or sanctioned  Loss of life;  Poor customer due diligence

jurisdictions; and  Economic and reputational processes; and

damages; and  History of terrorist activity.  Limited oversight of non-profit  International sanctions or organizations. blacklisting.

High-Risk Channels and Methods

Terrorists exploit various sectors to manage their financial activities such as:

 Non-Profit Organizations (NPOs): This sector is often targeted due to its cash-intensive nature and the ease at which funds

can be raised.

 Informal Financial Systems: Systems such as Hawala provide anonymity and operate outside traditional banking

regulations.

 Modern Technologies: The increased use of Virtual Assets (Crypto), crowdfunding, gaming platforms and social media

may be used for fundraising for terrorist activities.

 Traditional Assets: Cash, gold or other precious metals may be used to move value across borders discreetly.

Key Good Practices 1.The role of Private Sector in mitigating TF risk.

 Adopt a Risk-Based Approach (RBA)

• Conduct regular enterprise-wide terrorist financing (TF) risk assessments -Allocate stronger controls where risk is higher -Identify high-risk and sanctioned customers, products/services, geographic areas and delivery channels

 Strengthen Customer Due Diligence (CDD) Policies and Procedures

-Encourage Financial Institutions (FIs) and Designated Non-Financial Businesses and Professions (DNFBPs) to implement and conduct proper Know Your Customer (KYC) procedures.

• Regularly review and screen customer listing against Sanctions Lists such as those produced by the United Nations (UN) and the

Office of Foreign Assets Control (OFAC).

• Apply Enhanced Due Diligence (EDD) measures on Politically Exposed Persons (PEPs), NPOs and customers from High-risk jurisdictions such as North Korea and Iran. -Develop formal and informal information-sharing mechanisms with Regulators and Law Enforcement Agencies such as the White Collar Crime Unit (WCCU) and the Financial Intelligence Unit (FIU).

 Enhance knowledge of identifying suspicious transactions and reporting them through training with the Financial Services Regulatory

Commission (FSRC) and the FIU.

 Develop partnerships with the Competent Authorities to improve communication and collaboration  Governance and Oversight

• Board and Senior Management must approve and implement CFT policies and procedures.

1. Mechanisms implemented by the Public Sector to mitigate TF Risk  The National Anti-Money Laundering Committee (NAMLC) has worked with the Attorney General's Office to develop and

implement the Anti-Terrorism (Targeted Financial Sanctions Listing) Regulations, No. 13 of 2023 which make provisions for the designation, listing and delisting of persons, groups and entities associated with terrorist financing.

 The Anti-Terrorism Act was amended in 2020 to insert Sections 114 - 119 which make provisions for Targeted Financial Sanctions (TFS)

for the freezing without delay of funds or assets and reporting to the Attorney General's Office, the FIU and the FSRC.

 The FSRC disseminates the UN and OFAC Sanctions Lists to all regulated entities when updated via email using office@fsrc.kn.  The FSRC in collaboration with the WCCU and the FIU have conducted training sessions on TFS for TF and conducting TF risk

assessments.

 In February 2025, the NAMLC, in collaboration with the Regional Security System--Asset Recovery Unit (RSS-ARU) organized a

simulation exercise to test the national legislation, policies, procedures and mechanisms for TFS in relation to TF.

 The NAMLC developed a National Standard Operating Procedure (SOP) for Targeted Financial Sanctions for Terrorist Financing and

Proliferation Financing which provides Competent Authorities and relevant AML/CFT/CPF Agencies with step-by-step procedures on listing, delisting and freezing in relation to designated persons, entities and groups.

KIndly refer to the fsrC's newsletter Core practices for enhancing

effectiveness for Countering the Editions on the following related

Financing of Terrorism: topics.  Public-Private Partnerships (PPPs): Establish formal *********************************************************** frameworks for sharing information between regulated entities

and law enforcement to better identify risks while enhancing  November 2025 - Hawalas and other detection. HOSSPs;  Risk-Based Approach (RBA): Conduct comprehensive

assessments to understand TF risks in sectors and tailoring and  August 2025 - Information Sharing; enhancing controls to align with the identified risks.  July 2025 - Combatting the  Financial Intelligence and Technology: Utilize technology to

analyse transactions and improve the quality of Suspicious Terrorist Financing Abuse of NGO/

Transaction Reports (STRs). NPOs; and  International Cooperation: Implement robust mechanisms for  April 2023 - The Importance of coordination between regional and international bodies to Public-Private Partnership (PPP) in detect, prevent, and prosecute MLTF/PF. AML/CFT/CPF.  Focus on high-risk areas including the abuse of virtual assets

and NPOs.

Case Study - International NPO

The case demonstrates how Non-Profit Organizations (NPOs) can be abused to finance terrorism. The Method: A domestic NPO held several accounts on which the NPO's founder had signing authority. Cash deposits and transfers were made into the accounts by donors, and the transfers always indicated that the funds were destined for a high risk jurisdiction. The domestic NPO then sent large wire transfers to a foreign-based international NPO. Outcome: An investigation by the national law enforcement agencies revealed that the founder of the domestic NPO willfully used his role to facilitate the financing of terrorism and that the international NPO was the parent organization of the domestic NPO. The international NPO was suspected of being linked to a terrorist network and one of its contacts had been listed as a supporter of terrorism.

1. What are the vulnerabilities identified in the case?
2. What are some of the terrorist financing risks identified in the case?

Global Standards and Tools

 FATF Recommendations: The FATF sets International Standards that require countries to conduct National Risk Assessments (NRAs) to

identify and mitigate their specific TF risks.

 World Bank NRA Tool: An analytical framework used by many countries to assess their inherent risks and the effectiveness of their

controls.

 Targeted Financial Sanctions (TFS): Mechanisms used by the UN and national governments to immediately freeze the assets of designated

terrorists. REFERENCES

 IMF Library  FATF-Gafi.org

South Independence Square Street, P. O. Box 898 Basseterre, St. Kitts, W.I. Telephone No.: (869) 466-5048/ (869) 662-5940 Email: info@fsrc.kn Website: www.fsrc.kn