How Terrorists Send Money by Dr. Rachel Ehrenfeld & John Wood

Advanced mobile technology, cooperation between international mobile communications providers and international financial institutions and the lack of regulations make for a swift, cheap, mostly untraceable money transfer -- known as "m-payments" -- anywhere, anytime, by anyone with a mobile telephone.

Members of the GSM Association and MasterCard are developing an m-payment service to enable 200 million international migrant workers and the poor who lack bank accounts to transfer money domestically and internationally. According to the World Bank, 175 million migrants transferred at least $230 billion in international remittances in 2005. A recent U.N.-sponsored South African study found that m-banking can be up to one-third cheaper for customers than the current banking alternatives.

However, the spread of m-payments in less developed countries, which often lack functioning anti-money laundering and anti-terrorist financing regulatory frameworks, and where corruption is rife, will likely increase money laundering and terrorist financing.

The abuse of the m-payments is easy when the stored value card is used. It does not require a bank account, credit card or two forms of government-approved identification to activate and use. It just requires cash. Most cards set limits on the amount held on the card, but most can be reloaded, allowing the transfer of thousands of dollars. Indeed, this anonymous and mobile m-payment service is the best vehicle for criminals and terrorists for transferring or receiving money.

Three billion people around the world have mobile phones, but only 1 billion have bank accounts, says the GSM Association. BearingPoint, a major management and technology consulting company, estimated the unbanked marketplace in the United States alone in 2006 at $510 billion. No wonder that banks such as Citigroup, HSBC, JPMorgan Chase, as well as mobile-phone companies such as Cingular, Verizon and Sprint, are clamoring for a piece of the action. More than a dozen m-payment service providers are already operating. The largest is PayPal, with more than 100 million Internet accounts worldwide.

Here's how m-payments can work: You buy a stored value card for a certain amount of dollars and a prepaid, disposable mobile phone. Next, you register with the m-payment service provider using a free anonymous e-mail account, your prepaid mobile-phone number and the money on the stored value card. Using your mobile phone, you log on to the m-payment service provider and give the number of the mobile phone to which you wish to transfer the funds from your stored value card. The m-payment service provider sends a message to the receiver's phone number asking where to transfer the money. The recipient can request the transfer to his stored value card and withdraw the funds from any ATM. Both sender and recipient can then throw away their mobile phones and use new phones and new stored value cards for another transfer, without any fear of detection.

In the United States, on Feb. 27, Citigroup teamed with Obopay, the mobile person-to-person payment service provider, enabling not only South American and Filipino migrant workers to transfer money to their families, but perhaps also offering drug traffickers and/or supporters of al-Qaida, Hamas and Hezbollah a safe way to send money to the Middle East or to each other.

The London-based HSBC, with more than 5,000 offices in 79 countries, and its subsidiary, First Direct -- a telephone and Internet-based commercial bank -- offer an m-payment solution over the Monilink World Wide Web network. Such an extensive mobile banking network in countries, many with close ties to and large potential terrorist populations, defeats any attempt to stop terrorist financing. How many al-Qaida and Hamas sympathizers in the United Kingdom are using this service?

In the Middle East, the Amman-based Access2Arabia offers mobile and Internet banking services to customers in Algeria, Tunisia, Nigeria, Lebanon, Syria, Saudi Arabia, Bahrain, Qatar, Sudan, Iraq, Ghana, Cyprus, Gaza and Yemen. In January the National Bank of Dubai signed an agreement for m-payments services with the Norwegian/European mobile company LUUP to service 300 million people in the Middle East alone. Dubai, a major international financial center, is also known as a money-laundering and drug- and arms-trafficking haven for organized crime, al-Qaida, Hamas, Iran and Hezbollah.

In the Philippines, which Hong Kong-based Political and Economic Risk Consultancy (PBRC) terms "the most corrupted Asian country" and where al-Qaida is active, at least 3.5 million people are using a service that lets them transfer money, pay bills, give contributions to charities locally and internationally, purchase prepaid Internet credits, and buy gaming credit over the two major mobile networks operated by SMART Communications and Globe Telecom.

Special security features of the m-payment system constitute a major impediment to law enforcement and intelligence services that seek to detect suspicious money transactions. Compounding the challenge is the fact that the m-payment process leaves little to no audit trail, and lack of adequate regulatory oversight makes the transactions untraceable.

The only applicable federal reporting requirement to providers of stored value cards is the Currency Transaction Report rule. A CTR must be filed for all cash transactions greater than $10,000 per day. However, the CTR can be filed up to 15 days after the transaction has occurred, giving terrorists and criminals enough time to disappear.

Furthermore, although almost all U.S. m-payment service providers are registered as Money Services Businesses with FinCEN, the regulations do not have specific provisions pertaining to them. Moreover, the government is already constrained by international privacy and secrecy laws, as in the Cayman Islands, Cyprus, Belgium and Panama.

Today, m-payment service providers cannot verify that the address given has not been taken from the White Pages. And there is no way to ensure that the Social Security number has not been stolen or "borrowed" from another person -- alive, dead or in jail. As we learned from the 1993 World Trade Center bombing investigations and trials, and the Sept. 11 Commission Report, terrorists can easily acquire valid driver's licenses, visas, Social Security cards and credit cards.

Since both terrorism and m-payments are global, the m-payment service provider, as all those monitoring terror financing, should have immediate real-time access to an integrated, closely monitored list of all individuals, organizations, businesses and countries suspected of links to terrorists.

Yet, in January, the U.S. Treasury's Financial Crimes Enforcement Network -- or FinCEN -- told Congress that while "the reporting of cross-border wire transfer data by financial institutions is technically feasible," law enforcement needs another year to assess whether it would be "valuable to the government's efforts to combat money laundering and terrorist financing."

We do not have another year to waste. To stop money laundering and terrorist financing in real time, the government needs to identify, develop and implement the best methods and technologies available to regulate the m-payment services. In fact, now is not too soon.

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Dr. Rachel Ehrenfeld is author of Funding Evil; How Terrorism is Financed—and How to Stop It, Director of American Center for Democracy and a member of the Committee on the Present Danger.

The Senate Banking Committee has been aware of this problem since the fall of 2001 but has declined to hold hearings, let alone actually produce a legislative response. All the committee members, regardless of party, get nice chuncks of campaign change from individuals in the companies that transfer the money, and as a result, nothing has been done and nothing will be done.

This is very interesting. It’s unfortunate that Congress put an end to the computer program (I don’t remember it’s name) that sifted through banking transactions, because we caught a lot of terrorists this way. I was at a trial where a Paki pleaded guilty to a scheme that was so complicated it was hard to follow in the courtroom. It involved getting several successive overvalued mortgages from a variety of fly-by-night mortgage companies. The defendant didn’t dream it up, but was a convenience store owner who had been pressured into it by other people in the Paki community.

The financing is very important to these groups, and it’s equally important to us to control it. The terrorists are very determined, and they can take anything, no matter how innocent, and turn it to their use. So the challenge is keeping the usefulness of something for non-terrorists, while being vigilant enough to spot when it is being used by our enemies.

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