Threat Finance is defined as the financing of illicit economic activity by “threat actors” such as terrorist organizations, militant groups, organized crime syndicates as well as non-state armed groups (NSAGs). Through the utilization of numerous legitimate channels of commerce, these threat actors are consistently finding new and innovative ways to raise, mobilize and store funds through international finance systems and multi-national corporate supply chains. These types of threats can manifest themselves as corporate transactions categorized as “high-tech” means such as supply chain transactions and digital currencies (e.g. Bitcoin), “low-tech” means such as invoice manipulation and trade facilitated transactions, and ““no-tech” methods like establishing shell companies and shipment fabrications.
Acquiring sustainable forms of finance is critical to threat actors seeking to operate in relative obscurity, while causing continued disruption to global governance and international economies. These funds are exploited to fund the creation of closely guarded criminal and terrorist networks by providing logistical support and means to pay for equipment, operational costs and further recruitment.
So what can financial institutions and government agencies do to protect against these types of evolving threats? On a broader, global scale counter-threat finance requires multi-channel cooperation in order to identify and analyze vulnerabilities within existing systems, such as distribution channels and supply chains. Consistent evaluation of protocols regarding Due Diligence (DD) and “Know Your Customer” (KYC) are critical to maintaining strong, dependable guidelines for your institutions. Threat finance can stem from a variety of sources, such as human trafficking, counterfeit products or even cigarette smuggling. However, there are red flags based on traditional measures that institutions should be on the look out for. Transactions with round figures, especially from commercial or retail businesses, and transactions during non-operational hours of business are quite common. Often times criminal networks will “stack” their addresses by, for example, having multiple individuals registered to a single family home. There are also certain industries that require extra precautions. Nail salons, for instance, have been known to be shell companies for brothels and sex trafficking, where the funding is reaching terrorist organizations in Asia. Dan Boylan, Senior Vice President and Audit Director at Bank of America, also mentioned the need for stronger measures in the oil industry, stating that “oil is a common denominator to many corruption cases.”
Essentially, as was discussed in the panel, financial institutions must go beyond “checking the box,” so that they can identify the connections and relationships facilitating the financing. They must also utilize big-data analytics to pinpoint the connections at the foundation, so as to map the network of vendors and counterparties to the source. Ultimately, for financial institutions to implement strong and strategic threat management against national security threats and their use of threat financing, they must recognize the necessity of both traditional and enhanced measures of detection