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Key Takeaways: Terrorist Financing

  • Terrorist financing or Extremist financing is an illicit practice that involves providing financial support for terrorism.
  • Regulators expect entities to detect terror funding activities and apply controls for counter-terrorist financing (CTF), alongside anti-money laundering measures.
  • Citadel365 helps regulated entities detect illicit financing of terrorism activities through automating customer due diligence, sanctions screening, and transaction monitoring. The platform helps detect high-risk customers and anomalies to prevent financial crime.

What Is Terrorist Financing in an AML/CFT Context

Terrorist Financing (TF) refers to the act of supporting terrorists or terrorist organisations to carry out terrorist activities. It includes providing, raising, or collecting funds to support terrorism.   Criminals use similar methods to move money to engage in terrorist financing and money laundering. However, in terrorist financing, funds are derived from legitimate or illicit sources and directed to illicit activities and are intended to conceal the destination and purpose of the money.   The legitimate sources include charities, personal income donations, and legal entities’ revenue, while illicit sources include theft, fraud, illegal taxation, illegal trade, etc., to finance terrorism.   The Financial Action Task Force (FATF) requires countries and entities to combat financing of terrorism (CFT) and develop effective control measures for tracing, freezing and confiscating illicit funds.

Key Terrorist Financing Typologies and Methods

Criminals use the following typologies or methods for terrorist financing:
  • Breaking down large amounts of money into small-value transactions, a practice called smurfing or structuring, to avoid detection.
  • Exploit non-profit organisations (using them as fronts), charitable donations, and informal systems (hawala brokers) to transfer funds and bypass regulatory controls.
  • Use of complex networks or third parties to move funds across borders.
  • Use of digital channels and advanced technologies to move funds and avoid detection.

Red Flags and Suspicious Indicators of Terrorist Financing

The following red flags or indicators represent terrorist financing activities:
  • Payments made to or from areas with weak AML/CFT controls, conflict zones, or suspected of high terrorism activity.
  • A series of small, frequent transfers with no defined economic purpose to avoid detection.
  • Clients who have connections to individuals or entities mentioned on sanctions lists or global watchlists.
  • Inconsistency between customers’ activity, such as deposits, transactions or fund transfers, and their profile, purpose or expected behaviour.

Regulatory Expectations for Counter-Terrorist Financing Controls

Regulatory authorities expect entities to identify, monitor, and report terrorist financing activities. Regulated entities must adopt a risk-based approach to assess risks related to customers, jurisdictions, transactions and products. Further, regulated entities must perform sanctions screening to check customers against global lists.

 

Moreover, entities must perform due diligence and apply Enhanced Due Diligence (EDD) for high-risk customers such as PEPs or customers from high-risk jurisdictions. Regulated entities should also conduct ongoing transaction monitoring to detect unusual patterns indicative of financing terrorism.

 

In addition, regulators expect entities to take immediate action upon identifying sanctioned individuals or entities, including freezing their assets and regulatory reporting to counter terrorist financing.

Detecting Terrorist Financing Risk with Citadel365

Citadel365 automates customer identification and ongoing monitoring to detect terrorist financing risks. Its customer onboarding software helps verify customers based on factors such as their business purpose, geographic exposure and risk indicators to develop effective customer profiles.   The name screening software checks customers against sanctions lists, PEP database and adverse media individuals to prevent terrorist financing. Further, Citadel365, a centralised platform that facilitates transaction monitoring, case management, and audit trails to detect unusual patterns, perform timely investigation and submit STR/SAR for CFT compliance.

Strengthening CFT Controls Across the AML Framework

Regulated entities must adopt effective control practices that ensure the detection of money laundering risks and the combating of terrorist financing.

 

Customer Due Diligence: Identify, screen, and verify customers during onboarding to detect high-risk customers and prevent misuse of businesses for money laundering or terrorist financing.

 

Risk Assessment: Develop customer profiles by assessing terrorist financing risks and assigning risk scores based on customer behaviour and their transaction patterns.

 

Ongoing Monitoring: Perform continuous monitoring of customer behaviour, geographies & counterparties involved.

 

Governance & Reporting: Document policies & procedures, CDD records, and audits conducted to support regulatory inspections and reporting.

Terrorist Financing FAQs for AML Professionals

Terrorist financing means providing or managing funds from legitimate or illegal sources to support terrorist activities, individuals or organisations. Unlike money laundering, which involves hiding the origin of funds, terrorist financing includes hiding the destination of funds.

Common typologies include the use of complex structures, intermediaries, charities, donations, and structuring to facilitate terrorist financing.

Red flags such as unusual transaction patterns, rapid transfer of funds in small amounts, customer involvement with high-risk jurisdictions or inconsistency between customer profile and activities.

Yes, technology such as Citadel365 improves the detection of terrorist financing risks by enhancing the accuracy and speed of due diligence and ongoing monitoring processes. It helps identify red flags early, supports investigations and ensures CFT compliance.